ArcelorMittal SA (MT) 2013 Q2 法說會逐字稿

Good afternoon and good morning, everybody. This is Daniel Fairclough from ArcelorMittal Investor Relations. Thank you for joining today's conference call.

There will be a short presentation of the second quarter 2013 results, followed by a Q&A session. The whole call will be limited to one hour. So, given this limited time and out of consideration to everyone, can I ask that you limit yourselves to just two questions. (Operator Instructions) And, can I also remind everyone that this call is being recorded.

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

Thank you, Daniel. Good day to everyone, and welcome to ArcelorMittal's second 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 while the second quarter market trends were not favorable, the outlook today is better than it was a couple of months back. Recent trends have been more positive, and as we move to the remainder of the year I expect the year-on-year datas to improve.

The second point I would like to make is that second quarter results demonstrate further improvement in our underlying performance as compared to the second half of 2012. I continue to believe the second half 2012 marked the trough in ArcelorMittal's profitability.

Again, this quarter's results show improved sequential and year-on-year performance in our Flat Euro business. I believe this provides further evidence that our optimization efforts have been successful.

My final point would be on our balance sheet. We have more than achieved our net debt target for mid-2013. Our balance sheet is now very well positioned. We are well within our covenants, and significant liquidity places us in a strong position to deal with the coming maturities. While I expect net debt to increase slightly by year-end, we will still be probably free cash flow neutral in 2013.

Moving to the agenda on slide number 2, 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 second quarter in greater detail as well as an update on our guidance for 2013.

Turning to slide 3, I will start with safety. The loss time injury frequency rate in second quarter remained flat, at 0.9 times. On the left-hand side, you can see the clear progress we have made in recent years. 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.

While I'm pleased to see our focused efforts being reflected in this improvement, I'm disappointed with the number of fatalities at our operations. Let me reiterate that I expect ArcelorMittal to make continued progress in our safety performance, particularly in further reducing the rate of severe injuries and fatality prevention. Our ultimate objective is zero harm.

Turning to the highlights of the second quarter results shown on slide number 4, EBITDA for second quarter was $1.7 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 steel partially offset by a negative price-cost impact in the mining business.

Our net debt declined to $16.2 billion, which is below our half-year target level of $17 billion, through improved cash flow from operations and M&A proceeds. We remain committed to a medium-term target of $15 billion of net debt.

The expansion of our AMMC, which is Canadian operations, from 16 million tonnes to 24 million tonnes is now almost complete, and we should start to see the benefits of the additional high-margin capacity as we ramp up production in the second half of 2013.

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

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 seven quarters, since third quarter of 2011. Through a combination of asset sales, [regenerated combined offering], and focus on working capital we have reduced net debt by almost $9 billion over the period. With net debt at $16.2 billion at the end of second quarter, we have successfully surpassed the target we set ourselves earlier in the year of $17 billion.

Our medium-term objective remains a net debt position of $15 billion. This is the 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] steel growth in CapEx nor increase dividends until $15 billion target has been achieved and market conditions improve.

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. As you can see on the chart on the left, including residual cost effects, we have now exceeded the targeted $1 billion level of savings on a run rate basis. As was the case during the first quarter, these residual costs will disappear from the system as we pass through the various legal and process milestones.

Importantly, we are now seeing the actions in our financial results. Excluding the impact of DDH, EBITDA for Flat Carbon Europe segment was over $300 million higher in the first six months of 2013 as compared to the same period of 2012.

Continuing the theme of cost cutting, at our 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 bottom-up process, rather than a top-down project. The individual components that make up the total $3 billion plan are based not on theoretical calculations but rather on actual KPIs that have been realized at our existing operations.

This is a very powerful program, and I remained 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. The program is still in its early days, but in the first six months of the year we are track with annualized saving of $600 million which we have achieved so far. This cements a key support to our (inaudible).

Moving on the subject of CapEx, on the next slide, although most steel CapEx remains suspended, in light of improved market fundamentals in the Brazilian long product, we have restarted our Monlevade expansion project. This will essentially involve two phases, the first phase focused on downstream activities including a new wire rod mill in Monlevade, as well as further investment in Juiz de Fora to raise meltshop and rebar capacity. The total CapEx for first phase is $180 million, and the project is scheduled to be completed by end of 2015.

Second phase will focus on the upstream facilities in Monlevade, with additional crude steel capacity of 1.2 million tonnes per annum. A decision on when to restart this phase will be taken in the future.

At the same time, we continue to fund our mining growth projects. We are making progress on our plan to take iron ore production capacity from our own mines from 56 million tonnes in 2012 up to 84 million tonnes in 2015.

We are pleased to report the completion of construction of the additional capacity at ArcelorMittal Mines Canada. In June, we produced the first concentrate from the new Line 7, and production will now ramp up over the second half. The estimated CapEx for the project was $1.6 billion. This was above the initial budget, and we have taken a number of actions internally [and will work] to ensure that lessons learned are not repeated in Liberia. I'm very disappointed by this overrun. Nevertheless, the economics of the project remain favorable, and we continue to expect a healthy return on this investment.

Moving to Liberia, we are also progressing with our second phase expansion from 4 million tonnes per year direct shipped ore to 15 million tonnes per annum, premium concentrate. Due to commercial considerations, we have changed the product specification to a sinter feed which we believe will be more marketable and will not carry value in [huge] discounts which Liberia is carrying today. We still aim to complete the expansion before the end of 2015.

Next, I will discuss our market outlook for 2013. Global indicators are slowly turning, particularly in developed markets. This supports our expectation of a mild upturn for global growth in the second half. Leading indicators, which were pointing to weaker growth as we entered second quarter, have now rebounded. ArcelorMittal weighted global PMI has moved back above 50 in June. The July [figure] released today show a further rebound and signal growth in industrial demand.

In the US, all the economic growth in the first half of 2013 was only 1.4%. This was mainly due to the sequester, and underlying fundamentals remain positive. Rising consumer confidence, employment growth, and expanding credit underpin [direct] demand. Auto sales remain robust. Appliance demand continues to grow strongly, supported by strengthening residential sales.

In comparison, demand from non-residential construction and machinery has been weaker than expected. However, year-over-year decline in [upturn] demand in the first half of 2013 was mainly due to [stocks] cutting over 1 million tons of inventory. Inventory in the United States is now low, and a slow rebound in underlying demand in second half should be supported by mild restocking.

Because of the weak start of the year, we have reduced our steel demand forecast for 2013, but still expect strong year-on-year growth in the second half.

In the Eurozone, leading indicators confirm the beginning of a slow turnaround in Europe. For the first time in two years in the Eurozone, manufacturing PMI is above 50. This points towards stabilization in underlying steel demand in Europe and the prospects to some slow improvement, [but from very low levels]. Auto sales hit a 20-year low in June, as all major markets declined except UK.

We remain cautious, as higher unemployment and ongoing political uncertainties will weigh on growth. Demand will slowly rise from manufacturing, but construction is likely to continue to decline, albeit at a slower rate.

Inventory datas for Europe are still unavailable, but with important steel prices declining during the period, inventory levels are likely to have fallen further. Again, the stock cycle is beginning to help the business, and we are seeing stronger order books than at this time last year.

Moving to China, Chinese GDP growth declined to 7.5% in second quarter due to weaker growth in investment, exports, and industrial output. While manufacturing has slowed, the more steel-intensive segments have continued to grow relatively strongly during first half 2013.

There is a robust growth in auto production, and infrastructure investment continues to benefit from previous stimulus measures. Housing starts have also begun to pick up recently. Therefore, despite high steel production level during second quarter, inventories at mills have been reduced, so that the prospects for apparent demand in the second half are better than previously expected.

Overall, we continue to forecast global apparent steel demand to grow by approximately 3% in 2013 and expect ArcelorMittal's steel [expense] to increase approximately between 1% and 2%.

With this, I hand it over to Aditya, who will discuss the financial results guidance in more detail.

Thank you. Good afternoon and good morning to everyone. I'll start with slide 11, the EBITDA bridge from Q1 to Q2 2013.

Stripping out the effects of the one-time gains of DJ Galvanizing sale and impact of DDH income from Q1 result, underlying EBITDA performance of the business in the second quarter improved by 19%. You can see this on the top, where EBITDA comparable was $1.4 billion and now for the second quarter we are reporting $1.7 billion.

The bridge also shows that our steel business was positively impacted by both volumes and a price-cost effect during Q2. More than half of the volume impact came in the Long Carbon business, followed by Flat Carbon Europe. With the exception of Flat Carbon Americas and AMDS, all steel segments saw a positive price-cost benefit in the second quarter. Flat Carbon Americas was particularly impacted during the quarter by labor and unforeseen operational issues in the US, as well as higher costs.

In our mining business, there was an overall increase in marketable iron ore shipments driven by improved volumes in AMMC, our business in Canada, following the seasonally constrained first quarter. However, despite positive impact from the effect of lag pricing on a portion of our shipments, the overall decline in seaborne iron ore prices this quarter resulted in a negative price-cost impact of $42 million in our mining results.

Moving to our P&L bridge, which is on slide 12, we'll focus on the chart in the upper half of the slide, which shows the second quarter results. The comparative figures are there for the previous quarter in the lower half. I'll point out the key differences below the EBITDA line. During the second quarter, we booked a non-cash impairment charge of $39 million, primarily relating to the closure of the organic coating and tinplate lines in Florange. That's in our facilities in Europe, Flat Europe.

In addition, we booked restructuring charges of $173 million, out of which $137 million represents costs incurred for the long-term idling of the Florange [liquid phase]. This include costs such as voluntary separation scheme costs, site rehabilitation costs, as well as take-or-pay obligations.

Both these charges represent our efforts to improve our asset base and are part of the Asset Optimization Program.

Net interest expense in the second quarter was comparable to Q1, but foreign exchange and other net financing losses were greater in the second quarter, at $530 million as compared to a $155 million charge in the first quarter of 2013. This delta is primarily due to a foreign exchange loss of $249 million in second quarter, as compared to a gain of $96 million in the first quarter of 2013.

The loss in the second quarter is driven by a 9% devaluation of the Brazilian real versus the US dollar, which impacted loans and payables denominated in foreign currency which are largely [inter-] Company. This is largely non-cash, and is reversed within the Other Non-operating Activities line in the cash flow statement.

After recording an income tax expense of $99 million for the second quarter, we reported a net loss of $0.8 billion for the quarter.

Moving on to the next slide, slide 13, although we reported an accounting loss for the quarter, the cash flow performance is strong, as you can see on this slide. This shows us the waterfall taking us from EBITDA to free cash flow. Cash flow generated by operating activities for the second quarter included a $1.3 billion release in operating working capital. Cash outflow for net financial costs, tax expenses, and others is $0.6 billion. After CapEx of $0.7 billion, we had positive free cash flow for the quarter of $1.7 billion.

Finally, we show a bridge, on slide 14, for the change in our net debt. The main components of cash generation during the quarter are free cash flow, as described earlier, of $1.65 billion and M&A proceeds of $290 million from the second tranche of the sale of a 15% stake in AMMC.

So, during the second quarter, net debt fell by $1.8 billion, to $16.2 billion. Over the course of the first half of 2013, net financial debt has declined by $5.6 billion, from $21.8 billion at the end of 2012. This is more than the total proceeds from the capital raised and divestment.

Let me now address guidance. That's on slide 15 of the presentation. As you know, we are today revising our full-year EBITDA guidance to greater than $6.5 billion. Let me make a few points regarding this change.

First of all, I want to highlight that this revised guidance still implies an improvement in underlying profitability (i.e., compared to 2012). This is being driven by an expected 1% to 2% increase in steel shipments, approximately 20% higher marketable iron ore volumes, and the benefits of our cost optimization efforts.

Nevertheless, we have adjusted our guidance due to lower than forecast apparent demand, primarily in North America and Europe where we have seen apparent decline in first half in excess of 5%, and its impact on [Group] shipments; lower than anticipated coking coal prices, including the impact on vertically integrated operations; lower premiums for high quality iron ore concentrate; an additional R&M spend; volume production incidents during the first half.

Secondly, moving on to our debt position, due to an expected investment in working capital and the payment of annual dividends, net debt is expected to increase in second half to approximately $17 billion. The $15 billion medium-term net debt target is unchanged.

Finally, 2013 CapEx is now expected to be approximately $3.7 billion, reflecting the increase at ArcelorMittal Mines Canada and the restart of our Monlevade project.

That concludes our presentation, and now we'd like to open the floor to your questions.

Thank you.

Great. (Operator Instructions) Please do limit yourself to just two questions so that we can get to as many people as possible in our limited time.

So, we'll start off with the first question from Alex Haissl at Morgan Stanley.

Good afternoon. It's Alex Haissl at Morgan Stanley. My first question is on your Canadian mines and the cost overruns. Basically, we have now one-third cost overrun. Can you explain in more detail what was the main driver behind it and why basically it's just visible at the very end of the process? Because, clearly, the invested capital now put on is [$200]. At current prices, you make this (inaudible), but if my calculations are right, breakeven in terms of cost of capital is slightly below [$100]. If you can comment on what happened here and what makes you more confident that [nothing happens] in Liberia?

And the second question is not on guidance. It's more on the cash flow. You have reduced net debt in the first half by $5.6 billion, and some $5.1 billion came from the offering as well as the divestment. And another $700 million came from working capital reductions. So, underlying free cash flow generation was slightly negative. So, my question is, what's your source of cash? Would you consider more asset divestments going forward if underlying situation is not changing dramatically from a year?

Many thanks.

OK. So, Alex, let me address your second question first. It's related to the first. So, our CapEx in the first half also includes growth CapEx. So, we're investing in the future. Out of the $3.7 billion, there's $1 billion in growth CapEx. So, if you strip out growth CapEx, underlying free cash flow for the business is positive.

Secondly, I do believe it is very aggressive to take out working capital effects, because working capital at the end of the day reflects how the business is doing. So, it always acts as a buffer. In case volumes are falling like they have in the first half, you have working capital release. In case prices are falling like they have in the first half, you have working capital release.

So, in many ways, the working capital from a cash perspective buffers the falls or increases in EBITDA. So, I think there are real working capital effects that occur, and therefore we have been free cash flow positive for the first half, I believe, on an operating basis including working capital. And if you strip out the investments we're making for the future (i.e., Canada and Liberia), we're even more positive on a free cash basis.

So, the underlying steel business and the mining business is healthy.

In terms of the returns, I'll get Peter to start talking about it, and if you have any other further comments, I can chip in on the viability of our investments in AcelorMittal Mines Canada.

Thanks, Aditya. I think the primary question that you asked was related to the causes underlying overrun in Canada. The primary cause really was construction contractor productivity that we experienced in the region, especially in the winter in the latter stage of the project, which was quite a bit lower than we had anticipated.

We were constructing at the same as a couple of others were in the region, which strained the system. Contractor productivity resulted is an extension of the schedule, which of course impacted indirect costs such as [camp] and transportation costs.

But construction is now practically complete, and the [seventh contractor] as Mr. Mittal indicated is being ramped up.

How will this impact, or what will we do in Liberia differently? First, I should point out that the construction environment, or the global construction environment, is not nearly as saturated today as it was while we were completing the AMMC expansion. So, that means that translates into better construction skills available, but at the same time we have substantially reinforced our owners project management team, both in terms of area project managers, overall project director, project controls staff, and are working very, very closely with our contractor to make sure that there are complementary skills.

But the lesson learned really is one of resource availability and project management expertise, and I'm absolutely confident that the team that we have in place for Liberia will deliver this successfully.

OK. Thank you, sir. Is there any operational risk in ramping up the volumes? Or, is everything on schedule here in terms of volumes, what you get out now?

I think the ramp up is proceeding quite well. Initially, you always get a couple of hiccups associated with control systems and stuff like that, and we've had our fair share of hiccups in the last six weeks, but we're finding that as we progress now we are in fact achieving quite sustained stability.

I would say that over the course of the last couple of weeks, we've reached 75% of nameplate capacity on a first half-line, and that's improving on a daily basis. The second half-line will start up in the next couple of days, but the mill has already been debugged. So, I anticipate that the ramp-up will in fact go quite smoothly.

OK. Great. Thanks for the clarification.

We'll take the next question from Steve Benson at Goldman Sachs, please.

Hi, there. Thanks for taking my question. Firstly, in the quarter it seemed like, with the mining division, the shipment volumes were up, prices were broadly flat, yet the EBITDA was pretty much flat, quarter on quarter, as well, and we were expecting a slight growth in that EBITDA. And you've touched a little bit on the costs of the overall division, but specifically for [Mont Wright], assuming it's ramped-up by year-end, should we be expecting this $38 cash cost run rate for 2014?

And the second question was just on the net debt target for year-end 2013. Does that factor in a possible bid for the ThyssenKrupp Alabama plant?

Thanks.

Steve, I don't think you can expect the $38 run rate immediately, but it certainly will be achieved in the course of the next year or so.

Just on the mining profitability, Q1 to Q2, you do recognize that even though volumes were increased, there was a price fall. On average, prices fell approximately $20, from $146 to about $127. And so that reflects the fact that there was a price-cost squeeze. Some of that effect was mitigated by better cost performance. Some of it was mitigated by the lag effects that we have in our contracts.

In terms of our net debt target, I think we've always said that we do not believe that the construct of our bid causes a material impact on our net debt.

OK. Thank you very much.

Great. We'll take the next question from Mike Shillaker, Credit Suisse.

Thanks a lot. I've got two questions. Firstly, when I look at the way you're splitting up the year in growth, and then I look at how you look at each half, you've got a very weak first half but obviously reasonable acceleration in the second half -- maybe down 5%, maybe up 4% to 5% in the second half of the year. Is this purely the second half base effect? Or, actually, are you experiencing a general underlying acceleration in the absolute as well in the second half of the year? And, if that is the case, do you actually think there's scope for further price hikes to come after the summer?

And my second question, just when you look at the -- I think we always agree that you don't keep management gains -- it's a part of the business -- but the supernormal stuff, you do. When you actually do the analysis, can you actually give us a sense of how much of the asset optimization gains, the $600 million, you actually think you've kept in the numbers?

OK. Michael, in terms of the AOP, I think it's quite easy. You can do the math yourself. If you strip out the non-cash dynamic delta hedge gain in the first half of 2012 and you strip it out in Q1, you will see two things. Number one, compared first half 2012 to first half 2013, Flat Carbon Europe results are $300 million-plus better.

This is in spite of first half 2013 having 2% lower shipments. So, you can see that even though shipments are down 2% -- so, there is no volume positive impact -- base EBITDA results are $300 million-plus better.

So, that gets you to the fact that the AOP savings are seen very clearly in our performance.

Just on your base effect, I'm sure others can comment on what they're seeing in their specific end-markets. Maybe the big end-market is North America or the Americas which Lou can comment on. In Europe, we are seeing a slightly stronger order intake into third quarter than we have in the past. Clearly, first half has been much weaker than we anticipated. [Apparent consumption] is down 5.7%. We're still forecasting apparent consumption in Europe to be negative for the year, but not at those levels, considerably less.

So, we're seeing a stronger second half than we have, purely compared to previous times in the same period.

Lou?

So, I think in North America it's a somewhat similar pattern. We have and we have had really for the last several years a very strong automotive sector. So, year on year we continue to see good strength in that sector, and that's the most important end-use market for our operations.

In NAFTA, I think we see some weakness in other markets. Energy, I think we still have a longer-term quite bullish perspective on, but that's largely project-driven. The projects have slowed down.

There's various impacts, I think, of the withdrawal of the stimulus that were connected to some political events the end of last year.

So, the bright spot is clearly automotive, but we're within five points of the pre-crisis consumption level. We actually see consumption, in the flat-rolled market at least, being a bit lower in 2013 than in 2012, but I think that's also an inventory effect, and of course low inventories which we're seeing certainly in the distribution sector now do support some upside in pricing if markets tighten at all. And we've seen that over the last six to eight weeks in the US.

All right. I think you've just seen (inaudible) in the 55, as well. What's the normal lag between the ISM and that coming through in real demand?

Probably we're seeing that in maybe two to three months, depending on the product.

OK. All right. Clear. Thanks.

Great. We'll take the next question from Luc at Exane.

Hi, gentlemen. Two questions, if I may. First of all, if you could quantify the impact of the issues you've been facing in the US with regards to the labor dispute and the production issues? If you have a ballpark number you can provide?

Second one, related to whether you have had recourse to securitization as part of your working capital requirement reduction?

And finally, with regards to net debt guidance, whether this includes or not the disposal of Kalagadi Manganese, and if you could update us on that?

Thank you.

Just to give a bit more chapter and verse on the volume issues that we had, the production issues we had in the US in the second quarter, we had several production problems in our operations in Indiana that basically affected blast furnaces, and we lost about 300,000 tons -- I'm talking about short tons here in that case -- and then we had labor issues, ultimately, at our Burns Harbor plant, where we lost about 250,000. So, we lost in total on a net level about 550,000 tons of production.

The impact on shipments though was much, much lower. We were able to reduce inventories about 280,000 tons, and we also sourced material, principally slabs from sister operations within the Flat Carbon Americas group. The slabs alone were about 165,000 tons. We also moved some orders around.

So, the shipments impact was less than 200,000 tons for that, relative to a more substantial volume loss, and we expect that to play out mainly in the second quarter, to some degree in the third quarter as well.

And I should comment that I think the operations actually are running ahead of plan today. So, knock on wood, these issues are behind us.

Aditya, would you like to answer on net debt and --?

So, in terms of securitization, we do not provide a breakdown on a quarterly basis, but I can say that broadly it was flat. You can get full details when we report annual results.

I don't know if there's anything else on the net debt?

And on Kalahari, clearly whether Kalahari happens or not is not part of our net debt guidance, primarily because the deal is signed but it is still subject to financing.

Thank you.

Great. We'll take the next question from Alessandro Abate at J.P. Morgan.

Good morning, good afternoon to everybody. Just my two questions. One is related to Brazil and the effect of the FX, whether you are expecting an acceleration of [FX] from Brazil and this can actually offset the weakness that you have relative to the US dollar in terms of translation effect on your P&L?

And the second one is related to the [bids] and the material cash outflow [or was] related to the [partners] you're going to take over [cover it]? Let's assume that you are the buyer of the assets. Can we expect basically a cash outflow, materially, having an effect in H2 2013? Or, actually, this is not included in your structure bid?

Thank you very much.

Alessandro, in terms of FX effects in Brazil, I think it's true for any such economy. At the end of the day, depreciating currency relative to the dollar increases the competitiveness of the asset base, assuming inflation doesn't catch up immediately.

We see some of that occur even in South Africa, where there was a weakness in the rand. We see some of that occurring in Brazil. In Brazil, the real weakness is much more recent. So, the key aspect here is, are we able to match the domestic sales prices in real to the dollar? That is still a work in progress, if we're able to do that, and that will offset the translation effects, because overall margins will be greater than the translation loss.

So, to the extent that we can increase prices in 3Q, that will be -- that would help our results.

In terms of Alabama, I think there are a lot of questions on this, but as we have said previously, due to the construct of our bid, we are providing our net debt guidance. We do not believe that our bid would materially change that, and that's true for the second half of the year as well.

Just one follow-up if I may, Aditya, on Brazil, because there is an article in the local press that the Brazilian government will not renew the benefits of the higher import tariffs on the series of products including steel that are set to expire in October. Do you have any news or a little bit more light on that?

Yes, I can weigh in, maybe building on what Aditya said. I think to date this year as the real has been weakening, of course that does give us the opportunity to keep things stable, to actually raise the prices in real terms, and that's been the case to date. What the future may hold is unclear. But, we've seen prices go up in Brazil in part to compensate for that.

On the trade front and regulatory environment there, I think there's two key elements and policy changes within the last year or so that improve the structure for the Brazilian steel producers. One is that they have eliminated or greatly reduced import incentives that were applied on the provincial level, and that is a very important event for us.

The [Letek] tariffs were always temporary. They're part of the [MercoSur] arrangement. They move from sector to sector. I don't think that those had a big impact on our market. Those are the things that are being removed.

The more fundamental issue is the elimination of these import incentives which amounted to somewhere just shy of 10% in terms of the attractiveness of coming through the provinces that offered those benefits.

So, that's the bigger event, and I think if we can say anything is gone for good, that's gone for good. The more temporary Letek arrangements will be removed, but I think it was always expected they'd be temporary, and frankly we don't see them as a significant event.

Maybe one other point is that I think if you look at Brazil, the bigger long-term concern we'd have there I think is the competitiveness of that whole manufacturing sector. As you know, it's a relatively expensive place to operate today, and I think the real coming more in line with what would be purchasing power parity levels is just a plus for our customer base, and longer term that's probably a much bigger event than what happens quarter to quarter or month to month with our pricing opportunities.

Thank you very much. Very detailed answer. Thank you.

Great. We'll take the next question from Tony Rizzuto at Cowen & Co.

Thank you very much, and I've got two questions. The first question is in regards to the Chinese dynamics. And you had indicated that you see a current steel consumption of about 4.5% to 5.5% for the full year. So far this year, it seems to be far outpaced by crude steel production. And as you alluded to, the inventory data doesn't appear to indicate that inventories are building. They've actually been coming down. But, is it possible that inventories could be building elsewhere that are not so transparent? That's my first question.

And then, my follow-up on the question I think that was asked of Lou, are you concerned about the supply increasing at a time of widening spreads? And how will that likely affect the steel price structure in the United States?

If I understood the question, it concerned whether there's supply concerns, let's say, for the pricing environment in the US. I think if you look back at the entire year, we were actually a little bit puzzled that prices were seemingly relatively depressed in first quarter and into the second quarter.

So, I think we had expected we would have been higher earlier in the year. The fact that we've recovered now is certainly good news for us, but it really is relatively consistent with our expectations. And in fact, if we look at spot price levels today, they're very, very close to what we expected when we put together our business plan for this year. The pattern though is different, that they were lower in the first part of the year than we expected, and we're compensating for that today.

So, I think the underlying demand and supply conditions support the level that we're at now. The concern as always is that we're in a global market. All these prices move together. There's arbitrage opportunities. There's a lag of several months if prices get out of line, for imports to go up or go down depending on the direction of that arbitrage opportunity. But, that's the issue I think much more so than the underlying supply and demand conditions in the US.

Clearly, we have an event with an ongoing strike, or lockout -- whatever you want to put it -- at Lake Erie Works of US Steel in Canada, but that's a 2% event in the overall market.

And as I mentioned, in our case, although we had a lot of issues on the production side of crude steel, the shipments impact for us in Q2 was relatively modest because of ways that we were able to compensate for that.

On China, in spite that their GDP growth is slowed down in the first half, what we have noticed is that [apparent steel consumption] in the first half grew by an 8.5% year-on-year basis, which is a very strong growth of cold rolled steel. And for the whole year, we expect 5.8%. We have increased our consumption rate in China, our growth, from 4% to 5% to 5.8%.

And what happened in the first half, because everyone -- we could also see from the raw material price, specifically iron ore price, that everyone was expecting that the iron ore prices would drop in the second half. So, there has been also destocking in the first half of this year. But since the demand continued to grow and there has been a strong production, we are seeing that the iron ore prices have not dropped as much as everyone was expecting and still it is hovering around $130, $128, which means that now there will be some restocking.

And though the second half we believe that the market will slow down, but iron ore prices will stay around $115 -- between $120 to $130, and they could be slowed down over the first half, but still the average growth rate will be 5.8%.

Thank you very much, gentlemen.

Great. We'll take the next question from Carsten Riek of UBS.

One question on the African volumes, because I notice that the production was actually up, but shipments down. Is that entirely a time lag effect from the inventories, as they have been affected by the fire in the (inaudible)? That's the first one.

The second one goes back to your free cash flow. What I've noticed is that receivables and payables moved actually in different direction, freeing around $1.2 billion in cash. Is that one of the reasons why you're actually more cautious towards the year-end with the net debt guidance, because usually we see free cash flow release in the second half compared to the first half?

Thank you very much.

OK. I'll start with the first one. Hello. Good afternoon. Good morning. Remember in the first quarter with the fire, we lost about 350 KTs. We tried to mitigate that by on one side reducing stock, on the other side we had imports of slabs. So, we don't see -- when we compare both quarters, it doesn't mean that in first quarter we lost completely those tonnes. So, the 350 KT, at least we compensated at 100 KT.

Now, also in the second quarter, we've seen slower demand in flat products. That is clear. Second, we did not want to increase our order book with exports, because we wanted to attend our domestic market. Additionally to that, third, and very important reason, we did see imports. When we had the fire, many of our customers got sort of nervous and said there could be a problem of production. But then we were able to reduce this impact, instead of three months, two months. So, we have seen imports.

So, it's a combination of our mitigation plan in the first quarter and the three reasons for the second quarter -- slower demand, lower exports, and increased imports.

Thank you very much.

OK. In terms of our working capital, we have a release normally in the first half. Even if you looked at the first half of 2012, you would see that in the second quarter working capital release was $1.381 billion. This quarter, it's $1.272 billion. So, slightly less than last year. Last year, first half was approximately a $1.1 billion release, and this year it is roughly $700 million.

So, the way we work it is we build up because of either the Great Lakes as well as we build stock in the second half, because we produce less so that we can ship more in the first half. So, that's a natural operating cycle that we have.

I agree with you the working capital performance in the second quarter from a days perspective was very low. I believe the teams did an exceptional job. I do not expect that that level will be sustained into the second half, partially because we will be rebuilding for the winter months and partially because maybe some of this efficiency is lost as volumes pick up a bit.

Thank you.

Great. We'll take the next question from Rochus at Kepler Cheuvreux.

Hi. Thanks for taking the question. Briefly, back on the US market, I think you've commented on the situation in the second quarter there. Can you -- ? As far as I know, there is a further outage at Cleveland now which has a scheduled standstill. How are the incidents in the second quarter impacting your ability to compensate for the blast furnace shutdown in Cleveland? Do you still have enough inventories in your system to mitigate for the volume loss which is obviously, with the blast furnace obviously down for two and a half months?

The second question is on our reduced guidance. Can you work out a little bit the various components where you have taken a more cautious stance? All in all, you're revising by $600 million. When I take the lower coal price, I'm getting to maybe $100 million effect. And if I take the slightly lower volume, I'm also getting to some $100 million effect. Could you elaborate what the outages and incidents in US were contributing to the guidance revision? And what are the other bits and pieces, as obviously you're not taking it? And [new stands] on the iron ore price?

I think on the Cleveland reline, that's been planned for quite a while, and I think we expect fully to be able to compensate for that without any interruption in our ability to ship.

One of the reasons we were able to compensate for the shortfall we had in Q2 was, as I mentioned, that the first part of the year was weaker than people had expected and we actually were building inventory over that period, anticipating that the market could turn around at any time, rather than throttling back on furnaces or even idling furnaces.

So, we had a bit more inventory when we went into these production problems. Blind luck on some levels, but we were able to use that as the major internal source for compensating for that.

And of course as you know, we're the largest slab supplier to the global market in the world. We always have that option, and we drew on that option with this production shortfall. That's part of the solution also for Cleveland potentially, that we can source slabs from Mexico or from Brazil. That means that we ship less into markets, particularly in east Asia, but those are frankly not very profitable markets anyway. So, the impact on the results for the Company are de minimis.

So, I think we expect to complete that reline -- the parts are all there, the plans are in place, et cetera -- on schedule, on time. No disruption on our (inaudible) capability.

OK. Great. Thank you, Lou. In terms of the guidance, if you just -- let's start with -- there are two effects, primarily, as you said, volume and raw materials. Our numbers are higher for volumes. We are seeing $300 million. So, let me break that down for you.

We believe we have lost 1% of shipment. This is for 2013. That's roughly, let's say, 900,000 tonnes, or 1 million tonnes. And that's because of weakness in Europe and in North America. We believe the opportunity lost on these shipments is about $200-plus per tonne, which means it's roughly $200 million.

The costs that we have incurred in South Africa as well as in the US, we estimate them at $100 million.

So, if you look at the shipment loss plus the $100 million higher cost in US and South Africa, we get to about $300 million.

When we look on the raw materials side, this is as per what we had budgeted internally, coal prices are much lower than what we had budgeted. Our budgets on an average basis were higher. So, we will produce about 8 million tonnes. A lot of this is to our -- some of this is marketable. Some of this is into our operations. So, if you take the aggregate of 8 million and you multiply that by $20 or $30, you get anywhere from $160 million to $250 million.

The last effect is the IODEX premia. Most of our tonnages are sold at 65% Fe-plus, and you have seen the premia decline by about $0.80, and that has had some effect.

So, those are how we get to roughly a $600 million impact which has led us to revise our guidance.

OK. That's helpful. Thank you.

We'll take the next question from Jeff Largey at Macquarie.

Hi. Good afternoon. Two questions. The first one is just back to guidance and outlook. Given the price hikes we've seen both in the US and Europe recently, is there any chance that you'll capture those price hikes in the third quarter, or whether they'll lag into the fourth quarter in terms of the impact on margins?

OK. Jeff, thank you for your question. I think the price hikes mostly will come in September. So, the impact on the third quarter will not be that significant. I don't know, Lou, if there's anything more to say?

No, I think because the increases started earlier in the States and in North America, we'll capture them earlier.

But I want to caution that we have 10% to 15% of our production is connected to [injects] contracts that are lagged a quarter. So, that's an offsetting effect as we go into Q3, because those are based on Q2 prices which for most of the quarter, certainly April and May, were relatively low.

OK. That's helpful. And just a quick second question, I think you've to a large extent answered it, but a couple of days ago you had the chairman of Nucor making some comments that everyone had dropped out of the bidding for the ThyssenKrupp Steel America's plants. Can I just confirm based on your comments that the bidding is still alive and well?

And I guess a final point is, if you had to compare the rolling mill in Alabama to a car, what type of car would you compare it to?

I can't comment on what Dan DiMicco has commented [until ticket confirms]. Otherwise, this is still an active process, and we are bound by the confidentiality. So, we really cannot comment much more on this at this time.

But we have always said -- I can repeat my earlier statement -- that Alabama Mine is an attractive asset in a growing market.

So, we have an appetite, but at the same time Aditya has clarified that if this transaction happens, if and when, it will have a minimal impact on our balance sheet.

Great. Thank you.

Great. We'll take the next question from Dave Katz at J.P. Morgan.

Hi. I apologize if the question has been asked before. My phone's been cutting in and out. On the expansion in Brazil, it's an interesting change of pace, that you're going after steel expansion again. I heard you say earlier in the call that you wouldn't do a large ramp-up of steel CapEx until the net debt target has been realized and market conditions have been achieved. But do you anticipate undertaking additional projects on a small basis and, if so, what regions do you think that would be central in?

OK. Good morning. Good afternoon. So, in fact, what we are doing in Brazil is we have the project to increase capacity by 1.1 million, but we have decided only to restart Phase One, which is in fact going for the rolling mill, which is in fact an investment of $180 million. Basically, it gives us a little bit more steel capacity, and it gives us more rolling capacity.

And the reason why we are doing it is that simply that we are today running full in Brazil, that we feel that the market is quite good, and that we have the customer base indeed to catch up. And so, from that point of view, the aim is really to be on the market, to be with our customers, to be with our market share by the end of 2015.

Second step will then come, and that will be a separate appreciation. We will get some more internal [semis] to supply for that rolling mill, and then we will decide to go further on. And when we will decide, we will let you know.

Great. Thank you. I just want to add one small point in terms of global steel CapEx allocation. I think we've talked about this in our Investor Day as well. We're focused on our franchise business, which is automotive. So, we continue to make smaller CapEx to enlarge our franchise and compete effectively, and those will be investments in North America as well as in Europe.

We do see growth opportunity in Mexico as well as in Brazil. And so, I think we're making the first step in Brazil, and I think your statement that a significant increase in steel CapEx would have to wait until we achieve our net debt target.

But these are franchise businesses, and we need to continue to invest in them to capture the market opportunity.

Thank you.

OK.

Great. We'll take the next question from Neil Sampat at Nomura.

Hi, there. I just had two questions. Firstly, just to clarify a question earlier on the North American production disruptions that have taken place. Did you expect shipments to come back -- the 300,000 tons, or 250,000 tons, that were lost -- to come back in Q3? Or, is it over Q3 and Q4?

And am I right in interpreting the comment regarding guidance coming down and the cost in South Africa and the US being roughly $100 million of that to imply that the actual direct costs of those disruptions in the US were just over $30 million?

And then, secondly, a question on [AA and CIS], can you just give us an update as to how the cost reductions there are progressing? Are we going to see any of that hit the P&L in the second half of this year? And is there potential for some sort of restructuring of the production footprint there?

So, in terms of the guidance, we talked about the direct cost impact, not the volume impact. The volume impact is also captured in decline in apparent steel production. So, Lou went through how we have offset a lot of the volume cost impact through a drawdown of slabs as well as the purchase of slab inventory in other parts of the world.

In terms of recovering the 200,000 tons in the second half?

Yes, I think we're planning to recover a good chunk of it, but I think our current expectation is that there will still be some loss, maybe 100,000 tons, and we reduce it to that level. But I think -- and that should happen really maybe some in Q4 but most in Q3 is the program. Now, this is all versus normal plans that we would -- business plan and forecast that we'd have in place.

(inaudible), do you have any update on cost reduction plan?

Yes, Mr. Mittal. Now, for third quarter, what we plan is as we've seen an improvement from Q1 to Q2 continue with that improvement, touch on wood, as Lou Schorsch said. So, we do see that in [thermita] we should see improving cost going forward, also in [Kleridy], where we did lose around 100 KT this quarter from some oxygen issues.

Now, we are concerned South Africa will be somewhat different, because I have to tell you that in South Africa the third quarter is when there is a high month of electricity. So, we do have somewhat higher costs, but we do continue in our liability program which has already rendered this quarter its first good results, and we hope to continue in that sense and continue improving our cost base as we've done in Q2.

Thank you.

Thank you. Is there any scope to do anything a bit more dramatic in terms of the production footprint there?

Well, you know we've announced in South Africa the closure of the electric arc furnaces. That is number one, and as therefore the [activity] of Kazakhstan. We don't think so. We have to continue working hard on our cost; that is, on our labor, on our energies, all our transformation costs. That's where we are very focused in on, and we think that if you say -- dramatic -- no. I would say more it's a day-to-day on our liability and reducing our transformation costs and improving also with our mining ore costs.

OK.

Thank you.

Thank you.

OK. We'll take the next question from Cedar at Bank of America Merrill Lynch.

Thanks very much. Two quick questions. Firstly, in the US market, can you give us an indication of what you're seeing on the import side? We've seen these prices go up, but from here what's the trajectory? And with the prices rising, has that simply been for real demand? Or, has there been any restocking actually going on? That's the first question.

And then, the second question, again on the guidance -- you probably don't want it -- but it feels like you guys are lowballing it a little bit, if I'm missing something, because if I take your first half EBITDA and I simplistically say that shipments need to be flat in order to get to the bottom half of your 1% to 2% shipment growth in 2013, and I look at some cost cuts coming through in the second half of the year from the AOP and from the management gains, and then we've got an increase in mining volumes, that $6.5 billion feels pretty conservative. Am I missing something there?

Lou, on the pricing?

Yes, I think we have not seen a big surge of imports. I think that's always a concern when you see prices moving ahead in one region versus in another. Currently, I think the spread gives us about $175 a metric ton between North American price levels, spot price levels, and what we see export prices out of China, let's say, which would be the low end there. And that's probably a bit higher than is a sustainable figure, but we've also seen the Chinese prices come up. I think as we see their (inaudible) price come up, that provides some support for that pricing level.

So, I think we're always attuned to [seeing those]. We know that we need to be competitive on a world basis, and we're not seeing the imports flow in now but with that kind of opportunity, you'll probably see some balancing between those prices over time. How that plays out, we'll have to see.

OK. Cedar, in terms of guidance, I wish we were lowballing it, but this is our most accurate forecast of what we're seeing in the business today. Just to perhaps put what we are seeing in a broader perspective, I think when we start the second half of this year, we're starting from a much lower base of steel pricing compared to where we were in [January]. So, that's why I think a lot of the discussion has been on what do we see in terms of price increases both in Europe and in North America.

Second, when we say average iron ore prices of $130, the first half was at $135, because Q1 was at $147. So, with this average of $130, we're implying iron ore prices of about $125. So, a weaker iron ore price environment clearly does affect some of the EBITDA for mining, but that's offset by the increased volumes.

Then, the others are just the effects seen normally in the second half. We do have higher maintenance costs, as well as there is some impact of August and December in terms of volumes.

But fundamentally, I think the two key drivers why saying that we should achieve a similar amount of EBITDA in the second half is plausible is primarily because of the other factors you talked about (i.e., AOP, management gains, recovering these end markets), offset by base steel pricing as well as a resumption on base for pricing.

OK. So, would it be fair to say that ex-AOP and management gain savings, you wouldn't be expecting to see any margin expansion in your steel business, obviously on a relative basis versus your peer group, because you think you're doing more? You would get the margins there, but no one else will, in an improving demand environment.

But to be honest I have not thought about it that way. So, I'll have to think about it a bit more before I can answer that.

But generally, yes. So, I think generally what we have talked about is we have AOP. We have management gains benefits. A lot of the AOP benefits though is in first half. So, we talked about in second quarter we have achieved the savings in excess of $1 billion already. There are some residual costs in the system. They're not that significant. They're less than 20% of the total AOP savings. That's $400 million. I don't see a significant chunk of that coming out in the beginning of the second half, perhaps towards the end.

And when we talked about Flat Carbon Europe, Flat Carbon Europe results do not represent 100% of the AOP. I was just giving Michael an example which is the largest example of how you can clearly see in the EBITDA the results. But there have been AOP effects both in AMDS as well as in the Long Euro segment.

So, a lot of the AOP has been done. Management gains is continuing. That's going to be a powerful driver of results.

OK. Thanks.

Sure.

OK. We've got about another five minutes here. So, we'll take the next question from Bastian at Deutsche Bank, please.

Good afternoon, gentlemen. Thanks for taking my questions. I've got two quick ones. The first one on SCE, for Aditya. I guess we see the first small positive signal from truck orders, which is usually good leading indicator for autos as well, and you are the largest player in this market. So, is there any sign in your order book or also from your discussions with clients supporting this trend?

And then, the second question is on iron ore shipments. I saw that the interim share and the absolute number of market price shipments has reached a record level, although the market price shipments overall I think were below last year's level. Could you please give us a bit of color on the reason for that and whether your marketing strategy is working according to plan?

Thank you.

Automotive at SCE, I think second quarter marked a 20-year low. We're not seeing a change in the order book. We are seeing a stronger order book in the third quarter, which I talked about earlier, but that's not coming necessarily from the automotive side. It's just a general market environment, because I think apparency of consumption will be less weak in the second half than in the first half. So, there's a small restock occurring.

In terms of iron ore shipments, I think overall marketable shipments are up, whether you look at first half 2012 versus first half 2013, or even second half. And they will continue to rise. We expect marketable shipments to be 20% higher.

You're right. A larger portion of these shipments are going to ArcelorMittal. I think some of this reflects the fact that we have better order flows and a more stable production in Europe and we're able to avail of the Liberian material which we were not availing of before. And as we ramp up our production capabilities in a more stable manner in Europe, we can utilize some of these internally sold market price tonnes of iron ore.

And Peter?

The only other thing that I would add is exactly that. Shipments are, say, Q-on-Q, from last year to this year, are actually flat. But remember (inaudible) expansion is ramping up right now, and that goes straight into the marketable tonnages. And Liberia performance is actually very good now, and it's anticipated that will continue to improve as well.

OK. Perfect. Thank you.

OK. So, we'll have to take the last question now from Alex Hauenstein at MainFirst.

Thank you. Just one. Could you provide us with an idea of the last year EBITDA losses in Liege, Florange, [Kalarti], and [Chivra Rodange], please? Just an idea on the EBITDA level. That would be helpful. Thank you.

I don't think we -- it's significantly negative, as you can imagine, on an EBITDA basis, and that represents the lion's share of the AOP savings. We have provided to some of the unions EBIT numbers, but I don't think at this point in time we want to get into the discussion on what was the profitability of Liege and Florange.

What I would say is that based on the Asset Optimization Program and based on how we are optimizing the footprint and what we intend to do with these facilities assuming we execute the industrial plan, we intend to make these facilities EBITDA positive, therefore sustainable, under the new asset configuration.

So, we will not be --.

OK. Thank you very much.

OK. So, because that question was quite brief, I think we can squeeze one more question in from Tom O'Hara at Citigroup. If you can just make it one question, please, Tom?

Yes, of course. Thanks very much, Daniel. Just a question. In Q1, you spoke about potentially doing some asset optimization in eastern Europe. Is that still something you're looking at? And is there any further developments on that front?

Yes, Tom. We're still looking at it. There are no developments to report. In eastern Europe, the AOP program would be over a few years. So, the savings would be over a few years. They would not be like the western Europe where we could see the savings quite quickly, primarily because we have to do more work in terms of the asset configuration to achieve those savings. And, therefore, it requires some work on our side to prepare the asset base before we can take those actions.

Secondly, in terms of the [Quantama] savings, the Quantama savings will not be that significant, primarily because the fixed cost base in eastern Europe, because wages are lower, is not that high. And clearly we will optimize eastern Europe over a period time, because the demand patterns there are still evolving, as it is a growth market.

So, I think that basically covers it.

I just wanted to make one point. I think this question was asked right in the beginning perhaps, and I just want to answer the viability of ArcelorMittal Mine Canada after the cost overrun. It's $1.6 billion for 8 million tonnes. That's $200 per tonne. Return on capital required is 15%. That's about $30 per tonne of cash profit. Knowing the cost structure and the quality capability of that product, clearly that return is still achievable on a long-term basis.

Thank you.

So, this concludes our call this quarter and looking forward to talk to you again. There may be still a lot many questions, but in view of the time constraint, we are closing the call now. But if you have any questions, you can always call Daniel on his line.

Thank you very much.