Earnings Call: Q3 2015

Nov 6, 2015

Are being recorded. Daniel, you may go ahead. 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 third quarter 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 Aditya, followed by a Q&A session. The idea is that the whole call should last about one hour. If you'd like to register a question, please do press star one at any time, and we will take those questions in the order that they're received. With that, I will hand over the call to Mr. Mittal. Thank you, Daniel. Good day to everyone. Thank you, Daniel. Good day to everyone, and welcome to ArcelorMittal's third quarter 2015 results call. I'm joined on this call today by Aditya Mittal, Lou Schorsch, Davinder Chugh, and Simon Wandke. Before I start the presentation today, I would like to make a couple of opening remarks. Firstly, that we have reported $1.4 billion 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 is fair to say that the operating environment has continued to deteriorate through the third quarter. 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. Whilst the EBITDA this year is falling short of our initial expectations, I am very encouraged that we remain on track to 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 the EBITDA in 2016 and ensure that our de-leveraging process continues. I will begin today's presentation with a brief overview of our third quarter 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 Ajit. 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 third quarter 2015 was 0.78 times, compared with 0.68 times in second quarter 2015. Stable as compared to 0.78 times in Q3 2014. The 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 zero harm. Turning to the financial and operating highlights of third quarter 2015 as shown on slide number four, we have reported EBITDA of $1.4 billion for the third quarter 2015. This is stable relative to the first and second quarters of 2015, despite lower shipments. Our 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 third quarter was an important gain mining EBITDA. Given stable prices, this reflects the further cost out. Mining segment cost improvement has exceeded our target set at the beginning of 2015. More will be achieved in 2016. Post-tax exceptional charges of $500 million and $200 million non-cash foreign exchange losses explain the headline net loss of $700 million. The positive, our liquidity position remains strong at $9.6 billion, and our net debt of $16.8 billion is $1 billion 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 five. Mining profitability in third quarter 2015 improved 24.5% compared to the second quarter 2015. This was primarily driven by further improved cost performance with nine-month 2015 R&O 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. Nine-month 2015 marketable shipments are at 19.1 million tonnes, and we expect approximately 26 million tonnes shipment by the end of the year. Well above the nominal capacity of 24 million tonnes. Our cost performance at Mines Canada has been excellent. A combination of volume improvement, cost optimization, and the benefits of foreign exchange and lower fuel cost means that concentrate cash cost in 2015 is over 40% lower than 2012. You'll see FOB cash costs move below $30 in the fourth quarter 2015, and there will be further improvement as we realize the full potential at Mines Canada. For Liberia, we are currently reviewing a structural 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 ton. Moving to slide six and the results of our steel segments. 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 unsustainably low-priced Chinese exports. Despite lower prices, the results for our NAFTA business have improved during the third quarter, primarily due to lower cost and improved performance in Calvert. Europe segment EBITDA declined during the third quarter, 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 third quarter, reflecting the negative impact of continued domestic demand weakness. Our domestic margins have been squeezed in dollar terms due to lower realized selling prices. 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 first nine 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, exports have increased. Clear the volumes, price excluding China, have declined to less than $300 per ton. 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 ton in the third quarter. My view is that this is unsustainable. In 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 curtailment. The weak international steel price environment is eroding prices in our core domestic markets. It's also prompting customers to hold off on their orders, run their inventories down. Apparent demand has been running below real demand. I expect the stabilization of prices will bring steel buyers back to the table. There's 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. Europe, we expect to see similar growth in 2016 levels that are 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. Overall, 2016 is likely to see a slight improvement in global steel demand, positively biased towards ArcelorMittal's core markets. As we look ahead of 2016, I wanted, 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 a billion-dollar structural improvements to EBITDA versus fourth quarter of 2015. Starting with some of the actions we have taken on the left of slide number eight. 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 2015. 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 optimize our downstream footprint in NAFTA and 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. We have identified significant further savings to be generated in 2016. Moving to the ACIS division in South Africa, there are two positive developments that will support results in 2016. The first is that the government is implementing import tariffs. Second 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 costs further in 2016, 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 a squeezed contract margin. Together with some of the market developments such as foreign exchange, port 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 business by $2.5 billion. As a result, despite the cyclically low level of 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 million. Together with the suspension of the dividend for the financial year 2015, we therefore see cash requirements declining in 2016 by a billion dollars. 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. As a result, the EBITDA free cash flow breakeven has been reduced to $9 billion. With this, I hand over to Aditya, who will discuss the third quarter 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 show the EBITDA reduction in the second quarter of $1.399 million to $1.351 million in the third quarter 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 shipping 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, you can see a negative $44 million impact from others. This largely represents translation losses following the strengthening of the U.S. dollar. Moving to slide 12, our P&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 third quarter, we booked an impairment charge of $27 million relating to the closure of Vereeniging melt shop in South Africa. During the third quarter, we also booked exceptional charges totaling $527 million. This includes $27 million retrenchment cost in South Africa and a half a billion dollar related to write-down of inventory. As we follow IFRS standards, we are required to write down the value of inventory to lower of 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 third quarter, our share of income was $30 million, as compared with an income of $125 million in the previous quarter. Third quarter income was positively impacted by income generated from the share swap in Gerdau, Brazil, offset by weaker performance from Chinese investees. Second quarter income was higher as it also included annual dividends from Erdemir. Net interest remained stable in the third quarter as compared to the second quarter. Foreign exchange and other net financing costs in the third quarter was $409 million as compared to $73 million in second quarter 2015. This includes a foreign exchange loss of $170 million, mainly on account of a 22% appreciation of the U.S. dollar against the Brazilian real and a 31% KZT 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 negative $34 million. As a result, overall, we reported a net loss of $711 million, 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 $0.1 billion in operating working capital. This is a normal seasonal movement and will more than reverse in the next quarter. The third bar shows the combined impact of net financial costs, tax expenses, and other items related to the prepayment of liabilities totaling $0.7 billion. Cash flow from operations of $473 million, combined with CapEx of $684, resulted in negative free cash flow of this quarter of $211 million. Turning to slide 14, we show the bridge for the change in our net debt from the second quarter to third quarter. The main components of the debt movement during the quarter were the negative free cash flow, as described earlier. There was a small M&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 2009. Our dividends of $21 million were also paid to minorities, and foreign exchange had a negative impact of $9 million. The combined result of these movements, net debt increased during third quarter to end the period at EUR 16.8 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 EUR 5.2 billion-EUR 5.4 billion. Full year 2015 CapEx is expected to be approximately EUR 2.8 billion, down from our previous guidance of $3 billion. As I mentioned earlier, our net interest expense for the year will be slightly lower than our previous guidance at approximately EUR 1.3 billion. Finally, we continue to expect positive free cash flow and end the year with net debt below EUR 15.8 billion. This concludes our presentation, and we're happy to answer your questions. Great. Thank you. We're ready to start the Q&A session now. We have a queue already, we will take the first question from Michael Shillaker at Credit Suisse, please. Yes. Thanks a lot, Daniel, for taking my question. I've got two questions if I can. First question, I think, Aditya, you said about one or two 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? I mean, it's great that you're taking the remedial actions that you're taking, but is EUR 1 billion actually going to be enough? I know that everyone says that Chinese exports are non-sustainable, ultimately what actually gives? They're unsustainable for the global market, that doesn't necessarily mean to say the Chinese are going to cut output and cut exports. Looking forward, 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 1. Question 2, just going to slide eight, which looks at your various elements of the $1 billion versus some of the headwinds. Can you give us a little bit more on the timing of the $1 billion? Because I guess that doesn't all start on January 1, so it's going to be spread through the year in terms of a run rate basis. Can you then just talk a little bit about the contracts, which I guess there's 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 are expecting those contracts to be lower? Thank you. Okay, Michael, there were three questions, not two, and a lot of questions in between, but I'm going to try and attempt to answer all of them. 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. 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. 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 have a very good asset base at Dofasco, 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, anti-dumping duties, and new raw material contracts, which itself saves $10 on 6.25 million tons, et cetera. In the CIS, we had a KZT devaluation in September. We continue to make progress in our Ukrainian operation. When we look at these businesses in 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. What does the $1 billion do? The $1 billion 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, ACIS 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 billion to impact first half EBITDA and the remaining two-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 and 2018. The U.S. AOP program is a good example. In terms of China sustainability, 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 billion in the nine months of this year, which is $35 a ton, and Q4 pricing is even lower. You multiply that by the tonnages in China, that's quite a staggering amount. We don't think that's sustainable in the medium term. 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. Then I'll hand it over to Lou, who can talk about the U.S. Europe is about 7 million tons out of 12 million tons of contract. Prices adjust to raw materials. 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 third-generation steels, which also contributes to protecting this margin. Turning to the contract issue in North America, maybe a couple 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 on 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. Finally, the spot environment clearly is also an important factor. 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 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. 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, 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. Okay. Thanks very much for the time. National behavior ultimately comes back to the market. Thank you. Thanks, Mike. We'll take the next question, please, from Alessandro Berenberg. Good afternoon, everybody. Just have two questions. The first one is related to the analyzed run rate of EBITDA that you're using as a kind of benchmark on top of which to add this $1 billion analyzed EBITDA into 2016. Is there any kind of confidence that Q4 2015 EBITDA can actually be the trough? Do you think there 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 anti-dumping. I just would like to get an update on the European space, because it seems to be significantly lagging behind. We're just basically only on the cold rolled. I was wondering whether, considered 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, a further other action, probably in hot rolled coils and galvanized material. 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 a falling market. 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 -$35 a ton, 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's a restock that will 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 2016 and 2016 overall. In terms of European trade protection measures, 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 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. You see a significant surge in Q3 where imports are up about 40% in Europe, and these imports are inappropriately priced. 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 Eurofer, are acting. I do expect there to be more progress in Europe than what you have seen in the last nine months. Aloysio, just going back to 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 into Q4, will remain relatively stable into Q1. In terms of potential upside to utilization rate, do you think that into Q1, a likely increase utilization rate could be able to offset the current price weakness? 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, we're sticking to that, 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 2015, you would see an annualized rate which is four million tons less. That's very significant because as you know, we're a fixed cost-heavy business and the contribution per ton is roughly $200. 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. 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. Yes, I do agree with you that volume impact could be quite significant into 2016 versus what we're seeing in the fourth quarter of 2015. Thanks, Aloysio. 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 just mentioned that probably margin will remain the same in 2016? Thank you. Go ahead, Lou. I don't think we see any significant risk to the automotive volumes from the VW situation. I think the markets, particularly in our core markets, those are actually the bright spots, North America and now increasingly Europe, for global automotive sales. We think that's really demand-driven and that momentum will continue. Thank you very much. Thank you. Thanks, Alessandro. We'll move to the next question from Roger at JPMorgan. Good afternoon, gentlemen. Thanks for taking the questions. First question is just on the EUR 1 billion EBITDA uplift that you've alluded to for next year. Can you break it down a little bit more clearly for us? How much of that uplift is cost savings and how much is top line improvement, A, through price improvement that you're assuming, and B, through mix improvement? 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? Also in relation to this, you mentioned in response to your question to Alessandro that there'd be a volume impact relative to the sort of seasonally weak Q4. Is that an impact that we need to factor in over and above this guidance? Where does that come into the formula, if you like? The second question is just around your balance sheet. 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 raise new capital or selling assets or more structural responses? Thank you very much. Sure, Roger. 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. 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. 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% are revenue. Just to walk you through then what that breakdown is. 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. We look at Calvert ramp-up, that will improve both costs at Calvert, and as the markets recover, that will provide volume recovery. ACIS, 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, this is not because of the price environment, this is because we have a more efficient business. We see mining. Mining is all cost-related. We're actually seeing that a headwind could be price risk. 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. 75% is largely cost. I think the competition will 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. I would add the volume pickup or shipment pickup in 2016 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 two key changes. One, that EBITDA will improve structurally by $1 billion. We're also reducing the cash cost of our business by $1 billion. To combine, 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 also are continuing to look at optimizing our portfolio. We've been quite successful over the last few years. We have generated $5.2 billion by optimizing our portfolio, and those actions also continue. I think if you put everything I said in context, I think it's quite obvious that we don't need to raise capital. Okay. Just to be absolutely clear, none of these kind of measures that you're talking about assume an improvement in pricing from here? Yeah. That's right. Yeah. Okay. Thank you. Thanks, Roger. We'll take the next question, please, from Carsten at UBS. Thank you very much. I want to stick to the two questions. The first one is on ACIS. We have seen now for four consecutive years an underperforming of this business. When would you actually consider strategic steps? You do a lot here, but it seems like every time you do one step forward, there is something happening, and you do two steps back. When would you actually say enough is enough, and we could actually reconsider ACIS? First question. Second question, revaluation of inventories. You put this below the EBITDA line, and I would guess that part of it will still reduce costs going forward. How much will that be? If you want to talk about it, please. It's just like Yeah. Just true that this quarter has not been particularly good for ACIS because we faced a 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. Our core markets, that is CIS, Middle East, and Africa, have not shown big growth rates also. That has been our, let's say, drawback of this quarter. We have a number of actions in hand, as has been brought out in this presentation also, that we are looking at our costs 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. We have some energy optimization initiatives in our CIS region. If I look at all of them, I'm very hopeful that we will contribute strongly to the $1 billion value plan, which has been already spoken to. Thank you, Devinder. In terms of the charge that we have taken in terms of our inventories, it doesn't have an impact on operating income. Or EBITDA, excuse me. What we do is we revalue the inventory at market, so it does not create or generate any EBITDA into Q4. I'm not sure if I've answered your question. Yes. Usually what happens is you take down your inventory. The value of the inventory, it benefits your COGS or your costs going forward. The question for me is, was it just a third quarter event and all your inventories which you devalued, you consumed those in the third quarter, or will that spread over the fourth and first quarter, which will actually lower your cost and will then be EBITDA irrelevant? Yeah. 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. 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. 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, Carsten. We'll move on to the next question, please, from Seth at Jefferies. Good afternoon. This is Seth Rosenfeld at 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 expected might help stabilize your margins. Can you just walk us through the current market conditions in Brazil, to what extent you might be able to offset weak domestic demand with 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 in the timeline or the scale of those measures. Thank you. Yeah. Clearly, we're in a sustained weak market environment, weak macro environment in Brazil. I'm sure everybody's aware of that. As we've talked before, it's compounded by a very difficult political environment and very challenging political environment. The responses needed on a political level to help turn the economy around are really not forthcoming. I think 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. As you pointed out, I think there's also some important exchange rate effects, and those will feed into part of this value plan that we're talking about. We've seen, in terms of the exchange rate, both a much weaker Real than we had expected, and I think also tremendous volatility. As a result, 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, particularly on our flat roll side, are below the landed price of imports. That's clearly not a 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, etc., in the space of a week, that makes it difficult to catch up there. I think we're seeing already in the fourth quarter 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, etc. That's the norm. I think that's an important part of what we see as a structural improvement affecting basically the entire industry in Brazil for next year. I think that's part of 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 we do see the ability to offset that with exports. Basically, we're running our operation in Tubarão 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 to export markets. That's happening on the flat roll side. We keep the benefits Of high operating rates, and therefore, good absorption of fixed costs with the high operating rate. 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. 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. Whereas we export currently about 60% of the flat roll production out of Tubarão. 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 Tubarão have to ship to. On the long product side, we have had to make some adjustments in our operations. We have two very low-cost competitive plants that we're running flat out. 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. 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 those activities because, again, there's competitive confidentiality aspects to that. I think we're confident we can offset that. 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 timeline 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 Brazil, you're more likely, hopefully, you see it in the results as opposed to discussion of individual initiatives. I don't think there's any important footprint initiatives for our company that we're foreseeing in Brazil. Again, I think we're always vigilant on this. We don't want to assume it, but we have been more profitable consistently than other producers in Brazil. 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. 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. We'll take the next question, please, from Mike at Citigroup. Hi there. It's Mike Flitton here. Thanks for taking my question. I just have one left, just on the free cash flow number. Looking to lower that by $1 billion. 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. If you could give us a bit of a breakdown. In terms of CapEx, you're already at $2.8 billion. I seem to remember that was a guide for a sort of sustainable through cycle number that you gave previously. I'm wondering how much you're able to actually cut from that and still not impact your operations. Thank you. Thank you, Mike. In terms of CapEx, if you go through our results, you will see that our depreciation charge is also $700 million down year-on-year. It's down primarily because of Forex impacts. If you look at our European business, the Euro has come down. If you look at the CIS business, Brazilian business, Canadian business as well. If you just look at where we operate, a lot of these businesses have been in a deflationary currency environment, bringing down CapEx costs. Number two, we also see that the cost of capital equipment is declining, and we're taking advantage of that. The break-even point for maintaining assets has actually declined significantly, primarily driven by Forex and lower capital costs. I would guide you towards a number of $2.2 billion-$2 billion 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 billion-dollar cash flow, how do we reduce by $1 billion our cash? Is that the question? No, it's just you've obviously accounted for about $600 million of the difference there in terms of $2.8-$2.2. The rest of the $400 million, is that broadly split between interest and tax? That's a good question. I'm not guiding towards CapEx of $2.2 billion 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? The $1 billion of next year is CapEx. Some of it is CapEx. I would take compared to this year, $300 million-$400 million is CapEx. We have cash interest, which is down. We have an MCN, which is maturing in January, and along with that and lower cost of average borrowings, that's about $150 million. We expect to have lower cash taxes. Then we have also proposed to suspend our dividend, which is another $360 million. If you add up all of those, you get $1 billion. Great. Thank you very much. Sure. Thanks. We'll take the next question from Ioannis at RBC, please. Two quick questions from me. First, in terms of the medium-term net debt guidance, you didn't reiterate it in your results today. Could you indicate if $15 billion is still the target? 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 explain the differential there? I'll talk about our debt targets, then Lou can address the U.S. question. In terms of our debt targets, you're right, we haven't explicitly mentioned the $15 billion target, but I wouldn't read into that. I think the whole release is about how we intend to further de-lever the balance sheet, how we intend to be free cash flow positive in 2015 and positive in 2016. I would just focus on the fact that ArcelorMittal intends to de-lever beyond this target, 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. Lou? I think we have revised our view of apparent 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 the fourth quarter. 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 a third of that 6% that we're seeing. 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's falling, people don't want to be buying if they don't have to and find out that two weeks later, the price has dropped a little bit. I think the real demand is driving things. We certainly don't want to give a number for next year, 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. We think as the pricing does bottom out, and people get a sense of that people will be coming back into the market. Okay, thank you. Thanks. We'll take the next question, please, from Rohit at Capital Sugar. Yes, thanks for taking the question. Just to follow up point on this previous question on net financial debt. Your comments on how to stay free cash flow positive or at least break even, 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? Obviously you shouldn't bet too much on the help from the market. 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 $15 billion, such as the asset deposit? Is there anything which could contribute materially here? In that context, what would be the precondition for resuming the dividend? Is this based on a kind of a minimum EBITDA? Is it based on reaching the $15 billion in net financial debt target? Finally, what is required to happen that you would take the next steps in terms of improving the business and getting the EBITDA break even lower considering, maybe you see the trade action in the U.S., but maybe Europe stays tough until the measures are taking effect. It could be mid-2016 until things are getting better. What needs to happen for you to go to the next level in terms of restructuring measures? Okay, thank you. 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 de-leveraging. We plan to make progress in 2015 and continue that progress in 2016. That is why we've tried to outline the actions underpinning that, the structural EBITDA improvement, lowering the cash break even 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. What we want to ensure every time we look at that and generate ideas, is that we get appropriate value. We don't want to identify what the asset is because that makes it a buyer's market versus a seller's market. In these conditions, it probably is not the most expedient way to or most value-creating way to raise cash. 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 third quarter because in the third quarter of next year, we would have clarity on where we are in terms of the earnings profile as well as in terms of our de-leveraging objectives. What we have been consistent about in terms of your last question was what needs to happen is we need to be on a path of deleveraging the balance sheet, strengthen our credit metrics, then we would be using discretionary free cash flow to either increase CapEx or to restart dividend, if we don't like those two options, to further de-lever. At that point in time, I think we can provide you more clarity as to what we would be doing. Great. Thanks, Rohit. We'll move to the next question from Tony at Cowen, please. Thanks very much, Daniel. Thanks for taking my questions. I just wanted to pursue your comments about optimizing the downstream footprint in the U.S. We're seeing a lot of other companies announce initiatives to attack redundant capacity and cost 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. Yeah, I think I would say definitively is 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 a third of our production goes into just the automotive alone, not to mention other high value-added attractive markets. 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 one furnace idled currently. 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, Lou, this is probably another one for you, if I may. It's about Brazil. 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. 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, contributing to the current oversupply. How do you balance that strategically? I'm not sure I understand how we're contributing to oversupply. Maybe just to answer the question, Calvert has not really increased shipments in 2015 versus 2014. The increase that you see are exports of slabs to third parties. If you know, in June of 2014, we restarted the third furnace. We have a very strong cost-competitive position in Tubarão, therefore we do generate value by selling those slabs in the export market. Are those primarily additive to the U.S. or Europe or both? They are to a broad range of customers, but your question was on Calvert, and on Calvert, we have not really increased shipments year-on-year. Okay. Thank you very much, gentlemen. Thanks, Tony. We'll take the next question, please, from Tom at Redburn. Are we there? Contribute to achieving the $1 billion of net debt reduction in Q4. It looked like at the end of the first half, you had about $500 million 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. The question was on the True Sale of Receivables Program and how much you will utilize that to help reduce Q4 net debt by that $1 billion that you're talking about. At the end of the first half, it looked like you had about $500 million of spare capacity in that facility. How much is that facility utilized as at Q3, and where do you see it going into year-end? I can get you the specific numbers, TSR overall is down year-on-year. It securitizes our receivables and as the value of those receivables have declined, the TSR value is down. It'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. Yeah. No, I understand your question. Overall, TSR is down year-over-year. We can get you specifics, but TSR is down. Okay. That's fine. Thanks very much. Thank you. Thanks. We'll move to the next question, please, from Philip at ABN AMRO. 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? That's my first question. That's also in relation to the covenant testing limits. My second one, 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 remember back 2 years ago, you issued your $15 billion 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 the trough EBITDA should be some $7.5 billion, and you would target a net debt EBITDA of 2 times. 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 this results announcement is that we're making structural improvement to EBITDA, we're reducing the cash break even, and we want to continue to de-lever the balance sheet. We've not announced a target, but clearly the focus is to continue to de-lever the balance sheet. As a result, we have also suspended 2015 dividend. That is the direction we are going. 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 be able to announce it to you. I would take away from our comments that clearly the focus is to go beyond the previous $15 billion medium-term net debt target. Okay. Thank you. Thanks, Philip. We'll move to the next question from Philip at KeyBank, please. Thank you. 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 iron ore, we have some scrap-based operations. In the long side, we use primarily our own material from a mine called Andrade that's located, I think it's 10 km or something from the Monlevade steel plant. Tubarão 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 sub-system. Not the only port, but one of the major ones for Vale. Essentially, they dump on for our facility on the way to the port, if you will. Obviously it's a terrible tragedy, but it's not a source of material for our operations in Brazil. Is it a source of material for your operations in Europe or NAFTA? Yeah, 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. Just lastly, if I could, for Lou, I think you said half of your contracts in NAFTA run on a calendar basis. Any help you could give me in terms of how much of your total business is contract versus spot in NAFTA? Thanks. Yeah. I think typically we're, let's say, 40% or so on an annual contract basis, and then there's another, call it 15-20 that would be some form of a lagged index deal with the timing of the index being somewhat variable. In other words, some for one quarter, some for half a year or semester, that kind of thing. Thank you. Great. Thanks. 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 Pez. 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, et cetera. That would be my first question. Second question related to contract margin squeeze. You've been a lot talking about the U.S. I'm wondering to what extent this could also be duplicated to Europe situation. Thank you. Okay. I think we'd answered these questions earlier, 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, supported by improved volumes relative to where we are in Q4. In terms of the contract business, we spoke about the U.S. and we went through the U.S. In terms of Europe, they adjust based on raw materials. The European market is growing. The automotive segment continues to grow in Europe, and we're also benefited by the fact that we have strong products in terms of third-generation steel, which also provide for a mixed improvement within that segment. We're not expecting significant deterioration into our 2016 results in terms of European auto. Thank you. There being no more questions, thank you for participating in this call and looking forward to be talking to you next quarter. Thank you.