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AKS Steel Holding Corporation (NYSE:AKS)

Q1 2009 Earnings Call Transcript

April 21, 2009 11:00 am ET

Executives

Albert E. Ferrara, Jr. – VP of Finance and CFO

James L. Wainscott – Chairman, President and CEO

Analysts

Sal Tharani – Goldman Sachs

Timna Tanners – UBS

Luke Folta – Longbow Research

Justine Fisher – Goldman Sachs

Michael Gambardella – JP Morgan

Chris Olin – Cleveland Research

Mark Parr – KeyBanc Capital Markets

David Gagliano – Credit Suisse

Charles Bradford – Bradford Research

Brian Yu – Citi

Seth Yeager – Jefferies & Company

Mark Liinamaa – Morgan Stanley

Kuni Chen – Merrill Lynch

Dave Cathe [ph] – JP Morgan

Operator

Good morning, ladies and gentlemen, and welcome to the AK Steel first quarter 2009 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. (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, 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 Ferrara, Jr.

Thank you and good morning, everyone. Welcome to AK Steel’s first quarter 2009 conference call and webcast. In a moment, I'll review our first quarter financial results as well as provide some guidance for the second quarter of 2009. 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. Other than our comments on historical results, the remarks we make today constitute forward-looking statements within the meaning of Section 21E 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 our Annual Report on Form 10-K for the year ended December 31st, 2008.

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 Web site aksteel.com.

Earlier today, AK Steel reported a net loss of $73.4 million for the first quarter of 2009. AK Steel’s results for the first quarter were significantly impacted by the dramatic and ongoing downturn in US and global economies. As the deep recession continued throughout the first quarter, AK Steel continued to experience a sharply lower level of customer orders and operating levels at our plants. In addition, while we expect to see a decline in raw material costs for the year, we did not yet begin to realize the full effect of those benefits in the first quarter. That’s because we continued to work through certain higher priced raw material inventory that carried forward from 2008.

Shipments in the first quarter total 778,800 tons, a 27% from the previous quarter. Our average selling price for the first quarter of 2009 was $1,184 per ton, which was 13% lower than the prior quarter. Our average selling price in the 2009 first quarter was negatively impacted by lower spot market prices and lower surcharges, which were partially offset by a reduced shipment mix. However, our first quarter 2009 average selling price did reflect an increase of $49 per ton or 4%, compared to the first quarter of 2008.

Total revenues for the first quarter were $922 million, which was $536 million or 37% below our revenues in the fourth quarter of 2008. I should note the continued increase on a relative basis of our business in the infrastructure and manufacturing area. This market group has increased from 18% of our revenues in 2003 to 29% in 2008, and for 37% in the first quarter of 2009.

Looking internationally, our non-US revenues in the first quarter of 2009 were up $180.2 million, which represented nearly 20% of our sales for the quarter.

On the cost side of the equation, our quarterly financial results were meaningfully impacted by our reduced operating rates due to a significantly lower volume of customer orders. However, our results did benefit from lower scrap, alloy, and natural gas cost, compared to the previous quarter. We would expect this trend to continue and actually accelerate in the remaining quarters of 2009.

Further in the first quarter of 2009, we benefited from a LIFO credit of $66 million. We incurred plant maintenance outage expenses of $5 million during the quarter, but majority of our outage expenses related to maintenance works in Middletown Works blast furnace, which began during the first quarter. Netting revenues and cost, we incurred a first quarter operating loss of $99.9 million or $128 per ton.

Turning to the balance sheet, our continuing focus on cash and liquidity, working capital management, and maintaining our financial flexibility allowed us to enter the current economic downturn in strong financial position. We began the year with a cash balance of $562.7 million and ended the first quarter with a very solid cash balance of $462 million. During the first quarter, we completed contributions of $50 million to our pension trust fund and $65 million to the Middletown Works retiree VEBA trust.

Excluding the impact of those contributions, we generated cash from operations in the first quarter of 2009. Combining our quarter-end cash balance with $676.6 million in availability under our revolving credit facility, AK Steel’s total liquidity stood at more than $1.1 billion at March 31st.

We continue to place a high priority on the management of our working capital. In the quarter, working capital was the source of $125 million of cash and we anticipate it will be an additional source of cash for the remainder of 2009.

Looking at our debt situation, our net debt at the end of the first quarter 2009 was less than $150 million. It’s also important to note that AK Steel has no significant debt maturities until the year of 2012.

During the first quarter of 2009, we continue to utilize some of our cash to directly benefit our shareholders. We’ve spent $10 million to repurchase roughly 1,625,000 share of AK Steel’s common stock, at an average cost of $6.13 per share. I’ll also point out that each of our company’s executive officers purchased additional AK Steel stock during the first quarter of 2009, increasing their personal investment in the company.

On the debt side, we are occasionally offered the opportunity to repurchase some of our 7.75% senior notes, that are due in 2012, and in the first quarter, we’ve redeemed $23.1 million in par value of these notes, at a cost approximately $19.8 million or roughly $0.85 on the dollar.

And speaking of our senior notes, let me take this opportunity to clarify their covenant structure for those of you who may not be familiar with it. These notes contain a covenant that requires a minimum EBITDA de-interest coverage ratio of 2.5 to 1 for the trailing 12 months. It’s important to note that this test is an incurrence covenant, rather than a maintenance covenant. As such, should we drop below coverage ratio of 2.5 times, our only limitation would be in the amount of debt we would incur beyond that which is available under our revolving credit facility. Non-compliance of the covenant would cost our no-limitation on the utilization of our cash or our ability to bar from our revolving credit facility. Simply put, the terms of our senior notes and our ability to access our existing liquidity will not be affected if we drop below the interest coverage test.

Before discussing the second quarter, I’d like to provide an updated summary of our cash uses in 2009. We have reduced our capital investment program due to current business conditions. We now anticipate capital expenditures of approximately $100 million for the year. Earlier this morning, we announced that AK Steel’s Board of Directors has authorized another early contribution to our pension trust fund. This $50 million contribution will be made during the second quarter and will be our second contribution of 2009. Following this contribution, we will have approximately $55 million of required pension contributions remaining this year, and we will have no further required contributions to the Middletown VEBA in 2009.

Now, let me provide some guidance for the second quarter. We expect our second quarter shipments to be approximately 800,000 tons, which is slightly higher than shipments in the first quarter. On the pricing front, we expect our average selling price to decrease by about 4%, roughly $40 million or $50 per ton. On the cost front, we expect to benefit from lower operating and raw material cost of approximately $80 million or $100 per ton in the second quarter. And we expect a substantial decline in our raw material cost for the full year 2009. We expect our maintenance outage cost to increase by approximately $15 million quarter-over-quarter, as we complete the Middletown Works blast furnace outage, and we anticipate another LIFO credit in the second quarter.

Overall, we expect to incur an operating loss of approximately $50 million in the second quarter, a 50% improvement from the first quarter.

Finally, with regard to income taxes, we are now projecting a quarterly book tax rate for 2009 of approximately 35%, and a cash tax rate of less than 5%.

Now, for his comments, here’s Jim Wainscott, AK Steel’s Chairman, President, and CEO

James Wainscott

Thank you very much, Al. Good morning, everybody. Following five years of steady progress for AK Steel, I have to say that the past five months have been an extremely challenging period of time for us. Having said that, if not for the major improvements that we made over the past five years, it’s fair to say that our situation would be grim. But, thanks to that progress, we’ve become globally competitive, and we’re well positioned to weather the continuing global economic downturn.

Some have turned the cur – some have termed, rather, the current economic situation in the United States as the Great Recession. Call it what you will, but in terms of its speed and intensity, I have to say that this downturn is unlike anything that our management team has previously experienced. And our first quarter 2009 operating results reflect that fact. At the core of our operating performance, there’s a lack of customer orders that resulted in the lowest level of quarterly shipments since AK Steel was formed. For the first quarter of 2009, our total shipments were 51% lower than a year ago, and our automotive shipments declined at an even greater clip [ph].

That put things into perspective. This is not your average recession. It’s extraordinary and we’re treating it just that way. Those who know AK Steel know that we welcome a good challenge and we’re facing a very big challenge this year. That said, as with previous challenges that we faced and overcome, the people of AK Steel are rising to meet this latest challenge. I’m proud of the performance of our management team and all of our employees who have reacted quickly and appropriately to these unprecedented times. To match production with our anemic order intake rates, we have temporarily idled certain of our manufacturing facilities.

Along with that, comes one of the toughest things that we have to do, that is, layoff our employees, the same employees who contributed to the company’s turnaround in recent years. While the exact number of layoffs fluctuates week to week, we had more than 1200 employees on layoff status in January of this year, and today that number has declined to about 800.

When one takes into account the breadth and depth of this downturn, our quick actions to adjust to the rapidly changing market conditions were both prudent and necessary. Beginning in late October of 2008, we began to reduce our operations as we sought to reduce costs throughout the company. That intense focus on cost reduction continued during the first quarter and it is ongoing. In essence, we have returned to an operating approach that served us well beginning in 2003, the early days of the AK Steel turnaround. It’s a program that we termed the Three Cs, which stands for customers, costs, and cash, because that’s what’s important now in order to win. Customers, costs, and cash always matter, but in an economic downturn, they matter even more.

Despite the tough times, we still hold our company values near and dear. We’re staying true to our core values of safety, quality, and productivity. Take care of your customers and your people, and the results will follow. That has been, and will continue to be, the philosophy of this company.

Speaking of customers, the first C, let me offer a few thoughts on what we see in our markets. The good news is that the economic free fall appears to be behind us, and we are seeing a slower rate of decline, if not, a leveling of order intake rates. For example, while the automotive industry is experiencing its worst sales level in decades, March was a better month than February. In addition, compared to a light vehicle inventory level of 101 days at the end of February, the comparable number stood at 82 days at the end of March.

Sufficient credit availability and consumer confidence are still lacking, but the automotive companies are still selling vehicles. And we’re still providing them with the highest quality steel available to produce them.

Inventories of service centers also continued to decline. March of 2009, carbon flat-rolled steel inventory levels were at their lowest points since March of 1996. Since peaking in August of 2008, carbon flat-rolled inventories have declined by 32%, and stand at 2.8 months of supply on hand.

For roughly the past six months, service centers have been shipping at higher rates than they have been purchasing. We believe that pattern is about to change. Service center customers report that they are near the end of their de-stocking programs and that they will be increasing their purchases to a level equal to their shipments. This is very welcome news indeed.

Similarly, stainless steel inventories and service centers are at their lowest levels since 1995. Service centers continue to hold relatively low levels of stainless inventory, with current stocks representing about 3.1 months of supply on hand. Just yesterday, we announced the stainless steel base price increase effective May 3rd for all flat-rolled stainless steel products that we manufacture. Depending on the grade and product form, the price increases range from 6% to 9%.

None of the markets we served is immune from the downturn and that includes electrical steel. As global economies have slowed, projects have been delayed or cancelled. And our (inaudible) customers are taking less electrical steel than planned as the housing slump continues. In addition to slower demand, we’ve also felt the effects of increased imports. Notwithstanding all those challenges, electrical steel continues to be a very strong product for our company. And going forward with the heightened focus on energy efficiency in this country and around the world, this product line will serve us and our customers well.

Before leaving this subject of customers and markets, let me share some excellent news about our company. According to the Jacobson and Associates independent survey of our carbon, stainless, and electrical steel customers for the additional quarter of this year, AK Steel continues to be ranked number one in quality.

In addition to our top ranking in this well-recognized broad customer survey, we received some specific recognition from an important customer during the first quarter as well. Toyota recently honored AK Steel with two awards, one for quality and one for supplier diversity. We greatly appreciate this recognition from one of the world’s leading automotive companies.

The second C is costs and from a cost standpoint, I really like our company’s profile. Over the years, we’ve improved our cost structure and our balance sheet, both of which are helping us now. There are several other characteristics of the company that also position us well. First, it’s a great time to be a company of a relatively small size, with our uniquely diversified product mix, and with our flexible operating approach.

Second, it’s a great time to be a steel company that’s raw material short. As most of you know, AK Steel is the least integrated of the integrated steel producers. Other than producing about 70% of our normal Coke requirements, we buy our raw materials on the open market.

With double digit annual cost increases in recent years, AK Steel paid a heavy price, as in billions of dollars. But this year, we expect a meaningful decline in the price we pay for various raw materials, including iron ore pellets. This should greatly advantage our results in the second half of 2009, as we work through higher cost inventories here in the first half. There’s a growing consensus that iron ore prices are expected to decline by 40% to 50% this year, and when they do, AK Steel will benefit more than those who own all or a portion of their iron ore requirements.

In addition, scrap prices have fallen dramatically, and given how we burden our basic oxygen prices with a 25% to 30% scrap charge, we’re enjoying the benefit of this lower cost. And I would remind you that in addition to our two blast furnaces, we operate five electric arc furnaces in the company, whose primary steel making input is scrap.

Third, in terms of cost, I believe we have the best labor contracts in the steel business, negotiated over the past several years. Our innovative labor agreements served as the steel industry benchmark when it comes to flexibility and cost reduction. Our labor agreements, which combine workforce flexibility, variable profit sharing and VEBA contributions, and frozen pension and retiree health care benefits, differentiate AK Steel from our peers. These labor deals are working great, exactly as intended and they provide us with the kind of overall flexibility needed to operate cost effectively in this part of the steel industry cycle.

I might also add that on the salaried employee front, we’ve implemented several cost reduction initiatives, including a pay cut for all salaried employees that was effective January 1st. In addition, to reduce the size of the salaried workforce, we offered a retirement incentive package, and where necessary, we implemented salaried layoffs. We locked and froze the defined benefit pension plan for salaried employees and we implemented a new defined contribution plan as well, and we dramatically reduced the use of outside contractors throughout the company, in favor of employing our own people as much as possible.

The final C of the Three Cs is cash, and as now outlined from a cash and liquidity standpoint, we’re also in very good shape. In recent years, with the cash we generated from operations, we chose to pay down debt and fund the pension plan. We also negotiated a groundbreaking retiree health care settlement that was affirmed by the Court of Appeals earlier this month. In short, we elected not to go on an asset spending spree during the market peak, and instead we used our cash to strengthen our balance sheet.

I suppose you might say that we fixed our roof before the heavy rains came, let alone this economic tsunami. And as a result, relative to our competitors, we’re in an enviable position from a cash and liquidity standpoint. Further, it’s important to note and I’ll emphasize once again that we have no meaningful debt maturities until the year 2012. We have no covenant issues of any significance in our debt indenture. We’ll continue to focus on the things that matter most, customers, costs, and cash, as we continue to weather this economic storm.

As the recession lingers, it’s becoming increasingly clear that 2009 is a year that will not be great. In the eyes of some, it may not even be good, but it will certainly be a year that differentiates the weak from the strong. The strong will survive and then prosper. The strong will get through the tough times. That’s exactly what we did in the first quarter and that’s how we intend to approach the future as well.

As we have reduced our costs and lowered our breakeven point, we expect to report a substantially better second quarter. Despite expected lower selling prices in Q2, we expect to cut our operating loss in half as compared to the first quarter. Beyond that, we expect sequential improvements in each of the third and fourth quarters of this year. In other words, we expect to generate positive EBITDA in Q2 on our way to reporting a positive operating profit in the second half of 2009.

Before taking your questions, let me comment briefly on the status of our major maintenance outage at the Middletown Works blast furnace. Begun in March, the blast furnace outage is underway and progressing quite well. In light of continued market softness, however, the outage will be extended from 45 days to at least 60 days. Despite the extended outage, we do not expect an increase in the cost of this important maintenance job.

Last week, I visited with the leadership of the outage team at Middletown Works and they’re doing a terrific job for us. Successful completion of this outage should position us very well to meet increased customer demands, when we see an improvement in the market place.

In 2008, AK Steel forged ahead and in 2009, we’ll take it one quarter at a time as we roll on. Using that mnemonic, we intend to remain focused on our core values in order to improve safety, enhance quality, and optimize productivity to outperform the expectations of both our customers and shareholders while we lower our costs and live to outgrow our cash position. While we’re focused intensely on improving our day-to-day operations, we will also continue to position the company for longer term success, just as we’ve done in years past. Great companies find a way to win and they find a way to turn crisis to an opportunity. That’s exactly what we intend to do in AK Steel in 2009.

Thank you all very much and now, we’d be happy to take your questions.

Question-and-Answer Session

Operator

Thank you, Mr. Wainscott. We will now begin the question-and-answer portion of our conference call. (Operator instructions)

Our first question comes from Sal Tharani of Goldman Sachs.

Sal Tharani – Goldman Sachs

Good morning, Jim. Good morning, Al.

Albert Ferrara

Good morning, Sal.

James Wainscott

Good morning, Sal.

Sal Tharani – Goldman Sachs

Can you give us some big dawn between your contracts with this spark business in the first quarter? I’m sure contract has increased a share.

Albert Ferrara, Jr.

Until last year just for a reference point, we were about 50-50, and I would say that that changed slightly in the first quarter to roughly 60-40. We’re back to roughly 60% contract, 40% stock in light of what was going on in net market place.

Sal Tharani – Goldman Sachs

And on electrical steel, you did give us some color, but do you have any idea – I remember in the fourth quarter conference call you mentioned that volume could be done 10% – 15%. Do you have any number you can give us or what could have been done based on the cancellation you have seen?

Albert Ferrara, Jr.

We’re not really backing off that number much, we’re continuing to try and find a home for that product increasingly overseas. But I think that is under some pressure to be sure, particularly in the (inaudible) markets. I wouldn’t have a new percentage number for you, except just highlight that the challenges are a bit greater than we’ve previously anticipated.

Sal Tharani – Goldman Sachs

And obviously, the prices will be slightly lower also because you’re trying to find a new home?

Albert Ferrara, Jr.

That potential exists. Again, we’ll do what we can for our shareholders to hold.

Sal Tharani – Goldman Sachs

Okay. And lastly, are you – your furnaces at Ashland, I think there is no hot strip mill over there, is that correct?

James Wainscott

The hot strip mill in Ashland was shot down about a decade and a half ago.

Sal Tharani – Goldman Sachs

So you actually bring the slabs now to Middletown is that what you are doing? Or are there any other facilities?

James Wainscott

We bring them to Middletown.

Sal Tharani – Goldman Sachs

Okay. So how much freight is this costing you?

James Wainscott

It’s $10 and change, $10 to $12 kind of range and that’s not anything new. Again, I would emphasize that despite all the challenges that AK Steel has we’ve found a way to overcome them. Including the fact that we’ve got land lack facilities and we’ve got a lot of facilities and we do transport material to location as in this case, from Ashland to Middletown. In the long run, we think it’s a great strategy that served us well, but that there’s a bit of a cost penalty associated with that.

Albert Ferrara, Jr.

System has been working quite well, obviously this market condition is difficult but it has been working well for as Jim mentioned for about fifteen years.

Sal Tharani – Goldman Sachs

But all I’m saying that once your Middletown is a pair is and let’s say we are still in a low demand environment. Is there a chance that you may just run the Middletown and shut the Ashland down and save this $10 a ton also?

James Wainscott

I’d just answer it this way Sal, we’ll continue to look at our operating plan and try and optimize for cost. A lot depends on really the products that we’re making and we look at the how we’ve burdening the furnaces and transportation as an element of that equation as well. But it’s certainly conceivable that we would flip the switch on at Middletown and turn it down. And actually we look forward to the day when we can operate both facilities again, it will be mindful that the market will determine that.

Sal Tharani – Goldman Sachs

Okay. Thanks. I’ll get by in the queue. Thank you.

James Wainscott

Okay

Operator

Our next question comes from Timna Tanners of UBS

Timna Tanners – UBS

Yes. Hi, good morning, guys.

Albert Ferrara, Jr.

Good morning, Timna.

Timna Tanners – UBS

I was hoping you could clarify a few questions I have from listening to your comments on the costs side in particular. The going through CapEx that’s a pretty deep cut from what you had anticipated previously from $180 million to $100 million, if I heard that right?

Albert Ferrara, Jr.

That’s correct

Timna Tanners – UBS:

Could you give a little bit more color, what does that mean for the Middletown Coke project in particular?

Albert Ferrara, Jr.

The Middletown Coke project was not in the $180 million and what we’ve done is really focus the expenditures on Middletown blast furnace in the buffer AF and we still have a component in our capital standing for maintenance CapEx not going forward.

Timna Tanners – UBS

Okay. So what’s the maintenance of the $100 million done if you would?

Albert Ferrara, Jr.

We’re probably around $40 million of that is maintenance CapEx.

Timna Tanners – UBS

Okay. And then if we’re – how do we look at the Middletown Coke project, is that still on track? Is that required to be a certain level by? Is there some sort of regulation required that it be completed at some certain time?

James Wainscott

Timna, I would just say, we’re obviously, sometimes we’re good, sometimes we’re lucky. Right now the market place is seeing what it is. It is not a great deterrent our continued progress given that we’re not going to need that Coke right away. Having said that longer term is still a very critical part of our longer term strategy and just to give you a little bit of the blow-by-blow, SunCoke did in fact receive a permit to install, but in light of our position from the city of Monroe on certain credit issues, elected to file a new permit as a result construction of the project had essentially come to a halt.

And really that’s very unfortunate because the project hold up is delaying the creation of jobs both construction and permanent jobs on a $340 million project which is unbelievable given the current job situation in this part of the world. It’s still as I said a great project critical to our desire to lower our costs, improve our self sufficiency, but probably delayed by about a year.

Timna Tanners – UBS

Okay, that's helpful. So we can model in some Coke costs until then – into 2010, and I think I had taken out assuming Middletown is complete. But we should lower CapEx at the same time, yes?

James Wainscott

I’m sorry to interrupt, but also you have to assume volumes, as we mentioned before, under normal circumstances, we produce 70 plus percent of our needs. That may need our requirements in 2010. It’s a little early to tell just yet given the economy

Timna Tanners – UBS

Certainly, and that’s leading to my second question, which is I think when you talk about lowering – falling costs helping you in the first half and then increasing – helping further in the second half? Can you clarify a little bit at some point natural gas and scrap have already started to benefit in the first half? In the second half, can you give us an update on the negotiations to reduce (inaudible), Coking coal costs? I know on the (inaudible) side, but on the Coking coal side, you talked in your 10-K about reducing that and it seems like those are some contracts that could be sensitive. Can you give us an update?

Albert Ferrara, Jr.

Yes, in terms of our Coking coal costs?

Timna Tanners – UBS

Yes, within the contacts that you have existing until the end of the year.

Albert Ferrara, Jr.

Well, in our Coking coal costs we would expect to be modestly, and I say just modestly higher versus 2009. Again, as we discussed in the past – excuse me in 2008, as we discussed in the past, signed agreements back in 2007 for 2008 and 2009 with fixed prices for 2008, and then a modest collar on these prices for 2009. When prices ratcheted significantly higher in 2008, it did not impact us. And so, now that they’ve come back, we’re still really just several million dollars higher year-over-year on the coal side.

Timna Tanners – UBS

I think you talked about volumes, trying to bring those down in line with the reduced volume of steel production. Is there any update there?

Albert Ferrara, Jr.

Well, our volumes will be lower versus the prior year because as Jim mentioned, we generally consume about two million tons a year of coal and we’ll probably be down to about 1.3 million this year in terms of our coal consumption year-over-year.

Timna Tanners – UBS

Okay. And then if I could, a final question related to those two. Is there any comment you can make you can make regarding CO2 emissions and how things are developing on the talks there?

Albert Ferrara, Jr.

Well, let me just say, this is a pretty serious matter not just for AK Steel, but for the entire steel business for all manufacturers, for energy producers and really bad for the recession itself, the subject would be getting front page news. In fact, this weekend the Wall Street Journal did get front page news. And I’ll just say and I want to be clear about one thing the cap and trade program that’s been proposed by the President of this administration really is not about improving the environment as we see it, it’s a tax on manufacturers.

It’s going to be used to fund a host of other programs including some sort of national health care. I think House Minority Leader, John Banner refers to it as cap and tax. And I think he’s called it just right. At a time when our economy and American manufacturers are on their backs, the Obama administration’s proposing to add a tax, believe or not, that would put American manufacturing at a further disadvantage globally.

Any solution has to be a global solution. You can’t solve global warming by taxing American manufacturers because the end result would be a shift to production. The country will pollute far more and that has solved absolutely nothing. We must continue to walk that very fine balance between the two Es, the economy, and the creation and sustainability of jobs and the economy – and the environment, rather. And that is really the challenge that we face. That is a huge deal for us and for, again, all manufacturers in this country.

Timna Tanners – UBS

Okay. Thanks a lot.

Albert Ferrara, Jr.

Thank you, Timna.

Operator

Our next question comes from Luke Folta of Longbow Research.

Luke Folta – Longbow Research

Hi. Good morning, gentlemen.

James Wainscott

Good morning, Luke.

Luke Folta – Longbow Research

Hi. I think Timna might have been going this direction with this. But in your 10-K you had, I guess, talked about how you might be trying to lower or get around some of the minimum purchase levels on some of the raw material contracts. Can you give some explanation as to – as whether you've had some success there, and possibly, which commodities?

James Wainscott

Luke, the good news is we did in fact get out from under some of the minimums. In fact, really, all of the minimums that we had committed to each of our providers to play (inaudible) of iron ore. Pellets have come back and worked with us. And that's really what great supplier relations are all about. So we were successful in that regard.

Luke Folta – Longbow Research

Okay. And just regarding Coke, with the Shenango contract, are you – are you required to still purchase Coke under that? Is that requirement space? Or is there a take-or-pay on it to that as well.

Albert Ferrara, Jr.

We have an arrangement with Shenango. And again, as Jim alluded to work with Shenango in terms of bringing in our Coking cycle down such that we're receiving reduced levels of Coke consistent with our operations on a go forward basis. And again, it has worked out really well for us.

Luke Folta – Longbow Research

Great. And just one final question, I was curious with the infrastructure packages, has there been anymore information as to how that might benefit the electrical steel business?

James Wainscott

I would say nothing specific at this point. Again, on the broader subject of the stimulus to the extent that it improves credibility and consumer confidence by creating or maintaining jobs. That's all wonderful because it's really all about jobs. The important thing here is to create jobs and put money into the hands of the consumer because they continue to drive to economic bus, if you will. To the extent that housing or consumer durable purchases, cars and appliances, begin to pick up as a result of the stimulus, again, all the better.

I think, really, where you're going is, with respect to the modernization of the grid, certainly the modernization of the grid is long overdue. It could be a significant plus for us in electrical steel. Our nation's existing transmission system is aging, it's patch worked, it's overburdened, and highly fragmented. It needs to be modernized. But I think that we could certainly help play a role in that.

Luke Folta – Longbow Research

Okay. Thank you very much and good luck.

Albert Ferrara, Jr.

Our next question comes from Justine Fisher of Goldman Sachs.

Justine Fisher – Goldman Sachs

Good morning.

Albert Ferrara, Jr.

Good morning, Justine.

Justine Fisher – Goldman Sachs

So my first question is regarding the use of cash to buyback stock of bonds going forward. I know that your bonds – they kind of even rallied to higher price points. And so, whether or not you want to buy them back at $0.90 or $0.95, they become less attractive. But going forward, is there a priority between buying back stock or bonds?

James Wainscott

Let me just say that we have an ongoing open share re-purchase program. We’ve been active in that program, as you know. And the two quarters since our board approved it. We’ll continue to evaluate that versus, any debt offers that come our way and decide accordingly.

Justine Fisher – Goldman Sachs

Okay. And then, on your raw materials contract, it’s great that you have been able to get some volume adjustments on your coal and iron ore on historical contracts. But are you guys looking to change the structure of contracts going forward with your iron ore and coal supply? Or in other words, given recent volatility, are you guys working with your suppliers to maybe sign contracts with a larger degree of price re-openers or shorter term contracts?

James Wainscott

Our contracts, typically, Justine have been of one year duration already. It’s conceivable that they could be less than that. And I would guess that in this current economic environment with pricing trending the way it is going, that maybe the suppliers would be of a mind set to do that. I think the idea of some sort of variable pricing or variable cost arrangement is an interesting one. It’s certainly something that we have introduced in our relations with our customers and we’d be open to that concept, as well.

Justine Fisher – Goldman Sachs

Okay. Then along those lines, obviously, there are some of deferrals of tonnage or rather these customers were taking – who had orders for electrical steel that are trying to not take those orders, I guess, but are any of your customers that are willing to take volumes trying to renegotiate on price. Because it seems that from coals, iron, ores to everything, people sort of throwing contracts to the wind these days. They were signed a couple of years ago. So are you seeing customers that sign contracts for high price electrical steel still willing to take volumes, that maybe they are trying to get a discount in pricing?

James Wainscott

Well, we remind all of our good customers that when prices continue to escalate higher and when everybody was on allocation that we were able to come through for them. And so, it works both in good times and bad. But again, this was what real relationships are all about. These are not one-sided situations. We have a dialogue and we’re trying to work through that together.

Justine Fisher – Goldman Sachs

Great. Thanks so much.

Albert Ferrara, Jr.

Thank you.

Operator

Our next question comes from Michael Gambardella of JP Morgan.

Michael Gambardella – JP Morgan

Good morning, Jim and Al.

James Wainscott

Good morning, Michael.

Michael Gambardella – JP Morgan

I have a question. I want to drill down a little bit on your inventory position. Could you give us some color on finished goods inventory? Just in terms of what volume level, not dollar map, but volume levels have done over the last quarter or two?

James Wainscott

Take it away, Al.

Albert Ferrara, Jr.

Michael, with respect to our finished good inventory, actually, they have been relatively flat December 31st, say, to March 31st, which is generally speaking. Unlike our normal cycle, which generally have been building the inventory in the first quarter to shift in the second quarter. As you know, our overall gross inventories quarter-to-quarter December 31st to March 31st dropped by about $100 million in gross terms, $40 million on a LIFO adjusted basis.

But I think our volumes on our working progress in finished are pretty much flat – we build a few slabs in the first quarter because of our outage in Middletown. But inventory is something that we obviously spend a lot of time on. And clearly, in terms of trying to meet our customers' needs yet balance our cash is something that we’re very active with.

Michael Gambardella – JP Morgan

Thanks a lot, Al.

Operator

Our next question comes from Chris Olin of Cleveland Research.

Chris Olin – Cleveland Research

How are we doing?

James Wainscott

Just fine. How are you, Chris?

Chris Olin – Cleveland Research

I wanted you to touch on that service center, tell me if you may, Jim, because it’s pretty interesting in that sometimes it allows here. You’re looking at apparent demand. It's something in the neighborhood of, let's call it, 55 million, 60 million tons. Have you ever kind of work through the math to get what you would consider real demand and or what the inventory issue is it in 2009?

James Wainscott

Al, I’ll leave the numbers tracking probably to you. You’re better suited for that. But what we do is we listen very intently to what the customers who buy from us are saying. And really, what they’re telling us, as indicated my prepared remarks is that they’re going have to buy at a higher rate because they have been selling out of inventory now for a couple of quarters.

And I think that could begin to turn things around here whether it is in May or in June or beginning in the second half. But I think that the inventory levels that they have got and the inventory levels that were reported in the last day or so are extremely low. And that really the service centers won’t be able to continue the ship at their current rates out of inventory. And so, I think the order intake rates are really a positive point where they are going to turn here very soon.

Chris Olin – Cleveland Research

I guess, I wonder if it’s more than just a distribution issue and the OEMs were holding inventory and that’s going to be the catalysts of these guys. They’ll start buying again.

James Wainscott

Yes. There’s no question. That’s the case as well. We noted that again, in the first quarter that the car companies were selling more than they were making. And so, I think that the whole supply chain is pretty lean. Now granted, we need the daily shipment rates coming out of service centers to go up. I think that’s going to happen. And we need the auto companies to a bit more. But I will tell you in the last week or two, we began to see the order intake rate from the auto companies took off a bit as well.

Chris Olin – Cleveland Research

That’s interesting. But forget the scenario. Let's say demand did start to improve and I don’t know, I’m just drawing numbers out. So you get some kind of ship of 15 million to 20 million tons in terms of an annualized improvement. There’s a lot of capacity that would be considered on hot idle or kind of de-active. Would there be any kind of supply shortage scenario developing in the summer if something like that did occur? Or do you think the supply could catch up pretty quickly?

James Wainscott

That’s very interesting question. We obviously make our own independent decisions with respect to what operates and what doesn’t. So I would just speak on our behalf. We evaluate that very, very carefully.

But I think it is important for the marketplace and for customers to consider what can come up and how fast it can come up. For example, the number of blast furnaces that have been on cold or hot idle here [ph] for quite a while. It may not be quite as easy just to turn them back on. And depending on which one is operating, which ones don’t. They need to have the gas capability and really be able to make a high-end exposed product. So in certain segments of the market is conceivable, you could have some shortages.

Chris Olin – Cleveland Research

That’s interesting. Looking near term, would you feel better about the stainless categories or the carbon categories in terms of that whole pick up.

James Wainscott

Unequally optimistic. But again, I think it’s not this month. Hopefully it’s the next month. Hopefully it’s late this quarter. As you probably saw, we in the stainless arena are looking for a bounce off the bottom there as well. I think we’re very close to the bottom in all stainless categories, and as a result just yesterday we increased stainless prices between 6%and 9%.

Part of that driver as well is what’s been happening to nickel. Nickel’s been on the move upward. And I think that was causing a number of people to sit on the sidelines before they came back into the market. But I think that’s changing. So I think in each case there’s a reason for optimism.

Chris Olin – Cleveland Research

And then just real quick, final question. Can you talk a little bit about scrap? What you’re seeing this month sounds like maybe things are getting a little bit better?

James Wainscott

We bounced off the bottom on scrap as well. I think the indications we’re getting is scrap could be up $20 to $25 a ton. And I think the message that’s getting out to the service center community is that prices are heading higher.

Chris Olin – Cleveland Research

All right. Thanks a lot, Jim.

Operator

Our next question comes from Mark Parr of KeyBanc Capital Markets

Mark Parr – KeyBanc Capital Markets

Okay. Thanks very much. Jim and Al, good morning.

James Wainscott

Good morning, Mark

Albert Ferrara, Jr.

Mark.

Mark Parr – KeyBanc Capital Markets

I had a couple of quick questions. One, Al I was wondering if you could give us some color on what your expectations are for LIFO in the second quarter compared to the first quarter.

Albert Ferrara, Jr.

Well, generally we don’t talk too, too much about LIFO on a projected basis. But we booked $66 million, so that’s probably a pretty good estimate for the second quarter subject to, obviously changes in commodity prices and inventory levels. But I think that’s – that’s probably not a bad guess.

Mark Parr – KeyBanc Capital Markets

Just what I was trying to get at is if any of the reduction in the loss expectation for the second quarter related to LIFO. And what you’re saying is that it does not.

Albert Ferrara, Jr.

No. We would not see – I think really what’s driving the bus there Mark are continued raw material changes and continued strong operating performance.

Mark Parr – KeyBanc Capital Markets

Okay. Just one other question if I could and really, I do appreciate all of the great color you guys are giving on this call. It’s been very helpful. But could you talk a little bit about the pick up Jim, that you saw in March as far as order intake. Is there one side of the business or another that might be looking a little better? And any help you could give us there would be really appreciated. Thanks.

James Wainscott

I’m not sure I’d offer much more Mark, than what we’ve provided so far. I think that there are a number of what I’ll call positive, broad based economic indicators that play here. For example, order for durable goods rose in February. That was unexpected on a rebound and demand for machinery, computers, defense equipment.

As we’ve talked about, service center inventories are on their way down. GM, Toyota, and Ford sales declines in March were less than estimated. Consumer sentiments improved slightly in March to 62, and that’s the highest since September of last year. Home builder sentiments improving April’s increase represented the biggest one month jump in five years.

Home mortgage application rates have risen dramatically as 30-year, fixed rate mortgages unbelievably are at 4.6%. The S&P 500, a proxy for the market had its best six-week period since 1938. We’ve got a long, long way to go. But certainly there’s some positive signs that are starting to emerge. And I guess if there’s one segment of the market that we saw was some of this housing activity that really picked up in March. It’s in terms of appliance and the HVAC sector.

Mark Parr – KeyBanc Capital Markets

Okay. Terrific. Thanks again and congratulations on all the hard work. It really is paying off for you guys, and look forward to next quarter’s call.

James Wainscott

Thank you, sir.

Albert Ferrara, Jr.

Thank you, Mark.

Operator

Our next question comes from David Gagliano of Credit Suisse.

David Gagliano – Credit Suisse

Hi. Thanks for taking the question. Most of mine have already been answered but I did want to ask a couple of quick ones on the Q2 volumes. First of all should we be expecting any kind of change in the mix and volume between, say carbon, electrical, et cetera?

Albert Ferrara, Jr.

Yes. I think we’re expecting a slightly improved mix. I think our mix of raw on a value added basis is likely to go from say 86% to 88%, which notionally might be just a touch more electrical steel volume there. But not of any major consequence.

David Gagliano – Credit Suisse

Okay. And then just as a follow up, based on everything that you know today, and obviously trying to get your comments about a potential restocking and your order books, if you had to take a stab at a range for Q3 volumes, what would you expect your volumes to be in Q3 at this point?

James Wainscott

Well, I’ll just say we expect them to be higher. But I’d be hesitant as to how much higher just yet until some of the things that I’ve laid out here really come to fruition. I think that the building blocks are in placed. It ought to take hold and it could be a much better second half than first half. But it’s very, very difficult to say.

I’ll tell you this that we’ll just continue to take our lead from our customers, from the market place. Fortunately, we find ourselves in a position where we, unlike perhaps some others, are not cash starved. So we don’t have to chase funds by pricing our steel to the level that doesn’t make sense given our core structure. But as the market conditions improve, we’ll be happy to be there to serve our customers.

David Gagliano – Credit Suisse

Okay. Thanks. And then just so I have the LIFO credit part right. The $66 million credit this quarter, about the same for Q2. And then just pretty much it on life of credit? The way I understand it, Dave that should be it unless there’s another decline in scrap, but that–

Albert Ferrara, Jr.

No. No. That is – the way that our LIFO calculation is done is that $66 million represents one-quarter of our expected LIFO credit for the year. And then we will make another calculation about what our LIFO adjustment for the year and take one-half of that in June, such that where you have the true up. That’s one of the reasons why for example our LIFO calculation has fluctuated because you’re essentially making an annual calculation every quarter with the true up, so to speak.

So all we’re saying is really we don’t have any transparency into that. We don’t know any – essentially what pricing levels will be when we do it again at the end of the 2nd quarter. And so our expectation is that it should be $66 million per quarter for four quarter, but we know that’s going to change.

David Gagliano – Credit Suisse

Okay. But the $50 million operating loss includes the sort of embedding expectation that the LIFO credit’s about the same, right?

James Wainscott

There’s no major change in the LIFO credit. That’s correct.

David Gagliano – Credit Suisse

Okay. All right. Thanks very much.

James Wainscott

Thank you, David.

Operator

Our next question comes from Charles Bradford of Bradford Research.

Charles Bradford – Bradford Research

Hi. Good morning.

James Wainscott

Good morning, Charles.

Albert Ferrara, Jr.

Good morning, Charles.

Charles Bradford – Bradford Research

Hi. It’s pretty clear that President Obama has warned everybody about impending automobile company bankruptcies. Can you talk about your cash exposure receivables or whatever at the big three? Since it seems pretty clear that if General Motors goes belly up and walks away from its pensions and (inaudible), it’s going to put a lot of pressure on Ford, as well. What kind of exposure do you have?

James Wainscott

Chuck, I’ll just say we’re obviously paying very close attention to what’s going on in Washington and what’s going on in Detroit. We have been for quite some time. And we’re very much aware of the deadlines that have been imposed by the Obama administration on Chrysler and GM. And I tend to agree that if they go, it’s pretty tough for Ford to compete effectively. But our outlook on sales, I would say in total are about half of what they used to be five years ago. But we still do a lot of business with the Detroit Three. Roughly 30% of our overall sales level, which is well diversified in the auto sector would be to the auto group.

We’re trying to quickly understand the pros and the cons of a program that would protect our receivables from GM and Chrysler if they go bankrupt. We’re trying to really surge through whether or not we’re able to get in the program. If so, whether or not it make sense for us and we’ll know more about that shortly.

The fact of the matter is it would be harmful if we were not in the program. In the short run, we will get through that. And I think you really have to get in to the bankruptcy law to find out which of our receivables would be protected and which might be subject to some longer term paybacks.

So I think it’s a little early to get into the details of that except to say that we’re very focused on it. And at the end of the say, what really has to happen here is that the Detroit Three need business models that make sense. It’s not about bankruptcy or bail out. It’s really about a business model that they can sustain themselves, which in the long run would be great for companies like AK Steel to service them.

Charles Bradford – Bradford Research

Have you been classified as a critical supplier?

James Wainscott

I don’t believe officially we have been at this point, although, we have sought such status. And we continue to have a dialogue with both Chrysler and GM about them getting into this program.

Charles Bradford – Bradford Research

And do you have any guess at how long it could take this 30 to 60-day? Quick bankruptcy doesn’t make a lot of sense. How long a bankruptcy could last? We’re talking years, two years, or any idea?

James Wainscott

That’s a really tough one. Sound to me like there’s a lot of work going on behind the scenes. I think all the hints are being given that something may be imminent. But I’ll leave it to the bankruptcy lawyers, the bound holders, and others to really opine on that. They have a better view than I would. If there is a pre-packaged arrangement available, perhaps it's a bit quicker. But I think it could get messy.

Charles Bradford – Bradford Research

Thank you very much.

Albert Ferrara, Jr.

Thank you, Charles.

Operator

Our next question comes from Brian Yu of Citi.

Brian Yu – Citi

Great. Thank you.

James Wainscott

Good morning, Brian.

Brian Yu – Citi

Good morning. I want to circle back on the iron ore. I think early you'd mentioned that iron ore pellet cause could be down 40%, 50%. Is there a split you can provide between those iron ore costs that are tied to the seaborne settlement, perhaps some that might be indexed to steel prices?

Albert Ferrara, Jr.

Well, the thing is we have four arrangements with IOC, QCM, now middle mining Cleveland-Cliffs in Valley. We try not to get into too many details with respect to specific arrangements that we have. But I think the lion's share of our arrangements are based on seaborne price. I think Cleveland-Cliffs has been very open about their contractual arrangement with suppliers that have a wider variety of industries. But the vast bulk of our pellets are tied to seaborne pressure.

Brian Yu – Citi

Okay. And with (inaudible) right now at the seaborne trade, are you essentially buying iron ore at prices that are similar to spot levels?

Albert Ferrara, Jr.

Well, no. What we have is an arrangement – really, we haven't received many pellets. That to date, we're in discussions with respect to our pellet suppliers, with respect to how that will be handled from an accounting perspective. We will make an estimate in terms of what the exact price will be. And hopefully, that will be sorted out here fairly promptly.

But we're not tied to any former price. Clearly, this is sort of a Never Neverland, which we seem to find ourselves in every year. That will effectively have us pay the price as it's contractually agreed. But it won't be agreed until such time as the parties come to that arrangement.

James Wainscott

Brian, I'll just add as an addendum to Al's comments, which I agree with, that in the past three years, I would remind you, that the price of iron ore has tripled. And we have endured every single minute of that. Demand is now less than it was three years ago before that tripling occurred for that product. So it would certainly stand to reason that the cost increases should go away and end some. And that's certainly what we have experienced on the sales side of our business.

So the shoe's on the other foot, so to speak. And the major iron ore producers are reluctant to negotiate, let alone reach an agreement, presumably hoping against hope that the markets will quickly turn. But having said all that, we should see, I think, upwards of a 50% reduction in the price of iron ore for 2009.

Brian Yu – Citi

Okay. And my second question on a different topic is, do you have any meaningful contract renegotiations in 2009 in terms of your sales, whether the (inaudible) products or somewhere else.

James Wainscott

We have, Brian, I think we stated this in our public disclosures as well, contracts that come up throughout the course of the year. They're not all deals that come due on January 1. Our mode of contracts, for example, typically are one year in length and expire at different times throughout the year. And we do have a number of them that expire in Q2. And the majority of those have already been settled at prices that are anywhere from rolled over to price increases depending on where we ended up with last year's price.

And I'll simply note that we will continue to prefer agreements that contain variable pricing mechanisms, which can work for us or against us, as the case maybe. But it's a better situation overall. And the agreements – the vast majority of agreements that we've completed are mostly tied to raw material inputs, which means that some have protection that should cause rise during the term the agreements will be covered.

Brian Yu – Citi

All right. Thank you.

Albert Ferrara, Jr.

Thank you, Brian.

Operator

Our next question comes from Brett Levy of Jefferies & Company.

Seth Yeager – Jefferies & Company

Good morning, guys. It's actually Seth Yeager calling in for Brett. Most of questions have been answered, just a couple of housekeeping items. In terms of the Butler expansion, could you give us any updates on that?

James Wainscott

Again, it's an interesting update. And I'll be as brief as I can be on that. But the fact of the matter is that I don't like what has been going on with our SunCoke project. It's difficult to be a manufacturer in America to get the kinds of permits that we need to build new assets. And that's what we're finding out in Pennsylvania as we do not yet have a permit to construct and operate our new number 5 EAF.

And granted the current economic situation, being what it is, it's much less of an issue that we previously envisioned. But we're really very disappointed with the lack of progress in obtaining a permit to proceed. We currently expect to complete the number 5 EAF project in mid to late 2010 as compared to our original expected completion date at the end of this year.

Seth Yeager – Jefferies & Company

Okay. Thanks for the update. I guess, finally, given the extent of the (inaudible), can you give us an idea how many slabs entered the state group chain in the second quarter?

Albert Ferrara, Jr.

Let me be quick, none.

Seth Yeager – Jefferies & Company

Okay.

James Wainscott

We're making all that we need out of Ashland, and consuming added inventory.

Seth Yeager – Jefferies & Company

Okay. Great. Thank you very much, guys.

Albert Ferrara, Jr.

Thank you.

Operator

Our next question comes from Mark Liinamaa of Morgan Stanley.

Mark Liinamaa – Morgan Stanley

Hello, guys.

James Wainscott

Hi, Mark. How are you?

Mark Liinamaa – Morgan Stanley

Good, thanks. Earlier, I think you made the comment that you're in – that you weren't in a position somewhere to chase orders at any price. Could you comment further? Was that related to imports? Or are you saying which would – it was undisciplined behavior in the domestic market? And if so, any comments on product line? Thanks.

Albert Ferrara, Jr.

I just thought that, Mark, again, similar to production decisions we make our pricing decisions independently. And the market determines the price, not AK Steel. We intend to do what makes sense for our business. And because of our solid financial position, we're not in a situation that maybe some others are to chase funds. But I think that's reflective in the volume that we've indicated to you this quarter, which is only slightly better than it was last quarter because we feel that that makes the most sense for us given our cost structure.

Mark Liinamaa – Morgan Stanley

Are you seeing any quarter chasing, though, by domestic producers?

James Wainscott

I don't know. We meet the market. We see some numbers that we don't like, and so we don't go there.

Mark Liinamaa – Morgan Stanley

Okay. Thanks, guys.

Albert Ferrara, Jr.

Thank you, Mark.

Operator

Our next question comes from Kuni Chen of Merrill Lynch.

Kuni Chen – Merrill Lynch

Hi. Good day, everybody.

Albert Ferrara, Jr.

Hi, Kuni. How are you?

Kuni Chen – Merrill Lynch

Hey, doing all right. Just a couple of quick ones here, so with the sequential decline in the cost that you're guiding to in excess of $100 a ton, is there an imbedded assumption in that for lower iron ore?

Albert Ferrara, Jr.

We have a certain assumption that Jim has alluded with respect to iron ore, which we think is consistent. However, I would say that our guidance is not predicated solely on iron ore. We have some other costs coming our way, such as scrap, nickel, and also natural gas. So like I said, clearly, we've made an assumption with respect to pellets, which we think is reasonable. But our forecast does not predicate solely on that.

Kuni Chen – Merrill Lynch

I guess of $100 per ton, can you rank order which are the largest contributors to that cost decline?

Albert Ferrara, Jr.

Well clearly, scrap is very important, as is nickel, as is pellets. So we have a number of very important components in that. We wouldn't want to get into a sort of ranking, one, two, three, four, five. But I think they all matter, but scrap is very, very important right now.

James Wainscott

I'll also give credit to the plants that have really put their arms around spending and has spent less, and have been very judicious throughout the company in terms of how we're spending dollars. So it's a whole host of things, not anyone.

Kuni Chen – Merrill Lynch

Let me try it from one other perspective. Obviously, you're not going to tell us exactly what you're iron ore assumption is. But just as far as the cost improvements, how much would you say or what percent of that $100 per ton would you say is fairly in the bag at this point?

James Wainscott

Well we certainly hope all of it or we wouldn't be giving it as guidance. But I don't know that anything's ever really in the bag. We work our tails off every quarter just trying to deliver above expectation results. That's what we'll do here. And one component of that is improved iron ore price.

Albert Ferrara, Jr.

We're very comfortable with our guidance that we're giving.

Kuni Chen – Merrill Lynch

Okay. Thanks.

Albert Ferrara, Jr.

Thank you.

Operator

Our final question for today comes from Dave Cathe [ph] of JP Morgan.

Dave Cathe – JP Morgan

Hi. I was just hoping you could talk about the borrowing base in your revolver? And would you expect to go, I guess, through the SV of given the relief from working capital that you're expecting.

Albert Ferrara, Jr.

Well we have that – a dramatic fall in working capital. While we were comfortable with the fact that our borrowing base was comfortably above the $850 million level, it still remains there. Our expectation really is that our borrowing base for the rest of the year would be above the $850 million, consistent with the guidance that we've given that we expect working capital to continue to be a source of cash for us for the remainder of the year.

Clearly, as you've probably noticed. Our receivables were down about $100 million quarter-to-quarter. We would expect our receivables, actually, to stay probably in that same area, with shipments being relatively flat, and prices being down, but mix being a little bit better. But we do expect some improvement on our inventories.

One of the things, David, on our borrowing base for our inventory, we have not been as aggressive in the past, frankly, in terms of getting off site inventory into our borrowing base getting daily letters from processors. We're now in the process of doing that, which will offset some of the declines elsewhere. But net debt, we're comfortable with our borrowing base that it will hold for the remainder of the year.

Dave Cathe – JP Morgan

Thank you.

Albert Ferrara, Jr.

Let me just, in closing, say that 2009 is going to be an interesting year for AK Steel. In fact, it already is. But I'm confident that our company is going to get through it and emerge as an even stronger force to the steel business. And so as we sign off, let me offer my thanks for you all joining us on today's conference call and for your continuing interest in AK Steel. Have a great day, and here's hoping for an even better tomorrow.

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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