You may start, Daniel.
Thank you very much. Hi, good afternoon, and good morning, everybody. Welcome to ArcelorMittal's third quarter 2019 analyst and investor call. This is Daniel Fairclough from the ArcelorMittal Investor Relations team, and I'm joined on this call today by Genuino Christino, our head of finance. We're here to answer your questions on the third quarter results, which were published this morning, alongside a Q&A document and the presentation with detailed speaker notes on our website. Today's call is scheduled to last up to 45 minutes. If you would like to ask a question, please do press star one on your telephone keypad, and we will answer the questions in the order that we receive them. As an experiment this quarter, we'll ask you just to ask one question at a time.
If you ask one question, and then if you have a follow-up later, you can rejoin the queue. Before we begin the Q&A session today, I'd like to make a few remarks. I think it's clear that deteriorating steel market conditions have continued to weigh on the company's results in the third quarter. Demand in our core markets, Europe and the U.S., has remained weak, reflecting depressed manufacturing activity and continued weakness in automotive markets, compounded obviously by further customer destocking. The current steel spread environment is both exceptional and unsustainable. Nevertheless, we must be disciplined in our active response to this exceptionally challenging environment. We do continue to look to moderate production in Europe, and we are on track to achieve the 4.2 million ton annualized production curtailments in the second half.
We're also actively managing the cash needs of the business, particularly CapEx, to ensure that the business remains free cash flow positive without relying on working capital release. Regarding the developments this week in Italy, as you'll be no doubt aware, on Monday, we sent a notice to Ilva's commissioners terminating our agreement. Our press release details the reasons behind this action, which includes the Italian parliament's removal of legal protections that were critically necessary for the company to implement its environmental plan without risk of criminal liability. As per our agreement and notice letter, the commissioners must assume responsibility for Ilva's operations and its employees on or before December four, 2019. In the interim, we're implementing a standby plan to ensure an orderly transfer to the extraordinary commissioners.
Clearly, this is a legally sensitive topic, and our lawyers have requested that Genuino and I do not comment further on these developments during today's call, which I'm sure you will both appreciate and respect. Looking forward, whilst there are some constructive signs, particularly the recently announced price increase in the U.S., steel industry fundamentals do remain in a fragile state. As such, we remain focused on delivering against our Action 2020 targets. The business is expected to generate healthy free cash flow this year and demonstrate progress in our efforts to further strengthen our balance sheet and towards improved shareholder returns. With that, we are now happy to take your questions, and we will begin with the first question from Alain at Morgan Stanley, please.
Good afternoon, gents. One question from my side is on the demand outlook for Europe. Do you see any inflection point on pricing? Do you see any tangible evidence that we are past the worst in terms of pricing and spreads in Europe? This is in the context of automotive volumes starting to recover from very low levels. Any comments on the pricing dynamics in Europe would be very helpful. Thank you.
Yeah, thanks, Alain. I think I'd reference a couple of points. First of all, obviously the demand environment throughout this year has been very weak, and we have seen an ongoing deterioration, particularly in that automotive market. What we have seen, I think, in recent weeks is a stabilization. No further deterioration, but rather a stabilization. I think from our perspective, it's perhaps too early to talk about an inflection to the positive, but things have certainly stabilized. In terms of pricing, I think also you've seen in recent weeks some stability in pricing in Europe. As I noted in those introductory remarks, the environment in Europe is exceptionally low. It's unsustainable, and I'm sure we will see the spread environment normalize. It is just a question of time.
Thank you.
We'll take the next question, please, from Jason at Bank of America.
Yep. Thanks, Dan. Just a quick question for you on CapEx. You're taking CapEx down, and I guess my question is, to what extent is this being permanently removed versus, say, deferred for a future year and ultimately maybe creating a liability, which is, say, CapEx that should have been spent but wasn't? I guess we've seen a pretty extreme example of that in the U.S. with one of the large steel players there.
Okay, Jason, this is Genuino. Let me take your question. We are not at all cutting our maintenance CapEx. That remains. What we are cutting right now is the discretionary CapEx projects, smaller projects across the board. We have not touched on the key projects, like the growth projects in Mexico. We don't see that as something that we necessarily need to do. These are discretionary CapEx and something that we will consider going forward to the extent that the market conditions improve. We are not at all here creating any future liability for the operations.
Okay. Thanks Dan.
Thanks, Jason. We'll take the next question from Luke at J.P. Morgan.
Hi, guys. Can you give a sense of how much additional working capital has been built in Italy over the last year since the asset was transferred, and whether or to what extent the $1.4 billion release in Q4 includes a release in that region? Thanks.
Luke, let me address the working capital, the release. Let me reiterate our guidance. What we have been saying since the beginning of the year is that we will release at least $1 billion, and that's basically the amount of overspend in 2018 that is coming back now in 2019. That means that for quarter four, we should expect to see at least $1.4 to take us to the $1 billion. Having said that, I think it's probably fair to assume that given how raw material prices are moving, there is some potential for some upside on this number. I will stop there and let's see, because as you know, there are several moving parts here. It's very difficult to precise where we're going to be finally landing at the end of the year.
Minimum, the $1 billion we should see, the $1.4 in Q4, 1 year for the year or $1 billion for the year, and there is some potential for more release on that. I'm not going to get into specifics on Ilva right now, as following what you heard from Daniel earlier in this call.
Okay, thank you.
Great, thanks. We'll move to the next question from Emiliano at ODDO.
Yes. Hello, can you hear me? Okay.
We can.
Yes. I have two question. One follow-up on Jason's question regarding the CapEx. Do you have early indication of 2020 CapEx? I would say my question really would be on, you said you are making good progress on asset optimization initiatives. Could you give more color on this statement?
Emiliano, we will not get into the 2020 guidance. This is something that we will for sure do next quarter. As you can see, giving our guidance for full year of 3.5, then you can see that the run rate of Q4 is going to be in the range of $750 million. I'll stop there. We will be updating you fully in Q4.
Okay. Thank you.
Yeah. Thanks, Emiliano. Just on the process of optimizing the asset portfolio, I think we've got no specific updates at this stage. I think what we can say is that the process is underway. It has positive momentum. We have several work streams underway, several expressions of interest on assets that we've identified, and we will look forward in the coming quarters to be able to update you on that progress.
Okay. Thank you.
Great. We'll move to the next question please, from Seth at Exane.
Good afternoon. Thanks for taking the question. Just with regards to the outlook for your cost base going into Q4 and perhaps early 2020, obviously your European volumes will be impacted by the 4.2 million ton annualized reduction. Looks like other regions also tracking quite light. How should we expect that to impact your cost base? Has Mittal been able to adjust its fixed costs, in particular, in line with the capacity idling, or is there some risk of more significant fixed costs under absorption potentially weighing on realized margins in the coming quarters? Thank you.
Thank you, Seth. I think it's quite clear if you look at our results, we are highlighting in our release. You see fixed costs going down, particularly in Europe. There is a lot of efforts there to try and to offset some of the headwinds that we are facing. Making sure that we capture the attrition, that we review our overtimes, that we revise our service agreements, contractors, a lot of focus on all those points. I think we have been quite successful, and we expect that to continue into Q4. We don't expect the gains that we have captured in quarter three to reverse in quarter four. That's where we are. Going forward in quarter four, we expect to see costs generally down because of just how the raw materials have been moving, the basket.
That is a positive for us in quarter four.
Okay. Thank you very much.
Thanks, Seth. We'll move to Carsten, please, at Credit Suisse.
Thank you very much. In the absence of any Ilva questions, a question on the mining operations. We saw on the third quarter quite a steep fall in the mining EBITDA. I understand that the volumes were down 1.5 million tons in iron ore, but I still struggle to reconcile the number. Could you help me a little bit on that? What is actually the fixed cost base here? Do I overlook anything on a fixed cost? What other components other than the volumes played a role? Thank you very much.
Yeah. Carsten, I think the main elements, you have the volumes. Of course, you have also the evolution of the freight costs that impacts the NRPs, even though you don't see really a big change in the average price quarter on quarter, but you have an impact on the NRPs because of freight. You also have, of course, then the decline in coal prices that impacted our results as well. The evolution of the pellet premiums. As you know, Mines Canada sells a significant volume of pellets, so that has an impact on our performance as well. Those are the key major block points here. The volumes, the premiums, coking coal prices, and the freight.
The premium should have not touched you that quarter, at least not that severely, in my view, because usually it's longer term. How much of the pellets you sell is on spot, and how much is actually on longer-term contracts?
Most of our pellets are being sold on a quarterly basis, and most of our pellets goes also to the group, Carsten, on a quarterly basis.
Okay. That makes sense. Thank you.
Great. Thanks, Carsten. We'll move to Alan at Jefferies, please.
Thanks. You provided some interesting profitability metrics in the presentation, namely the $38 per ton achieved in Europe, excluding Ilva. With your comment that raw material costs should be moving lower into Q4 in Europe, let's call it an unknown for the Ilva impact in Q4. Do you think you can achieve a similar level for your European operations of $38 per ton EBITDA Q4 or somewhere around that?
Alan, we're not going to be giving specific guidance on Q4. I think we're just trying to help you with the major factors. Cost is an element here that we know that should go down because just how the basket is evolving and has been evolving recently. On the other side, you know how prices in Europe have also evolved. I guess the missing block here is shipments. Shipments, our guidance is on a reported basis, our shipments should be up for full year year-on-year. On an adjusted basis for scope chains, we are saying, you have in our release, we expect shipments to be stable. On a reported basis, it should be up for full year 2019 versus 2018. I hope that helps you with your modeling for quarter four.
If I can try to push you a little bit, I'm speaking just to Europe for Q4. The reported number in Q3 is significantly lower than what you provided excluding Ilva. Do you think your reported number for Q4 could, let's just say, somewhat track around that $38 per ton number? I know you're not going to give me an exact number, but if you think that could be achievable.
I'm not going to get into the specific numbers for Q4 for Europe, Alan. We don't give this level of granularity in guidance.
All right. Fair enough.
Great. Thanks, Alan. We'll move to Phil at KeyBanc.
Thanks for taking my question. Certainly iron ore, particularly the pellet piece, has moved down. Coking coal has moved down, scrap has moved down. If we just take that last part of the quarter, nearing the lows of when those things reset. How much of that drop have we realized in aggregate in the business versus what we're going to see moving forward, just in terms of a high level? If I look at a segment like Brazil, the spreads were a lot more resilient there than I would've thought, even a little bit in Europe. I know that there was also some true-ups in the pellet premium. Just trying to understand so we don't overestimate the impact of these things moving forward.
Yeah. I think, obviously, we've talked a lot in the past about the lags of raw material costs and how quickly or how slowly they can hit the cost of goods sold and the income statement. The model that we've consistently talked about in the past is in Europe, where we assume 35% of current quarter raw material purchases hit that quarter's cost of goods sold, 25% goes into the next quarter, 15% into the quarter after that, and then the remainder the quarter after that. The bulk of it hits the cost of goods sold within two quarters, but it takes a full four quarters before you see the full impact of a change in the raw material costs actually fully translated into cost of goods sold. That's the model for Europe, which you should assume.
For Brazil, because we have a shorter supply chain, we don't have to carry quite as much inventory. It does tend to translate a little bit faster. That's a good model for Europe. In terms of revenue, obviously, you should be aware just of the typical fluctuations in lead times and also factor in our contract business. Hopefully that gives you the element that you need and if you would like, we can follow up in more detail after the call.
Thank you.
Thanks, Phil. We'll take the next question from Myles at UBS.
Great. Yeah, just on curtailments. There's 4.2 million tons annualized curtailments in the second half. What was the actual run rate during the third quarter? I assume we're going to be at the full 4.2 during the fourth quarter. Thinking into 2020, are you likely to extend these curtailments if demand remains weak or even take more aggressive action? Is that on the cards potentially if we don't really see much of a meaningful improvement in demand next year?
You have in our presentation one slide showing the evolution of our shipments. We are down on a comparable basis in Europe by about 4%, and you should expect an acceleration of the curtailments in Q4. We are on track to achieve the 4.2 million tons run rate in the second half. To the second part of your question, whether we will consider to extending that, I think we're going to be, of course, monitoring the market conditions, and taking a call on a quarterly basis going forward.
Okay.
Great. Thanks, Myles. We'll move to Rochus at Kepler, please.
Yes, thanks, guys. Based on what you said on the moving parts on the cash flow generation, shall we consider any decrease sequentially in terms of net debt by the end of the year, taking into account that you are closing Essar by then? Could you remind us what the residual cash out will be for Essar in terms of equity contribution and the hedging effect?
Yeah, Rochus. On Essar, the impact will be about $900 million. You have $700 additional equity contribution to the JV, plus roughly $200 million of the hedging that goes as well. I believe you have all the components of the major blocks to come up with your estimates for net debt. We are not giving a guidance. I think at this point, it should be clear that the company will be deleveraging. You have the cash needs, $5 billion, you have your assumption in terms of EBITDA, you have the working capital component, and then you have the M&A. I believe you have all the elements, and that should give you comfort that for the year, we're going to be deleveraging further despite the challenging market conditions that we have been facing in 2019.
Okay. Got it.
Super. Thanks, Rochus. We'll move to Bastian at Deutsche Bank.
Yes. Good afternoon, gentlemen. My question is on the volumes which you're cutting in the European business. When you announced these production cuts, you said that these tons would be having negative contribution margins, and this is what we can see in your better European numbers as well. Now, is there any color you could give us on whether the volume weighted contribution margins of the additional tons you are now cutting in the fourth quarter is going to be negative as well? If so, are we talking rather a level of $50, $100, or even higher here? Thank you.
Bastian, I think this is a little bit too specific. As I said, I don't want to be providing specific guidance for quarter four. Clearly, as we are cutting this production, that's because we are not making money. I hope that helps.
Okay. Basically, at least you're confirming that these tons you're taking out, that they are having a negative contribution margin. That is what you can confirm.
I think that is a fair assumption.
Yeah. Okay, good. Just as a quick follow-up to just your statements on costs, you said that beyond that, you're obviously taking out some fixed costs. Could you just, across the group, just quantify or give us a rough idea, like how much fixed cost you're aiming to take out? Of course, we can all do the math on the, I think, spot market businesses. On your fixed costs, which you're tackling, can you just give us a rough number, how much you plan to take out in the fourth quarter? Is there any framework for 2020 at this stage, on your target for fixed cost reduction?
I guess this is happening across the group. I'm not going to be giving a specific number for quarter four. I can only tell you that in such market conditions, the whole organization is geared to try to reduce the cost base as much as possible. The benefits that we have in quarter three, and that is visible in Europe and in other parts of the group, our expectation is that it remains, that it's not going to reverse in quarter four. Of course, we're going to be looking for ways to maximize the gains going forward. I'm sure we're going to be able to update you more in quarter four on future plans for 2020.
Okay. Thank you.
Great. Thanks, Bastian. We'll move to Christian at Societe Generale.
Yes, thanks. Just a quick check. When you're saying you're going to be deleveraging for the year, I assume you're excluding the IFRS 16 impact? That's just excluding all that.
Well, that is part of the equation. You have your opening position, you add IFRS, and then we should be lower than that.
Otherwise, in Brazil, you've been able to increase your sales of the domestic market in the third quarter. Is this something you're seeing continuing in fourth quarter, increasing domestic relative to exports?
Well, I suppose you're asking about Brazil?
Brazil, yeah.
Yeah. In Brazil, quarter three is typically a quarter where you see there is some seasonality. For full year, we expect to grow our shipments domestically, marginally, in line with the apparent steel consumption, that you have, which is in the range of 1% for this year. We are not really looking at a significant increase, but in line with the apparent steel consumption in Brazil.
Okay, great. The last thing is, in mining in Canada, all the issues on the INO, is that normalized for fourth quarter? Are we assuming a normal shipment environment?
Yeah. The concentrate is operating now as per normally. We are reiterating our guidance. The mark to book tons should be stable year-on-year.
Great. Thank you very much.
Thanks, Christian. We'll move to some follow-up questions, the first coming from Alain at Morgan Stanley.
Yeah. Hi, just a follow-up question, and I appreciate you cannot address the legality that's Ilva, but if you refer to slide 12, which addresses your cash needs, can you give us an indication how the pro forma cash needs would have looked like without Ilva in 2019, for example?
I don't know if we want to get into this level of details right now, Alain. Sorry for that.
Okay. No problem. Thank you.
Back to Alan at Jefferies.
Thanks, guys. On the hot strip mill project in Mexico, you previously guided to a potential $250 million contribution in EBITDA. How much stronger of a market environment does that assume to get to that number? Also, can you just remind us roughly when next year it's expected to finish? Should we expect much of a contribution next year, or would it really be 2021?
Yeah. Our plan, our forecast is to finish next year. Of course, you have the ramp-ups. I think you will see some contribution, of course, starting more in the second half of 2021 and then fully in 2022, 2023. The incentive of the project here is to use the slabs that we produce and that we are today exporting or selling domestically and convert that into added value products. I think that today, the project remains attractive. We look even at revised assumptions, the IRR of the project remains quite attractive in these conditions, given that we have all the iron ore, all the facilities are there. Converting into HRC in a market that is basically importing a large part of its needs will always make sense for us.
Thank you. I won't ask you to give me the exact IRR, could you tell me what your company policy is for an investment hurdle of IRR?
Our policy, our hurdle rate is 15%.
Great. Thank you.
Thanks, Alan. We'll go back to Myles at UBS.
Great. Yeah, just a couple of follow-ups. One was just on my original question on the catalysts. How quickly in theory could you turn this 4.2 million tons back on? Is it almost immediately or would there be a lag? Whatever. The main follow-up question is on Liberia. Could you give us an update where we are. I think the feasibility study is done now. Could you give us a sense of timeline, whether the returns actually look attractive at current iron ore prices and whether you're thinking about partners for that expansion?
Myles, on the 4.2 million tons, the answer is, once we see the markets back, it's something that we can bring back quite quickly. Some of the cuts, as you know, we are just moderating production. It would just be a matter of putting full charge in the blast furnace. That would be easy. Of course, some of the cuts are linked also to relines. It's just a matter of completing the relines. We should be able to be back to production very quickly once we see demand for that. On Liberia, do you want to address, Daniel?
Thanks, Genuino. Sure. On the Liberia project, you're absolutely right. We have completed the DFS, the definitive feasibility study. What we're doing now is just some final detailed engineering works. Those are underway in the current quarter. What we're looking to do is finalize the investment case, the plan is to present that for funding in the early part of 2020. It is a very strong project. It's attractive. It's going to be a high-quality product. Clearly in the current iron ore price environment, the returns potential is very high. Even at our long-term assumptions, we think that this will be a very attractive opportunity for us.
Great. How much capacity does the rail have in Liberia if some of your neighbors wanted to use it?
Yeah. We have 15 million tons of annual capacity.
Okay. It needs upgrading.
Yeah. 5 million tons-15 million tons of capacity.
Yeah. Thanks.
Okay. We'll go back to Rochus at Kepler.
Yes, thanks. One is on the production cuts in Europe. Can you remind us which of the blast furnaces in Europe are currently idled? I recall Bremen at least, I think Krakow now. I'm not sure which one I missed. Other point is more for housekeeping reasons. What came to my attention is that in the third quarter, the assets consolidation line for shipments was abnormally low, maybe 25% of the usual size. Can you explain what's behind that, is that fully back to normal in Q4?
Rochus, let me touch on your first part of the question. I'm not sure that I understood your second question, but on the assets in Europe. I guess what we would like to confirm to you is that we are on track to achieve the 4.2 million tons, but we don't want to get into the specifics, the name of the assets at this point. There is some sensitivity to it. We are on track to the 4.2 million tons.
Okay, on the shipment on your reported shipment breakdown, you have this eliminations line, yeah? That is usually much larger than it was in the quarter. It was just 176,000 tons, normally 700,000-800,000 tons. I'm not sure whether I understood what kind of internal shipments were so much lower this time, and was it just a one-quarter phenomenon?
Yeah, just one quarter. There is not so much change actually going forward.
Okay. Maybe on mining, what comes across is that it's another quarter where you had operational issues in Canada. Now we see electrics. Is there a pattern because we have seen some issues repeatedly before? Is there anything being changed, adopted in Canada going forward? Maybe on the CapEx side? From the outside, very hard to see where these issues are coming from.
Well, I think, you're right that we had some issues also last year, but they were more geological issues. The issues are quite different in nature. Given the size of the operation, I think it's kind of from time to time, unfortunately, we will be experiencing something like that.
No need for higher CapEx going forward?
No, I don't think that this is a CapEx issue. It's really just the equipment will fail from time to time. It's not really a matter of lack of CapEx or maintenance CapEx in this case.
Okay.
Great. Thanks, Rochus. We'll move to another follow-up from Phil at KeyBanc.
Thanks very much. I know the topic of the last call certainly was just the import surge into Europe, particularly from Turkey, and I know that there was some discussions with the EU regulatory bodies, whether or not we were going to tighten up some of those quotas and restrictions. Just curious from your perspective, have those flows slowed to a degree that you all are comfortable with? Has Turkey's presence particularly taken a step back? Just maybe some thoughts around that, just given the fact that I know on the last call it was such a major issue.
Thanks. It was a particularly topical issue last quarter as we awaited the outcome of the review of the efficacy of the safeguards. Obviously, the conclusion of that review was that the planned relaxation of 5% was reduced back to 3%, which okay, that's better than what it would have been. However, given our updated forecast today of demand contracting by up to 3% this year, it doesn't seem logical that imports should be allowed to increase by 3% relative to that. It's clearly just leading to imports having a higher market share. I think the import trends have not necessarily improved. I think we saw a sharp rebound of imports in September.
It remains something that we have to be very focused on and very vigilant on, because I think what's currently in place in Europe has not necessarily had an effective protection of the European steel industry from uncompetitive imports. The other thing, obviously, that we've been talking about on previous calls is the border adjustment tax, the green border adjustment tax. I think we continue to have positive momentum there. It's something that we've been talking a lot about. We've been a very vocal advocate of the need for a level playing field, a vocal advocate for a need that imports of steel into Europe should face the same cost of carbon that domestically produced steel faces. I think we've got good news there.
There is momentum, as I refer to the President-elect of the European Commission, Ursula von der Leyen, has announced her intention to include a border adjustment in the upcoming European Green Deal. I think we look forward to being updated on the progress of that important topic.
Makes sense. Thanks very much. We'll stay tuned.
We'll move back to Alan at Jefferies.
Thanks. You provided the raw material acts for Europe and Brazil. Can you just give us a sense how quickly the fall in the pellet premium or how quickly it'll benefit the NAFTA steel cost base? Just a reminder of how much of those Canada volumes are sold into NAFTA, please.
The Canada volumes. Mines Canada is selling about 10 million tons of pellets per year. In NAFTA, in U.S., as you know, we have our supply agreement, for a large part of our needs. We have our own supply, Hibbing Taconite, that is captive. That is, of course, translates cost, so there is no impact there.
Will we see that benefit in Q4 in the P&L?
In Q4, so our supply agreement, in NAFTA, it's an average price for the year, and it moves according to the indexes. Yes, there should be some benefit flowing, also in quarter four.
Okay, thank you.
Thanks, Alan. We'll move back, I think, for our final question from Christian at Soc Gen.
Yes, thank you. Just a quick one. The $40 million positive contribution on EBITDA from other and elimination in the third quarter, what's the main factor that makes that number positive? What should we expect roughly for the fourth quarter?
Yeah, Christian, I think it's important to see that quarter 2 was exceptionally higher. The reason for that is just the high stock margin elimination following the increase in iron ore prices in quarter 2. In quarter 3, you don't have that negative impact. On top, as we discussed, the supply of pellets intragroup, given the lower premiums. You have a reduction of the stock margin eliminations. That's the bridge. A higher negative impact in quarter 2, some release in quarter 3. That's why you have this delta. Going forward, we're not gonna provide specific guidance, but to the extent that your assumption is that iron ore prices will go down, you should see some release.
Don't forget that we have our recurrent expenses as well, which is in the range of $40 million to $50 million for all the head office costs and other costs.
Great. Thank you very much.
Great. Well, thank you, everybody. We'll draw the call to an end. I think the experiment worked well this quarter. Thanks very much for everybody for limiting your questions and going through that process, which I think worked well. I'm sure we will see many of you in the coming days and weeks. Obviously, we will have our fourth quarter results in early February. Thanks very much, and speak to you all soon.