NLMK.L Regulatory News (NLMK)

NLMK GROUP Q3 2018 IFRS FINANCIAL RESULTS1

NLMK Group (MICEX and LSE: NLMK) is pleased to announce an EBITDA growth of 11% qoq to $1,015 m. EBITDA margin was 32%. Net income grew by 11% qoq to $646 m. Free cash flow doubled qoq to $638 m. Net debt/EBITDA hit its minimum in a decade of 0.25x.

Q3 2018 key highlights

· Group revenue in Q3 2018 totalled $3.13 bn (+0.5% qoq, +23% yoy). The decrease in average sales prices was offset by the 1% qoq growth in sales volumes and the increase in the share of HVA products in the Group's portfolio.

· EBITDA growth by 11% qoq to $1,015 m (+57% yoy) was driven by product portfolio improvements, the drop in coal prices and the weakening of the ruble. 

· Net income grew by 11% qoq (+82% yoy), driven by higher operating profit.

· Q3 free cash flow increased 2.2-fold qoq to $638 m, impacted by the increase in EBITDA, and stable working capital.

· Net debt/EBITDA decreased to 0.25x.

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 the results of joint ventures, impairment of capital assets and losses from fixed assets retirement, 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 Q3 2018 IFRS CONSOLIDATED FINANCIAL RESULTS

Key highlights

Comment from NLMK Group Deputy CFO Nelli Meshcheryakova:

"In Q3 2018, demand for steel products at our key international sales markets remained relatively stable. Russia saw a weakening in activity of rolled product buyers due to high stock levels at large traders. At the same time, the uptick in demand for long products enabled the Company to grow its consolidated sales qoq (growth of long product sales totalled 46% qoq), maintaining high steelmaking capacity utilization rates.

"Group revenue totalled $3.1 billion, flat qoq. The decrease in average sales rates was offset by the seasonal growth of consolidated sales and product portfolio improvements.

"Company EBITDA was 11% higher than the record level set last quarter, reaching $1,015 m. This is the best result since 2008. This growth was driven by product portfolio improvements, the decrease in coal prices, the weakening of the ruble, and impact from capex projects and operational efficiency programs. EBITDA margin was 32%.

"Free cash flow grew 2.2-fold qoq to $638 m, driven by stable working capital, and record-high EBITDA.

"Net debt/EBITDA decreased to 0.25x, which is testimony to the Group's financial stability. This is confirmed by NLMK's investment grade credit ratings from Fitch, Moody's and S&P. Moreover, NLMK was awarded a high ruAAA credit rating by RAEX (Expert RA) (see Press Release)."

TELECONFERENCE

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

Thursday, 25 October 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 and the webcast, participants are invited to dial:

US number:

+1 929-477-0402 (local access) // 888-208-1711 (toll free)

UK number:

+44 330 336 9128 (local access) // 0800 358 6377 (toll free)

Russian number:

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

Conference code: 4058228

To join the webcast, please follow the link: https://webcasts.eqs.com/nlmk20181025.

* 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 

GLOBAL PRICES

Q3 2018

· Raw material prices: average global coal prices decreased by 2% qoq (-1% yoy); average iron ore prices grew by 1% qoq (-6% yoy).

· Market prices for steel products: 1% qoq decrease in the US (+22-41% yoy); 0-3% qoq decline in dollar terms in Europe (+4-8% yoy).

· Prices for steel products in the Russian market for uncoated rolled products in dollar terms dropped by 5-7% qoq (+10% yoy). Average rebar prices in dollar terms decreased by 4% qoq (+15% yoy). 

· Slab export prices (FOB Black Sea) decreased by 4% qoq (+15% yoy).

MARKET REVIEW

Q3 2018

· Steel exports from China decreased by 13% qoq (-5% yoy) ahead of steel production restrictions during the heating season. Over 9M 2018, export dropped by 11%.

· Demand in the US grew by 2.5% qoq (+1% yoy in 9M 2018), driven by growth in the automotive and construction sectors.

· Europe saw a seasonal weakening in demand in Q3. Growth from year start was approximately 2.2%.

· In Russia, demand was flat qoq (flat yoy in 9M 2018).

NLMK GROUP'S OPERATING AND FINANCIAL HIGHLIGHTS

Output and sales

Q3 2018 highlights:

· Steel output grew by 1% qoq to 4.42 m t (flat yoy). Group steelmaking capacity utilization rate was 99%.

· Sales totalled 4.42 m t (+1% qoq), due to the increase in long product sales as accumulated stocks were being sold off. 

· Finished steel sales grew by 6% qoq to 2.91 m т (+5% yoy) as long product stocks were being sold off driven by the uptick in demand.

· Sales of semis to third parties totalled 0.97 m t (-2% qoq; -10% yoy) due to the drop in demand for slabs from the tube & pipe sector in Russia, and the decrease in pig iron export sales.

Slab deliveries to NBH, NLMK's joint venture, decreased by 18% qoq (+41% yoy) to 0.54 m t due to seasonal maintenance at the European sites.

· Sales to home markets in Q3 grew by 4% to 2.76 m t (-4% yoy), driven by the 15% qoq increase in sales in Russia. Local sales by NLMK Group's companies in the US decreased by 8% qoq, with consumers expecting the downward price trend that started in July to persist. Sales by European companies decreased by 10% qoq due to annual equipment maintenance.

9M 2018 highlights:

· Steel output grew by 3% yoy to 13.13 m t.

· Sales totalled 12.95 m t (+7% yoy) due to the increase in the sale of semi-finished products, driven by the uptick in demand in global markets.

NLMK Group's key financials

Revenue

Q3 2018 highlights:

· Q3 2018 revenue totalled $3.13 bn (flat qoq). Reduction in average sales prices was offset by the 1% qoq increase in sales volumes and improvement in the sales portfolio breakdown. The 23% yoy growth in revenue is due to the growth of average prices for steel products and the 4% increase in sales volume.

· The share of finished steel in the revenue gained 3 p.p. qoq reaching 69%, following the 6% qoq increase in sales volume supported by the uptick in demand for long products.

· Revenue in Russia increased by 9% qoq to $1.12 bn driven by seasonal demand growth. The share of the Russian market in the revenue increased by 3 p.p. qoq to 36%. The share of the US market in the Group's consolidated revenue remained flat qoq (22%), while the share of the EU reduced by 5 p.p. to 16%, driven by the drop in sales due to seasonal maintenance.

· The Group's revenue from sales to home markets (Russia, the US and the EU), taking into account JV (NBH) sales, increased by 3% qoq to $2.17 bn. At the same time, the share of local markets in the revenue increased by 2 p.p. qoq to 68% due to the seasonal decline in sales of European companies.

9M 2018 highlights:

· 9M 2018 revenue totalled $9.03 bn (+25% yoy), supported by growing prices and sales volume.

· The shares of the EU and US markets in the Group's consolidated revenue increased by 1 p.p. and2 p.p. yoy, respectively. Meanwhile, the share of the Russian market in the total revenue decreasedby 4 p.p. yoy to 34%.

· Taking into account JV (NBH) sales, the share of sales to NLMK's home markets reduced by 2 p.p. yoy to 67% due to outstripping growth of export sales to Turkey and the countries of Central and South America.

Operating profit

Q3 2018

· Operating profit* increased by 15% qoq to $879 m (+75% yoy), driven by a 4% qoq reduction in the costof sales (backed by coal price reduction), ruble devaluation, and gains from capex projects and operational efficiency programs.

· Commercial expenses reduced by 3% qoq (+6% yoy) to $208 m, due to a drop in transportation costs caused by the weakening of the ruble.

· G&A expenses decreased by 7% qoq to $87 m, due to the high base effect of the previous quarter,when an additional reserve for bonus payments was made.

9M 2018

· Operating profit increased by 62% yoy to $2.30 bn, driven by the expansion of price spreads, the impactof currency rates, and gains from operational efficiency ($138 m) and capex projects($107 m).

· Commercial expenses increased by 10% yoy to $634 m due to the increase in sales.

· G&A expenses increased by 9% yoy to $267 m due to payroll indexation.

Net profit

· Growth of net profit in Q3 2018 by 11% qoq (+82% yoy) to $646 m.

· In 9M 2018 net profit increased by 69% yoy, also supported by growth of profit from operations.

Free cash flow

Q3 2018

· Free cash flow increased to $638 m (2.2x qoq and +20% yoy), supported by stable working capital, and record-high EBITDA values.

· 2x qoq growth of operating cash flow (+25% yoy) to $831 m is attributable to an increase in profit margins and working capital stabilization.

· Cash outflows for working capital financing reduced two-fold qoq, amounting to $9 m, mostly driven by:

o -$49 m: a reduction in accounts receivable, due to faster inflow of payments from customers;

o +$57 m: an increase in stocks due to seasonal scrap accumulation at NLMK Russia Flat Products and NLMK Russia Long Products divisions.

Operational efficiency projects

· In 9M 2018, EBITDA gains from operational efficiency projects amounted to $138 m; gains from capex projects amounted to $107 m.

Debt management

· Net debt dropped by 11% qoq to $865 m, backed by growing profits from operations and reduced loan payments. As a result, Net Debt / EBITDA ratio improved to 0.25x (vs 0.31x last quarter).

· Total debt increased slightly to $2,123 m (1% qoq; -17% yoy).

Investment

· NLMK Group's Q3 2018 investment increased by 58% qoq to $183 m.

Dividends

· In Q3 2018, cash outflow for Q1 2018 dividend payments totaled $482 m. At the Extraordinary General Shareholders' Meeting (EGM) held on 28 September 2018, NLMK shareholders approved the paymentof Q2 2018 dividends of 5.24 rubles per share (for a total of $477 m) (See Press Release).

SEGMENTAL PERFORMANCE

NLMK RUSSIA FLAT

Q3 2018 highlights:

· Sales dropped by 7% qoq and yoy, driven by lower slab deliveries to Europe and the US (Appendix 2) and reduced sales of HRC due to planned maintenance of NLMK Lipetsk Mill 2000.

· Total revenue of the Segment reduced by 7% qoq (+10% yoy) to $2.1 bn, following the drop in sales. Year-on-year revenue growth was associated with an 18% increase in average sales prices driven by the growth in global prices.

· EBITDA grew by 4% qoq (+40% yoy) to $636 m, driven mainly by price spread expansion.

9M 2018 highlights:

· Sales increased by 1% yoy to 9.96 m t, backed by stronger demand for slabs and pig iron in export markets.

· Revenue increased by 18% yoy to $6,591, impacted by a rise in steel product prices.

· EBITDA increased by 52% yoy to $1,771 m as a result of widening price spreads, foreign currency rates, and gains from capex project and operational efficiency programs.

NLMK RUSSIA LONG PRODUCTS 

Q3 2018 highlights:

· Sales in Q3 2018 grew by 46% qoq (+27% yoy) to 0.93 m t, backed by recovering demand after the World Cup, as previously accumulated finished steel stocks were being sold off (Appendix 3). 

· Revenue in Q3 2018 increased by 29% qoq to $633 m (+38% yoy), supported by the growth of sales volumes, which was partially offset by a drop in average sales prices. The year-on-year increase in revenue was associated with higher sales of steel products and growth in average sales prices.

· EBITDA of the Segment in Q3 2018 increased by 35% qoq to $70 m, supported by an increase in sales volumes with a growing share of finished steel, and impacted by foreign currency rates.

9M 2018 highlights:

· Sales in 9M 2018 climbed by 9% yoy to 2.34 m t, backed by growing finished steel sales to the Russian market and semis exports.

· Revenue increased by 29% yoy to $1,584 m, driven by an increase in sales volume and steel product price growth.

· EBITDA increased by 83% yoy to $183 m as a result of an increase in sales volumes, widening price spreads and gains from efficiency improvement programs.

MINING AND PROCESSING OF RAW MATERIALS

Q3 2018 highlights:

· Sales of iron ore in Q3 2018 climbed by 2% to 4.60 m t (+5% yoy): pellet sales reached 1.71 m t (+2% qoq), concentrate sales reached 2.51 m t (+2% qoq) (Appendix 4).

· Revenue in Q3 2018 dropped by 12% qoq to $288 m (+38% yoy), driven by a reduction in average sale prices. A year-on-year increase was associated with growing prices (+31%) following the growth in global prices, and higher sales volumes.

· EBITDA went down by 13% qoq to $211 m (+59% yoy) following the change in revenue; EBITDA margin remained at a high level of 73%.

9M 2018 highlights:

· Sales in 9M 2018 improved by 6% yoy to 13.63 m t, driven by increased equipment productivity.

· Revenue went up by 37% to $952 m, driven by the growth of iron ore prices and a higher share of pellets in the Segment's sales.

· EBITDA increased by 49% yoy to $708 m due to widening price spreads and gains from capex project.

NLMK USA

Q3 2018 highlights:

· Sales dropped by 8% qoq to 0.59 m t (+4% yoy), driven by weakening demand from consumers anticipating an adjustment in prices (Appendix 5).

· Revenue grew by 3% qoq to $609 m following an average 12% increase in sales prices due to trade restrictions imposed on steel imports. Year-on-year revenue growth of 44% was attributable to the same factor.

· EBITDA increased by 16% qoq to $88 m (2.3x yoy) against the widening spread between slab and finished steel prices. EBITDA margin gained 1 p.p. qoq.

9M 2018 highlights:

· Sales in 9M 2018 climbed by 5% yoy to 1.78 m t, supported by increased HRC and HDG sales amid growing demand from consumers.

· Revenue increased by 29% yoy to $1,630 m, driven by a rise in prices for steel products.

· EBITDA increased by 21% yoy to $204 m, backed by expanding price spreads and volume growth.

NLMK DanSteel

Q3 2018 highlights:

· Plate sales dropped by 11% qoq due to planned maintenance (+14% yoy). Year-on-year sales increased, driven by stronger demand in the European market (Appendix 6).

· Revenue reduced by 5% qoq to $125 m (+32% yoy) following weaker sales performance coupled with an increase in average plate prices. Year-on-year revenue growth was associated with an increase in the Segment's sales volume and price growth.

· EBITDA was $1 m vs. $5 m losses in the previous quarter, backed by expanding slab/thick plate price spread.

9M 2018 highlights:

· Sales in 9M 2018 climbed by 13% yoy to 0.4 m t, supported by increased demand for plates.

· Revenue went up by 31% yoy to $395 m, driven by rising prices for steel products (+16% yoy) anda 13% yoy growth in sales volume.

· EBITDA went down to (-) $9 m due to the narrowing of the slab/plate price spread.

JV PERFORMANCE (NBH)

Q3 2018 highlights:

· NBH sales dropped by 18% to 0.47 m t (+5% yoy), driven by planned seasonal maintenance.

· Revenue reduced by 20% qoq to $390 m (+15% yoy), driven by lower sales volumes.

· NBH EBITDA was (-) $27 m vs. (-) $20 m in Q2 2018 due to slumping sales.

9M 2018 highlights:

· NBH sales increased by 5% yoy to 1.69 m t, backed by stronger demand for flat steel.

· Revenue increased by 22% qoq to $1,401 m, supported by higher sales volume and price growth.

· NBH EBITDA was (-) $55 m vs. $2 m income in the same period a year ago, due to narrowing price spreads amid growing slab prices.

Appendix. 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 share of results of joint ventures, impairment of non-current assets and loss on disposals of property, plant and equipment, 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 share of results of joint ventures, impairment of non-current assets and loss on disposals of property, plant and equipment.

(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 30.09.2018

Balance figures presented as of 30.06.2018