Q1 2004 International Steel Group Inc. Earnings Conference Call - Final.

Original Source: FD (FAIR DISCLOSURE) WIRE

OPERATOR: Good day, ladies and gentlemen, and welcome to the quarter one 2004 International Steel Group earnings conference call. My name is Jean. I will be your conference coordinator for today. At this time all participants are in a listen only mode. We will be facilitating a question and answer session toward the end of this conference. (OPERATOR INSTRUCTIONS). As a reminder this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Mr. Brian Kurtz, Vice President and Treasurer.

BRIAN KURTZ, TREASURER, INTERNATIONAL STEEL GROUP: Thank you and welcome to the International Steel Group's conference call for the first quarter of 2004. I'm Brian Kurtz, Vice President of Finance and Treasurer for ISG. With me are Rodney Mott, President and Chief Executive Officer; Len Anthony, Chief Financial Officer; and Lonnie Arnett, Vice President and Corporate Controller. Before we begin I want to remind you that statements made during the conference call that are not historical facts may be forward-looking statements. Forward-looking statements involve risks and uncertainties that may cause actual results or events to differ materially from those expressed or implied in such statements.

In addition this conference call contains time sensitive information that reflects the management's best analysis only as of the date of this live call. ISG does not undertake any ongoing obligation other than that imposed by law to publicly update or revise any forward-looking statements to reflect future events, information or circumstances that arise after this call. Further information concerning issues that could materially affect the financial performance related to forward-looking statements can be found in ISG's prospectus filed on December 12, 2003, and in the company's subsequent periodic filings with the Securities and Exchange Commission. This call is open to the public and is being Web cast simultaneous on our website at www.intlsteel.com, and will be archived for replay.

A copy of the press release we issued this morning is also available on our website. On today's call Rodney will begin with some general remarks about the first quarter, then we'll turn the call over to Len who will discuss our financial results and give you some guidance for the second quarter. We will then take your questions and the operator will instruct you on the procedure for asking a question at that time. I would now like to turn the call over to Rodney Mott, our President and Chief Executive Officer.

RODNEY MOTT, PRESIDENT & CEO, INTERNATIONAL STEEL GROUP: Thank you, Brian, and good afternoon to everybody. As you are well aware this is our second conference call and as we get more comfortable dealing with these calls and anticipating your questions we will learn to adjust our style slightly here to where our comments are more pointed and maybe a little briefer than we did previously, and anticipate getting into a more in-depth question and answer session so we can address your concerns. In the announcement we made this morning, we reported strong first-quarter growth with shipments of 3.9 million tons and net sales of over $1.8 billion, up approximately 25 percent over our last quarter.

This gave to our bottom-line. We reported net income of 70.9 million or 68 cents per share. We are extremely pleased with the progress we made over the three months ending March 31. The results from the past two quarters, which have both proven to be profitable reflect the impact of our acquisitions and our ongoing optimization of the facilities we have acquired. We've shown solid growth in all markets that we serve and have achieved or exceeded our stated targets in areas such as shipping volume, contract versus spot business and in selling prices.

We've accomplished these targets much sooner than we originally anticipated. These achievements coupled with strong (indiscernible) market demand and the unprecedented pricing that we are seeing have lead to our excellent results and have positioned ISG to continue this trend into the second quarter and beyond. We continue to have strong bookings in all of our markets and we see no sign of a slowdown of the economy or in overall market demand. Discrete plate (ph) demands from OEMs have increased substantially during 2004. In addition demand in the construction markets for galvanized and galvanneal (ph) products have strengthened throughout the year. Our target of achieving a strong mix in the high carbon and alloy sectors has also been realized already this year. Selling prices remain at unprecedented levels driven by this market demand.

We have announced increases in our base prices. The next increase will take effect the first of May. With this announcement, our base pricing with the surcharges in the second quarter show an increase of $130 per ton over what was realized in the first quarter of 2004. In addition, yet just as significant, we have announced our intent to continue our raw material and energy surcharge of $100 per ton through the balance of the second quarter.

Upward pricing pressure specifically for spot Coke and to a lesser extent on scrap leads us to this decision. Later this quarter we will reevaluate our surcharges as we will our base prices and make a decision of how to adjust them moving into third quarter. Our organization has risen to the challenge to maximize production to fulfill this strong market demand. As a company we continue to find ways to increase productivity through streamlining the processes, by working harder on the productivity bonuses we have in place, or the use of best practices across our facility, and by detailing and planning for loading the orders across our facility to optimize each of the operating units.

We cannot say enough about the dedication and motivation of our workforce with both the management and the union striving toward the same goal of productivity and profitability. With our employees' commitment to ISG, our first-quarter results could not have been attained. Therefore we are pleased to announce that ISG will be making a well-deserved profit-sharing payment to all of our employees for first quarter. In addition to the profit-sharing payment we will be making a contribution to our retiree health care plan or VEBA for the former retirees of Acme, LTV and Bethlehem.

As I previously stated we have seen upward pressure on spot market purchased for Coke. Our spot purchases represent approximately 33 percent of our needs for 2004. The balance of course is from our internal generation or long-term contracts we have with various suppliers. The good news is we have not seen any material production issues associated with the current Coke market. We have been able to find the Coke as needed to keep our facilities running at full capacity. We believe the spot market pricing of Coke has reached a plateau through second quarter, however, it's premature to forecast where coke prices might be headed going into the third quarter. The unexpected volatility and availability of Coke has motivated us to develop a longer-term strategy to cope with a current raw material situation.

This strategy, which we will continue to develop and announce in incremental steps, includes the establishment of more long-term commitments with domestic suppliers. It also includes the potential redevelopment of previously idle coking facilities and some potential for new greenfield locations strategically located near raw material supplies or near our facilities. Looking ahead, we see ISG continuing to entrench itself in the markets that we serve and participating in the further consolidation of the steel industry. We have no intention of sitting still and will continue to effectively utilize the capital we are generating through our operations.

We remain on track towards our target of investing $300 million in CAPEX excluding acquisitions and raw material strategies for 2004. In addition to our CAPEX, we are actively pursuing potential acquisitions that will either enhance our position in the current markets or allow us to enter new markets. As you know the Weirton acquisition is still in the appeals process. We respect the process that must take place through the court system, yet we are anxious to close on this deal and begin the swift integration of Weirton into the ISG family. The acquisition is expected to close within the second quarter. We anticipate the ongoing support -- we appreciate the ongoing support of the Independent Steel Workers Union at Weirton and are very pleased with their ability to work with us on an early transition program.

We believe that this acquisition will further our strategy of having a significant ISG presence in all of our markets. Weirton specifically brings to us strength both in the tin and the galvanized construction markets and will also make ISG the largest integrated steelmaker in North America. Some of the key elements of our overall strategy are to improve our position in markets we choose and reveal potential new markets. The Bethlehem acquisition strengthened our position in value added cold rolled and coated steel products. Our acquisition of the Gary (ph) Plate operation has increased our presence in value added plate markets and has proven successful on an integration basis with the Burns Harbor facility.

As I mentioned, the Weirton facility will give us a strong position in the tin market. As we look at other markets we will look for places to go for a low-cost acquisition and has a potential to institute our culture and our cost structure to enhance an operation. On a looking back basis, due to the size of our acquisitions and the number of facilities that we have acquired, we are constantly evaluating each facility to optimize or even rationalize our production. We enrolled a basic (indiscernible) strategy that evaluates the marginal facilities or the underutilized facilities and we take appropriate steps to improve these facilities as needed.

During first quarter we announced we were shutting down the Chicago cold-rolled (ph) facility. This was to address the overcapacity we had in cold-rolled capacity within the company. On a good news basis, everyone of the employees at the Chicago cold-rolled facility have found further employment within ISG, primarily through enhancing our operation at Burns Harbor. Again we will …