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ArcelorMittal (NYSE:MT)

ThyssenKrupp Steel USA Acquisition Conference

December 02, 2013 9:30 am ET

Executives

Daniel Fairclough - Director of Investor Relations London

Lakshmi Niwas Mittal - Chairman, Chief Executive Officer, President, Managing Director of Operations and Member of Group Management Board

Aditya Mittal - Chief Financial Officer, Principal Accounting Officer and Member of Group Management Board

Louis L. Schorsch - Chief Technology Officer of Research & Development - Global Automotive, Member of Group Management Board and Member of Investment Allocation Committee

Analysts

Neil Sampat - Nomura Securities Co. Ltd., Research Division

Carsten Riek - UBS Investment Bank, Research Division

Michael Shillaker - Crédit Suisse AG, Research Division

Alexander Haissl - Morgan Stanley, Research Division

Alessandro Abate - JP Morgan Chase & Co, Research Division

Jeffrey R. Largey - Macquarie Research

Luc Pez - Exane BNP Paribas, Research Division

David S. Martin - Deutsche Bank AG, Research Division

Philip Ngotho - ABN AMRO Bank N.V., Research Division

Michael F. Gambardella - JP Morgan Chase & Co, Research Division

Jeffrey Kramer

Daniel Fairclough

Good afternoon, everybody. This is Daniel Fairclough from ArcelorMittal Investor Relations. Thank you very much for joining us today on this call, which was drawn at quite a short notice. And we will have a presentation from Mr. Mittal. Then, we will have a Q&A session. So without further ado, I will hand over to Mr. Mittal.

Lakshmi Niwas Mittal

Thank you. Good day, everyone, and thank you for joining us on this call at such a short notice. This is a very important announcement for ArcelorMittal. Over the weekend, we, together with our partner, Nippon Steel & Sumitomo Metal, announced the acquisition of ThyssenKrupp Calvert facility in the U.S. This is a strategic acquisition for ArcelorMittal, demonstrating our industry leadership and continued ability to capture value-enhancing opportunities. We have prepared a few slides, which Aditya and myself will walk through to help you understand the strategic and investment rationale for this acquisition and its financial impacts.

So firstly, an overview of the transaction. ArcelorMittal and our partner, Nippon Steel & Sumitomo Metal Corporation, have agreed to acquire 100% of TK USA, which is ThyssenKrupp's U.S.A. business. The agreed price is $1.55 billion on a debt free and cash free basis and inclusive of working capital.

This acquisition will drive a significant expansion of our franchise business in the growing metal automotive steel market. It also expands our presence in other reported markets, including high-quality steel for the energy sector. As part of the agreement with TK, the joint venture will offtake 2 million tonnes of slab from TK CSA at a market-based price.

In addition to the level return on our equity investment, ArcelorMittal have identified synergies amounting to $60 million annually to our supplying the remaining slab required by the joint venture. This is a great opportunity, and we have structured a deal that allows ArcelorMittal to capture the value without any significant impact on our consolidated net debt. This was important, as we remain committed to our medium-term financial targets.

Now turning to the strategic and investment logic behind this transaction on Slide 2. The investment logic is clear. ArcelorMittal is one of the leading steel suppliers to NAFTA automotive, and this expands and develops our position to supply this demanding market. The automotive market has recovered strongly postcrisis. According to the LMC Automotive forecast, NAFTA auto sales are expected to grow by a further 15% over the next decade. This growth is really coming from Southern U.S. and Mexico for this new facility in Alabama is ideally located to service this group. Calvert has state-of-the-art hot-strip mill, which is ideally suited to the production of advanced high-strength steels, which we have been developing as solutions for automotive.

Additionally, this acquisition will significantly enhance ArcelorMittal's position to supply steel to the growing NAFTA energy market. Increasingly, the pipe makers are demanding high-strength coils with outstanding surface properties, exactly what Calvert is designed and able to produce. Calvert is perfectly located to serve this growing market in the Gulf Coast region.

Now I will hand it over to Aditya, who will walk you through the specific details of this transaction.

Aditya Mittal

Okay, thank you. Good afternoon, and good morning to everyone. You can see on Slide 3 of the presentation the overview of the JV structure. It is a 50-50 JV with Nippon Steel & Sumitomo Metal, modeled on our existing I/N Tek partnership in the U.S. We will have joint management of the JV, with both partners having equal representation on the JV's management committee.

ArcelorMittal will supply slabs, as required by the JV, and sell the JV's product. As well as bringing strong customer relationships to the table, Nippon Steel & Sumitomo Metal will provide technical expertise to the JV. TK CSA will continue to supply 2 million tonnes of high-quality slab to the JV through an offtake agreement. The price will be referenced with the market through 30th of September 2019. TK CSA has an option to extend this for further 3 years, but at a discounted price basis in the initial agreement. All of the remaining slab required by the JV will be supplied by ArcelorMittal. Clearly, once the slab offtake agreement expires, the amount of slabs required to be supplied by ArcelorMittal will increase, and this will be further economic benefit to us.

Turning to Slide 4, I want to spend a few moments to clarify the financial impact of the transaction. Firstly, I want to stress that the balance sheet impact will be minimal. The partners anticipate that the JV will be funded with a debt-to-equity ratio of 2:1, with debt at the JV level. We therefore expect to fund $258 million in cash. This will be the impact on a reported net debt as the JV level debt will not be consolidated. We will account for the JV under the equity method.

Secondly, as we mentioned earlier, we do expect to have an immediate impact on the performance of the Calvert plant and its success in the marketplace. As a result, we expect the JV company to be EBITDA positive in year 1. We also expect the JV to be free cash flow positive in year 2.

We will see the positive EBITDA of year 1 in our financial statements as a positive in our equity income line. Once the return profile to the equity holders are satisfied, the incremental performance of the JV will be reflected in the higher price paid for ArcelorMittal slabs, which will be then fee in FCA EBITDA.

Let me also address why we expect EBITDA to be positive in year 1. There are 3 main factors. Number one, greater flexibility and proximity of the slab supply chain. Instead of just supplying slabs from Brazil, we have the benefit of supplying slabs now from our U.S. facilities, Mexican facilities, as well as our own Brazilian facilities as well.

Secondly, faster acceptance with customers due to our established presence in NAFTA. And lastly, better quality and mix performance of the Calvert operations. We believe, as a result of these 3 factors, we will be able to more quickly realize the potential of Calvert and improve product sales to the targeted market.

Now let me turn to Slide 5, which walks through the synergies for ArcelorMittal. We had clearly reviewed the strategic and industrial fit of this transaction. And now let me address the synergies.

On the synergies slide, there are some interesting pictures as well that you can browse through on Calvert's capabilities. The key synergy that we have quantified is the additional margin we realized by selling the JV -- by supplying the JV versus selling slabs to the Southeast Asian market.

Today, there's a price differential of about $20 of selling slabs into North America versus Southeast Asia, and across 2 million tonnes, that translates into $40 million for ArcelorMittal. In addition, we have identified a further $20 million from SG&A and customer freight synergies. So in total, $60 million of annual synergies to ArcelorMittal had been identified from this transaction, and this will increase once the slab supply agreement with TK expires.

Let us now conclude. I'm going to try to conclude the presentation. I'm on Page 6. This is a strategic acquisition for ArcelorMittal, demonstrating our industry leadership and continued ability to capture value-enhancing opportunities. The deal expands our capability to serve and develop growing NAFTA demand for high added value products from a region where we're currently underrepresented. Significant synergies will accrue to ArcelorMittal, as well as the economic success of the JV. The JV structure and the JV-level debt financing ensures minimal cash requirements, minimal impact on net financial debt and no impact on our medium-term target to achieve net debt of $15 billion.

While we do not anticipate any regulatory issues, we will, of course, still need to secure approvals where they're required. We anticipate we'll begin the transaction in the second quarter of next year. And that concludes our prepared remarks. And we're now happy to answer your questions.

Question-and-Answer Session

Daniel Fairclough

[Operator Instructions] So we will take the first question from Neil Sampat at Nomura.

Neil Sampat - Nomura Securities Co. Ltd., Research Division

So 2 questions for me. On the synergies firstly. I guess, if you decided to meet the increased slab requirements not by diverting your existing slab shipments to the U.S. but actually by increasing your utilization rates at some of your slab facilities in and around the U.S., how do we think about the earnings upside there for slab have in Americas? And then, secondly, you told us why you think Alabama will be EBITDA positive -- or the JV will be EBITDA positive in year 1. You mentioned a greater flexibility and proximity in slab supply if the slab supply chain is a factor. Could you also -- because I guess you've seen the accounts of Alabama themselves, and the vendors seem to imply that its majority EBITDA negative. Could you also can shed some light on whether the slab supply agreement from CSA is on maybe slightly more favorable terms than it's been the case historically? And how much of a role that plays in taking this to EBITDA breakeven or EBITDA positive?

Aditya Mittal

Okay, sure. I hear that's a great question, Neil, especially on utilization rates and the impact on financial performance. To the extent that there is underutilized capacity and we ramped it up, we normally see a $30 to $50 increase in contribution margin on those tonnages. That's because the fixed costs are largely constant, and this becomes a variable cost game and you can have from roughly $30 to $50. So if we were to increase capacity utilization at an incremental synergy, which we have not quantified for your benefit, we have created the synergy model based on a diversion of slabs from Southeast Asia to Alabama, which we think is an appropriate, but perhaps, a slightly conservative approach. In terms of the slab agreement, I think that the structure of the slab agreement is different rather than the actual economic. But I think the structure plays an equally important role. Historically, I think there used to be price disconnects between what's happening in the slab market and the U.S. market, and this created disruptions in the whole supply chain. Today, the pricing is based on U.S., Midwest HRC pricing. Therefore, there's always going to be an assured supply of high-quality slabs, and that's linked to the U.S. market. We know that there is a stable order book, and you can guarantee a certain level of profitability on those tonnages. And I think that helps create a strong baseload both at CSA, as well as the Calvert, Alabama.

Neil Sampat - Nomura Securities Co. Ltd., Research Division

So -- a follow-up question on that. So if today's pricing or the pricing going forward under this offtake agreement is based on U.S. and Midwest HRC prices, I mean, given the level that they're at, would you not -- would that not -- could you confirm whether that's going to be at a lower rate than, I guess, has been based or accounted for at Thyssen?

Aditya Mittal

Neil, I don't want to get into the specifics of their contract that they had with Calvert and our contract. I think that would be a violation of confidentiality agreements. So it's better that you direct those questions to TK. I think what ArcelorMittal is focused on and is concerned about is creating a business which is going to be EBITDA positive in year 1. And I think we went through the factors in our presentation, and we're all happy to elaborate on what those factors are. This slab supply agreement from TK is based on U.S.-Midwest pricing. We believe that's market-based, and that allows us to appropriately turn around the Calvert facility.

Daniel Fairclough

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

Carsten Riek - UBS Investment Bank, Research Division

My 2 questions are first, when is the cash flowing, and was it an all cash deal or was there also equity involved at some point? And the second question is how do you actually split the capital outlays between the joint venture partners? Because if you're doing the slab deliveries, I would guess that your portion would be comparably smaller, cash-wise, compared to your partner. Is that true or is it 50-50?

Aditya Mittal

Sure. Carsten, it's 100% cash deal. And we're acquiring it on a debt-free, cash-free basis. We include about $334 million of working capital as part of the 1.550 purchase price. It's an equal split between us and Nippon Steel. And so both partners have decided that the debt-to-equity ratio should be 2:1, which implies roughly $1 billion of debt on the JV, half of that will be ArcelorMittal debt, half of that would be JV debt, as it's on the JV level, it's JV debt as far as we're concerned. And then there is $250 million that each partner would spend as their equity contribution. And the $250 million is what would be the impact on our net financial debt.

Carsten Riek - UBS Investment Bank, Research Division

Perfect. Just very quickly, a follow-up. You mentioned that you want to turn it to free cash flow positive. Is it a -- obviously, is it quite a distance to go here or was the free cash flow generation of the North American facility of ThyssenKrupp not that bad?

Aditya Mittal

No, I think Neil asked a question earlier that presently, the company is negative on EBITDA. We believe it will be EBITDA positive in year 1. We do believe it is also losing cash. The reason why we're saying cash breakeven in year 2 is because in year 1, there will be some investment in working capital. There will also be a slightly higher level of CapEx than what we have normally. Primarily, this CapEx is not because there's any issue with most of the equipment, I think, the facility, as we all know, is state-of-the-art. There are some minor investments that we want to make on the logistics side, larger slab base, we also want to do some stuff between the hot rolling mill and the cold rolling mill, and there could be some minor investments we make in the coated facilities to match to our technology capabilities. There are some CapEx in year 1 that would quickly come down in year 2, and that's why we're saying cash flow positive in year 2.

Daniel Fairclough

We'll move to the next question from Mike Shillaker, Credit Suisse.

Michael Shillaker - Crédit Suisse AG, Research Division

Well done on the deal, I think. I suppose that, yes, the question, I've got it, I think when we saw just in a couple of years ago, one of the things that came across is that they'd mis-underestimated or underestimated the extent of time it would take to penetrate autos, because you can get accreditation but automakers don't tend to change steel supplies intra model. How do you view the ramp-up, including full penetration of auto? And can you kind of give us any kind of sense of where you see the ultimate profitability? Great, you're breakeven next year in EBITDA. But 2, 3, 4 years out, where do you expect the profitability of this asset to go to?

Lakshmi Niwas Mittal

Michael, the profitability of this is based on the increased volume and it's also based on the market. And also, that in the year 2 and 3 and going forward, this -- we will be able to participate in the group of the high value-added market, which is the automotive sector and also the energy sector. And the formula which we have with TK for supplier of slab guaranteed us minimum EBITDA margin on the slab supplied by them. And then, we will also get extra premium on the value-added segment. And similarly, the slabs which will come from our business where we have indicated some synergies will also help in improving our EBITDA margin. And on top of this, our high dilutive segments will get the premium.

Michael Shillaker - Crédit Suisse AG, Research Division

Okay. So I guess you're not going to give me a sort of target EBITDA, which is fine, I guess. But are you effectively saying that within 2 or 3 years, you would imagine that you would have met pretty much full penetration of the auto market?

Lakshmi Niwas Mittal

No, the full penetration means -- what I mean by full penetration, we will participate in the growth of the NAFTA market. Today it is at 2 million tonnes, we expect, for example, 3% growth next year. And we have said in our comment that there will be a 10%, 15% growth in next 10 years. So there is a growth and everything that we will have a great situation, great position to participate in this market. And we will have a higher capacity utilization, as Adit said, that we will also have flexibility in slab supply, and customer acceptance will be faster in our case because a lot of our supply source have -- are already accepted by the customers in NAFTA.

Daniel Fairclough

So we will make the next question from Alex at Morgan Stanley.

Alexander Haissl - Morgan Stanley, Research Division

It's Alex in Morgan Stanley. One quick question on the working capital involved. Can you give us any indication how much working capital was involved in the deal? Are we talking about USD 100 million to USD 200 million here?

Aditya Mittal

334 of working capital.

Alexander Haissl - Morgan Stanley, Research Division

334, great. The second question is can you give us more details what Nippon Steel & Sumitomo Metal, what their contribution is to the JV? Because clearly, it seems both are contributing equally and you get much more benefit out of the JV. So anything I'm missing here or is it really that straightforward?

Lakshmi Niwas Mittal

We have a very historic, well-established and very strong relations with Nippon Steel through our existing joint venture in I/N Tek and I/N Kote. And there, we have all very successfully. And here in Calvert operations, there will be a joint management. We will be jointly represented equally on management committees and Nippon Steel will continue to provide the technology as they've been doing in our other joint venture, and they will also be helping us in improving our product mix for the process plants, the Japanese process plants in America.

Daniel Fairclough

And we will move to the next question from Alessandro at JPMorgan.

Alessandro Abate - JP Morgan Chase & Co, Research Division

Really, well done for the operation at Calvert. Just 2 questions. It's not clear to me yet what is the product mix you are expecting to year 1 utilization rates to bring the EBITDA into positive territory. And even though you're speaking about the joint venture agreement, is there any potential side effect, knock-on effect positive, across the other rolling plants we have in Flat Carbon Americas. And then, assuming maybe more looking forward, what is the operational leverage you can get out of the initial ramp up into year 1 coming from the high utilization rates potentially that you might be having across the 3 slab facilities U.S., Mexico and Brazil, on top of the $20 you aim to get because of a more advantageous price you'd get to the U.S.?

Aditya Mittal

Okay, Alessandro, thank you for your questions. We'll try and answer your questions but perhaps not in the same order. So just starting with slabs. The synergy numbers, just the incremental sale from Southeast Asia to North America, that's $20 on a tonne of slab. On 2 million, that's $40. We talked about earlier that higher utilization implies an additional contribution of 30 million to 50 million per annum. -- $30 to $50 per tonne of slab per annum. So that is the other way of looking at how much higher capacity utilization translates for ArcelorMittal. I think that's a little bit, I wouldn't call dangerous, but problematic because particularly, there is a slab market that we could supply to. And so you should just be careful that we were not double-counting some of these benefits, and the market is there and we double-count the true slab benefit. But there is some benefit that will occur from higher capacity utilization, the safe number is $30 to $50. In terms of Calvert. Year 1 EBITDA is basically there because of 3 factors. The flexibility that we have from our slab supply chain, which is U.S., Mexico and Brazil, plus the existing TK CSA contract, which is now U.S. market-based. Number two, we have already a customer base in the U.S., so this will translate into faster acceptance of our customer base. And thirdly, it is improved quality and mix. We're not targeting a significant increase in capacity utilization in year 1. We believe we can make the facility positive in year 1 on those 3 factors. As we move forward, we believe that as the market is growing in NAFTA, we can ramp up capacity utilization, and that will translate into further EBITDA improvement of the joint venture. So I think that answers.

Alessandro Abate - JP Morgan Chase & Co, Research Division

Just one thing, Aditya. On -- there is no potential knock-on effect on the other rolling plants we have in Flat Carbon Americas. My question basically is, I mean, to get whether it's possible or not to have a kind of mini asset optimization plan across the rolling plants you have in FCA?

Aditya Mittal

The fundamental difference between North America and Europe is that in Europe, the demand is down 22% from pre-crisis levels. And when you look at NAFTA, demand is back up to precrisis levels. Today, we are running our finishing operations at high capacity levels. So we're not really forecasting a mini asset optimization -- we, in North America. What we're focused on is capturing the growth that's going to exist. We're forecasting 50% growth in NAFTA, a notch above specifically over the next 10 years. There's a much higher growth rate than you would see in Europe as well.

Alessandro Abate - JP Morgan Chase & Co, Research Division

So just a quick follow-up question. You mentioned that basically, the agreement with Thyssen of 2 million tonnes slab, high-quality grade slabs. Can you just tell me a little bit which are the target markets you have in mind for these 2 million tonnes slabs, if they are all high-quality grade steel.

Aditya Mittal

Yes, I think it's -- we have some ideas, which are customer-based as to what our lead times -- the specific customer segments require. For example, today, because of the long lead chain, what I understand from Lou and the detailed version, and Lou can elaborate further, is that there is a long supply time to supply this, for example, the service centers. We can shorten that because we have more flexibility on the supply -- slab supply chain. Clearly for automotive and appliance, a long supply chain works because the volatility in their ordering is much more limited, or primarily annual contracts. You can predict much better the offtake of the quality and the quantity of such customers. So it's -- so the change in how Alabama remarket itself will come through the ability for us to provide it will multiple sources of slabs, with higher customer acceptance, as well as shorter lead times.

Lakshmi Niwas Mittal

Lou, do you have any comment?

Louis L. Schorsch

I think it's very situation-specific. I can give another example, in the energy market, a lot of that business is very well suited to this facility. Technically, its pipelines for example, frequently, as part of the pipeline construction effort, you made very quick turnaround times for that might be in short supply, with maybe some quality issues with certain people we've got. And that's a big disadvantage if your supply chain is as long as the 1 facing Calvert, we have operations that can also make those products that can turn it around more quickly. So the bundling of Calvert capability with what we can do with existing facilities, I think, is a beneficial thing for us as well as for that customer base. So that's the kind of benefit that the TK standalone couldn't achieve that we think we can achieve. It connects the facilities that we have in North America.

Daniel Fairclough

So we'll move to the next question from [indiscernible] at Cheuvreux Capital Estimates [ph].

Unknown Analyst

Before I start the questions, just a clarification, this net working capital figure, was that including the $1.5 billion or on top of this?

Aditya Mittal

It's part of the $1.5 billion.

Unknown Analyst

Okay, great. On your contract, maybe can you explain me a little bit this price formula, HRC Midwest minus. I see the point from having a perfect processing margin on that. But on the other hand, maybe can you shed some light why you're exposing yourself to an HRC price? Because if we consider that U.S. market is more favorable as a flat rolled market, whereas the global slab market is more competitive, isn't a link to HRC more of a disadvantage for you than a link to a global slab price. And whatever the exact formula is, can you confirm that the price is, as of -- at the port in Alabama? The second question, in respect to this automotive business, can you give us a little bit of a sense how much of automotive business you're [indiscernible] now versus the transition of the plan? Is there already auto business done from -- by TK out of Alabama? And how are you ramping up now? Do you need to requalify that supply chain from CSA to potential automotive customers, or do you have to reroute that now to your existing facilities in the U.S. or Mexico? Maybe can you give us a little bit of more sense? And how does it work with other high-strength steel with such a long supply chain down to Brazil, if there's any issue in terms of quality requirements, is that really effectively working on a larger industry scale? And then ThyssenKrupp steel import automotive steel from Europe? So are you now in competition with them from those work? Yes, I guess, these are all the key questions as of now.

Lakshmi Niwas Mittal

Lou, would you like to answer?

Louis L. Schorsch

I don't know which of the key persons to start in on this. I think the facility is clearly oriented towards making some very high-quality material. And I think that there's that, that we know the slab market very well. There's really aren't that many suppliers that can meet those quality requirements and are qualified to do so. So I think the argument that we would be better off or could be better off going to the global market, I think that's not really feasible for the quality ranges we're looking at here. So I think we're very comfortable with the idea that's so long that it is market space-based. We know the market does move up and move down, that this is a structure that will provide good margins for us kind of throughout the cycle. So I think that was the first question that you raised. I think in terms of TK's current position in auto, I can only say I think that they do certainly have some automotive customers. It's not appropriate for us to kind of done the volumes there that's associated with that. But we certainly see them in competition at some customers. So I think they sell into those markets to some degree.

Aditya Mittal

And maybe I'll just add. TK has no restriction on selling into NAFTA. So TK work's allowed to sell into NAFTA like they are today. And just one small point, if you look at the contract that we have for the slabs, on a 10-year basis, the market price for slabs will match the spread that we have, HRC minus spread that we have. So there could be periods of time where the contract is very favorable for our slab supply. There could periods of time where the contract is unfavorable. The key is a structure which allows us to market these products from a daily basis without running any Brazilian exposure on these slabs -- international exposure in the U.S. marketplace. And also, we should bear in mind that the contract is a win-win, right? I mean, I think it provides Alabama with good quality slabs and it provides CSA with a foreseeable contract as well.

Unknown Analyst

Okay, fair point. On this pricing, is the price formula as of the port of Alabama?

Aditya Mittal

Yes, it's Pinto Island actually. Pinto Island is really where the port is for Calvert operations. So it's delivered Pinto Island.

Daniel Fairclough

So we'll take the next question from Jeff Largey at Macquarie.

Jeffrey R. Largey - Macquarie Research

Congratulations on the acquisition. My first question is, really, if you could talk about the relationship with Outokumpu at Calvert, if that in any way changes? And if there's any way to actually extract, say, greater economics out of their reliance on the rolling mill there?

Lakshmi Niwas Mittal

There's no change in the relations between Outokumpu in Calvert.

Jeffrey R. Largey - Macquarie Research

So they have 1 million tonnes roughly of rolling allocation?

Lakshmi Niwas Mittal

Yes.

Jeffrey R. Largey - Macquarie Research

And does that go on into perpetuity?

Lakshmi Niwas Mittal

Yes, that's right.

Jeffrey R. Largey - Macquarie Research

Okay. My second question was just maybe on the regulatory front. You hit on it in your slides and in the presentation. But if you could talk a little bit more about whether you see any issues from the DOJ or potentially from many competitors in the U.S. who might be -- well, maybe they're happy that you ended up with the mill rather than a new foreign entrant but on the other hand, maybe they're a little bit intimated by your ability to grow market share?

Lakshmi Niwas Mittal

No, we see that this is a very competitive market. And in our view, we do not see any major problem with DOJ and Department of Commerce.

Jeffrey R. Largey - Macquarie Research

Okay. That's great. And other than the U.S., do you need regulatory approval from any other body?

Lakshmi Niwas Mittal

Yes, we will need regulatory approvals from 2 other countries. And we think that there should, in our view, there should not be any problem with other countries.

Daniel Fairclough

So we'll move onto the question from Luc Pez at Exane.

Luc Pez - Exane BNP Paribas, Research Division

Gentlemen, 2 quick follow-up questions, if I may. First of all, could you be perhaps a bit more specific with regards to the investment in working capital requirement you're foreseeing for the first year of operation, please? And secondly, maybe with regards to reliability issues that CSA has been facing since a while, how's that cover with slab supply agreement?

Aditya Mittal

So Luc, we're not providing with specific numbers. Suffice it to say that, as we start with $334 million of working capital, the incremental working capital requirement is not that significant. So it's a portion of that amount, but it is not that significant. In terms of CSA, at the end of the day, it's a 2 million-tonne contract. And CSA is a 5 million-tonne facility. And I believe even though they had the reliability issue, CSA was still able to supply at least 2 million tonnes to Alabama. And therefore, we do not see an issue in TK CSA's ability to supply 2 million tonnes to Alabama.

Daniel Fairclough

We'll move to the next question from Dave Martin at Deutsche Bank.

David S. Martin - Deutsche Bank AG, Research Division

I had a follow-up question, somewhat similar to the last one. On year 1 cash flows, I know you said there was going to be some incremental spending in year 1 beyond kind of maintenance requirements. Could you give us a range of what these capital expenditures may be? Is this tens of millions of dollars or hundreds of million of dollars?

Aditya Mittal

It's between those 2 numbers. We haven't really disclosed that at this point in time. I think it's, again -- it's in the same order of the working capital investment, which is not that significant. And recognize that all of these will be funded equally by us and by and by Nippon Steel.

David S. Martin - Deutsche Bank AG, Research Division

Okay. And secondly, in deals like this with secondary supply agreements, on occasion, I've seen a portion of the transaction of value assigned to agreement such as slab agreements. I'm curious as to what value you'll assign to that slab agreement over the next 6 to 9 years?

Aditya Mittal

Yes, that's a good question. There are -- there's no value assigned, positive or negative, to the slab.

Daniel Fairclough

The next question is from Philip at ABN AMRO.

Philip Ngotho - ABN AMRO Bank N.V., Research Division

My first question was actually basically on the Alabama plant. Could you maybe indicate what level the utilization rate is currently and maybe also what you -- what rate you are targeting in the coming years or what do you think is feasible? And then one other question, I don't know if you can answer it. But how much oil or spare capacity do you have within the slab-producing units within the Northern American plants? And what impacts -- or to what level were the utilization rates go for these plants once you start supplying Alabama plants?

Aditya Mittal

The capacity is roughly 5.3 million tons for Alabama. This includes 1 million ton of stainless toning contract, where Outokumpu pays the tolling fee for the 1 million ton. And then light flat rolled capacity is roughly 4.3 million. The 2012 number, as per our diligence, is about 2.8 million tons of light flat rolled. So that gives you a sense of at what level of capacity that they're operating at. Clearly, we're not running -- we're not going to ramp up to full capacity in the short term. We're going to ramp up as we gain acceptance by the customer base, as we fix the quality issues, as we stabilize all the slab flows. So we're not expecting a dramatic increase in year 1 of capacity utilization.

Philip Ngotho - ABN AMRO Bank N.V., Research Division

Okay. And to what levels do you think it is feasible within, I don't know, maybe 2 or 3 years?

Aditya Mittal

Yes, I mean, clearly, the incremental EBITDA growth will come from as we ramp up the Calvert facility, to fully utilize that capacity base. The prospects are good for that because, as we mentioned earlier, NAFTA market is growing. We have, I think, [indiscernible] Association talked about a 3.5% growth next year itself. So we are in a growing market. We are in the right place in a growing market, which is Southeast and United States. We have the right segments within the growing market, which is automotive and energy, and plus we have close proximity to Mexico. In terms of slab availability, we're not providing a specific number on what is the incremental slab availability. We did announce a few days ago that we are starting up a furnace in Tubarao, which does provide incremental slab capability of 1 million to 2 million tonnes.

Daniel Fairclough

We'll take the next question from Mike Gambardella at JPMorgan.

Michael F. Gambardella - JP Morgan Chase & Co, Research Division

Just a couple of questions. With the slab agreement pricing linked to the Midwest pricing, I'm a little confused because if you're pricing off of the Midwest hot roll price now and the U.S.-Midwest hot roll price is one of the highest in the world, wouldn't that increase the slab cost going into Calvert when this contract kicks in shortly?

Aditya Mittal

Yes, Michael, that's a fair point. If you look at 6 months ago, then the reverse was true as well. So when you look at this contract on a medium to longer-term basis, the spread, we believe, mimics the average spread over a long period of time between the global slab markets and the U.S. HRC Midwest price. What we were trying to do is not create a situation where Southern U.S., now Alabama, is buying slabs like crazy and then in June and July, it is not buying slabs because the cost of slab is too high, because that would create tremendous amount of disturbance to its customer base and the total marketing force. So what we wanted to do was create a stable supply, which we knew would always work in Alabama and not get disrupted by the international markets. That's how the U.S. is operated and we run the risk of what is the U.S. marketplace everyday. And the finishing operations at the end of the day should be running at full capability because that's -- there is life, there is life in refinery side of things.

Michael F. Gambardella - JP Morgan Chase & Co, Research Division

So you're expecting full capacity at the rolling facilities at Calvert?

Aditya Mittal

Eventually, yes. I mean, this is the most modern finishing facility in NAFTA. So if not a full capacity utilization, that will be a shame.

Michael F. Gambardella - JP Morgan Chase & Co, Research Division

And I'm sorry. On the amount of slabs, staying with slabs that you have to roll for Outokumpu, what is the maximum amount of stainless slabs that you would have to roll? Is it 900,000 or 1 million?

Aditya Mittal

It's closer to 1 million. I have 992,000 in my numbers.

Michael F. Gambardella - JP Morgan Chase & Co, Research Division

And what is the capacity of the hot rolling plant now?

Aditya Mittal

5.3.

Michael F. Gambardella - JP Morgan Chase & Co, Research Division

So if it's 1 million, doesn't a stainless slab, because it's harder, take longer to roll, so how much of the 5.3 would be chewed up? It's not 1 million, it's much greater than 1 million, right?

Lakshmi Niwas Mittal

The 5.3 has a 1 million tonne of stainless steel capability.

Michael F. Gambardella - JP Morgan Chase & Co, Research Division

Oh, so that's counting the extra time it takes to roll the stainless in that plant?

Lakshmi Niwas Mittal

Yes.

Michael F. Gambardella - JP Morgan Chase & Co, Research Division

And how much extra time is that? Is that double?

Lakshmi Niwas Mittal

It's a technical question. We can get back to you once we get a more technical analysis.

Michael F. Gambardella - JP Morgan Chase & Co, Research Division

Just a question on the market with servicing NAFTA. A lot of the Midwest integrated plants, probably like your own, had been shipping sheet product down into the South and into Mexico for a long time now. Are you replacing that tonnage now that -- will you stop sending your plant products from the Midwest down to the South and to Mexico once you -- at Calvert?

Louis L. Schorsch

I think we haven't gotten into the detailed planning yet. I mean, again, we're interested in this facility primarily because we see a lot of opportunity for growth. And we are running our automotive capabilities, our current ones, at a relatively high level. So I think this allows us to participate effectively in that growth. Obviously, should we get the approval, then -- and hopefully, to get to that point and at the point that we control the facility, then we'll look to optimize, where a part of that would be -- a part of the optimization, there's going to be logistics cost, there's also going to be graphic capabilities, lengthy production runs, supply chain initiatives, et cetera. So there will be a complex set of issues, but certainly, one of the attractive points for this for us, is to be able to optimize so that we can serve that customer base even better.

Michael F. Gambardella - JP Morgan Chase & Co, Research Division

I'm just trying to get a sense, if plants in the Midwest, yourself being one of them, other competitors that have been shipping down to the South are going to be forced to curtail some of those shipments because of your increased capabilities down there. Is that going to create -- do you think that will create some excess supplies in the Midwest market?

Aditya Mittal

Michael, I think the growth is in Southeastern united States, as well as Mexico. So I don't see any curtailment of shipments from the other producers. At the end of the day, the market is growing. And this has -- this facility has been created to cater to that growth. And if you look at our numbers, we have some customer freight savings of about 10 million as our synergy numbers. So there's not a significant amount of change that's also going to occur in our order book. But really, this is to capture the growth that's going to occur in these markets. And I just want to make sure that everyone was aware that the numbers I spoke about in terms of Calvert, in terms of shipments, as well as stainless toning volumes and capacity are all in short tons, they're not metric.

Michael F. Gambardella - JP Morgan Chase & Co, Research Division

And can you send product from the Mexican plant -- your Mexican slab plant that's DRI-based? Is that an equivalent slab in terms of quality that you need into Calvert?

Louis L. Schorsch

Yes, I think the customers we have for this plant in Mexico would universally say that this is an outstanding product, and there isn't many applications where a DRI-based product is preferable to -- because, again, it's pure. I mean, anytime you make it into a blast furnace, really into a BOS, and North America, typically, is charging 20% scrap into the BOS. And I'm sure you know, Michael, in Mexico, we charge only home scrap into those electric furnaces. So it's actually a pure product in many ways than what we get from the traditional integrated plants. So it's an outstanding product. I'd say all 3 of the slab sources we've discussed here, the operation in Brazil where we're already making automotive quality product and qualify with basically every major automotive producer, and obviously, the operations in the States will be mixed. We could provide some of the slabs for Alabama. I think there's very good quality, background and capability for all those 3 potential sources.

Michael F. Gambardella - JP Morgan Chase & Co, Research Division

So just last question. Just going back to my first question on the cost side, with the slab agreement. Just in a very short period of time, the next 3, 6, 9 months, assuming that hot roll market in the U.S. stays constant, I'm still struggling to see how you improve profitability, if the slab cost is going -- is increasing for Calvert and the utilization rates really aren't going up that much.

Aditya Mittal

I think, Michael, you have to appreciate that Calvert's profitably I do not believe reflects the marketplace in the U.S. today. I think when you look at Calvert's numbers , they are more -- the pressure realization they had was in the U.S. marketplace back in the second quarter and partially in the third quarter were pricing was not at levels where they are today. So you would have an uplift in pricing and an uplift in costs as well. But it's still adequate for us to be a positive EBITDA year 1.

Michael F. Gambardella - JP Morgan Chase & Co, Research Division

So would Thyssen have been more profitable than you over the short term because it wouldn't have the higher slab input cost then? It would have captured the prices going up.

Aditya Mittal

I don't want to speak about Thyssen. But clearly, as the facility captures the market potential today in North America, through a faster acceptance of the existing customer base of our -- clearly, the profitability in year 1 of Calvert will be there. That's what we're seeing.

Michael F. Gambardella - JP Morgan Chase & Co, Research Division

And then the purchase price. Is the purchase price net of the working capital or would you buy...

Aditya Mittal

I think we answered that question earlier. 1.550 includes net working capital of $334 million.

Michael F. Gambardella - JP Morgan Chase & Co, Research Division

So you're paying less than 1.55 net of working capital?

Aditya Mittal

That's right.

Daniel Fairclough

So we'll move on to the next question from Jeff Kramer of Morgan Stanley.

Jeffrey Kramer

Just hoping you'd clarify the comment earlier about the financing at the JV, the debt financing specifically. Is ArcelorMittal involved with that $1 billion?

Aditya Mittal

There will be $1 billion of debt at the JV level. And Nippon Steel and ArcelorMittal are going to jointly arrange that financing at the JV level.

Jeffrey Kramer

And they'll only be recoursed to the JV, correct?

Aditya Mittal

We haven't finalized the terms of the JV debt. As soon as we do that, we will inform you. The anticipation is that the JV level debt will not be higher cost than what our cost of financing is.

Daniel Fairclough

We'll move on to the last question, which is a follow-up from Neil Sampat at Nomura.

Neil Sampat - Nomura Securities Co. Ltd., Research Division

Just wanted to understand the terms of the slab supply agreement between your slab plants in the U.S. and Mexico and the JV. So am I right in thinking that longer term, as long as the JV makes a certain EBITDA margin or certain return on capital, that you could -- if that could increase the price of slab that you charge to the JV, and therefore, more value accrues to your Flat Carbon Americas operations?

Aditya Mittal

That's absolutely correct, Neil.

Neil Sampat - Nomura Securities Co. Ltd., Research Division

And then conversely -- so for your EBITDA to be positive in year 1, is it a case that you effectively have to subsidize that -- the JV EBITDA by negative or below cost slab pricing from your Flat Carbon Americas operations until the JV reaches a certain level?

Aditya Mittal

If the JV were to lose money -- lose EBITDA, then that would be the case. But we are expecting the JV to be positive in year 1, and so that's not the case. And just to explain that a bit more, Nippon Steel's return profile is based on finishing returns, and our return profile is based on integrated chain. And therefore, when we say we expect it to be EBITDA positive, we are referring to the integrated chain.

Neil Sampat - Nomura Securities Co. Ltd., Research Division

Okay. So the JV itself won't necessarily be EBITDA positive, but your integrated return would be, including the synergies that you're Flat Carbon Americas operations?

Aditya Mittal

Yes, the answer is that both are EBITDA positive in year 1.

Daniel Fairclough

Great. I don't think there are any questions, so I will hand back to Mr. Mittal for any closing comments.

Lakshmi Niwas Mittal

Thank you for participating and look forward to talking to you soon. Have a good day.

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