Plan to Lower Costs
The steel manufacturing sector continues to experience rising costs of energy, raw materials, labor and transportation at a time that steel prices remain soft and flat. The steel industry itself could be viewed as having survived a mild recession this past year. It appears to us that demand for flat rolled products is off roughly 10-15 percent in the U.S. from last year. In times like this, when selling prices and demand are low, and raw material and other costs are increasing, the only producers who can be profitable are those that have low cost structures.
Wheeling-Pitt currently has neither the raw material advantages of the integrated producers nor the labor and technical cost structure of the mini-mills. Although we took a number of steps to lower costs at operating units this past year, the increased cost of scrap for our Electric Arc Furnace (EAF) and the rise in energy and raw materials required for our blast furnace operation overwhelmed our efforts to reduce operating expenses. The Esmark merger and the liquidity (and balance sheet) it brings will provide time and capital for us to continue to attack our cost structure.
Of course, we can't influence the price of iron ore, scrap or natural gas. These costs will remain high or go up in all scenarios we can envision. Similarly, labor rates and transportation costs are not going down. They are going up. Wheeling-Pitt has a plan which we believe will lower our dependence on each cost category. Our medium term corporate goal is to reduce our overall operating cost structure by $150 million per annum. The cost rationalization process has already begun.
Our plan consists of a two-step transition: (1) Immediate Restructuring for 2008 Profitability, and (2) Strategic Investment Considerations for Long Term Profitability.
Restructuring for 2008 Profitability
- Immediate actions are being taken to rationalize our existing equipment and redirect our product offerings. Our mills are spread out over a wide area and a number of our production units are severely underutilized and are not capable of competing with modern facilities and new technology. In particular, we will:
- Maximize our profitable cold rolling capability and the trade sales of those products and limit our less-profitable cold rolled products.
- Optimize our value-added, high margin corrugating (WCC) division.
- Discontinue noncompetitive product offerings.
- Idle underutilized and noncompetitive equipment.
- Rebalance our scheduling of operating, maintenance, and support service manpower to match the restructured product flows and equipment utilization.
- Reduce and realign administrative and labor activities in line with the above operational restructuring.
- Following our July EAF outage, we have been making dramatic improvements in our ability to charge hot metal into our EAF. This allows us to reduce our dependence on high cost scrap, eliminate the use of expensive pig iron and minimize electric power consumption. This will also improve our overall steelmaking conversion costs.
- The company and the United Steelworkers (USW) formed a Joint Strategic Labor Management Committee to discuss adjustments to business strategy and workplace changes. In partnership with the USW, we will work together to realign manpower consistent with our obligations under the collective bargaining agreement.
- We are actively pursuing a plan to enable us to begin producing merchant pig or granulated iron in 2008.
- We are taking steps to become energy self sufficient. Wheeling-Pitt spends approximately $7-10 million per month on natural gas. We are in the process of investigating the recovery of believed substantial natural gas deposits on 1,700 acres of property owned by our company. If the reserves are proven and recoverable, then we have the possibility to significantly reduce our natural gas costs. We currently expect that this project could begin to reduce our dependence on volatile purchased natural gas as early as the 3rd Quarter of 2008.
Strategic Investment Considerations for Long-Term Profitability
- Our 80-inch Hot Strip Mill facility is a very valuable asset. We are evaluating plans to upgrade the mill's capability, enabling it to produce a broader spectrum of more profitable products.
- We plan to take the hot strip mill's annualized production rate above the 3 million ton level in 2008. This plan fits well with our formulation of E2 Acquisition Corporation's acquisition of Sparrows Point, which would be an ideal source for the required incremental high quality slabs.
- Wheeling-Pitt has been considering a number of possibilities and scenarios for making capital investments that will provide us with highly competitive finishing capability, including rationalization of our 3 existing pickling lines; a long-term strategy and solution for sheet cold rolling; and/or replacement of our higher-cost galvanizing equipment with modern hot dip technology.
We also believe that combining our steel operations with those of Sparrows Point makes sense. After E2's acquisition of Sparrows Point, we will pursue a combination with the new owners of Sparrows Point, subject to approval of our board and shareholders.
Linking Distribution and Production
Our underlying strategy is to change the steel supply chain model in North America by combining a mill with service centers. This is the model used and employed by successful companies in their operations in Europe, such as ArcelorMittal and Corus. The steel operations of Wheeling-Pitt, which is essentially a spot player with a small customer base, will benefit by creating more customers for its products. Esmark is a steel distribution company with a customer base of approximately 2,000 customers which stretch across the states of Illinois, Wisconsin, Indiana, Michigan, Missouri, and Ohio. We believe that steel consumption in these states comprises a significant part of the steel consumption in the United States. The distribution operations will benefit by allowing the service centers to offer customers faster, more efficient and just-in-time service. Ultimately, we believe this combination will enhance shareholder value.
Finally, I cannot pass up the opportunity to point out how valuable our partnership with the USW is to accomplishing our plans. The USW and our employees believe in our strategy. They care very deeply about the success of New Esmark and they are helping. With continued support, I am convinced we have the right people, partners and strategy to become a low cost "big 4" producer of steel in North America.
I am also thankful to Esmark and its largest shareholder, Franklin Mutual Advisers, for remaining steadfast in their determination to build this company into something very special.
We have through the merger agreement provided each shareholder of Wheeling-Pitt the ability to also share in our strategy to change the steel supply chain model in North America through the right to purchase shares of New Esmark stock at $19 per share. These purchase rights will not only improve the capital structure of our company, but they provide Wheeling-Pitt stockholders with the opportunity to reduce dilution and participate in the upside of the strategy to combine distribution with production.
I ask for your continuing support and to vote "FOR" the merger on November 27.
Sincerely,
James P. Bouchard
Chairman and Chief Executive Officer