美國鋼鐵 (X) 2010 Q2 法說會逐字稿

Welcome to the United States Steel Corporation second quarter 2010 earnings conference call and webcast.

(Operator Instructions).

I would now like to turn the conference over to Dan Lesnak, Manager of Investor Relations.

Please go ahead.

Thank you, Linda.

Good afternoon, and thank you for participating in United States Steel Corporation's second quarter 2010 earnings conference call webcast.

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

Next, I will provide some additional details for the second quarter, and then Gretchen Haggerty, US Steel's Executive Vice President and CFO, will comment on the outlook for the third quarter of 2010.

Following our prepared remarks, we'll 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 statements or projections made on today's call.

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

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

Thanks, Dan.

Good afternoon, everyone.

Thank you all for joining us again.

Earlier today for the second quarter we reported a quarterly net loss of $25 million or $0.17 per diluted share, a significant improvement from the first quarter as we returned to profitability in our North American flat-rolled segment, and we had continued improvement in our already profitable European and tubular segments.

As you likely have noted, the net loss included a foreign currency loss that decreased net income by $0.62 per diluted share, which is more fully discussed in our earnings release text.

In the second quarter, we had another strong operating performance as our facilities ran very well producing good results for each of our reportable segments.

However, due to the foreign currency loss and an unusually large tax provision, not all of the benefit from our strong operating performance got to the bottom line.

And while we do not normally look back to prior year quarters in these discussions, permit to us note with pleasure that our segment income from operations improved by more than $750 million over the second quarter of 2009 during the depths of the steel recession.

Now turning to our operations, we reported second quarter income from operations of $198 million compared to a $57 million loss from operations last quarter and a $465 million loss from operations in the second quarter of 2009.

Our segment income from operations was $241 million or $41 per ton compared with a loss of $13 million or $2 per ton in the first quarter.

A $254 million improvement in our quarterly segment operating results from the first quarter was primarily due to a $178 million improvement in our flat-rolled segment and a $51 million improvement in our tubular segment.

As a result of the significant improvements for the flat-rolled segment in the second quarter, all of our reportable segments were profitable for the first half of 2010.

The improvement in flat-rolled results for the second quarter was primarily due to the benefits of higher average realized prices and shipments, lower energy costs and increased production volumes.

The benefits from these items were partially offset by higher facility repair and maintenance costs and higher costs for purchased coke and scrap.

Our flat-rolled raw steel capability utilization rate increased to 82% in the second quarter, our highest quarterly operating rate since the third quarter of 2008.

This reflects another strong operating performance in the second quarter, as our steel making facilities that operated for the entire quarter achieved a utilization rate in excess of 90%.

With the completion of the restart of operations at Lake Erie Works late in the second quarter, we had all of our facilities operating at quarter end.

Shipments increased to 14% to 4.1 million net tons and average realized prices increased to $700 per net ton, an increase of $46 per net ton from the first quarter, primarily due to higher and index-based contract prices.

Second quarter results included approximately $60 million of repair and maintenance costs at our Lake Erie Works, where we did extensive work on the major operating units in connection with the restart of that facility.

Second quarter results for our European segment improved slightly from the first quarter, as an increase in Euro-based transaction prices was offset by higher raw materials costs.

Reported average realized prices for our European segment were $687 per ton in the second quarter, almost 12% higher than the first quarter average of $614.

Average realized Euro-based transaction prices were substantially higher in the second quarter.

However, the currency translation process offset a portion of the Euro-based price increases that we report to you in dollars.

Shipments increased by 9% to 1.4 million tons, primarily due to lower -- I am sorry, shipments decreased by 9% to 1.4 million tons, primarily due to lower shipments to spot market customers.

Second quarter tubular income from operations of $96 million was more than double first quarter results, as operating rates increased throughout the quarter in line with increasing rig counts for both oil and gas development.

Second quarter tubular results reflect higher average realized prices and shipments for both seamless and welded products.

Average realized prices increased 8% to $1,496 per ton, the highest level since the second quarter of 2009.

Shipments increased for the fourth consecutive quarter to 433,000 tons, a 40% improvement over the first quarter.

Now before turning the call over to Dan, I have one more item I would like to cover.

We frequently comment in this forum on our safety performance, as it is one of our core values and a constant focus in everything we do.

Although our second quarter safety performance reflects continuous improvement in our key measures, we are not off to a good start in the third quarter.

We had a very serious incident at our Clairton coke plant which resulted in injuries to employees and contractors and a significant injury at the Gary Works high line.

We are saddened and deeply troubled by these events.

We do not accept excuses like "accidents happen" or "it's a dangerous job." It is still our firm belief that zero incidents is achievable and recent events will not deter us from continuing our efforts to achieve this most important goal.

We're committed to finding the root cause of these incidents, and we will move swiftly and decisively to take appropriate corrective action.

Our thoughts and prayers are with our injured colleagues for a speedy recovery from their injuries.

With that, I will turn the call over to Dan for some additional details about the quarter's results.

Dan?

Thank you, John.

Capital spending totaled $117 million in the second quarter, and we currently estimate the full year capital spending will be approximately $710 million.

Depreciation, depletion and amortization totaled $162 million in the quarter, and we currently expect it to be approximately $660 million for the year.

Pension and other benefits for the second quarter totaled $110 million, and cash payments for pension and other benefits were $122 million in the quarter.

For the full year, we expect our pension and other benefits cost to be roughly $425 million, and we expect cash for pension and other benefits to be approximately $700 million, which includes the $140 million voluntary contribution we made to our main defined benefit pension plan in the first quarter.

Net interest and other financial costs totaled $150 million in the second quarter and included a foreign currency loss of $96 million.

Excluding foreign currency effects, interest expense for the third quarter is forecasted to be $60 million.

Our second quarter 2010 effective tax rate of 150% is unusually high, largely because losses in Canada and Serbia, which are jurisdictions where we have recorded full valuation allowances on deferred tax assets, do not generate a tax benefit for accounting purposes.

The geographical mix of our future pretax results could have a material impact on our reported effective tax rate, as it has in the past.

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

Thanks, Dan.

Our cash balance decreased by $439 million in the second quarter, primarily due to a $515 million increase in working capital as steel prices and operating rates continued to increase.

Our liquidity remained strong, as we ended the quarter with $947 million of cash and total liquidity of approximately $2.5 billion.

As Dan indicated, we now anticipate our 2010 capital spending will be approximately $710 million, substantially higher than the $560 million we had mentioned on last quarter's call.

The increase is primarily related to an acceleration of our strategic coke project at Clairton and Gary Works.

Turning to our outlook, we expect to report an overall operating profit in the third quarter as the US and European economies continue to work their way through a gradual and uneven recovery process.

Operating results are expected to be below the second quarter, largely due to a decrease in shipping and production volumes for our flat-rolled segment, reflecting slower order rates primarily from spot market customers thus far in the quarter, which likely includes some normal seasonal variations and the impact of shorter lead times.

However, reported carbon flat-rolled inventory levels on a month of supply basis at North American service centers remained below historical averages, and end-user demand appears stable.

Similar market conditions prevail in Europe.

Third quarter 2010 results for flat-rolled are expected to be near breakeven levels due to lower trade and intersegment shipments and production volumes, and increased costs for raw materials and energy.

The favorable effect due to the absence of Lake Erie Works repair and maintenance costs is expected to be offset by increased costs primarily related to planned maintenance work on several blast furnaces and repairs of the transportation system used to deliver raw materials to the blast furnaces at Gary Works.

We expect average realized prices for the third quarter to be in line with the second quarter, as the benefits of a higher value-added mix of shipments and increased prices for both index-based contracts and recently negotiated contracts offset decreases in spot market prices.

Third quarter results for USSE are expected to be comparable to the second quarter, as the benefits of higher Euro-based transaction prices are offset by increased raw material costs.

We expect slightly lower shipments due to reduced order rates from our spot market customers and normal seasonal variation.

In response to these lower order rates, we have idled a blast furnace at US Steel Serbia.

We also have begun planned maintenance work on a blast furnace at US Steel Kosice.

Third quarter results for tubular are expected to improve as compared to the second quarter.

The benefits of higher average realized prices and decreased costs for steel substrate are expected to be only partially offset by the impact of lower carbon OCTG and welded line pipe shipments.

The results for other businesses are expected to be lower in the third quarter, due primarily to the second quarter impact of a land sale by our real estate operations.

That concludes the outlook.

Dan?

Thank you, Gretchen.

Linda, can you please queue the line for questions?

(Operator Instructions).

And we'll begin with the line of Michelle Applebaum with [Steel Market].

Please go ahead.

Hi.

Hi, Michelle.

Just noticed the land sale.

How much was that in the quarter?

From the other businesses?

It was probably most of the income related to the other businesses.

It was 16, 17, 18 million, somewhere in that zone.

And can you talk about what your operating rate is right now, and do you have any plans to change that domestically right now?

Well, I don't know exactly what it is right now, Michelle.

You saw what we did through the quarter; we ran it, I think, at 82%.

We did have an operational issue at Gary, where we have four blast furnaces.

As it happens, we have one of those furnaces down at Gary already for maintenance, and that project is underway.

The other three were interrupted for a short while, but they're all back up and operational now.

So I think the AISI figure I just saw a little while ago came out, and it was -- the industry figure was 72% or 73% or 74%, something like that.

I think we're probably today operating in excess of that, but probably below where we operated for the second quarter.

Just in terms of looking out further, if market trends that we talked about in our release would stay as they are, we probably would be in that range, somewhere perhaps above the AISI figures but below what we did in the second quarter.

We could go up to the same level.

We'll have plenty of fire power.

We could go up to a higher level by some, if there was a market need to do that.

We hope there is, but we're prepared to really go either way.

In terms of the rest of our operating sort of configuration for the quarter, there is some commercial knowledge in that.

I am not sure we want to say much more than that.

Okay.

That's a lot more than I would have expected, so I appreciate that.

Can I ask what the economic back drop is of what you're saying?

Everybody is saying -- well, a lot of people are saying this is seasonal, but they're not -- but they're saying there is no automotive cutback, and my experience in life is that most of the domestic flat-rolled seasonality is automotive in the summer.

So just wondering about that.

It is not clear to us what is happening in the market, Michelle, to be honest.

I will give you our take on it.

I think our view is that the customers, groups and markets that is we're into, that there are materials going pretty far into the end use market -- you just mentioned one market that's very important to us.

Demand there appears to be stable.

There is some seasonal issues as there are shutdowns for vacations or changeovers or whatever, maintenance or otherwise.

And they have largely gone as we expected, and I think those customer groups and markets we expect do reasonably well with for the quarter because the demand there appears to be very stable.

Those sectors that are more in the inventory carrying mode -- distribution, service center, processing, converters, et cetera -- there the mood is much more cautious.

There is a bit of a pause, has been for some time.

I think that's been pretty well documented, and we're not sure what that means, because if the end use demand that we see in the other markets remains stable, it implies probably that there is some still pretty good demand out there.

Inventories are not particularly high on a days supply basis, I think we pointed out in our release.

And lead times are relatively short, which abets that process in not ordering until the last minute.

That all could mean that there is some better order rates ahead in the third quarter, or it may be later than that.

We just don't know.

That's the environment we find ourselves in.

You can't throw anything about the economy at all, which I think is fair --

We don't, I don't think, have any particularly important insight into the broader economy other than what we would see through our customers' eyes, and I think there, there is a high degree of uncertainty.

There is a recovery underway.

It is going to be choppy, and it won't be a straight line, and you can pick whatever alphabet you like, but I think it is going to be a choppy recovery and it is going to take some time.

Thanks.

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

Please go ahead.

Good afternoon, guys.

Hey, Luke.

Hi, Luke.

A couple of questions.

Can you give us a feel for the magnitude of the decline you're expecting in shipments in North America?

Just trying to get a sense of what moves the third quarter number to a breakeven or at level -- at or near, I should say.

And then also, can you talk about what commodities are you seeing cost inflation on in North America?

I am assuming it is coke, but just to verify.

I will take the latter one first.

Purchased coke is a tight commodity, and we're in that market, so that's one cost increase for us.

So that would be one.

Scrap, gas, all the rest of them, they are just market-based.

You can read those pretty much at your leisure.

And with respect to other commodities, I guess there is relative stability.

Our coal costs will be a little higher in the third quarter than in the second for several reasons.

One is we have had to replace some tons that we didn't get at a somewhat higher cost, and then we have got additional facilities running that we didn't originally plan on, so we've had to be in the market for a little bit of additional coal and that's come at a somewhat higher cost.

So I think you have -- those couple would be the major commodities we would look at, then a couple of them we called out, I think, in the release.

In terms of shipments, it is not a -- our best guess is not a huge reduction -- a less than 10% reduction probably.

We did have some shipments in the second quarter that would be, I would describe, occasional, and we happen to be able to secure, which makes our second quarter number look particularly strong versus the first quarter number.

If we hadn't had those or they went into the third quarter, the numbers would be relatively flat.

So it is not a tremendous difference; it's a few hundred thousand tons probably.

Okay.

And just secondly regarding your tubular business, metal margins have expanded there pretty nicely over the last twelve months or so, and I am just -- I just want get your sense of, do you think this is kind of structural in nature since the Chinese import restrictions have been put in place?

Or is this something that we think could kind of flatten out here?

Oh, it's hard to say.

Look, I think it is likely to be a very competitive marketplace, Chinese imports have -- imports from China have been reduced necessarily based on the trade case.

Imports from other regions have increased to some degree.

The drilling rig rate remains over 1,500 pretty healthily, and movements into oil as well as gas on the unconventional side are a positive from our standpoint.

So we're reasonably optimistic, but if gas prices -- just on the edge.

If gas prices stay strong we're more optimistic; if they're not quite so strong we're less optimistic.

I am not so sure I would say it is structural.

It's still going to be a very competitive market, but it's a much better market for us today than it was last year.

And next we will go to the line of Kuni Chen with Bank of America.

Please go ahead.

Hi, good afternoon, everybody.

Hi, Kuni.

Hi, Kuni.

Hey there.

I guess, can you just give us a little bit more color on the spot market, sort of what -- and then this is just North American flat-rolled -- what percent was spot in the second quarter versus what you see going forward in the third quarter?

There probably will be some -- if things stay exactly as they are today -- some modest change in spot, and spot is not an easy number to talk about.

But for us, it is probably about a -- in the second quarter, it was probably about a third of our book, something plus or minus that, and it will probably be a little less than that -- maybe it's only 30% or so in the third quarter unless the spot market were to come back very strongly.

So it will be off probably a little bit because, among other things, we picked up some new business in the contract side that will take some of that and put it in a better place.

And as we said in our release, the order flow on the spot type of industries -- intermediate, inventory, holding businesses -- have been a little bit slower -- so far.

We try to make it clear that's so far.

We're not really making a prediction as to how it is going to end up.

Okay.

And can you give us a little bit more color behind the CapEx changes?

Is some of that motivated by what's happened at Clairton, or is that completely independent?

No, no, this was under way quite some time ago, Kuni.

I think if you scroll back on the videotape back into the first and second quarters, we did a bond offering that was designed to allow to us move forward on some -- what we view is some important strategic capital projects without having to pull the lever back and forth as much as we have had to do recently, and a lot of that is aimed at the carbon side.

The last question I answered -- and I mentioned that purchased coke is an expensive item for us -- replacing some of our capacity at Clairton, which will be going out of service for environmental reasons in the intermediate term, is necessary; and also increasing our capacity and replacing some other capacity at Gary Works to give us additional coke capacity and have to buy less in a very tight market.

That's been underway for some time, and we're just getting the projects underway to where we want them to be, and it's precisely the reason we did the capital raising activity back in March.

Gretchen, anything you want to add to that?

No, I think we're just getting a little more defined scope, and since we're proceeding expeditiously, particularly on those coke projects, we're just saying that the spending is going to occur sooner rather than next year, for example.

Okay.

Great.

I will turn it over.

Thanks.

Thanks, Kuni.

Next we will go to the line of Timna Tanners with UBS.

Please go ahead.

Yes, hi.

Good afternoon.

Hi, Timna.

Hi, Timna.

Wanted to ask a little about tubular.

So two questions really.

Wanted to know why the volumes aren't ramping up more given the really strong signals you have given us for a while on demand.

What might be going on into the third quarter to bring volumes down a bit?

We're not expecting a huge ramp down.

I just think the market has reached a little bit of equilibrium, that inventories are probably at a decent level, and the rig rate is likely to stay maybe more stable instead of ramping up as it has.

Imports have come up somewhat, particularly on the carbon grades, and that it is making things a little more competitive.

So it's that just combination of factors.

It may be that we're being too conservative, but if that's the case, so be it.

But I think it is more a sign of stability and maturation of the market in some of the tight conditions and certain grades that prevailed three or six months ago maybe are a little more well supplied now.

Okay, so along those same lines, we have some new capacity -- last I saw was still starting up in October about 400,000 tons.

Will the market be more -- will have a greater appetite by then, or will they be potentially taking some market share?

I mean, how do we think about the size of the market with some of the capacity increases coming up?

That's a valid concern, Timna.

It is a very competitive market out there, and we're going to compete with along with everything else to keep our share and hopefully to gain some share.

I think in a stacked market, bringing in additional capacity is not an easy thing to digest.

We think we can distinguish ourselves with a lot of our customers by having the metallurgy, which is superior in most cases, because of the steel making capacity we have, by providing a very secure source of supply because we've got lots of steel behind our pipe mills, by having good heat treat capacity, and increasingly by having some very important connections that the marketplace, particularly in unconventional gas, have found very, very suitable for their needs.

So we're going to be in there competing as hard as we can.

But when the room gets more crowded, it is not as easy to make your way.

So we'll just have to compete.

Okay, thanks a lot.

Next we'll go to the line of Brian Yu with Citi.

Please go ahead.

Great.

Thank you.

Good afternoon, everybody.

Hey, Brian.

Hi.

John, with the repair and the maintenance expenses, can you give us a sense of how much -- what your spending is temporary and likely to go away as you get all of these short-term fixes done, and how much would be, like, sustained levels if you were to assume an 80% utilization rate?

Sure.

Well, I think the big lump that we had at Lake Erie that was mentioned was $60 million.

And that's quite an usual matter.

We hadn't really done any work there since we acquired the facility basically because we ran it really hard in 2008 and we basically took it out of service, so there was a big catch up with a lot of work there.

If we were just looking at that versus what we would normally do in the third quarter on outages, it would be a reduction.

It would be not quite half probably, but it would be less than that.

In doing the comparison, though, where we guided to you basically an offset, we did add in costs for the Gary high line matter, a little bit of (inaudible) and a few other things that are just going to be special for the quarter.

So I think in total, we won't see that effect, but I would hope we could see it in the future.

Okay.

And then this is a little bit more detailed question.

In the supplemental information, it looks like USSE for a couple quarters now showing about $20 million to $25 million in intersegment sales.

Is this USSE shipping product to North America?

I don't think so.

I am a bit stumped on that.

Flat-rolled an tubular --

Well, we -- but that wouldn't be intersegment, that would be intra.

So I am not sure we would have slabs.

We move slabs between operations.

Let us take a note on that, and Dan or I or Gretchen will get back to you on that one.

Okay, thank you.

And next we'll go to the line of Brett Levy with Jefferies.

Please go ahead.

Hi, good morning, guys.

It's actually David (Inaudible) for Brett.

Just had a question on CapEx.

Do you have a number in mind for 2011?

CapEx for 2011 -- no, not really.

Gretchen, I think, gave you a view -- or Dan or both -- a view of what CapEx will be for this year.

To the extent we get into a couple of significant projects, they do tend to carry the number to a somewhat higher level.

I just might add, when we -- I would think equal or higher would be my general observation, assuming that business conditions support it.

When we look at our CapEx on a per-ton basis, either produced or shipped, we have been on the below average end of things, and we probably need to just move ourselves back towards average, which we were working on prior to the recession and we're now back on the path again.

So I would say we don't look out that far.

We have no plans where I could give you an exact number, and probably in the same zone and maybe a little bit higher.

Okay.

And then kind of in the same vein as Michelle's question earlier, can you give us an idea regarding the European operating rates just in terms of kind of where you think they're going to be in 3Q versus 2Q, just -- and more along the lines of kind of like a month to month breakdown for 2Q.

Like has it -- let's say June -- or I am sorry -- April, [85, 87, and then 91], or how did that look during 2Q?

I don't really remember the monthly operating rates.

Gretchen, if you do, feel free to comment on it.

But I think in the second quarter or at the end of the first quarter, we had some problems at one of the Serbian furnaces that we probably improved during the quarter, but that would be just one happenstance issue.

We had some work being done on one furnace that got done.

I am not sure that the month to months make a lot of difference.

I do think that with, as we said, I think we took a furnace off for business condition reasons in Serbia already, so in all probability our utilization rate in Europe will be lower in the third quarter than it was in the second quarter.

How much, don't really know until we get to the end of the quarter.

The lead times there are also short; although like I could say in Europe, it feels like perhaps we have worked our way a little further along in the adjustment process in Europe than in North America.

And while we're still not prepared to say there is a turn or we're getting optimistic again, it feels like there is a little bit more traction in the spot markets in Europe than there are so far in North America.

So it will probably be lower, but until the market tells us how much we have to make, it is really hard to say how much.

Next we'll go to the line of Mark Parr with Keybanc Capital Markets.

Please go ahead.

Okay, thank you very much.

Hey, Mark.

Hey, John, hi, Gretchen.

Hey, Dan.

Mark.

A couple of questions.

First, just trying to get a little more color on your outlook commentary for the domestic flat-rolled business, and just want to get some specific comments.

I mean, you talked about we're not really sure whether the spot business will be 30% of the mix or a third of the mix.

I mean, does your commentary skew towards one way or the other as far as that potential outcome?

No, not really, Mark.

I think again, what we're observing in the marketplace is that those customer groups that are again heading more towards the final destination showed some pretty good stability, and end use demand there is pretty good.

Order rates are still relatively firm, not much different than they were in the earlier months and quarters of the year, and so we're pleased that there is stability there, and we're expecting to have a pretty good run with those customers in those sectors.

The spot oriented industries, those are holding inventory with lead times for hot roll at three weeks -- maybe less, maybe more, but let's say around three -- versus five or six at the end of the prior quarter, provides an opportunity for inventory holding, spot oriented customers to take their time, and not buy until they really have to, and I guess those lines haven't crossed yet.

They may cross this week, next month, we just don't know that.

But if end use demand remains relatively firm, we're a little unsure as to how long the spot industries can go without ordering.

But maybe we're not there yet.

Okay.

So I mean, if we're looking at volumes down a little bit -- say it is down 7% or a couple hundred thousand tons, and pricing it relatively stable -- and arguably, with a mix that's actually a bit richer in the third quarter than the second quarter, is that fair?

Just because of some of the spot -- your trade business or spot business, those prices have rolled over, but you've got a higher mix of higher value business or contract business that arguably would be higher value as well.

Is that fair?

I think the mix from a price stand pointed mix will be a little higher value and that's from some of the reasons you described; but also we'll have, I think, a little less semi-finished business in the third quarter, which has that effect.

But to be clear, Mark, that's the prices -- that doesn't necessarily mean the margins weren't really good about on the business we're not going to have.

So the margins were pretty health in the second quarter, so even though our mix may be richer, the margins don't necessarily have to go exactly that same way.

Okay, so I guess -- so really what we're looking at -- is it coke?

I mean, if you look at 3Q versus 2Q on the -- if you were good, is there a way you could help us to understand the magnitude of where the cost pressure is coming from?

I mean, is coke the biggest issue?

And if it, is how long do you think that persists?

It isn't, I don't think, the biggest issue just looking quarter to quarter -- and I wish there was one simple answer for you.

But I think it really goes across a range of topics, several of which you have already hit.

Prices will actually be positive, I think, as you noted we said.

Volumes are a negative.

That negative volume, by the way, brings with it negative cost absorption, which means higher per hour labor.

I mean, the volume has other cost effects with it that are negative, not just margin on the tons that we don't have.

We have the relatively higher outages offsetting the benefit coming from Lake Erie because of these additional items that I have already mentioned.

I figured those two things would basically cancel each other out.

I think that's a fair assessment.

But we have some higher spending, higher electricity costs, some higher gas costs, and higher outage spending.

It is a fairly long list of things that just happen to be going the other direction this particular quarter.

Gretchen, anything you want to point out that's different?

No, I mean, I think to the extent that we have cut back our operations to reflect an expectation of lower orders, the spending ends up being higher, and that's probably a noteworthy piece.

Again, Mark, we don't have the whole quarter booked at this point.

In fact, I went back and took a look at it.

Our bookings for August at this point are quite a bit percentagewise of what we expect.

They are quite a bit less than they were for May at this time at the end of last quarter, which again is evidence of, I think,, the caution that prevails in the market particularly for the intermedial customers.

So we don't know where we're going to end up.

We could end up in maybe a better place.

We could end up in a worst place, of course.

But there is just some uncertainty there because we're just not seeing the orders yet in the spot businesses.

All right.

Look, thank you very much for all of that color, John.

I really appreciate it.

Thanks, Mark.

Thank you.

We will go to the line of Tony Rizzuto with Dahlman Rose.

Please go ahead.

Thank you very much.

Hi, John, Gretchen, Dan.

Hi, Tony.

I've got a question on tubular, and I see this morning that a major player in the Marcellus shale, Range Resources, ratcheted up their drilling budget and citing some pretty good margins there.

With the decreased cost for substrate -- you did indicate it is a competitive market.

We know that.

It seems you might be may be a bit overly conservative there, John.

Am I reading too much into that?

I mean, you were a little bit kind of going both ways on that a little bit, actually, in your earlier comments.

Tony, we have never been conservative.

Well, perhaps.

We're just trying to be careful and make sure that what we're saying is something we can deliver on.

Sure.

No, that's the right way to be.

The customer you mentioned is a very important customer for us -- not to talk about customers specifically.

The busier they are, the busier we will be, and we think that's good news.

Yes.

No question about it.

I appreciate it, John, thank you.

Okay, thanks, Tony.

We'll go to the line of David Lipschitz with CLSA.

Please go ahead.

Yes.

A question on -- you talked about the guidance.

What are you expecting in September?

You sort of somewhat know what August is, I guess, with the lead times where they are.

Are you using like sort of a flat July/August of what you have, and then saying -- extrapolating that out into September, or looking for a pickup in September?

There might be normally be some improvement in September just from a seasonal point of view; but we have got a pretty good read on, again, the end use customers that we're getting orders quite a ways out for.

But because lead times are short, as I just said, we're not really booked up into August at the level we normally would be because lead times are so short.

So we're taking our best educated guess at what the ultimate market requirement is going to be, and then we build our forecast off of that.

And as a follow-up, do you think the steel industry bought too much capacity down the line too quickly, or didn't demand fall more than people had thought?

I can only speak for ourselves.

We brought on the capacity we needed to satisfy what our customers asked us to deliver, so we got behind to some degree -- not a lot.

We wanted to make sure we stayed close with our customers and we picked up some new business; so we brought in the capacity we needed to keep our customers supplied with the kind of deliveries that they expect from us, and if their demand diminishes then we'll make less, and we'll either slow some things down or we'll take a furnace off.

We have done both of those so far.

So we just try to calibrate to what they tell us they need.

So you're saying that from your perspective that demand has slowed -- whether it is seasonal or not, you don't know -- but it definitely has slowed?

Well, I think in our -- again, in outlook, if you read it carefully, we said that order rates have slowed, particularly from the spot sector.

So I think we didn't make any secret of that, that's correct.

Okay, thank you.

All right, and next we will go to the line of Michael Gambardella with JPMorgan.

Please go ahead.

Hey, guys, good afternoon.

Hey, Mike.

John, I think on the last quarter conference call, you talked about -- you briefly talked about a strategy you were developing for your -- I believe your Canadian operations and using your raw material cost advantage and maybe doing a little bit more on the semi-finished products like slab and hot roll to kind of base load your operations.

How is that going, and what were your exports in the quarter, and where do you think those will be going forward?

We didn't do a lot of exporting.

It was, I would say, a de minimus number.

But again, we have some opportunities, Mike, within our system where we've got, for example, a joint venture in California where that's sort of an export for us, and our shipments there in the second quarter were pretty firm, and we did pretty well there.

It replaces something they otherwise would have imported at times like it might have in this quarter, so that was a positive for us.

Not a lot of exports otherwise.

One of the reasons being that Lake Erie is really our best export location, and we didn't really have it available until the very end of the quarter.

Your first comment is -- your memory is quite correct.

We do have a nice business now in semi-finished.

We have a long semi-finished position; it happens to be in Canada.

We don't always sell just from Canada.

We could sell from whatever plant makes the most sense for the customer based on their requirements in slab width and dimensions and metallurgy, those kinds of things, and we have done pretty good slab business in the second quarter.

It was our best month -- our best quarter so far.

We'll probably do a little less in the third quarter.

We have some volumes which are committed which we expect to be taken and we expect to make them ship.

And we have just some occasional spot business which could be export within NAFTA usually, and some of that we'll probably get as well, but maybe less than in the second quarter.

But it is a nice business for us, because the cost structure for those additional slabs is relatively competitive.

And next we'll go to the line of David Gagliano with Credit Suisse.

Please go ahead.

Great, thanks.

I just -- first of all, I just wanted to follow-up on the question earlier on the US flat-rolled expectations for Q3.

About how much of the 100 million or so decline in Q3 profit expectations is -- if you can do this -- is strictly due to lower volumes versus higher raw material and energy costs?

Can you kind of put it in buckets roughly?

Well, I guess if -- the lower volume impact broadly defined, I'd probably say is about half of it -- broadly defined.

And then -- yes, including the intersegment shipments, et cetera.

Broadly defined, it would be probably half of that number.

Okay, okay.

That's helpful .

And then my second question, on your European business, I noticed you mentioned you expect higher Euro-based prices in Q3 versus Q2.

Is that outlook driven by currency hedges that are already in place?

Is that driven by mix shift, or is something

No, it's just the market I think.

Prices moved up in Europe -- they needed to because of the raw material pressures that we were under, and that didn't really happen -- we didn't get to a decent pricing level until during the course of the second quarter, and we expect to be able to attain that level maybe more fully in the third quarter.

So I think it is just the movements in the market and being able to get it for the whole quarter versus just part of it in the second quarter.

Is that a fair (inaudible)?

Okay.

There were no other exotic --

Nothing else?

-- activities that would have changed that.

All right, perfect.

I missed the answer before.

What's the contract versus spot mix in Europe in Q3?

Oh, it's probably 30% contract, 70% spot.

We're trying to nudge it a little higher on the contract side, but it is still pretty heavy a the spot or spot related monthly indexes, those kind of things.

Okay, all right.

Perfect.

Thanks very much.

We will go to the line of Charles Bradford with Affiliated Research.

Please go ahead.

Good afternoon.

Hi, Charles.

Hi.

Pretty clearly, your retiree benefit expenses are North American related.

Could you break it down at all for us between the flat-rolled and the tubular?

Oh, I would say just -- no, we don't break it -- I don't have it broken down that way, but I mean, it's much -- it's mostly on the flat-rolled side, I would say.

There are many more retirees there.

The bulk of it is really related to retirees rather than active

Right.

So I would say it is mostly on the flat-rolled side.

We don't really break it out.

Yes, it would be quite -- there's quite a little on the tubular side.

The only other refinement, Chuck, I would give you would be that the preponderance of it relates to retirees for facilities that we no longer have and that most of us on this call never had when we operated them.

We weren't here, so they are from facilities long gone.

Understood.

Could you talk a bit about the coke project, the new technology that you are putting in?

How does that differ from the more conventional coke making?

There really doesn't seem to be a lot of information out there as to what the technology really incurs or involves.

Yes, I don't -- I think there is probably a website.

We name the technology in our filings.

It is called Carbonics, and there is a company behind that.

They have got maybe a website that has information.

I think we're under fairly -- Gretchen, help me here -- fairly strict confidentiality rules, because we have got an agreement.

So we can't say too much about it, Chuck, but I'd just tell you this.

Among the reasons we find it attractive is that it is maybe a further step down the road from recovery to non-recovery.

This is a further step down the road.

It is environmentally very suitable to the areas where we want to install it.

It can be permitted, we think, perhaps -- still with all the requirements, but with a little less difficulty because of the nature of the process from an admissions standpoint.

And importantly, we believe it will be able to be geared up and down and turned on and off without the refractory worries have you with either recovery or non-recovery.

So it has a degree of operating flexibility we find very desirable and would have loved to have had at this time last year.

And next we'll go to the line of John Tumazos with Very Independent Research.

Please go ahead.

John Tumazos Good afternoon.

Just a detail.

On the currency charge, was it based on the average rate or the June 30th rate period end?

And if the Euro reverses, is it recovered almost to $1.30 -- does that reverse in the third quarter?

Yes, it is at the quarter end rate, which was -- mostly this relates to Euro -- the Euro dollar relationship, so at $1.22, something like that, was what we were at the end of the period; so much of that has reversed even during this month.

You can do a broad calculation, $75 million to $80 million, something like that, John.

I think you're on the right track.

Thank you.

Next we'll go to the line of Mark Liinamaa with Morgan Stanley.

Please go ahead.

Hello.

My understanding is that you have entered into some long-term agreements to sell tubular into some of the shale plays.

Is that correct?

And can you talk about what the pricing structure might look like in out years and maybe a little bit of commentary on the volumes if possible?

Thank you.

Sure.

I would say we have programs, maybe, is a term that we use -- and inside of that there might be a contract form.

There might just be some kind of understanding as to how it is going to work out.

Pricing could vary from spot to some fixed for a period, although not real long; to some index for a period, although not real long.

So we're just kind of -- this is a new concept for us and we're exploring it.

The volumes are significant.

They're not small.

And if you get into OTGC, particularly in the sizes that are critical for the unconventional stuff -- shale, both liquids and gas in the size ranges -- heat treat alloy, significant proportions of that -- because our product is very desirable, and both we and the customers who need it to keep their programs going sleep much better at night knowing we've got -- they've got a committed source, we've got our capacity committed to a particular customer, and it has worked out very, very well so far.

But early stages, a variety of pricing mechanisms, but still not a lot of really long-term committed pricing, just because of the volatility we both see.

And was it done mainly at the -- kind of at their initiative?

And I guess I will leave it there at that.

I think it was a mutually desirable thing for both parties.

We were -- I think everyone -- somewhat chastened by our experiences in 2007 and 2008, and we prefer to have a much more stable relationship and worry about what our customers needed when and where, and not quite so much about how much on every transaction.

So I just think it was something that was really good for both parties.

We're very satisfied.

You'll have to ask them, but the ones I talked to, I think they're pretty pleased as well.

And they like, by the way, knowing we have got 24 million tons of steel behind the tubular products we're going to sell to them.

If they're working with us when it comes to a tight steel market, they have nothing to worry about,, and they put some value on that.

Great.

Thanks, guys.

Good luck.

And next we'll go to the line of Sal Tharani with Goldman Sachs.

Please go ahead.

Thank you.

Good afternoon.

Hey, Sal.

John, can you quickly remind us how many furnaces do you have in North America, and how many are you running at the moment?

Oh, we have -- you can add these all up -- I guess it's 12, if that's the right number.

Or 14 -- I am sorry, you can add the Canadians in.

I forgot about that.

But everything we have is operating today.

Just for the record, we have three furnaces at Great Lakes, but we only ever operate two just because of the configuration, so.

We are operating just about everything except the one at Gary Works that I mentioned we have down for some maintenance.

We said in our outlook that we have some other maintenance scheduled, but I don't want to get into three days at Grand City and four days at -- it's a very fluid situation depending on the market, depending on what we need, where we see the market, what kind of customers, what contractors are ready.

We may work on three or four furnaces, and we may only work on two.

And they may be later in the quarter, and some may go over into the fourth quarter.

So we're really not sure exactly what the schedule is going to be.

Okay.

And on coke expansion or the coke project, there was a big CapEx you had signed in 2008 and you pulled out in the back because of the downturn and then you're starting to fund that a little bit.

I was just wondering, have you ever looked at the economics of having somebody else build these plants for you and you just take the offtake, like SunCoke?

We have.

We have a SunCoke project, and we have a contract at Granite City, at the Gateway Coke Battery, which is an excellent facility and an excellent agreement.

SunCoke has been a good partner and we're taking the coke, and it allowed us to avoid having to build a new boiler house.

It was an excellent project for us.

We're very pleased with it.

It was their capital -- we're paying for that, indirectly, I am sure through the coke costs and the facility charges.

The one at Clairton that you mentioned, Sal, is really inside of our existing Clairton Works and is so integral to the overall facility I am not sure that it is feasible to have done that in any other way than doing it ourselves.

As additional things come down the road, we take a look at that, that really gets into capital allocation, financing, and I will let Gretchen comment as to whether we find that attractive, whether it is our direct use of credit or indirect.

I'll let Gretchen comment.

I will let Gretchen comment.

Yes, I would say, generally speaking, I think we have found it to be more economic to do it ourselves from a cost of capital standpoint, because there's markups in everything in there.

Sometimes for technological logical reasons or other operational reasons it makes sense; and the Granite City example, it makes perfect sense for us there.

The Clairton project, we have got a recovery battery there, and it makes a lot of sense to do it at Clairton because they have the existing infrastructure to allow to you do that.

You probably couldn't do it capital competitively anywhere else, but at Clairton where they have those facilities.

So -- but it makes sense at Clairton because of what we have at Clairton.

Oh, great.

Thank you very much.

Thank you.

And next we'll go to the line of Dave Katz with JPMorgan.

Please go ahead.

Hi, I was hoping that you could provide an update on the situation with Marathon environmental revenue bonds?

Gretchen, it's all yours.

Yes, David.

Thank you.

We've refunded most -- more than half of those, I would say.

We have got probably about 200 million remaining that we will have to refund or repay by the end of 2011.

Some of those, David, we probably can't call them quite as efficiently until really late in that timeframe, but we'll keep chipping away at them as we have been.

But I would say we have taken a big chunk of that out and we'll work away what we can between now and then; otherwise, we'll just have to refund them or repay them at the end of 2011.

Okay.

And then with regard to the CapEx plans that you talked about earlier, if you were to see demand pick up, let's say, in September, would that accelerate the expenditures that you expect?

And I guess on the opposite side, if demand weren't to pick up would you perhaps dial back from what you had set out earlier?

I don't know that we would cut that that fine a line.

I think -- I am not sure we could accelerate much effectively anyway.

There is only so fast you can do these sort of things, and we've got engineering and permitting and contracts to let for major equipment, et cetera.

So it takes some time and we're on an accelerated pace, but speeding it up much is going to be difficult, and I am not sure that we would do it just because business conditions were better.

By that same token, if there is some slowdown in demand beyond what we see, we have to think about that.

We have got to look at our overall financial structure.

Gretchen and I will review it and visit on what the overall structure looks like.

But one of the reasons we did the long-term financing earlier in the year is to be able to avoid having to go on and off because that's not a good thing for the project or for the business.

It would be costly for the project to do it that way, so.

Okay.

Thank you.

Thank you.

And next we'll go back to the line of Michelle Applebaum with Steel Markets.

Please go ahead.

Hi.

Hey, Michelle.

Hello.

Okay, y our stock is down 7.5%, so I'm going toi ask the right question.

How is that?

Thank you.

I have to do well now, right?

Under pressure.

This problem started in April with China tightening, because everybody in the world knows China is the marginal exporter, right?

And you guys have great insight into China, but looks like Chinese steel prices have come up the last few weeks.

What's going on in China, and how is that impacting us?

I don't know that we know any more about what's happening in China than you do, Michelle, maybe less, so --

That's not true.

I just know that China is a big country and there's a lot of Chinese folks who live there, and they have great expectations for housing and infrastructure and the better life, and I think that's a good thing for them and a good thing for the world of steel.

So I think in the long-term, China is going to be a great place to make and consume steel.

You may remember a speech I gave in 2004 when I assailed the Chinese for expanding capacity too much.

Had they listened to me the country would be in real trouble.

So I think they're going to be an excellent producer, consumer, and I think their overall policy to consume roughly what they produce is probably what they intend, but it is a big and unwielding machine.

We haven't seen a loft effects so far, Michelle.

We would see it first in our business in Europe, and we haven't seen large Chinese volumes washing up yet in Southern Europe, which is where we would see it first.

We're vigilant.

We're watching for it.

We don't see as much of it here in the US.

We keep an eye on it, but so far we haven't seen great effects from it that I can recall.

And our final question will come from the line of John Tumazos with Very Independent Research.

Please go ahead.

Had everything gone smoothly with the Gary high line and clicked right, how much do you think the net effect on second quarter results to the better would have been?

Well, it didn't happen, John, until early July, so it didn't affect the second quarter at all.

The effects will be really in the third quarter and sort of -- they're through by now, or essentially through.

We're pretty well done with a lot of the work there.

There's some more work to go, but not a whole lot.

But it is going to be -- all things, including volume, et cetera -- it's going to be $10 million to $20 million kind of price tag for us.

So relative to Lake Erie Works, it's small change?

Yes, it is a lot, but not by comparison to that.

That's a fair analysis.

And what would be the next largest repair productivity item?

[Kashetza] maintenance and Serbian blast furnace down?

Well, the Serbian blast furnace down is really a commercial thing, so we'll do some maintenance but it is not really for that purpose.

It is really a commercial decision.

The work on the furnace in Kashetza will not be too unlike the work we're doing on the furnace at Gary, and I think it's number six which is down now.

We do top work.

We do some hearth work, fix the tap holes, et cetera, et cetera, so it is pretty routine stuff, and they would probably be of comparable size, duration and cost.

It could be anywhere from two weeks to a month to do some shock treating, depending on what's necessary.

So those are the -- that's the vintage-type of repair work we'll do on a number of furnaces throughout the rest of the year.

Again, we didn't do any in the first six months.

So we ran really hard, didn't do hardly any work at all, and we have some scheduled now for the back part of the year.

Is there any extra maintenance you're going to budget in 2011, or extra effort, given that there were a couple of surprises this past month on the equipment and safety front?

Fair question, John.

I think the things that we need to do will have some cost effect, but it probably wouldn't rise to the level that we would notice it in this forum.

I think it is -- we're not done with the analysis yet, so I shouldn't be saying this.

But I think it is going to be things like planning and attention to detail and making sure that we complete everything in the schedule we're supposed to, so it's -- but it's early for me to say that, so forgive me for not being as specific on that part of the question.

But the things that we'll need to do, my sense would be, wouldn't require a lot of money.

We will probably be back doing more normal level of maintenance throughout our facilities next year.

This year, again, was a recovery year after a tumultuous shutdown year last year, so we're nowhere near normal and we hope to reach some stage of normalcy late this year or early next year.

And there are no further questions.

Thank you, all.

All right, guys.

Thank you for participating, and we look forward to talking to you again next quarter.

Linda, will you give the replay information, please?

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