美國鋼鐵 (X) 2011 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the United States Steel first quarter 2011 earnings conference call and webcast.

At this time, all participants are in a listen-only mode, and later we will conduct a question-and-answer session with instructions being given at that time.

(Operator Instructions)

As a reminder, today's conference is being recorded.

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

Dan Lesnak, Manager of Investor Relations.

Please go ahead, sir.

Thank you, Kylie.

Good afternoon, and thank you for participating in United States Steel Corporation's first quarter 2011 earnings conference call and webcast.

We will start the call with some brief introductory remarks from US Steel Chairman and CEO, John Surma, and next, I will provide some additional details for the first quarter.

And then Gretchen Haggerty, US Steel's Executive Vice President and CFO, will comment on the outlook for the second quarter 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 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, and thank you for taking the time to join us today.

Earlier today, we reported a first quarter loss of $86 million, or $0.60 per share.

Although we did not return to profitability in the first quarter, the economic recovery has continued, resulting in market conditions where we expect to be significantly profitable in the second quarter.

Now, before I discuss our results in detail, I would like to make a brief comment about our safety performance.

Through the second week of April, our 2011 global safety performance, in terms of our total recordable injury rate, has improved by over 4% as compared to our 2010 performance.

Likewise, our days away from work grade has improved by over 12% from the 2010 base period.

Safety is our number one priority, and with the active participation of all of our employees, we will continue to pursue our goal of zero injuries.

Now, turning to our first quarter results.

The operating loss for the Flat-rolled segment was $57 million in the first quarter, a significant improvement compared to the fourth quarter 2010, as the impact of a rising price environment that began in December ran ahead of the impact of a continuing increase in raw materials costs.

Although our total increase in shipments was relatively small, we did have improved shipment levels in virtually every market we serve.

Our raw steel capability utilization rate was 77% for the Flat-rolled segment, 5% higher than the fourth quarter 2010.

Hamilton Works steelmaking facilities remained idle throughout the quarter.

We incurred approximately $40 million in idle facility carrying costs at Hamilton during the first quarter.

For US Steel Europe, we had an operating loss of $5 million, an improvement from a $39 million operating loss in the fourth quarter, as the benefits of increased Euro-based transaction prices and improved product mix and higher shipments across most of our markets exceeded the continuing increase in raw materials costs.

Shipments increased by 17% to 1.4 million tons, due to increased customer demand driven by improved economic conditions, reduced imports, and lower customer supply chain inventory levels.

We operated at 92% of raw steel capability for the first quarter, a 15% increase over the fourth quarter 2010, as we restarted a blast furnace at US Steel Serbia that was idled during the fourth quarter.

Tubular income from operations was $30 million in the first quarter.

The decrease in operating income from the fourth quarter was primarily results of increased costs for hot-rolled bands, and rounds supplied by our Flat-rolled segment, and decreased average realized selling prices due to changes in product mix and lower prices for OCTG products.

Tubular results did benefit from a 10% increase in shipments, to 425,000 tons, as rig counts remained at good levels.

Now, before turning things back to Dan, I want to add a few comments on our strategic view of things.

Prior to the recession, we had invested in our iron- and steelmaking facilities and we're now focused on important strategic projects to address our coke requirements, and to improve our market position in both the automotive and tubular markets.

The carbonics coke substitute project at our Gary Works, the new C Battery we are constructing at Clairton, and the addition of pulverized coal injection to the rest of our blast furnaces in Europe, will generate significant cost savings as we reduce our exposure to the comparatively expensive merchant coke market.

The new heat treat and finishing facility at our Lorain Tubular operations, and the new continuous anneal line at our USS/Kobe joint venture in Ohio will position us to serve the growing demand from the shale developments, and to provide the grades of advanced high-strength steels that will soon be required by our automotive customers.

Over the longer term, we're considering strategies to take advantage of our significant iron ore resource position, and the abundance of natural gas in North America, to further reduce our dependence on raw materials such as coal and coke.

Our goal would be to create a more flexible and cost-effective business model, as raw materials have become more constrained and costly, and our markets have become more volatile.

While the recent and dramatic change in the natural gas environment in North America is providing excellent opportunities for our Tubular business, we could realize further benefits from this now abundant, competitive, and environmentally-friendly source of energy.

This could be as basic as increasing natural gas injection in our blast furnaces in order to replace costly purchase coke, and lower our CO2 emissions.

Looking over a much broader and longer time horizon, it could be as involved as supplementing our blast furnace production with gas-based, direct-reduced iron and electric-arc furnace steelmaking to further leverage our strong iron ore position and increase our operating flexibility.

While all of this is very conceptual at this time, we believe that it is appropriate to consider these types of options, given the changing landscape in which we operate.

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

Dan?

Thanks, John.

Capital spending totaled $180 million in the first quarter, and we currently estimate that our full-year capital spending will be approximately $990 million.

Depreciation, depletion, and amortization totaled $169 million in the first quarter, and we currently expect it to be approximately $675 million for the year.

Pension and other benefits costs for the quarter totaled $140 million, and we made cash payments for pensions and other benefits of $117 million.

As we indicated on our January call, we expect an increase of just over $160 million for pension and other benefits costs in 2011, and our first quarter results reflect an increase of approximately $41 million in line with that projection.

You can see in our Earnings Release that $28 million of this increase is reflected on the retiree benefit expenses line, as the first quarter amount was $71 million compared to $43 million in the fourth quarter.

The remainder of this increase was in the segment results, primarily in the Flat-rolled segment.

For the full year, we expect both our pension and other benefits costs, and cash payments for pension and other benefits, to be approximately $595 million.

These estimated cash payments exclude any voluntary contributions we may choose to make to our main defined benefit pension plan in 2011.

Net interest and other financial costs were $21 million favorable for the quarter, and included a foreign currency gain of $77 million.

Excluding foreign currency effects, net interest expense for the first quarter was $58 million, and we expect it to be approximately $55 million in the second quarter.

For the first quarter 2011, we recorded a tax provision of $16 million on our pre-tax loss of $70 million.

Tax provision does not reflect any tax benefit or pre-tax losses in Canada and Serbia, which are jurisdictions where we have recorded a full valuation allowance on deferred tax assets, and does not reflect any tax provision for foreign currency gains that are not recognized in any tax jurisdiction.

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

Gretchen?

Thank you, Dan.

Our first quarter cash flow from operating activities was slightly positive at $17 million, which included a $45 million increase in net working capital, as a significant increase in accounts receivable due to higher shipment volumes and selling prices, an amount in excess of $500 million, was almost entirely offset by lower inventories and higher payables.

While working capital can be difficult to predict within a particular period, we are expecting a further significant build in accounts receivables, given the higher average realized Flat-rolled prices we're anticipating in the second quarter.

Accounts payable changes should reflect higher operating and capital spending activity in the quarter.

And, as for inventory, we expect a build during the quarter as we rebuild our North American steel inventories, which finished the quarter at lower than planned levels, and also as we strive to meet the requirements of our automotive customers that may have shifted from the second quarter to later periods.

We ended the first quarter with $421 million of cash, and total liquidity of $2 billion; and, of course, it is our objective to continue to maintain a strong liquidity position.

With that in mind, we are actively looking at refinancing opportunities for the approximately $200 million of environmental revenue bonds that we are obligated to repay or refund by the end of 2011.

In addition, we've been exploring opportunities to amend or replace our existing domestic liquidity facilities well in advance of their scheduled expiration dates -- May of 2012 for our inventory facility, and July of 2013 for our accounts receivables facility.

Now, turning to our outlook for the second quarter of 2011, we do expect to report a significant overall operating profit, primarily due to the realization of price increases in our Flat-rolled segment.

Order rates for most customer groups, which began to improve later in the fourth quarter, remained firm throughout the first quarter.

And, while recent order rates have moderated, we remain cautiously optimistic that improving global economic conditions will continue further stimulating end-user demand.

We are assessing the effect of the events in Japan on our business.

As I alluded to in my earlier comments, some of our automotive customers have reduced April builds and adjusted future production schedules, due to part shortages.

However, we expect reductions in automotive production during the quarter to be made up in 2011, as vehicle inventories, which are presently low compared to historical levels, will need to be replenished.

Flat-rolled results for the second quarter 2011 are expected to improve significantly compared to the first quarter of 2011, driven largely by significantly higher average realized prices.

Raw material costs are expected to remain relatively stable, reflecting our iron ore, coal, and coke position.

Average realized prices are expected to increase from first quarter 2011, as we realize the benefits from increases in spot and contract prices, with index-based contract prices reflecting significantly higher published market price assessment.

Our raw steel capability utilization is expected to increase from the first quarter of 2011, as all of our steel-making facilities are expected to operate for the majority of the period, except for Hamilton Works.

We expect second quarter 2011 results for our European segment to be in line with the first quarter of 2011, as increased average realized prices are expected to be offset by higher raw material costs and decreased shipments.

Our average realized prices in Europe are expected to increase from first quarter 2011, as we realize the benefits from increases in contract prices.

And, our raw steel capability utilization rate is expected to decrease from the first quarter of 2011, due to reduced spot market demand, caused by increased production across Europe and the rising threat of imports.

We believe that the strength of underlying demand, as well as low to moderate inventory levels across the supply chain, should limit the duration of this current cycle.

Based on the current low level of spot customer orders, we have decided to accelerate planned maintenance on a blast furnace in Serbia originally scheduled for later in the year, and we will continue to adjust our blast furnace configuration to coincide with our customers' order rates.

Second quarter results for Tubular are expected to be in line with the first quarter, as the benefits of increased average realized prices in shipments will be offset by higher costs for hot-rolled bands supplied by our flat-rolled segment and purchased rounds.

Our average realized transaction prices are expected to increase from the first quarter levels as price increases take effect and product mix improves.

Dan, I'll turn it back to you now.

Thank you, Gretchen.

Kylie, can you please queue the line for questions?

Thank you.

(Operator Instructions)

Our first question will come from the line of Michael Gambardella with JPMorgan.

Please go ahead.

Yes, good afternoon.

Hi, Mike.

I have a question on Tubulars, because I can understand how the Q1 Tubulars profitability could be getting squeezed, but I would have thought that you would have a catch-up in Q2 as opposed to just basically staying flat at these levels of profitability that are quite a bit below normal.

Well, we are, Mike -- we are, after a fashion, having a catch-up on the commercial and price side.

I think our volumes are expected to be decent, I think, as Gretchen indicated, and there have been a number of price increases we've talked about with our customers and some of those are going to be coming through in the second quarter.

But, the fact is, there's a pretty good dose yet of higher hot band costs also to come through in the second quarter.

And April and May are really the peak, it looks like prices from a hot band standpoint, so those are flowing through as well.

So, I think what we're suggesting by saying in line or whatever term Gretchen used is that we probably have sort of stemmed the downward movement, and we're trying to move the margins back out to something that we're more comfortable with and just take a little bit more time to do that.

But the prices are moving in the right direction, but costs are still moving in the second quarter.

Gretchen, Dan, anything you want to add that?

No, that's fine.

Because the Tubular profits per ton are about a third or even less than where they have been historically.

Yeah, I think this is a squeeze that we're in here, and there's really not much we can do about it except try to move the prices through as quickly as we can.

We do have a good bit of business in our OCTG business in particular that are on programs.

I wouldn't say that it's contract business in the sense we think about it with fixed prices and all that, but we do have a program structure in certain cases.

And there are certain timeliness on price adjustments and they are taking a little while to feed through.

So again, costs are still moving up, prices are moving, but not as quickly as we would like, and we, like you, I think, want to get those margins back as quickly as we can.

One last question on the coke offsetting the expensive coke purchases.

When do you start to really feel that in terms of some of these cost-saving efforts that you're doing on carbonics, PCI, and so forth?

Well the capital is still just being spent, Mike, so carbonics is next year some time late, and then the C Battery a little ways after that.

So those will take a longer timeline.

We're already injecting higher levels of natural gas on the furnaces now, and when, I think, Gretchen mentioned that our -- what we're using that for gas in a lot of places in North America as well.

When Gretchen mentions that our overall cost structure is going to be relatively stable in Flat-rolled in the second quarter that's the one of the reasons, I think.

When purchased coke is in the $300 to $400 range, and gas is really anywhere below $10 or so -- which it's way below that.

It's a real good thing to do to reduce -- change those BTUs from carbon into gas.

And so we're doing a lot of that already, and that's part of the reason our cost structure stayed relatively stable.

But the big ticket, we'll get some of it in Europe later on this year when our coal injection is all on in both Slovakia and Serbia, and then the big projects in North America don't come on until a little bit later.

Thank you.

We'll go next to the line of David Gagliano of Credit Suisse.

Please go ahead.

Thanks very much.

Just a couple quick questions.

On the US Flat-rolled -- or on the North American Flat-rolled business, I was wondering if you could just drill down on the cost side.

Obviously, there was a considerable increase sequentially on the implied unit costs, and I'm wondering if you could break it down a little bit more between some of the components.

Met coal, obviously, was part of it, pension, I think, was part of it.

I was wondering if you could just quantify it in more detail?

Thanks.

Sure.

I think you named two of them right there.

I think the pension figures -- and Dan, you perhaps can correct me on this, but I think we've talked about pension costs year-over-year up $160 million.

Is that the number we talked about maybe in January?

Yes.

And I think Dan or Gretchen called out a piece of that that was in the retiree benefits line on the P&L.

$28 million in the first quarter.

So if you take $160 million and divide that, you've got $40 million.

And if you take that piece out there's $13 million or $12 million or whatever the number would be would be in the Flat-rolled segment.

So that would be one figure that you could probably put your hands on with some calculations.

And then there's, as you point out, some coal costs, although I think we've reported that our coal cost on average this year, we expect to be about $180 a ton or so in North America.

And that's probably about $10 a ton more, I think, than last year.

So you go through coke yields and process costs, and you end up with about $10 a ton of raw steel, probably something like that.

So those would be two you'd call out.

And then I think in the first quarter, we probably also had some pretty heavy scrap increases would be our single biggest number if I just look it up.

Reconciliation scrap would be a big number, and just based on how much we spend and how much we buy -- it's probably $50 million or close to it somewhere in that zone.

So those would be probably the biggest ticket items we would see across the way.

Yes.

Okay, that's helpful.

And just back on the carbon-to-net gas, I was wondering if you could quantify how much over time roughly you think you could substitute away from the coke and toward the net gas?

Yes, I don't have the capability figures with me, and some of it we have to put additional injection equipment on.

Some of the furnaces where we don't have the right [clear] injection capability, and we're injecting other things.

So, it's fairly meaningful.

It's not a small amount, and to the extent we're using on average, let's just say, 800 pounds of coke -- on average, that would be our target.

We're probably above that right now, but if we use 800 pounds as a number, could we bump out 100 pounds or 200 pounds through gas or coal?

Sure.

There are blast furnaces in the world that go to 400 probably, and we may well just try to get there.

But it's a tradeoff because you have other things that go the other direction.

But it's meaningful.

It's a meaningful portion of that total coke load if you think about it of 800 pounds per ton of raw steel.

Okay, that's very helpful, and very last question.

On the Tubular business, it does seem like there may be a bit of supply pressure shaping up, and I just want to clarify what you just said on that business.

Do you think the market is strong enough to absorb the supply to the point that the price increases will be more than the cost pressures, i.e., margin?

Or do you think that it's mostly just price -- or cost-related price increases?

No, I think -- we think at least that the market is firm enough particularly just because of the strong activity on the liquid side, although gas is still going pretty good as well, that the market is strong enough to absorb our capacity because we think we have really good capacity in the right place with the right connections and the right metallurgy and the right distribution network.

And while there's new capacity coming on, we don't fear that and we think we can compete against that quite well.

What we don't know necessarily is what's coming on a ship from some place far away, and we're a little anxious about that.

And if you follow the import numbers like we do, there have certainly have been some trends that are unsettling, and I think that's the wild card here, and we keep a close eye on that.

We all know what that means.

But in terms of the absolute competition, we're making our own steel, and we're enjoying that synergy all the way along the line.

We've got great metallurgy, all of our customers know that now, and I think we're going to compete just fine with whatever comes whether it's new capacity or otherwise.

Imports -- we'll keep an eye on.

John, it would be helpful to say too that on the cost side -- on the revenue side you talked about the programs, and the revenues get a little stretched out that side, but the cost side comes in pretty fast on Tubular, maybe a little faster than that, so.

In effect, we treat our Tubular business unit as if it's just a trade hot-rolled customer, and its got basically the same terms, same extras and same delivery terms.

So, that's generally a monthly spot assessment, and it's coming through pretty directly every month.

Thank you.

Next we'll go to the line of Dave Martin of Deutsche Bank.

Please go ahead.

Thank you, and good afternoon.

Wanted to start with flat-rolled pricing.

I know forecasting quarter-over-quarter changes can be a little dicey, but I wanted to ask you to remind us of your general mix of spot and contract.

And in particular, wanted to understand the percentage that was related to these quarterly contracts that I believe are CRU Index.

Could you provide some details on what percentage of the order book they represented in the first quarter, and how much they may be in the second?

Sure.

I'll give you just a number that we expect to be about the average for the year.

I don't know that the first or second quarter will be a whole lot different, so I'll just give you the broad numbers I have in my head.

We're guessing -- this sounds way too exact, but 37% would be the spot number.

That's way too exact., so you could say 35% to 40% would be probably a better range -- would be a plain spot number generally monthly, and we all know what that means.

The remainder would be contracts, and the exact number I have in my head is 27% for contracts.

That would be either firm for a period -- six months, a year, probably not longer than that -- or that has some cost adjustment in it, usually halfway through.

Not for 100% of the change but for some portion of it., so that would be 27% that are relatively firm, stable, maybe a cost adjustment, maybe no adjustment.

And I think that would leave, if my math is right, 36% for market-based contracts.

And the index you mentioned is a common one, and that would be about half-and-half probably between monthly and quarterly.

There may be a stray semi-annual here or there, very small, so I think it would be about half monthly, half quarterly.

So if I recap that it would be 37% spot, 27% cost or firm, 17% monthly index, 18% quarterly index.

I think that would get you there.

Okay, but I guess the key point is you're not expecting a lot of volatility and/or movement in the distribution of that makeup?

Well, we're not going to try to cause that I don't think, Dave.

Our customer may have a different view, and we'll talk about it., and the customer is always right, of course, but I think those general array has been fairly stable for some time now.

Yes, okay.

And then on contracts, can you comment on how many tons you have coming up for renewal July 1?

Oh, we have some, but it's not a large number.

I don't have it off the top of my head, but it would be less than a million tons, maybe less than half a million tons.

It would be somewhere in that range, I'd have to dig a bit further, but it's not a huge number.

We had a larger cluster at the end of last calendar year, and then we had a larger number that typically comes up at the end of March and April because of some of the Asian manufactures prefer that date.

And the rest is kind of happenstance, but there may be one or two at the end of June that are significant, but it would be in that range.

Okay, and then I had just one last question on the Tubular business.

Your average prices were down quarter-over-quarter, albeit modestly.

Was there any mix impact in the first versus the fourth quarter?

And then secondly, on the OCT program business, are those traditionally annual contracts or six-month contracts?

I'll take the last one first, Dan will come up with an answer on the first.

I think the program businesses we call it is relatively new, but I think what we've been shooting for is to have at least a year, maybe a longer framework of volume and commitments.

We have capacity, we committed.

They have the volume requirements that they need.

And then we might have pricing definition -- It may be monthly negotiated pricing, or it may be quarterly-type of pricing that has some specificity to it for a period of time.

And we're working on some indices there.

I'm less enthusiastic about those.

I'm not so sure that they are really going to give us a good idea of what's in the market because the variety of the pipe grades and applications is so great.

It's just hard to get, I think, a decent read on index.

So, that's the long answer to your question, but I think the programs have some duration.

The pricing within those typically would be a bit shorter -- maybe a quarter, maybe a month.

Dan, on the first one?

Dave, on the mix side, yes, we did have some mix change.

We did have some pretty strong volumes on the carbon side.

So the mix moved in that direction somewhat, but it was more driven by an increase in carbon volumes as opposed to a decrease in alloys.

We just saw more carbon this time.

Okay.

That's fair.

Our alloy mix gets back up to more of a traditional trend in the second quarter is our expectation.

Okay.

Thank you, and good luck.

Thanks, Dave.

Thank you.

We'll go to the line of Brett Levy with Jefferies & Company.

Please go ahead.

Hi.

Good afternoon, it's David Olkovetsky for Brett.

My question is regarding the Tubular business as well.

We've seen hot-rolled coil prices up from -- call it, $600 to $900 a ton.

What's your view on the Tubular price increases for the second quarter?

Is it $150 or $200 maybe?

Well, it's hard to give you an absolute blanket number on that.

I think the latter number you mentioned strikes me as a bit on the high side.

I'm sure there will be some business that $200 is within reach, but that's a little bit on the high side.

And maybe the lower number, just a tad lower than that might be what the overall average would be because we're talking overall average including welded and carbon.

So I think, on average, there would be some that would attract that kind of a number, but overall, it would be somewhat less than that.

Okay, great.

And then relative to ERW versus seamless.

I think there were comments made that you're expecting improvement from mix in the second quarter.

Is that a shift toward more seamless, or a shift toward larger diameter pipe, or anything along those lines?

No, the seamless/ERW mix might just tilt a tad back toward seamless, but it's about 50/50 plus or minus.

It's not going to be a big change.

We probably will have a little more of our total shipments will be OCTG, just because those are up higher.

We'll probably have a little more volume on the alloy side than carbon.

Carbon absolute volumes probably stay the same.

Alloy OCTG probably increases a bit, and we may do a little more export business that gives us a chance to pick up a couple extra turns on some of the mills and get a little more volume.

So the overall mix would be relatively similar, just small changes around the margins, but I guess the most noteworthy thing would be probably higher alloy volumes than carbon And we were a little limited on our alloy ability to respond to everything because we were doing a blast furnace outage at Fairfield.

And our rounds supply -- we had enough, but we didn't have any extra, so I think that probably limited us a little bit.

We're going to pick that back up this quarter.

Perfect, and one more, if I may.

Are you seeing a continued draw-down of inventory levels at either the distributor or end-user level within the Tubular business?

Inventories have gotten down to somewhere on the six-month version.

I don't know that we've seen recently any big change in that.

They've been in a reasonable position, and supply has been increased mostly by imports, but consumption has been good.

And the tons per rig, particularly in the unconventional resources, particularly with longer laterals -- the tons-per-rig are pretty good.

So they are usually a good bit of pipe for the same number of wells, maybe a little bit more, so I'd say inventories have been relatively stable.

Again, it's hard for me just anecdotally to give you that.

There are two or three outside services, and you can see what those say, six months, five and a half months, something like that.

But our distributors, I think, would say that they probably have some holes in their inventory, but generally, they're pretty well fixed But their inventories aren't too heavy, I don't think either.

I think we're about in balance.

Thank you.

We'll go next to the line of Dave Katz at JPMorgan.

Please go ahead.

Hi.

I was hoping that you could talk a little bit more about Hamilton Works.

Is the $40 million carrying cost that you saw there this past quarter what you would expect there in the second quarter?

And then what would it take for you guys to kind of open that back up?

Well, on the carrying costs, it will vary around at a bit.

We'll do our best to try to make it as low as we can, but when you look at property taxes and pension and OPEB allocations and depreciation -- there's some certain diet of cost there that's hard to avoid.

And then we have some fuels and utilities just to keep the equipment in an operative way and then some labor for fire watch and lubrication.

So we want to be able to operate the facilities when we're able to, and that's about what we need to spend, we think.

It's going to be hard for us to spend a whole lot less than that.

Now with respect to restarting Hamilton, we really need to get to the position where we have a successor labor contract that covers the operation there.

And we don't want to comment too much on the specifics of that because we think that's between us and the negotiators.

But there really isn't a whole lot to report.

We remain interested in negotiating an appropriate contract.

That's the best interest of us we think for the employees as well, and for the facility to get that done as soon as possible.

The steel workers have negotiated lots and lots of contracts all over North America, many of them with us.

There's one that's been negotiated -- you probably read about it that is I think to be voted on in the next week or two or three if I understand what's in the trade press at RG Steel.

My reading of that would suggest that the terms that we have offered that the contract has not been voted on are probably a bit more generous to the employees at Hamilton than they would be at the RG Steel, but that's just my observation.

There's no reason we couldn't reach an agreement like that at Hamilton, but that has to be an agreement that's competitive, and it can't be an agreement that has pension provisions that are just singularly out of touch with what the rest of the North American steel industry has.

So, long answer to your question, but we would be delighted to do that if we have a competitive agreement.

And that's where we have to get to.

Okay, and then coming back to RG Steel.

With the expectation that more steel is going to be coming out into the industry because of what they're doing, do you anticipate any impact on you as a result of that?

Well, I hate to get into hypotheticals.

There's not any steel being made there as far as I know at this point, so I guess it's possible.

But if the market continues to develop, and the economy continues to chug along at a reasonable rate, there may be room for additional supply.

But I'm sure it will be a competitive situation, but we know what the current incremental cost of raw materials are for us.

Maybe they're smarter than we are, and they'll do better than that, but we know what it is for us, and that's not a simple thing today.

So, that capacity to the extent it does come on, I think will have a certain position in the marketplace that we're prepared to compete against.

Okay.

Excellent.

Thank you very much.

Thank you.

We'll go next to the line of Brian Yu at Citi.

Please go ahead.

Great.

Thank you.

Good afternoon.

Hi, Brian.

Hi.

Could you discuss your order book in terms of what the lead times are and maybe how many weeks of spot exposure you have left in the second quarter?

Sure.

I think our average lead time -- I'll just talk hot-rolled -- it's a little longer of course on the coated [coil] products, but hot-rolled would be between six and seven weeks -- maybe six and a half if I had to guess right now.

And that's maybe in a week or so in the last month or two, and that's okay.

We think that's not a bad lead time, and it gives customers decent visibility and us a chance to plan our affairs.

I think that's from what I can tell about -- or we can tell about -- what the industry average lead time is, even though there's a lot of variation of it.

I don't know that we have much business to book for May.

Maybe a little bit, but probably not very much, maybe some specific things that we're keeping space for, and we're into June on that business that we need to book that isn't contractual, in an early way, but not meaningfully so far.

So we have some business yet to go, and that would be in June and depends on how the economy does and how confident people are as to how far we're going to have to push to get that booked.

It's interesting to note though that from what we can tell, service center inventories are relatively low.

And our customers are tending to try to buy just what they need to sell.

They are not holding much inventory.

That risk is ours at this point, and that means that they probably need to order at some point if their business continues to do pretty well which I think they're doing.

So we have some confidence that the overall market will smooth out, and that we ought to do fairly well volume-wise through the end of the quarter, but it's not all booked yet.

We have a lot of steel yet to sell, and a lot yet to make.

Okay.

Can you help us put some bookends on what type of realized price that we could be looking at in the second quarter?

It doesn't look like there's that much spot exposure left, spot prices are actually still quite high.

Well, we're getting pretty good price response not just on monthly spot business, but also on these index based contracts.

And in particular, on those that are based on a quarterly index because the first quarter quarterly index was based upon the third and fourth quarter comparison which was quite low.

And then the second quarter is based on the first and fourth, and so that -- if you follow that logic out, as you just pointed out, the spot prices are quite high.

And there's probably some room left for that calculation to help us all into the third quarter, but I won't go that far yet.

If you look back at our statistical supplement, it tells me that our flat-rolled price average realized was up $63, is that right?

Is my math right on that?

Correct.

In the fourth, the first -- I think there's -- our expectation would be it would be quite a ways beyond that, again, in the second quarter, compared to first.

Okay.

Would $100 change be out of the question?

If you took the percentage that I gave you and made some assumptions and worked really hard, you probably could get there.

All right.

Great.

Thank you.

Thank you.

And our next question will come from the line of Mark Parr of KeyBanc Capital.

Please go ahead.

Hi, thanks very much.

Good afternoon.

Hi, Mark.

John, I've heard you talk a lot about mitigation of cost increase and focusing on higher costs.

I think at the beginning, you were talking about working on lowering costs.

I was wondering, do you have any quantifiable targets for cost reduction that you could share with us?

Or how you look for the -- is there an overriding program around how cost reduction is expected to unfold for you over the next year or two?

And can you give us any color on that at all?

I don't think I can, Mark.

That's a good question, and I'll have to think about it.

Maybe I'll have something better to say next time, but I think we're looking at the broader landscape and saying what do we expect to happen here?

We expect ferrous material to be in relatively tight supply, relatively firm pricing.

We have undeveloped resource, we think we can capture real value in one of several ways by further developing that, and we're about that now.

And then to the extent we can -- using natural gas which has -- versus met coal and purchased coke has a lot of really valuable economic advantages right now aside from being a much cleaner burning fuel if you want to think of it that way.

And that combination of things depending on how we manage to harness it, whether it's cost reduction or new opportunities, I don't know, but it's real value creation, we think.

But I don't know that I can give you a number, Gretchen or Dan, we haven't really thought of it that way.

We could probably do some calculations.

I can't do them right now, but just talk about just in the nearer term how much we're going to be able to save by having blast furnace coal injection in Europe and also by adding more natural gas injection in North America.

We probably could -- those two things are fairly current, and they're fairly simple to understand.

And then just think about our coke manufacturing costs, our coal plus a number, let's say it's $250 to $300 of coke costs, something like that.

If you're buying coke at $450 or $400 you could see what your savings is right there pretty quickly.

So the numbers add up pretty quickly.

I think my ballpark I did in my head earlier today was that if you look at the purchased coke we have coming in North America this quarter -- or last quarter versus what we could have made it for ourselves with our given coal costs would have been about $40 million, I think, was my number.

So it's pretty meaningful stuff.

Yes.

That's helpful.

I appreciate that.

Just another, coke does a number of things in a furnace.

One thing it does is provide a burden -- provide a way for the iron ore to move effectively physically.

I'm wondering if you're going to take some furnaces to 400 pounds of coke per ton of iron -- is there any re-bricking involved in -- do you have to open a furnace up and re-brick it to rearrange how the burden moves through the furnace?

Not necessarily, Mark, but you're on to one of the issues.

These things all sound good.

If you take them to an extreme, they don't work as well as you like them to.

So it's a question of balance and getting the right combination of pulverized coal injection and natural gas injection and use of coke substitute.

That's something that we have lots of science around, but ultimately it comes down to trial and error and seeing how the furnace behaves.

So, I don't know that we're going to have to do any structural -- I mean, we have to do things to inject and all that, but in terms of the actual process of burdening the furnace with the reductant value of these various hydrocarbons.

I don't think there's anything we have to do to change the structure of the furnaces for that purpose.

Okay, well I just think a cost reduction plan would be great.

I think it would be well received.

Anyway, look forward to more comments on that to the extent you are comfortable sharing them.

Sure.

We do have an internal cost reduction plan every year that every department has X amount per ton, and it goes into a web-based system.

And they make monthly reports on it, and they are evaluated on it.

So we do all that, and it's in the $5 or $10 or $15 per ton kind of zone, and that's a repetitive thing we have been doing it for a decade now or so.

But in the world of $160 iron ore and $200 coal, those numbers begin to get a little bit smaller.

We're talking about fairly small things, but we do that all the time, but I appreciate your advice, and we'll make sure we consider it.

Okay, John.

Thanks, and good luck.

Thank you.

Thank you.

Next, we'll go to the line of Michelle Applebaum of Steel Market Intelligence.

Please go ahead.

Hi

Hi.

Okay, so I appreciate the strategic big picture stuff at the beginning.

I just want to get it straight.

Two of the things you said you would consider is building DRI, or did you say an electric furnace?

I did.

Okay, so building a DRI plant or building an EAF -- you said that, right, to capitalize on your iron position?

Yes, and I think that we've had that included in the -- we referenced that in our 10-K earlier this year, too, Michelle, as something that we would consider.

Building an EAF?

Yes.

Okay, and my question on the iron ore is I thought there was a limit to the life, and in the past, you've been fairly protective about expanding too much on the hot-ends because of that?

And I was just wondering if that's changed, or if I misunderstood that?

Actually, what we are really talking about our Keetac facility, Michelle, and we have plenty of resource available.

What we have to look at there is more palletizing capacity.

And so back in 2008, we announced that we were looking at expanding that and while in all of the turmoil of 2009 we didn't advance very far in that, we have continued to pursue permits for expanding that facility.

And that's really what we're referring to that that could give us the potential of a couple million more tons of capability.

And I think if you read our 10-K, we've got significant iron ore capacity now between Minntac and Keetac.

We do have some contracts in North America -- long term contracts that we buy under, but there's I think a lot of potential given that resource base for us to look at how best we might use it.

So we have been continuing with this permitting process.

It takes quite a while to complete, but so we felt we should just start articulating some of the things that we would consider doing with that.

Okay, and then speaking strategically, I was wondering about Europe.

You guys -- when you bought U.S.S.K.

originally.

It was -- I think it may have been the single best investment I've ever seen.

I think it had a pay back of five months or something like that.

It was just amazing, and then that's continued to grow, and its thrown off incredible cash flow, but I'm wondering now with the raw material situation being the way it is and their situation being the way it is, is there a possibility that asset might be worth more to someone else who might be in a better raw material position in that region?

Yes, I think, we -- certainly, Michelle, we've articulated that being a little more in balance on raw materials there is something that we would hope for.

So I think almost by definition given where raw materials are today that if you had a longer position on raw materials you could do a little better there right now.

Part of the issue that we have, I think, in Europe is just the market is still recovering, and recovering in fits and starts.

And the raw material prices have been very high, and there hasn't really been the economic strength, I think, to completely or quickly recover those higher costs and get the kind of margins that we have enjoyed in the past there.

So there's probably a couple of ways to address that, but I think having some greater market strength over there is going to help our position.

Thank you.

We'll go next to the line of Sal Tharani at Goldman Sachs.

Thank you.

John, did you have any impact from the gas issue with one of the plants?

I believe there was some news during the quarter?

That Praxair had an accident, and you -- ?

That was in the first quarter.

Oh, I'm sorry.

The industrial gas facility at our Great Lakes plant.

We did.

There was an incident that took that facility out of production for a couple weeks, I guess, from start to finish, maybe a bit longer than that before it was fully up.

And it did limit our production in our Great Lakes facility which is a very important plant for us particularly in the automotive sector, and the hot-end was virtually down or down-down for a period of time.

We limped along on a low level of operation with some bottled gas, but if it affected us It affected annealing because hydrogen was out, everything was out.

It was a very difficult place for us, and it's back up and running now and we guess that in the first quarter we can make estimates on what things cost and what we could have done or didn't do, but it's probably a $20 million item in the first quarter, plus or minus.

Okay, and -- ?

No hangover at the moment.

We may have to do some repair cost in the vicinity that might be some of our responsibility, but nothing significant.

Got it.

Also there was news in a local Pittsburgh newspaper that your OCTG welded facility in McKeesport -- that you are building a new mill over there.

Is that correct?

No.

That's a little bit of a departure from what happened.

We have an ERW line pipe plant in McKeesport, and it uses mostly scale from our urban plant just up the hill, so it's quite a nice, easy delivery pattern.

And it's been recently more busy just because of the additional line pipe activity going on in the shale play, particularly Marcellus, which obviously is right here.

For some years, I forget how long now.

But for some years, that's been operated by a third party under contract to us or from us.

And just recently, we judged it an appropriate time to become full operators of the facility again, and that contractual change is in the process of taking place like right now -- Last week, this week, next week -- some time like that.

So we had to go through the process of, I think, a new labor contract, and in effect, a change of employment, but really no effect on the people.

And we're going through that process right now, and we just judged it the right time because of its importance that it would be better to be under our direct operating control.

There's really nothing more to the story than that.

Okay.

And lastly, on the market conditions going into the second quarter.

Which end markets do you directly serve you have seen consistently stable, strong?

And where do you see a little bit of slack as we go into the second quarter?

Almost every market has been pretty good, Sal.

The auto market we've talked about before has been pretty firm.

Appliance has been pretty firm.

Our piece of construction, such as it is -- not very large, has been pretty firm.

Pipe and tube markets have been pretty good.

The container markets have been pretty strong.

Where the variation might come is more from the intermediaries.

The service centers and other types of processing customers we would have, and they might cut back on their buying because of trying to moderate their inventories, but that can't go for very long because again, inventories seem to be relatively low.

Any one Company is one thing but the overall sector looks to be in relatively good balance from an inventory standpoint.

So I'd say most of the OEM or end use markets we can actually see into the end use market, they are all going pretty well.

I think the distributors and processors maybe is where some of the slowdown has come more recently, but we feel like that's probably going to work its way out.

Thank you very much.

Thank you.

Our next question will come from the line of Evan Kurtz at Morgan Stanley.

Please go ahead.

Hi, John, Gretchen, Dan.

Good afternoon.

Hi.

Most of my questions have been answered, but just looking forward.

If you were to look at the flat-rolled pricing in the US, and if it does manage to hold somewhere near the $800 ton level.

Just given your contract to spot ratio, would you see a possibility for a third quarter pricing somewhat on par with second quarter?

I'd have to do some math there to get a couple [crays] together on that one, Evan.

But I think if the spot -- if you're saying that the exit third quarter, if I could say it that way or the last month of the quarter CRU spot number would be $800 or so in that zone.

I think our pricing for that quarter could look pretty good under that model.

It depends on the interim months, of course, but I think it could probably still look pretty good.

Thank you.

We'll go to the line of Justine Fisher at Goldman Sachs.

Please go ahead.

Good afternoon.

Hi, Justine.

Actually, I have two questions for you, Gretchen.

The first is on the accounts receivable -- on the inventory facilities, I know that you secured your credit facility in 2009 when the market was a bit distressed and there were some covenant issues.

In your preliminary discussions with the banks if there have even been any, have you looked at reducing the security requirements of these facilities or going back to something similar that you had prior to the financial crisis?

Or is the bank still demanding security until maybe they see a more full recovery in the steel markets?

I guess the way I would probably respond to that, Justine, is that the market for borrowing base-type facilities, the ABL market, is really pretty strong right now.

And I think that might be -- that's what we've been living with.

I wouldn't say so much the people are demanding that, but I would say it's probably where we could do the best and get the best pricing and the highest amount of liquidity.

So I think that for now, makes the most sense for us.

At some point in the future, we could consider another alternative or option, but that market is looking pretty good right now.

I think that's really why we're exploring it now.

Okay, and then on the environmental -- ?

I would say -- .

On the environmental revenue bond, can you refresh our memory as to how you would go about taking care of that remaining portion?

If I remember correctly, it would have -- one option was to refinance it in the muni market, and I think you may have done that for part of it already.

Yes.

Given the state of the muni market, are there other options -- did I get that right?

Yes, that's exactly right.

I think your memory is good on that, Justine.

We've had several hundred million dollars of those environmental revenue volumes that we have refunded over the last couple of years in the municipal market -- in the tax-exempt market, and we've done that very successfully.

We did our last tax-exempt offering in the fourth quarter of last year.

It was really a recovery zone bond financing we did on the order of $70 million related to the Lorain Quench and Temper project that we had.

So that was the most recent time we were in that market, and I would say at that time, while the deal was good.

We did a good deal, it was a little sloppy -- getting sloppy in the market, and I would say that that market has become more distressed since then.

So while we've continued to look at that, and you may remember we can't really call some of those bonds until later in the year.

We would probably look hard at maybe should we do some other financing and maybe the taxable side because that market seems to be a little bit better right now.

So we're considering all those kinds of things given that we have to have it done by the end of the year, and there's maybe some market risk and rising interest rate risk associated with waiting for the tax-exempt market to clear up.

Okay, thank you very much.

I appreciate it.

Sure.

Thank you.

I'll turn it back to our presenters.

Thank you.

Actually, I thought we had a couple people left.

They must have dropped off.

But apparently not.

So we appreciate everybody participating, and we look forward to having another discussion next quarter.

Thank you.

Thank you.

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