NLMK.L Regulatory News (NLMK)

NLMK GROUP Q1 2017 IFRS FINANCIAL RESULTS

NLMK Group (MICEX and LSE: NLMK) is pleased to announce a 19% growth in EBITDA1 in Q1 2017.

Key highlights

• Growth of revenue: revenue grew by 10% qoq to $2.16 bn driven by higher steel prices and a 1% qoq increase in sales.

• Growth of profitability: EBITDA gained 19% qoq to $618 m (+113% yoy). EBITDA margin expanded to 29% (vs. 26% in Q4 2016 and 18% in Q1 2016). Net profit grew by 5% qoq to $323 m.

• Growth of cash flow: Free cash flow grew by 14% qoq to $208 m, driven by higher profitability and lower capex. Debt leverage remains low, with Net debt/EBITDA at 0.4.

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. The same assumption applies to calculation of segmental financial results.

1 Indicator hereinafter referred to as EBITDA, as used in NLMK's financial statements and 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.

Calculations for this indicator are presented in the Appendix.

2 Free cash flow is determined as net cash from operational activity net of interest received, interest paid, capital investment and changes in advances made as part of investment activities. Free cash flow calculations are presented in the Appendix.

3 Net debt is calculated as the sum of LT and ST credits and loans less cash and cash equivalents, as well as ST financial investments 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.

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. The same assumption applies to calculation of segmental financial results.

NLMK GROUP Q1 2017 IFRS CONSOLIDATED FINANCIAL RESULTS

Key highlights

Comment from NLMK Group acting CFO Sergey Karataev:

"In Q1 2017, NLMK Group was able to grow sales in the EU and US markets against a backdrop of higher internal demand; and to expand export deliveries of flats, offsetting the seasonal weakening in demand in Russia.

"Group's capacity utilization gained +1 p.p. to 96%; sales climbed by 1% qoq to 3.7 m t.

"Stable sales and the uptick in prices for steel products supported by high prices for raw materials pushed revenue up by 10% qoq to $2.16 bn.

"EBITDA grew by $100 m to $618 m, $57 m attributable to gains from operational efficiency efforts and capex projects vs. the 2016 level. EBITDA margin expanded by 3 p.p. to 29%.

"Profitability growth and moderate capex in Q1 supported a 14% qoq increase in free cash flow to $208 m.

"Debt leverage is at a comfortable level, Net debt/EBITDA at a stable 0.4х."

TELECONFERENCE

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

Thursday, 27 April 2017

· 10:00 a.m. - USA (New York)

· 03:00 p.m. - Great Britain (London)

· 05:00 p.m. - Russia (Moscow)

To join the conference call, participants are welcome to dial:

US number:

+1 719-325-2385 (local access) // 1888-882-8941 (toll free)

UK number:

+44 (0)330 336 9412 (local access) // 0800 279 7204 (toll free)

Russian number:

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

Conference code: 1487592

To connect to the webcast, please follow the link: http://www.audio-webcast.com/cgi-bin/visitors.ssp?fn=visitor&id=4515.

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

We recommend participants download the presentation in advance from NLMK's website: www.nlmk.com 

MANAGEMENT COMMENTS

Market overview

· Global steel production up by +1.4% qoq to 410 m t.

· Chinese steel exports down by 12% qoq against the backdrop of recovering internal demand and trade restrictions.

· Demand in the EU up against a backdrop of the seasonal uptick in consumer activity and restrictions imposed on steel imports.

· Demand in the US up driven by stable demand from construction and energy sectors as a result of lean inventories.

· Demand in Russia faded qoq due to the seasonal drop in demand from construction. Steel output eased 1% qoq to 17.9 m t; imports grew by 6% qoq to 1.3 m t* supported by a stronger FX rate.

Prices

· Raw material prices: a variety of trends in raw material prices: global coal prices slumped by 30% qoq (2x yoy), while iron ore prices climbed 20% qoq (+78% yoy).

· Steel prices: 10-20% qoq growth in the US, EU and Russian markets (+50-90% yoy), driven by higher prices for raw materials, lower pressure from Chinese exports, and the impact of protectionism in the US and the EU.

· Growth of prices in Russia was supported by the global price trends and the significant strengthening of the ruble.

· Export prices (FOB Black Sea) gained 5-12% qoq (+40-80% yoy).

*estimate based on data for 2M 2017

Output and sales mix

· Steel output kept at a stable 4.21 m t (+4% yoy) against a backdrop of high sales in markets outside of Russia, offsetting the seasonal drop in demand in Russia.

· Steelmaking capacity utilization rates grew to 96% (+1 p.p. qoq and +3 p.p. yoy), including 100% at NLMK Lipetsk.

· Growth of sales (+1% qoq) was attributable to the growth of export sales by NLMK Russia Flat (+24% qoq), and the spike in sales by NLMK's EU and US-based companies (up to +33% qoq).

· Weaker sales yoy (-11% yoy) were associated with delayed recognition of export sales by NLMK Russia Flat.

· Finished steel sales gained 7% qoq to 2.44 m t (-5% yoy), driven by a 16% qoq growth in flat steel deliveries (-1% yoy). Finished product share grew to 66% (+3 p.p. qoq and +4 p.p. yoy).

· Intragroup slab deliveries (including to NBH) grew by 29% qoq and by 54% yoy to 1.18 m t. With billet exports down, sales of semis to third parties decreased by 32% qoq to 0.59 m t (-45% yoy).

Sales markets

· Total sales to home markets accounted for 62% (-2 p.p. qoq and +1 p.p. yoy) of total sales.

· Sales to the EU and US home markets increased by 24% qoq to 1.24 m t (+16% yoy), supported by stable demand from automotive, shipbuilding and infrastructure sectors.

· Total sales to home markets eased by 4% qoq to 2.25 m t, pushed down by the seasonal lapse in demand for products used in construction in Russia. The -15% yoy fall in sales to home markets is associated with a high base effect: recovery of demand in Q1 2016.

· Sales to export markets grew to 1.37 m t (+4% qoq and -12% yoy), accounting for 38% of total Group deliveries (with NBH), against a backdrop of higher export sales by NLMK Russia Flat. Key export destinations were the Middle East (including Turkey), Europe and Latin America.

Delivery of Strategy 2017

· In Q1 2017, execution of Strategy 2017 delivered savings of $57 m vs. 2016 cost base, or 9% of Group's Q1 2017 EBITDA.

· The bulk of the gain came from capex projects ($47 m), including $44 m from Stoilensky projects (Pelletizer and HPGR technology).

Debt management

· Net debt: growth of +23% qoq due to payment of Q3 2016 dividends of $367 m.

· Net debt/EBITDA remained at Q4 2016 level. The yoy decrease was associated with the growth of EBITDA and reduction of net debt.

· Total debt: Growth of +3% qoq (-12% yoy) to $2,344 m, with 37% accounted for by short-term liabilities, including short-term targeted investment loans, revolving credit lines to finance working capital, RUB bonds and Eurobonds.

· As part of debt portfolio optimization and maturity extensions, NLMK: 

o Paid off the remainder ($200 m) of the PXF line;

o Organized a new 4-year credit line of $250 m to finance NLMK USA working capital.

o Organized a new credit line of EUR 250 m to finance working capital and export trader Novex Trading.

· Financial guarantees for NBH liabilities decreased by 2% qoq to $251 m.

· Interest payments decreased by 17% qoq to $19 m.

NLMK GROUP KEY FINANCIALS

Revenue

· Growth by 10% qoq (+37% yoy) driven by an improved product mix and higher average sales prices. 

· Revenue per tonne of steel products totalled $586 (+8% qoq and +53% yoy).

· Share of revenue from finished product sales grew to 69% (+5 p.p. qoq and +4 p.p. yoy), driven by higher sales of finished steel by NLMK Group's international divisions.

· Taking into account sales by associated companies making up NBH, sales to home markets accounted for 68% of revenue. The US and EU markets grew their share in total revenue to 18% (+4 p.p. qoq and +4 p.p. yoy) and 19% (+3 p.p. qoq and +1 p.p. yoy), respectively. The 4 p.p. qoq decrease in the share of revenue in home markets was associated with the seasonal slowdown in Russian sales (32% of total sales: -9 p.p. qoq, -4 p.p. yoy).

Operating profit* grew by 19% qoq (2.5x yoy), driven by an improved product mix and higher sales prices, as well as the gains from Strategy 2017.

· The 2% qoq (+26% yoy) increase in commercial expenses to $186 m was supported by higher sales, primarily exports.

· The decrease in G&A expenses by 10% qoq to $74 m is associated with provisions made under the long-term management incentive programme in Q4 2016, and the decrease in costs related to IT and other projects. 

· The 36% yoy increase in G&A expenses is associated with the strengthening of the RUB FX rate by 21% yoy (from 74.6 to 58.8 RUB/$).

* 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

Net profit*

· Q1 2017 net profit gained 5% qoq (5.7x yoy) to $323 m due to higher profit from operations.

* Profit for a period attributable to key shareholders

Free cash flow

· Q1 2017 free cash flow increased to $208 m (+14% qoq and -24% yoy) against a backdrop of a 45% qoq (-20% yoy) cut in capex following the completion of Stoilensky Pelletizer construction.

· Operating cash flow eased by 21% qoq to $310 m due to cash outflow to replenish working capital a.

· Growth of working capital by $223 m was associated with the seasonal build-up of finished product stocks in Russia; the increase in the cost of stocks against a backdrop of higher raw material prices and the strengthening of the ruble; and slab stocks building up at NLMK's international divisions due to the increase in output. Growth of AR from a low base at the beginning of 2017 and an increase in the volume of export operations with deferred payment served as an additional factor for working capital growth.

Russian Flat Products

· Sales in Q1 2017 increased by 6% qoq to 3.1 m t, supported by the 19% qoq growth in intragroup semis deliveries, and the 35% qoq growth of slab deliveries to NBH. The yoy decrease in sales is attributable to the high base in Q1 2016 against the backdrop of active consumer restocking after a period of sluggish demand.

· Revenue grew by 20% qoq, driven by the 6% qoq increase in sales volumes and higher steel prices. Revenue spiking by 51% yoy was associated with the significant increase in prices vs. prices bottoming in Q1 2016 that fully offset the 5% yoy decrease in sales.

· EBITDA gained 13% qoq, thanks to sales gaining 6%, finished products growing their share, and price spreads expanding. Profit growth vs. Q1 2016 was driven by the widening of price spreads, and Strategy 2017 gains.

Russian Long Products 

· Sales in Q1 2017 totaled 473 k t (-30% qoq and -24% yoy). This decrease was associated with the build-up of steel product stocks by end consumers and traders in Q4 2016. Segment companies also posted lower exports (mainly for billets) vs. Q4 due to waning profitability in external markets.

· Revenue in Q1 2017 totaled $266 m (-27% qoq and +41% yoy). Lower revenue vs. Q4 2016 was factored by the drop in sales that was partially offset by higher long product prices. Revenue grew 41% yoy driven by the spike in prices for long products vs. low Q1 2016 levels, offsetting the drop in sales.

· Revenue from intersegmental operations contracted by 52% qoq due to the 38% seasonal decrease in scrap collection.

· Segment EBITDA in Q1 2017 totaled $18 m, dropping by 54% qoq

Mining

· Sales of iron ore in Q1 2017 totaled 4.13 m t, including 1.13 m t of pellets. The 5% qoq and 4% yoy decrease was the result of changes in Fe content requirements applied to iron ore concentrate used in the production of pellets.

· Sales breakdown: Over 99% of Stoilensky products were supplied to NLMK Lipetsk (78% in Q4 2016, 76% in Q1 2016).

· Q1 2017 revenue totaled $238 m (+36% qoq and +122% yoy), with growth attributable to the increase in prices for iron ore, and higher sales of pellets.

· Revenue from external sales contracted to $4 m due to the decrease in sales to external customers with sales focused on supplying the Lipetsk site. 

· Q1 2017 EBITDA surged by 75% qoq (+188% yoy) due to a sustainable gain of $44 m from launching the Pelletizer and HPGR technology; and the increase in iron ore prices.

· EBITDA margin expanded to 70% driven by the aforementioned factors.

NLMK USA

· Sales grew to 562 k t (+33% qoq and +20% yoy). driven by stable demand from construction and OCTG. Sales exclusively focused on the US home market. 

· Revenue: +41% qoq (+67% yoy) to $399 m, supported by higher sales and prices for steel products.

· EBITDA: +90% qoq (7.3x yoy) due to the widening of spreads between slab and finished product prices.

· EBITDA margin: +4 p.p. to 17%.

NLMK Dansteel

· Sales: +11% vs. Q4, driven by stable demand from shipbuilding and infrastructure sectors, and successful competition with European peers and imports.

· Revenue: +17% qoq (36% yoy) due to the increase in sales volumes and recovery of plate prices.

· EBITDA: $6 m against a backdrop of higher plate prices.

· EBITDA margin grew to 5%, driven by higher sales and а better pricing environment.

Associated companies (NBH)

· NBH sales climbed by 16% qoq to 0.6 m t (+14% yoy) against a backdrop of recovering demand in the European market. 

· Flat steel sales: +17% qoq (+19% yoy) due to higher deliveries to automotive and machine-building sectors, and lower pressure from imports.

· Plate sales gained 15% qoq to 0.19 m t (+10% yoy), supported by stable demand from machine-building, shipbuilding and infrastructure sectors.

· NBH EBITDA increased to $16 m against a backdrop of higher prices for finished products in the European market.

· EBITDA margin expanded to 4%, driven by higher capacity utilization rates and improved market conditions.

Appendix #1. Operating and financial results

(1) Sales markets

(2) Russian Flat Products

(3) Russian Long Products 

(4) Mining Segment

(5) NLMK USA

(6) NLMK DanSteel

(7) Sales by product

(8) Sales by region

(9) Revenue by region

(10) EBITDA*

* Indicator EBITDA 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. Under IFRS, EBITDA is not an indicator of operating profit, operating activity or liquidity, 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 31.03.2017

 Balance figures presented as of 31.12.2016

The interim condensed consolidated financial statements as set out on pages 5 to 19 were approved on 26 April 2017.