美國鋼鐵 (X) 2004 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the United States Steel, 2004, first quarter earnings conference call.

At this time, all participants are in a listen-only mode.

Later, we will conduct a question-and-answer session.

Instructions will be given at that time.

If should require assistance during the call, please press star, then 0.

As a reminder, this conference is being recorded.

Now, I would like to turn it over to our host, Manager of Investor Relations, John Quaid.

Please go ahead.

Thanks, John.

Good afternoon and thank you for participating in United States Steel Corporation's, 2004, first quarter earnings conference call and webcast.

Today, our call is coming from St. Louis, Missouri, which we chose for this year's annual meeting of shareholders because of its proximity to our recently acquired Granite City Works, just across the river in Illinois.

We will start the call with some brief introductory remarks from U.S.

Steel President, John Surma, then Gretchen Haggerty, U.S.

Steel CFO, will review results for the quarter and provide some comments on our outlook for the second quarter and balance of the year.

Following our prepared remarks, U.S.

Steel Chairman and CEO, Tom Usher, and Nick Harper, our newly appointed Manager of Investor Relations is here, and the team will be happy to take any questions that you may have for us.

Before we begin, however, I must caution you that today's conference call contains forward-looking statements, and that actual results may differ materially from statements or projections made on today's call.

For your convenience, the forward-looking statements and risk factors that could affect those statements are referenced at the end of our release and are included in our most recent annual report on form 10-K in accordance with the Safe Harbor provisions.

Now to begin the call I would like to turn turn it over to U.S.

Steel President, John Surma.

John?

Thanks, John.

Good afternoon, everyone.

Thanks for taking time to be with us.

Before I get into my comments, let me just take a moment to acknowledge John Quaid, our Manager of Investor Relations for the last several years.

Done an excellent job in that position.

As I think many of you on the call know, he has moving off to an important position in Business Planning we've asked him to undertake, and as he mentioned, is being succeeded by our colleague Nick Harper, comes from our Corporate Finance organization and our Financial Group.

Nick's very experienced as well in these affairs, and many of you, I think, have already spoken with Nick, perhaps with Nick and John together.

This sort of marks John's completion of this tenure in this current role, and he will be handing the baton to Nick.

In the meantime, I'm sure John and Nick will continue to liaison to make a smooth transmission.

So thanks again, John.

Turning to our results now.

For the quarter, we reported earnings of 36 cents per share before the effective and accounting change.

If you add to that the 8 cents per share effect from an unfavorable income tax item and two items that we've excluded from ongoing segment results, you arrive on something on the order of 44 cents per share, solid results for the quarter which compares favorably to the average of analyst expectations of 36 cents per share.

Now, as you can clearly see from the results issued this morning, our domestic Flat-Rolled business benefited considerably from the robust economic recovery currently under way, with our best results in six or seven years.

And in fact, they've got better as the quarter went on.

Our competitively unique raw materials position and proved cost structure has positioned us in our domestic operations very well to take advantage of the current good market conditions.

Throughout the quarter, we observed steadily increasing prices on our spot business, as a result of strengthening demand across virtually all of our end markets.

And as you will hear later in the call, we expect these favorable trends to continue through the second quarter as the improving economy continues to create more demand for steel.

As I mentioned, our domestic raw materials operations have been a strength over the last quarter and are expected to be so into the future.

But as I will discuss later in the call, we do expect continued tightness in our raw materials supply during the second quarter, particularly as it relates to coke and coal and coke.

Now, just as a reminder, as an integrated steel company, the key ingredients we use for steel making include iron ore coke, the coal to make coke and scrap.

For your modeling purposes, let me just tick through our expected 2004 domestic requirements for these materials.

We're self sufficient in iron ore, and the approximately 21 million tons of ore we plan to melt this year will be entirely from our two mines in northern Minnesota.

As a result, our iron ore costs should be flat year-over-year.

We use a limited amount of scrap and expect to purchase only about 2.6 million tons of scrap to support our domestic operations.

We also expect to purchase roughly 10 million tons of coking coal and produce about 7 million tons of coke, or about a half million tons more than our expected 2004 domestic needs.

While we have the production capability to be self sufficient in coke for the year, we expect to sell approximately 2.8 million tons of coke and purchase about 2.3 million tons, including purchases from the coke batteries at our Great Lakes Works, which are owned by a third party.

All of our coke sales are carried out under contracts which are generally priced annually in the fourth quarter, while only about 70% of the purchases are similar fixed price arrangements.

That results in a short position of about 700,000 tons for the year that we need to cover with open market purchases.

Looking ahead we plan to adjust this merchant position and use our production internally and sell only coke production above our needs for the next year or so.

More on that later on.

In Europe, our results, like those of other European steel producers, reflect the impact of the significant run up in raw material costs, again, especially coke.

While we have had good success in raising prices across Europe, it's not been enough to offset this precedented cost escalation and maintain our margins.

The situation is particularly acute at our new Serbian operation which relies on 100% purchased coke.

As we continue to ramp up production in Serbia, we find ourselves competing as a new customer in a very tight raw materials market.

And as a result, to date, raw material cost increases have outstripped the gains we've made on product pricing and productivity.

Looking forward, we do not expect this condition to improve much during the remainder of the year.

We're attempting to lessen the impact through alternative sourcing of incoming materials, optimizing our shipments into higher-priced, more profitability markets, and by taking full advantage of the synergies with our operations to the north in Slovakia.

Lastly, during the quarter, we made pretty good progress towards resolving a number of outstanding issues.

An agreement was reached, as you may have read between Slovakia and the European commission, regarding our Slovakian operations tax benefits, and we also reached a pending settlement with regard to a longstanding dispute over property taxes at our Gary Works.

We did issue press releases and continued to clean away as much as of the underbrush that's collected over the years as we can to allow us to focus on the business of making steel and to reporting clearer and more transparent results to all of you.

Now, I will turn the call over to Gretchen for a review of the quarter's results.

Gretchen?

Thank you, John.

First quarter, 2004, consolidated revenues and other income totaled nearly $3 billion, which was an increase of almost 300 million from the fourth quarter of 2003, as our consolidated average realized prices increased by 13% for all steel segments.

Total steel shipments increased by 174,000 tons to 5.6 million tons.

Revenues and other income more than doubled from a year-ago quarter, primarily as a result of the National facilities acquired in May of 2003.

So for the quarter, we reported net income of 58 million, or 47 cents per share, compared with a net loss of 22 million or 26 cents per share in last year's fourth quarter, and a net loss of 38 million, or 40 cents per share in the first quarter of 2003.

As noted in our release, a recent revision regarding the accounting for variable interest entities required us to consolidate the Clairton 1314 B partnership, a partnership involving three of the 12 coke producing batteries at our Clairton Works, which was previously accounted for under the equity method.

This change in accounting resulted in a favorable cumulative after-tax effect of $14 million, or about 11 cents per share in the quarter, which I should also note had no effect on first quarter or ongoing net results.

The quarter's results reflected a number of items of note, including a $32 million tax charge, as a result of an agreement resolving a dispute between the Slovak government and the European commission, pretax income of $43 million, primarily from the sale of the company's remaining mineral interests, which were part of the real estate segment, and compensation expense of 10 million for outstanding stock [appreciation] rights.

After applying a statutory tax rate of 35%, as applicable, these items had a net unfavorable effect of $10 million, or 8 cents per share.

Excluding the two above the line items, the $43 million mineral interest sale and the 10 million compensation expense for the SARs, total segment income from operations before retiree benefit expenses was 162 million, or $29 per ton, an improvement of $113 million from the fourth quarter of 2003.

This was driven primarily by a $90 million improvement in our flat-rolled segment.

Looking at Flat-Rolled in particular, versus the fourth quarter of last year, there was a 12% increase in the average realized price to $475 per ton, primarily due to increasing prices on our spot business, with March prices ending significantly higher than the first quarter average.

This $52 per ton improvement in price, and the assets of fourth quarter major outage costs, were somewhat offset by increased costs for purchase of both scrap and natural gas, resulting in a $20 per ton improvement in margin for the flat-rolled segment.

In Europe, margins continued to be compressed by raw material costs, and results were also affected by lower shipments due to operational difficulties with the blast furnace in Slovakia, which we discussed with you on our last call.

The problems with the third blast furnace in Slovakia, which have been corrected, not only reduced that plant's capability utilization, but also significantly reduced the amount of slabs that were available to send to Serbia in the first quarter for finishing and further sale.

On an encouraging note, operations in Serbia are ramping up as planned.

The new steel-making vessel made nearly 1,000 [heaps] of steel during the first quarter, and we reached 50% of capacity utilization in the month of March.

The new vessel was performing better than expected, as are most of the main producing units in Serbia.

Turning to the Tubular business.

The strength in the order book we discussed with you on our last call continued throughout the quarter and led to our tubular operations' first quarterly profit since the third quarter of 2002.

The segment realized a meaningful portion of announced price increases over the quarter and increased shipments by 16% from the low fourth quarter levels.

Finally, let me mention our efforts to strengthen our balance sheet in the quarter.

In early March, we sold 8 million shares for net proceeds of 294 million.

This issuance of common equity allowed us to take advantage of certain limited and time-sensitive optional redemption features in our senior notes, and on April 19, we used the proceeds to redeem 259 million of these outstanding notes, materially reducing our debt maturity schedule in 2008 and 2010.

These redemptions will result in a pretax charge of 33 million to second quarter, 2004, net interest and other financial costs for the redemption premium and unamortized issuance and discount costs.

In 2004, they will save the company about $18 million in interest expense and amortization costs for the balance of the year and then about 28 million on an annual basis.

Now, John Quaid will provide some additional details on the quarter's results and some items for your modeling purposes.

Thanks, Gretchen.

Capital spending, which is detailed by segment in the earnings release, totaled $70 million for the quarter.

Our current plan for 2004 has total capex of approximately $445 million, including 245 for domestic operations and 200 for European operations.

Depreciation, which totaled $102 million in the first quarter, is expected to approximate 400 million for the year, higher than our previous forecast, due to the consolidation of the results of Clairton [1314 B] partnership that Gretchen previously mentioned.

Defined benefit and multi-employer pension costs and OPEB costs for the quarter totaled $83 million.

No contributions were made to the pension or health care plans, but during the quarter, we did make cash payments of 44 million, primarily for multi-employer pension plans and health care costs.

Turning to interest expense.

Exclusive of the $33 million charge, that Gretchen again mentioned earlier related to the redemption of a portion of our senior notes, interest expense for the year is now expected to total approximately $165 million.

Moving on down the line, as it now stands, our estimated annual effective tax rate for the year is at 26%.

And lastly, as a result of the equity offering that we've discussed, and assuming conversion of our preferred shares, the fully diluted share count for the second quarter of 2004 is expected to be approximately 128.5 million shares.

With that, now I'd like to turn it back to Gretchen for some additional comments on the quarter and some comments on our outlook for Q2.

Thank you, John.

For the quarter, we did an excellent job of generating cash, with operating activities providing cash of 97 million.

We had positive free cash flow after capital spending and after dividends, but before external financing of about $102 million.

We ended the quarter with a cash balance of 764 million, 21 million of which related to the Clairton [1314 B] partnership that is not available for U.S.

Steel's use.

I should also point out that 290 million of this balance was used for the April 19th note redemption.

For the balance of the year, we expect to build working capital as a result of higher prices and higher inventories, to support increased demand.

But we still expect healthy cash flow for the year.

And as we've discussed with you in the past, tax effective contributions to our [Viva] Trust to prefund retirees health care cost is at the top of list for uses of any excess cash generated this year.

Concerning the second quarter, we expect improved results on a quarter to quarter basis.

Starting with the Flat-Rolled segment.

As John mentioned earlier, we are seeing strong steel demand across virtually all of our end markets.

Auto production schedules remain strong.

Service center industry inventories remain well below historical levels.

And we are finally seeing demand strength on the nonconsumer side of the order book.

Based on the resulting strong pricing environment going into the second quarter, we expect Flat-Rolled realized prices in the second quarter to improve significantly more than the $52 per ton improvement in the first quarter.

The Flat-Rolled segment will face some higher costs in the second quarter, as we expect increased costs mainly for purchase coke and certain other raw materials.

Compared to the first quarter of 2004, our costs for purchase coke is expected to increase significantly.

Various press reports with no coke and the related export licenses out of China selling for current market prices of over $450 per ton, versus perhaps $250 in the first quarter of 2004.

As we noted in our release, we expect to purchase about 240,000 tons of coke in the second quarter. most of which we also expect to consume in the quarter.

So this -- this near $200 dollar per ton increase in purchased coke would equate to about $48 million in higher costs or about $12 per ton of steel shipped.

For 2004, we expect three major blast furnace outages domestically.

Originally, we planned for these outages to start at end of the second quarter and be completed in the fourth quarter, with one furnace down in each of the second, third, and fourth quarters.

Last week, we accelerated these plans with a furnace at our Gary Works, which came down for a 35-day outage.

The new schedule will have a little heavier impact on the second quarter, and we will finish the outages by the end of the third quarter.

Just for round numbers, somewhere in the neighborhood of 8% of our daily capacity will be affected by these outages, and the actual cost effect on the second quarter is currently estimated at $20 million.

Next, I'd like to update you on the status of our coal supply.

Despite our continued efforts to obtain additional coal supplies, we have been adversely affected by force [majours], declared by a number of coal suppliers, in addition to the pinup force [majour], declared in December of last year.

As a result, coke production for the quarter was at only 92% of capacity, and we continue to supply less coke to ourselves and our coke customers.

We continue to balance our coke position by reducing inventories and making market purchases in order to minimize any effect on steel production.

Barring any significant additional disruptions, we believe that the changes we've made to production schedules, and the planned receipt of coke and coking coal have us reasonably well covered for the second quarter.

Flat-Rolled shipments for the second quarter are expected to decline slightly as a result of the outage we moved up, and lower liquidation sales of Straightline inventory that were included in first quarter's shipments.

However, full-year 2004 shipments are expected to increase from our previous estimate of 15.5 million tons to approximately 15.9 million tons.

Year over year, that's an increase of 18%, primarily due to a full year's worth of shipments from the National assets we acquired in May of last year.

We are also expecting continued improvement in results for the Tubular segment in the second quarter, due to recently announced price increases for certain products, ranging from 100 to $150 per ton and a strong order book.

However, the supply of rounds used to make seamless tubular products has been impacted by worldwide raw material shortages.

To date, the impact on shipments has been minimal as inventories have been reduced and schedules adjusted.

While second quarter shipments could be affected by these ongoing shortages, we expect to achieve our million ton, annual target for Tubular shipments, a year-over-year improvement of about 18%.

For U.S.

Steel Europe, we expect higher average real prices to cover increases in raw material costs and maintain margins.

As a reminder, we announced an increase of a minimum of 40 euros per metric ton, effective April 1st of 2004.

Shipments for the quarter are expected to improve by about 10%, and for full-year 2004, they are currently estimated at 5 million tons.

Briefly looking out beyond the second quarter, a number of our competitors have recently announced increases of 40-60 euros per metric ton for the third quarter.

We're currently evaluating market conditions to determine our course of action, but given current and expected worldwide fuel market conditions, further price increases in the third quarter are likely.

For the second quarter, we expect improved seasonal results from taconite pellet operations.

Also due to improved profitability, we expect higher costs for profit-based payments under our labor agreement with the USWA.

That concludes our prepared remarks.

Now, at this time, I would like to turn the call over to Tom Usher for U.S.

Steel -- our U.S.

Steel Chairman and CEO, for some brief remarks before we open the call to your questions.

Thank you, Gretchen.

I think, as many of you know, it was nine years ago, about this time, that I was elected to the position of CEO of USX at that time.

And as I mentioned earlier, you know, during that time, some days have gone quickly, other days have seemed like an eternity.

But it has been a great time and a very interesting time to be in the steel business.

An awful lot has happened.

We, as you know, went through the successful split of Marathon and Steel into a separate company.

We had the 201 battles.

As a company, we more than doubled our size from about 12 million tons of capacity to close to 27.

We have begun much more of an international player.

We've , I think, entered into a very innovative and constructive, long-term labor contract with the steelworkers, and we have considerably strengthened our balance sheet during a period that has been a very difficult time for many steel businesses.

So I feel that the company is in very good shape as we move forward.

In September, I will be 62 and I have elected to retire from the company, and the Board has elected John Surma to replace me as CEO, effective October 1st of 2004.

At that point, I will remain as Chairman, and it would be my expectation to remain as Chairman through April of 2007 and to work with John on the development of some of the strategic initiatives we have in the area of some organizational development.

This whole process of succession, which we take seriously at U.S.

Steel, began really in late 2002, and at that time, it was important that I felt John was ready to step up to the table.

It was important the Board felt John was ready to step up.

And it was important that John felt he was ready to step up.

And also, I think it's important that the business was -- is in a period of relative calm.

And I think all of those conditions have been met.

Both myself and the Board have tremendous confidence in John moving forward.

We expect this transition to be somewhat seamless.

And I think those of you who have met John, you know he is a very intelligent, highly ethical, hard-working, and a person who truly cares about the corporation and where we're going.

I expect him to be a great leader.

We have worked together for the last several years really as partners, and I would expect that to continue as we move forward.

So I'm looking forward to get on with the next phase of my life.

John is looking forward to get on with the next phase of his, and as I said, I think a lot of the momentum we've created will continue as we move forward.

With that, John, we will turn it open to questions.

Thank you.

Ladies and gentlemen, if you wish to ask a question, please press star, then 1 on your touchtone phone.

You will hear a tone indicating you have been placed in queue.

You may remove yourself from queue at any time by pressing the pound key.

If you are using a speaker phone, please pick up the handset before pressing the numbers.

Once again, if you have a question, please press star 1 at this time.

And one moment, please, for our first question.

And our first question comes from the line of [Bruce Kline[ from CSFB.

Please go ahead.

Hi, good afternoon.

I was wondering on the -- you guys, I think, John Surma went a little quick for me on the coking coal and the coke; if you can just help me out with the beginning of your comments in terms of how much coke you buy.

Sure.

Let me reorient myself.

I think, in general, starting at -- just the coke side, we purchase, I indicated, about 10 million tons of coking coal, domestically -- about 10 million tons, this is all domestic and that yielding coke production of about 7 million tons.

And that's about a half a million tons more than our North American consumption.

So say 6.5 million tons consumption.

Now, we sell, though, about 2.8 million tons of coke, and we purchase about 2.3 million tons, hence the difference of about a half million tons.

On the purchase side, most of the sales are under longer-term contracts that we reprice annually.

On the purchase side, about 70% or so of those are under longer term arrangements where we would have a fixed price for a period of time.

But that does leave position, a short position of about 700,000 tons that needs to be covered in the merchant market.

Thank you.

And the -- what about -- I guess contracts that are coming up, I think it is about a thirty-year contract at the end of '04.

Have you started those discussions, any early indications, and how I guess aggressive do you kind of expect to be?

You mean sales contracts?

Yeah, sales contracts.

We have had some initial engagement with some of our contract customers, because either we initiated it or they did or there was some matter that had to get resolved, and without wanting to get specific on customer groups, because we try to be sports about that, In general, I would say that the supply/demand balance very much does favor us at this moment, then the spot price being what it is.

That's not the sole determinate, but it certainly is something that's considered, and it is generally far above where our current contracts are.

And those that we've had engagement in so far, we've done reasonably successfully.

Actually, quite well by historical standards.

Not up to the current spot price but quite well by historical standards, and we would have an expectation that that kind of result would derive from what whatever contracts we have to deal with later on in the year as they come due.

So we're optimistic and we'll do better.

And the spot price always has a -- in effect, the current supply demand scenario also has an effect, and we think both of those matters give us a pretty good negotiating position.

In the past you guys have talked about getting a higher percent of your business under contract.

Is that an important part of the strategy for '05, or are you not as aggressive on that front?

Bruce, are you talking steel or coke there?

Steel.

I apologize.

John was really referring to our coke position.

And we -- you know, at the end of '04, we will have the opportunity to renegotiate contracts if we want.

But our general direction will be to sort of just take care of our own needs moving forward.

On steel, that answer applies, and we're looking to continue to move up.

You know, longer term, we would look to, maybe have a 70/30 split between contract and spot.

Obviously, the spot business is a better now, but long term that mix of 70/30 is where we want to be.

And then the tin surcharges, how ask that faring in the marketplace?

We are under a -- we are in discussions with that group of customers, which is a fairly small group, and I would really rather not get into specifics about that right now.

And we're really not -- I think you said surcharges.

I mean we haven't -- other than once in January, really effective February, we had one surcharge, but we really did not get into the surcharge game.

We preferred to discuss all this as attaining market pricing for our products, and what we're looking for is the prices that's evident in the market, and that's being established by a variety of party -- sometimes us, sometimes somebody else -- but we haven't gotten involved in the calculation of surcharges.

We're just after the market price, and that's what we're trying to get, and the discussion with the folks in that particular line of business is ongoing right now.

Okay.

And, lastly, and I will pass it on, just your latest thoughts on acquisition.

How important is that part of the strategy?

And geographically, your latest thoughts -- where?

Again, we still feel that there are opportunities to grow.

And both domestically and internationally, we're still quite aggressive in that area.

But having said that, we do not want to pay based on what's going on in the market today maybe.

And you know, we continue to pursue a number of different initiatives.

I can't get into any great detail.

But our future -- I mean our view is that, you know, the days of a steel company of five or six million tons are probably going to put them at a competitive disadvantage, and we think the steel companies of the future will be both international and be of the scope of 30 to 50 million tons, so we're still pursuing initiatives.

I have nothing specific to say.

But we still think there's opportunities out there.

And either now or when the business turns a little softer, we would intend to be aggressive in that area.

Okay.

Thanks, guys.

Thanks, Bruce.

Thank you.

Our next question is going to come from the line of Andy [Pittings] from Goldman Sachs.

Please go ahead.

Good afternoon, everybody.

Hi, Andy. [several voices]

It looks like preliminary steel imports into the U.S. ticked up sequentially in March.

You guys worried at all about imports putting downward pressure on steel prices in the second half of the year?

I don't think so, Andy.

We -- you know, we think the demand ticked up in the United States in that period, also.

Most of the domestic people were running flat out, and as you know, there is a structural deficiency in this country, so you need imports, and the imports that did come in were priced sort of at market, so it's not something we're concerned about.

And a number of the factors, including currency and shipping costs and so forth, I think, will tend to keep that just sort of what the market will require.

Can you give us an update then about your order book?

Have you opened up June or July?

And where does all that stand?

We're opening up the order book very, very slowly.

We have kept it very close to the vest.

We are only starting late last year.

We still have some material to book in June.

And we're doing that very judiciously and trying to make sure again that we price all this business at the market, and we'll work our way through then starting into the third quarter little by little, trying to make sure that the orders that we take, anything we can produce and deliver, of course, and also, that we're going to get the right price for them.

We don't have any great concern about filling up, but we want to make sure that we're doing it at market price.

Thanks.

And then last question.

Can you just give us an update on your expectations for full-year pension and OPEB costs, and what will be cash, and what will be noncash?

Thanks.

Andy, those numbers, you know, would not have changed from the estimates we would have given in the K. As you know, you do that valuation and measurement of those defined benefit plans at the beginning of the year.

You calculate a cost and you spread it evenly over the year, so I think we were looking at roughly 205 and 105 for pension and OPEB costs, respectively.

On the cash side, you know, we've talked about on the pension side doing a voluntarily contribution of 75 million.

Later in the year, and then for OPEB cash, Gretchen, I want to say 210 million is our number?

I got them all except the last one.

Right.

But that's really disclosed in the footnotes that were in the K. And those numbers wouldn't have changed appreciably since then.

Right.

And, Andy, you know, as most of you probably noticed as well, we did not have a condensed balance sheet and cash flow in this earnings release.

Really, the thought there was our 10-Q is probably going to be filed here within a day or two.

So given the proximity of those two, we just moved to give you the full balance sheet cash flow and footnotes in the 10-Q, and a more limited earnings release.

But certainly, I would appreciate any comments or feedback that you might have on that decision, you know, to myself or Nick.

John, just a follow-up then.

Was there any noncash OPEB in the first quarter?

Yeah, probably about 5 million; 25 of P&L and about 20 of cash.

Great.

Thanks.

That's all for now.

Thank you.

Our next question is going to come from the line of [Brett Levey] from Royal Bank of Canada.

Please go ahead.

Yes, can you guys give a little bit of an update on sort of the restart of [your Met] coal mines, and sort of the force [majour] there and then I had a couple of other questions?

It is not ours anymore.

We sold it last summer sometime, to Pinnacle Mine, I presume you're talking about.

The Pinnacle Mine, yes.

They're back in the mine it's reported -- there are two continuous miners at work in the mine.

And some production is coming out of it.

Those continuous miners, among other things, are -- we understand, prepping the mine for the reemployment of the long wall, which we hear might be sometime later this quarter, but we don't have a specific date for that.

We understand it could be as early as May.

It could be as late as June.

Who knows.

Or even later.

Those are always unpredictable things.

But that's where that stands right now.

It's back under production.

They're in the mine with two continuous miners getting ready for the long wall, but the long wall is a big hitter and it's not back up working yet.

And you guys had mentioned that you guys have continued to use working capital during the year.

Can you give some guidance as to what you anticipate the impact of that will be on cash flow for the second quarter and then full year?

I don't know that I've got a forecast of that for you.

We just -- what I said is that we do expect, though, to have healthy cash flow in excess of those working capital bills.

I think that they tend to kind of mirror the improvements in pricing and what have you that we have, so you know, we still expect to generate pretty good cash flow before external financing, but after capex.

All right.

And then can you guys talk a little bit about some of your major realigns beyond the current year?

Sort of what the schedule looks like?

We generally don't either talk about them or disclose much about that going out beyond the current year.

There is a certain amount of competitive knowledge involved in that.

And -- as well as the fact that the exact timing and nature of what we do, how big the projects might be, what projects we may do, depend on a lot of things that we can't assess right now and don't need to until we get closer to it.

The only thing I'd say is we have, domestically, 12 furnaces, and from time to time, we're going to be working on them, and when we have that many more than we had before, we're going to have, you know, of course running greater frequency and major projects throughout the year, and we will also have some in Europe from time to time.

But in terms of specific schedule for next year, there's really not much I can tell but that now.

And then the last question: You guys are getting closer, obviously, you took out some debt with some equity; is it a priority in a relatively near term or intermediate term for you guys to be investment grade?

It is.

It has been an objective of ours, and I'd like it to be in the near term.

I'm not sure that that's realistic given that we're, you know, the -- rated where we are in double B minus for -- and continue to [be one] by Moody's, but we just think that that's something that gives us the kind of flexibility that we want.

It's going to take some debt reduction and it is going to take some funding of our OPEB obligations, but we think we can, you know, just move in that direction.

And we will do it a bit at a time.

All right.

Thanks, guys.

Our next question is going to come from the line of Mark Parr from Key/McDonald.

Please go ahead.

Thank you very much.

Good afternoon.

Hi, Mark.

I have several questions.

First of all, Tom, you had mentioned the -- kind of the thought about exiting the merchant coke business for next year.

I was wondering if you could give a little more color on that, and also, what does -- what do the change of control provisions in your coke supply agreements with Weirton and Rouge imply for pricing into those mills after the change of control has occurred?

Yeah, I mean, there was a position that we've taken over several years, where we were selling some coke, buying other coke on the open market and really sort of playing the transportation arbitrage of, you know, making 10-15 bucks by buying in one area of the country and selling in another area.

And, obviously, with what has happened in the coke market, we found ourselves in a position where we didn't have as much flexibility in '04, and we've had to go out and buy a limited amount on the open market, and I think John used the number of 700,000 tons.

And -- but as these contracts come to an end, most of them deal with price renegotiations on a year-to-year basis, so we would be in a position to renegotiate prices.

But our general thinking is that we see this coke market staying tight for the next several years.

And we would probably move into a position of rather than trying to, you know, buy and sell about 2.5 million tons each, we would tend to consume that ourselves, and you know, get ourselves in a position where we would be slightly long on coke, have some for sale, but not be out buying coke.

And so we are in negotiations and will be later in the year, with people who are now coke customers of ours, but those deals would have to be very, very attractive for us to move towards that.

In general, our philosophy would be to take care of ourselves more.

Does the -- so that we can assume, then, for 2005 that your coke costs would go down dramatically, compared to what they would be in the second half of '04?

Yeah, I would say that would be a good assumption.

And it would be basically what our -- what our costs would be.

And the big unknown there would be coal, but the coal escalations have been far less than the coke escalations.

So we would expect to see a substantial improvement in '05 because we wouldn't be out in the spot market for coke.

Okay.

All right.

Terrific.

Is it also fair to say that a big -- as far as the second quarter is concerned, that the lower cost of acquiring scrap due to the reduction in scrap costs will be a significant mitigating factor for the -- relative to the higher cost of coke in the second quarter?

They will offset some.

Maybe not one for one, but certainly, it will be.

In our big improvement we see in the second quarter is really coming on the pricing front.

You know, we, you know, if you look a at how we got our pricing, we probably were very slow compared to maybe some others in January.

We didn't get a lot of price increase in January, we got some in February, significantly more in March.

And you know, the second quarter should be -- should be very strong.

We showed a $52 a ton improvement fourth quarter to first quarter, and we should do substantially better than that second quarter to first quarter.

Do you think that -- just a couple of questions on pricing, if I could -- do you think that spot prices in June for hot-rolled will be higher than they were in May?

Yeah, probably a little.

I mean, yes.

Good chance of that.

Good chance of that.

All right.

Are you seeing any indication at all of service center inventories stabilizing?

Or do you think that the inventory situation is continuing to decline for your service center customers?

We think, you know, a lot of this isn't going into a bill; it's actually going into consumption, so we see these continuing to be tight.

Their sales have been very strong, as have you seen reportedly.

It is interesting back in '02, the weakness -- or you know, the trough of service center inventories was in the May time frame, and prices didn't stop going up until September, October.

So if the service center inventories continue to decline through the May/June time frame, we may see prices continue to increase through the end of the year, given the magnitude of the decline.

I think that is very possible, and, of course, as we mentioned earlier, in some of these questions, the availability of cheap imports are really not there, so that's a very possible scenario.

Anyway, I would just say congratulations on, you know, moving into the black and, you know, hopefully, we will continue to see some really nice improvements in the earnings over the course of the year.

I'm very encouraged.

Thank you, Mark.

Thanks.

Our next question comes from the line of Michael Lucas from Appaloosa.

Please go ahead.

Yeah.

I was wondering if you guys could give us some -- like a relativity of where -- what realized spot prices you guys realized in the first quarter.

I understand there is so much -- you didn't start until February, then you got some in February and some in March.

What was the actual realized price?

Would that be like a 370 number?

On spot pricing?

Yes, sir.

Well, if you figure roughly about half our business is spot, half is contract, we increased by 52.

We did get some price increases, so probably 80-90 bucks on spot.

I mean I'm just trying to understand what the reference price was.

You know, in other words, if it was 300 at the end of the year in the fourth quarter, what do you think it was for the realized in the first quarter?

So add 70 to that, say 375 for a spot?

Yeah, that's probably pretty good.

On a steady mix?

On a consistent --

Yeah.

We're just talking hot-rolled there, yes.

Okay.

And do you guys -- I know you don't like to speak about the pricing contracts, but as they come up, I mean, obviously, some of these auto guys have put up some pretty decent numbers.

Is that factored into your compensation at all?

Well, as we said before, we don't talk about specifics, and what we have done, we have sat down with all of our contract customers, and a number of them we have gotten some increases, other ones we have -- in some cases, restructured deals, either for new pricing, or longer volume -- or longer terms, or higher volumes, so it's sort of on an individual basis.

In general I, I would say contract pricing has been helped, not nearly as much as spot, but the profit margins on these customers are good margins, and you know, we've had some improvement there, but not to the level we've had on spot.

Let me ask that in a different way.

I mean I understand everything you want a caveat because you want to protect those contract negotiations, which I appreciate, but you know, as a shareholder, I hear you saying that you want to go to actually more contracted business?

And it seems now that it's actually hurt the business, and I realize this could be a short-term anomaly, but I'm wondering what your thought process is.

Does it mean you really think it's this short term?

Do you think there's been a secular move in pricing of steel that it's moved up a leg?

Where do you think contracts are going?

Because, obviously, guys like some of your competitors did really good numbers and are looking second quarter, great numbers, and I know you guys don't give numbers for the second quarter.

I'm trying to understand your thinking, your thought process here.

We're looking for great numbers in the second quarter, too.

I'll say that.

I would say that that 70/30 goal is a little longer-term objective.

But you know, if you look at this thing several years out, over the full cycles of the business, I think that's sort of a nice balance to be in.

And when we say 70% contract, contracts which are negotiated every year are done with the -- sort of the spot market in mind.

So while you may have, you know, a couple quarters where you're locked into prices, where the spot market runs above it, there are a lot of quarters, also, where the spot market runs the other way, and if you're renegotiating annual contracts, in general, I think that's probably a good business model to have.

And, again, that would be an aspiration that we would like to move towards.

Right now, I would say we're, you know, 45% contract, 55% spot.

Okay.

Just, you know, in terms of the way you said that, I just want to make sure that you do think that this current environment though is a very positive environment to renegotiate contracts.

Exactly.

That was the point I was trying to make, Michael.

That when we come to the fall, if spot prices are at, you know, for hot bands are at $500, that's a totally different dynamic when you negotiate the pricing of spot -- of spot hot-rolls at 300, or 200 even.

I just wanted to lastly touch on, you guys world view here, nobody really focuses on India and there is a lot of industry guys out there who've followed this industry for 25 years, basically saying imports are up and it is a big worry right now.

What do you guys think about, you know, in terms of inventories, the dollar, world production numbers and where they're going, the [met] coal story, kind of where you think the market is?

I guess I would say we still see -- on the iron ore side, we expect to be very tight in the world.

And that's partly just the availability of ore, but also the poured and transportation infrastructure, and so forth.

And we see coke staying tight for the next several years.

You know, it can't stay at these kind of levels, or we think additional capacity would come on.

In terms of scrap, we think even there has been some softening.

We don't see scrap coming back to the kind of numbers we saw a year or so ago.

We still think there is going to be a fairly good price for scrap.

In terms of imports, we expect most of the U.S. producers to be at full capacity and imports to make up the difference for whatever the demand is.

And as demand steps up in the United States, with some economic recovery, you might see imports coming up.

But it's not going to be at the expense of domestic production, because I think most of the domestic producers will be operating at full capacity.

Okay.

And when you say, you know, in the coke story, are you guys tied up on your [met] coal story?

On our [met] coal, we're in pretty good shape.

Obviously, this major problem that took place at [Pin Oak] caused us some disruption here over the last several quarters, but we think they're getting back in business.

And with them coming back, and other arrangements we've made, we feel we're in good shape on coal.

Okay.

And there's been speculation you guys had a bunch of incremental price decisions, actually settlements on these contracts from the last quarter.

Could you comment on that?

Or do you want to comment on that?

Well, this is something I'm -- say it again.

That there's been speculation that you've had incremental price settlement talks on some of the contracts.

Is it -- you know, are guys wanting to do things early, prematurely or do you people will wait until September?

You're talking about steel customers?

Yeah.

We've had -- go ahead.

I was going to say, these discussions we've had ongoing, they continue, and we're open to talk.

You know, some may wait until the fall.

Others may want to do it early.

You know, this is sort of on a customer-to-customer basis.

Okay.

Thanks.

Thanks, Mike.

Thank you.

The next question is going to come from the line of Wayne Atwell from Morgan Stanley.

Please go ahead.

Thank you.

Tom, I'd like to congratulate you on passing the baton to John -- I think you've gone a great job.

Thank you, Wayne.

-- and put the company in a very strong position.

In terms of coke, you're not going to buy too much on the outside next year?

You're just going to be pretty much self sufficient so you won't really negotiate much in the way of purchases next year?

We will be buying in North America, less next year than we have this year.

Depending on how some of the arrangements work out, we may buy some, but we will be buying a lot less next year than this year.

And would you buy most under long-term contracts?

That depends on the market structure at the time, Wayne.

But if we get our wish, we won't have to buy any, if we're buying some, it may be more on a medium-term contract, I think would be maybe where we're heading.

Think of it this way, Wayne.

We're a tad long on coke.

And, you know, if we elect to sell some it 'll be at pretty good prices.

And if we elect to buy some, it would have to be at prices that would also make sense.

But we could get to a position where we would be able to take care of all our coke needs as we go into '05.

So whether we buy and/or sell, it would depend on the deal, but we do not expect to get ourselves in the sort of a situation we have now where we are a little short on coke and are buying in the spot market.

And the implication there, of course, Wayne, is there will still need to be merchant coke coming into the North American market to keep all the furnaces running.

We're just not going to be worried about it.

Right.

In terms of pricing, I guess the press release made the statement you think your price increase will be substantially more than are $52 increase you got in the first versus the fourth quarter?

Yes.

Can you give any additional guidance on that?

Are we talking $60? $90?

Can you -- the real key here to your profitability is how much you can ratchet up your pricing.

Well, we, you know, as we said earlier, we have not really booked out June yet.

But in the direction that we're -- we think it's going to come, it -- we'd be much more expecting it to be towards the 90 than the 60.

Okay.

So if we were to use 80 or 90, that would be reasonable in terms of modeling.

We feel from a pricing standpoint in the second quarter that would be a reasonable assumption.

Great.

Thank you very much.

Thank you.

It looks like our final question is going to come from the line of [Frank Gnau from H Capital].

Please go ahead.

I've just got a simple question.

It's for Tom.

You described when you're passing the baton to John, that one of the conditions was a relative period of calm?

And I just want to know, if this is a relative period of calm, what would describe a stormy period?

I'd say that 2001 was a stormy period.

I'd say when a third of the industry was going bankruptcy, that was kind of a stormy period.

No, I mean, it is a -- I'm not sure you will ever have a relative period of calm, but it's a period in which the company is doing better.

We're not trying to integrate National right now, and so forth, so I'm not sure you'll ever get a relative period of calm, but this is calmer maybe than some other times.

Okay.

Thanks .

That concludes our remarks and Q&A.

I thank you for your participation today and have a great afternoon.

Bye.

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