美國鋼鐵 (X) 2012 Q2 法說會逐字稿

Ladies and gentlemen, thank you very much for standing by.

And welcome to the United States Steel second-quarter 2012 earnings conference call.

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

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

(Operator Instructions) Also, as a reminder, this conference is being recorded.

I would now like to turn the call over to your host, Mr. Dan Lesnak.

Please go ahead.

Thank you, Parkie.

Good afternoon, and thank you all for participating in our second-quarter conference call today.

For those of you participating by phone, the slides that are included on the webcast are also available under the investor section of our website at www.USSteel.com.

We will start the call with introductory remarks from US Steel Chairman and CEO, John Surma, covering our second-quarter results.

Next, I will provide some additional details for the second quarter.

And then Gretchen Haggerty, US Steel's Executive Vice President and CFO, will comment on a few financial matters and our outlook for the third quarter.

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

Before we begin, 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.

We appreciate you taking the time to join us today.

Earlier today we reported second-quarter net income of $101 million or $0.62 per diluted share, on net sales of $5 billion, and shipments of 5.4 million tons.

Excluding the early redemption premium on the repayment of senior notes in April, our adjusted net income was $112 million, or $0.69 per diluted share, as compared to adjusted net income of $0.67 per share last quarter.

Consistent performance from our flat-rolled and tubular segments, and a return to profitability for our European operations resulted in a second consecutive solid quarter.

Our segment operating income was $330 million, our second-highest quarter since the onset of the global economic downturn in late 2008.

Lower average transaction prices for North American flat-rolled products was the primary reason for the decrease from second-quarter 2011 operating income levels.

Results in both our tubular and European operations improved as compared to the year-ago period.

Before I go into more detail on our operating results, I would like to comment on safety, our primary core value.

I want to recognize the outstanding accomplishments of our employees in this critical area.

Two very important measures of safety performance, our OSHA recordable injury rate and our days-away-from-work rate, have both improved over 2011, with the most significant improvement being in our days-away-from-work rate, which has improved by over 15%.

12 of our operating locations have worked without a days-away-from-work case so far in 2012.

And several of our facilities have recently attained significant milestones in their safety performance.

For example, our Fairfield, Alabama flat-rolled operations have now worked over 5 million hours without a days-away-from-work injury.

Our Keetac, Minnesota iron ore facility has now worked over 1 million hours without a reportable injury.

And just this past month, our US Steel Kosice cold-rolling operations passed the million-hour milestone injury free.

We are proud of the collective efforts of our employees, as we continue to pursue our shared goal of zero injuries.

The global economic recovery continues to be slow and unsteady.

And we have focused on finding ways to make money in the economy we have today.

Thanks to the excellent and safe work of our operating and commercial teams, our operating results were significantly better in the last 12 months than the prior 12-month period.

We realized higher average prices in both our flat-rolled and tubular segments.

Our tubular shipments have increased with the continued development of shale resources.

And overall, operating margins for all of our operations in North America have improved year-over-year.

Our flat-rolled segment had income from operations for the second quarter of $177 million, which was comparable to the first quarter, but lower than our results from the particularly strong second quarter of 2011, when spot steel prices were considerably higher.

Our flat-rolled operations had another quarter of strong operating performance, and we managed our planned major maintenance outages quite well.

For the first half of 2012, we had flat-rolled income from operations of $360 million, which represents our best first-half performance since 2008, as first-half results have improved each year since the low point in the first half of 2009.

The automotive industry has been a key component to industry-wide flat-rolled steel shipments thus far in 2012, and specifically to our performance, as well.

The automotive segment continues to operate at levels well above last year, with light vehicle production of 7.9 million units in the first half of this year, 21.5% higher than the first half of last year.

Additionally, vehicle sales have increased by 15% year-over-year.

And days supply of vehicle inventory remains lower than historical averages at 59 days at the end of June.

While the second-half vehicle build schedules are projected lower by approximately 800,000 units versus the first half, which is a typical seasonal pattern, full-year production estimates remain in the mid to upper 14 million unit range.

Many other contractual industries are projecting steady demand, which suggests that spot market activity is going to be the key to future shipment levels for the North American market.

Spot industry segments, like the service center, pipe and tube, and construction-related industries have recently increased their order activity, as they kept purchases during the second quarter to a relatively low level, and continued to closely manage their inventories.

As end-user demand remains firm, they have begun to increase their inventory to levels which support the volume of end-user shipments.

So, at present, the spot market volumes we thought we would see are materializing.

Results improved for our European segment in the second quarter, reflecting better performance by US Steel Kosice, and the sale of US Steel Serbia in the first quarter.

Focusing on USSK, operating results improved by $51 million as compared to the first quarter, primarily reflecting lower raw materials, energy and maintenance costs.

Results at USSK improved as compared to the second quarter of 2011, as lower raw material costs and efficiencies related to higher operating levels were only partially offset by lower selling prices.

The European steel-consuming markets continue to struggle.

Consumer confidence is weak as the region deals with the complex issues surrounding the sovereign debt crisis and member state governments attempt to implement austerity measures.

The regional markets for our Slovak operations have tended to outperform those in Western Europe, where, in many cases, manufacturers, especially automotive, are idling or permanently closing less efficient operations, and reallocating some of their production to central Europe.

The weaker euro should continue to discourage imports in the near term.

Steel purchasers continue to use caution in their buying patterns.

Inventories remain at reasonably low levels.

And we would expect any incremental recovery in demand to be promptly reflected in order rates for the quality products that we provide to our customers.

Our tubular segment posted another solid performance in the second quarter, with operating income of $103 million.

Shipments of 493,000 tons were below last quarter's record levels, but remained at historically high levels.

Average realized prices were lower compared to the first quarter, as selling prices, particularly for welded pipe, were pressured by declining spot hot-rolled prices.

A portion of this impact was offset by lower substrate transfer pricing from our flat-rolled operations, which is done at market prices.

The $72 million improvement over the second quarter of 2011 primarily reflects significant improvements in both shipments and prices, as lower substrate costs were essentially offset by higher maintenance and outage costs.

Although there was a slight decrease in total rig count in the second quarter, as the increase in new oil-directed rigs was slightly less than the decrease in gas-directed rigs, drilling activity in the United States continued at a high level.

While the recent volatility in commodity prices has resulted in a slight moderation in customer drilling programs, overall demand remains firm.

And Gulf of Mexico activity is gradually increasing, as a recent licensing round by the federal government drew record high bids.

Before I turn it back to Dan, I would like to provide updates on several strategic projects we have been pursuing.

With carbon costs being one of our larger market exposures, we have been focused on reducing our coke requirements and on becoming self-sufficient in our coke production capabilities in North America.

We have a targeted reduction of 100 pounds of coke per ton of liquid metal produced in our blast furnaces, as compared to our 2010 coke rates.

We have already achieved more than 50% of our targeted reduction.

And we have a series of projects scheduled for completion in the second half of this year that should get us very close to our objective by year-end.

At Gary Works, the first of the two carbonics modules is in the commissioning phase, and the initial production batches are in the furnace today.

We expect to have both modules running by early 2013, and reaching full production later in the year.

The C battery at Clairton is expected to start production by year-end, and reach full production early in 2013.

In order to serve the growing demand for value-added premium tubular products, we constructed a new heat treating and finishing facility at our Lorain Tubular Operations.

This facility started production in the third quarter of 2011.

And production levels have continued to increase each quarter, as the high levels of unconventional drilling drive demand for these premium products.

Also, we are in the early stages of a project to increase the size range for our number 4 seamless mill at Lorain, up to 6-inch outer diameter, which will increase our capability to supply the sizes that are in high demand from our customers for the continuing development of shale resources.

Once the engineering for this project is completed, we will seek final project authorization.

At our PRO-TEC automotive joint venture in Ohio, we are constructing a new continuous annealing line, and we remain on schedule for a startup in early 2013.

The new line will extend our existing coated advanced high-strength steel capability to include cold-rolled advanced high-strength grades that our customers require for their next generation of vehicles.

It is also designed to process new and higher strength grades currently under development to meet the future material demands in vehicle designs of our automotive customers.

Production of many competing materials is typically much more energy intensive than steel, which results in higher costs and increased CO2 emissions.

And as a result, these materials generally cannot provide the lowest carbon emissions when measured on a lifecycle basis.

The grades of steel we will be capable of producing at this new facility will position steel to remain the material of choice for automotive customers.

It is a cost-effective and environmentally sound solution to meet their need for lighter weight, greater fuel efficiency, while also meeting the improved safety standards that we all want for our families.

Another project we have been discussing is the potential expansion of our Keetac iron ore operations.

We have completed the necessary engineering, and have the required permits.

And we're positioned to move forward with this project when we believe the market outlook and economic conditions are appropriate.

Now I will turn the call back to Dan for some additional details on the second quarter.

Thank you, John.

Capital expenditures totaled $168 million in the second quarter.

And we currently estimate that full-year capital expenditures will be approximately $800 million, down from our previous guidance of $900 million, primarily due to lower planned spending this year related to the Keetac project.

Depreciation, depletion, and amortization totaled $164 million in the second quarter.

And we currently expect it to be approximately $660 million for the year.

Pension and other benefits costs for the quarter totaled $133 million.

We made cash payments for pension and other benefits of $112 million.

We expect pension and other benefits cost to be approximately $530 million in 2012, a decrease of $70 million from 2011.

And we expect cash payments for pension and other benefits to be approximately $500 million, excluding any voluntary pension contributions, and any contributions to our trust for retiree healthcare and life insurance.

Net interest and other financial costs were $82 million for the quarter.

And include $18 million of early redemption premium on the senior notes we retired in April.

Now Gretchen will review some additional financial information and our outlook for the third quarter of 2012.

Thank you, Dan.

Our cash flow from operations was $435 million for the second quarter, bringing our cash flow from operations over the last 12 months to almost $1 billion, even after $280 million of voluntary contributions to our main defined-benefit pension plan.

We have generated free cash flow, after cash used in investing activities and dividends, of almost $600 million in the first half of 2012.

This is a substantial improvement as compared to the last half of 2011.

We ended the second quarter with cash of $565 million, and $2.4 billion of total liquidity.

Given recent pension risk management developments, I thought that it would be helpful to highlight some of our actions to manage the liability and funding risk associated with our pension plan.

We've limited the growth of our pension obligations by closing our defined-benefit pension plans to new entrants.

We've taken a long-term approach to funding our main US plan, even when not required to do so.

Our practice of annual voluntary contributions to our main US plant has served us well.

And we have voluntarily contributed approximately $1.5 billion over the last decade in order to mitigate the risk of potentially larger mandatory contributions in later years.

The recently enacted pension stabilization legislation is helpful to us.

It also validates the prudence of our long-term approach to funding.

In an effort to stabilize pension funding over the next several years or so, the new law in essence changed the interest rate formula used to measure defined-benefit obligations for calculating minimum annual contributions.

In general, the new law defers required contributions, and reduces the medium-term likelihood of increased pension funding to our main plan that we may have faced in the years 2014 and '15 under the old law.

This is certainly helpful to us in light of the 2014 maturity of our $863 million convertible note.

Turning to our outlook for the third quarter, we expect total reportable segment and other businesses operating results to be positive in the third quarter, but below our second-quarter results, reflecting the continued weakness in the North American, European, and emerging-market economies.

Average realized prices are expected to be lower for all three operating segments, with total reportable segment shipments slightly lower than the second quarter.

Our Tubular segment is expected to continue its trend of solid operating profit.

We expect near breakeven results for our Flat-rolled segment in the third quarter due to lower average realized prices.

Proceeds are expected to be lower compared to the second quarter, as spot and index-based contract prices decrease.

While average realized spot prices are projected to be lower for the third quarter, spot transaction prices are expected to increase as the quarter progresses.

Shipments for our Flat-rolled segment are expected to be comparable to the second quarter, as end-user demand appears stable, and supply-chain inventories remain balanced.

Our operating costs are expected to be comparable to the second quarter.

For our European segment, we expect results to remain positive, but lower than the second quarter, reflecting the continued economic challenges in Europe.

Average realized prices are expected to decrease compared to the second quarter, as lower spot market prices carry over into the third quarter.

Shipments are expected to be lower as service centers and distributors maintain a conservative buying pattern to minimize inventory, and Europe enters its summer holiday period.

Our operating costs should be comparable to the second quarter.

For our Tubular segment, we expect third-quarter 2012 results to be in line with the second-quarter results.

Shipments are expected to be lower, as end users continue to adjust their drilling plans due to economic uncertainty and concern over energy prices.

Similarly, average realized prices are projected to decline, as supply has outpaced demand, manly due to a substantial increase in imported products.

Operating costs are expected to decrease compared to the second quarter due to lower substrate and facility maintenance costs.

And then, finally, we are currently negotiating with United Steelworkers for a new labor agreement covering most of our domestic operations.

The current agreement expires on September 1, 2012.

We anticipate reaching a competitive agreement without a work stoppage.

That concludes our outlook.

Dan?

Thank you, Gretchen.

Parkie, can you please queue the lines for questions?

(Operator Instructions) Luke Folta with Jefferies.

I have three quick ones, if I could.

The first one I had was, if I look at your North American Flat-rolled segment, the other revenue category, where you have total customer sales and you've got the tons times price, there was about a $100 million-plus step-up sequentially in other revenues in the category.

And I assume it's higher coke and iron ore sales and all that.

I just wanted to get a sense of what that piece is and how that impacted profitability in the quarter.

Luke, that's really the arc businesses.

It's everything other than that Flat-rolled, Tubular and Europe.

That would include our remaining transportation assets, some of our railroads, our Transtar operation and real estate and things like that.

I think the revenues really relate to that, probably more on the Transtar side.

There were just improvements in those businesses.

Nothing really I think worth--.

Nothing of a structural or unusual nature that we think we would need to draw to your attention.

I was referring to, within the Flat-rolled segment, if you take reported shipments and reported sales prices and do the math there, what is left when you look at total segment revenues?

That piece that's left.

That piece is much bigger this quarter than it has been in a long time.

I was just looking for some color around that.

Luke, let me look into that.

I will get back to you with off-line on that one.

But I'm not aware of anything unusual.

But I will find out for you what's going on there.

Okay.

And then, secondly, just on the outages.

I think we had talked about potentially a bigger outage at Gary Works this quarter.

And we have gotten some indications that maybe you might be limiting that outage or pushing it forward in some way.

Can you maybe give us some thoughts on it?

Maybe not only in your North American steel segment but just overall what outages are planned in the third quarter and second half.

There's always a normal diet of things, Luke, as you know.

But I will acknowledge we do have planned a relatively significant project -- repair project -- at our number 14 furnace at Gary that is scheduled to be underway later in August.

That's our current schedule, at least.

It could be earlier, it could be later.

And that would continue probably sometime into the fourth quarter and early October.

The duration is probably about that length.

When and whether we start it depends on a lot of things but it's pretty close.

Pretty likely we are going to do that, and it's likely it will be done this year, and likely on the schedule I gave you.

So that would be the single biggest element that I would mention.

We already did a smaller outage at one of our Mon Valley blast furnaces, which is already behind us.

Those would be the highlights through the rest of the Company.

Tubular, Europe, there's a variety of things.

Nothing that I would draw to your attention that would be of consequence.

And you'll notice we did say that our operating costs are expected to be comparable quarter over quarter.

Okay.

And just lastly, regarding the labor negotiations, Gretchen, you touched on it.

Obviously, one of your competitors in North America is going for some pretty steep reductions in wages and benefits and things.

My sense was that, before that was announced, maybe you guys weren't asking for big cuts anywhere.

And I'm just curious to know whether or not that development has really changed the way you are seeing your negotiations or what your expectations are just to remain competitive?

I will handle that for Gretchen.

Our expectations are, as they were set forth in our earnings release, and as Gretchen mentioned, we expect to reach a competitive agreement.

And we expect to do so on the schedule we outlined.

We don't really like to comment on the substance of our own discussions with our major union, let alone anybody else's.

So we will leave that part alone.

But I think from our standpoint, we are working hard towards a competitive agreement.

We've done it before, we expect to do it again.

Great.

I will turn it over, thank you.

Brett Levy with Jefferies & Company.

You've got considerable liquidity here.

Can you talk about whether or not you're looking at any of the RD assets?

ThyssenKrupp is apparently looking for a buyer of their Alabama assets.

That has some strategic importance to you guys in the long run probably, as well.

Talk a little bit about anything you're thinking about on the M&A front.

And whether it's more North America or maybe another geography.

I would say on the latter point, our primary footprint is in North America.

Because, as a region, North America is long ferrous, long met coal, long gas, long scrap, it's a pretty good region to be in our line of work.

Once the market catches up with our capabilities, it will be even better.

And I would just say on the general point you mentioned, we look at everything that's available to see if there's a way that it would add value to our Company.

That's our determinant -- does it add value.

That's the first question.

Second question would be, how might we accomplish such a thing.

And with respect to the company you mentioned, I'm reluctant to comment on specifically, because it is fairly early in the process.

But we like to look at everything that's available and to the extent there's something we think can add value, we will take a pretty good run at it.

All right.

And in terms of spot prices from 2Q to 3Q, obviously because you are indexed monthly and indexed quarterly, and that kind of thing, there is a certain stickiness.

Can you guys talk a little bit -- there's been two rounds of price increases.

Have you implemented it across the board or announced it across the board?

And then talk a little bit about rough magnitude.

Because it looked like spot prices actually fell by close to $100 a ton from peak to trough, $700 to $600 in round numbers.

Just want to get a sense as to when that is going to come through and how fast that's going to reverse itself in your numbers.

Let me just try to work it through.

That's a good question.

You can take a look at the indices from the outside folks and see what the highs were.

But I think the order of magnitude, if you just look at what happened in this quarter, that's probably not a bad assessment.

On the way down, that is.

The indices would indicate -- some were weekly -- that there seems to have been a turn upward.

There have been a number of press reports about different pricing actions.

That's certainly what we are experiencing.

We see the market moving up in front of us and we want to make sure we're getting what the market has to offer.

It's still early in the process and we like to discuss these things with our customers before we talk about them too much here.

But I'd say the direction is pretty clear.

It's up and it's a direction that we intend to pursue and make sure we get what the market has to bear.

Your assessment about us, I think, is accurate.

We are already booking into September probably at this point.

And because of some of our outages, we don't have as much spot business available as might be the case in other quarters.

Some, but maybe not as much.

So, because of the timing and the amount of spot business we have, we probably won't get as much of that effect in this quarter.

But we take a longer view of this and we think the movement is in the right direction.

It will begin to work its way into the indices.

\The indices will not work for us this quarter.

I think you all understand how that works.

And we had quite a nice adjustment in the last quarter.

This one goes the other way.

That's the nature of the beast.

So, for us, it's a little longer horizon.

There will be some in the third quarter but if the trend continues it would be more of a later item.

Michelle Applebaum with Steel Market Intell.

Very nice quarter.

I don't mind admitting when I'm wrong, but I really like admitting I'm wrong when I can say US Steel beat.

So really nice job in a tough environment.

My question was, the Wall Street Journal made this very large deal about this Ford truck turning into aluminum.

And it's interesting because you had just had this automotive thing.

I was checking my records, and on the subject of aluminum substitution in automotive, in 1981 the target for five years was 500 pounds per car.

In 1990, the target was 500 pounds per car in five years.

In 2000 the target was 500 pounds per car in five years.

And in 2012, the amount of aluminum used per car is 330 pounds currently.

So it's interesting to look at that and to see that this has been out there for a lot of our lifetimes, almost.

And why has aluminum not taken much share?

And is there anything going on that is changing that?

Because we have had this fuel economy moved before but is this time different?

Michelle, I will let folks from the companies that are involved with those materials comment about why they do or they don't.

That is their concern and not ours.

I'd just say that one of the reasons steel has remained a very competitive material in that marketplace is because we have been able -- we, as a company, and I think as an industry consortium, we have been able to keep our material aligned with what our major automotive customers need.

And right now, they need mass reduction and strength and formability and coatability.

All those things support your steel vehicle program which was a global industry consortium.

Together with the environmental benefits, the much lower production phase emissions, and the much higher recycling rates at the end.

We've got, I think -- have had-- a fairly compelling value proposition for automotive markets.

Which may be the answer to your question.

We always have competition.

We're going to be working as hard as we can to make sure we win that competition, doing all the things I just described to you.

And everyone in our Company is dedicated to making that the end result.

Dave Lipschitz with CLSA.

Good afternoon.

My question to guys is about the pricing in the second quarter.

Obviously spot pricing came off pretty hard at the last part of the quarter.

Yet your pricing was up.

And now in the third quarter is dropping pretty precipitously.

Is that just a timing issue?

Or what happened there?

It usually doesn't fall off as much on a quarter-over-quarter basis, and up in a spot price type of environment like that?

David, I think if you look back in the appendix and the slides, there's a couple of pie charts there which are pretty helpful.

They show our overall contract/spot mix.

Spot about 30%, contract about 70%.

But in the things that are market related, we have monthly based contracts that are about 20%.

And they respond fairly quickly.

It may take a month but eventually we are going to catch up with the spot.

The market base quarterly, those don't respond until the subsequent quarter.

So we do tend to, on the way up, we move into better territory a little slower.

We tend to hold it, including the second quarter, which is precisely what you're seeing.

We had a very nice adjustment first to second quarter.

And then when we get to the third quarter, the downdraft you mentioned begins to catch up with us.

And eventually it evens out and we end up heading in whatever direction the spot market is.

But I think our movements tend to be less abrupt and more measured and over longer periods of time because of our particular commercial strategy that you see on those charts.

I understand but it's not that much different than last year's chart.

Maybe a tad here, a tad there.

Prices fell precipitously last year second to third quarter and you were only down $30, I think, a quarter.

That's what I was just trying to figure out.

It seems like it's happening more than it normally did.

That would just be the way the numbers worked through the indices.

There would be nothing structurally any different.

The indices come out once a month.

You can work the math and see what they do.

But it's basically the indices.

And then for us it might be affected by how much spot business we're actually doing because, for other reasons, we may or may not have as much available.

You may recall last year we had a difficulty in one of our facilities and we had very little spot business available when the spot price was high.

It just depends on the amount we have available and which direction they're moving.

But nothing different now than it would've been last quarter or last year at this time

Okay.

Jeff Kramer with Morgan Stanley.

On the Tubular side, you mentioned building new plants being revisited, the excess inventories, and there's obviously a competitor mill starting up this fall.

The ability to balance supply and demand seems pretty challenging in the near term.

How do you see that playing out?

I think it's going to play out better if drilling remains active and the rig rate stays strong.

And if imports are guided by fair trade and not dumping for reasons we can't fully understand.

If any of those things go the other way, then I think it's going to be a longer, more difficult process.

Our guidance incorporates the fact that that process is going on right now.

There's a few things in there that Gretchen mentioned.

But we see the rig activity in the 1,900s as still pretty healthy.

Still a lot of business that is going on.

We see our place in the market with a very strong supply capability on the alloy and heat treat.

Key things that the really important drillers, the big drillers, really want to have, particularly for the more challenging shale plays that they are after now.

And pretty healthy line pipe market, too.

I think we've done pretty well on that site, as well, in the last quarter or two.

And we have a decent outlook there.

It's going to be a competitive market but if the underlying demand remains strong, and for all the reasons that are good for our country for energy activity, we think we've got a pretty good shot at doing okay.

Okay.

And just on the slab caster at Fairfield, when the decision is made next year on whether to lease or purchase, what are we looking at in terms of dollars, either the purchase price or the increase in the annual lease amount?

That's going to play out over a period of time.

But I think the original contract had a buyout option on the order of $50 million-ish, something like that.

That's what the buyout is.

And if you went back to the original -- what the facility cost and all that stuff -- that would make sense in the context of the lease that we did.

But we still have to sort through that.

There is a process that we have to work through, which we are in the midst of doing.

And we have notices and things we have to meet.

Okay, thanks.

And then just a quick housekeeping question if I could.

Was there a LIFO credit for the quarter, Gretchen?

I honestly don't think so.

We don't normally comment on that.

That's like giving you earnings results without payroll or something.

We think that really doesn't tell the whole story.

In our particular case, we've been on LIFO since 1941 so it doesn't have the same charm as some others.

And we think what you get with us is essentially a current cost of sales so that's the number that counts.

Tony Rizzuto with Dahlman Rose.

Just a couple questions here.

John, do you think the domestic market can accommodate further price hikes beyond the July announcements?

I don't know, Tony.

I think that depends a lot on how the general economy does, and if there happened to be a little bit of good news on the construction and housing side.

I saw some reports of one of our really good major customers saying that they were hoping that's going to happen.

That would be great.

If the energy markets stay strong, and if the automotive builds stay stronger, there certainly could be that possibility.

It depends on the supply/demand balance.

And if utilization rates have been what they've been, in the high 70s or whatever, most recently.

But I think one has to look a bit deeper and see what the utilization rate is for those that are actually operating/ And it may be that that supply/demand balance right now is in a pretty good place.

And if that's the case, there could very well be.

Obviously imports are trending downward right now.

But would you be concerned that they might begin to pick up again if prices were to move up too much here?

It's certainly a possibility, Tony.

We've had that experience the last couple of years, and the combination of maybe North American prices being a little fuller, and some other regions being less so.

And currency moving in a direction that wasn't helpful.

That all conspired to be a concern for us.

We are quite concerned about imports, and remain so.

Particularly when we see some news out of China that isn't particularly inspiring.

It seems to me that if things stay in the general zone we're in, with some reasonable price stability, and there's availability of supply, there's really no reason for imports to come this way any more than they already do.

But that remains to be seen and how far the market would go.

Just one further question, if I may.

Just in regards to the maintenance expenses for the third quarter.

Your commentary sounded as if you're going to see a continued high level of those expenses.

I know the second quarter was $40 million above Q1.

Should we expect a similar level in 3Q versus 2Q?

I think the actual amount of that spending might be a little bit higher than it was in the second quarter.

But I think Gretchen's comment was that overall costs are expected to be comparable.

So that encompasses our expectation for those major maintenance costs, Tony.

Maybe we were too subtle on that.

But when we put it in with other things that are up and down, the amount of cost we had in the second quarter, natural gas movements, scrap movements, and other odds and ends, and whatever is happening on productivity, et cetera, we expect total costs to be about the same.

All right.

Just sometimes you got to hit me on the head a little bit, that's all.

No, reading it now, I could see how maybe that question could be there.

So we were perhaps too subtle.

We're not good at that.

Thanks a lot.

Kevin Cohen with Imperial Capital.

John, just to elaborate a little bit further on the import front, how much of a risk do you think there is to the import equation in terms of it going up in North America, just given the move in the US dollar?

I think, Kevin, if your question is on Flat-rolled, I think there is some risk.

I guess euro/dollar was 1.22, 1.23 range last day or so.

We sure like it more at 1.50 or 1.40 or 1.30.

But I think still the relative position of the dollar/euro, when one looks at transportation and taxes and import fees, et cetera, it's not so extreme that it's a sure thing for imports to make economic sense.

And, again, if there is reasonable domestic availability it takes way that reason for maybe some customers to want to go and look to imports.

There is probably also some good concern to have about just the difficulty in other regions where the markets are in difficult shape in important, where exports would be an attractive alternative to keep their plants running.

We haven't seen a whole lot of that but it's always a risk and we may see some of it in the future.

So I wouldn't say the currency situation is, in and of itself, a reason for a flotilla to head this way.

But it would be much better if the currency went back the other way.

Dave Katz, JPMorgan.

I have a clarification.

When you guys say operating costs would be comparable, are you talking on a per ton basis or on an absolute basis?

Absolute, Dave.

Okay.

And then coming back to CapEx, with the understanding, John, earlier when you were talking about Keetac, obviously you are waiting on the market before you decide to go ahead.

But looking out at 2013 with items that are now already decided, what would CapEx be?

Dave, it's probably a little early for us in our process to be talking about that.

I think if we have the Keetac project underway, you're going to be looking at spending more on the order of the $900 million to $1 billion level that we started the beginning of the year talking about.

I don't know that I would change that.

You could push this $100 million or so out into the next year, but I don't know that we could really --

No.

The other thing that's probably worth mentioning, if I understand the nature of your question, would be that, as I mentioned in my comments, we are finishing up the carbonics project.

We're finishing up the C battery project.

We've had an ongoing ERP installation that's taken some capital and we are in a position where we might be able to see the finish line there.

And when those larger strategic projects are behind us, when the strategic larger projects are behind us, it does open up some flexibility on capital expenditures.

That if we wanted to try to minimize them for whatever reason -- because there was another dip or whatever it might be -- or maybe an opportunity if we wanted to think about a larger strategic project.

So we will do some thinking on that but we are not in a position to say exactly how much.

But it would be in a position where some of the bigger projects are rolling off.

And that's not a bad place.

Dave Martin with Deutsche Bank.

John, I wanted to ask you briefly about the Tubular business where your profits and margins were quite strong despite volatile and declining steel prices.

I'm just curious as to what impact program sales and other sales embedded in this segment may be having to the stickiness of the profitability of Tubular.

And then, secondly, I'm just curious if you can comment on the order books you currently have in that business.

Sure.

On the stickiness, if that's the term, Dave, I think programs have been helpful for us.

And I think on the one slide we show program business was 44% or whatever.

It bounces back and forth but that is not a bad place.

That's a situation where we and an important end-user customer agree that we're going to commit a certain amount of capacity.

And they get what they get, and we make what we want to make.

We match up and we usually have an understanding about how prices will be arrived at.

Mostly it's just a normal negotiation on a monthly or quarterly basis.

And I think the program business has been more important in terms of allowing us to keep our manufacturing running at the levels we want.

And to have us align our products with what the market is going to need, with the knowledge that we can do that.

The pricing is still, I think, determined by the broader market.

And while it has been helpful to that regard, I think it is more helpful to us from an overall volume standpoint.

I'd also point out that we continue to make pretty good progress on our own premium connection strategy.

We've got a number that are already in the market.

We have a new one, CDC HTQ, which is high torque casing drilling connection, which is just now getting into market.

It's already being accepted by a couple of very important customers.

And that brings with it a nice margin improvement, as well.

And some of that begins to work its way into the figures that you see.

Okay.

And then, secondly, John, earlier you had mentioned that your lead times were into September, I believe, in your North American business.

Were you referring to hot-rolled?

I was just saying, we're booking into September on a variety of products.

Some are contract and some are more spot based.

But our lead times, the absolutes I don't think are all that meaningful because it's reflective of our particular product mix and what facilities are running.

But we're, spot hot roller, probably three to four weeks out, which is what that would indicate.

And I would just say recently our lead times have probably lengthened a bit.

And I think what's more important is direction, and I think the direction is a somewhat longer lead time at this point.

I didn't answer your question on the Tubular bookings, but that is largely a spot monthly booking program.

And we are booked pretty far out into September.

On some of the mills, probably into October.

So we're booking reasonably well in the Tubular business, also.

David Gagliano with Barclays.

I was wondering what the average natural gas price was that flowed through your costs in the second quarter.

And also, how much of your third-quarter natural gas is hedged at this point?

And if so, at what price?

I will let Gretchen or Dan look up the figure.

It'd $3-something, I think, if I remember right, for the second quarter.

Gretchen?

$2.89 for the second quarter.

So a little less than $3.

And I think that's a delivered cost so it's got transport up to the plant, et cetera, on it.

And that was reflective of some gas we had purchased before.

And we do some advanced buying, some with some financial mechanisms.

Largely to allow us to make sure we cover gas we've already sold when we do fixed or firm contracts a little further out.

And the market, I think the prop month and the strip has turned up pretty substantially since then.

On a percentage basis, the numbers are still pretty low.

And so we probably will have higher gas costs in the third quarter but that's all part of our prediction that costs ought to be about the same.

Okay.

And then just one more time, coming back to the Tubular.

I apologize for beating a dead horse here.

But I'm going to give it a try.

Obviously you've got a view on rising input prices.

And given the commentary on the supply/demand imbalance, what scenario, is there a scenario, where your margins in Tubular do not compress in the fourth quarter versus the third quarter, as you see it right now?

In the fourth versus the third, I don't know that I've thought it out that far, quite honestly.

I think the fourth quarter is pretty far away, it seems, for us right now.

But I think there is a few things you have to look at.

Certainly a flat-rolled strengthening, flat-rolled hot-rolled market probably is a good thing from that standpoint.

My tubular colleagues here won't necessarily like it because we'll charge them more.

But I think in the end that probably is a supportive activity.

Import levels have to be carefully monitored.

Tubular imports for the first six months were over 1 million tons, more than half of the market.

And a lot of them low priced, a lot of them from Korea.

At prices that we can't comprehend based on what we know it cost to make something and to ship something.

So I think we have to monitor that and see what damage to our market that might be doing.

And then we have to watch the rigs, and if the rigs are busy and active, and they're running the kinds of heat-treat alloy, small diameter product we make, we think we can probably still do okay.

We may have a little bit of compression as the hot-roll price moves up.

That happens for us very quickly.

As you know, we just do it on a monthly market basis so you can all see how it works.

But I think those are usually shorter-term things that work themselves out.

I'd be more concerned with the volume, with the rig counts, than with the absolute prices.

The ultimate cost, we end up equalizing those over time.

Michael Gambardella with JPMorgan.

Congratulations on the quarter, by the way.

I wanted to get back to the labor contract because your contract and Middle's contract expires at the end of August.

And last time you negotiated a contract, in the first half of 2008, the market was a lot better under those negotiations than it is today.

Are you seeing any type of customer-buying patterns changing in anticipation of the end of the labor contract?

Not in any significant way, Mike.

I would tell you that some of our customers were interested in our views on that subject, on our situation, and we commented to them precisely as we commented to all of you.

That's what our view is.

It would be hard to see that probably, but we haven't seen anything that would suggest that's the case.

Just hypothetically, if your competitor were to go on strike, and you did not, how much availability do you have on the volume side to fill the void?

We are running essentially everything we have right now, with the exception of Hamilton.

And that would be one large incremental piece that would be a couple million tons as a rate of capacity.

But from a current operations standpoint, I think today, or last week in the US business, just US business that would compare to the mid '70s or whatever, the AISI number was we were probably pushing 90% or close to it, maybe not quite.

So some, but not a whole lot, particularly as we go through these maintenance projects.

But, again, it's a hypothetical so what we might do or not do it's impossible to say now.

In all likelihood, though, if there were a strike by one of your competitors, to make a move to restart Hamilton, that would be a pretty big decision, right?

It's an important decision regardless of what the reason might be.

And I'm not suggesting that would be a natural reaction.

I'm just suggesting -- you asked me what the capacity was, and that's a factual answer, which you probably already know anyway, of course.

But it seems to me that we would look at this like we have described it before.

We need to look at what the cost of that is, and what the longevity of the conditions are, market or otherwise, that might provide a margin that looks positive.

Measure that against the working capital and capital which is required, and try to make a rational decision.

Richard Garchitorena with Credit Suisse.

I just wanted to touch a little bit on Europe.

Pretty strong results there this quarter.

Can you remind us about the value-added capabilities there?

It seems like the demand for your firm, and I know you mentioned how you are positioned on a regional basis better than others.

So maybe just some color around that would be great.

Sure, in Europe we're, we think, positioned a little more favorably than some for a number of reasons.

One would be that we have a really good plant with really good equipment, and excellent and productive employees.

And so we have a, I think, reasonably strong operating cost position.

We've got access to materials that, while market-based are competitively market priced, we think in most cases.

So we've got a pretty good cost position.

On the market side, we have steadily invested capital over the decade or more that we have been in Slovakia.

Initially a new 10 mill.

We operate several low and they're running reasonably well.

We have electrical motor laminate, the dynamo, would be the term of art in Europe.

We have two of those lines.

One of which is fairly new that we invested in four or five years ago.

We have -- I still think of it as new but it's a few years old now -- a continuous galvanizing line that is automotive capable.

And we have won quality awards from the very top European automakers for our material.

And it's in quite good demand and fully loaded.

So we've got reasonably good and very high quality -- but from a volume standpoint reasonably good exposure to higher value-added markets.

But we still have a pretty heavy spot hot-roll.

It's probably half of our book, plus or minus.

Pretty heavy spot hot roll position that we'll continue to look at ways to upgrade over time.

But it's a very competitive hot-roll coil and we usually manage to sell it for a pretty good price.

When the market is functioning better than it is today.

Great.

So, do you think that second quarter is indicative of what a normal type of run rate might be going forward?

Obviously Q3 has seasonality but I'm trying to look beyond Q3.

If the European economy doesn't deteriorate further, is that a good base to think about, is my question?

It looks really small to me, actually.

Most quarters we're way better than that over the 10 or 12 years we have been around in Slovakia.

So we have expectations, really it's aspirations, that would be much better than that.

But in the market that we are in, in the location the we are in, the pricing in the second quarter was not great but it was good enough, given our cost position.

We could make a reasonable amount of profit.

The cost and the prices will move to some degree in unison, but not always perfectly.

So I am reluctant to say that is the new normal.

We think we can do better than that.

But I think, given what's happening in the spot market in the third quarter, as our outlook indicates, it's going to be difficult to maintain that.

So we're going to have to run hard.

I think the second quarter was reasonably good, given what we had to work with.

But there've been other quarters that we have done way better than that, and that's the kind of quarters we are shooting for.

Shneur Gershuni with UBS.

Just a question here about the maintenance with respect to number 14.

Once it's completed, if my recollection is correct, it wasn't actually operating at design capacity beforehand.

With this maintenance in place, do we expect to see a productivity improvement in '14?

Is there a way that you can quantify the improvements, if there is expected to be one?

I think there will be some higher productivity levels.

We have been not running it extremely hard just because the refractories and some of the harsh walls were in a little bit tenuous condition.

We were emphasizing safety.

But I think there's an expectation, at least on my part, there should be some better ability to run day in, day out at higher levels.

How much that is we have to wait and see, and see how it behaves when the project's done.

And we don't know everything about the furnace until we get inside and have a look at it.

One thing I would comment on, though, is that this will be a very big step in getting to our natural gas substitution goal of 100 pounds that I mentioned before.

This furnace has not been accommodative to a lot of gas usage because of its condition.

When we are done, it will be.

And that will be a big step forward.

Hopefully we will have that stabilized and, as I said, by the end of the year be chasing, or be right on top of our 100-pound goal.

So that will be a very important step for us.

And the economics on that?

The economics on that are very good for us.

And as a follow-up question, we've seen a decline in the end market specifically in coal the last couple of weeks and so forth.

Does this prompt you to bring forward the discussions you normally have with the producers to discuss contracting for next year?

Or do you plan to stick onto the normal schedule?

We are thinking about that.

We stay in pretty close touch with our coal suppliers anyway.

And whether it might be in their interest and ours to have an earlier discussion, trying to time that to a particular move in the market has never been a particular skill of ours.

We go through a lot of data gathering.

So today, we look at our needs, they look at their availability.

And that'll happen at some point, whether it's any earlier or not I don't expect that but it's possible.

Sandeep SM with Goldman Sachs.

In the outlook for Tubular segment, you have mentioned that operating costs will be lower than second quarter because of lower substrate and facility maintenance cost.

Can you just quantify how much was the maintenance costs in second quarter?

And much do we expect it to be in third quarter?

I don't know that we can give you the total maintenance cost.

We might be able to comment, if Dan looks, we might be able to comment on what the maintenance project cost was that was not normal to have in every quarter.

It was, I'm going to guess, single digits millions, or something like that.

Dan?

Yes it was.

So it's probably $10 million to $20 million in the range that would be different one quarter versus another.

Okay.

The working capital, first half of the year for US Steel is usually a drain on cash rather than source.

This time it was a source on cash.

Do you have any comments on the performance?

And secondly any comments on how the second half could shape up to be?

I'm sorry, can you give us the question one more time?

Sure.

Working capital, first half it was a source rather than a drain on cash.

What was the reason for that?

And second, how do you think the second half is going to play out?

Actually, the first half, working capital was positive.

It was a good source of cash.

Yes, right.

And mostly in the first quarter, for the most part,

And we had some from the second quarter, as well.

But I think what is happening there is that we managed our inventories well.

We have balanced our inventories to lower positions.

We have our coke and coal and iron ore inventories in better positions, and more well aligned with what our requirements are.

And on the steel side, we have been selling a little more than we have been making, and so our inventories are getting in balance, as well.

And I think that is something we have asked our operating and commercial folks to emphasize.

And they've done a good job on it.

And the cash flow numbers Gretchen mentioned earlier that are on the slide, where it shows cash from operations of nearly $1 billion in the last 12 months, that was an area of emphasis for us, and our folks did a very good job on it.

Yes.

And I think a lot of the inventory effort for this year has occurred, and we should be able to manage our working capital reasonably over the balance of the year.

But I don't know that I am expecting a lot of big swings in there.

No.

But absent any major change in the market, we don't expect to have to put a lot in either.

I think we are in a reasonably good position at this stage.

Phil Gibbs with KeyBanc Capital Markets.

A lot of good questions, so a lot of mine have been answered.

I just have a quick one here on the coal, to just go off a little bit about Shneur was asking.

But assuming current market pricing for coal at these levels persist, any way for you to handicap potential cost reduction opportunities in '12, John?

No, I would be reluctant to do that.

That would be a bit unfair to our good suppliers.

I think it's going to be a good discussion and negotiation.

Our costs have generally been in line with what the market has to offer.

We usually do a bit better because we're, we think, a good customer, with some of the best logistics and somebody they know is going to be there.

Our coke plants are the same place they always are.

So I'm confident we will get a good competitive coal supply.

We continue to work on using different coals and different coal combinations to try to get the best overall cost and value.

Not always the cheapest because that could lead to battery damage and things that have short-term benefit but aren't good for us in the long term.

We have a group of people whose job that is.

And we're still working on that.

We test new coals all the time and we're going to try to get the right combination that gives us the best coke at the right value for the overall production process.

And that has saved us a lot of money.

I'm going to just estimate that that's probably a $10 difference in the average cost of our coal in a year or so.

When you're buying 10 million tons, that's a lot of money, so we expect to continue to do that.

How many of those tons, John, are on longer-term agreements, like two or three years?

Or is this all annual?

Most of the pricing would be annual.

There might be some that's a little bit longer than that.

We have understandings with some of our suppliers for quantity nominations for a longer period.

You have to be priced.

So I'm confident we're going to have supply but most of it would be annual pricing.

Not very much would be any different than that.

Sam Dubinsky with Wells Fargo.

Just a quick housekeeping one.

You had $44 million in income from investees this quarter, which is almost double what it was in 1Q.

Could you just explain the reason again?

What's the reason for increase this quarter?

And how should we model that for the rest of the year?

Sam, that may be something that Dan can work with you later.

It just reflects our existing joint ventures.

We didn't have anything particularly new or different from that.

So, to the extent that it reflects Pro-Tec, EPI, our equity ventures on the iron ore side, that's really what it is.

It's fundamental to whatever is happening in the rest of our business.

So how should we benchmark just the profitability, or the contribution, in the coming quarter?

Should it be down, I assume?

To the extent that if you just look back over a period of time and look at quarters and values, generally speaking, I think that is how it has gone.

So I think directionally it probably should be the same.

Some of the items in there might be a little bit counter-cyclical.

But generally speaking I would say they are all in the steel game with us, one way or the other.

So that would be a fair assessment.

Dan will see if there's something we might not be thinking of that we should have brought to your attention, but I think that's probably a good assumption.

Great, I will coordinate with him off-line.

Thank you.

I would like to thank everybody for participating and we will see you next quarter.

Ladies and gentlemen, this conference call will be available for replay starting today at 5.30 PM and run until August 7 at midnight.

You may access the replay service by dialing 320-365-3844 and entering the access code of 253506.

Those numbers again, 320-365-3844, and entering the access code of 253506.

That does conclude your conference for today.

Thank you very much for your participation and for using the AT&T executive teleconference.

You may now disconnect.