Earnings Call Transcript - ASTL Q1 2025

Operator, Operator

Greetings, and welcome to the Algoma Steel Group Fiscal First Quarter 2025 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. As a reminder, this call is being recorded. I would now like to turn the call over to Michael Moraca, Vice President, Corporate Development and Treasurer. Thank you, Michael. You may begin.

Michael Moraca, Vice President, Corporate Development and Treasurer

Good morning, everyone, and welcome to Algoma Steel Group Inc.'s first quarter fiscal 2025 earnings conference call. Leading today's call are Michael Garcia, our Chief Executive Officer; and Rajat Marwah, our Chief Financial Officer. As a reminder, this call is being recorded and will be made available for replay later today in the Investors section of Algoma Steel's website. I would like to remind you that comments made on today's call may contain forward-looking statements within the meanings of applicable securities laws, which involve assumptions and inherent risks and uncertainties. Actual results may differ materially from statements made today. In addition, our financial statements are prepared in accordance with IFRS, which differs from U.S. GAAP, and our discussion today includes references to certain non-IFRS financial measures. Last evening, we posted an earnings presentation to accompany today's prepared remarks. The slides for today's call can be found in the Investors section of our corporate website. With that in mind, I would ask everyone on today's call to read the legal disclaimers on Slide 2 of the accompanying earnings presentation and also to refer to the risks and assumptions outlined in Algoma Steel's first quarter fiscal 2025 management's discussion and analysis. Please note that our financial statements are prepared using the U.S. dollar as our functional currency and the Canadian dollar as our presentation currency. Our fiscal year runs from April 1 to March 31, and our financial statements have been prepared for the quarters ended June 30, 2024 and June 30, 2023. Please note, all amounts referred to on today's call are in Canadian dollars unless otherwise noted. Following our prepared remarks, we will conduct a question-and-answer session. I will now turn over the call to our Chief Executive Officer, Michael Garcia. Mike?

Michael Garcia, CEO

Thank you, Mike. Good morning, and thank you for joining us to discuss our fiscal first quarter 2025 results. Ensuring the safety of our employees remains a core value and top priority for our company. This unwavering commitment led to significant improvements in our lost time injury performance during fiscal 2024, with continued focus into the current fiscal year. Our focus on safety is more crucial than ever, as our site continues to be a hub of activity with the EAF project advancing. This dedication is further emphasized in Algoma's second annual ESG report released this past Monday, which delves into a wide range of topics across the spectrum of environmental, social and governance in greater detail. The report highlights our ongoing efforts not only in maintaining safety standards, but also in advancing our broader ESG commitments, reinforcing our role as a leader in sustainable and responsible business practices. Next, I'll cover the key events and milestones during our fiscal first quarter as well as give an update on the progress at our transformative EAF project. I will then turn the call over to Rajat for a deeper dive into the numbers and a discussion of our strong liquidity and balance sheet before closing with an update on market conditions. There are a few important themes I would like to get across on this call. First, our results for the quarter reflected overall conditions in steel markets, resulting in lower volumes and realized prices. Shipment volumes were also softer, reflecting the planned outage at our plate and strip facility in April. We prioritized plate production coming out of the outage and expect that we will continue to ramp up volumes over the next several quarters. Second, our balance sheet and liquidity are strong, having been bolstered by our USD 350 million notes offering in April, leaving us with cash at quarter end of almost $500 million and total liquidity of over $800 million. We are well funded to complete our EAF project. Finally, the EAF project is approaching a truly exciting milestone, nearing the planned beginning of commissioning of Unit 1 in our calendar fourth quarter. Every day that goes by derisks the project and brings us another step closer to being one of the greenest producers of steel in North America. Now let me give you some additional color on those key themes. Our results for the fiscal first quarter of 2025 were in line with our previously disclosed guidance for both shipments and adjusted EBITDA. They reflected a continuation of the challenging market conditions we have seen this year in steel pricing. We are laser-focused on ensuring the safe operation of our existing legacy facilities, some of which are over 70 years old, as we make the transition to EAF steelmaking. All told, the combination of lower shipments and softer realized steel prices led to an overall decline in revenues, adjusted EBITDA and cash flow generation versus the prior year period. As discussed on our last call, during the quarter, we successfully completed substantially all of the remaining upgrades related to the modernization of our plate mill. This upgrade involves installing new equipment across the facility that has enhanced product quality and is resulting in a steady ramp to higher plate shipments. Despite the facility being offline for three weeks, our plate shipments in the first fiscal quarter of 2025 were approximately 61,000 tons. The second phase of our two-part plate mill modernization project originally called for a final multi-week outage later this year. However, our team was able to accelerate additional work during this outage, so that the vast majority of the modernization project at the facility is now substantially complete. We expect any remaining items to be addressed with other planned maintenance activities over the coming year. We expect our fiscal second quarter plate production to be close to 90,000 tons as we execute a steady ramp over the balance of the fiscal year towards our expected annual run rate capacity of over 650,000 net tons. With our previously announced exit from the wide coil market during our 2025 fiscal year, we will be in a position to prioritize plate production and sales, taking advantage of our position as Canada's only discrete producer of plate products. This should result in a more favorable product mix that is expected to drive meaningful margin enhancement. With the maintenance outages on the blast furnace and the plate mill upgrade complete, our operations are running normally, and we continue to expect solid production levels in the second half of calendar 2024. In April, we completed a USD 350 million note offering which bolstered our liquidity position substantially as we enter the home stretch of our EAF project construction. Cash on hand at quarter end was almost $0.5 billion, and when combined with our undrawn credit facility, gives us great flexibility and security to execute our strategic growth strategy. Now let me give you an update on our progress during the quarter on our electric arc furnace project. This is a truly exciting time in Sault Ste. Marie as we continue to see the skyline change at the site of the EAF, with the exterior sheeting closing the building in anticipation of commissioning activities commencing by the end of this year. With EAF steel production expected by the end of the calendar first quarter of next year, we will begin to ramp towards a shipping capacity of approximately 3 million tons per year. During the quarter, cumulative investment in the EAF project reached $611 million. To date, we have committed contracts totaling approximately $850 million, with over 90% tied to fixed price contracts. Progress to date on both the construction of the project and the contracted portion of work yet to be completed has significantly derisked the project budget. We expect that all remaining contracted work will be settled during the current quarter. As a reminder, our start-up plan continues to include normal production from our existing steelmaking facility while ramping up steel production from our EAF in calendar 2025, followed by a complete switch to EAF production. In summary, in very tough market conditions, we focused on what was within our control in the quarter, operating our existing facilities, safely completing the important upgrades at our plate mill, and advancing the EAF project on schedule and on budget. Near-term pricing weakness can't dampen our excitement for what's happening at our company and the huge step forward it represents for Algoma Steel and our community. I'd like to once again thank all our employees for their hard work, dedication, and professionalism. Now I will pass the call over to Rajat to go over our financial results for the quarter. Rajat?

Rajat Marwah, CFO

Thanks, Mike. Good morning, and thank you all for joining the call. As a reminder, all numbers are expressed in Canadian dollars unless otherwise noted. Our first quarter results included adjusted EBITDA of $37.7 million, which reflects an adjusted EBITDA margin of 5.8% and cash generated from operating activities of $12.5 million. We finished the quarter with a strong balance sheet, including $493 million of cash and availability of $351 million under our revolving credit facility. Now let me dive into the key drivers of our performance. Steel revenue of $597 million in the quarter, down 20.8% versus the prior year period. We shipped 503,000 net tons in the quarter, down 11.6% versus the prior year quarter. The decrease in shipments was largely attributable to the planned maintenance outage at our plate and strip facility as we work to complete the final stages of our plate mill modernization project. Net sales realization averaged $11.87 per ton, down 10.4% versus the prior year period. The decrease versus the prior year level reflects weaker market conditions, partially offset by improvement in our value-added product mix as a proportion of steel sales. On the cost side, Algoma's cost per ton of steel products sold averaged $10.69 in the quarter, up 12.5% versus the prior year period. The main drivers of the increase versus the prior year period include lower volume, the cost of replacing internally produced coke with purchased coke, and higher natural gas. Cash flow from operations totaled $12.5 million for the quarter, as compared to $163.9 million in the prior year period. The main drivers of the decrease in cash flow in the quarter was lower operating income. Inventories at the quarter end were $800 million, down modestly from $808 million at the end of the 2024 fiscal year. We remain focused on driving down working capital levels and continue to expect a release of at least $100 million in fiscal 2025. Next, I'll remind you of the financing activity we completed in early April. Our wholly owned subsidiary, ASI, issued and aggregated USD 350 million of senior secured second lien notes due April 2029. This move enhanced the strength and flexibility of our balance sheet and reflects the positive view that credit investors have of our company and their confidence in our strategic direction and financial stability. All told, the company had cash of $493 million and unused availability under the revolving credit facility of $351 million, representing approximately $845 million of liquidity plus approximately $45 million available on our strategic innovation fund loan supporting the EAF project. One additional note on the insurance recovery related to the coke-making corridor collapse in January. We continue to work closely with our insurance providers and adjusters as they complete their assessments. While claims of this nature require a detailed adjudication process, we have made progress on the property damage component and expect to receive an advanced payment of $25 million in the current quarter as we work through the balance of both the business interruption and property damage claim.

Michael Garcia, CEO

Now I'll turn the call back to Mike Garcia, our CEO, for closing remarks. Thanks, Rajat. Looking at the state of the North American steel market, prices have generally weakened through the spring and into the summer. While prices have shown signs of stabilizing somewhat since late July, we do expect that these prices will generate headwinds on earnings performance over the near term. Softer market conditions in the last few months reflect ample spot supply, short lead times, economic uncertainty, and cautious buying during the typically slower summer buying season. As we wait for these headwinds to abate, we will continue to focus on what we can control: operating our facilities safely and positioning ourselves to best capture market opportunities as they arise. We have been on this journey to bring electric arc furnace steelmaking to Sault Ste. Marie for close to five years. Our entire company is energized as we approach this major milestone. In the months ahead, we will continue to relentlessly focus on the safe operation of our existing facilities while executing the commissioning of our transformative EAF project. Our strategic vision in undertaking this endeavor is expected to unlock significant shareholder value while delivering some of the greenest steel in North America. Thank you very much for your continued interest in Algoma Steel. At this point, we would be happy to take your questions. Operator, please give the instructions for the Q&A session.

Operator, Operator

Thank you. Our first question is from David Ocampo with Cormark Securities.

David Ocampo, Analyst

Maybe first one here for Rajat. We're getting closer to the EAF coming online. I was wondering if you could help us understand the duplicate costs that you guys will incur during the hybrid phase? And then the second part of the question is what do unit economics look like once we're a full EAF operator? Is that scrap plus $200 to $220 of conversion cost? I think that's a number you've alluded to in the past. So just hoping that you could refresh us on those metrics.

Rajat Marwah, CFO

Sure, David, and thanks for the question. So as we transition through the EAF, the major cost change that will happen while we are running in transformative mode is the labor cost from a fixed cost perspective. And then the gap - the difference between purchasing scrap or producing coke internally. The way we see it is that next year when we start producing from both the furnaces, which is the blast is running at their current capacity and EAF adding tons as we ramp up, our cost on a per ton basis will come down because there will be more volume. But on absolute terms, the cost on a fixed basis will be very similar. Variable will vary based on some of the index contracts that we have in scrap purchase. But on a fixed cost basis, it will be very similar to what we have right now because the number of people that we need to run the furnace is already in the current cost that you're seeing there. They’re getting trained, they are writing SOPs and so on and so forth. So our cost on a per ton basis will come down as we start producing more and shipping more during the transformative period. When we get to the stage where we shut down the blast furnace and get into only electric arc furnace, there will be substantial savings on the fixed cost side as people will go out to match with the operational capabilities. We will look at scrap plus $200 to $220 in the very similar range, as I mentioned earlier, from a full cost perspective.

David Ocampo, Analyst

And I think if we're thinking about the reduction in headcount, I think it was close to 1,000 employees, if I'm not mistaken. Can you update us on how that's going to be achieved? Or is there going to be sizable transition costs as it relates to reducing headcount?

Michael Garcia, CEO

David, this is Mike. Yes, I mean, the most impactful savings or changes that will happen from a headcount perspective will be when we no longer are operating our blast furnace and coke ovens. There will be some smaller adjustments on some of the supporting departments such as maintenance and some of the infrastructure support departments. But your headcount number is about right. From an execution standpoint, it's relatively straightforward when you no longer run an asset or a department that it's well laid out in the CBA what happens to those employees. As they leave the company, they retain some recall rights within the collective bargaining unit for a period of time. The cost of making that headcount reduction is pretty well laid out in the CBAs, and we have good visibility to it.

David Ocampo, Analyst

Then Michael, while I have you, just on the $25 million that's left to contract, what's the risk that you guys potentially go over budget? Just wanted to know what the worst-case scenario would look like either order of magnitude or even what could go wrong.

Michael Garcia, CEO

Yes. We have committed and signed contracts totaling CAD 850 million. Our aim is to finalize the remaining contracts necessary to complete the project within the remaining budget of $25 million. We only need to secure a few more contracts to complete the installation and construction of the facility. All the equipment is already on site, and everything is being assembled. We are currently in a busy phase of construction and installation. The building is mostly finished, and the integration with adjacent operations is nearly done. The transformers for the first EAF furnace are set up, and there are nine transformers since it's a Q1 technology. Many of the cranes are already being commissioned. The project team plans to place the final installation and construction contracts within the budget. Currently, less than 10% of the total budget is allocated for commitments or contracts based on time and materials, which comes with some risk of a budget overrun if we need more time or materials. We are managing this risk closely, and it falls within the overall budget of $60 to $70 million. Therefore, that figure carries the risk. At this stage, we are nearing the final phase of the project, concentrating on execution and finalizing these remaining contracts for installation and construction, and we intend to complete it within the CAD 875 million budget. While it's challenging to quantify the risk, we are diligently focused on finishing this project at CAD $875 million.

David Ocampo, Analyst

Okay. It sounds like the time and materials are tracking in line with your expectations so far. Is that correct?

Michael Garcia, CEO

Yes. And we brought in a project coordinator, Ellis, Don, to help us with the management of that time and material piece as well as the overall scheduling and pacing of all the different construction and installation activities going on throughout the project site. They've been on board for over a year and a half. So they've been a great addition to the team.

Operator, Operator

Our next question is from Katja Jancic with BMO Capital Markets.

Katja Jancic, Analyst

Maybe starting on the plate ramp-up. So second quarter, you expect 90,000 tons. How should we think about the ramp-up in the rest of the year?

Michael Garcia, CEO

Well, I think from a production standpoint and a capability standpoint, we feel really good about where we are. The mill came out of the April outage. I think it's a 22-day outage. The mill came up very smoothly from that outage. We're really delighted with the capabilities and the performance of the mill. We're still working on some of the shear line pacing to make sure that the shear line is performing well, but that's not a limitation to our actual shipments or production because we have not yet shut down the gas cutting line. So from a production standpoint, we are real happy about where we're sitting. I think the main challenge right now, frankly, is the market. We're in a soft market and the commercial team, although we're getting great reception on the quality of our plate and the delivery performance of our plate mill, demand is not necessarily robust right now. There's still a $300-plus spread on plate pricing versus coil. We feel good about that, but we're facing a little bit of a soft market right now. So I think that our current expectation for that 90,000-ton quarter is in place. Ramp up for the end of the year will probably be a little bit lower in the next quarter after this current quarter because we are taking a small maintenance outage in the mill. So that's the way we're seeing our plate business right now.

Katja Jancic, Analyst

And can you remind us how much of your plate volume goes into the U.S. market?

Michael Garcia, CEO

About 30%. And that's not strictly 30% month after month, but around 30% throughout the whole year.

Katja Jancic, Analyst

And then maybe, Mike, you mentioned initially that the pricing environment is soft. We're currently in a seasonally slower demand period. How should we think about near-term shipments in total? Last quarter in part, you were impacted by the plate maintenance or upgrade. What about this quarter? How should we think about shipments?

Michael Garcia, CEO

Yes, Katja, thank you. I believe they will be generally higher. The operations are performing well. The commercial team is diligently working to ensure our customers are supplied. Currently, we know the pricing situation, and I don't anticipate any immediate factors that would lead to increased pricing for the remainder of the year. Demand is likely to remain stable, but it should trend higher in the upcoming quarter. During this current market environment, our focus is on completing the EAF project, and we have sufficient liquidity to ensure the project is finished on time and within budget.

Katja Jancic, Analyst

I have one final question. You announced that you're relaunching the NCIB. Will you consider using some of the available liquidity since it's quite large at the moment? Or will this be more dependent on free cash flow generation?

Michael Garcia, CEO

We wanted to reinstate the NCIB to give us the flexibility to return capital to shareholders and buy shares of the company when we feel it's the right time. We're aware of our liquidity position and need to complete the EAF project while also executing our strategic transformation. However, we remain focused on our capital allocation strategy. Therefore, we believe that having the NCIB in place provides us with the flexibility to pursue our objectives.

Operator, Operator

Our next question is from Ian Gillies with Stifel.

Ian Gillies, Analyst

Good morning, everyone.

Michael Garcia, CEO

Good morning, Ian.

Ian Gillies, Analyst

As you think about using the NCIB and whether the stock is expensive or inexpensive as a baseline, do you think about your production being 2.2 million tons, 2.7 million tons, or something closer to 3 as a baseline for setting that value of when to figure whether the stock is inexpensive or not to go and use that?

Michael Garcia, CEO

Well, I mean, that's a great question. I think we are building this company to be a 3 million-plus finished goods steel company of plate and DSPC. That's the value we are creating, and that's going to be enabled by completing these EAF furnaces and starting them up successfully in 2025, and then reaching 2.4 million tons of EAF production sometime in 2026. We've got the power secured to do that. So there's no limitations from the power. That's how we kind of think of the value we're creating and our view of the value of the company. Now we aren't there yet. We've got to complete the project and get it started up. But I think where we've gotten to over the last five years that we've been on this journey, we are in a really exciting place right now and we'll be making EAF steel in another just over six months.

Rajat Marwah, CFO

And Ian, just another comment. I think our valuation is low, and it's not a surprise. It will go up as we complete our EAF, and it’s reflective of what the normal trading levels are. So I think it’s pretty clear, but our focus is always, as Mike said, on completing this project and ensuring we have enough funds to finish it.

Ian Gillies, Analyst

As we approach 2025, Rajat, could you help us understand the tax benefits associated with activating the EAF? I assume there will be significant capital cost allowances, so should we expect the cash tax impact to be quite low or even lower next year?

Rajat Marwah, CFO

You're absolutely right. As we commission and capitalize, we have accelerated depreciation in Canada, where we can take most of it in two years. So our cash taxes will definitely be lower, and we'll benefit from that over two or three years depending on economic conditions, but our taxes will be lower.

Ian Gillies, Analyst

And then last one for me as it pertains to EAF and power. Is there any sort of detailed update you can provide on the status of where you're at with the public utility commission and getting final approval to build that power line? I thought it was something that was supposed to come through this summer into the fall.

Michael Garcia, CEO

We anticipate receiving the final determination and official approval from the Ontario Energy Board regarding PUC's application to construct the power line either at the end of August or early September. We have maintained close communication with PUC as they work on the application, and the OEB is currently reviewing it. So far, there have been no issues or additional inquiries from the OEB or any interveners opposing the project. The OEB needs time to thoroughly review the application and provide a positive outcome. Once that approval is secured, we can begin the construction activities, which we expect to finish by 2027. When the power line in Sault Ste. Marie is completed, it will enable us to produce 2.4 million tons of EAF steel using 100% electric arc furnace coal charging without needing to use any hot iron from our blast furnaces. With the new local line by 2027, we will have the capacity to produce 3 million tons of EAF steel, thanks to increased grid power and our ongoing operation of the Lake Superior power plant. The final step will involve completing the grid and transmission lines in Ontario, which will further enhance our ability to produce 3 million tons without relying on our captive power plant, thus significantly reducing our costs and carbon emissions. We expect to reach full production capacity based on our EAF steelmaking capabilities and downstream processes once the local power line is operational in 2027. After that point, any changes in power supply will primarily lead to lower costs and reduced carbon emissions.

Ian Gillies, Analyst

And maybe just a follow-on, if I may. So does that mean at some point, perhaps it's a longer-dated item that LSP becomes a potential monetization opportunity to service some extra value?

Michael Garcia, CEO

I think so. It will depend on the overall state of the Ontario grid and how the system operator and the OEB view that power plant in terms of does it add grid stability? Does it have value from a peaker perspective to ensure available power? To the extent that those discussions will be happening at that time, there will be value in maintaining that power plant and having it part of the overall generation footprint in the province to run it to generate 110 megawatts of power when it's needed by the system operator.

Operator, Operator

Thank you. There are no further questions at this time. I would like to hand the call back over to Michael Moraca for any closing comments.

Michael Moraca, Vice President, Corporate Development and Treasurer

Thank you. Thank you again for your participation in our first quarter fiscal 2025 earnings conference call and for your continued interest in Algoma Steel. We look forward to updating you on our results and progress when we report our fiscal second quarter results scheduled for November. Thank you very much. Have a good day.

Operator, Operator

This concludes today's conference call. You may now disconnect your lines. Thank you for your participation.