Arcelormittal SA

Welcome to ArcelorMittal's second quarter and first half 2022 Analyst and Investor Call. This is Daniel Ferkler from the ArcelorMittal Investor Relations team. I'm joined on this call by our CEO, Aditya Mittal, and our CFO, Germina Cristina. Before I hand over to Aditya, I would like to mention a few housekeeping items. Firstly, I want to refer everyone to the disclaimers on slide two of 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. Finally, if you would like to join the queue to ask a question, then as usual, do press star one on your telephone keypad and we will answer the questions in the order they're received. With that, I would like to hand over to Aditya for some opening remarks.

Thank you, Daniel. Good afternoon and good morning, everyone, and welcome to today's call. As you have read we have reported very strong results for the first six months of the year. Eight billion dollar net income and earning per share of approximately eight and a half dollars. These numbers reflect the hard work and commitment of everyone at ArcelorMittal. Together we're taking big steps to strengthen grow and develop our business to position ArcelorMittal for its future as a leader in a decarbonized world. With this in mind, I'd like to update you on the acquisition of the Texas HBI plant we announced in April. The acquisition is now complete. The plant is achieving its rated capacity for the first time. EBITDA is run rating at $200 million, giving us confidence in a 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 EF capacity we're building at Calvert and is a key component of our 12 million ton low CO2, highest quality NAFTA sheet franchise. Our agreed acquisition of CSB in Brazil is similarly exciting. It's a world-class, well-invested, modern facility connected to a deep-water port. Plus, we have important synergies. CSP is also an asset with fantastic potential. Like Texas for the U.S., the state of Serra in northeastern Brazil is a focus for the development of renewable power and hydrogen in Brazil. It gets the most sun and it has plentiful wind, both on and offshore. Massive investment is being committed to this region. So looking forward, I see real potential for CSB to be a globally competitive, low CO2 steam making hub. Just like AMNS India, I expect we will look back on the acquisition of Texas HBI and CSB very positively. They represent major milestone in our strategic development. Together, these acquisitions add $500 million to normalize 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're 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 whilst growing and developing our business. With that, we're ready to take your questions.

Thanks, Aditya. So we do have a queue of questions already. If anybody does want to join the queue, please do press star one. But we will move to the first question, please, from Alain at Morgan Stanley. Please go ahead, Alain.

Thanks, Daniel. Hi, everyone. I have two questions. The first one is on M&A. So clearly you've bought this asset at around seven times normalized EBITDA, while your own stock is trading on less than three times next year's numbers. Why did you choose to invest in an external asset instead of buying more of your own stock? And then especially that this increases your group's carbon footprint. I get it, it's a low carbon footprint, but nonetheless, it still raises your carbon footprint. That's my first question. Thanks. Sure.

So in terms of normalized EBITDA, I would be careful in comparing it to the headline transaction value. I think there are important benefits in the state of Sarah. As you know, it's an economic free zone. There are significant NOLs that we have. The level of tax rate is much lower. It's a well-invested asset, so the maintenance capex going forward is significantly lower as well. And 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 do 6 million tons. 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 the flat side. It's a growing market. And I spoke extensively about how the state which it is located in, Serra, is very, very exciting from a renewable perspective. Overall, this fits into our carbon footprint. It fits into our climate action report. So, as we decarbonize our global assets by 25% and Europe 30%, this asset fits into that strategy. It does not have a markedly different carbon intensity to the average of our surmittal. In terms of our shares, we continue to highlight that our shares remain undervalued. We see tremendous value creation opportunity in them. We actually spent 70% of our free cash buying back our shares. I mean, 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 21 net income versus first half 22 net income, net income increased by 28%, but EPS increased by 58%. We continue 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, returning capital to shareholders, as well as growing and developing the business.

Thanks, Aditya. And my second question is on the buyback. So the $1.4 billion that was announced today and the $2.2 billion acquisition would take your performance at that above $7 billion. So as the CEO of the group and a major shareholder, how much appetite do you think there is to call for an EGM in the second half to get authorization for more buybacks, and what needs to happen for you to take that step? Thank you.

Yeah, without giving guidance and getting into too much detail, there's also free cash flow, right, that's coming in the second half. And it's not that there's no free cash flow in the second half, so we have to offset that. based on the uses we have of some of our cash. When we look at the overall financial picture, we are very satisfied with our strong balance sheet. We will 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, i.e. the acquisition of CSP as well as the share buyback program.

Thank you.

Thanks, Elaine. So we'll move to the next question, please, from Tom at Barclays. Go ahead, Tom. Are you there, Tom?

Able to hear me?

Hello? Yes, we can hear you now. Please go ahead.

Sorry about that. Yeah, thanks for taking our questions. Two for me, please, both on CSP. The first one, you know, clearly the asset has a lot of these offsetting losses, but they've been 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 net income, because it looks like it's seen some sizable net losses in the last few years. That's the first one.

Sure. Thank you, Tom. If you look at the company, the company obviously went through a ramp-up phase, right? So an integrated asset is not always easy to achieve for ramp-up. When we look at the business and based on the acquisition price of the assets and the fact that our CapEx level is 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 last year. 2021 was much higher than this 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 in Azera as well. Azera had significant NOLs. when we acquired the business. But when you look at how the business is performing, it's markedly different. The same is true of Texas. It has now achieved its design rated capacity. It's actually run rating at higher than normalized EBITDA. I'm 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, you know, you've added slab capacity. Just wondering what your preference could be between adding further downstream capacity, either domestically or in other regions, or closing upstream capacity elsewhere to sort of make that upstream-downstream equation balance. Do you have a preference on which one you'd rather do?

Maybe I have not fully understood your question, but I would say neither. I think this asset is not precipitating a closure of any asset. Fundamentally, what we are doing is, as you're 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 slabs that Lazaro has. And therefore, as a group, we become slap-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 remains 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 flat products. And we then had the opportunity to do it either here or to do it in Tubarau, and clearly there will be extensive discussions internally, and then we will announce. So I think from just an overall slab balance, it fits very nicely into our short-term, medium-term, long-term strategy of our Suramithal. Lastly, I would also add that in Europe we buy slabs as well. So the shortage or the requirement of slabs in our Suramithal is 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 fact that it's located in an export processing zone, you sort of mentioned Brazil's short slab. Is there a material difference in tax treatment if you sell domestically versus export from CSB?

Yeah, there are some important advantages. I'll get Genuino to elaborate on that.

Yeah, hi, Tom. Yes, I think the biggest advantage there, Tom, is that when we sell internally, then we don't pay the VAT. So we get the credit, the VAT credits, when we buy the raw materials. And then when we sell, that is very small. The effective rate would be more like 1%. So you retain that benefit in the business. So that's a significant impact. Another important tax benefit that we have is when we import raw materials also, you're not paying the normal taxes, import duties. So from a pure tax point of view, it's a fiscal point of view, 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 at at BNP. Please go ahead, Seth.

Good afternoon. Thanks for taking our question. I've got two questions, first on M&A again, and then secondly on supply discipline in Europe. Starting out with M&A, when you first spoke back in February about Mattel's renewed M&A interest, it seemed quite confined around green power and then subsequently green metallics. And CSP seems to be a pretty big step towards growth rather than either of those first two options. Are we interpreting this correctly? Is this more of an opportunistic move to grow in a valuable region like Brazil? And how should we think about the future M&A priorities? Is the focus going to return to green power, green metallics, or is metal now open to growth? I'll start there, please.

Yeah, Seth, thank you for your question. I would say that we were never closed for growth. So a few years ago, we also acquired Hazira in India, and that has been growing and doing really well. I think clearly as we were decarbonizing, we are also focused on growing in terms of renewable energy, which is attractive to our assets because we have to have certain synergy or operating benefit. That's when we would make the investment, as we have done at Greenco in India, or acquiring assets which will serve us as we decarbonize our footprint. So I think those were additions to our strategy. Growth is always in the DNA of our Sromitil. But I think what's also in the DNA of our Sromitil is to maintain a strong balance sheet. I think we have had a past where we didn't have that, and we are very focused on maintaining that strength 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.

Okay, thank you. And a second question, please, on European supply discipline. We understand that Mittal has perhaps several blast furnaces, idols in Europe recently, perhaps Dunkirk and Ilva. Can you talk about the rationale for these outages in the current market environment? Is there opportunity for better supply discipline from Mittal or peers having learned lessons in past cycles? And how can we fix costs under absorption? Is it also able to access some of the COVID benefits like furlough schemes that help lessen the blow of lower volumes back in 2020? Thanks.

Yeah, I'll just hit the high level points and then I'm going to ask Ginvino to elaborate. But fundamentally, the furnace we took down in Dunkirk I think is reflective of what we're seeing 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. Gianvino?

Yes, so we are seeing the demand picture in Europe, as Aditya mentioned. So the real demand, even though, of course, we see headwinds, And based on what we can see today, we are still expecting the real demand to be at least stable, if not slightly positive, right? So, but you're right. So, as we go now, as we head now into summer breaks, as you know, we're going to see seasonality. On top of that, we believe that we are in the middle of the stocking cycle. And what we are doing is we are adjusting our demand to meet our supply, to meet demand. And I think coming to the discipline, I think if you look at the data that was released recently by the World Steel Association, you see the size of the cuts in production by Europeans, and not only Europeans, but across the board. It seems to indicate that there is discipline. You see cuts across the board. So it seems that everybody is following that, which is a good sign. 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 variabilizing our fixed costs. We learned quite a lot during COVID times, right? So it's clearly today we don't have the same schemes that were available to us back in 2020. But in many of these countries, there are different schemes that continue to be available and that we continue to use. A good example is 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 this crisis if it materializes in a very good way.

Great. Thank you very much.

Thanks, Seth. So we'll move now to Alan Jeffries.

Thanks. Good afternoon. Two again on CSP, and I'll take more time. Just the first one, a bit more around the potential to add the rolling into downstream finishing capacity. When do you think you'd make a decision on that?

Yeah, so that's one in the immediate vicinity. It's a few years away, I think. Fundamentally, the asset will cater to the domestic demand that exists for slabs. and help ArcelorMittal bridge the gap in terms of our shortage for SLAPs, right, which is starting up because the Mexico host tribunal is ramping up nicely.

And on the NOLs, did I understand that they could be used at the group or the continental level, or are they ring-fenced to those assets?

You're right. As we would merge or consolidate, merge these entities, they can be used at the group level. I don't know if, Genuino, you would like to add anything on that.

Yeah, no, that's basically it. So the tax legislation in Brazil, to the extent that you combine the assets, then it becomes available to the Brazilian entity. So we have one large legal entity in Brazil, Asilomito Brazil. So a natural step for us would be to combine the businesses so that we can accelerate the consumption of the tax losses. And as you do that, you would also So the rest of the business would benefit by a higher rate, which is 34%, which adds more value to these NOLs for the group.

So it can be used at 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 we'll 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, you know, 2021 was a bull of, you know, close to $7 billion and then another $3 billion in the first half. If prices and raw, you know, if 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.

Yeah, Patrick, that's a good point. And what we have been saying, the message continues to be 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 release a significant amount of working capital in the second half.

Yeah. Thanks. And then maybe just one follow-up. I mean, looking at Europe, it does seem, well, obviously everybody's kind of consensus bearish on the outlook. But autos does seem in some ways the supply chain seems to be unblocking a little bit. And actually, you know, Q3 in terms of autos production looks like it could be, you know, relatively decent compared to Q2. Can you maybe just give us a read of what are you seeing there? from your customers. Yeah, that would be helpful, Kala. Thank you.

Yeah, I think you're right. So the first half, to be honest, and as we have been discussing also consistently, we have not really seen significant improvement in the first half, right? But when you look at the forecast that exists out there, you still see a lot of this forecast showing growth year-on-year in terms of production. some good signs. I mean, 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, they are being resolved. But I think based on our experience so far, it's good to wait and see really what happens. But I think that we can be cautiously optimistic about seeing higher volumes going into the second half. We'll see. Yeah, I think that it can provide some support to the apparent steel consumption as we progress.

Okay. Thank you very much. Thanks, Patrick. So we'll take the next question, please, from Ewan at Credit Suisse. Go ahead, Ewan.

Good afternoon. All questions have been answered on my side. Thank you very much.

Okay. Thanks, Ewan. So we'll skip straight to Rukas at Kepler.

Yes, hi. Good afternoon. Two questions. The one is on the capital allocation again. So for the time being, you had kind of a two-to-one in terms of Sherpa Big versus M&A. How shall we think about that priorities As we are supposed to move towards the recession, you're saying you want to maintain net debt under $6 billion. How shall we think about the moving parts in terms of capital allocation?

Yeah, thank you. Fundamentally, there's 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 markets come down due to the working capital release. And at the same time, cash is consumed when markets improve. And 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. The net debt target, I think I heard you say seven, sorry, six. 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 you're seeing economic activity go down in most parts of the world. Second quarter was already a rather soft quarter in terms of volumes. How shall we think about the decisionality in the second half, particularly Europe in Q3? And what is your read on China and the market situation in China for the rest of the year?

Yeah, Rokos, let me take the first question. So you're right. So in terms of volumes, I mean, I think we spoke already about Europe, the seasonality, the stocking that we are experiencing. I think it's not so much in some of the other markets where we operate. In terms of volumes, my expectation is that we're going to see volumes relatively stable in our NAFTA division. Brazil as well, perhaps a little bit less exports from Brazil, given the international prices. But overall, my expectation is to see shipments over there also be relatively stable. And we should see shipments actually improving a little bit in CIS. as we face the strike in South Africa. So that should provide some support to shipments as well. I would just say that, so when you look at H1 against H1 of last year, and you exclude the losses that we had in CIS, 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. And as we discussed, so the real demand continues to be at least flat to small positives. So I think we can also take some comfort from that. Yeah, and then China, I think we all know, I mean, it's been really impacted by COVID, by the lockdowns. I think there is some expectation that the markets will improve. The government has announced significant investments or incentives. Of course, that takes some time. I think we're not going to see that probably in a very short time. But I think I would expect to see some of that already impacting Q4 and hopefully also 2023.

Right. So you're not really worried about the margin levels in China, which apparently, according to my data at least, the margins are kind of as bad as they were in 2016 or 2017. So you're not seeing that there is a fundamental shift?

No, I think that's a good point. And given where spreads are in China right now, it's fair to say that there is not a lot of money being made by the steel mills. In China, normally when you see that, it doesn't tend to last, right? So we start to see also production cuts, maybe not yet enough. We have to see how it evolves now as we progress. I think the Chinese government has made also very clearly the point that they don't want to see production increasing. I think there was a good arbitrage for the Chinese meals and And that's perhaps why we saw some high exports in the last two months. And it's clearly something to be paying attention. 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.

Thanks, Rakesh. So we'll move now to Nina at Goldman Sachs.

Good day. Thank you very much for the presentation. Two questions from my side. The first one, can you share your thoughts on your approach, how to minimize the effort from ongoing energy supply crisis in Europe? Can you share any scenarios that you're reviewing under different development of energy crisis?

Sure. Uh, Nina, maybe I'll, I'll, uh, start high level. And if you need, uh, more details, uh, uh, can obviously supplement, uh, very well, uh, in terms of our strategy, we are unique in, in Europe, uh, because we're multi-unit multi-country. And that gives us a lot of flexibility because as you appreciate the energy crisis is not uniform across, uh, the European continent. You have different power prices, uh, 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's lack of availability or prices continue to spike and transfer some of that production to facilities which have cooking coal as the energy source or fuel oil 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 will be transfer of tons, transfer of production, and all of those activities that we will 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 our perspective, just in terms of what happens to end demand, but not as serious in terms of our ability to supply.

Understood. So you can play with supply from different plants located in different parts of Europe to ensure stable supplies for customers, right?

Exactly.

And the second question on CSP acquisition, could you advise what is the current capacity utilization of the plant, and what was the construction capex when it was built, and what's the replacement cost to be in your view?

So, Nina, excellent question. You should refer to the website, the CSP website, on what was the construction capex. I would argue that replacement costs would be very similar, if not higher, than construction, than what they spent. So that would give you a sense of what is the capital invested or required to build such a facility. In terms of capacity utilization, it's more or less running at design capacity. So the operation is doing well. And EBITDA levels, as I mentioned earlier, are actually much higher in 2022 and have been higher in 2021. But clearly, as we know, these have been elevated spreads. So as spreads normalize and we tack on our synergies, we get to a normalized EBITDA level of 330 million.

Mm-hmm. Thank you. Thank you.

Thank you. Thanks, Neena. So we'll move now to Andrew at UBS.

Hi. I was just trying to ask a question that's just fundamentally In terms of, I think you just touched slightly on a previous question, but with the blast furnace that you're buying here, you're probably going to have to replace it in 10 years or so anyway. I would assume that it probably costs about $2 billion or so to build that. I mean, why not do it now rather than wait for 10 years to do it? Rather than buying it outright, why not just build would be my question. And then just secondly on some of the other aspects for EQ, just some guidance on the different divisions and where you see the evolution in terms of volumes, potentially prices and spreads, just a little bit of guidance division by division would be helpful. Thank you.

Yeah, thank you. In terms of building, I think I don't want to comment on the building costs. I think I 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, our suramithal in its decarbon journey has three paths to decarbonize. The first is your hydrogen DRI EF path. The second, we call it smart carbon that is fundamentally utilizing the blast furnace and applying technologies, whether it's CCU, CCS, or different injection technologies or different gas-based technologies to reduce the CO2 footprint. So clearly that remains an opportunity for this business as well. If in case smart carbon, let's assume smart carbon in your scenario, not in my scenario necessarily, does not work out, then when you do acquire such an asset, you are still getting all the land, the infrastructure, the connection to the port, the steel shop, slab casters, all of the utilities, raw materials, offices, all of that has already been built. And that doesn't need to be adapted. The only thing that needs to be adapted is theoretically the steam making, i.e. the blast furnace, the hot metal unit. So the cost 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, our capability, and there are important synergies with this asset. I'll get Genvino to answer your question on third quarter and what we are seeing. Thank you.

Yeah, Andrew, I think we touched on some of the drivers already, but let me repeat. So if I again, if I start with shipments and we talked about Europe and the seasonality, you should expect that the this talking that is that is that is happening in other regions. My expectation is for shipments to be more stable for a quarter. That's true for for or NAFTA for Brazil. We should be improving a little bit in CIS because of South Africa, the impact of the strikes that we had in South Africa. So in terms of prices and spreads, I mean, we're all seeing what has happened after, you know, that initial shock coming from the war. I mean, we have seen prices and spreads correcting, especially from May onwards. I think prices, they seem to have stabilized in parts of the regions, especially in Europe, at least for the last 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 that raw materials have corrected also quite significantly. We will start to see the benefits of that as well as we work through the inventories that we have in our books on a weighted average basis. Yeah, I think that's in a nutshell how we are seeing things spread, normalizing volumes relatively stable in most regions with the exception of Europe. I think that's the main moving parts, Andrew.

Yeah, that's clear. And can I just ask one follow-up on the first question? Just fundamentally, if I look at ArcelorMittal's EBITDA ratio over time, it used to trade on five or six times. Now it's two to three on a sort of mid-cycle basis. Clearly, the sector overall is derated. It seems like with these acquisitions, you're willing to pay multiples we've seen in the past in terms of, you know, elevated multiples like seven, eight times in the case of the HBI plans or six or seven times in the case of this, yes, with an offset, but still clearly more expensive than your own stock. I mean, when you approach these acquisitions, do you account for the same sort of discount derating of these sort of assets that the rest of the market applies to your share price and that of your peers?

Yeah, look, that's a great question because we don't apply a discount or due rate to these assets because we expect finally the market will appreciate the value inherited from it all. 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 is not making the impact that we desire, but I do expect it will make the impact that we desire in the in the medium term. These assets also remain very important to the future growth of this company. I talked about it right at the beginning of my opening remarks, but to give you a flavor, post-Texas and post-EF and Calvert, and as you know, we are decarbonizing our business in Canada. We will have a high-quality, I believe the highest-quality sheet business in NAFTA, automotive-capable without using coal, right? There'll be no coal in our 12 million tons capacity because Mexico is already DRIEF. Calvert is moving to DRIEF, and so is DeFasco. So this is a footprint that can use renewable energy to decarbonize the EEF. And on top, when hydrogen is competitive and available, we can use hydrogen. And we clearly believe that... You 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, because today it's run rating at 200 million. In terms of CSP, I think we talked about the standalone asset value quite a lot. in the northeast states of Brazil, state of Serra, the renewable assets, the fact that the assets are world-class, well-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. And in the short to medium term, it fits very nicely into our slab 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 it creating value, and we do believe it is. And we're navigating this without reducing the level of capital return to shareholders. We're very conscious of maintaining the 50% level. We think it's excellent value. Actually, in the first half, we did 70% of free cash flow was used to buy back shares. So that is what we're trying to achieve.

So, thank you. Great. Thanks, Andrew. So, we'll move now to questions from Phil at KeyBank. Go ahead, Phil.

Hey, good morning. How does the acquisition of CSP fit into the strategy in Mexico and or Calvert? Is that going to be part of your, you call it your North American supply chain? long run?

To some degree, yes, because in the long run, we will remain short slabs in North America, primarily because of Calvert. Not so much, but they will remain a short slab. So if I were just to walk you through it, today it fits in because, as you know, Calvert doesn't have any EFs. So Calvert is buying about 5 million tons of slabs. and Mexico was one of the key suppliers along with our Tubarão asset. As Mexico ramps up its hot strip mill, that level of slab supply into Calvert is no longer available. And therefore, CSP fits quite nicely into that strategy of supplying slabs either to other customers of Tubarão and Mexico, and they can focus on Calvert, but fundamentally that's how it fits in. In terms of going forward, as Mexico fully ramps up, Calvert ramps up, Calvert will still be short slabs. And either Tubara or 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 Calvert. So anyway, just trying to provide you with the flavor of how it fits into our NAFTA strategy.

I appreciate that. And then just in terms of a follow-up in North America, the automotive market, you're still a very big part of that, clearly through your JVs and through Canada and to a lesser extent Mexico. What are you seeing in terms of the signposts for the second half? There's been a lot of fits and starts, obviously, over the last few months. Thank you.

Yeah, I'll ask Jean Reno to take that question. Thank you.

Yeah, I think we touched on this point early in the call as well, Phil. So I think the first half, as you know, so the OEMs, they continue to struggle, right? The volumes, we didn't really see volumes increasing so much, right? And I think there is some expectation to see some improvement in the second half. But again, we have to wait and see whether they can really get their own issues resolved. I think there is still an expectation that there will be an improvement year over year. So I think that... you know, it creates some opportunities for our business in the second half to the extent that it materialized.

Thank you. 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 HBI plant. And Aditya, you kind of alluded to it, but the facility, since I've been covering it, hasn't really been generating that much EBITDA. And you've only sort of been owners of it for very long, and now it's generating, well, $130 million on a normalized basis. Can you give us some sense? Is it just a matter of timing that it was generated? It's now just reached its full capacity, or did you actually go and do something and change something to get it to that level? That's my first question. My second question is just on the decarbonization strategy for CSP. So just so that I understand it, obviously there's a potential for low-cost green hydrogen. If that were the case, would that then entail you to replace that facility with a DRI EAF facility, or would there be some other clever way of injecting hydrogen directly into the blast furnace as an example? I just want to understand the technicalities of it all, or what your approach is. You've kind of alluded to it, but I just want to make sure I'm clear in my own mind how you're going to go about it. Thank you.

Sure. Grant, look, excellent question. I think the timing has been helpful. in terms of the Texas acquisition. 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 an appreciation of that value relative to I guess iron ore costs, 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. The team there has done a great job. Clearly, we've had a lot of interaction as we did the due diligence on what are the areas that we need to focus on. But I will give credit to the team down there on achieving nameplate capacity. And we will continue to drive improvement because, as you know, we are the world's largest producer of DRI 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 megatrends we don't see materialize in terms of metallic pricing or gas value, then you have the normalized EBITDA. So far, we are 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 Voiced Alpine ownership is on the existing plant. the existing HBI plant, the rest of the land, the port, there's a lot of land there, belongs to our Sromitl. In terms of CSP and DCAB, I think you ask a very good question. So when you have low-cost hydrogen available, I think there are two things that we could do, theoretically. The first is we could install a new DRI EF facility, hydrogen-based, to take full advantage of the melt shop capacity, which, as I mentioned earlier, is around 6 million tons. And we could look at the existing blast furnace and see what we can do in terms of smart carbon capability to decarbonize. I think you alluded 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, then that becomes a very natural segue to decarbonize last 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 DRIE airflow. So on a combined basis, we think 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 Northeast of Brazil stands out. And you can dovetail that with a steelmaking asset, which is well invested, and create a low-cost, low-carbon steelmaking hub.

Thank you very much for that answer.

Sure. Great. Thanks, Rand. So we'll move now to Bastian at Deutsche Bank. Go ahead, Bastian.

Yes, good afternoon, and thanks for taking my question as well. I only have two quick ones left, and I would go back to CSP if that's okay. Can you maybe give us some color on the terms you've agreed to here, i.e. who will own the cash flow between, which is generated between now and the time of closing? I imagine that could be quite significant given the working capital fluctuations, which we've seen in your parent company as well. That is my first question.

Gemino, please.

Yeah, Bastian, so I think it's a little bit early to talk about some of these details. I think what you should take is that the EV is 2.2 billion, right? And so we're going to be acquiring this company debt-free. So that's how far we go now. So we still have to go through the PICAR approval process and everything. But our expectation is that on closing, that's the deal for us, 2.2 billion.

But I take it as this is not yet finally locked down. Is that correct? So there's still some flexibility in there?

Yeah, I think that's a fair assumption. That's a fair assumption, Bastian. But I think that's our expectation. That's the expectation of the sellers as well. So I think that is a high probability that that's where we're going to be landing. But there is not a lot of variability here. So it's not that it can be... can change significantly.

Got you. Then my second question is just on the client and commercial structure. Are there any long-term supply agreements which you still have to honor? I'm talking about agreements in the same fashion as you had with Turnium and COVID.

No, not really. So CSP will have, so we have a supply agreement, an iron ore supply agreement with Vale that will continue. But that's for the raw materials, which is the same contract that exists today. But that's it. There are no other long-term agreements in place.

Okay, understood. Thank you. Thanks, Bastien. So we'll move quickly to Max at Otto.

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, you have relaunched 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 more advanced in terms of displacing exports to other countries. And in Ukraine, you are trying to diversify your coke procurement away from Russia. I wondered whether you had made any headway and whether we could expect in the coming months to relaunch a further ramp-up of production there, which is now very much focused on Big Air One, and if that could move to semi-finished products anytime soon, and if you could provide a timeframe for that. Thank you.

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 run the mining operations at about 50% to 60% capacity. We have one furnace operating, so that's about 20% of the capacity. We have since restart some rolling activity as we had inventories of billets, so that is also part of the setup today. Most of the coal for this capacity, of course, which is limited, is being sourced locally, domestically in Ukraine, and a bit also coming from Poland. So I think that it's okay. I think it's early to talk about going beyond that. We have to see logistics continue to be a significant challenge. So we are observing how it evolves, how it develops. Also, the fact that market prices have also corrected, put some more pressure. So I think we, for the time being, we are not anticipating significant changes in the footprint over there. When it comes to Kazakhstan, as we know, Kazakhstan, Russia, they are part of the same economic zone. So Kazakhstan is competing in that economic zone. So we have started some shipments in this area again. But it's fairly limited at this point. So that's really where we are, competing in this economic zone.

Okay. And secondly, you highlighted that around 33% of your European footprint was vulnerable to gas supply issues. I mean, on this 33%, I mean, what's the share that could still work without gas? I mean, using alternatives or using, I mean, no gas from the beginning? And what's the share that could be potentially displaced to the countries, I mean, in terms of production? Could we think like that?

So in Europe, I think I did talk 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? And the dependence of Russian gas in Europe, it varies from country to country, right? It's more pronounced in Germany, in 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 the business has done well. So I think I would summarize that we feel comfortable that we're going to be able to meet demand. There are uncertainties, of course, depending on how the situation evolves to the extent that it destroys demand. We have to wait and see. But I think Asselamita will be in a position to continue to help customers get the products that they need.

Okay, but it would be a bit far-fetched to imagine production in Germany or Poland being shifted to other countries now.

Yeah, go ahead, Aditya.

No, I think generally we're going to do the same thing as me, but it's really the downstream that normally requires additional gas, right? It's your reheat furnaces at the hot strip mill or in front of the coal mill. Not so much reheat, but just generally in the process. So we could move slab elsewhere. I think that's the point.

Okay, thank you. Thank you.

Great. Thank you, Max. So we'll move now to – we've got about five minutes left, so we'll take the next question from Miles 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 price is? And in terms of increasing the authority, you know, if you've got $10 billion of working capital that could flow back, clearly you can stay below $7 billion. How straightforward is it to increase the authority to do another buyback, say, in three or six months' time? That's the first question.

So in terms of the speed, as you know, we're not going to comment on that. I would just remind everyone that we do have limitations in terms of how much of the free float that we can buy, depending on how the share price evolves. We can also not cross certain averages of the last 30 days. So there are some technical limitations that we have to observe. And other than that, we have the flexibility to execute. When it comes to authorization for extra buyback, we'll see when we get there. So 60 million shares, it's a big number. That's about 7% of our outstanding share count today. So I think the focus right now is to execute 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 the flexibility. So today when we get there, I think we will be considering calling an EGM to replenish our authorization limits.

Okay, that's helpful. And then with the destock in Europe, what's your best guess in terms of where infantries are and how long this can last? Obviously, it can be quite a major driver of how spreads and prices move. But where do you think we are in the destocking cycle in Europe?

Yeah, that's a good question. Look, I think our expectations is that basically we have to wait and see, you know, once activity picks up again after the summer break. When we look at inventories across the chain, the supply chain, our view is that it's not excessive, right, which is a good thing. So the ability of customers to wait and not buy, we believe it's relatively limited. I would also point to the fact that the arbitrage that existed has basically closed, so it's much reduced. The fact that when you look at Asian prices, you look at European prices, and you put the logistics costs today, The incentive for imports have come down significantly. The fact that the euro has also weakened put some pressure also on imports. Everything just gets more expensive, right? So I think there are some good points. We are seeing, again, the prices in Europe has been relatively stable over the last couple of weeks. The international prices, to some extent, showing some signs of normalization. We talked about the low spreads that the Chinese mules are earning today, probably burning cash to some extent. So I think there are some good data points as well that can point to, hopefully, a pickup in activity as we come back from the summer holidays in Europe.

Great, thank you.

Great. Thanks, Miles. So we'll move now to Moses at J.P. Morgan.

Hey, thanks for answering our questions. Most of mine have been answered already, but I just had a quick question on CapEx. So the guidance has come down ever so slightly, but you've still seen a meaningful step up in H2 CapEx, about 3 billion. So are there any risks of that being deferred into 2023? And what are you thinking in terms of your decarbonization CAPEX outlook, if there could be perhaps maybe a step up there as well.

Yeah, so you're right. I mean, and that's very typical in our way. If you go back and you look at our, call it our CAPEX seasonality, it always starts a bit slow in H1, and then it accelerates. It's just the cycles. As we prepare the budgets, we get these projects approved, and then the units start committing the capital. So it's just normal for us to be spending more in the second half than in the first half. So we will update you based on the forecasts that we have in front of us today. We feel comfortable that we're going to be getting to the 4.2. But If not, we will, of course, update you as we progress. Then in terms of your guidance for DCAP, I think we have been also talking about it, right? So we have started this year. So we have in our 4.2 envelope about 0.3 for DCAP. Our expectation is that as we continue to progress with our projects, that there will be the natural increase of the spend as we progress. We have guided for 35% of the $10 billion to be spent by 2020-25. So I think if you simply divide that by the remaining three years that we have in front of us, then the $300 on a gross basis should lead to about $1 billion of the CAB over the next three years. And that's, of course, before any contribution from So that's the gross number. So we hope that the net increase should be more moderate. And then the other components, I think, you know, you have the maintenance that should not change much, right? And then you have a lot of details on our strategic growth projects that we continue to execute. And I think you can get a good guess on that number, and it's not changing at this point.

Thank you. Great. Thanks, Moses. I'm very conscious, Aditya and Jen, we know that we've gone quite a chunk over time, so I think I'll draw things to a close there. Obviously, there's been a lot of ground to cover on the call today, some very exciting developments. If anybody does have any follow-up questions, please do reach out to me, and I'm, of course, available to address those. So otherwise, thank you very much for dialing into today's call. Thank you for your interest and attention, and we all collectively wish you a very happy summer. Thank you.

Thank you.

Thank you, everyone.

Bye-bye.