Good day and welcome to today's conference call to discuss Algoma Steel's Fiscal Second Quarter 2023 Financial Results. My name is Latanya and I'm your operator for today's call. At this time, I like to turn the hand the call over to Mike Moraca, Treasurer and Investor Relations Officer for Algoma. Mr. Moraca, please go ahead, sir.

Good morning everyone and welcome to Algoma Steel Group Inc's earnings conference call for the fiscal second quarter ended September 30, 2022. Leading today's call are Michael Garcia, our Chief Executive Officer and Rajat Marwah, our Chief Financial Officer. As a reminder, this call is being recorded and will be made available for replay later today in the Investors section of Algoma Steel's corporate website at www.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. Actual results may differ materially from statements made today. In addition, our financial statements are prepared in accordance with IFRS, which differs from US 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 financial statements and management's discussion and analysis for the full year ended March 31, 2022. Please note that our financial statements are prepared using the US dollar as our functional currency and the Canadian dollar as our presentation currency. Our fiscal year runs from April 1 to March 31 and our financial statements have been prepared for the three months ended September 30, 2022. 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 today. I will start my comments as we always do by addressing what truly matters most to us, the safety of our employees. At Algoma, we believe in safety without compromise and our continued focus has resulted in substantial improvement over the last decade in our lost time injury frequency rate. That said, we are focused on continued diligence as we relentlessly pursue our goal of achieving zero workplace injuries. I'll cover events and milestones during the quarter and subsequent to its end. I will then turn the call over to Rajat for a deeper dive into the numbers before closing with thoughts on the current state of steel markets. Our performance in the fiscal second quarter was not up to the standards we strive to achieve at Algoma. It included a number of operational challenges, which we disclosed last month, including commissioning challenges at the plate mill, a fire at one of our two coal conveyors, COVID-related labor availability issues at our direct strip production complex, as well as overall steel price softness in the market. We are taking actions to get our operations on stronger footing and improved performance. Specifically, we are addressing the operational challenges themselves, so we can return to full operating capacity. We continue to focus on cost control and working capital efficiency to maximize margins and cash flow. We are maintaining our pace of investment in our EAF project to dramatically transform Algoma, driving enhanced capability and long-term sustainability. And most importantly, we continue to focus on safe operations for our employees, our customers and the communities we serve. During the quarter, we continued the commissioning of Phase 1 of our plate mill modernization project, working through automation upgrades that will improve the…

Thanks, Mike. Good morning and thank you all for joining the call. Our fiscal second quarter results, while challenging for the operational reasons Mike alluded to, came in line with our guidance for shipments and EBITDA. I'll remind you again that all numbers are expressed in Canadian dollars unless otherwise noted; however, our functional currency is the US dollar. During the quarter, the Canadian dollar weakened materially, which impacts balance sheet comparisons quarter over quarter. For the quarter, net income was CAD87 million or CAD0.36 per diluted share compared to CAD288 million and CAD4.02 per diluted share in the prior year quarter, with the decline attributable to market conditions as well as the operational factors we are working to resolve. In addition, the quarter was impacted by a one-time charge resulting in increased pension and post-employment benefit expenses. The one-time charge was due to the extension of indexation for the contract period related to the ratification of new collective bargaining agreements with our unionized employees. The only long-term debt on our balance sheet continues to be in the form of government loans linked to our capital projects. We finished the quarter with CAD465 million of unrestricted cash and remains undrawn on our revolving credit facility. So even after funding our $400 million SIB, our balance sheet remains strong. Now let me dive into the key drivers of our performance. We shipped 435,000 tonnes in the quarter, down 25.9% as compared to the prior year quarter. As we previously disclosed, delays experienced during the commissioning of our plate mill modernization project were the largest impact on shipments. In addition, volume through our DSPC was adversely impacted by production shortfalls arising from COVID link workforce availability events. Net sales realization averaged CAD1,266 per tonne down 20.6% versus the prior year period. The…

Thanks, Rajat. Looking at the state of the North American steel market today, pricing has been steadily declining for much of the year. Highs that were reached in March around the start of the Ukraine war quickly reversed and prices have tested various support levels through the summer and into the fall. The steel industry, as well as our customers, continue to face challenges related to inflation and interest rates, supply chain issues and recessionary fears. However, our underlying order book supported by a significant portion of contract sales, will keep demand for our products consistent with our expectations, including sales to the automotive, construction, oil and gas, and other steel intensive industries. Additionally, global price dynamics and trade measures reduce the attractiveness of our market for imports. We continue to focus on improving operational reliability and we are currently executing a number of planned seasonal maintenance activities ahead of the fourth fiscal quarter winter period. For the fiscal third quarter, we expect sequentially higher shipments tempered by planned maintenance activities and lower production at our plate and strip facility as we complete Phase 1 commissioning. Coupled with current steel pricing, we expect reduced net sales realizations impacting margins for our products. While there remains uncertainty, the published forward curve for hot-rolled coil currently shows prices rising modestly from now through next summer, albeit at levels well below what we have realized the last few quarters. With this backdrop, our primary focus remains on prudent financial discipline, returning to full operating capability and execution of our EAF project, ushering in the next era for our Company that provides the foundation for long-term value creation for our stakeholders. While the market remains challenging and we are completing our plate mill commissioning, my view is consistent with the Board's in that we expect to be a significant generator of free cash over the longer term, which supports our transformation journey, including our two main capital improvement programs, the second phase of the plate mill modernization and the EAF. We are focused on putting the operational challenges we have faced behind us to ensure safe, reliable, efficient production at our existing facilities while we advance the EAF project. Thank you very much for your continued interest in Algoma Steel. We 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. We will now conduct a question-and-answer session. [Operator Instructions] Our first question our first question comes from David Ocampo with Cormark Securities. Please proceed.

Thank you. Mike, you called out that 40% of the $130 million negative impact should be realized in the upcoming quarter. But I was wondering if you could break it down by the operational issues that you guys are facing, so the plate mill modernization, the coke operations, and then the labor availability.

Sure, David. We've prepared some more detailed information on that. So, I'll pass it over to Rajat and he can walk you through that in a little bit more detail.

Hi, David. It's, I think, the most important question for the quarter and it's easy from business perspective, but it's one, which where the accounting creates a lot of complexity to this. So, I'll try and simplify it as much as possible. So the $130 million is the total impact because of the three events that happened during the quarter -- during the second quarter and the three big events where the plate mill commissioning delays, the coke fire and DSPC in the order of impact. And the order is roughly 50% of that impact is due to the plate mill commissioning, roughly 30% is because of the coke conveyor fire, and 20% is for the DSPC labor shortage because of COVID. So that's the percentage. Now as far as the impact between the two quarters is concerned, going one by one. On the plate mill side, we started operating at 80%, but some of the impact of the plate mill is flowing into inventories and infecting the cost for the third quarter. And it's roughly around 70%-30% split, 70% of the cost is getting absorbed in the second quarter and 30% is going into the following quarter. And it's just way the higher cost of inventory based on production gets trapped into inventories and that moves into the following quarter. So again, accounting 50% of the impact is the total impact because of that quarter issues but 30% of it flows into the following quarter. On the coke batteries, I think, that has the biggest overflow into the following quarter just because we had lot of inventory of coke that we had already contracted for the year, which we were using and we had to buy additional coke on the spot market at higher pricing, which flows through inventory of coke and also flows through higher cost of steel produced based on purchased coke. So that has a biggest impact, it's roughly 20%-80%. 20% in the second quarter and 80% moving into the following quarters, which is the third quarter. And on DSPC, we see most of the impact in the second quarter, nothing moving into the following quarter because most of the impact was mid quarter, does not affect inventory a lot. So, in short, 50%, 30%, 20% is the ratio of impact for the three events, and the way it flows from one to the other is -- plate mill, is roughly 70%, 30%. Coke batteries is 20%, 80% and DSPC is 100% in Q2.

That's very helpful commentary there, Rajat. And then on the inventory side of it, I think you said in your remarks that it would stay elevated and it does look even if you exclude FX that it's probably CAD250 million to CAD300 million above normal levels. So, how should we think about that release into fiscal 2024? should we expect that full CAD200 million or CAD250 million to be release kind of in equal proportions throughout the quarters?

So, I think you should see it releasing from first fiscal quarter onwards. The normal release between in the first calendar quarter, which is our fourth fiscal will happen because we will be building again more in December and then we'll be releasing it and the balance release will come in the first and the second quarter of next year from inventory perspective. So that's how it will flow. We've also built some raw material and some web as well as we ship less. We have some web developed which we will also release over the next couple of quarters. So your point is right, it will get released in the first and the second fiscal quarter of next year, more so as compared to what we've seen in the past.

And is there any risk on the work in progress there, just given the softness that we're seeing in the marketplace today?

No, I think we should not -- normally, we buy slabs from outside to fill up the void that we have in our own production facility to some extent, and whatever we have will help to replace that. So we don't see much of a risk to get that released over the next couple of quarters.

And then last one from me on your fixed annual contracts. I think it's 10% on an annual basis. How are those discussions going with customers? Do they actually believe that the futures curve is actually on contango and they're negotiating around that or are they looking for pretty steep discounts relative to where we are?

Yes, I think, we're right in the middle of several negotiations for our contracted customers, David. And I think, each one of them has their own particular order book to fill and then they oftentimes know the pricing or have pricing expectations in their own order book and they're looking to secure contracted supply of their raw materials they need. And we haven't faced a huge amount pressure or expectations that we would need to be talking of pricing levels a lot lower than they are now, although I think, everybody that we speak to had some expectation that there's going to be a recession or recessionary conditions next year, but they're all looking at their own unique positions, which in spite of expectation of an economic slowdown, they may be sitting with an order book that they feel gives them a lot of clarity that maybe not as much risk because maybe you would expect in the overall recessionary period. And I'm speaking about customers that are producing either parts in a supply chain or end product that have firm visibility. Obviously, if it's a customer that is a service center and needs to think about the pool on their products that they stock and supply that aren't necessarily tied to contracts, they would be more sensitive to where they think the pricing is going and an expectation of lower pricing. Is that helpful?

That is. Thanks guys. I'll hop back in the queue.

Our next question comes from Anoop Prihar with Eight Capital. Please proceed.

Yes, good morning. Just a couple of quick questions from me. Rajat, can you tell me, please, what's the remaining CapEx for the completion of the plate mill modernization and can you just give me the number net of government funding, please?

Yes. The remaining CapEx will be around CAD40 million that needs to be spent on the plate mill and that's mostly the Phase 2 where work is happening, and that's net of any government funding.

And so, just to be clear, what's the reasonable expectation for your plate mill production volume in fiscal 2024? I know it's a bit of a moving target. I just want to make sure, I mean the ballpark that was reasonable here?

So, we should be at historical levels in any case on fiscal 2024. The big question still is on our second phase and when we get it done. Currently, it's slated for middle of next year. And as we have said that we will be very cautious and careful about moving on the second phase though most of the work will be done but pulling the trigger and getting all the integration done and automation completed will be very carefully studied and done because we don't want to lose beyond what is normal downtime on that mill. So that's a big wild card. If, let's say, that gets completed in the middle of next year, which will be, let's say, in the June, July period, then it will take at least five odd months to start ramping up for higher volume because that upgrade will double the volume that we have currently, but reaching that full percentage will take little bit longer.

Okay, all right, thank you. And lastly, are you guys still active on the NCIB?

Yes, we are. That program is on and we are still selective on it.

Thank you.

Our next question comes from Ian Gillies from Stifel. Please proceed.

Morning, everyone.

Good morning, Ian.

What I understand. coking contracts or pricing is simply said in and around this time of year, is there any context you can provide for how you're thinking about that cost item as we head into, call it, calendar 2023 and usage there and usage there just given what's kind of transpired over the last couple of quarters and the inventory build?

Sure. So on the coal and coke, you're absolutely right. This is normally the period by which most of the contracts get settled and we've settled out as well. And it's flat year-over-year is where the coal is moving, and similar, very similar, is on the coke side. So, year-over-year, long-term contracts, which is annual contracts, pricing is flat. And that's what we're expecting and whatever shortfall as I mentioned we had on the on coke battery fire, we contracted on spot pricing, which was definitely higher, which we're rolling through in our cost this quarter -- last quarter and this quarter.

Okay. That's really helpful. Thank you. With respect to the construction contracts for the EAF, it looked like there was a modest uptick in what's been fixed. Can you just provide a bit of a reminder of when you think some other chunky items may get fixed here? It would seem maybe some of the costs might be moving in your favor given the deflationary pressures on some of the inputs.

Yes sure. So, we expect a big chunk to be done over the next, let's say, five months to six months, which is, let's say, towards the end of our fiscal year and --

Yes.

Yes. And then from cost perspective, definitely it will help. So Mike, you have added color on it?

Yes, I would add, Ian, that we are seeing a competitive environment as we go out to our contractor base and potential business partners with these bids for further pieces and chunks of the major construction and we are seeing an environment where contractors are eager to put the -- get the business and bring clarity to their own book of business for next year. And several of the recent or few of the recent bid packages that we got completed and are nearing completion, we are pretty -- we are satisfied and encouraged by the pricing environment that we're seeing. And those are coming in -- a handful of specific examples are coming in nicely below the budget number we had in our project. And that's not to say that everything is going to be like that, but certainly, contractors that are looking for visibility in their book of work next year see the same fears around recessions and may have a general thought about, if I don't get this business, what other business am I going to get, that's out there floating around for me to bid on and I think we're benefiting from that from a cost perspective and engagement from potential suppliers as we select the best ones for this project.

Got it. That's helpful context. And one of the things I just want to clarify the language in the MD&A had changed a little bit around completion of the EAF. There was a comment about it finishing midyear. There was another comment about finishing end of year. Can you just reconfirm that there has been no change to the in-service date and the expected start-up or if there has been what is transpiring there?

That's correct. It's still midyear. Sorry for the confusion on that. Just to add a little more color, the bid packages, the final important ones are getting placed with suppliers and our approach is fixed pricing. So unless we come in with a change of scope or a change order, we feel very comfortable that we have visibility to the pricing once that bid package is awarded. We continue to work very hard on supply chain issues that we need to be managed for a project of this size. The only real specific one that we are working is with a certain -- with a vendor of cards that rely on semiconductor chips. So, in one specific instance, there's some cards that go into some of the control panels in the new melt shop. Those cards are delayed by six months right now. So, we had to put plans into place to complete all of the other periphery work in those panels and those cabinets, get those on the boat and ship to Sault Ste. Marie and installed and the cards will be installed at a later date, when the panels or cabinets here in Sault Ste. Marie versus being installed at the vendor's construction site. Now, that won't jeopardize the overall critical path and timeline, but we just need to be mindful of where we are doing that and making sure that almost every day, but at least weekly, we are in touch with the actual semiconductor supplier to our vendor, doing everything we can to make sure that we know exactly when those cards will be delivered. And we're doing everything we can to make sure nothing slips or if it does slip anything, any further, that we work on mitigation plans. And this is a global supply chain issue and the suppliers of these cards, they've got a global kind of criteria for managing who gets what's coming out of the supply chain based on their first preference is medical devices and then things involved with National Defense and then things involved with more typical industries like ourselves.

Okay, that's -- once again, that's very helpful. And if I could just ask one last question. With respect to the high-voltage power line at the PUCs going to be installing, there's been no change to the disclosure there. But I'm just curious if there's any update -- operational update on how you're thinking about that key piece of getting the EAF into service and ramped up?

You're right. There is no change in the timeline. It's another critically important piece to how this all comes together. There is the 230 K volt line that is 11km long, and is being run from one side of Sault Ste. Marie to the other. That's in process that's being done by the local utility provider and everything is on pace for that. The other piece of the power as the grid power upgrades by Hydro One and we are interfacing with them regularly to help answer their technical concerns, come back if they have further technical concerns working through that with them. That piece -- it's not as critical because while it would be disappointing that the grid is maybe not as robust as we would like it when we first need to start feeding power to the electric arc furnaces, there's -- we've done the analysis and there is enough power here in Sault Ste. Marie to run those furnaces, also considering all the other electrical use demand that might grow in the community in the next couple of years. But at some point, when there is unusual maintenance issues or weather events, it may then call for more internally generated power from ourselves and that's one reason we're upgrading our internal power generation capability with the new GE gas turbines, which are on-site and being installed.

Got it. Thanks very much, I appreciate that. I'll turn the call back over.

Sure.

Our next question comes from Ahmad Shaath with Beacon Securities. Please proceed.

Hi guys, just a quick one on the plate modernization project. Did I catch that right, there is a light CapEx increased from $120 million to $135 million and if so, can you guys speak to that?

Yes, there is -- there has been slight increase to $135 million on the plate mill modernization, and that's reflective of the delays that has happened on getting the project done, which was supposed to be completed earlier and we shifted it to this year and the next one to next year and also with the delays that has happened in the commissioning. So. that's all factored in, including the inflationary pressure that we saw. So, that's all factored into that 135 total.

Perfect, thanks for that. And if I got your answer regarding the timeline for Phase 2, is it fair to say that mid next year, as stand right now is sort of a soft timeline depending on how we end up commissioning Phase 1 and see how that works out for you guys or are you guys committed to the mid-next year for the Phase 2?

I think, it's -- I don't know soft is the right word, but it's flexible depending on our absolute certainty that we understand all of the issues that we dealt with in plate, in the first phase of the plate mill modernization. And we understand everything that needs to happen beforehand that can greatly mitigate those -- the chances of those type of challenges being met, while we're live and we're waiting and we need to run steel through the plate mill. So, there's going to be a point. It's already started, but it can't really be complete until everybody that is involved in this and there's certainly people still involved on the actual commissioning. We need to make sure that we done a thorough after action review, if you will, understand all of the issues and the root causes and how we can take steps to mitigate, to the greatest extent possible, all of that offline before we shut down for Phase 2. And then, make sure we have an oversight function to confirm and ensure that everything we're talking about doing offline is actually happening to the level of detail that it needs to happen to. And then, only then will I be convinced and I'll be able to convince my Board that we are ready to proceed with Phase 2. But the plan now is that we can get all that done, and all of that level of preparation in order to proceed with Phase 2 at midyear. But if for any reason we don't reach that level of comfort and confidence, then we will not go down as planned until we're ready. Is that helpful?

Yes, that's very helpful. Thanks for that answer. I'll jump back in the queue.

Our next question comes from Alexander Jackson with RBC. Please proceed.

Yes, thanks guys. So given market conditions with weaker pricing and higher OpEx, I'm wondering if that's impacted how you're thinking about capital returns and maybe some non-essential capital projects or maybe we're not there yet? Thank you.

Yes, it's a good question, Alexander. Because of our fiscal calendar that we're on, we've begun the annual business planning cycle for our next fiscal year and we know that it's -- that involved a lot of scenario planning on kind of the commercial assumptions that you need to use, but certainly a very strong and important scenario that we're working on is a scenario of continued low pricing environment and low demand. And we understand that in those -- in that type of environment, controlling any discretionary costs that you can is critical and we need to make those decisions mindful of not just the importance of being able to do that in a challenging environment in terms of supply and demand and pricing but also understanding the consequences of doing that and only doing it when it not just -- when it makes sense not only for the immediate environment, but also where the consequences are not so adverse that you wind up making just poor decisions for the business over the longer term. But this business is quite aware of and especially Rajat having to do that in challenging environments and we have almost a playbook, if so to speak of, of things that we know we have to be, leverage that we know we can pull on, and things that we need to think about as we go into a changing business environment.

That's helpful, thanks.

[Operator Instructions] There are no further questions in queue at this time. I would like to turn the call back over to Mr. Michael Garcia for closing comments.

Okay, thank you again for your participation in our second quarter fiscal 2023 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 early next year.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time and thank you for your participation and have a great day.