Earnings Review: ArcelorMittal (NYSE: MT)

On Friday, Shares of ArcelorMittal (NYSE: MT) gained 0.28% to $21.75. The stock grabbed the investor’s attention and traded 2,657,579 shares as compared to its average daily volume of 2.88M shares. The stock’s institutional ownership stands at 3.20%.

ArcelorMittal (MT (New York, Amsterdam, Paris, Luxembourg), MTS (Madrid)), the world’s leading integrated steel and mining company, recently declared results for the three-month and twelve-month periods ended December 31, 2018.

Analysis of results for the twelve months ended December 31, 2018 as compared to results for the twelve months ended December 31, 2017:

Total steel shipments for 12M 2018 were 83.90M metric tonnes representing a decrease of 1.6% as contrast to 12M 2017, mainly because of lower steel shipments in ACIS (-10.3%, counting unplanned maintenance in Ukraine and operational issues in Kazakhstan/Ukraine) offset in part by improvement in Brazil (+5.8%, counting the impact of the Votorantim acquisition), NAFTA (+1.0%) and Europe (+0.2%, counting the impact from the Ilva acquisition offset by impact of a flood in Asturias (Spain), power outage in Fos (France) and slower ramp-up after blast furnace reline in Poland).

Total steel shipments for 12M 2018 excluding the impact of Votorantim acquisition (in 2Q 2018) and Ilva acquisition (in 4Q 2018) were 82.50M metric tonnes representing a decrease of 3.0% as contrast to 12M 2017, driven by lower steel shipments in ACIS (-10.3%) and Europe (-1.2%), offset in part by improvement in Brazil (+0.5%) and NAFTA (+1.0%).

Sales for 12M 2018 increased by 10.7% to $76.00B as contrast with $68.70B for 12M 2017, mainly because of higher average steel selling prices (+13.5%) offset in part by lower steel shipments (-1.6%).

Depreciation of $2.80B for 12M 2018, stable as contrast with 12M 2017 (marginally below 12M 2018 guidance of $2.90B).

Impairment charges net of purchase gains for 12M 2018 were $8100M and include $0.70B mainly related to Ilva and the remedy asset sales for the Ilva acquisition and the agreed remedy package required for the approval of the Votorantim acquisition. Impairment charges for 12M 2017 were $206.0M in South Africa.

Exceptional items for 12M 2018 were charges of $117.0M mainly consisting of $113.0M in charges related to a blast furnace dismantling in Florange (France), $60.0M in charges related to the new collective labour agreement in the US (counting a signing bonus), a $146.0M provision taken in 1Q 2018 in respect of a litigation case that was paid in 3Q 2018offset in part by PIS/Cofins tax credits related to prior periods recognized in Brazil of $202.0M. Exceptional charges for 12M 2017 were nil.

Operating income for 12M 2018 was higher at $6.50B as contrast to $5.40B in 12M 2017 mainly driven by improved operating conditions (positive price-cost effect in the steel segments) offset in part by the impact of lower market priced iron ore prices. Operating results for 12M 2018 and 12M 2017 were influenced by impairment charges net of purchase gains and exceptional items as discussed above.

Income from associates, joint ventures and other investments for 12M 2018 were $652.0M as contrast to $448.0M for 12M 2017. Income in 12M 2018 included dividend income from Erdemir of $87.0M as contrast to $45.0M in 12M 2017. Income in 12M 2017 included a gain from disposal of ArcelorMittal USA’s 21% stake in the Empire Iron Mining Partnership ($133.0M), offset in part by a loss on dilution of the Company’s stake in China Oriental ($44.0M) and the recycling of cumulative foreign exchange translation losses incurred following the disposal of the 50% stake in Kalagadi ($187.0M).

Net interest expense was lower at $615.0M for 12M 2018, as contrast to $823.0M for 12M 2017, driven by debt repayment and lower cost of debt. The Company anticipates full year 2019 net interest expense of about $0.60B.

Foreign exchange and other net financing losses were $1.60B for 12M 2018 as contrast to losses of $52.0M for 12M 2017. 12M 2018 includes foreign exchange losses of $235.0M (as contrast to foreign exchange gains of $546.0M in 12M 2017) and includes non-cash mark-to-market losses related to the mandatory convertible bond call option totaling $0.50B (as contrast to gains of $0.80B in 12M 2017). These also include $0.10B premium expense on the early redemption of bonds in 12M 2018 (as contrast to $0.40B in 12M 2017). In addition, 12M 2017 included mark-to-market losses on a derivative regarding a pellet purchase agreement in the US of $0.30B.

ArcelorMittal recorded an income tax benefit of $349.0M for the 12M 2018 as contrast to income tax expense of $432.0M for 12M 2017. The current income tax expense of $928.0M for 12M 2018 as contrast to $583.0M for 12M 2017 is mainly driven by improved results in a number of countries. The deferred tax benefit of $1,277.0M in 12M 2018 as contrast with a deferred tax benefit of $151.0M for 12M 2017 includes $1.40B deferred tax benefit recorded mainly in Luxembourg, because of the expectation of higher future profits. For the 12M 2017 a deferred tax asset of $0.30B was recorded in Luxembourg.

Non-controlling interest’s income was $181.0M for 12M 2018 as contrast to $7.0M for 12M 2017. The difference is mainly because of the improved operating performance of ArcelorMittal South Africa. In addition, 12M 2017 was also influenced by impairment that was proportionately allocated to minority shareholders of ArcelorMittal South Africa.

ArcelorMittal’s net income for 12M 2018 was $5.10B, or $5.07 basic earnings per share, as contrast to a net income in 12M 2017 of $4.60B, or $4.48 basic earnings per share.

Analysis of results for 4Q 2018 as compared to 3Q 2018 and 4Q 2017:

Sales in 4Q 2018 were $18.30B as contrast to $18.50B for 3Q 2018 and $17.70B for 4Q 2017. Sales in 4Q 2018 were 1.0% lower as contrast to 3Q 2018 mainly because of lower steel shipments (-1.5%), lower average steel selling prices (-1.4%), offset in part by higher market-priced iron ore shipments (+16.8%). Sales in 4Q 2018 were 3.5% higher as contrast to 4Q 2017 mainly because of higher average steel selling prices (+8.2%) and higher market-priced iron ore shipments (+18.2%), offset in part by lower steel shipments (-3.6%).

Depreciation for 4Q 2018 was higher at $723.0M as contrast to $653.0M for 3Q 2018 (mainly because of the Ilva acquisition) and lower than $747.0M in 4Q 2017.

Impairment charges net of purchase gains for 4Q 2018 and 3Q 2018 were $215.0M and $509.0M, respectively, and mainly relate to Ilva and the remedy asset sales for the Ilva acquisition. Impairment charges for 4Q 2017 of $160.0M related to ArcelorMittal South Africa.

Exceptional net gains for 4Q 2018 were $29.0M mainly related to $202.0M for PIS/Cofins tax credits related to prior periods recognized in Brazil, offset in part by $113.0M in charges related to a blast furnace dismantling in Florange (France), and $60.0M related to the new collective labour agreement in the US (counting a signing bonus). Exceptional items for 3Q 2018 and 4Q 2017 were nil.

Operating income for 4Q 2018 was $1.00B as contrast to $1.60B in 3Q 2018 and $1.20B in 4Q 2017. Operating results for 4Q 2018, 3Q 2018 and 4Q 2017 were influenced by impairment charges net of purchase gains and exceptional charges as discussed above.

Income from associates, joint ventures and other investments for 4Q 2018 was $227.0M as contrast to $183.0M for 3Q 2018 and $125.0M for 4Q 2017. 4Q 2018 was positively influenced by $0.10B in currency translation gains following the disposal of ArcelorMittal’s investment in MacSteel (South Africa), offset in part by reduced results from our Chinese investee.

Net interest expense in 4Q 2018 was $140.0M as contrast to $152.0M in 3Q 2018 and lower than $188.0M in 4Q 2017, mainly because of debt repayments and lower cost of debt.

Foreign exchange and other net financing losses in 4Q 2018 were $556.0M as contrast to $475.0M for 3Q 2018 and $261.0M in 4Q 2017. Foreign exchange loss for 4Q 2018 was $7.0M as contrast to a gain of $9.0M in 3Q 2018 and a gain of $83.0M in 4Q 20178. 4Q 2018 includes non-cash mark-to-market losses of $443.0M related to the mandatory convertible bonds call option as contrast to losses of $114.0M in 3Q 2018 and non-cash mark-to-market gains of $174.0M in 4Q 2017. 3Q 2018 also included premium expenses on the early redemption of bonds of $0.10B. In addition, 4Q 2017 included mark-to-market losses on a derivative regardinga pellet purchase agreement in the US of $0.30B.

ArcelorMittal recorded an income tax benefit of $711.0M for 4Q 2018 as contrast to an income tax expense of $178.0M for 3Q 2018 and an income tax benefit of $119.0M in 4Q 2017. The income tax benefit for 4Q 2018 includes a $0.80B deferred tax benefit recorded mainly in Luxembourg resulting from the expectation of higher future profits.

Non-controlling interests income was $91.0M for 4Q 2018 as contrast to $46.0M for 3Q 2018. Non-controlling interests’ income increased in 4Q 2018 mainly in ArcelorMittal South Africa where the result was positively influenced by a currency translation gain from the disposal of MacSteel.

ArcelorMittal recorded a net income for 4Q 2018 of $1.20B, or $1.18 basic earnings per share, as contrast to a net income for 3Q 2018 of $0.90B, or $0.89 basic earnings per share, and a net income for 4Q 2017 of $1.00B, or $1.02 basic earnings per share.

Liquidity and Capital Resources:

For 4Q 2018 net cash offered by operating activities was $2,170.0M as contrast to $634.0M in 3Q 2018 and $2,885.0M in 4Q 2017. The higher net cash offered by operating activities during 4Q 2018 reflects in part a working capital release of $430.0M (mostly on account of lower steel shipment volumes and prices in a weaker demand environment, partially offset by higher inventory) as contrast to a working capital investment of $1,713.0M in 3Q 2018. The 12M 2018 working capital investment of $4.40B mostly reflects the price effect of improved market conditions practiced (which influenced working capital through higher inventories and higher trade receivables) during 12M 2018. The 12M 2017 working capital investment was $1.90B.

Net cash used in investing activities during 4Q 2018 was $1,926.0M as contrast to $601.0M during 3Q 2018 and $931.0M in 4Q 2017. Capital expenditures increased to $1,156.0M in 4Q 2018 as contrast to $781.0M in 3Q 2018 and $1,036.0M in 4Q 2017. FY 2018 capital expenditure was $3.30B as contrast to $2.80B in FY 2017 (as compared to FY 2018 initial guidance of $3.80B). FY 2018 capex was lower than expected because of delayed spending as well as lower spend at Ilva because of the acquisition only being accomplished in November 2018. Capex in 2019 is expected to increase to $4.30B reflecting carry over from underspend in 2018, the impact of Ilva and the continued projected high return investments in Mexico and Brazil and other planned projects (mostly cost optimization).

Cash used in other investing activities in 4Q 2018 of $770.0M mainly includes $1.00B investment for the Uttam Galva and KSS Petron debts (India), quarterly lease payment for Ilva acquisition ($52.0M) offset in part by MacSteel (South Africa) disposal proceeds ($220.0M). Cash offered by other investing activities in 3Q 2018 of $180.0M mainly includes cash received from Enerfos JV and the second instalment of disposal proceeds from ArcelorMittal USA’s 21% stake in the Empire Iron Mining Partnership ($44.0M). Cash offered by other investing activities in 4Q 2017 of $105.0M mainly included tangible asset disposals and disposal proceeds of US long products (Georgetown).

Net cash used in financing activities in 4Q 2018 was $411.0M as contrast to $597.0M and $2,167.0M in 3Q 2018 and 4Q 2017, respectively. In 4Q 2018, $406.0M mainly includes repayment of short term facilities. In 3Q 2018, $543.0M mainly include payments regarding bond repurchases following cash tender offers ($0.60B). Net cash used in financing activities in 4Q 2017 includes $1.20B of bonds repurchased in October following cash tender offers, $0.60B (€540.0M) repayment at maturity of the euro 4.625% Notes due November 17, 2017, $644.0M used to early redeem in December the 6.125% Notes due June 1, 2018 and partial repayment of borrowings offset in part by a $0.40B (€300.0M) Schuldschein loan in October and $0.60B (€500.0M) euro 0.95% bond due January 17, 2023 issued in December.

During 4Q 2018, the Company paid dividends of $32.0M mainly to minority shareholders in Bekaert (Brazil). During 3Q 2018, the Company paid dividends of $37.0M mainly to minority shareholders in ArcelorMittal Mines Canada. During 4Q 2017, the Company paid dividends of $21.0M mainly to minority shareholders in Bekaert (Brazil).

As of December 31, 2018, the Company’s cash and cash equivalents amounted to $2.40B as contrast to $2.50B at September 30, 2018 and $2.80B at December 31, 2017.

Gross debt reduced to $12.60B as of December 31, 2018, as contrast to $13.00B at September 30, 2018 and $12.90B in December 31, 2017.

As of December 31, 2018, net debt declined to $10.20B as contrast to $10.50B as of September 30, 2018, mostly because of positive free cashflow of $1.00B (counting working capital release ($0.40B)), disposal proceeds from MacSteel sale ($0.20B) and foreign exchange gain ($0.10B), offset in part by the investment for the Uttam Galva and KSS Petron debts ($1.00B). Net debt as of December 31, 2017 was $10.10B.

As of December 31, 2018, the Company had liquidity of $7.90B, consisting of cash and cash equivalents of $2.40B and $5.50B of available credit lines. The $5.50B credit facility contains a financial covenant not to exceed 4.25x Net debt / EBITDA (as defined in the facility). As of December 31, 2018, the average debt maturity was 4.0 years.

MT has a market value of $22.52B while its EPS was booked as $5.05 in the last 12 months. The stock has 1.04B shares outstanding. Beta value of the company was 2.47; beta is used to measure riskiness of the security.



Winfred Marion

Winfred Marion

I am Winfred Marion and I’m passionate about business and finance news with over 4 years in the industry starting as a writer working my way up into senior positions. I am the driving force behind Digital Wall with a vision to broaden the company’s readership throughout 2016. I am an editor and reporter of “Basic Materials” category. Address: 2614 Kincheloe Road, Tigard, OR 97223, USA Phone: (+1) 503-443-0752 Email: winfred.marion@yourdigitalwall.com