美國鋼鐵 (X) 2009 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the United States Steel Corporation third-quarter 2009 earnings conference call and webcast.

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

(Operator Instructions).

And as a reminder, today's conference is being recorded.

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

Dan Lesnak.

Please go ahead, sir.

Thank you, Keeley.

Good afternoon and thank you for participating in United States Steel Corporation's third-quarter 2009 earnings conference call and webcast.

We'll start the call with some brief introductory remarks from U.S.

Steel Chairman and CEO John Surma.

Next, I will provide some additional details for the third quarter, and then Gretchen Haggerty, U.S.

Steel Executive Vice President and CFO, will comment on the outlook for the fourth quarter of 2009.

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

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

For your convenience, forward-looking statements and which factors could affect those statements are referenced at the end of our release and are included in our most recent Annual Report on Form 10-K and updated in our Quarterly Reports on Form 10-Q and in accordance with the Safe Harbor Provisions.

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

Steel Chairman and CEO John Surma.

Thanks, Dan, and good afternoon, everyone.

Thanks for joining us.

Earlier today, for the third quarter, we reported a loss of $303 million or $2.11 per diluted share, an improvement from the second quarter.

Our European operations returned to profitability, a significant achievement, and our tubular business made good progress in a difficult market.

Before continuing, I want to comment briefly on safety, which continues to be our number one priority regardless of operating conditions.

Year to date, both our global OSHA reportable case rate and our days away from work case rate have improved compared to our performance in 2008.

That's also a significant achievement considering the challenges of the current business cycle.

We thank our employees for their shared commitment to this most important of our objectives.

Now turning to the business, we continued to face difficult operating conditions in the third quarter, as evidenced by a domestic steel industry utilization rate of 54% for the period, as was reported by AISI.

We experienced some improvement in order rates earlier in the quarter, and we currently have more of our facilities operating and more of our people back to work.

Recently, order rates in our flat-rolled and European segments have decreased, and demand trends remain uncertain, as both the US and global economies struggle to recover.

We're also entering a seasonally slower period.

We anticipate that we'll continue to face challenging conditions until a recovery becomes more apparent and more sustained and that there will likely be ups and downs along the way.

We're staying focused on what we can control safety, costs and taking good care of our customers.

Now let me turn to our results.

We reported a third-quarter loss from operations of $412 million.

Net interest and other financial costs in the third quarter of 2009 included a foreign currency gain that increased net income by $24 million or about $0.16 per diluted share due to the remeasurement of a US dollar-denominated intercompany loan to a European affiliate and related euro-US dollar derivatives activity.

Our North American flat-rolled segment had an operating loss of $370 million in the third quarter.

Our flat-rolled shipments increased almost 50% to 2.7 million tons, but as a result of lower index-based contract prices and increased sales of semi-finished products, our average realized prices decreased $72 to about $605 per net ton.

The flat-rolled results included approximately $165 million of continuing employee and other costs associated with our idle facilities as compared to $285 million of those costs in the second quarter.

We also had approximately $65 million in facility restart costs at Granite City, Great Lakes and Hamilton.

Also, in conjunction with increased steel production, we increased our operating levels at our raw materials operations during the third quarter.

We're currently making steel at six of our seven North American steelmaking locations, the exception being Lake Erie Works, where our labor agreement has expired and we have not yet reached a successor agreement.

In addition, downstream finishing facilities at our plants are operating as needed to meet our customer orders.

We had operating income of $7 million for the third quarter in our European segment, a significant improvement compared to our second-quarter loss of $53 million, which, as you may recall, included a $34 million gain on the sales of emissions allowances.

Shipments were almost 1.3 million net tons, a 24% increase over last quarter.

Reported average realized prices increased slightly to $615 per net ton as a decrease in actual euro-based prices was more than offset by favorable currency translation effects.

Also, we realized benefits from lower raw materials and energy costs.

For our tubular segment, we had an operating loss of $21 million in the third quarter, an improvement from the $88 million loss in the second quarter.

Shipments were 151,000 net tons in the third quarter.

That's up 64% from the extremely low second-quarter levels as order rates increased in line with customer demand for alloy and heat-treated products due in part to continuing development of the shale gas plays.

We're beginning to see increased activity at our welded pipe facilities in east Texas, which will also benefit our flat-rolled operations that supply the substrate for our welded mills.

In the third quarter, prices fell 3% to $1,474 per net ton, a substantially lower decrease than the last two quarters as prices may be €" I emphasize may be €" stabilizing.

Our tubular markets continue to be negatively impacted by high inventory levels in the supply chain caused by high levels of unfairly traded and subsidized tubular imports from China in prior quarters.

Our operating rates are still well below historical levels, and our tubular results also reflect idle facility carrying costs of about $25 million.

Now I'll turn it back to Dan for some additional details about the quarter's results.

Dan?

Thank you, John.

Capital spending totaled $117 million in the third quarter, and we currently project that full-year capital spending will be approximately $455 million.

Depreciation, depletion and amortization totaled $167 million in the third quarter, and we currently expect it to be approximately $645 million for the year.

Pension and other benefits costs for the quarter totaled $97 million.

We made cash payments for pension and other benefits of $262 million, which includes a $140 million voluntary contribution to our main domestic defined benefit pension plan.

For the full year, we expect our pension and other benefits costs to be roughly $470 million, and we expect cash payments for pension and other benefits to be approximately $675 million, which includes the $140 million voluntary contribution.

Net interest and other financial costs totaled $25 million in the third quarter and included a foreign currency gain of $21 million.

Our effective tax benefit rate was approximately 30% for the third quarter and 22% for the first nine months of the year.

These are lower than the statutory rate because losses in Canada and Serbia, which are jurisdictions where we have recorded a full valuation allowance on deferred tax assets, do not generate a tax benefit for accounting purposes.

The third-quarter tax benefit rate includes the impact of a $23 million catch-up adjustment as a result of a slight increase in the estimated annual effective tax benefit rate.

Lastly, the weighted average shares used for EPS purposes for the third quarter were 143.4 million shares as the 27.1 million shares we issued in our public offering in April are now fully reflected in the EPS calculations for the third quarter.

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

Thank you, Dan.

Good afternoon.

Year-to-date cash flow from operating activities was $118 million and reflected the $140 million voluntary contribution to our pension plan in the third quarter.

We continued to reduce inventories in the third quarter, with benefits from working capital reductions totaling $1.3 billion for the year to date.

Our liquidity remained strong as we ended the quarter with $1.5 billion of cash and total liquidity of $2.7 billion.

Now turning to our outlook, we expect improvement in our overall fourth-quarter results mainly as a result of increased demand for flat-rolled products in North America, driven primarily by automotive markets and continued strength in tin mill markets.

However, we expect to report an overall operating loss in the fourth quarter due primarily to continued low operating rates and idled facility carrying costs for our flat-rolled and tubular segments.

We remain cautious in our outlook for end user demand as customer order rates in our flat-rolled and European segments have decreased from the third quarter, partly due to seasonal slowdowns, and we will continue to adjust production to meet our customers' demand.

Despite these concerns and uncertainties, we believe that the US and global economies are in the early stages of a gradual recovery, which has been aided by global stimulus policies and may be supported by continued improvement in credit markets and in inventory restocking.

For flat-rolled, fourth-quarter results are expected to improve somewhat from the third quarter due primarily to higher average realized prices and increased shipments.

However, we expect to report an operating loss for the fourth quarter, primarily due to low operating rate and continued carrying costs for idled facilities.

In order to adjust production to meet customer order rates, during the fourth quarter we expect to idle the #14 Blast Furnace at our Gary Works for necessary repairs, as well as one of two furnaces at Granite City Works.

As a result, we currently expect fourth-quarter raw steel capability utilization rates to be in line with the third-quarter levels.

We expect fourth-quarter results for U.S.

Steel Europe to be in line with the third quarter, as higher average realized prices are offset by higher raw material costs and slightly lower shipments.

Due to a planned maintenance outage for one of the three blast furnaces at USSK, we expect raw steel capability utilization rates to be lower than third-quarter levels.

The blast furnace operating configuration in Serbia will be adjusted as required in the fourth quarter to coincide with customer order rates.

Now, fourth-quarter results for tubular are expected to be comparable to the third quarter as operating levels, shipments and prices remain around prior-quarter levels and we continue to incur carrying costs for idled facilities.

Dan, ready for questions?

Thank you, Gretchen.

Keeley, can you please queue the line for questions?

Thank you.

(Operator Instructions).

Our first question will come from the line of Kuni Chen of Banc of America-Merrill Lynch.

Please go ahead.

I guess just first off, on the North American utilization rates and your outlook there, basically as you go forward from here, is your view to sort of throttle up and throttle back your number of blast furnaces depending upon your order entry rates, or certainly at a below-60% utilization rate, do you think you might be closer at this point to contemplating any permanent capacity decisions?

I don't know that we can give you anything definitive there, Kuni.

It's a very fair question, but I think as our comments in the release and Gretchen indicated, it's likely that we're going to take two furnaces off sometime during the quarter, depending €" when depends more on how we see the market developing.

And we're going to continue to try to match our steel make with what the ultimate demand is.

But there is just so much uncertainty compounded by the fact this is a seasonally difficult time anyway.

It's hard to filter out how much of this is seasonal versus how much might be more systemic.

So I think we're continuing to look over our hand, see what we think is the best configuration long term for the Company.

That depends a lot on, of course, what the long-term demand curve looks like, and I don't know that we know any more about that today than the last time we did this.

I think we'll have to look at that, as well as what other developments on the supply side in North America might be.

So we'll factor all that in, but we continue to look at our hand, but nothing definitive on it yet.

Okay.

And then just as a follow-up, can you comment on your raw material positioning for 2010 at this point, and particularly on met coal?

Sure.

Again, in North America, from an iron standpoint we're self-sufficient and we'll make, again, what we need.

We've drawn a good bit of inventory down to quite a low level.

We think we're okay where we are, but we can make more if we need it.

So I think from an iron standpoint, we're fine.

On the met coal side, we have in the books sufficient commitments for next year to make the coke that we expect to need and to be able to make, so I think we're fine from a volume standpoint.

Coal, met coal prices are still being worked on.

I don't want to do all that in this environment, but I think in general this year we've been estimating all-in delivered for met for North America to be about $160 a ton for us.

We like to think we'll do better than that next year.

Some contracts that are already in give us that hope.

Some have collars that should be, plus or minus, at favorable prices, and some may have to be negotiated, but we think we'll be light this year or maybe a bit better.

Thanks.

Thank you.

Our next question will come from the line of Dave Katz with JPMorgan.

Please go ahead.

I was hoping that you guys could talk a little bit about any pressures you're seeing in pricing, specifically carbon flat-rolled pricing.

I'm not sure we can add much to what's been in the general trade press.

If you just follow the indices, there were a number of price increases that were sought, including by us.

We did reasonably well on that through October.

Some additional price increases have not been as successful, and it would appear at this point that spot market prices are leveling and perhaps retracing a bit.

That's exactly what we're seeing.

We think we're going to do at least as good as the market as we work through this with our customers, but the broad trends that are observable in the market are no different for us.

We can't really add much to what's already been written about it.

It just seems that things happen very quickly these days.

After numerous stories now in the trade press about spot prices softening in North America, lo and behold, the overnight press tells us that spot prices are increasing in China.

So that shows how quickly things can change.

I'm reluctant to draw a straight line from here forward, but if you look back in history, this is generally a slower time of year.

I don't see any reason why it's going to defy the laws of gravity this year.

Okay.

Then secondly, after aggressively managing down your inventories, you had another decrease this past quarter of about $100 million.

Where do you see the inventory levels going forward over the next quarter or two?

Well, it really depends €" and I'll let Gretchen comment €" it really depends on the operating configuration.

We do have, particularly on the raw materials side, inventories down to quite a low level.

We think we can probably keep them in that vicinity even if we do ramp up.

We'll probably need a little bit more, but not a whole lot.

Steel inventories are very low everywhere, including in our system.

If we continue to ramp up, we might need a bit more there.

If we are increasing inventories because business is increasing, that's probably okay at a reasonable level.

If things begin to slow down again, we can probably liquidate a bit more, but I think, as Gretchen pointed out, we've taken a billion-something out of working capital this year.

It's going to be hard to have larger chunks in the next quarter or two.

Gretchen?

Yes.

No, I think that's fair, John.

We still probably have a little more room to go on inventory, but we've done an awful lot on working capital this year, and it's just going to be a little harder to have a favorable effect in the fourth quarter, I think.

Okay.

Thank you.

Thank you.

Our next question will come from the line of Brian Yu of Citi.

Please go ahead.

John and Gretchen, with regards to your shipment guidance in the flat-rolled segment, you're expecting flat utilization rates, yet shipments up, which suggests you have some finished product inventory on hand.

Can you give a sense of how much that is?

Not really.

I mean, I think we have in process what we need to fill our book, which was, as we said, stronger a month or two ago.

As the book slows, our shipments will catch up with inventory and we'll have less on the ground or in process when we get to the end of the year.

So I think we're just going through sort of a mini-cycle almost within the fourth quarter.

So our in-process and finished are a little bit higher today, but we're in the process of working that down through mostly shipments and finishing.

So it would be in the hundreds of thousands of tons, I would guess, but it's not a big number.

Yes.

It would be transitory.

Now, if the order book, for whatever reason, would begin to strengthen, then in all probability we would have a little bit more inventory to support that.

I think, too, if I would just add to that, is that similar to in the second quarter, where our average utilization rate was 32%, we probably came out of that quarter at a lower rate than the average.

Coming out of this quarter, we're coming out at a higher rate than average, but if we're going to €" we'll probably move down throughout the fourth quarter as we see seasonal effects.

So we've been building up a little bit later in the third quarter and early in the fourth quarter, so it just kind of all €" it will average out over the period of the fourth quarter.

Got it.

Okay.

And then my second question, it's in regard to the Wabush sale.

I know you guys are long iron ore in North America.

In the past, you've actually shipped that product to Europe.

I mean, how are you looking at that from a raw material strategy standpoint?

Well, we view that as an asset that was really surplus to what our needs are to support our North American and operating configuration as it currently stands.

The material doesn't particularly fit our slate anyway.

We were offered, we think, a reasonable price for it.

We were inclined to sell it, which we did.

Who buys it I guess is still being worked out, but it doesn't really change our position.

It was surplus from our standpoint, and we have additional reserves in both Minntac and Keetac that are easily accessible and can be scaled up in a level that we think is sufficient.

So, it was surplus, a reasonable value.

It was a pretty easy decision to sell it.

Okay.

Thank you.

Thank you.

Next we'll go to the line of Luke Folta of Longbow Research.

Please go ahead.

Just a couple questions.

Quickly, sorry, Dan, I missed the idled facility cost number for the third quarter.

Can you provide what your expectation is for 4Q?

Third-quarter number was $165 million for the idled facility costs.

At this point, we don't have a real number for 4Q until we see how the order book plays out and how the volumes run.

I think, Luke, just directionally it's a fair question.

If we ran for the entire fourth quarter everything we're running today, it probably would be lower than that.

If we begin to take some things off, as we've indicated we intend to, assuming that the order book stays where it is, it might be closer or it may be less.

It's really hard to say.

Okay.

And then just on the #14, how long do you plan to have that down?

If we should see a pickup in order rates in the first quarter, do you think you'd have that ready to go?

In the first quarter it will be ready to go.

It really depends on how quickly the job goes.

We're going to be taking it down sometime next month likely, and there will be a fairly lengthy period of quenching and trenching and demolition on some of the stuff inside.

We expect to have everything we need for the job in sometime in December.

We'll start to work on it.

We're not going to rush.

We'll do it mostly with our own people and mostly on straight time.

If it turned out that we thought we needed it in a hurry, we probably would have it done sometime in February and be ready to go mid- to late February.

That would be just a general schedule.

Having said that, we have other firepower that we could handle whatever market developments we think are within the realm of possibility.

I don't know that the 14 project will in any way inhibit our ability to respond to really anything the market can throw at us in the near term.

Okay.

And then just finally, on your raw material costs in Europe, you said that you are seeing some higher costs there.

Can you just give us a feel for which commodities that's in and kind of the magnitude?

Sure.

It would be on met coal and coke, which we purchase for Serbia, met coal for Slovakia.

All the carbon resources are tight right now in Eastern and Central Europe.

I'm not sure I know exactly why, but a lot was taken off during the downturn and maybe isn't coming back on as quickly.

So I think coal and coke generally are tight in Eastern and Central Europe.

Iron ore has moved up, metallics generally €" iron ore, pellets, fines, etc., cinder fines are a little bit tighter.

So it will be on those two commodities is where the pressure will be.

And scrap will follow whatever the general market trends are, so it's really on those two key commodities for us.

Don't really have a feel for how much yet, because some of this is day-to-day and month-to-month negotiation, but we had a nice benefit from it in the third quarter compared to second.

We'll give some of that back in the fourth quarter, I think, as Gretchen indicated.

Thanks a lot, guys.

Thank you.

Our next question will come from the line of Michelle Applebaum of Steel Market Intelligence.

Please go ahead.

That really was €" I was pleasantly surprised on the quarter and on the guidance.

I wanted to ask you; you said the operating rate would be flat quarter on quarter.

Obviously, if you were ramping up during the third, to be flat with the fourth you're ramping down.

I didn't catch that in the press release, so I appreciate your clarification on that.

Can we get some numbers on that?

What was your operating rate as you ended the September quarter?

Just to be clear, I thought in our release we did say we intend to take the Gary 14 furnace off and one furnace at Granite City, so (multiple speakers)

Okay.

Well, then, I completely missed that.

Okay.

So I think those are pretty concrete at this point.

I mean, we could change our mind if things cause us to change our mind.

We didn't really give and probably don't want to give an exact €" you know, you're looking for like an exit rate percentage in €"

Yes.

I think the AISI percentage the most recent week was 63.2 or something like that, if I remember it right.

Right now, we're running above that, and if we kept running everything we'd be above that, but if we take a few things off we will probably be below that.

So that's the reason we gave you the indication it probably would be flat.

Okay.

So that's the average of the quarter to the quarter?

Right.

Average for third quarter versus what we expect average for second quarter to be.

I think, you know €"

(multiple speakers) average for fourth quarter to be, I beg your pardon.

As we said, Michelle, we are expecting some seasonal effects here, which usually means the latter part of December you see a pretty significant effect.

And then of course, even though we indicated we intend to take those two actions that we mentioned in the release, we reserve the right to change our minds.

That order book is flexible, huh?

My question, though, is can you give some indication of are you responding to market conditions, or is this all maintenance?

Maintenance often will be in December, so do you have any €"

Right.

Well, I think you know that the Gary 14 project will involve maintenance, but it also takes care of responding to the market.

If we felt that there was a strong enough market, we could delay that and run at a lower level for some period of time.

So both Gary 14, even though it's required maintenance, the timing of it is certainly relevant to what we expect to see in the market.

The Granite City furnace is €" we've got to do something there eventually, but it doesn't have to be next month.

We could probably do that later as well, but that's also market related, our current expectation.

Okay.

It sounds like your lead times must be pretty short that you're open to keeping Gary open in December, and it's the end of October.

Is that a fair assumption?

I don't know.

The lead times have come in a bit, but I think for hot-roll, just on average for us, it's probably six weeks, plus or minus, something like that; maybe five to six, somewhere in that range.

Coated products would be a good bit longer.

Some of those have moved out recently, but €" reflecting automotive demand, which is still pretty good.

But it's not so much that it's a week-to-week thing.

We might look a little bit more expansively than that, but we don't want to build a lot of inventory just for the sake of having it there.

Right.

That's terrific.

That's not short at all.

Thanks for all of the clarifications.

Thank you.

We have our next question from the line of Sal Tharani of Goldman Sachs.

Please go ahead.

John, just wanted to get some idea on your European business.

You have run it very hard, 82%.

You expect some slowdown, but still much better than the US.

It has been running better than the US all along.

I just want to know, are you getting market share?

Is the business over there better than the US?

Well, at least where we were, or where we are, we were able to get a pretty good share in the third quarter, Sal.

We have a configuration where we tend to make some of the wider things in Serbia because of our strip mill capability there.

We were on a campaign to lay down some slabs and to have things ready to be available for customers for a period of time.

So we had the firepower ready, and our raw materials costs came in pretty well, so we had a position to take some share, and ran pretty hard and did pretty well.

I think our European operations grew.

Management and employees did a fine job.

And at least in the area where we were, demand was sufficient to allow us to do that.

As in the US, there seems to be a bit of a softening now, some seasonal undoubtedly, hard to tell whether it's end use demand or not.

But at the moment, we expect things to be a little bit slower there for the fourth quarter.

We're going to calibrate our production accordingly.

We have one furnace that we'll be taking off relatively soon, #3 at Kosice, which is due for some significant work in any event.

Then we'll just use Serbia to throttle up and back as we need to, to meet whatever the demand is.

I hope we run them the whole time, but it's too soon to tell yet.

Is the €" Central and Eastern Europe, where you are, the demand is better than, you say, Western Europe?

Well, I guess.

I mean, we were able, because we had the material available maybe sooner than some of our other colleagues in the region did, we were able to take advantage of whatever business there was.

And our cost structure was pretty good because the materials came in.

We got a good cost structure to begin with.

So we were well positioned there, and our folks did a good job with taking advantage of it.

Okay.

You mentioned in your comments about the [access cell] slab shipments.

Was that out of the US?

Where did you ship these slabs out of?

The semi-finished shipments would be in North America and they would be to mostly domestic North America sources.

Okay.

Great.

Thank you very much.

Thank you.

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

Please go ahead.

I just wanted to see if, first of all, you could give us a little bit more color on what you're seeing with regard to OCTG inventories.

We don't have a lot of visibility there and a lot of disclosure, so I would really appreciate your thoughts on that.

Sure.

I think there's a number of sources we look at, some of which are public.

They're probably the same ones you look at, but they all seem to indicate that inventories probably peaked sometime earlier in the year and that in general it would appear that inventories are on their way down.

Maybe we're at the 3 million tons, plus or minus, OCTG mark now, and maybe that's about a year's supply.

Those are just feelings that we get based on interpolating some data.

That's down quite a bit from the peak back in March, which was probably almost 4 million tons and maybe a 16-month supply or even two-year supply, the way I calculate it.

We also talked to our distributor customers, who are in the middle of it and are very important to us.

Their trends would follow that same general trend, so it feels like we're moving in the right direction, can't tell how quickly we'll move from here, but things are moving back towards a point of equilibrium.

There are some disparities in that.

I think the inventories on QT and alloy, heat treat and alloy are probably in a little bit better shape.

The big bulge of carbon imports €" we had a lot of imports in heat treat and alloy as well, but the big bulge of carbon imports continue to be a huge overhang.

Our carbon orders and shipments are really quite modest right now.

So we're in better shape in total, quite better shape on the heat treat and alloy, some ways to go yet on carbon.

A year's supply sounds like a lot.

What's the normal amount?

What would be a good amount to have, maybe, normally, like three months?

Maybe like three to six months or so.

Yes, probably three to six months would be something we'd be more comfortable with.

Okay.

Then logistically speaking, it sounds like there are still some changes that you might make regarding which mills are operating.

How should we expect to get an update on that?

Would you put a release out or should we just be watching the trade press?

What's the best suggestion you have there?

Well, I think we've indicated in our release what we expect to do if we decide to vary a lot from that.

We think it's material information and we'll try to convey it some way, but of late, at least, a lot of that's been conveyed by our union colleagues when we, out of courtesy, professional courtesy, tell them what we're up to .

You can usually believe the first sentence.

After that, the quality goes down a bit, but that seems to come out from time to time.

But these things happen up and down.

We're doing game-time decisions every day, so I'm reluctant to sort of be posting a daily operating schedule for everyone to see.

But if there's something really dramatic that signals something major, a major difference, then we'll consider finding some way to get that to you

Okay.

Fair enough.

Then final question from me.

Just looking to understand on the auto demand that you've highlighted as the main source of increased volume into the fourth quarter, how much of that do you think is incremental and sustainable, and how much might be a restocking of the auto channel?

That's a really important question that we don't know the answer to, Timna.

I think right now if you just look at what the end use dealer inventories are, and you all can see that as well as we can, they're still quite low.

They're working those inventories back up to have a sufficient number of vehicles on lots to be able to sell from.

That probably moves us through the end of the year or close to it.

How well that supply chain is maintained and the order rate is maintained really depends on how well they sell.

So I think if you see decent auto sales figures, then we probably have some chance at having a pretty good run with auto.

If you see the sales figures starting to slow down and then go the other way, then we'd probably have a bit of a slowdown coming.

Thanks a lot.

Thank you.

Our next question will come from the line of Mark Liinamaa of Morgan Stanley.

Please go ahead.

Just in regard to, again, the European operations, can you quantify what, if any, impact you're seeing of export flow coming out of Russia or China into pricing or supply/demand characteristics there?

Thanks.

Mark, those are two important things that we're following.

I don't know that we have any quantitative data to give you there yet.

It's really too soon to tell, but when there is a large flow of exports from China, which we're very much concerned about, we tend to see it first in Southern Europe.

That's where it tends to hit in the markets we care about first.

With respect €" and there is some very early anecdotal evidence that that may be a concern, but nothing that's really hit heavy so far.

That's probably a little bit of time away yet, if it's going to happen.

The Russia/Ukraine situation is a different thing.

A lot of the semis that we can see were flowing from Russia and Ukraine and Kazakhstan going east into China.

That was a positive for the European market, I think, and for us.

That seems to have been because of the disruption in the China market, seems to have slowed.

To the extent that begins to come west into Europe, North and West and Central Europe, undoubtedly that will put some pressure on our markets.

We're alert to that.

It may be happening right now, but really too soon for us to tell how significant that's going to be.

You addressed or mentioned stabilizing prices in China.

Is there anything from an industry behavior perspective that you would attribute that to, or is it just simple ebb and flow?

Thanks.

No.

I think the market and the industry in China is so large and so complex I think it defies any simple analysis.

I think it just shows that even though inventories are relatively heavy in China, we read, the absolute amount of inventory, what's observable as compared to annual consumption in China, is relatively small.

As a result, I think things can change there maybe more quickly than we think they might turn here in North America or in Europe.

Thanks.

Good luck with everything.

Thank you.

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

A couple of questions.

You had indicated that the mix was going to be negatively impacted in the third quarter.

I was wondering if you could give some idea what the mix of semi-finished was relative to the second quarter and how you would see that mix in the fourth quarter as well.

Sure.

I'll just do this directionally.

Gretchen, maybe you can add more specifics.

But I think in the third quarter, the total mix of semi-finished might be 5% of our total North American flat-roll mix, somewhere in that zone.

Perhaps in the fourth quarter, it might be as high as 6%.

In the third quarter, it might have been 4% or 5%.

It might have been 1% or 2% maybe in the second quarter, somewhere along that line.

Okay.

All right.

That's €"

Gretchen Haggerty Yes.

We'll get some details, Mark.

If we're way off, we'll let you know, but I think generally speaking that's probably about where it is.

Okay.

Any additional color you can give on the magnitude of pricing recovery for the fourth quarter in the domestic flat-rolled business?

I know your actual realizations lag a little bit relative to current spot numbers.

Can you put some parentheses around or goalposts around what it might be for the fourth quarter?

Well, one way to do that €" I don't have the figures just in front of me yet, but if you were to take the average of the CRU numbers, we have €" these calculations go all sorts of different ways.

There are lag quarter, lag month, current month, last month.

There's a lot of different ways to do it.

But if you just, for example, would take the average of the August/September/October CRU figures, I think they'd probably average a little less than $500, plus or minus.

The similar average in the previous period would have been about $400.

So just on average, maybe there was a $100 step-up quarter on quarter.

Then that would flow through into our spot business either immediately or over the ensuing two quarters or two months or one quarter.

So that would be, say, $100, plus or minus, on 40% or less of our business.

So that gives you some sense of what the spot price effect could be.

Okay.

That's really helpful.

And then there's lots of different ways that's done.

I'm just giving you a crude example if you want to take a few public numbers and try to put them together.

Okay.

No, I appreciate that.

I had another question related to China.

I know you have a lot of windows on the global marketplace that maybe some of us don't have.

I have heard from at least two different places that there seems to have been a very marked acceleration in consolidation activity in the Chinese steel industry, especially with a lot of the smaller mills.

I was wondering if there's any commentary you can make that would either confirm that or verify it, or if you think that that's really not a fair way of thinking about China and the direction that they're moving.

There's no doubt in my mind, Mark, that's the direction that they want to move.

I think that's what the senior policy folks have been saying at the recent World Steel Meeting in Beijing.

One of the very seniormost policy €" steel policy officials made that very clear, that that is their objective.

They expect to have fewer larger mills, more coastal oriented, reduce some of the central area, particularly in Hebei Province, some of the smaller, less productive facilities that have much higher energy use.

That's all sensible, and that's exactly what they want to do.

But there was also an observation made by this person that that kind of activity took 30 years to take care of in Europe and 20 years to take care of in North America, and they shouldn't be expected to accomplish all that in nine months.

So I think there's a clear direction, and some of it, undoubtedly, is happening.

You've seen some of the mergers.

The things that have taken place have been largely with the larger companies that are owned by the federal authorities, the State Asset Control Commission.

That can be done, I think, much more quickly and efficiently.

Actually implementing that at the provincial, local level, I think, will take some time, because there's lots of social issues there.

But no doubt in my mind that's the direction, but anyone who is expecting hundreds of millions of tons of reductions in the short term, I think that's unrealistic.

Okay.

Are you concerned that the recent price upside in China may not be sustainable for a couple of months?

As I said, Mark, it's such a big market and so complicated that I'm reluctant to imply any particular knowledge there.

I just pointed out that prices moved up just because there was a huge consensus of opinion among everyone who knows, and we don't, that they were going to keep going down.

Then all of a sudden, they reversed.

I think it's a very unpredictable market, and there seems to be a level below which prices probably won't go because they start getting really on top of what their cash costs are.

Okay.

Just one last thing, if I could.

Is there any way you could help us quantify the magnitude of the extra maintenance expenses for the fourth quarter relative to the third quarter in the North American business?

Maybe a bit more.

I'm not sure.

Well, we did have the start-up cost phenomenon in the third quarter.

I think we gave you a number on that, $65 million or so, some of which was just plain old start-up, some of which was things that we had to do around the facilities that hadn't been done for the last 18 months.

We don't necessarily expect that to recur in the fourth quarter.

We will have some other outages, but just as we think of major maintenance, my sense is there won't be, excluding that start-up item, won't be a lot of big differences fourth versus third.

Okay.

Terrific.

Well, look, thanks very much.

Congratulations on the positive, at least relative to consensus.

I look forward to you guys back in the black one of these times soon.

We do too, Mark.

Thank you very much.

Thank you.

Our next question will come from the line of Charles Bradford with Affiliated Research.

Please go ahead.

I don't know if I missed it or not, but did you mention any kind of a LIFO credit?

No, actually, we didn't.

Did you have one?

I think we had a modest credit.

Okay.

In the fourth quarter, what should we look for in regard to interest expense?

Do we just add the $25 million and the $24 million from the foreign currency?

Actually, yes.

I think the third quarter just was expense; when you take out the net, the foreign currency gains was $45 million.

That's probably a pretty good number to use.

Did you give full-year number?

Yes.

What about the tax rate for the fourth quarter, or tax credit rate, whatever you want to call it?

Well, right now, we use €" 22% is the effective rate that we used through the end of September.

That's probably a pretty good number to use for estimating at the time.

Yes, that was our best guess at what it would be for the year.

If there's a marked change in relative results in the different jurisdictions, that would change, but that was our best guess for now.

Can you talk a bit about selling prices?

I know a lot of things are indexed, but there are lots of ways of indexing.

I think you guys use the CRU a lot.

Other people, or some people, use cost indexing.

What would be more important to you as far as your ongoing business?

Well, we would have more business based on market indices, and CRU would just be one, [not used] for shorthand.

At least right now, the way the business has been running, our North American flat-rolled mix has been about a 60/40 contract versus spot mix.

And by contract, we mean something where there is a buying commitment for some period of time.

Of that 60%, about half of it would be market related, so that would mean 30% of our total would be market related.

CRU would be most common.

It could be monthly.

It could be quarterly.

It could be semi-annual.

Then the other piece would be some firm and some that would have cost collars on it.

Those would both be much more stable, Chuck.

The firm is firm, and the cost base would be typically with collars that provide stability within a pretty decent range.

What dictates for us what's best is what we work out with our customers.

It really allows them to match up their pricing with what their end-use requirements are.

We've explored that pretty well in the last couple years, and I think we've arrived at pricing structures which work pretty well for our customers, pretty well for us, allow markets to flow through, and doesn't result in a lot of pent-up changes that don't get resolved, and hat causes lots of difficulty.

So, really, to answer your question €" and it's a long answer; I'm sorry €" we really worked it out with our customers based on what's best for them and what meets our expectations.

Because people like GM are beginning to tell us they want to change the way things are priced for the next contract.

Obviously, I don't expect you to talk about that on this call, but I'm trying to get things into some kind of perspective.

Well, I think in the auto sector, there would just in general would still be a fairly stable pricing mechanism in most cases.

It could be firm.

It could be cost based.

That would be what's most prevalent in that area for us.

That's fine with us.

Thank you very much.

Thank you.

Our next question comes from the line of David Gagliano of Credit Suisse.

Please go ahead.

Thanks for taking my question.

Just coming back to the commentary about flat-rolled pricing for a second, you gave us some figures for the Q3 spot pricing, for that 40% of your business.

I think you said about $500 per ton is a reasonable assumption for the 40% of your business that was spot.

Is that right?

Is that €" first of all, is that right?

Well, I may have shortcut it.

I was just trying to give an example of how the CRU process works.

Again, if you take the average of the August/September/October sort of midmonth, official CRU assessment, that would have been around $500, a little bit less than that.

If you look at that same time series one quarter back, it would have been about $400.

That gives an indication of a change of $90-something.

We're not necessarily pricing right at that index.

We may be above that in most cases, but that would be what the relevant change would be.

In some cases, our structure would be X percent of that change is what flows through.

Some would flow through on a delayed basis.

So there's different ways to do it; it just depends on how we've worked it out with the customer.

But just as an indication of what the quarter-to-quarter change would be, that's one indication.

Okay.

I'd encourage you to look at the change, not the absolute, necessarily.

Okay.

Basically what I'm trying to do is back into what the contract price was, average, for the quarter.

Yes.

What was the contract price, average, for the quarter?

I haven't backed into that yet, either.

Okay.

Well, let me ask this question, then €" obviously, it was a bit higher than spot.

I'm wondering if you €"

Well, you have to look at mix as well.

I'm just giving you hot-rolled prices there.

You can look at €" we have CRU contracts that run against coated and cold-rolled as well, so I think you have to look at the total mix.

Okay.

We have tin plate prices, which are different yet and run to a different structure.

So the total price we give is for all the products together.

All right.

Given that we're heading into, obviously, a number of negotiations, can you share some general comments with regards to your views towards the contract component on your flat-rolled business for 2010?

Sure.

I think we think we're going to be satisfied with where we land with our several customers.

We do have a lot coming up at the end of the year, some in the first quarter, some mid-year.

But because of the flexibility element that's been put into a lot of these structures, there isn't the same maybe degree of anxiety each period as we go through it.

I think we're arriving at prices that we're going to be satisfied with, our customers are satisfied with.

And now, much more than two or three or four or five years ago, the general trend of assessed market prices €" and you can use any of the assessments, because they're all roughly the same and all more or less accurate €" that trend is going to be a pretty good indicator.

Generally speaking, on the way up, we'll be a bit behind it.

On the way down, we'll be a bit ahead of it.

But eventually, we're going to be following the trend of what those indices are.

And I think if we were just sitting here today and everything stayed exactly as it was, for the business we call contract, all of '09, all of '10, it's probably a push €" a little bit up, a little bit down, but close to a push.

That would be my best guess.

Okay.

All right.

Perfect.

Thanks very much.

Thank you.

Our next question will come from the line of John Tumazos of John Tumazos Very Independent Research.

Please go ahead.

Was the idling decision for the 14 furnace scheduled due to maintenance?

Was it due to market conditions?

Or was it because of a hiccup?

And then secondly, should we assume that the level of corporate employment will be roughly steady for the next six months and that most of the rationalization that would be done has already been done in the last 12 months?

Let me take them individually, John.

The #14 decision, as I tried to comment earlier, I think we do want to do this repair project to get the furnace back to its full abilities, because we think that's the right thing to have in the long term for the Company.

We could do it sooner.

We could do it a little bit later.

But it's a combination of having the materials available to do it in what is seasonally a typically slower period, and with the slight order book slowdown, all that together said to us this is probably the right time to do it.

If we would see some major change in the marketplace, we may decide to do it a bit later.

So it's a combination of both ability and timing which seems to be convenient.

So that's the best I can tell you on that.

On the employment side, we still have €" the last number I think I saw was 3750 people on layoff inside the Company, both management and hourly rated employees.

We had brought back a lot that we needed to run the restart of facilities, but we're trying to run those with fairly lean organizations when we're back at it.

We've made significant reductions in our management staff in general through early retirements and layoffs.

I don't know whether we're at a steady state or not.

If business improves, we'll have to bring some people back, I don't think as many as we had to begin with.

If we have continued deterioration of the market, there could be additional layoffs.

So it really depends on what the market tells us.

Thank you.

Thank you.

Next we'll go to the line of Bob Richards with Iron Edge Research.

Please go ahead.

Thanks for taking my call.

The idle facility costs, just to clarify, those are incremental due to facility start-up?

No.

No.

[How about] Gretchen, why don't you do that?

Yes.

The start-up costs were the $65 million.

That was really a new element in this quarter related to starting up some of our facilities that had been idled.

The idled facility carrying costs really are the fixed-cost burden of carrying facilities that aren't operating.

So that was $165 million in the third quarter.

But those are all hitting the bottom line €"

Exactly.

Yes.

(multiple speakers) anything like that.

Right.

Any further comment on Keetac, what the short-term plans are there?

No.

That's also a gametime decision.

It depends on what our iron requirements are and as it €" we're considering our hand, and we could probably respond there quickly, But the fact €" with the lakes beginning to freeze up and shipping not being available, the later we go, the less likely it is that we'll need any response out of Keetac in the near term.

So a gametime decision, still watching it, but we think, given what we expect to be making in the fourth quarter or early in the first quarter, we're probably okay with what we have.

Okay.

Thanks very much.

Thank you.

We'll go to the line of Brett Levy of Jefferies.

Please go ahead.

Can you talk a little bit about the pipe and tube market, if you can break it down into subsectors?

It sounds like there's about a year's worth of supply.

Is there sort of subsectors where it's a little bit better or it's a little bit worse?

Then can you talk a little bit about sort of when you see pricing hitting a trough?

Okay, but what was the last part about a trough?

Dan, did you hear that?

I'm sorry.

You're breaking up a little, Brett.

What was your last piece?

When do you see pricing hitting a trough?

Okay.

Well, I mentioned in my prepared remarks that we may be seeing an overall bottoming of prices now, and it will be different by OCTG, different by alloy, different by carbon, different by line pipe, but it seems like there might be some bottoming in prices this quarter, maybe.

We're not saying that for sure, but it may be €" it sort of does €" feels that way.

I think the business conditions in the alloy and heat-treat higher application products, higher metallurgical products are better.

That's where the development work on the shale plays continues, and that's what they need right now.

We've got an excellent supply line there, able to respond quickly at Fairfield and beginning to bring up some of our well facilities to respond quickly as well.

So that is in better shape €" not good shape, but better shape.

Still lots of Chinese inventory to contend with.

The carbon OCTG market has the largest inventory overhang.

That's where the real tsunami of imports came in in the third, fourth and first quarters.

So I think that's going to take longer to work through.

Line pipe inventories are still on the high side, but are moving in the right direction.

It seems like we might be getting some better inquiry activity on line pipe, so line pipe may be showing some signs of life.

But I'm really reluctant to chart a call here, or a new direction.

I think we're just telling you what we're observing in the marketplace.

But for the real trends to develop, it's going to take a bit more time.

All right.

Thanks much, guys.

Thank you.

We'll go next to the line of Jeff Cramer of UBS.

Please go ahead.

Just if we can get your comments on the pension contribution, $140 million, and just I guess where you €" kind of sources and uses of liquidity going forward €" well, not sources, but kind of use of the liquidity going forward and if you have any outlook on CapEx and further pension €" voluntary pension contributions next year.

Yes.

It's probably a little early to be talking about next year's CapEx.

We'll be working through our plans for next year and meeting with our Board and discussing that.

We'll have something to say about that at the end of January.

We made the $140 million contribution.

That was a voluntary contribution.

That's the size of contribution that we've made the last couple of years.

That's probably a pretty good rule-of-thumb level of contribution for that.

It approximates our normal cost, so it's a pretty good thing to fund every year.

So we won't be deciding what we're going to do next year just yet, but that's been a pretty good number just for working purposes.

Okay.

And on the €" I guess with regards to cost-cutting that you guys have made, I guess do you have a figure for that, what you €" how far you've gotten this year and how much of that you expect could stick over time or versus what may be temporary?

Just in cost-cutting in general?

Yes.

It's really a harder question, I think, to answer, but I can give you an example, I guess, on the SG&A front, for instance.

If you get our 10-Q, we have disclosed our SG&A for the quarter.

If you strip out the amount of that that relates to pension costs, because we had about a $30 million increase in the quarter in pension costs, just as an example, our SG&A quarter to quarter, third quarter of '08 to third quarter of '09, is down probably about 20%.

So there are some €" we have made some significant efforts to reduce costs, might be a little bit masked by the increase in the pension costs that we had this year there.

Okay.

Thank you.

Thank you.

We'll go to the line of Wayne Atwell of Casimir Capital.

Please go ahead.

Thanks for all your color on the environment.

I have a two-part question.

The first part is a little obvious.

The first part was, what has the impact of the weaker dollar been on your business?

The second part is, I personally look for the dollar to continue to weaken based on the deficits and the level of debt.

Are you running your business on the basis of a continuing weaker dollar, or, as you say, is that a call you make at the line of scrimmage?

Well, that's a good question.

It's one that we watch very carefully.

We tend to watch the dollar and euro just because we're in those two communities.

It's, I think, a positive for our business, for obvious reasons €" tended to keep imports in a better position just from a value standpoint, gives us a little bit better competitive edge.

And then it does favor some of our customers who are big metal users and big exporters.

We think that's a good thing.

I don't think €" we're not in favor of a chaotic currency situation.

That's not in anyone's interest.

But I think a dollar that is a little more realistic, particularly against the Chinese currency, would certainly do a lot to rebalance some of the excesses which are in the system.

The longer they run, the more dangerous it becomes of having a real currency row.

So I think a gradual recognition of what the true value is, given the excesses we have and all the deficits we have, is inexorable and it's probably a net positive for our business.

It doesn't really affect, necessarily, what we do, but it might give us a view about the future direction of the market, which might then influence some of our assessments about capacity and capital, etc.

So that's about the best we can tell you right now, but I think your diagnosis is one that we don't really disagree with.

Thank you.

Thank you.

Our last question will come from the line of Sal Tharani with Goldman Sachs.

Please go ahead.

John, the Granite City furnace you are shutting down, was it shut down earlier this year also?

Oh, yes.

Both furnaces at Granite City were down for a number of months.

Okay.

I just want to understand, what was the logic of bringing all these things up?

Because you are shutting it down in a few €" what, less than two months again?

Well, a couple things.

We eventually have to do some work on this furnace anyway.

Let me just remind everybody, take you back a bit.

In 2008, during most of 2008, the first eight and a half or nine months, we ran very hard and didn't do much work at all because the market was positive and we wanted to make as much as we could.

So we didn't do much furnace work then.

Since then, we haven't done any, because we didn't run very much and didn't want to spend the money to do it.

So we brought some things back on because we had customer orders that we wanted to keep our share.

They were important customers, and we thought that was the right thing to do.

Now if we need to take something off, we're going to try to do it in a manner that facilitates doing some additional work.

Our hope is that it might just be for seasonal purposes and we get back to work more quickly, but we just don't know what the market is going to bring us.

So the logic was, we wanted to keep our share.

We tended, Sal, not to get ahead of it, by the way.

We tended to come back perhaps a little bit behind the market.

Our supply lines got a little bit stretched.

We got to where we were a little behind on the order book, but eventually we took care of all of our customers' critical needs.

By doing that, we created some of our own visibility.

So we're able to run a little bit longer with our configuration as we retire an order book that we already have.

We were hoping that might bridge us through a period of possible slowness in the season, but that may not work.

If things change, we'll continue to run.

If not, we'll have to get our facilities in balance with the market.

Have you become better at closing and opening furnaces or shutting down and restarting as €" because we always thought that you only turn a furnace up or heat a furnace when you think there's a longer-term €" several quarters of demand there.

Yes.

Well, I'd rather not get good at it, because that means we have to do it a lot, and we'd rather not do it at all if we can help it.

But I think we've learned a lot through this last cycle.

Of course, we had furnaces that were off and plants that were effectively closed for extended periods, and there was a lot of work that had to get done to get them back and running.

In this case, having one furnace off for maybe a short period of time, not completely cold and trenched, but just banked, that's a much less invasive process than having to go through what we went through in the earlier part of the year.

So I think we are €" I'm not sure if we're better at it.

We think we can do a reasonable job of it.

We prefer not to do it at all, but it's the cards that we're holding right now.

Thank you very much.

Thank you.

That was our last question.

I'll turn it back to our speakers for any closing remarks.

Thank you, Keeley.

We appreciate everybody being on with us.

We will talk to you again in January.

Thank you.

Thank you.

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