ArcelorMittal SA (MT) 2016 Q3 法說會逐字稿

You can start now, Daniel. Thank you.

Good afternoon and good morning everybody. This is Daniel Fairclough from the ArcelorMittal investor relations team. Thank you very much for joining us today on our conference call to discuss the third quarter 2016 results. In an effort to reduce the length of our call, we have this morning published our results presentation with full speaker notes. So after a brief introduction from Mr. Mittal, we will move straight to the Q&A this quarter. The intention is that the whole call should therefore last about 45 minutes and if you do want to register a question, please do press star one on your keypad and we will take the questions in the order that they are received. And with that, I will hand over the call to Mr. Mittal.

Thank you, Daniel. Good day to everyone and welcome to ArcelorMittal's third quarter 2016 results call. I'm joined on this call today by Adit Mittal, Group CFO and CEO of Europe as well as Simon Wandke, EVP Mining; Genuino Christino, who is our Head of Finance; and Daniel. Before we move to Q&A, I would like to make some brief introductory remarks. As usual, I will start by commenting on our health and safety performance. Our lost time injury frequency rate for the first nine months of the year was 0.8 times. Safety remains our number one priority and it was pleasing to be recognized last month by World Steel for our commitment and innovation in pursuit of any injury free, illness free, and healthy workplace.

Turning to results, this was a solid quarter for ArcelorMittal. EBITDA was $1.9 billion, a 7% improvement over second quarter and more than 40% improvement compared with the third quarter of 2015. It is worth noting this is our highest level of quarterly EBITDA since third quarter 2014. Encouragingly, we also reported a second consecutive net income of $700 million. Overall, our steel-only EBITDA improved by 5.3% to $1.7 billion in the third quarter primarily driven by a 7.4% improvement in average steel selling prices offset by an 8.1% decline in shipment.

Performance also improved in our mining business with EBITDA 25% higher at $204 million driven by higher seaborne iron ore prices offset in part by lower iron ore marketable shipment volumes. Despite a $600 million investment in operating working capital during the quarter, we had a positive free cash flow of $300 million contributing to a further net debt reduction to $12.2 billion. Net debt is now $4.6 billion lower than one year ago and the lowest level since the ArcelorMittal merger.

Looking ahead to fourth quarter, we expect EBITDA to be lower compared with the third quarter due to lower steel prices in the US and the impact of rapidly rising coking coal prices on steel spreads. Coal prices have spiked unexpectedly in the third quarter due to supply issues including China's decision to limit coal mining to 276 days per year. Near-term, there will be a negative impact on global steel spreads, but I'm confident that the steel prices will adjust to these higher raw material costs. We have seen it before, it is just a question of time and I know that over the past month or so there has been a sharp increase in steel prices globally.

Globally speaking, overcapacity also remains a challenge and a comprehensive trade response across all product categories remains important in order to support fair trade. I'm therefore pleased to see that the decision by the US Department of Commerce to initiate anti-circumvention investigation on coal rolling products and core exports from China through Vietnam. Lastly, the implementation of our Action 2020 plan to improve underlying performance is on track and we remain confident about the potential of this plan to significantly increase EBITDA and free cash flow. Thank you very much. Now, we are happy to take your questions.

Thank you, Mr. Mittal. So if you can remind everybody if you would like to ask a question, do press star one, we have a queue already and we will take the first question please from Mike Shillaker, Credit Suisse.

I've got three questions, if I may. The first question, just a clarification on the guidance because I've had a lot of questions on this, this morning and some confusion. If I look at your implied guidance, it's the $4.5 billion of cash neutral as per Q1 adding the $1 billion of inventory of net working capital build and then adding around $400 million, [there's $390 million] of bond redemption payments, which did go into operating free cash. So am I right? Is the math right in thinking that your implicit guidance is better than $5.9 billion for the year is question number one. Question number two if I may, just on volumes, I think the volumes looked a little bit weak probably than expected, [we kind of expected in Q3].

There doesn't seem to be any seasonal rebound going on in Q4 either. So could you talk a little bit about volumes A) around the regions because I think Europe was clearly a little bit weaker than seasonality wise in Q3. What is weak in Q4 that's not giving you a seasonal rebound? Is it a buyer strike you're suffering from or you're seeing any form of real demand problem or is there any risk that you're just simply losing market share is question number two.

And question number three, Mr. Mittal, you talked about steel prices rising to compensate for raw materials and absolutely, we have seen this before, can you just talk a little bit more about your vision of the timing of this and would you expect Q4 as a consequence given you're seeing steel prices rising to be the trough quarter in the current EBITDA cycle. Thanks a lot.

I think Aditya is going to answer on your guidance and volume and since the steel prices is in everybody's mind, I will take up this question. Thank you, Michael first of all, and always there has been a lag in steel price rise versus the cost rise and this I have seen in many cycles before and that's why I said that I'm confident that steel prices will rise to pass it on to the customers in view of the cost increase.

First of all, this coal price rise has been unexpected, very surprising, and we did not expect this to move so fast. Clearly, China undertook this volume or capacity cut -- there has been two issues, one is, there was a flood issue, then we see this, that they announced this capacity cut. Very quickly they moved, they reduced the operating days of the coal mines and they have shut down some of the coal mines. Clearly, they want to help, they want to reduce the stress on the financial system because these mines have not been making money and this would help to reduce the financial stress as well as they want to create a better environment for the coal mines. And we see that there is a lag here and we will see the prices moving forward next quarters and next month and next weeks and we have seen it before. Adit?

Okay, great. Michael, in terms of your question, our guidance is the cash flow from operating activities will exceed CapEx. Cash flow from operating activities as you rightly point out includes our working capital investment, which is $1billion and includes the prepayment cost of retiring debt which is approximately $400 million.

In terms of volumes, so let's talk about Q2 to Q3 and then a bit about Q4. So in terms of Q2 to Q3, I think the biggest drop in volumes is in Europe where we've had approximately a 13% decline Q3 to Q2. If you look in the past roughly, when we've had a proper seasonal impact, that's about 11%. So the drop is about 2% greater. I attribute this to the Fos outages that we have had and again, that's a short-term issue and so production is being restored and things should look better.

In terms of Q4 as a result, European volumes will be better and I expect there to be a small pickup in volumes in Brazil, in the CIS and the only reason why we are suggesting that overall volumes are flat Q4 to Q3 is because of a buyer strike in the United States and as you know, when prices fall in the US, people get hesitant to buy. If you look at the underlying characteristics of the US marketplace, real demand is good, apparent steel demand is still good and we're forecasting positive numbers into 2017. As a result, that's temporary in nature. I don't expect that to continue. So it's not a signal or a sign of anything more significant than that.

In terms of market share, look, market share is good. We're not losing market share. If you were to look at the European numbers, you may wrongly conclude that. You have to recognize that in Europe, we have reduced the level of exports. So our market share in the domestic markets remain the same and domestic shipments are increasing. Also in Europe, we have changed the operating plan. So if you were to compare our European shipments excluding the changes to the operating dynamic, shipments are actually up year-on-year even on a nine months basis.

So what are the operating changes? As you know [Sastav] which was producing 700,000 tonnes to 800,000 tonnes is at a level of production which is much lower, approximately 150,000 tonnes to 200,000 tonnes and in the long business, we have idled our wire rod plant, which was a commodity-based facility called Zumarraga. That change in operating footprint is worth about 600,000 tonnes to 700,000 tonnes on a nine month basis. So just to conclude, market share remains healthy, Q4 is just a buyer strike in the US and overall, we're seeing good demand patterns on a global basis.

That's great. And just a quick comeback on the met coal situation. What do you think the met coal shortage at the moment is doing for China because it obviously looks like the Chinese are starting to export steel. Do you think there's some degree of constraint going on in the Chinese market at the moment in terms of ability to produce profitably to export.

And I think just as a follow-up again to the lag, is it fair to say that given raw materials are now on relatively short-term contracts that the lag will be a lot less than for example in 2005 when steel industry went into destocking, but the iron ore price went up on a trailing 12-month contract, which clearly gave a pretty material squeeze for a significant amount of time, but obviously the pricing of raw materials now has changed and therefore, it allows the steel industry to recoup those cost rises a lot quicker. Thanks.

So in terms of China, what we have seen just in the last month perhaps because of how much [coking coal] prices have risen exports have reduced. So clearly that dynamic is unfolding and it will be interesting to watch. We have not seen exports in the last nine months change in spite of the various trade measures that have been put in place in Europe and in United States and in other countries, what we're seeing is those trade flows moving towards Southeast Asia.

Now, suddenly in October, we saw exports in China decline. In terms of the lag effect, I don't want to draw too many parallels to 2005. Today, when we look at our business, roughly half of our businesses in Europe and in North America is contract-based and the rest is spot-based and that's how it works in terms of the revenue side. Did you have any other questions on the lag effect or--

No, I think its all pretty clear. That's great. Thank you.

Alain, Morgan Stanley.

Just a quick question on the cash needs of the business beyond 2016. Are you able to just qualitatively give us some color on what will be the cash needs next year in terms of CapEx, interest payments and so on, working capital. Thank you.

Okay great. So, the headline is we are expecting marginal changes to the cash requirements of the business. So cash requirements for this year which we had announced in February is $4.5 billion, that's what we expect for the full year. So there would be a marginal change into next year. We give you a specific target in February once we have completed our internal budgeting and strategic work. In terms of what could change, I expect interest expense to be down, but simultaneously, we would be investing a bit more in terms of growth opportunities. So CapEx would be slightly higher.

Seth, Jefferies.

A couple of different questions, first on coking coal and then separate on the NAFTA business. On the coking coal front, can you just quickly confirm what your contract structure is by region in terms of annual contracts or quarterly or spot sales and also what the scale of inventory backlog is for coking coal in inventory by region. And then separately, in your NAFTA business, I know that you recently announced plans to restart Indiana Harbor. Can you give us a bit more color on the logic behind this restart given the recent weakness in domestic steel prices and since the timeline to hit full capacity exactly what incremental volumes should expect that to bring on over that time frame. Thank you.

Sure, I will give some color on the regions, but let me begin with the global picture on coking coal. So, we need about 35 million tonnes of coking coal a year, out of which we produce about 6 million tonnes to 7 million tonnes. We do about 4.5 million tonnes to 5 million tonnes in Kazakhstan and the rest in the United States. So that gives you a flavor of where that production is based. Then when you take the number of about 28 million tonnes, 29 million tonnes, there's about 5 million tonnes which is covered in the annual US benchmark system.

So that leaves you with about 24 million tonnes of coking coal. Approximately half of that is on spot or monthly spot or a bit more than just half and the rest is on quarterly basis. In addition, we buy about 9 million tonnes of PCI, so that gives you the complete picture of our coking coal plus PCI requirements.

In terms of inventory on average, we have about 2.5 months of inventory on a combined basis. Clearly, more inventory in the European environment, less in the CIS regions, but that's how it plays out.

So, in terms of restart of Indiana Harbor, I think -- look the idea to restart was to produce slabs for Calvert. It was not to increase the amount of steel that we put into the marketplace. And just starting a furnace doesn't necessarily mean that all of that production comes on to that market, because we can also reduce some of the levels of production at some of the other furnaces.

Thank you, just a follow-up on the Indiana Harbor ramp-up, could you give us a sense of when you would expect that plant to hit full capacity -- I understand that you've just alluded to the fact that other plants could be pulled down slightly. And then separately, just to go back to one of the earlier questions on Q4 potentially being a bit of a trough in the cycle, given your comments on coal inventories, would it be fair to think that Q1 actually would be significantly higher impact of the coal price increase relative to Q4. Thank you.

So we are not providing specific guidance on when Indiana Harbor will hit full capacity. It's safe to say when the market is pulling more volumes I think all the furnaces in our facilities would be running a bit harder. In terms of your coking coal question, you're right. Q1, we are going to see more of an impact than in Q4. You have to recognize that the price rise movement is just starting on a global basis. We have seen significant price rises in the last 30 days and in Europe, we have signaled and announced a price increase four, five weeks ago, which predominantly covers the Q1 contracting environment.

Ioannis, RBC.

Just a couple of questions from my side. First on NAFTA, you suggested that there is some uncertainty around volumes in Q4, but we've seen a recent price hike from you and some of your peers and also inventories are relatively lean. So in that environment I would have expected some modest restocking over the short-term. Could you perhaps elaborate on that?

And the second question on working capital investment, the additional $500 million you suggested today, could you give us a rough split between how much is coming from higher steel prices and how much from higher raw material prices and when you think about raw material prices, should we really look at the spot prices or let's say pricing at the beginning of a quarter as an indication? Thank you.

Okay, great. Thank you. So in terms of NAFTA, you're right, things are improving in the US marketplace. We have announced price increases. We see that the inventory levels are low and this points to a return to more normal level of demand and consumption, which should support shipments and what we're seeing is, we don't see that necessarily in Q4.

In Q4, we are forecasting at this point in time shipments to be lower than Q3. Clearly, if the market rebounds strongly in the next few weeks, that may change, but at this point in time, we are expecting Q4 shipments in NAFTA to be lower than Q3. In terms of inventory, I would say about three-fourths, two-thirds to three-fourths of it is coking coal. So that is sitting in inventory and the remaining is in receivables and that's [your steel prices] impact of the $500 million. In terms of what price levels to think about, I think you are more or less on the right page because our inventory cycle is about 2.5 months, so therefore prices at the beginning of this quarter is what's going to be reflected in inventory. The only thing I'm going to suggest is when you look at the inventory, look at Q4 over Q4 last year, right. That's the delta change because actually in Q4 compared to Q3, we'll be releasing some working capital.

That's very helpful. And if I could just ask a follow-up question in terms of mining and the impact from Ukraine in terms of volumes. Do you expect to see better volumes from Ukraine in 2017 or should we assume a lower operating level going forward. Thank you.

It's Simon. I mean, if you go back in the recent history, Ukraine open cuts produced around 10 million tonnes per annum. This year, you saw the reference in the notes today. Obviously older mines, more complex, getting access to land in arable areas and it's taken us time to get that land access for the tailings. It's been achieved in Q2. So it has impacted 2016 and we're expecting full year production of concentrate [around 9 million, so bit about 1 million tonnes less than 2015], but back in 2017, with the new mine plan, we fully expect to be back on track around the 10 million tonnes as per history.

Tony, Cowen.

First one was touched on a little bit, but I'd like to pursue on the demand side of the equation, China, it wasn't long ago that people seemed to be writing off China and now we've got iron ore at $68 and met coal at $300 and your commentary sounded more positive. I was wondering if you could provide more color as to why you think the demand recovery there is more sustainable?

I don't think we're suggesting that demand recovery in China is necessarily more stable. Clearly, it has done better than what we had forecasted, slightly better and that's driven by stronger automotive growth as well as infrastructure investment in real estate. All of these factors we think infrastructure real-estate supported by rising credit. In terms of what's happening in the global steel industry, clearly we are seeing positive demand evolution in most of the markets in which we operate. For example, in Brazil, we think the worst is behind us. We're seeing positive growth in Europe as well as in North America. The ArcelorMittal PMI, global weighted PMI is above 50 and that's always a good sign and so I think that is what is underlying our confidence.

Secondly, normally when raw material prices are rising, that's another indicator that general demand for steel is good, which is another positive indicator. In terms of China, I think in the last 12 to 18 months, we clearly have made a lot of progress. We still have some more progress to be done, but we have made progress, what is the progress? Number one, we have established that the Chinese steel industry cannot survive at a spread which is [lower than $130] compared to raw materials, which provides a base in terms of steel pricing compared to the raw materials.

Number two, we have demonstrated that the Chinese have been dumping their overcapacity problem on to our markets in Europe, US, and other markets and have put in appropriate trade measures in all of these markets. So what aspects of the journey remain to be done? The overcapacity situation in China is unresolved. It needs to be resolved and there is a path that they're on and hopefully that arrives at the logical conclusion. And the last thing that remains unresolved is we need comprehensive trade reform.

So we've made progress, but we need to make sure that there is no backdoor entry or no loophole. An example of this is circumvention by Vietnam and as you are aware, the DOJ has opened an investigation on that which is good news. In Europe, we are covering certain products, not all products in terms of Chinese flat steel. So there needs to be some work done at the Europe level. So that just provides an overview of our flavor of China's role in the global steel industry and on the positive demand outlook for the global steel industry.

Jason, Bank of America.

Just one question from me, which is on dividends. We have seen some other groups who've been going through a similar process of balance sheet repair start to talk about dividends again and I'm just wondering, could you frame for us how you as a management team think about dividends and when they might be appropriate and how you might frame a policy on dividends?

As we have said before that topic of the dividend will be back on the Board's agenda once the net debt EBITDA multiple sees below two. And however the Board will also look at the sustainability of those earnings and the structural improvement that we have made to free cash flow and also they will review where we are on the credit rating though the -- any [decision] will not be tied to our credit rating, but clearly our rating will at some point reflect the progress we are making on these factors. We think that our near-term priority for surplus cash is further deleveraging.

Just to push you on this a little bit Mr. Mittal, if I look at EBITDA at the moment, it does look like you're already at that two times threshold. Does that indicate then you've got some concerns on the sustainability of earnings right now?

What we have said that we will like to look at the sustainability -- we are saying that now we are seeing the volatility in the coal price and we have to push for the price increase as soon as possible. At the same time, the Board should review that how -- what is the structural changes which we are bringing to our business, how sustainable is this, but I do not think that the dividend will be the priority for the Board, more will be progress on Action 2020 and the structural changes.

Roger, JPMorgan.

I just want to go back on to coking coal. You've mentioned there's 2.5 months of inventory. Is that the entirety of the lag that we should assume between the price of coking coal that we see on the screen and that coming and hitting the P&L or is there now then a further lag in terms of the time between producing steel and delivering it or is there a lag before you take delivery of it as well between agreeing a price for the coking coal and actually taking it on to your books. So could you sort of give us some more color on what the full sort of lag time is on the high coking coal prices right now on hitting your P&L.

And then secondly, just could you give some more color on the dynamics of the annual contracts for coking coal in the US. If you just sort of look at the forward curve for coking coal at the moment compared to where it was this time last year, probably talking about a $120 increase year-on-year. I mean is that a good sort of starting point to consider for how much your coking coal prices are likely to increase in the US and sort of if not, why not?

And then also you mentioned in an answer to a previous question that you've reduced your level of exports from the EU, could you sort of explain what's behind that? Are you seeing more competition outside the EU and therefore focusing more on the domestic market.

Okay, great. Thank you. In terms of your question on coking coal, 2.5 months is a good guide. If you're extremely precise, you would argue that there is some inventory in built in metal stock and finished goods. So we should just be careful because this effect is not starting in Q4 only. Some of the coking coal prices began a month before or 45 days before. So maybe if you want to be a bit more precise, you can round it up to three months including the full impact and that's more or less everything. That's more or less everything.

That's obviously not the case throughout every region right. So in [ACIS] it's shorter, but they also have more exposure to the spot market, so hopefully prices are correcting or improving in that environment faster. In terms of the annual benchmark in the US, look, the annual benchmark in the US -- we don't talk about the price levels in that, that's something that we negotiate some of those mines have limitations on their ability to export. So I would not necessarily tie the pricing exactly to the export markets.

In terms of level of exports for Europe, I think that's not because the export market is weaker. I think we did talk about some changes in the operating footprint and also production outages that we had in Fos. So, historically what we have done is we have been pushing our facilities to run full produce at their maximum output and excess steel, we tend to export. We still make good contribution margins on those exports and as the domestic market was growing and our demand patterns were improving and we didn't have that much of metal so, we reduced our exports. That's all that is.

Alessandro, Berenberg.

I have three question. First one related to Brazil that you basically saying that the worst is behind you. If you can actually quantify in terms of expectation, how stronger can be shipment or probably contribution to an average profit that you can see [naturally in 2017]. The second one is related to an update on Ilva, because last October theoretically was the first deadline for the government to take a look at the environmental plan presented by the bidders.

Then the third one is for Mr. Mittal, you just highlighted at the beginning of the conference call that you're confident that you're going to be able to align steel rises to increase raw material cost. Usually, of course, raw material cost in terms of positive demand growth has always been a tailwind. [Stripping out basically forward probably part of Q1] when the impact would be quite significant to the P&L, do you see these three alignment of steel prices relative to the level of demand and inventory as a potential tailwind let's say from mid Q1 or end Q1 onwards throughout 2017. Thank you.

So let me address Brazil first. So in terms of Brazil, all we're saying is the bottom is reached, we're not necessarily saying that we're off to the boom time so soon. I mean we have been seeing year-on-year declines in Brazil, as you know, roughly demand is [off 30% since 2013]. So a very significant drop in the demand of steel. So the bottom has been reached. We see it in the currency, we see it in local sentiment, we see in the fiscal reforms that have been enacted and we're forecasting positive GDP growth and positive consumption growth of steel next year. That's a big change compared to this year where we have negative 12% to 14% apparent steel consumption decline. In terms of Ilva, look at this point in time, there's not much more to add. I think we're part of the process and the process is going slower than anticipated. I think there is a referendum in Italy in December and I don't think anything will be decided before that referendum.

The question on the price? I believe that since there is such a steep price increase in the coal, it is affecting everyone's cost and our cost also going up and we see that the strong -- basically the environment is positive in every market segment. We see there is a positive growth in 2017. Inventory levels are not high and we see that it could be possible for us to pass it on to the customer. Adit just walked you through the positive environment in terms of our forecast for 2017.

In all the markets we are seeing that there is a positive growth even including Brazil which was minus 12% to 14% negative this year. We will be in positive territory 5% to 6%. Russia is also in the negative territory this year. We are forecasting flat next year. So all these markets, we are seeing that there is a positive growth in demand and there's a steep increase and already announcements have been made, the scrap price is going up. So all these factors put together we see is a tailwind and we should be able to get it from the customer.

Bastian, Deutsche Bank.

I've got two questions please. My first question is again on coal. So you quantify your exposure on coal with 30 million tonnes but that excludes the 30 million tonnes of coke which converts into additional 40 million tonnes of coking coal. Can you please give us some additional color on the terms at which you buy the coke and how coal prices will feed through here? Is this pretty much aligned with your contracts for coal (inaudible) in Europe, was there difference here or even longer-term contracts, which would give you some more cushion.

And then my second question is on demand where you've increased your outlook despite the reasonably weak third quarter shipment number and just a flat Q4 volume outlook, which is probably a little bit weaker than the normal seasonality would suggest. When seeing the third quarter shipments were weak, we essentially reference it to the first half of this year when global prices were [rolling] heavily and while this would usually give us some restocking and probably strong volumes in such environment, volumes in the first half were essentially flat. So the question is are Q3 and Q4 really just temporarily weak or do you see a risk that it's actually been the first half of this year which disappointed in a massively booming price environment as it may have included some restocking and the actual underlying volume basis is much lower than what we thought it would be. Thank you.

Let me just quickly address your first question and then we'll move on to volumes and what that means. In terms of coke, we are not net short as a group globally. So in some markets, we are buying coke, but in Europe we are surplus coke. So really the way to think about it is to just look at the coking coal impact and the 35 million number that I gave you I think accurately captures the impact on the Group on a global basis. In terms of volumes, look, we are not suggesting that there has been a change in the demand pattern, inventory levels, if you look at it in the US, especially where volumes have been weaker are low. So just to quickly go through the points and then talk a little bit about next year.

The third quarter was weaker in Europe as we shipped out less export tonnes. We had some production issues. European volumes are up in Q4. So our Brazilian volumes, our volumes in CIS business. The only impact we are facing in Q4 is what is the buyer strike in the US which has led to a temporary weakness or a temporary destock of orders in the US. We expect that to correct. So if you just look at it, this year, if you annualize the first half, we did about 3 million tonnes more in the first half of this year, I would expect that phenomena to also occur in the first half of 2017 or perhaps even a greater amount.

That significant volume we are talking. So that's a positive tailwind to Q1, Q2 results where you would see our shipment levels of 1 million or 2 million tonnes more volume per quarter, which is quite significant. You know we have a $200 contribution per extra tonne we ship out. So if we were to track [the same way we tracked] this year, that's 3 million tonnes more volume in the first half of next year. So that's [$600 million of EBITDA] just in the first half of next year. As far as we see this is clearly a temporary destock occurring in the US. The real demand picture is very constructive on a global basis.

Very clear. Thank you. Just to follow up briefly on the point on coal. So essentially you say the 30 million tonnes of coke which you require, this is essentially what you also sell externally. So you really -- your net exposure to coal is really just flat to coke sorry.

So, Coke I have not given you a number on coke production, but roughly it's [a million] what we do on coking coal, right. So coking coal, just so that no one else is confused on the call, we need about 35 million tonnes of coking coal, of which we have about 6 million tonnes to 7 million tonnes of our own. And overall, our global coal consumption mirrors -- so we are neutral on global coke consumption.

So basically the coal, which you have been giving us, that's already what you would be using in your coke making process?

Yes, exactly.

Carsten, UBS.

Most of my questions have been answered. One, just for the understanding, maybe you can help me to reconcile the NAFTA third quarter result because I'm still struggling a little bit. Shipments were down only 1%, production 1% to 2%, sales was significantly up -- sales per tonne, but we still have only seen quarter-over-quarter a small increase in EBITDA. What cost position actually led to the increase in your cost sphere because it can't be coking coal because you mentioned the 2.5 months of inventories.

So as I was saying, this is the Calvert effect. So if you look at Calvert in the second quarter -- so Calvert slabs come in on a lag effect. So we have higher cost slabs in the third quarter. So that should help reconcile your numbers and then when you move into fourth quarter, we will also have the same cost of slabs. So prices will fall in Calvert.

Rochus, Kepler.

Just one follow-up on costing questions on the NAFTA region. When I look at this Calvert effect, is that purely the higher cost you mentioned for the slabs. So let's say maybe on a four months lag, it's about $100 and then multiply the volumes. Do I need to consider also that the incoming slabs are now not probably being squeezed, [we're still on market price] or is there any inventory write-down included in your third quarter result. That's first question.

The second one, can you comment a little bit why the long product side in NAFTA was so weak in the third quarter, 40% down quarter-on-quarter, any color you can provide on that?

Then the other question is on your net debt guidance. I guess you have come close to what you wanted to achieve by the end of the year, looking at your working capital guidance the kind of $600 million-ish negative inventory built will widely revert in the fourth quarter, so you should be able to generate minimum the same free cash flow in Q4 as you did in Q3, any color on that is also appreciated? And can you also give us a sense how the ACIS volumes were impacted by all these effects from reline in Saldanha, the issues in Vanderbijl and the other problems in the Ukraine that would be of help.

You'll have to -- going back to your third question because I was not clear what your question was maybe Daniel --

It was the effect from relines, operational issues, production outages in South Africa and Ukraine, how much has that impacted volumes?

Okay fine. So in terms of NRVs, we did not have any NRVs in the US business in the third quarter. So the way to think about it is exactly what you mentioned, you take the slab price and then you multiply the -- slab tonnes and you multiply the price delta change and that's the cost -- that's not all the cost increase, but that's the most significant cost increase that we have in the third quarter because we did have some inventory.

In terms of long products in the US, we had weaker shipments out of Mexico and we should just be careful that you have adjusted for scope changes. In terms of South Africa, I think there was a [loss of about 67,000 tonnes -- primarily 67,000 tonnes was mostly the reline in Saldanha and a total loss of 110,000 tonnes] and in Ukraine, it's also similar number but both those facilities are doing better in Q4.

Net debt?

What was the question on net debt, maybe that was the question I missed.

Yes, I was looking to get a bit of an update on your net debt guidance. I think you got close to where you wanted to be in terms of net debt by the end of the year already in the third quarter and looking at your working capital guidance for the whole year, so you will have a positive release from working capital in the fourth quarter and you probably should be in a position to have a higher free cash flow in Q4 than you had in Q3. Can you give us a bit of sense how much further down you expect the debt by the end of the year.

I think that would be -- look, we are not providing net debt guidance. So I think we have provided a lot of information, which allows you to create your own framework on what that number is. I think the missing plug is really EBITDA and provided what the factors are, which are going to impact the EBITDA into Q4, we've talked extensively about the cash requirements of the business. So that actually should be quite clear to you.

Okay, no problem. Maybe a follow-up on Liberia, I think production operation is running at that 2 million tonne run rate now. I guess previously you [scaled the business down to more of a 3 million tonne] operation. Any update what's driving that kind of lower level of output?

The notes that we've issued today, we've actually taken the production down to 2 million tonnes. The key driver is that we're working on the final feasibility engineering work for potential expansion to a brownfield area called Gangra, which is about 14 kilometers from Tokadeh. It's a DSO, it's higher grade than the Tokadeh deposit, its lower strip ratio. It will be very competitive, but it is in the final stages of engineering and that would not be potentially ready to come on-stream until mid-2017. So at this point, the issue is around making sure that we extend the life of the Tokadeh deposit to take us through to that inflection point. So 2 million tonnes is the current run rate and we would expect to see all going well an approval of the project. If that goes ahead, you will see higher production from Liberia in 2017 calendar year.

Luc, Exane.

Couple of questions if I may. First of all, with regard to the coking coal questions, maybe a follow-up. If I understood right, you have a part of your contracts which are labeled on the spot or monthly basis or at least I understood this was something a bit new. Could you may be elaborate on that one?

Secondly, with regards to the 2020 cost savings initiatives, could you help us maybe workout how much has been captured already? And last on the CapEx side, could you may be elaborate a bit on your automotive strategy high strength steel and how much CapEx should we run going forward for the steel division, gross wise, quality wise? Thank you.

Okay, in terms of coking coal, I know there's been a lot of discussion on coking coal, but I wouldn't get too nervous about it. I think the 50-50 that I spoke about also mirrors the order book that we have and that is how we contract. It's slightly more than 50-50 as I mentioned earlier, so just to repeat, net of US, net of our own coking coal, take approximately 24 million tonnes of coking coal that we buy, roughly more than half is spot monthly and that's roughly how much of the steel we sell on spot monthly basis.

So it is designed that way, so there is no squeeze either way. So the same way that there are some revenue lags in our business there are costs lags in coking coal. So over a period of time, all of that should neutralize and as we mentioned earlier, we're very focused on passing on the cost increase in terms of prices on a global basis. In terms of the 2020 action plan, I think we're making excellent progress. I can give you a lot of headlines on that, but I'll try and be as distinct as possible. So in terms of the US AOP that's ongoing, we have taken down a hot strip mill and first half of next year, we'll take down another steel shop. Calvert is progressing well. Output is greater this year than last year. We're making very good progress in getting auto into the order book at Calvert. So NAFTA is doing great.

In terms of Brazil, we talked about how the bottom has been reached, which is good news. We can now accelerate what we're doing in terms of the value plan that we have in Brazil, focus more on the domestic market, increase domestic market shipments, which creates further EBITDA and continue to focus on reducing our cost base. In terms of Europe, the transformation program is running well. If you look at what we're doing in the European environment, we have changed the operating structures, cost is down, our yields are better, cost is better.

And then moving on to the CIS, I think the turnaround has been effected I mean, shipments are going to be significantly higher than last year, profitability has been restored clearly helped by the devaluation in Kazakhstan. So we can see that the CIS turnaround plan is also in shape. We've also addressed our portfolio. We have shut down [a Trinidad facility], we have sold our US long business, we have sold our facility in Europe as well. Mining cost is also doing well. Mining cost is on track to be down 10% year-on-year. So those are all the headlines and they demonstrate and at least the feeling of flavor inside is that we are ahead of where we want to be in terms of Action 2020. What we're going to do is in February, we will detail that more on a numerical basis. So you can see what impacts it has had on the EBITDA by region.

The last question was on automotive strategy. As you know, you may not be aware, but roughly a few hours ago, we issued a press release just talking about how we have expanded our global portfolio of automotive steel. This basically is part of the Action 2020 plan as well and there are numerous deals that we have introduced. I mean you can go to our website and find the press release, but we were developing Usibor 2000 for long time. Usibor 2000 has been released, Ductibor 1000, (inaudible) in a range of up to 1050 and various other products. As we mentioned earlier, we ranked Number 1 among 22 out of 23 global OEMs in technology capability. We continue to expand our R&D efforts and I think we're making very good progress in finding the right solution for the automotive universe.

Charles, Bradford Research.

With your iron ore contract in North America, I believe there is an adjustment clause that indexes the price somewhat to the price of hot-rolled coils, which have clearly come down from over $600 a short tonne to under $500. First of all, is that clause in your contract? What size of it is relative to the total impact on pricing and what is the time lag of the calculation?

That's a great question. The Cliffs agreement is confidential. So I cannot get into any details, but this is an annual contract environment. That's the only thing I can say.

Okay, Cliffs also says that there aren't any sinter plants operating in the US. I thought you had two operating. Are they still?

So I believe in Burns Harbor we still have a sinter plant operation, but we will verify that and come back to you.

Christian, Societe Generale.

Mittal, I've just two question to be quick, one is in Brazil. I think you have some charcoal there, you get some eucalyptus left, I mean is that somewhat reducing your coking coal pricing pressure there. And the second one is on your EBITDA breakdown, there seem to be a growing amount of negative internal amount especially this quarter, could you just explain why this amount is increasing in recent quarters? Thank you.

So it's a good question on charcoal, eucalyptus. Yes, that's right, that exists in our Brazilian operations. It's not as significant as you may think. So it comes out and [rounding here] at the end of the day, it's about 260,000 tonnes, but does provide a cost benefit to our Brazilian operations namely the Juiz de Fora facility. In terms of your other question on other, this is because of rising iron ore costs. So as iron ore costs rise, the EBITDA that we generate in the mining business is sitting in the inventory of our steel facilities. So we have to net that off and that's why you have the other impact, which is greater in Q3 than other quarters.

Brett, [Loop Capital].

We've seen a good run up in both iron ore and in met coal prices. You guys are backward integrated enough to know when capacity is coming on, there's been a lot of capacity that came off as prices were heading down. Just give a rough sense of -- heard some news about capacity coming back on again, but do you think things get back to an equilibrium in iron ore or met coal at lower pricing levels anytime soon?

Brett, I think if you're talking seaborne, I mean at the moment, we're seeing a sort of a surge in additional demand in China and you could argue that somewhat offset by declining production domestically in China. So those iron units are in demand. I think at the other side of it, we're seeing latent capacity maintained by a number of producers in the industry. Greenfields are pretty well all gone that were promised. Brownfield expansions are quite minimal and there's only a couple of new players so to speak due in the industry in any small tonnage and it's in the 30 million tonnes or 40 million tonnes as you see into calendar 2017. So we don't see a dramatic change in that supply balance and a lot of this rests back on the earlier conversation around the health of the Chinese steel industry and the spreads.

Got it. So you don't see a lot of restarted capacity coming on in iron ore or met coal in the near-term?

Not if you believe in the capital cost per tonne that needs to be put into greenfield projects. So I think you're more likely to see people look at brownfield, but if you step back and if you are a person midpoint on the cost curve and you're realistic with your view of the world, you look at [who lines] the latent capacity on the cost curve, its first quartile players. So it has to be quite a brave person that's going to enter significant capital entry into the iron ore game for green and similarly for brown. So I think what you're seeing is more tonnages coming from capacity utilization, productivity improvements, small brownfields. We're not seeing the brave decisions that were discussed about in the last seven to 10 years.

The last one is manganese, I hear its running up a lot. What's going on there? What's going on in South Africa? Is there any way of kind of keeping a cap on these places. It's obviously an outlying agent that most people use and just wondering about what you're seeing in supply and demand in manganese?

Again, it's not a commodity we're directly in. We are an alloy consumer as a company, but the index price has moved up heavily. It's obviously connected with other raw material inputs and health of steel on the consumption and for the alloy plants. The supply is still on the heavy side, i.e., there is a lot of latent capacity in the sector and we're certainly seeing it fly up for a reason driven by the market dynamics. So I think if you went and looked at the supply demand numbers right now, you'd find latent excess capacity, which is not currently turned on in the industry.

Phil, KeyBanc.

Aditya, can you update us on where we are in the automotive contract discussions for NAFTA at this point?

Phil, as you know, we don't comment specifically on pricing attributes on automotive. Clearly, the demand picture is favorable. We have seen good growth in the automotive environment in 2016 and are forecasting in NAFTA stable environment. Europe has been marginally stronger in 2016 and we expect the same into 2017. Our focus with our automotive client has been to push our advanced high strength steels. They have higher margins and we're expecting the penetration of higher strength steels to grow as the years pass.

I appreciate that and follow up here would be on the Mexican automotive market and how you're currently participating in that market and how you plan on participating over the next couple of years?

At this point in time, our participation in Mexico is primarily through Calvert. So we have the advantage of bringing in slabs from Mexico, processing them at Calvert, and then shipping it back into Mexico. The advantage of that is under a system called Makila where we don't have to pay Mexican duties. Clearly, Calvert's capabilities are second to none and that helps us improve our presence in the automotive universe in Mexico.

So this concludes our earnings call today and thank you very much for participating and look forward to be talking to you soon next quarter. Thank you. Have a good day.