美國鋼鐵 (X) 2005 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the United States Steel Corporation fourth quarter 2005 earnings conference call and webcast.

At this time all participation lines are in listen-only mode. [OPERATOR INSTRUCTIONS] As a reminder, today's conference call is being recorded.

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

Please go ahead.

Thank you, Rod.

Good afternoon, and thank you for participating in United States Steel Corporation's 2005 fourth 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.

Next, I will provide some additional details for the fourth quarter, and then Gretchen Haggerty, U.S.

Steel Executive Vice President and CFO, will comment on the outlook for the first 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.

Thanks, Nick, and good afternoon everyone, thanks for taking the time to join us.

For the fourth quarter we delivered very strong operating results as you saw with segment income of $313 million or $63 per ton, a marked improvement over third quarter results.

However, not all of that $100 million increase in segment income made it to our bottom line.

We reported earnings of $0.85 per diluted share, which included, as you saw, a number of items, let me mention a few, a $16 million income tax charge resulting from the repatriation of $300 million from our European operations under that special deduction Congress passed back in 2004.

We also had a $20 million pre-tax environmental and accrual related to a former steel production site which we sold some years ago, and an $11 million pre-tax charge for workforce reductions in Europe.

Those items reduced fourth quarter net income by $39 million, or $0.30 per diluted share.

So if you exclude those items we calculate that our results exceeded the average of analyst expectations of $1.06 per share.

In addition, as noted in our release, during the fourth quarter we changed our method of inventory accounting in Slovakia from LIFO to FIFO, a simpler, more stable method and we adjusted prior period results to apply that change retrospectively, as is required by the accounting standards.

The change in accounting method had an unfavorable effect on USSK fourth quarter operating results of $22 million and that number, along with a complete recap of all the related figures, is included on a special exhibit to our earnings release for your convenience, and, of course, there will be lots more about that in the financial statements when they're filed.

One final computational note, our full-year tax rate came in a bit higher than we expected at the third quarter earnings date, and the effect of the catch up adjustment in our fourth quarter results was about $22 million or, $0.17 per share just for your information.

Now, just looking at the big picture for a minute, by any measure United States Steel had a very, very good year in 2005.

I'm particularly proud of our improved safety performance which is always our top priority.

A number of years ago, we established internally a very aggressive goal of becoming a global leader in terms of safety, not only among steel companies, but compared to other leading global manufacturers.

It's been demonstrated that leaders in the safety performance tend to be the best manufacturers in term of productivity, reliability, and results, and 2005, on a global basis, our OSHA reportable rate improved by 42% and we achieved a 65% reduction in the days away from work cases.

Our employees deserve the credit for this improvement which has been facilitated by ongoing cooperation with union leadership both in the U.S. and in Europe.

I wanted to take a minute today to publicly thank all of our employees for their contribution to making 2005 a much, much safer year at U.S. Steel.

Let me turn now to our operations compared to the third quarter flat-rolled results reflect the combination of higher shipments and prices, offset by higher energy and outage costs all of which we talk about at this time last quarter.

The flat-rolled segment earned $36 million in the fourth quarter despite operating at 80% of capacity, and this is the third consecutive quarter the segment has delivered an operating profit while operating well below optimum levels.

This performance reflects the improvement in our cost structure made over the last few years.

At Gary Works, our Number 14 blast furnace rebuild project was delayed by an equipment failure in September, and an expanded project scope which then pushed us into periods of high wind and harsh weather conditions and delayed some of the heavy crane work needed to complete this project.

With construction now completed we're now making iron and working through the start of protocol and the furnace should be producing at its over 9,000-ton daily capacity in the next few weeks.

Perhaps I can answer a question which is likely to be asked later by stressing that we will, as always closely, closely monitor our order book and match our production plans with customer requirements to avoid significant inventory builds.

Our five domestic steel producing facilities and 12 domestic blast furnaces provide us with the operating and commercial flexibility to adjust production at one or more facilities to match the needs of the market and our customers.

The European segment earned $112 million in the fourth quarter despite the negative impact from the accounting change I mentioned and some other non-operating costs as European markets recovered from several quarters of high inventory levels.

Fourth quarter prices firmed and shipments increased 129,000 tons compared to the third quarter, and our facilities operated at much higher levels.

Our number two blast furnace in Slovakia restarted in late October after a four-month outage and a second furnace in Serbia ramped up nicely after its restart in July.

Europe's improved performance reflects the operating and cost efficiencies associated with higher operating levels and lower raw material costs, although the change to FIFO at USSK reduced, somewhat, the variable raw materials effect recognized in quarter.

Our tubular segment continued its run of outstanding results with fourth quarter operating income of $149 million reflecting a balanced market, strong demand in prices.

From an operational perspective, we recently completed modifications to the Fairfield tube round caster to expand its size and production capabilities.

That allows now for much greater internal sourcing of tube rounds for Lorain from Fairfield.

Fairfield currently has the capability to produce approximately 71% of our rounds requirements versus approximately 60% in prior years.

In addition, the tubular segment continues to benefit from the quench and temper, or Q and T lines at both our Fairfield and Lorain mills.

The Q and T process is required for virtually all high strength casing products used in the oil and gas exploration market.

In 2005, the Lorain Q and T line, which was installed back in 2003, operated at levels 55% higher than contemplated when the project was originally authorized.

The Fairfield Q and T line operated at record levels, as well.

The higher Q and T operating rates facilitated more shipment to some of the highest margin tubular applications we have.

We expect demand for tubular products to remain strong in the first quarter.

As noted in the earnings release we repurchased 4.6 million shares of common stock in the fourth quarter for a total cost of $202 million, bringing our repurchases to 5.8 million shares for a total of $254 million since we announced the program last July.

Earlier today, you might have seen our Board of Directors author the replenishment of the repurchase program back to 8 million shares.

This action, along with the previous stock repurchase activity, and the two increases in our dividend last year, reflects our commitment to our shareholders and our long-term optimism for our Company.

Of course, we'll continue to approach the share repurchase process in a conservative and responsible manner with regard given to our overall capital allocation process.

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

Nick?

Thank you, John.

Capital spending, which is detailed by segment in the earnings release, totaled $268 million in the fourth quarter resulting in full year capital spending of $741 million.

We expect 2006 capital spending to total approximately $700 million reflecting domestic spending of about $440 million and European spending of approximately $260 million.

Much of the 2006 capital spending program will focus on infrastructure projects, mostly on the primary side of the business, including open pit mining equipment, coke battery [INAUDIBLE] repairs and a new air separation plant in Slovakia.

Our major market-related project is the automotive quality galvanizing line in Slovakia, which should be completed in early 2007.

In addition, certain lease buy outs have also been included in the 2006 capital budget.

Depreciation totaled $92 million in the fourth quarter and $366 million for the year.

Depreciation is expected to increase to about $430 million in 2006.

Defined benefit and multi-employer pension and OPEB costs for the quarter totaled $95 million.

We made cash payments of $66 million primarily for retiring healthcare costs during the quarter.

Also, during of the fourth quarter, we made a $50 million voluntary contribution to our retiree healthcare trust that Gretchen will discuss in a moment.

For 2006, we expect our pension and OPEB costs to be approximately $300 million.

Excluding voluntary contributions we expect our 2006 cash pension and OPEB payments to be approximately $260 million.

An additional detail will be included in our 10-K which should be filed late next month.

Net interest and other financial costs totaled $14 million in the fourth quarter.

Excluding foreign currency effects and interest income on cash balances, we expect our 2006 interest expense to be about $130 million.

Also, as disclosed in the release effective, January 1st we adopted the euro as a functional currency for our European operations.

This should reduce the future income effects of remeasurement gains and losses.

Our estimated annual effective tax rate for 2005 increased 25% to 27% in the fourth quarter resulting in a $22 million, or $0.17 per share charge to essentially increase the tax provision on prior quarter results to reflect the higher final annual tax rate.

For 2006, we expect domestic earnings to be taxed at the statutory rate and Slovakian earnings to be taxed at a flat 9.5%.

Lastly, we ended 2005 with 126 million fully diluted shares.

With that, Gretchen will now review some additional information and outlook for the first quarter.

Thanks, Nick.

Cash flow was very good in 2005 with cash flow provided by operating activities of $1.2 billion, even with the $180 million of voluntary contributions to our employee benefit plan during the year.

In total for the year, we generated free cash flow after capital spending and dividends but before external financing of $455 million, and we ended the quarter with $1.5 billion of cash and $2.7 billion of totally liquidity.

With our strong cash position, in addition to accelerating our share repurchase program in the fourth quarter, we took steps to further improve our capital structure.

In the fourth quarter, we voluntarily contributed $50 million to our tax-qualified fund for union retiree healthcare costs.

By virtue of our agreement with the steel workers, voluntary contributions allow us the flexibility to reimburse ourselves later from the trust for healthcare costs for our steel worker retirees.

We also refreshed our Board authority to make voluntary contributions up to $260 million for either pensions or OPEB in either 2006 or 2007.

As of December 31, 2005, we remeasured our main pension plan and determined that the accumulated benefit obligation exceeded the fair value of plan assets.

So in accordance with accounting requirements, we recorded an additional minimum liability resulting in a $1.4 billion after tax charge against equity.

You may recall that we have recorded and reversed similar amounts in the past.

This charge had no effect on income or cash flow.

The shortfall is mostly due to a 25-basis point decline in our discount rate assumption, and also reflects the performance of our plan assets.

As you might expect, our pension plan is very sensitive to changes in assumptions particularly in discount rate assumptions.

We estimate a 50-basis point increase in the discount rate would reduce our plan obligations by about $300 million and result in a reversal of the additional minimum liability.

Our plan remains very well funded.

In fact, using a 5.5% discount rate assumption our main plan was about 92% funded on a projected benefit obligation basis at the end of 2005.

As discussed last quarter, we continued to accumulate a profit-based liability for payment to the national benefit trust when it is established.

As of December 31st, we recorded a payable of over $200 million for this purpose.

We expect first quarter flat-rolled shipments to increase due to the restart of the number 14 blast furnace, and average realized prices are expected to be in line with fourth quarter levels.

We expect higher raw material costs will be mostly offset by lower outage costs.

For U.S.

Steel Europe, first quarter shipments are expected to increase due to having the number two blast furnace in Slovakia operating for the entire quarter.

Also averaged realized prices and costs are expected to be consistent with fourth quarter levels.

However, natural gas supply disruptions have recently curtailed Serbian operations and may continue to adversely -- and their effect is uncertain.

In the tubular segment, first quarter shipments and average realized prices are expected to be in line with fourth quarter levels.

First quarter 2006 results for other businesses should decline from the fourth quarter due primarily to normal seasonal vary variation at our iron ore operations in Minnesota.

That concludes our prepared remarks now we would like to open it up for questions.

Rod, could you please queue the line for questions?

[OPERATOR INSTRUCTIONS] One moment, please, for the first question.

Our first question will come from the line of Aldo Mazzaferro with Goldman Sachs.

Please go ahead.

Hi, good afternoon, John.

Aldo, how are you, thank you.

Good.

On your, I wonder if you can just update us you what you might be thinking, previously, you said there was some thought about the monetizing the assets in the oil country tubular area.

Would you have any update on what your thoughts are there?

I would say we had a great quarter in tubular business in the fourth quarter and we look forward to more of the same in the first quarter.

That's my glib response, Aldo.

I think, in general though, that, that business is doing extremely well and as I just emphasized in my comments the integration of being able to supply tube rounds throughout our tube business now even more so from Fairfield is even more important for both sides of the business.

We like the integration, we like the results and we like where that market is right now.

And to follow up on that point, the comments on tubular we just heard were the shipments in pricing in line with fourth, did you have a comment for what the cost might be after that change?

Well, our tube round cost will go up somewhat from quarter to quarter because of just our normal whatever cost increases there are in the cost of steel making additions and other things, and in the flat-rolled side of the business energy would be chief among them.

We do have some purchased rounds and that's at a market price and to the extent that overall steel prices are stable or up, which we hope they are, there may be some price cost inflation on tube rounds, but in general we still look for a very, very healthy margins in the first quarter.

So is there any reason why you wouldn't expect your pricing to improve a little bit rather than be in line with the first, I mean with the fourth quarter?

No, I think as you know, Aldo, we tend to be, we like to comment on things we're pretty sure about.

I think there is certainly a prospect for increased pricing and particularly on some of them the alloy ranges, that's a possibility, and if the market supports that we'll certainly continue to pursue it.

Okay.

Just on one other, on a different topic on the FIFO, the change to FIFO in Europe, I can see how it penalized your numbers, that would imply that going forward then you should have lower costs than the cost to sales.

Wouldn't you then?

I guess, technically speaking, if everything stayed exactly the same and all we did was run through the cost structure in the first quarter, the lower cost, stay on the balance sheet instead of going through in the fourth quarter, I think that's right.

That all depends on what else happens with the rest of the cost structure.

But as far as it goes, all things being equal, that's the right calculation.

Thanks, John.

Great quarter I thought.

Thank you, Aldo.

Thank you very much.

We'll next go to the line of Michael Gambardella with JP Morgan.

Please go ahead.

Good afternoon.

Good afternoon, Mike.

I just wanted to congratulate you, again, on the quarter and especially on the share buy backs at a really good price and the extent of the share buy back work that you did in the fourth quarter.

Got a question on the Gary furnace.

Can you give us an idea about the extra cost in the fourth quarter that you got hit with at Gary because of the wind and the delays and so forth?

It is hard to absolutely quantify that, Mike.

If you compare the third quarter to the fourth quarter, what I will loosely define as outage costs there was additional capital but that was more because we were doing more.

The overall outage costs, third to fourth, the outage costs related to the Gary project, Number 14 blast furnace itself, were higher for the reasons you described, as well as the fact we were doing a little bit more cost work, but we rescheduled some other things, pushed some things back, had done some things earlier that reduced the overall, the otherwise outage costs, of course, and the third to fourth their outage costs were somewhat higher, but not by a dramatic amount, and, however, going from fourth to first, we probably would see some moderation of outage costs from fourth to first.

Any idea just, when you look at the year '05, you had two big outages, you had Europe and you also had Gary, and any idea what the total cost of that hit to your numbers was for '05?

The back half?

It is hard to say in absolutes, again, Mike.

I would just say that if you compare what we had in 2005 with what a normal year would be, I am not sure I know what a normal year would be.

That was a fairly heavy year because we did have two substantial projects.

We always have outages on hot strip mills in steel shops and blast furnaces, but, anyway, the overall increased cost in '05 versus what an average normal year would have for a Company our size, it could easily be $50 million or more.

It was a substantial amount of additional cost.

Last question.

Any thoughts or comments in terms of the recent bid by Mittal for Arcelor and the implications to U.S.

Steel, and the industry in general?

No.

It is really a) hard for me to comment because I have in in board meetings most of the time last 24 hours and I am way behind on the news flow.

So whatever has occurred in the last day or so I don't know as much as you or most of the time other people on the call I am sure, and I will leave the commenting to you and others.

I would only say the industry has been undergoing a trend towards consolidation in every region for the last five years, and it seems like a conclusion or a continuation of that, not necessarily a conclusion to it, but a continuation of it, and beyond that there is really not much more we can say.

Thanks.

Great quarter.

Thank you.

The next question will come from the line of Michelle Appelbaum with Michelle Appelbaum Research.

Please go ahead.

Congrats on all the great results.

Thanks, Michelle.

Even though things in Chicago are weaker, everybody else, you know, seemed to more than make up the difference, and it really validates, I think, the Company's portfolio when you see this kind of effect.

Thanks, Michelle.

We use the word balance a lot and I think we showed a pretty good balance this quarter.

Well, I think for so many years it was the way Gary went U.S.

Steel went, so now Gary can back off and the rest of the Company picks up the slack.

It really is an impressive quarter and the buy back just frosting on the cake, but I have some questions.

I was pretty surprised, Newcor on their conference call last week, identified their order book at 100% sold for the first quarter, which I guess wasn't terribly surprising, but then said they were 80% full for the second quarter.

Can you give us a little sense of the strength of your bookings right now going out a little bit?

Sure.

We have, as you know, a good bit of contract business in some important industries and while we don't have absolutely order flow all the way, out deep into the second quarter, we have some decent assurance that based on bill schedule and long-term plans that we should have pretty good order flow from those key industries, and, really, all the industries we're selling to in large quantities the order flow has been quite strong, the service center volumes have been excellent pipe converters, tube converters been excellent.

Sheet converters have been strong.

Appliance has been strong, tin container strong, so, I mean, really everywhere in the non-residential construction, as well, coming back strong, automotive, even though there is a lot of dark clouds around, the overall build rates in our order flow have been pretty respectable.

We didn't hear that or see that.

I am not surprised by it.

I think it is, essentially, the same thing we're seeing.

Great.

A second question, I know you guys have kind of your own window into what's going on with China with an office over there, one of the only domestic guys to have actual people on the ground there, so I would love to get your overview on recent business trends in China the last couple weeks.

Sure.

China is going into a holiday period, as you know, but what we see is that China has continued to be a net importer of flat-rolled products even though we may see overall net exports from the time.

Net imports of flat-rolled continues to be the rule.

We've seen after some very long periods of difficult prices we've seen the glimmer of some price increases coming in China, and the one thing we probably see there, is, I think, most important is, overall, demand that economic activity in China is really strong, and maybe stronger than the official figures, and our particular sector maybe stronger than we all anticipated or actually have seen in the last year or so.

A lot of capacity comes on in China.

There is no doubt about that.

There is excess we're concerned about.

That's the reason we're very strong on maintaining our trade laws and the reason we had delegations in Hong Kong for the Doha round.

I will continue to make that statement every time someone gives me a chance to.

But the overall supply and demand balance in China seems like it's moved a little bit more in a favorable direction as reflected by the prices, and then the activity around the consolidation in that country's industry towards a few larger players seem to be moving in the right direction, too.

It is not without risk.

It is huge, the biggest territory in the world market with excess capacity could be troublesome, but the activity we've actually seen is generally positive right now.

Okay, let me -- not to be unduly paranoid, just why do you think the market in China is tightening, is it possible that they're exporting more and the boats are on their way, or do you think it's their inventory situation, economic activity, what do you attribute it to?

Anyone's guess is at least as good as mine, Michelle.

But I don't attribute it to a flotilla of exports heading out of China.

We don't know for sure.

That's not what we've seen anecdotally and what we do see anecdotally is a more robust domestic economy that's managed to chew up a little more of that supply than we might have anticipated.

But that's just our observation, I wouldn't warrant that that's the case.

Thanks.

Appreciate it.

Thank you, Michelle.

We'll next go to the line with Bear, Stearns.

Tony Rizzuto, please go ahead.

Thanks very much.

I just want to echo some of those comments made earlier about the performance and then also the share buy back.

I have a couple questions here.

First one pertains to the tubular business, and I see that a competitor, [Valorec and Minisman] apparently announced a price increase for May 1 on seamless mechanical tubes.

Are you guys involved in this particular part of the market and have you followed this price increase?

I haven't.

I saw just a headline on a screen somewhere during the course of all these meetings we've been in, and just based on what I read my quick observation would be that's not a market we're in although it is a general trend we agree with.

Okay.

All right.

I guess if I could just circle back a little bit to the cost issue, could you give us the level maybe on an MMBTU basis that you realize in natural gas in the fourth quarter.

I know you consume about 80 million BTU per year.

If you can help us out, as natural gas has come in a little bit, just to help us think about where the fourth quarter level was?

Sure.

I think that's a good question.

I just use those kind of general numbers we've all talked about before if we use 80 a year let's pretend it was 20 in the fourth quarter and maybe a little more and maybe a little less.

Let's just say 20, and if you take, the last time I looked at it a daily daily average strip value it probably would be $2 and if you took 2 times 20 and got 40 that wouldn't be too bad a number.

Great.

And if you could give us some help with the [INAUDIBLE] obviously, with the number 14 coming back up to the full capacity, can you give us some idea as to what the type of volume, your order book is pretty full for the first quarter, what type of volume we should be looking in there for FRP for shipments in Q1?

I think we said we were looking for increased shipments and I guess that we're not going to get much more specific because we want to ship as much as we can while making a good margin on it.

So as the furnace comes up and we've got a decent order book, at decent prices we'll continue to book it.

I think we have upside from where we were in the fourth quarter, but I don't want to give you a specific number, Tony, as to how high that would be.

Gretchen, is that a fair comment?

Yes, that's a fair comment.

Thank you very much.

Thanks, Tony.

We'll next go to the line of John Tumazos with Prudential.

Congratulations on the share repurchase announcement and I presume that that half billion dollars of capital is not going to be used to make acquisitions, and that you like your own business as opposed to bidding wars, such as north of the border, and you're not going to flinch if making your capitalization slightly smaller makes you more absorbable by some [INAUDIBLE.]

I guess, John, I would say that we're very comfortable with what we've been doing on the share repurchase side, and I think that, obviously, reflects that we thought we were doing the right thing in the fourth quarter.

We, and we were happy to renew our share repurchase program back to the 8 million share level.

I don't know that I would conclude from that that we wouldn't do an acquisition if we thought that was appropriate.

Not a big one, moderate ones.

I think that John has said appropriately that we've tried to approach everything we do with some balance, and we've been working on our capital structure.

We have been working on returning some capital directly to our shareholders.

We've been working on our capital programs, our capital expenditure program, so I think we'll continue to do that and some strategic activity is going to factor into that balance.

Thank you.

Next question will come from the line of Wayne Atwell with Morgan Stanley.

Please go ahead.

Thank you.

Could you enlighten us on your outage schedule for the first quarter and for all of '06?

We don't usually give specific schedules because they're not firm and there is a little bit of -- not a little bit, a lot of commercial strategy involved in that and I prefer not to do that in this more public forum, but because of the significant outage load we had in 2005, I can't say that it should be less in 2006.

I think that's a pretty safe bet.

We'll have a diet of more moderate outage jobs, some blast furnace, lots of steel shops, all strip mills throughout the year, and I think the biggest thing we'll miss will be, '06 compared to '05, we did have a heavy load in the back half of the year because of the big jobs going on in Slovakia and in Gary and I think that bulge we had in the second half probably would be a more level kind of load in all of 2006.

Just generally speaking less and more level than we had in '05.

Okay.

Thank you.

And, obviously, you're probably not going to answer this specifically, but you have a lot of cash flow.

You're buying back stock.

You're funding your legacy obligations which is great, very responsible, but you have a lot of cash flow, there is M&A cycle going on.

I know you're not going to tell us, specifically, but are you interested, other than buying raw materials in central Europe, is there anything else that might catch your fancy or is this not something that has any appeal to you maybe something overseas, Brazil, Asia, Europe, are you likely to, or are we likely to read something that you've initiated?

I think that we just continue to take a look at opportunities as we go.

I am not sure that we would say anything more specific than that.

We're interested in doing things that add value to the Company wherever and whenever, but really nothing specific to say beyond that.

So you are willing to be opportunistic, but you wouldn't rule that out as a possibility?

I wouldn't say, we'll run on our record that we've done pretty well at adding things to the Company, and we've done pretty well at not adding things that wouldn't have added value to the Company.

Thank you.

Okay.

Next question from the line of John Novak with CIBC World Markets.

Please go ahead.

John, can you give us a sense with respect to your outlook for North America of why the raw material costs might be rising, particularly when you're likely to see lower natural gas prices in that first quarter?

It would be really a series of more modest non-headline items that would be zinc and other additions and would be one, if you've seen zinc gone from $0.50 a pound to $1.00 a pound, and we use a lot of zinc in coating, and tin would be driven by the same thing, and other steel making additions, probably blast furnace coal we may have a slightly higher cost on this year as we rolled out of some older contracts.

I think it would be those non-headline items, and then, indirectly, we view it as a raw material cost when we use additional higher priced gas to be processing our iron ore and taconite pellets, and we view that as a higher raw material costs, as well.

So it would be those non-headline items, but it would be basically just higher market prices for those inputs.

Okay, and last year on this same quarter I think you gave us an indication of how much, incrementally, your coal costs would be up.

Could you do that again for us this year?

I don't remember how much we said about it last year, vividly accepted, as I mentioned we do have from time to time these contracts that are older contracts that run out, and I looked at it recently, but the increases are in the order of $5 to $10, something like that, on a per ton basis over our entire domestic volume of 9.5 to 10 million tons, probably somewhere in that range.

Okay, and back on the third quarter when you gave guidance for the fourth quarter, you indicated that you were hopeful that you would see some price increases take place in Europe, and it looks like, in fact, they came off a little bit in the quarter.

Can you give us a sense of what transpired in the quarter to bring those prices down a little bit and where you might be seeing increased competition?

Some of that was in Serbia where we were bringing on additional volumes into the marketplace and really trying to develop a market.

That is material we have to compete into the market to try to find a home for where we haven't had a position, and then also a little bit of mix, a little more hot roll coming out of Serbia in total, or in proportionally than we would have had in the previous quarter.

I think some of was that was mix and some was just forcing our way into the market and working our way through the market in Serbia.

Prices, I think, in Slovakia were probably relatively flat, maybe a little bit of spots off this early in the quarter but we see prices in Europe doing pretty well right now.

Lastly, on the tubular business, I guess you anticipated the price of the rounds would go up about $46 a ton going into the fourth quarter.

It didn't appear that that fully impacted you.

Is there more catch up that takes place in the first quarter, or was that the extent of that transfer price increase in that quarter?

No, I think that's it.

Whatever you saw in the fourth quarter is it.

I think we managed to have our prices up high enough and then we have cost that came through, but not as heavy as we expected.

Whatever we said we were going to put through is what we put through and whatever the results are they are.

We put all that through, and I am not sure we see another big move like that coming in the first quarter.

Thank you very much.

And next with Bradford Research we'll go to the line of Charles Bradford.

Please go ahead.

Good afternoon.

Hi.

Hi.

There has been some reports out of, I guess you could call it eastern Europe, about a very large iron ore complex in the Ukraine being for sale again, and your name has been mentioned.

Is that an accurate reflection of interest?

Yes, I haven't seen the report, Chuck, so I don't know which one it is referring to.

We've had conversations with a number of people, either directly because they're owners, or indirectly because they have an interest in the transaction, about a number of different alternatives in Russia and Ukraine, as I mentioned before.

I am not sure which one that is and I haven't seen the news report you're talking to.

There would be a number of iron ore positions in Ukraine and Russia that our name could reasonably be linked to because we either visited or had a conversation about.

Unfortunately, it is one of these where it is difficult to pronounce, but it is supposedly a very large one that the Russians never finished.

That particular project just based on that description was a project that it is hard to pronounce.

I won't try to.

It was a three-part project with Russia, Ukraine and Slovakia, or some, [Krevarog,] is my clumsy pronunciation of it.

And Slovakia had invested in it back in the 90s, at some point, it wasn't finished.

We have some knowledge because the Company we bought in Slovakia had some knowledge of it, and we know of it, we talked about it.

We'll talk about it again.

Nothing I would say is imminent or dramatic.

Are there any mills themselves that you think might be put up for sale, just so many in Russia, Ukraine, Slovakia, or maybe not Slovakia, but some of the other places that could be of interest?

I am not going to ask you whether you're bidding or not.

Well, I think the, Russia would be a place where there are some excellent, excellent facilities, many of which have raw material positions in them, and we have been interested in those, as I said, and we've had lots of discussions with them, but I think, I'm not sure where the national interests would be on a complete sale of a Company in that territory to a western Company.

I think that's a complicated proposition that has a lot more than just business to it that we would be very, very careful about and would consider and work our way through, but that would be something that would have to be approached carefully and very, very slowly.

Can you also address the spot price of coking coal in the U.S.?

Obviously, I heard your comment about the impact of the older contracts running out and your average costs going up.

I have been under the impression that spot prices are actually coming down.

Can you give us more information?

Sure.

I don't think these comments are at all inconsistent.

I think spot prices probably have come in a bit from the extremes they were in way up to 120 or whatever they were within the last year or so.

Spot prices, indeed, have come down, we don't buy a lot of spot coal.

We don't usually try to do too much of that.

It is probably well under 100 right now, I would guess, or maybe that range.

I don't want to negotiate on the phone.

We're paying something well south of that on contracts, so our contracts are moving up a bit, still well below spot.

But I think you're correct, spot has certainly come in and there is a lot more coal available right now.

Thank you.

Thanks, Chuck.

Next questions will come from the line of Brett Levy with Jefferies & Co. Please go ahead.

Hey, guys, two questions.

First off, can you give a little bit of an update on what you're hearing out of Washington on pensions, and I think in the worst case of the bill it sounds like rather quickly you will need to fund about 80% of your under funding.

Obviously, that would be horrible news for some guys a little bit closer to the precipice than you, but can you talk a little bit about what you're hearing over there?

And then, secondly, can you talk -- I've heard that iron ore price discussions away from you guys have been up somewhere in the ZIP code of 20%.

What have you guys been hearing?

How close are you to done with your negotiations there?

Why don't you do the pension plan stuff, Gretchen.

Okay, John, thank you.

On the pension side, I guess we're staying very close to what's going on down there, and there is an awful lot of conversation, no action yet.

If you look at all of the bills that have been thrown out there, the main objective is to try to take under funding and eliminate that over some period of time, maybe seven years.

I guess I would never characterize us as being on the precipice.

I think we have a very well funded plan, but all the legislation would have some effect of accelerating contributions that we otherwise would not be required to make.

We've not had mandatory required contributions for some time now.

But we have voluntarily funded over $500 million into our plan in the last two years.

The, and the authorization that we got today for an additional $260 million is intended as voluntary funding.

We've tried to approach this by voluntarily funding, not waiting to be told what we have to do by Congress, but the effect of all of this legislation would be some acceleration in funding for us.

It would, as you've observed, be more funding for others, I think.

And this question is a tad more pointed.

In looking at acquisitions, do you guys view post-retirement health liabilities as debt?

You know, I think the rating agencies will take the unfunded portion of that and add that back for purposes of their calculations, and they've been doing that pretty consistently for some time, but OPEB is not really, they don't have -- it is not totally debt like, it is not a, as firm as a bond.

There is not a set maturity time and so you have an opportunity to effect that obligation with reductions in healthcare costs and there is a lot of assumptions that go into that.

We have, in fact, affected our liability that way.

I think there is still some -- you can manage that to a certain extent.

There is also a little bit more risk to it than just a bond because it can't change on the upside, too.

Where we treat that as debt, it is debt like, but it is not debt, I guess.

When we acquired National Steel, back in 2003, we assumed the small amount of OPEB, from our point of view I think we tend to view it, as Gretchen said, as an obligation.

It is an element of the cost of acquiring something, and it has risks and also opportunities.

We're not intimidated by it.

We think we know how to manage it decently well to make our obligations, or to fulfill our obligations, but not exactly as debt.

I think Gretchen described it well.

On the iron ore side, we have been observing the reports about the Seaborn trade negotiations.

We're not directly in that.

We don't buy much that way.

Not in North America, maybe a small bit opportunistically in Europe.

We buy most of our iron units from Ukraine and Russia on annual contracts with quarterly pricing adjustments that we negotiate.

And. while they have some relationship to, they're really somewhat detached from those big game negotiations going on right now.

We have heard the same thing you heard, but we have no really direct knowledge about how it's going.

And the next questions will come from the line of Marty [Pollack] with NWQ Investment Management.

Please go ahead.

Hi, guys.

Almost all my questions were answered.

Let me ask one just generally about pricing.

The big spread on Asian prices, the U.S. and certainly the evidence that imports might start coming in here in December, can you talk about pricing in light of whether you think this is that plateau we were seeing here, what pricing possibly easy into what would still be attractive levels, or do we have the possibility of firming of prices from these levels, as opposed to probably not what we saw two years ago when prices on hot roll got over 700, but if you could talk about conceptually what is the upside and downside of pricing?

That's a complicated question, Marty, as usual a very good one.

I would say that there is a demand dimension to that, and I think that underlying demand in North America is pretty good right now and across the customer groups we serve at least we see more to be happy about than not, and it is pretty broad based not just in one sector or another, so I think if you see decently robust demand which reflects a decently by robust economy, and supply which is not extreme, either by production or by imports, I think there is a good shot at firming prices later in the year, or at least maintaining these prices maybe up a bit more.

The supply matter needs to be addressed by people like us who supply, but also the import mechanism, there has been supply disruptions and some plants in other parts of the world that may limit that to some degree, but also we've seen prices firming in both China and Europe which is a nicer way to keep that differential a little bit more narrow.

All of that said, it could go either way.

I think the reasonably firm demand in North America is a very positive sign for prices throughout the rest of this year.

Is that by any chance reflected in what might be March pricing quotes that you can tell at this point?

No.

I don't want to get into what our specific prices are.

We do see the external indices that published prices, if you've noticed what they have done, they have tended to have expectations of prices tailing off and each month they have to move it up to what the current price is which is more or less at the same level it was last month.

I think the prompt price, if I can call it that, has been pretty strong, and I think demand remains relatively strong and that would be a positive.

We watch imports very carefully, of course, both actual imports and then the import monitoring system we take a look at, and while we see some move up on imports, it is not a torrent, and it could be well needed to balance the market given the demand we have in North America.

That question on imports is one that bears very, very careful watching.

Next questions will come from the line of Mark Parr with Keybanc.

Please go ahead.

Thanks.

Good afternoon.

Hi, Mark.

Hi, John, Gretchen.

Congratulations.

Thanks.

Great quarter.

Thank you.

I had a couple of questions.

First, and I missed the first few minutes of the call.

Did you, John, talk at all about the natural gas availability situation in Serbia, if there is any additional color you could give us on that as far as potential impact for the first quarter?

We didn't and I can, Mark.

We had a disclosure as you saw in our press release because we have had some disruptions there.

There is really only one line into the country and because of a lot of reasons which could be the fact that it was extremely cold, compared to just normally cold in that part of the world, and also, perhaps, some other disruptions be they political or otherwise.

We were, as the largest industrial consumer in that part of the country, were cut back and as a result had to cut back on blast furnace and strip mill activity, and we thought it appropriate to let everybody that.

It was public knowledge in that part of the world.

We've seen some of the flow rate restored just recently, within the last 24, 48 hours, so we're feeling a little bit more comfortable that we're going to be able to get back some of the production that we had on before, but it is an unstable situation and we thought it was worth just mentioning.

I suppose we can all dial into Belgrade weather radio or something and see what the reports are there.

But for the moment, we've seen the flow rates getting back towards normal and we should have a second blast furnace back on and the hot strip mill up and running fairly soon.

Okay, terrific.

That's helpful.

Had another question, if I could, on the inventory situation.

Is there any help that you can give us as far as potential movements in the LIFO reserve between the end of September and the trueing up for year end?

Gretchen, you may want to cover that.

Yes, I guess I think not.

We weren't on LIFO at the end of year so we don't have that.

You mean in Europe or just in general?

No, for the domestic business.

The domestic side.

I am sorry.

I am hung up on the European side.

I think in the U.S.

I don't know anything about anybody else and how they do it, but there is simple LIFO and more complicated LIFO, and we're of the latter variety and have been for a long time.

Giving out that kind of -- even if we had it which I don't have to hand differential measurements we don't think is very valuable.

It is nothing we would think about and look at and I don't want to give you something that would not have thought behind it.

It is not a measure that we consider because our situation is much older and much more complicated than I think most of the others that might talk about that.

And just if I could ask one more inventory question, is there anything that was discernible between the end of September and the end of December related to the mix of finished product versus work in process inventories?

I guess where I am coming from here, John, looked like you might have run your front ends, or your hot ends maybe at a little stronger rate than your shipping volumes were, and you might have built a work in process inventory.

I wonder if that it true or not?

We ran our hot ends in the fourth quarter.

Those that were running hard.

I think we set blast furnace production records on one of our small furnaces in Gary.

We did well on that, but we also sold pretty briskly.

I don't know that there was any dramatic change between end process and finished.

Those things ebb and flow over time.

We weren't chasing that.

The one thing we did do is add some raw materials inventory to our portfolio and system over the course of the last six months, particularly, on coal side where we were chronically short of coal, we got ourselves back to a more comfortable position so that would be inventory we did add.

Okay, all right, terrific.

Lastly on this ongoing saga of consolidation and integration, I just had a question.

I wanted to throw out there that really hasn't been discussed, and looking at some of the other producers in the U.S. have been focusing on some down stream acquisitions.

Well, down stream, we were in down stream at one time.

We used to be in the service [INAUDIBLE] business many, many years ago.

You have a lot of experience many in that area.

Right, not all of it fulfilling, but I would just say in general that we like where we are positioned.

We might like to have additional finishing assets and whether that goes just additional galvanized or some other coating we don't know.

Whether it goes into pre-painting, those are things we talk about all the time, haven't taken steps on yet, we are very mindful of the channel challenges that that engenders because we don't ordinarily like to compete with our customers.

For the moment we've seen a better use of our capital is to do the things that you've seen us do with it, which is to improve our infrastructure, add some market facing assets in Europe and the U.S., stabilize our balance sheet and return cash to shareholders.

We haven't seen fit to use it for that purpose yet.

Next questions will come from the line of David Martin with Deutsche Bank.

Please go ahead.

Thanks and congratulations.

Wanted to come back to, I guess, firstly, the European results and think about the performance quarter-over-quarter.

You commented on lower raw material costs and outage costs.

Could you attempt to quantify the impact of each quarter-over-quarter?

Well, I would rather not.

I just say that the details, I would say that if you looked at the third versus the fourth quarter, in terms of overall results which was $100 million plus or minus increase, the preponderance of that would have been lower raw materials costs.

I think that would be the major piece, and others which would be a little outer spending, in particular, offset by some energy cost things would be the second biggest piece.

I think the largest preponderance of that roughly $100 million difference would be raw materials.

And just remember that those results do reflect the change from LIFO to FIFO, as well.

Right, which we gave you the number for.

And then on FIFO, just to make sure I understand this, the restated third quarter figure, a $21 million in Europe compared to the 112 in the fourth quarter, what was the FIFO inventory accounting change quarter-over-quarter?

In the fourth quarter, it was $22 million, so that had we not changed it, the operating income would have been $22 million higher.

The full year was $17 million.

Nick, do you have the schedule handy there, we could discern what the third quarter number was.

The third quarter was $11 million negative.

Okay.

Okay.

And then lastly, just coming back to the tubular business, focusing on the profitability and the impressive margins, you generate in that business, there is often a lot of discussion about the profitability of the business and what maybe the profitability of the business would look like if you transferred material at cost.

Could you comment generally about that?

We do transfer things at, basically, full production cost, and as you know we make adjustments to do that more current to last year when some of the additions cost went wild.

We don't know what the market price for 900,000 tons of rounds, or a million tons a rounds a year would be.

If there was a NYMEX of rounds, we'd use that price, as I've said before, but it would be certainly higher than where it is now, and if you want to try to fashion some relationship of what merchant slabs are and trade it against as a percentage of what export hot roll would be, and that might give you some crude example of what the upgrade would be.

It is not something we have a good way to tell you.

And until you went to negotiate the contract for the supply of the million tons of rounds a year according to a certain schedule and certain size ranges you never really know.

I don't have a good idea to tell you how much it will be, but it will be more than it is now.

Next to the line of Chris Tanners with UBS.

Please go ahead.

I am Timna.

I assume that's me.

Hi, good afternoon.

We knew who you were, Timna.

That's a new one.

Just wanted to quickly ask about the restart of Gary, if I missed it I apologize, on the timing there and if you could talk about where the tons are going to go?

I thought it was going to be more spot market tons given that a lot of the, you've had to keep a lot of your existing flat-roll business satisfying contracts, but if you could give us a little bit of a break out of end markets to remind us where your heat business is diverted to that would be great.

Interesting question, Timna.

It's hard to say.

We are in the start up process and making our end steel today and we're on the way up to what we hope will be a 9,000 tons or so per day in a few weeks time, probably.

We don't have the production earmarked, specifically, from that furnace to a particular customer group, but I think your thinking is along the right lines, that a good bit of that is going to move towards more spot oriented markets which is where we backed out a good bit of that when we had a cut back because we didn't have the volume.

I would also say, though, that some of the contract markets where our inventories are a little too close for comfort we want to replenish those, as well, and so there will be some of that moving to other markets just to make sure we have the right positions.

But it would be largely in spot pipe to converter, sheet converter, and construction would be where the majority of that additional business would go, and then service centers and construction converters, pipe and converter sheet.

Those would be where a majority would go.

Can you give us your total exposure to auto, then?

I'm sorry?

Just for arguments sake, can you give us your total exposure, then, to auto for your U.S. operations?

I don't know about exposure, but it is about 25% roughly of our market and it is an excellent customer group for us, and it's really important, so they are 25% plus or minus maybe a little bit more if you do some indirect things, through service centers.

It is a good piece of our business.

Thank you.

Next we'll go to the line of Chris Olin with Longbow Research.

Please go ahead.

Hi, John, Gretchen.

Do you think there is further room for consolidation for the domestic mills that are currently supplying the automotive skins?

I am just wondering if you think [INAUDIBLE] got issues if someone would try to reduce the supplier base further?

Chris, I don't know.

I think, I honestly don't know.

That gets into areas I am not qualified for on competition matters that others smarter than me have to decide.

There has been a good bit of consolidation so far in that sector in North America, and to the best of my knowledge or belief, nobody said there can't be any more.

What form it would take, how much, who would say yes, who would say no, really beyond my knowledge, but no one to my knowledge has said no.

Operator?

Yes.

We'll next to the line of follow-up from Tony Rizzuto with Bear, Stearns.

Please go ahead.

Thanks very much.

John, I would like to talk a little bit about capital spending requirements over the longer range, and if we could look out beyond '06 and think about what you consider to be your maintenance level in the current configuration, also thinking about the major blast furnace outages and hot strip mills.

I know it is a little bit looking into the future.

I know you think about those things all the time.

I know you got the government, the agreement with the governments in eastern Europe to spend a certain amount of capital, so if we look beyond '06 what do you think about spending needs might be?

Well, it's a good question, Tony.

We do have commitments in Europe and we're meeting those easily, I think.

We've had a sufficient number of very, very attractive things to do, together with some things on environmental we committed to do that we're meeting that without any problem.

I think you're correct in assessing that the bulge on the infrastructure spending in the U.S. is going through the system and we'll have more of that this current year and maybe a bit more next year.

If you look at it and you look at the major companies and you take an average of the capital spending per ton, the average tends to be $30 some, or $35 or $36 a ton, something like that, we've been on the short end of that 20 to 22, 23, somewhere in at that range, somewhere in that zone is probably where we should be over the long-term.

You have you to invest, we might invest a little more than some because we have a little higher value product mix, but not as much as others because they've got other businesses we don't have.

I would say if the our the tonnage, if we're going to we ship 22 million, 23 million, 24 million tons somewhere in that zone, depending on what the year is and what we're making and what we're doing with it, times $20 to $30 that kind of brackets 550, 650, somewhere in that range, I am just giving you broad averages, but I think over the long-term that is probably the investment necessary to maintain the vitality of your operations.

If we see opportunities in central Europe, which we may well, or additional value added capacity whether it is auto or value added construction, which probably occasions additional pickling in a cold mill, those fit within that.

They would make that number get a little bit bigger probably towards the latter half of this decade.

I think those are things we can do that may be opportunities.

For the long are term on a tonnage basis, $20, $25 a ton, maybe in that range is not a bad place to be looking for us, which gets you to that number I mentioned.

And please go ahead, sir.

I would like to thank everyone for participating.

We look forward to talking to you next quarter.

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