美國鋼鐵 (X) 2002 Q3 法說會逐字稿

Thank you for standing by, and welcome to the United States Steel third quarter earnings release teleconference.

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

Later we will conduct a question and answer session.

Instructions will be given at that time.

If you require assistance during the call, press zero and then star.

As a reminder, this conference is being recorded.

For those who prefer, there is a simultaneous Webcast of this teleconference at www.ussteel.com.

Now I'd like to turn the conference over to Director of Investor Relations John Quaid (ph).

John Quaid (ph): Good morning, and thank you for participating in United States Steel Corporation's third quarter earnings conference call.

With me on the call are Tom Usher, Chairman, CEO and President, and John Suma, Vice Chairman and CFO.

Before we begin, I must 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-related issues, 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, United States Steel Corporation included in its one 10-K for the year ended December 31, 2001, Form 10-Qs for the three months ended March 31st and June 30th, 2002, and in subsequent Form 8-Ks cautionary statements including important factors but not necessarily all factors that could cause actual results to differ from those set forth in the forward-looking statements.

Before I turn the call over, I'd like to note there have been some releases on the wire with our results that may have some of our special items in the incorrect columns.

However the subtotals are correct, as are the EPS numbers.

We are now or shortly will have a revised release out on the wire.

With that said, now John Suma will review the third quarter results.

Thank you, everyone, and thanks for joining us on the call today.

I'm pleased to report that U.S.

Steel had a second consecutive profitable quarter.

Our domestic flat rolled business experienced significant improvement and profitability due primarily to the restoration of domestic spot market sheet prices and high supply-driven levels of shipments.

Similarly, USSK (ph) benefited from continued strong shipment levels and rising European spot market prices.

In addition, both our domestic and USSK (ph) steel-making operations again benefited from operating rates in excess of 90%, as well as the results of our cost-savings efforts.

Now let's have a look at the numbers.

Reported third quarter net income was 106 million, or $1.04 per share compared to net income of 27 million or 28 cents per share in the second quarter and a net loss of 23 million or 26 cents per share in the year-ago quarter.

Adjusted third quarter net income was 103 million or $1 per share, substantially improved from the adjusted second quarter net income of 17 million or 18 cents per share, and also quite a turnaround from the adjusted net loss of 17 million or 19 cents per share reported in the third quarter of last year.

Now, you probably noted that these adjusted results are significantly above our earlier guidance on September 24th.

At that time, the range of analysts' estimates according to First Call was 43 to 75 cents per share, and we said we'd be near the top of that range.

Our results for the quarter were significantly affected by our estimated annual effective tax rate, which I'll discuss in more detail shortly.

However, if you just look at our income before tax and apply the 24 percent tax rate that we understand most of you were using in your models, I believe you'll arrive at something on the order of 80 cents per share, still well above the consensus for the quarter.

These adjusted results exclude the after-tax effect of several special items which for the current quarter were quite minor.

As in prior quarters, the special items are listed in the earnings highlight table and are then described in the footnote, the statement of operations which we include with our release, so I'll not discuss them in further detail now.

Now, before we get into the operating results, I want to just take a moment to take you through a brief discussion about our respective (ph) tax rate.

As you know, on an interim basis, accounting rules, specifically Interpretation 18 of the FASB require that we estimate our annual income tax to determine an estimated annual effective tax rate which we then apply to our year-to-date results.

Due to Slovak Republic laws regarding tax credits and also certain U.S. tax-planning strategies, virtually no income tax provision is recorded for USSK (ph) income.

Therefore, our effective tax rate is typically well below the U.S. statutory rate of 35 percent.

We then apply that effective rate to our domestic income, and as has been evident for the last few quarters, our annual effective tax rate will vary quarter to quarter depending on what we then foresee as the absolute amount of annual income and the relative proportions attributable to domestic and USSK operations.

At the end of the third quarter, our current estimated annual effective tax rate is in fact a tax benefit rate of approximately 31 percent.

And that was noted in our release.

This rate reflects our revised estimate of annual domestic income from operations, including the estimated effect of a fourth quarter pension settlement charge of approximately $100 million, which we had disclosed before and which we'll talk about again in a little while.

Now, under these rules, again, Interpretation 18, the new estimated rate is then applied to year-to-date pretax result and a catch-up for the cumulative effect of the rate change is then reflected in the current quarter.

In this case, we're required to apply our estimated tax benefit rate of 31 percent to our loss before tax of 67 million for the first six months, and that results in us providing taxes on a six-month year-to-date loss as opposed to the tax benefit we provided at the end of the second quarter.

In total, an unfavorable catch-up effect of approximately 36 million or 35 cents per share is included in the third quarter tax revision as well as the indicated tax benefit at 31 percent on current quarter results.

The nine-month taxes also reflect a deferred charge of four million related to a newly enacted Indiana state tax law which we also mentioned last quarter.

I'll be glad to go into this in more detail in the Q&A period if anybody should desire.

Back to the results for the quarter.

Total segment income from operations for the third quarter was 135 million.

That was significantly improved from the income of 32 million in the second quarter, and a loss of 16 million in the third quarter of last year.

Looking at third quarter results at the segment level, our flat-rolled products segment recorded third quarter income from operations of 61 million or $23 per ton, a $33 per ton improvement in the second quarter loss of $10 per ton as sheet and spot market prices were restored.

Flat-rolled product shipments were in line with the second quarter and up 12 percent versus the year-ago quarter.

Looking at flat-rolled shipment changes from the second quarter in detail, sheet shipments were up one percent.

Plate shipments were down two percent.

And tin shipments were up eight percent.

The average realized price for the flat-rolled product segment of $428 per ton was up $26 per ton, or six percent versus the second quarter.

By looking at average realized price changes from the second quarter for the flat-rolled segment in more detail, the average realized sheet price increased eight percent as spot market price increases were collected and the average realized plate price was flat, as was the average realized tin price.

Turning to cost performance in the third quarter, the average calculated cost per ton for the flat-rolled product segment was $405 per ton shipped, down $7 per ton from the second quarter, due primarily to higher shipment levels and lower accruals for environmental obligations and administrative costs.

Our tubular product segment reported income from operations of four million or $19 per ton despite continued weak (inaudible) country markets in the third quarter, during which the U.S. rig count averaged only 853, a small increase from the low second quarter count, but more than 30% less than the year ago quarter.

Third quarter tubular shipments were in line with the previous quarter.

However, the averaged realized tubular price increased $27 dollars per ton to $663 per ton as we sold more seamless tubes and less welded tubes in the third quarter.

In the third quarter, the average calculated cost per ton for tubular was 644 per ton shipped, an increase of $36 per ton for the second quarter, largely reflecting the increased proportion of seamless tube shipments I just mentioned.

USSK (ph) reported income from operations of 40 million in the fourth quarter, an increase of 14 million versus the second quarter and one million better than the year ago quarter.

USSK (ph) had strong shipments for the quarter of one million tons, nine percent lower than the record level in the second quarter, but comparable with the year ago quarter.

The average realized price for USSK (ph) increased by $33 per net ton, or 13 percent, compared to the second quarter as realized prices increased for all prime products and exchange rates moved favorably.

In the third quarter, the average calculated cost per ton of steel shipped for the USSK (ph) segment was $250 per ton, up $17 versus the second quarter.

This increase was primarily due to the unfavorable effect of costs on foreign exchange rate changes, lower shipments, and related declines in utilization rates, costs associated with our continued ramp-up of conversion operations at Sarteen (ph) and Serbia and costs associated with planned maintenance during the quarter, as well as cost associated with our review of expansion opportunities in Europe.

These unfavorable items were partially offset by net favorable changes in our raw materials cost.

In summary it was a solid quarterly performance for the company.

Now my colleague John Quaid (ph) will provide additional results on the quarter's results -John (ph).

John Quaid (ph): Thanks, John.

Turning to other items of quarterly interest, in the third quarter the net of our other post-retirement benefits cost and pension credits across all units was a $7 million charge, reflecting a pension credit for the quarter of 29 million which was offset by OPED (ph) costs for the quarter of 36 million.

Due to the use of our VEBA (ph) fund to pay union OPED (ph) costs and the funded status of our pension plans, both of these channel (ph) items for the year are largely non-cash.

While we're on the subject of pensions, our earnings release provided an update on the unfavorable pension settlement effect for the qualified plan for non-union employees that will be recorded in the fourth quarter.

This loss, currently estimated at approximately $1 million pretax, is an accelerated recognition of deferred actuarial effects which otherwise would be recognized in future periods.

In order to calculate the settlement effect, accounting guidance requires that the plan assets and obligations be re-measured as of the date of the settlement, which in this case is expected to be the end of this month.

Pension expense in the fourth quarter will reflect this new measurement and is expected to increase by approximately $15 million compared to the third quarter.

The final amount of the pension settlement and the subsequent revision to fourth quarter pension expense will depend on pension fund investment performance, interest rates, and liability changes up for the measurement date.

Separately, we provided an update on the funded status of our pension plan for union employees.

Using the fair value of the pension plan assets as of September 30th, projected to year-end, we estimate that the accumulated benefit obligation for this plan would exceed the fair value of plan assets by approximately $500 million.

Assuming these estimates hold true, we would estimate a charge to equity of approximately $750 million at the end of the year.

This reduction in stockholders equity is not expected to affect any of our debt covenants or borrowing arrangements or result in any requirement for pension plan and cash funding in 2002 or '03, nor will it affect earnings per share.

This issue is further detailed in nine (ph) of the financial statement included with our earnings release and we'll update all of this again in our third quarter 10-Q filing.

Capital spending in the third quarter was $46 million, and it's detailed by segment in the supplemental statistics accompanying the earnings release.

Our current plan is total 2002 capital spending at about 260 million, excluding the first half of the deferred purchase price payment for USSK (ph) of 37.5 million, which was paid to DSED (ph) in July.

Reviewing significant capital projects at USSK (ph), the vacuum to gasser (ph) installed in the first quarter is operational and running as expected.

Work continues on a new continuous (inaudible) and additional tin coating line, and we recently announced plans for a new Dynamo (ph) line, which is used to produce electrical steels (ph).

All these projects support our goal to improve USSK's (ph) value-added production capability.

The new (inaudible) and tin lines are scheduled for startup in the second half of next year, and the Dynamo (ph) is scheduled to be put into operation early 2004.

At our Seamless Two Mill (ph) in Lorraine (ph), Ohio, work continues on a in-line (inaudible) that will result in reduced costs for our tubular segment.

Completion of this line is targeted for the end of next year.

Looking at some highlights from the balance sheet, our long-term debt balance of 1.4 billion is essentially unchanged from the second quarter.

Our total equity increased by about 106 million to approximately 2.8 billion, or $27 per share, thus improving our long-term debt to cap ratio to 34 percent.

At the end of the third quarter, our available sources of liquidity totaled 794 million, an increase of 79 million from the second quarter due primarily to improved operations.

The breakdown of our quarter-end liquidity was as follows.

We had cash on the balance sheet of 103 million, availability under our AR sales agreement of 400 million, availability under our inventory facility of 243 million, and availability under USSK's (ph) credit facilities of 48 million, again, for a total of 794 million.

Also of note, in accordance with the terms of our bank credit agreement, our available sources of liquidity will increase by an additional $100 million with the filing of our third quarter Form 10-Q in November as a result of the financial covenants being met under this facility.

As previously discussed, we have committed to a domestic cost savings program of $10 per ton per year for the three-year period ending in 2004.

Our employees have identified and implemented hundreds of projects at each of our plants, and through the end of the third quarter these efforts have resulted in cost savings in excess of our $10 per ton annual target.

With that, now I'd like to turn it back to John Suma for a discussion of the fourth quarter outlook and summary of the call.

Thanks again, John.

As you can see in our domestic prime order rate trend graph, which is displayed on our Web site, we began to see some softening in domestic orders the last week in September, particularly for hot-rolled product reflecting lower demand due to customer reference (ph) to control inventory.

Looking at the other portions of our domestic order book demand for both plate and tubular products continues to be weak, while tin demand has been stable.

Looking at some of our major domestic markets for flat-rolled products first, demand for sheet products from consumer-related industries such as automobiles and appliances has remained healthy.

We're not aware of any extensive cuts in the automotive build schedule and U.S. light vehicle sales are on track to hit 17 million units, a near-record year.

On the other hand, demand from industrial-related markets such as converters and nonresidential construction continues to be spotty, which is negative for our plate products and some sheet products as well.

Furthermore, service centers have seen their inventories in the month of supply rise slightly from recent lows.

Looking forward, shipments for the flat-rolled product segment are expected to decline in the fourth quarter, part of which is a normal seasonal effect.

The average realized price is expected to improve slightly, primarily as a result of changes in product mix as we ship less hot-rolled sheet and begin to gain mixed improvements from the restart of our double-eagle (ph) steel-coated joint venture.

We now expect full-year flat-rolled shipments to be approximately 9.8 million tons.

Cox (ph) in the fourth quarter will be negatively impacted by two scheduled blast furnaces repair outages.

Mon Valley Works (ph) will have a 14-day outage on the number one furnace to change the top, and Fairfield Works (ph) will significantly reduce operations to perform a gutting project on the number eight furnace and (inaudible) rebuild.

In addition, natural gas and scrap costs are expected to be higher in the fourth quarter.

Tubular OCTG (ph) markets remain flat as the U.S. active recount has hovered around 850 since mid-May.

Distributors continue to operate with low inventories and a recovery in North America drilling appears unlikely before next year.

We expect fourth quarter tubular shipments to be down compared to the third quarter, and prices are expected to be down slightly due to mix effects.

Our annual shipment forecast stands at 800,000 tons.

Turning to Europe, despite moderate demand in USSK's (ph) key markets -- auto, appliances (ph), construction, and containers - price increases have been successful.

USSK (ph) expects its fourth quarter average realized price to improve as a result of continued success in collecting increases in European spot market prices.

Shipments in the fourth quarter are expected to be in line with third quarter levels.

Shipments for the full year 2002 are expected to be approximately four million tons.

We continue to improve our value-added shipments from USSK (ph) through the conversion agreements with Sarteen (ph) and Serbia and at (inaudible) with the completed vacuum de-gasser and the continuous in-coating (ph) lines, which are currently under construction.

In closing, a couple of final remarks before we turn to your questions.

As we discussed with many of you over the last several quarters, we continue to work aggressively on our strategies, to participate in the consolidation of the domestic industry, to grow our higher value-added businesses, and to monetize non-strategic assets to help fund acquisitions and reduce debt and other obligations.

I'm encouraged we are to update on you the progress we've made towards accomplishments on these strategic goals.

With respect to our strategy to monetize non-strategic assets, last week we announced we signed a letter of intent to sell our raw materials and transportation businesses to Apollo management.

Under the terms of the LOI, U.S.

Steel would receive about $500 million in cash and retain an approximate 20 percent interest in these businesses while Apollo would assume the union contract and certain employee benefit obligations and other liabilities.

We currently estimate the transaction would result in a pretax loss of $300 million.

It's a nonbinding LOI and closing is subject to buyer due diligence and other items to be negotiated.

We're hopeful we can reach definitive agreements on the sales by year-end, with closing to follow in the first quarter of 2003.

We also continue to make progress in our conversion agreements with Sarteen (ph) and Serbia, conversion of raw materials into hot-rolled and conversion of cold-rolled full hard (ph) into tin mill products is progressing.

During the third quarter we sold 32,000 of hot roll and 9,000 tons of tin mill product that was processed at Sarteen (ph).

We also continue to explore an expanded longer-term interest in the Sarteen (ph) facilities under a letter of intent we signed in April, since we continue to see this as an attractive opportunity.

In addition, we're looking at other potential opportunities in Poland and in Hungary.

On the domestic consolidation front, we continue to actively pursue opportunities, but as we have previously stated, any such acquisitions must be beneficial to our customers and shareholders and must preserve or enhance our credit position.

Our planned noncore asset sales and activities in Europe 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 and hot (inaudible).

Our strong third quarter results allow us to maintain a solid footing as we pursue these strategic goals.

With that, Tom Usher is with us, and we'll glad to answer any questions you may have.

John Quaid (ph): We'll turn it over to the operator to go over the procedures for queuing up for questions.

Ladies and gentlemen, if you wish to ask a question, press the 1 on your touch-tone telephone.

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

You may remove yourself by pressing pound key.

If you are using a speakerphone pick up your handset before pressing the numbers.

If you wish to ask a question, press 1 at this time.

One moment for the first question.

Our first question comes from Bruce Cline (ph) with CSFB.

Bruce Cline (ph): Hi guys, Credit Suisse.

Couple of questions, one on the raw material sale on (ph) the transportation.

What kind of priority in the terms of the use of proceeds are you guys thinking on that?

Secondly, maybe you could just touch on -- I know you're in contract price season.

I'm wondering if you've gotten any thoughts on direction or amounts you might see for next year and maybe what -- how much of your contracts are ready for next year and how much you still have to go.

I'd say on the first issue, I'd say our priority is to do something in this consolidation front.

We still think there's a great opportunity there, and we are aggressively pursuing that.

We don't really have anything to say specifically about that.

But we think we're making good progress and moving in that direction.

That would be our priority.

The second question, about the contract negotiations, you are correct -- we are in the midst of this with a number of customers.

We have completed some deals, and all I would say is that we're very pleased with the results that we've gotten on the negotiations that we've completed.

We continue to move forward with other customers.

And this will really be evolving over the next six to seven weeks.

Bruce Cline (ph): Tom, is there any progress in terms of legacy costs in terms of getting some support, whether it be through the government or elsewhere to trigger some of the potential stuff in the U.S.?

I guess there's still people that are trying to get the government to step forward on some of these things.

And de facto they are.

As people fall over to the PPGC (ph) and into Medicare programs and so forth, that's happening.

But I would say most of our impetus is towards putting deals together without any type of help from the government on these things.

Now, going down the road, we think some things may happen and some legislation in terms of things like drug programs and things like that.

But it will be broader than just the steel industry.

But our thrust is to try to put together a deal that makes sense to our shareholders which will allow us to consolidate some of these entities, but without any direct help on the legacy cost from the government other than the programs that currently exist.

Bruce Cline (ph): My last question is just on the pension.

Maybe, I don't know, Tom or John, you can give us some color in terms of what it might mean or how it might impact cash payments on the pension or health care next year vis-a-vis your latest thoughts on your charges by year-end.

Tom Usher (?): We wouldn't see any impact on cash flow for next year on the pension side, nor, I would think, on the health care side to the extent that the assets -- the disclosure we made in our 10-Q in the second quarter went into some depth about our funding requirements, and those were measured on an annual basis.

But we didn't see that and don't see now any near-term funding requirements.

I mean, with that said, we would much rather have higher assets than lower assets.

The higher they are, the less funding you have to do, ultimately.

To the extent assets have not performed as well as we would like, that's not a good thing, but we don't see any immediate funding requirements in the year ahead.

Bruce Cline (ph): I'll get back in queue.

Thanks.

Question from Michael Gamberdella (ph), JP Morgan.

Michael Gamberdella (ph): Good morning.

Congratulations on the quarter.

I have a couple questions on the recent announcement you made on the sales of the raw materials and transportation business, or the pending sale, I should say.

Can you give us a feel for how profitable these assets have been recently, and also some feel -- general feel for, going forward, what the buyback terms are that you have for raw materials and transportation services.

John Suma (?): Just a couple of thoughts.

We're going to try to stay pretty much within what we've already talked about.

But I would just point you first of all to -- in our results, we do give a little bit of visibility to coal, coke, and iron ore, from a profitability standpoint and then, on occasion, inside the all other, we have the transportation business there.

We don't say much more about it than that.

That would give you some sense of what we see profitability-wise and we have provided that for the last couple of quarters.

On the contracts, the release described these as contracts for our requirements at market-based prices.

I think that's as good a description and as detailed a description at this point as we can give you.

Tom Usher (?): We don't view this as any kind of financing deal.

We're looking at that, as John said, requirements and market-based pricing.

Michael Gamberdella (ph): And the, in that other category, don't you also book the real estate development ...

Yeah, real estate and a number of other odds and ends are in there.

Not all of that's transportation, but that's where it would be.

Michael Gamberdella (ph): Could you say that you're selling these assets at a higher EBITDA multiple than what the company is trading at overall?

We have to go back and look at it, Mike (ph).

Give us a chance to do a little analysis.

Michael Gamberdella (ph): Thanks a lot, guys.

We have a question from the line of Wayne Atwill (ph) of Morgan Stanley.

Wayne Atwill (ph): Thank you, and once again, congratulations on a good quarter.

Just a couple housekeeping items.

You talked about taxes.

Could you give us a feel for fourth quarter and '03 tax rates?

John Suma (?): Assuming that everything would come out exactly as we had predicted it, do you have a Ph.D. in taxology, Mike (ph)?

Wayne Atwill (ph): That's why I'm asking you.

John Suma (?): I just have an associates degree.

But assuming that everything would come out as we had expected it to when we did our best estimate for effective rate purposes, it would be the effective benefit rate that we mentioned, I think, in the second page of the release -- 30 percent (ph) or whatever it was.

If everything came out, that's what we would see for the third quarter.

That's our best estimate.

We'll see what happens as the quarter goes on.

Next year, we haven't had to do that exercise yet.

And as I commented earlier, it depends on our outlook for profitability in toto as well as a relative level between Slovakia and the domestic results.

I can't give you a number there except to say that over the kind of the income ranges we've experienced, we would almost always be assuming both entities are profitable, almost always be well below the 35 percent U.S. statutory rate and be more akin to the kind of rates we had earlier in the year, which was before we had to incorporate things like this $100 million pension charge.

Wayne Atwill (ph): All right.

Natural gas, what kind of impact is that having on your costs?

John Suma (?): We commented in the release, I think I mentioned here today, we do expect natural gas, the curve is up a little bit in the fourth quarter.

It will have a negative impact compared to some of the costs that we've seen earlier in the year.

I don't have a dollar amount for you.

But for us of course as a consumer lower is better than higher.

But we, probably overall this year, will have the highest cost probably now in the fourth quarter, since prices were pretty low throughout the earlier part of the year.

Wayne Atwill (ph): I realize it will be up but maybe could you tell me have you hedged forward at all, and what do you spend on an annual basis on natural gas?

We have not hedged at all.

Wayne Atwill (ph): What would your annual bill be there?

We've used a leverage before that if you move gas $1 per MMBTU (ph) on an annual basis, that's about 50 million in annual operating income effect for us.

For the year it's an annual number.

Wayne Atwill (ph): Right.

And lastly, do you have an opinion why, with natural gas prices so high, drilling activity hasn't picked up more?

Good question.

I guess I have a little question why natural gas is so high given the storage rates and so forth.

But I would just say, Wayne (ph), this is a very fluid situation and this tubular thing is volatile.

It could turn around quickly.

But I would expect to see more rigs out there drilling, especially where the gas prices are holding up.

So while we don't see anything happening in the next couple of months, this thing could turn around after the first of the year; it's tough to predict.

Wayne Atwill (ph): If you had told me gas prices would be at the level they're at right now, I would think your drilling activity picked up 20 to 30 percent.

I was shocked.

I would have thought the same thing.

We have a question from the line of Brett Liddy (ph) from Royal Bank of Canada.

Brett Liddy (ph): Can you talk a little bit about health care costs in the fourth quarter and going forward?

Some of your competitors have talked about numbers going up significantly on that front.

We won't have any effect in the fourth quarter.

Those are generally periodic cost numbers that are done on an annual estimate basis.

We haven't prepared our estimates for next year yet.

Won't be really doing that until later on in this year.

If there's any bias or pressure it's certainly on the upwards side.

But we're -- on a cash flow statement we're actually paying those out of our existing funds, so we don't have any cash flow impact.

And in fact (ph), health care trend costs might go up a little bit.

That would be a negative for us, but and we don't have a significant number in mind yet.

Brett Liddy (ph): Can you talk about cap ex costs in 2003, and also the kind of major realign (ph) schedule in some of the out years?

We have no major reline (ph) scheduled next year.

We do have some work we're going to do on a couple of our furnaces in Gary, which would be -- I wouldn't even characterize them as mini-realigns (ph), but just some repair work to try and prolong the lives of them.

I think our first scheduled realign (ph) would be in 2004.

And I think we have one furnace there and then another one in 2005.

So nothing over the next probably 18 months.

Brett Liddy (ph): The target for 2003 cap ex?

Probably at or slightly below our depreciation level.

We haven't put our plan together for next year.

But my sense would be it would be a little below the depreciation level.

Brett Liddy (ph): Then in terms of order book for spot hot (ph) brands, are you guys cool for fourth quarter and what are you seeing in rough magnitudes in terms of pricing versus 3Q?

I would say on cold rolled and galvanized, both pricing and volume are hanging in there.

On hot-rolled I would say pricing, flats (ph) are sliding a small amount.

I'd say volume is reduced because of some of the outages that we had to take as a result of deferring them from earlier in the year.

We, in effect, have not chased some business that might be out there.

I think talking to a lot of our OEM and service center people, they probably over-inventoried during the second and third quarter, when steel availability was more of an issue.

I think they're getting their inventories in line.

I would say hot roll, we see a little softness.

Plate we see softness.

Cold-rolled, galvanized, tin, we see as still pretty strong.

Brett Liddy (ph): Thanks very much, guys.

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

Mark Rogensinger (ph): I wonder if you can provide us with an update of the progress of Straight Line (ph) and maybe when do you think that business might get to break even, and what do you think it's going to happen in terms of market conditions going forward, what the effect on straight lines would be, or (ph) stronger or weaker markets?

I would say we continue to be optimistic on Straight Line (ph).

They are right on the business plan that they had established for us.

We're losing somewhere between $3 million and $4 million a month on this thing.

But we recognize that that was the cost of really building a business up, and we believe by next year it will be a profitable business.

That's our plan.

We're moving forward.

In terms of their ability to succeed in an up or down market, it's got to be something that's sustainable in both of these markets, but they probably will do better in a falling market than they would in a strengthening market.

One of the challenges they've been quite successful is broadening their base of suppliers.

We don't look for this to just be an outlet for U.S.

Steel tons; we look for them to be able to have their supply base from other people.

They've been successful in that.

They have continued to get additional volume consistent with the plan they put together.

Their repeat business is really exceeding the plan they put together.

So we are still in encouraged by it.

We look for next year to be a year where they break into profitability.

Mark Rogensinger (ph): Maybe, John, if you could comment -- provide us with an update on the year-to-date performance on your pension plan asset?

Year-to-date, our performance for all assets together is better than the broad indices that we measure - John Quaid (ph), if you've got the number why don't you comment on that.

John Quaid (ph): One second here.

But I checked just the other day and we were doing better than the broad indexes across the major asset categories by about 3%-4% per index.

So if S&P was off 10, we were off six.

Something along those lines.

We were doing a little bit better than all the indicators.

Mark Rogensinger (ph): Thanks a lot.

We have a question from the line of John DeMontsos (ph) with Prudential Financial.

John DeMontsos (ph): Good morning and congratulations on the great cost and total performance.

Concerning the transportation and raw materials asset sales, the $500 million price doesn't feel like a big number in relation to two, three years ago, I think you sold about one-third of the coke assets for something like 150 million.

Or what (ph) the assets would have cost to recreate obviously.

How did you get to the $500 million price?

And concerning the market-based requirements contract, if it's a contract that you have, do you have the right to go out and use a different railroad or buy iron ore from Cleveland Cliffs or Brazil or whoever the lowest-cost provider would be?

There's several questions in there.

I'll try to deal with a couple of them.

First, the transaction you referred to where we did have a financial transaction with another group for a portion of our Claritin (ph) coke operations, that's a substantially different kind of transaction than the one we're talking about here.

Without getting into a lot of detail here, I don't think that would be comparable to the transaction we're talking about here.

So for the record that one I don't believe ...

John DeMontsos (ph): ... why?

Again, I don't want to get into too many details, but there were tax elements that were quite compelling in the process and was not the same kind of transaction we're talking about here.

We could discuss it further, but I would say largely the tax elements and the tax credit element of it was very important was quite a bit different than what we're talking about.

That credit's really expiring in same kind of indicia (ph) value that it describe really wasn't there.

To the extent that the investors were looking to that for a large portion of their return, there is a different risk profile there than they would be looking to on this one.

The question on the requirements -- in this case, I would encourage you to read it quite literally again; we only (ph) have a nonbinding LOI, but requirements means requirements.

To the extent we have the (inaudible) requirements for either pellets or coke, they would be governed by this contract.

John DeMontsos (ph): I didn't understand your answer.

Does that mean that you have the legal right to source the raw material transportation from someone else or your choice?

No.

Requirements would be that to the extent we have a requirement it's committed to this contract, but at market price.

So I mean under your scenario, John, as prices fall, these would fall also.

John DeMontsos (ph): How do you determine market given that there isn't another big coke merchant of your Claritin (ph) and your iron ore buy is the biggest one among the North American companies?

How do you get a proxy for market if you were, for the purposes of these negotiations?

John (ph), these are things we're still negotiating, but I would say that both for coke and iron ore there are world markets for these, there's a lot of trade that takes place.

There's a uniqueness obviously to the U.S. market.

But as these things move around the world there's a market for iron ore, there's a market for coke, and these are things we're in the process of negotiating with the buyer.

John DeMontsos (ph): So then Riotinto (ph) and BHP (ph) and CVRD's (ph) benchmarks, for example, would be the benchmarks for iron ore.

That's what you just said John (ph).

What I just said was what I said.

John DeMontsos (ph): Is there a different world benchmark?

I'm just saying that we won't necessarily benchmark off them.

But in fact we want to do whatever we can to guarantee we're paying competitive world prices, not necessarily the same prices, but something that would be recognized in the unique location of the iron ore properties in North America.

John DeMontsos (ph): Thank you.

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

Charles Bradford (ph): Good morning.

A couple questions more about the fourth quarter.

Based on your full year domestic flat-rolled shipment estimates, looks like you're going to be down about 300,000 tons in the fourth quarter, or more than 11 percent.

Is that all because of the outages?

No, I would say part of that is the outages.

Part of it is the tubular business is slipping a little.

Plate business stays soft.

And part of it is we just elected not to chase some hot-rolled business.

Charles Bradford (ph): That would imply a pretty drastic decline in operating income.

If you combine that with a higher natural gas cost, plus the higher tax rate you're likely to have, it doesn't look terribly promising for a good fourth quarter.

As I said (ph), on an operational basis, and in central Europe we ought to have a solid quarter.

On the domestic business there will probably be -- we always get a certain amount of slippage in the automotive business.

The last two weeks tend to be soft, shipments are down.

It won't be as good as the third quarter, but it will still be a solid quarter.

Charles Bradford (ph): As far as the pension assets are concerned, how much of the plan is in debt securities and how much is in real estate?

Let me answer it this way.

We have had a fairly defensive -- more conservative asset allocation given the nature of our obligations, and on an overall blended basis we're more 60/40 equity versus non-equity, the non-equity piece, the biggest piece of that would be fixed income, and there would be some fairly modest real estate, not a whole lot of real estate investment.

If you look at your -- the hits you're going to take in the fourth quarter, the 100-odd million pretax earnings, the 750, the equity, where is that going to leave your equity at the end of the year?

Will any of that 750 get into a pension asset account?

No, I think the piece we identify is going to equity would go directly to equity as would the net income.

And I think you can see the income we have and what we might project for fourth quarter, what you might project for fourth quarter with the charge we identified for pensions and the potential for a charge related to the pending or completion of the Apollo transaction would each have effects on equity, and I think they would be just as we laid them out.

Charles Bradford (ph): On the further item, you talked about how you had no cash contributions necessary for the pension plan next year.

What's going to happen, however, to pension expense next year?

We have this year a pension credit and that will diminish substantially, as one might expect.

We're examining our assumptions and will have to complete that process as we prepare our estimate of annual pension costs for next year, as well as on the health care -- retired health care side.

Our expected return on assets on a blended basis as we disclosed it for this year was 8.9%.

That's sort of in the middle of what we see as large company pension assumptions.

Nevertheless, we would probably move towards a more conservative bent, and you can take a look at our assets roughly eight or nine billion.

If you say you take down by a percent, that gives you a number that you probably could use to estimate based on what your guess is as to what the right percentage would be.

I would say it's unlikely we would be increasing our expected rate of return, more likely would be a modest decrease.

Discount rates, which don't affect us quite as much because of our nature of our liability, we're at seven percent now, which we think is on the conservative side.

Wouldn't expect to see a big change, but a small change might be possible.

All that would combine to say that our pension credit should diminish substantially.

Charles Bradford (ph): Thank you.

We have a question from Frank Nell (ph) from Abidge (ph) Capital.

Frank Nell (ph): The things that you have a letter of intent to sell, will you carry them as discontinued operations going forward?

That's a bit of a puzzle for us right now.

There's a new standard, FAS 144, that lays out how all this accounting gets done.

It really depends on what stage the process reaches between now and our next reporting date.

It will not be discontinued operations at September 30th as we run it through the various tests and processes.

It's possible, likely perhaps, that that would occur at the end of the fourth quarter.

That really depends on what happens in the discussions.

Eventually that would be a likely result that there would be a loss on disposal as we've described, and then there would be some segregation of what was in the previous financial results.

But that depends on a lot of measurements and judgments under this standard which haven't been made yet.

But that will be occurring during the fourth quarter.

Frank Nell (ph): Second question -- does it become more difficult to undertake your strategy of consolidating the North American steel industry as you go into an underfunded position on the pension plan?

Because it used to be you were overfunded, could you absorb some of the underfundings of some of the other people and you would be okay.

I guess I would say we'd rather have an be overfund than underfunded, but we still think this is doable.

It's not changing our basic thrust.

It may change some evaluations and so forth.

But we still think, given the market for steel assets, this is doable.

Frank Nell (ph): And Going at least for the next six to 12 months, is it more likely you'd do a deal in eastern Europe as opposed to North America or is it something you can't call?

I would say it's just a very fluid situation.

We have a question from Matthew Shipler (ph) with Investment Strategies.

Matthew Shipler (ph): Just maybe another take on that same question -- consolidation question and just more of a vision.

With this backdrop, with the market strengthening here, maybe there are fewer Chapter 7s than 11s, and in that context, what is the outlook for your competitive position relative to some of the other guys being able to shed some light?

Why with this kind of backdrop would you not want to move more quickly on domestic assets than international assets if they were available?

Like I say, we're keeping both options available.

We're trying to do these on dual tracks.

A lot of times things happen that you don't have necessarily control over timing.

So we're being aggressive in both areas.

And one of the things that we see as the benefits of the deal with Apollo is it gives a lot more flexibility either place to do things.

So we're not focusing on one at the exclusion of the other.

We're trying to keep both things going active at the same time.

Matthew Shipler (ph): Just a follow-up.

What about the company's competitive position relative to other guys who just do the Chapter 11 route, and is there anything you could say in terms of your ability with the unions to get sort of -- kind of equal treatment?

All would I say is that we continue our discussions with the union.

There is certainly recognition on their part that long-term they cannot have an industry that has significantly different labor costs, and ultimately it will bring everybody down to the lowest common denominator.

So they're struggling with it, we're struggling with it.

But we're certainly not allowing this to happen without having in-depth discussions with the union.

Matthew Shipler (ph): Thank you.

We have a question from the line of Aldo Muster (ph) with Goldman Sachs.

Aldo Muster (ph): Good morning.

I know you have that rather large shelf offering available to you.

Now, with the 500 million coming in on the Apollo deal, how would you say your inclination is to use equity financing through this consolidation move, or would you like to try to avoid issuing equity at these prices?

Well, obviously we'd like the stock price to be higher.

But I'd say I wouldn't want to commit myself to any particular thing.

It would depend on the individual deal and the timing and et cetera.

So we're trying to maintain as much flexibility as we can.

We think having this extra cash will be valuable.

And by the time some of these things come around, I don't know what the equity price will be three or four months from now.

So I wouldn't want to commit to anything.

We're just keeping all options open.

Aldo Muster (ph): Can you describe the assets in Hungary that you mentioned earlier were of interest?

Again, I would say we're in some investigation and some study over there.

I wouldn't want to be specific about which assets we have interest and which we don't.

I think that's a little bit premature.

Aldo Muster (ph): If I can ask one more, Tom.

On the automobile negotiations that are beginning, is it fair to say that the number of players excluding LTV is consistent with a few years ago or are there other large suppliers that might be less advantaged in this round, would you say?

I would say from the car company's perspective, LTV is gone, plus they have some concerns about the future of other players out there, and that the last time they did negotiations, I think they look at the industry and see there's fewer healthier players.

So I think that's a plus for us.

Aldo Muster (ph): Thanks, Tom.

We have a question from the line of Rick Dotal (ph) with Park Investment Management (ph).

Rick Dotal (ph): Good morning.

I have a quick question for you.

Looking a little farther out than most of the analysts are looking at -- in relation to the pension and the OPED (ph) assets, when you look in 2005 and '06 you have some disclosure that your post-retirement benefit and cash payment in 2005 or '06 are about two million a year.

When I look at your pension liabilities, I know that you're not likely to have the payment for several years probably, six or seven, depending on what the assumptions are.

If you look at the size of the pension obligation in relation to the company and its profitability and you take any kind of assumption of an underfunding and some kind of ERISA payment of, say, like 20 percent, it's a really large number like $200 million, $400 million a year just under ERISA to fund those liabilities if you assume that those assets can continue to decline over time.

Now I just wanted to get a sense from you as to how concerned you are if there's a plan that you're currently contemplating to avoid any kind of ERISA funding requirement in pension.

Strategically, how are you thinking about this?

We think about it a lot because it's some big items on our balance sheet.

On the health care side we have taken some steps as you see to put some money away.

And that continues to be potentially attractive use of capital for us because it's tax advantaged.

That would not be our highest priority but it would be one that we would study from time to time as we have any cash available.

And I think the size of the obligation is pretty well demonstrated.

You can see what it is on the pension side.

There are some -- you refer to them, the ERISA and the other funding requirements that have different interest rate assumptions in them.

Number one, we study those are aware of their potential impact quite clearly.

We look out as far as you described and do different modeling as to how we might address them.

And to the extent that that might encourage us to consider funding something more quickly we'll do that.

We haven't felt a need to do that just as yet.

If you take an assumption that the asset levels declined inexorably to infinity, I think that's a problem not just for us but for a lot of people.

We don't include that assumption necessarily in what we're planning for.

We also, as an observation, are have much interested in the congressional action that deals with some of these interest rates that have to be reset.

It's a big issue not just for us but for a lot of other companies.

We actively participate in groups that provide advice and counsel with people in government on those issues.

So we look at it carefully but to the extent there's been something required we don't see there's anything required just yet to the extent there would be some funding, either necessary or prudent, to keep us inside of certain of those thresholds.

We'd look at that, but we haven't felt a need to do that yet.

I'm going to add as one of the big things that's been talked about legislatively is something in the area of drug benefits, prescription benefits, things like this.

Now, how this will actually play out is hard to say.

But that could have a big significant impact on us in terms of our projected obligation in health care costs.

Rick Dotal (ph): Any potential to go to the union and get the benefits paid to employees reduced?

One of the big discussions we're having with the union right now about what is the health care package moving forward.

And that is something that has been, I would say, verboten until now, but certainly what's been happening in this industry, I think they are more open to discussion in this area than they have in the past, how to buy more economically and how to share some of the risk with employees.

Rick Dotal (ph): Thanks.

There are no further questions in queue.

Thank you for your participation.

We're certainly available if you have any follow-up questions.

Thanks.

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