When James and Craig Bouchard formed Esmark a mere four years ago, their goal was bold—to build a billion-dollar service center company within five years. Buying a mill was never part of the master plan.

Yet in November, Esmark completed the rather stunning takeover of struggling Wheeling-Pittsburgh Steel, winning shareholder appro­ val of their plan and scuttling the company’s announced merger with Brazilian steelmaker Com­ panhia Siderurgica Nacional.

Esmark CEO and Chairman Jim Bouchard, who grew up in the steel business, doesn’t take sole credit for the masterstroke. Instead, he says, it was the United Steelworkers who approached him about bringing his turnaround touch to this troubled West Virginia mill.

Bouchard’s previous work, heading up U.S. Steel’s Kosice plant in Slovakia, drew the union’s attention. In a few short years, Bouchard had turned a bankrupt steel operation into a highly successful venture, a small regional steelmaker and processor operating in the shadow of Europe’s giants: Mittal, Arcelor, Corus and ThyssenKrupp.

“The union wanted to see if we could build a footprint similar to Kosice in North America,” recalls Bouchard, who left U.S. Steel to form Esmark with brother Craig, the company president. “So we toured the facility for the electric arc furnace grand opening. We saw the EAF, the caster and the strip mill. It had the fundamentals. Building a small Kosice here was possible.”

For 18 months, the Bouchards worked on a plan that would not just reverse Wheeling-Pitt’s course, but rewrite the blueprint for a North American steel company. But to say that Esmark has brought the “European model” to the United States—a model in which mills operate their own captive distribution—is a gross oversimplification. The Esmark model, as described by Bouchard, forms a sort of hybrid steelmaker/distributor. And it’s a model—spawned by a unique confluence of market conditions—that is unlikely to be duplicated.

Bouchard’s vision for Wheeling-Pitt wasn’t simply vertical integration. The mill and Esmark’s service center chain will operate separately and independently. But each will bring major competitive advantages to the other as they both focus intensely on moving steel through the distribution channel, he explains.

Like many old-line steel mills, Wheeling-Pitt has suffered from poor profitability as a result of overproduction, aging equipment, excessive labor and legacy costs, and credit and purchasing limitations. Bouchard plans to transform the company into a much more profitable regional steelmaker. Rather than operate its blast furnace, the company will become a converter of low-cost slabs, supplemented by a minimill-style electric arc furnace. By cultivating sales of smaller orders, from 2 tons on up, the company hopes to double its customer base to 4,000—primarily distributors in the Midwest. With its new low-cost production strategy, high capacity utilization, expanded customer base and cuts in overhead costs, Bouchard expects the operation to quickly return to profitability.

What Esmark brings to the table is strong financial backing, including a $350 million revolving credit facility for the combined company, which should translate into better terms and lower costs in the purchase of the mill’s raw materials, Bouchard says.

Esmark’s many service center locations provide an obvious outlet for Wheeling-Pitt’s production. While Esmark does plan to consolidate purchasing and leverage the volume of its service center chain, its distribution companies are under no obligation to buy from Wheeling-Pitt, which in turn will sell to both Esmark companies and their competitors, as well.

“Esmark provides Wheeling-Pitt with a direct link between production, distribution and the end-user,” Bouchard says. “Better supply chain communication will yield greater flexibility over inventory cycles by matching production with orders.”

Essentially, his idea is to create a mill with the value-adding culture of a service center. In the end, the mill will represent a relatively small portion of the new Esmark, accounting for less than 30 percent of revenues, he says.

“We’re going to stay very focused on downstream. We’re going to slit, we’re going to cut-to-length. We’re going to put zinc on it, we’re going to put tin on it and we’re going to pickle it. Everything we ship through the combined company will have value added to it. We will be out of a large portion of the commodity hot-rolled band market,” Bouchard says.

Wheeling-Pitt will produce steel only as warranted by demand from customers. “In the old days, mills produced as much as they could, ran it into service centers that carried huge inventories, then fed it into the marketplace,” he says. “We are not melting a pound of steel at Wheeling-Pitt without an order from a customer.”

Still, under Bouchard’s plan to target small and midsize OEMs via the distribution channel, he fully expects Wheeling-Pitt to increase its output to over 3 million tons from a historical average under 2.5 million. The increased production will require cooperation from the union, he admits, though Esmark has an advantage there since it has worked with the USW since the beginning of its takeover attempt.

“No matter how good or smart we are, the union has to embrace it,” he says. The company will produce more, yet reduce its workforce by cutting management positions and backing out employees of Wheeling Corrugated and Mountain State Carbon (a joint venture coke operation with Severstal) from Wheeling-Pitt’s payroll.

Wheeling-Pitt will answer to a different master than the nation’s larger steel mills, such as Mittal and U.S. Steel. “Their master is automotive and appliance. When automotive gets hot, and lead times shoot out, guess who comes first: automotive and appliance, followed by construction, service centers and converters. That’s the pecking order when markets get tight,” Bouchard notes. “Wheeling-Pitt will be focused on the service center market. It will be service centers first, construction second, appliance third, then automotive. We’re the exact opposite.”

Importantly, he adds, Esmark service centers will account for no more than 20 percent of Wheeling-Pitt’s downstream business. The majority of the mill’s output will go to a healthy customer base of independent distributors, converters and OEMs.

While some observers have expressed skepticism over this 20 percent figure, Bouchard points out that it makes no sense to run a high percentage of the mill’s product through Esmark companies, as it creates nothing but consolidated, internal shipments. “You’re better off selling out your service center and selling out your mill, and running at full-rated capacity. Otherwise, we wouldn’t be maximizing both entities for full asset deployment.”

Wheeling-Pitt will also supply steel to its Wheeling Corrugated sister company, a $500 million fabricator of roll-formed products, which has been in business since before the turn of the last century.

Bouchard is doubtful that other steel companies will follow suit by trying to merge production and distribution under the same corporate umbrella. While it made sense for Esmark to combine a small regional mill with a comparably scaled regional distribution network, there is no way for larger producers to create downstream operations big enough to match their production, he says.

Always thinking lean
Darting around his modest office at Sun Steel, Esmark’s corporate headquarters in Chicago Heights, Ill., Bouchard fires off e-mails, grabs cell phone calls and retrieves faxes as he discusses his company in a rapid-fire style. No secretaries or executive assistants at this billion-dollar enterprise. This Spartan approach is entirely consistent with the lean philosophy behind all Esmark’s operations.

Notably, Esmark is committed to running the leanest inventory possible. Though Esmark allows its acquired service centers to act autonomously, that freedom doesn’t extend to how they manage inventory. The first step Esmark takes after purchasing a distributor is to liquidate excess product, cutting stocks back to no more than a 2.5-month supply. “At nearly every service center we’ve bought, we reduced inventory by about two weeks. It takes a little time, but it generates a ton of cash,” Bouchard notes.

Orders at Esmark’s carbon flat-rolled service centers typically extend out about 75 days, so a 2.5-month supply matches up with orders in hand. This eliminates the risk of inventory devaluation if prices fall, and is the only responsible way to operate as a distributor, Bouchard says.

“If you have any inventory that doesn’t match up to a hard order, that inventory could be jeopardized as soon as any competitor walks in and drops the price,” Bouchard says. “Why would you want to have one pound of steel in your operation if it’s at risk?”

He points to the Japanese steel industry, where one month’s worth of supply is the rule. Europe runs at 1.8 to 2 months. “Why do Americans have to run with 3.5 months worth of inventory?” he asks. “It should be 2.5 months. Anything else is speculation.”

If a customer calls with a last-minute request for an item not in stock, Esmark companies are encouraged to contact each other, and even competitors, to fill that request.

Referring to a chart showing that steel prices declined every time service center inventories ballooned over the past 20 years, Bouchard criticized the lack of discipline among steel distributors. The industry would be much better off if, like Esmark, it held the line on inventories, matching them with actual demand, which would take much of the fluctuation out of steel prices.

“If service centers can learn to run with leaner inventories, this nutty stuff should not go on. Steel prices should be relatively consistent. The OEMs will know what to expect, and service centers won’t have to worry about making money or losing money on inventory. They can just clip along and make a fair profit,” Bouchard says.

Inventory isn’t the only area where Esmark takes as much risk out of the equation as possible. It also insures all of its accounts receivable, protecting it from customers that can’t or won’t pay their debts.

Going forward, Bouchard and his team are working feverishly to integrate the mill and acquired service centers, and expect most systems to be in place by June 1. The CEO plans to accomplish that by sticking veteran industry leaders in charge of individual systems within the company and letting them go. John Goodwin, a veteran of the steel industry lured out of retirement by the Bouchards, has been charged with reconfiguring the steelmaking operation. Mark Woomer, who worked with Bouchard in Kosice, will oversee the crucial IT system overhaul. Another veteran of U.S. Steel, Tom Mihelcic, is putting the commercial strategy in place.

Simply completing the Wheeling-Pitt deal hasn’t satisfied Esmark’s acquisitive hunger. With the deep pockets and backing of Franklin Templeton Mutual Fund, the company’s largest shareholder (the Bouchards are the second and third largest), Esmark has the wherewithal to continue feeding its appetite.

In February, Esmark formed a consortium with Duferco Group and Novolipetsk to purchase the assets of Winner Steel, a Pennsylvania producer of galvanized steel products. The company also has announced interest in purchasing Sparrows Point, the Maryland mill that Mittal Steel must divest.

The appeal of Sparrows Point, Bouchard says, is its slabs. “It’s long on slabs. We can make our slabs at Sparrows Point and bring those down to Wheeling-Pitt, so we can keep all of our slab position here domestically. We can keep Sparrows Point relatively full, and fulfill Wheeling-Pitt’s [rolling operation], which is short a million tons. That’s where it’s a nice fit.”

If Esmark is successful in acquiring Sparrows Point, the company fully intends to bring the Bouchard Model to the East Coast. “If Sparrows Point happens, we will be looking to build out an East Coast distribution network around it. We would probably want to scale our service center revenue up to $5 billion.”

Esmark’s next five-year plan is in the works. If history is an indication, it probably won’t take that long.

Esmark Rolls Up Midwest Flat-Roll Powerhouse
The acquisition of Wheeling-Pittsburgh Steel Corp. in 2006 has not distracted Esmark from its primary focus—the service center business. In fact, the company will soon announce the purchase of another $600 million service center in the Midwest, bringing its total to 10 acquisitions since 2003 with combined revenues of nearly $1.4 billion.

With its goal to become the largest flat-roll carbon steel distributor in the Midwest, Esmark has been on a buying spree, scooping up such strong regional players as ECT, Sun Steel, Century Steel, Great Western Steel, U.S. Metals & Supply, Miami Valley Steel, North American Steel, Premier Resource Group and Independent Steel.

Esmark CEO James P. Bouchard remains a big believer in the service center industry. While industry consolidation may reduce the number of owners, the role of the service center will only get larger, he says. “The service center business is not going to shrink.  Ownership may be shrinking, but the service center locations and the actual steel running through them will continue to grow.”

Bouchard notes that even though many service centers, including his, are focused on running lean inventories, other links in the supply chain are striving to eliminate inventories, relying more and more on distributors.  “All the excess inventory in the U.S. is being taken out of the system,” Bouchard says. “Now is the exact time service centers are needed.”