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AK Steel Holding (NYSE:AKS)

Q4 2011 Earnings Call

January 24, 2012 11:00 am ET

Executives

James L. Wainscott - Chairman, Chief Executive Officer and President

Albert E. Ferrara - Chief Financial Officer and Senior Vice President of Finance

Analysts

Devin Corr

Brett Levy - Jefferies & Company, Inc., Research Division

Michelle Applebaum - Steel Market Intelligence Inc

Charles A. Bradford - Bradford Research, Inc.

David Katz - JP Morgan Chase & Co, Research Division

Kuni M. Chen - CRT Capital Group LLC, Research Division

Sohail Tharani - Goldman Sachs Group Inc., Research Division

Richard Garchitorena - Crédit Suisse AG, Research Division

Jonathan Sullivan

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

David S. MacGregor - Longbow Research LLC

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

Evan L. Kurtz - Morgan Stanley, Research Division

Operator

Good morning, ladies and gentlemen, and welcome to AK Steel's Fourth Quarter and Full Year 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.

Albert E. Ferrara

Thank you, Amy, and good morning, everyone. In a moment, I'll review our fourth quarter and full year 2011 financial results. Following my remarks, Jim will offer his comments, and together, we will field your questions.

Our comments today will include forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. Included among those forward-looking statements will be any comments concerning our expectations as to future shipments, product mix, prices, costs, operating profit or liquidity. Please note that our actual results may differ materially from what is contained in 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 we refer to material information that includes non-GAAP financial measures, the reconciliation information required by Regulation G is available on the company's website at aksteel.com.

Let me begin by reviewing AK Steel's results for the fourth quarter of 2011, which were reported earlier today. During the quarter, we continued to experience challenging market conditions, along with ongoing high costs for steelmaking raw materials. As a result, for the fourth quarter, AK Steel reported an adjusted net loss of $28 million or $0.26 per share. The adjusted result excludes a pretax non-cash corridor charge of $268.1 million related to our pension plan. The corridor charge relates to actuarial losses associated with our pension plan. Under our method of employee benefits accounting, we are required to recognize these charges immediately instead of amortizing them over time. The corridor charge in the fourth quarter was primarily due to a lower discount rate as well as earning a less-than-assumed rate of return on the plan's investments in 2011. Once again, I would emphasize the corridor charge is noncash.

I would also note that we have reduced our expected annual rate of return on the pension plan investment portfolio to 8% from 8.5% beginning in 2012. While this change will affect our reported income in 2012, it will not impact our future funding levels.

Shipments for the fourth quarter of 2011 totaled 1.4 million tons, an increase of about 3% compared to the third quarter and consistent with our guidance. Our average selling price in the fourth quarter was $1,070 per ton, a decrease of approximately 8% compared to the third quarter and in line with our guidance.

Revenues in the fourth quarter totaled $1,509,000,000, a decrease of about 5% compared to the prior quarter. Sales outside the U.S. continue to be an important source of revenue for us and totaled approximately $212 million for the quarter or about 14% of sales.

During the fourth quarter of 2011, raw material costs moderated slightly but continued to pressure our financial results. However, these costs were largely in line with our expectations.

We did benefit from a LIFO credit of $44.1 million in the fourth quarter compared to a LIFO credit of $9.5 million in the third quarter. Our LIFO credit for the fourth quarter was larger than we had anticipated due principally to certain year-end inventory levels that were lower than expected. Also due to the continued weakening of the euro, our fourth quarter results were negatively impacted by a foreign exchange loss of approximately $3.5 million.

On an operating basis, we incurred an adjusted operating loss of $32.6 million or $23 per ton for the fourth quarter of 2011, substantially better than our guidance of a loss of $40 to $45 per ton.

Turning now to our full year results. Shipments for 2011 totaled 5.7 million tons, a slight increase compared to our shipments in 2010. Revenues totaled nearly $6.5 billion, an increase of approximately 8% compared to 2010 revenues. Our average selling price in 2011 was $1,131 per ton, about 7% higher than 2010. And sales outside U.S. totaled $946.4 million for 2011, an increase of $123 million or about 15% compared to 2010.

We recorded an adjusted operating profit of $66.8 million or $12 per ton for 2011. That represents an improvement of about $128 million or $23 per ton compared to our adjusted operating loss of $61.1 million or $11 per ton for 2010.

Excluding the corridor charge which I mentioned previously, we posted an adjusted net income of $10.3 million or $0.09 per share for the full year 2011. That compares to an adjusted net loss of $59.8 million or $0.54 per share for the full year 2010.

Turning now to the balance sheet. Capital investments totaled $30 [ph] million during the fourth quarter and $101 million for the full year of 2011. Of special note, during the fourth quarter of 2011, we invested approximately $125 million to acquire iron ore and metallurgical coal interests. We announced these strategic acquisitions on October 4, 2011.

As expected, we generated a significant amount of working capital during the fourth quarter. In fact, working capital was a source of $203 million in cash in the quarter, and for the year, we achieved our objective of keeping working capital flat year-over-year despite higher average selling prices and increased raw material costs.

We also contributed to our pension fund. In the calendar year of 2011, we contributed a total of $170 million to the pension plan. For 2012, we are required to make pension contributions of approximately $170 million. Of that amount, we have completed a $29 million contribution earlier this month and we expect to make the remaining pension contributions of $141 million throughout the rest of the year. For 2013, our current actuarials estimate of a required pension contribution remains at approximately $300 million.

During 2011, we made our final contribution of $65 million to the Middletown Works retiree VEBA. In total, we contributed $663 million to the Middletown VEBA since 2008. We also made an additional payment of $32 million related to the Butler Works VEBA settlement. As part of that settlement, we will make cash payments over a 3-year period totaling $91 million. The remaining payments will be approximately $32 million in the third quarter of 2012, with a final payment of roughly $27 million in 2013.

Despite the challenging business conditions we faced throughout much of 2011, we ended the year in solid financial condition with liquidity of $559 million.

Finally, let me offer some comments about 2012. We expect to provide specific guidance for the first quarter of 2012 in March. Further, to improve the clarity of our guidance, beginning in March, we plan to provide earnings per share guidance rather than operating profit per ton guidance. We will continue to provide various other metrics such as expected shipments, average sales price and other helpful data points to enable modeling and analysis of our results. Let me provide some of the data points, though, for the full year 2012 at this time.

We anticipate total capital investments of approximately $150 million in 2012. This includes approximately $50 million for our 2 strategic investments in iron ore and coal. In total, we anticipate these strategic investments will be accretive to earnings in 2012.

I would point out that the financial results for AK Steel's 49.9% interest in the Magnetation LLC joint venture were reported as part of other income on our income statement. We expect to incur interest expense of roughly $60 million in 2012 and we anticipate that pension and OPEB combined will be a credit of $35 million on the income statement in 2012, which is about the same as it was for 2011.

Finally, with respect to income taxes, while we are projecting a book tax rate for 2012 of roughly 40%, we estimate that our cash tax rate will continue to be less than 5%.

Now for his comments, I'll turn it over to Jim.

James L. Wainscott

Thank you, Al. Good morning, everyone. I appreciate you joining us on today's call.

Although AK Steel's fourth quarter of 2011 was slightly better than we'd expected, it did represent our toughest quarter of the year. Even after excluding the pension corridor charge, the combined effects of lower production and lower selling prices nearly eroded our profitability from the prior 3 quarters of 2011. But despite a challenging fourth quarter, I'm pleased to report that, for the first year since 2008, we generated adjusted net income for the full year 2011. Once again, this is before taking into account the pension corridor charge that Al detailed. Compared to 2010, our financial performance in 2011 represented meaningful progress and we look for continued improvement in our results for 2012 and beyond.

In recent years, our margins have been squeezed by lower shipments, selling prices and operating rates, coupled with higher steelmaking input costs. However, our sense is that things are beginning to improve on a number of these fronts. For example, carbon steel prices are rising. All of our automotive customer contracts, that is, those that are longer than 6 months, now incorporate pricing mechanisms that allow for adjustments related to iron ore costs. Our operating rates are improving and we can see daylight on the raw materials front.

In 2011, we continued to manage those things that were within our control: employee safety, product quality, unit productivity and controllable cost. Let me highlight a few standout performances in these areas.

On the safety front, an outstanding performance was delivered by our Zanesville Works employees. The Zanesville had 0 OSHA recordable cases for the entire year, and on top of that, employees at that plant have worked now more than 3,100 days, that's about 8.5 years, without incurring an OSHA lost workday. These are fantastic accomplishments and I offer my sincere thanks and congratulations to the employees at Zanesville and to all of our employees for making safety their highest priority.

Speaking of our employees, in December of 2011, we announced that we'd reached an early agreement with the United Steelworkers union on a 3-year labor contract at our AK Tube Walbridge, Ohio, location. This agreement replaced the existing contract that was set to expire 2 days ago, on January 22, 2012.

For the remainder of this year, we have 2 additional labor agreements expiring: one at our Zanesville Works with the United Auto Workers that expires on May 20, 2012; and one at our Butler Works, which is also with the UAW, and that labor deal expires on September 30 of this year. In both cases, we're hopeful that we will be successful in reaching new labor agreements well ahead of the current contract expiration dates.

Moving from our employees to our customers. Our performance for our customers continues to lead the steel industry. In what is frequently perceived is, at commodity business, our superior quality is one of the most important ways in which AK Steel differentiates itself from its peers. Led by our Mansfield Works, for 2011 we established new internal quality performance records as our rates for internal rejections and retreated products came in at their lowest levels in the company's history.

In addition, our customers were very happy with our quality performances as well. Each quarter, an independent customer survey is performed by Jacobson and Associates that compares AK Steel to our most direct competitors. We're delighted with the results of this survey for the fourth quarter of 2011. I'd like to take a moment to share them with you now.

According to the Jacobson survey results for Q4, AK Steel was rated #1 in quality, service, on-time delivery and overall customer satisfaction by our carbon steel customers. And we were rated #1 in quality, service and overall customer satisfaction by our specialty steel customers. During the fourth quarter, we also received Supplier of the Year Awards from 2 of our fine customers, Kenwal Steel and Mapes & Sprowl. These are marvelous accomplishments and they're the result of tremendous work by our entire organization. Let me take this opportunity to thank all of our employees, from the shop floors to the executive offices, for continuing to put our customers first.

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

From a productivity standpoint, on average, our operating units ran at just north of 70% of capacity for the fourth quarter of 2011 and slightly more than 80% of capacity for the full year 2011. At present, we estimate that our units will operate between 80% and 85% during the year 2012.

Improving our yield performance was a major goal of ours in 2011, and not only did we succeed in doing so, but we actually set new yield records at numerous operating units and plant locations throughout the company. A real standout performer was our Coshocton Works where new productivity marks were set at the Z mills, temper mills and slitters, among other units.

Now let me shift from looking in the rearview mirror to looking ahead. Although, as Al said, we're not providing specific guidance at this time for our first quarter of 2012, let me give you some sense, at least directionally speaking, of what we are seeing and what we expect to occur this year. In short, there are a number of factors that, when taken together, should allow us to substantially improve our first quarter 2012 financial performance compared to that of 4Q of 2011. Although first quarter 2012 shipments will likely be lower than those of the fourth quarter, we expect to operate at significantly higher production rates to ensure that we can meet increasing customer requirements for the balance of 2012.

From an order book standpoint, we have experienced an increased order intake rate for carbon steel products over the past couple of weeks or so. Lead times are extending on all of our carbon products. As a result, we're in a stronger position at this point in the first quarter of 2012 than we were at this time in the fourth quarter of 2011.

Due to a higher level of demand and a need to recover higher steelmaking input costs, we've been raising prices in the spot market. Back since October 1, 2011, we've announced 3 spot market price increases for carbon steel products totaling $140 per ton for hot-rolled and $150 per ton for cold-rolled and coated products.

In 2011, we increased our contract sales participation and we expect to do more of that in 2012 and beyond. That said, let me emphasize that the spot market remains a very important market for AK Steel's carbon steel products. At a seasonally adjusted 2.2 months of supply on hand, service in our inventories of flat-rolled carbon steel remained below their historical average of about 2.4 months’ supply on hand. And importantly, service center shipment levels were fairly robust in the fourth quarter of 2011 at 108,000 tons per day. December's seasonally adjusted service center shipments were the third-highest month of the entire year. With the recent uptick in the marketplace, we've seen a number of service center customers trying to secure product in rapid fashion to meet the needs of their customers.

Moving to the automotive market. Coming off a strong recovery year in 2011, the automotive market appears poised to continue to improve, though still far below the pre-recession annual totals for automotive sales. Light vehicle sales improved to about 12.7 million units for 2011, and for 2012, the consensus expectation is for the sale of about 13.5 million vehicles. We're encouraged by this outlook and hope that, like 2011, this forecast proves to be a conservative one.

Let me offer a few comments on our contract pricing for 2012. At various times throughout the year, we have contract business that comes up for price renegotiation. To date, we've been successful in negotiating higher base prices with most of our contract customers. And as I mentioned, we also succeeded in expanding the coverage of raw material variable pricing mechanisms to help recover a portion of our future raw material cost increases.

Moving from carbon to specialty steels. As you may recall, for AK Steel, specialty steels consist of the stainless steel market and the electrical steel market. And further, within stainless steel, we serve 3 separate and distinct markets: the 400 series or auto chrome market, the 300 series or commodity chrome-nickel market and the specialty sheet and strip market.

With strong automotive demand, we're experiencing solid demand for our auto chrome or 400 series stainless steel products. As automotive builds increase and automotive customers replenish their inventories, we expect higher Q1 of 2012 shipments, as compared to Q4 of 2011 shipments of auto chrome products.

Similarly, we're looking for higher shipments of specialty stainless steel products in Q1 compared to Q4. These are products that are largely produced out of our Coshocton Works. Once again, customers including automotive, energy and appliance customers, among others, are replenishing inventories in anticipation of a continuing slow-but-steady economic recovery.

However, when it comes to commodity chrome-nickel products, as has been the case for some time now, distributors are only buying what they absolutely need and nothing more. That said, we have seen a seasonal uptick in demand and we've announced a 12% price increase effective January 1. In addition, yesterday, we announced another 5% price increase effective March 4.

On the electrical steel front, demand continues to be relatively weak both within NAFTA and internationally. Within NAFTA, the new transformer market continues to be slow as housing starts remain at historically very low levels. Similarly, exports of grain-oriented electrical steel are down as increased supply, a strengthening dollar and instability of the European economy have contributed to this weakness.

One bright spot within electrical steel continues to be steady demand for our high-efficiency TRAN-COR H or TCH products. Whereas the market for lower efficiency grades is currently oversupplied, things are in much better balance for TCH-grade products.

On the whole, we expect roughly similar electrical steel shipment volumes for 2012, as compared to 2011, and we would expect somewhat lower average electrical steel prices, perhaps about 2%, for our contract and spot market sales of that product line.

Moving to the steelmaking input cost front. We expect a better year in 2012 compared to recent years. Lower iron ore pellet costs and other input cost reductions are expected to more than offset increases for coal.

While the future certainly feels better than it has in a while, our ability to forecast much beyond a month or 2 remains difficult. Many of the same issues that caused us to change our guidance practice in the fourth quarter of 2011 remain the same today, including a slow and uncertain economic recovery, the lack of visibility on spot market orders and pricing and the continuing volatility of input costs, albeit to a lesser extent than was the case a quarter or so ago.

As we look down the road, 2 of the things that we are most excited about are the vertical integration investments that we made in October of 2011 in Magnetation and AK Coal Resources. Magnetation is already running its first concentrate plant and recently completed the installation of its rail load out facility. In addition, great progress has been made on the construction of its second concentrate plant, which is expected to begin operations in the second quarter of this year and ramp up production in the second half.

Magnetation also recently succeeded in securing substantially more tailing basins for future mining activity. This puts the venture in an even better position to achieve the strategy of a 3 million metric ton pellet plant by 2016 or, depending on permitting activities, possibly even sooner.

At AK Coal Resources, we continue to make solid progress on our mine plan and permitting activities. We're also exploring alternatives to accelerate our coal production there. Overall, we're off and running and pleased with the progress to date of each of these key strategic investments for AK Steel.

In 2011, we thought we were on the road to recovery as we were certainly ready and determined to restore profitability and add value for AK Steel shareholders, but candidly, the economy and raw material prices did not cooperate. In hindsight, it was a tougher year than we'd expected with lower-than-expected selling prices and higher-than-expected raw material costs.

Having said that, we've come through the most difficult economic downturn in recent history and maybe ever and we're still standing, still competing, and we find ourselves on the front end of an economic recovery with vertical integration initiatives set to kick in, in the years ahead that unlock great value for AK Steel.

As we look ahead to 2012, our team remains focused on creating and on delivering value for our shareholders. Great teams find a way to win, and we indeed will find a way to win in the year 2012. It'll take great teamwork to achieve what we set out to do last year, but our team is absolutely committed to improving our earnings and cash flow in 2012 and beyond. This year, we'll strive to tap our potential as we enhance our product margins, accelerate vertical integration activities and manage working capital better than ever as we endeavor to serve our customers better than any other steelmaker.

I have the great fortune to lead a terrific management team, with the support of a outstanding Board of Directors. Our team has a track record of success, and we're excited and ready to tackle our challenges in the year 2012 and beyond. I'm confident, with all that we've done and all we will do, that better days are ahead for AK Steel.

Lastly, every team is made up of its players, and one important player at AK Steel will be retiring at the end of this month. After more than 35 years of dedicated service, Alan McCoy, who has served as AK Steel's Vice President of Government and Public Relations, has chosen to retire. For his tremendous contributions to this company, I want to take this opportunity to thank Alan and wish him and his family well in his retirement.

Ladies and gentlemen, that concludes our prepared remarks and we're now ready to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Evan Kurtz of Morgan Stanley.

Evan L. Kurtz - Morgan Stanley, Research Division

A couple of questions. First, just on electrical, you mentioned that pricing might be down about 2% this year. Just for clarification, is that your overall pricing between international and domestic, or is that just NAFTA contacts?

James L. Wainscott

That's really an overall comment, just trying to give you some sense as you do your models. I don't know that we'd break it out any more finite than that.

Evan L. Kurtz - Morgan Stanley, Research Division

Okay. And then also, just noticing over the past few quarters, your cold-rolled shipments have been trending down; hot-rolled, secondarily, spiked in the fourth quarter. And I just wanted to kind of get behind what's driving that mix shift, and is that something that we can probably see reverse over 2012?

James L. Wainscott

It's a great observation. It's something we talk a lot about internally. I think a lot of it depends on what customers are looking to buy. We only make what we sell. So, but I think it's our desire to be more of a value-added player and I think you'll see us shifting more from hot-rolled to cold-rolled and more cold-rolled to coated products. Candidly, at this point, most of our coating units are full, with the exception of the EG line, but there's activity going on there, as well. So yes, I think it's a good observation and I think you'll see that shift back to sort of a more normal territory for us here in future quarters.

Operator

Our next question comes from Luke Folta of Jefferies.

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

Question on the raw material side. You talked about coal prices stepping up for you in 2012. Can you give us a sense of the magnitude there? And also, on iron ore, you'll be benefiting from lower contract prices in the first quarter. Can you give us a sense of, on the timing and how that flows through?

James L. Wainscott

Let me, it's a big area, let me just sort of kick it off, and then certainly, Al can chime in as well. I would say we're delighted this year that, on the whole, we expect a lower steelmaking input cost. It has been many years since we've been able to make that statement. And so there are a number of things behind that. Certainly on the iron ore front, our iron ore costs are going to be down this year. After peaking at nearly $200 a ton, we saw a fairly significant drop in iron ore pricing, but it's moderated back in that $140-or-so range. We had iron ore pricing, I would guess, somewhere in the $165, $167 range for the fourth quarter. It's still going to be $160-ish in the first quarter. What's going on there, Luke, is we have some carry-over tonnage. And the other thing to keep in mind is, the way that those costs work, for example, first quarter of 2012, pricing for iron ore is based on the 3 months that ended 11/30 of 2011. So there's a bit of a lagging effect, which is another way of saying that, as we get into the second quarter and the second half of this year and particularly with the ramp-up of Magnetation, we really expect to enjoy the benefits of lower iron ore costs flowing through our product costs. With respect to coal, I'd just offer a couple of thoughts. First, you will recall that we benefited in 2011, to some extent, from the timing of when we got our deals done. Our deals were concluded largely before the Australian floods occurred and prices escalated. We have gotten good deals done, we think, this year but they're off a higher base in light of the success we had in 2011 and they're roughly in line with where the market is today, maybe slightly ahead of that. But rather than breaking out coal and coke and iron ore, I would just say that, overall, we're delighted with what's going on there. And then the other thing I'd just add I'd be remiss if didn't is, to the extent that we're wrong with iron ore, we do have the ability now with our contract business, all of our automotive customers I mentioned, those deals that are greater than 6 months in late -- in length, rather, we're able to pass that through, through a variable pricing mechanism and that gives us a good income [ph]. So I think the volatility that we've seen in years past, and it's been enormous with respect to things like iron ore, should be dampened considerably.

Albert E. Ferrara

All I would add, Jim, is in addition to dampening that volatility will be the variable pricing mechanisms that we incorporated into our commercial contracts. So in the future, we'll further lessen some of that impact.

James L. Wainscott

Right.

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

Okay, and then just a follow-up on that. With those moves in mind in raw material costs, and we've seen some increase in steel prices, I mean, do you think that you guys are going to able to generate a profit in the first quarter?

James L. Wainscott

If we were going to give you our guidance, we would have given it to you, but we'll be doing so in March, and when we have more clarity on that, we'll be there. I think everything we're trying to tell you is we look for a substantially better first quarter and a better year for all the reasons that we've noted, but we haven't quantified it just yet.

Operator

Our next question comes from Brian Yu of Citi.

Jonathan Sullivan

This is actually John Sullivan, filling in for Brian. I just had a quick question on the domestic carbon steel markets. I was wondering if you could talk a bit about the state of competition both in terms of imports and other domestic producers.

James L. Wainscott

Well, let me just say that, I think as noted in my prepared remarks, we've seen a bit of an uptick. We've utilized that opportunity as we independently took a look at our order intake rates and our cost situation and the need to recover those costs, to not be shy about raising prices, we've done that. And we are realizing that. I think, as orders have picked up, the traction has been gaining in terms of the degree that we're realizing those price increases and I think that's certainly a positive for us. Candidly, we think that there's further upside potential, John, here for pricing as customers replenish what I referred to as relatively low inventory levels and as our raw material costs, while they're better, still remain very, very high. In terms of the state of competition, as you know, it's a tough business, it always is, and I think a lot of people focus on increased capacity coming online and sort of how does that play with imports. I think we're probably at or near an inflection point. We haven't seen a big rush of imports, but I think we continue to hear more and more at these pricing levels that some of that may come. We'll keep a close eye on that and monitor it carefully as we have continued discussions with our customers.

Operator

Our next question comes from Richard Garchitorena of Crédit Suisse.

Richard Garchitorena - Crédit Suisse AG, Research Division

So I just wanted to clarify on the raw material, on the iron ore from Q4 being at $160 in Q1, likely would be $160 [ph] per ton as well. Should we expect the $140 that was the average in Q4 to be the average assumed in Q2, is that fair?

Albert E. Ferrara

Well, what you're talking about there, Richard, is just the way the IODEX works in the sense that, clearly, the, when you talk about Q4, clearly, there is that delay that comes about our prices for the fourth quarter were set by the end of August and, of course, for the first quarter, at the end of November. So clearly, that flows through. What Jim was saying, though, is there are some factors in the first quarter that impact us, specifically in the first quarter, but as the year works through and that IODEX declines, if you will, we will benefit on a delayed basis, going forward, in other words, largely starting in the second quarter.

Richard Garchitorena - Crédit Suisse AG, Research Division

Okay, and that's, you'll still see that, great. And then also, assuming the higher utilization rates, that there's -- can we assume that it also helps on a cost per ton as well?

Albert E. Ferrara

Clearly, if you increase utilization, it will be beneficial to us. It is one of those things as you operate more efficiently. Clearly, those costs will flow through and that will be a benefit to us in the first quarter, no question about it.

Richard Garchitorena - Crédit Suisse AG, Research Division

Great. And then last question, just in terms of volumes. With the 80% to 85% utilization rates, is that basically all your operations carbon and electrical and stainless? Is that...

James L. Wainscott

Richard, it's an overall number that we gave just for comparative purposes. It really does fluctuate, depending on demand for certain products. But I think that it's fair to say that it's indicative of what we're seeing just about everywhere. And it's a better number, but we're a high-fixed-cost type operation, we want to make even more. 80% to 85% is better than it's been, but it's certainly not anywhere near where we want to be.

Operator

Our next question comes from David Katz of JPMorgan.

David Katz - JP Morgan Chase & Co, Research Division

I was hoping that we can come back to the pensions. If I heard you right, Al, I thought you said that, this year, it would be $170 million, and the next year, $300 million, is that correct?

Albert E. Ferrara

That is correct, David, yes sir.

David Katz - JP Morgan Chase & Co, Research Division

Okay. And if we're looking at the cash flow statement, you guys have that line, pension and OPEB expense, in excess of payments, and that's been running between $25 million and $30 million a quarter for the past 8 quarters. Do you expect that to run the same in 2012 and '13?

Albert E. Ferrara

We would be looking for something in that area, probably around $150 million in 2012. That's the difference between what our pension and OPEB credit will be about $35 million versus what we will be paying actually in healthcare and related expenses of about $80 million. And so when you aggregate those 2 together, the $35 million credit plus the $80 million in cash, it comes about $115-ish, if you will. That can fluctuate during the year, but I that's a pretty good estimate right now.

David Katz - JP Morgan Chase & Co, Research Division

Okay. And then as we look forward, obviously, that implies a cash outflow imbalanced [ph] against the better results, which you guys have highlighted that you expect on the call. In the past, you've mentioned that you anticipated coming to the market for some long-term financing to match the long-term assets that you've purchased. Do you have a time line on that?

James L. Wainscott

I'd just offer, if I could, Dave, that we financed these 2 major acquisitions, or joint ventures as the case maybe, last year really out of cash and working capital. I think most companies tend to match their long-term investments with longer-term financing, as opposed to using their credit facility. So we're always exploring really the best capital market options to support the long-term growth and sustainability of the business. And I think it's fair to say that, if the Board elects to do something along those lines, we'll pick our spot and access the capital markets to support those projects and perhaps others down the road as well, but nothing to announce today along those lines.

Operator

Our next question comes from Sal Tharani of Goldman Sachs.

Sohail Tharani - Goldman Sachs Group Inc., Research Division

Can you give us some insight on your natural gas contracts? Would that, the lower natural gas pricing will help you, or are you hedged out for the year?

James L. Wainscott

Sal, natural gas is a good guide for us this year. I don't know that many of us can remember the gas Strip in the 250 to 350 range, but it's a wonderful thing. As gas has been falling, we've been advantaging ourselves of that falling price as we have been hedging our position. And we haven't entirely hedged our year, but I would say we're mostly hedged so that, to the extent that gas falls further, we may not enjoy as much of it. On the other hand, to the extent that gas goes back to more normal levels, it isn’t going to cost us, either. So I don't think that there's a material movement there other than, year-over-year, it's certainly a positive for us.

Sohail Tharani - Goldman Sachs Group Inc., Research Division

Okay. And Jim, I think you mentioned that first quarter shipment will be lower than fourth quarter. Is that correct?

James L. Wainscott

Yes, I think, marginally so. I don't know, we haven't given guidance along those lines. There's still some opportunity that we're playing through. A lot of it, Sal, would relate to the business that we've gained particularly in the contract arena. And to serve contract customers, you have to have a degree of inventory on hand: They kind of look in the pipeline and want to make sure it's there. And all of them are telling us that they're looking for a better year. They want us to be ready to support increasing pools and that's part of the reasons, so you're constantly balancing where you should be. And in our case, we've been moving more towards contract, a little bit away from spot. I think the last year was close to 60-40, and we hope to take that into the 60s this year with increased contract business. So that's one of the reasons behind that.

Operator

Our next question comes from Mark Parr of KeyBanc.

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

Just to follow on, on the contract-spot mix, could you give us some idea of the amount of base pricing momentum in the contract arena for '12 versus '11?

James L. Wainscott

I don't know that we would be comfortable giving individual percentage increases, except to say that we have been successful in getting higher base prices. A lot of it depends on when the last deal was done, how long it was and what base price you started from. But again, these are relationships. We do our very best that we can to make sure that our customers know, just as I mentioned in my prepared remarks, we're there, to provide great quality, delivery and service, that's worth something to most of our customers, if not virtually all of our contract customers. And we've got various other deals that are coming up throughout this year and we would expect in those cases, just as in those that we've already gotten deals done, to get higher base prices as well. And we'll continue to push for coverage on the input costs. It is an education process, it's a communications process. All of them have a varying degree of desire to accept risk and we understand that. We're working closely together. But base prices are up and they need to be.

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

Okay, that's really helpful. Just another thing, just along those lines, with the success that you've had in shifting the contract language to more variability, can you give us some idea of how much the lack of variability cost you in 2011 that you will -- that will not be recurring this year?

James L. Wainscott

Do you want a stab at that, Al?

Albert E. Ferrara

Well, I think that's, all we can say, Mark, is that we believe it will be positive. It's very difficult to ratchet that on a year-over-year basis. It was a challenge last year. Our raw material costs went up last year over $500 million so we didn't cover any near as much as that, as we should have. I think we're positioned very well for the future in terms of taking a lot of that risk off the table, but like I said, it's very tough one on saying what would it have been last year if we would have done things differently. We prefer to look to the future and say we think we're very well positioned, going forward, and continuing every day to improve our relative position on our costs.

James L. Wainscott

Let me just add on to Al's point: Raw materials and our lack of vertical integration over the last 7, 8 years anyhow that we've been counting, has cost us something north of $2 billion. Now, it's annualized at a $2 billion rate. It's really eaten our lunch. We are delighted that we have begun to take care of that situation with our new strategic investments, coupled with the great relationships that we have with our customers. And so I think those 2 things really make us feel pretty good, almost no matter what direction those input costs go in terms of where we are in the future. It's a new day for AK Steel.

Operator

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

Michelle Applebaum - Steel Market Intelligence Inc

Can I ask 2 questions?

James L. Wainscott

Yes.

Michelle Applebaum - Steel Market Intelligence Inc

Okay. The first one was about electrical steel. You filed an 8-K a few days ago with some new disclosure in it and the main new disclosure in the 8-K was about a pending proposal from DOE in February of 2012 revising energy efficiency standards that could impact that the DOE may change the efficiency standards in a way that could substantially reduce or even eliminate the competitiveness of electrical steel for use in such transformers. This would result in a decrease of AK Steel's sales of electrical steel and adversely affect et cetera. I was just wondering if -- the only disclosure we have is the risk factor, you're now talking about -- now can you give me a little bit more color since electrical steel has been such a key part of your P&L the last few years and such a great profit center for you?

James L. Wainscott

Happy to do so. Thanks for raising it. First, I'd just suggest that, for all of you on the call, that you read the risk factors contained in our public filings, including our latest one, and any discussion here really doesn't begin to substitute for the breadth of those comments, so I just want to make that statement upfront. We did have a filing here recently, and as you know, whenever there's a securities offering, there is a pretty broad reach and we felt that, in light of a recent development here, a potential near-term development, it was worthy of disclosure. A little bit of background: The Department of Energy has been looking at standards for electrical steel for a while and they've indicated, the DOE has indicated, that it will publish proposed standards on or before February 1, 2012, which is not long from now. We have had a prominent position in forming a group, if you will, of interested parties who have a particular perspective on this, includes other producers, manufacturers of transformers, utility groups and various labor unions as well to make our case. And our central message is simply this: that we want to make sure that a lot of thought is given to really balancing the need for energy efficiency and the economy because, depending on what standards might be proposed, a situation could arise such that a foreign-owned company might be given monopolistic pricing and potentially sole sourcing of a product and that's not a good thing for us, it's not a good thing for other producers or manufacturers of the product. So there is more to follow, and certainly, the final standards, as we understand it, wouldn't be out until October 2012 or beyond. But given the state of activity there, we felt it was worthwhile to raise it as a bit of a risk factor.

Michelle Applebaum - Steel Market Intelligence Inc

Okay, great, and I'm glad that you've put that out there. So it sounds like we really don't know anything yet.

James L. Wainscott

We really do not, Michelle. And I think we're hopeful that good, calm and constructive heads will prevail in terms of what makes sense here. We're always, as a company and, I think, as an industry, about energy efficiency. It just has to be balanced with the economics.

Michelle Applebaum - Steel Market Intelligence Inc

Okay, great. I want to ask the second question now. So forgive me, I do this green eyeshade thing on accounting, but I teach securities and analysis so I have to be true to that. So on the LIFO in the fourth quarter, you had $44 million credit, but of the $44 million, $46 million was actually for the prior 9 months. So if you had, had great crystal ball, you would have had a $2 million LIFO charge for the fourth quarter, am I getting that right, Al?

James L. Wainscott

I'm going to respectfully hand that over to Al.

Michelle Applebaum - Steel Market Intelligence Inc

Yes, so I'm going to Al here.

Albert E. Ferrara

Michelle, our LIFO expense for the year was $10 million, and so, in theory, correct: that had we known what we knew at the beginning, we would have had a LIFO charge, if you will, of $2.5 million per quarter throughout the year. But as you know, we started out the year with an expectation at the beginning of the year that we would have a LIFO charge of $100 million, which is why we accrued $25 million in the first quarter, and then of course, that adjusted to another $38 million in the second quarter. And then we had a $9 million credit in the third quarter, and then ultimately, the $44 million credit. So the point of that is you are correct, that throughout the year, that our charge was $10 million so it would have averaged $2.5 million. But we only knew what we knew and that was why we essentially adjusted debt and trued it up each quarter.

Operator

Our next question comes from Charles Bradford of Bradford Research.

Charles A. Bradford - Bradford Research, Inc.

Can you talk a bit about advanced high-strength steel in this Generations 3 version that some of your competitors are now crowing about and whether you can make it or not and how important it is or could be?

James L. Wainscott

Yes, we can make it, for whatever reason, we were not mentioned in today's Wall Street Journal article on the other competing materials and so forth. It is obviously in vogue, it's the material of choice. Steel, for that matter, is the material of choice when it comes to making automobiles, I don't think any of us want to drive around in a sponge car or, for that matter, probably an aluminum car and particularly if it gets banged up or it needs to get repaired. But the fact of the matter is that, with the administration's push and all of our desires for, again, energy efficiency at a price, we are about that. We have a number of relationships with various folks around the world, in Asia and in Europe, that we share technology and how to produce and we indeed are in that market and are continuing to look for opportunities to grow our position there.

Charles A. Bradford - Bradford Research, Inc.

So Severstal is not the only maker in the U.S., as they claim.

James L. Wainscott

I think their gentleman may have said that and he may feel strongly about that, and that's fine, that's his prerogative, but it's not accurate. There's obviously ongoing research for many new grades we're involved with as well.

Operator

Our next question comes from David MacGregor of Longbow Research.

David S. MacGregor - Longbow Research LLC

Congratulations, first of all, on getting the pass-through into your automotive contracts on the raw materials. What percentage of the non-automotive contracts are going to include raw material pass-through?

Albert E. Ferrara

Well, I think what we've generally said, David, is that about 90% of our agreements have raw material pass-throughs. We haven't delineated that between automotive and non-automotive. And like I said, we continue to move in the direction of trying to maximize that. And ultimately, we, our hope is to be up to 100%, but we’re at about 90% of our total contractual agreements have some component of a raw material pass-through, and we're continuing to add to that as time goes on.

David S. MacGregor - Longbow Research LLC

Is there a wide degree of variance in terms of how these pass-throughs are structured? Or is there more of a common architecture, like in your austenitic business?

James L. Wainscott

Dave, it's Jim Wainscott. There are many different mechanisms, and just as with each customer and their desire for different kinds of steel, there's different contracts. I don't know that it would benefit us to get into that, except to say that there are certainly trade-offs between floors and ceilings or other things in terms of when certain things kick in. And all of that really is part of the greater negotiations that go on in trying to meet our customers' needs.

David S. MacGregor - Longbow Research LLC

Okay, good. On the working capital, are there 2012 targets for the full year you can share with us?

Albert E. Ferrara

Well, the only thing is, David, is we recognized, last year, we were able to achieve our goal of essentially having working capital flat year-over-year. That's always our goal. Clearly, this year, we're into our revolving credit, somewhat more than we wanted to be. Jim, I think, explained why that was. But like I said, I think, on an ongoing basis, our goal is to minimize the use of our working capital through minimizing your inventories, maximizing our payables and keeping our accounts receivable low through our, limiting our days sales outstanding down to about 30, 31 days. But your upshot is we don't have any public goals other than to say that our goal each and every year is to maintain working capital flat year-over-year, and like I said, the last several years, we've been able to achieve that. We'll continue to do that this year. Obviously, it always presents a challenge in an up market, but we think we have the wherewithal to do just that.

Operator

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

Brett Levy - Jefferies & Company, Inc., Research Division

Can you, I know you said that the order books have stretched out a little bit, can you talk through by carbon steel or specialty steel, et cetera, a rough sense, everybody sort of seems to say that they're full for the quarter, can you guys sort of talk by product area just how far the order books have stretched out? And then a little bit about the difference between international prices, particularly Asian prices, and prices here and how you're keeping imports off these shores.

James L. Wainscott

I would say that lead times are extending. We do still have some product to sell but not a vast amount. For carbon steel, I would say hot-rolled is now out to end-of-February kind of time frame, for hot-rolled, that is. For coated and cold-rolled, we're well into March, perhaps late March for coated kind of thing. And for stainless, again I would say it's probably out into the March time frame. So that's pretty good particularly as you look back at recent years, the first quarter, where things are at. We feel comfortable about that. We're keeping an eye on imports, it hasn't been a problem yet. But again, given some of the economic decline in China, we're always mindful of what might come if they continue to employ people and make product, and a bit of a sneeze over there could cause a real cold or pneumonia for us, but there's nothing individually we can do other than to monitor that situation and try and provide great quality and delivery. The fact of the matter is we're domiciled here, we're able to serve customers here very, very well. I guess about 80%-plus of the business that we have is NAFTA based and so we're well positioned to serve our customers very timely. That cannot be said with a number of others, including some of the startups.

Brett Levy - Jefferies & Company, Inc., Research Division

All right. And then the other one relates back to pension. You mentioned $170 million in cash payments in 2012, a bit below the kind of the target. Can you sort of guesstimate at 2013 cash payments at this point, based on that number?

Albert E. Ferrara

We've indicated our cash payments in 2013 will be approximately $300 million.

Operator

Our next question comes from Kuni Chen of CRT Capital Group.

Kuni M. Chen - CRT Capital Group LLC, Research Division

Just a quick one, I think most my questions have been asked already. Can you just give us some view on any major outages or maintenance planned throughout the year, which we should be thinking about?

James L. Wainscott

Kuni, we are currently thinking in terms of probably 2 blast furnace stops, 1 is a little bit larger than the other. At the present time, it would likely be a third quarter event at the Ashland blast furnace, costs somewhere in the $10 million to $15 million range, to be determined. The other would be likely a fourth quarter event at Middletown. We haven't really taken a stop there since we had our major reline a couple of years ago or so, I guess it will be 3 years, really, coming up. And so that's going to run, again probably knocking on the door of $10 million as we're going to do some other things at the BO shop. So I would say those are the 2 big guys and they're really just to continue to position us well. As you know, we have a very good maintenance program, it served us very, very well over the years. We don't want to go any longer than we can or we need to so we'll be taking those and we'll plan accordingly. And it will be another reason why inventories, from time to time, will vary throughout the year. But those are the big ones. We'll take hot strip mill outages and other outages as conditions warrant and as we need to maintain the equipment, but those are the 2 big ones I'd mention.

Operator

Our final question comes from Timna Tanners of Bank of America.

Devin Corr

This is actually Devin Corr. Tim had to step off for another commitment. Just a quick question, a lot have been asked. Was [ph] a large destocking into Q4. Do you have any plans to restock in the near future? I know you mentioned flat working capital year-over-year. Just wanted to see kind of what you're thinking on a restock as we go into Q1.

James L. Wainscott

I think there is an element of that, Devin, that occurs, and that's really very typical. It's a seasonal kind of thing for us. The second and third quarters tend to be stronger quarters. Also, you bring in a degree of raw materials this time of year. As Al talked about, our goal on working capital for the year as a whole is to stay flat, that's been challenging. And as we continue to grow our sales and increase contract business, it'll be even more challenging. We, from time to time, put a task force together to look at working capital, but I remind our group that, while the task force efforts may be done, the task is just beginning. This is a way of life for us. We are very focused on managing working capital. But I think you'll see a bit of working capital growth just to take advantage of shipment opportunities in the second quarter and the second half.

Albert E. Ferrara

We should say that working capital will largely increase in the first quarter, I mean, as this normally does. And as Jim mentioned, with the build there and to build inventories for the second and third quarter, but working capital will be a consumer of cash in the first quarter.

Operator

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

James L. Wainscott

Ladies and gentlemen, as we sign off, I just want to take this opportunity again to thank you for your interest in and your continuing support of AK Steel. We hope that you can join us in about 3 months for our First Quarter 2012 Conference Call. And until then, we wish you a great first quarter and a much better year in 2012. Thanks very much, and have a great day.

Operator

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

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