美國鋼鐵 (X) 2002 Q2 法說會逐字稿

Welcome to US Steel's second quarter earnings release teleconference.

For those of you who prefer, there is a simultaneous webcast of this telecast conference at www.ussteel.com.

Today's conference call is being recorded.

I would now like to turn the conference over to Mr. John Quaid, Manager in Investor Relations.

Thanks, Paul.

Good morning, and thank you for your participation in the United States Steel Corporation second quarter earnings teleconference.

With us on the call this morning are Tom Usher, Chairman and CEO and President and John Surma, Vice President and Chief Financial Officer.

Before we begin, 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 on impact of imports, the level of capital expenditures, capability utilization, cost improvements, pension credit and settlements, and of 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, United States Steel Corporation included in its Form 10K for the year ended December 31st, 2001, Form 10Q for the three months ended March 31st, 2002, and subsequent Form 8K's, 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.

Now, John Surma will review second quarter results.

Thanks, John, and good morning, everyone.

Thanks for being with the call withus today.

I'm very pleased to report that US Steel had a profitable second quarter, as our businesses experience continued improvement, highlighted by flight driven increases in domestic flat roll shipments, recovery in domestic and sport market prices, record shipments at US Steel Kosice, and rising European spot market prices.

In addition, improved operating rates especially for USSK and continued progress on our cost reduction efforts contributed to an improving cost picture.

Furthermore, our iron ore unit experienced a seasonal improvement in our coal unit benefitted from improved mining operations.

Overall, our focus continues to be on returning our business to a position where we can earn a respectable return on capital employ and generate cash to support strategic growth.

Now, let's have a look at the numbers.

Adjusted second quarter net income was $17 million or 18 cents per diluted share, significantly improved from the adjusted first quarter loss of $96 million or $1.07 per share, and also, better than the adjusted net loss of 21 million or 24 cents per share reported in the second quarter last year.

These results exclude the after-tax effect of several special items.

Since they're detailed and described in the footnotes in the statement of operations, I'll not discuss them here, although we can certainly do that later on in the Q and A if you wish.

Unadjusted second quarter net income was $27 million or 28 cents per share compared to a net loss of 83 million or 93 cents per share in the first quarter, and a net loss of 30 million or 34 cents per share in the year ago quarter.

Now, let me comment for a moment about our effective tax rate.

As you know, on an interim basis, accounting rules require that we estimate our annual income to determine that our estimated annual effective tax rate, which we then apply to our year-to-date results.

Due to the Slovak Republic tax laws regarding tax credits in that country and also certain US tax planning strategies, virtually no income tax provision is reported for USSK income as we described before.

Therefore, our effective tax rate is typically well below the US statutory 35% rate and will in fact change quarter to quarter depending on the relative proportions of our estimated annual domestic and USSK income.

Our current estimated annual effective tax rate of approximately 24% at the end of the second quarter versus the 13% used at the end of first quarter primarily reflects higher estimated annual domestic income since the first quarter.

Under the accounting rules, of course, the new estimated rate then applies to our year-to-date pre-tax results which then causes a catchup effect for our first quarter taxes in the second quarter tax provision, and that's of course played out again in the third and fourth quarters.

For those of you that are also keeping score, one more item of comment on that is the second quarter and first half taxes also reflect a deferred tax charge of about $4 million related to a newly enacted Indiana State income tax law.

I'll be glad to take you through that in more detail later during the Q and A session if you wish.

Also now, in response to your interests in analyzing sequential quarters as well as the traditional year-over-year comparisons, our supplemental page of earnings release now includes information for the first quarter 2002, in addition to the second quarters of 2002 and 2001.

Many of our comments this morning will focus on sequential quarterly changes.

In addition, as many of you requested, we also provided historical supplemental statistics and footnote data for our new segment approach for the years 2001, 2000 and 1999, as well as quarterly data for 2001, and that was filed via Form 8K on June 4th.

Now, back to the numbers.

Income from operations before special items for the second quarter, 32 million, were significantly improved from the loss of 81 million in the first quarter and a loss of 19 million in the second quarter of last year.

Looking at the second quarter results, the segment level, the flat roll product segment reported second quarter loss from operations of 26 million or 10 per ton, a $22 per ton improvement from the quarter, but still an area where we have some work to do.

Flat roll shipments increased by 10% compared to the first quarter and they were up 12% versus the year ago quarter.

Average realized prices for the flat roll segment of $402 per ton were up $25 per ton or 7% versus the firstr quarter, as realized prices for the majority of our products increased and we shipped comparatively more of value ended products.

Looking at average realized price changes for the first quarter for the flat roll segment, a little more detail.

Average realized sheet prices increased 8%, reflecting the spot market increases that were phased in towards the end of last quarter and some favorable mixed effects.

Average realized plate prices increased by 1% due to a favorable change in mix and average tin prices declined 2% in the quarter, largely reflecting new contract pricing.

Turning to the cost side, cost performance, the average calculated flat roll cost per ton shipped in the second quarter comes in at $412, based on the average price of $402 per ton and the $10 per ton loss in the segment.

This cost is up very lightly versus the first quarter and reflects the first quarter but a whopping 35% less than a year ago quarter.

Tubular shipments increase 15% versus the first quarter; however, the average realized tubluar price decreased $4 per ton, or less than 1%, and $636 per ton as a result of mostly mix effects.

Folks in our tubular operation continue to do an outstanding job in managing costs at shipment levels that, while up from the first and fourth quarter levels, are down some 31% versus last year's second quarter, which happened to be the highest quarterly shipment level in over five years for our tubular segment.

On average calculated tubular cost per ton in the second quarter was $608 based on the $636 per ton average realized price in the 28 per ton profit for the segment.

Cost per ton improved $16 from the first quarter, reflecting improved operating rates, a lower cost product mix and contributions from our cost reduction programs.

Throughout the second quarter, our domestic progress stewing (phonetic) operations operated all seven blast furnaces resulting in improvement of our domestic raw steel capability utilization from 92% to 93.9, nearly 94% quarter-to-quarter to the highest quarterly level since the second quarter of 2000.

USSK reported income from operations of 26 million in the second quarter, an increase of 27 million versus the first quarter but 15 million less than the year ago second quarter.

USSK had record shipments of 1.1 million tons in the second quarter, up 46% from the first quarter and up 3% from the year ago quarter.

Average realized prices for USSK increased by $12 per ton or 5% compared to the first quarter, as realized prices increased for all prime products and exchange rates moved in our direction.

More than half of the second quarter shipments were slabs or hot rolls, so there remains tremendous potential to expand in value added markets through our processing and conversion agreements with Sartes and Serbia, for example, and the continuous (inaudible) with tin coating lines which are currently under construction in Slovakia.

USSK's calculated cost per ton in the second quarter was $233, down $13 per ton or 5% versus the first quarter, mainly reflecting higher utilization rates, net favorable raw materials cost and progress on this year's cost reduction target, offset by unfavorable foreign exchange rate changes and some costs associated with the rampup of our conversion activities at Sartes in Serbia.

All three blast furnaces at USSK operated during the second quarter, and correspondingly, our utilization improved from the very low 74% in the first quarter to 95, nearly 96% quarter-to-quarter.

In our earnings release supplemental statistics page, we also provided income results for selected shipping statistics for some of our other businesses, which included coal, coke and alloy businesses at Straight Line, our early startup technology enabled distribution company and our other units real estate real estate and Transtar.

In total, the other businesses reported income from operations of $26 million in the second quarter compared with a loss from operations of 9 million in the first quarter and income from operations of 48 million in the year ago quarter.

In summary, it was an encouraging quarter with continued signs of progress from the disappointing results from the last two quarters.

Now, my colleague, John Quaid, will provide some additional details on the quarter's results and the current market status and outlook for the third quarter.

Thanks, John.

Turning to other items of quarterly interest, in the second quarter the net of OPED and pension credits across all units, excluding the pension settlement loss of $10 million was a $13 million charge.

Due to the use of our EBA fund to pay union OPED costs and the funded status of our pension plan, both OPED costs and pension credits for the year are largely non-cash.

Also, to keep everyone informed, we did mention in our earnings release that we expect an unfavorable pension settlement effect in the third or fourth quarter of the year for the qualified non-union pension plan as a result of the plan exceeding the settlement recognition threshold defined in Paragraph 11 of FAS 88.

In brief, the lump sum payouts elected this year by retiring employees including those involved in the voluntary early retirement program from last year are now expected to exceed the sum of the service and interest costs for the plan.

Therefore, the accounting rules require immediate recognition of a proportion of share of the plan's deferred actuarial gains or losses.

In this case, we currently broadly estimate recognition of actuarial losses of $100 million which would otherwise have been amortized over future periods.

The amount of this charge will depend, will vary depending on the pension fund investment performance and liability changes up to the measurement date.

Capital spending in the second quarter was $48 million and are detailed by segment and statistics accompanying the earnings release.

Our current plan has total 2002 capital spending at about $270 million, but this amount excludes about $10 million of mobile equipment purchases which we expect to lease, and the first half of the payment to US ZED (phonetic)for USSK are 37.5 million which will be made later this month.

Reviewing significant capital projects, at USSK work continues on a new continuous (inaudible) and tin coating line that will allow us to improve USSK's value added production capability.

These lines are scheduled for startup in the first half of 2003.

At our Seemless Two Mill in Loran, Ohio work continues on an inline quenching temper line that will result in significantly reduced cost for our tubular segment.

Completion of this line is scheduled toward the end of 2003.

Our quarter end liquidity was $715 million, which represents an increase of 219 million from our available sources of liquidity at the end of the first quarter.

This increase is primarily the result of our May equity offering of just over 10.9 million shares of common stock for $192 million of net proceeds.

Our long-term debt is essentially unchanged from the end of the first quarter and our total equity increased by about 225 million to 2.7 billion or about $26 per share.

Also, just as a side note, US Steel is offering to exchange up to 535 million of its 10 3/4% senior exchange notes through August 1st, 2008 that have been registered under the Securities Act of 1933 in exchange for an equal par value face amount of its currently outstanding unregistered 10 3/4% senior notes due August 1st, 2008.

That will issue in July and September of 2001 under Rule 144A.

The terms of the new notes are identical on all material respects to the current notes except that the new notes have been registered under the Securities Act which allows the new notes to be freely traded.

The exchange offer, which is currently set to expire at 5:00 p.m. on August 5th, is being made only through a prospectus dated July 2nd, 2002, and is subject to the conditions described therein.

Any interested holders may obtain copies of the prospectus and related registration and tender offer statements at the SEC's web site or by contacting United States Steel's shareholder services department.

As discussed further in the notes to the statement of operations included in our earnings release, net interest and other financial costs for the second quarter include the gain of $13 million related to the remeasurement of USSK's financial statements into its US dollar functional currency.

Also, as previously discussed, we have committed to a cost reduction program for our domestic steel operations of $10 per ton per year for the three-year period ending in 2004.

Hundreds of projects have been identified in each of our plants, and the first half cost savings rate exceeded at $10 per ton annual target.

As a reminder, our calculation procedure attempts to remained healthy and stable while capital spending remains depressed.

Service centers have seen their own inventories continue to fall, and their monthly supply has remained at historically low levels, and demand in the plate market is flat.

Looking forward, our order backlog for sheets supports full sheet operations for most of the third quarter, as lead times for sheet products are extended into late September, early October.

Shipments for the flat roll segment are expected to be flat to up slightly in the third quarter, while average realized prices are expected to increase.

As a reminder, our most recent price increase was on May 15th, when we informed our customers of spot price increases of $20 per ton on hot roll, $30 per ton on cold roll, and $40 per ton on coated products for new orders shipping after August 4th.

Looking forward for the entire year, we now expect full-year flat roll shipments to be 10.1 million tons, an increase of 300,000 tons from our previous forecast.

Tubular markets remain flat.

Distributors continue to operate with low inventory levels but the demand is increasing as holes are now appearing in their inventories.

Tubular prices appear to have bottomed in the second quarter as well.

Most projections are for the recount to rebound in the second half of 2002 based on the current crude oil and natural gas prices and inventory level.

The June US active recount averaged 842, so a rebound as some suggest to the thousand plus level would be significant for our tubular business.

We expect third quarter tubular shipments to be up and prices to be up slightly.

Our annual forecast remains at 900,000 tons.

As a reminder, we displayed a trend of our incoming domestic order rate our flat rolled and tubular products on the US Steel web site on the investors page.

For the majority of the second quarter, the five-week moving average of domestic orders as a percentage of domestic melt shipping capacity remains between 90 and 100%.

Just as another footnote, that information is updated by noon on the first Monday of each month.

Turning to USSK, we expect third quarter realized prices to increase while shipments for the quarter will be flat from the second quarter record levels.

Shipments for third year 2002 are now expected to be 4 million tons, an increase of 200,000 tons from our previous forecast.

Now, John Surma has some final remarks before we turn to questions.

Thanks, John.

Just to conclude, let me comment that we continue to work very aggressively on a number of key strategic initiatives, including participating in the consolidation of the domestic industry, growing our higher value added businesses and monotizing selected non-strategic assets to help fund those activities.

We're currently working on both buying and selling assets, and our recent equity offering during the second quarter gives us a solid footing to pursue our strategic goals.

With respect to our global strategy, since our last quarterly conference call, we continue to make progress in our conversion agreements with Sartes and Serbia, conversion of slabs into hot roll commenced in late April and conversion of cobalt pull hard (phonetic) in the tin mill products commenced in late May.

During the second quarter we sold nearly 70,000 tons of hot roll and 3,000 tons of tin mill products that was processed at facilities in Serbia.

We look for these amounts to increase as we ramp up operations, and we also continue to explore and expand any long-term interest in the Sartes facilities under the letter of intent signed in April, since we continue to see this as a very attractive opportunity for growth.

We also continue to explore domestic consolidation activities but as we've said several times before, any such acquisitions must be beneficial to our customers and shareholders and preserve our hopefully enhance our credit position.

As noted in our earnings release, we did sign a letter of intent to sell our coal and related assets associated with our West Virginia and Alabama mines, and we continue to move forward with this process, and I'll expect to reach agreement on the sale by the end of the third quarter.

Our expanded activities in Serbia and the planned wholesale are consistent with our drive to build value in our company by investing in value added facilties and expanding globally while reducing our investment in exposure to domestic raw materials and hides.

With that, Tom Usher is with 00:21:11 us and will now answer any questions you may have.

Ladies and gentlemen, if you wish to ask a question, press the one on your touch tone phone.

You'll hear a phone indicating you've been placed in queue, and you may remove yourself from queue at any time by pressing the pound key.

If you're using a speakerphone, please pick up your hand set before asking the numbers.

One moment for the first question.

Our first question today comes from the line of Michelle Applebaum of Salomon Smith Barney.

Hi.

You know, you reported - this is a picky question, and you guys typically have the most conservative presentation in accounting and financial disclosure of almost any company I've ever covered, so I hate picking on you and I hate being the picker, but we're in an environment now where the kind of knit-picky stuff matters.

Anyway, with those due apologies, you reported 28 cents and you did the adjustment for us to get to 18 cents and, you know, in taking apart, you know, how you get from here to there kind of stuff, I'm noticing those two other items that were not included to get to the 18 cents, those were $10 million tax reversal, I guess from the first quarter, and then a currency gain from remarking the value of USSK that apparently every time there's going to be a massive swing, you'll have that, those kind of things I think should be included, and I'm wondering if you're going to do the math for us and there's two gains, you know, just to be the devil's advocate here, that you didn't disclose or put in your little chart on the first page, I was just wondering how you made that decision and how, you know, especially in this environment we should be addressing that.

I'll give you a couple of comments on that.

You're referring to two things, so let me take them individually.

First more generally, the question of how we arrive at what our list of special items that in this instance we delineated for you on the first page, starting with GAAP income and moving adjusted.

That inherently is a subjective process.

We try to use our best collective judgment as to items.

It might be noteworthy to disclose those.

You're of course welcome to make your own calculations and include those, exclude them, or include others as you like.

So first and foremost, we use our best judgment to provide information we think you'll find useful for that purpose, and then you're encouraged to make your own adjustment of it.

With respect to the currency matter, you'll notice we did include a description of that in the text of the press release.

If you consult the income statement, you'll note that net interest and other financial costs has a bit of a fluctuation.

That's the reason for it.

We thought that was good disclosure.

The fact is, the US dollar is a functional currency for our operations in Slovakia to the extent that the Euro and Euro sensitive currencies, the Slovak crown principally, moved to a large degree against the dollar as they have moved up and down in recent years since we've been over there, that's just a normal part of accounting.

We have to do that through FAS 52 and we measure debt and monetary liabilities and assets, and that's the number we came up with.

To There's lots of other items we could call special.

We try to reserve that for something that would be more unique.

We'd like to say non-recurring, but unique and special would be the general term.

On the tax side, because of our particular structure in Slovakia, our estimated effective tax rate is more likely to be sensitive to changes.

That was the reason for my earlier discussion in my comments about the model that we have to apply.

We're applying the rules strictly and as conservatively as we can.

I'm glad to hear you acknowledged that.

To say that would be special, I suppose again, you're welcome to make the calculations you like.

We want to giv you information, but to the extent it's a normal application of the accounting rules and our best estimate of what the results are going to be, we're getting to a pretty broad definition of special.

So things that are normal, routine operating matters or more as a result of undergoing accounting we have not typically called special, but you're on to two that are interesting and that's the reason we decided to describe it in such detail.

So if I was going to take the most possible conservative stance and deduct those numbers, you guys - as long as I'm consistent when it happens again and it's charge, which I would, you wouldn't argue terribly with that?

I would never argue with you, Michelle.

You're very smart.

I would only observe as I just described, it's really in the eye of the user.

We try to lay out information we think is relevant to inform an investor and analyst like you, and you're encouraged to do with them as you like.

Can I ask a second question or should I come back?

Go ahead.

Just quickly, I was surprised to see the tubular business, the profitability went up pretty significantly when the, sounds like there was a less value added mix, and looks like the cost went down pretty significantly.

I'm wondering if you could give us some insight into the composition, because I know that business has a range of prices of product that's pretty vast, right, much bigger than flat rolled.

It does, and it depends whether it's country, standard in line, it depends on alloy as opposed to straight carbon and so forth.

I would say in tubular they have done an exceptionally good job on the cost side, especially at whare have been historically low levels, and you know, it's been probably one of the brighter spots we've had here over the last six months.

They've just done a great job on the cost side.

So I'd attribute that entire improvement to cost or (inaudible) deterioration on the commercial side, but just a great job on the cost side.

Tom, I would assume that the material costs, they're buying their substrate from flat rolled at market prices, so there probably was also some offsetting pressure on materials cost in the quarter, wasn't there, or no?

We tend to have, as the segment noted that we filed in the 8K describes, we tend have-to-have market related pricing.

In this instance, it's relatively close to what the flat roll cost is because there isn't a real easily determinable relevant market.

We think the production cost on the flat roll side is about as good as we could get.

It hasn't seen as much pressure on the upside as they might have had in the short spot market port.

That's terrific.

Thanks.

Thank you.

We have a question from the line of Mike Gamberdella of JP Morgan.

Good morning.

I have a question on your consolidation strategy and acquisition strategy that we've talked about for awhile now.

Since the market for steel prices has improved so dramatically since the beginning of the year and you don't have these situations like LTV where they've just run out of cash and shut down, have you changed your strategy or what you're thinking about executing a consolidation strategy in this marketplace?

I can imagine that some of the potential sellers have different, differing opinions I guess, quite a bit differing now that the price has gone up on value of the assets that they hold.

I would say, Mike, we have not changed our strategy.

We still think that consolidation makes a lot of sense, and we are continuing to aggressively pursue this both domestically and internationally.

I would say that because of the current environment, it may change some valuations, but we still think these are things that can be done, and we are moving ahead to attempt to do some of these things.

I think you'll see that even in the improved environment, there are still a number of companies which are not generating a profit, probably will not through the rest of this year, and I think that most people will recognize that their ability to stand as entities by themselves probably is, you know, questionable, certainly after the 201 environment expires.

So we are pursuing them, and I would say it's not changed our strategy, even though valuations may change.

Okay, thank you.

We have a question from the line of Wayne Etwill of Morgan Stanley.

Good morning.

I wondered if you could give us realizations for flat rolled and tubular for the second quarter of '01.

I believe, Wayne, those will show up in the supplemental statistics that we issued in our earnings release.

Flat rolled Q2 '01 average realized price was 395.

And tubular?

677.

Can you give us any guidance on your thinking about pricing for both of those in the third quarter?

I think as we said in the comments, we expect flat rolled prices to increase and tubular to increase as well, maybe not as much, but that's I think what we've said and I'm not sure we have much more to say about it.

Okay.

And I guess in the pension area, can you tell us what - you said you had a $10 million expense in the second quarter and what did you do in the first quarter and maybe you could explain your thinking in the third and fourth exclusive of the $100 million?

Let's just sort of take it step by step.

We had one special item here that was a settlement of our excess supplemental plan in connection with some of our executives who retired last year, so that special item, let's put that one aside for a moment.

I think on an ongoing basis, John you commented in your comments.

Why don't repeat that.

Essentially, Wayne, the kind of estimated amount of $100 million that we're looking for into Q3 and Q4 really just arises through an application of the accounting rules.

With that non-union pension plan, it now looks like the -

No, that's pretty clear.

I was really more concerned with your ongoing treatment of - I was understanding that you would have about $100 million credit this year? to each other, and we wouldn't expect - those are generally under the accounting model in the absence of some reason to remeasure the entire plan, which we wouldn't have to do unless and until we had this other item later in the year.

Those don't really change.

So we would expect that run rate to stay about the same in the rest of the year as it has so far to the extent we'd have to do a remeasurement.

If we would have the settlement effect we've given you early warning about, we'd then tell you at that point what the rest of the year would look like.

What was your specific credit in the second quarter?

Second quarter item is actually the charge, and the pension settlement loss, we disclosed it as 10 million.

We have an excess supplemental pension plan that covers amounts that aren't covered under the qualified plan beyond what the limitations are for our more senior people, which is quite common, of course, and in connection with the early retirement program, in connection with the separation of US Steel last year, we had a number of retirements this year that actually were mustered out in the settlements paid.

That then occasioned the recognition of deferred actuarial gains or losses.

At this particular time, it happened to be losses, and that's what the $10 million was, it was really the recognition of the referred actuarial loss related to the retirement of our special executives.

Not to belabor this point, but would that mean there was actually a $35 million expense, the 25 credit plus the net of 10 million expense, which would have meant that it was really 35 million?

Are you trying to get to the net $13 million charge for the second quarter, Wayne?

I'm trying to figure out what the credit was and make sense -

Essentially excluding this $10 million special item, the settlement loss, we had a pension credit of about 22 million and OPED cost of about 35, which gets you the net $13 million charge I mentioned before.

Okay.

Sorry.

I think we kind of got off on a couple of the other items as well.

So the credit was 22.

OPED was negative 35.

Correct.

And they netted out to a negative 13?

Correct.

Great, thank you very much.

We have a question from Aldo Mazzavero, Goldman Sachs.

Tom, I wondered if you could give us your thoughts on the weekend events that we saw in the trade arena where the EU responded that they would delay the retaliation that they were considering and also the, maybe you could comment on the state of the exclusions that we've seen so far in the 201 as to whether you think they're a significant problem for the market or whether that's something that the market can absorb.

Yeah, I would say on the first point, the EU, you know, they've been talking about retaliation for some time now, and they haven't done anything and I would say generally the market is better in Europe.

So I don't know how much of this is just talk and how much will really be action, but we'll have to wait and see.

They'll do what they're going to do, but they haven't done anything yet.

They continue, I guess, to monitor the situation.

In terms of the exclusions, we met with Secretary Evans and Ambassador Zelec here a couple weeks ago and talked about this, and both of them stated emphatically that they did not want to do anything that they thought would undermine the intent of the present program.

To date, I would say the exclusions for the most part have been consistent with that.

They have what I would call legitimate exclusions.

There's probably a few that have been granted that we feel probably shouldn't have, but in general, I would say on balance there have not been any significant problems.

Our expectation is that over the next month or so this exclusion process would sort of wind down.

We wouldn't expect to see a lot more exclusions beyond that, and again, the conclusion of the meeting was a pledge on the part of these two that both individually and collectively they would do nothing to undermine the intent of the present program.

Thank you.

Do you have an estimate of what the tonnage involved is roughly at this point?

It's hard for us to see the exact tonnage.

I really don't have anything in front of me, but as I say, in general, I don't think it has been significant.

All right, thank you.

We have a question from the line of Charles Bradford with Bradford Research.

Good morning.

I'd like to go back to your comments about the meeting with Evans and Zelec, because there were press reports concerning their demands of faster consolidation and cost-cutting by the industry.

Did they set any deadlines or anything like that?

No, this was a collective meeting.

I think there were half a dozen CEOs in this meeting, and I was quite specific with both the Secretary and Ambassador that in terms of consolidation and company-specific plans, I was not prepared in an open meeting like that to discuss specific US Steel things that were going on, and they acknowledged that that probably was not an appropriate forum to do that, and sort of left with them that after the 1st of September, I would come back and sit down with them on a one-on-one basis and talk about things that we were doing specifically to address the areas of consolidation, restructuring, cost improvement, et cetera, and they were very comfortable with that.

They thought that was a better way to do it, and my expectation that not only with us but with other major companies, there would be a series of meetings in September to discuss what the individual companies are doing in terms of rationalization, consolidation, cost improvement and so forth.

So that was sort of the twist on that, Chuck.

Do you have any feeling for whether they understand the difficulties of consolidation and how it's not an automatic big cost reduction?

I mean, obviously, they're learning more as we go through this, but I think they have some sense of that but, you know, I mean, they have some awareness of that.

Thank you.

We have a question from the line of Bruce Kline with CSFB.

Hi, guys.

I was just wondering if you could help us with the actual debt balance to breakout as well as cash, also liquidity breakdown if you have it by the inventory line AR and CACHE and thirdly, with regard to contracts that I guess are reset, another competitor had some comments about how they're looking at those contracts, both sides are looking at them a lot earlier than at the end of the year.

I'm wondering if you're having any similar experiences and any thoughts for what happens with contracts next year.

Bruce, I'll take the first part as far as the breakdown of liquidity.

The 715 million that we talk about in the press release is made up of the following.

It's cash of approximately 28 million, USSK 39 million, the inventory facility 252, and the AR facility 396.

Is USSK, the 39, is that cash or of the first quarter, and largely through the equity proceeds, we're essentially out of the revolver line entirely as John just said.

Okay.

Bruce, on the other issue about contracts and so forth, I would say that we're having some discussions with customers that are currently operating under an annual contract about extending these and so forth.

We are continuing to honor all contracts that we have, as we have always done, and would expect to continue to do, but my personal view is, we probably won't see a lot of renegotiation this year.

There may be some, but most of these negotiations will take place in the October/November time frame, and for the next calendar year.

There may be some that turn out if we do something a little earlier, but I would not hold out great expectation for that.

Lastly, two quick ones.

The $14 million charge in there for asset impairment.

I'm assuming that was - was that SG and A or cost of goods sold?

SG and A, that's spelled out in the footnote as well.

I missed that.

Lastly, with regard to the exemptions in trade, Tom, maybe you could, I mean, put a, shed a little light maybe on how we sit back and I guess quantify some of these numbers.

I know there's a lot of different grades and sizes of products, but is there any way for you to help us frame how big an impact some of those exemptions might be?

I guess I would just say in general that the fact that you know, our order rates are still running at capacity, prices are still going up.

You'd have to say on a macro sense it hasn't been much of an impact.

Certain of these products that exemptions have been granted for we don't make either by choice or we can't.

Other ones, again, are not significant, but let me see if we can maybe get something that will help you on that, but it's kind of a difficult thing, because it's sort of company-specific as opposed to an industry thing.

There are products that we don't make that we have no problem in exemption being granted on, but another steel company may say, well, we can make that and there's no problem.

So it's tough to do it across the board, because what might be a legitimate exemption for us, others would object to.

So it's a challenge, and we don't really have a full set of information to do that.

We'll think about it and see if we can do something to guide you, but I'm not sure how to do it right now.

On M and A, is there any priority with regard to US or overseas?

I would say they're moving on parallel tracks, and all of these cases, you know, there's some things outside your control that control timing, but they're both moving ahead aggressively.

Thanks guys.

We have a question from the line of Mark Barr with McDonald Investments.

Good morning, gentlemen.

Good morning.

One question that I have, you know, we've seen ISG ramp up with a relatively novel labor arrangement, and Steve Miller over at Bethlehem has also gone on record indicating the increased need to focus on cost reductions, you know, on a standalone basis.

I'm just, you know, curious, Tom, you know, what your take is on these developments as it relates to your, you know, current labor situation and whether you plan on taking any new initiatives related to reducing labor cost inputs for your steel production.

No, I mean, we continue to have ongoing discussions with the union.

They certainly are aware of our sensitivity to what is taking place at ISG, what might take place at Bethlehem.

Leo Gerard both publicly and privately said that he's not going to do anything with ISG, that that he wouldn't be prepared to do with anybody else that he has a contract with, and that's sort of the thrust of our discussions.

This is an area that we feel quite strongly we can't be disadvantaged compared to anybody else, and we have a lot of discussions going on with the union, and I guess, you know, the next couple of months will be very interesting to see what they do in terms of ISG and/or Bethlehem and/or us or any other people, but this is not something that we're just ignoring and allowing these things to go on without our active involvement, and I can't get into great details, but it is our expectation that we will not be disadvantaged moving forward.

Okay, I appreciate those comments.

I just had one follow-up.

John, you had indicated a goal or I think you had talked about your business, you know, beginning to achieve or moving towards an acceptable return on capital, and I was just curious, you know, if you were prepared to perhaps give a little more, you know, color around what you believe to be an acceptable return on capital and what sort of time frame are you looking at in terms of achieving that?

I don't know that I have a specific time frame or number.

I'd be quick to say as high as we can or as quickly as we can, of course.

It's going to take some time as we really reposition capital from areas where the markets have clearly not given us a reward or return, particularly on the hot end side of the business towards finishing value added.

That's going to take some time.

That's going to take not just assets but also market activities, which we're all working on very hard, and we'd like to get back to working capital that certainly is high enough to give us a return for shareholders that would be something on the order of what the S and P average 500 average would be.

We think that's an aspiration that could be as well valued as an average S and P industrial company, and we think that's where we belong but just wishing it and having it happen are two different things.

The key things for us are to really reposition our capitol areas where the market's given a return and to make sure we can get to the right market penetration and the high value added market where the return's availabile.

So I would say we ought to be moving in that direction, as Tom said as expeditiously as we can on the asset front, and we are moving in that direction on the market front.

We won't be there next year, but at this time next year at this conference call, I hope we've made a lot of progress on it.

Thank you both for your comments and congratulations on a quarter that I think was better than most people anticipated.

I look forward to more good news in the coming quarters.

Question from the line of Dan Rolling with Merrill Lynch.

Thank you, and gentlemen, again, I would reiterate that, congratulations on a great quarter.

I stepped out for a minute, so if you've answered this, I apologize.

I would like your view on what I'd classify as Honda's public relations effort by air lifting steel or saying they're air lifting steel here because of the lack of available steel at an economic price.

What's your view as it relates to that?

I guess my view is that I think Honda may have experienced some disruption in their supply lines, but for a very short time, may have had a little problem.

We are working with Honda, and we feel we can supply their needs.

This idea of air lifting, I think, was more of a publicity thing probably than a real need for an ongoing sourcing but, you know, we're very well-prepared to take care of Honda's needs.

We look forward to working with them as they do some resourcing and, I would not expect to see a lot of air lifting.

Okay, so a follow-up.

Basically you think there is plenty of available exposed sheet capacity in the US to meet the auto sector?

Yes, we think so, yes.

Thank you.

We have a question from the line of John Hudson with Goldman Sachs.

Good morning.

Can you give us an update on Double Eagle and specifically, are they actively able to bid on 2003 automotive contracts, and if so, are they being successful in that?

Well, I would say we haven't really got into earnings on the 2003 negotiations, but we expect Double Eagle to be back by about the third week of September, and they should be fully prepared to be at full production level for the year 2003.

So we would anticipate them being in our bid packages to all the automotive customers back at the full capacity level they were at before the fire.

Okay, and just a follow follow-up on Dan's question on Honda.

Were you previously supplying Honda?

We were.

Okay, thank you.

We have a question from the line of Mark Rogensinger with Merrill Lynch.

Good morning.

I'm interested in your activities in central Europe.

Running the (inaudible) at USSK, is that something you think is going to continue in the longer term?

I'm asking that in connection with Sartes and how much tonnage you think you'll be moving over there going forward?

Well, a lot of it depends on, you know, strength of the market moving forward and our ability to ramp up production on individual furnaces.

So that's a tough one right now to call.

We just have to wait and see.

We expect the order book to be strong, but if we can get equivalent melt out of two furnaces, that's probably a more efficient operation and in any steel operation, bottlenecks tend to move, and if the bottleneck is iron, we would want to be maybe operating three furnaces, but if it moves to some other facility, steel make or whatever, then we could enhance the productivity through injections or whatever on these blast furnaces, we would do so.

I wouldn't focus as much on whether we're running two or three blast furnaces as much as in terms of what we're doing in terms of shipments for the rest of the year.

I'll just comment also that we haven't been in Slovakia all that long.

We're still exploring the most cost efficient and effective ways to give an order book and a given price deck, and then the addition of activities that Sartes and Serbia add another new element to the mix and where is it best to have certain They were actually down along the sequential market.

Thanks a lot.

Question from the line of Brett Leavy with Royal Bank of Canada.

Thanks guys.

Strong quarter.

Can you guys talk a little bit, as we start to model out some of the price increases that you've talked about, the percentage contract versus the percentage bought that you see in 3Q and 4Q, and then also you mentioned that you had started discussions in October and November with some of your contract customers.

Approximately what percentage of your contract customers will you be starting those discussions with?

It tends to be about a third.

Nothing has really happened to change our mix.

We said it's about 40% contract business, 60% spot business.

It was that way in the second quarter, and it will be that way in the third quarter and the fourth quarter.

In terms of contracts that we have pricing that extends beyond the January 1st, 2003, we'll probably have some discussions with those customers again about lengthening contracts and new business.

So we'll probably have discussions with all of them and time will tell how that lays out, but of that 40%, about 1/3 of that will roll over, absent any kind of new deal with these customers, we would have pricing that would be already set for 2003.

All right, one housekeeping item and then one strategic item.

What exactly was cash interest expense for the quarter, and then also can you give a little bit of an update on straight line.

On the cash interest expense I'll have to get back to you.

I don't think I have that with me.

We did comment that the currency remeasurement effect was 13 million, so go to the income statement and add 13 on to what was there, that would have been sort of you might say the more normal interest cost.

Now, how much of that actually, how much interest payments there were in the quarter, if that's what you're after, I don't think we know that.

We wanted to make it clear that was the one item that gave you the difference in the quarter to quarter movement.

It's also of course compared to last year, because we had the overall reduction in debt through the separation, the period to period comparison this year to last year, it also wouldn't be exactly right, but we'll come back if you're interested in the actual cash and try to find that out.

And then on Straight Line?

Straight Line, I would say we continue to be on the business plan that we developed for them.

They probably tripled their shipments quarter to quarter.

We look for them to continue to ramp up in the third and fourth quarter.

We continue to have additional steel suppliers be the supplier to Straight Line as opposed to US Steel being the supplier there.

We continue to make the kind of penetration.

We continue to get exceptionally good feedback from our customer base, a lot of repeat business and so forth, a lot of the loss is associated with capital investments and overhead and so we're still on target and as I say, right on the business plan that we had developed for them for the year.

This is a little bit further out than Straight Line.

If the sheet business succeeds through the Straight Line channel, any possibility of your expanding into long products or anything else through the boxes that you're putting around the country?

I don't think there would be any impediment to that happening.

The investment is all in the computer systems and worked there, and that would probably be a natural extension.

Thanks very much, guys.

Next question from the line of Elliott Glazer with USPA and Company.

Tom could you give us some kind of update or description of what happens after the first anniversary of the 201, in other words, how much the protection drops in the second year?

I mean, there are different tariffs for different products, but for flat rolled, it was 30%, and it has a decline rate of 6% per year.

So for those products, it would be a 30%.

That would drop down to 24% after the first year, and those are the products we're mainly concerned with.

Some of the other long products, I can't tell you off the top of my head, but they also have decline rates probably proportional to that.

The products we're interested in go from 30 to 24.

That's fine.

Now, do you have any idea or guess the company's operating rate in this, the third quarter?

I'd say our operating rate will be pretty much near capacity.

It will be up from the 94% of Q2?

Yeah, I mean, we're going to attempt to make every kind of steel we can make.

Now, if we have to take a stop to do some gunning for a term or something like that or we have some kind of an unexpected stop or something like that, that will all eventually work its way into the statistics, but our intent in the third quarter will be to produce every ton of steel we can produce.

Well, if you're producing every ton of steel you're going to produce and getting higher average selling price in flat rolls and tubular, you're going to earn close to $1 this quarter.

Should be a better quarter than the second quarter.

All right, last question, and I don't know if you want to even address this or not, do you have any range in mind for all your asset sales put together during the next twelve months, including control and whatever, a range of possible proceeds?

You're correct, Elliott.

I thought so.

Thanks a lot.

Question from the line off Aldo Mazzavero, Goldman Sachs.

Hi, Tom and John, I just had a quick question.

Based on the new SEC regulations about certifying accounting statements, do you anticipate the signing on your third quarter 10Q?

I mean, we feel we've been certifying these all along.

If you look at the beginning of our annual report, we sign off and certify it.

I don't know whether you're familiar but domestically, US Steel is the first people going back to 1902 that put out an annual report in great detail.

We were the first annual report people.

So you know, there will be probably some changes to this thing as we move forward with some additional certifications, but we would not anticipate any problem with this.

So the answer would be no problem.

At some point, although back from a treadway commission recommendation, that goes back several cycles ago of this process.

We've been including in the management report, Tom and I and Todd Richards and (inaudible) our controllers have signed and we've been doing so for some time.

For us, senior executive management taking responsibility for our financial reporting is not a new concept.

That's great.

John, while I have you, I wonder, given the somewhat difficult nature of predicting the other business segment, given the seasonality and the growth in Straight Line, I the third quarter, we only have a minor shutdown typically, as coal is not as big a deal as it used to.

Other than some market induced effect, I guess I wouldn't see the remainder of the year exhibiting a lot of movement up or down.

The only other thing I'd say, in the end, we also have real estate and resource, and they may have land sales, partial sales that come in at higher levels than otherwise, but sort of the on going operations of cold coke and iron ore as well as Transtar, which is the more stable kind of business, I don't see a variability there.

I would say just off the top of my head we'll see relatively (inaudible) for the rest of the year.

Straight Line, we're looking about the same.

You know, absent some unusual thing, we're looking about the same level.

So nothing unusual in the second quarter in the real estate line?

I think there were some sales in the second quarter that were pretty good-sized sales, but that's not unusual by our standards because we have them all the time.

They happened to be more partial perhaps sold in the second quarter than the first.

We have a forecast, but it's hard to say what it might be in the later portion of the year.

All right, thanks.

Question from the line of Charles Bradford with Bradford Research.

Okay, as you know, I think three bills before Congress for prescription drugs to be covered by Medicare.

Can you put some kind of a number to what your prescription drug costs are for your retirees that of Medicare age and your retirees that may be less than Medicare age, assuming that those of Medicare age could get coverage.

Sure, just in general, if we have something on the order of 90 or 100,000 retirees in that range, for rule of thumb I'd say 2/3 of those are currently Medicare eligible, and in fact, Medicare carried and covered.

So we're paying their Medicare supplement that they're also helping to pay for.

So if our total annual premium for covered live is, I don't know, $1500 a year, some number like that perhaps, might be in that range.

Prescription drug is typically a large percentage of that, less than half, but more than 5%.

It's a 20, 30, 40% number depending upon the plan and the location and the year.

So I think where we get into, if there were to be a legislative program to provide Medicare funded prescription drugs for Medicare eligible people in a large amount, it would be very useful for us.

That's what I wanted to hear.

Thank you.

Final question today comes from the line of John Paul Letisna with TD Newcrest.

If you guys covered this, I apologize.

I was wondering your outlook for plate shipments are in the third and fourth quarter, also what price increases you've already put in place for plates that we can expect to see in the third quarter and if you have any intention of trying to put through any further plate price increases either in the third or fourth quarter?

I would say the plate market has been relatively flat.

We see it continuing flat.

A lot of the traditional markets for plate have not really developed this year.

You know, price increases would depend on market strength, and as I say, we don't see any great strength out there on the plate side.

Okay, is there any increases that you've already put in place that we would expect to see in the third?

I think we've had some selective pricing actions, but we're also balancing our overall plate business which is really kind of a viable business for us as we take metal away for other purposes.

Until how we see individual markets respond, it's hard to tell how that might play out.

Okay, thanks a lot.

Mr. Quaid and speakers, there no further questions in queue.

Thank you for everyone joining us today, and if you have any further questions, please feel free to give me a call.

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