Esmark Incorporated F4Q08 (Qtr End 3/31/08) Earnings Call Transcript

Esmark Inc. (ESMK)

F4Q 08 Earnings Call

April 30, 2008; 2:00 pm ET

Executives

Jim Bouchard - Chairman and Chief Executive Officer

Craig Bouchard - Vice Chairman and President

Paul Mooney - Executive Vice President and Chief Financial Officer

David Lutdak - Executive Vice President Mill Operations

Tom Modrowski - Executive Vice President Downstream Operations.

Dennis Halpin – Director of Investor Relations

Presentation

Operator

Good day everyone and welcome to the Esmark Incorporated fourth quarter and full year 2007 conference call. Today’s conference is being recorded. At this time I would like to turn the conference over to Dennis Halpin; please go ahead sir.

Denis Alban

Thank you André and good afternoon everyone. Welcome to Esmark Incorporated’s conference call and webcast covering the fourth quarter and full year 2007 results. Joining me on the call today are Jim Bouchard, Chairman and Chief Executive Officer; Craig Bouchard Vice Chairman and President; Paul Mooney, Executive Vice President and Chief Financial Officer, David Lutdak, Executive Vice President Mill Operations and Tom Modrowski, Executive Vice President Downstream Operations.

Certain comments made on this afternoon’s call may contain forward-looking statements within the meaning of section 27A of the Securities Act and Section 21E of the Securities Exchange Act. Listeners are cautioned that such forward-looking statements reflect the current views of management and are subject to a number of risks and certainties that could cause actual results to differ material from actual future events or results. In addition, any forward-looking statements contained in this conference call represent Esmark’s Incorporated view as of today only and the company does not assume any obligations to updates them.

Also please note that the conference call is open to the public and it is being broadcast live both on our website at www.esmark.com and as well as on www.investorcalendar.com. It does contain time sensitive information and is being recorded for replay through May 7 by dialing 888-203-1112 or 719-457-0820 and using the pass code 8470714.

Before I pass the call over to our chairman I want to advise you of a little change in todays call format. Given this morning’s announcement regarding Essar and Esmark, coupled with the expected length of time of our prepared remarks, now to include some discussion on this matter we will not hold the question-and-answer session following these prepared remarks. We believe that the content contained in our prepared remarks this afternoon should provide sufficient depth as to not only the calls core purpose but also towards this morning’s news; with that over to Jim.

Jim Bouchard

Thank you Dennis and good afternoon everyone. Its an exciting day for Esmark today, all of our employees, our shareholders, for the Ohio Valley, we made an announcement this morning as everybody knows for a tender offer to Essar Steel Holdings from Mumbai, India; owners of Algoma Steel and Minnesota Steel here in the States. The transaction for it is approximately $1.1 billion. We have agreed to material terms of the proposed merger with Essar. The company plan to enter into a definitive documentation upon the exploration of the waiver of approximately 52 day rates of bid period set forth in a collective buying agreement with the United Steel Workers.

Esmark has also entered into a binding commitment letter with Essar for a $110 million term loan which is anticipated to be funded by the middle of May. Proceeds of the loan will be used to refinance existing term loan and in that we are paying off the government loan. We want to thank the United States government, the state of West Virginia and Joe Mansion for being a guarantor on that. Governor Strickland from Ohio is also a guarantor on the loan. The loan will be satisfied; we have paid that down from the initial $250 million. It was roughly a little over $150 million, we paid that down to $79 million.

So $79 million of the proceeds that ESSAR is providing to the company will extinguish the US Government Loan. The balance of that money will be used for liquidity purposes inside the company and operating the company to complete and get to the merger. On behalf of Esmark, our executive management team, I want to thank you for all taking the time to join us today to review the company’s performance for the fourth quarter and full year 2007.

Before we get underway I first want to introduce and thank our management team members who had worked very diligently over the last couple of months on this transaction as well as the strategic initiatives underway. These people here with me today will report on the financial and operational performance of the company for the fourth quarter and full year 2007 and joining me today is my brother Craig, Vice Chairman and President; Paul Mooney our Chief Financial Officer; David Lutdak, Executive Vice President of Mill Operation and Tom Modrowski, Executive Vice President of Downstream Operations.

Secondly I would like to offer some insights to why this earnings call has taken so long to occur, I apologize for that but as many of you know other companies are in the midst of conducting their 2008 first quarter earnings call; our business combination became effective November 28, 2007, so very late in the year. The nature of such a transaction, obviously the first reverse hostile merger in the history of the United States and this transaction requires some extensive opening balance sheet accounting tasks including for example evaluation of all company property, plants and equipment.

Once complete with the post merger financials you can then address the task of the year end financials and let’s not forget that this transaction was quite unique and that Esmark Steel Services Group was a small private entity prior to the business combination. When you combine these set of facts, I think one can began to understand the complexities of taking over a large public company and the time line involved in completing this particular year end. As a matter of fact this process is still not complete and we have not yet filed our year end 10K. Paul Mooney our CFO will address this later in more detail.

Since the business combination of Wheeling-Pittsburgh Steel and Esmark became effective last November 28, a lot has taken place here at Esmark. As outlined in my letter to the shareholders dated November 6 of this past year we have made substantial progress in moving the ball forward both operationally, commercially and strategically. The core of that letter spoke to a two step transaction: immediate restructuring for near term profitability and strategic investment considering for all, the long term profitability of the company. Let me speak to just a few of these initiatives.

First from the commercial prospective; we carefully analyzed our product mix and customer basis to combine companies and develop an optimum blend for profitability. We then overlaid these results against the capabilities of our facilities giving consideration to all the overall equipment, competitiveness and cost structure with inside of the corporation. We then step back one level more and fine tune the overall raw material input used to produce the substrate, but the focus on utilizing a higher residual scrap blend while maintaining the necessary quality for our existing and new customers we’ve added.

I’m proud to say that these initiatives have contributed to a dramatic change at Wheeling-Pittsburg Steel and our earnings performance. As noted in our earnings release issued earlier today Wheeling-Pittsburg Steel reported a positive EBITDA in the first full month of post merger operations and as probably explained later in the call it is expected to report positive EBITDA in the first full quarter post merger 2008.

From a strategic prospective we have announced several significant actions. First, the creation of two distinct business segments; the mill operations led by Dave Lutdak and the downstream operations lead by Tom Modrowski. These segments have independent management teams and tailored objectives. We firmly believe this organizational style lends itself to improved performance as a whole, as a individual and as a whole. Beginning with the next quarter’s conference call we will begin reporting our results along these lines.

Second, our intention is to permanently shut down the Allenport cold-rolled facility, idle two high class galvanizing lines of Martin’s Ferry, the equipment, condition and non-competitive conversation costs, ultimate product markets, customers and transportation costs all weighed in this very difficult decision. The sale of our minority equity interest in wheeling mission, the joint venture for over $71 million given our decision with regard to Allenport, the monetization of this asset in our minority position was a natural outgrowth and it’s net proceeds went to significantly reduce our long term debt that I discussed before against the US Government loan. So needless to say we have been working hard to change the composition of this company and our efforts are beginning to strongly reflect us.

Before I hand the call over to Paul, I want to address this press release issued earlier this morning, Essar and Esmark detail later in this call, but I would like to inject a few points at this time regarding the announcement. As most of you know our management team arrived here at Wheeling-Pittsburg Steel with little cash and very few orders on the books. While immediately reinitiating the backlog level and making a number of strategic and operational enhancements to prepare for our business post merger we have continued to work within a very tight credit market.

We had hoped to receive a significant cash infusion as a result of the merger and relate a purchase rights offering; yet ultimately a large portion of the initial proceeds was utilized to satisfy the put rights and while we remain steadfast in our efforts to refinance our long term debt we do so at a time when the credit market remains constricted and the cost of raw materials continues to escalate, but no resizing of a revolver to allow us to apply our typical procurement pattern. It is within this environment that we as the company Stewarts must consider the best alternative for all stake holders of this company and evaluate strategic opportunities that come before us.

We as a management group and with the unanimous approval our board of directors consider the opportunity announced this morning to be compelling. Again with the combination of Essar, the turnaround effort that they have demonstrated at Algoma, the capital commitments that they had made at Algoma, the low cost iron ore that they have on the Mesabi range, Wheeling-Pitt and Algoma will obviously be worth the integrated backward, respective cost to bring those pallets out and get that to Wheeling-Pitt will ensure a low cost steel production company for ESSAR going forward.

The vision for the company is outstanding. Their commitment for capital for Wheeling-Pittsburg Steel, Algoma and Minnesota is significant for the United States. We believe we have selected the absolute best partner for this company and for Wheeling-Pitt to take it into the decades in front us. It’s got a long proud tradition. ESSAR recognizes that dating back to the early 1900s and corrugate in late 1800s and they have nothing but growth plans for the company going forward.

So at this point with raw material costs escalating across all levels of the company and iron ore, coal, coke, gas, electricity, scrap, it is become the larger players and the peer size and the scope and capability of the larger international as well as US players. The larger companies are in a very strong position to help combat the raw, peer, dramatic raw material increases going forward. So with that in mind we targeted many companies and Essar was clearly out in front of all of those companies.

We believe ESSAR will take Wheeling-Pittsburg and all the Esmark downstream companies to the next level and I am proud to help in that transition with them. At the point when the merger is completed I will hand over to the range to Essar and Essar will again continue to take this company forward. So we are very excited and ask their full cooperation and support of all the management teams inside Wheeling-Pitt as well as the downstream operations and everybody is going to be focused on really continuing to take Esmark to the next level.

At this point I would like to move onto Paul Mooney, our Chief Financial Officer who will discuss the financial performance of the company during the fourth quarter and full year 2007 and provide some insight into our first quarter results. Paul.

Paul Mooney

Thanks Jim. Today we released for the first time earnings related to Esmark Incorporated. These results reflect the merger on November 27, 2007 of the operating entity then called Esmark which has been renamed Esmark Steel Services Group or ESSG and Wheeling-Pittsburgh Steel Corporation or Wheeling-Pitt.

For accounting purposes Esmark was the acquirer in the merger and purchase accounting has been applied to the November 27, 2007 balance sheet of Wheeling-Pitt. As a result, our reporting incorporates the results of operations of ESSG for the entire calendar year of 2007, but only includes the results for Wheeling-Pitt for the post merger period from November 27 through December 31, 2007; that is also the basis upon which our earnings release was prepared and which has formed the basis for our comments today. To avoid confusion I will refer to this as the reporting period and confine my remarks to the fourth quarter.

For the fourth quarter reporting period Esmark reported a net loss of $12.3 million or $0.76 per share after considering the effects of preferred stock outstanding prior to the merger. Consolidated EBITDA was a negative $1.8 million; however. This amount included a non cash charge for the impairment of goodwill at ESSG of $9.7 million; excluding this charge results in adjusted positive EBITDA of $8 million. As we had guided in our press release dated March 7 of this year, both ESSG and Wheeling-Pitt had positive adjusted EBITDA for the reporting period.

As it relates to Wheeling-Pitt this result represents a marked improvement when compared to the $35.5 million EBITDA loss reported in that company’s third quarter Form 10-Q. Shipments for the reporting period were 240,000 tons at Wheeling-Pitt and 246,500 tons at ESSG including total processing. Sales were $161 million or $671 a ton at Wheeling-Pitt and $168.1 million or $682 per ton at ESSG including our total processing but before inter company elimination. Process sales were $149.6 million or $623 a ton at Wheeling-Pitt and $152.7 million or $624 a ton at ESSG.

Turning briefly to Wheeling-Pitt results the significant EBITDA improvement which I mentioned was principally driven by higher volume and lower spending. Average selling prices were down by about $24 a ton. The post merger period includes 34 days of shipping including the last days of November and we shipped an average of only about 186,000 tons per month in the third quarter versus roughly 240,000 tons in the reporting period. Lower discretionary plant spending in absolute terms was also a contributing factor. Scrap costs were a little changed from the third quarter and we benefited from an opportunistic acquisition of Iron ore during the reporting period.

In the first quarter shipments averaged about 210,000 tons per month and average selling prices increased about $60 per ton; however cost will increase by slightly more as we have experienced significant increases in scrap costs as well as higher levels of discretionary plant spending and an increase in iron ore cost from the abnormally low December level. Natural gas costs have also been higher.

Turning to ESSG results, the fourth quarter EBITDA adjusted to and excludes the write-off of goodwill was approximately $3 million positive. With selling prices increasing as Tom will discuss and the cost of substrate increasing only modestly we see ESSG adjusted EBITDA in the first quarter more than doubling from the fourth quarter level.

Looking to the second quarter we see shipments relatively consistent with those in the first quarter. Based on recently announced price increases and surcharges we expect revenue per ton to increase across both our businesses. On the cost side of Wheeling-Pitt scrap, iron ore and natural gas prices will continue to rise as will the cost of subsidiary at ESSG; however, if we continue to produce and ship as we are doing today we presently foresee a very significant improvement in EBITDA from that which we expect to report for the first quarter and could possibly report consolidated second quarter net income for Esmark Incorporated.

In connection with our purchase accounting we have accrued approximately $42 million to provide for termination benefits and other costs related to our previously announced restructuring at Allenport and Martin’s Ferry which Jim mentioned. These costs will be disbursed over the next couple of years. Just to recap on our debt situation as Jim has mentioned during the first quarter we sold our interest in wheeling mission, we used the net proceeds to pay down the Wheeling-Pitt term loan by about $70 million. As a result the outstanding balance of that loan is less than $80 million today.

The new term loan for $110 million which we announced today would be used to replace the existing term loan and provide approximately $30 million of additional liquidity. At March 31, 2008 the availability of the combined companies was $82.6 million reflecting $36 million at Wheeling-Pittsburg and $46.6 million at ESSG. As we have previously disclosed the maturities of our revolving credit facilities have been recently extended until May 31 with an option to extend further depending on the maturity of the new term loan. When the new term loan is funded we expect the revolving credit facility to extend until September 30.

That’s it from my financial summary Jim, back to you.

Jim Bouchard

Nice job Paul. At this point I would like to turn it over to Dave Lutdak to give us a summary of the recent performance in our Mill operation, Wheeling-Pittsburg steel. Dave.

Dave Lupdack

Thanks Jim. I’ll focus on my mill operations comments on our five critical business drivers; safety, product quality, environmental compliance, productivity and cost containment.

We’ve made significant improvements in all five of these drivers.

In the area of safety we continue to focus on employee training, safety awareness and good housekeeping practices. Our 2007 safety performance was a significant improvement over 2006. Our accident recordable frequency rate improved by 24% and our loss time injury frequency rate was down over 17%. That trend has continued through the first quarter of 2008. We set a 2008 safety performance objective of an additional 20% improvement over our 2007 performance and through the end of the first quarter we are well ahead of that goal, both on a companywide and facility-by-facility basis.

In addition we are performing safety compliance audits and compliance remediation at all of our facilities. We benefit from excellent cooperation and involvement from the USW in all of these efforts. In working together we are committed to becoming world class in work place safety. Although we are pleased with the progress we have made, in this area nothing short of the zero accident frequency performance is acceptable.

Similarly we are making rapid and significant improvements in our performance in the area of product quality; both from the stand point of customer satisfaction and profitability, it is critical that we commit to make it right the first time. Our people have embraced this principal in our quality performance trend at all facilities during 2007 and first quarter of 2008 is very encouraging. The improvements in product quality out of the hot end of our operations have reduced our non prime shipments to under 3% and have allowed us to significantly reduce our in-process inventory. Year-to-date finished product customer claims are also at record lows.

On the environmental compliance front we have developed an environmental performance index to help us assess our effectiveness in this area. Essentially that index considers and quantifies all of the environmental requirements necessary to monitor and meet each and every applicable environmental standard. In an area we take very seriously, I am pleased to report we made market improvement in 2007 relative to 2006 and that this strong performance has continued through the first quarter of 2008.

On the productivity front during the fourth quarter of 2007 slab production from the hot end of our operations was 552,000 tons. We averaged 23 heats per day of which 63% is from our EAF. Full year 2007 slab production totaled 2.3 million tons. Our slab production numbers during first quarter 2008 were significantly improved. We cast 612,000 tons of which 58% came out of the electrical hot furnace.

Hot strip mill production for the fourth quarter 2007 was 572,000 tons and included about 67,000 tons of purchase slabs. For the year hot strip mill output totaled 2.4 million tons including approximately 214,000 tons of purchase slabs and about 20,000 tons of conversion rolling. First quarter 2008 hot band production was 618,000 tons, all of which came out of our Mingo Junction steelmaking operations. In light of worlds steel market conditions we do not currently intend to purchase slabs for processing through our hot strip mill during 2008.

Finally cost containment remains a critical driver as we move into 2008. Although our long term coal supply agreements and coal production facilities at Mountain State Carbon have buffered us from much of the cost increases associated with the tight worldwide coal and coke markets. Like all other domestic integrated producers we have seen significant increases in our iron ore pallets and scrap costs.

Similarly energy costs, particularly natural gas rates have increased and remained difficult to forecast. We are attempting to offset these cost increases by taking a hard nose look at discretionary spending; also we’ve made significant progress in our effort to reduce outside contractor spending. As we moving into the second quarter we see the market remaining strong and we intend to optimize both our hot end and finishing production capacity. So we’ve moved our blast furnace outage previously scheduled for April out to the mid September time period during which we will take less extensive outages at our caster BOF and hot strip.

Thanks; that’s all I have for the steel side operations; Jim back to you.

Jim Bouchard

Thanks Dave. Now let’s turn it over to Tom Modrowski who will give us an update on the service center side in business.

Tom Modrowski

Thanks Jim and good afternoon. This is our first post merger call. I’d like to reiterate that our 2007 downstream operation results consist of the original 10 Esmark service centers. In the near future we will present this section to include wheel and corrugating results, but for the 2007 fourth quarter and full year periods, our discussion strictly pertains to the 10 service centers.

Adjusted EBITDA for the year was $20.3 million. It would be fair to characterize 2007 as a difficult environment. The year began with industry-bloated inventories and weakened demand. Our experienced management team of Michael Ogrizovich, John F. Krupinski and Bill Ristau in conjunction with our service center presidents performed admirably, guiding us through these challenging conditions in ’07.

In spite of the 8% decline in service center flat role shipments as reported by MSCI, our shipments grew by 10% to a total of 732,000 tons. The growth came primarily through increase sales in the Chicago market. Unfortunately, industry wide excess inventory put downward pressure on pricing as the industry reduced inventory. Across our group gross profit was reduced by 16% from the previous year. Although down the negative trend was minimized through exercising great discipline with inventory control. Our inventory turns bested our competitors in 10 out of 12 months when compare to MSCI publish data.

In the fourth quarter a conscious decision was made to slightly increase inventories in anticipation of improved first quarter pricing. Although directionally correct we never expected the magnitude of the increases we’ve seen thus far. As Paul stated earlier, adjusted fourth quarter EBITDA was approximately $3 million.

Looking ahead to the first quarter clearly the run-up in prices is supply side driven. Mill consolidation, increases in raw materials and a weak dollar reducing imports have all contributed. Although demand continues to be weak we are anticipating favorable overall financial performance for the segment as margins improve. We are currently forecasting a 6% decline in sales. In spite of that we are very optimistic that higher selling margins will yield an expected EBITDA improvement in excess of 50% as compared to Q1 ’07. We are highly confident this trend will continue into the second quarter, inventories continue to be carefully controlled.

Staying with the first quarter, on January 29 we experienced a fire at one of our two electro galvanizing lines located in Bridgeview, Illinois; fortunately no one was injured but the facility incurred substantial damage that has rendered it currently inoperable. Insurance coverage includes real and personal property as well as business interruption. Negotiations are in the early stages making it difficult to provide any additional comment at this time.

Under the leadership of Scott Sterneimer, ECT’s President and his management teams and employees at both facilities, all of business at the Bridgeview facility has been successfully transferred to E-Chicago with minimal customer disruption. As a result we anticipate no material loss of earnings on a combined coding line basis.

In early January Jim announced the reorganization of the post merged company. Part of that announcement included Wheeling Corrugating as a stand alone business within the downstream segment. Since that announcement, Joe Mazur was appointed the president of Wheeling Corrugating. He and his team have been actively engaged in the separation process of Wheeling Corrugating from Wheeling-Pittsburg Steel while simultaneously working non-stop keeping ahead of market pricing. It is our desire that beginning with our third quarter earnings report Wheeling Corrugating’s financial performance will be included as part of the downstream segment.

In summary once the separation of Wheeling Corrugating is completed, the downstream operation segment of Esmark will consist of sales of approximately 1.2 million tons. Revenue using today’s pricing will approach $1.9 billion operating on a 23 locations in 14 different states across the country; Jim back to you.

Jim Bouchard

Thanks Tom. That’s it for today’s speakers. As Dennis mentioned at the beginning of the call we put considerable effort into this call prepared remarks to ensure our coverage was both comprehensive and insightful. Again I apologize for the delays; nobody has been more frustrated than myself but we finally got this conference call completed and thank you for everyone that has attended today for your patience. We will keep you updated as events progress here at Esmark Incorporated and thank you for joining us on today’s call and your interest in this fine company. Thank you.

Operator

And that does conclude today’s conference. Again thank you for your participation.

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