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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,
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
• Reviewing every asset, every product
and every market
• Developing new, innovative products
• 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