ArcelorMittal SA

NYSE:MT

Earnings Call Transcript 2019-Q1

[Operator]

You may start, Daniel.

[Daniel Fairclough]

Thank you. Hi, good morning, and good afternoon, everybody. Welcome to ArcelorMittal's First Quarter 2019 Analyst and Investor Call. And this is Daniel Fairclough from the ArcelorMittal IR team. And I'm joined on this call today by Genuíno Christino, who is the Group Head of Finance. We're here to answer your questions on the results published this morning. [Operator Instructions]. As usual, I'd like to remind you that this call is being recorded. Hopefully, everybody has had a chance to read our earnings statement published this morning together with the Q&A document and the presentation with detailed speaker notes. The idea of this call is that we will answer your questions but before we move to questions, I'd like to start with some brief opening remarks. Firstly, as you can see from the numbers, market conditions in the first quarter of 2019 have been challenging. Demand in our core markets has been weak, and we can all see this weakness reflected in the indicators such as the eurozone PMI and the year-on-year declines in auto production. This now has been further exacerbated by escalating imports into Europe, particularly for hot rolled coil. Unlike in other regions such as China, this weaker supply/demand dynamic has constrained our ability to pass through higher raw material costs and this has led to a price cost squeeze and a significant deterioration in the results of our steel business. And this is why we announced production cuts earlier this week. We can though take some encouragement that China has been able to increase spreads in recent months, reflecting the benefits of the structural supply side reform that we've talked of previously. In our presentation today, we do have a chart, I think it's on Slide 5, showing the unusually low hot rolled coil price differential between Europe and China. As I say, it's unusually low. It's not unprecedented, but it is unusually low and what you will see from that chart is that when this type of environment occurs, this dislocation occurs, it doesn't -- or isn't sustained for extended periods. Relative to steel, our mining segment fared better, delivering improved results despite seasonally lower shipments. This, of course, highlights the benefits of ArcelorMittal's vertical integration. And on the positive note, we have seen this quarter a lower than normal seasonal investment in working capital, which I think reflects our focus on the structural release of the excess working capital accumulated in 2018, and this will continue through the course of this year. Our Q1 free cash flow was marginally positive, and that I think reflects some of the improvement that we've made in recent periods, particularly on our cost of interest. If you normalize for the working capital effect, the working capital investment this quarter and reflect on our target to release working capital this year, and we're implying a minimum $1.6 billion over the next 3 quarters, then hopefully you should be confident, as we are, that we can deliver healthy free cash flow in 2019 and demonstrate clear progress on debt reduction. These, together with the Action 2020 progress and improved shareholder returns, are our priority. So with those brief remarks, we're ready to take your questions.And we have a queue so the first question we're going to take is from Ephrem at Citi, please.

[Ephrem Ravi, Managing Director and Analyst]

Quick question on the cash flow statement, you had a $300 million cash inflow from the SR hedge. Can you confirm that, that is going to -- that that's a temporary effect and that will reverse in the coming quarters when the [ fees ] are completed?

[Genuíno José Magalhães Christino, Head of Group Finance & VP]

This is Genuíno. Let me take this question. Yes, you're right. So yes, the impact of the hedging should reverse if the transaction -- when the SR transaction closes.

[Ephrem Ravi, Managing Director and Analyst]

Can I also have a quick follow-up question, sorry. The -- just on the production cuts that you've announced, the 3 million tonnes of production. So clearly that is -- is that a capacity impact? Or is that just natural tonnes of shipments that you obviously [ picked out of the box ]?

[Daniel Fairclough]

Sorry, Ephrem. Can you just repeat that question? But before you do so, I just wanted to go back to your previous question and just highlight again one of the remarks that I made on -- at the start of the conference call. If you look at the cash flow performance of the business this first quarter, I think it should give you encouragement. The free cash flow was slightly positive. I know it's only $25 million, but at least it was slightly positive and especially when you consider that we did make a seasonal investment of working capital, $550 million. So given that we're telling you today that you can expect us to at least release $1.6 billion over the remaining 3 quarters of the year, given the run rate of cash flow, excluding working capital investment in the first quarter, that should make you quite encouraged about the cash flow outlook and the debt reduction potential over the remainder of the year. But, sorry, I wanted to come back to your question, but I didn't catch it.

[Ephrem Ravi, Managing Director and Analyst]

Yes. Sorry, for not being clear earlier. The question was the 3 million tonnes of production cuts that you've announced, is that on the basis of capacity or on the basis of shipments that you would be planning to make over the full year? So I just want to kind of see if there is a utilization rate kind of haircut you need to take on that number?

[Daniel Fairclough]

Yes. I think the thing to recognize is that in the case of Kraków and in the case of Asturias, these operations have been running in the first quarter and in the second quarter, so this is capacity in production that we're taking out of the market. The other elements of the 3 million tonnes is the slowdown in the ramp-up at Taranto. Obviously, we were anticipating achieving a 6 million tonne run rate in the second half of the year and we are going to slow down on that pace of ramp-up. So the overall effect is a 3 million tonne annualized reduction in supply to the market, but it does incorporate, as I say, a slowdown in Taranto and cuts in Spain and Poland. I think the main takeaway to have on this topic is really the tonnes that we're taking out of the market in the first quarter, those tonnes had a 0 or negative contribution margin, so the price in the market was only covering the variable costs and there was no absorption of fixed costs on those tonnes. So if you think about where we are today, taking those tonnes out of the market has 0 EBITDA effect. And then the opportunity for us to attack the fixed costs of those tonnes in the coming months, that's the opportunity for us to improve the EBITDA relative to us not having taken action at this time. Hopefully that makes sense to you. So we'll move to the next question please from Cedar at Bank of America.

[Cedar Ekblom, Analyst]

Hi, I've got 2 questions. Firstly, on Ilva. With the delay in the ramp up, does that impact any of the realization of the synergies that you are targeting at that asset? And secondly, your cash needs of the business at $6.4 billion, I do appreciate that you have the potential to see working capital unwind in the second half, and that will order the remainder of the year, and that will support free cash flow. But ultimately, in the first quarter, you didn't generate much free cash. Is there any scope to see the cash needs of the business, particularly on the CapEx side, now down from that $6.4 billion? Or is there no real headroom to shrink cash requirements elsewhere?

[Genuíno José Magalhães Christino, Head of Group Finance & VP]

Okay, Cedar. So let me address your first question on synergies in Ilva. So we are making good progress. I mean I'm not so sure that you attended our presentation in Taranto, but we are clearly making good progress, particularly in some areas like procurement, commercial as we have these activities now as part of our European platforms. Clearly, as we slow down our production with the ramp-up, so that will have an impact, so there will be some delay, but we remain optimistic that we should be able to capture the synergies that we have announced initially. In terms of the cash needs, Cedar, so at this point, we are not updating the cash needs, our forecast. Typically, we do it in quarter 2. But at this point, as you know, the CapEx that we have, the increase that we have from last year, so the projects for Ilva, that will continue. We have also the Mexico project and some carryover from 2018. So we believe that those projects, they will be important for the company, so we are not at this point revising them. And some of the other aspects of the cash needs such as taxes, so they still take into account the level of profitability that we enjoyed in 2018 to the extent that you have a lower number for this year, then, of course, we have to adjust for that.

[Daniel Fairclough]

So we'll move to the next question please from Ioannis at Macquarie.

[Ioannis Masvoulas, Analyst]

The first one is on the sequential EBITDA bridge and how we should think about it. I mean any color you can provide on the volume development into Q2 across the different divisions? And also any color on the spread development, especially for the divisions that you have, some level of iron ore integration? I'll stop there for the first question.

[Genuíno José Magalhães Christino, Head of Group Finance & VP]

Yes. So thank you, Ioannis. So EBITDA bridge, let's start with shipments. So we would expect our shipment performance year-on-year to improve considerably given that we don't expect the operational issues that we faced last year, particularly in Europe and ACIS. And on top of that we continue to ramp up Ilva to the 5 million tonnes. If you look on a quarter-on-quarter basis, so then what we have is we have Kazakhstan then running at normal levels, following the explosions that we had in quarter 4 of last year and the ramp up in quarter 1 so then we will see a production back to normal levels in Kazakhstan in quarter 2. And also we will have Mexico running at normal levels as well, so the blast furnace in Mexico was -- the line was completed at the end of February, so we will have the full impact of that now in quarter 2. So CIS, we will see a significant improvement in terms of shipments, and we also expect a normal seasonal pickup in shipments in Europe. So in terms of prices, so we have seen international prices, particularly Chinese prices improving in the first quarter. So that will clearly benefit some of our -- parts of our business, so in particularly CIS and also in part our Brazilian business, exports of slabs and to some extent also the domestic flat business. So and then, of course, you know where prices are in Europe, so then you already mentioned that prices, the environment in Europe in particular, is challenging. And in U.S. prices did stabilize during the first quarter, and that's where we are.

[Ioannis Masvoulas, Analyst]

And another question on Brazil. It was interesting to see shipments being strong. I was looking at the year-over-year shipments and both flat and long were pretty strong. I guess long is partly due to Votorantim, if you can provide a bit of color on the underlying long shipment development that would be useful. And also on flat steel, you were pretty strong in Q1. And I'm just wondering, at the same time you cut your demand forecast for the year. So how do I reconcile the two?

[Genuíno José Magalhães Christino, Head of Group Finance & VP]

Yes. So let's talk about the performance -- the shipment performance in Brazil. So what happened there is that in Q4 of '17, we had a significant destocking in Brazil. So traditionally, we have some restock some of the hot strip mill for maintenance, you have holidays, but we tend to then export more, so we had a destocking. And then in quarter 1 of 2018, traditionally then we restock, so you have less shipments, we cut exports. And this time around, quarter 4 of 2018, we did not have -- we didn't have the destocking effect as much. So as a result in quarter 1 of '19, we could ship more. And on top of that the production is also higher year-on-year, so that's -- and in longs, you're right. I think most of the impact is coming from the integration of Votorantim.

[Ioannis Masvoulas, Analyst]

Okay, great. And just a quick follow-up for you on [ general adjustment of ] depreciation. You're guiding to $3.1 billion for the year. But if I look at the Q1 run rate, it's closer to $2.9 billion. And I was expecting that IFRS 16 is fully reflected in Q1. So how do we get from $2.9 billion to $3.1 billion for the year?

[Genuíno José Magalhães Christino, Head of Group Finance & VP]

So, yes. So when we provide this guidance, Ioannis, we also take into account -- we have to take into account FX. And also traditionally in quarter 4, you have some higher depreciation because it's typically when you have your year-end adjustments. So when you transfer some of your assets under construction to operations, so that's factoring this impact. We believe that the guidance is -- it's a good proxy for the number.

[Daniel Fairclough]

So we'll move to the next question please from Christian at SocGen.

[Christian Eric Andre Georges, Equity Analyst]

First question is on your cost of operation in NAFTA, if you exclude the cost of raw material, in the first quarter, in that calculation, it looks like you've had another sizeable increase in underlying costs. Could you perhaps highlight if you know what the cost conditions are at the momentum? And what may be impacting this in the first quarter which may be not recurring?

[Genuíno José Magalhães Christino, Head of Group Finance & VP]

Yes. So in NAFTA, so -- NAFTA -- so the costs are -- so you have some increases because of coal and also the costs went up in -- so as you know, coking coal was higher in quarter 4. And iron ore also went up so there is a catch-up impact, there is a lag impact flowing through our results in quarter 1. But other than that there is nothing exceptional other than, of course, the impacts that we highlight coming from [ Bansaba ].

[Christian Eric Andre Georges, Equity Analyst]

The impact from what, sorry?

[Genuíno José Magalhães Christino, Head of Group Finance & VP]

[ Bansaba ] .

[Christian Eric Andre Georges, Equity Analyst]

Okay. The coke is -- the increase in the OpEx seems to be even outside your cost of coal, and I know. The [indiscernible] in the other impact you would be seeing in your first quarter in NAFTA?

[Genuíno José Magalhães Christino, Head of Group Finance & VP]

Yes. So in quarter 4, I mean if you see in quarter 1 -- in quarter 1 in NAFTA. So clearly, if I walked you through the bridge, you will see that the main impact is really coming from prices, right? So the cost increases are modest and from metal linked to the points I have highlighted. And then we have also a positive coming from volumes. So that walks you through from Q4 to Q1.

[Christian Eric Andre Georges, Equity Analyst]

Okay. And my second question is on the -- on your $150 million impairment in Europe, which I gather is -- we should be adjusting at the potential value of the assets you're selling to Liberty Steel. Is that the case? And also, what are the timing on that sale of these European assets? Should we still include them in our estimate in Q2 and in Q3?

[Genuíno José Magalhães Christino, Head of Group Finance & VP]

Yes. So to the first point of your question, you're right. So the impairments reflect a reduction of the expected proceeds. And as we discussed last quarter, this is a negotiation among 3 parties. And in terms of timing, we would expect the transaction to close in the second quarter.

[Christian Eric Andre Georges, Equity Analyst]

Okay. And can you give us an idea about the amounts we're looking at in the end? We were like mid-digits millions?

[Genuíno José Magalhães Christino, Head of Group Finance & VP]

Well, you have the book values in our 20-F for about $1.1 billion. And then if you deduct the impairments now for about $150 million then, so you're going to be in the right ballpark.

[Daniel Fairclough]

So we'll move to Alain at Morgan Stanley, please.

[Alain Gabriel, Equity Analyst]

Just one question from my side is on the -- your outlook appears to have -- on-demand appears to have deteriorated in the last 3 months. However, you have not changed your working capital release guidance, which stayed at $1 billion. How do you reconcile those 2 facts given that falling prices should mechanically lead to a much larger working capital cash inflow?

[Genuíno José Magalhães Christino, Head of Group Finance & VP]

Alain, so what we discussed last quarter was that we overspent in our working capital last quarter. So we said we have about $1 billion should be released. But we never said that, that's the absolute number that you're going to see at the end of the year. Of course, now one effect is that it will impact at the end of the year the working capital release. I guess what we are seeing right now is that, given that where we are right now, we would expect, given that we have invested about $600 million in quarter 1, you would expect that to reverse and on top of that, we would expect the $1 billion to come through. So that's the minimum that we see right now.

[Daniel Fairclough]

Thanks, Alain. So we'll move to Sylvain at Exane please.

[Sylvain Brunet, Head of Metals and Mining Equity Research]

Just three quick ones, first one on the cycle. If we're talking about production cuts here, obviously suggests you have been surprised by the weakness in Europe. Curious to get a bit more color on your interpretation of that weakness, which seems to be very much led by Germany. Is it an inventory cycle there? Is there more worrying signs on some end markets, not just autos, that you guys are witnessing already? And what, in your mind, do we need to see happen for the whole situation to stabilize on the steel price? And my second question is regarding to TRQs. Obviously, quarters are going to reset over summer. What is your expectation of a potential risk on long product prices there, even they be included? And lastly, I know you haven't given a firm time line on the reduction of debt towards $7 billion. But whatever the time line was, with this new weakness in Europe, would you say that the -- whatever time line you had in mind is unchanged? Or is it a bit postponed now?

[Daniel Fairclough]

Thanks, Sylvain. So we'll start with your first question on -- really what's going on in the European market. I think you will note today that we have reduced our demand forecast for the year. At the start of the year, we were anticipating about a 1% or up to 1% growth in the market. We're now anticipating up to 1% contraction in European demand in 2019. So what's going on in terms of end markets, we can all see the weakness in automotive and that continues through the first half of this year. The better end market is construction. That continues to do quite well in Europe. And general industry -- general manufacturing is somewhere between those 2 markets. But from a flat steel perspective, overall demand outside of automotive just isn't strong enough to absorb the tonnes that would have been going to the automotive market, especially when you consider the additional tonnes coming into Europe through imports. And the numbers are quite striking. If you look at hot rolled coil imports so far this year, the run rate of imports is up about 1.5 million tonnes. And so imports are up about 16%. The major source of the additional imports really is Turkey. They account for the full uplift of HRC imports that the market has been facing in the first 3 months of this year. And so it is a combination of weaker than anticipated -- a slightly weaker than anticipated demand, but the additional supply effect of imports, which has weakened the overall supply/demand equilibrium, and that's why as I said in the opening remarks, that we really struggled in Europe to pass through the increase in raw material costs, which other markets like China have been much more successful in achieving. What needs to change? Obviously, it would be helpful if the demand environment were to improve. I think a lot of commentators out there are anticipating that things should improve in the second half of the year, led by autos. Clearly, if that comes to pass, that would help a supply/demand situation. If exports to Europe, i.e., imports into the European region, were to decline, that would also be helpful. If you look at the run rate of imports in the first 3 months relative to the quota levels for the next 3 quarters, it does suggest that the level of imports should come down. And somewhat that's dependent on your second question around what happens to the escalation of those quarters -- quotas in July. And, but then the third factor is domestic supply. And obviously, we've done our bit just this week by removing 3 million tonnes of capacity and production from the market. So ultimately, the market environment is going to be dictated by the supply/demand situation, and there are 3 different moving factors there. I think we can be hopeful on demand. We can expect imports to come down because of the quotas and obviously, as I say, we've done our bit from a domestic supply standpoint to improve the situation as much as we can. In terms of the tariff rate quotas, this is obviously -- it's not an automatic 5% increase in the quota levels, this is still something that needs to be determined. There is flexibility there, and there are going to be discussions between all of the various different stakeholders between the commission and the various different stakeholders as to what is deemed appropriate to escalate those quotas by in July. Clearly, the thrust of our argument today is focused on HRC, where given the demand environment, it's very difficult to generate any argument to suggest that the quota should be increased in July. So hopefully, the commission sees the sense and the logic of those arguments in their forthcoming discussions. And then the final question, just on the timing, I think obviously we haven't set out externally the anticipated pace at which we achieve on that debt target. I think clearly the weaker EBITDA environment is -- does have an impact on our free cash flow generation. But as we've talked about earlier in this call both myself and Genuíno are trying to highlight to you that there is a lot of benefit within the balance sheet from the working capital investment that we've made in the past couple of years, and that's our opportunity to deliver healthy levels of free cash flow this year, even though EBITDA is going to be weaker.So we will take the next question, please, from Phil at KeyBanc.

[Philip Ross Gibbs, Vice President and Equity Research Analyst]

Daniel, where do we stand on SR? And what are we looking for in terms of updates or signposts, either from you all or the market?

[Daniel Fairclough]

Yes. Thanks, Phil. It's pretty simple, so our resolution plan for SR has been approved by the NCLT. So what we are now waiting for is the final NCLAT ruling on how the funds are going to be disbursed between the financial and operating creditors. So this is not an issue for ArcelorMittal but rather an issue for the committee of creditors. Once the NCLAT makes its ruling, which is anticipated very soon, then we're ready to proceed. So we would expect to conclude the acquisition during the course of the second quarter or Q3 at the latest.

[Philip Ross Gibbs, Vice President and Equity Research Analyst]

Yes. Is there any further concessions or caveats that you may have to make depending on the ruling? Or do you feel like you've taken care of all of those issues?

[Daniel Fairclough]

Yes, that's the important point to take away here that our resolution plan has been approved. So this really is a discussion between the committee of creditors and the NCLT -- NCLAT about how the payment from ArcelorMittal is going to be distributed between the financial and operating creditors and there's no requirement or room for us to make further concessions.

[Philip Ross Gibbs, Vice President and Equity Research Analyst]

Okay. And then just a second question if I could on Calvert within the U.S. Are you all still pursuing an exemption there? Has anything come down in terms of a denial because we've seen obviously lots of denials in the last 2 to, call it, 6 weeks in the marketplace? But just was curious about the standing of that request.

[Daniel Fairclough]

So no, we don't have any problems there. We've got the source of slab coming from Brazil, and that's exempted from the tariffs. Okay. Sorry, I think I misinterpreted your question. So there's no progress update on the exemption request.We'll move to the next question, please, from Luke at JPMorgan.

[Luke Nelson, Research Analyst]

Just to follow up on the Ilva curtailments from earlier this week. Just trying to connect the decision from the site trip that 6 million tonnes was the key to getting your returns above the cost of capital and at that level, it was resilient to market conditions. Obviously, we can all see it's a tough market inside of Europe, raw materials, et cetera, et cetera. But given the potential through the cycle value creation from Ilva, were there not other assets that would have had less valuation impact? Or has something changed in the outlook for that asset? And then just to follow up more generally, do you expect other market players to follow your lead on curtailments? Or to what extent is this going to be a function of lost market share in HRC?

[Daniel Fairclough]

Great. Thanks. So I'll take those 2 questions. So maybe just starting with your question on what our peers might do or may or may not do and the impact on market share. The first important takeaway that you should have is that domestic producers in Europe have already lost market share, so imports are up and they've taken market share away from the domestic players. Our relative market share versus the rest of the domestic producers is unchanged, and it will not change. So we will continue to maintain our share of domestic production. The second point -- or your first question on our plans for Ilva and the strategic opportunity and the competitiveness of that asset going forwards, you're absolutely right that it's important for Ilva to achieve higher rates of production in order to achieve its full opportunity as a low-cost operator within the European system, and therefore, an asset with good levels of profitability equal to that of the rest of our European asset base. That hasn't changed. All of the structural opportunities and advantages that you saw and witnessed on the site visit, they're absolutely still in place. So this is a large-scale coastal Japanese-style facility, good access to raw materials. This is going to be a very competitive low-cost facility. But the reality is that it would be irresponsible of us to increase output from that facility into a market that can't take that demand. And so if we go ahead and increase the production at Taranto as per the previous plan, we're just going to be further exacerbating the situation. So the disciplined step for us to take is to sway that ramp-up down, take capacity outside -- take capacity out of the market from other areas of our portfolio and make sure that our level of production is appropriate to the level of demand. And as such a time as that demand environment improves, we're going to be ready to increase the level of output from Taranto and ramp it up to that 6 million tonne rate that we talked about on the site visit. Does that help?

[Luke Nelson, Research Analyst]

Yes. And a follow-up question, if I may, just on the green border adjustment, which you talked about again on the Monday announcement. Could you just give a bit more color on what exactly you would expect to hope for around that? And maybe the time frame that this could realistically be implemented in Europe.

[Daniel Fairclough]

Yes, thanks. So I think conceptually, it should be quite straightforward. So as we all know, there is a cost of producing carbon in Europe, which is a cost that the importers into Europe do not face. And so it's a simple concept and ask that at the border, there is an equalization so that the importers of steel into Europe face the same cost of carbon that the domestic producers in Europe also face. And in terms of the speed of implementation, that's not something that I'm in a position to talk about at this stage. I think there has been headway that we've been making as an industry, and it's not just steel that's asking for this. There are other industries such as aluminum which we're also pursuing the same objectives, a level-playing field of domestic tonnes -- or cost of carbon for domestic tonnes versus the imported tonne. And so from our perspective clearly, the sooner that such an instrument could be put in place, the better. But we'll have to wait for some more developments before we can comment on that more specifically.So we'll move to the next question, please, from Alan at Jefferies.

[Alan Henri Spence, Equity Analyst]

I've got a couple of questions on volumes, and the first is a bit of a follow up to what Ioannis was asking earlier. If we think about sequential volumes in Europe into Q2, and we take the 3 million tonnes annualized, that works out to about 500,000 tonnes for a 2-month period. Should we quite simply think about 500,000 tonnes lower quarter-on-quarter for shipments there? Or is there actually any real underlying demand that could leave us flat from a shipment basis quarter-on-quarter? And then secondly, in the mining division, I believe the guidance for the full year is still for flat this year-on-year but obviously with a bit of a weaker Q1. Will there be a significant step up in volumes and the flatlining thereafter? Or will it be a case of slowly improving production throughout the remainder of the year?

[Genuíno José Magalhães Christino, Head of Group Finance & VP]

Alan, let me take your question. So in terms of the volumes in Europe, so as I said earlier, I would expect -- we would expect the traditional -- or the seasonality in quarter 2. So traditionally, quarter 2 is our stronger quarter. We would expect that to be the case also this year. I also said that -- earlier that we continue to ramp up Ilva from the 4.5 million tonnes to 5 million tonnes. We will continue -- we will see an improvement in shipments coming from Ilva. So the way we think about this globally looking at the year as a whole, it's relatively simple. So you should take our -- you have our market share, so we're going to be adding Ilva. Of course, you have to discount the remedies and then you have the impact coming from the [ appliance 2 ] consumption that you have our forecast. Of course, you have to take into account that in the first half, we still have the shipments from remedies but that's, in a nutshell, how you should think about evolution of our shipments in Europe year-on-year. Clearly, we're going to be protecting or maintaining our market share vis-à-vis the domestic players.And in terms of the mining decision, so in quarter 1, it's typically we have some seasonality, so we should look on a year-on-year basis. You will see that our marketable shipments, it's stable marginally up, so that is just seasonal. And then we remain confident that overall the volumes for the year should be relatively stable.

[Alan Henri Spence, Equity Analyst]

What about if I think about that sequentially through the remainder of the year? Is that a step up to the flatline or is it slowly improving?

[Genuíno José Magalhães Christino, Head of Group Finance & VP]

So you will see an improvement in quarter 2 in line with the seasonality that you will see in prior years.

[Daniel Fairclough]

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

[Myles Allsop, Executive Director,Co]

Just following up on a couple of those. With the curtailments [ for 3 million tonnes ] do have any confidence that your competitors will follow? Do you think prices' margins are so thin for the marginal players that you will see others follow, and this could become a more meaningful move? Also the discussions around the quotas of the escalation, when are they taking place? Are they taking place now up until the 1st of July? Or could they take a bit longer and is kind of retrospect to adjustment to what imports can be in Europe?

[Daniel Fairclough]

Yes. So I think in terms of the discussions around the escalation and that's taking place in the coming weeks in order to make a decision as to what should and will happen in terms of any escalation on the 1st of July. I don't think we anticipate that it would drag into the third quarter and therefore require any sort of backdating. I think it will be resolved during this current quarter. In terms of our approach to managing capacity relative to demand in Europe. As I hopefully made the point previously, our intention here is not to allow our market share to go down. Our market share of domestic production in Europe will be maintained. The question really is the level of demand for our tonnes given the weak economic environment, which has been deteriorated further from a steel perspective due to the very high levels of imports. So the right decision for us is to take those tonnes out of the market. What makes sense for our peers, I can't comment on, but I reiterate that we won't be allowing our market share of domestic production to decline. Great. So thanks a lot, and we'll move to maybe the last question -- oh no, is this the last question? One more after this. So we'll move to the next question from Bastian at Deutsche bank.

[Bastian Synagowitz, Research Analyst]

I've got two questions on the remedy assets. Could you please update us on the performance of the remedy assets, have they been contributing every day in the first quarter? And now they're expected to be profitable in the second quarter? And then secondly, I understand that the $150 million impairment you took was related to emission credits, which you have now handed over to Liberty. Can you please explain again what has happened there? Is this a pure cash equivalent and basically this actually suggests that the EC has either been taking the view that the price was too high? Or have they basically been forcing you to strengthen the balance sheet of the assets financially before you hand them over to Liberty? And then maybe also related to that, can you maybe let us know how much of the cash-in we will get in the second quarter and then when the residual amount will be booked and whether this is conditional to any other moving parts.

[Daniel Fairclough]

I'll take the first question certainly on this topic. As you know, it's not our policy to talk about specific unit level performance and certainly, not in this circumstance, given the confidential nature of the process. In terms -- so I'll then hand over to Genuíno.

[Genuíno José Magalhães Christino, Head of Group Finance & VP]

Thanks for the question. So we are not yet in a position to speak openly about the exact terms of the transaction even though we know that there was a press release. But clearly, I mean the $150 million is just a change in the consideration, so the additional impairment that we are taking now for $150 million is leading to the fact that the consideration will be reduced vis-à-vis our expectations in the previous quarter.

[Bastian Synagowitz, Research Analyst]

Okay. But you can't give us exactly the number which we can expect then in the second quarter, I suspect?

[Genuíno José Magalhães Christino, Head of Group Finance & VP]

Well, substantially we should be receiving a substantial amount upfront, and there will be also a deferred consideration.

[Bastian Synagowitz, Research Analyst]

And can you at least tell us whether you expect the rest to be booked in this business year?

[Genuíno José Magalhães Christino, Head of Group Finance & VP]

I cannot comment right now, Bastian.

[Bastian Synagowitz, Research Analyst]

Okay, no problem then. Just one follow-up on Brazil. Do we see any constraints from iron ore, are your operations receiving enough raw material to keep up production?

[Genuíno José Magalhães Christino, Head of Group Finance & VP]

Yes, absolutely. So operations remain stable. We had a good performance in Brazil. And so far, we don't -- we have no shortage of materials in Brazil.

[Daniel Fairclough]

Great. Thanks, Bastian. So for our last question we're going to go back to Ioannis at Macquarie.

[Ioannis Masvoulas, Analyst]

Just a couple of follow-ups from me. The first again just on what Bastian was asking about. My understanding was that the -- when you took the impairment in Q4 for the remedy package, if book value was closer to $900 million, so the $150 million that you announced there is incremental. Is that right? Or am I missing something?

[Genuíno José Magalhães Christino, Head of Group Finance & VP]

So no, I think the numbers are the same. Maybe there was some confusion about dollars, euros. So in Q4, so the numbers were roughly $1.1 billion, so now you're taking on $150 million impairment, so we are down to $1 billion or slightly below $1 billion, and that's the math. And you can see that very clearly in our 20-F. So in terms of -- maybe I can elaborate a little bit more on the impairment -- on the reason of the impairment. I think this is public in any case. So as part of the negotiation, we were expecting to receive some excess future credits, which now following the final negotiations with the commission, will stay in the companies. So that's why this money that we were expecting to receive, we're not going to receive anymore. And as a result, you have this extra impairment now in quarter...

[Daniel Fairclough]

Quarter 1.

[Ioannis Masvoulas, Analyst]

That's clear. And just a quick follow-up for Daniel. You talked about maintaining your relative market share in the European flat steel segment. Are you referring just to the spot market or to the overall flat steel market? Because I guess taking 3 million tonnes out of the spot market where you are the biggest player probably has a pretty meaningful impact in terms of market share.

[Daniel Fairclough]

Yes. So before I answer that question, I just want to make an additional supplementary point to what Genuíno was just talking about. So he said that we will receive a substantial part of the consideration for the asset sale to Liberty upfront and that there will be an element deferred. But it's not long-term deferred, that would still be I think what you could consider as a -- in the short term, maybe not this calendar year, but it wouldn't be deferred over a long period of time. And so then to come to your market share question, I really don't want to embellish further on the point that I made previously. I think it's just clear that from our perspective, we will adjust our rates of production as we address the available demand. But it would not be at the expense of losing market share, whether that be at the spot market or of the total flat steel market, and here I'm talking about the share of domestic output or production, which is obviously the apparent steel consumption, less any change in imports.Great. So I don't think there are any further questions, so on behalf of Genuíno and myself, I'd like to thank everybody for joining us on the call today. I think we're due to see many of you in the coming days and weeks at the various events and conferences that we're going to be attending. So thank you very much for your continued interest.