United States Steel Corporation (X)

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United States Steel (X)

Q3 2010 Earnings Call

October 26, 2010 2:00 pm ET

Executives

Gretchen Haggerty - Chief Financial Officer and Executive Vice President

John Surma - Chairman, Chief Executive Officer, Member of Proxy Committee and Member of Executive Management Committee

Dan Lesnak -

Analysts

John Tumazos - Independent Research

Timna Tanners - UBS Investment Bank

Mark Parr - KeyBanc Capital Markets Inc.

Charles Bradford - Bradford Research

Brett Levy - Jefferies & Company

Luke Folta - Longbow Research LLC

Michelle Applebaum - Michelle Applebaum Research

Brian Yu - Citigroup Inc

Sal Tharani - Goldman Sachs Group Inc.

Mark Liinamaa - Morgan Stanley

Presentation

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the United States Steel Corp. Third Quarter 2010 Earnings Call and Webcast. [Operator Instructions] I would now like to turn our conference over to our host, Mr. Dan Lesnak, Manager of Investor Relations. Please go ahead.

Dan Lesnak

Thanks, Tony. Good afternoon, and thanks for participating in the United States Steel Corp's. Third Quarter 2010 Earnings Conference Call Webcast. We'll start the call with some brief introductory remarks from U.S. Steel Chairman and CEO, John Surma. Next, I'll provide some additional details for the third quarter, and then Gretchen Haggerty, U.S. Steel Executive Vice President and Chief Financial Officer, will comment on the outlook for fourth quarter 2010. Following the prepared remarks, we'll be happy to take your questions.

Before we begin, however, I'm going to caution you that today's conference call contains forward-looking statements and that future results may differ materially from statements or projections made on today's call. For your convenience, the forward-looking statements and risk factors that could affect those statements are referenced at the end of our release and are included in our most recent annual report on Form 10-K and updated on our quarterly reports on Form 10-Q in accordance with the Safe Harbor provisions.

Now to begin, here is U.S. Steel Chairman and CEO, John Surma.

John Surma

Thanks, Dan. Good afternoon, everyone. Thanks for joining us on what I expect was a busy day for the group. Earlier today, for the third quarter, we reported a net loss of $51 million or $0.35 per diluted share, which included a foreign currency gain that increased net income by $0.96 per diluted share. Our third quarter results also included a loss from a small asset sale that decreased net income by $0.11 per diluted share.

Our segment loss from operations was $80 million compared with income of $241 million in the second quarter. Our third quarter segment loss from operations included $86 million of cost, associated with structural inspections and repairs that I'll get into in more detail in a moment. The $321 million decrease in our quarterly segment operating results from the second quarter was primarily due to a $272 million decrease in our Flat-rolled segment and a $44 million decrease in our European segment.

For the first nine months of the year, our segment income from operations is $148 million, primarily as a result of a strong performance by our Tubular segment. Our third quarter results for Flat-rolled came in well below our original expectations, due to a combination of increased costs at our Flat-rolled facilities, as well as lower volumes and lower prices. Results for the third quarter also included approximately $30 million of costs related to operating inefficiencies, due to disruptions caused by the structural failure at Gary Works.

A bit of background on the structural inspection and repair matter, which was quite significant for the quarter for us. In 2007, we formalized a program to perform inspections and repairs of strategic assets at our major operating locations at specified intervals, spending about $10 million to $20 million per quarter for several years.

After the structural failure at Gary Works earlier in July, out of an abundance of caution and in consideration of the safety of our employees and commitments to our customers, we accelerated certain aspects of our structural inspection and repair program at all of our facilities. The costs associated with these activities totaled approximately $80 million in the third quarter to our Flat-rolled segment, as we performed extensive inspections and repair work on the entire Gary Works raw materials transportation system, on similar structures at Great Lakes Works and our numerous other structures at all of our facilities.

We're continuing our efforts to accelerate inspections and repairs and expect that the fourth quarter will reflect about $40 million of spending to complete the transportation system projects at Gary and Great Lakes, as well as numerous other small projects at all operating locations.

Our average realized prices were $12 per ton lower than the second quarter, as the benefits of higher contract prices were more than offset by a decrease in spot prices throughout the quarter. As was the case with the AISI industry utilization rate, our Flat-rolled raw steel capability utilization rate trended down during the third quarter. We operated at 70% of raw steel capability in the third quarter, down from 82% in the second quarter, and our shipments decreased by 6% to 3.8 million tons. Industry utilization was 69% for the third quarter as reported by AISI, as compared to 75% in the second quarter.

Also, our raw materials costs increased more than we anticipated, as our operating configuration for the quarter resulted in the consumption of some higher cost materials that we had acquired earlier in the year to facilitate higher operating levels. Although we are currently faced with difficult market conditions due to the continuing uncertainty over the pace of the economic recovery, we continue to move forward with projects that will better position us over the long term, as the economy recovers and the market returns to traditional levels of steel consumption.

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