Thank you. Good afternoon and good morning, everybody. This is Daniel Fairclough from the ArcelorMittal Investor Relations team. Thank you very much for joining us today on our conference call to discuss the Q3 2015 results. First, I'd like to remind you that this call is being recorded.
We're going to have a brief presentation from Mr. Mittal and Didier followed by a Q and A session. The idea is that the whole call should last about 1 hour. And we will take those questions in the order that they're received. With that, I will hand over
the call to Mr. Mittel. Thank you, Daniel. Good day to everyone. Thank you, Daniel.
Good day to everyone and welcome to ArcelorMittal's Q3 2015 results call. I am joined on this call today by Ajith Mittal, Lou Shores, Devan Chugh and Simon Wonky. Before I start the presentation today, I would like to make a couple of opening remarks. Firstly, that we have reported $1,400,000,000 of EBITDA this quarter against a very challenging backdrop. I believe this positively reflects the improvements we have made to our business in recent years.
It's fair to say that the operating environment has continued to deteriorate through the Q3. Very aggressive exports at unsustainably low prices have muddied the waters. Domestic prices in our core markets are falling in response to low price imports and customers are destocking as they wait for prices to find a bottom. So whilst the EBITDA this year is falling short of our initial expectations, I'm very encouraged that we remain on track hit our objectives of positive free cash flow and debt reduction. As we move forward, I do not believe this challenging environment to be sustainable.
Nevertheless, we are making the necessary changes to the business to further improve our competitiveness. These actions together with some positive market developments are expected to support EBITDA in 2016 and ensure that our deleveraging process continues. I will begin today's presentation with a brief overview of our Q3 2015 results followed by an update of our recent developments. I will then spend some time on the outlook for our markets before I turn the call over to Adit. He will go through the results in greater detail and provide an update on our guidance and targets for 2015.
As usual, I will start with safety. The lost time injury frequency rate in Q3 'fifteen was 0.78 times compared with 0.68 times in Q2 'fifteen, stable as compared to 0.78 times in Q3 'fourteen. Left hand side, you can see the clear progress we have made in recent years, reflecting our continued focus on this priority. As a company, we remain committed to the journey towards 0 harm. Turning to the financial and operating highlights of Q3 as shown on Slide number 4, we have reported EBITDA of $1,400,000,000 for the 3rd quarter.
This is stable relative to the 1st and second quarters of 2015 despite lower shipments. Steel performance remained relatively resilient against the backdrop of seasonally lower volumes in Europe as well as lower steel prices across all divisions. Supporting the group results for the Q3 was an important in mining EBITDA. Given stable prices, this reflects the further cost out. Mining segment cost improvement has exceeded our targets set in the beginning of 2015.
Or will be achieved in 2016. Post tax exceptional charges of $500,000,000 $200,000,000 non cash foreign exchange losses explain the headline net loss of $700,000,000 The positive our liquidity position remains strong at $9,600,000,000 and our net debt of $16,800,000,000 is $1,000,000,000 lower than the 12 months ago level. Moving on to the segment results in a little more detail, beginning firstly with Mining segment performance on Slide 5. Mining profitability in Q3 2015 improved 24.5% compared to the 2nd quarter. This was primarily driven by further improved cost performance with 9 months 15 RNO unit cash cost down 17% year on year, somewhat ahead of our 15% target for the full year.
Performance at Mines Canada continues to be strong in terms of volume and cost. 9 month 2015 marketable shipments are at 19,100,000 tonnes and we expect approximately 26,000,000 tonnes shipment by the end of the year, well above the nominal capacity of 24,000,000 tonne. Our cost performance at Mines Canada has been excellent. The combination of volume improvement, cost optimization and the benefits of foreign exchange and over fuel cost means that concentrate cash cost in 2,050 were over 40% lower than 2012. You should see FOB cash cost move below $30 in the Q4 'fifteen and there will be further improvement as we realize the full potential at Mines Canada.
For Liberia, we are currently reviewing a structured cost improvement program for our existing operations. We'll improve the cost position by focusing volumes on the natural European market. This will result in a smaller but more profitable DSO operation with a more flexible cost base and ensure that Liberia is not a cash flow drag on the group even at iron ore price below $50 per tonne. Moving to Slide 6 and the results of our steel segment. Steel only performance during the quarter has been negatively impacted by a seasonal slowdown in Europe as well as the impact of lower steel prices across all divisions driven by unsystemally low priced Chinese exports.
Despite lower prices, the results for our naphtha business have improved during the Q3, primarily due to lower cost and improved performance in Calvert. Europe segment EBITDA declined during the Q3, but this was on account of seasonally lower shipment volumes. Volume impact was partially offset through lower cost of goods sold. Moving to Brazil, EBITDA further declined during the Q3, reflecting the negative impact of continued domestic demand weakness. Our domestic margins have been squeezed in dollar term due to lower realized selling prices.
With the benefit of an excellent cost position, we have been able to further increase export volumes, but price competition in export slab markets has been very aggressive. For the ACIS segment, performance this quarter has been disappointing, reflecting significantly weaker market conditions across all geographies, in particular South Africa. If we look at the chart on the bottom right of the slide, you can see that the steel shipments for the 1st 9 months of 2015 have increased 1.4% compared to the same period of 2014. Clearly, this is well below initial expectations of a 3.5% increase in shipments. This shortfall in volumes reflects the exceptionally challenging markets we have faced so far in the second half of this year.
With the exception of Europe, all major markets have seen apparent demand contract in 2015. We are now forecasting global apparent steel consumption to decline by between 1.5% up to 2% this year. China, the ongoing weakness in real estate and machinery end markets has caused a contraction of real demand by around 3% up to 4% this year. Chinese steel production is sticky, so exports have increased. Here the volumes price excluding China have declined to less than $300 per tonne.
But this is not a profitable business model for Chinese mills as they have no structural cost advantages. This is highlighted by CISA reports that mills lost an average of $35 per tonne in the Q3. My view is that this is unsustainable. Order to arrest these losses, steel prices in China need to increase either as a result of improved demand or as a result of production curtailments. The weak international steel price environment is eroding prices in our core domestic market.
It's also prompting customers to hold off on their order, run their inventories down. So apparent demand has been running below real demand. I expect the stabilization of prices will bring steel buyers back to the table. There is already some indication of this happening at the margin. This would be encouraging as we transition into 2016.
At this stage, I think the outlook for ArcelorMittal Group volumes in 2016 is somewhat positive. The U. S, we expect continued positive real demand growth and a rebound in apparent demand driven by an end of destocking. In Europe, we expect to see similar growth in 2016 levels similar to this year. For Brazil and the CIS, we expect further but smaller declines in apparent steel consumption in 2016.
As the rate of decline for real estate slows, we see stabilization in real demand next year. So overall 2016 is likely to see a slight improvement in global steel demand positively biased towards our also metal core market. As we look ahead of 2016, I wanted to at this early stage to highlight some of the actions we have taken and some of the market developments that we are exposed to which is expected to provide $1,000,000,000 structural improvements to EBITDA versus Q4 of 15. Starting with some of the actions we have taken on the left of Slide number 8, in Brazil we are responding to the challenging domestic environment with a new value plan to improve EBITDA. This is a combination of fixed cost initiatives and market initiatives.
At Calvert, as you know, this was a considerable drag on NAFTA segment performance in first half twenty fifteen. Given no recurrence of the slab cost headwind as well as a ramp up of volumes and improved sales mix towards high added value, we expect an improvement in Calvert's EBITDA contribution
in 2016. As you
know, we are planning to sharing details on this once we have signed the new CLA. Europe, as you know, we have successfully optimized our industrial footprint. The process of transformation continues and we have identified significant further savings to be generated in 2016. Moving to the ACIS division in South Africa, there are 2 positive developments that will support results in 2016. The first is that the government is implementing import tariffs.
2nd is that we are renegotiating the terms of our iron ore supply agreement with Kumba. Also expect benefit from coke and PCI upgrades in Ukraine to benefits to accrue in 2016. The Mining segment will reduce cost further in 20 16 driven by operational improvements in Canada and the reduced scope of Liberia. Finally, we will be reducing corporate cost in 2016. Overall, I am confident in the actions we are taking to improve results that these expected structural gains more than offset headwinds in 2016 of lower iron ore prices and squeezed contract margin.
Whether with some of the market developments such as foreign exchange, food tariffs, these actions will support EBITDA in 2016. Moving to the theme of improving cash conversion of the business and net debt levels. Since 2012, we have reduced the cash requirements of the EBITDA, we are still on course to generate positive free cash flow in 2015. As we move forward, the cash required by the business is expected to decline further. CapEx will decline in 2016.
Cash taxes will be lower and cash interest will decline by $150,000,000 Whether with the suspension of the dividend for the financial year 2015, we therefore see cash requirements declining in 2016 by $1,000,000,000 These actions and developments are expected to ensure that the company continues to generate positive free cash flow, reduce net debt and maintain strong liquidity and as a result, the EBITDA free cash flow breakeven has been reduced to $9,000,000,000 With this, I hand over to Adith who will discuss the Q3 2015 financial results and guidance in more detail.
Thank you. Good afternoon and good morning to everybody. I'm starting on Slide 11 where we dollars to $1,351,000 in the Q3 of 2015. This represents a decline of 3.4% during the period, reflecting relatively weaker steel pricing and seasonally lower volume offset by improved mining business performance. In steel, the negative contribution from seasonally lower shipment volumes in Europe was partially offset by improved cost performance in Europe and NAFTA and an improved contribution from Calvert.
In mining, despite a decline in prices, EBITDA increased due to the improved mix and cost performance. Moving along the bridge, we can see a negative $44,000,000 impact from others. This largely represents translation losses following the strengthening of the U. S. Dollar.
Moving to slide 12, our P and L bridge from EBITDA to net loss, we will focus on the chart in the upper half of the slide, which shows the bridge for this quarter. During Q3, we booked an impairment charge of CAD27 million relating to the closure of Groningen Mill Shop in South Africa. During the Q3, we also booked exceptional charges totaling $527,000,000 This includes $27,000,000 retrenchment costs in South Africa and a $500,000,000 related to write down of inventory. As we follow IFRS standards, we are required to write down the value of inventory to lower our cost or market value. Given the rapid decline of prices following aggressively priced imports, the write down is significant and therefore classified as exceptional so as not to distort from the true operating performance during the quarter.
Moving to income loss from investments associates and joint ventures. In the Q3, our share of income was CAD30 1,000,000 as compared with an income of CAD125 1,000,000 in the previous quarter. 3rd quarter income was positively impacted by income generated from the share swap in Gerdau Brazil, offset by weaker performance from Chinese Invest teams. 2nd quarter income was higher as it also included annual dividends from Erdemir. Net interest remained stable in the 3rd quarter as compared to the 2nd quarter.
Foreign exchange and other net financing costs in the Q3 was $409,000,000 as compared to $73,000,000 in Q2 2015. This includes foreign exchange loss of $170,000,000 mainly on account of a 22% appreciation of the U. S. Dollar against the Brazilian real and a 31% 10 ks devaluation. This is in line with ForEx model and sensitivities to exchange rate movements that we provided at previous results.
Taxes and non controlling interests amounted to a negative 34,000,000 dollars As a result, overall, we reported a net loss of $711,000,000 but this is fully explained by the exceptional charge and non cash ForEx impacts. Next turning to slide 13, we turn to the waterfall taking us from EBITDA to free cash flow. During the quarter, we invested $100,000,000 in operating working capital. This is a normal seasonal movement and will more than reverse in the next quarter. The 3rd bar shows the combined impact of net financial costs, tax expenses and other items related to the prepayment of liabilities totaling 700,000,000 dollars Cash flow from operations of CAD473 1,000,000 combined with CapEx of CAD684 1,000,000 resulted in negative free cash flow of this quarter of CAD 211,000,000 Turning to slide 14, we show the bridge for the change in our net debt from the Q2 to Q3.
The main components of the debt movement during the quarter was a negative free cash flow as described earlier. There was a small M and A inflow due to the proceeds from Gerdau share swap as well as sale of tangible assets offset by the final installment for Ostrava acquired back in 2,009. Our dividends of $21,000,000 were also paid to minorities and foreign exchange had a negative impact of CAD9 1,000,000 The combined result of these movements, net debt increased during 3rd quarter to end the period at SEK16.8 billion. Finally, on slide 15, let me now talk about our guidance and targets for this year. As all of you are aware, operating conditions have deteriorated in recent months, both in terms of the international steel price environment, which has been driven by unsustainably low export prices from China and order volumes as customers adopt a wait and see mindset.
We now expect 2015 steel shipment volumes to be slightly higher than 2014. As a result, the company now expects 2015 EBITDA of $5,200,000,000 to $5,400,000,000 dollars Full year 2015 CapEx is expected to be approximately $2,800,000,000 down from our previous guidance of $3,000,000,000 As I mentioned earlier, our net interest expense for the year will be slightly lower than our previous guidance at approximately 1,300,000,000 Finally, we continue to expect positive free cash flow and end the year with net debt below 15.8. This concludes our presentation and we're happy to answer your questions.
Great. Thank you. So we're ready to start the Q and A session now. We have a queue already. So we will take the first question from Mike Schulicha at Credit Suisse.
Yes. Thanks a lot, Daniel,
for taking my questions.
So I've got 2 questions, if I can. On first question, I think, Aditya, you said about 1 or 2 years ago that about 30% of the business was making about 80% of the profits. If you now look at the current spot market and just assuming that, that stays stable for some time to come, How much of the business now is actually non viable in the current environment? Are you sure that a 1,000,000,000 dollars I mean, it's great that you're taking the remedial actions that you're taking, but is a billion actually going to be enough? And I know that everyone says that Chinese exports are non sustainable, but ultimately what actually gives because they're unsustainable for the global market, but that doesn't necessarily mean to say the Chinese are going to cut output and cut exports.
So looking forward, what is it enough what you're doing? And what do you think the end game is in terms of who actually ends up having to close capacity? Will it be the Chinese? Or does it happen outside of China is question number 1. Question number 2, just going to slide 8, which looks at your various elements of the 1,000,000,000 versus some of the headwinds.
Can you give us a little bit more on the timing of the 1,000,000,000 because I guess that doesn't all start on Jan 1. So it's going to be spread through the year in terms of a run rate basis. And can you then just talk a little bit about the contracts, which I guess is European contracts to go in here as well, which I guess will get negotiated down. Can you give us a little bit in terms of the actual magnitude of the size of volume of contracts in Europe and the U. S.
And the magnitude to some extent, which you were expecting those contracts to be lower? Thank you.
Okay, Michael, there were 3 questions, not 2. And a lot of questions in between, but I'm going to try and attempt to answer all of them. So let's start with the sustainability of our operations because that's an important subject. Our operations in the last few years have been improved, performance has improved. We have restructured non profitable facilities.
We have exited businesses, which we believe are not viable in the medium to long run. So if you look at the company today, in Europe, we continue to make good progress in terms of transformation gains. The mining business has had a dramatic program of reducing costs from its business. We're actually ahead of plan. And Simon, I'm sure, will speak later about it, but he intends to make even more progress in Q4 as well as next year.
So we're in good shape in those two markets. The area that we have been focused on for the last 12 months and not just today has been our Americas footprint. We talked a lot about the fact that we need to optimize our downstream business in the U. S, but we still make money in NAFTA in spite of these very difficult conditions. We're very good asset base at Difasco, at Calvert and as we improve our U.
S. Operations, we will be sustainable there. In terms of the ACIS operations, clearly there's a lot of work ahead of us, but we have made good progress. If you look at South Africa, there are a number of announcements we made this morning, including creating a level playing field in terms of trade, 10% tariff protection, antidumping duties, a new raw material contracts, which itself saves $10 on 6,250,000 tonnes, etcetera, etcetera. In the CIS, we had a Cengage evaluation in September and we continue to make progress in our Ukrainian operations.
So when we look at these businesses and the market context, we are sustainable. If you look at Q4, we expect to be free cash flow positive even though overall volumes in Q4 are significantly lower than the run rate of 2015 as well as our expected run rate of 2016. So what does the €1,000,000,000 do? The €1,000,000,000 adds to the sustainability of our operations and is really targeted at the areas where we see further opportunity. Again, it's the same areas that I just addressed, Americas, ASUS being the primary drivers, followed by continuing gains in Europe as well as in our Mining business.
In terms of timing, this is not a run rate EBITDA at the end of 2016. This is the structural improvement in 2016 versus 2015. We expect a third of the $1,000,000,000 to impact first half EBITDA and the remaining 2 thirds roughly to impact the second half. The full benefit of the structural improvements is not only in 2016, some of it runs into 2017 2018. The U.
S. AUP program is a good example. In terms of China sustainability, so the way I think about it in a nutshell is the following. The company strategy is intact. We have a basis of being sustainable.
We're going to be free cash flow positive this year, free cash flow positive next year. We're making improvements to our business. That's in an environment where we don't see Chinese prices being sustainable. Why? If you look at the level of profitability, CISA announced that the Chinese steel industry lost about $8,000,000,000 in the 9 months of this year, which is $35 a tonne and Q4 pricing is even lower.
You multiply that by the tonnages in China, that's quite a staggering amount. So we don't think that's sustainable in the medium term. But nevertheless, we're focused on enacting trade legislation to ensure that we have a level playing field in all of these markets. In terms of contracts, I'll talk about Europe and then I'll hand it over to Lou who can talk about the U. S.
Europe is about 7,000,000 tonnes out of 12,000,000 tonnes of contract. Prices adjust to raw material and therefore I expect in Europe to have similar margins in 2016 compared to 2015 in terms of Automotive. You must recognize that we have a very strong franchise. We continue to make progress in improving our mix. We continue to promote 3rd generation steels, which also contributes to protecting this margin.
So turning to the contract issue in North America, maybe a couple of points. First, I think all those negotiations are always driven by multiple factors. I think increasingly now because of the pressures on environmental regulations and fuel economy regulations, the technology factor and what support a supplier can give to the OEMs and technology is becoming an increasingly important factor. I think that plays into one of our strengths. Secondly, the current contract price always sets a baseline, if you will, and these contracts, frankly, are a little bit sticky whatever direction they're moving in.
And then finally, the spot environment clearly is also an important factor. So, just as context, it's not only driven by the spot price environment. The second point I'll make as context is that, while in fact
a little bit more than half of our contracts do run on a calendar
year basis, we are we have multiple periods where we're negotiating these We are we have multiple periods where we're negotiating these contracts. We have a little bit of experience with the softer market of this year in terms of negotiating. And I would say to date, certainly the spot environment does affect the outcomes here, but I think we've had good success in making the argument that the current particularly in the current spot levels are not sustainable and shouldn't be used as a baseline for these sorts of contracts. So that we're seeing to date, I think substantially less than the spot price movement in terms of the readjustment in these contracts.
So we'll take the next question please from Alessandro Berenberg.
I just have two questions.
The first one is related to the annualized rate of EBITDA that you're using as kind of benchmark on top of which to add this 1,000,000,000 annualized EBITDA into 2016. Is
there any
kind of confidence that Q4 2015 EBITDA can actually be the trough or do you think that might be further downside into Q1 2016 considering that most of the weakness of steel prices will be reflected into next quarter? If not, if you can actually highlight a little bit the pillars of your perception. The second one is related to the U. S. European antidumping.
Just would like to get an update on the European space because it seems to be significantly lagging behind. We are just basically only
on the cold rolled. And I
was wondering whether consider that in the U. S, they're already pushing up in terms of countervailing duties, if there might be a positive impact on the speed of implementation of the cold rolled in the European space, further other action probably in hot rolled coils and galvanized materials? Thank you.
Okay. Thank you. In terms of Q4 being a trough, I would point to a number of negative factors impacting Q4 results. Clearly, weak volumes, this is being held by destocking because customers are adopting a wait and see approach that typically happens in the following market. And also weak prices as prices are trending down in Q4 versus Q3.
I talked about earlier how the level of profitability in China, which was already minus $35 a tonne, is getting further exacerbated into Q4 results. In terms of is it a trough or not, I think when we look out into 2016, clearly, we're seeing a normal seasonal recovery of shipments. We always see first half being stronger than the second half to the extent that there is a restock would further support the business. And we briefly talked about all the structural improvements the business is making and that should also support results in the first half of twenty sixteen and twenty sixteen overall. In terms of European trade protection measures, so if you just look at what has happened in trade, you see that in the U.
S, the surge in imports of Chinese steel, which was impacting pricing, was very, very acute in the first half of this year. And therefore, the U. S. Steel industry reacted appropriately. In Europe, that impact is more a Q3 event.
So you see a significant surge in Q3 where imports are up about 40% in Europe and these imports are inappropriately priced. And therefore, right now, you are seeing much more action that is occurring at Brussels and the trade associations that all steel companies in Europe are part of such as Eurofair are acting. So I do expect there to be more progress in Europe than what you have seen in the last 9 months.
Alito, just going back to your for the first question. I guess that there are signs of destocking ongoing in the U. S. And European space and also indications that the import is declining. If we assume that demand, underlying demand is to be quite robust in 2Q4, we'll remember activity is stable in 2Q1.
In terms of potential upside to utilization rate, do you think that in 2Q1, a likely increased utilization rate could be able to offset the current price weakness?
So I appreciate the question. I think we're getting very specific into what Q1 may look like. I think it's very early to talk about Q1. Normally we provide you with an annual framework in February. And so we are sticking to that.
But since markets have been quite volatile and there have been significant changes, we thought we would talk to you today about what are the key structural changes we're making to our business 2015 versus 2016 both EBITDA and cash. In terms of just the level of volumes, if you were to look at our guidance for 2015 Q4, which implies slightly lower shipments than Q3. And you were to compare that with the first half of twenty fifteen, you would see a short an annualized rate which is 4,000,000 tonnes less. And that's very significant because as you know, we are fixed cost heavy business and the contribution per tonne is roughly CAD200 So that's a significant uplift that could occur compared to where Q4 is. I think you alluded to the fact which we buy into and which we agree with and we have briefly mentioned that in the presentation.
We see that real demand is still good. I mean automotive is hitting records. In NAFTA, we see 8% growth in Europe year to date. We're still forecasting real demand growth in the U. S.
As well as in Europe next year and positive apparent steel consumption growth. So yes, I do agree with you that volume impact could be quite significant into 2016 versus what we're seeing in the Q4 of 2015.
Thanks, Olivier. If I may just a little question on the automotive contracts.
Do you see
any major risks related to the Volkswagen scandal in terms of volumes and potential downside even though you've just mentioned that probably margin will remain the same in 2016?
Go ahead, Luc.
No, I don't think we've see any significant risk to the automotive values from the VW situation. So I think the markets in our particularly in our core markets, those are actually the bright spots, North America and now increasingly Europe for global automotive sales. And we think that's really demand driven and that, that momentum will continue.
Thank you very much. Thank you.
Thanks, Alessandro. So we'll move to the next question from Roger at JPMorgan.
Good afternoon, gentlemen. Thanks for taking my questions.
First question is just on the $1,000,000,000 EBITDA lift that you've alluded to for next year. So just can you break it down
a little bit more clearly for us?
How much of that uplift is cost savings? How much is top line improvement through A, through price improvement that you're assuming and B, through mix improvement? And then to the extent that you are making cost savings, to what extent have you assumed that you're going to have to pass those savings on to your customers? And then also in relation to this, you mentioned in response to your questions, Alessandro, that there'd be a volume impact relative to the seasonally weak Q4. I mean, is that an impact that we need to factor in over and above this guidance?
Or how where does that sort of come into the formula, if you like? And then the second question is just around your balance sheet. So if we were to assume that the steel market deteriorates further in 2016, what level of net debt to EBITDA would you be willing to tolerate before considering having to sort of raise new capital or selling assets or sort of more sort of structural sort of responses?
Sure, Roger. So if you look at the structural improvements that we have outlined in our presentation, I think the most important takeaway is that these are structural improvements. So the ability of our competition to replicate that we think is actually very limited. What we have not talked about, but is understood is that we continue to make progress in terms of improving the consumption factors in our business, further improving variable costs, sharing knowledge, improving maintenance practices. But as we have seen in the past that a lot of that progress that we make, the competition can do the same.
A lot of these are unique to our footprint or to our business and therefore we believe are structural improvements. Most of them are cost related, I would say more than 75% and maybe there's 20%, 25% of revenue. And just to walk you through them, that breakdown is. So in Americas, you see asset optimization, that's a cost plan. Brazil value plan is a bit of both in terms of improving the domestic parity price premium in Brazil, which has shrunk because steel consumption has been very negative this year.
But then we look at Calvert ramp up that will improve both costs at Calvert and as the markets recover that will provide volume recovery. ASUS that's primarily all cost. New iron ore contract means lower raw material, coke PCI upgrade is all cost. South Africa tariff provides some revenue protection because the domestic price level will increase. Transformation gains continuing in Europe that is all cost.
We see the progress we had made this year when Q3 EBITDA is still higher than Q3 last year in dollar terms. And this is not because of the price environment, this is because we have a more efficient business. And we see mining. Mining is all cost related. We're actually saying that a headwind could be price risk.
So that's how I look at it. I don't know if I provided enough color, but at this point in time, I think that's appropriate. So 75% is largely cost. I think the competition would find it very difficult to replicate this. In terms of volume, most of this apart from the Calvert ramp up does not include the volume pickup.
So I would add the volume pickup or shipment pickup in 20 16 versus Q4 2015 as a positive headwind. We spoke about the negative headwinds, iron ore price risk and contract margins. In terms of the balance sheet, I think we're demonstrating that we are free cash flow positive in 2015. Into 2016, there are 2 key changes. 1, that EBITDA will improve structurally by CAD1 1,000,000,000 plus we're also reducing the cash cost of our business by CAD1 1,000,000,000 dollars 1,000,000,000 So combined, those two factors are quite significant.
And as a result, we expect to continue to delever the balance sheet and make progress in terms of net debt to EBITDA coverage ratios. We and we also are continuing to look at optimizing our portfolio. We've been quite successful over the last few years. We generated $5,200,000,000 by optimizing our portfolio and those actions also continue. I think if you put everything I've said in context, I think it's quite obvious that we don't need to raise capital.
Okay. And just to be absolutely clear, so none of these kind of measures that you're talking about assume an improvement in pricing from here?
Yes. That's right.
So we'll take the next question please from Carsten at UBS.
I want to stick to the two questions. The first one is on ACES. We have seen now for 4 consecutive years an underperforming of this business. When would you actually consider strategic steps, because you do a lot here, but it seems like every time you do one step forward there after something happening and you do 2 steps back. When would you actually say enough is enough and we could actually consider ACES?
First question. 2nd question, revaluation of inventories, you put this below the EBITDA line and I would guess that part of it will still reduce COGS going forward. How much will that be?
Keith, do you want to talk about it?
Yes, it's just true that this quarter has not been particularly good for ASUS because we faced few issues more particularly besides the continuous weakening of the price environment particularly in Black Sea area where we operate. We have also seen low demand in CIS region and of course intense competition from China and Russia particularly backed by the weaker Russian ruble. So our core markets that is CIS, Middle East and Africa have not shown big growth rates also. So that has been our, let's say, drawback of this quarter. But we have a number of actions in hand as has been brought out in this presentation also that we are looking at our cost very carefully.
We do have a good cost performance coming through and we have more actions in hand. Stable operations should deliver and strengthen those efforts. We do have trade actions coming up in South Africa where we are making good progress in our engagement with the government as well as the support we are getting there. Then we have some energy optimization initiatives in our CIS region. So if I look at all of them, I'm very hopeful that we will contribute strongly to the 1,000,000,000 value plan, which has been already spoken to.
Okay. Thank you, Devinder. In terms of the charge that we have taken in terms of our inventories, doesn't have an impact on operating income because what we do is or EBITDA, excuse me, because what we do is we revalue the inventory at market. So it does not create or generate any EBITDA into Q4. So I'm not sure if I've answered your question.
Yes. Usually, what happens is you take down your inventory, so the value of the inventory, it benefits your COGS or your COGS going forward. So the question for me is, was it just a 3rd quarter event and all your inventories which you devalued, you consumed also in the 3rd quarter or will that spread over the 4th Q3, which will actually lower your costs and will then be EBITDA irrelevant?
Yes. So what we have done is we've looked at the inventory and all the inventory which is higher than market is revalued at market price. So it does not generate EBITDA into Q4. To the extent that we produce into Q4 at lower than market that generates EBITDA and to the extent that we have existing inventory which is lower than market that generates EBITDA. So it doesn't generate operating.
So the charge that we have taken IFRS accounting standards and because the amount is so large, we treat it as exceptional.
Okay. Thank you.
Thanks, Carlton. So we'll move on to the next question please from Seth at Jefferies.
Good afternoon. This is Seth Rosenfeld Jefferies. Just a couple of questions looking at your Brazilian operations where we saw quite significant earnings contraction despite a pretty significant move in FX, which many exports? And perhaps if you're seeing any domestic cost inflation beginning to eat into the benefit of the FX tailwinds? Also wondering if you can give a bit more detail on the newly announced kind of restructuring or cost cutting programs there and the timeline or the scale of those measures?
Thank you.
Yes. Clearly, we're in a sustained weak market environment, weak macro environment in Brazil. I'm sure everybody is aware of that. And as we've talked before, it's compounded by a very difficult political environment, very challenging political environment. So the responses needed to on a political level to help turn the economy around are really not forthcoming.
So I think this the depth of this has been a bit surprising to people. It's kicked in a lot in the second half, and that's certainly a major driver behind our results. But as you pointed out, I think there's also some important exchange rate effects, and those are will feed into part of this value plan that we're talking about. So we've seen, in terms of the exchange rate, both a much weaker reais than we had expected and I think also tremendous volatility. And as a result, and this is what we see in Q3 and I think this will persist into Q4, that actually, in dollar terms, the Brazilian prices are actually below the landed in many product categories, sustainable situation.
The timing of how quickly you can adjust to that, particularly when the exchange rates are quite volatile and even swinging 4.2 to 3.9, etcetera, in the space of a week, that makes it difficult to catch up there. But I think we're seeing already in the Q4 announcements of price changes that will take us back at least towards the more traditional kind of 10% premium over landed import prices, which is supported by the better local customer service, the lack of need to speculate on a long supply chain, etcetera. And that's the norm. I think that's an important part of what we see as instructional improvement affecting basically the entire industry in Brazil for next year. So I think that's part of the both the downturn that we're seeing now and something that we think will right itself going forward.
We do see in terms of the weakness in the domestic market and that we do see the ability to offset that with exports. Basically, we're running our operation in Tuberao at 100% of production. We're even pushing to create some record levels of production there because we have, given the location of that plant, given its cost position, the ability to easily export and switch from domestic sales export markets. So that's happening on the flat rolled side. We keep the benefits of high operating rates and therefore, good absorption of fixed costs with the high operating rate.
But I will say that the export market in the products that we're able to ship from there, particularly semi finished slabs, that's a very challenging market. So these aren't the most profitable exports for us, but they do keep the plant running well. On the long side, the locations of the facilities don't facilitate exports as easily. So whereas we export currently about 60% of the flat rolled production out of Tuborel. On the long product side, it's only about 15% that's going typically to regional markets.
The silver lining in that smaller number is that those markets tend to be much more profitable than the global markets that Tubero has to ship to. But on the long product side, we have had to make some adjustments in our operations. We have 2 very low cost competitive plants that we're running flat out. And the other two plants on the long side, we've cut back a bit on their production, but we've also been able to move the costs appropriately. You're right that there is some inflation in the cost base there, but I think we still have a lot of room to offset that, and that's an important part of the value plan.
I don't want to give details of that those activities because, again, there's competitive confidentiality aspects to that. But I think we're confident we can offset that. And of course, the stronger that inflation gets, the more pressure there is on the exchange rate as well.
Just on the value plan,
is there a time line during which we should expect to get more detail on exactly what's happening? Or if at the very least for now, could you comment on if the focus will be more on the operating cost side or if there should be any change in footprint expected?
I think just for any important print initiatives for our company that we're seeing in Brazil. Again, I think we and we're always digital and that's We don't want to assume it, but we have been more profitable consistently than other producers in Brazil and you are starting to see I think some important announcements by others about footprint changes, but we don't foresee that in our case. I will say the revenue side of this, I think there are already announcements we've made and others have made about price increases to again reestablish that very acceptable and normal premium to import prices. Those are being implemented more or less as we speak. So I think those are things that, assuming they stick, we'll see already in the very beginning of next year.
Thank you very much.
Thanks, Seth. So we'll take the next question please from Mike at Citibank.
It's Mike Flitton here. Thanks for taking my question. I just have one left just on free cash flow number, looking to lower that by $1,000,000,000 I was just wondering if you can give us a bit of a breakdown on that. Obviously, you've mentioned the inputs and where they come from in terms of interest costs and CapEx. But if you could give us a bit of a breakdown.
I mean, in terms of CapEx, you're already at 2.8%. And I seem to remember that was a guide for a sort of sustainable through cycle number that you gave previously. So I'm wondering how much you're able to actually cut from that and still not impact your operations.
Okay. Thank you, Mike. So in terms of CapEx, if you go through our results, you will see that our depreciation charge is also $700,000,000 down year on year. And it's down because primarily because of ForEx impacts. So if you look at our European business, the euro has come down.
If you look at the CIS business, Brazilian business, so a lot Canadian business as well. So if you just look at where we operate, a lot of these businesses have been in a deflationary currency environment, bringing down CapEx cost. Number 2, we also see that the cost of capital equipment is declining. And so we're taking advantage of that. So the breakeven point for maintaining assets has actually declined significantly, primarily driven by ForEx and lower capital costs.
And I would guide you towards a number of €2,200,000,000 to €2,000,000,000 on that in terms of maintaining our assets. You see that we continue to produce well. We are increasing output. If you look at our results compared to the industry or the market, we compare quite favorably and we continue to make progress in terms of automotive franchise. Your question on $1,000,000,000 cash flow, that's how do we reduce by $1,000,000,000 our cash, is that the question?
No, it's just you've obviously accounted for about $600,000,000 of the difference there in terms of $2,800,000,000 to 2.2 $1,000,000 The rest of the $400,000,000 is that broadly split between interest and tax?
Yes. So that's a good question. So I wouldn't I'm not guiding towards CapEx of $2,200,000,000 for next year. I was just responding to the question, what is your level of CapEx you could go down to in terms of maintaining your asset base. So the $1,000,000,000 of next year is CapEx.
So some of it is CapEx. I would take compared to this year $300,000,000 to $400,000,000 is CapEx. We have cash interest, which is down. We have MCN, which is maturing in January. And along with that and lower cost of average borrowings that's about $150,000,000 We expect to have lower cash taxes.
And then we have also proposed to suspend our dividend, which is another $360,000,000 So if you add up all of those, you get $1,000,000,000
We'll take the next question from Ionis at RBC.
Yes. Two quick questions from me. First, in terms of the medium term net debt guidance, you don't you didn't reiterate it in your results today. Could you indicate if $15,000,000,000 is still the target? And second question in terms of apparent steel demand in the U.
S, you seem to be indicating down 6% year on year versus the World Steel Association that estimates down 3%. Could you expand the differential there?
Yes. So I'll talk about our debt targets and then Luc can address the U. S. Question. In terms of our debt targets, you're right, we haven't explicitly mentioned the $15,000,000,000 target, but I wouldn't read into that.
I think the whole release is about how we intend to further delever the balance sheet, how we intend to be free cash flow positive in 2015 and positive in 2016. And so I would just focus on the fact that our strong Mittal intends to de level beyond this target and we do not want to put out a new target out there, but just highlight the fact that we have good plans in terms of how we can strengthen the balance sheet even in these unsustainable market conditions.
Yes. I think we have revised our view of parent steel consumption for this year down to the 6%. To be honest, I don't really want to comment on the WSA numbers. I think we are seeing a destock in Q4. We haven't changed our view of the real steel consumption.
Clearly, part of the apparent consumption is driven by a drop in the oil country market that accounts for about onethree of that 6% that we're seeing. But I think the major change right now is we are seeing customers, particularly spot buyers, be very reluctant to restock their inventories. I think as Aditya mentioned, this is a standard behavior as the market is falling. People don't want to be buying if they don't have to and find out that 2 weeks later, the prices dropped a little bit. So I think the real demand is driving things.
We certainly we don't want to give a number for next year, but we see apparent consumption being positive next year. So that gives you some idea of the kind of minimum swing we'd be looking for. But we think people as the pricing does bottom out, people get a sense of that that people will be coming back into the market.
Thanks. So we'll take the next question please from Rojas at Kepler Cheuvreux.
Yes. Thanks for taking the question. Just a follow-up point on this previous question on net financial debt. Your comment on how to stay free cash flow positive or at least breakeven, is that really where you feel confident in the sense that you run with a flat net financial debt through 2016 in a pretty challenging environment. And obviously, you shouldn't bet too much on the help from the market.
So would that be a sufficient trend for your business? Or is there any other element which significantly help you to progress in direction of the SEK 15,000,000,000 such as the asset disposal. Is there anything which could contribute materially here? In that context, what would be the precondition for resuming the dividend? Is this kind of based on kind of a minimum EBITDA?
Is it based on reaching the €15,000,000,000 net financial debt target? And finally, what is required to happen that you would take the next steps in terms of improving the business and getting the EBITDA breakeven lower considering maybe you see the trade action in U. S, but maybe Europe stays tough until the measures are taking effect. It could be mid-twenty 16 until things are getting better. What needs to happen to for you to go to the next level in terms of restructuring measures.
Okay. In terms of your question on net financial debt, we won't be satisfied just treading water, I. E. We want to make progress in terms of deleveraging. And we plan to make progress in 2015 and continue that progress in 2016.
And that is why we tried to outline the actions underpinning that, the structural EBITDA improvement, lowering the cash breakeven of the company and suspending the dividend. In terms of asset optimization, we continue to remain focused on that. We have a decent track record. The what we want to ensure every time we look at that and generate ideas is that we get appropriate value. So we don't want to identify what the asset is because that makes it a buyer's market versus a seller's market.
And in these conditions, it probably is not the most expedient way to or most value creating way to raise cash. So we are conscious of ensuring that we generate value as we go through our portfolio optimization. In terms of restoring the dividend, we have suspended the 2015 dividend payment. We would review that in the Q3 because in the Q3 of next year, we would have clarity on where we are in terms of the earnings profile as well as in terms of our deleveraging objectives. What we have been consistent about in terms of your our last question was what needs to happen is we need to be on a path of deleveraging the balance sheet, strengthen our credit metrics and then we would be using discretionary free cash flow to either increase CapEx or to restart dividend or if we don't like those two options to further delever.
So at that point in time, I think we can provide you more clarity as to what we would be doing.
So we'll move to the next question from Tony at Cowen, please.
I just wanted to pursue your comments about optimizing the downstream footprint in the U. S. And we're seeing a lot of other companies announce initiatives to attack redundant capacity and cost and inefficiencies in the upstream. And I was wondering along these lines, can you say definitively that there is no need to rationalize your U. S.
Upstream operations? That's my first question.
Yes. I think I would say definitively as a strong term, I don't know if we're talking for eternity or whatever, but I think we see major opportunities for the business in terms of rationalizing the downstream footprint. I think we have a solid market position. We've been able to maintain our share. About onethree of our production goes into just the automotive alone, not to mention other high value added attractive markets.
So I think we feel comfortable and confident about the upstream footprint that we have. We see the opportunities primarily in the downstream. It doesn't mean that based on markets up and down and inventory cycles and so on that you might not temporarily idle a furnace. We have 1 furnace idled currently. But in terms of structural closures and exiting the business, that's certainly not something in our expectations or that we're thinking about or discussing currently.
All right, Luke.
And this is probably another one for you, if I may. It's about Brazil. And I see that shipments were up sharply sequentially in spite of the weak domestic demand trends as you guys talked about. I assume this is primarily due to higher slab demand from Calvert. And it must be a tough balance for you because while you're trying to optimize your most competitive plants in the U.
S, you're also in a way kind of contributing to the current oversupply. How do you balance that strategically?
I'm not sure I understand how we're contributing to oversupply.
So maybe just to answer the question, Calvert has not really increased shipments in 2015 versus 2014. So the increase that you see are exports of slabs to 3rd parties. And if you know in June of 2014, we restarted the 3rd furnace. We have a very strong cost competitive position in Tuberao. And therefore, we do generate value by selling those slabs in the export market.
And are those primarily Aditya to the U. S. Or Europe or both?
So I don't want to I mean, they are to a broad range of Calvert, we have not really increased shipments year on year.
Okay. Thank you very much, gentlemen.
Thanks, Tony. So we'll take the next question please from Tom at Redburn.
Contribute to achieving the $1,000,000,000 of net debt reduction in Q4. It looked like at the end of the first half, you had about $500,000,000 of spare capacity in that facility. Where did it stand at Q3? And where do you see that going towards the year end?
Sorry, Tom, we missed the start of your question. Can you just repeat it again,
please?
Okay. Sorry. So the question was on the true sale of receivables program and how much you will utilize that to help reduce Q4 net debt by about $1,000,000,000 that you're talking about? And at the end of the first half, it looked like you had about $500,000,000 spare capacity in that facility. Where well, how much is that facility utilized at Q3 And where do you see it going into year end?
So I can get you the specific numbers, but TSR overall is down year on year. So it securitizes our receivables and as the value of the receivables have declined, the TSR value is down. There's been a cash outflow in terms of working capital.
Yes. I suppose my question was more about the spare capacity that you have in that facility to take more receivables off balance sheet and therefore reduce your consolidated working capital figure and therefore help your net debt at the year end?
Yes. No, I understand your question. Overall, TSR is down year on year. We can get you specifics. But TSR is down.
Okay. That's fine. Thanks very much.
Thank you.
Thanks. So we'll move to the next question please from Philip at ABN AMRO.
Yes. Good afternoon. Thanks for taking my questions. I have 2 left. I was wondering regarding the covenants, are there any material adjustments that are made to the net debt number or EBITDA, maybe also in relation to the one offs and the write downs?
So that's my first question. So that's also in relation to the covenant testing limits. My second one, and I apologize for starting about it again, but it's a follow-up question on the net debt. I was wondering if you'd be willing to give your thoughts on, the level that you might be targeting. I mean, I remember back 2 years ago, you issued your SEK 15,000,000,000 net debt target, but you also gave a framework where you indicated that it is the target that you feel comfortable with through the cycle based on the belief that trough EBITDA should be like some $7,500,000,000 and you would target a net debt EBITDA of 2x.
So I was wondering, given that it looks like the market fundamentals have probably structurally changed, Have your thoughts about that or view on that net debt figure changed as well materially?
Thank you. In terms of the covenant, the covenant is 4.25 times. It's tested twice a year. It's on our last 12 months reported EBITDA and on reported net debt as you see on our earnings release. In terms of the net debt, look, I think maybe I'm repeating myself, but I'll go through it once more.
What we're trying to get across in these results announcement is that we're making structural improvement to EBITDA. We're reducing the cash breakeven and we want to continue to delever the balance sheet. We have not announced a target, but clearly the focus is to continue to delever the balance sheet. As a result, we have also suspended 2015 dividend. And so that is the direction we are going.
And in terms of your question on what is the final level of net debt, we have not had those discussions in that much of detail with the Board to able to announce it to you, but I would take away from our comments that clearly the focus is to go beyond the previous $15,000,000,000 medium term net debt target.
So we'll move to the next question from Philip Gibbs at KeyBanc.
Just had a question on the Samarco disaster for Lou. What impacts might that have on your, call it, procurement of material moving forward?
Our operations in Brazil, insofar as we use Ironovia some scrap based operations, but in the launch side we use primarily our own material from a mine called Andrade that's located, I think it's in 10 kilometers or something from the Monovas steel plant. And Tubarau is basically supplied directly by Vale. If you know the facility, it's on the main rail line or at least the main rail line going to that port, which is one of the major ports for the subsystem, not the only port, but one of the major ones for Vale. And essentially, they dump us for our facility kind of on the way to the port, if you will. So obviously, it's a terrible tragedy, but it's not source of material for our operations in Brazil.
Is it a source of material for your operations in Europe or NAFTA?
Yes. We do have a business relationship with Samarco. I think it's inappropriate to comment on the specifics on how we procure our iron ore, but we do have a business relationship with Samarco.
Okay. And then just lastly, if I could, for a little. You said I think you said half of your contracts in NAFTA run on a calendar basis. But any help you could give me in terms of how much of your total business is contract versus spot in NAFTA?
Thanks. Yes. I think typically we're, let's say, 40% or so on an annual contract basis. And then there's another, call it, 15% to 20% that would be some form of a lagged index deal with the timing of the index being somewhat variable. In other words, some for 1 quarter, some for half a year or semester, that kind of thing.
So we're running quite short of time now. So we'll move to the last question, which we'll take from Luc at Exane, please.
Luc and Guillaume, one precision maybe because the line was bad. I was wondering if you had commented that the Q1 could possibly be lower than Q4 because of lower prices, etcetera? That would be my first question. And duplicated to Europe situation? Thank you.
So I think we'd answered these questions earlier, so I'll be very brief. In terms of Q1, we've not provided Q1 guidance. We've just talked about trends and we went through 2016 versus 2015 structural improvement we spoke about the U. S. And we went through the U.
S. In terms of Europe, they are just based on raw materials. The European market has growing the automotive segment continues to grow in Europe and we are also benefited by the fact that we have strong products in terms of 3rd generation steels, which also provide for a mix improvement within that segment. So we're not expecting significant deterioration into our 2016 results in terms of European auto.
Thank you.
There have been no more questions. Thank you for participating in this call and looking forward to be talking to you
next quarter. Thank you.