Stelco Holdings Inc. Reports Third Quarter 2023 Results

HAMILTON, Ontario--(BUSINESS WIRE)--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 nine months ended September 30, 2023. Stelco Holdings is the 100% owner of Stelco Inc. ("Stelco"), the operating company.

Selected Financial Information:

(millions of Canadian dollars, except volume, per share and net ton (nt) figures)	Q3 2023	Q3 2022	Change	Q2 2023	Change	YTD 2023	YTD 2022	Change
Revenue ($)	776	846	(8%)	841	(8%)	2,304	2,789	(17%)
Operating income ($)	121	217	(44%)	186	(35%)	325	1,038	(69%)
Net income ($)	68	158	(57%)	117	(42%)	174	974	(82%)
Adjusted Net Income ($) *	76	163	(53%)	123	(38%)	209	787	(73%)
Net income per common share (diluted) ($)	1.23	2.33	(47%)	2.12	(42%)	3.16	13.63	(77%)
Adjusted Net Income per common share (diluted) ($) *	1.38	2.40	(43%)	2.23	(38%)	3.79	11.02	(66%)
Average Selling Price per nt ($) *	1,083	1,162	(7%)	1,217	(11%)	1,084	1,363	(20%)
Shipping Volume (in thousands of nt) *	661	686	(4%)	653	1%	2,009	1,957	3%
Adjusted EBITDA ($) *	153	245	(38%)	215	(29%)	433	1,111	(61%)
Adjusted EBITDA per nt ($) *	231	357	(35%)	329	(30%)	216	568	(62%)
* See "Non-IFRS measures" for a description of certain Non-IFRS measures used in this Press Release and "Non-IFRS Measures Reconciliation" below.

"We are pleased with this quarter's results despite a relatively weaker pricing environment that existed this quarter," said Alan Kestenbaum, Executive Chairman and Chief Executive Officer. "We have built a business that generates significant cash which in turn has allowed us to deliver industry-leading returns to our shareholders, and I am proud that we are able to continue that trend in the third quarter. In addition to our quarterly dividend of $0.42 per share, Stelco will be providing our shareholders with a special dividend of $3.00 per share, bringing the total capital returned to shareholders to more than $2 billion since our IPO in 2017 - a record that we are exceptionally proud of."

"With the upward trajectory in steel prices that commenced a few weeks ago and continued solid market demand, we expect to see improved results starting in 2024," continued Kestenbaum. "Our continued focus on cost reductions and efficiency in our operations and lower input costs will afford our business the opportunity to continue our strong track record of generating cash and delivering results that benefit our shareholders."

"Despite seeing an 11% decrease in our Average Selling Price quarter-over-quarter, the business was able to generate $153 million in Adjusted EBITDA in the third quarter due to our ability to control our costs and drive revenue through to the bottom line," said Paul Scherzer, Chief Financial Officer. "We have a proven track record of generating returns at every point of the market cycle, and the third quarter was no exception. We continued to generate cash flow from operations and ended the period with total liquidity in excess of $1 billion, including $841 million of cash. This strong financial position has afforded us the opportunity to once again return excess capital to our shareholders through the $3.00 per share special dividend announced today."

"We anticipate that we will continue to build on our track record of generating positive returns for all our stakeholders," continued Scherzer. "Looking ahead to the fourth quarter, we anticipate our Shipping Volume will be approximately 600 thousand to 625 thousand net tons, and Adjusted EBITDA will be lower, but with increasing prices and expanding lead times we are anticipating a stronger first quarter in 2024. Over six years we have developed a strong track record of delivering results, and we look forward to continuing this trend through the fourth quarter and into next year."

Third Quarter 2023 Financial Review

Compared to Q3 2022

Q3 2023 revenue decreased $70 million, or 8%, from $846 million in Q3 2022, primarily due to a 7% decrease in Average Selling Price per net ton and a 4% decrease in Shipping Volume. The Average Selling Price of our steel products decreased from $1,162 per nt in Q3 2022 to $1,083 per nt in Q3 2023. Our Shipping Volume decreased 25 thousand nt to 661 thousand nt from 686 thousand nt in Q3 2022. Also impacting revenue were non-steel sales which increased to $60 million in Q3 2023, from $49 million in Q3 2022.

The Company realized operating income of $121 million for the quarter, compared to $217 million in Q3 2022, a decrease of $96 million consisting of a decline in revenue of $70 million and an increase in cost of goods sold of $32 million, partly offset by lower selling, general and administrative expenses of $6 million.

Finance costs increased by $15 million, from $17 million in Q3 2022 to $32 million in Q3 2023, due to the following: $15 million connected to the period-over-period impact of foreign exchange translation on U.S. dollar denominated working capital, $3 million increase in interest on loans and borrowings, and $1 million higher accretion expense related to lease and other related obligations, partly offset by $3 million related to the remeasurement impact from our employee benefit commitment obligation and $2 million lower accretion expense associated with our employee benefit commitment obligation.

The Company realized net income of $68 million for the quarter, compared to $158 million in the third quarter of 2022, a change of $90 million primarily due to the following: $96 million decrease in operating income, $15 million higher finance costs, and a $6 million change in finance and other income, partly offset by a $20 million decrease in current tax expense and a $7 million decrease in deferred taxes. Adjusted Net Income totaled $76 million in Q3 2023, a decrease of $87 million from $163 million in Q3 2022.

Adjusted EBITDA in Q3 2023 totaled $153 million, a decrease of $92 million from $245 million in Q3 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 Q2 2023

Q3 2023 revenue decreased $65 million, or 8%, from $841 million in Q2 2023, primarily due to an 11% decrease in Average Selling Price per net ton, partly offset by a 1% increase in Shipping Volume. The Average Selling Price of our steel products decreased from $1,217 per nt in Q2 2023 to $1,083 per nt in Q3 2023. Our Shipping Volume increased from 653 thousand nt in Q2 2023 to 661 thousand nt in Q3 2023. Non-steel sales increased by $14 million, from $46 million in Q2 2023 to $60 million during Q3 2023.

The Company realized operating income of $121 million in Q3 2023 compared to $186 million in Q2 2023, and Adjusted EBITDA of $153 million compared to $215 million during Q2 2023, which mostly reflects the impact of a decrease in Average Selling Price per net ton in the period.

Summary of Net Tons Shipped by Product:

(in thousands of nt)

Tons Shipped by Product	Q3 2023	Q3 2022	Change	Q2 2023	Change	YTD 2023	YTD 2022	Change
Hot-rolled	471	502	(6%)	475	(1%)	1,458	1,401	4%
Coated	125	115	9%	120	4%	367	343	7%
Cold-rolled	20	20	-%	26	(23%)	69	59	17%
Other (1)	45	49	(8%)	32	41%	115	154	(25%)
Total	661	686	(4%)	653	1%	2,009	1,957	3%
Shipments by Product (%)
Hot-rolled	71%	73%		73%		73%	72%
Coated	19%	17%		18%		18%	17%
Cold-rolled	3%	3%		4%		3%	3%
Other (1)	7%	7%		5%		6%	8%
Total	100%	100%		100%		100%	100%
(1) Includes other steel products: 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 $841 million and $200 million of availability under its revolving credit facility as at September 30, 2023. The following table shows selected information regarding the consolidated balance sheet as at the noted dates:

(millions of Canadian dollars)
As at	September 30, 2023	December 31, 2022
ASSETS
Cash	841	809
Trade and other receivables	188	147
Inventories	824	789
Total current assets	1,885	1,796
Property, plant and equipment, net	1,243	1,199
Deferred tax asset	3	2
Total non-current assets	1,356	1,335
Total assets	3,241	3,131
LIABILITIES
Trade and other payables	768	663
Other liabilities	69	83
Asset-based lending facility	15	15
Income taxes payable	3	2
Obligations to independent employee trusts	45	143
Total current liabilities	900	906
Other liabilities	410	404
Asset-based lending facility	42	54
Deferred tax liability	48	18
Obligations to independent employee trusts	300	315
Total non-current liabilities	831	820
Total liabilities	1,731	1,726
Total equity	1,510	1,405

Stelco Holdings and its subsidiaries ended Q3 2023 with current assets of $1,885 million, which exceeded current liabilities of $900 million by $985 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 $345 million of obligations to independent pension and OPEB trusts, which include $240 million of employee benefit commitments and $105 million under a mortgage note payable associated with the June 2018 land purchase. Non-current liabilities of $831 million as at September 30, 2023 include $300 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 $1,510 million at September 30, 2023. Total equity is calculated after giving effect to $69 million of common share dividends declared and paid and $174 million of comprehensive income for the nine months ended September 30, 2023.

Declaration of Dividends

Stelco Holdings' Board of Directors approved the payment of a special dividend of $3.00 per share and an ordinary quarterly dividend of $0.42 per share, both of which will be paid on November 28, 2023, to shareholders of record as of the close of business on November 22, 2023.

The ordinary quarterly dividend and the special dividend have been designated as "eligible dividends" 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, November 9, 2023 at 9:00 a.m. ET. To access the call, please dial 1-833-470-1428 or 1-226-828-7575 and use access code 156038. 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 November 9, 2023 until 11:59 p.m. ET on November 23, 2023 by dialing 1-866-813-9403 or 1-929-458-6194 and using the access code 782516.

Consolidated Financial Statements and Management's Discussion and Analysis

The Company's consolidated financial statements for the three and nine months ended September 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 nine months ended September 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, operational efficiencies and lower input costs; statements regarding future cash generation and positive returns; statements regarding steel prices and improved results in 2024; expectations regarding expected Shipping Volumes and Adjusted EBITDA in the fourth quarter; statements regarding lead times; statements regarding our dividend policy; and statements regarding our ability to deliver results in the fourth quarter and into 2024.

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 global conflicts on the international supply chain and economy overall; the impact of China's economic performance; the impact from a trend towards increased government spending; the impact of central banks' policy responses 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 Q4 2023 Shipping Volume Estimates and Q4 Adjusted EBITDA Estimates

The estimates with respect to our Shipping Volumes and Adjusted EBITDA during the fourth 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 fourth 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 nine months ended September 30, 2023, which is available on the Company's website and on SEDAR (www.sedar.com).

Stelco Holdings Inc.
Consolidated Statements of Income
(unaudited)

	Three months ended September 30,						Nine months ended September 30,
(millions of Canadian dollars)	2023			2022			2023			2022
Revenue from sale of goods	$	776		$	846		$	2,304		$	2,789
Cost of goods sold		644			612			1,931			1,702
Gross profit		132			234			373			1,087
Selling, general and administrative expenses		11			17			48			49
Operating income		121			217			325			1,038
Finance costs		(32	)		(17	)		(92	)		(52	)
Finance and other income (loss)		3			9			9			(3	)
Other costs		(3	)		(3	)		(9	)		(12	)
Share of income from joint ventures		1			1			-			1
Gain on sale of land and buildings		-			-			-			260
Income before income taxes		90			207			233			1,232
Current income tax expense		2			22			30			197
Deferred income tax expense		20			27			29			61
Net income	$	68		$	158		$	174		$	974

Stelco Holdings Inc.
Consolidated Balance Sheets
(unaudited)
(millions of Canadian dollars)

As at	September 30, 2023		December 31, 2022
ASSETS
Current assets
Cash	$	841	$	809
Restricted cash		9		9
Trade and other receivables		188		147
Inventories		824		789
Prepaid expenses and deposits		23		42
Total current assets	$	1,885	$	1,796
Non-current assets
Derivative asset		82		108
Property, plant and equipment, net		1,243		1,199
Intangible assets		12		8
Investment in joint ventures		16		18
Deferred tax asset		3		2
Total non-current assets	$	1,356	$	1,335
Total assets	$	3,241	$	3,131
LIABILITIES
Current liabilities
Trade and other payables	$	768	$	663
Other liabilities		69		83
Asset-based lending facility		15		15
Income taxes payable		3		2
Obligations to independent employee trusts		45		143
Total current liabilities	$	900	$	906
Non-current liabilities
Provisions		19		18
Pension benefits		12		11
Other liabilities		410		404
Asset-based lending facility		42		54
Deferred tax liability		48		18
Obligations to independent employee trusts		300		315
Total non-current liabilities	$	831	$	820
Total liabilities	$	1,731	$	1,726
EQUITY
Common shares		318		318
Retained earnings		1,192		1,087
Total equity	$	1,510	$	1,405
Total liabilities and equity	$	3,241	$	3,131

Non-IFRS Measures Reconciliation

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

	Three months ended September 30,						Nine months ended September 30,
(millions of Canadian dollars)	2023			2022			2023			2022
Net income	$	68		$	158		$	174		$	974
Add back/(Deduct) following items:
Loss (Gain) on derivative asset		11			-			26			15
Share-based compensation expense (recovery) 1		(1	)		3			12			6
Other costs 2		3			3			9			12
Transaction-based and other corporate-related costs		1			-			3			2
Remeasurement of employee benefit commitment 3		(3	)		-			(3	)		1
Gain on sale of land and buildings		-			-			-			(260	)
Total adjusted items before tax		11			6			47			(224	)
Tax impact of above items		(3	)		(1	)		(12	)		37
Total adjusted items after tax		8			5			35			(187	)
Adjusted Net Income	$	76		$	163		$	209		$	787

1. Share-based compensation consists of costs connected with the Company's Total Shareholder Return Based Incentive Program and other share-based compensation plans.
2. Other costs includes the write-down of certain capital projects that are no longer being pursued by the Company, representing aborted construction in progress costs without future benefit to Stelco, as well as demolition and other costs not connected to the Company's ongoing integrated steelmaking operations.
3. Remeasurement of employee benefit commitment for change in the timing of projected cash flows and future funding requirements.

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

(millions of Canadian dollars, except where otherwise noted)	Three months ended September 30,						Nine months ended September 30,
	2023			2022			2023			2022
Net income	$	68		$	158		$	174		$	974
Add back/(Deduct) following items:
Finance costs		32			17			92			52
Depreciation		31			24			92			64
Income tax expense:
Current		2			22			30			197
Deferred		20			27			29			61
Finance income and other		(14	)		(9	)		(34	)		(12	)
Loss (Gain) on derivative asset		11			-			26			15
Share-based compensation expense (recovery) 1		(1	)		3			12			6
Other costs 2		3			3			9			12
Transaction-based and other corporate-related costs		1			-			3			2
Gain on sale of land and buildings		-			-			-			(260	)
Adjusted EBITDA	$	153		$	245		$	433		$	1,111
Adjusted EBITDA as a percentage of total revenue		20	%		29	%		19	%		40	%

1. Share-based compensation consists of costs connected with the Company's Total Shareholder Return Based Incentive Program and other share-based compensation plans.
2. Other costs includes the write-down of certain capital projects that are no longer being pursued by the Company, representing aborted construction in progress costs without future benefit to Stelco, as well as demolition and other costs not connected to the Company's ongoing integrated steelmaking operations.

Contacts

For Further Information

For investor enquiries: Paul D. Scherzer, Chief Financial Officer, [phone], [e-mail]

For media enquiries: Trevor Harris, Vice-President, Corporate Affairs, [phone], [e-mail]