ArcelorMittal South Africa Limited (ACL) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the ArcelorMittal South Africa Interim financial results announcement. This is indeed for the period ending 30 June 2023. We are honored to have you join us this morning as we take you through these results. Presently, we made an announcement in terms of our trading statement, and I'm sure these results are no surprise to each and everyone joining this morning. The live broadcast will be available after 12:00 today, if you are interested in viewing it, so is the presentation that is available in our website as we speak. You're joining us today reminds us how important this companies to yourselves and how important this companies is to the economy of country. Without further ado, let me introduce to you our presentation planning, we will be led by our Chief Executive Officer, who will take us through the operational and market review and will be followed by the acting Chief Financial Officer, Gavin Griffiths, who will take us through the financial review and capital allocation. Our Chief Executive Officer will come back and give us sustainability and growth and also give us an outlook for the year. [Operator Instructions] Let me take this opportunity to present to you our Chief Financial Officer, Kobus Verster.

Thank you, Tami. Thanks for that introduction. Good morning, ladies and gentlemen, and thank you for joining this virtual presentation of our half year results. Welcome also to our Board members and senior management joining the presentation as well as to the media and shareholders. In February, at our previous presentation, we indicated that the trading environment for the first half of 2023 appeared to be improving compared to the difficult close to 2022. Despite the buoyance of 2021 and the first half of '22 having passed the international trading environment in the first half of '23, benefited from the end to the destocking and less painful energy prices. Locally, however, the trading environment called to such tailwinds as the burden of continued load shedding, high inflation, high interest rate and mixed growth in the key steel consuming sectors impacted already fragile consumer confidence. Understandably, domestic steel demand remained muted, which put significant pressure on local prices and volumes. On a more positive note, renewable energy and regional infrastructure projects are starting to give some support to local demand. The softness of the market was to an extent underestimated, which affected our response time to adjust production to lower-than-anticipated volumes. Maintaining stable operating rhythm which is vital from a cost control perspective, proved to be especially problematic. Our sales volumes were up 3%, with crude steel production 29% higher against the comparable period. Average steel prices decreased by 8%. And in rand terms, our raw material basket increased by 2%, with the international raw material basket decreasing by 13%. The value plan delivered improvements of just over ZAR 1 billion, consisting of commercial-related initiatives of ZAR 378 million and cost base initiatives of ZAR 629 million. To protect these hard won gains, extra attention has been given to address the negative impact that operational inefficiencies and volume have on the value plan benefits. Our fixed costs increased by ZAR 101 million, or 3% to ZAR 3.5 billion. EBITDA of ZAR 499 million fell by 86%. If you look on a quarterly basis, you can see the gradual improvement in EBITDA in Q1 and Q2 from a loss-making position quarter 4 last year. The company posted a headline loss of ZAR 448 million against earnings of ZAR 3 billion in H1 2022. Net borrowings position of ZAR 3 billion was ZAR 182 million higher compared to December. With the lower-than-anticipated sales, the investment in working capital was substantially more than we have planned for. When studying these international steel price and raw material cost trends, the impact of the Russia-Ukraine conflict is quite visible in the first half of last year as supply chains and trade flows were disrupted. Also evident is the positive momentum from quarter 4 last year into the first quarter of this year, which unfortunately could not be sustained through in to quarter 2. Looking at safety. Safety remains the company's highest priority. It's therefore with deep regret that we had one fatality involving an employee of a contractor, which occurred in January this year. Behavioral changes and process discipline are key to stamping out fatalities and serious injuries. Over the past 2 years, we have lost several safety initiatives involving the assistance of international safety experts as well as learnings from benchmark compliance within the ArcelorMittal group. We have seen good progress in many areas, and we'll continue to focus on our #1 priority. To facilitate our efforts, we've done a company-wide safety culture survey. On average, we found that our employees take responsibility for their own safety and believe that they can make a difference through their actions. There are a few plants that not at the same level of maturity. And obviously, our focus are more on these areas. In terms of B-BBEE, the transaction that was done in 2016 has not delivered the anticipated value to our empowerment partners, employees, communities and the company as a whole. This is mainly due to the lack in adequate growth in the share price in relation to the funding terms. The current projections are that the realization of any meaningful value in future is unlikely. In line with our commitment to promote transformation and economic empowerment with a remarkable process to modify the 2016 transaction. The terms are detailed in our [ SENS ] announcement and the shareholders' meeting to approve for approval is planned in quarter 4. Despite the challenging financial and operating environment, we continue to contribute to the communities in the areas where we operate. On the slide there, we named a few of these initiatives. The 3 science centers in Sebokeng, NewCastle and Saldanha is continuing. The Thusong project, where we provide meals over 2,900 individuals on a daily basis, the GetOn foundation in the Vaal focusing on training of unemployed youth. And currently, we support over 700 people in various training programs with the majority of that is in the artisan and production reship environment. These successful partnership that we have within the Emfuleni municipality whereby we assist them in repairing some of the infrastructure and bottles that was extended. Now looking at the global steel environment from a production perspective, global crude steel production decreased by 1% in the first half to just less than 1 million tonnes. China's crew steel production increased by 1% to 538 million tonnes, which we have a market share of 57%. In Europe, steel output decreased by 11% as well as in North America down by 4% to 55 million tonnes. Russia increased its output by 1%. Turkey decline as production fell by 16%. India, with last year increased their production by 8%, once again succeeded in increasing production by 7% to 68 million tonnes. I think China -- India is also targeting around another 8% increase in the coming year. Africa's output increased by 4% to 8 million tonnes due to higher production in South Africa, Tunisia and Libya. In South Africa, crude steel production increased by 14% to 2.4 million tonnes. Looking at sales prices and input costs. International hot rolled coil prices decreased by 22% in dollar term year-on-year, while rebar prices decreased by 19%. The international raw material basket consisting of iron ore, coking coal and scrap was 26% lower in dollar terms. In absolute terms, coking coal prices decreased by 37%, while scrap and iron ore decreased by 22% and 15%, respectively. Returning to our home market. South Africa's GDP growth is forecast to be around 0.4% this year, with the near and sub-Saharan African market forecast growth by -- to 3.5%. In South Africa, apparent steel consumption for the first part of the year increased by 2% to 2.1 million tonnes. Steel consumers, fabricators and manufacturers face stagnant domestic and export demand, given the weak price environment. As I have mentioned earlier, the effect of load shedding, high inflation and interest rates and low growth in some of the key steel consuming sectors, such as manufacturing, mining and construction negatively affected consumer confidence. Steel imports of primary hot rolled coil, galvanized sheet and plates decreased to 596,000 tonnes after a surge in the immediate preceding 6 months to 720,000 tonnes. These volumes constitute around 29% of South Africa balance steel consumption, down from 36% in the second half of last year. It's important to understand that about 44% of these imports is grades that cannot be or are not manufactured locally. Additional focus is needed to improve the local demand situation, including the fast tracking of infrastructure projects and increased local manufacturing along the lines proposed in the Steel Masterplan. Within our company, our steel production increased by 29% or 305,000 tonnes to 1.4 million tonnes for the first 6 months of the year and was flat against the immediate preceding 6 months. Sales volume increased by 3% to 1.2 million tonnes compared to the comparable period with a 6% lower domestic sales of 1 million tonnes, while Africa overland sales increased by 47% to 119,000 tonnes. Compared to the immediate preceding 6 months total sales volume increased by 19%, with domestic sales increasing by 13% and in Africa overland sales by 133%. In line with our regional strategy, Africa overland sales as a percentage of total exports improved to 52% from 34% in the previous period. Our overall steel prices increased by 8% in rand terms and compared to the immediate preceding months by 4% -- preceding 6 months by 4%. We remain the only primary producer in South Africa, which support the downstream industry through a formal export support program. This industry support totaled ZAR 91 million in value-added export and strategic rebank systems during the first half of the year. From an input cost perspective, our raw material basket, which represent 48% of the cash cost per tonne plus 2% up in rand terms. Within consumables and auxiliaries, which make up 31% of the cash cost per tonne, electricity tariffs increased by 14% and while dollar-denominated commodity index consumables increased by 12%. Fixed costs constituted 22% of the cost per tonne increased by 3% to ZAR 3.5 billion for the period under review. Operating environment. The company's average capacity utilization increased from 42% in H1 last year to 53% in this year and is currently around 70%. The startup of one of the blast furnace at Vanderbijlpark was delayed due to the weak domestic demand. After the major interim impair last year, which costs almost ZAR 0.5 billion, the blast furnace in Newcastle is performing well. However, extreme rain conditions disrupted production on a number of occasions in Newcastle. This was not limited to the blast furnace operations only but affected all operations in Newcastle. Unplanned outages at the steel plant in Vanderbijlpark at Newcastle, along with below targeted performance in the billet mill and plate mill, have resulted in these plants being placed into high care to assertively address some nagging reliability issues. As noted earlier, electricity load shedding, load containment resulted in high disruptive stop-start operations. The number of load containment events was substantially more during the past 6 months than the whole of last year. Positively, the planned iron ore rail line maintenance in the Northern Cape was well managed in collaboration with Transnet Freight Rail, and this did not cause any disruptions. Due to the restoration program of the coke batteries at both Vanderbijlpark and Newcastle, the production of commercial coke was 85% lower with sales volumes down 83%. Almost all our coke production capacity is being utilized to produce metallurgical coke or on consumption. A meaningful recovery in commercial coke production is expected from 2025 onwards. I will now hand over to Gavin to take us through the financial numbers.

Thank you, Kobus. Good morning, ladies and gentlemen. Regarding our financial performance. Revenue was down 5% or ZAR 21 billion due to 8% lower realized sales prices, while sales volumes increased by 3%. EBITDA ZAR 499 million was 80% -- 86% down as contribution margins were squeezed by negative price cost effects. The waterfall graph at the top of the slide displays EBITDA changes between the first halves, 2022 and '23. Export sales volumes were 93,000 tonnes up while local volumes were 59,000 down. Together, these effects led to a ZAR 305 million reduction in EBITDA. Average realized sales (sic) [ steel ] prices decreased by 22% in dollar terms, and 8% in rand terms. This led to a substantial fall in EBITDA of ZAR 4.9 billion before including the positive exchange rate movement ZAR 2.9 billion, which is displayed separately towards the right-hand side of the graph. Higher raw material prices and other factor costs had a positive impact of ZAR 50 million because of lower prices for imported coal and locally sourced scrap. Including the separately displayed exchange rate movements, raw material expenses were [ $642 million ] higher compared to 2022. Our value plan realized ZAR 1 billion of improvements, of which commercial-related initiatives contributed ZAR 378 million and cost-based initiatives, ZAR 629 million. Despite the difficult operating conditions, it's pleasing to note that the value plan added ZAR 430 million worth of additional improvements compared to this time last year. Efficiencies and operating costs had a negative impact of ZAR 573 million. As noted by quarters, the substantial load curtailment disruptions resulted in major production interruptions, which understandably proves to be very problematic when it came to responsible cost control. At ZAR 3.5 billion, fixed cost increases were well contained given the intense inflation pressures. The increase amounted to ZAR 163 million or 3%. When factoring in value plan improvements, the increase reduces to ZAR 101 million. Most notable in the so-called other category is the ZAR 358 million of lower earnings from the nonsteel business, with the rest being made up of mainly inventory-related movements. The right-hand side table details our segmental performance as follows: Steel operations contributed ZAR 460 million to EBITDA, with non-steel adding ZAR 75 million. Corporate charges decreased by ZAR 276 million and ZAR 36 million, a centrally managed restorative maintenance charges did not reoccur. Moving to the bottom graph, which reconciles EBITDA and headline earnings for the 6 months to June. Depreciation and amortization increased by ZAR 49 million to ZAR 405 million, largely due to additional charges relating to the refurbishment of the Newcastle last as you'll recall undertaken last year. Net finance costs increased by ZAR 286 million to ZAR 536 million because of higher interest charges on bank overdrafts and loans and lower net foreign exchange gains. The headline earnings loss of ZAR 448 million represents of ZAR 3.5 billion swing compared to the prior year. Turning to net borrowings on the next slide. With a free cash flow of ZAR 204 million, net borrowings increased to ZAR 3 billion compared to last December. Before considering working capital movements some ZAR 826 million in cash from operations was generated. Cash releasing working capital movements of ZAR 65 million, reflect ZAR 1.4 billion of higher inventories with steel stock ending on a solid 417,000 tonnes, ZAR 1.2 billion high receivables, returning to normalized levels after the seasonal slowdown found in last December's numbers. Finally, ZAR 2.7 billion of higher payables were due to overall greater production activity levels. We paid ZAR 234 million in net finance costs. largely flat compared to the 2022 number. Before addressing CapEx, it should be firmly stressed the producing net borrowings to a more comfortable level in this tough economic environment is a priority for this company. We end the finance section with capital allocation on the next slide. CapEx of ZAR 582 million is ZAR 273 million lower against last year, with most of the parts spent on sustaining and environmental projects. The coke making gas cleaning plant at Vanderbijlpark received ZAR 136 million of additional investment monies. New investments in automotive and appliance steels, Light's highly corrosion-resistant material. We do in, amongst others, renewable energy projects, and the major 200-megawatt solar project at Vanderbijlpark represent real opportunities to improve the quality of our future earnings and cash flows. Funding discussions on these and similar projects are advancing. Thank you for listening. And with that, we returned to Kobus informing us on our strategic initiatives and the outlook.

Thank you, Gavin. Looking at the asset configuration, we will continue to follow a flexible approach to operating our plants in the current economic environment, obviously, as far as technically possible. The definitive feasibility study for the construction of a 1.7 million tonne EAF electric arc furnace in Vanderbijlpark is progressing through some key milestones. Significant Africa has been invested in confirming the robustness of the long-term viability of Newcastle. I'm glad to say that our conclusion is that it actually does have a business case and indeed an investment case. We've launched an optimization program earlier this year, which will focus specifically on the long part of the business on the asset footprint optimization, improving mill capacity utilization efficiencies as well as logistics and energy. This exercise extends beyond Newcastle and will include operations in Vereeniging, Pretoria and Emalahleni. This past we spent almost ZAR 1 billion (sic) [ ZAR 500 million ] on the interim campaign refurbishment of Newcastle blast furnace. The attention will now turn to the progressive refurbishment of the coke-making capacity. Future investments that we are planning is more focused on cost, volume and improving the product mix. From a fixed cost perspective, we've signed a 3-year agreement with wages. Obviously, this will give us the stability and certainty, whereby we get the focus on improving performance, productivity and value adds. Importantly, although some matters were excluded from the agreement. These will be pursued through our internal corporate labor forums. Central to these discussions is the fact that ArcelorMittal South Africa so wage bill is well above the industry norms, yet the productivity levels does not just apply that. Another area of relevance in the fixed cost management is the significant increase in security cost necessary to safeguard our facilities and logistical routes. As we've said earlier, we've progressed well in finalizing the funding for the 200-megawatt solar plant at Vanderbijlpark. In terms of localization and info replacements in line and support the steel master plan, steel import replacement and localization initiatives is being fast tracked through the investment in steels suitable for renewable energy projects and extended automotive appliances. As mentioned by Gavin, a strong balance sheet is needed for us to execute our long-term strategy, and we will continue to focus on getting our net debt position to more comfortable levels. To conclude, let's look at the outlook for the second half. Once again, our focus will remain on improving our safety performance. Internationally, the indications from the World Steel Association is that there will be a 2.2% increase in steel demand. Obviously, China will continue to play a major role not only in the demand levels, but also on the price trends. Steel demand is expected to improve in South Africa as the economic indicators strengthened. Inflation is moving back towards the target range, which should ease pressure on interest rates, thus lifting the consumer confidence. We also predict that the renewable energy and regional infrastructure projects should start to support local demand. So despite this difficult first half of 2023 ArcelorMittal, South Africa is positioned to navigate these immediate and near-term challenging market conditions while remaining focused on our medium to long-term objectives. Thank you, and we will now take questions.

Thank you very much, Kobus and acting Chief Financial Officer, Gavin Griffiths. [Operator Instructions] Let me late the first question. ZAR 7 billion of inventory is extremely high. What rand value of inventory do you consider optimal? And how do you get to this level in a weak demand environment?

Firstly, from a tonne perspective, the volumes are actually quite in line. And I think, as I said, we haven't -- we've started the blast furnace in Vanderbijlpark to reduce the buildup of stock. So when you talk about inventory, you talk about final product, working process throughout the whole chain. So there's a marginal opportunity to reduce the tonne levels. But obviously, you will see costs are coming down, especially in coke and coking coal, and that will release some value in the inventory.

The second question from anonymous, is it possible to touch on the performance of AMRAS?