美國鋼鐵 (X) 2005 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the U.S.

Steel conference call and webcast. [OPERATOR INSTRUCTIONS].

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

Please go ahead.

Thank you, John.

Good afternoon, everyone, and thank you for participating in United States Steel Corporation's 2005 second 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 I will provide some additional details for the second quarter; and then Gretchen Haggerty, U.S.

Steel Executive Vice President and CFO will comment on the outlook for the third quarter of 2005.

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 in the end of our release and are included in our most recent annual report on Form 10-K in accordance with the Safe Harbor provision.

Now, to begin the call, here's U.S.

Steel President and CEO, John Surma.

Thanks, Nick.

Good afternoon.

Thanks for joining us.

Today's call, by the way, comes from the Mesabi iron range in Northern Minnesota, home to our Minntac and Keetac iron ore operations.

These facilities produce nearly 21 million tons of high-quality taconite production annually, providing our company with a very significant competitive advantage versus our integrative peers.

I'd like to congratulate and thank our 1,600 hard-working employees here on the range for their continued dedication, their hard word, and their significant contribution to our Company's bottom line.

For the quarter we reported earnings of $1.88 per diluted share, which includes two minor items unallocated to segments.

We also reported income from operations of $413 million, which was slightly better than the average of analyst expectations.

We also noted for you that second quarter net interest and other financial costs includes foreign currency losses of $43 million as a result of the change in the dollar, which strengthened significantly against the euro and the related local currencies during the quarter.

These losses primarily reflect accounting remeasurement losses, as accounting rules require to us remeasure our non-U.S. dollar denominated assets and liabilities, largely working capital, at our European operations into our functional currency, which for this purpose is the U.S. dollar.

Considering global market conditions we had a good quarter with strong operating results from our Tubular segment, which earned $448 per ton, and our European segment, which earned $106 per ton.

The Flat-rolled segment earned $59 per ton; we think a very respectable performance considering the lower demand and higher inventories in the service center sector.

Also affecting our Flat-rolled results were operating inefficiencies as we curtailed operations to match demand by taking our No. 13 blast furnace at Gary Works off line in late May, and by delaying the restart following an outage of the blast furnace at Granite City.

The recently reported decline in Flat-rolled service center inventory to 8.8 million tons we find encouraging.

The decline from record high inventory levels in January reflects, we think, steady underlying demand, lower domestic production, as well as lower imports as North American fuel prices appear at or near parity with other major steel consuming regions.

Now, I'm sure everyone saw earlier today the announcement that our Board of Directors authorized the repurchase of up to 8 million shares, or approximately 7% of our outstanding common stock.

The timing of purchases will depend on a number of factors, of course, including the market price of our stock, the availability and pursuit of strategic opportunities including investments and acquisitions, operating cash flow, our internal capital requirements and, in general, economic conditions in the U.S. and Europe.

This action today along with the increases in our common dividend the last two quarters reflects our commitment to our shareholders and our long-term optimism for our Company.

Of course, we'll approach the share repurchase process in a conservative and responsible manner, as we do with all of our overall capital allocation actions.

Now, I'll turn the call over to Nick for some additional information about the quarter's results.

Nick?

Thanks, John.

Capital spending, which is detailed by segment in the earnings release, totaled $157 million in the second quarter.

Our current plan for 2005 has total capital spending at approximately $695 million, with $440 million for domestic operations and $255 million for our European operations.

Depreciation, which totalled $88 million in the second quarter was $10 million lower than first quarter levels due to the effects of lower domestic production volume on our modified straight-line depreciation method for domestic facilities.

Full year depreciation is now expected to be $369 million.

Defined benefit and multiemployer pension and OPEB costs for the quarter totalled $101 million.

We made cash payments of $66 million, primarily for retiree healthcare costs and multiemployer pension plans during the second quarter, and additional details will be included in our 10-Q, which should be filed later this week.

As John discussed earlier and as detailed in the earning's release, net interest and other financial costs totaled $63 million in the second quarter and includes foreign currency losses of $43 million.

Excluding foreign currency losses, if any, and interest income on cash balances interest expense is expected to be $30 million per quarter for the remainder of the year.

Currently, our estimated annual effective tax rate for 2005 is is 25%, which excludes a $37 million first quarter charge related to the Gary property tax settlement discussed last quarter.

As a result of the increase in our estimated tax rate from 23% to 25% in the second quarter, we recorded a $9 million dollar, or $0.07 cents per share charge, to essentially increase the tax provision on first quarter results to reflect the higher rate.

Lastly, we're using 131 million shares prior to any share repurchases for the fully diluted share count.

Now, Gretchen will review the outlook for the third quarter.

Thanks, Nick.

Cash flow has been good this year with cash provided by operating activities of over $500 million even after the $130 million pension contribution that we made in the first quarter.

Year-to-date we have generated free cash flow after capital spending and dividends, but before external financing, of $200 million, and we ended the quarter with over $1.2 billion of cash and with $2.4 billion of total liquidity.

We expect third quarter operating results to be lower than second quarter levels reflecting recent spot price trends in domestic and European markets for sheet products.

As John mentioned earlier, we are encouraged by recent reports of service center inventory levels.

We have also seen an improvement in our Flat-rolled order entry rate.

However, market conditions will determine if these trends will be sustained throughout the third quarter and the remainder of the year.

We expect third quarter Flat-rolled average realized prices to decline moderately compared to the second quarter due to low spot prices.

However, our Flat-rolled contract position has continued to help mitigate the decline in spot prices.

We expect third quarter Flat-rolled costs to remain comparable with second quarter levels despite the costs and operating inefficiencies associated with the Gary Works No.13 blast furnace rebuild.

The rebuild will continue throughout the third quarter and we will operate our remaining domestic facilities to balance inventories with our order book.

For U.S.

Steel Europe, third quarter average prices are expected to decline significantly from second quarter levels, primarily reflecting lower hot-rolled spot prices.

This decline should be partially offset by a significant decline in raw material costs.

In the Tubular segment, third quarter prices are expected to remain in line with second quarter levels.

As mentioned in the earnings release, the transfer price for tube rounds produced at Fairfield Works was increased $20 per ton effective July 1, 2005, to reflect the markedly higher cost for steelmaking additions, which are used to produce tube rounds.

This increase is in addition to the $53 per ton increase effective at the beginning of the second quarter.

That concludes our remarks.

At this time, I'd like to open the call to your questions.

Nick?

John, please queue the lines for calls.

[OPERATOR INSTRUCTIONS].

Our first question comes from the line of Mark Parr with Keybanc Capital Markets.

Please go ahead.

Thank you very much.

Good afternoon.

Hey, Mark.

I was wondering if you could give a little more color on the cost outlook for the third quarter in both the domestic and European operations?

I think I'll take them in inverse order.

In Europe we're going to be affected by a blast furnace outage, which is currently underway, but we'll also have some reasonable reduction, we think, in raw materials.

Those things on balance will tend to wash out.

There's really not much more specific I can give you there, but I think the highlight would be, as we said in the release, we would see materials costs coming down a bit in Europe during the third quarter.

So you look at the materials cost coming down and that offset by the maintenance outage costs?

Well, there's a lot of ups and downs and odds and ends, but I think those would be the two highlights.

Okay.

With respect to our domestic Flat-rolled business, I think, Gretchen, in her comments, gave you some of that.

But essentially we would see costs relatively flat, with some benefits coming through materials and just cost reduction efforts as we pare down our operating level of getting our cost structure more in line and that offsetting, to some degree, the higher outage costs.

Because even though the Gary 13 outage costs were really -- have been incurred and will be incurred through the year, there's a good chunk of it in the third quarter, those two tend to go to the opposite directions.

So that's where we derive the conclusion we left you with in the earnings release.

Those would be the highlights.

Again, some other odds and ends, but those would be the highlights.

Okay.

Just as one follow-up, could you give us some sense of the availability of [met coal] and what the situation is in that market right now?

I just have a general view that the availability, as approved during the course of the year, there was one large met coal facility that was out through a force de jour operating casualty problem.

It's back on.

And that has, I think, tended to contribute to some loosening in the market.

And then you can see just from the ASI operating stats, including ours and other major companies, that the overall amount of iron making is down, coke making would be -- required less, hence, less coal.

So I think that's added as well for some better balance in the market.

So I wouldn't say anything has been in a free-fall, but he don't see the same kinds of tension in the marketplace for met coal that we saw earlier.

Okay.

Thank you very much, and congratulations on the earnings.

Thank you.

And thank you, sir.

Our next question comes from the line of [Lado] Mazzaferro with Goldman Sachs.

Please go ahead.

Hi, John.

How are you?

How are you doing, Aldo?

Good.

On the situation about your production outages that you have, I understand the Gary outage for maintenance.

Can you go through what you have down for what might be described as voluntary outages at this time both in the U.S. and in Europe, if any?

Well, in Europe, I think we've talked about the fact that we do have a furnace which is being worked on, the No. 2 furnace has had some [inaudible] has had some work scheduled on it and off and we try to position at that time right time based on the market and the staging of materials, and we needed some additional refractories for the bottom of the thing.

So that's just a matter of getting it teed up to do it at the right time.

And we're also trying to fit in, in Europe, with the schedule for bringing on a second burner in Serbia, so that all adds up to a big production planning exercise that ended up having it be done now.

We did observe, I think, in our release that we'll bring that furnace back on -- or we'll allow the market to let us bring it back on as that is necessary, and we really can't say much more than that about it.

In North America the only thing, I think, that you might be noting is that we did talk about a furnace in Granite City that we did some work on and then were able to keep our order book and inventories balanced without bringing it back on; it is now back on right now.

And we'll get to that as we need to, to keep our order book and our inventories in line.

There wouldn't really be -- we have a variety of minor maintenance outages on either primary or finished facilities that go on all the time, as I know you appreciate.

Those would be, really, the things of consequence that I would draw your attention to.

All right.

So how much of your total capacity would you say, right now, in Europe, is not operating?

Oh, --

I mean, if you count in the second furnace at Serbia?

-- well, we have one furnace out of five which isn't operating, so it would be 20% plus or minus.

The furnace in Serbia is a bit smaller, but something on the order of 20%.

All right.

Can I ask one follow-up, too, on a different topic?

Could you say whether the decision to buy back shares that you announced, which I think is is great, does that have anything to do with your current thinking on acquisitions in Eastern Europe?

Not directly, Aldo, no.

I think our decision was announced today was just a process of carefully thinking through our alternatives and arriving at the optimal capital structure -- to arrive at the optimal and highest value for our shareholders.

And this was, we think, a responsible and proper thing to do.

It doesn't directly -- it isn't directly reflective of what we're thinking or not thinking about .

Of course, if something would emerge and we would pursue that would be significant, that would have an impact on our thinking on the share repurchase process.

But there would be no direct reason to have done this or not done it based on an acquisition.

We do have over $2 billion liquidity, so we've got plenty of firepower to do the things that we want to.

Right.

Okay, John, thank you.

Thank you, Aldo.

Thank you, sir.

And our next question comes from the line of Michael Gambardella with JP Morgan.

Please go ahead.

Thank you.

Hi, John.

Hey, Mike.

Got a question on the sheet pricing and what you're seeing in the market right now.

Have you actually booked any new orders recently with higher prices?

I'm really reluctant to give you specifics on what orders we're booking at what prices.

You could observe, as we do what, you see in the indices, either CRU or other groups publish -- Fortune magazine has them.

Generally, the indexes would be pointing down from the last couple of months.

There have been reports in the trade press, I see, of some transactions being done at prices that are stable or higher.

Uh-huh.

I guess I'm prepared to see, in our own transaction mix, that we'd see some stability, but I'm reluctant to say that there's been a complete turnaround.

I think it's just too soon to say that.

No, I know that, but I was just wondering if you had booked any new orders out for, whatever, the end of August, early September, with higher prices in them?

I don't really want to answer that directly, Mike, to be honest.

One reason is that I don't watch every price on every order, and without knowing the prices we're on now it's hard to say exactly where the future prices are.

But we have not seen any further deterioration; we've seen some stabilization.

In terms of the order flow?

As we said in the release, we have seen an improved order flow.

But again, that's probably, from our perspective, too soon to call a trend, but we've seen improved order flow.

Can you quantify it at all?

Not in any way that I think would be meaningful for all of you to hear, quite frankly.

For us, we've seen improved order flow, but I'm reluctant to give you tons of tons per day because I think it's just too soon in the process for us to say that.

And then last question, just to follow-up on Aldo's about the share buy back.

How do you think about when to exercise the program?

I think that my attorneys told me not to say anything about all that because it's against whatever rules there are in this process.

The only thing I'd emphasize, Mike, is that we will be thoughtful, balanced and responsible, and probably conservative, which is our normal bent.

There's a whole process that we have to make sure from the disclosure and whatever is in the market, that's the regulatory regime we have to follow, that I'm not an expert at but my colleagues are.

And then just from a philosophical standpoint I think we'll balance our need for internal capital against what we see in the market and we'll proceed accordingly.

Gretchen, I don't know if there's anything you can add to that?

I think that's fair.

There's obviously lots of rules we have to follow in times when we can and can't be in the market [inaudible--microphone inaccessible].

We'll do what we're supposed to do.

Okay.

Thanks a lot.

Thanks, Mike.

Thank you for your question, sir.

And our next question comes from the line of Tony Rizzuto with Bear Stearns.

Please go ahead.

Thanks very much.

I also want to congratulate you on the management and Board for listening to shareholders --

Thank you, Tony.

--to you buyback.

My question is, I just want to try to understand the language a little bit better in terms of the definition of "moderately" and "significantly."

Should I assume that moderately is kind of the 2 to 3% that we saw the deterioration between the first and second quarters, and maybe significantly 5 to 10%?

Would that be fair to assume those type of ranges?

In our internal calibration of those adjectives, Tony, I think we can all agree that significant is more is more than moderate.

Let me stake out that territory for the moment.

But I think if you had 10% in your description of significant, that's probably where our mind ordinarily is, and moderate might be between 5 and 10, something like that, would be where we would be, and then less significant would be less than 5.

I don't know, Gretchen or Nick, if you want to explain that.

Okay.

And then if I may, just a question regarding mix.

Obviously, we are seeing -- you noted that you're also automotive inventories come down.

How might that mix change as you guys are looking to do more business with the new American manufacturers?

And as the domestics might build more, it looks like build rights are going to improve in the second half of the year, how should we look at mix in the domestic operations?

I guess for lack of any other guidance, Tony, I think our mix probably will be fairly stable during the rest of the year.

You do note the two things which are accurate;

I think we can all read about the success with the domestic auto manufacturers, the big three traditional manufacturers have had with some of their programs, and I think that's one of the elements that we've seen in our order books, certainly.

And I think that's great.

And to the extent that the other North American manufacturers, so-called transplants, all of whom we have important positions with and are very good customers also, to the extent they keep pace, that's good for us, and it will keep our high value-added facilities close to or fully loaded, and the more that that we get, the better off we are.

That would be a slight mix improvement, but it's really too soon to call whether that's even material or not.

But I think that would be a good prospect if it turns that way.

Thanks very much, John.

Thank you.

Thank you, sir.

Our next question comes from the line of Daniel Roling with Merrill Lynch.

Please go ahead.

Thank you.

John, could you elaborate a bit more on the comments you made about lower material costs?

And I think you were referring to Europe.

I thought the iron ore prices had signed up over 70%, and I though coke prices and coal, metallurgical coal contracts were signed.

Why now in the second quarter are we talking about declining prices?

In general, Dan, in the seaborn trade market, which we're not really in, the Brazil, Australia market --as I understand it those typically would be annual contracts with fixed pricing.

In the markets that we work with, in the case of coal and coke to some degree, would be more North Europe, Poland, Czech Republic.

And then iron ore to the east, either Ukraine or Russia, those we generally have annual volumetric agreements as to what our expectations are, which we both need to have to manage our affairs.

But pricing typically would be done quarterly, so their prices would move a little bit more quickly and be a little more responsive to market changes.

I think in the world markets we've seen, we tend to view the spot market in iron ore has softened somewhat, and we're seeing the benefit of that now in our Central European operations.

Okay.

And how are you doing on looking to find a secure source of iron ore for Slovakia and Serbia?

We continue to have a variety of activities underway, and I point out, though, that our suppliers, largely, again, in Ukraine and some in Russia on the iron ore side, have been very good and very consistent suppliers over a long period of time despite what other turmoil goes on in the world.

We've had excellent supply relationships, and they've been very dependable and very reliable and good, steady quality.

We would like to have, as we've talked about before, including some of your colleagues before, we want to have --we would like to have a more secure position from both a volumetric as well as a cost standpoint.

We continue to look both east for metallics, and north and west for carbon and coal.

We've had a variety of discussions ongoing, but none of reached the point of maturity where there's anything to talk about yet.

But we continue have that as a strategic objective.

Okay.

Thank you.

Thank you.

And thank you, sir.

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

Please go ahead.

Hi.

I was also glad to see the company's flexibility and coming back to a buyback decision.

Also, I hope it means something about the company's view on the sustainability of what's happening in the business right now.

Is that a fair inference?

Well, I think we said that, and our press release actually observed that we do see this as a degree of expression of our optimism for the the long-term prospects of our company.

I think that's a fair inference to draw, Michelle.

My question is a couple of things; first, you're saying your book is picking up significantly -- I don't know if that was materially or significantly, I got a little bit lost with the adjectives.

But I understand and respect that you're not quantifying it.

My question is a little bit different.

Most of the other guys that we're talking to are saying the same thing, that they're seeing a pickup.

They see nothing from Detroit yet.

Do I hear in that what you're saying as well?

I'm sorry, if you could just ask it again, Michelle.

Pardon me for not understanding, but just give me the question one more time.

You are see ago pick up in bookings.

You're not willing to go out and call it quantitatively, but you're not seeing any increase in Detroit bookings yet?

Oh, no, that's not what I indicated.

No, I'm sorry.

Okay, I was just checking.

We're doing fine in Detroit, and I think they're -- I don't have the numbers close at hand, but I believe that the inventory numbers that the auto sector measures, days, vehicles that are on hand, and I want to say from 59 to 51 or some number like that, is encouraging as well.

And that gets reflected -- this is is a fairly sophisticated supply chain system -- that gets reflected in our order book and in our steel make and in our finishing facilities relatively quickly and fairly predictably, so we're encouraged by what we see there.

So you have seen a recent pickup in orders from Detroit?

Yes.

Okay.

Because others in the last week have said they had not -- they had seen a pick up, but nothing from Detroit yet.

I can't -- I haven't been following everybody else.

Yes.

Okay.

Well, that's -- you hope Detroits on the come because sometimes Detroit goes away in the summer, so others have said that.

Then my next question is about the Tubular business.

I saw that you changed the price again.

How close to market would you say their cost of steel now are?

Is that an accurate reflection of market?

No, no.

We're careful to say in our disclosures it's cost, not market.

If there was a [NYMEX] for six-inch tube rounds we'd use it, but I mean the problem is that there really isn't a ready, easy market and, therefore, we just find transferring it at a cost number is simpler and more convenient.

And we try to adjust it annually, which we think is reasonable for a significant volume contract like that, but with these specific -- these round specific additions costs for molybdenum and [panadium] and whatever all going up so fast, we just have been adjusting the costs each quarter as necessary.

But it is not market -- not intended to be, and market would be substantially higher than what the cost transfer is.

Market would be higher?

So to certain extent, profits are moving from Flat-rolled to tubular because of that?

I guess you could say that, yes.

Well, I guess we use this call to present votes for changes, and I would just say I thought the purpose of delineating Tubular's results separately was so that we could try to do a sum of the parts, look at some of the multiples, exalted high multiples for pure play Tubular companies, and here, hands-down the best tubular company in the U.S. is U.S.

Steel, and --

We agree with that part.

Okay.

Well, I figured you would, that's why I said it.

So here you've given us the numbers, but then we can't really capitalize them and say, okay, twenty times earnings on Tubular and ten times earnings on Flat-rolled because Tubular's earnings aren't really Tubular's earnings; they're sort of -- it's a non-market transaction so we'd be overstating the valuation if we did that; right?

If you merely use what we put in our segment report, which is clearly noted as being a cost-based transfer -- so we've tried to make that clear --my sense is is that that would not be the same as if it was a market supply of tube round.

The difficulty, of course, is coming up with the market number, but you're welcome to come up with whatever one you want.

Thank you.

And our next question comes from the line of Bruce Klein with Credit Suisse First Boston.

Please go ahead.

Mr. Klein, your line is open.

We'll go on to the next question.

Our next question comes from the line of Wayne Atwell with Morgan Stanley.

Please go ahead.

Thank you.

Could you give us your thoughts on volume for Flat-rolled in the third quarter?

As you can see, Wayne, we did you want give you our thoughts for Flat-rolled in the third quarter.

I guess just with the way that the market has been so difficult recently and so tumultuous with lots of changes and lots of information coming at us, we didn't see any great benefit in trying to take what would really be a guess.

And, therefore, as you can see, we've just said that we see the order book strengthening.

What's going to happen is going to depend on the market for the rest of the quarter.

I don't really have a particular direction I even want you to lean, Wayne.

I think you saw what we produced and shipped in the second quarter.

We'll have, I would guess, probably a similar amount of iron being produced in North America in the third quarter just given the configuration we're currently operating under; maybe a bit lower because 13 was on for part of the quarter.

So if everything was exactly the same it would be similar to what we saw in the second quarter, and that would be as good a guess and as good a basis to guess as anybody right now.

And could we talk a little bit about your domestic coal?

Are you thinking at all about going out multiyear contracts?

Traditionally, met coal has been bought on a one-year basis.

Are you going to go multiple years and can you talk about pricing in the met coal market right now?

Sure.

We have been going out further on met coal pricing, traditionally; we've been doing that for ten years, probably, Wayne.

So we have, as we sit here today, a good number of contracts, less than fifty but more than ten, that do go out for a variety of periods, anywhere from a year to three to five, maybe some as far as seven, some of those entered quite sometime ago at prices in today's market for the moment look favorable, others entered more recently are much higher.

And we'll continue to do that.

We think that's a prudent way to manage our overall coal exposure.

We just try to term it out over time and have a series of vintage contracts that tend to get us what the average of the overall costs are going to be.

I would say right now, to the extent spot pricing is indicative, coal prices are probably softened a bit, that there's a little more volume available, not quite the tightness we saw just three or six months ago, certainly, and not a free fall.

I don't think we seem to be heading back down to the levels a few years ago, but we see not any increase at that time moment and stability with some slight trend towards softness.

Okay.

And then just lastly, in terms of your transfer pricing, you don't necessarily have a Flat-rolled based company.

If you transfer your costs in for Tubular and for Flat-rolled at costs, that really gives each division the benefit of your Flat-rolled -- or your hot metal cost structure.

So you're not necessarily advantaging or disadvantaging one or the other; what you're not doing is putting yourself on the same footing as your competition, which is not necessarily something you have to do.

So could you just walk through logic?

Presumably, if you transfer your pricing, or your cost in it, at your cost, you're not comparable with your peers but there's nothing that says you have to be.

You're just putting in your cost structure, and your margins represents the strength of those different products.

That's not a bad way to look at it, Wayne.

The way we do it is in Flat-rolled, Flat-rolled essentially owns all the steelmaking assets and all the costs on steelmaking, in Flat-roll, are sort of on the point of first entry.

And therefore, Flat-rolled, in essence, is the producer of two rounds, and [inaudible--audio difficulties] would then get transferred down the road to the pipe mill.

We have to make that transfer, as we disclosed and [inaudible] noted at full costs supplemented once in a while with cost adjustments.

And therefore each product is carrying -- is reflecting in the same results of profit against our cost.

And as you say, that's just the way we happened to divide up.

I happen to be a believer in markets, by the way.

I don't mind moving things at market, and if you've got a reasonably reliable and ready market reference pont, we don't have that here and, therefore, for simplicity, both internally and externally, we just keep at full cost.

But your point's not a bad way to look at it.

But you're not subsidizing Tubular to the expense of Flat-rolled?

Again, it all depends on where you start, I suppose.

The fact is that both operations have costs that are based on actual costs, and then the revenues are what the revenues are.

Thank you.

Our Lorain operation, of course, is buying rounds at market price in the market.

Thank you.

Next.

And thank you, sir.

Our next question comes from the line of John Novak with CIBC World Markets.

Please go ahead.

John, I was wondering if could you give us some preliminary comments on your thoughts for Flat-rolled contract pricing as we look towards 2006?

They'll be preliminary, John, just given the season and the time.

We're really not into the hot and heavy much right now.

I think we'll get into that in September/October as the normal season wears on.

We have some contracts that will be up and, as always, we'll be meeting with our good customers and presenting what we think is a reasonable basis.

And in our case, there's going to be certain things that will change, cost and otherwise, no doubt there will be some things on the other side that have changed and we'll have a conversation.

I'm really reluctant to make a prediction except to say that I think things are in much better balance now than they might have been in earlier years when one side or the other really seemed to have an advantage that was more evident than it is today.

So I think we'll after good natured commercial discussion, not just about pricing but about volume and term and quality and delivery and all the things we talk about, but it's really too early to say that we've got a winning hand or somebody else does.

We'll just play it out through the rest of the years and see how things go.

How much comes up for renewal?

And then I guess, secondly, do you envision more a contract that's tied more to the raw material prices going forward for iron ore and coal than what we have currently?

We haven't had -- let me take them in order, I'm sorry.

As for as how much is up, we have about, say, about half of our business is contract or less.

And of that, the majority of it will be renegotiated but not all of it.

We have some that are on contract that we've already redone last year that go longer than that, so more than 25% of our total book, I guess you might say, but more than half of the 50% of contracts will be up for negotiation.

And in some years we also negotiate things that aren't technically up by their terms, but we happen to want to talk about it because [inaudible].

The pricing mechanisms, traditionally, in our business have not had, directly at least, any reference to iron ore and coal.

Of course, on the cycle last year we did see the surcharges for scrap cost and other things like that that seemed to work fine.

I don't know that we'll have a greater incidence of using indices, other than what the scrap folks used in our contract negotiations.

That hasn't been something we proposed, although we wouldn't be necessarily adverse to it.

What we have seen, I think, and we'll probably see more of, is a conversation across the table between us and our customers on whether we want to have some band of variability based on a reference, whether it's [inaudible--microphone inaccessible], purchasing magazine or something like that, to take away a little bit of the hit and miss to give each of us a little more flexibility as we manage our affairs.

I think ,particularly, in the intermediate --

Okay.

And can you also give us a sense of where your inventories were both on finished and semi-finished in your operations during the quarter?

Well, inventories -- steel inventories in North America, because of the blast furnace outage, we had to build some inventory but then they tended to come back down.

I don't think on the steel side we had any great change.

Inventories would have been up on the raw materials side because the earlier periods were so low, because we had disruptions and really almost ran out of a few things, particularly on the coal and iron ore side.

So the builds would have been mostly in raw materials.

Okay.

And then Europe?

Europe, we were building inventories, for two reasons, on raw materials, because we had a second blas furnace coming up in Serbia, number one, and number two, on Flat-rolled, on the steel side, we had to build some because we had this blast furnace outage coming up in Slovakia and we had to get ready for that [inaudible--microphone inaccessible].

So we would have had up-ticks on both of those, but those would be temporary.

On the steel side, raw materials we'll see how our position works out with the second furnace.

Okay.

Thank you of very much, John.

Thank you, sir.

Our next question comes from the line of Michael Lucas with Appaloosa.

Please go ahead.

Hey, guys.

First off, I just want to commend you on doing a great step forward in creating shareholder value here and getting yourselves in line with your shareholder base.

Thank you, Mike.

Second, I guess I just wanted to ask two quick questions.

And they're quick, but I guess they are hard questions to answer.

One, you've said it a bunch of times.

I'm just trying to get your view of China, though, and in light of their investment that they'll be really investing in steel and what they've said recently.

Do you actually think that they'll keep building and that the production will keep going up, or do you think they will -- and I'm speaking about that you have to be a 10 million pound plant to invest if you're a foreigner, 40% equity, et cetera.

Do you think they'll be able to reel this in, in that what are your growth numbers for China?

And obviously, it's a difficult question.

And secondarily, I'm just curious about your view of the scrap markets, in general, worldwide.

Those are both hard questions.

On China, just the conversations I've had had with senior steel people in the Asian vicinity who have a little bit closer attachment to what's going on including with big investments in their country, the policy itself that came out -- we're still adjusting it -- but it's essentially what we expected it to say.

And they want encourage consolidation with a few large companies, more energy-efficient, more on the coast.

That's exactly what we expected, and together with a commitment to limit investment to no more than what they need to support internal growth.

I happen to believe that that's what -- as a matter of policy the national government wants to have happen.

We've been hearing that same general theory now for a couple years.

I think the investment seems to have moderated a bit.

They're coming on heavier in Flat-roll and going to aim towards the higher value-added markets.

If that would continue unabated it would be a risk for us, but at least for the moment, most of the people that are closer to it seem to believe that the intent, and actual spirit of what the national government's policy is and what they're going to try to do implementing it in that vast country with steel companies is not going to be an easy thing to do.

And my sense is it won't happen early or overnight, but for the moment at least, I'm going to tend to take them at their word.

And as a result, what we see is China being more or less in balance in the intermediate term, some months, and that exports, some months, import a little heavier on the long products, heavier on the lower value flat-roll products.

But that's just today, Mike, so we'll see where it goes.

That's our current view of it.

On the scrap side, we continue to see scrap, in general, as being relatively tight.

We continue to see scrap as probably not returning to the $75 a ton we saw two or three or four years ago, more and more steel being made that way, the current sideways market brought on as much by the overall reduction in production by companies like ours and others.

But in general, we see scrap as being relatively tight and that seems to be the reason for investment in a variety of alternative iron sources, which [inaudible-microphone inaccessible].

Thanks, guys.

Okay.

Thanks, Mike.

And thank you for your question.

Sir, our next question comes from the line of John Hill with Citigroup.

Please go ahead.

Thanks, and congratulations on the quarter and the share buyback announcement.

Thank you, John.

I had basically a strategic question on the subject of restarts both at U.S.

Steel and elsewhere.

It seems that as we survey the global, the U.S. data, the service center inventories, et cetera, even a pretty cynical observer would concede that it's less bad.

And would it would seem that outside of the China production push that one of the central risks perceived in the market is that of a series of ill-timed -- or let's say ill-timed restarts in the U.S. and abandonment of discipline or call what it you'd like.

I'm just curious whether you see this as a threat domestically, and then specifically, what type of a criteria you're applying to your own operations understanding that the Gary 13 restart has a -- appears to have a pretty rigid schedule attached to the given all the different moving parts.

That's a very good question.

I think you're right on the last point, the Gary project is being done according to a project schedule and doesn't have a lot of variability to it.

And when it's ready to go, we're going to want to run it and get it up and get it started, that's all part of the process so that's not a place to be tinkering and fooling around.

But we do say in our release that we intend to be balancing our production with our order book.

And I think the I thing to look at, John, is what are the lead times.

I think that's where you begin to see the evidence of what you cite, the lower service center inventories, shipments, still pretty high levels, days cover, fairly low, getting down to the three.

So all in all, we see that market as improved, but still, the entry rates yield a relatively short lead time.

So until lead times start to move out, which becomes an expression of confidence through those who are buying steel that the prices aren't going to move further down, my sense is there would be no real interest in putting more steel into the pipeline just to put it in inventory.

At least that's our view of the world and that's why we have that statement in our press release.

So I tend to think, for our purposes at least, we'll allow the market to direct that, and we'll see that through extended lead times, which right now are fairly short.

Right.

Do you believe that it's a real threat that investors should concerned with as they look at the broader U.S. market, that there's a possibility, again, of a series of ill-timed moves elsewhere, producers hitting the gas with both feet in November without having the order books to back it up, or do you think that, in general, behavior will be such that people will wait until they have the orders in hand to bring some of this capacity back on?

I don't know, John, it's really hard to say.

I can speak for our company, but I really can't --don't want to speak for anybody else.

We'll all do what's in our own best interest.

I know -- I just say -- you can see what we said in our release about that our production will be dictated by order book and inventory levels, and that's how we intend to play it.

I can't speak for anybody else, but if you look at what's gone on so far and the result and effect on the inventory levels, things are moving in the right direction.

Very good.

Thank you.

And thank you, sir.

And our next question comes from the line of Charles Bradford from Bradford Research.

Please go ahead.

Good afternoon.

Question about Republicans and your products, which has been a customer of yours for raw materials and a supplier for tube rounds, as I'm sure you're aware.

They've got a deal to be sold to a Mexican group [inaudible] and I was wondering what the status was of your raw material sales contracts and the status of your tube round purchase contracts, the change of control clauses, and if so, what differentials might there be current market versus those contracts?

Chuck, it's really too soon for us to react to that.

We're aware of it as well, just as you are.

That's been announced really, since I've been traveling to get up here to Minnesota.

So I really haven't had a chance to get into the details of that; my colleagues are going to brief me on it when we get back.

We've had [inaudible] have had a long and tumultuous history there.

Through it all we continue to supply, as necessary, materials, and we've had rounds, not all that we need, but a relatively steady supply.

To the extent that that continues to be in our interest and their's, we'll do that, but if it isn't we won't.

But it's just too early to know what the outcome of that recently announced transaction, which was just I think on Thursday or Friday night if I recall, really too soon for to us answer what are a bunch of very good questions, but in due course, those answers will be clear.

I wish I could be more helpful on that, Chuck, but it's just too soon for that.

I understand.

Just getting back to the steel pricing for a second, one of your competitors, if you will, suggested that third quarter prices would be down 50 to 60 bucks for a flat-roll.

Another one today said about 36.

Can you give us some kind of a feeling for where you would be relative to these other yard sticks, if will you?

Chuck, I have a hard enough time answering for ourselves without really getting into what everybody else is saying.

I know there's been a lot of calls this week and last, and I really haven't had a chance to see the outcome of those or digest what other people said.

I just get summaries that you guys write about them anyway.

So I'm reluctant to contrast what we think with what anybody else things.

What we think is what's in the release and what I've given you here, order book a bit better, inventories down, and we'll let the market take us where it's going to take us.

So I'm just reluctant to get into that.

I wish I could, but I really have nothing to offer to you.

Thank you.

Thanks, Chuck.

And thank you for your question, sir.

Our next question comes from you the line of Marty Pollock with NWQ Investments.

Please go ahead.

Hey, John, it's John Bosse.

Hi.

How are you doing?

Good.

Can you characterize, just as you're looking at assets to acquire, expectations from sellers come down a lot, a little bit, or no change in their expectations?

You mean in recent conversations?

Yes.

I haven't seen any meaningful change.

Quite frankly, the overall parameters that people have in their minds that might be interested in selling things have strengthened significantly given the much more favorable economics we've had.

I haven't really seen any great change in that, particularly on the resource side, where I think that situation is yet to really sort itself out.

It's still real tight?

All right.

Thanks.

And if I add our name to the chorus of people thanking you for giving us either some of our money back or going through the process of the share repurchase, we appreciate it.

Thank you, John.

And thank you, sir.

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

Please go ahead.

Thanks.

It's Kevin Cohen for Bruce.

Just real quickly in terms of future growth, do you guys think it will still be focused more on the international front and if so, generally in Europe or will that expand into maybe Asia?

And then I have a related follow-on question.

I think on that question we would not mind adding some assets to our position in North America.

Given the size of our existing position and the size of the market there, we'd run up against limitations at some point, from the competition's standpoint, but there could certainly be finishing assets and other things that would fit nicely into our portfolio in North America.

And we continue to look at those and again, for the right deal at the right price, we're glad to do that.

I think in Europe we would be interested in raw materials, as I've said, and if there's anything else outside of North America, Europe would be the likely case.

We like to work on things where we have an existing position, where we can get some synergies, where we get positions in the market for where we have existing relationships and operating synergies.

We like that kind of thing because we think we know how to do it.

It's been very valuable to us in North America so far, and also Europe.

So we would tend to want to build around positions we have, and it would be those two that we'd look at.

Okay.

And then lastly, with some people saying that prices have stabilized, maybe improving a little bit, do you think activity starts to pick up now that we're seeing a little bit of light at the end of the tunnel maybe?

Or do you think it remains pretty quiet?

ere's people on this call that know a lot more about that than I do, but I'll just give you my take on it.

I think things may stay relatively quiet, mostly because some of the more obvious elements of consolidation on a regional basis have already taken place, and they've been very effective in our case and other causes.

So I think the easier moves on the chess board, the moves, the subsequent moves, get more difficult and, therefore, I think will take more time.

All Right.

Thanks a lot.

And thank you, sir.

Our next question comes from the line of Andrew O'Connor from Wells Capital.

Please go ahead.

Good afternoon.

Hi.

Hey, John, related to the reline of the No. 2 furnace at USSE, what would a best case scenario of a restart of the No. 2 furnace there be?

Well, physically, we could probably have it ready to go -- it's a pretty substantial job, we were there recently to look at it -- but probably September sometime, mid September would be a time when we'd be ready to get it [inaudible], if necessary.

Okay.

Any other color regarding specifics about market conditions to restart the furnace?

No, it's just going to depend on the overall pool we have to market.

Remember, again, we brought the second blast furnace on in Serbia so we've got some additional horsepower now in that market that we could meet and this will just help us move into that overall larger market position.

When we're ready for it, we'll bring it on.

That's all we have.

Thanks very much.

And remember, of course, in Europe, that's not the hottest time of the year, with the market in August typically being a little bit slower.

Got it.

Thank you.

And thank you, sir.

Our nest question comes from the line of Brian Rayle from FTN Midwest Research.

Please go ahead. good afternoon.

Hi Brian.

Hi.

Quick follow-up question on the Gary restart.

When you said you want to run it when it comes back on line, you are talking about running it at the higher capacity that the realign is designed to achieve?

Probably, although the ramp-up curve on that is three, six months.

It takes a while to get there.

This is a huge project with many, many moving parts, and we have a start-up protocol that lasts well into next year and we want to get on that and stay on that.

This is a furnace which is going to last twenty or thirty years, and we're not as much worried about what happens in the next forty; we want to make sure we get the furnace up, done, and running, stabilized the right way.

Sure.

Okay.

So then if you were to balance your steel making capacity, it would be out of, maybe, some of your smaller furnaces, but that one would be targeted at the -- if it was -- if that -- if the market conditions warranted it, you would balance it using smaller ones and keep that as a core running furnace; is that a correct interpretation?

Realizing that's purely hypothetical, the answer would be yes.

Sure.

Okay.

Great.

Thank you.

And thank you.

And we have a follow-up question from the line of Michelle Appelbaum with Michelle Appelbaum Research.

Please go ahead.

Hi.

I thought that your comment about automotive contracts and the 2006 year contracts being premature, I was just wondering about it because some -- again,I know you don't -- you're not listening to your competitors, but we've heard some noise from some of your competitors on these conference calls and other places that there are customers coming back for reopeners.

Have you seen -- there's a different mix, I think, between you and had and some others, and have you seen any customers coming back for reopeners?

I'll just tell you, Michelle, on that point, we have virtually all the customers we have contracts -- when we say contracts I mean with a capital C -- contracts that we both intend to honor and have over a long periods of time.

They tend to be contracts that we honor and have over long periods of time, and sometimes they work better one angle than the other, but we've not done much of that -- either we nor they have -- and basic position and is, and I think our customers' -- although I hate to do this in a meeting.

In general, we tend to run the contract out [inaudible--microphone inaccessible].

And that's how we intend to play it, and so far that's how we're doing it, and they are as well.

That was a no, right?

That they're not trying to renegotiate?

We tend to honor their contracts and our customers do, too.

So do they.

Got it.

Thanks so much.

And thank you.

And there are no further questions in queue at this time.

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