| Fellow Shareholders: When we wrote to you last year at this time, we said 1997 would be a year of significant transition and challenge and that the costs of closing our ingot-making steel operations and ramping up our new $400 million thin-slab caster/hot strip mill complex would be a drain on 1997 results. We concluded our letter convinced that because of our investment in new technology, the future for Acme Metals was bright. Nothing has occurred since then to weaken our confidence, and we enter 1998 with the prospect of solid growth and profit improvement in the years to come.
Although our financial performance did not reflect our full potential, we made steady progress and reached a number of significant milestones during 1997.
Accomplishments
- We shut down our redundant ingot-making and narrow hot rolling facilities mid-year, as
planned.
- At the end of 1997, the new facility operated at 85 percent of its rated capacity.
- More importantly, we successfully developed and produced 99 percent of the steel grades
required by our customers.
- By the end of 1997, we achieved $25 per ton of the $70 per ton in product cost savings we expect to capture using our new thin-slab caster and hot strip mill process.
- Our Steel Fabricating segment, a consistently strong performer, turned in another record year.
- Each of our fabricating subsidiaries obtained ISO 9002 certification attesting to their
high quality output.
- We made significant progress in installing a broad-based information management system that will not only eliminate year 2000 computer software problems but will also improve business process control and information flow throughout our Company.
- Late in the year, we succeeded in refinancing our debt to take advantage of lower interest rates, extend maturities, and give us more flexibility in managing our balance sheet going forward.
- We initiated the sale of Universal Tool & Stamping, which had been part of the fabricating businesses. Even though this is a solid business, the competitive landscape was changing, and meeting the demands of the automotive OEM's to become a global supplier required significant additional investment outside our strategic focus.
Challenges
Our biggest challenge is to bring our new steelmaking plant up to full capacity with a product mix concentrated in the specialty, higher carbon and alloy grades used by our traditional niche customers. Our results reflect the challenge of the initial development of our specialty grades at the new facility and the problems encountered with our finishing capabilities.
The specialty product development in the first half of the year and the finishing bottleneck during the second half affected our customer service efforts. The result was
delayed shipments to some customers who were forced to look elsewhere for their immediate steel needs. This caused a temporary shift in our product mix to lower-margin, less value-added steel products. By the end of the year we made good progress toward reversing this situation and, as we increase our steel production and finishing capability, we will obtain more orders for value-added products, thereby increasing our margins and profitability.
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| "Although our financial performance
did not reflect our full potential,
we made steady progress and reached
a number of significant milestones during 1997." |
We also realize it is paramount that we achieve the remaining cash cost savings associated with the new facility as quickly as possible. We made steady progress in improving cost performance in 1997, but it is clear there were a few key factors which impeded our ability to reach our cost objectives. We have implemented actions to improve our cost performance and remain confident that we will achieve the expected cash cost savings of $70 per ton.
As we achieve the expected benefits and improve cash flows, we will be in a position to implement growth opportunities by expanding our existing capacity, or further capitalizing on our downstream integration strategy. By eventually adding another million tons of steelmaking and continuous casting capacity, thereby fully utilizing the existing rolling mill, we believe we would create significant additional value. Doing so would open the door to the full potential of our initial investment and drive us toward greater growth and profitability.
We will complete two capital projects this year in the Steel Fabricating segment. These projects will ensure profitable growth by expanding our markets and reducing costs. Specifically, Acme Packaging will install plastic strapping manufacturing lines and Alpha Tube will complete its consolidation into a new facility.
Improved Outlook
If the domestic economy remains strong, it should help maintain a healthy market for steel and steel-containing products. However, one of the unknowns facing us in 1998 is the potential impact recent economic events in Asian economies could have on the domestic market for steel. Our Steel Making segment's operating income should improve steadily during 1998, and we look for on-going solid earnings performance from our Steel Fabricating segment. Although we will continue to improve, we most likely will experience net losses, excluding the gain on the sale of Universal, during the first half of 1998. However, by the second half we will begin to realize more benefits of the investment made in modernizing our steelmaking operations.
Securing the Future
We are confident we have created a solid foundation for the long-term success and growth of Acme Metals Incorporated. The hard-earned progress we achieved in 1997 will propel us into a new era filled with the potential of growth and profitability. As we move into 1998, our strategy remains sound. We are on the verge of becoming a high quality, premier low cost producer of value-added products for a variety of industrial applications.
Our future would not be possible without the hard work and dedication of all the employees and Board of Directors at Acme Metals. We especially thank Edward G. Jordan, director since 1988, who will retire from the Board of Directors at the 1998 Annual Meeting. We have benefited from his counsel and experience and are grateful for his many contributions. Through teamwork, all of us at Acme Metals will remain focused and dedicated to our commitment to our stakeholders-shareholders, customers, employees, suppliers and the communities in which we do business.
| "The hard-earned progress
we achieved in 1997 will
propel us into a new era
filled with the potential
of growth and improved
profitability." |
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