Stelco Holdings Inc. Reports Third Quarter 2020 Results

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

Stelco Holdings Inc. third quarter 2020 highlights include:

• Revenue of $237 million
• Adjusted EBITDA* loss of $39 million
• Shipments of 334,000 tons
• Successful completion of the Blast Furnace Upgrade Project

HAMILTON, ON, Nov. 11, 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 and nine months ended September 30, 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)	Q3 2020	Q3 2019	Change	Q2 2020	Change	YTD 2020	YTD 2019	Change
Revenue ($) ^1	237	464	(49)%	411	(42)%	1,093	1,406	(22)%
Operating income (loss) ($)	(69)	9	(867)%	16	(531)%	(46)	56	(182)%
Net income (loss) ($)	(88)	—	NM^2	—	NM^2	(112)	44	(355)%
Adjusted net income (loss) ($) *	(81)	(11)	(636)%	10	(910)%	(97)	55	(276)%
Net income (loss) per common share (diluted) ($)	(0.99)	—	NM^2	—	NM^2	(1.26)	0.50	(352)%
Adjusted net income (loss) per common share (diluted) ($) *	(0.91)	(0.12)	(658)%	0.11	(927)%	(1.09)	0.62	(276)%
Average selling price per nt ($) ^1,*	683	688	(1)%	700	(2)%	698	754	(7)%
Shipping volume (in thousands of nt) *	334	654	(49)%	576	(42)%	1,531	1,811	(15)%
Adjusted EBITDA (loss) ($) *	(39)	23	(270)%	34	(215)%	15	131	(89)%
Adjusted EBITDA (loss) per nt ($) *	(117)	35	(434)%	59	(298)%	10	72	(86)%

	^1	Certain comparative results have been adjusted to conform to the Q3 2020 presentation of revenue.
	^2	Not meaningful
*	See "Non-IFRS measures" for a description of certain Non-IFRS measures used in this Press Release and "Non-IFRS Measures Reconciliation" below.

"Our third quarter was highlighted by the successful completion and commissioning of our blast furnace upgrade project," said Alan Kestenbaum, Executive Chairman and Chief Executive Officer. "As a result we will lower our already industry leading cost structure by up to an additional $30 per net ton and increase our output by as much as 300,000 net tons. The fact that we were able to accomplish this feat in the face of challenges presented by the ongoing COVID-19 pandemic is a testament to the dedication of our employees and business partners. I want to personally commend our Chief Operating Officer, Sujit Sanyal, for the success of this project and for his expert guidance of all the contractors and his very capable leadership team."

"This latest achievement builds upon momentum created by our success earlier in the year," continued Kestenbaum. "To date in 2020 we have increased our penetration in value-added markets, thanks in part to our earlier investment in new state-of-the-art batch annealing technology, and we have secured a long-term, competitively priced supply of iron ore along with an option to acquire a stake in the Minntac mine. With the fulfillment of our strategic objectives in 2020, we believe Stelco is well positioned as a low-cost steel producer with the capability to deliver positive returns to our shareholders at every point in the market cycle. In the coming months, we expect to commission our pig iron casting facility, which will increase our tactical flexibility and further diversify our product mix."

"While our strategic blast furnace upgrade project resulted in lower shipments in the quarter, we once again successfully sold out our available production capacity. Our achievements this quarter have set the stage for us to effectively deploy our tactical flexibility model and fully capitalize on the emerging recovery in the steel market where prices are now about 50% higher than we saw during the third quarter. The timing of our outage could not have been better as we completed the upgrade project during the period of lower prices in Q3, and are now poised to take full advantage of the current strong pricing and demand environment." said Kestenbaum.

Third Quarter 2020 Financial Review

Compared to Q3 2019

Q3 2020 revenue decreased $227 million, or 49%, from $464 million in Q3 2019, primarily due to a 49% decrease in steel shipping volumes. Our shipping volumes decreased 320 thousand nt, from 654 thousand nt in Q3 2019 to 334 thousand nt in Q3 2020, mainly due to the impact of the Company's now completed blast furnace upgrade project, resulting in significantly lower steel inventory available for sale during the period. The average selling price of our steel products decreased from $688 per nt in Q3 2019 to $683 per nt in Q3 2020.

The Company realized an operating loss of $69 million for the quarter, compared to operating income of $9 million in Q3 2019, a decrease of $78 million consisting of a decrease in revenue of $227 million, partly offset by lower cost of goods sold of $149 million.

Finance costs increased by $7 million, from $9 million in Q3 2019, due to the following: $11 million related to the remeasurement impact from our employee benefit commitment, partly offset by $4 million related to the period-over-period impact of foreign exchange translation on U.S. dollar denominated working capital and foreign exchange loss associated with foreign exchange forward contracts entered during 2020.

The Company realized a net loss of $88 million for the quarter, compared to nil in the third quarter of 2019, a change of $88 million primarily due to the following: $78 million decrease in gross profit, $7 million in higher finance costs and $5 million lower finance and other income. Adjusted net loss increased by $70 million from $11 million in Q3 2019 to $81 million in Q3 2020.

Adjusted EBITDA loss in Q3 2020 totaled $39 million, a change of $62 million from adjusted EBITDA of $23 million in Q3 2019, which reflects the decrease in revenue from lower shipping volumes and the impact of the Company's blast furnace upgrade project during the period.

Compared to Q2 2020

Q3 2020 revenue decreased $174 million, or 42%, from $411 million in Q2 2020, primarily due to a 242 thousand nt or 42% decrease in steel shipping volumes, from 576 thousand nt in Q2 2020 to 334 thousand nt in Q3 2020. 

The Company realized an operating loss of $69 million in Q3 2020 compared to operating income of $16 million in Q2 2020, and an adjusted EBITDA loss of $39 million compared to adjusted EBITDA of $34 million during Q2 2020, which also reflects the impact of the Company's blast furnace upgrade project during the period.

Summary of Net Tons Shipped by Product

(in thousands of nt)
Tons Shipped by Product	Q3 2020	Q3 2019	Change	Q2 2020	Change	YTD 2020	YTD 2019	Change
Hot-rolled	211	425	(50)%	423	(50)%	1,081	1,317	(18)%
Coated	76	87	(13)%	109	(30)%	297	220	35%
Cold-rolled	16	26	(38)%	15	7%	66	49	35%
Other ^1	31	116	(73)%	29	7%	87	225	(61)%
Total	334	654	(49)%	576	(42)%	1,531	1,811	(15)%
Shipments by Product (%)
Hot-rolled	63%	65%		73%		71%	73%
Coated	23%	13%		19%		19%	12%
Cold-rolled	5%	4%		3%		4%	3%
Other ^1	9%	18%		5%		6%	12%
Total	100%	100%		100%		100%	100%

^1	Includes slabs and non-prime steel shipments.

Statement of Financial Position and Liquidity

On a consolidated basis, Stelco Holdings ended Q3 2020 with cash of $106 million and $31 million of borrowing capacity under its ABL revolver at September 30, 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	September 30, 2020		December 31, 2019
ASSETS
Cash	106		257
Restricted Cash	68		8
Trade and other receivables	56		158
Inventories	470		483
Total current assets	710		914
Derivative asset	81		—
Total assets	1,603		1,594
LIABILITIES
Trade and other payables	565		444
Asset-based lending facility	12		8
Obligations to independent employee trusts	36		35
Total current liabilities	645		521
Asset-based lending facility	87		90
Obligations to independent employee trusts	472		472
Total non-current liabilities	629		623
Total liabilities	1,274		1,144
Total equity	329		450

Stelco Holdings and its subsidiaries ended Q3 2020 with current assets of $710 million, which exceeded current liabilities of $645 million by $65 million. Non-current assets include the derivative asset representing the US$60 million in installment payments made for the Minntac option. Stelco Holdings' liabilities include $508 million of obligations to independent pension and OPEB trusts, which include $397 million of employee benefit commitments and $111 million under a mortgage payable associated with the June 2018 land purchase. Non-current liabilities of $629 million as at September 30, 2020 include $472 million of obligations to independent pension and OPEB trusts. Stelco Holdings' consolidated equity totaled $329 million at September 30, 2020.

Cybersecurity Attack

On October 25, 2020, Stelco announced that it was subject to a criminal attack on its information systems. In response, Stelco immediately implemented countermeasures in accordance with established cybersecurity procedures and policies that have been developed in collaboration with expert external advisors. The countermeasures taken were effective and limited the scope of the attack. Certain operations, including steel production, were temporarily suspended as a precautionary measure but quickly resumed operations.

Stelco's team, in conjunction with industry-leading cybersecurity specialists and other advisors, continues to investigate the incident and extent of the impact on its systems. Stelco implemented its back-up and recovery plans to fully re-establish its systems as quickly as possible though certain business functions may be adversely affected during this recovery process.

Criminal cyberattacks on businesses and other organizations around the world are increasingly prevalent in the 21st century, and Stelco will be cooperating with law enforcement authorities to investigate this crime.

In addition to the continued development of industry-leading cybersecurity practices, Stelco is committed to utilizing all available means to protect its operations and customer, employee and business information. Stelco will continue to invest in its information technology networks and security to detect and minimize the risk of unauthorized activity in this age of ever-increasing and highly sophisticated information security threats.

Quarterly Results Conference Call

Stelco management will host a conference call to discuss its results tomorrow, Thursday, November 12, 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 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 at least 90 days. A telephonic replay of the conference call will also be available from 12:00 p.m. ET on November 12, 2020 until 11:59 p.m. ET on November 26, 2020 by dialing 1 [phone] or 1 [phone] and using the PIN 397880#.

Consolidated Financial Statements and Management's Discussion and Analysis

The Company's unaudited interim condensed consolidated financial statements for the period ended September 30, 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 September 30, 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, acquisition opportunities, 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 ability to successfully adapt to changing market conditions; our ability to continue to operate the business as one of the lowest-cost integrated steel producers in North America; our advancement of strategic initiatives and our intention to continue making strategic investments in our business; expectations that we will achieve a  lower cost operating structure, increase our steelmaking capacity and improve our product quality as a result of the recently completed blast furnace reline and upgrade; expectations that we will fulfill all of our strategic objectives for 2020; expectations that the fulfillment of our strategic objectives in 2020 will further position the Company as a low-cost steel producer with the capability to deliver positive returns to our shareholders at every point in the market cycle; expectations that we will successfully commission our new pig iron casting facility in the coming months and that this will increase our tactical flexibility; expectations that the agreed upon pricing provisions in our iron ore supply agreement will remain competitively priced during the term of the agreement; expectations that we will be able to fully capitalize on a recovery in the steel market and that we will be able to take advantage of the current pricing and demand environment; statements regarding cybersecurity crimes and threats and our plans to further invest in our information technology systems; and expectations regarding the ongoing diversification of our product mix with respect to value-added products. 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.

Key Assumptions Underlying the Anticipated Cost Savings and Increased Production Resulting From the Blast Furnace Project

Statements with respect to the expected increased production volumes and cost savings regarding the upgrade and reline 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: third party contractors and suppliers delivering, constructing and performing in accordance with agreed upon budgets, schedules and applicable performance guarantees; expectations that 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; the blast furnace performing in such a manner so as to provide molten metal to meet our production needs; and expectations that we will fully realize production levels at our Lake Erie Works facility that are equal to or better than production levels existing at our Lake Erie Works facility prior to the commencement of the blast furnace upgrade and reline project.

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 September 30, 2020 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 September 30, 2020, which is available on the Company's website and on SEDAR (www.sedar.com).

Stelco Holdings Inc.
Consolidated Statements of Income (Loss)
(unaudited)

	Three months ended September 30,						Nine months ended September 30,
(millions of Canadian dollars)	2020			2019			2020			2019
Revenue from sale of goods	$	237		$	464		$	1,093		$	1,406
Cost of goods sold	297			446			1,109			1,315
Gross profit (loss)	(60)			18			(16)			91
Selling, general and administrative expenses	9			9			30			35
Operating income (loss)	(69)			9			(46)			56
Other income (loss) and (expenses)
Finance and other income (loss)	(4)			1			2			6
Finance costs	(16)			(9)			(61)			(15)
Share of income (loss) from joint ventures	1			—			(1)			(2)
Other costs	—			(1)			(6)			(1)
Income (loss) before income taxes	(88)			—			(112)			44
Income tax expense	—			—			—			—
Net income (loss)	$	(88)		$	—		$	(112)		$	44

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

As at	September 30, 2020		December 31, 2019
ASSETS
Current assets
Cash	$	106	$	257
Restricted cash	68		8
Trade and other receivables	56		158
Inventories	470		483
Prepaid expenses	10		8
Total current assets	$	710	$	914
Non-current assets
Derivative asset	81		—
Property, plant and equipment, net	802		670
Intangible assets	8		7
Investment in joint ventures	2		3
Total non-current assets	$	893	$	680
Total assets	$	1,603	$	1,594
LIABILITIES
Current liabilities
Trade and other payables	$	565	$	444
Other liabilities	32		34
Asset-based lending facility	12		8
Obligations to independent employee trusts	36		35
Total current liabilities	$	645	$	521
Non-current liabilities
Provisions	6		6
Pension benefits	9		7
Other liabilities	55		48
Asset-based lending facility	87		90
Obligations to independent employee trusts	472		472
Total non-current liabilities	$	629	$	623
Total liabilities	$	1,274	$	1,144
EQUITY
Common shares	512		512
Accumulated deficit	(183)		(62)
Total equity	$	329	$	450
Total liabilities and equity	$	1,603	$	1,594

Non-IFRS Measures Results

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

	Three months ended September 30,					Nine months ended September 30,
(millions of Canadian dollars)	2020		2019			2020		2019
Net income (loss)	$	(88)	$	—		$	(112)	$	44
Add back/(Deduct):
Other costs ^1	—		1			6		1
Unrealized loss from commodity-based swaps	4		—			4		—
Transaction-based and other corporate-related costs ^2	1		1			4		3
Share-based compensation expense (recovery) ^3	2		(2)			2		1
Remeasurement of employee benefit commitment ^4	—		(11)			(1)		(27)
Tariff related costs (recovery)	—		(1)			—		19
Separation costs related to USS support services	—		2			—		9
Carbon tax expense (recovery)	—		(2)			—		1
Batch annealing facility startup related costs	—		—			—		1
Property related idle costs included in cost of goods sold	—		1			—		3
Adjusted net income (loss)	$	(81)	$	(11)		$	(97)	$	55

^1	Other costs primarily 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.
^2	Represents certain non-routine items that include, but are not limited to, professional fees, including those connected with the acquisition of the Option during Q2 2020 and Stelco Inc.'s withdrawn proposed senior secured notes offering during September 2019.
^3	Share-based compensation consists of costs connected with the Company's long-term incentive plan for certain employees (including 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 (loss) for the periods indicated:

	Three months ended September 30,					Nine months ended September 30,
(millions of Canadian dollars, except where otherwise noted)	2020		2019			2020		2019
Net income (loss)	$	(88)	$	—		$	(112)	$	44
Add back/(Deduct):
Finance costs	16		9			61		15
Depreciation	27		15			52		38
Other costs ^1	—		1			6		1
Transaction-based and other corporate-related costs ^2	1		1			4		3
Unrealized loss from commodity-based swaps	4		—			4		—
Share-based compensation expense (recovery) ^3	2		(2)			2		1
Finance income	(1)		(1)			(2)		(4)
Tariff related costs (recovery)	—		(1)			—		19
Separation costs related to USS support services	—		2			—		9
Carbon tax expense (recovery)	—		(2)			—		1
Property related idle costs included in cost of goods sold	—		1			—		3
Batch annealing facility startup related costs	—		—			—		1
Adjusted EBITDA (loss)	$	(39)	$	23		$	15	$	131
Adjusted EBITDA (loss) as a percentage of total revenue	(16)%		5%			1%		9%

^1	Other costs primarily 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.
^2	Represents certain non-routine items that include, but are not limited to, professional fees, including those connected with the acquisition of the Option during Q2 2020 and Stelco Inc.'s withdrawn proposed senior secured notes offering during September 2019.
^3	Share-based compensation consists of costs connected with the Company's long-term incentive plan for certain employees (including 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/