ArcelorMittal SA (MT) 2007 Q3 法說會逐字稿

Good morning and good afternoon ladies and gentlemen. And welcome to the Arcelor Mittal results for third quarter 2007, investor conference call hosted by Lakshmi Mittal, President and CEO. My name is Wendy and I'll be your coordinator for this conference. Throughout the presentation you will be on listen only. However, at the end of the call, there will be an opportunity to ask questions. (OPERATOR INSTRUCTIONS).

I will now hand you over to your host, Mr. Lakshmi Mittal to begin today's conference call. Thank you.

Good day to everyone. I'm Lakshmi Mittal from Arcelor Mittal and I'm joined by my GMB colleagues. I have with me today Malay Mukherjee, Michel Wurth, Gonzalo Urquijo and Adit Mittal.

First of all, welcome to this call and thank you for joining the third quarter call. This afternoon we will cover the topics listed in the agenda on this slide.

Before I move to this agenda, I would like to mention that we are very pleased that today is the first day after the legal merger has been effective since yesterday. We had our Shareholders' Meeting last week and both -- the second step merger has been overwhelmingly supported by the shareholders. And both the company shareholders have gone beyond 99% in the case of Arcelor Mittal and 97% and more in case of Arcelor. So we are very pleased with the outcome. And the legal merger is complete. So today, Arcelor Mittal is one Company.

Today's agenda, you can see that first I will talk about this -- give an overview of the Company's performance. Then I'll talk about the safety, synergies and investment plan progress. Then I'll give you a quick overview of the steel market. Then you will hear from CFO Adit on the Q3 results. Then my GMB members will talk about the divisional highlights.

So moving on to first slide. First of all, in the area of safety, I am pleased to inform that our frequency rates have been in line with the budget which we fixed in the beginning of this year. We have frequency of 3.2 average for this year so far. However, in case of Q3, we had some higher injury rates.

As far as the performance is concerned, we had a strong quarter for this Company. We had a record high quarter with EBITDA of $4.9b, which has been the guidance, which is the upper side of the guidance which we gave you, versus $4.4b in Q3 '06.

By the end of Q3 we have captured synergies of $1.3b. I am going to speak to you in detail about this. Our net debt decreased by $1.1b during the quarter, down to $22.2b. Our ratio of net debt to EBITDA decreased from 1.2 times to a conservative 1.1 times at quarter end as we had a strong operating cash flow for this quarter.

Most important, we announced a five year growth plan in our last calls where we are expecting our projected shipments to grow by 20% from 2006 to 2012. Then we have also announced that along with this shipment growth there will be improvement in the value added mix and value chain growth.

On the M&A front, we have announced several transactions. Most important is exercise of 100% option of Wabush mine in Canada. Then we have continued to work on expanding our downstream and distribution business in Turkey and Italy and also announced the acquisition of a galvanizing line in Estonia. Then we have also accounted to acquire minority interest of Acindar in Argentina. And very recently we announced a 28% share purchase of China Oriental, a steel company in China. And then another 100% purchase of a steel cord company called Rongcheng in China. So we are continuing to be active in M&A initiatives as well.

For the fourth quarter we are giving a guidance, very robust guidance, of $4.6b to -- between $4.6b to $4.8b. And the full year EBITDA guidance now is between $19.2b to $19.4b.

Most important, considering our strong underlying growth and new sustainable level of profitability, the Board has proposed to increase our base dividend by $0.20 to $1.50 from $1.30.

Now, just to give you a detailed view on the health and safety, here you will see, as I said, that average for this year so far has been 3.2 and we want to improve this in the coming years. But you can very clearly see the improvement the Company has made since the merger, when Q1 '06 we were at the rate of 4.1. Today we are down to 3.2. We have made a remarkable progress in our fatalities, especially in the mining operations. However, we continue to believe that we have to work, continue to focus on reducing our frequency rates through the different initiatives which you can read on the slide. There has been slight deterioration in Q3 related in particular to Flat Carbon Americas, but overall performance is within the targets.

As I mentioned, that synergy numbers are $1.334b against the guidance given in Q2 of $1.280b. So we believe that we have done very well in capturing the synergies. And for the year end our target is $1.4b and overall target remains $1.6b. But we are confident that we will achieve $1.6b targets much ahead of end of 2008.

Here we have given some details. In marketing and trading we achieved the synergies of $500m, in purchasing, about $535m, manufacturing and process optimization $88m, SG&A and others $206m. Most important here the synergies coming out of manufacturing and process optimization. And we believe that these synergies will accelerate during 2008. We have achieved big saving in SG&A mainly arising out of reducing the consultant fees.

Here it's important to see this CapEx and investment plan. Our organic growth plan remains on track. We spent $1.2b on CapEx in Q3 '07. And so far this year we have spent $3.5b. Here this is a very crowded slide, but I will mention some of the important projects which we will be completing in Q4 '07. Especially in Argentina we are going to complete this expansion of DRI, 250,000, 300,000 ton meltshop. And the new commissioning of the new bar rolling mill of 200,000 tons.

Then these new projects which we have approved in Q3 '07. Most important is the hot strip mill expansion in Brazil from 2.5m tons to 4m tons. And the start up date is Q1 '09.

Then the second most important one in Europe is the restart of the blast furnace in Liege from -- the capacity is about 1.7m tons. Then we have also approved project for new pulverized coal injection PCI system in Canada Dofasco.

Out of the growth plan which we have announced for 2012, we have several projects identified. And some of the important projects are outlined here. One is the second phase hot strip mill expansion in Krakow in Poland, expanding from 2.5m ton to 4m ton, very similar to our hot strip mill expansion in Brazil. And then also we have approved a project for new continuous caster in Poland of 1.7m tons.

Another important -- there are several other projects, that is in Germany, in Bremen in Germany, Differdange, Hunedoara and Rodange. They are the smaller capacity increase between 300,000 to 500,000 tons.

Just to remind everyone, that our existing projects, which we have initiated in the beginning of this year, are all ongoing. Most important is Kryviy Rih, our liquid steel capacity increased to 12m tons. This project is ongoing. Then the mining projects in Liberia, Saudi Arabia, the 500,000 ton seamless tube mill.

Then we have announced two new hot dip galvanizing lines, one in Eisenhuttenstad in Germany, 0.5m ton and Vega Do Sul in Brazil, another extension plan -- a new hot dip galvanizing line, capacity of 350,000 ton.

In addition to this, we announced a new bar mill project in Mozambique with yearly capacity of 400,000 tons.

Apart from this, there are several initiatives which are already working. And most important is a new joint venture we have announced to construct a 4.8m ton hot strip mill in Turkey with Borusan, our partners in Turkey.

So this clearly shows that the Company is moving ahead with all its growth plan, organic growth plan, which we have informed to you time to time. In addition to this, we have already embarked on or 2012 program of growing capacity -- by growing shipment by 20m tons.

Today it's important to give you little bit more details on two new strategic acquisitions in China. One is 28% participation in China Oriental for about $647m. This is an integrated steel plant in Hebei Province which is primarily focused on H-beam and strip. And, as part of its expansion plan, China Oriental is expected to increase its capacity to 6m tons. We believe this is a very strategic acquisition in terms of geography and diversifying the product. Just to remind that Hunan Valin is basically a long product and flat product. And this plant is also in the section business which is a diversification of products for us. And we believe that as a part of our China strategy we should not only be looking at the volume, but we should also be looking at diversifying our product mix in China.

Continuing on this strategy, we have acquired 90% stake in Rongcheng Chengshan Steelcord company, producing wire -- from the wire rod producing wire and bead wires. And I think this is part of our downstream expansions.

Just to give you a little bit more detail on this China Oriental strategic participation, this company is partially integrated in -- next slide please. Now it's there. This company is -- here we have outlined the process of manufacturing. This company is important is that it also has 35% of its iron ore coming in from their captive mines. Plus it has a blast furnace integrated route with three downstream facilities producing sections, hot rolled and the cold rolled products, and we believe this is a very important initiative for us. Plus the company has $370m investment program likely to be completed by end of this year with investment of -- which will take the capacity to 6m tons.

With this, now I will give you little bit -- I'll make comments on the steel market environment. As usual, China is the most important player in the industry. It is important to begin with China. We continue to see a very solid environment. As you can see from the graph on the left side, China continues to have fixed assets investment growth at the rate of 20% which clearly shows that there is a continuous momentum in the growth in China. However, it is important to see on the right side -- on the same side as the growth, on the left side, that the growth in the steel production in September was controlled at 17.5%.

And I just heard that the growth in the steel production in October was only 13%, which means that there is some control on the growth of the steel production in China.

Another good news is that China has shut down 15m tons of steel capacity already and they have a target to shut down up to 35m tons by the end of this year.

As far as the inventory is concerned, we believe that inventory remains extremely healthy in China. Out of the 25 Chinese largest cities, inventory increased by 7% from August to September but only to a level of about 5.9m tons as compared to 8.5m tons in February of 2007.

So if you look at the right side of the slide, you will find that in China the spot prices are increasing. Since July we have seen a domestic price increase of about $80 to $568 to $580 per ton, which means that the prices, the costs are increasing so the spot prices are also increasing.

In the U.S. underlying demand remains weak but production levels, import and inventory levels continue to fall, which results in a healthy supply situation and increase in prices. On the left hand side -- the left side it is interesting to see that production in the United States continued to decline for last 12 months. This since 2001 is the first time we are seeing 12 months continuous decline in the production. And at the same time, we are also seeing imports are continuing to decline due to market unattractiveness and the low price difference between the U.S. and China which is currently less than $30 per ton. We are also seeing that in September there has been 17% decline in import volume.

In U.S. very interesting to see that the inventory situation has improved drastically. The level of inventory is close to three month average, but in absolute terms it has been the lowest in the last two years.

In this environment, the industry has been able to increase the prices by $20 in Q4. And the news, industry has announced another $40 price increase for the next year already. And we have also noticed that industry has, on a global basis, we have been able to get double digit increase in the price on the contracts business. And we believe that if an economic -- if a recovery takes place, supply demand equilibrium could appear stressed, resulting in further price increase.

In Europe, demand has come back as expected after the seasonal summer slow down, but apparent demand is deteriorating due to destocking. Inventory levels are falling, which we have noticed, due to decline in imports. We have seen some decline in imports recently. However, in the first half we have seen that the imports had increased by more than 11m tons which is more than -- 50% more than 2006. The good news, that inventory levels are declining. Steel production in Europe has not been growing for the last five months and import has gone down by 10% in August and it will continue to decline further. At the same time, the freight costs have increased between China and Europe. This has also increased -- made the Chinese exports more difficult.

We believe that in 2008 inventory situation will return to normal. Real demand continues to remain solid. And due to cost increases, the steel prices should be again on the increasing trend.

In Stainless Steel we are expecting, we have seen a severe downturn and destocking from the nickel price collapse severally impacted by circulation, inventory, imports and over production. Stainless steel base price have declined by as much as $1,500 in less than six months.

Recently we have started seeing some improvement and recovery. First, to deal with the massive destocking, the industry has cut its production by more than 30% during Q3. Second, the level of imports has reduced dramatically as distributors and customers have begun to experience losses on materials coming from Asia. Imports in Europe have dropped by 50% in Q3 versus Q2. And finally, and importantly, real demand has not fundamentally deteriorated despite price volatility as customers have moved towards ferritic as opposed to austenitic. Just to remind on the call that Arcelor Mittal is increasing their market share in ferritic. Our production is about 45% of the total steel production.

We're seeing that orders have started slowly coming back and prices are recovering from their extremely low levels. The market remains difficult and average price should remain low in Q4 but the trend is positive and we believe that it will start recovering in 2008.

With this I hand it over to you, to Adit to speak on the results.

Thank you. Good morning and good afternoon. We are pleased to report another record quarter both from an a nine month perspective as well as a third quarter perspective. I should note that the third quarter is a seasonally low quarter as many customers have vacation shutdowns during this period.

Let me provide you with some highlights. Our net income is up 9% while EBITDA is down 8% compared to the second quarter. The difference in direction between net income and EBITDA is primarily the result of lower taxes, exceptional items, as well as a lower minority interest charge in the third quarter compared to the second quarter.

We had very strong cash flow generations in the third quarter and as a result, net debt decreased by $1.1b, bringing our net debt to EBITDA ratio down to 1.1 times and gearing to 38%.

In terms of capital expenditures, we spent $1.2b during the quarter, slightly down compared to the previous quarter. About $0.5b of this was growth CapEx. The remainder was maintenance CapEx. Normally the third quarter is when we spend more on R&M as well as maintenance CapEx. On a year to date basis, the Company has spent $3.5b in CapEx.

In terms of guidance, as you heard earlier, we expect a robust fourth quarter with full year EBITDA of $19.2b to $19.4b.

If you move to the income statement, I will walk you through primarily a comparison between our third quarter 2007 performance compared to the second quarter 2007. I will not get into much detail on how we did in comparison to the third quarter '06. Needless to say, compared to 2006 third quarter, our performance is excellent.

The third quarter shipments and revenue have been negatively impacted by seasonal slowdown with shipments down to 26m tons compared to 28.7m tons. The difference in shipments of about 2.7m tons is 1.4m tons in Flat Europe, seasonal impact as well as onset of imports, 0.7m tons in Long, mostly in Europe, 0.25m tons in Flat Carbon Americas, primarily due to U.S. and Canadian market weakness and the remainder is Asia, Africa, CIS as well as Stainless.

Overall revenue is down to $25.5b compared to $27.2b, which is a decrease of 6%.

If you look at our depreciation and amortization charge going forward, we expect our D&A to be about $1b per quarter.

In terms of equity income from joint ventures and others, you can see improvement in that line item, increasing from $257m to $280m. And that's because we did better as a result of improved performance in all of our joint ventures.

If you move forward, our net financing cost was similar to our second quarter levels. The results were impacted by a gain on mark to market basis on a financial instrument of $274m in the third quarter which was offset by higher foreign exchange costs.

In terms of our net interest expense, it remained at $315m. We expect a similar cost for the fourth quarter. However, we also have financial taxes and pension expense, which is captured in this line item, which should total another $75m. So in terms of guidance, I would guide a net financing cost closer to $400m for the next quarter and going forward.

Moving forward, our effective tax rate was lower in the quarter as well, 17% compared to 25.2%. This decrease is largely due to the fact that the German corporate tax rate was reduced from 38% to 30% and we took a one time gain as well as some reversal of valuation allowances in North America. Again, on a going forward basis, I would guide you to a normalized tax rate of 25%. And that has not changed.

In terms of minority interest, there was a dramatic reduction from the second quarter. $497m became $312m. Primarily, this reduction is due to the minority acquisition of Arcelor Brasil which created a positive of about $124m on a quarter on quarter basis. The rest of the reduction in the charge has to do with the fact that we had lower net income in Mittal Steel South Africa due to higher taxes at that subsidiary.

Going forward, in the fourth quarter I expect it to be similar. I expect South Africa to do better but we will pick up some of the reduction, minority interest charge for the 6% we do not own of Arcelor S.A., but that gets counted from the middle of November. So I would expect that to wash with the improved results of South Africa.

As a result of all of the above, net income increased by about 9% compared to the previous quarter.

In terms of the cash flow highlights, as you heard earlier, we had a very strong cash flow from operations for the quarter. $4.1b which is higher by almost $400m compared to the second quarter.

The main change within the two quarters was in net working capital where there is $1b plus in terms of working capital release.

The other big impact is others, minus $600m. And this is just a reflection of the non-cash nature of the reduction in tax as well as the fact that the mark to market $274m gain is on a non-tax basis. As a result, cash flow from operating activities in the third quarter was $4.117b.

CapEx was about $1.2b for the quarter.

Other acquisitions and disposals, we completed the minority interest in Brazil which was about $375m. And we received cash from our contribution of our tailor welded blanks business to Noble for about $100m.

Overall, within the quarter, in terms of investing activities, we returned $1.1b to our shareholders, $460m of dividends and $682m for our share buyback program.

So clearly, a strong quarter in which we reduced borrowings, generated a lot of cash flow from operations, did $1.2b in CapEx as well as returned $1.1b to our shareholders.

If you look at the balance sheet, the balance sheet remains strong and healthy. Our net operational working capital decreased, as I mentioned earlier, compared to the second quarter. Our net financial debt as of September 30 is $22.2b, representing a $1.1b decrease. This decrease is significant because a significant portion of our debt is in euros, so we did have a euro pick up in terms of our debt balance. So the real debt reduction on a cash basis is higher.

As I mentioned earlier, our gearing improved. Net debt to EBITDA ratio decreased. And our liquidity improved quite significantly. Liquidity at the end of the quarter is $18.8b, which is an improvement of $2.4b. So clearly, there was no impact of the subprime crisis on our liquidity.

Let me now turn to the divisional highlights. Let me begin with Flat Carbon Americas and then my GMB colleagues will talk about their respective divisions. In terms of overall results, the Americas have delivered a satisfactory performance with operating profit stable in spite of very difficult market conditions in North America.

With regards to revenue, Flat Carbon Americas achieved $5.7b in sales, which is 4.3% lower than the second quarter due to lower shipments in the region. Sales were also negatively impacted by decreases in the prices in the U.S. Flat Carbon Americas, in terms of shipments, achieved 6.9m tons in the third quarter which is approximately 235,000 tons lower than in the second quarter.

Let me describe to you the main differences in shipments. In North America we lost basically 235,000 tons between our operations in Canada and the United States. We made up some of this in South America where we are in the midst of our blast furnace revamp and as a result, our South American operations shipped out another 150,000 tons of slabs. But this was offset by gas disruptions in Mexico due to Pemex which costed us 160,000 tons. So Mexico and Brazil did not have any change in shipments and the real decline is as a result of market weakness in North America.

As you can see, our steel production was significantly up in the third quarter almost 700,000 tons. This significant increase is due to increased production in the U.S. of 0.5m tons and as a result of the blast furnace ramp up that has occurred in South America.

EBITDA remained flat in the quarter but there is a one time gain in the third quarter of $68m. So if you remove the one time gain our EBITDA is actually less.

In terms of guidance for the fourth quarter, we expect operating performance of steel EBITDA to be similar to the third quarter this year in spite of market weakness in the United States and in Canada. Overall though, EBITDA will be lower due to less shipments from QCM due to the St. Lawrence river freezing.

With that summary I will hand it over to Michel who will talk about Flat Carbon Europe. Thank you.

Thank you very much. So moving to Flat Europe I am very happy to see that we had had another excellent quarter in terms of results and considering in particular this is the traditional summer holiday slowdown in Europe. But let me start, unfortunately with safety, our safety performance was a little bit less good than the quarter before. But we are now taking new actions so that we'll remain at the top as a benchmark of our group.

So coming now to the results, you see indeed that revenues have dropped by 7.4% with respect to Q2. This is clearly linked once to the summer breakdown, which is a slowdown, which is important. But which is also linked the second time to the increase, the massive increase of Chinese Flat Products to Europe, which on average remained 800,000 tons per month over the three quarters and were particularly linked to hot dipped galvanized products, color coated products and to some extent, cold rolled products.

We are very satisfied that Eurofer now has launched some antidumping measures so that's to fight back against what we consider indeed as being dumping. And we are also confident that over the next quarters and in particular starting from Q1 2008, this will improve. And as we see it already today, as Mr. Mittal has said, it is due to higher freight costs and due to internal stronger prices in China.

Nevertheless, average sales prices were stable or even increased slightly. As a consequence being that on an EBITDA per ton basis, Q3 was even stronger than Q2 and I think this shows really the excellent results we had in Europe. This due to the volume effect. For that reason our total EBITDA decreased by $181m, $110m in the west, $60m in the east and $10m on special plates, special plates which are continuing to do extremely, extremely well.

And maybe one word on production because you see that production only went down by 100,000 tons. You might realize that we have increased our inventory. What I can say is that in terms of finished products our inventory remained absolutely stable. What has increased is to some extent inventory of semi finished products for two reasons. First of all, in Q2, we were buying some additional semi finished products from outside, which was not happening in Q3. And second, we are today doing some -- presently in Q4 doing some relining of a big blast furnace in France and for that reason we are preparing our inventory position. Last but not least, from an operations point of view I think that things were quite well over the quarter. The ramp up of the new hot strip mill in Krakow during third quarter is on schedule and this is really good.

Now concerning some guidance on fourth quarter, fourth quarter we will have two effects. The first effect will be that seasonally there will also be some negative effect due to the December month and in particular also for the automotive industry which slows down a little bit. On the other hand, in terms of prices, we will see some decrease in coated prices following the price correction which has taken place in the European markets due to the Chinese imports. Nevertheless, results should continue to be fine and let's say in the trend of Q3.

Last but not least, I would like to mention in fact during the term we took the decision to build a new hot dip galvanizing line in Eisenhuttenstad mainly for the automotive industry in Eastern Europe. On the other hand, the blast furnace start up in Liege, the work or preparation is going on. Normally we foresee to start in the first quarter of the next year, provided that these two issues with the authorities will be definitely be solved.

So maybe Gonzalo, you go forward.

Good afternoon and good morning to all of you. I'll start with Long Carbon Steel. I'll start with safety. Safety, we've had in Long, we've divided it between Americas and Europe. In Long Carbon Americas, we've had good progress. I would say even better than good. We are in frequency rate in 390 and one year ago we were in 1,040, which is an enormous progress. We're working very hard there. We're benchmarking with our best factories and we've seen a big progress.

In terms of Europe we were one year ago at 450 and now we are at 330. So we have seen a progress, but we have to do more in Europe. We are working very high on prevention, trainings, audit and support and benchmarks from the corporate. So we are working very hard on that.

Now if you see our figures, first comment you see our revenues. Our revenues are been reduced as our EBITDA. But these figures have a clear seasonal effect, especially in our Europe installations clearly. So we've lost, in terms of shipments, 833,000 tons. Where's that coming from? It's basically from Europe. And I would tell you 50% of that was due to seasonality, to stoppages. We had as August is a half of a month, we use that month to do maintenance, to do reparations, to do some investments also. So that was prepared. The other 50% is coming from the market. The market was tougher in Europe, clearly, especially in wire rods and rebars.

With respect to the American Long Carbon market, it was good, especially in South America.

If we look into prices, you see that price mix zero effect. Well, prices have been stable in Europe compensating, better prices in beams and sheet piles with lower prices in wire rods and rebar. But the average has been stability. But that's in euros. Once we turn it into dollars, there has been a positive impact.

Now with regard to American prices, we've been able to increase prices in Latin America and in North America we are succeeding now to push prices up. Costwise, cost has increased clearly for the European especially in dollar terms due to the exchange rate. And we've also had the full impact now of the increases of the raw materials which we didn't see completely in the second quarter due to stocks.

From an EBITDA point of view, it does say minus 18%. That is clear. But we have to compare it to the previous one year ago on one hand and here it's clear an effect of loss of volumes. Out of this difference the majority of this, practically $250m, is a question of a question of this loss of volumes I was addressing before. And another part is clearly the input cost.

Last and not least, if we talk about the guidance, we are reasonably optimistic with the fourth quarter. Now it is true it has two issues. I have to tell once more seasonality, which is curious but that also demonstrates we are a global company. And I'll tell you why. December is not in Europe a big month due to the Christmas. But the biggest effect is going to be in Latin America. It's the summer for them and there's many closedowns and many customers at the end in December are -- it's the equivalent for our month in Europe of August. So we will have a bit in the fourth quarter of that seasonality effect.

On the other hand, for Europe, we are optimistic with the price of beams, sheet bars and special products. Less optimistic and the market is tougher in wire rods and rebars. But for North America we are more optimistic. We've announced increase in prices and they'll have come through, so we are optimistic. And for South America the market is good or even better than good.

That is for Long, so if you want to bear with me once more, I'll go into the AM3S activities. Once more here I have to speak of seasonality. So all these fingers, but I'll start speaking of safety.

Safety, our frequency rate is 578. Our budget is lower, but we have incorporated new companies. Once more we are working very hard with these new companies because they don't have the standards we have in the Arcelor Mittal Group. And we're making tremendous efforts there because safety is not only a big part but it's everywhere in our Group.

Let's go a bit to the figures. You see once more a decrease it says here on EBITDA. That is clear. I spoke of seasonality. But if we go to the revenue and shipments, I would like and you see some footnotes there. In order to have comparable figures here, at the end what we should see is 3.5m tons in the third quarter versus a second quarter of 3.7m tons if we are comparing equivalent figures.

Additionally to that, we've incorporated, due to some scope effect, other companies that were not in these consolidated figures. But we have had a loss of volume in net figures of 400,000 tons. This is normal and if compared to previous year, it shows here as we're approaching our distribution to develop in other places, but it's still too European, where we have had the seasonal effect here.

Price wise, which I think is a good indicator, we're just stable, or a bit up. So that proves that still our markets and our end users have a positive price situation.

On the other hand, if we go into costs, we do have a cost squeeze. Why? Because in the first and second quarter we had the increase of prices and we had our stock that was valued at a lower price. Here's now the case if our stock is becoming higher in valuation wise and the market is more stable in terms of price. So that does give us a cost squeeze. So you see there it's $153m of EBITDA versus $219m. But the volume is 35m of that and the price effect, the price cost squeeze is 43. So seasonality 35 and the rest would be that cost squeeze.

But let's go to what I think is important for this activity of distribution, that is our stocks. Where are our stocks? With our stocks, we're comfortable with them. We have 2.3m tons. That is 66 days. So we are stable to a decrease and we feel that with that at the end within our distribution activities and here we are to give service to our customers. So we do have to have a volume of stock. And it's 66 days which we are very comfortable with.

Now in terms of guidance, for the last quarter we believe it's going to be a stable quarter. Once more impacted with December but if we compare it to the third quarter, it will be similar in the sense we have December with August, so we see a stable quarter and we see the end users. They're being prudent in terms of not increasing their stock levels, but we still see demand of our end users. Thank you very much. Malay.

Good afternoon. Well speaking for the Asia, Africa CIS segments, shipments were marginally lower in quarter three as compared to quarter two, arising out of seasonal factors and also liquidation of inventories in the construction segment in the preparation for slowdown in construction activities in CIS, during quarter four due to winter.

As you would also see that the gross operating result EBITDA has lowered in this segment in quarter three and the operating financial results were impacted by cost increases arising out of mainly four factors. One, expenses related to voluntary retirement schemes in Ukraine and Algeria. Total number of employees covered under this scheme is around 10,000 at a cost of $60m. Increase in input costs arising out of spot purchases of coal for our Ukrainian operations owing to a disruption in supplies contract as a result of two coal mine accidents in Russia. Coal had to be sourced on priority basis from U.S.A. and Australia to keep production going. These spot purchases had also higher freight costs as these shipments were not covered under our long term arrangements for regular shipments for the Arcelor Mittal Group.

Considering that the market in quarter two was very strong, number of planned annual repairs for the plants under the CIS segment were postponed to quarter three and accordingly, these annual repairs were expensed in quarter three.

We also had a delay in the blast furnace being relined in South Africa and therein, the costs which were incurred.

We do believe that most of these were one time effects. However, we have to also take into consideration that traditionally quarter three is always weaker than quarter two as the bulk of construction in markets catered to by the segment has increased activities in quarter two, tapering down in quarter three and quarter four.

As a guidance, we do believe that for quarter four we would have similar results as of quarter three, although this will be made up by diversion of export consignments to the markets where construction activities are still going on and moving away from the traditional markets of CIS countries where construction activities is very much down due to the winter conditions.

As was also mentioned by the President in his opening remarks, we have had substantially better results on the safety, particularly in the Mining sector. We do believe that the efforts being put in by the management at the local level has allowed these results to be obtained. And this would be continued on a very forthright manner in terms of making safety the priority for the CIS as well as the Mining sector.

Moving now to Stainless, as was already mentioned in the opening remarks by the President, quarter three results were impacted by destocking of inventory triggered by a drop in price of nickel. Eurofer deliveries in Europe and imports reduced from a high of 1.43m tons in quarter one to 736,000 tons in quarter three. Out of this, import volumes reduced from an average of 130,000 per month in quarter one and quarter two to about 60,000 per month in quarter three. The quarter three demand is seasonally low but as mentioned high level of inventories in the distribution network led to reduced production by more than 20% compared to quarter two and consequently reduced shipments from the manufacturing units.

As an example to look at the distribution sector, we find that the German distribution inventories in July had reached 86 days stock as against a normal holding of 60 days stock in October. However, the destocking led to inventories now in the distribution channel coming down to 68 days, which is still high and destocking is continuing in the fourth quarter. The low level of imports would continue resulting from the antidumping complaint to EU and examination thereof by EU of CR Stainless imports from China, Taiwan and Korea.

Going by the demand generated for Stainless in the month of December, there is an upswing and it is expected that Stainless will pick up in quarter one '08.

The situation for Acesita in Brazil has been much more stable, mainly arising from the better portfolio in Acesita of 40% electrical and carbon steel and a higher mix of ferritics at about 53%.

Going forward for quarter four, the financial results would be impacted by the change which has taken place in terms of the destocking going on still and also the level at which nickel price is now stabilizing at about 35,000.

In addition, we do believe that the import stock liquidations would also continue in the fourth quarter and to that extent, the Stainless outlook therefore would be making an improvement from quarter one 2008.

Adit.

Thank you, Mr. Mukherjee. Now I'd like to conclude by giving you our profit and outlook guidance and to talk to you about our new dividend.

You heard from all of my colleagues at the GMB as well as myself on each of the segment forecasts for the fourth quarter. Let me quickly summarize. Our expectation for the fourth quarter EBITDA is between $4.6b to $4.8b, which compares to $4.1b in the fourth quarter of 2006. So clearly, a year on year improvement within the company. Shipments are expected to increase. Flat Carbon EBITDA will be down primarily due to mining operations not steel. Flat Carbon Europe, Long Carbon as well slightly -- a slight decline. AM3S and AA, CIS would remain stable and Stainless profitability as you heard will further deteriorate.

In terms of our tax rate we are guiding towards 20% to 25%.

We also announced, as you heard earlier, our new base dividend of $1.50. As a reminder, this has been designed to guarantee a stable return. We are increasing it by $0.20. Half of it reflects the underlying and long term growth aspects of our Company and the other half the sustainable improvement as a result of our merger. We will continue with the policy we adopted last year of distributing 30% of our net income to shareholders. Dividends, cash dividends will now total $2.1b per year up from $1.8b. And the rest of the 30% of the net income will be in the form of a share buyback.

Why are we doing this? Fundamentally, because we believe in the long term prospects of our Company, as you can see on the next page the next slide please. Historically pre-merger we have had an EBITDA between $14.9b and $16b. During this period, steel prices have fluctuated severely, for example, hot rolled prices in the U.S. by almost 30%. This is a testament to the level of product, geographic and market diversification that we now have as a combined Company.

Now with the merger of these two companies, we are seeing the beginning of how we're unlocking the value. Our EBITDA for 2007 is $19.2b to $19.4b, clearly a step change from the prior years when we operated as separate companies. And that is the reason why we are increasing our base dividend. We believe, as highlighted in the dividend announcement, we have entered a step change period within the Company.

With that I'd like to open the floor to questions and answers. Thank you.

(OPERATOR INSTRUCTIONS).

Our first question comes through from the line of Kuni Chen from Bank of America. Please go ahead.

Hi, good day everybody. Two questions. First on Europe. I just wanted to get a little bit more color on the inventory situation. Obviously, in the U.S. inventories have been drawn down for the better part of the year now. I just wanted to get a sense as to how long you think inventory destocking will go on in Europe and when that starts to bottom out.

And then second question just on China. I'm just curious to know are you satisfied with basically building a portfolio of minority stakes with companies in China? Or do you envision that sort of becoming majority stakes at some point? And does that reflect more optimism that the Chinese government will allow for greater foreign ownership in the future? Thanks.

I shall start with the inventory situation in Europe and my general comment would be to say that inventory situation had deteriorated up to the summer months, mainly due to the strong income of imports. And the opinion is that now, as imports are slowing down, first of all because import competivity has decreased and secondly because customers become more cautious, I would say that our impression is that over the months of September, October and November, import is drying out to some extent.

Obviously, we need to distinguish between sectors. Traditionally, automotive industry which is represented in terms of volume 30%, 35% of our shipments has no inventory because we had some just in time delivery. The other question is that big fabricators and so on we had the impression that industrial activity in Europe is continuing to be quite healthy, so that there is a lot of consumption. And we definitely believe that the inventory situation should be totally normalized by year end so that we will come into healthy supply --into much more normalized supply and demand situation starting from Q1 next year on.

On this China, our growth strategy is very much focused on expanding our activities in growth markets. And China and India clearly plays very important role in our growth strategy. We have always said that we would like to expand our footprint in China and as we have seen, our minority participation in Hunan Valin has created a lot of value for the shareholders as well as for the Company in terms of market and technology and productivity.

We believe that similarly our minority participation in China Oriental will create value for the shareholders and definitely at some point we hope and we believe the Chinese government will allow foreign companies to participate in the majority ownership.

As far as this China Oriental is concerned, this is a Hong Kong listed company and today we have participated in 28%. And we have options to exercise more within 18 months depending on the approval from the Chinese authorities.

Okay, very good. Thank you.

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

Hello, I've got a couple of questions if I may. The first is could you just, on the numbers, just assessing the quality of the numbers, could you talk us through any one offs that were in the numbers at the divisional level?

And also in the last couple of quarters you've taken negative 350, negative 370 at the Group level not in the divisions, either inter-co or write downs and that has turned into a positive 16 if I'm right on the numbers, this time around. Can you tell us a, what the negative was in the last couple of quarters and b, why that's turned around to a positive 16 in this quarter?

And do you anticipate in your guidance for Q4, are there any anticipated positive or negative one offs in that guidance that are non-operating.

Second question on contracts, I think you talked about double digit outcomes in the U.S. which I guess is still quite a range. So can you give us the extent to which that's close to $100 a ton as opposed to $10 a ton? And maybe Michel could just comment, because we're hearing fairly punchy things on European contract outcomes as well. So maybe Michel could just confirm, or at least give us a hint of where you're expecting European contracts to come out?

And finally just on Europe, should you not I guess be taking and encouraging your peer group to take perhaps a deeper down time in Q4, to clear up the inventory cycle. I know imports have been a problem but this is something that you tried in the U.S. with a reasonable amount of success. You could clear up the cycle a little bit quicker in terms of high production cuts and maybe if some of your peer group did the same. Thanks

Michael, thank you very much for all your questions. Let me try and begin. I guess in terms of the segments, you're just focused on the EBITDA side. I'm not going to walk you through below EBITDA. That's disclosed in our income statement. The two main drivers were the $68m positive we got on renegotiating a contract with a supplier in the United States and that's just a present value benefit that has been captured within that. And we also had $60m of other VRS costs which were an increase compared to the previous quarter in the Asia, Africa, CIS division.

Now fundamentally, our disclosure policy is that we disclose provisions which are larger than $50m within our income statement. So there are other provisions which are minor in nature, i.e. less than $50m and the sum total of that is not a significant negative or a significant plus. So the EBITDA that you see is the EBITDA from the segments.

In terms of your question on minus 350 in the first -- roughly in the first half of this year per quarter and why it's plus 17, fundamentally, I'll give you the dynamics of that line item and there are three aspects. One is corporate expenses. The other is corporate eliminations and provisions and thirdly is inventory movement. So there have been changes on some of those aspects and as a result it's a positive 17.

In terms of predicting what it will be for the fourth quarter, I think that's difficult to do because we have to make a risk assessment at the end of the quarter to determine what risks there are to the business and account accordingly. So the guidance is generally based on the segment EBITDA summed up and communicated to you.

I will just quickly answer on automotive in the United States. Fundamentally, Europe automotive market is stronger than the U.S. both from a demand and a price perspective. So in the U.S. I cannot really give you more guidance than what I have said. And I don't know Michel if you'd like to comment on Europe as well as on the Europe price and volume strategy?

Thank you. First of all I think that I would confirm what you have said in terms of guidance. I would say that this applies also basically on Europe. So that is clearly we expect a double digit price increase. We have not finished all the negotiations but we have already concluded significant big contracts with some of -- with our two biggest customers. So that the result is there and what I can conclude is that my view is clearly that contribution of global automotive that means Americas, also South America and Europe will be significantly higher in 2008 than what it has been in 2007.

Michael you had a last question on Europe?

Basically the extent to which you can take potentially even stronger down time in Q4 to correct the inventory cycle quicker.

In Q4 what will happen obviously we will be cautious in terms of shipments. We will probably recuperate some of the galvanizing markets we have lost in Q3 and that is good. But you are absolutely right in Q4 we will continue to be quite cautious. This should also be simplified by the fact, for example, that we will have the blast furnace relining in France which is one of our major plants. So that globally in Q4, our forecast is only a slight increase in Western Europe in comparison to the shipments of Q3. In Eastern Europe it will be a little bit higher because Q3 has been really quite low.

Okay, thank you. Just finally, just regarding the contracts, I know you're not going to give me the number but would it be fair to say high double digit? Or to put it another way, are you comfortable that you're more than going to cover cost increases next year on your contract business?

Michael, I think I have answered to this question because I told you that my focus is that contribution of automotive to our results in 2008 should be higher than 2007 and that will be a consequence of our shipments. It will be a consequence of improving even our mix and it will be a consequence of increasing our price.

But the negotiations with the automotive industry is a little bit more sophisticated than simply volume and price. And what we are working very much in the automotive segment is precisely to give more value to the automotive industry and hence to capture a part of this value also for us. Otherwise it would not have been possible -- since the creation of Arcelor Mittal we have gained a market share in global automotive shipments despite the fact that we have taken the leadership in price. But that was due to the fact that our model with the automotive industry has been quite successful and we want definitely to continue in that way. And in order to achieve that also there is a lot of technical work, there is a lot of R&D. I would say almost half of our R&D effort goes into the automotive industry and it is precisely for that that we are so successful.

Okay, that's perfect, thanks very much.

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

Yes, good afternoon. Sorry to come back to the $300m. But I understand you can't say a number for the fourth quarter, but could you say something for the average annual number or something? Or should we expect the same number going forward for this line?

Okay, I think that's a good question. If you look at the net number of the last year it's about 357 negative. And this year so far we are at minus 600. So if you assume that we make the same risk assessments in 2007 then there could be a positive impact in the fourth quarter. But again this is not confirmed as we have to finish the accounting for the year.

Okay, thank you. And on the tax gain could you give me roughly what the size was there?

The tax gain, yes absolutely. If you look at our pretax income and just using 25% as the tax rate that we recommend, the difference is about $300m that we recorded in the third quarter. I.e. $300m lower taxes in the third quarter than our normalized rate of 25%. The German impact is the most significant which is greater than $160m and the rest is reversal of valuation allowances in the United States and in Canada. In the U.S. we had an IRS audit and we made certain provisions. And the audit was completed with no questions asked, so we reversed $100m there and the remaining in Canada.

And maybe just finally, could you talk a little bit about the investment in Turkey, it's quite big plants you're putting up there. And how you see the market and where you intend to sell this almost 5m tons of rolled products?

Yes, I think it's a very good question. So we have basically decided together with our Turkish partner to build a new hot strip mill potentially with the capacity up to 4.8m tons and we will build that in Gemlik. Gemlik is not neutral in the sense that we have, as Arcelor Mittal together with the Borusan Group, already today a joint venture in Gemlik where we produce 1.6m tons of galvanized cold rolled and galvanized steel. In addition, on the same site, the Borusan Group has a strip mill of 700,000 tons presently. And one of the ideas was precisely to build there in the port of the Black Sea this new hot strip mill.

Now in terms of risk assessment you can see that basically even if we would not serve 100% of these two productions we have already a very strong basis. Number two, Turkey is an excellent market and you will look at the last years from the big countries, the Turkish market for flat steel is only second in the world in terms of growth after China. And we have made extensive market analysis and we consider also that over the next five years or so, Turkish market should increase by 7% per year on average.

Number three, today Turkey is a very heavy importer of flat steel products in the sense that almost half of the Turkish flat steel consumption is imported and there also an additional potential market. Now it's true also that supply is going up because Adimer is just on the way to start a new hot strip mill which is situated in the south of Turkey where there is less market than we have in the north where most of the industries are. So we are very confident in terms of markets as we have a strong value chain.

Now we are also trying to capture the most sophisticated part of the markets for high quality products. We are now -- we believe also that our investment will be extremely competitive because from a logistic point of view it is very well situated. And also with most of its captive customers of the hot rolled strip we will be very close to them so that we will be extremely competitive. And for that reason we are very -- we think this is a very good move. And we are also very confident because our joint venture today already is extremely successful.

So is that to say that you expect most of the steel to stay in Turkey basically?

Absolutely, absolutely.

All right, thank you.

Thank you. Our next question comes from the line of [Annindia Mojista] from JPMorgan. Please go ahead.

Hello, good afternoon. I just have one question on Stainless Steel. When you say you see a recovery in Stainless Steel in 2008, as far as European three or four these prices are concerned, are we talking a recovery to levels of, say, about EUR1,400, or are we saying more like EUR1,000 to EUR1,200?

Going on the basis of the demand which is coming in terms of December, we see that the demand is growing but it does not automatically relate back to an increase of price. The base price, as you know, has come down substantially and we do believe that with the demand growing it is clearly appropriate to start thinking of increasing the base prices. It's premature at this time to talk about either 1,200 or 1,400.

Thank you.

Our next question comes from the line of Alan Coats from HSBC. Please go ahead.

I was just wondering what's going to happen with regard to increased iron ore costs coming through in Q2 I guess for much of the steel world? How do you see the steel world coping with this? Will people increase steel prices in Q1, wait until Q2, go very, very aggressively on things like plate and beams? What will happen to hot rolled coil globally? And how do you see the Chinese reduction in shipments affecting? When is the timeframe of that helping the rest of the world please?

This is a good question. First of all we really not know at this time how much price increase will be there in iron ore for the next year. The negotiations have not yet completed and once we know what is the extent of the increase and what is the extent of the impact on our cost, I am sure all the steel companies will endeavor to pass it on to the customers. And the impact will clearly be felt in the second quarter and, depending on the negotiations, I think the industry will have to decide this price increase.

Okay.

Thank you. Our next question comes from the line of Hermann Reith from BHF. Please go ahead.

Yes, hello, and just one question. It is related to the purchasing price accounting item. Once the merger is now completed since last week, will we see say now any impact from PPA in the -- starting from the next quarter, or is everything finished now?

Yes. We have completed the purchase price allocation for Arcelor and there have been no major changes that have been made compared to the previous quarter. However, what you may see in subsequent quarters, changes to goodwill as a result of exchange. Because the goodwill is amortized, basically, in euros and as the euro weakens, or strengthens, as has happened, the dollar amount increases.

The purchase price allocation of [Sircasta] is still preliminary. We expect to complete that by the end of the year. We, technically, have the label 2008, but we intend to finalize it by the end of the year. And there were significant changes in Sircarsta compared to the second quarter and, as a result, you might have seen other long term obligations decline. Some of it was offset by goodwill, but because of the exchange difference in goodwill, you don't see it in the goodwill line item.

Okay. Perhaps another follow up question. When [Airocon] will be deconsolidated, from which date?

Well, good question. We expect to finalize the sale by the end of this month so then it would be as of the end of this month.

Okay, fine. Thank you.

Thank you. Our next question comes from the line of Ken Silva from Royal Bank of Scotland. Please go ahead.

Hello, just a couple of follow ups to the iron ore question that was asked a few minutes ago. How much iron ore does the Company buy annually on the outside?

I think we buy close to 70m to 75m tons because 65m tons is our production and plus we have some contracts which are related to the pricing of the finished products. From the purchase point of view, from the yearly contract price, we would be buying between 70m to 75m tons.

Okay. And then, how much of that 70m to 75m is up for renewal or is done on an annual basis 2008?

I think all of that 70m to 75m tons is all based on end roll pricing.

Okay. And then -- so, people were talking about a 30% to 50% increase in contract prices. If we get that range, can you quantify how much your costs are going to go up?

It is a hypothetical question, because at this time we really do not know how much will be the increase. And there are some contracts in 70m, 75m tons which are not from the big three companies, but some very small quantities also coming from serious countries where there will a bilateral negotiation of the pricing.

Okay. So, if we get a 30% increase, just hypothetically, how much would your costs go up?

If it is 30%, our costs for 70m tons would be about $1.3b.

But then what you're saying it's not subject to the global contracts?

Yes.

So it will be less than that number?

And plus there would be freight change because the freight market is strong. But fortunately, at Arcelor Mittal we are 70%, 75% hedged for 2007, so 25% of the business would be still to be covered from the freight point of view.

Okay. All right, thank you.

I would just add that -- I would just add on the freight question that, even though we are covered for next year it is not at the same pricing as 2007. So there is significant increase still in freight costs, but the increases which we are occurring in the current period, clearly, we are immune to that.

Thank you. Our next question comes from the line of Ben Richards from Longbow Research. Please go ahead.

Good afternoon, and thank you for taking my call. Can you elaborate on the one time gain in North America due to the supplier renegotiation?

The one time gain?

Yes, sir.

It has to -- with the long term contract we have on gases that we procure. What exact details do you want?

What it was; industrial gases, iron ore?

Industrial gases.

Okay, good enough. Thank you very much.

Thank you.

Thank you. Our next question comes from the line of Cyril Benayoun from BNP Paribas. Please go ahead.

Yes, hello. I have a quick question regarding your indebtedness. You've stated in the past your intention to transfer your bank debt at the Mittal level -- at the Arcelor Mittal level to Arcelor Finance. Has this been done and, if not, when do you expect to complete this process?

And second question regarding the guarantee from Arcelor Mittal to Arcelor Finance.

In terms of the guarantee of Arcelor Mittal, that's continuing on Arcelor Finance. In terms of bank debt, what specific piece are you talking about that we have transferred?

Well, you talked about transferring most of the debt at the Mittal level, in particular the credit facility to the Arcelor Finance level. And I was wondering whether this had been done or there was still debt at the Arcelor Mittal level?

Yes. So, you are right, our intention is to transfer most of our debt to the Arcelor Finance vehicle and, principally, most of this has been achieved.

Most of it, sorry?

Yes, most of it has already been achieved.

Okay. And when was this done? Was this done before or at the same time as the second step merger or --?

It's in the process, so most of it will be done by next week.

Okay. Okay, thank you very much.

Thank you. Our next question comes from the line of [Stephen Goode] from [Sirrock]. Please go ahead. Hello, Mr. Goode, your line is open. Can you hear?

Okay, we'll move on. We have the next question from the line of Vincent Lepine from BNP Paribas. Please go ahead.

Good afternoon, gentlemen. I have two questions, please, first one on Ukraine. I was wondering if you could tell us whether you had seen seasonal slowdown in Q3 in Ukraine. And also, excluding the redundancy costs there, if you could tell us how profitability compared in Q3 versus Q2?.

And my second question is on Stainless Steel. I remember you were saying at the time of the Investor Day in September that you wanted to become the global reference in Stainless Steel. And I also read in the Stainless Steel presentation that you wanted to leverage the mining skills of the Group in Stainless. And I was wondering whether you could tell us how you intend to achieve those two things, please?

In terms of Ukraine, other than this one time ERS booking, the financial results are more or less equal to what it was in the second quarter. There is definitely -- there will be some slowdown in quarter four, not as much as in quarter three, because of the winter which has already set in. As you would know that even yesterday there was a snowfall of nearly 70cm in Ukraine. So, to that extent, there would be a seasonal slowdown in quarter four in the domestic market. But, as I already mentioned, we will be looking at this slowdown in domestic market in order to divert material to other construction activities which are going on in the rest of the world.

As regards the Stainless, as we have indicated we look at opportunities in order to look at both upstream and downstream. In Stainless there are activities that are going on in strengthening our downstream activities and we are looking at opportunities for upstream in order to ensure more hedging of the raw materials which are required for the Stainless industry. But it is premature at this stage to talk any specific acquisition or deal which is being considered.

Thank you. That was our final question, so I will now hand you back to hosts to conclude their conference. Thank you.

Thank you very much for participating in this conference call and I look forward to talking to you in the first quarter of next year. Since we will not be talking to you before - Happy Holidays!