On April 17, 2018, Severstal, one of the world’s leading steel and steel-related mining companies, announced its financial results for the first-quarter period that ended on March 31, 2018.

Q1 2018 vs. Q4 2017 analysis

The Severstal group’s revenue remained almost flat quarter-on-quarter at USD2,173 million (the fourth quarter of 2017 saw revenue at USD2,178 million), as a softening of sales volumes at the group’s Resources division was offset by an increase in average selling prices for raw materials and steel sales volumes growth in the first quarter of 2018.

The group’s EBITDA declined 6.4 percent quarter-on-quarter to USD706 million (the EBITDA for the fourth quarter of 2017 was USD754 million), due to increased raw materials expenses driven by higher prices and increased distribution expenses, as the company increased its share of export sales in the first quarter of 2018. The group’s EBITDA margin declined by 2.1 percentage points (ppts) to 32.5 percent (the corresponding figure for the fourth quarter of 2017 was 34.6 percent). Despite this negative trend, Severstal’s EBITDA margin remains one of the highest in the global industry.

Free cash flow was USD289 million (cash flow during the fourth quarter of 2017 remained at USD434 million), which reflects a seasonal increase in net working capital due to receivables growth. Free cash flow generation remains one of the company’s key strategic financial priorities.

The group’s net profit of USD461 million (net profit for the fourth quarter of 2017 was USD563 million) includes a forex gain of USD12 million. Adjusting for this non-cash item, Severstal would have posted an underlying net profit of USD449 million. The corresponding net profit statistic for the fourth quarter of 2017 would have been USD439 million.

Cash capital expenditures of USD136 million declined 20 percent quarter-on-quarter from the fourth quarter 2017 number of USD170 million due to seasonal factors. In December 2017, Severstal launched a production line for polymer-coated rolled steel products at the Cherepovets Steel Mill Metal Coating Workshop number three (“MCW No. 3”). Investment in MCW No. 3 amounted to approximately eight billion rubles. The new workshop has equipment for a polymer-coating line, as well as a hot dip galvanizing unit. This equipment is expected to produce 200,000 tons of polymer-coated steel per year and 400,000 tons of galvanized steel per year.

Severstal’s net debt declined 26.1 percent to USD785 million by the end of the first quarter of 2018 (fourth quarter 2017 debt figure was USD1,062 million), reflecting free cash flow generation during the first quarter of 2018. In the first quarter of 2018, Severstal paid off USD549 million worth of Eurobonds. The company’s public debt includes outstanding loan participation notes due in 2021 and 2022 and convertible bonds due in 2021 and 2022.

Severstal’s recommended dividend payment for the three months that ended on March 31, 2018 stood at RUB38.32 per share.

Q1 2018 vs. the Q1 2017 analysis

The group’s revenue increased 23.0 percent year-on-year to USD2,173 million (the first quarter of 2017 saw revenue at USD1,767 million). Severstal’s significant revenue growth year-on-year was supported by a favorable steel and commodities pricing environment in 2018 and steel sales volumes growth.

The group’s EBITDA grew 22.1 percent year-on-year to USD706 million from USD578 million registered in the first quarter of 2017, largely driven by topline growth.

The company generated USD289 million of free cash flow, which was an increase on the corresponding period of the previous year (the first quarter of 2017 had cash flow of USD70 million), primarily reflecting earnings growth year-on-year.

The group maintained its prudent approach to capital expenditures with investment of USD136 million, 1.4 percent lower year-on-year from the figure of USD138 million reported in the first quarter of 2017.

Financial highlights

At the end of the first quarter of 2018, cash and cash equivalents totaled USD757 million, reflecting the net effect of free cash flow generation and Eurobond payouts. Cash and cash equivalents as of the fourth quarter of 2017 stood at USD1,031 million.

The group’s gross debt declined 26.3 percent to USD1,542 million from USD2,093 million reported in the fourth quarter of 2017, reflecting the USD549-million Eurobond 2018 payment.

Severstal’s net debt decline of 26.1 percent to USD785 million at the end of the first quarter of 2018 reflected the group’s positive dynamics in terms of free cash flow generation during the quarter. Net debt as of the fourth quarter of 2017 stood at USD1,062 million. The net-debt-to-EBITDA ratio marginally declined to 0.3x at the end of the first quarter of 2018 (during the fourth quarter of 2017, Severstal posted the figure of 0.4x). Severstal’s net-debt-to-EBITDA ratio remains one of the lowest among steel companies globally and enables the Russian company to maintain a low level of debt while returning value to its shareholders.

The Severstal group’s liquidity position remains strong, with USD757 million in cash and cash equivalents and unused committed credit lines of USD1,074 million, more than covering the short-term principal debt of USD10 million.

The CEO of Severstal Management Alexander Shevelev said, “Severstal is constantly focused on maximizing value for its shareholders. I am pleased to report that we have also revised the company’s dividend policy in the interest of the company’s shareholders, with a formal commitment to pay 100 percent of free cash flow in the form of dividends. With an ever-increasing focus on the company’s ESG (Environmental, Social, and Governance) performance, the company’s ESG commitment is fully aligned with the group’s strategic objective to be a leader in value creation for all of the company’s stakeholders.”

The Russian executive went on to say, “We believe that by consistently driving innovation across all of the company’s assets we can take Severstal to the next level. The company’s products, processes, and business model innovations are already delivering clear performance improvements, and Severstal’s company-wide digitalization program will enable us to enhance our operational efficiency even further.”

The company’s financial performance in the first quarter of 2018 was supported by a strong export pricing environment and Severstal’s flexible distribution channels, which enabled the group to redirect higher volumes to export markets. As a reflection of the company’s goal to become a leader by total shareholder return, the board of directors has recommended a dividend of RUB38.32 for the first quarter of 2018.

“In 2018 we continue to forecast global steel growth. Russian steel demand increased five percent in 2017 and is expected to be a further 2.6 percent higher 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 from the recovery in local demand,” Mr. Shevelev concluded.

Q1 2018 review

In the first quarter of 2018 the company maintained steady performance, supported by positive trends within the global steel and commodities markets during the reporting period. The company’s stable position reflected the strength of the entity’s operations and the management’s ongoing focus on enhancing efficiency. The share of HVA (rebar, wire rod, and metalware) in the product sales mix remained at a high level of 45 percent, and the company sold off its stocks at various export destinations in the first quarter of 2018. To benefit from the improved profitability of export deliveries, the company increased its share of export shipments to 48 percent. Severstal’s proximity to both its main export and domestic consumers allows it to shift flexibly between exports and domestic sales, depending on the market environment.

The group’s revenue remained almost flat quarter-on-quarter in the first quarter of 2018, as steel products sales volumes growth, as well as strong prices for steel and raw materials, were offset by a decline in sales volumes at the Resources division. In the first quarter of 2018, Severstal’s EBITDA weakened 6.4 percent quarter-on-quarter to USD706 million due to higher raw material prices and increased distribution expenses to support the higher share of export sales. The group’s free cash flow of USD289 million was lower in the first quarter of 2018 due to a seasonal uptick in net working capital, which produced a temporary growth in receivables. The company’s high-quality assets and an efficient business model enabled Severstal to maintain one of the highest EBITDA margins of 32.5 percent and deliver solid cash generation to maximize shareholder returns.

Severstal is committed to returning value to its shareholders while managing and maintaining a low debt level.

Severstal Russian Steel (RSD)

RSD steel product sales increased three percent quarter-on-quarter to 2.87 million tons compared with the figures from the previous quarter. The fourth quarter of 2017 saw RSD sales at 2.79 million tons. Meanwhile, the company reduced steel product stock levels at its export subsidiaries in the first quarter of 2018. Semi-finished product sales volumes growth was driven by the change in the structure of the product mix and an increased demand for billets.

The company increased export sales volumes to 48 percent from 42 percent in the fourth quarter of 2017 to benefit from more profitable export deliveries at the beginning of the year. The share of high value-added (HVA) products within the sales portfolio remained high at 45 percent (fourth quarter 2017 figure was 47 percent), declining only two ppts due to a seasonal change in the product mix.

Severstal increased its sales of the hot-dip galvanized steel (HDG) and cold-rolled coil products to the U.S. market and hot-rolled coil to European destinations due to an attractive pricing environment.

Large diameter pipe (LDP) sales volumes declined 28 percent quarter-on-quarter, following the destocking of finished goods produced in the beginning of 2017 at the Izhora Pipe Mill. In March 2018, the Izhora Pipe Mill won a tender to supply around 165 thousand tons of LDPs for Gazprom projects during 2018-2019.

Steel and raw materials prices remained high in the first quarter of 2018. The company increased the export share of its steel sales in the first quarter of 2018, which resulted in flat average selling prices across the product mix and increased distribution expenses. Domestic prices were catching up with global price trends, but with a time lag. Growing sales volumes drove a revenue increase of 3.5 percent quarter-on-quarter to USD2,025 million. Fourth quarter 2017 sales stood at USD1,956 million. The EBITDA improved 0.4 percent quarter-on-quarter to USD535 million from USD533 million seen in the fourth quarter of 2017. The EBITDA margin declined insubstantially by 0.8 ppts to 26.4 percent from 27.2 percent registered in the fourth quarter of 2017.

As a result of raw material price increases, the total non-integrated cash cost of slab production at the Cherepovets Steel Mill in the first quarter of 2018 increased USD14 per ton quarter-on-quarter to USD335 per ton from USD321 per ton seen in the fourth quarter of 2017. As a consequence of the lower EBITDA at the Resources division, the integrated cash cost of slab in the first quarter of 2018 was up to USD264 per ton from USD243 per ton during the fourth quarter of 2017.

Severstal resources

Coking coal concentrate sales volumes from Vorkutaugol declined 25 percent quarter-on-quarter, as the long-wall repositioning at the Vorgashorskaya mine impacted production of the GZHO-grade concentrate. Meanwhile, the company managed to achieve stable production of 2ZH-grade coal, fully meeting the production needs of CherMK.

Iron ore pellet sales decreased 28 percent, totaling 2.38 million tons, (down from fourth quarter 2017 figure of 3.3 million tons) after the realization of a significant share of finished goods in transit in the fourth quarter of 2017 that were shifted from the previous quarter, as well as an increased share of goods in transit in the first quarter of 2018, which will be realized in subsequent periods.

Iron ore concentrate sales increased 14 percent quarter-on-quarter to 1.29 million tons from 1.14 million tons reported in the fourth quarter of 2017, despite a seasonal slowdown in production at Olcon. The improvement of iron ore concentrate sales in the first quarter of 2018 reflects the consolidation of the Yakovlevskiy mine and stock sell-off at Olcon. Mimicking the quarter-on-quarter decrease in sales volumes, the revenue of the Resources division declined 15.2 percent quarter-on-quarter to USD402 million from USD474 million seen in the fourth quarter of 2017, and the EBITDA declined 8.3 percent to USD188 million from USD205 million.

In view of the fixed-cost nature of the mining business, lower processing volumes at Vorkutaugol due to the long-wall repositioning at the Vorgashorskaya mine brought the first quarter of 2018 total cash costs (TCC) up to USD96 per ton. The corresponding figure for the fourth quarter of 2017 was USD92 per ton. At the same time, TCC at Karelsky Okatysh remained almost flat at USD29 per ton, with the fourth quarter 2017 figure standing at USD27. TCC at Olcon were up USD3 per ton at USD37 per ton (fourth quarter 2017 TCC at USD34 per ton), affected by the appreciation of the Russian ruble quarter-on-quarter.

Outlook

In the first quarter of 2018 steel and raw material demand remained high. Global steel prices were supported by winter restrictions in China and a seasonal increase in Chinese demand in March, which contributed to higher prices of raw materials.

Russian export prices are expected to follow global trends in the second quarter of 2018. Severstal anticipates Russia’s steel demand to grow by 2.6 percent in 2018.

With a solid portfolio of high-value added products and its proximity to important export routes, Severstal remains well-positioned to adapt quickly to changing conditions and capture attractive pricing both domestically and globally. In this environment, Severstal is poised to compete successfully with both local and global peers.