ArcelorMittal SA (MT) 2013 Q4 法說會逐字稿

Good afternoon, everybody, and good morning to those joining in some of the North American markets. This is Daniel Fairclough from ArcelorMittal Investor Relations. Thank you for joining us today on this conference call to discuss the fourth quarter and full-year 2013 results. First, I'd like to remind you that this call is being recorded. We will have a brief presentation from Lakshmi Mittal and Aditya followed by a Q&A session. The slides for the presentation are available for download on the website. The whole call will be limited to one hour so given this limited time and as a consideration to everyone, can I ask you to limit yourselves to just two questions. (Operator Instruction) And with that, I will hand over to Mr. Mittal.

Thank you, Daniel. Good day to everyone and welcome to ArcelorMittal's fourth quarter 2013 results call. I am joined by this call today all the members of the Group management board. Before I begin the presentation, I would like to make three key points. My opening point is improvement. At the beginning of this year, I stated my opinion that our results for the second half of 2012 would mark the low point of the cycle. The results for this quarter, the second half, and indeed 2013; as a whole, all show clear improvement on an underlying basis. Our fourth quarter shipments are up 4.5% year-on-year continuing the trend we observed in the third quarter. And looking at our EBITDA, the year-on-year comparisons show the continued contribution from our cost optimization efforts and mining expansion.

My second point is progress. We have made progress in several areas in fourth quarter. We successfully ramped up ArcelorMittal Mining Canada capacity to 24 million tonnes per annum rate. We announced the acquisition of ThyssenKrupp, Alabama to expand our footprint in the growing NAFTA automotive and energy steel markets. And we have reduced net debt to the lowest level since the merger in 2006. My final point would be on the outlook. While not without risk and some uncertainties, the leading indicators for our business are positive. As a result, we expect our shipments to increase around 3% in 2014. Together with our continued focused efforts on cost optimization and the growth in our mining business, this should support higher EBITDA in 2014.

Moving on to the agenda on slide number 2. As usual, I will begin today's presentation with a brief overview of our fourth quarter and year-end results followed by an update of our recent developments. I will then spend some time on the outlook for our market before I turn the call over to Adit. He will go through the results for the fourth quarter in greater detail and provide an update on our guidance for 2014. Turning to slide 3, I will start with safety. The lost time injury frequency rate in 2013 improved to 0.8 times. On the left hand side, one can see the clear progress we have made in recent years reflecting our focus on this priority.

In October 2013, this effort was recognized by World Steel Association where two of our units that received Performance Excellence Awards, Lazaro Cardenas in Mexico and Unicon in Venezuela. As a Group, we are pleased to see our focused efforts being reflected in our improved safety performance. While our fatality frequency rate decreased by 18% approximately in 2013, our ultimate objective is zero harm. A specific focus in 2014 will be on contractor performance as well as on those main causes for the 2013 fatal accidents. Turning to 2013 highlights shown on slide number 4. As I mentioned in my opening remarks, 2013 has seen an improvement in our underlying profitability.

Steel shipments increased marginally and there was a 4% decline in average steel prices. Yet on a comparable year-on-year basis, there was a clear 10.7% underlying improvement in EBITDA. This was driven by the 22% increase in market priced iron ore shipments and the benefits of our cost optimization efforts. While we did report a net loss in 2013 year of $2.5 billion, which was impacted by exceptional items totaling $1.7 billion. More importantly in my view, we were free cash flow positive in 2013. Cash flow from operations totaled $4.3 billion and more than exceeded the reduced CapEx of $3.5 billion. As a result, we were able to reduce net debt by $5.7 billion in 2013.

A key area where we made significant progress during the final quarter of 2013 was M&A where we announced our first significant acquisition since the crisis. I'm on the slide 5. Together with Nippon Steel and Sumitomo Metal Corporation, we have agreed to acquire ThyssenKrupp's rolling and finishing facility in Alabama. While the acquisition will have a minimal impact on our balance sheet, it is significant in terms of our strategy. This is one of the most modern advanced steel finishing facilities in the world with a powerful state-of-the-art hot strip mill, well suited to supply North America's fast growing demand for advanced high strength steel. We have recently received the DoJ approval from the US and remain on course to secure other regulatory approvals and expect the deal can be completed during the first quarter of this year.

Moving on to the development of our mining business on slide 6. We are making continuous progress on our plan to take iron ore production capacity from our own mines to 84 million tonnes capacity by the end of 2015. We are pleased to report that on top of that, the Mining Canada expansion is complete with a full 24 million tonne run rate production achieved in December. We also had a very good year in Liberia where operations are running well. We achieved record production in 2013 with more than 150% increase in shipments to over 5 million tonnes. We are progressing with our second phase expansion in Liberia. We now have all the environmental permits, major equipment procurement is complete, civil works have commenced at the mine, and work is continuing in processing sites, and it is also work is being completed at the Buchanan port. We still aim to complete the expansion before the end of 2015.

On slide 7, I want to touch now on CapEx and recap on what we are doing to support and develop our franchise steel businesses. Now that we are over a significant hump in our mining group CapEx, this has freed up capital to selectively restart some steel projects. Our overall CapEx budget has not increased, but due to some slippage last year, the CapEx expense in 2014 will increase slightly. To recap the key steel projects we are developing. In Brazil, the first phase expansion in long steel products is focused on downstream activities including a new wire rod mill in Monlevade as well as further investment in Juiz de Fora to raise melt shop and rebar capacity. The project is supposed to be completed by the end of 2015.

In Canada, we restarted our optimization of the galvanizing operations in Dofasco, which will involve the construction of 660,000 tonnes heavy gauge galvanizing line. In China, we are making good progress in developing our automotive steel capacity. The construction of the VAMA steel complex is proceeding well and we expect to produce the first coals in the second half of this year. Finally in Argentina, we are constructing a new 400,000 tonne rolling mill that will also enable our Acindar to optimize production at its special bar quality rolling mill in Villa Constitucion.

Moving to slide 8, I want to provide an update on asset optimization, one of our key focus areas. In Liege, the industrial plan has now been completed. Mothballing of the facilities are underway and we are proceeding with the next steps of the social plan. As one can see on the chart on the left, including residual cost effects, we have now exceeded the targeted $1 billion level of saving on a run rate basis. These residual costs will disappear from the system as we pass through the various legal and process milestones. The cost of the assets optimization process has now been accounted for. This includes $1.4 billion for restructuring cost and a further $800 million of non-cash fixed assets impairments. I consider this an excellent investment considering the success of the program and the returns visible in our financial results.

In addition, the Company does not anticipate any further significant charges in relation to the assets optimization as announced is essentially completed. Excluding the impact of DDH, EBITDA for our Flat Carbon Europe segment was over $700 million higher in 2013 as compared to the same period of 2012, an improvement of $26 per tonne. Next slide, ArcelorMittal is also extremely focused on our $3 billion cost optimization program. This program focuses more on variable cost reductions in our plants than on fixed cost savings although these will continue to be substantial. During 2013, we captured annualized savings of $1.1 billion and expect to achieve $2 billion on an annualized basis by the end of 2014. This provides a key support to our results. This is a very powerful program and I remain convinced that it is not something that all of our competitors can match. As a result, I expect the business to retain the majority of these savings.

Next I will discuss our market outlook. Manufacturing output in the developed markets expanded during fourth quarter at the strongest pace for over two years and is continuing to grow during first quarter 2014. As one can see on the chart on the left of this slide, the ArcelorMittal weighted global PMI at 52.9 in January remains supportive of improving industrial demand despite the signs of weakness in some emerging markets and impacted in the US by severe weather condition. In the US, underlying fundamentals continue to be positive, auto sales and appliance demand remained robust, steel demand in the second half of 2013 benefited from an end to destocking and rising underlying demand. The same support exists for the steel consumption during the first half 2014 with demand likely to be strongly up versus the same period of 2013.

In Europe, the Eurozone manufacturing PMI in January has risen to its highest level since early 2011 and has been remained above 50 for six months. European manufacturing is expected to continue to grow during first quarter of 2014 and EU car registrations are also rebounding. The recovery will be constrained by weak consumer credit and high unemployment, but underlying steel demand is rising. Moving to China, steel demand continues to remain robust due particularly to auto production, continued growth in infrastructure investment, and the strength of newly started real estate. However, we still expect underlying steel demand growth to slow in 2014 as infrastructure spending is impacted by weaker local government funding and as the property market loses momentum. Overall, we expect global steel demand growth in 2014 to be between 3.5% and 4% with US growth of between 3.5% and 4.5% and EU growth of between 1.5% and 2.5% and China between 3.5% and 4.5%.

With this, I hand it over to Adit, who will discuss the financial results and guidance in more detail.

Thank you. Good afternoon and good morning, everyone. I'm on slide 12 and I will start with the EBITDA bridge. The bridge shows a 11.5% EBITDA improvement from third quarter to fourth quarter 2013. You can see from the bridge very clearly that our steel EBITDA improved significantly. There was a slight negative impact from volume, which declined in Flat Carbon America because of seasonally weak South America as well as seasonally weak North American volumes. We also had seasonal factors impacting our South African business, which were offset in part by increases in volumes in Flat Carbon Europe and Long Carbon. Clearly, the negative impact of volume was more than offset by the positive price/cost benefit primarily in the Flat Carbon Americas and the Long Carbon business.

In our mining business, there was an increase in marketable iron ore shipments in Q4 driven by improved volumes in Mexico, Liberia, and in ArcelorMittal Mines Canada following ramp up of the expanded capacity. Turning to slide 13, this provides our P&L bridge. As there were various charges during the quarter, I will walk you through the key reasons for some of these charges. As you know, during the fourth quarter we booked impairment charges of $304 million. These included $181 million related to the Thabazimbi mine in South Africa following transfer of the asset to Kumba as part of a new iron ore agreement with Sishen. This provides immediate cash benefits to our South African business and reflects the capital we have invested in Thabazimbi so far. $61 million related to the now discontinued Mauritania iron ore project. In addition, we booked restructuring charges in the fourth quarter totaling $379 million primarily related to the industrial and social plan for the finishing facilities in Liege, Belgium.

As you heard earlier, the asset optimization plan is now largely complete and we do not except further charges due to the AOP plan. The loss from equity method investments and other income in Q4 was $453 million as compared to an income of $53 million in the third quarter. Fourth quarter was negatively impacted by a few factors. The first one being a $200 million impairment related to China Oriental, this follows our review of their future expected cash flows. A $152 million charge on the agreed sale of Kiswire steel cord distribution business, we still think this was a good idea to sell the business as we generated cash from the transaction and it was sold at a very attractive multiple. $111 million impairment of our investment in Coal of Africa and a $57 million charge related to the partial sale of our Erdemir investment.

We also took the opportunity to settle various tax litigation in Brazil resulting in a $302 million amnesty charge in Brazil. The terms of the amnesty were favorable as half of the cost is adjusted against existing NOLs and the remainder is the 118 months payment schedule. Overall, our net loss was $1.2 billion for the fourth quarter compared to a $0.2 billion loss in the third quarter 2013. Excluding these exceptional items, we should have had positive net income in the fourth quarter. Next we turn to slide 14, which has the waterfall taking us from EBITDA to free cash flow. During the fourth quarter, we released $0.8 billion in terms of operating working capital, primarily as a result of lower receivables. Rotation days decreased to 57 days from 62 days in the third quarter. The third bar shows the combined impact of net financial costs, tax expenses, offset by other cash inflows including VAT receipts.

So the $2.7 billion of cash flow from operations in the fourth quarter more than covered CapEx of $1 billion resulting in positive free cash flow of $1.7 billion for the quarter. On slide 15, we show a bridge for the change in our net debt from the third quarter to the fourth quarter. The main component of the debt reduction during the fourth quarter is the positive free cash flow described earlier, $0.3 billion of M&A proceeds from the sale of 6.66% stake in Erdemir, offset by $0.2 billion ForEx and others. As a result, net debt decreased by $1.7 billion to $16.1 billion during the fourth quarter. You should anticipate an increase in net financial debt in Q1 due to investments in working capital as well as the redemption of an equity instrument, our perpetual for $650 million and the cash impact of the closing of TK Alabama.

On slide 16, we show the change in our deferred employee benefits during 2013. We have a reduction in employee benefits of $1.7 billion, which is the result of an increase in long-term yields. For ArcelorMittal, the weighted increase in discount rate is 0.6%. This resulted in a reduction of $1.7b. We also had higher earnings in our plan assets, which led to further reduction of $0.7 billion. Along with more cash contribution versus our P&L expense, our overall deficit declined by $2.6 billion in 2013. Turning to the last slide, which is our guidance. As you know, the Company expects EBITDA of approximately $8 billion in 2014. The key assumptions behind this framework are as follows. The current economic outlook and our forecast is for global apparent steel consumption growth in 2014 of approx. 3.5% to 4.0% versus 2013.

ArcelorMittal expects its steel shipments to increase by approximately 3%. Mining volumes will increase further now that the expanded capacity at ArcelorMittal Mines Canada reached its full ramp up rate in December 2013. This should underpin a 15% expansion of marketable iron ore volumes for the Company in 2014. The working assumption behind the 2014 EBITDA guidance is an average iron ore price in line with current consensus expectations. Due to improved industry utilization rates and the further contribution of the Group's asset optimization and management gains of cost optimization programs, steel margins are expected to modestly improve in 2014. CapEx guidance for the year is approximately $3.8 billion to $4.0 billion. And lastly, our medium-term target of net debt of $15 billion is maintained.

This now concludes our prepared remarks and we are now ready for your questions.

Thank you. (Operator Instructions) Jeff Largey.

Jeff, you there?

Yes, I'm here, but I don't think you can hear me

Yes, we can. Thank you.

Okay. Sorry, I'll just start over. Congratulations on the progress being made. I just wanted to maybe expand a bit on the outlook and the guidance framework, particularly the comment on the moderate improvement in steel margins. Aditya, I heard how you explained a bit on the background there in terms of the cost cutting and management gains. I was just wondering to what extent have you factored in that we could see weakness in steel prices in the US. Does that moderate improvement in steel margins essentially assuming that you will have prices may be coming down there? Does it assume anything for say European steel prices? I wonder if you could just give some color on that.

Thank you first of all, Jeff. In terms of our moderate steel margins, the underlying assumption is that as we see raw materials decline, we can see that in our consensus forecast for iron ore which is $120 and we see a similar impact in coal where we have an environment in which average pricing so far is lower than last year. We expect the margin of steel to expand. So, this does not imply that steel prices don't come down, steel prices may come down, but not as much as what you would get from a direct impact of the raw material price decrease. So that's the way the consensus is built, that's the way our EBITDA bridge is built from 2013 to 2014 based on expansion of steel margins as raw material prices decline. In terms of specific assumptions, I don't want to get drawn into where the pricing environment in the US is and Europe is. Clearly, our expectation is that as asset utilization rates improve because we see that on a global basis for forecasting 3.5% to 4% growth, that will also provide the basis to improve steel margins.

Okay, great. And just as a second question, in terms of the free cash flow outlook for the full year, I mean you gave a little bit of color about net debt obviously increasing in the first quarter. But would you expect at the EBITDA level that you're generating free cash flow for the full year?

So Jeff, in Q4 clearly we had a working capital release and I will not expect that we would be generating that much of a release every quarter whenever we generate that much of EBITDA. So maybe I'll just walk you through our broad cash flow numbers and how we look at net debt during 2014. I think that the starting point is really $16.65 billion not $16 billion because in January of this year, we have actually the redemption of our perpetual, which is an equity instrument, and therefore you would add that to the net debt. As you heard, we are closing Alabama in Q1 so that's a net M&A outflow of $258 million. Starting with that baseline, I would then add the positive free cash flow of the business, which as you know based on our EBITDA guidance, we expect the business to be positive free cash flow less any investment in working capital. Typically as shipments increase in an environment in which economies are recovering, we do see some moderate investment in working capital.

Right. Okay, great. Thanks for the answers and congratulations on the progress.

Jason Fairclough, Bank of America.

Perhaps could you discuss how do you think the recent emerging market currency weakness will impact your various businesses I guess both in cost terms, but then also in terms of your ability to push through the proposed price increases in Europe?

There are two impacts; one is the accounting impact of this weakening of the currency, second on the business side. From the business point of view, we see that the business in these economies become more competitive because of the local cost in the currencies. At the same time, we have to be wary about the inflation. If the inflation is not catching up, then we tend to gain. At the same time, weakening currency also slows down the development of these countries. If these countries with the weakening of the currency continues to grow and they have a control on the inflation, I think that this is beneficial to us from the cost point of view and we can participate in the growth in the market, this also increases the volume. So, these are the things which we have to monitor country by country that in some countries inflation can remain in control, some countries cannot. So depending on the country's involvement, we tend to gain more upside. In some countries, we tend to gain less.

Just a follow up. So what about the risk of increased import competition in Europe and therefore the flow through on pricing?

Increased risk in imports, these countries do not have a significant impact except Turkey. Other countries like Brazil and you can say South Africa, they do not have major imports -- they do not affect the major imports in these European markets. But clearly, the Turkey situation needs to be monitored because the Turkish lira is devalued so they could impact little bit on the business. But at the same time, their costs are also increasing and while their costs are increasing, we have got several initiatives within our Company on the management gains. So basically, it is more on the variable cost side, we think that we will remain competitive.

Okay. Thank you very much.

And I also believe that governments will be working on the trade actions against such subsidized imports and I hope that we could also get some relief.

Okay. Thank you very much, Mr. Mittal.

Mike Shillaker, Credit Suisse.

When I look at your working capital move in the fourth quarter, obviously you had an inventory build which you would expect into a better market, but you actually had a fairly significant rundown in receivables and increase in payables so that's about $1.6 billion. How much of that, so we can get a starting point, was a genuine course of business and how much of that actually would you expect to reverse out and adjust effectively into year end? And when you reach that $15 billion of net debt be it this year or next, can you talk about what your key objectives are for use of capital? Is it dividend first, is it CapEx, is it a mixture or similar?

My second question. The ACIS is something we've been talking about for sometime in terms of its deterioration. You've obviously got the ongoing risk of a deterioration going forward given its self-sufficiency in Ukraine and Kazakhstan also, which I think we spoke about a year or even a two ago with Gonzalo. What are you doing because it just seems as though this business, which was your jewel in the crown several years ago, is just deteriorating and deteriorating? Is there something you're really stepping up in terms of looking at improving? And frankly, what is it you can do because the performance is just nowhere near; it's 3.5% margin is nowhere near A, the rest of the group and B, where it used to be. Thank you.

Okay. Michael, I think you asked four questions. In any case, we'll start going through them. Your first question $1.7 billion, I think you're ignoring the inventory impact. So, we built $810 million of inventory so net working capital build is $847 million in Q4. The inventory is very much linked to AP, right? As you build inventory, you don't pay your suppliers and so that impact will come in Q1. I will get more specific on Q1, but just so that everyone appreciates. Our actual impact of working capital has not been as significant as in prior periods. If you looked at Q4 2012, we used to have inventory destock as well so you would add to the AR. The same happened in Q4 2011. So, the fact that we're building has actually muted the release of working capital. Nevertheless, moving on to Q1, we are still expecting an investment in working capital. On average a day at ArcelorMittal, a rotation day is worth about $200 million. I would expect to see a movement of up to five days' increase in working capital.

We think that's a reflection of the steel environment in terms of higher shipments and if we're paying back the payables, AR will be going back up and that's the type of movement we will see. In terms of your net debt question, Michael, there's no change in our thought process there. Our net debt target remains $15 billion. We've always said that once we achieve that level, we will look to all of you, look to our shareholders for guidance and then discuss with our Board what is the best use of the free cash flow. Is it to increase dividend? Is it to further decrease net debt? Is it to increase CapEx? Is it to do share buybacks? So I think we should arrive at that level and then begin the discussion process and wish the Board would be intimately involved. In terms of ACIS, I would make a few remarks. I do understand that when you look at it from a third quarter to fourth quarter, you would feel that the business has not performed well.

But I think there is an underlying improvement, perhaps not to the level all of us want because if you looked at fourth quarter 2012 compared to fourth quarter 2013, you can see that negative EBITDA has become positive. As you are aware in the summer of this year, we have put in a new operating management team. The Group Chief Technology Officer, Marc Vereecke, is now the Chief Operating Officer of ACIS. The plan is similar to what we are doing in Europe of running assets stable, running assets full, bringing down the cost of the primary operations, having stable raw material flows. And we're seeing some preliminary results of that actually even in Q4 where in Kazakhstan we reduced the losses from Q3 to Q4. It's not enough I agree, but we do believe that there is more that the team can achieve and as the team achieves that, the performance should improve. There are also some specific factors in ACIS, which should help the performance going forward in 2014. I talked about the Kumba agreement in the previous quarterly call.

As you know, there's an EBITDA benefit of about $65 million to $75 million of changes based on the rand-dollar conversion and then there is a cash flow benefit because we no longer have to spend the CapEx on Thabazimbi, which is also about $65 million. So, that's quite significant. There was this question earlier on on devaluations. So we're seeing Ukraine devalue its currency quite significantly on an export market that's quite positive assuming that there is political stability and the local demand environment is not impacted, inflation doesn't catch up. That's a positive headwind for the Ukraine business as well. Kazakhstan used to sell a lot to Iran and we are hearing the Iranian market is opening up so that creates another opportunity as well. So, to try and conclude on ACIS conversation, we're not satisfied with the progress. A new operating team in place, nevertheless when you look on quarter-to-quarter last year to this year, you can see progress and there are some specific factors which should yield a better year in ACIS compared to 2013.

Thanks a lot. Just one very quick follow-up. If I remember, Kazakhstan used to sell around 1 million tonnes to Iran and I guess you got embargoes fully out of that. Have you heard anything terms of a softening of the stance there?

Yes, I think there is a softening of the stance, but I think it's premature for us to talk about it. We are reviewing that and when we have further updates, we will let you know.

Okay. Well done. Many thanks.

Alessandro, JP Morgan

Congratulation on a very good set of results. Going back to the FX effect just talking about Brazil, if you can give a little bit more color on the net effect you expect from the negative translation into US dollars and the positive effect that you're going to get in terms of export boost. Also because yesterday Aperam, they have confirmed that Brazilian order intake is quite solid at the moment. The second one is related to some sign of uptick in the Southern European space, mostly Spain and Italy, and if so, which segments of the markets you see picking up a little bit? And this related also to your view on the Eastern European countries especially the recovery of the activity, in which segment do you think might recover the fastest? The third one is in the US, do you see some kind of sign of uptick in the non-residential construction? And at last, if you can given a split of the $2.7 billion reduction of the pension between the European and the US assets? Thank you.

This is Louis Schorsch, I'll comment a bit on the South American situation with the FX effect. I think as Mr. Mittal mentioned, there's really two things that would affect the results coming out of that kind of situation. One is the rate at which we can alter or raise our finished product prices in the domestic currency to compensate for the loss in dollar revenues as the domestic currency declines and I think that this is something that we've been able to accomplish. There's typically a lag, but I think everybody recognizes that a lot of the cost base, the raw materials, ultimately the energy, etcetera are dollar denominated and acceptance of that need. Again, there's typically a little bit of a lag as you go through that development. I'll comment in the most extreme case and obviously this is looking backwards better than forwards.

But in Argentina last year, we had inflation of about 26% if I recall correctly and we were able to maintain the financial results from that operation. So it can be done, but again that's looking backwards. In terms of the cost base, I think it depends on the product that we're looking at, but obviously there is some benefit. Again, I don't want to give a figure because I think it depends on the individual product we're looking at, but I don't expect that they have a very significant effect on our export position, if anything helps. But if you look at our exports from that region, by far the majority is the semi-finished products, slabs in particular and of course you have less value added in the slabs so the benefits, let's say, the impact of the lower domestic cost base is certainly much smaller there than if you looked at more of a downstream product. So, I think the challenge is again managing the revenues to keep stable and competitive and balanced on a worldwide basis and I think with some lags, today we've been able to do that.

Do you guys have particular numbers?

Yes. I think, Alessandro, moving on to your last question on the construction market in the US. It's not a market that we participate in directly to any significant extent so we're affected in terms of our results more indirectly as some of our competitors who are more active there, [either they're able] to ship production and shipments into those markets or have to ship them out of it. I think we see in general some gradual, slower than anybody would like, improvement in construction markets in general; but again, I think that's still the gap. As you look at low operating rates at least in the reported statistics although that's driven by some weakness in that (inaudible) construction market because again all the other markets which are really the ones that we participate most directly in are really running at pre-crisis levels or close to it.

So let me just recap Europe on a macro basis and then get into East Europe and Southern Europe. As you know, manufacturing PMI is at the highest level in two years, very positive news. The negative headwind remains unemployment and credit margins remain tight. If we look at Southern Europe, we see the automotive demand environment there is much stronger where auto sales rose across Europe, especially in Q4 year-on-year, and that was really led by UK and Spain. In terms of East Europe, we are still very constructive on the construction segment where we see a lot of infrastructure build occurring in East Europe. Other than that, on the various other segments, it's been quite similar across Europe. So far, our forecast remains that auto production is positive, we see machinery being even stronger than the automotive sector and clearly construction remains the laggard here.

In terms of the $2.6 billion, the first $200 million is the fact that we spent more cash than we expensed. Then the other biggest component of that is $1.4 billion, which is the reduction in the liability because of an increase in discount rates. The biggest impact of that $1 billion roughly or $1.55 billion comes from US and Canada. US is $825 million, Canada is $230 million, and then Brazil is $265 million where we saw a big change in the discount rates of about 3.4%. We model 0.8% for the US and 0.45% change in Canada and the remainder is very small in the Eurozone. In terms of our plan asset performance, we will get back to you with the breakdown by country and I'm sure Daniel can follow up with you on it.

Thank you very much, Aditya.

Tony Rizzuto, Cowen & Company.

Congrats on all the progress. Probably a question for Lou here. What is the price of hot rolled coil that you're seeing hitting the US shores from foreign suppliers right now?

I am a bit hesitant to get into specific pricing discussions, if you will. We've recognized that we're always looking at sort of the arbitrage relationships, if you will, between US price levels and world price levels; particularly looking at Southeast Asia and they're now in probably higher than the norm, but that's been the case since July. So, we are seeing a bit more import pressure. I think we've been able to maintain the high end of that differential, as I said again, for now six or seven months. So, we've been a little bit surprised at that. I think inventories are low, many people are looking for that spread to converge at some point. So, I think we expect that some reversion to the mean as well, but again it's been well-sustained for a relatively long period of time.

I appreciate you can't talk about specifics, but possibly qualitatively as US prices have been pulling back and probably will do so in the near term, are we getting closer do you think, Lou, to establishing a pretty good floor of support?

I think there's still a gap that's a bit wider than the norm. We think today we're $200 around there versus China. We've seen it below, a year ago we were looking at numbers below $90 as a differential. So, I think we would expect some reversion to the mean there. I think there's other factors that drive this; the underlying demand in the marketplace, of course, and then some of the raw materials in particular for our markets, the movement in scrap and we have seen for a variety of reasons scrap trending downwards mainly because there's lower exports of scrap. So, that would tend to bring the overall pricing down without necessarily affecting the prospects too much. But it's actually quite difficult to get some visibility in this environment because of the weather related issues that we have in the States now and typically that would tend to tighten the scraps market quite a bit. So, that's a bit of an unknown or an uncertainty in the market environment now. But again, I think our planning would be that we would see some reversion to a more normal spread let's say over time.

Okay. Can you talk about your planned outages in the US for 2014? And then also where you see the Calvert, Alabama mill; where is it currently operating at present and how is the qualification process coming along?

We had one significant outage in the US this year, maybe it's more significant operationally than commercially. But we are taking our number seven furnace at Indiana Harbor, which is the largest in our system, down for about two months starting in -- the expectation is now around May-June. But this is anticipated; it's not a full rewind, but a repair job. We've been planning this now for at least a couple of years so we expect to be kind of well established, if you will, with slabs on the ground that will allow us to continue to serve the customer base even while we're doing that repair. So, it won't be a surprise, it's been well planned. I don't think there will be a big commercial impact because of it.

And in terms of Calvert, we now expect that with the DoJ approvals that we would close sometime this quarter. We'll get into the facility then to be able to operate it ourselves. I think because of the regulatory requirements and restrictions, we still won't be able to see the customer mix, the order book, et cetera until we actually take control of the facility. So to predict and project how we would operate it, that's something that will have to wait until we actually step in. I believe the facility though is running today at around 3 million tonnes in terms of its production rate so somewhat close to the [above] improvement certainly over the last few quarters in terms of the operating rate and we'd expect to be able to ramp that up as we take over.

I would just add that Calvert does short tonnes and includes some stainless rolls.

Thank you, gentlemen.

Alex, Morgan Stanley.

My first question is on the free cash flow. Did you say that the working capital rotation days should go up by five days during 2014 and is it fair to assume that we are talking about a high single-digit million figure then in terms of working capital buildup?

Alex, I am glad you asked that question. I think my specific comment was in relation to Q1 and it was five days roughly and each day is roughly about $200 million.

Yes. So it's a billion.

Yes, exactly right. That's Q1. In terms of cash flow for the year, working capital is a moving part. We did release working capital in 2013 and in 2012. At the end of the day, there is a small investment in working capital. I would think that is big news because it reflects that the macro environment that we were talking about materializes. We do have the growth in shipments, we do have the growth in margins, and therefore we have to invest in our business, which is including working capital.

Okay. That's fair enough. The other question is assuming some working capital buildup for the full year, is it fair to say that on an underlying basis you should breakeven on the free cash flow given that the $8 billion EBITDA and $3.9 billion CapEx and it should be roundabout breakeven?

If we exclude working capital, clearly we will be strongly free cash flow positive and I don't want to say what the working capital amount is because then we're giving a very specific guidance.

And my second question is on the guidance on the margin expansion. What makes you believe that in an environment with falling raw materials you can keep some margin because clearly when you look on the European market, at least year-to-date we are down $5, $6 versus first quarter 2013?

Okay. Alex, I don't want to get into specific pricing. I think when we talk about steel margins, we're talking about 3.5% growth on a global basis. We've always seen that Group steel capacity utilization around sub-margins normally improve so that's the main driver. Number two, in a stable environment not in a volatile environment, normally when you have some fall in raw material prices as we are efficient producers in Europe and in North America, we can regain some of that fall and that translates into a higher margin. So, those are the two drivers for us and I don't want to get specific on what Q4 to Q1 is and what is the change in raw material pricing. But we see that and so we remain comfortable on our guidance framework.

Okay. Thank you.

Luc Pez, Exane.

First of all, could you indicate if there has been any factoring of your what you consider working capital reduction over Q4 and if so, could you quantify it? And second question is related to the Long Carbon business, which I think is explaining most of the positive surprise on the EBITDA for Q4. It seems that a lot of that is coming from the other contribution, which I suspect is related to Tubular business. So if you could explain a bit as to how sustainable and where it has come from. Thank you.

In terms of TSR, the change from first half to second half is about $300 million. In terms of our Long Carbon business, you're right, the Tubular business did perform well. But if you look through it, you will also see that Europe performed well as well and Brazil was down on a seasonal basis. In terms of the Tubular business, as you know, we had a long strike in Venezuela. The strike came to an end in the third quarter and we were able to catch up in terms of production and shipments and satisfy our customer base. So, you see that pick up in our Tubular business in Q4. I don't expect that level of performance in Tubular to continue into 2014, but I do expect improved performance coming out of our Long Carbon Americas business.

Thank you.

Philip Ngotho, ABN AMRO.

First, maybe on the run rate of the cost saving. You mentioned that at the moment you have for the management gains you have a run rate of $1.1 billion. Could you maybe just give us a bit of an idea of how much of that cost saving that you actually realized you're expecting to still retain? And then also relating to the management gains program, can you indicate whether we can expect any one-off charges relating to that program? I understand that you're not expecting any charges waived for the asset optimization program, but I'm just wondering on the management gains program, are there any charges to be expected there? And then the last question is on the tax amnesty. I was wondering how much of it will be a cash out and within what time frame? Thank you.

Okay. So in terms of management gains, there's no charges because management gains is not a restructuring story. It's really a story in which we are optimizing our operating base and getting variable cost saving. The management gains plan that we have outlined is two-thirds variable cost, a third fixed cost and the fixed cost again is not a restructuring story, it's more optimizing and capturing attrition as we produce more tonnes of steel. In 2013, a larger portion than two-thirds was variable cost so the program has worked as designed. In terms of how much we have, again it's very difficult to create a bridge because clearly our performance has improved 2013 to 2012; to attribute it to a different bucket is a little bit guess work so we don't provide exactly how much is saved. We have always indicated that we do believe a majority of those savings flow through the business and the rest we lose through competition because of the competitive landscape. In terms of the tax amnesty, as I have said in my remarks, the good news is there is very minimal cash impact because half of it is being adjusted against our existing NOLs in Brazil so that's just a reduction of our NOLs and the remainder is being paid out over 118 months. 118 months, so you can run the math on that. It's not a significant amount, it's about $10 million a year.

Thank you.

Rochus, Kepler.

The first question is can you talk a bit about the current demand picture you're seeing in Europe from underlying goals and what you're seeing in terms of restocking and how that fits in terms of your first quarter volume expectations for Flat Carbon Europe? Will that be more in the kind of usual 10% quarter-on-quarter range and how does that fit with your current available production capacity at Flat Carbon Europe? And the second question is regarding the operating issues you mentioned in Brazil. Could you quantify the negative earnings and volume impacts you had from there? And is there anything else material that you're currently seeing in the New Year in terms of operational problems? Thank you.

So in Brazil, the impact we estimate is about $30 million to $35 million in Q4. We don't expect that to continue. There will be some residual impact, but not so significant and so you would see better earnings in Q1 coming out of Flat Brazil. In terms of the 10%, that's normally valid when you have a weak second half in terms of the [balance] sheet consumption. So we actually had quite a strong second half where demand in the second half was [balance] sheet consumption was positive 5.1% and if you remember in the first half of 2013, it was minus 5.2%. So if you look at 2014, we are not seeing that type of change in terms of demand compared to the second half. We clearly are in positive territory, but not those levels.

Maybe it's worth if we talk about Q1 just to comment again on the weather related situation that we have in the central part of North America. I think it's very difficult to predict any kind of numbers or impact. I think when we first saw the severe weather conditions, there's two effects I can mention. One is it does impact or affect our shipments. The major issues are related to logistics and movement of material, but there's also potentially significant issues with our customers being able to accept materials. We had literally cases of entire road shutdown, truckers not able to move, et cetera. The other impact is we see some very volatile energy prices, we're seeing natural gas prices being up 15% to 20% depending on the region and so on. Now this can be a short-lived anomaly or it can be something that would be more sustained. We don't know because it literally is predicting the weather. But I think when we have the impact in the first couple of weeks, we always think we can make it up, we can adapt to do it. It's now been sustained enough that it will have some impact for us on Q1, again very difficult to give any numbers around it.

Okay. And on the strong performance you have seen in Long Carbon Europe against the usual seasonality, is that driven by the weather in Europe or has that been a reflection of an improving construction environment across Europe and particularly in the South?

We had good performance in volumes in Q4 so there was a recovery that we saw. We saw some of this occur, flat as well where volume in the second half were better than the first half. We also had good cost performance. This is coming out of our Eastern operations where the Long business is actually part of the integrated business and in East Europe we are moving towards a system where we are running our operations full, stable, and that's providing cost benefits. And in East Europe, the larger portion of the business is actually curved to the long side versus the flat side.

Okay, great. Thank you.

Rui Dias, Espirito Santo

Going back to CIS, you were saying that you are seeing some improvement here, but when should we expect this region to achieve a cash breakeven? And for how long are you willing to wait for this breakeven before deciding for a potential divestment from this region? I mean what could trigger such a divestment? Thank you.

Rui, I think the thing to appreciate is that we are reporting the steel results in the ACIS region and there is a portion of the value which is also captured in the mining and that comes in the mining segment results. So what you have to look at the business is as these businesses are very interconnected, theoretically you could separate them, but I think that would not be a very attractive proposition to the buyer so you would basically be sending the packages. If we go to Ukraine, for example, the mine is contiguous to our primary operations. And therefore, you should look at the combined business really on a strategic basis and when we look at that and with all the changes we have discussed and talked about, we see the business on a combined basis being cash flow positive.

Okay, very clear. Thank you.

Bastian, Deutsche Bank.

My first question is again on the Latin American business of FCA, could you let us know whether there has been any negative impact in Q3 from the restart of the blast furnace in Tubarao and if not, do you expect any impact going forward? And then my second question is once again a furlough on the North American business of FCA. Lou, could you please remind us again what is the share of the contract business in the US? I would have expected that you should have seen a pretty good price increase for the contract, which you have based as of January given that we have now seen six to seven months of really strong price premium versus previous price levels and obviously also versus other regions, which is generally a good argument to go back to your clients. And I guess shouldn't this together with a possible uptick in volumes in Europe give some confidence on a sequential EBITDA improvement going now into the first quarter. Thank you.

If I understood then first on the blast furnace in Brazil, I don't think any negative incidents or complications, if you will. We are doing some repairs now on our number three furnace, which is the second largest in the system there in Tubarao, and we would expect to blow that in sometime towards the middle of this year at which point, the current plan is we will be operating the three furnaces in that operation. On the contract business, roughly I would say 50% to 60% is a good number for the North American business. I hesitate a little bit because traditionally we've had about 40% that's been clearly spot, maybe 10% or so that's been indexed and the remainder contract. We have tried to move away from the index contracts to some extent this year, but it may be a little bit more than 50% on the [LIBOR] side of the business. We can't comment on any specific negotiations or situations that I think always appear in a negotiating environment. The discussion is shaped by the spot market environment and spot pricing and of course since we had a relatively favorable spot pricing environment in the second half of last year, at least from August or so, contracts that were under discussion in that period reflect to some extent that environment.

Okay, got it. Then just to follow up on that and I guess what it basically means for the Group. I mean if I basically look at this I think of the rebasing effect so you're telling us that actually we should improve in Brazil in the first quarter. Obviously, some volume improvements in Europe as well along with some possible margin improvements, I guess probably some seasonality in the shipments and mining with maybe the iron ore prices are not the only negative. So, why would actually the first quarter EBITDA not be up versus Q4?

So, that's a good summary. I think the only thing we need to be aware of is Tubular, right. So I had talked earlier about how Tubular had a very strong performance in Q4 and that will be not replicated. So if you take the headwind on mining pricing as well as Tubular and the rest of the environment is constructive and then Lou did mention that it's not clear to us the impact of the weather disruption, it's still early days, the weather disruption in North America.

Brett Levy, Jefferies

With respect to the newly acquired Alabama mill, I mean you gave a little bit of an answer. Can you talk a little bit about kind of what the plan is for that mill? How cash flow negative might it be as we look into 2014? What the plan is to kind of sort of turn it around, maybe shifting some of the order book from some of the other plants? Just kind of a little bit of a sense as to your business plan as you look at this new asset.

Well, I can start on it. I think we view the asset as additive to our existing operation so there may be some optimization for logistics reasons and so on, but again, we view this in terms of the shipments and the revenues as something that'll be an addition. Clearly, it's a facility that's capable of producing and serving very high-end markets. For those that have visited, you recognize that the principal target markets there are automotive and energy. We are obviously big players in those markets already, but certainly I think that allows us to optimize in terms of the shipment. So a lot of the energy market, hot roll going into tube making, some of the biggest tube makers are within 100 miles or so of that facility so certainly I think that strengthens our position in that operation. We again need to get in there I think and really see what the current order book is. Obviously, that gives us a base on which to build.

We have an arrangement with TK as part of the sale to have a certain level of slabs volume or sort of a base load, if you will, from CSA. And I think as we expand, we would plan to be able to then round that out in large part with our own slabs either from excess that we had in the US or potentially from our slab making operations in Mexico and Brazil. We have indicated I believe that we see important synergies that amount to I think our estimate is around $60 million once we're fully running this facility. And we have said that we see a way with some hard work and so on that this will be EBITDA positive in the first year of operations. So beyond that, I think that's about all we can say at this point until we get in there and can actually report more on the operations and running it up. The facility is a very good one. I think the people are good, et cetera, so we're very pleased about it and confident that we can make it work.

And how EBITDA negative was it on an LTM basis?

I think that's in the announced results. I think you should wait till they do that. We will update you when Alabama is under our control.

Thanks very much, guys.

Alex Hauenstein, MainFirst.

What kind of feedback or indication are you getting out of China regarding the planned steel industry consolidation due to the environmental issues? And the second question, I don't know if I got everything on that or whether you commented on it already, but I was wondering whether you could shed some more light on the newly signed contract for automotive steel in Europe? Thank you.

On the China, we are getting some feedback that in the new policy they really want to curtail some of the capacities which are polluting, which are not following the EPA regulations. And we're hearing that they're very serious to shut down about 60 million tonnes in (inaudible) Province and in the other regions, we are seeing that authorities are putting a lot of pressure on these companies to follow the new EPA regulations or shut down the smaller facilities which are not viable and which are not following the EPA regulations. They have promised, but let us see how much is executed and implemented. You would like to answer, Lou?

Automotive again, I think we don't really want to get into pricing on contractual relations. We do see some modest growth, 1% to 2%, in terms of auto demand in Europe for the coming year so that gives a bit of a positive environment in which they have those discussions.

Thank you very much.

Tom, Theodoor.

Aditya, a question for you. Just following up on the framework for the guidance, would you be possible to give us some kind of clarity of the order of waiting of what the important drivers are? I noticed that you put the moderate improvement in steel margins as point D, is that because it has the least power in terms of driving that $8 billion 2014 EBITDA guidance?

A great question. As a matter of fact, Tom, it's the last item on our bridge so I don't know if that means it's the least important, but it is the last item. I think the first driver of our bridge when we think about it of the deposits is first is steel volumes, I mean clearly 3% increase is quite substantial. If you just look at rough numbers, that's about 2 million tonnes to 3 million tonnes. We talk of fixed cost benefit of between $200 to $250 a tonne. So that's quite substantial, that underpins the macro environment that we are forecasting for 2014. The second volume growth is occurring in mining. I mean we didn't really talk about it in much detail, but you don't see it in the shipment number; but when you look at the level of production of AMMC, it was very strong in Q4 and December we were at full capacity utilization i.e. running the place at 24 million tonnes. So we are forecasting 5 million tonnes more. Our average margin for ore is about $55 a tonne so that's significant.

We talk about the AOP plan being complete, but we still have some residual benefits which are flowing through, that's about $200 million. We have another $1 billion in management gains, we talk about the majority of that being saved so that's a significant driver. Offsetting that is our forecast on iron ore pricing, $120 is about $15 lower than where we were in 2013. That's a big negative because we had the impact of marketable shipments, but we also had the impact on the iron ore price in our integrated operations and that kind of comes back to the previous question on ACIS to some degree. And then there's a small steel margin expansion, which is really driven by increased crude steel capacity utilization so we should have improved pricing. If your question is were EBITDA guidance predicated on improving steel margins, I would not say that. I think there are significant improvement potential within the Company even if we don't get the steel margin driver.

Thank you.

Tim Huff, RBC.

One is on the mining division costs. It looks like you guys had really good cost control over the past year, better than the past three years. Excluding first quarter seasonality, do you think you will be able to maintain that cost level going into 2014 or are you looking for a modest improvement as the ramp-up continues? And the second one just a quick revisit, I didn't actually hear the answer to the pension question that Alessandaro asked a bit earlier. I was just wondering if you could repeat the answer. Thank you.

Sure, I think Bill can talk about mining cost structures.

Mining costs could benefit or continue to benefit as we are ramping up on the AMMC. On top of that, we are focusing on cost reduction in (inaudible) price outlook for iron ore as well.

Okay. So on the mining side, clearly we are forecasting cost improvement in 2014 due to AMMC ramp up. In terms of the pension question, what exactly did you want to know? The breakdown of the deficit reduction, the discount rates, what was the thing that you did not hear?

I think it was the split between regions where the reduction come from or I didn't know if you answered it that way or you could actually split out the reduction and if you could quantify how much of it came from changes of assumptions versus the higher return on plan assets?

So we have provided a split. The global split is $2.6 billion; $0.2 billion comes from higher cash payment versus P&L expense, $1.4 billion comes from deficit reduction that's just an increase in discount rates, and the $0.7 billion is coming from the increase in return on plan assets. So this is not really assumption driven, it's just the actual situation. The $1.4 billion for us is 0.6% on average discount yield change across our liabilities and to be more specific; in the US we have a 0.8% change that's $825 million, Canada 0.45% that's $230 million, Brazil 3.4% that's $265 million, and that's the lion share of the $1.4 billion. As you know, most of our assets are in America so the return that I talked about is driven by our performance in North America.

Alain William. (Operator Instructions)

Could you give us an update on the CapEx in Liberia? Just wanted to make sure that there is no cost overrun there.

We haven't really provided an update on the CapEx of Liberia. We will do that in more detail in the Investor Day. As you know, (inaudible) of the mining division and you'll have a chance to speak in detail of his plans; the mining division, the strategy, as well as CapEx in Liberia.

Seth, Jefferies.

Seth Rosenfeld at Jefferies. Just one last question following up on the mining division. I hear you're making lot of progress in terms of increasing your market price tonnage. In the medium term after Liberia is completed, I was wondering if you can give us a bit more color on the next stage of growth, particularly up at AMMC. You've talked for a while about potential to grow from 24 million to over 30 million tonnes per annum, should we assume that that is still on the horizon or ultimately that that won't be considered by the Board though after your $15 billion net debt target is achieved? I'll leave it there. Thank you.

At this time, we are focusing on completing our existing projects to achieve 85 million tonnes operating capacity by end of 2015 and you know that we have some project going on Baffinland and we have some ideas being discussed. Perhaps when we meet up in March on the Investors Day, we can give you some more medium to long-term view, what are the potential ideas we have in the mind.

Thank you. And just one more follow-up question. In the last full year you saw some strong increases in shipments from Liberia and Canada clearly, but you also noted some weaker production at European, African, and US mines. I was wondering if you can give a bit more color on what drove that drop in iron ore production in some of those regions and if you expect that to rebound in 2014?

Some of that is related to the shipments going to the steel mills in those areas and I think in the US there was weather related drop at the back end of the year. But it's nothing major there. We're expecting volumes to recover with steel demand in those areas.

Finally, thank you very much. Sorry, we could not get through all the questions. I understand there are a lot of questions pending. Please forward this to Daniel and his team. They are all available to answer the rest of the questions. And I wish you all the best for 2014 and look forward to seeing you or talking to you during our March Investors Day. Thank you very much.