美國鋼鐵 (X) 2007 Q2 法說會逐字稿

Welcome to the United States Steel Corporation second quarter 2007 earnings conference call and webcast.

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

Later we will have a question and answer session with instructions given to you at that time.

(OPERATOR INSTRUCTIONS) As a reminder, the conference is being recorded and the replay information will be given out at the end of the call.

I would now like to turn the conference over to your host, Mr.

Nick Harper, please go ahead.

Thank you, Cindy,.

Good afternoon, and thank you for participating in United States Steel Corporation second quarter 2007 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, we will be happy to take any questions.

Before we begin, however, I must caution you that today's conference call contains forward-looking statements and that future results may differ materially from statements or projections made on today's call.

For your convenience, the forward-looking statements and risk factors that could affect those statements are referenced at the end of our release and are included in our most recent annual report on Form 10-K and updated in our quarterly reports 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.

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

Earlier today we reported solid second quarter results with earnings of $2.54 per diluted share, which includes one pretax charged interest expense of $23 million related to the early retirements of our 9.75% senior notes.

And excluding that one item, which reduced net income by about $14 million or $0.12 per share, our results were $2.66 per diluted share.

That's up from $2.30 per share in the first quarter and well ahead of the average of analysts estimates of $2.35 per share.

And in fact, I understand ahead of the high-end of the analyst estimates.

From an operating perspective, we've reported second quarter segment results of $434 million or $79 per ton, a very solid performance and more than a 10% improvement over good first quarter operating results.

Segment results were again led by our European operations with record operating income of $244 million or $151 per ton.

This segment continues to benefit from a favorable business environment that supports healthy steel consumption and strong demand throughout the central European corridor as well as in western and southern Europe.

Gretchen will review our outlook in a moment, but as I mentioned on last quarter's call, we do plan to realign one of our blast furnaces in Serbia beginning in September, resulting in lower shipments, higher outage costs, and lower operating income compared to the second quarter.

During the second quarter, our new automotive galvanizing line in Slovakia remained ahead of the planned startup curve.

Trial material and, in some cases, production quality material is being supplied to our European auto customers.

And we continue to receive substantial interest in the high quality product from this new line.

Testing and commissioning will continue into the fourth quarter and we look forward to larger automotive contract volumes in 2008.

Second quarter flat-rolled segment results of $92 million, or $26 per ton, is a 23% improvement over the first quarter and reflects a 411,000 ton increase in shipments, partially offset by higher outage and raw material cost.

Looking forward, we see the potential for some improvement in a spot market, as both service in our inventories and flat-rolled imports are at more reasonable levels.

Given the possibility of stronger economic activity and an improving manufacturing environment, at least as predicted by some economic experts, we may well experience higher operating rates and firmer pricing in the domestic flat-rolled market as we move through the balance of this year.

Turning to our Tubular segment, we earned $97 million or $336 per ton on shipments of 289,000 tons, that includes 47,000 tons from Lone Star following the June 14th acquisition.

Despite the U.S.

rig count that near 20-year highs and strong end user demand, higher customer inventory levels and imports have dampened apparent demand from our oil country distributors, even though actual consumption has remained quite strong.

While imports remain at high levels, we're somewhat encouraged that over the last several months OCTG distributor inventory levels appear to have stabilized.

Regarding Lone Star, the integration process is well underway and we are on pace to generate at least $100 million of annual run rate synergies by the end of 2008.

To remind you, the source of those synergies will be steel sourcing and processing along with procurement, supply chain management improvements, overhead reductions, and leveraging best practices.

We have a new Tubular management team in place led by Joe Alvarado, our new Vice President Tubular.

A seasoned steel industry veteran who is responsible for all aspects of our Tubular business unit.

And keeping with the personnel theme for a moment, Sue Suver joined our Company recently as Vice President Human Resources.

One of our great challenges as a Company is attracting, developing, and retaining the next generation of leaders.

And Sue is uniquely qualified to fill important this role.

So it is a pleasure to welcome Joe and Sue to the U.S.

Steel executive team.

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

Nick?

Thank you, John.

Capital spending, which is detailed by segment in the earnings release, totalled $142 million in the second quarter.

Our current plan for 2007 has total capital spending at approximately $770 million, with $540 million for domestic operations and $230 million for European operations.

Depreciation and amortization totalled $118 million in the second quarter and is expected to be about $485 million for the year, which recognizes the increase related to Lone Star.

Defined benefit and multi-employer pension and OPEG costs for the quarter totalled $58 million.

We made cash payments of $61 million for benefits, primarily for retiree healthcare during the second quarter.

Also during the second quarter, we made a $35 million voluntary contribution to our main pension plan.

Additional details will be included in our 10-Q, which should be filed in the next few days.

Excluding the $23 million charge for the early retirement of our senior notes that John mentioned previously, net interest and other financial costs totalled $11 million in the second quarter and we expect third quarter interest expense to be about $25 million, which excludes foreign currency gains and losses, but includes the impact of the recently issued debt.

Our estimated annual effective tax rate for 2007 will be determined based on domestic results taxed at the statutory rate of about 38% and Slovakian earnings taxed at a flat 9.5%.

This rate in the first half of 2007 was about 16.5%, a decrease of 1.5% from the first quarter as Europe is contributing a greater proportion of our pretax income.

We expect our Slovak tax rate to increase to 19% during 2008 due to full utilization of our tax credit that has been available since we purchased USSK in 2000.

This issue is covered in more detail in our 10-Q.

Lastly, for the quarter we averaged 119 million fully diluted outstanding shares.

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

Thanks, Nick.

Our cash flow has been very strong so far this year, with cash flow provided by operating activities of $790 million.

Excluding the Lone Star acquisition, our free cash flow after capital spending and after dividends but before external financing was $510 million.

We ended the quarter with nearly $1.1 billion of cash and about $2.4 billion of total liquidity.

As we've highlighted before, we do continue to accrue a profit-base liability to be used to assist National Steel retirees with healthcare costs.

It's not been paid yet because the associated trust has not been established.

So as of the end of the second quarter, we have recorded a liability including interest of $427 million for this purpose.

As Nick mentioned earlier, during the second quarter, we voluntarily contributed another $35 million to our main pension plan bringing our year-to-date total to $70 million.

This is half of what we're anticipating for the year.

Since the beginning of 2004, we have voluntarily contributed more than $765 million to our domestic benefit plan, our defined benefit plan.

As noted in the earnings release, we repurchased 305,000 shares of common stock in the second quarter for a total of $33 million.

This brings our total repurchases to 13.7 million shares or approximately $754 million and it represents about 10% of the balance of fully diluted shares outstanding when we authorized the original repurchase program in July of 2005.

There are 7 million shares available under our current authorization.

During the second quarter, we accessed the debt markets and we raised $1.1 billion with six, 10, and 30-year maturities, with an average coupon of 6.13%.

Proceeds were used to redeem the outstanding $378 million of 9.75% notes and to fund a portion of the Lone Star acquisition.

The balance of the Lone Star acquisition was funded through a combination of cash on hand and financing obtained under our existing credit facilities.

Turning to our outlook, for the third quarter we expect continued solid operating results for our three main segments, with overall results improving from the second quarter, excluding any charges or other effects resulting from the Lone Star integration activity.

In the flat-roll segment, we expect results to improve in the third quarter due primarily to reduced outage and related costs and higher shipments.

Third quarter averaged realized prices are expected to be slightly lower, reflecting current spot market conditions and higher semifinished product shipments.

For U.S.

Steel Europe, we expect third quarter results to decline mainly as a result of higher outage costs and related effect, including the blast furnace realign in Serbia that John mentioned earlier and that we expect will begin in September and continue into the fourth quarter.

Shipments are expected to decline, while average realized prices are expected to increase slightly from second quarter levels.

Third quarter average realized prices for Tubular are expected to decrease from second quarter levels, including the effects of product mix.

Results will reflect the inclusion of Lone Star for the entire quarter.

Third quarter Tubular results may be negatively impacted as we address inventory issues in conjunction with the integration.

Nick.

Cindy, could you please queue the line for questions?

(OPERATOR INSTRUCTIONS) And we'll start with Kuni Chen, Bank of America Securities.

Hi, good afternoon, folks.

Hi, Kuni.

Just to start off.

In flat-rolled, what are your production expectations for the coming quarter?

You were operating at 85% in the second quarter, do you expect that to go up in the third quarter?

Oh, I think it'll be up slightly, Kuni.

We ran reasonably well in the second quarter, had some outages.

We'll have some outage work to do in the third quarter, not a lot.

So I think it will be perhaps up a little bit.

That'll depend, of course, on how the market shapes up for the rest of the quarter.

What's driving your expectation for higher shipments in the quarter?

Others out there are continuing to see volume weakness and some of your competitors are starting to take some market down time.

So are you gaining share at this point and do you start to worry that you're driving volume at the expense of price?

No, as you can see, our prices have been quite stable through the year and that's a balance that we always work on.

And I think we've done fairly well at keeping our prices stable.

Our expectations for shipments are largely based on what we've already received orders for and what we have good reason to believe, based on conversations with our customers, we think we can expect.

The quarter's just started obviously we're not that far into it.

Based on what we can see and the markets we serve, including our contract position, we look for the third quarter to be slightly better.

Okay.

One last question, if I may.

As far as the evolution of the North American market over the next two to three years, just wanted the get your views there.

Obviously a lot of capacity coming on.

Do you accept the fact that the market becomes more competitive?

Or are there actions that you're taking now to kind of mitigate that, either by driving mix improvements or targeting higher value-added markets?

Well, just to begin, the amount of capacity which is coming on can be discussed, I suppose.

There certainly is the one EAF project in the south and maybe some additional finishing capacity coming on in the south.

But beyond that, I'm not sure how much more, but in the periods you describe.

But nevertheless, even if there is, I think you have to view that in the context of a North American manufacturing economy, which might turn out to be pretty decent in the next couple of years.

The dollar trending lower makes not just us, but our customers a little more competitive.

The export industries do a little bit better.

And that may be one reason or series of reasons why others are interested in participating in this market.

Our Company, in particular, is after a nice balance in the market where we have a strong position with all the major North American automotive companies, the major appliance suppliers, the major can makers, as well as excellent positions with the major service centers that we do a lot of business with.

We think our market position is well-balanced.

There'll be share here and there, but for the most part, we think where we're positioned in the market is pretty good right now.

Great.

Thanks a lot.

Your next question will be from Timna Tanners, UBS.

Please go ahead.

Yes, hi, good afternoon.

Hi, Timna.

Wanted to ask a little bit follow-up on that last question, actually, because I think it is striking that the average price per net ton that you report in the U.S.

business has been very flat over the last what, three, four quarters at about 650.

And if you look at the spot prices for sheet, they've been much more volatile, with the hot roll price being somewhere what in the low 500s versus the low 600s a couple quarters ago.

So can you tell us a little bit more for purposes of us understanding how to model this Company going forward?

How is that achieved and maybe it helps to understand if you're half and half contract in spot, what might we be missing in terms of how that spot business is priced?

It's hard for me to really respond, Timna, without a large spread sheet in front of both of us.

But you're right.

About half or so of our contract -- our business is Flat-roll is contract in this particular year where spot prices trended down a bit during the year.

We did enjoy some improvements from last year to this year on contract.

And those two tended to offset each other.

And when you observe spot price reports, indexes or other reports, it's hard to tell what those are.

Those may be looking back, they may be a transaction that day, they may be for the next month.

But not every piece of business and every ton in every month is shipped at that price.

These things sort of evolve over time.

And our business is frequently done on 30 days or 60 days or 90 days or longer time.

Some of it has indexes with it.

So not every ton every month goes up and down exactly at the spot price you might see reported.

So it's really all those things that we're in.

Not just spot but also intermediate markets that follow the spot index but don't drive to it every month.

And our contract business, which has been doing fairly well, is at competitive levels now compared to some earlier years.

And that's tend to offset some of the spot business.

Okay.

What do your contact customers say when they look at the spot market versus what they're paying and it's not the discount that they're used to in the past?

Do you think they're realizing that they're not going to get that kind of discount going forward?

Well, I would first say it hasn't always been a discount.

There have been many times in recent years when contract prices were below spot and sometimes when contracts are above spot, we probably have some of both.

And at least the kind of contracts we enter into with the kind of customers we have, we both intend to honor that.

We both understand there is some risk.

And while we observe differences from the spot price and take it into account when it comes time to negotiate, it's coincidence if the spot price and the contract price are exactly the same.

Okay.

And then just lastly if you could just refresh us on your outlook or your thinking currently about acquisitions, because there's some talk in the market, as there always is, about what you might be looking at.

But in the past you've kind of said that you'd be more keen to look into Tubular, which you've pursued, and also Europe.

So if you could give us -- if you could refresh our views right now on what you might be targeting in terms of growth by acquisition?

Well, nothing specific that I'd comment on, of course, because we don't want to comment on whatever the current rumor of the day is.

That would be a full time job, Our view is that we have opportunities in all of our major business units.

Certainly in Europe we continue to be interested in some kind of raw materials opportunity.

Given the way the world is today, that's not an easy thing to accomplish.

We think with our recent acquisition in Tubular space, we're a very strong Company with great opportunities to move further in the Tubular business, which could be in some adjacent businesses or more in Tubular directly, nothing specific there to talk about.

And then in the North American flat-roll business there are some assets with some opportunities.

We look at everything.

We don't mind growing by acquisition or joint venture or partnership if that's appropriate.

But we're going to apply the same kind of discipline and tests to that as we have in the past.

That is to say we like to see synergies, good market potential where it adds value quickly, immediately, if we can.

And if we see something that meets that criteria in any of our business units, we'll pursue it.

Really nothing specific we can talk about.

Got you.

Thank you very much.

Your next question is from John Hill, City Investment Research.

Please go ahead.

Right.

Thank you.

And thanks for a great presentation as always.

Thanks, John.

Just curious if we could come back, this is a very basic question about the outlook.

And I know it's not a quarter to quarter business.

And I hate to get hung up on this, but we're looking for overall improved results, but Europe's going to be softer, pipe's going to be softer, those were 79% of operating earnings in the quarter.

And then it looks like there's kind of some mixed messages on Flat-rolled, less outage costs but lower price more semifinish.

How does this all translate into a stronger overall outlook from Q3, again given Europe, given pipe, and given the kind of offsets in flat-rolled?

Well, I'm not sure how to answer that, John, except to say when we look at the totality of it, our expectation is that we'll have a somewhat better operating order in the third quarter than in the second quarter.

Taking all that into account, I think in the North American Flat-roll business you can see we are expecting higher shipments and relatively flat pricing and we do comment on semifinished.

I'd just point out that even though semifinished would tend to affect the average realized prices we've reported, semifinish can also have very healthy margins.

I wouldn't equate that necessarily to lower margin business per se.

We expect Tubular to do reasonably well and Europe to continue to do reasonably well.

We are coming off a record quarter.

The lower volumes there will be in effect, as well as in Europe the fact that we do have the blast furnace outage and we'll be moving some material from Slovakia into Serbia during other outage work in Slovakia, so we have some higher transportation costs, slightly lower margins.

We put it all together and we felt comfortable with making the outlook that we gave you.

Great answer.

Great answer.

And then it's great to hear you talk about views of the overall steel supply chain as being tight looking into the rest of the year.

I just wonder if you could in that regard comment on mill level inventories and just provide us some comfort that your facilities don't have excess coil stacked up in the parking lot, et cetera.

Oh, no.

If they do, they won't be there for long.

We have managed our business in a very sort of straggly low inventory way.

And we've made no change in that policy whatsoever.

And I would say that Ron's really from the iron ore mines and the coke piles all the way through.

We keep inventory at what we think is a responsibly low-level.

And we manufacture really for our customers.

The only exception to that would be in connection with Lone Star and I think we have a comment about this in our release, that there's more inventory on hand at Lone Star as of the date of the acquisition that we think is necessary or appropriate.

And there's probably some which is either obsolete or not appropriate for its intended use and we're going to deal with that in a very forthright way in this quarter.

We did observe, we don't know whether that will be part of the purchase price allocation of part of the accounting results and whatever it is it is and we'll probably have some of both and let you know where we are at the end of the quarter.

But with respect to our U.S.

flat-roll business, to get to your original question, we don't have coils piled up, I can assure you of that.

Great answer.

Thank you.

Thanks, John.

Your next question is from the line of Michael Willemse, CIBC World Markets, go ahead, please.

Great, thank you.

John, just going back to your comment on inventories at Lone Star, your inventories are up about 435 million in the quarter.

How much do you think you could reduce inventories by to get it to where you'd be comfortable with?

The Lone Star would be one piece of that and it would be a fraction of that.

I'm reluctant to say how much of that would be attainable in the quarter.

It'll be a substantial amount, but not half of that or not that size of a number, I think.

That number is somewhat seasonal, as well.

So there'll be a good-sized chunk taken out, but I'm not really sure I can give you a number right now.

and how about on the accounts receivable side with the receivables you acquired from Lone Star.

Could some of that be factored out, like you do with some of your receivables currently?

No, that's really a financing technique question.

Maybe I'll let you comment on that, Gretchen.

Right.

I don't think that -- on our prior business we do have an accounts receivable financing vehicle available to us, which we used a bit of in financing the Lone Star acquisition.

The receivables change for Lone Star.

We'll have something relatively modest to assign to that from a purchase price standpoint on the order of 100 million or so and then we'll just collect those as we would normally do.

In general, I would say that at Lone Star the entire supply chain will be tightened up a lot, both inventory and receivables.

And as we sort of combine the operations, I think we'll have a much more disciplined Tubular wide supply chain that I think will allow us to eke out a good bit of working capital as we, U.S.

Steel, are doing more of the sourcing on substrate and as there's less of a need for the old former Lone Star to be sourcing material from further away places on alliance business because they didn't have the same capability.

We can tighten up a lot of that and, I think, take some working capital out.

But that's all underway.

Okay.

Great.

You didn't mention an outlook or I didn't catch an outlook for the other business.

Last quarter you had some higher costs in the other business just due to additional stripping at one of your mines.

Should we expect the operating earnings to kind of go back to where it was last year in the third quarter of '06?

No, I think we tend to give you our outlook on a sequential basis and therefore I think what we had in the second quarter would be more indicative of what will happen in the third quarter.

And as we talked about in the -- as we talked about in last quarter's call, we're revising our approach a bit in the iron ore operation to do a little higher stripping ratio in order to extend the line lights and be in a position to overall extract more at higher rates in the future.

So our overall cost and productivity levels have been effected by that.

I think what you'll see in the third quarter would be more similar to what we had in the second quarter and not necessarily like we had last third quarter.

Okay and great.

One last question.

How many shipments of semi-finished steel do you think you'd make in the third quarter?

And do you think that'll continue into the fourth quarter?

It's not a material amount that's in the sort of 100 thousand tons or so plus or minus in that range.

And those are sort of just sporadic when we have capability and there's a buyer who wants them.

I think those are more one off opportunities.

It may, may not, but it's not a big part of our business plan long-term.

Okay.

Thank you.

Your next question will be from Mark Parr, KeyBanc Capital Markets.

Please go ahead.

Thanks very much.

Hi, good afternoon.

Hi, Mark.

Thanks for having me on today.

I had a couple of questions.

John, I was wondering if you could give us some historical perspective on the, call it the meantime between an ITC preliminary investigation and some actual shifts in market momentum.

And what I'm referring to specifically here is the last Friday's announcement that they were going to take a closer look at the pipe and tube import situation.

It takes an educated trade lawyer to do that.

And I'm trying not to become one, Mark.

So I don't really have a good answer for you on that except to say a couple of things.

One, we were pleased with that preliminary ruling by the ITC staff.

We think, of course, it was the right ruling.

And we think that the trade flows from China continue to be damaging.

And if they're not dealt with properly, I think we could have longer term damage and we think that was the right thing to do.

The actual process now as it plays out takes quite a bit of time.

There's no immediacy to that ruling.

We have to have hearings and orders and all those kind of things that happen later.

I think that'll take some time for it in a formal way to be effective.

I do think that that ruling and some other things that have happened recently probably send a message to the authorities in China that they should be sensitive to and alert to the need to carry out the restructuring industry they have pledged to do frequently and recently.

So indirectly, it probably has some benefit more immediately, but the actual process plays out over quite a long period of time.

Will those -- assuming that there are some duties that are levied, will they be applied retroactively?

I honestly don't know, Mark, but I think -- .

I think there is precedent for that, isn't there?

That is the case.

It has been the case before.

I don't know how far back and how significant the retroactivity can be.

But that in fact is the case.

Again, you're getting beyond my modest capabilities on trade law on that

Well, yours is much greater than mine, so I'm just asking for some guidance.

I had one other question, if I could.

Could you talk a little bit about lead times in the domestic flat-rolled in terms of where they've been, where they are now, and how soon will you be getting the August release from the automotive companies?

Well, on the automotive business, that sort of goes along on almost a daily basis or weekly basis.

And we're running to their published build schedules, which are pretty good right now.

And in fact, if things continue through the rest of the year, the second half auto build will be better than the second half last year.

And we'll actually show some decent improvement.

I would say it would be some of the other sectors that we're looking for, we hope.

Continued improvement on lead times have been short throughout the summer.

And in particular, the distribution service center and converter sectors have been reluctant to get much more inventory back on their books until they really need it and therefore they're keeping their orders tight and our order books have been relatively short.

But the order book in recent weeks has been improving.

And lead times are moving out a little bit, not a lot, but those -- those few signs of life we have seen are encouraging.

And then some of the contract business has been steady and that what gives us the confidence of saying we might see some movement in the right direction.

But fundamentally, if there's good economic activity and the overall industrial production indices continue to move up, we think we've got a shot at maybe a better second half than the first half.

Okay.

Terrific.

Well, congratulations on all the progress and look forward to next quarter's release.

Thanks, Mark.

Thank you very much.

Your next question is from Michelle Applebaum, M Applebaum Research.

Go ahead, please.

Hi.

Hi, Michelle.

First of all, congratulations on Joe.

I don't know, Sue.

I've known Joe for 25 years and he's one of the best guys I know.

So congratulations on that.

Now he's going to kill me for saying that because he's listening.

We'll make sure we pass it along if he's not.

Oh, I'm sure he's listening and I'm sure I'm in trouble.

Second of all, now that you've acquired this great commercial operational management team and you have these assets and you've had all of these get to know you kind of stuff going on at the companies, what can you tell us about what you're finding at Lone Star?

What's new and different and what have you learned in the last couple of months?

I'll just give you some general commentary, Michelle.

I think it may take a little longer than the short time to really have a good answer to that.

In general, what we've found, among other things we've found an excellent leader with Joe, is that what we're looking at here is combining an excellent operation that we had on the seamless side and an excellent market and oriented operation on Lone Star on the welded side and out of this -- and the new team we have which has been assembled from both organizations, we want to be able to prorogate the U.S.

Steel disciplined manufacturing safety oriented tight management inventory management system throughout Lone Star, which I think will be good for the entire organization.

And then, likewise, at Lone Star, I think we've observed before and now are convinced that Lone Star had a much wider range of products and services and a wider view of the market, necessarily, because our view was a little more narrower just on seamless.

And out of that I think comes a much better market oriented organization than we had certainly before just as U.S.

Steel Tubular and out of it we think comes a real strong North American Tubular services and products organization that is second to none and it has all sorts of opportunities to move forward.

I'm really delighted with what we've seen about the combining of the two organizations.

Out of it comes one really, really strong first class organization.

Is any of that different then what you thought going in or anything incremental?

Not much.

I would think that, though, that we are more pleased with what we've seen in terms of the market savvy and the market knowledge and the knowledge all the way into the customer that the Lone Star folks have.

Not that we didn't but ours was narrower because our product range was narrower.

I think we see opportunities to improve the overall marketing and the overall manufacturing and operating activities at Lone Star to a level that we think is appropriate and we think will provide cost benefits, certainly improvements in safety, shorter supply lines, tighter working capital management, all of the things that we've done in other operations we have acquired.

Okay.

So the real power is throughout the organization, but in particular on the commercial side, which I would tend to agree.

That Chicago influence.

I have another question, you made reference to shipping bands to Lone Star, shipping steel to Lone Star.

Have you talked publicly about how much steel you're going to be shipping to Lone Star?

No and we probably won't.

We can supply most of what the requirements would be physically, technically, supply most of what the requirements would be and how we decide to run our Flat-roll facilities, how much we choose to supply to Lone Star for substrate purposes is really a commercial decision that we'll make from time to time.

We're already running some of the material from, I think, largely Granite City, perhaps some from Gary.

Could also use Fairfield material.

It sets up a real nice set of options for us as we schedule our plants and we are just exploring those boundaries now with our combined team.

I just want to get clarification of the comment about you can supply most of what their requirements are.

When you say that, do you mean volume of of tons or do you mean the different types of products they need?

Really, both.

I think technically we've investigated almost all of that now and I think there's virtually everything that it would be required we could supply from our North American plants.

And from a volumetric standpoint, of course, we make a lot more than that, so we certainly could.

But that's really, again, a question of commercial strategy and how much we wish to have in that market versus where the next highest and best use for it would be in the rest of the market.

Is there an arbitrage opportunity where you could supply Lone Star, Steel Dynamics could supply the techs or something?

I'm just trying to think that through.

That's too complicated for me to think through.

We look forward to supplying the customer you just mentioned.

We have for a long time and we intend to keep doing so.

And they do, as well.

They said that today on their call.

Your next question is from Charles Bradford, Bradford Research.

Please go ahead.

Good afternoon.

Hi, Chuck.

I'd like to talk about the automobile situation.

I'm sure you're as well aware as we are about the labor negotiations beginning with the Big 3.

Do you have or can you talk about your exposure?

I'm assuming it's pretty much like the automobile companies market shares.

Would that be true?

I think that's a pretty good approximation, Chuck, yes.

It's not perfect, but I think it's a pretty good approximation.

In looking at your flows of material, if you had been supplying a lot of hot bands to Pitcal as well as Posco has.

If you start supplying in addition products to the large diameter mill that you're going to be building, I believe out in the same neck of the woods.

Right.

And then also to Lone Star, do you really have the hot bands to do that?

Oh, yes.

We have plenty of hot roll to do that.

There could be some issues on size and gauge and those kinds of things.

But that all really depends on what the overall market position is and how much we choose to supply and how much we would choose to allow those units to develop for themselves in a marketplace.

And that's a matter of commercial strategy.

And when we first announced the Lone Star acquisition, you may recall, that I said that we look forward to enjoying synergies that are upstream operations over a range of market conditions.

And that's what we intended.

Depending on how the market happens to be at a certain time, we may choose to be more or less of a supplier to those downstream units.

And then it's also my understanding that the final weld plant needs a heavier gauge product than you typically make.

More like a coil plate.

I'm assuming that the Gary mill can do that.

But is that really the best use of the product?

That again depends on the relative attractiveness of the alternatives.

We do have the capability to supply most of what we understand the requirements are going to be on that mill.

Obviously that is one reason why we like the project out there.

We think that having the ability to place more of our product at those kind of sources could be an advantage through much of the market.

Remembering again that the extent we could run our strip mills and our steel shops and our furnaces and our iron ore mines at higher rates through market cycles has a big cost benefit for us over time.

Thank you.

Thanks.

Your next question is from John Tumazos,John Tumazos Independent.

Please go ahead.

John?

Quest in a question.

There are three companies I've met in recent weeks that are mining companies where the drill data is in part U.S.

Steel drilling from over 20 years ago.

Two are copper nickel, one gold and they're worth well over $1 billion.

There is a trend on the mid continent rift near Duluth with a coper-nickel precious metals horizon.

And I would be greatly interested if in another presentation you would talk about the Minntac deposits, where they lie on that trend, and copper or nickel occurrences that may or may not exist on your property.

There was an era where a different iron ore mine in Minnesota set aside a waste dump that was non ferrous ore, copper-nickel ore.

And that's an item of great interest given how much those prices have changed.

We're hoping to find new value in U.S.

Steel.

Well, we join you in that, although we think we'll do it through our traditional operations.

There is, John, there are some deposits like that that run through that part of the world.

And I think there was a report sometime ago, but within the last year or two, about someone with an idea about a project to extract some of that.

I don't know that that particular type of deposit is in our area in any commercially recoverable quantities, but that's as much as I know about it.

In your June 30 balance sheet, 62% of the price paid from Lone Star was classified goodwill and intangibles or about a quarter of the corporation's equity.

What was the change in the property plant and equipment accounts and inventory accounts of Lone Star, if any, when you closed the transaction?

Did you write up inventory to market?

Did you have appraised change in any of the PP&E?

I'll let Gretchen comment, but we'll file our 10-Q in a day or two, typically, and there'll be a fairly fulsome disclosure of the acquisition with the purchase price allocation in a footnote, I expect.

But with that comment, Gretchen, go right ahead.

Yes, John, we went through traditional appraisal process and came up with a preliminary estimate of the balance sheet.

It will be refined over time.

And we hope to get most of that out of the way this year.

But we do have some time to further refine it.

But our property plant and equipment and you'll see some more details of this in the 10-Q.

We were estimating at about $460 million.

The goodwill was at about $970 million.

So that just gives you an order of magnitude.

Inventory about $550.

Those details will be laid out in the 10-Q with some other things.

Could change over time, but that's roughly what was come up with at this point.

Thank you very much.

Thanks, John.

Your next question is from the line of Sanil Daptardar, Sentinel Asset Management.

Please go ahead.

Yes.

You gave a pretty optimistic picture for the third quarter in terms of the domestic shipments here.

One of your competitors, in fact, was not so bullish or optimistic on the third quarter.

They still continue to see inventories in the domestic market and presumably you think that the inventories will be pulled down and probably shipments will increase.

Why your thoughts are more optimistic than the others here?

Yes, I can't speak for our competitors.

I'll let them do that on their own.

And I haven't studied all of what the other earnings reports have contained so far.

We would just observe that inventories have continued.

Those that we can observe on the service center sector have continued to be reduced really throughout most of the year and are at the lowest level now in the last year or so, if I remember looking at the chart.

And I also observed that assuming there's some reasonable recovery in economic growth, which seems to be the consensus economists view, that could make for a slightly more robust second half than others might have otherwise predicted.

Normally the second half in our business is not as strong as the first half for outage reasons and other reasons.

So I think in our point of view, inventories have moved into a better balance, imports have remained relatively restrained for several reasons.

The only real footnote on that is that China, I think, could still be a problem if their industry is not properly restructured.

And with some decent economic activity, we think the second half can be pretty good.

I can't explain why that might be different than others, but that's what we see.

Okay.

And on the demand front you said about if the economy improves.

But on the demand from you see things improving in the auto sector, appliance sector, you talked about pretty strong order books here or improving order books.

So you must be getting a feel that in auto industry, or the appliance industry, things are improving in that case?

Is that the case here?

Yes, the auto industry, again, I think will be better in the second half, assuming there's no labor-related disruptions.

It'll be better in the second half than in the first half, or at least that's our expectation.

Appliance would be stable, I think.

There's no doubt that they are affected by the residential housing difficulties and the residential housing difficulty does eventually work its way into other markets, as well.

The extent that that may be hitting a bottom and some of that may now be prepared to stabilize and move up a bit.

Nonresidential remains relatively strong.

Pipe and tube manufacturers, some of them are doing quite well, others are just stable.

We see more signs of life than industries that are going in the wrong direction.

So, again, we're not predicting a huge turn around, but if there's some reasonable economic recovery, we think the second half could be better.

Thank you.

And last question on the European side.

You are looking for sequential decline in the shipments.

Is it more to do with the outage only or it's something to do with demand patterns over there?

No, it's largely outage oriented.

I think demand in Europe remains pretty robust.

And it's the blast furnace outage and then some other things that will be done adjacent to that.

So it's largely the outage.

Thanks.

Thanks a lot.

Okay.

And the last question for our question and answer session will be from Bob Richards, Longbow Research.

Please go ahead.

Good afternoon, guys, and thanks for taking my call.

Thank you.

Hi, Bob.

Real quick question on the tin business.

I may already know the answer to this.

Do you see any material favorable impacts on your tin business with the transition at Sparrows Point?

Not that would be discernible so far.

Of course, as I read that transition hasn't taken place yet, but nothing that would be discernible.

That market is fairly steady and is characterized by being steady sort of year in and year out.

We have not seen any major, major affect on our business.

We picked up some spot business here and there, but nothing major so far.

Okay, great.

Thank you.

And just, you may have already touched on this, but in your shipments again, materially higher than what your -- admitting no competition has stated theirs were?

What end markets did you see as specifically strong this quarter?

I'm sorry, strong looking forward?

Strong this particular quarter, John.

Well, I don't know that any one industry.

I think we did fairly well across all the industries.

Our contract business was reasonably stable and service center and other businesses like that, even though they're not ordering in large quantities, they were relatively steady, but staying, I think, with the short order book.

I would just say on balance the increases would have been more in the intermediate markets, but all of our markets did reasonably well for the quarter.

Okay.

Thanks for the detail.

And good luck.

Thank you.

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

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