ArcelorMittal SA (MT) 2005 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to today's Arcelor 2005 first-quarter results conference call. For your information, this call is being recorded. At this time, I would like to the call over to your hosts today, Mr. Guy Dolle, CEO, and Mr. Michel Wurth, CFO. Please go ahead.

Thanks a lot. Good afternoon and good morning, everybody. I am of course very delighted to present these fantastic results so after giving some short comments and some highlights I will give the floor to Michelle, who will present in detail our results and then I will come back later in order to present what could be the future for Arcelor.

So these results we closed to EUR1.7 billion EBITDA are fantastic, and as you know, there are many huge of the improvements compared to first quarter last year is mainly due to the huge improvements we have in Flat Carbon Steel and also to the continuous effort in cost savings we have been able to achieve. If we have are to look also on the debt prediction, with 250 million, it has grown but of course it takes into account the fact that due to the market we have some increase in our inventory and Michel will describe that in detail.

So if we detail our results sector by sector, flat as you know has been fantastic, taking advantage of the price increase for contracts and I think it is very important to keep in mind that for a huge part of our contract, we have a price increase for all the year and of course we took advantage of the good spot prices we had during the first quarter of this year. And last, but not least, we took advantage of the results of CST and the results of CST for the first quarter are very good.

For long, the situation has been a little bit different for the market which was in Europe decreasing starting in quarter four but due to our cost efficiencies and due also to our exposure to South America, the results stayed stable despite small decreasing volume in Europe. And we do believe that the environment is more safe for the future.

For stainless, we see a strong improvement despite the fact that the market at least in Europe was weak and of course it is a consequence of all the cost savings we have already achieved. Remember the shutdown of the (indiscernible) steel shop, we have grown end of the first half last year. And last but not least, despite a decrease of shipments in our distribution and transformation business due to the market, the results are also very, very, very good.

So now Michel will describe the results of this first quarter.

Okay, with a bit for my position as well and I would like immediately to go to slide number two. We have it here in order to tell you that for the first time I think that I have a chance to present to comment to you quarterly results, there is no recurring items in which we have to mention today. This is also a factor of stabilization.

The second introductory remark I would like to do there is one change in consolidation methods which you should note and that is concerning financial results in the sense that we have decided to account for the discount factors of pension and early termination benefits into financial charges and no longer into personnel costs as this was done previously. That has had an impact that EBITDA is 28 million higher and financial charges is also 28 million higher. For the whole year we anticipate that this position will increase our financial charges by EUR130 million.

This being said, we look at our main figures we see that revenues went up 18% or 14.6%. It will remain in the same scope but don't forget since last year, the scope has changed quite dramatically because it came into the group CST and Acindar in that Latin America and then a German steel distributor which in approximately this contribution of 50 million on the year-over-year basis went out of the perimeter (ph) Thainox in stainless which was minimal in long and the whole (indiscernible) business which is also a train and illustration of our active portfolio management we are doing and we have announced another important step also this morning.

In terms of gross operating results, we had 1.7 billion, we have a 21% margin, which is extremely well because if we compare that with last year, it is more than doubling the margin and if we compare it with quarter four, we have 17.4%. We have another illustration that Arcelor is moving more rapidly than most of its competitors.

Depreciation and amortization is a little bit higher mainly driven by the consolidation of CST and of Acindar and my comments referring to EBITDA obviously also refer to EBIT where we have today a margin of 17.1% and a 1.4 billion contribution in the quarter. With a relatively high tax rate, our net result is 934 million, hence our earnings per share are EUR1.52 per share, which also even if don't -- you cannot annualize that totally, this shows that in terms of price earnings, our share extremely low price. This is same is our gearing but I will comment on this a little bit later.

The last driver of our good results were also our synergies and I think we should mention that at the end of first quarter, we are at 560 million on yearly synergies so we are still very well on track and synergies are really one of the major drivers of our good results.

Let's now go to flat carbon which has been, as Guy told you already, the main driver of this exceptional result. We have had an increase in total revenues of 18%, largely influenced by the scope change due to the first consolidation of CST, and you can see this also if you look at production which went up to 9 million tons in the first quarter versus 7.7 million tons in the first quarter last year.

On the other hand you see also the shipments went up less and you will see the results of this in higher inventories which I will comment later on when I'm speaking about working capital requirements.

EBITDA was 24.7%, obviously this is extremely good. It is good to the more than 50% contribution of CST but it is also due to the good results in our European flat business, especially if you compare this 24.7% margin with the 13.5% -- with the 19.4% we realized in the fourth quarter or the 13.5% we realized in the third quarter. Depreciation and amortization was 191 (ph) million reflects the consolidation of CST and operating results is parallel to EBITDA.

What do we foresee for the quarter two? Let's say flat carbon sector should be at the similar level of quarter one. We foresee also similar prices, prices which went up in the first quarter quite significantly mainly due to the contract, the yearly contract prices, which were effective on January 1 which more than largely -- more than offset lower volumes which have taken place because of the customer base having higher inventories and because growth in most of our European markets was slowing down.

Next slide is long carbon steel where we had also an increase in revenues of 21%, which represents 15% (ph) at the same consolidation scope, so it was Acindar and that was a steel Atlantic steel shop in the Southwest of France. We had been in the volume act of -13.9% mainly in Europe and the main reason for that was obviously the very cold winter we had and which was reducing shipments for the second quarter. We foresee now in the building construction activity a little bit higher activity so that in long carbon things should go better.

Price effect with 29% was mainly driven by the introduction of the scrap surcharge and by higher scrap prices than in the first quarter of last year. Prices were similar in Europe. Prices increased in Brazil and overall the margin increase was mainly due to price effects but also to some cost effects.

Depreciation and amortization, mainly once again through consolidation scope and in terms of operating results we're extremely pleased with the high-level here we have achieved in long with EUR264 million. In long we had been extremely flexible in terms of production and we're able to be extremely (indiscernible) because we shipped more than what we produced. For quarter two in long, the main question in terms of prices will be the scrap surcharge. We foresee also that scrap prices will continue to be weaker. This should not have a strong influence on margins so that we could see with higher activity also and very good results in long in quarter two.

This was one new factor which is known since this morning because you are aware that we agreed to sell our Rebar and Mesh activity in Spain. This represents 1.5 million tons we have sold this at a value which represents average EBITDA multiples times 5.3 and this is a very good example how to make portfolio activity. We will make a capital gain on this operation in the range of EUR160 million and this does not mean by the way that Arcelor will exit all over the globe's Rebar market. We thought our main driver for selling this activity is that we believe that Spanish construction activity comes to a peak and that there is no strong growth potential in the future. So that we would like more to allocate our resources to more gross activities.

Next sector I would like to comment is stainless steel and alloys. In stainless steel we have made a lot of also portfolio changes because it is today out of the perimeter Thainox which we sold last year; J&L which we sold last year; Matthewy (ph) in the U.S.; Acaloy (ph) and (indiscernible) and we decided also to transfer Industeel which was the special plate business outside of the sector. And all this scope changes explains mainly the drop in revenues by 19% and the same consolidation scope we have in the price effect of 7.2%, which is mainly compensated by higher raw materials and we have a mix volume effect of -12.5%.

We are quite pleased with gross operating margin of 9.6%, which is the best margin we achieved in stainless steel since the beginning of the creation of Arcelor, and we can see really that today also with the management gaining efforts which have been done, we are now making some progress. The same applies to operating results with EUR70 (ph) million and to 7.1% margins.

For quarter two, we see continued pressure on the market in stainless steel with base price which should continue to drop so it will be plus there and we believe that (indiscernible) profession, including Arcelor will recover from a margin squeeze in the second quarter. More in the medium-term perspective, you know that our investment project in Carinox is making progress and the true real appreciation of what sector is capable -- or what J&L is capable of doing will be in the second half of 2006.

On the other hand in stainless steel it may be worthwhile to remind you that we have started negotiation in order to gain control in terms of voting shares in Acesita and we hope that these negotiations would be completed by the end of the second or let's say more probably during the third quarter of this year.

Distribution next slide is A3S so that accounts for Arcelor Steel services and solutions. So this is the new name of our old distribution business, and this is really the part of the business which is very close to the end customer and for that reason, change of the name should have been announced last Friday in our Board of Directors.

In this sector we had said a change scope with the sales of our Cuban (ph) business which are presented 1.5 million tons. Today we have an increase in revenues of 13.3% at constant scope, which represents only 4.2% at variable scope at EUR2 billion. Gross operating result is fairly similar to what we have done last year but the quality of the robustness of earnings is quite good because what happened in the question of stagnating prices, the margins were -- the price margin squeeze was explained so that we are today with a margin of 3.8% at the operating level.

Total volumes sold went down quite dramatically. That it because end-users in Europe did not buy so much in the market where we paid full price discipline. It is also an indication that inventories are going down at the end-users. You can also see that from Arcelor the sector boasts 2.5 million tons which is very important also for our whole activities.

For the future we believe that the activity should go up a little bit because also in springtime distribution is more active and margins could remain stable once we foresee or as soon as we foresee a stable price policy also in this sector.

Next slide is our consolidated income. I will not comment all of the figures maybe that I could go into one or the other items. First of all net financing, the costs and taking into account my remark concerning the discount factor to early retirement and the pension costs, financing costs were lower than what we have expected. There was a small exchange rate gain which is included in this sector for the whole year. We foresee more total financing charge of between 250 and 280 million, taking into account the 130 million charge for the discount factor on pensions.

Income from associates was extremely high because we compared it with a figure one year ago. One year ago CST was included in that and it is today out, so what was so good is our plate business due to our equity position in the bidding which went extremely well. You know that plate business is a fantastic business and this moment and bidding is doing very well. Then we have SAT (ph) which is also giving us a lot of pleasure with a strong contribution and our minority stake in Bombari (ph) which is the Spanish distribution company where we have a 35% stake and the majority being owned by a family.

Income tax was EUR374 million represents 27%. This is a high number. I hope that with my tax people we could over the next quarter try to bring that rate a little bit down due to tax optimizations and the use also of nondeferred tax -- of use tax carryforward losses which have not been accounted for in our deferred tax assets. But don't ask me the exact rate because you know that in our tax environment this is extremely difficult because we pay taxes in all different European countries, in the U.S., in Brazil, in Argentina. So it is too much to give you the right number.

This gives us a minority interest, minority interest mainly is in Brazil with CST minorities, Belgo Mineira minorities, and minorities within the Belgo Mineira group in particular in the wire drawing activity.

Consolidated balance sheet not big changes because globally CapEx equaled depreciation. On the other hand, the balance sheet had been increased a little bit due to the appreciation of the dollar. Dollar rate at the end of December was 136. It was 129 by the end of March, so that means that the value of our dollar-denominated assets, which means U.S., but also CST, was increased and we said also this has the consequence of EUR150 million.

Investment under equity method mainly increased because of the profitability of this company. In terms of current assets, I will come back when I will comment on the working capital requirements only one word, cash and cash equivalents decreased because we paid back in the convertible at the January 1 and we used our cash for doing this repayment of 500 million convertible and 200 million as of that.

On the liability side the next slide, we see that net shareholders equity increased by 1.1 billion. This is due to the result of the year of the quarter plus the foreign exchange translation effect I was explaining to you. In the non-current liabilities, we were extremely stable and I think I have nothing to add to what is in our annual report and what I commented to you last time.

When we look at the current liability I will comment on the nice peak about working capital. Retirement is the only factor which I show would be interest bearing liabilities, which went down from 2.3 billion to 1.6 billion. This was a decrease of our financial -- gross financial debt.

Next slide is cash flow and net financial debt. Cash flow from operating activity was 733 (ph) million, which is a high number despite the fact that working capital increased by 736 (ph) million, in fact we will see in one moment that most of this is higher inventory and higher inventory which has been produced at still low raw material costs in quarter one so when we -- as soon as we sell this inventory, that will be positive for our results and it will be even more positive for our cash flow.

Cash flow from investing activities, tangible and intangible assets were low in the first quarter but this is the normal. The nominal advent of the acquisitions and disposals, this is only a financial placement we made in extent over a period of three months and that is the reason why it is here and it is not under operating cash flow.

Then in financing activities there is nothing to mention in all of this. At the end we have a change in net financial debt of EUR241 million. And on the next slide we see this very nice figure of what has been achieved in terms of the debt reduction today with 2.2 billion. We have some gearing ratio of 17%, which is largely below our objective. But it is a strong balance sheet giving us also some room for moving into changing steel markets but I am sure that Guy will comment on this item a little bit in one moment.

Next slide and this is my last slide that is working capital, you can see that inventories went up by 541 million. This represents an increase of 800,000 tons of finished -- of steel product -- of metallics whereas there might be some other inventories in terms of raw material which went up as well.

Trade receivables were constant because shipments did not really increase and trade payables was decreasing simply because we are ordering a little bit less to take into account the reduction of production we have foreseen and the kind of reduction we have foreseen in quarter two. And in all of this we have been operating working capital, which went up by EUR728 million.

The other receivable and payable was to be linked with the financial operator -- investment I was mentioning just before so that we have the total working capital increase of EUR876 million. And hence, and a way to generate free cash flow in the forthcoming quarters. That is for my comments.

Thank you, Michel. If we want to be able to predict what will happen in the next coming quarters, I think it is very important to come back to the year 2004. In the year 2004 in Europe at least the final consolidation of steel was up 3%, close to 6% compared to 2003. That is the apparent demand which in fact that (indiscernible) to Europe as well as for European steel companies as well from imports were up 6% on average and even 9% for flat and even close to 11% for (indiscernible). Which means that in fact that in the year 2004 due to speculation of some customers, especially transformer and also due to the increase of importing the second half of the year, there was some build up of inventory.

For flat carbon steel we do consider that at the end of the year 2004, the excess inventory compared to normal situation was close to 3 million tons and it is clear that for a lot of customers having a negative outlook for the evolution of the economy of their business and being more and more convinced that there will not be huge price increases for steel in the second quarter in the future they have started in February for flat but even for long at the end of last year to decrease inventory. And how we have reacted is presented in the slide page 14 which is a little bit confusing. It is clear that in our case we have decreased our Long Carbon Steels production in Europe because it is only for the moment in our European concern.

We have decreased our European Long Carbon Steel production starting in Q4. Of course it is not seen in these figures because we have at the same time increased in Brazil with the new steel plant we have just started in last quarter. And for Flat Carbon Steel, we started to decrease our steel production in February. The figures do not show any decrease compared to the first quarter last year because in last year there was a blast furnace which was stopped during January.

But in February and March due to the shutdown of the two blast furnaces we have decreased our steel production and as you can see on these figures we will decrease close to one million tons, our production in the second quarter, taking advantage of course of the shutdown. The definitive shutdown of the blast furnace in Belgian and also some enabling of blast furnace in other parts and also the decrease of production of our mini mill in Spain.

But you can see also on this slide that the shipments during the first quarter has already decreased 10%, never had this close to 10% or flat, but it is an average between just 3% for the automobile industry as and close to 15% for industry. And you can see at the bottom of the slide what are the evolution of the inventory just for flat and for Long Carbon Steel.

In next slide you see what has been -- and I think it is very important to understand that there is some change in the behavior of the actors (ph) in this industry what has been the consolidation of this industry region by region and the only region where for the moment there is no consolidation is China. And I do believe that now it will in the next coming quarter start and the most important company in China will have and will be obliged by the administration to take care of the medium and the small sized player. And I think it is a very important factor of the stabilization of the price in the steel industry.

On the next slide you will compare what has been the first quarter result of last year and the pro forma with the same perimeter end you can also see that the inference (ph) at the EBITDA level of the consolidation of CST end Acindar is close to EUR300 million which represents something close to 30% of the improvement of the EBITDA between the two quarters.

Next slide and I think this one also is a very important one if you want to understand what is the Arcelor position compared to some of its peers. We are on an annual basis, we are more or less shipping 48 million tons of product out of which two for stainless, which are 80% spot and close to 20% contract. We are shipping also 30 million tons and long which are more than 95% spot which is a quarterly price. And for the Flat Carbon Steels, we have 32 million tons of shipments out of which price for Brazil which are mostly spot.

And then the one year contract which has been negotiated at the end of quarter four in 2004 which represents 9.6 million tons with the price increase which was depending on the product between EUR100 and EUR150. We still have close to 5 million tons of negotiated (ph) contract and the majority of this contract will be negotiated at the end of this year and that means that in fact we just have mainly 12.7 million tons of shipments on a year basis which are spot and which could be affected by the evolution of the spot prices in Europe.

Next page is an explanation of what are the consequences of the raw materials in price increase for flat carbon steel. We have chosen to reference quarter one, 2005. In fact, quarter one, 2005 was close to EUR12 more than the other average of the year 2004. And you can see that due to iron ore and coking coal, the cost increase for the second quarter will be EUR13 and for the second half close to EUR30, compared to quarter one.

And don't forget that some part of this will be offset by the management gain we are able to achieve and also by the definitive shutdown we have achieved in Belgium and it has been done last week. Don't forget also that some decrease in production will be done through, (indiscernible), the minimill, which is using scrap and which has very low fixed costs, and due to scrap price, higher variable costs.

And last but not least don't forget that in the next coming quarters the production of our Brazilian acquisition will be more or less stable, with an outlook for the slug market which is rather good at least in volume. If -- how to summarize what will happen in the next coming quarters? For the second quarter, and for Flat Carbon Steel in Europe, spot flat carbon steel, we will see a small decrease in price growth between 10 and EUR15 which will be close to fully compensated by the increase in annual contract between 10 and EUR15 because of course as you know we have inventory. And the full effect of the contract price increase will be seen in the second quarter.

Of course we will have some decrease in shipments in flat in Europe in the quarter four -- in quarter two, sorry -- but not in Brazil where the prices are still good and where the volume will be good in quarter two. That means that in fact we will see for Flat Carbon Steel in quarter two just the effect of raw material cost increases and this will be in Europe in volume.

For long, we do expect that the results will be close to quarter one plus a small decrease in Europe but compensated by the increase that we will have in South America. Regarding stainless steel, Michel gave some comments that in fact prices are down in quarter two. So we will be affected for us less than some peers because we are more under a contracted incentives than some of our colleagues.

And also for Arcelor for three years of course, the margin is more constant but the volume will be down of course taking into account what are the market's requirement. Regarding the evolution for the second half, you have to keep in mind that we are much more contract linked than some of our other peers and we will take advantage of that in this year, which is of course one advantage compared to what has been the year 2004. And we do not see and we do not anticipate any collapse on prices in Flat Carbon Steel and the key question for us is when will the inventory be back to a normal level? That means when will we be able -- European producers to decrease around 3 million tons, the inventories as well for end-user as well for distributors? I do believe that it will be done either end of July or beginning of September.

So that means that we are confident and as we have said since the end of last year, the year 2005 will be also a fantastic year, much better than the year 2004 for Arcelor.

Now with Michel, we are ready to answer your questions.

(OPERATOR INSTRUCTIONS) Michael Shillaker, CSFB.

I have got three questions, if I can. First of all, can you give us a sense of the moment of the level of imports coming into Europe? And is there any risk as the U.S. is going through its destocking phase that U.S. producers as they did in 2003 start to target the European market? And are we seeing any actual visible signs of that at the moment?

The second question is that you just give us sort of a sense of the, a confirmation of the amount of fixed cost that you take out each time you close a blast furnace and give us Liege I guess as the example.

And final question on buybacks, you have mentioned I think before that you are potentially interested in buybacks at the end of this year or in early 2006 if acquisitions don't come through. I guess the question is this is the second conference call in a row, when you sort of flagged that the share price on a PE basis as cheap. You seemed to me to have a relatively good ability to gear up the balance sheet further. Why don't you effectively come forward and bite the bullet and start buying back shares sooner?

Regarding imports, the last figure I got was for January and February. Imports were up more than 30% compared to one year ago where to be frank they were down. But don't forget that import just an average, depending on the product but something close to 15% (ph) of the total steel consumption in Europe which means that in fact -- if it is 30% up, it represents something close to 4% in of the total consumption.

Regarding fixed costs, I am not able to answer your question. What we have explained is that when we shut down a swing phase (ph) which means (indiscernible) L'Ardoise, and steel shop for (indiscernible) ton plant the savings would be close to between 120 and EUR150 million per year. But when it is full upswing phase in the case for instance of shutting down a blast furnace of (indiscernible), we will decrease our workforce close to 450 people because it is one blast furnace but keeping of course the downstream steel plant active.

Regarding buybacks share, do you want answer?

First of all, we share with you the question of the value of our share price because we are reading you very good reports, so we share this. I think you are asking the right question. You know that our shareholders meeting has given us instrument to buy back shares if and when management does it. I think we have been very clear that we would like to evaluate it. Our time horizon has been indicated to be end of this year or beginning of next year provided there would be no acquisition move which would be sizable. And I think that is right and let's wait in order to see whether this will happen.

Or let's take it the other way around also if you see that you have the possibility to make acquisitions you see that normally one or two or three months ahead, so maybe that if we take a decision by the end of the year, we know by the summer or by the beginning of autumn whether we will be where we would like to be or we will be in the (indiscernible).

But as we have said before, we would like to justify any investment, gross investment compared to the efficiency of buying back shares.

If I could just go back quickly, so the timetable for the buyback is pretty much set in stone? There is no hope of bringing this forward? You are deadly serious about leaving this till the end of the year or early next year?

If I could also follow up on the first question as well in terms of imports, have you seen or are you seeing any influx of imports from the U.S.?

Not yet. We have seen imports in February coming from China and Italy. I think it was close to 100,000 tons of hot (indiscernible). But we did not see imports coming from U.S., as we have seen, as you are right in 2003. But we saw a lot of increase of imports and (indiscernible) product coming from India.

And is that still ongoing or has that dried up?

It is still going for India.

Okay, on the buybacks, a yes or no I guess. The timetable is pretty much set in stone?

It is set in but do we have obviously the right to change our mind and we believe that this is the right thing to do. You know that normally we will discuss that in our Board and we have normally many meetings of that. But at this moment we did not change our position.

Okay, that's good. Thank you very much.

Patricia Lopez (ph), Morgan Stanley.

And I have three questions, if I may. The first one when you talk about inventories reaching normal levels by the end of July or September, does it mean that probably we will see some further production cut backs in Q3? And if that is the case, can you perhaps quantify them?

To be frank, we hope not to need any further cut of production in Q3, but we are ready to do that. It will be in this case something close to 40 or 30% of what we will achieve in Q2, which means it will be much closer to 300 or 400,000 tons to 1 million tons.

Okay, the following question is regarding your CapEx figure for the quarter. If we analyze the first quarter, we reached a number that is below EUR2 billion for the full year that you previously guided for. So is there any change in your CapEx guidance for 2005?

No. There is no material change. It is simply the use at the end of the year normally quarter four for accounting reasons is high because people are emptying their books into the year. And in Brazil also it is most of the expense is a little bit delayed and most of expenses will come over the summer and in the second half of the year.

Perhaps it will be a little bit down compared to the 2 billion because Brazil is a little late but it is not significant. It will be in this case unchanged between Q4 and Q1 next year.

That is clear. My last question has to do with the near term news flow on the Brazilian subsidiaries for a possible listing. When are you going to have more news about it?

I think that we will have finished our studies and also our fiscal models by early July and that we can give them guidance about the final structure we would take, provided we take the decisions that the final structure will take place, which is the most likely scenario.

I should be a little careful when I was this morning saying that it could be done end of June. Sorry -- end of June.

Thank you very much for your answers.

Sylvain Brunet, Exane BNP.

Good afternoon and congrats on the results. My first question was looking at the current run rate on your cash flow generation. Would you agree that on the current run rate and even allowing for some weakness temporarily in the spot price you would be net cash in the second half?

My second question was regarding again the run rate of operations at this stage. Do you see already that you would be in a position to raise your dividend this year?

My last question regarding Erdemir, update on the timeframe? What we could expect then and what you feel would put you in a position of strength to get the deal at a good price? Thank you.

Okay, for the first question, so we are very positive about cash flow generation for the rest of the year at an accelerating rate for the working capital reasons I was mentioning. We do not foresee however to be cash positive by the end of the year because we have foreseen at least one acquisition in this year and that is Acesita where I expect that we have done some -- where we are starting some negotiations of Acesita still has 250 million of net debt plus the acquisition price we will pay for the number of (indiscernible) we can buy at this moment.

So let's assume an expense of 400 plus million of euros and taking all of this into consideration, we will not be cash positive by the end of the year.

We will not be far. If there is no other external gross project.

And then the second question, dividends, I think everyone was aware and probably pleased yesterday when all our shareholders got the dividends for fiscal year 2004. What we said is this was a change in dividend policy as soon as we are making progress in the structural profitability of our Company, the dividend will increase. We're confident that our results should improve in 2005 versus 2004. So there might be room for an improvement in dividends also in 2005.

So regarding the time schedule of Erdemir, at the center it is supposed be released in the next coming two weeks. That means that normally in this case the decision could be taken next fall. I don't know if it will be October or November. I do believe that we are the best partner for the Turkish steel industry. Why? Because we already a partner of Erdemir as well in some steel center for packaging. Secondly, we are delivering a lot of product in Turkey as well from Borcelik as well as from Europe and we have in mind to transfer this top-quality product to have a mill step by step and of course we want to grow with this Turkish acquisition. So I think that for all these reasons we are the best partner for Turkey.

Do you anticipate that you could run a plan B if for instance the price was not what you were expecting to pay?

Of course. It is our responsibility to have always a plan A and plan B. We will, we will have two plans. But I will not describe the plan B, which is in fact -- don't forget we are active in Turkey through Borcelik, which is a cold rolling mill with an object line delivering sub product to the (indiscernible) industry. It is already the case.

Okay, thank you very much.

Josef (indiscernible) of (indiscernible).

A quick question. You mentioned China and the need for consolidation in that market. Do you see yourselves as being active participants in that consolidation at any stage?

It is the reason why we changed our minds a couple of months ago regarding our exposure with China. You know that we just started end of last year our partnership with Baosteel and with Nippon which is starting two steps for coal products end of December and for other products end of March for automotive industry. But we do believe now that there is a window for consolidation of the Chinese steel industry and that it is time if we want to be active and if we want to take advantage of this opportunity, it is time to have interest with China.

So that was the reason why for at least the six months we have a look on Chinese steel industry. We have some projects but I will not describe into details these projects and I hope that we will be able in the next coming months to find an agreement. You know what we have in mind is to be a steel producer in China but with the management and normally also with either a majority or at least 50-50 with an efficient partner.

Thank you.

Herman Reet (ph) of BHF Bank.

Three questions. The first one to get an impression of the size of volumes of cross-border volumes, you mentioned the share of total steel demand coming from or delivered by imports. What is the share of total shipments of European producers going into exports? And what was the reason or the recent developments in the export markets for European producers?

Second question, Mr. Dolle, you mentioned that inventories are too high by about 3 million tons. What is compared to --?

Flat.

What is this volume compared to the total inventories in flat, the flat sector? And third question is what was the situation behind the decision to transform low valued raw materials in steel and then to put these steel products in your own inventories when the general inventories had been on a very high level?

I am sorry to tell you that I have these figures in some documents in my office but I am not able to answer this question regarding my peers. What is the level of export from Europe? I think it is between 10 and 15%, no more than that. In our case, compared to last year, we just in Q1 increased a little bit of our export. We are not so much exposed to China and so I do believe that in quarter two perhaps we will ship between 80,000 and 100,000 tons of flat product to China, no more.

Regarding level of inventory, if we measure that amount, it was as far as I remember close to 2.3 months at the end of 2004 for flat and it will be 1.9 and the target is 1.9. Which means we have to decrease 0.4 months (multiple speakers) which means two weeks of consumption. It's just that in fact, inventory up four million tons but as they were done in 2004 we consider that 3 million tons is a level of further inventory which is much lower than what we had at the end of the year 2000. That means a decrease of inventory we have to achieve now is much lower than what we did in 2001 and what is good is that as far as I know regarding my peers, we are doing that much faster now than the four years ago. And it is certainly due to the consolidation of the steel industry.

Perhaps one follow-up question. Why are inventory levels measured in months and now lower than it was in 2000?

It is because according to the distributors has been reluctant to increase inventory during the year during the second half of the year 2004 because prices were high and for many centers, I think that inventory has increased much more for end users, or for transformer than for distributors. This transformer were very much concerned last spring or last summer that they will not have the level -- the amount of metal of steel they needed, so they build inventory. But if you ever look in distributors, inventory is increased especially in Q4 but they are not so high. They're just medium-high. And in fact the inventory now are not very, very high compared to what has been achieved three or four years ago. They are medium-high and still the main concern of the distributors and the consumers is the expectation regarding economy.

Thank you and third question. Why did you produce steel with this lower -- raw material instead of say -- put the raw material into the inventories instead of steel?

I think that in long-term, we have reacted as earlier we can do for flat. It's clear that the landscape changed a lot in February and to be frank, we have been a little bit late to react. We decreased our production of steel late in March. We decreased our (indiscernible) production in February. If you ever look on the increase of inventory compared to the end of the year in flat, most of the increases is in finished products. That means a lot of customers have been reluctant to take their orders at the end of March and also end of March was a lowly day in Europe and resistant. But that was the reason why we were a little bit late to react, to be frank.

As we shall explain, we use these raw materials, these low-cost raw materials we will see the main negative effect when we respond from this inventory in quarter two or ship this inventory in quarter two.

Julien Onillion, HSBC.

Good afternoon. Just a question concerning Erdemir. In fact, looking at (indiscernible) strategy, you have to pay 6.6 times EBITDA (indiscernible) to acquire this company, (indiscernible) company. If tomorrow he comes and asks and is ready to pay 6.6 times the EBITDA of Erdemir, will you follow that, or you will crazy as you have to pay (indiscernible)?

It is not because we are the best partners that we will get it. I have said many times that we will not make a crazy proposal.

So 6.6 times EBITDA is not a crazy proposal?

We see he EBITDA of the year 2004, yes. If you look at what is the market cap today of (indiscernible), it is $2.1 billion, which is less than three times EBITDA.

Okay, thank you.

Mike (indiscernible), Stuebing (ph).

I've got three minor questions. The first question is can you give us a figure about earnings contribution of dividend in the first quarter? Second question is you said this morning that stocks in long are at a normal level. Do you mean the sector or do you mean your product mix? And final question is April orders seems to be very poor of what we've got for the first indications? So do you think that the announced production cuts are sufficient to develop the margin in the coming months? Thank you.

Regarding the second question I do believe that for at least some of the long product we are close to something normal. Of course that is to be confirmed but as you have noticed, we still have decided in Europe to decrease production for quarter two, which means that it will help us to decrease a little bit more inventory.

Regarding shipments and orders, almost as well for distribution as well as for the plants in quarter two are down in Europe except of (indiscernible) of course -- 20% compared to a normal level. And that is the reason why we do believe that after doing that for four, five or six months we will be close to a normal level of inventory for (inaudible).

Good.

Don't forget that for the moment for automotive industry our shipments are close to normal, minus 3% in the first two quarters and for the month of April it was normal.

Okay.

Concerning the questions of dealing into the contribution of dealing into our net bottom line, that is after taxes was 33 million and we own roughly 50% of (indiscernible).

Thank you.

Luke (indiscernible).

I have just a quick question trying to follow up on a few remarks. I saw you made at the HN (ph) which were pointing to the early signs we are seeing with regards to a possible slowdown of changes to iron ore consumptions. I was wanting to have your views on this issue with regards to basically to where you see iron ore prices going forward next year?

I did not say any comments regarding iron ore consumption in China. There was a comment made by the iron ore company. I make the comment that according to me, iron ore price will decline next year, which is different. I don't see any reason why the price increase has been 71.5% during this year. It is clear that there are now many projects of course which will not come on stream next year but which will put pressure of iron ore mine company in order to decrease their prices. I do believe that price of iron ore will decrease next year with or without Chinese evolution.

Thank you.

Andrew Snowdowne, UBS.

Good afternoon. A couple of financial related questions if I may. Previously you suggested that guided towards effective tax rates of around 30% for the year. You currently are running at below that level. What should we be factoring in a lower level than 30% for the full year estimates?

And the second question, your current running synergy benefits around 580 million which is an impressive 20 million improvement from what you had at the end of last year. Could you give us any sort of indication in terms of management gains where you had 903 million last year? What are your targets to achieve for this year?

And finally you suggest you guided towards 4.9 billion of EBITDA for the year. Do you still maintain that target? And also when you suggest earnings for 2005 being higher than in 2004, are you talking at the net level or are you talking at the EBITDA level?

I was talking at EBITDA level. And I never gave any forecast for the EBITDA for the year 2005. I will just say at the six months that the EBITDA of the year 2005 would be better than the year 2004, which was 4.3.

Sorry, I didn't mean to (indiscernible) that you gave an actual forecast. I think that you just suggested that you should be able to achieve a level of 4.9 billion which is what you showed as what you would have achieved if you had consolidated your Brazilian and your Argentinean assets in 2004. You thought that you would be able to achieve that target again for 2005. Do you still believe in that?

So you are right. I told that the pro forma basis for the full year 2004 would have been 4.9, but I never made any comment regarding the year 2005 compared to this 4.9. My comment was comparing to 4.3. I have some ideas but I would not give them.

Okay, concerning the tax rate, I think that we should make it below 30% this year. We had been at 27% in quarter one and it is difficult to give you a guidance. Personally if I would model my company I would be closer to 25%. In terms of synergies, you are right that we had in 580 million. This will go gradually and we will exceed 700 million by the end of next year. You could take that on a linear basis what would be the yearly -- this quarterly improvement.

And concerning management gains in the first quarter and taking also into account the more difficult production environment because we cut back some productions, we were at the level of 100 million over the quarter.

Thank you very much.

Robert Stonals (ph) of TLZ (ph).

Good afternoon. Just two questions, if you don't mind, on the inventory. Firstly, the production that you said that inventories increased by 800,000 tons. I just wondered if you could just explain how that comes through considering that on one of your slides you show the production and flat carbon was running at about 1.5 million tons ahead of shipments?

And also the second question relates to the implied unit costs of that inventory build which at EUR541 million would imply about EUR676 per ton. Is that when you transfer into stocks, do you transfer at the cost of production or do you transfer at the assumed selling price?

Cost of production. Otherwise you would not have made the comment we have made twice saying that we have produced these steel products with low cost. On the other hand, when you look at our production in flat carbon, reality is that in Spain, flat carbon is producing semifinished products which are then rerouted for long product and that is the reason why if you would look at long product very often we have higher shipments than we have the production. On the other hand, globally you can say in terms of inventory that in carbon, inventory went up by 500,000 tons. We had in long inventories we're not up by so much and then we had slightly higher inventories also in distribution 100,000 tons and we have 1000,000 more in CST.

I can you give you -- the evolution of inventory in flat. For flat, this has increased 50,000 tons compared to end of last year. For work in process, 200; and for finished product, 240,000 tons, which means together it would be (indiscernible) days.

Sorry, could you say those numbers again, if you don't mind?

50,000 tons more for flat; 200,000 tons more work in process; and 240,000 tons finished product. For flat. That means that -- (multiple speakers)

If you take flat as a division, just out of interest, your production is 9 million tons. You shipped 7.5. Superficially one would expect the inventory build to be 1.5 million tons. How does that figure differ from the numbers that you're presenting here?

The (indiscernible) I mentioned is a level of inventory outside of the plants mainly. It is not the inventory inside the plants.

So the 800,000 tons increase in inventories which you commented that for the increase in working capital, that is purely the increase at the plants rather than downstream in your own distribution Company?

It is including 150,000 tons in our distribution business.

And you have not listened to what we have stated concerning our Spanish operations. So we have the steel shop in (indiscernible) which has an annual capacity of 1.5 million tons which is mainly serving producing semifinished products for long but for logistic and for organizational reasons, this is run by flat steel and the steel is in fact our flat crude steel production.

I'm sure the other experts on the call will understand what you have said but just the other point was about the value that you attributed to the inventory build. Simple math says the average price of EUR676 per ton. If I take flat as being the predominant product that you see in the inventory build, your average price in the first quarter was ERU 6530 per ton. If I take 20% off for the profit EBITDA margin on that, you're talking about an average unit cost of EUR500 per ton. What is the difference between that EUR500 per ton cost of production and the 670 that you put it into stock at?

The difference lies in the fact that we are only showing you the inventories in terms of metals. We have also other inventories in terms of coal, cooking coal, coke, hot coils spare parts and so on and the difference is that. I hope that in our plants some of these inventories have been a little bit built up because prices were going up very strongly from the second quarter on, and this makes a difference.

Will the working capital outflow continue into the second quarter given the fact that you will be moving onto the higher raw material contract?

There will be two opposite effects. The first one is the increase of the cost and the second one will be the decrease of the volume.

Will the decrease of the volume more than offset the increase in raw material working capital costs?

I think that it should be possible to reduce working capital in the second quarter of the year. -- in million euros, yes.

It appears there are no further questions at this time. Mr. Dolle, I would like to turn the conference back over to you for any additional or closing remarks.

Thanks a lot. I think that we will have the release of our first half-year results 28 of July. So thanks a lot for your attention and see you end of July. Thank you.

Ladies and gentlemen, that will conclude today's conference call. Thank you for your participation. You may now disconnect.