(vervolg)
ArcelorMittal has a liquid listing in the US, Europeans may consider the Amsterdam or Madrid listings.
The financial results remain strong
In the third quarter, Arcelor’s total crude steel production remained strong at the usual run-rate of just over 23 million tonnes per quarter, but there was an interesting slowdown in the total amount of steel that got shipped. Whereas the company shipped 21.8 million tonnes of a 23.2Mt production in Q2, the production in Q3 increased slightly to 23.3 million tonnes, but the shipment volumes decreased by 1.3 million tonnes to 20.5 million tonnes.
Source: company presentation
On top of that, the generated EBITDA per tonne of steel also decreased by approximately 7% to $119/t. That’s the main reason why ArcelorMittal’s consolidated EBITDA decreased from $3.07B to $2.73B on a total revenue of $18.5B. The operating income came in at $1.57B for an operating margin of 8.5%. That’s indeed pretty low, but as it includes a $509M impairment charge related to the Ilva plant, there was a non-recurring event with a substantial impact on the operating margin. Excluding this impairment charge, the operating margin would have remained relatively stable at 11.2% (sure, it’s still lower than the 11.8% operating margin in the second quarter, but the margin decrease wouldn’t be as spectacular as reported).
Source: financial results
After paying the interest expenses and taxes, the net income attributable to the ArcelorMittal shareholders was approximately $899M or $0.89/share. Please note this already includes a $475M FX loss, and this brings the total FX loss in the first nine months of the year to $1.04B. This means we should keep in mind the reported net income attributable to the ArcelorMittal shareholders of $3.96B in the first nine months of the year is actually understating the FX-neutral position and performance of ArcelorMittal. The EPS of $3.89 in the first nine months would have been substantially higher at approximately $4.70/share.
So, great, ArcelorMittal has been putting in an excellent performance based on the income statement, but if it’s really serious about reducing its net debt to just $6B, it needs to convert paper profits into hard dollars to repay the debt (and/or build its cash position).
Source: financial statements
In the third quarter, Arcelor’s operating cash flow was approximately $634M, but this includes a $1.7B investment in the working capital position as well as a $451M cash inflow from ‘other operating activities.’ If I would isolate both positions from the cash-flow overview, the adjusted operating cash flow would increase to $1.9B. The total capex was just $781M (higher than the depreciation rate), resulting in a net free cash flow of $1.1B for the quarter. For the entire first nine months of the year, the adjusted operating cash flow was $6.07B, of which $2.15B was spent on capital expenditures leaving approximately $3.9B on the table in free cash flow. Again, this excludes the changes in the company’s working capital to get a better idea of how the underlying business is performing.
As the world economy appears to be slowing down, we will need to keep an eye on the inventory levels and how much ‘cash’ is tied up in receivables. Approximately $1.6B of the working capital investment was due to Arcelor reducing its amount of payables from $13.4B as of the end of last year compared to the end of the third quarter. Additionally, another $800M of the WC investment was related to prepaid expenses. So we shouldn’t be alarmed by the $4.8B working capital investment as roughly half of it was due to Arcelor paying its suppliers.
As expected, ArcelorMittal is now a dividend-paying entity again
ArcelorMittal paid its first dividend in years in May, and has also repurchased $200M worth of stock. Granted, this isn’t an impressive move, but if things continue to go well for Arcelor, it will step up its efforts to reward its shareholders.
ArcelorMittal is now aiming to reduce the net debt to $6B as a first priority and once this happens, it will spend more cash on paying dividends and buying back stock. And that could be an interesting milestone as I can’t see Arcelor suddenly spending its entire free cash flow on dividends. So I would expect a substantial share repurchase program to be initiated once the debt level has been reached.
Source: company presentation
And that’s another reason why it could make sense to have another close look at Arcelor. If the cash flows remain robust (sure, Arcelor will feel the impact of trade wars but should remain free-cash-flow positive), a buyback program at a relatively low share price could create quite a bit of value for its shareholders in the longer term. Additionally, once the $6B target will have been reached, the dividend payments will be linked to the free cash flow result.
As of the end of September, the net debt position of Arcelor was approximately $10.5B, so we’re still not even close to the $6B net debt mark. That being said, keep in mind Arcelor has invested almost $5B in its working capital position in the first nine months of this year, and unwinding a part of this investment (selling inventories, cashing in outstanding invoices) could quickly reduce the net debt.
Investment thesis
Unless the world economy goes down the drain, I think ArcelorMittal has a good shot at meeting its own $6B debt hurdle by the end of next year which would pave the way for dividend hikes and a substantial share buyback program.
On an adjusted basis (excluding working capital changes and other operating activities), ArcelorMittal should be able to generate $5B in free cash flow this year (this assumes a $1.1B contribution in the current quarter) which is 4.4B EUR using a EUR/USD exchange rate of 1.14. Divided over 1.02B shares, the FCF/share would be approximately 4.31 EUR/share and this compares very favorably to the current share price on Euronext Amsterdam as Arcelor is trading at just over 20 EUR per share.
Of course, should the world economy fall off a cliff, ArcelorMittal will be one of the companies that will be hit the hardest. Taking a small position could make sense, but I definitely wouldn’t go all-in yet, no matter how cheap ArcelorMittal appears to be.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.