美國鋼鐵 (X) 2008 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the United States Steel Corporation fourth 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.

(Operator Instructions).

As a reminder, this conference is being recorded.

I would now like to turn the conference over to Mr.

Dan Lesnak.

Please go ahead.

Good afternoon, and thank you for participating with us today.

We'll [start the call with some brief introductory] remarks from US Steel Chairman and CEO John Surma.

Next, I will provide some additional details for the fourth quarter, and then Gretchen Haggerty, US Steel Executive Vice President and CFO, will comment on the outlook for the first quarter 2009.

Following our prepared remarks, we'll be happen to take any questions.

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

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

Now to begin the call, here is US Steel Chairman and CEO John Surma.

Here is CEO John Surma.

Thanks, Dan, and good afternoon everyone.

Thanks for joining us on what I expect has been a busy day for many of you.

Earlier today, we reported fourth quarter 2008 earnings of $308 million or $2.65 per diluted share.

As we noted in our release, that figure included the $0.65 per share net effect of a $150 million pretax gain from a contingency reversal, and a $28 million pretax charge to exit the drawn-over-mandrel tubular business.

If you exclude those items, our earnings were $2 per share, which exceeded the consensus estimate which, Dan informs me, as of today was $0.71 per share.

Although we are currently operating in an extremely difficult environment, it is worth noting that 2008 was a record year for United States Steel Corporation, with revenues of $23.8 billion, operating income of $3.1 billion and net income of $2.1 billion, or $18.11 per share.

The assets and operations and people that we have assembled through our strategic activities over the past eight years, positioned us to realize substantial benefits from the strong global market conditions that existed throughout most of 2008.

Also, we are particularly pleased with our long-term trend of improving safety performance.

In 2008 on a global basis, our OSHA reportable rate improved by 7%, and we achieved a [30%] reduction in days-away-from-work cases.

Our employees, who accept the responsibility for their own safety and that of their colleagues, deserve the credit for this continued improvement.

Turning now to our segment results, in the fourth quarter our North American flat-rolled segment had an operating loss of $2 million, reflecting the reselling prices as spot prices continued to fall throughout the quarter, lower shipments and the unfavorable cost impact of operating at a utilization rate of less than 45%.

That's our lowest quarterly utilization rate since 1983, as customer demand remained severely depressed.

The unfavorable impact from these items was partially offset by net favorable inventory effects of approximately $90 million, primarily from LIFO inventory liquidations and lower raw material and energy costs.

Shipments for the fourth quarter totaled 2.8 million tons, that was down 38% from the third quarter.

And average selling prices decreased just over 11%, again as compared to the third quarter.

We had an operating loss of $134 million for the fourth quarter in our European segment.

This was only the second time we've had a quarterly loss since we expanded into Europe in 2000.

And, as was the case in North America, this result reflected decreased selling prices, lower shipments and the adverse cost effects resulting from low operating rates.

Our utilization rate fell to 51% for the quarter.

Shipments were just over 900,000 tons or 36% lower than the third quarter, and selling prices declined by 22% to an average selling price of $847 per ton.

Our raw material costs continue to reflect the higher prices that were set earlier in 2008.

For our tubular segment, operating income was $559 million in the fourth quarter, a record performance.

Operating income per ton increased by $309 to $1,118 per ton, primarily due to higher selling prices.

Our average realized price for the quarter increased by $285 per ton from the third quarter, and shipments remained strong at 500,000 tons for the quarter.

With that introduction, I'll now turn the call over to Dan for some additional information about the quarterly results.

Dan.

Thank you John.

Capital spending totaled $197 million in the fourth quarter, resulting in a full-year capital spending of $735 million.

This is lower than our earlier estimate of $860 million.

These amounts exclude spending by our variable interest entities of $67 million in the fourth quarter and $161 million for the full year, primarily related to the non-recovery coke battery project at Granite City.

We also spent $140 million in 2008 to acquire the remaining interest in the Clairton 1314B partnership and three [pippel] lines in Canada.

Our current plan for 2009 has total capital spending at approximately $740 million, excluding spending related to the non-recovery coke battery for Granite City, with $610 million for North American operations and $130 million for European operations.

Significant North American capital projects for 2009 include construction of a new coke battery at our Clairton Cove operations, and the completion of a cogeneration facility at Granite City, which will be sourced primarily by the steam produced from the non-recovery the coke battery.

In Europe, 2009 capital spending will focus on several environmental projects.

We intend to manage our spending on these and other smaller projects in a manner appropriate in relation to changes in market conditions and cash flows.

Depreciation, depletion amortization totaled $141 million in the fourth quarter and $605 million for the year.

Depreciation is expected to be about $650 million in 2009.

Defined benefit and multi-employer pension OPEB costs for the quarter totaled $70 million, [and new cash] payments for pension OPEB of $193 million.

For the total year, defined benefit and multi-employer pension OPEB costs were $227 million, and we made cash payments for pensions in OPEB of $739 million, which included $140 million of voluntary contributions to our main defined benefit pension plan.

For 2009, we expect our pension OPEB costs to be roughly $360 million compared to $227 million in 2008.

Excluding any voluntary contributions, we expect cash pension OPEB payments to be approximately $535 million in 2009.

Gretchen will discuss this in a moment, and additional details will be included in our 10-K, which will be filed in the last week of February.

Net interest and other financial costs totaled $23 million in the fourth quarter, compared to $46 million in the third quarter.

Fourth quarter net interest and other financial costs included a foreign currency gain of $17 million, and the third quarter included a $6 million foreign currency loss.

We expect first quarter net interest expense to be about $38 million before any foreign currency gains or losses.

Our effective tax rate of 28% for the year was higher than projected at the end of the third quarter as a result of lower-than-projected earnings from our European segment.

As a result, the tax provision in the fourth quarter included a $55 million adjustment to previously recorded tax [expense].

We currently estimate our annual effective tax rate will be 28% in 2009.

Lastly for the quarter, we averaged 116.4 million fully diluted outstanding shares.

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

Okay, thank you Dan.

In the firth quarter, cash flow provided by operating activities was $327 million.

The fourth quarter included a record US Steel worker profit -sharing payment based on our third quarter results, t he final contribution to our trust for retiree healthcare and life insurance for USW retirees under a December 2007 letter agreement, and a $75 million annual contribution to the trust under our new USW labor agreement that was effective on September 1.

We also had a large federal cash-up tax payment in the fourth quarter.

In total, these payments were in excess of $400 million.

Reduced working capital levels was a significant source of cash in the fourth quarter.

Cash flow provided by operating activities was approximately $1.7 billion for the full year in 2008.

And our free cash flow after capital spending and dividends, but before external financing, was approximately $500 million.

We ended the year with $724 million of cash and about $2.1 billion of total liquidity.

We remeasured our OPEB obligations as of December 31, 2008.

And our unfunded OPEB position is estimated to be $3.1 billion.

OPEB expense was $149 million in 2008, and we expect OPEB expense to total approximately $180 million for 2009.

We also remeasured our pension obligations as of December 31, 2008.

And on a consolidated basis, they are now underfunded by an estimated $2 billion for accounting purposes.

As a result of the voluntary contributions that we've made in the past, we do not anticipate having to make any mandatory cash contribution to our main plan in 2009.

We have voluntarily contributed in excess of $900 million to our main plan since late 2003, and we may continue to make voluntary contributions.

We expect pension expense of roughly $180 million in 2009 compared with $78 million in 2008.

The increase is primarily the result of 2008 asset performance.

As noted in the earnings release, we repurchased 260,000 shares of common stock in the fourth quarter for a total cost of $14 million.

This brings our total repurchases to 16.3 million shares for approximately $1 billion, and represents approximately 12% of the balance of fully diluted shares outstanding when we authorized the original repurchase program in July of 2005.

As of December 31, 2008, 4.4 million shares remained available for repurchase under the current authorization.

We have suspended repurchases under this program.

Turning to our outlook, we expect an operating loss in the first quarter as results continue to reflect the extremely difficult global economic environment.

We do not know when conditions may improve, but we are well-positioned to fully participate in a market recovery when it occurs.

In the meantime, we continue aggressive efforts to maximize liquidity and reduce costs, and will take additional actions as market conditions warrant.

Flat-rolled results for first quarter of 2009 are expected to decrease substantially from fourth quarter 2008, primarily due to further declines in shipments as a result of lower customer demand, lower average realized prices and reduced effects from LIFO liquidations.

First quarter 2009 results for US steel Europe are expected to be comparable to the fourth quarter, as lower raw material acquisition costs begin to be reflected in cost of sales, and average realized prices are expected to be lower.

Results for tubular in the first quarter of 2009 are expected to decrease significantly from fourth quarter of 2008, although we expect to remain profitable.

Shipments and average realized prices are expected to decrease in line with market trends.

Dan?

Thank you, Gretchen.

Jolie, can you please queue the line for questions?

(Operator Instructions).

And our first question is from Michael Gambardella, JPMorgan.

Please go ahead.

Yes, good afternoon.

Hey, Mike.

How are you doing John?

Hey Gretchen.

Quick question on tubulars.

You had almost $600 million in operating profit in the quarter.

My understanding is that most of your tubular sales go through distributors.

Is that correct?

Yes, certainly in the OCTG, to some degree the standard line.

That's correct.

John, is that more of a quarterly fixed price?

Or how does that go?

Quarterly or monthly?

It's generally order-by-order pricing.

There are some programs that we would work with our distributors through to the end customer that would have longer pricing.

But at this point I would say it's relatively short-term pricing.

In terms of your outlook, you're saying -- earnings would be down significantly but still profitable.

Does that mean we're going to go near break-even for first quarter?

We hope not, Mike.

But because of the relatively short lead times and the -- just all the noise in the market, we don't have a great deal of visibility forward.

We were not necessarily trying to move it to break even.

But it really remains to be seen what the order book shapes up at later in month -- the later months of the quarter.

Okay.

And last question, the industry has been really good so far on supply discipline, a big change from previous cycles.

Do you still feel that the players, the other players out there are still holding the line on the production discipline?

And is that a concern going forward?

I can't really comment, Mike, on what others might or might not be doing.

We see the AISI statistics, which through the end of last week -- I glanced at this morning, capability was 43% or 44%.

That's really all we know and all we need to know.

We don't really need to or want to know what anybody else is doing.

I can just tell you what our policy is and has been, that we see no value right now in manufacturing product to either have it be in the warehouse or on the ground, or to try to force it into a customer with a price that doesn't create demand, just creates inventory.

So I can only tell you what we're doing, and that's continuing to be our policy.

Are you seeing any kind of leading indicators that would suggest some type of recovery?

No, not really, Mike.

I wish I could say we see a great ramp coming, but not really.

I think we see fits and starts and spurts, but not really any sustained pattern of strong demand or order flow across virtually all the markets that we serve.

We all see, you all see the service center statistics and they have been fairly grim in terms of shipments.

But inventories have continued to come down, particularly on the sheet side.

It seems to be clear to us at least, that apparent demand, which is what we're observing from an order standpoint, most probably is less than real consumption.

And as long as those two lines are going in different directions, they probably will cross at some point.

But we don't see any great evidence they've crossed so far.

Alright, John.

Thanks a lot.

Thank you.

Thank you.

We'll go to the line of Timna Tanners with UBS.

Please go ahead.

Hello, good afternoon.

Hi Timna.

Two questions, really.

One is, regarding some of the reported potential asset divestitures.

Do you think of yourself as a buyer?

What are the kind of parameters you'd like to look for in potential asset divestitures available in the market?

Okay.

In other words, what might we be interested in acquiring if something became available.?

Yes, and I know you can't give me specifics.

But what are the parameters, what kind of -- what are the guidelines that you look at in considering opportunities?

Sure.

I think among other things, we have tried to be disciplined in our approach.

We're not, and have never been, seeking tons for the sake of tons.

We're not looking for a certain number or for a certain size.

We have tried to acquire things, and I think have acquired things, that we saw Company-specific synergy value in.

And that certainly was the case in the [Onstar] technology transaction, going back further to the National Steel transaction and the [Stucko] transaction, that we had things that we knew we could do, were the acquired facilities and what what we had.

The markets, the customers that we could make some additional money doing that and therefore justify the acquisition.

We, I think, would have the same kind of disciplined approach as opportunities might arise.

The big difference I would point out even compared not just to last year or two years ago, but back to two and three, the capital markets were functioning well even though the sector was in extremist at the time.

So capital was available.

I think that's a big question mark right now.

The capital markets are in a very difficult condition.

We all know that.

Gretchen of course advises us on that.

So I think we'd have to be really thoughtful and very careful from a capital structure standpoint as well.

And we would very, very mindful of maintaining a strong capital structure, which we've been successful in doing recently.

Sometimes the uses of cash [can identify] acquisitions as a top priority recently.

Is that a fair assessment?

Our top priority right now, I think, is to maximize liquidity and reduce our cost structure and deal with the market that we have in front of us.

But we're mindful that through these periods come opportunities, and we're not necessarily going to forsake the potential for opportunities.

But given the capital markets, where they are, I think that would be a difficult thing right now.

Okay, helpful.

Thank you.

And then the other question is related to OCTG -- I think you addressed a little bit on the demand side.

I'm really curious in the more medium to longer-term supply issues.

If you could talk a little bit about the status of dumping cases in the near term.

And then into 2011, it appears that there are several new mills that are starting, or looking to start up.

And that could be quite competitive perhaps with your product.

Can you talk a little bit about the supply of the tubular side?

Sure, there are a couple of questions in there.

It's always been a competitive market and we've always had ebbs and flows.

I think one of the bigger concerns we have is the, we think, clear evidence of excessive unfairly traded product, particularly from China, where there has been excess expansion that's been aided and abetted by export tax rebates which we think is front page news in Unfair Trade Illustrated magazine.

When you look at the volume of imports of OCTG from China, they have in some cases exceeded monthly consumption, which we think is excessive.

I think we'll have to deal with that in our own way.

There's no cases on OCTG from that region right now.

There may be in the future.

We are successfully prosecuting, nearly to the final steps, although I think there's a little bit more to go yet, on a -- I think it's a line pipe, welded line pipe, 16-inch if I have the right size diameter, case.

And that one has proceeded almost completely through the process, will result in anti-dumping and, because of subsidy counter [weight] duty requirements, we think that's an appropriate outcome and that may be the outcome in other cases as well.

And the new capacity longer term?

Sorry.

There's been probably more talked about than done, which is usually the case.

And there were a number of projects talked about in the Western Hemisphere, I guess I might say.

But I think given the difficulties in the overall market, I'm not sure how quickly they will happen.

There are a number of projects that are coming on in the [spiral] weld market, which may be what you are referring to.

One of those is a joint venture we have.

We think that the long-term demand outlook in that market is still pretty good.

And we think we can still make a pretty good living at the project we're involved in.

So I think over the long-term, supply and demand, as long as it's left to market forces, we'll have a way of calibrating and we think we'll do quite well there.

There's been talk of new [seamless] mills.

That's a very expensive proposition, without, I think, a clear demand pool outside of subsidized capital.

It's hard to make that case in today's world.

Thank you very much.

Thank you.

We'll move on to the line of Kuni Chen with Banc of America Securities.

Please go ahead.

Hi, good afternoon.

Good evening.

Can you guys -- I don't know if I missed it in your opening comments.

Can you comment on contract mix for 2009.

Sort of contract versus spot, and what the sort of differential is between contract and spot prices, and how many tons have yet to be repriced for this year?

Sure.

In general, we usually talk about a -- sort of a 50/50 blend, and that's about where we'll be for 2009.

There's a big question mark, of course, about how many tons, because the demand across all sectors, spot versus contract, are very opaque and we don't really have good visibility.

But out mix will probably be about 50/50.

I would guess maybe just a little bit heavier on the contract side.

Maybe it's 55/45, somewhere in that zone probably.

We had last year a little more on the spot side versus contracts.

That's the way the market worked out.

But it will be about the same.

We had a good bit of contract business up to requote and reprice at the end of last year.

And that's virtually all completed, with reasonable increases across most major markets.

We also changed to some degree the character of the contracts.

We still have some of the normal fixed price for a period with a [nominated] the volume.

We have some others that have periodic adjustments based upon certain cost inputs, where that makes more sense for the kind of customer and market it is in.

And then we have a good number -- a growing number of tons that will be on some kind of periodic adjustment based on a market reference price.

So we really have all three of those.

But wrapping those up, that will be 50% plus a little bit more.

Okay, And as far as anything yet to be repriced for this year?

[Target-wise] in the middle of the year or anything like that?

Not a whole lot to do during the course of 2009.

A bit that would come up at the end of April and some at June, but not a whole lot.

Okay.

And then lastly, on the cost side of the equation, can you talk about input costs across each of the segments and sort of which businesses will sort of lead and lag on the way down as your costs sequentially are moving lower?

Sure.

That's a good question.

First, on tubular where we're effectively producing the preponderance of sub-straight either rounds or flat-roll.

In effect, we're transferring that at market or something close to market, a full cost plus a modest markup in the case of rounds.

So I think the North American steel-making, which is all inside a flat roll, is really where that question is relevant.

Let me start there.

In North American steel making, of course iron ore costs are going to be relatively stable, changing for just some fixed cost absorption if we're at lower levels.

And some energy, plus or minus some transportation, plus or minus, but fairly stable on the iron costs I would think.

Our full costs in North America in 2008 were very competitive.

We did a good job of buying our coal in 2008.

And we'll have some increase in coal costs, less than we might have led this group to conclude when we last spoke about it.

And I'm just going to use round numbers.

If our full cost in total for North America was something on the order of $125 a ton, something along those lines.

Probably an increment of $40 on top of that for 2009 might be what we're looking at.

We might be more successful.

We might have less, depending on where the market shakes out.

But we'll have some increase there.

Those will be the major inputs in North America.

Things like coating metals, alloy agents, the [ferro] complex are all trending down.

You can see the market quotes on those and we'll enjoy that ride down as it comes down.

Natural gas, we buy ahead some, but there are also market-takers.

You can see what happened in gas.

Electricity is relatively stable.

In Europe, I think it's a little more complicated story.

In Europe, we had agreed raw material input prices in the earlier part of 2008 at very high prices when the markets were very tight and we were wanting to make sure we had material.

Those prices ran through the end of the year.

So we were acquiring and buying at a pretty high price all the way through 2008.

We renegotiated to much, much more competitive prices for both carbon and ferrous inputs in Central Europe starting at the beginning of the year.

But we have a large inventory of material yet to consume that is not going down as fast as we'd like because our consumption is relatively low.

We have lower input costs negotiated for acquisitions starting January 1 through the end of the first quarter, and after that, we'll take a look at where the various settlement prices settle for the larger negotiations, and that will be a guide to us and our suppliers.

I think I covered most of it.

Thank you.

We'll go to the line of Sal Tharani Goldman Sachs.

Please go ahead.

Good afternoon, John.

Hey Sal.

On the contract side of the auto industry, I think you had guided slightly up in your last conversation.

Has there been any renegotiations on those?

No, I think our contracts that we had for discussion at the end of last year are largely completed, and with reasonable increases that we were satisfied with.

Okay.

And going back to the OCTG, you mentioned that Chinese imports into the US are more than the actual monthly consumption over here.

What prevents you from filing a case?

Is it -- and especially as Gretchen in her outlook mentioned that you expect a significant decline in the earnings.

Would that be a better time than the earnings come to a level where you can go to the IATC and file a case?

It's a good question, Sal.

These are matters of litigation and trade law, so I'm not an expert.

But in general, when we file a trade case, we want to make sure it's a case that we can win, that has solid technical grounding.

And we're working on that right now.

The statute, as I understand it, does not require one to be losing money to win a trade case.

But I think the relative level of profitability is something, I understand, has been considered from time to time.

So we're going to look over our hand, and when we file a case, we'll make sure it's a case we're going to win.

And the welded line pipe case, if you win would that be a positive or would that lead the way to follow through with OCTG?

I don't know that they would necessarily be linked.

But winning that case handily as we have done so far, and I expect will I hope, I think that would be probably be a positive.

Can't be a negative.

And lastly, I don't know if you made a comment earlier in your prepared remarks.

I wasn't on the call.

But have you given us indication of what utilization rate you ran in the fourth quarter?

And at what rate, at what utilization rate, do you think you can become break-even in the US flat -rolled operations?

I think our earnings release Gretchen is going to flip to make sure I have the right numbers.

It's 44%?

or

Yes, 45% in the US and 51% in Europe.

Yes, roughly 45% in the US, and roughly 50% in Europe.

I would just observe that that's a complicated question, Sal, because there are so many dynamics.

There's prices and mix and other inputs and a lot of things that could change.

But there have been other periods in the last few years when we operated at 65% plus or minus, and managed to make a profit.

And I think we could still do that at that level.

It would be difficult to have a sustained strong profitability at 44% of capacity.

Somewhere in between there probably is where our break-even is, but it depends on really too many factors for me to give your sort of a specific answer.

Thank you anyway.

Thank you.

Thank you.

Our next question is from Mark Parr with KeyBanc Capital Markets.

Please go ahead.

Thanks very much.

Good afternoon.

Hi Mark.

How are you guys doing?

All things considered, okay.

I meant that in a nice social way.

You're very gracious.

Thank you.

One thing I was curious about, is your iron ore.

Keetac and Minntac are based -- are sized to satisfy a larger steel consumption environment.

Are you considering selling any iron ore into the spot market right now Or in addition to that, your semi-finished capability at [Astelco] and with slab production there, does that provide opportunities to sell slabs into the world market?

Let me take the last one first.

It does.

We do a fairly brisk slab business last year, a good bit from Canada, not all, but a good bit from both Lake Erie and Hamilton.

We've got decent access to Blue Water there, so that was a pretty good business for us.

If there is a market, that is certainly something we'll pursue.

There isn't a strong market for that, at least not right now.

On the iron ore side, Mark, we have from time to time, and are actually right now doing a little bit of movement of product from our Minnesota operations to either export customers or occasionally to our operations in Europe where that has made sense just from a market perspective.

The Great Lakes transportation system is not really suited to a steady diet of high volume iron ore export when you look at the cost and the number of moves you have to make.

So, it's something we will do periodically, but probably not something we'll make a steady diet of.

I was just thinking about this in the context of the weakness in the shipping rates that have emerged recently, and also some of the idling of rail capacity.

Certainly, it is something we take a look at all the time.

We have plenty of rocks to blow up and plenty of capacity to [pelletize].

It's just a question of whether the economics work given the transportation.

Good question.

Another question if I could.

I'd just like to get your take on some of the stuff coming out of Washington regarding infrastructure spending and potential new project opportunities that would involve steel.

How do you feel about how good a job they've addressed the opportunities?

And where do you think -- if you had the ability to advise them, what sorts of areas would you encourage them to look more aggressively?

I'm not sure I'm qualified to give them advice.

But I think the overall infrastructure emphasis is a very good thing.

You may have seen that our industry grew.

AISI had a press release recently saying that we were disappointed in the lack of meaningful infrastructure spending was the headline.

We would prefer a larger amount of whatever stimulus package there is moving into infrastructure spending because it does create construction jobs.

It does need manufactured products, the majority of those from American sources, with American labor of course.

We would think a greater portion of that would be good.

It would be good for us too, directly and indirectly.

Some portion of the stimulus that would be aimed at stimulating business investments, which is a form of infrastructure but also would be good for the kinds of customers that we sell to, that make manufactured goods and industrial equipment.

That would be very positive.

And some element that might stimulate consumer demand is okay for our standpoint because a piece of our flat-rolled business is gauged more to consumer demand.

So across that spectrum, we think all of that is good.

Heavier on infrastructure would be better from our standpoint.

Where they'll setting out on, the other competing social needs, I'm not expert enough to really give any good advice on that.

Just one last thing if I could.

Could you comment at all on the automotive steel supply chain in terms of -- this economic downturn has kind of hit everybody.

I'm just wondering if on the raw materials side that the automotive supply chain -- how would you characterize it?

Is it reasonly in line?

Is it over-served right now?

Is there some de-stocking that's going on at the end user level there?

It's hard to tell.

But I think in the -- from us all the way to the stamping plant and assembly plant, I think inventories, and even the vehicle inventories, are relatively low.

I think one clear effect of the credit crisis and the lack of credit is that everyone, including us and all of our inputs, are trying to drive down everything we hold to the lowest possible level to maintain the maximum possible liquidity.

Everybody is doing that.

I think that the steel supply chain is in relatively good shape as near as we can tell.

Our relationships are fine or functioning well.

We hope that they get back to work and make as many cars as they can.

We'll be prepared to serve them when they do

Thank you.

We'll move onto the line of Dave Martin with Deutsche.

Please go ahead.

Thank you.

I wanted to start with inventories.

I would have expected you would have seen a bigger draw on inventories in the quarter.

And as a result you probably didn't generate as much cash as I would have thought.

Can you comment on that?

In your ability to generate cash via working capital in the coming quarters?

I'll just start and then I'll turn it to Gretchen.

She's got the numbers better in mind than I do.

But if you're just looking at the gross inventory number, which I don't see that way necessarily.

I think our raw material inventories might be a little bit higher on both the pellet and coke standpoint.

We're continuing to run our coke batlies on extended coke times.

We're not making more than we need to.

But we probably have a bit of an inventory investment on the coke and pellet side.

On the steel inventories, we've run them down very, very low and took a lot of working capital out on the steel inventory side.

The end of December inventory, steel inventory for us, is the lowest it's been in some years, for as long as I can remember.

Yes, I think that's right John.

I wouldn't say anything differently.

I mean particularly on the coke side, we have to keep our batteries running and we're not using as much and we're building coke and that's just where we're going to be.

And we're probably going to keep producing that, but ultimately it will come back.

And that may actually work well for us, because we've had to buy a good bit of imported coke in the last year or two or three, really going back to back to 2004 at prices up to $600 and $700 a ton.

So us making it for less than half of that and having it on the ground for a short time, we think that's a reasonable proposition.

Okay.

And then secondly, I just wanted to -- on variable costs and thinking about moving parts this year and profit-sharing in particular.

What was the profit-sharing amount you paid out in 2008?

In round numbers I think our profit sharing for the year -- and of course we'll give you a pretty full disclosure on this when we get to the 10K in a couple of weeks.

But I think it was about $220 million.

Okay.

Profit-sharing.

Right.

Okay.

And then just lastly on the income statement, the other income line of 143.

What was in that?

Oh, I'm sorry, that's right.

It's the -- That's where our -- the $150 million reversal of the contingent funding obligation that we had set up for our partnership on 1314 B.

That's where that slowed through.

Okay.

Thank you.

Thank you.

We'll go to the line of John Tumazos of John Tumazos Independent Research.

Please go ahead.

How are the tube volumes in the first three weeks of January?

You selling close to 40,000 tons a week, or is it more like a couple trucks going out every day?

It's probably somewhere between there, John.

I don't have it down to weeks.

But -- I think it was publicly observed that we've idled one tube mill in [Bellveau] Texas, and we are taking shorter turns and fewer turns at most of the other mills.

So our volume of production has begun to ebb a bet.

And shipments will follow that, probably already are.

But I don't have it down to tons per week.

But clearly, a bit slower as we enter the new year.

Have you flushed out all the $30 moly and expensive alloys so that they're contemporaneous with the prices today Or do you still have some -- stale raw materials from a few months ago?

Not a whole lot on the furnace editions, alloys, that suite of things, John.

I think there we don't have a real long supply to begin with.

And if there is any carryover, it won't last for very long.

It will be gone pretty quickly.

Probably gone by today.

I mean it would go quicker if we were running at a higher rate of course, but that will not be a long-term drag, I don't think.

Thank you.

Thank you.

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

Please go ahead.

Great, thank you.

Just wondering, and maybe I missed this earlier, if you could give a sense of exposure to the Big Three just from a credit perspective.

And even if you could give on a percentage of sales, if we were to take the two ones that are in trouble, GM and Chrysler.

Would they be less than 5% of your sales?

Well, it kind of ebbs and flows over time.

And we don't have any single customer that we have to disclose as a 10% customer, so I mean obviously that's an outside.

I guess I don't want to talk specifically about what we have there.

We generally have our fair share of whatever it is that they're selling.

And so they haven't been selling much lately, we are at low levels relative to our history.

But in total, our exposure there is quite manageable.

Okay.

And just to move on to Europe, you had an -- a pretty big operating loss there, the first one that I can see ever.

How much of that loss would you itemize as just higher raw material costs going through cost of goods sold or a mismatch between your costs and selling prices?

And how much of that loss is just due to the big decline in shipments or the weak capacity utilization?

I guess what I'm trying to get at is once the raw material praises decline and stabilize, do you think that the European operations can be profitable again?

By all means.

In response to your last question, they can and I'm confident they will.

Our European operation has demonstrated over a wide range of market circumstances, an ability to generate a very competitive conversion margin because we have a competitive cost structure and have a good market position in a good steel-intensive part of the world.

Over the years, Mike, as the steel prices would ebb, we were able to negotiate our raw materials to a level that would allow us to have a good conversion margin.

In this particular instance, because of the abrupt and rapid reduction in volume and in prices, we weren't really able to ride it out the way we have in previous cycles.

So the lines crossed in a very significant way in a hurry.

And because of lower volume, as I may have mentioned, we're taking a longer time to work our way through the higher cost of raw materials, which on the FIFO average costs which were on in Europe Gretchen would advise, will take a little bit more time to work through.

But in the long term, and I don't mean 20 years, but could be sooner than that, I hope, I think we'll be able to generate a competitive conversion margin because we've got good plants with good costs, a nice cost advantage over most of Western and Northern Europe.

And we think a good product and market position.

So I'm confident that the European business will do well.

Okay, and one last question, similar to that.

The contract pricing you're able to secure for 2009.

Would you look at that as profitable business?

h, yes.

Yes.

In fact, considering what's happened in the marketplace just looking at the published prices that are available on the various indices.

Pricing has remained relatively positive, relatively speaking.

It's not where it was earlier in the year or last year even.

But at this price level in the contract business that we have, we can do reasonably well.

This is more of a volume question than a price question right now.

We're looking for orders.

Thank you.

We need the country to get back to work.

Thank you.

We'll go to the line of Evan Kurtz Morgan Stanley.

We'll go to the line of Evan Kurtz of Morgan Stanley.

Please go ahead.

Hi.

Good afternoon.

Hi.

Just one more follow-up on tubular.

I was hoping you could kind of walk us through the evolution of pricing through the fourth quarter.

Where do we start realizations at the beginning and the end, and where they might be right now?

I'm not sure I can do that from my head.

Gretchen might be able to help us in a moment.

But we had a number of significant price moves during the middle part of last year, I might say.

And they really weren't all fully realized and collected until we began the fourth quarter, I think, if you take them in sequence.

And therefore we were fully collecting essentially everything we had priced into the market by the time we got to the fourth quarter.

And those were very full prices as you see, and the margins were quite full.

They were record in either case.

So it really was a cumulative sum of the price increases we've had throughout the year.

Is that a fair way to say it Gretchen?

Yes, $285 million [assume this is dollars in millions] from the third quarter.

But it was flowing through pretty steadily.

Okay.

And on the last call, we had talked a little bit about the [coking] coal costs.

And you had thought at the time that you might be paying somewhere above [$200] and it's [$165] now.

I was just wondering if you could provide some detail on why the change?

Were contracts renegotiated, were they deferred or canceled even?

Well, I think when we gave you that outlook before, it was based on what we saw in the market.

We really hadn't placed everything and priced everything then.

But the market was heading then, as you know, was heading toward [$300] or some other astronomical number.

I think what we're looking at now is just a more realistic, for us, realistic expression of what is actually in the market.

And what we can realize based on where our coke plants are, the transport we have, the access and the long relationship we have with some of these mines.

So, I think that was reflective of the market then.

This is a more concrete reflection of what the market is today.

Okay got it.

Thanks.

And we'll do better if we can.

This is what we're guessing now.

Great, thanks.

Thank you.

We'll go to Charles Bradford with Bradford Research.

Please go ahead.

Hi.

Good afternoon.

Hey Chuck.

How are you?

Hi Chuck.

Can you give me some color on the status of what's happening with the EJ and E.

Certainly.

As I understand it, Chuck, the relevant regulatory body, which I believe is the Surface Transportation Board, has issued their final order and we are moving towards a closing in the near term.

Can you tell us whether you'll book a profit on that?

Or just what the situation will be?

I'm sure there will be a profit.

That property for the most part dates from Judge Gary's days.

So I'm sure there'll be a profit, but how much it is, I don't know.

And that will be, assuming it does proceed to close, it will be a transaction worthy of probably separate mention in our results next time around and we'll make sure we let you know what that is.

Right.

The automobile bailout bill has provisions requiring suppliers or participants in the automobile industry like the union, debt holders and so on to share some of the pain.

Is the steel industry covered by any of that?

You know, Chuck, there are pretty broad provisions in there, and I know that they're trying to do the best that they can.

I don't think that it serves anybody to talk about what they may or may not be doing right now.

And how many blast furnaces are your currently operating?

And how many are on idle in the US?

Chuck, we've kind of gotten out of keeping score.

We're operating about what the operating rate was you saw in the quarter.

It's 50% or less.

And on any given day, we may be taking one furnace up at Gary or one furnace down somewhere else.

So I'm not really inclined to get into a day-by-day scorecard.

But we're operating at relatively low level.

We've got plenty of blast furnace capacity, and when the orders come, we can get them up fairly quick.

Thank you very much.

Thank you.

Thank you.

The next question is from [Bob Semolek] with New River.

Please go ahead.

Quick question.

You mentioned that apparent consumption is below sales.

If you were to estimate that in say what [operating] that would imply, is there a way to talk about that?

I think if you're referring to my comment that apparent demand, what we're seeing and what we're producing too, is below consumption.

That's a bit of a conjecture based upon what the economists are saying, what the real economy is doing.

We can see pretty clearly what the industry production is through the industry-wide statistics.

I don't know how great that difference is or how significant any recalibration would be.

But if that's what you're referring to, all I can see is the general trend.

I can't really derive from that any particular number of tons or direction for our order book.

That is apparent from just the way the industry is taking down inventory, right?

Well, let me give it to you this way.

The domestic steel industry as reported through the AISI industry group statistics for the last two months, maybe longer, has been operating at 50% or less capacity.

I don't have any reason to think that the US economy has begun to operate at 50% or less of its total capacity.

What's happening is somewhere in the system inventory is being taken out which we see as lower apparent demand.

We gear our production to that.

At some point, we think that those would have to recalibrate.

It always has.

Whether it happens sooner or later, it's impossible to say right now.

Thank you.

Thank you.

Thank you.

Next question is from [Christine Fisher] with Goldman Sachs.

Please go ahead.

Good afternoon.

Hi.

Hi.

I just wanted to check on the covenants in your credit facility to make sure I have them right.

And I know -- I think the [$751 million] isn't drawn.

But it's a three and a quarter times leverage covenant and a two-times coverage covenant, is that right?

Yes.

Okay.

And then how much total did you have available?

I guess -- I think it's that one, and then the $500 million AR facility.

Those weren't drawn on at the end of the year.

Okay.

And so I guess -- obviously, the $500 million one is not drawn then.

Any fluctuations in AR.

Doesn't really matter.

But with the availability decline potentially, or you're not going to cross that bridge until it's drawn?

I think the availability on receivables can decline over time.

But that $500 million, we've got a fair amount of room on that $500 million.

That's a pretty modest level for us given our receivables.

Okay, and then the last question is just on the credit facilities that you guys have drawn down on.

Are there any collateral posting requirements on those facilities or no?

No.

Okay.

Thank you.

Thank you.

We'll go to Zach Schreiber with C Capital.

Please go ahead.

Hi.

It's Zach Schreiber with [McCain].

Thanks for your time.

Hi Zach.

Just a quick question on this apparent demand versus what you think actual demand is.

If you could just put some numbers around it.

How much lower is apparent demand?

What do you think this gap is between apparent demand and actual demand?

As a result, how much de-stocking has occurred, and what kind of evidence do you have that supports that?

Or is it more sort of a qualitative feel and so forth?

It's a little bit of all of that, Zach.

It's a fair question since I brought it up.

Let me try to answer it.

The most observable data point we have is the MSCI Material Steel Service Center statistics that they publish I think monthly, if I recall.

And we look at the flat-roll numbers.

They have an overall steel and other categories.

We look at flat-rolI, and I don't have the numbers immediately in mind.

But I think in the last several months, the inventories have gotten down 4.5 million tons, maybe something in that range.

And I believe that the lowest it's been in the last 30 or 40 years was about 3 million tons.

Now, earlier, in the last five years, five, six, seven million tons was not uncommon, even eight.

So that's the level of de-stocking that's gone on.

We don't know when the low point is.

Is it 4.5?

Is it four?

As I mentioned, there's a data point somewhere, and a long time ago, at three.

So whether the system can function much lower than it is today is a question.

So I can't qualitatively say when that inflection point is.

But that's one bright spot we see, that the stock is continuing to be drawn down.

And what's the rate of de-stocking for those inventories?

And what -- what is the apparent demand decline show up as?

You guys have -- you're running at 48% utilization basically as an industry.

Is apparent demand down more than 50%?

No, I think that's a fair proxy for apparent demand.

At least I just can tell you for our Company, we're producing roughly to what the order book is, and the order book is net of the inventory draw, so I think that;'s a fair proxy for apparent demand.

At MSCI, on their website has statistics going back a long way.

I think you can see the actual numbers there pretty easily.

If not, Dan Lesnak would be glad to get them for you.

Got it.

Thank you so much.

Thank you.

Thank you.

We have no further questions.

Thanks everybody.

Thanks for joining us.

We'll talk to you next quarter.

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