Steel giant ArcelorMittal (MT) reported diluted net loss of 65 cents per share in the fourth quarter of 2011, much below the Zacks Consensus Estimate profit of 10 cents and last year’s loss of 51 cents per share.
Total steel shipments in the fourth quarter of 2011 were 20.6 million metric tonnes versus 21.1 million metric tonnes in the prior-year quarter.
In fiscal 2011, ArcelorMittal reported net earnings of $1.19 per share versus $1.72 in fiscal 2010.
Total steel shipments in fiscal 2011 increased by 0.9% year over year to 85.8 million metric tonnes.
Revenue
Quarterly revenues increased 8.5% year over year to $22.4 billion from $20.7 billion in the year-ago quarter and decreased 7.3% sequentially from $24.2 billion. Sales were down sequentially primarily due to lower average steel selling prices (-6.2%) and lower volume of shipments (-2.5%).
In fiscal 2011, revenue increased 20.4% year over year to $94.0 billion, primarily due to higher average steel selling prices (+17.7%) and marginally higher steel shipments (+0.9%).
Costs
Depreciation expense of $1.2 billion in fourth-quarter 2011 was flat versus the prior quarter and slightly higher than $1.1 billion in the year-ago quarter.
Impairment loss was $228 million versus $85 million in the previous quarter and $381 million in the year-ago quarter.
Restructuring charges were $219 million versus nil in the previous quarter and the prior- year quarter.
Operating income in fourth-quarter 2011 was $47 million compared with $1.2 billion in the previous quarter and $0.4 billion in the year-ago quarter. The drop in operating income resulted from the weaker market environment particularly in Europe, with lower steel selling prices in general for the quarter, as well as impairment and restructuring charges.
However, the operating performance in the quarter reflected a positive impact of $163 million of dynamic delta hedge (DDH) income recognized during the quarter and a net gain of $93 million recorded on the sale of carbon dioxide credits, the proceeds of which will be re-invested in energy saving projects.
Foreign exchange and other net financing costs were $26 million in the fourth quarter of 2011, flat sequentially. Foreign exchange and other net financing gains were $494 million in the prior-year quarter.
Segment Review
As from January 1, 2011, ArcelorMittal reported the results of its mining operations as a separate operating segment. The segmental change has been undertaken in order to reflect changes in the company’s approach to manage its mining operations, as required by IFRS.
Flat Carbon Americas:Sales in the segment were $5.0 billion in the fourth quarter of 2011, down 8.5% sequentially, primarily due to lower average steel selling prices (-4.6%) and lower steel shipments volumes.
Flat Carbon Americas crude steel production amounted to 6.0 million tons in the quarter, up 2.4% sequentially, due in part to normalized North American production following downtime during the third quarter of 2011, offset by lower production primarily in South America operations.
Shipments were 5.5 million tons, down 4.4% sequentially. Shipments declined in all operations with the exception of the US operations.
EBITDA in the fourth quarter decreased by 43.6% to $237 million from $420 million in the previous quarter, primarily driven by price cost decrease in North America on account of lower average steel selling prices and steel shipment volumes.
Flat Carbon Europe: Sales in the segment were $7.0 billion in the quarter, down 9.0% sequentially, primarily due to lower steel shipment volumes and lower average steel selling prices (-6.6%) impacted by base prices and currency effects.
Flat Carbon Europe crude steel production amounted to 6.6 million tons in the quarter, down 10.4% sequentially, reflecting weaker market sentiment in Europe and the reduction of inventories accumulated in the third quarter.
Shipments were 6.2 million tons, down 3.1% sequentially, due to weaker market conditions and strong de-stocking activity.
EBITDA in the fourth quarter plunged 92.9% to $26 million from $367 million in the previous quarter, primarily driven by lower steel shipment volumes and significant price cost squeeze.
Segment operating performance in the quarter was negatively impacted by impairment charges of $56 million relating to various idled facilities and restructuring costs totaling $143 million. These costs were associated with the implementation of the Asset Optimization Plan, primarily relating to Spanish entities.
Long Carbon Americas and Europe: Sales in the segment were $5.9 billion in the quarter, down 11.1% sequentially, primarily due to lower steel shipments and lower average selling prices (-6.3%).
Long Carbon Americas and Europe crude steel production reached 5.5 million tonnes during fourth-quarter 2011, down 2.4% sequentially. Production was lower in the Americas primarily due to drawdown of inventory, mainly in Brazil and overall weaker market demand.
Shipments were 5.8 million tons, down 2.3% sequentially, particularly due to the summer holiday period in Brazil and lower demand in North America and Europe.
EBITDA was $338 million, down 22.8% sequentially due to lower volumes and lower average steel selling prices, primarily reflecting currency effects.
Operating result in the quarter was negatively impacted by impairment charges of $160 million of which $151 million was related to the extended idling of the ArcelorMittal Madrid electric arc furnace.
Asia Africa and CIS (AACIS):Sales in this segment increased 4.4% sequentially to $2.7 billion, primarily due to marginally higher steel shipments, offset by lower average steel selling prices.
AACIS segment’s crude steel production was 3.6 million tons, up 2.5% sequentially, primarily due to improved production in Ukrainian operations.
Shipments were 3.1 million tons, up 2.0% sequentially.
EBITDA during the quarter was $238 million, down 16.2% sequentially, primarily due to lower average selling prices, partially offset by a slight steel shipment volume increase.
Distribution Solutions:Sales in the segment were $4.9 billion, flat sequentially, primarily due to higher steel shipment volumes (+7.6%), partly offset by lower average steel selling prices (-6.1%).
Shipments in the segment were 5.0 million tons, up 7.6% sequentially.
EBITDA loss was $19 million versus EBITDA of $48 million in the previous quarter, primarily due to reduction in price cost.
Mining
Iron ore production (excluding supplies under strategic long-term contracts) increased 7.2% sequentially to 15.1 million tonnes in fourth-quarter 2011, primarily due to increased production from Liberia and Mexico.
Coal production in the quarter increased to 2.2 million tonnes versus 2.1 million tonnes in the previous quarter.
EBITDA attributable to the Mining segment in the fourth quarter was $779 million, down 7.5% sequentially, primarily due to lower average selling prices following the change to the seaborne benchmark pricing system impacting a substantial proportion of marketable volumes.
Discontinued Operations
Discontinued operations (i.e. the Company’s stainless steel operations, which were spun-off into a separate company, Aperam) in fiscal 2011 amounted to a gain of $461 million versus fiscal 2010 loss of $330 million. The results include $42 million of the post-tax net results contributed by the stainless steel operations prior to their spin-off. The balance of $419 million represents a one-time non-cash gain from the recognition through the income statement of gains/losses relating to the de-merged assets previously held in equity.
Balance Sheet
At the end of December 31, 2011, cash and cash equivalents including restricted and short-term investments were $3.9 billion versus $2.8 billion at the end of September 30, 2011.
During the quarter, net debt decreased by $2.4 billion to $22.5 billion compared with $24.9 billion as of September 30, 2011.
Cash Flow
Net cash used in operating activities was $2.9 billion in the reported quarter versus $0.8 billion in the previous quarter. The cash flow used in operating activities for the fourth quarter of 2011 included a $1.8 billion investment in operating working capital compared with $1.0 billion investment in the third quarter of 2011.
Capital expenditures increased to $1.5 billion in the quarter versus $1.3 billion in the previous quarter.
During the fourth quarter, the company repaid loans for a net amount of $816 million primarily related to a reduction in commercial paper and bank loans. Additionally, the company also paid dividends amounting to $289 million versus $309 million in the third quarter of 2011. Dividends paid during the fourth quarter of 2011 included $7 million paid to minority shareholders.
Outlook
The company’s EBITDA in the first half of 2012 is expected to be lower than first half of 2011, but above second half of 2011, supported by continued progress on management gains and asset optimization plans.
ArcelorMittal expects steel shipments in the first half of 2012 to be at a similar level to the first half of 2011. Mining production is expected to be higher than in the first half of 2011, in line with its plans to increase iron ore and coal production by approximately 10% in full-year 2012.
In light of recent market uncertainty primarily due to the European debt crisis and its potential global impact, the company will continue to calibrate its steel growth projects for evolving demand situations. Moreover, at the same time, the company is focusing on core growth capital expenditure in its mining business given its generally more attractive return profiles. This has resulted in postponement of some planned steel investments. Accordingly, full-year 2012 capital expenditure is expected to be approximately $4-4.5 billion.
A further reduction in net debt is anticipated due to a continued focus on working capital management and non-core asset divestments, as per the company’s stated objective to retain its investment grade credit rating.
Major competitors of ArcelorMittal are are United States Steel Corp. (X) and Tata Steel Limited.
We maintain our Neutral recommendation on ArcelorMittal with a Zacks #5 Rank (Strong Sell) on the stock.
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