Annual Review 2016Sustainable progress
2016 was a year of important progress for ArcelorMittal.
Action 2020 is ArcelorMittal's commitment to structurally improving profitability and cash flow generation.
Good corporate governance is about compliance, continuous stakeholder dialogue and being a good corporate citizen.
Details of our steel and mining operations, financials, production facilities and shareholder information.
Net debt to Ebitda ratio
At the start of 2016 we set ourselves two financial priorities for the year: to deliver positive free cash flow and to improve our financial strength by reducing net debt. We successfully achieved both priorities, while also generating a healthy net profit of US$1.8 billion. 2016 was a very encouraging year of strategic progress for ArcelorMittal.
Global steel market dynamics at the start of 2016 were very different from the much-improved conditions in which we operate today. Steel spreads - the difference between the basket of raw materials used to make steel, and the steel selling price – fell rapidly in the second half of 2015 and remained at very low levels, compared to historic norms, at the beginning of last year. We felt that global steel spreads, which were driven by the very low export price of Chinese steel, were unsustainably low, so the improvement we saw throughout 2016 was both welcome and expected.
Although we don’t expect to see a return to the levels we witnessed in the second half of 2015 and the early part of 2016, until the steel overcapacity situation that exists in China is fully addressed, the risk of a volatile operating environment remains. Therefore, our focus for 2016 was to initiate and implement actions that would ensure ArcelorMittal can thrive in any market environment.
This meant a focus on two areas: firstly, strengthening our balance sheet, and secondly, launching a new five-year strategic plan, Action 2020, designed to structurally improve the earnings capabilities of the group and enhance our ability to generate free cash flow.
The key metric we refer to when assessing our balance sheet strength is our net debt to Ebitda ratio. At the end of 2015 this ratio was 3x, well within our banking covenants but not at a level that we were satisfied with, particularly given the uncertain operating environment at the start of last year. As all our shareholders will be aware, we addressed this issue by launching a US$3 billion capital raise in February 2016, which was significantly oversubscribed and closed in April 2016. This, alongside asset sales of US$1.4 billion and positive free cash flow during the year enabled us to reduce net debt by US$4.6 billion to US$11.1 billion, which represents a healthy net debt to Ebitda ratio of 1.8x.
The proceeds of the capital raise and asset sales were primarily used to repay or pre-pay several of our corporate bonds. This has materially improved our debt maturity profile with an average debt maturity today of seven years. We now have one of the strongest balance sheets in the sector and a very solid platform on which to further improve our financial performance.
Having reviewed the financial progress made in 2016 our Board of Directors, despite being pleased with what has been achieved so far, wants to see further progress, especially with respect to achieving credit metrics consistent with an investment grade rating. As such, deleveraging remains the priority for surplus cash flow and the Board therefore decided against paying a dividend from 2016 earnings.
free cash flow performance
Our free cash flow performance of US$0.3 billion in 2016 was pleasing. This was achieved despite a US$1 billion investment in working capital in 2016 because of the improved market conditions, and US$0.4 billion of premiums incurred from the various bond buybacks we carried out last year.
Further improving the level of free cash flow will support further debt reduction, and enable the Board to invest behind growth opportunities presented by the better market environment. We continue to manage the annual cash needs of the group very carefully, and hence the level of Ebitda required to be free cash flow breakeven. We have, however, indicated our annual cash requirements will increase by US$0.5 billion this year due to increased investment in development CAPEX in order to take advantage of improved market dynamics.
While this cash focus will continue, the real driver behind increasing the level of free cash flow we generate is our Action 2020 strategic plan that was launched last year. It is designed to deliver an additional US$3 billion of structural Ebitda improvement and annualised free cash flow in excess of US$2 billion, by 2020.
reduction in mining costs
Action 2020 got off to an excellent start and played an integral role in our improved financial performance in 2016, delivering US$0.9 billion of Ebitda to the group total of US$6.3 billion. There was a solid contribution from all segments: in NAFTA, our footprint optimisation is nearly complete and the ramp-up of activity at AM/NS Calvert, our state-of-the-art downstream finishing facility, is progressing well; in Europe, the Transformation Plan is on-track, we have centralised a number of functions to deliver efficiency improvements and are improving the productivity and reliability of our asset base; in Brazil, our Value Plan is similarly delivering efficiency gains and structural cost improvements; in ACIS, our CIS operations are benefitting from a more competitive cost base resulting from currency devaluations while also improving operational performance, with record quarterly production achieved during the year; and finally, our Mining division delivered a 10% reduction in iron ore unit cash costs, following the 20% achieved in 2015.
There are three broad elements to Action 2020, structural cost improvement, volume improvement and increasing the proportion of higher added-value (HAV) products we sell. While we are not splitting out the level of Ebitda generated through Action 2020 into these three areas, the bulk of savings delivered in 2016 was through cost improvement. Therefore, our focus for this year turns to delivering improvement in the other two areas. On the volume side, we are forecasting apparent steel consumption growth in our core US and European markets this year, while a return to growth is also forecast for Brazil and CIS, albeit from a very low base. I believe we are well placed to capture our share of market growth, but it is imperative that we ensure we minimise operational disruptions at all our assets and rigorously focus on ensuring we operate at optimal levels. On the product mix side we must better leverage our world-leading product portfolio and ensure we reap the benefit of the additional growth capital expenditure we have allocated for 2017 to increase the proportion of HAV, higher margin products we sell.
We made a lot of encouraging progress in 2016, but if we are to achieve our long-term targets, and generate the returns for all stakeholders that I believe this business is capable of, there is much still do it. I have no doubt about our ability to deliver. Looking at our plans, and our capabilities, we are in a strong position – strategically, operationally and financially – and are thus extremely well poised as our markets recover and our plans deliver.
Aditya MittalCEO ArcelorMittal Europe and Group CFO