Severstal reports Q2 & H1 2019 fiacial results

July 19, 2019

PAO Severstal (MICEX-RTS: CHMF; LSE: SVST), one of the world’s leading steel and steel-related mining companies, today announces its Q2 & H1 2019 financial results for the period ended 30 June 2019.

CONSOLIDATED FINANCIAL RESULTS FOR THE QUARTER ENDED 30 JUNE 2019

$ million, unless otherwise stated	Q2 2019	Q1 2019	Change, %	H1 2019	H1 2018	Change, %
Revenue	2,177	2,031	7.2%	4,208	4,432	(5.1%)
EBITDA¹	753	663	13.6%	1,416	1,580	(10.4%)
EBITDA margin, %	34.6%	32.6%	2.0 ppts	33.7%	35.6%	(1.9 ppts)
Profit from operations	625	555	12.6%	1,180	1,351	(12.7%)
Operating margin, %	28.7%	27.3%	1.4 ppts	28.0%	30.5%	(2.5 ppts)
Free cash flow²	263	389	(32.4%)	652	887	(26.5%)
Net profit³	475	428	11.0%	903	1,018	(11.3%)
Basic EPS⁴, $	0.58	0.52	11.5%	1.10	1.25	(12.0%)

Notes:

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). A reconciliation of EBITDA to profit from operations is presented in Severstal’s quarterly financial statements.
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. A reconciliation of free cash flow to net cash from operating activities is presented in Severstal’s quarterly financial statements.
Net profit after FX fluctuations and other non-cash items.
Basic EPS is calculated as net profit divided by the weighted average number of shares outstanding during the period: 825.0 million shares for Q2 2019, 822.5 million shares for Q1 2019, 823.7 million shares for H1 2019, 814.3 million shares for H1 2018.

Q2 2019 vs. Q1 2019 ANALYSIS:

Group revenue increased 7.2% q/q to $2,177 million (Q1 2019: $2,031 million), mainly driven by the favourable pricing environment for steel and raw materials.
Group EBITDA increased 13.6% to $753 million (Q1 2019: $663 million), reflecting topline growth. The Group’s vertically integrated business model delivered an EBITDA margin of 34.6%, remaining one of the highest in the industry globally.
Free cash flow totalled $263 million (Q1 2019: $389 million), which primarily reflects CAPEX growth and changes in net working capital q/q despite earnings growth.
Net profit totalled $475 million (Q1 2019: $428 million) and includes a FX gain of $30 million.
Cash CAPEX was $267 million (Q1 2019: $209 million).  Net debt increased to $1,469 million at the end of Q2 2019 (Q1 2019: $863 million), primarily reflecting growth in total debt and lower cash balances.  Severstal is committed to returning value to its shareholders whilst managing and maintaining a comfortable level of debt. Severstal’s financial position remains strong with a Net debt/EBITDA ratio of 0.5 as at the end of Q2 2019. The Board of Directors has therefore recommended a dividend of 26.72 roubles per share for Q2 2019.

H1 2019 vs. H1 2018 ANALYSIS:

Group revenue declined 5.1% y/y to $4,208 million (H1 2018: $4,432 million). This drop in revenue y/y was a result of weaker pricing for steel products and lower sales volumes y/y.
Group EBITDA was 10.4% lower y/y, at $1,416 million (H1 2018: $1,580 million), primarily reflecting the lower revenues. The Group’s EBITDA margin therefore remained at high levels of 33.7% (H1 2018: 35.6%). 
The Company generated $652 million of free cash flow, which represents a decline of 26.5% y/y (H1 2018: $887 million) mainly reflecting EBITDA decline and CAPEX growth y/y.

FINANCIAL POSITION HIGHLIGHTS:

At the end of Q2 2019, cash and cash equivalents stood at $345 million (Q1 2019: $583 million), reflecting dividend payout for the period offset by placement of two rouble-denominated bonds and FCF generation for the period.
Gross debt increased to $1,814 million (Q1 2019: $1,446 million). In April 2019, Severstal completed the placement of two exchange traded rouble-denominated bonds due in 2029, with put options in 2024 and 2026.
Net debt increased to $1,469 million by the end of Q2 2019 (Q1 2019: $863 million), primarily reflecting growth of total debt and decreased cash balances. The Net debt/EBITDA ratio reached 0.5 at the end of Q2 2019 (Q1 2019: 0.3). Severstal’s Net debt/EBITDA remains one of the lowest amongst steel companies globally and enables Severstal to maintain a comfortable level of debt whilst returning value to its shareholders.
The Group’s liquidity position remains strong, with $345 million in cash and cash equivalents and unused committed credit lines and overdraft facilities of $1,201 million, more than covering the short-term principal debt of $259 million.

Alexander Shevelev, CEO of Severstal Management, commented:

I am pleased to highlight that in Q2 2019 Severstal delivered a sustainable financial performance reflecting strong raw material and steel market conditions and the effect of our ongoing efficiency programmes.

Amid rising iron ore prices and hence declining margins of not-integrated steelmakers across the globe, we have once again demonstrated the competitive advantages of our business model with captive raw materials. In Q2 2019, we increased Group EBITDA by almost 14% to $753 million and our EBITDA margin rose to 34.6%, which is one of the highest in the industry globally.

At our Capital Markets Day in November 2018 we committed to growing our EBITDA by 10-15% annually after taking account of macro factors, and presented our planned investment projects for the coming five years that should support this growth. In H1 2019, our sales & marketing initiatives enabled us to deliver an additional $85 mln of EBITDA.

I would like to draw your attention to some of our strategic and operational highlights for Q2 2019:

We signed a definitive agreement for the sale of the Steel Mini-Mill in Balakovo. The consideration for this transaction will amount to $215 million. Following the sale of Mini-Mill Balakovo, we plan to focus on developing steel production at our main asset, the Cherepovets Steel Mill. We are confident that this will enable us to streamline our internal processes to successfully execute our updated strategic priorities.
In 2019, we plan to continue improving our ESG disclosure as well as to continue with projects to make our operations more environmentally friendly. In Q2 2019, we published an ESG investor presentation, and also disclosed information on our tailings management and the risk management system of our iron ore segment.

The Board remains confident in the outlook and is recommending a dividend of 26.72 roubles per share for Q2 2019, bringing the dividend payout to more than 100% of quarterly free cash flow.

DIVIDEND

The Board of Directors has therefore recommended a dividend of 26.72 roubles per share for Q2 2019. Approval of the dividend is expected to take place at the Company’s EGM which will take place on 6 September 2019. The record date for participation in the EGM is 12 August 2019. The recommended record date for the dividend payment is 17 September 2019. The approval of the record date for the dividend payment is also expected at the Company’s EGM which will take place on 6 September 2019.

OUTLOOK

Following supply disruptions in Brazil and Australia in H1 2019 and due to growing steel output in China, iron ore prices continue to stay at record levels with various scenarios of their further direction. Though ex-China steel demand is stagnating due to weakness of the auto and machinery sectors in Europe and economic slowdown in Turkey, the current cost of the raw materials basket is giving a certain level support to steel prices limiting their downside potential. In Russia, steel demand showed an impressive 10% y/y growth in H1 2019 driven by restocking activity in the local construction sector. Hence, we can expect some deceleration of steel demand in the second half of the year. However, Severstal’s proximity to export routes continues to be a major competitive advantage giving us the flexibility to quickly redistribute shipments between best performing markets. Despite a number of potential headwinds on both export and domestic markets the Board remains confident in the resilience of Severstal’s vertically-integrated business model relative its local and global peers.

NOTES