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WCI Steel Reports 1st Quarter Results
05/15/2007 - WCI Steel reports a net loss of $4.3 million on net sales of $201.8 million for the first quarter ended March 31, 2007.
WCI Steel, Inc. reported a net loss of $4.3 million on net sales of $201.8 million for the first quarter ended March 31, 2007.
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Under the former WCI Steel’s plan of reorganization, the new WCI Steel (a Delaware corporation) acquired substantially all the assets of Old WCI. At that time (May 1, 2006), WCI Steel issued $100 million 2016 senior secured notes, received $50 million in cash for the issuance of 5.0 million preferred shares and was obligated to issue 4.0 million shares of common stock to the creditors of Old WCI as bankruptcy claims were resolved. As of March 31, 2007, WCI Steel had distributed 3.9 million shares of common stock and expects to distribute the remainder in 2007.
The 5,512,500 shares of preferred stock outstanding as of May 14, 2007 have a 10% "payment-in-kind" (PIK) dividend, payable semi-annually on May 1 and November 1. Each share of preferred stock converts into 1.2 shares of common stock no later than May 1, 2008.
Assuming conversion of the 5,512,500 shares of preferred stock and the current 4.0 million shares of common stock, WCI Steel had approximately 10.6 million common shares outstanding on a fully diluted basis as of May 14, 2007.
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Results, which were adversely affected by a weak market, were also weakened by costs due to damages to one of the company’s two BOF vessels in late January. The incident resulted in lost production, which further weakened results.
Total repair costs related to the BOF incident were about $6.0 million, of which $2.8 million was expensed in the quarter. The company maintains insurance coverage for a portion of the property damage. Although the damaged vessel was returned to service in mid-March, the event limited sales volume somewhat in the first quarter, but more significantly, it prevented the company from building inventory to meet needs for a scheduled outage in the second quarter.
Management Comments—"Our first quarter performance was modestly better than our prior guidance,” said Patrick G. Tatom, President and CEO. “Our shipments of 307,000 tons in the quarter exceeded our prior guidance of 290,000 tons largely due to very strong shipments at the end of March. Our average revenue per ton of $637 was $39 per ton below the fourth quarter, but $6 per ton above our guidance for this quarter.
“Although we are not satisfied with our performance in the quarter, EBITDA in the quarter of $1.8 million would have been $5.2 million without $2.8 million of expense related to the BOF incident and $0.6 million of salaried employee headcount reduction charges included in costs."
Cynthia B. Bezik, Chief Financial Officer, noted: "Our liquidity remains strong. At the end of the quarter, we had $1.3 million of cash on hand and $30.5 million borrowed under the $150 million revolving credit facility. Our borrowings under the revolving credit facility increased by only $5.8 million since year-end. Although we invested $18.3 million in capital projects during the quarter, the quarter benefited by a $33.5 million liquidation in inventory, primarily due to the normal seasonal reduction in iron ore combined with lower steel inventories at the end of the quarter."
Capital Expenditures—In late April, WCI Steel completed construction of a $29.3-million baghouse system at its basic oxygen furnace. The new system, which will help to reduce environmental emissions as part of the company's efforts to meet new federal air quality standards, is located on the west end of the BOF. The project was completed on time and on budget.
WCI Steel’s other major capital investment project—construction of the $36.7-million walking beam furnace at the hot strip mill—is ongoing. Although production at the hot strip mill continues to be limited during construction, the new walking beam furnace will eventually help to reduce operating costs and allow the company to expand its custom steel offerings. The walking beam furnace is expected to produce annual operating improvements of between $10 million and $14 million primarily due to energy savings and increased sales of custom products. Start-up scheduled for January 2008.
Outlook—The company expects second-quarter sales volume to be 280,000 tons, reduced from the first quarter level due to operational constraints. As a result of the lower expected sales volume, the company is projecting sales of about 587,000 tons for the first half of the year. For the second half of the year, the company believes sales volume will total about 680,000 tons, resulting in total shipments for the year of approximately 1,267,000 tons, including the sales of semi-finished steel. Once the walking beam furnace is operational in 2008, the company expects shipments to approach 1.4 million tons of finished steel.
The company says second-quarter results will be penalized due to the scheduled outage for the BOF baghouse installation. Due to a challenging start-up at the blast furnace after the BOF baghouse installation, the scheduled outage was extended by an additional two weeks, from mid-April until early May. Operations have recently returned to normal levels.
Although the company expects second-quarter pricing to improve by about $30 per ton, it says that costs associated with the production outage, along with reduced sales volume, will result in second quarter EBITDA being modestly negative.
"As we have previously emphasized, our future success is driven by aggressively focusing on three strategies: market differentiation, strengthening our core operations and pursuing external growth opportunities," Tatom said. "Although expected first half results are unacceptable, we are taking the right actions to position WCI Steel for a profitable second half. In the last six months of 2006, we earned EBITDA of $34.8 million. Based on our current market outlook and actions under way, we expect second half performance of 2007 to exceed the same period last year. We remain committed to executing our strategies to build WCI Steel as a strong, custom steel producer."
As an integrated producer of value-added, custom steel products serving niche markets, WCI Steel emphasizes customer and technical service. The company currently produces 185 grades of flat-rolled custom and commodity steel products at its Warren, Ohio facility. It focuses on a wide range of custom flat-rolled steel products, including high carbon, alloy, ultra high strength, and heavy-gauge galvanized steel and on developing closer, more responsive relationships with customers. Major customers are steel converters, processors, service centers, construction product companies, and to a lesser extent, automobile manufacturers.
