NLMK.L Regulatory News (NLMK)

NLMK GROUP Q1 2018 IFRS FINANCIAL RESULTS1

NLMK Group (MICEX and LSE: NLMK) is pleased to announce an EBITDA growth of 3% qoq to a record $812 m. Q1 2018 free cash flow increased 3-fold qoq to $599 m, driven by strong performance.

Q1 2018 key highlights

· Group revenue in Q1 2018 declined by 1% to $2.79 bn (+30% yoy), due to a seasonal drop in sales(-5% qoq), which was offset by the growth in prices.

· EBITDA grew to $812 m (+3% qoq), driven by the growth in steel prices and new operational efficiency programmes.

· Q1 free cash flow increased 3-fold qoq to $599 m, driven by the growth of profitability, partial release of working capital, and lower investment.

· Net income grew by 17% qoq (+56% yoy), driven by higher operating profit.

· Net debt/EBITDA decreased to 0.31х due to reduction of net debt and growth of profitability.

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.

NLMK GROUP Q1 2018 IFRS CONSOLIDATED FINANCIAL RESULTS

Key highlights

Comment from NLMK Group Acting CFO Sergey Karataev:

"The growth of sales in the Group's home markets of Europe and US, and an improvement in the pricing environment in international markets enabled NLMK to maintain its revenue practically flat compared to the strong Q4 (-1% qoq), despite a seasonal 5% drop in sales qoq.

"The widening of steel product/raw material price spreads, gains from completed capex projects, and operational efficiency gains were the key drivers behind the growth of EBITDA to a ten-year high of $812 m(+3% qoq). EBITDA margin was 29% (+1 p.p. qoq).

"It's important to note that Q1 2018 operational efficiency gains totalled $57 m, with the annual target set at $130 m. 

"Investments in Q1 decreased vs. the high level at 2017 year-end and amounted to $131 m.

"Business profitability growth, conservative capex and the reduction in working capital supported a 3x qoq increase in the Company's free cash flow to $599 m, resulting in a Net debt / EBITDA reduction to 0.31х.

"A significant liquidity cushion and a strong balance create favourable conditions for high dividend payments, while maintaining financial stability and conditions for further business development."

TELECONFERENCE

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

Tuesday, 24 April 2018

· 10:00 a.m. - USA (New York)

· 3:00 p.m. - Great Britain (London)

· 5:00 p.m. - Russia (Moscow)

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

US number:

+1 929-477-0448 (local access) // 800-239-9838 (toll free)

UK number:

+44 330 336 9105 (local access) // 0800 358 63 77 (toll free)

Russian number:

+7 495 213 17 67 (local access) // 8 800 500 9283 (toll free)

Conference code: 8925037

To join the webcast, please follow the link: http://www.audio-webcast.com/cgi-bin/visitors.ssp?fn=visitor&id=5531. 

*We recommend participants start dialling 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

Q1 2018 market overview

· Steel exports from China decreased by 6% qoq and by 27% yoy, due to seasonal restocking and steel production curbs imposed for the winter season.

· Demand in the US increased by 5% qoq*, supported by the automotive, construction and oil and gas sectors.

· European demand increased by 6.5% qoq, riding on economic recovery.

· Russia saw a seasonal weakening in demand by 4% qoq.

Q1 2018 prices

· Raw material prices: average global coal prices increased by 14% qoq (+21% yoy); iron ore prices increased by +13% qoq (-13% yoy).

· Market prices** for steel products: 14-24% qoq growth in the US market (+10-20% yoy); 1-9% qoq growth in Europe (+10-20% yoy).

· Prices for steel products in the Russian market in dollar terms grew by 6-8% qoq (+0-8% yoy).

· Slab export prices (FOB Black Sea) grew by 12% qoq (+31% yoy), supported by growing demand for semis.

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

** 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

Q1 2018 highlights:

· Steel output* remained flat qoq at 4.33 m t (+3% yoy). Group steelmaking capacity** utilization rate grew by 3 p.p. yoy to 99%.

· Sales dropped by 5% qoq (+ 13% yoy) due to a seasonal decline in demand in Russia (-21% qoq) and a higher share of intragroup slab supplies (growing supplies to NLMK USA in anticipation of stronger local demand).

· Sales breakdown: sales of semis to third parties reduced by 20% qoq to 1.04 m t (+77% yoy) due to the 55% growth of slab sales to NLMK Group's companies.

Slab deliveries to NLMK's joint venture (NBH) grew by 32% qoq (-7% yoy), backed by NBH sales growing by +26% qoq (+7% yoy).

· Finished steel sales reduced by 4% qoq to 2.50 m t (+3% yoy) due to the seasonal decline in demand in Russia. The share of finished products in total sales remained flat qoq at 60% (-6 p.p. yoy).

· Sales to home markets in Q1 totalled 2.60 m t (-9% qoq, +15% yoy), driven by the seasonal weakening in demand in Russia, where sales fell by 21% qoq. Sales of our international companies in their respective home markets of Europe and the USA increased by 20% and 1% qoq (+3% and -2% yoy) respectively. The share of 'home' sales reduced to 62% (-2 p.p. qoq, flat yoy). Sales to external markets increased by 1% qoq to 1.59 m t (+16% yoy).

* Hereinafter NLMK Group steel output and local sales include NBH. Consolidated sales are given without NBH. Sales to home markets mean sales of the Group's companies in the regions, where production capacities are located in Russia, Europe and the USA.

** Without production capacities that are undergoing planned maintenance.

Operational efficiency projects

· In Q1 2018, EBITDA gains from operational efficiency projects amounted to $57 m, or 44% of the 2018 target.

· In Q1 2018, 65 new operational efficiency projects were launched.

Debt management

· Net debt reduced by 4% qoq to $883 m, driven by the growth of free cash flow to $599 m. Net debt/EBITDA decreased to 0.31х

· Total debt grew by 4% qoq (+1% yoy) to $2,365 m, as a result of an increase in the drawdown of ST lines to finance trading companies and NLMK USA.

· Financial costs remained flat qoq at $19 m.

Investment

· NLMK Group's Q1 2018 investment reduced by 51% qoq to $131 m.

Dividends

· In Q1 2018, cash outflow for Q3 2017 dividend payments totalled $545 m.

· At a meeting held on 5 March 2018, NLMK Group's Board of Directors recommended the Company's shareholders to approve payment of Q4 2017 dividends of RUB 3.36 per share at the upcoming Annual General Shareholders' Meeting (AGM). Taking into account declared dividends for Q1-Q3 2017, 12M 2017 accrued dividends could total RUB 14.04 per share, which is equivalent to 100% of NLMK Group's 2017 net income. (See press release)

NLMK GROUP KEY FINANCIALS

Revenue

Q1 2018 highlights:

· Q1 2018 revenue totalled $2.79 bn (-1% qoq), with sales volumes reducing by 5% qoq, which was partially offset by the 4% qoq increase in average sales prices. The 30% yoy growth in revenue is due to the 13% increase in sales volumes and the 15% increase in prices.

· The shares of the EU and US markets in the Group's consolidated revenues increased by 5 p.p. and 2 p.p., respectively. Meanwhile, the share of the Russian market in the total revenue decreased by 6 p.p. qoq to 35%, due to the seasonal weakening in demand in Russia.

· Taking into account JV (NBH) sales, the share of sales to the Russian, US and EU home markets in the Group's revenue increased by 1 p.p. qoq to 68% due to the growth in sales by NLMK's international companies to local markets.

Operating profit

Q1 2018 highlights:

· Operating profit* increased by 7% qoq to $657 m (+39% yoy), due to the seasonal decline in repair costs, expansion of price spreads and the growth of operational efficiency gains.

· Commercial expenses reduced by 3% qoq (+14% yoy) to $212 m, due to lower sales volumes (-5% qoq).

· The decrease in G&A expenses by 28% qoq to $86 m was associated with the high Q4 base due to the 2017 bonus accrual.

*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 2018 net profit grew by 17% qoq (+56% yoy) to $502 m, mainly due to operating profit growth.

* Profit for the period, attributable to NLMK shareholders

Free cash flow

Q1 2018 highlights:

· Free cash flow hit an all-time high of $599 m(3x increase qoq and 2.9x increase yoy), driven by growing cash inflows from operations and a qoq reduction in investment.

· Free cash flow grew by 55% qoq (+138% yoy) to $737 m, driven by an increase in sales margins and a partial release of working capital.

· Working capital decreased by $58 m (vs. the increase of $190 m in Q4), due mainly to:

o an increase in accounts payable for coal, due to the increase in prices and changes in the ruble exchange rate;

o reduction of scrap stocks at the Group's Russian facilities;

These factors were partially offset by the growth of accounts receivable driven by growing prices for finished steel and changes in the sales breakdown; as well as due to the growth in stocks of semi-finished products and rolled steel at the Group's US and Lipetsk sites.

NLMK Russia Flat Products

Q1 2018 highlights:

· Sales grew by 3% qoq to 3.34 m t, driven by the growth of pig iron sales in the US market and slab sales to NLMK's international facilities. The recovering in demand for HVA products and slabs for large diameter tubes in Russia supported the 9% yoy growth of sales. The share of finished steel in the sales breakdown reduced to 38% (-5 p.p. qoq, -6 p.p. yoy).

· Total revenue of the Segment grew by 5% qoq (+27% yoy) to $2.17 bn, driven by increased revenue from intersegmental operations, resulting from higher sales of semis to the Group's other facilities. Despite the increase in the share of semi-finished products in the sales portfolio, average sales prices increased by 2% qoq. Year-on-year revenue growth of 27% was associated with a 16% increase in average sales prices and a 9% increase in sales.

· EBITDA decreased by 6% qoq to $523 m due to the narrowing of spreads between steel prices and main feedstock (iron ore concentrate and coal), and changes in the sales breakdown towards a growing share of semis supplied to NBH and NLMK USA for downstream processing in Q2.

Year-on-year EBITDA growth of 42% was associated with the widening of spreads and with optimization gains.

NLMK Russia Long Products

Q1 2018 highlights:

· Sales in Q1 2018 reduced by 6% qoq(+63% yoy) to 0.77 m t, driven by in the weakening in buying activity in Russia (sales dropped by 13% qoq) as export sales grew by 2% qoq to 0.41 m t.

· Total revenue in Q1 2018 amounted to$460 m (-18% qoq and +73% yoy). The quarter-on-quarter reduction was attributed to reduced scrap sales to the Group's facilities due to the seasonal drop in scrap collection. The year-on-year growth of revenue was driven by higher sales of steel products and a 17% yoy growth in the average prices.

· EBITDA of the Segment increased by 17% qoq to $61 m in Q1 2018. The widening of spreads fully offset the seasonal drop in sales. The significant year-on-year growth of EBITDA (3x) was mainly due to the 63% increase in sales, and the widening of finished steel/scrap price spreads.

Mining and Processing of Raw Materials

Q1 2018 highlights:

· Sales of iron ore climbed 7% to 4.51 m t (+9% yoy) in Q1 2018: pellet sales reached 1.69 m t (+5% qoq); concentrate sales reached 2.45 m t (+9%).

· Revenue in Q1 2018 totalled $338 m (+36% qoq and +42% yoy), supported by growing sales and an increase in average sales prices (+28% qoq). The year-on-year increase was associated with growing prices (+30%) following the growth in global prices, and a higher share of pellets in the sales mix.

· EBITDA grew by 53% qoq to $254 m; EBITDA margin reached a record 75%, supported by growing prices and sales volumes. Alongside the gains from the equipment productivity improvement programme, these were the main drivers behind the 52% yoy EBITDA growth.

NLMK USA

Q1 2018 highlights:

· Sales grew by 1% qoq to 0.55 m t (-2% yoy), supported by stronger demand.

· Revenue grew by 5% qoq to $431 m, following an average 4% qoq increase in sales prices and the 1% qoq increase in sales volume. Year-on-year revenue growth of 8% was attributable to higher sales prices.

· EBITDA totalled $40 m (+38% qoq, -41% yoy), driven by the widening of the slab/finished steel spread, and growth of sales volumes. EBITDA margin gained 2 p.p. qoq. The year-on-year decrease in profitability was associated with a 2% drop in sales and shrinking slab price spreads.

NLMK DanSteel

Q1 2018 highlights:

· Sales of thick plate grew by 16% qoq (+6% yoy), driven by stronger demand from shipbuilding, energy and construction sectors.

· Revenue grew by 20% qoq to $138 m (+30% yoy), driven by a 16% growth in sales volumes, coupled with a 4% increase in average prices qoq. Year-on-year revenue growth was associated with a 24% yoy increase in plate prices and an increase in the Segment's sales volume.

· EBITDA amounted to -$5 m driven by high slab prices and the corresponding narrowing of finished steel price spread.

JV performance (NBH)

Q1 2018 highlights:

· NBH sales grew by 26% to 0.64 m t (+7% yoy), backed by intensified business activity in the European market.

· Revenue increased by 34% qoq to $525 m (+32% yoy), supported by stronger sales.

· NBH EBITDA was -$8 m vs. -$26 m in Q4 2017, mainly due to stronger sales and the widening of slab/finished steel spread, due to using the accumulated slab stocks.

Appendix No.1. Operating and financial results

 (1) Sales markets

(2) NLMK Russia Flat Products

(3) NLMK Russia 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*

*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 31.03.2018

Balance figures presented as of 31.12.2017