Please go ahead, Daniel.
Thank you. Good afternoon and good morning, everybody. This is Daniel Perko from ArcelorMittal Investor Relations. Thank you very much for joining us today on this conference call to discuss the Q1 2015 results. First, I'd like to remind you that this call is being recorded.
We will have a brief presentation from Mr. Michel Eniducia followed by a Q and A session. The idea is that the whole call should last about 1 hour. So with that, I will hand over the call to Mr. Mittal.
Thank you. Good day to everyone and welcome to ArcelorMittal's Q1 2015 results call. I am joined on this call today by all the members of the Group Management Board. I will begin today's presentation with a brief overview of our first 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 Wazit.
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 health and safety. The lost time injury frequency rate in the Q1 was 0.88 times versus 0.89 times in 4th quarter '14 and 0.85 times in Q1 'fourteen. On the left hand side of this slide, you may see the clear progress we have made over the past 8 years. This demonstrates our commitment to this priority.
As a company, we remain committed to the journey towards 0 harm. We recently held our 9th Annual Health and Safety Day to reinforce this message and ensure that all levels of the organization are focused on this primary objective. Turning to the Q1 highlights shown on slide number 4. It is clear that combined impact of lower iron ore prices and the challenging U. S.
Market has resulted in lower EBITDA in the Q1 2015. Our reported EBITDA of $1,400,000,000 does include $100,000,000 provision for owned risk contracts in the U. S. Excluding this charge, steel only EBITDA is essentially stable year on year. Clearly, we have been working hard to offset the various headwinds, including U.
S. And Brazil market challenges, as well as negative translation effects. Compared to the same quarter of 2014, we increased our steel shipments by 3%. In mining, we increased our iron ore production by 5% year on year basis. More importantly, we have reduced unit operating cost by 13% year on year.
While we have reported a net loss of $700,000,000 in Q1 2015, this is largely the result of foreign exchange impacts on the value of deferred tax assets. A better reflection of our performance I believe is the ongoing progress on net debt. As expected, there was a seasonal investment in working capital in the Q1, so net debt increased to $16,600,000,000 comparing with quarter 4. But if I compare net debt to where it was 12 months ago, I can see a decline of almost $2,000,000,000 Moving on to the next slide, I want to spend a few more minutes on the performance of our Steel and Mining business. The standout segment is again Europe, where we continue to make good progress.
EBITDA per ton increased by 9% in the Q1, reflecting further improved market conditions as well as the results of our cost optimization efforts. In local currency terms, the improvement is even more pronounced. I remain encouraged by the results of our ACIS segment. Despite the market impact of political instability in Ukraine, EBITDA per ton was higher than year ago levels, showing good progress on operational improvement. Looking at Brazil performance, market conditions have been challenging for some time and they remain so in Q1.
Dollar margins have been squeezed due to the lower realized selling prices, impacted by weaker Brazilian reals and aggressive competition in export submarkets, offset in part by higher steel shipments following the restart of the 3rd blast furnace in Tumorin July 2014. Results for our naphtha business have been hampered by the exceptional market conditions in the U. S. Following a period of unusually high imports, apparent demand in the Q1 was very weak and domestic prices have collapsed. Our naphtha performance was further impacted by inventory write downs at the end of the quarter.
As a result, while business conditions are expected to remain very challenging in the second quarter, NAFTA performance should not deteriorate further. Our Mining segment profitability has clearly been impacted by the drop in iron ore price. However, cost performance has been good and I want to discuss in some more detail. As mentioned, iron ore prices have declined by 48% over the past 12 months. We cannot do anything about this.
What we can do though is focus on our timing cost base. We reduced unit cash cost by 13% as compared to the same period of 2014. Approximately half of this improvement reflects operational improvements including debottlenecking benefits at Mines Canada as well as efficiency and procurement savings. Our performance at Mines Canada is particularly notable. Following the expansion, this is now a world class operation.
We expect concentrate cash cost in 20.15 to be almost 40 expect further improvement during the remainder of 2015. I said at the start of the year that unit iron ore cost would decline by 10% in 2015. I now expect them to fall by at least 15% in 2015. On slide 7, I will discuss the topic of CapEx. As you know beyond what is essential to maintain the business, our CapEx has been very selective.
We have and will continue to invest to support our franchise steel businesses, in particular, automotive.
That said,
due to the benefits of ForEx and the postponement of some smaller investment projects, our CapEx spend for the year 2015 is now 2015 is now expected to be approximately $3,000,000,000 This is below the previous guidance of $3,400,000,000 and represents a decline of approximately 18% versus 2014. Lower CapEx, together with our focus on working capital efficiency and benefits of lower net interest costs are all improving our ability to convert EBITDA into free cash flow. Next slide, I will discuss market outlook. As you can see on the chart on the right hand side of this slide, the ArcelorMittal shipment with a global PMI has slowed over the past few months, largely due to moderating growth in the U. S.
But important date has been consistently above the critical fifty level, indicating continued growth in demand for our steel. Our weighted PMI global weighted global PMI for the month of April is around 52. Real underlying demand continues to grow across our key developed markets. The U. S.
Has been impacted by the weakening of energy investments and the strength of U. S. Dollar. Although it is worth to note that underlying real demand to note that underlying real demand continues to grow particularly in the auto and machinery sectors offsetting weakness in the energy sector. Moving to Europe.
Manufacturing is benefiting from rising consumer demand boosted by cheaper oil and easier credit, while the weaker euro is supporting exports. We remain confident that underlying real demand will gradually accelerate, buoyed by the recent strength of auto sales and a rebound in business confidence, which will support future investment. Chinese industrial indicators point to further de acceleration. The real estate correction will continue to dampen activity over the coming months. And despite the growth in passenger car in The outlook for Brazil has deteriorated, impacted by a weak consumer government spending cuts and rising interest rates leading to declining real steel demand.
As expected, low oil prices and financial sanctions are negatively impacting Russia, albeit the risk of a more severe recession has moderated somewhat by a recent uptick in both the ruble and oil prices. Now on slide 9, I want to highlight our forecast for apparent consumption growth in our key regions. After all, it is apparent rather than underlying demand that will drive our shipments in 2,050. Starting with the U. S, despite rising real demand due to significant restocking in 2014 caused by the strength of imports, we expect apparent demand to decline in 2015.
Despite this decline, steel demand remains within 5% of 2,007 levels. In Europe, I expect the continued real underlying demand to translate into further positive apparent demand growth in 2015 within a range of 1.5% up to 2.5%. In Brazil, we now expect Given the company's specific geographical and end market exposures, we expect ArcelorMittal shipments to increase between 3% 5% in 2015. Approximately half of the increase will be as a result of the completion of the Newcastle reline in South Africa as well as the full year impact of the restart of Blast Furnace 3 in Tuberao, Brazil. With this, I hand over the call to Adit, who will discuss the Q1 2015 financial results and guidance.
Thank you, and good afternoon and good morning to everybody. I'm on Slide 11. Here, we show the EBITDA progression from Q4 'fourteen to Q1 'fifteen. On an underlying basis, we have an EBITDA decline of about 20%, which reflects weaker performance in both our steel and mining businesses. In steel, the positive contribution from higher shipment volumes was more than offset by weaker pricing.
Shipments have increased shipments increased by just under 11% in Europe, reflecting seasonal factors and improved demand, but this was partially offset by reduced shipments in the other steel segments. There was a significant price cost squeeze in steel during the quarter, reflecting price declines in all segments, most notably the U. S. In Mining, EBITDA was negatively impacted by seasonal decline in shipment volumes, particularly in Mines Canada. The impact from declining iron ore prices was only partially offset through improved cost performance.
Moving along the bridge, you can see a negative $125,000,000 impact from others. This largely represents translation losses following the strengthening of the U. S. Dollar, which is primarily euro and Slide 12, our P and L bridge which shows our P and L bridge from EBITDA to net loss. We'll focus on the chart in the upper half of the slide, which was the bridge for this quarter.
Depreciation was lower at to $1,000,000,000 in Q4 'fourteen. This is primarily due to foreign exchange impacts following the depreciation against the U. S. Dollar of all the major currencies, Brazilian real, euro as well as the Canadian dollar. Assuming exchange rates remain around current levels, then you should anticipate full year depreciation of approximately $3,500,000,000 Moving to loss from investments associates and joint ventures.
In Q1, our share of losses was $2,000,000 as compared with losses of $380,000,000 in Q4. The big difference here, if you remember, is that Q4 'fourteen was negatively impacted by impairment of China Oriental, partially offset by gains recorded on the sale of Gallatin. Net interest remained stable in Q1 as compared to Q4. Foreign exchange and other net financing costs in Q1 was negative 7.50 $6,000,000 as compared to $549,000,000 for Q4. This increase largely relates to the impact of the U.
S. Dollar appreciation on the value of our euro denominated deferred tax assets, partially offset by foreign exchange gains on the euro debt. This is in line with ForEx model and sensitivities to exchange rate movements that we provided at our Q4 2014 results. These largely non cash FX related charges resulted in a reported pretax loss of $510,000,000 this quarter. Next, we turn to the waterfall taking us from EBITDA to free cash flow.
During Q1, we had a one $200,000,000 investment in operating working capital. This is a normal seasonal effect. I should highlight here the difference between the balance sheet and cash flow impacts. On the balance sheet, working capital is largely changed unchanged, but this is due to FX impacts, while rotation days increased to 54 days from 51 days in Q4, twenty fourteen. The 3rd bar shows the combined impact of net financial cost, tax expenses, reversal of noncash items such as unrealized ForEx as well as the payment of other payables such as employee benefits, VAT totaling $1,100,000,000 Negative cash flow from operations of $915,000,000 combined with CapEx of $745,000,000 resulted in negative free cash flow this quarter of 1,700,000,000 dollars On Slide 14, I want to touch on our overall balance sheet position.
At the end of Q1, we had a strong liquidity position of $8,800,000,000 at the end of March, consisting of $2,800,000,000 in cash and $6,000,000,000 in unused bank lines. I'm pleased to confirm that last week, we closed the refinancing and extension of our DKK 6,000,000,000 lines of credit. These are 2 tranches, the the first of which now matures 3 years from now. These were oversubscribed and come at an even lower margin. I would also highlight that the covenant on these lines of credits is 4.25 reported net debt to last 12 months of EBITDA.
The ratio at the end of Q1 was 2.4x. Moving to net debt. While net debt did increase sequentially during Q1, this was due to seasonal working capital investments. I think the bigger takeaway this year is the year on year decline of almost $2,000,000,000 in net debt. Gross debt is also $4,200,000,000 lower year on year.
Furthermore, we expect to make progress in terms of reducing our net debt target or achieving our net debt target of $15,000,000,000 this year, and we expect to be free cash flow positive in 20.50. Finally, let me now talk about our guidance and targets for 2015. While steel markets have evolved largely as per expectations, the subsequent deterioration of iron ore prices as well as weaker U. S. Market results in a headwind to earlier guidance.
Although the company expects to benefit from further improvement in costs, both in Mining and Steel segments, including lower raw material costs, the company now expects 2015 EBITDA within the range of €6,000,000,000 to €7,000,000,000 We mentioned earlier that capital expenditure budget for 2015 has been further reduced to $3,000,000,000 Lastly, even at the lower end of this new EBITDA guidance range, we continue to expect to be positive free cash flow in 2015 and to achieve growth in the medium term net debt target of RMB15 1,000,000,000 during the course of the year. That concludes
We do have a nice queue already. So we will take the first question from Mike at Credit Suisse, please.
Yeah. Thanks, Daniel. Thanks, guys. So my two questions, if I may. The first, I think if you look at where you probably had some of the highest structural challenges a few years ago was Europe.
And you went through, I think, a pretty major restructuring of the European operations, including some capacity closure. And I think you're now reaping the dividends of that in that Europe almost consistently seems to surprise on the upside with good numbers. I guess, structurally your 2 most challenging areas at the moment include backward integration and strong currencies which is the U. S. On one hand and Kazakhstan on the other.
And I know clearly there's a destock going on in the U. S. Which is cyclical. But structurally, I guess you can't rely on a much weaker dollar and you can't rely on raw material prices rising again materially. So have you got any plans to attack EBITDA margins costs in both the U.
S. And Kazakhstan more aggressively than you're doing? My second question is just on U. S. Anti dumping where there's clearly a lot of noise at the moment.
Can you give us any sort of view you have on an update for that? And I guess the question is, is it actually the answer because when you go back to 2,002 and look at Section 201 or if you look at the OCTG anti dumping on China in 2,009, neither really worked. The U. S. 201 action
caused the flowback, which then flowed back into the U. S.
2 months later and caused simply led to replacement of OCTG imports coming in from elsewhere. So is it the answer? And if not, what is the answer? Because really, the problem is preventing exports as opposed preventing imports, I think, is the problem. Thanks a lot.
Yes. Just to comment on the U. S, I think at our and kind of structural opportunities along the lines of the asset optimization program that we implemented in Europe over a sustained period and that as you had indicated is showing very fruit now. I think as we mentioned on the last call, this is something we have been looking at I would say quite deeply in the U. S.
And discussing quite extensively. And obviously, the downturn in the market is something that increases the urgency of that. So I think we are again looking very carefully and deeply at that. We know what to do. As we mentioned in the last call, I think we certainly have very significant opportunities in terms of rationalizing our finishing assets.
We're committed both to being highly cost competitive in our operations and to maintaining our market position and we think we can get there that an asset restructuring plan in the U. S. Is going to be part of the answer there. We're not quite ready to announce that. I think when we're ready, though, certainly we'll bring that information to the market.
Can you comment on NTW?
Yes. On the trade front, I think you're I'm not sure that I at least personally would agree with you that these cases and initiatives have limited impact as you indicate, although I think the idea that they're the solution is also overstated. I think in terms of the way we look at things and this takes us back to the U. S. Question that I just tried to answer previously.
Clearly, we're not counting on any trade actions providing any material benefits. This is something we need to improve the results kind of on our own and anything that happens on the trade front that's positive is just icing on the cake, if you will. But I think we don't comment on specific trade cases or potential for trade cases in public forums. But think we do have an unprecedented surge in imports into the U. S.
Market and naphtha markets generally. And it's clear that they are part of what's causing significant harm to the domestic industry. And I think it's appropriate that naphtha producers protect themselves from the unfair actions of foreign producers trying to export their excess capacity to NAFTA. And as the largest steel producer in NAFTA as well as the largest globally, we actively support in all markets where we operate efforts to ensure fair trade in steel. So I think we're supportive of those efforts that the U.
S. Industry is undertaking and generally supportive, I would say. But again, we recognize that we've got to improve the results based on our own initiatives and actions with our assets and our positions with our customers.
Okay. Thanks. Very clear. So just throwing that back over to Kazakhstan and I guess the CIS in general in terms of similar plans for maybe more aggressive restructuring.
Yes. I think, Mike, you're very right when you point out that in the face of these headwinds costs appear to be the only alternative left. And that's what precisely what we are focused on. And one thing of course which we have been doing now for some time is to focus on the operational stability and our maintenance practices. And that of course underwrites then good cost position.
That's one thing. And energy is another very important component of our cost in Kazakhstan. We are closely looking at that and we have made some good dents there. Fixed costs, captive mines, though they are captive, but still they lend themselves well to any cost reduction. And then of course to keep up with the competition we must look at our mining costs also.
There's a great focus on that. And then there are other areas like purchasing and service contracts. You will do a close review of these things. Overall, we are very happy with the developments on the cost in Kazakhstan. Since January, we are seeing very good developments happening.
So you're very right in asking this question. Cost is the focus there.
And as Lou alluded to it, in some ways, you're not kind of in a position yet to announce anything. But is it something that you would package together as a group and potentially announce just to help the market out in terms of how we could see your plans for group cost reduction accelerating over time?
Michael, I think we don't have any plans to announce a group wide AOP like we did almost 4 years ago. I think we find that it's more beneficial to us and the markets and the shareholders in the long run if we focus on management gains and highlight the opportunities we have to drive further costs. The danger of doing these things on a global basis is we also alert the competition to our plans, and that is not in our interests. So just to be just to underline the responses, clearly in Kazakhstan, we're focused on cost reduction. And in the U.
S, apart from cost, we have opportunities to optimize the asset base.
Okay. Very clear answers. Thanks a lot.
Great. Thanks. And we'll move to the next question from Mike Fitton at Citigroup, please.
I had just 2 around the run rate, firstly around NAFTA and then for the group. I was wondering if you could just give us a bit more color on how you feel NAFTA will develop. And obviously, you're probably going to continue to have prices weaken over the next quarter given the quarterly given the contract delays.
I was wondering if you could
just say, do you expect Q2 to be below Q1? And just in terms of the second half recovery in NAFTA, how much are you, I guess, looking for a restock in the second half as opposed to just the destocking abating? That's the first question. And then in terms of the group, how much of the guidance for the full year is dependent on that NAFTA second half recovery? And obviously, you would expect the rest of the group, so 80% of EBITDA to fall away seasonally in the second half.
So I just if you can give us a bit more color on how they would interact and how you see a group second half recovery for the rest of the business as well?
Well, I think to start on the NAFTA trajectory, let's say, I think you're right to say that this is really a first half phenomenon for us. So I think that you're seeing that destocking. We have, I think, some indications that our expectation that this was just an inventory adjustment, even if a particularly sharp and drastic one and that we'd be seeing the end of that by kind of May to June. I don't want to declare with certainty that that's the case here, but I think we are seeing lead times extend out. We have idled one furnace that we were going to work on this summer.
It's a relatively small one at our Indiana Harbor facility. So that's idled indefinitely. Now we'll do that work this summer, but we're ready to bring it back if the market supports it. But if we take that bit of capacity out, our order book is now relatively full for Q2. I think the lead times have moved out as we understand from our customers to 4 to 5 weeks in spot markets and a month ago I would say they were typically 1 to 2 weeks.
So I think customers are coming back into the market. Again, we're I wouldn't say things a boom is here, but I think we are seeing the end of that destocking process. As you may know, we announced a price increase about a week ago or so, and I think we did that only thinking that the supply and demand conditions did warrant that. And we'll see how that plays out, but I think the early indications are that, in fact, that instinct was correct. But nevertheless, given the kind of structure of some of our contracts, the lag and some of the index contracts, which is, let's say, 15% or so of our business, we are going to see that impact of the price drop carry through the Q2.
I do think we look if we take Mr. Mittel's the numbers he gave overall for the market, the real growth versus the apparent decline, just if you work through the arithmetic, that apparent decline, I think, has basically occurred more or less already. So I think we see that we see some no further decline. Whether we see the uptick there, I think that we're not counting on that. As you say, there's some seasonal negatives for us into the second half.
But I think that inventory adjustment, which was very sharp, very drastic, but I think that's going to play out to be largely behind us. And we'll now see the underlying strength of the U. S. Economy come back and show up in our markets and in our results. But again, I think it's more of a second half phenomenon, and we'll still see some overhang of this structural adjustment in the Q2.
Let me talk about the specifics of Q1 regarding EBITDA versus Q2 and then talk to you about guidance. So in Q1, we took a onerous contract charge of $69,000,000 as well as an inventory write down based on NRB provision. So therefore, on a reported basis, those charges will not be there in Q2 versus Q1. And Q2 EBITDA for NAFTA will be higher than Q1. In terms of so when I say higher, I'm not saying higher than the reported number, I'm saying higher if you add back if you have the Q1 reported number plus the $69,000,000 owners contract charge, we would expect that Q2 NAFTA EBITDA would be higher than that figure.
In terms of the the guidance, the guidance has a range of 6% to 7%. And I'll talk in terms of the range, because I think that best answers your question. So the lower end of the range assumes that iron ore pricing is where it was at the end of Q1, which is about $48 It assumes that U. S. Conditions, apart from volume, do not change compared to where they are in the first half of this year.
It also incorporates the fact that Calvert will do better in the second half compared to the first half because that in Calvert, we have in inventory higher cost slabs because the slabs are based on HRC pricing. And as the pricing has come down, we are carrying expensive slabs in Calvert. It also incorporates the fact that we're making good progress in terms of cost performance as well as we expect volume growth in Mines Canada, that's in the mining EBITDA, And also a seasonal improvement in volumes. Some of this is in NAFTA that we talked about because the destock is coming to a close, Calvert should do better as well. But also ASUS, where Q1 is seasonally weak because of the winter months and ASUS should perform better in the next three quarters.
Plus the cost reduction of raw materials through inventory on a global basis, and there'll be some benefits of that in the forthcoming quarters. What it does not incorporate in the range or the upside of the range is that iron ore is higher than the end of Q1. If you look at where iron ore is trading today, it clearly is higher than $48 It does not anticipate even stronger pricing in the U. S. Market, that bottom end, but clearly the upper end of the range would incorporate a a stronger return to fundamentals in the U.
S. Market, as well as better pricing of steel markets globally. I think if we look at Chinese data of exports, China was exporting 120,000,000 tonnes of level is closer to $90,000,000 which is the same average of 2014. And so that and also the trade action, which was discussed earlier on the call. So that would be on the
upside of our guidance range.
Thank you. And just quickly, how does Brazil fit into that in terms of the group? I'm just wondering how much visibility you guys have down there. Obviously, there's macro headwinds, but you've historically managed to outperform those, certainly in terms of a volume basis. Just wondering how you think that will develop over the year?
So if you look at Brazil, if you look at Q1 performance, so I think the biggest impacts have been twofold. 1 has been our tubular business, which has not performed or seasonally is weaker in Q1 compared to Q4. And that has a big impact because there is a big tubular component in our Brazil segment. And the second has been the domestic volumes are lower. Nevertheless, relative to the macro situation, margins are holding in Brazil, and we expect that to be the case for 2015.
So our the low end of our guidance range assumes no improvement in apparent steel consumption in Brazil, I. E, matching our forecast, margins remain where they are. The upper end of the guidance would obviously be an improvement in the Brazilian macro store.
Store.
Great. So we'll take the next question from Bastian of Deutsche Bank, please.
Yes. Good afternoon, gentlemen. I've got 2 questions. So my first question is again on the S- where I would like to dig a little bit deeper. So you said you took some inventory impairment on the finished goods and semis and you obviously keep a few 1,000,000 tonnes in stock.
So I guess the effect could have been quite material. How much has that been? You quantified the effect of the onerous contracts. So maybe you can give us some quantitative guidance here as well as could change the starting point for your Q2, obviously, quite materially. And then my second question is on the others line, could you give us some more color here what was driving the better performance for others, which is typically a negative EBITDA contributor?
That
would be very helpful. Thank you. Sure. So the others line is an 85 represents freight as well as the sale of real estate, so return land sales as well compared to Q4. I expect that trend to not continue.
So I expect the others line to not have the same positive 85 for the next three quarters of the year. In terms of the inventory write down, I don't want to give a specific number, but what I would suggest to you that it is larger than the owner's contract provision of 69,000,000 dollars And so it's in the low three digit 1,000,000 of dollars number.
Okay. That's very helpful. Thank you.
Great. Thanks, Bastian. So we'll take the next question then from Tim at RBC, please.
Yes. Thank you very much. The one question on the guidance range has been answered. So thank you for that. Also you in your commentary on depreciation gave a comp on the Q1 range on the Q1 number versus what you'd expect for the full year at a constant FX.
Is it possible to get that for your FX and other or the at least the $538,000,000 portion of that at a constant euro rate for the end of the year? Have you guys figured out approximately what impact that would have for the full year 2015? Thank you.
Yes. So it this the FX is based on changes. So to the extent that there is no change from the end of Q1, there would be no impact. And then it would be a normal 200 $1,000,000 cost that we run due to pension and other bank fees. The model that we had shared with the analyst community, and I'm sure you can spend more time with Daniel and Hector to go through, was on a very simple thumb rule that 1% depreciation of the euro would be a $35,000,000 charge and a 1% depreciation of the Brazilian real would be a $7,000,000 charge.
And so if you look at the rates and the way the rates have moved, I believe the euro has moved on a balance sheet basis by 10% to 11%, and that's about $350,000,000 The Brazilian real on a balance sheet basis has moved by 17%, and that's another $150,000,000 And when you add that up, you get to the ForEx charge that we had in Q1. Does that answer the yes, okay, great.
Okay. Thanks, Tim. So we will take the next question from Jeff at Macquarie, please.
Yeah. Hi, good afternoon. My two questions were more to do on the mining side. If you look at the revised cost reduction guidance, the 15% reduction, can you give a breakdown as to the main drivers of that in terms of say what portion from FX, what portion from say self help and what portion maybe from just lower costs for consumables like diesel?
Yes. Okay, Jeff. Yes, when you look at the cost reduction, I'd say about 45%, 40% is from exchange rate and fuel effects. 55%, sixty percent is on OpEx and cost. There's a variety of drivers of that.
I've spoken before about the procurement initiatives we're taking, that's a material part of that. Volume through Canada is another driver of that. If you think year on year, we're up 18% in the volume from Canada. That supports that. We've had the ongoing program on maintenance, which is bearing fruit.
That's improving the reliability, which reduces some of the unfanned outages, which also impacts costs. FTE productivity benefits are also a small part of that. And also SGA and fixed costs, which at a corporate level for mining are down 20% year on year. So there's a variety of levers behind that. On the procurement, the benefits from the global categories, so whether it's explosives, tires, heavy mobile equipment, the benefits of that program over the last 18 months are coming through as we renegotiate contracts in different parts of the world.
So there's a whole variety of levers there.
Okay. That's helpful. My second question is, earlier in the year, you had talked about maybe revisiting the scope of the Liberia Phase 2 project. And obviously, we haven't had an announcement, which just remains suspended. I mean to what extent the weakness we saw with iron are kind of pushing towards $45 a tonne maybe force you to revisit that whole expansion.
I mean it almost seems like a double edged sword here where given the low FE grades, I would imagine that price is below $50 a ton for benchmark that operation is really suffering. But on the other hand, do you really want to commit capital to try and upgrade the product?
Yes, Jeff. I think that's a little bit a dilemma.
As you know, with the Ebola, it's suspended. Since then, we all know what's happened to the iron ore price. We're continuing to look at this. There's various ways to think about how you might proceed at different rates. The key is to try to think about how you'd upgrade the product.
So the team are continually assessing different ways to do that at different times and different rates. We'll keep doing that.
And when we set on some conclusions, of
course, we'll come back
to the market. Phase 1 is continuing the DSO. Clearly, the issue there is not cost, it's more the product quality. So we work on the mind plan. We're trying to differentiate the product and target the markets, which is in line with our broader marketing approach anyway.
And that's what we're focusing on in Liberia at this point in time.
Just to follow-up on the DSO product. Can you give a price as to what's necessary to breakeven there?
No. It's not something we communicate on an asset by asset basis. It's clearly marginal at this point in time. But as I said, we're working on the mine plan and the products to improve realization for the product and of course, a lot of effort on costs.
Okay, great. Thank you.
Thanks, Jeff. So we'll take the next question from Carsten at UBS please.
My first question also comes with regard to the mining business. We have seen quite a bit of optimization programs in steel, closures of site, etcetera. Could we expect something similar in mining given where the raw material prices are? And do you see potential here for actually getting profitability back on track for the mining business? That's the first one.
And the second one is rather on the dividend policy. We have seen for a few years now that net debt net income was actually negative. Could that at some point influence your dividend strategy because you're still paying $0.20 per share? Might you suspend that temporarily? Thank you very much.
Okay, Carsten. I think in terms of restructuring,
of course, at the end
of last year, we had the Koosbaz sale. And then also during the course of last year on the coal side, we made some adjustments to the footprint in Princeton to focus on a new above ground mine and just the underground. I think when we look at the current pricing or the pricing around the end of Q3, there's a program we've got in place on the growth in Canada of the volumes, the cost reduction that we're doing. We expect to be free cash flow neutral at these levels across the portfolio. So the real focus is on the cost.
We've had a good Q1. And behind that, that's why we've increased the guidance to 15% for the rest of the year.
Okay. So there's no immediate action on any closures for you guys because the costs are low enough?
No. I mean the only other one is in Brazil where we take a more opportunistic view as to whether we can put some of the Synta feed on the market or not depending on pricing. Otherwise, we focus it more internally.
Okay.
Thank you. Okay. To caution your question on dividend and net income, I think it's important to recognize that even if you looked at 2014, if you excluded the noncash impairment charges and noncash one offs, we were positive on the net income basis. And if you do the same work going back a few years, you would realize that largely we are net income negative primarily due to the impairment charges and even the ForEx in Q1, for example, is non cash and that's a big amount, it's 5 $39,000,000
Okay. So you actually we can expect that you keep the dividend then? Yes. Perfect. Thank you.
Thanks, Carsten. So we'll take the next question from Seth at Jefferies, please.
Good afternoon, gentlemen. This is Seth Rosenfeld at Jefferies. Just a couple of questions looking specifically at the European market. Is there anything you can just comment on the current level of inventories across Europe? How you've seen that move over the last couple of months?
Obviously, demand has gradually recovered. And then secondly, on import pressure within Europe, where are the greatest import pressures coming from at present? I think you'd commented in the past that you had a close eye on Russian volumes, but they had yet to materialize as the last time you commented publicly. Where does it stand at present with those exports from Russia within Europe? Thank you.
Yes. So let me just quickly address the European market. In terms of inventory environment, there is no significant increase in or change in the level of inventories in Europe. So there is no inventories in Europe. So there is no restock or a destock, which we're seeing in other markets.
If you look at 2014, there was a small increase in inventory towards the end. And in 2015, we expect that level to be maintained. So we're not forecasting a destock. In terms of imports, there has been a slight increase of imports as well in Europe, not to the same degree that we see in the U. S.
I think clearly Europe is supported by the fact that because there is a weakening Europe, the attractiveness of imports into Europe is also declining. Europe is also becoming more competitive on an export basis. There is more increase of Russian exports into East Europe, but not the surge type that we have seen in the U. S. Clearly, even in Europe, we are vigilant and we are ensuring that in Brussels, associations like Eurofair are ensuring that a fair trade level field is maintained and we at ArcelorMittal are supportive of those efforts.
Okay. Thank you very much.
Great. So we'll take the next question from Sita at Merrill Lynch Place.
Thanks very much. One question on the European business. You saw an 11% increase in shipments quarter on quarter and EBITDA obviously rose by a commensurate amount. But if we look at EBITDA per tonne in the European business, we haven't seen any improvement despite the fact that there is significant amount of cost savings that have been put through and also the fact that higher shipments should theoretically translate into better fixed cost absorption per tonne. I appreciate that some of the flat EBITDA per tonne can be attributed to an FX translation issue.
But can you just talk about what pricing power you're actually seeing in the European market as volumes rise? Because I think we're all trying to get excited about the uptick in the potential margin in the European market, but it doesn't seem to be coming through in Q1. What can you talk about going forward? Thank you.
Okay. Cedar, we should be careful when we look at it on a per ton basis. The numbers I have at least show that year on year there has been an improvement. And you're right, Q4 to Q1, it's constant. And the only reason why I say we have to be careful is because the fixed cost absorption benefit is coming on the incremental tonnes.
And that doesn't necessarily have the same when you spread it over the tonnes, the profit is rising that's where we see the benefit. So when you do a bridge, you will not do the bridge on a per tonne basis having the fixed cost benefit, but on the whole EBITDA. But let's put that issue aside and we can talk about that later. I think the key point in Europe is twofold. Number 1, the translation impact is significant.
It's about $51,000,000 So on a euro basis, the increase is greater. And number 2, I think on the margin, there is an inventory lag in Europe as well. So when you look at the cost of our inventory, it is higher than where the spot pricing is. So I think the what people are suggesting or what may be an upside to our guidance is if we get the full benefit of the fact that raw material costs have come down and prices remain where they are, then there should be an increase in margin in Europe as well. The third thing I would say is that the impact of raw materials is also not as pronounced in Europe because clearly the euro has weakened and all the raw material pricing is in dollars.
In terms of that raw material benefit, is that something that should start come through in Q2?
Yes. Q2 normally is Q2 should be stronger for Europe. And in terms of raw material benefits, yes, some of that is coming through Q2 and Q3 as well.
Okay. Thank you.
Sure.
Thanks, Peter. So we'll take the next question from Tony at Cowen, please.
Thanks very much, Daniel. Good afternoon. I've got two questions here. First, it was very encouraging to hear your comments about the destock in the U. S.
Coming to an end, but you also sounded a cautionary note on U. S. Manufacturing. So I was wondering if you could elaborate there. And secondly, question about mining North America.
It's unclear to us where SR Minnesota where that progress stands today. But if need be, would you guys be able to let your contracts with Cliffs expire and source your iron ore needs from your Canadian mining ops? And I guess along with that, if you could indicate to us what you think your delivered cost might be to your mills in the Great Lakes? And then I guess if you've begun any early discussions with Cliffs at this point? Thank you.
I know it's a lot, but appreciate any thoughts on these.
I didn't catch
the first question.
Just on the manufacturing commentary, Niel.
Yes. No, I think Tony, we again, the one market that is somewhat important to us, maybe less to some other folks or less than the industry as a whole That is a concern is, of course, energy. That's actually a bigger market for us in Canada. And we're a big player in the construction market in Canada and actually the weak energy market in the western part of Canada is affecting construction there as well. But I think in general in manufacturing, we're still seeing from our customer base relatively good demand.
Again, automotive is by far our biggest, most important market, about 35% or so of shipments in North America. So and that I think is continuing to go great guns and we're actually continuing to grow share in that market. So certainly there's concerns about the strong dollar and what that does
to the
manufacturing sector and then competition in traded goods. There's concern about some of the most recent macro statistics for the U. S. Economy, but I think we're seeing still good performance and good demand from our OEM customers with the exception of the energy sector. And even within energy, most of our sales actually are into tank cars, line pipe, more energy distribution, which I think continues to be relatively good.
On the mining, I mean, it's very difficult, I think, for us to comment on specific supplier relationships and so on. I think we have an arrangement with commitments on their part about when they will be able to provide material to us. You mentioned about will the contracts with Cliff end, will the course still end? I think we now have volume contracts. We adapted one contract that it ended in 2015.
NPD is a kind of a joint venture, with the larger contract we have with Cliffs. And where I think we're always aware that this is a situation that needs to be discussed And so we continue to discuss that with them. We're still a ways off, so it's maybe not so urgent. And I think we'd always, if the necessity was there for whatever reason, we always have the option to bring material in from Quebec. Now it's an opportunity cost for us because we could be selling that elsewhere, but if that was the best answer for the company as a whole and something we can explore.
The logistics are a little bit depending on where you're going to. And typically the logistics cost to our Cleveland facility, it's kind of a coin toss between bringing material from Minnesota versus bringing material from Quebec. But to the plants in the Chicago area, then there's a logistics penalty to have to bring stuff in from Quebec versus from Minnesota or Michigan.
Thanks, Luke.
Great. So we'll take the next question from Philip at ABN IRROW, please.
Yeah. Good afternoon. Thanks for taking my question. I have actually one question left. That's on the CapEx.
You reduced the lower the guidance. I I was just wondering if you could give a split of the part that's caused by the foreign exchange and the part that is caused by postponement of some projects? And as a follow-up on that, could you also explain whether that is driven by that you're seeing less demand in certain markets that you've been postponing CapEx or that it's balance sheet driven? And how much more flexibility do you have going forward to postpone projects?
Yes. Thank you for your question. So CapEx reduction is about $400,000,000 Roughly half is FX. And when I say FX, what I mean is we have a euro budget for CapEx for 2015, a Brazilian real budget for 2015 and these segments are honoring the local currency budget. The other half is primarily mining projects that have been postponed or put on hold.
So it's not really impacting the steel business as much as it is on the mining side.
Okay. Okay. Clear?
Great. Sorry, carry on.
Yes. And maybe just on I don't know maybe on the steel business itself. Is there any are there any projects that you still have flexibility to postpone and to put them on hold if the market does deteriorate further than you actually expected? I could imagine, for example, Brazil, where they're concerned still on the growth?
Yes. So Philip, if you look at the $3,000,000,000 number, there's not that much growth CapEx going in finally.
Okay.
So Brazil, we had not restarted the upstream in Mont Lebaud. There's no short term plans to restart that either. And the remaining growth CapEx that's going in on steel is primarily in Argentina, where there's a very strong business case. It's cost driven as well primarily cost
driven to upgrade our finishing facilities.
And the other aspect is, finishing facilities. And the other aspect is more or less what we call franchise businesses. So this is to maintain and safeguard our quality capability. The biggest driver of that is automotive. And as the demands continue to increase for even more lightweight steel, we are upgrading some of our finishing equipment to make sure we can supply that demand.
So apart from that, there not really any other growth CapEx that is occurring in the steel business.
Okay, clear. Understood. Thanks.
Excellent. So we'll take the next question from Luke at Exane please.
Hi, gentlemen. Most of my questions have been answered. I would still have one however with regards to Brazil. I know you touched upon already on that. But willing to have a bit more clarity as to how you would expect profitability to evolve here going into the next quarter in kind of similar comments you made on other divisions?
Thank you.
Yes. I think, obviously, we've talked about some much stronger headwinds in Brazil and downgrades to the projections of again all the kind of macro fronts. Now again, I think part of that at least is kind of, let's say, fiscal medicine that's been established to put the economy in a sounder footing. Hopefully, that bears some fruits towards the end of this year into next year. But it's a tougher environment than what we even expected as we put our business plan together.
I think we do have the advantage in Brazil of, as we've talked about many times, a very extensive and well established distribution network, downstream, value added processing, etcetera. And I think that's helping us to maintain a relatively strong position there and to have relatively stable profitability in that business despite those headwinds. I think as time wears on, though, that becomes an increasingly challenging balancing act to get there. We have a few with the real weakening, but actually it's been relatively volatile the last few weeks. So it strengthened a bit again.
It is difficult for us to even as we've increased real prices to some degree in the 1st part of the year, particularly on the long side of the business, you don't see that showing up when you translate into dollars. So it's that's one of the headwinds. Certainly, we're helped by the exchange rate on the cost side, but it's difficult with the headwinds on the to get the full EBITDA
recognition in dollars, given
that they'd have to push the prices up to get there. And obviously, given that they had to push the prices up to get there. And obviously, we're looking to be need to be competitive with imports in that market as in every other market. So I think that's the major challenge. We're continuing to look at ways very actively to get our costs down.
We're moving into more from construction, for example, in our long product business, which is a very the more challenged market segment into industry applications, which has had a little bit more opportunity for us and stuff. So we're really working hard to optimize. We've got a good team there that's able to do that. But again, the macro environment is quite a challenging one. The other point I'd make that's important about Brazil is that it's particularly on the flat side, but for the whole business, somewhere around 35% or so of our production is exported.
So obviously, you don't and those are all dollar denominated, you don't have the dollar translation impact there. But that's been a very difficult market, particularly on the slab business in the first half of the year, pressure from the political developments in Russia. I think we're seeing some prospects for that to improve in the second half and better realization in export markets where we're quite cost competitive now in Brazil. I think that's a potential upside, maybe to offset some of the pressures on that in the domestic market there. But through Q1, I think the team there has done an excellent job of dealing with those headwinds and still if you look just at the domestic market providing still good returns particularly given what they're up against.
Thank you. Great. Thanks, Lives. So we'll take the next question from Rochus at Kepler, please.
Yes. Thanks for taking the question. Just a few points left from my side. Maybe another way to look at the guidance. I guess, Atigi, you talked about the assumptions for the low end of the guidance range.
If we consider that the 2nd quarter is probably not really getting better compared to the Q1 based on the realization of the lowest steel prices then it appears that you have to make up for less than for more than 50% of the €6,000,000,000 guidance floor in the second half and this is happening against a weaker seasonality in Europe. So on a regional basis, what are the drivers to have potentially sequentially better EBITDA realization in the second half to get to the €6,000,000,000 That will be the first question. Then just a follow-up to the previous Brazilian question. I guess with the restart of the said furnace, I think your production expectations have been previously pretty high. And I think the expectations were in direction of like 7,000,000 tons.
Is that still valid in the light of the margin realization you have in the international export market? And then on the volume guidance, I guess you've taken that down from 4% to 5% to 3% to 5%. What are the specific regional adjustments you where you're getting on your product portfolio a little bit more careful? And finally on ForEx, can you give us a sense what the ForEx effect was on your net working capital movements? That's it from my side.
Okay. A lot of questions. I'm going to try and go through some of them and then I'll get Lou to talk about Tuberao and 7,000,000 tonnes and competitiveness vis a vis the export markets. So in terms of guidance, I think, first of all, if you look at Q1, you add back the owner's contract $1,440,000,000 multiplied by 4, you get roughly $5,800,000,000 So very close to the bottom end of our guidance range. In terms of sequentially, what happens in the second half versus the first half.
So let me talk about Europe again. I think in Europe, I think the key point is that, look, volumes have gone up quite a lot, but we don't see that margin benefit, because we don't have the lower cost of raw the impact of lower cost of raw materials through the inventory. So there's no margin benefit actually. The impact of the increase in volumes is eaten up by a negative price cost squeeze. Now as we go through the year, there is a possibility of margin expansion if prices remain where they are and we get the full benefit of lower cost raw materials.
So that clearly is the cost reduction aspect that we spoke about earlier in terms of what needs to be achieved. In terms of other sequential effects, we went through NAFTA where we talked about the fact that the de destock is over, lead times are improving, the level of imports are also showing some data, the level of imports is declining. So we expect NAFTA volumes to do better. We also expect Calvert volumes to do better in second half versus the first half. And then we talked about ASUS, where ASUS has seasonally lower volumes in Q1, and we expect volumes to increase in ASUS.
We talked a lot about mining, but in mining, clearly, we're making progress in terms of cost reduction. So that will have some impact in the second half versus the first half. In terms of ForEx effect, what was the question on the working capital? So the working capital ForEx effect is very similar to the working capital investment in ForEx. So it's about $1,200,000,000 is the ForEx impact on working capital.
Lou, do you want to go through the Brazil Tubarral?
Yes. I think Tubarral, we're very comfortable with the 7,000,000 tonnes there. There's no market constraint connected with that. Knock on wood, we have good equipment reliability and so on. But again, I think we're seeing very good results there, good performance, good cost, etcetera.
And I think with the quality of that facility with the depreciation of the real and going through the plant and the related fixed cost absorption, there's a lot of positives for the cost position of that facility. So even with the current slab environment, we're EBITDA positive with the slab sales that we make. So and I think looking forward, as I mentioned, I think you have a couple potential positives in the market with the ruble appreciation from the extreme collapse that we saw in the Q1, as well as some inflation in the Russian economy that should support higher prices in that product coming out of that region. I think the recent movement in iron ore, even if it's not sustained, it does tend to change the psychology in the buying community a little bit. And as Aditya mentioned, we'll have more volume.
We expect more volume at Calvert as you see the customers start to come back in the U. S. And that Tubra is certainly one of the customers, one of the outlets for it is as Calvert ramps up its capacity. So I think we have no doubts or concerns about the 7,000,000 tons. And I'd say even at very weak Q2 slab prices, this is we're still right around breakeven, but we're not into contribution margin land there.
So the cost structure is very, very good there.
Okay. That's very helpful. Just for clarification on the work on this working capital question. I guess the increase in working capital was €1,200,000,000 So that was did I get it correct? That was all driven by ForEx now?
No, no. So the cash investment in working capital is RMB1.2 billion. You don't see that in the balance sheet because there's a reduction in the dollar value of ForEx by roughly RMB1.2 billion as well. And the reason is because we have a lot of euro denominated working capital. We have a lot of Brazilian working capital as well as Canadian dollar.
And as those currencies have depreciated, their working capital translated into U. S. Dollars is worth less. Is that
clear? Okay, got it.
Sure. Great. Thank you. So we are running short of time now, but we'll very quickly move to Phil Gibbs at Key Bank Capital Markets.
Thanks very much for taking my question. I appreciate it. Aditya, on the Q1, if you add back that inventory write down, I assume it's about $100,000,000 that would get you to about $40 a metric ton in profitability when you also add back that contract hit. Are you suggesting that the second quarter will be at that $40 a ton level or be below that level? I was just not sure about that.
Yes. That's a very specific question. And unfortunately, I can't give you a response. I can just repeat what I said. And I think you got all the points that had said earlier.
But we expect NAFTA EBITDA to be better than Q1. And when I say Q1, I mean it on an underlying basis, which is roughly $122,000,000 So I expect it to do better than the Q1 number.
Than the reported number?
Reported plus the onerous contract charge. Okay. Underlying number is about $122,000,000 Hence, I expect it to better than $122,000,000
All right. Perfect. And then just one more just on the Chinese macro if I could. From your perspective, are you thinking that the Chinese stimulus that's going through right now is merely going to support a flattish consumption forecast for 2015, meaning do they need that stimulus to basically maintain the status quo?
Yes. Our forecast for China show virtually 0 to slightly negative real steel consumption growth, right? So there's an apparent growth, but that's primarily because in 2014, we had negative apparent growth as there was inventory destock in China. And on construction, we're still expecting a negative year on year change in output, so roughly about 3 percent down in construction. But the way we get to a flat growth of sea demand in China is because auto is still doing well.
Auto, we still expect growth and same in the machinery segment in China.
Thanks. I appreciate you taking my questions.
Sure.
Great. So we'll move to Brett at Jefferies, please.
Hey, guys. It's a question you guys get often, but the aluminum flat rolled story seems to be talking about sort of sequential, I don't know, 30% CAGRs in terms of their market share and that sort of thing. Can you give some examples of kind of what you're doing in kind of the latest round of this battle? And talk maybe about an example of where someone could have gone to aluminum and instead stayed back with steel?
Yes. I think we really would prefer that our automotive customers are the ones making those claims and talking about that. I think as you know the major battlefield or the most obvious battlefield here is in the pickup truck region with the announcement of the aluminum intensive F-one hundred and fifty. I think we have mobilized more or less the whole company to say, look, this is something we have to we've been working on it already, but this is something we really have to redouble our efforts to attack and working with the with Ford for that matter, but also with other OEMs, particularly in that particular vehicle segment. And I think we've been pleased with the kind of reception that we've had.
I think part of the reception is that we've been able to bring in our kind of material science capabilities to bear even to help influence design decisions or to illustrate some design alternatives or options that would achieve what we've kind of proven. I'd say with existing products, much less ones that are under development and likely to be commercialized soon, is a 23% reduction in pickup weight for standard kind of vehicles. So again, I think it's up to other companies to customers to announce those sort of the impact of the benefits for us of those kind of efforts. But I think if you I don't know if you're
coming from
the states, but if you read the lines of the commercials for the light trucks, I think that there's a lot of steel being mentioned in the products being offered by other OEMs other than Ford. In terms of specifics, products, I'd say the one that's kind of the most highest profile for us is if you look at the door ring that we developed jointly with Honda and with Magna, this is a part that I think was clearly being heavily promoted by the aluminum sector. This is a very sophisticated concept that combines both our advanced high strength steels, particularly the press hardenable steels as well as proprietary laser welding techniques that allows a very substantial reduction in weight as well as an interesting design concept that I think now is first pioneered by Honda, has won a lot of awards in the industry, in the automotive industry and I think is potentially on the way to becoming sort of a standard in terms of door design. So that's probably the most salient example, but I think there's many others companies and even designers at major OEMs that talk about seeing no need to consider materials other than steel, in large part because of the progress we've been able to make and continue to make in introducing new weight saving products.
Thanks, guys.
Yes. I think, and Ethan, just that's a very brief overview of the sort of update on auto and all our efforts there. I think now is a good time to flag for those who are not aware that we are having a specific event on the 3rd 4th June to address this topic, R and D and specifically what we're doing in automotive product development, how we're working with our customers and providing solutions. And so that is coming up on the 3rd June followed by a site visit on 4th to actually see these products in process. So for those who are not aware of that trip, do get in contact with us and we can give you the details.
But we are running out of time now. So we've got time for one more question, which we will take from Charles at Bradford Research, please.
Good afternoon.
I don't know if you saw the comments made by U. S. Steel's CEO, but he's claiming that without tariffs on Chinese steel, the American steel industry won't survive. Given they haven't even filed a case yet, presumably, you might have a different feeling Or if it's similar, what kind of tariff are you talking about?
I think it's very difficult for us to comment on what the competitors have said. I think I wouldn't want to challenge that. I'm not familiar with the exact quote. I think clearly we're all very concerned about the surge in imports. And I think a lot of it particularly, you look at the sort of phenomenal volumes coming out of China, D.
C. Mentioned already, in January, dollars 120,000,000 ton annual rate. This is a huge challenge and issue for the U. S. Industry, but even for the entire global industry.
So I think we would certainly support initiatives to say that needs to be done on a fair basis and the kind of surge that we're seeing, the economics of that material and so on is appropriate. Whether it means the total collapse of the Western world as we know it, that's a bit I don't think at least I wouldn't want to go that far.
Thank you.
Okay. Thank you everyone for participating in this call and look forward to be talking to you for the next quarter's call. Have a good day.