ArcelorMittal S.A. (NYSE:MT) Q4 2023 Earnings Call Transcript

ArcelorMittal S.A. (NYSE:MT) Q4 2023 Earnings Call Transcript February 8, 2024

ArcelorMittal S.A. beats earnings expectations. Reported EPS is $1.18, expectations were $-1.47. ArcelorMittal S.A. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Daniel Fairclough: Good afternoon, everyone. This is Daniel Fairclough from the ArcelorMittal Investor Relations team. Thank you for joining this call to discuss our performance and progress in 2023. Present on the call today, we have Mr. Mittal, our Executive Chairman; our CEO, Aditya Mittal; and our CFO, Genuino Christino. Before we begin, I would like to mention a few housekeeping items. As usual, we will not be going through the results presentation that we published this morning on our website, but I do want to draw your attention to the disclaimers on Slide 2 of that presentation. We will be moving directly to the Q&A session following some opening remarks. So if you would like to ask a question, then please do press star one on your keypad to join the queue. With that, I will hand over to Mr. Mittal to begin the opening remarks.

Lakshmi Mittal: Thank you, Daniel, and welcome, everyone. We are working tirelessly to improve our safety performance and I’m convinced that we are on the right pathway. We must achieve our target of zero facilities — fatalities and serious injuries as quickly as possible. Against the backup of a challenging economic and geopolitical environment, our financial results in 2023 are commendable. This shows the benefits of the actions we have been taking in recent years to structurally improve our business. Destocking is showing signs of coming to an end, and we are predicting growth this year in our core markets. Interest rates have peaked and there is a confidence they will come down this year. Inflation has already started to ease and energy prices have retreated from record highs.

I look to ArcelorMittal’s future with great optimism. Our asset portfolio is lean and focused. Our recent acquisitions are performing strongly and the capital projects in which we have been investing will soon begin making a significant contribution to our regions. I want to thank this opportunity to thank all our employees for their efforts and contributions. Over to you, Aditya.

Aditya Mittal: Thank you, and welcome, everyone. I want to talk first about safety and then the subject of growth and capital returns. Beginning with safety. As we committed at our third quarter results, we have now commissioned the comprehensive third-party independent audit of our safety practices and governance. There are three work streams well underway. The first is the on-site audit of our fatality prevention standards, the second stream is reviewing our process safety management systems and the third stream is a review of all of our safety governance practices. I’m confident that dss will support us in achieving our target of zero fatalities and serious injuries. Everyone at ArcelorMittal is fully aligned behind this objective.

After allocating significant capital to organic growth over the past three years, ArcelorMittal is now on the cusp of a step change in profitability. This year, we will commission high value-added lines in Brazil, a new electric furnace in the U.S., new electrical steel capabilities in Europe and iron ore projects in Brazil and Liberia. These projects represent the bulk of our strategic growth envelope, which in total is expected to add $1.8 billion to our EBITDA. Today, our asset portfolio is derisked and well positioned to capture the medium to long-term demand that we forecast. Steel is a vital enabler of the transition to new energy systems. Steel will be the foundation on which supply chain security is built and steel is vital to improving the living standards of growing populations in large parts of the world.

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Q&A Session

We estimate that these megatrends will drive approximately 300 million tons of additional steel demand ex-China over the next decade with the biggest contributors being India, Brazil and North America. Our asset portfolio is well aligned to these growth vectors. Going forward, we will define our EBITDA, including the share of JV net income. What you should appreciate is that 60% of our EBITDA is driven by assets in North America, India and Brazil. And if you include our Canadian mining operations, it is almost 75%. We have excellent market positions, and we have attractive opportunities to continue to invest and capture the growth in demand. In North America, we are developing our plans to add another electric furnace at Calvert and double the scale of our asset in Texas.

In India, we’re currently doubling our capacity to 15 million tons with plans under development to eventually grow to 40 million tons. In Brazil, we have a fantastic primary steelmaking position with the opportunities to add finishing capacity as domestic demand grows. In terms of capital returns, the value-creating impact that our growth investment has on every ArcelorMittal share has been significantly increased by our share buyback programs. It really is a massive achievement that we have repurchased one third of our equity over the last three years. We still have a large buyback program outstanding, and with the positive outlook for cash flow generation, we’re well positioned to continue taking advantage of our discounted valuation.

The structural improvements we are making to profitability are feeding through into our base dividend. The change in our portfolio over the past 12 months supposes a further increase in the base dividend. Again, this should be seen as a clear statement on the progress we are making and the confidence we have in our outlook. I will now hand it over to Genuino to talk more about our financial performance.

Genuino Christino: Thank you, Aditya, and hello, everyone. There is much to be pleased about with our financial performance in 2023. We generated $7.6 billion EBITDA. This is $136 of EBITDA per tonne shipped, which compares very well with our history and highlights the inherent strength that we have built into our business in recent years, the quality of our asset base and the value we are deriving from our recent acquisitions and strategic growth projects. Net income was impacted by nonrecurring impacts related to the sale of our operations in Kazakhstan and the impairment of our investment in Italy. But adjusted for these factors, net income of just under $5 billion also compares very well with our history and illustrates not only the structural improvement to EBITDA, but also the growing contribution from our JVs and the impact of our lower cost balance sheet.

And then these impacts have been further geared by our consistent share buybacks. The value we are creating is clear. We are consistently delivering a solid return on our book value, which has grown to $66 per share. Moving to cash flow, 2023 was yet again another strong year. We generated $2.9 billion of free cash flow, and this is after spending $1.4 billion funding the growth projects that Aditya referred to in his remarks. Looking to the year ahead, we have seen an end to the destocking headwind that impacted markets in the second half of last year. As a result, steel spreads have improved in recent months, and we are forecasting apparent demand growth in all our core markets in 2024, which should support growth in our shipments. To conclude my remarks, I believe our performance continues to provide evidence that ArcelorMittal can deliver value through all aspects of the steel cycle.

We are consistently generating good levels of cash flow. We are investing in high-return projects, several of which will be concluded as we move through 2024. And to reiterate Aditya’s message, these projects will structurally increase our EBITDA by at least $1.8 billion. And finally, we are achieving all of this while consistently returning capital to our shareholders. With that, Daniel, I believe we can start the Q&A.

A – Daniel Fairclough: Great. Thank you, Genuino. [Operator Instructions] So we will take the first question, please, from Alain at Morgan Stanley.

Alain Gabriel: Good afternoon. And thank you for taking my questions. The first question is on your new accounting practices. So you decided to change your definition of EBITDA to better reflect growth in India, that I would argue, was overlooked by the market. Do you think that is enough to change the market’s perception around your India business? And then what was your share of net debt at AM/NS India in December 2023 as some skeptics would argue that you have decided to consolidate net income to keep your JV net debt out of side basically? That’s the first question.

Aditya Mittal: Sure. First of all, I would just say that overall, I don’t think it’s enough to highlight the value of our India joint venture and our other joint ventures. These joint ventures over the years have done incredibly well. They have market-leading positions. A lot of these joint ventures actually don’t have much debt. To give you a flavor, the actual combined EBITDA of these joint ventures is about $4.7 billion. So we are not reporting $4.7 billion. We are just including our share of net income. And as you know, net income is after financing costs, depreciation, taxes. So it really is the value that is accruing to ArcelorMittal. In terms of the future, I do believe that these joint ventures, especially India will continue to perform in Calvert.

We have talked about how we are doubling capacity in India by 2026 that our share of net income is about $400 million from that. Clearly, the EBITDA generation is much greater and then Calvert, we are commissioning our first EAF by end of the year, and we’re progressing on plans on setting up a second EAF at our Calvert facility. So the idea of including the results from our equity income into the EBITDA is to highlight, but I still believe that we need to do more in terms of really educating, demonstrating the true value of these joint ventures, which I think is a unique asset that ArcelorMittal owns.

Alain Gabriel: Thanks. And what about the net debt setting at the AM/NS India?

Aditya Mittal: So we have talked about it before. It’s about $4.5 billion.

Alain Gabriel: Okay. Thank you.

Aditya Mittal: As of 2023. And that’s post the infrastructure asset acquisition of $2.4 billion that we completed in 2022-2023. Yes.

Alain Gabriel: Great to hear. And my second question is on your M&A approach. You’ve done a few deals over the last couple of years, like CSP, HBI and so on, how much of your EBITDA today is generated by these assets? And what is the upside from here from the M&A that you have already done? And on the flip side, is there a case for a more radical approach towards assets that you own, like [indiscernible] or South Africa some or JVs that are noncore to better streamline and optimize our portfolio. Thank you.