How Much Could Weak Chinese Demand And Operational Disruptions Affect ArcelorMittal’s Q1 Results?

ArcelorMittal (NYSE: MT) is set to release its Q1 2019 results on May 9, 2019, followed by a conference call with analysts. The company’s revenue trended lower in the second half of 2018, mainly driven by lower shipments in certain regions due to operational disruptions, along with hyperinflation accounting in Argentina, and devaluation of the South African Rand affecting steel price realization in those regions.  On a year-on-year basis, revenue has increased in all four quarters of 2018. However, we expect this trend to reverse as MT’s total revenue is projected to decline by 1%-2% (y-o-y) in Q1 2019, led by lower price realization as Chinese demand is expected to slow down in 2019, coupled with lower shipments to Kazakhstan.

We have summarized the key expectations from the announcement in our interactive dashboard – How is ArcelorMittal expected to fare in Q1 2019 and what is the full year outlook? In addition, here is more Materials data.

A Quick Look at MT’s Revenue Sources

MT reported gross revenue of $81.7 billion in FY 2018. This includes 5 revenue segments:

• NAFTA: $20.3 billion in FY 2018 (25% of total revenue). This includes the Flat, Long, and Tubular operations of the USA, Canada, and Mexico
• Brazil: $8.7 billion in FY 2018 (11% of total revenue). This includes the Flat operations of Brazil, and the Long and Tubular operations of Brazil and its neighboring countries including Argentina, Costa Rica, Trinidad and Tobago, and Venezuela
• Europe: $40.5 billion in FY 2018 (50% of total revenue). This comprises the Flat, Long, and Tubular operations of the European business, as well as ArcelorMittal Distribution Solution (AMDS)
• ACIS (Africa and Commonwealth of Independent States): $8.0 billion in FY 2018 (10% of total revenue). This includes sale of steel sheets and plates as well as tubular items like pipes, that are made by rolling processes in ACIS
• Mining: $4.2 billion in FY 2018 (5% of total revenue). This consists of iron ore and coal operations. ArcelorMittal owns mines in various countries including Canada, the U.S., Brazil, Russia, Ukraine, and Algeria.

A] Key Revenue Trends

NAFTA

• NAFTA revenue has largely trended higher through 2018, with a drop in Q4 2018, driven by lower shipments due to weak market conditions in the US and blast furnace reline delay in Mexico.
• Revenue is expected to see a marginal increase in Q1 2019 (y-o-y), driven by higher shipments in Mexico, partially offset by lower price realization for long steel products.

Brazil

• Revenue in Brazil has witnessed a lot of volatility over recent quarters mainly due to the impact of hyperinflation accounting in Argentina.
• Segment revenue is expected to increase in Q1 2019 (y-o-y), driven by higher shipments due to the impact of the Votorantim acquisition in 2018, offset by price volatility.

Europe

• Revenue trended lower for most of 2018 due to operational disruptions such as a power outage at a facility in France and a slower ramp up following a blast furnace repair in Poland.
• We expect revenue to increase in Q1 2019, driven by consolidation of Ilva from November 2018, partially offset by lower organic shipments.

ACIS

• Revenue declined in Q4 2018 due to an explosion at a gas pipeline at Temirtau (Kazakhstan).
• Segment revenue is expected to be lower in Q1 2019 (y-o-y) due to lower shipments following the gas pipeline blast and unplanned maintenance activities in Ukraine.

B] Expense and Profitability

• Total expenses largely declined through 2018, but were higher on y-o-y basis in all the four quarters, driven by lower than expected cost savings under the Action 2020 Plan along with higher expenses related to operational disruptions.
• However, margin was relatively stable for the year, mainly due to a tax benefit recorded in Luxembourg.
• We expect total expenses to increase in Q1 2019 and therefore margins to drop further during the quarter, driven by lower revenue, higher costs related to repairs and disruptions, and acquisition-related expenses, partially offset by productivity-related savings.

Full Year Outlook

• For the full year, we expect net revenue to decline marginally by about 0.2% to $75.9 billion in 2019, primarily driven by lower Chinese demand during the year.
• The company projects a decline of 0.5%-1.5% in demand from China in 2019, as relatively stable demand from automotive and construction is offset by declining machinery output. This is in contrast to a demand growth of 3.5% in China during 2018.
• Though ArcelorMittal has minimal exposure to China, a slowdown in Chinese demand would likely have an adverse impact on global steel prices.
• However, net income margin is expected to increase from 6.8% in 2018 to about 7% in 2019 due to cost efficiencies as the company nears the end of its Action 2020 Plan, which would, in turn, push EPS higher.

Trefis has a price estimate of $32 per share for MT’s stock. In February 2019, the company announced a share buyback program, which it intends to complete by December 2019, under which it plans to repurchase 4 million shares. Along with share repurchases, the company’s ongoing debt reduction program (which has been successful so far), increased dividend, improving margins, and inorganic growth is expected to support growth in the stock price through 2019.

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