ArcelorMittal SA (MT) 2007 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Arcelor Mittal results for the first quarter 2007 conference call, hosted by Mr. Joseph Kinsch. My name is Wendy and I'll be your coordinator for this call. During the presentation, you will be on listen only. However, at the end of the call there will be an opportunity to ask a question. [OPERATOR INSTRUCTIONS]. I will now hand you over to your host, Mr. Joseph Kinsch, to begin the conference. Thank you.

[Technical difficulty]. Okay, gentlemen, we can start the session.

Good day to everyone. This is Lakshmi Mittal here. With me I'm very pleased to inform you that I have Mr. Kinsch, Chairman of Arcelor Mittal. Then I am also accompanied by Aditya Mittal, CFO, and Roland Junck, Michel Wurth and Gonzalo Urquijo, Members of the General Management Board.

This afternoon -- this morning we have made two important announcements, one on the earnings of the first quarter 2007 and on the merger issues. Today I will begin this call, giving you the overview of Q1 financial results and activities. I will then update you on our progress on Arcelor Mittal Steel merger, including report on synergies, and discuss our investment plan. Then we will make some comments on the state of the steel market. Aditya will give you Q1 financial results, followed by a discussion of divisional performance by applicable management members.

First of all, I would like to start my presentation with what we are starting at all our GMB reviews, that is discussion on the health and safety statistics. We have launched a health and safety awareness program about six months back. And March 6, we held the health and safety day throughout the Company, where all the senior management met all the employees of the different companies, met local communities and local governments to create an awareness in health and safety initiatives.

I am very pleased to inform that our frequency rates have reduced in Q1 '07 versus Q4 '06.

Second, our EBITDA. Next is Company generated an EBITDA of US$4.3b in Q1 '07 versus $4.1b in Q4 '06. This is slightly better than our guidance due to a greater amount of synergy captured than anticipated. In Q1, we have captured $573m of synergies as against previous guidance of $500m. And we anticipate to increase this to $830m in Q2.

We reduced our net debt by $1.7b during quarter one, due to $2.7b cash flow generated from operations, which means our net debt is now down to $18.8b. This reduces our leverage ratio of net debt to EBITDA to 1.1 times. This is based on annualized profit -- or EBITDA of Q1.

Our investment program is progressing as we have planned. We have major growth projects in Poland and Brazil, expected to start in Q2 '07. And we have announced some new projects during the first quarter. And we have completed the transaction of Sicartsa.

Then we are going to discuss about the legal merger process, what we have disclosed to shareholders. Mr. Kinsch will speak about this. And we will be also closing our acquisition of minority shares in Arcelor Brazil by end of Q2 '07. Just to give you an overall idea, our EBITDA is expected to increase in Q2 '07.

Continuing on the health and safety, as I said before, that we have launched a new health and safety policy based on analysis of fatalities and return on experience leads to specific measures at Group level. All these fatalities are discussed at the Group Management Board on a weekly basis whenever there is an accident.

As I said, we had a global health and safety day on March 6, '07. And you can see on this slide that we are reducing our Group frequency rate by -- we have reduced to 3.4. Our target for the year is 3.2. But we have made progress if you compare this with Q4 '06.

On synergies, here are some more details on synergies of $573m. You will see that 60% of synergies is coming out of our commercial activity, that is marketing and trading, 33% of our synergies we have captured through our purchasing, and 7% from manufacturing and process optimization and SG&A.

Progress on manufacturing and process optimization has been slow, indeed, so far. But we hope that we will start getting higher benefits in second half of this year. Similarly, on SG&A we are expecting higher synergy benefits in 2007 and 2008, and we have raised our estimate for June 30 to $830m. That means progress on the synergies is quite good.

Next slide, I'll give you some more details on CapEx and investment plan. Here there are more detailed information. We have completed one of the four coke batteries in Brazil, and also completed the power generating plant of 170 megawatts.

There are a lot of projects which we expect to complete in 2007, in Mexico, in Brazil, in Poland, Argentina and iron ore mines in Mexico-Volcan. But I'll specifically speak about two major projects in 2007, that is the increase of slab capacity in Brazil by 2.5m tons, from 5m metric tons to 7.5m tons, will be completed in Q2 '07.

Second, this hot strip mill in Poland, a major investment of exceeding EUR400m, will also be completed -- the startup will take place in Q2 '07. And we will --the rest of the year we will see ramping up of our hot rolled capacity -- hot rolled production in Poland.

There are some other small projects which are also listed here.

2007 is important for some new projects, major projects. One most important project is initiating the initiatives to increase the capacity of Ukraine-Kryviy Rih plant from 7m tons to 10m tons. This is an important initiative.

Then we have completed all our formalities and approval process in Liberia regards iron ore. And now we will very soon start working on this project.

Similarly, we announced Saudi Arabia seamless tube mill in the first quarter. And we hope that some time during this year we will start the activities on this project.

Apart from this, in Q1 '07 the Company has -- we have approved two projects. One is the restarting of 1m ton integrated route in Bosnia-Zenica, in place of electric arc furnace. And the startup date is March -- Q3 '08.

And second, we have also approved two additional direct reduction plants that is [inaudible] in South Africa, and the startup date is Q4 '08.

On the next slide, I'll give you some update on merger-related issues. As part of our requirements in the U.S. as per the direction of the Department of Justice, we are working on disposal of the Sparrows Point facility. The progress is good. We have received a lot of interest and we are working on them. And we hope that the next six to eight weeks' time we will have finalized the sale of Sparrows Point.

As you know, in Arcelor Brasil we have made the mandatory tender offer based on approval received from Brazilian regulator, CVM. The offer is already open. The offer is between a mixed offer and cash and also only cash offer. And this auction will be closed on June 4 and then we will proceed accordingly, based on the offer which we have open in market.

Now, with this, I will request Mr. Kinsch to give an update on legal merger. Mr. Kinsch?

Thank you, Lakshmi.

As you know, yesterday we had the Board meetings, as well as Mittal Steel or Arcelor Mittal and Arcelor. And as announced on May 3, '07, we decided -- we confirmed yesterday that the legal merger will take place in a two-step merger process.

In the first step merger, Mittal Steel is merged into Arcelor Mittal, a Luxemburg company, in a one-for-one transaction. Then, in the second step, Arcelor Mittal Luxemburg will be merged into Arcelor at the exchange ratio announced today after the decision of the Board, of 0.875 Arcelor shares for each Arcelor Mittal share. And then Arcelor will issue new shares to Arcelor Mittal Luxemburg shareholders, all of which are former Mittal Steel shareholders. And the shares of Arcelor owned by Arcelor Mittal will be cancelled. The merger documentation has to be filed and reviewed by the Luxemburg regulator called CSSF and by the SEC.

The MOU and the subsequent public statements prescribe that the merger exchange ratio is consistent with the value of Arcelor shares pursuant to the secondary offer as at the date of its settlement and delivery, meaning August 1, 2006. And, as required by law, the merger exchange ratio will be reviewed and validated by independent auditors, as required by law, considering its fairness to both Mittal Steel and Arcelor shareholders and, naturally, has to be approved by the shareholders.

Yesterday, into the Board meetings the investment banks presented their evaluation analysis on the exchange ratio, based on a multi-criteria analysis including but not limited to EBITDA multiples and discounted cash flow analysis. The Board of Directors has agreed an exchange ratio based on such multi-criteria analysis.

And the fairness opinions on the value of both Arcelor Mittal and Arcelor were carried out by four investment banks and one independent advisor. The investment banks were Goldman Sachs, who provided a fairness opinion to the Arcelor Mittal Board, Morgan Stanley, Societe Generale, Fortis and Ricol Lasteyrie, an independent financial expert, have provided fairness opinions to the Arcelor Board. In addition, the exchange ratio will be reviewed by independent auditors.

And yesterday the Board of Directors unanimously approved the ratio after a review and discussion about the fairness opinions.

So the exchange ratio is consistent with the MOU and subsequent public statements we made. Secondly, the exchange ratio reflects the intrinsic relative value for Arcelor and Arcelor Mittal, former Mittal Steel. And third, the exchange ratio is in line with recent market prices at Arcelor Mittal. So, the exchange ratio is therefore fair to both the shareholders of Arcelor and the shareholders of Arcelor Mittal.

That's about the merger.

Now I will request Roland to speak about the market evolution.

Yes. Thank you very much, Mr. Mittal. Good afternoon. When we look at the different markets, we should first go to China where we are seeing a continued and strong underlying demand. The prices are firm. Of course, this is also due to rising costs of production.

On the slide that you can see, in blue you have the growth in the steel production and in grey the growth in fixed investments. And you can see that they are pretty much alike.

Looking at the prices, Chinese domestic prices have remained solid although -- or despite the elimination of the VAT rebate. You know that, for example, on hot rolled coils the VAT rebate passed from 8% to 0%. Nevertheless, the prices have remained stable. This is also due to the fact that inventories at -- are again at a normal level after a restocking period.

We do not currently see anything which could have a negative impact on that, on the stability. Of course, we need to acknowledge also that China is preparing a system of export licenses which will limit the exports from China. Basically, it should happen in May. And we should also not forget, which is a problem on a lot of sites in [inaudible], that China has decided to restructure and to consolidate and to close obsolete capacity.

And from the target of 2010, the reduction of 42m tons, there should be something more than 24m tons which should happen in 2007 in the 10 most important provinces of China and something like 35m tons overall in China, which is also definitely limiting the risk of export of China and should keep stability in the prices.

And last but not least, we should acknowledge that freight costs actually between Europe and Far East have increased between January 2007 and April 2007 by something between $50 and $70 a ton.

The situation is completely different when we go to the U.S., where the underlying demand remains weak. We can see on this slide. But, nevertheless, prices remain generally stable.

On the left side we see that steel production has been lower than the period the year before. This is very important when we look at utilization, or capacity utilization. Today that turns around 85%, which is 6% to 7% lower than the year before. Now, but the most important are the prices. And we see that the prices in North America have rebounded nicely in response to our industry's earlier production cut and they are currently stable.

I should also say that the level of inventories has come back to a normal level of something like 3.2 months after a peak of 4.8 months, which leads us to believe that the prices will remain stable.

Completely different situation again in Europe. In contrast with the U.S., we know that in Europe the underlying demand is quite strong. The supply and demand equilibrium is still okay. There are important imports, for sure. The euro is very high, so the European metals are quite attractive. Nevertheless, the prices have gone up. They are - you can see it on the right side - at a quite interesting level.

It is clear that we follow closely the future demand. Up to now, we are not worried and we believe that this situation will continue. Also, inventories are in line. They are a little bit higher but they are absolutely in line with the increased demand. In February 2007 they were around 2.1m tons. But they absolutely remain lower than February 2005, with something like 2.3m tons.

So overall, when we look at the different markets, we see a quite positive situation for the steel industry.

Thank you very much. And I'll hand over to Aditya Mittal.

Great. Thank you, Roland. Good afternoon and good morning to some. I am pleased to present our first quarter results. We are reporting legal results this quarter. However, we are comparing it to our pro forma result for the fourth quarter of '06 and first quarter of '06.

If you look at it compared to the first quarter 2006, clearly we have considerably increased our EBITDA. It's an increase of 30%. First quarter 2006 was $3.3b. We have come in at $4.346b for the quarter. The EBITDA is also higher than our guidance. And I think the year-on-year performance reflects the positive integration impact of bringing the two companies together, the synergy realization as well as the strong underlying market in the steel industry.

Our net income similarly is up almost 40% when you compare it to first quarter 2006. Net income is down compared to the fourth quarter, primarily due to the normalized tax rate.

Our CapEx expenditure in the first quarter was $1b. Roughly two-thirds of this was maintenance CapEx and the rest was growth CapEx.

We had a strong net debt reduction in the first quarter. We generated $2.7b in cash from operations, primarily due to solid operational performance, in spite of the fact that we consumed nearly $700m in working capital. Our net debt was reduced by $1.7b, representing a net debt to EBITDA ratio of 1.1 times. This includes the proceeds from the sale of assets, primarily relating to Thuringen and Pallanzeno. Similarly, our gearing was reduced to 35% compared to 41% in the fourth quarter.

In terms of guidance, I am unable to give guidance, specific numerical guidance for the second quarter, due to the European Union directive on prospectuses. However, we can provide some color by segment. And our EBITDA is expected to increase in the second quarter compared to the first.

This slide provides a perspective on our Q1 2007 performance compared to the fourth quarter. As you can see, our shipments are higher by about 300,000 tons. Our revenue has increased by about 5% as well, due to shipments as well as due to prices.

A quarterly EBITDA increase of about 6%, but if -- to $4.3b compared to the previous quarter. But if we adjust for the disposals of Thuringen and Pallanzeno, like-to-like EBITDA growth is 7.4%. Our EBITDA in the fourth quarter would be reduced to $4,046m, as these companies earned about $77m EBITDA in the fourth quarter of 2006. The 7.4% growth on EBITDA is despite ongoing weakness in North America.

In terms of the rough breakdown on the EBITDA bridge between the fourth quarter and the first quarter, volume has added about $115m in terms of EBITDA. Management gains and standalone value plan realization is about $135m. The synergy impact is $115m. The scope impact is minus $72m -- [I misspoke]. And the price/cost squeeze is a negative $88m, providing us the $4,346m EBITDA for the first quarter.

In terms of net financing costs, we had a $200m benefit in terms of the unwind of the Canadian swap, as well as other gains on options of financial instruments, and $100m of foreign exchange and other gains. Roughly, our interest expense cost on a going-forward basis is about $300m. And that would have been in this quarter apart from these items.

Our effective tax rate was higher. It was 25.8% compared with 18.6%. 25% is clearly a more normalized rate and that is what we have been guiding at. And, as a result, our net income and EPS decreased by about 5% compared to the previous quarter.

If we turn to the cash flow, the big change in cash flow from operating activities results from working capital. There's a $1.7b swing in terms of working capital. We generated $1b in cash on working capital in the fourth quarter. In the first quarter we consumed about $653m. It's primarily accounts receivables, inventories and accounts payables, offset by an increase in accrual expenses. Nevertheless, we generated $2.7b of cash flow from operations, spent $1b on CapEx and we had $862m of proceeds from various disposals.

We paid out $514m of dividend. $454m of this was paid out to the Arcelor shareholders and $60m was paid out at various subsidiaries which are minority holdings. And that gets you to $514m, resulting in a net change in cash and cash equivalents of about $2.138b.

Now, this number is higher than the net debt reduction by about $400m. And the difference has to do with the fact that we primarily have a euro loan book on the balance sheet, which has appreciated as a result of the appreciation of the euro.

In terms of the balance sheet, very roughly, $18.8b of net debt in the first quarter, for the first time we're lower than $20b, representing a $1.7b reduction compared to the previous quarter. As I mentioned, our gearing is reduced. Our net debt to EBITDA is 1.1 times. And we have a net working capital of about $18.7b.

That provides a perspective on the first quarter highlights. I will talk in some detail about Flat Carbon Americas and what happened in that division in the first quarter, and then my colleagues will talk about the rest of the segments.

First of all, and most importantly, safety performance was dramatically improved, particularly at our U.S. operations, which was an excellent performance. We had our global health and safety day and we continue to make progress on safety at all of our operating units in Flat Carbon Americas.

Secondly, it was quite a busy month at Flat Carbon Americas -- busy quarter at Flat Carbon Americas because we are integrating two companies. The [HS order] was basically removed towards the end of February and we've been busy integrating Dofasco. And the Sicartsa acquisition, though closed in April in the second quarter, the first quarter we were already working jointly with the company and a single management team and a business plan which was in effect, as well as synergy progress which was in effect.

We will see the Sicartsa impact primarily in the second half of 2007, due to the fact that they are undergoing a blast furnace reline and there will be some purchase accounting impacts as well. But, other than that, good progress on the integration with Dofasco as well as on Sicartsa.

Generally, Flat Carbon Americas had a good quarter, in spite of market weakness. EBITDA is down by about 5%. Clearly we were impacted most by Dofasco, actually, and that was because of QCM. QCM could not ship in the first quarter due to it being winter months. Otherwise our EBITDA would have been flat. Most operating units compared to the fourth quarter were flat, in spite of a weaker demand environment in Flat Carbon Americas.

The outlook is considerably stronger. We're forecasting increased volumes and increased EBITDA at virtually all of our operating units in Flat Carbon Americas.

With that, I hand it over to Michel to talk a little bit more about our business in Flat Carbon Europe.

Yes. Good morning. Good afternoon to everyone. I must say that Flat Carbon Europe had an excellent first quarter 2007 because EBITDA increased by $258m and was stronger than what we expected.

What were the reasons of it? I think, first of all, internally things were extremely well. Integration is moving well. First synergies between east and west are going on. And second, most importantly, the market was stronger than what was expected. In particular, we see Eastern Europe, the Eastern European economies going strong, Germany doing extremely well and, in particular, the export business which is very still intensive. And it was due to that that we were able to have some good and strong market behavior with an average price which was increasing overall by almost $30 per ton.

From an industrial point of view, I can say that we make good progress first in Eastern Europe. We had the ramp up in Poland, with the organic coating line in [Florien] and the start up of the continuous caster in Dabrowa. We are also making progress in Romania, and we had the good commissioning of a new continuous caster in [Darkek] and a restart of the sizing press in [Foss].

Nevertheless, we had also some problems and some negative items in the upstream facilities in the sense that we have set two blast furnaces which need repairs, one in Gent and another one in Florange. And hence we are constrained by our upstream because demand is stronger than what -- or let's say what our customers ask is higher than what we are able to produce.

And it is in that respect also that the Board has agreed yesterday that we would try -- we would make the proposal to restart as soon as possible blast furnace number six in Liege. It's a short-term opportunity. It is not a decision for doing long term, but it is really a possibility on an annual basis to produce up to 1m tons more, while reducing average costs. And we are now discussing with the different stakeholders, two unions, labor flexibility in order to see whether this proposal can be transformed into reality. And it is also for that reason that we foresee that for the rest of the year things should go okay.

Now, if we compare Q1 with Q4, so I think that we had an excellent quarter in the sense that EBITDA increased by EUR258m. This is only slightly due to a volume effect. Volume was up by 250,000 tons. Cost was almost stable. Western European prices went up by roughly $30, whereas Eastern European prices slightly go down, which was also partly linked to a negative mix. This gives us then this EBITDA increase of 24% based on Q4, which is much stronger than what had been initially expected.

I was -- so globally we go into products. We send more shipments to automotive, a little bit less tin plate and more plate, which is also doing extremely well and which is showing the strong functioning of the European business. For quarter two, we remain constrained with volume, but we anticipate that markets should remain quite strong. And that's the reason why we believe that margins should -- or that contributions should remain at a high level.

Gonzalo?

Good afternoon to all and good morning. As you can see here, the Long Carbon results have been good or very good. Why? Because, once more, I think they are giving stability, as you can see here.

First, I'll start with shipments. Shipments, we've done just above 6,169,000 tons. Now, if you compare them to Q4, it looks similar. There's a question of perimeter because we did have there included the productions of Pallanzeno and Stahlwerk Thuringen. So the reality is we have been able to ship more, so there's more than 200,000 tons more than in the previous quarter.

As you see, in production we have the same effect. You see practically 6.2m versus practically 6m. Once more, it's a question of perimeter. We have produced and shipped more than the previous quarter.

Now, if we go to our revenues, the revenues approximately $480m higher. Basically, this is an important question of, as I said, volumes. But it is also prices. We've had a big improvement in prices. As an average, our prices are 6.5% higher than the previous quarter, which is a very important effect.

Now, where does that come from? Basically, when we see these results, I will tell you that two-thirds comes from Europe, one-third comes from Americas. You could also remain with that proportion in tons also.

Now, so Europe has performed the best. After, we have had South America who has performed well, maintaining stability. And North America has been the toughest market. There you know we are less in construction. We are more in manufacturing and in wire rods. But it has also performed well, but not as well as the other two.

Now, in terms of EBITDA, you see the differences of EBITDA. It's a 10% increase in EBITDA. That is clearly the price has a very important impact here. Through that price increase we have been able to offset two things, the increases of our labor, of energy and, above all, some raw materials, also scrap which is very important. We have had important increases in scrap with respect to the previous quarter in the first quarter 2007 but we have been able to offset that. And our costs have increased, of course, less than our prices.

On the other hand, we have been working hard on safety. Clearly we are better than last year in safety. Note where we have put very ambitious targets in safety in our budget. We're not there but we are better than the previous year and working hard on that.

The [handling] synergies, we have a [fully won] commercial network. We are optimizing our industrial facilities clearly. And we're continuing to work very hard on operating free cash flow. That is, a very important part of our EBITDA is free cash flow. And, as Aditya said, we have a positive view on the second quarter, at least for Long.

Next page. If we go to AM3S, also we worked hard on safety. It's a clear challenge. Safety is also a question not only of the big factories, but also of small installations.

Now, we see the figures here of shipments. Want to tell you we haven't put here the new shipments that we are doing through our international sales network coming from the ex-Mittal. So you would have to add there 1.7m tons that we are doing through our network. That is important.

It's sales that basically come from Kazakhstan and Ukraine before they were sold, basically, to traders. Now we're working very hard. We're selling them through our international network. And we are focusing in order to sell them to end customers and not to traders. That means the traders are not completely disappeared, but we will reduce them to less than 40% when in the past they were practically all. Now we're at 60% and they will decrease to less than 40%.

Now, we see the EBITDA. You'll see a difference because we are talking of $155m versus $148m. That shows a decrease. I have two comments here. On one hand that during the last quarter of last year, there were small issues that brought a positive result. And, on the other hand, we had a stock effect, that we were able to push prices in distribution further up versus our stock in the fourth quarter versus the first quarter.

We do have higher prices. And when you see that margin, and if compared, because we all may tend to compare this 4.4% versus other distributions, I do want to insist that here we do have part -- not the ex-Mittal, but the ex-Arcelor international network. And that gives a margin of 1%.

If we go business by business, where the distribution is at 5%, the service center is at 4%, our construction is 7%, so our margins, business by business, are higher than that.

One more important element, our stocks, because everybody looks at our stocks in distribution. And we believe that's important and it's a thermometer of what can happen. We -- our stocks have increased. Not very much, from 2.2m tons to 2.4m. That gives us from 62 days to 71 days. That has been done on purpose. Why? Because we saw prices going up. We believe they are going to continue going up. So we preferred having a bit more stock. It is not very much, and that is just rising because of prices, which is natural in our distribution activities.

For -- as I said, same as in Long, for the first quarter we see a stable result. Thank you.

Thank you, Gonzalo. Mr. Mukherjee could not be here, so let me present the results of Asia, Africa and the CIS.

Overall, we had a good increase in revenue, 7.6%, and EBITDA increased by about 6% in the first quarter.

In terms of the details, volume added about $53m. Value-added growth due to better mix added another $25m of EBITDA, which was offset by the price/cost squeeze of $31m. The actual price/cost squeeze is about positive $20m. What happened in the quarter was in [QBV] there was a VRS impact, voluntary retirement scheme. And the charge was about $50m. So actually the performance in Asia, Africa, CIS is better than what you would see on this page. EBITDA has increased, as a result, more than just 6% compared to the first quarter.

In terms of the outlook, the outlook is strong. We expect shipments to increase and EBITDA to increase as well in the second quarter.

Moving then onto Stainless, Stainless had an excellent quarter. It did very well. As you can see on this slide, our revenue was up by 7.6%. On Flat, volumes were actually lower volumes of about 40,000 tons. And there was a very positive price impact of about 16%. EBITDA has increased by 8% for the quarter.

In terms of the detail, volume had a negative $40m impact. Mix, management gains, synergies, etc., positive of $50m and the price/cost squeeze was another positive of about $22m, resulting in an EBITDA of $429m for the first quarter.

In terms of the outlook, the outlook is not as strong for the second quarter as it was from fourth to the first. We expect EBITDA to decline, primarily because of volumes and prices which are weaker, but primarily only in Europe. We believe our performance in [associates] should be stable for the second quarter.

With that, let me quickly turn to guidance for the second quarter. As I repeated earlier, we are unable to give guidance, primarily due to the European directives. You have heard from all of the segments as to what the guidance forecast is. This is just a summary of all of that. I will not repeat it.

But, predominantly, shipments are expected to increase due to good market conditions and expansion projects which are getting completed. Our interest rate should remain stable or should normalize. Our tax rate will be normalized at 25%. And, as a result, we expect EBITDA to increase in the second quarter compared to the first.

To conclude very briefly, we had a very strong first quarter in spite of weakness in North America. And we're forecasting an even better quarter in the second part -- second quarter of 2007.

With that, we'd be happy to answer your questions. Thank you.

[OPERATOR INSTRUCTIONS]. Our first question comes from the line of Michelle Applebaum from Michelle Applebaum Research. Please go ahead with your question.

Hi. Good afternoon and congratulations on a great result. A couple of questions, first is a housekeeping question. Aditya, you mentioned $200m benefit of unwinding on a gain in interest expense and then $100m of ForEx gains. I was wondering if there were any unusual items, like a gain on asset sales or anything like that, that would have benefited the quarter or hurt the quarter.

No, there was no gain on assets which benefited in the quarter because we took care of it in purchase accounting. So the impact of the gain on Thuringen and Pallanzeno or Bankowa was captured in the purchase accounting, so you don't really see it flow through the income again.

The gains that we had in the first quarter were basically financing in nature and that's why they're in the net financing column. Primarily we had some options on some financial instruments, and the value of those instruments has increased and we have recorded an unrealized income. Similarly, there was ForEx gains at some of our subsidiaries due to the changes in various exchange rates.

We have other income as well within the quarter. The other income has to do with our ownership in Dillinger and other subsidiaries, which provide a continuous other income which is flowing through the income statement.

Okay. Another question. There's been a lot of press reports about the possibilities of expansion of the relationship between Mittal and Nippon Steel. I was wondering if you could comment on some of that.

There is existing relations with Nippon Steel in Europe and United States. There is no discussion on discontinuing. The discussion is how to strengthen these relations between Nippon Steel and Arcelor Mittal. There has been a separate agreement between Europe, Nippon with Arcelor, and separate agreement with ex-Mittal. And since both companies are merged now it's time to look at the overall perspective and see how do we strengthen our relations, and the discussions are going on. Discussions will only result in strengthening the relations.

Okay. The question was about how you would expand it, not discontinue or, I don't know if you got the wrong impression. So at this point there's nothing to comment on how you might strengthen those?

At this time we will not comment anything else.

Okay. One more. You seem to have a better insight into China than most other people we talk to out there. Can you talk about why you seem encouraged about the latest changes in China because a lot of it looks like the same kind of commentary we've been hearing for a long time?

The Chinese situation always keeps on changing, and only for improving and giving more confidence in the industry. Last quarter we discussed about possible withdrawal of rebate. So that has been announced, which is very positive news. Second, now the new report -- new announcement that they will introduce licensing from May 20. That's also positive news. And everyone was expecting that in view of withdrawal of the rebate, export rebate, the prices will go down. On the contrary, domestic prices have strengthened.

So these two actions clearly show that there would be a better discipline going forward in exports from China. You definitely also see the surge in month of April to 6m or 7m tons. We believe that that surge is due to announcement -- due to expected announcement of withdrawal of this export rebate. So I thought -- we feel that the traders and the companies took out one bit of the period and suddenly increased their exports in the month. But, going forward, I believe that exports will also go down.

Third point, Chinese government has clearly announced reduction of capacities. In 10 major cities about 35m tons, 10 major regions 35m tons, and overall 42m tons. And I think this process will continue and there will be more closure of capacities which are not rival and which are environmentally very polluted.

Fourth point, just you must -- you have all noticed that the freight markets have strengthened. Now, the freight between Europe and from Far East to Europe has increased from $50 to $70. At the same time, we are also seeing the fixed investments in China are continuing in the range of 15% to 20%, which means that underlying demand in China is strong.

So, keeping all these elements in mind, I believe -- we see China's development positive. And China's currency continues to strengthen a little bit slow. But all these will bring a healthy situation in the steel industry.

Great. Okay. Thank you very much.

Thank you. The next question comes from the line of Anindya Mohinta from JP Morgan. Please go ahead with your question.

Hi. Just four questions, if I may, South Africa firstly. I don't know if you can please give me the spreads in the slab costs between what you are buying externally and your in-house costs, and how long these external purchases continue.

Secondly, on stainless, if you can give us a sense of the drop on shipments. Really, was that again some teething problems at Carinox or was that a production cut? Also some sense of your internal view on stainless in the Mittal portfolio, how that's changed or if that still remains as it was during the last results.

The third one is really just a CapEx breakdown between the different divisions.

And lastly, on Dillinger. I just wanted to get a sense of how comfortable you guys feel with the way the holding structure is. You obviously are sharing in a very lucrative business but not with much industrial control, and for how long will you be prepared to carry on with this holding structure? Thanks.

Before I pass it on to Aditya, I would like to make comment on Dillinger. The relations with Dillinger is very well and we may not have 100% industrial control but we have our own CEO in the Company. And the partnership between Arcelor Mittal and Dillinger is working well. We are in dialog with the state to see how we can strengthen and expand our relations and what are the future plans. These discussions are ongoing. But there is no change in the situation and we believe that Dillinger is a very good partner for our business and this will continue.

Let me start with taking some of your questions. I'm still getting the data on CapEx unit by unit, which I think I now have. But let's begin with Stainless. I believe, in terms of Carinox, there was some work which was done at the furnace in the first quarter. And going forward we are forecasting a similar level of shipments compared to the first quarter. In that sense we are moderating to some degree our shipment volume in the second quarter.

In terms of South Africa, I'm not sure what you mean by imports of slabs. Is that [multiple speakers]?

I was just -- I mean in terms of the [multiple speakers].

The relining costs.

Well, it just said in the divisional reports that there's some external slab purchases going on as well. Hello? I can hear you very faintly but I'll try repeating myself. It just says in the divisional report that there's a few slab purchases going on at the moment. I just wanted to get a sense of how that compares in terms of your own internal slab production costs for spread, and for how long the external slab purchases will continue.

Yes. I believe we have purchased about 300,000 tons, roughly, of slabs in South Africa. But I don't think -- and it has to do with the reline. I think some of it has to do with the fact that we over produced but some of that had to be purchased. The impact clearly is about $100 a ton but that's part of the reline expenditure and that's the CapEx. I don't think you'll be seeing any discreet impact on the income statement of Mittal Steel South Africa going forward due to the purchased slabs.

In terms of the CapEx breakdown, I think we will get back to you on what the breakdown was on a quarterly basis. But generally, in terms of CapEx, $4.8b is projected for 2007, $3b of that is maintenance CapEx, the rest of the projects are what you saw on the page.

Okay, thank you.

Thank you. The next question comes from the line of Michael Gambardella from JP Morgan. Please go ahead with your question.

Yes, good afternoon. Could you give me your feeling on growth in the future? It looks like organic growth in terms of rounding out existing operations is starting to look a lot more appealing than, say, external or acquisition growth. Could you comment broadly on that concept?

First of all, we are working on these different initiatives and we have announced that in our low-cost growth markets we plan to increase production by 10.5m tons, which is Kazakhstan, South Africa, Ukraine and Poland, Czech Republic. All these countries where there is a growth market and where we have demand for the semis, like Michel mentioned in the morning perhaps, that we are looking at restarting of [Liege] blast furnace. So we are working on some of those initiatives to see how we can remain competitive in these markets.

Clearly, we have growth potentials to grow in growing markets and those -- fortunately those -- all these facilities have a very low cost production -- low costs in producing slabs and we would like to grow in that. However, if you say that organic growth is more appealing than inorganic growth, you are right, but today the steel industry is getting [related] so I think this industry is moving to a correct valuation.

Thank you and a second question. Could you give us your thoughts on the ThyssenKrupp announcement to go ahead and build in the United States? What are your thoughts on that decision and how will it impact you -- your business in the U.S?

Michael, let me take a crack at that question. From our position, we believe we are the leading player in the Americas. We have an excellent asset base both in North America as well as in South America. We have not been able to create an investment case to bring in slabs from Brazil or Mexico to Southern United States. We find that the upstream route that we have in North America is efficient, is low cost and the product coming out of that serves the market and our capital return requirements quite well.

If I could also just come back to Andy's question on CapEx in the first quarter, in terms of Flat Americas it was $382m that was spent. Most of it has to do with the project in Brazil. In Flat Europe $179m, a Long identical number of $179m, AM3S $36m, Asia, Africa, CIS, $97m and Stainless was about $68m. And that gets you to the total of $988m for the quarter.

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

Good afternoon, gentlemen. My first question relates to Stainless Steel. Just wanted to know how you assess your competitive position today and in the future, first against your European competitors but also compared to the Chinese mills, which have adding capacity lately?

Second question is your views on the electrical steel market.

And my last question, clearly after this strong set of numbers you're on track to post probably an EBITDA anywhere between $17b/$18b by the end of this year. If that's confirmed, would you say that would create the conditions for you to raise your base dividend next year? Thank you.

In terms of Stainless, I think we said this morning that we see Stainless as a core business. The Carinox investment has been critical in achieving this because we believe it has brought down our costs and our margins comparable to any other European player. We are also right at the heart of the market. And therefore we see a very strong and sustainable business in, yes, the configuration that we have today.

And in terms of electrical steel, our primary exposure to electrical steel is through Acesita. It is a difficult business to enter into. Clearly it's very attractive if you look at the price levels that exist today on a global basis. We have also some exposure in Central Europe, in the Czech Republic through VPSN. And those are the two primary facilities that we're using to expand our presence. But it is still negligible. I think I saw a report which said we are number nine on a global basis in terms of electrical steel, so we're nowhere close to being even a top five player.

In terms of a share buyback, I think we need to wait. Not share buyback in terms of the dividend and whether we would increase either the minimum dividend or a share buyback. I think we need to wait till the end of the year, when we have achieved the numbers that you talked about. If we achieve those numbers and then discuss it with the Board of Directors as to what is an appropriate dividend policy for the Company going forward.

Thank you.

Thank you. Our next question comes from the line of Michael Shillaker from Credit Suisse. Please go ahead with your question.

Yes, thanks very much. I've just got three questions. First of all, on the European Flat market, I guess we're a little bit surprised that you're forecasting stability in Q2 versus Q1. I understand your supply constraints but, as we understand it, the market is still very strong and pricing momentum was still relatively good in the second quarter. Plus you should still have the ongoing feed through from contracts coming through, which dripped through in the first quarter and are fully in in the second quarter. So can you give us a bit of sense as to why you are maybe a little bit cautious on European Flat in terms of your guidance?

The second question, on costs. If I get this right, cost per ton in the Group was up around 4% quarter on quarter. Which costs are you most worried about? Are you being negatively surprised by any costs across the Group? And is there any risk that you see that cost increases coming in ahead of your expectations are curtailing your earnings growth aspirations in any way?

And the final question, just a very quick one. A lot of rumors, of course, in the market on acquisitions at the moment and your name has been linked to many of them. Can you give us anything at all, I know you won't give names but could we realistically expect a sizeable acquisition from you in the next three to six months? Thank you very much.

Okay, Michael, let's start about Europe. First of all, I think the first reason why stability is that the first quarter has been exceptionally good. It has been very strong demand and -- because we were up 24% in comparison with Q4 and we were very much pleased and we are strongly ahead of budget. Now, the problem is that we have constraints, we have constraints in twofold. We have done relining in Asturias [which just] was finished last week, so we lack of metal there. And then we have had two problems of blast furnaces in Gent and in Florange, and the consequence is that we need to buy, in order to keep production at the same level, we have to buy approximately 300,000 tons of additional Flat at these very high prices as they prevail today.

And so it is partly Group companies like Mexico and CST who get the benefit of it but it is a lost opportunity because it could be sold to the market. And I think that is the main reason why we foresee flat results. In Eastern Europe things are well but there also we do not have additional capacity which is available and it is in fact -- in fact market is stronger than what we can supply. But the result is excellent results.

The first two -- first quarter you have seen the cost increase that is more rising of increase in the raw material costs and that has already been -- that has been factored in our budget. And we really do not see any surprise going forward in new cost increase. And that follows on in our Stainless Steel business, nickel is one cost for which we believe that we are able to transfer this to our customers any volatility, any increase or decrease. And on some of these major raw materials, I think we are on long-term contracts, we are adequately hedged. So I do not believe that there will be a major surprise in any further cost increases.

Acquisition rumors, we also hear every week some rumors going on and as a policy of the Company we do not comment on this kind of news.

Okay, thanks. It still seems to me that maybe you could do a little bit better in Europe in the second quarter but I guess we'll wait and see. Thanks very much.

Thank you. The next question comes from the line of Rochus Brauneiser from Kepler Equities. Please go ahead with your question.

Yes, good afternoon, gentlemen. Just one housekeeping question first. If I'm correct and I'm adding your EBITDA profits per division, I come to a negative of some $360m as kind of an other or a consolidation effect. Could you maybe explain what kind of cost impacts are behind this negative figure, if I am correctly?

And then maybe back to the Stainless market, maybe could you give us somewhat more flavor where you are seeing the market in the second quarter and the third quarter, where you see [base] prices moving to, and maybe eventually where you see the run rates for your profits, maybe rather in the $200m area or $300m area?

And could you finally give us also a split for the first quarter Acesita and European contribution to the Stainless profits? Thank you.

Sure. In terms of the difference, you will find that difference is there every quarter and it has to do with corporate allocation of costs, which are not done in the segment reporting. It also is the elimination of inventory and inter-company sales and purchases. So that gets you the $370m that you are seeing in the first quarter.

In terms of the Stainless market, fundamentally demand is fine. There is some substitution which is going on due to the high prices of nickel, but nothing which is very dramatic. The issue has been imports and clearly that is having some price impact. We will see more of the price impact in the second half of this year compared to the first half of this year, clearly. We've heard some producers announcing a production cut. We are also to some degree moderating our level of shipments. So that's generally the outlook on Stainless.

You asked a question on the difference in profitability between [QNA] and Acesita for the first quarter. Let me provide it to you on a quarter-on-quarter basis. In the fourth quarter Acesita did $126m and in the first quarter this year it did $157m, and our European business was basically flat, $271m for the fourth quarter which is now $272m for the first quarter of 2007. Thank you.

All right. That's very helpful. Can I ask a follow-up question on the consolidation overhead? This $360m negative number was considerably higher than what we've seen in previous quarters. In a normal quarter going forward, what would be the average level for this kind of consolidation effect in your earnings?

It depends a lot on the level of inter-company transactions and inventory eliminations. I would suspect you would see a similar amount in the second quarter and in the third and fourth quarter it will be reduced.

Okay. That was very helpful. Thanks.

Thank you. Our next question comes from the line of Johan Rode from Deutsche Bank. Please go ahead with your question.

Good afternoon, gentlemen. I have three questions, firstly on the CapEx this quarter. You've spent around $900m and your guide was towards $4.5b and $5b. I believe that's unchanged. Can you give us a progression through the rest of the quarters? Do we see a big step-up in one of these quarters or is the average CapEx spend over the next couple of quarters relatively stable?

Secondly, perhaps you can give us guidance on -- the previous quarters you've mentioned that the merger costs were excluded from the pro forma numbers. Can you perhaps quantify the merger costs as opposed to the other costs that were included in the purchase accounting and how much of that cost was capitalized?

And then thirdly, perhaps, can you just give us any guidance whether you sell any of your slabs produced in Brazil in North America at the moment and how much of that is sold into North America?

In terms of the CapEx, it will be progressively increasing. And what we saw last year was the fourth quarter was the highest. Typically what happens is we realize that there are unpaid supplier invoices in the fourth quarter and we pay them all off. So the fourth quarter CapEx number would be higher than what we're seeing in the first quarter and I suspect a linear progression.

In terms of merger costs and purchase accounting, I'm not sure what you're looking for. In the earnings release we have the pro forma results, which take out all the purchase accounting impact as well as all the merger cost impacts. And you can see on a like-for-like basis what we have done. In the second half of the earnings release you have the legal, and the legal captures all of the purchasing accounting impacts. The main purchasing account impact has been on inventory which -- and you can bridge the two EBITDA and you can get the main purchase accounting impact. The merger costs were capitalized on the date of the merger and we released in some previous earnings releases what the amounts were and how they were capitalized.

In terms of the slab sales into North America, yes, we continue to sell slabs into North America both from our facilities in Brazil as well as in Mexico. We sell high-value-added slabs to various customers in the United States. That's an important part of our business and we see it continuing.

Just to follow-up on that specific point, in terms of the assets that you were closing down at the end of last quarter -- at the end of the fourth quarter 2006 to balance the market, are you selling some of your slabs additionally into North America to substitute for that product, or is there a chance that we could see a start-up of those facilities in North America in the next quarters?

I perhaps misunderstood your question. We have not really been selling any slabs to our facilities in North America. So there's no slab sales really to speak of from either facility, in Mexico or Brazil, to our facilities in the United States. We might substitute the purchases of Defasco in the future if Defasco is net short.

However, from the U.S. no slabs are purchased. We have now restarted all the furnaces that we have brought down. We have brought down three furnaces in the first quarter. They have all been restarted. But, however, we have also taken down another furnace for a reline job, which is at Burns Harbor. So to that degree there is a moderation in our production, it's not a production cut, it's a moderation, as we do expect shipments to increase in the second quarter compared to the first quarter as inventories have considerably been reduced compared to the first quarter in the United States.

So clearly Burns Harbor is just a maintenance shut. It's not an unscheduled maintenance closure. It's not to balance the market. It's purely related to the maintenance.

Yes, absolutely.

Perfect, thank you.

Yes.

Thank you. The next question comes from the line of Alan Coates from HSBC. Please go ahead with your question.

I'm just looking at your individual sectors and within those sometimes you've got Brazil on one hand and the United States on the other. That's particularly true in Flat Carbon Americas. I wonder if you can give the difference trends, because clearly the American market had people losing as much as $88 ton in it. And the other one is really where there's a slightly different trend between Long Carbon Americas and Europe. Any way you can split the trend, it would be very helpful.

Alan, thank you for your question. I can generally give you the trend. You'd be surprised, but in the U.S. generally our results were flat and so are they in South America, so the trend was not very different. The trend will be different in the second quarter, partially because the South American market is strengthening and so is the slab market, and also because we will have completed the expansion project. The only change in trend was Defasco, which was down compared to the fourth quarter and that was because QCM could not ship enough pallets in the first quarter.

I think going forward that's a legitimate request, and we're working with Investor Relations as well as with Finance to provide shipments as well as prices by region. We just want to make that it is 100% correct before releasing it. You must have seen in this earnings release, in the second appendix I believe, we provided you shipment breakdowns by region. The next step would be to provide you some price, so you would have a better sense of the trends and what we are doing by region in addition to all the segment information that we're providing you.

Thank you very much. You made some very good margins.

Thank you. The next question comes from the line of Johan Swahn from Morgan Stanley. Please go ahead with your question.

Thank you and good afternoon. Most of my questions have been answered but I have a few more. One of them is on the restatements you made of the segmental information for Q4 '06, if you could help me understand what they were?

Secondly, the price realizations in the Americas, where did the 3% price increase come from?

And then, finally, if there's anything you can say about buybacks? Thank you very much.

Thank you. In terms of the, I wouldn't call it restatement I would call it reallocation, and that's what it says in the earnings release as well. Basically, and this goes back to previous question on the $370m number. Basically, when we did the segment work in 2006, we found there was a lot of other income which was not captured as segments. For example, coke sales and things like that in Poland and other income of a couple of hundred million dollars. And we just felt it was more appropriate to reallocate them to the segments because they are managing the business and they are responsible for that income. So we did that in 2007 and hence, to compare like to like, we have reallocated the profits on these segments and that's where the sum is. And the sum of the segments is now much greater compared to the end result, the $370m. Some of the gap is also explained by that.

In terms of the price increases and the costs in the U.S.A., our U.S. operation, it has to do with the contract businesses as well as primarily automotive. Clearly automotive business is stronger in 2007 compared to 2006 and you see that impact in the revenue line.

Thank you.

Thank you. The next question is a further question from the line of Anindya Mohinta from JP Morgan. Please go ahead.

Hi. I have two further questions, if I may. Firstly, if we could please get the actual quantity of the Canadian dollar swap gain?

And secondly, just to follow up on Mike's question on Thyssen's greenfield plant. I guess Thyssen's whole case is built around the thesis that in the South Central U.S. you have about 56% of demand from the Asian and European [transplants], and this is a market that is not being serviced adequately enough by existing producers. Could you give us some color in terms of what your business activities are in that region, and if there is indeed any truth in this claim that there is a genuine opportunity and that Thyssen can enter into this opportunity without hurting margins and prices at other mills? Thanks.

In terms of the Canadian swap, the Canadian swap amount is $40m. And the rest is the income on the options, which is $152m, gets you to about $192m. The remaining $100m is explained by foreign exchange and other income in the financing costs.

In terms of Thyssen's project, I think we have to understand from our perspective the project doesn't make sense, but clearly from TK's and perhaps other players' it does make sense. I think this project is not only carbon, it is also stainless steel. There is a growing market in Southern United States. It will continue to grow. We believe we can service that market adequately from our facilities in Chicago. I believe the freight is not prohibitive, it's between $30 to $40, and we're servicing that area of the market presently today. But clearly that is a growth area and to that extent it's not a squeeze box in the United States in terms of automotive demand. Demand will be growing and therefore there is room for other players.

At the same time, ThyssenKrupp's project in Alabama is based on slab supply from Brazil, because this project has been announced and now they are finding a home for this project. And we believe that we will continue to expand our automobile business in United States. We have a very strong franchise. We are the largest supplier to all the automobile customers and we have very strong relations with all of them. And we are -- technologically we are ahead of all the competition in the United States.

Thank you.

Thank you. Ladies and gentlemen, that was the final question, so I will now hand back to your host to wrap up today's conference call. Thank you.

Thank you very much for participating for this Q1 conference call and looking forward to talk to you for Q2 conference call. Have a good day. Thank you.