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. Should anyone require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference call is being recorded. It is now my pleasure to introduce your host, Michael Marocca, VP Corporate Development and Treasurer. Thank you. You may begin.

Good morning, everyone, and welcome to Algoma Steel Group, Inc.' 's second quarter 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 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 law. 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 US 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 two of the accompanying earnings presentation and to also refer to the risks and assumptions outlined in Algoma Steel's second quarter 2025 management's discussion and analysis. Please note that our financial statements are prepared using the US dollar as our functional currency and the Canadian dollar as our presentation currency. Please note all amounts referred to on today's call are in Canadian dollars unless otherwise noted. Following our prepared remarks, we'll conduct a question and answer session. I would now turn the call over to our Chief Executive Officer, Michael Garcia. Mike?

Thank you, Mike, and good morning, everyone. Thank you for joining us to discuss our second quarter 2025 results. At Algoma Steel, safety continues to be our top priority. I'm proud to share that our lost time injury performance showed marked improvement throughout 2024 and we sustained this positive trend in the second quarter of 2025. This is especially important as we ramped unit one of our EAF complex towards first arc during the quarter and maintain intensive operations leading to full project completions next year. Before diving into the details, I want to highlight three important themes. First, our quarterly results reflect the continued challenging conditions across global steel markets. particularly due to tariff uncertainty, which led to lower realized prices and higher production costs. Second, we have achieved a major milestone with first steel production from our Unit 1 of our EAF project, with the second unit progressing as planned. And third, our liquidity position ended the quarter at over $400 million, and we are working with the Canadian government to further bolster our liquidity. The steel industry is experiencing unprecedented disruption as the tariff situation has significantly deteriorated since our last quarter, with the U.S. market now effectively closed to Canadian steel producers due to prohibitive 50% tariffs. These trade disruptions are reverberating globally, creating supply chain dislocations and forcing steel producers worldwide to seek alternative markets, while macroeconomic uncertainty continues to compound the headwinds facing our industry. The combination of trade barriers and broader economic volatility has fundamentally altered market dynamics, with customers across North America adjusting purchasing patterns and supply strategies in response to this unprecedented level of uncertainty and volatility. We recognize that while current conditions are challenging, markets will eventually normalize, and we remain focused on completing our transition to lower-cost, lower-carbon green steelmaking. As Canada's only major independent steel manufacturer, we are a strategic national asset and we are positioning ourselves to emerge from this cycle as a more competitive and sustainable operator. We continue managing our existing operations to respond to rapidly changing conditions, strategically adjusting our product mix between plate and coil products based on capacity and contractual obligations, while leveraging our value-added product advantages to maintain our market position during this unprecedented time of industry restructuring. Our second quarter performance was in line with our internal expectations across both shipment volumes and adjusted EBITDA metrics. These results reflect the continuation of challenging market conditions that began mid-2024 that deteriorated further with the implementation of 25% steel import tariffs from Canada in March, which were then increased to 50% in June. Consequently, we experienced lower steel shipments and realized steel pricing, as well as elevated cost pressures, resulting in year-over-year declines in both revenues and adjusted EBITDA. We continue the planned steady ramp of production at our fully modernized plate mill. For the quarter, plate shipments reached approximately 103,000 tons. up from 91,000 tons in Q1 of 2025 and 82,000 tons in Q4 of 2024, as we strategically focus on our position as Canada's only discrete plate producer. Turning to our electric arc furnace project, I'm thrilled that we've reached a truly pivotal milestone for Algoma and the Canadian steel industry. In early July, we successfully achieved first arc and first steel production from unit one of our state-of-the-art electric arc furnace complex, a moment that represents the realization of our vision that began when we broke ground in November of 2021. This achievement is particularly meaningful as it positions us at the forefront of the largest industrial decarbonization project in Canada, demonstrating our ability to execute on strategic objectives even amid challenging market conditions. The commissioning process has been methodical and thorough. With over 10 days of successful arc testing and comprehensive validation of all nine Q1 transformer modules, while we continue to operate in a difficult industry environment, we're energized by what this milestone means for our future. The ability to produce green steel with up to 70% lower carbon emissions while maintaining the performance standards our customers depend on. Despite the uncertainty that the trade war has unleashed, this achievement reinforces our confidence in our transformation strategy and our commitment to emerging as a more competitive, sustainable, and strategically valuable steel producer. As of June 30, 2025, cumulative investment in the EAF project was $880.5 million. Now let me give an update on our government relations initiatives. We continue to engage directly with the highest levels of both the provincial and federal government and believe that Algoma is being treated as a high priority in ongoing trade discussions. The strategic importance of our operations to Canada's industrial, environmental, and economic goals is clearly recognized at both the federal and provincial levels. Algoma has sufficient resources on hand to manage its liquidity over the near term. However, the risk of prolonged US tariffs present a serious threat to our business model. As such, we are reviewing multiple scenarios, including an environment in which access to the U.S. market remains severely constrained for an extended period of time. To support operations under these conditions, we have submitted an application to the Federal Large Enterprise Tariff Loan Facility Program for $500 million. This support would provide the financial flexibility needed to maintain continuity while we diversify our customer base and adapt to the evolving trade dynamics. We are also pursuing opportunities aligned with domestic demand in defense, infrastructure, and clean manufacturing, reinforcing national priorities and our role in Canada's low-carbon industrial future. We remain hopeful that timely, targeted policy support will enable Canadian steelmakers to remain competitive and resilient, With the right framework in place, Algoma is well positioned to serve as a long-term pillar of Canada's nation-building agenda. In conclusion, we have delivered solid execution during one of the most challenging periods in recent steel industry history. The successful production of first steel from our EAF Unit 1 marks a transformative milestone, validating our long-term strategy and reaffirming Algoma's role at the forefront of Canadian industrial decarbonization. We are advancing our evolution into one of North America's premier low-cost, low-carbon steel producers. This includes completing the ramp-up of our electric arc furnace complex, diversifying our customer base in response to shifting trade dynamics, and pursuing opportunities with high-priority domestic sectors such as defense, infrastructure, and clean manufacturing. At the same time, we are actively engaging with policymakers to ensure that the strategic importance of Canadian steelmaking is recognized and supported. We believe Algoma is uniquely positioned to contribute to Canada's economic strength, environmental leadership, and national resilience for decades to come. The production of our first EAF steel is not just an operational achievement. It is a defining moment in our 120-year journey. It reflects the execution of a bold transformation vision and our emergence as a more competitive, more sustainable, and more strategically valuable enterprise. I want to thank our entire team for their commitment and contribution to this historic inflection point. Together, we are laying the foundation for enduring stakeholder value as global trade relationships continue to evolve. 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 included adjusted EBITDA that was a loss of $32.4 million, which reflects an adjusted EBITDA margin of negative 5.5%, and cash used in operating activities of $37.9 million. We finished the quarter with an $82 million in cash and availability of $329 million under a devolving credit facility. Now let me dive into the key drivers of our results. We shipped 472,000 net ton in the quarter, a decline of 6.2% versus the prior year quarter. Lower steel shipment was the result of weakening market conditions. particularly due to the Section 232 tariffs, which impacted the company's export sales and resulted in oversupply of the Canadian market at reduced transactional pricing. Net sales realization averaged $11.32 per ton compared to $11.87 per ton in the prior year period. The decrease versus the prior year level reflects weakening market conditions due to the current trade environment. This resulted in steel revenue of $534 million in the quarter, down 10.5% versus the prior year period. On the cost side, Algoma's cost per ton of steel products sold averaged $11.44 in the quarter, up 7% versus the prior year period, and relatively flat versus the last quarter. Starting March 12, the company was subject to 25% tariff on outbound steel shipments to the United States. which increased to 50% in June. For the second quarter, direct tariff cost totaled 64 million, which was included in cost of sales. Furthermore, the company's net sales realization for the Canadian sales was up to 40% lower than its U.S. results across various product categories. This is a significantly greater discrepancy than historical averages and additionally resulted in approximately 30 million lower revenue on Canadian sales during the three months ended June 30th, 2025. There was no material tariff related cost in the quarter due to inbound purchases of products or materials from the US. Net loss in the second quarter was 110.6 million compared to net income of 6.1 million in the prior year quarter. The decrease was driven primarily by lower steel shipment volumes and lower allies pricing in light of the ongoing trade environment. Cash used in operations totaled $38 million for the quarter compared to cash generated by operations of $12 million in the prior year period. Inventories ended the quarter at $736 million compared to $800 million during the prior year quarter, with the reduction primarily coming from the release of raw materials. During the quarter, inventories grew by approximately $42 million, attributed to our usual inventory build. we continue to focus on measures to optimize working capital. Liquidity at quarter end was $411 million, and as Mike mentioned, we are in active discussions with the federal government on support measures in response to the trade environment. I'm pleased to announce that Algoma has also received final approval, totaling $21.3 million related to our EAF investment, qualifying as the inaugural project under Ontario's Emissions Performance Programme. I'd now like to turn the call back over to our CEO, Michael Garcia, for closing comments. Mike?

Thank you, Rajat. In conclusion, we have executed during one of the most challenging periods in recent steel industry history. Achieving first arc and first steel production from EAF Unit 1 is a defining milestone, not just for Algoma, but for Canadian industrial transformation. It affirms our ability to advance critical, future-focused initiatives, even as trade barriers and market volatility reshape the landscape around us. Despite escalating challenges, 2025 remains a pivotal and energizing chapter in our journey. We are executing with purpose, completing our transition to low-cost, low-carbon steel production, expanding our relevance in strategic domestic sectors, and reinforcing our role as Canada's only independent primary steelmaker. This transformation is about more than technology. It's about national leadership, long-term competitiveness, and value creation for our stakeholders. While global trade uncertainty may persist, we are building a fundamentally different Algoma, one that is leaner, greener, and better aligned with the needs of the future. I want to sincerely thank every member of the Algoma team for their extraordinary contribution to this effort. Your dedication is laying the groundwork for a stronger company, a stronger industry, and a stronger Canada. 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 will now be conducting a question and answer session. 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 would 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 star keys. One moment, please, while we poll for questions. The first question is from Katia Janczyk from BMO Capital Markets. Please go ahead.

Hi. Thank you for taking my questions. Maybe starting on the current market, we know the sheet market is weak in Canada. Can you talk a bit about the current plate market?

Sure, Katja. This is Mike. I think the plate market in Canada is not as oversupplied as the sheet market. It's pretty well balanced. In fact, over the past few months with our increased production and well-received plate from a quality standpoint and capability standpoint that we're now producing with our modernized plate mill. We've been able to build our market share in the Canadian plate market to over 40%. So I would characterize the plate market as stable. I can't say that it's growing yet, but we do expect it to grow because of the many what I would call Build Canada Strong projects that are being advanced by the Prime Minister's government. So it's an important market for us. It's better than the sheep market in Canada, and I would characterize it as stable right now.

And when you look at the pricing relative to the U.S., how do they stack up?

I think the biggest difference in pricing is the Canadian plate market is more of a spot market. I expect that to change as these infrastructure, energy, and defense projects start to kind of reach that shovel-ready or shovel-in-the-ground status and move towards more of a contract market. But right now, it's a spot market, so the pricing we're seeing in the Canadian plate market is about 40% lower than in the U.S. plate market.

And maybe shifting gears to the EIF, how much of CAPEX is still left to be spent?

We're not changing our guidance on that. We've got, you know, our prior guidance was within 5% of the previously disclosed top end of the budget. I think what we've done is we've de-risked the completion of the project by demonstrating the operation of the first unit. When I look at the overall value that this project and this EAF complex and the transformation to green steel making is driving for the company, I don't see any change in how that value that we're creating for the company should be evaluated or should be measured based on the budget that it's taking us to complete it or the schedule that we plan to complete it on and start it up. So no change to our current guidance.

If the environment stays as it currently is, which is very weak, how should we think about just broadly about CAPEX in second half of the year and maybe even into next year?

So the capex, if the environment stays the way it is, capex probably will be lower. Our maintenance capex, we do flex between $80 to $120 million a year, and you tend to go towards the lower end as you go through it. On the EF side, whatever is the balance capex remaining will be spent. Most part of it by end of the year, maybe some going into the following year as we do have liabilities that get paid over 30 to 60 days.

Okay, thank you. The next question is from Ian Gillies from Stiefel. Please go ahead.

Morning, everyone.

Hey, Ian. Morning, Ian.

Outside of existing liquidity and the potential for participation in the LETL program, can you talk about any additional levers that you're considering to help create and or improve the liquidity profile for the business?

The short answer is yes. Barring aside all the spending that we do, whether it's whether it's on CapEx or others, and cost reduction that we are working on in order to optimize further, there is work happening on the working capital as well, on the working capital optimization. You do see some noise in this quarter on the working capital side as it's gone up because we had some Some annual shutdowns, at least for some build-off WIP, work in progress, and there's normally a normal build-on on raw material. But we do expect year-over-year working capital to be a source of cash rather than a use of cash by end of the year. But we are working on the working capital actively to optimize further and generate generate more cash for the business as we go through this turbulent or uncertain time.

As we think about shipments into third and fourth quarter and under the presumption that tariff rates stay where they are, do you expect you're going to have to curtail production even more than what we saw in Q2 for the rest of the year?

You know, it's Short answer is no. I think it should be around that number. There is a lot of uncertainty around the environment currently on what's going to happen or not happen on the trade, a discussion that's happening, and a large part of it gets driven through the outcome of those. So very difficult to model everything. We're modeling various scenarios to see how it plays out, but things continue. I think that, you know, we should be around that number as we go along. As you mentioned, plate is ramping up and doing good, and coil definitely is on the weaker side, and that's why you see our shipments being where they are.

Yeah, I think what we're trying to do, Ian, is there's so many different moving parts. There's the tariff. There's the supply and demand landscape in the Canadian market. There's the moves by the Canadian government to move the Canadian market towards a more domestically supplied market. The Canadian market historically up until the past 12 months is supplied 66% by foreign steel. There's no other advanced economy in the top 20 economies in the world that that have that type of dynamic in their domestic steel market. Just about every other country, from large producing steel countries to much smaller producing countries, supply the majority of their domestic steel needs by domestic productions. So we've advocated strongly as an industry to the government to put measures in place to change this. They've begun taking those measures. I think there's still a lot to go. So the way the Canadian market moves and transitions going forward will be a big part of the scenarios that we prepare ourselves for, as well as just the fundamental commodity index pricing of steel. So what we try to do with all of our scenarios is prepare the company to move through any of these scenarios that might transpire as we move into the future.

Understood. On the import side, there's obviously the absolute volumes which have been an issue, but my understanding is that bidding practices for new work have also been problematic. Have you witnessed anything on the leading edge when you're going out and bidding new plate sales that would suggest that the new walls or the new restrictions put in by the Canadian government are helping on the pricing side for plate in Canada?

Not yet. We continue to give constant feedback to the government on what we're seeing in the market and whether the measures that they have put in place are having the intended effect, because I think that's exactly the effect that the government is looking for. So to the extent that we see that effect or don't yet see it, we give that feedback, and I would expect based on that feedback that the government will continue to take actions to reach that effect, but we haven't seen it yet.

Understood. Thank you very much. I'll turn the call back over.

The next question is from James McGarrigle from RBC Capital Markets. Please go ahead.

Good morning and thanks for having me on. I just had a question on the realized pricing into Q3 and more specifically on your sales into the Canadian market. You highlighted in the MD&A that 40% impact to your Canadian realized pricing, but how should we be thinking about that into Q3 given that 50% tear was only in place towards the end of Q2?

I think it will be around that number, James. So as As Mike was alluding to, where there is tariff on the sales at 50% into the U.S., the Canadian market being oversupplied by sheet is balancing around that number. So we don't expect it to go further down, but it should be around that 40% mark.

I appreciate the color there. And I should be thinking about a cost of goods sold into Q3 as well. I know there's some moving pieces with... input costs being volatile, and of course, you know, the EAF ramping up. But can you just give us some color on how you expect things to move directly in Q3 versus Q2?

Yeah, it should be quite similar, you know, from Q2. You're not expecting significant changes coming into Q3 based on Q2. Q4 definitely will be slightly higher as we approach winter, and then, you know, you know the the gas pricing and other things start shooting up. So barring that, we don't see much changes in the cost. It should stay around a similar number.

And just one final one for me. I just had a question on the federal loan support. Can you just give a quick update on your talks there? And could you foresee potentially any conditions surrounding that loan, anything like warrants or anything like that?

Sure, James. So those talks are ongoing. We are currently getting great engagement with the government. I would characterize the talks as very active, and I don't want to comment on any details at this time. I think given where the talks have progressed to, it wouldn't be appropriate to talk about details.

I appreciate the call, guys, and I'll turn the line over. Thank you. Thanks, James.

The next question is from David Ocampo from Cormark Securities. Please go ahead.

Thanks for taking my questions. My first one is just on shipments to the U.S. on the order book. It's still north of 50%. I'm curious how much of that can be reasonably shifted to alternative markets, whether that's Canada or abroad. Or is there very little wiggle room there since I think most of that is contracted volumes?

Yeah, it's all contracted volume right now into the U.S. We sign these supply agreements with our contracts, with our customers, our valued customers that we've had relationships with for over many years. So we understand that those contracts have to be fulfilled at least in – currently in the situation that we're in. So that's really all that we're moving now. I think the ability to move that volume elsewhere will depend, obviously, on the opportunities of the Canadian market. I spoke to that earlier. We are not seeing tremendous opportunities right now, currently, and in the very short term. We expect that those opportunities will continue to grow moving forward as the Build Canada agenda begins to get fully realized in Canada. We just signed a memorandum of understanding with C-SPAN, a large shipbuilder in Vancouver, to reestablish the steel supply chain for shipbuilding in Canada, making sure that we are ready as – supplier of steel to support Canadian shipbuilding. So that's an example of the type of work that's being done now. We're doing the same type of work on the defense side. We're doing the same type of work, I would say, on the infrastructure and specifically the energy infrastructure side. So the groundwork is being laid. So that will be a driver of the opportunity for this volume into the future. The opportunity for Export is difficult. Given where we sit geographically, it's hard for us to put our steel on a ship. We can put our steel on an ocean-going ship here in Sault Ste. Marie, but getting it to an export customer in Europe or elsewhere... there just aren't those opportunities right now. I don't think that there'll be a lot of those opportunities going forward, to be frank.

Okay. And this may be a tougher question and a little bit more loaded, but how long do you guys continue to service those volumes if the 50% tariffs continue to continue here? I mean, eventually at a certain point, you're starting to burn too much capital, even though these are longstanding relationships that you've built over the years.

Yeah, I think it's something that we need to be thoughtful about, and frankly, our customers need to be thoughtful about as well. We haven't yet entered into what I would call the contract season. We start discussing annual contracts in the fourth quarter, but I think that'll be the main question that both ourselves and our customers ask ourselves as we get into the fourth quarter and look at the landscape and our understanding of the landscape.

And then just going back to the EAF, I know there's been a couple of questions on that. I was hoping you could walk us through some of the milestones or next steps in ramping up to full production that we should be made aware of. And also, at what point do you start shutting down some of the blast furnace assets against those milestones?

Sure. So, You know, we're into production on unit number one. We have another campaign scheduled for next week. So there's a lot of learning and shaking out, I guess, what I would characterize in unit number one. On the second unit, we are in active construction on that, and we should be finishing construction and entering commissioning at the end of this year. We have a ramp-up plan, and I think we've talked in past calls about our expectations of EAF volume in 2025. We haven't changed that. We still expect roughly 200,000 tons of EAF steel production in this calendar year. Obviously, there could be scenarios in terms of... market dynamics that could affect that. We're not going to make steel that we don't have orders for, but barring that, that's our expectation. There's a lot of learning that we've applied to the construction of the second unit. We realize that in the final construction phases of the first unit, it gets pretty tight and So we're pushing for more modularized construction methods where we take more modules of the second unit, get those constructed offsite so that there's less construction required onsite. The building is now fully enclosed, so we're not subject to weather impacts or weather delays. We did have weather delays in the building of the first unit. We've identified and we know where those high congestion areas are, so we're going to build the construction plan so we can get early access to those areas. That'll make a difference. We're building the schedule so that there's no overtime hours in there, and that'll help with the labor component. The plan is It will be finishing the second unit by the end of this year and commissioning it, starting commissioning it by the end of this year. We're proceeding with our ramp-up plan on the first unit and moving forward from here. Again, there are certain market scenarios you could imagine that might impact the number of tons, but that's our base plan for right now.

Perfect. And if I could sneak one last one in for Rajat, I think on the last quarterly call, you mentioned that a full 25% tariff on an entire quarter would be around that $60 million hit. I look to line up this quarter, but with a 50% tariff, is it just simple math and multiply by two?

Yeah, it depends on the pricing as well. So it won't be as simple. It probably will be in between. So the 64 had had a month of 50% tariffs in it. So if you can adjust that, you'll come to that number. So it won't be as big as just multiplying by two. It will not go into three-digit number.

Okay. That's all. Thank you so much, everyone.

Thanks, David. There are no further questions at this time. I would like to turn the floor back over to Michael Marocca for closing comments.

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

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.