Algoma Steel Group Inc (ASTL) 2022 Q4 法說會逐字稿

Greetings and welcome to Algoma Steel Group Inc. Fourth Quarter 2020 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn this conference over to your host, Mr. Michael Moraca, Treasurer and Investor Relations Officer. Thank you, sir. You may begin your presentation at this time.

Good morning, everyone, and welcome to Algoma Steel Group Inc.'s Fourth Quarter Fiscal 2022 Earnings Conference Call. Leading today's call are Michael McQuade, our former Chief Executive Officer and current Board member; Michael Garcia, our new Chief Executive Officer; and Rajit 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 statements are prepared in accordance with IFRS, which differs from U.S. GAAP, and our discussion today includes references to certain non-IFRS financial measures.

Last evening, we posted an earnings presentation to accompany today's prepared remarks. The slides for today's call can be found in the Investors section of our corporate website. With that in mind, I would ask everyone on today's call to read the legal disclaimers on Slide 2 of the accompanying earnings presentation and to also refer to the risks and assumptions outlined in Algoma Steel's fourth quarter fiscal 2022 Management's Discussion and Analysis.

Please note that our financial statements are prepared in the U.S. 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 3 and 12 months ended March 31, 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 former Chief Executive Officer and current Board member, Michael McQuade. Mike?

Thank you, Mike. Good morning. Welcome and thank you for joining Algoma Steel's earnings call for our fourth fiscal quarter and full year ended March 31, 2022. 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. I'm proud to say that our fiscal year 2022 was Algoma's safest year ever. The safety of our employees is our top priority at Algoma, and I commend our entire team for their collective success and continued diligence as we relentlessly pursue our goal of achieving 0 workplace injuries.

Before getting into my specific comments, I'd like to express my gratitude to the entire Algoma family and all of our stakeholders for their trust and support during my tenure as CEO over the last 3.5 years. Transformational milestones we achieved will chart a new course for Algoma Steel. And while they certainly did not come without challenges, these years have been some of the most rewarding of my career.

As I move into the next phase of my life, I'm leaving with a tremendous amount of confidence as I hand the reins to Mike Garcia, and I know he will be a great steward of this company. Algoma's future has never been brighter, and I look forward to continued participation via my role on the Board.

Our fiscal 2022 marked a time of profound change for the company and for the industry, and our outstanding results during that period put us in an enviable position of having options on capital allocation. We told you last quarter that prudent financial management means focusing on the cash that we have, not cash that we expect to realize at some point in the future.

We have put an exceptional amount of work into achieving the enviable balance sheet we have today. We remain laser-focused on creating long-term value for our shareholders through a combination of prudent financial management, transformative capital investment and safe and efficient operations of our facilities. Steel markets are cyclical and pricing can be highly volatile as evidenced by what we've seen over the last several quarters, which is why I'm particularly proud of the foundational building blocks we have put in place that will make us successful throughout the steel cycle.

Relentless execution by the entire Algoma team drove the strong results we achieved in our fiscal year. Those results, including shipments of 2.3 million tons, revenues of $3.8 billion, adjusted EBITDA of $1.5 billion and cash generated by operating activities of $1.2 billion, have positioned us to drive long-term value creation on 2 fronts simultaneously.

On the capital return side, last night, we announced a new USD 400 million substantial issuer bid, or SIB, that is over and above our existing normal course issuer bid and our regular quarterly dividend. The SIB has the potential to represent share repurchases of approximately 1/3 of our current market cap. We are proud of our continued commitment to return capital to shareholders as our results warrant, all against the backdrop of advancing and completing our transformative EAF project.

On that front, construction is advancing as expected with regard to time and budget. Subsequent to quarter end, the province of Ontario announced the Northern Ontario Energy Advantage program. This program supports industrial electricity customers in Northern Ontario and gives security and visibility into their long-term needs and was significant in our decision to pursue electric arc furnace steelmaking. Ontario's clean energy grid is known as one of the lowest carbon-emitting power supplies across North America. When combined with our transition to EAF, we intend to become one of the leading producers of green steel in North America.

Given how major a milestone it is in the life of our company, I'd like to give you a quick reminder of why we're so excited about the EAF project. The project entails dual furnaces that are designed for a combined annual raw steel production throughput of 3.7 million tons, matching our downstream finishing capacity. It will lower our carbon emissions by approximately 70% when fully operational. The 2 EAFs are expected to come online in 2024, followed by a continued transition away from blast furnace steel production as increased power supply becomes available from the grid with the support of the provincial government.

Project will fundamentally transform who we are and how we operate, positioning the company as a next-generation steelmaker, focused on sustainability and poised to be successful across all phases of the steel market cycle. It's a testament to the execution by our team during unprecedented times that we are able to operate our existing portfolio of assets normally without being operationally impacted by the construction of a transformational project, all while being able to return meaningful capital to shareholders.

As I said before, it's an exciting time and a bright future for Algoma. Now I'll pass the call over to Rajat to go over the strong financial results for the quarter and the fiscal year before our new CEO, Mike Garcia, closes out our prepared remarks. Rajat?

Thanks, Mike. Good morning and thank you all for joining the call. Our fiscal fourth quarter results continue to demonstrate the impressive cash-generating potential of Algoma. I'll remind you again that all numbers are expressed in Canadian dollars unless otherwise noted.

Our quarterly results were highlighted by net income of $242.9 million; adjusted EBITDA of $334.4 million, which reflects an adjusted EBITDA margin of 35.5%; and cash generated from operating activities of $443.8 million. We finished the quarter with $915 million of unrestricted cash and remain undrawn on our revolving credit facility. You'll recall last quarter, we fully repaid all USD 358 million of outstanding senior secured long-term debt. And as a result, the only remaining long-term debt on our balance sheet is in the form of government loans linked to our capital projects.

Diving into the key drivers of our performance. We shipped 547,000 net tons in the quarter, down 1% sequentially and 12% as compared to the prior year quarter. As we previously announced, our shipments were lower than we expected due to various issues outside of our operations, including increased slowdowns at customers, logistical supply chain constraints and COVID-related challenges.

Net sales realization averaged $1,608 per ton, down 12% sequentially but up 71% versus the prior year period. The increase versus the prior year level reflects the positive impact of our contract order book as higher lag prices flow through the revenues. This resulted in steel revenue of $818 million in the quarter, down 13% sequentially but up 50% versus the same quarter of last year.

On the cost side, Algoma's cost of goods sold averaged $989 per ton in the quarter, flat on a sequential basis and up 45% over the period year -- prior year period. The main drivers of this increase versus the prior year period includes commodity price increases for select raw material inputs, increased employee-based profit sharing as a result of our historic performance and higher SG&A cost related to being a public company.

Looking at our fiscal 2022 full year results. We shipped 2.3 million net ton for the year, up 9% as compared to the prior year. Net sales realization averaged $1,545 per ton, up 101% for the prior year. This resulted in steel revenue of $3.5 billion, up 120% versus last year. On the cost side, Algoma's cost of goods sold averaged $894 per ton for the year, an increase of 29% over the prior year. The main drivers of this increase versus the prior year period again include commodity price increases for select raw material inputs, increased employee-based profit sharing and higher SG&A costs related to being a public company.

Our fiscal year 2022 was highlighted by record adjusted EBITDA and cash generation, which, as Mike described earlier, positioned us to add another layer of our capital allocation story through the SIB we announced in our release last night. Armed with the fortress balance sheet and strong cash-generating profile, we are well positioned to continue evaluating all options around capital allocation.

Now turning to our outlook for the first quarter. Steel prices have come off from their most recent highs that coincided with the start of the Russian invasion of Ukraine but remains at attractive levels, still well above past mid-cycles. Based on our operations to date in the quarter, our order book and our expectations for our end market through the end of this month, we expect to deliver strong fiscal quarter -- first fiscal quarter adjusted EBITDA in the range of $335 million to $355 million. This EBITDA guidance includes, as previously disclosed, the impact of our planned 1-month plate mill modernization outage that is currently in the commissioning stage.

I'd now like to turn the call over to our new CEO, Michael Garcia, to provide further color on current market conditions and our balanced and disciplined approach to capital allocation. Mike?

Thanks, Rajat. Let me start by saying how excited I am to have joined the Algoma team and to thank Mike McQuade for his stellar leadership throughout the last 3.5 years. I look forward to ongoing mentorship and guidance from Mike through his continuing position on our Board of Directors.

Looking at the state of the North American steel market today. Pricing levels in the fiscal fourth quarter saw a dramatic spike to near record levels for the second time in the last 2 years, largely as a result of the Russian invasion of Ukraine. Since the beginning of April, those prices have come off from those highs and are showing signs of stabilizing at levels still historically higher than any point prior to 2021 and approximately double mid-cycle pricing.

We expect pricing to find a near-term equilibrium, and we remain optimistic about where that level should shake out, supported by the fundamentals we continue to see in the market and in our order book. We have a diverse customer base that provides selling opportunities across Canada and the U.S., traditionally servicing roughly 150 customers in a calendar year. We target a high percentage of contract sales and currently sell approximately 65% of our steel on contract. These volume commitments provide stability to our order book and operations, and the lagging price mechanics helped to smooth some of the volatility experienced when prices shift up or down quickly.

We sell a wide range of offerings that include plate products, which currently enjoy a price premium of approximately USD 675 per ton as compared to hot-rolled coil. We have always maintained that investments in our plate mill should serve us well given we are Canada's only producer and heat treater of discrete plate products.

Our modernization project remains on track with the first phase wrapping up and going through hot commissioning of the new equipment and Phase 2 work planned for completion during the calendar fourth quarter. Despite the economic uncertainties being seen across industries and around the globe, we have a number of reasons to believe near- and intermediate-term pricing will remain at attractive levels. These potential positive factors include underlying strong demand in the automotive, construction, oil and gas, and other steel-intensive industries as well as controls on imports. We remain well positioned today to benefit from these favorable market conditions operationally even as we execute the construction of the EAF project.

Now let me talk about our capital allocation policy. As you heard from Mike McQuade, our primary focus is on delivering prudent financial discipline and operational excellence to ensure our ability to execute our EAF project, ushering the next phase of our company that provides the foundation for long-term value creation for our stakeholders. That endeavor defines the future of Algoma and solidifies our leadership position at the forefront of green steel production in North America.

We are proud that even as we transition to a low-cost green steel company, the steps we have taken to strengthen the balance sheet and to position our operation to benefit from strong market pricing also have afforded us the opportunity to return capital to shareholders on 3 fronts: our USD 0.05 per share regular quarterly dividend, our normal course issuer bid program, and our USD 400 million substantial issuer bid announced last night.

My view is consistent with the Board in that we expect to be a significant generator of free cash over the long term. And we will continuously evaluate our capital allocation policy with the Board. Mike McQuade's stated approach was to live within our means, not to spend money we didn't have or expect to realize down the line, and I am happy to echo those sentiments.

In my first 2 weeks at Algoma, I have been immersing myself across the business, meeting people and familiarizing myself with the specifics of our operations, processes and approach. The sense of pride among our team in the business shines through in their attitudes and in their desire to do what's best for Algoma and all of our stakeholders. While only just getting started, my first thoughts are really about opportunity. I feel we have tremendous potential to build upon our strong foundation. I commend the steps taken and the results achieved over the past several years to build on a platform on which we can grow from. I'm confident that my extensive management background and experience, specifically in large construction projects and EAF operations, will help further our team's efforts.

The fiscal fourth quarter was a strong end to a very exciting year at Algoma that included our return to the public markets; the retirement of our senior secured debt; the start of our transformative EAF project; achievement of historically strong financial results; the commencement of a robust capital allocation program; and most importantly, a continued legacy of safety for our employees. As I take the reins, be assured that we will continue our relentless focus on safe, reliable, efficient operations of our existing facilities to enjoy the benefits of strong markets even as we advance the dual-EAF facilities, a generational investment designed to forever change how steel is manufactured in Sault Ste. Marie while making our business greener, more competitive and more resilient. We will continue to build upon this and position Algoma as a compelling value proposition for all of our stakeholders.

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 our Q&A session.

(Operator Instructions) Our first question comes from the line of David Gagliano with BMO Capital Markets.

First of all, thanks -- I mean congratulations on the transition at the top and on the solid results and the significant SIB. I have just really basic some operating questions first, some near-term questions. First of all, on the volumes for the upcoming quarter within embedded in the EBITDA guide, can you give us a breakdown of the volume expectations embedded in that guide and the mix of hot-rolled and plate for the upcoming quarter? That's my first question.

So David, thanks for your compliments. I think it was a great quarter and a good outcome based on capital allocation. So on the guidance, I think you're absolutely right. The numbers are part of the overall guidance that we are giving. And what we are providing is EBITDA, which is more important and meaningful for the market. And we would like to just go and provide the EBITDA number and not the volume.

Okay. All right. Also a follow-up on the operating side -- go ahead.

The only other thing that I would add, sorry, David, is that we have a 1-month outage on the plate mill that we had said last time. And that is something that's finishing off here in the commissioning stage right now.

Okay. Just switching over to the EAF spend. What was the CapEx for the EAF in the March end quarter? And if you could just talk us through the process of applying for the government refunds, how much, when, et cetera, et cetera.

Sure. So we spent roughly 8% to 9% of the CapEx by the March quarter. So that's the spending. Expecting to spend, as we said earlier, 50% to 60% in this year -- this fiscal year, which is running. From a process perspective, it's a reimbursement mechanism where you spend the money and you then apply for a reimbursement and you get the money back. And normally, there's a quarter lag from when you spend it to when you really get the money.

Okay. And then just my last question, is the $700 million expected total spend for the EAF project? Is that still a reasonable assumption given the obviously inflationary pressures out there, et cetera, et cetera?

David, this is Mike Garcia. Yes, that's still our current estimate.

Our next question comes from the line of David Ocampo with Cormark Securities.

I just wanted to circle back on the government funding. I think on the last quarter, you guys mentioned that a piece of it, I think the -- not the strategic investment fund portion, but the other piece would ratchet down by 1/3 for every dollar that you're putting out the door. So how much do you guys think that you'll get out of that total $420 million that you guys were alluding to in the past?

So it's -- so you're right, it's -- it will go down by 1/3 based on the allocation of capital towards shareholder. So that will include the dividend that we are paying on a quarterly basis, include the NCIB. And the number is disclosed on how much NCIB has happened, and it will be subject to the SIB pickup. So if it is $400 million, that 1/3 of it -- and USD 400 million, 1/3 of it will be counted. So when you take -- if everything gets executed as planned for the rest of the year, most of the CIB loan will not be available.

David, this is Mike. I would say that's an exciting story because of the compelling value of the SIB. So we're really excited about the strong cash flows that we're generating. And although the SIB was -- or the CIB, I'm sure -- I'm sorry, was very attractive, we really believe about -- have faith in the SIB that we're executing.

Okay. That's helpful. And then on your CapEx, I know you guys announced a number of contracts. How much of the $700 million is now locked in at? I'm presuming it could be even at fixed rate. So a breakdown of that would be pretty helpful.

Sure. So we have locked down over 60% -- up to 60%, 65% of the CapEx. And the balance is open. We still have most of the contingency available. So our contingency is -- the percentage has grown from when we talked of last time of around 25% to over 30%. So it's over 60% locked up, and the balance is still getting done.

Okay. That's helpful. And maybe jumping the gun here. Do you guys have any update on the upcoming employee agreement for as much as you can disclose at this time?

David, yes, you're correct that we are currently in discussions with the unions -- both unions about the upcoming employee agreement. The current one expires at the end of July. Without being able to share any specifics, I can tell you that we are engaged with -- in productive conversations. And I would remind everybody that we haven't experienced a work stoppage here at Algoma in 30-plus years. So we expect to continue productive conversations in the weeks to come.

Our next question comes from the line of Anoop Prihar with Eight Capital.

Just back to the CapEx on the quarter for a sec. Of the [$93] million that you guys spent, can you give us a rough breakdown in dollar terms? How much was the plate mill and how much was the EAF initiative?

Most of it -- the plate mill is not much. Plate mill is getting spent this quarter. So it will be the EAF.

So the majority of that was EAF?

That's absolutely right.

Okay. And then just back to your previous comments, when you were giving the breakdown, Rajat, of the contingency remaining, I just want to make sure I understand the math. You said you have about 30% left. So does that mean -- is that 30% of the $700 million that's remaining? Is that the way I should be thinking about the buffer you have remaining in your spend?

No. It's 30% of the remaining CapEx that's not contracted yet. So as I said, 60%-plus has been contracted for on budget. And much of the contingency has not been used. So we are in a stage where the balance has a huge contingency available, which is over 30%.

So I'm a little confused. When you say 30%, 30% of what?

30% of the 40% remaining to spend out of $700 million.

Our next question comes from the line of Ahmad Shaath with Beacon Securities.

Just a quick one on the oil spill incident. If -- how should -- any color on that? Are you guys expecting maybe insurance to cover some of that? And how has been the discussions with authorities on the potential fines on that front, if any?

Thank you, Ahmad. We have had discussions with our insurance carriers. I can't share anything yet about what the final determination would be. And we also don't have any color around what the potential fines may be or the size of those fines. It was a very disappointing incident. And I would say that the source of the spill was safely contained. And all the appropriate officials were notified, and we're working through all the next steps required. And that's really all I can share right now. But thank you for the question.

I appreciate that. And then maybe back on the contingency front. So just remind us again, what was the total percentage of the contingency? And how much did you spend from that contingency?

So we've not -- it was 12.5% of the total project, and we have not spent much of that contingency. So much of that contingency is available, and that represents over 30% of the remaining spend, which is, let's say, 40% of the $700 million remaining.

Perfect. Perfect. So I think in well ahead -- within the budget. That's great to hear.

Our next question comes from the line of Alexander Jackson with RBC Capital Markets.

I'm just curious on costs, what you guys are seeing quarter-over-quarter from last quarter to the current and where you might be feeling any pressures and if there's any offsetting impacts that might be coming into play as well.

Sure, Alex. From a cost perspective, the pressure continues due to the inflationary increase in all commodities, whether it's refractory alloys, natural gas where it sits right now, power. So we expect to have the same pressure continuing in this quarter as well. The only other point I would make, which I have made earlier as well, that coal will start impacting us from this quarter onward. It's $100 increase on the coal pricing year-over-year based on the contracts that we have done, which is still much better than where the coal market is currently. So we will see the cost pressure continuing in this quarter as well.

And the only other thing to point out is that we have this downtime on the plate and strip mill, and that definitely will affect the working capital side as we'll be producing more in progress material and keeping it on the floor.

Got it. That's helpful. And then maybe just one follow-up. On the $100 per ton of coal increase, are you able to quantify a dollar per ton impact on your -- or dollars per ton steel impact on your operating costs from that increase specifically?

That's roughly 50% to 55% of the coal that goes to cost.

Okay. So at $50 per ton increase per ton steel basically from the coal increase?

Yes.

Our next question comes from the line of Kirk Ludtke with Imperial Capital.

Congratulations to Michael. You're leaving Algoma in great shape. Well done.

Thank you, Alex -- thanks, Kirk. Sorry.

With respect to the substantial issuer bid, can you maybe provide a little bit of background as to how you sized it? And more specifically, do you think it cleans up -- is it big enough to clean up any overhang in the shares?

Sure. So from a sizing perspective, I'll go back to the principles that Mike and Mike talked about, which is living within our means, allocating cash that we have generated, not that we will be generating in the future. So we looked at how much cash is with us as at March and looked at how much we need to spend to derisk our EAF CapEx, which is what we are pursuing, keeping cash for operations and the balance we are using to allocate to the best use possible. And considering where the stock is, and as you mentioned overhang, I think we are buying back the stock. So that's how the number came about as far as overhang is concerned. It's difficult to say whether this will take care of all the overhang or not.

Got it. That's helpful. You mentioned that you have -- you're seeing strong demand across a number of your end markets, auto, construction, oil and gas. Can you break that down a little bit? Maybe give us some color by end market, and most specifically, what you're seeing in auto?

Kurt, this is Mike. Don't have a lot of details of it for you other than -- I think part of it is, even though particular supply chains maybe struggling in some of these industries -- for instance, auto is a perfect example with some of their issues that they are facing in order to produce more units. As we look at the fundamental demand for those industries products, we remain pretty bullish on what that looks like. I'm talking in the auto example of the demand -- the unmet demand for automobiles by consumers. And you can see that in the order books for new cars as well as the healthiness of the used car market. So we continue to try to look beyond our customers into their markets and their demand, and that helps inform our current optimistic view of several of these fundamental markets that are important to our steel demand. Does that help?

It does. Can you talk about how far out you're taking orders?

Yes. So our order book is roughly 6 weeks, which I would characterize as more in line with our traditional lead times versus where we were a few months ago.

Okay. And lastly, the downtime that you're taking, how much time does that buy you? Do you -- can you get to the completion of the new facility before you have to take more downtime like that in the old mill?

Well, this -- so this downtime that we are taking, which is a month-long downtime on the plate mill, is to finish off the upgrade to the plate mill from quality perspective. And we'll be taking another downtime towards end of the year to increase the volume. So this is part of our plate mill modernization project, where we are we are going into different end markets by improving the quality and then improving volume as well to go to 700,000 tons. So another downtime taking later this year, and then we are upgraded on the plate mill side and no other specific upgrade contemplated at this point in time.

(Operator Instructions) Our next question comes from the line of David Gagliano with BMO Capital Markets.

I just have a couple of quick follow-ups. First of all, on the [6-month] lead time, is that the average between hot-rolled coil and plate? And if so, can you break down the difference between the 2 in terms of lead times right now? That's my first question.

David, it's the average per right -- and I really can't share anything beyond that. But it's roughly the average of our order book.

Okay. Okay. And then just one clarification. I apologize, I might have missed it, but I thought there was mentioned in terms of the interplay between the forgivable part of the SIF loan and the SIB, can you explain if that Dutch auction happens, obviously, assuming it does, how does that affect the SIF loan?

So it does not affect the SIF loan. That loan will be drawn as we go along. It only affects the CIB loan. And as Mike mentioned, that loan is something that contemplated this kind of a situation where there is more cash getting generated and getting used where the loan is not supposed to be drawn. So it only affects the CIB loan, the CAD 220 million. It does not affect the SIF loan.

Our next question comes from the line of Ahmad Shaath with Beacon Securities.

Just a follow-up on the plate modernization project. So looks like it's set to complete by November. So when should we expect you following the qualification with customers to start ramping up the shipments from the added volume?

Ahmad, the added volume really will depend on the excess steel that comes -- or the additional steel that comes with the EAF project. I think the current improvements and investment we're making in the plate mill in these 2 phases really allows us to address our quality position in the market and offer quality plate that was a challenge for us before in terms of levelness and other -- and descaling of the plate. So we're really excited about the quality of the plate we're going to be able to bring to the market with this modernization project. And we're already seeing early indications of the quality jump we're making even though we're very much still in ramp-up from the most recent outage. But the excess or the additional volume of plate will really -- that opportunity really comes with the excess or the additional EAF steel.

Ladies and gentlemen, we have reached the end of today's question-and-answer session. I would like to turn this call back over to Mr. Michael Garcia for closing remarks.

Thank you, Laura, and thank you again for your participation in our fourth quarter fiscal 2022 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 fourth quarter results later this summer.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation, and enjoy the rest of your day.