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AK Steel Holding (NYSE:AKS)

Q4 2012 Earnings Call

January 29, 2013 11:00 am ET

Executives

Albert E. Ferrara - Senior Vice President of Corporate Strategy & Investor Relations and Member of Proxy Committee

James L. Wainscott - Chairman, Chief Executive Officer, President and Member of Proxy Committee

Roger K. Newport - Chief Financial Officer and Vice President of Finance

Analysts

Evan L. Kurtz - Morgan Stanley, Research Division

Luke Folta - Jefferies & Company, Inc., Research Division

Riya Bhattacharya - Crédit Suisse AG, Research Division

Michael F. Gambardella - JP Morgan Chase & Co, Research Division

Justine Fisher - Goldman Sachs Group Inc., Research Division

Sam Dubinsky - Wells Fargo Securities, LLC, Research Division

Michelle Applebaum - Steel Market Intelligence Inc

Arun S. Viswanathan - Longbow Research LLC

Charles A. Bradford - Bradford Research, Inc.

Mark L. Parr - KeyBanc Capital Markets Inc., Research Division

Sohail Tharani - Goldman Sachs Group Inc., Research Division

Operator

Good morning, ladies and gentlemen, and welcome to AK Steel's Fourth Quarter and Full Year 2012 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. With us today are Mr. James L. Wainscott, Chairman, President and Chief Executive Officer of AK Steel; Mr. Albert E. Ferrara, Jr., Senior Vice President of Corporate Strategy and Investor Relations; and Mr. Roger K. Newport, Vice President of Finance and Chief Financial Officer.

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

Albert E. Ferrara

Thank you, Sam, and good morning, everyone. Welcome to AK Steel's Fourth Quarter 2012 Earnings Conference Call. In a moment, Jim Wainscott will offer his comments on our business. Following Jim's remarks, Roger Newport will review our fourth quarter and full year 2012 financial results. And together, we will field your questions.

Our comments today will include forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. Included among those forward-looking statements will be any comments concerning our expectations as to future shipments, product mix, prices, costs, operating profit or liquidity.

Please note that our actual results may differ materially from what is contained in these forward-looking statements provided during this call. Information concerning factors that could cause such material differences in results is contained in our earnings release issued earlier today.

Except as required by law, the company disclaims any obligation to update any forward-looking statements to reflect future developments or events. And 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 company's website at aksteel.com.

And with that, I'll turn it over to Jim for his comments. Jim?

James L. Wainscott

Thank you, Al. Good morning, everyone. Thank you for joining us on today's call. Although AK Steel's fourth quarter 2012 financial results were slightly better than our guidance, the quarter concluded a challenging year for AK Steel and for the steel industry in general. Weak economic conditions contributed to lower sales and production levels, and those items, coupled with excess steelmaking capacity, increased steel imports and lower average selling prices, negatively impacted both our fourth quarter and full year financial results. To quote the CEO of JPMorgan's Asset Management group, in many respects, 2012 was a year of waiting, including waiting for a path forward on the European debt crisis, waiting for the results of a polarizing U.S. election, waiting for the Chinese leadership transition, waiting for resolution to the U.S. fiscal cliff issues, waiting for the Middle East to find peace and waiting for a clear path to global growth.

Since the onset of the great recession in the second half of 2008, many of us have grown tired of waiting frankly, but then again, we have to realize that many of the things I just mentioned are not within our control. And any case at AK Steel, we're delighted to say goodbye to the year 2012 and hello and welcome to the year 2013. While we're not providing specific guidance today for the first quarter or the year 2013, suffice it to say that we expect significant improvements for each period.

Let me give you a sense of why that's the case for us. First of all, we expect to benefit from lower raw material and energy costs. As we tally up the potential here, we believe it could exceed $150 million, largely from coal, coke and iron ore. That is to say our 2013 raw material and energy costs should be at least $150 million lower than we incurred in 2012.

Here's what's happening regarding our input costs as global economies have faltered. Steelmaking input costs, namely coal, coke and iron ore, have fallen, and that will result in significant cost savings for us in 2013. Second, we expect to benefit from increased shipments to both the contract and spot markets in 2013 due to slightly improved overall demand and a greater share of the automotive market. And because of the increased shipments, we expect to incur lower per ton operating costs as we intend to operate at higher rates. To quantify the benefit of higher operating rates for you, each 10% increase in operating rates improves our margins by about $40 million. Third, through a variety of strategic purchasing initiatives, we intend to further reduce our cost of operations by at least $25 million, and we're not going to stop there as I'm confident we'll continue to find other ways to lower our production costs in 2013. Even with global economies remaining rather in slow recovery mode, each of the items I just mentioned, coupled with our company's continuous improvement philosophy, gives us comfort that we can and we will deliver significantly improved first quarter and full year 2013 results.

Speaking of progress, we continued to make a lot of progress during 2012, especially in those areas over which we have control. Let me take a moment to provide a few highlights regarding employee safety, product quality and customer satisfaction. Safety remains our highest priority at AK Steel. Outstanding performances in safety were delivered in 2012 by our Ashland, Rockport and Zanesville plants, each of which incurred 0 OSHA recordable injuries for the entire year.

Of particular note, on November 30, our Coshocton plant was granted certification under the OHSA 18001 standard for occupational health and safety, and in so doing, Coshocton became the first location within our company to be certified. This certification confirms AK Steel's commitment to a healthy and safe working environment.

Taken as a whole in terms of OSHA recordable injuries, 2012 represented our second best annual safety performance in the history of our company. And really, those are fantastic achievements, and I offer my sincere thanks and congratulations to all of our employees for making safety their highest priority each and every day.

Speaking of our employees, as information, we have 3 labor agreements that expire in 2013. The first of which is at our Coshocton Works where we have an agreement with the United Auto Workers that expires on April 1, 2013. Our Ashland Works agreement with the United Steelworkers expires on September 1 of this year. And lastly, our Rockport Works agreement with the UAW expires on September 30, 2013. Consistent with each of the labor agreements we've reached in recent years, we're hopeful that we'll be able to reach new labor deals at each of these 3 locations well ahead of the current contract expiration dates.

Moving from our employees to our customers. Our performance on behalf of our customers continues to lead the steel industry. In an industry that is perceived by some at least to provide pure commodity products, AK Steel distinguishes itself by providing superior product quality, customer service and delivery. In fact, our product quality is one of the most important ways in which we differentiate our company from our competitors. For example, for the year 2012, we established all-time company best records for internal quality performances. Our rates for both internal rejections and retreated products came in at their lowest levels in company history, surpassing the previous records that had been set in the year 2011. In addition, our customers were equally happy with the quality of products that we shipped to them last year.

Each quarter, an independent customer survey is performed by Jacobson and Associates that compares AK Steel to our most direct competitors. We're delighted with the results of the survey for the fourth quarter and the full year 2012. According to the Jacobson's survey results for the fourth quarter, AK Steel was rated #1 in quality, service, on-time delivery and overall customer satisfaction by our carbon steel customers, and we're also rated #1 in quality service and overall customer satisfaction by our specialty steel customers. I might add that throughout 2012, AK Steel received a number of Supplier of the Year honors from important customers, highlighted by our Metallic Supplier of the Year award from Chrysler Corporation. In fact, we were the only metal supplier in the world to receive this honor from Chrysler.

High rankings and awards are great, I suppose, for bragging rights, but more importantly, they speak to the solid relationships that we built with our customers. And I think also they are a valuable indicator of future business opportunities that will likely come our way.

At AK Steel, serving customers better than any other steelmaker is at the heart of who we are, what we do and how we do it, and it's great that our customers appreciate the job we're doing for them in these continuing difficult economic times.

So, ladies and gentlemen, that's a quick look back at AK Steel's 2012 and the foundation that we've established to build on in the year 2013. As I've already indicated, we've got good reasons to expect a better year this year. And with that in mind, let me provide you with a brief update as to what we're seeing in the markets for our products, the progress that we're making at Magnetation and AK Coal and our strategy for enhancing earnings and shareholder value. Following my comments, Roger will conclude our prepared remarks with a recap of the numbers and some key data points. After which, all of us will be happy to respond to your questions. So let me start with a few comments then on the automotive market.

The automotive market was a real bright spot for AK Steel in 2012. We increased our automotive business by about 20%, which was higher than the overall auto market's growth last year. In other words, we gained market share and we expect more of the same in 2013. While the automotive market has not fully recovered, the fourth quarter of 2012 sales rate for light vehicles represents the best quarter since Q1 of 2008. We're now back to roughly the 15-million-unit level for both production and sales in the U.S. And that's terrific, but there's a lot of room to grow from here. The consensus estimates are for continued growth in 2013 and beyond, and the increased optimism appears justified for several reasons. Considered the following: certainly, the low interest rate environment we find ourselves; improving credit availability; the fact that the average age of the fleet is the highest ever at 11 years, with 20% of the vehicles on the road at least 16 years of age; we've certainly got a larger pool of drivers; there's a desire out there for greater fuel efficiency, safety and entertainment features; and underlying all of this is, of course, the slow but steady improving economic conditions. In addition, more automotive production is coming to the United States from other parts of the world. This is music to our ears as we love the sound of making things in America.

Let me take a moment to address recent articles in the press regarding substitute materials and, in particular, aluminum. Since we've had a number of questions come to us about aluminum's inroads into the carbon sheet space, we thought it deserved a comment or two. Today, in one form or another, steel makes up about 60% of the weight of a vehicle. And as Ron Krupitzer, a Vice President with the American Iron and Steel Institute, recently has said, "Both the steel available for car companies is now up to 5x stronger than the steel used by them 10 years ago."

With advanced high strength steels, a part that weighed, say, 100 pounds in the past is being replaced by a part that now weighs 75 pounds and at no extra cost. Stronger, lighter, more formidable steel that's close to the weight savings achieved with aluminum and that costs a lot less than aluminum, that's a pretty amazing product. Even Alcoa has acknowledged that it costs $600 to $800 more using aluminum to produce a body in white. In a recent Reuters article, Volkswagen's Head of Materials Research and Manufacturing perhaps said it best. He noted, "Costs are the driving factor. Using new innovations in steel engineering, it's possible to reduce weight without the use of more costly materials such as aluminum and carbon fiber."

Although aluminum will continue to play a role in automotive design and construction, steel will continue to play the leading role because of passenger safety, engineering and design know-how, as well as advances in weighting and value just as it has for the past century.

I'd also remind everyone who's concerned about the environment that steel remains the most recycled material in the world, more than glass, plastic and aluminum combined. Again, an amazing product.

Before leaving the subject of automotive, let me offer a few comments on contract pricing for 2013. As a reminder, throughout the year, AK Steel's contracts with automotive customers expire and are successfully renewed. For those contracts that have been renewed effective January 1, 2013, we've succeeded in securing higher base prices where possible, as well as the continued use of variable pricing agreements, incorporating raw material and energy surcharge mechanisms. That said, with lower steelmaking input costs, we expect our surcharges to decline this year.

Moving to the spot market for carbon steel, buying activity at service centers and distributors has begun to pick up somewhat, following a sluggish fourth quarter. Service centers appear to be poised to place orders to meet the needs of their customers. Taking an independent look at our order book and market conditions, we announced a series of 3 price increases in the fourth quarter of 2012 for carbon steel products. These increases have been followed by an additional $40 per ton price increase that we announced last Monday.

Moving from carbon to specialty steels, let me first comment on what we're seeing in terms of stainless steel service center business, as stainless steel inventories represent about 3 months of supply in inventory on a seasonally adjusted basis. And for comparison's sake, in prior years, that ratio was typically closer to about 4 months of supply. The market for commodity stainless has improved slightly, but competition remains brutal as the commodity stainless market has way too much capacity both domestically and globally. Imports, especially from China, have been at very high levels. The specialty sheet and strip market is a more important part of our business, and this covers the unique products that we produce out of our Coshocton Works. We're looking for a pickup in orders from appliance, automotive and passenger railcar customers, especially for bright trim applications. And in light of increased demand in the automotive sector, the 400 series or auto-chrome stainless steel market has been and continues to be a strong performer for us.

With that, let me offer a few thoughts on electrical steel. On the positive side of the ledger, we've seen increased domestic demand due to a nice bump in the housing sector and selected other growth opportunities. That said, on the other side of the ledger, as global economy slowed and foreign capacity increased in 2012, we've continued to experience sluggish demand overseas, with shipment volumes and selling prices tailing off for international electrical steel. In short, we look for a better first quarter from a NAFTA grain-oriented electrical steel shipment standpoint, with the second and third quarters typically being our strongest quarters due to seasonal factors.

With an oversupply of global GOES products, coupled with slower economic growth in China and India, we expect the international market for GOES to remain crowded and highly price-competitive. Having said that, we continue to do everything we can to profitably grow our business positions in both China and India.

Let me shift gears for a moment then from the markets we serve to the markets for our steelmaking inputs, again, namely coal, coke and iron ore pellets. To reiterate, we've locked in all of our coal requirements for 2013 at substantially lower prices than 2012, which is expected to save us more than $100 million. In addition, by the fourth quarter of this year, we expect to begin to consume a portion of our own high-quality, low-cost, low-vol coal from AK Coal. In terms of coke, we have the capacity and expect to internally produce about 25% of our blast furnace coke requirements. Our remaining needs are supplied by SunCoke, and taking into account the passthrough from lower coal costs in producing coke, we expect meaningful savings here as well. In terms of iron ore pellets, we also expect to incur lower costs. The IODEX index has been a bit of a roller coaster, as many of you know, depending on global supply and Chinese demand. Our perspective is that iron ore prices will continue to moderate since Chinese restocking has concluded and given slow global growth ahead.

With that, let me take a moment to provide you with the latest progress reports on our 2 vertical integration investments: Magnetation and AK Coal. We are very excited about the continued progress at our joint venture with Magnetation. In the fourth quarter of 2012, Phase 1 of the JV was completed, and Magnetation's operations are performing as expected. Excellent progress continues with Phase 2 of the JV, which involves the construction of a pellet plant to provide us with about 50% of our iron ore pellet needs going forward. In November of 2012, Magnetation announced that its pellet plant would be built in Reynolds, Indiana. Reynolds is located about halfway between Chicago and Indianapolis. It's well-positioned for the movement of concentrate from Minnesota to Indiana and in pellet form from Indiana to our blast furnaces in Middletown, Ohio, and Ashland, Kentucky.

As to our long-term iron ore strategy, the recent volatility in the IODEX further supports the reasoning underlying our goal of becoming 50% self-sufficient in our iron ore needs. Until the pellet plant is operating, our share of earnings from Magnetation's iron ore concentrate sales will serve as a hedge to our iron ore pellet costs, thus buffering price volatility in the IODEX index.

On the coal front, we're equally pleased with the progress made at our AK Coal operations. Barring any unexpected setbacks, which we obviously don't expect to occur, AK Coal expects to receive its permit to construct and operate its initial underground mine in the second quarter of 2013. But in the interim, AK Coal is not standing still, not by a long shot. It is continuing to develop and refine its mine development plan and its coal washing plant. It's continuing to process coal to ship to AK Steel's coke battery in Middletown and to our strategic partners at SunCoke.

So we move forward at AK Steel with great resolve in 2013. We know how to win and we look forward to getting back on the winning track this year. In fact, we resolve to win this year to restore profitability and generate EBITDA to meet our needs to sell more and grow profitable sales, to operate at higher rates of efficiency, to ensure liquidity remains strong, while we vertically integrate and exceed expectations of our customers and shareholders. Like many of you, indeed, we're tired of waiting for next year. This is our year to implement our plans, to improve our results and to reward our shareholders.

I suppose others in the sector may be looking for a carbon copy, no pun intended of their 2012 and 2013, but at AK Steel, we expect a better year. We believe in better and we have an experienced management team in place that know what it takes to win. Our team is here to enhance shareholder value, and that's exactly what we intend to do.

Thank you, all, very much for your attention. Now here's Roger Newport. Roger?

Roger K. Newport

Thank you, Jim. Earlier today, AK Steel reported an adjusted net loss of $36.6 million or $0.30 per share for the fourth quarter of 2012 and a net loss of $230.4 million or $1.89 per share. The adjusted net loss excludes a pre-tax corridor charge of $157.3 million related to our pension plan and an income tax charge of $96.4 million related to a change in our deferred tax asset valuation allowance.

The corridor charge relates to actuarial losses associated with our pension plan. Under our method of employee benefits accounting, we are required to recognize these charges outside the defined corridor immediately instead of amortizing them over time. The corridor charge in the fourth quarter of 2012 was primarily due to a reduction in the discount rate of approximately 1% as compared to the discount rate at the end of 2011. The impact of the lower interest rates was partially offset by our pension plan investment earning a return of about 15% for the year 2012, which was significantly higher than our assumed rate of return. I would also like to emphasize that the corridor charge in the fourth quarter had no impact on our fourth quarter cash flow or position.

Our fourth quarter results, including noncash income tax expense of approximately $96 million or $0.79 per share as a result of a change in our deferred tax asset valuation allowance during the quarter. This charge is a result of, one, the impairment of the tax benefit associated with our pre-tax loss; and two, the effect of the change in our tax planning strategy related to our change in our LIFO reserve.

Shipments for the fourth quarter of 2012 totaled 1,406,100 tons, an increase of about 43,000 tons compared to the third quarter and slightly than our fourth quarter -- slightly higher than our fourth quarter guidance. Our average selling price for the fourth quarter was $1,011 per ton or 5.8% lower than the third quarter and basically in line with our guidance.

Revenues for the fourth quarter totaled $1,423,000,000, roughly 3% less than the prior quarter. The lower average selling price and lower revenues were primarily driven by lower spot market selling prices and a higher percentage of our shipments sold in the carbon spot market.

Sales outside the United States for the fourth quarter totaled approximately $209 million. This represented about 15% of our total sales for the quarter. As anticipated, our results for the fourth quarter of 2012 included about $1 million in planned major maintenance outage costs compared to $29 million in the third quarter.

In the fourth quarter, we benefited from a LIFO credit of about $31 million compared to a LIFO credit of $28 million in the third quarter. This slight increase in the LIFO credit quarter-over-quarter was primarily due to the continued decline in raw material costs.

As we began doing last quarter, I would also like to provide you a comparison of our earnings before interest, taxes, depreciation and amortization, or EBITDA, adjusted to exclude the pension corridor charge and noncontrolling interests, which are included in our operating results. Our noncontrolling interests consist primarily of SunCoke Middletown. We believe that providing adjusted EBITDA results, excluding our noncontrolling interests, facilitates an understanding of AK Steel's financial performance for the reported period, as well as for period-to-period comparison of our financial performance. Excluding the noncontrolling interests, our adjusted EBITDA for the fourth quarter of 2012 was $16.8 million or $12 per ton compared to an adjusted EBITDA of $27.2 million or $20 per ton for the third quarter. This decline was a result of lower steel selling prices, partially offset by lower planned major maintenance outage costs and lower raw material costs.

Now moving to our results for the full year of 2012. Shipments for 2012 were just over 5.4 million tons, a 5% decrease compared to 2011, which reflects continuing tough domestic and global market conditions. Our average selling price for 2012 was $1,092 per ton, a decrease of 3.4% compared to our prior year of $1,131 per ton. Revenues for 2012 were slightly more than $5.9 billion compared to approximately $6.5 billion in 2011, reflecting the decline in shipments and average selling prices year-over-year. Sales outside of the United States totaled $857 million in 2012, which represented about 14% of our revenues. For the year, we reported an adjusted net loss of $64.4 million or $0.57 per share compared to an adjusted net income of $10.3 million or $0.09 per share in 2011.

Our adjusted EBITDA for the year 2012, once again, excluding the pension corridor charge and the noncontrolling interests, was $181.2 million or $33 per ton compared to an adjusted EBITDA of $265.7 million or $47 per ton for 2011. The year-over-year decline in adjusted EBITDA was primarily driven by a decrease in shipments and lower steel prices, along with higher coal and coke costs, which were partially offset by decreases in our other raw material and energy costs.

Turning to the balance sheet and cash flow statement. For the year 2012, our capital investments totaled $46 million and our strategic investments totaled about $61 million. The strategic investments are related to a $13 million investment at AK Coal for a coal preparation plant and a $47.5 million investment at Magnetation.

During the fourth quarter, working capital was a solid source of cash of $103 million. In the fourth quarter, we successfully completed 3 capital market transactions, resulting in $601 million in gross proceeds. We took a balanced approach in these capital market transactions in order to solidify our balance sheet and substantially enhance our liquidity. On the strength of those capital market transactions, as well as our solid working capital management, we ended the year 2012 with very strong liquidity of $1.1 billion. With this level of liquidity and our year-end inventory levels, we are well-positioned to serve the needs of our customers and execute our strategic plans as we enter into 2013.

In regards to pension funding, our 2013 pension funding requirements totaled about $180 million. Earlier this month, we completed our first required pension contribution of $30 million, and we will be making the remaining $150 million of contributions throughout the remainder of the year.

Now turning to our outlook. We expect to provide detailed guidance for the first quarter of 2013 in March. While we are not providing financial guidance at this time, we would like to provide a few data points for 2013. We anticipate total capital investments of approximately $60 million in 2013. In addition, we expect to invest approximately $90 million for our strategic investments in iron ore and coal.

I would remind you that the financial results for AK Steel's 49.9% interest in Magnetation LLC joint venture are reported as part of the other income line on our income statement, and Magnetation's results will vary primarily based on changes in the IODEX and their concentrate shipments. We expect to incur interest expense of approximately $120 million in 2013.

We anticipate that our pension and OPEB combined will be a credit of approximately $64 million versus a credit of approximately $35 million in 2012. This increase in the credit is primarily the result of the lower discount rates, partially offset by the lowering of our assumed expected annual rate of return on our pension plan investment portfolio from 8% in 2012 to 7.25% in 2013.

Finally, with regard to income taxes, our book tax rate attributable to AK Steel, excluding SunCoke, will be a function again of the tax effect of our LIFO charge or credit. For example, if we incur a LIFO credit, we will incur a tax expense for the year. And if we incur a LIFO charge, we will incur a tax benefit for the year. Currently, we expect our LIFO credit for 2013 to be substantially lower than the $89 million LIFO credit we recorded in 2012, primarily reflecting the anticipated lower raw material costs. From a cash perspective, we estimate that our cash taxes will continue to be very minimal given our NOL tax carryforward position.

Let me conclude by saying thank you for your interest in AK Steel. At this time, Jim, Al and I would be happy to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Evan Kurtz of Morgan Stanley.

Evan L. Kurtz - Morgan Stanley, Research Division

Maybe just starting on electrical steel. Could you -- I know you gave some details there, but just trying to nail down exactly what we can model for perhaps pricing and volumes on the electrical steel front in 2013. It sounds like you think -- it sounds like you're saying that U.S. pricing is up year-on-year, but that's going to be offset to some degree by the international pricing. Is that true?

James L. Wainscott

I think it's fair to say that, really, what's going on internationally, it's also exerted some downward pricing pressure on our NAFTA sales as well. But we are gaining market share in NAFTA. The mix, historically I would say, we've been probably in that 90% contract. That's about where we're going to be this year, 10% spot. So we pretty well know where the business is going. But we've also been about 50-50 domestic or NAFTA and international. Clearly, that's shifting more towards NAFTA and away from international in the current environment. So a little bit of color on all of that. Volumes, I think, are going to be roughly comparable year-over-year, Evan, as we look at 2013, again, from time-to-time, whether it's due to forces of nature or other things, there may be opportunities where we can help participate in recoveries, and one can make one's own assumption about how those things will happen year-over-year. But I think as we look at the underlying economic situation, roughly a similar year in terms of volume. In terms of pricing, again, very depressed internationally. I think in many cases, you've got producers that may not be able to really cover their cash costs. We've certainly not seen anything like that domestically, but there has been some downward pressure here as well.

Evan L. Kurtz - Morgan Stanley, Research Division

And on the import front, I've been hearing more and more about the Japanese electrical steel imports in the U.S. market. Is that mostly a commodity kind of grain-oriented? Or are they starting to impact the high perm [permeability] sections of the market?

James L. Wainscott

We like our position in the high end of the market, we always have, and we'll continue to do what we can to serve our customers well and defend that. I think one of the things that we've taken a hard look at, and we'll continue to do so, along with our lawyers, is whether or not there are issues that really amount to dumping here. And it's something we'll continue to look very, very hard at, including at the Japanese.

Evan L. Kurtz - Morgan Stanley, Research Division

Got you. All right. Then maybe just one more on the auto contracts. I'm just trying to understand the timing for modeling these. It sounds like the base prices are up a little bit, but you have some raw material surcharges. I assume you're still buying iron ore on kind of a 1-quarter, 1-month lag. How are the surcharges charged here? Will we see any sort of timing issues as those kind of come on and off?

James L. Wainscott

Again, we're delighted with our growth in the auto business, first of all, and expect more of the same this year as we continue to grow not only with the announced growth that all of them are seeing and I think articles in the paper today on Toyota recovering, retaking #1 position. That's a very good customer of ours and so forth. But to your point, again, at various points throughout the year, whether it's a January 1, a March 31 or midyear or beyond, there will be contracts that come up for renewal, and we'll successfully renew them. There is obviously a base price component, and then there is a surcharge component, a variable pricing mechanism component, if you will. And, again, some of it depends on the timing of when those things are renewed. Some of it depends on the volume commitments. Each relationship is unique. Each contract is different. Each variable pricing mechanism is a bit different than the others. Some include iron ore, where possible, some don't. So it's very difficult to be very specific and really to model that, except to say that, clearly, we're going after prices that allow us to make a profitable return. And we'll continue to grow profitable business. We'll continue also to push for the variable pricing mechanisms. We think that makes sense. Although this year, as I've indicated, given that some of our materials are down, our customers will enjoy some of the benefit of that as well.

Operator

Our next question comes from Luke Folta of Jefferies.

Luke Folta - Jefferies & Company, Inc., Research Division

In your prepared remarks, you said that you forecasted there could be as much as $150 million in savings from raw material costs in 2013, and I think you said that over $100 million of that is due to coal. So I just wanted to get an understanding of if there's any further granularity you can add to that $150 million comment. And I just -- basically, I'm trying to get a sense of what's in the bag already and what could change from here depending on where spot prices go.

James L. Wainscott

Luke, great question. Thank you. Let me lead off, and then I'll toss it over to Roger to fill any blanks that I miss here. But we just -- we've come out with this number because it's really something, I think, that you can grab and appreciate the benefit. There are advantages, I suppose, to being fully integrated. There are advantages to not being fully integrated. We think the right thing long term is to be right in the middle, which really gets to the strategy that we've undertaken here. But in a year when prices have come back, it's really coal and coke. It's hard for us to really distinguish between the 2 because, again, we get the passthrough benefit of the coal purchases in the coke that's being produced by our friends at SunCoke. So, really, on a combined basis, a little bit more than $100 million we would expect in terms of coal and coke. And those deals are done, right? We know those deals, they're in the book, and so we're very confident when we talk about that number. The savings that we talk about, which could be, say, half of that amount, for example, just to give you sort of a ballpark number in iron ore, is based on 2 things: One, we know the cost of about half of our iron ore pellets for 2013 for a variety of reasons. We bought forward, we've hedged, we came into the year with a fair amount of inventory. And all of those things -- and, of course, we already know the first quarter pricing just the way the mechanism works. So all of those things taken together give us confidence that we know what those dollars are. And the other thing is, again, the IODEX had a huge run from the 90s, back up to the 150s or so, that we think it's going to moderate somewhere in the 130s. And if that's the case, again, we expect to generate those savings. And there's a bit of an offset here again, that which benefits us in the open market may deplete a little bit of the benefits associated with Magnetation and vice versa. So overall, though, raw materials for one of the few times in recent years have really come our way, and we're delighted about that. Roger?

Roger K. Newport

Jim, you covered all the items.

Luke Folta - Jefferies & Company, Inc., Research Division

And we've got a great deal of detail. Second question I just had was -- congrats on the continued share gains you're seeing in automotive. It seems like it's a place where everyone is really focused. And I just wanted to get a sense of what you're seeing. There's the new mill in Alabama, and obviously, a lot of that is ultimately going to be aimed towards the auto market. You've also got the stainless part of that. Can you give us some sense of what you're seeing from a competitive perspective as it relates to that mill? Do you think that because it's in a situation where the assets are for sale, that maybe you kind of got a free pass on them participating in the contract markets this year? And can you just give us maybe your overall thoughts on that whole situation?

James L. Wainscott

First off, thanks for the comment. We're delighted with our growth. At one point, AK Steel probably had something like 60% of its business tied up with automotive, got all the way back probably to half or less than that. And we're coming back, I think, as we've really again reestablished and are growing on relationships that are very valuable. It's very good business. We've invested in our company in the facilities that we've put in and the mindset and the approach that we have to our business. AK Steel has never been sort of the Walmart of the steel business. We're not a commodity player. We are indeed a very high-end player, and we want to serve folks with high value-added product, including the automakers. So that's our focus, nothing new there. Good luck to anybody else who wants to take on that business. It's very, very tough business, not only the applications themselves but the customer service, what it takes to make a $1 in that business. And good luck to TK or the new owners. I think one of the things that people have to realize is that there is a qualification process that has to occur. I suppose a lot of the material that was coming from Germany or perhaps from Brazil has been qualified. But we'll see. And I think not only do you have to get qualified, you have to get on platforms. And unless someone screws up and provides an open door for someone else, you're getting on new platforms. And we'll see. That does take time. I think it's going to take a little longer than probably most people think it will take, and it will probably cause continued pressure, more so in the spot market than in the high-end automotive market, at least initially.

Operator

Our next question comes from Richard Garchitorena of Crédit Suisse.

Riya Bhattacharya - Crédit Suisse AG, Research Division

This is Riya for -- on Richard's line. Just wanted to -- I had a couple of questions. One was that you mentioned about the raw material cost savings. So how much of this do you think you would pass on to your customers versus actually keeping to yourself?

James L. Wainscott

The numbers that I think that we have shared with you are what I would call net numbers. So I don't know that we've quantified how much we'll pass on. And, again, it would depend entirely on -- we've got gas and other raw materials, scrap and other components in each of our deals. And so -- and each one is unique, and each one sort of resets as things change. So I don't know that I'd be able to quantify it for you.

Roger K. Newport

Coal and coke generally have not been a surchargeable item and a modest amount on iron ore. So I think the numbers that you're looking at should be pretty close to being net.

Riya Bhattacharya - Crédit Suisse AG, Research Division

Okay. And the second thing that I wanted to know is -- so regarding the stainless, what is your outlook for the stainless steel market? Are you seeing any improvement in white goods demand from housing recovery at all?

James L. Wainscott

We're seeing a little bit of improvement, again, not as much as we'd like. And I think the point first that we always like to make for us in stainless, you really have to slice that in a particular market a number of ways. The good news for us where the market is strengthening is really the auto-chrome, the 400 series portion of that market, as a function of the growth in automotive, generally. But we've been serving that market well. Our customers like what we're doing for them there. The other market that's shown a pickup is really in the specialty sheet and strip products, the kind of materials that we make out of our Coshocton Works. So that's very good, and that would go into the white goods, in particular. And we've seen some growth there in the appliance arena. The commodity 300, the pure commodity down and dirty business remains, as I said in my prepared remarks, overcrowded, closely tied to nickel prices. So -- and I would say that nickel prices have sort of leveled out and actually picked up a bit. And so you've seen a bit of firming there at least in terms of pricing, if not demand. I think one of the things again that people look to is with the entrée of Outokumpu now with Inoxum, sort of what happens to all of that? We are somewhat amazed, if not stunned, when we hear comments that they will be coming into the market to add perhaps as much as 1 million tons of capacity in a market that's really overcrowded already.

Operator

Our next question comes from Michael Gambardella of JPMorgan.

Michael F. Gambardella - JP Morgan Chase & Co, Research Division

I have a request. Is it possible for you guys to consider starting to report a specialty steel segment in addition to your carbon flat-rolled business?

James L. Wainscott

Mike, all things are possible in life, but the reality is, it's not the way that we run our business. How we run our business is we may melt product in Butler and hot-roll it in Middletown and finish it in Rockport, send it somewhere else. So we'd be making an awful lot of assumptions there with respect to things like transfer price and overhead allocation that tend to lose meaning, and we try and deal with that through just giving you some sense and feel for demand and so forth, ebb and flow in that market. But I just don't think it would have particular meaning. We thought about it a lot internally, as you could guess, but I wouldn't look for it anytime soon.

Michael F. Gambardella - JP Morgan Chase & Co, Research Division

Could you give us an idea, if you look at the specialty steel business that you have, the electrical steels, the ferritics and the austenitic stainless? Of the $5.9 billion in just sales for 2012, could you give us a rough estimate of what those 3 specialty steel product groups were?

James L. Wainscott

Roger?

Roger K. Newport

On the sales side, we do not have the sales, there's shipments.

Michael F. Gambardella - JP Morgan Chase & Co, Research Division

Well, you can give us the profitability side, too, if you have that.

Roger K. Newport

We have, as you know...

Michael F. Gambardella - JP Morgan Chase & Co, Research Division

I've been trying that one for years with Al.

James L. Wainscott

Yes, well, keep going. We provide as much data as we're comfortable providing, of course, and we do have a supplemental data package that we give shipments and so forth. And we're happy to provide that to you. I don't know if that's where you're going with all of this. I think it's fair to say that historically speaking, that specialty steel's margins have been somewhat better than carbon margins, and I think that's still the case, although clearly, we've seen a narrowing of that as you look at what's going on, in particular, with electrical steel and international electrical steel. Stainless, again, it's -- you can't kind of glob it all together because it really does depend on what type of stainless you're talking about. But I would say again to the point historically, those margins have been better than carbon. Much of our focus at the company, Michael, and others, has been on enhancing our margins in every one of our product categories and, in particular, in carbon, hence the investment announced a little more than a year ago into our raw material vertical integration. And I think those really have the capacity to unlock significant value for us, narrow the volatility substantially and really improve the bandwidth of earnings. And that's really what we're focused on, as well as continued innovation and product development in each of those markets. That's really what it's all about.

Michael F. Gambardella - JP Morgan Chase & Co, Research Division

The last question on this. Does any 1 of those 3 specialty steel products account for all of your positive EBITDA last year?

James L. Wainscott

Short answer is no.

Operator

Our next question comes from Justine Fisher of Goldman Sachs.

Justine Fisher - Goldman Sachs Group Inc., Research Division

One question that I have is just on the potential benefit from the development of AK's own raw materials in 2015. I know that when you guys were marketing your deal -- your bond deals in December, a number that was out there was regarding cost savings in 2015 of about $150 million from the oncoming supply from AK Coal and Magnetation, which the $150 million benefit this year from raw materials just being lower. How does that change the relative benefit that we might see from the internal development of raw materials in 2015?

Roger K. Newport

Well, Justine, I think in the arusha [ph] development, we added various levels of pricing, various benefits, so to speak. For example, on the coal side, with coal being at $110 per ton, so to speak, we were generating about $20 million of benefit. And, again, it's a sliding scale on that basis. Again, both of these investments are looked at as a hedge, such that, obviously, they'll move in proportion to where prices are going. But we see these benefits [indiscernible] through [ph] us significantly because of the low-cost nature of both of Magnetation, as well as AK Coal.

Justine Fisher - Goldman Sachs Group Inc., Research Division

Okay. And then also on the financing side of things. Obviously, you guys didn't use your [ph] equity and converts in December, so that was a pretty big change around in the balance sheet. But is there still the possibility of funding some of the $90 million of strategic investment CapEx in 2015 off balance sheet with some debt at Magnetation or some way to basically fund that without using AK's cash flow from operations or AK's revolver?

James L. Wainscott

Great question, Justine. Again, I would say, first, we have no current plans for accessing the capital market. Such matters are always topics for debate and discussion amongst the board. We have no announcement today. We constantly work closely with our friends at Magnetation about their financing needs and working capital needs. And I wouldn't rule something like that out, although it's not presently on the table or something we have an announcement for today.

Operator

Our next question comes from Sam Dubinsky of Wells Fargo.

Sam Dubinsky - Wells Fargo Securities, LLC, Research Division

Just a few quick ones. Given volatile input prices, how should we think about LIFO credits and charges for 2013?

Roger K. Newport

Well, as I mentioned in my prepared remarks, we expect that we will have a LIFO credit still for 2013 based on our assumptions, as Jim had outlined in our cost -- or in the raw material reductions. But it'd be substantially lower than the $89 million that we had in 2012. But we're not providing a specific number.

Sam Dubinsky - Wells Fargo Securities, LLC, Research Division

Okay. And then in terms of -- can you just give some color on the coal mining production cost targets for '13 and '14 and also Magnetation...

Roger K. Newport

Well, Sam, again, our indications are that when we're ramped up, that -- again, we haven't given a specific number, but I think you can deduce from the numbers that we've provided namely that in $110, that in a 1 million tons of production, we'd be generating about $20 million of operating profit, which would indicate a cash cost in the $90 neighborhood, so to speak, which I think we're comfortable at, fully recognizing that we're still in the permitting process. And -- but like I said, we feel that, that's a decent number and, again, consistent with what we think are costs in the Somerset area where we're producing coal -- where we will be producing coal.

James L. Wainscott

Candidly, Sam, we hope to do better than that.

Sam Dubinsky - Wells Fargo Securities, LLC, Research Division

Okay. Then my last question is it just seems like we've seen 4 rounds of price hikes over the past few months. Some of the price increases have just been an effort to stop the market from falling because I think we have seen pricing pull back a little bit. Directionally, and not for you guys specifically, just based on the spot market of what you're seeing, could you say where pricing is today, just in the dollar term, how high it is off of 4Q lows?

James L. Wainscott

Well, we're up. We're not up nearly as high as we'd like. We're attempting to realize and have price quotes out there for our full $40 per ton. But, again, it's a very competitive market, and we're going after many of the same orders in the spot market that our competitors are. One of the things that I just offer, Sam, that we're looking at -- we're about 65%-35% contract to spot market, looking to continue to grow that hopefully upwards of 70%, all the way to 75% or 80%, so that there's less of us in this very crowded spot market arena. But prices are trending higher but not moving quite as quickly as we'd like them to be going. We're now certainly north of $600 a ton, which is a better place than we've been recently.

Operator

Our next question comes from Michelle Applebaum of Steel Market Intelligence.

Michelle Applebaum - Steel Market Intelligence Inc

A couple of drilled in kind of questions. First one is, on automotive, you said you're getting increases wherever possible. I'm just wondering how often that's possible.

James L. Wainscott

We go after them in each case. We have been successful in some cases. And in other cases, perhaps it's due to what we've negotiated volume-wise. We may not have gotten an actual base increase. But, again, each one is unique and different.

Michelle Applebaum - Steel Market Intelligence Inc

Okay. And then second question is, you're saying you're still going to have a LIFO credit for the year, but it will be a lot lower than last year. And I'm trying to figure out what kind of trend line assumptions you're forecasting from current levels at year-end, because in order to have a LIFO credit, you'd have to be forecasting that your raw materials would be lower-priced by the end of the year. And I noticed that Nucor's guidance today said that they expect to go from a credit to a charge, and I think that their raw material prices have been recently -- have not increased the way iron ore prices have increased. So I was just kind of curious what your assumptions are on iron ore and coal between now and year-end that lead you to a credit? And then the second question is, what's the sensitivity of your LIFO layer to each of those commodities? I mean, is that the bulk of the forecast?

James L. Wainscott

Let me defer to our LIFO expert, Roger Newport, Michelle.

Roger K. Newport

Michelle, a couple of things. In regard to the iron ore, as you're aware, it had dropped down late in the year in 2012. Here, in the beginning of the year, we have seen it spike up to nearly $160 was what the IODEX went up to. We're continuing to see a decline from that level. It's down in the 140s right now. And we think that will continue to moderate itself and continue to reduce throughout the year at this point. In regards to coal, we know what our coal costs are going to be this year. So that is known, that is going to be lower. Those contracts are completed. And a comment on the scrap side is, scrap had declined throughout last year. Scrap costs will probably -- could be flat or could go up. I won't give a projection on what I think it will do this year. That's why we're not giving guidance of what we think LIFO will do. But it is -- it usually trends with what's going on with the spot market pricing for hot-rolled. So I can understand your commentary of others. What they're saying is it's their outlook for scrap.

Operator

Our next question comes from Arun Viswanathan of Longbow Research.

Arun S. Viswanathan - Longbow Research LLC

I guess my first question is on cash flow. You guys had an operating cash use of $270 million in 2012. Working capital was $115 million of that. What's the expectation for working capital in '13? And is that -- and how does cash use vary with average pricing?

James L. Wainscott

Arun, a great question. We expect to be working capital positive in 2013. I'd emphasize that point. Our liquidity is in great shape, as Roger mentioned, ending the year with about $1.1 billion position. You start with the premise that we expect to have a better year. No doubt we have some sizable expenditures, including things like pension funding and interest and so forth. But, again, I think we're starting off in better shape, looking for a better year. And we'll pay very, very close attention to your point on working capital and expect working capital to be a positive for us.

Albert E. Ferrara

Arun, I just mentioned that working capital was a use of $110 million last year, which was very unusual for us because we've been fairly close to using that. But I think, again, as Roger mentioned in his remarks, that's going to inure to our benefit in some of those carryover tons and I think also will lead itself to a more positive use -- or positive benefit from a working capital perspective for 2013.

Arun S. Viswanathan - Longbow Research LLC

Okay. So let me just clarify another way. Assuming price stays constant, you get the $150 million in raw materials and you get maybe $100 million or $50 million to $100 million in working capital. There's a good possibility that you could have positive operating cash flow in 2013. Is that right?

Roger K. Newport

I guess I'll just comment on working capital side. I mean, we see that it will definitely be a positive to us for this year, especially with the iron ore declining.

Arun S. Viswanathan - Longbow Research LLC

Okay. But if you -- if you assume that price stays constant and you get all the benefits in raw material, you should see potentially a positive operating cash flow, too, for the year?

Roger K. Newport

Yes, I think if you look at the lower cost, you got to look at what's in inventory at the end of '12 versus what's going to be in the inventory, the value at the end of '13. So our $100 million -- the numbers Jim have talked about is total for the year, not all of that is sitting in inventory at year-end. So you would get a pro rata share of that in working capital benefit year-over-year.

Operator

Our next question comes from Charles Bradford of Bradford Research.

Charles A. Bradford - Bradford Research, Inc.

I'd like to talk a bit about stainless. Your comments were pretty spot on, the best I can tell, but even worse might be one of your competitors putting in a new wide hot strip mill. And since so much of the stainless market historically had been 48-inch wide, I think you can go 60, the plant in Alabama can go 72. The limitation would seem to be not on your rolling limitation but on your casting limitation. How wide can you cast a stainless slab?

James L. Wainscott

Yes, we're in the 40-plus, 42 kind of range, Chuck, I think, is typical.

Charles A. Bradford - Bradford Research, Inc.

And so you can't take advantage of the full 80-inch hot strip mill?

James L. Wainscott

Well, not really at this point. Again, what I would say, Chuck, on that whole subject, I think you're referring to Allegheny. I think they will be continuing to construct this year as we understand things begin ramping up and continue most of that through next year. And we may be facing more of them late next year, in 2015 and so forth. We're keeping a close eye on what's going on there, as well as what's going on in Alabama. The fact of the matter is, we're not sure that really -- I mean, look, the basic driver in that particular marketplace is the raw material input costs. And until someone owns their own mines, it's not a dramatic change, but we're mindful. We think our costs and certainly our quality are extremely competitive. We continue to get very high marks from our customers in that arena. We'll do everything we can to defend our position there as we have for years.

Charles A. Bradford - Bradford Research, Inc.

Second question involves the Alabama plant. Do you understand -- or do you know whether or not they're going to go after the 409 market? Or is it strictly the 300 series?

James L. Wainscott

They'd have to answer that question themselves. But what we have read is that -- and I think we sense is that they're bringing a small amount of product to the market now, looking to increase their position perhaps as much as 25% of the stainless market. I guess, again, it depends on how one defines the stainless market, and maybe they could answer that question more fully. One of the fallacies though that I think we saw play out with the carbon business for TK is that despite higher capabilities and presumed higher quality or superior quality, you don't get paid for that, right? I mean, we know that. We certainly have seen the hemorrhaging of cash that has occurred for TK, and I suspect absent prudence, the same kind of thing will occur with respect to the stainless business here. We think, candidly, that whole approach is illogical and perhaps borders on insanity. To bring 1 million tons to a market that already has 1 million more than it needs and to say that you'll come into the market with -- and be competitive on pricing, at least that's their intension, I just don't see how that happens. So, again, we'll be very interested to see how and if it comes and whether or not it pushes out imports and perhaps some of their own product. And one really has to do the math, but the whole idea of adding this capacity candidly doesn't make sense to us.

Operator

Our next question comes from Mark Parr of KeyBanc.

Mark L. Parr - KeyBanc Capital Markets Inc., Research Division

I just had a couple. Most of my questions have been answered. And Jim, you've given a lot of really good color today. It's been very helpful. First question I've got relates to the Auto Workers' contracts. And I'm wondering if with the recent new contracts out of Chrysler and GM, if there may be any new wrinkles to the negotiations based on the pattern established up there.

James L. Wainscott

Short answer is no. We look at them carefully. We've got very good deals. We think the deals that we have are as good as anybody has in our business. And in business generally give us kind of flexibility when it comes to workforce size, job classes, flexibility and then sharing in the cost of benefits. So not anticipating any significant issues and haven't really gleaned any insights from those deals you referenced that would give us a leg up.

Mark L. Parr - KeyBanc Capital Markets Inc., Research Division

Okay, terrific. And secondly, you may have already mentioned this, but I think in your opening comments, you talked about $25 million of operational improvements you were working on. I was wondering if you could give some more color on that.

James L. Wainscott

I think the $25 million that we referenced really had to do with strategic purchasing initiatives, and there's just a whole host of things that we've been doing. Obviously, our spend is, depending on what you put in that category, well north of $1 billion. And so we're looking where we can to consolidate activity, to streamline activities. And I think that's a very achievable goal for us. And we won't stop there, as I said. There's a whole host of other things we're doing in terms of maintenance practices and operating practices in the mills that we think will also bear fruit and hopefully a multiple of that. So that's who we are. We are in the business of improving things at our company. Management, as it's always been said, doesn't get paid to maintain the status quo. We get paid to improve things. That's our philosophy of continuous improvement, believing in better and then making better happen, and that's what we intend to do this year.

Operator

Our final question comes from Sohail Tharani of Goldman Sachs.

Sohail Tharani - Goldman Sachs Group Inc., Research Division

Just wanted to go over some of the benefits, just get an idea of what 2013 would look like. So you have $100 million benefit from coke and coal, let's assume 5.5 million ton of production, around $18 a ton benefit. And then pension looks like, Roger mentioned, is going to be about $30 million benefit further credit. So there's about $5 a ton. And then less is utilization rate is up 5%, and every 10% you get $40 million. So that's about $4 a ton. So you have about $27 a ton benefit, plus some cost cutting you've targeted. So around $30 a ton, is it fair to assume that kind of saving and, of course, offset by if there's a price decline year-over-year and electrical price decline and so forth?

James L. Wainscott

We haven't quantified it quite so digitally, but I think you're right in the ballpark.

Sohail Tharani - Goldman Sachs Group Inc., Research Division

Okay. So, I mean, how are you set for the electrical steel price contracts in the U.S.? Because 90% of yours is already set. So is that significantly down or modestly down? Or how are you seeing that?

James L. Wainscott

To the extent they are, we hope to offset those with other cost reductions is, I guess, how I would characterize it. Again, we like the additional volume, which we've been successful in getting. And we've had to be competitive, if you will, on the pricing front. But I wouldn't really quantify it here, except to just acknowledge that there have been downward pressures with respect to pricing. But for us, again, and we don't know what others are saying, we've read a lot of headlines, perhaps including your own, that 2013 looks and feels a lot like '12. For us, as you've just quantified, we're going to have lower costs, right? We know that. We're going to have a richer product and market mix. We're going to have higher volumes of sale, not [ph] dramatically higher, but they're up. And we're going to get the benefits of lower production. So there are a lot of moving pieces in the works, but we feel very good about the direction generally starting here with the first quarter and continuing throughout the year.

Sohail Tharani - Goldman Sachs Group Inc., Research Division

And one more thing. Is -- the benefit of the coal is for the whole consumption, including the one which is -- comes through the coke agreement. Is that correct?

James L. Wainscott

That's correct.

And, ladies and gentlemen, again, we want to take this opportunity to, as we sign off, thank all of you for your interest in and your continuing support of AK Steel. We hope we can have you join us again in about 3 months for our first quarter 2013 conference call. Until then, we wish you a great quarter and a much better year in 2013. Thank you again. Have a good day.

Operator

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

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