ArcelorMittal SA (MT) 2012 Q2 法說會逐字稿

Good afternoon, everybody, and thank you for joining ArcelorMittal's Q2 results conference call. And I must inform you that the conference call today is being recorded, and we will have a brief presentation followed by a Q&A session, which should last, in total, about one hour. If you would like to ask a question, please do press *1 on your telephone keypad at any point, and can I make the point that we will only take two questions per analyst. But of course, if we have time at the end, we can return and ask for more questions.

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

Thank you. Good day to everyone, and welcome to the ArcelorMittal second quarter 2012 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 a few introductory remarks. Market conditions remain challenging. The sovereign debt situation continues to suppress demand in Europe, and is also sapping confidence from other key markets like US, because scrap markets have been a feature of the second feature of 2012, and this has put pressure on steel prices quite significantly, and has affected our results to some degree. The full effects will only be seen in the third quarter.

But to some extent, this is behind us. Leading indicators are bottoming, scrap fundamentals are now improving, and we are now seeing higher scrap prices. The impact of these factors will become apparent as we move through the third quarter.

Despite the volatility and uncertainty, the key strengths of ArcelorMittal are producing results. The macro situation is not in our control, so the focus of the Company remains on improving efficiency, cutting costs, and reducing debt, while not sacrificing the high return growth projects we have in our portfolio. My confidence in the strength of our business and our people is of great comfort, as we navigate these challenging market conditions.

Moving to slide number 2, I will begin this presentation with a brief overview of our results for the second quarter 2012. I will then spend some time on the outlook for our markets before I hand over to Aditya to go through the results and our guidance in more detail. As usual, I will start with safety.

ArcelorMittal's health and safety performance improved in the second quarter of 2012, with lost time injury frequency rate of 0.8 times, as compared to 1.1 time in the first quarter of 2012. Despite this impressive performance in lost time injury frequency rate, there is still more work to be done. In particular, improving the safety performance of the contractors who work at our site.

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

Turning to second quarter 2012 performance shown on slide number 4, we reported EBITDA of $2.4 billion, which includes $300 million of non-cash gain on subsidiary divestments. This compares to $2 billion reported in the first quarter 2012. The first quarter figure included a $200 million gain from changes in the employee benefit plans in the [first quarter]. Ignoring these one-time impacts, EBITDA in second quarter 2012 was 21.9% higher than the first quarter. This improvement came despite a 2.5% decrease in steel shipments following the end of [restock].

Through the second quarter 2012, our own iron ore shipments saw a seasonal rebound to 15.2 million tonnes, which is 15.6% higher than second quarter 2011. And we are on track for 10% growth this year.

In the quarter, net debt decreased by $1.6 billion to $22 billion on account of $1.4 billion cash investment from working capital. [M&A, divestment] (inaudible) [$700 billion], and positive ForEx gains added to this net debt reduction. We ended the second quarter with $14.8 billion of liquidity, and average debt maturity remained at 6.4 years.

This brings me to slide 5, and the subject of non-core asset sales. Through the second quarter of 2012, we completed the sale to Nucor of 100% of ArcelorMittal's stake in Skyline Steel's operation in the NAFTA countries and the Caribbean, for $684 million. We also closed the transaction with AXA to sell our 23.48% stake in Enovos for EUR330 million. We will receive 50% of this amount in the third quarter of 2012, (inaudible) plus interest due over subsequent periods.

We also (inaudible) the sale of our 48.1% interest in Paul Wurth to SMS for EUR300 million. Including the sale of Macarthur Coal and our (inaudible) steel joint venture Erdemir, Skyline, Enovos and Paul Wurth, now the Company has sold approximately $2.7 billion [of debt] since 2011. We expect further progress in this area in the coming months.

Rather than waiting for the demand recovery to come to us, the (inaudible) could improve , resize our operating footprint. I'm on slide 6, now. We call this our asset optimization plan. This is entirely separate from the management (inaudible) program, as it involves the closure of assets, and (inaudible) in order to optimize production at our (inaudible). The program was launched at our Investors Day in September last year. The program is (inaudible) as planned, and is expected to generate $1 billion of savings on an annualized basis by the end of 2012.

Moving on to the subject of CapEx, on slide 7. Capital expenditures decreased to $1.1 billion in the second quarter, as compared to $1.2 billion in the first quarter. You will recall that back in third quarter of 2011, we suspended all steel growth projects in light of the uncertainty on the European debt situation, and its potential effect on global demand.

We do, however, continue to fund our mining growth CapEx. We are making progress on our plan to take iron ore production from our own mines from 54 million tonnes in 2011, to 24 million tonnes in 2015.

The team is making good progress with the expansion of our (inaudible) mining operations in Canada, where we on track to increase production from current 16 million tonnes to 24 million tonnes in 2013, and currently studying the further expansion to 30 million tonnes per annum. Overall, the Group's CapEx spend for 2012 is approximately $4.5 billion.

I will now talk about the market outlook. I'm on slide 9.

We continue to believe that the fourth quarter was the weakest point in the steel cycle, and are pleased to see that the demand has recovered somewhat, but remains (inaudible). Global apparent steel consumption increased by 3.4% in second quarter of this year, versus first quarter of this year. This was a 1.7% increase on a year on year basis, while demand in the US was up 11.7% in the second quarter compared to a year ago (inaudible). In Europe, apparent steel consumption was 8.7% lower than the same period of 2011.

Next slide, number 10. In the US, our order intakes have slowed somewhat during second quarter. This reflects the weakening PMI reading, which has dipped below 50 for the first time since [July] 2009, in the sectors of machinery, energy, and auto continue to offer strong support to demand growth.

In Europe, we still believe that our focus (inaudible) debt crisis, but risk remain on the [downside]. The PMI has now been below 50 (inaudible). This suggests contraction. We expect output to stabilize in the second half, assuming Greece avoids a euro (inaudible).

(inaudible) economic indicators continues to be generally weak, signify that end user demand has yet to pick up. Indeed, the output data for June continues to stabilize, at best. But housing sales and investment, particularly in construction, was -- are showing signs of a rebound. We continue to believe that the pro-growth policies of the government will support a demand recovery, and we should begin to see this as we move through the third quarter.

Moving to construction end markets, slide 11. The good news is that there has been an uptick in residential construction in the US. Home sales have improved and permits are increasing. Housing starts in second quarter were 30% up, year on year, with June the best month since October of 2008.

On the non-residential side activity, it has slowed down again. Behavior indicator has now been below 50 for the last three months, and this obviously leads US non-residential construction by six to nine months. We still expect construction activity to be a key steel driver in the US during 2013 and 2014, but it is going to be a slow recovery.

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

Moving to slide 12, on China, recent data in China has been weak, with the industrial output growth slowing to 9.5% in second quarter 2012, from 11.4% in the first three months of the year, but helped by reasonably low levels of inflation. The government is enacting similar measures aimed at stabilizing output and supporting investment.

Controls on private real estate remains, again, mostly in place, but other [measures have been rolled off]. These include auto incentives, [thinking] forward in prospective projects like railways, and the speeding of funding for social housing. Overall, the investment growth has already started to slow pickup, helped by rising non-growth and the renewed forecasts are (inaudible). Building has -- continues to grow month on month, to rebound strongly in the second half, affecting the recent capitalization by the government.

We still expect GDP growth this year of about 3%, with steel demand growth slightly at the bottom of our 4.5% up to 5% forecast range for 2012.

Moving to the inventory situation shown on slide 13, the first quarter of 2012 was characterized by restocking activity, particularly in Europe. In the second quarter, the inventory situation had generally stabilized.

In Europe, inventory levels are still relatively low, and there may be some restocking potential once we accept the seasonally weak third quarter. In the US, inventories have stabilized and can be considered normal, based on historical levels of months' supply.

In Brazil, we can see that the inventory situation has improved significantly compared to where it was a year ago. Finally, in China, inventories have come down from seasonal highs for the fourth consecutive month, (inaudible) difficult seasonal trends. So overall, I would characterize the current global inventory picture as good.

So to summarize, with an update on our apparent steel consumption forecast for 2012, we move to slide 14.

Our base case at June, some tactical (inaudible) in Europe and low GDP growth as well. With these scenarios, we expect efforts (inaudible) [consumption] in Europe, a decline between 3% to 5% this year, but to grow all of the regions. The risk to the outlook in Europe is, if Europe moves into crisis, marked whereby one or more countries would likely to (inaudible), this would drive GDP down sharply. And under this scenario, we could see a low double digit decline. If you look at the steel consumption, (inaudible) impact of US and other important markets.

Finally, to touch on raw materials and steel prices. The second quarter was characterized by recurring scrap markets. In the US, scrap prices of today are around $140 tonne lower than they were in early February. As you move through the second quarter, the decline in scrap have been matched by a decline in steel prices. Scrap prices, in our opinion, appear to have bottomed. The next move is likely official provide support, at a minimum, and potentially, positively (inaudible).

On this note, I will hand over the call to Adit.

Thank you. Good morning, and good afternoon, everybody. I'm on slide 17, and here, you should be able to see the bridge, explaining the increase in Group EBITDA from $2 billion in Q1 to $2.4 billion in 2Q. Second quarter EBITDA includes a positive gain of $339 million. This is due to our divestment of Skyline in North America. Our first quarter EBITDA also included a positive non-cash gain of $241 million, and this related to changes in our employee benefit plan at Dofasco in Canada.

The net of these, and a ForEx translation impact, as well as a small difference in DDH income is shown in this bridge as Others. Stripping out these one-time gains, EBITDA increased by 21%, 21.9% in the second quarter compared to Q1 2012.

In terms of performance, increasing mining volumes due to a seasonal rebound contributed $74 million to (inaudible) profitability. We also had a positive price cost impact in the steel business, which contributed an additional $393 million.

Turning to the P&L bridge on slide 18, we'll focus on the chart in the upper half of the slide, which shows 2Q 2012 results. But comparative figures are there for the previous quarter in the lower half. I will point out the key differences below the EBITDA line.

During the second quarter, there were no impairment charges. However, during the quarter, the Company booked restructuring charges of $190 million related to separation schemes, take or pay contracts, as well as site rehabilitation costs for the Liege primary operations in Belgium.

Income from equity method investments in second quarter was $121 million, as compared to a loss of $14 million in Q1. This reflects improved results. And also, in Q1, the income line was impacted by the partial sale of equity investing.

Foreign exchange and other finance costs were $32 million for the second quarter, compared to $362 million for Q1. Foreign exchange and other net financing costs for the second quarter were positively impacted by significant foreign exchange income, primarily due to the 6% US dollar appreciation to the euro, compared to the 3% US dollar depreciation in the previous quarter.

Primarily due to increased EBITDA and the change in the ForEx line, net income increased to $1 billion in the second quarter, compared to $11 million in Q1 2012.

Next, we turn to slide 19, and we have the waterfall taking us from EBITDA to free cash flow. Cash flow provided by operating activities for the second quarter included $1.4 billion of release due to operating working capital. This was primarily due to lower receivables and lower inventory, and as a result, our rotation days decreased to 61 days the second quarter, compared to 69 days in the first quarter.

Net financial cost, tax expenses and others of $1.6 billion, includes the non-cash reversal of Skyline, as well as a reversal of $0.1 billion DDH income. Cash flow from operations was positive, at $2.3 billion, and with CapEx in the quarter at $1.1 billion, we had positive free cash flow for the quarter, at $1.1 billion.

Finally, on slide 20, we show a bridge for the change in our net debt. The principal contributor of cash during the quarter was the positive free cash flow of $1.1 billion, as just discussed. In addition, we received $0.7 billion in proceeds following the completion of the Skyline divestment. The appreciation of the US dollar reduced the value of our euro debt, euro-denominated debt, by $0.5 billion, and these effects were partly offset by by dividend payments and subsidiary finance. As a result, our net debt decreased by $1.6 billion, to $22 billion.

Let me now turn to the last slide of our presentation, slide 22, and review outlook and guidance. As you heard earlier, the global economy remains fragile, but we expect second half 2012 operating conditions to remain broadly similar to first half 2012. The situation in Europe and its potential impact on other impact remain the big thing.

In the absence of an economic rebound, steel shipments in the second half of 2012 are expected to follow the normal seasonal pattern. Group EBITDA per tonne for the second half of 2012 is expected to be similar to the underlying first half 2012 level. Full year, our own iron ore shipments are expected to remain on track, to increase by approximately 10% year on year.

In terms of CapEx, we continue to focus on core growth CapEx, primarily in mining, with a postponement of all steel growth CapEx. As a result, as we heard earlier, we expect full year CapEx to be approximately $4.5 billion.

A further reduction in net debt is targeted by year-end 2012, but this will be dependent on further divestment proceeds. The Company remains committed to retaining its investment grade credit rating.

With that introduction, we are now ready to take your questions. Thank you.

Great. So, if I can remind everyone, if you'd like to ask a question, please do press *1 on your keypad. And -- but we have a queue already, so we will take the first question from Mike Shillaker at Credit Suisse.

Yes, thanks very much. I'll ask my two questions, if I may. The first question, could you just explain a little bit the change in the style of guidance to an EBITDA per tonne, because as I see it, your kind of implicit guidance is that volumes are going to be normal seasonal. The fact that you've gone to EBITDA per tonne suggests that you're actually leaving the door further wide open for volumes. But then the fact is, is that EBITDA per tonne is clearly contingent on volumes, given fixed cost dilution.

So, can you just be a little bit clearer with us in terms of exactly what the guidance means, and what your actual fundamental underlying assumptions are behind that guidance?

My second question, I guess, is looking at the rating agency stance of clearly accepting a delay on any potential decision on the rating downgrade. It appears as though the rating agencies, S&P, I guess, have a lot more comfort with what you're saying on the balance sheet than you can explicitly give us in the current release. Can you at least share with us the kind of conversations you've had with them about how you're going to get that down, and at any stage, have you included a conversation with them about the potential for a rights issue if you don't meet your targets through asset sales? Thank you very much.

Great. So, good afternoon, Michael. In terms of your first question, I think our guidance is -- yes. But perhaps I can provide you with a few more data points.

I guess in terms of our guidance, what we have indicated is, we expect to achieve similar pattern margins underlying level of first half 2012. The underlying level on a per tonne basis is $88.00. This is based on the expectation that the operating conditions in the second half would be similar to those in the first half -- i.e., challenging.

We also expect shipments to follow the normal seasonal pattern in the second half, and if you look back historically, shipments are normally 5% to 7% lower, and therefore, that would be an impact on the overall EBITDA amount, because you'd be multiplying the $88.00 with a lower shipment amount.

I think the guidance is quite clear. It provides you with sufficient information to provide a view on how we can perform in the second half.

In terms of coming -- in terms of the rating and your specific question on S&P, yes, we are obviously in continuous dialogue with them. If you look at their -- their focus is adjusted debt. Adjusted debt includes pension and (inaudible) liabilities and other debts on the balance sheet such as leases, etc., which are not in our net financial debt calculation.

If you just go back two months ago, I think we had announced that we needed to reduce adjusted debt by $11 billion, due to recognition that, assuming higher tax basis in the US for our pension and (inaudible) liabilities, that was reduced by $2 billion. In the second quarter, we have reduced debt by $1.6 billion. So already, we are roughly $4 billion down on that target of $11 billion, which implies that we have $7 billion to go.

In terms of moving forward, we have indicated that we continue to focus on divestment. That remains a focus of this Company. And we have also demonstrated that we can execute and implement benefit changes, which can reduce the level of benefit on a future basis to some of our employees, as we did in Q1 (inaudible). But that opportunity remains with the Company.

On a medium term to longer term basis, we clearly are committed to further reducing net financial debt. We have indicated in the past, as we have met you and other analysts and investors, that our focus is to achieve a net financial debt target of $15 billion.

Thank you. Did -- just as a quick follow up, did the conversation include the prospect of doing a rights issue if you couldn't meet through the pension reductions and asset sales?

Yes, I think, Michael, I've answered the question in a lot of detail. I've given you a perspective on the denominator clearly when we discuss with S&P the ratios. There is also the element of numerator, which I've not elaborated on. But clearly, we're committed on maintaining our investment grade credit rating.

Okay. All right, fair. Thank you.

Great, thanks. So we'll take the next question, from Jeff Largey at Macquarie.

Hi, yes, good afternoon. My first question, kind of going back to the balance sheet, and I suppose the guidance that was given, clearly -- well, clearly, to reduce net debt, as you said, it's contingent on further asset disposals. I don't really expect you to give me specifics, but I'm just curious if you can give us a flavor of, you know, in this current macro environment, are asset divestitures still possible? Are there any, say, non-asset disposals that -- or, sorry, non-specific items like this subsidiary financing, this $350 million that might reverse? I'm just trying to get a sense of what type of non-operating cash flow related -- cash flows you might actually get into the balance sheet?

Okay. Hi, Jeff. I think we are making progress on our divestment program. And when I say that, it is not ideas, but it is discussions and bids that we have. And that gives us comfort that we could have material success in the second half, like we had demonstrated in the last nine months.

I cannot, at this point tin time, get into individual assets, because we -- because that may compromise our negotiating position. But we are making progress, and I expect the level of progress to continue.

Okay. And then, just -- I mean, I still have a second question, but I did see that in the investing cash flows, there was some $356 million that was an outflow. And I'm just curious, is that something that could reverse in the second half of the year?

Yes. Our expectation is that it reverses in the second half. Hopefully it reverses in the third quarter. But a safe estimate is by the end of the year.

Okay. And then, for my second question, I really wanted to kind of talk about the US. There has been some speculation on, well, this upcoming collective labor agreement that's in place. I mean, there has been some media speculation that you guys are driving a pretty hard bargain, or it looks like it could potentially be contentious. You know, I don't know if that's to be believed, but I guess my sense is, is a lot of this driven by the fact that if you can drive the same types of concessions, say, from the US labor unions as you did, say, similar to Dofasco, and I understand that's a non-union workshop. But if you can deliver that, would that materially cut into potentially this $7 billion of debt that's remaining in the eyes of S&P?

I can look and elaborate, perhaps, on the dynamics. I think clearly, there are significant liabilities that are associated with our US workforce and our US assets. Our objective remains to make our US assets competitive. I mean, if we look at the performance relative to the domestic competition, the integrated assets have a cost (inaudible) advantage primarily due to legacy [liability]. And so that remains a focus area, and we remain in discussions.

This is Lou Schorsch. Just to comment a bit on that, I think -- you know, it's really not productive to try to be negotiating kind of publicly or in the press on these sorts of issues. I think we have a long-standing, good partnership with the United Steelworkers in the US. I think everybody's aligned around the necessity of having a sustainable, viable business that we can invest in, that we can grow, that will provide the kind of good jobs that we do in fact provide. But as Aditya recognized, we have at least one hand tied behind our back in terms of competing, you know, primarily with the mini mill sector, which is so substantial in North America, because of those legacy costs. And I think we're all aware that we need to work very hard to find some way to overcome that competitive disadvantage.

So that's probably as much as we could say in this environment, but I think we -- again, we expect that we'll be able to make some progress on that front.

Ah, great. Thank you.

Okay, we'll move on to the next question, which will come from Cedar Ekblom at Bank of America.

Thanks very much, gentlemen. Two quick questions. One, can you just comment on what realizations are doing out of Liberia? Have you been successful in improving the logistics solution there, or when we can expect that?

Peter?

Sure. It's Peter Kukielski. Realizations in Liberia are really a function of two things. One is, obviously, is iron content, and the iron content is roughly 2% lower than 62%. It ranges from 59% to 60%. So you get a reduction there of roughly, say, 7-odd%, and then there's a further reduction for quality, which includes silica content, alumina, moisture, that type of thing, which bring the total demerit to about 16% to 17%.

In terms of what we're doing to improve shipping, we will have a (inaudible) sized solution in place in the fourth quarter of this year, so that will have a significant positive impact on cost.

Okay, great. And then just my follow up question is on the investment grade ratings I'm sure you're sick and tired of talking about. But can you just explain to me why the exact reason is that you're so focused on maintaining investment grade? Obviously, credit is very important. But if we look at your peer group, a lot of steel companies globally are operating just fine at sub-investment grade levels, and aren't pushing -- you know, trying to de-gear very aggressively. We can argue whether that's right or wrong, but you know, this focus on investment grade does raise some questions on the priority of equity over debt shareholders going forward. If you can just explain the sort of implications of being investment grade versus sub-investment grade.

Cedar, that's a great question, and I am (inaudible) answer this one. In terms of cost, you're actually right. The cost of one notch downgrade is not significant. It's $100 million of higher interest expense.

Actually, however, ArcelorMittal was founded on a vision of consolidating the steel industry and creating sustainability, and recognizing that the steel industry is cyclical. And as a result, we believe that to continue our vision of sustainability and consolidation, of consolidating the steel industry globally as well as continuing our growth in the mining business, the appropriate rating for such an organization of our size is investment grade. And so that is a key consideration, and that's why we say it's a strategic priority. Clearly, we do recognize costs that are there, but at this point in time, retaining our investment grade rating remains a strategic priority.

Okay, thanks.

Okay, moving on to the next question, from Alex Haissl at Morgan Stanley.

Hello, good afternoon. This is Alex Haissl from Morgan Stanley. Two questions, first on the asset optimization program. If I remember right, to get this $ billion, the total cost (inaudible) some $2 billion, half of which cash and non-cash, can you give us an update how much cash has been spent so far, and when we can see, or when we can expect the cash out for this?

The second question is on CapEx and mining expansion. Can you give us an update on the CapEx spend so far in Canada? I guess it's probably spent already. Also, Liberia? And when the second phase of Liberia, most of the CapEx should be seen. Is it more 2013, 2014? At the end of 2011, I think it was some $700 million out of $2 billion, many things.

Okay. Thank you, Alex. In terms of the asset optimization program, at this point in time, we are not providing the level of savings, and therefore, I would not like to expand on the level of cash expense. Clearly, there has been some expense associated with the AOP program. But perhaps, not as significant as the level of charges we have taken. Much below the level of charges we have taken. So far, the total charges we have taken is $800 million, if you look at all the restructuring and impairment and (inaudible) charge.

In terms of CapEx and mining, I'll get Peter to elaborate on how far we are in terms of Canada, and everything in Liberia.

Sure. So, our capital outflow for the first half of this year on our capital projects is roughly of the order of $520 million. Plan for the year is about $1.3 [million], so that we ramp up the spending during the year, the second half. Approximately 90% of Canada will have been committed by the end of the year. And Liberia, the rate, the burn rate is quite low, of course, because we're in the engineering phase.

So this year, the preponderance of capital has been on completion of Andrade, which is now complete, or the Andrade expansion, on a major effort in finishing up the AMMC expansion, and on engineering of Liberia. Then next year, we move more into the phase of executing Liberia.

Okay. Okay, many thanks.

Okay, we'll move to the next question, from Alessandro Abate at JPMorgan.

Good afternoon. Just a couple of questions. When you're giving your guidance for each (inaudible), I mean that shipment are expected to follow seasonal pattern in absence of the improvement of the economic scenario, are you referring to an EBITDA per tonne that is including basically the underlying, or are you basically also implying the possibility of potential one-off in the second part of the year?

And the second question is related to the asset optimization plan. If you already started (inaudible) your assets in Europe, the process of diversification, at which is the assets that is going to benefit the first at the moment? If you can be a little bit more specific in terms of utilization rates, age of plant Fos-sur-Mer in France.

And then, a last question, if you can give an update of the study of feasibility for the expansion of QCM Mining, up to 30 million tonnes per year, how much would imply in terms of CapEx? Thank you.

(inaudible), for mining.

Sure, I'm happy to start with that. I should just clarify, I'm not sure if I made it clear in the last question, that $1.4 million -- billion, is the total spend for the year on the projects, not in the second half.

With respect to the study for expansion of QCM to ore, AMMC to 30 million tonnes, we are conducting pre-feasibility study right now, and we expect to complete that by the end of the year. And you can assume roughly the same capital intensity of the current expansion, so the current expansion is, what, $1.2 million for 8 million tonnes.

Sure. In terms of guidance, Alessandro, our focus is reported guidance, and that's what we're seeing, how we're thinking about it in terms of the second half. In terms of which asset will benefit the most, I think Liege and Florange have been idled, and so, already transferred some of these tonnages that, based on the demand that is there in the marketplace, to some of our other facilities in Europe. And even then, we are not able to fulfill the level of demand in all of our facilities.

In (inaudible), also, we have gone through a similar exercise, in which we have taken down a furnace in Madrid, as well as in Luxembourg. In the past, a few years ago, we also did a furnace (inaudible).

So based on that, what we're doing is, we are keeping the order book, transferring it to other un-utilized facilities. It's not that one specific facility benefits the most, but it's just spreading of the order book, based on customer proximity and cost considerations.

Thank you, Aditya. If you can be a little bit more clear on utilization rate on the capacity of Fos-sur-Mer, if they still remain relatively low, or there is margin for improvement in second half of 2012. Thank you.

In terms of Fos -- what was your specific question? You'll have to repeat it. Sorry, Alessandro.

The capacity utilization rates at Fos-sur-Mer, what is the current level at the moment, if you think that there might be some beneficial impact from the first step into the asset optimization plan before the end of the year. Thank you.

So, what I was trying to suggest is that these furnaces are already down. So, there is Liege and Florange. So, I mean, they're not operating, or they're not making a single tonne of steel, and that's been the case for the last nine months. So, to the extent that there is an increase in the second half, that would occur at some other facilities, or other furnaces on a temporary basis are taken down.

At this point in time, we have not disclosed what our operating footprint would be. I think to venture out and give capacity utilization on a plant by plant basis would be difficult. I think certainly we have various stakeholders, and we would like to engage with them if we have to take down a furnace in the second half.

Thank you, Aditya.

Okay, so we'll move on to the next question, which is Carsten Riek of UBS.

Thank you very much. First question, that's on ACIS. Again, it performed comparably poorly. Could you just remind me what were the reasons, and do you see that the second half will be -- or, will show an improvement, or do we see a continuously difficult business year?

The second question is more on the recovery and the steel space in general. What makes you think that the worst is over? If I look at China, they still produce at almost all-time highs. We need to get this production down in order to -- at least, settle on a global level. Do you see already any indications that the Chinese mills slowed down? Thank you very much.

Well, we see Chinese mills slowing down. If you look at the inventory levels of China, it has come down, which means that despite that the production has peaked, they have been consuming still domestically. As I said in my earlier comments, we still believe overall, China's apparent steel consumption this year will grow around 4.5% of -- between 4% to 4.5%, which means they are going to (inaudible) more steel this year.

As far as export trade is concerned, though I see a number amount of June that their export is already 47% of the production, we have seen this in the past. But I believe that China's export, overall basis may not exceed the last year's study. So, while we should keep our eyes all the time on their behavior, today I am not unduly concerned.

Okay. So especially, when you look at the inventories at the steel mills itself, they actually went up quite significantly. So, there is a tendency that the steel trade is coming down, but the steel mills building up. So there is not a clear trend here from the steel traders only.

So you were right, that is helping what we see in one of our joint ventures, that they have (inaudible) to give inventories, because liquidity from the banks (inaudible) income (inaudible). So, I think that they cannot have (inaudible) inventories.

Okay, yes.

(inaudible), Gonzalo?

Thank you, Mr. Mittal. Good afternoon. It's Gonzalo Urquijo speaking. In terms of the ACIS for the second quarter, I'll address three points. First of them is production. If we go to production, production in (inaudible) has been clearly better. But on the other hand, we've had in South Africa, a weaker market, which has led to a decrease in production, and third, we had a sinter fire in [Terra Mittal]. That also decreased production.

So w'eve had two issues of production, one due to market, the other one, let's say, due to production, due to this fire in Terra Mittal.

Second, that made that our mix was worse, because at the end, Ukraine went better, when Ukraine is exporting, let's say, more than two thirds of its market, versus South Africa, which had an internal weaker market, or Kazakhstan, which at the end, only exports around 25% of its production. When I mean exports, means to international markets. For us, those markets are the home markets and the domestics, that is CIS.

So at the end of the mix, that was the second point, that was worse. Third point, which I think is important, is in South Africa, we had a clear decrease of prices.

Now, your second part of the question referred to ACIS was the following. How do we see the future? Let me go with market by market.

Look, South Africa, we've seen big changes. We started off Q1 with a good market. There was low inventories, we had the new [cost of issue] that we had last year, so we had a strong Q1. But we've seen a very important change in Q2.

Now, going forward, we are very prudent. The market continues to remain weak. And remember there, we don't have a seasonality, because we are in the south cone, so it should be a good quarter. But we are very concerned, and we have our doubts. The half, second half, remains clearly challenging in South Africa, and market continues to be weak. Why? We see little infrastructure, little construction investments, and second, little investments, let's say, in mining.

Now, if I go to the CIS, two sorts of markets. The market of the export, I have two comments on that. For the moment, it remains weak, but as Mr. Mittal said, and Aditya said, if we believe the scrap has gotten down, at least we probably are in the bottom. So we hope it doesn't deteriorate even more.

And the other point I want to share for the CIS markets, for the moment, we have seen that those markets don't appear to be -- they have volumes, and there's a lot of pressure of prices, because many of the tonnes that were going to be exported have been reverted into that market. So that's basically -- so I would say, we are cautious. I think the market for the second half remains challenging in ACIS.

Thank you.

Thank you.

Okay, well, we'll move on to the next question. But can I just remind everybody to have their phones on mute, so that we don't pick up any background noise and conversations. And so, we'll move to the next question, from Bastian Synagowitz at Deutsche Bank. Thanks.

Yes, good afternoon, gentlemen. I've got two quick more questions. And the first one is actually a follow up on the guidance. So what is the directional assumption for sequential average selling prices in the third and in the fourth quarter, which you have embedded in this stable EBITDA [baton]? Do you actually expect a fourth quarter price uplift?

And then secondly, on the European business, where the situation obviously has been deteriorating quite a bit after probably a pretty strong and solid first quarter. Obviously, none of the market (inaudible) really happy with the current situation is, (inaudible) the average net debt to EBITDA in the industry, I think it has almost doubled versus 2008.

So do you believe that there is still a possibility that we might actually see more consolidation happening in Europe over the next couple of months, and would you generally rule out being involved in that? Any views on that would be great. Thank you.

Okay, great. In terms of price assumptions, I think I do not want to get into a lot of detail as to what we have assumed. Suffice to say that our guidance is based on similar operating conditions. Also, cost pressures are reducing marginally in the second half, as the lag effect of (inaudible). And therefore, we are expecting our EBITDA per tonne to be similar to the first half and the second half.

I think in terms of consolidation --

I think you're looking, steel industry, (inaudible) good to speak of consolidations. There are not too many (inaudible) here. I do not see any (inaudible) of consolidation in Europe. We see (inaudible), already in a full capacity, and (inaudible), we're just seeing more than (inaudible).

Okay. And -- I mean, obviously, right now, you -- I mean, you are becoming a bit more active in taking out capacity in Europe, and (inaudible) can see that this is not -- obviously, not an easy process. And are there any other players in particular now looking into southern Europe, where you do expect that you -- we might see further capacity reductions? Thank you.

We -- southern Europe, we see, for example, Spain, since 2008, the demand is down by 50% in [Milan]. So I think that there are -- we have also shut down and turned down some of the facilities in southern Europe, in Spain, and I'm sure we cannot produce what you cannot sell. And I'm sure that everyone is looking at this economic (inaudible) condition.

Okay, thank you.

Okay, we'll move to the next question, from Neil Sampat at Nomura.

Three questions. Firstly, just a comment on -- if you see any update on the impact of Russian imports into the European market following the ascension to the World Trade Organization. Secondly -- later this year. Secondly, in light of the divestment program, and the target is deleveraging, could you also give us a sense of whether we should be purely thinking about steel assets, or whether selling, let's say, minority stakes and minority assets -- in mining assets, would be on the table, or would that be contrary to your strategy, part of which has clearly been the growth of the mining business?

Clearly, this (inaudible) challenge (inaudible), I don't think (inaudible). We have to be really watchful, because we have seen that they -- they are -- their abilities, they are increasing their exports to Eastern Europe, and they have a low raw material cost, which they are translating into steel and -- shipped to various parts of the world. And I think that they're -- I believe that there's a challenge, when they become the WTO member, whether they like to convert cheap raw material into steel and ship to Europe.

At the same time, it also offers an opportunity to European mills to ship back to -- ship to Russia for the high value added product. It's (inaudible) also in [potential] for the European to increase their -- at least, for ArcelorMittal, increase their potential to export to Russia. But clearly we need to remain (inaudible), remain watchful about increasing exports from Russia to Europe.

On the divestment, we are not -- first of all, our target is to look at our non-core assets, which we want to divest, and we continue to work on divesting of those assets during the second half of the year, analyzing various other -- various opportunities, how -- which are their (inaudible), which we can look for divestment. Once we have reached some conclusions, we will let the market know.

Thank you.

Okay, we'll move to the next question from Alex Hauenstein at Mainfirst Bank. Okay, so it looks like Alex has gone, actually, so we will then take the next question from Tim Cahill at Davy.

So, to Europe. Could you just give us a little bit more flavor on how the demand is developing on the ground? You mentioned that you thought maybe we're through the worst, but maybe just a little bit more up to speed about how things are developing on the ground. And then, are there kind of a knock on impact from that, on the European pricing side. I think I saw some comment, that you thought that there might be some sort of a chance of a price increase in Europe later this year, and that seems kind of a bit surprising, given the underlying demand trend. Do you mean that's more probably an inventory restocking their pricing initiative, or is it something else going on there?

And then secondly, you've given us a view on scrap prices, and a view on kind of Chinese demand and stuff. I know our prices (inaudible) quite weak, but could you just give us your expectation on iron ore price over the next, kind of few months or so? Obviously, it has been weak, but some people believe there could be more downside potential. Just wondering if you've a strong view on that. Thank you.

Sure. In terms of Europe, I think, Timothy, the market environment on the demand side clearly remains weak. We are forecasting apparent steel consumption to be 3% to 5% lower, compared to last year. I mean, the second half should be better than the second half of last year, because if you remember last year, in the second half, we had destocking in the fourth quarter, which drove down volumes.

We expect, as you suggested, the reverse in Q4 of 2012, as inventory levels are low, which implies an inventory restocking, and therefore, there could be a technical rebound in prices.

The second -- second thing that is underway in Europe is that the euro has depreciated quite significantly. So clearly, just to maintain the same margin, there needs to be a technical recovery in prices as the dollar cost of raw materials begin to catch up.

So, the third thing I would say, just on the currency, is that at some point in time, that should flow in to the end customers, because if it become more competitive on an export basis, and we may see some improved demand. I don't know if that's a short-term or a medium term effect.

The negative on the ground in Europe remains credit. Credit is constrained. That is affecting the customer base.

So I don't know if that provides you with some color of the European marketplace. I think in our introductory remarks, we went through the segments and how automotive and construction and other segments are doing.

In terms of iron ore --

On the iron ore price, we have just seen the results of some of iron ore producers. Their shipments are still strong. In general, continue to report, I don't know, increasing volume every quarter to quarter. At the same time, we have also seen that the price is dropping from $150 to about now prevailing our (inaudible) [3500] and (inaudible) [$46]. So it is basically the markets softening because of the (inaudible), because of slowdown of some of the non-Chinese markets (inaudible).

Since there are only a few major producers, and they have about 85% of the business, I believe that the potential to go down substantially much less in the iron ore price, our ability there in the near term iron ore price should vary between $150 and $235, depending on the economic conditions and the economic environment. And we have seen this at one point in the fourth quarter of 2011, some prices going below (inaudible) [$118], but it was short lived, and the prices rebound.

On a medium -- on a normal scenario, and on a long-term basis, our position is (inaudible) of the iron ore price, and that's how the majority of our budgets are based. So on a near term, I believe that the iron ore prices should remain between $150 and $235, while we have seen a big swing in the current price, which (inaudible) $240, which did not reflect in the (inaudible) iron ore price.

Can I just ask one follow up question on Europe? And because, obviously, I understand the restocking argument. But if you look at all the indicators, PMIs, you look at obviously the auto data, which is [weakening], more important, I suppose, if you're trying to understand what austerity actually means in Europe, and what it could mean to underlying demand as governments actually start to cut into some of these projects and some of these construction companies start getting less jobs.

And you know, are you trying to say that actually stocking, you still believe we're at the bottom of some sort of a cycle, as in, the worst is behind us? Or is that just more of an H2 comment, and obviously, visibility for 2013 now is still very weak?

I think, Tim, it's a bit early to talk about 2013 at this point in time. I think, clearly, we have highlighted in our presentation that what happens in the Eurozone remains a key risk. So to the extent that there are further actions which reduce demand, and obviously, that would be negative to 2013, to the extent that there are further actions to support the Eurozone, that would be positive for 2013.

So I think, clearly, the macro picture is significantly impacted, not only in Europe, but globally, on what happens here. And at this point in time, it's too early to talk about (inaudible).

Thank you very much.

Thank you.

Okay, thanks. We'll take the next question from Luc Pez at Exane.

And two question, if I may. First of all, on the working capital requirement, as you're pointing to the potential technical recovery for Q4, what shall we expect with regards to working capital requirement? I just (inaudible) over to Q3, and perhaps marginally on that -- in the coming quarter, ex-disposal, of course.

And secondly, with regards to the implementation of your asset optimization plan, I'm starting to wonder how confident you can be to achieve the $1 billion target sustainable savings by year-end, having completed 40% of the plan costs associated with that, and I guess, current social environment being quite difficult in France (inaudible) those, and if you could perhaps elaborate a bit on the [deficients] you might have there. Thank you.

Okay. So, Luc, in terms of the working capital, I don't want to leave any confusion. At the -- the second half shipments overall will still be down, compared to the first half, right? That's a seasonal pattern, and we're not going to offset that seasonal pattern. All we're suggesting is that in the European context, there may be a recovery on the apparent demand side, which could lead to maybe a better price environment. But hat is not going to offset the seasonal weakness that we typically see in the second half.

So fundamentally, if you ask for the aggregate amount of working capital, that will reduce in the second half. It will be factors of the demand side, as well as price. We have talked about how raw material prices have come down towards the end of second quarter, and that will impact our working capital.

On the days basis, however, as business is less, and typically, in Q4, we begin to restock for the winter months in some of our facilities around the world, the days will probably increase compared to the days that we had at the end of the second quarter.

In terms of the asset optimization program, I think -- I believe we're making good progress. I believe recording 40% of the game doesn't mean anything. We can still achieve the $1 billion -- 40% of the charges, we can still achieve a $1 billion EBITDA run rate. So I do believe that we are making progress, and we expect to deliver that by the end of the year.

Thank you.

Okay, Luc.

We'll take the next question from Tom O'Hara at Citigroup.

Hello, there, thank you. Just one question, going back to the guidance for the second half, the assumption of $88 EBITDA per tonne. Does that include the assumed cost savings from the management gains and the asset optimization program?

Yes, it does.

Okay. Thank you.

Okay, so we'll move to the next question, from Rochus at Kepler.

Ah, yes, hi. Thanks for taking the question. The one thing is on your coal production target. I think you had dropped that from your previous guidance. So I'm just wondering why you (inaudible) away, so you're falling short of. And if -- what is the reason for that. And maybe, back to the guidance, when you said you maintain -- you expect to maintain a stable EBITDA per tonne in the second half. Could you just elaborate a little bit in more detail, what is exactly offsetting a weaker average price in the second half, and a lower operating leverage? So are you modeling in any pickup in prices in the US at the later part of the year? Other -- if you -- I don't understand how you get to that number if we assume prices stay where they are today.

And assuming -- a third question, that you have the same seasonality in Europe, are you planning to take any further blast furnace down during Q3, and where -- and probably, where are you standing right now in terms of blast furnace operating today? Thank you.

So, the question on coal production, the -- what -- where our coal production has been impacted this year has been in Kazakhstan and in Russia, where we've encountered geologic condition in both countries which have limited our production. In Kazakhstan, where the primary impact has been felt, we've just had geological conditions that have resulted in higher ash contents. We're operating our [wash ponds] flat out, but they're operating at capacity now, so we just don't have the ability to increase production with a higher ash material this year. So we -- the impact is, this year, we anticipate that we will make that up next year.

Okay. In terms of the guidance, I mean, I just want to (inaudible) comment, in that we're getting focused on this $88 number. And I think if you look at the way we provide guidance historically, is to provide you with a perspective on what we are seeing, and we want to provide a broad range, and I do it on a half-yearly basis.

So -- and that is the intent. Just on your specific question, on $88, clearly, I mentioned earlier that raw material costs are coming down, we have a lag effect, because of the way we procure i.e., the shipping routes, and the fact that we have to carry raw material as an inventory, etc.

And so, as a result in the second half, we are seeing costs come down. Scrap is down, coal is down, iron ore is down, and that should create a more favorable cost situation in the second half.

In terms of blast furnaces, I had said this earlier as well. I think -- I don't want to make any announcements or give forward looking guidance on which furnaces we're going to be running in the third or the fourth quarter. As in many, we take a decision, we will announce it. Clearly, there are a lot of stockholders involved (technical difficulty) furnace as it impacts people within an operating facility, and it could impact customers, and we need to make sure that everyone is aware of what that decision means to our key stakeholders.

Okay, but maybe as a follow up on the coal side, how do you overcome the bottleneck on the coal side, if the -- is there a change back in terms of geological conditions again? Is there any capacity or implement in Kazakhstan and Russia in order to increase your coal capacity? Thank you.

No, we are really constrained by geological conditions. I mean, these are things in the deep underground mines that are quite difficult to predict firmly until you get there. At the same time, we have a lot of experience there, so we anticipate -- we don't anticipate that it can get any worse than it is right now. It can only get better.

Okay. Thank you, (inaudible).

Oh, sure. Sorry. So in the medium term, we are targeting 11 million tonnes. Oh, sorry. Yes, and just to explain how that's an increase from where we are today. So today, this year, we anticipate roughly 8.6 million tonnes. Next year, we take a slight drop in Russia, because we have to focus on development there. It increases the following year. But the increases come primarily in both Kazakhstan and in Princeton, in United States.

Okay, good. So we'll have -- we've got time for one more question, which we'll take from Alain William at SocGen.

Yes, hi. Thanks for taking the question. Just two quick questions. First one, can you remind us the implication of the down rates on the financial costs and others? And second, can you perhaps give us some color on the demand pattern in Brazil, and are you concerned by the supply impact of (inaudible) selling to a Brazilian player, bearing in mind that's a (inaudible) concept is a -- clearly on the track.

Do you want to (inaudible)?

Okay, we start on Brazil. I think everyone in Brazil, really, has been disappointed by the slow macroeconomic growth in the first half of the year. I think we were -- everyone was looking at, kind of, 3% GDP growth at a minimum, and we had less than 1% in the first half.

So I think to some degree, the country is a bit of a victim of its own success, running into infrastructure constraints, [famous crystal] Brazil, some high costs of investment and construction there. I think the government is being relatively aggressive in terms of pursuing reductions in interest rates, so the inflation rate is down to about 4.5%, etc. So we remain bullish on the prospects for Brazil longer term, but clearly, there's some growing pains in that economy right now, and since we are a major player there. And then the flat [road] side, we're a major exporter from there, we are negatively affected by those growing pains.

I think -- you know, any operation that's export-oriented out of Brazil in the steel sector now, so long as you're playing international prices for the raw materials, given that it's weakened recently, given the relatively strong real there, it's very difficult to be competitive in that market going forward. I think that's going to be true -- that's been true for anybody who's playing in that market, regardless of who owns the operation, the former [Thyssener] CSA operation, that's going to be the case so long as you're paying those international prices for raw materials.

Okay, great. I think your question was on, what is the increase in finance costs if we get downgraded? So it's $100 million. We have spoken about it earlier. It's -- that's based on a one notch downgrade.

All right. Okay. Thank you very much.

Great, thank you.

Thank you very much. This concludes our today's call, and thank you very much for your participation, and looking forward to talk to you in the next quarter, and have happy summer, and some of you enjoy your --