美國鋼鐵 (X) 2006 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the United States Steel Corporation third quarter 2006 earnings conference call and Webinar.

[OPERATOR INSTRUCTIONS]

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

Please go ahead, sir.

Good afternoon and thank you for participating in United States Steel Corporation's third 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 third quarter and then Gretchen Haggerty, U.S.

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

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

Before we begin, however, I must caution you that today's conference call contains forward-looking statement 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 10K and quarterly report on Form 10Q in accordance with the Safe Harbor Provisions.

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

Steel Chairman and CEO, John Surma.

Thanks, Nick, and good afternoon, everyone.

Thank you for taking the time to join us.

As you saw, we reported very strong third-quarter earnings of $3.42 per diluted share, which includes a $21 million or $0.17 per diluted share unfavorable item associated with the Serbian workforce reduction program that we mentioned last quarter.

Excluding that item, our results were $3.59 per diluted share, well ahead of the average of analyst expectations of what we understood was $3.23 per share and in fact ahead of the highest estimate of $3.46 per share.

Each of our three main operating segments continued to deliver excellent results with combined segment income of $652 million or $117.00 per ton, a 13% improvement over strong second quarter levels and more than three times last year's third quarter results.

Simply put,this was a terrific quarter, not only financially and operationally but also just as importantly from a safety perspective.

So far this year we have experienced a 30% safety improvement over a very good 2005 performance.

So congratulations to our employees for their contribution to this outstanding quarterly result.

Now turning to our flat-rolled segment.

Third quarter operating income of $230 million or $62.00 per ton was a 9% increase over second quarter levels.

Flat-rolled results reflect higher averaged realized prices, partially offset by lower shipments and higher raw material costs and related profit-based accrual effects.

In Tubular, third quarter income of $164 million or $541.00 per ton was a 12% improvement over second quarter levels reflecting slightly higher shipments and prices and lower outage costs.

Our European operations had a tremendous quarter with operating income of $219 million or $141.00 per ton.

That's a 17% increase from the strong second quarter, reflecting improved pricing, partially offset by higher raw material costs and outage costs and lower shipments.

As I mentioned last quarter, our new 350,000 metric tons per year auto quality galvanized--galvanical line remains on pace to be coating stripped in the early part of next year and we continue to receive strong customer interest for the product.

We expect this state-of-the-art facility will be booked full shortly after start-up.

Now Gretchen will review our outlook more specifically in just a moment, but first, let me make a few general comments.

As I expect you are all well aware, the North American economy has slowed somewhat from the robust pace of growth in recent quarters.

Second half automotive production will likely be lower than in the first half, and service center inventory levels are on the high side, reflecting the high levels of imports earlier this year.

These factors have resulted in some softening in the reported spot price as evidenced by the various pricing indices which are available these days.

As a result, our customers have been ordering less steel and under the policy we have followed and described here for several years to balance our operations with customer demands we have been making less steel.

We don't intend to publish a weekly report of Operations, but we will likely have three or four blast furnaces off-line for all or parts of the balance of the year, including two of our smaller dairy works furnaces plus additional furnace outages during the quarter.

Ultimately the market will dictate when and how many blast furnaces we operate.

In Europe, the continued favorable business environment and resulting strong growth rates continue to support healthy steel consumption and strong demand.

However, this demand could be affected by rising inventory levels, and we expect to operate our European facilities at or near capacity levels in the fourth quarter, subject, again, to the continued strength of our order book.

In the Tubular segment, the energy markets, which are the key driver for the majority of our products remain robust.

Key indicators such as the rig count remain near a 20-year high, however, due to elevated customer inventory levels and higher imports, we have reduced our production and adjusted our product mix to help balance our operations with our customer demands.

With most market observers continuing to forecast that high crude oil and natural gas prices will result in continued strong demand for our pipe products, we remain optimistic about the long-term prospects for thos small but very mighty segment.

As noted in our earnings release, we repurchased 4.7 million shares of common stock in the third quarter for a total cost of $279 million.

This brings our total repurchases to 12.4 million shares or nearly $650 million and represents almost 9.5% of the balance of fully diluted shares outstanding when we authorized the original repurchase program in July 2005.

It is noted in two other releases earlier today, our Board of Directors authorized the replenishment of the repurchase program back to 8 million shares and authorized a $0.05 per share dividend increase, which brings our annual dividend rate to $0.80 per share.

The share repurchases, the dividend increase reflect our confidence in the long-term outlook for our business and together with substantial debt reduction, employee benefit plan funding and focused capital spending illustrates our balanced and responsible approach to capital allocation.

Now let me turn the call over to Nick for additional information about the quarter's results.

Nick?

Thank you, John.

Capital spending which is detailed by segment in the earnings release totaled $146 million in the third quarter.

Our current plan for 2006 has total capital spending at approximately $655 million, with $440 million for domestic operations and $215 million for European operations.

Depreciation totaled $113 million in the third quarter and is expected to be about $450 million for the year.

Defined benefit and multi-employer pensions and OPEB cots for the quarter totaled $87 million.

We made cash payments of $91 million for benefits primarily for retiree health care during the third quarter.

Also during the third quarter we made a $140 million voluntary contribution to our main pension plan that Gretchen will discuss further in a moment.

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

Net interest and other financial costs totaled $7 million in the third quarter, and we expect fourth quarter net interest expense to be about $15 million.

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

Lastly for the quarter, we averaged 122--122 million fully diluted shares.

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

Gretchen?

Thank you, Nick.

Good afternoon, everyone.

First let me talk about our cash flow for the first nine months which has been quite strong.

We have generated over $1 billion of cash flow provided by operating activities and nearly $600 million of free cash flow after capital spending and after dividends, but before external financing.

We ended the quarter with $1.4 billion of cash and $2.6 billion of total liquidity.

As we've mentioned in the past, we have accrued a profit-based payment to be used to assist National Steel retirees with health care costs.

This liability has not yet been paid because the associated trust has not been established.

As of September 30th, we have recorded a liability of $331 million for this purpose.

With our strong cash position, we took a few steps that further improved our capital structure during the quarter.

We reduced debt by $112 million during the quarter most of which came from the repayment of the credit facility that we'd entered into at the end of last year to facilitate the repatriation of foreign earnings in accordance with the American Jobs Creation Act.

We also voluntarily contributed $140 million to our main pension plan.

I would like to emphasize that we were able to significantly reduce debt and fund our pension plan while using $279 million to repurchase 4.7 million shares of common stock, a well-balanced approach to our capital allocation.

By the way, while John mentioned that we had used $650 million to repurchase over 12 million shares since our program was authorized in July of 2005, we have also voluntarily contributed $695 million to our pension plan and health care trust since the beginning of 2004.

And we currently have board authority to contribute up to $300 million to either our pension plan or health care trust through the end of 2008.

In addition, we have reduced debt since the beginning of 2004 by nearly $600 million, and we will continue to evaluate opportunities to further improve our balance sheet through reduction of our higher costs, long-term debt as our bonds get closer to their maturity and their redemption date and it becomes more cost effective to retire them.

Until then, we may hold a higher cash balance than we might otherwise require.

Turning to our outlook, domestic service center inventory levels continue to reflect the higher levels of imported steel shipped to the U.S. earlier this year.

We are hopeful that imports peaked in July and that the downward trend of the last two months accelerates.

Lower imports are an important factor in the inventory liquidation process.

While off from second quarter peak levels, steel consumption remains sufficient to rebalance our inventory within a reasonable period of time.

As demand is reduced from key service center, construction and automotive markets, we expect spot market prices to moderate somewhat in the fourth quarter; however, the upside is the contract prices should have a positive effect as we move into 2007.

In the flat-rolled segment, fourth quarter averaged realized prices are expected to be lower than third quarter levels, reflecting the recent spot price decrease.

Flat-rolled costs are expected to increase reflecting several blast furnace outages as John noticed and our reduced operating rates expected.

We do expect fourth quarter flat-rolled shipments to decline as a result of the production adjustments and potential curtailments to match customers' man pattern discussed earlier.

As we said in our release, we expect continued strong results from our European and Tubular segments in the fourth quarter.

For U.S.

Steel Europe, fourth quarter averaged realized prices are expected to be in line with the third quarter and higher costs are expected to be more than offset--to more than offset the anticipated increase in shipments.

In Tubular, fourth quarter average realized prices are expected to decline slightly and shipments are expected to decline significantly from third-quarter levels, due to high levels of imports and customer efforts to bring their inventory in line with demand.

That's all I have to say.

Now, Nick.

[OPERATOR INSTRUCTIONS]

And our first question this morning comes from the line of Puny Chen with Bank of America Securities.

Please go ahead.

Good afternoon.

The first question I had was on the down time for the fourth quarter.

Obviously your down time plans are kind of a moving target and will continue to evolve.

How would you compare having three or four blast furnaces down for the rest of the quarter, how would you compare that to what your normal seasonal down time would be and is there any way to quantify the percentage drop off in production based on your current plans as they stand today?

This is John.

I will take a shot at it.

It is hard to say what "normal" is.

I think if you just look back at the very last page of our release it does give a raw steel production as a percent of capability and that is not a bad--not a bad estimate of how active we are and how less active we will be.

My sense is for the fourth quarter, we will be somewhat--at a somewhat lower percentage of capability than we might originally had thought.

We did have a number of these outages planned in any event--you may remember that we were bringing on our largest furnace at Gary earlier in the year so we had back-end loaded a number of our maintenance outages just to make sure we had plenty of fire power earlier in the year.

We plan on doing some.

At this point because of our interest in balancing our order book and our production, we're not necessarily conducting the outages as quickly.

Certainly not on overtime, not an expedited basis we can be a little more cost effective in that regard.

If you had to sum it all up and look back across that last chart, you might see back into the third quarter of 2005 when we had a number furnaces out, our raw steel capability was-- I think it was 71.9%.

It may be--and I am not making a prediction here, it may be that the fourth quarter looks more like that third quarter of last year than it did most recent third quarter.

Great.

That's helpful.

One quick follow-up if I may.

Just on the significant drop in shipments that you are expecting in Tubular.

Can you give us a sense as to what you mean by that?

Is that 10%?

Is that 20%?

Thanks.

I guess that it would be probably closer to the--the 20%.

I mean, it's--it is a little bit hard to predict, but I think we have been at the $300 million or so level of shipments for some period of time and I think it will be less than that.

The last time that we had lower shipments I think was in the third quarter of 2005.

Something look that.

All right, thanks.

Thank you.

Our next question comes of David Lipschitz with Merrill Lynch.

Please go ahead.

Yes, thank you.

In terms of the auto forecast for next year, what kind of number are you guys using now?

We haven't really built our production plant per se, but the numbers that we are seeing is that it might--it is probably going to be 15 million plus next year and not sure exactly where we will finish up this year.

Next year may be a little higher than this year depending on how deep the cuts are the rest of this quarter but 15 million plus, whether it is 15 million 2, 15 million 3, 15 million 4.

All we're doing is compiling what we see in other forecasts that you have access to probably.

But we have some guarded optimism that maybe some of the adjustments that have been made this year will clear the way for a better year for all of us next year.

Thank you.

Thanks.

Our next question comes from Timna Tanners with UBS Please go ahead.

Yes, hi, I wanted to thank you for the great color but I am going to poke for a little more if I could on the flat-rolled outlook.

Specifically if you can comment on what your order book looks like right now looking into the next couple of months and how much lead times have contracted?

And then if I could on the flat-rolled outlook, in Tubular you have mentioned the significant versus slight declines.

Can you give a little more color there?

Or is that still a moving target.

Gretchen, do you want to cover Tubular one more time?

I will be answering it in the context of the last question, is it closer to 10 or 20 -- it is probably more in between looking at it.

But the--I don't know, Timna, if you take a look back at the shipments in the fourth quarter--third quarter of 2005.

260.

That was a down quarter for us in Tubular.

We really have had eight -- eight quarters of strong results in Tubular.

So when we say we expect Tubular results to be strong, you can look at it in that context.

I mean --

I was actually asking about the flat-rolled products just because you gave the--a little bit more detail on the Tubular shipments and the Tubular prices.

I was wondering if you could also help a little bit with the flat-rolled shipments and price outlook?

I would say just again on flat-rolled, because there's some distance you have to go in the quarter, we can't be too specific, but it may end up on operating capability and shipments and those kind of things.

As I said looking more like last year's third quarter than this year's third quarter, and that gives you some parameter of shipments.

Pricing -- here's been some successive moves since then, so we are guiding to somewhat softer prices and that would be really reflecting the spot market prices that you can see in the various indices that are available to us all.

The order book is not robust as we said before.

That is the reason we are making less steel.

Lead times are fairly short.

My sense is that those that we ship to in the intermediate sectors are interested in controlling their inventories and we don't see any reason to disagree with that.

We are trying to control ours.

Fair enough.

Thank you so much.

Thank you, we have a question from Chris Olin with Cleveland Research.

Please go ahead.

John, I am trying to get my hands around what is going on on the supply side for the market today.

I think I get a sense that there is a surge of call it Canadian Steel Supply that may be redirecting shipments into this country.

There's some aggressive pricing in the marketplace and I am guessing this is where it is really coming, these kind of mills under pressure up north.

Are you seeing this in the marketplace today and could this be a smart way that the Chinese maybe trying to export more product to avoid some type of U.S. retaliation.

Those are all possibles, I suppose, Chris.

I don't know that we are seeing in the particular segments we are in and the particular kinds of customers that we deal with that we are seeing a lot of that, but probably some.

We don't really know what is happening with China through other parties.

I think that is a worthy line of discussion and conversation.

And I can assure you we are very alert to that--we are alert to everything China is up to and that would be in particular something we're alert to, but I don't have any basis to say that that is going on or isn't at the moment, but we are alert to the potential for it.

We may have seen some of that but in the particular segments we're in, the customers we're with, not very much.

Fair enough.

I just want to talk a little more on this automotive.

I've heard there could be extended shutdowns for November and December.

Have you considered--considered this risk in your outlook?

And are you seeing anything like that as of now?

We -- we have pretty close tie to what the schedules are and we get the information directly and plan our production accordingly, and I think we have taken into account what we know about.

I think what we know about is--as far as I know everything that they know about and everything can change of course, but we are not hearing anything that would cause us any immediate concern.

Fair enough, thank you.

Thanks.

We have a question now from the line of Luke Folta with Long Bow Research.

Please go ahead.

Hi.

I am a little interested in what might be going on with pricing regarding your contracts moving into '07.

Okay.

It's really a similar comment of what we have given before in that regard.

I think we have been saying we have about 3 million tons of contract business.

I am sorry, I might have missed that.

No, no, I am sorry.

The result is essentially the same.

We had about 3 million tons to work on, and we are part way through all that.

I think those conversations are coming to a reasonable conclusion for both us and our customers.

I think we will do just fine volume-wise.

And net-net, our contract prices, '07 annual--'06 annual should be a good increase overall about 3 million tons '07 versus '06.

We are optimistic we will bring all those things home to a good conclusion for both us and the customers with good volumes still and with improved pricing in certain cases.

I have one more question.

Is there any significant changes in the difference between the contract and spot mix moving forward?

Good question, but no, not really.

I think we go back and forth a little bit on the margins, but as spot markets are weaker, and we make a little bit less steel and we sell a little less into the intermediate service center, just distribution markets, those are more typically spot.

Through the cycle when we hit this particular point we might be a little heavier on the contract side just because we're doing less on the spot side, but our overall configuration both Facility and Commercial is about the same it's been and no big change expected.

Thank you very much.

Thank you, we have a question now from the line of David Gagliano with Credit Suisse.

Please go ahead.

Hi.

I was wondering if I could just switch over to Europe for a second.

It looks like pricing in the third quarter was particularly strong up, I think about 10% sequentially.

Were there any changes in mix there or was that strictly a function of the market and how should we think about beyond the fourth quarter in terms of any indications for 2007?

There was no significant mix effect or even significant currency effect.

Sometimes some of that gets mixed up in the analyses.

I think that was good pricing is what that reflected and I think as Gretchen indicated we have some decent outlook for the fourth-quarter pricing.

Beyond that, it's going to be guided more just by what the overall economic outlook is in Central Europe, mostly in our home markets, but also in Northern and Western Europe.

There--we have garnered optimism but too far out to check.

We did point out that the inventories that we track there are moving a bit higher, but so far no significant impact on pricing.

We will keep a close eye on that.

The short answer is, the third quarter prices were good prices and we are optimistic for the fourth quarter.

Thank you very much.

Thank you, we have a question now from the line of Mark Parr with Keybank Capital Markets, please go ahead.

Good afternoon.

Hi, Mark.

I have a couple of questions.

First of all, I would like to get your take on the magnitude of domestic production curtailment that we have seen.

I have looked at the weekly steel production numbers, and based on the run rate that the industry was operating at through most of the year, it looks like the industry may already have lost about 500,000 tons of raw steel production in October.

Does that -- does that correspond or jive with your kind of internal thought process?

Mark, we have been spending so much time on our own plans and affairs and our own preparation for this process and our outlook, that we read the same reports that you do in the trade press that there is perhaps less production on an aggregate basis but I really can't comment on whether that particular point estimates the right number or not.

I can comment with a little more efficacy what our plans are which are to run fewer furnaces.

That sounds like it's probably in the ballpark that we really haven't--at least I haven't seen an the independent analysis of how much that actually represents.

If I can just do a follow-up along that line of thinking.

Some of the service centers that have been reporting are beginning to indicate that October inventories are moving down, that we are beyond the peak in inventories at the service center level.

Now these are just a couple of data points.

I am wondering if you can give us any more color on as far as what your customers are telling you about their inventory positions in October?

I don't really have anything to add to that.

We tend to watch the public numbers that come out like you do so carefully.

I think in general the big service centers we deal with, they seem to suggest that things are at a reasonable even keel, that their underlying shipments and consumption are going pretty well but their inventories are on the high side and they want to work them down, I think that's generally the story we get.

One last question if I could on natural gas.

Could you talk--give us an update on your natural gas cost outlook for the fourth quarter and how much different that might be from the third quarter?

Oh, fourth--third probably won't be too different.

I don't think that will be--Gretchen may have a different opinion.

I think not.

It should be fairly similar in total and we've gotten most of October's gas and November's gas done of course and some of the winter gas already in that we are buying forward but not a huge percentage.

Somewhere less than 20% purchased for two months out, but given the stability in the current market, we probably wouldn't see a whole lot different in the fourth quarter and third quarter.

Congratulations.

Great quarter and the production discipline I think is really going to make a huge difference moving into '07 and '08 if you can maintain it.

Thanks, Mark, appreciate it.

We have a question now from the line of Brett Levy with Jeffries & Company.

Please go ahead.

Hey, guys, a little difference in timing in North America in terms of the contract discussions.

One of your competitors seems to be substantially done and guiding to double-digit increases.

Why do you think there's kind of a difference given that you all are sort of going toward the same customers?

Can you talk a little bit about what you think the dynamic is in terms of contract, pass-throughs, whether there will be adjusters for various raw material, that sort of thing?

Sure, Brett.

First of all, I can't talk at all about what any of our competitors might have done, because I don't know.

And I wish them good luck, but I have no idea what they are up to and how they're doing it, I can only talk about what we are doing.

What we do is to try to not talk a whole lot in this kind of a forum about what we do with our contract customers because that is very important and we think somewhat private relationship.

Having said all that, we are moving through our discussions fine and we have a number of major contracts already settled and in the process of completing all the other detail work that goes with it about terms and conditions, etc., etc., so I think we are moving through just fine.

As I said, I think our prices will be higher next year than this year on a contract side for a number of reasons, one of which is some of the business that we are finishing contracts on, some of the contracts that they replaced date from two or three years earlier before the current price structures were fully established.

Your next point, I don't see we will have a lot of different structures in our contract prices.

Of course, we are all taking note of where zinc is and making sure we have our zinc position covered either in the context of the zinc extras that are built into the pricing structure or doing some price management on zinc on the side if we choose to do so.

We will do some pricing that has some colors and (inaudible) around it based on one of the indices that is common and maybe there will be a little bit more of that than last year but by and large I think they are fairly similar but I can't comment as to whether we are further along or not than our competitors.

The second part of that actually relates to hedging.

Can you talk about your outlook for import costs whether it is scrap, iron, natural gas, etc., zink?

And in the context of your outlook going into '07 for each of those products how you have chosen to hedge them to this point?

Well just going through them in terms of significance, we hedge iron ore by keeping our 22 million tons of production capacity in Minnesota in good condition.

Our iron will be the cost of mining and production and transportation, and that shouldn't change all that much in North America.

Natural gas, we already talked about.

We are merchant buyers, as you know.

We do move forward a little bit to buy for a bit but not a whole lot.

Coal, we have our contracts largely in place.

Our coal prices will probably be up a little bit next year over this year.

We are not done with all that yet but we have some older contracts that are lowered that are rolling off as we talked about over the last couple of years and they'll probably move up a little bit over a period of time.

Coal market is somewhat in a stable positions is what I would describe generally.

The bigger exposure for us would be zinc, to a lesser degree, tin.

On zinc we are A. trying to ensure that we've got the right price additive into whatever commitment we make on sales and B. where it's more of a (inaudible), we are considering buying forward to make sure we cover our position and don't end up with long sales and short deposition inside.

In Europe, really all the same things go except for also buying iron ore in Europe, but usually on a quarterly nomination basis from sources in the East Ukraine and Russia, and while those are influenced by world prices they tend to move at a far lower amplitude and more competitive than the world prices are.

I think that leaves scrap, and I really can't comment much on scrap.

It moves in directions, but I have never been able to figure out.

But in general we would expect that the scrap price structure would stay sort of in the quarter it is now and we are all making--we are making less steel, that means we're buying less scrap that has probably one effect on it.

The availability isn't getting any greater and as a result we see a lot of substitutes coming in and they're all fairly high costs, so we would see scrap in the same general corridor but I am reluctant to look forward on scrap too much because it tends to defy gravity.

Thank you very much, great quarter.

Thank you, and our next question comes from the line of John Tumazos with Prudential, please go ahead.

Congratulations on the record results.

Thanks, John.

Thanks, John.

In the past when competition increased or import flows occurred, it was a common response to cut domestic selling prices to maintain business volumes, as well as to go to Washington for trade assistance.

In the third quarter, new corrs realizations rose $42.00 a ton from the second as yours rose $27.00 domestically and $59.00 Eastern Europe.

While going to Washington to enforce trade laws is admirable, today the evidence of financial injury is not as great as it was in prior periods when steel companies were going broke.

Why are prices increasing?

I know it sounds like a stupid question, but it would seem like given the competitive dynamic of over 45 million tons of imports it is not a great time to raise price.

Is there some sort of anomaly in the mix?

Or are these the prevailing market prices?

Well, I -- if you are talking about our third quarter averaged realized prices, I think the -- the fact that the increase was certainly the result of prevailing market forces and there's plenty of International competition in that for things that are fairly traded, as well as substitutes as well as scrap based products as well as integrated based products.

I think it is about as active and transparent market as we can find and we try to sell our product for what the market clears it for, so I'm not exactly sure how to respond, John, except to say that I think those are just the market prices.

In our case there is a little more stability period to period because we do have more contract business and some other of our competitors who will be more oriented to spot markets and of course lawn prices are moving it to different parameters than flat prices and we have some of that, but not a lot of it, so there's a lot of dynamics in there but ultimately the market decides all that.

Do you feel that relations with customers are improving or deteriorating or the same?

It amazes me that the customers want to import as much steel as they have imported, because they can't control inventory, turnover and quality, and it amazes me that Japanese auto customers get involved in tariff regulation and things like that.

Times are changing.

Yes, they are.

I think our relations with our customers are good.

And the things that we value I think are the things they still value which are a good service and good quality and the right metallurgy and supplier who's put money back into the capital base to ensure that we can be a good supplier over the long term and not just in the short period.

I don't want to comment on what one customer or group of customers might have said in a particular proceeding.

I think those are best left to proceed in the court room as they did and we are more focused on making profit and getting into our customers' warehouses.

I think our relations are fine, not withstanding that particular issue, and we have our point of view.

Someone else has their point of view.

They are entitled to it, we are entitled to ours and we will let the people in charge make the decision.

Thank you.

Thanks, Jon.

Thanks and we have a question from the line of Sam Martini with Cobalt Capital.

Please go ahead.

Hi, guys.

Just two questions on the return of capital.

I guess both for Gretchen.

Gretchen, can you help clarify the two press releases today?

One, the incremental buyback, as well as the increase in the dividend, how you think about those different forms of returns, obviously both signify slightly different--slightly different expectation for the future from you and--as you see the business.

And secondly, it just--some clarification on the comments you made earlier about maybe maintaining a bit more cash than you otherwise might?

You are in a negative--you are in a net cash position and you had said in the past that you thought something around a billion dollars on the balance sheet in cash made sense.

Could you give me a little bit more color as to what those comments meant, and I guess specifically, it looks like the returns of cash are not hugely dissimilar from the free cash flow that you generated this quarter if you add up the debt repayment, the pension contribution and then the $280 million buyback.

Shouldn't we expect similar types of returns, i.e., roughly equal to quarterly free cash flow in the future given current cash balances?

Thanks.

Well, Sam, I guess a couple of things.

One, we did--we've done a significant amount of share repurchases over a period of time, third quarter included.

The releases that we issued, I think, are really consistent with the fact that we have tried to approach our capital structure and how we return -- return things directly to our shareholders in a balanced way.

So we've considered every approach.

We've repurchased debt.

We've paid--we funded our employee benefit obligations.

We spend money on capital.

We pay a dividend, and we have repurchased shares.

All of which we feel over the long run accrued to the benefit of our shareholders so that's what we think about when we decide what to do with our cash.

The--I think our--as we look at dividends, we do like to have a dividend that we can sustain over a long period of time.

It is something we take a long-term view to, and I think it shows our confidence in the long -- in our long-term for this company.

So that's what I would say about that.

Share repurchases, I think we just feel that that's been a good way to use our cash over the past number of quarters since we approved the program in July.

Gretchen just a question if I juxtapose what I see here which is to my knowledge the largest share repurchase since the July '05 authorization in an absolute dollar amount contrasted with what I read from a lot of folks, which is that things are getting much worse, and imports are flooding the country and this, that and the other thing.

Can I read into the $280 million that you spent that you see some--you have some variant view?

Well, I guess, Sam, I would just say we have--we went through a period in 2005 where we had a couple of quarters that were not as good as the quarters that came before that, and yet it was really July of '05 that we first approved our share repurchase program, and I guess I don't see that our actions are at all inconsistent or inappropriate.

Or really that different or (inaudible) from what we have done in the past.

I would just say--this to add, this is John, and I think we are all properly and necessarily focused on the short-term tactics and how we manage our way through the current market position we are in.

I think we will do a good job of that as -- with our company as we did before.

But I stress what we had in the release regarding the stock repurchase program which is -- it demonstrates our confidence in the long-term outlook for our business.

And that's really what it demonstrates, and there may be some ups and downs, but we think in the long term, we have a good business and it demonstrates that.

Good use of our cash.

Is it fair, Gretchen, to think that given the cash on hand now and the net cash position, that something approximating quarterly free cash flow will be put to these uses?

There is no --

I am sorry.

You were asking that question.

It just looks like roughly --

If you look at--we are not going to have $140 million pension obligation and pension contribution every quarter.

And I think all we were trying to say--we have been comfortable holding a billion dollars worth of cash.

I think all I am trying to say with my remarks is we are coming up to the point where a number of our debt issues are going to become due.

So I just want people to focus on that fact that we may get there and just use cash on hand to repay it or, we may do something earlier than that.

That's all.

Certainly we commend you for--for these uses of cash.

It is the right time to be doing it.

Thank you.

Thanks, Sam.

Thank you very much.

We appreciate it.

Thanks and we have a question now then from the line of Dave Martin with Deutsche Bank.

Please go ahead.

Yes, thanks.

I wanted to go back, John, to your comments about these '07 contracts.

Can you give us a sense of what the age mix may be of the 3 million tons?

And I guess ultimately what I am asking is of this 3 million tons, can you give us a sense of how much is 3-year-old business, a couple hundred thousand tons, 2 million tons instead of 3 million?

I think it was about a third.

Roughly a third?

Yes.

Okay, and then--then secondly no one asked you about the work force reductions at Serbia.

You mentioned work force has been reduced 20%.

Can you give us a sense of what that means in number of folks, and then what the average wage cost would be?

Yes, I think the total was on the order of 1800 to 1900 people.

They are not all out, but they will be in just a few months' time.

And, oh, the average hourly rate, I think is less--less than $5.00 might be $3.00 including social cost so it's a fairly low amount.

Okay.

But this is a good step towards productivity improvement that we think we can attain with the facility.

It is not necessarily where we finish either, but it is a good step, and you may remember looking back, we had similar programs in Slovakia and it's a good step toward the kind of we think the people have, we just haven't gotten to the right configuration yet.

Thank you.

We have a question then from the line of Aldo Mazzaferro with Goldman Sachs Please go ahead.

Hi, John, how are you?

Hi, Aldo.

Regarding the production cuts that you are announcing in the market expectation, would you say it is a fair--it is fair to say that the two blast furnaces were expected down for maintenance time but the two at Gary now are kind of market related and might be a surprise to the market at this point?

Well, what we--we are not certainly announcing anything, we are just confirming that our policy is to make enough steel to supply our customers.

But I think if you -- if we go back to some earlier date on an original plan, if there were to be such a thing for the year, it -- I think three of the furnaces that we are dealing with now probably would have been worked on in any event in the fourth quarter.

How long they might have taken to get finished, how much we might have hustled with contractors and overtime to get it done and get it back into production, it could have been probably done more quickly, but we don't find a reason to do that yet, so we are also using this then to do other work, downstream, probably the majority of what we are doing would have been done, but it might have been done in a shorter period of time.

Right, so, John, of these--of these cuts, do you think any of them are yet reflected in the weekly production numbers that we see out of the AISI?

Some, but some were not, and I--I am not sure what the data collection cycle is.

I will have to refresh myself, but probably half are and half aren't.

I think it is through -- I think today would be through last Saturday.

At least a week delay.

No, I would probably say half are and maybe half aren't.

Okay.

A quick question for -- for Nick.

When you mentioned interest expense expectation of $15 million.

You are talking about just gross interest, right?

Right, that is net interest.

I am sorry?

Oh, that is net interest without any --

Oh, I'm sorry.

It is interest expense, it is not net interest.

Great.

That does not include and interest income from the pocket change.

Cash on hand, yes.

Okay.

And then, John, finally, just one quick follow-up, the way you see the market at this point with middle having cut and you guys cutting back production, do you think supply is falling faster than demand at this point if you balance off the auto production cuts that you are seeing and maybe a little bit slower in the general economy?

I really don't know, Aldo.

I don't know what our competitors have done other than what I read.

I'd be reluctant to bank too much on that.

I would just say that in the--in the window I have visibility into our operations and our customers.

My sense is we have gotten into a better equilibrium now and with imports apparently on the way down we may well be into the inventory consuming process and that ought to lead to perhaps a better outlook in some time, whether that is weeks, months, how many months, it is really hard to say, you can go back and look at history and see when the lines start to cross and some have already crossed, but my sense is that our customers are chewing up some inventory now and I think that is a good sign.

And I think it's good that they're underlying business of the consumption rates for their customers, they would describe technically speaking as pretty good.

I think that is a good sign.

Great.

Do you still think the industrial equipment market, after Caterpillar's conference still looks good to you?

Yes, although that is not our biggest market, but from what we are selling into, we still have a pretty good outlook on that.

Our business in that segment has been--it is not huge.

It has been fairly stable over time.

And many of our customers are operating at or near capacity, so we weren't expecting a lot of growth anyway, so I think that market for us still looks pretty good.

Thanks, John.

Congratulations on the cash flow and the balanced use of it.

I think it is great.

Thanks, Aldo, you are very kind.

Great, thank you, and we have a question from the line of Michelle Appelbaum with MAR.

Please go ahead.

Hi, congratulations on the quarter and particularly on the dividend increase and buyback.

Thanks, Michelle.

The stock is doing nicely on the news.

I have a couple of questions and don't mean to be beating a dead horse on the contract business, but remind me, of the 3 million tons that are repricing for next year in the U.S. market, is it a million tons that is left over from '03?

Do I have those numbers right?

That is a reasonable approximation, Michelle.

Okay.

And then when you talk about having significant increases next year, can you separate those two?

Because the rest is annual, right?

Oh, mostly, not entirely, but mostly.

Some more, some less, but an average probably would be mostly annual.

I've talked to a number your competitors and people in the field about their thoughts of older tonnage and when I've thrown out numbers 50% or up 70%, people kind of say, yes, probably.

Do you want to give us any more insight into how much some of those older tons could be up for next year?

No, not really, Michelle.

And I just think it is better--I don't like to get into too much of our specific customer dealings.

That is not playing fair.

If you just look at the overall trend and the price structures in general, if you take an average of Gal, hot-roll and flat-roll from the '03 time fram to what it is today, just take an average to see what the differences are, that is probably not a bad indication.

Just spot difference?

Just over time, the overall structure was built off of hot-roll price back then of 270 or 300, whatever it would have been and it's built off a much different structure today.

I think it is that kind of general structural movement that needs to get adjusted.

Okay.

The other question I was going to ask is, if -- if I can ask another one.

Is it okay?

Sure.

U.S.

Steel was kind of one of the early consolidators in the sector, and you really did an incredible job.

Your acquisitions were huge home runs both in terms of the price that you paid and how they ultimately performed for the Company.

You have been a little bit less involved as an acquirer, and I am wondering if asset values have been driven up yet you have been more aggressive on your share price--I mean on your share buyback.

And I am just wondering on a go-forward basis if there's the possibility for more opportunities for acquisitions for the Company or do you find that U.S.

Steel is actually the most attractive acquisition right now?

Buying back your own stock.

A good question, Michelle and it's one we think about and talk about a lot to be perfectly honest about it.

We think there could still be opportunities for us to expand our footprint and expand our business through acquisition, but not just as we said before for the sake of being higher in the lead table.

We don't get any particular satisfaction out of that and neither would our shareholders, I don't think.

So to the extent we could find something in particular synergistic aspect that would add value at the bottom line, that's probably a decent thing to do and we would be glad to do it again, as you demonstrate we think we know how to do it.

But in the meantime when we have had some cash flow that was available, we think that using it to--again to buy back shares is something we are quite comfortable with as Gretchen said and the context of a wider capital allocation process not the exclusion of other things.

We are quite content to have that going on while we are considering other teaching alternatives and not really limiting our ability to do either one.

So I think our thought process involves the balance that you just described quite a lot.

You can see what it has led us to so far.

I agree with that.

I think we want to compromise our ability to do strategic acquisitions and our financial position and certainly improved significantly over the last couple of years and put us in a position to be able to do quite a number of things.

So we think, again, that the repurchase of shares, use of cash and a very good thing to do.

Okay, thanks, thank you.

Thanks, Michelle.

Thank you.

We have a question from the line of Marty Pollack with NWQ Asset Management.

Please go ahead.

Good quarter guys, I wanted to ask you with regard to--maybe you can provide a comment on production cuts in the fourth quarter.

You talked--you seemed to agree 20% might be not a bad number for Tubular.

If you look at third -quarter to fourth quarter, are we talking 10%, 5%, 15%?

Can you help us?

Marty, are you asking on the flat-rolled side now?

Yes, flat rolled fourth quarter.

I'm probably a little high on Tubular.

I am not very good at math on conference calls, but I try to steer you a little bit more towards the--the third-quarter '05.

I think that is really what John is trying to do on the flat-rolled side.

If you take a look at the third quarter with our reduced operating--third-quarter of '05 with our reduced operating rates during that period of time, we were faced on the flat-rolled side with some similar decisions, if you will, on our furnaces and--so order of magnitude that probably is pretty good directional way to point you.

Let me understand, clearly if you are talking about anything like a 3.5 million production rate in '05, that's--that's not what you are saying.

This is not where fourth quarter is going to be in--

In the third quarter--in the third quarter of '05, our flat-rolled shipments were about 3.2 million.

Right.

And we operated at about 72% of capability, and I think all we are observing is that depending on how things work out for the rest of the quarter, it may be that this fourth quarter looks more like that third quarter of '05.

But certainly that would suggest a significant underabsorption and--I mean if you are even suggesting--if you are saying it is more--it is more than 10%, whatever the total outage is.

Last time you--when you had that type of rate last--last year, your profit per ton was fairly devastated going into that fourth quarter.

Was there other things in there?

Yes, there's other--our prices are at higher levels now.

It was a somewhat different environment.

There's a lot of other things that are different then natural gas costs.

Yes, prices are higher now, but zinc is a lot higher also which is one of the reason prices are higher, of course, and we are doing more actual outage work this quarter than we otherwise would have done in the third quarter of last year which is a negative crisis on the other had you're quite a bit higher, so I am not using the third quarter specifically, it's just to say from an operating standpoint, total metal may well end up looking a lot like that and then applies our results will depend upon a lot of things that more current than they were back then but I think from an overall operating level standpoint that may not be a bad guidance

The only thing I would say--one could sit here with a pencil and paper and have--let's say the production declined third quarter to fourth quarter is a million tons, if that's even what is applied, there is quite a hell of a detrimental decline in profitability.

Third quarter, fourth quarter and flat-rolled.

Just doing the simple numbers.

I want to make sure I understand where you are going.

Are we -- is that -- is it planned production for the fourth quarter to go back to that type of level?

At this point?

I guess I don't want to get too specific on what our absolute production plans are, because we don't know yet, and I think that is going to depend on some short-term tactical things that can change quite a bit, but the market condition, again, is a lot more like it was in the third quarter of '05 so I just use that.

As a rule of thumb, it will be more like '05 third quarter than '06 third quarter.

And--but you are saying with the fact that some of those other costs are brought non-profitability per ton.

So significantly that time would not--there would be some market conditions that are a little different you are suggesting?

Prices are better.

Puts things higher.

Natural gas lower.

Ups and downs, plus and minuses both ways.

Thank you.

Thanks, Marty.

Thanks and we have a question now from the line of Michael Willemse with CIBC World Market.

Please go ahead.

Thank you.

There are a lot of questions on North American contract prices.

If I recall, your European contracts are about 30% of total shipments.

I am wondering what might be going on there in 2007?

You recall correctly.

It is about 30%, maybe third or so of our business, and I think there--the overall contract price trends are--are slightly up just as the overall market prices are moving up, and we are competing into new positions there and we've managed to increase volumes and have pretty good pricing which I think reflects the fact that we have really good product and pretty good service so I think there we see a general uptrend in contract prices as well.

Will it stay at about a third?

Yes, I -- I am hedging only because as I commented we do expect to have our new galvanizing line up during the first quarter, but how that is actually going to commercially play out and whether the initial contracts are for the whole year, I am a little bit uncertain as to the exact Commercial approach that will evolve there.

So I would be a little reluctant to say in '07, too much that happens.

I think if you look forward into '08 when we have the line up and running for a year, that will move a nice piece of business 300,000 and some tons into a contract position.

And the downstream business in Slovakia, after the galvanizing line, what would be some other downstream investments either Greenfield or maybe acquisitions that you might consider in Slovakia?

I would just say Europe in total, Slovakia and Serbia because we do tend to operate them together at this point, at least from a capital standpoint, we've done pretty well on the 10, pretty well on electrical motor laminate.

That is one market that continues to do well and we'll have to continue to consider.

One thing we have to look at is our cold rolling capacity because we will be taking a large chunk of that and moving it into the galvanizing line.

We like the cold rolled market in Europe and we may need to do something on cold roll capacity and pickling capacity which could be in either either in Serbia or Slovakia, and then the other big item might be a construction of galvanizing line that we debated about whether to make this initial line construction or auto.

And we thought auto was coming quickly enough that was the right answer but maybe construction is another possibility.

So I'd say cold roll, pickling and construction and it could be in either Serbia or Slovakia.

Last question.

Any sense on Cap Ex for 2007 yet?

No.

We don't have that plan in process completed yet.

It is a fairly rigorous process, but just in general we always talk about $650 million or so as a decent rule of thumb, and I don't know Gretchen or Nick, if you want to comment on that any higher or lower, could be higher, could be lower.

Yes, could be a little higher with some of the--the spending that we are talking about, but order of magnitude, I think that is right.

In that range.

Thank you.

You are welcome.

Thanks and we have a question from the line of Leo Larkin with Standards and Poors.

Thank you but my questions have been answered.

Thanks and we'll go on to a question from Mark Parr with Key Bank Capital Markets.

Please go ahead.

Thanks very much.

John, I was wondering if you could give us an update on the raw material situation for the Central European mills, particularly iron ore.

Are you any closer to long-term or equity investments that would assure a source of supply?

We are probably closer, but still quite a ways away.

Hard to be perfectly honest about it, we continue to have lots of conversations and we have excellent relationships and our deliveries are good and the FE content is good and the pricing is competitive.

And we continue to try to improve it, but we really haven't made that much progress.

And if you read, as I know you do, the various trade press reports in Europe, there are a number of restructuring activities going on in Europe, in Eastern European, in Russia, in particular and Ukraine right now in that sector and that no doubt complicates things, but to answer your question we are further along but we're not there.

Terrific.

Just one last thing, if I can make a comment.

Another major North American producer had indicated an outlook of--or indicated the potential to provide some formal earnings guidance once the quarter was further along.

And I just will make a comment that--or make a suggestion for you to encourage potentially providing some formal earnings guidance for the quarter, given the somewhat unusual nature of the current operating outlook.

Once you have a better feel for it.

So I hope you'll thoughtfully consider that, but if you were willing to commit to that I think it would probably help investors feel a lot better to the current situation.

Thank you for your comments on that.

There are pros and cons to doing it which is why--one of the reasons we haven't done it to date, but we will certainly take that under consideration.

Thanks, Gretchen.

Thanks Mark.

We appreciate your comment.

We want to be a company that says what we do and we do what we say and I think we have tried to do that for some time now but we will give it consideration.

Okay, appreciate that, thanks.

Thank you, and our last question this afternoon comes from the line of [Michael Weir] with Citigroup.

Please go ahead.

Hey, good afternoon, guys.

Congratulations on the great results.

Thank you.

Just a question on the Tubular business, given the M&A we have seen in this space and some of the attractive valuations and some media--recent media reports suggesting we could see further activity.

I was wondering how you are thinking of that business going forward.

Whether it's a business you prefer to keep inhouse or if you view it potentially as an opportunity to monetize that asset?

Thank you.

We--I think we've talked about that a bit before, Michael.

We like Tubular, it has performed very, very well, including this quarter.

And I think it is generating excellent cash flow.

It is a nice piece of our integrated business because it does consume material we are making and the steel shop allows us to run the Fairfield operation in a much more thoughtful way with our own iron ore transported--on our own transportation asset.

We are make rounds in Fairfield to consume partially in Lorraine, so it's a nice integrated package, it's in a really good part of the market that has an excellent outlook for us.

We are quite happy to have it as it is, as part of the Company, that's not to say we haven't talked about different things in the past but currently our current thinking is we like it where it is and we look at all sorts of things, though, and I wouldn't say anything is forever, but for the moment our strategy would be that we enjoy the integrated aspects of it, it really complements our other businesses and we kind of like it where it is.

Thanks, guys.

Okay, thank you.

Great, thank you.

Were there any closing comments from your end today?

We thank everyone for participating and we will talk to you next quarter.

Great, thank you very much.

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