美國鋼鐵 (X) 2007 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the United States Steel Corp.

fourth quarter 2007 earnings conference call and webcast.

At this time, all participants are in a listen only mode and later we will conduct a question and answer session with instructions being given at that time.

(OPERATOR INSTRUCTIONS) As a reminder today's conference is being recorded and I would now like to turn the conference over to your host, the Manager of Investor Relations, Mr.

Nick Harper, please go ahead, sir.

Thank you.

Good afternoon and thank you for participating in United States Steel Corp.

fourth quarter 2007 earnings conference call and webcast.

We'll 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 fourth quarter; and then Gretchen Haggerty, U.S.

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

Following our prepared remarks 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 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 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.

Good afternoon, everyone, and thanks for joining us.

Earlier today, we reported fourth quarter earnings of $0.29 per diluted share.

These results include a number of items not allocated to segments including inventory transition effects of $69 million related to the Lone Star and Stelco acquisitions and a $57 million charge associated with the early retirement program at USSK.

You might recall that we discussed the potential for these charges on last quarter's call.

Excluding these items which reduced net income by $117 million or $0.98 per share, our results were $1.27 per diluted share.

These results are lower than our third quarter results and lower than what we expected when we discussed our outlook on last quarter's call for several reasons, that we'll review in a minute.

Going forward it does appear that the markets are moving in the right direction and that business conditions for us are improving.

And you may have noted earlier today that we increased our quarterly dividend by $0.05 per share to $0.25 per quarter or $1 per year per share.

Looking back at 2007 in total, U.S.

Steel had another good year with record revenue of $16.9 billion, operating income $1.2 billion, net income of $879 million.

We're particularly pleased with our continually improving safety performance which is alway our Company's top priority.

In 2007, on a global basis our OSHA recordable rate improved by 13% and we achieved a 42% reduction in days away from work cases.

Our managers, employees, and Union colleagues deserve the credit for this steady improvement.

We're all working hard together to continue this important trend.

Now, before I comment on our results let me just remind you that we had not closed our Canadian acquisition at the time of our last earnings release and therefore, U.S.

Steel Canada was not within the scope of our fourth quarter outlook.

In addition to segment income and income from operations, the acquisition had an effect on net interest expense and our tax provision in the fourth quarter.

More on that a bit later.

Turning to our operations, we reported fourth quarter segment income of $257 million or $43 per ton.

We experienced challenges in each of our operating segments and completed several planned and unplanned facility maintenance outages.

We operated at 82% of raw steel production capability in North America, 79% in Europe, down from third quarter levels of 89% for both segments.

Our flat-rolled segment operating income of $53 million declined significantly from the third quarter as we included the operating results of U.S.

Steel Canada effective October 31, and we completed a number of planned and unplanned blast furnace repair outages during the period.

U.S.

Steel Canada lost nearly a month of production as a result of unplanned blast furnace outages operating at only 60% of capability for the two months compared to 89% in the third quarter prior to our acquisition.

Lower average realized prices compared to the third quarter primarily reflected a higher level of hot rolled and semi-finished with the addition of U.S.

Steel Canada.

In addition, cost for raw materials, natural gas, and outages, and modernization increased.

U.S.

Steel Canada added 557,000 tons to fourth quarter flat-rolled shipments under commercial arrangements in place at the time of the acquisition in which we of course played no role.

An operating loss was incurred at U.S.

Steel Canada for the two months as unplanned blast furnace outages resulted in lower shipments and higher unit production costs.

Of course, November and December are usually not strong months in any event.

Our operations in Canada have been much more reliable this quarter and we are completing the commercial arrangements we inherited with the acquisition.

The acquisition of U.S.

Steel Canada brought with it about 900,000 tons of excess slab on an annual basis and we will likely be selling a meaningful quantity of slabs in 2008 and finishing the rest on our U.S.

facilities.

While slab sales tend to reduce average prices as we report them to you, the margin on slabs can at times be quite attractive.

North American steel mark fundamentals continued to improve during the fourth quarter and service center inventories and flat-rolled imports declined throughout 2007 to historically low levels.

We are cautiously optimistic that our shipments and prices to the North American flat-rolled market should improve, supported by high ocean freight rates, the relatively weak U.S.

dollar compared to most major currencies, high scrap prices, and the prospects for a significant increase in the seaborne price for iron ore.

North American spot prices have been increasing in response to these factors as we expected, and we were realizing these increases in our spot business as the quarter progresses.

The sustainability of this favorable trend will depend to some degree on the strength of the North American economy particularly for the second half of the year.

The U.S.

Steel Canada integration process is moving forward and we expect a much higher operating rate in the first quarter.

We continue to expect at least $100 million of annual run rate synergies by the end of 2008.

The primary source of the synergies will be expanding our supply chain and providing semi-finished steel to our flat-rolled and tubular finishing facilities in the U.S., although as I mentioned we also expect to be in the semi-finished market to some degree in 2008.

As a result, we expect improved operating efficiencies throughout our entire system from our iron ore operations in Northern Minnesota throughout our U.S.

hot strip mills, coating lines and (inaudible) mills.

Additional benefits include leveraging procurement and best practices and overhead reductions.

In a moment, Gretchen will review our recent acquisition and financing activities.

Our fourth quarter European segment operating income was $85 million or $61 per ton, that excludes the impact of the workforce reduction program in Slovakia.

The fourth quarter results included unfavorable production and shipment volume effects associated with the rebuild of one of our two blast furnaces in Serbia, the repair of one of our three blast furnaces in Slovakia and a decline in euro based steel prices as high imports, particularly from China, and high service center inventories in Europe pressured spot prices and order rates.

Also, raw material and energy cost increased.

The outage has limited our production to 79% of capability.

In addition, shipments from Slovakia were negatively affected late in December by a Hungarian railway strike.

The workforce reduction program in Slovakia was completed with about 1500 employees accepting the offer and just under half of them left the workforce during the fourth quarter.

The remainder will be leaving throughout 2008.

We anticipate the 2008 productivity savings will be about $25 million increasing to $33 million annually beginning in 2009.

During the fourth quarter the European and consuming markets remained reasonably stable, although Europe based spot pricing was down from the third quarter due to in precedented levels of flat-rolled imports especially from China; however, recent reports indicate that both Southern and northern European spot prices have begun to firm and could increase through the first and second quarters.

Southern Europe is a large consumer of imported product and as such price increases in this region bode well for near term European flat roll pricing.

Turning to our tubular segment, during the fourth quarter we earned $83 million or nearly $195 per ton on shipments of 427,000 tons.

Compared to the third quarter results improved slightly due mainly to higher average realized prices resulting from a change of product mix and improved overall cost performance partially offset by lower shipments.

High inventory levels coming into the quarter and year-end ad valorem taxes led our tubular distributors and service centers to continue driving inventories lower during the quarter.

Market prices for both seamless and ERW products were generally lower pressured by inventory destocking and low priced imports, most notably from China.

Recently, we've announced several tubular price increases for most sizes and applications ranging from $50 to $200 per ton.

The higher prices will be realized mostly in the second quarter.

The increases are intended to recover higher costs, primarily for semi-finished steel and in particular for the high alloy component of our product line.

Market fundamentals and demand are positive as 2008 drilling programs begin.

The Lone Star integration process is nearing completion and we are on track to achieve our initial estimate of at least $100 million in annual run rate synergies.

The primary contributor to the synergies are semi-finished steel supply as we integrate the assets acquired from Lone Star into the U.S.

Steel supply chain for hot rolled product.

Additional synergies include leveraging procurement and best practices and overhead reductions.

Due to our shorter supply chain now, steel cost increases and decreases are reflected more rapidly in Tubular costs, again especially for high alloy grades.

In summary 2007 was one of the more significant years in our 106 year history.

From a financial perspective, 2007 was one of our best years.

It was also a year of strategic action as we acquired Lone Star Steel in June, doubling the size of our tubular business, then at the end of October, we purchased Stelco and increased our annual production capability by 4.9 million tons to 31.7 million tons, making U.S.

Steel the fifth largest steel producer globally.

These acquisitions are expected to result in at least $200 million of combined annual run rate synergies by the end of 2008.

These savings coupled with the savings from the USSK early retirement program, should significantly bolster each of our three main business segments.

A good portion of our work in 2008 will be focused on delivering on the commitments we made in 2007.

Now, I'll turn the call over to Nick for some additional details about the quarters results.

Nick?

Thanks, John.

Capital spending which is detailed by segment in the earnings release totaled $215 million in the fourth quarter, resulting in full year capital spending of $675 million, lower than our earlier estimate of $725 million.

Our current plan for 2008 has total capital spending at approximately $940 million, with $675 million for North American operations and $265 million for European operations.

North American capital projects for 2008 include mining and equipment at our iron own operations, coke battery (inaudible) projects at our Clairton coke operation and a proposed co-generation facility at Granite City which will be fueled by blast furnace gas and coke oven gas from a third party non-recovery coke battery which are both subject to environmental approval.

In Europe, 2008 major capital spending projects will consist of a realign of the number one blast furnace in Kosice and a number of environmental projects in both Slovakia and Serbia.

In addition we will also continue the implementation of an ERP system in both North America and Europe.

Depreciation, depletion, and amortization totaled $154 million in the fourth quarter and $506 million for the year.

Depreciation is expected to be about $660 million for 2008.

Defined benefit and multi-employer pension and OPEB costs for the quarter totaled $69 million.

We made cash payments for pensions and OPEB of $109 million, Gretchen will discuss these more in a moment.

For 2008 we expect our pension and OPEB costs to be roughly $200 million compared to $266 million in 2007.

Excluding voluntary contributions, we expect cash pension and OPEB payments to be approximately $570 million which include among other things, the cash related to the obligations assumed from the Stelco and Lone Star acquisitions.

Gretchen will discuss this more in a moment and additional details will be included in our 10-K which will be filed in late February.

Net interest and other financial costs totaled $44 million in the fourth quarter, compared to $22 million in the third quarter.

The increase reflects interest expense resulting from debt incurred to fund the Stelco acquisition.

We expect first quarter net interest expense to be about $50 million before any potential foreign currency gains or losses.

Our effective tax rate for the year was higher than projected at the end of the third quarter, as a result of the inclusion of U.S.

Steel Canada and a change in the profile of our global earnings.

As a result, the tax provision in the fourth quarter included $20 million to apply this higher tax rate to income for the prior three quarters.

Our estimated annual effective tax rate for 2008 will be higher than in prior years as we expect to reach the limit on the tax credit in Slovakia that has been available since we purchased USSK in 2000.

As a result, earnings at USSK will be taxed at 19% less approximately $25 million of the remaining credit.

Our domestic earnings will be taxed at the statutory rate of about 38%.

U.S.

Steel Canada is expected to modestly increase our effective tax rate.

This matter will be covered in more detail in our 10-K.

Lastly, for the quarter, we average 118.5 million fully diluted outstanding shares.

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

Thank you, Nick.

Our cash flow in 2007 was good with cash provided by operating activities of approximately $1.7 billion.

Excluding the $4 billion of cash invested for the Lone Star and U.S.

Steel Canada acquisition, our free cash flow after capital spending and after dividends but before external financing was approximately $1 billion.

We ended the year with $400 million of cash and about $1.6 billion of total liquidity even after making a $468 million contribution to our trust for retiring health and life insurance in Late December.

I'll talk a little more about this in a moment.

During the fourth quarter, we accent the debt capital markets issuing 500 million of 10-year maturity senior notes with a coupon of 7%.

Proceeds were used to retire debt associated with financing the Stelco acquisition.

As of 12/31/07 we had a long term debt balance of approximately $3.2 billion.

During the fourth quarter, U.S.

Steel and the United Steelworkers agreed that U.S.

Steel will provide healthcare and life insurance benefits to certain former national employees and their eligible dependents under a U.S.

Steel insurance plan using funds that had been accrued based upon provision of the 2003 basic labor agreement.

In December, we contributed $468 million to our trust for retiring health and life insurance.

You might recall that we've identified the growing balance of this profit based obligation for some time.

As a result of this agreement, our OPEB obligation increased by approximately $314 million as of the end of 2007.

Beginning with the fourth quarter of 2007, we eliminated this profit based charge from our retiree, benefit expenses.

But the funding obligation continues through August 31, 2008 , the expiration of our basic labor agreement.

The amount contributed to our trust going forward will be calculated as before with the variable contribution based on 6 to 7.5% of profit from operations.

We remeasured our OPEB obligation as of December 31, 2007, and our unfunded OPEB position is estimated to be $2.9 billion including the obligations for such former national employees and their dependents as well as the obligations assumed at U.S.

Steel Canada and Lone Star.

We expect our OPEB expense to total approximately $140 million for 2008.

We also remeasured our pension obligation as of December 31, 2007, and on consolidated basis including U.S.

Steel Canada and Lone Star, it is now overfunded by an estimated $223 million for accounting purposes.

We expect pension expense of roughly $60 million in 2008 compared with about $130 million in 2007.

Again, more detail on this matter will be included in our 10-K.

The Stelco acquisition was funded with cash on hand and various U.S.

Borrowings, the proceeds of which were sent to our Canadian acquisition Company through a series of inner Company loans and capital contributions to and from European subsidiaries.

This approach allowed us to fund the acquisition from the U.S.

As well as to reinvest the undistributed foreign earnings from U.S.

Steel Europe.

This approach improved our long term flexibility to efficiently utilize funds generated offshore; however, volatility in net interest and other financial costs could increase going forward as a result of foreign currency accounting remeasurement effect, primarily on a $1.2 billion inner Company loan to a European affiliate related to the acquisition of U.S.

Steel Canada.

As this inner Company loan is repaid, our exposure will decrease.

Also, we expect to mitigate a portion of this volatility with our normal hedging activity.

As noted in the earnings release, we repurchased 295,000 shares of common stock in the fourth quarter for a total cost of $30 million.

This brings our total repurchases to 14.3 million shares or approximately $812 million and represents more than 11% of the balance of fully diluted shares outstanding when we authorize the original repurchase program in July of 2005.

6.5 million shares remain available for repurchase under the current authorization.

Turning to our outlook, we expect first quarter results to continue to reflect the volatile cost and pricing dynamics in our three major segments.

Overall, we should be in a good position as 2008 progresses to take advantage of favorable supply side conditions, our expanded product and geographic positions in North America, and our new galvanizing line at USSK.

For flat-rolled, we expect improvement from fourth quarter results as shipments in operating rates are expected to increase compared to the fourth quarter, with the inclusion of U.S.

Steel Canada for the full year and the completion of the blast furnace project as John talked about.

Our facilities in Canada have been operating much more reliably.

Prices are also expected to be higher as increasing spot market prices will be realized throughout the quarter.

In addition, customer commitments in place at U.S.

Steel Canada at the time of the acquisition are being completed and new commitments consistent with U.S.

Steels commercial policies are being made.

We also expect significant cost increases for raw materials, particularly purchased scrap, coke, and alloy.

For U.S.

Steel Europe, we expect higher euro based prices and shipments should increase as a result of higher facility availability in the quarter.

Escalating raw material costs are expected to partially offset these improvements.

Shipments and prices for the tubular segment are expected to remain in line with the fourth quarter and semi-finished steel costs will increase.

Other businesses will reflect the normal and favorable seasonal effects of the closing of the Great Lakes for taconite pellet shipments.

Though we typically do not comment on our outlook beyond the current quarter but given the dynamic North American flat-rolled steel environment, we thought it would be appropriate to expand our remarks a bit.

Given our very favorable supply side data points and the recent spot price increases, we are optimistic about our results for the next several quarters; however it will take a few months for our results to fully reflect spot price increases and the results of the integration of our new businesses.

The overall direction of the U.S.

economy will also be important.

Could you please queue the line for questions?

Thank you.

(OPERATOR INSTRUCTIONS) Our first question will come from the line of Michael Willemse of CIBC World Market.

Mike?

Yes, actually, this is [Adam Pullen] from [Gunderman Research].

A couple of things regarding this fairly challenging economy that we're experiencing right now.

John, what are your operational improvement initiatives revolving around lean manufacturing, TPM, and Six Sigma and how do you expect those to benefit improvements and throughput throughout your plants and throughout your bottom line?

Well, we have a very well developed and widely distributed continuous cost improvement program as well as a variety of continuous improvement activities, largely at our manufacturing locations and that process involves setting specific targets for each operating unit in a Company, wherever they may be, and there are specific dollar amounts for specific things, that's a web-based system and we total them up each month, a group that's responsible at the operating level is tasked with completing those projects as part of their individual metrics, their unit metrics that affects everyone's rewards so it's a well developed, well prosecuted process that we've been using for a number of years and again, this year in our 2008 plans we have substantial cost improvements built into our system.

Thank you.

Next we'll go to the line of John Hill of Citi.

Great.

Thank you, and thanks for a detailed and forthright presentation as always.

Thanks, John.

We spent a lot of time talking about U.S.

Steel and in fact, you gentlemen have about, the protective cost umbrella from internal sources of raw materials and the pricing leverage, externally.

Obviously, this quarter did not demonstrate those for a number of the reasons that you laid out, but we're just wondering, is this still, do you believe it's still a core attribute of the Company and something that investors should be focused on as a driver of margins as we go forward?

By all means, I'll just give you a couple of observations on that.

The basic premise of our cost structure particularly in North America having a little more stability I think is still there.

I mean, our iron units will be slightly higher in 2008 than 2007, but only by single digits, so I think whatever advantages there will likely expand substantially depending on what happens with the global iron ore settlement, and the fact that we re -- expect to be running at much higher levels I think that will allow us to enjoy some of the cost benefits from the incremental ton not being quite as expensive as the last ton, and also, the fact that as Gretchen pointed out in some of the outlook comments on the supply side, spot prices are moving, overall prices are moving, and I think we're on the right trajectory.

The question is how quick that all happens and I think over a period of years, you all have had a chance to observe how that works through our system and we expect some price results in the first quarter but as time goes on, more and more would be manifested.

We did point out just for the record on the cost side that among things we're dealing with is purchased coke, purchased coke is quite expensive on the market these days but in the total context of things, I think our overall hot band cost as a reference of how well we can manage our cost in North America.

Our overall hot band cost increase because there will be a higher cost in 2008, will be at the very low end of the spectrum of analysts and others like you that have guessed at what cost increases would be for European and U.S.

flat-rolled Mills, I feel fairly good that we're going to be at the low end of that for two key reasons.

Iron units under control, higher operating rates generally much more cost effective operationally.

Great color, great color.

Also, it seems there were several blast furnace outages that were unplanned, and other items and the press release featured quite a recitation of these, so just wondering if you could summarize -- someone on the team could summarize a couple of the most significant unplanned operating outages and perhaps quantify some of the impacts of the Company?

Sure.

These things occur from time to time.

For us, happily they've been occurring less frequently but just starting East to West in Europe and Slovakia, we had on one furnace an unplanned project that we thought for the sake of safety and stable longer term operating rates that the we need to do some work on one of the furnaces and that put a bit of a dent in our steel making in the fourth quarter that wasn't part of our plan which has an effect on cost for utilization, also on shipments, and that was not something we built into our plan but when those things occur and when our Operators conclude it's something we need to do, we do it and we did it and it's behind us now.

The Serbian blast furnace realign, which was a major project we talked about at some length on several calls, that took a little longer and made it into the fourth quarter, and that was a slight negative effect.

I think those would be the impacts in Europe.

I think in the North American market, the most important thing, most noteworthy that we drew your attention to would be in Canada.

We had a problem with one of the blast furnaces in mid November and it took roughly a month, not quite, maybe three and a half weeks to get that furnace right and back up and running and we effectively lost a months worth of production in a two month period in a time when the market was otherwise not very strong and so that had a predictable effect both on cost and on results.

Those would be the two major things, and in the overall system of things, we operate a good number of furnaces, when these things happen we don't normally bring them to your attention, because they're usually offset with other effects and we could try to make do and work around it, particularly the one in Canada was something that stands out because it wasn't part of our outlook and really we didn't have any reason or any way to work around it in such a short notice.

Very good, thank you.

Thank you.

And next we'll go to the line of Nate Carruthers of Applebaum Research.

Hi, everyone.

Good afternoon.

Good afternoon.

In your press release, it seems like you might be suggesting that U.S.

Steel Canada's commercial commitments prior to and at the time of the acquisition were priced lower than U.S.

Steel prices.

Can you give us some color on that?

We just wanted to point out and make it clear that for a variety of reasons, most prominently the fact that for anti-trust purposes or competition purposes in Canada that we're not really allowed to know anything about those arrangements until the day of closing and that was really the first venture we had into the commercial arrangements in the acquired company.

We're not trying to cast any aspersions on what was there.

The fact is we don't know what would have been reached with those assets as part of a 20 million ton North American Company versus a much smaller Canadian only enterprise and we wanted to make it clear that we won't really be able to implement our North American commercial strategy until those commitments are worked off, and they are being worked off, it would have been worked off faster, had we not had the blast furnace problem I just referred to which caused some of those to carry over the first quarter so we just wanted to make it clear that by necessity that process takes some time for our overall commercial approach to take effect and that's starting right now.

All right, and then I guess what percent of U.S.

Steel Canada shipments would you say are going to be under the new commitments, via your U.S.

Steel commercial policy in the first quarter?

Well, probably the majority, but that depends on how well we operate and how quickly we turn things over so I would say probably half, maybe plus or minus, but that would just be a broad generalization.

All right, and then you're expecting U.S.

Steel Canada's operating rates to increase significantly.

I assume.

Do you have any guidance for I guess how or what kind of operating rate you're expecting?

No.

I think we referred to the third quarter operating rate of in Canada was 89% or something like that.

Not under our ownership, I think we just use that as a data point but we would certainly be shooting for something at least that good in the first quarter and in fact I would go so far as to say that we have all of our normally operating U.S.

blast furnaces running now including four at Garion and with the market as it is right now, we're running pretty hard.

And intensive.

All right, thank you very much for the color.

Thank you.

And next we'll go to the line of Timna Tanners of UBS.

Hi, can you hear me?

We can hear you, Timna.

Okay, great.

Just wanted to comment on or ask, sorry, about the coal side of the business, whether it has been sharp increases in spot prices, given some of the global dynamics and wonder if you could please summarize for us your position on coal in the Europe and U.S.

Operations.

Certainly.

In the U.S, I'll start there, it's a bigger number, and a better number.

In the U.S., because we had some contractual commitments that we brought into 2008 as part of our normal policy of trying to have a series of term contracts, and because we are in a good position physically on the Rivers with coke plants close to, reasonably close to where the mines are, we generally do fairly well.

I'd say in the U.S.

for our overall coal supply, 10 plus million tons, we would be looking for single digit increases, no more than that in 2008.

In Europe, a little different there, I think the coal market is quite tight and we're exposed more to the the spot market and there, the increases are likely to be substantial and are likely to be in line with what, not exactly with what the seaborne trade coal market is but much closer to that.

Okay, and when do the U.S.

ones guest repriced?

Well, we have a series of contracts that we work on periodically so there's no magic day where everything turns over.

There will be some contracts which will be concluded probably this year, I don't have the details right in front of me and some will go beyond this year into next year and we will begin to renew those with other contracts so we try to make -- try to encourage some stability in our overall coal cost by having a series of contracts that run for more than one year.

Okay, great and then finally just trying to understand the European market a little bit better.

You highlighted a few concerns there and maybe if you could comment on if the inventory situation from the high imports is getting back in line from your assessment?

And also the ability that you're seeing to pass through the higher costs on the coal and iron ore side?

I'd say, Timna, just in general and it's not much different than last couple years, that the European flat-rolled market looks to be behind what's happened in the U.S.

market by a quarter or two.

It seems that observability inventories, service centers, a few other data points we have in Europe are moving in the right direction and that maybe the peak supply has been worked off and is on the way down.

Price increases are a little more evident now and there seems to be an expectation in the marketplace that price increases are necessary for cost purposes and achievable based on the current supply demand.

So I think in Europe, things look better today than they would have three months ago.

Okay, thank you.

Thank you.

Thank you.

And next we'll go to the line of Aldo Mazzaferro of Goldman Sachs.

Please go ahead.

Hi, John, how are you?

Hello, Aldo.

I just had a question on pricing.

I'm trying to get a better feel for how the actual trends were in your business.

I know the mix at Stelco or USSK probably brought you down there but I'm wondering, I'm actually wondering if you could just give us a sense of direction on the U.S.

Steel plant and the national plants and on the Stelco plant, so you could just tell us if they were sequentially up quarter to quarter or down quarter to quarter, or maybe you'd want to give us the average selling price?

I'll take door number two, I think.

Just let me start again, in Europe, in euros in Europe, our prices bottomed out in the fourth quarter so -- and there was some mix effect in that but in general, I think our European euro based or euro selling prices, not dollar express but euro prices were slightly lower in the fourth and in the third and some of that was mix but I think it was just the market that we're in, bottoming out in the fourth quarter.

In North America, I can't really say anything meaningful about the prices in Canada because it was such a short period, and again, not commercial arrangements we're responsible for but I think the direction there would also be up.

In the U.S, fourth quarter versus third quarter on a like to like without getting into much mix, prices were flat to slightly down for most product groups and now, as we've entered into the first quarter, certainly in January, but increasingly through the rest of the quarter prices are heading up in the right direction.

Great, and so going forward on the Canadian business, would you expect the mix to improve or stay more or less heavy on slabs?

Improve implies that the current mix is not good.

I'm not sure I'm prepared to say that.

I think the mix is what we knew it to be and that is a heavy hot rolled, heavy year hot rolled mix than we might have had in the traditional U.S.

North American plants and a certain amount of slab that we are going to either sell semi- finished if that's attractive or finish in our U.S.

plants and in all probability we'll do some of both of that as we develop our overall relationships and new customer positions but I think the mix would be relatively similar.

There's some coated, some cold, but a heavier version of hot roll and some semi-finished, not 900,000 tons but some portion of that and we'll have to decide really month to month and quarter to quarter how much of that we want to do, it's not a really easy market to get in and out of because even with semi-finished the receiving party wants to have some understanding of what the material is and how it runs so it takes some time to develop those relationships but we'll I think probably a stable mix through the earlier part of the year as we further the process.

We're already running some Canadian slab through U.S.

hot strip mills and it works just fine and I think that gives us new opportunities to get to new customers that we might not have been able to get to before so we're just exploring all of those opportunities and we see nothing but good things in front of us but the overall mix near term fairly similar.

Great, John, I didn't mean to imply it was a bad mix, I meant less rich.

Could I ask one more question on the tubular, kind of the same question.

I assume the mix improved in the fourth quarter.

Could you talk about the mix going forward in tubular?

Yes, that's a very fragile calculation, Aldo, because the price ranges on what we sell are quite different and just expressing it as an average price per ton can be quite effected by whether there's a big order of wide diameter casing for the deep Gulf, when that happens prices are very high and can really affect it.

I think overall, we've had a number of price increases both late last year and just more recently either later last year or early this year, where over the entire range of products we expect to see some price movement for no other reason than to try to recover some of the higher costs but I think there -- our mix should be fairly stable in near term, our mix is strongest right now in the narrower smaller diameters, not as strong in the very wide diameter casing which is deeper Gulf kind of projects, that drilling recomposed in the deep Gulf has been still fairly weak, has been really since the hurricanes came through several years ago.

The hurricanes didn't blow the projects away, they're still there and we hope eventually that the rigs are lowered back and they begin to drill there and that makes them improve but in the meantime, the mix can be affected by a lot of things, it's a long answer, I'm sorry, but I would say in the near term it probably stays relatively stable.

Thank you.

Next we'll go to the line of Michael Willemse of CIBC World Markets.

Great, thank you.

Hi, Mike.

John, just going back to the issues at the Canadian operations, was it the Hamilton mill or the Lake Erie mill?

I might have missed that?

You didn't because I didn't say it but I'll tell you it was the Lake Erie plant.

We had a couple blips at Hamilton but the largest issue I mention the was at Lake Erie.

Okay, and when was the last outage taken at Lake Erie?

Was it quite awhile ago?

No.

I think both of the furnaces are in pretty good shape.

This was just an item which could happen at any furnace.

It has in other places.

It just happened to happen on the wrong time and took a little while to get it fixed, but I don't want to make it too nefarious or significant, it happened, we take care of it, then we go on.

The furnaces are in pretty good shape.

Okay, and then just going back to the guidance, particularly U.S.

Steel Europe, if I look at the investor package, the calculated costs per ton in the fourth quarter in Europe was $691, so should we assume that the costs will be up in the first quarter 2008 or higher than $691?

Of course, those figures are affected by the dollar/euro relationship but just in absolutes, yes.

I think costs are likely to be higher in the first quarter in Europe, not just for us but probably for everybody but certainly for us for iron use and for carbon use in particular, so we would expect some price increases in the first -- I'm sorry, cost increases in the first quarter and we are running after price increases too.

We hope more than recover that, how quickly that happens remains to be seen as the quarter goes on.

I think John, that from a -- with the pricing and volume improvements we're expecting, we do expect an improvement.

The costs would be higher, but it will largely offset those.

Higher operating rates are going to give us the help in stretching points out, I should have mentioned that.

Thank you, Gretchen.

Yes, actually that was my point.

So you do expect the higher operating rates to offset the higher -- I guess which one will offset more?

Will the higher operating rates cause costs to decline more than raw material costs or the other way around?

Not likely.

I think it's the other way around.

Right.

Okay.

And also, just one question on going back to North America, how far out would you say your order books are now?

Oh, four to six weeks maybe something along those lines.

The lead times have been extending recently, I think that's a positive sign and that goes hand in hand with price increases.

Okay, thank you very much.

Thank you, Mike.

Thank you.

Next we'll go to the line of [Evan Kurtz] of Morgan Stanley.

Hi, good afternoon.

I know we've talked about a lot already but going back to the outages, I was hoping you could quantify from a cost perspective of what we're looking at in 1Q versus what happened in 4Q, and if there's any spillover effects that are going to bleed into the first quarter.

Effects in the first quarter from the outages per se, I don't think there's anything significant coming out of that, the only derivative of that would be that some of the customer commitments in Canada that we were working our way through will take a little longer to work through because we didn't get all the tonnage out and to some degree likewise in Europe where we had some shipments, service interruptions with this railway strike issue, some of those tons took a little longer to get out and that will take a little longer than to get things moving through the system but the outages per se costs lingering in the first quarter not really.

Okay, any specifics on numbers?

Tonnage or costs?

You mean cost increases?

As far as the outage costs or outage tons?

In fourth quarter versus one quarter -- or first quarter?

Well, we've kind of given you the operating rates and the outages were largely the reason for the change in operating rates from that you can derive the -- I mean we have the table with production and shipments and I think that's the best expression I could give you.

I think the steel capability -- the steel production was affected by the outage at the difference from the third quarter would be the best way to measure that.

Okay, I'll move on.

My other question was on the new galvanizing line in Europe?

Yes.

Wondering what the -- maybe an update on that, the status and what percent increase would that -- or what percent of the increase that we're looking for in Europe in the first quarter might be due to higher ASP's from a mix with more galv?

The first part of your question, the new line is running very well.

It exceeded all the start up curves and our target production for 2007 was exceeded by a nice amount, not huge but nice amount so the plan is running well and we're into exposed automotive trials and we're selling into the appliance market and selling into the higher end of the construction market so the line is running fine.

The margins are quite good, and no doubt that will be a positive contributor in the first quarter.

It really wasn't running in the first quarter last year.

How significant that depends really how well the galvanized pricing does so I'm reluctant to predict that but it will be a positive for the first quarter because it wasn't there first quarter last year.

Okay, thank you.

Thank you.

Next we'll go to the line of Mark Parr of KeyBanc Capital Markets.

Thanks very much.

Hi, Mark.

Hi, John, how you doing?

Good.

Good.

Could you give us some color on your spot mix for your U.S.

operations as opposed to Stelco?

For as you move into '08?

Sure.

We generally talk 50/50.

It won't differ by much.

I think if you look at actual capital C "Contracts" with a fixed price for a year, that's probably 40% of our total U.S.

non-Canadian flat-rolled book, and at least 40% is spot which is 30 days, maybe a little bit longer and there's an intermediate component there that maybe has a slightly longer contract period, six months, and some that would also be index based on CRU or some other index and most of that the would be a monthly index, some a little bit longer so the actual fixed pricing fees, less than 50%, some form of spot related, a little more than 50%.

All right, and are there any raw material escalators in the fixed price contracts for '08?

Not of any significance, no.

I mean, I would just respond to that, I mean it's one thing that because of its extraordinary volatility the last several years we have some provisions in some contracts to deal with that.

I would just say, Mark, that with respect to the U.S.

fixed price contract business, we had a decent idea of what our costs were going to be for 2008 when we had our contract price negotiations for those we had to negotiate for for 2008.

Okay, all right, and so at this point anyway, you're not seeing su prices on cost side relative to where you were during the negotiations?

Not really, no.

Maybe the one slight exception would be scrap, really big move in scrap and alternative iron units that occurred late in the year was maybe a little beyond our expectations.

That has other favorable benefits on the overall market but maybe it's not such a bad thing from our standpoint but that would be the one exception that moved up at a very rapid, very high level and that would be maybe the one footnote I'd put on it.

Okay, just if I could ask another question about Stelco.

Sure.

Once you closed the transaction, you were able to get in there, you discovered this one issue with the one blast furnace.

In your due diligence to date, have you uncovered any other potential significant capital projects or also could you rank the Stelco blast furnaces from a productivity standpoint against your North American standards?

Sure.

It's still a little soon to do that because we're doing a lot of evaluation and examination, but both furnaces are pretty good size and both furnaces are in pretty good shape.

They have been working on them in the last several years and both furnaces are running well.

This one problem didn't take much discovery because it was sort of a bussel pipe structural failure, (audio difficulties).

So that wasn't so much an investigation, it was more of a casualty kind of a thing, so I think everything we've seen since then, Mark, tells us there's lots of opportunities, for optimization improvement.

Our objectives for operating rates for the entire item really, the blast furnaces, coke plants and blast furnaces and steel shops are quite high, higher than the operating rates that would have been relevant there in the past.

So we think we can do a lot better on throughput that has benefits on cost and we're hard at it right now with all sorts of people.

Just lastly, Gretchen, could you review the total pension and OPEB P&L impacts in '08 and '07?

Just give me those numbers again, please?

Yes, the total in '07 was $266 million.

In '08, we're expecting the total to be approximately $200 million.

Of that $200 million amount, 140 is OPEB and 60 is pension.

Okay, terrific.

Thank you very much.

Thanks, Mark.

And next we'll go to the line of John Tumazos of Very Independent Research.

Please go ahead.

Congratulations on all of the integration and acquisitions.

Thanks, John, we're trying hard.

If I'm counting right, you now melt steel in nine locations and there's a half a dozen other operations that don't have steel making furnaces that are significant like Lone Star or Portage or other operations, could you describe how you're reporting or command and control has changed over the last decade when you got down to the low point of three steel making operations, Gary really dominated the Fairfield and Long Valley operations as to significance, and just wondering how you manage it all?

That's a really good question, John, because we spend a lot of time on that subject and I'll just give you a quick historical perspective.

If you think about the old U.S.

Steel from circa year 2000 that we were 10 million tons plus or minus and now we're 30 some million, so it's a much bigger operation than we dealt with back in those days, and in North America, it's 20 some versus just 10 back then, we do have a lot more facilities.

We move a lot of product around and we source a lot of different things.

What we discovered when we added National Steel back in mid 2003, that it set up all sorts of opportunities for sourcing, interplant operations, what's the best way to source Midwest.

Well, that depends upon what the substrait dimensions are, depends upon what the load is on Gary versus Great Lakes, it depends upon transportation rates so we went through sort of found one of figuring all that out, also on the outbound side what's the best location to source the customer from because there can be choices when you have more facilities.

It took several iterations for us to get that more or less right.

We still work on it every day but that was a process that took a little bit of time.

Now we've added a big demand factor in the Southern end of our system, in East Texas, with 900,000 some tons of consumption and a large source of semi-finished with 900,000 some tons on the northeastern end of our system and we are busily figuring out the optimization of that, that responsibility rests in our Corporate business planning function together with our Corporate marketing function trying to figure out where the most margin is given a certain set of market assumptions, based upon what we make and where the customers are, how we can process it.

It's a very complex process and bringing in the new operations last year to the South and to the North have made it more complex but also opened up huge opportunities for us and we're busy on that right now so I wish I could give you a big schematic that shows you exactly how it worked but we're working on it right now.

Whom do the nine plant managers report to in the melting operations and how many layers are there between you and them?

There's only a couple layers, a lot fewer than there used to be but our General Managers at the plants report to a Vice President of Operations who reports to our Chief Operating Officer who reports to me.

I guess that's the simplest way I can describe it.

They're responsible for running the plant, necessarily not for selling and marketing.

Thank you.

Thank you.

Next we'll go to the line of Dave Martin of Deutsche Bank.

Thank you.

I had a couple remaining items.

First of all coming back to Michael's question, on European costs in the first quarter.

Did you conclude that accounting for the raw material costs and then the increase in operating rates that your cost would effectively be consistent with the fourth quarter?

Cost per ton?

It may, we don't know for sure yet but it may be -- one other positive I'll give you is that we might have lower outage costs in the first quarter than the fourth quarter because again, we don't have any expectations of outages right now, so we have some positives, high rates as well, but higher material costs and it could go either way but I would expect right now that our overall cost per ton like to like same mix will probably be a bit higher.

Okay and how about in North America?

We would be maybe higher but more stable, I think.

Again, the outage cost will be lower and the absolute cost increases for other items will be relatively lower, scrap will be higher, gas could be higher typically at this time of the year.

Iron will be relatively flat, coal relatively flat, purchased coke will be quite a bit higher so it could go either way, but I would say the costs in the U.S.

will be more stable than they would be in Europe.

Okay, and then secondly, coming back to the discussion on contract prices, specifically auto contracts I think back in October, you had highlighted that the potential existed for significant price increases.

Yes.

For 08 could you just update us on that?

I'm not sure I said significant, but in any event let me just say that when we went through our normal contract negotiations, we had a pretty good idea of what we had our costs, we had a good idea of what our costs were expected to be, and we went through those discussions, expecting to at least maintain, if we could improve our position.

That's the market process, competitive process and we're comfortable with where we came out.

Okay, and then lastly, I think Nick mentioned when going through the CapEx budget for '08, mentioned some mining CapEx , and could you give us kind of the magnitude of that CapEx and what exactly you're

I don't have the exact number, maybe Nick can flip to some if we know them, but they aren't huge numbers and they are largely just normal replacement equipment.

There's no new projects there, although I think we're giving some attention to that, because our iron requirements are a little higher now or will be over time with the Canadian operation, so but these are just excuse me, largely replacement equipment trucks, drills, shovels, and the like.

And I would, I'm not sure but I'm guessing less than $100 million, more like 50.

Okay, thank you.

Thank you.

Next we'll go to the line of Marty Pollack of NWQ Investment Management.

John, a quick question.

As far as the USSK, when you look at last years quarter, I mean the January quarter of '07, you shipped about 1.650 million tons, 98% operating rate.

Average price was about $669 a ton and you generate profits about $206 million.

I bring that only in context to trying to understand assuming we get the operating rate back up to some level that would be clearly addressing levels beyond the outage problems you had, what kind of operating rate can we expect and with those headwinds and cost, are we, should we be looking for a profit level somewhere between this 85 million and the $200 million that you guys generated in last years first quarter?

I'm trying to understand sort of the context here.

Sure.

Just a couple of observations, Marty.

Number one, at least in the first half of the year, I don't, we don't expect to have any large outages, so assuming the market is reasonably supportive, we would be running at pretty high rates and capability utilization rates would be maybe more back to where they were in the middle part of last year and that could be well into the '90's we had a quarter or two maybe we ran 100% so I think that's within our normal possibility if the market would support it, that adds certainly some cost benefits.

What we are getting though I think are more substantial raw material increases being influenced by the overall world trading patterns for iron ore and coal, not exactly the same amounts but moving more in that direction, and the real question is whether or not we can move prices far enough, fast enough more than offset that, will our profitability likely be between somewhere compared to where we were in the fourth quarter and where we were back in those earlier quarters.

In all probability I think that's not a bad assessment but where it would land in there it's hard to say.

Gretchen, anything you want to add to that?

I guess I'd just say given the cost pressures and we anticipate getting squeezed a little bit in the early part as we try to get some price increases and so we'll see the costs faster than we'll see the prices.

So I think, Marty, in between there is right but I think we're coming up from the fourth quarter.

We're not going to zoom up to where we were at the first quarter of '07.

Yes, the trajectory we're on is positive one.

How quickly we would get back into those zones of profitability depends on how quickly the market would respond on the price side.

Well, I think that may have been at peak level anyway, so I think in a sense, I don't think one would expect that, but if outages had such a significant impact and your operating rate was so low, it seems that maybe one would want to get comfortable that nominal profits in this quarter were considerably lower than what would be normalized and maybe that's the way to hope to see that in terms of how you might describe that.

Yes, Marty, I think it really all depends on the raw material cost price relationship and I think everybody who is making flat-roll in Europe has that same question.

The overnight reports from the trade press suggest that some other manufacturers are talking about the need to try to address that issue and we'll be doing the same thing.

Okay, what seems to be also here is some tail wind in things that you've laid out.

I add up the numbers, $200 million on synergies and another $66 million on pension and OPEB and another $25 million you already described also in benefits, I think those numbers you said were USSK savings on this retirement.

Curious, one, what have you seen in terms of savings out of the steel dynamics at this point towards that $100 million of synergies by '08 and in fact, can we expect these to be tail winds to your results on some level so that we actually capture the benefits of these synergies and offsetting the costs you're talking about.

Yes, so a very fair question, Marty.

Our committment is to deliver with respect to the Canadian assets and Stelco acquisition, at least $100 million of annual repeatable synergies by the end of the year, so we'll be hitting a run rate and I think it will be more back end loaded as we go through our process and that's the way it normally works and I'm thinking back to the national acquisition, the Serbian acquisition, et cetera.

So I think there is a nice tail wind there.

We expect we'll embed that in our overall results but it will be loaded more towards the back end.

And as far as the Stelco acquisition, integration, should one assume that your comments suggest the integration while you expect it to work by year-end, is in fact more labored or slower to develop online with your schedule?

No, no, not really.

Let's remember we only closed the acquisition on October 31, so it's not been all that long.

It's been less than three months and we have a very detailed plan with a lot of people working on it and we're going through it step by step, and we start with safety and we install systems and we install people and we install support groups to work on coke plants and blast furnaces and steel shops and we begin to develop our commercial strategy and that doesn't happen in two months, it happens over some period of time and this feels a little bit to us, to me at least like late 2003, early 2004 because we had come through the national acquisition about mid year 2003 and really didn't get to where things started to click until mid year 2004.

I think we can do faster than that, but I think expecting us to have it done in three months even is a pretty tall order.

I think we're making pretty good progress, it's on schedule.

Thank you.

Next we'll go to the line of Charles Bradford of Bradford Research.

Good afternoon.

Hi, Chuck.

On your last conference call, you just I think convinced with a change in the capital trade system in Slovakia and I think you didn't know at that point how much of the reduced Slovakian emissions you'd be allocated and also what alternatives you had.

Has anymore information come out of what they are going to let you have or what you're going to do about it?

We have some anecdotal reports, Chuck, but not anything final yet to the best of my knowledge and belief.

What we're going to give you in our 10-K filings sort of an up to the minute specific disclosure and everything we know at the time.

We had some lawsuits and there's been some actions there that wasn't to our satisfaction, but based on what we've heard so far, from the Slovak level in these discussions we feel a little more comfortable that we're going to be able to get an allocation that together with improvements we're making in our overall system that we'll be able to operate at high levels of capacity without large costs for additional carbon based requirements.

That's in the current system.

That doesn't speak to what comes in the next round of CO2 reduction, that the EU is working on.

You can read about that every day of course, we have opinions on that but in the current system it looks like we should be in a position where we'll be able to navigate our way through this without major negative costs.

The iron ore situation in Slovakia, obviously it's not on the water so it wouldn't be based on the necessary seaborne price, obviously without the freight.

What kind of pricing basis do you have and how close are you going to be to the 75% demand that CVRD is apparently making ?

Well, we buy our iron units almost exclusively from the East, Ukraine and Russia.

We have a number of suppliers we've had excellent long term relationships with and that's a normal market negotiation and they have some alternatives, we have some alternatives and we try to settle out at a price that we can both live with, or that we're both equal and happy with maybe and I think in this particular instance, I expect us to be below what the seaborne resolution is.

I don't have a particular guess at that, I'm just looking at the reports that folks like you write and my guess is we're going to come in underneath that for the year but that remains to be seen on how high that settlement would be.

We're really not directly in that but no doubt, those that we're buying from have pretty good knowledge of what that discussion entails and so do we.

Thank you very much.

Thanks, Chuck.

Thank you.

And next we'll go to Ted Izatt of Bear Stearns.

Good afternoon, everybody, congratulations on your quarter.

Thank you.

A couple of questions here, first of all have you given any guidance or could you give any guidance in terms of free cash flow for '08 and whether or not actually what I'm really getting at is whether or not you might come to the debt markets again?

Well, I guess I don't have any immediate plans to access the debt markets right now but we did, we have done a fair amount of financing over the last year in conjunction with our acquisitions and I felt pretty comfortable with the level of financing that we had done, not wanting to have too much long term fixed rate debt and wanting a nice balance which on shorter term debt that we could pay off quickly with free cash flow generated so I think we're pretty comfortable with where we are and the financings that we've done.

We don't really give a free cash flow forecast for the year.

We've given you some pieces of things that are higher than they were last year, but we obviously are expecting some favorable effects from our acquisitions over time, so I think over time, we're hoping to generate favorable free cash flow.

I don't think I can give you a forecast.

Okay, and then that would be used towards debt reduction; correct?

Yes, and I guess one -- as a matter of fact one of the things that's not easy to see from our earnings release but I did tell you last quarter that when we financed the Stelco acquisition, we drew about 400 million on our accounts receivable facility, their receivable sales so it doesn't appear on the balance sheet as debt but there's lots of detail in the footnotes that allow you to see that and it is really a financing vehicle, but we drew 400 million and at the end of the year, you will see from our 10-K when we file it, we're down to 150 there so we really already have in a way reduced some of the financing that we arranged for the Stelco acquisition.

Okay, great and then as far as your credit ratings go, are you fairly comfortable where you're at?

Would you be trying to improve to one non-investment grade line or?

Absolutely.

We're hopeful to continue to demonstrate strong financial performance that will warrant having Standard & Poor's rated investment grade, that's absolutely an objective for us.

Okay, thank you, Gretchen.

Thank you.

Thank you.

I'll turn it back to our host for any closing comments.

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