SOURCE: Arcelor SA

August 02, 2006 02:01 ET

Arcelor SA announces 2006 First Half Results

Luxembourg -- (MARKET WIRE) -- August 2, 2006 --Press release

2006 First Half Results

Arcelor delivers excellent operating result in buoyant market despite high costs of raw materials

* Excellent contribution of all divisions despite price cost squeeze compared to H1 2005

* Substantial management gains at EUR 350 million

* Active portfolio management: acquisition of Dofasco and a controlling stake in Moroccan Sonasid, disposal of long stainless producer Ugitech

* Performance confirms Arcelor's 2008 Value Plan targets

* Strong outlook for second half thanks to increasing sales prices

Arcelor delivers an excellent operating profit in a positive demand environment despite strong raw material price increases, confirming its Value Plan targets:

* Excellent EBITDA generation: EBITDA is at EUR 2.84 billion. After reprocessing of exceptional items including the Dofasco purchase accounting, the pro forma EBITDA is at EUR 3.1 billion, an excellent level in line with Arcelor's 2006-2008 Value Plan objectives.

* Outstanding performance despite massive price cost squeeze that will be alleviated as of Q3 thanks to sales prices increases. Raw material prices (iron ore, zinc, coal,...) attain record levels, burdening H1 performance. Sales prices, which were lower in 1H06 than in 1H05, will rise in 2H06, favourably impacting the second half of the year. Between 1H05 and 1H06 the price cost squeeze represented more than EUR 1.8 billion.

* Buoyant demand on all markets, allowing for shipments of 26.5 million tonnes after a weak level of demand in 2H05.

* Remarkable results of all divisions supported by substantial management gains at EUR 350 million for the six first months of 2006.

+ Long Carbon Steel in Europe reports record results (EUR 333 million).

+ Turnaround of the Flat Stainless Steel activity in Europe is almost completed and Brazilian operations are very profitable. EBITDA of EUR 240 million, which confirms the pertinence of the improvement plans launched in that Business Unit.

+ Within the Flat Carbon Steel division, Dofasco confirms its excellent profit generation potential, with a pro forma EBITDA of EUR 294 million over the half year, confirming the rapid and smooth integration of this newly acquired asset.

+ Increasing margins at A3S, the service and distribution arm of Arcelor. * Working capital increases due to Dofasco integration and to the impact of seasonal and cyclical effects on receivables, while inventories remain fully under control.

* Cash flow before growth investments and dividend at EUR 1 billion, despite the impact of a strongly rising activity and materials costs on working capital.

* Continued investments in Brazil, including a 50% capacity increase at CST that will help to further expand the low cost production base of the group.

Business environment and outlook

The first half of the year has been excellent for the world steel industry in terms of volume. Since January, the world economic climate has improved considerably and simultaneously in all regions. Real GDP and industrial production growth have supported real steel demand in mature economies as well as in emerging markets. The real steel consumption growth year over year should be around 6% this year. In developed economies, the steel consuming industries have started to replenish their 2005 low level of steel inventories for long and flat products. The strong demand for steel products explains that the replenishment of inventories has not yet been completed at the end of H1.

Therefore, the contribution of the technical recovery has been very positive and strong on 1H06.

The simultaneous surge in demand in different regions of the world and higher raw materials prices (iron ore: + 19% in 2006, after a 71% surge in 2005, zinc: + 160 % between Q2/05 and Q2/06, carbon scrap: + 30% and nickel + 22% over the same period) have increased costs and have started to lead to increase world steel prices, featuring regional variations.

Supply has matched the high demand. In EU 15, for example, deliveries on the five first months - which have been very robust - were already higher than the peak of the year 2004 (Eurofer). In the US, May deliveries were also above March 2004 peak in this country. As a result of high demand, steel imports in Europe and North America have increased significantly.

In 2005, apparent consumption growth of finished steel without China was -1.5% and should be + 6 % this year, showing the strength of the 2006 sharp recovery in the rest of the world (annualized around 4% on H1 and 8% on H2, resulting in an annual average of 6%). The global apparent steel consumption growth including China which was 3.5% in 2005 should be above 8.0 % this year.

Based on first half 2006 achievements, sustained demand, selling price increases for third and fourth quarters, as well as further management gains, full year prospect looks very bright for all Arcelor activities. This positive outlook confirms Arcelor's Value Plan targets. New acquisitions will contribute to supply Arcelor's clients' growing global needs.

Luxembourg, August 2, 2006 - The Board of directors of Arcelor met on July 26, 2006 under the chairmanship of Joseph Kinsch. It reviewed the consolidated financial statements for the second quarter of 2006 and approved the Group consolidated financial statements for the first half of 2006.

At June 30, 2006, consolidated net result, group share, was EUR 1,414 million, versus EUR 1,970 million for the first half of 2005.

With EUR 19,992 million for the first half of 2006 compared to EUR 16,822 million for the same period last year, consolidated revenue increased substantially reflecting essentially last year's sharp shipments reduction and significant production cuts led by adjustments to unfavourable market conditions. This evolution also translates the acquisition and full consolidation of Huta Warsawa (long products-Poland), Acesita (stainless-Brazil), Dofasco (flat products-Canada) and lately Sonasid (long products-Morocco). Ugitech, long products stainless steel producer has been sold as of January 1st 2006.

Geographical breakdown of revenue was as follows: total Europe: 69.1% (EU 25 and others Europe), South America: 12.2%, North and Central America: 13.9%, Rest of the world: 4.8%.

Consolidated gross operating result amounted to EUR 2,835 million for the first half of 2006 versus EUR 3,389 million for the same period last year, results reduction being attributable to selling prices differential and strong increase in raw materials, (more than EUR 1.8 billion price/cost squeeze effect over the first six months of 2006 compared to the same period 2005). Management gains amounted to EUR 350 million.

Consolidated operating result amounted to EUR 2,084 million for the first half of 2006 versus EUR 2,647 million for the same period last year.

After a financial result of EUR -458 million, merger incurred costs of EUR 182 million (including 140 million euros of break-up fee paid to Severstal), a contribution from associates of EUR 156 million (including Dillinger Hutte - DHS, for EUR 111 million) and tax profit of EUR 64 million (current tax charge of EUR 393 million), the consolidated net result, group share, was EUR 1,414 million, compared to EUR 1,970 million for the first half of 2005.

Key Figures

 
In millions of       1st Half      1st        2nd     1st Half 
euros                  2005      Quarter    Quarter     2006   
                                   2006       2006             
                    (restated)                                 
                                                               
Revenue                  16,822      9,565     10,427    19,992
Gross Operating           3,389      1,427      1,408     2,835
Result                                                         
Operating Result          2,647      1,091        993     2,084
Net Result, Group         1,970        761        653     1,414
share                                                          
Earnings per Share         3.21       1.23       1.04      2.27
(in EUR)                                                       
Net Financial Debt

Net financial debt amounted to EUR 6,864 million compared to EUR 5,742 million at March 31, 2006 and EUR 1,266 million at December 31, 2005 thus reflecting both the acquisition of Dofasco during the first quarter and the payment of the yearly dividend in June (EUR 1,149 million). Financial charges for the first quarter included IAS 32 compliance leading to the recognition of Arcelor share price increase in the convertible bond value (O.C.E.A.N.E.) which amounted to EUR 295 million at March 31.

Cash-flow from operations amounted to EUR 1,479 million over the first six months of 2006. The variation of working capital needs over this period is mainly due to increased activity, to the high prices of inputs and receivables which increase in line with price increases, inventories remaining under tight control. Capital expenditure (EUR 1,067 million of which 489 million for growth capex) remains normal in Europe and includes expansion expenses at CST.

Net debt-to-equity ratio (including minority interests) increased to 0.38 at June 30, 2006, from 0.07 at the end of 2005 and 0.31 at the end of the first quarter of 2006.

 
In millions of euros          December 31,   March 31,   June 30,  
                                  2005         2006        2006    
                               (restated)                          
Shareholders' equity*             17,430      18,602      17,954
Net financial debt                 1,266       5,742       6,864
Net financial debt/                 0.07        0.31        0.38
Shareholders' equity*                                           

* Including minority interests

Flat Carbon Steel

Revenue for the Flat Carbon Steel sector was EUR 11,374 million. This compares with EUR 9,665 million for the first half of 2005, the 17.7% increase (2.9% on a comparable basis) being essentially due to the consolidation of Dofasco (EUR 1,413 million). Total shipments increased by 21% to 18,035 thousand tonnes from 14,893 thousand tonnes for the first half of 2005.

Auto deliveries show a small decrease (-2%) while, in general industry, deliveries grow substantially and average selling prices trend improves during the second quarter after marked decreases since last year. Profitability of coated products (HDG) was significantly reduced by the strong surge in zinc costs (over EUR 200 million from 1H05 to 1H06) leading to the implementation of a new surcharge pricelist as of July 1st.

Gross operating result was EUR 1,566 million, or 13.8% margin for the first half of 2006, compared to EUR 2,381 million, or 24.6% margin, for the same period of 2005 and reflects the negative selling price variation incurred since July 2005 particularly strong for semi finished products (CST) and all spot related selling prices as well as the strong increase of raw material prices (EUR 900 million on 1H06 compared to 1H05). Positive contribution from Dofasco started only in May due to purchasing accounting method. EBITDA contribution was EUR 92 million for four months.

Operating result amounted to EUR 1,105 million, or a 9.7% margin for the first half of 2006, compared to EUR 1,964 million, a 20.3% margin for the same period last year.

Total crude steel production for the first half year of 2006 was 18,921 thousand tonnes (including Dofasco for 1,479 thousand tonnes) compared to 17,057 thousand tonnes for the same period of 2005. Figures for 2006 include a blast furnace relining at Gijon (Spain).

Long Carbon Steel

Revenue for the Long Carbon Steel sector was EUR 3,827 million, which compares with EUR 3,230 million for the first half of 2005 (+27.4% on a comparable basis). Variation takes into account the full integration of Huta Warszawa but also the divestment of rods and bars in Spain and of small tubes in Argentina and noticeable price improvement.

Total shipments were 7,022 thousand tonnes for the first half of the year to be compared to 6,216 thousand tonnes for the same period last year, translating both an improved market situation (production cuts of more than 500 thousand tonnes last year) and changes in perimeter.

Gross operating result for the first half year reached EUR 840 million, or 21.9% margin, compared with EUR 662 million or 20.5% margin for the same period last year. Performance improved, reflecting the very good contribution of assets in the Americas. Scrap costs for Europe have increased considerably during the last six months and margins were maintained.

Operating result was EUR 685 million, a 17.9% margin for the first half year, compared to EUR 522 million or a 16.2% margin for the same period of 2005.

Total crude steel production amounted to 6,389 thousand tonnes for the first half of 2006 compared to 5,889 thousand tonnes for the same period last year. Arcelor has acquired 50% of SONASID in Morocco, consolidated as of June 2006, and assumes management. The company enjoys a leading market position in construction products.

Stainless Steel and Alloys

Revenue for the Stainless Steels sector for the first half year 2006 was EUR 2,789 million compared to EUR 1,975 million for the same period of 2005. The increase is essentially due to the full consolidation of Acesita (October 1, 2005) which accounts for EUR 560 million. Improved demand leading to increased base prices starting from a very low level, also contributes to a positive variation. Nickel prices have reached unprecedented levels leading the stainless business to implement in "third countries" a pricing system (base price plus alloy surcharge) as of August 1 similar to the ones applicable in Europe and the Americas.

Shipped volumes amounted to 1,203 thousand tonnes for the fist half 2006 compared to 778 thousand tonnes last year (Acesita accounting for 352 thousand tonnes for the first six months of 2006).

Gross operating result reached EUR 240 million for the first half of 2006, an 8.6% margin, compared to EUR 151 million, or a 7.6% margin, for the same period last year. Improved demand, management gains, the ramp up of the Carinox steel shop, as well as the very competitive Brazilian activities have contributed to a significant improvement despite depressed base prices which have risen only lately. Inventories remain at a low level.

Operating result, at EUR 166 million, a 6% margin, for the first half of 2006 compares to EUR 59 million, a 3% margin, for the first half of 2005.

Crude steel production amounted to 1,406 thousand tonnes for the first half of 2006 (including 415 thousand tonnes for Acesita), compared with 834 thousand tonnes for the same period last year.

Ugitech, the long stainless products activity has been divested.

A3S (Arcelor Steel Solutions and Services)

Revenue of the sector was EUR 4,621 million for the first six months of 2006 compared to EUR 4,403 million for the same period last year. This variation is due to the beginning of rising prices during the second quarter.

Shipped volumes amounted to 7,409 thousand tonnes for the first half 2006 compared with 6,865 thousand tonnes for the same period last year.

Gross operating result, at EUR 188 million for the first half of 2006 compares with EUR 176 million for the first half of 2005 and the operating result, at EUR 152 million for H1 2006, compares with EUR 106 million for the same period of 2005. Improvement in margin reflects the positive trend both in demand and selling prices. Inventories are estimated to be at low levels.

Revenue, Gross Operating Result and Operating Result by business sector

 
In millions of                    1st Half 2005                 
euros                                                           
 unaudited                         (restated)**                 
                    Revenue     Gross      %      Op.       %   
                                 Op.             Result         
                                Result                          
Flat Carbon Steel        9,665    2,381   24.6%    1,964  20.3% 
Long Carbon Steel        3,230      662   20.5%      522   16.2%
Stainless &              1,975      151    7.6%       59    3.0%
Alloys                                                          
A3S                      4,403      176    4.0%      106    2.4%
                                                                
Arcelor Steel                                                   
Solutions &                                                     
Services                                                        
Others                     990       20    n.a.       -3   n.a.   
Intra-Group             -3,441       -1    n.a.       -1   n.a.   
Total                   16,822    3,389   20.1%    2,647  15.7% 

 

 
In millions of                    1st Half 2006                
euros                                                          
 unaudited                                                     
                    Revenue    Gross      %      Op.       %   
                                Op.             Result         
                               Result                          
Flat Carbon Steel      11,374    1,566   13.8%    1,105    9.7%  
Long Carbon Steel       3,827      840   21.9%      685   17.9%
Stainless &             2,789      240    8.6%      166    6.0%
Alloys                                                         
A3S                     4,621      188    4.1%      152    3.3%
                                                               
Arcelor Steel                                                  
Solutions &                                                    
Services                                                       
Others                  1,004        2    n.a.      -23    n.a.
Intra-Group            -3,623       -1    n.a.       -1    n.a.
Total                  19,992    2,835   14.2%    2,084   10.4%  

** 2005 comparative information restated following the change in accounting policies in 2006.

Arcelor prepares its consolidated financial information under International Financial Reporting standards ("IFRS") since 2002. Revised IFRS standards are applicable as from 2005 in the perspective of the deadline fixed by the European Union. Those changes have had no impact on the Group consolidated financial position of the first semester and should not have significant impact on the Group consolidated financial position of the next quarters.

About Arcelor

Arcelor is a global leader in steel with a turnover of 32.6 billion euros in 2005. The company, which is to merge with Mittal Steel following a recommended public tender offer, holds leadership positions in its main markets: automotive, construction, household appliances and packaging as well as general industry. Arcelor is the number one steel producer in Europe and Latin America and holds significant positions allowing it to capture the growth potential of developing economies and offer technologically advanced steel solutions to its global customers. Arcelor employs 110,000 associates in over 60 countries. The company places its commitment to sustainable development at the heart of its strategy and ambitions to be a benchmark for economic performance, labour relations and social responsibility.

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