Good morning, everyone, and welcome to Stelco's third quarter earnings conference call. Joining me on the call today is David Cheney, our Chief Executive Officer.

Yesterday, after the closed, we issued a press release overviewing Stelco's financial results for the third quarter of 2019. This press release, along with the Company's financial statements and Management's Discussion and Analysis, have been posted on SEDAR and on our Investor Relations website at investors.stelco.com.

We have provided a link to the presentation referenced on today's call on our website as well. I'd like to inform everyone that comments made on today's call may contain forward-looking statements, which involve assumptions, which have inherent risks and uncertainties.

Actual results may differ materially from statements made today, so do not place undue reliance on them. Stelco management disclaims any obligations to update forward-looking statements, except as required by law.

So with all that in mind, I would like to ask everyone on today's call to read the legal disclaimers on Page 2 of the accompanying earnings presentation, and also to refer to the risks and assumptions outlined in Stelco's public disclosures, in particular the third quarter Management's Discussion and Analysis sections relating to forward-looking information, risks and uncertainties as well as our filings with Securities Commissions in Canada. The appendix of our presentation and the non-IFRS performance measures and review of non-IFRS measures of our third quarter MD&A provide definitions and reconciliations of the our non-IFRS measures that we use today.

Please also note that all dollar figures referred to in today's call will be in Canadian dollars, unless otherwise noted. Following our prepared remarks, David and I will take questions.

[Operator Instructions] With that, I would like to turn the call over to David.

Thank you, Don, and good morning, everyone. I want to begin today's call by highlighting several key points from our third quarter performance.

Steel pricing for the quarter was depressed, with our ASP down $57 per ton. Despite that, we executed our business plan and further enhanced Stelco's position as a competitive, well-positioned diversified steel producer in seven critical ways.

One, we delivered EBITDA that beat Street consensus; two, we shipped 654,000 tons, a 20% increase over second quarter; three, we shipped 113,000 tons of value-added and cold-rolled coated products, up 31% over the second quarter. This includes products from our newly process cold-rolled facility, which are generating the highest profit per ton in our portfolio.

Four, we realized in just one quarter approximately half of the $50 million run rate cost savings announced last quarter. We are well ahead of schedule and have identified up to an additional $20 million, bringing the total potential cost reductions to $70 million.

Five, last night, we announced our decision to install pig casting at Lake Erie, and we signed an LOI or off take agreement for a substantial portion of the output. This will further diversify our product mix and enable us to have yet another option to augment our tactical flexibility model.

Six, at quarter end, we fortified our liquidity position and strong balance sheet by raising a $100 million with the term loan at favorable conditions. Seven, we've continued to return capital to our shareholders by maintaining our quarterly dividend of $0.10 per share, and we opportunistically repurchase shares under our buyback program.

Now, for the current quarter, North American steel demand remains solid. Prices have started to increase.

Our lead times have extended to levels not seen in over a year, and I affirm our outlook for 1.3 million tons of shipments for the second half of 2019. As you know, management is committed to maximizing profitability by producing and selling a broad range of products and selling to the markets that have the highest margin.

This is the core of our tactically flexible business model. As evidenced this commitment, during the quarter, we began to unleash the potential of our new state-of-the-art batch annealing facility by delivering high margin, fully processed cold-rolled products.

The result has been a 61% increase in shipments of cold-rolled and coated products since the first quarter. This improvement demonstrates our desire and willingness to invest in value-added products, and our ability to deliver products that our customer demand.

Looking forward, I fully expect to continue to grow volume in this important part of our business. When we acquired Stelco, we made recruiting and training a priority.

We invested heavily in technology and innovation. These investments have afforded us the opportunity to conduct a thorough evaluation of our operations to ensure that our organization is right-sized and efficient.

Our review concluded that we have room for improvement in this area. Accordingly, we launched a voluntary retirement plan to those employees who are currently eligible to exercise their retirement options.

I will share specifics next quarter, but expect to realize up to $20 million in annual savings through this initiative. This is in addition to the $50 million of savings, of which – half of which has been realized that I announced last quarter, and this does not include savings in raw material costs.

Speaking of raw materials, we are seeing declines and increased availability in virtually all of raw materials we use as a result of announced curtailments and shutdowns as well as the increase of output in the key raw materials we buy. We expect to see the trend of declining raw material prices to continue.

Maintaining a strong balance sheet is a critical success factor in our industry. Why?

Because when you have a strong balance sheet, you can continually deploy capital to invest and grow the business. Last week, we fortified our liquidity when we announced the funding of $100 million term loan at favorable terms with few restrictions.

I am excited to announce an investment at Lake Erie Works to install a brand-new pig iron castor as part of our hot end enhancements taking place in Q2 of next year. These upgrades will increase our capacity, lower costs and give us, yet another product, pig iron, to sell in accordance with our tactical flexibility model.

Demand for this product is a strong, as evidenced by the LOI we signed for the off take of pig iron first two years of production. Finally, I would like to provide a brief update on advancements we are making with respect our land development.

During the quarter, we continue to secure additional leasing revenue, and as a result have now leased 28% of the surplus building space available at favorable terms. Additionally, we have identified further non-rent revenue, specifically in content creation, which is in high demand in the Hamilton area.

All of those advances the value of this non-core asset. In closing, our mandate and priority is to maximize long-term shareholder returns.

We do this by focusing on six key principles, serve and expand our customer base, optimize asset utilization, maximize profitability and cash flow, maintain a strong balance sheet, grow the company, and operate safely and sustainably. Our relentless focus to improve and innovate will place Stelco in a position of strength as we operate to the balance of the year and into 2020.

Now, I will turn the call over to Don to share some specific information on our financial results.

Thanks, David. Our strategic principles build on our strategic advantages, including our deep and broad customer relationships, our skilled employees, our highly-competitive cost structure, our wealth of assets and our strong balance sheet.

Every day, we see opportunities to further strengthen our business and to make us even stronger and more competitive. While many in industry reported sequential volume declines between Q2 and Q3, we posted quarter-over-quarter volume increases.

In Q3, our steel volumes were 654,000 tons, up 20% over Q2 2019 and up 12% over Q3 2018. The increased volume was balanced across all of our product categories with quarter-over-quarter shipments of hot-rolled, cold-rolled and coated products up 13%, 37% and 30% respectively.

We are very encouraged by the strong demand we're experiencing. The volume growth in Q3 is directly related to our strategic investment in assets like our annealing operations, but also due to our highly-competitive cost position and relationships with our customers.

Due to the strong demand that we've seen today, we are reaffirming our expectation that second half 2019 sales volumes will be in the range of 1.3 million tons, and we anticipate sales volumes in Q1 of 2020 will be in the range of 600,000 tons to 650,000 tons depending upon product mix. With regards to cost management, we’re extremely pleased with progress that we've made so far.

But there is more to come. Our stated goal, as David said, is $25 million to $50 million of run rate cost savings, above and beyond the anticipated $20 million in annual savings from early retirements and excluding any savings from raw material price declines.

So far, and within very short order, we have captured roughly $23 million of permanent savings. We've achieved these permanent savings through the efforts of all of our employees who work together to identify savings opportunities through our service and materials contracts, contractor rationalization, improvements in material and yield performance as well as tightening controls on SG&A spending.

For perspective, $50 million in annual savings represents $20 per ton at a 2.5 million-ton annual sales volume, and $70 million in annual cost reductions, if you include the high-end of our target range as well as $20 million of early retirement savings, would represent $28 per ton. We already believe that we're one of the lowest cost steel producers in North America, and our cost reductions will further strengthen that position.

Volume and cost management can also be seen in our Q3 financial performance. In Q3, we posted adjusted EBITDA of $23 million or $35 per ton, reflecting an average selling price of $704 per ton and sales volume was 654,000 tons.

In Q2, our adjusted EBITDA was $32 million or $59 per ton, reflecting an average selling price of $761 on volumes of 545,000 tons. Despite a $57 drop in average selling price, due largely to market steel price declines, our adjusted EBITDA per ton dropped just $24, reflecting the benefits of strong operating leverage and cost take outs.

We ended Q3 in a strong liquidity position as well. On September 30, cash balance was $349 million and availability under the ABL revolver facility was $115 million.

In November, we increased the liquidity benefits of the ABL facility by adding a $100 million term loan that is secured by our machinery and equipment. Interest rates for the term loan depend upon the total borrowing levels under the ABL facility and currently range between 4.25% and 4.75% annually.

And the loan can be repaid at any time without penalty. Please read the financial statements for additional information on the term loan.

We believe in keeping a lean and liquid balance sheet. The term loan adds cash to the balance sheet that can be used for strategic investment, such as our 2020 blast furnace reline and upgrades to the steel production, and also for the pig iron casting machine.

The ABL facility, in combination with our inventory monetization facility and receivable sale facility, are highly efficient tools to manage working capital of our business at minimum cost of capital. These facilities are useful in financing a portion of the seasonal inventory build as we add inventory from September through December in preparation for the seasonal shutdown of Great Lakes shipping starting in early January.

In addition to using working capital fund portion of our inventory build in Q4, we deposited approximately $36 million into the third-party pension trust in October. The deposit represented the sharing of tax savings from utilization of net operating loss carry forwards in fiscal 2018.

Consistent with our strong liquidity position, I'm pleased to announce the company has declared its eighth consecutive quarterly dividends. A dividend of $0.10 per share will be paid on November 29 to shareholders of record on November 25.

I started by saying that we see the current market conditions as an opportunity to strengthen our competitive position. We're making disciplined strategic investments to ensure our capabilities and to enhance our capabilities as well as meet the demands of our customers.

New product capabilities, increased capacity and improved cost structure should enable us to achieve our goals to create value for our stakeholders. That concludes the prepared remarks.

Now, I look to turn the call back over to the operator for Q&A. Operator?

Yes, thanks. Good morning.

Good morning, Curt.

I guess, first question with respect to the pig iron casting facility. Can you talk to the capital required to install the caster?

And then, given that you have significant excess hot mill capacity at Lake Erie relative to BOF production. Is the decision to pivot more into pig iron effectively a view that you think making merchant pig is higher margin than effectively converting that pig into excess downstream rolling, which you have capacity to do?

No, Curt, actually that's not that at all. Installing the pig iron capacity is directly in line with our tactical flexibility business model, which really is predicated on having a broad suite of products that we can market to as many end use and consumers as possible to drive the highest profit per ton of our steel products.

We do believe that selling pig iron can be very – generate very attractive margins. As you know, we have an internal hurdle of a two-year payback from investments, and we expect the pig caster will certainly exceed that.

But this is not a reflection of diverting metal away from the hot strip mill. It is simply enhancing our capabilities to offer a broader suite of products and maximize profitability.

Okay. But if your current pig iron capacity effect – I don't know, exactly what it would be, but if we're going to do 1 million tons of pig iron, you're saying that, that would have no cannibalization effect in your ability to ship at current run rate of flat rolled?

Well, actually, Curt, the nameplate capacity of the pig caster is over 1 million tons. It doesn't necessarily mean that we're going to fill or even come close to filling that capacity.

That's just simply the utilization rate. As you know, pig casting is a relatively straightforward process.

You take hot metal and then you cast ingots. So that's the capacity, that's not the volume.

As you know, we don't ever give specific volume targets for any product so just because we have that capacity, does not mean we will fully utilize it.

Okay. And what's – can you give us a view for what, the cap – I guess, maybe just 2020 CapEx will look like?

Yes. Look, we expect 2020 CapEx to be in the $180 million range.

Our normative CapEx is between $30 million and $35 million, the remainder is growth CapEx, which is allocated amongst the various projects between the blast furnace, BOF upgrades, continued investments in our coke batteries as well as the pig caster.

Okay. And then on the cost management, the $25 million to $50 million, I guess, what would be the buckets or the plan to get you the remainder of the $27 million?

And can you give us a sense of what the timing could look like on that to get to the high end of your cost management target?

Certainly. So look, the – as Don indicated in his comments, the results to date are really a function of watching our contractor spending, renegotiating contracts with our – with certain vendors as well as offtake for certain byproducts.

As we look to complete our program, we have a number of initiatives around improving yield and improving reliability, continuing to maximize the utilization of our dock, rail and shipping channels to reduce transportation costs as well as being more efficient on our consumption of alloys and other products. But I want to take a pause here.

On the topic of cost reductions, we're a nimble and decisive management team, that is laser-focused on exploiting opportunities as they emerge in the market. For example, recent market conditions have created opportunities to purchase semi-finished and finished products at very favorable prices.

We've also been able to negotiate lower prices for many of our raw materials. We all know that we operate in a volatile industry.

But that volatility creates opportunity, so long as you're looking for them and can act decisively, which we are doing.

Okay. And then final question with regards to land value or monetization efforts, I mean, I think, that you've quickly used at least or almost 30% of the space, and you're looking at other – that content creation capability.

Can you give us a sense of timing on when you could, maybe, have a more clear monetization path for that value? I mean, I think there's clearly a lot of value there that may be traditional analysts, like myself, struggle to value.

Is there anything kind of on the time horizon that would help put more of a marker on fair value there? I know you went through some of the metrics last quarter on kind of implied value, but any update there would be helpful.

Thank you very much.

Certainly. So look, we're not going to give a specific guideline for when to see monetization.

As a reminder, we purchased the land just over a year ago. We've made tremendous progress to-date in leasing nearly 30% of the land, and we continue to move as quickly as possible.

And I expect you'll see further developments and announcements in the first half of next year.

Great.

Hi, thanks for taking my question. Just wanted to follow up on pig iron projects, if possible so CapEx for 2020 is $180 million.

You've got sustaining CapEx of, I think, $30 million to $35 million was a comment? And then a blast furnace project which I believe, what's the CapEx for the blast furnace reline again?

That's about $100 million.

Right. So is the balance then most of the pig iron?

Or is there other pieces in that as well?

There is other pieces. We know, we've given some indications in the past of some of the key products – or key projects that we're interested in, in executing, but certainly the pig is a part of the remainder.

Okay. And then just on the profitability of pig iron.

Not a lot of visibility on, at least, on my side for merchant pig iron profitability over time. Can you give us a sense as to just arrange EBITDA per ton metric, something that we can use to think about measuring profitability?

And also can you give us a little more in terms of this two-year commitment? How much volume and, if possible, some of the metrics behind that payment as well?

So at this stage, we're not going to disclose any of the details of the offtake. What I can say is that, we expect to receive a premium to the Nova Index pig iron price.

As we've talked about, we expect pig casting to be accretive to our overall margin per ton, and that's really – but that's really only part of it, Dave. I think the other part of this is that, by having a pig casting, it gives us incredible amount of flexibility in how we operate our assets, how we arbitrage the market between utilizing scrap and hot metal in our production mix as well as how we manage our maintenance programs.

So having this outlet for hot metal offers a number of benefits operationally from a tactical flexibility perspective and from a marketing perspective. So it's a lot more than just tons and volume – and dollar per ton.

That said, we wouldn't be doing this if we do not expect this to be accretive to our overall profit per ton.

Okay. Thanks.

Just switching gears to near-term operating metrics. If our calcs are correct?

It looks like obviously, 4Q – why, I shouldn't say obviously, its look like pricing, average pricing in 4Q likely to be down versus 3Q. Can you talk us through – we've got the volume obviously, implied can you talk us through mix expectations for 4Q?

And any color around – framing a bit of a range about the quarter-over-quarter decline in average prices, please?

Dave, our ASP does move generally in line with the CRU index. I would expect that our ASP will drop quarter-over-quarter.

We're still in the early stages of the quarter, so beyond the typical relationship to the movement in CRU, that's what we can say at this point. But I think what's really important here is the demand for steel.

We're very optimistic around the continued strong demand for steel. Broad economic indicators are favorable, trade tensions are moderating, employment statistics are all positive, and this all points to continued economic growth, continued demand for steel.

We talked about this in our press release. Our order book is very strong.

We are completely sold out for this – for Q4, and we're booking well into January. So from that perspective, we're very optimistic.

When it comes to guidance for specific products, look our cold-rolled and coated represented 27% of all primarily sheet sales, this is the highest percentage that we delivered since our IPO. And our order book is very strong in these products, and I expect that – those orders to continue to grow.

The other point, though, is that we've been very active this quarter with automakers and we have secured more contracts for next year with additional automakers, more parts, both North and South of the border. So you should expect to see our participation in that part of the high-end market also increase.

That’s very helpful. Thank you.

Just on the last point on the auto contracts for 2020. How much of your volume now in 2020 is committed under contracts, under annual contracts with fixed pricing or fixed margins?

I would say, about 5% of our – if you assume that we would ship 2.5 next year, which we are not given that guidance, because as you know we have the outage, but 5% of 2.5 would be under contract. So couple of hundred thousand tons and growing, actually, it's less than – I think it's about 125,000 tons.

Okay, all right. Perfect.

Thank you.

Good morning guys, this is Mark on for Ian.

Good morning.

Great. So most of our questions have been answered, but just a quick one on opportunities.

You guys have done well on the organic side, is there anything else in the pipeline right now? Or is there anything interesting on the sort of M&A front you guys will consider?

Thanks.

Look, we always have a robust pipeline of both organic and inorganic projects. The announcements on pig iron is just one of the things that we're working on.

As you know, this company is focused on growth, both organic and strategic. And this is really the synergy of the bifurcated Executive Chairman and CEO roles.

While we made some announcements this quarter around organic projects, Alan and the team remain very active, evaluating a range of M&A opportunities. We have one of the strongest balance sheets in the industry, and so we will comment more on those when appropriate, but it remains another potential source of growth for the company.

Okay, great. Thank you guys very much.

Great, thank you everyone. Have a great day.