Severstal reports Q2 & H1 2018 financial results (706123)

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 PAO Severstal (SVST) 
Severstal reports Q2 & H1 2018 financial results 
 
19-Jul-2018 / 09:01 MSK 
Dissemination of a Regulatory Announcement that contains inside information 
according to REGULATION (EU) No 596/2014 (MAR), transmitted by EQS Group. 
The issuer is solely responsible for the content of this announcement. 
 
      Severstal reports Q2 & H1 2018 financial results 
 
      - Record margins support further improved cashflows - 
 
 Moscow, Russia - 19 July 2018 - 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 QUARTERED 30 JUNE 2018 
 
$ million,   Q2 2018 Q1 2018 Change, % H1 2018 H1 2017 Change, % 
unless 
otherwise 
stated 
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        38.7%   32.5%  6.2 ppts   35.6%   32.6%  3.0 ppts 
margin, % 
Profit from    766     585     30.9%    1,351   1,004    34.6% 
operations 
Operating     33.9%   26.9%  7.0 ppts   30.5%   27.1%  3.4 ppts 
margin, % 
Free cash      598     289    106.9%     887     452     96.2% 
flow2 
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 QUARTERED 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. 
 
            SEVERSTAL RUSSIAN STEEL (RSD) 
 
$ million,   Q2 2018 Q1 2018 Change, % H1 2018 H1 2017 Change, % 
unless 
otherwise 
stated 
Revenue       2,036   2,025    0.5%     4,061   3,379    20.2% 
EBITDA         630     535     17.8%    1,165    779     49.6% 
EBITDA        30.9%   26.4%  4.5 ppts   28.7%   23.1%  5.6 ppts 
margin, % 
 
    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, Q2 2018 Q1 2018 Change, % H1 2018 H1 2017 Change, %
unless
otherwise
stated
Revenue 475 402 18.2% 877 895 (2.0%)
EBITDA 232 188 23.4% 420 452 (7.1%)
EBITDA 48.8% 46.8% 2.0 ppts 47.9% 50.5% (2.6 ppts)
margin, %

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). ?ash 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 [1]

2. The Annual Report 2017 is available at
http://www.severstal.com/eng/ir/results_and_reports/annual_reports/index.pht
ml [2]

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

Vladimir Zaluzhsky

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

vladimir.zaluzhsky@severstal.com

Severstal's financial communications agent - Hudson Sandler

Andrew Hayes / Emily Dillon / Alex Brennan / Dan de Belder

T: +44 (0) 20 7796 4133

A conference call on Q2 2018 results for investors and analysts hosted by
Alexey Kulichenko, Chief Financial Officer, will be held on 19 July 2018 at
14.00 (London)/ 16.00 (Moscow).

Conference ID: 2088337
International Dial:

+44 (0) 330 336 9411

Russian Dial:
+7 495 646 9190 (Local access)
8 10 8002 8675011 (Toll free)

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

Replay Passcode: 2088337

International Dial:

+44 (0) 207 660 0134 (Local access)

Russian Dial:
810 800 2702 1012 (Toll free)

***

P?? Severstal is one of the world's leading vertically-integrated steel and
steel related mining companies, with assets in Russia, Latvia and Poland.
Severstal is listed on RTS and MICEX and the company's GDRs are traded on
the LSE. Severstal reported revenue of $7,848 million and EBITDA of $2,577
million in 2017. Severstal's crude steel production in 2017 reached 11.7
million tonnes. www.severstal.com [3]

ISIN: US8181503025
Category Code: IR
TIDM: SVST
LEI Code: 213800OKDPTV6K4ONO53
Sequence No.: 5763
EQS News ID: 706123

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2: https://link.cockpit.eqs.com/cgi-bin/fncls.ssp?fn=redirect&url=cc9e6e458392b444513ed83935a36ddf&application_id=706123&site_id=vwd&application_name=news
3: https://link.cockpit.eqs.com/cgi-bin/fncls.ssp?fn=redirect&url=5885d49ed5e8dc686b77ca6aa78e352b&application_id=706123&site_id=vwd&application_name=news

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