美國鋼鐵 (X) 2003 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Good morning, or good afternoon, and welcome to U.S.

Steel's fourth quarter earnings release.

Now at this point all of your phone lines are muted or in a listen-only mode.

However, later during the release there will be opportunities for questions and those instructions will be given at that time.

And just as a note, if you should require any assistance during today's call you may reach an AT&T operator by pressing star 0 on your phone keypad.

As a reminder, today's call is being recorded for replay purposes, and that information will be given out at the conclusion of our call.

With us today we have U.S.

Steel's President Mr. John Surma, Executive Vice President and Treasurer as well as Chief Financial Officer Gretchen Haggerty, and of course, Tom Usher, Chief Executive Officer.

Here with our opening remarks is U.S.

Steel's Manager of Investor Relations, Mr. John Quaid.

Please go ahead, sir.

Thank you, Brent.

Good afternoon everyone and thank you for participating in United States Steel Corporation's 2003 fourth quarter and full year earnings conference call and webcast.

Brent has nicely introduced our participants on the call this afternoon.

We'll briefly review the results for the quarter and provide some comments on our outlook for the current quarter and the balance of 2004.

Following our prepared remarks we'd be happy to take any questions you may have.

But before we begin, before we begin, I must caution that today's conference call contains forward-looking statements.

For your convenience they are referenced in full at the end of our release in accordance with Safe Harbor provisions.

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, and good afternoon everybody.

We appreciate you, as always, taking the time to join us for today's call.

Before we turn to the review of results which we think no matter how you analyze it shows very good progress on the plans we've laid out, I'd like to provide some general observations on the year just ended.

As Tom Usher noted in our earnings release 2003 was a landmark year for U.S. Steel.

We made a number of significant moves.

We acquired the assets of National Steel in May, strengthening our position in the domestic flat-rolled market.

This company-changing transaction was enabled by a new labor agreement with United Steelworkers that improved our competitive position versus other tier one global steel producers by way of a sizable work force reduction and some of the most significant changes in 50 years in the way work gets done and managed on the shop floor.

By mid-year we were fully engaged and working to achieve cost reduction through synergies with our newly acquired facilities, better staffing efficiency at the plant level, and the implementation of our administrative process transformation effort.

We ended the second quarter with the sale of our coal mining assets in September.

We expanded our presence in central Europe with the acquisition of the assets of Sartid in Serbia, and we closed the third quarter with an exchange of our plate mill for an ISG sheet pickling operation.

As year-end approached we signed another landmark labor agreement, this time in Serbia and made the decision to shut down Straightline.

During the year we also made significant progress towards our goal of exceeding the $400 million annual repeatable cost savings run rate by the end of 2004.

As we noted in our release this morning we've achieved our targeted overall domestic work force reduction goal already.

On the dates of the National acquisition last May through the end of the year, mainly through retirements under our new labor agreement, the elimination of redundant personnel, normal attrition, domestic administrative reductions, and the sale of our coal mining assets, we reduced our domestic work force by approximately 6,000 employees from 28,000 to 22,000 or over 20%.

It's been a difficult process to have that level of employment reduction, particularly on the shop floor, our represented and non-represented staff have worked extremely hard together to make that a safe and as far as our customers are concerned, a transparent transition, and I can report that it's gone very well.

Not easy, but very well.

Over and above these savings, we've maintained our focus on continuous cost improvement.

Our employees' efforts over the last few years have resulted in cost improvements of over $200 million across our domestic operations, scanned in excess of $120 million in Europe.

I can confirm that these efforts will continue in 2004 and beyond.

All these actions are consistent with our strategy as we described to you many times, to build value in our company by investing in and focusing on value-added markets, constructing a world-competitive cost structure and expanding globally.

Now, turning briefly to domestic steel markets, which has strengthened considerably, our order books are filled for the first quarter.

We just recently opened the order book for the month of April and we're encouraged as we look out into the second quarter.

Current economic conditions favor the domestic steel industry.

The strengthening economy is creating more demand for steel and at the same time the dollar's weakness against the Euro and the Yen, the increased cost of shipping and raw materials and China's strong demand for steel and steel-making raw materials have constrained imports significantly.

The result, increasing steel prices and raw material costs both here and abroad.

So, in summary, we completed much to position our company to be competitive across the cycle but we still have much to do.

Now I'll turn the call over to Gretchen for a review of the quarter's results.

Thanks, John.

Starting with the top line, fourth quarter 2003 consolidated revenues and other income totaled $2.7 billion, an increase of 41% from the year-ago quarter and 7% from the prior quarter.

Our consolidated average realized price for all steel businesses of $420 per ton increased 4% from the fourth quarter of 2002 and was essentially flat with the prior quarter.

Total company steel shipments of 5.4 million tons increased 50% from the fourth quarter of 2002 due mainly to the National acquisition.

They increased 3% from the third quarter of 2003.

As noted in the footnote to our release net interest and other financial costs for the quarter included a gain of $15 million related to the re-measurement of our European operation's net monetary assets into the U.S. dollar compared with a gain of $2 million in the year-ago quarter and $8 million in the prior quarter.

Net interest and other financial costs for the quarter also included a favorable adjustment of $4 million relating to an adjustment of the prior year's taxes.

No such adjustment was recorded in the year ago quarter but a favorable adjustment of $13 million was recorded in the prior quarter.

For this quarter, U.S.

Steel reported a net loss of $22 million, or 26 cents per share after preferred dividend, compared with net income of $11 million or ten cents per share in the year ago quarter, and a net loss of $354 million, or $3.47 per share after preferred dividends in the third quarter 2003.

The quarter's reported net loss reflected a number of items detailed on a pretax basis in our earnings release.

They included, $72 million in expense to marked to market, outstanding stock appreciation rights as a result of the 91% increase in the company's stock price during the fourth quarter.

A $16 million charge related to the closing of Straightline, a $3 million charge related to additional work force reduction in excess of our estimates as of the end of the third quarter, and the gain of $55 million related to the contribution of some of our timber cutting rights to our pension fund.

After applying a statutory tax rate of 35%, these items had a net unfavorable effect on fourth quarter results of $23 million or 23 cents per share.

Before I comment on the segment's result I'd like to review a change we made to our segment reporting.

Effective with the fourth quarter of 2003, benefit expenses for current retirees are separately identified and are no longer allocated to the reportable segments in other businesses.

These expenses include pension, healthcare, life insurance, and any profit-based expenses for the benefit of retirees.

Benefit expenses for active employees continue to be allocated to the reportable segment and other businesses.

This change was made so that the operating result of our reportable segment will better reflect their current contribution and so that U.S.

Steel's segment results will be more comparable to those of our primary competitors.

For your analytical purposes we have provided restated historical segment information and the statistical supplement to this morning's release.

We've made significant strides in managing these obligations for both represented and non-represented employees.

We've closed our defined benefit plans to new participants.

Our new employee hired from National Steel as well as any future hires not participate in define contribution plan.

Additionally through the introduction of cost sharing mechanisms, retiree contribution and inflation caps under our new labor agreement, our union retiree health plan is more manageable while still providing a very competitive retiree benefit.

We've given you our outlook for pension costs in 2004 and the split of those costs between active employees and current retirees.

Our estimates of 2004 retiree medical costs are not yet complete.

We're currently finalizing our determination of the effect of recent Medicare prescription drug legislation on our retiree healthcare plan, and we expect a significant reduction in our ongoing cost as a result of this legislation.

After the analysis is complete we will provide you with this information.

Excluding the four items I discussed in retiree benefit expenses, U.S.

Steel reported total segment income from operations of $49 million compared with income of $38 million in the year ago quarter, and a loss of $9 million in the third quarter 2003.

Compared to the third quarter of 2003, some segment results before retiree benefit expenses improved by $58 million.

While there were a variety of items affecting the quarter's results, as noted in our release, this improvement clearly shows the benefit of cost savings from our work force reduction efforts and synergies from the national acquisition.

In Europe, the benefits from higher prices and increased shipments were offset by the unfavorable effect of a 38-day strike in Serbia, and operational difficulties with a blast furnace in Slovakia which reduced Slovakia's capability utilization to 87% in the month of December.

We've moved quick to implement corrective action and the blast furnace is expected to be back to normal operations by mid February.

While we're on the subject of European production, it is important to note how we calculate USSEs capacity utilization rate.

As mentioned in our statistical supplement to determine capacity utilization for European operations we use total raw steel capability of 7.4 million tons, 5 million tons for Slovakia plus 2.4 million tons for Serbia.

As we said before, due to the current condition of the mill in Serbia it is only operating at approximately one-third of capacity.

When combined with the operations in Slovakia, obviously this tends to greatly reduce the capability utilization rate for the overall European operation.

Since taking ownership of Sartid, we have quickly moved forward with plans to restore and return a second steel-making vessel into operation.

On January 17th the first [indescernable] was passed on the second vessel and as it ramps up the Serbian operation should reach 50% of capacity later in the first quarter.

Now John Quaid will provide some additional details on the quarter's results and some items for your 2004 modeling purposes.

Thanks, Gretchen.

At the end of the quarter, or the end of the year, I should say, our cash and undrawn sources of liquidity totaled over $1.2 billion from the following sources: We had cash of $316 million, availability under our AR facility of $383 million, availability under our inventory facility of $489 million, and availability under USSKs credit facilities of $47 million for a total of $1 billion 235 million worth of liquidity.

Capital spending, which is detailed by segment in the earnings release, totaled $106 million in the fourth quarter, bringing 2003 capital spending to $311 million.

Our current plan for 2004 has total capital spending at approximately $435 million.

Which includes about $235 million for domestic operations and then $200 million for European operation.

Domestic capital projects for 2004 include some mobile equipment replacements, mainly at our iron ore operations, and a number of smaller infrastructure projects across all our domestic facilities.

In Europe, 2004 capital spend will include a number of projects in Slovakia, a de-dusting facility at the number one steel shop, an air separation plant, and a third dynamo line which is scheduled to produce prime electrical steels in the second quarter of this year.

In Serbia we have scheduled some major upgrades to the cold roll mill.

Depreciation, which totaled $363 million in to 2003 is expected to approximate $370 million in 2004 as additional depreciation from acquisitions and investments is nearly offset by the lack of depreciation for the plate mill we exchanged with ISG last fourth quarter.

Turning to the condensed balance sheet, as of year-end 2003 our long-term debt balance, including amounts due in one year, totaled about $1.9 billion, a net increase of about $50 million from third quarter of 2003 due to the recognition of coke oven battery lease extensions that have been classified as capital leases offset by a $20 million principal payment on the USSK loan.

Based on this year-end debt balance, interest expense for 2004 would be expected to total approximately $180 million.

As we had previously disclosed was likely, we had to increase our additional minimum liability following the merger of our two major pension plans and recorded a charge directly to equity of approximately -- of $534 million, increasing the cumulative charge against equity to $1.5 billion as of the end of the year.

As you might expect, our pension plans are very sensitive to changes in interest rates.

So much so that we estimate a 50-basis-point increase in the discount rate would reverse this entire cumulative charge against equity while a 50-basis-point decrease would increase it by up to $365 million.

Regardless of these significant balance sheet entries a solid pension -- a solid return on the company's pension assets and the timber contribution we made helped to somewhat offset the 25-basis-point decline in the discount rate from 6.25% down to 6%.

The plan fund status was down slightly from the prior year with the company's defined benefit pension plans showing an underfunded position of about $520 million on total projected obligations of just over $8 billion.

So still fairly well-funded on a PBO basis.

Turning to pension funding, as previously reported last year we completed a $75 million voluntary contribution to our pension fund.

The contribution consisted of both timber assets, which are valued at about $59 million, and $16 million worth of cash.

While not required under ERISA funding rules, pension contributions of at least $75 million allow us to minimize required contributions to our LIBA under the terms of labor agreement.

Based on a preliminary assessment we do not expect any required funding this year but to mitigate potentially larger required contributions in later years we plan to make a voluntary cash contribution of $75 million to our pension fund.

Thereafter, while certainly subject to asset returns, interest rates, and other factors, we currently anticipate annual contributions to remain at that $75 million level.

With that, now I'd like to turn it back to Gretchen for some comments on cash flow for 2003 and the outlook for the first quarter.

Thanks, John.

Cash flow provided from operating activities increased by almost $300 million over 2002 on the strength of a $557 million year-over-year favorable swing in working capital changes, and in spite of the reported loss of $89 million in payments for the transition assistance program in 2003.

We paid just over $900 million related to the acquisition of National, U.S.

Steel Balkans, and the final payment for USSK, but absent those payments, much of which was financed, we had positive free cash flow of about $300 million after capital spending and dividends.

So all in all, given the market conditions and the challenges we've faced, I consider 2003 to be a pretty good cash flow year for us.

Our domestic flat-rolled segment, the orders for our domestic flat-rolled segment, the order book for the first quarter has been full for several weeks, and we expect first quarter shipments to remain strong at the 3.9 million-ton level of the fourth quarter.

Full-year 2004 shipments are expected to approach 15.5 million tons, a year-over-year increase of 14% as we benefit from a full year's worth of shipments from the National asset.

On the pricing front, based on market conditions, we expect to realize all of our $30 per ton increases on spot business which we announced last October.

However, this improvement is expected to be somewhat offset by increases in raw material and energy costs, while our balance domestic raw materials position in iron ore and our net loan position in coke should minimize the impact of cost increases for these commodities.

We do purchase a limited amount of scrap in all of our coking coal requirement and as we've noted in the past we purchase up to 80 million mmbtu's of natural gas per year.

To cover unprecedented cost increases for these raw material and energy inputs, we announced a $30 per ton surcharge on all flat-rolled products effective February 1st, 2004, which will remain in effect until further notice.

The forecast for 2004 reflects a continued improvement in steel market conditions.

The economy appears to be growing, global demand for steel is increasing, the lower U.S. dollar and high freight costs have constrained imports into the U.S., service center inventories remain low, auto and appliance production forecast remain strong.

After several years of depressed activity, capital spending is forecasted to climb in 2004.

And increased raw materials cost and in some cases shortages of raw materials have all put upward pressure on global steel prices.

As a result, we recently announced additional spot price increases of $50 per ton for hot-rolled and $60 per ton for cold rolled and coated sheet steel effective April 4th, which should benefit the second quarter's results.

As a reminder, roughly 50% of our domestic flat-rolled business is exposed to spot markets with the balance priced under long-term contracts.

For the tubular segment we are starting to see some signs of [inaudible] strengthening in the order book and we expect increased shipments in the first quarter.

Results should also benefit from efforts to collect recently announced price increases.

To recap these announcements, effective in December we announced increases of $40 to $50 per ton for certain OCTG casing and tubing as well as standard line pipe.

Just last week we announced immediate additional increases of $30 to $50 per ton.

Full year shipments are expected to rise by almost 14% to one million tons.

Turning to Europe, or USSE, as we refer to it in our segment reporting, first quarter prices are expected to be higher than in the 2003 fourth quarter.

However, we expect increased cost for raw materials and slightly lower production volumes in Slovakia to offset benefits from improved prices.

We announced January 1st spot increases of 20 euros per metric ton and given current and expected worldwide steel market conditions, further price increases in the second quarter are likely.

First quarter shipments in Europe are expected to be flat with the prior quarter.

Operations in Serbia are still in their initial ramp-up phase and are expected to reach 50% of capacity later in the first quarter.

As a result, USSE shipments in 2004 are projected to increase by about 8% to approximately 5.2 million net tons.

I should also remind you that in the first quarter our iron ore operations in northern Minnesota which are included in other businesses for segment reporting, are expected to experience seasonal losses as the end of the Great Lakes shipping season greatly limits results.

Before we turn the call over for questions I wanted to comment briefly about the potential capital market transaction we mentioned in our release.

Our 10.75% senior note has an equity claw-back provision which allows us to redeem up to 35% of the $535 million in outstanding notes at a premium equivalent to the coupon using the net proceeds of a public underwritten common offering.

This option is available to us through August 1st of this year.

After that, the notes are not callable until maturity in 2008, and subject to market conditions, we're currently considering issuing a common in order to take advantage of this expiring option.

But, given SEC rules, there's really not much more we can say regarding this on the call today.

I would note that, at the current street estimate and current stock price exercising the claw would be mildly dilutive on the premium.

Taking advantage of this expiring option would allow us to smooth out our maturity schedule, so while our near-term maturities are really quite manageable at roughly $36 million a year through 2007, we do face the $535 million maturity of the $10.75 in 2008 and this equity claw-back option gives us an opportunity to address some of this in the near future.

So with that, Tom Usher and John Surma are here with us, and we would be happy to answer any questions that you may have.

Very good, and thank you, Ms. Haggerty.

Well, ladies and gentlemen, as you just heard, if you do have any questions or comments we invite to you queue up at this point.

Simply press star then 1 on your phone.

You will hear a tone indicating that you've been placed in queue, and should you wish to remove yourself from the queue, simply press the pound key.

So once again, to ask a question, please press star 1 on your touchtone phone.

Representing Morgan Stanley, our first question comes from line of Wayne Atwell.

Please go ahead.

Thank you.

A couple of quick questions.

What tax rate should we assume for this year?

Well, I think, Wayne, as we've said before, what you really want to do is take your forecast for domestic pretax income and apply essentially a statutory tax rate of 35, or, I guess, 37 if you want to throw some state in, and apply that to that number, and then the earnings out of Slovakia would come through currently at a tax-free rate.

And the surcharge, we're hearing different stories about whether that's going through on contract business or not.

My understanding is that it's not holding on the auto contract business but it might be holding on the non-auto business.

Can you clarify that for us?

I would say for all of the spot business, Wayne, which is about half our business, we expect to collect the surcharge.

For the contract business, we either expect to collect the surcharge or to enter into negotiations with contract customers where we would consider such things as price, volume, and terms moving forward, so one of those two we'll either collect the surcharge or we'll get it back in the negotiations.

You're saying, let's just pick a large auto company.

So you might get something from them that --.

Again, you know, I think it would be kind of tacky to negotiate specific customers or industries in the press, but -- I'll just stick by the answer I had.

Lastly, the $400 million cost cutting program how much of that has been achieved so far?

I would say, this is John, Wayne, our objective has been to have $400 embedded in the run rate by the end of '04.

The biggest single chunk of that is the labor piece and certainly that's nearly all achieved by the end of '03 and in the run rate now.

In the first quarter there's a big chunk, by the fourth quarter we should be at $400 or very nearly so.

Would it be fair so say you've achieved maybe $250, $300 so far?

The majority would get you in that range, yes.

Thank you very much, Mr. At well.

Representing Goldman Sachs, a question from Aldo Mazzaferro.

I wonder if you could comment on the trend in the realized price in the fourth quarter versus the third was actually, you know, roughly flat and I wonder if could you comment on how the mix would be changing there and what might happen in the next few quarters on mix.

Traditional third to fourth to have some negative mix impact given the way the bill schedules work and the like in the auto sector.

Again, Aldo that would have been consistent, what we would have said in the third quarter call that while we were going to see increased spot prices Q3 to Q4 was going to be offset by a less favorable mix as John pointed out there.

Auto tends to be weak, so I'd expect moving fourth quarter to first quarter, a slight enrichment of the mix but still roughly in the 50/50 neighborhood.

What do you think the price, if you had the constant mix in the third quarter to the fourth, what do you think your prices might have been up?

Third quarter to fourth quarter?

You had a flat comparison with the mix changes.

I'm wondering what your index price might have been.

I'd want to do some work on that, have John get back to you.

I wouldn't want to just give you a number off the top of my head.

Okay.

Yeah, I'll get back in queue.

Thanks.

And representing Bradford Research we go to the line of Charles Bradford.

Please go ahead.

Good afternoon.

I'd like to ask more about the raw material situation.

You made a pretty positive comment in the release about getting the coke ovens back operating full in the fourth quarter, could you end up paying up a lot extra for coking coal or has the Pinnacle problem been solved or what's going on?

I would say the Pinnacle problem has not been solved but we have been aggressive in going out and lining up other coal sources and, you know, I guess I would say we're running at a lower coal inventory than we would like to be running at but it has not had a significant impact on us.

There are a couple little minor blast furnace jobs of a day or so that we have moved up in the schedule and so forth, but it is a serious problem but one we expect to work out rather shortly, and we've done a nice job of securing backup coal to Pinnacle.

Thank you.

And thank you very much, Mr. Bradford.

Next in queue is Mark Parr with McDonald Investments.

Please go ahead.

Thank you very much.

Good afternoon.

Hey, Mark.

I was curious with the increase in the bundles auction that occurred yesterday, which was, I think, another $38 a ton, American Metal Market is now talking about delivered costs to mills for bundled materials approaching $275.

And that's with freight and brokerage fees built into it.

I'm just -- you know this is obviously going to be triggering some fairly dramatic further increases in scrap surcharges from some of your competitors.

I was just wondering, and again, this is a very conceptual question, I mean, is, you know, if NewCorp is going to be out on the second quarter, you know, looking for something close to $500, you know, $460, $480, $500 for hot-rolled, is that something that you would feel comfortable following?

Well, I would say this, you know, new core is a competitor we've run into the marketplace, have, and we expect to in the future, and we would not expect them to get paid for the same product considerably in excess of us, so, you know, I guess you just take that answer like that.

Ultimately the market sets the price and we're a big believer in Adam Smith (ph) invisible hand.

Wherever the price is on the market we're going to hopefully be right there.

Okay, terrific.

Another thing you talked -- you talked about just the rising prices that you've announced and the surcharges that you've imposed on a portion of your mix.

Can you give us some idea about, you know, how much increase in realized prices you expect in the first quarter relative to the fourth quarter?

Remember, in the first quarter we had an increase of $30 the first of the year.

The surcharge takes effect 1st of February, then we have this 50/60/60 increase 1st of April, so basically we have collected in just really one month of the first quarter and for the business we've booked in the first quarter we're collecting at that increase.

Okay.

But I guess just the -- so are you in a position just to give us some sense of on a consolidated basis what it means as far as realized prices in the first quarter?

No, I'd say it's difficult because we're still very early in the first quarter.

Okay.

I guess all I would say, Mark, is the numbers we've announced we expect to collect.

Okay.

Terrific.

Hey, congratulations on making progress with the cost reductions and keep up the great work.

Thank you, Mark.

And thank you very much, Mr. Parr.

Next we go to the line of Brian Rail with Midwest Research.

Please go ahead.

Good afternoon.

Had a quick question with regards to the EU ascension of Slovakia, been a lot of things out there in terms of possibly reinstating the -- or I shouldn't say reinstating but doing something in terms of production in the region or maybe altering some of the aid that you guys get.

Do you guys have any comment as to, you know, where you expect that to fall out here over the next couple of months?

This is John Surma.

In the earnings release we did put a footnote in, I think number eight or somewhere along there, that would give you the kind of current state of play of that.

The only additional color I'd give you that we think that -- and we believe, and we know that we have complied with the terms of everything we were supposed to comply with insofar as we're concerned, our responsibilities under the treaty that the Slovak government negotiated with the EU.

The Slovak government is currently conducting negotiation with EU as our disclosure says.

We're somewhat disappointed to some degree in how that goes and if I were you I would not believe literally everything I read in the press.

This is a political issue in Slovakia, and therefore how it gets colored in the press isn't always reflective with what's actually going on.

We believe we've behaved appropriately, and we intend to adjudicate that with the best of our abilities.

Great, and one other question.

The OCTG improvement here in the year, my understanding is that the mix for offshore drilling is more favorable in terms of overall profitability versus some of the more shallower land equipment.

Is that -- do you expect to see the mix improve there as well as shipments?

I'd say yes, we expect that, but to try and quantify that through the whole year would be difficult.

But you do expect sort of the mix to move that way

Yes.

Great.

Thank you.

Next in queue is David Common with J.P. Morgan.

Thank you, good afternoon.

I didn't catch the actual number that you said, the cash use for the tap program, and could you also just characterize the extent to which those labor cost reductions are reflected in the fourth quarter results and the extent to which it's actually going to really benefit on a sequential basis?

Thank you.

The actual number of the tap?

89, David.

You can find 86 embedded in the footnotes, but there's a couple million more.

So 89 is the number I use.

Thank you.

And then --.

I'd say in general we had people really exiting the plants throughout the late third and then the entirety of the fourth quarter, including quite a few in December and some trickling into January, but the basics are 3,000 represented worker reduction is pretty well done at this point and you can take a guess at what an annual cost that would be.

Maybe at $60 or $70,000 per, that ought to be in our run rate for the most part throughout the year.

As we said on previous calls we expect to have most of this behind us through fourth quarter so as we enter '04 these quarters should be relatively clean from that.

Perfect.

Thank you.

And thank you very much, Mr. Common.

Next we two to Bruce Klein with Credit Suisse.

Please go ahead.

Hi, good afternoon.

Hi, Bruce.

I was just wondering, contract prices for '04, that came up at year end '03, what percentage of your business came up and how did you guys all do?

One of your kind of competitors said they were down one or two percent on auto.

Wondering how you guys did.

Secondly, just on the use of the equity money, if you were to pursue that, are you directing us sort of solely toward if you did that the money would solely be used for the claw, or would there be other proceeds, and what would they be applied to?

I would say on the first question there, Bruce, that of our contract business, roughly a third was up for renegotiation at the beginning of the year, and, you know, I guess I would say that we did notice the market tightening while it's, you know, I would probably have a difficult time keeping a straight face and say I thought it was going to get as strong as it has.

We did see it tightening, so we were rather aggressive on the contract negotiations also.

In terms of the second issue, the use of these proceeds, I would say that our current thinking right now is that with this option expiring in August, this is what our thinking is, that we would do this claw-back on this one issue.

Beyond that, we would have no specific plan.

We really can't comment on anything else due to the fact that we are in registration.

Tom, on the acquisition front, what are your latest thoughts in terms of segments or geographic area and how high a priority is that for you guys in '04?

I would say, again, as you know, we were not successful in trying to acquire Rouge Steel.

We thought that had some merit, but we were outbid in that.

Moving forward, philosophically I still feel that there needs to be additional consolidation.

We found out what the National deal there are great synergies and great ability to improve our cost picture, so we would still be very aggressively looking at our opportunities both domestic and abroad.

Having said that we'll do it in a disciplined way.

We would not want to overpay for these things, but we still think the long range outlook for this business is to have a company that's got the magnitude of size of $30, $35 million and to be represented in more than one part of the world, or 30, 35 million tons and to be represented in more than one part of the world.

So in both Europe and in the States, if the right opportunity presents itself we would look at that certainly.

Okay.

Thank you.

And thank you very much, Mr. Klein.

CRT capital's Ken Silver has our next question.

Two questions.

In the past you had talked about maybe increasing or looking to increase the percentage of contracts business.

And I was wondering if that was still the case and what your goal is.

I would say long term that's still our goal, and we would intend to move that up, but, you know, I'd say something in the neighborhood of 70/30 would probably be the type of mix we would reasonably end up with down the road.

And do you have a sense of where you would be a year from now?

No, I couldn't really say.

The only thing I'd add this is John Surma, we did in the National deal pick up some very good coating assets and particular some good EGL capacity and excellent hot-dipped capacity that's fairly new that isn't fully utilized, necessarily yet with contract business so we have a good opportunity given the kind of turbulent market conditions we're in right now and the opportunity the spot market adds we need to do this in a judicious way that balances the overall return as to how we get there but I think the target Tom talked about still remains a target.

In general we'd like to move in that direction.

Whether that's a year, two years, three years, hard to quantify.

Depends on the market.

You mentioned you're going to be making some pension contributions of $75 million.

Would you be helped by this bill that's making its way through Congress and potentially to Bush's desk?

I would say that, you know, sort of fixing this rate thing which is the main thrust of that bill, would be a positive, and I think anybody that has these plans, including many of the automotive people and so forth, that's an important feature of it.

There is a provision in the current one that came out of the senate to treat steel companies and airlines a little differently.

And I guess our view is that fixing the rate is the primary objective.

The other stuff doesn't have a lot of great interest to us.

And, you know, if it would simplify getting the legislation passed and would meet the approval of the Whitehouse, et cetera, et cetera, we would be very satisfied just with getting the rate fixed and wouldn't worry about the other exclusions.

Do you have a sense of how the bill's going to turn out in terms of whether that provision is going to be in or out?

I really don't.

We've heard both sides.

A lot will depend on how strong the Whitehouse decides to -- strong a position the Whitehouse intends to take, I think, but that would be a difficult forecast.

Thanks.

And thank you, Mr. Silver.

We go to Prudential's John Tumazos now for our next question.

Are there any particular opportunities in raw materials markets where your North American infrastructure could be utilized?

For example, are there any facilities where there's foundations for coke batteries or incremental expansion opportunities for coke batteries?

Could Mentach increase production 25, 50% back toward the levels it might have intended a generation ago, second?

Third, would it be more profitable, at one of your smaller integrated mills, to just sell the pig iron rather than make sheet and in particular Fairfield is very close to NewCorp Decatur, Urban Works hot strip mill from 1938 has beautiful architecture but the blast furnaces might be more lucrative than the finishing at the moment.

What is your -- do you have a particular strategy to leverage your strength in infrastructure and raw materials given the way the market's changing?

Just a couple of answers.

On the coke side, there's no immediate opportunities although we do have some infrastructure in Kocise where there might be an opportunity to do something from a coke standpoint.

We can make more coke than we're making today once we get our coal situation involved where it should be.

So I think there's an opportunity.

On iron ore, we probably do have some opportunity to improve our production capability at both Mentach (ph) and Kubatan, just by doing a number of projects that aren't all that expensive and we'll look at doing that to the extent the market can justify that return.

The current state of affairs in the raw materials market has not been with us for long so we're exploring new territory here.

On the pig iron side, there are certainly opportunities there for merchant sales of pig iron depending on where we can get the most money.

As you point out, whether we can more much money selling pig iron or finishing into high value sheets, we think the economics still dictate finishing pig iron in the high sheet.

To the extent that we have some incremental blast furnace capacity that's constrained by whatever is downstream from it.

Might we do some merchant work on the iron side, the answer to that is yes, and that's not just in North America but also in Europe, so I guess there's sort of three qualified yeses there but, this is such a new phenomenon we're exploring those alternatives right now.

How much hot-rolled do you sell in the U.S., and do you think hot-rolled is secularly a better product than pig?

Oh, I don't know, John.

I guess I would say I think long-term hot-rolled is probably a better product than pig, but we're sort of in a new phenomena now, and, I don't know, my gut instinct is that the hot-rolled is better than pig.

We try to build a customer base that we have good relationships with and we want to take care of these customers that are consuming steel.

That's sort of the business we're in.

Tom, if I could ask one more, metallurgically, what is your opinion of pig made from charcoal carbon as the, I call them Roman age baby blast furnaces in Brazil, you know -- the ones that are 500 tons a day?

Yeah.

What do you think of the quality of those, and if secularly there's an opportunity in pig, would you go to Brazil and get some eucalyptus trees to grow in seven years like weeds and some iron ore fines and go to town?

We might have some protesters sitting in these trees.

You plant them like a vegetable garden.

We certainly wouldn't have any prohibition from doing that but we don't have any current plans, I would say.

In terms of the metallurgical quality, I think it's probably okay but I'm not an expert on that, so it would be better to talk to someone who knows more than me.

Thank you very much.

Next we go to Appaloosa's Michael Lukas.

Please go ahead.

Yeah, how's it going.

I'm trying to understand what the true contract, where your real prices are, what you think the long-term market is and when your next round is coming up in contracts.

You said you just renegotiated a third of your contracts at the first of this year?

Of our business, let's say half of it is contract business and about a third of that we renegotiated, so that's what -- 17% of our business we renegotiated the first of the year.

Year in, year out, that's probably a pretty good average.

Where were the prices when you renegotiated this?

These would have been done in the fourth quarter so they were lower than they are now, but in general, prices for contract business have been higher than spot business.

I'm just trying to get a basis of how much higher from the prior year on those same contracts.

State the question again, Michael.

You said you renegotiated one-third of the contracts at the first of this year so prior, those were contracts.

How much higher percentage-wise were they than they were before?

Oh, I'd say 9, 10% probably.

Also on your raw materials side, I noticed in a bankruptcy filing, you guys have stopped giving coke to Rouge.

Where was that contract, and will we see a significant increase, obviously since coke has probably doubled since you entered into that contract?

How many tons is that for?

What actually happened in the court filing was that we filed a notice and a stipulation that we were going to cancel that contract as of the end of 2004.

Assuming that everyone else performs, both we and they, subject to force majeure, we'll be shipping them coke under that contract this year.

How many tons is that for?

I'm not sure.

I don't think we've ever specified how much we ship to other customers.

You could probably backward engineer it from what they're overall iron output would be, if you're interested.

Just understand the contracts.

The ones you just renegotiated, the third, how long are those for?

They could be anywhere from one to two years, I'd say, the majority of them.

So is it fair to say like next year and the first of the year we'll be seeing the same thing, a third of the contract come rolling up?

In that neighborhood, yes.

Of the 50%.

Of the 50%.

Do you guys still feel confident that you want to go towards a 70% contracted base, just because we heard NewCorp come out kind of saying think they're only 35% contracted and they think they're shortening their contract time to six months.

Is that something you guys have an interest in?

I mean, again, longer term over all cycles of this business I think we're better off moving to about a 70% contract, that's our objective, and the people we want to do business with we tend to do on a contract basis, and that is sort of the direction we're moving in, and some of these other people I've heard have been at 50/50 and now they want to be at 90/10, next year they'll want to be at 50/50.

Long term I think this is where we want to be.

One of the reasons for that strategically is that this particular kind of business, the metallurgical requirements that it demands as well as service requirements, tend to put us in a somewhat different market position than our colleagues and people offshore that really can't compete as well, either metallurgically or service-wise in those markets, so long-term, there's some real strategic value for us there.

Where do you guys think the long-term market -- do you guys think this is real?

I mean, a lot of analysts on the phone have covered this for probably 15, 20 years don't really think these prices are here to stay.

What do you guys feel about that?

I think a lot depends on your sort of view of the world market and China.

And our sense is that we think that -- we see nothing on the horizon in the short-term here that is diminishing any of this.

How long it lasts, you know, it's hard to say.

Just to have wait and see.

Just lastly, I know with all these people putting through surcharges, you guys seem to us to be the only truly integrated steelmaker in the United States, so it seems you're pretty much sheltered outside of i.e., your 80 mmbtu's you purchase a year of natural gas.

Will this be a significant factor to benefit you guys, will get over NewCorp and the rest of the guys in the marketplace?

We think with our raw material position, which in times of weak markets sometimes is a heavy fixed cost to carry, but when the market turns around we're much better insulated against world prices of coke and iron ore, and we buy some, but we're fairly self-sufficient in iron ore domestically, we're a seller of coke domestically, so we feel very good about that position in today's market and should give us a cost advantage.

I just want to understand one more time why you guys want to issue shares to call this debt in August of '04.

Well, we haven't elected to do that, but if we did, the rationale is that even with free cash flow, we cannot pay this down.

It is only the equity issue that allows us to have this claw-back, and as I think Gretchen said we find this thing very, very mildly dilutive.

We have a somewhat inflexible debt structure where we have a couple of years of very large payments towards the end this decade.

It allows us to smooth some of that out, and we think we can do it in a way which will be very minimally dilutive.

Last thing, I'm sorry, for modeling purposes, and with your cost savings and the price adjustment, the 9 to 10% increase.

It seems to me that you guys will do somewhere in the range of free cash flow of a billion dollars.

Does that sound realistic?

Again, a lot depends on how the year progresses but right now it looks good.

Thanks, Michael.

Thank you very much.

Representing Appelbaum Research, we go to the line of Michelle Appelbaum.

Hi, Michelle.

Okay, I keep asking this question, and I keep getting confused by the answer but I know that you're kind of -- you're net neutral, I guess, on iron ore, and you're long on the coke side, and you've said that a lot, but I'm asking a different question.

I know you buy and sell iron ore, and I know that you don't -- you don't disclose in your public filings what your economic arrangements are, and I guess my concern is that you only give us information or I guess you talk in terms of volume, and if you have purchase contracts for iron ore that float with the market, and your sale contracts for iron ore are fixed price, then you create economically short position to iron ore, so that if prices go up you actually will see costs increase despite the fact from a volume perspective you're neutral.

Do I have it right so far?

Well, Michelle, on iron ore, given the acquisition both the melt as well as the pellet capacity, we're essentially in balance and we're doing very, very little, almost none, merchant ironwork anymore.

We actually sold a couple of trains to China, if you can imagine that, earlier in the year, but very, very little iron ore merchant work anymore.

Okay.

And you're not buying any, anymore?

No.

Well, we're buying in Slovakia but not in -- in Serbia but not in the United States.

And I would assume Slovakia would be subject to the same kind of plus 20% everybody else in Europe is paying -- right?

We think we've done a pretty good job there.

We're tapping some more localized supplies in Ukraine and Russia and throughout Europe, but, yes, we're subject to some pressures like everybody else.

We have some advantages by location that a lot of people who would be traditionally buyers from either Brazil or Australia don't have but, yeah, in general you're right.

Okay.

Great.

Well, that's very helpful.

The same thing on the coke side.

Where, again, I don't recall that you're buying coke, but are you?

Do your coal contracts have -- are they linked to -- I've seen iron ore contracts linked to the price of steel.

Do you have coal contracts linked to the price of coke?

Do you have economic exposure?

In general, Michelle, we now buy all of our metallurgical coal, as I think our disclosures have said repeatedly.

So, whatever the price of coal is, what it is, we do some contracts that moderate that.

But none of these contracts are linked to the price of steel.

We don't really have any linkage to either steel or coke forward or backward.

So your exposure is met coal, it not coke.

We do also sell coke.

Generally speaking we've sold in the Midwest and purchased in the South just to save some freight arbitrage.

We shorten up that position when we get to where we are today where the prices are much more dramatic on the import side so we're both selling and buying some coke and there are some sells that are higher than some of the buys, but in general, our net long position is working to our advantage.

So then economically you're still net long.

Yes.

That's very helpful.

Much better answer than Larry has been willing to give me.

Thank you very much, Ms. Appelbaum.

We go to the line of Frank Dunal with Addage Capital.

I just have another theoretical question because I was just looking at the market.

If you're a customer and you signed a contract, and all of a sudden your supplier starts putting on surcharges, that's somewhat understandable if there's some clause in the contract that allows him to do it but even if there isn't, most industries I follow where there's a surcharge, most of the people who consume the raw material that they're putting a surcharge on consuming it in more or less the same quantities, and now you're looking at an industry where all the different steel producers, their metallics are completely different, some are scrap, some are not, yet they're all trying to put surcharges on, you know to cover their own individual cost position, and at least for awhile as a customer, I mean, how do you feel?

I cut a contract, but I cut it with the wrong guy here because he's nailing me here trying to raise his costs, and [indescerable] I can't go to anybody else, or long-term, a year from now, tahe next round of contracts, is everybody going to write surcharge clauses in them?

I don't understand what's going on.

Well, you know, I guess that was a theoretical question.

I guess I'd give you a theoretical answer.

I don't know what will happen the next time around, but as I mentioned, some of these contract customers, we will collect surcharges, other ones we're talking about taking another look at the contract in light of the new economics of the day.

So -- but it is a new world there.

I mean, are any of your salesmen, I assume your salesmen are going out and pointing out to at least some are your customers or potential customers that you probably have a more stable cost base and therefore more stable pricing than any -- that your contract may resemble a contract as opposed to some of these others?

I would say the stable pricing and stable cost and all that stuff are good but the market really sets pricing, and we do not intend to be disadvantaged in the marketplace by what customers are giving to other steel suppliers irrespective of their cost position.

So, you know, if a particular customer is giving a particular steel supplier in excess of what they're giving us for the same product, that's something that we find objectionable.

And it may all be semantics.

Would you call that a price increase, maybe, instead of a surcharge, if you can't really justify the surcharge?

Whatever we'd call it, we'd call it

Thanks.

Thank you very much Mr. Dunal, and we do have a follow-up question from Wayne Atwell once again with Morgan Stanley.

Just a couple of quick questions.

Maintenance outages over the next 12 months.

Do you have any of any significance?

We always do and not to any dramatically greater degree or lesser degree.

We don't always tell exactly when we're going to have them staged.

That depends on how the order book moves, how the cost structure is moving, what happens with the coke situation but we'll have the same general diets, both domestically and internationally that we've had over the last couple of years.

We have no really major jobs out there, maybe something right at the end of the year but for the most part we have no major three or four-month blast furnace outages this year, anything like that.

It sounded like from your release your healthcare costs are going to be coming down this year.

We're just working through the calculations, and as I'm sure you know, this Medicare prescription bill is horrifically complicated but our experts and actuarial consultants are working through it.

Our expectation, I think John might have used or Gretchen, whoever used the word, substantial reduction, I think that's an apt description.

Our cost last year was about $180 -- somewhere along that way.

And, a substantial reduction would be in order.

When we know it, we'll let you know.

Substantial might be 20, 30% of that.

At least.

Okay.

And then pension costs, what is going to happen with pension costs in '04 versus '03?

$205 versus $110.

Yea, Wayne, we noted in the release we're looking for '04 pension costs of $205, which are up about $110 from last year but, again, no required funding but we're going to look at doing some voluntary contributions to keep that plan in the good shape it's in now

So your cost might have been $110 last year, and now $205?

It was up 110;

I have that.

Right.

It was up $95 last year going up to $210.

Okay, so it's up $115.

Right.

So your pensions are up $115 and your healthcare might be down?

I'm sorry.

We're giving you too many [inaudible].

The release says $205 is our '04 number which is an increase of about $110.

An increase of $110.

Okay.

Thank you.

And thank you Mr. Atwell.

We do have a follow-up as well from Aldo Mazzaferro.

Please go ahead.

Just wondering, on the Slovakian and Serbian shipments, Gretchen, when you mentioned 5.2 million tons as a target, would it be correct to assume that Sartid, if you follow the logic a little bit, running about a third of the capacity in the first half, and then 50% in the second half might do, a little under a million, maybe 950,000 tons, and that would imply, then, that Slovakia is actually held back to about 4.2 or 4.3?

Am I missing something there?

Well, remember, too, Aldo, we've been operating these Serbian assets before we bought them for about a year under tolling agreements, so in some of the shipments numbers you would have seen for Kocise, we were already shipping product from Serbia.

Where it appears as if Slovakia is going down, it's actually probably staying where it is, and the tons that were showing up under Slovakia that were really the Serbian tons are moving to Serbia.

Okay?

So -- and I think as we said in the comments, we've got this second steelmaking vessel up and running and looks like things are going fairly well, which should get us up to 50% of capacity by the end of the first quarter, in Serbia.

Aldo, basically in Slovakia we intend -- our plan is to run a full order book and operate at capacity.

You're going to assume that you're going to -- that they're going to get into the EU without any material changes in your run rate, then?

We just don't know enough to comment on that.

It's still under negotiation.

Our plan is to run full.

If it comes to the fact that we need to move some slab from Slovakia to Serbia, we're doing that right now, It works just fine.

We've got a big, strong hot [indescernable] mill in Serbia that can run it quite well, and if necessary, that's a very convenient way for us to not get into excess production.

If it comes to that, that's one of the things that the Serbian operation gives us.

So they don't count slabs as production in Slovakia, then?

I don't want to get into too much detail on that, but I just described the fact that we could move material from Slovakia to Serbia if necessary.

We've been doing it before.

Ladies and gentlemen, we thank you for the strong interest being shown today in the call.

However, with time now for one more question, we have a follow-up Charles Bradford.

Please go ahead.

Hi, the Russian news services are saying that you've reached an agreement with Severstal in regards to the ownership of Double Eagle and they're saying that you've given up the right of first refusal.

But given what the sources are, would you please comment?

Well, the case is not closed yet because the final bankruptcy process and hearing and sale and all that has to play out I guess next week sometime.

We have agreed to a stipulation with Severstal that has been accepted by the court subject to the finalization that we did decide not to pursue our right of first refusal on the other half of Double Eagle.

We did, as was mentioned earlier, have as part of the same stipulation the fact that there was an agreement that we would be able to void and cancel as of the end of '04 the coke supply contract we have with Rouge that Severstal, we understand, will be paying the cure (ph) on and they would be accepting, so those are, in fact, factual statements.

I didn't see the one you're talking about but the general story you've got, I think, is correct.

And thank you, Mr. Bradford.

With that Mr. Usher and our host panel I'll turn the call back to you for your closing remarks.

Well, I think, as John mentioned at the beginning of this call this was a good year last year.

We positioned ourselves well.

We think we enter this year and from your perspective should be able to follow what we're doing a lot better.

We won't have nearly, I would think, the number of one-time type things that we had.

It was a very difficult year to sort of figure out what we're doing, but we took about 6,000 plus people out of the operation.

The integration has gone exceptionally well.

Commercially it's been somewhat seamless and we really think we're well positioned with our cost structure and our raw material position to have a good year here in '04, and we look forward to the future quarters.

And ladies and gentlemen, your host is making today's conference available for digitized replay for one week.

It starts at 5:30 p.m. eastern standard time January 30th, all the way through 11:59 p.m.

February 6th.

Please access AT&T's executive replay service by dialing 320-365-3844.

At the voice prompt enter today's conference ID of 718467.

And that does conclude our earnings release for this quarter and full year.

Thank you very much for your participation as well as for using AT&T's executive teleconference service.

You may now disconnect.