EuroBusiness Media (EBM): Global steel giant Arcelor just reported first quarter earnings for 2006. Guy Dollé, welcome. You are the CEO of Arcelor. What are your comments on the company's performance in the first quarter?
Guy Dollé (GD): We have strong results in a market which was much more difficult than one year ago, and which was mainly flat compared to last year's final quarter. It is clear that the prices were low compared to what they were one year ago. Volume was back because of the increase of the apparent demand. I want to underscore that the results in long [products] are excellent, and also confirm the strong improvement we have shown in our stainless steel business - as you know, there is some improvement regarding the market price.
EBM: When looking at your first quarter earnings, how should we interpret them in light of your €7 billion EBITDA target? Was it an exceptional quarter, or was it a "normal" quarter compared to your target?
GD: It was a normal quarter compared to the target. In cost savings alone, without Dofasco, we have achieved €160 million, which is fully consistent with our target. And if we have a look at the market prices, they were depressed, so we are very confident that we are going to achieve this normalized target of €7 billion EBITDA in 2008.
EBM: Getting into more detail, what are the steel price and capital expenditure assumptions upon which you based your EBITDA target?
GD: Our €7 billion EBITDA target was built based on the performance of 2005: €5.6 billion EBITDA. You have to add €1 billion for the new perimeter -- Dofasco and Acesita -- and then €2.2 billion of cost saving for the next three years. Which means a total of €9.5 billion, when you add a positive effect on volume - about €0.7 billion - and when you take the same market condition as 2005. We then took a reserve of €2.5 billion for squeeze between sales price and factor cost, which should only just represent 8% of the total revenue -- which is even higher than the average squeeze we had during the last 25 years. So we are very confident that in 2008, in normal market conditions, we will be able to reach this €7 billion EBITDA.
EBM: And concerning capex?
GD: Yes, you know that we have said that for maintenance capex, low- and medium-cost capex, we will be in the range of €1.3 billion. You then have to add growth capex to that figure. In 2006, instead of €1.3 billion, maintenance capex may perhaps go up to €1.4 billion, because of decisions taken one year ago. For growth capex, it will be in the range of €800 to €900 million, linked of course to the investment of our third phase of Arcelor do Brasil.
EBM: What is the progress report on the planned asset disposals in stainless steel?
GD: It is done, or more or less done, for Ugitec, our long stainless steel business. We have a binding agreement with the German industrial company Schmolz & Bickenbach, which will be a worldwide first for this business. We are still awaiting the Commission's final decision, but we do not expect any major problems. And for the flat [stainless steel business], you know that we have started a strategic review of this business. We initially intended to complete this review for the end of the first half of this year, but it will take perhaps one or two months more.
EBM: Could you give us some more detail about your plan to save €2.2 billion in the coming three years?
GD: €2.2 billion represents just €700 million per year, which is a little bit less than 2% of the annual revenue. This is more or less the average of what we have able to achieve in the last 20 to 25 years, so I am very confident that we are going to achieve this target. And if you have a look at the first quarter, we have been able - without Dofasco - to reach €160 million, which is fully consistent with this target. This plan has been split between the business units, and we now even have a little bit higher target than this official target of €700 million. I am fully confident that, by taking advantage of our maintenance capex and some normal productivity programs, we will achieve this €2.2 billion target in 2008.
EBM: What is your outlook for steel prices in 2006?
GD: The base prices for long are still good. The price will increase with a scrap surcharge, perhaps in the coming months. You are aware that there was a collapse of the price for stainless last year. The price started to increase $50 per month starting in Q1, it will be more or less the same rate in Q2, and after that may reach a plateau in Q3. For flat, spot prices were of the same magnitude as in Q4, which means €100 less than in Q1. In Q2 we are going to see a small price increase, and Arcelor is announcing a price increase between €50 and €60 for Q3, depending on the product, and perhaps more for galvanized products, linked of course to the price surge for zinc.
EBM: Has there been a rebuilding of inventories these past six months?
GD: I don't think so. I don't see any increase of material inventory, but there is an increase, a veritable surge, in orders. In Europe in the first quarter orders for flat, for instance, were up 18% more than one year ago. So we are starting to build virtual inventories for orders. I think this building of inventory is going to start in Q3 or Q4, so I am very confident that this year will be for us, as for all the steel industry, a very good year.
EBM: Iron ore negotiations have been dragging on longer than expected. As you wait to finalize, what have you budgeted for iron ore and commodity price increases?
GD: As you know, the explanation of this price increase lies with demand in China. Accordingly, we are asking China to fix a benchmark, because they are the main outlet for all the iron ore mining companies. For iron ore, we have no plans for a price increase or decrease in our budget, which was done six months ago. For coking coal, we have budgeted and achieved a 10% price decrease, and for PCI a price decrease of between 20% and 30%. The bad news is mainly coming from zinc. You know that zinc was at $1,000 per ton on the market just one year ago, and is now up to $3,000 and even $3,300 per ton.
EBM: With the integration of Dofasco, you have a source of iron ore within Arcelor. How much of your iron ore needs will be sourced internally from now on?
GD: We do not anticipate shipping a lot of iron ore from Dofasco's mine, QCM, to Arcelor's facilities. But it is a way to hedge our iron ore purchases, because this iron ore will be sold at market price, i.e. the benchmark price. So we consider that with our Canadian mine and our access to the mine in Brazil, we have access to approximately 25% of our iron ore needs.
EBM: Where do things stand today with your plan to distribute €5 billion back to shareholders?
GD: I just want to note that at the last shareholder meeting the payment of a normal dividend of €1.85 per share was approved; this will be done on May 29. Yesterday, there was a board meeting at which it was decided to call an extraordinary shareholders meeting for making an OPRA, in the range of €5 billion to buy up to 150 million shares, which will be approximately the €5 billion you mentioned, in reference to our stated intention of a few months ago.
EBM: And finally, it would appear that Mr. Mittal doesn't rule out increasing his offer, and that he is making overtures to get a friendly transaction with the recommendation of Arcelor's board and management. Under what conditions would you be willing to begin discussions with Mr. Mittal?
GD: The board did not change its mind. Either it is a cash offer, and we will have a new offer, and in this case we are ready to have discussions with Mittal Steel. Or it is a mixed offer -- which he says is the case -- and we will evaluate the real value of his shares, in which case we need to see the business plan. Mr. Kinsch has asked for this business plan, and Mr. Mittal told him that he is not ready to send it to him. So we are waiting.
EBM: Guy Dollé, CEO of Arcelor, thank you very much.
GD: Thank you.
