NLMK.L Regulatory News (NLMK)

NLMK GROUP Q3 2019 IFRS FINANCIAL RESULTS

NLMK Group (LSE: NLMK, MOEX: NLMK) today announced its Q3 2019 financial results1. Revenue amounted to $2,576 m (-8% qoq) with an EBITDA margin of 25%. Free cash flow totalled $249 m (-3% qoq).

Q3 2019 key highlights

·; Revenue decreased by 8% qoq (-18% yoy) due to lower sales volumes (-6% qoq) against the backdrop of ongoing overhauls at NLMK Lipetsk blast furnace and basic oxygen furnace operations. Additionally, revenue was affected by the downward price movement on the international steel markets.

·; EBITDA totalled $654 m (-11% qoq; -36% yoy) against the backdrop of a decline in steel prices outstripping key raw material prices. EBITDA margin went down to 25% (-1 p.p. qoq).

·; Free cash flow totalled $249 m. The qoq 3% decrease was associated with increased investment within the scope of Strategy 2022.

1 Consolidated financial results are prepared under IFRS. Reporting periods of the Company are 3M, 6M, 9M and 12M. Quarterly figures are obtained by calculation, including in the segment reporting. Figures for comparable periods may differ from figures posted earlier because of rounding off to integers.

2 EBITDA is the operating profit before equity share in financial results of joint ventures, impairment of capital assets and losses from retirement of fixed assets, allowed for amortization and 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 borrowings 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 reporting period and EBITDA as last 12 months EBITDA. Net debt calculations are presented in the Appendix.

NLMK GROUP Q3 2019 IFRS CONSOLIDATED FINANCIAL RESULTS

Key highlights

Comment from NLMK Group CFO Shamil Kurmashov:

"Q3 2019 saw the situation on the steel markets aggravate due to a weakening in demand and the resulting decline in steel prices, amid an economic growth slowdown in the Company's key international sales regions.

"NLMK continued overhauling its blast furnace and basic oxygen furnace operations, which will enable the Company to grow its steel output by 1 million tonnes by 2021 to 14.2 million tonnes per year. The overhauls drove the Company's steel product sales down by 6% qoq.

As a result, NLMK Group's revenue dropped by 8% qoq. EBITDA was down to $654 m, while EBITDA margin stood at 25%, or 1 p.p. down from Q2, caused by narrower price spreads.

"Net debt/EBITDA stands at a comfortable 0.59х (0.39х as at the end of Q2 2019). This growth was driven by keeping dividend payments high against the backdrop of investment as part of executing NLMK Group's strategy.

"Free cash flow totalled $249 m. Positive free cash flow, Net debt/EBITDA below 1.0x and dividend policy implementation enabled the Company's management to recommend NLMK's Board of Directors $300 m in Q3 dividends."

TELECONFERENCE

NLMK is pleased to invite the investment community to take part in a teleconference with the Company's Management:

Thursday, 24 October 2019

·; 10:00 a.m. - New York

·; 3:00 p.m. - London

·; 5:00 p.m. - Moscow

To join the conference call and web-cast, the participants are invited to dial:

US number:

+1 334 -777-6978 (local access) // 800-367-2403 (toll free) 

UK number:

+44 (20) 808 928 60 (local access) // 0800 756 33 33 (toll free) 

Russian number:

+7 (499) 609 12 60 (local access) // 8 800 100 36 87 (toll free)

Conference code: 5167079

To join the webcast, please follow the link: https://webcasts.eqs.com/nlmk20191024

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

MANAGEMENT COMMENTS

Q3 2019 market review

·; Steel exports from China decreased by 8.5% qoq (-10% yoy), supported by more favorable price conditions on the domestic market, and a reduction in steel output (-2% qoq).

·; Consumption in the US fell by 0.5% qoq (-2% yoy)* driven by a slowdown in demand from the machine-building, automobile and energy sectors.

·; European demand declined by 0.5% qoq (flat yoy), pressured by weak consumption in the automobile and machine-building sectors.

·; In Russia, demand remained flat (+8% yoy)*, supported by demand from the construction and energy sectors.

Q3 2019 prices

·; Raw material prices: average global coal prices slumped by 16% qoq (-9% yoy) due to the seasonal decline in demand in India and import restrictions in China; iron ore prices grew by 1% qoq (+36% yoy).

·; Market prices** for flat products: a 5-8% qoq decline in the US market (-26-35% yoy), a 3-6% qoq decline in Europe (-16-21% yoy).

·; In Russia, prices for steel products in dollar terms grew by 1-2% qoq (+2% yoy) driven by the seasonal increase in demand and the limited supply.

·; Slab export prices (FOB Black Sea) slumped by 11% qoq (-21% yoy) due to lower demand on the export markets.

Q3 2019 output and sales breakdown

·; Steel output*** decreased by 6% qoq (-16% yoy) to 3.7 m t due to the overhauls at NLMK Lipetsk's blast furnace and basic oxygen furnace operations.

·; Sales decreased by 6% qoq (-9% yoy) to 4.0 m t due to the decrease in the sales of semis following the overhauls, as well as lower slab consumption needs of the Group's European companies and the decrease in corresponding stocks.

·; Finished steel sales remained flat qoq at 2.7 m t, increasing their share in total sales by 4 p.p. qoq(+2 p.p. yoy) to 68%.

·; Sales of semis to third parties grew by 6% qoq to 0.9 m t, driven by increased slab deliveries to independent buyers. Slab deliveries to NBH, NLMK's joint venture, fell by 39% qoq to 0.43 m t, against the backdrop of lower NBH needs.

·; Sales on home markets (with NBH) dropped by 5% qoq (+3% yoy) to 2.8 m t, driven mainly by the decline of sales in the US (-6% qoq) to 0.6 m t and in the EU (-13% qoq) to 0.6 m t, due to summer overhauls and lower demand for finished products. Sales in Russia decreased by 1% qoq (+4% yoy) against the backdrop of lower sales of long products.

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

** 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.

***Hereinafter NLMK Group steel output and sales in home markets 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.

9M 2019 output and sales breakdown

·; Steel output decreased by 9% yoy to 11.9 m t, due to ongoing overhauls at NLMK Lipetsk.

·; Sales remained flat yoy at 12.9 m t.

·; Sales of finished products climbed by 2% yoy to 8.3 m t, supported by increased shipments of flat and long products in H1 2019. The share of finished products in total sales grew by 1 p.p. qoq to 64%.

NLMK GROUP KEY FINANCIALS

Q3 2019 revenue

·; Revenue totalled $2.58 bn (-8% qoq; -18% yoy). The increase in the share of finished and HVA products in the sales mix partially offset the 6% qoq decrease in steel product sales volumes and the drop in prices.

·; The share of finished steel in the revenue grew to 69% (+2 p.p. qoq; flat yoy). The share of HVA products grew by +2 p.p. qoq (+1 p.p yoy) to 39% amid lower sales of semis.

·; Revenue in the Russian market grew to $1.17 bn (+1% qoq). The share of the Russian market in the consolidated revenue grew to 45% (+4 p.p. qoq). Revenue from sales in the US and the EU decreased to $0.43 bn (-23% qoq) and $0.38 bn (-40% qoq), respectively. The shares of sales in the EU and the US went down by 7 p.p. and 3 p.p. to 15% & 17%, respectively.

·; The share of the Group's revenue from sales on its home markets (Russia, the US and the EU), including NBH JV sales, declined by 2 p.p. qoq to 72%, driven by lower volumes and average sales prices in the EU and US markets.

9M 2019 revenue

·; Revenue totalled $8.24 bn (-9% yoy) pressured by the decline in average sales prices by 8% yoy.

·; The share of the Russian market in the Group's revenue grew by 6 p.p. yoy to 40%. The US share decreased by 2 p.p. yoy to 19% and EU share was flat yoy on 19%. 

·; The share of the Group's revenue from sales on its home markets, including NBH JV sales, grew by 3 p.p. yoy to 70%.

3Q 2019 EBITDA

·; EBITDA* went down by 11% qoq (-36% yoy) to $654 m, due mainly to the narrowing of steel / raw materials spread.

·; Commercial expenses remained flat qoq at $202 m. The 2% decrease yoy was associated with lower export volumes.

·; G&A expenses not considering intangible asset depreciation remained flat qoq.

*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.

9M 2019 EBITDA

·; EBITDA reduced by 24% yoy to $2.08 bn following the narrowing of spreads.

·; Commercial expenses remained flat yoy at $630 m.

·; G&A expenses decreased by 2% yoy to $261 m due to cost optimization.

Q3 2019 net profit

·; Net profit** decreased by 17% qoq to $343 m, following the drop in operating profit and pressured by the higher effective income tax rate (NLMK USA loss).

·; Net profit for 9M 2019 went down by 34% following the decline in operating profit.

Q3 2019 free cash flow

·; Free cash flow decreased by 3% qoq to $249 m (-61% yoy) due to increased financing of investments under Strategy 2022.

·; Operating cash flow increased by 15% qoq (-32% yoy) to $568 m as cash was released from working capital.

·; Cash inflow from working capital totalled $20 m (vs. an outflow of $151 m in Q2 2019) due to:

o +$158 m: a decrease in receivables driven by lower slab sales to NBH;

o +$19 m: lower value of third party slab stocks at NLMK USA and decreased finished goods inventories and goods in transit at NLMK Lipetsk, which was partially offset by growing scrap stocks at NLMK Lipetsk and NLMK Russia Long ahead of the winter months;

o -$151 m: decreased payables driven by reduced volumes of slabs purchased from 3rd parties for NLMK USA.

Investment

·; NLMK Group's Q3 2019 investment increased by 39% qoq to $316 m (+73% yoy).

Dividends

·; In Q3 2019, NLMK paid out $601 m in dividends.

·; On 24 October 2019, the Board of Directors recommended that shareholders approve the payment of Q3 2019 dividends in the amount of 3.22 rubles per share, which is equivalent to 120% of the free cash flow.

Debt management

·; Total debt decreased by 4% qoq to $2,677 m (+26% yoy) due to the scheduled repayment of 7-year Eurobonds with an annual coupon rate of 4.95% for a total of $146 m.

·; Net debt grew by 34% qoq to $1,736 m (+101% yoy), driven by cash outflow towards dividend payments and higher capex related to Strategy 2022 execution. Net debt/EBITDA is 0.59х (0.39х as at the end of the previous quarter).

Q4 2019 outlook

·; We expect steel output to increase following the completion of overhauls at NLMK Lipetsk blast furnace and basic oxygen furnace operations, with the Lipetsk site reaching planned output of 12 m t in 2019.

**Profit for the period, attributable to NLMK shareholders 

NLMK Russia Flat Products

Q3 2019 highlights:

·; Sales decreased by 9% qoq (-13% yoy) amid ongoing overhauls at the blast furnace and basic oxygen furnace operations.

·; The Segment's revenue fell in line with shipments by 9% qoq to $1.74 bn (-18% yoy), pressured by lower semis sales to Group companies and NBH.

·; EBITDA declined by 20% qoq to $363 m due to narrower spreads and lower sales, which was partially offset by operational efficiency gains. The 43% EBITDA decrease yoy was caused by a stronger ruble, narrower spreads and lower steel product sales.

9M 2019 highlights:

·; Sales decreased by 7% yoy to 9.23 m t against the backdrop of lower sales of pig iron and slabs to the Group companies and NBH.

·; Revenue decreased by 14% yoy due to the decrease in steel product sales prices and volumes.

·; EBITDA decreased by 30% yoy, impacted by narrower raw material/slab spreads.

NLMK Russia Long Products 

Q3 2019 highlights:

·; Sales went down by 3% qoq to 0.69 m t, following an ongoing decline in export billet sales. Sales decreased by 26% yoy due to the Q3 2018 high base caused by selling off stocks accumulated in H1 2018.

·; Revenue in Q3 2019 grew by 4% qoq to $485 m, driven by higher scrap sales to NLMK Lipetsk for winter stockpiling. Revenue reduced by 23% yoy due to lower long product prices and reduced steel product sales.

·; EBITDA of the Segment grew to $46 m (+28% qoq), following sales mix change towards a larger share of finished products. EBITDA went down by 34% yoy amid lower billet sales, a stronger ruble and a narrower scrap/rebar spread.

9M 2019 highlights:

·; Sales decreased by 7% yoy to 2.18 m t as billet exports became less lucrative.

·; Revenue decreased by 14% yoy due to a decline in long product prices.

·; EBITDA reduced by 50% yoy, depressed by narrower spreads. This was partially offset operational efficiency gains and FX rate impact.

Mining Segment 

Q3 2019 highlights:

·; Sales of iron ore increased by 6% qoq to 4.78 m t (+4% yoy), driven by increased shipments of iron ore concentrate to 3rd parties amid a temporary slump in demand from NLMK Lipetsk.

·; Revenue increased by 27% qoq to $406 m, driven by higher delivery volumes and average sales prices.

·; EBITDA increased by 35% qoq to $314 m due to higher prices, sales volume and investment programme gains. EBITDA margin grew to 77%.

9M 2019 highlights:

·; Sales increased by 2% yoy to 13.87 m t, driven by higher iron ore sales to 3rd parties during the period of reduced NLMK Lipetsk demand against the backdrop of output growth.

·; Revenue increased by 4% yoy, supported by higher sales and iron ore prices.

·; EBITDA increased by 4% yoy, following revenue up.

NLMK USA 

Q3 2019 highlights:

·; Sales decreased by 6% qoq to 0.55 m t (-7% yoy) amid weaker demand in pipe manufacturing and construction.

·; Revenue decreased by 18% qoq to $391 m (-36% yoy) amid continued price adjustments on the US market and a decline in sales.

·; EBITDA decreased to -$33 m (vs. a $16 m profit last quarter), following the decline in prices for finished rolled products and the use of accumulated stocks of more expensive slabs.

9M 2019 highlights:

·; Sales decreased by 3% yoy to 1.73 m t, due to the drop in HRC and HDG sales amid weak demand.

·; Revenue reduced by 15% yoy, due to steel price adjustments in the US.

·; EBITDA decreased to $0 m, pressured by the slump in steel product prices.

NLMK Dansteel*

Q3 2019 highlights:

·; Sales of thick plate reduced by 14% qoq to 0.12 m t due to planned maintenance.

·; Revenue decreased by 15% qoq to $111 m (-11% yoy) following the drop in sales volumes.

·; EBITDA reduced to $1 m (-67% qoq) amid narrower spreads and lower plate sales.

9M 2019 highlights:

·; Sales remained flat yoy at 0.4 m t.

·; Revenue decreased by 4% yoy, pressured by the decrease in steel product prices.

·; EBITDA totalled $7 m (vs. a $9 m loss a year earlier), supported by a wider plate/slab price spread and investment programme gains.

JV performance (NBH)

Q3 2019 highlights:

·; NBH sales decreased by 13% qoq to 0.54 m t due to planned summer maintenance. Sales volumes grew by 14% yoy, driven by elimination of unplanned downtime.

·; Revenue decreased by 18% qoq $0.37 bn, due to lower sales and average sales prices. The 5% decrease yoy was also attributable to the drop in prices.

*NLMK Dansteel and plate distribution network

·; EBITDA totalled (-) $43 m vs. (-) $49 m in Q2 2019.

9M 2019 highlights:

·; NBH sales decreased by 1% to 1.67 m t, due to low capacity utilization rates in Q1 2019.

·; Revenue decreased by 13% yoy to $1.21 bn, due to lower steel product sales prices.

·; EBITDA totalled (-) $107 m (-$84 without the non-operating provisions for NLMK Clabecq accrued in Q2) vs. (-) $55 m the previous year against the backdrop of narrower rolled product/slab price spreads.

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) NBH

(8) Sales by product

 (9) Sales by region

 (10) Revenue by region

(11) 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

(12) Free cash flow

(13) Net debt

(14) Production of main products

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

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

(17) Segmental information

Balance figures presented as of 30.09.2019

Balance figures presented as of 30.06.2019