NLMK.L Regulatory News (NLMK)

Press release

17 May 2016 

Q1 2016 NLMK GROUP

CONSOLIDATED FINANCIAL RESULTS UNDER IFRS

NLMK Q1 2016 revenue was $1.577 billion (-4% qoq), EBITDA margin was 18%. Free cash flow increased by 2.5x to $275 million. NLMK net profit was $57 million.

Q1 2016 highlights:

• Sales volumes increased by 10% qoq (+5% yoy) to 4.1 million tonnes driven by the growth in finished steel sales

• Revenue was $1,577 million (-4% qoq and -29% yoy)

• EBITDA was $290 million (-10% qoq and -55% yoy)

• EBITDA margin was 18% (-2 p.p. qoq and -11 p.p. yoy)

• Free cash flow increased by 2.5x qoq to $275 million.

• Net debt decreased to $967 million at the end of Q1 2016 (-11% qoq and -22% yoy)

• Net debt / EBITDA was 0.61х as at 31.03.2016 

 TELECONFERENCE

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

Tuesday, 17 May 2016

· 10:00 am - USA (New York)

· 3:00 pm - UK (London)

· 5:00 pm - Russia (Moscow)

To join the conference call, please, dial:

US Number:

+1646 254 3363 (Local access) // 1877 280 2342 (Toll free)

United Kingdom Number:

+44(0)20 3427 1903 (Local access) // 0800 279 5004 (Toll free)

Russian Number:

+7495 705 9450 (Local access) // 8 800 500 9312 (Toll free)

Conference ID: 3302417

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

 It is recommended that participants download the presentation in advance on NLMK's website www.nlmk.com

Q1 2016 CONSOLIDATED FINANCIAL RESULTS UNDER IFRS 1

Key highlights 

Comment from NLMK Group CFO Grigory Fedorishin:

"Q1 global steel production sequentially stabilized: steel production in the US and the EU recovered, while Chinese steel production decreased. This was driven by improved steel demand and restocking in developed markets as the effects of strengthened trade barriers against steel imports from emerging markets, including from China, were felt. These factors, in tandem with the recovery in raw material prices, were behind the Q1 steel price growth.

"NLMK operates a network of production assets across its core markets; this unique model ensured a 10% growth in sales in Q1 against the previous quarter to a record 4.1 million tonnes, thus keeping utilization rates at maximum levels. Our revenue was down by 4% qoq due to a lag in recognition of export sales; hence, our sales reflected bottom level prices of the previous quarter. Growth in steel prices seen in Q1 will be reflected in our Q2 revenue.

"The sequential decrease in steel prices was partially offset by a positive effect from the ongoing operational efficiency programme. As a result, our Q1 EBITDA margin stood at 18%.

"Total capex allocated to the implementation of Strategy 2017 and to maintenance was $121 million.

"Working capital management and conservative investments drove our free cash flow to $275 million, a 2.5x increase compared to Q4 2015, and ensured a further decrease of our net debt.

"At the meeting held on the 22nd of April 2016, NLMK Board of Directors recommended approving Q4 2015 and Q1 2016 dividends of RUB 2.43 per ordinary share and RUB 1.13 per ordinary share, respectively. Dividend payment will be approved at the upcoming Annual General Shareholder Meeting (AGM) to be held on the 3rd of June 2016.

"The total amount of dividends for 2015 is expected to be RUB 6.95 per ordinary share, or 67% of net income and 65% of free cash flow of the Group generated in 2015."

MANAGEMENT COMMENTS

· Market overview

In the first three months of 2016, global steel production stabilized at 385.4 m t (flat qoq and -3.6% yoy). Q1 2016 production in China decreased (-1% qoq and -3% yoy), while Chinese steel exports declined by 5% qoq (+8% yoy). Global steel prices increased by 45% since the beginning of the year driven by the recovery in raw material prices on the back of growing demand from infrastructure and construction sectors, as well as by restocking.

In the USA, growth of demand from construction and automotive sectors was supported by restocking by trading and service companies. Steel demand in Europe was driven by an uptick in activity in the automotive and machine-building sectors.

Q1 2016 steel demand in Russia fell by 11% qoq, due mainly to the slowdown in the construction sector. Steel production remained stable qoq at 17.2 m t.

· Prices

In Q1 2016, average prices for standard grades of flat and long products in Russia decreased in US dollar terms by 15-20% qoq due to seasonally weak demand in early Q1. At the end of Q1, prices in the domestic market increased significantly following the global trend.

In Europe, average prices in US dollar terms fell by 5% qoq. At the same time, prices ended the quarter with a 6% increase since the beginning of the year. In the US, steel prices grew by 5% qoq, driven by restocking by customers and trading companies as well as the cost-push from higher raw material prices.

Q1 2016 financial results were impacted by the low price level of the previous quarter due to a lag in recognition of export sales. The impact of the price increase at the end of Q1 will be reflected in Q2 results.

· Production and sales 

Q1 2016 NLMK Group steel output increased to 4.0 m t (+3% qoq) driven by higher steel output at Russian Long Products and NLMK USA operations. On a yoy basis, steel output increased by 3% driven by increased production at the Lipetsk site and at NLMK USA.

Sales volumes increased by 10% qoq and 5% yoy to 4.1 m t on the back of higher sales of finished steel (+22% qoq and +10% yoy) in the key markets.

Sales of semis to subsidiaries and associated companies of the Group were 0.77 m t (-14% qoq; -7% yoy), including 0.45 m t to NBH (+1% qoq and -3% yoy).

· Sales markets

Local markets, i.e. Russia, the EU, and North America, where finished products are manufactured, account for 63%* of the Group's sales. A significant share of exports goes to the Middle East (including Turkey), and South East Asia.

Slab sales to NLMK's international subsidiaries and affiliates totaled 0.77 m t (-14% qoq; -7% yoy).

* including NBH sales to the EU

· Operational efficiency programmes

In 2016, NLMK continued the implementation of its operational efficiency programmes, delivering savings of $14 m in Q1 2016 (vs. the 2015 cost base).

· Debt management

Net debt at the end of Q1 2016 declined by 11% qoq to $967 million (-22% yoy) on the back of NLMK's positive free cash flow. Net debt/EBITDA stood at 0.61х as at 31st March 2016.

As at 31st March 2016, NLMK Group's total debt was $2,666 million, including 22% of short-term debt comprised mainly of ruble bonds and revolving credit lines for working capital financing.

Financial guarantees for NBH liabilities were unchanged at $274 million.

Interest payments in Q1 2016 were $41 million, or 14% of EBITDA.

· Capex 

Q1 2016 NLMK Group's capex sequentially decreased to $121 million (-19% qoq and +4% yoy), including $63 million maintenance capex (52% of total capex).

As of the end of Q1 2016, 80% of construction and assembly works were performed as part of the pelletizing plant construction project. The launch of the plant is scheduled for H2 2016.

In Q1 2016, revamp of the hot-dip galvanizing unit was completed at the Lipetsk site, increasing the Group's HDG capacity by 120,000 tonnes.

· Dividends

On 22nd April 2016 NLMK Group's Board of Directors recommended NLMK shareholders declare dividends for Q4 2015 in the amount of RUB 2.43 per ordinary share and for Q1 2016 in the amount of RUB 1.13 per ordinary share. Dividend payment will be approved at the AGM on 3rd June 2016.

Overall, the total amount of accrued dividends for 2015 could be as high as RUB 6.95 per ordinary share, equivalent to 67% of net profit or 65% of NLMK Group's free cash flow in 2015.

In Q1 2016, NLMK paid dividends for Q3 2015, which resulted in cash outflow of $153 million.

KEY FINANCIALS

· Revenue 

Q1 revenue declined by 4% qoq to $1,577 million (-29% yoy) due to the reduction in average sales prices and the weakening of the Russian ruble exchange rate (74.63 rubles per US dollar in Q1 2016 vs. 65.94 rubles per US dollar in Q4 2015). These factors were largely offset by a 10% increase in sales driven by growing shipments of finished steel.

The decline in revenue vs. Q1 2015 due to lower sales prices was partially offset by a 5% yoy increase in sales.

The share of revenue from sales to the Russian market remained at 37% (flat qoq and +2 p.p. yoy). The share of revenue from sales to North America increased to 18% (+4 p.p. qoq and flat yoy). The share of revenue from sales to the EU was 20% (-3 p.p. qoq and +3 p.p. yoy); the share of revenue from sales to the Middle East and Turkey was 8% (-1 p.p. qoq and flat yoy).

· Operating profit*

Q1 2016 operating profit* fell by 6% qoq to $189 million (-62% yoy) due to the narrowing of spreads between raw material and finished product prices, which was partially offset by a 10% qoq sales growth (+5% yoy). 

* 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 2016 net profit was $57 million (-25% qoq and -82% yoy) due to lower profit from operating activities and the negative net impact from exchange rate differences (-$66 million vs. $74 million of profit in Q4 2015). 

*Profit for a period attributable to key shareholders.

· Free cash flow

Q1 2016 free cash flow increased to $275 million (+147% qoq and -21% yoy). The increase vs. Q4 2015 was due to a 71% qoq growth in operating cash flow and a 19% qoq capex reduction.

The qoq increase in operating cash flow was driven by a $164 million working capital release due to reduction in stock and growth of accounts payable at the Group's Russian and USA subsidiaries.

Russian Flat Products*

Starting from Q1 2016, there was a significant increase in export shipments of long products through traders that are part of the Russian Flat Products segment. As a result, management took the decision to modify the way sales that go through the Group's export trading companies are presented: starting from Q1 2016, financial results of export sales for individual segments are recognized as sales of such segments rather than sales of the Russian Flat Products segment.

As a result, Q1 sales volumes of the segment declined by 2% qoq to 3.24 m t (+1% yoy). In comparable terms, segment sales grew by 2% qoq (+5% yoy) driven by the increase of finished steel sales (+16% qoq and +15% yoy), while sales of semi-finished products remained stable (-1% qoq and flat yoy).

Revenue declined to $1.14 billion (-12% qoq and -29% yoy). Key factors behind this decline: prices maintained at low Q4 2015 levels; RUB devaluation; and changes in reflecting export trader sales. Negative market factors were partially offset by an increase in sales of flat products.

Segment EBITDA decreased to $233 million (-14% qoq and -57% yoy) due to the narrowing spreads between steel and raw material prices. This factor was partially offset by operational efficiency programme gains. Segment EBITDA margin was 20% (-1 p.p. qoq and -14 p.p. yoy). 

Russian Long Products*

Segment sales increased by 42% qoq to 0.7 m t (+23% yoy) driven by the growth in exports (share of export sales increased by 19 p.p. yoy) and higher sales to domestic trading companies that were restocking ahead of the construction season.

Segment revenue decreased to $189 million (-10% qoq and -31% yoy) due to low prices in the domestic and export markets at the beginning of Q1 2016. This factor was partially offset by the increase in sales.

Q1 2016 EBITDA loss decreased to $5 million. Segment profitability was driven by the following factors: increase in sales volumes, including due to a significant reduction in accumulated inventory of finished products; and a conservative approach to managing operating expenses during the seasonal drop in capacity utilization.

Mining Segment*

In Q1 2016, iron ore concentrate and sinter ore sales were 4.3 m t (-4% qoq and +12% yoy). The qoq decline was mainly attributable to the decrease in concentrate and sinter ore sales to third parties by 18% on the back of the drop in prices. In Q2 2016, we expect an increase in shipments on the back of a significant improvement of iron ore prices: inventory sales will grow while capacity utilization rates remain high. Sales to third parties on a yoy basis increased by 7% driven by equipment productivity improvements at Stoilensky.

Segment revenue declined by 26% qoq due to lower sales volumes (-4% qoq), weakening of the Russian ruble exchange rate by 13% qoq, and low average sales prices impacted by previous quarter trends. The 21% yoy decrease in revenue was associated with the reduction of iron ore prices.

The decrease in sales volumes coupled with low iron ore prices and the weakening of the Russian ruble exchange rate triggered the decline in the segment EBITDA to $58 million (-30% qoq and -9% yoy). EBITDA margin was 54% (-3 p.p. qoq and +7 p.p. yoy).

Foreign Rolled Products Segment*

 NLMK Foreign Rolled Products Segment sales were up by 26% qoq (+9% yoy) driven by increased demand in the US and Europe.

Segment revenue grew by 12% qoq to $317 million (-25% yoy) due to increased sales volumes and higher prices in the US market (+5% qoq and -21% yoy).

EBITDA increased to $11 million compared to the EBITDA loss of $30 million in Q4 2015 and loss of $13 million in Q1 2015. Profitability improvement was attributable to higher sales volumes and widened spreads between finished product and slab prices.

NBH (associated company) results

Improved demand from key consumers of NBH products, including niche products, drove NBH sales volumes up by 21% qoq to 0.5 m t (+4% yoy).

NBH revenue grew by 7% qoq to $283 million (-20% yoy) due to higher sales volumes that fully offset the decline in steel prices in the European market (-5% qoq and -22% yoy).

EBITDA loss declined to $7 million supported by the growth in sales volumes and widened spreads between finished product and slab prices in Europe.

Appendix 1. Operating and financial results

(1) Sales by product

(2) Sales by region

(3) Revenue by region

 (4) EBITDA

*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

(5) Free cash flow

(6) Production of main products 

(7) Slab sales, including intragroup sales to NLMK Group companies

(8) Export shipments from the Russian assets of the Group*

*Export shipments of the Russian Flat Products and the Russian Long Products Segments. Export sales include deliveries to subsidiaries and associated companies of the Group.

(9) Segments information

1 Balance figures presented as of March 31, 2016

1 Balance figures presented as of December 31, 2015

Interim condensed consolidated statement of financial position

as at 31 March 2016 (unaudited) and 31 December 2015

(millions of US dollars)

Interim condensed consolidated statement of profit or loss

for the three months ended 31 March 2016 and 31 March 2015 (unaudited)

(millions of US dollars, unless otherwise stated)

Interim condensed consolidated statement of comprehensive income

for the three months ended 31 March 2016 and 31 March 2015 (unaudited)

(millions of US dollars)

Interim condensed consolidated statement of changes in equity

for the three months ended 31 March 2016 and 31 March 2015 (unaudited)

(millions of US dollars)

Interim condensed consolidated statement of cash flows

for the three months ended 31 March 2016 and 31 March 2015 (unaudited)

(millions of US dollars)