美國鋼鐵 (X) 2007 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the United States Corp.

first quarter 2007 earnings conference call and webcast.

(OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded.

I would like to turn the conference over to our host, Mr.

Nick Harper.

Please go ahead, sir.

Thank you, Alex.

Good morning, everyone.

and thank you for participating in the United States Steel Corp.'s first quarter 2007 earnings conference call and webcast.

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

Steel Chairman and CEO, John Surma.

Next I will provide some additional details for the first quarter and then Gretchen Haggerty, U.S.

Steel Executive Vice President and CFO will comment on the outlook for the second quarter.

Following our prepared remarks, we 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 is U.S.

Steel Chairman and CEO, John Surma.

Thanks, Nick, and good afternoon, everyone.

Thanks for joining us.

Earlier today we reported solid first quarter results with earnings of $2.30 per diluted share.

From an operating perspective, we recorded first quarter segment results of $385 million, a very good performance we think given the three distinctly different business environments with which we had to work with.

Segment results were led by our European operations, with operating income of $206 million.

This segment continues to benefit from a strong central European economy and growing steel demand, reflecting the continued expansion of manufacturing operations, including automotive assembly in the central European corridor.

This development will benefit our business directly, as our new automotive galvanizing line produced its first coil in early February and we are progressing along the planned startup curve.

We received substantial interest for this product from the automakers as well as from many of the tier one stampers and appliances producers.

Testing and commissioning will continue for the balance of the year and we expect to be in the position to balance automotive contract volume in 2008.

In the meantime, he demand for hot dipped products are strong and we will expand our production for the construction and other industries until we move to contract auto business next year.

Plat roll segment results of $75 million reflected improved performance over the fourth quarter.

As you know, the average North American hot roll spot price declined to approximately $50 per ton -- at least as reported by the trade sources -- from about $565 per ton in the fourth quarter to about $515 per ton in the first quarter.

However, our average selling price in the first quarter increased slightly, reflecting the benefit of higher contract prices effective January 1st.

Our Flat-rolled results also reflect higher shipments and the cost benefit of operating at 78% of capability compared to 67% in the fourth quarter.

Domestic flat-rolled market conditions continued to improve, with service center inventory levels moving back towards the historical levels.

Flat-rolled inventories declined 1.4 million tons or 14% during the first quarter, 8.9 million-tons in part due to lower flat-rolled imports.

Our order rate has improved and we now have only one domestic blast furnace idle for market conditions.

Turning to our Tubular segment, we earned $102 million or $413 per ton, as shipments declined 24,000 tons or 9% to compare it to the fourth quarter.

Despite the U.S.

recount at near record levels with good end user demand, high inventory levels dampened demand from our oil country distributors.

We've reduced our OCTG production and shipments to ensure our operations remain in balance with our order book.

This resulted in a different product mix that accounts for much of the 6% apparent price decline compared to the fourth quarter.

And as we had predicted in our last public outlook, first quarter results for our other business segment declined by $55 million due to normal seasonal effects in iron ore operations in Minnesota and the nonrecurrence of some fourth quarter land sales.

Now I'll turn the call over to Nick for some additional details about the quarter's results.

Nick?

Thank you, John.

Capital spending, which is detailed by segment in the earnings release, totalled $108 million in the first quarter.

Our current plan for 2007 has total capital spending at approximately $770 million, with $550 million for domestic operations and $220 million for European operations.

Depreciation totaled $111 million in the first quarter, and is expected to be about $450 million for the year.

The fine benefit and multi-employer pension and OPEP cost for the third quarter totalled $60 million.

We made cash payments of $64 million for benefits, primarily for retiree health care, during the first quarter.

Also during the quarter, we made a $35 million voluntary contribution to our main pension plan that Gretchen will discuss further in a moment.

Additional details will be included in our 10-Q, which should be file in the next few days.

Net interest and other financial costs totalled $5 million in the first quarter, and we expect second quarter interest expense to also be about $5 million, which excludes foreign currency gains and losses and financing activities related to the Lone Star acquisition.

Our estimated annual effective tax rate for 2007 will be determined based on domestic results tax at statutory rate of about 38% and our Slovakian earnings tax at a flat 9.5%.

This rate in the first quarter was a bit over 19%.

Lastly, for the quarter we averaged 119 million fully-diluted outstanding shares.

This compares to 125.5 million shares for the first quarter of 2006, a reduction of 6.5 million shares or 5%.

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

Thank you, Nick.

Our cash flow provided by operating activity was nearly $320 million, after the $35 million voluntary contribution to our main pension plan.

Our free cash flow after capital spending and dividends but before external financing was $188 million.

And we ended the quarter with over $1.5 billion of cash and about $2.7 billion of total liquidity.

As we've highlighted before, we continue to accrue a profit-based payment liability to be used to assist national steel retirees with health care costs that have not been paid because the associated trust has not yet been established.

As of the end of the first quarter, we had recorded a liability, including interest, of $392 million for this purpose.

As Nick mentioned earlier, during the first quarter we voluntarily contributed $35 million to our main pension plan.

In addition, we have board authority to contribute up to an additional $265 million to either our pension plan or health care trust by the end of 2008.

Since the beginning of 2004, we have voluntarily contributed more than $730 million to our domestic benefit plan.

We noted in the earnings release that we repurchased 305,000 shares of common stock in the first quarter for a total cost of $25 million.

This brings our total repurchases to 13.4 million shares or approximately $721 million, and represents about 10% of the balance of fully-diluted shares outstanding when we authorized the original repurchase program in July of 2005.

There are 7.3 million shares available under the current authorization.

Now we're limited on what we can say about the Lone Star acquisition, but I do encourage you to review the slides made available on our investor website that summarize the transaction.

Both parties encourage to work through the various closing conditions and regulatory filings, and we hope that the transaction will close by late in the second or early in the third quarter.

As we discussed in our Lone Star conference call, we plan to pay for the acquisition through a combination of cash on hand and financing obtained under our existing $500 million receivables purchase program, as well as three new fully-committed unsecured bank credit facilities with JPMorgan, the total $1.75 billion.

The three facilities are now being syndicated with a larger bank group, with final documentation expected to occur in the second quarter.

A new $750 million unsecured revolver will replace our existing $600 million inventory-backed credit facility in the second quarter.

We will also have a $500 million five-year term loan and a $500 million one-year bridge facility available for our use.

In addition, we may decide to access the debt capital markets to repay a portion of the liquidity facilities to retire the bridge or to refinance our 9.75% senior notes, which may be redeemed as a premium of half the coupon after May 15 of 2007.

Now turning to our outlook, coming off a strong first quarter where we exceeded even the high end of the range of analyst estimates, we do expect continued solid operating results for our three main segments in the second quarter, with overall results in line with the first quarter.

Now let me take our segments one by one.

In the Flat-rolled segment we expect results to improve in the second quarter, as shipments and utilization rates are expected to increase, partially offset by increased raw material outage and energy cost.

Average realized prices are expected to be comparable the first quarter levels, as our spot shipments and spot prices are expected to increase.

For U.S.

Steel Europe, we expect second quarter results to be somewhat lower than in the first quarter, as increased prices are offset by higher raw material and outage costs.

Prices at shipment levels are expected to be in line with the first quarter.

Prices and shipments for Tubular products in the second quarter are expected to be lower than first quarter levels, as imports and customer inventory remain high.

This outlook for the Tubular segment does not reflect any effects from the pending transaction with Lone Star.

Normal seasonal improvements at our Minnesota iron ore operations are expected to be lower due to production levels that will remain near first quarter levels, repair outages, and cost for longer-term mine development.

With that, Nick, that concludes my comments.

Alex, please queue the line for questions.

Thank you.

(OPERATOR INSTRUCTIONS) And our first question comes from the line of Kuni Chen from Banc of America Securities.

Please go ahead.

Hi, good afternoon, everyone.

Good afternoon, Kuni.

Just a question on the guidance, as far as what you're seeing in domestic flat-rolled, can you comment on the mix of spot in 2Q and where you expect that to be in 3Q?

It looks like spot is certainly having a negative mix impact the second quarter.

Do you expect spot prices and contract prices to be roughly a parody in the third quarter?

Just want to get your views now.

Just make the move from first to second quarter, let me be clear that our guidance was intended to say that in the second quarter we do expect higher shipments.

That will largely be -- not entirely but largely be spot business.

And even though spot prices are improving as we all see, that still will tend to moderate the total average price per ton just because of our contract prices are higher than spots.

So that mix effect is affecting the average total price but there's still a very, very good margin, so the absolute bottom line I think will be improved by our shipments as we described.

Moving into the third quarter, that's a little far out.

We don't usually look out that far, so I will say that we expect our contract prices to certainly be stable.

And subject to some normal seasonal events in the third quarter, including automotive outages, we occasionally would have less contract business in the third quarter relatively speaking because of that.

But we don't really have any outlook to give you beyond the second quarter at this point, other than what we would see at the trade press the same way you do.

Okay, thanks.

And one quick follow up, if I may.

Just on the M&A front, if you were to contemplate something else aside from Lone Star, theoretically I would say if it was a bit of a higher risk type of transaction, would you look for a shorter payback period?

Would you look for more synergies?

I just want to get your sense as to how you approach this philosophically and how you balance the financials with the strategic value of the transaction.

Well, we take them one at a time and I'm reluctant to say we have a particular formula.

We balance all those things along with a number of other things, but we do place a great deal of significance on our ability to do what we think is a good job on synergies and that has been an element of each of the actions we've taken in the last few years.

And the actions we haven't taken, in part, were likely because we didn't see the kind of synergies we like to see.

Risk is always a part of it.

It could be commercial risk or political risk or other types of risk, operating risk.

Those are always elements to it.

We tend to favor pretty heavily the ability to have a good return, relying at least in part of synergies because we think we can control that.

Risks that have to do with other outside forces that we can't control, we tend to put a little more emphasis on.

We like to be able to try look for returns in areas where we think we can deliver it because of specific skills or areas or market positions or locations that we can have from a synergy stand-point.

Great.

Thanks and good luck.

Thank you.

And our next question comes from the line of John Hill with Citigroup.

Please go ahead.

John?

Mr.

Hill, your line is open.

Yes, good day, everyone.

Thanks for the clear presentation.

Just a follow up on flat-rolled, perhaps a bit different.

As we look ahead and looking at the margins this quarter of roughly 3% or so, it looks like there's some offsetting factors.

Spot may have a depressing effect.

but then we should have the benefit of volumes.

How should we look for those two variables to interplay and should we look for those margins to be higher next quarter?

Just to relate back what I said, I think we observe some strengthening in spot prices.

That's pretty well documented and we expect that we'll enjoy that benefit as well in the second quarter.

We do have some higher costs for outages and other things in the second quarter that will have an effect on our margins.

Those are just things that happen from time to time for a variety of technical and inspection and engineering reasons.

And our contract [inaudible], of course, we expect to be strong and stable.

So I think we expect to see the higher shipments have a good effect on our total income.

Margins are affected by offsetting higher spot prices but also some cost effects.

Understood, understood.

Great color.

And then you commented on some lower production rates on the tube and pipe business.

How does that look going ahead and what's it going to take to ratchet that all the way back up?

I think it's just playing out a scenario that we have begun to observe in the third or fourth quarter last year and not much different than the first quarter now.

A bit of an overhang on inventory, particularly on OCTG and the distribution inventories.

Those seem to be moving in the right direction.

We are trying to make sure we produce what our customers are ordering and we don't intend to build inventory and we have not done so.

Our distribution customer inventories are high.

We understand they're moving in the right direction.

Prices have been relatively stable, as you can see, so I think it's a matter of working through these inventories.

Underlying factors, like the great rates, are very positive and the overall energy price structure is very positive, so we think the long-term outlook is very, very good.

This is one of the cycles we have to go through once in a while.

Very good, thank you.

Thank you.

And our next question comes from the line of Timna Tanners from UBS.

Please go ahead.

Hi, good afternoon.

Hey, Timna.

So, I just wanted to follow up on the tubular market a little bit.

There's some decisions coming out from the International Trade Commission recently, actually, on long line pipe and coming up on OCTG and I'm trying to understand a little bit about what the implication might be for your business.

The recent decision was to remove tariffs on Brazil and Argentina.

And I know there hasn't been decision on OCTG but could you characterize what you're thinking is on those decisions up-coming up on the tariff removal?

Just on the one decisions of play last week or whenever it was.

I think that for us is a relatively modest portion of our total overall market position and that would tend to moderate any effect for us just in total.

But more importantly, I would say that if the assertions that the other side made in that case are true and if they do not intend to re-enter the market in an unfairly trade away then everything will be fine.

And if in fact their assertions are not true, as they from time to time have not been, then we'll have reengage and and I would say that would be the same thing on the OCTG cases.

Those were just argued, as you know, and they are under consideration by the ITC.

There's really not much we can or should say about something that's in process that way.

Understood.

Thanks for the help.

With the last furnaces that you've restarted, can you give us a little idea of the timing on that and which one is still off?

Welt, one of our small [Gerry] furnaces is off.

The other furnaces came on during the course of the first quarter, some earlier, some later, and we've had other outages, smaller things on and off.

But it was really evenly spaced through the quarter probably and one of the Gerry furnace is still off.

And finally do you have any idea of what you might plan to do with that furnace?

This is usually the strongest quarter -- the summer quarter's usually the strongest quarter demand-wise for the year.

Given that, is there any expectation that you might not restart it or can you comment on that?

No, we'll restart it when we have the need for the additional metal we can make.

Our new furnace, number 14's, been producing very well and that has moderated somewhat the need.

Had we been producing the old blast furnace 13, it would be running right now, probably.

So we've been able to make ends meet without filling inventories; in fact, drawing inventories down a bit, as the numbers would show, with the current configuration.

But when we need additional melt, we can bring it on relatively quickly and that could be this quarter, could be next quarter.

Thanks a lot.

Thank you.

Our next question comes from the line of Michael Gambardella with JPMorgan.

Please go ahead.

Yes, good afternoon.

Hey, Mike.

Got a question.

In your release this morning, you mentioned that in your second quarter guidance that you have you're expecting outages in three of the four segments; in flat-rolled and European and also in the raw material, the other segment of the business.

Could you give us color on those three and maybe cumulatively what kind of an impact it's having on the second quarter?

Just on the outages themselves, I would describe them as routine.

There are things that we have to do on blast furnaces and strip mills and steel shop hoods, and those kind of things, and they just get done at a certain time and we try to group them together when a critical path develops and then when we get the materials and we contractors ready.

So we just have to do things when they occur and they happen to have hit in this particular quarter.

We could have done some earlier, but it didn't seem like that was the right thing to do.

We could maybe do some later, but we want to get it done when we think it's right time and it happens to be now.

This quarter versus last -- second quarter versus first quarter, the overall effect probably would be in the $25 million to $30 million range, somewhere in that zone in total from quarter to quarter.

Not a huge number, but it would probably end up being our largest outage quarter of the year if things play out the way we expect them to.

Okay, thank you very much.

Thanks.

And our next question comes from Mark Parr with KeyBanc Capital Markets.

Please go ahead.

Hey, thanks very much.

Good afternoon.

Hi, Mark.

I was wondering if we could get a little more color on the CapEx spend by quarter?

It looks like you did $110 million in the first quarter, you got another $640 million to go -- or six -- what, $660 million to go,

I'm not sure, Mark, we can tell you much except that we spend it as we get it.

We have typically a little bit more of a back-end loaded CapEx program and we still intend to target the kind of number that you refer to.

Whether we hit it, whether we're short of it really depends on how different projects get authorized and how we take care of them and how quickly they get done.

I don't have reason to say that the spending will be particularly lumpy, except it tends to be a little bit back-end loaded in our normal process.

Gretchen or Nick, I don't know if you have anything else you want to add to that?

No, I think that's probably fair, John.

We tend to start a little slower and spend more as the year goes on.

Okay.

If I could ask a follow up, relate to the European operations.

I'm kind of assuming by your comments about furnaces that you're running all five furnaces in Europe right now.

Is that right?

Yes.

Okay, and is that something -- are the two furnaces in Smederevo are they operating in a manner that you're comfortable with?

I guess the other thing that I'm curious about is given the capability of the hot strip mill in Smederevo, you think there might even be an opportunity to bring in purchased slabs at some point.

I was just wondering if the demand environment is such that you might foresee that in the next 12 to 18 months?

Just a couple of comments, Mark.

Number one, we are running all five furnaces and two in Smederevo are.

in fact, running -- we do have outage work planned for one of those later in the year just as a footnote.

It is an excellent strip mill in Serbia and its got a lot more horsepower than we are using right now.

But in general, for the Serbian operation, we're just exploring the boundaries of what we have there.

We're just trying to figure out how much iron we can make and continue to optimize the steel shop to make sure we can get it through, and get it cast and get it rolled -- rolling.

The hot strip mill is not the issue right now necessarily.

So I think we can do more there.

Business in central Europe is very strong.

As we said, the first quarter was one of our best ever in Europe.

And we look forward to continued good results for the rest of the year, as we said.

It's possible that we might -- we certainly have taken slabs from Slovakia to Serbia before, and it's possible we would look for additional slab supply into Serbia and it wouldn't be out of the realm of possibility some of that could come from North America.

We've done that as well from time to time and then also gone the other way when markets would support it.

So given currencies, given our pretty competitive cost structure because of our own iron position in North America, that's something we'd have to contemplate.

Okay.

What's the contract versus spot mix in Europe right now?

It's still heavily -- spot contract would be 35%, somewhere in that range.

Maybe a little north of that and tha'll improve, of course, with the new galv line, but it would be somewhere in that range.

All right.

Are you seeing an opportunity for higher spot prices in the third quarter in Europe at this point?

I'll respond in European currencies in the euros if your question was in the third quarter.

I suppose that's possible.

Again, we don't usually look out quite that far, but the macro-economics in central Europe where we are pretty good right now and scrap is relatively tight.

Our units, of course, are relatively high as evidenced by our own cost structure.

So I think there's certainly a chance for that if demand stays strong.

The question mark probably would be the level of imports because they have been fairly high in Europe, although they have not affected pricing so far in any significant way.

Okay, terrific.

Thanks very much.

Congratulations on all of the great progress.

Thank you.

Our next question comes from the line of Michael Willemse from CIBS World Markets.

Please go ahead.

Thank you.

If I look at capacity utilization in the first quarter you had, say, three or four blast furnaces down and the second quarter you probably will only have one down.

Does it make sense to suggest that shipments could be up by as much as 10% in North America, flat-rolled in the second quarter versus the first quarter?

Let's see, 10% -- second versus -- 10% would be a little over 300,000 tons, Mike, if that's the number you have in mind?

That's within a realm of possibility, certainly.

If everything works out okay, certainly.

And then just following up on a question earlier.

I guess what kind of mix contract versus spot would you expect in the second quarter versus the first quarter in North America flat-rolled?

I think it would probably move towards spot.

That's not only the clean cutoff, but the way we keep the score anyway, it would probably move from contract to spot 3% to 5% would be the zone of change we normally would see and I would just guess it would be in that range if things would play out as we expect them.

Probably more toward the 4% to 5% than the 3%, but that's typically the zone within which we would move.

So in the second quarter your mix will probably still be around 50/50?

It was probably a little heavier contract than spot on the first quarter and will move back towards more 50/50ish in the second quarter.

Okay, great.

Thank you.

Thank you.

Our next question comes from the line of John Tumazos with Prudential.

Please go ahead.

Congratulations with the great cost performance in the U.S., down $12 a ton despite the winter quarter.

Thank you.

Thanks, John.

With the volume gain in the second quarter, can we expect the drive cost per ton in the U.S.

flat-rolled to start with a five and not a six?

We are expecting increased raw materials and then -- and the outage and energy costs that, John, as we said in our release.

So I guess in spreading it over the shipments, the shipments go high enough you can, but on an absolute basis we're expecting higher costs.

On a per-ton basis we could do better.

Steel Dynamics mentioned last week on their call that in March their incoming scrap was -- their buy was $140 higher than in December.

With these different cost pressures that various companies are feeling, I guess there's the potential ,both in Europe and the U.S., that flat-rolled prices would rise.

Your guidance suggests that you're not piggy-backing on other companies price hikes to that degree?

Well, it really wasn't intended to say that or not.

I would just say that we do observe that spot prices are increasing in the second quarter and our commercial position, I think, has been clear but I'll restate for the record that we intend to get the best price the market has to offer.

While we don't do a lot of announcing of price changes, increases or otherwise, we expect to pursue whatever the market has to offer.

And if it's a stronger market and if that's supported by metallics and scrap, that's just fine with us and we would look forward to doing as best as the market allows us to.

Thank you.

Our next question comes from the line of David Magregory with Lowbow Research.

Please go ahead.

He tried.

It's David MacGregor with Longbow Research.

Hi, David.

Hi.

Congratulations.

Under the circumstance a good karat.

Thank you.

Under the circumstance a good quarter.

I wanted to ask you a couple question.

First of all -- these are kind of higher-level questions, but I'm interested in your thoughts on further capital investment in Europe over the next two to three years?

And you've done a pretty good job of deploying capital evenly around the model, but I'm just wondering if Europe starts to become a little more of a priority?

You've talked about the development of the manufacturing sector in eastern Europe.

Can you talk a little bit how we should see eastern Europe play into the -- your capital spending or your reinvestment program over the next couple of years?

I think you sense is a good one.

I think think we see our European operations as being a great place to invest for many reasons.

The market is terrific.

The capital formation rules are very favorable.

The governments are stable and it's a good place to pee, so we like it for a lot of reasons.

And there will be some capital, which is infrastructure environment oriented that we're committed to do and that will continue to be a piece of our budget.

But there's opportunities for a market-facing capital and in particular on the pickling cold roll galvanized, construction galvanized, the phase of our operation.

We're putting some pressure on on our cold roll opportunity with the new galv line coming up and we may need to have additional cold roll capacity and that implies more pickling capacity.

So there's a lot of things that we can do and probably will do.

Whether we do them in Serbia or Slovakia remains to be seen, probably in both places.

We think both are pretty good places to invest, so on balance we might see slightly, slightly greater portion of the budget going that way than in the past.

But a pretty healthy budget's gone there so far to begin with, so -- but your basic promise is one we agree with.

It's a good place to invest and we can look forward to continuing to invest there for some time.

How do the competitive forces of that market impact your decision making?

Is it a less competitive environment?

Would you find it a more favorable competitive environment than what you're facing in North America?

Compared to North America, it's -- they're both very competitive, first of all, but I think that particular market we have a good competitive advantage because we're the largest and strongest player in the central European corridor.

Logistics in that part of the world tend to give us a little more advantage comparatively than we might enjoy in North America.

Inland freight rates maybe a little bit on the high side compared to what we would have here, high in both places but probably higher there.

So on balance I think our position in Europe is very, very strong.

We also have a very good market position in North America, but I think right now, at least, the European operation is very, very favorable for us.

Okay, thanks.

Second question is just, where in your current North American business model would acquisitions deliver the greatest synergies?

Well, that's hard to answer in an abstract way.

I would say where there are opportunities for us to take advantage of our existing footprints, existing market position, existing raw materials position or existing transportation infrastructure.

Anything that allows us to optimize and fill out [Hofford Mill] that has some excess capacity and perhaps a place where we would find a position where there's a little bit longer steel position.

Anything that allows there to be operations that fit together.

Our experience has been very, very favorable.

Just acquiring things that -- just to be larger that are far away that don't offer any of the things I just described, we have not been as attracted to compared to other alternatives.

In the United States I know you've got excess iron pellet capacity.

Within your steel making business, where do you have ex -- do you have excess melt capacity, do you have excess hot melt capacity?

Where are you long resources?

It varies from place to place and time to time, but we are naturally just slightly long on iron probably over longer term.

We're relatively balanced through most of the steel shops.

We probably have some strip mill capacity in places like Granite City and Great Lakes from time to time and that's probably where our greatest opportunity would be.

Thanks very much.

Thank you.

And our next question comes from David Martin with Deutsche Bank.

Please go ahead.

Thank you.

Just a couple of things.

The first is a clarification I think on -- to Mike's question.

John, you gave an outage cost in the second quarter.

My phone cut out so I didn't hear that figure.

Well, we'll make sure to give it to you again.

I think I said it's $25 million to $30 million higher in the second quarter versus the first I believe was the right construct.

Is that right, Nick?

$25 million to $30 million higher in the second in total for the Company versus the first.

Okay.

And then secondly, could you comment on your existing inventories at quarter end.

I note that in your domestic business, for example, your production quarter over quarter is up a little over 400,000 tons, but your shipments were up about 100,000 tons?

Yes.

Well, the way we look at it, at least, we held the line on inventories pretty well.

We made, quite honestly, not as much steel as we might have expected and our shipments were roughly what we expected.

We kept inventories -- finished inventories roughly where we expected them to be.

There is seasonal raw materials effects that ordinarily would occur at this time of year.

but we watch inventories carefully and I think our inventories are pretty much where our targets would have them be at this time of year.

Okay, that's all for me.

Thanks.

Thank you.

And our next question comes from David Gagliano with Credit Suisse.

Please go ahead.

Hi, thanks.

I just wanted to come back to the Tubular business.

Obviously we've had now three quarters of production cuts and I think it's fair to say that some of that's driven by import pressures.

I'm just wondering if you could just comment, absent trade protection barriers, what do you think are the most significant long-term barriers to entry in terms of global tubular supplies continuing to penetrate the U.S.

market?

Thanks.

Sure.

Well, if the premise of the question is what barriers to entry are there for global supply moving into the North America OCTG or tubular market in total, I think it's just normal competitive cost pressures.

If in fact whatever capacity there may be around the globe is free of state-involved expansion, free of state support and free of subsidies.

then I think let the best company win and we're prepared to play that game straight up as we always have done.

I like to think that our position on seamless, which has a very good steel supply attached to it and a very high-end product line, we can do just fine.

And our prospective position in the welded pipe is similarly situated in a high end of the market and we, then, with synergies, particular on a supply [inaudible], I think can put together a pretty good package.

I think it comes down to normal global competition.

As long as it's free of state support and we're perfectly fine, I think we'll do well.

Fair enough.

Thanks.

Thank you.

And our next question comes from the line of Tony Rizzuto with Bear, Stearns.

Please go ahead.

Thank you very much, and I'm sorry about losing my voice a little bit today.

Good performance, too, with a fairly low operating rate.

But I did have a follow up too also on the tubular market.

Demand continue robust, imports are down, you guys are demonstrating good discipline as are others, and inventories are coming down, too.

What is your sense, John, at this time when we might see a pickup in orders for that business?

It's hard to say, Tony.

The numbers seem to be moving in the right direction.

The overall inventory number seems to be moving down as best we could assess it, in [SETG], at least.

And whether that's later in this quarter or in the third quarter, I mean that would be the time horizon we would look to.

We haven't seen any immediate evidence of that in this quarter, but this quarter's not that far along yest, so we have a good ways to go..

But probably in this quarter, perhaps earlier in the third quarter.

I think we've seen some anecdotal evidence of lower customer inventories beginning, so --

And if you look at the overall consumption rate with somewhat lower production, the apparent demand is moving into line with consumption, so things look like they're realigning in a much better way, but imports remain a question.

So it's in front of us, but things look like they're moving in the right direction.

Let me ask you this question [inaudible].

Look at your business, what percentage of your shipments go through service centers and what percentage of your tubular shipment goes through -- directly to the driller?

The preponderance of our tubular shipments go through distribution, the preponderance.

Some direct, but the preponderance would be through distribution.

All right.

So when we look at those inventories and currently -- I don't know, somewhere around 600,000 metric tons, who do you think we need to be?

Looking at historical trends, obviously with higher drilling rates there's got to be a higher working level, but where do you think that is?

Oh, it's been so dynamic, Tony, that I'm sort of reluctant to pick a number.

But I think as opposed to a number what might help is if we seen a trend, and a trend would be a series of declines in inventory driven by steady or increasing consumption, which we've had, and more moderate level of imports, which might level out.

So I think if we see a trend then I think that might instill a little bit more confidence throughout the system and we might see order rates pick back up, as opposed to an absolute number.

Okay.

And if I may ask a question about the share buy-back program, obviously you were taken away from buying back your stock.

You did buy a little back during the quarter, but obviously with the M&A activity, should we look at your share buy back program being a balanced -- evenly balanced over the succeeding quarters?

Well, Tony, I think what -- we just try to take a generally balanced view.

I don't know that I'd say quarter to quarter that if you look back over the course of our program, we haven't targeted a set dollar amount or anything like that, so it'll ebb and flow a bit.

But we're committed to the program.

We have authorization, as I mentioned, the remaining 7.3 million shares under our existing program and I think we've executed against that pretty well.

I can't predict for you what it's going to be every quarter because I can't predict what share prices and other things will be, too.

Right.

But the key is obviously you're price sensitive All right, I appreciate those insights.

Thank you.

Our next question comes from Charles Bradford with Bradford Research.

Please go ahead.

Hi, good afternoon.

Hi, Chuck.

Hi.

I'd like to talk about the tubular or the large diameter tubular plan that you have with Pasco in [inaudible] for the west coast.

Where's the coiled plate for that plant to come from?

It will be, we expect, supplied by both partners, which is the custom we have at our existing joint venture operation.

At UPI.

I understood that, but I didn't think you made much coiled plate?

I think we're probably a the position to make what is necessary for that particular operation.

And then Lone Star has a plan of its own for a large diameter plate -- a plate mill.

I'm assuming that no decision is made about that yet?

No, certainly not by us because we don't own it yet.

But we'll take a look at how that fits into our overall production profile once we get that opportunity.

Thank you.

Thanks, John.

And our next question comes from Aldo Mazzaferro with Goldman Sachs.

Please go ahead.

Hi, John, how are you?

Hey, Aldo.

A question on the Minnesota operations.

Last year in the second quarter you earned over $30 million.

I know there may have been some real estate sales and some things, but can you explain a little bit what you're doing there that might have the such impact on bringing your numbers down towards break even in the quarter?

A couple of things.

One is just some outages that happened to get scheduled at this particular time, because they had been pushed off for -- scheduled a little further out than having to get done now, so that would be one.

But the other matter we should comment on is that we are doing some additional stripping work there, additional mine development work, that means we're using our equipment not to generate shippable tons, but to prepare for future excavation for future development.

And you might look that really as infrastructure developments.

And particular at [Keytac], it's an area where we needed to get back on track and move our stripping ratio more towards what it needs to be in the long term.

So it's really just something we need to do from time to time.

And the iron wasn't otherwise required to support our operations at the moment because of where our furnace configuration was and we decided to get about doing some work to make sure our facilities are well positioned in the long term.

Right, so this -- you can't call this an expansion of the production capacity.

It's more like preparing yourself to continue on at that level?

Yes.

If you don't do it, it becomes the opposite of expansion at some point, so it is necessary for the long-term vitality of the operation.

Right.

And, John, when you mentioned the $25 million $30 million outage expense expected in the second quarter -- the increase, I mean -- does that include stuff at Minnesota?

Not what I described, I don't think.

That would just be in normal plant cost.

The outage I mentioned would be in that number.

In the steel making?

Yes.

Out-of-pocket outage costs.

Great.

Then if I could ask one final one.

Can you tell us what you're expecting in terms of a spot price average increase in the second quarter over first in the domestic?

I don't know that we're made those specific kinds of guesses, Aldo.

It'd only really be a guess.

Our spot pricing tends to follow -- tends to be better than, but it tends to follow what the average of all the various indices are one can read, so we'll just rely on that rather than make a projection at this point.

You think my math is right if I were to guess that you say the mix may change by 4% to 5% unfavorably but you're average selling price being flat to slightly up may imply a 5% or more change in spot, right?

Well, there's some math I'd have to go through there slowly, but I think that you have the general direction right, that we do expect spot prices to be higher because that's what has already been observed.

We do expect the overall volume to be higher and I think most of that'll be additional spot material.

It could be 4% to 5%.

And then, John, you're operational capacity in Europe, would you say you're running -- or the second quarter will be pretty close to your full output potential?

Probably.

We probably have more we can do in both locations, but they're running pretty full right now.

All right, thank you.

Thank you.

And our final question comes from the line of Michelle Applebloom with Michelle Applebloom research.

Please go ahead.

Hi.

Hi, Michelle.

Hey, Michelle.

Thanks, Nick.

Couple questions.

First I wanted to ask about exports in light of the middle press release last week.

You guys have any plans to ramp up exports on the sheet side?

I mentioned earlier that what we might consider doing and have done from time to time is to move some material from our operations here into Europe if we see there's some additional money to be made there and we can do that through our own sales network in Europe.

We haven't done that so far.

We may, we've done it before.

That seems to be a good alternative for us when we have additional material the spot market here can't take.

We haven't really reached that point yet, Michelle, and at least in our particular business sector, we were able to dispose of all of our material at pretty good prices right here.

But if it turns out that moving it offshore is a better place to go, we could do that.

For us it would most likely be through our existing operations and most likely through Serbia.

So you would ship slabs into Serbia or coils or --?

Could be either one.

Slabs would probably make the most sense because of the [inaudible] capability, it could be either way.

Okay.

There wouldn't be expert opportunities away from going through Serbia or is that just the most cost efficient way to do it?

There may be other alternatives but we have found that to be a reasonably efficient way to do it.

And you've done that before?

We have and we've come the other way before, as well.

But you don't put out a press release?

Not normally, no.

Okay.

Then I had another question.

I wasn't sure exactly -- Aldo was asking about what your forecast was for spot hot rolls.

I was just curious if you would venture a number of what your existing spot hot rolls is, not forecasting?

I just direct you what the various indices have issued in the last week.

I think the visibility and the transparency of pricing in this sector has become pretty good and we tend to track it -- usually a little better than, but track it directionally pretty well, so I don't think we're doing it any differently that what you see various published indices reflecting.

Okay, one more question.

A topic that comes up every conference call and I think we talked about this before.

But I'm wondering is your view on the combinations between distribution and mills changing at all?

Are -- you've been somewhat negative on that?

Well, we haven't been positive on it.

It may be the right thing to do for somebody at sometime.

We have had a sufficient of things that we are trying to accomplish with our capital that we haven't been looking that far from our core businesses to employ capital.

And as I've said before, I think we believe that our service center distribution processing-oriented businesses are doing fine and we're getting a pretty decent price from those that we sell to, and if we didn't think that then we might have a different view.

But for the moment, our view is not one that that's a fruitful place for us to employ capital rights now.

Okay, and if your competitors started doing that would your view potentially evolve?

Well, we would watch with interest, but I guess that would depend on how well they did.

Thank you.

Okay, Michelle, thanks.

No other questions from the phone line.

Please continue.

We'd like to thank everyone and we'll talk to you next quarter.

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