ArcelorMittal SA (MT) 2014 Q1 法說會逐字稿

Good afternoon and good morning everybody. This is Daniel Fairclough from ArcelorMittal Investor Relations. Thank you very much for joining us today on our conference call to discuss the results for the first quarter of 2014.

First, I'd like to remind you all that this call is being recorded. We will have a brief presentation from Mr. Mittal and Aditya, followed by a Q&A session. The whole call is scheduled to last about one hour. (Operator Instructions)

And with that I will hand over to Mr. Mittal.

Thank you. Good day to everyone and welcome to ArcelorMittal's first quarter 2014 results call. I'm joined on this call today by all the members of the Group Management Board and the senior management.

My main message to you is of improvement and progress. Despite a lower iron ore price and the extreme weather in North America, we delivered a 23% improvement in underlying EBITDA year-on-year in the first quarter, as well as improved steel market conditions. This reflects the benefits of our cost optimization process and expansion of our iron ore capacity. We continue to make a strategic progress on many fronts. The key highlight of the first quarter was the completion of the Calvert acquisition. This is a very important step that strengthens our franchise in North America. Calvert gives us the additional capacity to supply the award winning solutions we are developing for automotive.

I am cautiously optimistic about the outlook. While not without risk and some uncertainties, the leading indicators for our business are positive. The demand prospects for our core markets of Europe and North America are better than they were at the time of our full-year results in February. As a result, we remain confident that our shipments will 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.

I will begin today's presentation with a brief overview of our first quarter results, followed by an update of our recent developments. I will then spend some time on the outlook for our markets before I turn the call over to Adit. He will go through the results in greater detail and provide an update on our guidance for 2014.

As usual, I will start with safety. The lost time injury frequency rate in Q1 2014 was 0.8 times compared with 0.93 times in Q1 2013. On this chart, you can see the clear progress we have made in recent years, reflecting our focus on this priority. As a Company, we remain committed to this journey for zero harm. We recently held our eighth Annual Health and Safety Day to reinforce this message and ensure that all levels of the organization are focused on this primary objective. There are two focus areas in 2014; contractor performance and the causes of 2013 fatal accidents.

Next, I will turn to the highlights of the first quarter 2014 as you can see on slide number 4. EBITDA for the first three months of 2014 was $1.8 billion. On a comparable basis, there was a clear improvement in our operating results. Steel shipments increased by 2.4% year-on-year and market-priced iron ore shipments grew 28% on a year-on-year basis. Together with the continued benefits of our cost optimization efforts, underlying EBITDA improved by 23%.

Net loss in the first quarter was $200 million, down from a loss of $300 million in the first quarter of 2013. As anticipated, our net debt increased to $18.5 billion in the first quarter of 2014. We believe this is the peak level of net debt for the year and maintain our $15 billion medium-term target.

Now, I move to slide five. I want to talk about the expansion of our steel margins. On underlying basis, the steel EBITDA increased by $14 per tonne compared to a year ago. In fact, all of the steel segments demonstrated improvement during the first quarter with the exception of NAFTA. The decline in NAFTA is fully attributable to the negative cost impacts of the extreme weather in the first quarter.

If energy cost had stayed at Q4 levels, then NAFTA's EBITDA per tonne would have also been higher than a year ago. I am pleased to see the continued improvement in our results in Europe, where EBITDA increased by $19 per tonne year-on-year. Shipment volumes in Europe were 5% above year ago levels. Even allowing for volume impact, we can clearly see the benefits of our cost optimization efforts.

I'm also encouraged by the results of ACIS. Volume increased 2.2% year-on-year and despite the market impact of the political instability in Ukraine, EBITDA per tonne was clearly higher than year-ago levels. This was even after adjusting for the impact of the fire at Vanderbijlpark plant in first quarter 2013. The ACIS results for the two quarters will be impacted by the Newcastle blast furnace reline in South Africa, but this is essential work to improve the sustainable performance.

Moving on to the development of our mining business on slide five. We are pleased to report that we are making continued progress on our iron ore expansions. At ArcelorMittal Mines Canada, as you know, we completed our expansion from 16 million tonne to 24 million tonnes last year and in December achieved a full run rate for both concentrate production and shipments.

During the first quarter, we shipped 4.5 million tonne, which is 1.2 million tonne more than we shipped in the same period last year, despite the exceptionally cold weather. In Liberia, Phase 1 is complete and we are on track for 5 million tonne DSO shipments in 2014. Second phase expansion is proceeding well. We have all the environmental permits in place and major equipment procurement is complete. Civil works have commenced at the mine and processing sites have been completed at the Buchanan Port. This expansion is on track for completion before the end of 2015. In the first quarter, we saw a 28% increase in market priced iron ore shipments on a year-on-year basis, so we are well placed to achieve 15% increase that forms a key part of our 2014 guidance.

Moving on to slide number seven, with the Mines Canada expansion, second phase of Liberia and different end projects, we are making continued progress on our plans to increase our iron ore processing capacity from our own mines to 84 million tonnes capacity by the end of 2015.

Additionally, as we introduced at Investors Day in March, we now have identified some options to stress production from the existing assets base by further 11 million tonnes. The first of these options is in Canada, where it has become obvious that there is a real additional potential. Once we have sustained production at our new rate of 24 million tonne, we will then focus on debottlenecking to incrementally increase throughput. This maximizes the potential of our wholly owned rail and port infrastructure and will also help drive mines, kind of, further down the cost curve. We will eventually need some investment in additional rail sidings and additional conveyor capacity at the port to handle the increased product, but this will be significantly lower than the amounts invested previously.

Moving on to Liberia, second phase expansion involves the construction of a concentrator to produce 15 million tonne of premium sinter feed annually, as well as increasing the capacity of our infrastructure to handle the increased volume. We now see the potential to run second phase and first phase DSO in tandem. This is stressed to 20 million tonne, requires minimal incremental investment, and will leverage the rail and port investments made previously, as well as reduce unit cost even further.

On slide 8, I would like to take a moment to update you on some of the progress we are making with our automotive franchise. As you know, ArcelorMittal remains at the forefront in terms of developing solutions to help our automotive partners achieve their lightweighting requirements. A good example of this innovation is our laser-welded, hot-stamped door ring, which achieved an impressive weight saving, whilst at the same time improving safety performance. This was a very successful joint effort and partnership with Honda and is just one example of how ArcelorMittal is driving steel solutions for our automotive customers.

Another example is our lightweight door solutions. We've had good success in convincing several European OEMs to switch back from aluminum to steel doors. We have now developed a steel door that is a very close match to an aluminum door in terms of weight, but at a significant lower cost. We are now promoting this solution and it is under evaluation at various OEMs. Our view remains that steel remains the material of choice for automotive and that the solutions we have developed and continue to develop offer the auto producers the most competitive route to achieve their lightweighting requirements. We continue to enhance our ability to serve the growing automotive markets.

The acquisition of Calvert cements our position in North America for at least the next decade and is well positioned to participate in the fast growing markets, both in the US and Mexico. This state-of-the-art facility is capable of producing the advanced high strength we need for the solutions we are developing. The integration of Calvert is underway and we are pleased with the performance of the facility so far with 80% of the steel operations utilized. AM/NS Calvert, which is the name of this facility, had EBITDA positive in March, which is in line with our expectations for a positive EBITDA in year one. We continue to expect to be free cash flow positive in year two.

Furthering our global automotive leadership, VAMA, which is our JV for automotive steel in China, is on track and expected to commence production early in the third quarter of this year. Initial capacity is 1.5 million ton, extendable to 2.3 million ton, making VAMA capable of supporting about 10% share of this fast-growing markets.

My last presentation is the slide number 9, in which I will discuss our market outlook, which has improved over the past six to nine months. Our core markets of Europe and North America, which represent around two-thirds of steel shipments, contracted in 2013, but are expected to grow in 2014. Manufacturing output in developed markets expanded during Q1 at the strongest pace for three years, and continued to grow during Q2. As you can see on the chart on the left-hand side of -- left of this type slide, ArcelorMittal shipment Weighted Global PMI continues to indicate improving industrial demand, despite the signs of weakness in some emerging markets.

In the US, steel demand was clearly impacted by the severe weather at the beginning of 2014, but the fundamentals remained positive. Manufacturing orders continued to grow and overall sales and appliance demands are robust. Steel demand is higher than the same period of 2013 and we are expecting demand for the full year to be towards the top of the range we were expecting back in February.

In Europe, the Eurozone Manufacturing PMI has been above 50 for 10 months and together with even higher reading for Czech Republic, Poland, and the UK suggest continued European manufacturing growth.

EU car registrations are rebounding, up 8.6% in the first quarter compared with the same period of 2013. The recovery is still constrained by weak credit growth and high unemployment, but underlying steel demand is rising. Even demand from construction market was higher in January and February as compared to the same period a year ago. The pace of the recovery is slightly stronger than anticipated back in February, so we have upgraded our apparent demand forecast towards the top end of our new forecast range of 2% to 3% versus 1.5% to 2.5% back in February.

Moving to China, auto production rates are robust and there is a continued growth in infrastructure investment. That said steel demand growth is slowing due to declining residential sales and the lack of available credit for newly started real states. Although, we have trimmed our demand forecast slightly, we still expect underlying steel demand to grow by over 3% in 2014. Our production forecast for China are unchanged due to the increase in exports.

Demand in the CIS region has been negatively impacted by the crisis in Ukraine, but our mills in the region are able to sell into the faster growing Middle East and African markets. Overall, we expect global apparent steel demand growth in 2014 to be in the range of 3% to 3.5% and we continue to expect ArcelorMittal' s steel shipments to increase by around 3%.

Now I will 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 am on slide 11, which is EBITDA bridge from the fourth quarter to the first quarter of 2014. EBITDA declined by 8.2% quarter-on-quarter. Let me walk you through the key aspects of the reasons behind this. As we can see from the slide, there was a positive impact from volumes with seasonal improvement in Europe and our Africa CIS division, offset by Brazil, which was impacted by operational issues.

Volume and mix improvement was partially offset by price/cost squeeze, primarily in our NAFTA operations, which were impacted by severe weather. The total weather impact for our NAFTA operations is $350 million, with $200 million in Q1 and another $150 million in Q2. The main component of this weather impact has been a spike in the price of natural gas, as well as the cost of distributing this gas to our operations at Northwest Indiana.

In our mining business, there was a decrease in marketable iron ore shipments in Q1, driven by seasonally challenging weather conditions at ArcelorMittal Mines Canada. Nevertheless, year-on-year productions have increased by 13%. Additionally, the mining division was negatively impacted by lower seaborne iron ore market prices, partially offset by a portion of iron ore shipments from Canada and Mexico that still has the quarter lag system.

Turning to the next slide, page 12, I will talk to you about our P&L bridge. I am focused on the upper half of the slide, which is the chart which shows our Q1 results. Unlike in Q4, Q1 this year there were no impairment or restructuring charges booked. Depreciation was lower at $1.1 billion, compared to $1.3 billion in Q4, following a review of the Company's useful life of assets. Our maintenance practices have technically enabled an increase in the useful life of key plant and equipment. Following a full review, which is anticipated to be completed by the end of second quarter of this year, the Company expects the annual depreciation charge to be within the range of $3.5 billion to $4 billion.

As you can see from the slide, income from investments, associates and joint ventures in Q1 was $36 million, a significant improvement from the previous quarter, primarily because we were not impacted by the impairments we took in the fourth quarter of 2013. ForEx and other financing costs were very similar to the fourth quarter at $380 million. And as a result of these factors, we recorded a net loss of $0.2 billion for the first quarter of 2014 compared to $1.2 billion in Q4 2013.

Turning to slide 13, here we are presenting you with an EBITDA to free cash flow waterfall. During Q1, we had $0.9 billion in investment and operating working capital, primarily as a result of higher trade receivables, rotation days increase to 61 days from 57 days in the fourth quarter. This build in working capital was in line with our normal seasonal pattern along with the $0.4 billion investment in payables, and I expect most of this to reverse during the year.

The third bar shows the combined impact of net financial cost, tax expenses, as well as reversal of non-cash items and changes in other payables, such as employee benefits, payment of provisions and VAT. Negative cash flow from operations of $471 million, combined with CapEx of $875 million, resulted in negative free cash of $1.3 billion.

Turning to slide 14, you have a bridge for the change in our net debt from the fourth quarter to Q1. The main component of the debt increase during the first quarter is the $1.3 billion negative free cash flow as described earlier. M&A totaled $0.2 billion, primarily relating to the payment for the acquisition of Calvert. Furthermore, during the quarter, we redeemed our perpetual bond. This provides direct and immediate cost savings to the Company.

We also recorded ForEx and other charges of $0.2 billion. $130 million of the ForEx impact is primarily due to devaluations in Venezuela and Argentina and the remainder is a dividend payment of $55 million, primarily to our partner in ArcelorMittal Mines Canada.

Let me now turn to my last slide, slide 15. As you know, we are maintaining our EBITDA guidance of approximately $8 billion in 2014. Let me briefly reiterate the key assumptions behind this framework. The current economic outlook, as we just reviewed, and forecast for apparent steel consumption support our expectations that steel shipments will increase by approximately 3% this year. As mentioned earlier, given that Mines Canada is now operating at its full potential, we expect a 15% increase in marketable iron ore volumes for the Company in 2014. Our guidance continues to assume an average price of $120 per tonne for the year -- average iron ore price of $120 per tonne for the year.

Finally, we continue to expect a moderate improvement in steel margins this year. While higher industry utilization rates are a factor, the bigger driver is the further contribution of the Group's asset optimization and management gains cost optimization programs. So these are the assumptions behind our EBITDA guidance of approximately $8 billion. Additionally we continue to guide to CapEx of approximately $3.8 billion to $4 billion, net interest expense of $1.6 billion and maintain our medium-term net debt target of $15 billion.

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

(Operator Instructions) Bastian, Deutsche Bank.

Yes, good afternoon. Its Bastian from Deutsche Bank. I have got one quick question and that one is on your guidance, because everybody is quite focused obviously on the $120 iron ore price assumption, which you left unchanged, while at the same time increased your growth assumption for Europe and NAFTA. So, now looking at price -- cost price, it seems also like at least some of the falling variable cost can be retained on the steel price level. And I know it's quite early to discuss what is the right iron ore price assumption for the year, but are you effectively seeing a bit more buffer in your guidance coming from the steel side, which should compensate possibly for lower iron ore prices which we currently have on our screens? Any color on that would be great.

Okay, Bastian, thank you for your question. Our assumption for iron ore price is $120 for the year. We made this forecast in February and when we look at the fundamental analysis of the demand and supply situation for the global iron ore market, we arrived at the conclusion that our assumption of $120 remains reasonable. At this point in time we see a technical correction in the iron ore markets. We believe it's technical, because its is related from what we can see directly to the deleveraging that is occurring in the Chinese real estate sector and also in the imports of iron ore.

In terms of our margins, we are seeing benefits accruing due to our cost optimization programs in Europe, due to improvement in performance in ACIS. We see continued growth in volumes in these markets. Some of that is part of our guidance, because we had talked about an increase in shipments of 3%. We are still focused on an increase of shipments of 3%. We talked about a moderate improvement in steel margins and we're seeing that as well.

Clearly to some degree, price weakness on raw materials, [we have not] integrated operations and some of that effect may also play into our results during the year.

Okay, thank you.

Alessandro, JPMorgan.

Hi, good afternoon everybody. I have three questions, if I may. The first one is related to the US market where the prices are holding incredibly well despite increasing imports. I just would like to know from you, what is the splits in your view between contribution of strengthening demand in the US and beneficial impact of [outage] at the moment?

The second one is related to your view on the Chinese steel export, if this can actually represent a trend going forward for the European space. And the last one, it seems interesting to see that you're increasing your estimates of European demand towards the higher end of your range. What basically is the expectation you have in Southern European space? Thank you.

Alessandro, I can comment a bit on the US side of the question. Obviously we don't have any definitive split between the better demand and the supply side situation, but I think we see it as primarily demand-driven. I think we've seen imports be up to as much as 25% and 26% of US consumption this year and yet we've been able, in general, with some ups and downs to see prices not drop off a bit. So I think that's a sign that the underlying demand has been able to absorb that increase in imports.

It's true that we had a lot of disruptions as we described and as you can see in our results that is weather related on the supply side in Q1, but I would also say, as we talked in the last call, that there were also a lot of disruptions on the demand side. This affected the entire manufacturing sector in North America, certainly that part of it that's in the core center of the country. So, in a lot of cases, we had customers unable to pick up material, we had customer trucks and third-party logistics companies unable to move materials. So the weather phenomenon was as much a demand side issue as it was a supply side issue. So, I don't want to put percentages around it, but I think the fact that we've been able to absorb those imports with prices being relatively stable with some ups and downs indicates that it's the underlying demand that's the more important driver.

On China's exports, this is not a new phenomena. From our point of view, China's exports are really not cost competitive. If you look at the performance, most of the China's companies are losing money, or they are not profitable and in our view most of China's exports are meant for Southeast Asia.

Our product segment is very different, we have more moving parts, [heavy loaded] products, where we see our strength in terms of product capability in our products mix, customer relations, our participation with customer on the new product developments, R&D efforts. So all this put together, while the imports are increasing, we think that China's exports should not affect our markets in a degree. And there had been some exports to North Africa and all these -- especially the commodity products. And at the same time, we believe that with the new Chinese actions of reducing the pollution, curbing down the capacity, the export should slow down going forward. The Chinese economic fundamentals are still strong. Their demand is still going to grow, the apparent steel consumption is still going to grow between 3% to 4% this year. So, while we have to be geared for the (technical difficulty), we are not really unduly concerned.

Okay. I think there was another -- in your question on Europe, we don't have specific growth forecast by region, but I can provide you with some indicators. So, just at a high level, as you have rightly observed, we have increased our apparent steel consumption forecast for Europe. PMI has been above 50 for the last month. We expect continued growth in the manufacturing sector into 2Q. If you look at the key steel consuming sectors, automotive in Q1 it was up about 8.4% and if you look at construction, year-on-year, was up about 3%.

When you drill down into automotive and construction, the difference between Northern and European markets, you see that that is a bit more broad-based, the automotive recovery, primarily because in Spain we saw a 11.8% growth, in Italy we saw 5.8% growth in automotive, Germany was 5.6% and the laggard was really France at 2.9%. So you can see that in terms of automotive, new passenger registration, it's a bit more broad-based. The area where it is not broad based is construction in Europe, where we're seeing growth in construction in Germany, Poland and the UK, but not so much in the Southern markets.

Thank you.

Yeah, sure. Thank you.

Alain William, SocGen.

Yes. Good morning everybody. So, I would have two questions please. First, could you give us a breakdown of the workforce by reporting segment, just roughly in percentage? Second question is the [end game] for the new organization structure must include some cost savings. Do you expect to communicate them at some point? And probably a tough question, sorry, just wondered what's the operating leverage that remains in Europe, because the shipments were quite strong in Q1, the utilization rates seem to be quite high on the mine numbers. So just wondered what more you can do volume-wise.

Adit will answer on the workforce and operating leverage in Europe. I tell you this new organization had just begun working from January. I have been meeting some of the leaders of our new organizations and I am very pleased with the new organization, which reduces the complexity which we had in our business before. It also reduces certain layers. It also improves certain [synergies]. And when I meet the senior managers and the leaders, I find they are very excited and motivated.

In one of the segments, clearly, when I met them last week in Latin America, they identified $50 million to $60 million synergies by this organization changes. So, I'm sure that going forward for the year, when we will -- this new organization will have settled well, we will start seeing the benefits. But clearly there are benefits and there is much improvement in the leadership.

Okay. And now very quickly in terms of employee numbers by percentage, the total is 232,000. 13% NAFTA, LATAM is -- or Brazil as we call it 9%, Europe 39%, ACIS 22% and mining 16%, and there is other of 1%. So, that gets you to 232,000 -- the base is 232,000.

In terms of operating leverage, we still have operating leverage across our markets, whether it is EU or NAFTA, and we believe that we will be able to grow with the market. We have talked about a growth target of 95 million tonnes of shipments in the medium run to the long run, and we have the operating capability to achieve that.

Okay, very clear. Thanks.

Mike Shillaker, Credit Suisse.

Yes, thanks. Two questions from me, if I may. Firstly, can you just go into a little bit more detail, there has been a black hole, I think for us in terms of -- and you did touch on it, but a little bit more detail in terms of what is going on with you in Ukraine, the CIS in general and Central Eastern Europe [to round out]? Are you actually seeing domestic demand weaken? You talked about being able to get steel out and into the export markets, but I guess that's less profitable steel to sell giving shipping costs. So, can you give us a little bit more of an outlook in terms of what you expect the dynamic to be going forward? Is there any sort of confidence contagion in demand into Central Europe in similar and what you are expecting within the realms of not giving guidance, but what you're expecting for numbers in that region?

Second question from me is, look, we're clearly in a better demand environment, your numbers are better, but given your experience in past cycles when the PMIs have done this, the demand has recovered [and similar], are you maybe a little surprised the re-stock effects had not been more aggressive, because clearly it's not much a re-stock going on, it doesn't appear right now. There doesn't really appear to be any major pricing power, for example, in Europe where prices actually look, if anything, is rather down, and it's a bit of an unusual cycle relative to past cycles, even if you skip back to the pre-2006 period.

And final is a clarification. Did you say the weather impact in the US was $350 million? Thanks a lot.

Michael, on Ukraine, I'll make two comments. One that there is a crisis in this part of the region. We are continuously monitoring and watching and we are hoping that there will be some peaceful solution in coming months. There are lot of milestones in [next week] and every milestone will have some impact or it will evolve the situation.

As far as the operation is concerned, I'm very happy that operations have been normal. There has not been any significant supply chain disruptions. We are able to get in our raw materials, we are able to ship out our finished products. So that's a good news. At the same time, you are right that there has been some weakening of the domestic demand in Ukraine and Russia. Just to let you know that our sales to the domestic market was about 15% of our business, now it is down about by half. Similarly Russia, Russia would have a share of about 15%. That's also down by a couple of percentage. But on the flip side, Ukrainian currency is weakened by about 40%, 45% and which is helping us in improving our competitiveness at the same time and the Middle East and the North African markets are stronger. We are able to export our surplus material to these markets and in fact I was very surprised that there has been so much of media discussion on the Ukrainian crisis. Last 10 days we had the best 10 days of production in this year so far in Ukraine, which clearly shows that our teams are doing a great job in terms of maintaining the volume, maintaining the shipments, getting the raw materials.

As far as the Europe is concerned, I see that there is a very little impact -- there should be very little impact of this Ukrainian crisis, because we were not shipping to Europe, and at the same time I do not see a impact in Europe, unless there is a crisis turns into some kind of a gas problem, which means that if the gas supply is reduced and the gas prices go up, which could disturb the European economy. So, that is -- these are the various inputs which I could give to you to make a assessment of Ukrainian situation. Adit?

Okay. Mike, $350 million is the right number. $200 million in Q1 and $150 million in Q2. In terms of re-stock margin, prices and all those questions, I think what we did talk about was an underlying improvement across all markets, apart from the weather impact in NAFTA. And I think that's quite important to recognize. When you look out, for example, into the European demand environment, we see margin improvement. We see now that's a function of pricing and cost clearly, but we do see margin improvement. I think everyone -- all customers, distribution as well as other are very focused on a lean supply chain. So we see that trend continuing. So maybe that's one of the reasons of difference, and also credit remains an issue. And so combined with lean supply chains and credits, maybe that's why you don't see restock as aggressive as in past cycles. But we clearly do see positive real demand and positive apparent steel consumption growth in our core markets.

Okay, very clear. Thanks very much.

Jeff, Macquarie.

Yes, hi, good afternoon. You talked about the lingering effects of the adverse weather in the US, and Lou you mentioned some of the supply outages that have occurred. I guess I was just wondering if you could expand on that whether you are actually benefiting from some of these outages or is that really just falling to the domain of the US mini mills who have spare capacity? Obviously, I think it's pretty well known that one of your large integrated peers is having some real logistical issues on the raw material front. And then the second question I had was to go back to the guidance. I guess I wanted to ask the question a different way. Assuming -- I guess the way to ask it is, do you need iron ore to be at $120 a tonne for the full year on average to actually achieve the $8 billion of EBITDA or can you be near? I mean, I guess this is what -- the issue is the market seems to be fixated on what's happening with this technical correction in the iron ore price and not paying attention to progress that's evolving elsewhere in the business.

Lou, will you like to give some more color on this?

Yes, I would say that most of our production challenges, let's say, were in the first quarter. So, in fact, we were shipping ahead of our plan numbers in April. Again, I don't want to comment about competitors. We do have some negative effects. I would say they are relatively minor though in terms of the ability to deliver [coverage] that's been hand to mouth. If you're familiar with the situation there you know that we've had to have icebreakers involved in moving material, the convoys have taken much longer than in the past. So, we had been hand to mouth as well. That'll have some modest effect on shipment capability in Q2 for us. But really I think most of the production related issues for us are behind us as of Q1. The hangover in terms of the weather impact is really more as the higher gas prices flow through the income statement into Q2, because of the accounting procedures.

Okay, Jeff, that is a good question. I think that we are entering into speculative territory. At the end of the day, our assumption for iron ore remains $120, and that's the basis for our guidance. If iron ore is not $120, what happens to steel margin is really the question. And I think it's at best speculation to say what would happen to steel margins, how much they would expand in 2014 if iron ore remains at current levels.

Okay, I appreciate it's difficult to discuss, but I appreciate the effort. Thanks.

Sure. Thanks you.

Luc Pez, Exane.

Hi, gentlemen. Few questions, if I may. First of all, follow-up on Ukraine. Could you confirm the goodwill associated with the acquisition of Kryvyi? You had once with $3 billion left in balance sheet. Second, would it be possible to have a split, EBITDA wise, between flat and long in the different regions, because I think it's really affecting the readability of these results? And last on [Innovus], the second term payment when is it scheduled? If I remember right, this was to happen through the current year. Thank you.

Could you repeat your second question in terms of Innovus, Innovus was done already --

But there was a second part of the payment which was due in 2014.

It was done in 2013. We had accelerated the 2014 payment as well and that was done in the summer of 2014. And the payments came through finally in fourth quarter of 2014. So, there is no more Innovus -- sorry, in fourth quarter 2013. So, there is no more Innovus in 2014 results. In terms of goodwill, I mean, we are not providing goodwill by subsidiaries. For ACIS, the goodwill is at $1.5 billion.

And I think your second question, if I get it correct, was the EBITDA split between flat and long. And as you know, we have moved to a new segmentation, where we are going to try and provide you with the shipment change, selling price change, and then you can do some modeling as to what you think the flat/long EBITDA is. So we are not managing the business on that basis, we're managing it on a geographic basis and as soon as we took that decision from an accounting perspective and an SEC perspective, we have to report as per the segment in which we manage our businesses.

I do understand that you render this business from a geographical standpoint, but I mean throughout the appendix, back in the previous quarter, this was clearly helping us doing the modeling. So might be interesting to follow up on that one.

Yes. I think maybe I'll ask Daniel and his team to work with you. And we have provided some excel sheets in which you can look back at the last two years and go through how the segmentation would work and then the team can provide you with maybe more detail on what the changes in selling price and volumes imply for the relative EBITDA, flat and long.

Thank you.

Seth, Jefferies.

Good afternoon gentlemen, Seth Rosenfeld at Jefferies. Just a question on -- I look for net debt and I'll see your working capital outlook again. I just saw a significant increase in net debt in Q1, driven principally by working capital investment. Can you please discuss at more what your outlook is for working capital moving forward? First, in the near-term, if we are seeing further demand strength and volume growth in Q2, should we expect a further working capital investment [over what's] already been done in the past three months. And then in the longer term, how do you see working capital moving through your business into 2015, perhaps, and what are the possibilities to streamline this a bit more sustainably, the same way operate at lower levels in the coming years? Thank you.

Sure. Thank you Seth. We're not forecasting builds into second quarter our significant build and for the year, we would expect working capital to come down. If you look at the past two years and in Q1, we always build working capital and by the year end we have less working capital. We continue to remain focused on driving efficiency through our working capital spend and that's why you see that our days had not dramatically increased.

In terms of the other point, I would say in terms of 2014, yes, shipments are rising, but also recognize that iron ore, our assumption is $120. Last year average pricing for iron ore is $135. So that itself implies a lower cost of inventory on raw materials. As you know, coal is much weaker. Seth we believe that the shipment increase is offset by lower raw material prices.

And I think to answer your question on 2015, we then have to review exactly what is the price environment for raw materials, what is the price environment for steel and our forecast for volumes. The easier one to answer in that is volumes, clearly we would expect volumes to continue to rise and as that happens, not only we see margin improvement and higher profitability. So I hope that I've answered your question. I don't know if you have any --

Yes. I guess a follow-up question on the back of that. I guess, can you give a bit more color on your outlook from medium-term net debt as well? Clearly this would imply a reduction in net debt perhaps going into Q2. Your medium-term target at $15 billion in net debt, have you given any -- or can you give any public sense for what the timeframe is for that, and thereafter how you are considering the prospects for what to do after hitting that target between increasing your dividend once again, balancing your existing debt, buyback, or increasing CapEx? Thank you.

So I think you have already highlighted all the options available to us, but I will for good measure go through it again. So, the target of $15 billion is the medium-term net debt target. We have not provided the market with specific data on that and our target remains $15 billion in medium term.

In terms of what we will do when we achieve $15 billion, we talked about this in the Investor Day we had in February, but basically the options you outlined are available to us. We could increase dividends, we could increase growth CapEx, we could delever further and these discussions obviously would be held at the Board of ArcelorMittal. And one of the topics that they would also want to address is what progress have we made in terms of achieving investment grade rating. So, we would update the market once we've had that discussion with the Board and we get some direction and sense from them as to which way they would like the excess cash to be deployed.

Okay, thank you very much.

Carsten Riek, UBS.

Thank you very much for taking the question. My questions circle around the US. Steel price realization in the first quarter was comparably low, was only up $7, even though on a spot basis we have seen more than $50. The question is, was there a change in the product portfolio in the US, given all the difficulties we have seen with the weather, et cetera, or why didn't you actually achieve more price increases in the US in the first quarter? Second question, the steel prices recently have risen quite a bit in the US, driven by maintenance outages. One colleague of mine already mentioned the issues one of your competitors has is raw materials. But we have now seen that those assets will come back into the market, as well as we have seen a higher number of imports coming into the US. Could that challenge the steel prices going forward, which are again at quite a bit of premium compared to other areas? That are the first questions. Thank you.

Yes, I think as we discussed, most of our operations are in fact in the part of the US that was most heavily hit by the severe weather and that disrupted not only our operations, but the flow of materials to our customers. So we did lose some shipments in the US relative to where we were (technical difficulty) expected to be. And typically, when that happens, then your focus more on serving the contract customers where you have commitments to those customers versus the spot.

So, I think any time you see the shipments being down a bit in a company like us that does have a very substantial involvement in those OEM markets and customer bases, then the -- what's cut back is in fact the spot business. So I think Q1 for a lot of reasons was not a representative quarter. I think we'll be back on track as we come out of those bad situations. I mentioned already we look to the April shipments actually being a bit higher than what we had expected in our business plan, or even our forecast from earlier this year.

Looking forward, I think it's difficult for us to comment about prices. Whenever this comes up, I think we always communicate that we recognize we're in a market that is affected by trade flows and that there is certain arbitrage opportunities that can emerge or disappear depending on the differentials across regions. Clearly, by world standards, US price levels are relatively high right now. How that plays out in terms of that differential being adjusted over time, we'll see. I would say the supply disruptions, when you really look at the sort of volume involved here, particularly as we exit from the much more difficult first quarter, really are not substantial enough to drive big swings, at least as we see it in pricing level. So, again, we come back to thinking that the underlying demand in the US is good. But that price differential is something that we're always looking at. How it plays out going forward, when it plays out, that's something that's not really appropriate for us to comment on.

Thank you very much. Just one follow-up on the new structure, because it's -- in general its fine. I also don't want have an EBITDA breakdown between long and flat, but what would help tremendously, if we could have a volume split between long and flat, because the drivers are simply different. Is that possible going forward?

Yes. I don't want to keep on saying yes on these questions. But perhaps you could follow up with Daniel and his team. They would want to help you as much as they can. Since you are on the line, you mentioned a price change of $7 between 4Q and Q1 for NAFTA, our change that we are reporting, average steel selling price is $15.

I have $8.71 against [$8]. But I will check it. That's not a problem. Thank you.

Rochus, Kepler.

Hi, it's Rochus from Kepler. Two questions. The one is on the US business, I guess, we broadly discussed these disruptions in the US market which are partially still ongoing. Wouldn't it make sense at this context that you are postponing the revamp of this major blast furnace in North America. If I remember correctly, the revamp was scheduled for June for, I guess, three months or two months. Is this still on track or do you consider any pushback which might help you to make opportunity from the current favorable market environment? The second one is, could you share your view on the outlook for the European market for the rest of the year? We're seeing flat sale price on the strip side, driven by the decline in raw materials. Probably there could be a risk of rising imports into the EU because of strong euro and so on and weakening emerging market currencies. And as there is also probably less destocking, wouldn't you see the necessity that the industry is returning back to production cuts at some point, because obviously the reason for some of the blast furnace restarts is not there is -- nobody needs to restart more than necessary because of the current pricing outlook) That's it from my side.

First, in regard to the reline of our number 7 furnace in Indiana Harbor, we are proceeding with that. It's roughly a two-month project. We have been planning this really several years but the planning has been ongoing, that involves lining of contractors, delivering materials for the work that's done in the furnace, as well as then ordering and building inventory [of slabs] to compensate for this. So, we don't expect our shipments to be affected at all. And again, if you could just choose to reline it, because you decide you want to, you never reline it. So it's about time it needs to be done.

Okay, great. In terms of Europe I appreciate all your comments and your thoughts, but we are not in a position to talk about pricing, capacity and all of those factors in Europe. I think as soon as we talk about pricing on a forward basis, you're not looking historically. I think from a competition perspective it is inappropriate. So, I can just reiterate that we see in our business in Europe we see growth in the markets in which we are serving and we see, due to the combination of our cost optimization efforts, asset optimization, improved margins in our European business.

Okay. But let me try to ask differently. I guess, one of your parameters to get to the $8 billion is that you see an expansion on the [steam washing] side. Is this assumption regardless of the steel pricing you see for the rest of the year, and if not, what kind of steel price assumption you're taking for Europe and US from the current quarter onwards until the end of the year?

I appreciate the question, but again, what we are saying is that we remain constructive on the European market, both from a volume perspective, because the real demand is picking up and we're seeing due to our cost effort margins improving in the short run.

Okay, thanks a lot.

Thank you.

Mike Flitton, Citigroup.

Hi, there. Thanks for taking my question, is really coming back to construction in Europe. I was wondering if you can give us just some more color on what you guys are seeing, because there seems to be an increasing number of companies out there in other sectors, chemicals et cetera, becoming incrementally more positive over the last quarter or so on European construction. You do mention in the presentation you do expect growth in Europe in 2014. I was wondering if you view just alongside that any upside to the -- your construct figures, which were about 0.9% growth this year. And just sort of alongside that as well the -- you guys have quantified too -- give us a sense of how much EBITDA or EBITDA per tonne you may have lost on the back of this sort of slump in European construction, just to give us a sort of idea of sensitivity to recovery there? Thanks.

Okay. So maybe just some broad numbers and then we can talk about the impact of construction in our business in Europe. So, as you know, construction was up 3% compared to the same period last year. This rise represents more seasonal effect, because there was a severe winter in Europe in Q1, 2013, then a structural recovery of activity. Nevertheless, we are still forecasting a 1% growth in 2014 for construction.

When we look at the EU, I think as I said earlier, Germany, UK, Poland performed well, while Southern countries remained depressed. When you look at activity, activity is largely driven by residential and renovation sectors. Our non-res is still suffering from a lack of investment. Because non-res is suffering from a lack of investment, just to get a bit more precise on that, that implies the growth for flat products in construction is less attractive. They are still attracting markets for long, because res and renovation sectors also impact the long business a bit more.

In terms of the steel business, I mean the European steel demand is off almost 25% from 2007, 2008 levels, and this is largely due to the impact of the construction markets. Construction markets have a tremendous impact on volumes and as volumes increase we have clearly an impact on your base profitability. So as construction markets recover in the medium to long run that would be a significant positive to our core markets.

Okay, thank you.

Philip Ngotho, ABN AMRO.

Yes, good afternoon gentlemen. Thank you for taking my questions. I've three. First of all maybe on the mining expansion, could you indicate roughly how much additional CapEx you expect to need to expand their ore production, and also when you expect to have a final decision for go or no go? And then on the management gains program, if I'm not mistaken, I did not see an update of that in the presentation. Could you just share with us how that is progressing and what the run rate is currently? And my final question is on Brazil. We have been reading recently more news about possible energy rationing and electricity prices have soared by 400% year-on-year. I was wondering if -- how that might impact your cost base in Brazil and also what you're seeing in terms of demand in Brazil.

Bill?

Yeah. On the mining expansion, firstly, we communicated at the Investor Day that the capital intensity per tonne for the combination of Canada and Liberia could be around $75 a tonne maximum. We're doing the work on Liberia at the moment and we anticipate in the next two to three months bringing back to the Board for approval. We're pushing Liberia, because we want to piggyback some of that on the back of the Phase II work that we're doing there. There is some synergy in doing that.

The Canadian expansion that is a different situation. This year we are focused on sustaining the 24 million tonnes, which we're on track to do. From then it's incremental debottlenecking up to the 30 million tonnes and so that will come in steps along the way. So, it's difficult to put a timing on that. That will be going step by step from the 24 million tonnes this year.

Okay. And in terms of capital expenditure for the Canadian expansion?

What we say for the combination is going to be $75 per tonne.

Okay, great. Thanks.

Okay, in terms of management gains, I think you are aware of a program of $3 billion and a lot of progress in 2013, we continued to make progress in 2013. But we think from a competitive perspective as well it's more appropriate to update the market on an annual basis than a quarterly basis. Otherwise our competitors will track us very closely and they then find what we do on a quarterly basis which is not helping us. So we will update you on what we do in management gains for 2014 in the year-end results of 2014.

Turning to Brazil, you're right that there is a lot of concern about electricity prices and the scarcity there that's driven by significant drought in that country. In terms of the direct impact for us, more than 90% of our electricity needs are hedged or pre-purchased at let's say previous levels. So, I think we actually feel that it's not going to have a direct negative impact on our business. [In that way], we may actually benefit from that. We're going to reach number 3 blast furnace in Tubarao in July and because that plant is so energy efficient, it actually generates a significant amount of electricity that we sell into the grid. So, that's -- again we don't want to have any [chat provided] for the people that are suffering from that. But it may turn up in our results to have -- we'd be selling electricity to the grid at a very high price. Nevertheless, it does have an indirect effect on us in the sense that it potentially affects some of our customers, smaller customers that maybe haven't hedged the electricity prices to the grid in which we have. So, it's something that clearly we'd rather see the electricity environment be more supportive of growth and higher demand in that country.

I think in terms of the overall demand in Brazil and maybe I can talk about Brazil and Argentina together. I think we feel good about the prospects, certainly through the first half of this year. I think there is some pessimism in the Brazilian market. There's an election coming, as you know, in October. I think the exchange rate has weakened quite a bit from the peak a couple of years ago, at 1.6. It's now around 2.22, I think the last time I'd checked. I think most people feel it should be closer to 2.4. So I think there is some concern, let's say, in the Brazilian business community. I think a lot of people feel that that's temporary and it's a bit overblown, again, depending on the electoral prospects and outcome later on this year.

I think, Argentina, we have been very positively surprised to-date at how that demand has held up in that country and how the exchange rates even have stabilized a bit after devaluation in January. But, that remains also a question mark for the second half. But, I think through the first half will vary -- those results are more or less booked and they are quite positive.

Okay. Maybe just one follow-up question on that. Could you maybe give us an idea of a split of how much of the shipments are actually really for Brazilian market and how much you export?

Yes, across the entire region, I think we are only exporting now maybe about -- I would say it's about maybe 15% to 20%. And that's primarily on the flat side and it's primarily semi-finished product, a fair amount of which now will be going to our operations in Quebec.

Okay, thank you. Great.

Justine Fisher, Goldman Sachs.

Good afternoon. I just have one question on the total debt level. I know that you guys talk about net debt, obviously as far as the currency is concerned, but it looks like total debt was about $1.5 billion quarter-over-quarter. And I know that you did issue the EUR750 million of euro notes. But I am just wondering what other increase in total was up by -- yeah by $1.2 billion. And I am just wondering what the other increase in debt was. Is it short-term debt? Can we expect that to be repaid? And then second on the debt front, you guys have a few maturities left this year and I was wondering whether you plan to come back to the capital markets to address those. I know there was actually just one that matured in April. Or whether you will take care of those with cash? Thanks.

Great. So Justine, your numbers are exactly ours. Our gross debt is up by $1.2 billion. So, the bond that we did was EUR750 million or roughly about $1 billion, and then there was a EDC facility that we entered into Q1. That's a [$200 million] facility. So, that roughly gets you to the $1.2 billion number.

In terms of going forward, we like to maintain cash in excess our lines of $6 billion of [$1 billion to $3 billion]. So if you look at our cash balance at the end of Q1, it's rather on the high side, and we had been meeting these maturities -- there is a lot of maturities in April, May -- through our cash balance. Other than that I don't want to provide any guidance or forecast on when or if we will be accessing the capital markets.

Okay. And then -- so I actually have one other question for you. In your discussions with the rating agencies, how do they view the interplay between steel and iron ore? I mean, of course, what we get from the rating agencies, they talk about the macro recovery in steel as being the key driver for the Company. But, I mean, is it a big focus for them in conversations with you about the trajectory of the iron ore market and whether that might alter the way they view the macro trend, or do they focus on the recovery in steel instead?

So, a lot of these discussions are private in nature, as you can imagine, and confidential, and that's for you to have further discussions with the rating agencies. I think what I can say is that they are focused on the macro steel environment, how we're doing in terms of our key strategic initiatives, what's happening on our cost reduction plan, what's happening in terms of volume recovery -- not volume recovery, but volume growth in our mining division and then how -- and what our plans are to continue to delever the Company, what we would do with excess cash, whether it's CapEx or dividends and all the things that we've been speaking to you about is generally the flavor of discussions we have with our rating counterparts.

Alright, great. Thank you so much.

Rui Dias, Espirito Santo.

Hi, thanks Daniel. So two questions, quick ones. On pricing in Europe, if possible, if you can answer this. I guess that we should expect high steel spreads in Q2 owing to lower raw material prices, but for Q3, where should we -- Q3 you should have already visibility at least for June and July. So what are you seeing in terms of price-cost spread evolution? Are you being able to maintain at least flat prices and so benefit from even lower potential raw material costs during Q3 or is the spreads unlikely to increase in Q3? This is the first question.

Second question is, if possible, can you tell us how much are you expecting to materialize in terms of cost savings in 2014? I don't mean the run rates, but how much the delta between the EBITDA in 2014 and 2015 just on the back of cost savings. Thank you.

Rui, on pricing, I think I'm going to repeat a bit of everything we have all said. What I can say is that you can look at the indexes that are available for steel pricing. I think the indexes of today are saying that steel prices are today where they were close to the end of last year. And when you look at the indexes of raw materials, you can see that they are lower. And then if you look at our business, we can see that our margins have improved as a result of cost reduction and asset optimization.

In terms of your second question, I mean I think it's very clear what we had talked about in the past. There are two thrust areas in terms of cost reduction initiatives that we have, the first being management gains, which is two-thirds variable, one-third fixed. We have talked about in the past that we expect to keep the majority of these savings. In terms of AOP, the program is largely complete and we still have some residual savings, as it takes a bit longer for all the people to leave and for all efficiencies to be achieved in the existing operations. We've estimated their about $200 million. Both these numbers are baked into our guidance forecast that we issued in February, moving to what we achieved on an underlying basis in 2013, to a guidance of $8 billion in 2014.

Okay, thank you. Just to follow up, in Q1, how much in terms of cost savings did you materialize, how much is included in Q1 EBITDA?

Look, I talked about this earlier. We will update the market on an annual basis in terms of what we have done on a cost saving basis.

Okay, thank you.

[Anthony Rizzuto], Cowen and Company.

Thank you very much, Daniel for squeezing me in. I appreciate it. I've got two questions, one on the overall market. The aluminum industry seems to be quite aggressive in their claims their about gaining market share from you guys, out of steel industry and some of which I don't agree with. But do you see the steel industry being able to offset possible volume declines driven by your light gauging efforts and possible market share loss with higher prices and margins on the value-added products and solutions that you're developing for the OEMs? That's my first question.

The second one is just a question on Baffinland and Mary River. I think I recall reading something where you guys may get some production in the second half of this year, just an update there, please. Thank you.

Okay, the comment on the auto, obviously this could be a very long discussion. But I think, first, we remain bullish about steel's ability to provide the solutions at an attractive price and with attractive features that the automotive companies want. So we know it's (inaudible). There's a lot of technology being developed by our Company and others to try to respond to this. It's a positive thing I think for these sectors in general and we do feel it's positive for us in a sense that we see more and more that the OEMs are demanding relatively sophisticated technology and they're also looking for that to be supplied on a global basis, and we're very well positioned as a company to respond there. Nevertheless, I think you did point out that a part of the solution, even if you go to the weight savings of advanced high-strength steels, by definition, the tonnage if you will, that goes into this sector is going to come down. Again, we expect that we'll be able to serve fairly well, because of our strong technology and global position, able to get a premium for the better products. But in terms of tonnage, the volumes will come down. In terms of square meters, in effect it would be -- should potentially be about the same if we can win that race. But in terms of the pure tonnage, you're right, that it's going to come down as we supply better, stronger and lighter steels to help solve those problems for those companies.

Thanks Lou on that.

And on Maryland, we are making good progress and we are on schedule. We hope that first shipment will come in the summer of 2015; that is the shipping period available. I know that there has been some media that we will ship something on 2014. But we do not believe so at this time the way we see the progress of the project. And our original schedule was 2015.

Thank you gentlemen. Appreciate it.

[Dave], JPMorgan.

Hi. Another question on the auto steel. You spoke earlier about the advancements you've made with regard to the advanced high strength steel and highlighted how your positioned well in the US as a result. I guess the moves you've made with Calvert among other things and then you talked about how you're well positioned in China due to the JV that you are undertaking. I was hoping that you could speak specifically to any movements you've made forward in Europe. In addition, if you've noticed a (inaudible) among the auto manufacturers based on the geography of their headquarters, whether they want to move forward longer term with auto steel, or if they'd rather shift a little to aluminum?

Yes, if I could comment a bit on that. I think we see the same dynamic, whether it's in North America or in Europe. In Europe, the regulations are more focused around CO2, in North America they are more focused on weight. But they are all trending in the same direction. Again, they are deployed in a little bit different way, so it's not exactly the same. But anyway, I think we'd see ourselves still in a fight, let's say, in Europe as well. But we feel that we're in a very strong position here and in fact some of the dynamics, and this is largely has to do with the mix of vehicles that are used, make it a bit, let's say, more favorable for aluminum, particularly in that light truck segment, where we do see some in that direction. I don't think you have that same dynamic or that same product segment being as important in Europe. And really the leading automotive suppliers in Europe, I think have been very explicit publicly about saying they can get where they need to get to using steel and I'd say, in many cases, that's using specifically the kinds of solutions that we're providing to them.

Maybe I will just add, in Europe, there is much more acceptance of use about our products, advanced high strength steels. And as a result, we have also witnessed previous aluminum solution switch back to steel solutions in certain product regions in Europe. So, here the acceptance of highly sophisticated technological solutions from the steel industry is much more prevalent. The infrastructure to supply that is there as well. In North America, we are making efforts to replicate some of that as we speak.

Charles Bradford, Bradford Research.

Hi. Now that the election seems to be over in South Africa with the ANC winning pretty conclusively, does that set to rest a lot of the opposition's demands for nationalization, expropriation and so forth or could the AMC go back to the IMF steel they made 20 years ago and which now I guess expired?

I was in South Africa last week and I happened to meet the senior leaders and I get an impression that AMC's next target is to continue to improve the jobs or continue to support the jobs creating industries and I hope that they will be more supporting the growth in infrastructure in the business environment, because the new administration will be settled for next few years.

Thank you.

Thank you very much for participating in today's call and looking forward to see you in the next quarter call. Thank you. Have a good day.