United States Steel Earnings Call Nuggets: Cost Structure, Pension Payments

On Tuesday, United States Steel Corporation (NYSE:X) reported its first quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Cost Structure

Shneur Gershuni – UBS: My first question I guess is thoroughly due to I guess a big picture question about your cost structure on a go forward basis. I was hoping you can sort of touch on a couple of things. First, if you can talk about the progress that you’ve made about putting more gas into the blast furnaces and if you can sort of update us as to where you think the cost trend is headed longer term and maybe if you can also comment about carbonics and the C battery and so forth. How all that placed together as to how we should see your cost trend on a longer term basis?

What are the Key Themes in Gold?>>

John P. Surma – Chairman and CEO: I’ll just give you that big picture, I think we can do fairly easily. Our metallics costs are largely in the form of iron ingots we are mining and producing ourselves in Minnesota and Michigan. We buy a little bit of pellets from third party suppliers, less of that this year, but still some at a higher cost, but overall our ferrous costs are going to be pretty stable at about where they have been in the last year or two. On the scrap side, that’s not a big piece of our charge, but it’s not inconsequential, but you can read about that every day and we can’t add anymore to what the world knows about the scrap market, we don’t know very much anything. On the fuel side, that’s our single biggest cost we could manage. We’ve already got our coal purchase for the year for the most part due to slightly higher cost than last year. I think we bought wisely and our supplies are pretty well secured. So that piece of our cost structure should be about the same. By virtue of the expectation that our carbonics modules come on this year, and then early next year – late this year, early next year, our C battery comes on, we should be pretty well out of the purchased coke game, and that was a bad place for us to be, expensive type market, poor quality car deliveries. So we will be much better off, both cost and operating wise to be out of that market, and then we have to do some battery rationalization as we reach the end of lives through different environment settlements. But we will be well positioned, we think, to not have to do a lot of new capital in coke and our coke costs should be very stable, really coal plus surprises (indiscernible). One other ways we do that is for new facilities, plus the increased use of natural gas. We have got a target of 100 or so pounds of coke replacement, tracking back to exit rates in 2010, and we made pretty good progress there. We get slowdown occasionally where we are doing projects on blast furnaces, and when we do that, the current rates have to be higher for different reasons, and we are bringing down, starting off, we can’t do the same amount of gas there, but our target is still doing 100 pounds, we have made pretty good progress, and we got expectations that we will be looking at that kind of a reduction by the time we exit this year. Whether we achieve that or not, depends on how quickly we get the projects done. There is a couple of big things we have to work on. One is our largest blast furnace. We had a project we have been thinking about scheduling for some time, and currently scheduled later in the year, once that’s behind us, we will be able to use a lot more gas on that large unit. So I could tell you that from an economic standpoint. There is no reason not to use gas, we want to use as much as we can, because the economics are overwhelmingly positive. We just have to make sure we have to do that in a safe and a responsible way throughout our operating infrastructure. So I’d say our cost structure overall should be stable. The more gas we use, the better it’s going to get, the big plays, the car boom, the ferrous costs stabled, other operating costs should be stable. Next quarter, we have, we called out your attention to some increased maintenance costs, largely around blast furnaces. Strike that over long periods of time on a per ton basis will be little higher this year because we’re maybe doing some projects we didn’t do during the real dark days and we’ve just run more tons and it requires more process work and more maintenance work. But there again they come in clumps, so it’s awfully hard to predict that, but it will be little bit above the average, but probably higher second, third quarter, selling down a bit in the fourth quarter. But overall that’s been $15 a ton over a long time, or $14, maybe this year at $17, next year at $16, so relatively modest amount. So that’s probably more than you asked for, but you asked for broad based high level cost structure overview. It’s pretty good right now.

Shneur Gershuni – UBS: Just my follow up question, Gretchen mentioned a very sizable free cash flow number of generation this quarter. Even if I adjust out the working capital adjustment, it’s still very healthy number north of the 200 zone and you’ve got it towards a similar operating income for Q2 as well. (Indiscernible) So you kind of would expect that to continue. I was wondering if you can talk about capital redeployment, and maybe specifically talk about KeTech, when you would expect to look forward to greenlighting it and maybe if you can walk through the kind of economics there, the iron ore production with the third party, offsetting third party purchases as well as the economics on the DRI as well?

John P. Surma – Chairman and CEO: The economics are pretty good all the way around I think and we’re getting closer to making that decision one way or the other and naturally it involves trying to look ahead and the long term iron ore price structure and so there is lots of experts on that, all of which we try to consider and think about the costs on our project, both capital and operating would be such that we think it makes pretty good economic sense under most forecast curves we’ve got to get ourselves comfortable about that before we actually pull the trigger. Secondly, kind of (tax back) to your last question, it’s an $800 million or so project could be bigger, could be smaller, but that’s big number for us and we’ve got to have some confidence in the way the world is heading and we wouldn’t want to get into that just before we go into another tailspin not predicting that but we want to think carefully about that and make sure we balance the risk appropriately. Once the project is done, the actual incremental production cost per unit of pellet is quite low, it’s probably less than $50 and today we’re probably buying those tons that we do buy for more than $100. So you take that difference and multiply it times a million or two, and it’s quite a substantial savings that has a very positive impact on the return right away and then if you take that call it $50 and put that into a DRI tunnel furnace with 10 ounce of gas and much to say today that’s 40 to be generous to our gas friends. That’s a — with some operating cost on top of that. That’s a pretty competitive (varnian) as well. So that the cost on that are very, very favorable also if you’re starting with your own pellets with today’s gas structure. So, two very, very positive opportunities for us.

Pension Payments

Brett Levy – Jefferies & Company: Strong quarter. One of your competitors actually went so far as to say second half will be better than the first half based on their outlooks for their own end markets. Broad-brush are you thinking the same kind of thing?

John P. Surma – Chairman and CEO: Hard to say. I’ll refer to Gretchen maybe. I don’t usually quite that far ahead, that’s pretty far in this business. We’ve looked at our second quarter and said things looked pretty good for us, at least. I think the way I am seeing the world right now is there is the potential for some degree of stability which hasn’t visited us much since 2008. There seems to be a pretty good supply demand balance or at least a pretty good demand from our standpoint and our supply structure is relatively stable as I commented on and prices seems to be in a zone just based on the public reports that we can earn a pretty good living at. So things look like stability might be happening without us really expecting it. But whether we can hook out any further, Gretchen, you want to comment further than that?

Gretchen R. Haggerty – EVP and CFO: No, I mean our guidance, but usually is from quarter-to-quarter and things are looking pretty stable in that period of time. I think John commented on some of the positive things that we’ve seen on our underlying demand and in many of our markets and even on the construction side, things have improved a bit, but we’re still out a pretty low base there. So probably some more momentum on the construction side would help the back-end of the year.

Shneur Gershuni – UBS: The second one is really on the pensions side, I think you guys have guided to pension payments north of 500 for this year and for 2013, but when can I think that first off there might be some legislation or some relief that you guys might be getting from some laws passed, can you talk a little bit about that and then also just from an actuarial standpoint about what is the age of your average pensioner and can we start to sort of see that point where the number of actives relative to retires starts to actually move significantly in your favour?

What are the Key Themes in Gold?>>

Gretchen R. Haggerty – EVP and CFO: I mean, I guess there’s a couple things in your question. First off, I think we gave you 2012, I don’t think we gave 2013, but from a pension payment standpoint it’s been relatively stable, pension OPEB costs relatively. But I guess what I would say from the make up of our plan, a couple things. We closed our main defined benefit plan in the U.S. and now the plans that we have in Canada as well to new entrants. In the U.S. there was since 2003 and in Canada it’s just in our recent book contract negotiations. So when we talk about pensions, we’re usually talking about the main defined benefit plan because of the funding requirements in the U.S. So we have been in a situation where there is no new actives going in, and our retiree base is declining. So we call that the natural maturation of our plan. But it’s really – slowly, but we had a lot of retirees that in the late ’70s, early ’80s, mid ’80s, so that’s where the bubble of retirees came from. From a funding standpoint, we don’t actually have mandatory funding requirements, and haven’t for some years, but we have been voluntarily funding at a level that is around or maybe a bit higher than what our normal cost has been running. So the $140 million that we put in this year, really more than covers this year’s normal costs, and I think that’s what has put us in a reasonable funding state, even in a very low interest rate environment. Now, the legislation you are talking about of course is, it’s related to the very low levels of interest that we see now, which are really being artificially held at these levels by the federal reserve, and I mean, for good valid policy reasons, but it is having a tough effect on those with defined benefit pension plan. So the legislation, we have seen some proposals, some to really affect that interest rate, in a way that would make funding more stable. Some of that was pending highway bills. We have also seen some action on maybe having separate legislation for that, which could come by the end of the year, but as you know, it’s an election year, and it’s pretty tough to predict, whether that will occur or not. But having said that, I think we have tried to manage the risks of our plan by funding proactively even when we haven’t had a mandatory requirement.