Algoma Steel Reports 1st Quarter Results
05/03/2007 - Algoma Steel Inc. released its unaudited first quarter results—net income of $23.1 million on sales of $479.5 million—for the three months ended March 31, 2007.
Algoma Steel Inc. released its unaudited first quarter results—net income of $23.1 million on sales of $479.5 million—for the three months ended March 31, 2007.
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Profitability in the production of steel is highly correlated with steel prices — a major factor causing variation in quarterly operating results.
In recent years, raw material and energy costs have also emerged as significant factors.
Domestic steel industry pricing is largely dependent on global supply, the level of steel imports into North America and economic conditions in North America.
Since U.S. markets establish pricing levels, the exchange rate of the Canadian dollar to the U.S. dollar significantly impacts pricing realizations for Canadian producers.
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First Quarter Results—The $23.1 million net income ($0.72 per common share on a diluted basis) compares to net income of $50.4 million in the fourth quarter of 2006 and net income of $32.7 million in the first quarter of 2006.
The decrease in net income from the previous quarter was mainly due to a lower effective income tax rate in the fourth quarter of 2006 due to a pension plan prepayment of $85.0 million. Lower average selling prices and higher natural gas and iron ore costs also contributed to lower first quarter net income. The decrease from the first quarter of 2006 was mainly due to lower average selling prices and higher coal costs in the first quarter of 2007, partially offset by a lower effective tax rate versus the first quarter of 2006.
Earnings per share on a basic and diluted basis were both $0.72 as compared to $1.58 and $1.57 in the fourth quarter of 2006, and $0.85 and $0.84 in the first quarter of 2006. In addition to changes in earnings over these periods, earnings per share reflect the reduction in shares outstanding due to share buybacks in 2006. The weighted average diluted shares outstanding were 32.3 million in the first quarter of 2007 and 32.2 million in the fourth quarter of 2006 as compared to 38.8 million in the first quarter of 2006.
EBITDA of $53.1 million compares to EBITDA of $64.2 million in the fourth quarter of 2006 and EBITDA of $80.5 million in the first quarter of 2006. The company attributes the decrease from the previous quarter to 3.1% lower average selling prices (-$22/ton) and higher natural gas and iron ore costs, offset by a 20% increase in shipments. The decline from the comparable quarter in 2006 is attributed mainly to lower selling prices and higher coal costs. There were no coke sales in the first quarter of 2007 or the first quarter of 2006, while 10,591 tons of coke sales in the fourth quarter of 2006 contributed $2.2 million to EBITDA.
Sales of $479.5 million were $61.1 million higher than the previous quarter and $20.1 million lower than the comparable period in 2006. The increase from the previous quarter was the result of significantly higher shipments, partially offset by lower average selling prices. The decrease from the first quarter of 2006 was the result of lower average selling prices: steel prices averaged $699 per ton in the first quarter, $721 per ton in the previous quarter, and $737 per ton in the first quarter of 2006.
Steel shipments totaled 642,600 tons for the quarter, 108,400 tons higher than the previous quarter and approximately the same level as the first quarter of 2006. Although shipment volumes recovered from the low levels experienced in the fourth quarter of 2006, abnormally high customer inventory levels that affected sales near the end of the fourth quarter of 2006 continued to affect selling prices in the first quarter. Although price increases have been implemented, the increases did not take effect until relatively late in the quarter and product mix negatively impacted average selling prices compared to the previous quarter. The company expects that selling prices will continue to increase in the second quarter.
Cash and short-term investments decreased by $20.9 million, primarily due to an increase in accounts receivable as a result of higher volumes and payment of the remainder of the 2006 current tax liability totaling $51.9 million.
Management Comments — “The impact of a return to stronger sales volumes was mitigated by pricing that averaged $22 per ton lower than the previous quarter as price increases did not take full effect until late in the quarter,” said Denis Turcotte, President and CEO. “Manufacturing costs in the quarter were impacted by a 7% decline in raw steel production as compared to the prior quarter due primarily to unplanned downtime in our steelmaking operations. We are confident going into the second quarter as volumes remain strong, price realizations are increasing consistent with industry trends and our production levels have returned to more normalized levels."
Capital expenditures totaled $17.4 million, which compares to capital expenditures of $27.0 million in the fourth quarter of 2006 and $14.3 million in the first quarter of 2006. Expenditures in the current quarter included $5.2 million in preparations for the partial blast furnace reline scheduled for July 2007, while the fourth quarter of 2006 included $11.4 million of such expenditures.
There were minimal financing activities in the first quarter of 2007 and no financing activities in the fourth quarter of 2006, while financing activities in the first quarter of 2006 included $153.3 million paid on the redemption of the 11% Notes.
Proposed Acquisition by Essar Global Limited — The company recently announced that it had signed a definitive arrangement agreement with Essar Steel Holdings Limited (Essar), a subsidiary of Essar Global Limited, providing for Essar’s acquisition of all Algoma common shares for approximately $1.85 billion, or $56 per share. The offer price represents a premium of 48% to the company's volume weighted average share price for the 20-day period ending on February 14, 2007 (the date when the company confirmed that it was in discussions regarding a potential transaction).
Under terms of the arrangement, the company will undertake a court approved plan of arrangement pursuant to which an Essar subsidiary will acquire all company shares for consideration of $56 per share. The arrangement must be approved by two thirds of the votes cast (in person or by proxy) at a shareholders' meeting, and is subject to customary closing conditions including the necessary regulatory approvals. The arrangement agreement provides for the payment to Essar of approximately $55.4 million in the event that the acquisition is not completed under certain circumstances.
The company expects that the shareholders' meeting to approve the arrangement will be held in June 2007 and that the acquisition — if approved by the shareholders — will be completed shortly thereafter. Algoma’s Board of Directors has unanimously recommended that the company's shareholders vote in favor of the transaction.
Outlook — The company expects steel pricing realizations and strong shipment levels for the second quarter, which would result in higher operating income. The company says the abnormally high service center inventories experienced in the fourth quarter of 2006 declined in the first quarter of 2007, which is leading to increased demand from service center customers and higher selling prices going into the second quarter. Steel shipment levels are expected to remain strong in the second quarter, although selling prices and costs are subject to a high degree of variability.
The company anticipates that iron ore costs will be higher in the second quarter due to the full effect of the 2007 price increase. The company is currently making payments to its iron ore supplier based on its estimate of a pricing increase of 5%; the actual increase will be determined in the second quarter and could vary from this estimate depending on the outcome of global pricing negotiations.
