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Steel giant ArcelorMittal (MT - Analyst Report) posted a net loss of $0.2 billion or 12 cents per share in the first quarter of 2014, narrower than a net loss of $0.3 billion or 21 cents a year ago.

Revenues inched up 0.2% year over year to $19.8 billion in the reported quarter. Sales were almost at par with the sequentially prior quarter as improved steel shipments were partly offset by lower average steel selling prices, seasonally lower market priced iron ore shipments and lower iron ore reference prices. Steel shipments rose 2.4% year over year to 21 million metric tons.

However, the company’s net debt increased significantly on a sequential basis in the quarter, mainly due to investment in operating working capital and other payables.

ArcelorMittal’s shares fell as much as around 4% in the trading session following the release. The stock is down roughly 10% so far this year.

Segment Review

ArcelorMittal has changed its organizational structure, effective Jan 1, 2014, to reduce organizational complexity and layers, simplify processes, and take advantage of the scale effect within the regions. The new reporting segments now include NAFTA, Brazil, Europe and Asia Africa and CIS (ACIS) with the Mining segment remaining unchanged.

NAFTA: Crude steel production fell 1.9% year over year and 1.6% sequentially to 6.3 million tons in the quarter. The sequential decline was due to lower production in the U.S. impacted by severe weather conditions. Average selling prices went up 0.7% year over year to $840 per ton. Sales increased 0.8% year over year and were 1.3% lower sequentially at $4,928 million. Sales were impacted by lower shipments, partly offset by higher average steel selling prices.

Brazil: Crude steel production increased 0.5% year over year but declined 1.5% sequentially to 2.4 million tons in the quarter. Sales decreased 4.3% year over year and 7.1% sequentially to $2.4 billion in the quarter. The sequential decline in sales was due to lower shipment volumes and a decline in selling prices mainly resulting from lower Tubular prices due to currency devaluation. Average selling prices went down 3.2% year over year to $895 per ton.

Europe: Crude steel production increased 4.6% year over year and 4.3% sequentially to 10.9 million tons in the quarter. The sequential increase was due to the restart of a furnace in Dabrowa, Poland, following completion of planned maintenance work. Sales rose 1.2% year over year and 2.9% sequentially to $10.3 billion due to higher steel shipments. Average steel selling prices declined 1.3% year over year to $808 per ton.

Asia Africa and CIS (ACIS): Sales dropped 6.4% from the year-ago quarter but showed a 1.6% increase from the previous quarter to $2 billion. Higher volumes led to the sequential increase in sales. Production recorded a 5.2% year-over-year rise and a 8.4% sequential decrease to 3.4 million tons. The sequential decline in production was due to lower production in Ukraine, affected by blast furnace maintenance. Average selling prices were $567 per ton compared with $623 per ton in the year-ago quarter.

Mining: Iron ore production rose 13% year over year but declined 3.6% sequentially to 14.8 million tons in the reported quarter due to lower production from the Canadian mining operations, hurt by harsh winter conditions. Coal production declined 10% both on year-over-year basis and sequentially and came in at 1.8 million tons. Revenues rose 4.7% year over year but fell 22.5% sequentially to $1,256 million.

Balance Sheet

Cash and cash equivalents (including restricted cash) amounted to $5.1 billion as of Mar 31, 2014, compared with around $8 billion as of Mar 31, 2013. The company’s net debt jumped to $18.5 billion at the end of the reported quarter from $16.1 billion at the end of 2013.

New Developments

On Apr 30, 2014, ArcelorMittal signed a sale and purchase agreement with H.E.S. Beheer N.V. to sell its 78% interest in European port handling and logistics company ATIC Services S.A. (ATIC) to HES Beheer for €155 million ($214 million).

With this transaction, HES Beheer will own 100% stake in ATIC where it currently holds a 22% stake. The transaction is expected to close by Jun 2014 subject to customary closing conditions. The transaction is consistent with ArcelorMittal`s strategy of selective deposal of non-core assets.

Outlook

ArcelorMittal reaffirmed its expectation for earnings before interest, taxes, depreciation and amortization (EBITDA) of about $8 billion for 2014. The company expects a recovery in Europe and the U.S. to aid its results this year. It expects net interest expense to be roughly $1.6 billion in 2014, down from $1.8 billion in 2013, mainly due to lower average debt.

Capital expenditure is expected to be in the range of $3.8 billion  to $4 billion in 2014, a modest increase from 2013, with some of the expected spending from last year rolling into this year as well as the continuation of the Phase II Liberia project. The company does not plan to ramp-up any major steel growth capital expenditure or hike dividends until the medium term $15 billion net debt target has been achieved and market conditions improve.

As part of its management gain improvement target of $3 billion by the end of  next year, the company has set action plans and detailed targets for its various business units. As of Dec 31, 2013, $1.1 billion of improvements had been achieved on an annualized run-rate basis.

ArcelorMittal currently holds a Zacks Rank #4 (Sell).

Other companies in the steel  and related industries with favorable Zacks Rank include NN Inc. (NNBR - Snapshot Report), ThyssenKrupp AG (TYEKF) and and Timken Co. (TKR - Snapshot Report) While NN retains a Zacks Rank #1 (Strong Buy), ThyssenKrupp and Timken carry a Zacks Rank # 2 (Buy).

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