SVST.L Regulatory News (SVST)

Severstal reports Q3 and 9M 2016 financial results

- High margins underpinning strong results -

Moscow, Russia - 25 October, 2016 - PAO Severstal (MICEX-RTS: CHMF; LSE: SVST), one of the world's leading steel and steel-related mining companies, today announces its Q3 and 9M 2016 financial results for the period ended 30 September 2016.

CONSOLIDATED FINANCIAL RESULTS FOR THE QUARTER ENDED 30 SEPTEMBER 2016

Notes:

1) EBITDA represents profit from operations plus depreciation and amortisation of productive assets (including the Group's share in depreciation and amortisation of associates and joint ventures) adjusted for gain/(loss) on disposals of PPE and intangible assets and its share in associates' and joint ventures' non-operating income/(expenses).

2) Free cash flow excludes discontinued operation.

3) Net profit from continuing operations after FX fluctuations.

4) Basic EPS from continuing operations is calculated on the following basis: net profit from continuing operations divided by the weighted average number of shares outstanding during the period: 810.6 million shares for Q3 2016, Q2 2016, 9M 2016 and 9M 2015.

Q3 2016 vs. Q2 2016 ANALYSIS:

§ Group revenue remained almost flat, increasing 0.5% q/q to $1,588 million (Q2 2016: $1,580 million). This reflects a substantial rise in average selling prices for steel products and raw materials which was partly offset by lower sales volumes at both the Russian Steel and Resources divisions due to demand softening in the domestic market and planned stock replenishment;

§ Group EBITDA increased 11.0% q/q to $584 million (Q2 2016: $526 million) driven by lower operating costs and stable topline. Group EBITDA margin increased by a significant 3.5 ppts q/q to 36.8% (Q2 2016: 33.3%) and continues to be one of the highest in the industry;

§ Net profit of $429 million (Q2 2016: net profit of $608 million) includes a FX gain of $31 million, non-current assets impairment of $16 million and a loss on disposal of property, plant and equipment of $35 million in relation to fixed assets of Severnaya mine. Adjusting for these non-cash items, Severstal would have posted an underlying net profit of $449 million (Q2 2016: net profit of $427 million excluding FX gain);

§ Global steel prices started to rise in Q2, and this, alongside an increase in net working capital (on the back of a build-up of steel inventories) enabled the Company to continue generating positive free cash flow. Free cash flow decreased marginally 5.6% q/q to $323 million (Q2 2016: $342 million). Free cash flow remains one of the key strategic priorities for the Company;

§ Cash capex of $122 million increased 4.3% q/q (Q2 2016: $117 million). Severstal's FY 2016 capex target is RUB 43 billion, subject to FX fluctuations;

§ Recommended dividend payment of 24.96 RUB per share for the three months ended 30 September 2016.

9M 2016 vs. 9M 2015 ANALYSIS:

§ Group revenue decreased 14.7% y/y to $4,265 million (9M 2015: $5,000 million) primarily reflecting a substantial decline in average steel selling prices in the first quarter of 2016, as a result of the net decline in global benchmarks;

§ Group EBITDA decreased 18.4% y/y to $1,383 million (9M 2015: $1,695 million) as the top line compression was only partially mitigated by a decline in input operating costs;

§ Capex of $358 million was 12.9% higher y/y (9M 2015: $317 million).

FINANCIAL POSITION HIGHLIGHTS:

§ At the end of Q3 2016, cash and cash equivalents were $1,141 million (Q2 2016: $2,066 million) which reflects the redemption of Eurobonds 2016 of $255 million alongside other scheduled loan repayments during Q3. The Company also paid annual and interim dividends for the year 2015, Q1 2016 and H1 2016 in July and September respectively.

§ Reflecting the above, Severstal's gross debt in USD-terms decreased 19.1% as at the end of Q3 2016 to $2,084 million (Q2 2016: $2,577 million). In the meantime, S&P Global Ratings upgraded Severstal to 'BBB-' from 'BB+' in August 2016 and changed outlook from 'Negative' to 'Stable' in September 2016.

§ Net debt increased 84.5% to $943 million by the end of Q3 2016 (Q2 2016: $511 million) reflecting the considerable reduction of cash balances which offsets the decrease in gross debt. The Net Debt/EBITDA ratio increased to 0.5x at the end of Q3 2016 (Q2 2016: 0.3x) primarily affected by net debt growth q/q in parallel with relatively flat y/y earnings. Severstal's Net Debt/EBITDA indicator remains one of the lowest ratios amongst steel companies globally;

§ Liquidity position remains strong with $1,141 million in cash and cash equivalents and unused committed credit lines of $625 million, more than covering short-term principal debt of $106 million.

Vadim Larin, CEO of Severstal Management, commented:

"Before moving on to review our results for the quarter, I would like to provide an update on the Severnaya mine where operations remain suspended following the accident in February 2016. The mine will be sealed off to avoid the risk of airflow causing further underground fire and explosions in the mine. The decision was made on 20 September 2016 by the Technical Commission, comprising representatives of AO Vorkutaugol and the Russian authorities. Experts are now considering a safe method for sealing off the mine for the foreseeable future as well as the extraction of its resources through the adjacent Komsomolskaya mine, which is currently expected to start in 2020.

As we review the quarter, the stability of global steel prices during Q3 supported Severstal's EBITDA and with its highly competitive cost position Severstal was able to continue generating positive free cash flow. We expect the stabilisation of the global steel and steel-related commodity markets to continue in 2017. Global steel demand continues to improve. Though the recent price rally in coking coal might be temporary, in our view vertically integrated steelmakers will still be better positioned going forward. In China, ongoing capacity cuts, consolidation plans and continued investment in infrastructure have improved the outlook for its steel supply-demand balance, though experts forecast some decline in steel demand in China in 2017.

Steel producers globally still face the challenges of continuing protectionism across the world. This distorts global free trade principles and negatively impacts customers. Whilst Severstal complies with international trade rules, we continue to take initiatives to mitigate the impact of these restrictions on our performance by reducing costs, raising quality and service, increasing the share of high value added products in the sales portfolio and diversifying our export markets. We believe that our strategy combined with our strong financial position will enable the Company to continue to deliver long-term shareholder value."

REVIEW OF THE THIRD QUARTER ENDED 30 SEPTEMBER 2016

In Q3 Severstal delivered a steady performance driven by the strength of our operations and the management's ongoing focus on enhancing efficiency. The sharp spike in global steel prices at the beginning of the year enabled Russian steel producers to maintain relatively high domestic RUB-denominated steel prices in order to catch up with global benchmarks. Domestic sales in Q3 were impacted by reduced activity from local traders and domestic steel demand softening after a seasonal improvement in previous periods. In response to these conditions, the Company increased sales to its export markets. Severstal's proximity to both main export and domestic consumers allows it to shift flexibly between export and domestic deliveries each quarter depending on the market environment. In addition, the Company increased its stock levels and replenished some steel inventories.

The abovementioned factors had only a minor impact on total sales volumes, whilst average selling prices increased 2-15% q/q for the majority of steel products reflecting the upward adjustment in global steel prices, which continued in Q3. This allowed Severstal to increase its EBITDA 11.0% q/q and Severstal's EBITDA margin remained one of the highest amongst global steel producers, expanding by 3.5 ppts q/q to 36.8%.

The Company continued to deliver a high level of free cash flow during the quarter reflecting an increase in working capital coupled with improved earnings on the back of average selling price growth.

Whilst Severstal's gross debt reduction remains largely maturity-driven, with around 96% of the Company's gross debt being public, Severstal fully paid off the outstanding loan participation notes due in 2016 with a total nominal value of $255 million in accordance with the schedule.

Severstal's financial position remains strong with its net debt/EBITDA ratio at 0.5x as at the end of Q3 2016. Meanwhile the Company continues to search for an equilibrium between maintaining a low indebtedness level and returning value to its shareholders. This enabled the Board of Directors to recommend a dividend of 24.96 roubles per share for Q3 2016.

SEVERSTAL RUSSIAN STEEL (RSD)

RSD steel product sales decreased 5% q/q to 2.66 mln tonnes due to reduced trader activity as well as weaker domestic steel demand. The Company increased its stock levels during the quarter and reserved some steel inventories in order to adjust them to standard levels and underpin rolling capacity utilisation rates during planned maintenance works.

Cold-rolled coil sales improved 5% q/q following the completion of the four-stand cold rolling mill refurbishment at CherMK in May 2016. The share of HVA products within the sales mix slightly decreased to 42% (Q2 2016: 43%), despite an increase in cold rolled coil sales volumes q/q.

The proximity of key assets to the border also facilitated shifting to export deliveries within the sales-mix. Export sales increased to 40% in Q3 2016 (Q2 2016: 36%).

The abovementioned factors combined with stable export and domestic steel prices led to an increase in revenue of 1.5% q/q, to $1,471 million (Q2 2016: $1,449 million). The positive impact of higher selling prices alongside low production costs drove EBITDA up 12.2% q/q to $488 million (Q2 2016: $435 million). The EBITDA margin increased 3.2 ppts to 33.2% (Q2 2016: 30.0%).

The total non-integrated cash cost of slab production at the Cherepovets Steel Mill in Q3 2016 decreased $8/t q/q to $213/t (Q2 2016: $221/t) as a result of lower repair expenses, which were partially mitigated by higher coking coal prices and Russian currency stability. The integrated cash cost of slab in Q3 remained almost the same as Q2 at $180/t (Q2 2016: $179/t), as a result of the weaker performance from Resources offsetting a non-integrated cash cost reduction.

SEVERSTAL RESOURCES

Following the accident at Vorkutaugol's Severnaya mine in February 2016, coking coal concentrate sales at Vorkutaugol declined further, by 16% q/q to 0.91 mln tonnes (Q2 2016: 1.08 mln tonnes).

While internal procurement of iron ore pellets remained relatively flat, the Company continued to sell iron ore pellets to export markets, responding to seasonally high demand. Iron ore pellet sales remained largely the same, decreasing by only 2% q/q to 2.79 mln tonnes (Q2 2016: 2.85 mln tonnes).

Despite the recent uptick in hard coking coal benchmarks which was supported higher selling price at Vorkutaugol, cash costs increased as a result of lower production volumes in combination with a greater portion of finished good and work-in-progress write-offs in Q3. Lower sales volumes had an impact on revenue, which decreased 5.1% q/q to $281 million (Q2 2016: $296 million), EBITDA reduced 12.9% q/q to $88 million (Q2 2016: $101 million) and EBITDA margin compressed 2.8 ppts to 31.3% (Q2 2016: 34.1%).

Given the fixed cost nature of the mining business lower processing volumes at Vorkutaugol dragged total cash costs (TCC) higher to 77$/t (Q2 2016: $58/t). At the same time, TCC at Karelsky Okatysh increased to $23/t (Q2 2016: $21/t), while TCC at Olkon decreased to $22/t (Q2 2016: $24/t) partly reflecting operational efficiency improvements.

DIVIDEND

The Board is recommending a dividend payment of 24.96 roubles per share for the three months ended 30 September 2016.

Approval of the dividend is expected at the Company's EGM which will take place on 2 December 2016. The record date for participation in the EGM is 7 November 2016.

The recommended record date for the dividend payment is 13 December 2016. The approval of the record date for the dividend payment is also expected at the Company's EGM which will take place on 2 December 2016.

OUTLOOK

Coking coal prices unexpectedly surged at the end of Q3. Growth continued throughout October 2016 and prices reached levels of above $200/t, having almost tripled since the beginning of the year. Major drivers of this dramatic increase are the reduction of working days for coal mines in China (276 day policy) and supply disruptions in China and Australia. Nevertheless, these factors do not justify the current coking coal price and therefore a significant decrease in prices is expected in the forthcoming 1-2 months.

Steel and iron prices were relatively stable throughout Q3. Steel margins for Chinese producers have been hit by increasing coking coal prices. Higher hard coking coal prices translate into significantly increased costs of steel production which may support steel prices.

Following the contraction of Russia's GDP in 2016, domestic steel demand softened during the nine months of the year. However, many experts are forecasting the economy to strengthen during 2017 which should boost steel demand.

The Board is confident that the Company's vertically integrated business model, high quality and cost competitive operations, low debt level, and sizeable share of high-value added products in the portfolio, means that Severstal continues to be well positioned relative to both local and global peers.

For further information, please contact:

Severstal Investor Relations

Vladimir Zaluzhsky

T: +7 (495) 926-77-66

vladimir.zaluzhsky@severstal.com

Evgeny Belov

T: +7 (495) 926-77-66

evgenii.belov@severstal.com

Severstal Public Relations

Anastasia Mishanina

T: +7 (495) 926-77-66

anastasia.mishanina@severstal.com 

Severstal's financial communications agent - Hudson Sandler

Andrew Hayes / Emily Dillon / Alex Brennan

T: +44 (0) 20 7796 4133

A conference call on Q3 2016 results for investors and analysts hosted by Alexey Kulichenko, Chief Financial Officer, will be held on 25 October 2016 at 12.00 ( London)/ 14.00 (Moscow). 

Conference ID: 3050953

International Dial:

+44 (0)203 043 2002 (Local access)0800 358 6377 (Toll free)

Russian Dial:

+7 495 213 1767 (Local access)8 800 500 9283 (Toll free)

The call will be recorded and there will be a replay facility available for 7 days as follows:

International Dial:

+44 (0) 207 660 0134 (Local access)0 808 101 1153 (Toll free)

Russian Dial:

8 800 2702 1012 (Toll free)

Financial statements will be available at http://www.severstal.com/eng/ir/results_and_reports 

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PАО Severstal is one of the world's leading vertically integrated steel and steel related mining companies, with assets in Russia, Ukraine, Latvia, Poland and Italy. Severstal is listed on RTS and MICEX and the company's GDRs are traded on the LSE. Severstal reported revenue of $6,396 million and EBITDA of $2,096 million in 2015. Severstal's crude steel production in 2015 reached 11.5 million tonnes. www.severstal.com