美國鋼鐵 (X) 2006 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the United States Steel Corporation first quarter 2006 earnings conference call and webcast.

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

Later there will be an opportunity for questions and instructions will be given to you at that time.

If you should require assistance during your conference, please depress star and then zero and an operator will assist you offline.

And as a reminder, today's conference call is being recorded.

I would now like to turn the conference over to your opening speaker, Manager Investor Relations, Nick Harper.

Please go ahead.

Thank you, Doug.

Good afternoon everyone, and thank you for participating in United States Steel Corporation's first quarter 2006 earnings conference call and webcast.

We'll start the call with some brief introductory remarks from US Steel Chairman and CEO, John Surma.

Next, I will provide some additional details for the first quarter, and then Gretchen Haggerty, US Steel Executive VP and CFO, will comment on the outlook for the second quarter.

Following our prepared remarks, the team will be happy to take any questions.

Before we begin, however, I must caution you that today's conference call contains forward-looking statements and that future 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, here's US Steel Chairman and CEO John Surma.

Thanks, Nick, and good afternoon, everyone.

Thanks for joining us for this quarter's call.

For the quarter, we reported earnings of $2.04 per diluted share which included a $5 million or $0.04 per share asset impairment charge.

Our results significantly exceeded the average of analyst expectations of $1.48 per share and in fact, exceeded the highest estimate, which I understand was $2 per share.

As is evident from our results, our three main operating segments are firing on all cylinders with segment income of $429 million or $80 per ton, a 36% improvement over fourth quarter levels.

First quarter results benefited from a positive global economic environment and a robust steel demand across virtually all end markets and reflect a tremendous, tremendous operating commercial performance by our people and our facilities.

While there are always risks and uncertainties, we see the favorable global supply and demand dynamics supporting a positive economic environment for steel at least through mid-year and potentially quite a bit longer.

Now turning to our flat-rolled segment.

First quarter operating income of $127 million increased more than threefold over fourth quarter levels reflecting improved shipments following the start-up of our Gary Works No. 14 blast furnace in late January, slightly higher pricing and lower natural gas and outage costs, partially offset by higher raw material costs.

Speaking of our No. 14 blast furnace, our new furnace is operating quite well.

Since mid-March, the furnace has produced in excess of 9,000 tons on most days and near 10,000 tons on several days.

However, as always, we will closely monitor our order book to ensure our production plans are aligned with customer requirements to avoid any significant inventory builds.

The recently reported service center inventory and shipment data indicates that flat-rolled inventories are still low in terms of months on hand which supports our view of the strength of the steel market.

That strong market supports our current operating configuration and other than for routine maintenance, we intend to operate our furnaces at near capacity levels in the second quarter.

In Europe, our European segment earned $125 million in the first quarter, reflecting higher shipments as the No. 2 blast furnace in Filapia operated for the entire quarter.

In Europe, slightly lower realized selling prices were offset by lower raw material costs and the strong central European economy continues to generate increased demand for steel, reflecting the continued expansion of manufacturing operations in that territory, more specifically, automobile assembly to the central European corridor.

Our ability to serve this market will be greatly enhanced upon completion of our 350,000 per year metric ton auto quality galvanized line in the early part of next year.

In tubular, we continued our run of outstanding results for the first quarter with record operating income of $177 million or $554 per ton, reflecting a balanced market with strong demand and good prices, particularly for the high end products we make.

We expect demand for our tubular product to remain strong.

However, in the second quarter, our Fairfield and Lorain Works No. 3 seamless mills, two of our three seamless production lines, will undergo regularly scheduled two-week maintenance outages.

As a result, we expect strong -- we expect second quarter shipments to decline to first quarter levels and our product mix will change accordingly, likely resulting in a decline in our average price throughout the quarter.

We expect absolute price levels, however, to remain firm during the quarter.

Some industry observers are apparently concerned with the recent uptick in steel imports.

Recently landed imports are the result of orders placed months ago.

At that time, the market experienced record low service center inventory levels, lower domestic production due to maintenance outages, and a significant price differential between North America and other global markets.

With service center inventories moving toward more historical levels, improved domestic production including the restart of our No. 14 furnace, of course, and the reported price increases around the world, some of the economic motivation for ordering steel from offshore would seem to be diminishing.

We also have a number of trade orders in place that are important in terms of deterring unfair imports and, as always, we will closely monitor the import situation for any sign of unfair trade.

No common shares were repurchased during the quarter and our share repurchase authorization remains at 8 million shares.

But as you might have seen, we did announce today a $0.05 or 50% increase in our common dividend from $0.10 to $0.15 per share.

This 50% increase in our quarterly dividend rate, the third increase since the beginning of 2005, reflects our confidence in our financial outlook and our commitment to enhancing shareholder value.

With that, I'll turn the call back to Nick for some additional information about the quarter's results.

Thank you.

Thank you, John.

Capital spending, which is detailed by segment in the earnings release, totaled $127 million in the first quarter.

Our current plan for 2006 has total capital spending at approximately $650 million with $240 million for domestic operations and $230 million for European operations.

Including the $5 million impairment charge, depreciation totaled $112 million in the first quarter and is expected to be about $430 million for 2006.

Defined benefit and multi-employer pension and OPEB costs for the quarter totaled $75 million.

We made cash payments of $85 million for benefits primarily for retiree healthcare during the first quarter.

Additional detail will be included in our 10-Q which should be filed later this week.

Net interest and other financial costs totaled $16 million in the first quarter.

Excluding foreign currency effects and interest income on cash balances, interest expense is expected to be $130 million for 2006.

Currently, our estimated annual effective tax rate for 2006 is expected to be 25% reflecting domestic earnings taxed at the statutory rate and Slovakian earnings taxed at a flat 9.5%.

Lastly, we ended the quarter with 126 million fully diluted shares.

Now Gretchen will review some additional information and the outlook for the second quarter.

Okay.

Thank you, Nick.

In the first quarter, we generated $228 million of cash provided by operating activities and 94 million of free cash flow after capital spending and dividends but before external financing.

So we reduced debt by 83 million during the quarter.

Most of this reduction was for the repayment of part of the facility that we entered into at the end of the year to facilitate the repatriation of certain foreign earnings in accordance with the American Jobs Creation Act of 2004.

As we have previously mentioned, we expect to repay this facility in full by the end of the year.

We ended the quarter with approximately $1.5 billion of cash, but about 2.6 billion of total liquidity.

We continue to accumulate a profit based liability for payment to the National Benefit Trust when it is established and as of March 31st, we had recorded a payable of $236 million for this purpose.

In addition, as we've disclosed before, we do have board authorization to voluntarily contribute up to 260 million to either our pension plan or healthcare trust by the end of 2007.

We currently intend to contribute at least 130 million to our main pension plan by the end of the year, though the timing and exact amount of such contribution will depend on the outcome of pension legislation currently being considered by Congress.

Turning now to our outlook, we are entering the quarter with good momentum and we do expect strong results as demand in key markets remains firm and as our people and our facilities are performing well.

In our flat-rolled segment, we expect second quarter results to improve from the first quarter as shipments continue to increase in response to strong market conditions and a full quarter of production from the No. 14 blast furnace.

The incremental volume will mostly serve spot hot rolled applications.

We expect average realized prices and costs to be comparable with first quarter levels.

For U.S.

Steel Europe, we expect improvements in second quarter shipments to be partially offset by higher costs while prices should be comparable to first quarter levels.

In the tubular segment, second quarter prices and shipments are expected to be lower than first quarter levels as shipments and product mix will be negatively affected by the outages that John mentioned previously.

Second quarter results in 2006 for our other businesses should improve from the first quarter due primarily to normal seasonal effects at our iron ore operations in Minnesota.

That's all that I had on the outlook, Nick.

Doug, can you please queue the line for questions?

Certainly, sir. [OPERATOR INSTRUCTIONS] Our first question today comes from the line of John Hill representing Citigroup.

Please go ahead.

Good afternoon, everyone and congratulations on a great result.

Thanks, John.

Just wondering if you could comment on the flat-rolled pricing outlook, given that spot has been creeping up, and also perhaps wrap into there some more discussion on your contract position and objectives.

Sure.

What you're reading in the trade press, I think is true.

Spot prices on the flat-rolled side, North American spot prices, have been firming and we expect them to remain firm through the second quarter.

We've got some visibility sort of through that direction.

Our own outlook, of course, reflect the fact that we do have a heavier hot rolled book coming up in the second quarter, which is a good thing from a margin standpoint, but on an average realized price, it may make it look like we're not realizing much increase even though we really are so I think our outlook on pricing for the second quarter is consistent with what you observed.

I think we have prices look pretty firm.

With -- Gretchen, do you want to take the second half of that, or Nick?

I'm sorry.

John, could you repeat the question?

Oh, contract pricing.

I beg your pardon.

I thought you asked about -- On contract prices, during the year, we don't have -- during the year, we don't have a whole lot to negotiate some.

We do have a book of business, of course, that has some quarterly or semi-annual index, CRU based repricing that goes with it and you can see what those indexes do and get a sense of that, but during the course of this year, we won't have a lot of contracts to rework during the year but by the end of the year and for next year, we have got a pretty good sized book.

I think we mentioned last time several million tons worth to renegotiate by the end of the year or at the end of the year really for next year.

I think our outlook would be that usually those prices reflect lots of things but certainly they reflect the fact that whatever the spot market structure is at the time, spot market pretty good right now, so we think we've got a shot of doing well on this contracts.

It will be a good negotiation like we always are.

Some portion of those contracts would be from quite awhile ago.

Hence we would expect it to do pretty well on a portion of that, then reasonably well on the rest.

Very good.

Thank you.

Thank you.

Our next question is from the line of David MacGregor with Longbow Research.

Please go ahead.

Yes, good afternoon.

Nice quarter.

Thanks, Dave.

I wonder, for starters, if you could just give us a walk-through on each of your end markets.

Just briefly comment on market conditions and the outlook for the coming quarter.

Sure.

I'll start just at the top.

Automotive would be one of our most important markets and you can read in the trade press what automotive schedule adjustments have been, and they've been generally down but not in a level of significance that really affects our operations in a great way.

We still look at automotive as an important market, good market.

Our order rate and order flow has been strong and we would expect it to remain so for the second quarter so we look at automotive to be a good market for us for the second quarter.

Appliance -- the appliance build rates have been strong and we've got a good position there in a really first-class market so we see that as strong.

Construction's been good.

Construction non-residential, all the indices that we monitor, the MBNA incoming orders have been up 6% year to date, so the things we watch are pretty positive.

Even though residential has had somewhat of a slowing towards a soft landing, that hasn't affected us as much and the non-residential, I think's been important for us.

Pipe and tube converters, sheet converters, or intermediate markets -- they've been very strong and more often than not, looking for more volume from us than less.

And then finally the service centers, I think you can see what the recent statistics were on a flat-rolled side, at least, which we watch most carefully.

Shipments strong, inventories being where they are, days covered very low, we think all signs of a very strong service center market so and then the tin market for us, there I think stability would be the order of the day as typically for us, most people really liked on the market side.

Good.

Second question would just have to do with the ramp of the No. 14.

Can you give us some sense of what the incremental cost of the ramp might have been to the P&L in the first quarter?

If you mean what the incremental cost of running through the start-up phase would have been, it would not be significant.

I don't have a number but would it not be significant.

It was a quick start.

We didn't start until January, of course, but once it begins to start, it goes pretty quickly.

We get to fill in and begins to coke up and we're running metal pretty quick so it went fairly quickly and that would not be a number that I would call out for any particular significance from your perspective and I don't really have a specific number for it.

Okay.

And then final question is U.S.

Steel Europe, you mentioned that you're expecting higher costs in 2Q.

Is that just relative to iron ore or are there other things that you can highlight for us taking place there?

Nothing that would be noteworthy.

Zinc is going to be higher, gas may well be higher, but it would be the normal of things -- nothing that I can call out for Europe that would be specific or dramatic.

It would be largely gas and maybe a little bit on the zinc side because we do have some coating going on there.

All right.

Great.

Thank you very much.

Thank you.

Our next question is from Michelle Appelbaum representing Michelle Appelbaum Research.

Please go ahead.

Hi.

I have two questions.

By the way, nice result this quarter.

Thanks, Michelle.

I have two questions.

The first is, when I look at your volume last year, you did 15.5 million tons in flat-roll in '04 and you were down to 13.3 last year.

Do you have the capability to ship that 15.5 million tons again?

Because I recall there was some inventory liquidation early in '04.

What's your capacity to ship this year?

I think we can ship at least what we shipped in '04.

When you say at least, you mean you could do better?

If everything broke right, and depending on how the outages were, and depending on what the demand was, relatively speaking.

It all depends on really how the outages go. 14 wasn't up, of course, for the whole year.

We had it out for at least one month this year.

So just in North America, you're speaking about, Michelle?

Yes.

I think in North America we could do that.

It really depends on how the market falls and how the outages fall but there's no reason why we can't from an overall capacity is a little bit higher because of No. 14 being a little bit bigger than No. 13.

Okay.

And then the other question is, I hate to pick on a kind of fresh wound, but the whole No. 14 thing was a little bit longer than expected and a little bit costlier than expected.

Looks like it's working out great now, so obviously it was well worth the doing but going into what looks like it might be a meaningful maintenance outage in the tubular side next quarter, without having a little bit firmer guidance on what the financial impact could be, is a little bit disconcerting.

Can you try to, it's helpful to know two weeks, but can you try to talk about it, quantify it just a little bit, what that could be so that we're prepared when that comes out?

Yes.

I guess, Michelle, I would just say on the tubular, I would not compare tubular to the work that had to be done on No. 14.

The tubular outages, two-week outage at two of our seamless facilities, so the effect of that is that there will be some lost production in shipments which we've tried to steer you towards.

It will also have the effect of giving us a lower product mix in the second quarter because we're losing our higher seamless business, our better mix seamless business.

And Michelle, just a kind of a simple way to look at, I think the first quarter shipments in tubular were on the order of 300,000 tons, 320 or so, 319, and that suggests roughly 100,000 tons a month plus or minus, and we're talking about two weeks of two-thirds of our capacity, and these would be the two biggest mills.

So that will give you some sense of what the overall volume metric effect could be, and then you can see what the margins are, so you ought to be able to take a guess at it.

So if we were just to make a linear assumption that your average per ton result, you'd lose those average tons at $500 a ton profitability, and forgive me if I giggle when I say that, would that be the appropriate linear kind of analysis or do you get into the whole fixed cost component of losing those profitable tons?

You could make it far more complicated but that's probably not a bad way to do it just from a rough cut standpoint.

So take two weeks of volume at your average profitability in the first quarter and it should be no more than that.

I'm not saying it will be that or anything, but I think that's a reasonably good approximation of what the volume is, and using that kind of average profitability is probably as good -- probably as good a way to do it as any.

That's terrific.

Thanks for that help.

And on top of that, Michelle, there's going to be a little bit for the outage itself but this is not No. 14.

Yes, yes.

You've also got some pricing improvement coming up in the quarter in terms of on a mix adjusted basis as well, correct?

You just announced a big price increase?

In tubular?

In tubular.

There have been some price movements but again the volume we're going to miss in the quarter is going to be at the very high end of what we're doing.

All right.

Great.

Thank you very much.

But absolute prices and margins in that segment are strong.

Oh, yes.

Okay.

Great.

Thank you.

Thanks, Michelle.

Thank you.

Our next question is from the line of Mark Parr representing Keybanc Capital Markets.

Please go ahead.

Thanks very much.

Good afternoon.

Hi, Mark.

Hey, congratulations.

Fantastic quarter.

Our operators did a really good job.

They ran hard and really finished the quarter strong.

Thank you.

That was one of the questions I had.

I think you just answered it.

I was wondering if could you give us more color on how the quarter evolved, any relative magnitude would be really helpful.

I can't, of course, give you monthly numbers, but just in general, with the earlier part of the quarter, without the blast furnace up at Gary was not our best month, although it was quite good.

But as the quarter went on, the operating performance just got stronger.

We shipped well and finished strong in March with very strong shipments across the entire order book and naturally, as the incremental volume began to roll at Gary, that really makes the whole system work better.

Most of that incremental volume again is hot roll but it's really good hot roll coming off the Gary mill.

It's wide and it's heavy and it's things that command a pretty good price in the market these days.

And those incremental tons coming off the new furnace, off the Gary hot mill, don't cost nearly as much as the first tons do so it just allows us to finish strong, successively stronger each month throughout the quarter.

It was really fortunate that that 14 came up just as pricing was picking up and turning around in Asia.

I think that was probably the whole inflection point for the domestic market momentum.

We'd love to take credit for that but it's just the way it worked out.

I had another question if I could.

There's been a lot of talk about surcharges coming on zinc-containing materials.

Do you have a position on that, or do you have any plans regarding implementation of zinc surcharges, IMT automotive customer base or are your other guys buy galvanized?

We do a lot of galvanizing, and as a result, we of course buy a lot of zinc and the price has moved extraordinarily high recently and we have already made some movement in that regard during the course of the first quarter and then more recently, we had some other commercial actions that we took and the prices moved through those actions so we probably have some other actions we could contemplate.

We're going to move aggressively across our entire sector of markets to try to do the best we can to recover as much as we can.

It takes time to get there, of course, but over time, we can probably get some movement on zinc on half of our coated book, something along those lines.

I don't want to get into specifics on how we do that, Mark.

That's a commercial thing.

I would hate to have that conversation with customers over the phone lines.

But we have already taken some actions.

We'll be taking some more and try to move it as quickly as we can, about half probably we can work on.

Okay, all right, appreciate that.

And just one more question, if I could, related to the outlook for pricing beyond the second quarter.

Assuming if your third quarter mix on the domestic market is going to be somewhat normalized to the second quarter, is there any feel for what you might think is likely from a price realization perspective for the third quarter relative to the second?

Not really, Mark.

We don't really have any particularly good visibility out any further than you would would be just having an anecdotal conversations with customers and understanding what their demand requirements are and how good their business is.

The only anecdotal things I'd mention would be our customers that we chat with, which is all of them frequently of course, are pretty optimistic about their respective businesses.

They're all having very good years, or the vast majority of them are, and I think that portends very good things for our business.

Secondly, as we observe prices moving up in Asia and in Europe, as a result import prices that are landing seem to be moving more towards the North American level.

That all suggests that there might be some decent support for pricing in the third quarter, but we have no real visibility into that yet.

We're not really pricing into that period yet so we'll have to wait and see.

Okay.

Terrific.

Thanks for the color and congratulations again.

Thank you.

Our next question is from Timna Tanners representing UBS.

Hi.

Good afternoon.

Hello.

I wanted to ask a few questions.

One is just on SG&A.

It was pretty light for the quarter and wanted to check with you on what that might have entailed or if that's something that might be more sustainable, how you got to that lower number.

It was quite comparable to the first quarter.

I don't think there's really anything of --

The pension costs came though there, bit lower in the first quarter, and then also we had some bonus payments in Europe that flowed through in the fourth quarter that made it a bit higher in the fourth quarter.

And for the lower pension payments will be something that would be sustained, so that's good to know.

Yes, it would affect pension costs, not payments, but pension costs once we set the parameters for the year, absent something unusual, they typically would stay relatively constant.

That's helpful.

The other question I had was just on the European segment.

You have a press release out on March 24th talking about raising prices 30 euro.

Could you explain, is that also why you might see prices flatter there?

Well, the press release back in March was just a general purpose price increase which we're in the process of implementing and have been and I think have been doing fairly well on.

I think the observation on the outlook for prices in the second quarter would be more mix oriented as we're running up the volume in Slovakia but in particular, in Serbia.

Virtually all of that incremental volume in Serbia is going to be going into the hot roll market and I think that will be the influence that you observe in our comment on pricing.

I think your assumption is correct.

Okay, great.

Thank you very much.

And ladies and gentlemen, as a reminder, to ask any further questions or comments, please press star 1 at this time.

Our next question is from the line of Aldo Mazzaferro with Goldman Sachs.

Please go ahead.

Hey, Aldo.

Thanks for dialing in.

I wanted to ask you on pricing in North America, your competitor AK Steel went out with a $50 price increase announced today, effective May 15th, and I know in the past you've had a view that sometimes the pricing in the U.S. can get too high for its own good and cause a bad ending.

I'm wondering what you think about the ability of raising prices $15 or so for the kind of middle second quarter.

I didn't see that announcement yet or whatever it was.

I've been tied up in our shareholders' meeting and things today.

There certainly has been some upward movements in close-in spot prices and we've taken some advantage of that, how much there may be and what our competitors are doing, I don't know.

And -- but if you just observe the indices, CRU and Purchasing Magazine and the rest of them, prices have been relatively stable in North America.

It wasn't really until fairly recently, perhaps propelled the summit, zinc at least on the coated segment, and maybe that's pulling the whole structure up.

The prices have been fairly constant, I think that's good for our customers and good for us.

There's probably some room for movement.

How much, how fast, how far, we approach that very carefully and I don't really have a conclusion yet as to what the other folks are doing.

Can you tell us, John, what the action has been in your order entry, say relative to shipments in the last half a quarter or so?

Our order rates have been good across all the segments.

The rundown I gave a few minutes ago would suggest that all of our end market are in pretty good shape right now and the order rates have been strong, have been coming in pretty well and really we've been keeping our order book relatively short to ensure that we can, make sure we get whatever the market has to offer with an expectation that maybe there is some more coming, and we've been able to fill the order book pretty quickly when we decide to open it up.

Great.

One final one, John.

In the years I've followed the Company, I think you have always lost money in the other businesses in the first quarter and this time you broke even.

Is there something changed in that business that we could see better results going forward?

No, the makeup of what's in that category really hasn't changed.

There's some odds and ends, a few realty sales here and there that bounce around, but it largely revolves around how many pellets we make and ship, how heavy the outer schedule is, how high natural gas costs are, and then what our transfer pricing is for the first quarter, although there's no reason that that changed in any material way so I think we ran well.

The outage costs were a bit lower and we had a pretty good operating performance but other than that, really no specific change in anything that would account for that.

Okay.

Thanks, John.

Great quarter.

Thank you.

Our next question is from Michael Willemse representing CIBC World Markets.

Good afternoon.

In the 10-K is mentioned of a potential labor disruptions at the Serbia operations.

What's the latest update there?

We've been working our way through that.

We have had a few sporadic short and mild interruptions, nothing that's really affected us in a big way.

I think we're through the worst of that now.

It's possible we could have some more difficulties but I think for the most part, our contract terms are now being adhered to and we're operating normally.

Okay.

And as far as your natural gas costs position, have you looked at putting any hedges in place in 2006?

Or are you pretty much still on spot?

No.

We've been buying forward a little bit more as the strips seem to suggest that was a reasonable thing to do so for the second quarter, we do have some positions established already in the forward market and that's between 10 to 20% in the second and third quarter.

We're trying to take advantage of what looks like a decent price level.

As we move through the year, we'll be a little more thoughtful about how we might try to take away some of the real runaway risk that typically occurs in the winter months, which we didn't really get a chance to do last year because of the hurricane interrupting our normal schedule.

We're taking a thoughtful view of that and right now we've gone a little bit further forward than we typically have.

Is it meaningful yet or is it still pretty minor?

It's 10 to 20% of our consumption for the second and third quarter.

Okay, and as far as your iron ore exposure in Europe, if the Chinese end up agreeing to something in the upper range of forecast to 24% price increase for iron ore, would that have much impact on your iron ore buy in Europe?

Not necessarily immediately, but in general, those prices which are being established in sort of the eastern European, central European market will generally follow the world price eventually but there wouldn't be an immediate effect on it.

We might see something in three months or six months, something like that.

Okay.

One last question.

Any more developments on buying some iron ore or met coal assets in eastern Europe?

No.

We continue to visit and discuss and observe but nothing that would be meaningfully significant to talk about yet.

Okay, thanks, guys.

Thank you.

Our next question is from Michael Gambardella with JP Morgan.

Good afternoon, John.

Hey, Mike.

How you doing?

I have a question on your tubular business.

In the last six or seven months now, the comparable tubular publicly traded stocks, the OCTG stocks, are up quite a bit.

In fact, the one, Tenaris, that has the closest mix to you, is up about 130%.

You had talked awhile ago about potentially realizing some value from your tubular business by either selling it or spinning out a part of it to identify the value.

Anything more on that?

No, Mike, not really.

Our tubular business is doing really well, as you can see, and our own share price has moved quite nicely in the same general direction as the company you mentioned, maybe not at the same percentage, and that no doubt at least in part reflects satisfaction with the good results we're having in tubular.

As we've worked on the business, we've observed how significant the integration value of tubular is, allowing us to run a hot end in Fairfield full out all the time, and optimizing it based on whatever either the flat roll or tubular market gives us and we've made some pretty good provisions to keep supply, keep our Lorain tube mill supplied with rounds, in part from our Fairfield rounds castor which we've reconfigured to be able to make a little bit more rounds so that plus being able to use our own iron ore and fill out our coke balance, the integrated value of tubular for the Company as a whole is significant, and as a result, we're pretty satisfied with where we are right now.

Okay.

Thanks at lot, John.

Thanks, Mike.

Thank you.

Our next question is from Leo Larkin representing Standard & Poor's Equity Research.

Please go ahead.

Good afternoon.

Could you give us any guidance for working capital for 2006?

Will it be a source of funds, the use of funds, or neutral?

I don't think I can give you any guidance for the year, Leo, that would be worth probably -- I just don't think I can do that.

I don't think that we would be able to isolate working capital without knowing all the different ins and outs of stables and gas pricing and everything else.

I think you can look back the last couple of years and see what the working capital flows have been but nothing specifically we can provide.

Okay, thanks.

Thank you.

Our next question from Daniel Roling representing Merrill Lynch.

Thank you.

John, could you give us a couple numbers?

Like on iron ore shipments for the quarter and what should we look for in the second quarter?

Then also on coke, or metallurgical coal, I believe you had a contract with Pinacol, the company you guys did an LBL that used to be your assets, when does that contract expire and when should we look for mark to market on that metallurgical coal?

Let me take them in order.

On the iron ore side we're running our facilities in Minnesota hard and we don't have anything big planned, so as far as I know, the dollar ships you'll see in our statistics ought to be about like they were for an average quarter last year or an average second quarter last year.

I think we were still running pretty hard at that point last year.

I don't have any specifics for you there except we're running our operations in Minnesota hard.

As much as we can make, we're sending.

On the coal side, we're -- you're correct that one contract I think is publicly been disclosed before is running off at the end of this year, into next year, something like that, and as I've acknowledged, we're moving towards sort of a market price and we have a few other contracts also favorable.

Last year or this year, as you put that into the mix because we have had some pretty good contracts going forward, probably see our overall coal prices up in the order of $5 to $10 which is what it was last year, up by 5 to 10 and we would see about that this year as well.

Lastly, could you remind me how much natural gas you consumed?

For round numbers, I typically say 80 mm BTUs per year so dollar on a strip for us is 80 million, I think a more precise number occasionally is 83 million, but somewhere in that range in North America.

Of course, we have more in Europe.

We've been working on getting that down.

We're capturing every BTU we can.

They used to go up the stack, and trying to cut back on gas usage, where it makes sense, it depends whether it's coal or tar.

Okay.

Thank you.

Thank you.

Our next question is from Charles Bradford with Bradford Research.

Please go ahead.

Good afternoon.

Hi, Chuck.

You guys used to have some contracts, people like Republic.

You would supply them with coke and iron ore as I recall and get rounds back.

Has anything changed there with the new ownership?

We still have some modest relationships where we supply some material and get some rounds in return.

There's been ownership changes there.

That is down to a fairly low level.

And I don't really want to comment on what they may want to do because that's their business, not mine.

We've managed to keep the Lorain mill humming quite nicely with rounds supplied either from there or from our own sources or from other outside sources, so as far as what their plans are, you'll have to talk to them.

Are there any problems on the various river systems in the moving of coke and other materials?

It's that time of year when often problems occur.

No, Chuck, fortunately, in North America, no, on the upper Ohio system, which is most important for us, no problems, or in the Alabama system.

On the Danube in Serbia, there have been some floods reported.

You may have seen that.

It's caused us a little bit of discomfort in getting raw materials into our plant in Serejavia which is on a river.

The plant itself is fine but the dock movements have been a little bit difficult because of the flooding there.

That seems to be receding to some degree.

We've got some materials in so the only place would be on the Danube right now.

The domestic system is working fine.

Thank you.

Our next question is from David Gagliano with Credit Suisse.

Hi, just a couple quick questions on your European operations.

First of all, what is your natural gas assumption or consumption, sorry, for full year out of Europe?

I'll let Nick give that you number.

David, it's Nick Harper.

Somewhere around 3 million mm BTUs a quarter.

Okay.

Perfect.

Then just in terms of the volumes, looks like shipments are running along at 1.5 million plus per quarter.

Is that a reasonable assumption for the balance of the year?

Probably.

We've got some opportunity as we get our system in Serbia up and running.

We've got a third steel vessel that we're working on that we could probably do a bit better in Serbia.

But I think for round numbers, that's close enough.

Thanks very much.

Thank you.

Thank you.

Our next question is from the line of Frank Dunau with Adage Capital.

Can I just go over what Michelle did, was the right arithmetic one half times two thirds times 100,000 for the impact?

Was that what I understood for the volume impact on the tubulars?

Can you say that again, Frank?

Was it one half times two-thirds times 100,000?

Was that the mathematical equation?

I'm not sure I am following that.

It's two weeks of production at our two largest mills.

At 100,000 a month.

So it's a half times 100,000.

So about, I guess, yes.

And then there was something for two-thirds because not everything down?

Is that right or --

It was two of our three largest mills.

Right.

I'm not sure you need to make that last refinement.

It would be more like 75 or 80% probably.

And just on the No. 14, you got it up and running and humming as far as from your comments in the middle of March when it was really running well.

No, no, it was running fine in sort of early February and mid-February at the latest.

So you basically only lost a month there?

Yes.

We got a chance to improve a bit quarter to quarter if we run hard both quarters.

Would it be fair to say that the improvement there would probably at least offset whatever you've taken on the down time on the tubular mill?

Yes, those are different.

It's possible, and that calculation is a complicated one, of course, and there are things which could change, zinc and gas and scrap and other things that we use in quantities, but it's possible that that well may be the case, not just from the 14 furnace, but from our flat roll performance in general and we're going to try like heck to try to make sure it does, but there's some things that could go either way and it's hard to say.

We think there's a shot at it and we'll do our best to get there.

And I think, as John pointed out, the product that we're losing in tubular is really at the high end of our mix.

One last question.

Is the incremental coming off of 14 and the rest of the sheet system?

Is that most of that going out spot right now?

Yes, most of it would be spot hot roll, which is lower price but nice margin.

Okay, great.

Thanks.

And speakers, at this time there are no further questions in queue.

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We'd like to thank everyone for participating and we look forward to talking to you next quarter.

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