ArcelorMittal (MT) reported Q1 earnings on Thursday, May 10th, and the report was very much a mixed affair. Bears and bulls will both find support for their views, and those on the sidelines will find it easy to stay there until the global macroeconomic situation becomes clearer.
On the headline numbers, the company had mixed results. EPS was $.01, a miss of $.21 from the latest consensus figure of $.22. Revenue of $22.7B beat estimates by $300M. EBITDA, which some analysts and reports imply is the key figure, was $1.972B, a beat of $264M. Free cash flow was negative for the quarter, due mainly to working capital investments and net financial expenses. Moving forward, the company affirmed its EBITDA guidance on a half-year basis, which is for 1H2012 to beat 2H2011 numbers on EBITDA basis.
These numbers don't paint an extremely clear picture. A deeper look at key issues doesn't erase the uncertainty surrounding ArcelorMittal's near-term outlook, but it can help clarify a few things on the company:
Despite holding a large amount of debt and dedicating itself to reducing the debt and maintaining its investment-grade bond ratings, ArcelorMittal increased its net debt by about $1.1B. The negative cash flow and the depreciation of the euro over the quarter were the two main causes in that net debt increase.
On the other hand, the company had already hit its mid-year 2012 net debt target of $22.5B entering the quarter, before increasing it these past three months. CFO Aditya Mittal affirmed on the call that the company expected to again hit that target by the deadline of the end of the second quarter.
He also stated that the company expects to drop debt below that number should it continue to divest itself of non-core assets, including joint ventures. On the same day it reported earnings, ArcelorMittal announced the divesture of its stake in Enovos International, a Luxembourg-based Northern Europe energy distributor, an example of this divestment policy.
Considering ArcelorMittal is the result of a huge merger in 2006 and has a long history of mergers and acquisitions, divestiture and refocus on core assets seems like a good strategy for the company's health as a whole. If it helps the company reduce net debt, all the better.
While not stated explicitly, ArcelorMittal reduced its outlook for global steel apparent consumption growth in 2012. The company's most recent forecast from the Q1 earnings call is for 4-4.5% growth, a decrease of a half-percentage point from what it had forecast at the year-end earnings call in February.
Skeptics will see this lowering, especially with regards to Europe - the company forecast 1-2% decrease in European apparent steel consumption, vs. a more or less flat forecast in February - as proof that the global recovery is still on shaky ground and that ArcelorMittal is not worth holding. The forecast is more nuanced, however, and while it lowers the outlook for rest of world steel consumption by .7-1.2%, it raises the outlook in North America by 1-1.5% (to 6.5-7%) and affirms the outlook of 5% growth in steel consumption in China. The strength in the U.S. is, interestingly enough, driven in part by the natural gas boom, which leads to a subsequent rise in steel demand as companies seek to build pipelines and drilling facilities.
The conference call offered additional color on this forecast, as management affirmed a view that Europe would improve in the second half of 2012 compared to the year prior, and also mentioned that Brazil should see an uptick in demand related to World Cup and Olympics 2016 infrastructure building.
On the overall, the outlook for a return to form for ArcelorMittal appears to be slightly delayed more than it is overturned.
2Q EBITDA guidance
As mentioned, ArcelorMittal affirmed EBITDA guidance as ahead of 2H2011. This implies that the firm should earn better than $2.15B in EBITDA for Q2. The company also foretold improved profitability in every aspect of the steel business, and a return to strong growth for its mining business, which had been slowed in the first quarter due to seasonal issues (i.e. the Arctic regions freezing over for Canadian mines).
This marks a step in the right direction, in that the company is hitting its marks and improving both EBITDA and profitability. It should be noted that, until analysts adjust their estimates at least, the second quarter is estimated by analysts to be ArcelorMittal's strongest quarter of the year for earnings. So even if the company hits its marks, it might have a high bar to clear from the analyst community.
CEO Lakshmi Mittal fielded a question about the company's dividend policy. He reminded listeners that MT halved the dividend in 2009 and then stated that the board affirmed the yearly dividend policy of $.75 for the year. After a pause, he then said that he believed that should continue.
While it sounded awkward on the call, the statement suggests that MT realizes that maintaining its dividend will keep shareholders relatively satiated while the company works through this difficult macroeconomic period. The dividend date is scheduled to be announced on Monday, with an ex-dividend date scheduled for Wednesday, May 23rd. At current price levels, the yield is about 4.6%.
If you're not a believer of ArcelorMittal, there was nothing in the first quarter earnings to change your mind. The world economy is struggling along, Europe is most likely to hit a mild recession, China is heading for a soft landing but slowing nevertheless, and U.S. growth and demand isn't enough to balance out everything else. The company missed earnings, added debt, and had negative free cash flow. It continues to idle plants in Europe to reduce supply in hopes of helping prices. These are not the indications of a thriving company.
There were good things in this report, even if they were little ones. The company is on track with EBITDA and net debt reduction. Steel growth isn't quite as high as the company had forecast, but it is still there. ArcelorMittal expects increased profitability, maintained steel shipments, continued investment and growth of its mining business, and a consistent dividend. The company is pruning its assets and positioning itself to survive a slow period and thrive in the return to growth, whenever it comes.
I view the earnings report as mixed with a mildly negative tilt. I maintain my view that this is a good long-term pick for investors who expect the world not to collapse in 2012 and who like collecting a 4-5% dividend while waiting for that turnaround. I have a cost basis of 16.97 and look to add 50% to my holdings at around 15, if and when the stock gets there. The chart may be jagged and the ride bumpy, but a global leader in steel that isn't going anywhere, ArcelorMittal looks to be headed in the right direction, and just needs the rest of Europe to catch up.