Arcelormittal SA

Daniel, you can start now.

Thank you very much. Good afternoon and good morning, everybody. This is Daniel Fairclough from the ArcelorMittal Investor Relations team. Firstly, thank you for joining this call today to discuss the results for the second quarter and first half of 2020. We published those results this morning alongside a Q&A document and a detailed presentation with speaker notes. So in order to be as efficient as possible, the intention of this call today is not to go back through that presentation again, but to move directly to your questions. As a result, we should be able to complete this call in about 45 minutes. If you would like to join the queue to ask a question, please do press star 1 on your telephone. It's worked well the last few quarters, just taking one question at a time from each analyst, and you can always rejoin the queue later if you have a further question. So please, if you could just limit yourself to one question at a time, that would be appreciated. So with that brief opening, I'll hand over to our Chairman and CEO, Mr. Mittal.

Thank you, Daniel. Good day and welcome, everyone. I'm joined on today's call by Ajit Mittal, President and CFO, Simon Wanke, Head of Mining, Janmino, Head of Finance, and Daniel. Before we answer your questions, I would like to begin as usual with a few remarks. First on safety, which is always Arso Mittal's priority. We worked hard during the quarter to further secure the work environment for COVID-19, implementing all the measures we are all now familiar with. I'm pleased that excluding the lost time injury frequency rate this quarter was the level we have recorded, lowest level we have recorded. We will be working hard to sustain and further improve this performance. Turning to our financial results. While the impact of COVID-19 is visible in the shipments of the second quarter, our performance reflects how quickly we responded to the extraordinary market conditions. As we discussed at the time of our first quarter results, we had a clear strategy to adapt our production to lower demand and at the same time align our cost by verbalizing our fixed cost base. Our resilient cash flow performance combined with the benefits of the capital raise we completed in May have helped to reduce net debt to $7.8 billion at 30th June. This is our lowest ever level and our target of $7 billion is within sight. This is important as our target will trigger a shift in our capital allocation priority away from deleveraging to cash return to shareholders. Following the easing of lockdown restrictions, we are seeking a pickup in many of the markets in which we operate. While this is encouraging, demand does remain significantly below normal levels, and the pace and profiles of the recovery remains uncertain. Our focus therefore remains on continuing to keep costs as low as possible to protect profitability and cash flow, whilst being ready to react quickly to changes in the market environment. With that brief introduction, we are now happy to take questions. Thank you.

Thank you, Mr. Mittal. So as I mentioned, if you'd like to join the queue, please do press star 1. And if everybody could limit themselves to one question at a time, that would be very much appreciated. So moving to the first person in the queue, which is Seth from Exxon. Please go ahead.

Good afternoon. Thank you for taking our questions today. If I may, I'd like to dig a little bit more into the outlook for the second half earnings, please. I recognize you haven't provided formal earnings guidance as you did last quarter, but it's welcoming from the key moving parts. First, with regards to volumes, wondering if you can comment on the scale of potential recovery we could expect in Q3 and to what extent real demand recovery could be offset by seasonal weakness. And second part of that, please, when you think about the product mix, you commented earlier about greater auto sales, the improvement in mix quality. To what extent might that offset the metal spread compression we've recently witnessed in Europe and in NAFTA? Thank you very much.

Okay. Seth, thank you for your question, and good afternoon to you as well. We have not provided second-half guidance, primarily because When we did so in Q1, we felt the level of uncertainty was so high. We wanted to provide the market with a framework to think how the company would perform. As you've heard today throughout our results, I think we're pleased with our performance in the second quarter, especially in our ability to variableize our fixed cost space almost everywhere, clearly not in all regions, but almost in all regions. Looking forward into the second half, I think clearly the biggest driver remains volume. We see a pickup in almost all the sectors that we participate in, but clearly the strongest pickup is in automotive because, as you know, automotive went to basically zero production or shipments in the month of April. And since then, we have seen a sharp recovery. Nevertheless, when you do model a volume recovery in the second half of 2020, you do also have to take into account that we have variabilized our fixed costs in Q2. And therefore, we will also see some fixed costs pick up, right? The absolute nominal value of fixed costs will increase. Clearly, the level of fixed costs per ton will not increase, but will remain the same or hopefully in some markets actually slightly come down. In terms of other drivers, I think you talked about mix. So mix will be positive, clearly to the extent that automotive shipments are greater than what we saw in the second quarter. Nevertheless, as you know, prices remain low. When we look on a historical basis, spreads are very low. When I talk about spreads, I'm talking about steel margin, overall materials both in Europe as well as in NAFTA. And we have seen in the past that these levels of spread do not last very long. But today we can see that these spreads are prevalent in the markets in which we operate. The other driver into the second half clearly is costs. We do have the benefit of this cost through our mining business because we have a lot of iron ore and integration is working well. But clearly to the extent that we still buy iron ore in various regions and for our businesses, we will have cost inflation due to iron ore. So hopefully I've given you a good framework on how you can think about our business in the second half of this year.

Thank you. If I can just ask one follow-up, please. In Europe specifically, recognizing that lead time should give you some understanding for Q3. Would you expect that mix improvement to more than offset the spread compression or in reverse?

So that's very specific guidance. I think clearly we also have a little bit of benefit in the second quarter of lack pricing, which we don't have in Q3. So I don't know if I have answered your question, but reading between the lines, perhaps you can determine the trajectory.

That's great.

Thank you very much. Sure. Thank you.

Thanks, Seth. So we'll take the next question, please, from Jason at Bank of America.

Yep, good afternoon, everybody. Thanks for this call. Can we just talk on the working capital build a little bit? I guess, and probably a question for Aditya again, I'm interested in the extent to which this was a voluntary working capital build versus involuntary. So was this just an overshoot of the delivery of raw materials and the creation of steel as demand collapsed? Or is it that you've actually decided to build working capital ready for increased deliveries as the demand started to recover?

Great, Jason, thank you for your question. Hope you're well. So the working capital bill is really trade payables. So if you were to look at the balance sheet, you would see that there has been a reduction in AR, a significant reduction in inventory, and even more significant reduction in trade payables. And that is why there is a working capital bill. So actually, this was very deliberate. And I think what we ended up doing is as soon as COVID hit our main markets, we had an immediate response and quite a strong response. And as you heard, it focused first and foremost on ensuring the health and safety and well-being of all of our employees, and then obviously protecting assets, but then obviously moved to protecting the business. So apart from variableizing our fixed costs, we very aggressively expanded cut down purchases, right? And as a result, you can see that the trade payable levels have come down. We basically destocked because inventory has come down, and clearly as business was lower, we had less AR. So this was not involuntary. This was deliberate, I must say. And therefore, we want to continue to maintain these low levels of working capital. Clearly, in the second half, we will be supported by a buildup of trade tables as we begin to order. But as long as we maintain low levels of inventory and maintain working capital, we're targeting a release in the second half of this year.

Okay. Thanks. Very helpful, Aditya. Sure. Thank you.

Thanks, Jason. So we'll move now to Jack at Goldman Sachs.

Hi. Thanks for taking the questions. Just thinking about capacity utilization across the group, clearly you've done an excellent job sort of cutting costs to meet the production levels. Can you just tell us where you are today with regards to capacity utilization, just thinking about sort of spare capacity and how to think about that as demand recovers?

Sure. So, Jack, thank you for your question. The way we think about it is coming back to the theme that we've talked about is variableization of our fixed costs. And so if you extrapolate that, you would conclude that we've also variableized our capacity. Now, I recognize that capacity is a bit sticky, so you can't be precise on it. But fundamentally, that's what has happened. So as we cut down production, we took off capacity. And as we increase production, we will bring on capacity. I think in the call, I'm not going to predict or provide you with guidance on where and which furnaces we would bring back. I'm happy to confirm what we've already publicly announced, which is we brought back a furnace in Europe. We're bringing back a furnace in Brazil. Clearly, our South African operations have been started. And I think the main takeaway here that the main takeaway is that we will be maintaining market share. So that's how I would think about or guide you towards our capacity restart strategy. Okay, thank you.

Sure. Thanks, Jack. So we'll move now to Alain at Morgan Stanley.

Yes, sir. Hi, gents. Good afternoon. So my question is on the fixed costs and the furlough schemes in Europe. So they have been critical in helping you reduce your fixed costs. To what extent have you learned to do more with less during COVID and how much of those cost savings could you retain on a permanent basis if we can put some numbers behind it? Thank you.

Okay, great. So first of all, I do appreciate all the efforts various governments have put in place to act as a buffer as businesses reduce their fixed cost base to adjust to the new market demand environment in the second quarter. Having said that, the majority of our fixed cost savings are not because of these government schemes, but they're because of actions that we have taken as a company, such as reducing SG&A, reducing R&M in line with our production, a whole host of measures that we have undertaken. Going forward, my expectation is that you're right. We can do more with less. We have developed plans. Each of the units has developed plans. The corporate has developed plans on how we can turn these temporary fixed-cost savings into more structural fixed-cost savings. I think the appropriate time to provide you with specific numbers and specific details on what we're doing by region and what these programs are would be during our year-end results. But clearly, this is the direction we're moving in. How do we make these temporary cost savings into more permanent cost savings? Now, clearly, you won't get all of it because some of this will come back as capacity restarts and shipments restart and production restarts, or not restarts, but recovers is the right word. But we're still focused on how to do more with less.

Thank you. Great. Thanks, Alain. So we'll move now to Alan at Jefferies.

Thanks, and good afternoon, everyone. In terms of the iron ore deliveries in the quarter, there had been a mention that there was higher deliveries to external third parties. Do you think that was just a temporary measure, or is there an opportunity to continue serving those customers at higher levels and then also still satisfying your own internal needs as the demand recovers?

Simon, would you like to take that?

Sure. Thanks, Alan. Yeah, look, just to go through the map so you've got that clear. Yeah, so in response to the majority user of, say, in Quebec, if you take that as an example, in Q2 when demand was down in Europe, really we fell back onto our global portfolio, which is essentially internal and then a select number of customers around the world in Europe and also into North Asia And, I mean, our test is that we find people as long-term stable off-takers outside the group who also value and pay for value and use because we're in the premium product end of the range. So if you look at Q2, something in the order of 2.5 million tonnes went from normal group sales pivoted very quickly by our commercial teams into mainly China. And your question's quite valid because it's around margins and it's around opportunity. At the moment, we're running full in all operations and I don't think there's an immediate effect to have a look at increased capacity and that's not our intent. But I think what it's done is proven the strength of our portfolio system of marketing and customers. And probably product mix is the one where we would look at we've found some interest in customers that weren't traditional during this period and that might provide opportunity for us as we look at incremental growth expansions over the next couple of years across a couple of assets.

Thank you. And just a quick clarification, that went to both existing customers and some new ones?

Yes, that's right. And that's the big names you'd expect to see in the steel industry that typically we deal with and across particularly China. Thank you very much.

Great, thanks. So we'll move to the next question, please, from Luke at J.P. Morgan.

Hi, everyone. Thanks for the call. My question is on tax and interest within the cash need guidance, which over H1 looks to be tracking quite a bit below the full year run rate. So, please give an indication of how we should expect that to roll through the cash flow statements over Q3 and Q4. And also, to what extent there are any savings from tax or VAT, et cetera, that have been pushed into 2021? Sure.

So, you're absolutely right. level of cash requirements in the first half was lower than we anticipated. To keep the math very simple, roughly cash requirements is $3.5 billion for the year. That's guidance. And in the first half, it was $1.5 billion, which implies $2 billion for the second half of this year. Roughly $300 million to $400 million of that is deferred tax. and a significant majority of that is VAT. And clearly, as the economic recovery happens and as we pay the VAT and no longer avail some of these deferral programs, you will see that swing. So that's the main delta between the first half and second half in terms of cash requirements is really some of the cash tax deferrals.

Okay. Thank you.

Sure. Thanks, Luke. So we'll move to take the next question, please, from Carsten at Credit Suisse.

Thank you very much. My question is just on the restructuring because you mentioned in your report that even though the activity levels are picking up, you still need or you still see need for a restructuring program. Just curious what the magnitude might be, which areas are affected, and what do you think about the timing here? Thank you.

Sure. I think that's a great question and something important that I'd like to clarify. At this point in time, our base case is that in the medium term, demand levels normalize, i.e., they normalize to pre-crisis levels. And why do we feel that way? I think primarily for two reasons. Number one, the duration of this crisis assuming base case scenarios is relatively short-lived. And number two, there has been significant stimulus by various governments across the world. And in some markets, or perhaps in most of these markets, we feel that the type of stimulus is very steel-intensive. So to give a good example, in Europe, the recovery fund is focused on climate change, and we think to achieve that and then change energy infrastructure and other infrastructure requires a lot of steel. And therefore, our base case is that the demand environment normalizes. Structural fixed cost savings are not about necessarily adjusting to a lower base of demand. It's fundamentally about streamlining our asset base. So can we produce the same amount of steel with less assets? We've done that in the past. So if I were to keep it simple, for example, if we had a A steel plant with three blast furnaces producing 5 million tons of steel, can we more or less achieve the same level of throughput with two blast furnaces? Similar to galvanizing lines, let's say we have three galvanizing lines, each producing 4,000 tons. Can we move to two galvanizing lines, improve their product capability, their capacity throughput to 600,000 tons each, and so we streamline the asset base? So we have opportunities like that within the Arsenal Middle Plant configuration. And that's what we mean in terms of streamlining our asset base. And clearly through COVID and through this crisis, we have learned to be more efficient. And so clearly there are SG&A savings doing more with less. I would say that, yeah. And so those are the primary drivers of the structural fixed cost reduction that we're talking about.

Thank you. Just a quick follow-up on that. Given the furlough schemes and the short-term work schemes we have seen, especially in Europe, is it actually possible that you could streamline the asset base in Europe, or do you focus rather on areas outside Europe? Thank you.

Yeah, no, the streamlining is – Europe is part of the streamlining of our asset base.

Okay, perfect. Thank you very much.

Sure. Thanks, Carsten. So we'll move to the next question, please, from .

Yes, thanks for taking the question. Let me get back to the 7 billion net debt target. I think you're saying it's coming into reach, but you're still not providing a specific target. Just want to understand what the main obstacles are from here to get there eventually already by the year end, because when you look at the components of your cash flow drivers, you know, the one and a half, two billion of cash needs in the second half, let's assume current earnings runways, so one and a half billion of EBITDA, and then you're still expecting a one and a half billion recovery from working capital. So in theory, you should be already there by the end. So what makes you careful to get more specific on the timeline? What's the biggest risk factor here?

Sure. So I think in terms of working capital, we have provided you with a target, right? And as you know, a working capital is highly dependent on the levels of activity in Q4. So clearly the levels of activity are higher than we would forecast, then the working capital release would be less. And overall, that's good news. And so I'm not worried about that or concerned about that. I think fundamentally the message you should take away today from us is that assuming the market recovery continues as we're all anticipating and base case scenario pans out or better than base case scenario pans out, then I would expect that in 2021, we would pivot away from focusing on deleveraging, but returning cash to shareholders.

Okay. That makes sense. Maybe a brief follow-up on another part on the NAFTA segment. I think when you look at the release, you said It sounds like that in the NAFTA segment you had more difficulties to offset the fixed cost pressure due to a little bit less ability to variabilize the cost there compared to Europe or Brazil. How shall we think about the third quarter? Volumes are of course getting better in the NAFTA segment. Is there anything I can expect that the cost burden, fixed cost burden, disproportionately improving because of certain company-specific measures?

Yeah. So in NAFTA, the reason why it was harder than the other regions to variabilize the fixed cost has to do with the contract structure that we have for our union employees in which we have defined benefits, whether it's pension or health care. So it's difficult, obviously, to variabilize such costs. And that's the primary reason. In terms of going forward, obviously, that issue remains. Nevertheless, I do expect that in the third quarter, the fixed cost per ton rates in NAFTA would be stable, and we would see that across our rest of the regions as well. I don't know if I answered the question.

Yeah, I guess so. Thank you very much. Okay.

Sure. Thank you.

Thanks. We'll take the next question, please, from Grant at Bloomberg Intelligence.

Hi. Good afternoon, gentlemen. Thank you very much. I guess it's really a slight follow-on from the last question. I was going to ask, you know, could you compare and contrast NAFTA with Europe, where Europe seemed to do quite a bit better than I would have expected and NAFTA a little bit worse. Sort of building on that question, perhaps could you just, in the Europe region, could you just outline how sort of ILVA performed under these conditions and, you know, were you able to sort of offset any of the legacy costs there?

Yeah, so thank you for the question. I think ILVA also performed like the rest of our European business. i.e., we were able to variabilize our fixed costs compared to Q1. Italy also had various schemes, and so the performance was very similar to the rest of the European business. Is there any more detail you'd like, or does that help answer the question?

No, I think it does. I think, yeah, no, that helps a lot. Thank you very much, Aditya. Sure.

Pleasure. Thank you. Thanks, Grant. So we'll take the next question, please, from Christian at SocGen.

Oh, thanks, Daniel. I'll just stay with NAFTA again. I think we're seeing that all that new capacity which is coming, you know, from your competitors and generally very cost-efficient capacity announced in the next, say, 18 months, and in the background, you know, Donald Trump allows it, we're going to have elections in a couple of months. So Section 232 could come under some review at some point in 2021, I guess. So what's your take on how we should look at 2021? Are we looking at a much higher level of competition and pressure on margin? Is that inevitable?

Sure. So, look, as you rightly pointed out, a lot of the capacity that is coming on stream is focused on import displacement. In terms of Section 232, I think from an American perspective, it's been successful because it has put a lot of investment in the U.S. steel industry. So to backtrack so quickly post this capacity, I think, would be difficult for either candidate in the White House. In terms of our business, clearly we believe we're very cost competitive. We have strong attributes, starting with product capability, technology capability, and overall our cost position. And so it's a competitive environment. We will compete effectively as well. And our focus remains to retain market share.

So it would make sense that we should see some pressure on margins, even if you're performing well in that environment, the market would get a little tougher.

There could be pressure on margins. That's a fair comment. But at the same time, as we mentioned earlier, we're very focused on making structural fixed cost savings. So clearly we would be reducing the cost base of our business as well. And so that should offset some of those pressures.

Great. Thank you.

Sure.

Thanks, Christian. So we'll take the next question, please, from Bastian at Deutsche Bank.

Good afternoon, gentlemen. I've got one quick question on your European performance, where I really thought the cost performance was very impressive. Are there any absolute numbers you could give us on how much you got out of these government schemes and how much you've been cutting with your own measures? My impression is that the overall number could have been close to a billion this quarter. And then related to that, if we take a higher level view in the European business as a whole, one could obviously play devil's advocate and say you lost 27% in your volumes and yet you only had a marginal impact on your bottom line. And hence, if these mechanisms work so well, and you obviously do face mini-cycles in your business from time to time just by the nature of how the steel business works, why would you not make use of these tools more often and basically take out capacity more aggressively to basically balance out the market when these mini-cycles occur, basically to balance out margins and prices better over the cycle? What would be the answer to that question?

Aditya, we can't hear you. Actually, can you just unmute?

Sorry. Thanks for your question, Bastian. In terms of – let me address the first part of your question, which is cost performance. So in terms of what we achieved in Europe, the majority of it was not government schemes. It was actually actions that we took – R&M costs, SG&A costs, salary reductions – a reduction in overtime, items of that nature. And you're right. We were able to variabilize our fixed cost base in Q2, so that was an impressive performance, and I really appreciate the effort of all of our teams globally and also, obviously, the European team. In terms of going forward, the idea is to make some of these temporary fixed cost savings into structural cost savings, So clearly, we want to make the benefit permanent. Going forward in terms of mini-cycles, look, it really depends on the type of cycle. But fundamentally, you're right. We could variabilize our fixed costs. Our focus in any such cycle would be to maintain market share. So to take a greater than market proportion of capacity down I would not make business sense to our but to take down capacity relative to market demand drop is appropriate. Normally in these cycles you don't see this level of demand drop, right? Happening from one month to another. So it makes it more problematic and you see it on a gradual basis. But yes, the point is valid.

Okay, thank you. And then maybe just following up to the first part of my question. So in terms of absolute numbers, is one billion like a good assumption for the amount of fixed costs you've been able to take out of the European business?

Yeah, I think you can make your own models on how much capacity we have. You have a sense of how much is a fixed cost per ton. I don't want to be publicly confirming a number.

Okay, fair enough. Thank you.

Thank you. So we'll take the next question, please, from Miles at UBS.

Great. Thank you. Can we just talk a little bit about the rationale for the equity issuance in the second quarter? I mean, we're almost within 12 months where it looks like you'll be stepping up cash returns to shareholders. Is it that the world is just not as bad as you expected when you decided to raise $2 billion? Or did you not have the confidence in the Obviously, the disposals, the working capital income, which would have got us there anyway. Or should we have a lower net debt target given, you know, the aggressiveness of the cycle? Thank you.

Sure. Look, the capital raise was actually the right decision. I think what it does is it allows the company to focus on the medium term. And we are not in 2020 during COVID. focused on the short-term and taking actions which maximize cash over value. Based on how we have performed, I think it's fair to say that the business has done well, both on working capital, on variableizing fixed costs, and we see recovery momentum across all the regions in which we operate. But it does, in some degree, alleviate the pressure to take actions which may not create medium to long-term value. And therefore, in the totality, we do believe it was the right decision to take. It puts us in the right place. It also improves our dialogue with various stakeholders, whether it's customers or employees, who recognize that this is a company that is going to continue to thrive. and therefore we can do joint work on developing new steel technologies, new products focused on the Green Deal, et cetera, et cetera. So I hope that gives you a flavor of how we're thinking about it. If you want me to dig deeper in any area, feel free to ask.

Yeah, so looking back now, we're looking forward now versus what you're thinking in May. It's just that it's not as bad as you anticipated. And do you think like $7 billion is the right number before stepping up cash returns or in case we have another exceptional event like this?

Yeah, I would not. So number one, I don't believe our focus is to continue to deliver below $7 billion. So I would not get too focused on that theme. I think where it's appropriate to get focused on is that in 2021, assuming the market continues to recover as we have talked about, I would not expect that 2021 is about deleveraging, but I would expect that the focus in 2021 is about returning cash to shareholders. Okay.

Thank you. Sure. Thanks, Miles. So we'll move to the next question, please, from Phil at KeyBank.

Hey, thanks very much. Ditcha, can you maybe give us an update on just the European market in general and whether or not you see lead times getting better, orders getting better? I know there was a couple of price increase announcements in the last couple weeks to a month, and we see some move in the indexes, but it's slow. So just curious in terms of what you see out there and whether or not you think the new or adjusted quota system is working.

Sure. So, I mean, let me just start with the quota. Look, the quota was the safeguard measures that the European Union modified was good, but it was not enough, right? Because we have seen that demand has come down, and yet they did not adjust the overall quota. Nevertheless, let's focus on what's happening in the market. In terms of the marketplace, we see all the trends you talked about. We do see our order book lengthening. We see very little inventory in the system. We see some price tension in the marketplace. Clearly, as I mentioned, at the level of spreads that we see today, history has shown us that those spreads are not really able – they don't last very long. I think clearly the only other – so those are all positive indicators. I think clearly the only thing that we all need to think about is the fact that some infections are rising in Europe. We have not seen the impact of that in our order book. And I guess the focus really is that we hope that all of us are able to settle into a way of being able to coexist with the virus in a more stable manner than what we have seen in the last few months. So I would say that's the only caution. But otherwise, all the indicators that you talked about, lengthening of order books, lack of inventory in our customer base, price tension is all true.

Thank you.

Sure. Thanks Phil. So we'll move to some follow-up questions actually now. So we'll go back to Luke at JPMorgan.

Hey, thanks a lot for the follow-up call. My question is just on the asset sale. And I mean, in the past, there's been iron ore assets in Brazil and Canada that was sort of indicated that that could be considered as part of that process. It's in the context of Simon's It sounds like there's more optionality around products and projects. Is fee getting more positive on what that division could be within the portfolio? Is it still something that you're very keen to own a majority share or 100% share? How are you thinking about the mining division within the wider portfolio? and I suppose in the context of the asset sales process.

Sure.

So to begin with, clearly mining has shown the benefits of vertical integration. So we are highlighting it in our earnings release and our presentation. But as a management team, this is not anything new. We've always believed in the value of the vertical integration of our mining assets. In terms of your specific question on asset portfolio and all of that, I think I will go back to what we did in the past, right? So in the past, we own 100% of Arsenal Middle Mines Canada. It was a 16 million ton mining operation. And we had a capex, I'm approximating, just to keep the math simple, of $1.5 billion. and to increase the capacity from 16 to 24 million tons. As we had to incur that capex, we ended up selling 15% of the business for approximately, let's call it a billion dollars for discussion purposes. So net-net, our overall iron exposure actually grew. yet we reduced the capital outlay for that increase in tonnage, made the business more competitive because your fixed costs come down. When you have more throughput, it's just a much more efficient operation. So I could forecast such transactions where we do some partnerships to strengthen the business but not reduce the direct exposure of our swamithal to the mining business. So I hope that helps answer the question and provides you with some sort of framework. Yeah, thank you. Sure.

Perfect. Thanks. We'll return to Alain at Morgan Stanley for a follow-up.

Yes, thank you, James. I have a follow-up on Grant's question on ILVA. You have not disclosed EBITDA run rates of this asset for Q2. Has it been better or worse than it has been last year, which I think, if I remember correctly, you've mentioned 175 million EBITDA negative run rates? And what is your thinking around this asset? You do not seem to pay any more rent anymore there. So how should we think about rent going forward? Thanks.

So in terms of VILVA, as I mentioned earlier, it has done better than that run rate because fixed costs have come down, similar to what we have done across the European business. Nevertheless, there is a loss of metal margin, so we have to offset that. But still, the business is doing better than previous run rates. In terms of the rent, you're right. At this point in time, because we're operating under COVID, we believe it is not appropriate to pay the rent. There is a residual portion of the rent which is still due, and those rental payments have been deferred. As they get finalized in discussions with the commissioners, we will update you.

Thank you. Great. Thanks, Elaine. So we'll move back to Carsten at Credit Suisse.

Oh, thank you. My question has been answered. Thank you.

Okay. Thanks, Carsten. So we'll give Jack at Goldman Sachs another opportunity if you'd like another follow-up, Jack.

Just briefly following on from the question on the asset optimization program, I guess, given the challenging backdrop right now, what gives you the confidence in achieving this by mid-2021? Sure.

So there is a challenging backdrop. That is very clear. But the assets that we have been talking about are not necessarily directly core steel related. And therefore, we still have interest. We still have buyers. When we look at the offers, they do still create value for our shareholders. And so the discussions continue, and we have still another 12 months. And so let's see where we end up. But at this point in time, we remain focused on creating this value.

Okay, understood.

Thank you.

Thanks, Jack. So we'll move back to Rokas at Kepler.

Yes, thanks. Can we talk a bit about Brazil here? I guess in the outlook statement you primarily flag that you see the volume trend in NAFTA in Europe to be sequentially better in Q3 and further in Q4. How shall we think about Brazil? Because, you know, COVID is obviously kind of three months behind Europe. And what do you see in terms of production disruptions among your customers? And what is your thinking in terms of volume trends in Brazil for the second half? Jimeno, would you like to take this one?

Yeah, I can take this one, Rokos. Yeah, that's a good question. So in terms of trends, what we are seeing in Brazil right now, it's very similar to the rest of our regions. So we expect that domestically, we're going to be increasing shipments in Brazil in Q3, sequentially. So we are running pool in our longs division. We are bringing back one furnace in Tubarão. We announced that. So we are actually, I would say, positively surprised with the evolution of the demand domestically in Brazil.

Okay. Thank you very much.

Great. Thank you. And we have one final question, a follow-up from Miles at UBS.

Okay, thank you. I was just thinking about your net zero sort of carbon target by 2050 and the 30% reduction by 2030. To what extent is that through smart carbon versus the DRI route? Is it very back-end loaded? How will this impact met coal? Is this going to be kind of a big factor over the next five years, or is it more in the sort of five- to ten-year kind of framework? And also just – How much capex is required to achieve that?

Okay, great. Thank you. So the answer is very long and very detailed, so I'm trying to synthesize it as much as I can. We have published a carbon plan, which is available on our website, and I think the key slides we have attached to this investor presentation, the key highlights, I'd urge everyone to go through it. So, let me just start with the first, the root, right? So, we've identified three roots, and they're basically – the first one has the fastest timeline and so on. So, the first thing that we can do is we can utilize more scrap. So, clearly, by utilizing more scrap, we can produce more steel through the blast furnace root as well and reduce the carbon footprint on a per-ton basis. The second thing is to deploy what we call smart carbon technologies. So these are things like EGAR and steel and oil, carbon capture and storage. And we have a number of projects. We have about six projects that we have applied for funding. And clearly, this is using the existing infrastructure that we have in place and reviewing on how we can For example, steelanol has captured the CO2, converted it into bioethanol. We understand what carbon capture storage is. EGAR is using different types of fuel sources within the furnace, whether it's wood chips or things like that. And that's smart carbon, and that then starts once you have, in some sense, increased usage of scrap. And the third is innovative DRI, which is basically utilizing hydrogen to metalize iron ore. The DRI technology exists. We actually have a pilot in Hamburg where we are experimenting the use of hydrogen in an existing DRI facility. As you are aware, the cost of hydrogen is very significant. So I'd almost say that's the next technology route but clearly is very interesting because there's a lot of discussion on how the cost of hydrogen can come down significantly in the future. So those are how we are navigating our business in Europe. By 2030, we expect our carbon footprint to be down by 30%, and by 2050, to be down by – to be net zero. Now, in terms of the funding costs, clearly they're outlined in the report. so the cost of smart carbon and the cost of innovative DRI. It's multi-year, right? It's over a 30-year period, so I take those numbers, divide by 30. But then I think of three other things. Number one would be border adjustment, which would then allow us to have a level playing field and pass on the cost of emissions so there'd be a return on these investments. Number two, I think clearly there's the ability for us to access grants and state support and the funding of this CAPEX. And the third is other ideas, such as contracts for difference. I mean, this was used in the utility sector. So, for example, if we're using a lot of hydrogen, there's an additional cost, and for a period of time, that additional cost is borne by the state. So I think that's just the key headlines to map out for you that look – there are three paths which get us to our goals. funding has to be shared between customers, key stakeholders, government, and us. And clearly, there has to be a return to justify it, because otherwise, why would you be producing steel in Europe? Then you just import the steel, and then you never solve the carbon issue to begin with.

Yeah. Okay. Thank you. So one more thing. Is it quite back and loaded, getting to 30% reduction? Is that kind of more in the 25 to 30 timeframe.

Yeah, I think you make some progress with using more scrap, and the rest is on the smart carbon side.

Okay, thank you.

Sure.

Thanks, Miles. So, actually, we do have one more question, which I think we have time for, and so we'll take that from Bastian at Deutsche Bank.

Thanks, Daniel, for squeezing me in. I have just one quick follow-up on your exposure to plate in NAFTA. One of your peers is obviously adding a significant amount of capacity, and they're pretty clear about the aim to actually take market share away from domestic players rather than imports. And we have not heard you talking about your plate business for some time. Is that a business which you would still see as core? And are you also potentially looking at options to upgrade your mill? Just curious to hear how you look at the situation because all that equal obviously like adding 10 to 15% of capacity will change the economics of the business particularly as the demand in energy as an important end market has potentially been impaired more structurally. Thank you.

Yeah, so our plate business is clearly important to us in our US footprint. We have a very good plate franchise where we produce a lot of high-grade plate for different applications, whether it's military or energy or otherwise. And we will continue to invest and upgrade the asset to be competitive in the marketplace.

Okay. Thank you.

Thanks, Bhatian. So that was our last question, Mr. Mittal, so I'll hand back to you in addition.

Thank you. Thank you, everyone, for your continued interest in Aswamittal. I wish you and your families all the very best, and I hope that you can enjoy the summer. Keep well, stay safe, and we will speak soon, I'm sure.