美國鋼鐵 (X) 2003 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the U.S.

Steel second quarter earnings release conference call.

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 should require assistance during the call please press star then 0.

As a reminder this conference is being recorded.

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

Thanks, Shelly.

Good afternoon, and thank you for participating in United States Steel Corporation's second quarter earnings conference call.

With me this afternoon are Tom Usher, U.S.

Steel Chairman and CEO, John Surma, President and COO, and Gretchen Haggerty, Executive Vice President, Treasurer and CFO.

Before we begin, I must caution you that today's conference call contains forward-looking statements with respect to market conditions, shipments and prices, operating costs, the level of capital expenditures and interest expense, National acquisition synergies, work force reductions, administrative cost reductions and potential acquisitions and divestitures.

These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements.

In accordance with the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, cautionary statements identifying important factors but not necessarily all factors that could cause actual results to differ materially from those set forth in the forward-looking statements, have been included in our Form 10-K poor the year ended December 31st, 2002 and in subsequent filings.

With that, this afternoon we'll discuss second quarter results in our outlook for the third quarter.

We'll update you on integration of the assets acquired from National Steel and the implementation of our new labor agreement.

Lastly, we'll update you on a number of other strategic initiatives, before we open the call for your questions.

Now, to begin the call I'd like to turn it over to Gretchen.

Thank you, John.

Starting with the top line second quarter 2003 consolidated revenues and other income, which included 42 days of results from the assets acquired from National Steel, increased 31% to 2.4 billion from the 1.8 billion recorded in last year's second quarter and increased 24% compared with the 1.9 billion for first quarter 2003.

Our overall price per ton increased 11% from the second quarter of last year and increased 2% from the first quarter of 2003.

Total shipments from our flat-rolled tubular and USSK segments increased 19% from the second quarter of 2002 and 21% from the first quarter of 2003.

For the second quarter, U.S.

Steel reported net income before extraordinary loss of $3 million, or a net loss of 1 cent per share after preferred dividend.

Compared with net income of $27 million or 28 cents per share in the year-ago quarter and a net loss before cumulative effect of accounting change of 33 million, or 35 cents per share after preferred dividends in the first quarter of 2003.

As previously disclosed and as a result of exiting the coal mining business in the second quarter of 2003, we recorded an after-tax extraordinary loss of $52 million, or 50 cents per share for benefit liabilities granted under the coal industry Retiree Benefit Act of 1992, which is commonly referred to as the Rockefeller Act.

The accounting recognition and extraordinary item treatment of this obligation are established in the emerging issues task for EITF 92-13 and we've discussed that further in our footnote 3 in the earnings release.

We'll talk about the coal sale in more detail later in the call.

As we noted in our release this morning segment results for the second quarter of $6 million were 26 million lower than the year-ago quarter, primarily as a result of a number of cost-related effects on our domestic businesses, somewhat offset by record results at our European operations, higher averaged realized domestic sheet prices and the addition of the 42 day results from the assets acquired from National.

Compared to the second quarter of 2002 employee benefit costs increased by approximately $57 million and domestic natural gas costs increased by $29 million.

Also, as previously disclosed, second quarter 2003 segment results included approximately $38 million in costs for planned repair outages at Gary Works.

Compared to the first quarter of 2003, second quarter segment results increased by $25 million, primarily as a result of seasonal improvements in our raw materials operations, the addition of the results from the assets acquired from National and a $17 million decrease in natural gas costs.

These benefits were partially offset by the costs of the planned repair outages at Gary Works that I mentioned.

The segment results do not include the effects of certain items that were not allocated to the segments as detailed in the supplemental statistics to our earnings release.

For the second quarter segment results do not include the pre-tax effect of three items.

Pre-tax income of 34 million from the sale of certain coal seam gas interests at the end of April, the pre-tax gain of $13 million on the sale of our coal mining operation, and an 11 million dollar pre-tax impairment of a cost method investment.

These items contributed after-tax income of 23 million to the second quarter, or about 22 cents per share.

Looking at second quarter results for each of the segments, I should first point out that effective with the acquisition of National Steel's assets on May 20th, 2003, the operating results of Great Lakes, Midwest, Granite City, ProCoil, and U.S.

Steel's interest in Double G Coatings are included in the flat-rolled product segment, and the results of Keewatin taconite pellet operations are included in other businesses.

For the flat-rolled product segment we recorded a loss from operations of $68 million, or $21 per ton, compared to losses of $10 per ton in the second quarter of 2002 and $16 per ton in the first quarter of 2003.

Flat-rolled product shipments which included 42 days of shipments from the former National plant increased by 25% from the year-ago quarter and 31% from the first quarter of 2003.

The flat-rolled average realized price of 420 per ton was up $18 per ton versus a year-ago quarter and down $1 per ton from the first quarter of 2003.

Year-over-year the unfavorable impact of higher benefit costs, higher natural gas costs, and Gary Works outage costs more than offset these favorable trends in shipment and pricing.

Our tubular product segment recorded a loss from operations of $4 million, or $19 per ton, down from income of $28 per ton, earned in the second quarter of 2002, but somewhat improved from the $24 loss per ton recorded in the first quarter of this year.

Second quarter tubular shipments decreased 3% from the year-ago quarter and increased 2% from the first quarter of 2003.

The average realized tubular price of 6.44 per ton increased $8 per ton for the second quarter last year and $6 per ton from the first quarter of this year.

USSK turned in another outstanding quarter with record income from operations of $67 million, or $55 per ton compared to income of $24 per ton in the second quarter of 2002, and $54 per ton in the first quarter of 2003.

The increase of $31 per ton from the second quarter of last year was primarily due to higher realized prices and net favorable exchange rate effects, partially offset by higher costs associated with activities under the conversion agreement with Sartid in Serbia.

USSK had strong shipments for the quarter of just over 1.2 million tons, which were 10% higher than the year-ago quarter and 2% higher than the first quarter of 2003.

The average realized price per USSK of $369 per ton increased by $112 per ton or 44% from the second quarter of 2002 and by $28 per ton from the first quarter of 2003 as exchange rates moved favorably and USSK realized price increases for all prime products in both periods.

Straightline, our technology-enabled distribution business, recorded a loss from operations of $18 million in the second quarter versus a loss of 9 million in the quarter a year ago, and a loss of 15 million in the first quarter of 2003.

The quarter's results reflected weakness in the domestic manufacturing sector and significantly lower margins as Straightline began to dispose of inventory purchased in 2002 at prices higher than today's market prices.

USS real-estate reported income from operations of 17 million as compared with 12 million in the year ago quarter and 13 million in the first quarter of 2003.

Lastly, other businesses reported income from operations of 12 million for the quarter down from the 23 million reported in the year-ago quarter, but increased from the loss of 36 million reported in the first quarter of 2003.

Now, John Quaid will provide some additional details on this quarter's results.

Thanks, Gretchen.

Capital spending in the second quarter was $69 million and is detailed by segment in the supplemental statistics accompanying the earnings release.

Our current plan for 2003 is total cap spending at approximately $330 million which includes about 110 million for USSK and 30 million for the former National facilities.

In addition, the third quarter will include the last deferred purchase price payment for USSK of 37.5 million.

This payment was made in July.

For the year, we expect depreciation to total approximately 370 million.

Reviewing the status of significant capital project, domesticly, at the end of July we began operating a new $85 million quench and temper line with annual production capacity of 340,000 tons as part of Lorain Works number 3 seamless mill.

At USSK at the end of June, we completed our tin mill expansion plans with the start up of new continuous annealing and electolytic tinning lines, which have more than doubled USSK's total annual tinning capability to 375,000 tons.

Progress is also being made on a new Dynamo line, which is used to make electrical sheet steals and that line is currently scheduled for start-up in early 2004.

All of these capital project support U.S.

Steel's goals of increasing value-added capabilities.

Next, let me summarize for you, the major cash flow and balance sheet impacts of the new National acquisition and our new labor agreement.

On May 20th, as Gretchen mentioned before, we acquired out of bankruptcy substantially all of the assets of National Steel.

Effective with the acquisition, we also, entered into a new labor agreement with the Steel Workers Union.

Cash consideration for the acquisition totaled $844 million, and we also incurred about $28 million for certain lease payments and transaction costs.

The sum of these cash outflows is reflect in the cash flow data included in the earnings release.

In connection with the acquisition we also recognized $540 million in liabilities, which includes approximately 300 million for employee benefits, granted under the new labor agreement to active former National employees that have been hired by U.S. Steel.

More details on the acquisition of National's assets, including the preliminary purchase price allocation, will be included in our second quarter Form 10-Q, which is scheduled to be filed within the next week.

The financial portion of the purchase price, during the quarter we issued $450 million of 9.75 senior note, which mature in 2010.

As a result our long-term net balance increased to 1 billion 846 million and we ended the quarter with long term debt plus equity ratio of about 46%.

Looking out to the year interest expense is now expected to total approximately $180 million.

At the end of the quarter our available sources of liquidity totaled $1.25 billion, with a breakdown as follows: 145 million of cash, 500 million available under our 500 million dollar AR facility, and 556 million available under our $60 million inventory facility, and lastly 46 available under the $50 million USSK credit facility.

So, at the end of the quarter there was nothing drawn on any of our facilities, and after taking into account the National acquisition and the senior notes we issued during the quarter our liquidity actually increased quarter to quarter by $100 million.

Lastly I'd like to update you on our cost savings efforts before both domesticly and in Europe.

First, on the domestic front, as we've been reporting to you quarterly, we committed to a cost savings target for existing domestic operations of $30 per ton, or about $300 million over a three-year period ending in 2004.

Employees at each of our domestic facilities continue to identify and implement hundreds of cost savings projects, and their efforts over the last year and a half have resulted in cost savings of over $200 million on an annual run-rate basis.

You should note that these amounts do not reflect savings expected in connection with the National acquisition nor the implementation of the new labor agreement, and we will continue to track these savings separately.

I can also report that U.S.

Steel Kosice is on track to achieve annual cost savings of at least $10 per ton or close to $50 million for the year.

With that, I'll turn it back to Gretchen for discussion of our outlook for the third quarter and an update on the National integration and other strategic initiatives.

Thanks, John.

For our domestic flat-rolled segment, while there is a growing view that economic prospects are improving, there remains some uncertainty as to the timing and strength of the long awaited economic recovery.

Looking forward, as a result of order rates in excess of our ability to produce over the last four to six weeks and the inclusion of the National facilities for a full quarter, we expect third quarter shipments for the flat-rolled segment to exceed 3.8 million tons, an increase of 20% from the second quarter.

For the year we expect flat-rolled shipments of approximately 13 million tons.

On the pricing front , spot prices for sheet products have declined throughout the first half of the year but they appear to have bottomed in July as announced price increases for August begin to take hold.

As a result, we expect flat-rolled average realized price in the third quarter to improve slightly from the second quarter.

Looking out to the fourth quarter, last week U.S.

Steel announced a $20 per ton increase on new orders for hot rolled, cold rolled, and coated sheet products for shipment after September 1st.

A number of other steel mills have also announced increases for September.

Looking at third quarter costs for the flat-rolled segment we are, currently, projecting third quarter natural gas prices to decrease slightly from the second quarter.

For your modeling purposes, with the assets acquired from National Steel, domesticly U.S.

Steel now uses, roughly, 20 million mmbtu's of natural gas, per quarter.

Looking out to the fourth quarter, I should also note that we currently plan to take several major repair outages towards the end of the year, with costs totaling, approximately, $35 million.

Tubular markets appear to be showing some kind of life as the U.S. active rig count stands at 1,097 rigs, as of the end of last week, an increase of 249 from a year ago.

We expect third quarter tubular shipments to increase moderately from second quarter levels, while prices are expected to be only slightly higher.

Our annual shipment forecast for tubular stands at approximately 950,000 tons, taking into account a sequentially stronger quarters.

Turning to Europe, third quarter shipments are expected to be in line with the second quarter and the average realized price is expected to decline back to levels that approach the first quarter, due to the softening markets as Europe enters its summer holiday season.

During the seasonally slow period USSK plans to reduce production in the third quarter and perform annual maintenance on a number of facilities.

While the cost of this work is not expected to be significant, USSK will run at a lower utilization rate in the third quarter.

Full-year 2003 shipments from both USSK and Sartid are expected to total approximately 5 million tons.

As I mentioned earlier, on top of the current weakness in the domestic manufacturing sector, the primary reason for the increase in Straightline's losses from the first to second quarter related to significantly lower margins that resulted as Straightline began to dispose of inventory purchased in 2002 at prices higher than today's market prices.

Looking forward, business fundamentals appear to be improving and we will continue to closely monitor Sraightlines's progress towards profitability.

Now, I'd like to provide a few remarks on our strategic initiative, including an update on the National integration, before we turn to your questions.

Over the last year we've discussed with many of you our efforts to work aggressively on strategies to monetize non strategic assets, to grow our higher value-added businesses through participation and consolidation of the domestic industry and to expand globally.

With respect to our strategy to monetize non strategic assets, we completed two transactions in the second quarter.

On April 25th, U.S.

Steel sold coal seam gas interests for net proceeds of 34 million, which resulted in pre-tax income of the same amount.

The coal seam gas interest generated revenues in pretax income of approximately 3 million in the first quarter of 2003.

On June 30th we closed on the sale of our last two active coal mines located in West Virginia and Alabama.

The coal mining operations were sold for $50 million at closing plus an expected future payment of 7 million for final inventory.

Pre-tax income from the sale of the operating coal mines was 13 million.

These operating coal mines generated a pre-tax loss of, approximately, 3 million in the first half of 2003.

We continue to pursue the sale of most of our remaining mineral interests for net proceeds of about $75 million as well as a contribution of some of our timber lands and timber cutting rights to our pension plan later this year.

On the domestic consolidation front, as you are aware, we closed on the acquisition of National's assets on May 20th.

We also entered into the new labor agreement, and that was effective with the acquisition.

The integration process has gone well, and our customers and suppliers have been very supportive of the acquisition.

Many of our customers have also complimented us on the smooth transition as we continue to supply their needs for high-quality steel without disruption, shipping over 600,000 tons of steel from the facilities in the first 42 days.

From day one, we faced a market as one company as we quickly began to move toward a more uniform pricing structure.

The plants have operated well and we had new management teams in place that are executing our integration plan.

Our top priorities for the acquisition at this point include work in three areas.

First, achieving benefits from the combined operating configurations, consolidating purchasing and raw materials sourcing, and optimizing freight savings, which I will refer to that as the National operating synergy.

Secondly, streamlining operation and increasing productivity through represented and non-represented plant work force reductions and reducing and eliminating administrative costs at both U.S.

Steel and former National units.

Based on our current estimates our total annual repeatable savings from these three areas are expected to be well in excess of $400 million by the end of 2004.

While we are well underway with our efforts to achieve national operating synergies, plant work force reductions and a reduction in the former National administrative costs, we are in the early stages of our process to reduce U.S.

Steel administrative costs.

We also expect significant savings from this effort, and that should, really, position us to more than exceed the $400 million figure.

The administrative process review at U.S.

Steel was initiated in May with a 20% reduction in executive management.

Now as a reminder, in addition to these savings, we will also benefit from lower overall costs for depreciation of the acquired asset and retiree benefit following the National acquisition, bringing the total change in our combined domestic cost structure to over $600 million or about $40 per ton shipped.

More than half of the total savings are expected to come from work force reductions at the plant, so let me give you an update on that process.

With respect to the represented work force, as we've discussed with you before, the new labor agreement with the Steel Workers Union allows us to operate both the U.S.

Steel and the former National Steel facility with at least 20% fewer represented employees.

To accomplish this work force reduction we initiated an early retirement, or transition assistance program.

On July 1st retirement offers were made to all eligible represented employees.

Those employees have until August 22nd to accept the retirement offers.

We are still somewhat early in the process, but as of the end of last week over 1700 employees have accepted their retirement offers.

We expect the number of accept answers to accelerate over the next few weeks, as the deadline nears.

The majority of the employees who accept the offer are expected to leave the work force by the end of October with the rest departing before the end of the year.

In connection with the implementation of the Transition Assistance Program, or TAP for short, U.S.

Steel will record an estimate 500 million pre-tax charge in the second half, which approximately 115 million of which is for the early retirement incentives and is expected to have a cash impact in 2003.

The balance is pension and OPEC curtailment losses which essentially represent the recognition of deferred actuary of losses.

We're, also, well along in the process to reduce our work force at the plant.

At this point, we've made reductions at the acquired National facilities reducing total administrative head count from about 1500 before if acquisition to about 1000 as of the end of July.

We have also made reductions at Mon Valley and are in the process of completing our review of remaining facilities.

We expect to complete the restructuring of the plant work force by the end of September.

As a result of these work force reductions, we believe that the cost structure at our plants will be competitive with other large integrated field producers that have recently gone through bankruptcy.

On the international front, we expect to close on our purchase of Serbia steel producer Sartid in the third quarter for a purchase price of 23 million.

While we do not expect this acquisition to have a significant effect on consolidated results for the balance of the year, we believe that Sartid provides us with an attractive opportunity to expand our product mix in Europe, as well as ,deep water access both for incoming raw materials and outgoing steel products.

In Poland, on July 14th, a competing bidder was granted exclusivity by the Polish government to negotiate PHS.

As we note in our press release, we continue to be interested in PHS and we're monitoring the situation closely.

In closing, completed and planned non-core asset sales our acquisition of National Steel's assets, the new labor agreement and concurrent domestic work force reductions, and the pending acquisition of Sartid are all consistent with our drive to build value for the company by investing in value-added facilities, focusing on construct a world competitive cost structure and expanding globally.

Now with that, Tom asher and John Surma are here with us and we would be happy to answer any questions.

With that, Shelly, we'll turn it over to you to queue up the questions.

Thank you.

Ladies and gentlemen, if you wish to ask a question please press star 1 on your phone.

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

To remove yourself from the queue press the pound key.

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

Again, if you do have a question or comment press star 1 at this time.

One moment for the first question .

Our first question will come from the line of Bruce Klein with CSFB.

Go ahead.

Hi.

Good afternoon.

Question on the former National.

What might be a good kind of run rate for total shipments?

We saw what was your six weeks, but what's a fair number, do you think?

We had about, you know, more or less half the quarter, in the second quarter 42 days is more or less half, so we did about 624,000 tons.

If you double it, that would be a pretty good start for a quarterly run rate.

Okay.

With regard to -- maybe you can review for us just on the contract side now, putting two companies together, what percent of your total business might be on your contract as well as what percent of the contracts is going to come up the end of '03, and what might be kind of your initial thoughts or strategy, kind of, going into '04 in terms of pricing those contracts for '04?

Bruce, this is John.

I'd say just in general, on the pricing front in total, among our more immediate challenges, of course, is to face the market as one company, as Gretchen indicated in her comments.

We're in the process of working with a lot of customers we did business with on both sides of the aisle and coming forward with a more consistent pricing posture.

So, that means we have a lot of things to deal with, with lots of customers as opposed to where we were with two separate companies.

That's kind of a general answer that will have some maybe some contracts to deal with sooner than we otherwise would have.

To get to your first question, I'd say that, you know, we're a little bit more contract-oriented than we were as U.S.

Steel standing alone.

If we were 50/50 before, we're 55/45 now, maybe moving towards 60/40 as we actually rationalize the overall system.

I guess your flat-rolled prices, I think, were flat as 2 Q versus 1 Q. I'm wondering, I think the market was down a fair bit on a spot basis, but I'm wondering what was going on to drive that number to be flat.

Mix, or National's mix in there, or what else is happening?

Well, Tom, Bruce.

I think we were down a dollar quarter to quarter, and part of it was the fact that we picked up a little more contract business with National.

But, the other was that we just did not chase some of the lower-cost business that was out there.

We didn't run our facilities flat-out in the second quarter.

That market seems to be strengthening up now, and our order rate is in, but part of it was just walking away from some of the business that maybe others did chase.

Lastly, I think, Gretchen you might have mentioned the timberland business and maybe contributing some of that.

I suspect, for Legacy.

Can you touch on that again in terms of what the plan would be or how many acres is out there and what might be a target amount of proceeds that you would apply against and which of those liabilities?

I guess what we've said in the past is we're looking at contributing about 170,000 acres to our pension plan.

We've roughly valued that at about $100 million, Bruce, although I have to tell you, we're going through a process of appraisals, we will be getting a little better formal idea of what that is.

It's quite an extensive process to appraise that much timberland, as I'm sure you can appreciate.

But, it would be our plan to try to accomplish that by the end of year.

This is something that requires Department of Labor approval, and we've made our fillings and going through the process to get that accomplished by the end of year.

I'll pass it on.

Thank you.

We have a question from the line of Michael Gambardella with J.P. Morgan.

Thank you and good afternoon.

Couple of questions.

On the coal sales, I'm still a little confused.

Could you just tell me, for the two coal sales, could you give me what the income for the second quarter was for the operations that you sold and also what the gain was from these operations?

Because, the preliminary supplemental statistics mention a gain of 13 million, but then above it, income, which I'm assuming is a gain as well.

Is that correct?

Or can you just give me those numbers?

Are you looking up at the other businesses, Michael?

No, I'm looking down under items not allocated to segments and the income from sale of coal seam gas interest.

That's a separate sale altogether.

Those were our mineral interests we sold at a gain of 34 million.

The gain on the sale of our operating coal mines was 13.

Embedded in our first-half results, operating results, segment results, okay, which really would have fallen under other businesses, was a $3 million loss for the coal mine.

Right.

So you've got --

That's the operating loss we recorded for the coal mines, which would have been above the -- it would be in the other businesses item line where it says on a year-to-date basis -- well, that's the quarter, but I gave you the first-half effect of 3 million.

For the coal seam gas, Michael, we would have had pre-tax income of about 3 million in the first quarter.

There's two 3 millions there.

One was a 3 million loss and one was 3 million of income.

But the 3 million loss, you mentioned that was for the first half.

What was it for the quarter?

Let me see if I can lay my hands on that.

In the first quarter we showed a pro forma, in the debt offering, we showed a $4 million income, I believe.

So, that would make a loss of about 7 in the second quarter.

You had a gain of 34 and 13 for those two properties?

The 13 is for those two properties.

The two coal mines we sold for a gain of 13.

The coal seam gas interest, which is a different property all together, different interest all together, is 34 million.

But, the 34 is a gain on that sale, right?

Yes.

Okay.

The 13 is a gain on the sale also.

Okay.

The second question, in terms of Straightline, with the, you know, in last quarter, Tom, you mentioned that you were very disappoint with the results coming out of Straightline last quarter, and they got worse this quarter.

Is there at what point do you say, you know, kind of, "That's enough"?

Well, you're right, and we had a sense this is about where the second quarter would come in.

You know, this is something that we will not tolerate indefinitely.

It has made some improvements, whether they're enough or not, time will tell.

But we are very carefully monitoring this thing.

They have very specific objectives they have to meet between now and moving forward, and, again, I'm not happy with it.

We will not tolerate these kind of losses, but, again I don't want to put a specific time frame on that.

Okay.

Thanks a lot, Tom.

I'll let someone else ask some questions.

We have a question from the line of Andy Petigen with [INAUDIBLE].

You've talked about asset sales.

What proceeds, if any, do you anticipate viba to help fund OPEB for next year?

Well, I guess, really, we would take a look at that, later in the year to see if that's something that would make sense.

It's a good tax deduction, but we might not need that later this year.

The timber and contribution, at one point we look at putting it in the viba, but what's better is putting it in the pension plan, so that's how we're going forward.

We really don't have any plans to fund the viba anymore this year, although, we could.

It would be something that we could do with excess cash flow.

We've talked about that before.

I think we'd wait a little later in the year before we'd make that decision, but our current think sing to put the timberlands into the pension fund.

Okay.

So we should assume for now that OPEB switches to cash next year from non-cash this year?

For planning purposes in your modeling, that would be a good assumption

Can you give us, quickly, the breakdown of the non-cash pension and OPEB for this quarter, year to date?

Do you have that handy, John?

Looking at OPEB, we had 45 million in costs for the quarter, 18 of that in cost of goods sold, and 27 million in SG&A.

I think as we said before, for the year we were looking at about 40 million of that in cash, so maybe 10 of that is cash for the quarter so, you know, a net 35 non-cash charge.

For pension, we had 26 million of cost and cost of goods sold and actually an $8 million credit in SG&A for an $18 million credit for the quarter -- or $18 million cost for the quarter and all of that's non-cash.

Thank you very much.

We have a question from Mark Parr with McDonald Investments.

Please go ahead.

Thank you.

Good afternoon.

Mark.

I was curious regarding the administrative head count reduction planned for the U.S.

Steel assets or the prior U.S.

Steel assets.

I was wondering if the $500 million in charges you're going to take, includes non represented reduction plans, or if it doesn't, then what incremental charges we might be expecting before year end.

This is John, Mark.

It does not include -- that number does not include anything specific for the administrative work force reduction program on the former U.S.

Steel side.

I can't give you ,really, anything solid on what might occur through the end of the year, except that we don't anticipate any specific programmatic undertakings to achieve the reductions we're talking about.

There may be some accelerated retirements given where the interest rate structure is and maybe moving to, and that may cause certain effects as we go through our pension measurement, but nothing specific for that number and that plan.

We'll know more about where we stand with this process -- we really just kicked it off in May or June.

We'll know more about that when we speak in October and we'll make sure we give you more specific guidance on where we think that's taking us.

Is it conceivable that the reductions we're likely to see for the U.S.

Steel facilities is anywhere comparable to the kind of administrative reduction that you have achieved at National?

The National reduction, of course, is substantial, just because a lot of those activities are being folded into activities that organizations that can handle them on the U.S.

Steel side.

There will be, we anticipate, a pretty substantial reduction.

I think it's possible we could get that far.

There's also reductions we're taking, of course, in the non represent work force at the plant levels, and those are going to be very comparable wether it's a formal National plant or a former U.S.

Steel plant, on a non represented side.

On the administrative side, there will be substantial, perhaps not the comparable numbers we saw in National, because we had to resorb some of those activities, but on the plant operating supervision, whether it's Great Lakes or Gary or Mon Valley, I think you'll see the same kind of lien management structure achieved very quickly

This would be management structure, which would be similar to the kind of management you see in you see best in class at places like [Newchlor] or ISG.

If I could just ask one other question, the price increases that you've announced for flat-rolled product ,effective in September, appeared to be followed on by price increases from ISG that resulted in a slightly lower level of base price for hot-rolled.

I was wondering if you could comment on customer acceptance of your price versus perhaps a little bit lower price and, you know, I know that current orders have been really strong, so, you know, maybe the price acceptance -- or the acceptance of the price increase is really good.

I'm just wondering what you've seen so far.

Congratulations on a second quarter, breaking even in this kind of environment.

Thanks, Mark.

I would say, you know, it's still a little early to tell on this September price increase.

We'll have to see, and a lot depends on, you know, if the economy starts to get a little stronger we'll see whether the full 20 is collected or not, but it's too early to really tell.

Yeah.

Mr. Parr, did you have a follow-up?

No, I'm all done.

Our next question is from Wayne Atwell with Morgan Stanley.

Please go ahead.

Could you share your thoughts on the additional M & A activity you might be involved in, in the United States?

Are you done?

How much more aggressive will you be?

Is there a little left or a lot?

I guess I would say, Wayne, I think there's still more opportunity out there and we would certainly be interested, and, as you know we've looked at a number of opportunities and I would say we would continue to be rather aggressive in this area.

I'm not going to share any specific thoughts we have on any of these, but I think there's more opportunity for consolidation and size does matter, I think.

We've seen this in other parts of the world, and we would intend to pursue these things.

Without naming any names, is this sort of rounding out or could it be material?

I would say I would not want to limit myself to either one of those.

It could be some of each.

Okay.

That was it.

Thank you.

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

Please go ahead.

Charles.

In the prospectus, you talked about a possible hit of between 750 and, I think, $800 million in regard to the combination.

Now, is the new 500 a replacement figure for that?

No, I think in the -- if you look at a different place in the high-yield offering, we said the 500 million is kind of comparable to the $440 million charge that we thought we would take in the third quarter related to the Transition Assistance Program.

The number you're referring to, Chuck, is 750 million to 800 million, would really be a charge to equity as a result of a -- you know, when we take a look at -- very similar to the 750 million that we had at the end of last year when the accumulated benefit obligation exceeded the fair market value of our plan.

So, it would just be a measurement that with would do at that point in time, and we may have an additional charge to equity of 750 to 800 million.

Okay.

Well, in the prospectus, you also said, and, obviously, a lot of it depends on what happens in the equity markets and elsewhere.

And discount rates.

And discount rates.

That there might be another pension hit or, possibly, a reversal of last year.

Where would you stand if you were to do it today?

I though it's not the end of the year.

Yeah, I mean, I think that we're still kind in that 750 to 800 million range, although we will be working through our analysis and it's going to depend on where the fair market value of the plans are at the time that we have to measure it.

We'll be updating this as we go through the next quarter.

But, I think it's still pretty close to where we were in the high-yield offering.

Remember, too, Chuck, that hit you're talking about, that's a direct hit to the balance sheet, this is not a P & L charge.

I understand, but the equity market has been pretty good and you guys usually outperform the market.

Obviously, the bonds have been hit.

Anyway, thank you very much.

Thank you, Chuck.

We have a question from the line of John Tumazos with Prudential Financial.

John Tumazos here, good afternoon.

In terms of the $500 million charge to reduce employees, the press release says that will be in the second half.

Is there any reason to think it will be distributed in the fourth quarter rather than the third, or is it likely to be all a third-quarter charge?

It's likely to be -- most of it's likely to be in the third quarter, is my guess.

Yeah.

There could be some in the fourth quarter, but it's largely a curtailment loss, so we are going to have some of the cash payments occur in the fourth quarter, but I think it should also basically be backed in the third quarter.

From an accounting standpoint the booking will be in the third quarter.

Some of the cash will trail in the fourth quarter and into the next year.

In terms of the 7.2% drop in the operating rate domesticly in the quarter, how much of that was due to the Gary maintenance as opposed to turning down very low priced orders as opposed to National operating at a lower level than what U.S.

Steel was operating?

Well, I would say probably 20% of that would be Gary taking an outage.

The other 80% would just be deciding not to chase lower-priced orders, irrespective of whether it would be a former National plant or a U.S.

Steel plant, because commercially, you know, we're running this as an integrated facility.

Now, the May orders posted to your web were about 95% of capacity, and April was okay.

Should we infer from that that the June orders you didn't show must have been at a lower level than if you were turning down orders?

Of course, we recognized in our bookings that we were going to have some reduced capacity, so we wouldn't book it if we weren't able to make it.

But, I would say that, really, beginning about the middle of June, through July and, you know, in the first few days of August, we are in excess of our ability to actually produce and ship on an order rate basis.

So, somewhere six, seven weeks ago this thing turned up substantially, and now we're booking slightly in excess of our ability to make and ship.

Is there a point in time when you'll resume disclosing your orders?

Yeah, I think we've taken that off as part of the integration with National.

We were going to do some rework on that.

Did you guys find that helpful?

We find it very helpful, and I think some of your shareholders might be nervous when you don't show it.

We wanted to do some revamping on that, so we'll revisit that.

Your cost of capital will be lower if you disclose the orders.

Significantly, John?

Okay.

Thank you, John, for that input.

We have a question with Rayle Brian from Midwest Research.

Please go ahead.

Mr. O'Brien, do you have a question?

Mr. Rail.

Good afternoon.

Quick question with regard to USSK and the impact of currency there as it translates through on your average selling price as well as the operating profit.

Uh-huh.

What was the impact there?

Well, I mean, I think if you look quarter over quarter, year-over-year, really the big change was, you know, probably the euro and the crown both strengthened, what, about 25 to 30%, between those two periods.

When you look at it net, it probably benefited the results by about $10 million on the EBIT line.

Okay.

Okay.

So that was really the effect year-over-year.

You know, Q1 to Q2, the move -- well, it did strengthen, not nearly as much.

So, most of the price realization that you had from the 341 in the first quarter to the 369 in the second quarter, is from higher selling prices and better mix?

Yes.

Okay.

Great.

Thank you.

We have a question from the line of Daniel Roling with Merrill Lynch.

Please go ahead.

Thank you.

Gentlemen, on the $400 million in cost savings you referred to, is any of that taking into account the lower D D & A from National on sort of an annualized?

No, Dan that, 400 million is exclusive of depreciation, which I think Gretchen mentioned separately, then in the press release we acknowledged, would be in addition to the 400 million.

That is 100 some million, if I recall, Gretchen, is separate and apart from the 400 million, which is really acquisition represented, non represented labor and G&A

Also, Dan, it does not recognize the cost that National had for what had been their current retirees, which we never absorbed, so those savings from National are also not included in that 400 million.

Okay.

Good.

I think maybe when Gretchen was talking is when a number of lines dropped off and we had to dial back in.

Those two items amount to something just over $200 million.

Okay.

Then the other question I got is on Oil Country tubular goods.

You make reference to the fact that orders seem -- or drilling is up.

What do you see six months out in that area if you can, as your crystal ball improved any?

Well, I would say almost everybody we talk to seems to feel that natural gas prices are going to stay up, and they think drilling is going to continue.

So, we look for this to continue to strengthen there in the second half of the year.

What would you say your operating rates are now versus what they could be?

Oh, I'd say we're probably at 70% and certainly could go to, you know, 100%.

Thank you.

You have a question from the line of Marty Pollack with N S W Hewett Investment management.

Please go ahead.

Yes, just a quick one.

If you would, would you clarify again the 750 million potential charge on this revision of equity.

Did I hear, you're suggesting that ,as of today, that charge would take place?

Well, Marty, we really don't know whether it's going to take place or not, because it depends on a lot of factors.

But, what we've disclosed is that we intend to merge our two plans, our two pension plans, and due to the merger the accounting rules are going to require us to take a look at whether or not we have an additional minimum liability at that point in time.

If we determine that we do, which means that the accumulated benefit obligation exceeds the fair market value of the plan, then we'll end up with a net charge against equity.

We had estimated at the time of our debt offering that that would be in the range of 750 to 80 million.

But, we said at the same time that there's lots of uncertainties regarding the funded status of the plan, and to the extent the fair market value of the asset exceeds the accumulated benefits obligation at that point in time, we may not have any -- we wouldn't have any additional minimum liability, and we may have to reverse the 750 million charge we took last year.

So, there's a significant potential for, you know, shifting in our stockholders equity, but I think, importantly, as John mentioned, none of this has any effect on income.

Do you suspect, though, with the backup of bond rates that -- I believe you had 6.75 on the discount rate, I think it's through your plan, that, certainly, the pressure on funded liability side would be significant less than it might have been three months ago, or two months ago?

Yeah, it could be.

It will depend on all the assumptions that we have to take into account at the time that we actually do the measurement and we merge the plans.

So, you know, we've got the potential for nothing, we've got the potential for a $750 million reversal, or we may have an additional charge to equity.

Just one other thing.

With regard to the $10 ongoing cost reduction plan, I guess $10 per year, $30 per three years, you suggested that it's not in your figures for the cost savings.

However, going forward, do you expect any of that to be cannibalized in, let's say, next year or '05's numbers?

Should we model that to incremental to our cost savings?

Right now, we've got a system in place to track those very carefully at our plant location.

I can envision us continuing that effort, and we've established a whole different set of procedures to track the National operating synergies and the labor, the represented/nonrepresented work force savings and the administrative cost savings.

Right now we're tracking them all separately.

At some point I could see the efforts merging, but they really are separate things.

The $10 is a specific cost focus that are at the existing steel facilities, and the nonrepresented work force and represented work force reductions at those facilities is in addition to that, and we're tracking it that way.

So, we're continuing to keep the focus on what I'll call our traditional cost reduction efforts at the U.S.

Steel plants, and we'll be expecting cost reduction efforts from our National plants, too.

I'd say for modeling purposes you can include that $10 per ton incremental for '04.

Okay.

Thank you so much.

We go to the line of Brett Levy with Royal Bank of Canada.

Please go ahead.

Hey, guys.

Thanks.

Most of my questions have already been answered.

In putting all these companies together, can you talk a little bit about your re-line schedule and what you see it as being going forward?

I think we have two small jobs here in the fourth quarter.

One in Fairfield and one at Gary.

Timing of them, we haven't really locked down.

But, I'd say probably in the fourth quarter.

Beyond that, we're really going through quite a bit of analysis on our blast furnaces, and what our re-line will be and how we load different facilities and what kind of burdens we put on them, and we have the opportunity to, maybe, reduce the cost of some of our burdens at the expense of productivity, but given our opportunity to move steel around between different plants, we might find that to be a lower overall cost operation and spread out the cost of our re-lines and when they occur.

So, now that we have National in the fold, we've got a big project that's taking a look at this and trying to better firm it up.

But, we see no huge numbers in '04 or anything like that as a result of our current thinking.

What do you see as the first big re-line here?

A lot will depend on the analysis we're doing as part of this project.

All right.

Thanks very much, guys.

We go to the line of Aldo Mazzaferro with Goldman Sachs.

Please go ahead.

Good afternoon, Tom.

I was wondering, on your production rates for the third quarter and fourth quarter going forward, are you at the point where you think you'd bring your production back up, or what's the status on the furnace that was down at Gary?

It's back.

It's running good.

We anticipate running flat-out in the third quarter.

Okay.

So, are you seeing anything in your order book that would suggest that there's end-use demand improving, or do you think that we're looking at supply reductions showing up as a little tighter?

It's hard, always, to distinguish whether people are rebuilding pipelines or whether other people are having problems, then you have to fill in some of their needs.

All I can say is, we've had now six or seven weeks of exceptionally strong order input, and this is even during a period when some of the automotive was shut down for some of their vacations, even though their book is still strong.

So, you know, if I had to guess, Aldo, I'd say we're seeing just greater strength out there.

Great.

One final question.

I wonder if you could give us some kind of a estimate as to what your average head count was in the quarter and what it was at the end of the quarter and maybe what you expect it to be over the next couple of quarters?

Well, I could , but you'd prefer to be accurate and that would just be a guess, so how about if I just have Quaid get back to you and give you the exact numbers?

Okay.

That's fine with me.

Thanks.

We'll know a lot more about the specifics of our head counts and where' we are heading.

By the time the next quarter rolls around we'll have more information for you.

As you might appreciate, although, many people, both represented and nonrepresented, have been given opportunities to retire.

Each one of these is an individual decision, and they're out mulling, and the exact timing on some of these things.

We're committed to the numbers, we're sticking with the numbers, but the exact taming may slip a month or two some may slip into the fourth quarter, others may be accelerated into the third quarter.

We'll try and give you the best estimate, but there's a certain amount of unknowns in there, since each person is deciding somewhat independently.

Thank you.

We have a question from the line of Andrew O'Connor with Strong Capital.

Please go ahead.

Thank you.

Good afternoon.

Andrew.

I wanted to know, does your agreement with the U.S.

W A stipulate a certain percentage of raw materials to be sourced from North America?

This is John.

There is some language in there regarding raw materials, but from our particular perspective, we're essentially balanced on a raw material basis from a taconite standpoint and of course our supply basis from North American and on coke we're balanced slightly long, and we kind of like that position.

The effect of it would be to direct any significant need beyond, sort of, our historical pattern in Alabama where that makes transportation sense to direct our transportation on iron ore and we don't see a great need to do that so we don't see that as a big issue

Is there a percent we can assign to that, John?

No, not that I can give you off the top of my head, but our plan would be that, you know, our existing taconite facility, they're essential going to be roughly running full to keep us in balance with our, in effect, Midwest local melt requirements.

So, we don't see that as a major impediment or issue from an operating standpoint indefinitely.

Some of that could be diverted to other domestic producers, and we then would have the opportunity to bring foreign iron ore or pellets into fairfield, but that would be just a logistics play, but basically we've agreed with them that we'll keep the raw materials businesses running full as long as we can consume it.

We don't have to run it if we don't have orders there

I think at one point U.S.

Steel changed its bid to include the National Steel pellet company.

We did.

So what you're suggesting here, or saying, is that somehow you're not obligated to source iron ore pellets solely from National Steel pellet company.

No.

Is that correct?

That's correct , okay.

Thanks very much.

We have the question from Chip Rowie with Kramer Rosenthal.

Please go ahead.

Two quick follow-up questions.

On the timberlands, did you say 117000 or 170?

On the estimate, if it's over 100 million, would you contribute all the properties to the pension or are you just looking to contribute 100 million?

It's 170, Chip, and our intent,right now, is to contribute those timberlands, whatever they're worth.

It seems like that would be a pretty conservative evaluation for those timber properties, 100 million over 170,000 acres.

These are relatively new trees, in terms of the tree maturity, and one of the benefits of contributing it to the pension fund is that we think the valuation will grow over time, but you're correct.

Okay.

Then on the tubular side does that business normally lag the rate count, and if so, you know, why are you looking for a stronger third quarter versus second?

It does.

In general when the business turns down the -- this is a business that a lot of it is sold through a distribution system, probably a greater percentage of tubulars are sold through distribution than any other product we have, and that inventory gets swelled, it has to run down, and as the business turns up, there's a little bit of an inventory runoff, then they start refilling the pipeline.

So, it historically has lagged the turnup in drilling by four to six months.

That's it.

Thanks a lot.

We have a question from the line of Michael Lewittes with J L Advisers.

Please go ahead.

Mr. Lewittes, your line is open.

Hi.

Two quick questions.

One, why the change in interest expense guidance?

I think you've got it up, slightly further than a couple of months ago at the road show, and secondly, from where you stand now, do you expect to be net-net after all contributions for viba, for everything, do you expect to be free cash flow positive in '04?

I didn't think that the interest expense had changed that much.

John is checking the road show.

I think it's 15 million change.

I don't think we intended it to be a change there.

Oh, yeah.

Sorry.

We up-sized it.

I guess we were out for 350 million dollar offering, we ended up with 450.

I'm saying the guidance for interest expense for the year.

You gave a number for guidance for interest expense for '03 that you expected for the rest of the year of 180, was the number.

Right.

And it had been 165, if my notes are correct.

I think your those might be the interest expense when we had originally planned to issue 350 million of notes.

Oh, I see.

Versus the 450 that we ended up issuing

My mistake.

I think that was probably a big piece of the difference.

My mistake.

In 2004 as we see everything implemented here, with the significant cost reductions implemented, I think we should have positive free cash flow and be in a position to look at paying down some debt in 2004.

Okay.

Thank you.

We have a question from the line of David Common with J.P. Morgan.

Please go ahead.

Yes, good afternoon.

One simple question remaining, and that is, or comment, perhaps, even, I thought it was helpful to get the number of acceptances on the work force reduction, sort of progress report and just wondered if we might look forward to something rather than wait until the September quarterly numbers are released.

You know, that's -- I appreciate your comments there.

We will, I guess the end of our period is August 22nd, so we can take look at what we know maybe on an interim basis and see if it would be useful to put something out about it.

That may be something we need to coordinate with our colleagues in the steel works unions as well, because they may have some things.

These are all very personal things, and we want to be respectful to individual.

When we have solid information that may be something that, if it's of great interest, we could find a way to make public.

I think there is an opportunity, even after they do it, to have several wakes at which they could recant their decision, but we will check into that and see what we could do to get better information out there.

Thank you.

At this time I'd like to turn the call back to Mr. Quaid.

Thank you all for your attention and participation today.

If you have any follow-up questions, you know where to reach us.

Thanks a lot

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