ArcelorMittal SA (MT) 2009 Q3 法說會逐字稿

Forward-looking statements -- this document may contain forward-looking information and statements about ArcelorMittal and its subsidiaries. These statements include financial projections and estimates and their underlying assumptions, statements regarding plans, objectives and expectations with respect to future operations, products and services and statements regarding future performance. Forward-looking statements may be identified by the words believe, expect, anticipate, target or similar expressions. Although ArcelorMittal's management believes that the expectations reflected in such forward-looking statements are reasonable, investors and holders of ArcelorMittal securities are cautioned that forward-looking information and statements are subject to numerous risks and uncertainties, many of which are difficult to predict and generally beyond the control of ArcelorMittal, that could cause actual results and developments to differ materially and adversely from those expressed in or implied or projected by the forward-looking information and statements. These risks and uncertainties include those discussed or identified in the filings with the Luxembourg Stock Market Authority for the financial markets, Commission de Surveillance du Secteur Financier and the United States Securities and Exchange Commission, the SEC, made or to be made by ArcelorMittal, including ArcelorMittal's annual report on Form 20-F for the year ended December 31, 2008, filed with the SEC.

ArcelorMittal undertakes no obligation to publicly update its forward-looking statements, whether as a result of new information, future events or otherwise.

Good afternoon and welcome to the ArcelorMittal third quarter and nine-month 2009 results investor conference call. My name is Liz and I'll be your coordinator for today's conference. Throughout the conference you will be on listen only. However, at the end of the call you will have the opportunity to ask questions. (Operator instructions).

I will now hand over to Lakshmi Mittal, Chairman and CEO, to begin today's call.

Good morning and good afternoon to everyone, and welcome to ArcelorMittal's third quarter results. As usual, I am joined by my GMB colleagues -- Gonzalo Urquijo, Aditya Mittal, Michel Wurth and Christophe Cornier.

Before I start today's presentation, let me give you a brief overview. It is now one year since we announced our response to the financial crisis, which was centered around cutting cost, reducing debt and working capital and also cut production. We set also some very ambitious targets, but we are very pleased to be able to say that we have achieved the targets we set ourselves three months ahead of schedule.

The other positive news today is that, for the first time since the crisis began, we are quoting a net profit as a result of both market improvements and our own actions. That being said, the crisis is not over and the economic environment remains challenging. The world economy is slowly recovering but remains extremely fragile. In particular, a full economic recovery in the developed world is likely to take several years.

Apparent steel demand is improving as destocking completes, but real demand recovery, particularly in Europe and the US, is not yet confirmed. Emerging economies, particularly China, have recovered more swiftly, but overproduction remains a threat.

Against this backdrop, we continue to be extremely prudent. We intend to keep our working capital as low as possible. We will only increase production in line with demand, and we will continue with our cost reduction. Simultaneously, we will look to cautiously initiate a number of targeted growth projects in emerging markets.

Today, as shown in our agenda, after a brief introduction and overview we will look at our health and safety performance, the current steel market, the progress made in our industry plan and new initiatives, our Q3 results and financial plan, followed by the performance of our divisions. Finally, we will discuss our guidance for the fourth quarter 2009.

During the third quarter we maintained a stable health and safety frequency rate. Investment in health and safety has not been decreased in any way, and this remains the first priority of the group. We saw the first sign of recovery in the third quarter, operating at approximately 61% of capacity. We shipped 18.2 million tons during the quarter, which is 7% up compared to the second quarter.

We reported EBITDA of $1.6 billion, in line with our guidance, which is 30% higher than the second quarter.

We are pleased to report a positive net income of $0.9 billion and cash flow from operations of $2.4 billion. On the industrial financial plan targets, we have achieved $2.2 billion of annualized sustainable cost reduction in third quarter, and we are ahead of schedule in terms of reaching $2 billion reduction by the end of 2009.

We further reduced our net debt by $1.3 billion to $21.6 billion, and over the last 12 months our net debt went down by $10.9 billion. Additionally, as I said, we reinitiated several selective growth projects focusing on the emerging markets.

Finally, although we have seen an improvement in the demand for steel, we remain cautious. Our guidance for the fourth quarter EBITDA is between $2 billion up to $2.4 billion.

First, let's quickly look at our health and safety performance, which has consistently improved over the last three years. Despite the crisis, we maintained our focus on safety during the quarter. Based on our own personal figures, the frequency rate remained at 1.6 injuries per million worked hours, consistent with the past three quarters and much better than prior periods. Improving our health and safety performance has been one of the first priorities of the group and remains one of its main successes to date.

We have faced painful fatalities, but overall the initiatives and actions taken from the beginning have allowed us to improve our performance in this area. The journey towards zero accidents remains our ultimate goal, and we will continue our focus.

Before we discuss our results specifically, I would like to provide some comments on the steel markets in general. As mentioned in my introduction, world steel demand has improved significantly over the quarter due to the strong dynamics of the Chinese steel markets, the strength of the emerging economies and the end of destocking in developed world. Globally, demand increased by nearly 12% in third quarter compared to second quarter, and world [capacity utilization] rose by 600 basis points to approximately 82%.

We are expected to see further improvement as the global economy progressively recovers, but the steel market will remain fragile and is not likely to normalize in 2010. Chinese fundamentals are solid, but demand there is expected to face a short period of destocking to correct some excessive inventory building. In the US and Europe real demand is expected to improve in 2010, albeit from a low base in 2009. This improvement should remain modest and progressive. Overall, demand in the developed world should be 25% lower in 2010 than in 2008.

As I said, real demand in China remains strong, the result of strong fundamentals, continued liquidity and positive impact from the stimulus plan. Fixed assets investment increased by nearly 36%, and industrial production continued to accelerate to almost 14% in September. The [real estate factor] has picked up, although sales hit a record high in September. Real demand is expected to remain strong but apparent demand will soften, as some destocking is needed.

In September production increased by 28% year on year and new inventory increased by 10%. In addition, as underlying demand remains strong and exports increase, excess inventory should be corrected by the end of 2009. Talking about United States, real demand is still weak with early signs of recovery. Industrial production was down 6.1% in September year on year but has shown growth for the past three months as expected, although sales in September retreated after the end of Cash for Clunkers.

Over the quarter apparent demand increased sequentially by 25%. Recently prices have been slightly under pressure; however, demand should continue to improve as restocking had just been initiated.

Trends in Europe are similar to that of the United States. Market conditions are weak, although there has been positive impact from the [scrapping scheme] and real steel demand remains 23% down in Q3 year-on-year basis. However, apparent demand improved significantly over the last three months on the back of completion of destocking. Between June and September, apparent demand increased by 25%, similar to United States. Improvement in apparent demand has helped raise capacity utilization. Inventory levels continue to decline. At the end of August they were 38% down compared to pre-crisis level.

Going forward, we should not expect a strong recovery in real demand in 2010 in Europe. However, some inventory rebuilding will be necessary, and apparent demand should continue to improve progressively.

The stainless market continued to be well oriented with base and nickel prices improving further during third quarter. In fact, base prices are now back to levels in 2008.

Despite the weak real demand, the stainless steel market was supported by the nickel price [rise], low inventory level and cautious production. However, going forward, market remains uncertain, and we have to monitor prices very carefully and adapt our production levels to real demand.

Now I will discuss our industrial plan progress. In line with increased demand, you can see on this chart our capacity utilization grew to 61% in third quarter versus 15% in second quarter. In quarter three we increased our crude steel production by 24% versus second quarter while continuing to reduce our inventories. We will continue to gradually restock facilities and increase production as warranted by confirmed order from our customer. We expect that further demand improvement in the fourth quarter will allow us to increase capacity utilization to approximately 70%.

We are pleased to report that we have achieved $2.2 billion in management gains. This, as you can see on the graph on the left side, our target was $2 billion by year end. At our investor day in September we communicated our goal to achieve another $1 billion in management gains by end of next year, which is 2010, for a total of $3 billion in management gains over two years.

On the right-hand side we show the progression of our fixed cost over the last four quarters as compared to full year 2008. As we started to bring back production in some of our plants, fixed costs returned as expected, increasing by $700 million on an annualized basis for the quarter. An unfavorable currency effect contributed to the increase.

In third quarter our sales in the emerging markets, including both domestic and export sales, represented 45% of the total, as shown on the left side. As you might recall, we were planning a number of growth projects in the emerging markets before the crisis. Most were put on hold when the steel market collapsed late last year. We have decided to reinitiate several of these projects. South America, Middle East and India are three areas where we intend to invest, as they each offer meaningful growth potential.

With this I will hand it over to Aditya to walk you through our income statements, cash flow, balance sheet and financial plan.

Thank you. Good morning and good afternoon, everyone. Let me quickly walk you through some of our financial highlights. As you know, third quarter EBITDA is $1.6 billion versus $1.2 billion in the second quarter, which is a 30% improvement. EBITDA per ton is $87, which is about $15 higher. We were also positive on the EBIT line with an operating income of $305 million.

Net interest expense was marginally lower, just because we had less debt compared to the previous quarter. We also had a market-to-market non-cash charge of $110 million. This relates to the convertible debt that we have outstanding. This was largely offset by FOREX and other gains of about $106 million.

During the quarter we also had a $61 million impairment charge due to the shutdown of our coke factories in Romania, and this was offset by a non-cash gain due to our dynamic delta hedge of $50 million.

As you know, we had a significant income tax benefit, deferred income tax benefit, of $899 million. And therefore, we ended up the quarter with $0.9 billion of net income.

Moving on to cash flow highlights, clearly a good quarter from a cash perspective, $2.4 billion, driven largely by operating results as well as the $1.3 billion change in working capital. CapEx remained flat, similar to the previous quarter of $0.6 billion. We had free cash flow, therefore, $1.8 billion, of which we paid approximately $306 million of dividends, out of which $24 million were paid to minority shareholders in some of our subsidiaries.

Turning to the balance sheet, clearly, due to the free cash flow performance, we were able to reduce our net debt by $1.3 billion to $21.6 billion. This brings the total net debt reduction of about $10.9 billion from the start of the crisis.

We also announced two new targets, as you know -- gearing as well as net debt to average EBITDA. Our gearing came down to 34% from 37%, and our net debt to average EBITDA from 2004 is 1.3 times.

In terms of our net debt to last 12 months EBITDA, under our debt agreements that ratio is 3.3 times for the quarter.

Turning to our liquidity and overall gross debt maturity profile, clearly liquidity remains very strong at $19.4 billion. As you know in the quarter, we canceled certain lines as well as prepaid certain debt. I would suspect that we would continue to do the same thing in the fourth quarter because we do not really need $19.4 billion of liquidity going forward. In the quarter we also raised a 30-year [debut] bond, a yield of 7.4%, coupon of 7%, which I think is a good development, reflecting debt capital markets' confidence in the Company. Our average maturity profile has increased to 4.3 years versus 2.6 years at virtually a year ago, the start of the crisis.

In terms of working capital, as you know, we have continued to make progress and we are finally within our target range. Our rotation days have now improved to 83 days. As a result, we had a $1.3 billion release. This is primarily an accounts payable story, but nevertheless $1.3 billion release in the quarter. This brings our total release since the start of the crisis due to working capital to $6.8 billion.

With that I'll hand it over to my GMB colleagues to get into more details about their decisions. Michel?

Thank you, Adit. As usual, good afternoon to everyone. I will begin the segment with this segment reviewed with Flat Carbon Europe, starting with safety, where we can see that over the quarter we have -- or for the whole year we have been quite stable in terms of safety, in line with group results. Nevertheless, we had one fatality of a subcontractor in our Romanian mill of Galati, which is obviously all the time a fatality and a new insightment to really to move forward and to continue with our journey to zero.

Moving onto operations now, steel shipments have gone up from just under 5 million tonnes to 5.6 million tonnes, an increase of almost 13% as most market segments, including automotive, industry, electrical steel and appliance experience a technical recovery following destocking throughout the value chain in the previous quarters. The percentage of long-term contracts in our mix decreased slightly to 42% of our sales as sales of industry products which are typically sold on the spot markets have grown more than automotive, generally sold on a longer-term basis.

Average steel prices have decreased from $797 per ton in Q2 to $759 in Q3, so a decrease of 4.8%. In euro terms, this drop was even significantly more pronounced due to the depreciation of the US dollars, and it is due partly to a drop in the average long-term contract prices following renegotiations of the new automotive contracts, which started as from July 1 on with slower raw material costs as well as some indexation clauses we had in other contracts. Also, we have seen a mix effect due to lower sales of heavy plates, and particularly specialty plates with high prices, and also our spot sales increased as contract customers shut down production during the traditional holiday months of August. Also, spot prices remain lower than contract prices. They have actually started to increase as the previous negative trend stabilized and began to reverse throughout Europe.

Looking at profitability, you have seen that EBITDA declined by $246 million in the third quarter to $271 million, corresponding to a $48 of EBITDA per ton. This decline was due to our average selling price decline, as explained previously, the deterioration of the product mix due to the strong decline in demand for highly profitable specialty plates and the fact that operating results for Q3 only include a non-cash gain of $50 million relating to hedges on raw material purchases as compared to $239 million in Q2. These negative factors could not be fully compensated by the positive effect of the cost improvements which have been realized in Q3 in Flat Carbon Europe and which were encouraging.

Now looking at quarter four, we expect an increase in volumes and higher average selling price in spite of the certain lack of visibility in the markets. Scrapping incentive still ongoing in several European countries are expected to continue, which should give us a decent sales and shipments to the automotive industry.

I would now like to come to Steel Solutions and Services, starting, again, with safety. After an increase last quarter, the frequency rate has improved to four in the third quarter. This level is still too high, and we are working hard in order to continue to improve it.

Moving to operations, steel shipments in quarter three were 4.2 million tonnes, which is 7.5% lower than the second quarter of 2009, due in part to lower shipments from our export division, ArcelorMittal International, but also due to seasonality effect as the large number of customers in our core distribution markets shut down their operations in August.

Expressed in US dollars, these selling prices increased, reaching $736 per ton in the third quarter. This corresponds to an increase of 2.6% compared to the previous quarter, this increase being, nevertheless, the effect of the exchange rate evolution as price increase passed to customer remained modest during the quarter.

After a poor result during Q2, which was heavily affected by windfall losses due to the decrease in selling prices compared to our average stock value, EBITDA for quarter three was almost at breakeven with minus $1 million. This improvement is due to lower windfall losses and to good cost cutting progress, in line with the lower shipments.

In terms of outlook for the fourth quarter of 2009, after month of October at expected levels, the market is driven by cautious overbookings for November and to December with customers targeting low stock levels for year end.

And I think now, Gonzalo, I pass it over to you to speak about Long Carbon segments.

Good afternoon and good morning to everyone. As always, I will start with long products and with safety. I have to regret to report a fatality. It happened in Astralloy the first of August. Even though we had this fatality, we are working very hard on the journey to zero, and we have achieved positive results. That is, we are very happy to say that our frequency rate was 1.7 in Q3 versus double, 3.4, one year ago. So all this hard work is rendering now and giving us a positive effect. We have all our employees and managers involved, and so we are very proud of this result.

If we go to operations, as you will be able to see, our steel shipments are somewhat lower. But that is logical because in Q3 we have a seasonal effect that has been in Europe and in US. We have had some positive that has mitigated this a bit; that was Brazil, where you see the seasonal effect in January. But that's why we've had this decrease in steel shipments.

On the other hand, to give you the capacity, the capacity was at 67% versus Q2; that was at 60%, which is not bad if we take into consideration that Q3 is 2.5 months.

Now, average selling price is better, as you can see, is up 5.3%. Why? We've had basically three effects -- increasing prices, on one hand; second, it has been also the foreign exchange; and we've had a better mix of products.

Also, accompanied to that, we had increases in scrap. You've seen that in Europe, scrap was around 160 at the beginning of the quarter, and it went up to above 200. And in USA, it was $200, and it went further up than $300.

Going to profitability, we see in EBITDA we have $589 million, is up 80%. It's basically a very important decrease, due to this improvement in prices and mix. And our margin at present is 13.6% versus 8% we had in the previous quarter.

Now, looking forward for the first quarter, we do see that volume could increase. And in terms of prices, what we are fighting is for margin because now we are assisting in a different trend of scrap. Scrap is going down. That will impact our prices. But what we are fighting is not only to maintain but, if we can, to improve our margin.

Next slide, please? I will talk of stainless now. We had an exceptional good first semester in stainless, and that has deteriorated somewhat, because we were at 0.7%, as Mr. Mittal was saying, and it's a real benchmark in terms of frequency rate. And this Q3 we are 1.8. We've had minor accidents, and we continue working very hard on our journey to zero accidents.

If we go to operations, our shipments have declined here. Clearly, it's the impact, once more, like in long, of the seasonality effect. So Europe has declined, even though Brazil, compared to Q2, our steel shipments have increased.

In terms of capacity utilization, we are at 68%, which is much better than Q2, which we were around 57%.

In terms of transaction prices, we have a big improvement, in fact, 14%. Now, that's a combination of two things. It is nickel that has increased very much, as all of you now. It's continued increasing now in October, I believe to date, around 18,900. But I think what's important here -- the increase in base price -- persisted to a very important increase in base price that has increased around 25% in the last months. This has given us much better EBITDA, and we are multiplied by it. We are $133 million, and we are in the black in Brazil and in Europe because, in the previous quarter, if you remember, Brazil was compensating Europe. Now both of the units are in the black.

Looking forward, what do we see? Well we will see -- we hope to see that the full impact of higher prices, we will see it in Q4 even though, as Mr. Mittal said before, we have a lot of -- or, we do have uncertainties, so we want to remain somewhat prudent. And we will add that, our production, to real demand, and we'll keep an eye on imports, which continue in Europe to be very low, around 10%.

Thank you very much. Christophe, I believe the floor is yours.

(inaudible). For Asia, Africa, CIS I will stop by safety. In Q3 we had globally the same frequency level as in Q2, but we had a very negative September month with five fatalities -- one in Ukraine, one in South Africa and three in Kazakhstan. The analysis of those accidents shows that, apart from the South African one, which is, let's say, steel related, these are mainly accidents linked to organization failure to prepare and execute work according to our growth standards.

Then we have taken the decision to strengthen our programs and training, starting from management and even top management and [short] (inaudible). Nevertheless, we had good result in Kazakhstan coal mine for safety, and zero fatality during the quarter. And you know that we pay special attention to the safety of this Kazakh coal mine.

Moving to operation, Q3 saw a further improvement in shipments by 5% to reach 4 million tonnes, mainly driven by South Africa. Market wise there was some improvement in the CIS market and positive market development in Middle East, and also in the domestic South African market.

However, its steel prices were higher by $40 at 514 versus Q2, due to improved international price. However, despite higher price and volume over the quarter, our EBITDA went down by 13% compared to the previous quarter, to $245 million due mainly to high operation cost related to operational problems. South Africa performance was impacted by unstable blast furnace operation in Vaderbijlpark. In Ukraine we faced production loss in Kryviy Rih due to coal and coke shortage rising due to an accident in a supplier's mine, and due to the need for good-quality call linked to the start-up of (inaudible) in blast furnace number nine.

Also we suffered from negative currency impact on our fixed cost and, in particular, the evolution of the rand in South Africa, which went up by 9%. Now action has been taken to correct the situation, and all operating units are performing better since the start of October. And I expect it to remain so.

For Q4, despite negative winter impact in CIS and also a negative summer impact in South Africa, we are anticipating a modest increase in volume and selling price.

And now I hand over to Aditya for Flat Carbon Americas.

Thank you, Christophe. Just talking about safety, we had two fatalities at FCA, one at our coke battery in [Montecon] and the other at Indiana Harbor works. We have analyzed the causes, we are taking all appropriate actions. Clearly, this is very tragic. Nevertheless, we continue to be focused on our journey to zero.

In terms of our frequency rate, we had a good quarter. Frequency rate was 1.46, which is comparable to our best-ever performance on a frequency rate basis.

Moving to operations, clearly there was a strong recovery in the marketplace, both in South and North America. And as a result, our Q2 production was up about 30%. Shipments are up about 20%. However, prices were down. There are primarily three reasons. We had some negative contract renewals, which primarily applied to tin and we have some index contracts which have a quarter lag, and there were some unfavorable mix because of some export tons that we had coming out of Canada. As result, prices are down roughly $12 per ton over the quarter.

In terms of costs we had relatively good performance. Fixed costs remained stable in spite of the increase in crude steel production. We also benefited from lower input costs both in Brazil and in Canada, as we had much more benchmark type raw material situations versus United States, which is much more integrated than fixed.

As a result of the cost performance and improvement in shipments, EBITDA increased by 89% to $332 million in the quarter. Going forward, looking at the fourth quarter, we expect further volume improvement as well as price improvement due to the summer spot price rise.

To conclude the presentation, let me just talk about our fourth-quarter guidance. Clearly, for the fourth quarter we are expecting volumes to increase. We are also -- relative to the third quarter, we are also expecting our average steel price to increase. We also expect costs to increase, as we will have increased activity. And some of the sustainable -- the temporary fixed costs will not be maintained in the fourth quarter as we restart some of these steel facilities.

As a result, EBITDA is expected to be between $2 billion and $2.4 billion. Clearly a very difficult year so far for the global steel industry, but we are seeing signs of recovery. And we are well-positioned to benefit from an improvement in the global economy.

Thank you. With that, we'll open the floor to Q&A.

Michelle Applebaum, Steel Market Intelligence.

I wanted to ask you about two different things. First, last week at the World Steel Association in Beijing, there were some comments about overcapacity in China and exports and that kind of thing. And it seemed that the CISA speaker was addressing you specifically, Mr. Mittal. I was wondering if you could give us some background on that, and also just tell us your current view about what's happening there, what your planned investments might be, if anything, and what's going on in terms of China's impact on the global market.

I think it was very interesting visiting Beijing last week, and we heard speakers from Chinese side, especially from CISA. First of all, let me make a few comments, and then I think that will clear the background of what we are talking. One, that China's real demand is strong, and this year their production has grown 15%, whereas we were expecting them to grow negatively. So this clearly showed that the stimulus program, this clearly showed the bank lending of $1.3 trillion, the stimulus program has been rolled out very effectively and very speedily, and clearly China is focused towards building infrastructure in central China, where they are really focused now. And the GDP growth is 8%, is more or less confirmed. And my sense is that, 2010, we will see the same kind of GDP growth number.

What is puzzling to us was, as I said in various forums, that while the GDP growth will be 8% this year and the steel demand went up by more than -- production went up by 15% or 20%, which clearly showed that today's price of GDP growth, and whereas they are talking next year the GDP growth of same number and the demand growth only 5%.

So the fear of the Chinese mills are over production. If you look at the Chinese capacity utilization, knowing from our joint ventures we are producing at full capacity. That means it is not the overcapacity problem, it is the over production problem. The Chinese mills have produced during the last three months much more than they were producing on a normal basis.

So clearly, this showed that they can produce more. At the same time, it's also showed that there is a demand, there is a real demand. It is not for building inventories. I've always said that capacity to hold inventory in China is much less than the Western world and other places. So the inventory levels are -- though it is increasing, but it is not increasing at the alarming level.

We saw price drops in last six weeks. Suddenly we have seen, last week, pricing, prices bottoming out, which means that they have already reached the cash cost level. And that means these prices would tend to go up again. That is what we see in China.

Now, the threat of China -- clearly, the passionate speech of the speaker of CISA clearly demonstrated that they are under pressure from the different quarters of the world about the Chinese threat of export. So clearly, the message which we were getting from this speaker that we should, the Western world should not really get worried because China has been the importer and the first net importer in the first half and they really do not want to grow for exports but they really want to grow for domestic consumption. Clearly, this is a good thing that the country is growing and they want to grow their steel production for domestic consumption. But looking at the history, there is always a threat of exports from China to injure our capacities or our production in Europe. So we will have to be always -- ArcelorMittal will be watchful in exports from China, how they are going to affect our domestic market.

As far as our investment is concerned, our joint ventures are working well. And we just concluded our negotiations to expand our capacities, expand our business in China in the downstream, in the value-added products. And we are very pleased with the investment we have made in China, and we think that we will continue to use those platforms to grow our presence in China.

There has been a lot of global commentary in addition to your own commentary. Many of the other Latin American and Canadian and all over European steel companies have had similar comments about China. What I don't fully understand is, if the Chinese were to allow the Western companies to expand their investment platform within China and partner with them, wouldn't that solve the problem? And why do you suppose that that's not happening? And do you anticipate that that's going to change and provide more opportunity for growth for you in that region?

You see, Chinese are not really looking for investments by the Western world. They have plenty of resources available domestically. In fact, they are focused today looking to acquire resources on a global basis. What not only applies for the steel but it applies to general tendency in China to get more knowledge, more technology, improve their management practices. And I think in this process Chinese are going to be very selective. They are really looking for partners who can really provide cutting-edge technology, that can provide them market knowledge and that can provide -- who can provide management -- more than management practices, who can really improve their corporate bonuses.

So their lookout for partnership is very different than what we really thought. So that is why they have limited companies available who can really partner with China.

Vincent Lepine, Exane BNP Paribas.

I had three quick questions, please. In your Q4 guidance, could you just tell us how much of the price increases that were passed through or announced for the summer should be fully captured in the Q4 results, or, is there some of these price increases that might only be captured into Q1?

The second question is on scrap cost. You did mention that scrap prices were coming down a bit and the impact that will have on long steel prices. But in terms of the cost, do you expect scrap costs in Q4 to be similar to Q3 or possibly that it's up on average?

And the last one is on the delta hedge. Based on the earlier numbers that you had guided for, for the full year, we probably shouldn't expect any additional impact in Q4. And also going into 2010, given, if I remember correctly, the impact of the hedge was based on your utilization rates, if you have no impact in Q4, I'm just struggling a bit to see what the impact would be in 2010. I think initially you had guided for $700 million or so positive impact in 2010. Is that still your guidance? And if so, could you explain again why it should be positive next year, even though volumes will be higher than this year?

Let me try and answer some of your questions, and then maybe Gonzalo wants to comment a bit on scrap.

In terms of average price increases for ArcelorMittal, I think a lot of the price increases that have occurred post the summer spot price rise will be captured in Q4. There will be some positive benefits that will come from lagged index contracts, which have a leg effect of a quarter, etc. The real issue is that spot prices, what we see, have been higher in October-November then they have been in December. So you see that if you are booking orders for October-November delivery, they were slightly higher than December. And that clearly will have an impact, may have an impact on Q1, although premature to say. You see that in scrap, which has also fallen recently.

In terms of the dynamic delta hedge, in the fourth quarter there maybe some impact, there may not be some impact. It depends really on how much of the hedge we believe remains effective. This is based on the percentage of raw materials we intend to buy in the spot market -- in the third-party market versus in-sourcing it from some of our facilities.

Nevertheless, the total amount outstanding under the delta hedge remains $1.79 billion. And that has to be captured between the fourth quarter 2010-2011-2012, based on how we procure our raw materials.

Offsetting some of that is (inaudible) the cost on coal carryover. We have contracted coal over the next three years at the old benchmark price. This is roughly $1.3 billion, and this will run out by 2011, and there will be some impact of that in the fourth quarter, some impact in '010 and some impact in '011.

So I don't know if I've fully answered your question, but I just wanted to provide those two key numbers, which I think will be important as we project the earnings capacity of this Company on a going-forward basis.

In terms of average cost of scrap?

Yes; in terms of average cost of scrap, what can I tell you? Various elements. First, just to remind you that in the long we have 50% is electric arc furnace in both LC and LCA, 40% is blast furnace, 10% is DRI.

But what is scrap, specifically? That was your question. Look, scrap started in Q3, at the beginning, in Europe around EUR160. And it went up -- I'm telling you average, okay? It depends quality of scrap, etc. And it went above EUR200. And in USA, from $200 to $340. That was third quarter. As of today, scrap tendency has changed. We have it much lower in Europe and in US, at around EUR30 to EUR40 lower in Europe, around $50 to $60 in US. So we do see scrap prices going down.

That last point, very important will, what we are trying -- this will have an impact on our prices. But once more, what we like to see is the margin over scrap. So we try to work on a margin of scrap.

I hope that answers your question.

Andrew Snowdowne, UBS.

Just some number-related questions, if I may. The 83 days of net working capital reduction, that movement -- maybe you could give us a split between receivables, payables and inventory? I know you made the point that it was primarily payables.

Also, just to confirm the EBITDA of $1.6 billion -- included in that, anything more, other than the $50 million currency hedge benefits? You did mention a number of non-cash impairments, FOREX items and so on. If you could just confirm whether that is included or not.

And then a final question -- the cost savings of $2.2 billion annualized, sustainable cost savings -- I wondered if you could give us a split by division on how that's coming through?

Sure, Andrew, let me try and get some of this information while I answer your question. The non-cash dynamic delta hedge, $50 million, that's part of the EBITDA of $1.6 billion. However, we also had an impairment charge of about $61 million in the quarter. So in some sense they offset each other, but that's there.

In terms of the days for your working capital, yes, the inventories went down from 116 to 109; this is second quarter to third quarter. Receivables were virtually flat, and payables went from 56 days to 63 days. So as a result, the days changed accordingly, from 98 downwards.

Then your other question had to do with the $2.2 billion management gain by segment. Let me see where I have that. Maybe we can go to the next question and then I can come back on that response? Or, do you have any follow-ups?

No; that's perfect. Thank you very much.

Michael Shillaker, Credit Suisse.

I've got three questions, if I may. The first question, on China -- I understand that China may structurally not want to export steel. But I guess, cyclically, they are at a position at the moment where they are over -- the apparent consumption is above real demand. And as you've said, they need to de-stock. They can deal with this in one of two ways; they can cut output or they can export steel in the fourth quarter. Based on the market intelligence you've got, which do you think is most likely through Q4? Do you think they are going to cut output, or do you think they are going to export steel?

Second question is -- the steel market seems to be sending very mixed signals at the moment. Normally, if you look at 1999, 2003 and 2005, you would have found that when inventory got to this sort of level you'd get relatively immediate tension in the market. And that tension just doesn't seem to be there right now. Why do you think that is? And again, what signals are you picking up? This seems to be driving this ongoing wait-and-see attitude in the market.

And my third question is just on the debt covenants. I know you changed them back in the summer; but, as I understand it, if you go above 3.5 times debt to EBITDA, there are certain penalties that you actually have to pay including, I think, M&A dividend and CapEx and some potentially financial penalties. Can you just basically clarify exactly what those are?

Let me just first quickly get back on the management gains question. So I think the easiest is for me to just read out the numbers. Flat Carbon Europe is 1.15 billion. Flat Carbon Americas 120 million, Long is 450, Corporate is 240, Distribution 210, Stainless 130, and the rest is AACIS and mining.

Do you want to -- on the covenants?

EBITDA 1.6 billion?

No; I think that was answered. But I can talk about -- I can address the question on the covenants. I see, Michael, you are right; if we do cross the 3.5 threshold, then there are certain restrictions on the Company. These restrictions are only applicable for the period of time in which we have an LTM to net debt ratio above 3.5 times. So, as soon as we are back to below that, any such restriction disappears. These restrictions are new M&A opportunities, new growth CapEx and an increase in dividends, primarily.

On this export, I think in the third quarter our export was about 14% of our total business. And we see the increasing demand in the different markets, in the emerging markets, and we believe we should sustain our business, export business, around that level. And we see opportunity there, and we will continue to look at this.

You are right that there is some kind of a mixed signal in the market. There is some wait and see attitude. It is clearly emerging out of a couple of points. One, people are not sure about Chinese behavior, whether they will export more and they will export in a big quantity, or it will be in a small quality; overproduction of Chinese mills, which also caused some concern, what will be the impact of this, whether there is a real demand or not. And price fall in the China market, whether this is continuing -- whether it is a down spiral or whether there is a bottom to this.

Clearly, every day we are seeing new signals. Last week we assumed that the prices have already reached cash cost level. We have seen some price movement in China positively. We are also seeing that the real demand is continuing to be strong. Inventory level buildup is not huge. If you look at the 550 million tonnes of production -- so there is some nervousness. At the same time, some of the stimulus package real effect we are not seeing in the market. And that's why I think a couple of these factors are causing -- sending some mixed signals. But as we move on, I think, as the apparent demand with the real demand is getting aligned, people will not like to hold inventories. People like to work on a different business model, so we will see much more smoothing as we are coming out of this crisis and as we move on in the fourth quarter, as we go into the end of fourth quarter or the beginning of next year.

I think that we can add to this also credit limitations of some of our customers, and I think that is extremely important because, as previously [we've released] there, our customers tend to be much more cautious and try to manage, particularly, their supply chain, which is in fact a very sound element because then speculation is going much less on, and we need, as mills, to be much closer and to be ready to deliver if they would like to do it.

I've got just a couple of follow-up questions. First of all, just to clarify, there are no financial penalties if you breach that 3.5 times? The question on China really was more, do you think they're actually going to cut output? Have you got any intelligence that they are actually going to cut output in the fourth quarter as opposed to exporting? And I don't think we really got there in terms of an answer.

And just as a follow-up to what we talked about, is there effectively a risk, if the world has to live on lower inventory for a longer time? So this has been a one-off downturn and inventory correction, but it actually never comes back, effectively, in any sort of magnitude because we're all just going to simply sit on low levels of inventory for a lot longer to come.

In terms of the covenant, clearly we did pay a waiver fee when we got the waiver. If we cross the 3.5 threshold, then the interest rates are higher for the duration, which is just for the duration. And they are still relationship-based interest rates, so they do not reflect theoretical market reality. So that is exactly what happens. So in that sense, yes, there is a financial cost that will occur if we cross the 3.5 times LTM EBITDA.

On China, we have not officially heard anything of cut production. But clearly, we are hearing that some of the mills are going for maintenance due to seasonality. So I really don't know whether it is one way of saying that there is a production cut.

Second, on the inventory levels, you are right that because of the limitations to the small and medium-scale businesses, credit tightness and the interest constraints, there will be new inventory levels. But that is good news in the sense that the markets become much more efficient. The market becomes much more efficient and we will not see much difference between apparent demand and real demand. But, however, I believe that this level of low inventory is only temporary, and once people start to getting confidence -- we have seen in auto, they went down in the inventory level as low as 27 days, whereas they need to work at 65 days. Those levels are not sustainable. So we believe the inventory levels have gone much lower than they are able to supply to the customers with the proper customer service. I'm sure inventory levels are going to go up.

And slowly, as the confidence will come back into the system, we see that inventory level will be much higher than what they are at today.

Jeff Largey, JP Morgan.

I was wondering if you could talk about the reversal of the temporary fixed costs in the fourth quarter, maybe as it relates to the fixed cost reversal we saw in 3Q of about $700 million. And also, maybe if you could shed some more light or possibly quantify what impact currency had on those fixed costs? I imagine it was predominantly in euro-denominated and perhaps in Brazil as well, as well as the rand -- South Africa, as you mentioned. So maybe you could shed some light on what role currency is playing and even potentially, if currency plays a role in terms of the guidance for the fourth quarter.

And then just the second question. Earlier, Mr. Mittal, you implied that developed-world demand might be down 25% from '08. And I was just curious if that then means that you're targeting, say, a 75% capacity utilization rate in the US and in Europe going forward and possibly, I would imagine, higher utilization rates in your emerging markets?

So let me try and address your first question. Currency has played a key role in the third quarter. Perhaps I can give you a breakdown; I think that's the easiest way to understand it.

Total fixed cost reduction for the Company in the second quarter was $10.1 billion, and in the third quarter it was $9.5 billion. So that's a decrease of $600 million. The currency effect itself was $700 million. So really, excluding currency, the Company's costs were maintained.

This foreign exchange benefit is really coming from the emerging market currency, so we are not really tracking that much significant issues vis-a-vis the euro. But it's really Brazil, Ukraine, Kazakhstan and such places. This was at the high in the first quarter of $2.6 billion, and now it's down to $1.1 billion. I do not know what will happen in the fourth quarter, but I do not expect a significant change.

The temporary fixed costs declined from 6.6 to 6.2, and the permanent management gains increased from $1.7 billion to $2.2 billion. And the temporary is, we're just bringing back capacity, and the management gains is we had more people leave the Company in the third quarter than we did in the second quarter.

So that is basically how these numbers are moving. If you look forward into the fourth quarter, I would expect that the global number would decline, i.e., it will be lower than $9.5 billion. I can't predict the currency, but I would expect sustainable management gains to increase as we would expect more people to leave the company in the fourth quarter. But we are also bringing back people who are on layoffs, etc., as we restart production. And clearly, those costs will come back. So the temporary portion will continue to decrease. So that's a long answer to your question.

And on your capacity utilization, what we are saying, that we are operating at 70% capacity, which means that we have enough capacity available in case there is a demand. That is what we think for 2010. But just to take you back to the focus given by World Steel Association, their forecast for '09 is 35% below then '08. And there forecast is 15% up than '09 in the developed world, which means we will be still -- based on this forecast, we will still be below 25% over '08. But if you believe that the market will have gotten the full impact of the stimulus packages, consumer confidence, [state of] interest continues to be low, and the real demand grows faster than what we are anticipating or what we are seeing today, then the demand could grow more than what has been forecasted by World Steel Association. But just to remind you that our [cap services] (inaudible) only [70]%, which means there is enough capacity available in case there is a demand up. So that's our position.

That's helpful. If I could just follow up, I think you guys are obviously showing production discipline. I guess I'm curious; some competitors of yours have talked about taking production down heading into the fourth quarter and possibly even into early next year. I guess, are you -- if the market does weaken, are you prepared to do the same thing?

I do not comment on what competition wants to do. Our position is very clear that we, ArcelorMittal, will continue to produce what the customer demands.

Alexandre Weinberg, Petercam.

Just a quick question regarding the Indian greenfield project. So there were comments in the press even pointing out you might consider some pullouts. Could you maybe give us some updates on the progress being made on these projects and the administrative issues?

We continue to be committed for India. We want to grow in India. We have seen that how in this financial crisis countries like India have come out of the crisis much faster. And as I hear from a lot of our friends in India, there is a continuous growth plan demand of a 7% GDP growth this year. A lot of infrastructure projects are being financed and developed.

So India is a great country to grow for us, and we are committed to these projects. What we are saying, that since we have not made enough progress on the sites which we have selected in two of the states, we cannot sit idle and we cannot just wait for these sites to be sorted out by various participants here who are creating problems. So what we have told our team to look for alternate sites. So alternate sites are being looked into those two states where we have already announced two projects.

While we are doing this, we have our Indian team, and we have told them that if there is a delay coming in these sites, why don't we look for other potential sites in the country. So that is all this is about. But the basic point is that we want to grow in India. We do not want to pull out of India; we want to grow, and we are looking for the sites where we can quickly sort out the land acquisitions, approvals, and we can start the construction work.

Rochus Brauneiser, Kepler Capital Markets.

Just a few follow-up questions from my side. The one is on your current crude steel production rates. When I look at the ratio between your crude steel production and shipments, so this has gone up massively in the third quarter. Is this a level which is being maintained in the fourth quarter, or has there been some overshooting in terms of crude production in third quarter as a preparation for shipments in the final quarter?

And in terms of your net debt outlook for the fourth quarter, as inventory has already started to go up in the third quarter, what is your net debt expectation for the year end?

A quick question on your guidance. How much of cautiousness is behind this $2 billion to $2.4 billion number? Can we expect any cautious balance sheet measures towards the year end?

And finally, on the utilization rate, you might see or expect for the first half of 2010, do you have already any sense how much further you could move from the 70% level in the fourth quarter and the first part of 2010?

In terms of our crude steel shipments, I don't think there was an overshooting as such because we are in a ramp-up stage. And actually, in certain markets, we could not supply the level of steel that we wanted to in the third quarter. And we heard earlier about the issues in AACIS in terms of coal supplies. We also had a small strike in Mexico which lasted for a month as well as inability to ramp up to meet demand in the United States.

So some of that is getting corrected in the fourth quarter. Whether we will continue to build inventory, I think, it's a bit premature. We have to see how demand evolves in December. But I would expect the idea is really not to build inventory, so we would expect our shipments to increase correspondingly. And that really -- coming onto your working capital question and your net debt issues, overall I would not expect net debt to increase. I think it depends a little bit on how we do in terms of the guidance. Are we at the low end of the top end of the guidance? Because there may be some AP benefit as we invest in inventory and AR.

There may be some investment in working capital if the demand is not as strong in December. So a lot of it is moving parts. But as you mean that things are going without any hiccup, then I would not expect significant investment in working capital in the fourth quarter. So net debt would be largely similar or slightly higher or slightly lower.

The guidance is what it is. I don't think we decided whether this quarter we wanted cautious guidance or optimistic guidance. It is our best forecast, based on information we have received internally.

In terms of utilization rate --

We are not giving any guidance for 2010, what would be the utilization rate in Q1 or the next year. We are only giving guidance for the Q4, but the only thing which I said earlier, that 70% means that we have capacity to go up in capacity, depending on the demand from the customers.

So maybe, let me rephrase the question. So how much -- when you look at this 70% utilization rate in the fourth quarter, how much of this -- how strong on this utilization rate is coming -- how much impact is coming from any potential restocking elements which might disappear at some stage in the first half of 2010?

I think in Europe, for example, restocking had just initiated. So generally, destocking takes six to nine months, so I hope that restocking also takes that long. The restocking demand is there; it just began. So we believe that part of this is due to restocking, but real demand should also start coming up in first quarter.

Ephrem Ravi, Morgan Stanley.

Just following up on this shipments versus crude steel production disconnect, I think the two places where it really stands out is Flat Carbon Europe, where crude steel production was up 66%, almost, quarter on quarter, while shipments were up only around 13%. So is there any specific issues in that division which caused this disconnect? And similarly in stainless steel as well, around 27% up quarter on quarter while shipments were relatively flat.

Second, on the tax loss carry-forwards that you have, are you still getting an income tax benefit? And you had guided to somewhere around 10% to 15% tax for the next few years. Is there a chance that, given the incremental tax loss carry-forwards that you are having, that that guidance -- that you will get a lower tax rate in the next two to three years?

And finally, just on the covenants restrictions questions, can you quantify the amount or the limit by which you need to stick within for (inaudible) [and new] CapEx, in case you go above your 3.5 times limit on last 12 months EBITDA to net debt?

I'm sure we Michel will expand on Flat Carbon Europe. I just want to be a little more specific, perhaps, on our forecast for the fourth quarter. Our capacity utilization is increasing less than, let's say, 20% compared to the third quarter, but our shipment expectation is higher than that. So clearly, there is some preparation for our fourth-quarter shipments as well in these numbers. But I don't think you would see the disconnect that you see here continue on that dramatically in the fourth quarter.

[Michel], you want to talk about -- ?

Yes; I can say what, so basically I think the situation has been quite abnormal in Q2 because in Q2 steel production was much below shipments, and that was due to the reduction of inventory we have done at that moment.

Now, starting with production in Q3, 6.7 million tonnes of steel, normally, let's say, you have a yield loss of 10% by going from liquid steel to finished products. So as we expense more than half of, let's say, of the difference between shipments and production, the other half is mainly distributed by -- in [2 cents] we have increased flat stock by -- or semi-finished by 200,000 tonnes, simply to have a little bit of buffer in order to make sure that service level is okay and we had work in progress of -- which increased by 300,000 tonnes. And I think mainly this is explained due to the increase in shipments and, in particular, also to the strong demand of automotive steel where inventory has become quite, quite low.

I'll talk about tax and covenants, but just from a different perspective. To have an organization which can increase its crude steel capacity utilization by 67% a quarter, I think, is quite remarkable, and just demonstrates the technical strength of that we have in our Flat Carbon operations.

In terms of our tax loss carry-forward, you are absolutely right; that continues to increase. And therefore, logically, we would assume a lower tax rate going forward. I don't want to go out and give a guidance because it also depends a little bit on where we generate money. Assuming that we continue to generate money in the places where we have the tax loss carry-forwards, then yes, you would have lower tax guidance. But in case most of the income remains in the emerging markets and less in the developed, then the tax loss carry-forward may not be that beneficial. But we haven't done the math. But logically, I think you are absolutely right.

In terms of the limits, I think at this point in time it's a bit premature to speak about these limits because we have not crossed this limit, and I would prefer to have this discussion if we cross this limit.

Also in Stainless, can you clarify that there is a [dissimilar] situation as you built up slab?

Can you repeat that?

So sorry. In Stainless also there was a big disconnect between the production and the shipment rate. So is that also a repeat [that will be stocking]?

While Gonzalo is looking at the data, I will just add, just to come back on the covenants limits, there are three limits. It's an increase in dividends, which clearly has not been contemplated post this release. Second is new growth CapEx, which are not in the pipeline, or new M&A which is not in the pipeline. And there's a limit on that. And they would apply for the period in time for a maximum period of six months. But I'm sure if we were to cross the limit and if there was an attractive opportunity we wanted to do something, we have good relationships with the banks, and they would be open to listen to that.

So I wouldn't get too focused on these restrictions. Personally, I don't think we are, either. Clearly, there is a cost. And clearly, as a management team, we would like that we do not cross this threshold. And clearly, we are trying our level best. But at the end of the day, the market also plays a role.

In terms of stainless, it is true that if you compare the crude steel and the shipments, the crude steel production has been higher than what the shipment is. But remember, we had to organize our calendars from a labor point of view and work-wise, so we did start doing -- we started the melt shops, in that sense, knowing that from a sales point of view August is very bad. But we couldn't bring up because, if not, that would have obliged us to bring other shifts.

So we have [planified], let's say, in Stainless, Q3 and Q4 together. So that's why you have seen sort of a disconnect in Q3 that will be equilibrated in Q4 because we do have the month of August in sales, which is very [full], as I said in my presentation, in Europe. But that will be absorbed in between September and October, which says we are already absorbing all this disconnect we had. Okay?

Sal Tharani, Goldman Sachs.

Aditya, I just want to confirm. You said that you expect utilization rate to be up 20% in the fourth quarter, in that neighborhood, and shipments up more than that?

Crude steel capacity goes from 61% to 70%, which is less than 20%. But shipments will be higher than a 20% increase.

Just wanted to get some color on the US flat roll market. You don't break the numbers out though, but if I look at your Americas shipment -- or, sorry -- North America shipment, it was up about 20%. That's slightly less than or less than the others who have announced results so far in 40%-50% range. Just wanted to see what's going on or is there some catch-up you think will be happening on your side in the fourth quarter?

I think principally, you are right; there will be some catch-up. But it's not as bleak as perhaps you suggest. It has to do with the fact that North America includes our Mexican operations, which was under strike for a month, and therefore we had a fall in shipments there.

Just our US operations is up 41%, so not necessarily as much as the marketplace. And this is some of the catch-up we will do in the fourth quarter. And our Mexican operations was down 40%, due to the strike. So that's why the North American numbers are relatively less than stellar then what the market has.

There are no further questions. I'll now hand you back to your host to wrap up today's conference.

(technical difficulty) talking to you again soon. Thank you. Have a good day.

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