ArcelorMittal SA (MT) 2004 Q2 法說會逐字稿

Good afternoon and welcome to the Ispat Iscor third quarter results conference call. [OPERATOR INSTRUCTIONS]. I would now like to turn the conference over to Davinder Chugh. Please go ahead sir.

Thank you Yvonne. Good afternoon ladies and gentlemen. I am Davinder Chugh, CEO of Ispat Iscor. I have on my table with me Mr. Sethuraman, Director of Finance, Mr Eric [Hinan], Rick Reato, Johan Fourie, Jake Olivier, Johan van Rooyen, the General Managers. My full team is on the table, plus I also have other members of the senior management team here.

Looking to the results, I am very happy to report another very strong quarter result. For quarter three 2004 our headline earnings have gone up by 347% as compared to the corresponding quarter of this previous year. Our present profit for this quarter is 15% up as compared to the previous quarter of the same year, that is 2004. Talking of the numbers, our trading profit for this quarter is R2.235b, and when we look at the headline earnings level, it is R1.575b. Very strong results by any standards and comparisons.

Looking at the market we had overall global markets and steel demand remained very strong. Prices also improved during the quarter under review, that is the third quarter. Going forward into the fourth quarter, prices are expected to level off. We have seen substantial increases in prices in this quarter comparing with past and the immediate previous quarter. For the fourth quarter, as I stated just now, they are expected to remain at the current level. Domestic sales volume showed a very strong growth of 33% compared to the same quarter of the last year.

Our production was affected by two events. In [indiscernible], we took a plan to shut down for 46 days to carry out interim repairs on one of our blast furnaces in Vanderbijlpark. It cost us 195,000 tonnes of liquid iron, but [indiscernible] and by phasing up our other automated production facilities, we made up about 100,000 tonnes of that, and eventually, only about 95,000 tonnes showed up in [indiscernible]. Market coke extension project. We announced some time back it is quite on track. We have now received the Board approval for the project, and we are very close to finding the contract for supply of [indiscernible]. The cost reduction drive is also quite on target. However, you will not see it in the numbers because, the reductions we have achieved through various interventions have been set off by the increase in coke prices, materials and services, which is a worldwide phenomena, you are all aware of that and how the commodity markets are behaving.

Outlook - earnings for the fourth quarter are expected to be similar to those of the third quarter. I did say I would like to share with you some more points about which we have been talking on our previous interactions. One of the issues, or one of the points is the distribution policy. You will recall that we have stated on previous occasions that in view of the strong cash flow position of the company, the Board has decided to review the current distribution policy, with a view to making an announcement on the reduction of capital before the end of 2004. In light of this, the Board has decided to forego the interim dividend. We propose to go to the Board with our recommendations before the end of the year, and we expect that the Board will take a view on this.

Another point I want to share with you is the strategy. As you are aware, Ispat Iscor has adopted a new strategy direction for the next 3 years to come, and this strategy has three important areas about it. One is the reduction in the costs. We have spoken about reduction in the costs of the company by about $50 per tonne. It has to come from various steps, which we have already identified. We have quantified it, and in fact evaluated them, and many of them are already in the implementation stage. They come from our import materials that is, [mines], particularly iron ore [mines]. We have some plans from that. We have plans to reduce fixed costs. We have plans about efficiency improvement and all these are contributing to the $50 per tonne reduction I spoke about.

We have embarked upon improving the throughput in the company at two levels. The first one million [tonnes] to come through small re-bottlenecking and small investments. We have now [indiscernible] and I propose to go to the Board for a final approval of the strategy direction in the December meeting. Immediately after that, I propose to hold detailed presentations to the investor community and share it with you [indiscernible] at this stage it will not be appropriate to talk about all the numbers without having the Board's approval.

Another object I would like to share with you is the cost situation - how we are seeing it and how we are going forward on that. We have seen some increases inn our costs, more on account of the [indiscernible] in input prices, coking coal, coke, iron ore, freight are some of these examples. Looking forward into the next quarter, this trend to some extent will continue because of the situation of the commodity market.

There is also a discussion, which we have shared with you, with regards to a new [indiscernible] contract with LNM. [indiscernible] and we are committed to deal with it in a similar confident manner, going forward also. Minority shareholders will approve that and we are already engaging in [indiscernible] with some of you. We have received some good positions, which we are looking at and we are sharing it with LNM to address those [indiscernible]. We are currently waiting for the responses to some of the points, which we have passed on, and we are taking it forward. I just want to remind you that the current business [indiscernible] agreement is [indiscernible] end of 2004, and we continue to receive assistance and technical help in all the fields of the working of the company under that arrangement until the end of 2004.

I think I have covered the aspects I wanted to cover from my side and, Yvonne, I would like to keep the floor open for any questions at this stage. Thank you.

Thank you very much. [OPERATOR INSTRUCTIONS]. Our first question comes from Antony Scuggan of [indiscernible]. Please go ahead.

Hello. Just one quick question. I just wanted to find out where the talks are with regards to investing in [sisco] steel. This was something that was mentioned a few months ago by your company.

Thank you. I dealt with this some time back, and what I stated there and I will state now also-- considering the cycle of the steel price, we believe that this is not the best time to be [indiscernible]. That is why at this stage it is not very, hot shall I say, and it's not close to any conclusions. So when we will be embarking upon it [indiscernible] I will appropriately share it with you.

OK, thank you very much.

Mr. Scuggan do you have any further questions?

No, that's it from me thanks.

Our next question comes from Johan Roder of Deutsche Bank, please go ahead.

Good afternoon, Davinder, gentlemen. I've just got a couple of questions actually. Firstly, we have just seen an announcement in the Government Gazette of the view from the DTI or specifically the International Trade Administration Commission, which forms part of the DTI, of the relaxation of the import duty of 5% on domestics steel on imports into South Africa. Could you elaborate a little bit on how the negotiations with the Department of Trade and Industry is going at the moment with this regard, and also with regard to developmental pricing within the domestics steel industry?

With regard to the 5% duty, we have also noted this announcement from DTI. We are responding to that, and our belief is that this is not [indiscernible] steel industry in South Africa. We are dealing with it at two levels, that is, our own company level and also at SAISI - that is the body collective of the steelmakers in this country at both these levels. As far as our engagement with DTI on developmental price model is concerned, we have made substantial progress. We are engaging with them. We know of their expectations and we have shared a lot of information with them now and this is progressing well. We are not at a stage where an announcement can be made very soon, but substantial progress has been achieved on that end.

Thank you. That answers half of that question. Just a little bit more on that question. Do you think that the negotiations with the Department of Trade and Industry led to this specific announcement from them, or was this a program driven from a different division than the one that you were negotiating with?

We have not specifically dealt with it, and it is coming from the International Trade Administration Commission that you have just mentioned, and we are engaging more directly with DTI and we have not discussed this on a one-to-one coalition basis, so I would say it is an outcome of our negotiations and discussions.

All right, thank you very much. In the last quarter you had an indication of R1.37b of cash on the balance sheet. Can you perhaps give us an indication of what cash is available now, given the 500 plus to spend on the business assistance agreement?

Yes, please give me a second. We do have cash to the tune of R2b at this stage.

All right, so it's exactly R2b that you have?

No, approximately.

Okay. Just one more question in terms of CapEx for the expansory 2 million tonnes that you are talking about. Can you break it down between the requirements for the first million tonne and the second million tonne? Can you give us an approximation of those two perhaps?

These are the details of the strategy which I propose to share with you immediately after the Board approval. At this stage it would not be proper to be talking about specific numbers, but I can give you some idea. We have identified where we are already having capacity in various [indiscernible]of this office and the first the first one million tonne strategy is more or less clear to us and a big part of that we are already factoring into our business plan of 2005.

The second one million tonnes which is a very detailed analysis which is going on at this moment, there are two strong candidates for that. One is [Salana Steel]. We already have extra [indiscernible] capacity available. The hot end of the process is already capable of handling extra tonnes. It is the primary end of it which needs [indiscernible] as far as [Salana] is concerned, but in our view that is quite linked to [indiscernible] natural gas there.

The other candidate - now I am speaking about the second one million tonnes - the other candidate is Vanderbijlpark. There also we believe that hot end rolling capacity to a large extent is available, and to some extent we also have steel making capacity in terms of [indiscernible] furnaces, which are this stage are not being fully pressed. At the end of primary end and actually metallics side which we will have to [indiscernible] now. So if we want these two locations which already have strengths, we will have to choose based on the final numbers which are being worked out.

Thanks very much and good luck with your strategy and we look forward to hearing more from that, and well done on your results. Thanks very much.

Thank you.

Our next question comes from Tarish Shamaldon, American Century Investment. Please go ahead.

Good afternoon. Congratulations on another very good quarter. My questions are as follows. About a year ago, maybe a little less than a year ago, on a similar call, there was a belief expressed that starting March 2004 steel prices will peak out and perhaps even decline towards the period now. Looking at the next year, do you have more conviction now that steel prices are peaking or do you still reasonably think that it is possible for the industry to negotiate higher steel prices? Thank you.

That's a good question. I wish I had a definitive answer to that. We do have a view and we do keep deliberating that, particularly with reference to our business plan for next year. It's a fact that all expectations with regard to the movement of the steel prices through the year 2004 have proved wrong, and the market has[indiscernible] continued to strenth. Talking about quarter 4, which is easier to talk about, being closer to us and we are living through it, we are expecting that the same level will continue.

For 2005 it is difficult to make a call because, so much is happening so fast that it is not easy to make a call on that one. The factors, which must be remembered are Chinese demand. Once again it is the single largest factor. Ability of the ports to handle the raw materials and the logistics of the steel which is moving all over the world is another issue which is going to influence the cost base and thereby the selling prices. One thing we can say with a certain amount of authority is on average 2005 will be a better year than 2004, but then we are speaking about averages. I think this is the absolute best I can get to answering that question.

May I ask a follow-up question here?

Yes.

Are you getting indications from any of your customers that they are either thinking about scaling down orders, or the growth in their orders from Iscor, the growth in their orders meaning from them to you, will not grow as much as last year, because they are either curtailing or maybe not growing production as much as they thought they would, because every incremental unit of output for whatever it is that they make, they are not making adequate returns on capital to justify expansion or maybe even to necessitate some reduction in output?

Very currently we are seeing that the demand in the [indiscernible] is not increasing at the same pace that it had been increasing. What we do not know is what of that is a seasonal impact, particularly remembering that we are getting into the festival season when the demand does go down, and how much of that is a normal slow down of the pace of ordering. That is one thing we need to check and our opinion is that as we go into quarter 1, this will become clearer. Also remember that some of the steel mills in the world, particularly in Europe, have already announced their intentions to increase prices for quarter 1, and that is based on their assessment that the current strength will sustain into next year also. But we for one are watching that very closely and we will be formulating our opinion going forward based on that.

Last follow up question, and I promise it's the last one. How confident are you, if you were a betting man and you had to place a bet, how confident are you that steel prices for next year, on average, will stay flat, meaning not go down?

From current levels?

From current levels, on average. I realise they may go up a little more in the first half and then go down in the second, but on average.

I think the current levels are fairly high and they reflect the good demand which we have seen in the past month and quarters. Let's remember that inventory build up or adjustments and corrections also have a very strong influence on the steel prices. Based on all these factors, I guess the best we can say is that on an average, 2005 will be better than 2004. How the prices will move from here, up and down, is a difficult call to make, but I guess that when it comes to periods on an annual basis, it is better to look at comparing 2004 with 2005.

Thank you.

Our next question comes from David Broden, Venin Foreign and Easer Securities. Please go ahead.

Hi, just a very specific question on the max steel line on your income statement. First quarter of the year, you got R60m profit, second quarter of the year R151m and in the third quarter of the year you've got R39m. Just explain the huge variance there from quarter to quarter and in particular why it's fallen from the second quarter to the third quarter.

David, I will pass on this question to Sethuraman sitting here.

Hi. This is essentially reflecting the shipping income part of max steel. As you rightly said in the first half of the previous quarter it reached a very high percentage because, as you know, the shipping was very tight. Since then the shipping rates have come down. That is essentially the driver for this.

Okay. Sorry, just a follow on then. What would you see as a ball park figure for the fourth quarter of the year?

Fourth quarter I am told will be in line with what we reported for the third quarter.

Thank you.

Our next question comes from Justin Brown from Ineg Bridge. Please go ahead.

Good afternoon. My first question was regarding your steel price model for South Africa domestic market. I just wondered if you could briefly explain what the status quo is in terms of that? I am just trying to get some understanding of what this current position is.

I just wondered why are you holding off paying dividends? This is the second time, I think there was a stop of paying full dividend until full year and I just wondered why? And just regarding the peak of steel prices. When will we know when steel prices have peaked? What will all the signals be? Thank you.

I will take your questions one by one. Our developmental pricing model, as you can imagine, has several dimensions.

You are probably aware that we already have a scheme under which we give incentives to secondary exporters. Those people who use our steel and export their goods, they can come back to us and claim a refund of a certain percentage. Then we also have sector specific contracts, which reflect, to our mind, an advantage to the customer for providing a continuous base load on our capacity, as is a trend in the industry. And there are some other incentives, which we are already giving to the industry by various means.

All these factors have to be taken into account for developing any pricing model. On one side is the desire of the DTI to give an impetus to the steel demand in the country, and on the other hand are the considerations with regard to what can be done, keeping the trusts of the company and shareholders in balance.

Now, it is important that I add here that we have perfect meeting of minds with regards to the needs to give an impetus [inaudible]. It is very clear from our results that our realisation and our profitability is better on the domestic side. Like any other steel producer who is facing exports and imports also. And given the fact that we have seen a substantial increase in the domestic demand, I mentioned that we have seen very strong demand of 33% compared to the last year's equivalent quarter. These are the factors. We want to be participating in expansion of the demand. We want to give an impetus to that because it adds to our bottom line. Each one tonne swung from export to domestic side is in favour of the company. We have no doubt about it. Now balancing all this [indiscernible] and coming out with a model, which addresses the expectations of all the role players, is a task which is at hand, and we are engaging in that. But this is what I can share with you are this stage.

To answer you second question about why we are holding off the payment of the dividend. I just recall what was done last time, that we held back only on the interim dividend and I have not made any statement with regards to going forward, based on the full year results. That is something which will still come. Therefore your statement that why are we once again holding on the dividend is not correct. I referred to the previous one only, which is the first one.

Okay.

And the third question you asked is when and how will we know that prices have peaked out. One sure way is that you will know in this conference, but before that, there are enough indicators out there because commodity markets and steel markets is a big news and a big event , and China in economic circles is the next big news. And I am sure we will pick it up. From that perspective I think quarter one is the most eventful which we will be watching very carefully. And forecasting turning point, in general, in economics cycles is by far the most difficult task to do. Usually, you will find the peak, only when you have lived through it, so this is a general economic phenomena. Thank you.

Thank you too.

Our next question comes from Wilhem Fentar from UBS. Please go ahead.

Thank you. I'd just like some more clarity on your cash position. You said that around R2b currently is there. Is that your gross position or your net cash position?

It is the net cash please.

Thank you.

Mr. Fentar, do you have any further questions?

No further questions.

Thank you. Our next question comes from Ron Pippin of FA Stockbrokers. Please go ahead.

Good afternoon. Congratulations on a robust set of numbers there. I wonder if you could just clarify one of two things. First of all the swing from exports to the current market. Could you sort of draw us what you see on the landscape in term of South African demand next year, taking into account current and macro factors within?

I will pass on this question to Charles, our economist. Charles.

If we look at the general economic state at this point in time it seems like the domestic market is fairing quite well, and macro indicators are pointing in the right direction with regard to growth in the domestic market. We are expecting the same swing will continue into next year, and will even gain momentum. Although we have analysed the current offtake of steel at this point in time to be at a very high level, we still reckon that there will be some more growth coming through into the next year, although not at the same rate as we have increased this year. So, the rate will be marginally higher, but not as high as this year.

Could you give us an indication in terms of percentages?

That is very difficult to call on at this stage, but what we have calculated at this point in time is anything between 4% and 6%.

Between 4% and 6%. Those would be fairly conservative numbers? Of the current base?.

Off the current base, which is the highest. It is the highest [indiscernible] that we have seen this year, that we have seen over the last decade.

Thank you very much. May I please just ask one more question? The timing of the cost savings $50 per tonne coming in - could you give us a feel in terms of the phasing in or when we will start to see the benefits and, quarter on quarter basis, what sort of numbers are we likely to see down the line over a two or three year period?

It's a very continuous process. Some of them you are seeing already. If you run a comparison with other steel manufacturers, major steel manufacturers, and the movement in their cost base over last year, for example, you will see that the company is already doing very well in controlling its costs. We keep a track of them, and we do bench marking and we do the indexation also based on various inputs and other parameters. But it is a continuous process and there are several interventions and action points in every scale of the company which are constantly being tracked, so it's a constant process and you will see its effect every quarter.

Taking into account high input costs obviously.

Say that again please.

I'm saying taking into account your view going forward for the next quarter of input costs, remaining pretty high and increasing as well.

Yes, that is true. The markets of input drivers iron ore, coking coal, I am sure you are tracking them and you know what is the expectation and how are they looking. That's one thing which we cannot help beyond a point, but what we can help, we are very strong program on that and that is related to an idea and intervention which we trace very closely and we keep doing that, therefore, we will keep seeing a reduction in the year to come.

Thank you very much.

Our next question comes from Troy Grady of Nedco Securities. Please go ahead.

Hi. I just wanted to make sure that I heard you correctly. Did you say that you wanted to take a proposal to the Board to pay an interim dividend and in which case will a capital reduction still be under consideration?

No, I said the Board will take a view on that before the end of the year, and what that clearly will be is the prerogative of the Board, and I don't want to speculate on that at this stage.

Okay.

Mr. Brady, do you have any further questions?

No thanks.

Our next question comes from Nikki Smith of Business Report. Please go ahead.

Hi. Just a question on the Business Assistance Agreement, well a couple actually. First of all, why is it appropriate to continue to pay for the business assistance agreement if LNM is now the major shareholder. You said this thing would expire in December, so when is the cut off date for this agreement to be concluded and what happens if you only get signatures in January? Do they drop you in the interim? And you said that in the interim you had received some sort of support from minorities on this. Could you give us an idea of what sort of percentage of the minorities that you've spoken to so far have still thought it was a good idea to support the Business Assistance Agreement?

Ok. Nikki I will address your questions one by one.

Thank you.

What you are saying, why is it appropriate to have any of these agreements?

No, why is it appropriate to continue to pay the major shareholder?

[indiscernible] in the end it is a question of why pay - I agree with you. Now it is a fact that as far as the management principles are concerned, our two targets of management process of control, setting the targets, supporting the process of achieving those targets, providing technical assistance in them, that process one can expect to come from majority shareholders [indiscernible] also.

But the moment we start talking about high end of technology. The moment we start talking about developing the production which the Japanese and others have developed at a very high cost, and sharing that technology. The moment we talk about sharing the certain development facilities, which are existing in the Group in Chicago and in France for flat and long products respectively. All these are areas, which are being managed at a very high cost. There are patents involved and all these issues are there. I agree with you, the normal control, guiding and other aspects of good management practices want and expect to come, free of cost, from the majority shareholders, as a matter of course. But other ones are an issue with [indiscernible].

It is expiring - the current business assistance agreement is expiring in December 2004, but there is no danger or risk that the assistance and guidance we receive from LNM Group will fall off in any case, even if a new agreement is not in position by that time.

Our interaction with the minority shareholders. I don't think I gave the impression that we already have the support of minority shareholders. I did speak that we are engaging with them and the fact we have spoken to the top five local shareholders. We have some feedback and ideas from them, which we are taking forward.

I guess what can be stated is that the current agreement has helped the company in a tremendous way. It can be seen by any comparison. If you compare our results with other companies. If you compare our movement of costs with other steel companies in any manner. I don't think there can be two views about that, that the company has tremendously benefited from existing agreements. The question is what should be the form and shape of that, which is acceptable to the minority shareholders, and yet addresses our aspirations as a company [indiscernible]. To have an access to that technology we are speaking about. The purpose of our initial interaction with some of the minority shareholders was to gauge the feeling of minorities over the future payments and future shape and form of such an agreement. As far as [indiscernible] is concerned, we as the management, are convinced that to have an access to that high end of technology and product development, we need something. Thank you.

Sorry, just one last question. It's a follow on from Justin's question. You were saying that you had made fabulous progress on the domestic pricing model, but it was not appropriate to make any kind of announcements on it yet. When do you think you will be in a position to make an announcement on this?

It's only internal process alone where I can fix a date and stand by that. As you can imagine that we are engaging with government, and they have their own priorities and they have their own engagements. So it's a bit difficult to place a time limit on that. But we are chasing it up. It is something we want to put to bed and from our side we are according it the highest priority.

Thank you very much.

[OPERATOR INSTRUCTIONS]. Our next question comes from Kerris Foster of Cazenove. Please go ahead.

Yes, good afternoon. You mentioned inventory build in [inaudible]. I wonder if you could just give us a little bit more color on that - a breakdown between the flat market and the long market.

And then perhaps also, if you could just also discuss some of the longer term contracts you have with the automotive and packaging industries, and whether or not you are looking for any sort of adjustments to those contracts in 2005.

And finally, if you could just give us an update of the state of [indiscernible].

Ok. I'll take them one by one and request Charles once again to comment on the inventory build up side.

I think due to the steel price rises that came through during the course of this year, there was a tendency for customers to build on stock. When analysing the stock [indiscernible] on both the flat and long side, that above the normal level on the long steel product side of roughly about six weeks, we've got about a two week surplus of stock in the system as well as on the flat side which has a normal level of around about nine weeks, also about a two week stock surplus in the system. That, in total amounts to about 80,000 tonnes to 90,000 tonnes in stock that needs to be equalized before we can go further on, and that is equated into the numbers that I have talked about just now, when we talk about the growth for 2005.

Your other question, if I may come back to that was with regard to the long term contract, particularly you mention the auto industry. We are in discussions with them and those discussions are in a very sensitive commercial stage, and it would not be appropriate to comment on that, but it should suffice to say that we are discussing with them every aspect of it.

[indiscernible] is the last point you raised. The case is before the competition tribunal as you know. All the sides have submitted their documents and their different arguments. We are waiting for a hearing date to be fixed by the tribunal. Thank you.

Thank you.

Our next question comes from Terence Teem of Engineering News. Please go ahead.

Hello. My question is on the sector specific contracts. I wonder if you could talk to how many tonnes are involved there, and how badly you are hurting with regard to how far below IPP are these guys getting, and what sort of time frame are you looking at to coming to a new deal?

I think speaking off my head, about 250,000 tonnes to 300,000 tonnes of steel is involved in such contracts, and I wouldn't like to comment beyond that at this stage.

Thank you.

Our next question comes from Tatara Shamalda of American Century. Please go ahead.

Returning to the dividends. I realise that there are different parties that are going to express their views on this issue. As a CFO, what is your view on the appropriate capital structure of the company given what you know about the outlook for the company, and what will be your recommendation to the Board or to your other members of the Management Committee as to the appropriate level of dividends?

[indiscernible] I take it that this question is addressed to me. In terms of dividend, the earlier policy was to distribute one third of the earnings. I would say that the Board is still considering the aspect of distribution in terms of surplus cash, the only question is whether it is going to come as dividends or capital reduction route, which has been discussed with the Board and you are aware of that.

In terms of distribution, the only question is whether the company will we be able to meet all its CapEx commitments. If you ask me I would say the company is well positioned to really meet its CapEx commitments and in the light of that, I would say that the company should continue to operate on our zero debt structure, given the fact cyclicality of the industry even [indiscernible] we have a very strong cash flow.

What do you think is the appropriate level of gearing that Iscor should carry?

If you ask me I would say that it need not carry any gearing and it should not carry any gearing.

Thank you.

Mr. Shamalda, do you have any further questions?

No, sorry, no I don't.

[OPERATOR INSTRUCTIONS]. Our next question comes from James McAveer of Reuters. Please go ahead.

Hello. Just wanted to ask a question on whether there are any plans to buy up [Hiveld] Steel. Thank you.

I think what I answered in the context of Sisco also goes for Hiveld also.

We have demonstrated in the past, our willingness and desire to buy up some of the steel assets around us. It is a question of timing and paying the right price. At this stage we are not engaging with Hiveld specifically in any serious talks.

Do you have any further questions?

No thank you.

At this stage there are no further questions. Would you like to make some closing comments at this time?

I think I want to just thank everybody for a very nice and extensive participation, and their continued interest in the company. Thank you very much for all your very nice and good questions on the performance of the company and your continued support. Thank you very much.

Thank you very much. On behalf of Ispat Iscor, that concludes this afternoon's conference. Thank you for joining us.