美國鋼鐵 (X) 2009 Q1 法說會逐字稿

Ladies and gentlemen, we would like to thank you for standing by and bell welcome you to the United States Steel Corporation first quarter 2009 earnings conference call and webcast.

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

Later we will conduct a question-and-answer session and instructions will be given at that time.

(Operator Instructions) As a reminder today's conference call will be recorded.

I would now like to turn the conference over to your host Mr.

Dan Lesnak.

Thank you for participating in United States Steel Corp.

first quarter 2009 earnings conference call and webcast.

We will start the call with brief introductory remarks from US Steel Chairman and CEO, John Surma; next I will provide some additional details for the first quarter; and then Gretchen Haggerty, US Steel's Executive Vice President and CFO will comment on the outlook for the second quarter of 2009.

Following prepared remarks we will take 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 you 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 and updated in our quarterly report on Form 10-Q in accordance with the Safe Harbor provision.

I will also caution you that last evening we announced the public offering of common stock and convertible senior notes.

SEC rules limit what we can say during the offering while we are allowed to talk about our results and business there may be some questions we will be unable to answer.

Also we are in a tight time schedule with our annual shareholders meeting so we will need to end this call by 8:25 a.m.

Now to begin the call, here is US Steel Chairman and CEO, John Surma.

Thank you, Dan, and good morning everyone, thanks for joining us.

We appreciate you all amending your schedules to join us a little bit ahead of our original plan.

Yesterday for the first quarter we reported a quarterly loss of $439 million or $3.78 per diluted share including a $0.06 per share favorable net effect of two nonoperating items which I will mention in a moment.

Before I get into more detail on the results, I'd like to discuss some of the Ks we announced yesterday to enhance our liquidity position, address the covenants in our existing revolver and term loans, strengthen our balance sheet and position us for growth over the longer term.

Our Board of Directors reduced our quarterly dividend from $0.30 per share to $0.05 per share.

This difficult, but necessary step will conserve approximately $116 million of cash on an annual basis.

We have received executed consents from the lenders under our $750 million credit facility, and the $655 million of outstanding term loans to eliminate the existing financial covenants and replace them with a fixed charge coverage ratio that is only tested if availability under the $750 million credit facility falls below a specified level.

When the amendments become effective which we anticipate will be later in the second quarter, pricing will be adjusted to current market levels and we'll be required to provide collateral principally in the form of inventory.

In conjunction with these amendments, we've also agreed to amend our $500 million receivable purchase agreement to revise the pricing and amend certain other terms and conditions.

We announced public offering of 18 million shares of common stock and $300 million of senior convertible notes due in 2014.

These are the completion of the convertible notes offering nor the completion of the common stock offering will be contingent on the completion of the other.

We intend to use the net proceeds from the offerings to repay our term loans and to use any remaining proceeds for general corporate purposes.

We have substantially reduced our estimated capital spending for 2009 from the $740 million that we discussed last quarter to $410 million.

That compares to the $735 million we spent on capital in 2008.

The remaining amount consists largely of required environmental and other infrastructure projects that are already underway.

A large portion of the $330 million reduction from the previous estimate is due to the delay of our previously announced Coke plant modernization project.

We generated significant cash flow from working capital reductions in the last two quarters including a substantial reduction in accounts receivable.

We expect continued cash flow from further working capital reductions over the balance of 2009, which we expect will be generated largely from reductions in inventories.

We reached agreement with United Steel Workers to defer $95 million of contributions to our trust or retiree healthcare and life insurance, and further the USW has agreed to permit us to use all or part of the $75 million contribution we made in 2008 to pay current retiree health care and death benefit claims.

In addition to layoffs and an early retirement program we previously placed a freeze on hiring and annual merit-based salary increases.

We discontinued the Company match on our 401-k program and discontinued all nonessential travel and other outside services costs.

As a further demonstration of our leadership's strong commitment to do what is necessary during these very difficult times, effective July 1, my base compensation will be reduced by 20%, other executive based salaries will be reduced by 10%.

General managers salaries will be reduced from 5 to 10% and fees for our Board of Directors will also be reduced by 10%.

Also I informed the compensation and organization committee of our Board of Directors that I am declining to be considered for any 2009 long-term incentive grants this year since my existing long-term incentive grants and direct share ownership provides sufficient incentive and alignment with our shareholders interests.

The committee accepted by recommendation.

You can find more detail about all of these matters in our 10-Q which was filed last evening.

Although difficult these actions position us well to an economic recovery when it occurs as it inevitably will.

We believe that steel will remain a material of choice in many important and exacting applications and we have the right people, facilities, and technology to deliver the steel solutions our customers need.

In addition to all of the actions I just described, we continue to focus on reducing our costs and operating as efficiently as possible even at these very low utilization levels.

Although this is a difficult operating environment, we have maintained our focus on safety.

I am pleased to report that our long-term trend of improving safety performance continues.

Year-to-date, our global OSHA reportable case rate has improved 33% from our 2008 performance, while our global days away from work case rate has held steady at 2008 levels, which was the best year for employee safety in our Company's long history.

We remain firm in our commitment to drive our business with safety and well being of our employees as our key core value.

Our drive to 0 injuries and incidents is relentless and is the right thing to do for our employees and our business.

Now let me turn back to our first quarter results.

We reported a first quarter loss from operations of $478 million which included a pretax net gain of $97 million on the sale of a majority of the operating assets of the Elgin Joliet and Eastern Railway Company at a pretax charge of $86 million related to the voluntary early retirement program, accepted by approximately 500 nonrepresented employees in the United States.

Net interest and other financial costs in the quarter included a foreign currency loss that decreased net income by $28 million or $0.24s per diluted share related to the remeasurement of the US dollars denominated intercompany loan to a European affiliate and some related euro US dollar derivatives activity.

Let me look at our segment results for a moment.

In the first quarter we recorded a pretax charge of $90 million related to the recognition of estimated future lay off benefits for approximately 9400 employees, associated with the temporary idling of certain facilities and reduced production in others with $72 million of that allocated to the flat rolled segment and the remaining $18 million to tubular.

Our North American flat rolled segment had an operating loss of $422 million in the first quarter.

In addition to the $72 million charge I just discussed, flat rolled results included approximately $230 million of continuing employee and other costs associated with our Iowa facilities, including fuels, utilities, depreciation and allocated corporate costs.

As a result of weak demand in the continued destocking of inventory throughout the supply chain, our flat rolled segment operated only 38% of raw steel capability in the first quarter down from 45% in the fourth quarter of 2008 and somewhat below the industry average for the first quarter of 43%.

Operating at these very low levels significantly reduced our consumption of natural gas resulting in a $50 million charge in the first quarter for excess natural gas purchase commitments which are subject to mark to market accounting as we took steps to dispose of the excess amounts.

Compared to our fourth quarter results, shipments decreased 24% to 2.1 million net tons and average realized prices decreased 11% to $715 per net ton.

We had an operating loss of $159 million for the first quarter in our European segment although we're facing weak demand and inventory destocking in our European markets, shipments remained close to last quarters levels and capability utilization rose slightly to 55% while average realized prices were off by more than 20% to $672 per ton.

We started to realize the benefits from lower raw material costs and reduced spending.

For the tubular segment operating income was $127 million in the first quarter, significantly below our record performance in last year's fourth quarter.

This severe downturn was primarily a result of reduced drilling activity due to lower oil and gas prices as well as unprecedented levels of unfairly traded and subsidized tubular reports from China.

These market conditions resulted in a sharp decline in shipments, falling prices, and high inventory levels.

The tubular results also reflect idled facility carrying costs of approximately $20 million and an $18 million share of the charge recorded for future lay off benefits that I referred to earlier.

Let me now turn the call over to Dan for some additional information about the results.

Dan?

Thank you, John.

Capital spending totaled $118 million in the first quarter and as John mentioned earlier we are now estimating that full year capital spending will be $410 million, depreciation, depletion and amortization totaled $158 million in the first quarter, and we currently expect to be approximately $620 million for the year.

Pension and other benefit costs for the quarter totaled $164 million included in this total ere $74 million of charges primarily related to the early retirement program.

We made cash payments for pensions under benefits of $159 million.

For the full year, we expect our pension and other benefits costs to be roughly $440 million we with expect cash for pension on the benefits to be approximately $525 million.

Net interest on the financial costs totaled $71 million in the first quarter and included a foreign currency loss of $34 million murder.

Our effective tax benefit rate of 20% for the quarter was lower than the statutory rate because losses in Canada and Serbia, which are jurisdictions where we have recorded a full valuation allowance on deferred tax assets do not generate a tax benefit for accounting purposes.

Lastly, for the quarter we averaged 116.1 million fully diluted outstanding shares.

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

Thank you, Dan.

In the first quarter, cash flow provided by operating activity was $309 million, including a working capital benefit of $790 million.

Cash flow provided by investing activity was a favorable $116 million as the $300 million cash proceeds from the sale of a majority of the operating assets of Elgin Joliet Eastern Railway Company exceeded our capital spending and other investing activities.

The total change in cash was an increase of $407 million in the first quarter, and we ended the quarter with over $1.1 billion in cash and total liquidity of approximately $2.5 billion.

Turning to our outlook, we continue to face an extremely difficult global economic environment.

We expect an operating loss in the second quarter as our order book remains at low levels and idle facility carrying costs continue to be incurred.

Extremely short lead times coupled with the uncertainty surrounding financial markets and (inaudible) consuming industries such as automotive and construction make it difficult to forecast beyond a very short horizon.

Second quarter 2009 flat rolled results are expected to improve slightly as compared to the first quarter of 2009 primarily due to the accruals in the first quarter for estimate future lay off benefits and losses on excess natural gas purchase contracts that John mentioned.

These effects are expected to be offset by lower average realized prices and additional idle facility carrying costs.

Shipments are expected to be in line with the first quarter of 2009.

We expect an operating loss for US Steel Europe in the second quarter of 2009 with improvement compared to the first quarter of 2009 primarily due to lower raw material costs, sales of CO2 emissions allowances and efficiencies resulting from consolidating European raw steel production to US Steel (inaudible) in early April.

These items are expected to be partially offset by lower average realized prices.

Shipments should be in line with the first quarter level.

We expect an operating loss for tubular in the second quarter of 2009 due to a continuing decrease in shipments and lower averaged realized prices as compared to the first quarter of 2009 reflecting lower oil and gas exploration, high inventory levels and the surge of unfairly traded and subsidized product from China.

Dan?

Thank you, Gretchen.

Can you please queue the line for questions?

(Operator Instructions) Our first question comes from the line of Dave Martin of Deutsche Bank.

Please go ahead.

Thank you.

Good morning.

I had two questions on costs.

On the idling costs, costs in the flat roll business, could you detail what's included and maybe give us a break down of what is included and what the change would have been quarter-over-quarter?

Sure, Dave.

I will try.

I mentioned a couple of them in my remarks, but with respect to quarter-over-quarter, I don't have an exact figure.

But we were just in the process of idling facilities in the fourth quarter.

So that, we weren't really seeing it that way, and trying to keep track of it that way quite frankly.

We did feel it was important to give you a sense of what the effect was in the first quarter.

So the majority of the 230 or whatever the number was I mentioned, the majority of that was related to facilities that had been idle for the entirety of the first quarter, Great Lakes, Granite City, [Kiwatin] and a bit for some of the tubular facilities and Lake Erie which was idled later in the quarter and then some of the Coke operations as well, but the biggest chunk was for several of the integrated plants in the operation which was out for the entire period.

So I don't have a good comparison of the fourth quarter but it would have been less because the facilities weren't idle for that much of it.

In terms of categories, we do have fuel and utilities to keep boiler houses heated up and water circulation and steam generation et cetera.

There is some continuing employment costs for staff costs although we are continuing to whack that down and some also for represented labor just for maintenance and fire watch and security et cetera.

We also have some continuing costs for contractual commitments for industrial gases and other services that we are trying to minimize, reschedule, reduce, but some continuing carrying cost there, depreciation, allocated headquarters costs, I am not sure I am missing anything.

Do you have anything, Gretchen, to add?

We had a large LIFO credit in the fourth quarter.

In terms of idle facility costs that really wouldn't affect it too much.

I think those would be the major categories.

Secondly, can you comment on second quarter costs in the flat rolled business and maybe provide an estimate of how much costs will decline on a per ton basis?

It is hard to do it on a per ton basis.

Again, we are trying to isolate the idle facility costs.

There's a few things going there.

In the one instance, we will have at least at this moment, I'm not predicting anything but we have an additional larger integrated facility idle that is the Lake Erie plant in Canada.

We just brought that to idle status in mid to late March if I recall right.

So there wasn't much from that in the idle category.

That will be idle, it is idled now and for part of the second quarter.

So that would be a higher level of costs that would be included in what we are isolating really for your use.

We did make two accruals that would have the, had the effect of accelerating the accounting recognition of cost items into the first quarter under the accounting rules I'm told, are the layoff, benefit accrual I described of $78 million I think for flat rolled and then the natural gas accrual of about $50 million.

Okay.

Those will moderate cost effects in the second quarter, but otherwise, there we will continue to try to reduce things, we're trying to get boilers off and reduce employment costs and reduce spending and reschedule commitments.

But there is in 40% land as I describe it there's a pretty significant chunk of that that is going to take us time to work down.

Thank you and good luck.

Thank you.

Our next question comes from the line of Kuni Chen with Banc of America Securities/Merrill Lynch.

Please go ahead.

Hi.

Good morning.

Good morning.

I guess can you, are you guys able to talk sort of on in broad sense about how you can position the business to be more competitive going forward?

Maybe talk about some of the cost reduction goals, over a longer period of time.

You are trying to take out $200 a ton $300 a ton of costs?

Maybe give some examples around that.

I wish I had easy examples of reducing costs by $300 a ton, that's a very difficult for us to do or for anyone to do for that matter.

I think in terms of our competitive position, we earned $18 a share last year.

I would submit that is moderately competitive.

In a world where US Steel apparent demand according to the international forecast is projected to be 68 million-tons or some number like that, that's kind of a 1950s level, and that's a very difficult world for us to manage our cost down in a short period of time.

In Europe, let me start there for a moment.

In Europe our could costs will come down pretty significantly beginning in the second quarter, because our overall raw materials position there is a merchant position and instead of buying ferrous inputs at $120 a ton, we are in the $65 a ton or $70 a ton range now.

That will start to filter through.

Gretchen mentioned that in her comments.

Likewise, with carbon inputs in Europe.

So I think in Europe, being a merchant producer that will move down pretty quickly.

In the US that's much more difficult process.

Our iron costs while they are competitive as anybody in the world, we think, they're not going to change much under this environment, and our coal costs will actually go up a bit this year from last year because we did a good job of buying our coal last year in 2007.

We think those larger material categories out the kind of cost changes you are talking about are difficult.

It might lead you to other configuration considerations but really I have nothing to say on that at this point.

Okay.

Just as a follow up, I notice that there was some deferred retiree payments, you were able to get some concessions there.

It seems like that can be the tip of the iceberg, can you maybe talk about what other discussions you might be having with the Unions, to try to get some more concessions going forward?

Sure.

I wouldn't describe it so much as a concession as it just was an idea that we and the Union were able to agree on.

It was in the best long term interest of the Company.

That's how we try to work cooperatively with the Union leadership.

That was one item we could deal with.

There are a variety of other matters we talk about all the time to try to maximize productivity and make sure that we are doing the best thing for the Company while also being faithful to the agreements that we have.

I don't want to get into too much labor negotiation on the phone.

You can appreciate that.

But quite honestly our labor contract is very competitive.

The productivity provisions are very good.

We are able to be very flexible on labor and while we continue to manage that cost item as aggressively and appropriately as we can, any sort of near-term major changes may be more difficult to achieve because again the amount of actual production we have, the amount of labor we are using for that is probably not our biggest cost issue right now.

Okay.

Thanks a lot.

I will turn it over.

Our next question comes from the line of [Jeff Kramer] of UBS.

Please go ahead.

Morning.

Morning.

If you can just comment on, from a volume perspective, the mix between spot and contract sales during the quarter and how that shaked out and you see shaking out in second quarter?

We usually talk about sort of a 50/50ish kind of a blend between contract and spot.

That's been blurred a little bit because three or four years ago contract meant one year fixed price for everything.

Our contract business has had a little bit more flexibility introduced into it together with our customer and to a discussion with them.

So we have contracts that have some variability either based on cost input which we agree on a score card to measure or some mark input one of the public indices that you can see in the publication every.

So even a contract business will have variability but generally speaking our contract business is a larger portion now just because some of the contract industries have held up relatively speaking a little bit better than some of the spot industries we sell to.

Neither one are doing very well of course but the blend right now might be more 60/40ish something like that.

Maybe a little higher than that.

Maybe for Gretchen just on the revolver, is that only going to be secured by inventory and is it subject to advance rates?

Yes, it is subject to advance rates.

That's a very typical structure.

It is primarily inventory.

There's some other excess accounts receivable and things that go along with that but it is primarily inventory.

I guess the do you expect it to be $750 million and curious why you went down this route versus a straight cash flow revolver?

Well, we had been operating with a secured credit facility since 2001 until about 2007 when we put this unsecured $750 million revolver in.

It really, in order to facility getting the amendments to drop the existing financial covenants out of the revolver, and out of the term loans, the $655 million of term loans we have outstanding we just concluded that it was appropriate to in addition to revising pricing, agree to provide, go back to a borrowing base type secured facility.

Now, the thing that we have to keep our eye on is that of our existing inventory, the first $655 million goes to the term loans, whatever eligible inventory there is, and there's a lot of definition around that.

So, we just think that, we can't say and you will see from our disclosures that we are always going to have enough collateral to support $750 million of revolver.

So that is why we are trying to repay the term loans, but that will free up whatever is left if we are able to do that for the revolver and be less likely to have that constrained.

Our next question comes from the line of Luke Folta of Longbow Research.

Please go ahead.

Hi.

Good morning everybody.

Morning, Luke.

My first question you had thrown a number out there for raw material costs in Europe at 65, $70 per ton, I am assuming that's iron ore, can you give us the approximate met coal costs would be over there in the second quarter?

The number I mentioned was in fact ferrous inputs.

That's just a one element I think I was thinking ferrous probably be different percent for lump ore.

The coal costs would have had the same general trend, the numbers would have been higher and maybe our coal costs was over 200 and maybe it is coming down to 110, 120 something like that I am just trying to do it from memory but I think it would be -- roughly it will be probably in the 120, 130 and it was probably quite a bit higher than that at the peak of the merchant market we were buying in last year, 180 to 200, something in that range, maybe even higher.

Okay.

Just in your tubular business, can you either give us a monthly break down of shipments or just tell us where you left the quarter from a capacity utilization standpoint?

Well, I can't.

I don't have it in my head monthly.

I can just tell you that during the first quarter, the trends was pretty sharp decline starting really at the very end of the year and then running through the first quarter.

I think we sort of tipped you off on that in our earnings outlook in the January discussion.

And at this point we have all of our welded tubular -- this is all in the disclosure, we have all of our welded operations are effectively idled at the moment.

Maybe there are some sporadic runs but very little.

We are really serving whatever market we have which is not very much thanks to the import situation from our two seamless plants in (inaudible) and Fairfield, Alabama.

So we are just running two seamless mills, three mills, two plants, even they're at a reduced schedule.

It is not a capacity utilization rate but if I had it wouldn't be very high.

One more quick one regarding your iron ore costs domestically.

I'm sure with the utilization so low, fixed cost absorption is a lesser amount.

Can you just give us a ballpark quantification on what the quarter-over-quarter increase was in -- per ton and iron ore costs in North America?

I dont have that in my head either.

I am just going to be guessing.

I think we went into the year and I am going to give you a deliberate number, that's the number I look at production plus transport to the Midwest furnaces would have been in the $50ish range probably and when we look at the drastically reduced tons I don't keep track of it that way because we have isolated the idle facility costs but it would be -- if you took all of the costs of those much fewer tons, it would be a much higher number, it would probably be in the 60s I would guess, something like that.

Our next question comes from the line of Timna Tanners of UBS.

Please go ahead.

Hi.

Good morning.

Two questions, one is if you could give us maybe if Gretchen could go through and give us a little bit more detail on how to think about working capital liquidation?

It was a really big number in the first quarter and you anticipate further but can you give us a little bit more detail around that?

Let me just start, while Gretchen is getting her 10-Q handy.

I am going to use the earnings release, simpler.

As Gretchen's remarks mentioned, the first quarter working capital pull was largely receivables.

There was some inventory but you can see the components, I think in the 10-Q.

I think we have harvested a lot of the receivables.

Now, a lot of that was the large flow through from our big order in tubular the fourth quarter of last year.

We would be looking forward to future working capital that would be largely for inventory.

Inventory came down quite a bit already So just days outstanding was already 42 and I am just wondering if there's any further color that you might have on it?

I think there is some room there.

One of the things, just one of the considerations, Timna, is that we had not rushed to idle our coke facilities.

We have been running them on extended coking times and really waiting for a little more clarity on what the right direction there was.

Now that we ran up a considerable amount of coke inventory and now we have idled our coke facilities we have a fair amount of raw material inventory to draw down as a result of that.

So while we made pretty good progress over the fourth and first quarter on our skill inventories we still have room to go particularly on raw materials.

We did have a normal level of inventory on the pellet side and we are running those down as well with the idling of the pellet operations.

We are also redirecting materials of all kinds but mostly coal coke and iron from the idle facilities to consume that at active facilities.

So we can generate cash from that as well.

That's seems to be a sensible thing to do.

And we are going to try to minimize what we buy particularly on the coal side, and we made pretty good progress on that, there's discussions still going on.

That's more of a commercial matter.

We won't get into too much detail But I think as Gretchen pointed out on the steel side including some material that we are idle facilities that we could convert and apply to an order we have been doing that as well.

So we are looking to take inventory down every way we can, better way that's consistent we are still giving our customers what they need in this difficult market.

Another question, is if you can please give us a status report on the glass furnaces at Gary Works.

So there's reports in the media as I am sure you have seen on number 14 in particular and then some restart problems I think might have been smaller.

If you could characterize those for us and give us any time line you might have for restarts of those?

There's usually more reports than are necessary, and you could decide how much of it is actually factual.

But what the facts are is that the smaller furnaces are fine.

We are making the iron we need.

The large furnace number 14 relatively new did have an unexpected failure in some refractory lining.

That furnace has been off for a week or so since it happened, we are doing diagnostics and a fairly technical team onsite.

We have got a medium term repair plan that should have the furnace repaired and closed and beginning to get back in operation by the end of this week, early next week, something like that is the current schedule.

Don't hold me to the day because those things change pretty quickly.

Then we will run it at some reduced level to make sure things are okay until we feel more comfortable.

It may be that we decide based on more diagnostics and some more analysis and technical assistance that a more extensive repair in that area would be needed.

It is not a huge thing if it is, it would just be a matter of scheduling and unfortunately in this market we have got some flexibility of the schedule.

But our blast furnace issues are not in any way restricted our ability fortunately to meet the customer demand that we have.

Our next question comes from Brett Levy of Jefferies and Company.

Please go ahead.

Hey guys.

It looks like you guys are in full covenant compliance after the amendments and this next transaction.

Can you talk about kind of where you are with your banks and if there's anything coming up in the next couple of quarters where you are going to need additional amendments?

Brett, we took these steps to avoid having issues later this year.

So we have received all of the necessary consents we need from all our banks on the term loans and on the revolving credit facility.

The amendment is subject to definitive documentation which we expect to have in place by end of the second quarter and is subject to collateral reviews and those sort of things.

We don't anticipate having any problems getting that in place.

Once those amendments are in place, the only financial covenant we have will be a fixed charge coverage covenant which only comes into play in the event that the availability under the revolver falls below a certain level which is approximately $112.5 million as we disclosed in our 10-Q.

That's a similar type covenant that we had under, when we operated under a secured credit facility before.

So we are pretty comfortable with that type of covenant as long as we maintain sufficient availability under the revolver, it shouldn't even come into play.

What is liquidity pro forma for the transaction?

I'm not allowed to talk about the transaction on this call.

I'd just have to refer you to the documentation, to the prospective supplement that has been filed there's some information in there.

Thanks much.

Our next question comes from line of Brian Yu of Citi.

Please go ahead.

Thanks, hey John, if we assume there's a slow recovery in apparent demand, what are the opportunities to reduce some of your idling costs maybe by taking them off idle and complete shut down and also can you give a sense of what the restart time difference is between the two?

Sure.

The first part of your question, everything that we put back into production absorbs costs and we get additional product out.

So the correlation is very direct.

Of course I don't have an algorithm that could easily be recited as to how it would work but if you just look back in our quarterly data in the last two, or three, or four years we've had occasional quarters where our North American flat roll business ran at 65%, 62%, 69%, rates like that.

And we were able to make a little bit of money just about break even or around break even and basically earn a living.

That correlation probably still holds relatively true today when we get back up into the mid to higher 60s things look sunnier for us.

But every percent or two certainly helps.

In the interim, since that time, we have added very strong position in tubular that can take away a good bit of flat roll when it is operating.

And we would think that gas is good and natural gas is going to have a pretty bright future and whatever energy policy there is and to the extent that the gas markets, energy markets come back and it gets up to where drillers want to drill again and we need to make pipe again that adds a little bit of strength to our flat roll operations as well.

And that would be a positive or us.

In terms of restart, it isn't a very lengthy process furnace by furnace.

We have to put some natural gas on to the stoves to get the glass stoves heated.

That takes a week or two.

And we get those to the right temperature, fill the furnace with material and we have a few days worth of operation that doesn't produce anything usable and then after that it is usable and then get $1 [million] worth of scrap and slag and we are back in business.

So it is a little bit of money, a little bit of time but quite predictable and quite achievable and we can do it all fairly quickly.

I was going to refer to what in terms of idling cost savings, additional cost savings you could realize if you were to shut down your facilities completely versus where--?

Well, that's a hypothetical and I'm really not prepared to give much detail on.

There are costs associated either way.

There are costs associated with idling and costs associated with some more permanent action involving all the components, environmental labor, facility contract, and we have done that before over many decades we have some experience in it.

But I don't have any real good figures to give you at this point on that.

These opportunity costs are taking that big of a permanent step.

There are risks to moving quickly and risks to moving slowly.

We try to avoid risks generally speaking.

I mentioned to someone recently that when we acquired National Steel in 2003, there was a school of thought, not by us but a school of thought that Granite City Works was something that should be shut down.

We looked at that and said no that doesn't seem like a good idea.

Had we shut that down we would have missed over $1 billion of operating results since that time.

So I think those are questions which have to be given pretty deliberate thought.

Not that we don't think about it.

But nothing we're prepared to say now.

That's fair.

Just a quick last one.

In terms of your FRP guidance, does that assume no change in utilization rates in current steel prices.

Well, it really assumes what we can see which is what you just described.

Okay.

Thank you.

Our next question comes from the line of Eliot Glazer of (inaudible).

Please go ahead.

Yes.

Hi, Eliot.

John, can you give us an impression of the Chinese steel situation in terms of production?

And imports with the United States?

The China Iron Steel Association Sunday was quoted as saying the production of crude steel has risen since December from 1.2-million tons a day to 1.4 million.

Some have accused them of subsidizing steel companies, offering preferential tax rates, giving access to low price materials and exempting Chinese steel firms from labor and environmental rules.

What is your assessment of the situation?

Is your assessment that they're actually increasing their production of steel?

And what about their import into the United States now that Europe has restricted Chinese imports into Europe, are we looking at even more imports into the United States?

You have a pretty good assessment about what I think about China already with some of the facts you described.

China, the steel industry in China is huge, it is hugely important to the world, hugely important to China.

And all of the factors you described run by a tight nit central authority.

Even though they're called companies they're really just individual expressions of a government policy.

They have their own view on environmental, their own view on subsidy, their own view on costs and as long as that all stays inside China they're welcome to their own view.

When a product of that system enters the world trading system it needs to respect the world trading system rules, WTO, there are many cases about this and when it enters the United States or Europe it needs to respect the European and US national trade policy.

And in the tubular sector where OCTG imports from China in the fourth and first quarters were greater than end-use consumption at values that were way, way below any cost structure based on market inputs would justify, together with export rebates and capital subsidies and everything else with it, we feel that's just beyond what trade laws, would allow either international national.

As you saw our industry participants and our Union took action with a trade case filing just a week or so ago.

It is really hard to tell, and there are a number of other trade actions already on the books, one is finding its way to completion on line 516 inch well design pipe where we sought together with other companies, antidumping and countervailing duty, both antidumping below costs, countervailing being illegal subsidy.

We won on both, they're additive and it will make a very distinct impression on trade flows that are not in compliance with our national trade laws: we we make no apology for that, that's what the laws are and they should be applied as far as we're concerned.

Hard to tell what the real trajectory is for production and consumption in China.

Recent reports suggest that industrial production and property market and the other large steel consuming industries in China may be doing a bit better, but very hard to tell.

I think the policy in China of trying to reduce some of the older inefficient capacity, and have larger more efficient facilities that the sensible one, policy which says they don't want to have extensive exports is a sensible one.

So we will have to wait and see what kind of behavior is actually entailed.

The World Steel Association forecast which was out other the weekend or yesterday or some time you can see I think predicts 400 some million metric tons of apparent steel demand from the China industry.

That seems like a bit of a low figure to us, but it may well be right, but I don't have really a good crisp view of the actual results in China at this point.

I can tell you it's something we watch carefully.

Sorry for the long answer but it was a good question.

Our next question comes from the line of David Gagliano of Credit Suisse.

Please go ahead.

Great.

Thanks.

Just following up on the contract versus spot question earlier, you mentioned more flexibility in the contract business, when were the majority of the contracts signed and when do they start to roll off?

That's my first question.

That's a good question, David, most would have been entered around the end of last year with the calendar start, that's a general rule for most but not all, and some portion and I don't have these broken down but some would be quarterly reset, some would be semiannual resets and some would still have an annual factor and here would be meaningful percentages across all three of those.

I just don't have the break down in front of me right now.

And there are some other contracts that because of just history in customer preferences don't have a year end date.

We have some that we, I think just worked on at the end of -- effective at the end of to month and some will be effective expiring at the end of June and we will work through those as best we can.

Okay.

That's helpful.

Thanks.

My other question, my second question, you mentioned in the prepared remarks, expected pension costs of about $440 million in '09, two questions, how much of that actually flows through the income statement for the full year and how much actually flowed through the income statement in Q1?

Well, let's see, 440 that's our estimate of the year for both pension and OPEB.

In the first quarter, let's see, Dan.

Get that?

159 I believe.

Did you say 159.

I thought we had that.

164.

Okay.

164.

Fair enough.

Then my last question, just if you can quantify the LIFO impact in Q1 and the expected LIFO impact if there is one in Q2?

LIFO it is hard to forecast that.

We did highlight it in the fourth quarter because really the significant decline at the end of the year ended up having a -- creating a significant LIFO credit.

Really all that means is that it is just a cost thing, approach.

So maybe some of that should have been earlier in that year.

There really isn't a significant impact in the first quarter really to talk about.

Our next question cops from the line of Tony Rizzuto of Dahlman Rose.

Please go ahead.

Good morning, everyone.

Morning, Tony.

Hi, John.

I just wanted to follow up on that capacity utilization question again because I obviously I do think it is critical in the environment.

And with the tubular acquisitions you have made, obviously with that market being very depressed, has that now reduced if you were to look at the break even level?

It seemed like your comments were alluding to a break even level that might even be -- have to be a little bit higher or capacity utilization that might have been even higher given the depressed state of tubular right now?

Well, you would have to I guess make an assumption about what's happening in each individual market.

This is a very unusual time now because looking back over our history, Gretchen ad I talked about this last night that in, at least in our history, it is unusual to have all three of our major segments in such difficult times at the same time.

Generally we've had some countercyclicalty and they're generally running to slightly different markets.

So that has been a real difficult thing for us that makes it even more difficult.

But when we added the Lone Star Texas operations let's use 1 million-tons for sake of discussion, and for a short time we were sourcing virtually all of that from either Granite City, Fairfield, well, let's just assume Granite City for the same of discussion.

That amounts to one blast furnace operation that would be supported by that.

And that would help us if the tubular business was otherwise strong when the flat roll business wasn't which is not uncommon.

That was a real positive for us, not having the operation running now isn't necessarily negative but it wasn't positive through the end of last year when we had what amounted to an existing furnace running to keep that operation filled.

So it is not, I wouldn't imply too much precision that that will make future break even more difficult.

It would just be a lot better if tubular was going well and both the Texas operations and the seamless operations because we are making rounds in Fairfield when that energy market is strong it does tend to support our flat roll utilization.

How do you see the second half playing out, John with respect to the auto situation, destocking of service centers?

Everything else remaining the same, how do you see the situation evolving from that perspective and some of your other key end markets outside of tubular?

I wish I had a good crystal ball Tony, but it hasn't been working well recently.

We sure hope that things improve but we don't really have anything empirical in front of us today that tells us that the lead times are short.

We talk to our customers about what they see through the end of the year.

Their general response is we're not sure either.

No one really has much visibility.

There are are uncertainties in the auto sector that can yet be difficult for all of us to deal with.

Maybe it works out well, maybe it doesn't.

It will be something we have to get through.

Certainly the credit markets making some progress and being more stable.

That would be a hugely important thing because whether it is residential, auto, appliances a lot of that is more discretionary, consumer oriented.

That would be very very important to us.

We look at the inventories we can see and whether it is the European service center inventories which have come down a little bit recently which was overdue or the MSCI inventories here we look at flat roll and we are down to the lowest level in probably five years, maybe not low enough in terms of sales just because their end use sales have not been very strong.

We would like to think that the production of the industry at 41% last week whatever it was is probably below end-use consumption and therefore the stock drawdown has to be continuing throughout the entire supply chain.

But when that line crosses usually there's a pretty good response but we don't really see anything, as far as we can see which isn't very fair that tells us that line has been crossed yet but everyday we go like this we should be getting closer to it.

Our last question comes from the line of Mark Parr of KeyBanc Capital Markets.

Please go ahead.

Thanks very much.

Good morning.

Morning, Mark.

One thing I was curious about and you have, John and Gretchen thanks for all the color that you've given on current operations.

And that's all really helpful.

But I was just wondering, with the, with some of the changes that you have made and you have gotten buy in on this macro environment, not only from the banks but from the Union, executive management really seems like there's a tremendous coordinated effort here to enhance, ensure the viability of your Company.

I want to congratulations you on that.

Thanks, Mark.

Thank you.

But I was wondering if you can provide a little more color on, kind of how you view your liquidity needs.

Is there, given what you have done here, could you talk about the underlying assumption that went into determining, these are good things or these are the necessary things that we need to do?

And also could you talk about are there any incremental things that you have got in your back pocket kind of on adjusting case basis, things do not improve the next months?

I will let Gretchen comment.

Taking the second part of your question first, Mark, there's a couple of things, but one, the agreement by the Union to allow us to defer up to $170 million of contributions that we have made or otherwise would make, that's very helpful and I look at that as a term pool of liquidity if you will.

Also, in the past we have made significant voluntary contributions to our retiree health care trust.

If you went back over the years and added up everything -- everywhere we said we made a voluntary contribution there it would be on the order of $130 million.

So right there you have about $300 million of a near-term liquidity pool that we can reimburse ourselves for retiree health care cost.

That's a very positive thing.

Also our pension plan, while we had a very -- as everybody did, had a tough time in the market last year, by virtue of our $1 billion of voluntary contributions there, we are at least in a position this year where we don't have to make a contribution should we not want to.

Those are kind of what I call near-term flexibility, okay.

Okay.

But as far as our liquidity needs going forward.

One of the things that we have been trying to position ourselves for and plan for is that as we've taken significant working capital out of our business, and intend to continue to drive that down as our, if operations stay where they are, at some point as things turn and it can turn pretty quickly as John talked about the inventory situation in North America, we are going to need some significant working capital build.

So we are trying to position ourselves with -- ourself with all of these actions to be in a good position as things turn around to not have real liquidity constraints as that comes to pass.

So we are really trying to look, give ourselves as much flexibility for as long a period of time as possible.

Okay.

Thanks.

Thanks very much.

Thanks, Mark.

I appreciate your comment by the way, the conclusion you reached was precisely what we hoped thoughtful observers would reach that we are trying to demonstrate that everyone in the Company's involved in making sure we do the right thing.

So I very much appreciate your very thoughtful comment.

There are no further questions in queue at this time.

Please continue, sir.

That is it for the day.

We do have a tight time schedule and we appreciate you getting up this morning to be us.

Thanks for changing your plans.

We will talk to you again next quarter.

Ladies and gentlemen, that does conclude your conference call.

On behalf of today's panel I would like to thank you for your participation and for using AT&T.

Have a wonderful day.

You may now disconnect.