美國鋼鐵 (X) 2008 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to United States Steel Corporation earnings conference call and webcast.

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

Later, there will be an opportunity for your questions, instructions will be given at that time.

(OPERATOR INSTRUCTIONS) As a reminder, today's conference is being recorded.

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

Please go ahead, sir.

Thank you.

Good afternoon.

Thank you for participating in the United States Steel Corporation's first quarter 2008 earnings conference call and webcast.

We'll 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 re included in our most recent annual report on Form 10-K and updated on our quarterly reports on Form 10-Q in accordance with the Safe Harbor provisions.

Now, to begin the call, here's U.S.

Steel Chairman and CEO, John Surma.

Thanks, Nick.

Good afternoon, everyone.

Thanks, as usual, for joining us.

Earlier today, we reported substantially improved first quarter earnings of $1.98 per diluted share compared to fourth quarter 2007 earnings of $0.29 per diluted share.

Other items not allocated to segment results included a previously disclosed $45 million pre tax litigation reserve and a $17 million pretax charge for inventory transition effects related to the acquisition of U.S.

Steel Canada.

These two items reduced net income by $45 million or $0.38 per share.

In addition, net interest and other financial costs in the first quarter of 2008 included a foreign currency gain than increased net income by $70 million or $0.59 per diluted share.

That was on the remeasurements of a $1.1 billion U.S.

dollar denominated interCompany loan to a European affiliate and related euro/U.S.

dollar derivative hedge positions.

We're disclosing this separately because it is a new item and we will have continuing remeasurement effects for some time.

Now turning to our segment results, we had a solid and much improved quarter with operating income of $327 million, or $48 per ton.

We operated at 92% of capability in North America and 103% in Europe, a significant improvement over fourth quarter operating rates of 82 and 79% respectively.

Our flat rolled segment earned operating income of $120 million, more than double fourth quarter results.

Compared to the fourth quarter, first quarter average flat rolled pricing increased by $19 per ton to $646 per ton, which reflected the initial effects of rapidly increasing spot prices as well as a full quarter of shipments from U.S.

Steel Canada.

Our Canadian business includes a higher relative proportion of semi finished and hot rolled products which have lower absolute selling prices than cold rolled, or coated, but healthy and growing margins.

Raw materials and energy costs also increased.

The integration of U.S.

Steel Canada is progressing as planned and we are on track to achieve over $100 million of run rate synergies by the end of 2008.

As discussed on our last call, we experienced some production issues in Canada in the fourth quarter.

Those issues are now well behind us as we operated at 93.5% of capability at U.S.

Steel Canada, in the first quarter, the highest operating level for those facilities in recent years.

We have also now completed most of the order book we inherited with the acquisition.

Most American steel market fundamentals continued to improve during the first quarter with spot hot roll pricing increasing dramatically by as much as $110 per ton from December to March, including $30 per ton in both January and February and $50 per ton in March as widely reported by industry publications, spot hot rolled pricing are now moving well above previous record highs in the second quarter.

We anticipate that our second quarter flat rolled average realized price will track the sharp increase in the spot market pricing, which affects about 50% of our shipments.

Flat rolled inventory and imports are both at historically low levels.

Imports continue to be affected by high ocean freight rates, the relatively weak U.S.

dollar and the strength of global steel markets.

The sustainability of this trend will depend to some degree on the strength of the North American economy, particularly for the second half of the year.

Given our more attractive cost position in dollar terms compared to the rest of the world, and strong export market conditions, we should be able to operate at higher levels than in the recent past and our North American raw material position should insulate us from a portion of the raw material cost increases particularly scrap that impact many of our competitors.

Our first quarter European segment operating income was $161 million or $98 per ton, a significant improvement compared to the fourth quarter.

First quarter European shipments increased by 250,000 tons, and average realized prices increased $39 per ton, including favorable currency effects.

Cost efficiencies from a record operating performance of 103% of capability helped offset the rapid rise in raw materials costs.

First quarter European end markets remained stable while fewer imports and a surge in steelmaking costs helped drive spot steel prices to much higher levels.

These factors particularly the significant increase in raw materials costs have some market observers predicting additional price increases in Europe.

We continue to monitor the commercial environment to ensure that our pricing remains in sync with the European market.

In Europe, we are more affected by purchased raw materials costs but our spot market exposure at approximately 70% is also higher than in North America.

Turning to our tubular segment, during the first quarter, we earned $51 million or $117 per ton on shipments of 433,000 tons.

The decline in first quarter results compared to the fourth quarter is mainly due to the rapid increase is costs for semi finished steel which outpaced the price increases announced during the quarter.

Since November of last year, we announced a series of tubular price increases for most sizes and applications ranging from $430 to $675 per ton.

In addition, recently, we announced a $250 per ton second quarter surcharge for all tubular products.

This surcharge is effective with May 1, shipments.

The increases are intended to recover sharply higher costs primarily for semifinished steel and in particular for the high alloy components of our product line.

The higher prices are supported by market fundamentals as tubular demand has picked up with the start of the 2008 drilling programs.

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

Nick?

Thank you, John.

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

Our current plan for 2008 has total capital spending at approximately $940 million with $675 million for North American operations and $265 million for European operations.

Depreciation, depletion, and amortization costs totaled $156 million in the first quarter and are expected to be about $635 million for the year.

Defined benefit and multiemployer pension and OPEB costs for the quarter totaled $48 million.

We made cash payments of $78 million for benefits primarily for retiree healthcare during the first quarter and $21 million in retired pension contributions.

Also during the first quarter, we made a $35 million voluntary contribution to our main defined benefit plan and a $30 million contribution to our viva.

Additional details will be included in our 10-Q which should be filed later today.

First quarter net interest and other financial income totaled $32 million including $76 million of favorable foreign currency effects.

Net interest and other financial costs will continue to be impacted by foreign currency accounting remeasurement effects partially offset by the use of euro/U.S.

dollar derivatives.

At March 31, 2008, U.S.

Steel had open euro/U.S.

dollar forward sales contracts with a total notional value of approximately $571 million.

Excluding foreign currency effects, we expect second quarter net interest expense to be about $45 million.

Our annual effective tax rate for the balance of 2008 is projected to be approximately 25%, although some discreet items lowered our rate in the first quarter.

Lastly, for the quarter, we averaged 118.5 million fully diluted outstanding shares.

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

Thank you, Nick.

As noted in the earnings release, we repurchased 305,000 shares of common stock in the first quarter for a total cost of $33 million.

This brings our total repurchases to 14.5 million shares or approximately $850 million and represents more than 11% of the balance of fully diluted shares outstanding when we authorized the original purchase program in July of 2005.

As of March 31, 6.2 million shares remained available for repurchase under the current authorization.

Turning to our outlook, we expect that segment income from operations will increase substantially compared to the first quarter of 2008 as realized price increases are expected to surpass the continuing increases in scrap and other raw material costs.

Second quarter flat roll results are expected to improve significantly from the first quarter as high higher spot prices are realized throughout the quarter.

Operating levels and shipments are expected to be comparable to the first quarter while raw material and energy costs are expected to increase.

For U.S.

Steel Europe, we expect second quarter results to be higher than the first quarter on increased prices and comparable operating and shipping levels despite higher raw material costs.

We expect second quarter tubular results to be improved over the first quarter as higher prices and shipments are partially offset by further increases in costs, principally for semi finished steel.

And then finally, results for other businesses are expected to increase primarily due to normal seasonal improvements at our iron ore operations in Minnesota.

With that, Nick, I'll turn it over to you.

Could you please queue the line for questions?

Certainly.

(OPERATOR INSTRUCTIONS) We'll go to David Martin with Deutsche Bank.

Please go ahead.

Yes.

I wanted to start by coming back to your comments about the ability to capture higher spot prices in the second quarter.

I think there continues to be quite a bit of confusion about how pricing trends in the market will roll through your books and based off of John's comments about kind of pricing trends post or excuse me late in the first quarter into the second quarter looking at published prices from, say, the beginning of March until now, prices in spot market may be up $300 plus per ton.

Is it accurate to think that for 50% of your business, those types of price increases will be realized?

David, this is John.

Yes.

I think the spot mix in the North American flat rolled sector is about 50/50 and by spot I'm saying where we're into monthly spot transaction pricing or shorter term index-based pricing but about half would be spot based and I just think it's important to remember that even in the first quarter there were a series of price changes that were effected throughout the quarter and even though there were prices announced that were affected in March, they would have affected only March business.

Likewise, price increases announced in pricing increases we're putting through in the marketplace in May and June, it will be effective just for May and June.

So it's important to weight those for the period in which they're effective, but having said all that we're about half spot, half contract.

Okay.

And then secondly, I know you commented production rates should be similar to the first.

How about for the balance of the year?

Do you have any significant outages planned or will that basically depend on market conditions?

The only thing that we're working on in earnest at this point is last furnace outage in one of our three furnaces that is ready for it and probably will be in August to start, although, we could move that around depending on what's happening and how ready we are to do the job.

Nothing of great consequence right now in North America.

That could change but as of right now the larger project in Slovakia later in the year.

Okay.

Thank you.

We'll go to Michael Gambardella of JPMorgan.

Please go ahead.

Good afternoon and congratulations.

Thanks, Mike.

Couple questions.

In the fourth quarter, you had a lot of production outages, and you haven't -- you didn't declare force majeure on those outages, so I assume that when you ship that product in the first quarter that it was priced at the old fourth quarter pricing?

Is that correct?

Generally that would be correct, Mike.

Some of the outages that we have that were planned we make provision for that and ensure that we can serve our customers needs and make the order dates in most cases where we had something that was not planned which was particularly in Canada.

There some of the order book would have carried over, in fact did carry over, and that undoubtedly had a dampening effect on our first quarter realized prices.

Can you quantify the impact from Canada of those outages an the flow through of the tons as well as the -- they had prebooked some lower priced product that you're just about done with now?

We are.

I mean there's a little bit of carry over perhaps into the current quarter but it will be, I think lost in the larger scheme of things.

I can't give you any real numbers, Mike, except to say that there were certainly some commitments on finished product as well as semi finished that were quite a bit below the pricing structures that prevailed during the first quarter.

That's behind us, I think the full impact on our Canadian book which is largely more than the U.S.

business will have quite a positive impact.

And next question, just you mentioned that you're going to implement a $250 per ton surcharge on your tubular product as of May 1, shipments?

Right.

One of your big competitors has already publicly stated they're going to do the same for their flat roll business.

What are you doing with your flat roll contract business in regard to the surcharges.

With respect to that matter, of course, the tubular market and sector are much different than the flat rolled sector.

With respect to flat roll, our policy is, has been, to attain the market price in as rapid a manner as is consistent with our arrangements with our customers.

We think this requires a customer by customer discussion to ensure that we get to the market price in a time that's appropriate but also considers our relationships with our customers.

We're going through that right now customer by customer.

It would be poor form for me to get in too many details on that.

I would just ask to you remember in 2004, the market went through a similar period of adjustment percentage-wise maybe even of greater magnitude.

It took a while for that process to take hold, to work its way through, we worked our way through and eventually got to market price in all of our sectors.

We're about that right now.

We prefer to do it customer by customer.

That's really as far as I want to take that.

Just last question, what are you going to do with all the cash you're generating?

I'll turn that over to Gretchen.

She's much better at that than I am.

Well, Mike, I think that we're going to keep doing what we've been doing.

And approach using it in as balanced a fashion as we can and that's going to involve spending some capital, we expect to be saving $940 million on capital this year which is substantially up from last year.

We continued our share repurchases.

We had a dividend increase.

We'll probably pay down some debt this year and, associated with the acquisitions that we made last year, and we do have $140 million of pension funding planned for this year.

We did $35 million of that in the fist quarter.

We'll do the balance over the balance of the year as we think appropriate, but I just would say probably more of the same and we'll tend to do that just kind of bit by bit over the quarter as we can, maybe not do anything dramatic in any one quarter.

We'll go to John Hill with Citi.

Please go ahead.

Thank you and good afternoon and thanks for a great call.

It's nice to see a downpayment on all the hard work you guys have been doing.

Thank you.

I was wondering if we could just talk about Europe for a moment.

Results were quite solid in terms of expansion of that segment income per ton, yet the news media seems to be filled with stories in Europe about a looming slowdown of auto sales and homes and tech distributors and heavy equipment demand down, et cetera.

What are you seeing seeing in Europe on the demand side.

How's the order book, lead times, et cetera?

Demand and order book and lead times are all essentially as they were in the first quarter for a good bit of last year.

Demand has remained reasonably firm in our part of Europe, Central and South towards the Balkans.

Demand is construction oriented, industrial, manufacturing, growth oriented, auto, sector in particular in Slovakia.

So we have a number of positives working for us, not maybe quite as sensitive where we are on the export front or the higher euro might be a little bit more of a problem.

Demand has remained pretty good.

Order rate has been fine, lead times everywhere for almost everything are not far out just because with the high prices and inventories where they are, customers particularly intermediary customers, service centers, stock is in Europe tend to be trying to keep inventories at a minimum.

We think that's perfectly fine.

So order fronts aren't out real far, we don't think we see much double ordering, those kinds of things.

I'd say the commercial difference in Europe are okay.

Great perspective.

In our part of Europe.

Understood the caveat.

Then just swinging over to Canada and to the Stelco acquisition, it's great that we rolled through some of those inventory effects and we're now going to see that can contribute to bigger company.

How should we think about the margin objective there in terms of EBIT per ton?

It's obviously a lower priced product, you indicated that you wee quite pleased with the margins.

Is a superior operating income per ton to the average in North America or in line with it?

That's a good question, John.

I think you have to view it in the context of the current market conditions.

The current market conditions of higher spot prices and the ability to export or land semi finished in locations that yield back quite a reasonable margin to us.

They set up -- these conditions set up extremely well for our operation in Canada and in these particular market conditions with higher spot exposure and more basic product mix on the hot rolled side.

We can probably do very, very well in Canada.

Maybe if we compared it that way perhaps in these particular conditions a little bit higher than in our traditional U.S.

business, I think both are going to do quite well in the second quarter.

These conditions set up extremely well for our Canadian position.

Thank you.

We'll go to Michelle Applebaum with Market Asset Research Institute.

Please go ahead.

Sure.

That sounds good.

Hi, Michelle.

Hey.

Listen, a couple of questions.

I think we all completely get that sitting here debating your contract customers, 20 years, I know.

We don't talk about that on the conference call, but if we could move up a little bit and try to talk conceptually, I think we're seeing a kind of reversion back to the days of what we used to call price and effect when it meant price and effect on day of shipment.

So if an order was placed -- when I got into the business, if the order as placed three months in advance like it is today, the pricing would be whatever the price was when the order was shipped.

This contract business is kind of newfangled.

It's only been around since the mid-'80s.

It's a very deflationary construct that came about in a very different environment.

One of your competitors A.K.

went as far -- and obviously they are more wedded to contract pricing than you are.

They went as far as saying this is probably going to be a thing of the past in the near future.

You are seeing, particularly in the plate side the surcharges instantaneous surcharges create that effect in the market.

You're not seeing a lot of resistance at the consumer side because they're very cognizant of what's going on.

Can you talk conceptually about that and just give us your thoughts on pricing mechanisms in the next few years?

It's a very interesting subject, Michelle.

There's been lots reported in the trade press about it.

Not anything we said of course.

Just in this environment, I would say these are quite turbulent times in the marketplace.

Major changes on inputs, major changes on market price levels and as we did back in '04 when we had a major change in construct.

We went through and explored some different pricing mechanisms.

Some of which are quite useful for us today on the index side and otherwise.

I think just in general as we go through customer by customer, sector by sector, we need to make sure we can find a way that allows us to get the market price for a product because that's what we're about.

Our customers need to find a way to get product into their markets at a price that allows us both to do well.

That's I think, an objective we will all have and it might well end up with some different kinds of pricing mechanisms in certain sectors that are different than what we use today.

There's been some talk about in Europe particularly on the packaging side about how at least the timing or the nature of those price forward commitments might be made.

I think that's a reasonable discussion that we'll have with our customers, customer by customer over time.

At the end of it, there's a new or different mechanism or one that reverts back to -- your memory's better than mine.

I don't know, Michelle, but I think it's probably a matter that we'll have some discussion.

I think that's a fair point.

Would you go as far as saying a year from now if things stay the way they're staying we won't have this risk where you're kind of bearing the commodity price risk, that risk will at least be more appropriately shared?

I couldn't put a time frame on how or what shape those discussions might take, Michelle, but I think when we do have this type of commodity price risk on the input side that we all are bearing these days there needs to be a mechanism to ensure, we think, for our product at least, that we can get the market price for our product.

Again, that may well, yield a different mechanism.

Whether it's a year or not I really don't know it's kind of hard to say.

One more question unrelated.

On the operating profit per ton side and the flat rolled business, to the extent that I do acknowledge and cede your point that we don't know exactly what the carbon sheet results are for any of your peers because they're not broken out publicly, how do you think U.S.

Steel flat rolled did in the quarter given the integrated position and what -- I guess just how would you evaluate that?

I think our operations performed extremely well.

I think our plans ran well.

Our operators did a splendid job.

Our costs because of the higher utilization rates and because of some raw material stability were quite favorable particularly if you look at it in dollar terms compared to the rest of the world.

I think we can do better in terms of our commercial position and what some of our product groups and some of our broader allocations of material in different sectors have yielded us.

That's going to be part of our job to ensure that we have our products in the right markets over the long term.

Strategy doesn't just involve acquisitions, dispositions and building plants.

It also involves commercial positions and I think that's a subject we're going to be looking at.

I think in general our first quarter performance was quite good.

I think our second quarter performance might be worth another look once we actually make three or four million more tons of steel and sell it like we intend to.

You might just hold that thought and see how we look in the second quarter.

And we'll go to Timna Tanners with UBS.

I wanted to ask two questions.

One was about the labor discussions that should be upcoming.

As I understand, you're already looking to prepare for that.

Can you tell us what you're hearing the Unions talking about in terms of things they're looking for and what you might be looking for into those negotiations?

The second question really relates to if you could talk to us about your met coal and coke positioning vis a vis 2009 contracts and 2010 positioning?

Okay.

With respect to the labor contract, it's very early.

There are some sort of defined mechanisms where we share higher level conversations about objectives and plans.

That really won't take place for a little while yet.

I think the discussion will no doubt be around things like economics and productivity and all of the things we normally talk about.

I think it's too early to really have anything definitive on that subject.

I think we'll have a good discussion.

Our objective is to have a fair and competitive contract.

Which we think we have something like that today.

It's worked quite well for both the employer and employees since 2003.

Our objective will be to have a competitive contract going forward for whoever period we haven't negotiated.

It's a little too early I think the next time we get together in this forum we'll be in a position to have I hope a more substantive discussion about it.

I think what we want is a competitive contract where our employees are fairly compensated and safe work environment and we can both do well over time.

That's what our objective is.

I think we've had that for the last five years and all material specs.

With respect to coal and coke, and I'll just speak North American for a moment.

Don't have the numbers absolutely fixed in my head, but we do have some commitments on coal into 2009.

It would be less than half probably of our consumption requirements.

Less than that in 2010, I think it's plus or minus around that number but less in 2010.

We do have coke requirements committed throughout 2008, but very little in terms of priced coke in 2009 and none that I can think of for coke in 2010.

We do have some suppliers we worked with for decades and we're quite comfortable with them and they're comfortable with us.

For the most part, currently for us, 2008 is pretty well a factor, we're still exposed a bit on some pricing on coke 2009, some coverage, less so in 2010.

So back to the labor discussion.

Just to clarify then, I mean there's some out there with the view that there could be labor stoppages with all the upcoming discussions again more in the third quarter as you mention.

What would you say to that kind of concern?

Do you think that you are that far positioned, that you're that far apart on the topics at this time going into negotiations?

The one thing I know with complete respect is that whoever's saying that doesn't work for our Company or for the Union, so I think that discussion really is between us and our Union who represents our employees and their objective as in ours is we have a fair contract.

They want to be working we want them to work.

I'm just not prepared to engage in that kind of hypothetical at this point.

I don't think it's productive for us or employees or anyone else.

I think the last number of contracts that we've had three or four we finished early.

Yes.

And we'll go to Mark Parr with KeyBanc.

Please go head.

Hi, Mark.

Hi.

John, I was wondering if you could give us an update on the refreshing of the iron ore, the taconite situation going on up in Minnesota and just a follow-on.

Timna's comments around met coal and coke, could you give us as your view on iron ore exposure globally as you look into '09 and 2010?

Sure.

We are in the first instance with respect to the expansion of our Keewatin Taconite plant.

We have what amounts to a mothballed line and we're in the process now of doing some engineering on being able to restart that line, refurbish it and then do all of the environmental emissions requirements that go with it.

That would yield us about 3 million tons per year of additional appellate capacity.

Really the governing factor and how rapidly we could bring that to fruition is going to be the permitting process which is very important.

We're going to play by the rules or even beyond the rules.

That is underway.

We're working hard on that.

I think we've given some disclosure about that in our 10-K as well.

I think the permitting process which is necessary, we need to go through.

That will have some lengthy time line to it.

In the meantime we're going to be doing engineering and to the extent necessary ordering some long lead time equipment for some of the processing.

But we have more than sufficient taconite reserves to develop.

The real issue is getting the iterating line refurbished back in business and the ticket there is the question on the permitting which we're about.

So I can't give you any specific dates.

That's where we stand.

With or without that North American position with our two very productive facilities in Keewatin and Minntac, together with our equity interests, in (inaudible) depending on how heavy we're running, depending on our level of consumption.

We're in balance.

If we're running very high, we might be slightly short.

If we're not running full, we might be slightly long.

North America we're in very good shape, this additional 3 million tons of very high level will keep us completely on our own material.

If we're long, we can I'm sure sell it.

At least in price in this market.

In Europe we're essentially working on annual commitments with suppliers to the East with typical quarterly pricing.

No real fixed commitments on pricing there over long periods of time.

We generally have got quarterly, sometimes a bit longer.

Those supply relationships have been very good for a very long period, and we would expect them to remain that way in the future.

Is your pricing in Europe more comparable to the ocean borne price.

Or the spot market price?

It would be really not comparable to either, but it would be established certainly by reference to the sea borne price less so the spot price.

We typically have had metallics pricing into our plants transportation included.

That might be a bit below the sea borne material as we would measure at least into the coastal plants in Europe and Asia just because their transportation is a little bit more efficient.

As those prices, sea borne prices are higher, ours would be higher as well.

Okay.

If I could just ask one other cost on the input side.

I appreciate all that color.

Natural gas prices, have not been kind of rolling over like they many times do into the spring heading out into the summer.

I'm just wondering if you have thought or given much thought strategically or at a high level to a vertical integration in natural gas or if just in addition to that if you could talk a little bit about the potential impact of higher natural gas costs in the next several quarters?

Sure.

As you know, we're large gas users now if I roll in Canada and Europe I probably 100 million Mmbtu's or something like that.

So $1 on the strip for us, or $100 million.

So it's an important issue for us.

We haven't given any serious thought to getting back into the oil gas business.

We were there with our colleagues from [Rython] for several decades.

We are, I think, reasonably proficient at what we do making and selling steel, getting into exploration production, taking on reserve risk and the like I'm not sure is something we have much of an appetite for or that we have so much capital that would be an appropriate use for us.

We do try to measure ourselves a bit by buying forward in the physical market, we don't do much paperwork but in the physical market, we try to make sure that we shave off a little bit of the exposure on our natural gas inputs.

Remember though that our tubular position, the largest OCDG position North America is largely a gas oriented position and those strong gas prices are now moving the drilling programs along quite rapidly.

We expect that to be a good reward for us on the tube producing side as gas prices, if they stay high we're likely to get some of that back.

We like that internal hedge we have built into our position.

We'll go to Bob Richard with Longbow Research.

Please go ahead.

Good afternoon.

Thanks for taking our call.

Are you able to offer what your domestic flat rolled sales mix was for the fist quarter hot roll versus cold roll versus gal versus semi finish?

We usually put that in the 10-K on an annual basis and it stays relatively stable if you took the 10-K outline that we give you it probably wouldn't be a whole lot different than that, some seasonality, I think in the current environment with some of the higher value products, appliance and automotive and others being down a bit, we probably have a few percent on the mix that has swung more into hot rolled or trade cold rolled and that's quite frankly, been helpful from a realized price standpoint.

Overall mix in our traditional U.S.

business wouldn't be a whole lot different.

Canada would have a higher exposure on hot roll and trade cold rolled than we would have had in the U.S.

traditionally.

Those two are coming together now.

You'll begin to see comparable quarters from now on.

Because we had a full quarter of those operations running full in the fist quarter.

Thank you for that.

One follow-up.

I appreciate your point, 50/50 split spot versus contract.

Is that pretty much the same across all product types?

I would imagine more hot roll is sold on spot than cold roll or galv and tin of course, the small part is all contract.

Are you able to share maybe qualitatively how those are different?

I think your assessment is intuitive and correct starting at the top.

Of course 10 flight which for us is a million tons a year business is largely on contract or contract types.

More of the -- almost all of the electric galvanized, much of the higher end hot dip would be on automotive and other sectors.

It would be more contract oriented.

The spot business would be more in the hot rolled.

There could also be a good bit of galvanized that would go into the construction sector which would be either spot or shorter term contracts and indexes.

Your general thought, I think, is intuitively correct.

Thanks a lot and best of luck.

We'll go to Aldo Mazzaferro with Goldman Sachs.

I wonder if you could just help me clarify a little on the tubular, I thought I heard you say that you raised prices 400 to 465.

I'm wondering when that is effective and I'm wondering whether that's in addition to the 250 surcharge?

I guess technically the 250's in addition to those.

Those price increases were -- you get on different products, different markets.

They were begun late last year probably November, December, something like that.

There was a series of those.

Then the 250 surcharge effective May 1, on shipments was really on top of that, those, of course, had been realized at different levels in the market depending on the product and the arrangement of the customer and the 250's on top of that.

Right.

Do you think of those November/December prices you saw a portion of that in the first quarter or all of it or what?

Some.

On some of the drilling programs we might have committed to.

Maybe not all of it or as much of it as necessary to cover our increased cost and in part at least the surcharge is designed to get us to what we perceive as the market more cleanly and more evenly.

Then a similar question on Canada, John.

I noticed how your domestic flat roll pricing was below my estimate, yet your profit return was above.

I'm wondering how much of your -- of that Canadian mix would be impacted by those old pricing that are rolling over now?

Well, I honestly don't have it because we don't sort of keep track of it that way but there was some portion of our business in Canada.

Whatever the number would have been if our shipment in Canada were a million tons or something.

It probably was a third of it or something that would have carried over because some commitments carried over.

But also, we didn't make and ship everything in the book in December because of production disruptions.

Then just a quick one on the retiree benefit line, that $1 million credit you ended up with, is that likely to continue through the year?

It's the result of funding, I take it?

The other change there, Aldo, that we talked about last quarter was as a result of the national benefit trust agreement that while we continue our funding related to that, it was running about 15 million a quarter, something like that.

That expense will no longer continue.

I see.

Finally, just one last one, on the strategy you are undertaking, I noticed you made some changes in the commercial side.

Does that have any implications on your ability to realize prices more quickly, do you think?

We hope so.

I mean, when you step back and look at what we did.

Last year we added what amounts to a very large consuming location in Texas and the related facilities, the million tons per year hot roll plus or minus.

Now we have two large producing locations, one of which has a long position of about 900,000 to 1 million tons of slab in Canada.

And with the world market now where, because of where we are in Canada and our excess position, we're in reach of export markets logistically in a much better way than we might have been for some other locations.

Having a separate global marketing position is designed to allow us to optimize our global steel make every day as we go through it, make sure we're getting our material in the highest yielding markets for what we're making.

We're just going through the process now of optimizing how fast to do that, it's largely a North American exercise but because of the much different position with the dollar Europe is not as far away or even Latin America, as it might have been before from a cost standpoint.

So our new position, our new organization is designed to allow us to ensure that we're getting the highest optimum value for our steel make each and every day and we're working our way through that right now.

It's much better to be doing it in a market like this.

We'll go to John Tumazos with John Tumazos Independent Research.

Please go ahead.

Congratulations to the plant people that ran almost eight steel mills full.

I agree with you, John, and I will pass your comments along.

They did a fantastic job globally.

Could you venture a guess as to -- trying to make this simple?

The Corporate average cost per ton in the second quarter.

Do you think it will rise $20 or $40 or.

I'm not sure just on a total corporate basis.

Whatever way's easy for you, John.

Let's state for the record first, let's keep sort of exchange rates where they are.

Because when we get things into the dollars that could have an effect in our European costs.

Or when we see them in dollars higher, just because of the much stronger euro even though they're extremely competitive costs in the local market.

Holding that aside for a minute, costs will certainly be up in Europe will also be up in the U.S.

and gas for alloys which didn't used to be a big deal but are today.

And also for scrap, those would be the three things that I think would be the most significant cost increases.

How much I just can't say.

I think I can say with some confidence they will be up a lot less and prices will be up.

Gretchen, you want to add more?

Honestly, I think directionally it's probably more than your 20 to 40 the way input costs have been looking.

Just with scrap and gas alone, if you take what the movements and the market prices are with the requirements per ton for what we make it probably would be a bit more than that.

Thank you.

We'll go to Charles Bradford with Bradford Research.

Please go ahead.

Good afternoon.

Hi, Chuck

Couple questions for you.

What's the situation up in Canada with Wabash?

Once Delco and of course triggered the right of first refusal, does that become reversible at any point?

Or what's the situation?

Obviously I understand about the lawsuits.

Sure.

Chuck, I think it's probably best that I refer you to the 10-Q we're going to file in a little while as soon as we push the button on it.

We have quite a thorough disclosure there that will give you our best view of what that is.

As you pointed out there's a difference of opinion on that at the moment.

At the moment Wabash is ours and until we sell it it will remain ours.

I would suggest that rather than me talking about litigation and getting my various orders mad at me it's probably best just to direct you to what's in the 10-Q.

Because I think you'll find it to be a thorough disclosure that will address specifically the question you asked.

What's the status of the large diameter pipe mill that you're building up?

It is under construction.

I was out in Pittsburgh, California a month or two ago for the groundbreaking.

It's going to be a nice facility.

We have two excellent partners.

(Inaudible) we've known for many years.

We just celebrated 20 years with them, next door at UPI.

And Seya which is an outstanding expert company in this particular type of pipe.

We're underway and I'd forgotten what the exact construction time line is but year, year and a half something like that we have been making pipe.

It's underway, construction's underway and we're busily talking to customers.

One of the trade papers this morning talked about an investment they said you made in Brazil in Apollo Tubular which was I guess a 50/50 JV with Loan Star.

Can you tell us more about that?

There's some disclosure about that in our 10-K I think, it's not a lot but I'm not quite sure why that was news.

That project was underway and the joint venture had already been formed under Loan Star technology's leadership.

We essentially acceded to the ownership position there.

It's an excellent venture, good partner.

Family which is well established.

The project there's a number of things underway, some additional facilities being put in there, moving along well.

We think it'll be a good venture but it's fairly modest and fairly early in its development.

There are good partners, we look forward to a prosperous future with Brazil.

There was no new development at least as far as I know.

I think it was just perhaps someone became aware of it and reported it, but that really was underway, established, and part of what we got when we (inaudible).

We'll go to Michael Wilhelm with CIBC World Markets.

Please go ahead.

Thank you.

Just wondered if you could go back to Aldo's question on the global strategy?.

Do you have a sense of what your exports were right of North America in the first quarter?

Not a whole lot in the outside of North America we export within the vaster region but they're more traditional flows for specific customer reasons.

There was a bit out of (inaudible) but not very much there would be probably some more in the second quarter to make sure we can continue to run it at strong rates and keep our facilities full if our domestic customers don't require the product we find that we can do something else with it.

Even having said that it won't be a huge quantity.

It'll be as much as we need to to balance the book.

We would much prefer to be selling to our domestic and North American customers.

We'd like to see them doing well and buying more.

Prices are generally better after transportation here than for exports.

If necessary we can still export at a very good price at today's market.

If I was to look at kind of past price cycles.

Generally on the low end, U.S.

Steel doesn't cut the price too far on the low end.

I always assumed that U.S.

Steel didn't really chase the price too high on the higher end as well.

Would it be fair to say that you're probably not chasing the hot rolled maybe as high as the press is.

Or would you say you're right in line with the market?

We are -- our intention is, and for their family's sake, I hope our sales people see it the same way is our intention is to be at the market and that doesn't mean at what the trade press says the market is.

But at the market as we see it in the field with our customers.

Our intention's to be at the market in consideration of all the facts but we're not taking a position or have any policy to be anything but the market.

That's what our shareholders expect and that's what we do.

Just last question on the Tubular business.

Last couple quarters you've been at around 430 tons per quarter of tubular shipments.

I can't remember for sure what the capacity is there.

I'm just wondering as that business improves, what do you think your kind of maximum shipments in the quarter could be if you really wanted to expand that tubular business as far as you wanted to go?

It can go quite a bit beyond where we are if we're, let's just say to make it simple 400,000 or 500,000 tons of that's not quite two and I think we say our rated capacity is 2.8 or something like that.

We can go quite a bit higher.

It requires additional turns which requires additional employment, training, et cetera, which is not impossible and in some of the operating units right now we're working through that very process because certain sizes and types of products are in quite good demand.

We can make more.

If the market's there, we can do that.

Over time.

We have the advantage and I think our customers see it this way or at least I think they should that we have a steady supply of steel.

We are well positioned to take advantage of that market as it develops and we intend to.

We go to Marty Pollack with NWQ Investment Management.

Please go ahead.

I guess from the previous question, I was off on the line for a couple of minutes so if you look at the average price March and obviously you got the Stelco in there, but March versus December you described $110 price increase, the average price is higher.

How much of this price is effectively impacted by Stelco's mix.

We did talk about that a bit, Marty.

I can't give you an absolute number, but if we had in Canada 1 million tons roughly maybe a third of it was business that was or maybe more that was priced and carried over from the earlier book either prices that were committed or material that was supposed to be made and delivered in the fourth quarter that wasn't because of short falls on the production side.

So it had an impact.

But then also our absolute product slate in Canada is more geared towards hot rolled and some semi finished which will have lower absolute prices.

Just looking at that one average realized statistic might give the illusion of it not being a good thing, but the margins on that product even though the prices are lower can be quite attractive.

In addition, this is where I had to get off the line, but I heard the word the price increase is now $20 more than finishing the March number.

Did you indicate at all what percentage of the price increase you can capture via above cost?

I don't know whether the cost -- to some extent you're experiencing higher cost.

On the other hand, you've indicated coking coal in previous discussions just going to be a fairly small amount.

Should one assume in modeling whatever we're going to see in the June quarter the escalation, you know, a trillion dollars might be the current price, but what is sort of the April/May type numbers that are implied already in this?

Just so we can understand whether we're talking about an average price of 640 going up to the $950 or some average just below that?

Looking at the scorecard as the quarter proceeded, we had their price movement of about $30 in April and 100 for May and maybe another $200 for June.

Okay.

I can tell you for sure that the 200 for June doesn't apply to April and May.

To add all those up because they were announced in a particular time, and multiple that times the quarter number first they come in over time and we're seeking to get the market for products as we make them and sell them.

I think if you saw what our outlook said, we expect there to be improvement in our margins for the second quarter over first quarter.

It does imply thought that come July 1 these prices are going to stick effectively.

You're saying you could be 300 priced higher than you were in the March quarter?

A ton that we would book for July?

At least on the spot business?

Spot time would book for July.

Or we would be booking for June now versus a ton for at January.

That's possible.

With regard to the whole issue of contract pricing as you go through customers presumably your customers do know that you have a favorable position vis-a-vis iron ore and also the locked up contract position versus coke and this year as well.

Is that the issue in terms of you want to go, clearly you want to be near a market but is the reality and target to these customers that they know your costs and in a sense they're likely to resist and so whatever you get we'll get some number much lower than what Mattel's asking.

I don't know whether Mattel itself has this same situation?

Is that the resistance because effectively you have a favorable cost position through this entire year?

That general subject's not one I want to get into on this call or anywhere for that matter.

Our competitors are doing is up to them and they're welcome to do it and I'm not going to really acknowledge that that discussion took place.

What we're doing is trying to get the market price.

In a market by sector, we're going to go after the market price.

Our costs are what they are.

That's really our responsibility to manage and our customers we're interested in the market price and what our costs are as far as I'm concerned really have nothing to do with that.

And we go to Chris Olin with Cleveland Research.

Please go ahead.

John, are you seeing anything difference in terms of the quality of the Asian tube product, I know this was a minor issue last year.

I'm just wondering if that changed?

We don't see much of it now whatever we had we disposed of largely because we thought the quality was inappropriate for its intended use.

In certain sectors, the imports have moderated.

Some of it's a decent quality.

Most of it's our customers who are into important drilling programs really are much better served and I think we're understanding they're much better served to be dealing with first class producers like us without the uncertainty of where it came from.

What sort of stencil will be on it and how true that stencil might be.

I'm not sure I see any change in the quality, but I think our customers particularly in some of the more challenging type gas plays whether it's Marcellus Shale yet to come or Barnett Shale wherever it may be.

I think domestic produced product first class like we do it we think has a good place in the market and we will compete with the Chinese and others.

I can't tell you I've actually seen any real major change in the product flow because we don't see much of that right now.

Lastly, I'm not sure if you touched on this, but it looks like we could be getting to a point where there's a potential shake out with distributors.

Maybe some of these guys going under.

Are you concerned at all about your exposure to this?

Or is that something you're watching today?

I think just philosophically and strategically in a world today where credit is tight and difficult and inventory carrying costs are much, much higher for anybody including us than they were a year ago.

Some credit pressure is probably inevitable but I'll turn it to Gretchen, you may want to add something to that Gretchen?

I think we keep a close eye on all our major customers and the level of exposure that we have to them, but I think we have, pretty good group of customers on the tubular side and we really haven't seen any issues there.

I do think to John's point, what happened, it does have the effect of keeping inventory somewhat under control because people are probably managing their credit availability more but I think that we're in good shape.

I'm really not concerned.

Thank you.

And our final question will come from Justine Fisher with Goldman Sachs.

Please go ahead.

Good afternoon.

The fist question I have is for Gretchen just on the debt repayment side.

I know there'sobviously the usual laundry list of cash to go through as far as share repurchases et cetera.

Is it possible at all to give us any more clarity as to what priority debt repayment is.

And also, are you guys looking to refinance some of the secured debt with additional unsecured financing?

We've seen some of your peers do some unsecured bond deals more recently?

I guess I would just say that our priority's kind of the easy stuff first, kind of which we do have a receivables facility, which is -- we have that structured facility just because it was good low-cost form of financing that we could arrange but our preference would to be repay that.

That's actually what we have done even in the fourth quarter we reduced our facility there as we could.

So that would be our first preference.

That just enhances liquidity and gives us more flexibility, going forward.

After that, probably the easiest debt that we have to get our hands on are the term loans that we put into place in conjunction with the acquisition, we have a three year and five-year term loans.

We can prepay those without penalty.

We would probably look at those.

Honestly, I have to say that there's a little bit of, we just give a little bit of consideration to liquidity and timing because, for example, if you pay off one of the term loans on the date when there's a payment due, then it comes off there rather than the back end of the schedule so we get into a little bit of that kind of what I call treasury discussion with the best thing to do.

So those are our easy options right now on debt to repay.

I think that's what we'll be looking at over the next year.

Just one more question on the surcharge issue.

I think most of the customers of yours who see iron ore prices and alloy costs going up certainly understand a decent percentage of the surcharges that have been announced but when you go through the math on some of those, the steel price increases are now pretty significantly beyond what the costs of some of the primary raw materials are.

Are you hearing any pushback from customers saying, look, we get part of the surcharges but at some point this is getting a little crazy or are people taking whatever level of surcharge possible because of limited supply?

It's hard to say because there are so many different surcharges floating around.

We've got the scrap surcharge for certain types of products and produces and customers and then I've read about a surcharge by another major producer in North America.

We have done a surcharge for our tubular customers for a specific cost impact that we think is justifiable so it's hard to respond because there's many, many different surcharges.

Fundamentally, everybody understands as we went through this adjustment period back in 2004 that eventually at least speaking for our Company only, our material needs to be in the market at the market price and how quickly we get there, how we assist our customers in working with whatever downstream issues they have.

That takes many different forms customer by customer.

At the end of the day, we've got to get to the market and there's many different mechanisms to get there.

We choose to do ours more individually with customers.

The only thing I would add to that is that we got a lot of our cost increases at the beginning of the year, early on as some of our price increases were being phased in.

So we certainly feel like we need to be recovering those costs.

Have any of your U.S.

coal suppliers approached you to renegotiate met contracts?

Some of the coal companies are certainly starting to try to do that with their utility customers.

Are they coming back to you and saying we shouldn't have sold you this met coal at the lower price can we renegotiate?

We have long and very good relationships with our coal suppliers.

We fully expect them to live up to their commitments.

Thanks very much.

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

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