ArcelorMittal SA (MT) 2010 Q2 法說會逐字稿

Dear analysts and investors, welcome to ArcelorMittal's second-quarter results 2010. Please note that we will take maximum two questions per analyst and investor. If there is time left at the end of the call, we will be happy to take your additional questions. I leave the floor now to Mr. Lakshmi Mittal, Chairman and CEO of ArcelorMittal.

Good morning and good afternoon to everyone, and welcome to ArcelorMittal's second-quarter 2010 results. As usual, I am joined by my (inaudible) colleagues, Gonzalo Urquijo, Michel Wurth, Aditya Mittal, Christophe Cornier, Peter Kukielski, (inaudible) and Sudhir Maheshwari.

Before I start today's communication, let me give you a brief overview. The global steel market continued to recover a bit slowly during the second quarter and for the fifth quarter in succession. Our shipments increased and the Group EBITDA improved dramatically.

Nevertheless, the current environment is challenging. (inaudible) emphasis and unemployment are high, corporate investment is low, and the construction market remains depressed. Through monetary tightening by the government, the Chinese economy has begun to slow down and could slow down further in the second half. This, along with the sovereign debt issues in Europe, has created uncertainty in the global economy. While this uncertainty, along with the normal summer slowdown, will result in reduced volume for us in Q3, real demand will continue to grow progressively.

In addition, we are also facing higher costs due to the lag effect for the quarterly coal and iron ore contracts. The recent price weakness in China has made it a challenge to pass this through to our customers, but this increase should be temporary.

On the positive side, we have been working with good success to have our long-term contract pricing mechanism better reflect the new raw material environment.

Today, we are also announcing that we will assess the spin off of our Stainless segment. Such a spin off would enable the Stainless segment to benefit from better visibility in the markets and to pursue its growth strategy as an independent company in emerging markets and (inaudible) products.

Today, as shown in our agenda, after a brief introduction and overview, I will discuss corporate responsibility, our performance and industry plan, followed by an overview of the environment and the steel market. Then Aditya will present our second-quarter 2010 results, concluding with our guidance for third quarter. We will conclude with a Q&A session.

During second quarter, our health and safety [frequency] (inaudible) improved marginally over that of Q1. Our commitment to health and safety remains a top priority of the Group.

Our financial results for the second quarter 2010 include second-quarter EBITDA of $3 billion, up from 59% from first quarter and within our guidance range. Net debt increased by $400 million to $20.3 billion, primarily as a result of foreign exchange.

In terms of our recent performance and industrial plan, we increased our capacity utilization to 78% in the second quarter, up from 72% in first quarter. We achieved $3 billion of annualized sustainable cost reduction by the end of second quarter, reaching our 2010 target ahead of schedule.

As you can see, due to anticipated weaker market conditions, including seasonal slowdown, third-quarter EBITDA is expected to be between $2.1 billion to $2.5 billion, and we expect capacity utilization to increase to approximately 70%.

Finally, we have announced that we are assessing the spin off of our Stainless Steel segment to shareholders.

(technical difficulty) let's look at some of our corporate responsibility. As I said, we have improved our frequency rate modestly to 1.8% from the second quarter from 1.9% -- in the second quarter from 1.9% in the first quarter. We have made significant improvements in the mining operations, Asia, Africa and CIS, and distribution solutions, which was offset by deterioration in the Flat Carbon Euro, Long Carbon Americas, and the Stainless Steel due diligence. We are targeting a further reduction to frequency rate for the year 2010.

While we have seen a gradual improvement in our safety performance, we have experienced accidents and regrettable fatalities in the first half, meaning we must continue our effort as we strive to reach our journey to zero [good].

In addition to health and safety, we have made progress with a number of other corporate responsibility initiatives, including we recently published our third group corporate responsibility report; we announced three major [dust] reduction system technology investments to reduce environmental impact. ArcelorMittal and its partner announced $7.6 million in funding for North American just in our Great Lakes program.

Now, I'll discuss performance and industrial plan. As I said, we have been gradually increasing steel production for the last several quarters as the market has been recovering. During second quarter, we -- our utilization was 78% from 72% but due to a seasonal slowdown in the market (inaudible) we expect our capacity utilization for third quarter to decrease to approximately 70%. We will continue to monitor our production levels and adjust our output as warranted by the order flow from our customer.

Iron ore, due to (inaudible) our internal line of production increased by approximately 21% from 10.6 million tons in Q1 to 12.8 million tons. As for 2010 as a whole, we expect iron ore production from our own mines to increase by more than 10 million tons due to both mine restarts and some expansion.

Production of met coal increased to just under 2 million tons.

In this chart, you clearly see that we have achieved $3 billion in cumulative management gains on an annualized basis. Our first-quarter achievement was $2.9 billion, and our target was to reach the $3 billion goal by end of 2010, so we've met our goal ahead of schedule. Just to remind, our target is to achieve total $5 million in sustainable management gains by 2012, and which is on track.

On the right side, we show the progression of our fixed costs over the last seven quarters as compared to full-year 2008. As we've continued to bring back production in many of our plants during the quarter, fixed cost increases increased as expected.

Last slide on the Stainless Steel, we are currently assessing the separation of our Stainless Steel business from the rest of the group. The rationale for this is to maximize the potential of the Stainless Steel business and optimize its allocation of capital in order to allow this business to finance its own group.

ArcelorMittal is a global player within the stainless market with 2.5 million tons of flat stainless steel capacity in Europe and Brazil.

Beyond the stainless, we have leading positions in high value-added niches, alloys and specialties such as electrical steel. We have a highly integrated distribution, processing and services network and a unique capability to produce stainless and specialties from low-cost biomass.

We continue to have great confidence in the future of the Stainless business and believe that a separation would be the best way for Stainless to achieve its growth objectives and create value for our shareholders. Once it is formally approved by the Board of Directors, three members from ArcelorMittal will be on the board of the new company that is myself, Aditya Mittal and Gonzalo Urquijo, as well as we will have four independent nonexecutives. The existing management team will continue; that is Jean-Yves Gilet will remain as CEO of the new business.

Before we discuss our second-quarter reserves specifically, I would like to provide some background on the steel market in general. The overall steel market has continued to improve, yet more recently, the deceleration in China, the macro uncertainty in Europe, and traditional seasonal factors have created weakness in the market. However, we believe this correction is temporary. Economic recovery continues slowly but surely, and real demand continues to improve progressively around the world.

While we should remain cautious, we still believe that the global steel market should grow by at least 10% in 2010. In the developed world, our primary business demands an increase in excess of 15% year-on-year, but we still remain approximately 20% lower than 2008 levels.

In China, after a very strong beginning of the year, the economy has started to slow down due to the government's monetary tightening. Their steel production, which grew by 18.1% in March, was up only 13.7% in June.

This is the real demand picture. European demand for steel has weakened much more significantly and indeed fell by 1% in June compared to the same period in 2009. Part of the reason for this comparative is the aggressive destocking period of met coal 2009 but negative growth in China, Israel and always (inaudible). Clearly, this collection is not sustainable and reflects a significant destocking along the value chain. Underlying demand continues to grow, reported by (inaudible) and increasing wealth.

Besides China, the emerging markets continue to perform well. During the second quarter, (inaudible) demand in emerging markets increased by 7% compared to the first quarter.

The Chinese slowdown and the sovereign debt crisis in Europe has impacted confidence and created some (inaudible) market weakness in the developed world towards the end of the second quarter. However, real underlying demand continues to recover slowly and progressively. In the US, industrial production increased for the 12th consecutive month and in Europe real demand increased by almost 3% during the second quarter. In Europe, real demand has continued to show signs of improvement overall, but there remains a [two-speed] recovery, stronger in the north boosted by industries that export exposures but still very weak in southern Europe, depressed by construction.

The European auto market has benefited from increased export demand, which has offset swing domestic new (inaudible) impacted by the end of the (inaudible) scheme. Leading auto producers are having to recruit temporary workforce workers to maintain production during the third quarter.

Mechanical engineering sectors have also shown robust growth due to the strength of the export market. This is the economic benefit of the euro depreciation we have seen.

While inventories have increased, they are not out of step with underlying demand levels. As we move through third quarter, activity should rebound seasonally. Additionally, any stabilization in China, or indeed improvement, should provide a boost to market confidence.

With this, I hand it over to Aditya for further explanation.

Thank you. Good morning, good afternoon as well. I am just going to quickly walk through our financial highlights.

Starting with our EBITDA, EBITDA is $2 billion for the quarter, compared to $1.9 billion for Q1. Our part-time EBITDA also increased by about $44 per ton to $132 in the quarter.

As you can see in the chart on the lower left, both increased volumes as well as selling prices have contributed to the improvement in EBITDA. Compared to the first quarter, our shipments have increased by 6% and selling price is up by about 9%.

Turning quickly to the various segments, operating results have improved in all the segments with the sharpest increase in Flat Carbon Americas, which has benefited from improved results both in our North American steel operations as well as an improvement from mining operations in Canada. In addition, our Long Carbon division improved from both the North American side as well as its European operation.

In terms of the ACIS division, we also had a significant improvement following the seasonally affected results in the first quarter.

Moving to a little bit more detail on the profit and loss account, starting with EBITDA, the EBITDA, as you know, includes a $92 million non-cash gain due to the dynamic delta hedge. This compares to $89 million in Q1. The depreciation and impairment charge is similar to Q1. However, unfortunately, within the depreciation and impairment charge, there is a $119 million impairment charge due to the sale of our steam coal mines in Russia. Overall, our EBIT is $1.7 billion.

There are a few factors which take us to net income. I'll walk you through them very quickly. Clearly, income from equity is higher than the first quarter. Our net interest expense is also lower due to exchange rate impacts as well as a one-time interest saving due to retirement of debt in the United States.

Other than that, we have two large non-cash gains and expenses, namely a $555 million gain as the result of mark-to-market adjustment on the conversion options relating to our convertible bonds which we issued in 2009, as well as a foreign exchange and other net financing charge of $479 million. The significant aspect of the $479 million is a nontax -- non-cash charge relating to the reduced value of our deferred tax assets.

Overall, we had positive net -- we didn't have to pay any taxes, so we recorded a positive tax expense for the quarter. Along with our noncontrolling interest charges, net income was flat compared to EBIT at $1.7 billion.

If we turn to the cash flow, as you know, overall cash flow from operations was about $0.4 billion in Q2 compared to a cash outflow of $0.7 billion in Q1. In this slide, we show a bridge taking us from EBITDA to free cash flow. We start with EBITDA of $3 billion, which is reduced by $2.3 billion, which equates to our investment in working capital during the quarter. Next, we show use of cash of other items totaling $213 million. This represents interest and other financing costs, partially offset by certain tax refunds that we had in the United States as well as sale of receivables.

Finally, CapEx expenditures increased to $0.6 billion in the second quarter as compared to $0.5 in Q1. Overall, we still expect capital expenditures to approximate $4 billion in 2010. These factors take us to a negative $258 million of free cash flow for the quarter, primarily due to the continued significant investment ongoing in working capital.

Looking to the charts on the right, especially the bottom right, you can see we also spent $127 million on M&A activity. This mainly relates to the minority buyout of Ostrava of about 3.7%.

In terms of the balance sheet and liquidity, clearly our liquidity position remains strong at $12.8 billion. During the quarter, we also refinanced and extended the maturity of our $4 billion syndicated credit facility and increased it by $600 million for bringing in two additional banks.

Overall, our net debt did decrease to $20.3 billion, but this is primarily due to the foreign exchange impact, i.e. the weakening of the euro and the strengthening and the appreciation of the US dollar. Otherwise, net debt would have been higher by $0.5 billion. Some of this impact will reverse in Q3. Already, we can see the euro is stronger there than when we ended the June 30 quarter with.

Overall, for the year, we expect our ratios, such as net debt to long-term -- last 12-month EBITDAR -- to continue to improve through the year.

Let me now turn to our guidance for the third quarter. Due to the factors you heard before, namely weaker market conditions due to seasonal slowdown and the deceleration of growth in China, our guidance overall is lower.

In terms of volume, as you know, capacity utilization is expected to be 70% in the third quarter. The most pronounced change quarter-on-quarter is occurring at our Flat Carbon European operations, again reflecting the European summer slowdown. Capacity utilization is lower in all segments, except we would expect flat capacity utilization in Flat Carbon Americas in the third quarter.

Prices are stable. There are three affects within why prices are stable. Contract prices are higher moving into the second half of 2010. We also have a positive lag on certain spot orders and other orders that we have. However, this is offset by the June spot price decline that has occurred and clearly is occurring within third quarter as we speak. As a result of these three factors, overall prices are stable.

In terms of costs, our costs continue to increase primarily due to the quarterly mechanism on iron ore. This, coupled with stable prices, is the biggest driver in the decline of EBITDA that we have in third quarter. As a result, EBITDA is expected to be between $2.1 billion to $2.5 billion due to the macroeconomic factors and higher costs.

With that, we would like to open the floor to your questions. Thank you.

(Operator Instructions). Michelle Applebaum, Steel Market Intelligence.

Good morning. Thank you for such a thorough analysis, and congratulations on a great quarter. I had a question. I always seem to be asking the same question, but do you seem to have more real-time information on the Chinese steel market than others? There seems to have been a turnaround in the last three or four weeks building up to some nice pricing improvement in China just in the last week. What do you think that's about? Do you think that's sustainable? Where do you think that is coming from or is that a blip?

We have also watched the development in China. If you recall, in the up to May, we were seeing the high-risk spot prices for iron ore and higher spot prices for hot pan and finished products. Since then, due to the acceleration (inaudible), Chinese government thinking not to allow overheating the economy, we have seen the spot prices dropping and decrease to a much lower level from the peak.

Clearly, the last few weeks a slightly turnaround or improving iron ore price is an indication that spot prices have bottomed out. That is not -- that level [prices] is not sustainable. We are also seeing the similar affect in scrap prices the last few weeks. We are also seeing scrap prices (inaudible) that means that low-level results are not sustainable, which has also seen some strengthening of the hot roll the finished goods pricing. So this is a positive signal which we can see in the market.

We have to also -- but for the quarter three, we have to remember that, in Europe, the seasonal slowdown and the recovery in Europe and the developed market is still progressive and slow. Some of the financial crisis situation in the last eight to ten weeks in Europe has also caused a slowdown, but underlying demand is recovering. You have to only monitor the developments going forward if -- the destocking in China -- what are the points to monitor? The destocking in China is over and that destocking which took place in the last two weeks has now stopped and people start to restock. The (inaudible) in the European market should convert into buying because they see the spot prices up, which means the spot hot [pan] prices ought to be flat, but finished goods prices will also go up. So these are the developments we are watching and we are also seeing the same.

My second question is on the passing through, you said you are working with your customers on passing through your higher and changed methodology in iron ore. How are you doing that? Are any surcharges?

Before you guys cut me off, I just want to comment that I think the spin off idea on the stainless side is brilliant and the right way to go. I've never seen carbon and stainless work together well in my 30 years. So congratulations on that decision as well. But my question is on iron ore.

Since the second quarter of this year, Michelle, a lot of things have happened in the iron ore pricing formula which had changed. At the same time, while this was playing out, we have seen the weakness on the spot price. So I believe that still it is evolving, it is at the (inaudible), and we have to see how the spot prices and the quarterly price converge at one point and the volatility gets reduced. This has to be (inaudible) customers are also watching this, and they and my ArcelorMittal customers do understand that there has been a change in the iron ore price mechanism. We are -- this is a challenge for us that how do we pass it on to the customer?

We see -- the second point is that there is a lag effect on our raw material costs. Second-quarter price impacts our third-quarter, part of third-quarter and the fourth-quarter production and shipment. So there is a challenge before us that how do we pass it on in the third quarter, if not third quarter, in the fourth quarter, this price impact?

We have just done some back-of-the-envelope calculation internally, but if ArcelorMittal has to recap to get back to the second-quarter earnings, we need to increase our spot prices by 10%. This is what we are working with our customers to explain them.

Your spot prices, you're saying? 10%?

Yes.

What about your contract prices under that scenario?

Contract price is an ongoing process. It is not that one month or one quarter, we have concluded all our contracts. Our contracts are renewed on a very different timing during the year. So what ever contracts we have, which are due in Europe, we have been able to pass it on to the customer.

Great. Thanks so much for all the color.

These contracts in Europe are not six months -- are not one-year, but now the new contracts are six-month contracts.

Michael Shillaker, Credit Suisse.

Good afternoon. I've got obviously two questions. The first question is a sub question. I just want to clarify. You're basically saying you will be putting or attempting to put steel prices up in the quarterly contract market in the fourth quarter. I guess that's a yes or no.

The main part of this question though, however, is what risk are you seeing structurally to steel prices? Obviously, the margin spread between steel price and raw materials is nothing like it was between '04 and '07. Is it just simply a fact that there is so much excess capacity in there for potential liquidity in the export market that the price is going to remain perpetually capped until that excess capacity has been worked off, is question number one.

Question number two -- can you just remind me on a Cliffs supply agreement with you in the US, when that actually expires?

Thank you Michael. Let's walk through some of your questions.

I think, in terms of steel prices, the comment is that we would have similar margins second quarter, i.e. the similar EBITDA per ton if we were to drive spot prices up by 10% from where they are today. That just gives you a sense of the cost pressures that we are facing as we move up.

Judging by some of the positive news that we have seen in the last few weeks, there is some expectation that there should be some price increase in the steel industry from September. The challenge remains to make it a 10% price increase. Until there will be some improvement in prices, we are not sure whether it will be the full 10%.

In terms of structural excess capacity, I think it's hard to make that judgment just looking at the second-quarter results in the export markets. From our perspective, clearly consolidation has worked, and consolidation is represented in many of the main markets in which we operate, such as the US, Europe Brazil and others.

I think the squeeze may be because of the change in the quarterly system of prices, but more pronounced I think is the slowdown that occurred in China. Current demand growth from the data we have seen is minus 1% in June in China. As China is such a big part of the global steel industry, I think that does have that impact. So I'm not sure whether the excess capacity is the main driver, or is China the main driver. But clearly we have to see that as time evolves.

In terms of Cliffs, we basically have two contracts with Cliffs. One deals with supplies to Indiana Harbor East and the other deals with supplies to the rest of the old International Steel Group, ISG. The one to Indiana Harbor East expires 2015, and the one to the rest of the operations in the US at 2016. Simply put, about 40% expires 2015 and the remaining 60% expires 2016.

Great, thanks.

Vincent Lepine, BNP Paribas.

Good afternoon gentlemen. I had maybe two questions, the first one, again, on steel spot prices. If we were to assume that iron ore prices don't really recover from let's say the levels where they bottomed out about last week, would you say that the current steel pricing [-- and so] again, just before the rebound we had last week were either in-line or below US (inaudible) for useful marginal production costs in China?

The second question is on utilization rates in North America. That was fairly low in Q2, and certainly it seemed below the industry average. So, I guess was -- why was this the case? You mentioned that you didn't really expect utilization to be cut into three in North America. That's contrary to a number of your competitors, but yet you would still remain below industry average. Are you the only player that, perhaps also with Nucor, doing what it takes to maintain inventories at low levels? Thank you.

Can you just walk us through your first question again? What did you want (multiple speakers) cost in China. I'm not sure if I understood your question.

Okay. The assumption was, if you start from the spot iron ore price where you bottomed out, so again before the rebound we saw over the last week, on that basis and on this sort of cost base, what would you say your steel spot prices today in China? Are they already below sort of a useful marginal cost, or are they still above? That was the question.

Spot prices will not have increased. You can clearly see that this is below the marginal cost. We've also seen some production cut in Chinese companies who are dependent on the spot prices. But this clearly is the case that before the spot price increase in the last two weeks, the costs were higher than the selling price in China.

Thanks.

In terms of utilization in the United States, or generally an STA, the expectation is that our utilization rates would remain stable into third quarter, and clearly would -- and may increase slightly. We have lost market share in the first half of 2010. Some of this has to do with production problems as well, and some of this has to do with the fact that we were unable to start up one of our largest furnaces, which is blast furnace D at Burns Harbor, primarily because we were still locked in with union negotiations. That has been completed and that furnace is starting up on August 1 so we will have more capacity on stream available to the marketplace. That is our lowest cost facility. Therefore, we would expect, during the second half of 2010, to be able to regain our market share that we have lost.

Thanks.

Other than that, if you look at what we are doing in Brazil, in Canada, we are running at very high levels of utilization rate. In Mexico, we continue to run at low utilization rates because we are not able to export slabs and make enough cash return based on imported iron ore. So that facility also impacts the FCA numbers because that's running at much lower utilization rates, but that's basically the overall situation at FCA for the second quarter and going forward.

Thank you.

Michael Gambardella, JPMorgan.

Thank you. Good afternoon. On the Flat Carbon Americas segment, you had a nice improvement in EBITDA; it doubled in the quarter. What was your -- you said most of the improvement in EBITDA I believe you said came from North America. What was your assumption on the iron ore costs for your US operations, since I don't believe you've settled a contract there?

Thank you. It's -- I think, at this point in time, we do not want to get into the specifics of what we have priced; you're absolutely right. We are under our arbitration with Cliffs. On a portion of the iron ore contracts, I believe we've taken the appropriate costing and the appropriate provisions in that in terms of our results.

Our North American results represent basically three operating facilities. It's Dofasco, AM USA, as well as our Mexican operations. All three operations have done much better than first quarter. As a result, we can see that those facilities have almost doubled their EBITDA from Q1 to Q2. (multiple speakers)

Great. Yesterday, AK Steel reported and is also in the same situation where they haven't signed an iron ore contract, but they released, in their press release and also in their conference call, that they provisionally priced their iron ore at 65% increase on the seaborne with their suppliers who are the same suppliers as yours, Cliffs in that case.

We will check back internally to see whether we can disclose exactly what we have done, because I'm not sure what the legal position of 8-K is with Cliffs and what our legal position is. I'm not sure exactly the dispute is the same. If we can do that, we will inform everyone appropriately.

Well, how about in your mining operation then, the old QCM operations? Are you able to tell us what price of pellets you're getting?

Sure. We can do that. Peter or --?

The (inaudible) put it on the marketplace (multiple speakers).

So what is the pricing level of QCM in the (multiple speakers)?

I don't have that handy right now, (inaudible) we can provide that later.

We -- in terms of what we have done, we have our own benchmark for QCM, as you may be aware, which we announced last week. That roughly is $165 going forward on pellets from June, July '10 onwards. The way our contracts at QCM are structured is that it's based on the Eastern Canadian pellet price. We have seen the annual Eastern Canadian pellet price and based on that, our contracts are structured. All QCM transactions within group companies and external third-party customers are done on that pricing mechanism.

So it's $165 FOB to plan?

Roughly.

Thank you very much.

If there is a press release which gives you the dollar per ton, and if you calculate it back in total [FE] and to the pellet premium, you get about $165.

Thank you, Aditya.

Nik Oliver, Merrill Lynch.

Thanks for the questions, just two as well. One, just thinking into the fourth quarter. I'll assume that volumes will be up at least just seasonally in North America and Europe, and then hopefully some snap back in apparent demand post the summer as well. But with costs also up, if we were to assume pricing only flat, so we didn't manage that 10% increase, where directionally would EBITDA be Q4 versus Q3? Would it be broadly flat or could we be looking at a down quarter-on-quarter?

Secondly, just looking into the Long Carbon business, the European parts of that business had a nice snap back in EBITDA in Q2 versus Q1. Could you just run through the moving parts of that driver? Was that more on the cost side, some relief on scrap, or was it better price management, or perhaps a bit of both? Thank you.

Can you quickly walk through your assumptions on fourth quarter? What did you say? You said volume increase 10% compared to --

No, sorry, I was saying assuming -- I didn't actually give a number. I said assuming a volume increase, so at least in North America and Europe, so volumes up. But costs also up as higher raw material costs work their way through the income statement and I said assuming that your targeted 10% price increase didn't happen, what we should assume in terms of an EBITDA progression. So essentially pricing flat, volumes up, and costs also up -- under that broad situation, and where we should think about EBITDA up or down in Q4 versus Q3? If that makes sense.

So I think the drivers you've outlined are more or less directionally correct. I would expect volumes to rise in Q4 compared to the third quarter, perhaps just a bit shy of Q2 levels or similar to where we are in the second quarter.

In terms of costs, costs would continue to rise. Fourth-quarter costs would remain higher than third-quarter costs, as we had the full effect of the increase in the quarterly raw material prices that we have.

In terms of where EBITDA will end up, what we have indicated is that broadly, if there is a 10% increase of prices in our spot business, that will have an effect to take up our EBITDA back to the level that we have had in the second quarter. To the extent that the price increase is less than that, clearly that would have an impact, it could. I think I would prefer to stop my comments there. Otherwise, we get into very specific guidance of fourth quarter.

Fair enough.

(technical difficulty) your second question, the Long Carbon Europe, it is true there has been an important jump in Long Carbon Europe, Q1 versus Q2. First, if you recall, Q1 was a difficult quarter for Long Carbon Europe. It is -- if you allow me -- it was a long and cold winter.

So what has happened in Q2 versus Q1? Volumes have been up in round figures in production 5%, in shipments another 5%, and there has been an important change in prices, which means in combination of increasing prices and also better mix. It practically is around 14%, just a bit below 14%.

Clearly, we have had an increase in scrap, but that did allow us to increase prices, and this time we've had positive a cost squeeze margin. So, it's a combination of volumes on one hand and of price increases that has more than compensated the increases in scrap we had. So that [insists] we also have increases in scrap. So those are the two main factors.

That's very clear. Thank you.

Luc Pez, Oddo.

A couple of questions, if I may? One, basically to reconcile your take on China, if I understand right, you would expect Chinese steel output to drop and therefore producers to get more disciplined. If so, how do you interpret actually [the reason we are] down in iron ore spot prices, and do you expect it to be sustainable? That would be my first question.

Second question is related to the kind of degree of discipline that you're seeing in industry. You were pointing to the benefits of consolidation. Now, when I hear your message with regards to the US, you talk about regaining some market share there. I do find it hard to see basically how it fits well with a better discipline industry. Thank you.

No. As I said before, that this low price which we saw in a couple of weeks back, timing -- did not find it sustainable and the spot prices are not sustainable, and we see that -- I do not have any view what will be the spot price in the future. But I think that at some point, there has to be convergence between quarterly prices and the spot price, and this volatility should reduce. So this is what we are seeing that they are moving towards the spot -- now the spot prices are moving closer to (inaudible) quarterly price. That is a good site and which should reduce the volatility.

On the consolidation -- on the market share, we have lost market share in 2009 in Europe and USA because we, ArcelorMittal, cut their production ahead of competition, because we saw the order flow was going down. In the meantime, we have lost the market share. Beginning of this year, we have started to recover what we have lost in 2009. This will be our process and this will be our endeavor to capture what we had lost in 2009.

Thank you.

Charles Bradford, Affiliated Research Group.

Good afternoon. Can you talk a bit about your electrical steel business? I know it's going probably with the spin off, but how much grain oriented do you make? What has been happening to volume and prices over the last quarter or two? What do you think will happen in the next couple of quarters?

In terms of values, when you see our -- in volumes -- when you see our total volumes of stainless steel, I want to tell you first 66% -- 65% of this is in Europe and 35% in Brazil. We are producing here and what is part of the spin off of electrical steel is in Brazil. So out of what we produce, I'll give you the whole picture. 83% is of the stainless steel, two-thirds is austenitic; one-third is ferritics. Of that, another 10% of this is electrical steel. Then we have a small part of carbon steel in Brazil.

Now, we have seen improvement, [so] the volume. We are producing in Brazil at full capacity at present now, so we are talking around 50,000 tons this quarter.

In terms of GO and NGO, we've seen a recuperation in prices and margins, and we do see it going forward for the third quarter.

Thank you.

Andrew Snowdowne, UBS.

Thank you very much. I just have a very quick question. You are maintaining your guidance of $4 billion CapEx. Can I just confirm? Does that include the acquisition spending? And maybe if you can just comment in terms of the progression so far, because my math suggests significant more to be spent in the second half of this year. Are you still in line with what you had previously planned, or are you backend loading the CapEx? Was that always the intention? Maybe (inaudible) start off with that question.

Andrew, can you -- what does the CapEx include? I did not get that (multiple speakers)

Sorry, I was just trying (multiple speakers) (technical difficulty) whether it included the acquisition spending, your $4 billion targets? Because you had $626 million acquisition spending in the first half versus $1.19 billion CapEx on that slide that you showed.

Yes, so the CapEx number -- the CapEx target of $4 billion does not include any acquisition spend. You're right that the CapEx seems to be back-end loaded to the second half. I think primarily this has to do with the fact that we began our investment program in the beginning of the year as we came out of the economic crisis, and there's just a time delay in implementing and executing some of these projects.

Our forecast for the third quarter in terms of CapEx is approximately $1.1 billion to $1.2 billion, so you can see a significant ramp up occurring. We would still expect to have roughly $1.5 billion to $1.6 billion of CapEx in the fourth quarter. So, there is a very heavy ramp up in the second half of the year, but that is what we have planned.

Maybe just to follow up in terms of networking capital movements going forward, I know some of it is being impacted by FX. You suggested that your net came down a bit by a (inaudible) will reverse somewhat. Maybe you could talk us through how that network -- you expect the networking capital to progress over the next two quarters. Also, and kind of the one almost linked to the other, you are suggesting production utilization falling to 70%. I wonder if you could maybe get some direction on shipments relative to production, Q3 and then into Q4. Thank you very much.

Okay. So in terms of the overall working capital movement, we would expect to continue to invest in working capital into the third quarter, not as much as what we have seen in the second quarter, clearly, so perhaps at half that value. In the fourth quarter, we would expect a muted investment in working capital, perhaps even flat. As a result, the working capital and CapEx will probably be offset by the EBITDA, and the primary effects on net debt would be exchange-related. So that gives you a sense that net debt will go up, should not be significantly more than the exchange rate impact, maybe a couple hundred million more in Q3, and there should be some positive free cash flow in Q4. So that is the overall picture, so not a dramatic change on the net debt. I would say marginally higher by the end of the year compared to where we are today. Does that answer your questions on networking capital and net debt?

Yes it does. Thank you very much. I just (technical difficulty) quick comments on shipments relative to production.

In terms of shipments, I would expect shipments to be about 5% lower in the third quarter compared to the second quarter. I would expect it to rise by roughly the same percentage into the fourth quarter.

Very helpful, thank you.

Rochus Brauneiser, Keppler Capital Markets.

Yes, good afternoon. Maybe as a remaining question on the first quarter, I think previously it has been said that utilization rate in the fourth quarter will be around 85%, borrowed back on the -- based on the previous comments now. I guess this number looks a bit higher. That is the first question.

The second is maybe could you give us an update on your strategy for India? We've heard about recently [LJE] entering into the Indian market. So far the strategy is based on (inaudible) sort of plans. Is there any option in joining local partners for building up a strong auto business?

Let me answer the first question, capacity utilization. On capacity utilization, you're right. The expectation a few months ago was of a more robust (technical difficulty) cycle as we saw 2010. What we are seeing today is economic uncertainty in Europe, which is causing a lot of our service center-based customers to adopt a wait-and-see approach. Because of this wait-and-see approach, our expectations of shipment levels and capacity utilization levels in the second half are not so high, coupled with the deceleration of growth in China.

I would expect, in the fourth quarter, we would see capacity utilization between the levels of second and third quarter. So I wouldn't -- it may inch up closer to where we are on the second quarter but I would expect it to be still lower. Seasonally also the fourth quarter is a lower quarter than 2Q, and plus because of December and other factors.

As regards to the question on India, you're correct. Our strategy in India is largely predicated on building a greenfield presence, and we are busy doing that. We are making progress on it. Recently, we have targeted line acquisition and cannot (inaudible) as well, so slow and steady progress in India.

As far as your second part of the Indian question is concerned, yes. We did acquire a stake in (inaudible) recently. Along with them, we are busy also developing a service center strategy into the automotive sector.

But this is -- this strategy is not, so far not based on a partnership with an established local partner in the country but more on a smaller bits and pieces acquisition. Is this a strategy which is excluded, or could you also imagine having a broader partnership with a local Indian producer?

No, I think we have -- I am not sure if I'm answering your question correctly. If I am not, please do repeat your question again. But if I understood your question right, our focus has been to develop the downstream strategy with the acquisition that we made in (inaudible) where we are not looking for any other partnership.

Okay, that's clear.

(technical difficulty) from Citigroup.

Good afternoon. My question is on the project you have in Liberia at the iron ore mine for 3 million tons. Can you give us some sense of CapEx and ramp up? I think you're talking about 1 million tons in the first year.

Secondly, in terms of impairment, can you give us some guidance on if we should expect any more goodwill impairment in the second half? Thank you.

The project in Liberia is progressing well on schedule and on budget. The overall CapEx for the first phase will be of the order of $700 million. The overall project will be -- is estimated to be approximately $1.7 billion, but that is a further phase. The initial production, as you say, will be 1 million tons estimated in 2011, increasing to 4 million tons in 2012.

On the impairment please?

In terms of impairment, from what we can see today, we do not expect any other charges in the second half of the year.

Dave Martin, Deutsche Bank.

Thank you. I wanted to also ask about Liberia. I guess the only remaining question there is you had previously talked about doing some sort of joint ventures with some other companies, including BHP. Are those opportunities off the table today?

Then secondly, I just was hoping to get a little bit more clarity on your book of business, potentially if you could give us some comments on what your spot and contract mix and in your contract business, how much is fixed-price, what's quarterly business, what has some cost variable associated with it? That would be hopeful.

On Liberia, we continue to explore opportunities with BHP Billiton. We have a memorandum of understanding with them. It's nonbinding, but we do continue to explore opportunities.

(technical difficulty) contract mix and fixed-price, so I think we need to distinguish a bit between the US and in Europe. In Europe, we have traditionally 40% contract business, with roughly 50% has been running (inaudible) safety starting in Q3, which means that in fact, in Q2, there had been really a price cost squeeze, which was quite important and which explains to some extent the evolution of the results of FTE.

In terms of new contract prices, Mr. Mittal was saying that we have been successful in explaining the new iron ore pricing situation in contracts, which means that either we have only six months contracts, which is the time where we have visibility on forward-looking costs on one hand side, or we have indexation clauses in longer-term contracts where we have volume plus the base price, which is (inaudible) uncertain parameters.

The good news is that these new contracts have been built in let's say a very constructive way. The bad news is that almost 50% of existing contracts are still on low prices and will continue to influence profitability in H2.

For the US, the major in the US, the contracts negotiations have gone down with some more one-year fixed-price, so that was -- also explain why the fact that most of the US producers have, let's say, fixed cost items or price and from that point of view better visibility on their forward-looking costs.

In the US, what's your percentage of contract business then? It is something around 20%?

In the US, it's very similar to Europe where we have about 40% to 45% contract business. Roughly it's 4.2 million metric tons split between our US and Canadian operations.

I was going to ask on the spot business, both in Europe and the US then, is that all day-to-day month-to-month business, or are there some contracts that may price on a quarter lag for example?

It depends much more from a regional basis. In Germany and Northern Europe, you had traditionally a strong wish to have quarterly prices whereas in Southern Europe, Eastern Europe, you would have much more monthly. What we see as a global tendency in the market is that prices -- price-fixing becomes shorter and shorter, also because forward-looking costs are due to spot iron ore prices which is now well-known is also moving quite fast.

What's a consequence of that is there is still a discrepancy in pricing between Northern Europe where prices are generally higher than in the South and in the East where markets have been recently the weakest.

Thanks for the detail.

Ephrem Ravi, Morgan Stanley.

Three questions -- first, on the Stainless business, can you confirm that the spin off includes everything that is in kind of the same Stainless Steel division, including kind of the electrical steel business and also the distribution center that comes along with it?

Secondly, on the question of iron ore backward integration, other than the Kumba and the Cliffs contracts, can you tell me what are the other contracts are involved in the 30 million tons of iron ore which you count towards self-sufficiency in your iron ore business?

Thirdly, on your earlier comment that you had lost market share and started gaining it back in 2010, especially in Europe, (inaudible) your competitors still running at capacity utilizations much higher than yours on a global basis. Is it fair to say that you haven't gained back all the market share that you lost? What is the plan going forward, especially if you are kind of taking production shut downs during summer?

Thank you. I'll start with the first question that is Stainless. Yes, I confirm that all orders [considered] today in the Stainless parameter is at the end of (inaudible) decides to spin off what is included, and this assessment we are doing. That is for Europe. It is all the factories, the rolling (inaudible) and all the steel service centers. Internationally, it's also the steel service centers. For Brazil it is also in Latin America also the factories, the steel service centers of course.

One more thing -- 35% of the awards, that is [BO Energia] where we do all the [char coat] and we have dinner awards there, there is we have it with Long Carbon Americas. That will also be part of the spin off. (inaudible) is the outcome of those awards for that charcoal process for our blast furnaces is also spun off, and also of course the electrical steel, as you were saying before. Thank you.

Then on the European market trends, I think you're right. It is true that, during the crisis 2009, end of 2008, we were cutting back production more than some of our competitors. The consequence was there was some market share loss. We have today (inaudible) declared policy in a way to progressively regain our traditional market share. This might not necessarily translate immediately in the same level of activity, because what you have not to forget is that, in the meantime, there have been some structural changes in market dynamics, and in particular market dynamic in Northern Europe is much better than in Southern Europe where consumption -- say, real consumption is really much more down than in northern markets. This might explain part also of the operations, for example in Northern Europe. In our (inaudible) North market, our capacity was higher than we had in the South, and it is also foreseen to have the same evolution in the future.

Last but not least, in order to make the real calculation in terms of market share versus production, you need also to take into account imports of slabs (inaudible). I think it's fair to say that Europe has reduced its imports in slabs also during the crisis. ArcelorMittal traditionally did not -- was not a significant importer of slabs.

Iron ore, the long-term contracts that we have are -- is basically roughly 18 million tons. In South Africa, these contracts are defined, as you know decision contract 6.25. There is a defined tonnage coming from the [Chukondeni] mine, which -- (inaudible) mine which is a separate contract. In the US, these contracts have requirements, so they are much more flexible; they're based on the requirement of ore that we need. There is a portion which is market-based and a portion which is a formula price base, which is a third hot band, a third global pellet and a third PPI. That basically provides you with an overall framework of our long-term contracts.

Can I just confirm that there is (inaudible) and there is, in terms of the 18 million tons, North America and -- Sorry, Cliffs and Sishen basically comprise 100% of it.

Cliffs and Sishen comprise 100% of the iron ore. We used to have (inaudible) and (inaudible) mine, which we have now acquired. Within coal we have two small contracts which are very tiny tonnages. They are about 400,000 tons from two suppliers.

Thank you.

Charlie Dove-Edwin, MF Global.

Yes, I had one question really. I was just interested in the development of your input costs Q3, where you get the margin squeeze, and whether and how much that goes into Q4 as well. Could you expand on what is likely to happen in Q4?

The honest answer is we are not sure. We see that our costs are rising into the fourth quarter. We are seeing some improvements in the marketplace. From the analysis that we can do, we know that a 10% increase in prices would get us to the level of profitability that we have enjoyed in the second quarter. How much prices will actually a rise in the fourth quarter clearly remains our number-one challenge.

Okay, great. Thanks.

Elena Antonova, Knight Capital Group.

Thank you for the presentation. I have a question regarding the M&A activities. Could you please comment on your plans regarding participation and auction for assets of bankrupt Bulgarian steel plant Kremikovtzi? Thank you.

We normally do not comment on such activities, but suffice it to say our interests would be limited.

Thank you.

The conference call is now over. For any further questions, please contact the Investor Relations department on the number indicated on this conference call invitation. Thank you for your participation.

Thank you for participating in second-quarter conference call and look forward to talking to you very soon. Thank you very much.