A Message from Roger K. Newport
AK Steel 2015 Annual Report
I am honored to serve as Chief Executive Officer of AK Steel and look forward to leading our management team as we implement the future strategy of the company.
Despite the significant headwinds we faced in 2015, we improved our financial performance throughout the year and made progress in safety, quality and lowering our costs. In the fourth quarter of 2015, we achieved our highest adjusted quarterly EBITDA (earnings before interest, tax, depreciation and amortization) level since the third quarter of 2008.
For the full-year 2015, our revenues reached approximately $6.7 billion on shipments of about 7 million tons, resulting in an average selling price of $942 per ton. And we ended the year with solid liquidity of approximately $700 million.
This was achieved as a result of the actions and focus of our employees to lower our costs, improve our productivity, and further enrich our mix toward more profitable products and markets.
I want to take this opportunity to thank each and every one of our employees for their outstanding efforts – particularly in the face of adverse market conditions.
Our most significant headwind in 2015 was caused by the massive global oversupply of steel, primarily from China, and the direct and indirect impacts of this oversupply in all regions of the world. And, although AK Steel is not a major player in the oil country tubular goods business, the significant downturn in that market contributed to the excess capacity in those markets in which we do compete and in the overall steel market.
The steel market in the United States has been flooded with what we believe are unfairly traded imports. While import levels have indeed begun to decline from many of those countries where preliminary duties are being levied, we still face significant on-going import pressures.
To combat these challenges, our efforts are focused on “margin enhancement.” This starts with the top line – sales – what we sell and who we sell to. It also includes lowering costs; both the costs to produce our products and all of our other costs.
Sharpening our Focus
We are sharpening our focus on our core business – and those products and markets that provide a reasonable return to our company and our investors.
In 2015, we took some difficult yet important actions to better position our business for long-term success. We wrote off our investment in Magnetation LLC in the first quarter as a result of the collapse in iron ore prices. In December, we idled the hot end of our Ashland Works facility. And we re-evaluated our investment in a discontinued insurance operation, took a cash distribution of $14 million and are nearing completion of its sale.
These were not easy decisions – especially the temporary idling of our Ashland Works hot-end – as we have about 600 of our hard working employees on layoff at this time. We continue to operate our hot dipped galvanizing line at Ashland Works that primarily serves the automotive market.
While these were the necessary actions to take, we continue to make improvements in all areas of our business.
The U.S. remains an attractive place to do business; the dollar has remained strong, with solid market demand, especially in the automotive market. Our operations continue to perform well as our employees find new ways to lower costs. It is their daily commitment to continuously improve that differentiates us from our competition.
I am also very pleased with the progress of integrating Dearborn Works – including improvements in the areas of safety, environmental, quality and
productivity. In 2015, we achieved $59 million of cost-based synergies from the Dearborn Works acquisition. This is more than double our original estimate of $25 million in year one, and above our year two estimate of $50 million.
Safety, Environment and Communities
At AK Steel, we strive to operate safely and responsibly across all aspects of our business, and to give back to the communities where we work and live.
Safety remains our top priority, and we continue to lead the industry with a safety record that is four times better than the steel industry average.
Both Dearborn Works and Mountain State Carbon greatly improved their safety performance in 2015. A number of other plants set new safety records during the year, while others are continuing record breaking periods with no injuries. Our Coshocton Works and Zanesville Works each received awards for safety from the Ohio Bureau of Workers’ Compensation Division of Safety and Hygiene in 2015.
We are committed to environmental stewardship at all of our locations. For example, during Dearborn Works’ first full year under AK Steel’s Environmental Management System, our environmental practices were implemented at Dearborn Works. This paved the way for a heightened level of accountability throughout the operation, and resulted in a dramatic improvement in Dearborn Works’ environmental performance. In addition, some of our new innovative products continue to provide benefits to the environment.
We were also honored with a supplier award for environmental achievement from Honda North America. The award recognized an environmental project at our Rockport Works that resulted in a substantial reduction in water and energy consumption.
AK Steel and its employees continue to support our local communities. Through the AK Steel Foundation, our employees and our matching gift program, we are able to make a positive difference in the lives of others through numerous programs, Max Eward Safety Award Winner AK Steel’s Middletown Works coke plant received recognition for its 2015 safety performance. scholarships and grants to nonprofit organizations, including the United Way. In addition, our employees collectively volunteer hundreds of hours of their personal time to support non-profit agencies in each of our communities.
Enhancing Value for our Customers
AK Steel is the only domestic steel maker to produce carbon, stainless and electrical steel products. We are uniquely positioned to provide multimaterial solutions to serve the critical needs of our customers around the world.
We have taken strategic actions in order to grow the more differentiated, value-added portions of our business while minimizing exposure to commodity products. Quite simply, our goal is to become the most valued steel supplier in the eyes of our customers.
The demand in our largest market – automotive – remains very strong. In 2015, North American light vehicle production totaled a record 17.5 million vehicles and sales to this market represented roughly 60% of our total sales.
Demand for our high efficiency electrical steels also remains strong. In the first quarter of 2016, we will be completing the final phase of our capital investment to expand our production capabilities for high value-added, grain-oriented electrical steels for both the U.S. and the global markets. This includes installing new equipment at Butler Works to upgrade an existing processing line. The new equipment will increase our capacity for producing TRAN-COR® DR® and CARLITE® families of high permeability grades of steel.
On the stainless side of our business, AK Steel remains the market leader in the world of automotive exhaust systems. 2015 was a record year for our shipments of autochrome products, and further growth in this highly demanding segment is expected in the coming year. Likewise, demand for chrome grades, such as those employed in exposed automotive trim applications, remains robust.
In carbon products, the significant decline in spot market prices over the past 18 months has been well publicized. Unfortunately as we have indicated before, contract business is not immune to these pricing pressures. We have faced lower prices with our contract customers, but to a much lesser extent than the spot market decline. Regardless of these market pressures, we continue to work with our customers to provide them with our best solutions, and best value, to meet their needs.
Research and Innovation
At AK Steel, we see the future in steel, and we are driving innovation in every part of our business. For each of the markets we serve, we are focused on developing innovative solutions through improved products and processes. In 2015, we continued to make terrific progress on the research and innovation front, and this will be a key focus area for us going forward.
We remain committed to the automotive market and we work closely with our customers to provide leading edge technology to assist in their ongoing efforts to reduce vehicle weight. Next generation Advanced High Strength Steels for automotive structures is just one example of innovation in this area.
In 2015, we announced an investment in our Dearborn Works galvanizing line to produce next generation coated and cold rolled Advanced High Strength Steel. We expect to begin production of these products in late 2016.
In our stainless business, we continue to grow sales of CHROMESHIELD® 22. Developed by AK Steel researchers for use in many applications, including food service, automotive and appliances, this product provides corrosion resistance that meets or exceeds the performance of conventional nickel-bearing stainless steels, and at a cost that is less subject to the fluctuation of nickel pricing.
In June 2015, we began construction of our new Research and Innovation Center in Middletown, Ohio. We expect construction to be complete in late 2016, and it will be home to our expanded team of research and technical personnel. Demonstrating our renewed and accelerated focus on new products and processes, we expanded our Research and Innovation team by nearly 30% over the last year.
Our strategy is to provide the best value of products and services to our customers, while creating a sustainable level of profitability as we continue to innovate and transform our product portfolio to best meet our customers’ needs.
We will continue to look for the best ways to make those changes, focusing on creating value for our investors, our customers, and our employees. And because the world around us is changing at a rapid pace, we must remain flexible to meet those needs.
That means we will focus on:
• Controlling things within our control
• Proactively addressing items outside of our control
• Improving our product and market mix to optimize our financial returns
• Investing in our higher-end growth products
• Reviewing every asset, every product and every market
• Developing new, innovative products and processes
• And above all else, maintaining safety as our number one priority
In closing, I would like to thank Jim Wainscott for 12 years of leading the company as President and CEO and his more than 20 years of contributions to AK Steel.
We Can…And We Will!
I’d like to thank our employees and our shareholders for their support. In 2016, we will work to enhance our profitability and align all of our resources with the needs of our business to ensure we are getting a return on those resources we are investing in our business. We will focus on controlling those items within our control. I am confident that the entire AK Steel team will collectively work to make AK Steel a stronger company.
Roger K. Newport