Severstal reports Q1 2017 financial results

Severstal reports Q1 2017 financial results

 

- A robust performance -

 

Moscow, Russia - 20 April 2017 - PAO Severstal (MICEX-RTS: CHMF; LSE: SVST), one of the world's leading steel and steel-related mining companies, today announces its Q1 2017 financial results for the period ended 31 March 2017.

 

CONSOLIDATED FINANCIAL RESULTS FOR THE QUARTER ENDED 31 MARCH 2017

$ million, unless otherwise stated

Q1 2017

Q4 2016

Change, %

Q1 2017

Q1 2016

Change, %

Revenue

1,767

1,651

7.0%

1,767

1,097

61.1%

EBITDA1

578

528

9.5%

578

273

111.7%

EBITDA margin, %

32.7%

32.0%

0.7 ppts

32.7%

24.9%

7.8 ppts

Profit from operations

476

435

9.4%

476

196

142.9%

Operating margin, %

26.9%

26.3%

0.6 ppts

26.9%

17.9%

9.0 ppts

Free cash flow

70

388

(82.0%)

70

(32)

n.a.

Net  profit2

359

313

14.7%

359

270

33.0%

Basic EPS3, $

0.44

0.39

12.8%

0.44

0.33

33.3%

 

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)     Net profit after FX fluctuations.

 

3)     Basic EPS is calculated on the following basis: net profit divided by the weighted average number of shares outstanding during the period: 810.6 million shares for Q1 2017, Q4 2016 and Q1 2016.

 

Q1 2017 vs. Q4 2016 ANALYSIS:

 

§ Group revenue was up 7.0% q/q at $1,767 million (Q4 2016: $1,651 million) due to higher prices in Q1 2017 which was partly offset by a decline in sales volumes at both the Russian Steel and Resources divisions.

 

§ Group EBITDA increased 9.5% q/q to $578 million (Q4 2016: $528 million) driven by topline growth which was partly mitigated by higher operating expenses. Group EBITDA margin expanded 0.7 ppts q/q to 32.7% (Q4 2016: 32.0%) mainly influenced by the Resources division profitability which was boosted as raw materials selling prices caught-up with global benchmarks. Severstal's EBITDA margin remains one of the highest in the global industry despite commodity and steel markets headwinds.

 

§ Net profit of $359 million (Q4 2016: $313 million) includes a FX gain of $19 million. Adjusting for this non-cash item, Severstal would have posted an underlying net profit of $340 million (Q4 2016: net profit of $293 million).

 

§ Free cash flow declined to $70 million (Q4 2016: $388 million) resulting from a significant increase of net working capital which was partly offset by a CAPEX decrease and earnings growth. Net working capital seasonal growth resulted from inventory accumulation to normal levels after a Q4 2016 sell-off, as well as building up finished goods stock for subsequent realisation during the construction season. Free cash flow generation remains one of the Company's key strategic financial priorities.

 

§ Cash CAPEX of $138 million fell 17.4% q/q (Q4 2016: $167 million). In February 2017 Severstal announced its CAPEX programme which sets an estimated target of 43 bln RUB across the business. The Company continues investing in safety across all of its assets - one of the projects included in the 2017 investment programme is a multi-functional safety system at Vorkutaugol mines. Investment programme also includes downstream and IT development projects at Russian steel as well as other maintenance projects.

 

§ Net debt declined 8.3% to $788 million by the end of Q1 2017 (Q4 2016: $859 million).

 

§ Recommended dividend payment of 24.44 RUB per share for the three months ended 31 March 2017.

 

Q1 2017 vs. Q1 2016 ANALYSIS:

 

§ Group revenue up 61.1% y/y to $1,767 million (Q1 2016: $1,097 million). During the first quarter of 2017 the Company benefitted from favourable steel and commodities pricing dynamics as well as increased sales of steel products and iron ore pellets, which enabled Severstal to improve its topline.

 

§ Group EBITDA was up 111.7% y/y to $578 million (Q1 2016: $273 million) as a result of higher revenue generation, which was partially offset by higher operating costs.

 

§ The Company generated $70 million of free cash flow which is higher than in the previous year (Q1 2016: negative $32 million) partially supported by stronger pricing y/y.

 

§ The Group maintained its prudent approach to CAPEX with an investment of $138 million, 16.0% higher y/y (Q1 2016: $119 million).

 

 

FINANCIAL POSITION HIGHLIGHTS:

 

§ At the end of Q1 2017, cash and cash equivalents totaled $1,939 million (Q4 2016: $1,154 million) which primarily reflects the net effect of the bond issue. In February 2017 Severstal issued Convertible Bonds due in 2022 in the amount of $250 million, bearing a zero-coupon rate. The initial conversion price was set at $20.33 per GDR, representing a conversion premium of 35% above the reference price. Later in February 2017 the Company successfully issued $500 million loan participation notes due in 2021 with a 3.85% coupon rate.

 

§  Gross debt in USD-terms increased 35.5% to $2,727 million (Q4 2016: $2,013 million) reflecting the abovementioned debt issue. In February Moody's rating agency  revised Severstal's outlook from 'negative' to 'stable' alongside an upgrade of Russia's sovereign outlook.

 

§ Net debt declined 8.3% to $788 million by the end of Q1 2017 (Q4 2016: $859 million). The Net Debt/EBITDA ratio remained flat at 0.4x at the end of Q1 2017 (Q4 2016: 0.4x). Severstal's Net Debt/EBITDA indicator remains one of the lowest ratios amongst steel companies globally and enables Severstal to maintain a low level of indebtedness whilst returning value to its shareholders.

 

§ Liquidity position remains strong, with $1,939 million in cash and cash equivalents and unused committed credit lines of $675 million, more than covering short-term principal debt of $1,195 million.

 

Alexandr Shevelev, CEO of Severstal Management, commented:

 

"Severstal entered into 2017 delivering a robust financial performance supported by high raw material and steel prices. Despite the expected seasonal factors putting some temporary pressure on free cash flow generation, the Company demonstrated the strengths of its vertically integrated business model delivering again one of the highest EBITDA margins in the industry.

 

In February 2017, the Company announced its capital expenditure programme which does not exceed the 2016 target CAPEX amount in RUB terms and which reflects our investment approach of selecting projects with the highest payback ratio and helping us to take the business to the next level. We have almost completed our large-scale programme of steel downstream development moving now to the hot-end renovation. This will allow us to become a world-class production organisation, raise further the efficiency of our operations and reduce our environmental impact. Since 2017 we will have made notable investments into digital technologies to improve operational efficiency, understanding the benefits that the fourth industrial revolution can give to businesses like ours. Safety and customer care will remain our priority focus areas as before.

 

We expect further fundamental stabilisation of the global steel and steel-related commodity markets to continue in 2017. As the global economy continues its growth, we expect world's steel demand to improve further in 2017. Steel demand will also be supported by China's shutdown of inefficient steel and mining capacities and continued measures to stimulate domestic economic growth. After three years of decline, Russia's local steel consumption is expected to rise by approximately 1.5-2% in 2017 on the back of GDP growth.

 

We welcome the European Commission's preliminary decision not to impose provisional duties on export of hot rolled flat steel products from Russia, however we would like to emphasise that Severstal always complies with international trade rules and continues to take initiatives to mitigate the impact of possible restrictions on our performance by reducing costs, raising quality and service, increasing the share of high value added products in the sales portfolio and diversifying our export markets.

 

Overall, we expect 2017 to be a better year for the steel industry globally".

 

REVIEW OF THE FIRST QUARTER ENDED 31 MARCH 2017

 

In Q1 a favourable pricing environment benefited all of Severstal's assets and the Company maintained a steady performance despite seasonal headwinds. This reflected the strength of our operations and management's ongoing focus on enhancing efficiency. High commodity prices supported export and domestic steel prices. The Company replenished inventories to normal levels and accumulated finished good stocks for subsequent realisation during 2017. The share of HVA in the product mix reached 44% driven by growth in cold rolled, colour-coated and large-diameter pipes sales volumes. Weaker domestic demand led to a decline in domestic deliveries to 58% as Severstal's proximity to both its main export and domestic consumers allows it to shift flexibly between export and domestic sales depending on the market environment.

 

The abovementioned factors in combination with 8-21% q/q increase in average selling prices (depending on the product) resulted in stronger profitability despite Russian currency appreciation and input cost increase. EBITDA in Q1 2017 increased 9.5% q/q. In Q1 2017 Severstal's EBITDA margin benefitted from Resources division reflecting global trends and remained one of the highest amongst global steel producers at 32.7% (up 0.7 ppts q/q).

 

Seasonal growth of net working capital led to a decline in free cash flow in the first quarter.

 

At the beginning of 2017 Severstal issued Convertible Bonds due in 2022 of $250 million bearing a zero-coupon rate and $500 million loan participation notes due in 2021 with a 3.85% coupon rate, in line with the Company's commitment to a favourable debt/equity balance. Meanwhile Severstal's gross debt reduction remains largely maturity-driven, with almost all of the Company's gross debt being public at the end of Q1 2017.

 

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 Q1 2017. As a result the Board of Directors is recommending a dividend of 24.44 roubles per share for Q1 2017.

 

In April the European Commission announced its preliminary decision not to impose provisional duties on hot rolled flat steel products from Russia and other countries which could make a positive contribution to the Company's performance outlook.

 

SEVERSTAL RUSSIAN STEEL (RSD)

 

$ million, unless otherwise stated

Q1 2017

Q4 2016

Change, %

Q1 2017

Q1 2016

Change, %

Revenue

1,623

1,508

7.6%

1,623

998

62.6%

EBITDA

409

406

0.7%

409

214

91.1%

EBITDA margin, %

25.2%

26.9%

(1.7 ppts)

25.2%

21.4%

3.8 ppts

 

Russian Steel product sales declined 9% q/q to 2.54 mln tonnes as after record sales volumes achieved in the previous quarter, the Company replenished inventories to normal levels and accumulated finished good stocks for subsequent realisation during 2017. This was combined with increased export sales in response to weaker domestic demand and lower activity from local traders.

 

Cold-rolled coil sales improved further, by 14% q/q, following completion of the refurbishment of the four-stand cold rolling mill at CherMK in 2016. Moreover, seasonal colour-coated coil stock created in Q4 resulted in a 6% sales increase q/q.

 

The share of HVA products within the sales mix improved to 44% (Q4 2016: 40%) fueled by cold-rolled, large diameter pipes and colour-coated sales growth. The proximity of key assets to the border also enabled the Company to shift sales to export, accordingly steel product export sales volumes grew to 42% (Q4 2016: 38%) of the sales mix.

 

Average selling prices for all steel products increased between 8% and 21% q/q, depending on the specific product  which enabled Russian Steel to increase its revenue 7.6% q/q to $1,623 million (Q4 2016: $1,508 million) despite a decline in sales volumes. With the positive impact of higher selling prices being offset by higher production costs due to growth in raw material prices, EBITDA was almost flat, up only 0.7% q/q at $409 million (Q4 2016: $406 million). The EBITDA margin shrank 1.7 ppts to 25.2% (Q4 2016: 26.9%).

 

The total non-integrated cash cost of slab production at the Cherepovets Steel Mill in Q1 2017 increased $73/t q/q to $323/t (Q4 2016: $250/t) as a result of higher raw material cost and Russian currency appreciation. The integrated cash cost of slab in Q1 2017 increased $46/t to $240/t (Q4 2016: $194/t).

 

 

SEVERSTAL RESOURCES

 

$ million, unless otherwise stated

Q1 2017

Q4 2016

Change, %

Q1 2017

Q1 2016

Change, %

Revenue

424

348

21.8%

424

229

85.2%

EBITDA

214

146

46.6%

214

62

245.2%

EBITDA margin, %

50.5%

42.0%

8.5 ppts

50.5%

27.1%

23.4 ppts

 

In Q1 2017 coking coal concentrate sales volumes from Vorkutaugol remained in decline, down 11% q/q to 0.71 mln tonnes (Q4 2016: 0.80 mln tonnes) impacted by scheduled long-wall repositionings at the Vorkutinskaya and Komsomolskaya mines. Once the Severnaya mine is fully sealed-off, the Company expects to begin extraction of the Severnaya mine resources via the adjacent Komsomolskaya mine in 2020.

 

Iron ore pellet sales decreased 8% and totaled 2.58 mln tonnes (Q4 2016: 2.79 mln tonnes) impacted by seasonal factors. Iron ore concentrate sales volumes declined 13% q/q to 0.80 mln tonnes (Q4 2016: 0.92 mln tonnes) mainly influenced by planned maintenance works.

 

Reflecting the abovementioned q/q decline in volumes, revenue from the Resources division continued to grow supported by the strong market prices in hard coking coal and iron ore which positively influenced Russian selling prices. Revenue increased by a significant 21.8% q/q, to $424 million (Q4 2016: $348 million) and EBITDA surged 46.6% to $214 million (Q4 2016: $146 million). Severstal managed to achieve record margins at its Resources division of 50.5%, expanding 8.5 ppts (Q4 2016: 42.0%).

 

Given the fixed cost nature of the mining business, lower processing volumes at Vorkutaugol dragged total cash costs (TCC) higher to 83$/t (Q4 2016: $79/t). At the same time, TCC at Karelsky Okatysh increased $5/t to $28/t (Q4 2016: $23/t) influenced by the growth in distribution and energy expenses. TCC at Olcon were up $6/t at $34/t (Q4 2016: $28/t) partly reflecting a seasonal decline in sales volumes as well as energy expenses growth.

 

DIVIDEND

 

The Board is recommending a dividend payment of 24.44 roubles per share for the three months ended 31 March 2017.

 

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

 

Spot hard coking coal prices were boosted in the beginning of April by supply disruptions in Australia after tropical storm Debbie. The hard coking coal market is now experiencing significant shortages. At the same time, China continues its relaxation of its 276-days policy and marginal producers from North America are increasing their shipments. Iron ore prices were supported by significant restocking in Q1 2017, but currently they started to slow down as port inventories are high and supply is rising.

 

Global steel demand is expected to increase by approximately 1% in 2017 across the majority of countries. Chinese steel demand could be flat y/y. The steel market balance in China is supported by supply restrictions for environmental reasons and policy of capacity closures which targets 50 mmt in 2017 plus closure of illegal induction furnaces by June 2017.

 

Steel demand in Russia decreased by approximately 4% in 2016 and it is expected to recover by 2% in 2017 on the back of pent-up demand and normalisation of macroeconomic conditions. Rouble strengthened in Q1 2017 on the back of OPEC cuts and high interest rates in Russia, but it is expected to slightly weaken. Russian export prices may be supported by decision of the European Commission not to introduce preliminary anti-dumping duties, as well as lower Chinese exports.

 

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

 

 

 

 

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 Q1 2017 results for investors and analysts hosted by Alexey Kulichenko, Chief Financial Officer, will be held on 20 April 2017 at 12.00 (London)/ 14.00 (Moscow). 

 

Conference ID: 8455612

 


International Dial:

+44 (0)330 336 9105 (Local access)
0800 279 6839 (UK - Toll free)

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: 8455612

UK Dial:
+44 (0) 207 660 0134 (Local access)
0 808 101 1153 (Toll free)

USA Dial:

+1 719-457-0820 (Local access)

1 888-203-1112 (Toll free)

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