ArcelorMittal SA (MT) 2016 Q2 法說會逐字稿

You can start, Daniel. Thank you.

Great. Thank you very much. Good afternoon and good morning everybody. This is Daniel Fairclough from the ArcelorMittal Investor Relations team. Thank you very much for joining us today on our conference call to discuss the Second Quarter 2016 Results.

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

Thank you, Daniel. Good day to everyone and welcome to ArcelorMittal Second Quarter 2016 Results Call. I'm joined on this call today by Adit Mittal, CFO and CEO of Europe; Simon Wandke, EVP Mining; Genuino, Head of Finance; and Daniel Fairclough.

I would like to begin with some introductory remarks. This was a solid quarter for ArcelorMittal. This is the best operating results in six quarters. We have reported comfortably positive net income and generated positive free cash flow. Secondly, ArcelorMittal now has a balance sheet to reflect its industry leadership status. Net debt now stands at $12.7 billion. This is 1.8 times based on run rate EBITDA.

Moving to the operating environment. We have clearly seen improvement over the past three months to four months. However, China remains a threat. Production is higher than domestic demand and exports are elevated. We must continue to encourage China to deliver on these plans to deal with overcapacity. In the meantime, we will continue to work with the governments in our various operating jurisdictions to ensure that appropriate protection measures are in place to ensure a fair and level playing field.

This quarter, there have been positive developments on trade measures, both in US and Europe. Clearly, pricing has recovered sharply during the course of the second quarter. In recent weeks, we have seen steel spreads moderate marginally. But if real demand continues to be positive and imports contained, then steel spreads should remain supported by good levels of inventory and extended order lead times. Finally, I'm pleased to report that Action 2020 is progressing well. The business is fully focused, all plans are on course and the business is motivated to deliver success.

I will begin today's presentation with a brief overview of our second quarter 2016 results, followed by an update on 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 results in greater detail and provide an update on our guidance and targets for 2016.

Next slide. As usual, I will start with safety. The lost time injury frequency rate in second quarter was 0.79 times as compared to 0.72 times in Q1 2016 and 0.68 times for the second quarter of 2015. For the first six months of 2016, health and safety performance was essentially stable at 0.78 times as compared to 0.79 times for the first six months of 2015 with improvements within NAFTA, Brazil and Europe offset by deteriorations in the mining and the ACIS segments.

On April 28, 2016, ArcelorMittal marked the Company's 10th annual Health and Safety Day under this year's theme, Together for safety: take care, with a focus on the importance of systematically following safety rules and procedures. We remain committed to the journey towards zero harm and must ensure that all levels of the organizations are focused on the primary objective.

Now, moving to the operating and financial highlights for the second quarter, as summarized on slide number 4, we have reported EBITDA of $1.8 billion for second quarter 2016. This is a clear improvement on the exceptionally weak Q1 performance but also represents a 27% improvement on the same period last year.

We have reported operating income of $1.9 billion in second quarter 2016. This includes a one-time exceptional gain of $800 million following the signing of the new labor agreement with the United Steelworkers. You can now see more evidence on the improved pricing environment on our steel segment results. Mining EBITDA also improved due to seasonally higher volumes, 23.2% plus and higher seaborne iron ore prices by 15.2%.

We reported net income of $1.1 billion as compared to a net loss of $400 million in Q1 2016. We also made notable progress in debt reduction as promised. Net debt declined by $4.6 billion this quarter following the proceeds of the right issue, the receipt of the Gestamp sale proceeds and positive free cash flow.

On slide 5, I will walk through more details in our steel performance by segment. Steel-only EBITDA improved significantly from $800 million in Q1 2016 to $1.6 billion in Q2 2016, primarily driven by a 7.7% improvement in steel selling prices and 2.9% higher shipments. All segments showed improvements relative to Q1 2016.

On a per tonne basis, the sharpest improvement was in ACIS. As you know, ACIS is a fully spot based business and therefore immediately benefitted from the rising price environment in Q2 2016. Europe had a strong quarter reflecting improved volumes and prices, but also tangible benefits of the transformation plan.

NAFTA also showed a strong improvement in EBITDA due to higher price levels, but given contract lags, the full benefit of higher prices have not yet been fully captured. Brazil segment performance showed an improvement in the second quarter. Domestic demand remains depressed but the premium over imports was reestablished and profitability of exports benefited from high international pricing.

Moving onto the mining segment performance on slide 6, mining EBITDA was 67% higher than Q1 2016 driven by higher volumes mainly at Mines Canada and higher seaborne iron ore prices. We continue to focus on aggressive cost cutting and remain on track to achieve our year end 2016 unit cash cost reduction of more than 10% year-on-year basis reducing our free cash flow breakeven level to $40 per tonne.

On slide 7, I would like to provide an update on the strategic progress we have made on our Action 2020 plan particularly in NAFTA. Firstly, as I have already mentioned that a new contract with the USW was signed and ratified during second quarter. This is a positive, as this will enable us to leverage the core strengths of our various US facilities. We have lowered the cash cost for the post-retirement benefits and there will be no wage increases during the contract period.

With the labor agreement ratified, we are now progressing with our footprint optimization project at Indiana Harbor. In its most simple term, this is about idling less competitive finishing assets while making important investments in more efficient asset to improve the configuration of the Indiana Harbor plant.

Let me now address demand. ArcelorMittal shipment weighted global PMI at 51.3 in June, continues to indicate growth in demand for our steel. Increased uncertainty post Brexit is likely to weaken European PMIs. The largest impact will be on the UK, which represents only 2% of ArcelorMittal sales and our forecast for European apparent steel consumption growth remains unchanged.

In the US, we have lowered our forecast for flat and long apparent steel consumption to positive plus 2% to 3% primarily due to tightening of supply resulting in lower inventories and longer lead times. Our forecast for demand in Brazil and CIS are unchanged as growth begins to stabilize as expected. Our view on demand in China is also the same as last quarter as robust infrastructure and the automotive continue to support steel demand while growth in real estate has lost momentum as expected.

Now I hand it over to Adit for financial results and guidance.

Thank you. Good afternoon. I'll discuss the second quarter financial results and guidance in a bit more detail. So turning to slide 10, I will reflect some of the key elements from EBITDA to net income in this quarter. During the quarter, we recorded an impairment of $49 million related to the sale of our ArcelorMittal Zaragoza facility in Spain. Zaragoza is a merchant bar and rebar facility in Spain primarily producing about 0.5 million tonne of commodity long products.

The largest item this quarter was an exceptional income of $832 million as reviewed earlier relating to a one-time gain on employee health benefits following the signing of our new US labor contract. Income from investments was $168 million benefitting from improved performance of Calvert, Spanish as well as our Chinese investees, and also includes the annual dividend received from Erdemir. The man item in our ForEx line is the $237 million one-off premium expense we incurred on the early redemption of our bonds. As a result, we reported net income of $1.1 billion for the quarter.

On slide 11, let me review the waterfall taking us from EBITDA to free cash flow. During the quarter, we had approximately $0.2 billion release of operating working capital. The third bar on the slide shows a combined impact of net financial costs, tax expenses and other items totaling $1.1 billion. This includes the $237 million one-time premium on early retirement of debt. Cash flow from operations of $0.9 billion combined with CapEx of $0.5 billion resulted in free cash flow of approximately $0.3 billion.

On slide 12, we show the bridge of our change in net debt from Q1 to this quarter. The main components of the debt movement during the quarter were the free cash flow we just reviewed. As you know, we had a proceeds of approximately $3.1 billion from the rights issue and M&A inflow of $1.1 billion.

Dividends of $41 million were paid out to minority shareholders in ArcelorMittal Mines Canada as well as our joint venture in Brazil with Bekaert. ForEx and other impacts was $100 million. The combined results of these movements was a net debt reduction to $12.7 billion in the second quarter compared to $17.3 billion in Q1 2016.

On slide 13, we show a summary of the deleveraging that has been undertaken this quarter. Gross debt has been reduced by $5.1 billion during the quarter to $15.1 billion at the end of June 30, 2016. As you can see on the chart, we have illustrated our new debt maturity profile showing what has been repaid or prepaid and what is left outstanding. The takeaway here is that we have significantly reduced our near-term maturities and our average debt maturity has been extended to 7.1 years.

Now to conclude with our guidance for the full-year, what we said at the beginning of the year remains valid. In 2016, we will do more than $4.5 billion in EBITDA. All the cash needs of the business and this include the expected investments in working capital will be covered by our EBITDA. And as a result, I continue to expect that we will again be free cash flow positive.

As we said last quarter, we are consciously moving away from giving very specific quantitative guidance and certainly do not want to be marking our guidance to market every quarter. What I will say is that despite the steel spread recovering losing momentum in recent weeks, the impact of lagged prices will be an important support for operating results as we move into a period of seasonally slower steel demand. There is nothing yet that we can see to suggest that results should significantly deteriorate.

That concludes our presentation. Now we're happy to answer any of your questions.

(Operator Instructions) Mike, Credit Suisse.

Thanks a lot for taking my questions and well done on the numbers.

First question really on cash flow, if you take your cash flow breakeven model of $4.5 billion and then looking at the Q2 EBITDA of around $1.8 billion, in principle that should give around $650 million of [free cash]. There is no obviously one-offs in there, because the net working capital release offsets versus the premium payment and yet we are running at about half that number. So, A, I guess the question part one, is what is the delta between the [350 or so and the 650]? And B, assuming EBITDA run rates remain the same versus Q2 through the second half of the year and that avoids any conversation on guidance, so that would my assumption for now. Would you expect free cash flow to improve in the second half of the year is the first question?

The second question, I guess, company very familiar -- Aperam has probably been the most successful rewriting story of the whole resources sector in the last few years and if you look at what they have done, cash flow discipline, focus on debt pay down, debt now running at about 50% of EBITDA, and a willingness to pay a dividend when they decided the time was right. Is this the type of model that you would actually now like to think about for ArcelorMittal, because I think steel companies in general have been over willing in the past to spend on acquisitions, over willing certainly to spend on CapEx. But if you look at what Aperam has done with the discipline it's had, its rerated to the equity massively.

So, A, is this something that you would like to follow now with ArcelorMittal in terms of the focus on debt pay down even further? And B, shareholder returns and on that concept of shareholder returns, would you now given what you see on cash flow, debt and visibility of your earnings be prepared or be thinking about reinstating a dividend either at the end of the year or as Aperam did last year, potentially early?

Michael, I'll start with your free cash flow question. So, just to be very clear on this question, we expect cost of the business to be $4.5 billion for the year. This excludes the early prepayment of our bonds, which is about $237 million.

If you look at Q2, I would not annualize that number, I would look at the first half, I think the first half is more representative, we had less cash payable outflows in Q1 then we have had in Q2. So when you combine that number, we are running very close to $4.5 billion.

The major delta between the first half and the second half is interest expense. Interest expense will come down in the second half. We also had higher cash interest expense in the first half of this year. So, we are very comfortable that our free cash flow breakeven including CapEx is $4.5 billion and that has not changed.

In terms of your other questions, let me address Aperam. I think, look, we are all very proud of Aperam, we are on the Board of Aperam as well. And I think when we did the rights issue, we spoke about the potential that ArcelorMittal to follow what Aperam has done.

The stainless cycle clearly recovered both from a trade perspective and a market perspective earlier than the steel cycle. Before china could dump steel into Europe, Aperam had put in place trade measures that is ongoing in Europe and now we can see some of those benefits that are occurring in our North American business.

Our Action 2020 is very powerful at ArcelorMittal, it drives structural improvement. What we see in this quarter's result is those structural improvements are coming through. When you look at our year-on-year performance, our second quarter 2015 compared to second quarter 2016, you can see that even though steel selling price are down 12%, our EBITDA is up 27%, just demonstrating that there is significant structural improvement underway in the business.

In terms of value creation, I think we're going to do what is right for ArcelorMittal. I don't believe that is necessary minimizing CapEx and not doing acquisitions. I think what we are focused on is further strengthening the balance sheet and making the right decisions to create value for shareholders.

In terms of the dividend question, clearly, when we reach a level of net debt to EBITDA of less than two times, this topic comes on the agenda of our board. I believe at that point in time, the board will take that as a consideration that we have achieved a decent level of leverage relative to earnings, but we will also look at the sustainability of those earnings, the structural improvements that we have made to free cash flow and also review where we are in terms of our rating vis-a-vis the credit agencies.

Alain, Morgan Stanley.

If I may ask you two questions from my side. Firstly, on the percentage of the group exposure to the automotive sector, how much of your volumes go to the automotive, and the second part of this question is are you seeing any signs of the slowdowns from this end markets in light of what we have been seeing in the Company's results?

The second question is on the pricing going to Q3, now I presume most of your contracts would have been concluded for the current quarter. How would you quantify the price increases versus the second quarter in light of the spot prices as well?

Overall, automotive shipments are approximately 20% for ArcelorMittal, but they clearly are much more concentrated in our NAFTA and Europe business where they are averaging around 40%, so the impact on automotive is felt much more in those segments. We have not yet seen a slowdown in automotive, we are still very cognizant or constructive I should say in terms of automotive production rates, both in Europe and in NAFTA. Inventories remain low through the system, the supply demand balance is good. So we have a constructive year on automotive growth in 2016 relative to 2015.

In terms of pricing, look, these are all confidential contracts, I would not get into many more specifics. I think the general comment we made at the end of our presentation remains valid that the biggest driver in terms of earnings improvement in the second half is not necessarily coming from contract improvement but from lag pricing.

So what is lag pricing? That's basically orders we have taken in the second quarter, which are being shipped into the third quarter. We have certain contracts, non-automotive, which have lag pricing. So, in Q1, when we deliver those, they are based on Q4, Q2 is based on Q1 and so on. So that will be a positive impact in the second half in our results. Offsetting some of that will be the fact that the second half is seasonally weaker and so we will have lower volumes.

Ioannis, RBC.

Three questions from my side. First of all, in the US, you highlighted tight supply and some destocking as reasons for slightly lower demand forecast for 2016. At the same time, last quarter, you indicated you had the blast furnace with 1.5 million tonnes of capacity idled. Any thoughts on restarting that facility?

Second question, can you give some indication on current lead times in Europe both for HRC and also cold rolled and coated sheet and have you seen any softening over the past weeks? And third question, again on Europe, strong numbers in Q2, has there been any notable change in product mix during the quarter?

You are right that our blast furnace three is idle at this time, but this is a commercial matter where we do not provide when do we start and how do we start. So we will inform the market what is the future development on this issue.

So, lead times in Europe are stronger then when they were at this point in time last year. I would not provide a breakdown by product, I think that's commercially sensitive. In terms of mix, the improvement is marginal. Obviously, every quarter we are trying to improve our share of HAV product, but there's no significant change in mix in Europe from Q1 to Q2.

Cedar, Bank of America.

Two questions from me. Can you touch on the trends in Brazil? That business made close to $1.9 billion only two years ago? Obviously, your shipments are still going down there year-over-year. Can we just get an update of where you see the market? And then, on the US, with the agreement now agreed with the US Steelworkers Union, is there any clarity you can give in terms of timing for plant closures, how we should think about phasing the cost savings that should be coming through there?

First on the US, we have got the agreement signed with the union. And some of the downstream facilities are being closed, that is the 84-inch hot strip mill and some finishing lines. At the same time, we have an investment program to invest in steel shop and continuous casting to optimize the footprint of Indiana Harbor and some of the other assets in US. We have said during this that this will give us a benefit of about $200 million from 2017 onwards, but some of the benefits will also come this year, maybe close to $50 million to $100 million, we are not sure yet. But we are expecting some benefits to come this year.

Clearly, Brazil is affected by the domestic weakness, but our plants are operating at full capacities, in flat at least, because when we are not able to cater to the domestic market due to its weakness, we are exporting. At the same time, you will find that our profit is not as affected as it should be, because international export prices have also improved, which has helped in improving our EBITDA in flat.

In long, we are operating at less than full capacity or less than 90% and that will depend on the market, but we are quite confident that at this time we are seeing things are kind of bottoming out. We see some improvement in Brazilian market slowly, we have to be patient about it, but we are confident that demand will be restored. We have lost about 30% of demand since 2013. We are confident that this will be restored and then we will operate at a high capacity and we'll participate more on the domestic market.

Alessandro, Berenberg.

Congratulations on solid set of results. Just a follow-up question to one of Cedar's. On Brazil, we have seen also Usiminas that is calling for an H2 2016 that definitely is stronger, in terms of recovery of domestic demand and consider that your exporting at [fully revisioned] rates at the moment. I'm expecting clearly a recovery of the premium in terms of domestic price. This I just want to know what the feel on this issue is.

The second is on the restructuring, because your Action 2020 seems to be only now showing some kind of sign of significant implementation. Would it be possible to understand how much of your Q2 very strong results is the results of operation and how much is basically related to this Action 2020 and if you may add, you were speaking about the lag effect of steel prices. How much of the Q2 strong steel price increase in the US and also Europe is being captured in terms of pricing to Q2?

Today, in Brazil, we already see the higher premium to IPP, and I think that kind of higher premium is not very sustainable. There could be some correction, at the same time, real has also appreciated. So we will come back to normal premium in the Brazilian market. More important is the improvement in the domestic demand, which will help us in improving now profitability. Our market shares are not changing, it's all domestic demand, which is poor. Action 2020?

In terms of Action 2020, I think there is a significant impact in our Q2 results already. If you remember, when we announced 4Q performance, we talked about $1 billion structural improvement. It was focused on Calvert, it was focused on improvements we are making in ACIS, it was focused on the European transformation plan, we also said that once the US AOP is underway, there will be certain benefits this year on US AOP.

The best way to think about it is to just look at our second quarter 2015 performance versus second quarter 2016. Shipments are more or less flat there, slightly down this quarter by about 0.3%, but what you find there is selling prices were down by 12%. That's clearly a very significant drag or a significant headwind, even if you were to normalize for cost, you would see there was a significant price cost squeeze that occurred between Q2 2015 and Q2 2016, yet EBITDA is up by 27%. And when we look at what are the attributes of that EBITDA growing by 27%, clearly, it's the initiative that we have embarked upon in our Action 2020 plan.

So in a nutshell, we are we are very confident and very comfortable. We are very pleased with the execution that we have achieved so far as well as in our ability to deliver the full plan in the medium term. In terms of more quantitative updates for the market, our intention is to do that on an annual basis. So, we should be doing that when we report year-end results and we can lay out much more clearly exactly how that has impacted our results. In terms of the lag effect, I think there is a significant portion of price improvement that has already occurred in our NAFTA as well as in our European business. The business which has very little lag effect is really our ACIS business and to some degree our Brazilian business. Going forward, we think that is going to support our business into the second half and that may offset or close to offset the impact that we will have from lower volumes due to a seasonally weaker second half.

Seth Rosenfeld, Jefferies.

On the outlook for import, it seems that we've seen a number of quite significant announcements from the European Commission in the last six to nine months and yet imports continue to be rising from the most recent data that we can see. Do you have a sense about whether or not the recentl activities are starting to have an impact on your buyers and whether or not we might see a bit of a shift in the import volumes into H2? Also wondering the outlook for galvanized steel appears to be the one major flat steel grade where there's no case as of yet. Is it an area of interest where you're perhaps doing work to request an investigation? And then separately on the US business for Calvert, if you can provide an update on the ramp-up of that plant in terms of volumes or profitability it would be interesting. Obviously given how strong domestic CRC and gal spreads are at present above HRC for example, is this perhaps one part of the business that is already at peak margins or is there more upside to come from Calvert? Thank you.

In terms of Europe, you're right imports are still increasing. Imports have increased if you compare first half of 2016 compared to first half of 2015 by approximately 15%. So, clearly this remains an issue and an area of focus for the commission as well as the various steel companies through Europe. In terms of galvanized product, I think your question is very fair and very appropriate. I don't want to comment on it at this point in time because I would rather that the information is made public and then the whole market is aware of the developments that are occurring in terms of trade cases. At this point in time, the trade cases that are sitting with the commission are antidumping and countervailing case against China on hot rolled coil as well as an antidumping case against various other countries, about five countries, on hot rolled coil. And so I think your question, is there an opportunity on galvanized steel, is an appropriate question.

On Calvert, Calvert ramping up is progressing very well. Even in the second quarter we have improved our volumes. Our capitalization was 85% in Q2 versus 72% in Q1 and we expect that this continues to improve even when we exit 2016, we should be operating around 90% of its capacity. You are right that there is a spread improvement between hot rolled and cold rolled. Calvert is continuing to work on homologation of its products with its customers. About 90% of its products have already been approved by the customers and now we are continuing to supply them those volumes and our target is about 60% to be supplied to automotive customers when it reaches its peak capacity.

So, just to conclude. So, that implies that there is further upside in Calvert as we sell more value-added products and that's part of the Action 2020 plan.

If I can ask one quick follow-up. When you look at the outlook for those spreads for gal versus HRC or cold rolled coil versus HRC, how sustainable do you think those spreads are in the market right now and is there any concern that by ramping up additional capacity at Calvert in terms of your peers are also doing similar things, that additional supply could ultimately dampen the spread outlook?

I think these spreads are because of trade action as well as the supply management in the sense that there's not enough capacity in the market and Calvert has the capacity to further improve its volume. And I think that this is sustainable for the time being.

Tony, Cowen.

First, are you planning any maintenance work on your blast furnaces or hot strip mills in your US system beyond Indiana Harbor works footprint optimization? That's my first question and then I've got a question about your NAFTA operations. We've always thought that your firmer annual contracts are approximately around 40% of your volumes, I was wondering if you could tell us what the percentage is on a quarterly basis? And then third, I'm curious as to your thoughts on the rather large jump that we're seeing in the license data on imports into the US, about a 25% rise if we look at where the June preliminary imports are shaping up to be and where the license data at least is indicating for July and a lot of that seems to be on the hot rolled and the cold rolled side. So, interested in thoughts there as well. Thanks.

I don't want to get specific on what our maintenance schedules are for our US operations. As we take or not take facilities into maintenance, we will update the market accordingly. In terms of NAFTA what is the split of contracts, it's quite simple. 40% is annual contracts, 60% is spot. Out of the spot 60%, roughly 30% is contracts using our lag contracts so let's say 40% annual, 20% lag, and 40% spot. So, those are the numbers that you can work with. In terms of import pressures, I think look in terms of the US marketplace; our view is supply-demand balance is quite constructive, inventory levels remain low, and so far we're seeing some stability in pricing with some downside risk. To your specific question of import licenses, we have to recognize that physical imports are lower than licensed data. That's what we saw in June and there could be some spill over into July.

Rochus, Kepler.

Based on the pricing structure you have, would it be a fair assumption that the realized pricing effect would be higher in the third quarter versus the second quarter? Can you help a bit on the strong performance on the NAFTA segment there? I'm looking at the volume performance and seeing that your average revenue per tonne was only up [20]. How can you get to the strong increase in the EBITDA? Would it be fair to assume that there has been some carryover effect from previous inventory writedowns?

No. I think you have increase in shipments, you have improvement in Calvert, you have a significant increase in revenue per tonne, and costs are remaining stable. So in terms of third quarter, you would tend to see even higher pricing environment. The only negative on that pricing environment would be the change in volume levels as the second half is usually weaker.

Luc, Exane.

I feel that the Q2 volume was a bit lower than the usual seasonality. Should we read that as meaning that the Q3 seasonal drop in volume will also be less than seasonally usual?

I don't have that reading. So, I think Q3 will exhibit the normal seasonal pattern relative to Q2.

Carsten, UBS.

Just on the question from Luc. We have seen that you announced the Polish blast furnace to be ramped up, Dunkerque is fully running now in the third quarter. I would also at least assume on the production level that you have come out a little stronger than the usual seasonal pattern here. That's the first question whether you would share at least on the production level even though on the shipment level we might see the seasonality. Second question I have is on the free cash flow generation. It looked like the inventories were comparatively stable, you still managed to release $235 million in net working capital so it came out of the receivables and payables. Is that sustainable or do we see here a reversal? Third question on the price differences. We have seen some big price differences in steel between Europe and US, actually the highest ever at least since I have records, 1985. Do you take advantage of it because not all the European countries are actually blocked by the US because it's a nice margin? So, that are pretty much my questions.

So in terms of your three questions, I'll start with the first one. So in Europe, the inventory cycles are different than perhaps what you see across ArcelorMittal. So, let me just address your European question. In Europe we typically build inventory in the second half and we draw down inventory in the first half. This is because the seasonal impact also is much more pronounced in Europe than in other markets. And so the fact that we are ramping up Dunkerque and we're going to be completing the reline of the Krakow blast furnace does not necessarily mean increased shipments, it just means that we are on track in terms of our inventory build. We had a significant drawdown of inventory in the first half of this year in the European segment. In terms of free cash flow and moving into working capital, look, we have invested over $1 billion of working capital in the first half of this year.

And we are suggesting that the net investment for the year would be $0.5 billion, which implies that we should be releasing $0.5 billion in terms of working capital in the second half. Some of it will be in inventory obviously not in Europe, but in other segments, and also perhaps better receivable and payable management. In terms of the price differential in the US and Europe, you're right, that does exist and it is an attractive opportunity. All companies and all countries in the world have to be cognizant that clearly the US is moving very aggressively on any surge of imports or any new countries which will bring in a lot of steel and we are aware of that plus we have a large operation in the US. So, we've put all of that into consideration before deciding on what the appropriate export strategy is for our European facilities.

Roger, JPMorgan.

But just looking at your cost performance, it was a bit better than expected and it slipped down a little bit QonQ. How much of a headwind did you see from rising raw material costs or were the lags still sort of working in your favor quarter-on-quarter on the raw material front? And then second question is just on Ilva. You sort of committed to running that plant at 6 million tonnes per annum if your proposal is successful. Would acquiring Ilva make you reconsider capacity elsewhere in your Southern European portfolio as in would it put that capacity at risk?

In terms of raw material and the cost impacts, clearly iron ore prices are more elevated than they were in the past. We're seeing some of that in the coal business as well. Scrap is slightly down or stable. The impact is not that significant that we're forecasting into our business. We will review that obviously further when we report results. Perhaps some of that is because of the cost reductions we're doing across our business and the structural improvements, perhaps some of that is because some of the lag impact or the impact of raw material costs is already captured into the second quarter. The biggest impacts we're seeing in the second half is the benefit of lag prices in terms of revenue offset by seasonally lower volumes.

In terms of your second question, that was Ilva. In terms of Ilva, you're right, we have made a bid along with Marcegaglia. Old news but perhaps worth repeating since we are addressing the topic is that we don't expect our bid to threaten or impair our strong balance sheet or its credit metrics. In terms of its impact on other operations in ArcelorMittal in Europe, we believe Ilva is complementary. We don't see an impact on our existing businesses. Perhaps you are aware, but Italy is the second largest market in Europe for steel and even though ArcelorMittal is the largest steel producer in Europe, we have virtually very limited presence in Italy. So, clearly this is an opportunity for us.

Bastian, Deutsche Bank.

My first one is on CapEx where you obviously demonstrated to the market how lean you can run the business if it needs to be, like I said it's quite impressive considering that this is essentially representing almost a 40% cut on discount compared to most of your peers. Since you have put together the budget for 2016, it's probably fair to say that the market conditions have not just improved drastically I guess certainly and also much more than anyone could have expected. It's still very early days, but could you give us an early sense for whether you plan to keep the budget as tight as $2.4 billion next year also? Was there any project in the pipeline, which would imply that we may step up from that level? That is my first question.

And then my second question is again coming back to the outlook and guidance. Clearly we have not yet seen the full impact of higher US prices, which as you pointed out after Q1 results we'll only see in the third quarter for the spot business and then for the annual contract business in the US this will be even Q1 next year. And the same applies essentially for Europe although volumes here maybe seasonally weaker although the pricing impact clearly should be overcompensating that. You said that we should not see a deterioration in earnings, but why would we not see an additional improvement in EBITDA in Q3? I appreciate that you want to remain at slightly higher level, but any directional help would be great and helpful. Thank you.

So in terms of CapEx, every time we look at our asset base and the products that we are producing and the acceptance of our products and technology, we rank the highest relative to our competition. We did a survey with 23 OEMs recently and 21 out of the 23 ranked us as Number 1 in terms of technology. So, our facilities are well maintained. We are producing the most demanding products at relatively good costs. Perhaps there's a difference in accounting measurement relative to the competitive landscape, perhaps we are expensing more items which others are considering as CapEx or perhaps not, but that could be one explanation. In terms of CapEx going forward, I would just add that part of the deflation that we have seen in CapEx is not only efficiency measures we have put in place in terms of rescoping and better negotiations, but also that we operate in various jurisdictions which have seen various currency devaluations. So that's Kazakhstan, Ukraine, Brazil; and so as a result, the CapEx cost in dollars has come down, the same in Europe.

In terms of going forward apart from significant currency impacts, we are not forecasting dramatic increases in CapEx. We are forecasting small increases, the exact number of what that small is obviously we will inform you at the appropriate time. But there is no CapEx out there that we can see, which will dramatically change the approximately $2.4 billion number. In terms of the same question of selling prices, seasonally weaker volumes, and all of that; I can just reiterate what I said. The only thing I would add is that you had mentioned that we would see the full impact on spot in Q3 in the US and in Europe. We have already seen the impact of spot in Q2. There is some lag effect of certain contracts and maybe some lag effect of some spot orders, but a significant portion of the spot impact we can see in our European and NAFTA results, in ACIS it's a very clear passthrough, same in Brazilian operations. So, just to reiterate. In terms of the second half, yes, we will have benefit of improved pricing, which we expect to be offset by seasonally lower volumes.

Phil, KeyBanc.

How much of the $1 billion in cost savings announced in the third quarter earnings call last year have been seen in current year-to-date results and are there any more benefits to come on that?

So, I had mentioned some of the key drivers of why we had seen a significant portion of that already in the second quarter results. There is still some left in the second half, primarily the benefit of the US footprint that we have just done in the second quarter where we have idled various facilities and we will see some reduction in their cost base in the second half. Our ramp up at Calvert continues so that should be another positive development into the second half. Remaining programs, I think we are on track and we're making good progress. But in terms of what will change first half versus second half, I would highlight more potential in Calvert in terms of higher value-added volumes as well as some cost reduction because of US AOP.

And then just for clarification and I'll jump off. The 60% in NAFTA that is non-annual contract, how much of that mix again is that quarterly lag? Thanks so much.

So 40% is auto, 60% is spot. Out of 60% spot, 30% is the lag contract.

Patrick, Macquarie.

With regards to the mining division, it seems like a number of the really large scale iron ore producers in particular are rapidly moving their cost structure downwards. I believe you haven't as yet changed your breakeven target for the iron ore business. Do you see more opportunities for cost savings there going forward?

It's Simon speaking. If you go back over the last four or five years, you'll see in fact we probably kept pace and in some of our assets, the bigger ones, we've actually outperformed the majors in terms of cost reduction on FOB basis. That work continues. We're not letting up, it's part of the DNA of our Company. Really where we see the next level is the sustainable structural changes, it's the Action 2020 topic again. So across the board you're seeing efforts in all our mines particularly in Canada and AMMC, Liberia, other assets where we have structured programs now underway. They are footprint based, autonomous, and semiautonomous equipment drivers, trucks, et cetera being viewed, conveyors, other methodologies, which will take us to the next step. And that's really the focus for the next two to three or four years is keep hacking away at the cost reductions. We know that it gets harder and harder to reach up the tree to reduce costs, but that doesn't stop us. But really now it's chasing those material structural changes, which will force us to a new level around FOB cost competitiveness.

And then finally apologies, this is a bit repetitious. But can you talk a little bit about your philosophy on the dividend policy going forward again?

If you know it's repetitious, what else do you want to hear? So look, it will be on the Board's agenda when we hit a level of net debt-to-EBITDA of less than 2 times. At that point in time the Board will review both the structural improvements we have made to our business, the sustainability of our cash flows, and we'll also take into consideration where we are in terms of our ratings vis-a-vis the various credit agencies.

Christian, Soc Gen.

Just on the ACIS division, you've done significant improvement in the second quarter. What's the pricing looking like in general both in South Africa and in Eastern Europe given that you're more exposed to spot prices and I guess the spot prices are beyond the renewed pressure in Asia? And as a side question, I read that you may be considering participating to the restart of the Highveld steel mill in South Africa, is there any relevance to this? Thank you.

As Aditya said before that our Ukrainian and Kazakhstan business is on a spot based price basis and there's a lag of only two weeks forward. So, I really believe that this will follow the market trend, whatever is the international price. And on the high value-added products what we are saying that we will start some electric arc furnace operations in Vereeniging, which will produce special billets to be rolled in Highveld heavy section mill and this will allow us to enter into heavy section market, which we are not there yet. So, this will help us to improve our volume and create value. At the same time, this will also allow our Newcastle plant to produce fully and they can produce more of the long products and Newcastle and Vereeniging can produce more long products, which is where there is a growth in demand.

That will be for exports or for the local market?

In South Africa, this product is for domestic market.

Brett, Loop.

First off, you've gotten your debt level down to where you want it to be, you've articulated the desire to get down below $15 billion and you're well beyond that on a net debt basis. Have any of the rating agencies sort of started to talk to you guys about positive outlooks or dare I even ask moving towards investment grade? And then also just talk a little bit about this Usibor 2000 and Ductibor 1000 in the automotive market. How big is that going to be? Is it going to be something that will effectively stave off some the competition from aluminum? So, the two questions are sort of about the new products in the automotive, sort of an arms race as it were with aluminum, and then also the rating agencies dynamic.

In terms of the rating agency dynamic, at this point in time we don't have anything to report, but clearly these are the conversations we will be having with the various credit rating agencies. In terms of new products, as I mentioned earlier, we are the technology leader, that's what the automotive consider us as. We invest about $230 million a year in terms of research and development. And as you correctly pointed out, we have been rolling out new products. Apart from rolling out new products, we have been working very closely to ensure that new vehicle design uses advanced high strength steels appropriately to stave off the usage of aluminum.

I think post the Ford F150 loss, we're making good progress. We see that in terms of the order intake for our advanced high strength steel products. The level of demand that we are seeing relative to what would have been a forecast maybe two years ago. So what we are seeing more is that the aluminum uptake is now more on the lower case scenarios that perhaps you had envisioned two years ago than the base case. So, that's the progress we have made through the launch of these various new products. And the launches and developments of new products is continuing so we should expect to see more of those initiatives succeed in the medium term.

Congrats on the strong quarter.

So there being no more questions, thank you all for joining today's call. This was a solid quarter for ArcelorMittal. We have shown good progress on all fronts; EBITDA is recovering, balance sheet is strong, and we are making progress with our Action 2020 projects. I look forward to speaking to you at our next results and wish you all a very happy and safe summer. Thank you. Have a good day.