Aug. 1, 2006 — Algoma Steel Inc. reported net income of $79.2 million on revenues of $504.8 million for the second quarter of 2006.
Second Quarter Results—The $79.2 million net income ($2.06 per common share on a diluted basis) compares to net income of $32.7 million in the first quarter of 2006 and net income of $64.7 million in the second quarter of 2005.
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Algoma currently projects that it will shut down its blast furnace for approximately 25 days in mid-2007 to perform work related to extending the blast furnace reline to 2010 or later.
The company is continuing to assess the scope and estimated costs related to this outage.
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Algoma says the increase in net income compared to the previous quarter was mainly due to lower costs and a lower effective tax rate. Other contributing factors were higher selling prices, an improved product mix, and the sale of coke. The lower cost of sales was primarily due to lower costs for natural gas, a decline in iron ore prices, and the recognition of a total of $8.4 million related to the benefit of research and development tax credits and a municipal tax refund. In the first quarter of 2006, higher financial expense was due mainly to the $7.9 million premium paid to redeem the 11% Notes in January 2006. The increase in earnings versus the second quarter of 2005 was due to lower costs and the effect of higher shipments, offset by lower selling prices and a lower tax rate.
Revenue of $504.8 million was $5.2 million higher than the previous quarter and $10.2 million higher than the comparable period in 2005. Algoma says the increase from the previous quarter was the result of higher pricing, offset by lower shipments. The increase over the second quarter of 2005 was the result of higher steel shipments, offset by lower steel prices. Steel prices averaged $753 per ton in the second quarter as compared to $737 per ton in the previous quarter and $806 per ton in the second quarter of 2005. Steel shipments totaled 625,000 tons, which was 18,000 tons lower than the first quarter of 2006 and 62,000 tons higher than the second quarter of 2005.
EBITDA was $124.1 million compared to EBITDA of $80.5 million for the previous quarter and EBITDA of $119.1 million for the second quarter of 2005. Algoma says the improvement from the previous quarter was mainly attributable to lower costs, although higher prices, an improved product mix, and coke sales also contributed to better results. The improvement from the comparable quarter in 2005 was mainly due to lower costs and the effect of higher shipments, partially offset by lower selling prices. Coke sales in the second quarter of 2006 amounted to 11,000 tons, contributing $3.0 million to EBITDA versus nil coke sales in the first quarter. Coke sales in the second quarter of 2005 totaled 27,000 tons and contributed $8.2 million to EBITDA.
The cash and securities balance increased to $341.4 million from $302.1 million at March 31, 2006 due to cash generated from operations of $90.1 million, offset primarily by capital expenditures of $11.3 million and share repurchases of $40.1 million.
Management Comments—Denis Turcotte, President and CEO, commented, "Strong pricing, solid commercial and manufacturing performance, and reductions in the cost of several main inputs combined to produce excellent results in the second quarter. We have continued to focus on shareholder value by purchasing in excess of 1.2 million shares under our normal course issuer bid and announcing our intent to repurchase $200 million worth of shares under a substantial issuer bid to be completed through the third quarter."
Operating Results—Cost of sales before employees' profit sharing was $351.2 million versus $397.0 million for the first quarter of 2006 and $352.0 million for the second quarter of 2005. The retroactive settlement of 2006 iron ore pricing resulted in an adjustment to second quarter cost of sales of approximately $3.0 million that relates to iron ore consumption in the first quarter of 2006. Algoma says the decrease compared to the comparable period of 2005 was mainly attributable to lower costs for natural gas, the decline in iron ore prices, the recognition of the benefit of research and development tax credits, and a municipal tax refund, offset by higher shipments.
Excluding employees' profit sharing expense, cost of sales per ton shipped for steel products was $512 per ton, which compares to $577 per ton for the previous quarter and $567 per ton for the comparable period in 2005.
The company had inventory of 49,000 tons of purchased slabs at June 30, 2006 compared to 13,000 tons at March 31, 2006. Approximately 40,000 tons of finished goods produced from purchased slabs were sold in the second quarter and these additional sales generated approximately an additional $3 million of operating income. This compares to approximately 35,000 tons of finished goods produced from purchased slabs in the first quarter generating approximately $3 million of operating income. There were no purchased slabs in the second quarter of 2005. The company expects to purchase a minimum of an additional 175,000 tons over the balance of the year, although the quantity purchased will be highly dependent on market conditions in North America and the cost of purchased slabs.
A $10.7 million ($17 per ton) expense for employees' profit sharing was recorded in the second quarter versus a $4.6 million expense ($7 per ton) for the first quarter and $8.7 million ($15 per ton) for the three months ended June 30, 2005.
Raw steel production totaled 665,000 tons versus 637,000 tons for the previous quarter and 639,000 tons for the second quarter of 2005.
Administrative and selling expenses totaled $18.8 million as compared to $17.5 million for the three months ended March 31, 2006 and $14.8 million for the comparable period in 2005. Algoma says the main reasons for the higher level were higher expenditures associated with the business systems renewal project and costs related to strategic activities.
Outlook—Algoma expects to report higher operating income in the third quarter, as compared to income for the second quarter (after excluding non-recurring items totaling $11.4 million). Higher steel pricing realizations are expected to offset the effect of higher costs. Selling prices and costs are subject to a high degree of variability and certain factors which could cause actual costs to vary from projections.
Algoma believes that current market conditions will remain favorable despite the increased imports into North America and reduced demand from the automotive sector due, in part, to seasonal factors. Algoma has implemented price increases for the third quarter consistent with general industry announcements. As a result, higher selling prices are expected in the third quarter and shipments are expected to be similar to the second quarter level of 625,000 tons. Coke shipments for the third quarter are expected to be unchanged at 11,000 tons.
Algoma expects to face higher costs in the third quarter due mainly to the absence of certain favorable non-recurring adjustments recorded in the second quarter. Higher coal costs, approximating $4 million, are expected in the third quarter due to the initial effects of the new coal contract. The full effect of the new coal contract is expected to be incurred in the fourth quarter.
The company currently projects that it will shut down its blast furnace for approximately 25 days in mid-2007 to perform work related to extending the blast furnace reline to 2010 or later. The company is continuing to assess the scope and estimated costs related to this outage.