美國鋼鐵 (X) 2002 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the US Steel fourth quarter earnings release teleconference.

For those you that would like to log into the simultaneous webcast, the address is www.ussteel.com.

Again that is www.ussteel.com.

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Later, we will conduct a question-and-answer session.

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

Please go ahead, sir.

Thanks, Lori.

Good afternoon and thank you for participating in United States Steel Corporation fourth quarter and year end 2002 earnings conference call.

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

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 price, shipment levels, the level and impact of imports, the level of capital expenditures, capability utilization, cost improvements, pension credits and settlements, 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 Form 10-K for the year ended 2001 and in subsequent form 10-Qs and 8-Ks cautionary statements including important factors but not necessarily all factors that could cause actual results to differ materially from those set forth in the forward-looking statements.

With that said, we have a lot to cover today.

So I'll turn the call over to John Surma, who will review fourth quarter results.

Thanks, John.

Good afternoon, everyone.

Thank you all for taking time to be with us this afternoon.

As we had forecast in our third quarter 10-Q outlook discussion back in November, results for the fourth quarter were significantly lower than the third quarter due to a number of market and cost-related effects.

Our flat-rolled segment faced lower demand due to customer efforts to control year end inventories and our tubular segment was affected by continued weakness in demand as evident in the lagging US [INAUDIBLE] count.

During this period of reduced demand we accelerated some scheduled 2003 blast furnace repair work in total the costs associated with all fourth quarter last of blast furnace maintenance work came to approximately $27 million.

I believe our prediction was $30 million in our outlook section.

Fourth quarter costs for both our flat-rolled and tubular segments were also negatively affected by higher prices for natural gas which increased by more than a dollar for MMBTU from our actual third quarter costs.

Also, fourth quarter pension cost was increased by $13 million following the settlement loss recognized for the plan for nonunion employees again as we had forecast for you in our third quarter outlook.

Conversely in Europe, our US Steel Kosice segment benefited from continued strong shipment levels and rising European spot market prices.

Excluding special items, fourth quarter net income was $44 million or 44 cents per share.

Well below the adjusted third quarter net income of $103 million or $1.00 per share but a significant turnaround from the adjusted net loss of $121 million or $1.36 per share reported in the fourth quarter of 2001.

Fourth quarter net income included a net charge totaling $32 million or 32 cents per share relating to a variety of special items the largest of which was the 57-cent per share pension settlement loss that we had talked about for several quarters running.

As in prior quarters the special items are listed in the earnings highlights table at the front of our release where we reconcile from reported to adjusted earnings.

They are also described in some detail in the footnotes of the statement of operations included with our earnings release so I'll not go into further detail on those at this point.

Now, before we get into the operating results, I'd like it just pause for a moment and comment on our income tax effects.

For 2002, excluding net benefit of $4 million related primarily to prior year taxes, we recorded a tax benefit of approximately $42 million on pre-tax income of $16 million.

And this somewhat unusual relationship reflects the tax benefit generated by our loss from domestic operations for 2002 and that included the $100 million worth of pension settlement losses for the year.

It also reflects the nontaxable fact of income we earned in Slovakia.

Now back to the results for the quarter.

Total segments income from operations for the fourth quarter of $54 million was substantially lower than the operating income of $135 million in the third quarter but significantly improved from the operating loss of $158 million in the fourth quarter of 2001.

Looking at fourth quarter results at the segment level.

Our flat-rolled products segment recorded income from operations of $8 million or $3 per ton compared to $23 per ton in the third quarter and a loss of $76 per ton in the year ago quarter.

Flat-rolled product shipments decreased from the third quarter by approximately 200,000 net tons or 8 percent to 2.4 million net tons but were up significantly versus the year-ago quarter.

The average realized price for the flat-rolled segment of $431 per ton was up $3 per ton or less than 1 percent versus the third quarter and up $35 per ton or 9 percent higher than the year-ago quarter.

Turning to flat-rolled segment costs, in the fourth quarter the average calculated cost per ton was $428 per ton shipped.

An increase of $23 per ton in the third quarter due again primarily to the blast furnace repair work performed in the fourth quarter as well as a number of other factors, natural gas prices being higher as I commented on, higher environmental accruals and an unfavorable year end LIFO adjustment.

Tubular products segment recorded a loss from operations of $9 million or $59 per ton, down significantly from both the $19 per ton, $50 per ton earned in the third quarter of 2002 and fourth quarter of 2001 respectively.

The decrease was mainly due to continued weak oil country markets.

Despite higher prices for oil and natural gas during the fourth quarter, the US rig count averaged only 847 rigs operating a very small decrease from the low third quarter count and about 16 percent less than the year-ago quarter.

Fourth quarter tubular shipments decreased by 64,000 net tons from the third quarter to their lowest level since we acquired Kobe's 50% interest in the Lorain, Ohio tubular operation at the end of 1999.

However, the average realized tubular price increased by $5 per ton in the third quarter to $668 per ton as price increases were realized in the fourth quarter on seamless tubular products.

In the fourth quarter the average calculated cost per ton per segment was $727 per ton shipped, an increase of $83 per ton from the third quarter largely reflecting increased costs as a result of lower volumes in the fourth quarter as well as an unfavorable year end LIFO adjustment increased prices for natural gas and higher environmental accruals in the quarter.

USSK recorded income from operations of $45 million or $42 per ton in the fourth quarter, an increase of $2 per ton versus the third quarter and $40 per ton better than the year-ago quarter.

USSK had strong shipments for the quarter of 1.1 million tons which were about 7 percent higher than third quarter shipments and 24 percent higher than the year ago fourth quarter.

The average realized price for USSK is $306 per ton increased by $16 per ton or 6 percent, compared to the third quarter as realized prices increased for all prime products and exchange rates moved favorably.

In the fourth quarter the average calculated cost per ton of steel shipped for USSK segment was $264 per ton, up $14 per ton versus the third quarter, mainly reflecting the unfavorable effects of foreign exchange rate changes and business development costs associated with (Sartif) and our conversion operations there as well as some due diligence costs associated with other central European expansion opportunities.

These increases were partially offset by favorable raw material price and usage variances.

You'll also note that the supplemental statistics to our earnings release includes two new reportable segments.

In accordance with GAAP, both our Straightline and USS Real Estate businesses have met certain quantitative thresholds and are therefore required to be shown as reportable segments.

You may recall we have been voluntarily reporting operating results for Straightline in prior quarters.

I expect that most of you had some estimate the operating results of our Real Estate segment but now you can see this amount reported separately.

USS Real Estate (indiscernible) includes for your information the operating results of our domestic mineral interests that are not assigned to other operating units as well as timber properties and residential, commercial and industrial real estate that is managed and developed for sale or lease.

In the fourth quarter, real estate reported income from operations of $20 million as compared to $15 million in the third quarter and $14 million in the year-ago quarter.

Looking back on the year, I'm very pleased to report that US Steel reported a profitable 2002 as three consecutive profitable quarters resulted in adjusted net income of $68 million for the year an increase of $325 million over $3.59 per share from the net loss of $257 million in 2001.

For the year, our domestic flat-rolled business experienced significant improvement versus 2001 due primarily to improved domestic spot market sheet prices, higher shipment levels and much improved raw steel capability utilization rates.

In addition, USSK benefited from continued strong shipment levels and rising European spot market prices.

In addition, both our domestic and USSK steel making operations benefited from cost savings results in excess of our goals.

Now I'll turn it back to John Quaid who will provide some additional details on the quarter's results, year end balance sheet items and some projected 2003 costs and capital expenditure amounts.

John?

Thanks, John.

Turning to other items of quarterly interest, excluding the settlement loss, we recorded a fourth quarter pension credit of approximately $15 million.

Other post-retirement benefits costs for the quarter were $34 million.

As a reminder, due to the use of our [Beaver] fund to pay union OPEC costs and the funded status of our pension plans both of these P&L items for the year are largely non-cash.

As noted in our earnings release and previously disclosed, we recorded a fourth quarter settlement loss of $90 million for the qualified plan for nonunion employees.

This loss represents the accelerated recognition of deferred actuarial effects which would otherwise be recognized in future periods.

In order to calculate the settlement effect, accounting guidance required that the plan assets and obligations be remeasured as of the date of the settlement which in this case was the end of October.

Pensions expense in the fourth quarter reflected this new measurement and as a result, the pension credit was reduced by approximately $13 million as compared with third quarter.

Separately, as we have forecasted in the second quarter, our pension plan for union employees ended the year with an accumulated benefit obligation or ABO, that exceeded the value of the plan's assets by approximately $540 million.

This resulted in the need to write off the pension asset recorded on the company's balance sheet for this plan, establish a minimum pension liability of $540 million, and record a direct charge to equity of $748 million net of tax effects at December 31, 2002.

In accordance with accounting standards this charge to equity would be reversed in subsequent years if the value of the plan's assets returns to a level that exceeds the ABO as of a future annual measurement date.

This charge to equity has no effect on 2002 earnings per share or cash flow and no direct impact on our debt covenants.

Furthermore, we do not expect any cash funding requirements for the 2003 plan year.

Our preliminary analysis for the 2004 plan year is not yet finalized.

However, holding all assumptions constant the union plan would likely have a minimum funding requirement of its normal cost, which is currently approximately $50 million.

This funding requirement would be offset by availability funding credits of approximately $20 million.

We may choose to contribute more than any minimum amounts required depending upon long-range asset studies which will be completed later this year.

As with any study of the plan's long-range needs, how well the plan's assets perform in the equity and bond markets this year and next and future government regulation of rates and funding measurements will have a significant bearing on the future needs of the union plan beyond 2003.

With respect to the non-union pension plan, our preliminary review indicates that the plan is still overfunded and we do not expect any requirements for cash funding for this plan in the foreseeable future.

While we are on the subject of employee benefits I'd also like to update you on a number of related items.

The company has completed our annual review of discount rates and long-term expected rates of return on plan assets for 2003.

Based on the average AA corporate bond yearly at December 31, 2002, our discount rate for pension and OPEB (phonetic) liability, will be 6.25 percent a reduction of 75 basis points from the discount rate used at the end of 2001.

The long term expected rate of return on plan assets will be 8.2 percent for purposes of calculating 2003 P&L.

As discussed in our earnings release, due to these changes in assumptions, and reduced pension plan assets, we estimate that 2003 net pension costs will be $65 million.

A significant swing from the $103 million net pension credit before settlement effects that we recognized in 2002.

Our earnings release also provides an estimate of other post-retirement benefits or OPEB costs for 2003.

As a result of unfavorable healthcare claims cost experienced in 2002, the use of the lower discount rate I just discussed and higher assumed medical cost inflation, 2003 OPEB cost is expected to increase to $210 million versus the $138 million recorded in 2002.

In both cases excluding the effect of multi-employer pension -- multi-employer OPEB plans, excuse me.

Obligations related to both pension and OPEB benefits will also increase as a result of the reduced discount rate at year end 2002.

These obligations will be reported in the footnotes of the financial statements that will be included in our 2002 Form 10-K.

Capital spending in the fourth quarter was $108 million bringing the total Cap Ex for 2002 in at $258 million.

These amounts are detailed by segment in the supplement statistics accompanying the earnings release.

Our current plan for 2003 has total capital spending at approximately $350 million, excluding equipment leases of $15 to $20 million and the last deferred purchase price payment for USSK of $37.5 million.

We also expect depreciation for 2003 to approximate $360 million.

Please note that these capital expenditure and depreciation amounts do not take into account any effects related to the potential acquisition of National's assets or the sale of our raw materials and transportation businesses.

Reviewing significant capital projects, at USSK, the vacuum degasser installed back in the first quarter of 2002 continues to run as expected.

Work continues on the installation of a new continuous anneal and tin coating line and we have announced plans for a new dynamo line which is used to produce electrical steels.

All of these projects support our goal of improving USSK's value-added production capability.

The CA and tining lines are on schedule for startup early in the second half of this year and the dynamo line is scheduled to to be put into operation in early 2004.

At our seamless tube mill in Lorain, Ohio, work continues on an inline clinching temper line that will result in significantly reduced costs for our tubular segment.

The clinching temper line is scheduled to be fully operational by late in the third quarter of this year.

As many of you have requested, we now include a condensed balance sheet and cash flow statement with our earnings release.

We trust that you will find this information useful in your ongoing analysis of our results.

Looking at some highlights from the balance sheet, our long-term debt balance of $1.4 billion is essentially unchanged from beginning of the year, and due mainly to the charge to equity related to the additional minimum pension liability, our total equity decreased by about $480 million to approximately $2 billion, or $20 per share.

Therefore, we ended the year with a debt-to-debt-plus equity ratio of 41 percent.

For 2002, net interest expense and other financial costs totaled $131 million.

When you exclude the $16 million of foreign currency remeasurement gains.

Looking forward to 2003, net interest expense is expected to be approximately $150 million, again exclusive of any effects from debt issued in connection with the potential effects of the acquisition of the -- the potential acquisition of National Steel's assets.

At the end of the year, our available sources of liquidity totaled over $1 billion an increase of $326 million from year end 2001, due primarily to the equity offering completed in May of 2002 and improved operations.

The breakdown of our year end liquidity was as follows.

Cash of $243 million, availability under our A/R facility of $343 million, availability under our inventory facility of $397 million, and availability on USSK's credit facilities of $48 million for a total of 1 billion 31 million.

Lastly I'd like to update you on our cost savings efforts.

As we have been reporting to you each quarter, we have committed to a cost savings program for our domestic operations 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 2002, these efforts have resulted in annualized cost savings in excess of $100 million.

So we are well on our way towards our three-year goal of over $300 million in annualized domestic cost savings.

I can also report that US Steel Kosice has exceeded its $10 per ton cost savings goal for 2002 which translates into annual cost savings of approximately $40 million.

With that, now I'd like to turn it back to John Surma for a discussion of the current market status and outlook for both domestic and European operations followed by a summary of our recent strategic initiatives.

Thanks again, John.

Taking a look at our domestic businesses first, this can be seen on the domestic prime order rate trend graph which we display on our website we began to see some strengthening in domestic orders the last couple of weeks of December reflecting the typical seasonal pattern for most sheet products.

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, demand for sheet products from consumer related industries such as automobiles and appliances has remained healthy.

We are not aware of any extensive cuts in the automotive build schedule and US light vehicle sales are expected to reach 16.5 million units in 2003.

On the other hand, demand from industrial related markets such as converters and nonresidential construction continues to be poor and negatively impact demand for some sheet products and most of our plate products, as well.

Furthermore, while absolute service center inventories are still well off their most recent peak in August of 2000, they have been -- we have seen their inventories in monthly supply rise recently from recent lows.

Looking forward, shipments for the flat-rolled products segment are expected to improve somewhat in the first quarter.

The average realized price is also expected to improve slightly due partly to successful negotiations of some of our contract business and a full quarter of operation for Double Eagle, our electrogalvanizing joint venture with Ruch.

We expect full year 2003 flat rolled shipments to be approximately 10.1 million tons.

Costs in the first quarter for both flat-rolled and tubular will continue to be negatively impacted by higher prices for natural gas.

As a reminder the impact of changes in natural gas prices to our operating results, a $1 change per MMBTU equates to about $50 million in annual operating costs.

As we said earlier in the call, tubular markets remain weak as the active -- US active rig count has hovered around 850 for several quarters and distributors continue to operate with very low inventories.

We expect first quarter tubular shipments to increase substantially from the low fourth quarter levels and prices are expected to be down.

Our annual shipment forecast for tubular products stands at 1.1 million tons and takes into account an expected recovery in North American drilling in the second half of 2003 due to higher energy prices.

Turning to Europe, to date price increases have been successful and the first quarter average realized price is expected to improve slightly from the fourth quarter due January 1, 2003 price increases for all products.

Shipments in the first quarter are also expected to increase slightly from the fourth quarter levels.

USSK shipments for full year 2003 are expected to total approximately 4.1 million tons.

Now, in closing I have some final remarks before we turn to questions.

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

On the domestic consolidation front we discussed with you on January 9th our progress with regards to the acquisition of National Steel's assets.

Our signed Asset Purchase Agreement has been filed with the Bankruptcy Court and a hearing is scheduled on January 30th to consider our agreements in a number of other matters.

At this point, we really can't say much more about that process.

However, we do intend to move ahead with our efforts to acquire National's assets including, importantly, continuing to negotiate with the United Steel Workers of America with regard to a new contract for the employees of National Steel.

We continue to believe that US Steel offers the best solution for all the stakeholders in National.

Customers, employees, creditors, suppliers, and communities.

We believe that in large part is due to what we see is the very high likelihood that we can bring this matter to a successful conclusion.

To date our discussions with the USWA are progressing well and you may have noted USWA President, Leo Gerard, has recently said that our long term relationship with the union will be helpful in building upon the consolidation process.

With respect to our strategy to monetize nonstrategic assets we continue to make progress in our negotiations with Apollo Management regarding the sale of our raw material and transportation businesses.

Although the process is going somewhat slower than we expected in the National Steel deal has and the some more complexities we are targeting definitive agreements by the end of the first quarter with closing sometime in the second quarter.

As we discussed with you previously, we currently estimate the transaction would result in a pre-tax loss of up to $300 million, and based on the application of the accounting guidelines that determine when an impairment has occurred, some or all of this loss may be recognized in the first quarter depending on the probability of closing a deal and the progress we have made at that time.

There was no effect of this matter in our 2002 results.

We're also moving ahead on the sale of US Steel Mining, which includes coal and assets relating to our two remaining active coal mines in West Virginia and Alabama.

We target closing for this sale in the first quarter of 2003 and we expect proceeds of approximately $50 million.

I'd also like to inform you of some progress we have made in structuring a contribution of some of our timberland to our Viva Trust which was created in 1994 as a tax-efficient way to fund post-retirement medical and life insurance benefits for our USWA represented retirees.

We are currently reviewing a transaction whereby we would contribute approximately 130,000 acres of timberland and an additional 40,000 or so acres of cutting rights to our Viva.

Contribution of these assets which could ultimately be valued at upwards of $100 million would allow the company to indirectly benefit from the timber's future appreciation.

At the same time, we would provide for a portion of the obligations we are committed to fund for our union retirees.

At this stage the amount of acreage to be included in the transaction and the estimated value of these asset's are very preliminary, however we wanted to inform you of our intention to the work with the USWA in developing a transaction to use these assets to fund a portion of our post-retirement, medical and life insurance obligations.

This contribution would also require regulatory approval from the Department of Labor which we are currently seeking.

On the international expansion front, we continue to make progress under our facility management and conversion agreements with [Sartif] in Serbia.

As a reminder under these agreements we are converting raw materials and a limited amounted of amount of [INAUDIBLE] into hot rolled and cold rolled and tin mill products.

During the fourth quarter we solid 62,000 tons of hot rolled and 22,000 tons of tin mill products that were processed at Sartif.

In July of last year Sartif filed bankruptcy in Serbia.

In November we entered into an agreement with Sartif whereby USSK will provide commercial and technical support to the Sartif's bankruptcy administrator.

In addition, the agreement gives us, USSK, the right to operate Sartif facilities for an extended period should the Serbian steel company be acquired by a strategic partner other than US Steel.

We continue to explore and expand long-term interest in the Sartif facility as we ten to see this as a very attractive opportunity to expand our product mix and provide us with deepwater access both for incoming raw materials and outgoing steel products.

Now as many of you may have read in various press reports recently we are looking at an opportunity in Poland.

As it prepares to enter the European Union, the Polish government has combined 4 of its larger steel mills into one company called, [INAUDIBLE] which for our mutual convenience I'll refer to as PHS in an effort to privatize its steel industry.

PHS presently has annual raw steel making capability of something on the order of 7 to 8 million tons and produces both long and flat-rolled products.

As we understand it, the Polish government is looking for an investor to acquire up to 85 percent of PHS.

We have had teams on the ground at these mills and are prepared to be involved in the privatization of PHS.

We have been invited by the Polish government to bid on PHS and expect to submit our initial nonbinding offer by the February 10th deadline established by the government.

At this point it's very, very early in the process so it's extremely hard to say how this will all play out but I will say that we will be taking a very hard look at these assets because they fit very well with our central European expansion strategy.

We're also looking at other potential opportunities in central Europe such as Hungary, but these are further out on the horizon than either Serbia or Poland.

In closing our potential acquisition of National Steel's assets, planned noncore asset sales and activities in central 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.

With that, Tom Usher is here with us now and we'll be delighted to respond to any questions you have may have.

John, I'll turn it back to you to establish the ground rules.

Lori, if you could review the procedures for asking questions, we'll get started.

And ladies and gentlemen, if you wish to ask a question, please press the 1 on your touch-tone phone.

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

If you pressed 1 prior to this announcement, we ask that you please do so again at this time.

You may remove yourself from the queue by pressing the pound key.

If you are using a speaker phone, please pick up your handset before pressing the numbers.

Once again, if you have a question, please press 1 at this time.

And our first question is from the line of Mark Parr with MacDonald Investments.

Please go ahead.

Good afternoon.

Hi, Mark.

Congratulations on a good quarter.

I had a couple of questions.

I was wondering, first of all, just from a bookkeeping standpoint, could you just review for me the quarterly pension credits, you know, like how the numbers progressed as the quarters went by for '02?

Sure, Mark.

One second.

Let me get that for you.

And I guess, you know, while you're doing that I had another question regarding the cost reduction goals?

I'm curious, you know, you reached the run rates at the end of '02.

I was just curious how much cost reduction do you actually feel that you realized in '02 and how much do you think you'll realize in '03?

Well, we had our objective in '02 and again we're measuring that against sort of a base case of a normalized '01 cost structure and not taking credit for things that we didn't accomplish.

But we had an objective of $10 per ton domestically and we ran well beyond that.

We're shooting for another $10 per ton in '03.

And it always gets harder as we go but we are not going it relent.

We expect to accomplish that $10 per ton in '03, as well.

Okay.

So, I mean, if you were starting from a base of zero in '02, I mean, did you actually realize $10 a ton, or did you just reach that number on an annualized basis?

I guess is what I'm saying.

Uhm-

Looking at the whole year of '02, I mean, did you realize that $100 million in reductions?

By the end of the year, we were at a $10 per ton annual rate.

Thomas Usher, Ph.D.: These were accomplished, Mark, during the year.

So you know, I think we had a little bit front end-loaded but we were at a $10 run -- a ton run rate as opposed to accomplishing it all January 1st.

Right.

I guess the only point I'm trying to make is because you are kind of like starting from zero, beginning a year ago, and now that you've got some momentum going, that the amount of the actual realized effect on the P&L should begin to accelerate as we move into '03 I guess is all I'm trying to get at.

Thomas Usher, Ph.D.: I think you're right there it's a good observation.

That as well as the fact that we did did run well past our $10 per ton goal for the year.

Okay.

I have some other questions but just one more I wanted to ask and then I'll pass it on because I know there are a lot of people that want to ask.

Regarding this National thing, I'm just curious, you know, Tom, if you have noticed the union becoming more -- more aggressive or more acquiescence as far as negotiating with you around National since AK made their bid or announcement.

Thomas Usher, Ph.D.: I wouldn't characterize it one way or another.

I think I would let the union statement stand on its own.

I think, you know, they see an ability to get a deal done with us is a pretty high probability, I think.

And, uhm, I don't think their attitude has changed any.

We had a very positive attitude before the AK announcement and I expect it to still be positive.

Okay.

Terrific.

I'll pass on but I'll come back later.

Thank you very much.

Your pension credits numbers as well for the quarter.

There's probably some rounding here, just to get to the annual number, but Q1 credit of $29.

Yeah.

Q2 credit of 30.

Okay.

Q3 credit of 29.

Okay.

Q4 credit of 15.

Okay.

Terrific.

Thank you very much.

All right.

Thank you for your question.

And our next question will be from the line of Michael Gamberdella with J.P. Morgan.

Please go ahead.

Yes.

Thank you and good afternoon.

I have two questions.

One, what is the average price increase for all of the sheet contracts that were recently negotiated?

Just an average percentage increase for all those contracts?

Uhm --

Doesn't have to be exact.

Are you talking just flat-rolled or across other products or --

Just flat-rolled.

Sheet products?

Just all the sheet products combined.

Mike, I think we would have to do a little work on that because different industries were different.

Certainly I'd say well over 5 percent.

Some industries we did better than others.

But I wouldn't want to give you an answer that, you know, probably in the 5 to 10 percent range, closer to 10 I would say, uhm, if you looked at it across all contracts.

Then last question, can you give us some type of timetable for the National -- proposed National acquisition?

Mike, this is John.

As we had talked about originally in our signed Asset Purchase Agreement that's the subject of a court hearing on Thursday, there is a specific time schedule when we had our visit with you all on January 9th.

We did have a slide that talked about having after the period of [INAUDIBLE] status being certified there is roughly a 60-day overbid period and then, you know, a few more days or weeks after that to get things finalized so it was sort of a 100-day period plus or minus from launch date.

That was the timeline as we had laid it out.

I really can't comment how that might be affected by what might transpire in the next several days.

That was original schedule.

All right.

Thanks, John.

Thank you.

And our next question is from the line of John Qumarros with Prudential Financial.

Please go ahead.

John Tomassis, Prudential.

Thank you.

We knew who you were.

I have been called worse.

In terms of following up on Mike's question on pricing.

Is it safe to say that the first quarter flat-rolled realization would be at least 2 percent more than the 431 that you had in the fourth quarter?

And I'm just trying to get over the shock of a quarter billion plus of cost escalation from pension, medical and natural gas.

Thomas Usher, Ph.D.: I think that would be fair to say.

So if the costs are going to go up 1 percent across the board, excuse me, 2, 3 percent across the board from the pension, medical and gas, at least the contract price something covering that and if we're lucky more?

Thomas Usher, Ph.D.: Yes.

With regard to Straightline, is it safe for us to assume in our models zero by '04?

In other words, if it doesn't get in the black, you kill it?

Thomas Usher, Ph.D.: What I have said on Straightline is that this was a bold initiative and we are going to try some things, recognizing there is going to be a loss.

We projected that we would make money in '03.

And we still feel good about that.

And I think it would be premature to say what we intend to do.

But we have full expectation that we are going it make money there.

And I'll just leave it at that.

With regard to the Apollo transaction, where your usage is probably 50, 60 percent-plus more if you have National, and you're bargaining position is stronger, is it safe to assume that you don't want to price those contracts and price that -- the contracts to purchase and price the asset sale until after National closes in the original guidance of up to a $300 million loss, uhm, if you actually close the National purchase, uhm... is probably too conservative a guidance since your bargaining position is much stronger?

In my comments, John, I noted that with respect to the Apollo transaction there are a number of complexities that we're exploring and that one of those was the National transaction which added certain additional complexities.

I think you have thoughtfully identified some and there are others.

And how that might be expressed in the final conclusion in terms of value and how it might affect what we have conservatively estimated as a potential write-off.

I can't give you any specifics but I think in general you have identified some of the complexities we have in mind.

John, I kind of have a -- an image of Forbes Avenue from Carnegie Mellon past Carnegie Museum and the University of Pittsburgh with Andrew Carnegie rolling over in his grave over the terms of that deal.

Is your financial position strong enough for you to walk away from the deal if business conditions are such that you think your raw materials and transportation assets are worth what you have them on the books for?

We have never portrayed this as a must do transaction and don't intend to now.

Thank you.

And, sir, does that conclude your question?

Sure.

Thank you very much.

Thank you.

Our next question will be from the line of Charles Bradford with Bradford Research.

Please go ahead.

Good afternoon.

I have some questions about the labor contract that ISG apparently has agreed to.

Among other things it calls for a reduction in management compensation to be 10 percent below the industry average and no Enron type option.

How would that affect you guys if you get National with that kind of contract and the situation with your own operations?

I'm not sure what an Enron option is.

But I guess, uhm, I -- I would say, uhm, you know, we're in the midst of negotiating a contract and I'm in the going to get into any of the specifics other than to say we are making good progress.

Thank you.

Thank you very much for your question.

Next we'll go to the line of Marco Pensac with Credit Suisse First Boston.

Please go ahead.

Thanks, good afternoon.

What percentage of your flat-rolled business do you actually have under contract for 2003?

Well, Marco, as we have always said and we kind of look just at our flat-rolled sheet business of 60 percent of it roughly spot, 40 percent is roughly contract.

Okay.

So that's not changed.

Thomas Usher, Ph.D.: But I'd -- just amend that a little and I'd say with some of the growth we see in some of our contract business, that could start to shift closer to 50/50.

But -- because we have made some nice inroads I think over the last year or so.

So... you know, it will depend how the book develops through the year, but while that number as John gave you is pretty good I would see it shifting more towards 50/50 as we progress through the year.

Okay.

You mentioned some of the LIFO effects in the quarter.

I don't believe -- I don't know that I saw them being disclosed .

Can you just quickly remind me of what they may have been?

Well, we really go through our annual year end LIFO calculation and -- throughout the interim periods it's a fairly complicated calculations as most of them are and we make estimates of what we want it to be at the end.

Year and they we true those up in the fourth quarter and the final events and they are affected by lots of things customer takes, weather, deliveries, and our own operations.

And they occasionally offset and in the fourth quarter it turned out that there was a little more negative impact in there than had been in the earlier quarters and it would just quarter to quarter probably negative impact would be, you know, less than 10 million but it certainly was meaningful in the fourth quarter.

John Quaid unless you want to add more color to that?

Yeah.

No, just kind of the Q3 to Q4, Marco, kind of the difference there would have been roughly, you know, 14 million bucks.

Okay.

Just for modeling purposes for 2003, should we be using the normalized effective tax rate of about 31 percent?

No.

It's probably not.

As you know, we have discussed kind of every quarter, you know, the Slovakian income comes through tax-free.

Right.

So, you know, I think, you know, we're always going to be below 35 and maybe a little bit more than you are in that number.

I think just for simple calculations, Marco, I'd say when you get to your pre-tax number, take out the Slovakian income out that, however you get there whatever it is, assume that the interest and rest of the income is all domestic US, take out the Slovakian number that's going to presume to leave you with a smaller taxable income number pre-tax.

Take that times your statutory rate for the US and divide it by your total pre-tax and you are going to come up with the number because of whatever your expectations are of Slovakian income, just using this year of $100 million plus, you are going to come up with a percentage that's far lower traditionally than what the statutory rate would be.

But my guess would be depending on how you're modeling a lot lower than 31 percent.

I guess what I was thinking is just there's other things that are flowing through your domestic business.

I was just wondering if they were present any sort of unusual impact on the effect domestic tax rate?

No.

Not so - I mean...

Excluding any big transactions like [INAUDIBLE] or otherwise, we have some percentage depletion, a few other odd and ends but nothing from an effective domestic tax rate standpoint is all that noticeable anymore.

Okay.

Are all the costs associated with your blast furnace outage in the fourth quarter all behind us so there's no lingering effects into Q1?

Right.

From those specific outages, no, nothing else that would be trailing us.

Okay.

And we can obviously we've seen what's happening with natural gas, my last question, is there any hedging you are able to do during the course of 2000 to that would affect your purchases for '03 or... what the sort of relative hedging position might be in that regard?

No.

We're at this point we're market takers.

Okay.

Thanks very much.

Thank you.

Our next question is from the line of Aldo Mozafero with Goldman Sachs.

Please go ahead.

Hi, good afternoon.

A question on the pension expense and the healthcare expense.

Would it be fair to say that the healthcare expense would be a cash expense next year and pension would be noncash?

They should both, next year be largely noncash, although largely as they were in the last several years, pensions certainly -- I mean, there will be some minor amount for multi-employer plans and supplemental stuff but the large qualified plans we shouldn't see any funding requirements in 2003 as I think John mentioned.

On the healthcare side, the preponderance of the represented retired healthcare costs which is the biggest piece will still be funded by drawing on our Viva assets.

I see.

Okay.

There will be some that will be currently paid smaller amounts but the preponderance would be funded by the Viva assets, still.

Okay.

And Tom, just a separate question on your -- on the negotiations you are likely to have with the steelworkers at National Steel, assuming that were to result in a contract more or less like the ISG, would that contract be applicable to any of your United Steel Workers union workers at the US Steel facilities?

Or would those away the -- steel facilities?

Or would those await --

Thomas Usher, Ph.D.: I would start by saying that the assumption that you would make that we would have a contract with ISG is correct.

We have led to believe by the union that they want to develop a contract which doesn't favor any one person over another.

And the idea of whether it would just the National employees or would also include the US Steel employees is a subject that we're currently negotiating and like some other issues, it's something that I would just not want to comment on until we get to the end of the negotiations.

All right.

Again, congratulations on the progress.

Thomas Usher, Ph.D.: Thank you.

Our next question is from the line of Bruce Kline with Credit Suisse First Boston.

Your line is open, sir.

Hi, guys.

Hi, Bruce.

Just so I was clear on the -- the, uhm, the OPEB, in '02 the cash payment was $80 million a good numbers in terms of cash payment?

I thought the '03 was more cash excluding what might have been corrected from Viva.

No, I think in general, our '02 payments or '01 payments you can see in the annual financial statements were $171 million or some number like that net out of the Viva assets.

And the payments in '02 will be more like $180 million somewhat more than half of it out of the Viva assets.

But you're saying all basically all out of the Viva assets?

Yeah, we still have the opportunity or did in 2002 and may in 2003 to transfer some funds from our overfunded pension plan on a 428 transfer and $15 million sort of side number that we did in '02, not sure whether that will happen in '03 or not.

That's a later measurement that we make.

Okay.

I guess the '03 expense on the OPEB of 2 10, again you're saying the bulk of that is going to be noncash?

Yes, largely.

There will be, you know, some smaller amounts of cash but largely noncash.

And the contract business that was up, I guess you noted in the past 60 percent or so of the business in flat roll is contract.

Is using 30 to 40 percent of the -- of that figure that 60 percent figure reasonable for what was up at the end of year end '02 which is what you kind of reset?

Or is it a different number?

Well, let's make sure we're talking about the right percentages here.

Thomas Usher, Ph.D.: Aldo, what we said last year was that 40 percent was contract, 60 percent spot.

In '02.

Okay.

Thomas Usher, Ph.D.: I said as we move into '03 we've increased some of our volumes -- I'm sorry, Bruce.

We've increased some of our volumes so that we should start moving closer to a 50/50 mix on contract.

And so forth.

nd I would say of the contracts that we had, probably 75 percent -- maybe closer to about 50 percent were renegotiated toward the beginning of the year and then we have other ones coming up during the year.

Okay. 50 percent of the contract business might have been reset at the end of '02, you're saying?

Thomas Usher, Ph.D.: Correct.

And then we have other ones coming up in a couple different spots in '03.

Okay.

If I could cut that one more way, in terms of that 50 percent that was up in year '02, could you cut it with regard to whether you reset one year deal, two or year or any generalization comments?

Thomas Usher, Ph.D.: No.

I would just as soon stay away from that.

Okay.

And spot, spot steel right now, could you give any color on what's kind of -- we know things kind of weakened here in December.

Did they continue to weaken in January, as well?

If you could --

Thomas Usher, Ph.D.: I would say they have stabilized in January.

The order rate through November had fallen off, December started picking up and January.

We're off in hot roll a little more than the third quarter but I'd say I see stabilization there as opposed to deterioration.

Okay.

And lastly, just with the National deal that you are looking to do, what the -- significance of the 1/31 deadline with the Court, do you need necessarily to be at a higher number in order to be the front guy with regard to the way the judge views that, with regard to where AKs numbers are --

There are many factors that play into it, Bruce and I wish I could give you an answer but I really can't.

That's sort of a minute-by-minute process.

And I would just say importantly, regardless of what all goes on, importantly, we believe we're in a good position to reach an agreement with the union that's satisfactory both to us and to them and that will be a significant determinant in how this story all plays out.

Okay.

Thanks a lot, guys.

Our next question is from the line of Peter Marcus with World Steel Dynamics.

Please go ahead.

Hi, gentlemen.

Hi, took to discuss what's going on in raw materials.

You know that coke on the world market has approximately doubled in price, scrap is up 20 percent, pig iron is up seems to be a tight supply of iron ore.

I'm wondering how hard are you going to be hit by any of these price increases and what may be the effect if you sell these assets to Apollo, will you be buying from them at a relatively fixed price in the future or be subject to price escalation?

Thomas Usher, Ph.D.: I'd just say in general, the pressure is on the various raw material components you have talked about I'm not sure how large they each are but there are certainly pressures there.

In our European operations, we feel them certainly in their source from different locations there but we feel those pressures there and we are taking steps to do everything we can do have effective competition from different sectors and that's the best way we can find to try to keep those costs under control.

Domestically, where we do right now produce a large degree of our raw materials we don't see quite as much of that pressure.

To the extent we would succeed in completing the Apollo transaction that we have laid out and we have said several times publicly in our press releases on that point that we will be entering requirements contracts at market-related prices.

So to a large degree, sort of periodic ups and downs would not be relevant to our expectation of what would be in those market-related prices.

And in particular, in the near term, we would not be subject to any sorts of dramatic ups given the kinds of contracts arrangements for our requirements that we are contemplating right now.

I'm not sure I heard the answer well.

So let's say coke in the domestic market would spike up in let's say 2004 by $20 a ton.

Would you be paying that $20 a ton and getting back 20 percent of the profit or would it stay more stable?

We would not be paying the $20 a ton.

Thomas Usher, Ph.D.: Peter, I would say that over the next few years, the pricing is negotiated closer to what we would expect our costs to be out beyond that, it would be affected by market more.

But not over the next few years.

Thank you very much.

And does that conclude your question?

Yes, it does.

Very good.

Thank you.

Next we will go to the line of Michelle Applebaum with Salomon Smith Barney.

Please go ahead.

Hi.

Uhm, you know, I want to ask you if and when conclude the Apollo contract, would you be disclosing the specifics of the pricing you'll pay and will be paying in the future for the material that you'll be securing from them?

Or will you just have disclosure of market-related prices?

That's probably a matter of some securities law requirement, Michelle, as to what's in the contract and what gets filed and what's considered confidential its a really interesting question but aim afraid I don't have a good answer for it right now.

I guess what I want to express is that I think that the securities laws require disclosure on raw materials in general.

It's kind of focused on if it's available to you or not and you notice that you tend to talk about how many years your coal and iron and all this stuff will live for you.

And I don't know when I look at a lot of the filings of companies that have like their buyers of slab or whatever, I don't know that I have the disclosure that I really need so I'm asking if you'll give more disclosure than required so that we can do analysis on our own to see if your contracts really are market-related or if there is vulnerability if prices move down and you're not able to benefit from that. -- I think there should be disclosure I guess is what I'm saying.

Thomas Usher, Ph.D.: Okay.

Well, we appreciate that input and we'll talk about that some.

Okay.

Thank you.

Thank you.

Our next question from the Brett Levy with Royal Bank of Canada please go ahead.

Hey, guys.

A little bit further afield, you talked about income from the real estate assets as being about $20 million in the quarter.

Was there anything unusual about that?

And could you also give an EBITDA number for the quarter?

Or just add back D&A?

And then I guess related to both of those, it seems like the kind of asset that also would be optimal to monetize in the current interest rate environment.

Is this something you're looking into at this point?

Let me try to answer those in some kind of order.

The $20 or so million in the fourth quarter and $57 for the year, there wouldn't be much D&A in there.

So say, you know, less than $5 million probably so you're essentially seeing the EBITDA probably just on that number maybe a little bit to round up 3 or 4 or 5 million but not very much.

Essentially I think if you want to use that as the EBITDA you are probably safe.

And we are looking as I just commented on monetizing part of those holdings which would be our timber properties, monetizing them after a fashion by partially extinguishing liability in connection with attributing those to a Viva where they would have a, in essence, a tax sheltered existence for a while.

We think that would be very useful way to monetize those.

Other things which we have coal, methane gas, royalties of all sorts, we look at those kinds of transactions all the time and we do them periodically and they're in these numbers periodically.

We don't have not done in this particular reporting period anything really big.

The fourth quarter numbers had some nice land development sales but nothing that was all that unusual and they sort of ebb and flow as the process goes so we'll continue to look at those assets.

Your observation about the interest rate environment being favorable for monetization is absolutely right and we have a few things that we're looking at but nothing other than the timber item that I mentioned that would be really big and worth talking about right now.

And in terms of the EBITDA that flows off the timber asset, would you be willing to disclose that for the last year?

From the timber assets specifically, it would be quite modest during this reporting period.

We have cutting rights, we sell occasionally, but there wouldn't have been, I don't believe, any big amounts.

We'll double-check that but in these particular reporting periods we had any large timber proceeds.

I'm sure some but not extremely large amounts during this period.

All right.

Thanks very much, guys.

Our next question will be from the line of Frank Donnel from Advantage Capital.

Do you know what the inventory was at the end of this year versus the end of last year?

Just a second, Frank.

We'll get that for you.

Guessing that's your only question?

No, I have another one while you're looking that up.

I guess it was in response to John Tomassis's question, was that 2 percent pricing, was that for the entire year that we should assume 2 percent up pricing or was that first quarter or what...

I was confused as to what period of time that was referring to.

I think John was asking, could we assume that the price increase that we got on contract business in the first quarter would be 2 percent greater than the fourth quarter, which would imply that if we had a 2 percent increase in costs that would offset that.

Okay.

I guess I was doing some arithmetic which may be wrong, but if I assume that 50 percent of your business is contract and half of that -- let's say got bumped up 10 percent at the end of the year or 25 percent of your business got bumped up at the end of the year, 10 percent, and 25 percent of your business on contract was flat, at least going in the first quarter, then in order to be flat with the first quarter pricing, to be flat with the fourth quarter pricing, then I can only have a one percent decline in the 50 percent spot business.

Am I doing anything wrong or is that how the arithmetic works?

I'm not sure how you can actually do that equation since we really don't tell what you our realized price is for contract business versus our realized price for spot business.

I mean, it's just -- I don't know.

I just got told that spot was -- contract was up at least on 25 percent.

Half your contract was going to be up close to 10 percent.

And you know, realized in the spot I can look at the spot market.

I don't know.

You're right.

I can't.

I'm just trying to figure out whether I'm doing something close.

Thomas Usher, Ph.D.: You know, there is such a mix differential between -- you would have to also, I think, get into the mix of hot rolled cold rolled and galvanized.

Most of the spot decrease we have seen has been on the hot rolled, not so much on the cold rolled, galvanized.

If also then has to have a sense I think of the relative proceeds for this contract business vis a vis the relative proceeds for spot business.

Because if you had some business that just to use a strange example, at $800, 2 percent increase there would be 16.

If you had business at $200, a 2 percent increase would only be 4.

So... in a very generic way, you're on the right thing.

But I think you would have trouble coming to the right answer without knowing the mix between hot rolled, cold rolled, galvanized, and the specifics of what spot business we have and what contract business.

Okay.

Then let me try and get a little closer just in my own mind.

Look at your order book in the first quarter is it a better mix of business or a higher price mix of business than it is in the fourth quarter.

Yes.

Okay.

That's it.

You know, and I'll wait for the inventory question -- answer.

Up about $ 61 million.

Up 161 million.

Up 161?

Yes.

What type of base?

That's up from 870 million?

Okay.

Thanks.

Thank you.

Our next question is from the line of Tom Lapointe with Columbia Management.

Please go ahead.

Good afternoon.

Hi, Tom.

When you guys made, going back to the question on the negotiations with the union on National Steel.

When you made your bid, did you assume that some of the employees at your current facilities would be able to benefit from the new contract?

Thomas Usher, Ph.D.: No, not really.

We make a lot of assumptions on future expectations but we didn't necessarily have that particular structure at the time in mind.

Do you think it would work -- if the union -- if you do have two contracts, how would that work?

It would seem as though it would -- it would suggest you might be able to move production over to one lower cost facility or you might decide to make Cap Ex in one plant versus another plant.

How would that play out if you had two separate cost structures?

I mean, that is an issue and that's the kind of thing we're discussing with the union.

Thomas Usher, Ph.D.: You know, uhm, they have concerns in this area.

And, uhm, there's challenges regardless of how we would do this.

And I would just say that these are items that are under discussion.

Okay.

And have you disclosed or has ISG disclosed what the cost per ton benefit is of the new contract?

Have you guys pretty confident you are going to get the same deal that they get?

What sort of cost per ton benefit are we going to see?

Thomas Usher, Ph.D.: I haven't seen anything where they have disclosed it and we're still working on it.

But obviously, you know it based on your made an offer for the company.

You must have an idea of what that would be.

I assumed it would make a significant difference in what you're willing to pay for the company.

Thomas Usher, Ph.D.: Well, I mean, a lot of our synergies that we identified were things other than the labor savings.

And we do have some estimate in there as far as what the labor savings are.

But it the was not a very scientific thing.

We'll just have to see how these negotiations develop.

And another question.

Why do you think AK thinks they can pay more for this?

Do they have more synergies inherent in their plants from combining them or do you think they want to just muck up the water?

It seems like they came in at the last minute here.

Thomas Usher, Ph.D.: That seems like an appropriate question for AK.

Okay.

How about the former question?

Do they have -- as you see it, do they have more synergies that they can squeeze out than you guys?

We think again --

Thomas Usher, Ph.D.: You know, you have to ask them what they think their synergies are.

If you look at where our plants are located vis-a-vis the national plants and some of the transportation savings and so forth, you know, you come to one judgment.

And you have to sort of decide, you know, where they think their synergies are.

But I don't know what they have in their bid.

Would you have to ask them.

It would be presumptuous for me to try and --

Last question, thank you, uhm, I was trying to understand if I'm reading this correctly.

The pension and OPEB asset/liability, how did it change in 2002?

In other words if you combine pension and OPEB assets -- the pension asset did you have an asset at the beginning of the year and now you have a liability if you include pension assets together?

I'm trying to see how that changed during the year.

Hey, Tom.

Why don't I give you a call offline.

I can walk you through the accounting entries for that.

Okay, thank you.

Thank you for your question.

And Mr. Quaid, at this time, I'll turn it back to you.

Thank you all for your participation today.

Again, we'll be here if you have any additional follow-up questions.

Thanks.

Ladies and gentlemen, that does conclude our conference call for today.

Thank you for your participation.

And for using AT&T Executive Teleconference.

You may now disconnect.