ArcelorMittal SA (MT) 2013 Q1 法說會逐字稿

Good morning and good afternoon, everybody. This is Daniel Fairclough from the ArcelorMittal Investor Relations team. Thank you for joining us today on our conference call for the first-quarter 2013 results.

First, can I remind you that this call is being recorded. We are going to have a brief presentation from Mr. Mittal and Aditya, followed by a Q&A session. The whole call should last about one hour. And if you do want to register a question, please do press star one, and we will take the questions in the order that they are received.

And with that, I will hand over the call to Mr. Mittal.

Thank you, Daniel. Good day to everyone, and welcome to ArcelorMittal's first-quarter 2013 results call. I am joined on this call today by all the members of the Group Management Board.

Before I begin the presentation, I would like to make three key points. My opening point would be that markets remain very challenging. This, in turn, has not been positive, but as we move through this year, I expect the year-on-year data to improve.

The second point I would like to make is that these results shows a clear improvement in our underline performance as compared to second half of 2012. I continue to believe the second-half 2012 will mark the trough in ArcelorMittal's profitability. A key positive in this first-quarter result is the improved sequential and year-on-year performance in our Flat Europe business. I believe this demonstrates the positive result of our optimization efforts.

My final point would be on our balance sheet. Our balance sheet is now very well positioned. We are well within our covenants. We are on track to hit our net debt targets, and our significant liquidity places us in a strong position to deal with upcoming maturities.

Moving to the agenda on slide number two, as usual, I will begin today's presentation with a brief overview of our results and an update on our strategic priorities. I will then spend some time on the outlook for our markets before I turn the call over to Aditya who will go through the results for the first quarter in greater detail, as well as an update on our guidance for 2013.

Turning to slide three, I will start with safety. We saw a further improvement in the rate of loss time injuries in first quarter, continuing the clear progress we have made in recent years. As a Company, we remain committed to the journey toward zero harm. We recently held our Seventh Annual Health and Safety Day to reinforce this message and ensure that all levels of the organization are focused on this primary objective.

Turning to the highlights of the first-quarter results shown on the slide number four, EBITDA for the first three months of 2013 was $1.6 billion. On a comparable basis, there was a clear improvement in our operating results. This was driven by higher steel and mining volumes across the business and the benefits of a positive price/cost impact in both steel and mining businesses.

The capital raised and the sale of a stake in AMMC boosted our liquidity position and materially reduced our net debt, putting us in a good position to meet our mid-year objective of approximately $17 billion and a position of strength to manage upcoming maturities.

I'm also satisfied to see that the actions we have taken and continue to take to optimize our cost position are delivering results. And I will talk about this in some more detail.

First, I want to spend a moment on net debt. As you can see on this slide, we have improved our balance sheet position dramatically over the past six quarters through a combination of asset sales and the January combined offering, we have reduced net debt by $7 billion over that period. Improved cash flow from operations, together with the final proceeds of AMMC's stake sale in the second quarter means that we are on course to achieve our target of approximately $17 billion by mid-year.

Our medium-term objective remains in net debt position of $15 billion. This is a level of debt that we believe the business can sustain at any point in the cycle. Ultimately this will be achieved through free cash flow, so I do not want to put a specific timeline on this target. What I will confirm, though, is that we do not intend to ramp up major growth CapEx nor increased dividends until the $15 billion target is achieved.

Moving to the next slide, I want to emphasize the progress we have made on reducing our cost base. We acted quickly and pragmatically to the Eurozone crisis. Despite what you may have read in the press, we have stuck to our course. Capacity has been closed, including the recent mothballing at Florange, and the savings are being realized.

What you see on the chart on the left is that, including residual costs effects, we are now at the targeted $1 billion level of savings on a run rate basis. The residual costs will disappear from the system as we pass through the various legal and process milestones.

We are now seeing the benefits of these actions showing through in the results.

If we look at the performance of FCE in first quarter, it is not only above the underlying level of fourth quarter, but it is also of the level of first-quarter 2012, despite significantly lower shipments.

The next slide continues the theme of cost-cutting. As you know, at our most recent investor day, we announced a new $3 billion cost optimization program. This new program focuses more on variable cost reductions in our plants than on fixed cost savings, although these will continue to be substantial.

This is very much a part of our process as a top-down objective. The individual components that make up the total $3 billion plan are based not on critical calculations, but rather on actual KPIs that have been realized at our existing operations. This is a very powerful program, and I remain convinced that it is not something that all of our competitors can match. As a result, I expect the business to retain the majority of these savings.

It is early days, but in the first three months of the year, we are on track with savings of $200 million achieved so far.

Turning to slide eight, I want to recap on the progress of our iron ore growth plan. As you know, there are now three significant steps remaining to reach our production capacity target of 84 million tonnes by 2015. First is the completion of the capacity expansion at AMMC. The [Spiros] replacement project was completed in the first quarter of 2013. The increasing nominal capacity from 16 million tonnes to 24 million tonnes required the expansion of mine, construction of a new concentrator line, and additional rail capacity. We are in the final stages. All the electrical rooms are energized. The first concentrate from the new line 7 concentrator is due before the end of the second quarter.

The next step will be our expansion in Liberia. I'm pleased to report that first quarter was a record quarter in terms of shipments now. Now that we have the capability to load Capesize vessels offshore, work on the second phase project is underway. All the major equipment procurement has been completed, and civil works are advancing. This is a 15 million tonne premium of high-quality concentrate. The remaining step is the early revenue fields in Baffinland.

This past quarter we have approved 3.5 million tonne pa haulings project of DSO (see slide 9). We expect to obtain local agreements and licenses in second quarter of this year to be able to start construction during this summer.

Next, I will discuss our market outlook for 2013. Having been on an improving trend since mid-2012, the ArcelorMittal weighted global PMI indicator has turned down recently. This suggests that the pace of the global economic recovery is slowing.

In the US, the economic picture remains positive. Order remains robust, and construction, particularly residential, is improving. However, steel consumption growth is much bigger than last year. This is due to the caution on the part of [stockers] and the slowdown in energy and other manufacturing sectors. Because of the weaker start to the year and the impact of sequester, we have trimmed our steel demand growth forecast by 1%, but still improve expect improvement throughout the year.

In the Eurozone, manufacturing PMIs are still of their lows of mid-2012. [Bird] indicators have weakened of late and still indicate continued underlying demand contraction. Despite support from a smaller decline of inventories, we expect Eurozone steel demand to decline in the lower end of our forecast range this year.

Although China's GDP growth weakened in first quarter, the steel demand is actually improving following the slowdown in the second half of 2012. Demand is increasing due to a rebound in the consumer-driven sectors that is auto and appliances, which is led by strong growth in household incomes.

Construction demand is also rising due to the acceleration in infrastructure approvals during the second half of last year and a stronger real estate market. We expect around 4% growth in steel demand in China in 2013, even factoring in a slower second half of the year.

Looking at the global picture, we are forecasting global apparent steel consumption to increase approximately 3% in 2013. In terms of steel and raw material pricing, the positive momentum earlier in the year has faded. The market has become increasingly cautious on the outlook for iron ore fundamentals in the second half as additional supply comes on at a time of seasonally weaker demand. As a result, steel buyers are purchasing cautiously. This is putting pressure on steel export prices and, in turn, domestic prices in most markets. However, given low inventory levels outside China, we don't see the potential for a sustained destocking in the second half.

Now I will hand over the call to Aditya who will discuss the financial results and guidance in more detail.

Okay. Thank you. Good afternoon and good morning, everyone. Let me start with the EBITDA bridge on page 11. The bridge is from fourth-quarter 2012 to Q1 2013. You'll notice that the starting point for Q4 is now $1.6 billion. This follows a mandatory adoption of new accounting standards, in particular, [IS19]. I will address the impact of these changes later, but I want to first focus on our performance.

The bridge shows that our steel business was positively impacted by both volumes and a price/cost factor in Q1. Most of the volume impact came at FCE. With the exception of AACIS, all steel segments saw a positive price/cost benefit in Q1, the largest contributor being Flat Carbon Europe where the impact of lower selling prices was more than offset by lower costs.

In our mining business, it was an overall increase in marketable shipments driven by Liberia, as we just heard, but this was offset by the mix effect of seasonally-lower volumes from our higher margin operation at ArcelorMittal Mines Canada. The full impact of the increase in seaborne iron ore prices this quarter was somewhat curtailed by the effect of lag pricing on a portion of our shipments from Canada and Mexico. But overall, there is a clear price/cost benefits of $126 million in mining.

Stripping out the effects of the gain on sale of CO2, credits, Paul Wurth, considering the reduced impact of DDH in Q1, you can see there was a clear improvement in underlying profitability this quarter as comparable EBITDA increased by more than $500 million.

Turning to slide 12, which is our P&L bridge, we will focus on the chart in the upper half of the slide, which shows Q1 2013 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.

Unlike in Q4, there was no impairment or restructuring charges booked in Q1, and depreciation remained stable at $1.2 billion. Losses from equity method investments and other income in Q1 was $18 million, lower than Q4 due primarily to the lower income from our Chinese and German investors.

Net interest expense in Q1 was the same as Q4, but foreign exchange and other net financing losses were lower in Q1 at $155 million as compared to $409 million in the fourth quarter of 2012. This was due to a $96 million foreign exchange gain in Q1 as compared to $108 million foreign exchange loss in Q4 driven by changes in the the euro/dollar exchange rate. After recording income tax expense of $97 million for Q1 2013, we reported a net loss of $0.3 billion for the quarter.

Next, we turn to slide 13 and the waterfall taking us from EBITDA to free cash flow. Cash flow used by operating activities for Q1 included a $0.5 billion investment in operating working capital, resulting from an increase in accounts receivable due to higher sales activity. Net financial cost, tax expenses, and others is $1.3 billion. After CapEx of $0.9 billion, we had negative free cash flow for the quarter of $1.2 billion.

Finally, we show on slide 14 a bridge for the change in our net debt. The main components of cash generation during the quarter are largely due to proceeds from our combined offering in January 2013 of $4 billion and $0.9 billion M&A proceeds, including $810 million from the first tranche of ArcelorMittal's 15% stake sale. These proceeds more than offset the negative free cash flow, allowing net debt to decline to the $18 billion level.

Let me now address the accounting changes. I am on slide 15. As of January 1, 2013, we were required to adopt a series of new accounting standards and revisions to previous standards. We, therefore, had to recast our prior period financial statements. The key change is IS19 standard on accounting for employee benefits. With the adoption of the revised IS19, all actuarial gains and losses are recognized on the balance sheet.

As a result, the amortization of unrecognized liabilities is no longer running through COGS, and so EBITDA increases by approximately $400 million annually.

Secondly, if you will recall, we booked charges last year in North America relating to employee benefit liabilities. Because these liabilities have now been fully recognized on the balance sheet, these charges have also been reversed and that we have classified as the nonrecurring accounting change.

Furthermore, with the revised standard, the return on plan assets is now equal to the discount rate applied to benefit -- employee benefit liabilities. As a result, net financial costs have increased in 2012 by $178 million. As a result of these changes, net income for 2012 increased by $374 million.

Looking at the balance sheet impact of these changes, an additional $5.1 billion of liability has been recognized on the balance sheet. The equity impact is partially offset by a $0.4 billion deferred tax asset, and a further $1.3 billion deferred tax asset will be recognized in the future as profitability improves.

Now to finish with an update on our guidance on slide 16. We continue to guide to full-year EBITDA above $7.1 billion, assuming that iron ore prices and the margin of steel prices over raw material costs are similar to 2012 levels. This would represent an improvement in underlying profitability. The anticipated improvement in underlying profitability is expected to be driven by three factors -- first, a 2% increase in shipments; secondly, an approximate 20% increase in marketable iron ore shipments; and lastly, the realized benefits from asset optimization and management gains initiatives.

Looking specifically at the second quarter, we expect EBITDA to be above Q1 2013 levels. Together, with an anticipated release of working capital, this will lead to higher cash flow from operations. Together with the final installment on the AMMC sale, we are, therefore, on track to reduce net debt to approximately $17 billion by June end 2013.

That concludes our presentation, and now we'd be happy to answer your questions. Thank you.

Great. If I could remind those who wish to ask a question, press star one on their keypad. And can I also ask everybody to limit themselves to just two questions per analysts, and that way we can get through as many on the queue as possible.

And so we will take the first question from Mike Shillaker at Credit Suisse.

Yes, thank you very much. Two questions then, if I may. Firstly, on Europe, you've obviously been focusing very hard on the restructuring there. Can you just confirm how many tonnes of capacity are now actually closed in Europe?

And when I actually look at the bridge or I look at the clean Q4 versus Q1 and I see 1 million tonnes of volume differential and I apply $250 a tonne to that, that gets into the difference between the two, more or less. So can you help us out a little bit seeing how much cost reduction you're actually keeping in the numbers, is my first question.

Second question, what used to be the [fuel in the crayon] in the old L&M was CIS. And that, regardless of what is happening in South Africa and the $67 million EBITDA disruption, really does seem to be problematic for you now, especially in the long term with iron ore coming down. It almost feels like an unviable business. What actually has gone wrong there, and what are you actually going to do to fix that business and give us some sort of sense of a target long-term EBITDA that you would have for CIS? Thank you very much.

Aditya.

Okay. Michael, thank you for your question. I will answer on Europe.

In terms of the capacity close, you know the capacity close is primarily Liege and Florange. I am talking about FCE results. I presume your question has to deal with FCE. Liege is about 2.7 million and Florange is about 2.2 million, so the total is 4.9 million tonnes of capacity closure.

In terms of your direction in terms of EBITDA, you're right. Comparable EBITDA has gone up by $250 million in Q4 to Q1. I think part of the benefit is due to higher volumes, but there is a significant portion driven by lower fixed costs due to AOP. I don't know if what you meant by how much of the cost reduction in the numbers is -- maybe you can elaborate on what you mean by that. In the meantime, we can get on to the second question.

Good morning and good afternoon and hello, Michael. Yes, in terms of CIS, what can we say? Versus the previous quarter, if you take out the Port-Cartier transaction, we were a negative minus $20 million in this quarter. We would be at plus $20 million.

Additionally to that, we have had $67 million cost, as you said, of South Africa. So the real comparison would be minus $20 million versus, let's say, in round figures, plus $90 million, I would say. That would be the real comparison, number one.

Two, I do think that in that area there's various issues. One of them we've had this fire in South Africa. Second, I do think in the Ukraine we've had good progress in terms of reliability and in terms of production we have had, I would tell you, record production shipments in the last five years. Now we do have some -- in terms of production, we have had some issues in Kazakhstan, which we are really focused in on, and we are trying to bring them up very, very hard.

Now, the other issue that you mentioned, it is true that if iron ore prices go down, this would mean where you have in these countries you have part of raw materials that is your own. This does mean a challenge. I do think there is another challenge. That for the moment, international market pricing is not -- has not been that high. For example, in the Ukraine, it has been following scrap. The scrap market has been going down, so that has impacted the long business.

In terms of Kazakhstan, you have a market that has practically disappeared, which is the uranium market due to the sanctions which we are fully complying with. Then you do have a market in Russia that has become, in terms of prices, harder.

So I think there is two different issues. One of them, the markets that is what it is, and they have remained challenging. And on the other hand, you do have in terms of what we can do internally. I think we are very focused internally. I think there have been enormous changes in South Africa and in Ukraine, and we are working very hard in terms of Kazakhstan.

I have to tell you that in turn, we are very focused in productivity, in reliability of our installations, in management gains, and we do hope we are going to deliver. So what will be in our hand? We are convinced and we are going to deliver, and this should mean progress going forward to Q2.

But as we said in the Investor Day, it does remain challenging. Some markets have disappeared internal like (inaudible). The international market is challenging as of today, but what we have to do is deliver all what is there internally, Michael. Thank you.

Okay.

Go on.

Maybe I will just provide a bit more color on Gonzalo's points and then come back and see if you have any follow-ups.

I think you're right that in the long run, iron ore price is declining, which is a negative headwind on AACIS. Nevertheless, in AACIS the productivity levels are much more inferior to what we have in Western Europe. So we can achieve productivity gains, which means lower fixed costs, which can offset some of that.

Number two, if you look at where AACIS is located, it is basically in growth markets. So at the end of the day, AACIS is still exporting a lot of tonnages. And to the extent that these markets grow, we will have more domestic market exposure, which, again, is higher margin.

So I do agree with you. There is a negative headwind, but there are some positive headwinds, as well, which is productivity and increased domestic market exposure. And Gonzalo addressed already the benefits if we have better operational reliability in these facilities.

In terms of FCE, if you are looking for what is the positive impact of AOP, I mean another way of looking at the same numbers is to compare Q1 2012 with Q1 2013. There also EBITDA is up by about $200 million when you strip out the impact of lower DDH, and this is despite 8% lower shipments. So you have a sense that there really is a cost reduction, which has occurred in the operating footprint of FCE.

Okay. Clear. Just one very quick followup. Have you got a target EBITDA, and it is preferring to get there for CIS?

For CIS target EBITDA?

We do have an internal one, but we don't make it public. But, of course, we do. And it's very demanding in terms of cost reduction, of productivity and reliability of installations.

Yes, we have bet it internal, Michael.

Okay. All right. Thanks a lot. Very clear. Cheers.

Great. We will move on to the next question from Alex Haissl at Morgan Stanley.

This is Alex Haissl at Morgan Stanley. My first question also on Flat Carbon Europe, if I look at your volumes and would annualize these volumes on your Flat Carbon Europe union business, this would imply a 6% year-over-year growth for this business. How does this fit into your market outlook which you expect to be down minus 1.5%?

I'm not sure how you run your numbers. Clearly we do see -- I think of FCE in 2013 a normal evolution of shipments compared to what we're seeing in terms of demand outlook. So I'm not forecasting a significant loss of shipments in the second half. I think second half would reflect the seasonal downturn. 2Q should be higher than Q1, which again reflects a seasonal shift.

Clearly our shipments at FCE are dependent on what our end customers are requiring, and perhaps there are changes in what our customers are requiring.

Secondly, when we look at EU 27, the number 1.5 is including flat and long.

Okay. My calculation was quite simple. I just take your first quarter, analyze it and compare what you have done last year, and I would come to a 6% year-over-year growth, which even if I take loan into account, much more than what you seem to guide for the full year.

My second question is also on the bridge for the group. If I take your $7.1 billion target for the full year, that leaves some $5.5 billion for the remaining nine quarters, which implies a quarterly run rate of $1.85 billion roundabout versus $1.4 billion. I think it is easy to strip out the mining expansion, as well as steel volumes, but still I come to $1.7 billion. Can you explain where you basically bring up the run rate from $1.4 billion in the first quarter, excluding delta hedge and devaluation getting to $1.85 billion?

Okay. I think you are asking me to repeat our guidance, which I am happy to do so. Our guidance is that we should do report EBITDA at or about above $7.1 billion in 2013. And there is a framework around that, which, you know, which iron ore prices are similar to 2012. Steel price over raw material costs are similar to 2012, and then there are three discrete factors. Clearly iron ore, as you said, is one of them, steel shipment increase is the second one, and the third is the benefit of management gains and asset optimization.

The only other color I can provide you is that Q2 EBITDA should be higher than Q1, and that allows us to achieve our net debt target of $17 billion. I don't really have much more color to provide you other than reiterating our guidance framework.

Just lastly on the management gains savings that you have achieved in the first quarter of $200 million, can you give us an indication how much have been seen at Flat Carbon Europe?

So the management gains has been seen at various segments, and a significant portion has also been seen at FCE. At this point in time, we don't break out management gains per segment on a quarterly basis.

Okay. Got it. Thanks.

Great. We will take the next question from Brett Levy from Jefferies.

It is two actually macro questions. The first one is with price levels as --

This is the operator. (technical difficulty)

In the current context. I've seen it other points in this type of environment and other cycles, and I am just wondering why there's not more trade cases being filed?

This is Lou Schorsch for Flat Carbon Americas. I think that, as I'm sure you know in the US context, you need to show injury, and that is typically a backward-looking perspective, and I think we certainly have very experienced and expert attorneys, as well as managements that know how to calculate the prospects for successful actions. And frequently there is a lag involved. That's one of the complaints of the industry, where you can see damage occurring, but again, the period at which the authorities would look is lagged a bit. So I think that explains potentially the fact that there hasn't been actions to the same degree as you might expect given the situation in the market.

And then if you look outside that region, certainly in other parts of the world, I think you have too many different regimes in different practices and different ways of dealing with these issues. I think particularly, in a lot of countries, for example, in our Company, Brazil is a very important market for us. Brazil had been traditionally a major exporting region. I think it takes time for countries to, let's say, adapt to an environment where they face potentially unfairly traded imports.

If you look at Brazil, though, I think that over the past two or three years, there has been significant movement, particularly last year with the imposition of what are called lentech tariffs on many steel products. These are relatively temporary, but they are substantial, 25% on many hot-rolled products, as well as political measures to eliminate some of the tax incentives that were provided by individual state governments to encourage imports.

So I think these things take time, and again, the regimes politically and legally are very different. And frequently there is a lag required to show the injury that is required under international trade regimes.

You answered my follow-up question. Thanks very much.

Great. So we will move on to the next question from Carsten Riek at UBS.

First question, if I look at your cash position, it looks quite comfortable. And I also look at your bonds. I believe you have two bonds which stick out. Both come from 2009 with coupon rates 8% and above. The one that is actually expiring in June, could we also expect something on the one which expires in 2016? Because it would actually lower your interest build quite substantially?

Second question, also on the steel shipments, you still expect 2% increase in steel shipments year over year. But you ended up 6% down year over year in the first quarter. How much of that was weather related in Flat Carbon Europe and Long Carbon, and can you make up for the loss of volumes in South Africa due to the fire? Thank you.

Okay. Thank you. In terms of your first question, you are right. The liquidity position on the Company remains very strong, and we are in a good position to meet upcoming maturities. Beyond that, I cannot comment on what we would do with the remaining debt profile.

In terms of 2% increase in shipments, if you look at Q1 apparent steel consumption in Europe and in the US, you see that is quite negative. For example, in Europe and the US, it is about minus 5% in Q1 year on year. Nevertheless, in the US, we are forecasting positive growth for the year and slightly negative growth in Europe for the year. This implies that in the next nine months, we will have stronger year-on-year growth, and that is why we believe we will achieve 2% increase in shipments.

In terms of South Africa, I will get Gonzalo to provide you more color, specifically.

Thank you, Aditya. In terms of crude steel, we lost [347 KT]. That is one. In terms of EBITDA, we have estimated [67 million]. But in terms of shipments, we have lost [150]. Because what we have been doing is recuperating those loss in production through various methods. One, we have used a lot of our stock, number one. Two, we got funds coming from Brazil, 22 KTs in forms of slab and Mexico; number three, we also used Saldanha. Instead of exporting, we took it to the domestic market.

So at the end, the impact in shipments has only been 350 KTs. We do hope by June with customers we are going to be updated, and we are going to try our best to recuperate a part of it, and we will see how the installations work. So we lost 350 KTs in crude steel; 150 KTs in shipments because we really worked hard to give service to our customers.

We work hard and we will see. We all have an ambitious internal target, but we will see if that is feasible, okay? Thank you.

Thank you very much.

Thanks, Carsten. We will take the next question from Alessandro Abate of JPMorgan.

Congratulations on the results of the quarter. Just one question which is related to, will you discuss all steel cycle, the capital markets, the restructuring program seems to be taking off quite nicely, in fact up in Europe. But I haven't heard any more talking about the portfolio optimization. What does that mean? I assume that you have $120 million capacity being sold. In other words, you have a lot of little assets, niche assets, that are generating nice profitability, but at the moment, the value that comes out of it is absolutely extremely low.

Is there any possibility in the future you might not be ruling out a potential spinoff of these assets? Thank you.

Spin-off of?

Low-return assets.

Portfolio optimization has been explained during our investors day in that we have our different classes for our assets, differentiating between our franchise business and the normal business. The franchise business is our value-creating business where we continue to invest. That is like the steel for auto companies. You file mechanical tubing, ultrahigh strand seal, or protocol, et cetera. Then the mining business where we continue to invest and grow to 84 million tonnes by 2015.

Then the rest of the business, we continue to evaluate them, continue to analyze them, what is the growth pattern, what is the demand pattern in different businesses. How is their competitiveness and where we should invest them -- with what we should invest them to make them competitive so they can still go toward the value-creation partner?

So this is our focus at this time, and we have done a lot of sale of non-core assets already. Everything now is an opportunity for us to look at the existing assets and try to optimize their business, improve their productivity, and create value from these portfolio business.

Mr. Mittal, just a follow-up question, if I may. What about your tubular business at the moment? It is about a couple of million tonnes capacity installed? Do you see any kind of potential spinoff in the future?

I think our -- we do not comment on the future speculation, but I can tell you that we are continuing to invest directly in some of end segments where we create value in our tubular business.

Thank you very much.

Great. So we will move up to the next question from Neil Sampat at Nomura.

I had two questions. Firstly, on the accounting changes, there was a $5.1 billion increase in liability. Could you update us on where the pension deficits stands and whether all of this increase in liabilities was on that line?

And also, secondly on AACIS, I understand that you are due or you are covered by insurance in terms of the fire. To what extent will the $67 [million] in any continuing amounts in Q2 be covered by insurance? And what kind of timing do you expect from that hitting the P&L?

First about South Africa.

The insurance, look, insurance you have to, first, cover the loss that we've had, plus the CapEx with that. But we have to tell you that we had a deductible off of $45 million at the factory level. And then we have part with a captive that is another $30 million. So that is where we are now; in the total, $75 million.

And at present now, we are negotiating with the insurance company to win more, and we hope to get during second and third quarter part of this back, especially the part of the CapEx.

So that is where we are at this stage. We are negotiating, and there is little more we can say now.

Okay. Great. Thank you. In terms of the $5.1 billion, the breakup between OPEB and pension is $3.9 billion of pension and $1.2 billion is OPEB. That total is $5.1 billion.

On a total basis, if you look at the total liabilities, the pension deficit is $4.8 billion, and the OPEB deficit is $6 billion. And that gets us to a total deficit of $10.8 billion. So predominantly this is an OPEB issue. We account for health-care liabilities on the balance sheet. There are certain companies which do not have these healthcare liabilities on the balance sheet, predominantly in North America where the majority of these liabilities are. If you just look at our US operations, out of $10.8 billion, $5.6 billion belongs to our US operations.

And can I ask what is now the ongoing charge following these accounting changes? What is the ongoing pension charges that it's going through your operating profits?

So it is roughly about $800 million; $400 million going to COGS; $400 million going to financial expense. That matches the cash. So actually in the past, we were recording more than the cash expense. And now, because we are no longer amortizing these liabilities, the P&L expense matches the cash expense much better, which is roughly $800 million on $10.8 billion of liability.

Okay. Thank you.

[Amey Mahinta], Goldman Sachs.

A couple of questions, please. Can you give us an update on the Kalahari investment process? I know it is subject to financing, but is that process still alive, and is there a certain cut-off point by which negotiations terminate? Or any sort of color you can give us on that would be helpful.

And secondly, just broadly on the divestments, you still have quite a few assets in your portfolio that I guess one could say are not entirely core to the business. What is the thinking on those assets? Are you still looking, but from a more comfortable position from where you were six, seven months ago, or are divestments completely off the agenda for the rest of the year? Thank you.

And Kalahari, we have no further update. Clearly we have signed a sale agreement, which is subject to various conditions. Those conditions remain. Regardless, our net to target is not subject to a close of Kalahari by Q2. Our net to target of $17 billion.

In terms of portfolio optimization, I think we addressed it before. We continue to look at how we should better allocate our portfolio based on which businesses we find attractive. Clearly businesses which are strategically not as attractive as others. We may look at divestment potential. There is nothing on the radar screen of significance. We continue to just optimize the portfolio. I think the significant aspects of asset sales have been completed.

If you remember in Q3, our balance sheet -- Q3 2011 had roughly $25 billion of net debt, and now we are at $18 billion going down to $17 billion by June end. So that reflects the assets we have put in in terms of optimizing our portfolio, as well as the recent capital raise.

Chuck Bradford.

Two questions. First of all, has Dofasco in Canada benefited at all from the Lake Erie lockout?

I think that it's very early days on that front. Obviously the Canadian market moves very much in tandem with the US market with some, let's say, slight wrinkles, if you will. One of the unfortunate wrinkles right now is that the inventory levels and distribution in Canada, which for almost geographic reasons, are typically higher in normal conditions than in the US, are now at extremely high levels. So over four months on hand.

So that market is still relatively soft. I think US Steel, not to speak for them, but certainly I think they have a lot of capacity in that region in North America. In so far as those markets move together, I think we haven't seen a major impact of the stoppage at Lake Erie.

Now again, it's very early days, but could at the margin have some positive impact on the market fundamentals. But we really haven't seen it dramatically yet.

It appears that Rio Tinto has put their share of iron ore company of Canada on the market. Would it not make sense for you to look than the expansion go back a month?

We do not comment on our bid activities.

Okay. Thank you.

I think you had asked previously had questioned on service costs of the liabilities. I overstated it by $100 million. So EBITDA is approximately $300 million, and P&L is $400 million. So service costs, $700 million and not $800 million, as I mentioned earlier.

So we will move on to the next question then, and we will take that from Jeff Largey at Macquarie.

And most of my questions have been answered, but and I promise I'm not asking specifically about the ThyssenKrupp sales process here, but I do want to know if you have a view on how worried you would be about a new entrant entering the North American market? I mean, to be perfectly blunt, I think there's two options here with the Alabama plant, either you guys buy it or someone else buys it. And I'm just curious as to your sense on how that shakes out in the North American sheet market.

It seems to me that some of your competitors over there seem quite nervous. I would argue you guys are probably in a better position, given where the balance sheet stands and your market share and all of that. But just was wondering if you could share some thoughts on how the market might evolve in North America, assuming a new foreign entrant pick to hold to that Alabama plant?

Lou.

So I think someone else owns it already. So there is net deterioration in our position if someone else buys it versus where we are were a year ago or two years ago or what have you. I think obviously the current owner is an extremely capable company. The asset is a very good one, and yet it has been extremely difficult to make that business model work.

So I think, as we indicated, we're in the process now, but we are not going to overpay. And again, if someone else gets it, then I think we will just cope with it as we would have coped with under (inaudible) ownership.

I have a sore throat. (multiple speakers)

I think we will move onto the next question, which we will take from Rochus Brauneiser from Kepler.

It is Rochus Brauneiser from Kepler. Just a few follow-ups from my side.

When we look at the guidance, which was confirmed and I guess that when you gave guidance, you were probably aware of the accounting effects. Can you give us a sense where the incremental buffer you get from as you have brought down the volume expectations slightly from a 2% to 3% to 2%? And in that respect, can you also give us a sense how you see the second half seasonality versus the first half? Typically it is the weaker half. Is there any reason to believe that this is different this time because the first half is rather weaker?

And the second question is regarding your recurring accounting effects. When I look at the restated numbers, it's clear that there was a positive trend in this accounting effect. Can you give us a range for your expected returning effects for the current year?

And finally, on the mining side, obviously on your Canadian business, there are still operational problems. Is there anything which impacts your business, apart from the weather, which is obvious, and apart from some distortions you had in the previous quarters due to the expansion of the business? Do you see some slightly increased risk to deliver on the 20% increase? Because this now means that you have to improve the run rate quite significantly from the second quarter onwards. And maybe a word on the coal business. I think this continues to run well below the run rate you targeted for the business years ago. I think I remember a number of like 12 million tonnes, and it continues to be stuck at around the 8 million tonnes now.

I will answer the non-mining questions, and then I will ask Peter to answer the mining questions.

So when we announced our guidance at the end of our 2012 results, we were aware of the accounting change. There was no buffer as such. Clearly when we announced the framework of guidance, we announced it above [7.1]. So to the extent that shipments have moderated a bit, we have not felt it necessary to change our guidance.

In terms of the second half versus the first half, you are right. The second half of 2012 was very weak. We went through a destock period. If you look at Q1 2013, it is also very weak where we had negative or pass due consumption growth of 4.7% in EU and 3.8% in NAFTA. We are still projecting positive growth in NAFTA, as well as a negative growth of 1.5% for the year at EU. This implies that the next nine months will be stronger than what we saw in 2012, which implies that the second half of 2013 should be stronger than the second half of 2012. And the change between the first half and the second half should not be as pronounced.

In terms of repairing accounting effects, there is no recurring accounting effects. Our statements are now recast, so all comparisons are on a like-to-like basis. As I've said previously, we were overstating the P&L costs as we were amortizing these liabilities. We no longer amortize these liabilities; we recognize these liabilities. The amortization charge has dropped by about $400 million in EBITDA, which reflects cash much better. And as I clarified, the ongoing costs within EBITDA is about $300 million. And on the P&L, it is $400 million to service these liabilities. Peter?

Sure. On the mining side, in our Canadian operations, the operational issues that we experienced in the first quarter were primarily related to a short Crusher breakdown, as well as a conveyor tie-in for the expansion and then slightly lower iron grades. But all of those will be reversed in the second quarter. So we are mining higher iron grades right now. The conveyor tie-in is being completed in order to support the startup of the seventh line.

And some of the production that had, in fact, was up at the concentrator and not shipped down to the port was not accounted for. So that would appear in our second-quarter volumes. So those effects will be reversed completely.

And then, of course, in the second quarter, it will be -- toward the end of this quarter, we will be starting up the expansion. So we do not anticipate any further impact to that business during the course of the year.

On the call side, you are correct. Our production has been pretty flat for the last few years. There is quite a lot of opportunity for us to grow that business both in the United States and in Kazakhstan. In Princeton we are operating at about 2.6 million tonnes, and there is significant potential to expand that.

The same applies at Kazakhstan, but we are being quite cautious in the current environment. We want to make sure that however we grow that business, it's done very, very carefully.

And with respect to the Canadian business in the second half, can we expect that the capacity expansion at AMMC, is this fully reflected from the third quarter onwards, or is there kind of a ramp-up effect which would delay the full run rate into the fourth quarter?

Yes, there will definitely be a ramp-up curve. None of these operations start up at the nameplate capacity. So I would expect that that ramp-up will proceed through the third quarter.

Okay. Very good. Thank you.

Great. We will take the next question from Alex Hauenstein of MainFirst.

A lot of questions already answered. The one remaining with regard to temporary shutdowns, is there some scope for further temporary production shutdowns, i.e., in Eastern Europe, and when could these become effective?

And the second one, also with regard to Europe, you mentioned that the Q3 and eventually also Q4 development in terms of demand might be a bit less -- lower than the usual seasonality would suggest. Could you elaborate a bit about the order development you see already maybe from some of your customers into automotive so that we can a bit better understand what makes you more positive for the second half than some of your peers seem to restated. Thank you.

Okay. In terms of temporary shutdowns at FCE, we do not see much benefit in a temporary shutdown because at the end of the day, a lot of the costs remain in the system when you do a temporary shutdown.

What we are focused on is optimizing our assets, which is, if we feel that the asset has no market value, we eliminate the asset and all of the costs associated with those assets.

If we look at the footprint at Flat Carbon Europe today, post the closures of the Asian Florange, we have 21 furnaces in our footprint. Out of those 21 furnaces, we are operating 16. The five that we are not operating, there is one in the eastern part of Germany, which is in Eisenhuettenstadt, and the remaining four are in Eastern Europe.

The value of those assets is dependent on the growth in the Eastern European market environment. To the extent that we are not as bullish on the prospects of Eastern Europe, then clearly the potential of asset optimization does exist in our Eastern Europe operating footprint.

Nevertheless, I would just caution that in Eastern Europe, as you can appreciate, the fixed cost element is a lower factor than what it is in western year. So the gains associated with such action will not be as significant as what we saw in Western Europe. And it's also the ability for us to wait a little bit and see how the demand environment evolves.

In terms of your question on the second half, clearly in terms of FCE results, second-half results would be impacted. They would be impacted by the seasonal slowdown that occurs in the second half. There's no change to that. Raw material costs will be higher as well in the second half as the Q1 costs of raw material flows through the inventory. All we are trying to suggest is the level of slowdown that we saw in the second half of 2012, we should not experience in second half of 2013 because in the second half of 2012 in Europe we saw a destock, and we are not forecasting another destock as inventory positions remain low.

Other than that, we are seeing the muted demand patterns from our customer base in Europe, reflecting the fact that real demand is negative, as well as the fact that our forecast for the year remains a negative of a parent steel consumption growth in Europe. Thank you.

Thank you.

Okay. We will move on to the next question from Bastian Synagowitz with Deutsche Bank.

Just to follow up on the last question regarding FCE, I guess you already mentioned the drivers obviously -- prices seem like they are coming down, and then variable costs are going up. So will there be any improvement possibly in the next quarter, including the second half would have to come from your cost cuts? Is that basically what you are trying to convey?

And then on the second question, it's on cash generation. Just looking at the cash flow bridge, which you saw from EBITDA, it seems like the components of financial costs, tax and others is almost robbing the entire EBITDA, despite the fact that you actually lower the debt costs considerably. Could you please remind us weather this $1.3 billion includes any positive or negative one-offs items and also whether this is basically a run rate which we can work with on a quarterly basis? Thank you.

Okay. In terms of FCE, I am not suggesting that we can offset the seasonal impact or the increase in raw material costs through cost-cutting. I'm just suggesting that that will occur in FCE. Nevertheless, within our (inaudible), we are seeing positives in terms of mining because we should have extra growth due to the expansion in our ArcelorMittal Mines Canada. Gonzalo spoke about resolving issues in South Africa, as well as in Kazakhstan, which should allow for higher volumes.

So those are other positive drivers. Clearly FCE would be a negative driver as we move through the year.

In terms of Q1, I think we had some exceptionals in the cash because we had to reverse the DDH. We reversed the DTHE gain, the galvanizing joint venture that we bought for $47 million. There were some DAT cables as well that we reversed. And that is why that cash out was larger. I wouldn't suggest that that is a normalized cash out for the Company.

So I would see that is where we are forecasting EBITDA -- at net debt of $17 billion. As we are forecasting that in the second quarter, some of these cash elements will be less. Operating working capital should swing to a positive, and EBITDA will be higher.

In terms of interest charge, clearly the capital structure or the balance sheet in Q1 was not ideal as we carried almost $8 billion in cash. We have upcoming maturities, as you know, a month from today, basically in the first week of June, which is about $3.1 billion. So, as those debts get paid, then interest costs over time would further reduce.

So I think that's all the color I can provide on your questions.

Just a very brief follow-up, if I may, on the effect on your pension provisions, basically the $5.1 billion increase in other liabilities. Could you just confirm whether this is still not at all relevant for any of your covenants, and basically what it means for your discussions with the rating agencies? Thank you.

Sure. So the $5.1 billion flows through equity. It has no cash impact, and we have discussed all the P&L impacts.

As you know, the rating agencies look at our adjusted debt in any case. So we are forecasting no impact of this change on the rating agencies assessment of ArcelorMittal.

And therefore, no impact or implication for the Company's covenants. I assume it is still --.

Yes, we have no gearing ratio, as you may be aware. And so we see no impact on any covenants or any bank facilities.

At the end of the day, even though we did record a liability of $5.1 billion, please appreciate that we also raised $4 billion in capital, and we sold $1 billion -- we sold about $810 million so far of ArcelorMittal Mines Canada, and we will sell another $300 million. So the equity is almost unimpacted by this because we had the negative of the liability. But the positives from the capital raise, as well as the minority sale in ArcelorMittal Mines Canada.

Perfect. Thank you.

Justine Fisher, Goldman Sachs.

I have two questions. The first question is about the working capital number for the second quarter. I know that you had highlighted that you expect to release the cash from working capital in the second quarter in order to be able to hit your net debt target. But it seems as though that release would have to be about $1 billion, which is pretty significant. So I was wondering if you could give us some color as to where that's going to come from. Is it a significant liquidation of inventories? Is there one particular region that we will see that much of a release of cash from?

And then the second question is just on the total debt balance. I was just wondering, how much of the first quarter convertible bond issue you actually are counting as debt on the balance sheet. I think it was supposed to be 80-20, and so there should be about $450 million of those converts counted on the balance sheet as debt, but I just was wondering if you could clarify how much you ultimately did count as debt. Thanks.

Sure. So there are two factors which bring us to $17 billion of net debt. You have highlighted one, which is working capital. I cannot comment on the direction of your number, but I would just highlight that there are two other factors which are also equally important. The second is the EBITDA increase. And the third is we continue to optimize our portfolio of assets. So, you know, we have the second tranche of ArcelorMittal Mines Canada, which is roughly $300 million, and then there are other smaller items similar to that.

We have treated the full combined offering as 100% equity. So we are not applying the 80-20, and therefore, we have the full impact of the $4 billion capital raise on our net debt number.

Great. Thanks very much.

Okay. I think we've got time for probably two more questions. The first one we will take from Luc Pez at Exane.

One question if I may, following up on the pension light ITs. If I understand correctly, the new number is $10.8 billion unfunded one. I'm wondering whether this includes the additional different tax assets you were referring to as potentially $1.3 billion. And if you could also say over which timeframe you would expect to repair these.

And the second question would be related to your comments on working capital requirement going into Q2. Given the fact that you are guiding on higher EBITDA for Q2, could you perhaps emphasis a bit on what you would expect in terms of volume for Q2 versus Q1, and how is it comparable with reducing working capital requirements if you expect profitability to improve? Thank you.

So I'm happy to answer your first question. The $10.8 billion of liabilities is excluding the deferred tax asset. So this is the gross amount.

I would just highlight to everyone, that out of the $10.8 billion, $4.8 billion is pension and $6 billion is healthcare. So this is not pension underfunding, this is healthcare, which we can have a long discussion on whether this is a liability or not, what will happen to healthcare legislation in the United States; what at the end of the day will happen to North American steel industry and dealing with retiree health care.

And as I had highlighted, out of the $6 billion of OPEB liability, $4.2 billion is just in our US operations.

In terms of Q2 to Q1, we can't really get into details because then we'd be talking about very specific guidance for the second quarter.

The third thing I would just highlight on all of these liabilities is that the reason the $5.1 billion is being recognized as the history is that as discount rates have reduced over time, we have an unrecognized portion. The unrecognized portion is what we estimate the discount rate to be at the beginning of the year and what the discount rate is at the end of the year. And as we have gone through a period of three, four years where the discount rates have trended down, we have accumulated an unrecognized liability of $5.1 billion, which is now being recognized on the balance sheet through equity.

As discount rates go up, then clearly this will reverse, as well. Because the liability would reduce. So this is very interest-rate specific, as well, and I just thought I would mention that now for everyone's benefits.

Okay. So we will move on to the last question [Sal Terani] at Goldman Sachs.

You recently signed a contract for iron ore in the US with SR. I just wanted to understand some color on that, what kind of pricing mechanism would that be? And also, I think you are starting it sometime in early 2015, if there were a delay in the SR mine, what would be the alternative for you, or is there a provision for that?

I'm going to say something.

Yes, I think, you are right that we did sign this contract. I don't think we can get into the details of the terms of it, but I can tell you that it is based on the IDEX index. So it is linked to world prices. I think any time you are negotiating a contract in that region for that commodity, a lot of the discussion is going to be around export parity versus import parity, et cetera.

So those are terms that I don't think it's appropriate for us to get into. But obviously, both parties felt that this is an attractive arrangement, and that is how we went forward with it. Again, I think it's a bit awkward to get into the details of the contract. Hopefully, that gives you a little bit of color on that arrangement.

And it is delayed?

Yes, I think if it is delayed, there is protection in the contract for us. So that component is in the arrangement.

Thank you. This concludes our first-quarter earnings call, and thank you for participating, and we are looking forward to talk to you for the second quarter. Thank you. Have a good day.