Q2 2024 Algoma Steel Group Inc Earnings Call
Greetings and welcome to all Goldman Steel, Inc. Fiscal second quarter 2024 earnings call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation.
Anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
Please note. This conference is being recorded I'll now turn the conference over to your host, Mike, Morocco, Treasurer, and Investor Relations Officer, you may begin.
Good morning, everyone and welcome to Algoma Steel Group, Inc. Second quarter fiscal 2024 earnings conference call.
Leading today's call are Michael Garcia, our Chief Executive Officer, and Roger 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 our gourmet steals corporate web site at Www Dot Algoma Dotcom I.
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 actual results may differ materially from statements made today. In addition, our financial statements are prepared in accordance with I F. R S, which differs from U S. GAAP.
And our discussion today includes references to certain non I F. R S 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 slides two of the accompanying earnings presentation.
And to also refer to the risks and assumptions outlined in Algoma steel second quarter fiscal 'twenty 'twenty, four managements discussion and analysis.
Please note that our financial statements are prepared using the U S dollar as their functional currency and the Canadian dollar as our presentation currency our fiscal year runs from April 1st of March 31st in our financial statements have been prepared for the three and six months ended September 30th 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 the call over to our Chief Executive Officer, Michael Garcia.
Mike.
Thank you Mike Good morning, and thank you for joining us to discuss our fiscal second quarter results.
As always I will begin my remarks by addressing what truly matters. Most the safety of all of our employees at Algoma, We believe in safety without compromise.
And our continued dedication has led to a significant improvement in our lost time injury frequency rate over the past decade.
Furthermore, we bring the same focus and attention to safety as we continue progressing on the largest capital project in our history.
E F transformation project I want to commend the team for working 420000 hours with no lost time injuries to date and want to emphasize the importance of safety, especially as we enter the winter months, we will continue to work diligently as we relentlessly pursue our goal of achieving zero workplace injuries.
Next I'll cover key events and milestones during our fiscal second quarter and subsequent to its end as well as update you on the progress of our transformative E F project.
I will then turn the call over to Raj it 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 the fiscal second quarter of 'twenty 'twenty four were in line with our previously disclosed guidance for both shipments and adjusted EBITDA. These.
These results reflect solid operational performance against a challenging backdrop and steel markets, where the recently resolved UAW strike at various U E U S auto making facilities impacted demand and pricing.
During the quarter, we continued progress on phase two of our plate mill modernization project, including commissioning and testing of the inline sheer we.
We expect this year to be online later, this month and to wrap up plate production through the end of the year.
This higher production level.
We will allow us to capture market opportunities and to build inventory ahead of the planned outages for the implementation of the final phase of the modernization project.
The project team has worked through the detailed implementation steps and identified opportunities to further derisk. This phase.
Originally we had planned on one outage spanning 40 days. However, we have identified advantages to splitting the outages into two shorter duration outages of up to 20 days, which we expect will mitigate the impact on our customer base, while also reducing commissioning risk.
The first outage will be in April of next year and the second outage will be scheduled for later in the calendar year to align with our planned maintenance outages, providing further advantages.
We still expect the same increase in production volume over the course of the year with much less impact on our customers.
Turning to other strategic initiatives, we have made significant progress on securing key raw material inputs during the quarter.
We signed a two year extension to our existing iron ore purchase contract with U S steel with an option for a third year at our sole discretion.
By extending the existing contract, we now anticipate our iron ore volumes needed to make the transition to electric arc furnace steelmaking are fully covered giving.
Giving us certainty of supply and uninterrupted access on the coking coal front, we have settled our calendar 'twenty 'twenty four contract needs.
And pricing is for this raw material is expected to be down low double digits in calendar 'twenty 'twenty four.
So given the certainty of labor due to the five year Union agreement signed last year the contract for our iron ore needs for the next few years and our coking coal contracts for calendar 2024, we have solidified our inputs and created better visibility into our cost structure for the next several quarters.
Positioning us to expand margins, especially as steel prices continue to improve from recent strike impacted weakness.
We are optimistic as forward prices have hovered around 1000 U S dollars per ton for hot rolled coil in recent days reflective of the pent up demand and low inventory levels at certain customers.
Next I'd like to update you on our progress during the quarter on our transformational E F project.
This will ultimately increase our throughput capacity by roughly a third from $2 8 million tons per year of liquid steelmaking capacity by conventional means today to $3 7 million tonnes employing dual E F furnaces upon completion.
The higher output will match, our expanded downstream, finishing capacity as we increase throughput at our plate mill.
Importantly, this will improve overall product mix, while simultaneously lowering our carbon emissions by approximately 70% when fully operational.
When factoring in the makeup of our power supply when we switched to a F operations, we expect to be one of the greenest producers of steel in North America.
During the quarter cumulative investment in D. E F project reached $456 million or 54% of our expected total project cost at the mid point of our project budget.
We have made meaningful progress since quarter end, securing uncontroversial portions of expected project costs and as of today approximately 80% of the total project budget is under contract.
We expect to contract the remainder of the project budget by the end of March 2024.
Furthermore, it is important to point out that as of now only 5% of the total contracted amount is subject to time and material adjustments, meaning the vast majority is under fixed price terms.
This demonstrates significant derisking of the AAF project over the past several months as we progress towards the start of commissioning in late calendar 'twenty 'twenty four.
As a reminder, our startup plan continues to include normal production from our existing steelmaking facility, while ramping up steel production from our Eas in calendar 'twenty 'twenty five.
By a complete switched E F production.
I spoke earlier about our successful efforts to secure coal and iron ore inputs for our existing operations and when you think about the inputs for E. S. Steelmaking one of the most important is power.
As we mentioned previously we already have the required power to run to the electric arc furnaces at our current run rate of 2.2 to $2 4 million tonnes of shipments without relying on the blast furnace utilizing onsite power generation and the current grid.
We can utilize hot metal from the blast furnace, Opportunistically, which would provide further upside to our current capacity.
In this quarter, we received a system impact assessment for the second phase of our project.
Which means when the local to 30 K volt line is installed we can run either E F unit without running our onsite power plant.
Also subsequent to the quarter and the Ontario government's announcement and issuance of an order in council to accelerate regional power infrastructure upgrades provides further assurance for our long term power requirements for our E. F project all in all a significant amount of progress has been made substantially derisk.
The availability and cost of the power needed for our new Eas, It's an exciting time in Sault Saint Mary as our existing facilities operate normally and work on the ethics celebrates.
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 a F project forward.
Now I will pass the call over to Roger to go over our financial results for the quarter and give more details on the expected funding of our capital expenditures Raj. It. Thanks, Mike good.
Good morning, and thank you all for joining the call.
Our second quarter results included adjusted EBITDA of $81 million.
Which reflects an adjusted EBITDA margin of 11, 1%.
Cash generated from operating activities was $57 2 million.
We finished the quarter with $213 6 million of unrestricted cash.
And our U S $300 million revolving credit facility remains undrawn.
Representing total liquidity in excess of $500 million.
You had mentioned in our previous calls and included in our strategic direction, our focus on financial discipline.
We have structured our balance sheet, the only long term debt in the form of common loans linked to a capital project and maintained a very low leverage profile.
With ample liquidity to manage through market fluctuations and complete those capital initiatives.
I'll now dive into the key drivers of our performance in the quarter.
We shipped 549000 tons in the quarter.
Up 26, 1% as compared to the prior year period.
Cleveland strip operations continue to run well.
And the normal seasonal maintenance is occurring as expected in <unk>.
Clothing of analysts steelmaking vessels Eli.
As a reminder.
This normal seasonal maintenance typically reduces production by 20 to 30000 tonnes. As a result, we would expect our fiscal third quarter production to be lower sequentially as compared to the fiscal second quarter.
Net sales realizations averaged 12 13 per tonne down four 3% versus the prior year period.
The decrease versus the prior year levels, primarily reflect overall softer market conditions in the quarter.
Please 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 get a real goods.
As a reminder, the other only discrete placement in Canada, and we look forward to the incremental tons from the plate mill in the calendar fourth quarter and beyond as a result of the new sheer installation.
Yes.
Steel revenue in the quarter totaled $665 8 million up 27% versus the same quarter of last year.
Reflecting the increase in shipments that were more than offset by lower average realization per ton of steel.
On the cost side I'll go most cost per ton of steel products sold average 10 21 in the quarter.
Down one 6% versus the prior year period.
The main drivers of the decrease versus the prior year period include the positive impact of increased volumes.
The prior quarter of cost of steel products or approximately 7% higher.
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Lower volumes higher costs related to various raw materials and utility inputs, including natural gas and purchased Coke.
Cash flow from operations totaled $57 2 million for the quarter compared to a use of $66 1 million in the priority of Peter.
I didn't win trees at the quarter end, but $822 7 million up eight 3% during the quarter due to normal seasonal patterns.
We expect to build inventories further during the calendar fourth quarter ahead of winter.
As we typically do at this point in the year.
And to release inventories in the first half of calendar 'twenty 'twenty four heavily weighted towards the first calendar quarter now I'd like to provide additional color on our funding plans for the F project.
As previously noted.
Our outlook for the total cost of the project remains in the range of 825 million to $875 million.
So at the end of the quarter, we had spend 456 million or 54% of the expected total cost.
Having 394 million to be spent.
Yeah, well position today, when we look at unexpected sources for those expenditures.
With cash on hand of over $200 million, another 93 million of available capacity on our central cephalon and approximately $150 million of cash to be generated from drawing down excess working capital.
Approximately 70% of this coming in the fourth fiscal quarter and the balance coming in the following fiscal year.
Combined this exceeds the remaining expected capital requirement to complete the project with that I'll turn the call back to Mike Garcia for closing comments Mike.
Thank you Roger.
Looking at the state of the North American steel market Hot rolled coil index prices fell approximately 25% in the calendar third quarter as the concerns about and the reality of a UAW strike weighed on the market.
Capacity was curtailed at several North American Mills, as a result and inventories across distributors were drawn down.
We do expect this to meaningfully impact EBITDA in the current fiscal quarter as lower prices and lower shipments on account of our planned maintenance outages are felt.
Looking further out as labor settlements have been reached over the last few days pricing has rapidly moved higher and we have seen forward curve pricing climbed to near $1000 per ton, which will provide significant upside in the fourth fiscal quarter.
We are also supported by the fact that plate pricing continues to demonstrate a significant premium as overall demand for plate products remains high which in turn continues to benefit our average price realizations.
Yeah.
We will relentlessly maintain our primary focus of operational excellence and maintaining prudent financial discipline, regardless of volatility in our end markets.
This will ensure our ability to execute our EIF project ushering in the next phase of our company that define the future of Algoma provides for the long term value creation of 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 at this point, we would be happy to take your questions operator.
Please give the instructions for the Q&A session.
Thank you and at this time, we will be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.
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You May press Star two if you would like to remove your question from the queue.
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Okay.
Okay.
And our first question comes from the line of David Ocampo with core Mark Securities. Please proceed with your question.
Thanks, I guess my first one here is for our resort.
Based on kind of your annual buys that you have for your raw materials in your new iron ore contract do you guys think we've hit peak raw material prices in and how should that trend into next year.
Yep, so for for coal definitely it comes stone.
And I don't know you you'll see how the index fluctuates so that affects to some extent is as we have two contracts right now running but that's what I would say that your youre right that we should see cost coming down in the future.
Normally the winter months.
Have some challenges primarily based on our high cost of utilities natural gas power that goes through but other raw materials should start coming down as we go into the next year.
Okay, and then I guess just sticking with your resort.
Take a look at your inventory levels are still a little bit elevated there actually saw an uptick in the quarter can you just walk us through how those raw materials or finished product begins to unwind and how much cash we can expect on locked in the next several quarters.
Sure so.
So you know we normally build during during December and this is typical and then will release in March and then we'll do the same next year.
But when you look at March to March.
March and too much and this should release.
You know a $100 million in working capital and I say working capital is it is it includes inventories and some other some other you know on the payables side as they go hand in hand.
So so you'll see that happening and then there is another 50 odd million dollars that we should see in the following years. So we should see that 150 coming down it's taking a little longer as I had mentioned earlier as well that we have.
<unk>.
Rich will take little bit longer to run down and this is primarily on the on the raw material side on the finished goods and website.
As cost comes down we should see that improving but from tonnage perspective, we should see some optimization happening.
Got it and then my last one it could be for whoever wants to take it.
But you typically set your annual contracts around this time at least that 10% that you typically hold out on was this done before the resolution of the UAW strike or postal strike when we saw much better pricing conditions.
David This is Mike.
I think it's happened throughout its still happening now so it really depends on the on the specific customer in and kind of the historical timeframe, but we definitely began it are on the cusp of the strike, but it's it's continuing to happen as we're speaking.
Okay perfect. Thank you so much.
Okay.
Our next question comes from the line of kind of Judge Johnson with BMO capital markets. Please proceed with your question.
Hi, Thank you for taking my questions first maybe on the plate side I think you mentioned that the demand environment remains healthy and prices elevated but what we're seeing in the U S did one of your peers has actually announcement, they're reducing prices and it seems that the demand environment.
Man is softening.
Can you talk a bit more are you seeing a different environment in Canada and how much are you selling into the U S market.
Thanks Katja. This is this is Mike so when you think of our our plate a book of business. It's it's the majority of it is in Canada, It's roughly a 70 30 split between.
Canada and the U S.
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And again I think is reflected in this in the spread which still remains large and it actually opened up a bit this week.
We're still seeing pretty robust demand for our plate business.
I think theres some segments of the plate market that are maybe under a little bit more pressure than others I'm sure you saw the cancellation of the the wind tower projects.
But that's not a segment that we're in so we still feel relatively confident about that.
The plate spread and where our book of businesses.
Does that help maybe yeah no. That's super helpful. Thank you for that and then just on near term cost side given that the production level, it's going to be lower this quarter. How should we think about cost per ton should they be higher or what are some of the puts and takes there.
Yeah, I got you so it will be higher.
Just because of the the volume so the so the so when you look at puts and takes for the coming quarters, let's say over the coming quarter at least is that the.
Volume definitely will impact other costs are more or less very similar Utah.
Utilities might continue Oh, it's just natural gas in Butler, but some.
Some pressure.
On higher pricing so that's how the.
Next quarter will play out quarter. After you know getting back to normal production levels.
The outages that out and then you still have the utility pressure and then you'll get into get into the summer months. When did you start getting into much normal situations. So that's how we see the cost playing out over the next couple of quarters.
Okay. Thank you I'll hop back into the queue.
Okay.
Our next question comes from the line of Ian Gillies with Stifel Nicolas.
With your question.
Hi, everyone.
Hi, Ian.
With respect to the plate mill modernization and the new sheer being sure line being installed.
If I recall correctly I think that was supposed to be done at some point during this past quarter and it sounds like it's still ongoing and has there been some sort of delay there that's impacted that's impacted volumes or.
Am I misreading the situation.
No.
What we had mentioned before was hot commissioning.
Beginning in this quarter and we're pretty much right on schedule with that project. It is a pretty involved hot commissioning exercise and so.
We're still on.
On track as we bring up that that sheer into more normal production in November and then consequently in December and through the first quarter of next year.
Okay. That's helpful and as you think about once you get past the two brief outages next year.
Do you have a good sense of where you think volumes are going to be post that or is that number is still a bit in flux, depending on on what may happen and if you do have a good idea would you be willing to quantify it for us.
Well I think what we're aiming for prior to the first outage in April is to roll in a 10% to 15% increase in our in our plate business.
And then building from there.
The plate business, it's a very important market segment for US we are spending a lot of time with customers now about and it's really kind of two pieces. It's it's recovering our position at some of our historical play customers.
We had some challenging times last year with the with the commissioning of the and the startup from phase one of the projects. So we had a little bit of room to to recover so to speak but we've made the type of improvements in quality and and promised performance that we believe the customers require.
Of us and now as we bring on more capacity steadily through next year.
We will build our business with with the quality and promised performance improvements as well as the increased flow path to handle it.
Okay. That's that's helpful. Thanks, Mike.
If I could just squeezing one more with respect to what you're seeing from your customers right now and as it pertains to the rise in HRC prices.
How much of it do you think of this run is due to a structurally stronger demand.
And how long how much do you think is tied to inventories being rebuilt because they don't bind had been pretty weak I know, it's a tough question to answer but any commentary there I think would be helpful.
Yeah. It is a tough question to ask definitely there is.
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Eight.
An aspect of it and probably a significant aspect in there in the early days. The first few weeks couple of months.
That is tied more toward a recovery from the positions people reached during the strike inventories or I think at two months, which is quite low.
Lead times for the Mills, where we're out at eight weeks for the most part so I think the initial stages of it have been a recovery from the the concern and the the specific outages tied to the the UAW strike.
I think going forward is where it'll really.
Kind of.
Demonstrate whether the the rest of it any further pricing beyond where we were we're reaching now will I think be more tied to fundamental demand and economic activity.
Understood. Thanks, very much that's that's helpful I'll turn the call back over.
Yeah.
And our next question comes from the line of Lucas pipes with B Riley Securities. Please proceed with your question.
Thank you very much operator, thank you very much for taking my question.
The first one is circling back on annual contracts and.
With the decline in raw material costs in 2020 for what you expect the margin on annual contracts to increase or stay the same go down with would appreciate your perspective on that thank you.
Sure so.
The.
The contracts that we do.
Mostly index based.
And and it is a very small amount that's on fixed price work.
There then youll see that that's happening but overall.
We should see margins, improving because costs should get optimized and and if the pricing remains at <unk>.
At the level it is or lower we should see higher margins, so relatively margins will be better because the cost comes down.
But.
Most of our contracts are indexed based so heavily days on the.
On how the pricing moves throughout the year.
Got it and thank you for that and can you remind us roughly what percentage would be fixed versus floating.
We normally do.
One, 5% or so fixed and <unk> of our total book and.
And we normally do contracts around 50% to 60% so.
So so 5% is fixed and the balances are all floating based on monthly and quarterly contracts.
Very helpful. Thank you for that and then.
My second question. This is on your Coke procurement during the transition phase can you remind us what the what's the strategy various what would you expect the mix to look like and and any any possible savings on the on the capital side.
As you as you transition them.
Thank you very much for your color.
Yeah, Lucas so were.
We continue to maximize production from our internal coke batteries.
And we continue to spend critically required capital to maintain those batteries in a safe operating.
Condition.
But the fact remains even when they're running very well.
We're still short of Coke, So we will continue to.
To purchase.
Coke externally as we've done in the past, we always try to minimize that number but.
But we expect that to go forward into the future.
Got a little bit of.
Benefit here recently, because the market price of Coke has has come down pretty significantly.
But our approach remains the same we'd have to maintain the batteries, even though they don't have a long life or a life for us beyond our our final transition to a F production, but we're still spending some amount of required sustaining capital to keep them safe and operating profit profit properly.
Does that help.
It does I do have a follow up question.
There's there's talk of some potential idling of blast furnace coke, making capacity.
In the U S. Sorry blast furnace capacity in 2024, so I just think that overall, there's more coke available.
From a merchant basis.
Is that tempting or when you kind of think about.
You just answered the question before that if you wanted to kind of maximize your internal needs, but is there a point where that where that can switch them, where it makes more sense to buy more or coke on a merchant basis.
Yeah, I think at the end of the day it comes down to economics. So we have to have a good understanding of our internal coke production cost including.
The yield loss that Youll get an coke when you when you buy it externally and transport it here.
But certainly if the economics are.
Changed significantly in that decision internal production versus external purchase.
That's something we will be tracking and be aware of and prepared to act on it.
And how how quickly could could switch of course that.
The decision you have to kind of make once a year or can you be flexible.
As the year progresses.
Supply demand changes.
Yes, we can we can be pretty pretty quick and that it's not.
Within days, but probably within months, we can we can switch.
Don't have to wait for a year.
Because we what we do is that we we do contract out based on our optimum production internally and if he has to if they have to switch that based on opportunity available in the market to buy at a price, which offset shuttle in production then you'll have than we have than we have that flexibility and we can move quickly within months.
Very helpful really appreciate all the color on continue past US luck. Thank you.
Thanks Lucas.
And our next question comes from the line of Ahmad Shah with Beacon Securities. Please proceed with your question.
Hi, guys.
Quick one for me on that project did I read that right.
Yes.
Hybrid scenario is not on play anymore.
I'll start commissioning.
Given the.
What are your thoughts on.
Connectivity.
Okay.
No I think hybrid is definitely still in play, but what we mentioned was that we wanted to emphasize that we will be able to match our current output.
With only running.
<unk> cold charge and the power that is available today.
Today and with the recent decisions by.
ISO and the completion of the system impact study, so theres been a full kind of understanding of the impact of our power demand and the nature of it by the.
The operator of the grid.
Antero and they've issued some conclusions based on that however, we still have the optionality to continue to run our blast furnaces and.
Take advantage of hot metal from those blast furnaces at a reduced blast furnace right to augment our our production through the Eas, if we want to increase the total amount of steel produced and again that'll.
That will go back to the economics, and how that decision looks from an economic perspective.
Got it.
That's very helpful.
Maybe a little bit later on that.
On the carbon tax credits.
So from an income statement perspective, the number was a little bit higher but it doesn't look like.
The big impact on the cash flows so maybe that's one for Roger just to walk us through as we go forward.
How should we think about that the blast furnace has continued to operate.
Okay.
So sorry.
Can you repeat the question I.
Yes, I'm just trying to understand the potential impact on your cash flow from the carbon tax payment.
Because it was substantially this quarter.
Somewhat of a $12 million haven't seen that number in a while so maybe you can help us explain why is it a little bit bigger, but from a cash flow perspective. It doesn't look like it's operating cash flow. So just trying to understand is it.
I would go back to numbers.
Got it.
Government tax so yes carbon tax.
So the way to look at carbon taxes.
We have roughly.
We definitely pay on 5% of our emissions, which is roughly 200000 tons and in the price.
For last year. This for this year is 50 and for next year. This goes up by another 15.
So the so that's how that's how the total cash out it comes out and normally the cash hold goes in November.
From from accounting perspective, it was based on the estimates that come out until the time. They are finalized those estimates are looked at and the accounting happens and that's how you'll see a big number coming in in this in this quarter, which is the September quarter, but four from cash out person.
<unk> and total expense perspective, it still remains.
A simple math of roughly 200000 tons on an average and and the price that gets published each year on what we need to pay down.
Yeah.
That's very helpful and last one for me if I heard you correctly, you do expect margins to improve but because of the volume situation in fiscal Q2, we should expect a small dip in calendar 2024 margin should start improving.
Correct.
Thank you very much.
Okay.
We have reached the end of the question and answer session I will now turn the call back over to CEO, Michael Garcia for closing remarks.
Thank you again for your participation in our second quarter fiscal 2024 earnings conference call and for your continued interest in Algoma Steel mill.
We look forward to updating you on our results and progress when we report our fiscal third quarter results scheduled for February.
And this concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation.
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