Algoma Steel Group Inc (ASTL) 2024 Q1 法說會逐字稿

Hello, and welcome to today's conference call to discuss Algoma Steel's Fiscal First Quarter 2024 Financial Results. My name is Doug, and I'll be your operator for today's call. At this time, I'd like to hand the call over to Mike Moraca, Treasurer and Investor Relations Officer for Algoma. Mr. Moraca, please go ahead.

Good morning, everyone, and welcome to Algoma Steel Group Inc.'s First Quarter Fiscal 2024 Earnings Call -- 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 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 also refer to the risks and assumptions outlined in Algoma Steel's First Quarter Fiscal 2024 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. Our fiscal year runs from April 1 to March 31 and our financial statements have been prepared for the 3 months ended June 30, 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 will now turn the call over to our Chief Executive Officer, Michael Garcia.

Thank you, Mike. Good morning, and thank you for joining us to discuss our fiscal first quarter results. As always, I will begin my remarks by addressing what truly matters most to us, the safety and well-being of everyone at Algoma Steel.

During our last quarterly call, we updated you on the tragic fatality of a contract worker at Algoma Steel on June 15. The Ministry of Labor was notified and attended the site to conduct its investigation, which remains ongoing. At Algoma, we believe in safety without compromise. And while our continued dedication has led to a significant improvement in our lost time injury frequency rate over the past decade, we remain committed to creating a safe zero injury workplace.

Next, I'll cover the key events and milestones during our fiscal first quarter and subsequent to its end as well as an update on the progress at our 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.

Our results for fiscal first quarter of 2024 came in modestly ahead of our previously disclosed guidance for both shipments and adjusted EBITDA. Our shipments of 569,000 tons were up 5.9% versus the prior year period. Our results reflect a quarter of solid operational execution even in the face of commodity price volatility, and we expect that momentum to continue throughout the fiscal year as we work in parallel to advance the investment and activity at our EAF project.

On our last call, we provided an update on the progress of Phase 2 of our plate mill modernization project, including the in-line shear installation, which is progressing ahead of schedule. I am pleased to report that the shear installation is now complete, and we expect to begin cold commissioning this month with hot trials expected by the end of this quarter.

We plan for higher plate production levels after commissioning. We are very excited about this given the continued robustness of our current plate market and the high price spread over hot-rolled coil. This higher production level will allow us to capitalize on this market opportunity and to build inventory ahead of the planned Phase 2 hot mill outage to upgrade the hot mill drives, currently scheduled for April of 2024.

Next, I'd like to update you on our progress during the quarter on our transformational EAF project. This will ultimately increase our throughput capacity by roughly 1/3, from 2.8 million tons per year of liquid steelmaking capacity today via the blast furnace route to 3.7 million tons employing dual electric arc furnaces upon completion. The higher liquid steel output is expected to match our expanded downstream finishing capacity as we increase production at our plate mill.

Importantly, this will improve overall product mix while simultaneously lowering our carbon emissions by approximately 70% when fully operational.

During the quarter, EAF expenditures totaled $74 million, bringing cumulative spend as of June 30 to $341 million or 40% of our expected total project cost at the midpoint of our unchanged project budget. The construction of the main steelmaking building is progressing on schedule, and we expect to begin receiving key equipment from Danieli this quarter. We continue to make meaningful progress securing the remaining portion of expected project cost as bid packages continue to come in.

Our expectations to begin commissioning in late calendar 2024 are also unchanged. Our start-up plan continues to include normal production from our existing steelmaking facility while ramping up steel production from our EAFs in calendar 2025, followed by a complete switch to EAF production.

We said on the last call, and I would like to reiterate today that we expect the completion of the EAF project will be funded through a number of existing capital resources, including cash on hand, cash generated through operations, a drawdown of excess working capital and the capital resources already available to us such as the federal SIF loan. Rajat will get into more details there. But given our strong balance sheet that includes no debt outside of government loans and with full availability under our ABL credit facility, our operations are well supported throughout this exciting transition.

Through the quarter, we demonstrated consistent and reliable operations. There is also no shortage of excitement here on site in Sault Ste. Marie as we see the EAF progressing rapidly and the future of our company becoming reality.

I'd like to once again thank all of our employees whose execution continues to deliver solid operational and financial results safely while simultaneously driving the EAF project forward. Now I will pass the call over to Rajat to go over our financial results for the quarter and give more details on the expected funding of our capital expenditures.

Thanks, Mike. Good morning, and thank you all for joining the call. I'll remind you again that all numbers are expressed in Canadian dollars, unless otherwise noted.

As Mike said, we had a solid quarter to start the fiscal year. Our first quarter results included adjusted EBITDA of $191.2 million or $336 per ton, which reflected an adjusted EBITDA margin of 23.1%. Cash generated from operating activity was $163.9 million. We finished the quarter with $300.6 million of unrestricted cash and our USD 300 million revolving credit facility remains undrawn, representing total liquidity in excess of $600 million.

As a reminder, the only remaining long-term debt on our balance sheet is in the form of government loans linked to our capital projects. And those loans have highly attractive terms that include the potential for partial forgiveness of principal as we reach certain carbon emission reduction targets with the shift to EAF steelmaking in the coming years.

I will now dive into the key drivers of our performance in the quarter. We shipped 569,000 tons in the quarter, up 5.9% as compared to the prior year period. Our plate and strip production continues to run well and despite normal seasonal maintenance in the second half of the year, including our annual vessel reline, we expect our shipment in each of the next 2 quarters to be roughly in line with our typical run rate achieved over the last several quarters.

Net sale realizations averaged $1,323 per ton, down 18.9% versus the prior year period. The decrease versus the prior year level primarily reflects overall softer market conditions. Plate pricing continued to enjoy a significant premium relative to hot-rolled coil during the quarter, driven by resilient demand, particularly from spending on infrastructure projects and durable goods.

As a reminder, we are the only discrete plate mill in Canada, and we look forward to the incremental additional tons from the plate mill in the second half of calendar 2023 as a result of the new shear installation Mike talked about.

Steel revenue in the quarter totaled $754.5 million, down 14% versus the same quarter of last year, reflecting the lower average realizations per ton of steel that more than offset the increase in shipments. On the cost side, Algoma's cost per ton of steel products sold averaged $950 in the quarter, up 3.3% versus the prior year period. The main drivers of the modest increase versus the prior year period include the cost of replacing internally produced coke with purchase coke and higher cost of other key inputs, which more than offset the positive impact of the increase in volumes.

Cash flow from operations totaled $163.9 million for the quarter compared to $276.6 million in the prior year period, but up by $68.5 million sequentially. Our inventories at quarter end was $759.3 million, up only 5.1% during the quarter, which would otherwise have been a large increase due to normal seasonal build patterns of what is typically our lowest level in March. We expect to continue releasing inventories throughout the year as quantities normalize with consistent production.

Now I would like to provide additional color on our funding plans for the EAF project. As previously noted, our outlook for total cost of the project remains in a range of $825 million to $875 million. Through the end of the quarter, we had spent $341 million, leaving approximately $510 million of investments remaining to reach the midpoint of our project budget. We are well positioned today when you look at our expected resources for those expenditures over the next 12 to 18 months. We have cash on hand of roughly $300 million, another $135 million of available capacity on our SIF loan and approximately $150 million of cash to be generated from drawing down excess working capital.

Combined, this exceeds the expected capital requirement to complete the project and does not include any borrowing on our ABL or any contribution from operating cash flow, highlighting the strong position we are in as we advance this transformative project. I would now like to turn the call back to Mike Garcia for closing comments.

Thank you, Rajat. Looking at the state of the North American steel market, pricing levels in the fiscal first quarter saw periods of volatility, with index pricing for U.S. Midwest hot-rolled coil ranging from approximately $850 to $1,200 per ton. Subsequent to the quarter end, prices have continued to decline to current levels in the low $800s. Plate pricing continues to demonstrate a significant premium as overall demand for plate products remains high, which in turn continues to benefit our average price realizations.

While the steel business involves inherent volatility, we address that volatility by serving a diverse customer base that provides selling opportunities across Canada and the U.S. We traditionally service roughly 150 customers in a calendar year and target a high percentage of contract sales. Those contracted volume commitments continue to 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.

While the forward curve shows some expectation of stability at prices modestly lower than current spot, we've seen time again how quickly things can change. Regardless of the swings in our end markets, we will relentlessly maintain our primary focus of delivering prudent financial discipline and operational excellence. This will ensure our ability to execute our EAF project, ushering 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. We are off to a solid start of our fiscal year and look forward to the rest of what promises to be a transformational year. At this point, we would be happy to take your questions. Operator, please give the instructions for the Q&A session.

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

Maybe just as a clarification, did you say that the volumes or shipments are expected to be similar in the next few quarters to the first quarter?

Yes. So it will be similar, not exactly to the first quarter, but if you look at the last several quarters, it will be an average of that. So similar but not same.

And what about with plate expected to increase? Is that still the expectation, plate volumes?

Yes, Katja, this is Mike. So the shear is in and we are currently conducting cold commissioning followed by hot commissioning. So by the end of this calendar year, we should start to see a 10% to 15% increase in plate volume. Now that's assuming we've done the work on the commercial side and we have the orders. And so some of that will be reflected in plate shipments. Some of it will be used to build inventory ahead of the outage next April. But the total increase will be in the 10% to 15% by the November, December time frame.

Is this a bit of the delay? I thought that was expected by third quarter calendar year?

No, I think it's consistent with what we spoke about in our last call. Rajat?

Yes, it was third fiscal quarter, what we mentioned.

Okay. And then maybe just on the cost side. How should we think about costs in the next few quarters?

So cost will be pretty similar to what we are seeing right now. There should be some reductions coming as we keep increasing our production on the coke batteries, our internal coke and start replacing it with the purchased coke, but that probably will come towards the end of the fiscal year. But for the next, let's say, 1 or 2 quarters, our costs should be pretty similar.

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

I just wanted to follow up on the last line of questions regarding costs. I seem to remember that a portion of it is tied to HRC prices or some sort of index type of steel as well as the IODEX for iron ore. I just would have thought that with steel prices coming down, at least in the next quarter or maybe next 2 quarters that your input costs would also follow that. So maybe you could help reframe how we should be thinking about costs in the following steel price environment?

Sure. So you're right, there is a portion of our contract that is linked to pricing and it has certain bands. So within a price range, it moves and then it stop. So -- and the other portion is based on IODEX. So with this -- with the price drop in IODEX, remaining same or increasing it, it more or less offsets each other for the quarter or for the coming period. So that's how iron ore will play. Scrap definitely will help because scrap is coming down and we expect other commodities -- commodity price, if they come down, if price remains at lower level in the following quarters, we should see some reduction coming, some slight reduction coming. But it totally depends on how the commodities plays out in the next couple of quarters. But it should change slightly, but that's why I said it's very similar, our cost quarter-over-quarter and for the next 1 or 2 quarters, and then we will see some reductions coming just because of coke as well as coal negotiations that will happen and it will start impacting in the next year. Does that give you some color?

Yes. That's helpful there. And I guess, if I think about your breakeven cost structure, just given that framework that you laid out there, are you guys now closer to $700 a ton of breakeven on sheet prices?

Yes, it should be in that. You're closer to that vicinity, maybe slightly lower, but that's where it is as we see the cost now.

Got it. Okay. And then last one for me. One of your competitors here in Canada called out some customers deferring shipments just given the uncertainty that they're seeing in the marketplace, whether that's related to auto or not. You guys do have a 30% exposure to automotive. So are you guys starting to see more of that from the customers where there may be some pushback on taking delivery?

David, not really. We don't have any large customer sector where we're experiencing that.

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

Most of my questions have been answered, but maybe back on the cost structure. So is it fair to say that we should expect maybe some downward pressure on unit margins per ton, but not a lot, given the comments you got to have heard on what the cost on the pricing side?

Yes, there will be downward pressure, specifically from the pricing side as you've seen that the price has dropped from peak to low by $400 and the market is at $800, but frankly, it's -- CRU is at $800, but the market is lower. So there's definitely pressure from margins coming from the pricing side, which will impact the quarter.

Now our playbook is good and the plate pricing is good, which offsets it as well as the contract position that we have helps us to maintain a decent margin for this quarter. And then it's -- from a forward perspective, it depends on how the pricing shapes up.

Got it. That's very helpful. And maybe I'm back on your commentary on the volume side. If I look at the last several quarters, the range is wide -- is pretty wide. I mean we're looking at from 430 to 570 tons, if we look at the range over the last several quarters. So are you being able to give us maybe a little more color on expected volume? Is it just the last 2 quarters? Because if I go back to Q2, Q1 last fiscal year, the volumes were -- obviously, there was operational issues, but the volume was down.

Yes. Ahmad, I think it's a good point. Just take the outliers quarter. There were a couple of quarters which were -- which are outliers, so take them out and then you average out, you should come to a good number.

(Operator Instructions) Our next question comes from the line of Lucas Pipes with B. Riley.

My first question is, Rajat, I think you made some important comments regarding cash flow in the second half of the year in your prepared remarks. And I just wanted to make sure I fully understood those. So if you could maybe go back and just highlight your cash flow expectations for the second half of the year. I would really appreciate it.

Sure. So I did not specifically provide any guidance on the cash flow for the second half. But what I did say was that based on the cash that we have, and I was talking about electric arc furnace funding. So based on the cash that we have on hand, the SIF loan that is yet to be received in cash of $135 million and also the important factor, which is drawdown of our inventories, there is roughly $150 million of drawdown that we are expecting over the next several quarters. That will be enough to manage the spending, the remaining spending on the EAF project without even considering the operational cash flow that we will generate during that period. So that's what I commented on, which gives us enough liquidity to manage the EAF project.

That is very helpful. And congratulations on that. My second question is regarding coal procurement and it's a two-pronged question. The first is how do you think about co-procurement in light of your EAF transition over the next few years? And then secondly, some of your North American peers have noted expectations were significantly lower coal prices in 2024. So I wondered if you could comment on that.

Sure. So I'll start with the second question. So the expectation is the same that the coal pricing should drop for next year. When you look at what's happening in the market, we've seen a drop of 10% to 20% year-over-year from index perspective. And we are expecting that the coal price should come down. Our negotiations will start soon, and then we'll finalize for the following year. As far as the buy is concerned and the period of the buy, we've laid out a transition plan where we do the commissioning end of next year and then have a ramp up over a 12-odd month period, during which we will continue making steel for both the routes and then we -- based on availability of power and stability of our furnaces and availability of prime scrap, we will be running our blast furnace, which means coke battery as well for a little longer, while we are transitioning through and then ramping it down.

So we will be running our batteries and the blast furnace for the next couple of years. And the coal contracts are normally annual. So we will be renewing them carefully as we go along. But our first intention is that we want to exclude the purchased coke that we do right now and be self-sufficient on our coke production during the interim period and then start ramping it down.

That is very helpful. I really appreciate the color. I'll try to squeeze one last one in. On the end markets, can you maybe run down where you're seeing strength -- persistent strength, where you're seeing more pockets of weakness. We would really appreciate your perspective on the demand side?

Sure. I think before I go into any specific markets, on demand, we're roughly 4 weeks out in our order book on sheet, a little longer, 5 to 6 weeks in plate. Year-to-date, the auto build rates have been tracking as expected and are positive. Obviously, there's a lot of potential uncertainty with the OEM contract negotiations that are taking place and a September 14 expiration date of the current contract. It's probably a little bit too involved to try to predict the -- all of the knock-on effects on our order book from a potential labor disruption, but obviously, a lot of steel is going into automotive. So if you have an industry slowdown, that's going to have some effects.

On the distribution side of our business, we see the majority of our customers continue to buy mostly when they have back-to-back needs of sales. So they're looking and they continue to manage their inventories closely. They've been doing that and that's the behavior we've seen for a while now. The coil market, although we continue to fill our coil order book, you can probably tell from the way that coil pricing has moved over the last several weeks that we still see a little slowness there, although our order book is still full, but that's mostly driven by distribution.

Our markets around infrastructure build, where we send a lot of plate, continue to be pretty firm. And we see that in our plate demand, in our plate order book and obviously in the plate pricing. So that's kind of some of the landscape that we're seeing on the commercial side, Lucas.

There are no further questions in the queue. I'd like to hand the call back to management for closing remarks.

Thank you again for your participation in our first quarter fiscal 2024 earnings conference call and your continued interest in Algoma Steel. We certainly look forward to updating you on our results and progress when we report our fiscal second quarter results scheduled for November. Thank you very much.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.