美國鋼鐵 (X) 2003 Q3 法說會逐字稿

Ladies and gentlemen, welcome to the U.S.

Steel third quarter earnings release tele conference.

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

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 zero.

As a reminder, this conference is being recorded.

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

Please go ahead.

Thanks Stacy.

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

With me on the call 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, which are based on a number of assumptions concerning future events and information currently available to management.

These forward-looking statements are subject to risks and uncertainties many of which are outside of our control, that could cause actual results to differ materially from those expressed or implied by such statements.

All statements in today's conference call other than those about historical results constitute forward-looking statements, including those regarding market conditions, shipments, prices, operating costs, strikes and other similar employee actions, national acquisition synergies, workforce reductions, administrative cost reductions and the potential savings from those efforts.

Although we believe that our expectations reflected in those forward-looking statements are reasonable, we cannot assure you that these expectations will prove to be correct.

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 there those set forth in the forward-looking statements have been included for your review in our Form 10-K for the year ended December 31st, 2002, and in subsequent filings.

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

Steel President and Chief Operating Officer John Surma.

Thanks John.

Good afternoon everyone we appreciate you taking time to be with us this afternoon.

Before we get into our review of the quarter's results I thought I'd take a minute to provide some comments on a number of strategic matters that might be of interest to you including the integration of the National assets, our domestic workforce reduction efforts, our expansion plans in Europe and our domestic asset redeployment efforts to name a couple.

Since our acquisition of the National assets on May 20th, little more than five months ago we have moved very quickly to fit the new U.S.

Steel plants as we refer to them into our company.

The integration have gone extremely well, we’ve made significant progress on a number of fronts, such as qualifying customer orders at multiple locations to improve operational flexibility, reconfiguring inter work supply patterns to reduce freight cost, implementing our supply chain and business management systems for better coordinated management of the combined facilities, improving our safety and environment performance which is very important to us and implementing best operating practices at all of the plants.

Many of our customers continue to compliment us on the smooth transition and in fact we shipped almost 1.4 million tons from the acquired facilities in the third quarter.

Now as we noted in our release this morning we also made very good progress in reducing our overall domestic workforce in line with the new competitive realities.

As a result of TAP reductions the early retirement incentive program we talked about before under our labor agreement.

The elimination of redundant personnel following the national acquisition, normal attrition has taken place and efforts to reduce our domestic administrative costs and the sale of our coal business late last quarter, from the time of the acquisition through the end of this quarter we reduced our combined domestic workforce by approximately 4200 employees or about 15%.

And we have more to do as we now expect to achieve a 20% overall domestic workforce reduction by the end of this year.

The majority of the TAP participants are expected to actually exit the workforce, exit the plants by the end of this month, with the remainder departing before the end of the year.

The majority of the plant nonrepresented reductions have already taken place, and as a result of these efforts we believe the cost structure at our domestic plants is competitive with other large integrated producers that have recently gone through bankruptcy.

We are also much further along with our domestic administrative cost reduction programs since we last spoke with you.

In addition to the elimination of redundant SG&A at the former National locations we have begun a process to review our overall administrative functions to assure we have a corporate wide administrative structure that reduces costs, scalable for future growth and provides administrative flexibility.

Over the last few months you have seen a number of press releases on this subject.

We had several senior executives retire for which no replacements have been appointed, and we just recently announce a creation of a new business services organization led by a new executive that will handle many day-to-day administrative activities that are currently spreaded across multiple administrative groups.

We really just begun the implementation of these efforts and we expect them to continue over the next 12 months.

Based on current estimates, total annual repeatable savings from these three areas, the National Operational Synergies, the plant workforce reductions and our administrative cost reductions are expected to be well in excess of $400 million by the end of 2004.

On top of these specific expected savings programs we have also continued the cost savings efforts that were in place prior to the National acquisition.

On the domestic front we continue to make very good progress towards our goal of reducing cost by $30 per ton over the three years ending in 2004.

Our employees’ efforts throughout the system over the last year and a half plus have resulted in cost savings of over $200 million on an annual run rate basis.

Well on our way to achieving our $300 million annual savings goal.

In Europe we remain on track to achieve annual cost savings of at least $10 per ton or close to 50 million in savings for the year.

As part of our continuing efforts to refocus or domestic businesses and evaluate underperforming assets we entered into a non monetary asset exchange with International Steel Group on September 30.

Under this pending asset swap, we’ll trade our Gary Works Plate Mill for the ISG East Chicago number 2 pickle line which is located just across the street from our East Chicago Tin operations.

We expect to close this transaction in the fourth quarter, I would hope quite a bit sooner than that.

In Europe just last month we be completed the acquisition of Sartid, a steel mill in Serbia with install capacity of 2.4 million tons.

Since taking ownership we've quickly moved forward with plans to restore and return a second Steel making vessel into operation.

I was there a few weeks ago and the fabrication work on that project is well under way.

This project is really key to our future profitability in Serbia.

Now as you probably read, beginning around October 14th we have been subject to a work stoppage in Serbia.

We don't expect a significantly financial impact from this at this time we are in the process of negotiating a labor agreement with the relevant union.

This after all is our initial negotiation which may take some time, but I'm confident that an agreement can be reached and I should also point out that this work stoppage in Serbia has nothing to do with our operations in [US inaudible]

All of these strategic actions are consistent with our strategy to build value in the company by investing in and focusing on value added facilities constructing a world competitive cost structure and expanding global.

Now as you will hear later in the call from Gretchen Haggerty in more detail the market appears to be turning also in the right direction and we're encouraged by a strong order book that we've been seeing recently.

Following the acquisition of National at the end of May we had three months during which our orders exceeding our order capacity.

Obviously when you're taking orders in excess of production, you begin to extend your time, and at some point order intake slows to correct for this but at this point we're pretty much sold out through the end of this year.

In summary we've made pretty good progress but we still have a lot to do.

Now I'll turn the call over to Gretchen Haggerty our Chief Financial Officer for a look at the quarters results.

Gretchen.

Thank you John.

For the quarter U.S.

Steel reported a net is lo of 349 million or 3.42 per share after preferred dividends compared with net income of 106 million or $1.04 per share in the year-ago quarter.

And a net loss of 49 million or 51 cents per share after preferred dividend in the second quarter of 2003.

The current quarter's net loss reflected a pretax workforce reduction charge of 618 million, and an asset impairment charge of 46 million.

These charges translate into $3.89 per share and 29 cents per share respectively after applying a statutory tax rate of 35% which is how we traditionally adjust for domestic items.

The quarter also reflects a favorable adjustment related to prior year's income tax of 27 million or 25 cents per share.

Now, let me review these items with you in a little more detail.

In line with our guidance to you earlier this month as a result of the company's ongoing operating and administrative cost reduction program, U.S.

Steel reported a charge of $618 million related to both union and nonunion employee retirement benefits.

As described in the text, and notes to the release, the workforce reduction charge included 408 million in pension and retiree health care plans curtailment and termination losses, 113 million for early retirement incentives and layoff benefits, which is expected to have a near-term cash impact, and a pension settlement lost of 97 million. 441 million of these charges were recorded in cost of revenue, and 177 million was recorded in SG &A.

As a result of the pending nonmonetary asset exchange with ISG which John discussed earlier, we recognize the asset impairment charge of 46 million which is recorded in depreciation.

Lastly the quarter's net results benefited from two favorable adjustments related to prior years income taxes, net interest and other financial costs included a favorable adjustment of 13 million related to interest accrued from prior year income taxes, and 14 million favorable effects related to an adjustment to prior year's taxes.

Turning to operating results in the top line, third quarter 2003 consolidated revenues and other income which included a full quarter of shipments from the assets acquired from National Steel, increased 31% 2.5 billion from the 1.9 billion recorded in last year's third quarter and increased 6% from the 2.4 billion recorded in the second quarter of 2003.

Our overall average realized price of $417 per ton increased 3% from the third quarter of last year, and was essentially flat with the second quarter of 2003.

Total company shipments of 5.3 million tons represented an increase of 38% from the third quarter of last year and 14% from the second quarter of 2003.

Excluding the workforce reduction and asset impairment charges, U.S.

Steel reported a segment loss from operations of $23 million or $4 per ton.

In the third quarter of 2003.

This compares with segment income from operations of $6 million or a dollar per ton in the second quarter of 2003, an income of 135 million or $35 per ton in the third quarter of 2002.

Compared to the second quarter of 2003, segment results decreased by 29 million primarily as a result of lower results from our European operations due to lower prices shipments and utilization.

Approximately $20 million in associated with the August electrical grid power outage, a $10 million charge to impair receivables, from companies which sought protection under bankruptcy laws, and lower tubular due to tubular goods markets, somewhat offset by the full quarter inclusion of assets with National and lower planned repair outages.

Before I get into the individual segment results I'd like to review two changes we made to our segments this quarter.

First, based on recent management changes, the Flat-Rolled Products segment now includes the coke operations that were formerly reported in other businesses.

Second with the acquisition of Sartid in Serbia we now have one segment called U.S.

Steel Europe or USSE for short.

That reflects the results of our European operations.

For your analytical purposes we have provided historical restated segment information in the exhibits to this morning's earnings release.

Looking at third quarter results for each of the segments, the flat-rolled he products segment recorded a loss from operations of 47 million,12 dollars per ton compared to income of $22 dollars per ton year ago quarter and a loss of $19 per ton in the second quarter of 2003.

Flat-Rolled Products shipments which included almost $1.4 million shipments from the former National plants increased 50% from the year ago quarter and 22% from the second quarter of 2003.

The flat rolled average realized price of $4.24 per ton was $4 per ton lower than the year ago quarter due to the offset of lower prices somewhat offset by a more favorable product mix but increased by $4 per ton from the second quarter of 2003 primarily due to a more favorable product mix.

Our Tubular Products segment recorded a loss from operation of $10 million or $43 per ton compared with income of $14 per ton in the third quarter of 2002, and a loss of $19 per ton in the second quarter of this year.

Third quarter tubular shipments increased 7% from the year-ago quarter and 9% from the second quarter of 2003.

The average realized tubular price of $625 per ton was $38 lower than the third quarter of last year, and $19 lower than the second quarter of this year, primarily due to a less favorable product mix in both comparisons.

Bra Europe segment turned in income from operations of $39 million or $35 per ton, compared to income of $40 per ton in the third quarter of 2002, and $55 per ton in the second quarter of 2003.

USSE had strong shipments for the quarter of 1.1 million tons which were 11% higher than the year ago quarter but 8% lower than the record realized in the second quarter of this year.

The average realized price for the quarter of $352 per ton increased by $62 from the third quarter of 2002 due to both favorable exchange rate and realized price increases but decreased by $17 per ton from the second quarter of 2003 primarily as a result of lower prices.

Straightline, our technology enabled distribution business recorded a loss from operations of $15 million in the third quarter versus a loss of $11 million in the year-ago quarter and a loss of 17 in the second quarter of 2003.

USS Real Estate recorded income from operations of 12 million compared to 16 million in the year ago quarter and 17 million in the second quarter of 2003.

And lastly other businesses reported a loss from operation of $2 million for the quarter, down from income of 30 million and 3 million reported in the year-ago quarter and the second quarter respectively.

The year-over-year decline in quarterly results for other businesses was primarily driven by the lack of income from the coal operation, which were sold at the end of the last quarter.

Lower results at Transtar which were partially due to a software project cost write-off of $5 million, as well as higher benefit costs.

Now, John Quaid will provide some additional details on the quarters results.

Thanks Gretchen.

Capital spending in the second quarter totaled $73 million and is detailed by segment in the supplemental statistics accompanying the earnings release.

Our current plan for the full year has total capital spending of approximately $325 million including $120 million for Europe and approximately $25 million for the former National facilities.

For the year we expect depreciation to total approximately $360 million when you exclude the $46 million impairment charge which was recorded this quarter.

You'll also note that third quarter cash flow included the last deferred purchase price plan for U.S.

Steel Kosice of $37 million.

As of September 30th our long term debt balance including amounts due in one year stood at 1.880,000,000.

Interest is expected to total $150 million.

And I'd note though that this is without, if you took out the favorable effects related to the prior year's income taxes and the foreign currency remeasurements interest expense for the year would be closer to $180 million.

At the end of the quarter our available sources of liquidity totaled 1.23 billion and came from the following sources.

We had cash at the end of the quarter of 160 million, we had 489 million available under our AR facility, 530 million available under the inventory facility, and USSK had 47 million available under its credit facilities.

As we discussed with you in the past we continue to pursue a contribution of some of our timber assets to one of our pension plans before the end of the year.

The draft appraisal has valued these assets at approximately $60 million.

Assuming the final appraisal values the contribution at that same 60 million, we're currently inclined to contribute an additional $15 million making the total contribution this year equal to 75 million.

We also continue to work on the sale of most of our remaining mineral interests for net proceeds of approximately $70 million, and now target a closing in the first quarter of next year.

With that, now I'd like to turn it back to Gretchen for a discussion of our outlook for the fourth quarter.

Thanks again, John.

For our domestic flat flat-rolled segment looking forward we expect about the same as the third quarter even as we enter the seasonally slow fourth quarter.

Full year shipments are expected to exceed 13 million tons.

As we informed you last quarter we have planned several major repair outages for the fourth quarter which are expected to negatively effect flat rolled cost by approximately $40 million.

On the pricing front after an apparent bottoming in July spot market prices continue to improve however this improvement is expected to be somewhat offset in the fourth quarter by a less favorable product mix, due to slower holiday related operations by our OEM customers, as a result the average realized price should be in line with the third quarter.

Forecast for 2004 reflects a continued improvement in the market.

As a result, we recently announced a $30 per ton increase for hot rolled cold rolled and coated sheet steel and a 4% increase for tin milled products effective January of 2004.

Tubular markets continue to struggle despite the apparently strong U.S. drill rig count which stands at approximately 1100 rigs.

We expect fourth quarter tubular shipments and prices to improve slightly versus third quarter levels and annual shipments are expected to be approximately 900,000 tons

In the fourth quarter domestic operating results will also be affected by increases in ongoing employee benefit expenses.

Pension and retiree health care costs are expected to total approximately 90 million in the fourth quarter, an increase of about 30 million from the third quarter.

Turning to Europe fourth quarter shipments are expected to increase moderately from the third quarter and shipments for the year are expected to total approximately 4.8 million tons.

USSE is expecting a slight increase in the fourth quarter's average realized price and has announced a 20 euro per ton increase for flat rolled products effective January 1st of 2004.

Now with that Tom Usher and John Surma are here with us and we'd be happy to answer any questions that you may have.

Stacy if you're ready queue up the questions.

Thank you.

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

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

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

Once again, ladies and gentlemen, if you have a question, please press star one at this time.

One moment please for the first question.

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

Please go ahead.

Hi, good afternoon.

Hey Bruce.

Just want to check in in terms of what the strategy is, and how things are going in terms of the contract prices for next year, and how important is it you guys have sort of I think stayed in the past, you'd like to increase some your contractual OEM higher value-added business.

I guess how aggressive do you guys plan to be in order to achieve that and what do you sort of expect from the competitors out there?

Yes, Bruce, Tom.

We expect prices to go up, and we are in line with what is going on in the marketplace, pushing for price increases.

We've had a number of cost increases.

I think the industry has as a whole.

And certainly in raw materials and gas, the market appears strong.

So we're being I wouldn't say aggressive, but we are trying to go after price increases in line with what we see happening in the marketplace.

Any success, I mean has there been anything that you set to date yet or are you still --

Yes.

We've had success.

I'm not going to go into specific by customer but we have had success that we're pleased with.

Okay, and then for pension and OPED cash expenses, I kind of have a table I've had, I wonder if there are changes or expectations on that the next couple of years?

We'll have an update that in the Q. We have our typical contractual obligations table.

But I mean as we've said before on the pension side, we see no required contributions this year or next year.

You know, note in the comments we talked about maybe throwing in an additional 15 million on the pension side to round out that contribution.

And then on the OPED side for retiree medical as we've laid out in the past as well, in the past we've been able to use our VIBA fund to reimburse ourselves for those costs but looking out into next year that fund probably runs out, and we'll update that number in the Q as far as what we're expecting for 2004 cash.

But the last update would have been approximately 230 million.

And this is John.

One last point on the retiring medical, we did as part of the labor contract institute cost sharing mechanisms that are designed to be more efficient, save the company some money and in the long term we'll start to see the per capita cost come down as well.

That won't be manifested in a big way immediately but its a important thing for us.

Yeah I mean there’s 2 things on that Bruce, one we’re going to have cost sharing on both the active and retired represented workers, but the second thing and we have not forecast this or have in any of our estimates.

But we expect similar to our management plans which have these co-pays, we expect better management of the health care expenditures as a result of the union retirees and actives actually paying part of it.

And so you know, we think that there's going to be some convergence between what it cost management people and what it cost union people as a result of co-pays.

But we've included none of that in our estimates.

Everything is on historical estimates.

We think one of the big benefits from having this latest contract is we'll get better management across the board of our health care costs.

Okay.

Last question was, maybe I was -- maybe I was the only one confused but I saw 100 -- within the $618 million of charges I guess second bullet point you guys talk about $113 million for payments under the TAP and else where in the release there is a number of $105 million early retirement cash incentive related to the TAP.

I'm wondering if there related as one – than the other, I’m trying to strip out the charges related.

If you’re not there on the bullet, the 113 is both the TAP and some salary layoff benefits. 98 million of TAP and I'm sorry -- $95 million.

He's right, he gets the 105 right.

And 8 million for the layoff.

The 105 is embedded in the 113, Bruce.

Okay, that's what I need to know, okay, thanks guys.

And our next question comes from the line of Ken Silver with CRT Capital.

Please go ahead.

Hi.

Good afternoon.

Back on contract OEM business, combining National Steel and U.S.

Steel, what percentage of your business, your flat-rolled shipments are contract OEM?

I would say it has moved up a little, since with the acquisition of National it has helped us a little there, and we are probably approaching 55 to 60% would be contract, the other, 40 to 45% would be quarter to quarter type pricing.

But that's a fluid thing.

And even within some of that, we have certain business with customers, same customer for example service center who may be supplying something to a contract business that we'll tie part of that in.

So it's hard to get a good estimate but I'd say those are reasonable numbers.

And is -- do you have -- what's the strategy as far as leaving that the same, are you looking to grow that percentage?

In general, you know, if it makes sense we'd like to get into more of that and get our mix more contract business and less spot.

But you know, that has to get done.

Are you looking for it to be 80%, 70%, 65%?

I'm trying to get a sense.

Very comfortable, three to one, 75-25.

Okay.

And is that a goal that you are looking to achieve in the next 12 months or sit a longer than that?

Probably little longer term because we have these things take a while to get done, and a lot of it will be dictated by what's happening in the competitive marketplace.

We're finding more and more customers are becoming more amenable to longer-term contracts.

So that's a fluid situation.

Okay.

All right.

Then I have just a couple of questions on the European operations.

If I read this right, operating income declined from 67 million in the June quarter to 39 in the September quarter, and I think March was 64.

So can you just talk about why -- why it dropped, and also talk about if there's any sort of currency translation gains in these numbers.

Well, I think the operating results that you point out I think are the right numbers.

We had indicated in the outlook at the last quarter that we expected third quarter results in Europe to be down somewhat, which is a seasonal pattern we see that the third quarter is typically a little bit softer given the vacation season.

Besides that we saw softening in demand in western Europe which is an important market for us and we saw some softening of prices for obvious reasons that the overall economic activity in Western Europe weren't as good as we would like.

We were operating assets in Serbia under a management contract and there were some costs involved with that, that was the process of us getting in at low value from an acquisition standpoint.

That had lower effective results trailing to a greater degree than second and first quarter.

What sort of currency gains or losses are you experiencing from these European operations?

I mean Ken looking at kind of Q2 to Q3, the currency effects were not material as they related to the results.

We do disclose in the footnotes that we do have a foreign currency remeasurement gain for the quarter which we have every quarter we have to remeasure their results.

And for this quarter it was $8 million and that's detailed in the notes to the release.

But that flows through net interest and other financial cost, does not flow through segment income.

Okay.

So -- and in the fourth quarter, I mean, are we sort of -- should we be looking more towards operating income like the $40s or $50s or can you give any sense for that?

For the European operations?

I guess we don't really forecast the quarter itself, but we've given you some directional guidance, where we are expecting that shipments are going to increase moderately from the third quarter levels.

And so the full year we are looking at 4.8 million tons.

You can do the math on the shipment there if I could do that while I was talking I'd do that for you.

We are expecting a slight increase in the average realized price, as I mentioned we announced a 20 euro per ton increase, but that's going to be effective January 1st.

So the fourth quarter we are really only just expecting a slight change from the third quarter.

Okay, thanks.

And our next question comes from the line of David Common with J.P. Morgan.

Please go ahead.

Yes, thanks, good afternoon.

Hi David.

Hello there.

I have two questions.

One is may sound like a nitpick but the pricing that I obtained from the press release was -- looked to me like it was un1% Q over Q and down 1% year over year.

But I think you mentioned numbers on the call that were flat sequentially and up 3% year on year.

I just wanted to reconcile that.

I think the comments David were related if you took all the segments together and got kind of a consolidated price.

And I think the numbers you're looking at are just the flat-rolled segment.

I beg your pardon.

That explains it thanks.

Can you just address the extent to which those prices were affected, the realized priced were affected by mix in the flat-rolled segment in particular?

Did it help or hurt?

I think again we did say in the comments that when you looked at it Q2 to Q3, we did see some favorable mix effects there.

You know, certainly when you bring in the National tons, they have a richer product mix than the U.S.

Steel tons did.

So you had them for the full third quarter versus just part of the second.

Okay, thank you.

And then finally are there any comments you feel comfortable in making with respect to Rouge on this call?

I mean, as I think many of you know K Rouge filed for bankruptcy Thursday of last week, and there have been reports that they've entered into agreement with Severstall a Russian producer, we haven't had the opportunity to see what that agreement is.

All of this will become more apparent.

We have had some interest in Rouge over the years and are familiar with them.

And this bankruptcy process as we found out in the past is really sort of just the beginning, not the end.

And we will continue to monitor it very closely, and see just what is there, and if it makes sense, we may do something.

But other than that, that's about all I would want to say.

Okay, great, thanks for taking the questions.

Our next question comes from Aldo Mazzaferro with Goldman Sachs.

Please go ahead.

Good afternoon.

I was wondering if you could help us a little bit with the restructuring on headcount.

I heard you comment about OPED expenses next year at $230 million.

Would that include any assumption for further layoffs I take it?

Out of that number was cash not P&L.

Oh.

So we haven't forecasted the OPED expense for 2004.

Oh.

I suppose if you wanted to get a - raping, you know we have said OPED for the fourth quarter is going to be 40 million.

If you want to annualize that you could get some feel for what that number would be, but really we have to get to the end of the year to do the calculation for what the P&L is going to be for the 2004.

The number I was referring to was cash.

I'm sorry I missed that.

In terms of the pension then kind of the same thing your annualized 50 million estimate for the quarter?

Would that be a stab at the '04?

Yeah, I mean we'll have to remeasure the plan or plans again to be planned by then probably at the end of the year and go through the calculations but it will change to some degree as the additional period goes by and some asset gains or losses are amortized in or out.

Having said all that it is probably not a bad indication to take that number as an indication of what the run rate will be next year.

John in terms of actual charges to reduce headcount I would expect this big charge you took in the third quarter that must have included some assumption for people that will be reduced through the end of the year, right?

Yes, it will.

It -- we really have a -- we've got a pretty good read on at least on the represented side in particular, those that have accepted at this point irrevocably the TAP offer, they're committed to go, it is a matter of getting the process, plans redone and the training done to get them out of the door.

But the calculation of the charges actuarial charges special benefits, that all includes a pretty good read the total number that will be exiting through the end of the year.

If I could ask one more on the separate topic, on the USSE division, this strike at Sartid, do you have any feel for volume contribution you would get and whether it would enhance the product mix or not at USSK?

It will certainly enhance the product mix.

The capability sort of the width and the complementary mix is a standpoint from being able to finish the hot roll or maybe take slabs from Slovakia to Serbia.

We see great opportunities from mix standpoint and mix opportunities there.

We think that's a positive development.

We were operating under this contract which didn't give us really full flexibility to operate the way we ultimately want to at a rate that got us probably annualized 800,000 tons, 900,000 tons a year with one steel shop not running at high level.

Second steel shop we can get past a million pretty quickly we think and sustain that operation even at one blast furnace at well pass a million tons a year.

And on an annualized basis once the second plant comes on depending on how the strike works out, should be late this year, you know, we'll be operating at pretty good level early next year.

Aldo we were in sort of a box in a sense that while we were running it under this contract we didn't want to spend any money because we wanted to make sure we got it.

But now we have it we can spend some money and crank up some volume there and be more profitable.

Most of the fabricating work on the steel shop has been done.

We just took a look at it recently when we we’re there.

There is a new control room that's ordered all set to be put in.

So we've got a good leg up on the project, matter of getting it done and getting everybody back to work.

Great, thank you.

And our next question comes from the line of Andy Patagian: with Goldman Sachs.

Please go ahead.

Good afternoon everyone.

Hey Andy

I was just wondering what the latest thinking regarding Straightline any thoughts of exiting that business or any improvements around the corner that we should be aware of?

I would say we continue to make progress at Straightline.

We have no specific time line there.

One of the problems they had gotten into at Straightline was in '02, they had picked up a lot of inventory rather high-priced.

We have done in a very orderly way a disposition of that.

But they continue to get more contract customers and we continue to monitor.

Okay.

Thanks.

I was just wondering if you could talk about the spot market a little bit.

Where would you say hot rolled prices are today and where do you think they will be towards year end?

We don't like to talk too much specifically about prices.

I'll just say that we've seen quoted reports that you know, the hot rolled prices is certainly bumped up off the bottom that it reached mid year this year and I haven't seen the most recent number out of the [inaudible], it might be around 295, or 300 as a reference price, maybe 300 plus as a reference price and you saw recently that we announced a price move effective January 1st or 4th early part of next year and we thought that was an appropriate action given where the market is and where the demand is.

Great thanks, I'll hand it off to somebody else.

Okay

Thank you.

Our next question comes from the line of Michelle Applebaum: with Michelle Applebaum research, please go ahead.

Tom you were quoted in press in Detroit, being fairly more specific for your plans for Rouge, do you have specific plans?

Did you say something about making an offer?

I have that article in front of me Michelle, I don't think I said anything more specific than that other than we have had interest in Rouge, we may have future interest in Rouge.

It just depends how it plays out in this bankruptcy process.

And I think I indicated that we would continue to monitor it very closely and see what develops.

Okay.

And my other question if I can, your company has stated maintaining a balance sheet and liquidity and financial stability is an important goal.

The stock's done great.

Do you want to comment on any kind of plans for equity?

Michelle, this is Gretchen.

Hi Gretchen.

Our liquidity, you know, I would agree with the statement as you phrased it.

We're in very good point from liquidity standpoint.

I feel comfortable where we are.

We don't have immediate plans doing an equity offering or other capital markets transaction at this point.

But you know, I like to think of myself as an opportunistic Treasurer and you know, I never say never to anything.

But from a liquidity standpoint we've got a fair amount of cash on the balance sheet and a lot of availability.

Okay, great.

Our next question comes from the line of Brian Rail with FTN Midwest Research.

Please go ahead.

Good afternoon guys.

I had one quick question on the charge for the reduction in the workforce.

We’ve kind of illustrated that it will include more employees through the end of the year.

Just kind of curious as you went through the process did you get more takers than you had originally thought and is there any sort of expectation or possibility that you could offer an additional program to get your headcount down further, or are you comfortable where this program will lead you?

I think the last question is the better one to answer.

We're not satisfied but we're comfortable that the reductions will achieve with the current program are essentially what we had expected and what we think we can take and still operate our mills safely and responsibly.

As we went through the process, it is a plant by plant program, that's how we bargained it and there of course are ups and downs no plants come out exactly perfect, some high some low there are certain areas where we can move different people around.

I don't want to get into too much of that because that gets into things that are currently the subject of discussions with the union and as a matter of honor we and they try to keep those pretty quiet until they are all done.

So we don't want to put any more pressure on people than we have to.

We are pretty comfortable with where we've ended up with this program.

My earlier comments, when we look at it all, asset mix product mix, we think the cost structure at the plant both represented an nonrepresented is right there with anybody else in our line of work.

Ok.

Great, thank you.

Our next question comes from the line of Frank Denau with Adage Capital.

Please go ahead.

Yes a few questions, the 40 million cost you’re going to incure in the 4 the quarter, is there going to be any more in the first quarter or is it cleaned up in the fourth quarter?

We don't normally get into forecasting outage some any of that thing.

A lot of these are smaller jobs that we do from time to time.

It may be depending on the market, sometimes things get delayed or things get accelerated depending on how things happen.

This is our current look, based on our operating plan, it may be if some things occur we may move things back or up a little bit.

That's our current look.

We don't have anything concrete enough to talk about in the first quarter.

And the fourth quarter is a convenient time to do a lot of these outage work as some our OEM customer shut down we try to plan around that.

Is there tubular business, Is that right sized tubular, given what’s going on in the market, your stuff isn't selling as much because we're not drilling as deep or do you have to do more work there?

We always have more work do from a cost standpoint.

I think the plant in Alabama at Fairfield is an extremely competitive plant, excellent assets with pretty lean cost structure and they've shown an ability to operate at relatively low rates and still do a pretty good job of it.

Having said that a little more market would go along way there.

I think in Lorain, our other large Jupiter asset they had a pretty big size capital project in this last year the Q and T line and we're just working our way through that start right now.

I think once the startup phase get behind us we'll see a little better performance.

In each case we are taking people out through the TAP process so I think we've got a fairly good fix on that business.

We're looking for the market as you point out to be something that's a little bit more responsive.

We've taken a pretty good whack on the cost side but step wise move on both capital and cost this year.

We see inventories in the past continuing to fall so we think this thing will turn.

I like the new segment reporting but does anybody know what the over-under is, what First Call will say you've earned this quarter?

That's it, thanks.

Home team favored by four.

The over-under.

Thank you and our next question comes from the line of Timothy Hurkus with John Bristol.

Good afternoon.

I don't have anything as colorful as Frank had.

You talked earlier about merging two of your pensions and incurring roughly $500 million charge to the equity balance sheet.

Is that still likely to occur this year?

The pension -- this is John.

The pension merger is quite likely to occur, perhaps in the next month or so.

It's just an administrative matter, finding a convenient time to do that.

We expect that to occur.

What happens when that does occur, then one plan would be remeasured at that point and at the end of the year, depends largely on where the discount rate stands, to some degree where the assets are but most importantly from our standpoint discount rate and we would see interest rates higher at the end of the year, that would have an effect, if where they are now are lower that would more likely effect to be in the range of what you describe was in our I think in our 10-Q disclosure last time.

We'll update the disclosure this time but if rates stay where they are or lower and we do intend to combine the plans because that's the right thing to do for a variety of reasons, that disclosure still remains accurate.

And in prior investor presentations, I believe Mr. Usher had the -- made the statement actually had it in a slide, that during most environments, U.S.

Steel was expecting to earn between 1 and $2 billion of EBITDA on an annual basis.

Is there any reason to expect 2004 would be outside of that range?

Well, I mean, one of the key variables there is what happens to pricing, we've got a price increase that we think is justified, and so forth.

So I would say if pricing comes back to normal levels, within the range, with the cost improvements we've made, that would seem to be reasonable.

Okay.

And given even at the bottom end of that range, U.S.

Steel would be substantially free cash flow.

I do understand that you have some repair of the balance sheet to do in terms of the Viba and the pension fund.

But why would the company consider issuing a stock offering when they are looking at a period of free cash flow and, you know, actually looking for place toast reinvest that cash?

You know, I don't think Gretchen said that she did.

She said we had no current plans, and I think she gave herself a little wiggle room to say never-never.

But right now we have no current plans for issuing equity.

Okay.

I mean -- just as one shareholder, and you can currently poll a lot of them, you know, absent a shareholder -- a stock offering in conjunction with expanding the business in an asset purchase, it would appear that U.S.

Steel has good liquidity and good prospects, in raising stock just for additional liquidity, you know, seems to detract from stockholder value.

Would I agree with your premise.

Okay.

Thanks very much.

Have a good day.

And our next question comes from the line of Mark Parr with McDonald Investments.

Please go ahead.

Thank you very much.

Good afternoon.

Hi Mark.

I have a couple of questions, first related to the European operations.

Is there any -- is there -- I guess is there any way to assess whether or not Sartid will be accretive to the fourth quarter, in light of the current labor disruption?

Or is there -- are there any financial -- potential financial impacts from that?

No, I mean I would say basically sort of a nonevent either way.

And we had not expected it to be accretive in the fourth quarter, because we expected to be spending some money to get volume up and get facilities in shape.

So you know, I'd say for planning purposes, Mark, just treat it as sort of a nonevent either way.

We're not sure where this labor thing is going.

We're in what I would consider productive talks.

But it shouldn't have a big impact either way in fourth quarter.

It will have much more of an impact in '04.

Okay, terrific.

All right.

Just to follow on that in Europe, I've been reading recently about Ukrainian government indicating a fairly serious interest in putting an export tax on iron ore.

I just, you know, Kosice is a large buyer of iron ore pellets from the Ukraine.

I was wondering if there is anything at this point we need to be putting into our '04 outlook for a $3 or $4 a ton export tax out of the Ukraine?

We hear those things of course as well, we do buy from Ukraine and also from Russia and other territory in central Europe among other things. .

Sartid acquisitions gives us deep water access and [audible] into Kosice if we have to.

So we're buyers of iron ore in the merchant market in Central Europe.

There is no secret that the iron ore market is tight worldwide, no doubt we’ll have an effect of that, but still think we’ll have very competitive iron cost, very very competive total steel costs in our relative market in central Europe next year.

Just to kind of follow up with that I was just wondering to what extent this tremendous escalation of freight rates, you know, ocean-going freight rates, might have on your business over the next 18 months.

And I've got one more question after that.

I would see from our perspective it would be a positive thing, in that certainly you know, we take about 20, 25% into this country as imports.

That will just be an added cost to the people who are doing the importing.

And we -- other than Mexico, which really doesn't get into ocean freight rates, we don't do a lot of exporting.

Some tubular.

But for the most part it would be relatively small.

So from a competitive standpoint I think it will help us.

And you know, most of our production domestically goes to domestic markets, most of our production central Europe goes to central or western Europe.

Thank you.

One last question, given all the setup that you've done for next year, as far as the cost reductions, price increase announcements, et cetera, I'm particularly interested in the cost savings outlook for the first half.

And I was wondering, Tom or John, if there's any way that you can help us to quantify the magnitude of savings that will be realized in the first half of '04, given all the activity that's -- you know, that we've seen here in the last several months.

I would say, of the -- certainly the labor savings, and synergy savings that we expect from the National acquisition here, that that will be pretty front-end loaded.

We would expect to get a good bit of that in the first half of the year.

There will be some that will take some time.

For example, in our administrative reductions, some of these people have been put on layoff.

Those costs are to continue for a year.

But for the most part I would say the large majority should be in the first half of the year.

How about the labor savings at the U.S.

Steel operations and the salaried workforce reductions, will you be getting most of that as well in the first half?

First half of the year.

It should be front end loaded.

Thank you very much and congratulations on good progress.

Thanks Mark.

Thank you Mark.

Our next question comes from the line of Michael Gambardella with J.P. Morgan.

Please go ahead.

Hi, good afternoon.

Hi Mike.

I have a question you know in regards to your comment about increasing raw material costs in the steel making process.

And with the weakness in the dollar, and the surge in steel production in China, pushing a lot of those input costs for steel making up, you're kind of in a unique position in that you're long a number of the key raw materials.

Could you give us some more details on how you think you'll fare in '04, in terms of some of your long positions in the raw materials?

On just looking at domestic business for a moment, Mike, on iron ore we're essentially in a balanced position right now.

We're basically making on the range what we're melting in North America.

We occasionally will sell some in the merchant market, because perhaps in Fairfield for freight arbitrage purposes it's better to buy some.

But given where the market is going we may not do that, we may decide to just consume all that ourselves.

We’ve got ourselves in a balance position on iron ore, our largest commodity, and given the savings which we’re going to achieve in both representative and non representative administrative workforce those all in effect flow through all our operations including those in the iron range, so iron ore we would be I think relatively unique in North America in having a cost structure which is probably stable or maybe even going down a little bit.

On the Coke side we're slightly long, slightly long with everything we have currently operating at pretty high levels.

We're selling that on the merchant market.

That market as you know is pretty high these days.

We hear reports of cargos landing from international sources at $160 a ton a metric ton which is quite a substantial price, much higher than we've seen recently.

There again our production that we are going to consume is going to be at our cost and we think that will be quite a bit lower than what the merchant price is.

We do buy coal, of course and coal has become somewhat more expensive, although there’s still a lot of it around , we just have to work a little harder to get it looks like.

In North America I would say our overall commodity position is extremely favorable given the movements in both cost and transportation costs of off-shore sources of those merchant commodities.

Likewise on scrap you know we use some scrap but certainly a lot less than an electric furnace operator would use.

On the flip side of that of course in central Europe we do buy in the merchant market all those commodities.

We've got pretty good supply sources that are usually to the East, Ukraine, Russia, other places like that, so we think we could still operate there, and coal has fallen competitively because they're not too far away.

So over all, otherwise we think they are pretty well set next year, perhaps uniquely in North America against all our competitors.

On the Coke front are your internal Coke costs somewhere around 100, $110?

We typically don't talk about our cost.

I would tell that when merchant prices are at 160 our internal cost are a whole lot less than that.

Last question, your comments on the fourth quarter product mix in terms of your commentary about flat average realized prices, could you give us some more details on how the mix is changing, and causing that to be flat?

It's probably more of a seasonal change than anything, Mike.

It's a lot of the OEM auto appliance guys and others that would be more consistent buyers throughout the other quarters tend to have holiday shut downs in the like and changing models et cetera that perhaps slow down some of their demand.

Then we fill that in with shipments to more [inaudible] markets.

I think that's more of a seasonal impact than any sort of ingrained real significant long term change.

I think you'll just see more service center business, that type of stuff, less automotive, getting to the point the last two weeks automotive is very difficult to ship.

As I thought with the outages with the outages that you were talking about for the fourth quarter that the reverse would have happened where you would have taken some of the tonnage out of the spot market as a result of the outage and therefore you wouldn't see as much of an impact seasonally in the contract business?

That's a good question.

There is some of that.

In addition we've got some slabs and inventory and so forth, we'll be driving down inventory and generating cash later, while we might not be melting as much we will be driving down some inventory.

Okay, Thanks a lot guys.

Our last question comes from the line of John Tumazos with Prudential.

Please go ahead.

With the dust settled on retirement programs and 4200 out by September 30th, how many will be out in October, November, December, of the balance of the fourth quarter?

I don't know that we have an absolute specific number.

We will certainly have on the represented side, a pretty substantial number yet to come out that have committed that just haven't completed the exit process.

That would be, you know, at least a thousand I would guess or some number like that.

And then more to come on the administrative side.

Those we don't have sort of an acceptance process.

That's more of a layoff, if it happens it happens, so I can't make a prediction on that.

The biggest chunk I think would be the remainder of the TAP people from the union side.

Are you going to meet the original target of 5700 from both National and the[inaudible] Steel operations?

When we look at our expectations for total employment in North America, represented nonrepresented all the way through from May 19th sort of the day before to where we will be at the end of this year, or maybe into mid next year, yes.

That's our expectation.

Thank you.

And there are no further questions.

Please continue.

Thank you all for your participation.

We'll see you next quarter.

Ladies and gentlemen, this concludes our conference for today, and thank you for using AT&T Executive Teleconference.

You may now disconnect.