October 25, 2016

Severstal reports Q3 and 9M 2016 financial results

- High margins underpinning strong results -

Moscow, Russia – 25 October, 2016PAO Severstal (MICEX-RTS: CHMF; LSE: SVST), one of the world’s leading steel and steel-related mining companies, today announces its Q3 and 9M 2016 financial results for the period ended 30 September 2016.

 

CONSOLIDATED FINANCIAL RESULTS FOR THE QUARTER ENDED 30 SEPTEMBER 2016

$ million, unless otherwise stated

Q3 2016

Q2 2016

Change, %

9M 2016

9M 2015

Change, %

Revenue

1,588

1,580

0.5%

4,265

5,000

(14.7%)

EBITDA1

584

526

11.0%

1,383

1,695

(18.4%)

EBITDA margin, %

36.8%

33.3%

3.5 ppts

32.4%

33.9%

(1.5 ppts)

Profit from operations

458

428

7.0%

1,082

1,400

(22.7%)

Operating margin, %

28.8%

27.1%

1.7 ppts

25.4%

28.0%

(2.6 ppts)

Free cash flow2

323

342

(5.6%)

633

1,247

(49.2%)

Net  profit3

429

608

(29.4%)

1,307

676

93.3%

Basic EPS4, $

0.53

0.75

n.a.

1.61

0.83

n.a.

 

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 Q3 2016, Q2 2016, 9M 2016 and 9M 2015.

Q3 2016 vs. Q2 2016 ANALYSIS:

  • Group revenue remained almost flat, increasing 0.5% q/q to $1,588 million (Q2 2016: $1,580 million). This reflects a substantial rise in average selling prices for steel products and raw materials which was partly offset by lower sales volumes at both the Russian Steel and Resources divisions due to demand softening in the domestic market and planned stock replenishment;
  • Group EBITDA increased 11.0% q/q to $584 million (Q2 2016: $526 million) driven by lower operating costs and stable topline. Group EBITDA margin increased by a significant 3.5 ppts q/q to 36.8% (Q2 2016: 33.3%) and continues to be one of the highest in the industry;
  • Net profit of $429 million (Q2 2016: net profit of $608 million) includes a FX gain of $31 million, non-current assets impairment of $16 million and a loss on disposal of property, plant and equipment of $35 million in relation to fixed assets of Severnaya mine. Adjusting for these non-cash items, Severstal would have posted an underlying net profit of $449 million (Q2 2016: net profit of $427 million excluding FX gain);
  • Global steel prices started to rise in Q2, and this, alongside an increase in net working capital (on the back of a build-up of steel inventories) enabled the Company to continue generating positive free cash flow. Free cash flow  decreased marginally 5.6% q/q to $323 million (Q2 2016: $342 million). Free cash flow remains one of the key strategic priorities for the Company;
  • Cash capex of $122 million increased 4.3% q/q (Q2 2016: $117 million). Severstal’s FY 2016 capex target is RUB 43 billion, subject to FX fluctuations;
  • Recommended dividend payment of 24.96 RUB per share for the three months ended 30 September 2016.

9M 2016 vs. 9M 2015 ANALYSIS:

  • Group revenue decreased 14.7% y/y to $4,265 million (9M 2015: $5,000 million) primarily reflecting a substantial decline in average steel selling prices in the first quarter of 2016, as a result of the net decline in global benchmarks;
  • Group EBITDA decreased 18.4% y/y to $1,383 million (9M 2015: $1,695 million) as the top line compression was only partially mitigated by a decline in input operating costs;
  • Capex of $358 million was 12.9% higher y/y (9M 2015: $317 million).

FINANCIAL POSITION HIGHLIGHTS:

  • At the end of Q3 2016, cash and cash equivalents were $1,141 million (Q2 2016: $2,066 million) which reflects the redemption of Eurobonds 2016 of $255 million alongside other scheduled loan repayments during Q3. The Company also paid annual and interim dividends for the year 2015, Q1 2016 and H1 2016 in July and September respectively.
  • Reflecting the above, Severstal’s gross debt in USD-terms decreased 19.1% as at the end of Q3 2016 to $2,084 million (Q2 2016: $2,577 million). In the meantime, S&P Global Ratings upgraded Severstal to 'BBB-' from 'BB+' in August 2016 and changed outlook from ‘Negative’ to ‘Stable’ in September 2016.
  • Net debt increased 84.5% to $943 million by the end of Q3 2016 (Q2 2016: $511 million) reflecting the considerable reduction of cash balances which offsets the decrease in gross debt. The Net Debt/EBITDA ratio increased to 0.5x at the end of Q3 2016 (Q2 2016: 0.3x) primarily affected by net debt growth q/q in parallel with relatively flat y/y earnings. Severstal’s Net Debt/EBITDA indicator remains one of the lowest ratios amongst steel companies globally;
  • Liquidity position remains strong with $1,141 million in cash and cash equivalents and unused committed credit lines of $625 million, more than covering short-term principal debt of $106 million.

Vadim Larin, CEO of Severstal Management, commented:

“Before moving on to review our results for the quarter, I would like to provide an update on the Severnaya mine where operations remain suspended following the accident in February 2016. The mine will be sealed off to avoid the risk of airflow causing further underground fire and explosions in the mine. The decision was made on 20 September 2016 by the Technical Commission, comprising representatives of AO Vorkutaugol and the Russian authorities. Experts are now considering a safe method for sealing off the mine for the foreseeable future as well as the extraction of its resources through the adjacent Komsomolskaya mine, which is currently expected to start in 2020.

As we review the quarter, the stability of global steel prices during Q3 supported Severstal’s EBITDA and with its highly competitive cost position Severstal was able to continue generating positive free cash flow. We expect the stabilisation of the global steel and steel-related commodity markets to continue in 2017. Global steel demand continues to improve. Though the recent price rally in coking coal might be temporary, in our view vertically integrated steelmakers will still be better positioned going forward. In China, ongoing capacity cuts, consolidation plans and continued investment in infrastructure have improved the outlook for its steel supply-demand balance, though experts forecast some decline in steel demand in China in 2017.

Steel producers globally still face the challenges of continuing protectionism across the world. This distorts global free trade principles and negatively impacts customers. Whilst Severstal complies with international trade rules, we continue to take initiatives to mitigate the impact of these 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. We believe that our strategy combined with our strong financial position will enable the Company to continue to deliver long-term shareholder value.”

 

Full vertion of the press release

 

A conference call on Q3 2016 results for investors and analysts hosted by Alexey Kulichenko, Chief Financial Officer, will be held on 25 October 2016 at 12.00 ( London)/ 14.00 (Moscow). 

 

Conference ID: 3050953

 

International Dial:

+44 (0)203 043 2002 (Local access)
0800 358 6377 (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:

 

International Dial:

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

Russian Dial:

8 800 2702 1012 (Toll free)

Financial statements will be available at http://www.severstal.com/eng/ir/results_and_reports