Algoma Steel Group Inc. · NASDAQ:ASTL
Algoma Steel — Investor Presentation (March 2006)
35 slides from Algoma Steel's investor presentation, March 2006
Slide 1: Investor Update
INVESTOR UPDATE Algoma Steel Inc. Investor Presentation – March 2006
Slide 2: Disclaimer
Disclaimer Certain statements made in this presentation are forward-looking statements that involve risks and uncertainties. These forward-looking statements reflect the Company’s best judgment based on current information, and although we base these statements on circumstances that we believed to b
Slide 3: Algoma's Track Record
Algoma’s Track Record • The existing board: – delivered 902% return to shareholders from February 21, 2002 to February 20, 2006 versus 72% total return on S&P TSX Composite – stewarded the establishment of superior operating and commercial performance – explored a broad range of strategic alternativ
Slide 4: Strategic Review Process
Strategic Review Process • Special Committee of directors constituted in late 2004 to oversee process • Stelco transaction considered in late 2004 to understand the opportunity • Formal sale process initiated in early 2005 with financial advisors – Involved financial and strategic buyers • Sale proc
Slide 5: Moving Forward
Moving Forward • Algoma has a solid foundation: – Strong balance sheet and liquidity – World-class assets, products and knowledge – Operating more effectively than it has in 20 years • Board has announced a further distribution of $200 million due to better clarity on business conditions - just as i
Slide 6: Why Distribute $200M Now?
Why Distribute $200M Now? • The steel markets are firming up – solid Q1 and Q2 pricing • Our input costs for 2006 are clearer – Coal contract finalized – Natural gas prices down – starting to hedge again – Iron ore negotiations suggest a modest increase • Our operating performance has continued to b
Slide 7: Driving Value
Driving Value Will stay focused on the core business EBITDA Free Cash Flow Capital Deployment Enterprise Balance Sheet Value Financial Risk Cost Structure Risk Profile Business Risk Markets Turning Concept Into Action Products • Margin improvement process Capability • Capex framework • Balance sheet
Slide 8: Margin Improvement Plan
Margin Improvement Plan This core program has been effective $ Millions $175 $148 MM Accrued Annualized $150 Savings Achieved $125 $100 $75 $50 $25 $0 Q1' 03 Q2' 03 Q3' 03 Q1' 04 Q2' 04 Q3' 04 Q4' 04 Q1' 05 Q2'05 Q3'05 Q4'05 EMPLOYMENT ENERGY VOLUME & MIX PROCESS IMPROVEMENT PURCHASING & DISTRIBUTIO
Slide 9: Margin Improvement Plan Potential
Margin Improvement Plan Potential ($ Millions) • Focus on continuous improvement $180 $160 $160 $148 • Incremental potential approximates $140 $160 MM $120 $100 • Over 50 individual initiatives, including: $80 $60 – Increase shipments $40 $20 – Improve DSPC reliability $0 Achieved: Additional – Opti
Slide 10: Industry Dynamics
Industry Dynamics Major Drivers: • Stronger global and regional steel demand • Imports less competitive • Global and NA consolidation U.S.$/ton • Higher costs (minis & integrated) $800 $750 $700 $650 $600 Upper New Level? $550 Trend $500 Line $450 $400 Lower Numerous bankruptcies in NA Level ? $350
Slide 11: Developing World Is Poised For Growth
Developing World Is Poised For Growth 80 2004 KT/$BLN GDP (Real 2000 $) 70 60 Korea Steel Intensity Ukraine 50 China USA 1930-2004 40 Turkey 30 Vietnam Russia Japan 20 Germany USA 10 India S. America 0 $0 $5,000 $10,000 $15,000 $20,000 $25,000 $30,000 $35,000 $40,000 Economic Development GDP per Cap
Slide 12: Growing Consumption Better Returns
Growing Consumption Better Returns 60 1927 50 Supply Overhang Years to reach 40 Supply chasing demand ROCE < WACC 30 1951 1997 20 Returns are ROCE > WACC improving 10 1959 1964 2002 1968 1972 1974 2004 0 100 200 300 400 500 600 700 800 900 1,000 M. Tonnes Liquid Steel Production Source: IISI, First
Slide 13: Strategic Positioning
Strategic Positioning Where and how to succeed • Economies of scale Large Market Leaders • Supply leverage • Critical mass • Cost of capital Mid-Market Competitors • Risky without clear path or unique capabilities • Entrepreneurial – focused, action-oriented Small Niche & Regional Players • Market s
Slide 14: Core Strategy
Core Strategy Primary Manufacturing Maximize Value from the Strategy “Base Case” Scenario • “Lock in orders” for 35-50% of capacity – optimize the mill Processing & Distribution • Supply highest value products to most demanding buyers • Slitting • Apply steelmaking know-how to • Cut-to-length applic
Slide 15: Strategic and Investment Framework
Strategic and Investment Framework • Will distribute excess free cash flow – Will need ~ $150 million of cash on hand for the next 18-24 months • Will move towards our target capital structure of 25% debt to total capital – Will seek to use existing debt capacity plus cash on hand to move strategica
Slide 16: Appendix
APPENDIX A Position of Strength
Slide 17: Algoma Steel Inc.
Algoma Steel Inc. Algoma Share Price Share Listing $45 $40 Algoma Steel Inc. trades on the Toronto Stock Exchange under the symbol AGA $35 $30 Share Transfer Agent $25 $20 Computershare Investor Services Inc. Ex $15 Dividend $10 Corporate Auditors $5 KPMG LLP, Toronto, Ontario, Canada $0 03 04 05 06
Slide 18: Process Flow
Process Flow
Slide 19: Products and Markets
Products and Markets 2005 Sales SHEET BY MARKET SECTOR MFG. TUBULAR 5% PRODUCT CATEGORY 19% SERVICE Plate Unprocessed CENTERS 47% 20% 25% Blanks 3% AUTOMOTIVE 29% Cold Rolled PLATE BY MARKET SECTOR 7% Processed FABRICATION & 19% CONSTRUCTION Pickled 32% 26% SERVICE CENTERS 68% A Position of Strength
Slide 20: Investment Highlights
Investment Highlights • 2.3 million tons / diversified product mix • Low cost structure • Favourable coke position • Highly competitive assets • Positive employee and union relations • Strong balance sheet • Experienced management team • Substantial value enhancement Head Office/Steelworks: opportun
Slide 21: Financial Highlights
Financial Highlights (Cdn $ Millions except EPS) 2005 2004 2005 Q3 Q4 Sales $1,803 $1,918 $446 $478 EBITDA 597 417 63 78 Income Taxes 196 125 21 7 Net Income 344 240 31 55 - EPS 8.83 6.00 0.77 1.38 Dividends - 238 238 - Share Purchases - 38 30 8 Cash and Securities 453 435 453 435 A Position of Stre
Slide 22: Strong Financial Performance (2004)
Strong Financial Performance 2004 Operating Income – $US per ton $225 $200 $175 191 186 Integrated Mills Mini-Mills $150 148 $125 132 $100 92 94 90 $75 75 $50 52 46 $25 33 $0 (13) ($25) I A ISG WP * * S on r co AK co* SD MA co lco lN US Ips eg Nu fas Ste tta GO Or Do Mi AL * 2004 converted to US$ at
Slide 23: Strong Financial Performance (2005)
Strong Financial Performance 2005 Operating Income – $US per ton $275 $250 259 $225 $200 $175 $150 Integrated Mills Mini-Mills $125 131 136 $100 110 103 $75 73 70 $50 $25 35 18 0 0 $0 ($25) ) on co * I cor AK S NA * WP * (1 SD MA lc o US eg Ips Nu sc o l Ste GO tta Or Mi fa AL Do * 2005 converted to
Slide 24: Relative Share Price Performance
Relative Share Price Performance Relative Share Price Performance January 1, 2003 to December 31, 2005 1900% 1700% 1500% 1300% Relative Return (%) Mittal 1100% 1097% Algoma 900% 1091% IPSCO 700% 729% Oregon 500% Steel 632% Nucor 223% 300% US Steel 266%Steel Dynamics 100% 195% Dofasco 215% (100%) AK
Slide 25: Asset Advantages
Asset Advantages • DSPC – Superior quality – Niche products / value-added capability – Low-cost structure • Other Advantages – Large scale blast furnace – Integrated coke batteries (coke self-sufficient) – Heat treated plate capacity Flexible Manufacturing – Wide coil capacity – Opportunity to expan
Slide 26: Commercial Strategy
Commercial Strategy • Product Market Strategy focused on differentiation, utilizing Algoma’s distinctive strengths to deliver better value to its customers • Main Elements: – Leverage Algoma assets and products to maximize value – Product extension and development – Forward integration – Optimize mi
Slide 27: Gains in Productivity
Gains in Productivity Tons shipped per employee 745 761 Up 90% 619 517 401 1998 2000 2002 2004 2005 A Position of Strength
Slide 28: Capital Structure Philosophy
Capital Structure Philosophy • Target is 25% debt to capital over time • 11% notes redeemed in January 2006 • Timing of potential debt financing is dependent upon: – Steel market prospects – High yield market conditions – Investment opportunities Debt-free in the short term but will continually moni
Slide 29: Approach to Capital Deployment
Approach to Capital Deployment • Algoma’s approach to capital deployment entails: – Maintain prudent level of liquidity ¾ Manage liquidity to our weak case scenario – Evaluate opportunities to invest capital at appropriate rates of return – Consider strategic opportunities and positioning needs – Re
Slide 30: Capital Spending
Capital Spending • Capex philosophy ~ Average $60 million / year on existing assets – Sustaining capital reinvestment ~ $40 million/year – Business improvement projects ~ $20 million/year ¾ Priority on payback projects < 3 years ¾ Focused on productivity, quality and cost reduction ¾ Quality and ser
Slide 31: Blast Furnace Status
Blast Furnace Status • Several major engineering firms retained to assess BF condition • Additional work in 2006: – 15 day outage in 2006, estimated capital cost of $11 million – 30-35 day outage planned for 2008 – Full reline projected in 2010 or beyond • Operating and maintenance plan developed to
Slide 32: Pension and Post-Employment
Pension and Post-Employment ($ Millions) Actual Actual Estimate 2004 2005 2006 Pensions Expense $35 $53 $55 Funding 72* 97** 15** * Includes one-time payment of $40 **Prepayment of $44MM in Dec/05 Liability: Accounting - Balance Sheet 69 25 65 - Unfunded 254 287*** Statutory Basis - Unfunded (Solven
Slide 33: Major Elements of Operating Costs
Major Elements of Operating Costs* 2005 Employment Costs ($288M) 22% Raw Materials ($595M) 47% Other Supplies & Services ($161M) 13% Energy ($235M) 18% Total $1,279 million * Cost of sales for steel products only. (Excludes profit sharing costs, SG&A and costs related to coke sales) A Position of St
Slide 34: Cost Commentary For 2006
Cost Commentary For 2006 Raw Materials: • Iron ore price depends on global negotiations • Coal price projected to increase by 10% over 2005 Employment: • Pension and post employment expected to increase by $6 million versus 2005 Energy: • Natural gas has declined recently from record highs in Q4 A P
Slide 35: Margin Improvement Plan
Margin Improvement Plan Objective: – To improve trend-line profitability and to offset increases to input prices and other escalating costs outside the control of management Criteria for Inclusion: – Potential annual benefits of over $100,000 realized within three years (within five years if requiri