美國鋼鐵 (X) 2005 Q3 法說會逐字稿

Ladies and gentlemen, good day and thank you for standing by.

Welcome to the United States Steel Corporation's third quarter 2005 earnings release conference and webcast.

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

Later there will be an opportunity for your questions.

Instructions will be given at that time.

If you should require assistance during the call, press star and then zero.

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

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

Please go ahead, sir.

Thank you, Barb.

Good afternoon and thank you for participating in United States Steel Corporation's 2005 third quarter earnings conference call and webcast.

We will 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 third quarter, and then Gretchen Haggerty, U.S. teel Executive Vice President and CFO will 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 future 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 are included in our most recent annual report on Form 10(K) in accordance with the Safe Harbor provisions.

Now, to begin the call, here is U.S.

Steel President and CEO, John Surma.

Good afternoon, everyone, and thanks for joining us and thank you, Nick, for getting us started.

For the quarter we reported earnings of $0.82 per diluted share, which includes the negative effect of a couple of small items not allocated to segments, of 4 million, or $0.03 per common share.

The third quarter was challenging from both a commercial and operating perspective.

Nonetheless, we posted very respectable results, exceeding the average of analyst expectations, which I understand was around $0.77 per share.

Our flat-rolled segment results reflect a combination of lower shipments, lower spot prices, higher energy costs, and cost and efficiencies associated with operating at about 72% of capacity.

Given this fairly difficult environment, our flat-rolled segment performed well, reflecting improvement in our cost structure over the last few years.

With the third quarter behind us, things look somewhat brighter on the horizon and the only exception there would be higher energy costs.

The service center inventory bulge that began about a year ago seems to have receded and inventories are now at more normal levels.

In fact, some of the recent strength we see in our flat-rolled order rate directly results from stronger demand from this very important customer group.

We are also beginning to see positive signs from the construction market, a very important sector for our industry and for our company.

It was a similar story for our European segment in the third quarter.

Inventories throughout Europe were relatively high for most of this year and the correction resulted in rapidly declining spot market prices and lower shipments during the third quarter.

This combination of lower spot prices and lower shipments is particularly difficult for our European operations, which rely heavily on hot-rolled spot market business.

Things are looking better on the commercial side and our outlook for both volume and prices in Europe is positive.

Our tubular segment results reflect a balanced market with strong demand, strong prices, and good margins.

Also during the quarter we made good progress on our ongoing blast furnace infrastructure improvement projects.

In North America to begin, the Granite City A blast furnace went down for repairs on May 1, with the work completed and the furnace available for service in late May.

As I think we discussed before, we decided to keep the furnace idle until the market coaxed us back into operation, which occurred in late August.

It's run full and run well since then.

Gary Works, after their construction mishap we reported on last month, the Number 14 blast furnace project is back on track and should be on-line sometime in December and then ramping up to full production in early 2006.

This furnace has been off-line since mid-May and following restart will produce approximately 4 million tons of iron annually for the next 20 years.

We are focused right now on getting the job done, getting it done right, so that this highly productive furnace is ready for a long run when it gets back into operation.

In Europe, our Number 2 blast furnace in Kosice was also off-line the entire quarter, as our rebuild project there turned out to be larger and more difficult than we expected for two reasons.

First, the demolition process was difficult, with more time spent drilling and blasting to remove the solidified iron from the furnace, more than we expected.

Second, we expanded the project scope to replace additional cooling stays that were in a more worn and worse condition than we expected at the time of the plan.

As a result, the project took a few extra weeks, but the furnace was blown in earlier this month and is back on stream and making iron just fine today.

In Serbia, we commissioned the second blast furnace late in the second quarter.

This is the first time that both blast furnaces there have operated in 18 years.

This was a fairly complicated restart from a control standpoint and it took most of the third quarter to stabilize the operation of some of the ancillary systems, but by the latter part of the quarter this furnace was up and running well and we made a record amount of iron at our Smederevo plant in September.

The dramatic increase in natural gas prices will continue to increase our costs in the fourth quarter.

We are redoubling our energy conservation efforts, including maximizing the use of bi-product fuels to reduce the consumption of purchased natural gas and electricity and to focus production on our most energy-efficient facilities.

For example, we've tightened up our hot strip-mill rolling schedule to use fewer re-heat furnaces where we can.

These, of course, are our largest gas consumers.

As I'm sure you saw in our earnings release, we repurchased 1.2 million shares of our common stock in the third quarter for a total cost of $52 million.

We have an additional 6.8 million shares that are authorized for repurchase under our board's action that we took back in July.

With that, I will turn the call back over to Nick for some additional information about the quarter's results.

Nick?

Thank you, John.

Capital spending, which is detailed by segment in the earnings release, totaled $194 million in the third quarter.

Our current plan for 2005 has total capital spending at approximately $730 million, with $480 million for domestic operations and $250 million for European operations.

Depreciation, which totaled $88 million in the third quarter, is expected to be $370 million for the year.

Defined benefit and multi-employer pension and OPEB costs for the quarter totaled $94 million.

We made cash payments of $89 million, primarily for retiree healthcare and life insurance costs and multi-employer pension plans during the third quarter.

Additional detail will be included in our 10(Q), which should be filed later this week.

Net interest and other financial costs totaled $16 million in the third quarter.

Excluding foreign currency effects and interest income on cash balances, interest expense is expected to be $30 million in the fourth quarter.

Currently our estimated annual effective tax rate for 2005 is 25%, which excludes a $37 million first quarter charge related to the Gary property tax settlement, which was partially offset by a number of smaller discrete items.

Lastly we are using 130 million for the fully diluted share account, which excludes any additional share repurchases.

Now Gretchen will review the outlook for the fourth quarter.

Thanks, Nick.

Let me just touch on some cash flow items before I get to the outlook.

Cash flow has been good this year, with our cash provided by operating activities of $884 million, even after the $130 million voluntary 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 about $400 million.

And we've ended the quarter with 1.4 billion of cash and $2.5 billion of total liquidity.

Now as we disclosed in prior quarters, we have been recording a liability based on profits which will be paid to the national benefit trust when it is established.

As of September 30th, we've recorded a payable of $191 million for this purpose.

As for the outlook, we expect fourth quarter flat-rolled averaged realized prices and shipments to improve compared to the third quarter.

However, these effects may be more than offset by higher costs for natural gas.

For U.S.

Steel Europe, our fourth quarter shipments and averaged realized prices are expected to improve, reflecting the increase in spot prices.

Our European operations will also benefit from the operating and cost efficiencies associated with operating all five blast furnaces after the restart of Number 2 blast furnace in Slovakia earlier this month, as well as from lower raw material costs.

In the tubular segment, fourth quarter shipments are expected to return to second quarter levels and averaged realized prices should increase, due to continued strong energy markets.

As mentioned in our release, the transfer price for tube rounds produced at Fairfield Works was increased by $46 per ton on October 1.

That concludes our remarks and at this time we would like to open the call for questions.

Nick?

Barb, if you could please queue the line for questions.

[Caller Instructions].

Our first quarter in queue is from Aldo Mazzaferro from Goldman Sachs.

Please go ahead.

Thank you.

A couple of quick questions on the guidance.

In tubular, Gretchen, when you raised the transfer price $46 a ton, is that an implication that you are seeing something like double that in the selling price of tubes?

Aldo, I think when we do that it's really more cost related.

We -- earlier in the year you'll recall that we were seeing some significant increase in the additives that are really specific to our tube, our tubular business.

So we started changing that transfer price quarter by quarter.

I would say it's more cost related but we are expecting price increases in the fourth quarter.

Okay.

Do you think those price increases beat the transfer price increase?

Aldo, this is John.

In fact we just had a price increase announcement that we are going out with today that I think at this point is public, so I will mention it, but we did have price increases ranging from $100 to $200 a ton, depending on application and size and grade, so I think the answer to your question is that the price increase would pretty well take care of that cost increase.

Right.

Sounds good.

On Europe, when you look at the full run rate now of all your blast furnaces, can you give us a feeling for what kind of shipping volume you might have in tons?

I know maybe the fourth quarter won't get it all, but what do you think about a run rate at some point?

I think on a short ton basis we could be in the 6 million-plus ton range easily, Aldo, maybe a little bit higher than that.

We really haven't fully explored what we can do in Serbia yet.

Again, this plant hasn't run at this level for a long, long time and not under our ownership, certainly, so I think our question is really how much we can get in and out in Serbia.

But we've got a lot of room to increase unit growth over anything we've shipped before next year.

Okay.

And if you wouldn't mind one other follow up, on the domestic flat-roll, could you give us a little feeling as to how you have seen the spot price movement, third quarter to fourth quarter, how much of that might flow into your bottom line, given your contract mix and some of the lag effects you might have?

Sure.

I think we can all observe what happens in the spot market based on reference prices, CRU or FEMAG or whatever, and we have seen spot price improvement throughout the fourth quarter and it looks like we will have a nice improvement fourth versus third in the reference prices and we will certainly see some of that.

We will see it less than perhaps the 50% average that our spot book would give us, for really two reasons.

One, with our reduced iron and steel make in Gary, that mix for the fourth quarter will be more heavily contracted spot just because most of that flexibility came out of the spot market.

And, number two, we chart our prices, our actual realized prices against the indices and see how we do and I think we did a little better holding our pricing structure during the difficult conditions in the second and third quarter.

And hence, some of the [indice] movement you see in the fourth quarter, we never really gave back so we won't get.

That's a long way around of saying we expect, as we said in our guidance, better pricing, but because of those two limitations, maybe not as much as just the simple numbers would give you.

All right.

Thanks very much, John.

Thank you, Aldo.

Our next question is from Bruce Klein from CSFB.

Please go ahead.

Good morning.

Afternoon, I guess.

Sorry.

It's been a long day, Bruce.

Exactly.

I joined a little bit late, but just a little color on the contracts in terms of what's going on next year and have you started, how much is done and whether you expect to get any sort of quarterly gas pass-through in the contracts or whether you are doing more of a surcharge sort of method on those contracts?

Okay.

Just in general on the contracts, we are just in the thick of that season now, of course, and as you know I don't want to get into specifics.

But our contract business typically is 50% and using that as a rule of thumb, this season is a little bit lighter, just the way things have shaken out the last year or two, than other years.

We probably only have about 20% of that 50% to deal with.

So it's a smaller set of our overall contracts this year.

And inside of that there would be some older dated contracts that have not been brought up to today's cost and price structure.

So I think we will probably do okay on that segment.

There will be others that we did last year that we will do well to hold our own on.

The fact that the spot market is strengthening is certainly a help.

So net/net, we would think that we've got a good shot at seeing contract pricing next year a lot like it was this year, maybe a little bit better, but that remains to be seen for the fourth quarter.

We haven't done anything yet specifically on energy in terms of surcharges.

We, in general as you know, have preferred to deal with those kind of thing in the context of a total price structure, but we are not ruling that out.

I think that remains to be seen.

Okay.

So on the energy, you haven't done it yet but you might build it in.

I'd just say -- well, we look to attain a price that gives us a reasonable return and that considers all of our cost, including energy.

Okay.

And is there -- remind me, are there hedges that you guys have, what percent?

No, we have not typically done a lot of price management.

We've done a little bit, usually just to shave off some of the risk in the winter months and just as we were about to start doing that is when this problem occurred and we saw this location with the spot prices up.

We do have some storage capacity at a few facilities which we typically fill and did fill at much lower prices.

We will begin to use that in November and December.

But that's not going to materially change the fact that our gas costs are going to be up a lot, generally in line with what the strip is.

I'd just remind you that, at least internally, we tend to look at our tubular business to some degree as a hedge and if you look at the results it's been pretty effective.

Right.

Thanks.

And lastly, just the use of cash.

Anything -- additional thoughts on what the latest thinking is there?

No.

I think it's more of the same.

We've done funding of benefit plans, which we we'll continued to do to the extent that's prudent and feasible.

And you see what we did on our share buy-back and I'm not going to say much more than that.

I will leave it to Gretchen to comment on that if she wishes.

But I would think you will see more of the same balanced sort of responsible use of cash and caution when it comes to anything that might go on from a strategic standpoint because values are quite at high levels these days.

And we do have a substantial capital program we want to make sure we can complete.

Thanks a lot, guys.

Thank you.

Your next question is from David Martin from Deutsche Bank.

Please go ahead.

Thank you.

I had two questions.

First of all, I wanted to come back to CapEx.

If I do the math right, it looks like you are going to spend about $260 million in the fourth quarter.

I'm just, first of all, wondering what you are doing.

And then secondly, thinking about production outages, and you've clearly taken your fair share in 2005.

Can you comment just generally on your continued discipline and your willingness to take outages to control inventories and where you think about doing this over the next, say, six months?

On the capital -- if you are subtracting 730, or whatever our number was, from what's in the earnings release.

Well, whatever the number is is what it is, and I think that would be the right number and I think what you are seeing there is some pretty heavy work in Europe on the galvanizing line we have underway there and also the steel shop and departmental projects, and also the guts of the number 14 blast furnace project going on right now out in Indiana, and then just a smattering of other projects.

So I think you are absolutely right on that number and that's our expectation of what we are going to spend.

We also have done some lease buyouts and other things that we find just to be financially efficient, it's debt reduction or at least obligation reduction as we see it, and we've done a few of those that probably add 30 or 40 million or something like that to that kind of a number.

But I think you've done the right calculation there.

On production, we right now are actually quite tight.

So we could use a little more steel and we are running as hard as we can.

If it -- when we get our larger furnace back on to the extent we need to balance our production to beat the market, we don't like to build steel inventory.

Our steel inventories are very low right now and we want to keep them there.

If necessary we would moderate production and we would take a good hard look at that.

It really depends on how the new furnace runs and what we find there, but it may be that there's one of the smaller three furnaces at Gary that would be a good place to consider that.

But that's something we'd have to look at, but that would be probably where we would start.

Okay.

Thank you much.

Your next question is from Timna Tanners from UBS.

Please go ahead.

Yes, hi.

If you could talk a little bit more about the contracts, if you could, on going into next year, if you are planning on keeping the same percentage of contracts?

I wasn't clear on that.

Also if you could talk about the reason you may or may not be able to or want to pass through any cost escalators?

And then I guess a little backward-looking but on the third quarter, trying to understand why so much variance, if it was about 75% contracts, if the mix is about 75% contracts.

Okay, just sort of taking it in reverse, our contract in the North American flat-rolled segment, our contract business is about 50%; if I said 75% I apologize.

That was a mistake.

It's about 50%.

And if you take the C.R.U., or whatever index you like, spot, second to third, and divide it by two and times our tons, you get, I think, a fairly reasonable ballpark estimate.

We did a little bit better than that because we managed to hold our prices during that period, so, if you look from the beginning of the year.

So I think it's 50% contract, 50% spot.

I think, Timna, we should have roughly the same mix next year.

My comment was that of that 50% contract next year, only about 20% of that, or 1 million tons or so, probably would be up for negotiation between now and the end of the year that would affect next year.

Does that clarify it at all?

No, I guess what I was wondering about is the 75% I thought was a function of less spot sales -- less spot sales as you were running at a lower run rate because of the outages.

So I thought there would have been a smaller variation on the third quarter from the second quarter because there was more contract mix?

Maybe that's just a function of the autos not taking as much contract?

Maybe you could help clarify how that works.

July is a big automotive --

Yes, July typically is a very low month from the auto side, so for the quarter we probably ended up at about 50/50.

In the fourth quarter it will be a little bit less spot, a little bit more contract, because of that.

Okay.

So then, on the gas escalators or gas hedging, is there -- there are some, I guess some other steel makers that are hedging even with the higher gas prices and the higher costs of doing, so just in the worse case scenario that the winter is colder than we expect, that kind of thing, what would be the rationale then for not getting more cautious on natural gas or hedging further?

Well, it's just a matter I guess of what your view of the market is and I wouldn't want to give away ours, but as I said, we do do some price management during the winter months.

So I didn't necessarily say we didn't or won't, but we didn't get into it as aggressively as we otherwise would have, just because of the time this happened.

I think that's still a good possibility.

As I also said, we do have some gas already in storage that we view as price management for the winter months and we will start to withdraw that sometime in November.

Okay.

Great.

Thank you.

Thank you, Timna.

Our next question is from John Novak from CIBC World Markets.

Please go ahead.

John, I was hoping you could give us a bit of sense of the raw material outlook for Europe, particularly with respect to iron ore and coal?

And then secondly, I would like to ask, just given the levels of capacity utilization you ran at in the third quarter, are you disappointed that you haven't seen better production restraint by some of the other steel companies in North America?

I guess I will take the last one first.

I don't really know, other than what I read in the trade press what others did.

My sense is from some of those reports that at least one other large integrated player certainly did restrain production to a very large degree, again based only on public information.

Others that are smaller operators that don't have blast furnaces you can observe, it's a lot harder to see, so I don't really know that I'm disappointed or not.

I'd just say that I think this cycle we just went through, and I'm not sure we are through it yet, but the cycle we are working our way through seems to have evened itself out more quickly than in other cycles.

And to the extent that reflects a more consolidated industry, that may well be the case, and if it is, I hope that's a portend of things to come.

But I really can't comment on what others might have done or not done.

On raw materials in Europe, we tend to price those quarterly.

We tend to have blind commitments or indications for the year, but price those quarterly.

And on our major requirements on coal and also coke that we would buy for Serbia, where we don't have batteries, those prices for the fourth quarter are coming in lower than we experienced during the third quarter.

Also on coal, also on all the metallics, concentrate pellets, and scrap would be about the same.

I'm reluctant to predict scrap, but the other two, I think, concentrated pellets we see -- and sinter, where we see pretty good stability and a downward trend in prices.

We actually saw the price trends coming down in the second quarter but because we didn't make as much steel because of the outages, we didn't consume as much of higher priced material early in the third quarter, hence, we didn't see as much of the favorable effect.

We will see better raw material pricing and better cost for us in the fourth quarter because all of the commodities, coal coke, concentrate, pellets, and sinter, have all moved in the right direction.

Any temptation to enter into longer term contracts in Europe?

Yes, although that's not been the custom there.

We actually have some exploratory discussions underway right now with a large supplier to do that.

That has not been typically the way we do business there, the way business is done there.

We may like to do that and we are working our way through that right now.

But that's something we would hope to try to accomplish.

All right.

Thank you very much.

Thank you.

Our next question is from Michelle Applebaum from Michelle Applebaum Research.

Please go ahead.

Hi.

About a year ago, I think it appeared that you were much more active, looking at steel assets.

And we talk about this every quarter.

Do you want to comment -- there's a debate on what Kryvorizhstal went for, because of the valuation of the iron reserves.

Do you want to talk about your view, refresh us on -- if we are still going to expect to see you do large steel acquisitions?

Or are you going to step back as a consolidator because the market may be a little bit too ebbulient?

If that means it's getting expensive, we agree with that.

I think you are on the right track, Michele.

I think we've observed that in our conversations before.

These are very high-values and we still have responsibilities and obligations we want to take care of, and we tend to be cautious and aggressive where we think it can create value.

We don't mind taking a risk but it's a thoughtful risk and that's how I would describe our position now.

We don't mind being aggressive and taking a risk when we think we can create a good bit of value, but it's hard to see those kinds of opportunities in the near term and I would hold out as an exception doing something on raw materials in central Europe and Eastern Europe, where that might be more of a building proposition as opposed to a buying proposition.

But I think the way values are today, anybody who is in a buying mood has to be somewhat sobered by what we just saw.

Okay.

And then I wanted to get an update from you on your thoughts on China, just something noncontroversial.

They became a big exporter -- I mean importer again in September, with 1 million tons of net imports.

Are you feeling more comfortable with China these days?

Well, that's certainly better than what we saw before, but I still think that China is going to have an enormous influence on the world of steel for a long time.

I don't think there's any way to escape that.

I think it remains to be seen about how the new steel policy is implemented.

There seems to be a view that we heard about in some of the public discussions at the IISI meeting that China will not become a large net exporter as a matter of policy.

And that may well be the case.

I really don't know.

That's up to the folks over there to decide.

But there seems to be at least now some restraint on that and we think that's a good thing, and I think the policy there intends there to be consolidation and winnowing out the higher cost, less energy efficient lower end of their industry is probably also a good thing.

But when you have a 350 million ton player in a billion ton market, who knows what could happen?

I think my biggest worry, quite frankly, is more that the overall China economy has a hiccup, which I guess it could, we don't see it coming, but if it did and their consumptive power was substantially interrupted, I think that would be more of a problem for to us deal with.

I think as long as the China economy does okay for the near term, then I'm a little more optimistic that things can work out okay.

That's great.

Thanks.

Thank you, Michelle.

Next question is from Wayne Atwell from Morgan Stanley.

Please go ahead.

Thank you.

Hey, Wayne.

Hi.

Two questions.

When do you think you might have to put some more money into the pension fund or may you not be required to do that?

And you've sort of alluded to central and Eastern Europe acquisitions or construction of raw materials.

Could you give us an update on what's your planning and timing and how aggressive you are going to be there.

Sure.

Gretchen, why don't you handle the pension question first.

Okay.

Wayne, we did get authority from our board earlier this year to put another 260 million into our fund over the course of this year and next.

We've used 130 million of that authority so we still have authority to do another 130 million, which we could do this year or next.

The -- but we are not in a mandatory funding requirement right now and have not been for some years.

This has all been voluntary funding and I guess since the end of 2003, we've funded voluntarily about $500 million.

On raw materials in eastern and central Europe, Wayne, nothing that I can give you without any specificity except that we do have specific discussions with different parties in those regions and they cover both carbon and metallics, not a big blockbuster deal, but beginning with a contract, leading to perhaps an equity interest in something, something along those lines, that we think we can use and harness the buying power we have, because we could be a good customer, given the five furnace we have in the region, and denominate that into a stable raw material supply at a decent price.

That's sort of our best objective.

But we have a lot of worked to do before we get there.

Now, are you talking about being a buyer under contract?

I thought you were talking about building or purchasing an ownership in --

We might well start with the former to have it lead to the latter, where there might be a new development that either through technology or capital management, we could have some involvement in.

I think it may well start with contract and lead towards something else as a way to get to know each other.

Have you gone so far as to have feasibility studies done?

Or -- what you're sounding like, you would have a contract which would then lead into an equity position.

So it sounds like maybe you wouldn't be building, you would just be developing a relationship which ended up in maybe an ownership position?

I don't want to get too specific, Wayne, I guess.

Those are all possibilities and I wouldn't say feasibility studies, but we've had a lot of very good technical discussions.

It could go either way or both ways.

I think these kind of things take a long time to develop and we've been at it for a year or so and it will probably take at least that much time before we get something that actually comes to fruition.

Our next question is from John Hill from Citigroup.

Please go ahead.

Good afternoon everyone.

Just a quick question in the flat-rolled product costs for this quarter, down $1.00 from $5.74 to $5.73, is that just a profit sharing effect?

You mean on a per ton basis?

Yes.

There's going to be a lot of moving pieces in there.

You are going to have the impact of higher natural gas prices.

You are going to have scrap moving around.

It's trying to --

It's really the net effect of all --

Probably the base payments would be one.

We had some improvement on labor utilization and a few other odds and ends.

But that is an offset of a lot of fairly small items as we go through the analysis.

Okay.

And then moving forward, and I guess echoing Aldo's question, as we look to the fourth quarter and flat-rolled product tons up, price is up, gas offset, but cutting to it ,are you guiding segment operating earnings lower than the 41 million that we in this in the third quarter?

It sounded like that's what you were trying to say.

Well, what we said was it would be lower than the first two quarters, which we could both be right if what you just described could happen, but I don't know that we want to get that specific.

I think we are looking at trends and we can't see that far into what's going to happen in the NYMEX or the gas market or the spot price.

It could go either way and we may have higher, it may be lower, and that's really as specific as we can get.

I see.

Okay.

And then just finally, any observations about the principal issue upon which paranoia is focused in the market, being the premium U.S. prices over international quotes.

Any views on which way that's likely to brake and how it's likely to go?

Well, it's worth being concerned about, John, because I think at this point last year, although the differential was a bit wider, we did see quite a bit of imports flow in.

I think just today the numbers -- I want to see preliminary numbers look like they are still relatively low.

Our commercial sense is that there aren't all that many offers in the market.

That's in part because China is still attracting a good bit of what's on the export market.

But it's worth being concerned about and we think one good way to deal with that is to raise prices in Europe, which we are trying to do.

And if restraint actually occurs in China, that would be good, too.

So it's worth being concerned about but so far we are worried about symptoms but we haven't seen it yet.

Do you think it's possible for imports to tick up slightly and for us to sustain current price levels in the U.S.?

Yes and yes, I think so.

I think there could be room for some higher level of imports if the economy goes okay and demand stays strong.

And really, all of our markets look pretty good.

We see pretty good strength in construction, which has not been strong, and that's improving.

We see pretty good strength in the service center market.

The recent numbers were quite encouraging.

And at least as far as we are concerned, the automotive market for us has been pretty good.

So if the underlying economy stays fine, I think there could be room for a balanced position with greater consumption being fed by imports.

But if it got to a larger number, it would be a concern.

Great.

Thanks and good luck.

Thank you.

Our next question is from Anthony Rizzuto from Bear Stearns.

Please go ahead.

Thanks very much.

Good afternoon, everyone.

A lot of my questions have been answered here, but let me just follow up on -- maybe -- I want to make sure I understand correctly what your response was, John, to one of the issues about would you look to idle capacity again?

There are concerns out there obviously, China still as a wildcard, there's been a lot of speculation about what that industry may be doing from a rationalization standpoint.

But would U.S.

Steel be prepared to idle blast furnaces again if the industry conditions were to worsen from here?

Tony,if you will permit me, the way I will respond to that is that when we bring our large furnace back on we are going to be making a lot of iron and a lot of steel and we don't like to make iron and steel to put it on the shelf.

If the market takes it away, fine.

If the market doesn't take it away we are not going to build inventory and we are going to gear our iron and steel production to what the market will take away at a good price.

If that means we have to take a furnace off, we know how to do that.

And, importantly, with our cost structure now and the new labor contract, we have a lot more flexibility to do that.

And we can do that and still make money at an operating rate which is far lower than it was before.

So, when we have time to plan it, to get our cost structure to where we want it, we can do that and if necessary we will.

All right, excellent.

And then, if I may, first of all I'm very pleased to see you do the share buy-back.

Thank you.

And I was wondering, in the guidance that Nick was giving about the shares outstanding, you guys are using or guiding to for the fourth quarter, 130 million; could we assume that you've not been buying back your stock at these levels?

Go ahead, Gretchen.

Well, I guess, Tony, we try to be a little bit cautious in our share buy-back program so we do have some fairly typical blackout periods and we are not buying right before our earnings release goes out.

That wouldn't really be a fair thing to do and I think probably most companies operate that way when you have an open market share repurchase program.

Right.

But in response to the answer you gave to the question about acquisitions, I was very pleased to hear that you are not going to chase some of these acquisitions out there and the multiples look to be sky high at these levels.

But is it fair to assume that some of the priorities of cash, certainly share buy-back, is one of those top priorities now?

I think that's fair.

John I think articulated well that we really have tried to take a balanced approach with how we are using our cash and we considered debt reduction, funding our employee benefit plans, and that share repurchase program as very important to us.

Excellent.

And the lawyers all tell me I can't say much about it, but I would just say that if you look at what we did in the relatively few number of trading days we had in the last quarter, we made business doing this.

Right.

And it looks like you did it about $43.

I appreciate that.

Thank you.

Okay, Tony.

Our next question is from Mark Parr from KeyBanc Capital Markets.

Please go ahead.

Thank you very much.

Good afternoon.

I had a couple of questions.

First of all, as a housekeeping item, could you give us some guidance on what you would anticipate for the retiree benefit expense on the P&L for the fourth quarter?

It's going to be, excluding the profit based payments, which end up in the retiree costs, it should be fairly close to what it is in the third quarter.

That's a number that you establish at the beginning of the year and you basically recognize a piece of that.

Okay.

Could you talk to me a little bit about the reason that it went from 70 million in the second quarter to 55 million in the third? quarter?

A big piece of that is going to be related to the profit based payments that flow through that line.

Okay.

All right.

I appreciate that.

That's helpful.

I was wondering if you could talk a little bit about in the domestic market, give us some color on your backlog and how far the mills are booked out for at this point?

We got very short, as you know, Mark, but I think the promised fronts have been pushed out quite a bit now and we are into December business at this point, what spot business we have to let, just because of the way our metal situation is.

But promise fronts are out, then we are booking into December.

Okay.

Another item related to potential year-end adjustments, I know looking at your inventories on a consolidated basis it moved up a bit as the year has progressed.

I was wondering to what extent we might be looking at what your anticipation for a LIFO, either a charge or a credit in the fourth quarter might be.

Just on the inventories to begin with, our steel inventories on a tonnage basis, both in Europe and in North America, both finished and semi-finished, we pooled down.

That's the reason the cash flow was there that Gretchen reported on.

We have added to our raw materials position, particularly on coal, because as many of you know we lived really hand to mouth through the last two years and we finally have a position now where we have enough coal to work with, which makes our life a little bit handier.

On LIFO, that's a difficult thing to project.

We do, according to all the rules and regulations I'm told, do LIFO on a quarterly basis.

It's designed to not leave a lot of unfinished business to the fourth quarter other than what occurs in the fourth quarter.

Having said that, I really don't know of anything that we are expecting, but I have no real great basis to say that, one way or the other.

But we've been doing the process all the way along.

We don't expect to have a large movement in inventories between now and then, so I would derive from that that there's nothing we can tell you that we are expecting.

Okay.

Was there anything significant from a LIFO perspective in the third quarter results?

No, not really.

Okay.

Just one other question, if I could, and I appreciate the time here.

I was wondering, in looking at the Smederevo mill, the fact that you are ramping that up with two blast furnaces now and that's really poised to have a significant increase in output over the next 18 months, can you talk a little bit about the profile of where you expect that tonnage to find a home?

And also, could you put that into context of perhaps in increase in the competitive profile, maybe, with Erdemir getting into the flat-rolled business over the next couple of years?

Okay.

Erdemir is in the flat-rolled business now and the big change at [Intamere] I think will take some time, so I think that's out of the immediate competitive horizon.

But if it is a competitive marketplace there, we are moving up largely in the hot-rolled business.

Our value-added facilities in tin and cold-rolled have already been largely booked out with the existing capacity in Smederevo.

So as we move up, it's largely going into hot-rolled, we may expand a bit in some other areas.

And our best markets are the former Yugoslav Republics.

Those markets are showing a lot of economic vitality, a lot of infrastructure work going on, and then the remainder is in western Europe -- southern Europe and into turkey, some actually in Eastern Europe.

Putting some on the export markets, from time to time we would send some both west and east, because we are on the Danube and get pretty good access to deep water.

But to be fair -- or to be honest on that, Mark, we are actually just exploring and developing the market for that new capacity as we go.

One last comment if I could, I really think you guys deserve to congratulate yourself for being profitable at 64% capacity utilization.

Congratulations.

Thank you very much, Mark.

Appreciate it.

Next question is from Michael Lucas from Appaloosa Management.

Yes, how's it going, guys?

I'm curious, I'm hearing a lot of talk on this call about purchasing assets and this and that, and I was wondering if you guys ever considered the latter, and that's divesting assets.

Because as I see it, I look at some things that are publicly traded companies and your guys [inaudible] the mavericks, et cetera, you guys are a compilation of all of those assets and it seems like those valuations trade much, much higher on EBITDA, on capacity figures, et cetera.

So I'm thinking the other way.

Would you guys ever consider divesting assets to create more value for shareholders?

Yes, if you go back over our company's history we've divested billions and billions since 1980 or so.

And so we are not afraid of doing that and we think we know how to do it.

But at the moment the pieces we have seem to fit together well and provide pretty good balance and pretty good synergy.

We have looked at different things from time to time and we've sold pieces of real estate and coal properties and had looked at doing a divestiture of some I&R and coke properties before.

But at the moment we think the pieces fit together pretty well and are generating pretty good value.

But I'd never say never, Mike.

I think we've done it before and we are not afraid to do it again if that's the best thing to do.

I'm just -- John, do you see it in the same kind of, intellectually speaking, the same way that I do?

Do you think there's an unlocked value within the whole enterprise of the U.S.

Steel that's there, relative to your [OCTG] business, your iron ore business, and then where this European deal was done.

Everybody's focused on purchasing, except if it's a sellers market -- it just seems interesting.

Well, we agree with you, Mike.

We think there's a lot of value that's not being recognized and our job is to try to get it recognized and get it into the share price.

So we agree with you but how best to do it and how finally to do it is maybe a different question.

But intellectually, I think you've got a good point.

Okay, thanks guys.

Thank you.

Next question is from Leo Larkin from Standard & Poor's.

Please go ahead.

Good afternoon.

Could you give us CapEx guidance for '06 and also DD&A for '06, if that's available?

It's actually a little bit early in our process to do that, but we will be coming up to doing our budget.

But I wouldn't expect -- we've been at a higher level of capital spending this year and I would say that it would be closer to where we are now than where we were prior to the National acquisition, more on the order of 700 million.

But we still have to go through that process and we will be giving that probably earlier in January, John?

Yes.

And given the number of tons we have now to support when we look at it on a per ton basis, we still, even at the current level we are still well below average and we need to spend a little more than we did in the past, but we don't need to get to average necessarily.

We think we can still do quite well with a prudent and moderate capital spending plan, but that amounts to something on the order of 700 million.

Okay.

And DD&A?

I don't know, Nick, it would be -- like it is this year, a little bit more probably.

We said 380-some million.

I would say 400 probably would be a ballpark number.

Working number.

Okay.

Thank you.

Your next question is from Brett Levy from Jeffries and Company.

Please go ahead.

Hey, guys.

Can you just sort of divide out the impact of the relines and maintenance from the third quarter and how that would compare to say the fourth quarter, just to give sort of a rough apples-to-apples.

Then, and I know you guys have been hesitant on this in the past, is there anything else in the way of major relines kind of out there in the next year or so?

And then last two would be, electricity costs per ton and natural gas per ton, if you can break that information out.

Let me just tick a few of them off.

I think on the natural gas per ton, we tend to say 4 to 5, say 5 for simplicity.

And then BTUs per ton on maybe 4 in total, global, but 5 probably for the U.S.

So, something -- per shipped tons.

So, something on the order of 5 MNBtu's per shipped ton would give you a number, so in strips of 10, that's 50.

Electricity I don't have handy.

Nick, if you could look it up for us while I'm talking, perhaps.

On the relines for -- and other major projects for the future, the kind of spending profile that Gretchen just talked about accommodates a variety of blast furnace work and stove work and steel shop work over time.

Certainly none that would be approaching the magnitude of the double number 14 USS K2 that we had during the third quarter.

I think that was a fairly unusual alignment of stars and planets.

But there will be some ongoing blast furnace work next year probably, and then it would slow down a bit.

We would be concentrating more on stoves probably at that point.

Between the third and fourth quarters, even second, third, and fourth quarters on actual outage spending as we measure it, it was probably fairly comparable, Nick, I want to say between second and third and third and fourth quarter, because we got started on the 14 project early, we had a lot of work going on in Europe.

So I think the outage costs -- unless Gretchen or Nick want to adjust this comment -- would have been roughly comparable and maybe even be slightly in the fourth quarter, but not by much.

I think the outage burden we've born has been about the same in all the three quarters and would last through the year.

Electricity, Nick, if you want to comment on that?

We consume somewhere in the neighborhood of between say .4 and point -- between .5 and .6 MKWH per ton in the U.S.

Got it.

Now, you guys, I think you were saying even cost, and I guess what I'm trying to figure out, is that a CapEx cost number or is that an impact on EBITDA or EPS type cost?

No.

That was a cost number.

That was not a CapEx.

That was actual cost.

We would measure sort of extraordinary outage cost, where we're doing maintenance work that would be other than routine.

Then we capture that and call that outage cost.

That's what I referred to.

Not the capital.

So I guess my question is, what are those costs going to be in the fourth quarter?

About the same as they were in the third quarter, maybe slightly lower.

I guess what I'm -- the specific items that you are going to be working on?

Well, the largest piece is finishing up the Gary blast furnace project.

There's a lot of maintenance cost that goes with that, then ancillary things that we do around it.

But there will be some other regularly scheduled outages that happen all the time.

But in terms of total outage cost which would affect the total cost structure, it will be about the same in the fourth quarter as it was in the third.

We do tend to do some thing in December, at the end of December, of kind of a more ordinary nature every year, because some of our customers are taking outages then, too.

So if you assume that the Gary blast furnace job continues through much of the quarter, you are going to have --

But the most recent analysis shows that it might be a little bit, our costs might be a little bit better in the fourth quarter insofar as this goes, mostly because we've moved some things out a little bit so we could make a little more iron and steel and get a little more shipments out to our customers.

We're really trying to hustle in the market as best we can, but it's not going to be a change.

Thanks very much, guys.

Our last question today comes from Daniel Roling from Merrill Lynch.

Please go ahead.

Thank you.

Gentlemen, on the tubular business, could you give us an idea of what your operating rates are and your market share and are you seeing any increase in demand there as a result of the hurricane and what's the outlook?

We are running as hard as we can, Dan.

Certainly on the seamless side we have a small ERW component that's running pretty well, but it's not as meaningful from a profitability standpoint.

So at capacity we are running as hard as we can on all three of the seamless mills in Ohio and also in Alabama.

Market share is hard to describe just because it's hard to define the market.

We're in a variety of different markets, but we are the biggest player in North America by some distance.

And in the size ranges we play in we are a formidable player in 20, 30% kind of market shares, maybe bigger.

So it's hard for me to quantify more than that without studying a bit more.

We do look at those by size range and I don't have them all committed to memory.

We are big players in the size ranges that we play in.

Okay.

And when the prices --

Oh, I'm sorry, I beg your pardon.

On the hurricane side, it's too early to the tell that.

I mean, we had some shipments that were delayed just because the logistics weren't moving, but I think that's all going to flow through.

Our marketers who I just talked about this recently with, tell me that it's likely there was some damage to subsea pipeline tiebacks to platforms, of which there are many, and that's a sweet spot for a lot of our product and it's likely that both the hurricane disruptions and the price structures are going to spur additional drilling, deep stuff, which is also our sweet spot.

So we expect that this is going to be short term a little bit disruptive just from a shipment standpoint, which we saw in the third quarter.

Long-term it should be positive for the business.

Okay.

And then, during the summer when we had the low prices, did you commit many tons into the fourth quarter or -- at those prices that have yet to flow through?

No, no, not really.

In fact, we held our prices above where most of the indices would show they should have been and did not go forward to chase additional volume, partly because we didn't have it, Dan.

We weren't making as much with the furnaces out.

So, no, I don't think we did anything unusual compared to our normal strategy.

Thank you.

Thank you, Dan.

I think that's it, Operator.

Operator?

There are no further questions in queue.

Thank you very much everyone.

We look forward to talking with you next quarter.

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