Q2 2022 Algoma Steel Group Inc Earnings Call
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<unk> second quarter 2022 earnings call.
At this time all participants are in a listen only mode.
You didn't answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad as a reminder, this conference is being recorded.
It is now my pleasure to introduce your host Brenda Center manager of communications and branding.
You may begin.
Morning, everyone and welcome to Oklahoma Steel group incorporated second quarter fiscal 2022 earnings conference call, leading today's call are Michael Mcquade, Our Chief Executive Officer, and rich admire what our Chief Financial Officer. As a reminder, this call is being recorded and will be made available.
Later today in the investors section of Alkermes steel corporate web site at Www Dot Algoma Dot com.
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 uncertainty.
Actual results may differ materially from statements made today.
In addition, our financial statements are prepared in accordance with our S. R. L, which differs from U S. GAAP and our discussion today includes references to certain non ISR financial measures with that in mind I would ask everyone on today's call to read the legal disclaimers on slides two and three of the accompanying earnings.
Presentation and to also refer to the risks and assumptions outlined in our gondola skills second quarter fiscal 2022, managements 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 1st to March 31st in our financial statements have been prepared for the three and six months ended September 30th 2021.
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 now turn the call over to our Chief Executive Officer, Mike Mcquade, Mike.
Thank you Brenda.
Good morning, welcome and thank you for joining our.
Earnings call for our second fiscal quarter ended September 30th 2021 are.
Our first earnings call since closing our merger with legato and returning to the public markets.
I will start my comments by addressing what truly matters most to us safety.
Safety of our employees.
In Oklahoma, we believe in safety without compromise and our continued focus has resulted in substantial improvement over the last decade, and our lost time injury frequency rate.
Which I'm proud to say it was zero for the second consecutive quarter.
I commend our entire team for their collective success on safety performance.
Priority for Algoma.
Before we get into a discussion about our exceptional results for the quarter.
Let me address the two transformative announcements that we made this morning.
First we are happy to report with.
With the approval of our board we have reached a positive final investment decision for our proposed electric electric arc furnace project.
This announcement marks a major milestone for the business evolution of Algoma and demonstrates our commitment to producing greener more sustainable steel.
Project entails dual furnaces that are designed for a combined annual raw steel production throughput of $3 7 million tonnes matching our downstream finishing capacity.
There is also expected to lower our carbon emissions by approximately 70% when fully operational.
Additionally, the project adds new vacuum degassing to increase the product capability of our steel plate Griggs.
Project is expected to increase productivity and make algoma more agile and profitable company, but just as importantly is expected to result in a 3 million ton per year reduction in our C. O two emissions as we drive towards a more sustainable message steel production.
The C O two reductions would represent 11% of the federal.
100% of the provincial targets for industrial emitters as set for 2030 under the Paris accord.
The total project cost is expected to be approximately 700 million Canadian.
Funded with previously announced financing commitments the proceeds of our recently completed merger and ongoing cash flows.
We expect it to be asked to come online in 2024. Following a 30 month construction phase with continued transition away from blast furnace steel production to follow as increased power supply becomes available.
The other strategic announcement, we made this morning was that our board has approved a plan to retire all of our outstanding senior secured debt, which totals $358 million U S, leaving us with an even stronger balance sheet to support critical investments like the F to drive growth and create an.
<unk> long term value for all of our stakeholders.
We expect the process of retiring the debt to be completed by the end of next week.
Combined these two announcements mark the next great milestones in our company's evolution.
Now, let's turn to the quarter's results.
Our strong fiscal second quarter results displayed impressive cash generating potential of Algoma.
I'll remind you again that all numbers are expressed in Canadian dollars unless otherwise noted.
The results were highlighted by record net income of $280 million.
Quarterly adjusted EBITDA of $431 million, reflecting an EBITDA margin of 43%.
As well as cash generated by operating activities of $380 million.
We finished the quarter with a total liquidity of $659 million, including a cash position of 367 million and availability under our credit facility of $292 million.
<unk> will expand on the numbers and give our outlook for the third fiscal quarter in a moment.
Optimism continues for steelmakers across North America.
Strong demand in key end markets continue and pricing remains at near record levels.
The strong cash flows we are generating.
Our focus on operational efficiency.
And the strategic moves made on our capital structure, our positioning our government is a next generation steelmaker focused on sustainability with attributes that we believe will make algoma successful across the steel market cycles.
We have several reasons to be very optimistic about what lies ahead for Oklahoma and we'll share more details later on the call, but first I will pass it over to resort to go over the financial highlights of the last quarter.
Thanks, Mike Good morning, and thank you for joining the call.
Before we get into these details I'm happy to report that we had.
Very successful quarter, the second quarter.
Fiscal year Index September 28, 2021.
Total revenue in the quarter was one point you to $1 billion up 168% year over year.
Our steel revenue was $936 5 million, which was up 179% versus the prior year quarter.
We shipped 587000 victims in the quarter up 14% from 516000 tons in the same quarter of last year.
Primarily as a result of a return to near run great utilization levels compared to the pandemic loss experience last year.
This resulted in average steel revenue per ton of $1594 up 146% from $649.
Sure.
As a reminder, both our contract and spot orders are subject go up pricing back.
Due to price mechanics, and mill lead times.
We started to see these positive results flow towards earnings last quarter.
And that impact continued in this quarter.
Steel markets have remained strong and prices.
Oh from record levels achieved in last summer.
Near those elevated levels.
On the cost side.
Cost of goods sold per ton increased quarter over quarter.
And some commodity price increases had an effect on selected raw material inputs.
In an effort to offset these increases algoma remains focused on our cost saving initiatives and to date, we have captured run rate savings of approximately $45 million on an annualized basis, and we remain on track to reach a $15 million topic.
When compared to the same quarter of last year cost of steel products sold both of them.
Is approximate 37% higher.
But yeah, there will be an.
The increase was primarily driven by higher commodity pricing impacting some of our raw material input costs and higher cost of utilities.
Please keep in mind that last year ago moguls eligible and good received benefit under the Canadian emergency wage subsidy program.
As the pandemic impacted our business substantially.
Which allowed us to keep our employees working during this period.
Lower production volume and mitigated higher fixed costs gone up recommendations.
We generated $431 million of adjusted EBITDA during this quarter.
Compared to 281 million of adjusted EBITDA in the prior year quarter.
We are continuing to reap the rewards of even higher pricing moving to our results. However, due to the lagging nature of her order book, we expect to realize higher prices in the subsequent months.
We generated $350 million of cash from operating activities and ended the quarter with $367 million of cash on the balance sheet.
Which resulted in liquidity of approximately $659 million, including availability under the credit facility.
I'd like to take a moment to follow up on Mike's comments.
Other announced that the government.
It truly is a remarkable achievement when you consider our September and cash position and paid the cash received in connection with the closing of the merger transaction.
Much of it is in a position where our cash exceeds our outstanding debt.
We have begun the process of putting all of our senior secured outstanding debt at par.
We expect this positive cash flow with only improve going forward.
Supporting the strong steel market and our competitive cost position.
We feel this places us with a stronger balance sheet as we begin constructing the EES.
Which puts us in a tremendous position to create long term stakeholder value.
From a position of strength.
Now turning to outlook.
As you all know that.
It's been a sustained significant increase in the index space of steel since August of last year.
Strong demand, coupled with low customer inventory levels across the supply chain continued to support black Scholes bean prices above historical peaks.
Demand from key end markets, including automotive remains strong and we expect this to continue into next year.
We feel that the investments we have made in our plant moves are serving us well as traditionally absolutely it is priced higher than hot rolled coil.
So that relationship is important.
However, the infrastructure spending we believe the traditional relationship Linda and government will be ready at that point with higher production capacity and go to market reach.
Our products.
With the macroeconomic drivers in North American market that includes projected infrastructure spending to tell you that it's a replacement that's great quarters and discussions around carbon border adjustment.
I believe that pricing will remain elevated for the foreseeable future.
Do you think in a new paradigm for steel selling prices.
All of these factors support our positive guidance.
Shipments in the third quarter.
2022, ending December 31st I'd expect it to be in the range of 519006.
610000 victims.
Net sales realization of Athene expect it to be Directionally higher as we expect to see our realized prices climb month by month in parallel with the significant index price increase we have experienced.
We expect in district, a better performance of at least $450 million.
I would like to lag that.
<unk> quarter end, we announced that we had established metals sourcing joint venture with Triple net.
One of the North Americas largest privately on ferrous and nonferrous metals recycling companies.
We expect this JV to add stability to our scrap supply chain health.
Helping us take some of the volatility out of our cost structure.
It could take us for those who are strategic activities I will pass on the call to Mike.
Thanks Richard.
As you are aware on October 20th we celebrated a milestone day in this company's rich 120 year history with a return to public markets.
Together with the number of employees and other stakeholders, we opened the Toronto stock exchange. The following day and what was a short one minute ceremony.
One minute ceremony that was only made possible by countless hours and hard work and dedication from our team.
And while the ceremony was breach this moment served as validation for the value we have created in this business.
For the past three years, we have taken a dedicated strategic approach to improving algoma.
Whether it is our approach to operational and capital improvements.
Improvements made to the balance sheet.
Our focus on organizational excellence and ESG, we have developed the building blocks to position Algoma as a successful next generation steelmaker.
Powered by our employees, it's the collective effort of our team that has facilitated a returned to public markets.
In connection with the successful merger Algoma received proceeds of over $300 billion U S.
Former private Algoma shareholders received public shares of the new company with contingent rights traditional shares.
<unk> targeted calendar year earn out adjusted EBITDA numbers.
These will be fully earned if the company generates 2021 calendar year earn out adjusted EBITDA of greater than $900 million U S.
Our current EBITDA guidance projects that we will surpass the earn out thresholds and achieve our calendar year adjusted EBITDA of approximately $1 1 billion U S.
Would truly represent a win win for the company and its shareholders.
While the opening of the Toronto stock exchange provided a moment to reflect on all the work we have done to get to this point we.
We are by no means resting on our laurels.
With cash injected from the merger.
<unk>, earning performance.
And a commitment of $420 million from the federal government, we're moving on to our next strategic focus.
Our team is already mobilized to begin work on the electric arc furnace transformation.
And we believe this to be a generational investment that will forever change how steel is manufactured in Sault Ste Marie and.
And that'll Goldman is well capitalized and positioned to execute.
Our team is focused both operationally and financially on this critical investments to make our business greener.
More competitive and more resilient.
We expect this transformation will create a compelling value proposition for all of our stakeholders.
Exciting times to say, the least for the steel sector and for Algoma steel in particular.
Thank you very much for your continued interest in Algoma steel.
Very much look forward to what the future holds.
At this point, we would be happy to take your questions. Operator, please give the instructions for the Q&A session.
Thank you ladies and gentlemen at this time, we will be conducting a question and answer session. If you'd like to ask a question you May press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue.
You May press Star two if you would like to remove your question from the Q.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key.
Our first question comes from the line of David Gagliano with BMO capital markets. Please proceed with your question.
Okay, great. Thanks for taking my questions before I ask my questions I, just want to congratulate the algoma team as well I'll be back in the public equity market great to see how it goes back stronger balance sheet and solid strategic outlook here Congrats again.
Thanks, So much David and really appreciate you dialing in this morning and look forward to your questions.
Great. So just one on capital allocation first of all given the obviously for Gaslog $350 million I think.
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Probably a higher number of this current quarter, we've got the destock proceeds.
It looks like alcohol in calendar year 2021, with over $700 million of cash on the balance sheet and no debt. Once these bonds the bonds are redeemed.
And then we don't we haven't even talked about 'twenty is going to it's probably going be another strong free cash flow yield. So I thought it was interesting to see it within the.
The Eas go ahead press release couple of days ago that the plan is still to fund the EIF in part with the previously announced government financing agreements.
Given the strength of the balance sheet now the upcoming cash generation number one do you still plan to draw on the entire government funding package or would you instead just drawing the forgivable portion for example, and then number two what are the restrictions if any.
Related to shareholder returns for example, if you draw on EBIT.
The forgivable loan or the CIB alone.
Yeah.
So David.
Sitting on the front end.
Share your optimism with respect to steel.
Steel markets.
And we'll let that play out.
And with the certainly the final investment decision behind us.
As well as the debt retirements.
We will turn our minds to.
Turning our minds to the alternatives that are available to us and it's really focused on maximizing shareholder value. So the degree to which the debt as required.
The other strategic options that we have with respect to.
Rewarding the shareholders.
The regular dividend.
<unk> special dividend share repurchases, obviously subject to the lockups that exist.
The warrant settlement strategic investments.
All of those things.
Are on the table if you like so at this point in time, we're not declaring.
Or are we able to declare.
Plans going forward with respect to specifically the financing thats available from the government I would note that it is very attractive debt.
And it may make sense to proceed and we will see how the market unfolds and whether that continues and obviously this is all done with the.
Oversight of the board.
The stakeholder and shareholder value in mind.
With respect to the restrictions there are some.
And it's basically the availability and a reduction.
Of what's available to us from the government as we do that and again that will factor into the decisions.
Okay. That's helpful. Thanks.
Switching gears just to the contract versus spot mix here I think it's about 10% of the volumes that are actually tied to annual contracts I believe that reset at the end of the calendar year.
Just assuming you're mostly done with these those negotiations now what's a reasonable.
Average year over year price increase for 2022 for that 10% of your of your business.
So to be clear.
There is approximately two thirds of our business, 65% that is in fact covered under contract.
On a on a fixed price over the course of the year. Some on a one month lag and some on a three month lag but.
You were to look at.
The year over year increase.
Spot is in late.
Late in calendar.
Q3 and into Q4 as they are being renewed relative to last year and that would be a good proxy for.
The negotiating starting point.
Okay. So just to clarify how much of that two thirds is actually.
Tied to full year annual contracts that.
Reset at the end of this year.
I think you have the number right its 10% that is a fixed price for the full year with the balance being indexed either quarterly.
Monthly.
Okay. So and your point was that if we just look at year over year price changes in the spot market.
That actually is a reasonable proxy for the magnitude of the increase for that 10% of the business.
Yes, I believe so.
Okay. Okay.
Okay, Great and then just quickly on the cost side.
Coal producers in the U S been flagging, some pretty meaningful cost increases up 100 Bucks a ton in U S dollars.
Is that a reasonable expectation for your 2022 coal costs.
And if you can remind us what is your annual coal consumption.
Sure.
Hi, David This is Roger.
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The coal consumption normally from.
Annualized basis is half of what.
Steamship and charged phenomenally.
That's that's the requirement 121 3 million tonne for the whole year.
We have.
Got into the discussions on on fixing our contracts for next year and I think it's it's falling in the same ballpark as you are seeing.
That range, though the index has gone up 300 person, but we know that the north American.
Settlement normally it at a discount to that index because that can index reflects mostly.
Material going offshore.
So it's it's a it's a reasonable ballpark.
Okay. That's helpful. Thanks, and then just one last question for me.
For now the.
Just a kind of annoying question, but the share count.
You know with the earn out rights.
What is the fully diluted share count once those are those are finished and also actually the same question for the for the warrants.
Sure. So so the the it's all it's all given an epsilon with recently filed but at a very high level.
That is a 112 million shares outstanding currently.
And that does not include the 37 and a half million Ono chairs, which will come sometime early next year. It does not include the 24 million warrants.
That are out there and it also does not include.
Three odd million dollars of management shifts that have not the initial so so so that's that's the that's the total count of 112 outstanding right now three three roughly of might've been chairs 37, and a half of which will come early next year and 24 million rewards.
Okay. Thanks very much.
That's it for me Congrats again on the again on the returns of the equity market. Thanks again.
Thank you.
Our next question comes from the line of Alex Jackson with RBC Capital markets. Please proceed with your question.
Yeah. Good morning, guys and thanks for taking my question I know you've talked to it a little bit already but just in terms of the operating costs.
Driving those higher those higher cost in terms of which commodities and how would that compare to what we might see in a more normalized environment for an operating cost kind of run rate going forward. Thank you.
Sure. So most of the increase that we're seeing is in the AR in the metallics side scrap.
Iron ore and also on a on the on the items and other variable cost items like refractory reagent central and so forth. So all the commodities have gone up.
And that's reflective of the significant increase in steel prices as well.
On the other side, we've also seen increase in natural gas and power to some extent.
Based on what's happening in Europe.
So that's that's what we are seeing we will see a similar trend.
In the fourth quarter as well, but on a more normalized basis.
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We expect scrap to flow the same way as steep pricing is flowing so that should correct itself natural gas and power should correct itself because there's a lot of natural gas availability in North America still.
And and iron ore as Steve said that Oh.
A portion of that at all is linked to link to revenue and a portion is linked to our island.
The iron ore index, so that may correct itself in the future as well so cost is expected or should come down as things normalize.
But it's high currently just because of the Covid the commodities out currently.
Okay.
Got it. Thank you and then another one I just had on your volumes you guys guided for a little bit higher volumes in Q4, sometimes Q4 can be a little bit seasonally weaker. So I was curious what kind of what impacted Q3 shipments and what the run rate looks like going into the start of 'twenty two.
So calendar.
Q3, and the shipments.
Sorry, let me make sure I understand youre talking fiscal or calendar Q3 on the shipments.
Yes, sorry calendar Q3.
Okay.
So our maintenance.
Typically concentrated in the nine months really from April through the end of December.
And the issue is really.
Not performing.
Significant amount of maintenance and I'm talking planned maintenance in the winter months of January February and March.
So this year we've completed.
Maintenance on our DSP C.
Realigned our number for steelmaking vessel Hood repairs. So it really is an impact of while we have $2 $4 million to $5 million on an annual basis, we do tend to have.
Our strongest quarter in that January through March and again supported by the contracted.
Did volumes that we have with our customer base.
Got it. Thank you and then the last one I had just curious on lead times for your spot cells. One of them is looking like right now.
The weeks.
Again, we are a we're.
Looking to just clean up and finish up the end of December. So we're out six weeks at this point in time on hot roll well beyond that on on cold roll.
But I think hot roll is the most indicative and looking to close out to December now and move into January.
Got it that's helpful. Thanks, guys. That's all for me.
Thank you.
There are no further questions in the queue I'd like to hand, the call back to management for closing remarks.
Yeah.
Well listen our first earnings call as a public company certainly appreciate the the attendance. This morning, the interest and the questions certainly exciting times for Algoma steel and we look forward to.
Future earnings calls and sharing our our success and progress against the objectives that we set so thanks very much have a safe day.
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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