Algoma Steel Group Inc.

Greetings and welcome to the Algoma Steel Group, Inc. second quarter 2025 earnings call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mike Moraka, Vice President, Corporate Development and Treasurer, Thank you, sir. You may begin.

Good morning, everyone, and welcome to Algoma Steel Group Inc.' 's second quarter fiscal 2025 earnings conference call. Leading today's call are Michael Garcia, our Chief Executive Officer, and Rajat Marwa, 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 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 websites. With that in mind, I would ask everyone on today's call to read the legal disclaimers on slide 2 of the accompanying earnings presentation and to also refer to the risks and assumptions outlined in Algoma Steel's second quarter fiscal 2025 management discussion 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 1st to March 31st and our financial statements have been prepared for the three and six months ended September 30, 2024 and September 30, 2023. Furthermore, today we are announcing that our Board of Directors has approved a change in Algoma's fiscal year end from March 31st to December 31st starting this year. This will result in a period of March 31st to December 31st being reported as a nine-month reporting period. We plan to provide reclassified historical financial information in the first quarter of 2025 to assist investors in evaluating the impact in the change in fiscal year we'll have on reported annual operating results for the years ended December 31st, 2023 and 2024. 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. Mike.

Thank you, Mike. Good morning and thank you for joining us to discuss our fiscal second quarter 2025 results. Over the last several quarters, our relentless focus on employee safety yielded measurable results demonstrated by our improved lost time injury performance. With construction of the EAF project reaching peak levels of activity, our commitment to workplace safety has never been more vital. We continue to prioritize the well-being of every team member, Reinforcing safety is not just a corporate value, but a fundamental aspect of how we operate. Next, I'll cover key events and milestones during our fiscal second quarter, as well as give an update on 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, we delivered solid operational performance in the quarter, partly blunting the impact of continued soft conditions across global steel markets. Second, our balance sheet and liquidity are strong, with cash at quarter end of over $450 million and total liquidity of $800 million. We are well-funded to complete our transformative EAF project in the coming months. And finally, we have further de-risked the EAF project, with substantially all remaining items now contracted as we enter the start of commissioning activities this quarter. Now let me give you some additional color on those key themes. Our results for fiscal second quarter of 2025 were in line with our previously disclosed guidance for both shipments and adjusted EBITDA. They reflect a continuation of the challenging market conditions we have seen this year in steel pricing, which touched year-to-date lows during the quarter as uncertainty around the U.S. election, the pace of interest rate cuts, soft demand, and overall economic factors weighed on our customers' buying behavior. All told, softer realized steel prices and lower shipments led to an overall decline in revenues, adjusted EBITDA and cash flow generation versus the prior year period. Our plate shipments in the second fiscal quarter of 2025 were approximately 73,000 tons, up from 61,000 tons in the fiscal first quarter. Market conditions impacted our expected plate shipments. However, our production was in line with our expectations of approximately 90,000 tons. We were able to grow market share despite poor market conditions, and we were able to rebuild strategic inventories for product categories that will help us improve delivery performance as we continue to position Algoma as the North American leader in customer service. While there are no clear signals of the market improving in the near term, we plan to continue ramping up plate production over the balance of the fiscal year towards our expected annual run rate capacity of over 650,000 net tons. We are Canada's only discrete producer of plate products and the completed modernization and associated quality and volume improvements should result in a more favorable product mix going forward that is expected to drive meaningful margin enhancement. Market conditions remain challenging. However, we remain focused on what we can control, including the consistent operation of our facility and unwavering focus on our customers. We are entering our normal seasonal maintenance period, but we don't expect any unusual impacts to production and should see directionally higher shipments in the third fiscal quarter. Now let me give you an update on our exciting progress during the quarter on our transformational electric arc furnace project. With the facility now towering over our site, we are in the busiest phase of the project with nearly 500 specialized trades contractors on site. Critical equipment installation is well underway, including our 550-ton cranes, our fume treatment system with over 2,500 feet of large-diameter piping, and our automated scrapyard cranes. Critical electrical infrastructure has been installed, including our Daniele Q1 power systems and our EAF substation, which has now been energized. We have told you that we expect to commence commissioning activities by the end of this calendar year And I'm proud to say we remain on track for that important milestone. We have selected and staffed the EAF operating team who will be tasked with executing commissioning activities beginning as expected in December. And we remain on track to deliver first steel production by the end of the calendar first quarter of next year. When both furnaces are up and running, we expect to reach a steady state shipping capacity of approximately 3 million tons per year. 35% higher than current production levels. Every bit as important as the project being on time is the milestone we reached with regard to contracting activity for the remaining construction. As you all know, we have been advancing the project during what has been a period of sustained high inflation, particularly for labor and materials associated with large industrial construction projects. Our project team has worked closely with all stakeholders, including major equipment suppliers and subcontractors to de-risk the project at every turn. I'm proud to share today that we have contracted substantially all the remaining work on the EAF project. As we continue to work towards the completion of construction and commissioning of both EAFs, we expect to finish the project within 5% of the most recent budget guidance. We are also excited to announce that Algoma's EAF project is eligible under Ontario's Ministry of the Environment Conservation and Parks Emissions Performance Program. Under this program, Algoma has applied for and expects to receive reimbursement for carbon taxes paid since 2022, driving down the net cash cost of the EAF project and further enhancing the strength of our balance sheet and liquidity. Specifically during the quarter, cumulative investment of the EAF project reached $672 million, and to date, we have committed contracts totaling approximately $870 million, with over 90% tied to fixed-price contracts. The transition to EAF steelmaking involves the support and partnership of many agencies and companies. In August, we were pleased to see PUC Transmission and Hydro One each obtaining authorization pursuant to the Ontario Energy Board Act to construct a new 230 kilovolt transmission line and related transformation components in Sault Ste. Marie. The combined project improves the city's access to Hydro One's planned regional grid infrastructure upgrade as previously prioritized by the province of Ontario. No capital contribution from Algoma will be required for these upgrades. This enhancement is part of phase two of the transition to EAF steelmaking, where power required for the two EAFs will come from the grid, supported by our own Lake Superior power plant. As a reminder, our startup plan continues to include normal production from our existing steelmaking facility, while ramping up steel production from our EAFs in calendar 2025, followed by an eventual switch to full EAF production. This provides us with operational flexibility as we ramp up the EAF furnaces to full production. In summary, in very tough market conditions, we focused on the safe operation of our existing facilities, our customers, and the planned ramp-up of plate production, finalizing our contracting for the remaining components of our EAF project and taking the first steps toward the on-time start of commissioning activities for the EAF project. As I said last quarter, the near-term weakness in steel markets can't dampen our excitement for what's happening at our site and the huge step forward it represents for our company 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 second quarter results include adjusted EBITDA of $4 million, which reflects an adjusted EBITDA margin of 0.6%. This includes the benefit of net insurance proceeds totaling approximately $28 million, which I will explain in more detail after. Cash generated from operating activities totaled $25.4 million, We finished the quarter with a strong balance sheet, including $452 million of cash and availability of $348 million under a revolving credit facility for total liquidity of approximately $800 million. Now let me walk you through the key drivers of our performance. Steel revenue was $539 million in the quarter, down 19% versus the prior year period. Steel shipments were 520,000 net tons in the quarter, down 5.2% versus the prior year quarter. The decrease in shipments and revenue was largely attributable to soft market conditions and depressed pricing. Net sales realization averaged 1,036 per ton, down 14.6% versus the prior year period. The decrease versus the prior year level reflects weaker market conditions partially offset by improvements 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 1032 in the quarter, up 1.1% versus the prior year period. The main drivers of the increase versus the prior year period include lower volumes and the increased use of purchased coke. Inventories at the quarter end were 793 million, down modestly from $808 million at the end of the 2024 fiscal year. We remain focused on driving down working capital levels. From a timing perspective, during the December quarter, we will grow inventories at a lower level than seen in previous years, and we expect a release of at least $100 million of total working capital by March 2025, as previously discussed. One additional note on the utility corridor incident from last January. During the quarter, we received an advance from insurers related to property damage. You will see approximately $32 million insurance proceeds flowing through our financial statement as other income during the quarter, offset by approximately $4 million of costs associated with the outage. We continue to work with our adjusters on recovering funds for the balance of the property damage and business interruption claims. I'd now like to turn the call back over to Michael Garcia for closing comments. Mike?

Thank you, Rajat. Looking at the state of the North American steel market, demand and pricing remain depressed prior to the U.S. election, contributing to overall economic uncertainty. During the past quarter, index pricing touched year-to-date lows in the mid-600s. While we saw some modest price improvement, it again moved lower and has traded sideways over the past few weeks, potentially a reflection of market participants sitting on the sidelines awaiting a result from the U.S. election. We are optimistic that post-election steel prices will gain ground. We applaud Canada's recent imposition of tariffs on Chinese steel and aluminum as it aligns Canadian trade policy more closely with the United States. fostering a unified North American approach that strengthens the regional steel market by mitigating competition from unfairly traded overseas imports. In the near term, we do expect that current prices will continue to generate headwinds on our earnings performance on account of our lagging contract order book. As we wait for these headwinds to abate, we will continue to focus on what we can control, operating our facilities safely, servicing our customers and positioning ourselves to best capture market opportunities as they arise, all while executing the completion of construction and commissioning of the EAFs. It's no exaggeration to say that in the 120-plus year history of Algoma, we are in the most exciting phase of our existence, transitioning from traditional blast furnace steel production to being one of North America's greenest producers of steel, This is further supported by recent modernization investments across the steelworks, including Canada's only discrete plate production facility. We will significantly expand our production capacity, dramatically improve our environmental footprint, energize the local economy, and unlock tremendous value for all of our stakeholders. I'm proud of what the team has accomplished, their dedication to safety, and their focus on enhancing every aspect of our operations. The last several years have been busy ones in Sault Ste. Marie, and we are truly excited for what the future holds. 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.

Thank you. We'll now be conducting a question and answer session. In the interest of time, we ask that you please limit yourself to one question and one follow-up. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the start keys. One moment, please, while we poll for your questions. Our first question comes from the line of Katia Jancic with BMO Capital Markets. Please proceed with your question.

Hi. Thank you for taking my questions. Maybe starting on the working capsule, just to clarify, Rajat, I think you said that in this current quarter, the build is not going to be as much as in the recent past. Can you talk more about what's driving that? Because I would assume that it would be higher given the EIF start.

Hi, Kacha. So the EF startup will start the first heat and the beginning of the EF startup will happen end of March sometime in the next quarter. So we are not building much material specifically for EF. And for the blast furnace and coal, we already carry inventory and we are trying to manage that. So the So the buildup, normally we build up around $150 million by December, from March to December, and then we bring it down. I think it will be lower than that. When you look at the three quarters, I think it'll be, probably around $100 million if we see the buildup, and then we'll see a release happening in March. But the point is, right, come next year, we'll see some buildup happening extra on the scrap side as we are ramping up our EIF, but that will be 2025. 2024 will be smoother.

And can you maybe talk about how to think about that buildup for the EIF side? Sure.

So it will, you know, we will be building up to the extent of, you know, roughly month, month and a half or the next two months of inventory for scrap. But then we'll be reducing some of the material that we need for the blast furnace and the coke batteries as we will be transitioning slowly, slowly out of it. So the way to think about it is that we may have, you know, anywhere from $30 to $50 million of build But eventually, during the transition period, but eventually we will see at least $100 million of further release in working capital when blast furnace and coke batteries are shut down and we are only on the EF. So overall working capital-wise, at least $100 million we should see releasing by March. And then we will see another $100 million at least coming out when the transition is complete. In between, we may see a slight build that happened for a year, which will be next December.

And you said the slight build is $30 million to $40 million? Was that correct? Yeah. If I may, one more. I think, Mike, you initially mentioned that for the current quarter, you expect volumes to increase a bit sequentially. What will drive that increase? Because typically, right, in the December quarter, the environment is a little softer, so we see most of your peers are talking about lower volumes.

Yeah, I think primarily it's our operating schedule, so we don't have any outages scheduled in the quarter, so I think you'll see our volume increase from that perspective. You're right, as we enter the holiday period, although I think there's probably a positive sentiment on economic activity. I don't think we'll see a significant demand increase over the next six or seven weeks in the quarter.

Okay, thank you.

Thank you. Our next question comes from the line of David Ocampo with Cormark Securities. Please proceed with your question.

Thanks, everyone. Rajan or Mike, maybe you could take this. But I was hoping you could comment on the timing and total insurance proceeds that remains to be delivered to you guys, both from the damages to the property as well as lost production that occurred in the quarter. And then also in terms of timing and total proceeds that could come from the Ministry of Environment program.

Sure. So on the insurance front, You know, as we've mentioned, there is, you know, 50 to 60 odd million dollars that we see on the property damage. That's slightly higher. I think it will be a little over 60 million. And we've received some right now, and we'll receive the balance between this quarter and next, most probably in the next quarter. which is the March quarter. And on the property damage, you know, our loss has been 120 to 130, roughly in that range, as we indicated. And we should see, you know, more than 50 percent of that, yeah, more than 50 percent of that recovered. We're going through the process. As I said, it's a lengthy process. We do expect to get it by before end of March or could flow into the June quarter, but that's what our hope is. Most of it should, at least from property perspective, should come by March, and we are trying to see if we can get it in that quarter or it will be following for the business interruption. So that's how it will flow through. on the insurance side. And on the carbon, we are part of the program. We've applied for 2022, and it gets applied every year. But the way to think about it is that it's a The recovery happens based on the process and the way it's laid out. It's roughly in the second year or third year. It takes two years. So that's a 2022. We should get it by either this year or early next. And this is how it will flow. It will probably be two years delay the way it works. So they do the work. They do the audit after the year ends. We file. They calculate. and then it gets you in the following year. So it's a two-year lag the way we get the money.

Okay, and just so I have my numbers right, I have you guys having paid $54 million since calendar 22. Does that line up with your numbers?

No, I think it's a much lower number for calendar 22, but you start counting it.

Sorry, Rajat, that was cumulative, so 22 to 22.

Yeah, no, you're right. The cumulative is that. And it's done on a calendar year basis, which will align with the fiscal year. Now it becomes much easier for you guys, for us, and for everybody. And we are pretty happy and excited about it. This is done on an annual basis, which is calendar year basis. And We have one more quarter, and then it gets finalized. But you're right, those are the numbers that you see, and it's actually done year by year.

And each year, the province has to decide or declare whether the program is running for another year. So we're a little guarded in committing that all future carbon taxes for the life of the project while we're undertaking this project will will qualify on this, but definitely, you know, the province has made the decision as it applies to the taxes we paid for 2022 emissions that were paid at the end of 2023.

Okay, that's helpful. That really helps us from a modeling standpoint. And then maybe just a last one for Rajat. This definitely goes to you, but it does look like the diluted share count is equal to the basic share count this quarter, and that's probably just because of the negative income But in the past, if you look at the quarters, it did include all the warrants in the diluted share count, but I know the warrants can be settled on a cashless basis, and they're callable at 18. So what's the right way to think about the maximum dilution for everyone that's trying to model this one out?

That's a very good question, David. You know, the right way to look at it is that if you're at 18, it's one-third dilution because It's callable, it's the strike price is 11 and a half and the difference between 11 and a half and 18 is it's a six odd bucks. And that's the dilution that's there from dollars perspective. So if you issue shares, then it's one third dilution. So it's not the whole 24 that leads to the dilution. It's only one third. And accounting is accounting and we have to follow those rules. So we follow those rules while we show it. But from real modeling perspective at 18, it's only one third and it changes. goes lower, goes higher, depending upon where the share price is. But that's how to look at it. And at 18, we have the option to do a cashless settlement, which brings the dilution to one-third.

Okay. Those are my two questions. I'll hop back in the queue. Thank you, everyone.

Thanks, Ian.

Thank you. Our next question comes from the line of Ian Giles with Stifel. Please proceed with your question.

Morning, everyone. I asked about this last quarter. I'm going to ask again. The plate ramp, are you putting any additional thought or are you thinking about slowing that down at all or changing the mix in the near term, just given that that market seems to be a little oversaturated at the moment, pricing isn't great, et cetera?

Well, I mean, we're not... we're not going out uh and destabilizing destabilizing the market by chasing a lot of a lot of plate business we are uh rebuilding strategic inventories so we're if we have a slow demand for plate which we've certainly had during this previous quarter uh we're doing a few things we're We're making sure that we are rebuilding some of our strategic stocks, so that includes both our just-in-time automotive programs, which need to be fully stocked because that's the expectation of those automotive customers, but also building some on-the-floor inventory of plate that we know is going to sell. It's high-demand products. products or grades and sizes that our existing customers are regular consumers of. We are taking the advantage of time to finish any of the modernization work that needs to be done in terms of proving and improving our rolling profile of some of the thinner grade material, the half inch and below. So we are being mindful of And we're taking advantage of the slow time in plate demand, building up our promise performance. And we think when plate demand returns, we'll be really well positioned to take advantage of that.

Understood. That's helpful. With respect to the EAF and the new cost budget put out, just to confirm, but is there – Is there much left that could change in the updated budget, or do you feel like you're kind of pretty much tied down there and this is a final, final number?

Yeah, we feel really good that not much is going to change. In fact, you may have noticed we didn't refer to it as a different budget. I mean, the budget is what we previously disclosed, and I think now we're focused on communicating where we're going to end up. And we're having better and better and more confident visibility to that now as we approach commissioning. So substantially all of the contracted work is in place and contracted. We've got less than 10% of the budgeted work operating under time and material. at a high level, 60% through all that time and material work. And the actual spending on that work is tracking about where it should be tracking. So there hasn't been a cost overrun on that time and material work. If you look back through the life of this project, when the cost of the project has increased from the original budget number, it has not been because of poor execution by a contractor that gets cost overruns from us that are legitimate cost overruns. So that hasn't increased any of the, you know, that's not what's driven up the cost. And it hasn't been a time and material contract that has been overspent. What's caused the cost of the project to go up, again, is not poor execution. It's finishing all the detailed design and then placing the contracts in a pretty inflationary environment. So we just, you know, the contracts got placed at a higher cost than the original budget contemplated. But that being said, the work is being executed as contemplated once the contracts are in place. So we feel confident about where we're going to end up. And it'll be, you know, I can't give you an exact number, but it's going to be south of that 5% number we referenced.

Understood. That's very helpful. And I guess last one for me, Rajak, are you able to provide any context into how you think cost per ton may trend over the next couple of quarters as you start to use more of your own coking coal rather than some of the third party you've probably have purchased in specific inventory?

Sure. So, you know, overall, when you look at it for the next year, the cost will be trending slightly lower. You know, as I mentioned, we have We have most of the fixed costs tied up based on all the people that we need for the year, so all sitting there. On some of the variable side where commodity pricing is coming down for next year, I think we should see some reduction coming. Generally, when you look at our cost, first calendar quarter cost is always slightly higher just because of winter and you know getting all those commodities here primarily power and gas that goes up and the consumption also goes up so that you see that slightly but overall you'd see the cost coming down and coming down further with the production uh increase that will happen as we as we stabilize the first tf and then start work on the second and and get that so that's that's how we see it in uh you will not see a substantial drop frankly and not even a substantial increase it probably will be hovering within a couple of percentage points on the cost side as you see it right now. The mix does make a change. When we do higher plate, our cost proportionately will go up. But overall, from a cost per ton basis, we don't see a significant change happening, and we see it coming down as we start producing more. Does that help? I mean, I'm not giving you a number, but it's probably within a couple of percentage points.

No, no, that's helpful. It's just a matter of us figuring out how much plate you're going to be putting out the door. So anyways, thanks very much. Thank you.

Thank you. We have reached the end of our question and answer session. I'd like to turn the call back over to Mr. Garcia for any closing remarks.

Thank you. And thank you again for your participation in our second 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 third quarter results scheduled for February. That is all, operator. Thank you.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.