Q4 2004 Oregon Steel Mills Earnings Conference Call - Final.

Original Source: FD (FAIR DISCLOSURE) WIRE

OPERATOR: Good morning. My name is Amanda, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Oregon Steel's fourth-quarter earnings release conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. (OPERATOR INSTRUCTIONS). Thank you.

Mr. Declusin, you may begin your conference.

JIM DECLUSIN, PRESIDENT, CEO, OREGON STEEL MILLS: Thank you, Amanda. Good morning, and welcome to Oregon Steel Mills' conference call. And I am Jim Declusin and President and CEO. And joining me today is Ray Adams, our Chief Financial Officer. I'm going to have Ray give an overview on the fourth quarter, and then I will come back online to discuss the outlook for our markets and products and to give you a flavor of what Oregon Steel will be looking for in '05. Ray?

RAY ADAMS, CFO, OREGON STEEL MILLS: Thank you, Jim, and good morning everyone. Before we began, let me state that today's conference call will also include certain guidance for the year 2005 and beyond. Other than our comments on historical results, the comments we make today constitute forward-looking statements within the meaning of Section 21E of the Securities and Exchange Act of 1934, including our expectations as to future shipments, product mix, pricing, cost, operating profits and capital investments.

While we believe these expectations are reasonable, we cannot assure you that they will prove to have been correct. They are based on a number of assumptions and estimates that are inherently subject to economic, competitive, and operational risk; uncertainties; and contingencies. All of which are beyond our control and upon assumptions with respect to future decisions that are subject to change. For more detailed information, we encourage you to review the discussion of risk, which may cause results to differ materially in our Form 10-K for the year ended December 31, 2003. Forward-looking statements, which will be identified as such words, such as -- I expect, I anticipate, I believe, or similar qualifications.

I would like to begin by talking about the highlights for the fourth quarter, and they are as follows. Sales were $302 million, up 79 percent from the fourth-quarter of 2003 on about 360,000 tons of shipment. I'd like to note that I'll talk about this a little bit more later on, as the Company finalized our early retirement program with the Union over Rocky Mountain Steel Mills and recorded an additional one-time charge of a net $2 million. Operating income was 55.4 million. And before the Early Retirement Charge of $2 million, operating income was 57.4 million, the second highest number in the Company's history. Net income was $44.8 million, $1.27 per share. And before the Early Retirement Charge, net income was 46.7 or $1.33 per share.

As I noted for the fourth quarter, we reported net income of 44.8 income and operating income of 55.4. This compares to an operating loss in the fourth quarter of 2003 of 38.4 million. Of course, the fourth quarter of 2003 includes a charge of $31.1 million related to the labor dispute settlement of Rocky Mountain Steel Mills. The operating income breakdown by division for the fourth quarter of 2004 is 38.3 million at the Oregon Steel Mills Division. And at the Rocky Mountain Steel Mills Division, the operating income was 16.1 million, which includes the additional $2 million charge. Operating at the Rocky Mountain Steel Mills before this charge was $18.1 million.

Price increases; shifting product mix; a strong flat-rolled market; rail, rod, and bar markets improved and improved ERW pipe shipments and a reduction in losses in the large diameter pipe business -- all positively impacted our results as compared to the fourth quarter of 2003. Specifically higher production in shipments of plate at the Oregon Steel Division, higher average selling prices for plate, about $539 per ton versus the fourth quarter of 2003. Higher average selling prices for coil up $416, structural tubing shipments of 10,000 tons in the fourth quarter of 2004, higher volumes of rail at Rocky Mountain Steel Mills, higher average selling prices for rod and bar up $287 a ton, higher average selling prices for rail up $189 a ton and higher average selling prices for ERW pipe up $436 a ton compared to the fourth quarter of 2003. These positives of course were partially offset by continued unprecedented high cost of slab and scrap and lower shipments of rod and bar in the fourth quarter of 2004.

At the Oregon Steel Division, the plate, coil and structured tubing markets continued to perform well. And we saw a pickup in the ERW business in the fourth-quarter 2004, which allowed our margins in that product to increase. As in the previous quarters at the Rocky Mountain Steel Mills Division, average scrap costs continued to rise, although not as high as we had previously forecasted, with average scrap costs up about approximately $92 a ton when compared to the fourth quarter of 2003 to an average during the fourth quarter of 2004 of $223 a ton.

In summary, fourth-quarter results when compared to the prior year reflect the expansion of overall margins due to higher average selling prices and higher volumes in plate and coil, ERW pipe and structural tubing at the Oregon Steel Division. Higher average selling prices for rail and rod and higher volumes for rail at the Rocky Mountain Steel Mills Division, partially offset by continued high costs of raw materials at both divisions. Average steel slab costs and average scrap costs were up 89 percent and 71 percent, fourth-quarter to fourth-quarter respectively. Average scrap cost in December at Rocky Mountain Steel Mills was $220 per ton. And the average cost of scrap was $205 per ton in January. And we expect the cost of scrap to be flat to slightly down for the first 6 months of 2005.

We expect the base price of slab to be down in the second quarter of 2005 versus what we expect it to be in the first quarter of 2005.

With respect to Union settlements during the fourth quarter of 2004, we recorded an additional pretax charge of $2 million related to the previously announced agreement that settled the labor dispute at Rocky Mountain Steel Mills. This final charge, and I like to emphasize final charge, related to the conclusion of the early retirement option offered to certain bargaining unit employees that was based upon seniority that began in the third quarter of 2004 and was concluded during the fourth quarter of 2004. This will be the last and final non-reoccurring charge for the Company related to the settlement of the labor dispute.

As noted in the press release, earnings before interest, tax, depreciation and amortization for the fourth quarter of 2004 were $64 million and $66 million exclusive of the $2 million Early Retirement Charge. This compares to a -25.4 million in the fourth-quarter of 2003, which included the $31.1 million charge related to the settlement of the labor dispute. Of course, we've included a reconciliation of EBITDA and EBITDA adjusted in the last table of the press release. The higher operating income that I spoke about earlier and EBITDA from continued operations during the fourth-quarter compared to the fourth quarter of 2003 reflects the higher average selling prices that we discussed above, partially offset by lower shipments, higher steel slab costs at the Company's Oregon Steel Division, and higher scrap cost at the Company's Rocky Mount Steel Division.

During the fourth quarter, we had an effective income tax rate of 1.4 percent. And of course, it becomes expected to why it varies. But as in previous quarters, we reduced our evaluation allowance, in this case $15 million, that was established in 2003. Going forward, we would expect our …