ArcelorMittal SA (MT) 2006 Q1 法說會逐字稿

(technical difficulty -- Aditya Mittal, President & CFO; Michael Pfitzer, Director of Marketing; Roeland Baan, CEO of Europe; Mr. (indiscernible), Managing Director; Tom McCue, Director of Investor Relations, North America, and (indiscernible) Mr. Mittal to start with the presentation.

Good afternoon and good day to everyone. I am very pleased to be with you today to discuss about our first-quarter results, and we are also very excited as the (indiscernible) is progressing well, and we believe our offer will be offered soon. After (indiscernible) the overview on the quarter results and market perspectives, Aditya will present you on our financial performance for Q1.

But let us talk about Q1. We are extremely with our performance despite bottom-cycle market environment in Asia, (indiscernible), we have been able to realize higher results than expected and published an increase of 17% of our operating income and 15% on EPS. These strong numbers underpinned a very strong performance in Europe and in America where we have increased our operating income by more than 50%. As Aditya will explain later, this perform reflects in particular strong volume growth related to gained market share with high demanding customers. Q2 is expected to be even better. The Asian market has started to recover, and our internal growth we believe our operating income will grow at a higher rate than in Q1.

Q1, as I said, has also been very exciting as we announced our unique proposal to combine Mittal Steel with Arcelor to create unmatched leader of the steel industry.

Here I will just talk about progress which we have made on the Arcelor transaction. We are, as I said, progressing well. We have received the clearance from U.S. antitrust authority. We have made an announcement to this effect this morning. We expect our documentation to be approved soon by the European and U.S. Stock Exchange regulators. We expect that soon our offer will be live. We have made good progress with different governments in explaining our investor logic and investor project.

So far our only disappointment has been that we have not been able to engage a friendly dialogue with Arcelor despite our proposition to improve the term of our offer.

Now I will speak about -- I will make some comments on the market, and there has been difficult market conditions in Asia in Q1 '06. However, you can see on our slide that how the prices dropped in Q3 of last year in North America, in Europe and -- however, in Europe and America, they started to recover, but in Asia they continued to slide until March of Q1. However, we believe that -- now let us come back and be Chinese market because what we are talking about Asia.

The first good news is that the Chinese market and demand growth is still very strong. Q1 GDP has been stronger than expected at 10.2%, and growth in (indiscernible) investment has risen again to 27.7%. That means that underlying demand is remaining very strong.

In parallel and as expected, supply growth is going down. Chinese producers' cash flow has shrunk, and their capacity expansion has been slowing down. As a consequence, steel production growth has continued to slow down in Q1 at 17.9% versus 19% in Q4, and supply/demand program has improved. Our belief is that going forward this year this production growth will further slow down. It is also due to Chinese government policy to reduce the expansion to constraint the expansion of the Chinese capacities. They have been looking at shutting down some of these smaller facilities which are not environment friendly and which are not viable.

At the same time, they do not want to use their expensive resources like energy infrastructure to produce steel for export. Due to better prices driven by the large Chinese producers and expected additional cost reserves, Chinese prices started to rebound from beginning of March from the cyclical lows. With the smaller differential to international pricing, there is, of course, China exporting into North America and Europe have also diminished.

In Euros and in Europe, raw materials were also improving. Economic leading indicators are still going strong, going up, and industrial steel production has started to recover in Q1. The steel demand has also followed this trend, and (indiscernible) demand is solid. The supply-side is also very encouraging as world steel production excluding China has been very stable during Q1. Seasonal operators of several plants will potentially reduce offers to the market and keep the market in balance. As a consequence, inventory levels remained clearly below average in Europe and the U.S.

Slab products are benefiting from restocking and strong underlying demand. Strong demand for slabs cannot be satisfied, indicating large additional demand. Also in place the demand is strong and pricing prices are rising since Q2.

Our tube and pipe business has been developing nicely as a consequence of the strong energy market. (indiscernible) products after a remarkable price increase of 30 to $40 U.S. in the course of quarter one, we expect prices to stabilize. However, for quality products in industrial segments, we expect the ongoing positive price trend. Price increased in Q2 in the magnitude of U.S. $30 to 40 depending on production area will positive impact on our revenues in Q2 and Q3. Based on the strong economic environment, we expect further price increases in Q3 as announced by competitors in the magnitude of U.S. $30 to 50 on a global basis.

With this, I hand it over to Aditya to talk about the financial results for Q1 and give guidance for future.

Thank you. Let's come back to the first-quarter results. We're very pleased to have done better than our guidance. As you remember in February, we mentioned that we were expecting volume growth of 10%, stable pricing and a slight increase in cost per ton, which would have implied an increase in operating profit of less than 10%. During the quarter, we achieved an operating profit increase of 17% and EPS growth of 15%.

Let me walk you through the particulars of our income statement on the same page. U.S. dollar, U.S. GAAP we have provided IFRS reconciliation for the first time, and that is part of our earnings release. Our sales increased by 19.5%. In terms of SG&A, we had a slight increase in SG&A of about $10 million, some successful cost-cutting measures that were implemented in SG&A, and we have provided for almost $40 million of expense for the Arcelor transaction. So the cost-cutting measures are not clear from the SG&A amount and show marginal increase, but in reality SG&A is down.

Depreciation has increased due to Kryvorizhstal. Operating income includes the CO2 sale of one credit, which netted us $31 million. (technical difficulty) -- the businesses were generating on a recurring basis, we actually still have 9.5 million units remaining, and this is a significant CO2 credit. Over time we will be spending more of these credits as the market for these items improve. Operating margin was basically flat, and our shipments increased by 14% to 15.6 million pounds.

Let's turn to the next slide. Let me talk about the volume growth that we had in different regions. Our better performance than expected, as I said earlier, was mainly due to stronger volumes across all regions. If you exclude Kryvorizhstal, our volume growth was 14%. Including it, it is 9%. If you look at our growth in America and in Europe, it is very strong. We clearly believe we have done better than the market, and as a result, we have gained market share.

For example, in the U.S., we grew our volumes by 8.8%. We believe the market growth in the U.S. was lower than that. In Europe we had a similar story. In Asia/Africa we had a slight increase in volume growth, primarily driven due to the performance in Algeria, but i remember we had bought a market condition in Asia/Africa.

If we turn to the next slide, slide 14, we will talk here about the squeeze that we have had in Asia/Africa in terms of the price and cost. Overall price was stable across a group level, and in America prices improved due to improved long-term contracts. In Europe prices are marginally down related to a negative mix effect of Kryvorizhstal, not realize that the European results include Kryvorizhstal for the fourth quarter, and finally, as expected, price was significantly down in Asia/Africa.

Our cost increased in Americas primarily due to raw materials and natural gas. In Europe our cost declined due to greater volumes, and in Asia/Africa costs have increased due to negative impact from coal price increase that we have had. We had long-term coal contract in South Africa which expired.

The next slide talks about our margins in different parts of the world. Generally the margins have been flat and have increased in the Americas and Europe but significantly down in Asia/Africa. What is more interesting is the overall volume of operating income, which is on page 16.

This slide is very interesting because in Americas and Europe we have grown our operating income by more than 50%. In the U.S. EBIT is up by 51% from fourth quarter. In Europe it is up by 66% if we exclude Kryvorizhstal. Otherwise, we have doubled EBIT. We have a significant drop in Asia/Africa, a 41% drop in EBIT in Asia/Africa. As you know, Asia/Africa is a significant portion of our business. It historically drives [40%] of our income, and clearly the bottom cycle environment is reflected in the fact that our EBIT is only up 17%, given that we had maybe 50% increases in in the U.S. and in our European business.

I will come and talk to you later on about Asia/Africa, and the guidance we are seeing and how we are very bullish on these prospects in the second and third quarter.

Let me talk to you about our net income. This is basically a reconciliation of our operating profit to net income. Our financing cost increased due to added debt and increased base rates, primarily due to Kryvorizhstal. Our tax rate was below the normalized level of 25%. Minority interest declined due to lower earnings in South Africa to $85 million from $104 million, and in the equity method, income we had $25 million gain, primarily due to income coming from our investment in China with Hunan Valin.

Let me talk to you about our cash flow generation. Cash flow generation was strong during the quarter. We generated almost $1 billion in cash from operations, excluding working capital. Due to strong sales and increased prices, Accounts Receivables increased by more than $.5 billion in the quarter. Our CapEx was low relative to our run-rate, but we still anticipate 1.7 billion in CapEx. The CapEx amount for the first quarter was $260 million.

We acquired Stelco and made some share purchases of our minorities in the Czech Republic, leading to several subsidiaries, not Stelco, leading to the [$30] million approximately acquisition expense. And we have two dividend payments bunched up in the first quarter. All-in-all because of these reasons, our net debt number did not change.

Very quickly our balance sheet remains strong. Ratings were reaffirmed. Clearly there is a negative watch due to the Arcelor transaction, but excluding that, ratings reaffirmed and approved during the quarter. Our net debt to EBITDA has further improved. Our ratio today is 1.1.

In terms of slide 20, I'm now going to walk through the investment program details. Apart from the fact that we are making good progress in terms of our debottlenecking expansion in Romania, investment value-added products is continuing, specifically the new conversion of hot-dipped galvanizing line in the U.S., as well as the new value-add investments in Poland, and as always, the mining situation remains a top priority, and we are moving full steam ahead in terms of our expansion of our mining operation.

Let me very quickly talk to you about the merger synergies, both Kryvorizhstal and ISG. At ISG we captured an additional $35 million of annualized synergies during the quarter. The overall breakup is 110 million in purchasing and 45 million from processing, which is in line with our overall plan. We are comfortable in achieving our target of $250 million by 2007.

In terms of Kryvorizhstal, we captured the selling price synergies, more than that than we anticipated. In addition, we have nearly completed our improvement of the raw material costs. The coke oven battery still has to commission itself, but the purchasing contract renegotiation change of suppliers has all been done.

Unfortunately our selling price synergies, offsetting synergies had been offset in the first quarter by the negative impact related to the inability to recognize 600,000 tons of material in transit. So, in the second quarter, we will see this positive impact. Plus, we will see the positive impact coming from the synergies. So you almost have two double impacts in terms of Kryvorizhstal results, which will come in the second quarter of 2006. So we fundamentally see a much stronger performance from Kryvorizhstal in the second quarter of 2006.

If I turn to guidance, perhaps the most important and interesting slide of my presentation, normally we give very specific guidance. Unfortunately due to the fact that we intend to make our offer document effective very soon, we cannot get into very specific guidance. However, I can try and provide you with a perspective of what we believe is the ability of our company to generate income.

I think in terms of guidance we have remarkable news as to what we are seeing in both the second and the third quarter this year. The guidance for the second quarter is basically driven only by volume increase, having seen significant volume increase occurring in the second quarter and significant income generation as a result. The price impact that has been created due to a better supply and demand balance in the global steel industry we will see in the third quarter. Therefore, we expect significant upward movement from the first quarter and the second quarter and going into the third quarter.

Let me just talk about the second quarter. In the U.S., shipments are stable. We expect shipments to be stable, prices slightly up, cost to be stable, operating income to be higher, but nothing remarkable in terms of the operating performance here.

In terms of Europe, shipments will be strongly up, prices up, costs slightly down. Operating income will be significantly higher. This excludes all the exciting things going on in Kryvorizhstal. On a stand-alone basis, excluding Kryvorizhstal, we expect operating income to be significantly higher.

In terms of Asia/Africa, we are forecasting a recovery in our business with operating income up clearly. This is important as Asia Africa is a significant portion of our overall business. In terms of total, shipments are expected to be significantly up, prices up, cost stable. Operating income will increase at a higher rate than the first quarter versus the fourth quarter '05, which means that rate was 17%. So we expect operating income to increase at a higher rate than that. We also expect that the tax rate will be normalized in the second quarter, and in spite of the tax rate being normalized, we expect that the EPS growth will be similar to the rate of growth that we had from the first quarter to the fourth quarter of '05. So clearly strong guidance, not only for the second quarter of 2006 but also for the third quarter of 2006 where we will see the price impact. Thank you.

Thank you, Aditya. Just to summarize what has been said in today's call, we are seeing the China economy continue to be very strong, so is the economics for India. We are also seeing stronger economics in African region, which means also Africa and Algeria. Similarly on the G-7, as I said, the U.S. and Europe enrollment is also improving. Economically the leading indicators are still going up, and industrial production started to recover in Q1.

The second conclusion that production increase in supply and demand is balanced, which we have seen in Q1, and we expect this trend to continue partly arising out of consolidation in the steel industry. We are seeing the benefits very strongly of consolidation. We have seen it in Q2, Q3 of '05, and we are also seeing this at the beginning of this year, which means that we are also expecting price recovery to continue as Aditya has just outlined about his outlook for Q2 and Q3. And with all these factors, we believe that our Mittal Steel profit increase expected to accelerate with a strong underlying growth.

And final point, that Arcelor tender we are expecting to be opening an official shortly.

Thank you very much. Now we will open for questions.

(OPERATOR INSTRUCTIONS). Daniel Altman, Bear Stearns.

Congratulations on the quarter. A couple of questions. Firstly, the Asia and Africa business showed a sharp decline versus the fourth quarter. I wonder if you can explain from a country standpoint what was going on, and again from a country standpoint what you think -- where you expect to see the bulk of the recovery starting in the second quarter?

And then my second question is regarding the Arcelor bid. As part of your bid, I know you have a commitment to take out minority shareholders in Brazil. I am wondering the share price depreciation that we have seen for Arcelor shares, I wonder if your calculation for the cost of taking out minority shareholders in Brazil has grown in proportion to the increase that we have seen in the Arcelor shares?

In terms of our Asia/Africa business, I would love to help you out in terms of breaking it out by country. The problem I have is that part of that business has been listed (indiscernible). If I break it up too much by country, then I am giving very specific guidance for South Africa.

What I'm going to try and do is provide an overall perspective. Clearly a lot of the improvement in pricing is coming out of China, which we have our operations in Kazakhstan, which is sending a lot of tons into China. We see a significant improvement in operating income as a result. Overall stock prices are up in Southeast Asia. We see that. In fact, if you look at South Africa, there will be improvement but not as significant perhaps as the other operations.

In terms of the Brazilian minority purchase, we have gone through this question many times. Clearly it is up to the Brazilian stock regulators to decide whether the offer of value we tender for it is fair or not. We have a history of also maintaining this to some degree. For example, in South Africa, it is not entirely clear whether there would be an offer for the minority.

Just as a follow-up, if they do require you to make an offer for minorities, the market cap in Brazil is now about 12 billion. Is that the basis that you would use in terms of issuing stock and cash to minority shareholders there?

Yes, I really cannot answer the question because then I'm making an offer. So I think the bottom line is we're going to be in compliance with Brazilian law. We need to discuss with the regulator what is a fair offer and whether we are required to make an offer.

David MacGregor, Longbow Research.

I wondered if you could talk a little about the iron ore market right now in your outlook for iron ore prices in the year ahead?

At this time, iron ore producers are in dialogue with China with the Chinese producers, and like anyone's guess, the discussions are going on between expectations of iron ore producers at 24% or maybe more and Chinese producers negotiating less than 5% or 0%. This year it is all the discussions are being led by Chinese, and we hope that in the next couple of weeks we will have some idea where the negotiation is going on.

But as far as Mittal Steel is concerned, we have said before that we are 50% self-reliant on our own captive minds and our existing contracts, and going forward we have business plans to expand our iron ore business and add Mittal Steel. By 2010 we plan to have up to 80% of our requirements met by our own mines.

So, it sounds as though you are expecting a resolution in the pricing negotiations in the next few weeks. Did I hear that correctly?

Yes, this is what we expect.

[Alan Coate], HSBC.

You have given us guidance of what sort of price increase per ton you might see at 30 to $40 for Q2 and 30 to $50 for Q3. I am assuming you're relatively booked up for that period, which is half a question. And then the other question is, what sort of cost increases are you seeing per ton, LNG or anything else?

Yes, we have not given guidance on price increase in the second quarter. What we said was that there are price increases in the market of $30 to $40, but the impact of that you would see in the third quarter. I think we should just differentiate between the market outlook versus operating guidance.

As far as operating guidance is concerned, we see significant volume growth in the second quarter compared to the first quarter. We also see the fact that Asia/Africa, which has bottom cycle conditions in the first quarter, is now normalizing. You will see that impact in the second-quarter EBIT.

Third-quarter EBIT you will see the impact of the price increases which are there in the market. Because the orders are booked in the second quarter, but by the time they hit the income statement, we get it in the third quarter.

In terms of cost pressures, clearly depending on what happens in the iron ore price negotiation, there will be cost pressures on that. We are hedged but only 40% hedged, so we will still bear the brunt of any iron ore price negotiation. Other than that, there is volatility in zinc and nickel, which has impacts on value-add products. But we have our hedged books, and we have not seen anything significant flowing through income as far as we can tell today in the second and third quarter.

Thank you.

Aldo Mazzaferro, Goldman Sachs.

I was wondering if you could describe a little bit what the areas of contention are on antitrust in the U.S. where you mentioned in the press release that if you were unable to sell [Tisan], you may need to sell another asset. I am wondering if you could describe what areas of the market are the overlap that you are concerned about?

The interesting thing is you said area of contention. We don't believe that there is any issue. But we have accepted a process which we think is reasonable for all parties concerned, which is north (indiscernible) of Dofasco (technical difficulty)-- for our agreement.

What you will -- the only thing I can say is not the area that we normally expected. It is something slightly different. But I really cannot get into the details as to what product range it is. It also leads into which mills we are looking at remedies. It is not necessarily the mills that we have in the Chicago-area, but other mills.

If I remember correctly, there is only two areas that might be -- automotive and template. Am I on the right track there?

I think we cannot get more specific.

And then second question, a more general topic. In the production trends in China recently, we had very good control in production up until March where it seemed to go up quite a bit. I know seasonally that is a stronger month anyway. I am wondering as you go forward, how is your confidence level regarding the ultimate control over production in China?

We have always been a believer that China cannot be a major mass exporter of steel. Now on our very different -- some of the studies we have seen that based on (indiscernible) or price, their cost is in the range of 370 to $400. And if you include the expected iron ore price, I think their prices will further go up. Energy costs are going up, and since most of the plants are inland, you can say that the cost of production will only go up in the future.

At the same time, we have been hearing, and I was in China a couple of weeks back, we have been hearing that the Chinese government does not want to increase the steel companies to use their cares and expensive resources to produce steel for export and make losses.

At the same time, there are 800 blast furnaces in China, and we hear that at least the direction is clear that 100 million tons of capacity should be shut down, which are very small blast furnaces and they are not viable in the future. All these actions are very positive, and we believe that all the -- at the same time, they are also putting restriction on financing those new projects.

So with all this, one can clearly summarize that we see the slowdown on the growth curve, the growth and expansion in the China steel industry. At the same time, the government is very conscious on taking away its required export rebate in case this is the export increasing. All this are good news and shows that they would like to produce the steel for their domestic consumption.

Charles Bradford, Bradford Research.

I presume that you heard the Arcelor comments about their offer for 150 million shares. Do you have any reactions?

Yes, we did hear it this morning. Our reaction is very simple. We have lots of questions as to exactly what they intend to do. In spite of their announcement, we intend to proceed forward with our offer.

Because it seems almost like you are going to have less shares than you have to buy, and it could actually be a [huff] deal?

It could actually be a what?

Shares for you to have to buy and, therefore, might be helping you.

I would say it is neutral in that sense that our offer has an automatic adjustment. It would (indiscernible) to do a dividend or a share buyback. It reduces our offer terms. So it is left pocket, right pocket from a shareholder perspective as well and from our perspective as well.

I don't necessarily know how it helps because from our side we made the following comments earlier on, which was it complicates the process because suddenly you have a tender offer. You could have two competing tender offers. One is for the whole company. One is for a certain portion of the Company, which creates confusion in the market.

If you look at the whole offer for us, that process, the regulators have prevented us or our Arcelor from trading in Arcelor stock. Clearly this is not trading in the stock, but this is clearly doing a tender offer for their own shares.

Number three, there is no process outlined as to when they would do this. There is an EGM. If they reach the quorum, there will be another EGM end of June. So it creates uncertainty in the environment. The cleaner structure would have been to issue a straight dividend, which they have not done.

It just seems like there is going to be 150 million less shares outstanding possibly. Therefore, less cash that you have to put out anyway.

Yes, absolutely right. Theoretically that is true, but it could also delay the offer.

Ian Davey, Lehman Brothers.

Actually my question was pretty much answered by the last one. But if I could just follow-up, in terms of your offer, which I guess will help you all come early next week, can you give us any color in terms of all the regulators who are looking at the transaction, which one has been or which timetable you will attend to use ahead (inaudible) actually being published?

You are asking a very political question. I cannot get into which regulator and all that. I can give you a general perspective, but I would divide it into two regulatory bodies -- the European regulatory body and the U.S. In Europe, we have five regulators -- Netherlands, Luxembourg, France, Spain, and Belgium. In Europe we can do an offer process, let's say, for 35 days. In the U.S., that can be a shorter timeframe. So we are forecasting that the European offer would open and perhaps the U.S. offer would open right after that.

Vincent Lepine, Exane BNP Paribas.

I have three tiny nitty-gritty questions on your results. First of all, on credit sales, I was wondering if by now we had a final version of the allocation plan in Poland. Because I seem to remember that back in March in Rotterdam, you were saying to us you had about 7 million tons of credit (indiscernible) in Europe. And if I heard you properly earlier today, you mentioned you had still 9.2 million costs per year, the sales you made in Q1. So I was just wondering what the exact figure was on that?

Then on income from equity investments, I know it is a small number, but you mentioned that it was up mostly because of Hunan Valin, and I was just surprised because in Q4 and Q1 I was assuming China at least in terms of resources hadn't recovered, and we could see this in the results of the Asia/Africa region. So I was just wondering when that (inaudible) in absent Hunan Valin that we missed, or maybe it is just a small variation, and we should not worry too much about it.

And the last one, on Asia/Africa, again you're showing on one of the slides that prices were down. If you just divide sales by shipments in that region, you actually noticed that the price per ton on average is actually up. So I was just wondering if you can help me reconcile this?

I will answer the last two, and I will get Roeland Baan to answer the CO2. The interest and equity income, you are absolutely right. Valin's income was much lower than the fourth quarter. Fourth quarter was $44 million and the net income, and the first quarter was 8 million. However, U.S. GAAP accounts were not ready for Valin in the fourth quarter of 2005. So we do not account for any income of Valin.

So in the first quarter, we are counting for both fourth quarter and first quarter. So we are counting for 44 plus 8, 52 million. We have a 30% stake. That is what you see in the equity income line.

In terms of the trading, we have a trading arm in Asia/Africa. So as Kryvorizhstal is exporting into that region, you have intercompany sales. And also the intercompany sales amount has also increased. We are not providing divisional breakdown in the intercompany sales. I think in the near future we will be making that improvement as well.

On the CO2 question -- this is Roeland Baan speaking -- you are right. The difference comes from the fact that as per the end of March we have gone through a verification process in all the units, and the verification process in Poland has increased the actual surplus on CO2. So that has moved up from about 6.4 million tons of service to 8.2 million tons of service. It brings the whole (indiscernible) to the surface theoretically of 10.5 million of today's fresh levels.

Did that answer your question?

Yes.

[Mark Sal], Goldman Sachs.

I just want to confirm that relation in your closing comments that despite normalized tax rates you expect to Q3 EPS growth rate to be higher than Q1 versus Q4?

That is right.

Okay. Obviously this, based on your breakdown a bit in volume, pricing and cost, most of it is coming from volume, a little bit on the price. But then you also mentioned that market price is up 30 to $50 in Q2. Some of it will be impacted or most of it impacted in Q3. Are we correct in understanding that Q3 earnings will be better than Q2 at this point as an example (inaudible)?

Yes.

Okay. And lastly, can you just give us an idea on your interest expense going forward at least in the Q2, will it be in the same zip code as you had in the Q1?

Let us forecast. We normally don't give -- it is $7 million down for the second quarter.

[Jim Rice], Avenue Capital.

I was just curious what your plans are right now in terms of the Dofasco trust and what your counsel is saying how you may be able to get around the trust if it becomes an issue with the EU?

I don't know if the trust will be an issue with EU as such from a regulatory point of view or legal perspective. However, we have our options reserved. That is the legal validity of this trust, and we would exercise those options when appropriate.

Okay. And then in terms of the U.S., obviously we've got a positive decision from the FCC. Do you know what plants you may consider divesting?

The decision rests on us honoring our binding agreement with TK, which involves the divestiture of Dofasco. That is basically the scenario we are working towards.

[Sam Sabar], Quattro Global Capital.

It is S.T. Tallapragada with Sam at Quattro. You have said that you would consider revising your offer if it were recommended by the Arcelor Board. If that bridge can't be crossed, would you consider taking a revised offer directly to shareholders?

We said that we would revise our offer because we believe there is value to recommend the transaction. We never said that the value of Arcelor has changed in our minds. The value of Arcelor is what we put on the table. Our offer has dramatically improved since we announced it.

Today our offer is close to EUR34. I have not checked the latest rating, which is almost a 50% (inaudible) for their all-time high. It is almost multiple where they were trading on average in 2005. So clearly it is a rich offer. People are very excited about the share component in our offer (inaudible) the rerating of the steel industry this year achieving the synergies we understand in industrial logic. I am very excited about the transaction, and that is what we can see in our offer and the reaction of the market.

Okay. And since it seems to have -- a sticking point that seems to have emerged between the two boards is the Arcelor Board's requirement that you offer an all-cash offer. I was wondering since that seems to have emerged as a point of contention, would you consider guaranteeing cash electors in your secondary offer to receive all-cash since those shareholders who might not want to elect stock might want cash?

That is a change in the structure of our offer, and today if you look at that, everyone is excited about the share component, not about the cash component.

I agree. Just once again, assuming that is the case, why not offer for cash electors the ability to receive cash for all of their shares since logically because there is so much value being created from the merger, and obviously as you pointed out in your stock price inventory performance, most shareholders would, in fact, elect stock, not cash.

Yes, no, I agree with you as well. But the issue is that as a public company we have a responsibility to all of our debtholders. And if we were to provide the stability (indiscernible) the notion of that amount, which could have implications of the rating agencies and clearly that we get into rating grids and what implication of all those things are, increased costs. So the eventual outcome is not as important as the structure of putting something like that in place, which creates debt issues internally.

One last question. What are the reservations of the Luxembourg government currently, and to what extent, have you been able to mollify those concerns?

We actually have almost a new policy on board where we are not commenting on specific governments because we don't think it is appropriate or fair. We have had discussions with various governments. If governments choose to make their discussions public, that is their prerogative. Discussions are ongoing. We have provided the industrial plan to key stakeholders, and the general feedback is good.

[Mark Wumanutar].

Congratulations on a good quarter. I just wanted to get more color on Q2 and Q3 from a pricing standpoint. My understanding was that there was typically a lag given your global assets, but that Q2 would really see that pick up. It seems like Q2 will see some of that, but that Q3 will see the majority of it. Can you walk us through how we should be thinking of pricing and the impacts of average selling prices going forward?

And my second question is just, if you can spend a bit more time talking about general price increases that we might see in the back half of the second quarter and going into the third quarter and how that could potentially impact discussions with the automotive makers in terms of setting contracts for 2007?

Thank you for your question. We cannot give guidance on third quarter, fourth quarter. We have given a suggestion as to what the second quarter will be. We believe it is going to be higher than the rate of increase that we had during the first and the fourth quarter this year.

In terms of price, you're absolutely right. There is a lag, and the price improvement that we indicated you will see in the third quarter. To the extent that there is further price improvements towards the back-end of the second quarter, you see that in the fourth quarter. And I think you jumped onto that point because you asked us what our outlook for 2007 long-term contracts are.

I think it is point in time it is very premature to discuss so far out. Historically as a company we are just giving quarterly guidance, but in this environment of rising prices, we thought we would provide some perspective as to what is going to happen in the third quarter.

Johan Rode, Deutsche Bank.

I just had a couple of questions surrounding the Africa and Asia businesses. Just firstly, there is a tax charge ruling against you in South Africa that accounts for roughly $70 million, which is about 10% of true net income for the quarter. Why have you done that provision for this, and what grounds are you using in your appeal against this case?

Just for clarification, we have not taken any charge on our books (inaudible) not that charge because it is the case which we are contesting. We do not believe that the South African government has a -- their case has merit. Basically it is very simple. When we acquired -- when we were in the process of acquiring Iscor, we had an agreement in which they would pay us a 10% of their shares if we created 700 million brands of operating improvement which were documented and which were sustainable, which we did. They paid us a consideration in shares. The government wants to tax that seeing that payment for services rendered in South Africa as one of the service factors we're seeing with that. That is not service tax, and we're going to contest that. I do not believe that that had any role in the results of the first quarter.

I agree with that. Just in terms of the timing of that appeal, when do you expect that appeal to be settled?

I think I hear around the table a few years.

Okay. (multiple speakers)

If we have another update, we will provide it. But I heard it is a few years.

And in terms of the outlook for the second quarter, the competition ruling on pricing policy in South Africa is going through on the 31st of May. Given that they recently cut the 5% import duty, what is your outlook on that relaxation of import value within the South African market?

Just to be very clear, they have announced an intention to cut the duty. They have not physically cut the duty.

In terms of the competition case, our positioning and case is very strong. We have won various competition cases through the history of this Company. We are pricing based on the market-based formula. The government I think are putting price controls which we're seeing for price control, and judging by the history of South Africa, you would expect them to be reasonable.

The final question just on CapEx within that market and you are sitting on a 20% net cash fairly inefficient capital structure within that business, and the cash generation seems to be relatively strong. What kind of CapEx requirements do we have in that Asia/Africa region and specifically in that South African subsidiary and for the rest of the business?

Well, you know we have a plan to expand the Company by 2.5 to 3 million tons by expansion of [Vanderbilt] market, as well as [Suzannah], some capacity expansion at Newcastle. So that is ongoing. I do not want to get into commenting on the capital structure of individual facilities, but from a CapEx perspective, that is the guidance they have provided.

And finally, just as a follow-up, for the rest of your regions, CapEx for the regions outside of South Africa or outside of Africa?

CapEx expectation is 1.7 billion. So we believe we are not really providing regional CapEx breakdown. We incurred a small portion of that in the first quarter. Out of the 1.7 billion, almost 500 million is mining-related. Where 400 million is mining-related, the rest is (indiscernible) related CapEx.

[Lee Dunlap], Cazenove.

I just wanted to clarify, one of the concessions you made in terms of trying to get Arcelor to negotiate was the one-for-one vote change you were considering and then rewarding longer-term shareholders with two votes, a standard in France.

Now, as I understand it, if that holds and you do get a high acceptance rate, on the one-to-one vote situation, the family holding falls below 50%. So I was just wondering, does that mean you will award longer-term Mittal shareholders with two votes automatically to maintain that 50% holding in the event of a high acceptance rate?

Can you repeat the question?

Okay. (multiple speakers)

If I have understood it, then correct us if we have not, the voting structure would be put in place at Mittal Steel because they are turning into Mittal Steel shares?

Yes.

Basically every shareholder was held the shares for a certain period of time, we have not defined it. It is actually a difference between one to three years would get double voting rights at all the general meetings or EGMs or AGMs based on a record date of ownership and that is it.

Yes. But my confusion lies in the fact that if the Mittal family has a one-to-one vote or if there's only a one share with one vote or one class of share with one vote. But if you get a high acceptance rate, and I understand the Mittal family wants to retain a 50% stake, under that situation the family holding falls below 50%.

Yes, but the family because it is owning the shares for more than two years gets double voting rights.

Okay. So the two-year situation would start from -- well, it does not start from that. It starts from how long Mittal shareholders have held their shares.

Yes, we have not disclosed this or defined the terms or how the mechanics would work. It was a concept which we proposed to Arcelor to provide equality for all shares, as well as the concept of rewarding shareholders who have been with the company for a longer period of time.

Okay. Thank you very much.

At this time, sir, that does finalize the Q&A portion. I would now like to turn it back to you all for closing remarks.

Thank you very much for participating in our first-quarter conference call, and we look forward to talking to you soon. Thank you very much. Have a good day.

Ladies and gentlemen, this does include your presentation. At this time, you all may disconnect and have a wonderful day.