July 19, 2018

Severstal reports Q2 & H1 2018 financial results

PAO Severstal (MICEX-RTS: CHMF; LSE: SVST), one of the world’s leading steel and steel-related mining companies, today announces its Q2 & H1 2018 financial results for the period ended 30 June 2018.

CONSOLIDATED FINANCIAL RESULTS FOR THE QUARTER ENDED 30 JUNE 2018

$ million, unless otherwise stated

Q2 2018

Q1 2018

Change, %

H1 2018

H1 2017

Change, %

Revenue

2,259

2,173

4.0%

4,432

3,698

19.8%

EBITDA1

874

706

23.8%

1,580

1,207

30.9%

EBITDA margin, %

38.7%

32.5%

6.2 ppts

35.6%

32.6%

3.0 ppts

Profit from operations

766

585

30.9%

1,351

1,004

34.6%

Operating margin, %

33.9%

26.9%

7.0 ppts

30.5%

27.1%

3.4 ppts

Free cash flow2

598

289

106.9%

887

452

96.2%

Net  profit3

557

461

20.8%

1,018

495

105.7%

Basic EPS4, $

0.68

0.57

19.3%

1.25

0.61

104.9%

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 is determined as the aggregate amount of the following items: Net cash from operating activities, CAPEX, proceeds from disposal of PPE, interest received and dividends received.

3) Net profit after FX fluctuations and other non-cash items.

4) Basic EPS is calculated on the following basis: net profit divided by the weighted average number of shares outstanding during the period: 814.4 million shares for Q2 2018, 814.1 million shares for Q1 2018, 814.3 million shares for H1 2018 and 810.6 million shares for H1 2017.

Q2 2018 vs. Q1 2018 ANALYSIS:

  • Group revenue increased 4.0% to $2,259 million (Q1 2018: $2,173 million) largely driven by higher sales volumes in the Resources division in Q2 2018.
  • Group EBITDA improved significantly, up 23.8% q/q, to $874 million (Q1 2018: $706 million). This EBITDA increase was supported by the Group revenue growth and lower cost of sales in the Russian Steel division. Group EBITDA margin grew 6.2 ppts reaching a record level of 38.7% (Q1 2018: 32.5%). Severstal’s EBITDA margin remains one of the highest in the industry globally.
  • Free cash flow totalled $598 million (Q1 2018: $289 million) which reflects a release of net working capital on the back of receivables collection, accumulated in Q1 2018 and a decline in inventories. Effective conversion of EBITDA to free cash flow remains one of the Company’s key strategic financial priorities.
  • Net profit of $557 million (Q1 2018: $461 million) includes a FX loss of $56 million. Adjusting for this non-cash item, Severstal would have posted an underlying net profit of $613 million (Q1 2018: net profit of $449 million).
  • Cash CAPEX increased 17.6% q/q to $160 million (Q1 2018: $136 million) due to seasonal factors. The Group’s capital expenditure programme for 2018 is expected to stand at 49.5 bn RUB and will focus on upstream investments.
  • Net debt declined 80.5% to $153 million by the end of Q2 2018 (Q1 2018: $785 million) reflecting cash balances growth on the back of free cash flow generation for Q2 2018. The Company’s public debt includes outstanding loan participation notes due in 2021 and 2022, and convertible bonds due in 2021 and 2022.
  • Recommended dividend payment of 45.94 RUB per share for the three months ended 30 June 2018.

H1 2018 vs. H1 2017 ANALYSIS:

  • Group revenue increased 19.8% y/y to $4,432 million (H1 2017: $3,698 million). The significant growth in revenue y/y was supported by a favourable steel and commodities pricing environment in 2018 and 8% steel sales volumes growth y/y.
  • Group EBITDA grew 30.9% y/y to $1,580 million (H1 2017: $1,207 million) driven by topline growth partly offset by growth in cost of good sold.
  • The Company generated $887 million of free cash flow which represents a significant increase of 96.2% y/y (H1 2017: $452 million) as a result of earnings growth y/y.
  • The Group maintained its prudent approach to CAPEX with investments equal to $296 million in H1 2018, an increase of 6.9% y/y (H1 2017: $277 million).

FINANCIAL POSITION HIGHLIGHTS:

  • At the end of Q2 2018, cash and cash equivalents stood at $1,376 million (Q1 2018: $757 million) reflecting the net effect of free cash flow generation for the period.
  • Gross debt remained relatively unchanged at $1,529 million (Q1 2018: $1,542 million).
  • Net debt declined 80.5% to $153 million by the end of Q2 2018 (Q1 2018: $785 million) reflecting cash balances growth on the back of free cash flow generation for the period. As a result, the Net Debt/EBITDA ratio declined to 0.1x at the end of Q2 2018 (Q1 2018: 0.3x). Severstal’s Net Debt/EBITDA remains one of the lowest amongst steel companies globally and enables Severstal to maintain a low level of debt whilst returning value to its shareholders.
  • The liquidity position remains strong, with $1,376 million in cash and cash equivalents and unused committed credit lines of $1,044 million, more than covering the short-term principal debt of $195 million.

Alexander Shevelev, CEO of Severstal Management, commented:

“Severstal is continuously focused on maximising value for its shareholders. To further demonstrate this, I am pleased to report that in April we have revised our dividend policy, with a formal commitment to paying 100% of free cash flow in the form of dividends on a quarterly basis.

We are committed to growing our business further. This growth will be delivered through the Company's operational improvements, customer care initiatives and our innovation-focused transformation of the business. Actual figures, of course, may vary during the period due to the cyclical nature of the steel industry. Further information on Severstal's operational enhancements will be given at the Company's annual Capital Markets Day in November 2018.

We are focused on constantly improving our Environmental, Social and Governance (ESG) performance and this commitment is fully aligned with the Group’s objective to be the leader in value creation for all of our stakeholders. We have now started providing additional information on ESG as part of our operational reporting. We achieved a solid financial performance in Q2 2018.

In a strong pricing environment, the flexibility of our distribution channels enabled the Group to quickly redirect larger volumes to domestic markets.

Reflecting our goal of becoming a leader by Total Shareholder Return, the Board of Directors is recommending a dividend of 45.94 roubles per share for Q2 2018. In 2018 we continue to forecast global steel growth.

Russian steel demand increased by 5% in 2017 and is expected to grow by a further 2.6% in 2018, supported by GDP growth and gradual economic recovery. Russia remains Severstal’s core market, and with the flexibility to redistribute shipments quickly between domestic and export markets, we are confident that Severstal will benefit strongly from any local demand.”

REVIEW OF THE SECOND QUARTER ENDED 30 JUNE 2018

In Q2 2018 the Company’s EBITDA improved by 23.8% driven by higher sales volumes at the Resources division as well as strong steel prices. The the Group’s EBITDA margin reached a record level of almost 39% in Q2 2018. Domestic steel sales volume increased to 64% (Q1 2018: 52%) reflecting a more attractive pricing environment driven by the commencement of the construction season in Russia. 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. Meanwhile, the Company maintained a high level of high value added (HVA) sales at 46%.

EBITDA to free cash conversion remains one of the Severstal’s strategic financial priorities. Free cash flow totalled $598 million in Q2 2018 resulting from a net working capital (NWC) release in receivables and inventories.

Severstal is committed to returning value to its shareholders whilst managing and maintaining a low debt level. Severstal’s financial position remains strong with its Net debt/EBITDA ratio at 0.1x as at the end of Q2 2018. As a result, the Board of Directors is recommending a dividend of 45.94 roubles per share for Q2 2018.

$ million, unless otherwise stated

Q2 2018

Q1 2018

Change, %

H1 2018

H1 2017

Change, %

Revenue

2,036

2,025

0.5%

4,061

3,379

20.2%

EBITDA

630

535

17.8%

1,165

779

49.6%

EBITDA margin, %

30.9%

26.4%

4.5 ppts

28.7%

23.1%

5.6 ppts

 

RSD steel product sales declined to 2.86 mln tonnes in Q2 2018 (Q1 2018: 2.87 mln tonnes). Domestic sales increased to 64% (Q1 2018: 52%) reflecting a more attractive pricing environment driven by the commencement of construction season in Russia.

The share of high value-added (HVA) products within the sales portfolio remained high at 46% (Q1 2018: 45%) benefitting from higher sales volumes of thick plate, colour coated and galivanised products, partially offset by lower LDP and cold rolled steel sales.

Severstal increased its sales of the HDG and colour-coated products responding to seasonally strong demand in Russia. This resulted in lower cold-rolled coil sales volumes. 

Large diameter pipe (LDP) sales volumes declined 28% q/q due to the accumulation of finished goods to be dispatched in Q3 2018 from the Izhora Pipe Mill. In March 2018, the Izhora Pipe Mill won a tender to supply approximately 165,000 tonnes of LDPs for Gazprom projects during 2018-2019.

Average selling prices for the majority of steel products remained high in Q2 2018 in line with global trends. Export steel prices were supported by strong steel demand in China. The recovery of domestic steel prices after the Q1 slowdown resulted in a more attractive domestic pricing environment. The increase in semi-finished product average selling prices was a result of a higher share of slabs in the product mix and the decline in LDP average selling price was compensated by higher sales volumes of thick plate.

Declining sales volumes were offset by higher average selling prices which resulted in a broadly stable topline q/q of $2,036 million (Q1 2018: $2,025 million). EBITDA improved 17.8% q/q to $630 million (Q1 2018: $535 million) on the back of decreased cost of goods sold. The EBITDA margin improved 4.5 ppts to 30.9% (Q1 2018: 26.4%).

The total non-integrated cash cost of slab production at the Cherepovets Steel Mill in Q2 2018 declined $13/t q/q to $322/t (Q1 2018: $335/t) as a result of Russian currency depreciation q/q. The integrated cash cost of slab in Q2 2018 decreased $31/t to $233/t (Q1 2018: $264/t) as a result of higher EBITDA of the Resources division.

SEVERSTAL RESOURCES

$ million, unless otherwise stated

Q2 2018

Q1 2018

Change, %

H1 2018

H1 2017

Change, %

Revenue

475

402

18.2%

877

895

(2.0%)

EBITDA

232

188

23.4%

420

452

(7.1%)

EBITDA margin, %

48.8%

46.8%

2.0 ppts

47.9%

50.5%

(2.6 ppts)

 

Coking coal concentrate sales volumes from Vorkutaugol grew 19% largely driven by higher production volumes of “2ZH”, “GZHO” and “Concentrate K” grades. Meanwhile, Vorkutaugol sold-off stocks of “1ZH” grade which also contributed to Q2 2018 sales volumes growth.

Iron ore pellet sales grew strongly 31% and totalled 3.12 mln tonnes (Q1 2018: 2.38 mln tonnes) after the realisation of a share of finished goods in transit in Q2, carried over from the previous quarter.

Iron ore concentrate sales increased to 1.36 mln tonnes (Q1 2018: 1.29 mln tonnes) driven by seasonal production growth at Olcon. The improvement in H1 2018 iron ore concentrate sales y/y partially reflects the consolidation of the Yakovlevskiy mine. Reflecting the q/q uptick in sales volumes, revenue of the Resources division gained 18.2% q/q, to $475 million (Q1 2018: $402 million) and EBITDA increased 23.4% to $232 million (Q1 2018: $188 million).

Given the fixed cost nature of the mining business, higher processing volumes and Russian currency depreciation at Vorkutaugol brought Q2 2018 cash costs down to 85$/t (Q1 2018: $96/t). Сash cost per tonne at Karelsky Okatysh declined to $23/t (Q1 2018: $29/t) driven by sales volumes growth and RUB depreciation. Cash cost per tonne at Olcon was down $9/t to $28/t (Q1 2018: $37/t).

DIVIDEND

The Board is recommending a dividend payment of 45.94 roubles per share for the three months ended 30 June 2018.

Approval of the dividend is expected at the Company’s EGM which will take place on 14 September 2018. The record date for participation in the EGM is 20 August 2018.

The recommended record date for the dividend payment is 25 September 2018. The approval of the record date for the dividend payment is also expected at the Company’s EGM which will take place on 14 September 2018. Efficient conversion of high EBITDA margins into free cash flow supports our commitment to be a quarterly dividend payer with up to 100% FCF payout, provided that net debt/EBITDA level is below 1.0x.

OUTLOOK

Demand for steel and raw materials markets is expected to remain at good levels. Prices for our products should be further supported by the continued construction season in most parts of the world. With a strong portfolio of high-value added products, a leading cost position and its proximity to export routes, Severstal remains well positioned to adapt quickly to changing conditions and capture attractive pricing both domestically and globally. The Board is confident that Severstal will continue to be well-placed relative to 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 2017 is available at http://www.severstal.com/eng/ir/results_and_reports/annual_reports/index.phtml