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Executives

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

Albert Ferrara - Chief Financial Officer, Senior Vice President of Finance and Member of Proxy Committee

Analysts

Paul Cheng - Lehman Brothers

Mark Parr - KeyBanc Capital Markets Inc.

Jamie Melzer - BofA Merrill Lynch

Charles Bradford - Bradford Research

Evan Kurtz - Morgan Stanley

John Sullivan - Leerink Swann

David Gagliano - Crédit Suisse AG

Michelle Applebaum - Michelle Applebaum Research

Unknown Analyst -

Brian Yu - Citigroup Inc

Sal Tharani - Goldman Sachs Group Inc.

Michael Gambardella - JP Morgan Chase & Co

AK Steel Holding (AKS) Q1 2011 Earnings Call April 26, 2011 11:00 AM ET

Operator

Good morning, ladies and gentlemen, and welcome to AK Steel's First Quarter 2011 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. With us today are Mr. James L. Wainscott, Chairman, President and Chief Executive Officer of AK Steel; and Mr. Albert E. Ferrara, Jr., Senior Vice President of Finance and Chief Financial Officer. At this time, I will turn the conference call over to Mr. Ferrara. Please go ahead, sir.

Albert Ferrara

Thank you, Marlina, and good morning, everyone. In a moment, I'll review our first quarter 2011 financial results, as well as provide some guidance for the second quarter.

Following my remarks, Jim will offer his comments and field your questions.

Our comments today will include forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. Included among those forward-looking statements will be any comments concerning our expectations as to future shipments, product mix, prices, cost, operating profit or liquidity. Please note that our actual results may differ materially from what is contained in the forward-looking statements provided during this call. Information concerning factors that could cause such material differences and results is contained in our earnings release issued earlier today.

Except as required by law, the company disclaims any obligation to update any forward-looking statements to reflect future developments or events to the extent that we refer to material information that includes non-GAAP financial measures, the reconciliation information required by Regulation G is available in the company's website at aksteel.com.

Earlier today, AK Steel reported net income of $8.7 million or $0.08 per share for the first quarter of 2011. Our solid first quarter results are better than we had originally forecasted and are $0.09 per share above the first call consensus earnings estimate.

Shipments for the first quarter of 2011 totaled 1,423,100 tons, about 5% higher than our prior quarter. Our average selling price was $1,109 per ton, slightly higher than we anticipated and an increase of approximately 9%, compared to the fourth quarter of 2010.

Revenues totaled $1,580,000,000, an increase of about 14% over the prior quarter. Sales outside the U.S. were once again an important source of revenue for us totaling approximately $218 million or an increase of 15% over the previous quarter.

As we previously announced, our first quarter results includes several one-time items that net to a total charge of $1.5 million. The one-time items include: first, $1.3 million in cost associated with the shutdown of our Ashland Works coke plant; second, a non-cash charge of $14.2 million related to the settlement with a group of our Butler Works retirees; and third, a non-cash credit of $14 million for the final settlement accounting of the Middletown Works, VEBA.

Netting revenues and costs for the first quarter of 2011, we achieved an operating profit of $19.5 million or $14 per ton. That represents a solid improvement in our operating results of more than $174 million, compared to the fourth quarter of 2010.

Turning to the balance sheet. During the first quarter, we made capital investments totaling $36 million. As business conditions and shipments improved, we had an expected increase in working capital of approximately $133 million. We will remain focused on managing working capital throughout the year and anticipate it will be roughly flat for full year 2011.

Let me make a few comments related to our pension plan. During the first quarter, we contributed $30 million to our pension fund. And within the next week, we expect to complete our remaining $140 million pension contribution for 2011.

Looking beyond 2011, our independent actuary has recently updated their estimate of our future pension contribution requirements. As a result, we now expect our 2012 contributions will be about $180 million, substantially lower than previously estimated.

Turning briefly to the VEBA settlement with the group of our Butler Works retirees as previously announced, we will make 3 annual cash payments starting in 2011, which will total $91 million. The first cash contribution of $32 million will be made in the third quarter of 2011. The other payments will be approximately $32 million in 2012 and $27 million in 2013.

Now I'd like to provide some guidance for the second quarter of 2011. Reflecting continued strengthening in most of the markets we serve, we expect second quarter shipments of between 1,500,000 and 1,550,000 tons, a significant increase over our first quarter 2011 shipments. In addition, we expect our average selling price to increase by approximately 7% quarter-over-quarter primarily due to a higher contract of spot market selling prices. We expect higher cost for raw materials including scrap, iron ore and purchase slabs of approximately $50 per ton, compared to the first quarter. We anticipate our maintenance outage cost to increase by roughly $8 million quarter-over-quarter. We expect to incur additional one-time cost of approximately $4 million associated with the shutdown of our Ashland Works coke plant in the second quarter of 2011.

Overall, we expect to generate an operating profit for the second quarter of approximately $65 per ton, which would represent a substantial improvement of more than $50 per ton over the first quarter. Now for his comments, here's Jim.

James Wainscott

Thank you very much, Al. Good morning, everybody, and thank you for joining us on today's conference call. I'm really delighted to report that in the first quarter of 2011, AK Steel returned to profitability on both an operating income and a net income basis. And while we still have a long way to go, to get back to where we want to be, it's certainly nice to be back in the black.

And as Al described, we see positive momentum ahead. Suffice it to say that I'm very encouraged about what we see in terms of our second quarter outlook. But before looking ahead, let me take a few moments to comment on a few of the items that contributed to our improved and better-than-expected first quarter results. Despite somewhat lower shipments than we had expected due, I might add, entirely to a shortfall on the delivery of purchased slabs, we experienced a solid shipment mix, better-than-expected average selling prices and above-expectation cost performance. So let me offer a tip of the hardhat to all of our employees for the excellent job that they did in Q1 on controlling those cost that were within our control. In particular, I was very impressed by our record yield performances and I think that they're sustainable going forward.

Those performances were needed. Frankly, to help offset higher steelmaking input costs for scrap, iron ore, coal and coke. For example, we consume about 500,000 tons of carbon scrap each quarter and during Q1 of this year, we paid about $75 a ton more than we did in the fourth quarter of 2010.

On the iron ore front, as was the case in 2010, and as in recent years, we paid more for our pellets in the first quarter of 2011. That said, from my perspective, the good news is that we made excellent progress in Q1 by reaching agreements with 2 of our 3 iron ore suppliers. We reached new supply agreements representing nearly 75% of our expected iron ore purchases for this year. And just last week, we reached an agreement in principle for 2011 pricing with our third iron ore supplier for the remaining 25% of our needs. And we hope to put the finishing touches on that deal in the next couple of weeks.

In each case, we've shifted from historical annual benchmark pricing to a quarterly pricing approach. Given the increasingly volatile pricing of this important steelmaking input, we chose to embrace quarterly pricing for iron ore pellets going forward.

Similarly, for our contract sales agreements, we have completed some and are negotiating other pricing agreements with customers that contain an iron ore variable price adjustor. Accordingly, from a standpoint of matching our revenues and input costs, we're in a much better position in 2011 than we were last year.

Many of you will recall that in 2010, the benchmark price for iron ore was not settled until October. That made it virtually impossible for us to recover last year's increased iron ore cost from our contract customers.

Before leaving the raw materials area, let me offer a few brief comments on coal, coke and slabs. While our coal costs are expected to be higher in 2011 than 2010, it's important to note that we signed our coal supply contracts prior to the Australian floods that took place in Q1 of this year.

On the coke front, let me comment on both Ashland and SunCoke Middletown. As we announced in December of 2010, we're in the process of shutting down the Ashland Works coke plant. We're doing so because of the high cost of continuing to operate and maintain the coke batteries, as well as increased environmental challenges. We expect to close this plant by the end of the second quarter.

To replace the Ashland coke production, we've bought coke from several third-party producers on an interim basis as we consider our best long-term approach for coke. The SunCoke Middletown project is proceeding well with about 3 million of the 3.6 million bricks in place. The project is on schedule for an anticipating startup in mid-October of this year.

Regarding carbon slabs, thanks to the first quarter 2011 startup of our new electric arc furnace, what we refer to as #5 EAF at Butler Works, we will soon be capable of producing more carbon slabs on our own. Beyond that, the addition of the new EAF and ladle metallurgy furnace, or LMF, is a big part of the modernization of the company's specialty steel operations in recent years. The EAF and LMF provide us with much greater flexibility and they allow us to lower production costs, increase steelmaking capacity and improve the quality of all of Butler Works' products. We expect to begin and enjoy the payback on this $160 million investment starting in the second half of 2011.

Vertically integrating remains an important long-term goal for AK Steel and discussions are continuing on this subject with the number of parties around the world. However, we're not in a position at this time to announce a transaction with respect to either iron ore or coal.

Now let me take a few moments to provide you with an update on the markets that we serve. I'm pleased to report that in general, we see a continued slow, but steady, economic recovery. That's certainly the case with the automotive market. But right up front on behalf of all of us at AK Steel, let me express our heartfelt concerns for our Japanese friends and customers who have faced more than 50 earthquakes, the devastating tsunami and radiation fears from the troubled nuclear plant. We wish the courageous people of Japan and our Japanese customers the very best as they deal with the aftereffects of this monumental natural disaster. At AK Steel, we stand ready to help.

In the first quarter of 2011, the automotive market, which represents about 1/3 of AK Steel's sales showed some signs of recovery. U.S. light vehicle sales were at an annual rate of more than 13 million units, a sign of continued improvement in this sector and the economy as a whole. Compared to the 11.7 million annual sales rate for the year ago first quarter, it was a double-digit percentage gain for automotive sales. Of course, everyone is concerned about the near-term effects of the devastation in Japan and so are we. Taking into account recent announcements from our customers regarding possible parts shortages, we're continuing to assess our second quarter automotive sales forecast.

To date, we're aware of some second quarter reductions to original production plans for automotive customers. At this point, our customers believe the cuts are temporary in nature. I think we all understand that it's simply too early to tell the full impact that the Japan effect, if you will, will have on second quarter automotive shipments.

Having said that, we do not expect that vehicle demand will be affected. And if necessary, we suspect that the demand will be met through inventory reductions in Q2 and increased production in the second half of 2011.

It's our understanding that the automotive production shortfalls will be made up through increased production schedules in the third and fourth quarters as key component supplies from Japan resume or are replaced with alternate sources.

We'll continue to stay close to our automotive customers and take our lead from them as their build schedules take shape for the second quarter and beyond.

Moving to the construction market. While construction activity is still lagging, general manufacturing activity has been robust. In the first quarter of 2011, industrial activity appears to have grown by about 9%, compared to the first quarter of 2010. That's really encouraging news especially when one considers that new home construction and non-residential construction have yet to experience any meaningful improvement.

As a result of this increase in general manufacturing, I'm pleased to report that we have seen an uptick in our infrastructure and manufacturing market. Despite the dual shocks of Japan's natural disaster and rising oil prices, the U.S. economy appears to be improving ever so slightly. For example, since November of 2010, the unemployment rate, although still way too high, has dropped by about a full percentage point and the ISM manufacturing survey is pointing to strong manufacturing growth. Coincident with improving employment manufacturing metrics, consumers are gradually returning to America's retail stores and car lots and that's a good thing for AK Steel since most of the steel we manufacture goes into producing consumer-durable goods.

At our company, we also share the summary view of the Fed's Open Market Committee minutes from their March 15 meeting, which stated, "The economic recovery is on a firmer footing now and overall conditions in the labor market are improving gradually."

At our company, we've been successful in winning new business in the appliance and HVAC markets, and we continue to pursue additional opportunities of those OEMs who desire what we have to offer, namely our value-added products and who appreciate the reliability of our equality, our delivery and our unsurpassed customer service.

Our largest market continues to be the contributor and converters, or the DMC market, and throughout the first quarter, demand from the DMC market held strong. Customers in this important market segment provide valuable processing activities and just-in-time deliveries to a variety of other market sectors.

In response to increased demand and higher steelmaking input costs, AK Steel has announced a series of price increases for specialty steel products and carbon steel products since the beginning of 2011. We're realizing the impacts of those price increases in our second quarter results and in our outlook.

And for that matter, we expect carbon spot market prices to remain strong in light of very low inventory levels at service centers at around 2 months and continuing high steelmaking input costs.

Now let me turn to the electrical steel market where overall things are also improving. We've experienced higher demand for our high-end products, most notably in Europe and South America. This increased demand has buoyed spot market pricing for our international electrical steel sales. Global demand for high efficiency electrical steel products had already begun to improve prior to the Japan crisis. But since that natural disaster, demand has increased for AK Steel's highest quality electrical steel offerings.

In total, we look for about a 15% increase in grain-oriented electrical steel shipments for the second quarter for 2011, compared to the just completed first quarter.

Increased order intake rates mean higher operating rates for steelmaking and steel finishing and that translates into more work for our employees. As a matter of fact, we're hiring. We're looking for 30 people at our Zanesville Works right now. And as of March 31, each of our roughly 6,500 employees was working hard to satisfy the needs of AK Steel's customers, and not a single person in the company, not one, was on layoff status.

Speaking of our employees, with the announced shutdown of the Ashland coke works, we continue to try to place as many of the affected coke plant employees as possible. We now expect opportunities to be available for about 2/3 of the displaced workers from the Ashland Works coke plant at either the Ashland Works main plant or at other AK Steel locations.

In addition, we were delighted to announce last week that we had reached an early agreement with the International Association of Machinists, who represent our Middletown Works hourly employees on a three-year labor contract extension that expires on September 15, 2014. This agreement replaces the existing contract that was set to expire on September 15 of this year.

I sincerely appreciate the IAM's leadership in negotiating an early agreement that continues to provide us with the kind of operating flexibility we need, while offering competitive wages and benefits for the employees of Middletown Works.

At AK Steel, each and every quarter, we do our best to remain true to our company's core values of safety, quality and productivity, take care of your people and take care of your customers, and the results will follow. And in recent years, this has been AK Steel's mantra for success.

During Q1, we were honored for our safety performances at our Zanesville plant and at AK Tube. And more recently, our Coshocton Works has been honored for its safety performance. I want to congratulate our employees at each of those locations for making safety their highest priority every day.

In addition, the American Coke and Coal Chemicals Institute informed us last month that both of AK Steel's coke plants share the Max Eward Safety Award together, with a third recipient, for the year 2010 in their safety performances. This happens to mark the sixth consecutive year that the Ashland coke plant has earned this prestigious award and it's the 13th time in the past 14 years that 1 or more AK Steel coke-making facilities has been so honored. I congratulate our Middletown and Ashland coke plant employees for working the entire year, all of 2010, without a single OSHA recordable injury, that's fantastic.

Unfortunately, however, on March 31, we were reminded why safety is and must always remain our #1 priority. Tragically, an outside contractor suffered a fatal injury at the Ashton Works coke plant while performing routine maintenance work. In our business, we must all be each other's keeper and our thoughts and prayers go to his family, friends and his co-workers.

Turning very briefly from safety to quality. During Q1 of 2011, our internal quality measures were stellar. For example, internal rejections set a new quarterly record and retreated products tied the record that have been set in the fourth quarter of 2010. And externally, we continue to experience a very low rate of customer claims reflective of the high-quality products that leave our plants.

In addition, we fared quite well on the Jacobson independent survey of our carbon steel customers, AK Steel was ranked #1 in quality customer service and on-time delivery, as well as inside sales support in the first quarter. These performances translated into a #1 overall rating in terms of customer satisfaction for our carbon steel customers.

On the specialty steel front, we were ranked #1 in quality. And these outstanding performances and service to our great customers are the result of a great team effort by all of the employees of AK Steel, a job well done by one and all.

At AK Steel, we have a proud history and tradition of steelmaking. Between AK Steel and its predecessor company, we've now been in business for 111 years. But for the efforts and the can-do spirit of those who'd came before us, frankly, there would be no AK Steel today. I recently had the good fortune of visiting with several hundred, I guess almost 1,000 of our retirees at their 50th Annual AK Steel/Armco Retiree Reunion. It was a great opportunity for me to say thanks to all of them for their hard work and dedication. To put things into perspective, back in 1961, the first year of that reunion, the former Armco had 83 plants in 15 countries, employed more than 35,000 people and had sales of less than $1 billion. Today, in comparison, AK Steel operates 9 plants with about 6,500 employees, and we generate about $7 billion in annual sales. That's 50 years of progress.

The opportunity to meet with our retirees also gave us a chance to reflect, not just on what our company has done and how it's evolved over the past 50 years but on what we've accomplished over the past 7.5 years, to honor their legacy. For starters, we've contributed nearly $1.2 billion in cash to the pension fund. In addition, we've continued to honor our commitment to retiree healthcare.

Importantly, in meeting our commitments, we've reached groundbreaking settlements regarding retiree healthcare costs. For example, last month, we made the final payment of $65 million, bringing total settlement payments to $663 million to wrap up our obligation in the Middletown retirees case. Our OPEB liability, which had stood at $2.2 billion in 2003 has now declined to $755 million as of March 31, 2011. In fact, since the autumn of 2003, we've used our cash to reduce our outstanding debt, negotiate retiree healthcare settlements, fund the pension plan, reinvest in the business and reward our shareholders. We've been able to do all of these things in recent years with internally generated cash.

I've no doubt that this would not have happened without the resiliency of today's AK Steel employees, who continue to exhibit that same can-do spirit as those who preceded them. And I'm proud to lead them and to serve with each one of them.

In closing, we're off to a great start in 2011. We reported solid first quarter results. And despite some challenges ahead, we expect a much improved second quarter. Each and every day, we will continue to execute. On behalf of our customers, our shareholders and all of our constituents, we're on the right track for continued progress in the months and years ahead. Thank you very much for your attention. With that, we'd be happy to field your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Michael Gambardella of JPMorgan.

Michael Gambardella - JP Morgan Chase & Co

Just have a question in terms of your second quarter outlook, could you give us some color on the pricing side? The impact on your pricing outlook between carbon and specialty?

James Wainscott

Al, I think in summary, it was about 7% -- was the guidance we gave up...

Albert Ferrara

7%. We benefited, Michael, right, from strong pricing, certainly on the carbon side. But better pricing as we look out to the second quarter on the electrical side than we had anticipated. And stainless continues to be very solid.

James Wainscott

And Mike, I would just offer, it's really an across-the-board thing. We're benefiting from the previously announced price increases. We're negotiating contracts as they expire. And not only are we getting higher base prices, but we're also incorporating certain variable price mechanisms and all of that is really kicking in for us in Q2.

Michael Gambardella - JP Morgan Chase & Co

And what are those variable price mechanisms and how much of that impact the overall mix?

James Wainscott

It's not a really big number yet, I have to say. And let me just offer a few thoughts in that regard. It's a bit complex and I've got to be a little careful not to cross over into the dark side and upset customers here, or for that matter suppliers. But as I mentioned in my prepared remarks, we're really delighted that we now have the degree of certainty. And the way these raw material, particularly iron ore deals work, is that we'll know at the end of May what our third quarter cost will be with respect to iron ore. So let's say, a daily average, if you will, of the pricing and then that takes effect for the subsequent quarter. And then we're able to, where we have agreements in place, pass-through, it isn't exactly a dollar-for-dollar and each agreement is a bit different. But as we continue to negotiate more of these as the number of the customer contracts roll off, we expect to continue to recover more and more of our increasing costs. It is absolutely the right direction that we have to move in, and we'll get to a point, we're not there yet, where we have 100% of all of our contract deals that contain surcharge or variable pricing mechanisms to really help share some of the risk associated with these higher costs that we've been incurring.

Michael Gambardella - JP Morgan Chase & Co

Thanks a lot, Jim.

Operator

Our next question comes from Michelle Applebaum of Steel Market.

Michelle Applebaum - Michelle Applebaum Research

Hi, it's Steel Market Intelligence. I was going to ask a little bit more specificity under my question.

James Wainscott

Sure.

Michelle Applebaum - Michelle Applebaum Research

How many of your customers are willing to price in the iron ore prices?

James Wainscott

Today, we won't do a deal, Michelle, with any customer, a long-term contract or even one-year deal without getting those agreements in place. And we've been successful in each case as they've expired. Not all of our deals are done for 2011. As you probably know, some of them expire and are in effect January 1. Some are the end of the first quarter and a variety of others occur throughout the year. But that's really our stance. That's the stance it has to be in light of the fact that really we've taken it on the chin for billions of dollars of higher input costs in the recent years.

Michelle Applebaum - Michelle Applebaum Research

You're saying you won't do a new contract unless there is an iron ore pass-through and a pass-through of the full increase in the iron ore cost?

James Wainscott

Each deal is going to be a bit unique. So I don't know that we'll get dollar-for-dollar in every case, as I said before. But it's going to have to be a deal that has that provision in it. And we'll get the best possible deal we can for in each case for our shareholders.

Michelle Applebaum - Michelle Applebaum Research

I guess it's an important distinction if you're getting the increase or you're not getting the increase. So you're saying, you may get some of the -- every deal will have an iron ore escalator. But it may be less than the increase in iron ore or it may be the full increase?

James Wainscott

Yes, part of the difficulty in getting much more specific, Michelle, is in each case, of course, we look at the overall profitability of the relationship, the growth of the relationship. There's a variety of factors that matter to us. And in addition, as we have with other sort of items that we've embedded previously, there's a threshold that you have to establish. And that depends kind of in the moment in time, in which one gets these deals done. So to blanket say that we'll get everything on the upside and some will have a threshold on the downside. Some will allow for sharing. It really does depend on the degree of risk and the overall deal that is cut in each case. So it's just difficult to be a lot more specific except to say that as I said, we'll get the deals done and they'll have an iron ore component in them.

Michelle Applebaum - Michelle Applebaum Research

Great. Can I ask another one?

James Wainscott

Sure.

Michelle Applebaum - Michelle Applebaum Research

Your comments seemed -- you made some kind of disclaimer in the outlook about no one can predict what the impact of the Japanese production cuts might be. So I'm presuming your guidance doesn't take into account the risk of cancellations of production domestically from parts impact?

James Wainscott

Well, I would just reference this weekend's Wall Street, where you had the 3 Toyota executives really speaking to the fact that this could be a bit longer than anyone expected. We take our lead from people like Toyota and others who are extremely well diversified in the automotive sector. But if it's worse than what they think, then that could adjust our schedules as well. So we're just noting that, stating the facts as our customers have said to both of us directly and in the press. We have tried to assess by individual automotive customer what it means? We have a spreadsheet that's worked through all that. We have sort of a base case, high low. And again, our guidance does incorporate what we expect to occur for the second quarter. It incorporates both what we intend to ship to automotive, which is a little less than what we thought, but not dramatically less. And we expect that to recover in the third quarter and really have our strongest shipment quarter to the automotive sector in the fourth quarter. But our guidance is what it is. It's always based at a point in time. And so based on the information that we currently have, we've considered that, which has been made known publicly by all of the automotive companies. But things are subject to change and that's the only point that we would make there.

Operator

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

Mark Parr - KeyBanc Capital Markets Inc.

Hey, one thing. Just as a point of clarification, Al, you had talked about the cash contributions, the pension and did you -- you talked about finishing up the 2011 contribution in the next several weeks.

Albert Ferrara

Yes, sir.

Mark Parr - KeyBanc Capital Markets Inc.

You talked about a reduced expectation for 2012.

Albert Ferrara

Right.

Mark Parr - KeyBanc Capital Markets Inc.

And then was there something else? Did you also talk about free cash payments related to VEBA contributions?

Albert Ferrara

The free cash payments, Mark, related to the Merkner case, which we announced actually in January. Those cash payments will be made, as I mentioned, the first one in the third quarter of this year. And then subsequently in the third quarter of the next 2 years totaling $91 million.

Mark Parr - KeyBanc Capital Markets Inc.

All right. So that's related to the Butler Works retirees?

Albert Ferrara

That is correct, yes. A special charge, if you remember in the fourth quarter of $9 million associated with the settlement of that.

Mark Parr - KeyBanc Capital Markets Inc.

Yes, I got that. I just -- all right. Another question, again, just a point of clarification. Jim, I think you had mentioned a grain-oriented volume was going to be up 15% in the second quarter relative to the first quarter, is that right?

James Wainscott

Correct.

Mark Parr - KeyBanc Capital Markets Inc.

Okay. Is that -- could you comment on that in the context of normal seasonal momentum? Is that an unusual gain? Or is that -- how does that -- what does that really mean?

James Wainscott

I think it's an increase in overall demand as global economies continue to recover. There's a piece of it that might be just a bit seasonal, but I would say the vast majority of it is an improvement and that's a very, very good thing. In fact, I would guess that with the domestic market or the NAFTA market lagging a bit, probably the international growth is even a bit higher than the 15% and a great bulk of that would be due to the stronger demand. There really is a very good appetite at this point, Mark, and we're happy to see it, of course, for the high-end really, the most efficient grades, and that's where we're capitalizing on things and look forward to utilizing all the capabilities of our new #5 EAF as it continues to ramp up to meet those needs.

Mark Parr - KeyBanc Capital Markets Inc.

You think there might have been any impact here? People may be concerned about the ability of the Japanese to produce higher-end, grain-oriented steels?

James Wainscott

I think, that there's the possibility of course, you'll never know for certain. That could be a little bit of the opportunity that's there. And I suppose we've had some inquiries. But I don't think that's the bulk of what's happening here. Again, we think it's more fundamental in nature.

Operator

Our next question comes from Brian Yu of Citi.

John Sullivan - Leerink Swann

This is actually John Sullivan, filling in for Brian. I have one quick question. I was wondering if expectations with regards to electrical steel pricing for 2011 have changed since 4Q given the stronger demand expectations?

James Wainscott

I think we've seen the end of the slide, which has been pretty painful. But I don't know that we would give a revised outlook. I think overall, we were indicating that the prices would be down. And I think that's still the case. But things are strengthening. And where we have the opportunity, we will not be shy about raising prices.

Brian Yu - Citigroup Inc

Thank you.

Operator

Our next question comes from David Gagliano of Credit Suisse.

David Gagliano - Crédit Suisse AG

Great. Thanks. I just have a couple of quick questions. First on, on the electrical business, can you quantify how much volume you actually have to sell into the spot market for the second half of 2011?

James Wainscott

I don't know that we've done that publicly.

Albert Ferrara

Most of our business, David, as you know, is contract. We do have the ability to produce incrementally a bit more spot volume. If there's volume there, we'll be able to capture it if in fact, the price makes sense. But I think at the present time, we've been saying that our sales would be somewhere in the up single-digit percentage wise year-over-year into the below to mid-200,000. So we would have a little bit capability there. But again, it's a function of where this demand is and the type of product that they're seeking.

James Wainscott

And I would just offer as well, I think we've shared before that we're something like 70-30 in terms of contract to spot. So one could do the math. But it's a question of what's the base. And as that base volume continues to improve, I think that's a very good thing and a very positive sign for us. In addition, I think again, while we're very sad to see what happened in Japan, I think there's an opportunity for us longer-term to participate in the infrastructure rebuild over there. And we're looking forward to those opportunities.

David Gagliano - Crédit Suisse AG

Okay. Thanks. So the mix now is 70-30, 70 contract, 30 spot. And is that consistent throughout the course of the year? Meaning, 30% of your volumes left to go in the second half?

James Wainscott

I think that's a reasonable number to use for your model. It can fluctuate a few percentage points.

David Gagliano - Crédit Suisse AG

Okay. Perfect. And then just my follow-up question. On the coal cost commentary that you made on -- during the prepared remarks. Given that you signed your coal prior to the spike in prices, I was wondering if you could help us quantify the incremental cost change for 2012. If magically, coal prices held current levels as we move through 2011, what would -- rough estimate on the incremental costs hit in 2012? Thanks.

James Wainscott

It would be a big number. I mean and that doesn't give you a degree of quantification. But we're concerned about that. I guess the good news is, we were fortunate to get ahead of the recent increase. But who’s to say what the coal prices will be. We'll continue to kick the tires on some opportunities ourselves. It's probably the next thing that we go after in terms of our agreements with customers to recognize that, that too is an important element of our input costs.

Operator

Our next question is from Charles Bradford of Bradford Research.

Charles Bradford - Bradford Research

Have you seen any impact or anything from the so called, the newer producers or the restarting producers as far as them going after your customer base? I'm thinking specifically of Tisson-Krupp [ph] service [ph] on Columbus, which apparently is bringing on its new capacity earlier and of course the reopening of Sparrows.

James Wainscott

Yes, the short answer, Chuck, is that we have not seen much at all. I think it's greatly overblown so far. It's far more psychological than real. But we'll see longer term. We understand that TK, for example, may bring the market couple of million tons of product this year. But a million tons or so might be hot-rolled. And we fully expect it's going to take them a while to qualify on automotive, particularly automotive exposed product. And we're still not sure why our customers who rate us first would look to make the switch unless somebody wants to buy that business. So we'll see. Are they knocking on doors? I suspect they are. Are they making lots of promises? I suspect they are. I'm not sure the market needs that capacity, whether it's in carbon or specialty anymore than they need the new capacity that you referenced including RG, if that's what they're calling themselves. But perhaps on the bright side, the case of RG, it's another slab supply opportunity for AK Steel. So maybe there's maybe a bit of a silver lining there. But short answer is, we really haven't seen much of any of them just yet.

Charles Bradford - Bradford Research

And secondly, can you tell us how many slabs that you bought in the first quarter and have used? And what you expect that to look like maybe in the second half?

James Wainscott

It's a really interesting question because what we tried to buy and versus what was delivered were 2 different things. So I'll be a little cautious there just to preserve the guilty party. We, I think consume somewhere in the 25,000 ton range in the first quarter. That number should be substantially higher, maybe triple or so in the second quarter. And the second half remains to be seen. As I mentioned, we'll have the ability with our new EAF to make most of what we need. However, if there's the opportunity out there for us economically to buy rather than make, we'll do that. So I'd be cautious by giving a second half number.

Charles Bradford - Bradford Research

And then finally, has there been any real changes in your purchasing of scrap now that you've got the number 5 furnace up?

James Wainscott

Well, we'll be buying more. And we'll be buying it from that Pittsburgh market. But I don't think we're doing anything other than what we've been doing, which is trying to buy smart. Try and buy appropriately in terms of the mix of scrap, which our group has done an excellent job on for years now. And we try and be representative participants in the marketplace and we'll continue to do so.

Operator

Our next question comes from Sal Tharani of Goldman Sachs.

Sal Tharani - Goldman Sachs Group Inc.

Thank you. Couple of quick questions, Al, housekeeping and then from iron ore. What's the pension OPEB credit or expense during the quarter and what was the LIFO?

Albert Ferrara

The pension expense, Sal, was actually a credit of $100,000. The OPEB credit was about $8.3 million. We would expect for the year the pension expense to be close to a push, maybe $1 million credit. And for OPEB about $35 million credit. And for LIFO, LIFO in the quarter was around $25 million. That was up about $15 million quarter-over-quarter.

Sal Tharani - Goldman Sachs Group Inc.

Thanks. Jim, you mentioned that by the end of May, you will have the idea of what the iron ore price will be -- cost will be for the second quarter. So then you have a month lag and a quarterly average. Is that the way it's going to work out?

James Wainscott

Yes, I wasn't clear. Sal, we already know the second quarter.

Sal Tharani - Goldman Sachs Group Inc.

Sorry. Third quarter, yes.

James Wainscott

That was determined at the end of February. We'll know the third quarter at the end May and the fourth quarter at the end of August.

Sal Tharani - Goldman Sachs Group Inc.

Got you. And there was another issue last year was not only that the duration wasn't fixed. But also what price to use because there was no benchmark, global benchmark for the palette. Is it not tied to the iron ore fine price with some escalator on top of it?

James Wainscott

Yes, each of our deals, once again is a little unique. But I think it's fair to say that in general, there are more tied now to the IODEX index as the benchmark.

Sal Tharani - Goldman Sachs Group Inc.

Okay. And one more thing. Last conference call, you had given us, although you don't give guidance quarter out just for the next quarter. But you have given us some view on what kind of pricing you would expect for the second quarter. Based on the second quarter, price increase would be higher than the first quarter price increase versus the fourth quarter we saw. How do you look at third quarter? Do you have any view what prices would do at that time or based on your sort of contract agreements and the lead times?

James Wainscott

Well, we'll sort of stay with our long tradition of only providing one quarter's worth of guidance. But with respect to the issue of pricing sustainability, there has been a bit of what I'll call recent cautious buying in anticipation of these additional supply coming on-stream that Charles Bradford mentioned. Again, I think it's more psychological than anything so far. We'll see going forward. But frankly, Sal, with service center inventories, as low as they are, and demand and the fundamentals remaining pretty strong here, you couple that with these stubbornly high input costs that we've been yapping about. And I think there's every reason to believe that prices are going to stabilize if not rise from here.

Sal Tharani - Goldman Sachs Group Inc.

Okay. And one last thing. How much in advance do you get an indication from the auto customers about the delivery schedule? Is it they tell you in a quarter in advance? What I mean, is that, if the Japanese impact is more than expected, less than expected, how far in advance you would generally find that out?

James Wainscott

Well, we're talking, if not every day, every other day at this point. And we would get a more formal update every week. So and with some of them, as you might imagine, we have people at their plants. So we're pretty much real time.

Operator

Our next question comes from Evan Kurtz of Morgan Stanley.

Evan Kurtz - Morgan Stanley

Most of my question has actually been answered already. But maybe just briefly if you could give us an update on how the electrical steel WTO case is going with China and maybe if there's any chance that we could see some increased spot sales for ES if that's the result itself within 2010 -- 2011? Excuse me.

James Wainscott

We certainly wish that we had a favorable answer for you. But we remain essentially zoned out of China. As in the past, we've been encouraged that our U.S. trade rep Ron Kirk is pursuing the review and continue to believe that, that's the right thing. And that there's really no factual or legal basis for the case. China is a tremendous growth opportunity for us. We want to get back in there just as quickly as we can. But we have no news to share with you today, Evan, with respect to that case. But we're on it.

Evan Kurtz - Morgan Stanley

Okay. And then maybe what is your rough breakdown between the D3 producers and the transplants at this point?

James Wainscott

I don't know that we've shared that. Other than to say, that again, in total our automotive business might be 30% to 33% of our sales and that no single customer accounts for a double-digit percent of sales. We are very well diversified. We have had the good fortune over the years of growing with the transplant automakers. And as obviously, they've grown in the states. But we have a tremendous relationship as well these days with Ford and improving with others. So I would not necessarily try and put the number on that. Our sense is, look, this is a business. Its competition that where one may struggle, another may step up to take some market opportunity. And we're there to serve all of our customers.

Evan Kurtz - Morgan Stanley

Okay. Thanks.

Operator

Our next question comes from Paul Cheng with Deutsche Bank.

Paul Cheng - Lehman Brothers

Regarding you guys had made some comments about electrical steel demand in Q2. Just given the situation in Japan, do you guys have any additional comments you can offer for the back half of the year?

James Wainscott

Again, we hope to be able to continue to increase our levels of production and shipments. We're about that. We're really pulling together the degree of clarity when you get beyond the quarter anymore and given the faster cycles that we're seeing in really all of the markets. I think we'd be hesitant to give a forecast. Having said that, we don't see electrical steel stepping back. We look for it to continue to improve in the second half and beyond. The overall global recovery, economic recovery needs to continue to take hold. I think that's happening. And then of course, the U.S. recovery, with respect to in particular residential construction, needs to improve. And that's taking a bit longer. But overall, we look for a better market there. And as we look at the out years, expect that to continue.

Paul Cheng - Lehman Brothers

Thanks.

Operator

Our next question comes from Jamie Melzer of Bank of America.

Jamie Melzer - BofA Merrill Lynch

Thanks for taking my question. Just a couple of quick things, if I can. I wanted to circle back to the met pricing. Do you have any remaining exposure to your annual needs for met this year? And then I guess if you could just remind us what the annual kind of tonnage going into 2012 and if any of those are contracted?

Albert Ferrara

Well, short answer is, we don't really have much exposure there. Our annual needs, Jamie, are generally speaking between coal that we buy directly and what we're buying for our batteries operated by SunCoke, runs about 2 million tons a year. And like I said, those needs are largely met contractually for the year.

Jamie Melzer - BofA Merrill Lynch

Okay. And then are any of those contracted for 2012 or they're open?

Albert Ferrara

We do have some contracts that extended into 2012. But generally speaking, the price has to be negotiated, generally speaking within a collar.

Jamie Melzer - BofA Merrill Lynch

Got you. Okay. And is that determined based on market pricing at that time?

Albert Ferrara

Well, there's a number of indices, if you will, that are used. That marketplace is certainly one. But there's a bit of negotiation within that collar.

Jamie Melzer - BofA Merrill Lynch

Okay. And then one other quick question. I know it's hard to pinpoint on the cost side because there's a lot of moving pieces. But assuming all of this is kind of held equal, what kind of cost savings would you expect to see from the Butler Works, the new EAF at Butler Works once it's fully ramped up?

James Wainscott

I don't know. $50 a ton.

Jamie Melzer - BofA Merrill Lynch

Okay. Perfect.

Albert Ferrara

Well, we should also point out, Jamie, there's 2 benefits there. Just exactly what Jim mentioned, but also the ability, if you will, to produce slabs for, instead of buying on the merchant market. So there's not only an operating cost benefit, but also the ability, if you will, to have flexibility and also to negotiate better prices from purchased slabs in that instance. If in fact, we wish too.

James Wainscott

In other words, Jamie, it's a really good project for us. We're excited that it's coming up. And we can't wait until it gets to full capacity.

Jamie Melzer - BofA Merrill Lynch

And are you expecting the ramp up of the full capacity in the second half of this year?

James Wainscott

Second quarter and really start tasting it the second half.

Jamie Melzer - BofA Merrill Lynch

Nice. Thank you.

Operator

Our final question comes from Brett Levy of Jefferies and Co.

Unknown Analyst -

This is David O'kovetski[ph] on Brett's behalf. My first question relates to the legacy liabilities. You guys have presented a fairly strict payment schedule. Just curious can that be pushed out by a year? Is there any flexibility with respect to the pensions or the OPEB or the VEBA?

James Wainscott

We don't need to push it out candidly. Our liquidity is strong. We feel very good about what we've done and what we'll do. I think as Al mentioned in his comments, we intend to make the remaining pension agreement. We've taken advantage of this 7 2 or 2 7, whatever it is. A legislation that has allowed us to reduce as many other companies have with defined benefit pension plans. And so our numbers are very manageable. We're very comfortable with them. The big VEBA settlement that we had at Middletown for all intents and purposes is done. The last payments have been done there. The Butler retiree settlement as far as smaller in scope, none-the-less important, but far smaller in scope. So I would just say that the big numbers are a lot smaller now. And they're very much within our capability to manage. So we're not seeking waivers or pushing things out or anything. Quite the contrary, we'll continue to do everything we can to meet and honor our obligations and further strengthen the balance sheet.

Unknown Analyst -

That's great to hear. And then I guess further on the liquidity side. You had a little bit of a working capital build this quarter. Was that more in anticipation of a strong second quarter? Or was that primarily to meet first quarter demand and I guess is there going to be a need for further working capital increases and revolver draws during 2Q?

James Wainscott

David, excellent question, and thanks for asking it. Sometimes it takes money to make money. And that was really the case in the first quarter. And we'll see the benefit of that in the second quarter. We're confident. As we improved our sales, as we rebuilt inventories to some extent with higher priced inputs, we see the effects of all of that. We also had a very large use of capital that is for capital investments. So it's working capital and capital investments as we wrap up the spending on the #5 EAF. And then coupled with that the pension contribution and the VEBA settlement. So there were a number of uses all made great sense in the minds of our management team and our Board. And we'll use our facility to the extent that it's a working capital based facility when we need to use it. But I think all of this is in an effort to continue to grow the company profitably and to generate that positive cash flow that we're known for doing over the years.

Operator

This concludes our question-and-answer session. I would now ask Mr. Wainscott for his closing comments.

James Wainscott

Just very briefly everybody. Although there will undoubtedly be challenges along the way, AK Steel expects a much better 2011 than 2010. And certainly a much better second quarter 2011 than first quarter. For years at our company, we have met and overcome challenges only to emerge as an industry leader. And we plan to do exactly that. Again in 2011, in service to our customers, employees, retirees and shareholders. Thank you, all, very much for joining us today. Have a great day and a 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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