美國鋼鐵 (X) 2002 Q1 法說會逐字稿

Welcome to the U.S.

Steel first quarter earnings teleconference call.

At this time all participants are in a listen-only mode.

Later there will be a question-and-answer session and I will give you instructions at that time.

Should you require assistance while you're on this call, simply press zero then star and an operator will come on to your line to assist you.

As a reminder, this conference is being and it will also be replayed.

Please stay on the line at the conclusion of the call if you want the replay information.

I would now like to turn the conference over to our host and first speaker, the vice president of investment relations, Mr. Larry Schultz.

Please go ahead.

Thank you,

.

Good morning and welcome.

We appreciate your participation in this call and your patience as you work through the changes we made to our reporting segments, which are intended to provide a better understanding of the performance of our key business units.

In addition our to first quarter earnings, this morning we also announced that next week we intend to commence a public offering of 8 million shares of U.S.

Steel common stock with an over-allotment option of up to 1.2 million additional shares.

With us on this call are Tom Usher, chairman, CEO and president; and John Surma, vice chairman and chief financial officer.

I caution you that our presentation today contains forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements.

Such statements typically include and may be identified by words such as ``anticipate,'' ``estimate,'' ``expect,'' ``project,'' `'intend,'' ``plan,'' ``believe,'' or other words used in connection with any discussion of future operations, projects, acquisitions, divestitures or financial performance.

The forward-looking statements in this presentation address a variety of subjects affecting our domestic and Central European businesses, including, but not limited to, anticipated profitability, steel demand, steel pricing, shipment levels, the level and impact of imports, the level of capital expenditures, capability utilization, cost improvements, pension credits and the success, timing and implementation of various projects, including potential acquisitions and divestitures.

In accordance with the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, U.S.

Steel includes in its Form 10-K for the year ended December 31, 2001, and in subsequent forms 8-K, cautionary statements including important factors but not necessarily all factors that could cause actual results to differ materially from those set forth in the forward-looking statements.

With that said, now let's turn to John Surma to review our first quarter results.

Thanks, Larry, and good morning, everyone, and let me add my welcome to the call.

U.S.

Steel experienced supply-driven improvements in our domestic flat-rolled shipments in the first quarter, but average realized prices in all business segments declined from the fourth quarter levels.

Improved operating rates versus fourth quarter for all operations and, importantly, progress on our cost-reduction efforts contributed to a much-improved cost picture.

Our focus continues to be on returning our business to a position where we earn a respectable return on capital employed and generate cash to support strategic growth.

Adjusted first quarter net was a loss of $96 million or $1.07 per diluted share, improved from the adjusted fourth quarter loss of $121 million or $1.36 per share.

The special items are detailed in our earnings release, so I'll not discuss them specifically here.

Unadjusted first quarter net was a loss of $83 million or 93 cents per share and you should note that our first quarter net results reflect a tax benefit for our pretax losses at our estimated annual effective tax rate for 2002 of approximately 13 percent.

That tax rate reflects our current expectations that we will be profitable for the year and the fact that a significant portion of our earnings are expected to be from our Slovakian operations, which are currently not subject to income tax in the Slovak Republic and for which we have made no U.S. income tax provision.

Although the adjusted loss, at $1.07 per share, is below the latest First Call consensus loss of 81 cents per share, we believe that our adjusted pretax results were, in fact, better than most analysts estimates and the difference at the EPS level mainly resulted from the use of effective tax rates in excess of the 35 percent U.S. statutory rate, an assumption which was consistent, of course, with our 2001 results.

Now, we estimate that a change from our actual 13 percent tax benefit rate to, for example, a 35 percent U.S. statutory rate, which is still lower than many analysts use, would have improved our results by about 24 cents per share.

The loss from operations, excluding special items, for the first quarter of $81 million was much improved from the adjusted of $158 million in the fourth quarter.

This improvement was primarily the result of increased shipments and operating rates from domestic operations, which, in total, shipped 2.5 million tons in the first quarter, up 14 percent from the 2.2 million tons we shipped in the fourth quarter.

Correspondingly, our domestic raw steel capability utilization improved from 67 percent to 92 percent, quarter to quarter, which contributed to a 10 percent decline in our hot band productions costs quarter to quarter.

Now beginning this quarter, we've enhanced our financial reporting structure with a new, expanded breakout of our segment results, which also now include all pension and OPEB effects and administrative costs.

These changes better reflect our diverse activities and recognize that our ongoing operating units must support all of our costs of our business, regardless of their origin.

Now starting with the flat-rolled products segment, which includes our domestic sheet, plate and tin mill operations and related joint ventures, the first quarter loss from operations was $70 million or $30 per ton, but greatly improved from the fourth quarter loss of $143 million or $71 per ton.

Our domestic primary steel-making operations, which are in this segment, benefited from the late December and mid-January startups of two auto blast furnaces and since then, we've been operating all seven of our domestic blast furnaces.

Now compared to the fourth quarter, flat-rolled shipments increased by 15 percent or 310,000 tons and prices on a constant mix basis were essentially unchanged.

However, average realized flat-rolled prices declined by $19 per ton, primarily as a result of reduced higher-volume electro-galvanized shipments following the December fire at our Double Eagle coating joint venture and also the switch in product supply to our U.S.S.-POSCO joint venture from cold-rolled in the fourth quarter to lower-priced hot-rolled in the first quarter, following the restart of

cold mill earlier this year.

The Double Eagle facility is being rebuilt and is expected to resume production late in the year, but our product mix will continue to be negatively affected until full shipments are resumed sometime in the fourth quarter.

Stock sheet prices were phased in toward the end of the first quarter, but these were offset by some reductions in contract prices which had been negotiated some time ago.

We announced stock price increases of $50 per ton on hot rolled and $70 per ton on cold rolled and coated for new orders shipping after May 1st.

In the first quarter, average plate prices declined by slightly over 2 percent, but we have announced plate price increases of $20 to $30 per ton effective for new orders shipping after April 28th.

Average tin prices rose slightly less than 3 percent in the quarter, largely reflecting new contract pricing and some mix improvements.

The tubular segments recorded income from operations of $2 million or $11 per ton, despite continued depressed oil country markets, which were impacted by high import levels and U.S. rig counts, which averaged 818 during the first quarter a decline of 19 percent from the fourth quarter.

Although tubular shipments increased 4 percent versus the fourth quarter, the average tubular price dropped $41 per ton to $640 per ton.

The folks in our tubular operation have done an outstanding job in managing costs at shipment levels that were up only slightly from the fourth quarter and down some 36 percent versus last year's first quarter.

Our U.S.

Steel Kosice segment, which includes our Central European operations, lost $1 million in the first quarter, a decline of only $3 million versus the fourth quarter, despite a shipment decline of nearly 117,000 net tons or roughly 13 percent and an average realized price decline of $6 per net ton.

Prices declined for all major product lines and shipments were a low early in the quarter follows our delays in restarting the blast furnace, but we returned to more normal levels by March.

A total of 57 percent of first quarter shipments were slabs or hot rolled, but there continued to be a tremendous potential to expand into value-added markets.

Our recently announced conversion and tolling agreement with Sartid in Serbia, which I'll comment on a bit later, and the mid-March startup of the new vacuum degasser in Slovakia are two important steps in expanding our value-added shipments from USSK.

In the first quarter, USSK operated at 73 percent of raw steel capability, up from 66 percent in the fourth quarter.

The 73 percent reflects a very low level of operation in January during the blast furnace startups.

Since early February, the three USSK blast furnaces have operated above the 90 percent level and we expect to remain at a three furnace level throughout at least the second quarter.

USSK has announced two 20 euro per metric ton prices increases on new sheet orders for shipment after April 1st and June 1st and we expect second quarter prices to increase slightly, despite some carry-over business which did not ship in the first quarter.

In our earnings release, the statistical page, we also provided income results for our other business, in total, which include coal, coke and iron ore businesses, Straightline, our new distribution unit, which is in early startup, and our other units and we hope that our new disclosure will provide an improved view of the performance of our several varied business units.

We reported on our quarter-end liquidity in our earnings release.

Our long-term debt has remained essentially unchanged from year end.

We sold receivables of some $200 million to support our working capital needs, which rose in line with the pickup of business activity and to pay the $54 million true-up settlement with Marathon.

Our total equity declined by about $60 million to about $2.4 billion or $27 per share.

In summary, it was a difficult quarter, with prices down for all segments and tubular and USSK experiencing depressed shipment levels.

We're encouraged, however, by improved operating rates and increasing spot prices for most flat-rolled products.

We still have work to do to return this business to a solid footing of profitability and cash generation, but we're starting to see signs of progress.

Now let me turn it back to Larry Schultz, who'll provide some additional detail on the quarter's operations and the current market status.

Larry?

Thank you, John.

As John mentioned, with the revised segments, we now allocate all pension and OPEB effects and administrative costs to the segments and other businesses.

Previously, we kept the net pension credits, costs related to former businesses and the USX administrative charges out of segment results.

In the first quarter, the net of OPEB charges and pension credits across all units was an $8 million charge and due to the use of our VEBA fund to pay union OPEB costs, both pensions and OPEB are largely non-cash.

Capital spending in the first quarter was $56 million and is detailed by segment in statistics accompanying the earnings release.

We plan to cut our 2002 capital spending to about $260 million, which is $40 million less than our previous $300 million target.

This current plan excludes about $30 million of mobile equipment purchases with respect to lease and $37.5 million, which will be paid to VSZ in July for half of the deferred purchase price for USSK.

Construction continues on a new continuous anneal and tin-coating line which are scheduled for startup in 2003 at USSK and will further our expansion into value-added products.

The average calculated flat-rolled cost per ton in the first quarter was $407 per ton, based on the average realized price of $377 per ton and the $30 per ton loss for the segment.

This cost is down $60 per ton from the fourth quarter and reflects cost efficiencies of our improved operating rates, a lower-valued product mix and results of our cost-reduction programs.

The average calculated tubular cost per ton in the first quarter was $629 per ton, using the $640 for the price and $11 per ton profit for the tubular segment.

This is down $7 per ton from the fourth quarter and reflects slightly improved shipments and contributions from cost reductions.

As previously discussed, we've committed to a cost-reduction program for domestic steel of $10 per ton per year for the three-year period ending 2004.

We've identified numerous cost reduction programs and the first quarter of cost savings rate exceeded the $10 per ton annual target.

Our calculations procedure does eliminate the majority of volume and price-change effects and focuses on cost savings of the specific projects.

USSK, which reduced costs by the equivalent of $20 per metric ton in 2001, has established a cost-reduction goal of $10 per metric ton in 2002.

USSK's calculated cost per ton in the first quarter was $246, down $3 per ton versus the fourth quarter and mainly reflected reduced

spending and progress on this year's cost-reduction target.

Looking forward, our order backlog for sheets supports full sheet operations for the second quarter as lead times for sheet products are extended into the third quarter.

Plate and tubular remain well below capacity.

Because the second quarter sheet order book was strong until very early in the quarter and because we just recently opened the third quarter order book, new orders for the last several weeks have trended down.

As a reminder, we display the trend of our five-week moving average incoming domestic order rates on the U.S.

Steel Website on the investors page.

Information is normally updated by noon on the first Monday of each month, but this was up -- this information was updated today and includes order activity through last week.

Turning now to markets for major products, the domestic economy is showing signs of recovery as consumer confidence and spending continue to improve, while industrial inventories decline.

Automotive and appliance sales have remained healthy and stable, while capital spending remains depressed.

Service centers have seen their sheet shipments begin to improve while their

inventories continue to fall and we saw that with the announcements yesterday.

Demand in plate markets is flat.

Bridge building, which is a large market for us, is threatened with federal and state government funding cuts and the important railcar market is operating at about half of historical levels.

Tubular markets also remained soft as distributors continued to reduce inventories.

U.S.

Steel's distributors have reduced inventories by 30 percent since the second quarter of 2001.

Tubular prices appear to have stabilized following the first quarter decline and most projections are for the rig counts to rebound in future quarters, based on the current crude oil and natural gas prices.

The March domestic active rig county averaged slightly 763, so a rebound, as some suggest, to the 1000-plus level would be significant for our tubular business.

Now let's go back to John, who had some final comments before we turn to questions.

Thanks, Larry.

Since our last quarterly conference call, President Bush has taken very bold action in imposing Section 201 tariffs, which should give the domestic industry some breathing room to pursue much-need consolidation and restructuring.

We do not believe the survival of many of the once or twice-failed companies is good for our industry or our customers and we are continuing to work for industry consolidation.

We're also considering numerous opportunities to acquire assets that will contribute to our value-added strategic growth agenda.

As noted in our earnings release, we have signed a letter of intent to sell our coal and related assets associated with our West Virginia and Alabama coal mines.

If completed -- and there are several contingencies -- the sale would involve cash considerations and would result in a pretax gain.

However, this excludes the potential recognition of obligations related to a multi-employer health care benefit plan which has a broadly appraised net present value of $76 million a year end 2001.

Now turning to Central Europe, we've announced an agreement with Sartid in Serbia for the full conversion of slabs into hot bands and cold-rolled substrates into finished tin products.

Under a related facility management agreement, we will have management oversight of Sartid's tin facilities and we've also signed a letter of intent to explore an expanded long-term interest in the Sartid facility.

Tom and I had occasion to visit there recently to observe the early stage processing of the material and we came away very impressed with the facilities, with the people and with the potential.

The planned coal sale and our activities in Serbia are consistent with our drive to build value in our company by investing in value-added facilities and expanding globally, while reducing our investment and exposure to domestic raw materials

.

Now with that, Mr. Usher is here with us and we'll now answer any questions you may have.

Ladies and gentlemen, if you wish to ask a question, please depress the one on your touch-tone.

You will hear a tone indicating you've been placed in queue.

You may remove yourself from queue at any time by depressing the pound key.

And if you're on a speaker phone, please do pick up your handset before you key.

Once again, press one if you have a question.

Our first question comes from Prudential Securities.

We go to the line of

.

Please go ahead.

A couple specific questions, if I may.

In the first quarter, was your iron-making roughly 2 million tons and your internal coke use about 800,000 tons and iron-ore usage about 3 million tons?

I'm not sure I have the usage figures,

, but on the production side, I'll look at...

And if I could ask another one, maybe, while you're looking that one up, is $150 to $200 million a reasonable guess for the coal sale proceeds?

And does that involve about half of your 775 million tons of coal reserves?

I think that estimate would be quite a bit on the high side,

, quite frankly and we really haven't concluded the details on the reserve picture, so I really can't give you a number for what portion that would be, but I think you're quite high on that side and on the high side and I would say that the proceeds, when we're -- assuming that we do complete the transaction, which, as I said, is subject to contingencies, would have cash results of quite a bit less than that.

Your Illinois coal reserves are almost half of your 10-K reserves, which are excluded from, I guess, this sale, so I would think that the sale would be no more than half of your coal reserves, possibly less?

Yeah, you're correct that the Illinois reserves are excluded, but I honestly can't respond to the specifics.

But it would be, you know, a not-inconsequential piece of reserves that would be attached to those two.

There's a footnote in our -- in our annual report that is the breakout between the operating lines and the reserves in those places.

Yeah,

, we basically produced more at Minntac than we shipped in the first quarter.

The lakes are frozen, so we did rail some product this year, a little bit more than we did in prior years, but we produce substantially more than we ship.

Actually, Larry, maybe I didn't phrase my question well.

I was estimating your internal iron make at 2 million tons, your coke usage at .8 and your iron ore consumption at 3 to try to understand or conclude that you sold at least 300,000 tons of coke on the outside in the first quarter and that it didn't -- it wasn't clear whether or not you had any outside iron ore sales.

That's what I was really trying to get to if you could comment on that.

Yeah, we had both.

We had outside sales of both iron ore and coke.

I don't have at my command immediately how much they were.

Is -- are my guesses as to your internal consumption in -- are those in the ballpark?

I think you take the raw steel production and use normal ratios and, you know, I haven't worked out the math...

Well, I don't know what your scrap ratio is in your raw steel usage, which is why I guessed 2 million tons out of the 2.6 would be your own pig.

Yeah,

, I'd say we're running in the low 20s as far as scrap consumption in the -- in the first quarter, so the rest would be hot metal.

Thanks, Tom.

And then, in the -- in the footnotes, in the financials, it's on page 29 of the annual reports, I show the coal reserves that are assigned to those specific operating lines.

Thank you and congratulations on a decision to sell stock.

It's a tough world out there and I think you're doing the right thing to safeguard the company.

Just as a general comment, because I'm sure there's some interest out there, this is sort of a two-edged sword.

We think the stock price has upside potential and we sort of hate to be selling at this price.

Having said that, as a result of the financing we did and the current environment we have found ourselves in, we have some restrictive covenants that limit our flexibility and, as we look forward, we think over the next six to nine months there's going to be some real opportunities to buy specific assets and/or companies that will really enhance our strategy of moving up the value chain and will give us a real competitive edge and we would hate to not have the flexibility to be able to pursue some of these.

So we have come up with this proposal for this limited offering.

We think this will give us needed cash to enhance our balance sheet and provide us with the kind of flexibility that we need to be able to take advantage of things very quickly and move on what we feel are very desirable types of acquisitions to build the company.

Our next question comes from the line of

and is from the -- from J.P. Morgan.

Please go ahead.

Yes.

Good morning, Tom and John.

I had a couple questions.

One, in the release where you talk about we currently anticipate that we will be profitable for 2002, could you give us a little bit more detail on what line you're talking about on the P&L and how you're going to get there?

Well, I mean, the line we're talking about is net income and we intend to get there by having, in effect, our prices exceed our costs, which they haven't done for a while.

And I don't mean that in a simplistic way.

I mean, we see our costs continuing to come down as we get the volume increases.

Our order book is very strong.

Our lead fronts have been pushed out into the third quarter.

We're getting the price increases that have been announced, which, as all of you know that have been around this business for a while, there's a big difference between announcing increases and actually collecting them.

We appear to be collecting them.

We're starting to book business for the third quarter.

The prices are holding up strong and we continue to make a lot of good progress on our -- on our cost front and I guess all we're trying to convey is that, based on our best look at the next three quarters, by the time we get to the end of the year we expect to make money on a net income basis in the business.

OK.

And then, in terms of Sartid, do you have a management fee that you'll be collecting for that?

Yes.

That's part of the arrangement we have there.

They have a excellent tin facility, for example, that has not run and we intend to bring our product down there, convert it tin.

The tin market is still very strong in Central Europe and we are at full capacity at Kosice and we will have management there.

We will get a fee for that and we will then sell the product to our existing commercial organization.

And final question on the pricing front, have you attempted to renegotiate some of the pricing contracts with some of the larger end users like automotive and OEMs?

And how successful have you been there?

No.

I mean, we've had, I'd say, with these types of customers long-term relationships where when prices have been falling, they have stuck by their obligations.

I know there's a -- there's a rumor out there that some of these people have reneged on process -- or on prices during a falling market.

That has not been our experience with them.

In the same sense, we entered into contractual deals with these people, either through the first half of the year or through the entire calendar year and we don't expect to renegotiate prices.

I'd say we will expect to be very well positioned when we come to September-October when we begin our price negotiations for calendar year 2003.

And we would expect to see, you know, some bargaining strength which we haven't had for several years.

There are some contractual deals we have that are expiring at midyear.

I would say they're not a significant number, but, again, on those would expect, then, to get significant price increases for those ones that are really open for negotiation at midyear.

OK.

Thanks a lot, Tom.

OK.

Our next question comes from

at Midwest Research.

Please go ahead.

Tom, you've discussed in the past purchasing assets and or inevitable domestic consolidation through this natural bankruptcy process.

However, you passed on what would -- I would consider a great opportunity in LTV.

Clearly, some of those assets would have fit in nicely with your business model.

Simultaneously, you could have shut some of the excess capacity.

Given the attractive price at the raw state for the asset, I'm wondering why U.S.

Steel didn't try to pursue this opportunity further?

Well, I guess I would just -- without any getting into detail,

, say that the final chapter hasn't been written there.

Are you ready for the next question?

I am.

OK.

Then the next question comes from

at

.

Please go ahead.

Hi, Tom.

I also want to compliment you on the fine job your management team is doing in a very difficult environment.

Thank you, Elliot.

My question has to do with, number one, what was the affect of the pension on the P&L in the first quarter?

Where there any gains in there some place?

We do have -- I think we gave in our last quarterly call an estimate of what our pension credit would be for the year, which was about $120 million, in that range, and roughly one quarter of that was recorded in the first quarter.

OK.

Now I'm estimating second quarter tons at about 2.7 million tons shipped.

Is that in the ballpark?

Yeah, I'd say you're pretty close there.

The sheet business is very strong.

The tin business is strong.

We do have some weakness in plates and tubular, but, you know, that's probably a decent number, maybe it would be a little higher than that, maybe closer to 2.8.

OK.

I'm also estimating that your realized collection of prices on that will be about $40 a ton higher, sequentially.

Well, I mean, we don't disclose that, but, again, you know, we've said 60 percent of our business is spot, 40 percent is contract.

The contract's going to stay about where it is and we would expect to see significant improvement on the spot business.

OK.

Let's say, just for the sake of a mathematical example, that I was right and 2.7 times 40 is $108 million and you just showed a pretax loss of $95 million.

If my numbers were right, so you'd be at least at break-even in the second quarter.

Is that -- my mathematics right?

Your mathematics are correct.

OK.

Lastly, on the subject of assets going up for sale, what do you anticipate happening at Bethlehem Steel.

Do you think they'll follow the pattern of LTV and put those assets on the market?

And if that's so, would you be a prospective buyer?

Well, again, I mean, what they're going to do I think would be better addressed towards them.

You know, I don't know anything more than what I read in the paper.

But there are assets that the have that we would have some interest in and, you know, how this thing will evolve -- I mean, I appreciate the desire on your part to sort of know exactly what we're going to do and what our strategic thrust is going to be, but I think you need, also, to be sensitive to the fact that in any of these deals we don't want to tip our hand too much about what we're interested in, what we're going to pay for them, et cetera, et cetera.

So all I would say is that there are certain Bethlehem assets that would have interest to us.

There's other ones that would not.

What they are going to do is better left for them to answer, but I guess I would just continue to say that we intend to aggressively pursue those assets and/or companies we think are of benefit to us.

That's a fair answer.

Thank you very much.

And next we go to

at

.

Good morning.

Getting back to the contracts again, what percentage of your contracts roll over between now and the end of the year?

Relatively small.

We've got a few of them,

, but I mean, I think for planning purposes and so forth, figure 95 percent of them will go through the calendar year.

OK.

How many roll over at the beginning of the year.

One of your competitors said that they only expected 30 to 40 percent to roll over for next year?

No, no.

We have a much higher percentage than that and we would expect probably in the neighborhood of 80 or 90 percent to roll over.

Thank you.

Our next question comes from

at

.

Please go ahead.

Good morning, gentlemen.

Good morning.

Good morning,

.

I have just a couple of quick questions.

First of all, regarding the pricing changes that you're implementing for sheet on the spot market.

You had indicated a $50 increase for hot-rolled in May.

Have there been any additional price increases beyond that announced?

And I guess, you know, what -- I'm trying to get some sense of how much additional upside you're seeing for some of the initial bookings you're making on the third quarter book.

Yeah, we've just started to book that quarter, but I mean, I would say to just use a surrogate hot band pricing -- we expect to see that in the third quarter, say, up in the neighborhood of roughly $100 a ton vis-a-vis where we were at the beginning of the year.

So I think for your analysis, we expect to be -- collections in the neighborhood of about $100 a ton higher than we were, say, the first of the year.

OK.

All right.

Thanks.

A couple of -- also, could you talk about the impact of energy costs, looking at the first quarter versus the fourth quarter and then what you would expect energy costs to be 2Q versus 1Q?

, this is Larry.

Our natural gas was reasonably flat between the first quarter and the fourth quarter.

We're looking at the second quarter being up, maybe, about 60 cents an MCF, which will cost us a little bit less than $10 million for the quarter ...

OK.

In terms of an increase.

The remainder of the year we expect it to stay basically flat through third quarter, fourth quarter, depending on whether and drilling and storage removal, et cetera.

You know about, we don't have as much certainty there, but we expect, you know, probably relatively flat to minimal increasing prices in the third and fourth quarter.

We've got nothing hedged right now and we don't have any anticipation of hedging anything.

OK.

Another question is, shifting gears a little bit on liquidity issues, you had -- in your release you talked about availability liquidity at the end of March.

You know, given the -- you know the dramatic changes in your operations, you know, combined with the anticipated proceeds from your equity offering, you know, what would you anticipate available liquidity to be at the end of the second quarter and how much of that would you think would be appropriate to allocate toward potential acquisition activity?

This is John.

The exact numbers that we'll have at the second quarter, I can't tell you, except that, as you would expect, assuming the equity offering is completed, it would be more than it is -- than it is now.

We'll be updating that liquidity figure to a more current figure in connection with the offering documents, I believe, and we'll have some more current information there that I think you can get your hands on fairly quickly.

We have some other uses of liquidity for surety bonds that we've disclosed earlier as well that, while not, you know, consuming cash, does consume some of the liquidity on the line.

So we would expect the operating to, in essence, supplement that and the working capital consumption we've had recently that begins to moderate as we hit, you know, essentially a fully booked and fully operating level.

So I don't have a specific number except to say those things sort of all go in different directions and we would see the overall liquidity level, with the offering, either being about the same or moving up slightly.

OK.

And then how much -- what's an appropriate, you know, expectation for us or how much is -- how much -- how much of that liquidity is, you know, kind of allocated for growth-oriented acquisitions?

Well, I wouldn't say that we have an allocated amount that we're committed to spend.

I mean, it's really a question of how attractive the opportunities are and to the extent we find one that's attractive and consumes a portion of that, then we will, I think, have to balance that and weigh that and we want to have, as Tom said, the flexibility to do that and that's the purpose for the offering.

So I wouldn't say all of it.

I wouldn't say none of it, but if the opportunity is good enough, then the amount available would be larger.

OK.

One last question, on the cost reduction plan.

Can you give us some examples of, you know, of where you're making some headway on costs and how you would expect those programs to unfold over the course of the year?

Yeah.

There's a, you know, a lot of different elements and some of them are related to -- a lot of them are related to energy usage.

That would be -- that would be a good bit of it and that just is smarter usage of energy that's generated inside the plants with better use of steam and better use of waste heat, those kinds of things.

And they're generally low capital investment, high return sort of things.

We have a lot of projects that are aimed at yields, which is a big part of the cost savings program, as well, and that's just by better practices on edges and other things like that that would just be sort of workmanlike projects.

And then a variety of fixed cost things, as well, that would be just looking at our overall fixed-cost picture.

So the specific projects are many, many, many and most of them relatively small, but they add up to a fairly good-sized number.

But it would be -- the biggest hit would be on sort of general spending and energy spending -- energy consumption, not pricing, and then on material usage and yield.

OK.

Terrific.

OK.

Thank you very much and congratulations on being -- on getting yourself in a good position to kind of benefit from this upside in the market.

Thank you.

OK.

We're going to go to

at Royal Bank of Canada to see if he has a question.

Please go ahead.

Most of my questions have been asked.

Can you guys talk about sort of your plans going forward for the rest of the year vis-a-vis Straightline?

And then, after that, I had a question about kind of where you see the plate market going, but first Straightline.

Yeah, I would say on Straightline, we continue to bring new parts of the country into our coverage.

We are exceptionally pleased with the results of Straightline to date and they continue to have a high degree of repeat business and, you know, it's still a losing operation because we've had a tremendous investment there in infrastructure and hiring people and introductions into new areas, but it is right on the plan that we've established for them and we continue to see thing grow at a pretty good rate over the next three quarters.

So I'd say we are very pleased with Straightline to date and we will be disclosing, as we did in the release, how we're doing with that venture.

What is -- what is sort of the target coverage of the country or even beyond and then when do you see the thing turning profitable?

Yeah, I would say the target coverage is, you know, we would probably expect to cover 50 to 60 percent of the country here over the next 18 months and we're looking for this thing to turn to profitability sometime during calendar year 2003.

All right.

Can you talk a little bit about the plate market as you see it...

Yeah, the plate...

Developing

and yet new capacity seems to keep the price heading in the wrong direction?

Yeah.

The plate market, you know, more and more of our tonnage is going into OEM businesses, both the service center business in our particular case and I would say the demand side in some of these markets has been severely depressed over the last year or so.

We don't see the strength of that.

However, I would say that in talking to a number of customers over the last month or so, they are beginning to see some glimmers of hope and so, you know, I'd say we expect this to turn up during the year, show modest increases in volume, but we don't see the same kind of strength that we see on the sheet business, but we do expect it to improve as we move forward and I would ask you to maybe hold that question until the end of the next quarter and I'll probably give you a little better update on that.

We're seeing glimmers of hope, but it's still, even with the 201 action, still kind of a sluggish market.

All right.

And the last one is sort of housekeeping.

What was the split and the liquidity between cash and revolver availability?

The -- without having an exact number, the majority of the liquidity would have been in the two revolvers and a more modest amount in cash, both here and in Slovakia, so the cash would be -- would vary as things go back and forth, but it would typically be less than $100 million and the rest would be in the -- in the two facilities.

Thanks very much, guys.

Next we go to the line of

at Standard Asset Management.

The liquidity question was mine, but other than that, I'd just like to ask, you know, given that you've drawn down on your facilities and such, you don't really have a lot of working capital calls on cash in the -- going into the second quarter.

Do you think you'll positive cash flow from operations for the second quarter?

We're heading towards that level.

I guess it really depends on how quickly the price increases get implemented, get captured and work through the system, but as we move through the quarter or as we would enter the quarter, I think we're much nearer or probably attaining that level by then.

Yeah.

I mean, most of the cash draw was really building up the pipeline in the first quarter.

We went from a, you know, relatively low level of running five blast furnaces.

We stepped it up to seven, running at, you know, significantly reduced rates and now we're running pretty much flat out, so I'd say almost -- most of that call was in the first quarter.

Given that, you know, natural gas prices and energy commodity prices kind of turned on a dime in the last month and a half, have you received any significant positive responses from your end markets in the tube business?

Is that like an area of optimism for you guys?

It is an area we think there's certainly far more upside potential than downside.

We think we've hit bottom and, you know, from my Marathon association still, there's a fair amount of bullishness there on improved drilling here in the summer months.

So I'd say inventories are -- have gotten into much better shape at the distributor level and I'd say there's a good potential for some upturn here through the year.

Are you still concerned about, you know, foreign manufacturers taking that business away from you?

Is that sort of, you know, kind of quelling your optimism at all or do you still feel that you'll get a good share of that business.

Well, it is a concern, but as you know, imports have increased significantly.

We've filed a trade case on this and we think that'll also be a positive.

That's a few months down the road, but I'd say we're still mildly optimistic on the tubular side.

Thank you very much.

Next we go to the line of

at Merrill Lynch.

Please go ahead.

Good morning, gentlemen.

Good morning.

Just a question on the capital expenditure, really.

Could you explain to us what that $23 million cap ex in the quarter on other businesses was made up of?

Yeah.

The largest piece of that -- remember, other businesses includes our domestic raw materials, coal, iron ore and coking operations and the largest portion of that would have been transportation equipment for our Minntac mining operation and in other capital projects at each of those three.

Those are three areas that are capital using activities, so we would typically have a capital requirement there.

The largest piece in this particular quarter would have been mobile equipment, transportation equipment at Minntac.

OK.

In terms of the -- could you give us an idea of the breakdown of the $260 million capital expense for this year in terms of the segments?

Well, we do have the first quarter breakdown and I think you could derive from that that the larger piece of it would be the domestic flat-rolled business and then the USSK piece would each have, on an annual basis, maybe larger chunks than you'd have here.

So we would probably see a good bit in Slovakia, a good bit in the flat-rolled business and then the

project we have going in tubular would have a more meaningful number there in the future than you see here.

So I would say those would be the three biggest categories.

I'd say proportionally tubular will probably be a greater percentage than you see in the first quarter.

This is a project that the spending will be more towards the back end of the year, so that is one large, specific project.

The relationship between the rest of them is probably pretty good.

Raw materials would probably be down a little bit.

OK.

Thanks a lot.

Next we go to the line of

at CSFB.

Please go ahead.

All right.

Good morning.

Two question, I think both for John.

First off, the $260 million in cap ex, obviously, it's on the low side relative to sort of historical trends.

I was just curious, John, if you could sort of tell us, you know, what your thinking is in terms of maintenance cap ex going forward, whether that's come down at all in this downturn or basically you're finding you can run the business with less capital and what, as you come out of the downturn, what might you be thinking in terms of a ramp up in cap ex, if there is going to be one over the next couple of years?

And then the second question is on the cost cutting.

Obviously, we're enjoying a big pickup or you guys are enjoying a big pickup in volumes at the moment.

How are you finding the ability to sort of track cost cutting that's being done as a part of your program as opposed to cost reductions that are being seen due to higher volumes, better absorption of fixed costs, that sort of thing?

Let me address them both.

The cap ex matter -- our capital spending has been reduced as you see, or our expectations, and that's just being, we think, probably responsive to difficult business conditions that we experienced and wanting to properly guard our liquidity and not spend beyond our means.

So we did throttle back a bit, but we don't believe at all, in any way, that diminishes the sort of long-term utility and competitiveness of our facilities.

So we're mindful of the things that need to get done and we're making sure that we do those and being, maybe, a little more selective on opportunistic projects as market conditions would warrant.

We also have the absence this year of any major blast furnace projects and, you know, those would tend to cause the numbers to flip up and down as time goes on.

So we don't have that particular requirement this year, that we foresee, anyway.

And the bigger projects you'll see over time will be market oriented and, in general, they'll be probably more focused on the downstream end of the business, closer to the customer, which you're seeing this year.

We have a degasser in Slovakia, a dynamo line, a tin project and the Q&T line here, things that are close to higher value-added customers is really what we're trying to head to.

So I think that'll be the trend, but I don't think looking forward we would have an expectation of the overall trend, which has been around DD&A for some time now to go significantly above or below that general trend line.

And on the cost reduction ...

Yeah, on the cost side, we are, in our sort of score keeping process and having done this in a couple different lives before, you really have to make some assumptions and we have to assume that -- we're not giving ourselves credit, for example, for the bounce back in the volume from the fourth quarter to the first quarter.

We're doing this on an assumed constant, normal operating level.

We're not giving ourselves a pat on the back because gas prices may have been down versus up.

We're trying to really make it -- the cost savings to things that we have done, our people have done, our management has accomplished and that's -- you know, we're changing blast furnace burdens and combining jobs and limiting positions and doing things like that that really are designed to show real costs that once you make them, they stay embedded, not just transitory changes in volume or external prices.

OK.

And you feel comfortable you're adequately able to sort of measure that so that, I mean, when volumes turn down some day out there, you won't be negatively surprised?

Yeah, well, it doesn't, to be honest, have the elegance of a double-entry bookkeeping system.

I mean, no one who ever has tracked either synergies or cost reductions -- and I've done both of those -- can make that claim, but I mean, it is something that if we have a rigorous measurement, project-by-project system that's applied consistently throughout the operations we feel we have a good enough control on it to report confidently to you all the progress we've made.

OK.

All right.

Thanks a lot.

Next we go to

at T.D. Newcrest.

Please go ahead.

Good morning.

Could you guys just talk about what your feelings are in terms of potential disruption to current pricing and shifting momentum that could occur as the assets of LTV and

are back -- brought back up?

Yeah, well, I mean, I guess there is the potential there.

We've not seen anything to date.

As I say, we're booking in the third quarter right now.

They have talked about coming back on a limited basis.

If there's any type of upturn in the economy at all, I don't think it'll be a factor at all.

But, again, there's a tremendous sort of mix within mix situation here and I think if it would affect anyone, it would be on the very low-value-added end of the commodity grades.

They would probably tend to suffer a little more than people who are in markets that require a little more expertise and quality and, even within our hot-rolled mix, we tend to move more towards the high end of that range.

So if it has an impact, I think it'll hurt people on the lower end more.

I don't see it being significant, especially -- it doesn't take much of an improvement in demand to absorb that.

We expect imports to continue to be reduced as a result of the 201, so, you know, we're sensitive to it, but it's not something that causes me overconcern.

Great.

Thank you.

And our last question comes from

at

.

OK.

Just a couple more nitty-gritty kind of things.

Will you be giving us back quarterly data on the new segments in the investor packet, hopefully, for a couple of years because last year was kind of an abnormal year?

Chuck, this is Larry.

With all the changes, it'd take us some time to do that.

We want to make sure it's right.

We will get that out there, but we're still working the 10-Q and it's probably going to be coincident with or slightly behind the 10-Q in terms of our priority list at this point.

So we're probably about two or three weeks away from that.

We understand you need that.

We want to make sure you get it.

But will you give us a couple years, not just last year?

Yes.

OK.

And then one other issue.

Could you give us some idea of the percentage in the all other that might have been from real estate?

I mean, you've got a pretty nice development business that, I don't think, gets enough credit?

Percentage of what, revenue?

Of the income, the $13 million you had in the all other category.

We -- Go ahead, Larry.

We typically haven't given the number specifically.

I mean, the real estate resource development operation is a nice, consistent profit generator and in the first quarter the raw materials, typically, are not, so certainly of that and the other things that are in there, certainly of that $13 other number, real estate resource development would have been the majority of it.

Yeah, the two big pieces there are realty and also Transtar and Transtar, seasonally, doesn't normally do well in the first quarter, so...

OK.

That's what I needed to know.

Thank you very much.

OK, there are no more questions.

OK.

We appreciate very much your participation in this call.

We hope the change that we have made to provide more information is helpful to all of you to help with your analysis of the business and how we're doing and we would be very interested in any feedback, one-on-one, that any of you might have as you get into this and if there's items you want clarification on, Larry is certainly available and hope this has satisfied some of your needs.

In summary, you know, things certainly look a lot better today than they have for some time.

The order book remains strong.

We're seeing pricing take hold and we continue to drive our costs down and we're trying to put ourselves in a position to make some good strategic moves so that when the next downturn comes in this business that we feel we're a much healthier company with a greater participation of value-added products and less dependence on our raw material side of the business.

With that, I thank you all for your participation.

Goodbye.

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