Algoma Steel Group Q1 2024 Earnings Call Transcript

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August 11, 2023

There are 8 speakers on the call.

Operator

And welcome to today's conference call to discuss Algoma Steel's Fiscal First Quarter 2024 Financial Results. My name is Doug, and I'll be your operator for today's call. At this time, I'd like to hand the call over to Mike Maureka, Treasurer and Investor Relations Officer for Algoma. Mr. Maraca, please go ahead.

Speaker 1

Good morning, everyone, and welcome to Algoma Steel Group, Inc. 1st Quarter 2024 earnings conference call. Leading today's call are Michael Garcia, our Chief Executive Officer and Rajat Marwa, 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 corporate website atwww.algoma.com. I would like to remind you that comments made on today's call may contain forward looking statements within the meaning of applicable securities laws, which involve assumptions and inherent risks and uncertainties.

Speaker 1

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.

Speaker 1

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 refer to the risks and assumptions outlined currency and the Canadian dollar as our presentation currency. Our fiscal year runs from April 1 to March 31, Our financial statements have been prepared for the 3 months ended June 30, 2023. Please note all amounts referred to on today's call are in I will now turn the call over to our Chief Executive Officer, Michael Garcia.

Speaker 2

Thank you, Mike. Good morning and thank you for joining us to discuss our fiscal Q1 results. As always, I will begin my remarks by addressing what truly matters most to us, the safety and well-being of everyone at Algoma Steel. During our last quarterly call, we updated you on the tragic fatality of a contract worker at Algoma Steel on June 15. The Ministry of Labor was notified and attended the site to conduct its investigation, which remains ongoing.

Speaker 2

At Algoma, we believe in safety without compromise. And while our continued dedication has led to a significant improvement in our lost time injury frequency rate Over the past decade, we remain committed to creating a safe zero injury workplace. Next, I'll cover the key events and milestones during our fiscal Q1 and subsequent to its end, as well as an update on the progress at our 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. Our results for fiscal Q1 of 2024 came in modestly ahead of our previously guidance for both shipments and adjusted EBITDA.

Speaker 2

Our shipments of 569,000 tons were up 5.9% versus the prior year period. Our results reflect a quarter of solid operational execution even in the face of commodity and activity at our EAF project. On our last call, we provided an update on the progress of Phase 2 of our plate mill modernization project, including the in line shear installation, which is progressing ahead of schedule. I am pleased to report that the shear installation is now complete and we expect to begin cold commissioning this month with hot trials expected by the end of this quarter. We plan for higher plate production levels after commissioning.

Speaker 2

We are very excited about this given the continued robustness of our current plate market and the high price spread over hot road coil. This higher production level will allow us to capitalize on this market opportunity and to build inventory ahead of the planned Phase 2 hot mill outage To upgrade the hot mill drives currently scheduled for April of 2024. Next, I'd like to update you on our progress during the quarter on our transformational EAF project. This will Ultimately increased our throughput capacity by roughly 1 third. From 2,800,000 tons per year of liquid Steelmaking capacity today via the blast furnace route to 3,700,000 tons employing dual electric arc furnaces upon completion.

Speaker 2

The higher liquid steel output is expected to match our expanded downstream finishing capacity as we increase Production at our plate mill. Importantly, this will improve overall product mix while simultaneously lowering our carbon emissions by approximately 70% when fully operational. During the quarter, EAF expenditures totaled $74,000,000 bringing cumulative spend as of June 30 to $341,000,000 or 40% of our expected total project cost at the midpoint of our unchanged project budget. The construction of the main steelmaking building is progressing on schedule and we expect to begin receiving key equipment from Daniele this quarter. We continue to make meaningful progress securing the remaining portion of expected project cost as bid packages continue to come in.

Speaker 2

Our expectations to begin commissioning in late calendar 2024 are also unchanged. Our start up plan continues to include normal production from our existing Steelmaking facility, while ramping up steel production from our EAFs in calendar 2025 followed by a complete switch to EAF production. We said on the last call and I would like to reiterate today that we expect the completion of the EAF project will be funded through a number of existing capital resources, capital and the capital resources already available to us such as the federal SIF loan. Rajat will get into more details there, but given our strong balance sheet that includes no debt outside of government loans And with full availability under our ABL credit facility, our operations are well supported throughout this exciting transition. Through the quarter, we demonstrated consistent and reliable operations.

Speaker 2

There is also no shortage of excitement here on-site in Sault Ste. Marie as we see the EAF progressing rapidly and the future of our company becoming reality. I'd like to once again thank all of our employees whose execution continues to deliver solid operational and financial results safely while simultaneously driving the EAF project forward. Now I will pass the call over to Rajat to go over our financial results for the quarter and give more details on the expected funding of our capital expenditures.

Speaker 3

Thanks, Mike. Good morning, and thank you all for joining the call. I'll remind you again that all numbers are expressed in Canadian dollars unless otherwise noted. As Mike said, we had a solid quarter to start the fiscal year. Our first quarter results included adjusted EBITDA of $191,200,000 or $336 per ton, which reflected an adjusted EBITDA margin of 23.1%.

Speaker 3

Cash generated from operating activity was $163,900,000 We finished the quarter with $300,600,000 of unrestricted cash and our US300 $1,000,000 revolving credit facility remains undrawn, representing total liquidity in excess of $600,000,000 As a reminder, The only remaining long term debt on our balance sheet is in the form of government loans linked to our capital projects. And those loans have highly attractive terms that include the potential for partial forgiveness of principal as we reach certain carbon emission reduction targets with the shift to ES steelmaking in the coming years. I will now dive into the key drivers of our performance in the quarter. We shipped 569,000 tons in the quarter, up 5.9% as compared to the prior year period. Our plate and strip production continues to run well.

Speaker 3

And despite normal seasonal maintenance in the second half of the year, Including our annual vessel reline, we expect our shipment in each of the next two quarters to be roughly in line with our typical run rate achieved over the last several quarters. Net sale realizations averaged $13.23 per ton, down 18.9% versus the prior year period. The decrease versus the prior year level primarily reflects overall softer market conditions. Plate pricing continued to enjoy a significant premium relative to hot rolled coil during the quarter, driven by resilient demand, particularly from Spending on infrastructure projects and durable goods. As a reminder, we are the only discrete plate mill in Canada And we look forward to the incremental additional tons from the plate mill in the second half of calendar twenty twenty three as a result of the $54,500,000 down 14% versus the same quarter of last year, reflecting the lower average realizations per ton of steel that more than offset the increase in shipments.

Speaker 3

On the cost side, Algoma's cost per ton of steel products sold averaged $950 in the quarter, up 3.3% versus the prior year period. The main drivers of the modest increase versus the prior year period include The cost of replacing internally produced coke with purchased coke and higher cost of other Key inputs, which more than offset the positive impact of the increase in volumes. Cash flow from operations totaled $163,900,000 for the quarter compared to $276,600,000 in the prior year period, but up by $68,500,000 sequentially. Our inventories at quarter end were 759,300,000 Up only 5.1% during the quarter, which would otherwise have been a large increase due to normal seasonal build patterns of what is typically our lowest level in March. We expect to continue releasing inventories throughout the year as quantities normalize with consistent production.

Speaker 3

Now I would like to provide additional color on our funding plans for the EAF project. As previously noted, Our outlook for total cost of the project remains in a range of $825,000,000 to $875,000,000 Through the end of the quarter, we had spent $341,000,000 leaving approximately $510,000,000 of investments remaining to reach the midpoint of our project budget. We are well positioned today when you look at our expected resources For those expenditure over the next 12 to 18 months, we have cash on hand of roughly 300,000,000 Another $135,000,000 of available capacity on our SIF loan and approximately $150,000,000 of cash to be generated from drawing down excess working capital. Combined, this exceeds the expected capital requirement to complete the project and does not include any borrowing on our ABL or any contribution from operating cash flow, highlighting the Strong position we are in as we advance this transformative project. I would now like to turn the call back to Mike Garcia for closing comments.

Speaker 2

Thank you, Rajat. Looking at the state of the North American steel market, pricing levels in the fiscal Q1 saw periods of volatility With index pricing for U. S. Midwest hot rolled coil ranging from approximately $8.50 to $1200 per ton. Subsequent to the quarter end, prices have continues to demonstrate a significant premium as overall demand for plate products remains high, which in turn continues to benefit our average price realizations.

Speaker 2

While the steel business involves inherent volatility, we address that volatility by serving a diverse customer base that provide selling opportunities across Canada and the U. S. We traditionally service roughly 150 customers in a calendar and target a high percentage of contract sales. Those contracted volume commitments continue to provide stability to our order book and operations and the lagging price mechanics helped to smooth some of the volatility experienced when prices shift up or down quickly. While the forward curve shows some expectation of stability at prices modestly lower than current spot, We've seen time again how quickly things can change.

Speaker 2

Regardless of the swings in our end markets, we will relentlessly maintain our primary focus of delivering prudent financial discipline and operational excellence. This will ensure our ability to execute our EAF project, Ushering in the next phase of our company that defines the future of Algoma, provides the foundation for long term value creation for our stakeholders and solidifies our leadership position at the forefront of green steel production in North America. Thank you very much for your continued interest in Algoma Steel. We are off to a solid start of our fiscal year Operator, please give the instructions for the Q and A session.

Operator

Thank you. Ladies and gentlemen, at this time, we will be conducting a question and answer session. Our first question comes from the line of Katya Jamsik with BMO Capital Markets. Please proceed with your question.

Speaker 4

Hi. Thank you for taking my questions. Maybe just as a clarification, did you say that volumes or shipments are expected to be similar In the next few quarters to the Q1?

Speaker 3

Yes. So it's it will be similar, not exactly to the first But if you look at the last several quarters, it will be an average of that. So similar, but not same.

Speaker 4

And what about with plate expected to increase? Is that still the expectation, Please, Williams.

Speaker 2

Yes, Katja. This is Mike. So the shear is In and we are currently conducting cold commissioning followed by hot commissioning. So by the end of this calendar year, we should start to see a 10% to 15% increase in plate volume. Now that's assuming we've done the work on the commercial side and we have The orders and so some of that will be reflected in plate shipments, some of it will be used to build inventory ahead of the outage next April.

Speaker 2

But the total increase will be in the 10% to 15% by the November December timeframe.

Speaker 4

Is this a bit of the May? I thought that was expected by 3rd Quarter calendar year?

Speaker 2

No, I think it's consistent with what we spoke about in our last call.

Speaker 3

Rajat? Yes, it was 3rd fiscal quarter, what we mentioned.

Speaker 4

Okay. And then maybe just on the cost side, how should we think about cost in the next few quarters?

Speaker 3

So cost will be pretty similar to what we are seeing right now. There should be some reductions coming as we keep Our production on the coke batteries, our internal coke and start replacing it with the purchase coke, but that probably will come towards the end of the But for the next, let's say, 1 or 2 quarters, our cost should be pretty similar.

Speaker 4

Okay. Thank you so much.

Operator

Thanks. Thank you. Our next question comes from the line of David Ocampo with Cormark Securities, please proceed with your question.

Speaker 5

Thanks. I just wanted to follow-up on the last line of questions regarding costs. I think I seem to remember that a portion of it is tied to HRC prices or some sort of index type of steel as well as the IDEX for iron ore. I just would have thought that with steel prices coming down at least in the next quarter or maybe next two quarters, That your input cost would also follow that. So maybe you could help reframe how we should be thinking about cost in the following steel price environment?

Speaker 3

Sure. So you're right. There is a portion of our contract that is linked to pricing and It has certain bands. So within a price range, it moves and then it stops. So And the other portion is based on IDEX.

Speaker 3

So with this with the price drop in IDEX Remaining same or increasing it more or less offsets each other for the quarter For the coming period. So that's how iron ore will play. Scrap definitely will help because scrap is coming down And we expect other commodities commodity price, if they come down, if price remains at lower level In the following quarters, we should see some reduction coming, some slight reduction coming, but it totally depends on How the commodities plays out in the next couple of quarters. But it should change slightly, That's why I said it's very similar. Our cost quarter over quarter and for the next 1 or 2 quarters and then we will see Some reductions coming just because of coke as well as coal negotiations that will happen and it will start impacting in the next year.

Speaker 3

Does that

Speaker 5

give you some color? Yes, that's helpful there. And I guess if I think about your breakeven cost structure, Just given that framework that you laid out there, are you guys now closer to $700 a ton of breakeven On sheet prices?

Speaker 3

Yes, it should be in that you're closer to that vicinity maybe slightly lower, But that's where it is as we see the cost now.

Speaker 5

Got it. Okay. And then the last one for me, one of your competitors here in Canada called out some customers deferring shipments just given the uncertainty that they're seeing in the marketplace, That's related to auto or not. You guys do have a 30% exposure to automotive. So are you guys starting to see more of that from Smrits, where there may be some pushback on taking delivery?

Speaker 2

Hi, David. Not really. We don't have Any large customer sector where we're experiencing that.

Speaker 5

Okay. That's it for me. I'll hop back in the queue.

Operator

Our next question comes from the line of Ahmad Shah with Beacon Securities. Please proceed with your question.

Speaker 6

Hi guys. Most of my questions have been answered, Maybe back on the cost structure. So is it fair to say that we should expect maybe some downward Pressure on unit margins per ton, but not a lot given the comments you got, I've heard from both the cost and the pricing side?

Speaker 3

Yes, there will be downward pressure specifically from the pricing side. As you've seen that the price has dropped from peak to low by $400 and the market is at $800 but frankly its CRU is at 800, but the market is lower. So there's definitely pressure from margins coming from the pricing side, which will impact the quarter. Now our plate book is good and the plate pricing is good, which offsets it as well As well as the contract position that we have helps us to maintain a decent margin for this quarter. And then It's a from forward perspective, it depends on how the pricing shapes up.

Speaker 6

Got it. That's very helpful. Maybe back on your commentary on the volume side, if I look at the last Several quarters. The range is pretty wide. I mean, we're looking at from 430 to 570 tonnes, we look at the range of last several quarters.

Speaker 6

So are you able to give us maybe a little more Color on unexpected volume? Is it just the last two quarters? Because if I go back to Q2, Q1 last fiscal year, the volumes were Obviously, it was operational issues, but the volume were down.

Speaker 3

Yes. Ahmad, I think it's a good point. Just take the outliers Quarter, there were a couple of quarters, which were outliers. So take them out and then you average out, you should come to a good number.

Speaker 6

Fair enough. That's great color. I appreciate you guys. I'll jump back in the queue.

Operator

Our next question comes from the line of Lucas Pipes with B. Riley. Please proceed with your question.

Speaker 7

Thank you very much, operator. Good morning, everyone. Thank you for taking Questions. My first question is, Rajat, I think you made some important comments regarding cash flow in the second half of the year in your prepared remarks. And I just wanted to make sure I fully understood those.

Speaker 7

So if you could maybe Go back and just highlight your cash flow expectations for the second half of the year. I would really appreciate it. Thank you.

Speaker 3

Sure. So I did not specifically provide any guidance on the cash flow for the second half, but What I did say was that based on the cash that we have and I was talking about electric arc furnace funding, so based on the cash We have on hand the SIF loan that is yet to be received in cash of $135,000,000 And also the important factor, which is drawdown of our inventories, there is roughly 150,000,000 Of drawdown that we are expecting over the next several quarters, that will be enough to manage The spending, the remaining spending on the EAF project without even considering The operational cash flow that we will generate during that period. So that's what I commented on, which gives us Enough liquidity to manage the EA project.

Speaker 7

That is very helpful and congratulations On that. My second question is regarding coal procurement, and it's a Two pronged question. The first is, how do you think about co procurement in light of your EAF transition over the next few years? And then secondly, some of your North American peers have noted expectations for significantly lower coal prices In 2024. So I wondered if you could comment on that.

Speaker 7

Thank you very much.

Speaker 3

Sure. So I'll start with the second question. So the expectation It's the same that the coal pricing should drop for next year. When you look at what's happening in the market, we've seen a drop of 10% to 20% year over year from index perspective and We are expecting that the coal price should come down. Our negotiations will start soon And then we'd finalize for the following year.

Speaker 3

As far as the buy is concerned and the period of the buy, we've laid out a transition plan Where we do the commissioning end of next year and then Have a ramp up over a 12 odd month period, during which we will continue making steel through both the routes. And then we based on availability of power and Stability of our furnaces and availability of prime scrap, we will be running our blast furnace, which means coke battery as well For a little longer, while we are transitioning through and then ramping it down. So we will be running our batteries and the blast furnace for Couple of years and the coal contracts are normally annual. So we will be renewing them carefully as we go along. But our first intention is that we want to exclude the purchased coke that we do right now and be self sufficient on our coke production during the interim During the interim period and then start ramping it down.

Speaker 7

That is very helpful. I really I'll try to squeeze one last one in. On the end markets, can you maybe run down where you're seeing Strength, persistent strength, where you're seeing more pockets of weakness, would really appreciate your perspective on the demand side? Thank you very much.

Speaker 2

Sure. I think before I go into any specific markets, On demand, we're roughly 4 weeks out in our order book on sheet, a little longer, 5 to 6 weeks In plate, year to date, the auto build rates have been tracking as expected and are positive. Obviously, there's A lot of potential uncertainty with the OEM contract negotiations that are taking place And a September 14 expiration date of the current contract. It's Probably a little bit too involved to try to predict the all of the knock on effects On our order book from a potential labor disruption, but obviously a lot of steel is going into automotive. So if you have An industry slowdown that's going to have some effects on the distribution side of our business.

Speaker 2

We see the majority of our customers continue to buy mostly when they have back to back needs of sales. So they're And they continue to manage their inventories closely. They've been doing that and that's the behavior we've seen for a while now. The coil market, although we continue to fill our coil order book, you can probably tell from the way that coil pricing has moved Over the last several weeks that we still see a little slowness there, although our order book is still full, but that's Mostly driven by distribution. Our markets around infrastructure build Where we send a lot of plate continue to be pretty firm and we see that in our plate demand and our plate order book and obviously in the plate Pricing.

Speaker 2

So that's kind of some of the landscape that we're seeing on the commercial side, Lucas.

Speaker 7

Mike, I really appreciate the color. To you and the team, continue best of luck.

Speaker 2

Thank you. Thank you.

Operator

There are no further questions in the queue. I'd like to hand the call back to management for closing remarks.

Speaker 1

Thank you again for your participation in our Q1 fiscal 2024 earnings conference call and your continued interest in Algoma Steel. We certainly 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.

Operator

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.

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Key Takeaways

  • Algoma delivered a solid Q1 with shipments up 5.9% to 569,000 tons, adjusted EBITDA of $191.2 million ($336/ton) and generated $163.9 million of operating cash, ending the quarter with $300.6 million of unrestricted cash and over $600 million of total liquidity.
  • The Phase 2 plate mill modernization is ahead of schedule: the inline shear installation is complete, cold commissioning is underway, and hot trials are expected by quarter-end, driving a targeted 10–15% increase in plate output by late fiscal Q3.
  • Progress on the transformational EAF project reached 40% of budget spend ($341 million), with main building construction on track, key equipment en route, commissioning slated for late 2024 and dual EAF capacity ramp-up in 2025 to boost annual steelmaking capacity from 2.8 Mt to 3.7 Mt while cutting carbon emissions by ~70%.
  • Despite softer market realizations down 18.9% year-over-year to $1,323/ton, Algoma’s cost per ton held at about $950; strong plate market premiums, contract volumes and anticipated easing of coke and coal input costs should help sustain margins above an approximate $700/ton breakeven.
A.I. generated. May contain errors.
Earnings Conference Call
Algoma Steel Group Q1 2024
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