ArcelorMittal SA (MT) 2005 Q2 法說會逐字稿

Good morning, ladies and gentlemen. And welcome to your Mittal Steel second quarter earnings conference call. At this time, all participants have been placed on a listen-only mode and the floor will be open for questions following the presentation.

It is now my pleasure to turn the floor over to your host, Mr. Julien Onillon. Sir, the floor is yours.

Today the presentation will be given by Lakshmi Mittal, Chairman and Chief Executive of Mittal Steel, and Aditya Mittal, President and CFO of Mittal Steel.

This presentation contains forward-looking statements that involve a number of risks and uncertainties. These statements are based on current expectations whereas actual results may differ. Among the factors that could cause actual results to differ are the risk factors listed in Mittal Steel's most recent SEC feelings.

I will now turn the call over to Mr. Lakshmi Mittal.

Thank you, Julien. And good afternoon, and welcome to Mittal Steel Company's second quarter results presentation. Joining me along with Aditya is Malay Mukherjee, Chief Operating Officer of the Company.

This is the first set of consolidated results since our acquisition of International Steel Group which we completed in April. Our results for the second quarter are solid given the market conditions.

As we discussed during first quarter, first quarter results back in April, the industry has been experiencing an inventory destocking over the past three months. This has resulted in softening of prices in all three regions. As a result Mittal Steel cut back in production in Europe and the U.S.

[Technical difficulties ] Despite this, we are pleased to be reporting a net property of U.S. dollar $1.09 billion in 2Q '05 versus U.S. dollars $1.15 billion in Q1 '05. The Company has maintained healthy financial position with net debt reduction of U.S. dollar $1 billion for Q2 '05.

We continue to focus on further strengthening our global position. Chinese government, we have received the Chinese government approval for expedition of 56.67% of Hunan [inaudible] steel tube and wire.

ISG integration is progressing very well. We are pleased with the way the integration is progressing, including our last Q1 result, we highlighted, that we had identified some $230 million of synergies.

As this graph highlights, we have already managed to capture some $60 million in the Q2 on an annualized basis. We expect the full $230 million to be captured in year 2006.

Mittal Steel Company operates in three major regions, Americas, Europe and Asia. This slide highlights the major trends experienced in each region in the second quarter.

In both Americas and Europe, our [inaudible] steel industry demand was affected by inventory overhang, which resulted in decline in the spot prices. This was a catalyst for the temporary production cut we have seen in a number of steel producers, also including the [inaudible].

In Asia, China's demand remains strong and there was only a small decline in spot prices. Overall there has been a slow down in the global economy but growth remains good in absolute terms and this is positive for the industry in long-term.

I will now like to pass over to Aditya Mittal who will walk you through the financial results and provide guidance for the next quarter. Thank you very much.

I'm going to just walk you through the results, the balance sheet, as well as brief guidance on the third quarter.

If we turn to the income statement, I have in front the second quarter '04, first quarter '05, and the second quarter '05 as a comparison. I'm not going to walk through the comparisons simply because the results can't really be compared, they're not meaningful in a sense that ISG was acquired on April 15.

As such, ISG's results are only included for 75 days in the second quarter. Nevertheless, second quarter results are as follows.

$7.579 billion sales. $1.391 billion operating income. That equates to a 18.3% operating margin. A 1.19 billion net income, EPS of $1.57 per share.

More interestingly, the pro forma comparison. This is first quarter pro forma including ISG's results, and second quarter pro forma which means ISG results for the full quarter 90 days is as follows.

First quarter sales, 9.084, second quarter sales, 8.072, operating income of $2 billion in the first quarter, second quarter $1.441 billion. Translates into an operating margin of 22.1% for the first quarter, and a reduction of about 4% to 17.9% for the second quarter.

Net income, 1.329 billion for the first, and 1.135 for the second quarter. This translates also into operating profit per ton of 141 for the first quarter, and 112 for the second quarter.

This is very similar to the guidance we provided at the end of our first quarter earnings release, which implied that our operating profit would be about $30 lower on a pro forma basis compared to the first.

With that, I'm going to walk through some of the shipment numbers but before I do that, I want to make two more points. In our second quarter results, we have certain one-time items.

We have a $75 million charge for income for the fire in Kazakhstan and the cost of sales. This income of 75 we believe is less than the loss of income the Company would have incurred if it could ship normally without the fire.

We also have dividend income from Erdemir of $24 million. As you might have seen from the release we own 6.8% of Erdemir. We made the investment in December '02 to March 2003.

There's also about $7 million net benefit out of a property sale in Mexico, and $156 million due to one-time tax items both in Mexico and in the U.S.

Lastly, we have improved the disclosure of the Company on our Web site. You will have shipment numbers by facility as well as more disclosure, almost an income statement on a region by region basis and we hope that helps you understand the Company better.

Moving forward in terms of shipments on a pro forma basis, this includes ISG numbers for the first quarter as well as second quarter. Shipments declined by 10.5% for the Company.

This was an environment in which there was extensive destocking both in Europe and in the U.S. We believe as a Company we acted responsibly and responded to the market environment.

Let us try and break down this shipment drop of 10.5% on a region by region basis. It's clearly higher in the U.S. and Europe where we have drop shipment [inaudible] 13%.

In the U.S., we exercised our leadership, and clearly, that has yielded in terms of benefits, in terms of the outlook for the rest of the year.

In Europe, the primary drop has occurred in our Polish and Czech facilities and in Asia and Africa, you can see the shipment drop is 4%, which responds well to the argument that Chinese demand remains strong and the Asian markets remain strong.

If you move forward to the price and cost dynamics that we experienced in these three regions, on a pro forma on a global basis our cost was up by about 3%, price, down by about 3%, translating into the operating margin difference which I spoke about earlier.

If we just focus on a region by region basis very quickly, in Americas, the price drop was 4%. There are two key elements here. First of all, we do have a significant portion of contract business.

Secondly, there is also the lag effect. Some of the orders that were booked in the second quarter will actually be shipped in the third quarter so some of the pricing effect has been postponed to the third quarter.

Our costs have risen by about 3%. Off all that is the fixed cost absorption, as we are producing less steel, our fixed costs are rising, and there is some increase in inputs such as natural gas, electricity and others.

In Europe, our cost increase is higher, again some of it is fixed cost, but we also suffer from the fact that we have a larger portion in the spot market of ore and coal and similarly we had a 4% price drop.

We did well in Asia and Africa in terms of price, virtually flat from the first quarter. Clearly there's some product mix improvement here as well. But more importantly, costs were contained, we had slightly higher costs in Nigeria and in Kazakhstan.

Moving forward, if we just look at the operating margin of the Company, on a pro forma basis, we had an operating margin of almost 18% for the second quarter. We consider that healthy, considering the way the steel industry was in terms of destocking and the weak price and demand environment.

In terms of our performance, generally in line with the market, it demonstrates the price cost squeeze that occurred in the Americas, Europe and how in Asia and Africa we held on.

The reason why the margin is higher in Asia/Africa to 32.1%, is because of the insurance claim of 75 million. But as I mentioned earlier, we believe we would have earned more money if it were not for the fire in Kazakhstan, more than the $75 million.

If I just quickly break down our net income, operating income 1.39, other income of about $70 million, that includes the dividend income from Erdemir of 24, the sale of land from BMT of 7, and Mexico as well as about 20 to $30 million of income from our other equity joint ventures, including Max Steel in South Africa.

Our financing costs went up compared to the first quarter, $51 million. It's primarily because of the higher debt at ISG.

Our tax is lower, it's the one-time which I spoke about the 456 million, minority at 152, translating into a net profit of $1.09 billion, or an EPS of $1.57 per share.

In terms of our debt profile, we reduced debt by a billion dollars in the second quarter. We arrive at this calculation by looking at March 31 Q1 numbers.

The net debt of the Company was $520 million. We paid 2.093 billion for ISG, acquired ISG net debt on the 31st March of 230, paid out 144 million for the stock options which was a working capital account, and ended up at the net debt figure of about $2 billion in the second quarter.

We think this is a significant performance in light of the steel market condition, more so demonstrates the strong free cash flow characteristics of our business.

If I just move to the balance sheet very quickly, post the acquisition of ISG, we have a gain of only 18% which again is a strong balance sheet. More importantly we have healthy working capital of $4.3 billion.

We believe we have opportunity to generate more cash from the working capital in the next six months and therefore should see that number reduced gradually in the third and fourth quarter.

Lastly, our return on invested capital remains at the top of the industry. I think that demonstrates the three salient features of the Company which we've always been talking about, first of all that globalization brings benefits in terms of purchasing and knowledge and marketing.

We operate in primary consolidated markets, and therefore, have good end markets.

And lastly, vertical integration provides us with a lower cost base, the fact that we have significant ore mines and coal mines and coke facilities does provide us with a lower cost base.

With that, I have one more slide. In terms of the guidance for the third quarter compared to the second quarter, we expect shipments to be slightly down in all regions as production cuts will be maintained.

Price to be significantly down. Obviously more resilient in regions with long-term contracts.

What I mean by price to be significantly down, a significant portion of our orders which were taken in the second quarter in June, some of it in May which are being fulfilled in July and August. And therefore, [order] position in August is stabilizing, is improving, but the effect on an accounting basis would be that prices are significantly down in the third quarter.

It doesn't mean that we expect prices on the spot markets to be significantly down in the third quarter compared to the second quarter.

Cost is also going to be also slightly down. This has to do with productivity improvements, but also to the fact that spot prices of raw materials have declined, specifically iron ore and coal, which will flow through the Company in the third quarter.

All these three impacts, shipment, price, cost, we estimate will impact our operating income per ton by about 50 to $60. Furthermore we will have a normalized tax rate of about 25% which will also impact the net income. With, that I turn it over to our Chairman. Thank you, Aditya.

Now I will speak a little bit on the outlook [inaudible] and strategy. Since around the third quarter of 2003 we have seen the emergence of a new pricing dynamic for the steel industry.

Although prices have softened somewhat since 2004, on a historical comparative, the industry is still enjoying healthy levels of pricing despite being in a cyclical downturn. This trend demonstrates the progress the industry has made toward [picking] a new structure and this has definitely been held by the recent consolidation.

Looking ahead, outlook for the global economy is positive as all [LCD] leading indicator is stabilizing. In both America and Europe, all the production cuts will continue through the third quarter, real demand growth should stabilize, leading to an end of the recent destocking.

In Asia, although China's real demand growth is expected to slow down, we should also see a significant production growth slow down and [inaudible] new movement in exports.

You can see in this slide, some of are you may not be seeing this, but Chinese, the monthly production has declined about 4% from May to June this year, after a very strong first half. And we have another graph here which illustrates that export appears to be stabilizing since the first quarter and in [inaudible] started to increase.

We have, next chart is where we are showing that prices are stabilizing in August. And this differently shows the industry sensible behavior, which has helped in stabilizing the price in August, and we hope that this trend continue, and we see this stabilization in all the three markets, which is North American, European, and the Far East.

Mittal Steel is well positioned to build on these fundamentals. The Company has established a unique global industrial and market position. We are the low cost and high [inaudible] producer. We have a very strong return. We have a very solid balance sheet.

As I just mentioned that we are among the highest in terms of ROIC, and we have a continuous investment program for value-added products. We will continuously work on continuous improvement program which will help us in productivity and cost reduction.

Our strategy is to continue to further build on this position by both investing in our existing operations and using our M&A expertise and experience to look for new opportunities.

This next slide is basically showing investments for evaluated products, those were not on the Web site, I will just give you a few highlights. We are making investments, we are having a couple of investments for improving the value addition product mix.

In the USA we are converting one [inaudible] line for auto, about 400,000 tons. We are doing, building a new [inaudible] line in South [inaudible] and 420,000 tons.

We have announced a hot strip mill building in Poland for capacity of about 4.2 million tons. This is part of our purchase agreement with the Polish government.

We are also installing a new [color coating] line in Poland, capacity 100,000 tons. We are modernizing our wire [inaudible] Poland, capacity 2,500,000 tons.

Plus in Kazakhstan, we are just commissioned our core rolling mill, 120,000 ton and we'll be completing new color [coating] line from 50,000 tons. That's also in Kazakhstan.

All of these investments will further enhance the [inaudible] position of our operations.

Through our continuous improvement program, we are also looking at ways in which to boost annual productivity and we estimate that by 2010, our productivity has increased by about 5% per year.

The market conditions have also demonstrated the progress the industry has made on focusing on long-term shareholder value. This has been illustrated by the temporary production curve that Mittal Steel and others have taken in an attempt to restore the supply/demand balance and this bodes well for the future sustainability of the steel industry.

Short-term steel market prospects are encouraging and long-term fundamentals remain very positive.

We have produced a solid set of numbers in challenging market conditions. ROIC is still the top of industry, and thanks to Mittal Steel's unique global position and the strategy ISG acquisition has further enhanced our global [inaudible].

We will continue to focus on continuous improvement program and we continue to look for further acquisition opportunities which will further enhance and develop our unique global position and create additional shareholder value.

Thank you. Now we are happy to take any questions that you might have.

Thank you. [OPERATOR INSTRUCTIONS] Your first question is coming from Peter Marcus from World Steel.

Hi, it's Peter Marcus, World Steel Dynamics. I have a quite macro question for Mr. Mittal.

Could you let us know, if you look down the road, let's say three years, if you think your Company could have a capacity, a shipment capacity of well above 100 million tons? Do you feel you will be far more integrated in raw materials such as iron ore and coking coal? And what are some of the regions in which you can is see expansion?

There have been some stories that you are having negotiations in Brazil with CSN, for example. So that's my question, please.

Thank you for your question. And a very loaded question. What I have always been saying, that thee steel industry needs consolidation and I never said we would be 100 million tons or not, we maintain our position that there should be at least two or three global players who should be producing in this region.

And we are seeing this trend in the industry that my peer group companies have realized that consolidation is the way going forward. They also need to have a global presence. And this trend we are seeing in whether it is U.S. companies or even in the CIS companies, we are seeing this in Japan and we are also seeing even in China. So the trend is very positive.

All these companies are looking for consolidating these businesses. China is going to announce that by 2015, 70% of production should be produced by top 10 companies and by 2010, it should 50% by the top ten companies.

So we are clearly seeing a trend in the industry, which has been very favorable for the future sustainability of the steel industry. And this trend has demonstrated the strength of the industry in the last few months when the markets have been soft and the industry has resorted to cut the production and we can see the stabilization of the pricing coming back in August.

On the traditional, in three years down the road, definitely we will be focusing on further integrating, vertically integrating our business. We are today better than most of our peer companies. We are 50% [inaudible].

I don't know, we are neutral on the coke but we need to continue to strengthen our iron ore presence. We will look for opportunities to develop the iron ore business and we also look to develop opportunities in the core business. And we think that this will definitely strengthen the Company going forward.

I do not want to comment on Brazil or anything we have got. We have announced publicly that we are interested in [inaudible] in Turkey, which makes sort of sense for us.

We are also interested in [inaudible] Ukraine where we have participated last year, and we will be highest bidder. We continue to have a strong interest, very strong interest in both of these [inaudible].

Third, we have announced a potential green tree project in India in Jarken. We are doing our due diligence study and we are negotiating with the state government. These are the publicly known activities which we can talk about.

Okay. So thank you very much.

Thank you. Your next question is coming from Michael Shillaker from Credit Suisse First Boston.

Yeah, hi. I've got a couple of questions if I may. The first question, could you talk a little bit, or you talked about the third quarter. Could you talk a little bit beyond that in terms of where you see pricing trends regionally and also trends for raw materials? You talked about ore and coal especially in short-term markets coming down. Should that continue into the fourth quarter?

And the second question is on China. How convinced are you that what we're seeing in China is not similar to last year, more of a seasonal or short-term slow down? How convinced are you this is something more secular in terms of a slow down in Chinese growth of production?

The good thing is that OCD leading indicator is positive. We are seeing globally a strong economy, even fed announced yesterday interesting interest rate on the basis that fundamentals are strong. We are seeing in addition the economy is strong, CIS country, generally globally we are seeing the strong economic fundamentals which means that the demand will continue to be strong and robust.

We have seen 6% growth in last two years. But I think going forward, even if the Chinese production slows down, which we have seen in May, we still believe that 3 to 4% growth will continue to be [inaudible].

And as we have seen in last couple of months, the steel industry has demonstrated that they are not volume centric, they like to cut down the volume to maintain the profit, we believe that the steel industry is moving towards sustainability. We believe beyond Q3 when the new prices will come, we will see a better quarter going forward, and definitely 2006 we will be entering the [inaudible] positive outlook.

Does that include a positive outlook in terms of both annual contracts outcomes for steel, and what you think may happen to the annual contracts outcomes for ore and coal?

Annual contracts for this, we will know in the summer when we will start the annual contract negotiation and I do not see any major increase but I know on the contrary now we have seen that the spot prices have gone down on the iron ore which means which will prohibit or at least deter the iron ore producers to increase anything further.

On the spot basis coal prices have gone done also, which mean that there is a possibility of coal prices moving downward in the contract on a contract negotiation in December or January.

Okay. Thank you very much.

You had a question on China?

Yeah, on just on the, how convinced are you that this is more of a secular slow down in Chinese production growth and the last couple of months hasn't just been a temporary blip?

I have always been saying that we have been overplaying China, and China could never be a net exporter on a long-term basis. And we have seen that the Chinese environment have been [inaudible] they've been taking action to allow the economy to heat up beyond what they want to do it and this blip in productivity, this production downturn in June I think should be sustained, and I do not expect that they would be having 30% year-on-year growth as demonstrated in the first half, and if we look at May to June production downturn, which means they would have only a growth of only 15%. And if you look at their [inaudible] increase, which volume the first half of 28%, 29%, and that would also slow down, which means that there will be a better balance between the Chinese demand and supply.

Just to add, I think most important to note that the Chinese government is not encouraging exports. Their new steel policy which was announced a month ago specifically asks domestic steel industry to focus on domestic steel production.

I think they recognize that the Chinese steel industry is not geared for exports because it has higher energy cost, it's inefficient, it has an inland network and has to import iron ore. And lastly, they have demonstrated that through actions as well as they have reduced various export incentives for Chinese exports which show some teeth to the policy.

Okay. Thank you very much.

Thank you.

Thank you. Your next question is coming from Vincent Martine from Exane BNP Paribas.

Good afternoon, gentlemen. I had three questions if I may. First of all, if you could give us out of cost of goods sold what would be the proportion between fixed costs and variable costs per region?

My second question was on the annualized productivity gain of 5% that you mentioned. How much would that be after inflation? And also, how much of this do you expect we'll see through to the bottom line?

And my last question was on the mix of grade. I was wondering whether you could comment on how you plan to go about improving the product mixing, particularly in Europe, to reduce earnings volatility. I know you've mentioned the investments that you're making in Eastern Europe and in Kazakhstan, for most of it, but overall, it seems that the tonnage is, you know, fairly small compared to the whole group, so should we, you know, expect some other strategic moves? Thank you.

We are not really broken down fixed versus variable per region. A good thumb rule is that it's 100 to $120 of fixed costs on average at our facilities, because all of the costs are variable.

Even manpower to some degree is variable in the sense that as we have demonstrated, as we've cut production, we have laid off some people. It's not permanently variable, but temporarily variable. And that's across the board generally.

In terms of the productivity question, 5%, that's just productivity, it has nothing to do with cost increase or inflation so you could theoretically have cost increases which eat up some of the productivity improvement. But we believe 5% is a very robust number, especially because the intention of the Company is not to increase volumes without understanding what the market demand environment is.

So this is, the 5% productivity improvement with the recognition that we need to be responsible steel company and only produce to market requirements.

In terms of what's happening in central Europe, primarily the strategic initiative is to improve, increase value-added production. There has been some press about this as well.

On June 19, we signed the hot strip mill contract in Krakow which enables at least the finishing side of the operation to have automotive quality. We already core rolling in galvanized facilities as well, but may consider further investments in the finishing operations as well.

Thank you.

Thank you. Your next question is coming from Michael Sones from ABN AMRO.

Good afternoon. Two questions I suppose although they're related. I don't want to hark on about Q4 again, but I if I can just be clear, I understand the economic points you've made that explain why the climate for pricing has stabilized, but can you be clear to me exactly which of those key economic indicators you refer to in the release make you believe that prices will rise in Q4 and which ones you're looking and what levels they've reached to give you the confidence to say you expect prices to increase?

And related to that, with regard to Q4, have you signed or received a single order anywhere globally for Q4 deliveries over and above the Q3 levels that are currently provided? Thanks.

What is the second question?

Have you actually had an order yet given you're only six weeks away from the fourth quarter anywhere at raised levels for Q4 delivery versus those prevailing in Q3?

The leading economic indicator that we looked at are OACD, which was already mentioned. ISG scrap moved by $60 in the last couple of weeks. You have Nucor announcing a surcharge and therefore their finishing prices are higher. U.S. Steel has announced price increases for September, we should following through. So those are some of the indicators we're looking at. [Inaudible] inventory level which is down to 3.1 which has been one of the low numbers, and there has been, now there us a small anxiety among the buyers to start buying because they've not been buying. And secondly, we are also seeing that the order numbers are principally strong in the U.S., where it is being produced by General Motors or by the transplants. So that's, we're underlying demand is still strong in terms of market.

Okay. I understand that and that makes sense. But are you saying that it's definitely getting stronger and it is the increasing strength that is going to drive the price increase during the fourth quarter?

We believe that if the existing strength continues, the prices should improve. Because the underlying demand is strong.

Okay. But you think it's going to get stronger or do you think that demand will be stable but you'll nevertheless be able to increase prices?

It is very difficult. But we are very, we are optimistic about the [inaudible].

And have you put any orders through yet for Q4 at higher levels than Q3 anywhere?

I just said that recently only last week, you see some surcharges being announced by the peer group companies.

But you guys personally have you put any orders through at all yet at higher levels for Q4?

Not yet. But I think it's important to recognize that six weeks are still too early, because we're in the middle of the August. Normally the orders are getting booked the beginning of September for the fourth quarter, I mean, there is a lag.

So it's not that the end customers not accepting the price increase, it's just that the discussion's not started.

Okay. And in terms of that discussion period, that lead period, once we enter the early part of this year and into the back end of next year, producers were very keen to have very long lead times in their discussions with consumers and they were arguing that providing they were given a long heads up, customers were willing to accept price increases because of the scarcity of product. Has that lead time because there's scarcity around there?

To a certain degree the lead time has come in. But that's also because the producers have acted responsibly and the whole inventory cycle has improved. I mean there is more inventory at the producer level, less at the customer level.

I'm just highly concerned that he fact that no one is --

Producers have not started booking long yet because they're expecting higher pricing. So now, once we see this trend in last two weeks, I hope that the new prices will emerge in the coming weeks.

We shall see. Thank you.

Thank you.

Thank you. Your next question is coming from Wayne Atwell from Morgan Stanley.

Thank you. We've talk about a lot of this but maybe you could just give us a run down on backlog and order demand in the different regions of the world.

The backlog numbers are relatively similar to what they were before. The change we're seeing in the market which is perceptible is the fact that customers are coming and asking for tonnages at existing prices for forward deliveries and coming back to the previous question, so they say, okay, can we now book September, October and we're saying, no, let us wait for a couple more weeks. So you can see that there is some tension developing and that is why the prices are stabilizing. That is why the producer announcing price increases.

And we have also seen some higher bookings in last few weeks.

And we also hear the auto industry in the U.S. is coming to the table early and wants to book next year's contract, is that right?

Yes, the auto industry definitely trying to book their orders for 2006, and this clearly indicates that they also believe that the prices will go up but they want to be first in the line to get the contracts for 2006.

Thank you. And can you tell me how much of the iron ore is purchased under the global price? Maybe you give us a break down, how much is internal, what's purchased globally and then how else is it priced?

Out of 50% of our requirement, which is about 27 million ton, 50% is about 27 million ton. 17million ton is purchased through the global price, about 15 to 16 million ton is purchased through global pricing, and 8 to 10 million is on the spot basis every quarter.

Thank you.

Thank you. Your next question is coming from Daniel Altman from Bear Stearns.

Hi, good morning. Two questions for you. First of all, can you talk about on your third quarter guidance, I know that you provided kind of an average result for the quarter. I wonder if you can point whether there is one month within the quarter that was weaker than the others? In other words, was the last month of the quarter the weakest heading into third quarter?

The second question is, you've obviously announced a lot of production outages for the third quarter, as is the second quarter. Do have you plans to bring some of that capacity back in what you consider to be a stronger fourth quarter? Thanks.

In terms of the guidance on a monthly basis, it's an excellent question. Don't have too much of color for you apart from the fact that June is weaker than April and the trend was downward. August would be weaker. July is relatively equal to August because August is typically always a weak month. And September should be a much stronger.

In terms of production, we right now have no plans to bring back production. We want the environment to stabilize, prices to improve, and as demand improves, we will bring back production.

Okay. Thanks very much.

Thank you. Your next question is coming from Mark Parr from KeyBanc Capital Markets.

Good morning, it is Mark Parr with KeyBanc.

Hi, Mark.

Hello. Had several of my questions have already been answered but I was curious if you could provide some color on the trend in your shipment activity for Chinese buyers? You know, how much demand have you seen over, or how have you seen the demand emerge over the past several quarters?

As you may be aware that we do substantial shipment to China from [inaudible] operation, and over the last four weeks we have seen both demand growing and also prices moving upwards. This is more in respect to our value added products, including the cold rolled galvanized and [inaudible] plate.

Now is this pickup that you've seen adjusted for any negative impacts from the fire that you had?

No. It is, if I do a like-to-like comparison, because when they had the fire, it was more the commodity products which had affected other than the value-added products.

What we did was we catered to more of the high end segment and that is why you see some of the price increases in Africa, Asia in the second quarter, and that a lot of it is mix-related.

All right. But you've seen, have you seen the strength in momentum continue as you look into your third quarter outlook?

Yes, we do. We see it from week to week.

Okay. Terrific. And thank you and congratulations.

Thank you very much.

Thank you. Your next question is coming from David Common from JP Morgan.

Yes, thank you. I hope you won't mind an ISG-related question. I'm wondering if you could give us the cash and debt at the ISG entity at the end of June, and also your thoughts on the future debt profile of ISG, including the potential retirement of 6.5% issue? Thank you.

The net debt as of the end of second quarter at ISG I have to get back to you on. At the end of first quarter it was 230 million and by the time we closed the acquisition on the 15th of April it had fallen to 98.

The debt numbers are changing because we're also putting intercompany debt on to ISG and it will be disclosed in the 10-Q filing. And at this point in time, we have not made that disclosure.

In terms of the 6.5% floating piece, the fixed rate note that we have outstanding, we did purchase some of it in July. And approximately 100 million and we have no further plans.

Okay. Thanks for the comments. What's the timing on the 10-Q for --

The timing of the 10-Q is within a week. Yes, within this week.

Thank you.

Thank you. Your next question is coming from Aldo Mezzaferro from Goldman Sachs.

Yeah, good afternoon. My question is on the amount of capacity that I believe when you formed the Company, a number of 70 million tons was mentioned, which compared to your shipment level and adjusted for the yield, effective yield loss, I'm wondering if you can tell us how much capacity globally right now you have shut down, and possibly if you could break that by region it would be very helpful, thanks.

We haven't done the analysis region wise but our capacity is still 70 million tons. We have shut down, if you see in our numbers we have shipped about [13] million ton in Q2, and if you analyze it, that means we still have another capacity of 12 to 14 million tons globally.

Do you know roughly how much is shut down at ISG at this point?

Yeah, we have in production cut leaders, and our production cut compared to the second quarter has been about 2.9 million tons compared to the first quarter. So we're 30% down in the U.S., that's at Inland and ISG, so it's about 1.5 million tons in the U.S., is down production the second quarter compared to the first quarter. Globally it is 2.9 million.

Thank you. And if I could follow-up. Can you give us just a broad breakdown as to the production you had in the second quarter, how much was derived from electric furnace and how much was derived from integrated operations?

We don't have the numbers perhaps we can get back to you.

All right. I appreciate it. Thanks very much.

Thank you. Your next question is coming from Efram Robbie from Credit Suisse First Boston.

Hi, just a couple of micro questions. Number one on productivity, you have given a new guidance of 5% [inaudible]. Does this constitute a difference from the head count reduction guidance that you had given earlier?

Second question on the tax rate, again that is a slight reduction in guidance, I think earlier it was around 28%. Do we take this as the guidance for tax rate going forward?

And thirdly, a slightly more macro question. On the new plant in Jarken that you are proposing and doing due diligence for, do you see this as an export-oriented facility or a domestic facility given the large number of new projects that have been announced in India? Thanks.

In terms of the productivity guidance, 5% is similar to the 40,000. The tax rate, the tax rate I think in the first quarter was 23% and it is now down to, what was it, 15%. We are guiding to 25%. I don't think it's different. I think before we provided a range of 25 to 30, now we're seeing it's more like 25.

The Jarken facility is still under due diligence. We still have not signed an MOU, we're just under discussion but the idea is that it's primarily a domestic facility.

Thank you.

And it will not be, developed immediately this production work they're talking of 10 to 12 million tons if they would develop in stages as the country's demand will grow.

Okay. Thank you.

Thank you. Your next question is coming from Jim Rice from Avenue Capital.

Can you just comment on expected uses of cash going forward? After the significant delevering on the quarter, I'm just curious if the board is considering looking at increasing the dividend further in the future?

It's a very good question and we were asked the same question the quarter before. It's a bit premature I think for the board to get into that discussion, primarily for two reasons.

First of all we are still actively pursuing other acquisitions which can have significant uses of cash, we've talked about earlier, we talked about [inaudible] as publicly known, we're looking at [Greenfield investments] in India potentially.

Secondly, we just announced a dividend policy literally a quarter before, and I think we will re-examine only after the year-end results are in. So that will be in the first quarter of '06.

And can you comment on what inventory levels are like in Europe currently at the service centers?

Europe is about 3.4 months, or 2.9 months.

Okay. And where is that versus where it was a month or two ago?

It has come down by about -- from 3.4 to 2.9.

Okay. Great. Thank you.

Thank you. Your next question is coming from Charles Bradford from Bradford Research.

I've got a couple of nitty gritty items. Can you give us some guidance as to where interest expenses will be in the third quarter?

Sure. Interest expense should be about $45 million for the third quarter.

45?

Yes, that's a reduction from 55 to 45 in the third quarter.

And what's the 88 that shows up on the income statement for the second quarter?

The 88? The interest expense and then have you interest income.

Okay. You're netting the two. Okay. You [inaudible] them separately.

No, I'm netting the two. Because there are significant cash balances of about $2 billion remaining at the Company and net debt is about 4 billion so we're just netting the two.

Okay. And as far as the depreciation in the third quarter?

It should be very similar to the second quarter. It's about 210 for the third.

And what's in other income?

For the second quarter?

For the second quarter, yeah, it jumped quite a bit from--

Other income is about 35 million and 24 million of this is coming from Erdemir, this is the state that we had which we purchased two years ago.

Thank you very much.

Thank you. Thank you. Our final question is coming from Michael Sones from ABN AMRO.

Thanks. I just one brief question. Just with regard to iron ore, you said that spot prices are falling which certainly they are. Can you just tell me, the spot purchases of iron ore you've still making, are those being made above or below long-term annual price contract levels?

They are below the annual price contract levels for [inaudible]. They have been at least $20 below the annual price, annual contracts.

Thank you.

Thank you. I'd like to turn the floor back over to management for any closing remarks.

Thank you very much for participating and looking forward to talk to you in the next quarter. Thank you very much. Have a good day.

Thank you, ladies and gentlemen. This does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day.