Stelco Holdings Inc. Reports First Quarter 2020 Results

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

Stelco Holdings Inc.'s first quarter 2020 highlights include:

• Revenue of $445 million for the quarter, compared to $435 million for Q4 2019
• Operating income of $7 million for the quarter, compared to an operating loss of $6 million for Q4 2019
• Adjusted EBITDA* of $20 million for the quarter, compared to $10 million for Q4 2019
• Shipments* of 621,000 tons for the quarter, compared to 633,000 for Q4 2019

HAMILTON, ON, May 5, 2020 /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, 2020. Stelco Holdings is the 100% owner of Stelco Inc. ("Stelco"), the operating company.

Selected Financial Information:

(in millions Canadian dollars, except volume, per share and nt figures)	Q1 2020		Q1 2019		Change		Q4 2019		Change
Revenue ($) ^1	445		515		(14)%		435		2%
Operating income (loss) ($)	7		44		(84)%		(6)		NM
Net income (loss) ($)	(24)		43		(156)%		(24)		—%
Adjusted net income (loss) ($) *	(26)		60		(143)%		(13)		(100)%
Net income (loss) per common share (diluted) ($)	(0.27)		0.48		(156)%		(0.27)		—%
Adjusted net income (loss) per common share (diluted) ($) *	(0.29)		0.68		(143)%		(0.15)		(93)%
Average selling price per nt ($) ^1, *	705		824		(14)%		659		7%
Shipping volume (in thousands of nt) *	621		612		1%		633		(2)%
Adjusted EBITDA ($) *	20		76		(74)%		10		100%
Adjusted EBITDA per nt ($) *	32		124		(74)%		16		100%

1	Certain comparative results have been adjusted to conform to the Q1 2020 presentation of revenue.
*	See "Non-IFRS measures" for a description of certain Non-IFRS measures used in this Press Release and "Non-IFRS Measures Reconciliation" below.

"During the first quarter, our business successfully met the market headwinds and shipped close to our capacity which in turn allowed us to generate Adjusted EBITDA of $20 million – a 100 percent increase over the previous quarter," said Alan Kestenbaum, Executive Chairman and Chief Executive Officer. "We reached 150,000 tons or an annualized run rate of close to 600,000 net tons, of value added cold-rolled and coated shipments. With our order book approximately 85 percent filled for the second quarter, we are hopeful to be able to ship to capacity yet again for this current quarter despite the uncertainty resulting from the pandemic."

"In the months ahead, we are planning to complete our blast furnace upgrade which will increase our steelmaking capacity and improve our cost structure. Also, as announced last week, we entered into a new 8-year iron ore pellet purchase agreement with United States Steel Corporation, as well as an option agreement granting Stelco a long-dated option to purchase a 25% ownership interest in the Minntac Mine. This transaction represents a major milestone for Stelco as it secures a long-term supply of high-quality iron ore pellets and a highly valuable future option in the Minntac Mine - the best asset on the iron range. Having this level of security for our iron ore supply, combined with the efficiencies gained from our remaining capital projects for 2020, positions Stelco as one of the lowest cost producers in the North American steel market," continued Kestenbaum.

"I also want to acknowledge the exceptional work being done by everyone to manage through the global pandemic that has had such an impact on all of our lives in recent weeks. I am grateful for the exceptional efforts of the frontline workers and all those who are providing critical services, keeping us safe and maintaining critical supply chains. I also want to express my sincere appreciation to Stelco's team, who have been exceptional throughout this crisis. Our employees' dedication and continued focus on working safely has allowed our business to be in a position to succeed through this challenging time," concluded Kestenbaum.

First Quarter 2020 Financial Review:

Q1 2020 revenue decreased $70 million, or 14%, from $515 million in Q1 2019, primarily due to a 14% decrease in average steel selling prices and lower non-steel sales of $4 million, partly offset by 1% higher steel shipping volumes. The average selling price of our steel products decreased from $824/nt in Q1 2019 to $705/nt in Q1 2020, due largely to decreases in market prices for flat steel products. Shipping volumes increased 9 thousand nt, from 612 thousand nt in Q1 2019 to 621 thousand nt in Q1 2020, mostly from higher coated and cold rolled steel product shipments, partly offset by fewer hot rolled coil shipments during the quarter.

The Company realized operating income of $7 million for the quarter, compared to $44 million in Q1 2019, a decrease of $37 million due to lower gross profit of $42 million (consisting of a decrease in revenue of $70 million, partly offset by lower cost of goods sold of $28 million) which was partly offset by lower selling, general and administrative expenses of $5 million during Q1 2020. Cost of goods sold includes raw material and conversion costs, depreciation and freight expense from steel inventory sold and shipped during the period.

Finance costs increased by $30 million, from $3 million in Q1 2019, due to the following: $22 million related to the period-over-period impact of unfavourable foreign exchange translation on U.S. dollar denominated working capital, $6 million related to the remeasurement impact from our employee benefit commitment obligation, $3 million increase in interest on loans and borrowings and a $1 million increase in accretion expense related to our lease obligations, partly offset by $2 million lower accretion expense associated with our employee benefit commitment obligation.

The Company realized a net loss of $24 million for the quarter, compared to net income of $43 million in the first quarter of 2019, a decrease of $67 million due to the following: $42 million in lower gross profit, $30 million in higher finance costs and a $1 million increase in restructuring and other costs, partly offset by $5 million in lower selling, general and administrative expenses and a $1 million increase in finance and other income. Adjusted net income decreased $86 million year-over-year, from $60 million in Q1 2019 to an adjusted net loss of $26 million in Q1 2020.

Adjusted EBITDA in Q1 2020 totaled $20 million, a decrease of $56 million from adjusted EBITDA of $76 million in Q1 2019, which reflects the decrease in revenue from lower average price of steel sales and reduced non-steel sales, partly offset by an increase in shipping volumes realized during the quarter.

Summary of Net Tons Shipped by Product:

(in thousands of nt)

Tons Shipped by Product	Q1 2020		Q1 2019		Change		Q4 2019		Change
Hot-rolled	447		517		(14)%		382		17%
Coated	112		66		70%		106		6%
Cold-rolled	35		4		NM		40		(13)%
Other ^a	27		25		8%		105		(74)%
Total	621		612		1%		633		(2)%
Shipments by Product (%)
Hot-rolled	72%		84%				60%
Coated	18%		11%				17%
Cold-rolled	6%		1%				6%
Other ^a	4%		4%				17%
Total	100%		100%				100%

^a

Includes other steel products: slabs and non-prime steel sales.

Statement of Financial Position and Liquidity:

On a consolidated basis, Stelco Holdings ended Q1 2020 with cash of $232 million and $74 million of borrowing capacity under ABL revolver at March 31, 2020. 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, 2020		December 31, 2019
ASSETS
Cash	232		257
Trade and other receivables	139		158
Inventories	378		483
Total current assets	762		914
Total assets	1,493		1,594
LIABILITIES
Trade and other payables	346		444
Asset-based lending facility	12		8
Obligations to independent employee trusts	34		35
Total current liabilities	419		521
Asset-based lending facility	122		90
Obligations to independent employee trusts	474		472
Total non-current liabilities	657		623
Total liabilities	1,076		1,144
Total equity	417		450

Stelco Holdings and its subsidiaries ended Q1 2020 with current assets of $762 million, which exceeded current liabilities of $419 million by $343 million. Stelco Holdings' liabilities include $508 million of obligations to independent pension and OPEB trusts, which includes $396 million of employee benefit commitments and $112 million under a mortgage note payable associated with the June 2018 land purchase. Non-current liabilities of $657 million as at March 31, 2020 include $474 million of obligations to independent pension and OPEB trusts. Stelco Holdings' consolidated equity totaled $417 million at March 31, 2020.

COVID-19 Pandemic

In March 2020, the World Health Organization declared the coronavirus (COVID-19) a global pandemic. This contagious disease outbreak, which has continued to spread, and related adverse public health developments, have adversely affected workforces, economies, and financial markets globally, potentially leading to an economic downturn. Global equity markets have experienced significant volatility and weakness. Governments and central banks have reacted with significant monetary and fiscal interventions designed to stabilize economic conditions.

The extent to which these events may impact the Company's business activities will depend on future developments, such as the ultimate geographic spread of the disease, the duration of the outbreak, travel restrictions, business disruptions, and the effectiveness of actions taken in Canada and other countries to contain and treat the disease. These events are highly uncertain and as such, the Company cannot determine the ultimate financial impacts at this time.

While it is currently unclear how quickly a broad-based market recovery from COVID-19 will take place, we are confident that as one of North America's most technologically advanced steel companies we are well positioned to succeed. Our tactical flexibility business model will ensure that Stelco remains competitive, versatile and ready to capitalize on the expected economic recovery across North America.

Organization Change

On March 9, 2020, Stelco Holdings announced the appointment of Paul Scherzer as the Company's Chief Financial Officer, effective March 16, 2020.

Quarterly Results Conference Call

Stelco management will host a conference call to discuss its results tomorrow, Wednesday, May 6, 2020, at 9:00 a.m. ET. To access the call, please dial 1 [phone] or 1 [phone] and reference "Stelco". The conference call will also be webcasted live on the Investor Relations section of Stelco's website 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 at least 90 days. A telephonic replay of the conference call will also be available from 12:00 p.m. ET on May 6, 2020 until 11:59 p.m. ET on May 20, 2020 by dialing 1 [phone] or 1 [phone] and using the pin number 975751#.

Consolidated Financial Statements and Management's Discussion and Analysis

The Company's unaudited interim condensed consolidated financial statements for the period ended March 31, 2020, 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. 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'', ''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, 2020 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, 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'', ''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'', ''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 intention to continue making strategic investments in our business; expectations that we will ship volumes during the second quarter of 2020 that are consistent with those of the first quarter of 2020; expectations that our capital projects will be successful; expectations that the Company's willingness to invest and innovate will allow the Company to succeed; statements with respect to the completion of the first phase of an upgrade and reline project at our blast furnace facility at the Company's Lake Erie Works facility; expectations that the blast furnace will produce increased volumes of hot metal and result in reduced production costs; expectations that these capital projects will position Stelco for growth across both existing and new markets; expectations regarding the anticipated production and shipment timing that may be realized upon completion of the projects; expectations regarding the future growth of our cold-rolled and coated shipments, including galvanized; statements regarding the Company's annualized run rate of 600,000 net tons of cold-rolled and coated steel shipments; expectations that the iron ore transactions with United States Steel Corporation will provide the Company with a long-term supply of high-quality, low-cost iron-ore pellets and that the option regarding the Minntac Mine will remain highly valuable; and statements regarding our ability to succeed despite the COVID-19 pandemic. 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 complete new capital projects on schedule and within budget and their anticipated effect on revenue and costs; 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, rule, and regulations, including international trade regulations; our ability to continue to access the U.S. market without any adverse trade restrictions; upgrades to existing facilities remaining on schedule and on budget and their anticipated effect on revenue and costs; 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 18, 2020 and the Company's MD&A for the period ended March 31, 2020 available under the Company's profile on SEDAR at www.sedar.com.

Key Assumptions Underlying Our Shipping Volume Estimates

The estimates with respect to our future shipping volumes included in this press release are based on a number of 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; consistent demands for steel in North America; no significant additional legal or regulatory developments; no material failure with respect to any of our operations; no changes in economic conditions, or macro changes in the competitive environment affecting our business activities; upgrades to existing facilities and the construction of new facilities remaining on schedule and within 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; the impact of competition; and growth in steel markets and industry trends. We note that: (i) potential further changes to trade regulations in the United States; (ii) a failure by Canada to implement the Canada-U.S.-Mexico-Agreement on North American trade; and/or (iii) the outcome of trade deliberations between the U.S. and China could materially alter underlying assumptions around anticipated shipping volumes and the steel market, generally. In addition, the effect that the COVID-19 pandemic may have on the Company's future results of operations and financial condition are highly unpredictable and it is possible that the COVID-19 pandemic may have a material adverse effect on the Company's ability to (i) operate at or near full capacity, (ii) find customers that are willing to purchase our products at fair market prices, and (iii) transport and deliver our products to customers.

Key Assumptions Underlying the Blast Furnace Repair

The estimated budget, schedule and production volumes with respect to the planned repair of our blast furnace at Lake Erie Works referenced in this press release are based on a number of assumptions, including, but not limited to, the following material assumptions: our ability to enter into definitive agreements with third party contractors and suppliers on terms acceptable to the Company; expectations that third party contractors and suppliers will deliver, construct and perform in accordance with agreed upon budgets and schedules; our ability to obtain any applicable regulatory approvals and permits required in connection with this project; expectations that, upon completion, our facilities will produce in accordance with anticipated design capacity; expectations that the market for steel does not experience a material adverse change in the short to medium term; expectations that our customers will continue to purchase material volumes of production upon completion of the project; the currently planned blast furnace repair proceeding on schedule and, upon completion, performing in such a manner so as to provide molten metal to meet our production needs; and expectations that we will fully realize current and future production levels at our Lake Erie Works facility. In addition, the effect that the COVID-19 pandemic may have on the Company's ability to complete the proposed blast furnace repair is highly unpredictable and is subject to many variables, including, but not limited to, the possibility that the applicable contractors' may be impeded and/or restricted from completing the work on schedule and within the budget.

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, 2020, 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)	2020			2019
Revenue from sale of goods	$	445		$	515
Cost of goods sold	429			457
Gross profit	16			58
Selling, general and administrative expenses	9			14
Operating income	7			44
Other income (loss) and (expenses)
Finance costs	(33)			(3)
Finance and other income	4			3
Restructuring and other costs	(1)			—
Share of loss from joint ventures	(1)			(1)
Income (loss) before income taxes	(24)			43
Income tax expense	—			—
Net income (loss)	$	(24)		$	43

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

As at	March 31, 2020		December 31, 2019
ASSETS
Current assets
Cash	$	232	$	257
Restricted cash	7		8
Trade and other receivables	139		158
Inventories	378		483
Prepaid expenses	6		8
Total current assets	$	762	$	914
Non-current assets
Property, plant and equipment, net	722		670
Intangible assets	7		7
Investment in joint ventures	2		3
Total non-current assets	$	731	$	680
Total assets	$	1,493	$	1,594
LIABILITIES
Current liabilities
Trade and other payables	$	346	$	444
Other liabilities	27		34
Asset-based lending facility	12		8
Obligations to independent employee trusts	34		35
Total current liabilities	$	419	$	521
Non-current liabilities
Provisions	6		6
Pension benefits	8		7
Other liabilities	47		48
Asset-based lending facility	122		90
Obligations to independent employee trusts	474		472
Total non-current liabilities	$	657	$	623
Total liabilities	$	1,076	$	1,144
EQUITY
Common shares	512		512
Accumulated deficit	(95)		(62)
Total equity	$	417	$	450
Total liabilities and equity	$	1,493	$	1,594

Non-IFRS Measures Results

The following table provides a reconciliation of net income (loss) to adjusted net income (loss) for the period indicated:

	Three months ended March 31,
(millions of Canadian dollars)	2020		2019
Net income (loss)	$	(24)	$	43
Add back/(Deduct):
Restructuring and other costs ^1	1		—
Transaction-based and other corporate-related costs ^2	1		—
Unrealized gain on commodity-based swap	(2)		—
Share-based compensation expense (recovery) ^3	(1)		2
Remeasurement of employee benefit commitment ^4	(1)		(7)
Tariff related costs	—		13
Separation costs related to USS support services	—		5
Carbon tax expense	—		3
Property related idle costs included in cost of goods sold	—		1
Adjusted net income (loss)	$	(26)	$	60

1	Restructuring and other costs include certain building demolition costs, employee termination benefits and consulting costs.
2	Represents certain non-routine items that include, but are not limited to, professional fees, including those connected with Stelco Inc.'s withdrawn proposed senior secured notes offering during September 2019.
3	Share-based compensation consists of costs (recovery) connected with share options awarded to certain members of the Company's executive senior leadership team during the period.
4	Remeasurement of employee benefit commitment for change in the timing of estimated cash flows and future funding requirements.

The following table provides a reconciliation of net income (loss) to adjusted EBITDA for the periods indicated:

	Three months ended March 31,
(millions of Canadian dollars, except where otherwise noted)	2020		2019
Net income (loss)	$	(24)	$	43
Add back/(Deduct):
Finance costs	33		3
Depreciation	13		8
Restructuring and other costs ^1	1		—
Transaction-based and other corporate-related costs ^2	1		—
Unrealized gain on commodity-based swap	(2)		—
Share-based compensation ^3	(1)		2
Finance income	(1)		(2)
Tariff related costs	—		13
Separation costs related to USS support services	—		5
Carbon tax expense	—		3
Property related idle costs included in cost of goods sold	—		1
Adjusted EBITDA	$	20	$	76
Adjusted EBITDA as a percentage of total revenue	4%		15%

1	Restructuring and other costs include certain employee termination benefits, consulting and demolition costs.
2	Represents certain non-routine items that include, but are not limited to, professional fees, including those connected with Stelco Inc.'s withdrawn proposed senior secured notes offering during September 2019.
3	Share-based compensation consists of costs (recovery) connected with share options awarded to certain members of the Company's executive senior leadership team during the period.

SOURCE Stelco

For investor enquiries: Paul Scherzer, Chief Financial Officer, [phone], [email protected]; For media enquiries: Trevor Harris, Vice-President, Corporate Affairs, [phone], [email protected]

Related Links

https://www.stelco.com/