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

Good morning, and welcome, ladies and gentlemen. I am Tami Didiza, responsible for stakeholder management and communication at ArcelorMittal South Africa and will be facilitating the proceedings this morning. Thank you for taking the time to join us as we announce our year-end financial results for the period ending 31 December 2023. We indeed appreciate your interest in our company and are honored to host you this morning. Please note that the live recording will be accessible on our website at www.arcelormittalsa.com. You can also find the presentation as we speak on the same website. Ladies and gentlemen, our presentation will be led by our Chief Executive Officer, who will take us through the overview of the results, including the operational and market review. He'll be followed by our acting Chief Financial Officer, Gavin Griffiths, who will zoom in the numbers. The CEO will come back and take us through how we are transforming the business for sustainability and growth and then give us outlook for the year. We'll then take your questions. [Operator Instructions] Ladies and gentlemen, without further ado, let me present to you our CEO, Kobus Verster.

Thank you, Tami. Good morning, ladies and gentlemen, and thank you for joining the presentation of our full year results for the year ending December '23. A special word of welcome to some of the Board members and senior management joining the presentation as well as the media and shareholders. Let me start with an overview. Obviously, the year was an extremely difficult year. If you look at the international steel environment, that was characterized by low demand in almost all of the markets. Prices were under severe pressure, especially in the second half. Slow growth in China resulted in substantial increase in China -- Chinese steel exports locally. Steel demand has remained relatively flat at historical low levels, and the prices followed the international downward trend. All of these factors resulted in a very difficult trading environment. The second half of last year was dominated by the news of the wind down of our long business. Despite best efforts, the initiatives implemented prior to the announcement were not enough to counter the combined effects of the negative growth in steel demand for a number of years, the high logistical and energy cost, combined with the financial impact caused by frequent disruptions from both rail and electricity. And then lastly, the ban and the export scrap -- tax on scrap that has created a substantial cost/benefit for scrap-based electric steelmakers. We also indicated that the wind down will be subject to intelligence and consultation process. Since our announcement the end of November, we have done just that. We have engaged many stakeholders, including government, represented especially by the Minister of Trade, Industry and Competition. We spent a lot of time with the Transnet executives, numerous steel industry and manufacturing associations, organized labor, affected suppliers and community forums and most importantly, our customers. During this period, certain short-, medium- and long-term initiatives were identified, some of which are set out in the Steel Masterplan plan to address the above constraints. Agreement on the short-term initiatives is required to provide a window to progress and cement the medium- to longer-term interventions, which are all focused on business sustainability. Following all these interactions, we are therefore able to announce a deferral of the wind down process to allow for continued operations for up to 6 months. During the 6 months period, the objective is to further progress and conclude these short-term initiatives, finalize their commercial and contractual agreements, followed by implementation to secure a targeted benefit. We have indicated before that the remaining business after the wind down will be more profitable and sustainable than the pre-wind down business. It is therefore vital that the business case for the continued operations deliver a better financial outcome in the closure scenario. Currently, our modeling indicates that, that will be the case should the anticipated benefits be realized. At the same time, job losses and a negative impact on the economy can be avoided. I will give you more detail on the short-term initiatives later in the presentation. Now turning to the rest of the business. Sales volumes were 12% up with crude steel production improving by 15%. Average steel prices decreased by 9% in rand terms. Our domestic raw material basket was flat in rand terms, while international raw material basket increased by 2%. Pausing at this point, these steel prices and raw material trends highlight the very serious spread squeeze that is affecting the global steel market. Our Value Plan delivered EBITDA improvements of ZAR 2.1 billion. To protect these hard-won games, extra attention has been given to address the impact of operational inefficiencies and lost volumes ahead. We know where the problems are and we're addressing them progressively. Fixed costs marginally decreased despite the inflationary pressures, but more importantly, fixed costs were just less than ZAR 0.5 billion down in the second half compared to the first half. We therefore posted a small EBITDA profit before impairment of ZAR 56 million and a headline loss of ZAR 1.9 billion. Our net borrowing position of ZAR 3.2 billion was just more than ZAR 400 million higher than a year ago, benefiting from intense working capital release initiatives. Looking at the international environment. Slow growth, increasing interest rate, worsening geopolitical tensions and the polarization in trade add to -- flat global steel production, slowing growth in China with export volumes out of China up a staggering 35%. We are now near to the levels we've seen during the damaging years of 2014 to 2016. As mentioned, the severe price-cost squeeze and decarbonization pressures, especially in Europe. Turning to the local market. Apparent steel consumption increased marginally to 4.1 million tonnes, the experienced high imports from China impacting local dispatch volumes. The high cost of doing business in South Africa, especially considering rail and road logistics, energy cost, labor and security, low business confidence with electricity unreliability impacting market activity and demand. And then we are still seeing limited infrastructure spend and a lot of project delays. If you look at the graph on the top right, that highlights just how much pressure spreads are under. Spreads are the difference between steel prices and the raw material basket. These differences are historically around $220 per tonne. Last quarter, we saw levels just above $60 per tonne. The graph on the bottom right depicts the substantial discount of local scrap prices versus international prices caused by the initial PPS price system, the introduction of 20% tax on scrap and then the total export ban later on. As is evident from these international price trends, except for hard coking coal, year-on-year prices were down far more than the price of steel materials. Notably, iron ore, which was down only 2% compared to hot rolled coil, and the rebar price is down 15%. Talk a bit more about this later in the presentation. Coming to safety. Safety remains the company's highest priority, and we remain committed to zero harm. In addition to the various safety initiatives undertaken over the past few years, the company this year will participate in an ArcelorMittal group-wide comprehensive audit of all safety-related topics. This will be undertaken by an independent external consultancy. In addition to addressing policies, procedures and other safety issues, it will also highlight the level of shop floor implementation and improvements required. The audit will support ArcelorMittal South Africa in becoming a better and safer company, which it aspires to be. While waiting for the results of the audit, the company will redouble assets already underway to improve safety performance. Given our focus on the long business in the latter part of last year, process to modify the 2016 B-BBEE transaction announced in July last year has been delayed. From a social economic perspective, I mean, making ends meet for most South Africa remains a challenge. We are therefore grateful that we can continue to contribute to communities even in this extremely difficult business environment. To name a few of these initiatives is the Science Centres in Sebokeng, Newcastle and Saldanha; the Thusong feeding schemes, where we provide daily meals to over 2,800 individuals in need; the GetOn Foundation in the Vaal, focusing on training unemployed youth. In December, we celebrated the graduation of 258 trainees. At the moment, we have over 650 people in various training programs within the company, of which the majority is artisans and production learnerships. We also extended the partnership with Emfuleni municipality and while we repair infrastructure and potholes in the local municipality. Looking at the global steel environment. From a production perspective, crude steel production remains flat year-on-year at 1.9 billion tonnes with a 6% decrease in the second half. Similarly, China's crude steel production remained around last year's levels at about 1 billion tonnes, retaining its market share of 54%. Europe steel output decreased by 7%. North America was down 2%. Russia increased output by 6% and Turkey declined by 3%. India, most probably for the last 4, 5 years, was successful to increase production by 12% last year to 140 million tonnes. Africa's output increased by 5% to 22 million tonnes, mainly due to higher production in South Africa, Libya and Egypt, and the SA crude steel production increased by 11% to 4.9 million tonnes. International hot rolled coil and rebar prices decreased by 15% in dollar terms. International raw material basket was 10% lower in dollar terms. In absolute terms, coking coal prices decreased by 19% while scrap and iron ore decreased by 12% and 2%, respectively. Returning to our home market. South Africa's GDP growth is forecast to be around 1.5% for 2023, but that of near in sub-Saharan African markets is forecast to be around -- to be about 3%. Steel consumers, fabricators and manufacturers face stagnant domestic and export demand given the weak pricing environment. As I mentioned earlier, the effect of load shedding, high inflation, high interest rates and low growth in 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 increased by 4.6% to 1.2 million tonnes. But we saw a substantial decrease over the past 18 months of 16%. Given our reindustrialization ambitions, this volume constitutes an unacceptable high percentage, about 30% of South Africa [indiscernible] steel consumption. That said, it's still important to remember that around 46% of the imports represent steel grades that are not manufactured locally. This is a good indication where capital investment should be allocated to. Our company is well placed to leverage such investment to further improve local production, particularly into automotive and mining as well as infrastructure and renewable projects. Within the company, our steel production increased by 15% or 359,000 tonnes to 2.8 million tonnes. Total sales volumes increased by 12%, 1.4% higher domestic sales at 1.9 million tonnes, while Africa overland increased by 84% to 242,000 tonnes for the year. In line with our regional strategy, Africa overland sales as a percentage of total exports marginally improved to 47%. From a pricing perspective, our overall realized prices in dollar terms decreased by 20% and as a result of the weakening of the exchange rate, 13% and 9% in rand terms. We are the only primary steel producer in South Africa which support the downstream industry through a formal export support program. This industry support totaled ZAR 144 million last year in value-added export and strategic rebates to assist and support the downstream industry. Input costs. Our raw material basket, which represents 49% of our cash cost per tonne, was flat in rand terms. Within consumables and auxiliaries, which make up 30% of the cash cost per tonne, electricity tariffs increased by 17%, while dollar-denominated commodity-indexed consumables decreased by 14%. Fixed costs constituted 21% of the cash cost per tonne, although flat on a year-to-year basis. In absolute terms, it decreased by 14% on H1. The company's average capacity utilization increased from 40% in the previous year to 54% last year. Incident of electricity load curtailment events increased from 8 events in 2022 to 51 disruption events in 2023. The lack of rail services in quarter 3 last year resulted in Newcastle running out of iron ore, which led to the blast furnace being shut down for 5 weeks from the end of September. This had a direct cost of ZAR 133 million. We saw improved reliability and production levels at Vanderbijlpark, especially in our plate mill area and sinter plant. The Newcastle billet mill program progressed well. Coke-making production increased in both Vanderbijlpark and Newcastle. Commercial coke production was 74% lower with sales volumes down 81% due to the previously communicated restoration program that is currently underway on the coke batteries. We will return to meaningful recovery in commercial coke production around the end of 2025. I will now hand over to Gavin to take us through the financial numbers.

Thank you, Kobus, and good morning, ladies and gentlemen. The waterfall graph at the top of the page categorizes the reasons for the EBITDA change between 2022 and 2023. EBITDA of ZAR 56 million was well down against the ZAR 4.3 billion of 2022. We will now go into the reasons, moving from left to right on the graph. Firstly, with 252,000 tonnes more sales, EBITDA improved by ZAR 691 million. Export volumes were up by 226,000 tonnes with only a small 26,000 tonne increase in local sales. Moving to prices. We lost a noteworthy ZAR 3 billion due to falling sales prices. On average, prices dropped 9% in rand terms. Local prices were down 7% and exports down 12%. Positively, the weaker exchange rate persisted. At this point, it bears mentioning that revenue increased by 2% to ZAR 41.6 billion. Going now to expenses. Raw materials cost us ZAR 938 million more, given the higher activity levels, greater transport costs and a weaker exchange rate. Looking at efficiencies and operating costs. These increased by ZAR 463 million due to additional natural gas purchases on account of the ongoing coke battery restoration programs, more on that later; a 17% increase in the unit cost of electricity; higher raw material handling costs due to more road versus rail transport; and much greater demurrage charges on account of port congestion. The reasons for the last 2 factors have received significant publicity in the national press. Having just mentioned the extra cost of road transport and demurrage, when we include the direct cost of additional security and the cost of replacing stolen and vandalized copper cables, our numbers include just over ZAR 750 million of abnormal costs of doing business in the current environment. This includes some ZAR 130 million to stop and restart the Newcastle blast furnace due to rail service unavailability in quarter 3. This is simply unaffordable for where our business finds itself today. As Kobus noted, fixed cost was ratcheted back dramatically in the second half, resulting in a flat performance year-on-year. We should stress that this was not achieved by cutting back on maintenance-related expenditures. Finally, the ZAR 518 million EBITDA drop attributed to Coke and Chemicals and inventory adjustments reflects the lower contribution from commercial coke and tar sales along with inventory-related movements. The table to the top right reflects the ZAR 2.1 billion Value Plan contribution and the categories in which it was achieved. Quantum underscores just how vital that program has become to this business. We need to be extra vigilant against operating inefficiencies and cost leakages, which can threaten to undo these hard-won games. Furthermore, for a commodity business such as ours, inflation creep remains an ever-present problem, our #1 bogeyman, if you will. At the top right, we display the EBITDA per segment. Steel operating -- steel operations incurred a ZAR 373 million loss. Non-steel operations contributed ZAR 534 million and included an environmental provision adjustment relating to the legacy Pretoria worksite of just over ZAR 200 million. ZAR 105 million charge for corporate reflects various service fees and accounting eliminations. Bottom left of the slide, we graphically bridge EBITDA to headline earnings. Depreciation and amortization rose by ZAR 107 million to ZAR 878 million, largely due to additional charges relating to the refurbishment of the Newcastle blast furnace in 2022. Net finance costs were up 11% at ZAR 1.1 billion on account of more interest on bank overdrafts and loans. Reducing this amount is very much on management's to-do list to action sooner rather than later. The headline loss of ZAR 1.8 billion represents a ZAR 4.5 billion swing compared to prior year's ZAR 2.6 billion profit. Excluded from the headline loss but included within our all-inclusive attributable numbers is an impairment charge of ZAR 2.1 billion, mainly for the impairment of the longs business. Importantly, this does not represent a wholesale write-off of the entire business or cash-generating unit as the accountants call it. On the next slide, we address the free cash flow and change in net borrowings. With the free cash outflow of ZAR 431 million, net borrowings increased to ZAR 3.2 billion. This remains within tolerable levels given the current conditions. Operations generated ZAR 246 million of cash. A substantial release of the company's investment in working capital was achieved through an intense focus on cash management in the second half of the year. This was both very necessary and long overdue and represents a hard-fought battle, which we intend to continue with vigor in 2024. The specific movements in the payables, inventories, receivables and provision balances are detailed at the top of the slide. Overall, this cash performance allowed the company to, unlike last year, run the full fleet of blast furnaces through the year-end season, a period that in recent years has become notorious for very low activity levels and thus, high cash absorption rates. Stopping and restarting a blast furnace, particularly in Vanderbijlpark with its highly integrated infrastructure, is exceptionally expensive, not to mention very hard on the asset. We paid ZAR 658 million in net finance costs and ZAR 1.5 billion to CapEx creditors. On that note, we will now take a look at our capital allocation for the year. CapEx of ZAR 1.3 billion is ZAR 774 million lower than in 2022, reflecting the absence of major relines or rebuilds. 2/3 of this was spent on sustaining operations as we prioritized this type of CapEx given the weak market conditions, 18% going to environmental projects, 12% to mill rolls and the balance on projects to enhance quality and the product portfolio. Rebuilding our coke-making capability resulted in notable investments in that area. This will increase in years ahead. Volume and quality improvement projects targeting the betterment of the customer value proposition received ZAR 77 million. This amount should be seen in the context that many of the projects are multiyear in nature, and the effective spend is more significant than it may first appear in isolation. Our investment in environmental projects continued, including at Newcastle. Future growth CapEx will focus on decarbonization, import replacement and localization as well as quality. With that, we return to Kobus to discuss the strategic direction of both the flat and the longs business and the outlook for the coming 6 months.

Thank you, Gavin. With that, within the flat part of our business, actions are underway to continue to grow volumes and include capacity utilization to support steel-based industrialization in the region. We have been adjusting footprint in the company for a few years. I think we've reached a point where we want to increase volume and we want to maximize capacity utilization. The flats also further enhanced and improved the quality and reliability and do continue to be the preferred supplier of high-quality steel in the country. We are building on existing competitive supply chain with the objective to ensure continued growth and competitiveness of core downstream industries, which include automotive, renewable energy, mining and key construction and infrastructure projects. From a footprint perspective, the definitive feasibility study for the construction of a 1.7 million tonne electric arc furnace at Vanderbijlpark is continuing. We are also looking, as Gavin mentioned, on commercial studies for new flat rolling plants that will enable the new generation of coating products. We've received inquiries in terms of the 200-megawatt solar energy plant at Vanderbijlpark, and we're progressing well with the funding there. Looking at longs. With the deferral of the closure decision, the long business will continue to operate for up to 6 months. We will monitor the realization of the anticipated benefits, and we will adjust our time line accordingly. Following the work that's already been done and in the coming weeks and months, we aim to conclude and start implementing these short-term initiatives. Initiatives include port and rail service improvements, which has been agreed with the Transnet leadership. The Transnet leadership has been very supportive in this process. Following the expiry of the steel scrap export ban in December, we will continue to engage government on the [ broader ] steel scrap policy, which in its current form, threaten the existence of small- and medium-sized scrap entrepreneurs and traders and continue to put our long business at risk. Expediting demand-side opportunities as envisaged by the Steel Masterplan, agreeing with key customers on longer-term volume commitments to create sustainable local supply and then working with suppliers, service providers and labor to adjust the cost structure, especially in Newcastle. The medium- to long-term initiatives includes: a longer-term iron ore security and pricing; value chain efficiencies to improve customer service and value offering; targeted investment, which is cost focused, but also to increase value-added export and replace imports. All of those are volume driven. I think it's important to note that the endgame for longs is to have a structural totally different business that's sustainable, and this will involve a different partnership and downstream integration model. To conclude the outlook for the first half of 2024. Safety will remain our highest priority, and we will continue to focus vigorously on that. Internationally, the World Steel Association expect an increase of 1.9% in steel demand, most probably a higher percentage steel demand ex China. Chinese growth will continue to play a directional role in the international steel demand and pricing trends. Price levels is unlikely to remain this low as we discussed the cost-price squeeze earlier. There are some positive growth opportunities, such as renewable energy projects already in implementation, Eskom's grid connection expansion and various infrastructure projects. These hold the potential to supply steel demand should government meet their implementation commitments. On the longs business, the key focus for the first half will be to progress and conclude the short-term initiatives and work with stakeholders to implement the medium- and longer-term structural changes. But in the flat business, the focus will be on increasing volumes and optimize operational efficiencies while further improving reliability and quality to the benefit of our customers. Thank you, ladies and gentlemen. We will now take questions.

Thank you very much, Kobus and Gavin. [Operator Instructions] For the members of the media in attendance, please be reminded that there's scheduled media roundtable taking place at 11:15, and we'll have at least a fair chance to ask the questions today. The first question is from [indiscernible]. Has the steel export ban been officially ended and [indiscernible] exporting [indiscernible].

The export ban was only up to a certain date mid-December. So it wasn't extended. So by default, it lapsed. The Minister has said they will take some time to introduce some administrative oversight to ensure that the infrastructure does not get damaged. So officially, you can export now, but there is a sort of a permit process, which we also want to simplify.

Can I ask Kobus, have you recovered market share losses [indiscernible] post-COVID as demand picked up at that time.

We have -- I think if you look at that import trend, we have increased our share of -- I mean, imports came down 16% over 18 months, given that almost 40% to 45% of that is not manufactured locally. We have definitely gained market share. But if you look at from 2022 to 2023, there was an overall about 4% increase in our market share.

Thank you, Kobus. We are still waiting for other questions to come.

Well, Tami, in the absence of any further questions, ladies and gentlemen, thank you for joining the presentation. Thank you for taking the time and your interest in our company. Have a lovely day. Thank you.