Arcelormittal SA

Good afternoon and good morning, everybody. This is Daniel Faircloth from the Basler Missile Investor Relations team. Thank you very much for joining today's call, which is being hosted by Mr. Mittal, our Executive President, Aditya Mittal, our CEO, and also Giannino Cristino, the Group CFO. The focus of today's call is to discuss strategic progress we're making at Basler Mittal. This is covered in depth and detailed presentation published alongside our results on the website today. So as usual, the format of this call will be some opening remarks from Mr. Mittal and Aditya, followed directly by a Q&A session. As such, we should be able to complete this call in about 45 minutes. Before we begin, some housekeeping items. Firstly, if you would like to ask a question, please do press star one to join the queue. Secondly, I'd like to remind you of the disclaimers on the first slide of our presentation deck. And finally, I'd like to inform you that this poll is being recorded. So with that, over to you, Mr. Mittal.

Thank you. Good day, everyone. Thank you for joining today's call. I hope you are all keeping safe and well. Today, we have reported a very strong set of results for 2021, including a record level of net income. As a company, we have achieved significant progress on many strategic fronts over the past 12 months. Cost improvements, advancing our decarbonization plans, and progressing with our investments to grow EBITDA. At the same time, we have been able to return significant amounts of capital to shareholders. The progress is gratifying, and it's down to the hard work commitment and dedication of all our people. I expect 2022 to be another strong year for company and all our stakeholders. Adit.

Great. Thank you and welcome, everyone. Good morning. Good afternoon. 2021 has indeed been a very progressive year for Arswar Mittal. However, I must acknowledge the one area where we did not make the progress we wanted. and that is safety. Our leadership is fully focused on improvement, taking decisions on where we need to strengthen and intensify our very important efforts to achieve zero incidents. We will continue to double down until we reach our goals. In terms of financial performance, full-year EBITDA was $19.4 billion and net income a record $15 billion. We delivered $6.4 billion of free cash flow for the year, with 3 billion being generated in the fourth quarter alone. These are very strong numbers, and I believe that we can post strong results in 2022 as well. At the start of the year, we set out four strategic priorities. I'm pleased to say that we are delivering progress on all of these areas. First, we're leading the industry on decarbonization. Second, we're further improving our cost position Third, we're investing for long-term strategic growth. And finally, we're consistently returning capital to our shareholders. These are the strategic pillars on which we can grow per share value. Our capital allocation and return policies are delivering. In 2021, we reduced the share count by almost 20%. The buybacks enhance the impacts of our growth projects, supported by the growing contributions from JV and Associates and the structurally lower net cost, net interest cost. These factors combined will drive higher earnings and create sustainable value for shareholders. Looking ahead, I see good prospects for 2022. Demand continues to improve. We have the support of higher annual contracts, and we have our value plan, which should offset some of the impacts of cost inflation. I fully expect 2022 to be another strong year of EBITDA and free cash flow generation and look forward to making further progress against our strategic priorities. Thank you. We're now happy to take questions.

Thanks, Aditya. Thanks, Mr. Mittal. So we have a queue of questions. The first we will take from Elaine at Morgan Stanley. Please go ahead, Elaine.

Yes, good afternoon, gentlemen. Two questions from my side. Firstly, it's on capital allocation. Across your presentation, you have reiterated your capital allocation framework. On capital returns, you have talk the talk and walk the walk. But what about M&A? Are you warming up to the idea of becoming more acquisitive again? What would you say to the skeptics who are worried about the potential increase in M&A risk? That's the first question.

Sure. Thank you.

Yeah, thank you for the remarks. I think we have walked the talk in terms of capital returns, and you should expect the same going forward. If you look at the capital allocation strategy or policy that we have outlined, 50 percent of free cash flow goes towards our shareholders. So really, in terms of M&A, we're focused on the other 50 percent and what we do with that. We obviously can continue to deliver the balance sheet, or we can also explore M&A opportunities. I think, for example, we could look at areas which support our decarbonization journey or areas like renewable, where clearly we have certain advantages. As you know, historically, we built a very strong iron ore business, which is a great business on a standalone basis, but also supports our steel businesses. There are very good and clear synergies there. We could do something similar in the renewable side, right? Because as we decarbonize our energy requirements will only increase, so we could make investments there or get into partnerships, et cetera. So fundamentally, the key message, though, is capital allocation is not changing. We are focused on returning cash to shareholders. Fifty percent of free cash flow is designated for that. And, I mean, I think it's understood, but I'll just reemphasize it. We are very focused on retaining our investment rate balance sheet as well.

Thank you. That's very clear. And the second question is on the outlook. You sounded quite upbeat on volumes and pricing. Given the contract resets in Europe and NAFTA, how should we think about the different moving parts for your Q1 EBITDA, especially with respect to the volumes, ASPs, and cost inflation? Thank you.

Sure. I'm going to hand it over to Giannino to take that question. Thank you.

Thank you. So let's talk about the moving parts for quarter one. I would say that the fact that we had a good negotiation with our OEMs contracts, that will support prices as we move into quarter one. Just quickly to remind everyone, about 70% of our contracts in Europe reset from general beginning of January, so that will support prices. So we also have sizable contracts being reset in NAFTA, about 30% of our contracts in NAFTA. So looking at the group as a whole, our expectation is selling prices will be higher. Then if we move to volumes, our expectation is for volumes to be at group level relatively stable, slightly higher. given the fact that we got also the highest shipments in Q4. And then on the flip side, of course, we are seeing cost pressure. So we are seeing, I don't know, and coal prices rising. And on the energy side, I believe that in Europe, we have seen, probably we have seen the worst. Of course, we have to be watchful, but probably we have seen the worst.

Thank you.

Great. Thanks, Alain. So we'll move to the next question, please, from Seth at Exxon. Go ahead, Seth.

Good afternoon. Thank you for taking our questions. If I can start out, please, with a question with regards to decarbonization. Mittal certainly has been a leader with regards to launching your decarbonization plan and the initial sales of green steel already. However, some of your peers within Europe have begun to accelerate their own plans at targeting full decarbonization by 2030 rather than 2050. How does that position Mittal ultimately? Is there a challenge? Is there a need to accelerate moving forward? Or do you feel comfortable with what's already been announced? I'll start there, please.

Sure. Thank you. Yeah, I have seen some of those announcements. I won't comment directly on those announcements, but really on what we are doing. I appreciate your commentary on us being the first, but obviously being the first is Not what wins the prize. It's really in the long game who has the best strategy. Just high level, very quickly, I think we have a lot of advantages or attributes which give us a lot of confidence and give me a lot of confidence that we will succeed in terms of leading the decarbonization journey. Our technology prowess, clearly our commitment to R&D, which we have not cut in spite of all the volatility in the steel business. our globally diverse workforce as well as our size and scale. In terms of our plans, if you look through what we have done, we have announced decal plans in Spain and Belgium and in France, most recently in Europe, and have done the same in Canada. For example, in Spain, we are scheduled to bring on the first net zero steel facility in Sestau by 2025. We've also launched XCAR products. These are steel products which we can sell and you can record under the greenhouse gas protocol zero carbon emissions. This is the green steel certified. And we have a recycled and renewable product range. Clearly, we need to grow that product range. And we're doing that through the investments that we have. I think when I look at the totality of our European operations and the totality of what we're trying to achieve, I feel very comfortable that we're on the right track and we're doing the right things.

Thank you very much. And if I can ask a follow-up question with regard to capital allocation, please. Your 50% free cash flow payout ratio has already supported really phenomenal buyback scale over the recent quarters. I think there are many investors hoping to see a hike in that payout ratio going forward, certainly as you approach the net cash buffer. certainly would have already been there were it not for the big buybacks to date. You already talked about for M&A. Just how do you think about the tradeoff of essentially using some of the excess capital for M&A as opposed to further expanding shareholder returns with a higher payout ratio? Thank you.

Yeah, thank you.

Look, fundamentally, there could be short-term conflict in that, but not really medium to long-term conflict. What do I mean by that? I think clearly, M&A actions or activities, if we undertake them, should create shareholder value, right? I think we have to review what they are, understand the synergies, how it furthers our strategy. So the concept is not to do things which would obviously reduce that. I think that's a given. In terms of increasing the payout, I think that's a dialogue and a discussion we can have and we should have with our key stakeholders. So far, we have not heard that feedback. I think what we have done last year has been very impressive in terms of both our dividend policy, the share buyback, the fact that when we did the disposal of our operations in the U.S., we returned 100 percent of those proceeds back to shareholders. So, in a nutshell, we feel very comfortable that our capital allocation strategy allows to return value immediately to the share buyback program, but also preserves the options and the capability for us to continue to create long-term shareholder value.

Great. Thank you very much.

Thanks, sir. So we'll move to the next question, please, from Tom at Barclays.

Yeah. Hi, guys. Thanks very much for taking the question. Congrats, I guess, first of all, on what has been record earnings in a very good year. Firstly, just on the current CapEx envelope that you have on strategic growth, I mean, it seems like every quarter there are some interesting new sort of growth projects that are coming online, most recently sort of Ukraine, Baromanza. Just wondering if that's something we should expect for the next couple quarters, or are you quite happy with the existing portfolio of projects?

Yes, first of all, thank you. It's been a long time since we've delivered such good results, so everyone at our summit is very pleased. In terms of the specific strategic projects, we'll update you as things develop. Clearly, as we move forward in terms of decarbonization and also our product suite, where we want to have capability to supply to the new demands that are being created in terms of the new energy infrastructure, we could have more updates and develop more projects which could create both EBITDA and value for us as we move forward. So I would not say that this is the end of it. I would say that the area to focus on is how interesting these projects are. Because if you look at the relative capex to the relative EBITDA generation, these are all very strong projects. primarily focused on the emerging markets, adding value in terms of our product range, adding value in terms of iron ore. And the reason why I say they're very strong projects, apart from the strategic reasons, is also because the EBITDA forecast that we have provided in terms of iron ore are based on long-term iron ore pricing, which we have not changed for many years. And in terms of steel, it's really based on the historical spreads between 2050 and 2020. And so to the extent that there is a structural shift in the steel industry, then obviously the EBITDA performance of all of these facilities will improve, or all of these projects will improve. So I think these are quite exciting. It's not that they are already commenced, so we should see the EBITDA benefits soon, especially Mexico, for example, where the first coil was already shipped out in December of this year.

Okay, thank you. Very clear. And just another question, please. I apologize. The line cut out a little bit during Alain's second question, but I heard that Europe seems to be past the worst, and you can see sort of, I guess, that CIS prices are starting to pick up. Would you rule out that Q1 EBITDA might be higher than Q4?

Do you want to? Hi, Sean. Yeah. Look, I mean, as you know, we don't really provide that type of guidance. I was just trying to discuss the moving parts, right? So we are, of course, very confident on Q1. We believe that we're going to have a good quarter there. And I spoke already about the moving parts. So I think that should give you an indication of what kind of EBITDA to expect in Q1.

Okay, fair enough. Thanks. I'll turn it back.

Great. Thanks, Tom. So we'll move to the next question from Patrick at Bank of America.

Hi, good day. Well done on the record results. I just wanted to ask two questions. One, the $1.5 billion value plan, which is in the result. Can you just maybe give us a little bit more color around what actions you're taking? I think I saw there it's... intended to offset some of the inflationary pressure you're feeling. So it would be interesting to hear what actions you can take. And then the second one is, could you just maybe give us an operational update on India and the strategy there going forward? It's obviously doing very, very well. And just to get a sense of the trajectory that the business is on. Thank you very much.

Thank you, Patrick. In terms of the value plan, as you correctly point out, it's $1.5 billion over the next three years. The focus area is really variable cost and improved operational reliability. And variable cost is really improving consumption factors and the way we can do it, or efficiency factors, and the way we can do it is through transferring knowledge. We have facilities which obviously do very well, and there are areas in which we can improve across the board, and so this is the bottoms-up plan. It's very clear which facilities have this improvement potential, and it's a cumulative of all of those plans which we have presented. Operational reliability is just improving mill availability, so ensuring that the mills are available much more. It's really focusing on preventive maintenance practices versus reactive maintenance practices, and the combination of the two is a prime generation of this value plan. It's different than what we did in 2020, 2021, where we had a fixed-cost plan, which, if you remember, included the footprint optimization. So, this is the Kokow in Florange, Saldana, as well as Krakow in Poland. And we improved employee productivity by 8 percent, reduced SG&A. So, this is much more focused on variable costs, operational reliability, and because it's variable costs, it should offset some of the inflationary impacts. In terms of operational update in India, I think you're absolutely right. India is off to a very, very strong start. It has done very well since our acquisitions. We're very proud of the team there and what we have achieved. It hit record results, both production and shipments in 2021, and it has excellent growth characteristics. Inherently, the facility is low cost, has a very good strategic base, because the iron ore is coming from the east via slurry pipelines to the east coast where we own pelletizing facilities, transported to the west coast where we have a coastal facility where the market is, and then obviously converted into steel. In the short term, our growth plans are twofold. Primarily it's automotive downstream. So we have a project to set up a new coal rolling facility, galvanizing lines, to address the market in terms of automotive demand. And the second is to expand the facility on the West Coast, which is a Zira site. We have a plan underway or a project underway, which hopefully we should be announcing soon this year, in which we can take that facility from 8 million to 14 million tons. And clearly, as it's an expansion, it's a brownfield facility. I think that will bring down its cost. So from a cost competitiveness perspective, I think it will be world class and clearly located to the growing market in India. Moving forward, there are other growth plans, but I think this is the main takeaway for today.

Thank you.

Thanks, Patrick. So we'll move to the next question, please, from Alan at Jefferies.

Thanks, and good afternoon. First one regarding the carbon price. In the presentation deck, you've highlighted some hedges at very low price levels, but none of them were actually used in 2021. Were you fully covered by your free allowances in the last year, or was this a strategic decision to hold on to them until later when perhaps the view is that the carbon price continues to rise?

Yeah, so let me take this one. Yeah, so that was a decision, strategic decision not to draw from our hedging position. So as you have seen in our slides, so we have and we have historically done that. So we have built a sizable position that can take us through the first half of phase four. And in 2021, we felt that there was no need to draw from that. So we are carrying that position untouched for future years.

Thank you. And then a bit of a different topic for my second question. But we're now about two weeks away from the deadline in Brazil for the removal of all the upstream tailings downstream. Can you, and there's been several articles out there speculating that perhaps not all mines, not specifically ArcelorMittal mines, will not meet this deadline. Can you give us a progress update on where you are for that?

Yeah, so I can speak for ArcelorMittal what we are doing. I'm not going to comment on what the orders are doing, but clearly you have seen in our books, we have already provided for the dismantling of the, of the dam, the one filling dam that we have in Brazil that is part of this plan. So it's progressing. It's progressing well. And we actually got the licenses already to start the expansion of that project, Serra Azul. So I would say from our side, everything is progressing quite well.

Okay. Thank you.

Thanks, Alan. So we'll move to the next question now from Luke at JPMorgan. Go ahead, Luke.

Hi. I suppose more broadly just on your guidance, we see a lot of your peers give a bit more granular quarter ahead or year ahead guidance. Literally just now one of your peers is coming out with next year's guidance. Just trying to get an understanding of why or what's holding you back from providing more quick quantitative guidance to the market? That would be my first question.

Look, as you know, this is something that we have stopped many, many years ago of providing very specific guidance. So we believe that by now you guys understand very well the company, understand the drivers. So we feel that there is no need for such specific guidance. So what we try to do every quarter, as you know, We tried to walk you through some of the moving parts for the next quarter, right? And I think we have done that to the extent that you guys would like to get into more level of details. By segments, I'm happy to do as well. So we talked about shipments being at group level stable to slightly higher. So where we are seeing, we are seeing basically shipments stable in all the segments with the exception of NAFTA where we would expect SHIPMENTS TO BE POTENTIALLY SLIGHTLY BETTER, RECOVERING A BIT FROM THE SEASONALITY OF Q4, PLUS SOME OF THE SLOWDOWN THAT WE SAW IN Q4. AND THEN IN TERMS OF PRICES, WE TALKED ABOUT PRICES BEING SIGNIFICANTLY HIGH IN EUROPE, HELPING TO OFFSET DECLINES IN PLACES SUCH AS NAFTA AND BRAZIL. SO OVERALL THAT GROUP LEVEL higher. And then costs, our expectation is that costs will continue to rise, with the exception maybe NAFTA, where that should not be so significant in Q1. And so that's really all the moving parts look for Q1. Okay. Let's not forget also that we should see some offset, also some higher results in our mining division, of course.

Yeah, okay. That's actually my next question is actually on iron ore. You've given the sort of shipment indication for steel, but haven't really talked about iron ore. And I think, I mean, in the not too distant past, you used to give market price shipments. Can you maybe talk to how you're thinking about that this year? And then just more broadly on iron Seaborne Iron Ore and the division. There's been some operational issues in Liberia. I think there was some headlines around some potential negotiations with unions in Canada. Can you maybe talk to that? And then just sort of broadly on pricing, given the price level that we're seeing at the moment, any indication on what you're hearing?

from the market from sort of yeah a marketing um marketing side and how you see that potentially progressing over the midterm yeah so look i mean a lot of questions so let me start with i don't know so yes you're absolutely right so 2021 was not a great year for us in terms of volumes so we had the impact of course of the strike in in mines canada and we have a couple of incidents also in Liberia. So in total, we lost close to 3 million tons of shipments because of these events. So our expectation is that they will not reoccur in 2022. So our expectation is to do better there in terms of production and shipments. So in terms of the strike in Canada, you're right. So unfortunately, we have right now a strike going on. For now, the impact is limited because we, of course, can still operate parts of the plant with non-unionized people. So we are drawing from inventories. And then it's going to be a function of how long the strike lasts So it's a little bit early to talk about potential impacts of that strike for quarter one. But I would not really expect that to be very, very material. In terms of prices, as you know, we don't really comment much on prices. But I would say, though, that if you look at indexes, clearly the costs, the fact that we have pressure on costs is also, to some extent, supporting prices. So you start to see index, if you look at the index prices in Europe, Black Sea, China, all moving up, which is, of course, a very good indication. The only exception, of course, being U.S., where prices continue to, looking at indexes, prices continue to decline, and that, to some extent, is to be expected, but the fundamentals remain quite strong. PMI is quite strong. So we are looking at a very good real steel consumption for the year. So there are also reasons to believe that the market will find a balance, and then the fundamentals will prevail.

Okay, thanks. I'll step back into the queue.

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

Thank you very much. Two questions from my side. The first one is on the 1.5 billion value plan. Could you give us a breakdown about the factors contributing, i.e., commercial versus operational factors versus other factors? And what area do you see the most value to be lifted? in the steel areas, in the mining, maybe you can give a little bit of color there. That's the first one.

So I did already provide some color on that. I would say that really the biggest part is really on account of variable cost, a bit also on fixed cost, and less so on commercial. And we have hundreds of initiatives here, Carson. It's really a very detailed plan coming from the units. It's part of our budget and strategy cycles. I would say you also have a good contribution coming from purchasing, which is, of course, part of the variable cost improvement plans. So yield, as Aditya said, it's difficult to be very specific, given the granularity, the volume of initiatives that we have here. I would say that also that our expectation is that we're going to see this flowing through our results almost equally throughout the next three years. Perhaps a little bit more this year, but you guys can assume one-third, one-third, one-third, roughly. So I hope that helps as well with your models.

Good. Thank you very much. The second question is on the Ukraine operations. We have seen that the tensions here are rising with Russia on a political base. Is there any risk from a volume and or other cost perspective? And did you already take any measures in order to mitigate any risk here?

Thank you, Karsten. Maybe I'll take that question. We're very focused on protecting and ensuring the safety of our people and assets. We have contingency plans in place in case the crisis escalates. what we should be doing with our operations, and then more importantly, with the people who work there. In terms of the operations, I think the operations are running normally. We don't see any supply chain disruption either. And if you go back into 2014, when there was another crisis in Ukraine, we had some disruption, but a relatively minimal, and we were able to restore supply chains and work through that disruption in 2014. Clearly, the focus or the hope is that the crisis does not escalate.

Perfect. That's very clear. Thank you very much.

Thanks, Carson. So we'll move to the next question, please, from Phil at KeyBank. Go ahead, Phil.

Hey, thanks. Thanks very much. You mentioned earlier the Mexican hot strip mill put out its first coil in recent days. I realize there's a ramp here, but How much incremental sheet volume should we expect in NAFTA from this project perhaps this year and then also next year?

Yeah, Phil, let me take this one. Yeah, so the ramp-up is progressing, and I would say it's progressing well, Phil. Our expectation is that we will start to see a more meaningful contribution towards the second half OUR EXPECTATION IS THAT IN THE SECOND HALF WE SHOULD BE REACHING ANYTHING CLOSE TO 60 TO 70 PERCENT RUN RATE BY THE END OF THE YEAR. AND THEN HOPEFULLY WE CAN CLOSE THAT, REACH FULL CAPACITY AT SOME POINT, YOU KNOW, SECOND HALF OF 2023. So I would expect by the end of 2023, we should be really running full that meal. We clearly expect good progress this year. That's the target. That's what everybody's focusing on right now. So we'll see already a good contribution this year and then more in 2023.

And that, Jen, we know is when you're talking about the 60 to 70 percent of of capacity that's relative to 2.5 million tons? Is that right? Correct.

Yeah. Okay. I would just add how we had a leadership presentation earlier this afternoon and we showed them the whole video of the Mexican hot strip mill and it was very impressive. It's an excellent mill. It was very nice to see that after such a long time, we had built a brownfield facility, and it has very good quality characteristics as well. And as Jinmino mentioned, the ramp-up is progressing well.

Thanks so much. And then in terms of a follow-up, Section 232 was brought down for the most part against the EU a few months ago. What does that mean for you all in terms of, you know, any shift in potential trade flows or, you know, how you're planning for the business this year? Thank you.

I mean, we don't believe really that it's going to change fundamentally our flows. I mean, typically we have been already exporting to us from european operations niche products like the big sections so that will continue so i don't believe that that's going to fundamentally change flows for us thank you thanks phil so we'll move to the next question please and we'll take that from ephraim at city please go ahead

Thanks. Most of my questions have been answered, so one very specific one. Apologies for this. In the CAPEX slide, you've said Liberia capex is under reconsideration for scope and inflation effects. So two sub-questions to that. One, does this mean that basically you will be building the rail line for the 30 million ton eventual capacity? Because I think the 0.8 billion was already for the 50 million tons capacity by 2023. And secondly, there's been some confusion in the market whether the rail line is exclusively for our slow use, or is it also for open access to others like the NIMBA project in the neighboring countries? So can you clarify if, you know, as part of the increased capex, you will get exclusive access to that rail line for the 30 million tons?

Yeah. Ephraim, thank you for the question. Fundamentally, you're right. Let me just provide you a little bit more detail. We have spent $500 million so far on the rail line for the first phase, which was a 5 million tons. So we brought it up and it has some capability to be expanded. So the incremental capex is not so great to bring it to 15 million tons. We retain the operatorship rights of this line. So we operate the line for all practical purposes. And beyond 30 million tons, we have the ability to bring in third-party cargo on the line, or we have a multi-user agreement beyond our 30 million tons. So for all practical purposes, we have a clear line of sight to shipping 30 million tons through our rail line, and then to the extent that there is additional capacity or additional iron ore in the market, and others can also utilize the line, but they would have to either invest the capital or agree with us how to invest that capital. We obviously are not investing capital to cater to third-party requirements. In all of this discussion, obviously, we retain operatorship rights. So I hope that solves the confusion. In terms of the CapEx, it's much more about the ore body and how we modify the concentrator design to get higher quality output. And so we will update you as we do that. And we just wanted to flag it today so that you're aware that the project, certain aspects of the project are still being finalized. The key obvious focus is to get the highest quality product. And we think that that makes a lot of sense, not only in the short term, but in the long term, because as you decarbonize, you need higher and higher quality products.

Thanks. Sorry, one more question that popped up in my mind. To the investments that you mentioned earlier on decarbonization, you did mention electricity capacity generation. What's your thinking about sort of the cost of capital of ArcelorMittal investing in green electricity versus the cost of capital for the renewable companies, which is like very low single-digit percentage cost of capital, while you're probably 10% to 15%. So do you think it's sort of wise on your part to use your balance sheet, or should you be exclusively kind of forcing it from others with a lower cost of capital?

Yeah, I think that's a fair point. I think when there's a project to be discussed, I think we should engage more constructively on those points. But fundamentally, I think we bring value to a project because we provide a clear power purchase agreement That's important because it creates a base load. I think we can also create these facilities which are in close proximity to some of our steel assets. And obviously, we are very cognizant of our cost of capital and will ensure that these projects succeed that. Thank you.

Thanks, Efrem. So we'll move now to Bastian at Deutsche Bank.

Good afternoon. I only have a quick follow-up actually on capital allocation, if that's all right. You talk about M&A in support of strategic targets, and if I remember correctly, that is new versus what was on the slide deck at least a year earlier. Is there anything which is on your immediate radar, or am I reading simply too much in it here? Maybe could you also specify a little bit whether you're referring to smaller, say, Bolton type of deals, or whether you keep the freedom to go larger say maybe 3 billion plus type of targets. Thank you.

Sure. Thank you, Bastian. I think I've answered this in the beginning of the call, but at the risk of repeating my points, I will go through it again. I think fundamentally what we highlighted is that we are very focused on allocating 50% of our free cash to shareholders, and we did that quite well. or very well, I should say, in 2021, and that remains the focus. As we go forward, we have the choice on the other 50% whether to continue to de-lever or to use that capital and do M&A. In terms of the targets I talked about, look, these could be things which further our de-carb agenda. It could be on the renewable space, hence Ephraim's question earlier. But within all of that, I think what is most important to remember is we remain very focused on maintaining our strong balance sheet, our investment-grade credit rating, and our credit ratios. So I think that kind of gives you a flavor of how we're thinking about it. Obviously, we're very focused on returns to shareholders and maintaining our strong balance sheet. And to the extent in between that we can do successful and value-creating M&A, we will explore that.

Okay, perfect. Thanks for clarifying again. And then, Ginovino, maybe one for you. You said we've seen the worst in your cost inflation now. If I remember correctly, I think last quarter you put out a number of 500 million of cost inflation, mostly for Europe, I think a little bit for ACES. Is there a cost number you could give us for energy cost inflation outside cooking coal for the first quarter as well, please?

Hi, Bastian. I don't think I'm going to get into this level of detail, Bastian, on coal today. I mean, you guys know very well that Europe, we are buying our needs, our coal needs. You guys know where prices are. So I don't think that should be very challenging for you guys to come up with your estimates. I was, of course, for natural gas power, that is a little bit more challenging from an outsider to come up with a good estimate. And that's why we try to help. And as I said, I think most of the costs in terms of energy, and energy I mean really here, gas and power, it's kind of already reflected in our Q4 results. So moving to quarter one, I don't really expect any significant increase in terms of costs based on what we are seeing today for gas and power. But of course, coal, as we know, it's going to be higher.

Okay, yeah, perfect. That was exactly what I was looking for. I think everyone can see calls, so I was really after electricity and gas, but thanks for taking that.

Okay, thank you.

Great, thanks, Bastian. I think we can make room for maybe two more questions, so we'll take the first from Miles at UBS.

Great, thank you. Just a couple of quick questions. Could you give us a sense of what order books and infantries are sitting now relative to three months ago?

Hi, Miles. So order books continue to be good, actually. I mean, and you look in Europe, so demand, the real demand continues to be strong, good. So order books remains quite, quite healthy. Delivery times have come down. I mean, of course, not as extended as they were at some point in 2021. But the order book continues to be good. We have basically completed for quarter one, and we are now booking quarter two. So the demand continues to be strong, even in Brazil. We expect to see also very stable domestic shipments, despite the negative apparent steel consumption that we published today. Our expectation is that we're not going to see such a decline in domestic shipments because we do expect that imports that hit Brazil also towards the end of last year will also come down. So we don't expect to see a drop there. So I would say overall it's a good picture.

And then just a second question, thinking about China over the last week or so easing some of their green policies. And we've seen obviously a little bit of a pickup in exports of steel from China. I mean, how concerned should we be about that, that China is going to start dumping significant volumes into the export markets and obviously having reverberations around the world?

I think I was on mute. Sorry, Milo. Yeah, look, I think fundamentally that risk always exists. Sorry, can you hear me? Yes, we can, yeah. Okay, good. So I was just saying that fundamentally that risk always exists, but a few things have changed. The export rebate on VAT has gone away from China, so there's less of an incentive to export. I think clearly there's been a lot of trade action that has been put in place. And thirdly, if you read the tea leaves in China, I think the perspective is that we should not be an export powerhouse for steel, primarily because then we're just adding to the CO2 problem and we're not really resolving it. So I think any surge in exports, I think there would be a reaction, maybe not instantaneously, but over time. And I think that should provide... structural support as we look forward, not only this year, but for the years to come. Our view on China is perhaps more bearish than others, where we see maybe no growth or negative growth in terms of apparent steel consumption. We've been doing that for the last few years, and every time we publish something, six months later, China surprises on the upside. But anyway, I think those are the key data points or things to think about when you think about that issue.

Thank you.

Sorry, I was on mute. So we can move to the last question, please, and we'll take that from John Tomazos.

Thank you very much. Congratulations on your different decarbonization efforts. As you study the conventional coal-fired blast furnace potentially converting to hydrogen or other fuels, the coke has a stability function where it bears weight, which helps to regulate the gas flow within the furnace. With hydrogen or other substitute fuels, how do they complement the load bearing former function of the coke to regulate the gas flow within the furnace?

Thank you, John. Great question. I think it's very difficult. I think fundamentally that's very, very difficult. And therefore, if you look at our announcements, we are really focused on direct reduction iron as a technology, DRI or HBI, as some of the plants in the US are producing. where the shaft is different and fundamentally you're not relying on that burden, but you're relying on natural gas. So globally today we produce about 9 million tons of metallics through the DRI route, and it uses natural gas. Switching DRI facilities from natural gas to hydrogen is possible. We actually have a pilot in Hamburg, Germany, where we're going to build a 100,000-ton DRI facility, which will be using hydrogen exclusively. And we feel that we can retrofit or make modifications to existing DRI plants. So to the extent that you have a blast furnace, like we have in some of our integrated sites, as well as in Canada, our first option is really to erect a DRI plant, get the metallics, put it into an EEF, and then use renewable power to melt it. So that's fundamentally our strategy. We call it the innovative DRI route because the natural gas is a transition fuel. And when hydrogen becomes cost-effective, you can use it. You can inject hydrogen. Nevertheless, there's a lot of work going on in terms of blast furnace technology, exactly trying to address the question that you pose. And I think there could be a combination when, yes, you still continue to use, use Coke. You increase the level of hydrogen or other gases like oxygen. But at the same time, you capture the CO2 coming out. And that CCU and CCS technology, that's what we call the smart carbon route. We actually have a big pilot, a big plant now, no longer a pilot, where we have spent 180 million euros in Belgium and Ghent, which does exactly that. It captures the CO2 from the furnace. It has microbes or bacteria which eats up the CO2 and converts it into a bioethanol product. And obviously, the EBITDA is generated not only because of the CO2 saving, but because of the value of the bioethanol that is generated. So look, DCAB is going to be a long journey. There will be technology evolution and new things that get developed. I think we're looking at various options. We're also looking at electrolysis. So you have the innovative DRI route, you have the smart carbon route, electrolysis, and I think finally, based on geography, based on the plant, you will figure out what is the most optimum solution for that site. And I don't know if I've answered the question, but I think that's how we're looking at it at our Sfirmato.

Thank you. I admire the scientific progress you're making and attempting to make.

Great. Thank you. Thank you. Okay, Daniel just told me that this is the end of the call. So thank you, everyone, for all your questions. I think we covered a lot of ground on the call today. Obviously, all of us are here to the extent that you seek any further clarifications. With that, we'll conclude the call. Stay safe and keep those around you safe as well. Thank you very much.