NLMK.L Regulatory News (NLMK)

NLMK GROUP 12M AND Q4 2018 IFRS FINANCIAL RESULTS1

NLMK Group (MICEX and LSE: NLMK) is pleased to announce an EBITDA growth of 35% yoy to

$3.6 bn in 2018. EBITDA margin hit a decade high at 30%. Free cash flow grew by 60% to $2.0 bn.

Key highlights

12M 2018 key highlights

• Group revenue in 12M 2018 totalled $12.0 bn (+20% yoy), driven by the growth of average sales prices and higher sales volumes.

• EBITDA grew to $3.6 bn (+35% yoy), driven by higher revenue and operational efficiency gains in 2018.

• Free cash flow increased by 60% yoy to $2.0 bn, due to the increase in profitability and a positive working capital trend vs. 2017.

• Net income grew by 54% yoy to $2.2 bn.

• Net debt/EBITDA decreased to 0.25х (0.35х at the end of 2017), driven by the increase in the Company's profitability and the decrease in net debt by 3% yoy.

Q4 2018 key highlights

• Group revenue decreased by 4% qoq to $3.0 bn (+7% yoy), due to the drop in prices for steel products in the Company's key markets and the growth in the share of semi-finished products in its sales portfolio.

• EBITDA totalled $847 m (-17% qoq), due to the narrowing of steel product/main raw material price spreads. EBITDA grew by +8% compared to Q4 2017.

• Free cash flow decreased by 21% qoq to $502 m (+150% yoy), due to the decrease in revenue and EBITDA, and the growth of capex, driven by active settlements with equipment suppliers at the end of the financial year.

• Net income dropped by 21% qoq to $509 m (+19% yoy) against the backdrop of lower operating profit

.

NLMK GROUP 2018 AND Q4 2018 IFRS CONSOLIDATED FINANCIAL RESULTS1

Comment from NLMK Group CFO Shamil Kurmashov:

"In 2018, demand for steel continued to recover, coupled with a rise in protectionism in key markets.

"In this context, NLMK Group's flexible business model that helped it secure its presence in key sales markets, enabled the Company to grow its sales by 7% yoy (by 1.1 m t) to 17.6 m t, hitting an all-time high for the Company. NLMK Group retained its leadership on the Russian market in terms of steel output, and consolidated its positions on global markets. Revenue grew by 20% yoy to $12.0 bn; NLMK's EBITDA increased by 35% to $3.6 bn, while its EBITDA margin grew to 30% (+4 p.p. yoy).

"In 2018, NLMK Group persisted with its consistent operational efficiency efforts. EBITDA gains from the operational efficiency programme totalled $189 m to the 2017 cost base. The impact of capex projects executed as part of Strategy 2017 totalled an additional $121 m. Total gains from Strategy 2017 in 2014-2018 were $1,348 m, which is significantly in excess of the $1 bn target6.

"EBITDA growth and the decrease in cash outflow to finance working capital supported a 60% increase in the Group's free cash flow yoy to $2.0 bn. Total debt decreased by 9% yoy, while the cost of financing reduced from 3.8% to 3.4%. The Company's debt is at an all-time low: Net debt/EBITDA decreased to 0.25x by the end of 2018. Growth of free cash flow and low debt enabled the Company to keep dividends high despite the growth in capex."

1 Consolidated financial results are prepared under IFRS. Reporting periods of the Company are 3M, 6M, 9M and 12M. Quarterly figures are derived by computational method, including segmental results. Figures for comparable periods can differ from figures published earlier as a result of rounding off to whole numbers.

2 EBITDA is defined as operating profit before equity share in net losses of associates and other companies accounted for using the equity method, impairment and write-off of assets, adjusted to depreciation. EBITDA calculations and further details are presented in the Appendix.

3. Profit for the period attributable to NLMK shareholders.

4 Free cash flow is determined as net cash from operations plus interest received net of interest paid and capital investment. Free cash flow calculations are presented in the Appendix.

5 Net debt is calculated as the sum of long-term and short-term credits and loans less cash and cash equivalents, as well as short-term deposits at period end. Net debt / EBITDA is represented by net debt as at the end of the period and EBITDA is presented as Last 12 months EBITDA. Net debt calculations are presented in the Appendix.

6 Strategy gains are presented with NBH.

TELECONFERENCE

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

Thursday, 7 February 2019

· 09:00 a.m. - New York

· 2:00 p.m. - London

· 5:00 p.m. - Moscow

To join the conference call and the webcast, participants are invited to dial:

US number:

+1 929-477-0324 (local access) // 800-458-4148 (toll free) 

UK number:

+44 330 336 9411 (local access) // 0800 279 7204 (toll free) 

Russian number:

+7 495 646 9190 (local access) // 8 10 8002 8675011 (toll free)

Conference code: 6705381

To join the webcast, please follow the link:

https://webcasts.eqs.com/nlmk20190207. 

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

MANAGEMENT COMMENTS 

2018 market review

· Global steel output grew by 4.6% yoy to 1.81 bn t.

· Steel exports from China decreased by 8% yoy, due to the recovery in domestic demand for steel in China, the plan to cut inefficient steelmaking capacities, and the policy to curb steel output during the winter period.

· Increase in demand in the Group's home markets (Russia, USA & EU) continued, driven by economic growth. In Russia, demand remained practically flat year-on-year (+0.3% yoy), following a marked recovery in 2017.

2018 prices

· Raw material prices: average global coal prices grew by 12% yoy, impacted by weather and infrastructure constraints in Australia and the US in the course of the year. Iron ore prices decreased by 2% yoy.

· Prices* for steel products grew yoy: by 17-33% in the US, by 4-13% in Russia, and by 6-11% in the EU.

· Export prices (FOB Black Sea) grew by 10-17% yoy, following global prices.

* 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.

Output and sales mix

2018 highlights:

· Steel output* grew by 2% yoy to 17.49 m t, driven mainly by high output growth rates at NLMK Russia Long (+9% yoy). Output at NLMK Russia Flat grew by +1% yoy to 13.3 m t. Group steelmaking capacity utilization rate grew by 1 p.p. to 99%.

· Sales*** grew by 7% yoy to 17.6 m t, against the backdrop of the growth in demand for semi-finished products and higher long product sales in Russia.

· Sales breakdown: sales of finished products remained flat yoy at 10.8 m t. HVA sales grew by 3% yoy to5 m t. HVA share in total sales dropped by 1 p.p. to 29%, due to the outstripping growth of semi-finished product sales amid intensified demand for slabs and pig iron, and planned hot-rolling equipment upgrades at the Lipetsk site.

· Sales by region: sales in Russia decreased by 4% yoy (to 5.8 m t), as sales were shifted to export markets. US and EU sales increased by 16% and 10%, respectively. Sales to the Middle East (including Turkey) grew by 7% yoy. The highest growth rates were achieved in Asian and Oceanian markets (+89% yoy), driven by the increase in slab sales to Taiwan and Indonesia.

· Sales to home markets decreased to 10.56 m t (-1% yoy), as semi-finished product sales were shifted to export following the uptick in demand in Q4 2018. Home sales accounted for 61% (-4 p.p. yoy).

· Sales to export markets grew by 17% yoy to 6.86 m t, driven by higher sales of slabs and pig iron.

* Without production capacities that are undergoing planned maintenance

** Steel output - with NBH

*** Consolidated sales - without NBH 

NLMK GROUP'S KEY FINANCIALS 

12M 2018 revenue

· Revenue increased to $12 bn (+20% yoy) due to higher average sales prices.

· Revenue share from sales of finished steel declined yoy to 65% (-2 p.p. yoy).

· Revenue share (including NBH) from sales in home markets decreased by 3 p.p. yoy to 66%, against the backdrop of growing exports of semi-finished products.

Q4 2018 revenue

· Revenue declined by 4% qoq to $3 bn due to lower prices for steel products in the Company's key markets and an increase in the share of semi-finished products in the sales portfolio. Revenue increased by 7% yoy due to a 6% yoy growth in the sales of steel products.

· Revenue share from sales of finished steel decreased by 7 p.p. qoq to 62% (+1 p.p. yoy), due to a 34% qoq increase in the supply of semi-finished products.

· Revenue share from sales to home markets reduced to 61% (-7 p.p. qoq; -6% yoy), driven by the increase in export sales of semi-finished products (equipment upgrades at the Lipetsk site), the seasonal decline in revenue from sales in Russia (-16% qoq; -17% yoy), and a decrease in sales in the US (-17% qoq; +23% yoy) against the backdrop of customer expectations of further steel price adjustments.

12M 2018 operating profit

· Operating profit* increased by 48% yoy to$3 bn, due to the growth in sales volumes, the expansion of price spreads, and operational efficiency programme gains.

· Commercial expenses grew by 12% yoy to $886 m, driven by an increase in sales volumes.

· G&A expenses increased by 3% yoy to $375 m, due to payroll indexation at the Group's Russian companies.

Q4 2018 operating profit

· Operating profit* reduced by 19% qoq, due to declining revenue and narrowing price spreads.

· Growth of commercial expenses by 24% qoq to $256 m was associated mainly with a 12% qoq increase in the Group's export sales of steel products. The 19% increase yoy was also associated with sales growth and a higher share of exports, with a corresponding increase in the transport leg to sales markets.

· Growth of G&A expenses by 24% qoq to $108 m was associated with the accrual of year-end bonus payments in Q4. The decrease in costs by 10% yoy was due to a one-off accrual of reserves for staff payments in Q4 2017.

Net profit**

· Growth of net profit by 54% yoy in 12M 2018 and by 19% yoy in Q4 was due to the growth of operating profit and a decrease in the effective income tax rate due to the recognition in Q4 2018 of tax losses incurred earlier by NLMK USA. Net profit decreased by 21% qoq following the decrease in operating profit.

* Operating profit before equity share in results of joint ventures, impairment of capital assets and losses from fixed assets retirement**Profit for the period attributable to NLMK shareholders 

12M 2018 free cash flow

· Free cash flow increased by 60% yoy to $2 bn, supported by growing EBITDA and decreasing cash outflow to finance working capital as compared to 2017.

· The 44% yoy increase in operating cash flow to $2.7 bn was driven by increased sales profitability.

· Cash outflow to finance working capital was $261 m (vs. $380 m a year earlier):

o -$258 m: increase in receivables due to an increase in export sales and an increase in average sales prices;

o -$187 m: increase in stocks due to the increase in raw material and semi-finished product prices, including the rising cost of slabs in NLMK USA warehouses following the introduction of import duties on steel;

o +$177 m: increase in payables as a result of rising prices for raw materials and the growth of externally sourced slab purchases by NLMK USA.

Q4 2018 free cash flow

· Free cash flow reduced to $502 m (-21% qoq) due to the decrease in operating financial performance.

· Investments increased by 37% qoq (-6% yoy)to $250 m with the beginning of the active execution phase of the BF-6 and BOF Shop No.2 upgrades at the Lipetsk site.

· Cash inflow from lower working capital amounted to $46 m:

o + $43 m: reduction of accounts receivable due to the high turnover level achieved and the decrease in prices;

o -$38 m: increase in stocks amid the seasonal growth in scrap stocks;

o +$37 m: increase in payables due mainly to an increase in the volume of externally sourced slabs by NLMK USA;

Strategy in action*

· In 2018, the Company continued to work on its operational efficiency programmes. Total EBITDA gains from these projects and initiatives amounted to $189 m to the 2017 base level.

· In 2018, gains from capex projects executed as part of Strategy 2017 additionally amounted to $121 m.

· Total gains from Strategy 2017 in 2014-2018 amounted to $1,348 m, which is significantly in excess of the $1 bn target.

* Strategy gains are presented with NBH.

Debt management

· Total debt decreased by 9% yoy to $2.1 bn, due to the closing of a credit line for working capital financing in Q2 2018.

· Net debt decreased by 3% yoy to $891 m due to reduced total debt. Net debt/EBITDA improved to 0.25х (vs. 0.35х last year), driven by increased profit from core activities.

· Financial guarantees for NBH liabilities totalled $309 m ($304 m at 2017 year-end).

· Decrease in financial expenses by 20% yoy to $70 m was associated with the reduction in the average interest rate (from 3.8% in 2017 to 3.4% in 2018), and an overall reduction in debt.

 Investment

· The Group's investments climbed by 15% to $680 m in 2018, with the launch of projects as part of the new strategic cycle, and the start of BF-6 upgrades and major repairs of steelmaking equipment at NLMK Lipetsk.

Dividends

· At an Extraordinary General Shareholders' Meeting (EGM) held on 21 December 2018, NLMK shareholders approved the payment of Q3 2018 dividends of 6.04 rubles ($0.09) per share. (See press release).

Q1 2019 outlook

· Steel output will reduce to the level of Q1 2018, impacted by the seasonal fall in demand for long steel and scheduled repairs at the Lipetsk site.

· Sales are expected to grow yoy, with an increase in the share of finished products in the sales portfolio.

NLMK Russia Flat Products

2018 highlights:

· Sales increased by 4% yoy to 13.52 m t amid a significant growth in demand for semi-finished products in export markets (Appendix 2)

· Total revenue of the Segment grew by 14% yoy to $8.7 bn amid growing sales of semi-finished products and average sales prices (by 5%-15%, depending on the type of product).

· EBITDA increased by 36% yoy to $2.3 bn, due to the expansion of price spreads between steel and primary raw materials, as well as operational efficiency programme gains. The decrease in the ruble FX rate also supported the Segment's profitability amid growing export sales. These factors supported an EBITDA margin increase by 5 p.p. yoy to 27%.

Q4 2018 highlights:

· Segment sales increased by 12% qoq and by 10% yoy to 3.56 m t, due to increased demand for semi-finished products in export markets.

· Total revenue climbed 1% qoq to $ 2.2 bn, driven by the growth in export semi-finished product sales. Revenue increased by 5% yoy.

· EBITDA declined by 11% qoq to $568 m amid narrowing spreads between steel and raw material prices. Year-on-year, EBITDA climbed by 2% due to higher prices and operational efficiency gains.

NLMK Russia Long Products 

 2018 highlights:

· Sales increased by 8% yoy to 3.18 m t amid growing demand for finished steel in the Russian market, and higher export billet sales, mainly to the Middle East (Appendix 3)

· Total revenue in 2018 was $2.2 bn (+20% yoy). Significant revenue growth was associated with an increase in sales and a favourable pricing environment (average prices increased by 12% yoy).

· EBITDA increased by 45% yoy to $221 m. EBITDA margin climbed by 2 p.p. to 10%. EBITDA grew at a higher rate than the revenue due to operational efficiency gains, expansion of the price spreads and the change in exchange rates against the backdrop of increased exports.

Q4 2018 highlights:

· Sales of long products declined by 10% qoq to 0.84 m t due to the seasonal decline in demand. Compared to Q4 2017, sales increased by 3% yoy due to an increase in demand for rebar and wire rod in the Russian market.

· Revenue also declined by 10% qoq to $568 m, following the decline in sales. Revenue growth of 1% yoy occurred following an increase in sales.

· Revenue from intersegmental operations decreased by 3% qoq and by 12% yoy due to a decrease in prices for scrap.

 · Segment's EBITDA declined by 46% qoq to $38 m (-27% yoy), due to the seasonal narrowing of price spreads and a decrease in sales volumes.

Mining and Processing of Raw Materials

2018 highlights:

· Sales of iron ore totalled 18.4 m t (+7% yoy). Sales of pellets reached 6.7 m t (+13% yoy) (Appendix 4).

· Revenue climbed to $1.21 bn (+28% yoy) amid growing sales and average sales prices, as well as due to an increased share of pellets in the sales structure (+2 p.p. yoy).

· EBITDA increased by 38% yoy to $0.89 bn, with the completion of a number of capex projects, as well as due to the increase in the productivity of production.

Q4 2018 highlights:

· Iron ore sales grew by 3% qoq to 4.75 m t (+12% yoy), due to an increase in steel output and growing share of captive iron ore in NLMK consumption.

· Revenue decreased by 10% qoq to $259 m due to a decline in concentrate prices by 16% qoq and a decline in pellet prices by 7% qoq. The main driver behind the 4% growth yoy was the uptick in sales.

· EBITDA reduced to $180 m (-15% qoq) due to the drop in iron ore prices. On a year-on-year basis, EBITDA increased by 8%.

NLMK USA

2018 highlights:

· Sales increased by 2% yoy to 2.3 m t, driven by the growth of HRC and HDG supplies against the backdrop of an uptick in activity in the construction and automotive sectors (Appendix 5).

· Revenue increased to $2.1 bn (+ 28% yoy) following the increase in sales and a rise in average sales prices due to the introduction of import duties on steel products in March 2018, which had an impact on the redistribution of steel trade flows in the US market and end-user prices.

· EBITDA grew by 28% yoy to $0.25 bn, due mainly to the growth of revenue.

· EBITDA margin remained flat yoy at 12%: revenue growth was offset by the growth of import duty related costs.

Q4 2018 highlights:

· Sales decreased by 15% qoq (-8% yoy) to 0.5 m t, driven by customer expectations of further price reductions. 

· Revenue fell to $0.5 bn due to lower sales volumes and a 17% drop qoq in sales prices. The 23% growth yoy was due to significantly higher sales prices.

· EBITDA dropped to $49 m (-44% qoq) due to narrowing price spreads between slabs and finished products, as well as lower sales volumes. Year-on-year growth totalled 69%.

· EBITDA margin declined to 10% (-4 p.p. qoq). Year-on-year, profitability increased by 3 p.p.

NLMK DanSteel

2018 highlights:

· Sales of plate increased by 9% yoy, driven by the increase in capacity utilization rates, amid growing demand for plate steel in export markets (the Middle East, Central and South America) (Appendix 6).

· Revenue increased by 24% yoy to $0.51 bn due to the growth in sales volumes and average sales prices (+13%).

· EBITDA fell to (-) $17 m (vs. (+) $2 m last year), due to the narrowing of price spread between slabs and plate, against the backdrop of the outstripping growth of slab prices.

· EBITDA margin totalled -3%.

Q4 2018 highlights:

· Sales: decreased by 2% qoq and yoy to 0.12 m t, driven by consumer expectations of further price reductions.

· Revenue fell by 5% qoq to $119 m due to a decrease in sales volumes, and a 3% fall qoq in plate prices on average in key sales markets. Revenue growth totalled 3% yoy due to higher prices.

· EBITDA reduced to (-) $8 m (vs. (+) $1 m in Q3 2018 and (-) $6 m in Q4 2017), driven by narrowing price spreads due to the use of stocks of expensive slabs purchased earlier.

· EBITDA margin amounted to -7% (-8 p.p. qoq, -2 p.p. yoy).

JV performance (NBH) 

 2018 highlights:

· NBH sales increased by 6% yoy to 2.23 m t,due mainly to the growth in sales of hot-rolled steel coupled with an uptick in demand from the construction sector and industrial producers.

· Revenue increased by 19% yoy to $1.84 bnagainst the backdrop of rising sales prices and volumes.

· NBH EBITDA decreased to (-) $87 m, due to the narrowing of price spreads between rolled steel and slabs, against the backdrop of a spike in slab prices in 2018.

Q4 2018 highlights:

· Sales climbed by 14% qoq (+6% yoy) to 0.54 m t, supported by the completion of scheduled repairs.

· Revenue increased by 12% qoq to $436 m, following stronger sales performance. The 11% increase yoy was also supported by higher prices.

· EBITDA amounted to (-) $32 m vs. (-) $27 m and (-) $26 m in Q3 2018 and Q4 2017, respectively, against the backdrop of narrowing price spreads due to using stocks of expensive slabs purchased earlier.

Appendixes. Operating and financial results

 (1) Sales markets

(2) NLMK Russia Flat

(3) NLMK Russia Long

(4) Mining Segment

(5) NLMK USA

(6) NLMK DanSteel

(7) Sales by product

 (8) Sales by region

 (9) Revenue by region

(10) EBITDA*

* EBITDA used in NLMK's financial releases is calculated as operating profit before equity share in net losses of associates and other companies accounted for using the equity method of accounting, impairment and write-off of assets, adjusted to depreciation and amortization. EBITDA is not an indicator of operating profit, operating activity or liquidity under IFRS, and NLMK discloses it because equivalent indicators could be used by investors and analysts. That said, NLMK's EBITDA should not be viewed on a standalone basis, or in place of profit before tax, or cash flows from operations, as defined by IFRS, or as an indicator of operational efficiency, or as the sum of free cash funds that NLMK can invest into business development. NLMK's EBITDA margin and EBITDA might not be comparable to similar indicators disclosed by other companies as there are no commonly accepted rules for calculating them. For instance, NLMK's EBITDA is calculated similar to what is termed as 'Adjusted EBITDA' in other companies, as NLMK's EBITDA excludes other profit/loss items in addition to interest payments, income tax, depreciation and amortization.

** Operating profit before equity share in net losses of associates and other companies accounted for using the equity method of accounting, impairment and write-off of assets

(11) Free cash flow

(12) Net debt

(13) Production of main products

 (14) Slab sales, including intra-group sales to NLMK Group companies

(15) Export shipments of steel products from Russian assets of the Group to third party consumers

(16) Segmental information

Balance figures presented as of 31.12.2018

Balance figures presented as of 30.09.2018