ArcelorMittal SA (MT) 2003 Q1 法說會逐字稿

Good morning. And welcome to the Ispat International first quarter 2003 earnings conference call. This call is being recorded. At this time all participants are in a listen-only mode. Later, we will conduct a question and answer session, and instructions will follow at that time. If anyone should require assistance during the call, please press the start key followed by the digit zero on your touch-tone phone.

During the conference call this morning, certain statements by the company officials may constitute forward-looking statements. Actual results may differ materially from those implied by such forward-looking statements on account of known and unknown risks and uncertainties. Please refer to the company's last periodic filings on form 20F, under the heading, Factors Effecting Future Performance.

I would now like to turn the conference over to Mr. Lakshmi Mittal, Chairman and Chief Executor Officer of Ispat International. Please go ahead, sir.

Thank you. Good day, ladies and gentlemen. I would like to welcome those participating in the Ispat International first quarter 2003 earnings conference call, as well as those listening to our reports on our website.

The company has released its results earlier today. Joining me on the call today are Malay Mukherjee, President and Chief Operating Officer; Bhikam Agarwal ph (ph), Chief Financial Officer; T.N. Ramaswamy, Director of Finance; and Jean-Pierre Picard, Director Marketing Flat Products.

Ispat International reported its first quarter 2003 results this morning. Our net income for the was $51 million or 41 cents per share. As compared to a similar net income of $51 million for the fourth quarter of 2002. In the first quarter of 2002, we reported a net loss of $39 million. Operating income and we picked up for the quarter, we're 35 million and $144 million respectably, compared to $91 million and $140 million after adjusting for one-time items for the first quarter of 2002. Our completed net sales for the quarter were $1.3 billion; roughly the same level as the fourth quarter of 2002. Steel shipments were higher by two percent from 3.74 million tons in the last quarter to 3.83 million tons in the second (ph) quarter.

I will now give you an overview of the marketing performance of the first quarter 2003, compared to the fourth quarter 2002, as well as our outgrowth for the second quarter 2003. Ispat shipped, steel shipments of 1.27 million tons were five percent less than the previous quarter, reflecting high levels of customer inventory (ph), and clearly softer markets can be shown.

Two-thirds of the production came for the distribution. Inland's average selling price was unchanged at $423 per ton. Although prices are generally higher than the first quarter 2002, a lower price product mix adversely affected the average net price per ton. The mix of first quarter 2003 sales included less cold rolled and coated (ph) products and more hot rolled products compared to fourth quarter 2002. The North American economy remains fertile (ph). However due to seasonal effects, we expect Ispat's Inland shipments to increase slightly in the second quarter. This increase should mainly come from the non-contract segment of the business, which is facing continued price inflation. It makes our shipments of 921,000 tons; we're 14 percent higher than the fourth quarter of 2002. It makes our average selling price decline by nine percent to $209 per ton; partly as a result of a different regional (ph) mix and higher freight costs.

The outlook for the second quarter for Sidbec size quarter two (ph). The average selling price should improve by $25 per ton as a result of better prices in Asia. Shipments are expected to increase by eight percent over the first quarter. While the Canadian economy is out performing the Euro, the integration of the steel markets in both countries influences their performance. Ispat's Sidbec shipment in the first quarter declined by two percent, versus the fourth quarter 2002 to 380,000 tons. Walker Wire (ph) shipments largely account for the decline. The average selling price in U.S. dollars remain unchanged at $359. In local currency, the average selling price was lower by five percent for flat products and two percent for long products. Ispat's Sidbec has concluded a new six-year level (ph) contract replacing the earlier one that ended on January 31st, 2003. The terms are competitive and there was no disruption to shipment or customer services during the period of negotiations.

Normal seasonal tension (ph) can increase slab (ph) sales should result in higher shipments in the second quarter for Ispat Sidbec. Although with a two to three percent lower average price realization (ph) due to continued pressure and the flat rolled hot (ph) prices. On the other hand, prices for long products are expected to remain at close to first quarter levels.

Caribbean Ispat shipped 261,000 tons of steel during the first quarter 2003, an improvement of nine percent over the fourth quarter of 2002. The increase came largely from direct sales. We have reduced our wire shipments to Europe (ph) and increased our participation in market in Africa and Europe. We expect second quarter shipments to be at approximately the same level as the first, with a slightly improved average price realization (ph). Caribbean Ispat directly reduced island business, which was affected by shipping delays in the fourth quarter of 2002, picked up in this quarter. Shipments are up 22 percent while selling prices are down five percent. We expect shipments to improve by 15 percent in the second quarter and prices to be higher by six percent.

Ispat Europe shipments of one million tons were two percent higher than the previous quarter, as result of better walker wire (ph) sales. The average price increased by nine Euros on the timber (ph) product mix sold. The European economy is growing at a slower rate than anticipated. This should have an impact on steel demand, albeit with a timeline (ph). We anticipate improvement in shipments and price generally similar to the first quarter, namely about two to three percent.

I will now deal with liquidity and financial information. Cash and cash equivalent at the end of first quarter were $71 million. We also had $285 million available to us under various un-drawn (ph) credit lines.

During the quarter there was an increase in working capital of approximately $50 million due to an increase in inventories and the lower equalization of receivables factoring them as part Euro. The increase in inventories are mainly due to the build up at Ispat Inland, preparedly to forthcoming blast from the assembly line as well as due to lower shipments than plant. Overall, the number of days inventories increased but number of day's receivables came down. Overall, net cash inverted (ph) from operations and the cut of our $21 million.

Net debt as of the end of the quarter that is total debt, net of cash balances was $2.2 billion. Net debt reduction during the quarter was $21 million. Capital expenditure during the quarter was $19 million and included about $7 million liquidity blasts (ph) from the assembly line at fartiment (ph).

During the quarter Ispat International NV portrayed part Inland SNV (ph), first mortgage born to the state sell of $22 million and accorded a gain of $30 million. Under our share buy back program, we have also bought back 538, 000 shares; that's an average price of $3.25 during the quarter.

I would like to conclude with some guidance for the second quarter 2003. We continue to watch the global situation with interest and some concern. Three months ago, most of us talked of the uncertain times ahead, and in particular the difficulties it presented when it came to forecasting and planning. Much the same can be said of the situation today. Although the war in Iraq is concluded, many economic uncertainties remain. There is a downward shift in the steel market, and this will have its impact on the second quarter, particularly at the companies, Europe and Canadian subsidiaries. Both Ispat Inland and Ispat Sidbec will see lower sell price realization. Selling prices of Ispat Mexicana sales are expected to be higher, mainly because of earlier order booking. Caribbean Ispat should benefit from better product mix and better direct (ph) diversification of its customer base. Volumes at our inaudible (ph) facilities are expected to remain largely unchanged from this quarter and selling prices are expected to improve to offset costs increases.

The company expects increases in costs of most of its key production inputs. The price of which is I don't know, is going up. Natural gas and transportation costs remain high and volatile. Ispat's plant blasts (ph) number seven will be brought down for a company to reline in the beginning of the third quarter 2003. There are significant uncertainties associated with the operations of the blasts (ph) that is near the end of its life. Productivity and costs would be adversely impacted. Ispat Inland has made arrangements to source that externally at costs higher than its own production costs to maintain customer service during the reline period.

Capital expenditure is expected to be approximately $40 million of which approximately $17 million is expected to be on account of blasts (ph) number seven reline at Ispat Inland. Debt reduction continues to be a major, major priority at Ispat International. We will continue to personal improvement in operations; working capital management, and other areas to maximize cash envision (ph). And we intend to continue to apply all liquid cash to reduce debt.

We have outlined a number of adverse conditions that we will have to deal with in the coming quarter. We will as usual be responsive to these developments, and will take appropriate actions to mitigate their impact. On balance, we expect our second quarter earnings to be only slightly lower than the first quarter on a like-for-like basis.

This concludes my remarks. Thank you for listening. We will now be happy to answer any questions.

Thank you. The question and answer session will be conducted electronically. If you would like to ask a question, please do so by pressing the star key followed by the digit one on your touch-tone telephone. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment.

We will proceed in the order that you signal us and we'll take as many question as time permits. Once again, please press star-one now to ask a question.

And we'll take our first question from Peter Marcus of World Steel Dynamics.

Hi, it's Peter Marcus, World Steel Dynamics. At the moment we seem to be seeing on the world market, that the price of hot rolled ban (ph) has come down much more sharply than the price of slab (ph). Wondering how you are feeling about the outlook for slab (ph) prices in the third quarter and are there reasons why slab (ph) may hold up better in price than might hot rolled ban (ph). Thank you.

Thank you, Peter. This is Shantiock Shah (ph).

Yes.

Well obviously there is a relationship between the slab market and the hot roll ban (ph) pricing, and however our slab makes sales, are really not very much related to the actual or not used directly to make hot roll ban (ph). We have a very diversified end use of customers and their end use is more upscale. The result of that we have in, we expect in the second quarter where because of really earlier bookings, and we expect some reduction from that point in the third quarter, but not at all comparable to the reduction of hot ban (ph) prices that we have seen so far.

OK. My next question is, in terms of the results of Ispat Inland, can you tell us roughly what was the operating profit at Ispat Inland?

Yes, this is Ramaswamy. The operating profit at Ispat Inland was about $35 a ton.

So that would be an EBIT or EBITDA?

That's operating costs; operating income. EBIT actually.

OK. Thank you very much.

Sure. What did you bid (ph) that person?

It's $50 a ton.

Fifty dollars per ton is the EBITDA.

EBITDA. Fifty per ton?

Yes.

Thank you.

And moving on, we'll take our next question from Tim Hursces of John Bristol.

Good morning, or good afternoon to you. Can you talk a little bit more about why Inland's volumes were down? And you know, why you're going to be increasing them in the second quarter when you know the mix is going to be shifting more adversely and hot roll prices are down?

Shantiock Shah (ph) again. Well as we indicated, the down, the reduction in sales came mainly from some of the distribution sector. And everyday, depending on your customer base and so on, changes can happen in your sales. As we have known, the service center inventories were very high at the beginning of the year. The increase we anticipate in the second quarter basically comes from the normal seasonal changes. As always better demand in the second quarter versus the first quarter and so we expect to regain the losses that we have made in the same customer segment basis. The contract volume should be somewhat stable.

OK. And can you talk about any cost benefits you expect from the reline, once blasts (ph) seven gets back up and running?

This is Mukherjee. We expect that we did technological improvements which we are making in the blasts (ph) which we will definitely have reduction in the coal crate (ph), as well as the productivity of the blasts (ph) this would be increased. And this would lead to the cost reductions both in terms of the input costs of the raw materials going in to the blasts (ph) as well as the fixed costs that are associated with the productivity of the fund (ph).

I know this is only 3.5 million tons of your total company production, but roughly what would the cost reduction be? The anticipated cost reduction be in dollars per ton, given the increase in volume and decline in coal crate (ph)?

It would be in the region of, I would put it between seven to $12 per ton.

OK. And ...

There would be also some production increase; volume increase.

And in the, in the news media, the reduction in labor staffing at both U.S. Steel and International Steel Group (ph) have, have hit the headlines. Is there any move on the part of Ispat Inland to reduce their job classifications and reduce their work force in the same way that U.S. Steel and International Steele Group have achieved?

We have over the last two years substantially made an improvement in our labor productivity in terms of the reduction; man power. If you look at it in terms of the fourth quarter, and the reduction, which has been achieved, only in the first quarter, it would be about 200 against a base of 6,700 and for the year we have, anticipating a reduction of about 500 people.

Do you believe if you got the approval by the USWA, that you could take out a significantly greater number of jobs?

Well, it is happened to the nearest course (ph), that's for us in order to improve on the productivity of the people and in terms of agreements which we already have, there are areas where based on a proper judgment of the level of many, we are being able to take care of attrition (ph) and basically at this stage of time to comment on the agreements which have been made by USS with USW (ph) as well as ISG (ph), it would be difficult to comment until the entire agreement are ratified inaudible (ph).

OK, thank you very much.

Once again, it is star-one if you would like to ask a question. And next we'll take our question from Bruce Klein of CS First Boston.

Hi guys. I'm wondering, just following up on the prior question. I'm wondering if those agreements at ISG (ph) in Bethlehem Center (ph) do get sealed; if it's your intention to go to the union and try to effect some changes. And secondly, if you could just help us with revour (ph) availability taking into account the limitations based on a barring base?

You will answer this. On this taking at one deal (ph) of the agreement which have been signed, between ISG (ph) and US Steel with USWA (ph), Malay said that once these agreements are actually signed, we will, we will definitely take it up and we will like to make sure our objective role there to ensure that we are not at a disadvantaged situation over our competition, and our regiments (ph) are due to renewal, re-negotiating July 2004, and by, we believe that before that situation, we'll be much more clear and we will be in a position to work with the union to get all the advantages which will be provided to other companies. However, the legalistic cost issue will still be there which that advantage for us, we will not be able to take, because those companies are going through a different process. But we believe that on the level cost, we should be able to take all the advantages which should, which have been given to ISG (ph) and Europe (ph) too.

OK, thanks. And the other question?

The second question on the availability. This is Ramaswamy. We had as of March 31st, $285 million available under radius (ph) credit lines, based on the total credit limit and based on the borrowing base, we had $225 million available.

Two twenty-five?

Two twenty-five, yes.

OK. And lastly, just on Inland in terms of the contracts, maybe you could just help us with what percent of your contracts came up for renewal at the end of '02, versus what you might expect for '03 roughly.

You're talking of sales contracts?

Yes.

Yes. Well as we indicated before, the majority of the out mallest (ph) contracts or long-term contracts were renewable at the end of the year. But it wasn't the total; probably 70/80 percent are close to that, were renewed at the end of last year or during the course of the second half of last year.

OK. And cutbacks for this year; for the total company?

Excuse me?

Total cutbacks for '03 for the company?

Total cutbacks for the company would be 180 million, which includes the 90 for the blasts (ph) seven inaudible (ph) at Inland.

OK. Thanks, guys.

And moving on, we'll take our next question from Brian Cap of JB Hanauer.

Good morning guys. I know that you mentioned it earlier, what was the shipment levels at Ispat Inland and on Amexica (ph)?

Inland steel shipments was 1.27 million tons, and Amexa (ph) shipments were 921,000 net tons.

Thank you.

Same as Inland. I mean it's both net tons. Because as you know, we often refer to slabs in metric tons, but in this case all the numbers are in net tons.

Thank you.

Anything further Mr. Cap?

No.

Once again, it is star-one if you do have a question. And next we'll go to Julien O'Nillon with HSBC.

Yes, my question was concerning the strategy in fact, and one question was that you know, possible acquisition in the U.S. One thinks these GFC's (ph) since line to it to disclose at inaudible (ph) to dispose reduce a debt and do some disposal. They're thinking about disposing of their GFC (ph) participation and why not California Steele (ph), and I understand that California Steele (ph) is one of your main clients now for Mexicana; probably you are the main supplier now of California Steele (ph). Would be interested in setting a coalition if it was going to the market and considering the Euro (ph) debt levels, would it be possible for you to do such a thing?

And a more global thing; in North America not only U.S., with you know with the big restructuring we are seeing in the conservation (ph) in both Canada and in the U.S., I mean we can't think of close now, inaudible (ph) which is a low now. Any thing to do further link up or for the alliance how we say in the U.S. or even in Canada with Calco (ph) or Defastco (ph) to reinforce your position in France (ph); your big company which has been merged ISG (ph) and U.S. Steele (ph) today?

Thank you for your question. But you know that we do not make comment on any specific case. As a manager (ph) of the company, we continue to look at the approach (ph) and strategies for the company, but as we have outlined before that at this time our strategy is to reduce our debt level of the company. But as inaudible (ph) said to me, unfortunately which we're paying given our constraints on our balance sheet, if we can use those approaches (ph), we will definitely look into that.

Hello?

Anything further, sir?

No, thank you.

Thank you. And we'll take a follow up from Tim Hursces of John Bristol.

Good afternoon, again. Given the blasts (ph) option (ph) in the third quarter and the anticipated reduction in slab prices, what is the possibility that Ispat comes very close to the break even level in the third quarter?

I think it will all depend on the market conditions, but we believe that we will be at the break-even level in third quarter.

OK. Thank you very much.

And as a final reminder, it is star-one if you do have a question. And we'll pause for just a moment.

Hello?

It appears there are no questions at this time. I'll turn the conference back over to you for any additional or closing remarks.

Thank you for participating in this call and looking forward, look forward to be talking to you again next quarter. Bye.

That concludes today's conference. We thank you for your participation.