管理層發言
Greetings, and welcome to the Algoma Steel Group Fiscal First Quarter 2025 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. As a reminder, this call is being recorded. I would now like to turn the call over to Michael Moraca, Vice President, Corporate Development and Treasurer. Thank you, Michael. You may begin.
Good morning, everyone, and welcome to Algoma Steel Group Inc.'s first quarter fiscal 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 website. I would like to remind you that comments made on today's call may contain forward-looking statements within the meanings 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 to refer to the risks and assumptions outlined in Algoma Steel's first quarter fiscal 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. Our fiscal year runs from April 1 to March 31, and our financial statements have been prepared for the quarters ended June 30, 2024 and 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 over the call to our Chief Executive Officer, Michael Garcia. Mike?
Thank you, Mike. Good morning, and thank you for joining us to discuss our fiscal first quarter 2025 results. Ensuring the safety of our employees remains a core value and top priority for our company. This unwavering commitment led to significant improvements in our lost time injury performance during fiscal 2024, with continued focus into the current fiscal year. Our focus on safety is more crucial than ever, as our site continues to be a hub of activity with the EAF project advancing. This dedication is further emphasized in Algoma's second annual ESG report released this past Monday, which delves into a wide range of topics across the spectrum of environmental, social and governance in greater detail. The report highlights our ongoing efforts not only in maintaining safety standards, but also in advancing our broader ESG commitments, reinforcing our role as a leader in sustainable and responsible business practices.
Next, I'll cover the key events and milestones during our fiscal first quarter as well as give an update on the progress at our transformative EAF project. I will then turn the call over to Rajat for a deeper dive into the numbers and a discussion of our strong liquidity and balance sheet before closing with an update on market conditions. There are a few important themes I would like to get across on this call. First, our results for the quarter reflected overall conditions in steel markets, resulting in lower volumes and realized prices. Shipment volumes were also softer, reflecting the planned outage at our plate and strip facility in April. We prioritized plate production coming out of the outage and expect that we will continue to ramp up volumes over the next several quarters. Second, our balance sheet and liquidity are strong, having been bolstered by our USD 350 million notes offering in April, leaving us with cash at quarter end of almost $500 million and total liquidity of over $800 million.
We are well funded to complete our EAF project. And finally, the EAF project is approaching a truly exciting milestone, nearing the planned beginning of commissioning of Unit 1 in our calendar fourth quarter. Every day that goes by reduces the risk associated with the project and brings us another step closer to being one of the greenest producers of steel in North America. Now let me give you some additional color on those key themes. Our results for fiscal first quarter of 2025 were in line with our previously disclosed guidance for both shipments and adjusted EBITDA. They reflected a continuation of the challenging market conditions we have seen this year in steel pricing. We are laser-focused on ensuring the safe operation of our existing legacy facilities, some of which are over 70 years old, as we make the transition to EAF steelmaking. All told, the combination of lower shipments and softer realized steel prices led to an overall decline in revenues, adjusted EBITDA and cash flow generation versus the prior year period.
As discussed on our last call, during the quarter, we successfully completed substantially all of the remaining upgrades related to the modernization of our plate mill. This upgrade involves installing new equipment across the facility that has enhanced product quality and is resulting in a steady ramp to higher plate shipments. Despite the facility being offline for 3 weeks, our plate shipments in the first fiscal quarter of 2025 were approximately 61,000 tons. The second phase of our 2-part plate mill modernization project originally called for a final multi-week outage later this year. However, our team was able to accelerate additional work during this outage, so that the vast majority of the modernization project at the facility is now substantially complete. We expect any remaining items to be addressed with other planned maintenance activities over the coming year. We expect our fiscal second quarter plate production to be close to 90,000 tons as we execute a steady ramp over the balance of the fiscal year towards our expected annual run rate capacity of over 650,000 net tons.
With our previously announced exit from the wide coil market during our fiscal 2025 year, we will be in a position to prioritize plate production and sales, taking advantage of our position as Canada's only discrete producer of plate products. This should result in a more favorable product mix that is expected to drive meaningful margin enhancement. With the maintenance outages on the blast furnace and the plate mill upgrade complete, our operations are running normally, and we continue to expect solid production levels in the second half of calendar 2024. In April, we completed a USD 350 million note offering which bolstered our liquidity position substantially as we enter the home stretch of our EAF project construction. Cash on hand at quarter end was almost $0.5 billion, and when combined with our undrawn credit facility, gives us great flexibility and security to execute our strategic growth strategy.
Now let me give you an update on our progress during the quarter on our electric arc furnace project. This is a truly exciting time in Sault Ste. Marie as we continue to see the skyline change at the site of the EAF, with the exterior sheeting closing the building in anticipation of commissioning activities commencing by the end of this year. With EAF steel production expected by the end of the calendar first quarter of next year, we will begin to ramp towards a shipping capacity of approximately 3 million tons per year. During the quarter, cumulative investment in the EAF project reached $611 million. To date, we have committed contracts totaling approximately $850 million, with over 90% tied to fixed price contracts. Progress to date on both the construction of the project and the contracted portion of work yet to be completed has significantly derisked the project budget. We expect that all remaining contracted work will be settled during the current quarter.
As a reminder, our start-up plan continues to include normal production from our existing steelmaking facility while ramping up steel production from our EAF in calendar 2025, followed by a complete switch to EAF production. In summary, in very tough market conditions, we focused on what was within our control in the quarter, operating our existing facilities, safely completing the important upgrades at our plate mill and advancing the EAF project on schedule and on budget. Near-term pricing weakness can't dampen our excitement for what's happening at our company and the huge step forward it represents for Algoma Steel and our community. I'd like to once again thank all our employees for their hard work, dedication and professionalism. Now I will pass the call over to Rajat to go over our financial results for the quarter. Rajat?
Thanks, Mike. Good morning, and thank you all for joining the call. As a reminder, all numbers are expressed in Canadian dollars unless otherwise noted. Our first-quarter results included adjusted EBITDA of $37.7 million, which reflects an adjusted EBITDA margin of 5.8% and cash generated from operating activities of $12.5 million. We finished the quarter with a strong balance sheet, including $493 million of cash and availability of $351 million under our revolving credit facility. Now let me dive into the key drivers of our performance. Steel revenue of $597 million in the quarter, down 20.8% versus the prior year period. We shipped 503,000 net tons in the quarter, down 11.6% versus the prior year quarter. The decrease in shipments was largely attributable to the planned maintenance outage at our plate and strip facility as we work to complete the final stages of our plate mill modernization project.
Net sales realization averaged $11.87 per ton, down 10.4% versus the prior year period. The decrease versus the prior year level reflects weaker market conditions, partially offset by improvement in our value-added product mix as a proportion of steel sales. On the cost side, Algoma's cost per ton of steel products sold averaged $10.69 in the quarter, up 12.5% versus the prior year period. The main drivers of the increase versus the prior year period include lower volume, the cost of replacing internally produced coke with purchased coke and higher natural gas. Cash flow from operations totaled $12.5 million for the quarter, as compared to $163.9 million in the prior year period. The main drivers of the decrease in cash flow in the quarter were lower operating income. Inventories at the quarter end were $800 million, down modestly from $808 million at the end of the 2024 fiscal year. We remain focused on driving down working capital levels and continue to expect a release of at least $100 million in fiscal 2025.
Next, I'll remind you of the financing activity we completed in early April. Our wholly-owned subsidiary, ASI, issued an aggregate of USD 350 million of senior secured second lien notes due April 2029. This move enhanced the strength and flexibility of our balance sheet and reflects the positive view that credit investors have of our company and their confidence in our strategic direction and financial stability. All told, the company had cash of $493 million and unused availability under the revolving credit facility of $351 million, representing approximately $845 million of liquidity plus approximately $45 million available on our strategic innovation fund loan supporting the EAF project. One additional note on the insurance recovery related to the coke-making corridor collapse in January. We continue to work closely with our insurance providers and adjusters as they complete their assessments.
While claims of this nature require a detailed adjudication process, we have made progress on the property damage component and expect to receive an advanced payment of $25 million in the current quarter as we work through the balance of both the business interruption and property damage claim. Now I'll turn the call back to Mike Garcia, our CEO, for closing remarks.
Thanks, Rajat. Looking at the state of the North American steel market, prices have generally weakened through the spring and into the summer. While prices have shown signs of stabilizing somewhat since late July, we do expect that these prices will generate headwinds on earnings performance over the near term. Softer market conditions in the last few months reflect ample spot supply, short lead times, economic uncertainty and cautious buying during the typically slower summer buying season. As we wait for these headwinds to abate, we will continue to focus on what we can control: operating our facilities safely and positioning ourselves to best capture market opportunities as they arise. We have been on this journey to bring electric arc furnace steelmaking to Sault Ste. Marie for close to 5 years. Our entire company is energized as we approach this major milestone. In the months ahead, we will continue to relentlessly focus on the safe operation of our existing facilities while executing the commissioning of our transformative EAF project.
Our strategic vision in undertaking this endeavor is expected to unlock significant shareholder value while delivering some of the greenest steel in North America. Thank you very much for your continued interest in Algoma Steel. At this point, we would be happy to take your questions. Operator, please give the instructions for the Q&A session.
分析師問答
Thank you. Thank you. Our first question is from David Ocampo with Cormark Securities.
Maybe first one here for Rajat. We're getting closer to the EAF coming online. I was wondering if you could help us understand the duplicate costs that you guys will incur during the hybrid phase? And then the second part of the question is what do unit economics look like once we're a full EAF operator? Is that scrap plus $200 to $220 of conversion cost? I think that's a number you've alluded to in the past. So just hoping that you could refresh us on those metrics.
Sure, David, and thanks for the question. So as we transition through the EAF, the major cost change that will happen while we are running in the transformative mode is the labor cost from a fixed cost perspective. And then the difference between purchasing scrap or producing internally will affect our costs. The way we see it is that next year when we start producing from both the furnaces, with the blast furnace running at its current capacity and the EAF adding tons as we ramp up, our cost on a per ton basis will come down because there will be more volume. But on an absolute basis, the fixed costs will remain relatively similar. Variable costs will vary based on some of the index contracts that we have for scrap purchases. But on a fixed cost basis, it will stay relatively similar to what we have right now because the number of people that we need to run the furnace is already included in the current cost you’re seeing; they are getting trained, writing SOPs, and so on. So our cost will, on a per ton basis, decrease as we start producing and shipping more during the transformative period. When we fully transition to only electric arc furnace, there will be substantial savings on the fixed costs as people will align with the operational capabilities. We will maintain that scrap plus $200 to $220 in a very similar range, as I mentioned earlier, from a full cost perspective.
And I think if we're thinking about the reduction in headcount, I think it was close to 1,000 employees, if I'm not mistaken. Can you update us on how that's going to be achieved? Or is there going to be sizable transition costs as it relates to reducing headcount?
David, this is Mike. Yes, I mean, the most impactful savings or changes that will happen from a headcount perspective will be when we no longer operate our blast furnace and coke ovens. There will be some smaller adjustments in some of the supporting departments, such as maintenance and some of the infrastructure support departments. But your headcount number is about right. From an execution standpoint, it's relatively straightforward when you no longer run an asset or department that is well laid out in the collective bargaining agreement what happens to those employees. As they leave the company, they retain some recall rights within the collective bargaining unit for a period of time. The cost of making that headcount reduction is outlined in the CBAs, and we have good visibility to it.
Then Michael, while I have you, just on the $25 million that's left to contract, what's the risk that you guys potentially go over budget? Just wanted to know what the worst-case scenario would look like either order of magnitude or even what could go wrong.
Yes. So we've made commitments and put contracts in place representing CAD 850 million. Our goal and expectation is to place the remaining commitments and contracts needed for completion of the project within the remaining budget of $25 million. We've got a small number of contracts to place that will complete the installation and construction of the facility. All the equipment is already on site. Everything is being installed. We're in a busy phase in terms of project construction and installation. The exterior of the building is largely complete, the tie-in to the adjacent operations is largely complete. Transformers for the first EAF furnace are in place, and they are being commissioned as we speak. The intention of the team is to get those last installation and construction contracts placed within the budget. About less than 10% of the total budget and commitments or contracts are time and material.
So there's always some risk involved with time and material contracts if more time or more materials are used than planned. So we're managing that closely. Again, that's probably a portion of the entire budget. That's around $60 to $70 million of the total cost. Therefore, the risk is inherent in that number. At this point, we're in the home stretch of the project. We're focused on execution and placing these last contracts for installation and construction. Our aim is to finish within the $875 million target. It's hard to quantify the risk accurately, but we're concentrating on completing this project within budget.
Okay. It sounds like the time and materials is tracking in line with your expectations so far. Is that correct?
Yes. We brought in a project coordinator to assist with managing that time and material aspect as well as the overall scheduling and pacing of all the different construction and installation activities going on throughout the project site. They have been on board for over 1.5 years and have been a great addition to the team.
Our next question is from Katja Jancic with BMO Capital Markets.
Maybe starting on the plate ramp-up. So in the second quarter, you expect 90,000 tons. How should we think about the ramp-up in the rest of the year?
Well, I think from a production standpoint and a capability standpoint, we feel really good about where we are. The mill came out of the April outage, which lasted 22 days, and it came up very smoothly. We're very pleased with the capabilities and performance of the mill. We are still working on some of the shear line pacing to ensure it performs well, but that's not limiting our actual shipments or production because we have not yet shut down the gas cutting line. From a production standpoint, we are happy with our current position. The main challenge right now is the market. We're in a soft market, and the commercial team is working hard to keep our customers supplied. While we are receiving positive feedback on the quality and delivery performance of our plate mill, demand is not particularly robust at the moment. There's still a significant spread on plate pricing versus coil, so we feel good about that. However, we are facing a little soft market right now. Therefore, our current expectation for that 90,000 ton quarter remains in place. For ramp-up towards the end of the year, we will likely be a little lower in the next quarter due to a planned small maintenance outage in the mill. This summarizes our plate business outlook.
And can you remind us how much of your plate volume goes into the U.S. market?
About 30%. And that's not strictly 30% month after month, but around 30% throughout the whole year.
And then maybe, Mike, you mentioned initially, pricing environment is soft. We're currently in a seasonally slower demand period. How should we think about near-term shipments in total? Last quarter in part, you were impacted by the plate maintenance or upgrade. What about this quarter? How should we think about shipments?
Yes, Katja, thank you. I think they'll be directionally higher. The operations are performing well. The commercial team is working diligently to keep our customers supplied. While we understand the current pricing landscape, I don't see any immediate catalysts for increased pricing over the rest of the year, similar to expected demand. However, shipments will certainly trend higher in the upcoming quarter. This is a period where we're focused on completing the EAF project and we have the liquidity needed to finish it on time and on budget, even under current market conditions.
And maybe if I just make one last one. You announced that you're relaunching the NCIB. Will this — would you be willing to use some of the available liquidity given that it's pretty large right now? Or is this going to be tied more to free cash flow generation?
Well, I think we wanted to reinstate the NCIB to provide us the flexibility to do both: return capital to shareholders and buy shares of the company when we think it's a good opportunity. We're mindful of our liquidity position and the need to finish the EAF project while continuing to execute our strategic transformation. However, we always keep our capital allocation strategy in mind. The NCIB being in place provides us the flexibility to pursue those objectives.
Our next question is from Ian Gillies with Stifel.
Good morning, everyone.
Good morning, Ian.
As you think about using the NCIB and whether the stock is expensive or inexpensive as a baseline, do you think about your production being 2.2 million tons, 2.7 million tons or something closer to 3 million tons as a baseline for setting that value of when to decide whether the stock is inexpensive or not to go and use that?
Well, I mean, that's a great question. We are building this company to be a 3 million plus finished goods steel company focused on plate and DSPC. That's the value we are creating, and that will be enabled by completing these EAF furnaces and successfully starting them up in 2025 and then reaching 2.4 million tons of EAF production sometime in 2026. We've secured the power to achieve that, so there are no limitations from the power perspective. That's how we kind of think of the value we are creating and our view on the company's valuation. Although we aren't there yet, we need to complete the project and initiate production. Nevertheless, I believe we are in an exciting position as we approach making EAF steel in a little over 6 months.
And Ian, just another comment. I think our valuation is currently low, which is not surprising. It will increase as we complete our EAF, reflecting typical trading levels. We are always focused on what Mike said, which is to complete this project while ensuring adequate funding to accomplish it.
As we move into calendar '25, Rajat, can you help us think about some of the tax benefits from turning on the EAF? I would presume there's a lot of capital cost allowances and the like. Should cash taxes impact be quite low next year or lower?
You're absolutely right. As we commission and capitalize, we will benefit from accelerated depreciation in Canada, where we can take most of it in 2 years. Consequently, our cash taxes will be lower, and we will receive that benefit over a period of 2 to 3 years, depending on how the economy is performing. Therefore, our taxes will be reduced.
And then last one for me as it pertains to EAF and power. Is there any sort of detailed update you can provide on the status of where you're at with the public utility commission and getting final approval to build that power line? I thought it was something that was supposed to come through this summer into the fall.
Yes. We expect the final determination, official approval from the Ontario Energy Board of PUC's leave to construct application either at the end of August or early September. We've been in very close contact with PUC as they prepare the application with OEB as they review it. We have been tracking their process closely, and there have not been any issues or extra questions from OEB or interveners opposing the project. However, it does take time for the OEB to conduct a thorough examination of the application and issue a positive finding. Once that is confirmed, construction progress will begin, which we believe will be completed in 2027. Once that local line is finished in Sault Ste. Marie, we will have sufficient power to produce 2.4 million tons of electric arc furnace steel without requiring hot iron from our blast furnaces. Following the completion of the local line, we will have enough capacity to produce 3 million tons of EAF steel. This will come from increased grid power and continued operations of our Lake Superior power plant. The final stage will involve completing transmission lines across the Ontario province to enable us to achieve that production capacity without relying on our captive power plant, which will help lower our costs and our carbon emissions profile.
And maybe just a follow-on, if I may. Does that mean at some point, perhaps it's a longer-dated item that LSP becomes a potential monetization opportunity to service some extra value?
I believe so. The value of maintaining the power plant will depend on the overall stability of the Ontario grid and how the system operator and the OEB evaluate that power plant's role in ensuring power availability. As discussions unfold, I think there will be value in maintaining the plant as part of the overall energy generation framework in the province to provide 110 megawatts when required by the system operator.
Thank you. There are no further questions at this time. I would like to hand the call back over to Michael Moraca for any closing comments.
Thank you. Thank you again for your participation in our first quarter fiscal 2025 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 second quarter results scheduled for November. Thank you very much. Have a good day.
This concludes today's conference call. You may now disconnect your lines. Thank you for your participation.