Q2 2025 Algoma Steel Group Inc Earnings Call
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Speaker Change: Greetings and welcome to the Algoma Steel Group, Inc. second quarter 2025 earnings call.
Speaker Change: Good morning, everyone, and welcome to Algoma Steel Group Inc.'s second quarter fiscal 2025 earnings conference call. Leading today's call are Michael Garcia, our Chief Executive Officer, and Rajat Marwah, our Chief Financial Officer.
Speaker Change: 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 meaning of applicable securities laws which involve assumptions and inherent risks and uncertainties.
Speaker Change: 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 to also refer to the risks and assumptions outlined in Algoma Steel's second quarter fiscal 2025 management discussion analysis.
Speaker Change: 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.
Speaker Change: Our fiscal year runs from April 1st to March 31st, and our financial statements have been prepared for the three and six months ended September 30th, 2024 and September 30th, 2023.
Furthermore, today we are announcing that our Board of Directors has approved a change in Algoma's fiscal year-end from March 31st to December 31st starting this year.
Speaker Change: This will result in a period of March 31st to December 31st being reported as a nine-month reporting period.
Speaker Change: We plan to provide reclassified historical financial information in the first quarter of 2025 to assist investors in evaluating the impact in the change in fiscal year we'll have on reported annual operating results for the years ended December 31st, 2023 and 2024.
Speaker Change: 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?
Michael Garcia: Thank you, Mike. Good morning and thank you for joining us to discuss our fiscal second quarter 2025 results.
Michael Garcia: Over the last several quarters, our relentless focus on employee safety yielded measurable results demonstrated by our improved lost time injury performance.
Michael Garcia: With construction of the EAF project reaching peak levels of activity, our commitment to workplace safety has never been more vital. We continue to prioritize the well-being of every team member, reinforcing safety as not just a corporate value, but a fundamental aspect of how we operate.
Michael Garcia: Next, I'll cover key events and milestones during our fiscal second quarter, as well as give an update on progress at our transformative EAF project.
Michael Garcia: 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.
Michael Garcia: There are a few important themes I would like to get across on this call.
First, we delivered solid operational performance in the quarter.
Michael Garcia: partly blunting the impact of continued soft conditions across global steel markets.
Michael Garcia: Second, our balance sheet and liquidity are strong with cash at quarter end of over 450 million dollars and total liquidity of 800 million dollars.
Michael Garcia: We are well funded to complete our transformative EAF project in the coming months.
Michael Garcia: And finally, we have further de-risked the EAF project with substantially all remaining items now contracted as we enter the start of commissioning activities this quarter.
Michael Garcia: Now let me give you some additional color on those key themes.
Michael Garcia: Our results for fiscal second quarter of 2025 were in line with our previously disclosed guidance for both shipments and adjusted EBITDA.
Michael Garcia: They reflect a continuation of the challenging market conditions we have seen this year in steel pricing.
Michael Garcia: which touched year-to-date lows during the quarter as uncertainty around the U.S. election, the pace of interest rate cuts, soft demand, and overall economic factors weighed on our customers' buying behavior.
Michael Garcia: All told, softer realized steel prices and lower shipments led to an overall decline in revenues, adjusted EBITDA, and cash flow generation versus the prior year period.
Michael Garcia: Our plate shipments in the second fiscal quarter of 2025 were approximately 73,000 tons, up from 61,000 tons in the fiscal first quarter.
Market conditions impacted our expected plate shipments.
Michael Garcia: However, our production was in line with our expectations of approximately 90,000 tons.
Michael Garcia: We were able to grow market share despite poor market conditions, and we were able to rebuild strategic inventories for product categories that will help us improve delivery performance as we continue to position Algoma as the North American leader in customer service.
Michael Garcia: While there are no clear signals of the market improving in the near term, we plan to continue ramping up plate production over the balance of the fiscal year towards our expected annual run rate capacity of over 650,000 net tons.
Michael Garcia: We are Canada's only discrete producer of plate products and the completed modernization and associated quality and volume improvements should result in a more favorable product mix going forward that is expected to drive meaningful margin enhancement.
Michael Garcia: Market conditions remain challenging. However, we remain focused on what we can control, including the consistent operation of our facility and unwavering focus on our customers.
Michael Garcia: We are entering our normal seasonal maintenance period, but we don't expect any unusual impacts to production and should see directionally higher shipments in the third fiscal quarter.
Michael Garcia: Now, let me give you an update on our exciting progress during the quarter on our Transformational Electric Arc Furnace Project.
Michael Garcia: With the facility now towering over our site, we are in the busiest phase of the project with nearly 500 specialized trades contractors on site.
Michael Garcia: Critical equipment installation is well underway including our 550 ton cranes.
Michael Garcia: our fume treatment system with over 2,500 feet of large-diameter piping and our automated scrapyard cranes.
Michael Garcia: Critical electrical infrastructure has been installed, including our Daineli Q1 power systems and our EAF substation, which has now been energized.
Michael Garcia: We have told you that we expect to commence commissioning activities by the end of this calendar year And I'm proud to say we remain on track for that important milestone
Michael Garcia: We have selected and staffed the EAF operating team who will be tasked with executing commissioning activities beginning as expected in December and we remain on track to deliver first steel production by the end of the calendar first quarter of next year.
Michael Garcia: When both furnaces are up and running, we expect to reach a steady-state shipping capacity of approximately 3 million tons per year, 35% higher than current production levels.
Michael Garcia: Every bit as important as the project being on time is the milestone we reached with regard to contracting activity for the remaining construction.
Michael Garcia: As you all know, we have been advancing the project during what has been a period of sustained high inflation, particularly for labor and materials associated with large industrial construction projects.
Michael Garcia: Our project team has worked closely with all stakeholders, including major equipment suppliers and subcontractors, to de-risk the project at every turn.
Michael Garcia: I'm proud to share today that we have contracted substantially all the remaining work on the EAF project. As we continue to work towards the completion of construction and commissioning of both EAFs, we expect to finish the project within 5% of the most recent budget guidance.
Michael Garcia: We are also excited to announce that Algoma's EAF project is eligible under Ontario's Ministry of the Environment Conservation and Parks Emissions Performance Program.
Michael Garcia: Under this program, Algoma has applied for and expects to receive reimbursement for carbon taxes paid since 2022, driving down the net cash cost of the EAF project, and further enhancing the strength of our balance sheet and liquidity.
Michael Garcia: Specifically, during the quarter, cumulative investment of the EAF project reached $672 million, and to date, we have committed contracts totaling approximately $870 million, with over 90% tied to fixed-price contracts.
Michael Garcia: The transition to EAF steelmaking involves the support and partnership of many agencies and companies.
Michael Garcia: In August, we were pleased to see PUC Transmission and Hydro One each obtaining authorization pursuant to the Ontario Energy Board Act to construct a new 230 kilovolt transmission line and related transformation components in Sault Ste. Marie.
Michael Garcia: The combined project improves the City's access to Hydro One's planned regional grid infrastructure upgrade as previously prioritized by the Province of Ontario. No capital contribution from Algoma will be required for these upgrades.
Michael Garcia: This enhancement is part of Phase 2 of the transition to EAF steelmaking, where power required for the two EAFs will come from the grid, supported by our own Lake Superior Power Plant.
Michael Garcia: 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 an eventual switch to full EAF production.
Michael Garcia: This provides us with operational flexibility as we ramp up the EAF furnaces to full production.
Michael Garcia: In summary, in very tough market conditions, we focused on the safe operation of our existing facilities.
our customers.
Michael Garcia: and the planned ramp-up of plate production, finalizing our contracting for the remaining components of our EAF project, and taking the first steps toward the on-time start of commissioning activities for the EAF project.
Michael Garcia: As I said last quarter, the near-term weakness in steel markets can't dampen our excitement for what's happening at our site, and the huge step forward it represents for our company and our community.
Michael Garcia: I'd like to once again thank all our employees for their hard work, dedication, and professionalism.
Michael Garcia: Now I will pass the call over to Rajat to go over our financial results for the quarter. Rajat. Thanks, Mike. Good morning, and thank you all for joining the call.
Rajat Marwah: As a reminder, all numbers are expressed in Canadian dollars unless otherwise noted.
Michael Garcia: Our second quarter results include adjusted EBITDA of $4 million, which reflects an adjusted EBITDA margin of 0.6%.
Michael Garcia: This includes the benefit of net insurance proceeds totaling approximately 28 million, which I will explain in more detail after.
Cash generated from operating activities totaled 25.4 million.
Michael Garcia: We finish the quarter with a strong balance sheet, including $452 million of cash and availability of $348 million under a revolving credit facility.
for total liquidity of approximately 800 million.
Michael Garcia: Now let me walk you through the key drivers of our performance.
Michael Garcia: Steel revenue was 539 million in the quarter, down 19% versus the prior year period.
steel shipments were 520,000 net tons in the quarter.
down 5.2% versus the prior year quarter.
Michael Garcia: The decrease in shipments and revenue was largely attributable to soft market conditions and depressed pricing.
Michael Garcia: Net sales realization average 1036 per ton, down 14.6% versus the prior year period.
Michael Garcia: The decrease versus the prior year level reflects weaker market conditions partially offset by improvements in our value-added product mix as a proportion of steel sales.
Michael Garcia: On the cost side, Algoma's cost per ton of steel products sold averaged $10.32 in the quarter, up 1.1% versus the prior year period.
Michael Garcia: The main drivers of the increase versus the prior year period include lower volumes and the increased use of purchased coke.
Michael Garcia: Inventories at the quarter end were 793 million, down modestly from 808 million at the end of the 2024 fiscal year.
Pyramid focused on driving down working capital levels.
Michael Garcia: From a timing perspective, during the December quarter, we will grow inventories at a lower level than seen in previous years, and we expect a release of at least $100 million of total working capital by March 2025, as previously discussed.
Michael Garcia: One additional note on the utility corridor incident from last January.
Michael Garcia: During the quarter, we received an advance from insurers related to property damage.
Michael Garcia: You will see approximately 32 million insurance proceeds flowing through our financial statement as other income during the quarter, offset by approximately 4 million of costs associated with the outage.
Michael Garcia: We continue to work with our adjusters on recovering funds for the balance of the property damage and business interruption claims.
Speaker Change: I'd now like to turn the call back over to Michael Garcia for closing comments. Mike.
Thank you, Rajat.
Michael Garcia: Looking at the state of the North American steel market, demand and pricing remained depressed prior to the U.S. election, contributing to overall economic uncertainty.
Michael Garcia: During the past quarter, index pricing touched year-to-date lows in the mid-600s.
Michael Garcia: While we saw some modest price improvement, it again moved lower and has traded sideways over the past few weeks, potentially a reflection of market participants sitting on the sidelines awaiting a result from the U.S. election.
We are optimistic that post-election steel prices will gain ground.
Michael Garcia: We applaud Canada's recent imposition of tariffs on Chinese steel and aluminum as it aligns Canadian trade policy more closely with the United States.
Michael Garcia: fostering a unified North American approach that strengthens the regional steel market by mitigating competition from unfairly traded overseas imports.
Michael Garcia: In the near term, we do expect that current prices will continue to generate headwinds on our earnings performance on account of our lagging contract order book.
Michael Garcia: As we wait for these headwinds to abate, we will continue to focus on what we can control, operating our facilities safely,
Michael Garcia: servicing our customers and positioning ourselves to best capture market opportunities as they arise, all while executing the completion of construction and commissioning of the EAFs.
Michael Garcia: It's no exaggeration to say that in the 120 plus year history of Algoma, we are in the most exciting phase of our existence.
Michael Garcia: transitioning from traditional blast furnace steel production to being one of North America's greenest producers of steel.
Michael Garcia: This is further supported by recent modernization investments across the steelworks, including Canada's only discrete plate production facility.
Michael Garcia: We will significantly expand our production capacity, dramatically improve our environmental footprint, energize the local economy, and unlock tremendous value for all of our stakeholders.
I'm proud of what the team has accomplished.
Michael Garcia: their dedication to safety, and their focus on enhancing every aspect of our operations.
Michael Garcia: The last several years have been busy ones in Sault Ste. Marie, and we are truly excited for what the future holds.
Michael Garcia: 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.
Speaker Change: Thank you. We will now be conducting a question and answer session. In the interest of time, we ask that you please limit yourselves to one question and one follow-up.
Speaker Change: If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue.
Speaker Change: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for your questions.
Speaker Change: Our first question comes from the line of Kasia Jancic with BMO Capital Markets. Please proceed with your question.
Hi, thank you for taking my questions.
Speaker Change: Maybe starting on the working capsule just to clarify Rajat, I think you said that in this current quarter, the built is not going to be as much as in the recent past.
Speaker Change: Can you talk more about what's driving that because I would assume that it would be higher given the EIF start
Speaker Change: and for the for the blast furnace and coal we already carry inventory and we are trying to manage that so the so the buildup normally we build up around 150 million dollars by December from March to December and then we bring it down I think it will be lower than that
Speaker Change: When you look at the three quarters, I think it will be...
Speaker Change: on the scrap side as we are ramping up our year, but that will be 2025. 2024 will be will be smoother.
Speaker Change: And can you maybe talk about how to think about that build-up for the EIS sign?
Speaker Change: So it will you know, we will be we will be building up to the extent of you know
Speaker Change: roughly a month, month and a half, or max two months of inventory for scrap.
anywhere from 30 to 50 million dollar of build.
Speaker Change: but eventually during the transition period but eventually we will see
and Coke batteries are...
Speaker Change: are shut down and we are only on the EF. So overall working capital-wise, 100, at least 100 we should see releasing by March. And then we will see another 100 at least coming out when the blast furnace, when the transition is complete.
Speaker Change: In between, we may see a slight build that happened for a year, which will be next December.
Speaker Change: And you said the site build is $30 to $40 million, was that correct?
Yep.
Speaker Change: If I may, one more on, I think, Mike, you initially mentioned that for the current quarter you expect volumes to increase a bit sequentially. What will drive that increase? Because typically, right,
Speaker Change: In the December quarter, the environment is a little softer, so we see most of your peers are talking about lower volumes.
Speaker Change: Yeah, I think primarily it's our operating schedule, so we don't have any outages scheduled in the quarter. So, I think you'll see our volume increase from that perspective. You're right, as we enter the holiday period, although I think there's...
Speaker Change: probably a positive sentiment on economic activity. I don't think we'll we'll see
Speaker Change: significant demand increase over the next six or seven weeks in the quarter.
Okay, thank you.
Mm-hmm.
Speaker Change: Thank you. Our next question comes from the line of David Ocampo with Cormark Securities. Please proceed with your question.
Thanks everyone. Rajat or Mike, maybe you could take this.
Speaker Change: And I was hoping you could comment on the timing and total insurance proceeds that remains to be delivered to you guys, both from the damages to the property as well as lost production that occurred in the quarter. And then also in terms of timing and total proceeds that could come from the Ministry of Environment program.
Speaker Change: Sure. So on the on the insurance front, you know, as we've mentioned, there is
Speaker Change: You know 50 to 60 odd million dollars that we see on the on the property damage. That's slightly higher I think it will be little over 60 million and We've received some right now, and we'll receive the balance between
Speaker Change: between this quarter and next, most probably in the next quarter, which is the March quarter.
Speaker Change: More than 50% of that recovered. Now, we are going through the process. As I said, it's a lengthy process. We do expect to get it by...
Speaker Change: before end of March or could flow into into the June quarter but that's what our hope is. So most of it should I mean at least from property perspective should come by March and we are trying to see if we can get it in that quarter or it will be following for the business interruption. So that's how
That's how it will flow through.
on the insurance side, and on the
Speaker Change: We are part of the program. We've applied for 2022, and it gets applied every year, but the way to think about it is that the recovery is
Speaker Change: happens based on the process and the way it's laid out. It's in, it's roughly in the second year or third year. It takes two years. So that's a 2022 we should get it.
Speaker Change: by you know either either this year or early next and and this is how it will flow it would probably be two years delay the way it works so they they do the they do the work they do the audit after the year ends we file they calculate
Speaker Change: and then it gets you in the following year. So it's a two year lag, the way we get the money.
Speaker Change: Okay, and just so I have my numbers right, I have you guys having paid $54 million since calendar 22.
Does that line up with your numbers?
No, I think it's a
It's a much...
Lower number for calendar 22
Speaker Change: Sorry Rajat, that was cumulative, so 22 today. Oh yeah, you're right, the cumulative is that.
Speaker Change: And it's done on a calendar year basis, which will align with the fiscal year now. It becomes much easier for you guys, for us, and for everybody. And we are pretty happy and excited about it.
Speaker Change: This is done on an annual basis, which is calendar year basis, and 2024 we have one more quarter, and then it gets finalized. But you're right, those are the numbers that you see, and it's actually done year by year.
and each year the province has to...
Speaker Change: decide or declare whether the program is running for another year.
Speaker Change: All future carbon taxes for the life of the project while we're undertaking this project will qualify on this. But definitely the province has made the decision as it applies to the taxes.
Speaker Change: paid for 2022 emissions that were paid at the end of 2023.
Speaker Change: Okay, that's helpful. That really helps us from a modeling standpoint.
Speaker Change: It does look like the diluted share count is equal to the basic share count this quarter. That's probably just because of the negative income. But in the past, if you look at the quarters, it did include all the warrants in the diluted share count. But I know the warrants can be settled on a cashless basis.
Speaker Change: and they're called 118. So what's the right way to think about the maximum dilution for everyone that's trying to model this one out?
Speaker Change: That's a very good question David. You know the thing, the right way to look at it is that if you're at 18 it's one-third dilution because it's callable, the strike price is 11 and a half and the difference between 11 and a half and 18 is let's say six odd bucks.
and and that's
Speaker Change: That's the dilution that's there from dollars perspective. So if you issue shares, then it's one third dilution, so it's not the whole 24.
Speaker Change: that leads to the dilution, it's only one-third. And accounting is accounting and we have to follow those rules, so we follow those rules while we show it. But from real modeling perspective, at 18 it's only one-third.
Speaker Change: It changes, goes lower, goes higher depending upon where the share price is, but that's how to look at it. And at 18, we have the option to do a cashless settlement, which brings the dilution to one-third.
Speaker Change: Okay, those are my two questions. I'll hop back in the queue. Thank you, everyone.
Speaker Change: Thank you. Our next question comes from the line of Ian Giles with Stiefel. Please proceed with your question.
Morning, everyone.
Good morning.
Speaker Change: I asked about this last quarter, I'm gonna ask again. The plate ramp, are you putting any additional thought or are you thinking about slowing that down at all or changing the mix in the near term just given that that market seems to be a little oversaturated at the moment, price isn't great, etc.?
well I mean we're not we're not going out
Speaker Change: and destabilizing the market by chasing a lot of plate business.
Speaker Change: rebuilding strategic inventories. So if we have a slow demand for plate, which we've certainly had during this previous quarter, we're doing a few things. We're making sure that we are
Speaker Change: rebuilding some of our strategic stocks so that includes both our just-in-time you know automotive programs which need to be fully stocked because that's the expectation of those automotive customers but also
Speaker Change: building some on-the-floor inventory of plate that we know is going to sell. It's not, you know, it's high demand.
Speaker Change: products or grades and sizes that our that our existing customers are regular consumers of. We are
Speaker Change: taking the advantage of time to finish any of the modernization work that needs to be done in terms of proving and improving our rolling profile of some of the thinner grade material, the half inch and below.
Speaker Change: So we are being mindful of that and we're taking advantage of the
Speaker Change: slow time and plate demand building up our promise performance and we think when plate demand returns we'll be really well positioned to take advantage of that.
Speaker Change: Understood, that's helpful. With respect to the EAF and the new cost budget put out...
Speaker Change: just to confirm but is there is there much left that could change in the updated budget or do you feel like you're kind of pretty much tied down there and this is a final final number
and the police.
Speaker Change: Yeah, we feel really good that not much is going to change. In fact, you may have noticed we didn't refer to it as a
Speaker Change: at a different budget. I mean the budget is what we previously disclosed and and I think now we're focused on communicating
Speaker Change: where we're going to end up, and we're having better and better.
Speaker Change: and more confident visibility to that now as we approach commissioning. So, substantially all of the contracted work is...
Speaker Change: in place and contracted. We've got less than 10% of the budgeted work.
operating under time and material will probably...
Speaker Change: At a high level, 60% through all that time and material work and the actual spending on that work is tracking about where it should be tracking. So there hasn't been a cost overrun on that time and material work. If you look back through the life of this project.
Speaker Change: When the cost of the project has increased from the original budget number, it has not been because of poor execution by a contractor that, you know,
Gets...
cost overruns from us that are legitimate cost overruns.
Speaker Change: So that hasn't increased any of the, you know, that's not what's driven up the cost, and it hasn't been a time and material contract that has been overspent. What's caused the cost of the project to go up, again, is not poor execution. It's finishing all the detailed design and then placing the contracts in a pretty inflationary environment. So we just, you know...
Speaker Change: The contracts got placed at a higher cost than the original budget contemplated.
Speaker Change: But that being said, the work is being executed as contemplated once the contracts are in place. So we feel confident about where we're going to end up. And it'll be, you know, I can't give you an exact number, but it's going to be south of that 5% number we referenced.
Speaker Change: Understood, that's very helpful and I guess last one for me, Rajat, are you able to provide
Speaker Change: Any context and how you think cost per ton may trend over the next couple quarters as you start to use more of your own Coking coal rather than some of the third-party you've had probably a purchase in specific inventory
Rajat Marwah: Sure, so you know overall when you look at it for the next next year the cost will be trending slightly lower you know as I mentioned we have
Speaker Change: We have most of the most of the fixed costs tied up based on
Speaker Change: based on all the people that we need for the year, so all sitting there. On some of the variable side where commodity pricing is coming down, coal, coke for next year, I think we should see some reduction coming.
Speaker Change: are generally when you look at our cost first calendar quarter cost is always slightly higher just because of winter and you know getting all those commodities here primarily power and gas that goes up
Speaker Change: and the consumption also goes up so that you see that slightly but overall you'd see the cost coming down and coming down further with the production increase that will happen as we as we stabilize the first year and then start
Speaker Change: work on the second and and get that. So that's that's how we see it. You will not see a substantial drop, frankly, and not even a substantial increase. It probably will be hovering within a couple of percentage point.
Speaker Change: on the cost side as you see it right now. The mix does make a change when we do.
Speaker Change: when we do higher plate our cost proportionately will go up, but overall from a cost per ton basis we don't see a significant change happening, and we see it coming down as we start producing more.
Speaker Change: Does that help? I mean I have not given you a number but it's probably within a couple of percentage points.
Speaker Change: No, no, that's helpful. It's just a matter of us figuring out how much plate you're going to be putting out the door. So, anyways, thanks very much.
Thanks Shane.
Speaker Change: Thank you. We have reached the end of our question and answer session. I'd like to turn the call back over to Mr. Garcia for any closing remarks.
Michael Garcia: Thank you and thank you again for your participation in our second 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 third quarter results scheduled for February.
That is all, operators. Thank you.
Speaker Change: Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.