Q2 2022 ArcelorMittal SA Earnings Call
[music].
2022 analyst and Investor call. This is Daniel Fackler from the ASO Mitchell Investor Relations team I'm joined on this call biopsy, a detrimental and our CFO , Jim you know Kristina.
Before I hand over to a ditch I would like to mention a few housekeeping items, Firstly I want to refer everyone to the disclaimers on slide two the results presentation that we published on our website. This morning.
I'd also like to remind everybody that this call is being recorded and is scheduled to last up to 45 minutes and finally, if you would like to join the queue to ask questions and as usual do press star one on your telephone keypad and we will answer the questions in the order that receipt.
I would like to hand over to <unk> for some opening remarks.
Yeah.
Thank you Danielle and good afternoon, and good morning, everyone and welcome to today's call.
As you have read we have reported very strong results.
Six months of the year $8 billion net income and earnings per share of approximately eight and a half dollars.
These numbers reflect the hard work and commitment of everyone at Arcelormittal.
Together, we are taking big steps to strengthen grow and develop our business to position <unk> for its future as a leader in it Decarbonize world.
With this in mind I'd like to update you on the acquisition of the Texas H B I plant, we announced in April .
Acquisition is now complete the plant is achieving its rated capacity for the first time EBITDA.
EBITDA is run rating at $200 million, giving us confidence in our normalized projections of 130.
The plant is very strategic for us for two reasons first it will provide a source of low carbon high quality metallics from a region that offers highly competitive energy and ultimately competitive hydrogen.
Secondly, this plant will supply the ERF capacity, we are building at Calvert and is a key component of our 12 million ton low Seo to highest quality NAFTA sheet franchise.
Our agreed acquisition of CSP, Brazil, Similarly exciting.
It's a world class well invested more than facility connected to a deepwater port plus we have important synergies.
CSP is also an asset with fantastic potential.
Texas for the U S. The stage of Sarah in northeastern Brazil is a focus for the development of renewable power and hydrogen in Brazil.
Gets the most sun and it has plentiful wind both on and offshore.
Massive investment has been committed to this region. So looking forward I see real potential for CSP to be a globally competitive low seo to steelmaking hub.
Just like eight minutes, India I expect we will look back on the acquisition of Texas, H, B, I and CSB very positively the.
They represent a major milestone in our submit those strategic development together these acquisitions at $501 million to a normalized EBITDA.
This is in addition to our organic pipeline of approved projects that are expected to add $1 2 billion to normalized EBITDA.
Lastly, while we're growing the business. We're also returning capital to shareholders. So far this year, we have generated $3 2 billion of free cash, 70% has been returned to shareholders and 30% invested in M&A.
We are increasing the M&A commitment today, but this is balanced by our announcement to repurchase a further 60 million shares. This is the maximum amount under our existing authority.
Our intention is clear we will continue to return capital to shareholders, while it's growing and developing our business.
With that we're ready to take your questions.
Okay.
Thanks for this year. So we do have a queue of questions all ready.
If anybody does want to join the queue. Please press star one.
We will move to the first question. Please from Alain at Morgan Stanley . Please go ahead.
Thanks, Danielle Hi, everyone I have two questions. The first one is on M&A clearly you bought this asset at around seven times normalized EBITDA, while your own stock is trading at less than three times next year's numbers.
Why did you choose to invest in an extensive assets instead of buying more of your own stock and then especially that that this increases your group's carbon footprint I got it thats a look it's a low carbon footprint, but nonetheless, it's still raises your carbon footprint. That's my first question. Thanks.
Sure.
Uh huh.
So in terms of normalized EBITDA I would be careful in comparing it to the headline transaction value I think they are important benefits in the state of Star Sarah as you know it's a.
Economic free zone, Theyre significant Nols that we have.
The level of tax rate is much lower so well invested assets. So the maintenance capex going forward is significantly lower as well.
So I think when we look through this and when we look at what we can achieve as a company. We feel that there is significant value. It creates a lot of options for us. If you look at the steel shop. For example, it's really designed to be 6 million tonnes and therefore as we grow the capacity the incremental capex would be much lower it has a lot of interesting downstream.
Options for our Brazilian business, whether it is on the long side or on the flat side, it's a growing market and I spoke extensively about how the state which is located in Sarah is very very exciting from a renewal perspective.
Overall, our covenants this fits into our carbon footprint.
Fits into our climate action report, so as we Decarbonize, our global assets by 25%.
And in Europe , 30% this asset fits into that strategy.
<unk> does not have a markedly different capex intensity.
Carbon intensity as the average of our assortment.
In terms of our shares we continue to highlight that our shares remain undervalued we see.
Tremendous value creation opportunity in them.
He spent 70% of our free cash buying back our shares since the start of the share buyback program.
You can see the significant amount of shares that we have bought back to put it into context. If you look at first half 'twenty, one net income versus first half 'twenty to net income net income increased by 28%, but EPS increased by 58%.
And to maintain that policy, we announced $60 million share buyback today, that's the maximum authorization level that we have so we remain committed to buying back shares and returning capital to shareholders as well as growing and developing the business.
Thanks. Thanks, Thank you and my second question is on the buyback. So the $1 4 billion that was announced today on the 2.2 billion acquisition, what take your pro forma net debt above 7 billion.
The CEO of the group and a major shareholder how much appetite do you think there is to call for an <unk> CGM and the second half to get authorization for more buybacks and what needs to happen for you to take that step. Thank you.
Yes.
Without giving guidance and getting into too much detail. There is also a free cash flow right that's coming in the second half.
And it's thought that Theres no free cash flow in the second half so we have to offset that.
Based on the uses we have for some of our cash.
When we look at the overall financial picture, we are very satisfied with our strong balance sheet.
We'll continue to maintain a balance sheet, which has a net debt level lower than $7 billion.
We're very comfortable in that very confident in achieving that.
In spite of these announcements that we have made today.
Acquisition of CSP is rather than a share buyback program.
Yeah.
Thank you.
Thanks, Helane, So we'll move to the next question. Please from Tom at Barclays Go ahead Tom.
Yeah.
That's all.
Okay.
Yes.
Everybody hear me.
Hello, Yes, we can hear you now. Please go ahead, sorry about that yes.
Thanks for taking my questions two from me please both on CSP.
Last one clearly the asset that has a lot of these.
Offsetting losses.
It generated before by losses from the company historically.
Just wondering what you will do differently compared to the previous owners that will bring it back to sort of net positive positive net income.
It looks like it's seen some sizeable net losses in the last few years, that's the first one.
Okay.
Sure. Thank you Tom.
If you look at the company. The company, obviously went through a ramp up phase right. So and integrated as such is not always easy to achieve full ramp up.
Uh huh.
When we look at the business end and based on the acquisition price.
Of the assets and the fact that our capex level. This estimated to be $50 million, we see healthy net income here.
The average EBITDA for this business has been about $320 million for the last five years clearly much higher this year and much higher than <unk>.
Last year 2021 was much higher than the average, but going forward, we expect normalized EBITDA to be 330.
So I would not have a read through in terms of the Nols in terms of future performance I think you could ask the same question zero as well as your add significant Nols when we acquired the business, but when you look at how the business is performing its markedly different. The same is true of Texas has now achieved is designed rated capacity it's actually run.
<unk> at higher than normalized EBITDA, clearly very proud of the team down there and what they have achieved so far.
Thank you that's very clear and then the second one is just.
<unk> added slab capacity just wondering what your preference would be between adding further downstream capacity either domestically or in other regions or.
Clothes and upstream capacity elsewhere to sort of make that.
Upstream downstream equation balance do you have a preference on which one you had royalty.
Maybe.
I understood your question, but I would say neither.
I think this asset is not precipitating a closure of any asset fundamentally what we're doing is as you are aware, we ramped up or are ramping up our investment in Mexico.
It's a world class Hot strip mill that we have commissioned.
In Lazaro as that ramps up it will eat up all the slides that lazaro has.
And therefore as a group we become slab short the second advantage. When you look at this company is that it has been selling a lot of slabs into the Brazilian market, because Brazil remained short slabs.
And that market remains an opportunity and then when the Calvert Eef start up.
We have the opportunity to.
Go downstream.
I think the Brazilian market will be ready for that type of growth. When you look at the demand supply balance for <unk> products and we then had the opportunity to do it either here or to do it in <unk> and clearly there will be extensive discussions internally and then we will announce so I think from a just an overall slab balance it fits very nicely into our.
Short term medium term long term strategy of our assortment.
Lastly, I would also add that in Europe , we buy slabs as well so the shortage or requirement of slabs and are limitless slightly greater than than just what we need in the NAFTA footprint and this asset is also well located to supply that.
Thank you that's clear and maybe just one housekeeping just on the that is located in an export processing you sort of mentioned, Brazil short slab.
Is there a material difference in tax treatment, if you sell domestically versus export from CSP.
Yes, there are some important advantages that will get Jim to elaborate on that.
Yeah, Hi form, yes, I think the biggest advantage there is that when we sell them internally.
Then we don't we don't <unk>. So we get the credits deviated credits when we buy the raw materials and then when we sell.
It is.
That is small.
<unk> rate would be more like 1%.
So.
You retain that benefit.
The business so that's.
That's a significant impact.
Another important benefits of tax benefits that we have when we import raw materials also.
You are not paying.
Normal taxes and import duties so from a tax point of view, it's a physical point of view with you.
You have a lot of good tax attributes over there.
Okay. Thank you very much I'll turn it back.
Thanks, Tom So we'll move to the next question from Seth.
BNP. Please go ahead Sir.
Hi, good afternoon, thanks for taking our question.
Two questions first one on M&A again, and then secondly on supply discipline in Europe .
With M&A.
When you first broke back in February about metallic renewed M&A and correct.
Volume derived with Green power and then subsequently green metallics.
Yes.
Pretty big step towards growth rather than either of those two options.
Are we interpreting that correctly is it more of an opportunistic move to grow and the valuable reason like Brazil.
And how should we think about the future M&A priorities is the focus going to return to Green power agreement, Alex Maccallum now open to growth.
There please.
Yeah.
Yes.
So thank you for your question I would say that we would never close for growth.
So a few years ago, we also acquired a zero in India and that has been growing and doing really well.
I think clearly as we would decarbonising. We're also we're also focused on.
Growing in terms of renewable energy, which is attractive to our assets because we have to have certain synergy of operating benefit. That's when we would make the investment as we've done at green coin, India or or acquiring assets, which will serve us as we decarbonize our footprint.
Those were additions to our strategy growth, it's always in the DNA of our storm it though but I think what's also in the DNA of our submit those to maintain a strong balance sheet. I think we have had a past where we didn't have that and we are very focused.
Focused on maintaining that trend and ensuring that the balance sheet has a robust level in terms of net debt not exceeding $7 billion. So that we remain very comfortable with that and to navigate our twin priorities within that returning capital to shareholders and also growing and developing the business.
Yeah.
Okay. Thank you and.
And the second question. Please on European supply discipline, we understand that.
Several blast furnaces idled in Europe recently, perhaps Dunkirk and Elba.
Can you talk about the rationale for outages in the current market environment.
Is there opportunity for better supply discipline from Macau or peers, having learned lessons of the past cycle.
Fixed cost under absorption does that help.
So able to access some of the Covid benefit furlough schemes.
To help lessen the blow of lower volumes in 2020.
Okay.
Yes, I'll just hit the high level points, and then I'm going to ask <unk> to elaborate but fundamentally the furnace, we took down in Dunkirk I think is reflective of what we see in terms of demand right.
So when you look through our release, we are forecasting weaker demand environment in the second half and so it makes sense to reduce our output and not build inventory.
Generally no.
Okay.
Yes so.
So we are seeing we are seeing that demand picture.
Europe is I didn't mention so the REO demand, even though of course, we see headwinds.
And based on what we can see today, we expect them to real demand should be at least stable.
If not slightly positive right, so, but you're right. So as we as we go now as we head into summer Greg as you know, we're going to see seasonality.
On top of that we believe that we are in the middle of.
These stocking cycle.
What we are doing is we are adjusting our demand too.
To meet.
Our supply to meet to meet demand and I think coming to the discipline and I think if you look at the data that was released recently.
<unk> Association and then you'll see the size of the cuts in production by Europeans not only European but across the board.
It seems to indicate that there is discipline, you'll see cuts across the board. So it seems that everybody is following that which is which is a good side okay.
And then in terms of your the last part of your question in terms of fixed costs. I think we have always done a good job in terms of what advising all fixed swaps, we learned quite a lot during these times.
So it's clearly today, we don't have the seen the same schemes that were available to us back in 2020, but.
And many of these countries there are different schemes that continue to be innovative and that we continue to use a good example.
As Germany, when we can reduce the working time and adjust.
The cost base.
The same way so I think we feel comfortable that we're going to be able to navigate described.
If it materializes.
Very good way.
Great. Thank you very much.
Thanks, Matt.
I'll move now to.
To Alan at Jefferies.
Thanks, Good afternoon.
Two again on CSP and I'll take them one at a time just the first one is it more around the potential to add rolling into downstream, finishing capacity. When do you think you'd make a decision on that.
Yes, so thats not in the immediate vicinity.
I'd say its a few years away I think fundamentally.
The asset will cater to the domestic demand that exists for slabs.
And help US bridge the gap in terms of shortage for slabs, right, which is starting up because the Mexico Hot.
Chipmos is ramping up nicely.
And on the Nols.
They understand that they can be used at the group or the continental level or are they ring fenced.
Those assets.
Youre right.
We would merge or consolidate merged these entities that can be used as a group level I.
I don't know Jeremy I know you would like to add anything on that.
Okay.
Yes, that's basically <unk> of the tax legislation in Brazil to the extend that to combine the assets then it becomes available to the Brazilian.
Entities. So we have one large legal entity in Brazil, So let me touch on Brazil.
The natural step for us with which combined the businesses. So that we can accelerate the consumption of the tax losses.
And as you do that would also so.
Sure.
Rest of the business would benefit by a higher rate, which is 34% which adds more value to this nols.
Great.
Okay. So it can be used as a brazilian level, but not let's say to offset losses in Kazakhstan.
No that would not be possible, okay, just double checking okay. Thanks, guys.
Thank you.
Thanks, Alan so.
So we will move now to Patrick at Bank of America.
Hi, Good day, thanks for taking our questions I just wanted to ask on working capital I mean.
2021 was a bowl of.
Close to $7 billion and another $3 billion in the first half.
If prices.
All the prices stay as is steel prices raw material prices, how should we think about that in the second half of the year.
Thanks.
Jamie.
Yes, that's correct.
Good point.
And what we have been saying the message continues to remain the same.
To the extent that you believe that these market conditions that we are seeing right now they persist throughout the second half then I would expect the business to reduce significant amount of working capital in the second half.
Yes.
Thanks, and then maybe just one follow up I mean.
Looking at Europe . It does seem well, obviously, everybody is kind of consensus bearish on the outlook.
But autos does seem in some ways the supply chain seems to be on blocking a little bit and actually.
Q3 in terms of auto production looks like it could be relatively decent compared to Q2 can you maybe just give us a read on what are you seeing there.
From your customers.
Yes.
It would be helpful color. Thank you.
I think youre right. So the first half to be honest.
As we have been discussing also consistently we have not really seen significant improved improvement in the first half right.
But when you look at the forecast that exists out there still see a lot of this forecast showing growth year on year in terms of in terms of production.
Some good signs in Europe had some at least during the second quarter, one or two good months in terms of production. So then we get the message that some of the constraints.
Yes, they are being resolved, but I think based on our experience so far it's good to to.
To wait.
Wait and see what happens.
But I think that as we can.
Cautiously optimistic about seeing higher volumes.
Going into the second half we will see.
Yes, I think that is it Kevin can provide some support to the fence to consumption as we progressed.
Okay. Thank you very much.
Thanks, Patrick So we'll take the next question. Please from <unk> at Credit Suisse go ahead Ian.
Are you an afternoon all questions have been answered on my side. Thank you very much.
Okay. Thanks, Kevin.
So we will get straight to ruckus at Kepler.
Yes, hi, good afternoon, two questions one is on the capital allocation again.
So for the time being you had kind of a two to one in terms of shop epic versus M&A, how shall we think about priorities.
Priorities.
As is as we as opposed to to move towards a recession, you were saying you want to maintain.
Net debt under 6 billion dollar.
Shall we think about the moving parts.
Sure.
In terms of capital allocation.
Yes. Thank you.
Fundamentally.
There is no change to our capital allocation policy right, we have been maintaining it and I would.
The design of the capital allocation policy is to withstand cyclicality, because we all understand and appreciate that the steel industry is cyclical.
And also I would just add because there are a lot of questions on working capital. There is a level of free cash that gets generated when end markets come down.
Due to the working capital release and at the same time.
Cashes consumer end markets improve.
So actually the volatility of cash is not as significant as perhaps earnings volatility.
And I think that's a very interesting point in terms of capital allocation.
We have set 50 50, 50% capital return to shareholders, 50% for M&A, that's what we intend to maintain.
Net debt target I think I heard you say seven sorry, six it's our idea is for it to be lower than $7 billion.
Okay.
And then on the volume outlook for the second half I think it's clearly mentioned by you guys that are you seeing economic activity go down in most parts of the world.
Second quarter was already rather soft quarter in terms of volumes.
Shall we think about the seasonality in the second half.
Particularly Europe in Q3.
And what is your read on China.
The market situation in China for the rest of the year.
Yeah Rocco slipping.
The first question so you're right. So in terms of volumes I mean, I think we spoke already about about Europe . This seasonality.
Saying that we are experiencing I think thats not so much.
Some of the auto markets, where we operate so in terms of volumes.
Expectation is that they're going to see volumes relatively stable.
Our NAFTA division, Brazil, as well, perhaps a little bit less exports from Brazil.
The international prices, but overall.
My expectation is to see shipments of wood. They also.
Relatively stable and we should see.
Shipments actually improving a little bit in Crs as we as we face the strike in South Africa.
So that should provide some some some support for shipments as well I would just say that so when you look at each one I guess H one of last year and you exclude.
If I exclude the losses that we have Ncis I think we did well you see.
An increase in shipments year on year, So, let's see how we do.
In the second half but.
As we discuss so the real demand continues to be at least flat too.
Small positive so I think we can also take some comfort.
From that.
Yes, and then China I think we all know I mean, it's been it's been really impacted by Covid by the by the Lockdowns I think there is some speculation that the markets will improve the government has announced significant.
Investments.
When incentives of course that takes some time I think we're not going to see that probably in the very short time.
But I think I would I would expect to see some of that already impacting Q4 and hopefully also in 2023.
Alright. So you are not really worried about the margin levels in China, which are frankly, according to my date or at least.
The margins are kind of as bad as they were in 2016 or 2017. So you are not.
Seeing that there.
Mental shift.
No I think thats, a good point and given where spreads are in China right. Now it's fair to say that that is not a lot of money being made by the by the steel mills in China normally when you see that it doesn't it doesn't it doesn't tend to last.
So we start to see also production cuts maybe not maybe not yet enough we have to see how it evolves as we progress I think the government. The Chinese government has made also very clearly the point that they don't want to see.
<unk>, increasing I think there was a good arbitrage for the Chinese meals and.
And Thats, perhaps why we saw some high exports.
Two months and we have it's clearly something should be.
<unk>, we will continue to see how that evolves, but again, it's not our expectation that we're going to see.
Structurally higher levels of exports from China.
Okay. That's clear thank you very much.
Yeah.
Thanks, Rochus, So we'll move now to Nina at Goldman Sachs.
Well. Thank you very much for presentation and the question is from.
The first one.
Sure Yes.
Youll approach helped minimize the asset from ongoing and largest supply crisis in Europe can you share any scenario that you're only doing underground development the farmer to clinical.
Sure.
Ill start.
Start high level, and if you need more details.
Obviously supplement very well.
In terms of our strategy, we are unique in Europe , because we are multi unit multi country.
And that gives us a lot of flexibility because as you appreciate the energy crisis is not uniform across the European continent, you have different power prices.
As an example.
And different availability of natural gas that may happen in the medium term.
When we go through our scenarios, what we are trying to do is minimize the use of natural gas.
If there is lack of availability or prices continue to spike and transfer some of that production to facilities with coking coal as the energy source or a few lowering as an energy source and we have run through simulations and as a result of the simulations. We feel very confident that we are able to supply.
Our customer demand.
So we do not expect to have operational disruption.
As we go through this energy crisis, clearly there would be transfer tons transfer production in all of those activities that we would have to undertake but we do not expect to create customer disruption.
It's a whole different discussion on what happens to customer demand what happens to their facilities.
Because clearly there could be supply chain knock on effects.
And the energy crisis, I think is more serious from from our perspective, just in terms of what happens to end demand, but not as serious in terms of our ability to supply.
Mhm, unless the three completed with supply from different plants.
Data from different parts of Europe to ensure stable supply for customers right.
Exactly.
And the second question on PSP acquisition.
Do you have what is the current capacity utilization of the plant and what was the construction capex. When it was built and what's been placement cost to be in Tokyo.
Okay.
Excellent questions.
You should refer to the website the CSP website on what was the construction capex.
I'd argue that replacement cost would be very similar if not higher than.
Construction than what they spent.
So that would give.
<unk> sensor.
<unk>.
What is the capital invested or are required to build such a facility in terms of capacity utilization, it's more or less running at designed capacity. So the operation is doing well and EBITDA levels as I mentioned earlier actually much higher in 2022 and had been higher in 2021 maturity as we know these have been elevated.
Rents spreads normalize and you tack on our synergies as we get to normalize you'd been done that from a $350 million.
Uh-huh net of Q3.
Thank you.
Thank you.
Yeah.
Thanks, Steve So we'll move now to Andrew at UBS.
Hi, I was just trying to.
Yes, good question.
Just from the monthly.
So I think you just touched on it slightly in a previous question, but with the blast furnace the Yo Yo buying you're probably going to have to replace in 10 years or so anyway I would just seem to.
It probably cost about 2 billion also to be able to add.
Why not do it now rather than wait.
Uh huh.
A quick one for 10 years to do it with me.
All combined it outlines one of my.
My question I guess, secondly on Smiths CFO .
Other aspects to that.
Just some guidance on that.
Patients and why you see the provision in terms of volumes potentially prices and spreads just a little bit guidance division by division would be helpful. Thank you.
Yes. Thank you.
Uh huh.
In terms of building I think.
Comment on the building costs I think it answered it earlier I think.
You can go to the CSP website to get a sense of that.
In terms of the future of CSP.
As you know ours from until then it's D Club journey has three paths to decarbonize.
First is your hydrogen <unk> E <unk>.
The second we call it smart carbon.
That is fundamentally utilizing.
The blast furnace and applying technologies, whether CCU cts or different injection technologies are different gas based technologies.
Reduce the footprint, so clearly that remains an opportunity for this business as well.
If in case smart hub and zoom smart carbon in your scenario not in my scenario necessarily does not work out and.
And when you do acquire such an asset you are still getting on the line the infrastructure the connection to the poor at the steel shop slap casters all of the utilities raw materials offices all of that.
<unk> has already been built.
That doesn't need to be adapted the only thing that needs to be adopted is theoretically the steelmaking.
The blast furnace.
The hot metal unit so.
<unk> would be different than what it would be to build.
And it's not necessary that you have to go down that path.
And so I think that is why we remain interested we think we can bring our technology capability and there are important synergies with this asset.
Okay.
To answer your question on third quarter, and what we are seeing thank you.
Yeah, Andrew I think we've touched on some of the drivers already but let me repeat so if I again if.
If I start with shipments.
Talked about Europe .
Seasonality you should expect that.
This stocking that is that is that.
And that is happening.
Other regions my expectation is for shipments should be more stable quarter on quarter that is true.
Well NAFTA for Brazil should be improving a little bit Ncis because of South Africa the impact from the strikes that we have in South Africa.
So in terms of prices and spreads.
We all seeing what is what is what has happened.
After.
That initial initial <unk>.
Truck from coming from the war I mean, we have seen prices at spreads correct.
Especially from May onwards, I think prices they seem to have stabilized.
Lots of parts of the regions, especially in Europe and it has for the last couple.
A couple of weeks.
But clearly that will have an impact on our results in quarter three.
Prices have corrected, but we should also keep in mind. The raw materials have corrected also quite significantly and we won't start to see the benefits of that as well.
We worked through.
The inventories that we have in our books.
Weighted average basis.
Yes, I think that's in a nutshell, how we are same things spreads normalizing volte.
Volumes relatively steady in most regions with the exception of Europe .
I think thats.
That's the main moving parts Andrew.
Andrew.
Yeah, that's clear when it comes to ask one follow up on the first question.
Fundamentally I mean, if I look at Oslo, Mattel's EBITDA ratio Everytime East trade on five or six times now.
Firstly on the sort of mid cycle basis.
The the sector overall is the rated.
It seems like with these acquisitions, you're willing to pay multiples we've seen in the past in terms of.
I would like to multiple sites.
The night time, some of the cases of the H ballet flat until six or seven times in the case of the Ics with an offset but still.
<unk> expenses.
Stock I mean, when you approach. These acquisitions do you account for the same sort of.
Discount the weighting of these sort of assets divested the market applies to your share class maskil pads.
Yeah, No. That's a great question, because we don't apply a discount or do you wait to these assets, we expect tightening of the market will appreciate the value inherent in our supplemental.
And that is our effort on a daily basis that is what we remain focused on.
That is why we continue to buy such a large volume of our own shares and I think all of that.
It is not making the impact that we desire, but I do expect it will make the impact that we desire.
In the medium term these assets also remain very important too.
The future growth of this company I talked about it at the beginning in my opening remarks, but to give you a flavor.
Post, Texas and post the Es and caliber of 10 as you know we are decarbonising our business in Canada.
We will have a high quality I believe the highest quality.
Sheet business in NAFTA automotive capable without using coal.
Alright, there'll be no colon or 12 million tons of capacity.
Mexico is already DRA, aes calibrate isn't moving to DRA aes.
And so as dofasco. So this gives us a footprint that can use renewable energy to decarbonize, the es and on top with hydrogen as competitive and available we can use hydrogen.
And we clearly believe that.
Need pure iron ore to meet the demanding standards of automotive.
And we have that capability at competitive cost.
So that gives you a flavor of why Texas is important apart from the fact that it generates good EBITDA today higher than your multiple number of mucus Judy it's run rating at $200 million.
In terms of.
Our CSP I think we talked about the standalone asset value quite a lot.
Yes.
In the.
Northeast States of Brazil state of Sara the renewable assets.
The fact that the assets are world class, both invested but it also fits very nicely into our Brazilian strategy I think we alluded to some of those highlights on what we can do in terms of future expansion in the short to medium term fits very nicely into our slot strategy as well.
So there are other strategic benefits that are coming but that's not the main driver for these acquisitions. Obviously the main driver is on an overall basis is just creating value and we do and we do believe it is and we're navigating.
Getting this with that without.
Reducing the level of capital returned to shareholders, we're very conscious of maintaining the 50% level we think.
It's excellent value actually in the first half weighted 70% of free cash flow was used to buy back shares.
So that is what we're trying to achieve.
Thank you.
Great. Thanks, Andrew So we'll move now to questions from Phil at Keybanc go ahead Phil.
Yeah.
Hey, good good morning, how does how does the acquisition of CSP fit into the strategy.
In Mexico, and or Calvert is that going to be part of your.
<unk>.
You call it your North American supply chain.
Long run.
Okay.
Okay.
To some degree yes.
Because in the long run we will remain short slab state in North America, primarily because of Calvert.
Not so much but they will remain assure slot. So if I were just to walk you through it.
To date fits in because as you know caliber doesn't have any yes.
So in California, spending about 5 million tons of slabs and Mexico is one of the key suppliers along with our Toubro asset.
As as Mexico ramps up its hot strip mill that level of slab supply into California is no longer available.
And therefore.
<unk> fits quite nicely into that strategy of supplying slabs either to other customers of tomorrow in Mexico, and they can focus on Calvert, but.
But fundamentally that's that's how it fits in.
In terms of going forward as Mexico fully ramps up calibrate ramps up Calvert will soon be short slabs and and either tuber, our CSP will have to go downstream.
So as one of those assets go downstream there still is a supplier that needs to continue to supply slabs to caliber.
So anyway, just trying to provide you with the flavor of how it fits into to our naphtha strategy.
I appreciate that and then just in terms of a follow up.
In North America.
The automotive market Youre still very big Big part of that clearly through your JV is in Canada and to a lesser extent Mexico.
What what are you seeing in terms of the.
Signposts for the second half Theres been a lot of fits and starts obviously over the last few months. Thank you.
Yes.
Arena to take that question. Thank you.
Yes, I think we touched on this point earlier in the call as well.
So I think the first half.
No.
So the Oems they continue to struggle.
Right.
Volumes, we didn't really see volumes, increasing so much right and I think there is some spectation to see some improvement in the second half, but again, we have to see to wait and see.
Whether they can really.
Yes, the one.
Issues resolved.
I think there is still an expectation that there will be an improvement.
Over a year.
So I think that.
Yeah.
Yes.
It creates some some opportunities for our business in the second half to the extent that didn't materialize.
Thank you.
Yeah.
Okay. Thanks, Phil So we'll move now to grant at Bloomberg Intelligence.
Hi, good afternoon everybody.
I have two questions. Please the first one is just on the <unk> plants.
And did you kind of alluded to it.
The facility has fallen since I've been covering it hasnt really been generating that much EBITDA and if broadly sort of being owners of it for very long enough, it's generating $130 million on a normalized basis can you give us some come something so is it just a matter of timing that it was.
<unk> just reached its full capacity or did you actually go into do something and change something to get it to that level.
That's my first question.
My second question is just just on the decarbonization strategy for CSP. So just to understand it obviously there is the potential for low cost green hydrogen.
If that were the case would that.
Entitled You to replace that facility with the deal right facility or would there be some other clever way of injecting hydrogen directly into the blast furnace as an example, I'm just want to understand the technicalities open what youre approaches you've kind of alluded to it but I just want to make sure I'm clear in my mind, how you're going to go about it. Thank you.
Sure Greg.
Excellent question I think the timing has been helpful.
In terms of the Texas Exposition.
So.
If you looked at second quarter EBITDA. It was much higher than the run rate I have spoken about.
Actually.
Second quarter EBITDA was $84 million for this asset.
So clearly when you look at metallic values and what's happening in terms of scrap.
There has been in depreciation or that value relative to I guess iron ore costs and energy prices also remain elevated U S energy is attractive relative to global energy.
So there are certain trends, which are supporting that acquisition, but I think the key has been to achieve nameplate and design capacity because when an asset is.
Not at nameplate design capacity, it's very difficult to make adequate returns.
Yes.
The team there has done a great job.
Clearly we've had a lot of interaction.
Did your divisions, what are the areas that we need to focus on.
But I would give credit to the team down there and achieving nameplate capacity.
And we will continue to drive improvement because as you know we are the world's largest producer of <unk> in the world.
So we have a lot of expertise and knowledge in this area and we will bring that to bear and if the mega trends, we don't see materialize in terms of metallic pricing.
Gas value then you have the normalized EBITDA, so far we're run rating at higher levels than that.
But that is the base case on a normalized spread level.
I would just add that we also own 100% of future expansion in that facility.
Because the voice <unk> ownership is on the existing plant the existing HB I plan to divest of the non deploy theres a lot of land there.
Belongs to our assortment.
In terms of CSP and <unk>. Okay. Thank you ask a very good question.
So when when you have low cost hydrogen available.
I think there are two things that we could do.
Theoretically.
First is to be good install a new <unk> facility hydrogen based.
To take full advantage of the melt shop capacity, which as I mentioned earlier is around 6 million tonnes.
And we could look at the existing blast furnace and see what we can do in terms of smart carbon capability to decarbonize.
You alluded to to an idea of using hydrogen in the blast furnace.
That's still a design that's.
Still an R&D project.
Companies are experimenting with that so if that comes to fruition and that becomes a very natural segue to decarbonize blast furnace. So you could do something in terms of smart carbon to the existing asset and you could also build a new asset.
Which would be on the <unk>. So on a combined basis, we think it's a it's an interesting place to be where you have access to these.
Low cost hydrogen I mean, when you look at the global cost curve of hydrogen clearly the northeastern Brazil stands out and you can dovetail that.
With the steelmaking asset, which is well invested and create a low cost low carbon steel making hub.
Thank you very much for that answer.
Sure.
Great. Thanks, Raj. So we will move now to Bastian at Deutsche Bank Great question.
Yes. Good afternoon, Thanks for taking my question as well.
I Wonder if two quick ones left.
Go back to CSP, if thats okay.
So can you maybe give us some color on the tariff agreed agreed to with.
With the cash flow between which generates between now and the time of closing.
I have mentioned that could be quite significant given the working capital fluctuations, which was seen in your parent company. So that is my first question.
Jamie please.
Yeah question.
I think it's a little bit early to talk about some of this detail.
I think what you should take is that the.
<unk> is $2 2 billion.
Right.
So this is so we're going to be acquiring this company.
Free.
So that's that's how far we go.
So now so you still have to go through the carrier approval process and everything.
But I was spectation.
<unk>.
On closing Thats the.
That's the deal for us too.
Okay, but I'll take it this is not yet finally locked down that curve.
Correct.
There's still some flexibility in there.
Yes, I think thats.
That's a fair assumption.
Assumption, Boston, but I think Thats, all expectation index expectation of the sellers as well.
So I think that is a high probability that that's where we're going to be lending.
Okay.
A lot of that is not a lot of variability here. So it's not that it can be.
Can can can change significantly okay.
Okay got you.
And then my second question is just on the on the client and commercial structure are there any long term supply agreements, which you still have to auto.
Talking about agreements in the same freshness, you had with Tony I'm in Calvert.
No no not really.
No.
So yes.
CSP will have so we have a supply agreement in iron ore supply supply agreement with all of that will continue.
But thats, where the raw materials, which is.
The same thing the same contract that exists today.
But that's it that's it there are no or the long term agreements in place.
Okay understood. Thank you.
Thanks, Bastian, So we'll move quickly to a Max order.
Yeah good afternoon.
I would like to know if it's possible to have an update on the situation in Ukraine, and Kazakhstan because in Kazakhstan.
Exports to Russia, So I wondered whether you would be able to.
Get back to former levels or if it's not the case, whether I mean, you're you're more advance in terms of displacing exports to other countries.
Ukraine.
You are trying to diversify your coker procurement away from Russia.
You had made any headway and weather I mean, we could expect in <unk>.
Months to.
So I mean, the ramp at the further ramp up of production there.
Which is now very much focused on the.
You got one and if that could move to.
Semifinished finished products to.
I mean anytime soon and if you could provide the timeframe for that.
<unk>.
Yeah, So why don't I start with Ukraine. So I think the situation has not changed much since we last spoke about it in our Q1 results. So we continue to true to run demos.
Mining operations.
About 50% to 60% of capacity.
We have one finance operating so that's about 20% of the capacity we have seen some restart some ruling activity.
As we had inventories of minutes. So that is also part of the.
Of the setup today.
Most of the coal for this capacity of course, which as Les mentioned is being sourced locally domestically in Ukraine.
And a bit also coming from from Poland. So I think that is.
Its okay I think it's early to talk about going beyond that we have to see.
Logistics continued to be a significant challenge.
So we are observing how it how it all how it develops also the fact that our market prices have also correct to put some more pressure.
So I think we put a time being we are not anticipating significant changes in the footprint over there when it comes to Kazakhstan, as we know Kazakhstan, Russia Theyre part of the same economic zone.
So.
So Kazakhstan is completing that economic zone.
So we have started some shipments in this in this area again.
But it's it's fairly limited at this point.
And yes, so that's <unk>.
Either way we are.
Completing this economic sense.
Okay. Okay.
Secondly, I mean, you highlighted that run 33% of European footprint everybody.
To get the supply issues.
<unk>.
I mean on this.
33% I mean, what's the scale of that.
With steelwork without gas.
Using identity or are using I.
I mean no.
Gaza from the beginning and what do you feel that could be potentially displaced to the countries I mean in terms of prediction.
Could we see it like that.
So.
In Europe , I think I did.
Quite a lot about it the fact that we are multi country, we have multiple sites.
That we feel comfortable that we're going to be able to meet the demand right.
Dependence.
Russian gas in Europe , it varies from country to country right, it's more pronounced in Germany, and Poland less so in some other parts of Europe I think our focus is trying to minimize the level of gas that we consume and I think that the business has done well.
So I think.
Would summarize that.
We still feel comfortable that we're going to be able to meet demand, but there are uncertainties of course depend on how the situation evolves to take to the extent that it destroys.
We have to wait and see.
But I think I said, let me Doug will be in a position to continue to help customers get the products that they need.
Okay, but it would be a bit farfetched.
When the production.
In Germany, or Poland being shifted to other countries now.
Yes.
Yeah go ahead of it yet.
So I think generally going to see the same thing as me, but it's really the downstream that normally requires additional gas rate issue reheat furnaces at the HUD strip.
Or do you kind of a cold.
Not so much <unk>, but just generally in the process.
So we could move slab elsewhere I think that's the point.
Hum.
Okay. Thank you.
Okay.
Yes.
Great. Thank you.
So we'll move now to we've got about five minutes left so we'll take the next question from Myles at UBS.
Great. Thank you very much just a couple of quick questions first of all on the buyback how are you going to manage the intensity of the buyback.
Given where the share prices and in terms of increasing the authority and if you've got $10 billion of working capital to flow back clearly you can stay below $7 billion.
How how straightforward is it to increase the authority to do another buyback say in six months' time. It was the first question.
Hi.
So in terms of the speed as you know, we're not going to comment on that.
To remind everyone that we do have limitations in terms of how much of that.
Oh, the three Florida that we can buy it depend on how the share price evolves.
Can also not cross it and averages of the less of the less.
Our base study days. So there are some technical limitations that we have to observe and other than that.
We have the flexibility to execute right when it comes to authorization for extra buyback, we'll see when we get there right so $6 million shares.
It's a big number right its about 7% of spending.
The share count today, So I think our focus right now is true as acute on that and when we cross that line. We will take a decision. We can do it quickly I mean I did already mention so normally the process requires 30 days notice.
And we can do it and it's always good to have this flexibility.
So when.
When we when we get there I think.
We will be.
Considering calling a new GM to replenish our authorization of the minutes.
Okay. That's helpful.
And then with the Destocking in Europe .
What's your best guess in terms of Latam countries are and how long. This can can last obviously.
Couldnt be quiet.
Major driver of how spreads from prices move, but why do you think we are in a destocking cycle in Europe .
Yes, that's a good question.
Look I think.
Oh expectations is that our base.
Basically we have to wait and see.
Once activity picks up again.
After the summer break when we look at the inventories across the.
The chain the supply chain.
Our view is that it's not excessive right, which is which is a good thing.
So the ability of customers to wait to wait and not buy we believe it's relatively limited I would also point to the fact that the arbitrage that existed.
Basically closed its much reduced the fact that when you look at Asian price as you look at European prices and you put that.
<unk> cost is today.
The incentive for imports have come down significantly. The fact that the euro has also weakened with some pressure also on imports everything just gets more expensive.
Right. So I think there are some good points, we are seeing again some some the prices in Europe has been relatively stable over the last couple of weeks.
The international prices to some extent.
Some signs of normalization that we talked about.
Those brands that the Chinese mills, earning today, probably burning cash to some extent. So I think there are some good data points as well.
Sure.
And then can Ken Kenny can point to hopefully pick up in activity as we come back from from the summer holidays in Europe .
Great. Thank you.
Yes.
Great. Thanks, Myles So we'll move now to Moses at J P. Morgan.
Yeah.
Hey, Thanks for answering our questions most of mine have been on.
Is it already but I just had a quick question on Capex.
Guidance has come down slightly.
Slide eight but.
You still see a meaningful step up in H, two capex of about $3 billion. So are there any risks of not being deferred into 2023.
What are you thinking in terms of decarbonization capex outlook could be perhaps maybe.
That pump time as well.
Yeah, So you're right.
That's very typical we now.
You go back and you look at our.
Call it our capex seasonality at all of his thoughts.
A bit slow in H, one and then it accelerates the cycles as we prepare the budgets we get these projects approved in the U.
Start committing the capital.
So it's just normal for us would be spending more in the second half than in the first half.
So we will update you based on the forecast that we have in front of US today, we feel comfortable that we're going to be adding to the $4 two.
But if not we will of course update you.
As we progress.
And then in terms of.
Your guidance for <unk> I think we have been also talking about it right. So we have started this year. So we have in our in our $4 two envelope about three four for the comp.
Spectation is that.
As we continue to progress with our projects that will be the natural increase of.
Our spend as we progress we have guided for 35% of the $10 billion to be spent.
By 2000 2025.
So I think if you if you simply divide that by the remaining three is that we have in front of us.
The 300 on a gross basis should lead to about $1 billion of the carb and the over the next three years and that's of course before any contribution from Cromwell. So that's the gross number.
So we hope that the net increase should be more moderate.
And then the other components.
Thank you.
You have the maintenance.
That should not change much right. So and then you have a lot of details on our strategic growth projects that we continue to as acute.
And I think we can get a good guess.
Number it is not changing at this point.
Yeah.
Thank you.
Great, Thanks, smooth and I am very conscious.
Got you and Jimmy now that we've gotten.
Quite a chunk over time so.
I think I'll draw things to a close there.
Obviously theres been a lot of ground to cover.
The call today.
Very exciting developments.
If anybody does have any follow up questions. Please do reach out to me.
I'm of course available to to address those.
Otherwise thank you very much for dialing into today's call. Thank you for your interest and attention.
We all collectively I wish you a very happy summer. Thank you.
Thank you.
Everyone Bye bye.
Yeah.
Yeah.
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Yes.
Thanks.
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