Severstal reports Q4 & FY 2016 financial results

Severstal reports Q4 and FY 2016 financial results

 

- Resilient performance in challenging conditions -

 

Moscow, Russia - 2 February 2017 - PAO Severstal (MICEX-RTS: CHMF; LSE: SVST), one of the world's leading steel and steel-related mining companies, today announces its Q4 and FY 2016 financial results for the period ended 31 December 2016.

 

CONSOLIDATED FINANCIAL RESULTS FOR THE QUARTER ENDED 31 DECEMBER 2016

$ million, unless otherwise stated

Q4 2016

Q3 2016

Change, %

2016

2015

Change, %

Revenue

1,651

1,588

4.0%

5,916

6,396

(7.5%)

EBITDA1

528

584

(9.6%)

1,911

2,096

(8.8%)

EBITDA margin, %

32.0%

36.8%

(4.8 ppts)

32.3%

32.8%

(0.5 ppts)

Profit from operations

435

458

(5.0%)

1,517

1,703

(10.9%)

Operating margin, %

26.3%

28.8%

(2.5 ppts)

25.6%

26.6%

(1.0 ppts)

Free cash flow2

388

323

20.1%

1,021

1,552

(34.2%)

Net  profit3

313

429

(27.0%)

1,620

562

188.3%

Basic EPS4, $

0.39

0.53

(26.4%)

2.00

0.70

185.7%

 

Notes:

 

1)     EBITDA represents profit from operations plus depreciation and amortisation of productive assets (including the Group's share in depreciation and amortisation of associates and joint ventures) adjusted for gain/(loss) on disposals of PPE and intangible assets and its share in associates' and joint ventures' non-operating income/(expenses).

 

2)     Free cash flow excludes discontinued operation.

 

3)     Net profit from continuing operations after FX fluctuations.

 

4)     Basic EPS from continuing operations is calculated on the following basis: net profit from continuing operations divided by the weighted average number of shares outstanding during the period: 810.6 million shares for Q4 2016, Q3 2016, 2016 and 2015.

 

Q4 2016 vs. Q3 2016 ANALYSIS:

 

§ Group revenue increased 4.0% q/q to $1,651 million (Q3 2016: $1,588 million) driven by higher steel product sales volumes on the back of strengthening domestic demand as well as diversification of sales to export markets to take advantage of higher average selling prices at both the Russian Steel and Resources divisions. Our key Russian steel producing assets ran close to 100% utilisation rate in Q4 2016;

 

§ Group EBITDA was $528 million, a decline of 9.6% q/q (Q3 2016: $584 million), due to higher operating costs which were partly offset by revenue growth. Group EBITDA margin decreased 4.8 ppts q/q to 32.0% (Q3 2016: 36.8%) mainly impacted by rouble appreciation which reduced profitability at Russian Steel as well as seasonally reduced share of high value added ("HVA") products in the sales mix and higher operating costs in Q4. Despite this, Severstal's EBITDA margin continues to be one of the highest in the global industry;

 

§ Net profit of $313 million (Q3 2016: $429 million) includes a FX gain of $96 million, non-current assets impairment of $115 million, a loss on disposal of property, plant and equipment of $8 million and a gain of $47 million relative to FX translation reserves of disposed foreign subsidiaries. Adjusting for these non-cash items, Severstal would have posted an underlying net profit of $293 million (Q3 2016: net profit of $449 million);

 

§ Free cash flow surged 20.1% q/q to $388 million (Q3 2016: $323 million) resulting from significant release of net working capital which was partly offset by a CAPEX increase and the abovementioned weaker operating performance. Free cash flow generation remains one of the Company's key strategic financial priorities;

 

§ Cash CAPEX of $167 million was up 36.9% q/q (Q3 2016: $122 million) reflecting seasonal expenses allocation;

 

§ Recommended dividend payment of 27.73 RUB per share for the three months ended 31 December 2016.

 

 

FY 2016 vs. FY 2015 ANALYSIS:

 

§ Group revenue decreased 7.5% y/y to $5,916 million (FY 2015: $6,396 million) primarily reflecting a substantial decline in average steel selling prices at the beginning of 2016, as a result of the net decline in global benchmarks and a marginal decline in sales volumes;

 

§ Group EBITDA decreased 8.8% y/y to $1,911 million (FY 2015: $2,096 million) as a result of lower sales volumes and a decline in prices, which was partially offset by lower input operating costs;

 

§ The Company generated $1,021 million of free cash flow which is 34,2% y/y lower than in the previous year (FY 2015: $1,552 million) partially impacted by the weaker Q1 2016 operating performance which resulted in negative free cash flow generation.

 

§ The Group's prudent approach to CAPEX was maintained with investment of $525 million, 19.3% higher y/y (FY 2015: $440 million).

 

 

FINANCIAL POSITION HIGHLIGHTS:

 

§ At the end of Q4 2016, cash and cash equivalents were $1,154 million (Q3 2016: $1,141 million) which reflects the interim dividend payment for Q3 2016 in December 2016, scheduled loan repayments during Q4 and CAPEX growth q/q which were offset by free cash flow generation during the quarter.

 

§ Gross debt in USD-terms remained almost flat, decreasing marginally 3.4% as at the end of Q4 2016 to $2,013 million (Q3 2016: $2,084 million).

 

§ Net debt declined 8.9% to $859 million by the end of Q4 2016 (Q3 2016: $943 million) reflecting gross debt reduction alongside growth in cash balances. The Net Debt/EBITDA ratio decreased to 0.4x at the end of Q4 2016 (Q3 2016: 0.5x) which was the result of a reduction in Net Debt and operating earnings growth y/y. Severstal's Net Debt/EBITDA indicator remains one of the lowest ratios amongst steel companies globally;

 

§ Liquidity position remains strong, with $1,154 million in cash and cash equivalents and unused committed credit lines of $675 million, more than covering short-term principal debt of $649 million.

 

 

Alexandr Shevelev, CEO of Severstal Management, commented:

 

"In 2016, Severstal delivered a robust financial and operational performance, in spite of global industry headwinds. This outcome reflects the strengths of our vertically integrated business model as well as the benefits of our strategy focused on driving efficiency, ever improving customer care and enhancing product quality.

 

I would like to take this opportunity to reflect on the tragic event at the Severnaya mine in February, and remember our colleagues and rescue workers who tragically died. One of the Company's key objectives is to eliminate all fatalities across the business, and health and safety remains a key priority and focus of investment as we strive to ensure tragedies such as this are not repeated. The Company has completed compensation payments to all those affected and the mine remains sealed off to avoid the risk of further underground fire and explosions.

 

As we review the fourth quarter, the rally in coking coal and iron ore benchmarks which fueled growth in global steel prices continued in Q4. This alongside an increase in sales volumes, allowed the Company to mitigate any negative impact from input costs rise. We maintained a sustainable level of operational earnings and significantly improved free cash flow generation as a result of continuous operational enhancements and efficiency improvements across our operations.

 

We expect further fundamental stabilisation of the global steel and steel-related commodity markets to continue in 2017. Global steel demand continues to improve supported by ongoing capacity cuts, consolidation plans and continued investment in infrastructure in China. Against this backdrop, we continue to believe strong, efficient and vertically integrated steel producers such as Severstal to continue to deliver long-term shareholder value".

 

 

REVIEW OF THE FOURTH QUARTER ENDED 31 DECEMBER 2016

 

In Q4 Severstal maintained a steady performance reflecting the strength of our operations and management's ongoing focus on enhancing efficiency. The sharp spike in global raw materials benchmarks supported steel prices which enabled steel producers to maintain high domestic rouble-denominated steel prices in order to catch up with export prices. The Company successfully increased sales volumes in Q4 due to domestic demand growth and the diversification of sales to export markets. Despite a decrease in the share of HVA in the product mix, the Company successfully responded to improved demand for its products in export and domestic markets. Severstal's proximity to both main export and domestic consumers allows it to shift flexibly between export and domestic deliveries depending on the market environment.

 

The abovementioned factors allowed Severstal to increase sales volumes and average selling prices 1-11% q/q (depending on the product) following an upward adjustment in global steel prices, supported by growth in coking coal and iron ore benchmarks. Russian currency appreciation and input costs growth negatively impacted EBITDA in Q4 which decreased 9.6% q/q. Nevertheless, Severstal's EBITDA margin remained one of the highest amongst global steel producers at 32.0% (down 4.8 ppts q/q).

 

The Company increased free cash flow during the quarter reflecting a substantial release of net working capital and despite the decline in earnings.

 

Severstal's gross debt reduction remains largely maturity-driven, with almost all of the Company's gross debt being public at the end of Q4.

 

Whilst maintaining a low debt level, Severstal is committed to returning value to its shareholders. Severstal's financial position remains solid with its Net debt/EBITDA ratio at 0.4x as at the end of Q4 2016. As a result the Board of Directors is recommending a dividend of 27.73 roubles per share for Q4 2016.

 

SEVERSTAL RUSSIAN STEEL (RSD)

 

$ million, unless otherwise stated

Q4 2016

Q3 2016

Change, %

2016

2015

Change, %

Revenue

1,508

1,471

2.5%

5,426

5,836

(7.0%)

EBITDA

406

488

(16.8%)

1,543

1,683

(8.3%)

EBITDA margin, %

26.9%

33.2%

(6.3 ppts)

28.4%

28.8%

(0.4 ppts)

 

Russian Steel product sales increased 5% q/q to 2.79 million tonnes. This was driven by the sell-off of stocks accumulated in the previous quarter in response to higher domestic demand for hot-rolled and long products.

 

High demand in the domestic market drove sales volumes of hot-rolled coil up 6% q/q. Reallocation of hot-rolled plate internal shipments to the market allowed the Company to increase sales of plate by 29%. An increase in semi-finished product sales was influenced by stronger demand in export markets and higher availability of production capacity in comparison with Q3 when Severstal accumulated steel inventories to standard levels after planned maintenance works. At the same time, the Company increased its stocks of galvanized and colour-coated products in response to seasonally weaker demand in the domestic market and on expectations of a typical demand growth for HVA products in Spring.

 

As a result, the share of HVA products within the sales mix slightly decreased to 40% (Q3 2016: 42%), despite a 15% q/q increase in cold rolled coil sales volumes. Domestic sales increased to 62% in Q4 2016 (Q3 2016: 60%).

 

The abovementioned factors combined with stable export and domestic steel prices led to an increase in revenue of 2.5% q/q to $1,508 million (Q3 2016: $1,471 million). With the positive impact of higher selling prices being offset by higher production costs, EBITDA was down 16.8% q/q to $406 million (Q3 2016: $488 million). The EBITDA margin decreased 6.3 ppts to 26.9% (Q3 2016: 33.2%).

 

The total non-integrated cash cost of slab production at the Cherepovets Steel Mill in Q4 2016 increased $37/t q/q to $250/t (Q3 2016: $213/t) as a result of higher repair expenses, raw material cost and Russian currency appreciation. The integrated cash cost of slab in Q4 increased $14/t to $194/t (Q3 2016: $180/t).

 

SEVERSTAL RESOURCES

 

$ million, unless otherwise stated

Q4 2016

Q3 2016

Change, %

2016

2015

Change, %

Revenue

348

281

23.8%

1,154

1,240

(6.9%)

EBITDA

146

88

65.9%

397

412

(3.6%)

EBITDA margin, %

42.0%

31.3%

10.7 ppts

34.4%

33.2%

1.2 ppts

 

With the Severnaya mine sealed-off, total coking coal sales at Vorkutaugol in 2016 decreased 27% compared with the previous year. The Company currently expects to begin extraction of the Severnaya mine resources via the adjacent Komsomolskaya mine in 2020.  Meanwhile, in Q4 coking coal concentrate sales from Vorkutaugol declined further, by 12% q/q to 0.80 mln tonnes (Q3 2016: 0.91 mln tonnes) impacted by scheduled long-wall repositionings at the Vorkutinskaya mine and the sell-off of stock during Q3.

 

Iron ore concentrate sales volumes decreased 19% q/q to 0.92 mln tonnes (Q3 2016: 1.13 mln tonnes) mainly impacted by seasonal factors. Iron ore pellet sales remained largely flat at 2.79 mln tonnes (Q3 2016: 2.79 mln tonnes) with seasonally lower export demand being offset by an increase in internal procurement.

 

Supported by the recent uptick in hard coking coal and iron ore benchmarks which positively influenced Russian selling prices, Severstal managed to achieve record margins at its Resources division. Revenue increased by a significant 23.8% q/q, to $348 million (Q3 2016: $281 million) and EBITDA surged 65.9% to $146 million (Q3 2016: $88 million) mainly driven by topline growth at Vorkutaugol and Karelsky Okatysh in line with relatively stable operating costs. Meanwhile the EBITDA margin reached a record level of 42.0%, expanding 10.7 ppts (Q3 2016: 31.3%).

 

Given the fixed cost nature of the mining business lower processing volumes at Vorkutaugol dragged total cash costs (TCC) higher to 79$/t (Q3 2016: $77/t). At the same time, TCC at Karelsky Okatysh remained flat to $23/t (Q3 2016: $23/t), while TCC at Olcon increased to $28/t (Q3 2016: $22/t) partly reflecting a rise in repair expenses.

 

DIVIDEND

 

The Board is recommending a dividend payment of 27.73 roubles per share for the three months ended 31 December 2016.

 

Approval of the dividend is expected at the Company's AGM which will take place on 9 June 2017. The record date for participation in the AGM is 15 May 2017.

 

The recommended record date for the dividend payment is 20 June 2017. The approval of the record date for the dividend payment is also expected at the Company's AGM which will take place on 9 June 2017.

 

OUTLOOK

 

According to industry experts, world crude steel production increased by 0.8% in 2016 driven by Chinese production which grew 1.2% and reached 808 mln tonnes. In 2017 steel production is expected to grow further driven by increasing global demand.

 

Global coking coal prices significantly declined from the peak levels of November 2016 to more normal levels due to increasing production after a relaxation of the 276-days policy in China and a recovery in Australian export volumes. The outlook will depend on Chinese policy which could introduce supply restrictions if thermal coal prices fall below a minimum threshold. Iron ore prices were particularly strong in Q4 2016 on the back of strong demand from China, which imported over 1 billion tonnes of iron ore in 2016. Steel prices were supported by high raw material prices and solid steel demand which led to some expansion of the spread between steel and raw material prices in Q4 2016.

 

The Russian economy is benefiting from improved oil prices, rouble appreciation and a significant decline in inflation. The domestic steel market is expecting a moderate recovery in demand in 2017 following the anticipated decline in 2016 of 4-6% y-o-y.

 

Steel producers globally continue to face the challenges of protectionism across the world. We are confident that our efficient cost position, wide geography of sales, increasing quality and service standards will continue to allow us to mitigate the effect of protectionism. At the same time we continue to defend our position in global trade associations as we view protectionist initiatives against us as unjustified.

 

The Board is confident that the Company's vertically integrated business model, high quality and cost competitive operations, low debt level, and sizeable share of high-value added products in the portfolio, means that Severstal continues to be well positioned relative to both local and global peers.



 

NOTES

 

1. Full financial statements are available at http://www.severstal.com/eng/ir/results_and_reports/financial_results/index.phtml

 

 

2. The Annual Report 2016, incorporating the financial statements for the year ended 31 December 2016, on which the auditors will give an

unqualified report will be made available to shareholders in March 2017.

 

 

For further information, please contact:

 

Severstal Investor Relations

 

Evgeny Belov

T: +7 (495) 926-77-66

evgenii.belov@severstal.com

 

Vladimir Zaluzhsky

T: +7 (495) 926-77-66

vladimir.zaluzhsky@severstal.com

 

 

Severstal Public Relations

Anastasia Mishanina

T: +7 (495) 926-77-66

anastasia.mishanina@severstal.com 

 

Severstal's financial communications agent - Hudson Sandler

Andrew Hayes / Emily Dillon / Alex Brennan / Fern Duncan

T: +44 (0) 20 7796 4133

 

 

A conference call on Q4 2016 results for investors and analysts hosted by Alexey Kulichenko, Chief Financial Officer, will be held on 2 February 2017 at 12.00 (London)/ 15.00 (Moscow). 

 

Conference ID: 9912978

 


International Dial:

+44 (0) 330 336 9105

Russian Dial: 
+7 495 213 1767 (Local access) 
8 800 500 9283 (Toll free)

 

 

The call will be recorded and there will be a replay facility available for 7 days as follows:

 

Replay Passcode: 9912978

International Dial:
+44 (0) 207 660 0134 (Local access) 

Russian Dial:
8 800 2702 1012 (Toll free)

 

***

PАО Severstal is one of the world's leading vertically integrated steel and steel related mining companies, with assets in Russia, Ukraine, Latvia, Poland and Italy. Severstal is listed on RTS and MICEX and the company's GDRs are traded on the LSE. Severstal reported revenue of $5,916 million and EBITDA of $1,911 million in 2016. Severstal's crude steel production in 2016 reached 11.6 million tonnes. www.severstal.com