美國鋼鐵 (X) 2009 Q4 法說會逐字稿

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

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

Later we will conduct a question and answer session.

Instructions will be given at that time.

(Operator Instructions).

As a reminder today's call is being recorded.

Starting off today, your hosting speaker, Dan Lesnak.

Please go ahead, sir.

Good afternoon and thank you for participating in the United States Steel Corporation fourth quarter earnings call conference call webcast.

We'll start the with brief introductory remarks from US Steel Chairman and CEO John Surma; next I'll provide additional details for fourth quarter and then Gretchen Haggerty, US Steel Executive Vice President and CFO will comment on the outlook for the first quarter of 2010.

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

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

For your convenience the forward-looking statements and risk factors that could affect those statements are referenced at the end of our release and included on our Annual Report on form 10-K and 10-Q in accordance with the Safe Harbor Provisions.

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

Thanks, Dan and good afternoon, everyone.

Thank you all for joining us this afternoon.

Earlier today for the fourth quarter, we reported a quarterly loss of $267 million or $1.86 per diluted share, an improvement from the third quarter as we reduced our losses in our North American Flat-rolled segment and our Tubular segment returned to profitability.

I'll have some more details on the figures in a moment.

First let me just reflect that 2009 was an extremely difficult year for our Company and our people, but we remain focused on the continuing improvement of our employee safety performance.

For the year, we maintained our positive trend of reducing both our global rate of recordable injuries and our global days away from work rate, our fifth consecutive year of improved employee safety.

The global economic crisis that began during the fourth quarter of 2008 resulted in dramatic unprecedented reductions in demand for nearly all of our product lines.

As one measure of the severity of the crisis, domestic steel industry capacity utilization as reported by AISI averaged 51% in 2009, compared to an average of about 86% over the previous 20 years.

Our strong financial performance and balanced approach to capital allocation in recent years placed us in a strong position as we enter this downturn, but there was no way for us to escape the effects of a global recession of this magnitude.

As we have reported throughout the year, we took a number of steps that helped us to enhance our liquidity, maintain a solid balance sheet, and position us for success in the longer term.

Those measures included idling all or portions of numerous steel making finishing raw materials and tubular operations in the US, Canada, and Europe while operating our remaining facilities at reduced levels to match our customers lower demand requirements.

On the financial side we reduced our quarterly dividend, completed successful offerings of senior convertible notes and common stock and renegotiated the provisions of existing financial covenants with lenders.

We curtailed capital spending, initiated substantial cost reduction activities at all locations, including reducing our non-representative workforce through attrition and an early retirement program.

We agreed with the United Steel Workers to defer certain mandatory trust contributions, froze hiring, and eliminated merit pay salary increases, discontinued the Company match on our 401 (k) program, reduced fees for Board of Directors and base salaries for all general managers and executives.

These were very, very difficult decisions that were given careful and thoughtful consideration.

We realize the profound impact these actions would have on our shareholders as well as our employees, their families, and the communities where we operate and live, but the difficult steps we took are now enabling our Company to take advantage of what appears to be the very early stages of an overall economic recovery.

Improved order rates in late 2009 and so far in 2010 have allowed us to increase our operating levels, and spot market prices have been increasing.

We believe this reflects in part a restocking process since we believe our apparent demand throughout 2009 was well below real end use demand, and it appears that our customers in several of our product lines are increasing their inventories toward more appropriate levels.

The continuation of this trend will depend, of course, upon the overall duration and strength of the general recovery.

Now let me get back to our results.

We reported a fourth quarter loss from operations of $329 million, which you may have noted included a pretax charge of $49 million related to the accrual of estimated environmental remediation costs at a former production site in Utah.

This charge reduced net income by $31 million or $0.21 per diluted share.

Net interest and other financial costs in the fourth quarter of 2009 included a foreign currency loss that decreased net income by $11 million or $0.07 per diluted share due to the re-measurement of a US dollar denominated inter-company loan to a European affiliate and related Euro-US dollar derivatives activity.

Our North American Flat-rolled segment had an operating loss of $284 million in the fourth quarter.

Our Flat-rolled shipments increased almost 18% to 3.2 million net tons, primarily reflecting improvements in the automotive and service center markets.

Our average realized prices increased $28 to $633 per net ton as spot price increases in the third quarter were realized in our quarterly index base contract prices.

The Flat-rolled results included approximately $80 million of continuing employee and other costs associated with our idle facilities, as compared to $165 million in the third quarter.

In the fourth quarter we had increased facility repair and maintenance cost as we completed maintenance work in a number of our steel making locations to improve available capacity in anticipation of increasing demand.

We continue to adjust our operating configuration and are currently making steel at six of our seven North American steel making locations, with the exception being our Lake Erie Works where our labor agreement has expired and we have not reached a successive agreement.

Now, also, as we indicated previously, we took the Number 14 blast furnace at Gary Works down for repairs late in the fourth quarter and expect to complete that project later in the first quarter.

We were operating all of our otherwise available blast furnaces at the end of the fourth quarter.

We essentially remained at breakeven in the fourth quarter in our European segment, as the impact of higher raw materials prices and slightly lower shipments and capability utilization, primarily due to a planned maintenance out age for one of our three blast furnaces at US Steel Kosice, was largely offset by an 8% increase and reported average realized prices.

For our Tubular segment, we returned to profitability, end of fourth quarter, with an operating income of $39 million, a significant improvement from the $21 million loss in the third quarter, but still well below levels we have achieved in recent years.

Shipments were 207,000 net tons in the fourth quarter, that's up 37% from the third quarter levels, as order rates continue to increase primarily for alloy and heat treated products due in part to continuing development of shale gas reserves.

In the fourth quarter, average prices of $1,462 per net ton were lower than the third quarter by $12 per ton.

Our Tubular markets continue to be negatively affected by high inventory levels, primarily of carbon grade OCTG caused by high levels of unfairly traded and subsidized tubular imports from China in prior quarters.

Although we have increased our operating levels at our welded pipe facilities in East Texas, our overall operating rates are still well below historical levels.

With that I'll turn the call back to Dan for some additional information about the quarters results.

Dan?

Thanks, John.

Capital spending totaled $149 million in the fourth quarter and was $472 million for the full year.

Depreciation, depletion amortization was $177 million in the quarter and $661 million for the year.

We currently expect depreciation to be approximately $670 million in 2010.

Pension and other benefits costs for the quarter totaled $98 million, and we made cash payments for pension and other benefits of $138 million.

For the full year 2009, pension and other benefits costs totaled $462 million, which included $93 million related to various workforce reduction programs and the sale of the EJ&E Railroad.

Total costs for pension and other benefit plans are expected to be approximately $420 million in 2010, compared to the $462 million in 2009.

Excluding the $93 million of charges in 2009 related to the workforce reduction programs in the sale of EJ&A Railroad, these costs are expected to increase by approximately $50 million, beginning in 2010.

The Company payments for these plants in 2009 were $657 million which included a voluntary contribution of $140 million to our main Defined Benefit Pension Plans and approximately $75 million related primarily to voluntary early retirement programs.

Our 2009 payments also reflect our agreement with United Steel Workers to defer the 2009 mandatory contribution of $75 million to retiree, health, and life insurance trusts until 2012.

In 2010, we expect to make payments of approximately $570 million before considering any voluntary contributions to our main Defined Benefit Pension Plan, and as also agreed with United Steel Workers, we could further reduce these payments by up to $75 million should we choose to use the mandatory contribution we made in 2008 to cover 2010 retiree, health, and life insurance payments and then refund this amount in 2013.

At year-end, our pension plans were underfunded on an accounting basis by approximately $1.7 billion and other benefit plans were underfunded by approximately $2.9 billion, as compared to an underfunded status of $2 billion for pension plans and $3.1 billion for other benefit plans as of December 31, 2008.

Net interest and other financial costs total $56 million in the fourth quarter and included a foreign currency loss of $11 million.

Our effective tax benefit rate was approximately 30% for fourth quarter, 24% for the full year.

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

fourth quarter 2009 results included a $36 million catch up benefit adjustment as a result of an increase in the actual annual effective tax rate, as compared to our previous estimate.

The geographical mix of our future pretax results could have a material impact on our reported effective tax rate.

Lastly, the weighted average shares used for EPS purposes for the third quarter was 143.4 million shares.

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

Thank you, Dan.

2009 cash flow from operating activities was negative $61 million, including the impact from the $140 million voluntary contribution we made to our main Defined Benefit Pension Plan in the third quarter.

The benefits from working capital reductions for the year of approximately $1.3 billion substantially offset our operating losses.

Our liquidity remains strong as we ended the year with $1.2 billion of cash and total liquidity of $2.5 billion.

Now turning to our outlook.

We expect to report an overall first quarter 2010 operating loss in line with the fourth quarter of 2009 as gradually improving business conditions are not yet fully reflected in our operating results.

We continue to experience improved order rates from several of our end markets; automotive, service center, converter and appliance customer order rates in North America and Europe are at or near their highest levels in the last 12 months, while in other markets such as construction in North America, demand remains soft, but due to the low levels of inventory and the anticipated seasonal increases in activity at the end of the first quarter, our construction order book remained stable.

A gradually strengthening economy should result in improvement in real demand, while apparent demand will likely be positively influenced by the restocking of the manufacturing supply chain which we believe is under way.

Relatively low levels of Flat-rolled product imports, if continued, are also expected to support improved order rates.

Our Tubular operations are also continuing to experience favorable demand trend, most notably in alloy product at our welded operations in East Texas.

At the same time, spot market prices are increasing across all of our segments in response to increased order rates and global raw material cost pressures.

We continue to believe that the US and global economies are in the early stages of a gradual recovery.

While we are becoming more optimistic, primarily due to improvements we're starting to see in the manufacturing sector, we remain cautious in our outlook for end-user demand.

Flat-rolled results for first quarter 2010 are expected to be comparable to fourth quarter 2009 as the benefits of increases and average realized prices in shipments and reduced facility repair and maintenance costs are expected to be offset by the absence of approximately $55 million of favorable effects from LIFO inventory liquidation and adjustments to employee lay off benefits.

Average realized prices are expected to increase from fourth quarter 2009 as we expect to begin realizing the impact of increasing spot market prices later in the first quarter.

Increases in our index based contract prices would be realized later as higher published market price assessments enter the index calculations for future periods.

We're currently making steel at six of our seven North American steel making locations with the exception being our Lake Erie Works, which represents approximately 10% of our annual Flat-rolled raw steel capability.

We expect to complete maintenance work on our largest blast furnace, the Number 14 blast furnace at Gary Works, late in the first quarter and have all available capacity in operation at these six locations before the end of the quarter.

Overall, raw steel capability utilization rates are expected to increase from the fourth quarter of 2009.

first quarter 2010 results for USSE are expected to be comparable to the fourth quarter of 2009 as the benefits of increased shipments and operating efficiencies are expected to be offset by higher raw material costs.

While Euro based transaction prices are expected to be comparable to the fourth quarter, reported average realized prices are expected to be lower due to foreign currency translation effects.

We expect to complete maintenance work on the Number 3 blast furnace at US steel Kosice in early February and operate all five of our blast furnaces in Europe for the remainder of the quarter.

We expect our Tubular operations to remain profitable in the first quarter; however, results are expected to decrease from the fourth quarter as the benefits have increased shipments are expected to be offset by increased costs as we continued to increase our production to meet increased order rates, as well as the absence of the $10 million of favorable fourth quarter items related to employee lay off benefits and LIFO inventory liquidation.

Seamless and welded Tubular product prices are expected to improve throughout the quarter and as a result of recently enacted price increases; however, reported average realized prices are expected to decrease slightly as compared to the fourth quarter due to a higher proportion of welded Tubular product shipments.

We expect increased operating rates at all of our pipe facilities in the first quarter, most notably our welded pipe facility in East Texas.

These expected increases should also benefit our Flat-rolled operations that supply substrate requirements to our welded pipe facility.

Capital Expenditures for 2010 are expected to total approximately $530 million and remain focused largely on environmental and other infrastructure projects.

We continue to evaluate investments of long term strategic importance, including projects to invest in production of coke and coke substitutes, given that some of our existing coke batteries are approaching the end of their useful lives, projects to reduce coke requirements in Serbia through coal injection, to enhance our Tubular operations in order to more efficiently serve customers increased focus on shale natural gas resources, and to allow us to increase our participation in the automotive market as vehicle emission and safety requirements become more stringent.

In light of the significant capital committment that such projects would entail over the next several years, we may seek to secure some long term funding for such projects and for general corporate purposes prior to committing to such projects.

Dan, that finishes the outlook.

Thank you, Gretchen.

Kevin?

Can you please queue the line for questions?

Absolutely.

(Operator Instructions).

Our first question is from the line of Michael Gambardella, JPMorgan.

Please go ahead.

Yes, good afternoon.

Hi, Mike.

I have a question on the index pricing on your sheet business.

Could you give us a little color on how that pricing is delayed in terms of realizations?

Sure.

It's a fairly mechanical process and there are a number of different ways we do that with customers, they're individual deals, but just to give you an example.

If there is a quarterly pricing formula, we would take the pricing formula for the most recent three months versus the previous three months, there would be a change and that would then be applied to whatever the agreed upon base price was and that would then guide us to the next three months and then we would do that again, so it would be an average of the monthly assessments by some outside source.

CRU would be one we use a lot.

We also have monthly adjustments where there would be, again, an agreed upon base price, not necessarily the assessments you would see by the third party, but an agreed upon base price between we and our customer and we would agree then on an adjustment either 100% over some portion of the change in the monthly index so if the agreed upon price is $500 and the index for this month and last month changed by $15 up or down, we would change our price by $15 up or down and would become $45 or $515.

Does that help?

Yes.

How much is quarterly versus adjusted monthly?

I'm not sure I have that immediately in my hands, but quarterly would be I think a significant piece of what our overall market index based pricing would be.

It would be significant, and it would have an affect on our quarterly reported realized prices.

So just hypothetically, a spot price goes up in December, you would take the average of whatever the fourth quarter was?

Yes.

And then look at that and then apply the increase on the average going forward?

Yes, I think that there's a variety of mechanisms, but the way it would work is we would take, in one instance, the average of October, November, December, whatever the monthly assessment was, and we compare that to the average for the previous three months monthly assessment and that would yield a change.

Whatever the agreed upon base price was would then be adjusted based on that change and that would become the price for the first quarter, and then we would do it again; so, if we're on a quarterly mechanism, if there was a December change, it would be at least partially included, and in this instance, of course, spot prices were down during most of the fourth quarter, maybe up a bit in December, so the increases that have been publicly announced and we're enacting with our customers in the first quarter to the extent that we're on a spot basis, we'll get that first quarter.

If it's on an index we most likely will get that in the second quarter, which, by the way, is precisely what happened between the second and third quarters, 2009.

Okay, last question just on CapEx.

You talk about some of the CapEx projects going forward.

What is the one regarding the Tube and you referenced the shale natural gas markets.

Are you losing share before you do this project or are you keeping your share in that business?

Well we hope to be increasing our share to be honest about it, and if the developments in the major shale resource plays play out, as they may, we think there's great opportunity there.

Our existing compliment of facilities are sufficient to allow us to enjoy that for quite some time but in the medium term, it may well be that our particular capacities will become limited initially more likely on heat treating and finishing, so our thinking is perhaps along the lines of some additional heat treating and finishing capability, in the right location for the right size range, to allow us to improve our throughput if that would be the limiting factor and as further developments would play out if in fact these Resource plays really do develop the way we expect and hope that they will, then we have potentially even further phases of that that could increase absolute Tubular production, so we've got a variety of ideas none of which are concrete enough to talk about now, but initially we focus more, most likely, on finishing and heat treating capabilities.

Thank you, sir.

Our next question is from the line of Kuni Chen from Banc of America.

Hi, good afternoon, everybody.

Just hoping you could comment a bit on the utilization, looking forward.

You're at the mid-sixties in the fourth quarter and you've said that should improve here as we look into 2010.

Number one, are you -- do you feel like we're getting closer to a level where Flat-rolled can breakeven again, and then can you also try to break out the impact that Tubular is having on higher Flat-rolled utilizations?

Sure.

I'll take it in reverse order, Kuni.

I think, as Gretchen pointed out in her comments and as our release notes, on both sides, but particularly on the welded side to the extent we're improving our throughput on our welded pipe mills, that's hot roll coming off Granite City and improved realization, but still given the level we're talking about it's not a huge change.

It's moving in the right direction; its several hundred thousand tons, perhaps compared to zero and that's great, but it's not going to have a huge change on our utilization percentage quarter-to-quarter, but certainly moving in the right direction.

On your first question about whether we're moving towards a breakeven point, certainly the higher utilization the better off we're going to be, better cost absorption, but a lot is going to depend on the cost price relationship and that is going to reflect full prices and scrap prices and product prices.

The fact that during the first quarter, we're fulfilling a lot of our customer commitments rendered at lower prices in the last quarter, we're not matching up well with what seems to be in the market now, we'll do much better on that in the second quarter; and with our Gary furnace, our largest furnace off for most of the quarter, not entirely but most of, and with our Lake Erie blast furnace down, which is roughly 10% that kind of puts a ceiling on how we'll get it even if we run perfectly every day between now and then, so a long way of saying we're moving in the right direction, but as our remarks indicated, we're probably not going to make that point in the first quarter.

Just a quick follow-up, on the index based contracts, what percent of the overall mix is that?

The index based or market based, other than cost, would be about 30%, probably something like that.

We would have -- spot would be about 40% roughly, the index based activity would be about 30% and again, of that 30%, I think two-thirds of that or 20% of the total would be quarterly and 10% of the total would be monthly.

Firm contracts would be about 20%, usually and cost about 10%, so I think that adds up to something like 100.

Thank you, sir.

Our next question is from the line of Tony Rizzuto of Dahlman Rose.

Thank you very much.

Good afternoon, everyone.

Hi, Tony.

Hi, John, Gretchen.

I've just got a couple questions here.

First a follow-up on Tubular.

How important are you finding it to have more threading capability and is this one of the issues that you're alluding to on the finishing end?

It is.

Threads, and other services like that are important from a commercial standpoint, and we've got a variety of developments both internally and externally we're working on to be able to satisfy our customers.

I think we're doing a decent job of satisfying them now; it's not holding us back in any way, but we're not being complacent and working on our own premium connections, some of which are already in the market and others are under development.

And we have other opportunities we're exploring, so it's important to us and, at least in my current thinking, I'm not sure it's a big piece of the capital we might be expending, but it's an important piece that will take some capital over time, and we really have to do it and we've assured our customers we're going to.

Okay and if you could help me, if you could frame for me the magnitude of the capital projects that you guys are looking at, when we were in Pittsburgh, I remember that we were talking about the coke oven batteries and there were different options that you were looking at.

One an electric furnace route that would be on the lower end of the capital spend, and then there was a possibility of a larger spend and now with what you guys are evaluating with regard to Tubular and PCI, could you find of frame this for me?

Yes, I'll give it to Gretchen in a second.

I think she might have better numbers in her head, but just in general the range of things we're looking at would be, really nothing that hasn't been talked about before, but on the coke side, that would be an important strategic priority, as it has been for a number of years, we've already completed the one non-recovery coke battery at Granite City through a third party and that's up and running and was an important step for us.

We've described how we've been looking at the Herbonics technology, initially in Alabama.

We may look at it in other locations, and it does have, as you alluded to, the opportunity to be ramped up and down much more easily and safely than traditional batteries of any kind, and on the Tubular, as I've talked about, more finishing capability.

So we've got a variety of projects, also on coke the project we started also near Pittsburgh at Clairton, that we may or may not decide to get back at in the same form or different form.

Those are all prospects that we're going to try to draw to some conclusion as quickly as we can, but we're not ready to name them, but I'll let Gretchen talk generally about what kind of numbers could be involved.

And Tony as you saw what we did in 2009, we started with the capital budget of about $740 million and then ET outset, at the beginning of the year, we took steps to try to reduce that more to the $400 million level, and then we ultimately ended up spending $470 million so I think, and it included in that was a continuation of our ERP project, our Enterprise Resource Project that involves some significant systems projects we're doing across the Company, so we actually continue that.

That's somewhat of a strategic project, if you will, that we continued in our spending, so I kind of bracket $400 million to $450 million as the base capital spending level that we have.

We could probably drive it down lower if we really had to, but, order of magnitude, if we want to do infrastructure stuff and systems project that $450 million has worked for us, so we've announced a capital budget for 2010 of $530 million, so there's a little bit more spending for some other things that we really had to defer in 2009.

Pretty much anything that was discretionary was market based, cost based type projects, so we've got a little bit of spending for the project that John has described for you but the real spending for those things would fall more in 2011 and 2012 time frame because we do a thorough job of engineering and designing our projects and getting them under way, so it would take a little bit of time.

So that's kind of a long introduction to saying that the types of projects that we're looking at here would probably increase our capital spending on average over the next couple of years in the $200 million to $250 million range over and above this ERP project that we have, so when we look at that -- a couple hundred million a year on average -- obviously, the bulk of that given our budget at $530 million this year, would be in the later years.

Okay, that's great, and how, Gretchen, are you thinking about working capital requirements in 2010?

Well, it probably depends, Tony, on the speed of recovery.

And I think if there's a gradual recovery, there's probably less of a significant consumption of working capital and it's up and down maybe a couple hundred million there.

If there's a very sharp recovery, you saw that we were able to draw down, reduce working capital by $1.3 billion in 2009.

I don't think it would be quite that much, it could be a substantial portion of that with a very sharp recovery.

We've seen that in the past particularly on the receivables side that can build up, so I think maybe it's just going to depend on the speed of recovery, but I think we could manage whatever scenario we have.

Thank you.

Our next question is from the line of Timna Tanners, UBS.

Please go ahead.

Wanted to ask you about the Gary comments.

So as I understand it, and I'm sure you could give me the precise numbers, Number 14 is your largest and most efficient facility; and if you think about starting that back up, if I recall, it's 4 million annualized tons, how does that change the way you configured your mills?

I know you said you have all mills available to run, but how do you think about the configuration in light of the market and in light of some of your colleagues also restarting capacity?

Well, our competitors will do what they are going to do, but that's a good question.

It's hard for us to tell you with precision today, because that's a little ways away yet, but we would, when we bring Gary 14 up it is a very efficient furnace and certainly we want to make sure we get it back in production as soon as we can.

We hope that will be some time towards the end of the first quarter as I described, but projects are projects that could be sooner or later.

Assuming it's ready to go we'll bring it up in a safe and efficient way, and we'll take a look at the order book.

If the order book is sufficient, allowing everything else to stay operating, we'll run everything and maybe we cut back one of the other smaller furnaces a little bit we can do that.

Blast furnaces aren't on or off, they have some range of operating capability that still has efficiency with it, and we don't have a lot of other necessary maintenance, because we did a lot of that work in the fourth quarter, as we tried to allude to in our release, so it depends on the order book; and I'd like to think when we bring it up, we'll run it all, but that depends what our customers ask us for.

Okay, great.

One more question, similar on the opportunity in auto.

Certainly there's been a sharp improvement in production rates and over 2009.

What are you looking for to get better color on improvements from this level given that you've already seen a nice recovery in some of the inventory within the auto channel?

Yes, I don't know that we have a crystal ball in that.

I think we look at those schedules that they tell us and they go out a little ways, but that so far has been encouraging, and certainly what we're looking for in 2010 at the moment looks pretty good compared to 2009.

But almost anything looks pretty good compared to 2009 and it was a very, very difficult year for the auto customers and for us of course, so I would look for broadly and say if the overall economy continues to gradually improve, if the employment picture at least stabilizes and maybe there's some improvement, and if the flow of credit and overall consumer activity improves, and I think that sets up for a potentially good year in the automotive sector.

We do have 3 million new drivers a year, and they need cars to get to work and there's pent-up demand, you've heard all the stories before, I won't repeat them.

But I think there could be a pretty good year if the overall economy and its attendant pieces, financing, employment would support it, I think that's the biggest question we have.

We look at inventories, dealer inventories indecent shape, we look at build schedules, what the overall consumer preferences are and that all looks okay, but it's from a really low year in '09 to '10 and we'll see what the consumer decides.

Thank you.

Our next question is from the line of Luke Folta of Longbow Research.

Good afternoon guys.

Just had a question first off, just trying to understand some of the moving parts in your North American Flat-rolled business on the cost side.

Just looking at results sequentially and you have prices up $28 a ton, half a million more tons.

Even if you assume a pretty modest contribution margin on those additional tons, it seems like -- I guess I assumed a little bit more would flow down to the EBIT line.

I'm trying to understand what costs increased in the quarter that might have offset some of that?

You're looking at--

fourth quarter to first quarter Luke?

Sorry, it would be third quarter to fourth quarter.

I see.

Well, I think among other things, we had quite a bit of maintenance work and start up costs and outage work of the like because we were taking furnaces down, bringing them up.

We had a lot of work on blast furnaces, steel shops, really everything that had not been done and had been pushed off for the better part of probably 12-18 months and as we got into the fourth quarter later and we saw order rates beginning to improve we felt we had to get enough capability ready to be able to satisfy our customers and we had to spend some money to do that so I think that would be maybe one thing that wouldn't be as visible.

We did a lot of work we said in our release we were running everything we had at the end of December and to be in a position to do that it took some work and spending.

Gretchen anything you want to add to that?

It captures it, John.

Can you give us a feel for how much that was?

It's more than $50 million I would say just in general and I'm trying to compare it to a change from one period to another.

The change, the effect of something on the bottom line could be easily at that number or more.

And then just to follow-up on that, would you expect some of these costs to continue in the fourth quarter because we're again looking for prices utilizations up and same kind of EBIT.

You mean in the first quarter?

Yes, I'm sorry.

No, not necessarily.

I think we've got a lot of that work done.

There is some of that related to the Gary 14 project, but net-net it's probably going to be similar or less I would think, but there are some other costs that will flow through.

Scrap is a big cost increase for us in the first quarter, not that we use as much as the electric furnaces do, of course, but that could, we're buying 600,000 tons a quarter plus or minus something like that, so if you say scrap was up 70, 80, 90 you could see what that number would be and that cost will come through and the price push that that's going to give us doesn't come through as quickly, so those would be a couple things I would mention would be slowing us down a bit on the bottom line first quarter.

Gretchen anything you want to add?

No.

Thanks for the color and if I could ask just one more on Europe.

Is it more of a timing issue why you aren't getting increased prices sequentially with the raw material cost being up or is it more of a competitive issue?

It's probably more competitive than sequential.

I haven't seen a lot of other results yet but my sense is we're at about the same spot that most others would be.

I look back at this just recently, if the conversion margin the difference between European hot roll and raw materials cost, carbon and Ferrous, and that spread was pretty predictable and pretty good over the last seven or eight years, and it got squeezed out quite a lot just in the last 12 months, much lower demand, much more competitive, a lot of excess capacity, facilities out.

So my sense is, it's more a competitive issue than anything else.

We have some hints of price movements in Europe, but Europe traditionally, at least our piece of Europe, would not move as rapidly as what would happen in North America.

It might be a bit slower.

Thank you.

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

Hi, thanks for taking the question.

I just wanted to follow-up on the US Flat-rolled business.

Given the improvements, obviously, in Q1 pricing and the plan at Gary Works and Lake Erie at the end of the quarter, do you now expect the US Flat-rolled business to return to profitability on an operating income basis by the second quarter?

Oh, I don't know that we can say that.

We don't look out that far and haven't given that kind of guidance that far and given the instability now I really don't think we should or can so just for the record, we do hope to have the Gary furnace, 14 furnace up.

You mentioned Lake Erie that's a labor dispute that may more may not occur.

That's an issue that may or may not be resolved at the bargaining table, so that depends on how the labor discussion goes; but as to what might happen in the second quarter, yes we would have more capability available if the market was there to take it away.

It would seem that the index pricing and overall pricing structures are moving in the right direction.

That's probably good for us, but whether or not that's going to translate into results it's really too soon for us to tell.

Gretchen anything you want to add?

I agree with that.

Sorry, I can't give you much more than that.

Understandable.

Thanks for the color.

Just my follow-up question.

The 20% of the volumes that are under firm contracts on the US Flat-roll side, have those contracts reset at this point and generally speaking could you give us a feel for the year-over-year change in prices and is that reflected in your Q1 targets?

Thanks.

Sure.

That pricing is reflected in what we're describing for the first quarter and there were some of those contracts that are firm that were reset during the fourth quarter effective in the first quarter and some ups and downs, again depends on where you're coming from and when the last contract was done etc.

But on average I think the overall affect may be slightly down on a pure apples-to-apples basis from the fourth quarter to the first quarter, slightly.

Our next question is from the line of Brett Levy of Jeffries.

Please go ahead.

Yes, in terms of the use of cash from this point, what are you guys thinking in terms of expansion?

You mean as far as the capital projects go?

Or acquisitions.

Geographies, upstream, downstream, what are you thinking?

Yes, I don't know, Brett, that we have a real active agenda in that context in mind right now.

We don't look at askance at opportunities, but I think as Gretchen pointed out in her comments and as I answered an earlier questioner, we have a lot of really important strategic high value high return projects inside the Company that we can deploy our capital against very effectively and, we think, very efficiently and that doesn't mean again that if something doesn't come along that is attractive but right now I think our attention is directed more at some of these projects that we think have sustainable long term value potential for the Company.

Gretchen anything you want to add or subject?

I think that's fair, John.

Thank you.

Our next question is from the line of Brian Yu of Citigroup.

Thank you, good afternoon.

Hi Brian.

Hi, John.

My question is regarding the Tubular business.

If we look at the new business that you're booking now and back out some of the substrate costs, are the resulting metal margins higher than where they have been the last few months?

Because I know you said costs were up and prices were up, too, but I'm not sure how that nets out.

Well, there's a couple things, I guess.

If you took like-for-like, I think the margins are probably stable.

We've been in a period of price compression for the last year, and margins have been compressed during all that time and I think we're, on a Seamless at least, which is the like-for-like.

We've been in a relatively flat pricing period, so margins are probably stable now.

We do have increasing volume of welded product and because of the way the market works and relative capital employed like-for-like in a certain size casing, a certain metallurgy, probably would have a slightly different margin, so on a mixed basis our margins in the first quarter might move in that direction.

But, in total, it's a much better place to be, so I think it's the changing character of the business.

And for us it's great to have the twelve mills up and running, and if they can substrate again from our Flat-rolled facility, so we hope they can take a lot more because there's plenty capability, but I think it would be more mix in the margin erosion that took place during most of last year, looks like it might be an end point.

Okay and just in terms of channeling, in the third quarter you said there's probably about a year's worth versus six months normal.

Can you provide an update on where that might sit?

It's going to continue to move in the right direction.

You have a lot of outside sources, but I think under a year of inventory by 12-31 is a much improved position and that would be concentrated, we surmise, in the carbon grades and that's where a lot of the unfairly traded Chinese product would still reside.

The non-carbon alloy grades etc., I think, are moving more briskly because inventories there are quite a bit lower.

So the inventories are clearly moving in the right direction, which we're pleased to see and just given the trends, getting down to that six-month target, I'm not sure when it's going to be, but it's a lot closer now than it was six months ago.

And then just a last question with regards to Europe.

What have you assumed in there in terms of your iron ore costs and depending on where the settlement comes in above or below, could that be a variance in your guidance?

Well, we just assumed a figure that would be probably lower over all than what it was at the peak last year, but higher than what our over all prices were last year.

The settlement price will affect us but my sense is it's not going to affect us a lot either way, but I can't really predict how the settlement price might bounce up against this.

Gretchen unless you have an idea?

We've used a number and have a number agreed for the first quarter, but when the settlement happens, we get adjusted.

I think there's probably an overall positive affect of just having that resolved and really everyone in that market.

And we're not buying in the seaborne market necessarily, but it has influence.

Everyone being on the same wavelength at that point probably has some effect so we're going to keep buying from our suppliers to the East and to the North and they've been great suppliers for a long time.

We do a bit better because we have wide gauge railroad coming in to Slovakia, but the seaborne price will go where it goes.

It'll affect us, but I'm reluctant to guess whether it's a plus or a minus.

Thank you.

Our next question is from the line of Sal Tharani of Goldman Sachs.

Please go ahead.

Good afternoon,.

Hi, Sal.

John, I want clarification on your comment in the press release and you made that six of the seven facilities are running and those six facilities only Gary Number 14 is down so what you're saying is all of the furnaces on those six facilities are running?

That's correct.

Okay, and so your utilization of 64% versus just one facility not running means you are running those furnaces at much lower rate?

Well, that 64% was for the previous quarter and we didn't have them all running during the previous quarter for the whole time.

We had furnaces up and down, work at Granite City, work at Great Lakes, as I think we said at the last call.

We were going to take a furnace down, so that was the average rate for the quarter and not really the exit rate that would have been there at the end of the year.

Would you give us what your exit rate was or what the rate is right now about?

Oh, I think if you look at the AISI figures, our figures are probably not too far off that.

I think the current AISI figure at the end of January or at the end of December was about 62%, if I'm looking at the right number in front of me, and we were higher than that at the end of January.

It was around most recent week was 65%.

We're probably higher than that as well the way things are moving.

Okay, and on iron ore, you are producing less iron ore, obviously, because you're running at less utilization rate in the US, which means that your fixed cost is a little higher over there.

Have you thought about what rate of increased globally would justify running the iron ore mines or producing the iron ore at full capacity and shipping it to Slovakia and Serbia?

You have done it in the past on an opportunity basis but to do it on a consistent full year basis have you thought about that?

We have and we're thinking about it now actually.

It depends where those numbers come out.

We did restart our Keewatin facility, and we'll have or do have all of the lines running.

We are going to be in a position to be making much more iron pellets in our facilities than we did during the last year.

I fully expect some of that material will make its way through our facilities in Europe, most usually Serbia just because of the logistics through the Black Sea in Kastanza and up the Danube to our facility, so I fully expect that will occur and that from time to time has had a salutary effect on our negotiations with our suppliers in the East.

Whether or not we'll get to the point where there's a steady diet of that, if we're running at a decent rate in North America we don't have all that much to be sending all the time to Europe.

So, we look at those figures and there will be some moving, how much remains to be seen.

Thank you very much.

Thank you.

Our next question is from the line of Mark Parr of KeyBanc.

Please go ahead.

Thanks very much.

Hi Mark.

Hi John how are you today?

Good, thank you.

I wanted to follow-up a little bit on Sal's questions on iron ore.

It seems to be a point of competitive advantage for your business as you move into a recovery.

Is there any way that you can provide some color or perhaps quantify the potential financial impact of restarting Minntac and getting Keetack up and running to the extent it was running?

Well, if they're up and running because we need to consume and our furnaces -- we're getting pellets out of those locations and blowing up rocks and getting them processed and down into the Upper Midwest blast furnaces at a really attractive value and it might be $50 or $55 or some number like that including freight, I'm just guessing, but it would be in that range and you could then take a guess at what seaborne pellet is, plus freight, into a northern European blast furnace or an east Asian blast furnace; and you could see what demand that is and it's a really nice place to be because it does allow us to harvest that resource value.

And we could start looking at export opportunities; it's a good place to be and we look forward to getting back there as soon as we can and again we have everything running now, so we're going to be producing as much as we can.

What we do with it really depends on how much consumption we have.

So in terms of the cost starting to have an impact on the operating results, second quarter would probably be the right time to think about some of that beginning to occur?

I think as we see the configuration with our largest furnace coming back on, there certainly is the potential that the second quarter, which is usually a pretty good period anyway, for overall production and shipments that the overall utilization and leverage would maybe work much more in our favor than it has in the last two quarters.

I had another question, if I could.

Just a little bit different tact.

It was looking at some of the revised cost assumptions for ThyssenKrups operation part of which is in the southeastern US and part of it is in Brazil; and you got to look at what I think the total number there is something over $10 billion, if I'm not mistaken for a 5 million-ton operation essentially.

And that works out to $2000 a ton or a little more than that and I'm just wondering how you think about what Thyssen has been forced to spend with the over runs and with the new realities of building integrated steel making, even in very low cost operations or low cost geographies against the current market value on US steel.

Is that a realistic way to be thinking?

Well being good sports we don't like to say too much about that Mark but no,--

Oh, come on here.

Well, no, we do assess whether it's a Greenfield project or projects in that instance or a capital transaction that we or others -- we take a look at that on a per ton basis, look at our value to see what kind of sense it makes.

It's a pretty full value and that's the result of where they are now.

You could always go back and do the "Mr.

Peabody way back machine" as I call it and try to go back and see what can be different, but I think in this instance--

You could also say they aren't done yet either.

But they are good competitors and good customers in Europe and North America, so being a good sport we wish them luck.

Okay John.

Thanks very much.

Thanks Mark.

Thank you.

Our next question is from the line of Charles Bradford, Affiliated Research.

Good afternoon.

Could you update us on the current status of your coking coal?

I know you've got contracts for a lot of the year, but how much is spot, how much did prices go up for 2010?

Sure, I'd be glad to.

In just looking at North America, we have virtually everything that we need in North America already under contract and most of that was done in the latter part of 2009, so we're not really into it right now; and looking at delivered prices for the roughly 8 million tons that we'll buy, probably, it will be less than it was we think in 2009.

And 2009 we talked about $160 delivered for what we bought 2010, 130, 140 depending on the mix and how it comes out so we have what we need at a pretty good value with suppliers we think we can rely on so we're pretty well fixed there.

Similarly in Europe where we're at about a 2 million-ton purchase position, most of those tons are lined up in almost all.

Prices there are a bit higher than last year.

The market is tight in central and eastern Europe, not really clear to me why.

I think there's maybe production issues but overall prices are probably up about $30 from $150 to $180 just to give you round numbers.

We have contract commitments with very dependable suppliers in North America that go out a number of years, at least two or three or four years from now, and fairly substantial quantities with some either price specificity or price structure around it, so we feel like we're reasonably well-positioned with our good suppliers to eventually have to pay what the market is but we think we'll get there in reasonable steps; but quantity wise we're in pretty good shape.

I'd like to address the issue that Gretchen mentioned about future funding requirements.

I'm assuming that all your options are open and this would include a possible equity issue as well as debt?

I would say that Chuck we've put that in because we're obviously thinking about not wanting to commit to long term projects using short-term funding credit lines or something like that, but the thing that's attracted us recently is the strength in the credit markets and the debt markets.

If you look at how the spreads on our debt have come in rather substantially as 2009 progressed and the debt markets have been very strong recently, it seems as if there's pretty good opportunity there, but I feel like we have time to figure out what to do here just because a lot of the heavy spending on these projects aren't coming -- isn't coming this year, but we have a pretty good opportunity and you tell me what's going to happen with interest rates and the debt capital markets later this year, so I'd been thinking about that.

Thank you.

Our next question is from the line of Wayne Atwell of Casimir Capital.

Good afternoon.

Hi, Wayne.

I want to clarify something.

I think you answered this, but did you say your maintenance cost was about $50 million for the fourth quarter; things such as re-lighting blast furnaces and the like?

No, that wasn't the number.

I'm looking at the effect on the fourth quarter versus the third quarter that it might have had a comparative effect in that range somewhere.

Okay, so the delta would be $50 million?

Yes, I'm sorry if I confused you.

And did you give us the actual number?

We didn't, at least I didn't because I don't remember what it is.

Oh, okay, and then you said the first quarter would be sort of flat?

On a comparative basis, yes -- maybe down a bit because we've got most of the projects done, some of that spending is coming on the Gary 14 furnace, but even some of that the heavy stuff was in December where we blew it down and began to blow up the salamander so some of its already out of the way.

And then going to the 40,000-foot level in thinking about what's going on, it's been a pretty tough environment, the auto industry changed, a lot of manufacturing will never be the same.

Is there any equipment that you're thinking shouldn't come back or pieces of equipment that you should shut down?

It makes sense to shut down the high cost equipment over the years and modernize and cut costs, so is there any equipment that you're going to circle and not bring back?

No, we're not really in a position to say one way or the other, at this point.

I think the fact that we're running all of our blast furnaces that we can run right now might be at least a partial answer to that.

We think the blast furnace route particularly as scrap prices are higher; and we think higher in the longer term as well that integrated iron making in North America could still be quite an effective way to make steel and eventually to make money and create value, so that's not to say there isn't the occasional coke battery.

We have had some batteries that we've taken down recently because they had expired beyond their useful life and we don't mind doing that but in terms of major facilities and the way we run our North American Flat-rolled business as an integrated operation where we move a lot of things around to get the right place at the right time for the right customer, we always look at that, but as utilization rates increase I think the attractiveness of that financially recedes.

Thank you.

Our next question is from the line of John Tumazos of John Tumazos Independent Research.

Thank you and maybe my questions have been addressed, but could you explain at the operating rates a little bit above 60% how much the seasonal drag on first quarter results is from the iron ore range running a little less full?

I don't think it's -- Gretchen or Dan will comment -- but I don't know that in the context of all this, John, that would be a real significant impact on us at this point.

We are because we're bringing some additional melt capacity on, we are doing a little more rail transportation, because we can't get lake shipments, which is much more efficient from our standpoint so we're doing more rail from Minnesota and that's more expensive and not always easy because of weather and things like that, so it becomes more difficult to operate that way; but in terms of total cost I guess I don't think that would be a big item to call to your attention in the first quarter versus the fourth.

If we were to compare looking forward the second quarter to what the first quarter might turn out to be, the iron ore seasonality, Number 14 furnace coming back, the Kosice Number 3, no more--

John?

Please hit star 1 to requeue.

Please go ahead.

John, you back?

I'm back, I'm back.

If we were to take the total effect of the iron ore, the Number 14 furnace coming back, the Number 3 at Kosice, and no disruptions, maybe hiccups at Granite City or other furnaces on the way up, looking at the second quarter would the net benefit to the second quarter be more like $100 million, $150 million, looking at the potential turnaround?

Yes, I don't know that we can give you a number on that, John.

I would just say all the things you just mentioned, 14 being back at work, and the Number 3 furnace in Kosice being up and atom, I was just there and it's almost set to go and certainly the iron ore transportation is much more positive then; those are all potentially very favorable things for us and would have some favorable impact and if the market is there, to allow us to do that, then I think we can do pretty well and if the market is not there, it's not going to make any difference.

It's more of a market issue and we'll be able to perform if the market is there.

Gretchen I'm not sure if we can get the number, are you?

No.

Okay.

Thank you.

Our next question is from the line of Bob Richard, Southridge Investment.

Thanks for taking my call.

The pretax charge for the environmental remediation, was that new information or is that just an under-accrual?

No, Bob, it's a good question.

It's not new.

Our 10-K and 10-Q's have had fairly repleat disclosure on -- it's the old Geneva site, for your information, you're probably familiar with it -- and we've had a disclosure that's been a continuing disclosure for 10 years or more probably at this point and in our disclosure in accordance with the accounting and SEC rules, we classify things as requiring further definition, etc., etc.

This one crossed the threshold from not knowing what the requirements are to having some agreed upon plan that clarifies it and gives us some definition to make a cost estimate.

It has to happen at some point.

Why is it this quarter?

It's just the way the process works so we had lots of disclosure around it and if you were to read our 10-Q and 10-K, which will be out in a couple weeks we give a pretty thorough rack up of all things like this.

Being a 100 year old Company, there's a few of these things around and this has gone through a long, long process.

Yes, the third quarter, Bob, we had disclosed a range of possible loss or possible accrual really for a number of projects with Geneva being the largest, and this was within that range.

Good point, Gretchen.

Okay, I appreciate that and at the risk of belaboring the point on your North American operation for the fourth quarter, but when you compare year-over-year fourth quarter '09 versus '08, pretty healthy increase in utilization, but operating profit, per ton fell off significantly; and I understand I appreciate all of the detail you've given, but do you have -- are you able to share -- was that fully reflected in hot metal cost year-over-year?

Was it that much more expensive to make hot metal in the fourth quarter of '09 versus '08 or do you look at it that way?

Well I'm not sure I'd look back much on the comparative quarters like that, Bob.

I'll have to look at that one and see if Dan can give you a comment or two.

I'm not sure I have anything to report on that.

We'll have to go back and look.

I haven't given much thought.

It's a fair question and one we should be prepared to answer, but we need a little time for one of us to get back to you.

At least from my perspective, maybe the surprise in North American operations was either lagging price or higher cost or a little bit of both, but I'm not really sure which one it is right now.

But I appreciate all of the detail.

Thanks.

Okay, thank you, Bob.

We have no further questions in queue.

Back to the speakers for any closing remarks.

Please go ahead.

We appreciate everybody being with us and we'll talk to you again next quarter, thank you.

Thank you, ladies and gentlemen.

That does conclude your conference.

We do thank you for joining and using AT&T executive teleconference.

You may now disconnect.

Have a good day.