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AK Steel Holding (NYSE:AKS)

Q2 2012 Earnings Call

July 24, 2012 11:00 am ET

Executives

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

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

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

Analysts

Evan L. Kurtz - Morgan Stanley, Research Division

Sohail Tharani - Goldman Sachs Group Inc., Research Division

Patrick Marshall - CRT Capital Group LLC, Research Division

Arun S. Viswanathan - Longbow Research LLC

Michelle Applebaum - Steel Market Intelligence Inc

Anthony B. Rizzuto - Dahlman Rose & Company, LLC, Research Division

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

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

Aldo J. Mazzaferro - Macquarie Research

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

Justine Fisher - Goldman Sachs Group Inc., Research Division

Charles A. Bradford - Bradford Research, Inc.

Shneur Z. Gershuni - UBS Investment Bank, Research Division

Operator

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

Albert E. Ferrara

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

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

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.

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

James L. Wainscott

Thanks very much, Al. Good morning, everyone, and thanks to each of you for joining us on today's call. Excluding the deferred tax asset valuation allowance, which Roger will cover in some detail in a moment, AK Steel's second quarter 2012 results represented a significant improvement compared to our first quarter of this year performance as we increased our operating profit to $42 per ton in Q2, compared to only $3 per ton in Q1. In many respects, it was our best quarter since the second quarter of 2011 when we generated an operating profit of $46 per ton.

Quarter-over-quarter, EBITDA nearly doubled as we generated EBITDA of about $88 million for Q2, compared to about $48 million for Q1 of 2012. Thanks to strong cost and outstanding quality performances, we exceeded our earnings guidance for Q2, again excluding the charge for the deferred tax asset allowance.

Despite the challenges of a sluggish domestic and foreign economies and their impacts on our shipment volumes and selling prices at AK Steel, we remain keenly focused on 3 things: first, taking care of our people and keeping them safe; second, serving our customers better than any other steelmaker and providing them with the best possible quality steel products available anywhere; and third, creating long-term value for our shareholders. This has been our approach, and going forward, it will continue to be our focus. So with those things in mind, let me take a moment to comment briefly on how well we're performing on each objective.

Starting with safety. On the employee safety front, we continue to educate, equip and enforce our safety program with the finest workforce in the steel industry. For all of 2011, our safety performance results in terms of OSHA recordable injuries led the steel industry by a factor of 6x. And through the first half of 2012, our safety performance has actually improved by about 10%. These results are a credit to all of our employees, and I commend them for making safety their highest priority.

During the quarter, AK Steel's Coshocton Works received a special award for safety from the state of Ohio for operating nearly 3 million man-hours from February of 2008 through August of last year without a single lost-time injury. Also during the quarter, AK Tube's Walbridge, Ohio plant was honored for its astounding safety performance. It received the 100% Award for Safety from Ohio for operating the entire year 2011 without any lost-time injuries or illnesses. These are marvelous achievements, and I congratulate the men and women of Coshocton and AK Tube Walbridge. We will continue to do everything we can to ensure the safety of our employees and our contractors who work on our property each and every day.

Speaking of our employees, I'm happy to report that just last week, we reached an early agreement on a new 4-year labor contract with our Butler Works employees represented by the United Auto Workers. This new agreement provides a competitive and flexible labor contract for the company and for our Butler Works employees. I might add that we have no other labor agreements expiring in 2012. Our next expiring contract is on April 1, 2013, with the UAW representing our Coshocton Works plant.

May I also take just a moment to comment on AK Steel retirees as we continue to meet our legacy obligations to them. During Q2, to complete our required pension funding obligations for 2012, we contributed $142 million to the pension trust. This brings our full year 2012 pension contributions to $170 million. In addition, it brings our total contributions to the pension trust since the year 2005 to $1.5 billion.

As we look out to 2013, due to a provision that was included in the recently passed transportation bill, our required 2013 minimum contribution will be lower by about $100 million. That is, instead of $300 million, we'll now plan to contribute approximately $200 million.

To be clear, this legislation has no impact on the discount rate utilized to calculate the pension liability on our books or on our intent to fully fund that pension liability. As in the past, our pension liability will continue to be determined by applying the appropriate discount rate at the end of each calendar year. The new legislation is entirely directed towards stabilizing how pension funding is calculated.

In determining future pension funding requirements, companies such as AK Steel with defined benefit pension plans will apply an interest rate that uses a 25-year averaging method in determining the funding amount. We applaud the leadership of the U.S. House of Representatives and the Senate for recognizing the need to fix this and for getting the job done.

Moving from our employees and retirees to our customers. Let me provide you with updates on our product quality and customer satisfaction. During the first half of 2012, our internal quality measures were simply superb. Our total company performances for internal rejections and retreated products each set new company records for the second quarter and for the first half of 2012.

Moving from internal to external quality measures, our customers also liked very much what they were seeing from us and what we were doing for them in the second quarter. We appreciate the business we enjoy from all of our customers, and one of those customers, Chrysler Corporation, chose to honor AK Steel during the second quarter with its Metallic Supplier of the Year Award. In fact, we understand that we were the only metallic supplier worldwide to receive this award on the basis of our quality, delivery, cost and service. We thank our friends at Chrysler for this very prestigious honor.

And on a broader basis, once again, AK Steel fared very well in the Jacobson independent survey of our carbon and specialty steel customers. For the second quarter of 2012, AK Steel received the following rankings from our carbon steel customers: #1 in customer service; #1 in quality; and #1 in on-time delivery. These performances translated into a #1 rating in overall customer satisfaction in our carbon market among our integrated competitors.

And on the specialty steel front, AK Steel received high marks as well, including a #1 ranking in customer service and a #1 ranking in quality, which taken together, resulted in a #1 rating in overall customer satisfaction from our specialty steel customers as well. These outstanding performances in service to our great customers happened because of a terrific effort and attention to detail. They're the result of our employees going above and beyond expectations, and I congratulate all of our employees on making and finishing great quality steel, keeping our customers happy and staying safe in the process.

While we're on the subject of customers, let me take a few moments to provide some insights on what we're seeing in the markets that we serve. As most of you know, AK Steel is unique among its peers in the steel business, especially those in the United States. Utilizing both blast furnace and electric arc furnace technology, we manufacture a high value-added, well-diversified product mix of carbon, stainless and electrical steels to our customers in the U.S. and abroad.

In terms of the carbon steel market, we continue to see strength from our automotive customers. Our automotive customers are experiencing higher sales and production, which is the driving force behind increased steel shipments of both our carbon and autochrome stainless steels. At AK Steel, our direct shipments to automotive customers increased by about 20% for the first half of 2012 as compared to the first half of 2011.

In the second quarter of this year, light-vehicle sales were at their highest level since the second quarter of 2008. And after a pause in the third quarter for traditional maintenance shutdowns, which, by the way, are much shorter this year than in recent years, we expect automotive production and sales to continue to remain quite strong for the balance of this year.

Automotive inventories remain in good shape as well at the end of June. Light-vehicle inventories of domestically produced vehicles stood at some 61 days, which is consistent with recent historical levels.

Speaking of inventory levels, let me briefly comment on inventories at service centers. Historically, carbon flat-rolled inventories at service centers have averaged about 2.4 months of supply on hand. Although distributor shipments declined somewhat in June, seasonally adjusted inventory levels as of June 30 stood at 2.5 months on hand, essentially in line with historical levels. That said, I think it's fair to say that service center buyers continue to exhibit a cautious buying mood. Oversupply relative to demand; the actions of now bankrupt RG Steel and for-sale TK Alabama; and an increase of imported, flat-rolled steel products have all led to a decline in selling prices late in the second quarter in the United States.

The other large market that we serve is the infrastructure and manufacturing, or what we refer to as the I&M market, which includes appliance and HVAC manufacturers, as well as other steel-consuming industries. I&M activity has been rather uneventful, as appliance and HVAC customers continue to see relatively flat demand. As with the electrical steel market, we really need a pickup in the construction markets to spark increased appliance and HVAC activity.

With that, let me move from carbon steel to specialty steels. Our specialty steel products serving the automotive market were in particularly strong demand during the second quarter and we expect solid demand to continue in the third quarter as well.

Commodity 300 series stainless steel sales increased as service centers slowly began to replenish diminished inventory levels. However, once again, imports of commodity stainless, especially from China, increased in the second quarter to the highest level seen in the past year. We expect more of the same in Q3 on the commodity stainless product.

Demand for our 400 series stainless steel used in automotive exhaust applications was strong, as customers replenished inventories and as auto builds increased. As a matter of fact, we set a new quarterly record for our company for autochrome shipments to NAFTA customers in Q2.

Our specialty stainless steel shipments, that is, products that we produce at our Coshocton Works, which include specialty applications for appliance and industrial manufacturers, saw a nice increase in Q2 and we expect similarly strong shipment levels to these markets in Q3.

Historically, stainless steel service center inventories have averaged about 3.5 months of supply on hand. That compared to a seasonally adjusted figure of some 2.8 months of supply on hand at the end of June. Similar to carbon flat-rolled steel, we're closely monitoring the recent decline in June distributor shipments for stainless steel.

And finally, regarding grain-oriented electrical steels, although our first half 2012 shipments are down compared to the year-ago first half, we did experience a slight increase in second quarter 2012 shipments compared to the first quarter shipments of this year. Most of our electrical steel growth has come in the NAFTA market as world economies, most notably Europe, slowed, and that resulted in increased pricing pressure on our electrical steel products in the second quarter. For Q3, we look for those trends to continue, with reduced international shipments largely offset by higher shipments to our NAFTA customers.

Let me offer just one other comment on electrical steel. During the second quarter, the World Trade Organization concluded that China had no legal basis to impose antidumping and countervailing duties on imports of grain-oriented electrical steel from the U.S. beginning in December of 2009. We applaud the WTO decision and we're grateful to United States Trade Representative, Ron Kirk, and his staff for their efforts to defend the rights of U.S. manufacturers on this important matter.

As one of the largest and most technologically advanced producers of grain-oriented electrical steels, we are helping to meet the needs of the developing world for efficient power generation, transmission and distribution. And we're delighted that the WTO agreed with us that there was no basis for the imposition of tariffs on our GOES steel sold in China. However, China has the right to appeal the WTO decision to the WTO Appellate Body. They have chosen to do so. As a result, the tariffs will remain in effect during the appeal process. I should add that since the nearly 20% tariffs were imposed against AK Steel, significant new electrical steel capacity has come online in China and elsewhere in the world.

Before turning it over to Roger for a review of our financials, let me briefly comment on the third major focus at our company: creating long-term value for our shareholders. Everything we do, everything do at AK Steel from the shop floors to the executive offices is intended to add value, both in our products, and in particular, for our owners.

In recent years, we felt the pain, and so have our shareholders, as lower shipments and prices, as well as higher steelmaking input costs, have squeezed our profits and our cash flow. Every day we utilize a continuous improvement approach, and the results of that approach are evident in our industry-leading safety, quality and productivity performances. All of this is in an effort to improve our top line, that is, optimize our sales portfolio; to improve our cost position by investing to become more vertically integrated; and of course, to improve our bottom line by generating the kind of earnings and cash flow to sustain and to grow the company and to enhance value for our shareholders over the long term.

Recently, given the difficult near-term market conditions facing our industry and the company's ongoing capital requirements, AK Steel's Board of Directors decided that it was appropriate to suspend the payment of our dividend. The board concluded that it was in the best long-term interest of our shareholders at this time to put the funds to use for longer-term purposes. Going forward, the board will continue to review this subject on a regular basis.

Speaking of rewarding shareholders over the long term, we're confident that AK Steel's strategy of serving the most demanding customers and the toughest product applications in the most difficult markets is the right strategy, and that it will serve the company and our shareholders well over the course of the cycle.

Our product offerings are some of the highest-quality, value-added carbon, stainless and electrical steel products available anywhere in the world. And that's great, but we need to expand our margins. For some time, we've recognized the need to lower our steelmaking input cost to produce a more cost-competitive carbon slab and hot band, and we're very hard at work to make that happen just as quickly as we can.

I'm delighted with the excellent progress that we're making in our long-term strategic initiatives of securing 50% of our iron ore pellet and coal needs. AK Coal has filed for a permit to construct and operate its initial underground mine. Progress continues on the mine plan as well, which will position us well in the years to come. We continue to accelerate our plans at AK Coal and we're making solid progress towards a goal of commencing mining activities in the first half of 2013.

Some of you have inquired about our expected cost of production at AK Coal. Let me simply say that when operational, we expect to produce low-vol coal, that is, coal that has been washed and is ready for coking, at a cost that's substantially below the current market price for low-vol coal.

We're also accelerating progress at Magnetation. Magnetation had an excellent start-up of its second concentrate plant, following a vertical start-up, and they expect to be fully ramped up in August, which is just terrific. I think it's important for me to point out that production and sale of the iron ore concentrate from Magnetation's 2 concentrate plants will continue to serve as a hedge against our iron ore pellet purchases, since the concentrate is sold for the most part at a price that's indexed to the IODEX.

At Magnetation, the next big thing, if you will, is the site selection and construction of the pellet plant. Depending on how long it takes to obtain the pellet plant permits and secure the equipment, there is a potential for us to start up the pellet plant in late 2014, which is nearly 2 years ahead of our original schedule. Magnetation has already made a permit application for one potential site and continues to explore others. In addition, the first equipment order for the pellet indurating furnace has been placed, with equipment delivery scheduled to be complete within 18 months.

In a moment, Roger will give you the details on the timing of our cash contributions to support Magnetation's growth. But suffice it to say that I'm very excited that we're well ahead of schedule for both the Magnetation and AK Coal projects. And that's because each of these investments has the potential to be a real game-changer for AK Steel as we enhance our self-sufficiency and improve our competitive cost positions for the long term. Improving our cost competitiveness is essential to improving our earnings and cash flow. That said, eventually, we need a real sustained economic recovery characterized by increased demand, higher shipments and improved selling prices, increased manufacturing and increased consumption both here and abroad.

Having experienced many economic downturns in the past, our team knows that recovery will come sooner or later, but we can't control exactly when that will occur. And in the meantime, we're controlling those things that we can and we're executing our strategy, confident that AK Steel is well positioned to continue to compete and to win, and we will be in an even better position to do so in the days ahead.

Thank you all for your attention. Now for some additional financial details, here is Roger Newport. Roger?

Roger K. Newport

Thank you, Jim. Earlier today, AK Steel reported adjusted net income of $11.4 million or $0.10 per share for the second quarter of 2012. Our adjusted net income exceeded our guidance of $0.04 to $0.06 per share and excludes a noncash valuation allowance adjustment of $736 million related to a portion of our deferred tax asset. Our second quarter adjusted results also represent an improvement over our first quarter of 2012 results of a net loss of $11.8 million or $0.11 per share.

While accounting rules required us to take this charge, this valuation allowance does not impact our ability to utilize our net operating loss carryforwards and tax credits in the future to reduce cash tax payments. I also want to stress that this charge is noncash. And I would note that our net operating loss carryforwards do not begin to expire until the year 2023 and beyond, with the majority of the NOLs expiring between the years 2028 and 2031.

Shipments for the second quarter totaled 1,335,800 tons, an increase of about 10,000 tons compared to the first quarter of 2012 shipments. Our average selling price for the second quarter was $1,152 per ton or approximately $14 per ton above the first quarter, reflecting a modest improvement and slightly favorable to our guidance.

Revenues for the second quarter totaled $1,538,000,000, another slight improvement compared to the prior quarter. Sales outside of the U.S. totaled approximately $224 million for the quarter. This represented about 15% of our sales for the second quarter and was comparable to the prior quarter.

In the second quarter, we benefited from a LIFO credit of $18.3 million, which compares to a LIFO credit of $12.4 million in the first quarter. This increase is primarily the result of lower raw material and energy costs.

In terms of income from operations, we achieved an operating profit of $56.7 million or $42 per ton for the second quarter of 2012, which, as Jim mentioned, is a substantial improvement over our operating profit of $4.1 million or $3 per ton for the first quarter of 2012.

Moving to our results for the 6 months of 2012, revenues for the first half were slightly more than $3 billion, compared to approximately $3.4 billion in the first half of 2011. Sales outside of the United States totaled $450 million for the first 6 months, which represented about 15% of our revenues, roughly equal to the percent for the same period during 2011. Shipments for the first 6 months of 2012 were 2,661,700 tons, a 9% decrease compared to the first 6 months of 2011, reflective of a tougher domestic and global marketplace.

Our average selling price for the first half of 2012 was $1,145 per ton, virtually identical to the first half of last year. And at the bottom line, for the first 6 months of 2012, we reported an adjusted net loss of $400,000. So thus, we essentially delivered breakeven results, which equated to less -- which equated to a loss of less than $0.01 per diluted share.

Turning for a moment to the balance sheet. Through the first half of 2012, our capital investments totaled $17.9 million. Our outlook for capital investments for the year 2012 is estimated to be approximately $100 million plus approximately $50 million in payments for our strategic investments in Magnetation and AK Coal. As Jim mentioned, we are pleased that both of these investments are progressing ahead of schedule. However, the expedited ramp-ups will likely result in some acceleration of a portion of our planned investments in both of these strategic initiatives, and more importantly, a corresponding acceleration of the cost reduction benefits of these investments as well.

On the iron ore front, the remaining investment of $48 million related to Phase 1 of the Magnetation joint venture is expected to be completed in the second half of 2012. Phase 2 consists of the construction of a pellet plant and 2 more concentrate plants. Once the conditions for Phase 2 are met, we will be obligated to ultimately contribute an additional $150 million. Currently, we would expect to contribute between $50 million and $70 million of this additional $150 million in 2013 and the balance thereafter.

Turning to AK Coal. As Jim mentioned, we are also making good progress on this strategic investment. For AK Coal, we expect to invest $60 million, which would include $17 million in 2012 and the balance in the years 2013 through 2015.

During the second quarter, working capital consumed $89.4 million of cash as we experienced a typical seasonal inventory build and prepared for a planned Ashland Works blast furnace outage. We anticipate working capital will be a significant source of cash in the second half of 2012. In fact, in total for the year 2012, we expect working capital will be a very modest consumer of cash.

Despite these cash uses and the pension contributions Jim discussed previously, it is important to note that our liquidity remains solid, as we ended the second quarter of 2012 with liquidity of $709 million. And I would add that we currently expect to end this year with liquidity of more than $600 million.

Looking forward, we expect to provide detailed guidance for the third quarter of 2012 in mid-September. However, in advance of that guidance, I want to provide a few comments on our outlook for the third quarter. We expect to incur approximately $28 million in planned major maintenance outage costs in the third quarter of 2012, compared to approximately $1 million in the second quarter. These costs are primarily related to the planned outage of our Ashland Works blast furnace and the hot-end outage planned at our Butler Works.

As a result of the tax valuation allowance recorded in the second quarter of 2012, the company expects that its normal current year income tax provision will be mostly offset by a related change in the valuation allowance. However, LIFO income or expense for the year will result in changes in the value of our LIFO-related tax planning strategy used to support the value of the portion of the deferred tax asset that remains on our books. Thus the company's projected -- current projection of LIFO income for 2012 is expected to result in income tax expense for the third quarter of 2012 as well as for the full year, regardless of what our pretax financial results are. Thus due to these and other factors, we expect to report a net loss for the third quarter of 2012.

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

Question-and-Answer Session

Operator

[Operator Instructions] Evan Kurtz of Morgan Stanley.

Evan L. Kurtz - Morgan Stanley, Research Division

Just a couple of questions. First on this tax expense for the remainder of the year, could you perhaps give us a little more detail on the magnitude? And if x out that tax, would that change your guidance for modestly a net loss next quarter?

Roger K. Newport

Yes, to comment on the tax, it will be a little strange going forward, but I'll try to walk through exactly what will occur. As you know, as part of the deferred tax asset that's left on our books, we have approximately $200 million left there and that's for if we would decide to go off LIFO in the future as a tax planning strategy. So as our tax -- or as our LIFO valuation changes, it will also impact our tax expense. So to give you an example, as you know, in the first half of the year, we had $30 million of LIFO credit. If you assume that, that would be amount for the year, let's say $60 million, if you annualize that, if that's what it turned out to be, what you would need to do is apply a tax rate to that. And the tax rate, say, if you're in a range of 35% to 40%, typical corporate tax rate, you'd be looking in the neighborhood of upwards of $25 million of tax expense. What you would need to do with that for modeling purposes is take that tax amount and divide it by your forecasted pretax income to come up with a rate for the year for our taxes and apply that tax rate to each of the quarters and realize that you have to do a true-up year-to-date for each of your quarters.

James L. Wainscott

Thank you for your question. It's a very complicated subject, to say the least. We'll probably describe that in a bit more detail in our 10-Q, which will be filed...

Albert E. Ferrara

And we can talk about that further off-line in terms of walking you through that.

Evan L. Kurtz - Morgan Stanley, Research Division

Okay. And just the second part of that, is that the difference between a net loss in 3Q and perhaps a breakeven?

James L. Wainscott

I think when we indicated in our sort of initial guidance, if you will -- we'll have more guidance late in the quarter, third month of the quarter as we have in recent quarters -- that it's really a function as much as anything of the increased outages. So I think that in and of itself, setting aside the taxes, would have put us into a loss category.

Evan L. Kurtz - Morgan Stanley, Research Division

Got you, okay. And then just a second question on electrical steel. I was reading in the Japanese trade press that in India, according to them, grain-oriented -- commodity grain-oriented prices fell by about 30% over the last quarter. And I know you participate in that market. I was just wondering if that's something that you're seeing as well. And does that concern you, that we could start to see an increased level of imports of electrical steel coming into the U.S. market?

James L. Wainscott

Well, the fact of the matter is -- this may be a little bit broader perspective on electrical, because I think some others may have questions as well. As I tried to indicate in my prepared remarks, we have seen a slight improvement, particularly in the second quarter, in NAFTA as customers build inventories for increased summer demand. But the international market has really not improved yet and I think it's fair to say that we've seen a decline there and significant pricing pressures, whether it's India or elsewhere. And it's really a function of the instability of the world economies and an oversupply situation. In addition, for us, the strengthening dollar versus the euro has certainly hurt in terms of that activity. So I think it's overcapacity, it's the global slowdown, currency issues resulting in really a lower pricing environment. Still, we think the quality of the product and all the other aspects we bring position us well to compete. But undoubtedly, it's a little tougher market, I think, than we or anyone else anticipated.

Operator

Our next question comes from Sohail Tharani of Goldman Sachs.

Sohail Tharani - Goldman Sachs Group Inc., Research Division

The pension relief that you're getting in 2013, I think there is also -- might be some in 2012. I know you paid the pension payment. I was wondering if you get the benefit if there was some relief also in 2012.

Albert E. Ferrara

Sohail, there's no impact on 2012's contributions. There will be in 2013. Maybe some of the confusion comes from plan years versus calendar years, but our calendar-year contributions that have been made, $170 million, are appropriate and won't be changed.

Sohail Tharani - Goldman Sachs Group Inc., Research Division

Got you. And can you talk about what's going on with your coke facility at the Middletown? Is there cogeneration you're going to pursue over there?

James L. Wainscott

Indeed, Sohail, it's running exceptionally well. We're taking about 550,000 tons annually, and we're getting -- the cogen has ramped up. And where we don't consume it, it gets sold into the open market, so we're benefiting from that as well. And overall, it is meeting or exceeding our expectations. It's a terrific project and we're happy to be getting the output, both in terms of product and in terms of the cogen.

Operator

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

Patrick Marshall - CRT Capital Group LLC, Research Division

This is Patrick Marshall subbing in for Kuni Chen, and just a couple of quick questions. One, I know there's labor negotiations going on at U.S. Steel and ArcelorMittal, and given that it account -- that those 2 guys account for 40% of U.S. flat-rolled capacity, we were wondering if you've seen any evidence of anybody in the automotive supply chain managing their inventories differently given the possibility of a labor disruption in a few months?

James L. Wainscott

Again, we were pleased to kind of get in early and get out early, to get our deal done up at Butler. We know that they're in discussions. We wish them well. We've been there. To really say we've seen any meaningful change in behavior just yet, the short answer is no. I think it's a little early. I think it's fair to say that as time marches on, inevitably the level of angst in the customer community rises and we would expect to get more inquiries. And we stand at the ready. We're not really in the -- what I'll call the firefighting business. We're in the business of serving customers for the long run. So to the extent that we can be helpful, and we can be at these sort of levels that we've been producing and shipping at, we want to be there. But we want to be there for the long run.

Patrick Marshall - CRT Capital Group LLC, Research Division

Okay. And then on the coal side, I mean the coal production is like 2 or 3 years away, but given the bankruptcies that we've seen recently and the strain in the coal industry, would you be interested in looking at any further coal assets if you saw them at a fire sale kind of price?

James L. Wainscott

Patrick, it's an interesting observation, and these things continue to evolve. When we put our strategy together for both coal and iron ore, it was really a hedge strategy, and I'd emphasize that. In other words, it was not our desire to be 100% self-sufficient in either of those very important inputs. By the same token, we didn't feel we could continue to be entirely dependent on the spot market. So the things that we've put in motion, the capital that we're spending, the investments that we're trying to accelerate and get producing will move us towards that 50%. One thing I think some folks have inquired -- and again, I tried to make mention of it. Undoubtedly, the coal market has come our way. We win when that happens, by the way. We're still 100% buyers in the marketplace. And even after we get up and running, we'll continue to win if coal prices stay down. And in fact, really, in each case, whether it's coal or Magnetation, it's about having a low-cost, high-quality facility, and we suspect that even with a decline in the coal market, that our low-vol coal cost will be 25% to 30% below the current market price for similar low-vol met coal. So that's a long-winded answer to sort of our strategy and our thinking, what's happened in that market. I never say never, but I'd also say that it's not high on our priority list to go after some of these assets.

Operator

Our next question comes from Arun Viswanathan of Longbow Research.

Arun S. Viswanathan - Longbow Research LLC

My question, I guess, is on the maintenance and overall supply-demand of your system. So what other maintenance do you have, I guess, planned this year? And then would you characterize your system as underutilized? Or I guess, relative to the market, would you need to take any more, I guess, market-related downtime at any time?

James L. Wainscott

Great questions. And again, just for perspective, when we talk about maintenance and we say we spent $1 million on maintenance, that's really major maintenance. We have maintenance going on all the time. We probably maintain our equipment as much or better because we have less of it than anyone else. We're constantly paying attention to what the equipment is telling us and try and really deal with maintenance on a preventative basis. And so it had been sufficiently long enough before we went in to do some significant maintenance at the Ashland blast furnace, which we've affectionately named Amanda. And we began that maintenance on the 11th of July, and in fact, it's successfully been completed around the 21st. That's the vast majority of the $28 million of major maintenance that we spent in this quarter. That and other jobs that we've got, whether it's Middletown hot strip mill or other things, again, they sort of come up on the calendar, we assess whether or not it's appropriate to do, and really the timing couldn't have been more perfect given the market conditions right now. We've got the jobs behind us largely and we'll be ready to go in anticipation of hopefully better market conditions on the way. We've been operating in the low 80% kind of capacity level. That's sort of been where we've been at for recent years. That could dip just a little bit here. We ran a little bit heavier in the first half of the year to build inventories in anticipation of the outage that Roger mentioned and to feed the growing automotive marketplace. So we'll balance that as we go forward and it really does vary by plant. But the maintenance isn't absolutely tied to capacity utilization, although we try and be opportunistic.

Arun S. Viswanathan - Longbow Research LLC

Okay. And then on the dividend, I just -- help me understand the thought process here. Basically, you have $37 million in cash and upwards of $700 million in liquidity with the revolver. So what was the kind of discussions to suspend the dividend, which really only cost you $22 million a year? I'm not sure why that -- especially when you've completed the pension requirements and it seems like you're ultimately going to get some relief on that side. Just not really sure why you necessarily had to do that at this point.

James L. Wainscott

It's a great question. It's one that we have great discussion at, at the board level and concluded that it was appropriate to do so. Now really not a liquidity issue at all, as you mentioned. We have cash, we have liquidity, and in fact, we've paid a dividend in some very difficult times really since 2008, the beginning of the Great Depression -- or Recession, call it what you will, until now. But I think, as I mentioned in my remarks, given the difficult near-term market conditions that face the industry, the company's significant ongoing capital requirements and the desire to really invest for the future, the board concluded in its wisdom and I fully support that, it was a unanimous view to suspend the dividend. In short, it's the prudent thing to do at this time. You really have to earn the dividend to pay it out. Otherwise, it's a liquidating dividend, and I don't think that's really in the best long-term interest of shareholders. We look forward to reinstituting it when the time is right.

Operator

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

Michelle Applebaum - Steel Market Intelligence Inc

Do I want to ask why it is that blast furnaces have always been named after women?

James L. Wainscott

That's a longer answer than we have time for on the call.

Michelle Applebaum - Steel Market Intelligence Inc

Yes, okay, and politically inappropriate.

James L. Wainscott

Absolutely.

Michelle Applebaum - Steel Market Intelligence Inc

And kudos on eliminating the dividend. Having a few pennies dividend that you're not earning anyway, and the stock really is not reacting very much to that. So I think that, that was a prudent decision that your board made to be anticipatory on that. My question is, if I look at the earnings and I see that adjusted for minorities, your pretax line was $19 million, right, Al?

Albert E. Ferrara

Approximately, yes.

Michelle Applebaum - Steel Market Intelligence Inc

Okay. And I subtract $28 million from that, okay, the $28 million is pretax, right?

Albert E. Ferrara

I'm sorry, Michelle, the pretax...

Michelle Applebaum - Steel Market Intelligence Inc

The $28-million maintenance outage, is that a pretax...

Roger K. Newport

The $28 million, yes, is a pretax number for the third quarter. That's correct.

Michelle Applebaum - Steel Market Intelligence Inc

Okay. So that would, everything else equal, give us a $9-million loss. Do you think that it's going to be ahead of that or behind that?

James L. Wainscott

Again, we really have not decided to give that guidance at this point. Lot of moving pieces and parts. One of the things that we've done recently, as you know, our order book is looking actually about as good as it's looked in the last year or so, and we did come out with a $40-a-ton price increase in carbon, which we're largely realizing, and evaluating another increase. But you've got a lot of moving pieces and parts here that it's just a little bit early to give more guidance than that.

Michelle Applebaum - Steel Market Intelligence Inc

You're evaluating another increase.

James L. Wainscott

What we do on a regular basis, we look at, again, our order intake rate. And if we compare it to where we were, say, last quarter at this time or a year ago at this time, we're substantially in better shape, which would, coupled with costs that we're trying to recover, be rationale for thinking about doing another one, and we are.

Michelle Applebaum - Steel Market Intelligence Inc

You said that in the answer about strike risk, you said, you can be helpful at these shipping levels, okay? With Amanda down, I presume that means that you can buy slab and convert that slab.

James L. Wainscott

Well, as you know, we shipped regularly 1,600,000 to 1,700,000 tons in the "good old days." So to have been shipping 1,350,000 or thereabout says that we've got a fair amount of upside from here.

Michelle Applebaum - Steel Market Intelligence Inc

Even with the blast furnace down.

James L. Wainscott

Yes. The blast furnace is back and running well, knock on wood. In addition, you recall that we added some capacity to produce our own carbon slabs, and we're doing that at our Butler Works, the new #5 EAF. It's doing a very, very nice job for us. We've been sort waiting for the opportunity to crank it up. And given where scrap has gone, we're producing more there these days than we have in a while. So we do have some upside potential or we could buy some slabs as well.

Michelle Applebaum - Steel Market Intelligence Inc

You could -- if there was a reason to and the demand was there, you could ship 1.6 million -- physically, you could ship, if the market was there, 1.6 million, 1.7 million again, you could probably do it this quarter, if the demand was there?

James L. Wainscott

That's correct. Demand drives all of our decisions. Of course, pricing matters as well. And pricing is not back where we'd like it to be. But it's moved up just a tad, and that's the right direction.

Operator

Our next question comes from Tony Rizzuto of Dahlman Rose.

Anthony B. Rizzuto - Dahlman Rose & Company, LLC, Research Division

Just the first question, just to follow up on Michelle's a little bit. And I'm just wondering, are your lead times really lengthening? Because it seems like the service centers seem to be saying the opposite with commentary on inventory behavior, and I'm just trying to get a little bit better read on that. And then I'm sorry to ask you to do this again, but I didn't hear all of the CapEx spend as you see for the major projects. And if you could just go over that again, I wanted to make sure. I think that's really important, and wanted to make sure I've got the correct spending as you guys are seeing it over the next -- balance of the year and into 2013 and '14. I appreciate it. Sorry to ask you to do that again.

James L. Wainscott

No, Tony, good questions. First, let me start with lead times. By the way, hopefully, we don't have an interruption in our call. We're in the midst of quite a thunderstorm here in West Chester, Ohio. So but continuing for as long as we can, for us, lead times have -- are out somewhat longer in particular for coated products, hot dipped galvanized. I would say that it's ever so slightly longer on hot-rolled than cold-rolled. We're probably out into the early August time frame for hot-rolled and late August for cold-rolled, and well into September for coated. I don't know how that compares with anybody else, but that's what our book looks like. And so it's better, certainly not great. With respect to the spending, again, as I sort of sum up the numbers for the second half of the year, capital-wise, we're probably $80 million or thereabouts and strategic capital, probably $50 million. And really, if you roll together all of the cash needs, if you will, for the second half, it's probably somewhere in the $200-million to $250-million range. I think, as Roger mentioned in his comments, we expect to be significant generators of working capital in the second half, such that we'll be small net users of working capital. But if we generate $150 million to $200 million of working capital in the second half, it will largely pay for the needs that we have here. So again, we feel our liquidity is strong, $700-million-plus as of June 30, with an anticipation to be north of $600 million at year-end 2012. Al?

Albert E. Ferrara

Tony, just going forward, as Roger mentioned, we have $150 million of CapEx with respect to Magnetation over the next -- our commitment there is -- in 2013 and '14, and about $60 million with respect to AK Coal over that 2013, '14 period as well.

Operator

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

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

One thing I was curious about, this -- your comments on the grain-oriented marketplace are just a little bit discouraging, and there may be some sustainability to the weakness. Is there opportunity to shift production into different kinds of products to try to get a better utilization and returns out of the Butler operation?

James L. Wainscott

Well, we've got tremendous flexibility. Again, as I mentioned before, the carbon slabs are an opportunity and we're going to tap that. Butler is ready to rock and roll again, and we'll continue to look at opportunities wherever we can make a buck. As far as the grain-oriented electrical steel, I think we'll have to play through this marketplace. We have been growing our business domestically. We expect to continue to grow that, and we're serving our customers very, very well. The replacement transformer business is steady. We have enjoyed, if that's the right term, a bit of increased business because of some of the heat that we've all endured, particularly in the Midwest, over the last 4 to 6 weeks as transformers expire. But ultimately, it's going to take, again, as with a number of our markets, a real recovery, and some of that's going to have come as well from abroad as the Eurozone crisis once and for all gets settled.

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

And good luck getting Amanda restarted.

James L. Wainscott

Oh, she's back up and going, and we're real happy with how she's producing.

Operator

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

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

I mean you've said Magnetation and AK Coal are somewhat hedges. As kind of the fact that you guys are net short in both products, as those hedges seem to be coming your way, is there any possibility that you monetize or finance some of the expenses necessary to kind of get those businesses ramped up?

James L. Wainscott

Well, the faster we pull them, the faster the requirement is for the capital utilization, and hence, we'll be looking at exactly how we do that and when we do that. And I think it's fair to say that typically, we've funded a portion of our strategic capital investments by accessing the capital market. But more funding remains as we've discussed here and we'll look at that. We have a variety of alternatives available to us and we'll continue to look at that, particularly to the extent that we want to bring these benefits on faster. I will tell you that we are still very, very confident in the strategic rationale for each of these investments, notwithstanding what's happened to the markets for coal and iron ore of late. Again, we win either way. And the hedge bet still holds very, very sound logic in our view. We just can't get it up and going fast enough. Again, we've moved as quickly as we can. I'm really thrilled with the progress that each of the teams has made, but we're still probably the better part of a couple years out before we really start to benefit in a big way on these things.

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

And I know that these are obviously negotiations with key customers, but you're in a position where the order book is good. You've got competitors facing some potential challenges. Can you guys talk about whether or not some of your big automotive and appliance customers have come back to you and asked for some level of certainty or an increased contractual commitment for later this year, early next year, maybe a little bit more flexibility or something a bit more favorable to you, since it seems like actually at this point it might be a good time for them to come running to you and asking for something?

James L. Wainscott

We have a very good relationship with our customers. We maintain a dialogue. I think really this is why you have relationships as market conditions change and so forth. We're going to be there to support them to the extent we can. We're gaining market share. We have really all this year because as you've seen, the markets increased. We're up by 20%. That's a greater percentage than what the market in general has gained. I think we've positioned ourselves very well with our service and our quality and delivery. There's clearly a place in the minds of our customers for a company like AK Steel, in fact, for AK Steel. That's what they continue to tell us all the time. So based on that and based on some other variables in the marketplace, we think there's certainly opportunity for us later this year and going forward. We want more and we want it sooner.

Operator

Our next question comes from Aldo Mazzaferro of Macquarie.

Aldo J. Mazzaferro - Macquarie Research

I was wondering if you could give us a little color on how the mix shift impacted. I can see how the stainless electrical and coated gained a little share relative to the first quarter. Could you give us any indication of whether any of those prices in isolation moved up in the quarter or what kind of trend you might have seen in hot-rolled pricing, for example?

James L. Wainscott

Roger, you want to take a stab?

Roger K. Newport

Yes. In regards to -- as Jim mentioned on the spot side, we had seen pressures on the spot side, both in the electrical steel overseas, as we talked earlier here on the Q&A and on the call. And also in the spot markets, scrap continued to drop throughout the second quarter so we saw a decline in our spot market pricing, which would be reflected in our carbon products, primarily in the hot-rolled and cold-rolled side. So those were the 2 key drivers. On the stainless front, I would say stayed relatively stable and chrome also was stable. As you know, on the chrome-nickel side, that -- the main driver of that is your surcharge side, and so that just fluctuated primarily with the surcharges.

James L. Wainscott

Aldo, when pricing went from the 700s into the 500s, we walked away from significant tonnage just because it made no sense for us to continue to play in that sandbox, and we'll continue to be very careful. It's an opportunistic place for us to be, but we don't have to be there. As you know, we are very much interested in being in the high end, whether it's carbon, stainless or electrical steel products, and probably walked away from 150,000 tons of business or so in the second quarter.

Albert E. Ferrara

And we had, Jim, a value-added mix of about 85%, which was a little bit better, again demonstrating one of the strengths of AK, is the fact -- the ability to move up that value chain, particularly in markets like this.

Aldo J. Mazzaferro - Macquarie Research

Great. And so you'd probably assume that same kind of market posture in the third quarter? Like in terms of chasing hot-rolled business, you probably would see more-stable-than-market pricing, would you think?

James L. Wainscott

We hope so. But again, I think a lot's going to depend on factors well outside of our control. We're monitoring it carefully. I think the fact that scrap has now bounced off the bottom, I think, adds a bit of stability to the current pricing level. We don't see the level of imports that we saw a quarter ago. I think that's -- those are positive factors. And again, just looking at our own situation, making an independent decision about where our order book stands, we feel a little bit better than we did certainly 3 months ago.

Aldo J. Mazzaferro - Macquarie Research

Right. And if I could just ask one more question on the -- it doesn't seem like this matters too much, but does the negative book value now impact your ability to do any drawing on your credit line or financing in general?

Albert E. Ferrara

No, Aldo, absolutely not. We have no covenants along that line whatsoever. We have one with respect to availability, but our availability has to drop all the way down to $137.5 million. We're a long way from that. So we're covenant free with respect to our debt issues, as well as largely covenant free with respect to our revolver. So the equity issue is not an issue.

Operator

Our next question comes from Luke Folta of Jefferies.

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

I'm not sure this question's appropriate, but I'll ask anyway. One of your competitors on their conference call recently had kind of suggested that ThyssenKrupp had kind of backed off the market here recently, that they had ramped up aggressively to kind of prove that they could do it and now may be in more of a cash conservation mode. And I was just curious to know if you've seen any impact on how they are -- maybe from your perspective when it comes to like -- I mean your contract auto customers and your position there and how you may be looking at that next year. Has there been any real change in market dynamics there since they announced that they're looking to sell that mill?

James L. Wainscott

Well, I think they had indicated in their own releases, they being Thyssen, that they had been, I'll paraphrase, sort of buying their way into the market, really doing some things pricing-wise that were not particularly sensible from our view. I'd say that's changed a little bit, but there's still some 200,000 to 250,000 tons of product coming into the market every month, and that's largely going into the spot market. I think one of the things that's really interesting to see when this plays out is qualifications for automotive customers take a while. And to the extent that the steel substrate comes from other than Brazil or other than Germany and there's an issue of sort of reliability and relationship building here, is it conceivable that product that perhaps TK Calvert was going to serve next year and in years to come could get pushed out? I think it's highly likely. But much depends on what happens to those assets. They're very interesting assets. Candidly, they're virtually identical to what it is that we built in Rockport some 15 years ago. They're probably assets that everybody in the world is at least considering as to how they might fit into their portfolio. But hopefully, at the end of the day, whoever winds up managing those assets does so efficiently and appropriately because right now, I got to say that there's just no demand, that we don't need that tonnage coming into the marketplace. There's no room for it.

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

Okay. And secondly, I just wanted to touch on the electrical steel market globally. There's been a decent amount of capacity added. I've got a list. I probably haven't updated it in a couple of quarters, and I just wanted to get a better sense from you guys being in the business and having feet on the ground, what the -- if you could frame up for us, what -- how much new capacity has been added or maybe what the utilization rate is now, ballpark, versus where it was in '08 or -- anything, any metrics that can help us put into perspective how much demand has to recover before we see a similar amount of tightness or -- than we did versus the last cycle.

James L. Wainscott

We have lists as well, Luke, and I don't know that it really merits a lot of attention to sort of go there. I think that it probably approaches some kind of number like 2.7 million, in terms of supply and demand now is probably 2 million and change, just to give you some sort of perspective. Those are rough numbers. But I think, really, since we started making a big deal out of the grain-oriented electrical steel business, you've seen a lot of capacity come on and you're seeing more added as we speak, unfortunately. We continue to think that as the #2 or 3 largest producer in the world, with the advancements that we're making, with the established relationships that we have, that we'll be well served. But when you have that sort of supply-demand imbalance, particularly in the foreign marketplace as we face, it makes a far more challenging market condition, and we've seen that both in terms of volume and pricing.

Operator

Our next question comes from Justine Fisher of Goldman Sachs.

Justine Fisher - Goldman Sachs Group Inc., Research Division

So I have a question on the revolver. It does seem that given where second half working capital could go, AK may not need to draw on its revolver at all in the second half. But for '13, there's some estimates out there saying that the company may need to. And my question to you is how -- what would availability need to get to on your revolver before you started to look to some other financing options to replenish liquidity, such as accessing the capital markets? I mean, obviously there is the $137-million covenant that if it goes below, then there's a fixed charge coverage ratio. But I suspect you wouldn't get it -- let it get that low, but what level would it need to get to before you would start considering those options?

James L. Wainscott

Just try it this way, Justine, that we're well aware of the capital investments that we have on the horizon, the strategic investments we have on the horizon, the pension contributions, albeit now lower, and other obligations. And we're very, very mindful of doing everything we can to make sure that the EBITDA generation and other actions that we can take, whether they're capital or working capital-related or other things get as close, if not meet or exceed our needs. That's an ongoing effort. That's part of that continuous improvement process that I've discussed in my remarks. And so I don't know that I have a specific answer for you other than we're on it, and I think you've seen our board be very, very judicious in terms of coming to the capital markets and particularly with respect to anything that might be dilutive to shareholders. I wouldn't preclude any action. I would just say that nothing's changed in terms of the way that we intend to utilize our precious cash and raise money in the future.

Justine Fisher - Goldman Sachs Group Inc., Research Division

Okay. And then my follow-up question is on the pension and OPEB liabilities. Obviously, the relief that you guys are getting from recent legislation is very positive on the liquidity front for 2013. But this is a question that we've been asked, so I wanted to ask it to you too. Is there anything else that AK can do to reduce the pension contributions going forward? Let's say, even in out years, I mean, obviously again, change -- a change in planned asset returns can be one thing or a change in the discount rate could be another. Is there anything as far as negotiations with your labor force, et cetera, that you might undertake in order to have a more permanent reduction in some of the contribution requirements à la the VEBA programs that you've done in the past?

James L. Wainscott

Well, it's sort of its own seminar, I suppose, and we actually have those here at the company from time to time, given our employee benefits. But the fact of matter is that on the liability side, it's really a function -- we have a frozen plan, if you will. In all of our labor agreements, we no longer offer a defined benefit. It's all a defined contribution. That's sort of the first thing and it's the most important thing. We did that many, many years ago. So if you will, the payouts from the pension trust and the population will be declining over time is the nicest way to say that. Of course, the other thing that matters is the earnings in the trust and we're tracking very nicely this year in terms of our -- versus our assumption. We are at a point -- the other thing that values the liability is discount rates, interest rates, and we are at a point, as you see, with long-term interest rates and even short-term interest rates that I don't think any of us have ever really experienced. And so in our case, every 0.25% change in the discount rate is worth about $75 million in liability, so if you have $1-billion shortfall, hypothetically, a 3-percentage-point move with all other things being equal, gets you d*** near fully funded. So at least from a liability side. On the cash side of things, again, the biggest change occurred with the action of the pension relief act and we think that's a very positive thing. In terms of one-off kind of out-of-the-box stuff, going to talk to people, our retirees are trying to do some sort of settlement. We've had a high degree of success in doing that sort of thing with respect to the retiree health care. We really have not given that any serious thought with respect to the pension.

Albert E. Ferrara

And because -- on the pension side, of course, it's ERISA-guaranteed and so consequently, you can't do that. But as Jim mentioned, Justine, we essentially don't have any service cost anymore. You've got the interest cost and the return on assets. I will say that over the last 5 years, our pension plan, according to surveys we've done, is in the upper 20 percentile in terms of trying to earn our way out of this. But you fund it, you try and earn your way out of it and lock and freeze the benefits. We think that's the approach that we've taken, and hopefully, that'll work its way to our benefit over the years.

Operator

Our next question comes from Charles Bradford of Bradford Research.

Charles A. Bradford - Bradford Research, Inc.

SunCoke, the people that you know quite well, have apparently been working with the folks at Ashland, Kentucky about building another coke battery in what they call the South Shore. Are you guys involved with that at all, because apparently they're getting some kind of an incentive package?

James L. Wainscott

We have a great relationship with SunCoke. We are always talking to them about what they're thinking and we let them know what we're thinking. But it's their project. And whether or not we would do anything with them in terms of an offtake remains to be seen.

Charles A. Bradford - Bradford Research, Inc.

Presumably, this is some time in the future, nothing that they're going to decide near-term. Or are they?

James L. Wainscott

Again, I believe that Fritz and his team -- I've read a similar article, I guess it was today or yesterday, that they were in discussions about incentives. But really beyond that, I'm not privy to any inside information.

Charles A. Bradford - Bradford Research, Inc.

And can you discuss for a moment the President's new medical -- or approved medical plan? What cost do you have per employee for medical coverage? And would you possibly be looking at some change in this towards the government-sponsored insurance exchanges?

James L. Wainscott

Charles, again, health care, whether it's active or retiree health care, is a big deal for our company. And it's the kind of thing that I think we have done very, very well by providing a lot of options to our employees and to our retirees in that regard. I think whereas the national average increase in health care has been 8% to 10%, we have been like 2% to 3%. So I think we will continue to look at this, as we have everything else in that arena, and do well. It's going to increase our costs. We said that before, and we would reiterate that now that the Supreme Court has ruled, partly because we're going to be covering people longer than we otherwise would have. I would not say that it is a material sum. It's in the millions, but not multimillions. And of course, our objective then is to look for other ways. As far as the implementation of all of the new regs, a lot of those things still have to get written. We have to digest them and then we have to react accordingly. But we'll be certainly compliant. We'll be timely, but rest assured it's going to cost more, not less.

Operator

Our final question comes from Shneur Gershuni of UBS.

Shneur Z. Gershuni - UBS Investment Bank, Research Division

My first question is kind of related to volumes. Considering your exposure to the auto market, considering what we've been hearing about automotive and so forth, I would've thought that your volumes would have been a little bit stronger. I was wondering if you can sort of comment about kind of your state of sales with respect to volumes and so forth?

James L. Wainscott

Well on automotive, perhaps I wasn't clear, but that is a very strong market for us. And just how strong? Well, in each of the first and the second quarters, at AK Steel anyhow, our quarterly automotive market shipments have been the highest they've been in 4 years. So we were really happy with what we were doing there. And I think the good news is there's upside from here, right? Most analysts, I think, have looked for 14 million to maybe 14.5 million units sold for 2012. That's great news. But it's still about 3 million units short of the record, which probably occurs, if you believe the forecast, in the 2015 kind of time frame. So there's a lot of upside here and we're really thrilled that people like BMW are expanding and they're making vehicles for consumption, not only in the U.S., but abroad. So the numbers might not be quite as apparent, but this is a far better place to be. And for the autochrome business, as I mentioned as well, which serves that marketplace for NAFTA, we had a record shipment second quarter. So I'm not sure what else we can do other than keep on keeping on, and we intend to do that.

Shneur Z. Gershuni - UBS Investment Bank, Research Division

Great. And my follow-up question is kind of a follow-up to some of Justine's questions. I was wondering if you can sort of talk about sort of your pension contributions. I know you've sort of given some color with respect to 2013, but assuming no changes in interest rates and everything else, combined with the 7-plus-2 rules and so forth, is it fair to assume that 2014 actually goes up? And then kind of as a follow-up to that, you've mentioned your sensitivity to interest rates. With the Pension Relief Act, do you get smoothed the other way now, where it doesn't benefit you as fast once interest rates actually go up?

James L. Wainscott

I'm going to kick it over to Roger here momentarily, and then I'll close the show. But we're benefiting far beyond just 2013. I think we talked about $100 million, 2014's $50 million to $60 million. But Roger, do you want to kind of add...

Roger K. Newport

Correct. And I think one clarity is that -- on this legislation is it is -- or is lowering the liability. So what it's doing is it's more of a permanent reduction in our funding. And to clarify on the accounting side that was talked about versus what's done for funding purposes, what the legislation did was put in the discount rates for determining how you fund your -- how -- what your liability is to determine what your funding is. So this was not like the prior -- the PPA and other things that were moving the dollars and spreading them out over time. This actually reduces it, as we said, about $100 million for 2013 and then we have, not as big, but we do have reductions in future years. Because what it's done is increase the discount rate by lowering -- then thus lowering the liability and the funding amount. It's still is spread. As Jim mentioned, we've had good performance year-to-date on our asset returns. If that continues, that helps reduce our funding. Of course, if it -- flip side, if it doesn't, but we've had a pretty good year-to-date performance. So that helps us out from the future funding side, and it's really going to be driven on now more on the pension asset returns of how we do there versus the discount rates, because we now will have the 25-year smoothing that will be utilized for determining the liability.

James L. Wainscott

So, Shneur, to your point, just to comment on that subject, to the extent you get a spike in interest rates, you wouldn't get an immediate benefit. It would get blended into that 25-year averaging.

Albert E. Ferrara

The collar, it increases as years go out. The collar right now is 10%, Shneur. As it goes out, it adds, I believe, it's 5% per year. So as interest rates go up, that collar expands, and so the benefit that we would be getting when interest rates go above the collar would be -- we would get more benefit than at the present time.

James L. Wainscott

Well, I just want to say on behalf of the management team, we thank you for the insightful questions because they help us understand what's on your mind and help us to try and do a better job of providing you with the kind of disclosure you need to help get a better idea of where we're going. And just simply before signing off, thank you again for joining us today and for your interest in one of America's premier steel makers, AK Steel. We look forward very much to having you join us again in October for our third quarter 2012 conference call. In the meantime, we wish you a good day and a great summer. Bye for now.

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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