Stelco Holdings Inc. Reports First Quarter 2019 Results

/NOT FOR DISTRIBUTION TO U.S. NEWSWIRE SERVICES OR FOR DISSEMINATION IN THE UNITED STATES/

Stelco Holdings Inc. first quarter 2019 highlights include:

• Q1 2019 revenue of $517 million, up 7%, compared to Q1 2018
• Q1 2019 net income of $43 million, up 48%, compared to Q1 2018
• Q1 2019 adjusted EBITDA* of $63 million and adjusted EBITDA per ton* of $103
• Q1 2019 tariff adjusted EBITDA* of $76 million, up 10% from $69 million in Q1 2018
• Q1 2019 tariff adjusted EBITDA margins* of 15%
• Company declares a regular quarterly dividend of $0.10 per share

HAMILTON, ON, May 1, 2019 /CNW/ - 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 months ended March 31, 2019.

Stelco Holdings Inc. Highlights:

Selected Financial Information:

(in millions except volume, per share and nt figures)	Q1 2019	Q1 2018	Change	Q4 2018	Change
Revenue ($)	517	482	7 %	648	(20)%
Operating income ($)	44	58	(24)%	118	(63)%
Net income ($)	43	29	48 %	110	(61)%
Adjusted net income ($)*	47	50	(10)%	100	(55)%
Net income per common share (diluted) ($)	0.48	0.33	45 %	1.23	(61)%
Adjusted net income per common share (diluted) ($)*	0.53	0.56	(5)%	1.13	(53)%
Average selling price per nt ($)*	827	762	9 %	917	(10)%
Shipping volume* (in thousands of nt)	612	613	— %	673	(9)%
Adjusted EBITDA ($)*	63	69	(9)%	144	(56)%
Tariff Adjusted EBITDA ($)*	76	69	10 %	167	(54)%
Adjusted EBITDA per nt ($)*	103	113	(9)%	214	(52)%
Tariff Adjusted EBITDA per nt ($)*	124	113	10 %	248	(50)%

*	See "Non-IFRS measures" for a description of certain Non-IFRS measures used in this Press Release and "Non-IFRS Measures Reconciliation" below. Q1 2018 per net ton comparative figures have been restated to conform to the current period's presentation applying steel revenue only.

"In the first quarter of 2019, we continued to demonstrate the benefits of our tactical flexibility business model by delivering year-over-year improvements in revenue, tariff adjusted EBITDA and tariff adjusted EBITDA per net ton," said David Cheney, Stelco's Chief Executive Officer. "As we look forward, demand from most of our key end markets remains stable and we are utilizing our logistics infrastructure to continue to expand our market footprint."

"I am pleased to report significant progress on a number of key initiatives. The installation of our state-of-the-art batch annealing equipment, a $35 million investment which we announced in Q4 2017, is on schedule and we have booked our first orders of fully-processed cold-rolled material for delivery in June. Additionally, we have captured valuable OEM and tier 1 auto accounts and we intend to continue to push hard in that end market for continued and sustained growth as we leverage the investments we have made in the galvanizing and hot strip mill to service that higher margin end market. We have progressed on a number of projects that will improve our cost structure and overall efficiency. In July, we plan to begin work to upgrade our Lake Erie coke batteries which we anticipate could result in up to an additional 100,000 tons of coke that we can sell in the very profitable merchant coke market. We are nearing a final decision on choosing our partner for our co-generation power plant to serve the Lake Erie facility which we believe will generate approximately $20 million in annual cost savings with limited capital investment.

"We are also starting to generate income from the surplus land at our facilities. To that end, we have signed a long-term lease with a new tenant for a currently unused industrial building at our Hamilton site at a rate that averages approximately $10 per square foot, and we are in active discussions with more potential tenants. We also continue to return value to our shareholders as our Board has approved the regular dividend of $0.10 per share. We ended the quarter with no financial debt, $285 million in cash and $577 million in total liquidity. To capitalize on market opportunities and our strong financial position, our Executive Chairman, Alan Kestenbaum, is leading efforts to actively evaluate a number of strategic and accretive M&A opportunities that have started to emerge. Overall, we are optimistic for the future as Stelco is extremely well positioned to deliver attractive organic and inorganic growth," concluded Cheney.

First Quarter 2019 Financial Review:

Compared to Q1 2018

Q1 2019 revenue increased $35 million, or 7%, from $482 million in Q1 2018, primarily due to a 9% improvement in average steel selling prices from $762/nt in Q1 2018 to $827/nt in Q1 2019. Shipping volumes remained flat at 612 thousand nt in Q1 2019 compared to 613 thousand nt in Q1 2018.

Operating income decreased by $14 million, or 24%, from $58 million in Q1 2018, mainly due to higher cost of sales of $47 million and selling, general and administrative expenses of $2 million, partly offset by an increase in revenue during Q1 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 $13 million, or 81%, from $16 million in Q1 2018, due to an $11 million gross remeasurement recovery on our employee benefit commitment due to a change in timing of estimated cash flows and future funding requirements, $6 million related to the period-over-period impact of foreign exchange translation on U.S. dollar denominated working capital and $1 million lower accretion on lease obligations, partly offset by $3 million increase in interest on loans and borrowings and $2 million higher accretion expense associated with our employee benefit commitment obligation.

Finance and other income improved by $13 million, from a loss of $10 million in Q1 2018. During Q1 2018, the Company entered into commodity-based swaps as part of a strategy to mitigate Stelco's exposure to hot-rolled coil steel market price fluctuations in anticipation of certain slab purchases from a third party, which did not occur. These swap contracts matured and settled during May 2018, with the Company realizing a loss of $10 million. Stelco did not enter these contracts for trading or speculative purposes.

Net income for the quarter was $43 million, up from $29 million in the first quarter of 2018, which benefited from $13 million lower finance costs, $13 million gross increase in finance and other income, $3 million lower restructuring costs, partly offset by lower gross profit of $12 million and higher selling, general and administrative expenses of $2 million. Adjusted net income decreased $3 million year-over-year, from $50 million in Q1 2018 to $47 million in Q1 2019. The decrease was impacted by tariff costs of $13 million incurred in Q1 2019, compared to nil tariff costs incurred during Q1 2018.

Adjusted EBITDA in Q1 2019 totaled $63 million, a decrease of $6 million from adjusted EBITDA of $69 million in Q1 2018. Tariff adjusted EBITDA was $76 million in Q1 2019, up from $69 million in Q1 2018, which reflects the increase in revenue from the higher average price of steel, partly offset by higher cost of sales.

Compared to Q4 2018

Revenue decreased 20%, from $648 million in Q4 2018 to $517 million in Q1 2019, which reflects a 9% decrease in steel shipping volumes, from 673 thousand nt in Q4 2018 to 612 thousand nt in Q1 2019 and a 10% decrease in average selling price, from $917/nt in Q4 2018 to $827/nt in Q1 2019, as well as lower non- steel sales. Operating income decreased to $44 million in Q1 2019, down 63% from Q4 2018 operating income of $118 million. Adjusted EBITDA decreased to $63 million, down 56% from Q4 2018 adjusted EBITDA of $144 million, primarily due to lower average selling prices, lower shipping volumes realized and higher cost of sales, partially offset by lower tariff costs. Tariff costs decreased from $23 million in Q4 2018 to $13 million in Q1 2019, as the Company continued to focus its sales on the Canadian market.

Summary of Net Tons Shipped by Product:
(in thousands of nt)

Tons Shipped by Product	Q1 2019	Q1 2018	Change	Q4 2018	Change
Hot-rolled	517	491	5%	553	(7)%
Coated	66	84	(21)%	79	(16)%
Cold-rolled	4	15	(73)%	10	(60)%
Other	25	23	9%	31	(19)%
Total	612	613	—%	673	(9)%
Shipments by Product (%)
Hot-rolled	84%	80%		82%
Coated	11%	14%		12%
Cold-rolled	1%	2%		1%
Other	4%	4%		5%
Total	100%	100%		100%

Statement of Financial Position and Liquidity:

On a consolidated basis, Stelco Holdings ended Q1 2019 with total liquidity of $577 million, including cash and cash equivalents of $285 million and $292 million of borrowing capacity under its ABL revolver, which remains undrawn. The following table shows selected information regarding the Stelco Holdings' consolidated balance sheet as at the noted dates:

(millions of Canadian dollars)
As at	March 31, 2019	December 31, 2018
ASSETS
Cash and cash equivalents	285	438
Trade and other receivables	265	252
Inventories	346	468
Total current assets	921	1,194
Total assets	1,439	1,655
LIABILITIES
Trade and other payables	285	436
Total current liabilities	428	579
Total non-current liabilities	509	508
Total liabilities	937	1,087
Total equity	502	568

Stelco Holdings and its subsidiaries ended Q1 2019 with current assets of $921 million, which exceeded current liabilities of $428 million by $493 million. Stelco Holdings' liabilities include $586 million of obligations to independent pension and OPEB trusts, which includes $473 million of employee benefit commitments and $113 million under a mortgage note payable associated with the June 2018 land purchase. Long term liabilities of $509 million as at March 31, 2019 includes $484 million of obligations to independent pension and OPEB trusts. Stelco Holdings' consolidated equity totaled $502 million as at March 31, 2019.

Declaration of Quarterly Dividend

Stelco's Board of Directors approved the payment of a regular quarterly dividend of $0.10 per share will be paid on May 31, 2019, to shareholders of record as of the close of business on May 27, 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 quarterly results tomorrow, Thursday, May 2, 2019 at 9:00 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 webcasted live on the Investor Relations section of Stelco's web site at https://www.stelco.com/investors. 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 90 days. A telephonic replay of the conference call will also be available from 12:00 p.m. ET on May 2, 2019 until 11:59 p.m. ET on May 16, 2019 by dialing 1-888-390-0541 or 1-416-764-8677 and using the pin number 538971.

Consolidated Financial Statements and Management's Discussion and Analysis

The Company's  unaudited interim condensed consolidated financial statements for the period ended March 31, 2019, and Management's Discussion & Analysis thereon are available under the Company's profile on SEDAR at www.sedar.com.

Please note that we have streamlined financial reporting starting in Q1 2019 by eliminating voluntary public financial reporting for our operating company, Stelco Inc. After the IPO in late 2017, and throughout 2018, Stelco Holdings Inc. did not have full prior period comparative information because it did not exist as a legal entity until September, 2017. As a result, we voluntarily filed financial statements and MD&A for our operating company, Stelco Inc., which did have prior period comparative information. Now that Stelco Holdings Inc. has prior period comparative balances for all of 2018, we have discontinued voluntary filing of Stelco Inc. financial statements and MD&A.

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. With first-rate gauge, crown, and shape control, as well as reliable uniformity of mechanical properties, our 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.

Non-IFRS Measures

This news release refers to certain non-IFRS measures that are not recognized under International Financial Reporting Standards ("IFRS") and do not have a standardized meaning prescribed by IFRS. These measures are not recognized measures under 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 share", ''adjusted EBITDA'', ''tariff adjusted EBITDA'', ''tariff adjusted EBITDA per nt'', ''adjusted EBITDA per nt'', ''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 period ended March 31, 2019 available under the Company's profile on SEDAR at www.sedar.com.

Key Assumptions Underlying Our Planned Lake Erie Coke Battery Upgrade and Co-Generation Plant Opportunity:

The estimated additional production of coke resulting from a planned coke battery upgrade at our Lake Erie facility referenced in this press release is based on a number of assumptions, including, but not limited to, the following material assumptions:

• the Company's ability to successfully complete the coke battery upgrade on time, within budget and in accordance with the required technical specifications;
• expectations regarding the production and quality of additional coke, resulting from the planned upgrade of the coke battery at our Lake Erie facility;
• the Company's ability to produce sufficient volumes and quality of coke to meet its internal consumption requirements; and 
• the Company's ability to sell any such additional coke at favorable rates in the merchant coke market.

The estimated annual cost savings resulting from the potential construction of a co-generation power plant to serve our Lake Erie facility referenced in this press release is based on a number of assumptions, including, but not limited to, the following material assumptions:

• the Company's ability to enter into a definitive agreement with a third-party development partner to engineer, procure and design a co-generation power plant at our Lake Erie facility on terms acceptable to the Company;
• the Company's ability to obtain the applicable regulatory approvals required to develop a co-generation facility at our Lake Erie facility;
• the Company's ability to secure publicly available grant funding on terms acceptable to the Company;
• expectations regarding the current and future prices of electricity in the Province of Ontario;
• expectations regarding the Company's current and future production levels at our Lake Erie facility; and
• expectorations regarding the actual cost of constructing the co-generation power plant and the annual costs associated with maintaining the plant being within the range currently estimated by management of the Company.

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, budgets, operations, financial results, taxes, dividend policy, 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'', "nearing", ''budget'', ''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'', "will result", "will improve", "continue to", "started to", ''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 news release includes our advancement of strategic initiatives, statements concerning the Company's expectations on increased margins and profitability, exposure to tariffs, the expected results from the Company's participation in higher margin segments of the steel industry, expectations concerning our coke battery upgrade, expectations concerning mergers and acquisition opportunities, expectations regarding maximizing shareholder returns and expectations regarding the declaration of a dividend. 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 our ability to source raw materials and other inputs; our ability to supply to new 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 international trade regulations; expectations that demand from our key end markets will remain stable; our ability to utilize our logistics infrastructure to expand our market footprint; our ability to complete the installation of our batch annealing equipment on schedule; our ability to leverage the investments we have made in the galvanizing and hot strip mill to service a high margin end market; expectations that our capital projects will improve our cost structure and overall efficiency; expectations regarding the additional production of coke resulting from our planned upgrade to the Lake Erie coke batteries; our ability to sell excess coke product at favorable rates in the merchant coke market; our ability to partner with a third party to develop a co-generation facility on favorable terms, and expectations that any such project will result in significant annual cost savings for the Company without having to incur significant capital expenditures; our ability to enter into favorable lease arrangements with various tenants with respect to the surplus land at our facilities and expectations that the Company will be able to generate material income from such lands; expectations regarding strategic and accretive M&A opportunities; expectations regarding future actions to maximize shareholder returns and profitability; expectations regarding our position to deliver organic and inorganic growth; 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.

Such forward-looking information is subject to known and unknown risks, uncertainties, assumptions and other factors that may cause the actual results, level of activity, performance or achievements to be materially different from those expressed or implied by such forward-looking information, including: North American and global steel overcapacity; imports and trade remedies; competition from other producers, imports or alternative materials; and the availability and cost of inputs placing downward pressure on steel prices or increasing our costs; as well as those described in the Company's annual information form dated February 15, 2019 and the Company's MD&A for the period ended March 31, 2019 available under the Company's profile on SEDAR at www.sedar.com.

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 news 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 period ended March 31, 2019, 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 March 31,
(millions of Canadian dollars)	2019		2018
Revenue from sale of goods	$	517	$	482
Cost of goods sold	459		412
Gross profit	58		70
Selling, general and administrative expenses	14		12
Operating income	44		58
Other income (loss) and (expenses)
Finance costs	(3)		(16)
Finance and other income (loss)	3		(10)
Restructuring and other costs	—		(3)
Share of loss from joint ventures	(1)		—
Income before income taxes	43		29
Income tax expense	—		—
Net income	$	43	$	29

Stelco Holdings Inc.
Consolidated balance sheets
(unaudited)

As at	March 31, 2019		December 31, 2018
ASSETS
Current assets
Cash and cash equivalents	$	285	$	438
Restricted cash	9		8
Trade and other receivables	265		252
Inventories	346		468
Prepaid expenses	16		28
Total current assets	$	921	$	1,194
Non-current assets
Property, plant and equipment, net	506		448
Intangible assets	7		7
Investment in joint ventures	5		6
Total non-current assets	$	518	$	461
Total assets	$	1,439	$	1,655
LIABILITIES
Current liabilities
Trade and other payables	$	285	$	436
Other liabilities	41		40
Obligations to independent employee trusts	102		103
Total current liabilities	$	428	$	579
Non-current liabilities
Provisions	5		5
Pension benefits	3		2
Other liabilities	17		13
Obligations to independent employee trusts	484		488
Total non-current liabilities	$	509	$	508
Total liabilities	$	937	$	1,087
EQUITY
Common shares	512		512
Treasury shares	—		(1)
Retained earnings (deficit)	(10)		57
Total equity	$	502	$	568
Total liabilities and equity	$	1,439	$	1,655

Non-IFRS Measures Results
The following table provide a reconciliation of net income to adjusted net income for the period indicated:

	Three months ended March 31,
(millions of Canadian dollars, except where otherwise noted)	2019		2018
Net income	$	43	$	29
Add back/(Deduct):
Remeasurement of employee benefit commitment ^1		(7)		4
Separation costs related to USS support services ^2		5		4
Carbon tax expense ^3		3		—
Share-based compensation ^4		2		—
Property related idle costs included in cost of goods sold ^5		1		—
Loss from commodity-based swaps		—		10
Restructuring costs		—		3
Adjusted net income	$	47	$	50

1	Remeasurement of employee benefit commitment for change in the timing of estimated cash flows and future funding requirements.
2	Includes ERP implementation costs associated with the process of separating from USS, management fees and shared services arrangement costs.
3	Represents a non-cash carbon tax provision for the period, connected to Stelco's estimated requirements under the Greenhouse Gas Pollution Pricing Act (Federal Backstop) for industrial facilities with greenhouse gas emissions. Actual cash payments related to the carbon taxes, if any, are not expected to occur until the year 2020 at the earliest.
4	Share-based compensation consists of costs connected with share options awarded to certain members of the Company's executive senior leadership team during the period.
5	Includes utility costs incurred by Stelco for non-operating and idled assets acquired from the Land Vehicle on June 5, 2018.

The following table provides a reconciliation of net income to each of adjusted EBITDA and tariff adjusted EBITDA for the period indicated:

	Three months ended March 31,
(millions of Canadian dollars, except where otherwise noted)	2019		2018
Net income	$	43	$	29
Add back/(Deduct):
Finance income	(2)		—
Depreciation	8		7
Finance costs	3		16
Separation costs related to USS support services ^1	5		4
Carbon tax expense ^2	3		—
Share-based compensation ^3	2		—
Property related idle costs included in cost of goods sold ^4	1		—
Loss from commodity-based swaps	—		10
Restructuring costs	—		3
Adjusted EBITDA	$	63	$	69
Tariff related costs ^5	13		—
Tariff adjusted EBITDA	$	76	$	69
Percentage of total revenue:
Adjusted EBITDA	12%		14%
Tariff Adjusted EBITDA	15%		14%

1	Includes ERP implementation costs associated with the process of separating from USS, management fees and shared services arrangement costs.
2	Represents a non-cash carbon tax provision for the period, connected to Stelco's estimated requirements under the Greenhouse Gas Pollution Pricing Act (Federal Backstop) for industrial facilities with greenhouse gas emissions. Actual cash payments related to the carbon taxes, if any, are not expected to occur until the year 2020 at the earliest.
3	Share-based compensation consists of costs connected with share options awarded to certain members of the Company's executive senior leadership team during the period.
4	Includes utility costs incurred by Stelco for non-operating and idled assets acquired from the Land Vehicle on June 5, 2018.
5	Includes tariff and tariff related costs connected with U.S. bound steel shipments.

SOURCE Stelco

For investor enquiries: Don Newman, Chief Financial Officer, 905-577-4432, [email protected]; For media enquiries: Trevor Harris, Vice-President, Corporate Affairs, 905-577-4447, [email protected]

Related Links

http://www.stelco.ca