Algoma Steel Group Inc. (ASTL) Q4 2024 Earnings Report, Transcript and Summary

Greetings. Welcome to Algoma Steel Group Incorporated Full Year Fiscal 2024 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to Michael Moraca, Treasurer, Investor Relations Officer. Thank you. You may begin.

Good morning, everyone, and welcome to Algoma Steel Group Inc.'s Full Year Fiscal 2024 Earnings Conference Call. 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 also refer to the risks and assumptions outlined in Algoma Steel's Fourth Quarter Fiscal 2024 Management's Discussion and Analysis. 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 1st to March 31st and our statements have been prepared for the years ended March 31st, 2024, and March 31st, 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 would now like to 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 fourth quarter and full year 2024 results. Ensuring the safety of our employees is a core value and top priority for our company. This unwavering commitment led to significant improvements in our lost time injury performance during fiscal 2024. As our site continues to be a hub of activity, especially with the increasing contractor involvement in our EAF project, emphasizing safety is more crucial than ever. We are pleased to announce the addition of Erin Oliver as our new Vice President of Health and Safety. This is a new position on our leadership team, reporting directly to myself. Originally from Sault Ste. Marie, Erin brings a wealth of experience and a strong background in fostering health and safety initiatives across Canada. Her expertise will be instrumental in our pursuit of zero workplace injuries. Next, I'll cover key events and milestones during our fiscal fourth quarter and subsequent to its end as well as give an update on progress at our transformational EAF project. I will then turn the call over to Rajat for a deeper dive into the numbers and a discussion of our strong liquidity and balance sheet before closing with an update on market conditions. There are a few important themes I would like to get across on this call. Our results for the quarter were adversely impacted by previously disclosed operational challenges related to the coke-making utility structure collapse and subsequent blast furnace outage in January, which was resolved and resulted in approximately 150,000 tons of lost production. Subsequent to the quarter-end, we completed our planned upgrade related to the plate mill modernization project. The upgrades to the mill are now substantially complete and production from the plate mill is already running as expected, with operations and commercial teams focused on increasing production and sales of plate products. Our primary operations are running normally, following recovery from the utilities corridor collapse and completion of the plate mill work, which we expect will result in sequentially higher shipments in fiscal Q1 of 2025 and further improvement in the quarters ahead. And finally, our long-term strategy remains unchanged and on track to successfully execute our electric arc furnace project and transition to being one of the leading producers of green steel in North America. Now let me give you some additional color on those key themes. Our results for the fiscal fourth quarter of 2024 were in line with our previously disclosed guidance for both shipments and adjusted EBITDA. They reflected approximately three weeks of lost production related to the utilities corridor collapse at our coke-making facility and related blast furnace outage. That outage highlighted the challenges of operating facilities that, in some cases, are over 70 years old, but also put on full display the professionalism and expertise of our workforce and their ability to rapidly recover from that incident. It also highlights the benefits we expect to realize as we shift from legacy blast furnace steelmaking to state-of-the-art electric arc furnace operations starting next year. Somewhat offsetting the lost production in the quarter was higher pricing. Due to the lagging nature of our order book, realized pricing in the quarter reflected higher index pricing from the end of calendar year 2023 flowing through our contract order book. Subsequent to quarter-end, we successfully completed the planned outage related to the modernization of our plate mill. Our team successfully installed new equipment across the facility, which has achieved enhanced product quality and paved the way for higher plate shipments. Despite the facility being offline for three weeks, our plate production in the fiscal first quarter of 2025 is expected to be approximately 65,000 tons. That would be in line with past quarters that had no maintenance outage and indicative of the higher run rate we expect going forward. On a very positive note, the team was able to accelerate additional work during the outage and the vast majority of the modernization project at the facility is now substantially complete. We expect any remaining items to be addressed with other planned maintenance activities over the coming year, providing significant efficiencies on downtime. So what does that mean for performance? In the upcoming quarter, we expect plate mill production to reach approximately 90,000 tons. Our operations and commercial teams are focused on ramping up production and sales of plate products over the balance of the fiscal year, putting us on a path towards our expected annual run rate capacity of over 650,000 net tons. As previously announced, we have begun our exit from the wide coil market, which will be completed over the balance of the fiscal year. This strategic shift will allow us to prioritize plate production and sales, taking advantage of our position as Canada's only discrete producer of plate products, resulting in a more favorable product mix that is expected to drive meaningful margin enhancement. With the blast furnace recovered from the unplanned outage in the quarter and the plate mill upgrade complete, our operations are running normally, and we expect solid production levels in the second half of calendar 2024. Next, I'll give an update on our progress during the quarter on our transformational electric arc furnace or EAF project. The EAFs will ultimately increase our throughput capacity by roughly a third, allowing us to reach a shipping capacity of approximately 3 million tons, utilizing our two state-of-the-art electric arc furnaces. The higher output will match our expanded downstream finishing capacity, including increased capacity at our modernized plate mill. Transitioning to EAF steelmaking will improve overall product mix and lower our carbon emissions by approximately 70% when fully operational. When factoring in the makeup of our power supply when we switch to EAF operations, we expect to be one of the greenest producers of steel in North America. During the quarter, cumulative investment in the EAF project reached $563 million. To-date, we have committed contracts totaling approximately $800 million with approximately 93% tied to fixed price contracts. Progress to date on both the construction of the project and the contracted portion of work yet to be completed has significantly derisked the project budget as we progress towards the expected start of commissioning in late calendar 2024. 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 a complete switch to EAF production. In summary, the quarter was a challenging one operationally and market conditions in the last several weeks have shown near-term softness, but we are focused on what we can control, operating our existing facilities safely, completing the important upgrades at our plate mill and advancing the EAF project on schedule and on budget. I'd like to once again thank all of our employees for their hard work, dedication and professionalism, particularly their ability to rapidly and safely bring our facilities back to normal production levels during a challenging period. 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. As a reminder, all numbers are expressed in Canadian dollars unless otherwise noted. Our fourth quarter results included adjusted EBITDA of CAD41.5 million, which reflects an adjusted EBITDA margin of 6.7% and cash generated from operating activities of CAD121.2 million. We finished the quarter with a strong balance sheet, including CAD98 million of cash and availability of CAD347 million under our revolving credit facility. Subsequent to the quarter-end, we raised US$350 million in the form of high-yield bond bearing interest at 9.125%. Mike provided details earlier on the coke-making corridor collapse. From a financial perspective, we estimate the resultant outage negatively impacted hot metal production in the quarter by approximately 150,000 tons and reduced adjusted EBITDA by approximately CAD120 million to CAD130 million. We have been working closely with our insurance providers and adjusters as they complete their assessments. While we do expect to recover a significant amount of the losses, the amount and timing of these recoveries are still to be determined. Now let me dive into the key drivers of our performance. We shipped 451,000 tons in the quarter, down 21.1% versus the prior year quarter. The decrease in shipments were largely attributable to the utility corridor collapse at our coke-making facility that resulted in the shutdown of a blast furnace that Mike previously discussed. This was offset somewhat by producing and shipping some products from available inventories of slabs and finished goods. Net sales realization averaged CAD1,260 per ton, up 18.2% versus the prior year period. The increase versus the prior year level reflects the lagging effect of our order book and the strong pricing around the ending of calendar year. Plate pricing continued to enjoy a significant premium relative to hot rolled coil during the quarter driven by resilient demand. This resulted in steel revenue of $568 million in the quarter, down 6.7% versus the prior year period. On the cost side, Algoma's cost per ton of steel products sold average CAD1,182 in the quarter, up 20.1% versus the prior year period. The main drivers of the increase versus the prior year period include lower volumes, the cost of replacing internally produced coke with purchased coke and higher natural gas. Cash flow from operations totaled CAD121 million for the quarter, up from CAD95 million in the prior year period. The main driver of cash flow in the quarter was a net change in non-cash working capital. Inventories at fiscal year-end were CAD808 million, down from CAD886 million at the end of the fiscal third quarter. Looking at our fiscal 2024 full year results, we shipped 2.1 million tons for the year, up 4.1% as compared to the prior year. Net sales realization averaged CAD1,220 per ton, down 4.1% versus the prior year, reflective of soft market condition on average across the fiscal year. This resulted in steel revenue of CAD2.5 billion, relatively flat year-over-year. On the cost side, Algoma's cost of steel products sold average CAD1,018 per ton for the year, an increase of 1.5% over the prior year. The main drivers of this increase were higher purchase coke use, higher natural gas use and labor cost, which more than offset the higher shipments. Adjusted EBITDA for the full year was CAD313 million, representing an adjusted EBITDA margin of 11.2% compared to adjusted EBITDA of CAD452 million and an adjusted EBITDA margin of 16.3% in fiscal 2023. The decrease was primarily attributable to lower price realizations and higher costs, which more than offset higher shipments. Cash flow from operating activities for fiscal 2024 was CAD295 million, up from CAD177 million in fiscal 2023. The increase year-over-year was primarily due to the net change in non-cash working capital, partially offset by the decrease in operating income. Working capital decreased from CAD875 million at the end of fiscal 2023 to CAD830 million at the end of fiscal 2024. We initially expected to release a higher amount of working capital during the period. However, as I mentioned on the last call, we released lower amounts on account of the unplanned outage in the quarter. We remain focused on driving down working capital levels and continue to expect a release of at least CAD100 million in fiscal 2025. Now I'll touch on the financing activity we completed in early April. Our indirect wholly-owned subsidiary ASI, issued an aggregate US$350 million of 9.125% senior secured second lien notes due in April 2029. This move enhanced the strength and flexibility of our balance sheet. The successful issuance reflects the positive view that credit investors have of our company and their confidence in our strategic direction and financial stability. All told, the cash on hand, undrawn capacity available on our ABL revolver at fiscal year-end, plus the additions of the proceeds from the issuance of these notes represents over CAD900 million of liquidity. Now turning to our outlook for the first quarter of fiscal 2025. Based on our operations to date in the quarter, our order book and our expectations for shipments for the end of the month, we expect to deliver solid fiscal first quarter adjusted EBITDA in a range of CAD30 million to CAD40 million and total shipments of steel of 500,000 to 510,000 tons. I'd now like to turn the call back over to our CEO, Michael Garcia for closing comments. Mike?

Thanks, Rajat. Looking at the state of the North American steel market, prices have been volatile year-to-date. Since the beginning of January, index pricing for US Midwest domestic hot-rolled coil have fallen approximately US$400 per ton. Current market weakness reflects ample spot supply, short lead times, economic uncertainty and buyers being cautious into the seasonally slower summer buying season. As I said previously, we are focused on what we can control. Operating our facilities safely to best capture market opportunities as they arise. Our results are supported by the fact that plate pricing continues to demonstrate a significant premium as overall demand for plate products remains high. This, in turn, continues to benefit our average price realizations especially as we see higher production levels from the plate mill following the most recent planned outage and upgrade. The next several quarters represent an exciting time in the story of Algoma as we continue to execute work towards the start of commissioning of our transformative EAF project by year-end. This will usher in the next phase of our company that defines the future of Algoma, provides the foundation for long-term value creation for our stakeholders and solidifies our leadership position at the forefront of green steel production in North America. Thank you very much for your continued interest in Algoma Steel. At this point, we would be happy to take your questions. Operator, please give the instructions for the Q&A session.

Thank you. [Operator Instructions] Our first question is from David Ocampo with Cormark Securities. Please proceed.

Thanks for taking my questions everyone. I guess my first one is just on shipments for the June quarter. I mean that's running below the normal run rate, even though plate shipments seem pretty small at 65,000 tons. Just curious what the lower volumes are attributed to? Is it mainly just weaker industry conditions or is there some other factors that are contributing to that?

Hi, David. Nice to talk to you. You're absolutely right, it's a touch lower. But normally, when we take such kind of outages, which is the 20-day outage that we took for the plate mill, and the ramp-up, we normally lose around 50,000 to 60,000 tons, both from the plate mill as well as the strip mill attached to it. So normally, our shipment should be below 500,000, but the plate mill really came back solid after the outage and recovered some of that losses. So we will be in the 500,000 to 510,000 range. But the main reason for that is the outage that we took, which it's normally 20 days and the ramp-up takes a little bit longer.

Again that's very helpful there, Rajat. And then maybe for you as well, just on the CapEx in the quarter, I think it was close to CAD120 million and CAD50 million of that went to the EAF. Curious what the other CAD70 million was attributable to -- did some of that CapEx leak into the coke ovens that you guys had to repair?

Yes, you're absolutely right. That's the CapEx that's related to the coke oven and some of the blast furnace issues. It's all because of the coke oven collapse, the utility corridor. And we are discussing with the insurance providers on that aspect as well, so which will be recovered once it's settled and it will probably come into the following quarter -- following year -- this year, 2025 fiscal.

Okay. So the CapEx potential recovery from insurance providers, that's on top of the CAD120 million to CAD130 million of lost EBITDA that you guys are trying to call back?

That's correct.

Okay. And then just the last one for me before I hand the call over. I mean you guys are nearing the completion of your EAF project. Just curious when we think about the range of outcomes for the total cost, what are the risks that are still out there that would push you guys above the top end of your guidance? And then on the flip side, what would cause you guys to come in closer to that 825 number just given that CAD800 million does appear to be locked in that contract prices already?

Hi, David. This is Mike. Really, we've substantially derisked the project in terms of schedule and budget, given where we're sitting right now. There's always risk around weather delays, any labor disruptions. We don't see any of those right now that we are concerned about. A small probably under 10%, probably under 8% of the work is being done on time and materials. So there would theoretically be a risk that the time and materials exceeds the placeholders we have in there right now our assumptions of where they'll come in. But again, that's less than 10% of the -- of our intended total spend. So we don't see that as a significant risk. On the flip side, in terms of potential for bringing it in under that range between 825 and 875 again because most of the work is contracted, there's not a lot of upside to be captured. There could be some efficiencies that we identify that would allow us to gain a little bit on some of the time and material work. And then we have a handful of contracts still to award on the remaining scope of work. There's probably only two contracts of moderate to significant size, one being the material handling system and fire protect, and the second one being the fire protection system. So the team is spending a lot of time working with the contractor base to give them the right engineering package to be able to bid on both those pieces of work. We feel good about where they're going to come in. But again we won't know until the actual contracts are awarded. Does that help?

Yes. And I guess those two pieces of contracts that are left to be awarded. Is that CAD25 million or CAD50 million or what's the order of magnitude that needs to be contracted still?

I don't have the number for you right now. I can talk to the team and maybe get something for you.

Okay. That's helpful. I'll hand the call over. Thanks a lot.

Thank you.

[Operator Instructions] Our next question is from Ian Gillies with Stifel. Please proceed.

Good morning, everyone.

Good morning, Ian.

Hey, Ian.

Could you -- as we get closer to the start-up of the EAF, could you, is there any update you can provide around the scrap strategy and where you think you're at on that front as it could be a potential pinch point?

Sure. So as we've shared before, our methodology or mechanism for sourcing scrap for the EAFs will be through our joint venture that we formed at the beginning of this project with Triple M Metals. That joint venture has been operationalized. It's staffed. The members of Triple M or ATM, Algoma Triple M is the name of the venture. They've been out in the market discussing with future and current scrap suppliers that we'll be buying from. So they've spent a lot of work in the market. We know who will be buying scrap from. We know how we'll be moving it to Sault Ste. Marie. We spent a lot of time on the supply chain making sure we have efficient logistics on rail, truck and across the Great Lakes. The joint venture is currently buying scrap for our ongoing operations. It's not near the magnitude of the scrap we'll be buying in the future, but we do buy scrap for our basic oxygen furnace steelmaking shop right now. So we feel good about understanding the scrap market who will be buying from. But again we won't be buying those large quantities until further down the ramp-up curve in the latter half of calendar year 2025. So it's hard to predict exactly what the market will look like or feel like at that time.

Okay. That's helpful. On the -- on the plate side, the ramp is obviously going to be pretty material over the next, call it, four to six quarters. Can you talk a little bit more about how your commercial team is capturing market share and tends to capture market share there because I mean plate price has been quite weak in recent weeks?

Sure. So the whole team is really delighted about our plate offering now. We've made substantial improvements in surface quality and flatness and dimensional tolerance with the improvements we've made in the plate mill over the last two years. We have made substantial improvement in the delivery performance of our plate over the last 18 months or so. And I think with those two combinations, the commercial team has a stronger selling proposition to our current and potential plate mill customers. We actually had a grand opening of our plate mill modernization here in Sault Ste. Marie earlier this week, and we had around 25 plate customers here in the mill. We toured them through the new facility. They got to meet the crews. They got to see the product. They got to see the new assets in place and running. And so from this point, it's having those one-on-one conversations with our plate customer base and potential plate customers, some of them who were frankly historical customers of plate in the past. And for whatever reason, we haven't had a big position with over the last 5 or 10 years. So it's that type of selling, understanding the customer needs, understanding what the customer wants and how they win in their marketplace and with their customers and just doing that type of work with the customers to either grow our share of wallet with existing customers or establish a position with customers where we aren't yet established.

Okay. That's helpful. With that, I'll turn it back over.

Thanks, Ian.

Our next question is from Katja Jancic with BMO Capital Markets. Please proceed.

Hi. Thank you for taking my questions. Maybe starting off on the CapEx for fiscal year '25. Can you provide an update to what the total expected CapEx is going to be?

Sure. So our normal maintenance CapEx as usual will be in the range of CAD100 million to CAD120 million, probably on the higher end, considering where the legacy assets are. Our EAF CapEx should be roughly CAD250 million, CAD270 million for the fiscal 2025. And this is all without any recovery from the government. And I think those will be the two substantial ones that you will see in the fiscal 2025.

Is there still any incremental from the coke ovens that's going to spill into the next few quarters?

Yes, there will be increment on the coke oven related, but all of that will be offset by the recovery that we'll see during the year and some more to offset the ones that we have spent in this year. So that should offset each other once we finalize, but those things are yet to be finalized. The amount that probably we'll be spending will be in the CAD30 odd million range, CAD30 million to CAD40 million on the coke side during the year. So if no recovery happens, that is what, in addition, you'll see, but the discussions with the insurers are going on that side.

Okay. And then maybe on the volume side. Currently, what is the normalized volume you think per quarter you can reach in a more normalized environment?

Yes. We've always said 550 is a normal that we will reach and that's what we benchmark against. And that should start improving once the EAF stabilizes. And again that's all considering where our primary operations are. So that's what we feel as a more normal over the next couple of quarters. And as I said, as we stabilize the EAF, we will start seeing the increase happening.

Okay. And maybe on that, how quickly do you think you can ramp-up the EAF or how quickly can it stabilize?

Yes, Katja, this is Mike. So the EAF will begin producing on the first EAF steel in the first calendar quarter of 2025. Commissioning is actually going to start before the end of this year, but we don't expect to be striking an arc and making heats until the first calendar quarter of 2025. Like all startups, it will be deliberate and a lot of work for the start-up team, but we have all the crews identified. We have training going on. We have a production plan and we expect to see volume on those EAFs ramp-up through the balance of 2025, but and we'll share that at the appropriate time. But frankly it's -- we're not -- we're cautious of overcommitting or overstretching on exactly how much metal we'll be making out of those EAF, especially in the first half of 2025. And that's why we plan to continue to run our current steelmaking assets and flow path at full production as we move into 2025 and through the balance of that year.

Okay. So just to confirm, during the start-up, basically, the blast furnace will operate as usual or as normal. So it should be reaching normal production levels. In other words, 550, let's say, per quarter?

Correct. We don't want to take a large -- any dip in quarterly shipments during that start-up year because it's a start-up year.

Okay. Maybe just one more, if I may. Mike, I think you said this quarter or in the first quarter, the plate production is about 65,000 tons. And did I understand correctly, next quarter, it should go to 90,000?

Correct.

Okay. Thank you.

At this time, there are no further questions. I would like to turn the conference back over to management for closing remarks.

Thank you again for your participation in our Full Year Fiscal 2024 Earnings Conference Call and your continued interest in Algoma Steel. We look forward to updating you on our results and progress when we report our fiscal first quarter results scheduled for August. Thank you.

Thank you. This will conclude today's conference. You may disconnect your lines at this time and thank you for your participation.