United States Steel Corporation (X)

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United States Steel (X)

Q4 2011 Earnings Call

January 31, 2012 3:00 pm ET

Executives

Dan Lesnak -

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

Gretchen Robinson Haggerty - Chief Financial Officer and Executive Vice President

Analysts

Michael F. Gambardella - JP Morgan Chase & Co, Research Division

Kuni M. Chen - CRT Capital Group LLC, Research Division

Michelle Applebaum

David Lipschitz - Credit Agricole Securities (USA) Inc., Research Division

Justine Fisher - Goldman Sachs Group Inc., Research Division

Luke Folta - Jefferies & Company, Inc., Research Division

Shneur Z. Gershuni - UBS Investment Bank, Research Division

Timna Tanners - BofA Merrill Lynch, Research Division

Brett Levy - Jefferies & Company, Inc., Research Division

David Gagliano - Crédit Suisse AG, Research Division

David S. MacGregor - Longbow Research LLC

Brian Yu - Citigroup Inc, Research Division

Sohail Tharani - Goldman Sachs Group Inc., Research Division

David Katz - JP Morgan Chase & Co, Research Division

Anthony B. Rizzuto - Dahlman Rose & Company, LLC, Research Division

Evan L. Kurtz - Morgan Stanley, Research Division

Richard Garchitorena - Crédit Suisse AG, Research Division

Mark L. Parr - KeyBanc Capital Markets Inc., Research Division

Sam Dubinsky - Wells Fargo Securities, LLC, Research Division

Nate Carruthers

Presentation

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the United States Steel Corp. Fourth Quarter 2011 Earnings Conference Call and Webcast. [Operator Instructions] As a reminder, today's call is being recorded.

I'll now turn the conference over to the Manager of Investor Relations, Mr. Dan Lesnak. Please go ahead, sir.

Dan Lesnak

Thanks, John. Good afternoon, and thank you for participating in today's earnings conference call and webcast. For those of you participating by phone, the slides included in the webcast are also available under the Investors section of our website at www.ussteel.com.

We'll start the call with introductory remarks from U.S. Steel Chairman and CEO, John Surma, covering our fourth quarter and full year 2011 results, as well as the sale of U.S. Steel Serbia. Next, I will provide some additional details for the fourth quarter; and then Gretchen Haggerty, U.S. Steel Executive Vice President and CFO, will comment on a few financial matters and our outlook for the first quarter of 2012.

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

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 on 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 P. Surma

Thanks, Dan, and good afternoon, everyone. Thanks for taking time to join us. Earlier today, we reported a fourth quarter net loss of $226 million or $1.57 per diluted share on net sales of $4.8 billion and shipments of 5.4 million tons. Excluding the effects of foreign currency accounting losses related to the remeasurement of an intercompany loan and an environmental remediation charge, our adjusted net loss was $164 million as compared to an adjusted net loss of $227 million in the fourth quarter of last year. Our adjusted loss per share of $1.14 was a $0.44 per share improvement over the fourth quarter of 2010.

Now before discussing our financial results in more detail, let me comment on our safety performance. Statistically, 2011 was the safest year in our company's history. The continued active engagement of our entire workforce resulted in improved performance in our key safety measurements. While we were pleased with our progress in recent years and the results we achieved in 2011, we recognize that there is still much room for improvement as an unfortunate incident that occurred at our Gary Works last night illustrates.

We will remain focused on achieving our ultimate goal of 0 injuries across our entire company.

Now turning to our operating results. Our segment's operating income was $652 million in 2011, a significant improvement from the $114 million we reported for 2010. Our Flat-rolled segment income from operations improved by over $700 million or $46 per ton, as we finished 2011 with operating income of $452 million.

Our Tubular segment turned in another solid performance in 2011 as rig counts trended up throughout the year while we continued to face increasingly difficult economic and steel market conditions in Europe, particularly for our Serbian operations.

As we commented last quarter, we had been exploring all of our options in Serbia because we simply were not willing to accept continuing losses. Our Serbian operations had struggled since the onset of the global economic crisis. As had become increasingly clear throughout 2011, the Serbian operations were our most challenged, with complete reliance on merchant raw materials, serving a European steel market that has been slow to recover, particularly in Southern Europe and the Balkan region, and a product mix that is predominantly commodity-grade hot-rolled products.

We took significant actions to address these issues, including changing our operating configuration to a 1-blast furnace operation, shifting our commercial focus toward value-added products, implementing a wide variety of cost reduction programs, installing pulverized coal injection facilities to reduce our exposure to the merchant coke market.

We have always had a very positive working relationship with the government of Serbia. And consistent with this long-standing spirit of cooperation, we have been in regular contact with the government over the last few months, keeping them apprised of the economic challenges facing our Serbian operations and our efforts to address these challenges. However, the continued deterioration of the European market, particularly in the second half of 2011, resulted in market conditions that our operating, commercial and cost-reduction efforts could not overcome. Additional efforts to address our cost and commercial position would've entailed significant capital investment in cokemaking and steel-finishing facilities, without any certainty that these investments could overcome the exceedingly difficult market conditions in a reasonable timeframe.

Furthermore, our efforts to find a buyer who might be better-positioned to profitably operate the business did not provide any viable alternatives. We therefore concluded that it was in the best interests of our shareholders to sell U.S. Steel Serbia to the Republic of Serbia and we completed the sale earlier today. We expect to record a total non-cash charge of between $400 million and $450 million in the first quarter of 2012 as a result of the sale. Our 2011 results will not be affected.

This was a difficult decision, but we simply could not continue to incur operating losses in Serbia. The sale allows us to exit the operations quickly, avoid further losses and redirect our capital to other operations. This is also a better outcome for the U.S. Steel Serbia employees than some of the other alternatives we had considered. We appreciate the hard work and dedication of our Serbian workforce under very difficult conditions. I'd particularly like to recognize the great improvements that were made in their safety performance over the years and we wish them well in the future.

Now turning back to our fourth quarter results. For U.S. Steel Europe, our operating loss increased to $89 million compared to a $50 million loss in the third quarter, primarily due to lower average realized euro-based prices, production volume and shipments as market demand softened in response to the continuing difficult economic conditions in Europe, partially offset by lower operating cost reflecting lower raw materials and facility repair and maintenance costs.

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