NLMK GROUP Q2 2019 IFRS CONSOLIDATED FINANCIAL RESULTS

Key highlights

Comment from NLMK Group CFO Shamil Kurmashov:

"Q2 2019 saw the launch of overhauls at NLMK Lipetsk's blast furnace and basic oxygen furnace operations. These projects are key in our Strategy 2022, and will enable us to grow our steel output by 1 million tonnes by 2021 to 14.2 million tonnes per year.

"Despite the 7% qoq decrease in steel shipments driven mainly by overhauls at NLMK Lipetsk, the company's revenue was down only 3% qoq thanks to our flexible business model and proactive sales portfolio management. The seasonally strong demand growth in the Russian market served as an additional factor.

"EBITDA grew by 6% qoq, driven by product mix improvements and growth of average sales prices in the Russian market. Solid financial performance was also supported by 100% self-sufficiency in iron ore amid high prices for this type of raw material. Additionally, overall EBITDA gains from operational efficiency projects stood at $72 m, including $53 m in Q2 2019.

Free cash flow totalled $258 m. The QoQ trend was associated with the Q1 high base effect, and the qoq growth of investment as part of Strategy 2022 and maintenance programme.

"Net debt/EBITDA continues to remain at a conservatively low level."

 

TELECONFERENCE

 

NLMK is pleased to invite the investment community to a conference call with the Company management:

Friday, 26 July 2019

·    9:00 a.m. - New York

·    2:00 p.m. - London

·    4:00 p.m. - Moscow

To join the conference call and web-cast, the participants are invited to dial:

U.S. number:

+1 646-828-8193 (local access) // 888-220-8451 (toll free)

 

UK number:

+44 330 336 9125 (local access) // 0800 358 6377 (toll free)

Russian number:

+7 495 213 1767 (local access) // 8 800 500 9283 (toll free)

Conference code: 4345418

To join the webcast, please follow the link:

https://webcasts.eqs.com/nlmk20190726.

* We recommend participants start dialling 5-10 minutes in advance to avoid waiting.

 

MANAGEMENT COMMENTS

Q2 2019 market review

·     Steel exports from China grew by 2% qoq (-14% yoy), driven by higher steel output.

·     Consumption in the US remained flat qoq (+3% yoy)*, driven by demand from the machine-building, energy and construction sectors.

·     European demand remained flat qoq (-1% yoy) due to weak consumption in the automobile and machine-building sectors.

·     In Russia, demand grew by 7% qoq (+6% yoy), due to proactive developer efforts ahead of changes to equity-shared construction regulations, and the launch of new projects.

Q2 2019 prices

·     Raw material prices: average global coal prices grew by 1% qoq (+3% yoy); iron ore prices grew by 23% qoq (+53% yoy) due to the uncertainty with Brazilian supplies.

·     Market prices** for steel products: 6-11% qoq decline in the US market (-23-30% yoy), 3-6% qoq decline in Europe (-12-20% yoy).

·     In Russia, prices for steel products in dollar terms grew by 6-11% qoq (-3-9% yoy) driven by the seasonal uptick in demand.

·     Slab export prices (FOB Black Sea) grew by 1% qoq (-15% yoy) due to limited supply in H1 2019.

 

 

* Data on trends for steel consumption in regional markets are estimates.

 

** Market prices reflect the level of prices for a given calendar period and differ from the average sales prices of the Company and its

segments due to the time lag of the production & sales cycle.

 

Q2 2019 output and sales breakdown

·    Steel output* decreased by 5% qoq (-9% yoy) to 3.99 m t due to the launch of overhauls at NLMK Lipetsk's blast furnace and basic oxygen furnace operations.

·    Sales decreased by 7% qoq (-3% yoy) to 4.27 m t due to the decrease in the output and sales of commercial slabs and billets.

·    Finished steel sales decreased by 3% qoq to 2.75 m t, due mainly to the reduction of HRC export from Russia.

·    Sales of semis to third parties dropped by 39% qoq to 0.81 m t (-18% yoy), due to the reduction in commercial slab output. Slab deliveries to NBH, NLMK's joint venture, grew by 61% qoq (+8% yoy) to 0.71 m t, driven by the uptick in Segment's sales.

·    Sales on home markets (with NBH) grew by 12% qoq (+13% yoy) to 2.99 m t, driven mainly by the seasonal growth of sales in Russia to 1.7 m t (+17% qoq; +21% yoy), and by the increase in demand for semis used in the production of oil & gas pipes; sales in the US decreased by 3% qoq (-8% yoy) amid expectations of a further decrease in prices; sales of the Group's European companies grew by 9% qoq (+11% yoy), driven by the growth in rolled product output.

H1 2019 output and sales breakdown 

·    Steel output* decreased by 6% yoy to 8.18 m t due to overhauls at NLMK Lipetsk's blast furnace and basic oxygen furnace operations, and the decrease in steel output at NLMK's Long Products Division, due to low demand for billets on export markets.

·    Sales grew by 4% yoy to 8.88 m t, supported by growth of demand for HRC, and the sale of flat steel and slab stocks accumulated at ports at the end of 2018 in Q1 2019.

 

NLMK GROUP KEY FINANCIALS

Q2 2019 revenue

·     Revenue totalled $2.8 bn (-3% qoq). This trend was associated with a 7% qoq decrease in sales, which was partially offset by the growth of prices in the Russian market, and the increase in the share of HVA products in total sales. The 10% yoy decrease in revenue was attributable to the decrease in steel product sales volumes and prices.

·     The share of finished steel in the revenue grew to 67% (+1 p.p. qoq & yoy), with the share of high value added products also growing by 1 p.p. qoq amid the decrease in the sales of semi-finished products.

·     The Russian, EU and US markets account for the most significant share in the Group's regional sales mix. The share of the Russian and the European markets in the Group's consolidated revenue increased by 9 p.p. & 4 p.p. to 41% & 22%, respectively. The share of the US market remained flat at 20%.

·     The share of the Group's revenue from sales on its home markets (Russia, the US and the EU), including NBH JV sales, grew by 11 p.p. qoq to 74%, driven by an increase in sales by NLMK's Russian and European companies.

H1 2019 revenue

·     Revenue totalled $5.67 bn (-4% yoy), driven by an 8% decrease yoy in average sales prices, which was partially offset by the 4% yoy growth of sales volumes.

·     The share of the Russian market in the Group's revenue grew by 3 p.p. yoy to 37%. The US and EU shares decreased by 1 p.p. yoy to 20% & 21%, respectively.

·     The share of the Group's revenue from sales on its home markets, including NBH JV sales, grew by 2 p.p. yoy to 69%.

Q2 2019 operating profit

·     Operating profit* grew by 6% qoq to $593 m, driven mainly by the increase in the steel/raw materials price spreads. The 22% decrease yoy was driven by the drop in revenue due to the decrease in steel product volumes and prices.

·     Commercial expenses declined by 11% qoq to $202 m, driven by the decrease in the share of export sales. The 5% decrease yoy was also associated with lower export volumes.

·     The 7% qoq growth of G&A expenses to $88 m was driven mainly by the annual payroll indexation.

H1 2019 operating profit

·     Operating profit* decreased by 19% yoy to $1.15 bn, due mostly to the decrease in steel product prices.

·     Commercial expenses grew by 1% yoy to $428 m, driven by growth of sales volumes.

·     G&A expenses decreased by 6% yoy to $170 m due to the accrual of long-term incentive programme bonuses in Q2 2018.

* Operating profit before equity share in results of joint ventures, impairment of capital assets and losses from fixed assets retirement.

Q2 2019 net profit*

·     Net profit grew by 8% qoq to $414 m, driven by the growth of operating profit, which was partially offset by the higher effective income tax rate due to the change in the methodology for bonus, vacation and pension provisions that were included into deferred tax assets. The 29% decrease yoy was due to the decrease in operating profit.

* Profit for the period, attributable to NLMK shareholders

Q2 2019 free cash flow

·     Free cash flow decreased by 62% qoq to $258 m (-10% yoy) associated with the Q1 2019 high base effect driven by the sale of stocks accumulated at the end of 2018.

·     Operating cash flow decreased by 42% qoq (+20% yoy) to $494 m, due to the growth of working capital, associated mainly with the purchase of third-party slabs by NLMK USA.

·     Cash outflow from working capital totalled $151 m (vs. an inflow of $262 m in Q1 2019) due to:

o  -$147 m: an increase in receivables driven by the growth of flat and long steel sales in Russia;

o  -$128 m: growth of raw material stocks, due to the seasonal stockpiling of scrap, the growth of iron ore stocks as a result of lower consumption during the overhaul period, and the increase in third party slab stocks at NLMK USA;

o  +$122 m: growth of payables driven by the increase in third-party slab purchases by NLMK USA.

Investment

·     NLMK Group's Q2 2019 investment increased by 28% qoq to $227 m (+96% yoy) due to the relatively low base of the previous quarter and the start-up of activities related to new strategic cycle projects.

Operational efficiency projects

·     As part of Strategy 2022, NLMK Group continued to work on its operational efficiency programmes. The overall EBITDA gains from operation efficiency projects in 6M 2019 totalled $72 m, including $53 in Q2. Operational efficiency projects for the Mining and Raw Material Processing Segment accounted for over 40% of these gains.

Dividends

·     In Q2 2019, NLMK paid out $615 m in dividends.

·     At an Extraordinary General Shareholders' Meeting (EGM) held on 7 June 2019, NLMK shareholders approved the payment of Q1 2019 dividends of 7.34 rubles per share, or 100% of NLMK Group's free cash flow over the period.

·     On 25 July 2019, the Board of Directors recommended that shareholders approve the payment of Q2 2019 dividends in the amount of 3.68 rubles per share, which is equivalent to 136% of the free cash flow.

Debt management

·     Total debt grew by 34% qoq to $2,801 m (+33% yoy) due to the placement of 7-year $500 m Eurobonds with an annual coupon rate of 4.7% in May 2019, and the use of its ST revolving loan facility to finance NLMK Trading for a total of $319 m.

·     Net debt grew by 41% qoq to $1,291 m (+32% yoy). Net debt/EBITDA stood at 0.39х (vs. 0.26х at the end of the previous quarter).

Q3 2019 outlook

·     We expect steel output to reduce by 2-3% qoq due to the overhauls at NLMK Lipetsk blast furnace and basic oxygen furnace operations. We expect a corresponding qoq reduction in sales volumes, coupled with an increase in the share of finished and HVA products in our sales mix.

 

 

NLMK Russia Flat Products

Q2 2019 highlights:

·    Sales decreased by 10% qoq (-11% yoy) due to lower steel output.

·    Revenue of the Segment decreased by 3% qoq to $1.92 bn due to the qoq decline in sales, which was partially offset by higher slab and finished product prices. The 16% decrease in revenue yoy is attributable to the reduction in steel product prices coupled with lower sales volumes.

·     EBITDA grew by 7% qoq to $455 m due to the growth in prices, sales mix improvements, and operational efficiency gains. The 26% decrease in EBITDA yoy is attributable to lower steel product sales volumes and prices.

H1 2019 highlights:

·    Sales decreased by 5% yoy to 6.46 m t, due to the decrease in semis sales to the Group's companies and NBH.

·    Revenue decreased by 13% yoy due to the decrease in steel product sales prices and volumes.

·     EBITDA decreased by 23% yoy due to the narrowing of price spreads.

 

NLMK Russia Long Products

Q2 2019 highlights:

·     Sales in Q2 2019 reduced by 7% qoq to 0.72 m t, due mostly to the decrease in export sales, which was partially offset by higher demand on the domestic market. The 12%  growth of sales yoy is attributable to the low base effect. 

·     Revenue in Q2 2019 grew by 13% qoq to $468 m due to higher average sales prices and the increase in the share of finished products in the sales mix. The yoy decrease in revenue resulted from the drop in long product prices.

·     EBITDA of the Segment in Q2 2019 increased to $36 m, impacted by higher prices and product mix improvements. The decrease in EBITDA yoy (-31%) was associated with the narrowing of rebar/scrap price spreads.

H1 2019 highlights:

·     Sales grew by 5% yoy to 1.48 m t. 

·     Revenue decreased by 7% yoy due to a decline in rebar and metalware prices.

·     EBITDA decreased by 60% yoy due to the narrowing of the rebar/scrap price spreads, which was partially offset by sales mix improvements.

 

Mining and Processing of Raw Materials

Q2 2019 highlights:

·    Sales of iron ore in Q2 2019 decreased by 2% qoq to 4.51 m t (flat yoy). The qoq decrease was associated with a reduction in concentrate and sinter ore shipments to NLMK Lipetsk due to ongoing overhauls. As a result, the Segment resumed sales to third parties. These totalled 0.11 m t in Q2.

·    Revenue in Q2 2019 increased by 19% qoq to $320 m, supported by growing average sales prices.

·    EBITDA increased by 22% qoq to $232 m, driven by growth of prices and operational efficiency programmes. Q2 2019 EBITDA margin grew to 73%.

H1 2019 highlights:

·    Sales grew by 1% yoy to 9.1 m t, driven by the growth in equipment performance.

·    Revenue decreased by 11% yoy, pressured by the decrease in average iron ore prices.

·    EBITDA decreased by 15% yoy following the decline in revenue.

 

NLMK USA

Q2 2019 highlights:

·    Sales decreased by 3% qoq to 0.58 m t (-8% yoy) amid consumer expectations of a further decline in prices.

·    Revenue decreased by 10% qoq to $476 m (-19% yoy), due to ongoing price adjustments on the US market.

·    EBITDA decreased by 6% qoq to $16 m , driven by lower sales for finished products and the use of more expensive accumulated slab stocks.

H1 2019 highlights:

·    Sales remained practically flat at 1.19 m t. 

·    Revenue reduced by 2% yoy due to steel price adjustments in the US.

·    EBITDA decreased to $33 m due to the significant decrease in prices for steel products.

 

NLMK Dansteel*

Q2 2019 highlights:

·     Sales of thick plate reduced by 6% qoq (flat yoy) to 0.14 m t due to high consumer stock levels.

·     Revenue decreased by 6% qoq to $131 m (-1% yoy) following the drop in sales volumes.

·     EBITDA remained flat qoq amid the decrease in natural gas prices and current maintenance expenses.

*NLMK DanSteel and plate distribution network.

H1 2019 highlights:

·     Sales grew by 2% yoy to 0.28 m t driven by stronger demand.

·     Revenue remained flat yoy due to the decrease in steel product prices.

·     EBITDA totalled $6 m (vs. a $10 m loss in 2018), supported by plate/slab price spread expansion.

JV performance (NBH)

Q2 2019 highlights:

·    NBH sales grew by 20% to 0.62 m t (+7% yoy), driven by higher flat steel output and restored capacity utilization after the strike at NLMK Clabecq.

·     Revenue increased by 13% qoq to $0.45 bn driven by a stronger sales performance, which was partially offset by the decrease in average sales prices. The 8% decrease yoy was also attributable to the drop in prices.

·     EBITDA totalled (-) $49 m vs. (-) $15 m & (-) $20 m in Q1 2019 & Q2 2018, respectively. Q2 losses include the one-off accrual of non-operating provisions for NLMK Clabecq restructuring costs for several years in the amount of $23 m.

H1 2019 highlights:

·    NBH sales decreased by 7% to 1.13 m t due to low capacity utilization rates in Q1 2019.

·     Revenue decreased by 17% yoy to $0.84 bn due to the decrease in sales volumes and prices.

·     EBITDA totalled (-) $64 m vs. (-) $28 m in 2018 due to accrued provisions (see above).