WCI Steel Reports 2nd Quarter Results
08/10/2007 - WCI Steel reports a net loss of $12.5 million for the quarter and a net loss of $16.8 million for the six-month period ended June 30, 2007; results were negatively impacted by a BOF baghouse installation, and unscheduled outages in the blast furnace and BOF.
WCI Steel, Inc. reported a net loss of $12.5 million for the quarter and a net loss of $16.8 million for the six-month period ended June 30, 2007.
Second Quarter Results—The $12.5 million net loss (prior to the accrued PIK preferred dividend) was earned on shipments of 284,000 tons and revenues from product sales of $191.0 million ($674 per ton). The net loss per share was $4.10. EBITDA was a negative $11.4 million, and the operating loss was $17.8 million.
According to the company, results were negatively impacted by the BOF baghouse installation and unscheduled outages in the blast furnace in the second quarter and the BOF vessel damage incurred in the first quarter.
“Our performance in the quarter was unacceptable, reflecting operational difficulties, disappointing plant performance and a variety of cost challenges,” said Michael C. Buenzow, Interim President and CEO. “The Board of Directors and management are moving decisively to improve operations, but we continue to experience under performance until operational improvement and cost reduction initiatives are fully implemented.
“The recent pressure on steel pricing, combined with weakness in some of our key market sectors going forward, makes it imperative that we work vigorously to reduce our costs and improve production and reliability," Buenzow added. "In the one month I have been at WCI Steel, I am pleased at the efforts being taken to drive long-term positive change.”
Second Quarter Operating Results—Shipments of 284,000 tons were in line with prior guidance, and the average revenue rate ($674 per ton) was $37 per ton better than the first quarter, and $7 per ton above the guidance for this quarter. Revenue per ton was generally in line with the level experienced in the fourth quarter of 2006. Sales volume, although consistent with earlier projections, remained constrained by production and inventory limitations.
Production and sales volume were adversely affected by several factors, including the inability to build inventory to meet second quarter shipments due to the late-January damage to one of the company’s two BOF vessels, as well as a one-week (scheduled) outage for the BOF baghouse installation in April. Additionally, the blast furnace experienced a difficult start-up after the BOF baghouse installation, which resulted in an additional two weeks of unscheduled outages. The challenge of stabilizing operations at the hot strip mill with only two furnaces operating until start-up of the walking beam furnace has further complicated the situation. Combined, these items reduced production and sales for the quarter by at least 75,000 tons.
During the quarter, $11.1 million of excess idle costs related to the April and May outages were incurred. Including the impact of lost profit contribution, the total impact of the reduced volume in the quarter likely exceeded $20 million. Although BOF production improved in June and July, operational challenges continue in the hot strip mill and finishing operations.
Cynthia B. Bezik, Chief Financial Officer, noted: "At the end of the quarter, we had $5.3 million of cash on hand and $48.6 million borrowed under the $150 million revolving credit facility. Our borrowings under the revolving credit facility increased by $18.1 million since the end of the first quarter due to the difficulties encountered during the quarter and our capital spending program. We expect our borrowings to increase for the balance of the year primarily due to the normal seasonal build of iron ore, capital spending and the business outlook. Liquidity going forward remains adequate to support our planned capital expenditures."
Capital Expenditures—Construction of the new walking beam furnace at the hot strip mill remains on schedule, with start-up planned for January 2008. Total project cost is now estimated at $41.6 million, of which $37.4 million is capital. Of the $37.4 million capital portion of the project, $21.9 million has been spent, with the balance planned to be spent in the second half of 2007 and into early 2008. During construction, hot strip mill production will continue to be restricted. Once fully operational, the walking beam furnace is expected to generate annual benefits of between $10 and $14 million due to energy savings and increased custom product sales.
Second-quarter capital expenditures were $19.0 million, and year-to-date capital expenditures were $37.3 million. Second-half capital spending is forecasted at slightly more than $24 million, largely related to the walking-beam furnace project.
Outlook—The company expects third-quarter sales volume to be about 305,000 tons, with the fourth-quarter sales volume anticipated at the same level. The company is projecting sales volume to total about 610,000 tons for the second half of the year, a decrease of 70,000 tons compared to earlier guidance. The reduced volume for the second reflects the company’s ongoing production constraints in the hot strip mill during the installation of the walking-beam furnace. Based on production constraints, the company says that total shipments for the year will be limited to approximately 1.2 million tons, including the sale of semi-finished steel.
The company expects third-quarter pricing to average about $35 per ton below second-quarter pricing. In addition to price weakness, the company says that third-quarter results will be adversely impacted by rapidly escalating raw material costs, particularly coke and certain alloys, and by the ongoing production limitations. The company expects rapidly escalating coke prices to add about $30 per ton to its finished steel costs in the third quarter. As a result, the company is forecasting that third-quarter EBITDA will be break-even to modestly positive. Although some steel pricing improvement is anticipated in the fourth quarter, the full impact of escalating coke prices will not be realized until the fourth quarter. The company notes that fourth-quarter results will also be negatively impacted by start-up efforts related to the walking beam furnace. In 2008, with the walking beam furnace fully operational, the company says that annual production and shipment levels should exceed 1.3 million tons.
WCI Steel is an integrated producer of value-added, custom steel products serving niche markets, emphasizing customer and technical service. WCI Steel currently produces 185 grades of flat-rolled custom and commodity steel products at its Warren, Ohio, facility. The company 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.
