Algoma Steel Group - Earnings Call - Q1 2025

Transcript

Operator (participant)

Greetings. Welcome to Algoma Steel Group Q1 2025 Earnings Call. [Operator's Instructions] It is now my pleasure to introduce Michael Moraca, Vice President, Corporate Development and Treasurer. Thank you, Michael. You may begin.

Michael Moraca (VP of Corporate Development and Treasurer)

Good morning everyone and welcome to Algoma Steel Group's Q1 2025 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 accounting standards which differ from US GAAP and our discussion today includes references to certain non-GAAP 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 first quarter 2025 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 note, all amounts referred to on today's call are in CAD 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 (CEO)

Thank you, Mike. Good morning everyone. Thank you for joining us to discuss our first quarter 2025 results. Employee safety remains our highest priority and a core value. We continue to focus on this priority, emphasizing a culture of safety throughout the steelworks. With construction activity levels at the site continuing, maintaining a strong safety focus is more critical than ever before.

Turning to financial results, I want to highlight three important themes. First, our quarterly results reflect the continued challenging conditions across global steel markets, particularly due to tariff uncertainty and Canadian trade policy which led to lower realized pricing and higher production cost.

Second, we continued to advance EAF construction activities across the site and commissioned several critical systems positioning us to achieve first steel production from our initial EAF during the second quarter with no material change to our project cost or 2025 production expectations. Third, our balance sheet and liquidity position remains strong. With over CAD 226 million in cash at quarter end and total liquidity of CAD 587 million, we remain well funded to complete our transformative EAF project.

The steel industry is navigating a period of elevated volatility largely due to ongoing tariff actions, creating uncertainty in both U.S. and Canadian markets as customers adjust purchasing patterns in anticipation of supply disruptions. This trade policy uncertainty has also impacted the U.S. dollar exchange rate, influencing our raw material cost and competitive pricing position. We are managing our existing operations during this period to respond to rapidly changing market conditions, strategically adjusting our product mix between plate and coil products based on capacity and contractual obligations. Our first quarter results were in line with our expectations for shipments and adjusted EBITDA, which include insurance proceeds that Rajat will discuss shortly. The quarter reflected challenging market dynamics that began mid-2024, driven by U.S. election uncertainty, interest rate concerns and softening demand, factors that intensified with new U.S. trade policies announced in March.

As a result, we saw softer realized steel prices and higher cost, leading to an overall decline in revenues and adjusted EBITDA compared to the prior year. On a positive note, we continue to ramp up production at our fully modernized plate mill for the quarter. Plate shipments reached approximately 91,000 tons, up from 82,000 tons in Q4 of 2024 and 73,000 tons in Q3 of 2024. Looking ahead, we expect Q2 2025 plate production to again be directionally higher as we continue to capitalize on our position as Canada's only discrete plate producer, steadily ramping toward our expected annual run rate capacity of over 650,000 net tons.

We recently announced our participation in Team Vigilance, strengthening our position in the Canadian defense supply chain, and we are encouraged by the federal government's renewed focus on domestic military procurement and infrastructure spending, which we believe will support future demand for our plate products. Turning to our transformational Electric Arc Furnace project, while unusually harsh weather conditions that began in November and persisted through much of the winter impacted project timelines, we used the opportunity to advance other work not on the critical path. This included commissioning the Fume Treatment Plant and Water Treatment Plant, positioning the furnace and energizing the substation. We anticipate achieving first steel production from our initial EAF during the second quarter with no material change to our project cost or 2025 production expectations. Despite the challenging market conditions we have faced, our balance sheet and liquidity position remain robust.

Once both furnaces achieve full operation, we anticipate reaching a steady state shipping capacity of 3 million tons annually. This production level will optimize our currently underutilized downstream finishing capacity, significantly enhancing our operational efficiency and cost structure.

As of March 31, 2025, cumulative investment for the EAF project was $824 million, including $83 million during the first quarter of 2025. All material aspects of the project have been contracted and we continue to anticipate completing the remainder of the project, including those structured as time and material agreements within 5% of the upper end of the previously announced budget range. Our startup plan continues to include normal production from our existing steelmaking facility, while ramping up production from our EAFs throughout 2025 and 2026, followed by a complete transition to EAF production.

As a significant milestone in this transition, we plan to shut down Number Seven Coke Battery at our coke making facility later this summer. Number Seven Battery is our least efficient battery and we do not expect its shutdown to result in any increase to operating cost. This action reflects our confidence that our EAF transition plan remains firmly on track.

In summary, despite very challenging market and weather conditions, we've maintained our focus on the safe operation of existing facilities, continued our ramp in plate production, and are approaching first EAF steel production during the quarter. Steel markets have had periods of great volatility in the past and during those times we do what we always do. Stay focused on the things within our control and never taking our eye off the ball as we prepare to take a tremendous step forward for our company and community. I'd like to once again thank all of our employees for their hard work, dedication, and professionalism. Thank you. I'll now turn the call over to Rajat for a deeper dive into our financials.

Rajat Marwah (CFO)

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 first quarter results included adjusted EBITDA. That was a loss of CAD 46.7 million, which reflects an adjusted EBITDA margin of minus 9% and cash generated by operating activities of CAD 92.1 million. We finished the quarter with a strong balance sheet, including CAD 226 million of cash and availability of CAD 361 million under our revolving credit facility. Now let me dive into the key drivers of our performance.

We shipped 470,000 tons in the quarter, up 4.2% versus the prior year quarter. The prior year quarter shipments were lower due to the impact on operations from the utilities corridor collapse and subsequent blast furnace shutdown. Net sales realization averaged CAD 986 per ton compared to CAD 1,260 per ton in the prior year period. The decrease versus the prior year level reflects weakening market conditions partially offset by improvements in value added product mix as a proportion of sales. This resulted in steel revenue of CAD 463 million in the quarter, down 18.5% versus.

The prior year period as lower realized selling prices more than offset higher shipments. On the cost side, Algoma's cost per ton of steel products sold averaged CAD 1,137 in the quarter, up 4% versus the prior year period on account of higher utility costs due to harsh winter conditions and tariffs. Starting March 12, the company has been subject to a 25% tariff on all outbound steel shipments to the U.S., and for the first quarter, tariff costs were CAD 10.5 million, which was included in cost of sales. Net loss in the quarter was CAD 24.5 million compared to net income of $28 million in the prior year quarter.

The decrease was driven primarily by lower realized pricing and higher input cost as detailed above, partially offset by a CAD 50 million receivable recorded as other income. Recognizing the approval of a second advance of insurance proceeds from the January 2024 collapse of the utility corridor. This amount exceeds previous expectations of CAD 20-30 million and the Company expects to receive proceeds from the second advance payment prior to the end of this quarter. The Company is working closely with the insurance advisers and carrier to finalize the remaining claims, with the balance of payout expected by year end. Cash generated by operations totaled CAD 92 million for the quarter compared to CAD 121 million in the prior year period, reflecting the Softer market conditions discussed earlier.

As we previously outlined, we targeted a release of approximately CAD 100 million in working capital between March 2024 and March 2025, a goal we have now achieved. This was driven primarily by a significant reduction in inventory. For context, inventory levels declined by CAD 138 Million compared to the prior year quarter. By CAD 185 million since December 31, 2024. We remain focused on further enhancing working capital efficiency as we transition to EAF-based steelmaking. Liquidity at quarter end totaled approximately CAD 587 million, consisting of CAD 226 million in cash and CAD 361 million of availability under our existing credit facility.

Based on our current liquidity position and expected cash generation, we believe we are positioned to complete the EAF project using existing resources. We have a strong funding plan and remain engaged in government programming that supports domestic steelmaking. I'd now like to turn the call back to our CEO Michael Garcia for closing comments.

Michael Garcia (CEO)

Thank you, Rajat.

In summary, despite persistently challenging market conditions and ongoing trade policy uncertainty, we have remained focused on the safe operation of our facilities, continued the steady ramp up of our plate production, and advanced our transformative EAF project. We are optimistic that the newly elected Canadian government will work constructively with industries like ours to advance timely solutions that strengthen both our company, the community, and Support the nation's broader economic goals.

With trade relationships evolving, we believe it is critical that the government immediately engage with the United States to address the Section 232 tariffs currently in place and to support fair and balanced trade between both countries. Resolving these issues is essential to ensuring a level playing field for Canadian steel producers, supporting ongoing investment in low carbon steelmaking, and protecting jobs in Canada's manufacturing sector. We are ready to stand up for Canada and to help build Canada strong with Canadian steel, Canadian workers, and a shared commitment to a more sustainable future. 2025 is shaping up to be one of the most exciting chapters in Algoma's history.

With our modernization advancing, our transition to low carbon steelmaking underway, and our role as a critical supplier to Canada's manufacturing and infrastructure sectors expanding, we believe Algoma is well positioned to deliver sustainable long term value for all of our stakeholders. I would like to once again thank all of our employees for their hard work, dedication and professionalism. Thank you very much for your continued interest in Algoma Steel.

Operator (participant)

Thank you. We will now be conducting a question and answer session [Operator's Instructions]. One moment while we poll for questions. Our first question is from Katja Jancic with BMO Capital Markets. Please proceed.

Katja Jancic (Metals and Mining Analyst)

Hi, thank you for taking my questions. Maybe starting on the near term, looking to 2Q, how should we think about shipments given that the environment remains pretty challenging?

Rajat Marwah (CFO)

This is Rajat. The way we see it is that we probably be higher on a quarter over quarter basis, so higher trajectory from where we were last time from shipments. The environment is challenging for sure, but we'll come down to little less than our normal run rate as we move into the second quarter, but quarter to quarter will be higher. On the plate side, we will be higher as well. As you've seen the ramp from last couple of quarter, we've gone down to. Gone up to 90 and we'll be going higher up on the plate side.

Katja Jancic (Metals and Mining Analyst)

If we look year over year for the total volume, is it, you know, getting close to that? I think last year it was probably around 500,000 tons. Is that reasonable or--

Rajat Marwah (CFO)

Yep.

Katja Jancic (Metals and Mining Analyst)

Specifically, how much higher can the plate go in the near term versus the 91?

Michael Garcia (CEO)

Katja, This is Mike. Obviously we'll be approaching the 100,000 ton per quarter level. I expect that we'll be at or near that. In the next quarter that we report. Our share of the Canadian steel market versus if you look at where we were when we really exited and completed the modernization, our share of the Canadian steel plate market has really almost doubled since that time. There's still some competition in the Canadian plate market. Although we're the only domestic plate producer, We still face competition from foreign plate every day in the market in Canada whether it's from Taiwan, Turkey, Italy, France, Korea, and even from the U.S. with some contracts that they have. We expect that there's still room to grow and that the plating, and more importantly, the Canadian plate market itself will grow.

I think it's shrunk over the last few years, but with the renewed focus by the government on building Canada strong, that means a focus on infrastructure, especially energy infrastructure, defense and maritime. All of those consume plate, the government acknowledges and understands the strategic importance of a strong domestic steel industry, especially in plate. I think, this next quarter will see us moving towards 100,000 tons and then continuing to move towards our annual run rate of 650,000 tons.

Katja Jancic (Metals and Mining Analyst)

Maybe staying on the plate market, we saw plate prices in the U.S. increasing. How is pricing currently in the Canadian market?

Michael Garcia (CEO)

Canadian market is still our most attractive pricing in the Canadian market. I think in general, the Canadian market is oversupplied in steel. Over 50% of the Canadian market is serviced by imported steel. A lot of that imported steel is coming in at pretty low pricing. We believe there's a significant amount of it that is unfairly traded into Canada. We're having active discussions with the Canadian government around what's the right trade policy that they should be putting in place to protect the strength of the domestic Canadian steel industry, because it is a vitally strategic part of the Canadian economy going forward. Your question was specifically about steel pricing.It's still the most attractive segment for us.

Katja Jancic (Metals and Mining Analyst)

Thank you.

Michael Garcia (CEO)

Although it is lower than the U.S. steel pricing.

Operator (participant)

Our next question is from David Ocampo with Cormark Securities. Please proceed.

David Ocampo (Equity Research Analyst)

Thanks for taking my questions, Mike. I was hoping you could provide a little bit more commentary on the sheet pricing discount. I think on the last conference call you guys noted a discount as high as 25%. Is that still the case and have you been able to find incremental pocket demand to be able to shift more of your mix from the U.S. to Canada because it has been as high as 60%?

Michael Garcia (CEO)

David, thanks for the question. In sheet and coil, it's difficult. The Canadian market price has pretty much adjusted almost equal to a 25% discount to the US coil price. You know, it makes for us particularly, it makes us a little indifferent to whether we service a sheet order in the US and pay a 25% discount or take it in Canada at a 25% lower market price. That's one of the challenges we're facing with the current Canadian steel market. It's oversupplied with coil and with the uncertainty around where the tariffs and where demand is going to go, there's not much of a, there's not much increased demand right now to support oil higher pricing. I spoke about the presence of all the foreign steel in Canada, over 50% of the market.

I think all those factors are leading to the current-- the current situation where the Canadian market pricing is significantly lower than the U.S. market pricing and it's settling out about that at 25% lower level.

David Ocampo (Equity Research Analyst)

Okay, that makes sense If I just look at the futures market just as an indication of what's to come, I mean it's getting close to $800 a ton and with a 25% discount and compare that to I think your break even cost structure on sheet at $650. It does suggest that there's more negative EBITDA prints to come. Is that the right way to frame kind of Q2, Q3?

Rajat Marwah (CFO)

Yeah, I think, looking at the futures and just discounting it. Looking at the math, you'll come to those conclusions. You start adding plate to it, it does make a difference as we are selling more and more plate and moving more to value added products. We do sell cold rolled and others where we fetch higher margins. Sheet base, that's how the trajectory shows. Overall it is different and to that we've also been working on our cost side. We know that there will not be big change from raw material perspective as they are normally linked to either fixed price on the coal side and indices on the iron ore side.

There are other costs that we are looking at optimizing and reducing to reduce our cost as we go through this year. Just math makes sense what you're saying, but there are a lot of other moving parts and other value added product that do make a difference.

David Ocampo (Equity Research Analyst)

Okay, and then just the last one for me on the tariff costs, $10 million in the quarter, but that was a partial tariff. When I look at 2018, I think you guys got to close to $250 million for the year. Call it $60 million for the quarter. Is that a good proxy for the hit that you guys may see in Q2?

Michael Garcia (CEO)

Yeah, it's close. That's how it should play out.

David Ocampo (Equity Research Analyst)

Okay, that's it for me. I'll hop back in queue.

Michael Garcia (CEO)

Thanks, David.

Operator (participant)

Our next question is from Ian Gillies with Stifel. Please proceed.

Ian Gillies (Managing Director of Equity Research)

Morning everyone.

Michael Garcia (CEO)

Morning, Ian.

Ian Gillies (Managing Director of Equity Research)

Mike, could you maybe just talk a little bit about what's transpired with the EAF between last update and this one. I acknowledge the delay is not long, but I guess it's only been six weeks since we last spoke. I'm just curious and maybe talk a little bit about what the critica path issues are over the next, I guess over the short term here to get your first hot metal out of the EAF.

Michael Garcia (CEO)

Sure. As you know, we've been constructing and installing the new EAF complex really since April of 2022 is when we really started. We had the earthworks prepared and We really started construction in earnest. It has been a three year journey. As you start to approach the end of that journey and anticipate fully energizing the furnace and producing metal in the furnace, you create a very detailed Gantt chart and timeline for all of the final critical steps that need to happen to put us in a position to kind of strike that first arc and melt that first heat of steel. As we started gaining visibility to this final timeline and final Gantt chart for the second half of last year, that was placing the first arc in the first quarter of 2025.

That is what we communicated the last time we spoke six weeks ago. We now had visibility that that was going to happen in the Q2. We were thinking second half of April, that's what we talked about. The change today is it's. Still happening in the Q2. The factors the team has run into has primarily been weather related as we dealt with higher than expected snow events beginning in November. Really also in March we had higher than expected snow events. We had colder than expected seasonal temperatures, which affected our ability to commission some of the critical systems, especially the Water Treatment Plant.

You can't really commission a Water Treatment Plant when you have sustained temperatures below zero. Complex piping and piping installation and hydraulics checkout. Really it's this last intense work where we're executing the plan every day as aggressively as possible. There's always things that could cause you to slip a day or a week at a time. Really what's happened is we slipped from the Q1 of 2025 into the second quarter.

Ian Gillies (Managing Director of Equity Research)

Understood, that's helpful. Just a quick follow on for that one. When do you think you'll fire up the second furnace?

Michael Garcia (CEO)

Second furnace will be at the end of the year. We're focusing on the first furnace right now. A lot of the major work for the second furnace has already been in place. I imagine the team's going to learn a lot about the final sequence of startup events and what needs to happen in order to strike that first arc. We'll certainly apply all of that learning to the second furnace. Right now, the second furnace is showing the end of 2025.

Ian Gillies (Managing Director of Equity Research)

Understood. Maybe switching gears, two separate questions in and around liquidity. I guess the first one with respect to the working capital facility, in the event that EBITDA is negative, are you still able to draw on that facility or are there covenants that would not allow you to draw on that in the event you are generating negative EBITDA?

Rajat Marwah (CFO)

We can still draw on that. There's a covenant that you have to test to draw the last 10%. You can still draw on that.

Ian Gillies (Managing Director of Equity Research)

I guess the follow on question, fully acknowledging liquidity looks okay today. Like, are you debating taking on any incremental debt or looking at any of these Canadian government loan programs at the time being, or are those just going to be left out there as call options in the event they're required?

Rajat Marwah (CFO)

As of now, no, we are reviewing all scenarios and we know that any scenario that we look at is right now will be different in just few weeks. Though we are reviewing all scenarios, we have enough liquidity right now. We are working closely with the government on the work related to the trade policies in Canada, we would want the government to be active on discussing with the U.S. government on the trade front as well. You know, at the same time, we are looking at optimizing our working capital as much as we can so that we have, you know, we can optimize it and we can use that cash if needed.

As of now, we do not, we do not see a need as we go through and the government programs are there and we are looking at all that is coming that has come out up till now. There will be more clarity as the government is in play. Definitely, we will be looking at all the government programs that are out there to manage the tariffs.

Ian Gillies (Managing Director of Equity Research)

Okay. Rajat, with respect to working capital, it was obviously a very strong quarter for inventory releases. Can you maybe just update us on how much, how big of a source of funds you think working capital will be this year now that you're through Q1, and whether that's changed?

Rajat Marwah (CFO)

We will see from inventory perspective when you look at working capital, there are so many moving parts primarily on the receivable side based on how pricing is and how much you're realizing. We do see a reduction during the year. Now, December, we'll be using some amount of inventories as we build inventories. March to March, we will not. See any big increase.

It will only be a reduction and we'll only build a little as we go through the year on the inventory side, specifically the raw materials by December. There will be definitely some release. The CAD 50 million that is booked as a receivable in the quarter will be released and we've collected most of the money on the insurance side by now, and we'll get the rest during this quarter. That will be a permanent release, as you're seeing on the receivable side. There will be puts and takes. We will see some release.

Ian Gillies (Managing Director of Equity Research)

Okay, thanks very much.

Michael Garcia (CEO)

Thanks, Ian.

Operator (participant)

[Operator's Instructions]. Our next question is from James McGarragle with RBC Capital Markets. Please proceed.

James McGarragle (Equity Research Analyst)

I just had a question on how we should be thinking about cost of goods sold into Q2. I know you flagged some cost control initiatives you're working through. Some of the input costs are contracted, but with the EAF ramping up, can you just give us some color on how we should be modeling things directionally into Q2 versus what we saw in Q1?

Rajat Marwah (CFO)

Yes. In Q1, the cost was higher because of one is volume, the other is the cost of utilities as the winter was quite harsh and we were not expecting that much higher cost. That cost will come down. We should be around overall cost of production. We should be around CAD 1,020-CAD 1,030, let's say CAD 1,020-CAD 1,040 range in Canadian dollars overall blended cost. As we come out and we keep on optimizing that during this year.

James McGarragle (Equity Research Analyst)

Thanks. Just another one on some of the recent developments on auto tariffs. The U.S. announced they're going to provide carmakers with credits for up to 15% of the value of vehicles that are assembled in the U.S. that can then be applied against the value of imported parts. I know steel wasn't specifically talked about in that announcement, but does that announcement impact your ability to pass on pricing into the U.S. at all or does that impact demand for your sales into the U.S. at all? Just trying to see if there's any impact from that announcement.

Michael Garcia (CEO)

Hi James, this is Mike. First of all, welcome to the call and thank you for picking up coverage on Algoma Steel. I think the biggest impact of the recent announcements yesterday around the auto industry is just it gives more certainty to the autumn, to the entire automotive, automotive supply chain around what the exact impact of the current tariff regime will be. I think anytime you have more certainty it's, you know, it leads to better predictability by the whole supply chain. It kind of helps us from understanding what the volume levels will be. We probably see stronger volume levels because those will always dip when there is uncertainty. On the pricing side, it really will not. We do not see it giving us the opportunity to benefit from pricing, but certainly, the lower level of uncertainty helps that segment for us.

James McGarragle (Equity Research Analyst)

Okay, thank you very much and I'll turn the line over.

Operator (participant)

With no further questions at this time, I would like to turn the floor back over to Mike Moraca for closing remarks.

Michael Moraca (VP of Corporate Development and Treasurer)

Thanks again for your participation in our first quarter 2025 earnings conference call and your continued interest in Algoma Steel. We look forward to updating on our results and progress when we report our second quarter results this summer. Have a great day.

Operator (participant)

Thank you. This will conclude today's conference. We thank you for your participation. You may now disconnect your lines.