U.S. Markets closed

Edited Transcript of STLC.TO earnings conference call or presentation 14-Aug-19 1:00pm GMT

Q2 2019 Stelco Holdings Inc Earnings Call

Aug 26, 2019 (Thomson StreetEvents) -- Edited Transcript of Stelco Holdings Inc earnings conference call or presentation Wednesday, August 14, 2019 at 1:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* David Cheney

Stelco Holdings Inc. - CEO

* Donald P. Newman

Stelco Holdings Inc. - CFO

================================================================================

Conference Call Participants

================================================================================

* Curtis Rogers Woodworth

Crédit Suisse AG, Research Division - Director & Senior Analyst

* David Francis Gagliano

BMO Capital Markets Equity Research - Co-Head of Metals & Mining Research and Metals & Mining Analyst

* Ian Alton Zaffino

Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst

* Matthew James Korn

Goldman Sachs Group Inc., Research Division - Senior Metals and Mining Analyst

* Maxim Sytchev

National Bank Financial, Inc., Research Division - MD & AEC-Sector Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good morning. My name is Chris and I'll be your conference operator today. At this time, I would like to welcome everyone to the conference call regarding Stelco's second quarter results for 2019. (Operator Instructions) Thank you. Mr. Newman, you may begin your conference.

--------------------------------------------------------------------------------

Donald P. Newman, Stelco Holdings Inc. - CFO [2]

--------------------------------------------------------------------------------

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

Yesterday, after the market close, we issued a press release overviewing Stelco's financial performance for the second quarter of 2019. The 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 stelco.com/investors. 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 obligation to update forward-looking statements except as required by law.

With that in mind, I would 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 second quarter Management's Discussion and Analysis section relating to forward-looking information and 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 second quarter MD&A provide definitions and reconciliations of the 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'd like to call -- take the call -- like to turn the call rather over to David.

--------------------------------------------------------------------------------

David Cheney, Stelco Holdings Inc. - CEO [3]

--------------------------------------------------------------------------------

Thank you, Don, and good morning, everyone. As many of you are aware, the end of the second quarter marked 2 years since its management team formally started its journey to restore Stelco's position as a leader in the North American steel industry.

Before I ask Don to provide some insight into our financial results for the quarter, I want to take a moment to share some details regarding the Stelco culture that has been integral to the success we have shared with our stakeholders during this period. Over the past 2 years, you've heard repeatedly about our tactical flexibility business model, the core philosophy behind the way we do business at Stelco. The willingness to change and adapt to changing market conditions and quickly respond to external pressures that challenge our business has allowed us to deliver sustainable financial results and also return more than $300 million directly to our shareholders. Those returns continued in Q2 as we delivered results within a range of expectations despite facing some challenging headwinds throughout the quarter.

While we have utilized our tactical flexibility model to guide our business and capitalize on the ever-changing market, Stelco has remained grounded in a core set of principles that are integral to the long-term sustainability of our business. Our priority is to maximize the long-term returns for our shareholders. To achieve this, we operate our business with a focus on 6 key priorities; one, expand and serve our customer base; two, optimize our assets; three, maximize profitability and cash flow; four, maintain a strong balance sheet; five, grow our business; and six, operate safely and sustainably.

These priorities drive our decision-making process, and I'm pleased to report progress across all of these key areas. We maintain unwavering commitment to serve our customers. As we announced earlier this quarter, we've responded to the demands by our customers by investing in new batch annealing equipment. The addition of up to 200,000 tons of fully processed cold-rolled capacity to our product mix has been welcomed by our customers and represents an important value-add product for our business. We expect this result in better utilization of our Hamilton Works finishing assets and has a potential to add meaningful incremental EBITDA once we reach full capacity.

We are also getting our products to our customers more efficiently and sustainably after investing in logistics capabilities.

The addition of nearly 400 leased railcars and vessel shipments from our Lake Erie dock offers many benefits. Greater logistics flexibility, quicker delivery times, lower freight costs and reduced carbon footprint. In the second quarter, 20% of our shipments were via vessel and rail. Going forward, we will work closely with our customers to further optimize logistics channels and to identify and develop the next generation of steel products to serve both their needs and those needs of the users of our products.

We've always been committed to investing to optimize the utilization of our assets and we will continue to do so. Over the past 2 years, we've invested in our assets to increase production and to improve our capability to manufacture the next generations of steels, especially for the auto industry.

Starting in July, we began making a significant investment to upgrade the [inflows] at our Lake Erie works coke battery. We expect this investment will yield approximately 100,000 tons of coke above our 2018 production levels. We're also continuing our preparation for investments to further upgrade and modernize our blast furnace, scheduled for 2020, that we expect to yield as much as 300,000 tons of molten metal above current production levels.

In addition, we are investing in cutting-edge technologies that we believe will enable us to run our assets more efficiently and profitably. For example, Stelco is at the forefront of deploying artificial intelligence in day-to-day operations. Working with Canvass Analytics, a leading AI platform for industrial operations, Stelco has implemented AI for optimizing the steel production process, leapfrogging the market by deploying AI in production using reinforcement learning in an autonomous control system and a full-production environment. This is leading to reduced waste, improve quality and optimization of asset utilization. We're extremely excited with the prospects we see in deploying an AI and you'll hear more from me on this topic.

The third of our core values is maximizing profitability and controlling cost. It is here where we will focus on maintaining and improving our cost structure, so that we will continue to generate positive returns throughout the cycle. The first half of 2019 is a challenging period for our industry. As a changing geopolitical climate, customer destocking and falling steel prices required us to be extremely disciplined with respect to cost controls. Despite these challenges, I'm proud to report our cost per ton improved versus prior quarter, our business remain profitable and we generated cash flow.

However, I believe there is more that we can do to improve our leading cost position. We're announcing an initiative to achieve sustainable annual run rate cost reductions of $25 million to $50 million over the next several quarters. This represents up to $20 per ton of steel on an annualized sales volume of 2.5 million tons.

The identified savings, while challenging, are achievable and will further position Stelco as an industry leader when it comes to the efficiency of our operations and our ability to generate returns for our stakeholders.

Fourth is our focus on preserving a strong balance sheet. As I've said in the past, we view the bottom of the cycle as a point where value can be created and more opportunities exist to grow. In order to take advantage of those opportunities, the business must be in a strong financial position with sufficient liquidity to execute our strategy. At the end of Q2, Stelco held cash and cash equivalents of $277 million after generating a $146 million in cash from operating activities in the first half of the year. Today, we have approximately $455 million in the bank. To put that in perspective, our cash represents approximately 40% of our market value. Our strong liquidity and balance sheet positions us to take advantage of opportunities in the market.

To that end, I'm pleased to say we have recently reached an agreement with the Government of Canada to access approximately $50 million from the strategic innovation fund. While the specific details of this partnership will be announced shortly, I can say that these funds will be used to support the modernization of our facilities in both Hamilton and Nanticoke.

Which leads me to our next core value, growing our company. As we execute our strategy, we continue to look for every opportunity to grow the business both organically and through accretive M&A activity. I spoke earlier about our asset optimization projects that will lead to increased production at our coke and steel making facilities as well as investments to support production of fully processed cold-rolled sheet. Further, our Executive Chairman, Alan Kestenbaum as well as others from our executive management team continued to investigate multiple M&A opportunities and conduct strategic assessments of the potential value creation. As these opportunities materialize, we will provide additional information at the appropriate time. We continue to believe we're entering a period where Stelco is uniquely positioned for growth.

Finally, we've maintained our commitment to ensure our operations are both safe and sustainable. The health and safety of our workforce remains at the heart of our operations, and we pride ourselves on returning our employees home to their families safely each and every day. As evidence to that commitment, none of our employees have suffered any injury requiring days away from work in nearly 2 years.

With respect to sustainability, we continue to pursue innovative opportunities such as electricity cogeneration. As a reminder, earlier this quarter, we announced a strategic partnership with DTE to construct a cogeneration power plant at our Lake Erie site. This initiative will require limited capital from Stelco, and we believe it will yield up $20 million in annual savings. We will continue to pursue measures to enhance our performance in these areas and report on significant developments and achievements at the appropriate time.

Overall, we believe that staying true to these core principles coupled with the responsive nature of our tactical flexibility model will position Stelco for continued growth and sustainable profitability. While 2Q had its challenges, we have seen a reversal of what we saw in Q2. Market prices have normalized and are rising and order volumes are strong. We believe Stelco to have one of the lowest steelmaking cost in the North American steel industry and the measures I've just outlined will only improve that position.

Before I hand things back to Don, I want to provide an update regarding the progress on the utilization of our surplus lands. In the Q1 earnings call, I said there was more to come regarding the land. I'm extremely pleased to announce that we have signed a long-term lease for 125,000 square feet of our space at our Hamilton site. The 10-year lease is with one of our largest customers at very attractive rental rates and has an NPV of approximately $20 million.

We have in excess of 500,000 square feet of existing industrial warehouse space available for rent and more than 500 acres of developable land, which could equate to an additional 8 million square feet of rentable space once developed.

I want to pause for a moment and put all this in context. The lease we just signed represents less than 1.5% of the total potential rentable square footage at our Hamilton site. In short, this land is an incredible asset and has a potential to drive significant value creation. Against this backdrop, we are seeing very strong interest from potential renters, including customers. Using the available real estate to better serve our customers and at the same time increase returns from a real estate investments has a twofold benefit of enhancing the core steel business and driving high ROIs on our land investments.

As always, our efforts are intended to achieve one core objective, maximize returns to our shareholders. Our utilization of the tactical flexibility model and commitment to our core principles has afforded our business the opportunity to build upon the more than $300 million we have paid in dividends to our shareholders since IPO, less than 2 years ago. Our Board has approved another regular dividend of $0.10 per share, which we paid at the end of August. This is further proof of our success in building a financially sustainable business that is capable of responding to the challenges and delivering positive returns at every point in the market cycle.

We see reason to be optimistic for our business in Q3 and beyond. We have seen positive developments in both market volume and pricing in the early portion of Q3. As we follow through on our commitments to diversify our product mix and secure permanent sustainable cost reductions, Stelco will be well positioned to maintain its position as an industry leader.

I will now turn the call over to Don to talk more about the financial results, cash generation and the balance sheet.

--------------------------------------------------------------------------------

Donald P. Newman, Stelco Holdings Inc. - CFO [4]

--------------------------------------------------------------------------------

Thanks, David. Despite facing a challenging market, we had success managing those headwinds, while at the same time strengthening our balance sheet and improving our cost structures.

Revenue in Q2 totaled $431 million, bringing revenue for the first half of the year to $948 million.

Adjusted EBITDA for the quarter was $32 million and $108 million for the first 6 months.

Our Q2 revenue of $431 million reflects an average selling price of $761 per ton, down $66 per ton from $827 in the first quarter. The 8% decline in quarter-over-quarter price reflects the general decline in prices experienced in the broader market as seen in crude prices.

We saw our selling prices trough in late June and then begin to recover in July. Again, not inconsistent with the pattern seen in broader market prices as seen in the crude.

Non-steel sales totaled $16 million in Q2, up $11 million from the first quarter.

We believe that the decline in market prices in 2019 and destocking by customers are related. Steel shipments in Q2 totaled 545,000 tons, down from 612,000 tons in the first quarter. While steel shipping volumes were lighter in the first half of the second quarter, order volumes improved noticeably in June, while market prices were bottoming. Those stronger order volumes have largely continued into Q3. The stronger order volumes coupled with some strengthening in market prices in July and early August are encouraging trends.

Through our focus on liquidity, strong cost management and tactical flexibility, our business generated $146 million in cash from operations, and we ended the quarter with $515 million of liquidity, including $277 million in cash and $238 million of borrowing capacity under our ABL revolver. These cash and liquidity amounts are after paying $118 million in dividends and investing $97 million in CapEx and $21 million in land year-to-date.

We believe that focusing on a healthy balance sheet and strong liquidity are important elements to creating shareholder value. To that end, we added an accounts receivable sale facility in late June. The receivable sale facility gives us the flexibility to sell receivables effectively accelerating the collection cycle.

Further, we've used our inventory monetization facility to improve working capital management and effectively extend vendor payment terms. After the close of the second quarter, we expanded the monetization facility to include more inventory categories and improve our inventory capital management, adding approximately $175 million to our cash position.

That concludes our prepared remarks. Now I'd like to turn the call over to the operator for Q&A. Operator?

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Your first question comes from David Gagliano, BMO Capital Markets.

--------------------------------------------------------------------------------

David Francis Gagliano, BMO Capital Markets Equity Research - Co-Head of Metals & Mining Research and Metals & Mining Analyst [2]

--------------------------------------------------------------------------------

I've got a few, but I'm going to try and limit it in the first round to some near-term questions. First of all, second quarter volumes, they were down about 11% quarter-over-quarter, which is more than the other producers that we cover anyway. Was that a function of being 100% spot exposed/destocking? Or is there something else going on there? And can you be a little more specific about your expectations regarding the second half volumes, please?

--------------------------------------------------------------------------------

David Cheney, Stelco Holdings Inc. - CEO [3]

--------------------------------------------------------------------------------

Dave, look, I think, it's a combination of a number of things, particularly around customers and destocking. But what's important is we're very optimistic for the second half. If you refer to our MDA, we're targeting 1.3 million tons shipped in the second half of 2019. This is consistent with our previous commentary on production and shipping levels. Your question is why are we so optimistic? I think the fact is we built a business that's capable of thriving in every part of the market cycle. And we've seen some real favorable movements in volume and pricing in the beginning of Q3 and we think that sets the stage for a return to volume similar to what we saw last year.

--------------------------------------------------------------------------------

David Francis Gagliano, BMO Capital Markets Equity Research - Co-Head of Metals & Mining Research and Metals & Mining Analyst [4]

--------------------------------------------------------------------------------

Okay. That's very helpful. And then just my follow-up, I'm switching gears to pricing. On our numbers, even with the recovery in pricing, it looks like most of the indices are still down on U.S. dollar basis about $15 to $50 a ton, if we assume current prices hold for the rest of the quarter that would be Canadian dollar around CAD 30 to CAD 80 a ton. Is that a reasonable assumption for starting point range for overall price declines quarter-over-quarter? Are you down CAD 30 to CAD 80, assuming spot stays flat for the rest of the quarter before we adjust for mix? Or is there anything else that we should be thinking about?

--------------------------------------------------------------------------------

David Cheney, Stelco Holdings Inc. - CEO [5]

--------------------------------------------------------------------------------

Yes. So look, when it comes to prices, I think, most importantly, we believe prices have bottomed. Since the first week of July, crude has increased from below $500s and reached $600 a ton. During the end of the quarter and to Q3, we've seen our lead times increased to over 4 weeks for HRC. Right now, the order book is very strong, and we've seen a real nice uptick in pricing. But as you alluded to, as we put all these in context, CRU was in the high $600s at the beginning of Q2. And I think, I would expect our quarter-over-quarter average sales price to follow the trend in CRU pricing.

--------------------------------------------------------------------------------

Operator [6]

--------------------------------------------------------------------------------

Your next question comes from Curt Woodworth, Crédit Suisse.

--------------------------------------------------------------------------------

Curtis Rogers Woodworth, Crédit Suisse AG, Research Division - Director & Senior Analyst [7]

--------------------------------------------------------------------------------

David, it seems like your -- in your prepared remarks you talked about exceptional sort of acquisition opportunities and obviously, given the liquidity of over $0.5 million, it does seem like you are in a pretty unique position to capitalize on sort of this mini downturn. So I'm wondering if you can kind of talk about how you view sort of the acquisition landscape? What do you view as kind of most strategic for you within that framework?

And then given the pretty sizable grant from the government regarding Nanticoke and Hamilton, would that imply that you're looking to restart those facilities? Or there is some meaningful reinvestment that you're looking to make there?

--------------------------------------------------------------------------------

David Cheney, Stelco Holdings Inc. - CEO [8]

--------------------------------------------------------------------------------

Okay. So I'll address both of those. With respect to M&A, Alan and I have a long track record of delivering highly accreted and value-enhancing growth. It seems to have fallen under the radar, but our recent land acquisition is a great example. As you may recall, on May 8, this year, we announced the acquisition of the remaining former Stelco lands. This included 500,000 square feet of industrial space, 100,000 square feet of office space and 37 acres of land. The purchase price was $20 million. The lease we just signed was from one of those buildings. To do the math for you, the lease square footage represents only 20% of the purchase square footage and the NPV is equal to the entire purchase price. All in all, I think that's a pretty good transaction. As for the future, Alan, myself and the executive team are working hard for the next transactions. That can be upstream, it could be further mill capacity and it can be in downstream. Specifics, we really can't talk about other than, as you've come to learn from us, we will remain incredibly disciplined, and we're always focused on highly accretive, highly value-creating transactions. That's on the M&A side.

On the Hamilton side, this is a bit of a continuation from previous comments. Stelco is asset rich. We have a number of underutilized assets, unused assets, which include the Hamilton blast furnace. But it also includes land, a 10-megawatt turbo generator and excess rolling capacity. Our focus has always been to utilize all of our assets. So when we think about the batch annealing, it's going to pull 200,000 tons through our cold mill. So this is going to provide a number of benefits. It's going to add more value-added product mix, but it's also going to lower our unit cost through fixed cost absorption. When we think about the turbo generator, having an additional 10 megawatts of low-cost electricity in Hamilton behind the meter is a resource that could provide many interesting opportunities for some high-paying tenants.

Regarding the Hamilton furnace, look, it remains an option. We'll continue to evaluate it and we'll update you when there is something more concrete to report.

--------------------------------------------------------------------------------

Curtis Rogers Woodworth, Crédit Suisse AG, Research Division - Director & Senior Analyst [9]

--------------------------------------------------------------------------------

Okay. That's helpful. And then maybe a question for Don, in terms of the cost progression in the second half of the year, you talked about $25 million to $50 million of this incremental opportunity. Is that a number that would be fully realized, like did you realize that? Or is that an annualized run rate? And would you view that as a structural change in the cost? Or is this more aggressively targeting discretionary cost and there could be just some temporary dynamic to that?

--------------------------------------------------------------------------------

David Cheney, Stelco Holdings Inc. - CEO [10]

--------------------------------------------------------------------------------

Yes. So Curt, I'm going to jump over Don and address some of this. This program has actually been quarters in the making. We've been making investments in our people, in our technology and in our assets to put us in a position to launch the program. The key elements of the plan are reducing contracting hours, strengthening relationships with key service providers, increasing equipment uptime and improving yield and getting greater utilization of our secondary materials and byproducts. Everyone at Stelco is fully committed to this objective and I'm highly confident we're going to delivery on these commitments. And these are not temporary cost reductions. These are permanent reductions to further improve our cost position. In terms of the realization, we've targeted $25 million to $50 million. We're going to try to achieve as much of that as fast as possible. In terms of the exact timing, look, I think, it's safe to say that at least $25 million in the second half of this year. And within the next several quarters, we expect to reach all $50 million.

--------------------------------------------------------------------------------

Donald P. Newman, Stelco Holdings Inc. - CFO [11]

--------------------------------------------------------------------------------

So Curt, I would add, too, to what David just said that again, this is not a last-minute attempt to take out cost. This is the fruition of really efforts that started months and months ago, when prices were still quite high. And it's our job to deliver the greatest return for our shareholders. And we see part of that is managing our cost structures aggressively. And so when we talk about delivering on this set of cost takeouts, this has been developed with a lot of discipline. We're pretty comfortable and confident in our ability to capture because we put in the time to understand it. And with that, we're also pretty comfortable that these are costs that we can keep out of our business. And so with all that, it's a pretty achievable goal for us from our perspective.

--------------------------------------------------------------------------------

Curtis Rogers Woodworth, Crédit Suisse AG, Research Division - Director & Senior Analyst [12]

--------------------------------------------------------------------------------

Okay. That's great. And then just one last one from me regarding the -- some of the optimization at Lake Erie and I think you mentioned 300,000 tons of potential molten metal upside. Is that -- will that coincide with the reline that's upcoming or could that be ahead of time? And can you just update us on sort of the current thinking around exactly the timing of the reline, which I think is at the end of next year?

--------------------------------------------------------------------------------

David Cheney, Stelco Holdings Inc. - CEO [13]

--------------------------------------------------------------------------------

Yes. Look, Curt, it's part and parcel with the reline. Part of this is positioning. We've always talked about, we don't want to just take our assets to prior levels. We want to improve them and upgrade them. So the optimization and the improvements will happen at the same time as the reline. We'll give you some more specific details, but we're expecting it to happen in the first half of next year. And a lot of the incremental production is going to come from greater stability in the assets. We're also going to make some repairs and upgrades to our BOF. And look, just to remind you, this is the first full reline at the Lake Erie blast furnace in the company's history. So we're going to get some -- again some pretty good stability. We're going to further deploy AI. And our COO has come up with some best practices that are being used around the world that we can implement at Stelco to increase capacity.

--------------------------------------------------------------------------------

Operator [14]

--------------------------------------------------------------------------------

Your next question comes from Maxim Sytchev, National Bank Financial.

--------------------------------------------------------------------------------

Maxim Sytchev, National Bank Financial, Inc., Research Division - MD & AEC-Sector Analyst [15]

--------------------------------------------------------------------------------

Just 2 quick questions. The first one around the cash balance that you guys are telegraphing in the press release that is building after Q2. Do you mind maybe describing a little bit where that increase is coming from?

--------------------------------------------------------------------------------

Donald P. Newman, Stelco Holdings Inc. - CFO [16]

--------------------------------------------------------------------------------

Sure, this is Don, I'll address that. So I mentioned in my script that, that we expanded our inventory monetization facility after the end of the quarter and that generated about $175 million of additional cash. The way to think about it is, the company had invested cash in inventory balances prior to us expanding this facility after the quarter. So in effect what we did is, we restored that cash that was invested in inventory with the expansion of the facility, that served to increase our cash balances significantly.

--------------------------------------------------------------------------------

Maxim Sytchev, National Bank Financial, Inc., Research Division - MD & AEC-Sector Analyst [17]

--------------------------------------------------------------------------------

And the second question pertains to the opportunity on slabs. It looks like it's going to the U.S. Can you maybe discuss how much of an upside you can generate from this type of business?

--------------------------------------------------------------------------------

David Cheney, Stelco Holdings Inc. - CEO [18]

--------------------------------------------------------------------------------

Look, we did sell slabs in Q2. Why? As we've said again and again, we're focused on maximizing profitability. So in Q2, we had the opportunity to sell slabs and cobalt full hard to a new strategic customer, both at attractive options. We'll continue to evaluate selling all these products to all the markets. And really Max, it sounds trite, but this is tactical flexibility at work. And look, going forward for the next quarter or 2, we should expect the ratio of other shipments as a percent of total to be roughly in line.

--------------------------------------------------------------------------------

Operator [19]

--------------------------------------------------------------------------------

Your next question comes from Matthew Korn, Goldman Sachs.

--------------------------------------------------------------------------------

Matthew James Korn, Goldman Sachs Group Inc., Research Division - Senior Metals and Mining Analyst [20]

--------------------------------------------------------------------------------

So you pivoted toward Canada heavily from last spring to avoid the excess tariff costs. Do you reverse that now that the 232 exemption is in place? And does that help you meaningfully in either placing tons or in your realizations?

--------------------------------------------------------------------------------

David Cheney, Stelco Holdings Inc. - CEO [21]

--------------------------------------------------------------------------------

Look, our focus has and will continue to be serving our customers. Our priority is to serve all of our existing customers, a significant portion are in Canada. During the 232 period, we honored all of our customers commitments in the U.S. But in terms of placing incremental tons, we're always mindful of tariffs. So with the tariffs going away, we're really pleased that the U.S. and Canada are working together again to facilitate supplying steel in an interconnected supply chain. And as our customers continue to grow and make investments, we hope to grow with them. So can that mean some incremental tons into the U.S.? Possibly, but it's really about serving our customers and meeting their needs.

--------------------------------------------------------------------------------

Matthew James Korn, Goldman Sachs Group Inc., Research Division - Senior Metals and Mining Analyst [22]

--------------------------------------------------------------------------------

Got it. Then, let me ask you a little bit on contacts. Can you talk about your status and success of foreign layering in contracts? How and whether you're going to increase that push in the year-end? And do you have a goal for what's your -- what you think you can achieve in terms of spot contract mix for 2020?

--------------------------------------------------------------------------------

David Cheney, Stelco Holdings Inc. - CEO [23]

--------------------------------------------------------------------------------

Look, the goal is to make as much money as possible. We're a low-cost producer and we think that being exposed to the spot market on pricing, offers our shareholders the most upside possible to a rising steel price environment.

In terms of contracts, we have a number of contacts that have volume commitments and pricing set based on market. We continue to invest on our advanced-strength steels, our ultra high-strength steels for the auto sector. We've been successful in securing contracts this year. And look, as we look to further penetrate the auto sector, we're going to take on some more fixed-price contracts, but it's all about striking the right balance. And again, given our low cost structure, given our pristine balance sheet, given our low fixed cost, we're in a truly unique position of wanting that exposure to spot price because again, it just allows investors to realize maximum upside.

--------------------------------------------------------------------------------

Matthew James Korn, Goldman Sachs Group Inc., Research Division - Senior Metals and Mining Analyst [24]

--------------------------------------------------------------------------------

All right. Then last from me. If you can remind me, just for the cogen plant, what is the expected cash requirement in terms of amount and timing? And when did that $20 million annual savings be realized?

--------------------------------------------------------------------------------

David Cheney, Stelco Holdings Inc. - CEO [25]

--------------------------------------------------------------------------------

We haven't made a comment on the specific capital, although it's really minor. So it's not a significant number at all. In terms of when we expect to realize full savings, we're expecting the plant to start in the second half of 2021, probably in Q4, and the savings will begin immediately.

--------------------------------------------------------------------------------

Operator [26]

--------------------------------------------------------------------------------

Your next question comes from Ian Zaffino, Oppenheimer.

--------------------------------------------------------------------------------

Ian Alton Zaffino, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [27]

--------------------------------------------------------------------------------

Can you guys just talk about what the pipeline looks for the real estate business? I know you mentioned 1.5% of your total square footage. How do we see this kind of progressing? Does this sale -- is an indicative of what you think you can monetize, let's just say, per foot at? And how we should kind of think about that?

--------------------------------------------------------------------------------

David Cheney, Stelco Holdings Inc. - CEO [28]

--------------------------------------------------------------------------------

Look, it's hard to give any specific details, Ian, other than I can say, it's progressing very well. The demand for industrial space in the GTHA market is red hot. The reality is there is just not a lot of space for industrial users. We have not only space and we have buildings. Those buildings; we're talking cranes; we're talking rail access, highway access, port access, and our development team has potential tenants coming in virtually every day. So we're continuing to work to, first and foremost, lease the existing buildings. At the same time, working on the master plan around the 500 acres of developable land. So we've only own this land for about a year, and built -- and we just bought certain buildings, not even 2 months ago. So we think we're moving at a pretty fast pace, and you should expect it to continue and potentially accelerate.

--------------------------------------------------------------------------------

Operator [29]

--------------------------------------------------------------------------------

Your next question comes from David Gagliano, BMO Capital Markets.

--------------------------------------------------------------------------------

David Francis Gagliano, BMO Capital Markets Equity Research - Co-Head of Metals & Mining Research and Metals & Mining Analyst [30]

--------------------------------------------------------------------------------

Just one quick clarification on that land, on the lease commentary. Is this lease that you're referring to that you just signed, is that different than the one you signed in May?

--------------------------------------------------------------------------------

David Cheney, Stelco Holdings Inc. - CEO [31]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

David Francis Gagliano, BMO Capital Markets Equity Research - Co-Head of Metals & Mining Research and Metals & Mining Analyst [32]

--------------------------------------------------------------------------------

Okay. And then...

--------------------------------------------------------------------------------

David Cheney, Stelco Holdings Inc. - CEO [33]

--------------------------------------------------------------------------------

We now have 2 new tenants to our land.

--------------------------------------------------------------------------------

David Francis Gagliano, BMO Capital Markets Equity Research - Co-Head of Metals & Mining Research and Metals & Mining Analyst [34]

--------------------------------------------------------------------------------

Okay. Great. And then regarding the cash balance obviously a pretty big pile. You kind of touched on it somewhat, but can you give us a little more specific about your priorities for that cash pile?

--------------------------------------------------------------------------------

David Cheney, Stelco Holdings Inc. - CEO [35]

--------------------------------------------------------------------------------

Look, it's to grow the business. We have truly, David, so many levers and ways to grow the business. We have utilization of the assets. We do have opportunities at, frankly, whether it's a turbo generator, whether it's a blast furnace whatever. And then we're also very active on the M&A front. So we said repeatedly, the bottom of the cycle is where you find great opportunities and we expect to use that cash to grow the business.

--------------------------------------------------------------------------------

David Francis Gagliano, BMO Capital Markets Equity Research - Co-Head of Metals & Mining Research and Metals & Mining Analyst [36]

--------------------------------------------------------------------------------

Okay. And then so -- I don't want to put words in your mouth or -- where does capital returns fit into the equation?

--------------------------------------------------------------------------------

David Cheney, Stelco Holdings Inc. - CEO [37]

--------------------------------------------------------------------------------

Look, we're always evaluating capital returns. But right now, as we've said, we take a look at where we see production, volumes, prices going, also we look at where we see the opportunity from an organic and inorganic pipeline, and then we try to figure out what's going to generate the best return. And right now, what I can -- what we can tell you is that growth is the priority. We see an incredible pipeline and shareholder returns and returns to shareholders will always be considered, but our focus is and always will be what's absolute highest returns for everybody.

--------------------------------------------------------------------------------

David Francis Gagliano, BMO Capital Markets Equity Research - Co-Head of Metals & Mining Research and Metals & Mining Analyst [38]

--------------------------------------------------------------------------------

Okay, great. And then the last question for me. If we add up these price agnostic initiatives at the company, the reline, the cogen facility, coke battery, et cetera, we're coming up with about $100 million of incremental annual EBITDA conservatively, I think, by around 2022, and I think that's on the top of the $25 million to $50 million you just flagged. So is it reasonable to assume about $150 million of incremental EBITDA by around 2022 from all these initiatives?

--------------------------------------------------------------------------------

David Cheney, Stelco Holdings Inc. - CEO [39]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Operator [40]

--------------------------------------------------------------------------------

There are no further questions at this time. Please proceed.

--------------------------------------------------------------------------------

David Cheney, Stelco Holdings Inc. - CEO [41]

--------------------------------------------------------------------------------

Thank you very much, and have a great day.

--------------------------------------------------------------------------------

Operator [42]

--------------------------------------------------------------------------------

Thank you. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.