美國鋼鐵 (X) 2006 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the United States Steel Corporation's second quarter 2006 earnings conference call and webcast.

At this time all lines are in a listen-only mode. [OPERATOR INSTRUCTIONS].

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

At this time then, I would like to turn the call over to Mr. Nick Harper.

Please go ahead, sir.

Thank you, Ken, and good afternoon, everyone, and thank you for participating in United States Steel Corporation's second quarter 2006 earnings conference call and webcast.

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

Steel Chairman and CEO, John Surma.

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

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

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 the 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 10K and quarterly report on form 10-Q in accordance with the Safe Harbor provisions.

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

Steel Chairman and CEO, John Surma.

Thank you, Nick, and good afternoon, everyone.

Thanks for taking the time to join us.

For the quarter we reported earnings of $3.22 per diluted share, which included a $15 million $0.12 per diluted share favorable adjustment related to our 2005 tax accrual.

Excluding that amount if you like, our results were well ahead of the average of analyst expectations of $2.38 per share and in fact were comfortably ahead of the highest estimate, which we understood was $2.85 per share.

Each of our three main operating segments delivered excellent results, with combined segment income of $579 million or $99 per ton, which is a 35% improvement over the already strong first quarter levels.

Our people and our plants performed exceedingly well and I congratulate our employees for their contribution to our outstanding results, which came together with continued strong safety performance.

We continue to benefit from a strong global steel environment.

And while there are always risks, we see the favorable steel environment continuing at least through the end of this year, subject, of course, to the overall direction of the U.S. and European economies.

Turning now to our flat rolled segment, second quarter operating income of $212 million or $55 per ton was a 67% increase over first quarter levels.

Flat rolled results refect higher average realized prices of shipments, with a full quarter's production from our Gary works number 14 blast furnace.

Flat rolled cost remained in line with first quarter levels as lower natural gas and outage costs were offset by higher raw materials and profit based costs.

Speaking of the Number 14 furnace, our new furnace is operating well.

In fact, during the second quarter, our domestic facility as a whole operated at nearly 95% of capability compared to 87% in the first quarter and 80% in the fourth quarter of 2005.

However, as we have stated many times before, we will closely monitor our order book to ensure that our production plans are aligned with our customers' requirements to avoid significant inventory builds.

The strong steel market, current strong steel market, supports our current operating configuration and other than for routine maintenance, including work on two of our smaller Gary Works furnaces, we are planning to operate at or near capacity levels in the third quarter.

Our European segment earned $88 million or $114 per ton in the second quarter.

That's a 50% increase from the prior quarter, reflecting improved shipments, as all five of our European blast furnaces operated this quarter.

In fact, our European operations established new production and shipment records during the second quarter and also benefitted from higher realized prices.

A quick update on our major capital project in Europe, our new auto quality galvanized line, is on pace to be coating strip in the early part of next year.

We continue to receive customer inquiries for this product and we expect this state-of-the-art facility will be booked full shortly after startup.

In tubular, as we expected and as we discussed in this forum a few months ago, second quarter operating income of $146 million declined from our first quarter levels, reflecting the impact of two maintenance outages which were completed on schedule and within budget.

Despite the outages, we were able to deliver a very strong shipping performance in the second quarter.

Tubular shipments came in just below 300,000 tons, exceeding our shipping forecast by pulling down inventory and by exceeding our production targets as we came back strong from the outages.

With our most significant outages behind us, we expect third quarter Tubular results to be strong, reflecting a continued robust market and firm demand.

Now, looking at a couple of key markets.

North American automotive sales and production are at respectable levels, down slightly from last year's very brisk pace, but in line with our forecasts.

On a broader basis, shipments to service centers have been robust, a combination of strong demand from their customers and some inventory rebuilding from the very low 2005 levels.

Contributing to the inventory build have been higher import levels which may moderate somewhat in the third quarter.

We anticipate third quarter demand from both of these important sectors to be healthy.

In this favorable market environment, domestic spot prices increased in the second quarter and we've experienced additional increases in the third quarter.

A similar commercial environment prevails at our European operations.

A final comment: as noted in our earnings release, we repurchased 1.9 million shares of common stock in the second quarter for a total cost of $117 million.

That brings our total repurchases to 7.7 million shares or $371 million, and represents nearly 6% of the balance of the fully diluted shares outstanding when we authorized our program about a year ago.

We have 6.1 million shares remaining under our current authorization.

Our share repurchases, combined with our recent dividend actions, reflects our confidence in our outlook and our commitment to enhancing shareholder value.

Now I will turn the mike back 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, totalled $124 million in the second quarter.

Our current plan for 2006 has total capital spending at approximately $630 million with $405 million for domestic operations and $225 million for European operations.

Depreciation totalled $114 million in the second quarter and is expected to be about $455 million for the year.

Defined benefit and multi-employer pension and OPEB cost for the quarter totalled $75 million.

We made cash payments of $66 million for benefits, primarily for retiree health care during the second quarter.

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

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

Net interest and other financial costs totalled $14 million in the second quarter and we expect third quarter interest expense to be comparable.

Currently, our estimated annual effective tax rate for 2006 is 24%, which excludes the $15 million favorable adjustment discussed earlier and reflects domestic earnings taxed at the statutory rate and Slovakian earnings taxed at a flat 9.5%.

Lastly, we ended the quarter with 124 million fully diluted shares.

Please note that during the second quarter our outstanding shares of 7% Series B mandatory convertible preferred shares automatically converted into common stock, increasing our shares of common stock outstanding by approximately 16 million shares.

This mandatory conversion had no impact on our fully diluted share count.

Now Gretchen will review some additional information and the outlook for the third quarter.

Okay.

Thank you, Nick.

Cash flow has been good this year, with our cash flow provided by operating activity of $568 million and $288 million of free cash after capital spending and dividends, but before external financing.

We reduced debt by $69 million during the quarter, which included $50 million for reducing the facility that we entered into at the end of the year to help with the repatriation of certain foreign earnings in accordance with the American Jobs Creation Act of 2004.

As we previously mentioned, we do expect to repay the remaining $107 million of this facility by the end of the year.

We ended the quarter with 1.5 billion of cash and 2.6 billion of total liquidity.

We had accumulated a profit-based liability for payment to the National Benefit Trust which has not yet been established, and as of June 30 we had recorded payables of over $283 million for this purpose.

With our strong cash position we continue to take steps to further improve our capital structure.

In the second quarter, as Nick mentioned, we voluntarily contributed $50 million to our tax qualified fund for union retiree health care costs.

This contribution is tax deductible and now will accumulate earnings tax free.

By virtue of our agreement with the steel workers, voluntary contributions such as this one allow us the opportunity to reimburse ourselves later from the trust for health care costs that cover USWA retirees.

In addition, we have remaining board authority to contribute up to $210 million to either our pension plan or the health care trust by the end of 2007.

We currently intend to contribute at least $130 million to our main pension plan later this year.

The timing of and exact amount of such contribution will depend on, among other things, the outcome of pension legislation currently being considered by Congress.

Turning to our outlook, we expect continued strong operating results for all three of our operating segments.

In the flat rolled segment, third quarter averaged realized prices are expected to improve, reflecting both the full quarter's benefit from second quarter spot price increases and additional third quarter increases.

These price increases will be partially offset by higher raw material and outage costs.

We also expect that third quarter flat rolled shipments will be comparable to second quarter levels.

For US Steel Europe, we expect higher average realized prices to be partially offset by higher raw material costs and we expect third quarter European shipments to be comparable to second quarter levels.

In Serbia, as we mentioned in our release, we are currently involved in discussions with our employees, unions, and government agencies regarding a work force reduction plan that may be initiated as early as the third quarter.

In Tubular, third quarter shipments and averaged realized prices are expected to be in line with the second quarter levels and costs are expected to improve, mainly due to the lower outage costs.

With that, Nick, I'll turn it back to you.

Ken, could you please queue the line for questions?

Certainly, it would be my pleasure. [OPERATOR INSTRUCTIONS] And our first question today comes from the line of Dave Martin with Deutsche Bank.

Please go ahead.

Thanks, and congratulations on all the success.

Just a few items.

First of all, on the other businesses, could you just explain or give us a little color on the performance in the quarter and then maybe mention where you expect that business to trend for the third quarter?

Sure, Dave.

Thank you, first, for your kind comment.

I think the other businesses, which would be largely iron ore pellet production oriented.

There's other things in there, realty, of course, but that effect would be largely seasonal and it's fairly customary that the first quarter is a lower performing quarter because of A., weather, and B., because of the weather we typically do a lot of outage work during that time, so there is typically a seasonal effect that picks back up in the first.

The second to third quarter for other businesses, we didn't comment on because we don't normally speak about it.

They're fairly small, but there would not normally be the same kind of change, so I would think if you're looking forward we would see similar kind of conditions prevailing in the third quarter for the other businesses that we did in the second quarter.

Okay.

And then secondly, coming back to your comments on the Tubular business, can you quantify or give us an order of magnitude on what the outage costs were in the second quarter, which will help us think about costs that will go away in the third quarter?

Well, I guess if you just look back to where the first quarter Tubular results were, the change from first quarter to second quarter, I think the pricing and shipments were a bit lower so the outage costs were in there.

So probably not quite up to the levels of the first quarter but better than second.

And also, Dave, I'd say that the effect on second versus first was more volumetric and less the absolute cost of the outage.

The effect was more volume than specific costs.

These projects take some time but they aren't huge projects that we do when we are on the hot end of the business.

Okay.

That's all for me.

Thanks.

Thank you.

Thanks.

And we have a question now from the line of John Hill with Citigroup.

Please go ahead.

Good afternoon, and congratulations on the very, very strong results.

Thank you, John.

You're welcome.

Just wondering: how far out are you selling flat rolled products, out into Q4 or any into '07?

And any comments on contract cover percentages?

Sure.

The first part of your question on how far out we are, we are normally a few months out so we are still dealing primarily on the noncontract business with third quarter matters.

And while we've got some good visibility, we aren't entirely done with the third quarter, although as both my comments and Gretchen said, things look pretty good in the third quarter from a price standpoint.

We do have contracts that go well beyond the end of the year, but that depends on specific order flow and how auto build rates are and clients' build rates are, et cetera.

So the normal half of our business that we are dealing with on more short-term levels -- that is typically shorter in.

There is some that is quarterly and some at six months, but typically shorter in, so we're not deep into the fourth quarter yet.

On overall contract business, if that was the second part of your question, our position really hasn't changed from where we might have reviewed the last call.

We are about 50/50, so in the North American market we are on the order of -- flat rolled market, on the order of 7.5 million tons or so, if you think of it as a contract business.

And of that, we probably have 3 million tons or so, I think we have been using as a round number that we have to negotiate by the end of the year for next year, a little bit between now and then, but largely would be by the end of the year for next year.

And of that, maybe a third of that is a longer dated contract that hasn't really come up to modern price levels yet and we expect to be able to do that.

So we are pretty optimistic that with that opportunity plus the overall strong commercial position we are in, that bodes well, we think, for overall contract negotiations for next year.

Fantastic.

And then just as a follow-up, are you out buying met coal for next year?

And if so, what are you seeing?

We're out buying met coal, but not just for next year.

We tend to have a plan of layering in met supplies on one, three, and five-year, even some longer than that, kind of contract.

And I would say that the met coal market, for us, is largely Appalachian, has been sort of stable, flat, some up, some down, but not a huge change either way.

Very good.

Thank you.

Thank you.

Thanks We have a question now from the line of Timna Tanners with UBS.

Please go ahead.

Yes, hi.

Good afternoon.

Hey, Timna.

I wanted to ask you a little bit about production levels, so the easy question is if you are expecting any outages in the fourth quarter, and the more involved question is, given what you were talking about in terms of your outlook, in terms of the market, auto being fairly flat and service centers being very strong, but certainly some of the restocking is already behind us, and given that production is globally picking up and also imports have been pretty high, are you starting to think, or would it be preliminary to start thinking about having to cut back production in the coming quarters to keep your production in line with demand?

Well, as I said in my comments, Timna, we always think about it and that's the way we run the business.

We tend to let the market pull the production out of us that we need.

We don't usually talk about outages that are further out, but I would say that there are no major events coming.

We do have, as I said, normal minor outages that we have something that has to get done and we group two or three things around it.

If we've got a steel shop that needs worked on, we might slow a furnace down and do some blast furnace work and also do a caster turnaround.

So we try to do things together that make sense.

We will have some of that in the fourth quarter.

We have it every quarter, but nothing that stands out in my recollection.

If, in fact, market conditions are such that we see inventories building in our shops, then, as I said, we would slow down a blast furnace, if necessary.

We did that last year.

We would do it again if we had to do it in the future.

But we see nothing on that horizon in the immediate term.

Understood.

So, what indicators might lead you to start thinking about that next step, then?

What would you point to?

Well, I think we would do it by what we see in our order book, but I think the things you ticked off, Timna, are quite appropriate references.

I think we should be watching flat rolled imports.

There are some preliminary numbers out that they just came out, so I'm reluctant to comment on them because I'm not really sure what they mean yet, but it seems like there might have been a report just today that the preliminary flat rolled numbers, sheet numbers, have moved off a little bit, which is good news.

We will watch the service center numbers.

I mean, for the moment the day shipments covered in inventory are within reasonable, acceptable levels, so we are comfortable there, but we watch that quite a lot.

And then we would watch the auto builds.

So I think the ones you talked about are all fairly good indicators and then more than that we watch our own order book and talk to our customers.

Great.

Thanks so much.

Thank you.

And our next question then comes from the line of Mark Parr with KeyBanc Capital Markets.

Please go ahead.

Thanks very much.

Good afternoon.

Hi, Mark.

I had a question about the Galv line in Slovakia.

Does this allow you to grow your shipments over and above -- from the mill, over and above what the GDP of the EU is?

Well, probably not in total shipments, Mark.

We are running the mill -- both mills, Serbia and Slovakia, we kind of run together, as hard as we can.

We are still exploring how hard we can run the furnaces and the steel shops and the casters in both places, but this is fundamentally a product mix upgrade.

That's the predominant benefit we get from it.

And the numbers we look at for automotive assembly expectations in Slovakia are just terrific.

It's a good country with excellent prospects and good capital formations.

So we think it's a great chance to improve our overall product mix, reduce our spot hot rolled and move us a little further down the chain.

I think it's a great strategic move.

I congratulate you on that.

I had a couple other follow-ups, if I could, regarding Europe.

Sure.

One, could you give us an update on your raw material sourcing strategy for the European mills?

And also, could you talk a little bit about how much price increase on hot rolled you were able to realize in the second quarter and maybe give a little more color on what you think about Arcelor's fourth quarter announcement, if there is any validity to it.

Okay.

On the raw materials front, Mark, nothing specific to tell you.

No announcements.

Nothing that I would say is imminent.

But we continue to plod along in discussions and conversations.

But because of a lot of things that are going on in the market, the large major transaction in the middle of Europe among them, and then the involvement of that in Russia, or potential involvement in Russia, I think there is a lot of things going on that are just going to make that a little bit slower to develop.

In the meantime, though, the people we buy from we have very good relationships with and we visit them and they visit us and I think we're doing a good job of making sure that our consumption patterns line up with their production patterns.

So we're doing fine in raw materials, but from a capital standpoint, nothing to talk about yet.

On pricing, we were strong in the market.

We tried to push the price pretty well in central Europe.

I think we did fine.

In the second quarter the numbers demonstrate that, I think our prices were up quite well.

I really can't tell you percentage-wise what we were seeking, how much we got.

That's commercial detail that I don't have and I'm not really sure I want to get into anyway.

I did read, Mark, a little bit about the announcement by one of our competitors that you mentioned.

I really haven't [inaudible] with our commercial folks yet, but it's not at all inconsistent with what we see in the marketplace which is good strength in Europe and opportunities to probably improve realizations throughout the rest of the year.

Okay.

Well, hey, thanks very much for that color and congratulations on an outstanding result.

Thank you, Mark.

Thank you.

And we have a question then from the line of David MacGregor with Longbow Research.

Please go ahead.

Good afternoon.

Nice quarter.

Thanks, David.

In the Tubular business, can you talk a little bit about price trends in the market right now?

I noticed your ASP was down.

It may have been the function of mix.

Can you talk a little bit about that?

The first versus second proceeds effect was mixed.

I think we had sort of led you in that direction last time around.

The outages happened to affect two of our three lines that typically would have had the higher price realization.

So I think that was more mix oriented.

The price dynamics in the market are very good, very firm, and we've had occasional price increases and we continue to do that where we think the supply-demand balance makes sense.

So I would say the dynamics in that market are very positive and we look forward to pretty good sailing the rest of the year.

Good.

Fantastic.

Second question just is what are you seeing in terms of your summer automotive business?

Can you just talk about trends that you may be seeing that may be different from prior years?

There are some seasonal things, but none that I would say are different from prior years.

There is all the stuff you read about in the press, but we're hooked up to all of those customers, really, by computer, so we have a pretty good sense of what's coming and we're out several months in that process.

And things look fine.

It's not as strong as it was last year, as I said.

But if you look at some of the industry-wide prognosticators that talk about volume of 15.8 or 7 or 6 or 16, whatever the numbers are, we are tracking along that kind of a forecast and demand so far has been pretty steady.

Nothing in the summertime that's any different than we would expected, based on our original plans.

Good.

Thanks very much.

And again, congratulations on the progress.

Thank you.

Thank you.

And our next question then comes from the line of Chris Olin with Cleveland Research.

Please go ahead.

Hey.

A couple of questions on the demand side.

It seems like there were a number of unplanned events that may have impacted domestic steel supply and potentially customer buying behavior.

Do you get any sense that your demand and/or maybe order activity on the service center side may be artificially high, based on what would be called a panic buy?

I guess, in other words, any concern that there may be some pull forward of demand from the second half into the first half?

Really hard to say, Chris.

I think there certainly has been some inventory restocking at the service centers.

I mean, their own self-reported numbers at MSEI would lead you in that direction.

My sense would be that the risk you pointed out, that there might have been either pulling ahead or panic buying or something, that's always possible, I guess.

The only thing that we think mitigates against that in our particular circumstance is that our acknowledged strategy is to have a fewer number of very strong, intimate relationships with service centers such that both of us have a lot riding on being very transparent and open in how we do business.

So I like to think that we are doing a fairly good job of supplying our service center customers what they need.

And their results tend to support that.

So there is some of that, perhaps, but if there is, we don't really see it right now.

Okay, thanks.

And then the other question I had, rather than on automotive production, are you seeing any kind of impact on maybe the mix or the shift toward smaller vehicles?

Or has that begun to affect maybe your automotive business?

Not really.

What we are really observing is a mix towards the crossover -- a movement toward the crossover, although I think the prognosticators would say it's a little ways out.

But some slight mix.

If anything, maybe a slight move from the larger SUVs to the mid-sized, crossover-type vehicles.

But also a move up from some of the smaller passenger to the crossover mid-sized.

So net-net, it really hasn't affected us in any significant way so far.

But it's a trend, of course, we have to watch.

That was good.

Thanks a lot.

Thank you.

Thanks.

And our next question then comes from the line of John Tumazos with Prudential.

Please go ahead.

Congratulations on your conservative market planning and your very good production and execution this quarter.

Thanks, John.

As the three furnaces have been rebuilt or resumed in Slovakia, Serbia, Gary, they may not reach their full potential the first full period.

Further, as those furnaces reach their full potential or break through prior bottlenecks, there could be other bottlenecking opportunities and other parts of the same plant.

Right.

The hot strip mill at Gary, other parts of the Belgrade mill, et cetera.

How much more than the 5.83 million tons that you shipped this quarter do you think is the potential from the fixed assets in place and just rebuilt?

That's a really good question, John.

I can't give you any kind of an engineering estimate on that, but you are right; there is probably some.

And let me sort of work from furthest away to closest.

In Serbia, it was an excellent quarter where we ran both furnaces.

We had some steel shop work done so we could take it all away.

The logistics, which are still behind there, are being developed so we can move things in and out, but we haven't found the top yet in Serbia.

I think there are things to do there with some enrichment of the burn, et cetera.

So there is more to come in Serbia.

Don't know how much, strip mill can take it easily.

So I think there's opportunities there.

Slovakia, we are -- I wouldn't say we are at the top, but we've gotten a lot of the low-hanging fruit from the system now.

There's probably some more to come, but that would be the -- probably an opportunity, but maybe not as much as in Serbia, percentage-wise.

And then in Gary, for example, I think there the issue might be more can we run the steel shops a bit harder so we really get all the furnaces cranking hard; can we take it all away?

And then I think we can probably handle it on the strip mill, at least most of it on the strip mill, and we have some strip mill capacity, both south and east of there that we can process that.

So there's upside in all those locations.

There's probably some in Granite City as well, but I don't have a good engineering estimate for you.

I mean, it's a single-digit percentage, it's probably something like that.

So you think it's less than 10% more?

Oh, I really have no basis to make a guess, but 10% is a lot.

So I would guess it's in that zone.

Thank you.

Thanks.

We have a question then from the line of Michael Willemse from CIBC World Markets.

Please go ahead.

Thank you.

The work force reductions in Serbia, do you have an estimate, would the one-time cost there be material at all?

And would there be a sustainable savings from the work force reductions?

We don't have an absolute estimate now because we are just in the process of working up the plan and there is a sort of a statutory process you have to go through.

So we don't have a number that we are using, either internally or that we want to get out in the marketplace.

But it could be significant.

And -- the number of people.

But the economics are very good here.

The economics are positive.

We can, we think, run with fewer people.

The relative amounts that we would pay versus the savings over a short period of time have a very good ROI, as they do in most regions when you can get high productivity.

So it would be something that we will probably talk about more in the third or fourth, or third and fourth, perhaps.

But in terms of numbers, we had a similar program like this in Slovakia last year, too, and we reported that as a special item, which we probably would do here as well, and the amounts, while they're noteworthy, are not substantial.

I think in Slovakia it was five or six or $10 million, something along those lines.

How many employees are we thinking about, as far as work force reduction?

I don't think we can say that yet, just out of fairness to the employees.

We really haven't gone through the statutory steps in Europe, in the Serbian requirements.

But you know, if we have 9000 employees, plus or minus, throughout the system in Serbia, it's going to be some percentage of that.

It's not going to be 30%, but it would be some percentage lower than that.

So you could probably come down to a number that would be in the ballpark.

Those are absolutes we don't want to get to just yet.

Just one more question on Europe.

Your -- raw materials are going up in the third quarter.

Is it safe to say that they will probably go up again in the fourth quarter, your raw material costs?

Not necessarily.

I mean, we view that -- we do those things on a quarterly basis and they really depend on somewhat localized supply and demand factors.

So not necessarily.

Okay, thank you.

Thanks.

And we have a question now from the line of Aldo Mazzaferro with Goldman Sachs.

Please go ahead.

Hi, Aldo.

Sir, if your line is muted on your end we are unable to hear you.

Aldo?

Yes.

Can you hear me now?

Oh, yes.

There we go.

Okay.

I wanted to ask, just basically on the market feeling that you are seeing over in eastern Europe -- or central Europe.

Could you say how much of an impact you think growing demand in Russia and Ukraine areas is having on the entire Black Sea environment?

Oh, not with any real precision, Aldo, except that the more that we see good internal consumption growth across -- a wide spectrum, by the way, in Russia, not just consumer goods, but construction is strong there.

That's a good thing.

Those countries, both Russia and Ukraine, have been traditional large exporters, at least in the last decade or so.

The more of that that stays home the better it is for everybody else and my sense is more is staying home.

So that's a good sign.

But how much is really hard for us to say.

Okay, thanks, John.

Thank you, Aldo.

Thanks.

And we have a question then from the line of Michelle Appelbaum with Appelbaum Research.

Please go ahead.

I have a question -- first of all, great performance this quarter.

Always nice to see everything running on full engines.

I have a question about the Tubular operations.

Sure.

Okay.

In -- the last real Tubular cycle we saw was my first Tubular cycle, which was in the early 80s.

And from what I recollect, your stock, U.S.

Steel, and then LTD and Armco were the two other companies that were pretty big in the space.

The three companies that provided tubulars to drilling in those years sold at a nice premium on a valuation basis, as much as two or three multiple points ahead of the peer group, and a lot of analysts were using those stocks, recommending them instead of some of the others, and there was kind of this groundswell of support for the steel companies that had those operations.

And you guys rightly figured out a few years back that you weren't getting the valuation that you might be getting for those operations, so you've finally broken out into a separate profit center, and so we can see that Tubular earned 36% of your operating income last year, probably do a similar thing this year.

And I was wondering, your stock doesn't seem to reflect that at all.

We have seen some data points in terms of private market value that are off the charts, and then there's public equities that saw the huge premium.

Have you done everything you can do to get public market value for that business?

Or is there more you can do, or is the onus on us?

Well, I think you all are welcome to value us the way you think it's appropriate.

I'm not sure that your premise that our value doesn't reflect our Tubular business is necessarily correct.

I think our value probably reflects a much greater appreciation for Tubular than it did a year or two ago, for the reason -- one reason you pointed, the way report it, but also because it's been demonstrated to be a really first class high-end tubular operation, generating really good returns.

So I think the market will begin to appreciate that if we continue to rack up the kind of numbers that we are, and I think overall our consistent record of strong operating and commercial performance and shareholder friendly actions I think is going to begin to be demonstrated -- at least we like to think so -- in a fulsome valuation, whatever the market decides.

We have done a lot of things internally to improve our business.

We are able to manufacture more, the majority now, of our internal round consumption at our steel plants in Alabama, which has substantial integration benefits, utilization of our own materials, our own transportation fleet, a lot of good value there that we've created through excellent operating and engineering performance.

If you are alluding to other market kind of transactions, my previous comment about the value of integration, for us, at least, says that that's probably not the best thing to do right now.

Okay.

And there is no way to -- I don't disagree that the Tubular operations, which, in my opinion, are the best tubular operations in the country, high quality, seamless, should sell at a huge premium and all that, and your results have been terrific.

You have done great with it.

And I understand that Integrated is a terrific model and it works well and it's worked well for you.

There is no way -- the company has some history with letter stock that was, I thought, very successful.

There is no way to help create, in terms of the financial market, some valuation that might not otherwise be there?

Well, I think, Michelle, that that may be a little bit more complication to go to that kind of a structure again.

But I think that we have given good visibility to our Tubular operations as it is.

And I think we benefit from having them be part of our larger enterprise.

And I think it gives us a little bit more options in that space.

You know, we always will look at the best way to deal with that business.

It's just been a good business to be in right now.

I don't think we are unhappy with the structure that we have.

I agree, it's a great structure.

It's just frustrating that the market doesn't seem to recognize it.

The only real way we think to solve that is to keep performing the way we perform.

Great.

Okay.

Thank you.

Thanks, Michelle.

Thanks.

And our next question then comes from the line of Jonathan Goldberg with Highline Capital Management.

Please go ahead.

My question has been asked.

Thank you.

Thanks.

Our next question then comes from the line of Wayne Cooperman with Cobalt Capital.

Please go ahead.

Hey, guys.

How are you?

Hi, Wayne.

Just a little confused about the share repurchase.

Just -- you didn't buy any in the first quarter at lower prices than the second quarter.

We bought some in the second.

Could you guys just maybe talk a little bit about what's driving the decision and why don't we kind of step it up here even more, given the great balance sheet, the great earnings, and the low valuation on the stock.

Well, we appreciate your advice, and I think we tend to look at our share repurchase program over a longer period of time and not worry too much about one quarter or another quarter.

And I think we've been pretty pleased with our purchases overall and we will just keep steady with the program.

Can you explain to me why we didn't buy any in the first quarter and we did in the second, at prices that were higher than the first quarter when we didn't buy?

Just trying to understand how it works.

You know, there are a lot of reasons why you do and you don't do things, and some of which you should talk about and some you don't want to talk about, and I guess we just don't want to get into having to talk about what we are doing every day in the market on something that really becomes a tactical thing.

So we would rather be judged on doing this over the longer term and not getting into things that our lawyers will chastise us about.

Okay.

Thanks.

Thank you.

We are showing a question then from the line of Timna Tanners with UBS.

Please go ahead.

Quickly wanted to follow up and see if you have any new thoughts on further uses of cash and M&A.

I know in the past you've said you were interested in acquiring more heat capacity in the U.S. and time keeps going by and I'm just wondering if you have any updated thinking on your perspective there and your priorities.

I will let Gretchen comment just on the overall capital allocation thought process we go through, although it's not much different than we have taken you through before.

But on the general subject of consolidation and M&A, et cetera, there's been quite a lot happening internationally with the big event in Europe, and then on the Tubular front on major event recently.

So I think there is lots of things going on, values are where they are, and you could be assured that we are very thoughtful about what's happening.

We keep close tab on things.

We are thinking about things, some of which we think might be of interest, but we apply the same premise that we don't want to get bigger for the sake of being bigger.

It has got to be better, has to generate a good return on capital, it has to be accretive and cash-generating, so -- but nothing that we would talk about that's any different today than we did last quarter.

I think some of these events that have taken place which aren't quite done yet, as they sort themselves out might leave the [inaudible] a little differently that would give us some new opportunities.

But the general allocation, Gretchen, if you want to go through your brief comments.

We -- in addition to strategic initiatives we look at what our capital spending plans should be.

The galvanizing line that we are pursuing over in Europe is a good example of one of the things we decided we should be applying our free cash flow to, and so we look at opportunities for that.

We are always trying to improve our capital structure in a reasonable, balanced way.

We expect that we will be doing some more pension funding as we see what happens with the legislation, which seems as though it's coming to some sort of a head, although we've fought that over the last year.

And then, of course, we've got our -- we balance out with what we can do on a direct basis to our shareholders and our share repurchase program is a cornerstone of that effort.

Great.

Thank you.

We have a question then from the line of Leo Larkin with Standard and Poors.

Please go ahead.

Good afternoon.

Could you give us any preliminary guidance for CapEx in '07?

No, Leo, not really.

We are in the process of working through plans now.

But you know, if you look at the numbers we've had in the last couple of years, 6, $700 million, somewhere in that range is probably where we're going to be aiming most years.

I mean, when you have a major event, big furnace project, you might be up.

But beyond that, I think that level is well within the norm of what, on a per ton basis, most of the competitive companies we look at spend and it's what we can spend fairly efficiently.

So -- and it also, I think, is probably enough to accomplish what we have to accomplish.

If we saw some big market opportunity in Europe or elsewhere that we needed a particular project for, we'd spend more, but I think the kind of numbers you have seen in the last two or three years would be where we're going to be.

Thanks.

Thank you.

We are showing a follow-up question from the line of John Tumazos with Prudential.

Please go ahead.

The Latin American company, Tenaris, wants to pay a $2.3 billion premium to the tangible book of Maverick Tube, which is not a similar company to your Tube operation, but at least another one.

Did you have any negotiations to sell to that generous buyer, or how did you let it get away, first.

And then second, what vulnerabilities in your business do you think makes this foreign company so eager to come here and try to compete with you?

Those are probably questions you're better off asking to them, John, quite honestly.

I don't -- I mean, you can read what their presentation was about the transaction about why and I will let you deal with that with them.

They are a good company and a good competitor, we compete with them in global projects before and know them well.

In terms of how they got to where they are and what else might have gone before it, I mean, it would really be impolite for me to comment on that.

So I think on those lines you are better off posing that to them than to us.

But it's is significant development when a company pays four times replacement costs of machinery to come to your market.

Right.

Although the machinery is still in the same place, it's just someone else owns it.

So that's a question I think you are really better off dealing with them on.

We don't see any immediate competitive impact.

They are good competitors, we will compete with them straight up as we always do.

There aren't going to be any capital investments or improvements or repositionings you make?

We are always making investments and improvements, but not necessarily because of what somebody else does.

Thank you.

Great.

Thanks.

And we are showing also a follow-up question from the line of Mark Parr with KeyBanc Capital Markets.

Please go ahead.

Thanks.

John, one thing you said today I thought really struck me about your interest in doing business with smaller numbers of service center customers, having more meaningful relationships.

Could you provide a little more color on, say, how the customer list has changed over the past couple of years, how you might see it unfolding over the next several years.

It's something that certainly would have some implications for consolidation at the service center level.

Yes, it may, although, Mark, I hate to get into the specifics about stuff like that.

I mean, we have lots and lots of customers in that sector.

We've had long, long relationships that went very well and really what the philosophy I'm talking about is really getting very deep into each other's thinking about what their needs are and what our capabilities are and what we are trying to do is to build a relationship around where we can both make money.

That's our objective.

Where our production and their market hit a sweet spot and we can both make money and we know, not for sure but we're pretty sure, every quarter we're going to have that business.

And that's the kind of relationships we've been really successful, our commercial people have been, in developing.

And I think that's probably symptomatic of where the overall service center business is going.

I think they are all a group of well-run companies that we're glad to do business with, but whether that leads to more consolidation it's hard to say, and I don't want to get specific.

We have lots of customers, but more important, intimate, transparent relationships with the bigger ones than we've had before.

It's maybe the nature of the relationship that's changed as well as the number of customers.

Thank you.

And our last question then this afternoon comes from the line of Marty Pollack with NWQ Investment Management.

Please go ahead.

Great quarter, guys.

Just one item and then following up on Michelle's question on Tubular.

But working capital use or source in the second half of this year, clearly there was a lot of use, in the first half.

How does that shape up in the second half of the year?

Well, in the first half it was -- there was quite a receivables build, which explains that.

So really if you look at whatever change might happen there, I think it's going to depend on I think pricing throughout the balance of the year and I guess right now we are looking at improved pricing in the third quarter so you will probably see a little bit of impact as a result of that.

And I guess it remains to be seen what it will be through the balance of the year though, Marty.

But inventories, we try hard to work those down towards the end of the year.

But we do end up with some build because the lakes being closed and all that stuff.

So I just don't see that we'd be looking at a huge -- any one thing that would make a huge change between here and the end of the year.

Yes.

The other point, I guess -- I think you've probably seen a lot of the models out there, looking at the Maverick transaction and then wondering what could Tubular be worth.

But it seems that the comments that perhaps this stock has already given some credit to that just seems to be maybe not as clear, especially if you think that here you have got an opportunity, maybe, to spin a partial spin on the company, and if the market at all will reflect any kind of valuation similar to what we saw on the Maverick transaction, it seems to suggest therefore that your domestic operations are almost worth, on the market, nothing.

So I think in a sense -- also the recognizing that Tubular is at a peak level, market may be interested in nevertheless -- in seeing that conflict as some kind of public entity.

It certainly would not be -- try to exploit that opportunity, but I think it does seem to suggest that the valuation here for the overall for U.S.

Steel is quite depressed.

Well, I'm not sure how to respond, Marty, except to say on the last point we agree with you.

We think there is opportunity for our shares to do quite a lot better, given the kind of performance we've been able to sustain.

And, again, I don't want to get into what another party did, but that particular transaction that you are referring to, the only thing I would take from that is that my sense would be that that party probably has expectations that the market is going to be pretty good.

We do, too.

And that probably portends good things for us and I think, again, our strategy is to -- while we'll continue to look at the various structural things you talked about, we have for a decade, and mostly they are good for tax authorities, they're not good for anybody anyone else.

We will continue to look at it, but I think for the moment we have got an excellent integrated facility that's earning a lot of money, a lot of cash, and I'm sure we're going to benefit from that.

Thank you very much.

At this time I would like to turn the conference back over for any closing comments.

We would like to thank everyone for participating and we look forward to talking to you next quarter.

Thank you very much.

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