ArcelorMittal SA (MT) 2004 Q3 法說會逐字稿

Please stand by, Premiere Conferencing, we're about to begin. Good day, ladies and gentlemen, and welcome to today's Arcelor 2004 Second Half Conference Call. For your information, this call is being recorded. At this time, I'd like to turn the call over to your hosts today, Mr. Guy Dolle and Mr. Michel Wurth. Please go ahead, gentlemen.

Good morning or good afternoon to everybody. First, Michel will present you the third quarter results, then I will give a few comments regarding the situation of the market and our expectations for the fourth quarter and next year. And then we will go through by our Q&A session. So please, Michel, present our quarterly results.

Okay, good morning, good afternoon, everyone. You have probably noticed by reading our press release that these are quite good results we are pleased to explain to you today. Before I am going as usual in some explanations concerning the figures, I would like to summarize to you some of the financial and accounting highlights, and I apologize, this is more for the specialists.

I recall that first, on the first slide, in the first half of 2004 there has been 1 change of accounting rule, we applied IFRS number 3, which meant that there was a transfer of €794m from non-allocating, but went directly to equity. The consequence of this was that accounting, the net bottom line was €100m -- is now today €100m lower than it was on a comparable basis 1 year before.

Then we had in the first half of the year the conversion and the redemption of a convertible bond, which raised equity by €277m. We made the buy out of Aceralia's minority interest, and we own today more than 99.5% of this company.

And then in long carbon steel we did some portfolio management due to the full consolidation of the Argentinean-based Acindar. I recall you that Acindar has an EBITDA margin of over 40%, so that we are very pleased, and this is entering into a gross operating result since quarter 2 2004.

And then we disposed of Acierie de l'Atlantique in June 2004 with a capital gain of €52m. Whereas in the past, Acierie de l'Atlantique almost generated no positive margin.

In DTT we made a successful disposal of carbon tube business from DTT sector. This is fully deconsolidated since April. And in quarter 3 we sold the remaining of our shareholding in the tube business, to the majority owner.

And then in stainless steel I remember that we started the implementation of our strategy by disposing of J&L's assets, which are now from an accounting point of view fully effective from June 1, 2004. And we disposed of Thainox.

Next slide is the quarter 3 financial and accounting highlights. The most important was obviously the successful rights issue and the consolidation of CST starting from October 1 this year. I recall you that the rights issue helped us to increase our equity by €1.14b, representing 107m new shares. Then we disposed -- in terms of our portfolio management, we disposed of IEE, which was active in electronic fencing, and we made a capital gain of [€64m].

In terms of flat carbon steel there was also the decision about a new restructuring and competitivity plan in Spain, in Asturias. And this meant that we took a charge and loss at the -- or provision at the EBITDA level of €90m for flat carbon and for €10m in DTT.

In long carbon steel we continued our portfolio management by disposing of 2 wire drawing companies in Emesa and Galycas. In stainless steel, the implementation of Carinox, the new steel shop in Charleroi, is going as scheduled. And parallel to that we were -- we took a restructuring charge of €20m in order to prepare the closure of the [indiscernible] steel shop, which will be done in 2006 when the Ardoise stainless steel shop has been closed by the end of June.

And then in distribution, transformation and trading, we came to an agreement and renewed the partnership agreement with the family owner of Gonvarri, which meant that we decreased our equity stake from 60% to 35%. I recall you that in this joint venture we are active in steel service centers and also for stamping with the automotive industry.

We made the disposal of J&F, which is a series of steel service centers for industrial clients in the US. And as I told you, there was a provision for restructuring in Spain, in parallel to what we did in flat carbon steel.

Now on the next slide I am very pleased to comment to you the key figures. First of all, I recall you quarter 3 was in Europe -- is traditionally a vacation quarter. And despite that, results are better in quarter 3 than they have been in quarter 2, which from a business seasonality point of view is all the time by far the best quarter in the year. And to give you -- to illustrate this I can tell you that we -- that shipments in quarter 3 were down by 1.7m tons versus quarter 2. But fortunately it seems markets in Europe were better, there have been 600,000 tons more shipments in quarter 3 this year than there had been in quarter 3 last year.

Second, it's obvious that there has been, and what I announced last time, that margin improvement has been quite strong. 15.4% EBITDA margin after recurring of €163m. We are giving you the non-recurring items so that you can make the comparison of the true progress we are making by running the business.

We can also see that the main reasons for this improved performance were mainly very strong results in long, and in distribution, which I will comment in 1 moment. Whereas in the flat carbon sector, prices increased now and on an accumulated base. If we take the 9 first months of this year, the price -- the cost increases we have seen in [iron ore] and in [indiscernible] have now been fully offset due to price increases in that sector.

Depreciation and amortization was quite at a normal level in quarter 3, so that it gives us an operating result of €835m, or 11.7%. And the net result Group share of €629m, which is a net bottom line margin Group share of 8.7%.

If we compare now the first 3 quarters 2003 with the first quarters 2004, we can see that sales went up 15.2% on a comparable basis. EBITDA or gross operating results went up by 70%, despite the fact that non-recurring in 2004 was significantly higher than in the first 3 quarters of 2003. Operating results went up by 127% to €2.1b. This was more than a doubling, or this is a doubling of the margins. And net Group share, with €1.5b, is obviously a very strong result.

Parallel to that, our gearings. You know that the cash flow generation has been huge and with the help of the rights issue at the end of the third quarter 2004 our gearing ratio was 21.3%. This is however before the full consolidation of CST, which I will comment in 1 moment.

Maybe 1 word about next quarter. Globally, we foresee that quarter 4 will be in numbers the best quarter of the year, at least in terms of gross operating margins. This will be done, and this will even be accentuated due to the full consolidation of CST, which will be extremely positive. So that there will be also further free cash flow generation and the continuation of decrease of net financial debt.

We may see that a little bit better, first of all, by looking at slide number 5, where we are speaking about flat carbon steel. And this confirms what I announced to you 3 months ago. Quarter 3 is stronger than quarter 2, despite lower volumes, because in fact in flat carbon steel, shipments went down by 700,000 tons.

We had good margins in that sector, with 13.5%, despite the lower volumes and despite strong non-recurring items, mainly due to the restructuring plan we are doing in Spain in Asturias. Where I can say that mainly 1,700 persons will be concerned, either subcontractors or own personnel in Asturias. So you can imagine that for the next 2 or 3 years to come, there will be strong productivity improvement also in that part of the Group. And this restructuring plan is now following the similar restructuring plans we have done in -- and productivity improvement plans we have done previously in France, in Germany and in Belgium.

Depreciation and amortization, I think is no particular comment. So that at the operating level, with 9.2% and €348m result is quite correct.

Now looking at or comparing the first 3 quarters of 2004 with the first 3 quarters of 2003, I would like first of all to emphasize that the improvement in margins is not due to improved prices. Because if we look globally at our figures we had the positive price effect for the first 9 months of this year of €599m, whereas our effective cost increase was almost -- was also much higher than €500m. So that from that point of view we can say that the price effect simply mainly helped to offset increased costs.

On the other hand, margins increased quite satisfactorily, from €1.1b to €1.4b, and operating result was going up from 6.4% to 8.2%. It is clear that in a quarter, that shipments were higher in the first quarter -- 3 quarters 2004 than the 3 quarters before. So that we can say that the improved margins were because of higher volumes and very good realization of synergies and of management gains.

Now in quarter 4 we will see, with the price rises which gave a true positive price effect, so that we can definitely see that results from quarter 4 in flat will be much stronger than they have been in quarter 3. And there will be not only the price effects, but we foresee also higher volumes. So it's both elements which will give us a strong improvement of results in quarter 4, in addition to the full consolidation of CST.

The next slide, page 6, is in long carbon steel. And I think 1 comment is only that these remarkable results in this Company, this is due to very good management and improvement in productivity as well in Brazil as in Europe. We have also had the lateral scope because of the full consolidation of Acindar since May, and the holding of Pallanzeno section rolling mill since June 2003, and the sale of others. So I could say that in long there has been active and positive portfolio management, there has been a very efficient introduction of scrap surcharges in order to -- in the pricing there has been good cost-cutting, and there's been strong growth in Europe.

This is also what we call the transformation of our business level in this sector. And as you can see, revenues jumped up from €3.2b to €4.5b, this is a plus one-third increase because of the positive price effect, because of the positive volume effect, and because of the positive scope effect.

Non-recurring in the first half has been positive, mainly because of the capital gain we made on the sale of [indiscernible] in quarter 3 2004. It was mainly due to the sale of the 2 wire drawing mills, Galycas and Emesa, in Spain. And with operating result of 23.1%, we can say that long carbon is truly a world-class business.

If I would like and see the prospects for quarter 4, we can see that it's fair to say that long reach today a level plateau of profitability at a very high level. What we see today is some stronger competition in factions in Europe, and the same applies to some extent in [indiscernible]. On the other hand, shipments may go down a little bit in quarter 4 because we know by experience that some of our customers will try to minimize their inventories by the end of the year. On the other hand, wire rods and wire rod transformation throughout the globe is doing perfectly well, and should even improve its productivity.

Next sector is stainless steel, on page 7. There you can see that compared to last year the situation is improving even at -- even if we can see, at a modest pace. The reason being that base prices are only slightly higher today than they have been 1 year ago. We had then in stainless steel a negative volume effect versus Q2, but stable margins. And we are on the way to build a transformation of this sector, in particular in the steel shops, where Uzbek will be closed in 2006, and as well -- as rapidly as Carinox will be in operations.

So I do believe we can say that in 2004, nevertheless, stainless is better than the same period in 2003, despite negative volume effect. I would say that this is due to 2 reasons. Positive management gains in the sectors, and then second positive consequence of the portfolio management, and in particular the negative -- the losses of J&L are now part of the past.

What is not in these figures is the excellent performance of Acesita. You know that still today we are not fully consolidating Acesita, but we, as you know, I recall you that we have a call option on the remaining shares -- on the remaining controlling shares of Acesita to be exercised next year. So we are following carefully this company. What we can say is that in quarter 3, Acesita had an EBITDA margin of 35% with €98m, and for the first 3 quarters the total EBITDA of this company was €257m, which [should once] become part of the Group.

The outlook in stainless is that business continues to be difficult because of an imbalance between supply and demand. From our point of view, we are pursuing our restructuring effort and also our efforts to do active portfolio management. I recall you that our strategy is to focus on such things in Europe, and on Acesita in Latin America. And that means in particular that concerning long stainless and the plate business, we are looking at active alternative solutions.

On page 8, distribution transformation and trading. There also we are extremely well pleased with the 6.7% margin in this sector and the contribution of €128m at EBITDA level. There have been some non-recurring items there, which are 1 restructuring file in construction, and the social costs of our Spanish optimization plan. At the end we have an operating margin of 5.6%, and despite the seasonal slowdown, we are really thinking that these are excellent margins, even better than the ones we had expected.

1 of the reasons being that the price -- cost squeeze is positive because inventory is accounted for at the average purchasing price, whereas when we are in a rising price horizon, margins are robuster. But on the other hand also we believe now that the synergies between the old -- between the distribution segments of the 3 former groups are playing well, and this is improving the results. And this trend should also continue even if, from a point of shipments in the fourth quarter we will probably see a slowdown, for the same reason as in long, that some of our customers would like to minimize their inventory level by the end of the year.

The next slide is now consolidated income statement. I will only comment some of the most relevant figures.

First of all, concerning net financing costs, we can say that on the cost of our gross debt, it's 3.8%. It's a mixture of short-term and long-term interest rates. The other remarkable figure is income from associates, €346m after 9 months this year. Out of this, CST accounted for €130.5m, and Acesita €29m, and for the other there are a number of smaller companies.

Result before tax is €2.25b, and then an income tax rate which might be, fortunately for us, lower than the 1 you might have expected. The reason is that we are quite conservative in terms of having deferred tax assets, and we are using today tax carried forward losses which had not been -- where we had -- where our internal procedure had not allowed us to account for as a deferred tax asset. And the result is, for that reason, a lower tax rate and a higher bottom rate -- a higher bottom line.

In the minority interests we can say that the most important single element is Belgo Minera, which has been very positive, but also [indiscernible], where we are still a minority shareholder, have been quite positive.

The next slide is working capital. Despite the raise of working capital since the beginning of the year, I can assure you that -- which makes €500m, I can assure you that working capital is still managed very well. I can give you 1 example, it's in terms of inventory. We had inventories of €9.9m by the end of last year, we have €9.2m today. So inventories have been brought down by almost 700,000 tons, and in the same time trade receivables and trade payables in terms of turnover remained almost constant. So that the increase of working capital is in fact good working capital, because prices are going up because sales were up, and this will be cash flow tomorrow.

The next slide, on page 11, is the net financial debt and gearing. So what can we say? Net debt financial since the beginning of the year was decreasing by €2b, and simply in quarter 3 it was 500 -- it is a free cash flow of 500,000 -- €500m. And also since the same period, shareholders' equity went up by almost €3b. What does that represent? €1.4 -- €1.1b rights issue, €300m increase or conversion of convertibles, and the results of the year, €1.5b. And that's the reason why gearing went down by 54 -- from 55% to 21.3%, this being before the full consolidation of CST.

You have not to forget in this context, that in addition to this net financial debt we have a constant rate of things -- of 2 things. Of receivables, roughly €1.5b, and we have also as provisions in our balance sheet, €1.5b as pension funds. Nevertheless, our rating is -- with BBB is extremely solid, and this has been documented now recently with the issuing of a new [indiscernible]. If you would imagine, we paid over -- Euribor was only 75 basis points for a bond issue with a maturity of 10 years, which is, we consider today, excellent results. We believe that with this financial debt, where we have very good maturities, we have also now the strong balance sheet to continue our growth strategy and our portfolio management.

Consolidated balance sheet on page 2, if we look at the assets side, it's nothing special to say. We can say that depreciation equals almost amortization, so CapEx remains under control, as management has committed investments under equity. A method increased due to the increase of our shareholding in CST, the first transaction where we had informed the market about it. And then in current assets its working capital I have already commented.

On page 13 we have the liability side. Shareholders' equity went up by more than €3b, for the reasons I was explaining. Including IFRS number 3, what I said at the beginning. [Long term debt] is going down in terms of provisions. If we have -- I think that we are quite prudent, and we can say that the situation is fully under control, including employees' benefits, which are stable at €1.7b.

Cash flow and net financial debt. Despite the high increase of working capital requirements, for the reasons I was explaining, we had cash flow from operating activities after 3 quarters of €1.9 -- of €1.8b. And I remember you that working capital was increasing by €815m. We have then acquisition of tangible and intangible assets, over €821m, so that once again CapEx is under control.

Other acquisitions and disposals gave us a net result for disposal of €209m, despite buying 20% of CST. And that means that we are actively pursuing our portfolio management and trying to sell off the businesses which we do not consider as [good].

Now from financing activities globally, it's a plus of €1b. The main element -- the main item being there the rights issue of €1.14m, and then there was some other moments. And this explained the decrease of net financial debt by €2.1b, and I think that documents very well the management -- the commitment of this management to have our debt fully in control.

The next and last 2 slides is the effects of the full consolidation of CST as from October 1 on, because what has happened on October 14, we signed a definitive final agreement with the Japanese shareholders. First of all, giving us the waiver to make transactions with other shareholders in the controlling stake of CST. And second, we agreed with these Japanese shareholders that we have a full put-and-call agreement to be exercised after May 26 next year, to buy their stake in the company.

What we can say that is globally, all transactions we have done under -- concerning CST have been done at similar values than the ones we have negotiated with CVRD. And it is these values which are now at the -- in our pro forma balance sheet concerning CST.

So you can see that mainly on the tangible and -- on the tangible assets, there is an increase of €1.3b or €1.4b. And then on shareholders' equity, €600m, which represents mainly the minorities, and then CST has a net financial debt of approximately €300m. Which means that after full consolidation of CST, our gearing ratio would go up from 21.3 to 26.4%.

I recall you that this pro forma is done for 9 months full consolidation of CST with a target percentage that represents 71.2% of the shares, which are secured by now. And I remember you also, in the profit and loss account you will have the fully consolidated results of CST after that period. But you have to take account that in the official results of our profit and loss account, of [a flow] you had for 9 months CST, the equity result that was 28% up to July and then 48% ownership in CST from July up to September.

Now the next slide is pro forma profit and loss. So you can see that revenues go only up by 4% but EBITDA by 14%, and EBIT by 19%. Profit before taxes -- or after taxes goes up by 10, respectively, 15%. These figures being not underestimated, but not taking into account that we have already an ownership of 48% of CST in the third quarter due to the transaction we did with CVRD.

From a non-dilute earning per share point of view, this transaction is accretive because on a pro forma basis, after 9 months earnings per share are €3.17.

And then finally, on the last slide, which is quite nice, we can see also that full consolidation of CST will increase our free cash flow by 20% and our cash flow from operating activities by 19%. And knowing the excellent prospects of CST also in quarter 4, this will surely be not worse, it will likely be better.

Thanks a lot for your attention, and excuse me for all these technical details I have given to you.

Well, thanks a lot, Michel. Just to summarize, I'll make 3 comments.

First, these third quarter results are excellent, and I do believe that our [indiscernible] result for the year 2004 will be also excellent.

How can we explain that? First, they are outstanding for loan and distribution, due to the fact that we've been able to increase price more, and the effect on raw materials. Secondly, for long, for flat, for stainless but also for the 2 other sectors, we have been able to decrease our costs. Taking into account our synergy savings, we have already achieved for the third quarter a synergy saving of €510m. You remember that our target for the end of the year was €500m. That means what we will achieve at least €540m, and we have been also able to take advantage to our perimeter of the increase of volumes.

And regarding our debt, we are now in -- on a pro forma basis without CST or after having used as well the increase of capital to take full control of CST, we have in the range between 26% and 30%, which was the target we've already fixed 2 years ago.

Regarding the working capital requirement. Despite the huge cost increase of inventory through raw material price increases, and also the price effect on receivables, we have been able to control this working capital requirement. So -- and of course, for the rest of the year we will take advantage on the fourth quarter of the full consolidation of Brazil. That is for the year 2004. We do believe, and we are very optimistic, at least for Arcelor, for the year 2005.

Why? First, we have fully consolidated our [indiscernible] and assets as well in Argentina, as well CST, and in Europe also Acesita.

Secondly, we will be able to continue to decrease our costs, as we have already shown during the last 3 years, when you have at least a positive effect on the price increase we have achieved on the spot market for the year 2005.

And last but not least, we will have a huge improvement due to our yearly contracts. We have already negotiated 70% -- 90% of our automotive yearly contracts, something between 60% and 70% for packaging and wire goods. And in fact, as I have already announced, we have achieved price increases between 20% and 40%, up to 50%, depending on the asset value for the product.

And this will be -- this year, 2005, will be excellent despite the raw material price increases, and we are very concerned regarding the raw material price increase for coking coal and for iron ore. Despite the fact that we anticipate a small slowdown of the economy and also of the [indiscernible] assumption on a world basis, coming from 8% during the year 2004 to something which will be close to 4%, between 3% and 4%, for the year 2005.

Inventories are now becoming normal, that is [really good] to have in our distribution business, the exceptional saving coming from improvement of inventory. And last but not least also, we have some concern regarding the currency. Of course with the strength of the euro, we pay a little bit less our purchasing but it will be -- it will make our European market more attractive for imports.

The third comment is that now we have achieved what was our goal regarding our balance sheet. We have a strong balance sheet with a gearing of less than 30%. That means that we are in a position to take advantage of this balance sheet for excellent growth, as far as we will have a good project in order to increase value for our shareholders.

So that was just the few comments I wanted to give. And now we are, with Michel, ready to answer your questions.

Thank you, sir. The question and answer session will be conducted electronically. [OPERATOR INSTRUCTIONS]. Our first question comes from [Alex Madison] from Maverick Capital. Please go ahead.

Hi, this is Chatri from Maverick Capital. Congratulations on a great quarter and good work for the year, first of all.

My first question is, if I run through the numbers in terms of the contract price increases for next year, and if I just assume flat spot prices from here, which may or may not be a reasonable assumption, a couple of things. I get to at least €5b in EBITDA for next year. And also free cash flow generation of €2b as a minimum for next year. Number 1 - are those reasonable assumptions? And number 2 - what do you intend to do with the free cash flow?

So, depending on what will be the price, spot prices on to the second half of the year, I do believe that with our new parameters, with our contract price increase, the equity results are rather good. So that means that next year we will have a strong cash flow, and we will use it very carefully. You know that we still have to pay the rest of our Brazilian assets, that is to buy 20% of CST. We have also to find an agreement with a pension fund regarding Acesita. And secondly, we have already announced that we are interested in the privatization process of Erdemir. Together, these 2 acquisitions would represent something in the range of $1.6/$1.8b.

And we will not increase our CapEx in our existing basis. That means we will stick in our [indiscernible] perimeter in the range of 1.2b of material CapEx.

But again, by year end your balance sheet should be quite clean, so will you do a buyback or raise the dividends?

We are -- a lot of investors ask us this question. We have to investigate, and we will take a decision at the Board of February 15 or 16.

Okay, thank you.

Thank you, sir. Our next question comes from [Julienne Odilon] from HSBC. Please go ahead.

Yes, good afternoon. I've got 2 questions. 1 technical, which is basically just looking at the depreciation by division, just a question concerning the long steel division and the stainless steel division. We see that in the third quarter we have a decline in the long steel division from €54m in the second quarter to €30m of depreciation for long steel. And in stainless steel, despite the disposal of J&L, at contrary was a stronger rise in terms of depreciation from [€26m] to €43m. So I just wanted to know why, what's going on behind those numbers?

My second question is more general, and it's in particular looking at the [middle steel] merger and acquisition. And I'd just like to know what your view is on the new strategy, and your view about the North American steel market, how you see today the North American steel market and North American steel industry, and how you can in the future participate or would like to go in this region in the future.

Well, thanks a lot. Michel will answer the first part of this question, but in order to help him to prepare this answer, I will answer the second question.

Of course, as a very important supplier to the automotive industry in flat carbon steel, we are interested to be active in continents where one-third of the cars are manufactured. The issue we were facing is the following, very simple to present. Do we need to have a small slice in the US in order to deliver our top quality product to the US? Or do we need to have a very important involvement in the US market for automotive and for other products when we perfectly know that the best place to create value for our shareholders is to be more and more involved in developing countries and [indiscernible]? I think that is a very important issue for us, as it is for all the players.

We were not interested by [ISG], because we took -- we did believe, we do still believe that the quality of the assets do not fulfill the standard of our expectations, so we had to answer the question I raised. For the moment, we don't see any solution where it could be interesting for us to be strongly involved in the US in the next coming -- or in North America in the next coming months.

Okay. And then for the second -- for the first part of the question. These are non -- these are special, 2 special events.

In the case of stainless, there was a depreciation of the assets of the Uzbek steel shop, because we have decided to close them and we have depreciated accordingly the assets, and this makes a difference with the quarter before.

And in long steel it was an opposite effect, due to the first consolidation of Acindar. We have made now the final calculations, and this gave a raise of bad will, and this bad will has positively -- has been re-introduced according to IAS into the results. And this has positively -- has a positive effect on the depreciation, which otherwise could have been in line with depreciation in the first semester.

Thank you, sir. Our next question comes from Charles Spencer from Morgan Stanley. Please go ahead.

Yes, afternoon. I just had a follow up question, perhaps getting back to Chatri's question on the increase for 2005. If we look at your flat steel segment, can you remind us what's the volume or tonnage that's impacted by these annual contract price increases? And I have a follow-up question to that.

Sure. Roughly speaking, before CST, that is just in our European perimeter, we have around 13m tons of annual or multi-years contract. Out of which something close to 10m in automotive industry, a little bit less than 2m for packaging, and close to 1m for appliance. So the packaging and appliance are usually only a yearly contract, and for automotive we have 50% of share of multi-years contracts and 50% of yearly contracts, mainly to subcontractors.

So that means that out of this 13m tons, roughly 8m tons have been or have to be finally renegotiated before the end of the year. And we can say that today, between 70 and 90%, depending on the outlet, have been already done. And for the multi-years contracts, if some of our customers ask for increase -- for some increase of volume, and they are asking for, we have passed a price increase, which is the same price increase as we have achieved for the other customers.

Okay. So if I understand correctly, it's basically 8m in the flat steel segment that's going to see an increase of 20% or more from January 1?

Yes, at least, yes.

And can you quantify for us the estimated impact of raw material cost increases in 2005? Perhaps express it in a total euros, millions of euros number?

Yes, it's a little -- too early to tell you very accurate figures. We have not yet finalized -- we have not yet started negotiations for iron ore. We are going to finalize negotiations regarding coking coal. I do believe that on average, compared to this year, cost with the dollar of 1.20 -- with €1 equal $1.20, the raw material price effect will be close to between €30 and €35 per ton on average, the year 2005 compared to the year 2004. That is our purchase forecast.

€30 to €35 per ton. And is that on the flat steel segment?

Just flat. And of course, it's less in the first quarter and higher in the fourth quarter next year. Because some of our contracts shall stop -- will stop at April 1.

So it's second half weighted?

The second half will be much more than the first half. You can say that it could be zero in the first quarter on average, or it will be 10 perhaps the first quarter 2005 compared to average. And the fourth quarter will be something between 45 and 50. [Indiscernible] of 2004

Okay, thank you. Just a last question, if I may? The cost of acquiring the JFE stake in CST. You went through a series of uses of cash, and you said you sought to buy a stake in CST the pension fund for Acesita. Can you go through the cost of that call option for the JFE?

It's exactly the same costs as for CVRD. The price of the shares will be exactly the same as the price we bought from -- as the shares we bought from CVRD.

Okay. All right, great, thank you.

Thank you, sir. Our next question comes from [Cezan Brunneck] from Exane BNP Paribas. Please go ahead.

Good afternoon, gentlemen. Congrats on the numbers.

2 questions. The first 1 relates to the automotive business, and basically the automotive trends. Are you in a position to expect an increase of your market shares in 2005?

And my second question relates to, as you've mentioned, your uses of cash, and basically why you think Erdemir is an interesting proposition for you. How profitable that is, and why you're better placed than potential other bidders to be selected by the Turkish government. Thank you.

We are building a budget with increase of ship deliveries to automotive industry, close to 10%. Taking advantage of our strong exposure in Turkey and in Brazil, and also to the fact that some customers are asking more tonnage and some other suppliers do not deliver them what they need.

Secondly, Erdemir is a very good company, with an expected EBITDA this year between $700m and $800m. It's [soon to be] coastal integrated plans with a turnaround which has to be finalized with Erdemir moving from the long to flat carbon steel. We are already involved in Turkey, in partnership with Erdemir, but more with a private investor in downstream activities since the end of the 80s, and delivering products to automotive industry appliance and in the future products, taking -- with the opportunity of Erdemir we'll also deliver product to the packaging. So our basic outlet will be satisfied through Turkey, and in Turkey.

Secondly, it's a good place to export to the Middle East and to the south part of Eastern Europe. And then it's a good company, well managed, with good results. Of course, there will be tough competition because if I read the newspaper it will be -- we will have at least 4 or 5 very important competitors to take control of Erdemir.

Thank you.

Thank you, sir. Our next question comes from [Joel Hersh] from Key Bank Capital Markets. Please go ahead.

Thank you. Congratulations on a terrific quarter, I must say, on behalf of [indiscernible], who wanted to be here, but he's on a plane for [indiscernible]. I was just wondering that in regards to your comments on the second half of '05, is the cooling primarily related to the euro, normal seasonal cooling, or global demand?

It was very difficult to understand your question. I think you have a little problem of -- with your phone. Can you repeat your question, being perhaps a little further from your phone?

Sure. Sorry about that. I'm just wondering if the cooling that you guys think will happen in the second half of '05, do you think that it's primarily caused by the euro strengthening, normal seasonal cooling or global demand? If you could just add a little color?

Oh, if I understood the question, it's regarding the strength of the euro and the influence of the strength of the euro on the macroeconomic. I think that of course, we would prefer to have a weak euro stable than to have a strong euro volatile, or weak euro volatile, which is in fact [indiscernible] the forecast for next year.

On 1 hand it's positive, because it will decrease our purchasing, of course, because all of our raw materials are purchased in dollars. But on the other hand, and in fact it's much more important that the first one, it is -- it's a concern for us because it has some influence on the economy in Europe, first. And secondly, because it helps our competitors to ship a little bit more to Europe, our exporters. And to taking advantage of the strengths of the domestic price in Europe. So in average we would prefer, as I have already mentioned, a strong dollar, which is not at all the basic scenario for next year.

Thank you very much.

Thank you. [OPERATOR INSTRUCTIONS]. We'll take our next question from Luc Pez from Oddo Securities. Please go ahead.

Good evening, gentlemen. I have 2 quick questions, and the 2 are actually related to the tax situation. The first 1, I would like to have perhaps further guidance with regards to the apparent tax rate and its future evolution.

And I was wondering to what extent the current very low apparent tax rate that we do see on the -- since the second quarter are therefore due to be sustainable over the future, and to what extent they are related to the subsidiaries in Brazil.

Which leads me to a follow-up question, which will be to relate it to the [indiscernible] Brazil future creation. And therefore if you could perhaps emphasize a little bit on the tax issue with regards to this entity. Thanks.

Okay, I would like to say that our tax result is fairly independent of our tax situation in Brazil. Maybe that I can explain you the question in the following way.

We have as our policy in order to judge whether we should take into and value tax carry forward losses, we have said that we have based this on 5-year business plans. And if we can compensate with future profit tax carry forward losses during this period of 5 years, we have the -- accordingly, deferred tax asset. So we have done this exercise in the years 2002 and early 2003, when the economic prospects and the profitability prospects of most of our subsidiaries were not as good as they were today. And hence we have adopted quite a conservative approach, because we would like to -- we hate coming before you and coming before our shareholders and telling them, "Sorry, we have to depreciate on a non-recurring basis deferred tax assets."

Now in the situation where the results are extremely good, it is clear that some of the companies have recovered better than what we have anticipated, and we see that they make more profits than what had been foreseen. And accordingly, there are no deferred tax assets on -- which exist and which should depreciate -- which should be depreciated accordingly to the profits which are made. This has had, as a consequence, that the average tax rate was decreased from the theoretical normative level of 32% or 33% down up to 25%. So I think this is an extremely good result for our shareholders, giving you more guidance.

My personal view is that this strength could continue to some extent if prospects continue to be good, as they continue to be good in quarter 4 this year, and maybe even in 2005. But it's clear that in long-term modeling, if you want to value the Company, it's more prudent to be around 30%.

And regarding Acindar, Brazil, so Acindar Brazil, the way how we would like to structure it will depend on the fiscal optimizations. We have carried forward losses in CST in Belgo, and there are also some in Acesita. So we are just completing our evaluation of the situation.

We would like to preserve these tax carry forward losses, but we have not yet come to a conclusion what should be the ultimate structure. Our vision is to merge into 1 consolidated entity, either through a holding company or through 1 of the 3 companies as a head company. The 3 companies, we are today probably, we are in a legal position to do so between CST and Acesita. You remember that between CST and Belgo Minera, you remember that in the case of Acesita, we are still today minority shareholders. So how the final way will be, I think that also in our next press conference we can tell you much more than the vision. We'll be clearer and we can give you guidance when this will take place. But our ambition is clearly that this transaction will take place in year 2005.

Thank you, sir. Our next question comes from Ivan Briery from Voltaire Asset Management. Please go ahead.

Hi, good afternoon. On slide 16 you said that the net income was accretive by 11% using the pro forma consolidation of CST over 9 months. Can you give us the number for the third quarter on its own?

I do not have it here, but I think we have noted your question and I would suggest that you will get the answers, and the answers will be available at our investor relation department.

Thank you.

Sorry for that.

[OPERATOR INSTRUCTIONS]. It appears there are no further questions at this time. Gentlemen, I'd like to turn the call back over to you for any additional or closing remarks.

Okay. So thanks a lot for having been with us today. You have seen that our results are excellent, that the outlook as well for the fourth quarter as well for the first half of next year are very good. And so we will have our next conference with the yearly results on February 17. Thank you and goodbye.

Thank you.

Ladies and gentlemen, that will conclude today's conference call. Thank you for your participation and have a good day.