美國鋼鐵 (X) 2008 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and thank you for standing by.

Welcome to the United States Steel Corporation third quarter 2008 earnings conference call and webcast.

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

Later we will conduct a question-and-answer session, and instructions will be given at that time.

(OPERATOR INSTRUCTIONS).

As a reminder this conference is being recorded.

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

Dan Lesnak, Manager of Investor Relations.

Please go ahead.

Thank you, Dimitri.

Good afternoon and thank you for participating in United States Steel Corporation's third quarter 2008 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 additional details for the third quarter, then Gretchen Haggerty, US Steel's Executive Vice President and CFO will comment on the outlook for the fourth quarter.

Following our prepared remarks, we will be happy to take any questions.

Before we begin, however, I must caution you 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 the release and included on our most recent annual report on Form 10-K, updated on quarterly reports on Form 10-Q in accordance with Safe Harbor provisions.

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

Steel Chairman and CEO John Surma.

Thanks, Dan.

Good afternoon, everyone, and thanks again for joining us.

Earlier today, for the third quarter, we reported record quarterly earnings of $7.79 per share.

As you might have noted in our release, that figure included the $0.67 per share effect of a $105 million pretax charge for employee signing bonuses paid as provided for in our new labor agreements with the steel workers, and a $23 million charge related to environmental remediation at a former production site.

In addition, net interest and other financial costs in the third quarter included a foreign currency loss that decreased net income by $39 million, or $0.33 per diluted share.

That's related to the remeasurement of an $840 million US-dollar denominated inter-company loan to a European affiliate, partially offset by Euro/US dollar derivative activity.

Excluding the effect of those three items, our earnings were $8.79 per share, which exceeded both the high range of analyst expectations and the consensus, which I understand was around $7.05 per share.

Turning now to our segment results, third quarter operating income of over $1.3 billion was nearly 40% higher than the then record results we reported last quarter, and almost four times our results from last year's third quarter.

Although capability utilization was lower than second quarter levels in both North America and Europe, as production was reduced later in the quarter to levels corresponding with declining customer order rates, we had significant improvement in operating margins for both the North American flat-rolled business and the tubular segment as a result of a strong pricing environment.

As in the second quarter, our safety performance remained very strong in the third quarter, with all of our performance metrics continuing to show significant improvement over year-ago periods.

We thank our employees for their personal commitment to this most important of our metrics.

Our North American flat rolled segment earned record operating income of $835 million in the quarter, significantly higher than our second quarter results, and nearly five times our earnings from the third quarter of 2007.

Compared to the second quarter, third quarter average flat-rolled pricing increased by $130 per ton to $907 per ton, as the increase in spot market prices was more fully reflected in our average realized flat-rolled prices in the third quarter.

Third quarter North American flat-rolled shipments were down due to some seasonality and weakness in the automotive segment, and some softening in the service center and converter markets, while energy related markets remained the most resilient.

Stable global steel demand for most of the quarter and the relatively weak US dollar helped us supplement third quarter North American flat-rolled shipments through slab sales and export opportunities.

Lower imports and manageable inventory levels across most industry market segments helped shipments and prices during the quarter.

We're currently negotiating customer contracts that expire at the end of the year, and we anticipate contract proceeds improving in 2009, as the new contracts more closely reflect market conditions.

We'll have a better view of this matter next quarter.

Our third quarter European segment operating income was $173 million, down substantially from last quarter's record performance, primarily due to lower shipments due to market conditions, higher raw materials costs, and increased operating costs as we proceeded with the scheduled reline of one of our three blast furnaces at U.S.

Steel.

For our tubular segment, operating income was $420 million in the third quarter, more than double our second quarter results.

Operating income reached $809 per ton of shipments of 519,000 tons.

And our average realized price climbed to $2,390 per ton.

These record quarterly results were driven by the strong tubular market environment and full realization of July 1st and prior price increases.

Now I will turn the call over to Dan for additional information about the quarter's results.

Dan?

Thank you, John.

Our current capital spending plan for 2008 is approximately $860 million, with $650 million for North American operations and $210 million for European operations.

This excludes spending by our variable interest entities which totaled $95 million in the first three-quarters of the year.

Depreciation, the depletion and amortization costs totaled $149 million in the third quarter, and are expected to be about $600 million for the year.

Defined benefit and multiemployer pension and OPEB costs for the quarter totaled $60 million.

We made cash payments of $160 million for benefits during the third quarter.

$41 million in required pension contribution and $119 million for retiree insurance plans, including $52 million of profit-based contributions to a trust based on an agreement with the United Steel Workers.

Also during third quarter.

we made a $70 million voluntary contribution to our main defined benefit pension plan, bringing our year to date voluntary contribution to this plan to $140 million.

Additional details will be included in our third quarter Form 10-Q.

Third quarter net interest and other financial costs totaled $46 million which included $6 million of unfavorable foreign currency effects.

Excluding foreign currency effects, we expect fourth quarter net interest expense to be about $42 million.

Our annual effective tax rate for the balance of 2008 is projected to be approximately 27%, and lastly for the quarter, we averaged 117.8 million fully diluted outstanding shares.

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

Thanks, Dan.

Through the third quarter, cash flow provided by operating activities was very strong at over $1.3 billion.

Our free cash flow after capital spending and dividends, but before external financing was $572 million.

We ended the third quarter with $793 million in cash and total liquidity of just over $2.1 billion.

As noted in the earnings release, we repurchased 1.13 million shares of common stock in the third quarter for a total cost of approximately $130 million.

This brings our total repurchases to 16 million shares or approximately $1 billion and represents almost 12% of the balance of fully diluted shares outstanding when we authorized the original repurchase program in July of 2005.

As of September 30th, 4.7 million shares remain available for repurchase under the current authorization.

Turning to our outlook, the volatile global economic climate is having significant negative effects on our overall business and our forward view is limited because of low order backlog and short lead times.

We expect a decline in fourth quarter results mainly due to softening demand in prices for our flat-rolled products in North America and Europe and we expect to continue to operate at reduced production levels corresponding with customer order rates.

For flat-rolled, fourth quarter results are expected to decrease from the third quarter due primarily to substantially lower shipments and lower average realized prices, partially offset by lower raw material costs.

Based on very weak market conditions, we expect results to decline substantially for U.S.

Steel Europe in the fourth quarter.

Fourth quarter results for tubular are currently expected to be comparable to the third quarter.

We believe over the longer term, our company is well positioned from an operating and commercial standpoint.

We've been through many down turns in the past and we're confident that our facilities and our people are in a much better competitive position to address the challenges ahead of us.

We will continue to focus on making steel for our customers as safely and as cost effectively as possible.

Thank you, Gretchen.

Dimitri, can you please queue the line for questions?

(OPERATOR INSTRUCTIONS).

We'll take the first question from Evan Kurtz with Morgan Stanley.

Please go ahead.

Hi, good afternoon.

We've been hearing how some of these cooking coal contracts for 2009 have been settled in the $300 range.

Wondering if you can give us a full update where you stand now for 2009, how much has been bought forward and roughly what kind of Delta are we looking at in costs.

Sure.

We're not completely done yet, and let me take it in two pieces.

Our North American coking coal, US and Canada together, for 2008, we had some fairly good contracts that we carried into the year.

We expect to have a fairly significant increase next year.

Could be more than 50% increase.

So instead of 120 or 30 or 40, it might be in the $200 plus range.

I think that's quite likely and quite possible.

In Europe, our prices were already somewhat higher, more 200ish, and we'll probably be above that, although we are going to do our best to couldn't as close to that or even drive it down, if we can, depending on how the global marketplace plays out, but it will be quite a bit higher in North America, relatively speaking to where we were, and somewhat higher probably in Europe.

Thanks so much for the detail.

Thank you.

Next question is from David Lipschitz with Merrill Lynch.

Please go ahead

Question for you on your pension for next year.

With the decline in the markets, and things like that, what kind of funding are you going to need for next year?

Well, I think as we have indicated in our disclosures before, we've been making voluntary contributions for some time now.

If you go back to the end of 2003, we've made in excess of $900 million of voluntary contributions.

And we really have done that in order to avoid larger mandatory contributions in the future, should something occur like the market deterioration that we've been experiencing recently.

I guess to answer your question directly, we really don't expect, because of the voluntary funding we've made that even with the market declines, to have mandatory contribution requirements in the near term, although we will likely continue with our pattern of making contributions on the order of $140 million.

I may recommend we do somewhat more after we see how the market goes for the rest of the year, but, we've been making voluntary contributions just to avoid getting in the situation where we have significant near term mandatory contributions.

Thank you.

Next question is from Kuni Chen with Banc of America Securities.

Please go ahead.

Good afternoon.

Just on the contracts, John, you mentioned you'll have a better view on that in the upcoming quarter.

I think I remember last time, you said you had about five to six million tons coming up for year end.

How much of that is out of the way at this point?

Some, but not by any means all.

That's probably a decent number.

That would be a decent number assuming somewhat normal volumes as of today, might be a bit less than that, but a pretty good number, but some has been concluded but more yet to come, and as I said, we'll give you a little more on that next quarter.

We should know quite a bit more then.

Okay.

And then just as a follow-up, just wanted to get your thoughts on the potential impact of auto industry bankruptcies or mergers and what the impact there is on the supply chain, and what type of things are you doing internally to sort of analyze the situation and better position yourself for continued volatility there?

Sure.

I will let Gretchen talk about the credit aspects of that.

But just from an overall market standpoint, first and foremost, they're all really good and important customers, and they have been for a long time, and our assets and their assets and our people and their people and their systems and our systems match up well.

We want to see them do really well in the case of merger or some other kind of instability, I guess what really matters at the end is how many cars or vehicles are manufactured in North America, because we think we're in position to get a pretty good share of that regardless of who owns it and how they own it.

We would prefer that all of our good customers continue to do business as they are, I suppose, and if they build more than they build this year, last year, but for us, we're going to be here to be a good supplier for whoever is on the other side.

We want to see them making as many automobiles as we can, and we're hopeful that all the customers find a way through this mess and morass and come out the other side a better stronger companies, but Gretchen, on the credit side, I'll let you talk about that.

Just from a receivables standpoint I think we've worked very closely with all our major customers and we're pretty comfortable with where we are.

We monitor our relationships closely and obviously it's a commercial relationship, too, so we look at it in the context of that whole relationship but I think we're pretty comfortable with where we are.

Fair enough.

Next question is from Michael Gambardella with JPMorgan.

Please go ahead.

Could you give us a sense on how you have seen the markets, for flat-rolled, say in the US, transpire over the last two months?

Two months is a long time.

I know.

Just looking back on it, well, there has been, at least in my experience, a fairly abrupt clapping in the market.

We were perhaps expecting there to be some normal softness for either seasonality or otherwise later in the latter part of the year but nothing that was as abrupt as, in fact, has transpired.

How much of that is because of worries about credit, I think probably some of it.

How much of it is because a broader slowdown in the economy, undoubtedly some of it is.

So it was a very abrupt slowdown.

But what seems to be happening now is the credit crisis, if I could use that common term, is not so much that we don't have access to capital or liquidity and cash as strong as Gretchen mentioned, or that the customers we deal with that they don't have the ability to run their business.

I think they do.

But everybody, including us, is trying to take their investment in working capital down and thereby preserve liquidity.

Particularly where we can observe it in the service centers in particular, because of the monthly statistics, inventory has been driven down, and it feels like they're heading -- they, in total, are heading towards another drive down by the end of the year.

It may be that's another million tons below what the restated number is right now.

If that's the case, it may be that by the time that additional reduction is achieved, it just may be that the relative consumption that underlies the economy and what's in the pipeline begins to calibrate a bit and we maybe return to some normal see in the order book but those are all just suppositions.

To answer your original question it was a very abrupt slow down, unlike any we've seen.

And what are you seeing on tubulars going forward?

Well, I think our outlook, as Gretchen indicated is that our order book for the fourth quarter on the tube side is pretty good, and we expect to have a very good fourth quarter in tubular.

We don't for a minute think that that particular sector of the economy is immune from all the other difficulties that the economy is bearing right now.

To the extent that translates into lower liquids and gas prices, it could, perhaps, translate into less drilling or at least -- right now the level of activity is near historic highs and very robust, but I think that remains to be seen how well that sector survives in this particular economic turmoil.

And final question, are you -- I know you still have nearly 5 million shares left on the buyback program.

Are you still actively around this close-out period, around the earnings release, blackout period, rather, are you still going forward with a buy back program?

I'll let Gretchen comment on that.

That not that she really wants to but I'll let Gretchen.

I think you can obviously see that we bought more shares back in the third quarter than we did in the second quarter.

So we were active there.

We really don't like to comment about what our plans are for repurchasing shares or what we might have underway, but we've got that authority available to us.

I think we've been pretty good about using it over time.

So we'll -- we'll continue to look at that as an aspect of how we balance the capital that we have available, and just take that into consideration.

But I guess I would just note that there are many other companies who have done that, too, who are husbanding their liquidity, as I guess I would put it, and that that would seem to be more of a predominant trend among some industrial players, but we've been pretty measured in how we've done that, so we'll continue to try to be measured even in light of this difficult environment.

Thanks, Gretchen.

Next question is from Michelle Appelbaum with Michelle Appelbaum Research.

Please go ahead.

Hi.

First, an amazing performance in the flat-rolled business in the third quarter, and it's obviously disappointing that it comes at a time when obviously we're not going to be able to repeat that, but congratulations to your team for that profitability.

Thanks, Michelle.

When I look at my screen, I see three tickers that are the same from the list of 20 names that I had when I started off 30 years ago.

Yours is one of them.

I think that looking back over that 30-year period, there were some amazing forks in the road where U.S.

Steel made choices that kept U.S.

Steel -- I hate to say alive, but alive and prospering, relatively rich in cash flow, pension fund, not building (inaudible) things like that.

Can you talk a little bit, this is a philosophical question.

Where U.S.

Steel has consistently made choices that would be kind of more conservative, kind of what I've started to think about as building your -- the three little piggies, you built your house out of bricks instead of straw like other situations.

Can you talk a little bit, going into '09, what some of the things, I know that you still have in place some of these conservative choices and how they'll benefit you and cushion as you go into this contraction?

Sure, Michelle.

I'll give you a couple general comments, then turn it the Gretchen.

But one was already raised.

Our predecessors were very much intent on funding our pension plan, investing it wisely, conservatively, and keeping us away from problems.

Gretchen has thoughtfully continued that tradition.

That's just an example, I think, where we've tried to deal with a matter that we promised we didn't make but necessarily need to be dealt with.

I think Gretchen has done it in a very appropriate way.

We have taken risks but they have been risks with a very thoughtful view of what the benefits are and what the downside was.

The acquisitions we've made have all been transactions that fit within our existing system, that have added on some elements that we didn't otherwise have where we had a feeling that the synergies would be good for us through a range of market conditions, which you've heard me say before.

I'd say in general the words we use a lot around here are balanced, and responsible.

And that's the way our predecessors have always thought, and that's the way we still continue to try to think, but Gretchen, you may want to be more specific.

I appreciate that, John, obviously the pension funding is something we have been very measured about, and the voluntary funding that we've done there, we did really just for the reasons that we're seeing now.

And so I feel pretty comfortable about where we are there.

I think from a capital structure standpoint, we do try to make sure that our maturity schedule is manageable, and over the next two years, we only average maturities of about $130 million.

So we don't really have a near-term need to be accessing the capital markets now to refinance any debt or anything like that.

So that's been pretty conservative.

We -- I think you know this as well as anybody, Michelle, but managing in difficult times is kind of a core competency of a lot of the management at U.S.

Steel, and we know the things and the levers that we have to pull when things are difficult, and as John mentioned, this came on a little bit more precipitously than we had or anybody had foreseen but we're moving pretty quickly to make sure that we're maintaining our liquidity and doing the right things, pulling down inventories where we need to, and matching our production to our customer order rates quickly, so I just think we've got a good history of conservative behavior that should help us during this kind of a time.

That's great broad overview.

I want to ask another question.

You've given out your production and operating rate for the quarter but I'm wondering can you comment on what your operating rate is as you exit the quarter right now?

We'd prefer not to do that, Michelle, for a number of reasons.

We will tell you that we're operating well below the rates that we operated at on average during the last quarter and probably today a bit below where we exited the quarter, quite frankly.

That's dictated by the order rate and as customers tell us what they want, which they do at the last minute in a market like this, we ensure that we're positioned to produce that.

The only thing I would comment on that maybe is a little bit off the beaten path is that we have one of our two -- usually two operating furnaces at Great Lakes near Detroit.

We intended one of those furnaces before to run into next year sometime, and we were beginning the work to do sort of moderately sized job on that furnace as part of a larger reconfiguration at Great Lakes.

But that furnace exhibited some instability in -- I'm losing track of time.

August, probably some time like that.

And rather than try to push it, we thought it better to take it down for performance reasons.

Initially it wouldn't have been necessary anyway.

So we're about doing that job now.

We weren't prepared for it so it's going to take a bit longer to get the materials in that we need to do, refractory states.

That's all underway.

I was in the furnace last week actually.

That furnace will be out probably through the end of the year or close to it.

We're not sure how much work we are going to do, because we're still in the process right now, but that's the only slight operational difference.

The rest is we're going to run as much as we need to.

That's very dynamic.

I could give you a number today, and a configuration today, but it could be different next week.

Our next question is from the line of Timna Tanners with UBS, please go ahead.

Thanks.

Wanted to ask a little bit about the contact structure that you might see going into next year, how much that might be more variable versus fixed price, and how you're seeing those talks go.

We're having discussions right now and it's sort of impolite to get into too much of that while we're conversing with our customers.

I wouldn't want them to think that we're talking about their business in this forum, but your interest is understandable and appropriate.

We are pointing towards a somewhat more variable contract structure to provide both us and our customers some better feeling that we can deal with the intra year volatility that just in the last six months has been extraordinary.

Some of that might be around published indices, some of it might be around more input-based kind of adjustments.

We're not quite sure how that's going to shake out but discussion are underway but the direction probably would be less fixed for a term, more some with some kind of market-related adjustment factors in there.

Great.

Along those same lines can you remind us how much of your costs in general are variable any know in the flat-rolled division in North America maybe a little less so but if you look at your cost per tenant was 722 in the third quarter, how do we think about that going forward?

When there's outages, does that number go up, what's variable within that, and then if you could give us a little bit of information on the other segments, similarly?

It all depends on how you want to measure it but he let me start furthest away in Europe.

Most of our inputs are market-based, in these days, raw materials are two-thirds more of our cost structure, you throw in energy, you're three-quarters, probably somewhere in that range.

Those are all market based over some time, whether it's quarterly or annually, or maybe monthly, the way scrap is, but I think in Europe the majority are variable, and we look for them to vary down either during this quarter or the next quarter.

In tubular, sort of the inputs, which would be either steel rounds or hot band, those would be variable when measure at the segment level, we're transferring mostly from other segments, and we're finding some of that outside but not a lot.

The other major components would be energy, which would be variable over some time period, and then labor would be fixed in that area, so I think in the tubular segment, the vast preponderance would be variable, if that's your definition of variable.

Back in the flat-rolled side, probably two-third at least would be variable, and you might think even though we have our own iron ore that that is just a fixed cost, but it really isn't.

The majority of the costs, when you're all said and done is energy and transportation and other elements that have a variable component to them, and I'd point out in our labor contract, because of our profit sharing arrangements, there's a not-insignificant piece of variability in that cost, as well.

It could be $15, $20 a ton, potentially, somewhere in that range.

Then we can pull a bit of a labor lever, where we have some contract services and other things that we could exit from quickly and easily and already have in many cases.

And begin to cut down over time and schedule vacations, et cetera.

So we can do all those things, so there's a good, a significant amount that's variable, but it isn't a monthly reset in every case so there's two different definitions there.

Thanks.

The next question is from Sal Tharani with Goldman Sachs.

Please go ahead.

Hi, John, how are you?

John, on USOC again, on your costs, are these quarterly priced or monthly, or how do you a buy these?

It's not monthly.

It has been periodically, whether it's quarterly or six months, depending on the material and the vendor, and as you know, in Europe, we're largely a spot-priced steel seller, we have some contracts but probably 70% would be spot of one kind or another, and if you look back to the second quarter, it was a record quarter for Europe.

The spot prices were firm and moving up, and the new raw materials costs that we had entered into, new contracts as of April first, really hadn't worked their way through the system, so we have widening margins then.

Right now we have sort of a triple whammy of volumes down, the furnace off for part of the third quarter, part of the fourth quarter, which gives us higher costs and raw material costs high and spot prices going down so it's put some pressure on us.

The spot price reduction has been much more rapid than we've ordinarily seen in Europe, and we're going to be about getting our raw materials costs in line that with that, but that may take a little time.

We're hoping to get some relief on that this quarter or next quarter but certainly into the second quarter we would expect to begin to see that kind of relief.

And also, your new galvanizing line, have you been able to get contracts at the auto companies on those?

How are you selling that product, mostly?

It's staying fairly close to home but there's a good deal of auto consumption there, so we have some contracts with automotive suppliers, again, we started up this informally, so we're in the process of getting qualified, but we have a good bit of auto, some appliance, and whatever is left over goes into the construction market.

We've been able to load that line pretty full, actually very full, since we started, and I think it's viewed -- the product is excellent, we've done the metallurgy in front of it, and I think all the European auto companies see is it as a good alternative and we look forward to make inroads in that market, but we're doing pretty well with that right now.

Is the demand different in Europe than here?

Demand, probably no.

I think I read one of the trade papers this morning that said the market is absolutely dead.

That's a bit extreme but it's not much better than that.

I think the European stocks inventories are a little bit on the high side and perhaps the European market is maybe a little ways behind some of the de-stocking that's gone on here but the European market that we look at, spot market, central, Europe, Southern Europe, is a little bit on the slow side right now.

Next question is from Tony Rizzuto with Dahlman Rose.

Please go ahead.

Hi, Tony.

Thank you very much, good afternoon.

Hi John.

With respect to the fourth quarter volume, I know you don't want to comment on that specifically, but would it be best to watch the AISI data very closely and perhaps with the assumption that your volumes are going to be fairly close to that, at least in flat-rolled?

I think that's a decent direction.

I think that's a fairly good direction, yes, there aren't that all that many tons going in there, we're a piece of it.

I think that certainly would give you a good indication, good direction, we could change ours more quickly than that data might suggest, but I think that's a pretty good indication.

All right.

I wanted to ask you a question, too, John, I can't recall any economic down turns where any industry has acted as quickly to counteract recession, and I'm interested to hear your thoughts on the discipline we're seeing around the world, and also, do you think this is sustainable?

I can only, as we've said through thick and thin and good times and bad, we can only speak for our own actions.

We've had a pretty firm policy of making what our customers order.

We prefer them to order more than we can make, not less than we can make.

But we think that's the proper business approach and we have been pretty studious and pretty clear that that is the approach we take.

I can't really comment on what goes around us, you can read about that in the trade press as well as I can, Tony, but our view is that we see no value in putting costs into the product and putting the product on the ground and we are not going to do that.

As a very important person in the World Steel Association, I was wondering if could you comment on China.

It seems like we're beginning to see a bit of reversal from earlier policy where the government and Chiza seem to be talking about maybe looking to restore the VAT rebates.

Can you comment on that?

Only that I read those kinds of rumors.

I did not hear anything like that the last time that the group convention was in session.

Not that we would talk about it necessarily, but I hadn't heard that sort of thing.

Just what I've read in the trade press recently.

That would be, I think, a very unpleasant result, and would be certain to cause additional trade tensions and it would be the poster child example of what state involvement and state ownership, causing market distortions.

It would be a perfect example that causing additional exports with a state-favored rebate, because of internal market disruptions.

That would be an absolute textbook case for trade distortions and we are not at all ashamed of saying that we expect our nation's trade laws to be respected and if necessary enforced.

Thank you very much, John.

Next question is from Mark Parr with KeyBanc Capital Markets.

Thanks very much.

Good afternoon.

Hey, Mark.

I don't know if you want to comment on this directly, but I want to ask the question anyway.

John, could you talk about how you feel regarding the profit outlook for the domestic business in the fourth quarter compared to how the fourth quarter of '06 turned out?

That's a long time ago.

Let me think.

Fourth quarter '06, if I recall, Gretchen's going to flip to our analysis, we operated at quite low levels, as I recall, that was a 65% --

Particularly in Canada.

And --

Wasn't that long ago.

Seems like a long time ago.

I think we were marginally profitable then.

I think a couple of things, Mark.

I think our company is much better now than we were then, we have the additional operations in Europe, I'm sorry, in Canada, we have the addition of Lone Star, which has taken away roughly a million tons a year which provides a lot more stability in our operating configuration now than it would have then, so big positive which as we said was one of the synergies we saw, and even though as spot prices have not been responding in the direction we like, relatively speaking, they're still quite fulsome at this point, compared to where they were last year or certainly in that period, so I like to think that compared to '06, we're a much better company, and maybe we can do a little bit better.

Along those lines, just to follow the thought process, I think you had made some comments about better flexibility with over time and scheduling and things like that, were there any changes in the recent labor contract that give you more or less flexibility, as far as the scheduling and the use of labor?

No, not really, no changes.

Although we always had a good deal of that flexibility, then the '03 contract, with the improvements in productivity orientation on job classes and otherwise, I think we improved that position.

And I don't mean it in an us versus them way, it's just a better way to operate the company, and that works for everybody as a result of profit sharing.

I think we've had that, we maintained it in this most contract, and I think, as I've said, we intend to use it judiciously to make sure we can keep our cost structure in line with what we're actually producing.

If I could ask one last question, could you give us a sense of natural gas costs in the fourth quarter, domestically, and how much you've been able to take advantage of the lower prices that emerged on the spot market?

We do a little buying ahead on natural gas for our operating units, mostly to match up to some of the contract tons where we've sort of already sold the BPUs forward on a fixed price.

It we do some buying ahead but that still leaves an awful lot that we buy on the spot market.

You could take a look at the strip like we do, if the gas price comes in, we are going to do a bit better.

Of course, we also keep an eye on our [Tibiter] business, and a certain level of gas price there, we find very healthy, so, we have to try to get to the sweet spot, I'm not sure exactly what it is, but the sweet spot is what we're looking for.

Terrific.

Thanks, John.

Thanks, Mark.

Next question is from Michael Willemse with CIBC World Markets.

Please go ahead.

Thanks for taking my call.

Hi, Mike.

first question on scrap.

Do you look at how much scrap prices have fallen off, is there any ability to increase your mix of scrap in steelmaking, or are you pretty much maxed out right now?

No, there is -- maybe we can flex it around 5% or so of the charge and where that makes sense, because you have to look at coke positioning and transportation and what coal inventory we have, et cetera, but overall, we would probably be leaning towards the somewhat heavier scrap blend given where the scrap price has gone.

We've got some flexibility.

5% is a rough number.

Do you have any thoughts on where you think the scrap prices could be going near term and maybe six to 12 months out?

No, not really, we're amateurs compared to others that are using that for their major materials, so we buy a lot of scrap in total, but comparatively less than many others we run our prices against the indexes that are available in the marketplace.

We think we do pretty good at that but we've never done well at predicting the scrap price, I'm not sure anybody has.

Okay, and then, focus on costs again, if you look at your cost per ton in Europe, $963, and you look at your cost per ton in North America, $722, you would think North America was much more cost competitive, but obviously mix has a big factor there.

So I just wondered if in your internal analysis, which mills have you generally seen as more cost competitive, particularly given where the US dollar has gone over the last couple months?

Well, if there's really three elements I'd call out, one would be the dollar/euro relationship, because that certainly has an influence.

That moved one direction, now it's moving the other direction, and we can all see what those curves are, so you filter that if you want to, but that certainly has an influence.

The other element is that just our pure conversion costs, our European operations are quite competitive.

Not exactly the same levels of productivity.

Still more competitive wages.

But on a conversion cost basis, they're quite competitive.

We measure them against other European competitors and we think they stand up very well and have a bit of an advantage.

But on materials they are converting in Europe, those materials cost, or have gone up much more than the corresponding materials cost we would have had in the US and North American plants, mostly Eastern European, Russian, Ukrainian ore and coal from the northern regions, so the overall cost increases in Europe have been more material driven.

We still have a very competitive conversion structure, but that's been somewhat dwarfed by the increase in the materials cost.

Great.

Thank you.

Thanks.

Next question is from John Tumazos of Very Independent Research, please go ahead.

Congratulations on all the the earnings and liquidity.

Thanks, John.

When you decide potential capital investments, business expansions, outlays, and the very uncertain world of the moment, what are the planning metrics you are using two, three, four, five years out?

Some of us worry of the Great Depression.

Other people think this is just a panic that will pass, and please tell us how the captain of the ship is steering the big boat.

Well, thank you, John.

Very artful question, I guess, and one that I'm afraid is a better question that I have an answer for.

I'd say carefully, thoughtfully, and responsibly, and without resorting to extremes.

That's the way we like to do things.

We go through a lengthy strategic planning process every year, and we do, using outside sources, inside information, we look at price curves and cost curves and where we think the sector and the adjacent sectors are going.

I must confess, the last time we did, we didn't build in a huge global recession occurring on one day in August or September, but we do have up and down cases, and low case sort of thing.

So we're not completely inexperienced at the fighting over this, but when we're looking at investing is in a coke plant or blast furnace, that's a 30-year operating life and I think it's difficult to say that -- it's likely to say that when you make those investments, you are going to go through two or three or four cycles before it's all said and done.

So we have to take a somewhat longer term view of that.

We try to focus our capital on the things that are most pressing for environmental safety, continuing operations, and highest ROI, not in any particular order, then we take a look at what our available capital is while maintaining a good capital structure and we try to make those two come together in some way, but I have no real magic elixir or Ouija board to try to tell you how we do it.

We just think about it, talk about it, try to come up with an answer that balances all of those things.

On the margin, we are going to tend to be a conservative responsible group that thinks more about what difficulties we may encounter rather running a big risk in trying to hit the big home run.

Do you have specific metrics you use such as a Dollar/Euro exchange rate or long-term growth rate of world steel output and consumption that you can share with us?

On the long-term steel we tend to look at the world steel numbers.

They are coming in from all the different regions so kind of a grass roots efforts.

They go through a lot of filters.

I tend to think that's as good directionally as anything, and I think the long term case for pretty good global steel demand I think is still there.

70% of the world's steel is consumed in the developing world, and I see no reason why the 4.5 billion people that live in the developing world, that their improved life has to stop today.

I think the long-term case for more steel consumption is very, very good.

When that gets back on track, and whether that's a lower track or higher track, your guess is as good as mine.

On the exchange rates, which is extremely important these days, we get all the econometric forecasters we can.

Gretchen talks to her colleagues at the various financial institutions and we try to come up with a composite view but we model everything we do across a range of possibility, not trying to just guess one or the other.

Those would be two metrics we use, but I'm not sure we use them to any absolute, precise manner.

Thank you.

Thanks, John.

Next question is from Marty Pollack with NWQ Investment Management.

Please go ahead.

Yes, just back to Europe, clearly one of the things we've seen in Europe in the past through thick and thin you guys have done very well even when the price of your hot rolled is $600 a ton, you made just as much money as you are making now, at least looking that it quarter.

What are the things it will take to normalize those operations next year?

Is it going to be utilization?

And other benefits maybe lower raw material costs?

Beyond the simple one quarter or two?

Should '09 be reflecting more historical trends?

Very fair question, Marty.

And I think it should reflect more historical trends.

Again, the very sharp turn-down in spot pricing against a rising raw materials environment is something we have encountered before, but over a much longer period of time.

It's really the speed that one has moved and the other one hasn't that's quite different this time, which, by the way, implies that we should thinking of pricing those materials to be more responsive at what happens in the market but over some period of time, the materials cost coming into better alignment with what the conversion market has to offer, and then us getting the plant down and blast furnace finished and getting those costs out of the way.

That's just an item that's going to happen once in a while, I don't see that as indicative of the future.

It's really that conversion margin that has been, as you point out, quite good historically.

We have every reason to think we are going to be able to maintain something like that.

This latest downturn happened so quickly that it just took away the margin much more rapidly than it did before.

Do you think, when looking at where the marginal cost curve is, you have historically been a low-cost producer.

Western European steel producers at this point, are they likely facing the same current costs that essentially makes you wonder how long can -- how low can the price go when what we've got the kind of environment we're facing, at least out of Europe?

Just wondering whether there's some indication that prices there have to start dropping.

It's a very good question, Marty.

If you are getting to the point that at some point when you start to hit the marginal cost of a large volume of production that something has to change, that's probably a fairly good observation.

I don't know what the right number is, but I think that the other European mills can just, based on public information, world cost curve, that kind of stuff, their costs are probably not much different than ours, maybe a little lower, again based on public information only.

And we're probably getting fairly close to that with the spot prices right now.

I think that's a fair observation.

A good bit of the piece of the cost curve is probably the European piece, close to being underwater at this spot price.

One question on the flat-rolled North America.

You do -- you have a spot buyer on scrap.

Part of your requirements, couple million tons a year.

Is scrap an offset benefit to the -- assuming that things continue as they are and scrap prices stay low, is that a net positive for you going into next year?

Oh, yes, compared to our costs this year, scrap coming off gives us a cost benefit.

Again, it's only 15 to 20% of our total charge, but lower scrap means lower cost for us, although positionally, from an overall market standpoint, probably high scrap is better for us, but a low scrap price did does help us from a cost standpoint.

Our next question is from Charles Bradford with Bradford Research.

Please go ahead.

Mr.

Bradford, your line is open.

We go to the next line.

Bob Richard with Longbow Research.

Please go ahead.

Good afternoon.

Thanks for taking our call.

Any lower cost or market issues on your steel product inventories, would that be material?

I don't know what your inventory levels are exactly, would that be an issue?

We're largely --

In North America, we're a LIFO player so we've got low basis inventories.

In Europe and Canada we're FIFO.

We don't really have an issue there I think.

Thanks.

And capital expenditures year to date, 66% of the $630 million spent in North America on the flat-rolled business, pardon me, where is the bulk of that going?

Can you refresh me on that?

Well, there's been a couple of blast furnace projects.

We have a variety of mobile equipment up in Minnesota, we had a fairly heavy diet of that at the iron mines this year.

We also have an ERP project underway, some of the software costs and other things get capitalized as part of that.

The rest would be spread throughout a variety of other projects at different locations.

And a good bit of it right now is heading towards the coke side of operations.

We're doing throughwalls and other refurbishment projects, some of which are capital, but no individual big hit project to include that in list.

Just a variety of things.

And do you have the flexibility to halt that for a quarter or so if you had to?

We have the ability to throttle back and reprioritize and move some things out within reason.

There are some things that we must do under a variety of environmental requirements or must do for production reasons, but we do have the ability to moderate slowdown, reprioritize.

We've done that in the past many, many times, and we're in the process of doing it right now.

Thanks, and again, great quarter.

Thank you.

All right, like to thank everybody for participating, and we will talk to you next quarter.

Thank you.

Thank you all.

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