United States Steel Corporation (X)

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United States Steel (X)

Q2 2011 Earnings Call

July 26, 2011 2:00 pm ET

Executives

Gretchen Haggerty - Chief Financial Officer and Executive Vice President

Dan Lesnak -

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

Analysts

John Tumazos - Independent Research

Arun Viswanathan - Susquehanna Financial Group, LLLP

Luke Folta - Jefferies & Company, Inc.

Mark Parr - KeyBanc Capital Markets Inc.

Timna Tanners - BofA Merrill Lynch

Justine Fisher - Goldman Sachs Group Inc.

David Katz - JP Morgan Chase & Co

Charles Bradford - Bradford Research

David Lipschitz - Credit Agricole Securities (USA) Inc.

Richard Garchitorena - Crédit Suisse AG

Kuni Chen - CRT Capital Group LLC

Michelle Applebaum - Michelle Applebaum Research

Aldo Mazzaferro - Goldman Sachs

Brian Yu - Citigroup Inc

Unknown Analyst -

Sal Tharani - Goldman Sachs Group Inc.

Michael Gambardella - JP Morgan Chase & Co

Presentation

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the United States Steel Second Quarter 2011 Earnings Call and Webcast. [Operator Instructions] As a reminder, this conference is being recorded. I'd now like to turn the conference over to Dan Lesnak, Manager of Investor Relations. Please go ahead.

Dan Lesnak

Thank you, Linda. Good afternoon, and thank you for participating in United States Steel Corporation's Second Quarter 2011 Earnings Conference Call and Webcast. We've included slides in this quarter's presentation that we believe will be helpful to you, as well as a few additional slides in the appendix that you may find of interest. For those of you participating by phone, the slides and the webcast are also available under the Investors section of our website at www.ussteel.com.

We will 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 first quarter, and then Gretchen Haggerty, U.S. Steel Executive Vice President and CFO, will comment on some financial matters and the outlook for the third quarter of 2011. Following our prepared remarks, we will be happy to make -- take any questions. Now to begin the call, I will turn -- sorry.

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

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

John Surma

Thanks, Dan. Good afternoon, everyone. Thanks for taking the time to join us today. Yesterday, we reported second quarter net income of $222 million or $1.33 per diluted share. Excluding the impact of foreign currency remeasurement on our U.S. dollar-denominated intercompany loan, our adjusted earnings per share was a significant improvement over our first quarter loss and was more than double our earnings for the second quarter of 2010.

Now before I discuss our results in detail, I would like to comment on something we consider more important, which is our safety performance. We continue to make significant progress in the elimination of injuries and illnesses in our company. From 2005 forward, we have reduced our OSHA recordable rate by 48%. On an annual prorated basis, this represents nearly 300 employees who have not sustained a medical treatment injury in 2011 that would have if we have not shown such improvement over the last 5-plus years. We've also reduced the number of days away from work injuries by 63% when compared to 2005. Again, on an annual prorated basis, this improvement represents nearly 90 of our employees who have not sustained injury in 2011, serious enough to result in missing a day or more from work.

While still some distance from our ultimate goal of 0 injuries, the performance improvements noted are the collective result of the focus of our leadership team, our joint efforts with our trade union colleagues, including the USW in North America, and the collective safety commitment of each and every employee of our company. As I say to our employees, someone we know was not injured today because of our collective commitment to the safety and health of our employees, and I'm very proud of each and everyone of them.

Now turning back to our second quarter results. Operating income for the Flat-rolled segment was $374 million in the second quarter. This was the best quarter for our Flat-rolled segment since the third quarter of 2008. And in fact, it was one of our best quarters ever. Our operating income was $95 per ton, an improvement of more than $100 per ton from last quarter, and more than 3x our operating income per ton in the second quarter of 2010.

Our improved results were driven primarily by significantly higher price realizations on both our spot and contract tons, as the benefits of the sustained increase in spot market prices throughout the first quarter were reflected in our market-based contract pricing for the second quarter. Although spot market prices began to fall and lead times shortened in the second quarter, order rates were sufficient to maintain shipments at first quarter levels. We had a strong operating performance at our steelmaking facilities in the second quarter. Excluding Hamilton Works, which remain idle due to an ongoing neighbor dispute, our raw steel capability utilization rate was 90%. Operating efficiencies from running at these levels went to a very solid cost performance as well.

For U.S. Steel Europe, we had an operating loss of $18 million, as the benefit of increased euro-based transaction prices driven by improved contract prices and higher spot prices early in the quarter was more than offset by higher raw materials costs and significantly lower shipments. We also recorded a lower cost of market charge of approximately $10 million in the second quarter.

As increased volumes of low-priced imports and increased production entered the spot market -- entered the market, spot prices trended downward later in the quarter and demand weakened, particularly in Southern Europe, where our hot-rolled-oriented product mix leaves us more exposed to the spot market.

The economic recovery in the Balkans area has been slow, and we continue to face challenges in Serbia where we rely completely on relatively expensive merchant coke and have a less favorable product mix. As a result, we decided to keep a blast furnace in Serbia that was idled early in the quarter for planned maintenance down rather than chasing hot-rolled orders that were few, low-priced and far away. It remains idle.

Tubular income from operations was $31 million in the second quarter. Tubular results were in line with the first quarter, as higher average realized prices resulting from both higher product prices and a favorable change in product mix were offset by increased costs for hot-rolled bands supplied by our Flat-rolled segment and purchased rounds.

Although margins were comparable to the first quarter on a total quarter basis, a continuing increase in price realizations during the quarter, combined with falling hot-rolled band prices, resulted in margins improving throughout the quarter. With steadily increasing rig counts in the oil and natural gas liquid-rich shale formations, we have good momentum heading into the third quarter.

Last quarter, we commented on some of the strategic projects we have in progress, as well as some potential opportunities we're considering as the environment we operate in continues to evolve. We have a strong resource base here in North America, with significant iron ore reserves and pellet production capability. With our wholly-owned operations at Minntac and Keetac, as well as our joint venture interests at Hibbing and Tilden, we have access to approximately 25 million tons of high-quality pellets annually, and we are currently pursuing permits at Keetac that could add an excess of 3 million tons of additional annual pellet capability.

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