Algoma Steel Group Inc. (ASTL) Earnings Call Transcript & Summary

Greetings, and welcome to Algoma Steel Group's Third Quarter 2025 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It's now my pleasure to introduce Michael Moraca, Vice President Corporate Development and Treasurer. Sir, you may now begin.

Good morning, everyone, and welcome to Algoma Steel Group Inc.'s earnings conference call for the 3 and 9 month period ended December 31, 2024. 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 Investor 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 were prepared in accordance with IFRS accounting standards, which differs from U.S. GAAP. And our discussion today includes references to certain non-GAAP 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 Investor section of our corporate website. With that in mind, I would ask everyone on today's call to read the legal disclaimers on Slide 2 of the accompanying earnings presentation and to also refer to the risks and assumptions outlined in the management discussion analysis for the 3 and 9 month periods ended December 31. Please note that our financial statements are prepared using the U.S. dollar as their functional currency and the Canadian dollar as their presentation currency. As previously reported, the company has changed its fiscal year-end from March 31 to December 31, resulting in a 9-month fiscal reporting period ended December 31, 2024. For ease of comparison, we will focus our comments today on the 3 and 12 month periods ended December 31, 2024 and 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. Mike?

Thank you, Mike, and good morning, everyone. Thank you for joining us to discuss our fourth quarter and full year calendar 2024 results. Employee safety remains our foremost priority at Algoma Steel. I am pleased to report significant improvements in our lost time injury performance throughout 2024. With our electric arc furnace project approaching first start and first steel expected in April, our site continues to be a hub of activity, making our safety focus more critical than ever. Before diving into the details, I want to highlight 3 important themes. Our quarterly results reflect the continued challenging conditions across global steel markets, particularly due to tariff uncertainty, which led to lower realized prices during the quarter. Our balance sheet and liquidity position remains strong, with over $267 million in cash at quarter end and total liquidity of $630 million. We are well funded to complete our transformative EAF project on budget and on schedule. We are in the final stages of EAF commissioning and expect first steel production in April. Our fourth quarter results aligned with our previously disclosed guidance for both shipments and adjusted EBITDA. These results reflect the challenging market conditions we've experienced, particularly in the second half of 2024. Steel pricing was affected by U.S. election uncertainty, interest rate concerns, soft demand and tariff and trade war tensions, all of which have influenced our customers' buying behavior. In summary, softer realized steel prices and higher costs more than offset higher shipments, leading to an overall decline in revenues as well as adjusted EBITDA and cash flow generation compared to the prior year. Our plate shipments for calendar Q4 2024 reached approximately 82,000 tons, up from 73,000 tons in calendar Q3 2024. Looking ahead, we expect our Q1 2025 plate production to be directionally higher as we look to capitalize on our position as Canada's only discrete plate producer and execute a steady ramp-up towards our expected annual run rate capacity of over 650,000 net tons. We are evaluating market conditions as they are changing rapidly, and we are dynamically adjusting our product mix between plate and coil products where possible based on capacity and contractual obligations. This approach continues to provide mix benefits as we focus on higher-margin products. Now for an update on our transformational electric arc furnace project. Despite the harsh winter, including particularly heavy snowfall in November and December, cold commissioning activities began in the fourth calendar quarter of 2024 and are progressing in the first quarter of 2025. These activities include the installation, testing and validation of critical equipment and systems to ensure operational readiness, including EAF charging cranes as well as the fume treatment plant and water treatment plant. This phased approach allows for thorough assessment and adjustments before transitioning to hot commissioning. With work advancing as planned, first steel production is expected in April 2025, marking a significant milestone in the project's execution. We have no changes to our expected final budget and are excited to begin EAF operations in 2025. And despite navigating challenging market conditions, we remain well positioned with our balance sheet and liquidity profile. When both furnaces are up and running, we expect to see improved operational efficiency and overall cost structure as we steadily ramp our shipping capacity to approximately 3 million tons per year, matching steel production to our downstream finishing capacity. As of December 31, 2024, cumulative investment for our EAF project was at $740 million, including $68 million during the calendar fourth quarter of 2024. All material aspects of the project have been contracted, and we anticipate completing the remainder of the project, including those structured as time and material agreements, within 5% of the upper end of the previously announced budget range. Regarding the evolving tariff situation between the U.S. and Canada and its potential impact on our business, the implementation of tariffs on Canadian steel and aluminum imports has introduced even more uncertainty into the North American steel market. We expect the Canadian government's swift and appropriate response will support the industry as we weather the impact of tariffs. Given the deeply integrated North American supply chain, we believe rational dialogue will prevail between these 2 close allies, restoring normal steel trade between Canada and the U.S. While we expect these tariffs to pose a significant challenge, we expect that our transition to EAF steelmaking will strengthen our cost structure and enhance our ability to navigate market uncertainties over the long term. In summary, despite very challenging market and weather conditions, we've maintained our focus on the safe operation of existing facilities, continued our ramp in plate production and achieved the final steps towards the first steel production at the EAF. As I've said before, the near-term uncertainty in steel markets and uncertainty around tariffs cannot diminish our excitement for what's happening at our site and the tremendous step forward it represents at our company and community. I'd like to once again thank all of our employees for their hard work, dedication and professionalism. Thank you. And I will now turn the call over to Rajat for a deeper dive into our financials. 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 calendar fourth quarter results included adjusted EBITDA that was a loss of $60.3 million and cash used in operating activities of $76.9 million. We finished the quarter with a strong balance sheet, including $267 million of cash and $362 million under our revolving credit facility. Now let me dive into the key drivers of our results. We shipped 549,000 tons in the quarter, up 6.3% versus the prior year quarter. Net sales realization averaged $976 per ton compared to $1,079 per ton in the prior year period. The decrease versus the prior year level reflects weakening market conditions, partially offset by improvement in value-added mix as a proportion of sales. Plate pricing continued to enjoy a premium relative to hot-rolled coil during the quarter. This resulted in steel revenue of $536 million in the quarter, down 3.8% versus the prior year period as the lower realized prices more than offset higher shipments. On the cost side, Algoma's cost per ton of steel products sold averaged $1,032 in the quarter, very similar to the prior year period. Cash used in operations totaled $77 million for the quarter compared to a use of $47 million in the prior year period. Inventories at the end of December 2024 were $879 million compared to $887 million at the end of December 2023. Looking forward, we remain on track to release approximately $100 million of working capital from March '24 to March '25. Now let me run through the full calendar year comparisons. We shipped 2 million net tons for the full year 2024 compared to 2.2 million net tons in the prior year. Net sales realizations averaged $1,107 per ton, down 5.6% versus the prior year, reflective of softer market conditions on average across the calendar year, partially offset by improvements in value-added product mix as a proportion of steel sales. This resulted in steel revenue of $2.2 billion compared to $2.6 billion in the prior year. On the cost side, Algoma's cost of steel products sold averaged $1,054 per ton for the year, an increase of 7.4% over the prior year. The main drivers of this increase were higher variable costs on account of greater consumption of purchased coke and lower shipment volume. Adjusted EBITDA for the full year was $22.3 million, representing an adjusted EBITDA margin of 0.9% compared to adjusted EBITDA of $319 million and an adjusted EBITDA margin of 11.2% in calendar 2023. The decrease was mainly attributable to lower shipments, lower price realization and higher cost. Cash flow from operating activities for calendar 2024 was $82 million compared to $269 million in calendar 2023. The decrease year-over-year was primarily due to factors previously discussed. We remain focused on driving down working capital levels and continue to expect a release of working capital as we transition to EAF. Also on the cash flow front, we expect to receive an advance on insurance payout related to the utility corridor and blast furnace outage a year ago, with the balance of payout expected by year-end. Before I turn it back to Mike, let me make a few comments on our calendar first quarter 2025 results to date. Due to persistently weak market demand on account of trade uncertainty, we reduced our order book during the current quarter. Coupled with a brief unplanned outage at our blast furnace in February, we expect shipment this quarter to be sequentially lower than the fourth quarter, likely in the mid-400,000 ton range. Along with lower pricing, this is expected to result in adjusted EBITDA that is sequentially lower as compared to calendar fourth quarter 2024. Despite the near-term weakness and trade uncertainty, steel pricing has jumped the last several weeks, and we expect those price improvements will start to be reflected in our results next quarter. I'll now like to turn the call back to Michael Garcia for closing comments. Mike?

Thanks, Rajat. In summary, despite very challenging market and weather conditions, we've maintained our focus on the safe operation of existing facilities, continued our ramp in plate production and achieved the final steps toward the on-time first arc of the EAF project. 2025 represents an exciting time in the story of Algoma as we expect to commence first steel in April with a ramp in production and first arc at the second furnace coming at the end of the year. This will usher 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. As I've said before, the near-term uncertainty in steel markets and concerns around tariffs cannot diminish our excitement for what's happening at our site and the tremendous step forward it represents for our company and community. Thank you very much for your continued interest in Algoma Steel. At this point, we will be happy to take your questions. Operator, please give the instructions for the Q&A session.

[Operator Instructions] Our first question is from the line of David Ocampo with Cormark Securities.

Just the first one here, Rajat. Maybe you can clarify a little bit. I didn't quite catch it on the blast furnace outage that happened in the quarter. How many weeks was it out for? And what's the expected cost of bringing that back online?

Yes, it was not out for a long time. It was a couple of days to a week. And it was regular. It was not a significant issue that led to it. So not significant cost involved with it. It was more to do with the heavy snow, the extreme weather condition that we faced during this period, which was not expected, leading to more ice and water going into the furnace, which create some issues. So it was for a couple of days to a week, but no additional cost.

Okay. And then maybe just turning the page to tariffs, which I imagine will be front and center for you guys. But when we look at CRU prices and think about your cost profile as a blast furnace operator, are you guys still able to generate positive EBITDA or at least breakeven EBITDA with a 25% tariff on your shipments to the U.S.?

Yes. When you start looking at where the pricing is right now, actually, it's gone to $950 as you see the print on CRU. It starts breaking even to a little bit money on the current cost side on the coils that go into the U.S. So your assumption is right that it's gone higher than what we were saying and...

David, this is Mike. The plates also gone up even more than coil. I think since inauguration day, both products are up 30% to 35%.

Got you. And then that's for -- at least for the index that we're seeing for CRU prices, and maybe that pertains more to the U.S. But I'm curious what you guys are seeing for Canadian sheet prices, especially given that there could be a potential oversupply with Cliffs moving some of Stelco's shipments down to the U.S. to avoid those tariffs.

Yes. So David, you're right, the Canadian market has shown different dynamics than the U.S. market in the last couple of months. It's, I would say, oversupplied with coil right now and undersupplied with plate. So the announcements by Canada yesterday putting a tariff on U.S. steel will help. There's about 3.5 million tons of U.S. steel in the Canadian market over the last 12 months. So that's an opportunity for both coil, but more so even plate to start moving up in price in the Canadian market.

I guess if you had a crystal ball, like how much of a discount do you think Canadian sheet prices will be versus the CRU index once those tariffs do come into place? I know it's a bit of a tougher question to answer, but perhaps you can provide some color there.

When you -- leaving the dynamics on products and customers and preferences, if you simply look at the math, if Canada is oversupplied and there's 25% tariff, so you will at least see closer to the 25% variation in the price in U.S. versus Canada because there's more sheet available in Canada versus the demand. So that's a simple math when you look at it, and that does not include dynamics around specific type of hot rolled or little value-add preference customer-wise and other things. So it will range from, let's say, 20% to 25%, maybe 28%. But again, just a guess. Nobody knows how the market will settle. But logically, that's where the math -- that's how the math works.

Our next questions are from the line of Katja Jancic with BMO Capital Markets.

Maybe staying on the tariffs. If these tariffs stick, and you just mentioned at $950 CRU price, you're essentially breaking even. Are you thinking of taking any mitigating effects? Like, for example, are you looking at potentially lowering costs? Is there anything you can actually do at this point to mitigate what's going on?

This is Mike. Obviously, lowering cost is always our focus. And with the -- being a couple of weeks away from EAF production, that is the biggest lever that we have to lower cost as a company. And as we ramp up the EAF production and eventually decommission our blast furnace and coke ovens, that will reset our cost basis significantly. With that being said, we've been pursuing an aggressive cost reduction plan for really several months now, even before tariffs were the threat that they are now. And we've realized gains. There's more cost savings initiatives that we're pursuing. So that's kind of an ongoing thing at all costs or at all times, I would say.

And just on the numbers, the numbers keep changing so quickly from the market perspective. And how they will stick in the market is yet to be seen. But when you start doing the math, our cost is, as I've said, is around $650 for a hot-rolled coil full-in and U.S., and we've been working on a lot of cost reduction. But assuming that's where it is, I mean, the math is easy to do on what it will cost us or how much money we'll make on what pricing. And that's only for the sheet side without value add and without plate.

Just to clarify, you said $650 million is the all-in cost for HRC right now?

For sheet. Correct.

For sheet?

Yes, HRC.

And then maybe just on the insurance comment. Can you remind us how much you're expecting to get in and, maybe more specifically, what the timing of that is?

Sure. So we do expect around $100 million to come in. We are working on some advance over the next month or so. And thereafter, we expect everything to get settled during this calendar year.

And how much of the $100 million is in the next month or near term?

Anywhere from $20 million to $25 million.

And then I think, Rajat, you mentioned before on the working capital release. Can you just remind us how much and the timing?

Sure. So we will see $100 million working capital release in this quarter, which is what I've mentioned in the past when we were fiscal year, expecting $100 million to come by March 2025. And we'll see that reduction. And continuing on that path, we'll see more reduction coming as we transition to EAF as the stock of iron ore and coal and coke comes down and we put scrap in. But that probably will come over this year and next, most of it coming in the next year.

And the tariffs do not change the $100 million that you're expecting to release in this quarter?

No.

Our next question is from the line of Ian Gillies with Stifel.

Just a clarifying comment. You mentioned breakeven at $950 CRU. Is that on a consolidated sales basis? Or is that only on U.S. related sales?

So I did say, and I just want to clarify that, that at $950 million, you do the math. Our cost is $650 million. So we'll make some money. It's not just breaking even. And the breakeven probably is lower than that when you look at 25% tariff. So that's just to clarify. And the cost will be $650 for us for hot-rolled coil U.S. And plate, definitely, the cost will be higher, but the pricing is substantially higher.

Understood.

Does that clarify?

Yes, that's helpful. As it pertains to toggling between HRC and plate, can you maybe talk a little bit about where you think you could get plate production to this year in the event that tariffs happen for the entirety of the year? And how you can go about toggling -- like really toggling that piece just because there's been a bit of push and pull the last year on what you thought you might actually produce in calendar year '25?

Sure, Ian. So we shipped 82,000 tons of plate last quarter. I think you'll see a directionally higher ramp-up in plate in the quarters to come. Our next kind of intermediate goal for plate is reaching the 40,000 ton per month level. I think that we're very confident of that. It takes a combination of -- and you get this typical debate in a steel company, is, do we have the operations and demonstrated capability first or do we have to have the sales first? And the ops guy will say, "Well, if we had the sales, I'd be there." And the sales guy would be, "Well, if we had what the customer wants, we would be there." So I think you actually need both almost simultaneously. You have to demonstrate the delivery performance, the quality and the reliability as a supplier to the customer at the same time that you kind of need sales to put in front of your mill to ramp up. We feel very confident about getting to this next intermediate step of 40,000 tons and then going beyond that as the year progresses. The plate market in Canada is rapidly changing. We're the only discrete plate producer in Canada. But even with that being said, it's -- and it's not a humongously large market. But in the last 12 months, there was more U.S. sold plate in the Canadian market than Algoma sold plate. So that gives us a great opportunity with the tariffs that they announced -- that the Canadian government announced yesterday to go out and capture more market share and more plate sales in Canada. We've already in the last 24 hours had discussions with plate buyers in Edmonton and with the folks in the supply chain for the 2 Canadian icebreaker ships that were announced. We've made lots of marine plate in Algoma's history. We've made armor plate. So to the extent that the defense spending and shipbuilding starts to ramp up in the Canadian market, we see that as a great opportunity, especially if the government implements buy Canadian requirements for that build. So I think that's how we see the plate ramp up here at the company. Again, it's a really important opportunity for us, and we're focused on it, especially during this uncertain time of tariffs.

Understood. That's helpful. There's been a lot of commentary in and around the Canadian government supporting the steel industry. I'm just curious as to whether it becomes something more than just retaliatory tariffs and whether you think something more along the lines of government loans or government grants may become available, not just to Algoma, to the broader steel industry, and whether that will be something you're amenable to.

Yes. I mean I've seen the same public company -- public comments that you've seen about support for the industries affected, vocal support that we're going to protect Canadian workers, we'll have their -- I'm trying to channel my inner Doug Ford here. But we've seen the same comments. And I can tell you that we have already engaged in one-on-one discussions with government officials at both the provincial and the federal level on exactly what that means and what mechanism or what form that pledge of support might take. So there's nothing I can disclose now, but those discussions are ongoing.

Understood. Last one for me. In the event tariffs get worse from here and they move higher, and you think about the operating platform for the business or the operating parameters, do you continue running the furnace at close to or near to 100% utilization just to keep it full and so on and so forth and stockpile inventory? Or do you try and reduce throughput and manage your sales volumes that way?

Well, I mean, as you know, Ian, when you're running a blast [ furnace ], it's very -- it's very difficult to model a better financial result with a blast furnace that you aren't running at full capacity utilization. So that's what we're dealing with at least for the next 12 to 18 months while we ramp up the EAF. So then -- your question was about inventory. It's difficult to just build a stock of coil inventory without a customer because there isn't great amounts of standard spec hot-rolled coil that you can just put on the ground and have a high degree of comfort that you're going to sell that coil easily in the spot market or with customers. With plate, we're certainly going to take the opportunity because plate is so important to us this year. We need to rebuild our plate slab stock a little bit. We do have a plate stocking program that -- where we put plate in stock, finished plate without customers assigned yet, and we sell out of that. So we'll make sure that both the inventory levels in those 2 items are where they need to be to support the opportunities on the plate side of our business. But in general, we're not going to put thousands of tons of coil on the ground in the hope that the tariffs go down and we can then start shipping coils into the U.S. to customers that we have or would go acquire. Does that help?

Understood. Yes. No, that helps. And last one for me and likely at the margin, but just curious whether you anticipate receiving any carbon tax rebates in 2025.

Yes, the -- Ian, we are expecting the first payment, which was probably around $7.5 million, surely to come. And the second one is in -- is under discussion. So we'll see how it goes through. But we are expecting $7 million, $7.5 million to come this year.

Our next questions are a follow-up from the line of David Ocampo with Cormark Securities.

I just wanted to circle back on my previous question about Canadian discount prices that's happening in the market. But more specifically that you guys have a pretty large contracted order book, and I think that's all based on CRU prices. So are your customers or Canadian customers giving any pushback if spot prices in Canada are at a 20% to 25% discount relative to CRU?

So David, most of the contracts that we have are in U.S., very little in Canada. Canadian market mostly works on spot, and that's why you're seeing this kind of anomaly also happening in Canada. So Canadian pricing are lower and most of it is spot. The U.S. guys are on contract and it goes through CRU.

Okay. And then just a last one just on the EAF ramp. First production expected in April. But I was hoping you guys could provide a little bit more color on how much production you guys can expect on a quarter-by-quarter basis until you're fully ramped in 12 months?

Sure. So our plan for the full year, the remaining, I guess, 9 months, is around just over 200,000 tons of EAF production. The majority of that will be on EAF -- the first EAF that we're starting up in a couple of weeks. And it will be a pretty -- a relatively steep ramp on the -- towards the back half of the year. We want to be making our first EAF steel. The plan is in April, as we shared. There won't be significant amounts of steel produced in the second calendar quarter, but then there'll be more in the third and, I would say, much more in the fourth, if that helps.

Okay. And then, Rajat, you think the $650 million breakeven that's on a combined basis between the EAF and blast furnace? Or is that one or the other?

No, that's this year on the blast furnace. EAF will be -- as I mentioned, we have most of the fixed costs on the EAF, barring some. So the additional tonnage that's coming from the EAF will give contribution because most of the fixed cost is there. So that will be scrap and other variable cost, electrodes and others and less the selling price. So it will be on contribution. Once it's done, as we said, EAF will be scrap plus 220 for us -- USD 200 million to USD 220 million for us for full conversion. And that's how it will play out.

Our next question is a follow-up from the line of Katja Jancic with BMO Capital Markets.

On the volume for this year, so if we have 200,000 tons from the EAF, how to think about -- in the first Q, you already said mid-400s. How to think about the volume in the rest of the year from the blast furnace overall? And then also how to think about the split between plate and HRC given that maybe there's a little more opportunity on the plate side?

Correct. So it will be anywhere from 2 million to 2.2 million tons on the -- in the total. I mean, you can take 2.1 million to 2.2 million just to narrow the range from overall shipment for the calendar year. And on the plate side, we will see higher shipment for sure. It will probably average around 35-odd -- for the balance of the year, 35-odd thousand tons a month, 240,000 tons a month. So that will be our shipment on the plate side. And overall, 2.1 to 2.2.

At this time, I'd like to turn the floor back to Michael Moraca for closing remarks.

Thank you again for your participation in our calendar fourth quarter 2024 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 calendar first quarter results later this spring. Thank you.

This does conclude today's conference. You may disconnect your lines at this time. We thank you for your participation, and have a wonderful day.