AK Steel Holding (AKS)

Q3 2011 Earnings Call

October 25, 2011 11:00 am ET


James L. Wainscott - Chairman, Chief Executive Officer and President

Albert E. Ferrara - Chief Financial Officer and Senior Vice President of Finance


Anthony B. Rizzuto - Dahlman Rose & Company, LLC, Research Division

Sam Dubinsky - Wells Fargo Securities, LLC, Research Division

Michael F. Gambardella - JP Morgan Chase & Co, Research Division

Kuni M. Chen - CRT Capital Group LLC, Research Division

Luke Folta - Jefferies & Company, Inc., Research Division

David S. MacGregor - Longbow Research LLC

Timna Tanners - BofA Merrill Lynch, Research Division

Shneur Z. Gershuni - UBS Investment Bank, Research Division



Good morning, ladies and gentlemen, and welcome to AK Steel's Third Quarter 2011 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. With us today Mr. James L. Wainscott, Chairman, President and Chief Executive Officer of AK Steel; Mr. John F. Kaloski, Executive Vice President and Operating Officer; and Mr. Albert E. Ferrara Jr., Senior Vice President of Finance and Chief Financial Officer. At this time, I will turn the conference call over to Mr. Ferrara. Please go ahead, sir.

Albert E. Ferrara

Thank you, Amy, and good morning, everyone. In a moment, I'll review our third quarter 2011 financial results, and following my remarks, Jim will offer his comments and field your questions.

Our comments today will include forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. Included among those forward-looking statements will be any comments concerning our expectations as to future shipments, products mix, prices, costs, operating profit or liquidity.

Please note that our actual results may differ materially from what is contained in the forward-looking statements provided during this call. Information concerning factors that could cause such material differences and results is contained in our earnings release issued earlier today.

Except as required by law, the company disclaims any obligation to update any forward-looking statements to reflect future developments or events. To the extent we refer to material information that includes non-GAAP financial measures, the reconciliation information required by Regulation G is available on the company's website at aksteel.com.

Earlier today, AK Steel reported a net loss for the third quarter of $3.5 million, or a loss of $0.03 per share. During the quarter, we experienced challenging market conditions along with continued high cost for steelmaking raw materials. Additionally, our results include costs related to an incident with the #5 electric arc furnace, or EAF in our Butler Works. As previously reported, the #5 EAF was damaged on July 1 when molten steel breached the furnace shell. Our third quarter costs related to this incident totaled approximately $9.8 million. After-tax is -- this equates to roughly $6.2 million, or $0.05 per share. Essentially the cost incurred reflect the amount of our insurance deductible associated with the incident.

This is consistent with the guidance we provided during the second quarter 2011 earnings conference call. Excluding the impact of the #5 EAF incidents, AK Steel's results for the third quarter compare favorably to First Call consensus estimates.

Shipments for the third quarter of 2011 totaled 1,368,800 tons, which was lower than our guidance as business conditions during the quarter, proved to be more challenging than anticipated. Our average selling price was $1,158 per ton, a decrease of approximately 2%, compared to the second quarter and slightly lower than we had forecasted. Revenues totaled $1,586,000,000, a decrease of about 12% compared to the prior quarter.

Sales outside the U.S. continue to be an important source of revenue for us and totaled approximately $244 million for the third quarter. During the third quarter, high raw material cost continued to pressure our financial results. However, these high costs were largely in line with our guidance.

Our outlook for determining our 2011 LIFO charge has changed, due principally to our expectation of reduced inventory levels at year end. This is primarily a function of lower than expected shipments and productions. As a result, we benefited from a LIFO credit of $9.5 million in the third quarter of 2011. However, we expect to incur a LIFO charge in the fourth quarter.

I would also note that due to a weakening of the euro, our third quarter results were negatively impacted by foreign exchange loss of approximately $3.7 million. On an operating basis, excluding the impact of the furnace incident at Butler Works, we recorded an adjusted operating profit of $21.2 million, or $15 per ton for the third quarter of 2011.

Turning to the balance sheet. During the third quarter of 2011, capital investments totaled $21.7 million. Working capital was a source of $29.7 million of cash during the quarter. We continue to be focused on managing working capital and anticipate that working capital will be a significantly larger source of cash in the fourth quarter. During the third quarter, we made $32 million in payments related to the Butler Works retiree, VEBA, as part of our previously announced settlement agreement with a group of retirees from our Butler Works. We will make additional payments to the Butler VEBA of $32 million in 2012 and $28 million in 2013.

For the first 9 months of 2011, our payments related to Butler and Middletown VEBAs totaled $97 million. In addition, we made $170 million in contributions to our pension plans. We have now completed all of our required pension and VEBA funding for 2011.

On October 4, AK Steel announced the acquisition of Iron Ore and Metallurgical Coal Interests as part of our strategic initiative to further vertically integrate the company. Jim will review details of these acquisitions at his remarks.

Read the rest of this transcript for free on seekingalpha.com

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