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Executives

Albert E. Ferrara - Vice President of Finance and CFO

James L. Wainscott - Chairman, President and CEO

Analysts

Brett Levy - Jefferies & Company

Michael Gambardella - JPMorgan

Bob Richard - Longbow Research

Charles Bradford - Bradford Research

Michelle Applebaum - Michelle Applebaum Research

Mark Parr - KeyBanc Capital Markets

David Martin - Deutsche Bank

Leo Larkin - Standard & Poor's

AK Steel Holding Corp. (AKS) Q3 2008 Earnings Call October 21, 2008 11:00 AM ET

Operator

Good day, ladies and gentlemen, and welcome to the AK Steel Third Quarter 2008 Earnings Call. (Operator Instruction). With us today are Mr. James L. Wainscott, Chairman, President, and Chief Executive Officer of AK Steel, and Mr. Albert E. Ferrara Jr. Vice President of Finance and Chief Financial Officer.

At this time, I would like to turn the conference call over to Mr. Ferrara. Please go ahead, sir.

Albert E. Ferrara

Thank you, Patty, and good morning everyone. Welcome to AK Steel's third quarter 2008 conference call and webcast. In a moment I'll review our quarterly financial results, as well as provide some data points and guidance for the fourth quarter. Following my remarks, Jim Wainscott, our Chairman, President, and Chief Executive Officer, will offer his comments and field your questions.

Today's call includes certain forward-looking guidance for 2008. Other than our comments on historical results, the remarks we make today constitute forward-looking statements within the meaning of section 21-E of the Securities Exchange Act of 1934. These statements include our expectations as to our future shipments, product mix, prices, costs, operating profit, and liquidity. While we believe that our expectations are reasonable, we cannot assure you they will prove to have been correct, since they are based on assumptions and estimates that are inherently subject to risks.

Such risks include economic, competitive and operational risks, uncertainties and contingencies, all of which are beyond our control and based upon assumptions with respect to future business decisions that are subject to change. Except as required by law, the company disclaims any obligation to update any forward-looking statements to reflect future developments or events.

For more detailed information, we encourage you to review the discussion of risks affecting forward-looking statements found in the management's discussion and analysis section of our Annual Report on Form 10-K for the year ended December 31st, 2007 as updated in our most recent quarterly report on Form 10-Q. To the extent that we refer to material information that includes non-GAAP financial measures, the reconciliation information required by Regulation G is available on the website aksteel.com.

Earlier today, AK Steel reported record quarterly net income of $188.3 million or $1.67 per diluted share for the third quarter. These results represent a 74% increase over our third-quarter 2007 net income and a 30% earnings increase compared to the 2008 second quarter. This performance also represents AK Steel's best quarterly earnings since the company's executive management changes in the fall of 2003.

Despite lower shipments than the year-ago quarter, 2008 third quarter revenues were $2.16 billion, the second highest quarterly sales if our history. This represents an increase of more than $400 million or 25% over our third quarter 2007 revenues. Our strong third quarter 2008 revenues were driven by a record average selling price of $1,462 per ton, which was nearly $400 per ton or 36% higher than in the year ago period and $175 per ton or nearly 14% higher than in the second quarter of 2008.

Average selling prices moved up sharply due to a richer shipment mix, higher prices in both contracts and spot markets, as well as increased surcharges. AK Steel's expanding global reach was reflected in the 47% growth year-over-year in non US sales during the quarter boosting those revenues to $346 million or 16% of our third quarter 2008 sales.

On the cost side, planned maintenance outages during the third quarter, totaled approximately $11 million, the largest of which was a five-day hot strip mill outage at Middletown Works. As expected we continued to see generally higher raw material and energy costs in the third quarter, however scrap and natural gas costs were lower than we had anticipated.

Additionally, our third-quarter LIFO charge of $65.4 million or $44 per ton was also somewhat lower than expected. Netting revenues and costs, our third quarter operating profit was another all time record at $309.6 million, or $210 per ton. This is the first time in company history that we have achieved an operating profit in excess of $200 per ton. A level once thought by some to be out of reach for an integrated steel producer.

Our third quarter 2008 operating profit represents an increase of roughly 90% year-over-year and was more than 30% higher than our second quarter of 2008 operating profit. Given the recent onset of economic slowdown that began in the third quarter, our record setting financial results authenticate that AK Steel's business model, flexibility and unwavering attention to the fundamentals is indeed working.

As cash and liquidity seem to be front and center on the minds of investors and analysts, let me offer some comments on our situation which remains very solid. We grew cash sequentially by more than $60 million from Q2, ending the third quarter with a cash balance of $441 million. Our growth in cash during the quarter occurred while we also continued to reinvest in the company and strengthen the balance sheet.

For example, during the third quarter we made capital investments of approximately $35 million, and we made another early pension contribution of $75 million. This brings our total pension contributions for 2008 to $225 million. Combining our cash balance with the availability under our existing $850 million credit facility, AK Steel's total liquidity stood at $1.1 billion at September 30.

I would add that our credit facility is led by a strong consortium of banks and financial institutions, and further, we have no significant debt maturities until 2012.

For the past five years, AK Steel has placed a high priority on maintaining financial flexibility. Our focus on liability management and de-leveraging our balance sheet has positioned us well to weather more challenging times ahead in our economy. As we look to the fourth quarter of the year, we expect to continue to generate positive cash flow. This will bolster our already solid liquidity and financial flexibility.

Our continuing actions to improve the company's financial position were recognized last month when we received a credit upgrade from Moody's Investor Services. Moody's cited AK Steel's favorable product mix, excellent reputation for service and technological leadership, solid liquidity profile, and the sustainable improvements achieved in credit metrics and debt coverage ratios in recent years.

Obviously we agree; receiving this upgrade particularly at a time of financial stress in the markets is another example of the tremendous progress we've made at AK Steel, and the positive outlook for our company. As an aside, I'd note that our interest coverage year-to-date in 2008 is approximately 25 times.

Now let's take a brief look at our results for the first three quarters of 2008. Revenues, operating profit, and net income each improved significantly for the first nine months of 2008 compared to the same period a year ago. Revenues for the first nine months were a company record $6.2 billion, compared to revenues of $5.3 billion in the first nine months of 2007.

Our non-US revenues of $939 million represented approximately 15% of our sales for the first nine months of 2008, an increase of roughly 41% over the first nine months of 2007. Operating profit for the first nine months of 2008 was $717 million or $150 per ton. That compares to operating profit of $471 million or $96 per ton for the first nine months of 2007. Net income was $435 million for the first nine months of 2008 or $3.86 per diluted share. By comparison, net income for the same period of 2007 was $281 million or $2.51 per diluted share.

Of special note, our net income through the first nine months of 2008 has already exceeded our record net income for the entire year of 2007.

With that, let me provide you with some guidance for the final quarter of 2008. We expect our shipments to approximate 1.4 million tons were down slightly compared to the third quarter, as automotive, housing, and other steel-consuming markets react to the economic downturn and negative consumer sentiment.

While we expect to experience lower raw material and energy costs as compared to the third quarter, we expect that our average selling price will be about 10% lower than we realized in the third quarter. As was the case in the third quarter, we expect to incur a LIFO charge in the fourth quarter of 2008. The net result is that we anticipate generating an operating profit of approximately $100 per ton.

Finally, it's important to note that our guidance excludes any potential quarter charges under our unique method of retiree benefit accounting. While we will not incur an [OPEP] quarter charge this year, it is likely that we will incur a pension quarter charge in the fourth quarter, and it could be substantial absent a recovery in the markets.

Again, I want to emphasize that regardless of the size of any pension quarter charge, it would be a non-cash charge. Now for his comments, here's Jim Wainscott, AK Steel's Chairman, President, and CEO. Jim?

James L. Wainscott

Thank you Al. Good morning, everybody. The third quarter of 2008 marked another three months of progress for AK Steel. More importantly, as Al indicated, it marked the first time in our company's history that our operating profit exceeded $200 per ton. That is a monumental achievement for AK Steel.

I'm really delighted with our record setting results. It represents an outstanding performance by all of our people on behalf of AK Steel's shareholders, especially in light of the challenges that we face in the latter half of the third quarter. And I find it incredibly ironic and, frankly unbelievable that despite delivering our best-ever financial results in the third quarter, our stock price declined significantly by more than 50% in Q3 alone.

Obviously we cannot control the price of our shares, but we can and we do manage those things within our control, the things that matter, including industry leading safety, quality, and productivity which when taken together form the basis of our successful operating approach.

Five years ago this month, the Board of Directors of AK Steel entrusted in me and this management team the high honor and great responsibility of rescuing AK Steel. You might say that we caught a falling star before it was too late and returned it to its long held position as an industry leader.

For those of you who were not following the company back then, as a painful reminder, for the third quarter of 2003, AK Steel had reported an operating loss of $82 per ton and had about a $2 per share stock price. At that point deeply in the red, we simply wanted to get back into the black, generate positive cash flow, and post an operating profit of any sort. I think it's fair to say that we have exceeded just about anybody's expectations except for our own.

Indeed, we've come a very long way in the past five years, rising from that $82 per ton operating loss, to an operating profit of $210 per ton for the just completed quarter. Over the past 20 quarters, that amounts to an improvement of nearly $300 per ton, and I think could be regarded as a recovery for the ages.

Business is a team sport, and I believe that our team has performed well on behalf of the owners of AK Steel, our shareholders, and all of our stakeholders by increasing shipments, optimizing our portfolio of products, markets, and customers, and investing to capitalize on our niche market positions. By developing and implementing sales agreements that provide flexibility for variable input costs that are outside of our control. By refocusing on our core competencies and improving on the basics, our industry leading safety, quality, and productivity performances.

By strengthening our material sourcing and improving our self-sufficiency and negotiating new, multi-year raw material supply agreements, and by lowering our controllable costs including reaching very important new labor agreements and lowering our legacy costs to improve our competitive position. In short, doing more with less.

I'd be remiss if I did not take a moment to pay tribute to several groups of people, starting with our Board of Directors, whose vision, courage, and direction led the way. Thanks, as well to our executive officers and our entire management team for the leadership that they have provided. Let me also offer my gratitude and special thanks to all of our employees for their tremendous dedication and hard work in transforming AK Steel from an industry laagered to an industry leader.

It is through these collective efforts that we are well positioned to compete for the long term and it is through our demonstrated ability to overcome adversity that gives me great faith in the future of AK Steel.

Now, let me take a few moments to share some thoughts on what we currently see in the markets we serve with our carbon and specialty steel products. But before doing so, let me offer a few thoughts on the broader economic picture, if there was ever a need for great leadership, the time is now. Strong leadership in government and in the private sector, steady leadership by our financial institutions and by those of us who run companies. It really comes down to two words that seem to have the greatest significance at this moment in our country's history, credit and confidence.

Just like the blood in our veins, credit is the lifeblood of business, without it, commerce stalls. Likewise, if consumers have little confidence, they're not likely to buy cars or houses or appliances. All these issues certainly make for more challenging business conditions, an environment of tighter credit and lower confidence does not mean that business is coming to a halt. On the contrary, business is continuing, albeit at a slower pace.

I've often said to our people, don't wait until it's raining to fix your roof and at AK Steel, we did not wait to get our house in order. We get busy, hoping for the best, but preparing for the worst. For example, compared to the last downturn, we have about 3,000 or over 30% fewer people. Because of that and a host of other cost reduction activities, I believe that AK Steel is well positioned to weather the storm and continue to compete as a world class steelmaker.

Just to confirm that the rains have indeed begun, let me offer a few facts and figures kicking off with some comments on the automotive market. In September, US light vehicle sales plunged to a 15 year low. Total sales were down by 27% compared to September of 2007. While sales figures for the automotive companies did not get released until the end of the quarter, they were not a surprise to us as we were living through the production cuts on a daily basis as they occurred.

Looking at the full year 2008, we now expect our direct shipments to automotive customers to decline by about 20% this year as compared 2007. At the moment, economists are predicting that about 13 million vehicles will be built in America in 2008 with about 14 million units sold. It is unlikely that we will see a significant improvement in the auto sector until the credit markets are stabilized and consumer confidence is restored.

Over the years, we've consciously diversified AK Steel's sales portfolio and concentrated less on the automotive sector. For example, in 2003, nearly 60% of our sales were made directly to automotive customers. By comparison for the third quarter of 2008, automotive shipments were less than half of that amount at about 29% of our sales. Notwithstanding the shift in our sales portfolio, we felt the effects and we will continue to feel the effects of the automotive slowdown on our shipments.

The deterioration in the automotive sector caused the diversion of those tons to the service center and distributive market and those tons in-turn have gone to serve a host of other markets including the energy and non-residential construction sectors among others.

Importantly, service center inventories are not overstocked as they have been during previous drops in market demand. That said, I think it's fair to say that service center customers have become conservative in their buying patterns.

At the end of September, carbon flat rolled inventory stood at about six million tons, equal to 2.7 months of supply, the inventory level declined by some 200,000 tons since the end of August. In terms of stainless steels, inventories have been declining and at the end of September they were actually at their lowest level since July of 1997.

About three months of supply remain on hand however as shipment levels have also declined. As nickel prices have fallen, declining surcharge levels of cooled buying at all levels of a stainless steel supply chain.

Certainly one bright spot for us is the continuing strength of the electrical steel market. Global demand for grain-oriented electrical steel products remains very strong. More on that in a moment, but first, let me simply say that now is a great time to be a company the size of AK Steel. That is, relatively smaller than our integrated steel peers, and in a market downturn, our smaller size, superior quality, and excellent customer service should be very helpful to us.

Due to all the hard work that we have completed in recent years to rationalize our operations and substantially improve our cost structure, we believe we are well positioned to ride out the current storm. With our reduced fixed costs and highly flexible labor arrangements, relatively speaking, we expect to perform well in this period in comparison to our peers.

In addition to our smaller size, we are well diversified in terms of products, markets, and geography. That said, we're not immune from the effects of an economic downturn, and under the circumstances we will take appropriate actions to run our business as efficiently and effectively as possible.

Fortunately at a time like this, we have a very seasoned management team at AK Steel that has capably navigated the rough waters of many previous economic downturns, and if there is a silver lining in all of this, it is that we expect a substantial drop in steel making input costs.

For example, the price of scrap has fallen by nearly $300 per gross ton in the past couple of weeks to about $270 per gross ton. That's down from a peak of about $850 per gross ton, just a couple of month ago.

We're also hearing from several sources that the spot market price of iron ore is declining rapidly. If iron ore prices remain low or decline further as we head into 2009 contract negotiations, this has the potential to benefit AK Steel more than other integrated steel producers since we purchase 100% of our iron ore requirements.

As the transformation of AK Steel continues to evolve, we look to the future with great excitement. As a reminder, AK Steel is not just a carbon steel player, we are uniquely positioned as America's only producer of carbon, stainless, and electrical steel products.

As I previously mentioned, not all of our eggs are in one basket so to speak. And not all of our markets that we serve are in a downturn; quite the contrary. Our specialty steel business and particularly electrical steel continues to perform well. In that regard, let me give you an update on our 2009 electrical steel contract negotiations.

Our 2009 electrical steel contract pricing arrangements are nearly complete. As we speak, with the exception of a few international deals that are not yet finalized, we have once again achieved substantial double-digit base price increases on electrical steel sales for 2009. I'm also pleased to announce that AK Steel's Board of Directors has approved two actions to enhance shareholder value and to demonstrate our confidence and belief in our business going forward.

First, our Board has authorized another $0.05 per share quarterly common stock dividend. Second, our Board has authorized a $150 million share repurchase program. The share buyback program is being undertaken in light of the recent dramatic decline in the price of our stock. Considering our company's progress and positive long-term outlook we believe that the stock is undervalued and creates an excellent opportunity for the company to enhance shareholder value by investing in its own shares.

We have great faith in the future of AK Steel, and we believe that our share repurchase plan is an important way of demonstrating this to our shareholder. Confident in our future, AK Steel will continue to forge ahead. Before turning the calendar to 2009, however, we have a lot of work to do in the fourth quarter of this year as we conclude what we expect will be our most successful year ever for AK Steel.

But as we all know, success is never a straight line. It's a series of ups and downs with an upward trend. And so it is that while we may have our short-term challenges as participants in the US and global economies, we believe that 2009 and beyond hold enormous promise for the future of AK Steel.

To further enhance our competitiveness, we will continue to focus on controlling our costs, managing our cash, and growing our business profitably. Along those lines, we'll continue to invest in revenue enhancement projects and cost reduction projects, projects that lower our costs and improve our self sufficiency such as the Middletown SunCoke project and the works EAF and LMF project, both of which are scheduled to be completed in 2009. I might also add that we will be completing our fourth electrical steel expansion project in 2009 and bringing that product to the market, as well.

For these reasons and the fact that we have yet to experience all of the benefits of our other initiatives, we strongly believe that AK Steel has not yet achieved its potential. In closing, lets me say that as proud as we are of the gains that we've made over the past five years, we continue to believe that our best days are ahead. Thank you all very much for your attention.

Now Al and I would be happy to respond to your questions.

Question-and-Answer Session

Operator

Thank you, Mr. Wainscott. (Operator Instruction). Our first question comes from Brett Levy of Jefferies & Company.

Brett Levy - Jefferies & Company

Fantastic quarter, guys.

James L. Wainscott

Thank you, Brett.

Albert E. Ferrara

Thank you. Brett.

Brett Levy - Jefferies & Company

Hey, Jim and Al. Given where iron ore has gone here in the spot market from north of 140 to kind of 65ish in the spot market. Any sense as to where that's going to end up? And, where it could be the case that iron ore field, lets say in half in price, how much do you guys buy in an average year, either in tons or in actual full cost?

Albert E. Ferrara

In any given year, Brett, we'll buy around 5.5 million tons of iron ore pellets. We have a number of long term deals in place for the quantity and the price is reset, largely based on what happens in the world price arena. We've talked in the past about our raw material input costs increasing, I think by a total of about $3 billion over the last five years. I think if you see a meaningful move in iron ore and scrap and other materials, we might be able to get a billion dollars or so of that back next year.

Brett Levy - Jefferies & Company

And tons of scrap purchase, because that's really dramatic.

Albert E. Ferrara

About 2 million tons, Brett, per year.

James L. Wainscott

And again, I think something that isn't often focused on for AK because it takes a bit more of a deep dive to analyze our company, is the fact that we do run both blast furnaces and electric art furnaces. We're also bringing on a new EAF next year, up at Butler as I mentioned in my prepared remarks. So we consume a fair amount of scrap, and I think that could be very, very beneficial as well as we've seen a dramatic move downward in scrap prices.

Brett Levy - Jefferies & Company

And as you look at some of these other markets this year, clearly you were, more than 50% spot. Looking to 2009, do you think it's about the same percentage?

Albert E. Ferrara

We look at that carefully again. I think your instincts are right. We ought to be roughly 50-50 contract sales, spot sales this year, that's been a pretty good number for us, but we'll be taking a closer look at that as we head into 2009.

Brett Levy - Jefferies & Company

Working capital guidance for fourth quarter?

Albert E. Ferrara

Fourth quarter, we would expect that we would try and be positive working capital wise. I think from a working capital perspective, we built some working capital through the first nine months of this year, because we were coming off a fairly low base after the Ashland outage last year. But we would expect it to be a source of cash and our goal would be that our working capital at the end of 2008 would really reflect what we had in 2006. In other words, our goal always is to be year to year flat.

Brett Levy - Jefferies & Company

Okay.

Operator

Our next question comes from Michael Gambardella of JPMorgan.

Michael Gambardella - JPMorgan

Hey, good morning.

Albert E. Ferrara

Hi, Michael.

James L. Wainscott

Good morning, Michael.

Michael Gambardella - JPMorgan

Question on your position within the industry. In the last three weeks or so, we've had significant announcements by your carbon flat-rolled competitors. US Steel, Arcelor Mittal, Severstal and even new corps, who has a lower cost on the carbon flat than you would be given they're 100% scrap. They've all cut production in the face of market uncertainty.

I understand your plant configurations are a little bit more tight or constrained in terms of giving you the ability to cut. But what are you guys doing to contribute to try and tighten up the market as just about all your competitors have taken action to take volumes out of the marketplace? The 5% reduction in your shipments for the fourth quarter is kind of surprisingly on the low side.

James L. Wainscott

Well, let me just say first of all that we do not at AK Steel base our production decisions on what the rest of the industry does, period. That's their business, and we respect their businesses, they are running fine businesses, and there are great management teams doing wonderful things for their shareholders. But we make an independent decision to try and match our production with the orders that we have coming in from our customers. Both in terms of volume and product mix that's our approach.

Second, I just acknowledge, I think a point that you were touching on, and that is that at AK Steel, our operating philosophy is to run as full as we can, to generate as much production from our facilities as we can, as a result we wind up operating some of the most productive facilities in the steel business. And that's really consistent with our doing more with less approach, whether it's people or facilities or the way we operate our company. And I think in hindsight that's proved to be a very successful model for us.

Having said all that, market conditions, in particular for carbon and to some extent stainless steel have deteriorated to a point where we're not able to run all of our manufacturing facilities full out, 24/7. And the demand is simply not there to support the level of shipments that we need to keep everyone of our lines running full.

But again, grain-oriented electrical steel and certain aspects of our specialty business are still very, very strong. So unless someone has an announcement later in the quarter, for example, if the automotive companies come out and say we're not going to build any more cars in the month of December, we'll have to take a different look, but, we make an independent look. We have seen rather anemic levels in our order books of late but frankly I'm very encouraged by what I've seen so far this week.

Michael Gambardella - JPMorgan

And have you taken down your purchase slabs which I guess would be your highest cost prime metal feedstock. Have you eliminated your purchase slabs or are you planning to?

James L. Wainscott

We were down, I think for the third quarter we consumed about 50,000. We won't consume any in the fourth quarter. We'll make all of our own.

Michael Gambardella - JPMorgan

Have you purchased any in the fourth quarter?

James L. Wainscott

We are not buying any.

Michael Gambardella - JPMorgan

Okay. And last question on the pricing guidance that you gave of down 10% in the fourth quarter, given that you're about 50/50 spot contract, is it safe to say you're down 20 on the spot side and can you give us any details around that spot market decrease?

James L. Wainscott

We're obviously down significantly in the spot market, there's also the surcharge factor, which is really the pass through of our costs and to the extent that some of our costs have come down. We are going to see that.

Albert E. Ferrara

We also had a mix effect.

James L. Wainscott

And really, Michael, one of the things that we've tried to focus on is, we're obviously concerned about price. We're concerned about costs. But mostly we manage our business around the concept of margin. To enhance that, we've tried to do deals in the contract arena. And as we've tried to negotiate deals even in the spot sector, we've tried to comprehend really a stable margin, and I think that's served us well and will continue to going forward.

Michael Gambardella - JPMorgan

And you still fully expect to get the contract pricing on the carbon flat roll up year-over-year?

James L. Wainscott

Well timing is everything there, obviously. And it's not a wonderful time, but I think one has to sort of look at history at where the contracts were done last year. What happened to pricing and input costs since those contracts were done? And obviously we've come back a bit since then, but it's still substantially higher than some of the deals that were done before.

Operator

Our next question comes from Bob Richard of Longbow Research.

Bob Richard - Longbow Research

Hi, good morning and thanks for taking our call.

James L. Wainscott

Good morning, Bob.

Albert E. Ferrara

Good morning, Bob.

Bob Richard - Longbow Research

Great quarter. On the carbon side, Al, is there a further upside into using more, cheaper scrap if you will at Middletown and Ashland there? Or are you pretty much maxed out in your charge mixes using as much scrap as you can?

Albert E. Ferrara

Well, I think that what we've done historically Bob as we have articulated in the past, we have an optimizer program that we maximize the use of, if you will, the type of scrap recognizing the shipments that we're going to be making. I think net, net that our operators have done a fantastic job of maximizing the burden across the board, not only in the scrap area but in other metallic's that we're using. And I think the ability to use the lowest cost metallics in our furnaces has and will continue to be the case at AK Steel.

Bob Richard - Longbow Research

Okay. Great and one quick follow-up, I appreciate your color. Jim, on the carbon contracts for next year, do you suspect that the pricing will be more variable next year than what it has been in the past rather than more of a fixed nature?

James L. Wainscott

That's certainly been our approach, Bob. We have not and really have no intention of entering into pure fixed priced sales agreements. The new agreements that we've been negotiating contain variable pricing mechanisms that adjust based on the direction of raw materials and energy. It's really a much better business model longer-term, and it really involves both parties sharing input cost risk which really has not been the case for a long time.

Bob Richard - Longbow Research

Okay, thank you very much, and great quarter.

James L. Wainscott

Thank you.

Albert E. Ferrara

Thank you, Bob.

Operator

Our next question comes from Charles Bradford of Bradford Research.

Charles Bradford - Bradford Research

Good morning. Could we talk a bit about coke and coking coal? You mentioned the new coke battery will be up next year, but it seems like it's gotten a late start. I presume you are talking about very late next year?

James L. Wainscott

You know, we're still plodding ahead. We've had a little bit longer permitting process than what we'd hoped for, but that could happen any day now. And we'll give it a full-court press as will our friends at Sun and Sonoco to see if we can get that done. We had always hoped for and still believe it will get done by the end of 2009. So we're happy about that.

Albert E. Ferrara

And our contractual arrangement with Shenango runs through 2009, so we're covered coke wise through that period of time.

Charles Bradford - Bradford Research

As far as your coal supplies, what kind of contractual terms do you have? I presume it's a multi-year and does the price adjust each year or does a portion adjust each year?

James L. Wainscott

Chuck, we're contractually committed through 2009 for virtually all of our coal. Our coal agreements run through 2009, and in the year 2009, unlike our iron ore agreements, all of our arrangements have effectively what amounts to as a collar on those such that there's either a modest increase or decrease off of our 2008 prices and so while we're looking for modestly increased pricing in 2009, it's certainly nowhere near what some have speculated in terms of what the market price for coal is. We feel we're very good, are very well situated with respect to coal in 2009. Both from a supply as well as a price point view.

Charles Bradford - Bradford Research

Well, that's what I needed to hear. Thank you very much.

James L. Wainscott

Thank you, Charles.

Operator

Our next question comes from (inaudible) of UBS.

Unidentified Analyst

Hi, good morning and thank you for the great details.

James L. Wainscott

Good morning, (inaudible)

Unidentified Analyst

I wanted to just ask further little bit more, if I could on the electrical steel, on the contract side you did alluded to the contract is being renegotiated for 2009. Is there any reason to believe that there could be any slippage there? Can you tell us a little more about the contracts? Do they lock in a certain amount of tons? Is there plus or minus a certain amount? How are those structured?

Albert E. Ferrara

We've had to allocate the tonnage based on demand.

Unidentified Analyst

Okay.

Albert E. Ferrara

And so we feel very good in years past that has worked and we've tried really feed as many mouths as we could with that product as we look out to 2009. But we still have unmet demand, hence we're bringing on additional product in 2009, continuing to think about how we serve that growing demand. Undoubtedly we've been able to capture some of the developing country activity, and we've also been able to help with infrastructure growth in America to the extent that there is a bit of a slowdown.

Of course, that could be an issue, but we don't think so. We think longer term certainly, as you look out beyond the current environment that there's still going to be opportunity. So we feel good about both the volume and the prices that we've been able to negotiate, and we'll continue to try and capture market share there.

Unidentified Analyst

Okay. Then also wanted to clarify, when you talked about another LIFO charge in the fourth quarter, is that truing up to the end of the year? Because you do talk about costs coming down, so how do we reconcile that?

Albert E. Ferrara

No, that's right. You're exactly right (inaudible) that our LIFO charge is a function really of our analyzing what inventories and costs will be at the end of the year. We've taken three quarters of our LIFO charge through the nine months. In effect it will be the final quarter if you will of what our expected LIFO charges for the year.

Unidentified Analyst

But given current trends, you wouldn't have necessarily expect continued charges into next quarter, right, if we have the continued trends we've been seeing in.

Albert E. Ferrara

No. We've taken three quarters of the expected charge through our nine months, and so consequently we have one fourth of the full year's charge expected in the fourth quarter and so consequently, while we might expect that charge as we indicated somewhat lower than the third quarter, we do expect a charge in the fourth quarter.

Unidentified Analyst

Got you.

James L. Wainscott

We would just hasten to add that if prices continue to fall on many of the commodity inputs, substantially further that that could change. But this is the best guidance as our guidance are with respect to shipments and pricing and everything else that we can see with the visibility that we have at this moment.

Unidentified Analyst

Well, just having guidance is nice this quarter, so that's kudos. Finally to clarify then, for the scrap position that you have, can you just give us a quick idea of how much you're keeping in inventory?

Albert E. Ferrara

I don't know that we said that publicly before, we're not trying to build a mountain at these levels. We've got enough to operate for probably a month or so. And I think that's really the world that we would intend to operate in.

Unidentified Analyst

Great. Okay, thanks again.

Albert E. Ferrara

Thank you.

Operator

Our next question comes from Michelle Applebaum of Michelle Applebaum Research.

James L. Wainscott

Good morning, Michelle.

Michelle Applebaum - Michelle Applebaum Research

I wanted to first, thank you for sticking your neck out on the guidance and it gives us a little bit of a picture into what you think is going on. I think it's an impossible environment. So thanks for that. The second thing was, you had mentioned an electrical scale, I noticed you started with that and you said double-digit increases and the order of magnitude, though to dollars per ton is so huge, Jim, that I wanted to see if you can get a little bit more granularity. Because just looking at your whole specialty business and I think electrical is your highest priced product, right?

You went from $1,500 a ton a few years ago to $2,600 a ton in '07 and that's the last data point I have. So I'm assuming when you're talking electrical, you're talking about double-digits on something that's $3,500 to $5,000 a ton in price, is that a good range?

Albert E. Ferrara

Well, again, today isn't the day we're going to disclose pricing on our electrical steel products. But we're talking primarily about grade oriented electrical steel. There's obviously non-grade oriented across the spectrum that would be a wide variation in pricing and it really gets to the efficiency of the electron movement on this product. But it's a meaningful revenue impact, and it's a meaningful operating margin impact we believe going forward.

It reflects market conditions and our increased costs. We haven't been any more specific with respect to the percentage. I guess we found in years past that as we disclosed percentages, if you got a number above that, percentage above that, you weren't too happy, if you got below, you were happy. It just didn't seem to really create a lot of harmony amongst our customers out there. So, we think what we've said that, it will be a meaningfully positive impact to our 2009 and beyond.

Michelle Applebaum - Michelle Applebaum Research

Okay, great. Thank you very much.

James L. Wainscott

You're welcome.

Operator

Our next question comes from Mark Parr of KeyBanc Capital Markets.

Mark Parr - KeyBanc Capital Markets

Hi, good morning.

James L. Wainscott

Good morning, Mark.

Mark Parr - KeyBanc Capital Markets

Hey, great quarter. And I just would love to go along, and we do appreciate the granularity on the fourth quarter. It's very helpful. I was wondering here, Jim you had made a comment about the extent of the visibility we have thus far in the quarter. Could you give us a little more color on how much visibility you have and maybe if order momentum has picked up a little bit this week? I mean is there anything from a macro perspective or any change in the economy that might be driving that?

James L. Wainscott

I think that all of the efforts that are underway both in our country and around the world are positive. I think that theirs is an ever so slight lessening of credit at this point. Confidence is still pretty low. I think that's going to take a while to return.

I sort of liken all of this to a pretty significant wound. You're not going to put a Band-Aid or a little bit of antibiotic cream on it and expect it to heal overnight. But it seems that the world has sort of stepped up and the leadership that I spoke of in my prepared remarks seems to be there, and I think that's a good thing. I think we're all getting a bit more comfortable, but then again, things can change. It's a very volatile environment that we find ourselves in.

One of the bright spots certainly is if you look at the service center date that came out late yesterday, you know, it's really on the margin pretty positive data. We find that the service centers are not sitting on a pile of high-priced inventory. They are really being conservative in their buying patterns, and so with any up-tick in the economy, up-tick in consumer confidence, I think that we are not going to have to play through that overhang. That's a good thing.

It's really a day-to-day, week-to-week kind of thing in terms of the visibility. Depending again on which product line we're talking about. And this is the point I would just emphasize again. We're unique at AK Steel. We're not just one business. We're really three businesses in terms of the way we take a look at things, and they're not all in a downturn. They're not all in the dumper.

Mark Parr - KeyBanc Capital Markets

All right. If I could just get some clarification; do you see fourth quarter visibility greater in stainless or in carbon right now?

James L. Wainscott

It's probably best in electrical, second best in stainless and third best in carbon.

Mark Parr - KeyBanc Capital Markets

Okay, terrific. If I could just ask one more follow-up. Have you talked at all about the potential impact of outage costs in the fourth quarter relative to the third? I might have missed that but any color there would be helpful. Thanks again.

James L. Wainscott

I will switch it over to Al in a minute, but I would just say that we're not accelerating a lost of outages. We're doing our normal outages, and I don't think there's anything particularly earth shaking quarter-over-quarter.

Albert E. Ferrara

No, I think in the third quarter Mark we had $11 million. In the fourth quarter we expect $10 million; that will give us $65 million for the year in comparison to last year when we had about $50 million. So net, net not a big change quarter to quarter and our $65 million is probably at the upper end of where our spending has been over the last several years.

Mark Parr - KeyBanc Capital Markets

Okay. Terrific, thanks for all the color. Thanks very much.

James L. Wainscott

Thank you.

Albert E. Ferrara

Thanks Mark.

Operator

Our next question comes from David Martin of Deutsche Bank.

David Martin - Deutsche Bank

Yeah, good morning. Two follow-ups if I may. First, coming back to coal, can you give us a bit more clarity, given your commitments to buy coal next year, what the cost changes may be year over year on a per ton of steel produced? I mean is it something in the $40 to $50 a ton range or is that is that not close?

James L. Wainscott

In terms of the increase David?

Mark Parr - KeyBanc Capital Markets

Yes.

James L. Wainscott

Now that would be very, very high. We prefer not to get into specifics, but if you think for a moment, we consume about two million tons a year of coal. Use whatever market price you want, but like I said, our collars if you will are relatively tight. In terms of percentages probably in single digits so to speak, so, net, net you're not talking about a significant amount, and in terms of an increase per ton, you're probably looking at single digits there.

Mark Parr - KeyBanc Capital Markets

Okay. And then lastly, just on the buyback program. Is there a term of the buyback program? Is it one year?

Albert E. Ferrara

Let me just offer that, as we said in the release today, it is going to be from time to time, and we are trying to be opportunistic as we go forward, but there is no specific end-timeframe on the program.

Mark Parr - KeyBanc Capital Markets

Okay. Thank you very much.

Albert E. Ferrara

Thank you.

Operator

Our final question comes from Leo Larkin of Standard & Poor's.

Leo Larkin - Standard & Poor's

Good morning. Could you give us guidance for CapEx for DD&A for 2009?

James L. Wainscott

2009 is a little early. Leo, I will turn it over to Al, and he'll recap 2008 at this point, but I would offer the offering. I think it's fair to say that with the projects that I mentioned in my remarks, and with the ongoing capital requirements of the business that we will likely be somewhere around depreciation which ought to be in that $220 millionish kind of range, but that's not a final business plan number. It's certainly not a plan that's been approved by our Board.

So again, I suggest it's a little bit early to go through that, but I think that we'll be mindful of our needs, but we won't go on holiday in terms of spending for capital, particularly in this kind of environment. Al?

Albert E. Ferrara

Leo, our depreciation issue will be modestly above $200 million, around $205 million and we would expect our capital spending somewhere in the $180 to the $185 area for the year.

Leo Larkin - Standard & Poor's

Okay. Could 2009 be a sort of a big year for capital spending? I know it's early, but could it possibly be a peak compared what we've seen in recent years or even this year?

James L. Wainscott

I think it's going to be a larger year than 2008, as we bring on the number 5 EAF, we did some of the infrastructure spending that we need to support the SunCoke project. We bring on the fourth expansion of electrical steel and so on. But again, I think it's manageable and it's something that we think is necessary to position us going forward.

Leo Larkin - Standard & Poor's

Okay. Thanks.

Albert E. Ferrara

Thank you, Leo.

Operator

I'm not showing any further questions.

Albert E. Ferrara

Let me just do a couple of things before we wrap up. First of all, I appreciate all of you joining us on today's call. We're certainly excited about the year that we've had, notwithstanding the fact that it's going to be a bit more challenging in the fourth quarter. I think it takes time in response to one of the questions again it takes time for the programs recently put into place by the world's financial leaders to take effect. And I suppose it could happen sooner or it could happen later, we will see together.

As I have repeatedly stated on this call and at other times, we have a unique position at AK Steel, very diverse product and market mix, not all of which are being severely impacted, and that uniqueness and our size and our diversity should serve us well in this environment together with our lower cost structure. I'd just offer in closing and as we sign off, please rest assured that the AK Steel, Board of Directors and management team is very hard at work to add value in everything we do on behalf of our shareholder. With that, we wish you a terrific day, happy Holidays, and we look forward to having you join us on our January, 2009 conference call.

Operator

Ladies and gentlemen, this concludes our conference call for today. Thank you for participating. And you may disconnect at this time.

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Source: AK Steel Holding Corp. Q3 2008 Earnings Call Transcript
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