Thanks very much for joining this conference call today to discuss our recently announced acquisition of Ilva. We will have a presentation from Mr. Mittal and Odisha followed by Q and A session. The intention is for the call to last up to an hour. And can I also remind you that this call is as usual being recorded?
And with that, I will hand over to Mr. Mittal.
Thank you. Good day, everyone. Thank you for joining this call to discuss the integration and transformation of Ilva. Today, I'm joined by Ajit Mittal, CEO of Europe and CFO Geert Von Pouwirth, who is the CEO of Flat Products Europe Genuine Augustino, Group Head of Finance Daniel Fairclough, Head of Investor Relations. This is a very important development for ArcelorMittal and upon signing a binding agreement, we were eager to share with you some details about our plans for the asset and explain why we believe Ilva will ultimately establish itself as a jewel in ArcelorMittal's crown.
So to begin with a brief overview, on Friday, we and our JV partner, Machidalia, announced that AM Invesco has signed a binding agreement with the Italian government to lease and ultimately purchase the operations of ILWA. This is a great news for ArcelorMittal. Ilva offers a strong fit for our business. We have a robust plan to transform the Ilva assets, reestablish its competitiveness and restore its market position. We have identified significant synergies that will improve Wilbur's cost and product position.
This will drive value for our shareholders. On completion of our plan, I believe we will have a Tier 1 steel asset, the largest single site facility in Europe and located in the country, which has the 2nd largest steel consumption in Europe. And we will achieve this without adding pressure to our balance sheet. Moving to Slide number 3, let me first of all address why Ilva is a strong fit for our business. The primary reason is the geographic complement.
Italy is the 2nd largest consumer country in Europe, a country where we currently do not have any primary steelmaking assets. Secondly, Ilva has the potential to be a Tier 1 steelmaking asset. Its main facility in Taranto is the largest single site facility in rope, is very well positioned on the coast with excellent access to a large deep water port. This is complemented by high quality cold rolling facilities and galvanizing facilities at Novi and Genoa. Now to Slide number 4, which outlines why we, ArcelorMittal, are the best custodian of the ILVO assets and why our unique offer is the most credible solution for its long term future.
The bottom line is that ArcelorMittal has the management strength and direct record to turn Ilva's performance around. We have the financial strength to commit to the required investment. We are in the best position to leverage our buying power to improve Ilva's competitiveness. And we have the customer franchise and R and D capability to reestablish Ilva's position in Italy and as a Tier 1 supplier to the European market. We can commit to this turnaround with an ingrained philosophy of safe, sustainable steel.
This brings me on to our vision for Tilva as shown on Slide number 5. I think we all understand and appreciate the challenges that Tilva faces today. But I'm very confident that we can deliver on our plan to transform Ilva into a modern best in class integrated steel producer, capable of producing top quality products, satisfying its natural customer base and reestablishing a trusted and positive relationship with its stakeholders and the local community. Key to this transformation will be the execution of our industrial and environmental investment plans. Moving to the next slide, which details the 4 key areas which we need to focus on to bring about Ylva's transformation.
First, our industrial plan, which includes €1,300,000,000 investment over a 7 year period aimed at dramatically improving Ilva's asset base, increasing utilization rates at the finishing lines at all 3 major sites. 2nd, our environmental plan, which includes €1,100,000,000 of investment over a 6 year period aimed at materially improving Ilva's environmental performance, complying with the integrated environmental authorization set out by the Italian government and improving environmental performance to beyond European best practice levels. Early, our commercial plan, which involves extending ILVA's product range with a focus on increasing the proportion of high added value products, leveraging our existing customer relationship and pan European sales and distribution networks and restoring Ilva to its rightful position as Italy's premier steel producer. Fourthly, our research and development strength. This is a critical topic because R and D is the engine room for our innovation.
And without innovation, you have no choice but to be a commodity producer. Obviously, our vision for Ilva embraces making Arso Metal's R and D capability available as a means of ensuring the plant produces high value added steels, which is a central part of our industry plan. I truly believe that Arcemeter is the most innovative steel company in the world and our commitment to investment in R and D sits right at the heart of that. Last but certainly not least, people and communities. We want to be a welcome neighbor in the communities in which we operate and intend to start an open dialogue with community stakeholders to fulfill and satisfy their critical requirements.
Finally, next slide. Let's discuss the overall CapEx investment plan on Slide number 7. AM Invesco has committed to invest €2,400,000,000 at Dilwa over the next 6 to 7 years. This will be split into 2 areas. Our investment our environmental investment plan totals $1,150,000,000 and is to be completed by the end of 2023.
Our industrial investment plan totals $1,250,000,000 and is to be completed by the end of 2024. The two plants are inherently linked as without the environmental investment, we will not be able to increase crude steel output above the currently licensed 6,000,000 ton rate. And the industrial investment plan, including the reline of blast furnace number 5 is required to move crude steel production to 8,000,000 ton with the most competitive asset configuration. With this, I will hand over to Adit to discuss these plans in more detail.
Great. Thank you very much and good afternoon, good morning to everybody. I'm on Page 8, which highlights our environmental investment plan in more detail. Our environmental investments can be broadly split into 2 areas: remediation work and environmental CapEx. The remediation work is essentially site cleanup work.
We will spend just short of €300,000,000 and this will be covered by the fund seized from the previous owner. The remaining CapEx of about €850,000,000 will be spent with the target to improve environmental performance such as reducing air emissions, improving energy efficiency, reusing byproducts and improving water quality. We take our obligation to improve the environmental performance at IRVA very seriously. Our plan is detailed and robust, and I'm confident it will deliver material improvement and ensure that there is never a return to the situation that IRVA and its communities have had to face in the recent past. Moving to Slide 9.
It provides further detail on our industrial plan showing our crude steel production targets for Ilva. As we just mentioned, we are constrained to a level of 6,000,000 tons of crude steel production at Ilva until the provision set out by the Italian government in their environmental authorization plan are complied with. Hence, until the environmental plan is completed, we will supplement IRBAS primary production with imported slabs and hot rolled coils in order to maximize usage of ILVA's finishing facilities. Post completion of the environmental plan, we intend to bring Blast Furnace 5, Avaya's largest blast furnace into operation. In order to do this, we will invest €225,000,000 realigning it, which is part of our investment plan.
Plus FMS V is intended to be operational as soon as our environmental plan is finished. This will enable us to further increase crude soon production to Ilva to 8,000,000 tonnes per year. Turning to Slide 10, which I hope holds all these drivers together to show you how we will turn around the EBITDA for Ilva. The first point I will make is that Ilva will be transferred to us with 10,000 people, which is less than the number of people they had in 20 16. This is approximately €100,000,000 to €150,000,000 fixed cost saving and the costs of this restructuring are not our responsibility.
What is our responsibility is capturing the synergies and variable cost improvements. These synergies include logistics savings from improved steel flows, applying ArcelorMittal's buying power to all of Irvast purchases, applying our management and benchmarking to improve variable costs, including working points, energy, consumption and yield. The total synergies we have identified is €310,000,000 of which €50,000,000 will be the benefit to ArcelorMittal's existing operations. So within this bridge, we are showing the €260,000,000 dollars that will accrue to Ilva directly. These synergies together with the impact of increasing downstream utilization and improving product mix are expected to significantly improve EBITDA by 2020.
First 2020, we will continue to improve the cost position by 2024 capture the benefits of restarting Blast Furnace 5, which will increase crude output by 2,000,000 tonnes. This will then bring IRVA's performance in line with the best performing assets within the ArcelorMittal Europe portfolio. Now to address the impact of Ilva and ArcelorMittal's financials, this transaction will only complete once we have received the required regulatory approvals. That process is likely to take the remainder of this year. Following completion, Arshomitur will take operational control of the IRVA assets.
On completion, we will recognize the IRVA assets on our balance sheet. We will also recognize the purchase price as a liability classified as other payables and therefore not included in the company's net debt position. The liability will reduce over time as the lease payments are made. The lease period will be for a minimum of 2 years and will continue if necessary until all remaining core processes are lifted. These payments will also not impact our P and L.
It is important to understand that Ilva will be transferred to us with $1,000,000,000 of net working capital and free from any financial debts and any pension obligations or other long term liabilities. On completion, we will commence our CapEx investment plans. Assuming the same steel market conditions as 20 16, we expect Ilva to be accretive to our SORMittal EBITDA in the 1st year and contribute to a positive free cash flow in year 3. Now let me try and conclude our presentation. As you just heard, Iva is an excellent opportunity for ArcelorMittal to create value for our shareholders.
We are acquiring a large scale asset, an asset that is currently not fulfilling its Tier 1 potential. We have the management capability and track record to turn the performance around and realize the significant synergies between the two companies. We will leverage our R and D strengths, our product leadership, our commitment to customer service, and we will reestablish Euva as a leader in its domestic market. We will do all of this and achieve all of this without sacrificing our balance sheet strength. An important next step is to start discussions with the trade unions and we will be engaging with the European Commission as we move through the regulatory approval process with the aim of completing it by the end of 2017.
That concludes our presentation, and now we're happy to answer your questions.
Thank you. And we will take the first question, please, from Fraser Jamieson at JPMorgan.
Yes. Thank you very much, gentlemen, for the presentation. I just wanted to ask, longer term, you've obviously presented some details about where you think 2020 EBITDA could go. It looks like you're talking about something like $40 to $45 per tonne on that basis. Ultimately, longer term, you've got the upside that you identify.
Where should we be thinking about where Ilva can get to relative to, say, the broader ArcelorMittal European division? Do you think that ultimately that can be a more profitable asset once the various synergies, etcetera, and environmental programs have been delivered? And then secondly, just specifically on the synergies, you talked in general terms about at some of the areas. Could you maybe talk about the elements of the synergies accruing to the broader European division where you see those opportunities, presumably in supplying some of the raw material slabs, etcetera, into Ilva. But some more detail on that would be great, please.
Sure. So I think to appropriately answer the potential of Ilva, there are 2 phases. 1 is when Ilva is running 6,000,000 tons and another when we achieve full capacity utilization. So let me start with full capacity utilization. In 2016, our European business earned about €62 per tonne of production.
And Ilva will be doing about 8,000,000 tonnes of crude steel by 2023 or perhaps earlier. And that translates into about €500,000,000 It will also be shipping an additional 1,000,000 tonne of product. A good thumbnail is that product earns about €50,000,000 of margin. So you get a run rate eventually of about €550,000,000 If you look at the cost structure of Ilva, Ilva is really a world class Tier 1 asset, very well laid out. It has a high level of integration, excellent coke facility, sintering.
It has its own oxygen plant, power plant, line capability, deepwater ports. The finishing facilities of Ilva are relatively new. Most of them have been built in the last 10 years. And logistic flows between Toronto and Northern Genoa are quite good. So if you look at what IRVA is, it's definitely a Tier 1 asset and fits into our European portfolio very nicely.
In terms of synergies, the broader synergy to our SORAMITOL is about $50,000,000 It's primarily to our SORAMITOL Europe operations. It's logistics, because today there is cross material flow, we can optimize on that. And it is also purchasing savings. As we see Ilva has a large supplier base in Southern Italy and perhaps we can exploit that in our European business, so it's vice versa.
Okay. Thank you.
Great. Thanks, Fraser. So we'll move to the next question please from Luke at Exane.
Hi, gentlemen. Thanks for taking my question. Could you maybe be a bit more specific as to what will trigger the payment for the assets? We are talking about the court process. So maybe if you could elaborate a bit on that.
Related to this question, could you also help us understand what is going to be the final structure for the JV and how Sao Paulo and what will be the share maybe of your partner Sao Paulo? And the third question related to that topic, the funding of the JV, do you intend or what will be the equity contribution for ArcelorMittal in the end? Thank you.
Sure. In terms of the court process, the reason why the transaction cannot close in a traditional manner when you achieve all regulatory approvals is because the assets are under criminal seizure. And the assets are under criminal seizure by the relevant courts near Toronto, and they're under criminal seizure till the environmental plan is met. And fundamentally what it means is that they want to make sure that there is an owner, which is going to fix the issues of the past. And therefore, to the extent that we start making environmental investments and they can see that emissions are coming down, the raw material yard is being constructed, the judge could lift the restrictions.
So the minimum is about 2 years contractually and it is up to 2023, but the judge could decide that we're making enough progress on the environmental front to lift the seizure earlier. So as soon as he lifts the seizure, then the transaction was closed. In any case, we would have foresight of that. So it's not going to be a certain thing that would happen tomorrow morning. It's a minimum 2 year period till 2023, and we would be constant dialogue with local authorities to understand when that event could occur.
In terms of the joint venture, we have 2 joint venture partners, Marcegaglia and Bankerintesa Sao Paulo. Combined, they are investing they are investing €200,000,000 which translates into a 12% equity ownership, roughly equal in their shareholding. In terms of funding, the funding is primarily ArcelorMittal. The investments of both Marcegaglia and Banca Enteza have calls and puts. And therefore, fundamentally, the funding for the investment, the environment and the equity price falls on us.
Excuse me, maybe a third. Did I understand correctly, but you're saying each March Egalia and Sao Paulo are taking 12% or is it the total?
It's total. It's €200,000,000 over €1,800,000,000 which is the purchase price. So it's approximately 11.1% to be percent. Okay. Thank you.
Thanks, Luke. So before we move to the next question, if I could just remind anybody who does ask, I want to ask a question to press star 1. And I don't I see a lot of people dialed in, but I'm not seeing a lot of questions. So I'm not sure if there's a technical issue. But we will move to the next question, please, from Charlie Clark at
Kepler Cheuvreux. Hi there. Thanks for your time. Just got two questions, if that's okay. First one, on Slide 6, you stated that Ilva's output will go gradually to 8,000,000 sorry, to 8,500,000 tonnes by 2020 and then up to 9,500,000 tonnes by 2023.
I'm just thinking, is this a contractual obligation? Or would this be a function of underlying demand? And the second question, will Ilva's exports be limited to the Mediterranean countries? Or will it be a global export? Thank you.
Yes. Thank you for the question. It's not contractual. What is contractual is we need to ensure that we complete our investment plan, our environmental plan. We hire 10,000 people and we execute on the strategy that we have decided upon.
Clearly, we do want to ship product because it is profitable to ship product. So even though we're producing 6,000,000 tons of COVID-nineteen, 2020 by increasing shipments and utilizing our downstream assets full, we create value. Roughly every 1,000,000 ton of shipment is worth €50,000,000 Where do we plan to ship it, if that's your question? You see when you look at Ilva, Ilva has historically lost a lot of market share in its markets primarily because of poor quality and service. So we need to improve quality performance and service performance.
That share has been eaten up by imports. So when you look at, for example, just Italy, Italian customers account for more than half of all the imports into the European marketplace. So that is an area to go. That is not price driven. That is just driven because Ilva has not been able to fulfill the quality and service requirements.
Those are the areas we will attack 1st. And clearly, Ilva is well positioned to also export into the Mediterranean market. We have important JV customers in Turkey, which buy a lot of hot band that could also be a source. And clearly, we have Marcegalya, which is a partner, which will also be taking on some tons from Ilva.
That's great. Thank you.
Thanks. We'll take the next question please from Phil at KeyBanc.
Thanks very much. My question just maybe dovetails well off the recent comments. But in terms of exporting into places like the United States, I know Ilva has probably done that over the course of the last 3 to 5 years. Given the fact that you've got such strong presence in North America, is it part of your commercial plan to start shipping those products more so in the Mediterranean and away from NAFTA?
Yes. Thank you. So Ilva historically has not shipped that much into the U. S, perhaps because of service delivery and financing issues. But you're absolutely right.
Our focus is to address the customers, which Ova has lost because of poor customer service, because of poor quality and delivery capability. And that would reduce the level of imports into the Italian markets and we would also look at opportunities in the Mediterranean region. Okay.
And then just the last question. In terms of market share, where would this take your European share in terms of the flat roll market with the consolidation move here versus where you were prior? Thanks.
So if you look at Ilva, Ilva adds about 6% points on share based on existing capacity. And so as we increase capacity and shipments, clearly, there will be few more points than that, but 6 percent is a good way to begin. I mean simple math, the European market, that market is 100,000,000 tonne market. So as we increase shipment clearly from the level of Ilva today, which was about 5.4, it would grow. Does that help answer your question?
Yes. I think I've given you enough building blocks. All right. Thanks very much.
There being no other question, I'd just like to we just got one question.
Yes. Sorry, Mr. Mittal, it's Alain from Morgan Stanley has
joined the queue. So can you
ask your question, Alain?
Yes. Good afternoon. Just a couple of questions. The synergy number of EUR 310,000,000, does that include the EUR 50,000,000 synergies for ArcelorMittal Europe? Or is it on top of it?
And I'll ask the second question after that one.
Yes. So this includes the synergy number of ArcelorMittal as well. So if I exclude the synergy number of ArcelorMittal, then you get about EUR 260,000,000 which accrue to Ilva. I would suggest that, that would be equally achieved over the next 3 years, so EUR 100,000,000 EUR 100,000,000 EUR 100,000,000 EUR 100,000,000. The way I think about how the business performed, Ilva, in 2016 was minus $220,000,000 dollars Fixed costs are down by about $150,000,000 We had $260,000,000 of synergy and we're talking about 3,000,000 tons more of volume.
And as I mentioned earlier, importing slab and selling finished product is worth about EUR 50 in terms of volume. So those will be the building blocks to get to a medium term EBITDA number for Ilva. And then earlier on, I had addressed the question on the longer term.
Okay. And thank you. And my second question is, will your JV partners participate in any of the CapEx, the SEK 2,100,000,000 net? Or is that all ArcelorMittal that will contribute that number?
Yes, that is ArcelorMittal that will be contributing, but we should not lose sight of the fact that two things. Number 1, and most important that Ilva will be contributing to this, right? Because we expect Ilva to be accretive in terms of EBITDA I mean to be EBITDA in year 1 and EBITDA concentrates from the sale and cash accretive by year 3. So you're looking at perhaps a short term requirement to fund this environmental and industrial CapEx. But fundamentally, Ilva should be earning its way through funding these significant investment amounts.
Also, since we're on this topic, I want to highlight that the CapEx number includes the maintenance CapEx that you associate with that we are we routinely talk about. So if it wasn't for the additional investments we're making on the environmental side or some catch up and the Blast Furnace 5, normally, Ilva would be earning would be requiring, not earning maintenance CapEx of between €120,000,000 to €140,000,000 That's part of our global CapEx number. And Iva will automatically be in a position to earn more EBITDA than that based on our estimates by 2019. So as a business, excluding the additional investment commitments, the business is actually cash flow generating in year 2.
Okay.
Thank
you. Based on 2016 spreads.
Yes. Understood.
Great. Thanks, Alain. So we'll move to the next question from Christian at SoftGen.
Yes. Thank you very much. Just a question on your on the 2018 accounts. So the image on the presentation Page 10 shows negative EBITDA or an implied negative EBITDA in 2016. So I assume 2018 is positive based on it being accretive.
My question is, should we expect that around this positive EBITDA you would be reporting in 2018, we should be anticipating some exceptional item for restructuring? And B, over the next few years, do you have any special tax advantage in Italy? Or would you be paying normal tax base once you start returning profits? Thank you.
Great. So thanks for the question. So we would not be anticipating any restructuring costs. We take over a new co where certain assets, certain liabilities and certain individuals are transferred to us. Previous liabilities and individuals are kept in old coal.
So we are entering into a new co and without any restructuring liabilities. In terms of tax, there are certain opportunities, primarily because Toronto is in Southern Italy. And in that context, there are a lot of grants as you make investments, especially environmental investments as well as investments to improve technology and we'll be working to try and avail of those benefits.
Thank you.
Thank you everyone for participating in this call. I'd like to just conclude by saying that we are very excited about this opportunity and we think it's a great opportunity for ArcelorMittal. It's a very important deal. We do not get this kind of opportunity always. This was a rare opportunity and it makes a lot of sense for the value creation for the shareholders of ArcelorMittal.
We will continue to update you on the process and the progress as we move forward. I'd like to remind you that Aditi is hosting an analyst and the shareholders on 4th July in Ghent. So I'm doing sales pitch on behalf of Daniel, but I just want to remind you that you please register yourself with Daniel. He told me that 2 or 3 seats are still available, so please hurry up. So we will be talking to you in end of July for our first half results.
Thank you very much. Have a good day.