美國鋼鐵 (X) 2010 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

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

For the conference, all the participant lines are in a listen-only mode.

There will be an opportunity for your questions.

Instructions will be given at that time.

(Operator Instructions).

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

With that being said, I will turn the conference now to the Manager of Investor Relations, Mr.

Dan Lesnak.

Please go ahead, sir.

Thanks, John.

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

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

Next, I will provide some additional details for the fourth quarter and then Gretchen Haggerty, US Steel Executive Vice President and CFO, will comment on the outlook for the first quarter of 2011.

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

Before we begin, however, I must caution you that today's conference call contains forward-looking statements and that future results may differ materially from statements or projections made on today's call.

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

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

Thanks, Dan.

And, good afternoon, everyone.

Thanks for joining us.

Earlier today, we reported a fourth quarter loss of $249 million, or $1.74 per share.

For the full year 2010, we reported a loss of $482 million, or $3.36 per share.

While we are by no means pleased with these results, they are a significant improvement over our 2009 results of a loss of $1.4 billion, or $10.42 per share, when our Company and our industry experienced a very severe effects of the global recession.

In 2010, there was improvement in many of the markets that we serve.

And, as a result, our total shipments increased by almost 50%.

Our raw steel capability utilization rates in both North America and Europe were significantly higher than the extremely low levels of 2009, although we still have not recovered to what we consider historically normal levels.

We were able to restart our facilities in 2010, and put our people back to work.

But, the pace of economic recovery continues to be uncertain and our markets remain very volatile.

We continue to focus on operating our facilities at levels consistent with our customer orders, and as efficiently and safely as possible.

Speaking of safety, 2010 was a challenging year for us.

We improved on two of our key safety measurements, global OSHA recordable case rate and global severity rate.

And, we're disappointed we did not improve on the third safety measurement, global days away from work case rate.

We remain firmly committed to safety as our number one priority, and we continue to work towards our goal of zero injuries.

We're also committed to environmental excellence, and we are working to reduce emissions as well as our overall carbon footprint.

Since we use a carbon-based industrial process, that's not necessarily easy, but it is something we're focused on because it makes good business sense.

We've implemented a Company-wide program with involvement from all levels of the organization including our union represented employees, to investigate, create and share innovative and best-practice solutions to reduce energy intensity per ton of steel and related CO2 emissions.

We're also committed to investing in technology to move the steel-making process in a more environmentally responsible direction, as evidenced by our recent and ongoing projects to renew our coke making infrastructure, such as the SunCoke non-recovery battery at our Granite City Works and the Carbonyx facility currently under construction at Gary Works.

Both are lower emitting technologies.

Also, we're incorporating the best environmental control technology available at the new byproducts recovery coke battery being built at our Clairton plant.

Now, let me get back to our results.

Operating income for our North American Flat-rolled segment improved by over $1.1 billion compared to 2009, as the benefits of higher prices, volumes, and utilization rates and lower energy costs were only partially offset by higher raw materials costs, and higher spending for facility repairs and maintenance.

While we realized similar benefits at our European operations in 2010, the magnitude of raw materials cost increases in Europe substantially offset these benefits, and limited our improvement in operating income to $175 million.

Operating income for Tubular increased by almost $300 million in 2010.

Shipments increased by 900,000 tons to almost 1.6 million tons.

But, average realized prices were lower, reflecting higher shipments of carbon-grade material, as the excessive inventory of unfairly traded Chinese imports in the supply chain was consumed.

For the fourth quarter, our Flat-rolled results were slightly better than the third quarter, as lower repair and maintenance spending was offset by lower average realized prices.

Publicly reported spot prices bottomed in November when CRU reported $520 per ton for hot-rolled.

Fourth quarter results were also slightly better than we had initially projected primarily due to higher-than-expected shipments and operating efficiencies.

Also, our Hamilton Works iron and steel making facilities were idled in October and we incurred approximately $40 million of idle facility carrying costs during the fourth quarter.

Fourth quarter results for US Steel Europe were below the third quarter, as lower euro-based spot market prices, which also bottomed in the fourth quarter, and lower shipments were only partially offset by lower raw materials costs and a higher mix of value-added contract shipments as we made progress in our long-term strategy to increase value-added product sales in Europe.

Tubular results for the fourth quarter were lower than the third quarter results as our program customers and distributors drew down their inventories at year end, and imports remained high, resulting in lower shipments and prices which were partially offset by lower substrate costs, as the cost of hot-rolled bands which are priced on a monthly basis, bottomed during the quarter, as I mentioned earlier.

We have continued to make progress on some of the significant capital projects we discussed last quarter.

Projects to improve our coke self sufficiency remain on schedule, with the PCI projects in Europe set to come online later this year, the Carbonyx modules at Gary during 2012, and the Clairton C Battery in 2013.

For the Tubular segment, construction is well underway on the new heat treat and finishing facility at Lorain that will increase our ability to serve the growing demand from shale developments.

We expect to start production at this new facility in the third quarter.

Construction has also started on our Innovation and Technology Center in Houston, as we continue our efforts to be recognized as a technical solution partner for our tubular customers.

Field trials for our Patriot TC premium connection continue, with the first well successfully completed using this connection in November, and shipments of our CDC Star semi-premium connection have continued to increase each quarter.

Now, I will turn the call over to Dan for some additional information about the quarter's results.

Dan?

Thanks, John.

Capital spending totaled $250 million in the fourth quarter, and was $676 million for the full year.

Capital expenditures for 2011 are expected to total approximately $990 million, and will remain largely focused on strategic projects primarily related to coke and coke substitute production, glass furnace coal injection in Europe, tubular heat treat and finishing facilities, implementation of an enterprise resource planning system, non-discretionary vinyl spending and other infrastructure projects.

Depreciation, depletion and amortization was $168 million in the fourth quarter, and $658 million for the year.

We currently expect depreciation to be approximately $665 million in 2011.

Pension on the benefits costs for the quarter totaled $107 million and we made cash payments for pension and other benefits of $35 million.

Pension and other benefits costs for the year were $428 million.

Company payments for these plans in 2010 were $534 million which included a voluntary contribution of $140 million to our main defined benefit pension plan.

Total costs for pension and other benefits plans are expected to be approximately $590 million in 2011 compared to $428 million in 2010.

This increase is primarily related to the amortization of actuarial gains and losses from prior years.

Excluding any voluntary contributions to our main defined benefit plan, Company payments for these plans in 2011 are expected to be approximately $575 million compared to $394 million in 2010.

Our cash payments in 2010 were reduced, based on agreements with the United Steelworkers, that allowed us to defer 2010 contributions to retiree health and life insurance trusts and to use certain prior period contributions to pay 2010 costs.

At year end, our pension plans were under funded on an accounting basis by approximately $2 billion, and other benefits plans were under funded by approximately $2.9 billion, as compared to an under funded status of $1.7 billion pension plans, and $2.9 billion for other benefit plans, as of December 31, 2009.

The change in funded status primarily reflects a decrease in discount rates.

Net interest and other financial costs totaled $94 million in the fourth quarter, and included a foreign currency loss of $39 million.

We expect net interest and other financial costs to be $55 million for the first quarter of 2011, excluding any foreign currency gains or loss.

For the full year 2010, we recorded a tax provision of $97 million on our pre-tax loss of $385 million.

In accordance with accounting guidance, the tax provisions do not reflect any tax benefit for pre-tax losses in Canada and Serbia, which are jurisdictions where we have recorded a full valuation allowance on deferred tax assets and for foreign currency losses that are not recognized in any tax jurisdiction.

Fourth quarter 2010 results included a $52 million, or $0.36 per diluted share, unfavorable [catch-up] adjustment as a result of an increase in the actual annual effective tax rate due to changes in the composition of domestic and foreign earnings.

The geographical mix of our future pre-tax results could have a material impact on our reported effective tax rate.

Now, Gretchen we will review some additional information and the outlook for the first quarter.

Thank you, Dan.

Our 2010 cash flow from operating activity was negative $379 million, primarily due to an increase in working capital.

In 2009, as operating rates and prices fell to extremely low levels, net working capital decreased by approximately $1.5 billion.

Although operating rates and prices have not yet returned to pre-2009 levels, they have improved significantly and we've reinvested approximately $750 million in working capital.

Our liquidity remains strong as we ended the year with approximately $600 million of cash, and total liquidity of $2.1 billion.

Now, turning to our outlook for the first quarter of 2011, we do expect to report a modest improvement in reportable segment results, in comparison to the fourth quarter of 2010.

Order range for most customer groups and publicly reported spot market prices began to increase later in the fourth quarter and we remain cautiously optimistic that global economic conditions will continue to improve in the first quarter.

Flat-rolled results for the first quarter of 2011 are expected to improve compared to the fourth quarter of 2010, as the benefits of increased average realized prices, shipments, and production volume are expected to be partially offset by higher raw material costs, primarily for scrap and coal.

Average realized prices are expected to increase from fourth quarter 2010, as we expect to begin realizing the benefits of increasing spots and some market-based contract prices throughout the first quarter.

Increases in some of our index-based contract prices should be realized in the second quarter, as higher published market price acceptance enter the index calculation.

Raw steel capability utilization is expected to increase from the fourth quarter of 2010, as all of our blast furnaces are expected to operate for the majority of the period, except for Hamilton Works, which is subject to a labor dispute.

First quarter 2011 results for US Steel Europe are expected to improve, compared to the fourth quarter of 2010, as the benefits of increased shipments and production volumes are expected to be partially offset by higher raw material costs.

Our Euro-based transaction prices are expected to improve during the quarter.

And, as in flat-rolled, increases in some of our index-based contract prices should be realized in the second quarter, as higher published market price assessments enter the calculations there.

Our raw steel capability utilization rate is expected to increase in the first quarter of 2011, as we've restarted the blast furnace at US Steel Serbia that was idle during the fourth quarter and we expect all five blast furnaces to operate during the first quarter in Europe.

We also expect our Tubular operations to remain profitable in the first quarter and we anticipate that shipments will improve slightly, as customer inventory levels appear balanced and end users pursue their 2011 growing program.

Average realized transaction prices are expected to be in line with fourth quarter levels, as announced price increases begin to take effect throughout the quarter.

Overall, compared to the fourth quarter, we expect lower results, due to monthly increases for purchased rounds and hot-rolled bands that will not be fully realized in Tubular product prices in the quarter.

That ends the outlook.

Dan?

Thank you, Gretchen.

John, can you please queue the line for questions.

Certainly.

(Operator Instructions) First, we go to the line of Michael Gambardella with JPMorgan.

Please go ahead.

Yes, good afternoon.

Can you, in terms of the first quarter outlook, can you say if you will be profitable or not?

Gretchen, you gave the outlook, I'll let you comment on it.

I think you gave it as we see it.

Yes.

We gave you general direction of where we're headed.

I don't think the direction we gave you is enough to overcome where we were in the fourth quarter though.

I'm sorry.

I couldn't hear that.

We're expecting improvements but we didn't say that we expected to be profitable.

Okay.

And the second question, can you comment on your coal requirements for 2011?

Have you locked those in?

And what pricing?

We have.

And I will speak to North America.

That's the biggest piece of it, of course.

We have locked in our requirements at this point.

We've got sufficient contracts to take us through this year.

And on the order of 10 million tons probably of met coal, a little but more when you add in injection coal, and our cost to us, and I wouldn't compare this to anything you might read publicly, because the way we look at it, it is the mine costs, plus delivery, at a constant moisture, but on average, I think we were reporting that last year's costs was about $160, and we would probably be -- probably be up this year a little less than $20.

Plus or minus.

Something in that zone.

Okay.

Thank you very much, John.

Sure.

And next we will go to Luke Folta with Longbow Research.

Please go ahead.

Hi, good afternoon, guys.

Hello, Luke.

A quick question.

The maintenance expense for the quarter, you had mentioned was down sequentially, in the fourth quarter.

Can you give us a sense of what that was, and whether or not you expect any non-recurring or one-off items in the first quarter?

You mean explain what the actual numbers were?

Well, there was --

I mean, we had a -- we talked, I think, last quarter about the fact that we had some structural failures, most notably at our Gary Works, and a couple of other projects at a few other plants that we were working on, and we got most of those done in the third quarter and, therefore, a lot of those costs didn't recur in the fourth quarter.

Our inspection and repair costs are down to a fairly constant level at this point, and, I mean, as we look at them, and gather them, they are somewhere between usually $20 million to $30 million a quarter.

There is some blurring of distinction between what is normal maintenance and what is an inspection and repair cost, but we're nowhere near the $80 million kinds of figure that we talked about in the third quarter.

I think we've sat down $40 million in steps --

That's probably where we ended up.

Right.

Okay.

That's good to know.

So when we look in the Tubular segment, in the first quarter, you had mentioned that it looks like the raw material costs are outpacing the realized pricing.

Do you think that is more of a timing issue, or does it speak to the competitive environment in two?

It is probably more timing than anything.

We've maybe were too subtle about this, but we, in effect, supply most of the steel substrate ourselves to the Tubular segment, the Flat-rolled segment happens to be the supplier, and we transfer price back on the same, as best we can do, at the same terms and conditions as we do to other customers who are in that line of business.

So we try not to distinguish from one and the other.

And that hot-rolled price movement that we talked about, Gretchen talked about, in our flat-rolled business, they are getting their piece of that in the first quarter, and the tubular prices, while we're trying to move those up, haven't quite kept pace and we also have some programs and negotiated projects that run for a little bit longer before price increases.

So I think it is compression of the margin with the substrate costs.

They're getting it from their big supplier pretty quickly and not getting it back in the marketplace as quickly as we would like.

That is more of a timing issue.

I think there is always stiff competition, of course, but I think for us, it is more of a timing question.

Okay.

And just last one, can you give us an update on how you did as far as your negotiations on fixed price contracts for 2011, and to the extent if there was any increase in the percentage of fixed price that you're seeing versus last year?

I'm thinking given your iron ore cost advantages here domestically that maybe you were able to gain some market share in that sense.

There are a couple of questions there.

I will try to get them all as best I can.

Luke, they're good questions.

We did find in our contract settlements, I think it depends where you come from in terms of what the actual change would be, but we had increases in most of them because the prevailing prices in the marketplace when we did most of that, a month or two or three ago now are actually higher than they were the previous year.

So I think we did okay from an overall price standpoint.

And you're right.

Our cost structure does give us a certain degree of confidence, that we still have some amount of firm price contracts, and some amount of cost-based, cost-adjusted, which are fairly sticky and don't have big changes in them typically during the year.

And those two in total are going to be in the order of 30%, maybe a third at the most of our total book in North America.

So we did do okay there.

We do have the ability to go firm if we wish, if it is the right price, the right contract, to our customer and if we pick up share, we think so.

That remains to be seen how it goes throughout the rest of the year but we think we've performed pretty well and came back strong for our customers in some of those markets and I think we have been rewarded for it.

Our next question is from Chris Olin with Cleveland Research.

Please go ahead.

I wanted to just ask a quick question on the Tubular side.

And I think you mentioned part of the supply pressure is related to the imports.

I'm just wondering if you're seeing some direct pressure for some of these domestic capacity start-ups, are they undercutting the market and preventing some of the capture on the market side?

Well, it is hard to say, Chris.

We compete with everybody.

And we bump into all sorts of competition.

There's undoubtedly some effect of domestic competition, as there is from imports.

If you just look at the total share of apparent demand that has been taken by imports in recent quarters, it expanded, I think, in some months over 50%.

And that seems to be a little bit out of line with where it should be based upon what demand and what North American capabilities are and what everybody's cost structure is in the world as we know it.

So, yes, we have stiff, brisk competition, brutal competition, with our domestic competitors, but we would view the imports as more of a problem in this case than anything else.

And we will go to Timna Tanners with UBS.

Please go ahead.

Hi, good afternoon.

Hi, Timna.

It sounds like you're going to be running most everything in flat-rolled besides Hamilton in your plans for the near future.

Is that fair?

I think so, Timna.

We will have the occasional relatively brief maintenance outage for one thing or another, but at least in the near term, as far as we can see, in North America we have the all of our fire power fired, and Hamilton, because of the situation, is not available to us.

So we will be running everything pretty well for the next few months.

Okay, great.

I just wanted to get an update, I know you talked in the past about being short some coke and having to buy that on the open market.

Kind of what are the prices looking like there and what is the time frame for being able to meet more of that on your own again?

Well, I commented on some of that in my remarks.

And we have Granite City, SunCoke batteries already online, and that has helped us, and it has taken the number down that we have to buy.

We will have the Gary Carbonyx modules not available to us this year, but at some point the next year and then relatively early in 2013 we will have the Clairton C Battery available to us as well.

So it will be sequencing in over the next several years.

The prices are high.

And I don't want to give you an exact number, but if you just look in the coke market report or something like that, you will probably find that domestic coke, if you can find it, will probably in the [450-ish.] And the balancing in the market takes place out of China and that's probably 500 or more, 600 items, I haven't seen it recently, and it depends how many licenses are available.

So it is a fairly expensive proposition and the quality is not all we like and the heavy screening loss, and less porosity.

And other than that, we really like doing it.

If I could really quick, Gretchen, I wanted to know if you could give me some color on the balance sheet, the cash on the balance sheet is kind of low relative to what it has been for the last at least two and a half years.

And given the high CapEx budget that you have unveiled today, I'm just wondering if there is some working capital release or something that maybe we haven't modeled?

No, actually, I think the cash balance is okay.

I mean, we look at the overall liquidity, we have quite a bit available to us with our lines.

Our capital, I guess, on the working capital side, Timna, we've been in a bit of a build bill, with getting ready for the winter and all that kind of stuff.

So we probably have a little bit more to go on a working capital, but I don't think a material amount.

We shouldn't get back to the levels where we were before in 2008.

But I feel pretty comfortable with where we are from a liquidity standpoint.

I think whatever we would have in working capital is going to be manageable from a capital standpoint, we're going ahead with these pretty heavy capital spending projects, making good progress on, because they're important to us, but I feel like we're able to manage doing that.

Okay.

Great.

Thanks again.

Our next question is from Mark Parr with KeyBanc Capital Markets.

Please go ahead.

Thanks very much.

Good afternoon.

Hey, Mark.

A couple of questions.

The lockout costs at Hamilton, how persistent is that?

Can you give us some color on what you would expect the magnitude of that to be on a go-forward basis?

Well, it is hard to make a real big dent in it, Mark, when you look at the components, the single biggest piece would be fuel and utilities, and that is going to be higher in the colder months, but still we got to run boilers and pumps and we have to circulate things to keep the equipment ready, and everything that -- in working order.

So that is really in power for heat and light for the things that have to be climate controlled, so it is really hard for us to cut that back.

We will continue to chip away on it.

But it is the single biggest piece.

Depreciation, not much you can do about that.

We have a certain level of labor necessary for fire watch and those kinds of things.

We will try to whack it down.

And, I think, our experiences in 2008 and 2009 gave us regrettably some experience in that.

To make it try to go away while we're still trying to operate things is pretty hard to do.

We're still operating the coke battery.

Some of the cost is going into that.

But it is hard to make it go completely away.

We will continue to work at it but it is probably going to be in that zone for some time.

Okay.

So that's one of the things that will continue to restrict the profit recovery.

Another question I had, in the fourth quarter, the Other category, I think, in a lot of years that fourth quarter gets some benefit from the fourth quarter shipments of pellets, and I was just wondering if you could give some color on the fourth quarter in the Other operations, in terms of some of the pluses and minuses that you experienced?

You know, Mark, I think you're thinking back to when we used to have our pellet operations in Other, and we -- it is now in Flat-rolled.

So I don't think that you'd see that there.

It is primarily realty --

It's transportation, it is usually our transportation assets, and our real estate assets, and those are -- the transportation typically are fairly stable and we just reflect business conditions up or down.

The real estate is more transactional.

We may sell some properties here or there that are being developed or that are excess, and those happen when they happen, not much happened in either the third quarter or the fourth quarter, as I remember.

So my guess is that that would be relatively stable.

There was a time, Mark, when because of the seasonal adjustment that Gretchen commented on, there were some wicked swings in that category, but that hasn't been the case for a couple of years now.

I will apologize for getting old then.

That's okay.

Your memory is very good.

It is.

(laughter) I had one more question if I could.

Maybe this one is a little better.

I was just curious, you do have a slab or a semi-finished component to your mix.

I was wondering if you could comment on what that was in 2010, and what you think the mix might be in 2011?

Well, I think if my memory serves me in total in 2010, a 1.6 or 1.7 million tons, something like that, probably, and we try to make a little bit of a business out of it.

It really, when we have everything running, of course, including Hamilton, which is a plant without a strip mill, we have a normal slab availability that we try to make something of, we use some and we would sell some.

We don't have that availability right now, but we will probably still do some slab business in 2011.

It likely would be at a somewhat lower level.

Probably won't be at the 1.6 million, 1.7 million tons.

It might be more a million plus or minus.

That remains to be seen how the market plays out.

There are times when that is a very attractive thing to do and we can make slabs in a lot of places.

So we don't have Hamilton available.

If for some reason it became available, it is a much different story and we might have a different approach.

Okay.

Anything on the export front you can update us on in terms of your mix of export business?

No, not a whole lot.

We have the -- for us, at least, rather than that, we choose the slab market is a better way to go.

And if we can find a way to get slabs where we don't see them again, that is even better.

And you can take a few guesses of how that would be.

But when export markets would be favorable, we might end up shipping a little bit more hot band to the West Coast to our joint venture because they might take a little more, and our partner might send a little less.

And we actually do have some straight-out export business that we are going to do.

We have done some already and we will do this year.

But for us it will be a heavier diet on slabs and a little more going out to the West Coast probably.

That is usually economically a better way for us to go.

Okay.

Terrific.

Thanks.

And good luck in the first quarter.

Thank you, Mark.

And next, we go to Justine Fisher with Goldman Sachs.

Please go ahead.

Hi.

If you guys did need to raise additional liquidity, by my numbers it is certainly not the case, but if that were the case, would you look to use your revolver as opposed to coming back to the bond market?

Well, we obviously have a lot of revolver available to us, and I think that is the easiest thing to do.

And it also gives us the greatest flexibility for paying it back later.

I think that probably is a good choice.

We do have some environmental bonds that we have to retire or refund on our own credit, they were part of the separation, and we have to see that by the end of the year, and so we will be looking at doing some tax-exempt financing probably, but just as a way of refinancing what their existing bonds are.

And then just on the raw material cost pass-through question, obviously a lot of the recent price increases in the spot market have been justified by various producers because of higher raw material costs.

Have you guys seen any push-back from your customers, saying well, clearly, you guys don't see as much of the raw material increase, at least on the iron ore front, so we don't necessarily agree to some of these increases or are pretty much people are going along with them because the supply chain is pretty lean?

Oh, I don't know.

We have very spirited discussions with all of our customers but I think they understand that steel prices are determined in a very active, deep liquid market and everybody is competing and we may have a certain advantage and somebody else may have a given advantage and we have plenty of disadvantages, too.

So I think we go straight up with our competitors and try to do the best job for our customers and try to get the best prices to the market and that is a long way to say our cost is our issue and the price is determined in the market.

Great.

Thanks.

And next we go to mark Liinamaa with Morgan Stanley.

Please go ahead.

Hello.

Over in Europe, you're going to be running all five furnaces now.

Can you talk a little bit about the demand that you're seeing?

Is this something that you think is going to persist through the year?

And then over there, maybe give a quick overview of your raw material situation.

Thanks.

Sure.

The demand patterns that have emerged, Mark, are very similar in Europe as they are in North America.

And around the same time, prices sort of bottomed in both places, and around the same time, if you look at the relevant indices, the demand, for us at least, in both North America and Europe seemed to pick up midway through the fourth quarter.

It has been pretty broad-based and it has been pretty well sustained.

So as we sit here today, demand is pretty brisk, order rates are firm across virtually all customer segments and I'm real reluctant to look out too far in this world of short mini cycles, but if you look at the broader economic context, as Gretchen pointed out, we have some cautious optimism that maybe the economies of the world certainly, the OCD countries and the US and Europe, are heading in a better direction.

So everything we see today looks okay.

But tomorrow could be of course a much, much different picture.

In Europe, we are merchant buyers of ferrous material and carbon material and coal and coke both.

We are generally on quarterly pricing with our suppliers in Europe.

As world prices have moved up, they are well aware of that, and that's a discussion, a negotiation we will go -- we have already set those for this quarter and they are moving up to some degree, I think, as we said.

For the second quarter, we'll have the discussion again and we will see where things go.

It is very imperative for us to be able to be long-term good customers for our suppliers of raw material.

We need to have a really good conversion margin that gives us a return on our capital and that's what we're going to shoot for.

Okay, thanks.

Thank you, Mark.

We will go to Brian Yu with Citi.

Please go ahead.

Great.

Thank you.

A question for John or Gretchen.

I'm trying to reconcile something in my head.

I think, John, you mentioned earlier the net coke costs are going up $20 per ton which works out to be roughly $12 per ton steel, and then pension/OPEB going up about $9 per ton.

So it seems to me that the profit should be greater, and is this because you have some contract lags coming through from 4Q and 1Q where that is pushing down your pricing?

That's offsetting some of the spot movements?

Well, there is just one other factor I should mention.

You ought to include scrap on your list of things that cost a lot more.

We're not the biggest scrap users in the world but we use a million tons a quarter or whatever it is going to be, and it has gone up quite a bit.

So I think on our list of raw materials increases, the scrap is quarter-to-quarter, fourth to first, I think is the largest one would be scrap.

On the commercial side, we do have a significant portion of our book and it is between 15% and 20%, something like that, North American flat-rolled, that would be on quarterly contracts, based on indexes, and if you look at those indexes, if you take whatever index you like, just take Chicago hot-rolled, for whatever index you like, and take July, August, September, compare it to October and November and December it actually went down.

Which means we actually got a price decrease for some of our volume.

That's the way it works.

And we held on earlier in the year at a higher level.

But I think the number for one index service for November was $520, and that was hot-rolled and I think the published number by that same index service in January was $710.

So we're going to take a number of things and average them and make that comparison, which looks to us like a much better comparison.

And that's not effective until April 1.

So there is a lag on some significant portion of our book.

And it would be fairly substantial in the second quarter.

All right.

And then can you just comment on your order book, and where are you open now?

March, April, and we have been hearing different things from other companies?

Well, I don't know about us, but we are essentially sold out through March in North America.

Orders are filtering in.

But effectively all of our space is spoken for.

And we're just in discussions with customers about April at this point.

But that is sort of commercial information.

I don't want to get in this forum necessarily.

But everything we can make through March is essentially sold.

Europe, not quite that far out yet.

We usually have a shorter order book there but Europe is filling up pretty quickly, too.

Essentially the same pattern.

Okay, thank you.

The next question is from Charles Bradford with Bradford Research.

Please go ahead.

Hi, good afternoon.

Hi, Chuck.

I've got kind of an awful low question on labor.

Do you know of any plants other than the one in Hamilton where the pension plan had an index feature?

No.

No, we don't.

The only one -- the one we knew about was Lake Erie and I think that one we made some progress on in the last negotiation.

And for that matter, Chuck, I don't know if -- I don't know of any plant, integrated blast furnace-based plant in North America that has a defined pension benefit plan at all at this point.

There may be one or two but I don't know what they would be.

For new hires.

Yes, for new hires.

Yes.

The old ones will obviously continue but for new hires, I don't know of any defined continuing benefit plan in the business anymore.

Are there any ongoing negotiations in Canada?

We're in a collective bargaining situation and we prefer to keep that between us and them.

It is not always necessarily what they do, but we prefer to be gentleman about that and keep it between us and them.

So with respect, Chuck, I'm going to refrain and when there is something worth reporting, we will make sure everyone knows about it.

No problem.

Thank you very much.

Thank you.

And we will go to Sal Tharani with Goldman Sachs.

Please go ahead.

Good afternoon.

Hi, Sal.

Just a quick question on pension first.

Are you expecting to do any mandatory pension contribution or are you all settled on that front?

Are we expecting to do any pension --?

Yes, do you have to do any mandatory pension contribution in 2011?

Not mandatory.

But we would consider doing voluntary, as we have done in the past.

Probably on the order of that $140 million, we have done the last couple of years, Sal, but we don't -- we've done enough voluntary funding for a long period of time, we've got pretty good cushion built up.

But the $140 million is kind of representative of our normal costs and we like to do that.

Okay.

And, John, if you look at your pricing outlook, what are you saying?

You are opening April books at the current price which is being asked about $800 plus.

Is that what you guys are getting?

I would prefer not to get too specific on the commercial terms, Sal.

But I would say we're in the zone of what you read about as being what is in the market today, and we wouldn't be too far off that, and in some cases we might be a bit ahead, depending on the customer and the product, et cetera.

But we're right with where you read the market to be.

And what you read, I think, is where the market is.

Got you.

And so your second quarter, and I think you alluded to the second quarter price realization will be much better than the increase you're going to get in the first quarter.

It means that the fourth quarter was the first quarter -- or the first quarter was the second quarter, we would be much higher?

It should be.

Just the way the index adjustments work, Sal.

We typically would lag a quarter behind full realization when there is a sharp move like there has been in the spot market.

You're absolutely right.

And the last question, we have talked about it before, about unlocking the potential of iron ore.

Iron ore has consistently remained high, it's been down a little bit late last year and pushed back up, pulled back up again.

I was wondering if you have given more thought, you have a nice asset which you can unlock and use it to either in the form of pig iron or slabs and I know have you done a little bit of slabs can but have you given more thought on how to exploit this particularly your short position in Europe?

Is there any advantage at this point sending it over there, some of the iron ore?

Yes, there could be.

It is a difficult logistics thing, Sal.

But in effect, if we would -- right now, let me just comment, right now, we're going to consume in our own configuration in North America everything we can make.

So all of the pellets we can dig and make we are going to consume and that is a great way to capture value we think and that will become more evident because the business conditions we're moving into now will favor our model.

If we got to where, through an expansion in our operations in Minnesota, or theoretically if we needed less in our blast furnaces, and if we were long, and we could capture that value locally, that is better from a transportation cost standpoint than sending it to Europe.

But we've done it before, and if prices stay high enough long enough and logistics get worked on we may decide to do that.

For us the key is we're using all we can make right now.

We're in a process of getting a permit for an expansion which I think we talked about publicly in our 10-K from time to time.

And it is a pretty big undertaking for us.

But it is one we will be looking at carefully the next year or two.

And I would just say that with pig iron, with DRI, the world of natural gas has changed and the world of DRI is much different than it was before.

It could be done right here, as I think you have read about in some other discussions.

So it is really interesting way for us to capture -- we've got plenty of resource in the ground, we got to get it out and get it processed in a way we can use it.

So we're giving that a lot of thought right now.

It is a very good subject for us.

Thank you very much.

Hey, Sal, one other thing I just wanted to mention because I took that you were asking me about mandatory contributions with regard to our defined benefit plan in the US, and I think you probably were, and that's what my $140 million answer was for.

But I would just, for completeness, mention that we do have required payments that we make in Canada every year, and that is fully disclosed in our pension footnotes on the order of 65 million Canadian plus that inflation, indexing piece of it, so $70 million, $75 million, something like that.

Okay?

Thank you very much.

Yes.

And we will go to Eliot Glazer with DuPasquier.

Please go ahead.

John Surma.

Yes, sir.

You gave us a very nice description of the Chinese import/export section for the United States for 2010.

Can you give us some indication of the Chinese import/export situation in the United States for 2011?

With respect to flat-rolled?

Yes.

Well, flat-rolled, from China into the US has been fairly muted.

We have some trade orders, and I think the Chinese exports have been consumed much closer to home, better for them, probably better for the consuming countries as well.

So we haven't had much of an influence from China in the US.

In our business, we would see it more immediately in Southern Europe, where a lot of our product from Slovakia ends up and we would find that to be the first place we would see that friction.

The same thing prevails in Europe.

The Chinese imports have been relatively muted so far just because of the very high costs they have, I think, and the fact that their production is being used at home.

Their production has been not increasing, by the way, either used at home, or sold, I guess, for better value in a more immediate Asian area.

So it hasn't been a big deal recently.

Fairly muted.

We watch it carefully.

Whether it is tubular or flat-rolled.

And if we think that our rights are being trampled, then we have some recourse as you know and as you see and we are pretty successful at it.

For the moment, fairly muted.

How about the same question for India, please?

Oh, there is an occasional bit of material from India, some like [keef] galvanized and some larger diameter pipe, but India, I think, India's production for 2010 was 70 million tons, or some number like that, and China's was 650 million tons.

So it is a different order of magnitude just not as much material to move and the consumption in India has been very strong.

So occasional but not nearly as significant as some other regions.

Thank you.

Thank you.

We have a follow-up from Mark Parr with KeyBanc Capital Markets.

Please go ahead.

Yes, hi, thanks.

I just want to make sure I got this straight because, John, I think you said you were seeing perhaps a bit of an increase in your mix of fixed price contracts for 2011.

If you could just review for us how you see 2011 unfolding as far as from fixed price business, and 90-day lag business, and spot business, just in general terms?

Thank you.

Sure.

I guess in general, as a rule of thumb, and it is going to depend on just how the markets work out, but as a general rule of thumb, we're probably going to be on the order of about 30%, some kind of [firm-ish] contract, whether that is firm, or whether it is a cost base, it is a fairly stickier contract, something on the order of 30% plus or minus at that level.

We would have about 40% or so spot.

Maybe a little more than that.

Maybe it is 42% or 43%.

And if my math is right, I'm not good at numbers anymore, that leaves about 30% for sort of index-based transactions and of that, I hate to confuse you, Mark, maybe I'm making this too hard, of that, about half would be monthly and half would be quarterly.

Does that makes sense or should I do it again?

No, I got it all.

That's really great.

Thank you very much.

I'm sorry to be so confusing about that.

Thank you.

Our final question will be from Michelle Applebaum with Steel Market Intelligence.

Please go ahead.

Hi.

Hi, Michelle.

First, belated congratulations to both John and Dan for, number one, on the institutional investor poll for steel companies.

It really was Dan.

I had nothing to do with it.

It was Dan.

Okay.

And --

But you're very kind.

Thank you, Michelle.

He deserves recognition.

He has done a good job.

Thank you very much.

Okay.

And then my other question, I have two questions for you, one is that, I guess, I'm sorry, Gretchen, please, but you said that you wouldn't answer the question on whether you would be profitable, but you're not saying you won't be profitable, you're saying you don't know?

You can't -- the knife isn't that fine here?

I guess, we just said we didn't put it in the release.

I mean we gave you some direction.

If we felt really confident, I imagine we may have said that.

But we did not say we were going to be profitable in the first quarter.

Okay.

All right.

Sorry about that.

Then the other question, I'm going to ask you, is a question that I get probably, I don't know, 30, 40, 50 times a day, which is the operating rate of the industry is about 70%.

So what is going on with these kinds of vertical price increases?

I will just give you a reflection.

I think the number the other night was 72.

Did it go up a little bit?

I think 72% was the most recent figure.

That doesn't change your question but it was up just a tad whatever it is.

Okay.

I will ask the question again.

72%.

I guess Michelle, just an observation on that and I am speaking mostly from our perspective from the flat-rolled side, the statistics assume a certain level of capacity, but if you would do a little bit of analysis and try to consider what is actually operating, or subject to operating, we know that one of our facilities is not, and there are -- I know from reading material, that you and others published that several others aren't too.

If you sort of back that out of the base and then look at the production, it yields a much higher number than that.

Our number, by the way, has been well above that number last year and it is right now as well, and maybe because of our markets or otherwise, but we have been a little bit above it.

If you take some of the facilities that are not operating out, you generally yield a much more robust capacity number.

And that doesn't -- I'm not saying that explains whatever price mechanism you describe there, but it is a much different analysis when you look at what is actually operating versus what the production is.

Okay.

[Whew.] That's the same answer I'm giving everybody, so I'm glad that we agree.

So then the question they ask me is, what happens when this other stuff turns on?

Or is it not turn-onable?

Is it that not quick like a ferrous point or something like that?

Is it some of it non-economic?

I can't answer those questions, Michelle.

Or we can't.

Our experience tells us it is not easy to turn it on.

But I mean if you -- I think it is important also to recognize the cost of the incremental ton today, is really different, okay?

IN days gone by, we would think, you would think, we would all think that the incremental ton would be a more competitive ton, from a cost standpoint because you've covered all of your fixed costs.

But for us at least, at some point, the incremental ton means we need to buy more coke and we probably need to buy ferrous material and in today's world the incremental ton is often more expensive.

So bringing on things that don't have an existing raw material source, you need to look at what that incremental cost is and what the current price structure is, and how long is that going to last to cover the start-up costs.

It is a much different analysis that might have been done just a few years ago.

So I think that maybe needs to be considered in how quickly things start up.

I can only speak for ourselves, if we had the ability to start something up, which we don't today, but if we did, that is the calculation we would do and we do what seem best in the circumstances.

That is an interesting perspective.

I had not thought of that so I appreciate that color.

And thanks.

Thank you.

And I will turn it back to the presenters for any closing comments.

All right.

Well, I appreciate everybody being with us today.

And we will talk you to again next quarter.

Thank you.

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