美國鋼鐵 (X) 2004 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the U.S.

Steel Corporation's third quarter 2004 earnings conference call and webcast.

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

Later there will be an opportunity for questions and comments.

Instructions will be given that time.

If you should require assistance during today's call, please press star, then 0, and an AT&T operator will assist you.

As a reminder, today's conference is being recorded.

I'd now like to turn the conference over to our host, Manager of Investor Relations, Mr. Nick Harper.

Please go ahead.

Thank you, Tom.

Good afternoon, and thank you for participating in United States Steel Corporation's 2004 third quarter earnings conference call and webcast.

We'll start the call with some brief introductory remarks from U.S.

Steel President and CEO, John Surma, then Gretchen Haggerty, U.S.

Steel CFO, will review results for the quarter and comment on the outlook for the fourth quarter.

Following our prepared remarks, the team will be happy to take any questions.

Before we begin, however, I must caution you that today's conference call contains forward-looking statements, and that actual results may differ materially from statements or projections made on today's call.

For your convenience, the forward-looking statements and risk factors that could affect those statements are referenced at the end of our release and included in our most recent annual report on Form 10-K in accordance with the Safe Harbor provisions.

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

Steel President and CEO, John Surma.

Thanks, Nick, and good afternoon everyone.

Thanks for taking the time to join us for the call today.

For the quarter, we reported record earnings of $2.72 per diluted share.

The results include a 24 million net favorable effect related to the settlement of some prior years' tax audits.

These settlements and a couple other items not allocated to segments increased net income by $21 million, or about 16 cents per diluted share.

So our results well exceeded the average of analysts expectations of $2.05 per share, even without the impact of the tax settlements and the other items not allocated to segments.

Now as is evident from our terrific results, U.S.

Steel and our employees continue to deliver exceptional results, and while this is due in part to favorable steel markets and a strong price environment, each of our three major operating segments performed very, very well in terms of operations, quality, and cost control, and I think our U.S.

Steel work force contributed quite a lot to our bottom line results as well.

I'm sure many of you are interested in our point of view regarding the sustainability of the current favorable worldwide steel supply demand balance.

While no one really knows for sure, we believe that during these periods of synchronous economic growth involving large populations in developing territories such as China, India, and the former Soviet states, history tends to demonstrate that large quantities of steel will be consumed to support this type of long-term economic development.

We believe this dynamic will fuel strong steel demand, and because of the demand, support a higher price structure across the business cycle.

U.S.

Steel should benefit from this favorable environment much more than others, given our favorable cost structure due to our balanced North American raw materials position, our diverse mix of products and end-user markets, our balanced commercial mix of spot and contract business, our geographic balance between our North American and European operations, and our more modest exposure to the volatile scrap markets.

And again, although no one knows for sure how long this current cycle will last, we expect continued strong results for the fourth quarter and we remain optimistic about 2005.

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

Gretchen?

Thanks, John.

Third quarter 2004 consolidated revenues and other income totaled $3.7 billion, an increase of 260 million from the second quarter, as our average realized prices increased $57 per ton to $628 per ton.

This was on 5.3 million tons, which was 250,000 tons below the second quarter.

For the third quarter, we reported net income of $354 million, or $2.72 per share, compared with net income of 211 million, or $1.62 per share in the second quarter, and a loss of 354 million, or $3.47 per share in the third quarter of 2003.

Total segment income from operations before retiree benefit expenses and other items not allocated to the segments was 570 million, or $108 per ton.

An improvement of 116 from the second quarter.

The Flat-Rolled segment contributed profits of 362 million, exceeded second quarter results by $27 million, or $13 per ton.

Flat-Rolled realized prices increased by $44 per ton from the second quarter, to an average of $627 per ton.

The Flat-Rolled segment results were affected by increased purchased raw material and scrap costs, which under LIFO are generally reflected in production costs in the current period.

Domestic results also included higher costs related to profit-based payments in line with improved profitability and costs related to blast furnace repair outages at Gary Works and Granite City Works, both of which were completed in the third quarter.

In Europe, third quarter income from operations was $146 million, an increase of 70 million or $56 per ton from the second quarter, as the average realized price increased $82 per ton.

This was partially offset by higher raw material costs.

Turning to the Tubular segment, third quarter results improved as the average realized price increased by $128 per ton, from the prior quarter to $907 per ton.

The segment posted income from operations at $55 million, more than double the second quarter results.

Now Nick Harper will provide some additional details on the quarter's results and some items for your modeling purposes.

Nick?

Thanks, Gretchen.

Capital spending, which is detailed by segment in the earnings release, totaled $202 million in the third quarter.

Our current plan for 2004 has total capital spending at approximately $570 million, including 360 million for domestic operations, reflecting some advanced spending in preparation for the Gary Works number 13 blast furnace reline, and $210 million for European operations reflecting some advance spending for the Serbian blast furnace rehabilitation.

Depreciation, which totaled $96 million in the third quarter, is expected to be approximately $390 million for the year.

Defined benefit and multi-employer pension and OPEB costs for third quarter totaled $89 million, and as Gretchen will discuss in a moment, we made a $70 million voluntary contribution to our main pension plan during the quarter, bringing the total contribution to $120 million year-to-date.

In addition, in the third quarter we made cash payments of $66 million, primarily for retiree healthcare cost and multi-employer pension plans.

Including both the $31 million prior-year tax settlement benefit discussed in the release, and the $33 million charge from the second quarter, interest expense for the year is now expected to be approximately $180 million, which reflects approximately $14 million of net foreign currency remeasurement losses recorded to date.

Currently, our estimated annual effective tax rate for the year is 27%.

Lastly, the fully diluted share count for the fourth quarter is expected to be 130 million shares.

With that, now I'd like to turn it back to Gretchen for additional comments on our results and outlook for the fourth quarter.

Thanks, Nick.

We anticipate continued strong results in the fourth quarter, as prices and margins are expected to remain at historically high levels across our three operating segments.

Fourth quarter results will continue to be affected by fluctuating prices for scrap and natural gas.

In addition, lower domestic coke costs should further bolster the performance of our Flat-Rolled segment.

Cash flow has been very strong this year, with cash provided by operating activities of over a billion dollars year-to- date, even after the $120 million pension fund contributions that we've made.

We had free cash flow after capital spending and dividends, but before external financing, of just over $700 million.

And we ended the quarter with over $1 billion of cash and about $2 billion of total liquidity.

With our strong cash position, we have taken significant steps to further improve our capital structure.

As Nick mentioned, in the third quarter we voluntarily contributed 70 million to our pension plan, which brings year-to-date contributions to 120 million.

I will also note that our Board has authorized additional contributions of up to 205 million to our employee benefit plan, which we fully intend to utilize and may do so sooner rather than later.

Furthermore, as we noted in our earnings release, we've given irrevocable notice to prepay USSK's 272 million of long-term debt in the fourth quarter.

This was our highest cost debt with annualized interest expense of approximately 23 million.

We should end 2004 with a total debt reduction of approximately 560 million, or 30% of our 2003 year-end balance.

In the Flat-Rolled segment, fourth quarter shipments should increase slightly and profit margins should remain at high levels.

Some markets are being affected by seasonal softness and efforts to control inventory.

Seasonal patterns suggest these markets will rebound in the first quarter of 2005.

Accordingly, average Flat-Rolled prices in the fourth quarter are expected to be comparable to, or slightly below, the third quarter, reflecting some differences in product mix and flattening in spot prices.

Scrap and energy costs remain volatile and planned outage costs will be comparable with third quarter levels, as we've accelerated into the fourth quarter a repair project on our Gary Works number 6 blast furnace, which was originally scheduled for early next year.

We anticipate Flat-Rolled segment costs will improve due to lower coke costs, as most of the higher priced coke we purchased earlier in the year has been recognized in our cost.

For full-year 2004, Flat-Rolled shipments are expected to be 15.8 million tons.

For U.S.

Steel Europe, we expect higher profit margins, as higher prices will be partially offset by increasing raw material and natural gas costs.

Fourth quarter shipments are expected to increase by approximately 150,000 tons, compared to third quarter levels, and shipments for full-year 2004 are now estimated at 5.1 million tons.

We intend to invest approximately $38 million in a project aimed at restarting a second blast furnace in Serbia.

Upon completion mid next year, our Serbian operations will operate near rated capacity of 2.2 million metric tons, essentially double current operating levels, providing year-over-year unit growth well into 2006.

As many of you know, Slovakia and much of central Europe is rapidly becoming the automotive center in Europe.

As a result, a number of global automotive companies have built or are building assembly facilities in Slovakia and surrounding countries.

Our central European operations are in a terrific position to surf this burgeoning market and consistent with our strategy to grow our value-added business, we're currently evaluating construction of an automotive [audio difficulties] hot-dipped galvanizing line to be built in this region.

We also expect continued improvement for the Tubular Segment, due to strong demand with average prices reflecting the full realization of a series of price increases implemented in the third quarter, as well as additional fourth quarter price increases.

Tubular margins reflect stable costs for two grounds supplied by the Flat-Rolled segment, which are transferred at an annual price each year, based upon expected costs.

Full-year Tubular shipments are expected to be 1.1 million tons.

That concludes our prepared remarks, and at this time I'd like to open the call to questions.

Tom, please queue the line for questions.

Thank you. [OPERATOR INSTRUCTIONS] Our first question comes from the line of Mark Parr representing Key McDonald.

Please go ahead.

Thank you very much.

First of all, I just want to say congratulations on an excellent quarter.

Thanks, Mark.

Thank you, Mark.

The one question that was coming to mind first of all, here is on the retiree benefit expense, and, Nick, I was just wondering if you could go over again, you were trying to get through this quickly, and I appreciate that.

I also want to congratulate you on only a six-page earnings release.

Okay.

One of our strategic objectives, Mark.

But could you go through the retiree expense, you know, the part that goes into SG&A cost of sales, then you've got the other part that you separately line item, and more importantly, what's the outlook for the fourth quarter and next year for this expense given the prepayments that you're making into the pension funds?

Okay, Mark.

We had $89 million of defined benefit and multi-employer pension and OPEB costs for the quarter, it's a P & L piece.

Then we also made $66 million worth of cash payments related to the retiree healthcare costs.

With regard to 2005, Mark, we will have to measure all that at the end of the year.

That's really when we do our remeasurement.

And it's probably -- we will be helped by the funding level of the plan, but right now, if we took a snapshot today, the discount rates have actually come down some from our year-end measurement so that could have an offsetting effect as far as expense goes.

We would just have to take a look at it where we are at the end of the year, and we will probably in our fourth quarter call give you some guidance on what we would expect that to be for the full year.

Any guidance could you give us on the fourth quarter given the prepayments that you've made?

That's really not going to change substantially because of the investments in the fund, Mark.

Okay.

Pretty comparable to the third quarter.

Yeah, when the 10-Q gets filed, Mark, it will have the third quarter detail on all this and under the new expanded disclosure regime and it will show sort of the normal plan expense typically as fairly stable throughout the year.

The one thing that will vary will be some of the profit-based payments for former national retirees similar to other companies that you observed, and that will go according to how the profits go.

If I could just ask one follow-up question, with the additional consolidation of the steel industry that's occurred here recently, I'm assuming this all concludes, what are the implications for negotiating leverage for U.S.

Steel as far as their contract business is concerned, and would you expect that this formation of matal [ph] steel could actually help your negotiating position with the automotive producers here in the fourth quarter?

Yeah, Mark, this is John.

It's really premature for to us say much about that situation at all.

All I know is what I've read in the couple of releases and really haven't seen much commentary yet on it.

Observe what they lay out as the timetable, and I assume it goes along that direction, contingencies, et cetera, so really too soon for to us comment on it in any form and really too soon for to us comment on how it might affect us, if at all.

The only thing I would say is that, as we go through any kind of commercial activity, we always, and everybody involved, always takes all the information at hand in going through that process in negotiating and reaching a commercial conclusion.

I'm sure we'll do that here too, just as we've done before.

Thank you very much.

Our next question is from the line of Brett Levy with Jeffreries.

Please go ahead.

Can you talk a little bit about where you guys are on your contract negotiations?

There's been some discussions away from you related to sort of whether or not to take more or less in the way of contract as a proportion of total business for 2005.

And also, about bringing some of the 2006 and earlier -- and, I'm sorry, later maturing contracts in a bit in order to secure more attractive pricing for 2005.

Can you give a little -- and the last one is obviously something with a price adjuster for raw material cost.

Can you talk a little bit about what your strategies are and what you're hearing out there in the market?

Sure, I'll give you some commentary, Brett, this is John Surma again.

Some of this, of course, gets into individual customer matters and proprietary issues of strategy, so I don't want to go there.

But just in general, our commercial balance is in a position where we like it.

We have about half of our businesses contract and when we say contract, we mean with meaningful determinations on volume and price that both parties expect to adhere to over time.

And then maybe another 20% or so of that would be intermediate kind of contract business that might be for a shorter duration but also have some meaningful determinations on value and quantity.

Then the rest would be spot 30%.

They may vary by a few percentage points here and there, but in general, we think that overall balance will serve us well across the business cycle and we're not -- and it fits our facilities well -- we're not looking to make a dramatic change in that balance right now.

We kind of like it where it is.

We are going through negotiations for some of our contract business that's up for negotiation this year, and all of it is, and certainly the spot and intermediate business of course is turning over more quickly.

We will, from time to time, engage in conversations with customers if it's in their interest and ours to bring forward negotiations which may take place later.

Some of that's already gone on, and we have improved our commercial position, not just in pricing, but also in terms, in inventory quantities, in delivery specifics, in processing, and in administration cost.

A lot of things that I think in this kind of a market we can do a little bit better on so we're just trying to make sure that the market gives us what the market will provide.

So in general, I think the contract negotiations have gone on fine.

Some we have concluded, some we haven't, some will take a little bit longer, perhaps, but in general, we think the supply/demand balance favors us a little bit in this discussion and we will want to go through it thoughtfully and in a way that maximizes the value for our position.

One other sort of macro question.

Obviously there was a much greater disparity between prices in Europe and prices in the United States.

Recent surge in imports seems to have -- and declined in the U.S. -- but I think seems to have addressed that a little bit.

Can you guys talk about what you see for the spot market, kind of going through the fourth quarter and into 2005?

Sure.

Both in Europe and in the U.S.

Right.

The differential between North America and northern European spot prices was quite wide through the last quarter.

One way that's narrowed a bit is because prices have moved up quite nicely in Europe, including by us, so we find that to be a good way to narrow that gap and we've moved prices in Europe pretty smartly, including an increase effective October 1st that seems to be working just fine.

And we have seen, as I think our release indicates, some flattening of peak spot prices.

Not that we always sold a whole lot at peak spot prices but some flattening of that.

Quite frankly that's a fairly seasonal and somewhat expected activity.

I saw some statistics recently in an industry publication that said that over the last, I forget the time series, five or six years, if you took total U.S.A. flat product shipments, they would round out to 25% in the first quarter, 30% in the second quarter, 25% in the third quarter, and 20% in the fourth quarter, and that seems to be a pretty stable pattern.

So some seasonal reductions in demand in the fourth quarter for lots of reasons.

Inventory management some of the larger manufacturers slow their build schedules.

Those are fairly commonplace and we're certainly seeing that now.

I think either Gretchen's comments or Nick's indicated we do have some optimism for the longer term pricing environment, supply/demand balance.

Just one anecdote I'd offer is with respect to imports which have increased certainly to balance the market recently, for those that are currently being offered, again, this is anecdotal, for what we see for offer for delivery, probably now sometime well out into February and March, in somewhat more measured quantities and at prices higher than that delivered at into the U.S., in the fourth quarter so we think that probably implies some strength for the first quarter, but that's anecdotal and not so much a prediction, just an observation

Last question.

You also talked about coke prices kind of moving favorably for you.

I assume that it's down, although I'd also note that you guys are net long coke, and so can you explain why that's positive for you?

What I think we said was our coke cost will be down.

I believe that's how we said it.

So for net coal?

No, our net coke costs will be down and that's because we will have consumed, through the end of the third quarter, a good bit of the higher priced commercial coke that we had to buy to cover our position, and as we move through the fourth quarter, most of that has now been consumed and our average cost of coke into our furnaces in the fourth quarter will be somewhat below what it was in the fourth quarter.

Our position will improve further next year, that is, virtually all of our commercial sales contracts roll off and our need to buy coke on the spot market or in the trade market at somewhat higher prices is diminished to a very low level.

Thanks very much, guys.

Good quarter.

Our next question is from the line of Mark Parr representing Key McDonald.

Please go ahead.

Oh, yeah, thanks again.

Just wondering, looking at scheduled maintenance costs in '04, in light of what you anticipate for '05, including the amount on the number 13 furnace you plan to expense, could you contrast those two numbers for us, please?

Gee, Mark, that's really hard to do until we get a little more definition on what sort of outage plan we'll have for next year, but those things are based upon what we see and what we think we have to do and what we think we want to do based on market conditions, et cetera.

We've done a good bit of work, as you know, this year, and we have some more scheduled in the current quarter.

We've already done a small job on a furnace in Mon Valley and we have another job we'll work on in Gary, also some work we're going to do at Great Lakes.

Traditionally, in the fourth quarter we do a good bit of finishing activity, finishing in outages that are just there because that's the best time to do them commercially.

We do have a very large project, as you know, slotted into I think more or less the second half of the next year although the exact time hasn't been fixed, on number 13 blast furnace.

That's a pretty big job.

There will be certainly some expense costs with that.

Whether that will be more or less than the total this year, Mark, until we go through the redetailed plan, it's hard for me to say.

We're working on getting engineering stuff done now.

It would be very logical for to us target a job of that size around the time of the annual outages in July, but it's going to take longer than that.

But whether a cost piece of that one big job, and there will be some other small jobs next year, is in total more or less than the accumulation of the cost pieces of the three or four or five smaller blast furnace projects this year, I honestly don't know that.

Okay.

Thanks.

One other question, if I could.

Just looking at, you know, some of the volatility in the group that we've seen recently, and it just -- it looks as if one of your -- or another participant in the group recently has announced a share repurchase and an increase in their dividend.

It seems like there was a very positive market reaction to that announcement today, and I was wondering to what extent you might view appropriate conditions to consider raising the dividend and/or authorizing a share repurchase plan.

We certainly look at that very intently with our Board and thoroughly examine all the different options in front of us.

I think as Gretchen mentioned and as the earnings release does mention, we have some pretty heavy work on the balance sheet to do yet this year.

Some we have already done, some planned this year with early extinguishment of the debt to Slovakia for 270 million or whatever the number is, and as Gretchen pointed out we have some additional authorization on employee benefit plan funding that we might be about sooner rather than later.

When you add that all up, that's a pretty substantial improvement in our financial position which we think is necessary to drive value in the longer term and we look at it every quarter from a shareholder specific standpoint and I can assure you that we'll do that again with our Board very thoroughly in the first quarter.

Thanks.

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

Please go ahead.

Hi, good afternoon.

Hi, Bruce.

Was just wondering, on the contracts, I think I had in my notes around 30% of your contracts are coming up for the end of this year.

I know one of your competitors talked about some of the longer term deals given where prices are, but they did double the amount of contract business that was up for renewal and they set that amount up for '05, meaning they kind of took, in your example, 30% and recut it.

So 60% of their business was rolled over into a new one-year contract for '05.

Have you guys been moving in that direction?

Thought about that?

Done any of that?

Is there likely to be more than 30% of your business that comes up at the end of the year, or forced that to come up.

Two different things there, Bruce.

One is we might get involved in discussions with customers whose contracts aren't up for renewal by their terms, and the answer that that is yes, we already have done some of that during the course of the year, and we may do some now.

One of the reasons of course is that there are some customers who value the kind of service and quality that we have to offer and want to establish a more stable supply position with us because they've got increasing business and they find us to be a good place to do business with, and we're always interested in increasing our volume.

But we may also want to talk about other issues about the total package.

So I'd just say that's about as far as I want to go, but we've had those kind of discussions, some of which are concluded, others of which we'll get into later.

Now the second question I think you raised and might have been raised earlier is about the way we're going about doing some pricing and might there be new mechanisms that are a play off the scrap surcharge and might there be some kind of pricing structures that allow both parties to have a little bit more concrete understanding of what's going to happen as indexes move up and down.

The answer to that is yes also.

I think in this market it's very possible that we'll begin to get into some different pricing mechanisms that some of our customers and we would both find attractive around maybe some shorter terms and volumes that we would feel comfortable in pricing on kind of an index method.

Those are all things that are under discussion.

I really don't want to get into much specifics because it's just not fair for the customers or for us that are working on them, I don't want to get much more specific than that, but the answer to those questions are yes and yes.

Okay.

And then I don't know if there's anything else you want to say, care to say on the M&A front, in terms of where you guys sit in terms of what happened yesterday.

What are your thoughts, or how important is it, are you going to get together, are you happy to go alone?

Any other thoughts on that?

Well, not really, Bruce.

We're just observing what was announced yesterday and trying to digest it all.

We -- we're a good sized Company.

We have worldwide capability on the order of 27 million tons, whether that's five or six or seven in the world we think we're a substantial Company and that we can provide excellent returns over the long term in our current configuration.

Having said that, we think we've also demonstrated we know how to make good value out of adding assets at the right price to fit into our structure well.

We've done that successfully and we would do it again.

There are some assets that we're interested in in places around the world.

Be they raw materials or steel assets or something in between, we continue to be interested, but only on the basis that it makes sense, adds value, is accretive, all of the things we promised before to deliver on, we'd want to promise and deliver on again.

And lastly, any other thoughts on use of cash?

You mentioned about your employee benefit program, but beyond that, what are the more likely candidates?

I guess you pay down the Slovakia debt.

In the near term, I think the major uses would be the debt reduction, which when coupled with what we did earlier in the year, as Gretchen points out, will be a substantial reduction in debt over the course of the year, not quite $600 million from the beginning of the year, then some continued employee benefit funding both on pension side and perhaps, on our retiree healthcare side.

And we do have a somewhat higher capital budget in front of us for the rest of this year and into next year largely reflecting some of these sort of lumpier blast furnace projects that we need to get done and we think those are pretty good return projects the way the value of metal is these days.

We think that making iron in North America in the blast furnace with our own iron pellet production capacity in Minnesota is a pretty good value investment and that's one we're going to make.

That's a pretty big use of cash.

Those three things will use a good bit of cash but we intend to have cash flow beyond that, and as I said, we'll look at that every the quarter.

Thanks, guys.

Our next question is from the line of Robert Lagaipa with CIBC World Markets.

Go ahead.

Thanks.

Just had a couple of questions.

One, I was hoping maybe could you outline your progress in terms of the raw materials exposure in Europe, and also you had mentioned that there's a greater presence of the auto companies in central and eastern Europe.

Do you have a target contract percentage there and, you know, what's your progress there as well?

Let me take the last question first on central Europe.

No real target there in terms of our spot contract.

I mean, In Europe in general, central Europe for us, both in Slovakia and Serbia, we're still a basic end producer, heavy hot roll, heavy spot.

We've improved our slate in Slovakia with some tin expansions, with dynamo expansions, bringing our tin line up in Serbia to full capability will help us but there's plenty of room to run out the product slate and do some higher value products and we've talked about on and off in the last year or two about what to do in Slovakia.

We think there's an opportunity perhaps for construction galvanizing there.

We'll continue to look at that because that's a commodity which is in pretty good demand in central Europe as a growing infrastructure but with Slovakia really having automobile production assembly as one of their economic development pillars, we now see Hyundai announcing a plan in Central Slovakia quite near to where we are in [audio difficulties] western Slovakia, Volkswagen already there.

The opportunity to supply a high value galvanized product to the auto industry is very tempting and we're in the process of looking at an overall view of the feasibility of such a line, may well be that's something we get to sooner rather than later.

That may well be one of the higher opportunities for us as we look to round out our product mix in Slovakia, so long answer, but we like auto galvanizing in central Europe and Slovakia and it may well be something we get into fairly soon.

On the raw material side, we really haven't made any structural changes yet.

We continue to-- I guess I would describe it as prospecting, having conversations with a number of different parties in different countries, Check Republic, Poland, Ukraine, Russia, Bosnia, on the coke production side and really trying to explore all the alternatives to improve our position which could be anywhere from shipping material from North America where we might have some excess, to Europe, to taking direct equity positions and then everything in between, contracts and otherwise.

So we really haven't had any structural changes yet but that's something that's very high on our priority list.

Terrific.

One last question, if I could.

Just in terms of the spot business and kind of what you're seeing in the overall market in North America, if you strip out seasonality, are you still in controlled order entry or allocation, you know, for the fourth quarter?

What are your order books look like?

Again, if you strip out the seasonality.

It's hard for to us strip out the seasonality because some of the material flows back and forth across markets depending on what is the hotter of the markets.

In the order book is -- you really have to look at it by market, and I don't want to get too specific, but there would be some end-used markets that are still pretty healthy and still exhibiting pretty good demand over the quarter, as far out as we can look, even in the first quarter.

Other segments that would be more in the distribution, the more general kinds of industrial product lines that because of seasonality and typical end of year inventory management have shown less.

How much of that, Bob, is seasonal versus real differences in end-used consumption, it's awfully hard for us to say.

John, maybe if you could give us a little bit more color in terms of the end markets that you see that are stronger than others, and also maybe the products that are stronger than others?

Just in general, I would say that the -- some of the stronger markets would be the OEM kind of end-user markets, the auto production, given where they are in their build schedules they're, I think, taking product along the lines of what they told us they would, so that's been a pretty good market for us.

Some of the container markets are pretty good.

The distribution service center, converter markets, where we would see, you know, greater opportunity for import penetration, that's where more of the softness would be and I think that's what's been pretty well documented throughout the last couple of weeks.

Again, how much is seasonal versus other factors, impossible to tell.

Terrific.

Thanks, I appreciate it John.

Our next question is from the line of Michael Lukac [ph] with Appaloosa Management.

Please go ahead.

Congratulations on the quarter.

Thanks, Mike.

I just wanted to focus a little more, question in terms of stock buyback and talking about separation to your balance sheet, I'm trying to figure out here actually what [audio difficulties] needs to be made.

Seems like you guys are around 500 million net debt now, and you generate $700 million in cash in the quarter, even if you spend 40 million in CapEx, [audio difficulties] what else you to have do to the balance sheet before you start buying back stock.

Mike, you know, I guess we have a better net debt position than we do.

We also have much larger unfunded employee obligations than we like.

And so we're working hard on doing that, and we've made some substantial progress on that this year.

We'll make some more later on, and we probably have some more to do.

And I think John stated it pretty well, that, you know, we're making a significant effort to reduce some debt.

Like to reduce some more, if we could, but we're pretty well, you know, locked up from a call standpoint on our outstanding debt so, you know, that probably puts focus more on some of our employee benefit obligations, the large portion which remains unfunded.

So we have a fair amount of balance sheet work to do.

We do consider more direct opportunities for shareholders every quarter and we'll keep doing that.

Are you speaking about funding the OPEB liability on your balance sheet?

Yeah, that as well, and we have made additional funding to our pension plan.

Okay.

I guess I just wanted to address contract pricing, too.

Can you help us quantify exactly in terms of how many tons, 50% of your tons is coming up as possibly 8 million tons on contract in the Flat-Rolled business.

How much are being repriced?

Is it 33%?

That's a number floating around in the past.

Somewhere -- I guess like in the 3 million ton range?

Mike, I'm not sure if that's the exact number, and how much it's going to get repriced or is going to be dealt with or is going to have tonnage added on, is going to have terms changed, I don't want to get too specific because quite frankly, that's proprietary and it's going to tell my competition things I don't want them to know, so I have to be very honest about it.

It's certainly, of our total contract business, it's not half, it's less than half.

It will probably get addressed specifically in terms of having to be renegotiated, but how many of those 8 million tons - that's roughly half our total Flat-Rolled shipments in North American, have some kind effect because of changes we're making of one kind or another, it may well be more than whether it's specifically pricing or not, so that's I know not a real direct answer but I'm reluctant to get into specifics because I'm not really sure I want the rest of the world to know exactly what we're doing.

Okay.

I also wanted to ask one more thing.

You guys have made a bunch of funding [audio difficulties].

What is the current number? 500 for underfunded pension?

What is the OPEB?

Those two line items.

Mike, they're basically, for accounting purposes, get measured once a year unless there's some event that causes to you remeasure it.

So it was about the unfunded balance, Nick, of the two together, at the end of the last year, it was about $2.5 million.

You view the OPEB as the same thing as an underfunded pension?

Well, it's a little bit different in this regard, Mike.

One, the pension fund is an ERISA-mandated funded vehicle, so you've got, you know, you've got legal requirements for funding that, and you need to be pretty careful about it, and on the OPEB side there isn't anything other than maybe a union contractual arrangement that dictates when you're required to fund.

So you have a little more flexibility there.

Having said that, it is an obligation.

The rating agencies look at it as debt.

They tell us that rather directly.

And while you would never want to get into funding 100% of it, it is an obligation that we look at funding over time, and our particular union agreement gives us some flexibility if we do fund it because we have the ability to maybe reimburse ourselves in the future should we need that.

So we look at that and the pension fund, I would say the pension fund is something the Company should give priority to because it is ERISA mandated.

We agree that the pension fund is something that should definitely be given priority to.

When you pay off that OPEB, you lose an option so you really decrease shareholder value by paying off that OPEB.

Well, David, I think that's what I was trying to explain, we do have a little bit more flexibility.

We view paying off that OPEB as taking away an option and it really does decrease shareholder value to pay off that OPEB.

So we view it as a negative to shareholder value.

You may be trying to make the rating agencies happy, but, geez, you almost have no debt, so I kind of think it's time for the shareholders here.

To pay off that OPEB, versus buying back shares, I have no disagreement about the pension, no disagreement about the debt, but to take an option away from the Company and to reduce shareholder value by taking that option away does just not make sense for the shareholders.

I guess I would just argue just a bit with you, David, that we have not given our agreement and our ability to at least reimburse ourselves for funds from the [audio difficulties] in the future should we need to, it's not exactly like taking an option away.

It is not exactly, but it kind of is, and you cannot take options-- when you take optionality away from this Company, you take value away from this Company.

So I can't strongly enough say that.

I don't want to belabor it.

We appreciate your point of view.

We got your opinion, David.

All right, thanks.

Our next question is from the line of Michelle Applebaum with Michelle Appelbaum Research.

Please go ahead.

In terms of other CapEx, I mean, I see all the debt pay down and the OPEB, we can see that there's pretty straightforward use of capital.

But I'm wondering, in terms of when you get to the point where you will have a little bit greater free cash, can we talk about it, is there -- I never thought I would say this out loud so sit down, but is there a possibility to expand mentax [ph]?

We really have, as you know, two properties up there and we're doing what I would describe now as sort of modest debottlenecking.

We have to do some environmental work, and when we do that we'll get a little capacity increase but in terms of a big hit, add a new line, that's a fairly significant undertaking.

We're beginning to take a look at that Michelle, but it's not an easy thing to do, one that might take some time.

We haven't really thought seriously about it yet, but it's at the point where we might want to do that.

Looking again, we might be talking about mid '05, maybe even '06 events, as you look around the landscape at the domestic market, I know you had a bid for Rouge.

Are there potentially domestic steel-making acquisitions that you guys could do if the price was there or would you be concerned, that given the success in the industry, Justice, Antitrust might become a bigger issue for you to expand domestically?

I don't know, Michelle.

That's a real riddle.

I think it's a good question.

I think the assets are available, you know those as well as we do, the assets that are there you know as well as we do, some in the U.S., some in Canada I guess that would be potential prospects.

If they were somehow involved in a way that we could get at it that would make financial sense and meet the kind of criteria that we've set for ourselves, I don't know that, per se, we would rule it out just because there's been some additional consolidation in the North American markets.

I think that would be something that we'd be willing to take a look at and to proceed on if it came to it.

So I wouldn't be so concerned about the progress in consolidation in North America that it's ruled out possibilities for to us do additional asset acquisitions in this market.

But valuations might be a consideration?

Sure.

Okay.

Just asking for a little bit of expansion on this, Serbian expansion, are you just going to be buying spot market raw materials?

Are you going to make contractual arrangements?

It's been a problem for you there as it is, and now you're going to be making twice as much steel.

It has.

That's a good question.

Remember, we were really bringing the plant up to some semblance of full production on a one-furnace operation earlier in the year at probably the worst possible time, from a raw material standpoint.

This plant had been operating on a barter basis under the Milosovic regime for the last decade, and we were really having to compete into a white-hot raw materials market worldwide with no established position, so it was very difficult.

I think our position now is a little bit more well established.

We're now trying to do some acquisition of materials together with what we're buying for use in Kosice and we also have the opportunity to move material from North America to Serbia.

On the Danube we can get to it a little bit easier from a water move standpoint, doing some work on expanding the river landings there, the materials handling equipment, so I think we'll continue to have cost pressure from raw materials.

It's one of our most important issues in Serbia.

I would just say that as time has gone on and our position has become more well established, we are a little bit more confident we can get raw materials in at competitive prices.

They're probably going to be high, but competitive.

One more question.

Quick one.

Can you give us update on what the status of IPO of the Tubular business might be?

With respect to Tubular, I think Tom mentioned that last quarter, an IPO you mention is sort of one possibility, I suppose, but the only thing I'd say there is our focus strategically has been on our Flat-Rolled business, both in North American markets and in Europe.

The Tubular business is a terrific business.

The results, as you can see, are really moving well with the price moves.

Some of our interests, when we talked about that two years ago, or four years ago, was probably motivated more by raising cash, and that's less of a concern at the moment.

I think our issue now is to do two things, if we could find a way to improve the business.

It's a good business, but if there's a way to improve it, that would be good.

If there's a way to improve the value that flows to our shareholders from it that would be better.

So those are really our two things we're aiming at.

Who knows what form it may take.

Maybe none if nothing would turn up but I think we'll consider a lot of alternatives but it's really those two things, perhaps improving the business.

It's a good business, but making it better.

And then finding a way to get value to shareholders would be our second alternative.

Thank you.

Thank you, Michelle.

Our next question is from the line of John [inaudible - microphone inaccessible] with Prudential.

Please go ahead.

Hi, John.

Congratulations on all the results and all the money.

Thank you.

Some of our firms might have internal guidance for oil, gas, coal prices, or we might have our own views of scrap.

Could you break out what the change in costs were by component so we could try to make our own adjustments?

And can you also repeat when the Gary 13 furnace reline will extend through next year?

Let me sort of take those in reverse order.

I'll let you, Nick, start to think about how to handle the first question, but on the outage for the 13 blast furnace we're not set necessarily on the schedule for that just yet.

It's a long outage, it's probably a three-month, 100-day, kind of something in that range.

And it will be, as I said, in the second half of the year.

It might be as early as July, as late as August, somewhere in there, depending on when it seems to fit the market the best, and also depending on staging material and getting contractors ready, a lot of factors have to go into all that, but 90 to 100 days, sometime in the latter half of the year.

July, August would be about as specific as we can get at this point.

Then on the materials cost, I'll turn it to Nick in a second.

I'd just say in general, John, you know the factors on how much material goes into a ton of finished steel, and you know what our scrap position is and what our scrap exposure is and what the scrap market has done so I'll turn it to Nick, but I think it's largely a mathematical calculation.

Nick, Gretchen, you guys may want to comment further.

Right, John, I think you can look at -- start with scrap, we talk about anywhere from 15 to 25% of our overall melt is made up of scrap.

Of that amount, we purchase about 60% on the open market and we consume about 40% of that internal-- or generate that from internal means, things such as natural gas, we're one of the largest consumers in North America of natural gas.

We consume about four and a half BTU's per ton of steel and for the most part, we're going to be taking the spot market on that.

We're exposed to swings in the spot market.

When it comes to things like coal and coke I think we've been through in quite a bit of detail on our exposure on the coke side.

I'm not sure if there's anything --.

on coal we're buying 10 or 12 million tons of coal, including pci, that's 12 per year.

That's three million tons a quarter.

If you just observe what the curve is on reported spot increases for met coal, and you use that on those numbers, you'd probably be close to what the effect was for us for the quarter.

There's probably some effects on LIFO but in general we'd be exposed to that kind of level.

On iron, we're just dead flat, cost about same as last year, so no real effect.

There's been a good bit of cost increase on some of the alloys and for manganese [ph], lime.

Virtually everything costs more this year than last year.

What's your view of the LIFO charge year-to-date and in the third quarter?

We don't -- go ahead, Gretchen.

You know, LIFO is just one of those things.

I don't know that it makes a whole lot of sense to worry about it quarter-to-quarter.

Ultimately ,we've had probably a higher adjustments in the third quarter this year than we did last year, as higher cost material that we bought at the beginning of the year earlier in the year on coke is flushed its way through.

But, you know, we have a fairly complicated formula based on forecast and what have you, so I don't know that it's particularly useful really to talk about it on a quarter-to-quarter basis.

Every other metals company discloses their LIFO item.

I guess from our point of view, John, implying that earnings prior to a LIFO adjustment has some meaning, we don't agree with, and at least in our particular shop, and we've been on LIFO since 1943, so we've been doing it longer than most.

And we have a number of pools and it's a fairly established process, but any individual number we might throw out to imply that our results but for that would have been this we don't think is useful information for those that are listening to it to have, and honestly I'm not sure how we would do that because in our system there's cost adjustment, LIFO adjustments.

But in this kind of environment we have prices, costs going up, they tend to fluster the income statement, and in the period the costs go up, that's what LIFO is designed to do.

I'm not trying to be difficult about it, but I not sure -- I don't know the number to begin with.

[Inaudible - multiple speakers] That was a credit.

It was, in fact, a charge with all the rising materials items.

Oh, of course.

Does that answer your question?

Not completely, but they won't.

Thank you.

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

Please go ahead.

Good afternoon.

Hi, Aldo.

Couple of quick questions on volume.

Can you say when the furnace in Serbia will start in '05?

Mid-year.

We're targeting mid-year, Aldo, and then we can't get more specific on it because we're in the process of ordering refractories and a lot of control stuff we need to have there, and doing work on raw materials for every system, so somewhere around mid-year, maybe it will be a bit earlier, maybe a bit later, but I would say mid-year is about as specific as we can get right now.

And then if you switch to the domestic side I know you lost some volume with Granite City being out and now that's coming back.

I know there's a repair moved up into Gary which might be offsetting.

I'm wondering, if it is offsetting, if could you tell us roughly how much volume is coming back on from Granite City and that would be fine.

I'm just trying to get a feeling for what might be the volume that can be, you know, capped.

Yeah, I think probably up slightly from a production standpoint.

Our shipments are up a bit, 15.8 million tons, we were at 11.9 through year-to-date, so 15.8.

You know, that gives you about 3.9 for the fourth quarter on Flat-Rolled, which would be our -- the biggest effect.

So not too much.

We're doing a little better there.

The outages that we have, we said that it's comparable with the third quarter because from a cost standpoint, frankly the work that we tend to do in the fourth quarter this year has a higher cost component than the stuff we were doing in the third quarter had so there's maybe less operating inefficiencies but it's more cost related out-of-pocket so we don't think there's going to be a huge change quarter-to-quarter because of this outage -- these outages in the fourth quarter versus the outages in the third quarter.

So raw steel shipments will be up a little bit in the fourth versus third at the end of the day.

Right.

Then you expect another increase in the first quarter, probably, is the Granite City get -- as Gary gets back?

As Gary gets back.

I think our configuration ought to be running pretty close to full tilt at the first quarter so we ought to have -- unless things change, a pretty good quarter.

We have maybe one or two small things, I think one in Fairfield perhaps, that we do either in January or December depending on the year.

Maybe a little bit later in February, but in general we would probably see the first quarter running close to full capacity.

Great.

Do you have any estimate on how much your coal costs might change in the fourth quarter versus third?

No.

Again, it depends a lot on -- if you just look at coke cost period it depends on when it flushes through the system and what our inventories are which does get into LIFO.

I'm reluctant to get too precise but it's less than $100 million.

Not anything bigger than that, of course Quite a bit less.

Then we're starting to see the effects of higher coal costs as they flow through our coke costs but that's a separate issue than the coke itself.

Okay.

Thank you very much.

Thank you, Aldo.

Our next question is from the line of Kim Nathaniels [ph] with UBS.

Please go ahead.

All my questions have been answered.

Thank you very much.

We'll go to the line of Charles Bradford with Bradford Research.

Your line is open.

Good afternoon.

Hi, Chuck.

One of your competitors north of the border apparently has lost their first quarter GM business due to a threatened strike.

Do you have the capability of picking up much other business?

Some, yes.

We've been in conversations with a number of customers about that.

Some capability but that's getting into specifics, Chuck.

I wouldn't want to go much further on, but, yes, we do have some opportunities.

Can you talk about how much your natural gas costs have increased?

Or are increasing at the current rate, because apparently the price of gas has really picked up recently.

It has.

We give a number that we -- we use 80 million mmbtu a year or something like that, so a dollar to us is $80 million, and whenever the strip goes up, the cost does.

We do some price management during the winter months but not in a way that's enough to stem that kind of a move.

My next question was going to be, have you done any hedging?

Some.

We do some price management but not enough to take away the sting of a move that size.

Thank you.

Thank you.

Our next question is from the line of Daniel Rouling [ph] with Merrill Lynch.

Please go ahead.

Going back to the Tubular business if we may, I appreciated your answer on your motivation a few years ago on possibly raising cash but could you give us a little more depth on what's going on in Tubular today?

What's your utilization rate, and what's your order book look like with 50 plus gas, one would expect to see more out of this segment.

Actually, the results have, you know, rebounded pretty substantially, but it reflects really what's going on in the market, and if you observe what the drilling rig utilization rate is, that's a pretty good proxy for how busy people are.

We're running pretty close to capacity in Fairfield, pretty close to capacity in Lorane.

Our limitations in some cases are steel.

We're allowing our Tubular and Flat-Rolled businesses in Fairfield to compete for the incremental heat and we do that sort of on an L P model every week or every month to see who should get the last ton of steel and Tubular has been doing quite nicely.

So I think we're running close to as hard as we can run in Fairfield.

Lorain, where we don't have a cap with steel supply, we are using steel from a variety of sources and we've probably had less steel than we would have liked to have had to capitalize on the market fully so I think the business is going -- is earning the way it should given the market dynamics we have in front of us.

We haven't, though, seen the complete rebound of the deep gulf drilling where you're going to get a couple of rigs that drill up 24 slots at a time.

That's a seamless product, the best in the marketplace that we make.

We're doing well but if we saw that kind of deep gulf drilling rebound again, that's where we would really hit our stride.

Nick, do you have the drilling rate right handy?

I don't have it in front of me.

It's moved up but not as smartly as you expect given liquid prices of 50.

If that's your point we agree with you.

That is the point.

The other point is the quality of what you're making, which you just addressed, seamless and real deep in the Gulf, that's still yet to come maybe.

We've seen some of it but not in a way that would play to our strengths yet.

We'd like to see more, let me put it that way.

Thank you.

Thank you.

Our next question is from the line of Kegler [ph] [inaudible - microphone inaccessible] with Credit Suisse First Boston.

Please go ahead.

How are you doing?

I had a question related to actually the European business.

I'm trying to figure out, you know, basically I'm looking at the volume momentum versus pricing momentum and at the same time I cannot tie it to the margins.

In other words, I'm trying to find out how much of the margin improvement, how much of the operating income improvement came from post reduction as opposed to just the shipments and price realizations from Europe because most of the momentum this quarter I think came from Europe in terms of the secondary impact.

Quarter-over-quarter change, most of it came from Europe.

But I would say on the European side most of it came on the price side with some offset for increased raw materials cost, and gas costs.

But I would say most of the quarter-to-quarter improvement in Europe was price related.

If you look at the quarter overall for the group expenses, how much of the cost reductions -- can you quantify the cost reduction for this quarter, and also how much of that would be from Europe as opposed to domestic Flat-Rolled or Tubular business?

I think this quarter versus prior quarter, if that's the frame of reference, most of the big cost reductions in North America from the labor contract and the acquisition synergies, a lot of those were in the cost base, either at the beginning of or during the second quarter, so I don't think there would be as big a difference in the North American cost base on our control over cost.

Second or third, I think we probably have some improvements but it would be in the dollars per ton as opposed to 20 or 30 or 40 that we had compared to last year.

And in Europe I would say it would be about the same thing.

We've had some modest cost reduction programs that are $8 or $10 a time.

Those are trickling in through the year as they always have but I think they been overshadowed by the dramatic price movements and then by the dramatic but less consequential raw materials increases.

Should we interpret the outlook for Europe as more margin improvements in Q4?

Yes, we've said that.

Okay.

We see strong margins continuing in Europe in the fourth quarter and depending on how it plays out, may well increase.

Thank you very much.

Thank you.

Our next question is from the line of Wayne Atwall with Morgan Stanley.

Please go ahead.

Thank you.

I know you talked a little bit about your iron ore expansion.

Could you put number on how much you might be able to get your iron ore volume up?

Would you consider a major expansion?

God forbid, are you thinking about getting back into the coal business?

God has forbid us, we're not going to get back into the coal business.

No, as you know, Wayne, we didn't want to have the risk of mining.

We'll leave that to those that are professionals at it.

I think we are where we are there.

On the iron ore side, we're talking about small incremental things that are not going to be meaningful or noticeable in our total production.

If we're going to make 21 million tons, maybe we'd make 21 and a quarter, or 21 and a half, or somewhere in that range, but it's not going to be a big change.

For a major change whether its 5 million ton a year, something like that, that really hasn't entered our consciousness.

That's a lot of money, a lot of planning, a lot of permitting, so we're not near anywhere anything like that yet.

Okay, and I know we've sort of beat this subject to death but there's a lot of M&A thinking.

You've done very well in central Europe.

Is there another area?

The CIS?

Any other area in the world you might think about going in and sort of duplicating what you've done in central Europe?

Sort of de novo, probably not.

Just a couple comments, moving east in Europe towards eastern Europe, former Soviet states, CIS, those are territories that we know and we buy things from and sell into, so we don't see that as there's an opportunity to become involved in a materials position or a company that was involved in steel production and raw materials.

We wouldn't see that as so much a new territory.

It's an area that we think we know a little bit about.

We would still proceed carefully with all the right structure, but it would be something we would feel as still sort of a home field for us.

We might further on down the line see that something in South or Central America would be interesting, a lot of investment there, or at least investment announcements, but that's just an idea, that's not something we're pursuing in any way.

We see a lot of announcements about things going on in Asia, largely in China, some in India.

We don't have any position there yet and we probably have other things to do before we get there.

We would still certainly consider that.

As I've said before many times, whether it's a joint venture, something around customer application, auto, whatever it might be, but we don't see those as imperatives or the kind of blockbuster thing that we saw just recently.

Thank you.

Thank you, Wayne.

Our next question is from the line of Scott [inaudible - microphone inaccessible ] with Coppler Research Cap.

If I could make some comments not just about this quarter, but if you look back over the last four or five quarters you and your team have done a great job in improving the U.S. operations, lowering costs, getting labor contracts, shutting straight line, expanding Europe, shoring up the balance sheet, prepaying pension, I mean you guys have had an amazing year, and yet if we look at the share price today, the Company has about a $5 billion enterprise value on run rate EBITDA of about $2.5 billion.

I would argue at two times that the Company's valuation is actually making an all-time low.

And it's a huge and obviously troubling disconnect for shareholders to see that, but I'm trying to figure out why that is.

I hear people are worried about the price of steel, but the price of steel was $300 at the start of the year or in December and even if the price went back to 600 or 550, the share price was higher at the end of last year than it is today.

So the only thing that I can come up with, John, is something that's been brought up on this call which is that there is a continued institutional aversion to having the surge in cash flow of the Company go back to the shareholders and there's, I guess, a perception or a taint that U.S.

Steel is just a one-way street, shareholders are just used for capital raising, then there's never a return of cap.

I'd really like to again address that issue in the context of the comment that Gretchen made that there's this boogie man of $2.5 billion of pension and OPEB which I think does a huge disservice, it scares shareholders and doesn't reflect reality.

Of the 2.5 billion, 230 million is pension as of the end of last year and you guys have funded a couple hundred million of that, so let's presume that number hasn't grown.

OPEB -- I'm not aware that you can actually pre-fund OPEB, nor would there be any reason to.

So I'm a little confused why the existence of OPEB, which is pay as you go, and you're paying at least a hundred million dollars this year for your current healthcare obligations, I don't know why that would prevent from you returning cash to shareholders.

So I'm just a little confused with how you see your obligation with regard to shareholder interest.

Sorry for the soapbox but I had to get it out.

You're gracious to share your thoughts with us.

As I said before, I appreciate your comments, and we listen to them carefully.

Let me just make a comment, and Gretchen may wish to as well.

First, technically speaking, we can fund our retiree healthcare for a union represented group which is the preponderance of our total balance sheet obligation.

We do have a collectively bargained plan that has a which is in effect a qualified plan, so we can take the tax deduction, sort of like pension fund if you think of it that way, that allows us current deduction and does allow the obligation to be reduced, and does, as Gretchen points out, though we still have the faculty of allowing us to withdraw those funds later, it does have a little different piece of value to it because we can contribute, get a did he deduction, take it back out if we need to, a little different maybe than you might see in other non-collectively bargained plans.

Now having said that, we didn't, I don't think, intend to imply that the conclusion Gretchen mentioned, or that I did as well that for this quarter's decision we decided to try to complete some activities on the balance sheet, and we'll look at it all again in the first quarter, that's a decision we look at every quarter and we'll revisit.

I can't explain why the market values us the way they do.

That's something that the market will have to explain, I guess, but my sense is that many other companies in our line of work with these kinds of strong earnings have seen their multiples compressed just like ours are, whether it's the same or more or less, I don't know, I'll leave that to the experts to tell us about, but we're going to try to work on the things that we can work on.

You have a pretty long list and as you can see, we tend to deliver on the stuff we said we would, but I hear loud and clear your comment and that of a few others on this call that this is something that we need to pay a lot of attention to, and we will.

I would just add, John, I do think it would go a long way to finally rectifying and giving you a fair valuation to announce a large share repurchase and say that some of that cash can go back to the shareholders because I think there's just a perception that the Company is just institutionally or chronically unwilling or unable to do that and your current financial reality reflects a great ability to return cash to shareholders, so I think it would go a long way to improving that final element of the U.S.

Steel story, which is getting your valuation in line.

Okay.

Thank you, Scott.

Appreciate it.

Next question is from the line of Aldo Mazzaferro with Goldman Sachs.

Please go ahead.

Just a quick follow-up.

Awhile back you had an agreement to study a possible acquisition with L&M, is that in Russia, I believe.

Ukraine, actually.

Yes.

Is that still in effect?

Anything to report on that?

No, that transaction that we were pursuing for a company called Krevastal [ph] was actually sold to another party, so, in effect, that took that joint venture off the boards.

Okay.

Thanks a lot.

Thank you, Aldo.

We'll go to the line of Michael with Appaloosa Management Steel Company.

I hear a number of analysts asking about possible acquisitions and I'm curious why street analysts think that this Company was trading at lower valuations than Russian steel companies, the lowest in the world should be buying any -- any other acquisition in the world versus their own stock.

So I'd like to ask ask the street analysts that question, how they can possibly ask that question.

Thanks a lot, guys.

We'll go to the line of Ken Silver with CRT Capital.

Please go ahead.

Just a follow-up on something that came up much earlier about contract prices.

Are you -- do you expect to have any sort of escalators for raw material prices in your '05 contracts?

We may well have some business we undertake that has some index related, whether it's scrap or some other index that would affect pricing over the course of the year.

That may well happen.

I don't want to get too specific.

But I think those kinds of conversations are underway, and I think that's a healthy conversation and one that we're in the process of pursuing.

Should we expect that to be the exception or the rule in '05?

It's really too early for me to tell.

I wouldn't expect that would be an extraordinarily large portion of our business.

I'd think it would tend to fit more in the intermediate kinds of contract arrangements we would have which are a smaller share, whether it's 15 or 20%, but it could well be meaningful but I would think it would be the majority or material piece.

Just to define, your intermediate is one year, long-term is like one to three years when you were talking earlier?

Yes, it's never that precise but intermediate I would think of between three months to nine months, maybe as long as a year, somewhere in that range.

Thank you.

You're welcome.

We'll go to the line of Andrew Cole with [inaudible - microphone inaccessible] Capital.

Please go ahead.

Could you tell me how much coke you bought in the quarter?

We talked about, Andrew, we talked, you know, in the first quarter call that we would have to buy somewhere in the neighborhood of 700,000 tons, some of which would have been bought earlier in the year.

Most of it was sort of already committed to in the second quarter.

We may have had the occasional boat show up and be unloaded during the course of the quarter but not much of that.

And as I said, most of it flowed through our costs in the third quarter, a little bit will flow through in the fourth quarter but most of that activity is done.

And that was domestically.

We probably had been buying for European operations.

Oh, I'm sorry, we buy for Europe, some for Slovakia, Serbia also.

What would the answer be for next year be in terms of how much coke you need to buy next year?

Well, in Europe we need to buy some to balance our position, in Slovakia, a fairly small amount, then we need to buy everything we'll burn up in Serb because we don't have any coke batteries there.

North America will be down to where we don't really need to buy very much.

We might bay a little bit of domestic coke where it makes some sense on transportation.

We might buy some for coal converting certain things here that we would want to be supplying but in terms of needing to for commercial positions to cover not very -- really not.

We're getting back to a balanced position.

Thank you.

Our next question is from the line of Frank Denouw with Adage Capital [ph].

Please go ahead

It's been answered.

Thanks, Frank.

We'll go to the line of Wayne Atwell with Morgan Stanley.

Please go ahead.

Thank you.

I hate to make this a dialogue between participants but to answer the question that was asked about why we're asking about acquisitions, we're trying to figure out what management plans to do.

We're not endorsing something.

We're just trying to inquire.

If you take a look at what your Company has done, you've bought equipment in Central Europe from national which has put you in the shape you're in today so we think we've done a wonderful job with your acquisitions buying assets when they were attractive and using your capital pretty well.

We happen to think the market underrates the shares and will rerate the shares higher, so don't confuse our questions with endorsement.

I just thought I'd make that comment.

Thanks, Wayne.

Thanks for both of the comments, actually.

Okay?

We have a question from the line of Jed Nisbaum [ph] with Redwood Capital.

At it regards to net coal, I know you sold your coal assets I guess last year.

Do you have any price protection on the -- with the supply agreement?

I think the supply agreement goes through '06.

Or are you going to be exposed to $100 net coal on all of your purchases next year, wherever contract rates end up being for next fiscal coal year?

Couple different points there.

We've actually sold off coal assets on and off for 20 years probably and the one we sold last year was just the last of the lot.

And in most of those cases as we sold them we did relieve ourselves of the risk of mining but did take back some contractual obligations so we could not have all the price risk of future prices.

And that's the case with the one we sold last year.

We do have a couple-year contract that runs through '06 or '07, whenever it is, I don't recall exactly.

We have some contracts that date from early mine sales that have prices more reflective of what prevailed two or three or four years ago than what prevails in the spot market today.

So our coal costs for next year will be a blend of some of the older priced contracts that are at in comparison very favor prices, some that are more at current prices and some that are reflective somewhere in between but over time we're going to be in the process of buying 12 million tons of coal a year to support our North American operations.

We're going to do it as smartly as we can, wisely as we can but we're going to be in that market, largely Appalachian, and whatever the price structures are there, they are.

We'll try to do it in a way as we have so far that we take positions over time that tends to average out and we'll try to buy wisely but we're going to be in the market for coal.

Can you just say how much coal you were buying this year at -- I guess really the question is for next year because that's when the big gap will be.

How much coal you will be exposed to, you know, the escalating prices on and how much will be locked in at lower rates, whether it's $55 or 45 but order of magnitude lower rates?

Yeah.

We already have all of our supply for next year locked up and I don't really have the absolute number of how much was older contracts or newer contracts.

It's going to be at a higher price though.

In total it's going to be at a higher price this year, and that's the reality of the market situation.

I don't have the exact blend between the two but the fact is our coal cost for next year will be higher and when we get into thinking about our outlook for next year we may talk about that more but that's really as far as I can go right now.

Mr. Harper, there are no other questions in queue at this time.

Please continue.

Thank you.

We'll talk to you next quarter.

Thank you all very much.

We appreciate you listening in.

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