ArcelorMittal SA (MT) 2006 Q3 法說會逐字稿

Good day, everyone. I've very pleased to be with you today, a day in advance to expectations with the full Group Management Board.

I will not go through the details of this disclaimer which has been read to you.

Today, after a brief introduction, I will go through the new organization decided by our Board. Then, Roland will present the environment in the steel market. Aditya will go through the Q3 financial results. Each GMB member will then go through his division performance and after a briefconclusion we will start the traditional Q&A.

But let us start by an overview of the quarter. First, I would like to say that we have a very successful start of integration. Our progress has been much faster than our anticipation and I'm very pleased to see that we are already starting to capture synergies.

Second, the Board yesterday have announced important changes at the head of the group. I will become the CEO and Roland will stay at the Group Management Board and also will become my advisor. We believe this will reinforce the leadership of the group and reinforce our organization.

In addition, I am very happy to say that we have confirmed our financial targets. We have started capturing management gains and synergies. We have validated through a bottom up exercise, value plan for 2008 harmonized and reaffirmed.

Merger agenda is on track. In the meantime, we have also made a mandatory tender offer to Arcelor Brazil minority shareholders. We have filed this with the Brazilian regulator with a reference value of European EUR12.118 per Arcelor Brazil share.

To come back to our Q3 results, I would like to highlight the strong performance of the group which has been better than our anticipation. And finally, I would like to confirm 2006 EBITDA guidance for the year which we had given between $15.2 to US$15.4 billion. But before I go through the results, I would like to say a few words about the change in our organization.

As I told you, the Board asked me to become the CEO of the group whereas Roland will remain a member of the GMB and will remain in charge of HR, health and safety, marketing, commercial coordination, international affairs, China, continuous improvement and system world development.

Davinder Chugh will no more be the member of the General Management Board but will continue with his responsibilities of shared services and will report directly to me. Except these changes there are no other changes across the organization in responsibilities and reporting relationship.

Clearly, priorities will be to continue the excellent job done by Roland in terms of integration. Everything is on track. The heart of our organization has been nominated and is at work. And since we announced this merge,r if I recall, we announced the Group Management Board in early August, management committee in September and main organization, top 250 colleagues have been nominated in November.

The integration office is operating at full speed with 20 task forces and 51 sub-task forces, operating involving more than 10 senior executives and we are tracking management gain and synergies on a weekly basis and the GMB is monitoring it very closely.

Internal communication is always keen integration and I must say that they have been very active within ourselves. We have been communicating very well with the group, with the senior management and the management teams at large. We already had eight road shows in three continents. Met more than 750 senior management. We are going to have a newsletter and very soon launch an Internet.

In the results of Q3, we have not got the synergies yet. Synergies have not impacted the Q3 results, but we are starting to capture in October. In the meantime, we are starting to work on the [quick wins]. We are starting to have one face to the customer and that is happening very well. We have started renegotiation of the existing supply contracts with the major suppliers in the industry. We have also look at the relocation of order book and harmonizing of prices for extras within flat Europe. We have improved our steel shop yield through bench marking within flat Americas. We have negotiated very successfully some of our contracts with major customers.

As we said last time also that this agenda of integration is quite full but the integration part and organization is very clear and we are entering the execution part of it. I can only report that it is on track and it is as per the plan which we announced in August.

The overarching priority for Arcelor Mittel is to continue our successful integration and deliver the margin synergies and benefits. This is my key focus and I'm confident we will achieve.

I would like now give the microphone to Roland who will explain you our view about the involvement and the steel market. Roland?

Thank you very much Mr. Mittal but before I come to that let me express again that I believe that the clarification of the leadership through merging the two functions of president and CEO and such avoiding overlapping is the best solution for the company and for this great project. And let me also say that due to the good understanding and excellent relationship I have developed -- that we have developed together, Mr. Mittal and myself during the last few months, is I can say that I also believe that he is the right person, the right CEO for running this company.

When we come to the evolution of the general situation of the steel situation in the world, one thing we always are watching is of course is China and the Chinese production growth rate has known some slowdown. Clearly, I must also say that the rate of production increase that we expect in 2007 but we always speak about rate of growth of production should slow down a little bit due to low profitability as we know of the Chinese activities and the investments of Chinese producers are in value added products. And additionally what would help is a cut in Chinese export VAT rebates and implementation of tariffs on exports of semi-finished products having positive impacts on the global market, but of course we have to remain prudent and to monitor closely the evolution of China.

And in North America we're already starting to have some positive impact on the announcement that Arcelor Mittal did on the reduction of production. We should expect a positive impact on the inventory levels to be reduced in the coming months and also due to the increased improved package situation in Asia we should see less pressure from imports. So we expect that the price situation could be stabilized in relative short term.

A similar situation in Europe where after the seasonal effect of the summer the market has stabilized again which is due to solid underlying demand. Also, we knew we have announced production cuts as well as in the U.S. either by advancing scheduled maintenance or by postponing recommissioning of blast furnace capacity which helps to maintain an adequate level of inventory level and as a consequence maintain prices at the solid and good level and I would like now Aditya to comment on the performances of our company the quarter three.

Great. Good morning and good afternoon. Thank you Roland and thank you Mr. Mittal for that overview as well as some understanding of what the market is like in the fourth quarter. I will very quickly walk you through the third quarter results and the pro forma highlights and then get into some more detail before the rest of GMB talks about their specific divisions.

In terms of our EBITDA, we had a very strong performance in the third quarter. We came in with an EBITDA which is higher than guidance of $4.4 billion compared to $3.5 billion in the second quarter. It's a 24% increase and it was in spite of low seasonal volumes in the third quarter which was offset by strong rises in steel prices.

To provide you with a quick bridge between second and the third quarter, we saw negative volume in part of about $400 million. We saw positive price impact of about $1.65 billion and a negative cost impact of 400, resulting in a net increase of approximately $900 million compared to the second quarter.

Our net income and earnings per share, as a consequence, are strongly up. Net income increasing by 20%. The reason why it's not 24% corresponding to EBITDA is primarily because of the higher tax rate of 20% compared to 12.7% in second quarter as well as higher financing costs which include one-time financing expenses in the third quarter.

In terms of the net debt. The net debt remains in line with the group target. We have a cash flow $1.7 billion in spite of a strong rise in working capital of 1.7 billion. We reduced net debt by $0.5 billion representing a gearing of 48% or a net financial debt to EBITDA ratio 1.3 times.

In some of our guidance we'll get into more detail of the guidance but in spite of production cutbacks both in the U.S. and Europe we are confirming our guidance at 15.2 to 15.4 billion for 2006.

If you turn to the next page we get some detail on what we achieved in terms of the P&L. Let me begin at the bottom of the page which is shipments. As you can see in the second quarter we shipped 29 million tons in the third quarter, 26.8 million tons. We had shipment reductions at most of our major steel making units apart from Asia, Africia.

At Flat Carbon Americas shipments were down by 0.7 million tons. Flat Carbon Europe by 0.8 million tons and Long by about half a million tons. Because of the price increases that we had in the third quarter compared to the second quarter sales were flat. Overall, our margins improved as less shipments implied less cost to the company.

As I mentioned earlier, we had higher net financing costs and a higher tax base for the third quarter. This resulted in a net income of $2.182 billion for the quarter. A 10% margin on net income to revenue and almost a 20% margin in terms of EBITDA to revenue.

If we look forward to the fourth quarter in terms of just tax guidance we're looking at a more normalized rate in the fourth quarter and a lower net financing costs in the fourth quarter.

This page provides a few cash flow highlights. The main highlight being that in the third quarter we generated $1.7 billion of cash flow from operating activities. This is in spite of a $1.78 billion increase in our net working capital. The increase was primarily in inventories in which the days outstanding of inventories across our facilities increased and some increased receivables as well.

If you look at the CapEx number, the CapEx number in the third quarter was 1 billion. Our nine months number is about 3 billion. It's lower than our annual target of 4.7 billion. We expect to have CapEx in the fourth quarter of between 1.5 to 1.7 billion.

In terms of dividends paid, out of the 355 million, about $200 million was paid to minorities both at Mittal Steel as well as at Arcelor Brazil and the rest is a $012.5 dividend which was paid out in the third quarter.

We also reduced debt. Gross debt was reduced by $1.2 billion but as we reduced cash by 700 we have a net debt reduction of about $500 million in the quarter.

Let me very quickly walk you through the balance sheet. The balance sheet is done on a pro forma basis and includes the purchase accounting impacts. As a result, we are reevaluating our plants, property and equipment by $11.5 billion. Non-current assets is $71 billion for the company. Current assets is 37 billion. We can see here the increase in inventories of almost 1.3 billion which occurred from the previous quarter as well as marginal increase in receivables.

Current liabilities down from 21 to 20.36 billion representing a net financial debt of $22.7 billion as I mentioned earlier. The interesting point here is our net working capital is $18.2 billion which represents 86 days of cash conversion cycle which we expect to reduce in the fourth quarter and therefore generate a further cash and net debt.

We will announce the divisional highlights on a proforma basis. I'm very quickly going to walk through Flat Carbon Americas and then Michel will take over for me to talk about Flat Carbon Europe and the rest of the GMB.

In Americas, we can see a significant increase in EBITDA. EBITDA has increased by 32% in the third quarter. The same story, lower volumes but higher prices. As a result, significantly higher margins.

Operating income margin is 14% at 774 and EBITDA's almost 19%. The primary increases have occurred in Mexico as well as in Brazil as well as in Mittal Steel USA. It's primarily in that order. The most significant increase we had was in South Africa -- or South America especially in Mexico.

We expect the fourth quarter to be weaker due to production cuts and do not expect an increase in the shipment level compared to what we have had in the third quarter.

2007 should be a stronger year primarily for two reasons. We have renegotiated some automotive contracts which have positive results in '07 and number two, in Brazil we are going to be expanding the CST furnace and as a result we'll be shipping more steel out in '07 compared to '06.

With that overview, I will hand it over to Michel. Thank you.

Good afternoon. In Flat Carbon Europe, I would say that the quarter was quite satisfactory despite the fact that we report on the holiday period which is all the time very low in and the consequence is there was a significantly lower production in shipment compared to Q2 basically, 10%.

On the other hand, the global EBITDA could be increased maybe because of slight improvement in prices and this despite the fact that Flat Carbon Europe is a very high proportion of contract business. In particular, what we can say that was increased profitability came through higher prices in commodities flat and also in plate business which was doing extremely well.

On the other hand, also during the Q3 we had higher costs in particular due to the rally of zinc prices and zinc prices for packaging but on the other hand we had very good management gains in all of our plants. We are on track on the cost side and that also I would like to make the remarks that integration between east and western plants is going well for us and eastern plants are taking a lot of pleasure of exchanging with their colleagues from the west in particular Poland with [Ecoschnau].

And all of this gives us then an EBITDA which has been slightly better than Q2. Significantly better in Eastern Europe whereas in the Western Europe and European plants EBITDA has been very slightly below Q2 values due to the reasons I explained.

Now the outlook is quite positive for the fourth quarter. Production will continue to be low. We have decided to delay the firing of the relined blast furnace in Dunkerque which will help us to take out of the market more than another 100,000 tons in addition to some of technical incidence we have also in [inaudible-highly accented] Fos concerning prices we see globally for quarter four almost stable prices and they're mostly thank to the very good product mix we have in Europe.

Concerning 2007, I think also there is quite the good sign of optimism. First of all we are on the way to renegotiate our annual contracts which is good and we will obviously more than offset the increase in the zinc prices which had been very sharp in 2006. We will continue to have our cost control which is strong and very optimistic also about the synergies and managements which are made between east and west and last but not least also in Eastern Europe we will have additional capacity due to first of all the commissioning of the new very nice color coating line in Poland which had started by the end of last quarter and then we will commission a new continuous caster in Krakow also which will improve our quality and also our volumes in Eastern Europe. So globally and positive outlook there as well and I give the floor to Gonzalo.

Thank you, Michel. Good afternoon to all of you. In long carbon, we also had a good quarter. As you've seen, we've been able to maintain our margins. Our EBITDA margins above 21%. As you see that demonstrates we are very stable because we have been in the previous quarter the lower 20% and for the year we are around 20% so we are proving we have a good stable business.

Now if you see it and we do have the breakdown of the EBITDA, first you can see the volumes. We've been impacted with a decrease in volumes. That is normal once in while as Aditya said before - Michel due to the month of August and especially in Europe so we have had a decrease in volumes.

On the other hand, we've had an improvement of prices of around 200 million for this quarter but we've had also an increase of 100 million. So the net effect there between the increase in prices and the increase of our raw materials has been around 100 million. That is a reflection of that. Now we have been able to compensate that decrease in volumes which we are very happy with. On the other hand, we've seen scrap has been continues to be strong. We've had around more than EUR211 per ton in Europe and it's decreased a bit in September but clearly it's still above EUR200 a ton.

On the integration side we are working already very well in Europe and in the Americas. We've put already the commercial organizations together on one hand and also the industrial are acting as one and we are already working and obtaining these synergies. So we are as one for the commercial and for the industrial optimization. If I take that to the Americas it is also the case. We have one organization for commercial and for industrials. We've even seen a lot of similarities in many plants.

For example, twin plants in between Acindar, Argentina and the Trinidad-Tobago, so there's enormous room to improvement and enormous room to learn together and to improve the state of our assets between those different plants that are -- we can really twin them and make a lot of progress.

Now we look forward. We believe the fourth quarter will be in line with what the third quarter has been. We have some differences in some products and some markets. The beams seem stronger now than the rebar part but we are comfortable to obtain an adequate result for the fourth quarter. And looking forward to 2007 our objective there is continue and try to maintain our margin -- our EBITDA margin of around 20%. We believe that through all the synergies we will be able to compensate the price squeeze and so we have an adequate and look for 2007 and we are adequately positive for 2007.

We speak of AMCS, the activities. Here you can really see the impact of holiday. Especially I would say in the European and all south of Europe. We've lost volume as you can see with respect to the second quarter. If we compare to last year and we see the figures we had of the previous year it is in line and we are very cyclical. In the month of August our customers tend to demand much less in order not to reduce, not to increase sorry, their stocks.

On the other hand, we had better results. Why? We've had a tendency of increasing prices so we've benefited from that and additionally we've benefited from a stock that was lower priced. So it's had a double positive impact in this. We've had a favorable price squeeze I would say.

But what's very important we believe in AMCS is the stocks. Where are we in stocks? Clearly, the stocks have different behaviors. In the U.S. we've seen stocks that have increased. In Europe also. Now we're not alarmed. Why? Because we were starting from a very low level on one had so it is true that they have increased but on the other hand we've seen there is demand. So basically the increase on stocks with the demand we have and as we started with that low level it is adequate.

I will tell you some figures. Clearly here for the moment they're more European. At present, we have 59 days of stock for example in our steel service center and distribution activities. For us, this is an adequate level. An organization that does distribution should have to give good service to its customers around two month.

Now it is true that at some stage of end of last year we were down to instead of 59 - 60 days to below 50. But that was exceptionally low. Now we do know that in the U.S. for example the stocks are closer to three months but we insist with the level -- and this message we're cutting productions on one hand, the demand we will be able to over to that situation. We don't believe will be a problem there on the contrary.

Now we look forward. We believe the fourth quarter we will be able to maintain the margins we've had in the third quarter and for next year with this decrease in productions we just talked about here, I think we will continue seeing the same margin and results we've seen during the first nine months. Thank you and now the floor is Malay. Thank you.

Thank you, Gonzalo. Good afternoon. Asian African areas in this division show good results for the quarter which were driven by a better product mix and higher prices, the domestic market growth in South Africa and the higher demand of coated products in the CIS markets and particularly the ones for construction long. Our products from Ukraine contributed to this good performance.

We do see in fourth quarter outlook is good and order book is healthy with strong market for the long products of [kivado]. The vertical integration model which we have within this division has contributed to the higher margins and the projects which we have already undertaken in order to increase the mining activities in Kazakhstan, Ukraine are progressing well and would provide a better bottom line for this division going forward.

We do see also the markets being much more stable than it has been in America and Europe and the fourth quarter as I've already indicated seems promising in terms of the third quarter results.

If I move to the stainless steel this has been one of the best performers for the quarter three with the EBITDA margins growing practically more than 50% over the quarter two. This has been driven mainly by the strong demand and base prices increases which the market has been able to absorb in spite of the high nickel costs.

The operational efficiencies arising out of the [carinox] investments are also paying dividends and the distribution model which is there for the stainless steel has enabled new markets to be explored and new products to be introduced.

Fourth quarter we see the performance to be equally strong and this is based on the current order books which are very comfortable and also the dividend which we see in terms of the inventories which are there in both our distribution networks and distribution networks of the others.

As would be seen that in this stainless steel there has been a substantial turnaround and we do believe that this turnaround can be sustained.

I would now hand over for the conclusion.

I'm very pleased to see the progress what we have made in the quarter three and also the progress in terms of integration is very satisfactory and is in my opinion is excellent and now I would like to say that we have published a very strong set of results which reflect the strong fundamentals of the group as there is a good progress on integration. Our guidance is confirmed and I'm very confident that we will achieve our financial target with this strong organization in place and our high potential strategy.

In particular for the quarter related to Q3 we expect the following -- related to Q2. Total shipments expected to -- sorry, in particular for the Q4 related to Q3 we expect following.

Total shipments expected to remain stable. Market weakness for Flat Carbon Americas. Slight market weakness expected for Flat Carbon Europe. Stainless steel profitability to improve. Other segments performance expected to remain stable. 25% tax rate. CapEx to increase to about $1.5 billion and we will continue to work to reduce working capital.

Pro forma guidance is $4 billion to $4.2 billion for Q4 and confirmed for the year at $15.2 to $15.4 billion. With this conclusion, I will open the floor for questions and all members of GMB will be very pleased to answer. Thank you.

Thank you. [OPERATOR INSTRUCTIONS]. Our first question comes through from the line of Scott Hudson from Morgan Stanley. Please go ahead with your question.

Yes, hi. A number of questions if I may. If I could have an update on Dofasco to start off.

State your questions and then we can figure out who'll answer them.

Yes, sure. The question is could I just get an update on your integration level as well I terms of how much iron ore and coking coal you're buying from the open market and then in terms of your contract process negotiations could you give us an outlook for 2007 and how much of your shipments relate to one year or multiyear contracts?

The [status] is that the Board has extended recommendations to the 16th and now the matter is to take a decision and we hope that in couple of weeks or sooner we will hear from the stichting their decision taking into account the interest of all the stakeholders. On the contracting position. Aditya would you like to comment?

Sure. In terms of our R&R integration level as I recollected is about 47% or nine months 2006 with the expansions in Liberia as well as a planned expansion in Ukraine, in Mexico as well as in Kazakhstan we should achieve a 67% self efficiency level looking out '08 - '09. We can provide more of an update in our fact book which you can refer to these other numbers that I have. We're not commenting on in terms of the iron ore negotiations for next year. We believe that's too early, but in terms of the automotive side, myself or perhaps Michel would like to lend some light as to where we are in terms of automotive contracts.

I think that you should notice that we have approximately between 17 and 18 million tons of yearly shipments so these are yearly or monthly contracts which were by far the most -- the highest proportion. I would say 85% will be renewed now for fiscal year 2007. Some of them have been already renegotiated with two major ones which had been previously long term old contracts and where price increases in three digits had been received.

For the new contracts, the situation is different from one company to the other. Obviously, we have an increase in cost and in particular coating. Zinc coating is becoming much more expensive so this has to be over thrown so that we foresee for next year a significant price increase for our automotive business and what we see also from our customers. They understand what the situation is. They understand also that if we go into multi-year contracts we have to introduce some indexations because we can not take all the time all the risk and I would say that the relationship, this kind of service, the innovation we give to the automotive industry relations are moving very well because automotive producers see that there is really -- there is a lot of advantage of having a global supplier who can supply every where the same quality of excellent steel with very good service.

Thanks very much.

Thank you. Our next question come through from the line of Sylvain Brunet from Exane. Please go ahead with your question.

Good afternoon, gentlemen. First question. Could you please give us some color on the contribution of Dofasco in the third quarter and my second question is also a reporting question. Could you also give us some more detail and split the numbers between eastern and western Europe in long and [sub] division if you could by sales, [EDDN] and EBIT, please.

That's a lot of questions. I will just begin with Dofasco first. In terms of the second quarter Dofasco did $115 million of EBITDA and the third quarter 147 million of EBITDA and since the other facilities are also disclosing information just to provide you with a full bridge. In USA, 376, becoming 417; Lazar which is our operation in Mexico which I said at the highest EBITDA increase 71 becoming 166. Arcelor Brazil 217 becoming 291 and the remainder is Flat Canada which is 6 becoming 14. Gonzalo, would you like to provide differences on Flat Carbon.

That's right. Yes. I have them. In Long Carbon Americas I have in total -- you wanted the breakdown between Long Carbon Americas and South [inaudible]. We show that for the first nine months it has been $1,143 million between the Long Carbon Americas and Long Carbon Europe has been a very similar figure and it has also been 1,001 - sorry. The total it's 1,150. Now I have to say that also includes our activities of wire drawing and that is not that much. So that would be the breakdown. Now if you want in the Americas I would tell you that the majority of this is the south is around 1 billion - the south and the other part is of North Americas including US and Canada. Okay?

Okay. Thanks so much.

I do not have specifics in sales but I can give you the ones in EBITDA so in quarter three we did in Eastern Europe $257 million versus 180 million in Q2 and in Western Europe the corresponding figures were 724 in Q2 and 690 in Q3. In terms of volumes, I give you the volumes of Eastern Europe which was in Q2, 1.661 million tons versus 1.623 million tons in Q3 and if you make the subtraction you find the corresponding figures for Western Europe.

Sorry. What I gave you before was the first nine months so as you are seeing Q3 was in round figures. Europe was around 400 million and the Americas was in round 350 million. Okay, so before I gave the first nine months and this would be the Q3 figures. Thank you.

Thank you. Our next question comes through from the line of [Ephraim Relly] from Credit Suisse. Please go ahead with your question.

Hello there. Just four questions. Number one. Could you give us an update on the disposal initiative that you have to do as part of your [inaudible-highly accented] process with the EU and how far down the line you are on negotiations with disposing those assets.

Number two. On stainless steel, Aditya mentioned that the turnaround in stainless steel is strong and on track so does this mean that the problem of having to dispose of that asset has reduced significantly since you started.

Number three. On production plants. You have announced a significant amount of production cuts, but do you think it is sufficient to bring the market into balance? If not, how long do you think you will have to go on before the rest of the industry can afford losing any meaning for fashion and finally a question on just the contract negotiations. Again, regard the update in terms of the split. Is there a pattern in terms of earlier contract negotiation finalizing all this kind of customers kind of holding out on settling contracts in anticipation of falling stock prices?

Revie, thank you for your question. Let me try and see which ones I will answer and then we will send the questions across the table. In terms of the disposals, we have primarily two sets of assets that we're disposing. In Europe we have an issuing section so we're disposing of three assets. That process is on track. It's doing very well. We received a lot of interest in the first round. We are now short lifting the bidders for the second round and they are doing management presentations and visiting the facilities to finalize their due diligence process. So that's on track and should close in the first quarter of 2007.

The second disposal activity is with U.S. disposal activity which is -- remains complicated. Clearly, we have an obligation to dispose of Dofasco. That decision now rests with the stichting. They have to take a view on whether the company can dispose of Dofasco. If it cannot dispose of Dofasco, then we need to move to plan B which is Weirton or Sparrow's Point and there's not much of an update in terms of the U.S. disposal process.

In terms of stainless. Yes, you're right. We are doing very well and continue to believe it's a value enhancing business to the company. Our performance of consolidation to the extent that we can consolidate the industry further open to options, but other than that we're focused on improving the business.

The production that I will speak primarily just on the Americas and then we maybe shall talk a little bit about Europe. In terms of the production cuts, we believe that should balance the market. There's not that much of an inventory overhang situation as well in the U.S. We should not over play the situation. It's about 2.8 months compared to an average of 2.1 to 2.2 months and the increase has primarily happened in the last 30 days.

We see other companies also cutting production in the U.S. and we believe this is a fourth quarter phenomenon and by the first quarter we should have a much more stable inventory levels within the U.S. market. There is a little bit of price pressure but not significant price pressure in the U.S. and that has not had any impact on our contract negotiations. So we're not seeing any U.S. based automotive OEMs -- automotive or OEMs delaying contract negotiations because of the market weakness. I do believe there is a recognition that this a short-term problem and will resolve itself in the fourth quarter.

Yes. In terms of Europe what we can see is that it's a question of oversupply is mainly coming not through the lack of demand because demand to Europe -- real demand is extremely strong and as you know Europe today has a growth rate which is better than ever before over the last five years. So the real reason is that shipments indeed have been a little bit higher from European mills than real demand. This was being due to the fact that inventory at the beginning of the year had been historically low and what we can say is at the end of the third quarter -- we can say that inventories have come to an almost normal level. Maybe a little higher than normal level but it's not worrying.

What is happening now in the fourth quarter is that there are huge imports coming in, in particularly from China and it is in fact imports and the products which are imported which are causing the situation of oversupply and it is in respect to this situation that we have decided to adapt our own volumes parting Eastern Europe but also to the production measures we have taken in our Western Europe plants.

For the first quarter of next year we foresee the same scenario in the sense that we have decided to have an earlier relining than foreseen in our second big blast furnace in Spain so that in the first quarter we will be lower on the market than what had been foreseen and then at the end we are monitoring the inventory situation very closely with our customers and we can see in particular our own distribution as Gonzalo has said has quite the normal level of inventory and is foreseen to remain there.

Also, our big partner customers have relatively reasonable inventory because they know they can rely on a very trustful supply from Mittal and from that point of view we believe that our situation is quite under control and we foresee reduction in imports in the first quarter also due to the events in China that I was explaining before. We believe that the situation is under control and for that reason we are not pessimistic about the price evolution in 2007.

Thank you. Can I have just a couple of follow-up questions from that? First on I want to comment on consolidation stainless doesn't mean that Arcelor Mittal is actively looking to consolidate the industry orders kind of waiting for offers from other industry parties on consolidation and secondly on production cuts on Michel's point on it being a supply problem. In the U.S. the other producers have followed Mittal's lead but in Europe Mittal seems to be pretty much alone in advocating production cuts at this point. Is there some [inaudible-highly accented] of frustration or kind of feeling that the European producers are relying on Mittal's initiative?

My personal view on this is that you should ask the question to Thyssen or to some other competitors and they will give you the answer and you will realize whether they are responsible industry players or not. But it's up to them to play and we are taking our own responsibility.

I'd also like to add that the situation in Europe is different from the situation in the U.S. I mean in Europe we don't have a production cutback as much as a production slowdown in the sense that we're delaying the bringing back of furnaces et cetera and maybe other producers are doing the same without making announcement. In the U.S. the issue is much more pronounced. There's actually a production and cutback.

In terms of stainless, I don't see a difference in terms of active consolidation or listening for ideas. We are constantly looking for ways with improving the value of our business both strategically in terms of shareholders. So whether it's active or passive, we're focused on increasing value to our stakeholders.

Thank you.

Thank you.

Thank you. Our next question comes through from the line of Christopher Rivituso from Steel Week. Please go ahead with your question.

Hello. Thank you very much gentlemen. Christopher Rivituso from Steel Week in London. I'd just wanted to know you'd spoken about production cutbacks in the United States and in Europe. I wanted to know if you'd be able to indicate in terms of crude steel production what those cutbacks are, by how much you intend to cutback crude steel production in both Q4 and in Q1 of 2007? I was also hoping to know basically -- a little bit color about the change in the management of Arcelor Mittal that happened earlier today. I've heard some reports that one of the reasons for this -- for the change over is because - both Q4 and Q1 are not expected to be as strong as Q3 which in itself was as strong as hoped for and I was hoping that somebody might be able to comment on that. Thank you very much.

In terms of the production cut in the Americas it's two blast furnaces. One at Cleveland and the other one at the Indiana Harbor East. We're not giving out a number as such but what we're seeing is compared to third quarter shipments will be down or equal. You get a sense of how much it is compared to what the average run rate is because the third quarter is a weaker quarter. And we're not expecting it to continue to the first quarter. We expect it to be a fourth quarter phenomenon.

In terms of your assessment on the management reorg, I do not see any connection with the results. I mean the results of the company are strong and robust. We are reaffirming our guidance for 2006. There is no change in the guidance. There was a question this morning as to why we brought forward the results today in terms of tomorrow. It's just because we're making such a big press announcement. It was uncomfortable for all of us to have such material information at our disclosing. So from a corporate govern standpoint it was appropriate to disclose this information simultaneously.

Okay.

Thank you.

Thank you. Next question comes through the line of Vincent Lepine from Exane BNP. Please go ahead with your question.

Good afternoon, gentlemen. I had three questions if I may. One is on Asia Africa excluding Ukraine. You mentioned an improvement in the product mix particularly with more demand for coated products.. I was wondering if you could give us a bit more color where that's coming from. Mostly Kazakhstan or South Africa or both and then possibly with some numbers. Also it seems that you increased volumes in this region through Asia, Africa -- but not -- I'm leaving Ukraine aside and I was wondering then if you could tell us exactly where it's coming from. Whether it's South Africa, Kazakhstan and if it's both to the extent.

Another question. The second is on the net financing costs. I think this year you mentioned that there was some one off items in that and I was wondering whether you could quantify that.

And then the third question is on the employee benefits liabilities and the balance sheet. It seems that it's been a moving number over the past few months when you reported pro forma to understand this was all being calculated. It's normal that it's moved down but it does seem that at 5.8 billion if I remember that properly it's significantly higher that the simple addition of these two of Arcelor and Mittal Steel had as standalone so I know Dofasco that was added in between, but I just have trouble reconciling that so if you could help that would be appreciated. Thank you.

[inaudible-microphone] wanted to know about the Asia Africa site. There has not been an enhancement of volume between quarter three and quarter two. In fact, there has been a shortfall of about 150,000. In respect of what has contributed to the higher margins, I would like to state that there were really three factors contributed to it. One was in South Africa where the proportion of the domestic demand was much higher as a result of which the exports went down as it was mainly in the domestic market which gives a higher margin.

The second positive factor which occurred in the third quarter was CIS demand in terms of the coated production. We had a quota production for that fund went up by about 20% to this area and the third factor was the long products from [CCV] which had also CIS countries particularly in Russia where it went up by nearly a third in terms of what was done over the previous quarter.

I'm not 100% sure what your second question was but if you could repeat that. In the meantime, the net financing costs about 30 million which are one-time items within the third quarter. This is all the refinancing that was ongoing and our fourth quarter forecast is 320. So that provides you with a perspective of the run rate because the net debt change is not that significant between the run rate and what we'll end up with because most of the debt reduction that occurred was at the end of the year not in the beginning of the quarter. What was your third question on 5.8? I'm not sure.

Yes. There was the employee benefit liabilities on the balance sheets and maybe I got that figure wrong. Let me just find it again. Sorry, the deferred employee benefits of 5.8 billion at the end of September which if I look at the let's say earlier sort of pro forma estimates that you had made it was either much lower or actually higher than that at the end of [June]. So there's been sort of a moving figure and in any case at 5.8 it was kind of significantly higher than if you were to add those two numbers with the standard Arcelor-Mittal steel so I guess of course you've adjusted the discount rates and things like this.

I don't have the numbers in front of me what you're referring to. What I know is the following and I think it answers what your question. The only change we have made in the proforma adjustments is 125 million to the Arcelor liabilities and that has to do with the rate adjustment which you've heard. The reason why if you add up historical Mittal Steel and Arcelor you might get a lower number and that should be about a billion dollars and that's because it's between U.S. GAAP and IFRS. Because if you go back to the end of our earnings release presentation you will see reconciliation of U.S. GAAP to IFRS and there we have an employee benefit cost of billion dollars which is lower than IFRS.

But within IFRS - to IFRS the numbers are not changing and certainly the 125 which is - does that--

Yes it does because actually with 1 billion away it kind of ties in with what I had.

U.S. GAAP to IFRS and if you turn to the last page of the earnings release - or not the last page but near to the last page you will find a reconciliation to your GAAP which has it and then just looking--

Yes. It says, 1.3

1.--

1.3 billion.

Yes, 1.329 and that didn't change. And the change is really the 125 which is rate adjustment.

Okay. And I'd just have a follow-up on the net interest charges. Where did you account for the - I guess the merger related fees?

Good question. The merger related fees we have not included in the proforma adjustments for the defense costs and the refinancing costs we did include some of them in the net financing expense.

Okay. Thank you.

Thank you.

Thank you. Our next question comes through from the line of John Hill from Citigroup. Please go ahead with your question.

Good day, everyone and congratulations on the strong results. There's been a lot of confusion in the U.S. due to the steel reporting cycle about construction markets with many commentators seeming to focus on non-residential and square footage trends and many of the steel companies pointing out that these figures do not capture a public and private infrastructure of build. I was wondering if you could comment on your views of the U.S. construction market as you see it in your own order books?

As you know we are in the long -- in the construction market and our views are the following. Even though we are not that positive for next year on the construction market why basically the fear of interest rates and the information that we have that there could be a slowdown, but we have to say that for the moment our sales related to construction - was the third quarter have maintained the levels we had in previous quarters. But we are concerned with the future of construction markets in North America. That's what I can tell you now.

Very good. If I can have a quick follow-up on stainless steel. Just interested in the commentary that the recovery in stainless you see as sustainable. Obviously the market has been very strong even setting aside nickel charges and the rest but it's obviously famous for its boom and bust attributes. There have been a lot of capacity additions. I was just wondering how you see the supply and demand picture evolving into 2007 in stainless?

As I already indicated to you that for the fourth quarter we definitely see the progress which has been made in the third quarter contributing to the fourth quarter. Even looking forward for the first two quarters of 2007 we do see the markets remaining stable and it will have to be also seen that the stainless market is also driven by the increase in demand which has taken place also in the Chinese market. As you know, they are importing practically 40% of their demand and to that extent in the European and the South American market where we are predominant, we do not see much of this competition coming in from the imports.

Very good. Thank you.

Can I come back to comment with it before because I just want to clarify which we think it's important that even in construction market we are very present with the long products in Europe for example or in Latin America with all our rebars, our beams, our commercial. Now in North America we're not very present. At the end it's wirerod. It is wire right. Now we do have - so our presence it's much smaller so we're less effective with the construction market in North America. We are much more effective in Latin America or in Europe clearly. Okay? I think it's important to make that clarification. Thank you.

Thank you. Your next question comes through from the line of Andrew Snowdowne from UBS. Please go ahead with your question.

Hi. Good afternoon. Two quick questions. I was just wondering whether you could clarify for us why the difference in the reported pro forma numbers Q1 and Q2 compared to what you showed in September and what are the different basis between changing these numbers today? By way of example you have 2.7 billion operating results in Q2 but previously you had 2.6.

The second question is, I was just wondering whether you could give us some guidance as to why in your opinion the numbers came in well above your guidance for Q3? Where were the major surprises and in line with that would it be fair to say that you've been cautious in your full year estimates? You suggested lower volumes driving that but looking at the outlook statement, you're talking about stable margins. You're talking about - we know that in Q4 you're talking about a price increase. Can you maybe give us more direction as to why you believe the Q4 numbers are going to be much weaker than the Q3 numbers to come up with your full year guidance?

In the terms of the difference in the pro forma it has to do with the difference in exchange rates. If you remember when we announced the pro forma results back in August, we'd not made a determination of the reporting currency of the company. At that time, the reporting currency was Euro and there was no impact on exchange rates. Now after deliberation and doing the integration process we determined as we issued on investors day that the dollar is more appropriate reporting currency because the steel industry trades in dollars. So the difference in exchange rate. We now use 1.229 versus 1.257 which was the old rate. That's 0.028. You multiply that by the EBITDA and you get a difference of 100 million which translates into the operating income. So an exchange rate explains 101 difference between the previous EBITDA and the existing EBITDA.

In terms of the surprises for the third quarter results. I think the price environment was stronger generally. We did expect volumes to weaker but the price environment was much stronger than we expected. So the price increases which were expected to occur in the fourth quarter almost quite a bit faster or sooner and you can see those results in the company.

The reason why we're not more optimistic or bullish about the fourth quarter is because along with that we had an inventory increase in the U.S. and some inventory increases in Europe and now we have a production cutback. So overall, the year is still good. We're still going to come in between 15.2 to 15.4 billion EBITDA so it's a very strong year, very positive year. Demonstrated integration is proceeding well and we expect to have the synergy benefits and the other value plan benefits shown more strongly in 2007.

Sorry, just to clarify things. The volume cutbacks in terms of your targets. Is that affecting what's been announced so far or potentially can we go for more volume cutbacks with you still maintaining your target for Q4?

We're not planning any more volume cutbacks and we expect to maintain guidance for the fourth quarter.

Thank you very much.

Thank you. Our next question comes through from the line of [Jean Mayer] from [BSM]. Please go ahead with your question.

Yes, good afternoon. I would have three questions, please. The first one is one that we've asked on previous call and that is whether you've decided which entity within the group would be the main borrower for Arcelor Mittal. The second one is about your capital expenditure. You had mentioned that you would probably review your guidance for medium to long term CapEx and I was wondering whether any update on this is available and third one. You mentioned some one time assets within the financial costs. If you could explain the extent of these costs and whether they were cash or not. Thank you.

In terms of the CapEx guidance, if we add up the value plan it was about 4.7 billion. You should come in a bit shy of that in 2006. We have not finalized the guidance for 2007 yet. I expect it's going to be between 4 to 4.7. The depreciation charge for the company will be around 3.8 billion on a going forward basis. This will not be significant in different - from the D&A charge. The primary growth CapEx in Poland in Arcelor Brazil and CSC and other facilities is complete. Now it's just a mining expansion which is undergoing in Liberia and other parts which have an ongoing CapEx. So from a steel perspective a lot of the heavy CapEx or the growth projects are nearing completion but do not expect a significant CapEx amount for '07.

In terms of the borrower. Today the borrower remains Mittal Steel. Mittal Steel is a parent to Arcelor and in the second quarter of 2007 we expect to merge that. In terms of the financial costs. The financial costs have to do with exchange rate changes which have occurred and so the exchange rate changes are creating - there was more of a gain in the second quarter. Less of a gain in the third quarter which amplifies this and that provides you the bridge of the 30 million which we expect to release in the fourth quarter.

Thank you.

Thank you. The next question comes through from the line of Thomas Wigglesworth from Citigroup. Please go ahead with your question.

Good afternoon, gentlemen. Just two quick questions if I may. What is the total uptake of Arcelor shares currently standing. I believe at investor day you were confident you would close out all the Arcelor shares by the set date. Are you still confident that's going to occur and secondly, just in terms of helping me understand the different divisions. Could you give me some guidance as to the percentage of volumes sold on contract annual or longer in the flat steel North America and flat steel European businesses? Thank you.

In terms of the uptake we remain confident. I think we're making good progress. The offer closes on November 17th and before that date I cannot provide you with a number. Earlier in the call Michel did provide you the contract amount about 17, 18 million tons to out specifically in the U.S. It's primarily at Mittal Steel USA and contract volumes in Mittal Steel USA automotive and non-automotive included are about 30 to 35% which is about 7 million tons. Aditya, are you sure you want to elaborate on that.

When we made the comment before this was mainly focused on automotive and I think global [inaudible-highly accented] to automotive is in the range of 17 million tons what I indicated. In addition to that you have to add our [inaudible-highly accented] and so we can say that we are producing roughly 2.5 million tons in the U.S. and Europe combined and in addition to that also we have some yearly contracts with white good producers and there we could say that there is another 2 million or a little bit more than 2 million tons which have to be added so in total it mean 22, 23, 24 million, a little bit less than - between 20 and 25% of total shipments.

Okay. Thank you very much.

Thank you. Our next question comes through from the line of [Caroline Grugette] from [Kaylin]. Please go ahead with your question. Your line is open if you'd like to ask a question. We seemed to have lost that question. Okay. We have a question from the line of [Serbin Nehal] from Societe Generale. Please go ahead with your question.

Yes. Good afternoon. Two brief questions. The first on corporate governance. Given the groups teaming difficulties with these issues and the potential conflicts of interest and balance of powers issues which remain outstanding, was any consideration or thought given to calling an EGM to approve the Board changes and secondly with regard to sustainable development. Could you give us a brief update on any significant progress that has been made following the merger?

[inaudible-microphone] ultimately voted for the change, but how will to maintain the highest corporate law and we as a family and [inaudible-highly accented] to the code. I will define two positions. One as the Board member as well as the chief executive officer we should take this appointment of the Board along with the EU to be taken to these particular shareholders for their opinions. At the same time Mittal Steel corporate family will not participate in such [inaudible-microphone]. I've also resigned from the nomination committee so the companies remain independent and [inaudible-microphone].

[inaudible-microphone] will be one of my new additional [inaudible-microphone] in one of the next meetings in order to tell you where we are.

Thank you.

Thank you. We have no further questions in queue. [Operator Instructions].

Thank you. Thank you very much for participating in this conference call. We are always excited about Arcelor Mittal and I believe that with the exceptional team which we have not only at the GMB level but at the management team we will continue to deliver the excellent performance -- excellent results for the shareholders. Thank you very much.