ArcelorMittal SA (MT) 2017 Q4 法說會逐字稿

Good morning and good afternoon, everybody. This is Daniel Fairclough from the ArcelorMittal Investor Relations team. Thank you very much for joining us on this call today to discuss the fourth quarter and full year 2017 results.

This call is being recorded. Hopefully, everybody saw the presentation and the detailed speaker notes and Q&A document that was published this morning. You've all had a good chance to review these documents. So our intention now is to move directly to your questions around the results and the strategic progress of the business. And the intention is that the call should last about an hour. (Operator Instructions)

And with that, I'll hand over to Mr. Mittal with some introductory remarks.

Thank you. Good morning, good afternoon, everyone. Thank you for joining today's call to discuss ArcelorMittal's 2017 results. I'm joined today by Aditya Mittal, Group CFO and CEO of our European segment; Simon Wandke, our Mining segment CEO; Genuíno, our Group Head of Finance; and Daniel, Head of Investor Relations.

Before we start our Q&A session, I want to provide some opening comments on the results and our outlook for the year ahead. Starting with safety, the injury frequency rate in 2017 improved relative to 2016. As an organization, we continued to prioritize for the improvement in our safety performance and strive to 0 harm.

Group EBITDA increased by 24% year-on-year and significant improvement in net income. The improved results reflect not only the strengthening market backdrop but also the ongoing benefit from our Action 2020 plan. After 2 years, reported benefits from Action 2020 have been $1.5 billion, which is halfway to our $3 billion target. This is encouraging, and I expect to see more progress in this area in 2018.

We have also strengthened the financial foundations of the business over the past 2 years. Net debt has been reduced to $10.1 billion and would have been lower again had it not been for a negative ForEx impact of $700 million and $400 million of premiums incurred on bond buybacks.

Our net debt to EBITDA ratio is now 1.2x. To put our financial progress in context, 2 years ago, this ratio was 3x. Given this progress, we have clearly outlined a new capital allocation policy. Mostly we will continue to prioritize deleveraging. We believe that a net debt level of $6 billion is an appropriate target to sustain investment-grade rating metrics and support positive free cash flow even at the low point of the cycle.

Secondly, we will selectively invest in high-return projects that will increase EBITDA and enhance future returns. And finally, we have [restructured] dividend at $0.10 per share. Once we achieve net debt at or below our target, we are committed to returning a portion of annual free cash flow to shareholders.

Now to conclude with some comments on the outlook. Market conditions are favorable. We expect the steel demand outside China to accelerate in 2018 to a growth rate of between 3% and 4%. This bodes well for our shipments and also for capacity utilization, which continues to help in the right direction.

With that, we are happy to take your questions.

(Operator Instructions) So we'll move to the first question, which comes from Mike Shillaker at Crédit Suisse.

Just on the China situation. Clearly, the export cuts from China and the capacity reductions have been a huge help to the market in the last 18 months or so. And I think you've been very vocal about the structural change taking place in China. I think one of the other things that's clearly been beneficial is demand has been very strong in China also in the last 18 months or so. Can you now give us your road map for the next 12 to 24 months in terms of what you believe is going to happen in China, a, to capacity; b, to exports? And put to that also, if you could, within the context of any risk that demand may slow in the next 12 to 18 months, how you think China would respond to that is my first question. And my second question, on capital allocation, can you give us a sense of how your potential interest in SR fits into this in terms of how that may shape the balance sheet with cash out, debt in and also future CapEx in terms of how you've looked at that possible acquisition? And also, in terms of capital acquisition, we've had a debt target, which I think is hugely helpful to build a road map. We've had the change in CapEx, which is helpful and obviously, a small dividend. But can you give us more sense of when you're likely to be ready to give us a greater sense of your likely dividend policy going forward à la Aperam did a couple of years ago when they gave a very, very clear road map for their shareholder return structure?

Thank you, Michael. I'll answer on China, then we will move on to your the second question on capital allocation. Clearly, the Chinese demand in 2017 had been quite strong, and it was stronger than we anticipated. At the same time, China has continued to reduce capacity, which is really encouraging. We have seen 115 million tonnes of capacity reduction against promise of 150 million, and the rest, 25 million, 35 million tonnes is expected this year. We have also seen that export in 2017 were lower by 30%. But this is very encouraging, but we still believe that China, to begin with, had 300 million tonnes of forward capacity excluding the 120 million tonnes which has been shut down of -- based on industrial -- or induction furnaces, which were never accounted. So 150 million still remains to be shut, and I hope that the Chinese government, as we move forward, they will continue to implement the environmental laws and continue to deleverage the Chinese steel companies. So all those actions, we think that should help them to moderate their production to demand. The demand could slow down, but we only hope that it could moderate the production to demand, otherwise, they will increase their exports, this will be unfair to the rest of the world. But looking today, in 2018, we think it is broadly stable. Last year, they were very strong in 3% to 5%, 4%, 5%. But this year, we think that it will broadly be stable for this year. Our 2018 apparent steel consumption forecast is more or less neutral to 2017. And we think that they will continue -- for the next 24 months also, I do not see a major change in China's consumption pattern. Adit?

Sure. Great. Thank you. So in terms of capital allocation, we're not obviously going to comment on any specific opportunity. And you correctly laid out our priorities. Our priority #1 is to continue deleveraging until we arrive at a net debt target of $6 billion or lower, which would allow us to have investment-grade metrics through the cycle, high and low points, as well as generate free cash flow through the cycle. We would then be focused on opportunities with higher return. So CapEx is a good example. M&A could be another example. As we've done in the past, we had been able to grow and continue to manage our balance sheet. Calvert is a good example. Ilva is a good example. So I will not necessarily take away from this discussion that we would now start and acquire companies and then relever the balance sheet. The focus remains to delever the balance sheet. We're conscious of that. And we would plan growth, whether it's CapEx or acquisitions, with that priority in mind. In terms of the dividend question, I think we have laid out a road map in terms of what we intend to do. We're starting with $0.10. We would move to a percentage of free cash flow when we were to hit a level of $6 billion of net debt. To comment whether this would be like apparent or not, I think, at this point in time is inappropriate. It's a discussion we continue to have with our Board of Directors, and at the appropriate time when we hit that target, we will let all of you know what our thoughts are.

That's great. And just a follow-up, as you mentioned, is there any update on the Ilva situation? And also any thoughts on the profitability of Ilva in the current market situation?

Yes. So in terms of the Ilva situation, no update on the profitability. Ilva is still moving similar amounts of cash that they were moving in the year before. So 2017 performance of Ilva is similar to '16 and '15. In terms of the situation, as you're aware, we are in Phase 2 discussions with the European Commission in terms of the competition department. Phase 2 is expected to be completed by April. And post that, we would move to (inaudible)

So we'll move to the next question from Alain at Morgan Stanley.

Two questions from my side. One is on the group EBITDA per tonne outlook. Or into Q1 and Q2, what other different moving parts that we need to take into account while looking at the group profitability per tonne? And the second question is on the shipments. You expect shipments ex China or is that fee growth ex China to be at 3% to 4%? Is that a good proxy for your own shipment growth into 2018? And how does that -- how is that distributed between H1 and H2?

Okay, thank you. We have not provided specific shipment guidance for 2018. I think it's fair to assume that we would mirror global growth at China because that's a good proxy for ArcelorMittal. But specifically, to answer the question, we're not providing a shipment guidance. In terms of the moving parts, I think you have a good sense on how, into Q1, how the demand pattern is for 2018. We're seeing demand ex China at levels higher than 2017. In terms of the specific moving parts, I'm not sure I can provide more color, unless you want to talk a little bit about what's happening by region.

Yes, please. By region, that's what I meant.

Okay. So in terms of NAFTA, we should see a good increase of shipments in Q1. Q4 was light in terms of shipments. As you have read through in our earnings release, we faced some issues in our Mexican and Canadian operations in terms of outages. It costed some money, about $15 million to $20 million, and we lost about 200,000 shipments due to those effects. So that should reverse the market. We'll obviously perform better because in Q4, we had a market slowdown in terms of demand volumes and -- yes, sorry, I think I lost my mic. I'm back. So in -- so shipments up in NAFTA. Price marginally up in NAFTA in Q1. Moving on to Brazil, Brazil shipments are down in Q1 seasonally. Prices are slightly up, especially in the flat business. Europe shipments are rising marginally into Q1. Prices are up but so our costs. We saw a little bit of spread improvement towards the back end of Q4, but not really impacting Q1 results. The spot spreads were actually stable into Q1. In terms of ACIS shipments, we'll have the seasonal factors. South Africa should be up. Prices clearly did very well in Q4. And we should have a flat -- roughly flat performance in terms of spreads, and we also have a big blast furnace reline in Ukraine, which will affect to some degree our profitability in CIS operations.

So we'll move to the next question, from Jason at Bank of America.

Look, a bit of a big picture question for me. Over the years, we've seen different strategic initiatives and directions from Mittal. We have the aggressive and transformational growth through M&A, we have the moves into EM, we had vertical integration by building and buying mining assets. More recently, we've had the consolidation to the core developed market business of high value-added steel. And of course, we've got the focus on the balance sheet and balance sheet repair. The other day, an investor asked me and he said, "What is Mittal's strategy?" And I really have to confess, I couldn't answer it. So how would you answer the question? What is your strategy now today? Where is this company 5 years from now?

So I'm glad you asked the question because I hope next time someone asks you that, you can answer it. From our perspective, it's very clear. We are the world leader in terms of technology and capability in the steel business. What does that mean? We make the most demanding products into the most demanding applications. 22 out of 23 OEMs rank us as #1 from a technology perspective. And that's a growth market for us as the world transforms itself, whether it's electrification or other areas, renewable energy, other transportation requirements, ArcelorMittal will continue to play a leading role. Number 2, we have strong businesses in 3 core markets, Europe, NAFTA, Brazil. We also have very strong businesses in our ACIS division as well. And those businesses continue to outperform the competition. They continue to make progress. As you know, we have a very strong transformation program in Europe, which will continue beyond Action 2020, the same in our NAFTA and Brazilian business. So this is a business which is leading in terms of technology, high quality, in terms of its performance. And the gap to competition should only improve over time. Thirdly, I believe we have very interesting growth opportunities that should create value over the next 5 years. We announced today -- we announced it before, but we have highlighted the investment in Mexico. It's a brand-new hot strip mill. We have a 4 million tonne slab operation in Mexico. We can set up a hot strip mill, which can utilize the growth in the domestic market. It's an interesting market. It's got good margins, and we think we can be strong player with our high-quality steel. So that's just one example of the things that we're doing. We also talked about Ilva. Ilva is another opportunity where we are able to bring our technical management and capability to turn around an operation. And Ilva has strong prospects because this is a low-cost operation, a large-scale, low-cost operation. Lastly, we have a very strong foundation, a very strong financial foundation where our interest costs keep on declining, our level or ability to convert EBITDA into free cash flow is increasing. And that provides a good value proposition for our shareholders and our key stakeholders.

Aditya, so just kind of paraphrase it and tell me if this is the right way to think about it, that for choice, you're moving up on the quality spectrum and you're becoming more focused. Is that a fair way to characterize it?

Yes, I think we've always been doing that. But I think it's good to emphasize that routinely. So yes, we are moving up the quality chain, we're becoming more focused. We're also capitalizing on high-return growth opportunities while at the same time ensuring that we continue to delever the balance sheet and return value to shareholders.

So we'll move to the next question from Carsten at UBS.

Two questions from my side. The first one is on the outlook statement because (inaudible) are quite positive on the 2018 outlook. But what is actually your visibility right now into the orders? Are you fully booked for the first half? Or how much is still outstanding? That's the first one. The second one is more on ACIS and Brazil because that is what surprised me most. We see quite a bit of change in profitability in those 2 segments. What has changed? Is there more than market movement? Did you do something in the underlying business? I'm just trying to understand it a little bit better.

Sorry, I missed the last bit of your question. You said ACIS and Brazil and...

The profitability improved quite substantially. Did you actually change something structurally? Or is the move predominantly market related?

Okay, clear. So in terms of visibility, Carsten, as you know, it's different by business, and we're talking order books here. So clearly, we have much longer order books in Europe and in our NAFTA business and much shorter order books in our ACIS business. And even I would argue that in our Brazilian business, our order books are much shorter as well. There's some contract business, but not to the same level or proportion as NAFTA or EU. So in terms of visibility, normally, in Europe and NAFTA, we'll be taking second quarter orders right now. In the other businesses, we're still taking orders for February and March, maybe more March. But that's roughly how it works throughout ArcelorMittal. In terms of ACIS and Brazil, yes, you're right, the market has also done well, and that has set to our results. But there have also been structural improvements to the business. Just talking about ACIS, I think this -- it has been a story which has not performed well in the past. But through all the actions and initiatives we've undertook, putting in a new management team, I think we now see a turnaround in Kazakhstan. Kazakhstan, as you know, hits its high shipment ever. Production records were set. Ukraine continues to outperform. And South Africa has been an issue for us for the last 18 months. Again, we redoubled our efforts. And along with the management team at South Africa, they're now turning the corner. So South Africa, which was negative EBITDA in Q3, has become positive EBITDA in Q4. In Brazil, we continue to make improvements on reducing the cost mix of our business and improving our product mix (inaudible) as we can.

Very quickly on Kazakhstan because there were recently some news articles about emission problems in Temirtau. Could that lead potentially to higher CapEx or -- and/or production stops? Because it sounded -- it was like snow and so on and so forth?

No, no. In Kazakhstan, we are continuing to invest to -- there is no other additional investment program for these environmental initiatives we already planned, which was approved by the local authorities. It was a little peculiar situation last winter, and it's still -- it's been investigated, what could be the cause for such a black smoke. And there are some different theories. The wind situation had dramatically changed into very strong winter those couple of days. Then there's also a theory that -- there's also a speculation that it could be caused by people in that area using a lot of coal for heating and less for cooking. And plus, there had been some change in the winter which allowed the -- some of the dust could not dissipate to -- and there's a discussion going on, and we are also investigating this matter, and I'm sure we'll put this to rest soon.

So we'll move to the next question, from Christian at SocGen.

On these (inaudible) here, the end of your guidelines for the timetable in Q1, but if you could tell us again what should we see at -- now in terms of occurrence. And also, I think maybe it was on the newspaper, but it seemed to have been some change in the group association you had with Marcegaglia. I mean are we still involved in that deal or is there a change? I think obviously, the newspaper article suggesting that you may be now having to sell one of your plants to them so they know what you're able to say about that. And my second question is on NAFTA. Obviously, you're highlighting that prices are improving and volumes also [keep] favorable. In that context, do you feel that possible additional tariff or Section 232 by the Trump administration are still necessary? And if not, are they becoming furthermore interest to the outlook?

So I'll answer Ilva. Just on Ilva, I think what I had suggested was we're in Phase 2 negotiations with the European Commission with the -- specifically with the Competition Department of the European Commission. So there's a Phase 2 investigation ongoing, and that is expected to close in April. And post that, we would expect to close our Ilva transaction. In terms of Marcegaglia, I think at this point in time, I'm not being able to make any comment. They have been and they are, as of date, a shareholder in the consortium, which is acquiring Ilva that may or may not change depending on our discussions with the competition authorities.

On Section 232, as we all know that the matter has been -- it has become -- the recommendation has gone from Commerce Department to White House, and it is being investigated. It is being studied. And hopefully, that very soon, we will have -- some results will come (inaudible) from the White House soon (inaudible). At ArcelorMittal, we always believe in fair trade, and we will continue to fight wherever we see unfair trade. And I said while this is going on, we still see that the imports in U.S. were all-time high in 2017, so we believe that it is important to have some favorable decision from Section 232, but we do not know what the decision is.

So we'll move to the next question, from Seth at Jefferies.

Just a couple of questions on your European business, please. In the course of Q4, you noted the blast furnace reline at Bremen's, maintenance costs at Galati as well. Can you help us better understand how to quantify the scale of those costs and perhaps if we're going to see a reversal of that going into the first quarter? Second, looking at your European longs business, can you give us a sense of where you think realized margins or demand could go in that business looking forward given that over the past couple of years, longs seemed to be trailing some of your flat operations within the region?

Sure. In terms of the benefit in Q1, it's more a shipment story. I would not forecast that much of cost reversal into Q1 versus Q4. In terms of the long margin, I'm not sure why you suggest that the long business has been trailing. I think the long business has performed quite well over the last few years. 2017 obviously has been harder, especially for integrated long, primarily because the cost of ore and coal was much more than scrap, but that has now normalized and some integrated long business seems to be doing well. In terms of long margins, I think there are 2 effects that we're seeing in 2018. We're seeing that the commodity side is doing better. And on the HAV side, we have not yet seen the full translation of the price pickup on the commodity side. But suffice to say, relative to 2017, what we're seeing today is that the long business in Europe is doing better in 2018.

Great. And just one last question, I guess, within the European business. You've spoken very positively about demand in that area for the last several quarters. But your margins have been quite stable, while many of your peers with pretty similar business models have seen sequential margin expansion within Europe. Many of those are more focused on the flat side than with the long. So I guess, that's why I was thinking maybe some of the pressure on the longs business. Can you talk a little bit about where you see directionally your European margins going in the medium term throughout the European region? Sorry, your flat business through the European region. Is there a reason to think that you will not see the same scale of margin expansion that your peers have witnessed in recent quarters?

Yes. So I can now understand what you're suggesting. I think what you have seen is that the long business has not necessarily improved its margins over the last few years. The margins have remained relatively stable at decent levels. And at the same time, we have seen our flat business improve its margins as the transformation program has kicked through. So yes, on a blended basis you may draw that conclusion. But it's very clear to us when we look at our flat performance versus our peer group, we have done very, very well. We look at it on EBITDA per tonne, and we can see that the transformation program is kicking through and our business continues to perform very well. That's not changing, so I would expect the same theme to continue into '18 and beyond.

So we'll move to the next question from Bastian at Deutsche Bank.

My first question is on Europe. I just was curious whether there was any cost effect from the fire at your coke battery in Belgium and whether there's anything we have to keep in mind with regards to the first quarter there? And also whether you provision for anything here on the CapEx side in your budget? And then my last question is just briefly on your debt rating. Clearly, your efforts to improve both your cash flows as well as balance sheet metrics have been very visible, and I guess, although, we can certainly debate on the macro side, it's quite hard to be agnostic to the fact that there has been some sort of improvement in the steel fundamentals compared to what we have had the last year. I remember that was one of the main critical points for the rating agencies as well. Now given what you have delivered so far and sort of the capital allocation policy which you just laid out today, which seems to be very rating friendly, is it fair to assume that an upgrade of the rating agencies could be more as imminent in such an event? Also, would there be any impact on your financing cost in terms of debt on (inaudible)?

Okay. Thank you for the question. The coal fire indeed was very tragic, and it's unfortunate that it occurred. However, it -- and it was very dramatic since you saw and mentioned, it was very dramatic. But the impact was very minimal. I think we lost 20,000 tonnes of coke production and there has been no impact on operating performance of the business. In terms of the rating, I mean, I guess 2 points. The first is the capital allocation policy announcement today was not for the rating agencies. This is what we believe is the right strategy and the audience is, our shareholders and our broader stakeholders, and if it's help rating agencies in their assessment, great. In terms of the cost, I think fundamentally, it's the 2 rating agencies, the 2 key rating agencies upgrade us to investment grade. As you know, all the rating agencies have positive outlook, the interest saving per year is about $20 million.

So we'll move to Luc at Exane.

Is it possible to have a bit more color on Brazil, which, to me, seems one of the area where the mineral self potential in terms of EBITDA profit margin is probably the greatest within the group given that the positive signs we are seeing in the economy there. Could you maybe frame a bit more what you're seeing on the ground? And to what extent the recovery is impacting at this stage where the flat business is the norm?

I would ask Genuíno to answer this.

Yes. So in Brazil, I think as we've been highlighting, if you remember, all last fall, I mean, we were quite pleased with the recovery already in our flat business, which is going already well, thanks to consumption cut by almost 10%, driven by automotive. We also highlighted some already some improvement in construction, which was positive in quarter 3, which remained positive in quarter 4. So overall, shipments in longs was kind of flat. So despite a weak first half, that was offset in the second half. And looking forward, looking at our apparent steel consumption forecast for 2018, so the prospects for both business are quite encouraging.

If I may have a follow-up one on working capital requirements, I understand the volatile nature of a number of parameters. But is it fair to assess that this year we should see more investment in working capital requirement, even if hopefully at the smaller magnitude than the one we saw in 2017?

Yes. Fundamentally, I think you're right and perhaps I will provide some more color as to how I think about it. Clearly, as the business is growing, raw material prices are moving up and there's an investment in working capital. This is not loss because its value is sitting on our balance sheet. In terms of 2018, what we're seeing is increased demand of our products. We talked about global growth ex China. And so from that perspective, it's natural to expect more investment in working capital.

So we'll move to a question from Kevin at Goldman Sachs.

Just had a quick question on automotive. A lot of your U.S. competitors are talking about ramping up more volumes to the automotive market. Are you seeing any fierce competition here? And what is your outlook on that market for ArcelorMittal? And also on auto contracts in general, how are they being renegotiated for 2018 versus '17 levels?

So as you know, we are always relatively guarded in terms of our comments on pricing. I think when we look at the business from a margin perspective, we're very comfortable when we look at the overall margins of automotive 2018 into 2017. And that comment applies to both our NAFTA as well as our Europe business. In terms of volumes also, we know how the market shapes, there has been some change in the mix of automotive, less passenger vehicles. We have a bit more exposure to passenger vehicles. So on a like-to-like basis, maybe there is some loss just because of the mix perspective on NAFTA. Other than that as I mentioned at the beginning of the call, when someone was asking about our strategy we remain the leader in terms of automotive capability, having the best products to offer in the world. We also have, if you go through our presentation, some nice slides on electric vehicles and some discussion on how some new electric vehicles that are being produced and manufactured historically we're using all aluminum and now we're using a combination of primarily steel. And these are advanced high-strength steel, ultra-high-strength steel, exactly the strength and specialty of ArcelorMittal.

So we'll move to the next question from Novid at Cowen.

So on your segments and we saw a pretty significant improvements in EBITDA year-over-year for all segments except for NAFTA. So I just wanted to see what can be done on this front to kind of get the needle moving. Clearly, the step-up in prices in flat should help in 2018. But is it necessary to see a prohibitive Section 232 relative to imports or other measures to really see a step-change in this segment? And then second question was on the iron ore side. You guys provided iron ore market price shipment guidance forecasting up 10% in '18 year-over-year. I was just wondering if you guys can give any comments on the cost side of the equation.

Sure. I'll talk about mining -- sorry, EBITDA, then I'll get Simon to talk about mining. In terms of NAFTA year-on-year, I think you're right, we've had flat EBITDA in '17 versus '16. Clearly, there's a level of dissatisfaction on that performance. I'll walk you through the regions. When I say the satisfaction, I'm not suggesting then on operating basis we've performed poorly. But, clearly, when we look at it on a global basis, it's an outlier. In terms of NAFTA, we -- I mentioned earlier on and then we talked about the long business in Europe. That integrated long business has suffered in 2017 relative to its EAF-based counterparts. As part of our NAFTA results, we have a significant long business, which is integrated, this is our Mexican business. And to some degree, our operations in Canada is DRI-based. So those businesses have performed much worse in '17 versus '16, clearly the prognosis for '18 is much better. Secondly, we've had some mix effects in our NAFTA business in '17 versus '16, more slab production than in the past. The other effect that you don't see is that some of the EBITDA that is in Calvert gets recycled into the equity income line. And so there is a small impact of that. But fundamentally, when we look into 2018, we've seen increase in shipments into Q1, we see prices improving in the NAFTA environment, the positive impacts of our Action 2020 feeding through. So we had some -- in terms of '17 it's flat, but we have a much more constructive perspective our NAFTA business into '18.

And just on the iron ore side, on the cost side?

So Simon here, Novid. I think if you sort of step right back, we're still maintaining our statement that we'll be cash flow breakeven, $40 CFO China on the pricing. That said, we still have pressures on our cost. We have inflation costs, input costs, exchange rates. So really what you're seeing is efforts across those suites in terms of more structured cost reductions, the 10% promise on 2018, above the 2017 marketable shipments most of its Liberia. And that's new production from the Gangra mine. It's at 5 million tonne rates already as we state in Q4, end of Q4 into Q1, those costs are moving down sharply from where we were at lower volumes with a lower-strip ratio and higher FE no silica penalty product. And then if you go to the big assets like AAMC, we've got quite significant programs under way, focused heavily on debottlenecking. But mobile and fix plant, got autonomous drills, committing operations this year. Our productivity gains, we're very focused on across how we operate, we have our next-generation program in place in terms of fleet optimization, movement around the pits. And a lot of detailed projects under Action 2020. Some of those are around just may be simple but very big outcome in terms of the standard deviation of fleet and concentrator, giving us smoother outputs, low costs and less surprises. So a lot of work going on and really the headline statements still stays that we will be maintaining the cash flow breakeven of $40.

Great. So we'll move to the next question from [Kishan] of Citi.

My question is on your cash needs for 2018. One, how much of the CapEx do you have considered in your $3.8 billion number guidance? And second is the cash need for other businesses, other is increasing from $0.8 billion to $1.2 billion predominantly on taxes. So can you give us some idea as to which of the regions are contributing into higher cash taxes? And does it take into account the impact of lower tax rating in U.S.?

Your first question on the CapEx?

How much of the Ilva CapEx you have taken in $3.8 billion?

So Ilva CapEx is $0.2 billion, or $200 million. So without Ilva, it would be $3.6 billion. And in terms of the change in other cash requirement, so a portion is timing differences because you end up paying in '18 for the taxes of '17 in some jurisdictions others that you have here. In terms of the U.S., there is no significant pronounced effect into '18 or into '17 for various reasons. And if you really keen, you can get into it. But as you have seen the headlines, there's no major impact on our business. I think the major impact is really hopefully, this spurs more investment in the U.S., more consumers -- I read about all the tax bonuses, so I hope they go buy more cars and we'll see.

We'll move to the next question from Rochus at Kepler.

I have a question again on your acceleration to CapEx. I think you kept saying that the deleveraging totals to $6 billion remains your top priority, at the same time, after a couple of years of high CapEx discipline, you're now considerably stepping up your CapEx, and it's not just the Ilva, the Mexican project, the various things you're doing in context with Action 2020 and we still haven't heard about the potential engagement with the SAIL joint venture or anything which could else happen in India. So can you maybe elaborate a bit deeper how we should see the $6 billion net debt targets? Is this now something which can stretch further into the future because you have made this progress now? The second question is, you didn't give any volume guidance and you implied that the market growth will be a good indicator. At the same time, you're saying now Action 2020 is also strongly geared to the volume. So in what destination shall we believe or shall we think that you could outgrow the market because of your specific initiatives?

So let's talk a little bit more about the CapEx. So if you look at the CapEx, there's a $1 billion increase. I would say net is $800 million, if $100 million was carryover from '17, so '17 was actually supposed to be $2.9 billion but we ended up reporting $2.8 billion. And the remainder $100 million is ForEx. So this is overall strengthening. So as a result, our European CapEx translates back into dollars as there's more dollars. So that's $800 million. I would then deduct $200 million for Ilva because that's the new acquisition so that was flagged before we had just put it in, because we are assuming a closure in the latter part of the first half and then the CapEx starts to kick in. So then we get the $600 million delta. Out of the $600 million delta, $350 million, so the lion's share, is really Mexico. And I will talk about Mexico a little bit, but maybe we can talk about it more. So we have a high-quality flat facility, which is on the coast of Mexico, electric-furnace based. It has its own pelletizer, it has 2 DRI modules. And it has linkages to ownership in iron ore operation which supplies pellets as well as iron ore locally that's available. So a low-cost slab operation out of Mexico. As you know, Mexico is a growing market. Mexico is importing a lot of hot band at prices similar to or even higher than the U.S. marketplace. And so if you think of a business which is exporting slab and has the opportunity to convert that slab into a hot band for domestic market which has price level similar to NAFTA, that's a good business proposition. We didn't do it before because we were very focused on deleveraging the balance sheet. We'll continue to delever the balance sheet, but we thought that this was the right time to begin that investment. So, I guess, the message I am trying to suggest you is don't think that these CapEx that we're starting now is because of the cycle. These are not cycle-based CapEx, these are CapEx which will return value and create value for ArcelorMittal whether we are in high-cycle or a low-cycle environment. The remainder is about $250 million, and this is accelerating the journey we had begun in Europe and in NAFTA on improving our leadership when it comes to HAV and what we have called downstream optimization in Europe. So this is above and beyond Action 2020. And this will -- $250 million but there are some examples of -- some of the projects that we are doing. It's really getting ready for moving on new products, it's further optimizing our downstream operations in Europe and making sure that we have bigger scale operation than what we have today. We began the clustering of those operations about 2 years ago, and now we're moving to the next phase and making sure that these downstream operations have larger scale. So a $250 million increase, excluding Ilva, Mexico, ForEx and carryover on the $2.8 billion CapEx is not that significant. The other area where some of this $250 million is going is things like digitalization, where we're making a lot of progress on taking our business forward. We did have a good investor discussion and investor meet back in our facility in Belgium in Gent in the summer, we will walk you through some of the technologies that we are deploying. And we can spend more time on that so that you have a better flavor on what we're doing. So moving on to your next question, sorry, that was a long-winded answer, but I think it will be good to give everyone a flavor of how we're responsibly investing our capital and making sure it's really high-return projects up or down cycle. In terms of when we achieve that net debt target, we'll not provide you the time line. I think you have a good sense of how the steel markets are performing, what our earnings potential is, you know our cash requirements, you can do the math. I think there are some differences in '18 versus '17. One and if you look at the net debt, we had a $700 million impact in '17 because of ForEx. Maybe there will be ForEx impact in 2018, but perhaps not at the same level because that reflects the euro moving from 1.05 to 1.2. The other thing is we paid $4 million in premiums for bond buybacks. I am not suggesting that we won't pay any premiums, but perhaps the amount is not that significant. So that gives you a sense of how the net debt numbers are actually coming down, in spite of investment of working capital of almost $3 billion. The earnings potential, yet at the same time, we remain focused on those priorities that we've talked about. So I can't give you a guidance as to when we achieved it, but that gives you clear of how we're doing as a business.

And on the volume?

On the volume, no change. Oh, yes, on the volume Action...

I know, I mean, because of Action 2020.

Yes. So in terms of volume, at this point in time, we have not provided a regional breakdown. I think I discussed it with Daniel as to how best we do that because there are also competitive impact if we talk about increasing in certain market volumes versus other markets regions we'll walk through that. But I think any change in share are just participating in the growth that we're seeing in demand in some of these markets, I think it is an important achievement that requires the ability of assets to ramp up to match growth, and that is not a given. And so that's what we can say at this point in time on volume.

Okay. But a brief follow-up on the debt, when we say it would feel comfortable with the $6 billion of net debt even on that trough of the cycle, you've already kind of a sense what the average net debt free cash flow would be going forward through the cycle.

Sorry, what was the question?

I was saying, if you now guide for $6 billion target net debt figure, which would be also good enough for low point in the cycle, do you have a sense of an average net debt figure through the cycle between the ups and downs where you feel comfortable?

So maybe I've not understood the question, but I think the takeaway is that you are suggesting that when we hit a net debt level of $6 billion, we will then begin dividends, which would be a percentage of free cash flow. We're not suggesting that we stop at $6 billion. To the extent that we have excess cash flow, I think there is a highly likelihood that we'll continue to delever as well. The last point of clarification is that the $6 billion number is the right debt because when we look at credit metrics, investment-grade credit metrics we found at that level we have investment grade ratios in all years during the crisis that we have seen. So that was the idea behind the $6 billion, as well as the fact that we'll be generating positive free cash flow in all those years as well. So it was like how do make sure we have a business that's actually generating positive free cash flow in all environments, down cycles, up cycles, and we arrived at that number. Investment grade ratios were the other.

So we'll move to the last question actually, which is from Phil at KeyBanc.

Aditya, when we think about the pickup in coal, consumables, iron ore pellets in NAFTA, how should we think about the magnitude of the increase in per tonne cost in '18 versus '17?

So in terms of coal, in terms of NAFTA, as we move into long-term contracts. So the impact in '18 versus '17 is not significant. In terms of iron ore, we have a long-term purchase contract. As you know, the details of how that works has been previously disclosed. If you want, one of us can walk you through it again. It's a proxy of market, both of -- it's roughly when I think about it, there is market price of iron ore and then there is also the market price of band -- hot band.

Okay. I think, I'm good on that, I appreciate it. And then on the timing of Action 2020, how much benefit of that remaining $1.5 billion because I think you said you're halfway done right now is baked into your 2018 view?

So we've 3 years left and $1.5 billion to go, so I will not be very specific about it. But if were to just do a simple division, I think that kind of captures the spirit of '18.

And then my last one here is just more of a kind of a strategic or philosophical question. And basically, are you concerned that the NAFTA free trade agreement right now is going to be altered based on the President's commentary? And some of the investments that you've made or are making in the Mexican sheet business right now, is that a way for you to hedge against any, call it, future disruption?

We do not know in what we our Mexico and Canadian negotiations will evolve, and we have a lot of moving parts here in this time. But we believe that our Mexican investment was planned much before this NAFTA negotiations begin. And we clearly believe that in view of our flats really competitive situation in terms of price, cost and quality, and converting those slabs into high-diluted products through downstream investment is the right decision irrespective of the NAFTA conclusion.

There being no other question, I'd like to thank you all for your attention and interest. As I mentioned in my opening remarks and from the discussion on this call today, it is clear that we continue to head in the right direction, the industry backdrop has structurally improved, our market trends are positive and ArcelorMittal is making progress both financially and strategically.

Thank you once again and talk to you next quarter. Thank you. All the best.