ArcelorMittal SA (MT) 2014 Q2 法說會逐字稿

Presentation

Good afternoon and good morning, everybody. This is Daniel Fairclough from ArcelorMittal's investor relations team. Thank you very much for joining us today on our conference call to discuss the second quarter 2014 results.

First, I'd like to remind you that this call is being recorded. We will have a brief presentation from Mr. Mittal and Aditya, followed by a Q&A session. The whole call should last just about an hour, maybe just slightly over an hour. As a result, we will be limited to two questions per analyst or investor. If you could respect that, we would appreciate it.

(Operator Instructions)

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

Thank you, Daniel. Good day to everyone, and welcome to ArcelorMittal's second quarter 2014 results call.

I am joined on this call today by all the members of the Group management board. I'm pleased to say that these results continue to demonstrate the underlying improvement in our operating performance and progress on our strategic objectives.

Despite the lower iron ore price and the continued operating difficulties in NAFTA, we delivered a 9% year-on-year improvement in underlying EBITDA this quarter. As well as a continued improvement in steel market conditions, this reflects the benefits of our cost optimization processes and the expansion of our iron ore capacity.

Despite the improvement in our steel margins, I think we could have done better this quarter, as I am somewhat disappointed by the performance of our NAFTA segment. But I expect this to improve in the second half.

In terms of the outlook for our business, I remain cautiously optimistic. We have seen a significant correction in iron ore prices so far this year, but it would appear a near-term floor has been reached. The leading indicators for steel demand remain positive, in particular the indicators for our core markets of North America and Europe. Although many emerging markets remain challenged, we remain confident that our shipments will increase around 3% in 2014.

We have today adjusted our guidance framework to reflect the lower than anticipated iron ore price. (inaudible), the market has anticipated this, and at the end of the day, that is the aim of our guidance framework.

Given the headwind from lower iron ore price and the weather-related impacts on NAFTA segment performance, I believe that it is very positive that we still expect EBITDA in 2014 to be higher than 2013. This reflects our continued and focused efforts to strengthen the business through cost optimization and maximizing the potential of our mining assets.

If I look to the next slide, on agenda, I will begin today's presentation with a brief overview of our second quarter results, followed by an update of our recent developments. I will then spend some time on the outlook for our markets, before I turn the call over to Aditya.

As usual, I will start with safety. The lost time injury frequency rate in second quarter was 0.87 times, compared with 0.90 times in second quarter 2013. On the left-hand, we can see the clear progress we have made in this [in the years], reflecting our continued focus on this priority. As a Company, we remain [comfortable journey towards zero home]. There are two focus areas in 2014: one, contractor performance, and the second, continue to analyze the causes of 2013 fatal accidents and action on those causes.

Next, I will turn to the highlights of the second quarter 2014 results, as we can see on slide number 4. EBITDA for the second quarter of 2014 was $1.8 billion. This includes the $90 million settlement of a US litigation case. Stripping this out, there was a clear 9% year-on-year improvement in our results, despite the weaker iron ore price environment.

The improvement is driven by several factors. Firstly, our steel shipments increased by 2.5% year on year, with limited additional fixed costs. Secondly, we had a record quarter in our mining business. Iron ore production was run-rating at over 66 million rate in second quarter. Market-priced iron ore shipments were 29% higher than the same period in 2013. Finally, we continue to reap the benefits of our focused cost optimization efforts, not only in steel but also in our mining business.

The improved operating result together with lower depreciation and net interest charges supported an improved bottom line result. Net income in the second quarter was $0.1 billion, up from a loss of $0.8 billion in the second quarter of 2013.

Moving to the balance sheet highlight, net debt decreased by $1.1 billion during the second quarter. So, we are again heading in the right direction towards our $15 billion medium-term target.

Moving to slide 5, I want to talk about the expansion of our steel margins. On an underlying basis, steel EBITDA increased by $7 per tonne compared to the same period of 2013. In fact, with the exception of Brazil, all steel segments demonstrated improvement during the second quarter.

In NAFTA, the impact of energy-related costs due to the severe weather at the beginning of the year also affected our second quarter results. This is due to the weighted average inventory accounting methodology we employ under IFRS. Despite this cost, as well as those related to planned and unplanned maintenance downtime, the NAFTA segment showed clear profitability improvements on an underlying basis. Had we avoided the unplanned outage at Cleveland, then performance would have been [better].

In Brazil, we did see margins contract year on year. Clearly, this reflects the weaker demand environment, in particular automotive, as well as the additional fixed costs incurred in anticipation of the restart of blast furnace number 3. Just to remind everyone, blast furnace 3 is oriented to produce slab for export. So, the decision to restart has no link to domestic demand.

In Europe, I am pleased to see the continued improvement in our results. EBITDA per tonne increased by $19 per year on year. Even allowing for volume impacts, we can clearly see the continued benefits of our cost optimization efforts.

I'm also encouraged by the results for ACIS segment. CIS performance has been strong both in Kazakhstan and Ukraine, and this has been partly offset the clearly weak South Africa result which was dragged down by poor demand and costs associated with (inaudible).

Moving on to the development of our mining business, in next slide, number 6, this was another record quarter for our mining business. The group achieved its highest ever quarterly iron ore production, of 16.6 million tonnes, out of which we shipped 10.5 million tonnes at the market price, an increase of 29% year on year.

At ArcelorMittal Mines Canada, as you know, we completed our expansion from 16 million tonnes to 24 million tonnes last year, and in December achieved the full run rate for both concentrate production and shipments. During the second quarter, we shipped 6 million tonnes, an increase of 1.9 million tonnes over the same period last year.

In Liberia, phase one continues to run very well. So, we are well placed to achieve 15% increase that forms a key part of our 2014 guidance. Higher volumes as well as focused efficiency efforts are driving a lower unit cost. Again, we are on well track to achieve our target of a 7% reduction in iron ore unit costs this year.

Looking to the future, second phase expansion in Liberia is proceeding well. We have all the environmental permits in place, and major equipment procurement is complete. [Civil] works have commenced at the mine, and processing sites have been completed at the Buchanan port. This expansion is on track for completion by end of 2015.

On slide 7, I would like to take a moment to update you on some of the progress we are making with our automotive franchise. We continue to enhance our ability to serve the growing automotive markets. Last quarter, we completed the acquisition of Calvert, which we reported earlier, and the ramp-up is proceeding well. In June, we achieved 83% utilization of the hot mill. In the past quarter, we have integrated the slab supply from our mills in Brazil and Mexico, and trials are underway to qualify these slabs with our customers. The slab process with the slab from [CSA] is really advanced.

This past quarter, we also started production at VAMA China. As you know, VAMA, our joint venture for automotive steel in China. Initial capacity is 1.5 million tons, expandable to 2.3 million tons, making VAMA capable of supporting above to a 10% share of this fast-growing market. We expect to supply the first (technical difficulty) before the end of the year.

Next, I will discuss our market outlook. The picture for our core markets Europe and North America continues to strengthen. We have again upgraded our demand forecast for these two markets which, combined, represent around two-thirds of our steel shipments. In developed markets, manufacturing output expanded during second quarter, and indicators point to continued growth in third quarter.

As you can see on the chart on the left side of this slide, the ArcelorMittal shipment weighted global PMI has pulled back slightly, due to signs of weakness in some emerging markets, but it remains in positive territory and points towards continued growth in demand for [our steel].

In the US, steel demand is growing strongly. This reflects expansion in underlying demand and some mild restocking. In second quarter, manufacturing output grew 6.7% annualized, supported by [auto] and machinery, the beginnings of a pick-up in non-residential construction markets. Steel demand is higher than we anticipated at the beginning of the year, and we have raised our growth estimate for 2014 towards 6%. And at the time of our first quarter results, we had a forecast of between 3.5% and 4.5%.

Moving to Europe, the euro zone manufacturing PMI has been above 50 now for a full 12 months. While the indicators have signaled weaker growth during second quarter, both business and consumer confidence in the region remains [upbeat]. Some restocking, together with an expected uptick in auto production and a [modest] pick-up in construction markets, supports an upgrade to our steel demand forecast. We now see demand growth between 3% and 4%, and in Q1 results we had a forecast between 2% and 3%.

Moving to China, manufacturing has rebounded during second quarter, supported by the targeted government stimulus. However, the real estate market remains oversupplied. Both newly started construction and property sales have declined, and this has negatively impacted steel demand. But elsewhere, there has been offsetting growth: [auto is] strong, 10% year-on-year in June; manufacturing is growing; shipbuilding has [stabilized]; and infrastructure investment continues to rebound.

While we have trimmed our demand forecast slightly, we still expect underlying steel demand to grow around 3% in 2014, as compared to our range between 3% and 4% at the time of first quarter results. So, we have slightly trimmed our forecast.

Elsewhere, we are seeing an overall slowdown in the emerging markets. Demand in the CIS region is impacted by the crisis in Ukraine, but our mills in the region are able to sell into the faster-growing Middle East and Africa markets.

Brazil is also suffering from declining auto sales, the World Cup effects, and weak investments prior to the elections in October.

Overall, we expect global apparent steel demand in 2014 to be towards the bottom of our range of between 3% and 3.5%. But due to the strength in demand in our core markets, we continue to expect ArcelorMittal steel shipments to increase by around 3%.

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

Thank you. Good afternoon and good morning to everybody. I'm on slide 10, where we show the EBITDA progression from Q1 to the underlying level in Q2, of $1.853 billion. The underlying figure excludes the $90 million class action lawsuit settlement in the US, as this charge will not reoccur in future periods.

Just walking through the bridge very quickly, as you can see, additional 0.5 million tonnes of steel volume added $131 million in terms of EBITDA. Selling prices did decline in Europe but increased in NAFTA, ACIS, and Brazil. Input raw material prices also declined in the quarter, but these benefits were completely offset by higher maintenance expenditure relating to planned and unplanned maintenance in NAFTA and additional fixed costs associated with the planned restart of Tubarao blast furnace number 3. So, overall, the price-cost squeeze impact was neutral in the quarter.

In mining, market-price shipments increased, as we heard earlier, to a record 1.2 million tonnes, driven by seasonally higher shipments in Canada. Whilst benchmark iron ore prices declined during the quarter, this impact was offset in part by an approximately 8% reduction in our mining cash costs, in line with our target of a 7% reduction this year, as well as the impact of lower freight costs. So, overall, the mining price-cost impact was a negative $70 million.

Moving along the bridge, we can see a negative $70 million impact from others. This largely represents the settlement of the US litigation case, which when we strip out, we get the underlying EBITDA of $1.853 billion.

Turning to slide 11, this shows our EBITDA to net results. We will focus on the chart in the upper half of the slide, which shows the bridge for the second quarter. As indicated earlier, depreciation was lower this quarter, at $0.9 billion, compared to $1.1 billion in Q1.

As [we said] last quarter, we have undertaken an exercise to review the useful life of our assets. We have concluded that our maintenance practices have extended the lives of our plant and equipment. So, depreciation periods have been adjusted accordingly. This exercise is now largely complete, and for the full year you should anticipate a depreciation charge in the range of $3.8 billion to $4 billion.

Moving to income from investments, associates, and JVs, in Q2 our share of income was $118 million, compared with an income of $36 million in Q1. The improvement was driven by the better performance of our European [investees], a $45 million dividend from Erdemir, and more importantly, our share of the Calvert net result, representing $22 million. In the second quarter, Calvert did not have an impact on the EBITDA line, but we can see the impact in our income from equity line, of $22 million.

Moving to net interest, net interest was lower, by 10%, in the quarter, following the maturity of our convertible bonds in 2Q. We should still expect the full-year net interest expense to be approximately $1.6 billion.

Foreign exchange and other net financing costs in the second quarter was $327 million, as compared to $380 million for Q1. The Q1 figure included the bulk of the $150 million settlement relating to our canceled [R&O] project in Senegal. In Q2, there was some Senegal-related costs, but it also included non-cash gains and losses on our convertible bonds as well as certain hedging instruments which matured during the quarter.

Pleasingly, we returned to positive net income, of $0.1 billion, for the second quarter, compared with the $0.2 loss in Q1 and a more significant loss in prior periods.

Next, we turn to slide 12, showing EBITDA to free cash flow. During the quarter, we had a seasonal release in operating working capital. As a result, rotation days decreased to 54 days, from 61 days in Q1, and this reduced working capital requirements by about $0.9 billion.

The third bar shows the combined impact of net financial cost, tax expenses, including amongst others the Senegal settlement payment.

Positive cash flow from operations of $1.5 billion, combined with CapEx of $774 million, resulted in positive free cash flow of $0.8 billion.

Turning to the next slide, which is slide 13, we show a bridge for the change in our net debt from Q1 to Q2. The main components of the debt decrease, as discussed earlier, is our $0.8 billion positive free cash flow. M&A totaled $0.2 billion, primarily relating to the cash proceeds from the ATIC and [steel core business] divestments and including the $45 million of debt transferred to the acquirers. There was a slight positive impact on net debt from ForEx, as the euro depreciated by 1% compared to the US dollar.

As a result of these movements, net debt decreased by $1.1 billion during Q2, to end the period at $17.4 billion. Clearly, if it were not for the $90 million US settlement and the Senegal settlement, net debt would have been a further $240 million lower at the end of the second quarter.

Finally, we will conclude with guidance. Essentially, our guidance framework is the same as it was at the start of the year, that the expanded steel volumes and cost optimization will support better steel margins and our volume growth in iron ore will go some way in offsetting a weaker iron ore price. That said, the iron ore price has been weaker than our assumption. Updating this assumption to $105, from $120 previously, clearly has an impact on the outcome of the framework.

Based on this revised iron ore assumption, we expect 2014 EBITDA in excess of $7 billion. I consider it positive that we're still guiding to improve EBITDA in 2014 versus 2013, despite a $30 drop in iron ore and the headwinds that our NAFTA business has faced. To me, this highlights the benefits of our ongoing focus on costs and the development of our franchise businesses, including global automotive, and maximizing the potential of our mining assets.

This concludes our prepared remarks, and we're now ready for your questions.

Great. (Operator Instructions) Mike Shillaker, Credit Suisse.

First question is on the announcement of the Nimba project today. Can you give us just some update or some facts in terms of the tonnage that you could produce, the timing of that, and the CapEx cost that that could actually incur, so we can get a sense of how meaningful that project could be?

I think my second question, really, is on iron ore itself, as well. If you look at the last few years, especially this year, we've got record steel output; $90-odd iron ore. And it kind of feels as though maybe the risks are still to the downside on iron ore, relative to a lot of work that people have done on cost curves and similar. At what stage are you prepared, or do you think you need, to pull back on iron ore CapEx?

And what remedial action can you take on steel mills where you've got captive iron ore to take out costs quicker if you needed to, if iron ore actually comes in at $60, $70 a ton over the next couple of years, as opposed to the $90, which I think was consensus?

We will not (inaudible), but I will give you a few details about Nimba. One, in our opinion, this is a very strategic and unique opportunity for us, because it will just (inaudible) from our existing mining operations. This is a very high class iron ore DSO, [direct ship ore], with over 63% [free]. And this [resource] is over 900 million tonnes and this resource is [tough] because of infrastructure. And the [whole Guinea] iron ore resource is not making good progress, because they do not have infrastructure available to them.

And in this case, one phase of Nimba is that they are 40 kilometers away. We can leverage our existing infrastructure of railways and the port, and we think that we will be able to leverage this infrastructure to create value for ArcelorMittal.

Now, we are seeking approvals from Guinea government for allowing us to use the Liberian [roadway to evacuate] the material. There is a bilateral trade agreement between the two governments to let it happen. So, we really do not see it as a problem.

But at this time, we are really looking to complete our interesting projects in Liberia, and once we have finished, we will start to [schedule this] in much more detail. And then, we will come back and give you more information about the project costs. And you can imagine that when the infrastructure facilities are available, [and then the cost], and it is a DSO, then it will make a lot of sense and the cost will be really, really -- it will be around tier one iron ore mines.

The second question on the [$90 iron ore] price today, clearly, in our projects which we are executing today, we have taken a much more conservative price estimates, and we believe that based on that conservative price estimate, our existing projects are still viable and makes [very good] sense and create value for ArcelorMittal. And we were expecting prices to fall, but like any other mining company we are also surprised that this fall has come sooner, and like mining companies, are more surprised about the fall in the coal price, which is much more steeper than anyone expected.

In our iron ore case, we were expecting this price (inaudible). Our projects are based on a much more [annuitive] price, and our costs are going to be [lower], because we are [always] leveraging the existing infrastructure in our mines, whether it's in Canada or Liberia. We are really not investing in a greenfield infrastructure [build].

So, I am quite comfortable with our existing projects, even if the prices go further down.

Why is there expectation in the business that [today is a floor] which could be sustainable? I do not know, but it is what everyone is saying. And we have accordingly -- in the beginning of the year, we had a consensus of $120, market consensus. And now, the market consensus has changed. So, we have revised our consensus market price forecast for rest of the year.

As far as the [captive], I don't know if (inaudible). You are right that if these prices continue to fall further, there is a pressure on these integrated plants with their own mines. So, we are conscious of this, and we are working on how to further improve the productivity of these plants, how to look at their cost structure, and how we can continue to still create value.

The good thing is that what Aditya said in his discussions about the margin is the margins in the steel business which has improved. And last year, we thought that the [amount of volatility] in the iron ore price, and the steel prices were also volatile and going along the iron ore price. But this year, we are seeing that there is less volatility, and the prices are stable, relatively, and margins are improving.

So, we hope that even for our integrated business, the steel prices remain stable for our customers, and our margins should improve in the steel business which should offset the lowering of the iron ore price.

So, we are prepared for those kind of business scenarios, and you can see that from our four [businesses]. Our guidance for this year is more than $7 billion, in spite of a $30 price reduction in iron ore. We are giving our guidance which is more than last year, and you can do your arithmetic or mathematic to calculate the effect headwind of this iron ore price, and still we are giving $1 billion more guidance. That means we are seeing that with our business plan, with our cost optimization, [our asset] optimization, and with our product development, and with our working on franchise business, we are creating value, which is offsetting half of the losses which we could have incurred due to lower iron ore price.

Okay. Very comprehensive answers. Thank you very much.

Jeff Largey, Macquarie.

Two questions. The first is, just looking at the performance of NAFTA, obviously you had a pretty material headwind in terms of the adverse weather and the litigation charge -- almost $450 million in the first half. All else being equal, would you assume that that basically disappears for the second half of the year? Or, are you expecting any kind of seasonality in the third quarter, given the market? The market does look pretty strong.

And then, the second question was just if you could talk to what's happening in ACIS? Obviously, a pretty noticeable step-up in performance. And I'm just trying to get a sense of if this is the start of the turnaround or if we are actually just seeing some temporary gains from better pricing?

Jeff, this is Lou Schorsch. Let me comment a bit on NAFTA. Clearly, we're very disappointed in the results that we showed in the first half, and I think we talked about this at the first quarter earnings call, particularly the impact of the weather, and because the way we account for it, that was going to extend well into the second quarter for us. So, that's a big bad event that we -- it is going away now.

I think the other point that I'd make is we did have some significant outages in the second quarter. One that we'd been planning, really, for a couple years was a major repair, about $70 million when the dust settles, of our number 7 blast furnace, which is the largest in our group at Indiana Harbor. We also had an unexpected outage that to some degree was weather related, but any rate should have been avoided, that cost us about $30 million at our Cleveland plant.

So, we had some bad incidents, let's say, and we do think that those are -- will not be affecting us in the second half. And if anything, I think we'd look -- and, again, it's hard to overstate the importance of this number 7 furnace to us. This has been, I could say, limping along the last year and a half, or so, as we prepared for this major outage. That's going to give us probably about 1,000 tons per day additional hot metal, as we bring that back on. We brought it back on about seven days early. It's now more than half-way through the ramp-up period.

So, we think the asset condition is actually probably the best it's been in a couple of years for our operations in North America and, knock on wood, would be expecting that we'll be able to benefit from that in the second half.

We still see the market being quite strong. I think you saw the macro statistics from the US. We're seeing that in our market. The pricing differentials versus the rest of the world is always a concern, but that's been the case now for about a year. So, again, we're optimistic that the issues are behind us for the second half.

On ACIS, I'd like to take up this question. First of all, we are seeing stability in operations in Kazakhstan, which is a good news, and we are seeing the very positive signs in terms of cost performance and the volume, which is a good news. And I personally believe that we will continue to have stable operations. We have made a lot of improvements in managing this business.

In Ukraine, I really appreciate my team in Ukraine because in spite of the geopolitical crisis, they have been able to maintain the operations well. And in second quarter, [even is] the period when we had a record production.

So, I think that this is a turnaround for ACIS. However, there is -- still I'm concerned about South Africa, which has underperformed in terms of volume and the unplanned maintenance. However, there's also something to look at -- the macro environment in South Africa, which has not been helping. There has been a negative growth, and there is a negative sentiment in the country. There have been strikes. There has been elections. So, that has also delayed the growth in this market.

So, there has been a macro situation in South Africa, and there has been also poor performance. And I'm hoping that --. We appointed a new CEO, who has joined us, plus we are working on the team. My CTO team is fully on the job with this team. And I hope that [this year] we will see also improvement in South Africa like we have seen in Kazakhstan and stability in Ukraine.

Great. Thank you.

Bastian, Deutsche Bank.

My first one is on Europe. I guess there has been a lot of skepticism on any improvement at the beginning of the year, but now, I guess we can really see that some recovery is happening. So, how far do you expect that to be sustainable beyond probably seasonally weaker Q3? And do you see a risk of a fall-back in margins in Q4? I guess your visibility into Q4 should be probably quite good already at this point. Maybe (inaudible) before taking my second question.

I think we certainly remain constructive, looking into the second half. Q2 was slightly weaker than Q1; we all noticed that. But then, we saw better PMI numbers in July. We have seen improved business confidence as we close for the summer, both on the consumer side and on the business side. And I think the June stimulus at the ECB is also going to help.

So, as far as what we can see, the visibility that we have today, we find that the environment in Europe is constructive. We've actually upgraded our apparent steel forecast in Europe by almost a percent.

In terms of the business itself, I think the business should continue to do well in the second half. Clearly, the second half is normally seasonally weaker, due to the [reline] costs, or maintenance costs, we have in August, and December is a weaker month. But nonetheless, we remain constructive, and we believe these results and this recovery is sustainable that has occurred in Europe.

Your second question, Bastian?

My second one is to follow up again on Lou's comments regarding the US. Could you just confirm what the actual total impact of weather has been (i.e., [has the change] compared to the $150 million you had been guiding for in the last call)? So, maybe quantify the total impact? Has that been I think around $270 million, just stripping out all one-off items? And will those completely unwind in the third quarter?

The total weather impact in the first half was $350 million -- $200 million in Q1 and $150 million in Q2. And in terms of one-time impacts, plus/minus, I would use a $50 million number for Q2. So, we did have higher costs in terms of the number 7 and Cleveland, but we did recover some of that and we postponed some maintenance, extended into Q3. So, I'd use a $50 million. The $200 million is a good number for the change that we should expect into Q3.

Plus, obviously then, the litigation charge of $90 million. So, making close to $300 million in total?

Yes. On an underlying basis, $200 million. On a reported basis, $290 million.

And then, I think there's probably no reason why you should see worse trends that what some of your competition has guided for (i.e., volumes should be stable to up; average price, probably stable)? So, I guess with the one-off items, we should be seeing a pretty steep jump in the third quarter already?

Yes, I think the third quarter -- of course, we're already well into it, and the bookings are even a further, at least, month or beyond for some of the downstream products. Again, I think the fourth quarter, that's a bit open. But the signals, as we all know, out of the US are generally very positive, with the exception of that price differential I mentioned and normal fourth quarter seasonality. But it's shaping up currently for a relatively strong second half.

Okay. Thank you.

Alessandro, J. P. Morgan.

Just a follow-up question on what Mr. Mittal has said about the lower volatility of iron ore price and the positive effect it is having on the margin expansion. Just related to the good performance of Europe, do you see an early sign of pricing power shifting back to the steelmakers? Because the resilience of price in a falling price environment seems to be quite unusual for the volatility of the steel market at the moment.

And then, if you think that going forward, excluding the seasonal slowdown, this is something that can actually stay? As soon as price stabilizes a bit more in terms of perception of the market, we might be seeing price going up, unless the demand falls off the cliff?

The second one is on NAFTA. This is for Lou. Everybody's a bit disappointed about the results; that's for sure. Is there anything that you believe you could have done a bit better? And also, what kind of impact this $1 billion management gain has actually had in H1? Or, if the impact was relatively limited, would the real impact you expect into H2, going forward, because you also upgraded your forecast for demand in 2014 for the US? So, I guess that if this management gain has actually an impact, as demand gets stronger the impact should be better?

I'll address the Europe (inaudible) margin. So, I think just to reiterate some of the points that were made earlier, Alessandro, if you look at our global EBITDA, on an underlying basis we did about $6.75 billion in 2013, and we are guiding towards an EBITDA which is in excess of $7 billion. The headwind of iron ore is about $30, and multiplied by our production level of about 65 million tonnes provides a headwind which is close to about $2 billion.

So, how have we made this up? $0.5 billion comes from volume; that's the 3% increase we spoke about; that's steel volumes. Roughly $300 million comes from the growth in mining volumes. The remaining $1.2 billion we believe is a combination of our asset optimization program, management gains, as well as a steel margin expansion.

Is pricing power back? I don't know if pricing power is back, but we clearly do see that we have the ability to increase margins in a falling raw material environment. Pricing power is not back to the level where it should be, clearly. But the markets get better, and I think this is normal for the global steel industry.

We've always talked about how, when capacity utilization was up, it matches margin expansion. And that is why when we look forward on a five-year basis, when we talked about our global EBITDA target of [$150], we did say that iron ore prices would fall. But we will offset that by volume expansion, margin expansion in steel, mining volume expansion, AOP, management gains, and turnaround in ACIS.

And I think this year is a good example of how we're delivering on all those five aspects, because we do have the progress in ACIS; we have the volume growth in both steel and mining; we have expansion in our steel margins; as well as delivering in terms of AOP and management gains.

Well, Alessandro, when you say people are disappointed in the first half results, you can imagine the discussions within the Company. I think if you -- it's a very good question. We ask ourselves, what could we have done better? If you look at the major thing that hit us, it really was the spike in energy prices -- particularly gas prices, to a lesser extent power -- that hit us in basically February and March.

So, we have spent a lot of time and effort reevaluating the way we go to market there, the degree to which we should hedge in advance, how we can manage the basis risk, which was the biggest negative surprise. And I don't want to give specifics, but we have altered the way we are buying that input for next year. It cost us a little bit more for the insurance, but we have taken that step.

Now, on the other hand, this was a once-in-50-years sort of severe weather environment incident. So, you could also say, just eat it and move on. But we have changed the way we go to market -- we are in the process of changing the way we go to market to purchase that input.

Linking that back to management gains, I think that program is fully on track. Again, the way we look at that is we have a set of improvement initiatives based on a lot of internal benchmarking, input from the CTO group, best practices, et cetera, moving people around, [twinning] operations from one business unit to another. And those specific projects are all on track.

Again, what hit us was more that incident -- the set of incidents around input prices, particularly energy.

And I would say if you look outside the US, the other operations within NAFTA have done quite well. Now, obviously the biggest operation is within the US, but I think the fundamentals we see elsewhere are actually pretty positive.

So, for all those reasons, I think we're committed to saying this is a one-time event. We have to absorb it, and we move on to a better second half.

I just have a quick follow-up question. What's the run-rate you expect of slabs delivered from Brazil to the US in the second part of the year?

From our own operations, you mean?

The Brazilian slabs, right.

From Tubarao. We're looking at eventually to be more than 4 million tons requirement. We have -- currently, we're a little bit over 80% in terms of the production capability, and we're ramping that up. And more than half of that will come from our own operations.

We're still working on how that would be split between Mexico and Brazil, and that depends a lot on cost, logistics, quality requirements, et cetera, with our Brazilian slabs being a bit better suited for automotive-type applications, the Mexican slabs being a bit better suited for energy. Both of those are key target markets for Calvert.

So, I think a rough assumption would be about 1 million tons for each of those two operations. And, again, we're probably at 80% of that now through the rest of this year.

Thank you very much.

And maybe just to complete on Calvert, generally in the second quarter and for the rest of the year, we are producing at a level which is about 30% higher than last year. So, in terms of carbon steel, we should do almost 800,000 to 900,000 tons more than Calvert did in 2013.

Thank you, Aditya.

Carsten Riek, UBS.

Two questions from my side. First one, is it possible to get a net working capital split? How much was it actually down per division? Because I suspect that in NAFTA, actually, your net working capital went further down, given still the struggle you had in Cleveland and also because of the refurbishment of blast furnace number 7 in Indiana.

Second question I have, what makes you actually so confident that you could reach $100 per ton in iron ore in the second half? You're currently at about $95/$96. Because we definitely need for that a bit of a positive impact from China. And here, you are not particularly positive, if I read you correctly.

In terms of working capital, I think your sense is correct. In NAFTA, we didn't really have a significant (technical difficulty). More of the build occurred in Europe and some of our ACIS segment. But that's not a significant amount. So I would not read into that.

I think clearly in the third quarter we will have the seasonal build in working capital, as we have. And then, in fourth quarter we will have a release. And I think the numbers this quarter are very similar to what we witnessed a year ago, in the second quarter 2013.

On the iron ore price, we believe that this adjusted guidance framework is appropriate, given the year-to-date evolution of the iron ore price. The average price which we have assumed is $105, which means for the second half we are assuming $100, compared to $95/$97 today. And this is also based on the market consensus which we have seen.

And I would just make maybe two more points there. We get to $100 because we see that in Q4 China normally restocks and, clearly, Q4 is a stronger market for the global steel business than Q3. So, we would expect some pricing improvement.

But I don't think that's important. I think what's important at this point in time is that we have been able to offset to a great degree the impact of the change in iron ore price through our actions in terms of AOP, management gains, and margins. So, I think the guidance of in excess of $7 billion is what you should really think about. And if there is a $3/$4 change in the iron ore price, I don't think that would change our guidance.

Okay. Fair point. Thank you very much.

Seth, Jefferies.

Just a couple of quick follow-up questions on outlook for European demand and the general market outlook. I was wondering if you can comment on which of the end markets you think are performing better now than what you had expected at the beginning of this year? And certainly in light of some of the deterioration in macro data, it's a bit surprising to hear your increased confidence in that region.

And then, secondly, if you can follow up with your outlook for seasonality going into the third quarter in Europe? I was wondering if you think that this supposed improvement in the fundamental demand outlook for Europe will [somewhat] offset normal Q3 weakness and if you think there's any risk of a further de-stocking going into the third quarter as a result of that?

Seth, I will do my best to answer most of your questions. On a macro basis, automotive is doing the best in Europe. We see a real growth in the automotive sector, followed actually both by machinery and construction.

In the first half, apparent steel consumption grew by 5.6% already. So, when you see the fact that we have upgraded our forecast, if you've done 5.6% in the first half, a small improvement in the second half will arrive at our guidance for the full year.

Real demand is also up, compared to previous forecasts, and again driven by all of these sectors. And we see in various sectors in Europe, Germany published their July numbers for PMI, which was higher than June. We see continued strong growth in Poland, in Spain. And Germany, as I mentioned. There is some weakness that continues in southern Europe, but when we talk to our customer base, we see a level of confidence which is higher than normal. And therefore, we have upgraded our yearly forecasts.

Great. Thank you. And can you just comment on how you expect that to play out going into the third quarter? And do you expect there will be normal seasonality in terms of weakness in demand and volumes? Or, if you think that therefore there would be slightly more stable volumes than what you've seen in years past?

We should be a little bit careful, because last year the second half was also very strong. So, it was less than the seasonal pattern. So, seasonal pattern is normally minus 10%. First half, as I mentioned, was strong in Europe. So, I think you would expect the seasonal pattern. I don't think it would be better than the seasonal pattern, maybe slightly. And it won't be as good as the second half of 2013, which was a much stronger second half than the first half.

Great. Thank you very much.

So, Daniel has asked me to clarify. It doesn't imply that the second half of 2014 will be lower than second half of 2013; it will still be higher. But relative to the first half, I would expect the seasonal pattern, which is minus 10%, to occur.

Luc Pez, Exane.

First of all, on Brazil, I noticed that you have been cutting pretty dramatically the outlook there. Could you maybe elaborate a bit more as to what you expect for H2? Any risk of de-stocking? And if you could split your comment between the long markets and the flat market?

And second question with regards to Ukraine, if you could elaborate a bit more as to what are the risks your operation might be facing there?

To comment a bit on the market conditions in Brazil, I think I'd start with the perspective that it's really relatively uncertain. I think we've had a lot of disruptions, if you will, connected with the World Cup that makes it difficult to see what the underlying [themes] are. But clearly, the economic activity in Brazil has been well below what the projections were in the first part of the year.

I think we've seen a very severe cutback in automotive. The cutback has been much stronger in production, almost twice the level in production as what we have seen in sales of our automotive. And that's driven by a couple of factors. One is that some good chunk of the production -- I think about 30% -- from Brazil is exported, and about 70% of that goes to Argentina. So, as the Argentina market has been weaker, that has affected automotive demand and production. I think in addition there's some credit issues, and so on, that have curt back on automotive.

If you look at the projections, though, of Anfavea, which is the automotive trade association in Brazil, they're looking for about a 10% drop in production for the full year. The reduction in the first half of the year was, I think, 17.5%. So, that says a more or less stable, maybe a modest decline, in the second half. And I think that is our perspective for most markets there.

Construction was, for the first half of the year, only down slightly, less than a point. It was down more in second quarter but, again, I think that could be related to World Cup events. We see that market, going forward, as being relatively strong, and of course that's our major market for the long products business, just as auto is such a critical market for the flat business.

In general, I think it's manufacturing and industry that's taking the bigger hit in Brazil. I think we still foresee the market being stable, both in volume and pricing terms, for the second half but, again, with a lot of uncertainty coming out of the, let's say, spotty economic data connected to the World Cup period and then -- I think as Mr. Mittal mentioned in his opening remarks -- uncertainty around electoral prospects, and that always [can potentially have an impact on investment].

So, industry, I think in general, we see as the weaker sector. Construction seems to be holding on pretty well, and we expect that for the second half, which is, again, the major market for long products as well as important for the flat products. Others, energy for example, are somewhat in between.

The second question, on Ukraine, as I said earlier, geopolitical crisis continues to be of concern to us. However, our operations are normal. And as I see the forecast from my team, this is [guided to] stable operating environment for the rest of the year and stable market conditions.

However, as I said, domestic shipment has been (technical difficulty) because of the crisis in Ukraine (inaudible). Still, I am seeing that our shipments to Russia is normal, and the lower demand in Ukraine has been offset by higher exports to different markets. While we are watching the situation really carefully, while we are also watching and managing the supply chain issue carefully, we at this time [think stable] performance in Ukraine.

Maybe one quick follow-up, if I may? Are you benefiting anyhow from reduced export pressure coming from Russia in some of the Middle East market because of the geopolitical issues and sanctions that are maybe affecting some Russian companies?

(inaudible) Too early to comment on that, because these are very recent developments happening. And we will be seeing if any effect is felt in the market. As of now, markets are operating normally.

Thank you.

Alex, MainFirst.

I have two questions. First, with regards to the European flat steel price expectations [over and post-summer], maybe you can comment here a bit, potentially including some thoughts what is going on here with [Ilba] and how that might impact on the price environment?

And the second question would be, how much was the cost impact from the blast furnace number 2 restart in Brazil during Q2? And is there any more to come in Q3?

Blast furnace 3 impact in Brazil was $20 million. That occurred and that should not continue into Q3.

And I think Lou can talk a little bit more about the prospects of second half.

I think we had some capital as well as some operating expenses related to the restart of that furnace. And I'd say in addition, this would be the first time we've been running all three furnaces in Brazil since 2008. So, it's been quite an extended period where we've been producing below the capacity there. For most of that period, it was the smallest furnace, number 2, that was down.

So, the OpEx associated with this was maybe a little bit higher than what you might normally expect, because we also had to do work in the steel shop, for example. And there will be some additional fixed costs that we have to bring on to operate these facilities.

So, for example, we have a three-vessel steel shop. We had been running it with more or less two crew -- operating two vessels. We moved people around. All three were working, but now we need to crew up for the full capacity. So, we're going to have to add some people, as an example.

So, there will be some additional fixed costs ongoing, but the impact in terms of the actual start-up OpEx was the slightly over $20 million that showed up in Q2.

And maybe just to supplement a bit, I think as a result of the start-up of the furnace and since we don't have the $20 million cost showing up in Q3, we should do better in Brazil as well in Q3 and then into Q4 when we get the full impact of the slabs that we export into the North American region.

Just moving on to prices, I think as you know, we don't really talk about prices. I think we had talked generally that the margin environment in the steel business remains constructive, and I think the same applies to Europe.

Rochus, Kepler.

Just a follow-up question on the guidance. Can you share with us your confidence for considerably better results than these $3.5 billion you have shown on a reported level in the first half? I guess your second half is running against a negative seasonality you mentioned. I guess the most positive swing factor you described is the swing in the NAFTA region. Could you please help us, what would be the second largest other element which is supporting your performance in the second half? That's the first question.

The other one is again on your NAFTA performance. I tried to reconcile your performance there, considering the effect from energy ($150 million), considering the $90 million from litigation, and considering the $50 million from your outages, but still I really don't get to the performance in the NAFTA region. Are there any other cost effects? Are there any major one-off items I need to consider to really get to the number there in the quarter, despite a good volume performance?

In Q2, we added back roughly $300 million from the reported EBITDA number; on an underlying basis, about $200 million. And that, I think, is a good number for NAFTA. We can review later on, maybe offline, why you still feel that that is not the full potential of the business.

So, just maybe on a more macro basis, for the full year, when we look at first half versus second half, I think we had talked about iron ore. So, I won't get back into that.

Clearly, the biggest driver of increased EBITDA is NAFTA. So, we have on an underlying basis one-time effects of $400 million -- $350 million-ish is the weather and then $70 million is the planned and unplanned maintenance costs. That does not repeat. And so, that's the biggest positive. And plus, some positives coming from our Brazilian business.

Offsetting that is seasonal weakness, most pronounced obviously in Europe. But overall, volumes are slightly more muted in the second half than the first half.

And slightly higher maintenance costs, as in some other places in August we do planned maintenance.

So, that, I think is how I think about it. If you want to get more specific into mining, clearly we have more mining volume pick-up, which should offset the fact that overall first half pricing is higher than second half.

So, on a very macro basis, this is how we look at our business, and that is why we talked about a framework guidance based on the new assumption of iron ore of EBITDA in excess of $7 billion.

Okay. Fair enough.

Justine Fisher, Goldman Sachs.

The first question I have is just on the ongoing CapEx and related to the iron ore business. I know you guys mentioned in the press release and you said this before that you don't intend to ramp up any major steel growth CapEx or dividends until you hit the $15 billion net debt target, but it seems as though you may be willing to expand in iron ore. Obviously, the Liberia project was started before. But you've been talking about after that looking at the Nimba expansion. Possibly, we're reading in the press about bids on additional iron ore projects.

So, is there a reason that given the state of the iron ore market, which is pretty weak right now, that the Company might decide to pursue additional iron ore CapEx before you hit that $15 billion net debt target? And is there something that would make the Company say: We really need to get to $15 billion; let's just stop these growth projects until we get the balance sheet back to that target.?

Justine, in terms of the overall CapEx and M&A, I'll come to your specific question, but just to refresh everyone else's memory on the call, we're focused on -- our number one priority remains to achieve a medium-term net debt target of $15 billion. Until that time, we don't intend to increase either dividends or CapEx, and that applies.

Secondly, in terms of acquisitions, I think when we were doing the Calvert deal for the last 12 to 18 months there was a lot of discussion on each quarterly conference call on: What was the impact on your balance sheet? How will you mitigate it? What will you do? And clearly, we could not be as transparent as we would want to be, as it was a competitive process.

But what you see in terms of Calvert is we spent $258 million in Q1, and in the second quarter we have announced divestments which exceed the cash acquisition costs of Calvert. So, M&A is a cash inflow to cash positive in the first half of this year.

And therefore, I think we have demonstrated we can make strategic moves and maintain M&A on a cash inflow basis, and I think that's a safe assumption and that is what we are focused on.

In terms of your specific questions on mining, I think earlier on in the call we talked about how our long-term price forecast of iron ore is lower than today's market, in any case, and the projects that we have are very attractive in that price environment. And we're delivering on those projects.

I don't see that our mining CapEx is actually increasing; I think actually it's decreasing, as a significant majority of the projects we wanted to do have been completed (i.e, in Canada, and in Liberia we have phase two). Nimba is post-that. And so, I don't see us increasing our CapEx until we hit $15 billion.

The projects that we are doing within our CapEx envelope of $4 billion create tremendous value. So, I think it would be value-destroying for the Company to stop these CapEx projects, whether it is Liberia or expansion in Brazil long or our automotive franchise, and focus on reducing net debt.

The $15 billion target is not imposed from the outside; it's something that we think is prudent, as ArcelorMittal. And we recognize that target and we're focused on that. But at the same time, we think we should maintain the CapEx projects that we have.

Okay. Thanks. And then, my second question is also on the iron ore front. You had mentioned at the beginning of the call that you would consider ways that your integrated mill operations integrated into raw materials to cut iron ore costs there. Can you give us some color as to how that might be done?

And then, if we think about some of the long-term contracts you have -- I know the Cliffs contract expires at the end of 2015 -- is there a way that the Company could meaningfully reduce iron ore costs to improve the steel business margins, despite the decline in the iron ore business margins, from renegotiating contracts like that?

In some of the integrated plants, the cost of mining is coming down due to (technical difficulty). [We are hoping to] reduce our iron ore costs. For example, Ukrainian hryvnia has devalued by more than 50%, and it help us to reduce our cost in these integrated environments. So, that is one way we are reducing the cost of these iron ore mines [in these integrated markets].

I think, just to supplement -- Bill can add further -- we were focused on a total iron ore mining cost reduction of 7% this year, and second quarter we already had 8%. And as all companies are doing, we are looking at costs very aggressively, and Bill can provide more detail.

Yes, indeed, Aditya. Firstly, we get some benefit on our costs from the growing volumes. So, that's firstly something that we get there. In addition to that, we're getting benefits from the mine plan, with some optimization that's taking place in Canada, and we get benefit from opening up the [P5]. In Liberia, the more drilling we're doing there is also giving us benefits on the mine planning strip ratio.

In addition to that, we have a focused program on procurement. So, we are looking at global categories. We're getting benefits on tires and contract negotiations there. We're focused on de-bottlenecking, improving the maintenance, which is also giving us benefits. And that is in the mine in Canada, along the rail as well.

So, there is a number of programs. We're doing zero-based organizational work. So, we've taken out a couple of layers in some operations. So, there's a whole variety of programs that we're focused on to try to improve the cost position.

And maybe I would like to add two small points. The Cliffs contract is end of 2016. And the second point I would just say is that, as always, proof is in the pudding. We can see that in the integrated business, which is ACIS. Our profitability has improved in spite of the fact that there's a $30 reduction in the price of iron ore. So, I think that strategy is working, and I would expect the same going forward.

Great. Thanks.

Chuck Bradford, Bradford Research.

I've got a question about advanced high-strength steel. What's the timing of the adoption in China, and also in the US?

Chuck, I didn't -- I heard the question was about advanced high-strength steel, US and China?

Rate of adoption.

Rate of adoption. I think that it's -- clearly, the pressure is on a bit more strongly in the US now. So, the rate of adoption is strongest in the US. I think the rate of adoption in absolute term -- the adoption in the absolute terms is higher in Europe than in the US, but we're moving quickly to that adoption in the US.

I think China is a little bit behind. But I would say also that we have planned the VAMA facility that Mr. Mittal mentioned in his opening remarks to be fully capable of producing all the grades that we produce and sell in Europe and in NAFTA. So, I think that's coming there as well. And certainly, the western OEMs that are based there, which are the customers that are pulling us most strongly to be present in China, would expect to use the same materials there that they use in other parts of the world.

And then, on a slightly different subject, does your contract with Cliffs have any change in ownership clauses, or changes in management?

I don't know the answer to it (inaudible), and I don't want to go there, really. So, you can have a long debate, I guess, about whether what just happened there is a change of ownership, or not. I think that's part of the discussion.

Thank you.

Tim Huff, RBC.

Just two more general questions. You guys have mentioned a couple of times on the call that you've been pretty disappointed with the NAFTA results. But given the items that you've detailed that bridge the gap in between reported and underlying results, I would have thought you would have been a little bit more satisfied with the underlying performance of the assets in NAFTA, especially with Calvert going above 80% capacity utilization by the end of the second quarter. So, if you can give us any sort of color how you feel about the underlying results, that would be great.

And then, the last one, on net debt, just breaking it into two. Within six months, by the end of fiscal year 2014, do you think, excluding any bolt-on acquisitions, you'll be able to hold the net debt level to between $17 billion and $17.5 billion? And I guess longer term, the $15 billion medium-term target, but maybe a little bit of clarification as to what exactly that means, because it always seems to be rolling on? Is this a level you actually want to hit, once profitability gets above a certain level?

These one-time effects are not accounting charges; they are operating impacts. So, it's very hard to say the underlying EBITDA was okay in NAFTA. The US litigation, you can strip out, because that's a one-time charge. But on an underlying basis, clearly, the operations did not ship the amount of volume they should have, and their cost was higher because of all these impacts that we have spoken about.

In terms of Calvert, as you know, Calvert is a 50/50 JV, and the first income that accrues to Calvert flows through our other equity income line. So, there was no impact on EBITDA in the second quarter even though Calvert has performed well.

To the extent that Calvert's profitability increases as we continue the ramp-up and, more importantly, we get the right products (i.e., we get the right orders from our customers that are demanding products), then we will start seeing more impact on the EBITDA line, and we will update you guys when that happens. I am not forecasting much this year, but that will be more a 2015 event.

In terms of net debt, I think the way we think about the medium-term net debt target is, until we don't achieve $15 billion, we will not increase CapEx or increase dividends, and that's the guideline that we're focused on. Clearly, as an organization, we're very focused on achieving that sooner rather than later, and we continue, I believe, to make progress on that.

We have also taken a non-measured debt from the balance sheet into net debt. So, for example, we paid off the perpetual, which was $650 million, which is equity, which was previously equity-accounted but was a higher cost, and we transferred that to (technical difficulty).

So, I think what we are seeing is our interest expense cost is down; it's down 10%. And that's a good reflection of how we're managing the balance sheet and that focus remains.

Thank you.

There being no other questions, thank you very much for participating in this call, and look forward to be talking to you for the next quarter. Thank you very much. Have a good day.