Algoma Steel Group Inc. (ASTL) Q2 2026 Earnings Report, Transcript and Summary

Greetings. Welcome to the Algoma Steel Group, Inc. Second Quarter 2026 Earnings Call. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to Laura Devoni, Vice President of Human Resources and Corporate Affairs. Thank you, Laura. You may begin.

Good morning, everyone, and welcome to Algoma Steel Group, Inc.'s Second Quarter 2026 Earnings Conference Call. My name is Laura Devoni, Vice President of Human Resources and Corporate Affairs, and I will be moderating today's call. Leading the prepared remarks are Rajat Marwah, our Chief Executive Officer, and Mike Moraca, 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 U.S. GAAP, and our discussion today includes reference 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 2026 Management's Discussion and Analysis. Please note that our financial statements are prepared using the U.S. dollar as our functional currency and the Canadian dollar as our presentation currency. Please also note that 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, Rajat.

Thank you, Laura, and good morning, everyone. Thank you for joining us to discuss our second quarter 2026 results. As always, I want to begin with safety. The pace of activity on our site remains extraordinary with our first EAF unit running around the clock, construction on our second unit nearing completion and commissioning activities commencing. Just as important to us as every milestone in this transformation is sending every employee home safely every day. I'm proud of the discipline our teams continue to demonstrate toward these shared goals. The second quarter demonstrated the resilience of our transformed business against a stubbornly challenging industry backdrop. Before I get into the details, I want to highlight 3 key themes. First, we generated positive adjusted EBITDA of $13.8 million, in line with our previously announced guidance range. That result includes the benefit of a $45 million final insurance settlement and a $54.7 million capacity utilization adjustment, which Mike will walk you through shortly. But the underlying message is clear, as transition costs are falling, realized pricing is rising and the transition we described to you last quarter is playing out as expected. Second, we delivered a second consecutive quarter of record plate sales with plate shipments of 125,000 tons in the quarter, up from 116,000 tons in the first quarter. As Canada's only producer of discrete plate, we hold a unique competitive position and demand from infrastructure, construction and defense end market remained healthy throughout the quarter. Our Volta brand of low-carbon steel produced through our EAF platform is delivering the same trusted performance our customers rely on and is made in Canada. Average net sales realization rose to $1,361 per ton, up 20% from the prior year quarter, driven by this mix improvement. We expect plate production to continue to increase as our ramp-up progresses through 2026. Third, we are entering the final stage of the most significant transformation in Algoma's history. This quarter was our first full quarter with all liquid steel production sourced entirely from our EAF platform. A ramp-up of this scale is inherently complex. We are bringing a new steelmaking platform at rated capacity while retiring more than a century of integrated operation. Our throughput is increasing daily as we work through the equipment learning curves and process stabilization that accompany our transformation of this magnitude. Unit 1 is operating on a full 24-hour schedule and quality metrics have been achieved across a broad range of plate and hot-rolled coil grades. Construction on our second EAF unit is nearing completion with commissioning and testing of critical equipment underway. We expect first steel production from Unit 2 later this quarter. I would also like to note that we have scheduled operational downtime in the third quarter in connection with operational time of Unit 2 alongside planned maintenance activities at the melt shop and our power generation plant. As a reminder, once fully transitioned, our facility will have an annual raw steel production capacity of approximately 3.7 million tons and is projected to reduce our annual carbon emission by approximately 70% from pre-EAF levels. On the broader market environment, the 50% U.S. Section 232 tariff on steel imports from Canada continues to define the operating landscape. We incurred $18.7 million in direct tariff costs in the quarter, down from the prior quarter as we continue to reduce volumes shipped to the U.S. The Canadian market remains supply pressured. The coil pricing continued to trade lower than the U.S. benchmark pricing due to domestic oversupply. These conditions reinforce why our pivot to a Canada-centric plate first strategy is the right response. While tariff remains a structural headwind, the rise in steel pricing is encouraging. On the strategic front, our diversification initiatives continue to advance. Roshel Algoma Defence, the joint venture we formed in April with Roshel, a Canadian-owned defense manufacturer, is establishing a Canadian center of excellence for ballistic steel production with full cycle capabilities in fabrication, forming, welding and machining. This initiative positions Algoma as a strategic pillar of Canada's industrial and defense supply chain. With respect to our previously announced strategic relationship with Hanwha Ocean, The Government of Canada recently selected TKMS as the preferred bidder for the Canadian Petrol Submarine Program. As a result, our binding MOU with Hanwha Ocean has been suspended in accordance with its terms. That said, our strategic rationale for pursuing a structural steel beam will remain unchanged. We continue to engage constructively with governments as we advance to potential development of the project, which we believe has the potential to strengthen Algoma's long-term role in supporting Canada's infrastructure, industrial and defense priorities. I want to recognize the continued support of the federal and the provincial governments as we complete this transition and build a stronger, more sustainable Canadian steel industry. I will now turn the call over to Mike for a closer look at the financials. Mike?

Thanks, Rajat. Good morning, everyone. As a reminder, all numbers are expressed in Canadian dollars unless otherwise noted. I will start off with a brief note on currency. The Canadian dollar weakened over the course of the second quarter, moving from approximately CAD 1.39 per U.S. dollar at March 31, 2026, to CAD 1.42 per U.S. dollar at June 30, 2026, an approximate 2% decline. Our foreign exchange gain in the quarter of $18.8 million reflects the favorable impact of a weaker Canadian dollar. Comparisons between the second quarter of 2026 and the second quarter of 2025 were significantly impacted by the transition from legacy blast furnace operations to our EAF platform. In the prior year quarter, the company was producing steel exclusively through its legacy blast furnace operations, which were permanently halted on January 18, 2026. In the second quarter of 2026, all liquid steel production was sourced from our first EAF unit, which continues to ramp up. In addition, direct tariff costs were substantially lower than the prior year quarter, reflecting our deliberate reduction of U.S.-bound shipments as part of the pivot to a Canada-centric plate-first strategy. Now on to the results. We shipped 181,000 tons compared to 472,000 tons in the prior year quarter. The decline reflects the transition to EAF-only steelmaking and our deliberate pivot towards the Canadian plate market, and shipments were slightly above the high end of our guidance range of 175,000 to 180,000 tons. Consolidated revenue was $267.5 million compared to $589.7 million in the prior year quarter, with steel revenue of $247 million. Average net sales realization was $1,361 per ton, up 20.2% from $1,132 per ton in the prior year quarter, reflecting the improved product mix under our plate first strategy. Cost per ton of steel products sold was $1,411 per ton compared to $1,144 per ton in the prior year quarter, primarily reflecting lower fixed cost absorption at reduced production volumes during the ramp-up. I want to highlight that this metric excludes the $54.7 million related to capacity utilization. As volumes build with Unit 2 start-up and the elimination of legacy fixed costs, we expect this metric to improve meaningfully. Direct tariff costs in the quarter were $18.7 million, down from $64.1 million in the prior year quarter. Adjusted EBITDA for the quarter was $13.8 million, representing an adjusted EBITDA margin of 5.2%. This compares to an adjusted EBITDA loss of $32.4 million in the prior year quarter, which represented a margin of negative 5.5%. A few items I want to call out specifically. First, on capacity utilization. Adjusted EBITDA includes the benefit of a $54.7 million capacity utilization adjustment tied to excess fixed costs from our previous operating configuration, down from $90.2 million in the first quarter and on track to be fully eliminated by the fourth quarter. Second, on the prior year comparison, adjusted EBITDA in the quarter includes the benefit of $45 million of insurance proceeds recognized in other income. This now closes out our claim related to the January 2024 utility corridor collapse in full, of which we recovered $145 million net of applicable deductibles. There were no comparable insurance proceeds in the prior year quarter. On an apples-to-apples basis, excluding the insurance benefit, adjusted EBITDA was a loss of approximately $31 million, an improvement of approximately $1 million versus the prior year quarter despite substantially lower shipment volumes. On the sequential trajectory versus the prior quarter, excluding the insurance benefit, adjusted EBITDA was roughly in line with the first quarter. But when you exclude both the insurance benefit and the capacity utilization adjustment from each quarter, results improved by approximately $33 million sequentially, which reflects our improving trajectory. Loss from operations was $134.2 million compared to a loss of $85.1 million in the prior year quarter, primarily reflecting lower shipments, partially offset by improved mix and lower labor and other fixed costs. Net loss in the quarter was $96 million compared to $110.6 million in the prior year quarter primarily reflecting the $45 million in insurance proceed, offset by the higher loss from operations. Turning to cash flow and liquidity. Our $79.4 million of cash used in operating activities during the quarter was driven mostly by the increased loss from operations, offset by a continued reduction in working capital. This was driven by a further release of approximately $26 million of inventories during the quarter as we fully transition to our EAF-based platform. We ended the quarter with $62.6 million of cash, $206.7 million of unused availability under our revolving credit facility and $168 million available to draw under the LETL facilities. Total available liquidity at quarter end was approximately $437 million. During the quarter, we drew $124.5 million under the LETL facilities to support operations and completion of the EAF transition. Looking ahead on cash flow, we continue to expect a number of positive items to benefit the company over the balance of 2026, including the recovery of approximately $200 million related to income tax refunds. Combined with declining capacity utilization costs, lower capital intensity and the Unit 2 start-up, we believe we have the liquidity and financial flexibility to complete the ramp-up and position the business for improved profitability. As Rajat highlighted earlier, we have scheduled operational downtime during the third quarter to complete the operational tie-in of EAF Unit 2, together with planned maintenance activities at both the melt shop and our power generation plant. As a result, we estimate that third quarter shipments will be directionally lower by 10% to 20% versus the next quarter. From a volume perspective, we view this as the trough quarter of the transition. That said, we expect our underlying EBITDA performance, excluding any benefit of capacity utilization adjustment to continue to improve sequentially as we continue realizing the operational and financial benefits of our EAF platform. Finally, on legal matters. As previously disclosed, we have initiated and are responding to legal proceedings in connection with certain supply agreements, taking the position that these agreements have been frustrated by the extraordinary and unforeseen tariff environment. We believe we have valid legal remedies and defenses, and we will continue to defend our position. We are not in a position to comment further on this at this time. I'd now like to turn the call back over to Rajat for closing comments. Thanks, Mike.

Thanks, Mike. The second quarter showed that our transformed business can deliver even against a difficult backdrop. We continue to ramp our first EAF unit, set up plate sales record for the second consecutive quarter. Transition costs declined meaningfully and remain on track to be eliminated by the fourth quarter. And our second EAF unit is weeks away from first deal, the final major milestone in our transformation. Our position remains clear as Canada's only producer of discrete plate. Demand across infrastructure, construction and defense end market is healthy and growing as our EAF platform gives us a structural cost and carbon advantage that will serve us across market cycles. I want to thank our employees for their continued dedication and disciplined execution, our customers for their trust and the federal and the provincial government for their continued partnership. We look forward to updating you on the start-up of Unit 2 when we report our third quarter results this fall. Thank you for your continued interest in Algoma Steel. At this point, we are happy to take your questions. Operator, please provide the instructions for the Q&A session.

[Operator Instructions] Our first question is from Katja Jancic.

Maybe starting on the volume commentary, Mike, you said sequentially in 3Q volumes down again. Is that purely due to demand and some seasonality? Or is part of that also due to the maintenance work you mentioned?

Yes, I think that it's related to the maintenance activities. We're trying to put all of the maintenance activities in place ahead of Unit 2 coming online, which includes some work at our power plant that's scheduled, routine maintenance that we will do for preventative maintenance as well as in the steel shop at the first unit that's online and then some tie-in activities at Unit 2. So trying to bulk all of that together so that we enter Q4 with both units online and able to move up the capacity curve.

And then how should we think about the mix between plate and sheet because my understanding is that plate should continue to move higher.

Yes. I think that for this quarter, there is activities that we will also do at the plate mill. So it will be close, but it may be slightly less plate for this quarter as those maintenance activities happen with a little bit more volume on the sheet mill.

And maybe one more, if I may. Given the maintenance, how should we think about costs?

Yes. So I mean the capacity utilization charge is going to come down really related to the elimination of the costs. However, we will have the fixed cost absorption with lower volume that comes into that. So you should see pricing improving as we've seen in the marketplace and costs being around the same as where they were. Okay, thank you.

Our next question is from James McGarragle with RBC.

I just wanted to ask a question on your production capacity as the second EAF comes online. Can you just talk about what you expect your production run rate to be as you exit 2026? And then I guess, the demand environment in the Canadian market to kind of take on that level of production, especially on the sheet side of the business.

James, so our exit will be similar to what we had said in the past, 1.5 million to 2 million tons will be the run rate when we get into 2027 calendar year. And we are ramping up on the plate side, and you've seen that happening, and that will be our first priority. And sheet definitely depends on how the market plays out next year. We are looking at some other avenues as well, as I mentioned in the last call that we are looking at supplying to other jurisdictions because of our green steel that we have, and there is the demand that's increasing of green steel, especially in Europe, and we are looking at those opportunities as well for next year.

And then in terms of your cost targets, I guess, as that second EAF mill comes online, is there any change to your production targets or your cost targets versus what you've been communicating on the prior earnings call.

No. I mean, as the denominator increases, we're certainly going to have a significant improvement in the cost on the fixed cost absorption side as we exit calendar Q4 into next year. So across the board, we're continuing to focus on cost and driving down our cost across the board, but the volume is the biggest lever in improving that.

Okay. And just one last one for me before I turn it over. Any update on a potential LSP monetization and how you're viewing the opportunity and optionality surrounding that?

No. I think we continually feel that, that asset's going to be very important for us, and it's going to continue to serve us. The best way to monetize it really will -- it will really be a factor of what the available revenue stream is for that facility, and we continue to work through those optionalities. So we don't have an update at this time, but we really think that, that asset provides us a tremendous amount of flexibility in a world where power demand is only going up.

Our next question is from Ian Gillies with Stifel.

Could you provide a bit of an update on what you think a realistic outcome is for plate production in 2027, just given customer demands and what you're able to make versus what they want and kind of how you're thinking about that moving into next year.

Yes, sure. So our plate production has been growing, and you see that it's closer to 0.5 million ton a year. We can grow it further to, let's say, 600-odd thousand tons and that's our plan to get into the next year. The demand in Canada definitely is growing, and we would be able to cater to a lot of it in the following year. And also, it depends on how these projects that are being launched play out from a demand perspective. But we feel comfortable that the demand that's available will be met by -- or we'll be able to meet the demand that 600,000 tons of production for next year.

That's helpful. Maybe switching gears a little bit. Obviously, the Canadian government has gone with someone other than Hanwha for the subcontract. Can you maybe talk a little bit about how you intend to pivot and service some of this defense demand and whether -- and even though another competitor got the contract, whether you still think you might be able to participate in some way, shape or form?

Sure. So being the Canadian producer of steel and green steel as well, do participate in all of the programs that are out there from the government perspective and otherwise as well on the private sector. And that is continuing. We are talking to everybody and engaging with everybody from that perspective. So our strategy to pivot into beams is not changing because that market is there and it's available, and we will be working towards getting that initiated. On the plate side, we are supplying to defense right now. There will be more and more as we go through next year. From the new party who's got it, we will and we are engaging with them. The steel that will be needed for submarine is one part, and then there is steel that's needed for infrastructure on both sides of the country. And that will be made in Canada if Canada can make it by that time, and that will be plate and beams. So we are quite focused on ensuring that we are at least involved in all these programs that are coming out where we can, as Canadian producer, supply steel.

That's helpful. And then maybe last one for me. On the LETL loan, as you work your way through that, I guess, towards the end of this year, early next year, would the intention then be to move into, if you need to, the ABL? Or would you try and source some other version of financing perhaps from the government to continue until there's some sort of either relief on tariff or other alternatives?

Yes. I think, look, Ian, we have a number of other cash items that are going to be supportive that are coming through the rest of this year. We have -- well, we have the $45 million of insurance settlement, it's as a receivable right now. So that will be cash that we add at this point. We have the $200 million of tax refund that we're going to receive at this point. That's -- just filed a statutory requirement that we'll get those funds this year. So those are going to be supportive. Beyond that, we're working on driving costs down and improving the revenue to get this business to cash flow breakeven. So that's goal number one. We'll look at other options on the balance sheet if required, but we're really working to get this business to cash flow breakeven is the goal.

[Operator Instructions] We reached the end of the question-and-answer session. I would like to turn the floor back over to Laura Devoni for closing comments.

Thank you again for your participation in our second quarter 2026 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 third quarter results this fall.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.