ArcelorMittal SA (MT) 2012 Q3 法說會逐字稿

Good afternoon, everybody, and thank you for joining ArcelorMittal's Q3 Results Conference Call.

I'd like to, first, inform you that this conference call is being recorded today. We will have a brief presentation followed by a Q&A session, which, in total, should last about an hour. If you would like to ask a question, please, do press star, one on your telephone keypad at any point. Can I, please, remind you that we will take a maximum of two questions per analyst. But, of course, if we do have time at the end, we will be able to return to you so that you can ask more questions.

So, with that, I will hand over to Mr. Mittal.

Thank you. Good day to everyone, and welcome to ArcelorMittal's third quarter 2012 results call. I'm joined on this call today by all the members of the Group management board.

Before I begin the presentation, I would like to make a few introductory remarks.

Market conditions remain challenging. The ongoing European sovereign debt situation, the threat of a fiscal cliff in the US, and a slower growth in China have all impacted demand. This was further impacted by the deterioration in the iron ore price in August, which came as a surprise to everyone.

Nevertheless, global economic leading indicators appear to be bottoming, so I am optimistic that the worst is behind us.

The focus of the Company remains on improving efficiency, cutting costs, and reducing debt whilst not sacrificing the higher-tonne growth projects we have in our portfolio.

My confidence in the strength of our business and our people is of great comfort as we navigate these challenging market conditions.

Moving to the agenda on slide 2, as usual, I will begin today's presentation with a brief overview of our results for the third quarter 2012. I will then spend some time on the outlook for our markets before I hand over to Aditya to go through the results and our guidance in more detail.

Turning to slide 3, I will start with safety. ArcelorMittal's health and safety performance in the third quarter of 2012 declined with a lost time injury frequency rate of 1 time, as compared to 0.8 time in the second quarter of 2012. Nine months into the year, and our overall health and safety performance is in line with our target and show good improvement when compared to the rate of 1.4 times for 2011.

We will continue our efforts to keep our Group LTIF rate below 1 time, working on continuous improvement and the ultimate objective of zero harm.

Despite the encouraging recent performance in lost time and injury frequency rate, there is still more work to be done; in particular, improving the safety performance of the contractors who work at our sites.

Let me reiterate that I expect ArcelorMittal to make continuous progress in our safety performance as we strive to be the safest metals and mining company in the world.

Turning to our third quarter (inaudible) performance shown on slide number 4, the Group reported EBITDA of $1.3 billion in the third quarter. This included a one-off, negative impact relating to the new agreement with our US employees. Ignoring one-time impacts, EBITDA in third quarter 2012 was 33% below the second quarter. This decline in profitability was due to two factors. Firstly, steel shipments were 8.3% lower due to seasonal factors and weaker market demand. Secondly, the iron ore price was around $25 a tonne lower, which had a clear impact on the profitability of our mining segment.

During the quarter, net debt increased by $1.2 billion, driven by negative operating cash flow, a seasonal increase in working capital, and negative foreign exchange impacts. I expect this to reverse in the fourth quarter.

From a liquidity perspective, we remain in a good position. We have $13.4 billion of liquidity. Our credit lines are undrawn, and our debt has an average maturity of over six years.

We have today announced a cut to the dividend for next year. The board recommends making a single payment of $0.20 per share in 2013. Assuming this proposal is approved at the next annual general meeting in May, then this dividend will be paid in July 2013.

Once the de-leveraging plan is complete and market conditions improve, the board intends to progressively increase the dividend.

Moving to the next slide, these are the ongoing initiatives towards the two priorities that we as a management team are focused on, de-leveraging and cost competitiveness.

In terms of cost reductions, the Group has a strong track record of delivering efficiency gains. I'm pleased to report that we have achieved our $4.8 billion management gains plan slightly ahead of schedule. I will talk to this in more detail on the next slide.

They also made good progress on our asset optimization process. This process is advancing as planned and will generate $1 billion of savings on an annualized basis. During the most recent quarter, we have closed the liquid phase of Liege and announced our intention to launch a project to permanently close the liquid phase at Florange.

Moving to the de-leveraging priority, we continue to target an investment-grade credit rating. We have a plan which is sufficient to get our net debt to where it needs to be on a sustainable basis. Although we have not announced any further sales over the past three months, I can assure you that the plan remains on track, and we expect to make progress in the coming months.

Preserving cash is a focus for the Company. As a result of the challenging economic conditions and our priority to de-leverage, the board has determined a dividend cut is necessary, and this will save $850 million of cash in 2013.

Aside from the dividend, we are also focused on optimizing our CapEx budgets. CapEx should be materially lower in 2013 compared to $4.5 billion plan spent for 2012. They are focused on achieving savings without impacting our growth targets. We will be in a position to give more detailed guidance on CapEx in the full year results in February.

Now moving to slide 6 and the subject of management gains, which is what we call our cost-saving program. As I mentioned, we have now achieved $4.8 billion management gains target that we set back in 2008, so I think this is a good time to review what's been done and how it impacts the Group.

Since 2008, the Group has removed $3.4 billion of fixed costs from the system and improved variable costs by $1.4 billion. It is important to reiterate that this is permanent reduction. The main sources of gains under this program have included, firstly, the continued improvement in operating practices. Second, we have reduced headcount through volunteer retirement plans, natural attrition, and targeted virtualization. Third, we have reduced energy consumption through internal benchmarking and key investments. And, finally, we have achieved a significant yield improvement through the specific investment and application of internal best practices. This is all about sustained cost competitiveness.

And, if you look at our fixed cost portion today, they are below where they were in 2008, despite significantly lower volumes and inflation. So, as volumes come back, we will have significant operating leverage.

I will now talk about the market outlook. Apparent demand on a global basis has barely increased over the first nine months of the year. The reality is that the global demand in third quarter was 3% below second quarter level and just 0.4% above year-ago levels. During third quarter, demand declined in all of the key markets. In China, destocking led to a 1.3% decline in demand, despite industrial production still growing at a healthy rate. In Europe, the rate of decline of 11.9% due to seasonal demand patterns and weakening economics. In the US, after some restocking in second quarter, demand fell by almost 5% in third quarter. As I stated at the start of this call, operating conditions in third quarter were very challenging.

Moving to slide 9, while we have not seen any improvement in operating conditions [most of summer], I can say that they have not deteriorated further. Whilst I am optimistic that the worst is behind us, the outlook is nonetheless risky and uncertain. And the chart of this slide shows leading indicators have turned up in the last few months. If this momentum is maintained, then I think we can look more optimistically to the near-term future. But there are potential risks in Europe, US, and China.

In the US, the key driver has been automotive, and that remains strong. PMI readings are over 50, and consumer confidence is high. The risk in the US remains the potential fiscal cliff at yearend, so the next few months will likely shape outlook for 2013.

In Europe, we have seen a mild uptick in sentiment, and destocking has ended. Manufacturing has stabilized at a low level. My expectation is that activity will remain subdued, but I am also wary of downside risk should a country be forced to exit the eurozone.

In China, we are at an important juncture. After quite abrupt slowdown over the past six quarters, leading indicators have started to improve again, and both investment and manufacturing are strong. The leadership transition should lead to a pickup in demand from infrastructure and other investment. However, with employment and inflation at acceptable levels, it is unlikely that significant, additional stimulus measures will be forthcoming in the short term.

Moving to construction and markets, the good news is that there has been uptick in residential construction in the US. Home sales have improved, and permits are increasing. While this is good news for the economy and consumer confidence, it is not a big driver of steel demand. Non-residential construction has been weakening, but the recovery in the ABI since June 2011, now above 50, suggests an improvement in demand around the corner. We still expect construction activity to be a key steel demand driver in the US during 2013 and 2014, but it will be a slow recovery.

In Europe, the overall situation shows no improvement. Although German construction continues to grow, markets in the south continue to decline, with Spain, Greece, and Portugal expected down 10% in 2012 versus 2011.

Moving to slide 11 on China, recent data in China has shown some early signs of a pickup. Industrial output and investment growth increased in September. Sentiment has improved, as the government is enacting stimulus measures aimed at stabilizing output and supporting investment, particularly infrastructure. Overall investment growth has already started to slowly increase, helped by rising loan growth and a renewed focus on infrastructure spending. Railway investment continues to rise strongly, reflecting the recent capital injection by the government. Controls on private real estate remain in place, and newly started construction is down compared to year-ago levels. We expect these controls to remain in place. But residential transactions have picked up from the low levels at the start of this year. This has reduced developers' inventories, which means new property starts should improve next year.

We expect GDP growth this year of about 7.6% with the steel demand growth forecast at only between 2% and 2.5%. This projected low steel growth rate is due to slower real demand growth but also a significant (inaudible) to steel production in 2011 in China.

Now moving to the global inventory situation, which is shown on slide 12. We can see from the chart that, on an absolute basis, inventories have been declining during second quarter and third quarter in all major markets. In Europe, inventories are low, and there may be some restocking potential. In the US, the inventory situation is more full. In Brazil, we can see from the chart that the inventory situation has improved significantly compared to where it was a couple years ago. Finally, in China, inventories of the traders have declined significantly since February. The normal, seasonal pattern would now suggest room for a restocking. Still, inventories at the producing mills remain at high levels but have also started to decline over the past couple of months following adjustments to output since July.

So, overall, I would characterize the current global inventory picture as supportive.

To summarize is an update on our apparent steel consumption forecast for 2012. We have cut our forecasts for Europe and China. The ongoing recession in Europe means that demand is likely to decline by 8% this year. This would mean that apparent steel consumption in Europe 2012 would be over 25% below pre-crisis levels. In China, we have brought our forecast down to growth of between 2% and 2.5%. Our forecasts elsewhere are largely unchanged. Our global forecast is now for growth of 2% in 2012. 2013 may be similar or may be slightly better than this, but we will update you on this forecast at the full year results.

Finally, to touch on raw materials and steel prices, it is fair to say that a decline in iron ore prices to less than $90 per tonne in August came as a surprise. It was a surprise to everyone. And the belief was that there was a structural support level based on the cost curve of domestic production in China. But I think that cost support is now evident. Production of iron ore in China has declined perhaps by as much as a third. A pickup in buying activity has brought the iron ore price back to $120, which I believe to be a justifiable level. With coking coal stabilizing and scrap no longer falling, steel buyers have a signal that costs are more likely to rise than fall.

In terms of steel prices, the third quarter was quite volatile. The price was increasing in July only to reverse later as scrap declined in the United States. In China, slowing demand and, in particular, destocking led to a significant price fall in July. But, since late September, the adjusted price in China has increased by $100 per tonne. This is an increase of more than 15% and has gone a long way to closing the differential with US pricing.

So, on that note, I will now hand the call over to Aditya, who will discuss the financial results and guidance in more detail.

Good morning, and good afternoon, everyone.

I'm on slide 16, where we can see the EBITDA bridge to explain the decrease in Group EBITDA from $2.4 billion in 2Q to $1.3 billion in third quarter. The second quarter EBITDA of $2.4 billion included a positive gain of $339 million on the divestment of Skyline, and the Q3 EBITDA of $1.336 billion includes a negative $72 million, one-time impact from the new US labor agreement. If we strip out these effects, EBITDA decreased by 33% in the third quarter versus the second quarter.

As you heard earlier, the key drivers behind this decline in EBITDA are lower steel volumes and iron ore prices. Seasonal factors in Europe, combined with destocking in major markets, as well as duration in end markets led to an 8% decline in steel shipments from the second quarter to the third quarter. This represents a negative $465 million EBITDA impact for the quarter, clearly the most significant negative impact in the third quarter compared to the second quarter. Although steel prices also declined in Q3, this effect was largely offset by lower raw material costs. So the price/cost effect was not significant in steel.

Where prices did have an effect was in the results of our mining segment. Q3 iron ore averaged less than $115 compared to $140 in Q2. This had a negative $105 million impact on EBITDA.

If we turn to slide 17, we will focus on the chart in the upper half of the slide, which shows 3Q 2012 results, but comparative figures are there for the previous quarter in the lower half. I will point out the key differences below the EBITDA line.

During the third quarter, we booked impairment charges of $130 million, primarily related to the intention to launch a project to permanently close the liquid phase at Florange. And we also booked restructuring charges of another $98 million related to costs associated with the closure of Liege. As a result, the operating loss for the third quarter was negative $49 million. If we strip out the impact of the restructuring and impairment charges, the Company would have booked an operating income of [$0.2 billion]. And, if we add back the one-time impact of the US labor contract, clearly, operating income would be almost [$0.28 billion].

Loss from equity method investments and other income in the third quarter was $55 million as compared to income of $121 million in the second quarter. The main driver of this reversal is declining results from our Chinese investees, Hunan Valin and China Oriental, as well as lower dividend income from our JV partners.

Foreign exchange and other finance costs were negative $103 million for the third quarter as compared to costs of $32 million for 2Q.

Also, in the second quarter, we had a tax income of $219 million, and, in the third quarter, we had expenses of $43 million.

As a result of all these factors, we reported a net loss of $0.7 billion, compared to $1 billion of net income in the second quarter of 2012.

Next, we turn to slide 18 and the waterfall taking us from EBITDA to free cash flow. Cash flow used by operating activities for the third quarter included a $0.3 billion investment in operating working capital, primarily resulting from a seasonal buildup of inventory. Rotation days increased to 72 days during the third quarter from 61 days in 2Q, primarily driven by this inventory buildup. Net financial costs, tax expenses, and others of $1.4 billion includes additional payments for employee benefits, mainly in the US, and reversal of DDH income. Cash flow from operations as a result was negative at $0.3 billion. And, with CapEx at $1.2 billion, we had negative free cash flow for the quarter of $1.6 billion.

Finally, on slide 19, we show a bridge for the change in our net debt. The principal consumer of cash during the quarter was the negative free cash flow of $1.6 billion, as just discussed. The depreciation of the dollar increased the value of our euro-denominated debt by $0.1 billion, and we had a further $0.3 billion of dividend payments. These effects were partly offset by M&A proceeds and issuance of $650 million of subordinated, perpetual securities, $642 million on the slide, net of expenses. As a result, our net debt temporarily increased by $1.2 billion to $23.2 billion.

Turning to the outlook and guidance slide on page 21, back in July when we set the guidance framework, it was based on stable operating conditions, including an expectation that iron ore would remain in the $125 to $135 per tonne range. The drop in iron ore below $90 in August was surprising and compounded the impact of a weaker macro backdrop on profitability. We now expect fiscal year 2012 EBITDA to be approximately $7 billion.

The Group is focused on conserving cash, and we're looking at CapEx budgets closely, as you heard earlier. As a result, CapEx will be approximately $4.5 billion for this year and meaningfully lower in 2013. But this will not impact the expansion at our (inaudible) facilities, which remains on track to ramp up to 24 million tonnes of ore during the first half of 2013.

As you heard earlier, as well, net debt reduction remains a priority for the Group. The increase during Q3 is temporary, and I expect net debt to return to the $22 billion level by yearend. This excludes any potential impact from asset divestments.

So, to conclude, it is clear that the level of profitability in Q3 and, indeed, Q4 is disappointing. It reflects a set of very challenging operating conditions, which we believe will mark the low point in the cycle.

But we cannot bank on a recovery, so the Company remains focused on removing unproductive assets to reduce costs and improve inefficiencies. Despite the temporary increase in net debt this quarter, our deleveraging plan remains on track, and we expect to be in a position to give you more details at the Q4 results in February.

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

Could I ask anybody who wants to ask a question to press star, one on the keypad? And we do have a queue already, so we will take the first question from Alex Haissl at Morgan Stanley.

My first question is on asset divestments. I understand that it's very difficult to comment on the individual assets. I just want to get a sense with regards to your conviction, basically, that you can de-lever via divestments. Basically, you need some $5 billion to stay investment-grade rating. So I'm just curious to get what's your conviction here and how the dividend cut at this point played a role with regards to Moody's.

We remain confident. We believe we have a very clear and credible plan to execute in terms of divestments. We are in discussions with various parties on certain assets. We have a high level of confidence that we should succeed. As you know, in the last year, we have divested $2.7 billion in assets, and we continue to embark on that path.

(Technical difficulties) this $2.7 billion. It's more a question of timeline. Right? I mean, basically, you would need to go for core assets or sell a stake in core assets because $5 billion is quite a big amount. So you're also still confident to get to this $5 billion target, basically, in terms of cash?

Alex, as you know, we have not set out a target of net debt reduction. We intend to do that during February and March of next year in detailing further as to where we are.

What the takeaways of this call should be is that, number one, we believe that the bottom has been reached in terms of steel pricing, as we can see prices go up in China, as well as in the US. Global leading indicators of still below 50 are now trending upwards. So we believe that risks remain in the system, but, overall, the economic situation, assuming the risks don't materialize, should improve in 2013, which should help our business.

Number two, we continue to make progress on asset optimization programs. We have not received the full benefit of that. That should occur in 2013 as these assets close.

We continue to make progress in expanding our iron ore business. And, in the first half of 2013, we should have more tonnage from our operations in Canada.

In terms of de-leveraging, that remains a priority. And, considering the global economic situation, as well as our priority to de-lever, the board has taken a decision to reduce our dividend, which should save approximately $1 billion in cash next year.

Furthermore, we continue to work on our divestment plans, which we believe are well advanced and should result in materially reducing our net debt.

Thanks. The second question I have is on the global steel market. I mean, I agree that the second half this year is not reflecting normal trading conditions because of destocking in Europe, US, and China. However, to me, it seems it's not just a cyclical slowdown. It's really more of a structural mean reversion. And we discussed in the past some kind of normalized profitability per tonne. How do you see the situation? Are we agreed that we are really just going back to pre-boom years and the good years that all went we should just look at the, let me say, normalized EBITDA between $80 and $100 per tonne, which brings Group $7 billion or $8 billion? Or you still believe just it's a cyclical slowdown, and markets will recover at some point? I just want to get your thoughts here.

I think, as Aditya said, that we are at the bottom of the situation, and the last quarters have been really challenging in terms of uncertainties in Europe, weakening of China's economy, and leadership questions in United States and their fiscal policy going forward.

I think, as we move forward in 2013-- or as we enter into 2013, I expect that things should improve. At least, we will see some very marginal improvement in the demand in Europe, the marginal improvement of demand in America and also in China. So I believe that 2013 will have a better economic environment with some of the uncertainty going away from the environment.

As a company, we have taken -- we have started a lot of initiatives the last years. And now some of the programs that we launched are coming to fruition, like our mining projects in Canada, our mining project in Liberia. Also, we have launched on part of an initiative on cost reduction, which you have seen that we have achieved through our management gains. So we have taken actions to improve our cost position, improve our captive -- improve our iron ore business. So all this should improve our profitability. And the question is really about the economic environment. And, also, the question is that how the economic environment improves -- if the economic environment improves based on our new footprint, based on our [royalty] cost estimates of any normal economic environment, I still believe that we should have a normal EBITDA of $150 per tonne. But, when the economic environment conditions are not normal, there is a pressure on the profit margins.

Great. Many thanks. That's very helpful.

Luc Pez, Exane.

A quick question, if I may, on the CapEx. I know you're not willing to commit to any CapEx guidance for 2013. But I'm just wanting you to elaborate a bit more as to where you would see maintenance CapEx going forward and, with regards to gross options, whether you would intend to push down the road the Liberia expansion. Thank you.

In terms of your questions, Luc, for maintenance CapEx, we expect it to be between $2.8 billion to $3 billion for the year. Going forward, we are examining what we can do in terms of our CapEx budget for next year. As we are embarking on an active optimization program, to some degree, we have less assets to maintain, and that needs to be more fully factored into our maintenance CapEx budgets for next year. And, therefore, I expect our maintenance CapEx to be lower next year as well. I don't have an exact number at this point in time. You have to wait 'til our yearend results for that.

And, in terms of Liberia expansion, clearly, we will elaborate on that, as well, and where we are in terms of growth CapEx. But, at this point in time, we remain committed to achieving our 84 million tonnes of ore production target by yearend 2015. Therefore, I would expect that the Liberian project would continue.

Thank you. And a quick follow-up question, if I may, on the US inventories. I know you described them as normal. But, looking at the charts you were pointing to on the -- I don't remember which slide -- this seems to be pretty high, actually, by historical standards, meaning since 2010. So, if you could elaborate a bit on this and, actually, also on where you see inventories at steel mills by your position at distributors. Thank you.

I think we do see a bit of softening in demand in the US, part of that being seasonal. But I think there's also a lot of political uncertainty related, immediately, to the election and, then, following quickly on that, to the potential risk associated with, let's say, extreme circumstances of the so-called fiscal cliff. So I think we have seen people holding off from some purchases, and I think that's enabled the service center inventories to (technical difficulties) somewhat. But I don't think we view this as cause for alarm and, certainly, nothing more severe than what we've seen in situations in the past. So I think this is a, to some extent, normal seasonal pattern.

t also is affected by the kind of highly volatile price movements we've seen in the US the last few weeks and then, finally, this uncertainty. Obviously, if the worst happens on the political front, then that will have consequences for us. But I think we're waiting and seeing on it.

Bastian Synagowitz, Deutsche Bank.

I've got two questions, and my first one is on the cash flow. Aditya, in the cash flow bridge which you have been showing from EBITDA to free cash flow -- I think it was on slide number 18 -- we have this very large position of $1.4 billion for financing costs, taxes, and others. And if I go in and add up financing costs, taxes, DDH, and, also, the employee settlements, I think that is explaining, roughly, half of that amount. Could you, please, give us a bit more detail on what's in there?

And maybe, then, I'll follow up with my second question afterwards. Thank you.

Sure. In terms of this chart, this captures everything; so, interest expense, taxes, as well as other cash items. In the third quarter, other cash items significant -- the reversal of DDH income. But the largest component was a catch-up on paid liability items. So we had various accruals. And, in the third quarter, as we closed the contract in the US (technical difficulties) various employee benefit plans.

And that should not occur in Q4. And, as a result, in Q4, I would expect that this amount would be much less compared to what you're seeing in Q3. And, as a result, we will be reducing our net debt. So this is, literally, accruals versus cash more than anything.

Does that answer your question?

If possible, could you give us the number for the amount which will go out in the fourth quarter, please?

At this point in time, I don't have a specific forecast. The number will be lower directionally -- significantly lower directionally because we've not had these one-time items. But in the yearend and what we're comfortable in articulating is that our net debt should come down to $22 billion because, internally, we have reviewed working capital forecasts, and we're seeing that there's a significant working capital release that is occurring. And, as a result of those factors and where we see this going directionally, we feel comfortable at $22 billion.

Also, recognize that, in Q4, we will have the subsidiary finance that we had done in Q2 of $300 million also reverse. So that's another positive in Q4 from a net debt perspective and cash flow perspective.

Okay. Perfect. And then my second question would be again on your guidance on net debt. Obviously, you had targeted to, I think, flat to lower net debt after the second quarter, depending on further divestments. And the new target of $22 billion is now after raising the $650 million for the hybrid bond which you issued. Is the higher debt guidance which is implied by this -- ? Is it just a function of the lower earnings outlook? Or is there anything else which has been factored into that?

I think, primarily, it's lower earnings. I mean, as you can see, we had just three months ago guided towards a higher level of profitability in the second half. Due to the factors previously, we have now announced a guidance of $7 billion for 2012 and still maintained our net debt target for at the end of the year.

And is there any number you can already give us on what would be the sustainable debt level you would really feel comfortable with which you mentioned earlier?

What will be comfortable is saying that we need to reduce it. What we have not said is how much and by when. And I think, since we have articulated before we are in a process of divesting certain assets, we think it is not necessarily the interest of our stakeholders to articulate that target. And, once we are completing those divestments, it is more beneficial for us to articulate the target. So, at this point in time, I do not have a specific number that I can share with you. But, by our investor day, we should be in that position.

Okay. Fair enough. Thank you.

Mike Shillaker, Credit Suisse.

I think the question, unfortunately, is going to be balance sheet focused again. The conditions, I guess, have weakened since Moody's published the $5 billion debt reduction target. I think they were using a $7.8 billion EBITDA. So, on their metrics, that $5 billion should be more like $7 billion. Are you in a situation where, at the moment, you're on pause in terms of debt reduction, yet the sort of target to meet their investment-grade criteria is getting away from you, so you just turned around and say, look, we're just simply not going to do this? And, actually, important or not, we're just not going to make it, and, therefore, forget it. And I think one of the comments you put on Reuter's this morning about investment-grade being preferential but not imperative may sort of allude to that.

On the same question, can we also infer that the fact that you've highlighted today in advance that you're cutting or proposing a cut of the dividend and CapEx for next year basically suggests that, actually, the major debt reduction focus will actually really come into 2013 and not 2012?

And my second question would be on asset sales. Can you give us a little bit more color in terms of the extent to which you are prepared to sell minority stakes in various assets, including, potentially, steel and the mining assets? Thank you.

I think you asked four questions, not two. I'll try and go through some of your questions and, hopefully, will give you enough of a response on all of them.

So, in terms of Moody's $7.8 billion, I don't want to get specific on exactly their ratings methodology and their calculations. What I would say is that, when Moody's calculates a retained cash flow, they include dividends. And, to the extent that we have now reduced dividends by almost $1 billion, that should help because that implies that cash flow is that much higher. And so, to the extent that you have lower EBITDA but you reduce your dividends, the cash flow is maintained.

Secondly, I think, from a rating agency perspective, it's important to have a very clear and credible plan. We're working on that. We expect to make progress on our asset sales.

Thirdly, in terms of our statements this morning on investment-grade rating, I think we remain on track to target an investment-grade credit rating. There is no change on that. All we said is that it is important but also that we will not maintain it at all costs. We have to balance the interest of all of our stakeholders, and we will do so. The benefits of an investment-grade rating, I think, are obvious to everyone. It allows us to access different pools of capital. The cost increase of losing it is also obvious to everyone. And we've said in the past that it remains an important attribute and asset for this organization.

I would not really link the CapEx and dividends to the asset sales. I forget exactly what your remark was. I mean, we're reducing CapEx because the global economic environment is more challenging, and we need to continue to de-lever. We're reducing dividends both from a global macroeconomic perspective, as well as the de-leveraging, and, clearly, the reduction in dividend helps the ratios vis-a-vis Moody's.

In terms of asset sales, I think the focus remains to strengthen our core business. And we will continue to do that while we target a strong and credible divestment process.

Okay. Thank you.

Jeff Largey, Macquarie.

My first question is on the dynamic delta hedge. My understanding is that this rolls off at the end of the first quarter. And it is annualizing at something like $500 million a year. I'm just curious if the -- as this rolls off at the end of the first quarter if the asset optimization plan and those cost savings associated are adequate to, basically, cover that change in the earnings profile.

Jeff, you're absolutely right. It rolls off by Q1. We expect that the impact of both the management gains as well as the asset optimization program should more than offset that. As you know and as we have said previously, we have now completed the management gains. And, in terms of the asset optimization, which perhaps may be more tangible next year, we are targeting $1 billion run rate of savings. The closure of Liege has been announced, has been agreed. But we don't have the full savings yet in our EBITDA, nor of Florange because, there, the project has been launched-- we still need to wait for the French government to see if there is any buyer out there for the Florange assets. To the extent that none is found, we will embark on that process, and those savings will then accrue to our bottom line. And, therefore, those savings are still to come and should offset the DDH.

Okay. Great. My second question is on the mining division. Obviously, we saw a bit of a drop in sequential shipments. As I look towards the fourth quarter here and your guidance on meeting the 10% year-on-year increase in shipments -- I mean, should we assume that this -- even though that's a pretty material step up in shipments for the fourth quarter -- that this is all achievable? I'm assuming that you kind of built stocks at Port-Cartier and that this isn't a reach to try and meet this 10% year-on-year shipment target.

Jeff, it's quite achievable and for two reasons. One, we don't have the stock necessarily at Port-Cartier but the stocks at the mine. One of -- the two primary reasons for lower shipments in the third quarter were higher than expected rainfall in Liberia, which is now slowing down, so we'll ramp up shipments in the fourth quarter there. And, also, we have expansion work on the rail network during the summer, which meant that we didn't rail as much concentrate down to Port-Cartier as we would have liked to. But this just means that those shipments will be pushed out into the fourth quarter. So we're quite confident that we'll meet the 10% year-on-year increase.

Okay. So what that means is, in the fourth quarter, in Liberia, you're running at kind of your 4 million tonnes of annualized shipments. What would the number be, necessarily, for QCM?

It would be -- just give me a second.

I think, roughly, it's about 16 million for external shipments in Q4.

Okay. Great. Thanks for that.

Cedar Ekblom, Bank of America.

Just a quick question on the asset optimization plan. Where are we in terms of the $1 billion annual saving target and with the closure of Liege and Florange?

And, just following up, can you just remind us what the process is going to be on the hot end with the government looking to potentially sell that to someone? Are you still required to run it and bear the costs in the interim? What are the timeframes, just to remind us? Thank you.

Okay, Cedar, the saving is $1 billion. And we expect -- we had announced almost -- yes, exactly 12 months ago, I guess, or 14 months ago that we should achieve that by the yearend 2012. At this point in time, we have not provided you an estimate as to where we are. We will do so at the yearend results. We are making good progress on that. Maybe there's a quarter delay in achieving the full amount of savings, but we should be close to achieving a significant majority of those savings by yearend.

So, in terms of process, I will talk to you, perhaps, about the two major ones, the first one being Liege, and then I'll address your questions on Florange.

In terms of Liege, we have an agreement to close the hot end, so the hot end is closed. We are now in discussions with the unions to finalize the exit of all of the employees associated with that primary end. That should get done in the first week or second week of November. And, when that is done, we should record the savings.

In terms of Florange, the process is that we provided the government with 60 days to find a buyer. They have 'til the end of November to come back to us with a buyer. From that date, we're not supposed to be bearing any costs associated with that primary facility. And the new buyer is supposed to be bearing those costs. We have no obligation to purchase any steel or coke or any such product from a new buyer if a new buyer does arrive at the scene. Assuming that there is no buyer, then the process would begin in Florange. And, once that process is complete, the cost of that primary would come out of the system.

Okay. And how long does it usually take when you're into sort of a closure process in terms of agreeing with unions, restructuring, laying everyone off?

In Florange, the process has started a month ago, roughly. And, normally, these processes can take from the start date, a month ago, six to eight months, assuming that it runs smoothly.

Okay. Perfect. Thank you very much.

Carsten Riek, UBS.

Two questions from my side. The first one. There was quite a bit of inventory buildup, in my view, in FCE, AAC, and the mining business. There is a little bit of deja vu from last year, even though the conditions were similar. Why have we seen, especially in FCE, such a big buildup in inventories? In my opinion, it must be in the range of $300 million to $400 million. Did you expect some kind of huge pickup in demand? Is that the reason why you actually built it? That's the first one.

The second one is on the iron ore prices because the big drop in mining was predominantly because of prices, even though we have seen the iron ore prices actually down only from -- massively down from mid to end of June until August. So it should have been in your balance sheet a little later -- in the P&L a little later than we actually have seen this. What caused, actually, the quick realization of lower iron ore prices? Thank you.

In terms of inventory, first, I think Peter went through the buildup in terms of the mining division. I don't know if you heard him. But we had issues with the rail -- we were doing a rail expansion, and so we had more stock at Port-Cartier. In Liberia, we were impacted by the monsoons, (technical difficulties) there.

In terms of FCE, clearly, the increase in inventory has to do with the fact that the slowdown in third quarter was larger than what we had anticipated. And so we have seen a drop at FCE in terms of shipments of about 13% to 14%, which is very significant if you consider that second quarter was already weak. We were seeing a European apparent steel consumption, which, on a nine-month basis, was down 9%. So these numbers are more significant than what we would have forecasted.

The good thing is that a lot of this is on the finished goods side. It's not on the raw material side. On the raw material side, we've been relatively prudent in (inaudible) inventory stocks. So there's not a cost burden going forward at FCE, which is significant, of higher-cost raw material.

Gonzalo can expand on the ACIS buildup of inventory.

We had gone down in Q2 in some markets very much. So we did do a rebuild of stock in Kazakhstan, amongst others. And then, also, due to the market, we didn't want to force the markets. But it was basically Kazakhstan, and that's why we rebuilt some of the inventory.

And, very quickly, at FCA, as the first (inaudible) number one at Tubarao had a delayed ramp-up, as we lost shipments, we had greater levels of raw materials sitting in Brazil. And that's one of the reasons why inventory went down.

And I think, overall, your question on inventory is very valid, and that is why we think that we will have a reversal of inventory in Q4 as the production level FCA slightly lowers. So we will bring down the level of inventory there. Peter walked through what's happening in the mining side and [ACIS].

In terms of your second question on pricing, Peter can elaborate on the mining side.

Yes. As Aditya already mentioned, the negative impact of pricing in the third quarter was $115 million. The balance of -- the variance between Q2 and Q3 was about $150 million. The balance was volume related for the reasons that I described with respect to shipping.

Yes. But the pricing, at least, in my opinion, kicked in quite early, the lower pricing. I thought it would be a bigger lag effect. A similar kind of thing we see with Vale or Rio in the iron ore. But it looks like that some of the contracts were -- at least, it looks like renegotiated early.

Obviously, the contracts are dynamic. By and large, we have -- we're not following a lag methodology any longer, although we have some lags. So, if you look at -- if you take $115 million spread over our marketable production for the quarter, you'll see that we actually did quite well relative to the market.

Okay. Thank you.

Alessandro Abate, JPMorgan.

Just one question related, always, on the reduction of the level on net debt. Considering that you are moving towards the right direction in terms of steps, even though not within 2012 but for 2013 with, potentially, lower CapEx and a reduction of the level on net debt, when you are talking about the status of your plan of asset disposal, is this plan shared real time with Moody's? Considering that a little bit of extra time could actually lead towards a higher preservation or value of your assets, could that imply a potential extension of the debt line that you have for the reduction in net debt? Thank you.

As you know, we are in dialogue with the rating agencies. I think the discussions that we have with them are confidential on both sides. And I think, earlier, perhaps you were on the call or not -- I'm not sure -- but we had gone through our thought process on what we're trying to do in terms of de-leveraging, as well as the importance of an investment-grade credit rating, as well as our thoughts on the asset divestment or disposal program.

Thank you.

Carly Mattson, Goldman Sachs.

In a scenario where Arcelor were to fall to high yield, would the focus on reducing net debt turn more to reducing through organic cash flow rather than asset sales or other measures? And, in this case, would this mean that the Company could look to refinance the 2013 maturities in public debt markets?

I'm not sure what your question is. Is your question whether we can finance our 2013 maturities through -- ?

Like, what my question is is -- would Arcelor -- ? Would the focus on debt reductions slow if investment-grade ratings was no longer a question if the Company had already fallen to high yield? And, in this kind of scenario, with credit relatively cheap right now, would it make sense to term out the 2013 maturities?

So, as you know, we lost an investment-grade credit rating from S&P in July. But our focus on maintaining an investment-grade credit rating has not changed. And so we would remain focused on de-leveraging the balance sheet appropriately, which is the focus today. And we would take actions as we can as a management which is in the interest of all stakeholders to achieve that priority.

In terms of next year's maturities and where we are, as you may have seen, we have good liquidity. Cash is in excess of $3 billion. And, therefore, we should be able to meet those maturities easily. Whether we act through the capital markets or not next year, I think, at this point in time, may not be appropriate for me to comment on.

Okay. And then, as a follow-up question, have you had conversations with Moody's and Fitch regarding their willingness to potentially extend the timeframe over which the Company could retrieve the gross debt reduction targets that they've thrown out?

Again, as we had said earlier, the discussions we're having with the rating agencies remain confidential. And they do issue their thoughts on a periodic basis. And you're free to review that when they issue.

Okay. Thank you.

Neil Sampat, Nomura.

I've just got three questions. Firstly, could we -- ? On Baffinland, are we still expecting a feasibility study by the yearend? I think that was the original timeline you gave. I'm not sure if that remains the case.

Secondly, Mittal is still -- you guys are still being mentioned in the press as being involved in a tiff Steel Americas' process. Clearly, the priority for the Group is on de-leveraging. But could you clarify your role in the process?

And, thirdly, could you give some sense of how negotiations are proceeding for asset sales in light of the weakened earnings outlook that's emerged in recent months and the implicit increase in balance sheet pressure for the Group? Have do you, for example, found bidders potentially more aggressive in terms of their negotiations? The reason I ask is because, clearly, asset sales are now your preferred method for de-leveraging, which is fine, but I guess the price you get for the assets are also important. So could you give us some sense? I know it's very difficult because you give sense. But how far are we away from levels where other options to reduce net debt are potentially better than asset sales from a long-term shareholder value perspective?

Maybe I start with TK Americas. I think we have made comments on that already. I don't think there is much more to add.

Regarding Baffinland, maybe Lou has something to say on TK Americas.

I think we're clearly players in the US market, leading players. And I think, as anybody that's active in that market is, we have a responsibility to look at and assess that set of assets. I think, beyond that, it's probably inappropriate for us to comment.

With respect to Baffinland, yes, we remain on track for what we committed to, and completion of a feasibility review by the end of the year. But, at the same time, a ruling by the responsible minister on the recommendations of the impact (inaudible) is forthcoming very, very shortly. So, as soon as we receive that ruling, then we, obviously, need to take a look at the requirements underpinning that ruling and what they mean to the project. And then you would make a decision on how to go forward. But we remain very committed to the project.

In terms of asset sales, I think we have demonstrated that, as we have sold these various assets, we have -- it creates a lot of value for ArcelorMittal. Most of the asset sales we have reported book value gains. So we continue to be confident in our plan on continuing our divestment process and achieving the right balance for our stakeholders in terms of finding the right value for this asset.

Thank you.

Alex Hauenstein, MainFirst Bank.

I have a couple of questions. First of all, what do you see in terms of order intake in October for flat steel Europe and flat steel Americas?

A second question also related to the steel part. What's your view on European pricing here? When do you expect some restocking again, at least to some extent, if any?

And the next question, on the mining side. Do you think the Q4 mining contribution will be significantly higher quarter on quarter due to reviving oil prices and rising volumes? Or will there still be material negative spillover effects from lower Q3 prices? Thanks.

Alex, let me just touch on the mining side. I think that Q4 -- certainly, the volumes will be higher. So, if the volumes are higher, our shipment volumes are higher, then we'd obviously have higher earnings. But, right now, we imagine that the earnings will, certainly, be marginally higher.

But the negative price effect will still have some effect, or is that more or less directly -- ? Or has that directly gone through the P&L in Q3 only?

We expect the price to remain flat.

Okay.

On the order intake issue in the Americas, I think, if you're asking primarily about North America, which is probably the more relevant case, I think, as you know, there were some recent announced price increases. I think they were quite widespread, triggered by increases in the prices in China. I think, as Mr. Mittal described, we are, thereby, kind of closing the premium gap, if you will, between North American prices and Chinese prices. I think those are still playing out. We'd certainly expect those to, eventually, lead to an increase in order as people try to get ahead of potentially increasing prices.

But we're still in a period where there are short lead times available for some of the participants in the marketplace. And I think people are still waiting to see just how those price increases play out. So we're not seeing a big change in the order intake currently, but I think that that would be the normal pattern as we see those price increases take effect.

In terms of the European flat perspective, there's no noticeable change in the order intake either. I think customers remain in a wait-and-see mode. We've seen their inventories come down in Europe, and, therefore, if there is a change in sentiment, there could be a rebound and restocking that could occur.

In terms of the price environment, as the US price increase was announced, in Europe, no price increase has been announced.

Okay. Thank you.

Tim Cahill, Davy.

My first question is in relation to the guidance. I just wanted to confirm with the $7 billion number. That is -- essentially, it relates to reported EBITDA. So it's implying the Q4 guidance would be around $1.2 billion or $1.3 billion of EBITDA or something like that.

And then my second question is in relation to actual steel prices. Obviously, looking at, specifically, the spot price but, also, your steel price in Europe and the US over the last couple of quarters, things have obviously been quite weak. So I was just wondering, given the inventory comments that you've made what you think the chance of a price increase being announced and implemented in the US or Europe before yearend was. Thank you.

I think some of it we covered in the earlier question. But I'll get Lou to comment again on FCA.

In terms of your first question of EBITDA, it's on a reported basis of $7 billion.

I think we just commented on the US environment. I think the message was that the recent announcements, which we do expect to take hold, are still quite fresh. And I think it's difficult to determine, you know, would there be any reason for another round of price increases still in this quarter. I think the US is a net importing region, so we're ultimately affected by international price levels. So a lot depends on what that gap is between the domestic price levels and the US and what it costs to bring the imports in. So, again, it's difficult to project at this point.

Thank you very much, guys.

Rochus Brauneiser, Kepler.

Just a few follow-up things. One is maybe back on the asset optimization plan. I guess you guided previously that you are planning to book some $2 billion of charges in the context of this plan. If I've done my math properly, then, I guess, you have so far booked about $1.1 billion or so. So, taking into consideration there is probably some delay in terms of the savings you capture, what can we expect still in terms of these charges? Are they to be booked by the end of the year? Or is this being deferred considerably into the first half of next year?

The second question is regarding your working capital management. What can we expect in terms of your crude steel output? I think there has been a little bit of over production due to the market environment. Does it mean, assuming that volumes will be rather flat in Q4 that the crude output is down? And can you elaborate in this context what is the potential you see from a working capital standpoint on your payables/receivables which have trended quite nicely in the third quarter?

You're right. Charges to date are about (technical difficulties). Most of the other charges -- i.e., Florange, should be in Q4. And I don't expect another $1 billion. Maybe the charges that we have outlined are slightly lower than previously guided toward. But that's where we are on a global basis on that issue.

In terms of working capital, you're right. Crude steel production would be down in Q4 versus Q3. And we should do marginally better or a similar level in terms of days or AP and AR. It's not going to be a significant change. The main difference will be a reduction in inventory for all the reasons discussed earlier; i.e., mining, ACIS, FCA, as well as FCE.

Okay. Then maybe a follow-up on the iron ore effect. When I look at the bridge for your EBITDA, it looks to me on the pricing effect on the mining -- iron ore side that this has just described half of the average price decline. Is this a fair assumption that you have a similar decline in profitability in the fourth quarter on that side?

I think that the iron side that we gave earlier was that you can expect a marginal increase in profitability in the fourth quarter because of increased volume.

We're not seeing -- and just to supplement what Peter just said, we're not seeing further erosion in prices in Q4 in the mining side. And, therefore, the brunt of the price fall is captured in Q3. And, Q4, the average pricing is flat versus Q3. There's also some cost saving that has occurred in Q3. And, as Peter alluded to earlier, we may have done slightly better in terms of our mix, contracts and spot sales, to mitigate some of that. So we're not seeing any negative impact of that issue in Q4.

Okay. Fair enough.

Charles (technical difficulties).

My question refers to the $72 million that you charged off for the US labor contract. US Steel yesterday gave $35 million for their cost of the labor contract, at least the up-front payment, yet they have more employees than you have. What's the difference?

We have a very similar contract to US Steel, so there is no competitive difference between the contract that we have and the contract that US Steel has, from our understanding of the situation. I would also add that, Chuck, as you know, US Steel operates under US GAAP, and operate under IFRS. And there's a difference in accounting treatment. Some of the costs in US GAAP can be amortized over the life of the contract, and we have to recognize these costs up front.

In terms of our cost of a signing bonus in Q3, out of the $72 million, the signing bonus is $30 million. And I think you said US Steel is $35 million. So I hope that equates exactly to the lower number of employees that we have.

Okay. The second question involves QCM. The trade press has been talking about you offering either a partial or even more of the property as a sale. How does that tie in with the expiration over the next couple years of your contracts with Cliffs?

I didn't understand the question. Tied with Cliffs. Could you repeat that, Chuck?

The trade press has you selling either a part or all of QCM. But your contract with Cliffs expires over the next couple of years. Would you not need the additional iron ore to offset the loss of the Cliffs' ore?

I mean, we're not commenting on this market speculation.

I just want to highlight how we operate in North America for a clearer picture of what's going on in terms of macro or strategy. QCM today is 15 million tonnes. We intend to grow it to 24 million tonnes. A small portion of that is going into Dofasco. The rest of that is actually being exported either to Europe or into the Chinese market and some into Japan, as well, maybe a small portion into the Middle East as well.

Within North America, we do source ore from Cliffs, and that contract does expire. And, when that contract expires, we will find an appropriate solution for that. I would not necessarily link the two issues.

Thank you.

Tom O'Hara, Citigroup.

Back when we visited QCM in June, I believe the guidance was that 90% of the CapEx for the expansion would be committed or spent by the end of the year. Is that still the case? It's just to try and get an idea of the CapEx flexibility that you have in 2013.

I think the word committed is probably the most accurate word to use. And we expect the progress certainly won't be at 90% yet, but we are on track to complete in the first quarter or so of 2013.

And, Peter, it's also right to say, as you just highlighted, that cash out will be less than 10% in terms of the project after yearend.

Approximately that.

Approximately that committed and cash. But, in terms of work, clearly, the work will continue on, and we expect to complete and ramp up in the first half of 2013.

Okay. That's great. Thanks very much.

(Inaudible).

I just have two questions. Can you give us a sense of what would have increased in funding costs if you were go to your banks and renegotiate your covenants; so, ask them to relax the covenants? There has been precedence (inaudible) when they've done it, and they've talked about sort of $150 million or $200 million annualized. Could you give us some sort of range? Is it that big a number? Is it a smaller number?

And, secondly, you talked about demand as being close to the bottom of the cycle and things improving from a top line perspective in the sense leading indicators are picking up. Just looking at two of your bigger markets, Europe and the US, from a bottom-up perspective, what are the things you expect to improve over the next three to six months? Like, if you look at auto and construction, where do you see pockets of strength in the next three to six months? Thank you.

In terms of the covenant, I think we are at 3.1 right now. I expect to be at the same ratio at yearend. Next year, we intend to de-lever the balance sheet. That's a priority for this Group and management team. And, as a result, I do not expect that to be an issue.

In terms of end demand markets, I think, in terms of Europe, the sentiment overall is quite weak. Risks remain in the system in terms of eurozone exit. I think the risk of that -- of a country exiting the eurozone -- I think risks of that have reduced, but the risks remain. At this point in time, we are not forecasting any particular segment a dramatic recovery from a bottom-up perspective in the short term.

In terms of North America --

I think, in North America, clearly, auto has been the sustained, positive story in that market. And I think we see that continuing. We see it now. We expect that to continue into next year, reflecting some more positive consumer sentiment.

I think the energy market, which is an important one for us, particularly for more the line-type business in our Company's case than the drilling activity, but both are in play -- that can be hot and cold, let's say, and move up and down quickly in a short timeframe. But I think, certainly, the fundamentals are positive for that, and we see that, I think, opening up further for us in 2013.

And then I think, finally, the construction market, which, of course, was one of the causes of the crisis to some degree and has been, really, quite soft for the last four years in North America, at least in the States -- Canada is a somewhat different story -- I think we do see on the residential side a really kind of the first robust indications, prices coming up, permits going up, et cetera. I think the architectural index is also over 50 now. I think that's for the larger steel market in general. And, if we do see -- no one sees that sort of bouncing back robustly next year. But, to see that start to climb out of the hole it's been in, I think, is quite a positive for that market.

Okay. Thank you.

This concludes our third quarter conference call. Thank you for participating. Looking forward to talk to you next year. Thank you.