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Executives

Dan Lesnak – Manager, IR

John Surma – Chairman and CEO

Gretchen Haggerty – EVP and CFO

Analysts

Kuni Chen – Bank of America

Dave Martin – Deutsche Bank

David Gagliano – Credit Suisse

Timna Tanners – UBS

Brian Yu – Citi

Luke Folta – Longbow Research

Michael Gambardella – JPMorgan

Sal Tharani – Goldman Sachs

Charles Bradford – Affiliated Research

Mark Parr – KeyBanc Capital Markets

Brett Levy – Jefferies & Company

Dave Katz – JPMorgan

United States Steel Corporation (X) Q1 2010 Earnings Call Transcript April 27, 2010 2:00 PM ET

Operator

Ladies and gentlemen, thank you for standing by; and welcome to the United States Steel Corporation's first quarter 2010 earnings conference call and webcast. At this time, all participants are in a listen-only mode, and later we will conduct the question-and-answer session, and instructions will be given at that time. As a reminder, this conference is being recorded, and I would now like to turn the conference over to our host, Mr. Dan Lesnak. Please go ahead, sir.

Dan Lesnak

Thank you, Karen. Good afternoon and thank you for participating in United States Steel Corporation’s first quarter 2010 earnings conference call webcast. We will start the call with some brief introductory remarks from US Steel Chairman and CEO, John Surma. Next, I will provide some additional details for the first quarter; and then Gretchen Haggerty, US Steel’s Executive Vice President and CFO will comment on the outlook for the second quarter of 2010. Following our prepared remarks, we will be happy to take any questions.

Before we begin, however, I must caution you that today’s conference call contains forward-looking statements and that future results may differ materially from statements or projections made on today’s call. For your convenience, the forward-looking statements and risk factors that could affect those statements are referenced at the end of our release and are included in our most recent Annual Report on Form 10-K, and updated in our Quarterly Reports on Form 10-Q in accordance with the Safe Harbor provision.

Now, to begin the call, here is US Steel Chairman and CEO, John Surma.

John Surma

Thanks, Dan; and good afternoon, everyone. Thank you all for joining us. Earlier today, for the first quarter, we reported a quarterly net loss of $157 million or $1.10 per diluted share, a significant improvement from the fourth quarter, as we substantially reduced our operating loss in our North American Flat-rolled segment. Our European segment returned into profitability, and our Tubular segment continued to improve on its already solid performance.

Net interest and other financial costs in the first quarter of 2010 included a foreign currency loss that decreased net income by $56 million, or $0.39 per diluted share, due to the remeasurements of a U.S. dollar-denominated intercompany loan to a European affiliate, and related Euro-U.S. dollar derivatives activity. As previously disclosed, we reported a deferred tax charge of $27 million, as a result of U.S. health care legislation enacted in the first quarter.

Also, as the result of the inclusion of certain tax examinations and the remeasurement of existing tax reserves, unrelated to the new U.S. Healthcare legislation, we recorded a net tax benefit of $30 million in the first quarter. In total, these two tax items increased net income by approximately $3 million or $0.02 per diluted share.

Now let me turn to our operations. We reported a first quarter loss from operations of $57 million, compared to a $329 million loss from operations last quarter. Our operating results have been making a slow and steady recovery since hitting a low point in the first quarter of 2009, until this quarter, when the benefits of improved utilization rates and sending prices began to be realized in a more significant way.

Our segment loss from operations was $13 million, essentially break-even on a per ton bases, compared with a $245 million or $53 per ton loss in the fourth quarter. The improvements in our quarterly segment operating results from the first quarter of 2009 through the fourth quarter of 2009 was $212 million in total, while the improvement in this current quarter alone was in excess of $230 million, driven primarily by a $204 million improvement in our Flat-rolled segment. Our utilization rates have strengthened from extremely low levels in the first half of 2009, and shipments are at the highest level since the global economic downturn began in late 2008. When the improvement in our results as compared to the fourth quarter was most pronounced in our Flat-rolled segment, both the European and Tubular segments continued to make progress in becoming increasingly profitable.

The significant improvement in results for Flat-rolled in the first quarter of 2010 from the fourth quarter of 2009 was primarily due to the benefits of higher average realized prices of shipments, operating efficiencies, and decreased costs for facility repairs and maintenance, energy, and facility restarts, and increased inter-segment shipments through Tubular. Our Flat-rolled raw steel capability utilization rate increased to 73% in the first quarter of 2010, compared to 64% in the fourth quarter of 2009. We completed maintenance work at our #14 Blast Furnace at Gary Works in mid March and had all steelmaking capacity in operation, with the exception of our Lake Erie Works, before the end of the first quarter. Our ability to achieve a 73% utilization rate in the first quarter, when Lake Erie Works was down for the entire quarter and our #14 Blast Furnace at Gary Works operated for a very brief period, reflects an exceptional performance by our operators, since they were able to operate all of our other furnaces at extremely high and consistent levels throughout the quarter.

Shipments increased 12% to 3.6 million net tons and average realized prices increased to $654 per net ton, an increase of $21 per ton from the fourth quarter of 2009, as we began realizing the impact of increasing spot market prices later in the first quarter. First quarter results reflected continuing employee and other costs for idled facilities totaling approximately $50 million, solely at our Lake Erie Works, compared to $80 million in the fourth quarter of 2009. As we announced earlier this month, the USW-represented employees at our Lake Erie Works have ratified a new three-year labor agreement, and we expect to restart steel finishing, coke making, and steelmaking facilities in a staged process throughout the second quarter.

First quarter 2010 results for our European segment improved from the fourth quarter of 2009, primarily due to the benefits of a 22% increase in shipments to 1.5 million tons. Average realized euro-based transaction prices were slightly lower than the fourth quarter, as spot market price increases later in the first quarter almost completely offset the impact of lower prices early in the first quarter. However, the reported average realized price for the segment was $50 per net ton, lower than the fourth quarter of 2009, due primarily to currency translation effects. Capability utilization was 87% in the first quarter of 2010, compared to 80% in the fourth quarter of 2009. We completed maintenance work on the #3 Blast Furnace at U.S. Steel Kosice in early February, and all five of our European blast furnaces were in operation for the majority of the first quarter.

First quarter 2010 Tubular results improved from the fourth quarter of 2009, as the benefits of increased shipments were partially offset by increased costs for steel substrate. Operating rates increased at all of our major pipe facilities, most notably our welded pipe facility in East Texas, as the ongoing developments of the shale gas plays has continued to support increasing recounts. Shipments increased by 50% to 310 thousand tons, primarily due to increases in welded pipe shipments. The reported average realized price for the Tubular segment decreased to $1,389 per net ton as compared to $1,462 per net ton in the fourth quarter of 2009, mainly due to product mix, as our welded product shipments more than doubled from the fourth quarter level, and the impact of bottoming spot market prices towards the end of last year.

Now, let me turn the call over to Dan for some additional information about the results. Dan?

Dan Lesnak

Thank you, John. Capital spending totaled $125 million in the first quarter and we currently estimate that full year capital spending will be approximately $550 million. Depreciation, depletion amortization totaled $165 million in the first quarter and we currently expect it to be approximately $660 million for the year. Pension and other benefits for the quarter totaled – we made cash payments for pension and other benefits of $262 million, which included a $140 million (inaudible) to our main pension plan. For the full year, we expect our pension and other benefits costs to be roughly $420 million, and we expect cash for pension and other benefits, including the $140 million contribution to be approximately $705 million.

Net interest and other financial costs totaled $108 million in the first quarter and included a foreign currency loss of $63 million. Including foreign currency effects, interest expense for the second quarter is forecast to be $58 million, reflecting the full quarter effect of the newly-issued 7.375% senior notes and the repayment of the (inaudible) under the U.S. Steel Kosice credit facility. Our first quarter 2010 effective tax benefit rate of 4% was lower than the average quarter rate, largely because of losses in Canada and Serbia, which are jurisdictions where we have recorded a full evaluation from deferred tax assets not counting the tax on accounting purposes. Also included in the first quarter 2010 tax benefit was the impact of the two tax items John discussed earlier on the call. Lastly, for the quarter, we averaged 143.4 million fully diluted outstanding shares.

Now Gretchen will give you some additional information on the outlook for the second quarter.

Gretchen Haggerty

Thank you, Dan. During the quarter, we took several actions to enhance liquidity, maintain a strong balance sheet, and position us for growth over the long term. On March 16, we issued $600 million of 7.375% Senior Notes due 2020. We received net proceeds of $582 million, which will provide us with the financial flexibility to pursue investments of long-term strategic importance, without impacting our ability to meet anticipated increased working capital requirements as business conditions recover. As Dan just mentioned, we made a $140 million voluntary pension contribution to our main defined benefit pension plan, and additionally, we repaid the $270 million of outstanding borrowings under the U. S. Steel Kosice revolving credit facility, which matures in 2011. As of March 31, 2010, we had $1.4 billion of cash and $2.9 billion of total liquidity, as compared to $1.2 billion of cash and $2.5 billion of total liquidity at December 31, 2009.

Jan indicated that we now anticipate our 2010 capital spending will be approximately $560 million, modestly higher than our initial capital budget of $530 million. We are moving forward with permits and engineering on several projects of long-term strategic importance in all three of our segments, with the added support of our successful financing. The majority of the spending for such strategic projects will occur over the next several years. We will provide some additional details in our first quarter 10-Q.

Now turning to our outlook, we anticipate being profitable in all three of our operating segments in the second quarter of 2010, as gradually improving business conditions should be reflected in our operating results, most notably for our Flat-rolled segment. We continue to experience healthy order rates from most of our end markets, resulting in increased production levels. In North America, reported inventories in key end markets, such as automotive and service centers, remain below historical averages, as do flat-rolled product imports. In Europe, imports have also remained below historical averages, and reported inventories remain low across our end markets.

Our Tubular segment is also benefitting from both increased order rates, particularly for small diameter alloy oil country tubular goods, and a continuing steady decline in reported U.S. oil country tubular goods inventory levels from the record highs of early 2009. In summary, we remain cautiously optimistic in our outlook for end user demand for all three of our operating segments, in line with a gradual and continuing economic recovery.

Our second quarter 2010 Flat-rolled results are expected to improve as compared to the first quarter of 2010. The benefits of increases in average realized prices, higher trade and intersegment shipments, and lower energy costs, are expected to be only partially offset by higher raw material costs, mainly scrap and coke, and increased facility repair and maintenance costs, including the facility restart costs at Lake Erie Works.

Average realized prices are expected to benefit from increases in both spot and index-based contract prices, which now reflect higher published market price assessments. We expect to complete the restart process at Lake Erie Works late in the second quarter. Our remaining steelmaking facilities are expected to operate for the entire quarter, and in recent weeks, these facilities have operated at over 95% of raw steel capability.

We expect second quarter 2010 results for our European segment to improve as compared to the first quarter of 2010, primarily due to the benefits of increases in euro-based transaction prices, partially offset by increases in raw material costs. Shipments are expected to be comparable to first quarter levels. We expect to operate at slightly higher overall utilization rates as compared to the first quarter, reflecting increased raw steel production at U.S. Steel Kosice. However, U.S. Steel Europe's raw steel availability will be limited due to operational issues with one of two blast furnaces in Serbia. We currently expect the #2 Blast Furnace at U. S. Steel Serbia to return to full production before the end of the second quarter.

Second quarter 2010 results for Tubular are expected to improve from the first quarter of 2010. The benefits of expected increases in average realized prices and higher shipments are expected to be only partially offset by increased costs for steel substrate. Operating rates are expected to continue, increasing throughout the quarter, in line with demand trends.

That concludes the outlook, Dan.

Dan Lesnak

Thank you, Gretchen. Karen, can you please queue up questions?

Question-and-Answer Session

Operator

Certainly. (Operator Instructions) Your first question comes from the line of Kuni Chen with Bank of America. Please go ahead.

Kuni Chen – Bank of America

Good afternoon, everybody. I guess just to start off; can you kind of walk us through the North American utilization rate? I think I heard Gretchen say that you could run it over 90% utilization in the second quarter here. You know, can you just clarify again where you see yourselves potentially running here, and you know, do you think that is sustainable as we look into the second half of the year, if you could talk about some of the puts and takes in terms of how you think about running your system in the second half?

John Surma

You are right. This is John. Just a couple of things. I think our earnings release said that if you exclude the effects of not having Lake Erie available and then the time where we didn't have Gary 14 available, we were at 94% I believe. So that was designed to indicate that despite what you may have read, we operated extremely well during the first quarter and I think that Gretchen indicated that in recent weeks, that same group facility is now, including Gary 14, has been running at over 95% capability. So again, very strong performance in every facility, the only exception being the fact that Lake Erie is now just in the process of coming back up. I think our release indicated, as you look further out, that we are number one. We don’t have any large planned maintenance projects in the second quarter.

When we get into the third and fourth quarters, there will be some maintenance projects that ordinarily would take place in the blast furnace end of things and we don't have them all scheduled yet, but they will be you know, occasional two or three week projects that will dampen out a little bit, but not significantly. The way we intend to hit the market allowed us to run pretty full through the rest of the year. The Lake Gary plant, we are just putting together our restart process right now, and I think the order we list the facilities in, in the earnings release, was done with some purpose. The mill will be up and available to us in a fairly short period of time, and we have got to get some slabs in front of it to make it efficient, but that will be helpful, because it allows to run our distribution to Canadian customers in a much more efficient way than riding slabs through Victoria or Gary or otherwise.

Then, we have got to get the high end back and that is going to take a little more time and be pretty well into June before we have both coke making and iron and steel making up and running, and that is merely a matter of getting the environmental facility stabilized on the coke side, and getting the furnace restored, because there is some work to do inside the furnace that we have contractors looking into right now and we don’t know how long it is going to take, so I think it would be, for the most part, the entirety of the quarter to get everything up and running at Lake Gary.

Assuming we get all that done in the quarter, we will be able to fire on all cylinders getting into the third quarter, and whether we maintain that will depend largely on the markets and we will wait and see how that goes. We can't really see that far out yet.

Kuni Chen – Bank of America

Okay, great. And then just one follow-up, if I may. Just on iron-ore, obviously, that is a big benefit for you in North America, you know, given what we are seeing globally in terms of the spot prices. Can you talk about what your latest thinking is in terms of how you can perhaps best leverage that cost advantage now, you know, would you think about trying to develop a business as a merchant supplier of either slab or pellets?

John Surma

Sure, excellent question. Really a couple of things all the way along there. There is no doubt where the iron resource structure in the world is going, at least, everything that we read, we are not sure exactly what is happening, I am not trying to put it out, but everything we read talks about very large increases, you know, the iron ore benchmark spotter index, or something like that, and the kind of price levels that would take you to begins to say that you know, there may actually be some economics in moving material to weaken, extract, and process in Minnesota or Michigan a little further than has been the case in the past. That is one of the ways out for us I think as we run at decently high levels in North America, we can consume almost everything we can make today.

But, we do have an expansion project on the griddle in Minnesota at our feedback facility to really bring back a fairly old line that would need to be completely rebuilt and refurbished at some cost, but it would be I think an economical approach to do it, and we are working on the permitting process there, I think that was in our 10-K, as I recall in the last year or so. It is useful for us in the current state of affairs to get as much of that resource into a steel product or an iron product in North America as we can, and we are actively participating in the slab market, both domestically and potentially internationally. And, as we have talked about in passing before, it may make sense for us to have a big machine in one place or another in order to maintain high utilization of blast furnaces, when for some other reason; we don't have an ability to take the iron away into steel shops. So we are just in the early stages of some of that thinking, but getting more of that resource that we can extract very efficiently into the marketplace is a very good thing for our shareholders.

Operator

Our next question comes from the line of Dave Martin with Deutsche Bank.

Dave Martin – Deutsche Bank

Thank you. I wanted to ask first about the met coal. Can you comment on your met coal position or supply for this year, and any exposure you may have to the Massey situation at their UBB line?

John Surma

Sure. Since you bring up that subject, I will just say that, you know, we are all expressing our condolences to our colleagues at Massey and the families affected by this terrible tragedy and our heart goes out to all of them. As for the impact on us, we do buy coal from a wide variety of suppliers, I think more than 25 mines or something like that in North America, including Massey, and to some degree, in action with the blend that we buy from the affected mine, we do have a variety of long-term contracts, we are in the process of purchasing additional coal to meet our business requirements because of that issue. We have got also, with the Lake Gary coke plant coming up, and we are confident we will be able to make our expectations for coal requirements for the year through the wide group of pretty good suppliers we have developed relationships with. We have talked in the last quarter or two about we expected our 2010 met coal costs in North America to be less than our 2009 met coal costs, and I still think that will be the case. It may not be as low as we expected it to, because anything we have to do now is in the contract. So it is a somewhat better market, but we are confident we are going to get our supplying, we are confident we are going to have a decent cost when we are done.

Dave Martin – Deutsche Bank

Okay, and you mentioned coke. Can you remind us how much coke you purchase annually and what proportion of that comes domestically, as well as internationally?

John Surma

It really depends on what level of ironmaking we are into. Dave, it is a good question. But it could be on the order of a few million tons, it could be less, it could be more, but it is not an inconsequential amount, and we will be buying from some domestic merchant sources, technically speaking, the new Gateway coke battery at Graham City that we have constructed with. So our focus is an outside source, but I will put that aside. We buy from a variety of other merchant suppliers, and also from Asian suppliers and from Latin American suppliers, European suppliers, and I would expect that as the year goes on, we will continue to do business with all those different sources.

Dave Martin – Deutsche Bank

Okay.

Operator

Our next question comes from the line of David Gagliano with Credit Suisse. Please go ahead.

David Gagliano – Credit Suisse

Great, thanks. My first question is regarding your mix in each of the three segments. What was the rough mix between the spotting contractors in both the U.S. and Europe in Q1, and what do you expect that split to be for Q2 and Q4, and on the Tubular side, what was the actual split between welded pipe and seamless in Q1 and what do you expect that mix to be moving forward?

John Surma

Okay. I will take those in reverse order and work my way back through and Gretchen and Dan can remind me if I forget some piece of a question. On our Tube side, we are probably moving into a 50/50 mix in the first quarter, with welded and seamless, I don't know if that is exactly where we were, maybe Dan gave me a high sign if it is much different than that, but with the substantial increase in volumes that we had, a lot of that came through the weld mill. So I think we are roughly 50/50 and probably would be situated in roughly that position through the rest of the year, as in some major change in the market. So I think in general in Tubular, that is where we will be if I think I am facedown and tell me and give you may be an update on that.

In Europe, we generally would be – from a contract standpoint, 30% or less, was I think is roughly where we were in the first quarter, maybe a little less than that, and I don't see that changing much during the course of the year, just given our product mix and how we do business and who we do it with. So in Europe, quite a bit less contractual oriented, more spot short term oriented.

And then, in the North American Flat-rolled business, and again, we expect that to be the same. In fact, towards North America then, I would say that our firm contract commitments in North America continue to be at about 20% of our business, which I think has been consistent now for a number of quarters, don’t expect a lot of change, you know, 1% or 2% here or there through the course of the year. We have another 10% or so that our contractors have some cost-based reference, and that should stay fairly constant after that. That gets you to 30%, we probably have another 30% or so that are, if you were to spot contracts maybe a bit more than that, then the remainder would be a variety of index-based contracts that would be either lumpier quarterly and I don't know that we have anything on the semi. If we do, it is a very small amount on a semi-annual basis right now. That should add up to somewhere around 100% I hope, and that mix, I think would stay about the same during the course of the year. It could vary if one market is stronger than another, but by intention, it would be about the same from our side.

David Gagliano – Credit Suisse

Okay, perfect. Thanks for the great detail. And just the follow-up question. Regarding your met coal needs for next year, for 2011, I was just wondering if you could simply remind us how much met you will need in 2011, how much is already under fixed-price contracts and when were those contracts signed? Thanks.

John Surma

In 2011, you know, our needs will be about the same. I guess 9 million tons, somewhere plus or minus in that zone, and we do have some commitments into 2011, actually beyond that, not – and very substantial volume commitments, but not much of that is priced, some is, but not very much so. Those contracts were entered at a variety of times, but in almost every case, that certainly into 2009 or sometime earlier than that. A large percentage of that would already be covered. Sorry, go ahead.

Operator

Thank you. Our next question comes from the line of Timna Tanners with UBS. Please go ahead.

Timna Tanners – UBS

Good afternoon. Can you talk a little bit about more in Europe? It sounds like the raw materials cost increases are being passed through pretty quickly, but just wondering if you could give a little bit more color on how that is going and the market conditions there, in particular. Also, you know, if you can remind us how much that is really tied to the global contact price increase?

John Surma

Sure. In the latter instance, it is not really tied directly per se and there are some of our materials on the ferrous side that there are kind of contractual craters based on what the published world price is. I am not sure how we are going to find it, but that is by the way, that is a bit of a challenge these days, but it will follow that same direction. So I think the general trends that you would read about would be the general trend we would be experiencing in both ferrous and some would be metallurgical coal and coke in Central Europe. We have – our company has been successful in obtaining reasonable price movements in the first quarter, and so far into the second quarter, and we could do this on the phones is our plan, but I mean I think given where the cost increases are in order to have some margin, I think it is necessary to do that, but maybe to do that a bit further, I think there is some uncertainty in the market, certainly around what the real material costs are, and how they are going to be felt and some producers, including us, we haven't felt the full month of that yet. So I think it is important for us in order to maintain a reasonable return on capital have investment capital available to get a fair return and it is going to be hard to do that without some reasonable price relief in the face of these material costs.

General market in Europe, as that was your last point or question, where we live is pretty good, I think in the B4 countries, it has been okay, and in the Balkans, it has been okay. North and west, not so strong, but still reasonably good and European manufacturing activity has been improving, not you know, gangbusters, but reasonably good. So, our ability to mix deal and to tell at our facilities has been pretty good in recent months, and we look forward to doing that again in the second quarter as well.

Timna Tanners – UBS

Okay. And if I could ask also, on Tubular, you talked about inventory coming down from high levels, but where do they stand and at what point do we think we will get down to a level that will allow you to run more, you know, in line with, you know, kind of where market conditions are?

John Surma

Probably, we are getting near to that point, and these are inventories of our detract portion in that sector and we look at a variety of services, but we are, the point of expectation would be about six months supply, plus or minus. That is probably pretty close to where we are getting to now, you know, that would mask a little bit of a bigger inventory position in the carbon grades and probably a not-so-big inventory position in the alloy and heat free grades, but the lower inventories has come down reasonably well in recent months, and maybe not as quickly now as we are getting to a little bit lower level and it maybe that operations and inventories and consumption are coming into some better degree of balance, and that is fine with us, if that is where we are, and we expect to be running pretty well through certainly the second quarter as we have talked about and really depends to some degree on the energy price position and the drilling rig rate stays up, flirting with 1500 like it is today, then that is pretty good price for us.

Operator

Thank you. Our next question comes from the line of Brian Yu with Citi. Please go ahead.

Brian Yu – Citi

Thank you, and good afternoon. And my question relates back to the question Timna just had, which is just on the European iron ore cost, can you give us a sense of what the percentage increase is that you are baking into your first half guidance?

John Surma

Well, our guidance was restricted to saying it would be profitable, I think. I don't want to imply more precision in that than is necessary, and the exact number I have written it somewhere, but it would be in the context of the kind of increases that you all are talking about, so it is not a small percentage, you know, 50%, 60%, 70%, whatever, you know, depending on buying, whether it is thinner lines or whether it is pellets, whatever, when the contract was entered, et cetera. But it is a pretty healthy increase, and that is what we are expecting to contend with.

Brian Yu – Citi

And have all your suppliers gone over to the quarterly types, or are there some stragglers who still won't give you their manual?

John Surma

I don't think they are giving us anything on us. There are some that – on the coal side for example, that we have somewhat longer time with contractually suppressed it for them, and on the metallic side, it is almost exclusively correlated or some that would go a little bit longer, but we moved almost without it quarterly.

Operator

Thank you. Our next question comes from the line of Luke Folta with Longbow Research. Please go ahead.

Luke Folta – Longbow Research

Good afternoon. I know it is not reflected in your share price, I just wanted to say graduation on a good result this quarter.

John Surma

Thank you. Our timing wasn't good.

Luke Folta – Longbow Research

Most of my questions have been answered, but I wanted to ask just what your guidance impression was as far what we are seeing in the import transfer OCTG. We figure there has been some pretty meaningful increases. You think this is the function of – you know, where short supply, where we are short actually domestically and this is filling a whole in some of those sizes or do you think it is market share gain on the part of the imports?

John Surma

It is hard to say. Like it is probably the sum of all those things. I mean it has been a fairly attractive market, and it has been fairly traded. It is a free country and everybody can take their shot at it. We think we are pretty competitive and we are going to get our share, maybe a little bit more than that, and again, if it is the imports or anybody else that is fairly traded, I guess that is okay. So it is probably a little bit of replacement of other import material, some market share opportunistic trading, and the fact that this is a pretty effective market.

Luke Folta – Longbow Research

And just on the Tube side, when you think about how much of your product offering can be used within the shale plays, do you have a feel for how much actually is suitable for that?

John Surma

Well, just a couple of ways to look at it. One would be, all of our line pipe can be used anywhere, and it doesn’t care if the gas comes out of shale or anyplace else or – our line pipe, you know, is just fine in the (inaudible) for example here in the Marcellus, where the gathering and distribution network has not really been established, it is a pretty good line pipe there for reserve. That is just fine from that standpoint. Down-hole on the OCTG side, you know, one of our mills at the rain is a very large diameter seamless mill that would not normally be applicable to shale activity, it is not impossible, but not normally, but everything else there would be in the majority of our well mill capacity would be. So it would be – the larger share of our capacity would be well suited to almost any kind of a shale project, whether they are gas or now increasingly, or –.

Operator

Thank you. Our next question comes from the line of Michael Gambardella with JPMorgan. Please go ahead.

Michael Gambardella – JPMorgan

Yes, good afternoon, John and Gretchen. Congratulations on a nice improvement.

John Surma

Thanks, Mike.

Michael Gambardella – JPMorgan

Got a question on the Gary 14 furnace. My understanding I think from what you said in the past is that one furnace represents about 15% of your North American flat-roll capability.

John Surma

Yes, it is 8,000 tons a day, plus or minus, and you could probably work out the math.

(inaudible)

John Surma

Yes, in that vicinity.

Michael Gambardella – JPMorgan

So then, if you are running at 95% of your capability today with that furnace, your North American flat-rolled operations in the second quarter should have shipments about 14%, 15% higher or more?

John Surma

I don't know about the percentages, but I think you are pretty good with a calculator, Mike. I will let Gretchen comment on that further, but I think you have heard Gretchen's comment about our current utilization rate. If we were to continue at that level, I mean, assuming we ship everything, which would be our plan, that would take us in that direction.

Operator

Thank you. Our next question comes from the line of Sal Tharani with Goldman Sachs. Please go ahead.

Sal Tharani – Goldman Sachs

Good afternoon. John, how are you seeing the order flow at the moment at these price levels, since they have increased a lot? I know you are bringing all this capacity up because we have enough – the order book is good, but how about new order flow? How is that?

John Surma

As we indicated in our release, we continue to experience healthy order rates. I think our order rate has been good, and I think we are reviewed by our wide range of longstanding customers as a very good, committed supplier, and they and like to do business with us, and we like to do business with them. So our order rates have been good across really a wide range of markets and undoubtedly, construction remains in the more distant zone, but even a construction market is coming off absolutely terrible. Last year, have moved up a bit the piece that we see, and this is the construction season. So order rates have been good.

Sal Tharani – Goldman Sachs

Okay and I didn't get the pension number, Dan. What was the pension cost in Q1?

Dan Lesnak

I missed that. The cost was $105 million, and we are looking for a pretty consistent, so about $420 million for the year.

Operator

Thank you. Our next question comes from the line of Charles Bradford with Affiliated Research. Please go ahead.

Charles Bradford – Affiliated Research

Could you talk a little bit about the situation at Hamilton? I understand the labor contract is up this month. First of all, is that correct? And secondly, have you started negotiations yet?

John Surma

It is – the labor contract and I think this is I am sure disclosed somewhere, in our public record is up at the end of July of the first of August or sometime like that and you know, there will be an appropriate discussion at an appropriate time. I am really not fair to say we are having discussions now or not. As a matter of honor, we keep that between us and our union companies.

Charles Bradford – Affiliated Research

And in your 10-K for last year, you talked a lot about the coke situation, your delaying the billion-plus rebuild at Clairton and some other facilities that might have to go down. Can you update us on that situation?

John Surma

Sure. I think what was in the 10-K remains factual and accurate as of today. And our 10-Q which will be going in later tomorrow –

Gretchen Haggerty

Maybe momentarily.

John Surma

Maybe later today. I think we will comment a little bit on our capital outlook and that would include some construction and continued engineering work going on at Clairton right now on that project, and the final definition of it may not be complete yet and we have some other dates to get through, but I think we are moving forward on that project, which would include, I think as you allude to, just taking some older batteries down because of our commitments on our air permits and our current strategy fully comprehends all those things that were talked about and we are underway there and we are in the permitting process in Indiana with respect to some of the carbon we talked about here.

Operator

Yes, our next question comes from the line of Mark Parr with KeyBanc Capital Markets. Please go ahead.

Mark Parr – KeyBanc Capital Markets

Thanks very much. Congratulations. It was nice to see that turnaround in the momentum. It is too bad the market kind of took the gas out of the stock today, but I think that is hopefully just a short-term thing.

John Surma

Thank you, Mark. We hope so too and we are confident at the end of the day, the market will take an appropriate view and an appropriate value.

Mark Parr – KeyBanc Capital Markets

This Europe thing is – one thing I was wondering, if you had – I don't know if speculation is the right word, if you had any comments or any thoughts about what is going on in Greece, you know, in the Balkans, with the debt situation, and does that create any challenges for your European operations here over the next 6 to 12 months?

John Surma

That is a really good question, Mark. We were just talking about it recently. Now our colleagues in Europe worry about that situation a lot less than people in New York do. And our overall business in that part of the world, including in Greece, by the way, has been reasonably good, in this early part of the year. So that is not to make light of it, it is a serious situation, of course, in the EU and afterwards that we threw it, but it hasn't been a major setback for us in the areas that we do business in. Gretchen, anything you want to add to that?

Gretchen Haggerty

No, I would say that the – you know, we are still coming out of the economic problems in general there and you know, we have some customers that may have more challenging credit issues, particularly smaller customers, I would say, but you know, really I would agree with John, our business has been moving in the right direction.

Mark Parr – KeyBanc Capital Markets

Okay. Just as a follow-on, a little bit different tact, and I don't think this question has been asked, but is there any – you are operating your mills at a very strong rate in the U.S. The – you know, some people might suggest that, well, maybe you are overproducing, and you indicated that your order book is very solid. But I was curious if you could just comment a little bit about how you see the mix between production and order momentum, or maybe if you could make a comment about lead times. I would also be interested in any comments you could provide about lead times in the OCTG market as well.

John Surma

In the latter instance, lead times in the OCTG market is a pretty hard thing to pin down. I would just say there that it is traditionally relatively short lead time, and spot oriented. We are doing some programs and have a little bit longer due on them with some really critical key customers and they are listed in our slide and we are listed in their business and we have been able to make a – I think a really good arrangement with a good number of them for a good chunk of our capacity, but otherwise, it is a relatively short lead time from order to delivery, and our order book usually fills up relatively late. On the flat-rolled side, just looking at the number, we would guess our lead time and consolidated things to be around six weeks, maybe a little lesser than that. The industry was probably, as we can best guess at it, about the same. I would just say that we might have brought our lead time in just a tad recently to make our customers feel a bit more comfortable about their position in getting what they are ordering, but not much of a difference in our order rates again across a pretty wide range of markets doing just fine, and we are increasingly involved in the semi-finished slab business domestically and we will do some international things too, and that is really helping to support a very strong operating link.

Gretchen Haggerty

And inventories.

John Surma

Yes, sorry. Gretchen makes a good point. Inventories that we can assess, you know, finished goods inventories that the order folks might have, the clients inventories, we had some comments and news about that yesterday, which we were delighted to see, major equipment manufacturers, again, we saw comments yesterday by one of our big customers. We were delighted to see and service and inventories. You know, all inventories are relatively tight and our customers are cautious and we are fine with a cautious fire, I think it keeps our position and theirs in the right frame and we are reasonably confident as far as we can see that will remain.

Mark Parr – KeyBanc Capital Markets

John, thanks so much for that color, and look forward to chatting with you again soon.

John Surma

Thanks, Mark. Appreciate your help.

Operator

Thank you. Our next question comes from the line of Brett Levy – Jefferies & Company. Please than go ahead.

Brett Levy – Jefferies & Company

In the Tubular division, you guys mentioned that the pricing had kind of troughed in the fourth quarter or towards the early part of the first quarter. If you were to just give us a rough sense from, you know, the trough to now, where average selling prices have gone for welded and where they have gone for seamless, just so I can kind of model in the full extent of the increase. And then do you get another round of increases announced for May on both fronts?

John Surma

It is really hard for us to do that, and it is also, there is some commercial value in what you are asking for that we are a little reluctant to get too far into, and I hope you can forgive us for that, but just in general, it hasn't been all that long since prices bottomed and things seem like they are moving in the right direction. So, while there have been a number of increases announced by us, or at least our customers have been informed by us in the last three to six months, it has really been getting us to where we can start moving maybe back in a better direction, and from bottom till now, I don’t know that it is a huge number, and I am kind of reluctant to say, it is X for welded and Y for seamless, because it really varies so much by product, and one particular type of product even has both, it could be a whole lot different than the other one. So I just would say that the direction is the right direction from our standpoint, steady, and we have got some ways to go to get back anywhere near where we were just a year and a half ago.

Brett Levy – Jefferies & Company

It is more like 10% to 15% than 30% to 40% like what you are seeing in the sheet?

John Surma

Well, I am not going to get into percentages either; I don't think that is in our commercial interest, but the rate of change in the last few months in sheet has been more substantial than (inaudible).

Brett Levy – Jefferies & Company

All right. And then, in terms of utilization, you have given a lot of information on the utilization of the sheet metals. How about on the tube mills and just sort of talking in general where you are on welded and where you are in seamless in terms of utilization?

John Surma

Sure. It is a little harder to respond to that question, quite honestly, because we don’t have, you know, blast furnaces running, to give you kind of an easy reference point. One way I tend to look at it would be to say, how are we doing versus our great record year in 2008, and if you look at our volumes now, we are not where 2008 was, but we are moving in a much better direction I think in the first quarter, if you take the third quarter of 2008, it is like a half a million tons, 250,000 more or less of each of seamless and welded. In the first quarter, we are probably getting into somewhere in the order of 60% or 70% of that, and that will give you some sense of where we are going. We have got some capacity yet to go, but we are in a much better place than we were three or six months ago.

Operator

Thank you. Our next question comes from the line of Dave Katz with JPMorgan. Please go ahead.

Dave Katz – JPMorgan

I was hoping that you guys could talk a little bit about any plans that you have in terms of Tubular units to take advantage of the growth of the Marcellus shale region.

John Surma

Well, we have talked about just in general, and I think in the 10-Q, which will be filed shortly, we will have a little more specifics on our thinking for projects at our Lorraine Tube Works in west Cleveland and we have got a line there that we think we can do some things on, initially from a finishing side on – finishing, quench temper et cetera, that will allow us to serve the Marcellus, certainly, but also some of the other shale plays as well, that we maybe going to get limited on some of the finishing and quench temper kind of technology that we have another facility. So that would be our first aim and I think that would be well suited for the Marcellus shale. We think the customers will be very happy about it, and we are doing engineering and looking at permitting on that right now, and we will have a little bit more say about that, that would be the first stage of projects which could be a little bit larger and longer than that, but that is probably what we start.

Gretchen Haggerty

We are really able to serve our customers' needs in the Marcellus shale right now. This will better position us in the future as that grows.

John Surma

And not just the Marcellus, I mean, from there, we would be going east and west and south if necessary.

Dave Katz – JPMorgan

Very good. And then, as a follow-up to one of the other questions, in terms of the growth that you are seeing in terms of capacity utilization, obviously with the lead times that you have and the order rates that you have, the customers are definitely there for you, but anecdotally, from your customers, have they indicated that they have moved their business to you from somewhere else?

John Surma

Well, there is a lot of commercial value in that too. I would say that it is more likely we would have that occur than the inverse, I could be oblique about it, and we have had more customers talk to us, this is a non-scientific survey, but more customers would be indicating they need more supply looking forward and fewer saying they need less, and I think that is a sign of the overall economy, and maybe a sign that they view us as a pretty dependable alliance.

Operator

Our next question comes from the line of Brian Yu with Citi. Please go ahead.

Brian Yu – Citi

Thanks for the follow-up. John, with regard to the US flat-rolled side, obviously Q1 shipments surprised the upside. Can you comment on which particular end market surprised you? And then secondly, Q2, as you are guiding for higher shipments, is there any particular end market where you are expecting that incremental pickup?

John Surma

I would say it is pretty broad based, and I don't think, no one comes to my mind, no one market has been particularly exemplary. Automotive remains a very good market for us across a very wide range of very good customers. The pipe and tube conversion market remains an excellent market for us across a wide range of customers; coated material clients markets are pretty healthy right now. So I would say across our general marketplace, things look pretty good. We will have a greater volume of grade slab shipment as well in the second quarter, at least that is our current expectation, and that will take a little bit more of that blowing away.

Operator

Thank you. Our final question comes from the line of Michael Gambardella with JPMorgan. Please go ahead.

Michael Gambardella – JPMorgan

Yes, thanks for the follow-up. In your European operation, given the quarterly nature of the iron ore benchmark pricing, or the iron ore pricing now in the world, you know, outside the US, do you foresee going to a pricing structure that would include an iron ore surcharge in your flat-rolled pricing in Europe than with others?

John Surma

I guess that is possible, Mike. Again, we don't have that much business that has a firm pricing structure with it today. So that might be possible. We wouldn't surely resist that. We have some of those types of contracts in North America today and we have discussed that type of structure, not in the current environment, but earlier with some of our European customers, so I don’t know that we would not pursue that. I think it was in our best interest, but I think it is just too soon for us to see how that is going to shape up and I think that we need to make it across by others that have greater contact commitments forward than we do and no doubt, we will be observing that and reading with great interest what folks like you have to write about.

Michael Gambardella – JPMorgan

And one last thing. Your CRU index contracts that you have, are they based, if you have a quarterly contract, is it based on the weekly average of the CRU price for the quarter?

John Surma

Well, it is kind of based on whatever we and our customers agree, but in general, there is the once per month official index that is issued and that would most typically be what we would use, I think it is the second week, I don’t recall that.

Michael Gambardella – JPMorgan

And for the quarterly, that would just be an average of the three months?

John Surma

Yes. Most usually, we succeed in making it even more complicated for me to understand and to explain to you by sometimes having a quarterly offset. So instead of having January, February, March being simply averaged and then being applicable to April, May, and June, we would go back to December, January, and February. And so, we succeeded making it more complicated, but the basic theory, the one that would be most prevalent would be either monthly as you described or quarterly as you described.

Michael Gambardella – JPMorgan

Okay. Thanks a lot, John.

John Surma

Okay, thanks, Mike.

Operator

There are no further questions. Please continue.

Dan Lesnak

Okay. Thanks, everybody for being on the call with us and we finally have some better news and look forward to talking with you next quarter.

Operator

Thank you. Ladies and gentlemen, this conference will be made available for replay after 4.30 PM Eastern Time today until May 4, 2010 at Midnight. You may access the AT&T Playback service at anytime by dialing 1800-475-6701, and entering the access code of 151982. International participants may dial 1320-365-3844. Again those numbers are 1800-475-6701, and international, 1320-365-3844, entering the access code of 151982. That does conclude our conference for today. Thank you for participating and for using AT&T Executive Teleconference. You may now disconnect.

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