18 Feb 2015 07:00
Severstal reports Q4 & FY 2014 financial results
- Strong results in challenging market conditions -
Moscow, Russia - February 18, 2015 - PAO Severstal (MICEX-RTS: CHMF; LSE: SVST), one of the world's leading steel and steel-related mining companies, today announces its Q4 and FY 2014 financial results for the period ended 31 December 2014.
CONSOLIDATED FINANCIAL RESULTS FOR THE YEAR ENDED 31 DECEMBER 2014
$ million, unless otherwise stated | Q4 2014 | Q3 2014 | Change, % | FY 2014 | FY 20131 | Change, % |
Revenue | 1,878 | 2,240 | (16.2%) | 8,296 | 9,434 | (12.1%) |
EBITDA2 | 602 | 636 | (5.3%) | 2,203 | 1,818 | 21.2% |
EBITDA margin, % | 32.1% | 28.4% | 3.7 ppts | 26.6% | 19.3% | 7.3 ppts |
Profit from operations | 453 | 479 | (5.4%) | 1,594 | 1,209 | 31.8% |
Operating margin, % | 24.1% | 21.4% | 2.7 ppts | 19.2% | 12.8% | 6.4 ppts |
Free cash flow 3 | 425 | 218 | 95.0% | 1,232 | 381 | n/a |
Net (loss)/profit 4 | (795) | (45) | n/a | (1,602) | 83 | n/a |
Basic EPS5, $ | (0.98) | (0.06) | n/a | (1.98) | 0.10 | n/a |
Notes:
1) These amounts reflect adjustments made in connection with the presentation of the discontinued operation.
2) EBITDA represents profit/(loss) from operations plus depreciation and amortization of productive assets (including the Group's share in depreciation and amortization of associates and joint ventures) adjusted for gain/(loss) on disposals of PPE and intangible assets and for share in associates' and joint ventures' non-operating income/(expenses).
3) Free cash flow excludes discontinued operation.
4) Net (loss)/ profit after FX losses attributable to shareholders of PAO Severstal.
5) Basic EPS includes both continuing and discontinued operations. Basic EPS is calculated based on the following basis: weighted average number of shares outstanding during the period: 810.6 million shares for Q4 2014, Q3 2014, FY 2014 and FY 2013.
FY 2014 vs. FY 2013 ANALYSIS:
§ Consistent focus on further increasing operational efficiency and reducing costs whilst continually improving service standards and putting customers first;
§ FY 2014 revenue decreased 12.1% y/y to $8,296 million (FY 2013: $9,434 million) as a result of lower realized prices and sales volumes y/y at Russian Steel and Resources and despite substantial improvements in product mix at both divisions;
§ EBITDA increased 21.2% y/y to $2,203 million (FY 2013: $1,818 million) driven by a strong result at Russian Steel on the back of operational enhancements, lower input costs and RUB devaluation, more than offsetting lower deliveries at Resources;
§ EBITDA margin increased by 7.3 ppts to 26.6%, which is amongst the highest in the global industry;
§ FY 2014 net loss1 was $1,602 million (FY 2013: net profit1 of $83m) has been impacted by FX losses on continuing operations of $1,807 million, impairments for continuing and discontinued operations of $1,222 million and a gain on disposal of $101 million of the discontinued operation. Excluding these non-cash items, Severstal would have posted a net profit of $1,326 million (FY 2013: net profit of $749 million);
§ Continued strong improvement in free cash flow at $1,232 million for the FY 2014 (FY 2013: $381 million), is in line with the Company's strategic focus;
§ Capex2 of $779 million for the FY 2014 was 28.1% lower y/y (FY 2013: $1,084 million) and 10.3% below FY 2014 capex target of $868 million. Severstal's FY 2015 capex target is RUB 30 billion, subject to FX fluctuations.
Q4 2014 vs. Q3 2014 ANALYSIS:
§ Group revenue decreased 16.2% q/q to $1,878 million (Q3 2014: $2,240 million) despite a high share of high value-added ('HVA') products in the sales portfolio at Russian Steel as well as significant sales volumes growth at Resources. The revenue decrease reflects a decline in average selling prices (at both divisions) on the back of the sharp RUB devaluation;
§ EBITDA margin expanded further by 3.7 ppts q/q to 32.1% (Q3 2014: 28.4%), representing the highest level since Q3 2008 and primarily reflecting a combination of ongoing efficiency improvements at both Russian Steel and Resources as well as lower input costs and the RUB devaluation mitigating the impact of lower selling prices. Group EBITDA decreased 5.3% q/q to $602 million (Q3 2014: $636 million);
§ Net loss1 of $795 million (Q3 2014: net loss1 of $45 million) was primarily impacted by FX losses of continuing operations of $1,214 million, impairment of $131 million and a gain on disposal of $16 million of the discontinued operation. Adjusting for those non-cash items, Severstal would have posted a net profit of $534 million (Q3 2014: net profit of $323 million);
§ Continuous robust free cash flow generation of $425 million, almost double the previous quarter (Q3 2014: $218 million), is in line with our key strategic focus;
§ Capex2 of $157 million, 13.3% lower q/q (Q3 2014: $181 million) reflecting our prudent approach to investments as well as the completion of the majority of Severstal's large-scale development projects.
§ Recommended dividend payment of 14.65 RUB per share for the 12 months ended 31 December 2014, reflecting the previously announced modified dividend policy.
FINANCIAL POSITION HIGHLIGHTS:
§ Despite the fact that our debt is predominantly public, further deleveraging remains our priority. That said, Severstal gross debt declined another 2.8% since the end of Q3 2014 to $3,429 million. Aided by proceeds from the Severstal North America (SNA) disposal, Group gross debt over the last year decreased by more than $1 billion (YE 2013: $4,7543 million);
§ Committed unused credit lines temporarily reduced to $388 million as a result of $300 million of short-term debt raised in Q4 via committed facilities to be repaid during Q1 2015;
§ As at the end of Q4 2014, cash and cash equivalents reduced to $1,897 million (Q3 2014: $2,753 million) reflecting the special dividend payout during the quarter. This resulted in a 97.7% q/q increase in net debt as at the end of Q4 to $1,532 million (Q3 2014: $775 million). As at the end of 2014, net debt was less than half as compared to YE 2013 of $3,7183 million reflecting the SNA deal completion and strong free cash flow generation during 2014;
§ Net Debt/EBITDA ratio increased q/q in line with Company's expectations to 0.7x at the end of Q4 (Q3 2014: 0.4x) after the special dividend payout. During FY 2014 our net debt/EBITDA ratio went down to 0.7x from 1.6x4 as of YE 2013 driven by both 21.2% y/y higher FY 2014 EBITDA and substantial reduction of net debt.
§ Continued solid liquidity position with $1,897 million in cash and cash equivalents and committed unused credit lines of $388 million, more than covering short-term debt5 of $768 million.
POST PERIOD END HIGHLIGHTS:
§ Given the Group's strong financial position, during Q1 2015 Severstal announced a public tender offer to buy back its 2016 and 2017 Eurobonds. A total of approximately $220 million of both bond issues was purchased from the total outstanding of $500 million and $1,000 million of the 2016 and 2017 Eurobonds respectively.
Alexey Mordashov, CEO of JSC Severstal Management, commented:
"In 2014, Severstal was consistent in its focus on becoming the most efficient steelmaker globally. This has been achieved through the consistent execution of our strategy focused on increasing operational efficiency and reducing costs whilst continually improving our service standards and putting our customers first.
The resilience of our financial results and continued progress against the Company's strategic objectives is underpinned by our vertically integrated business model and highly efficient assets portfolio, which provide a strong competitive advantage throughout the industry cycle.
Severstal is now fully focused on its most profitable assets. The sale of the Company's North American business during the year realized significant value for shareholders as well as structurally upgrading the Group's profitability. The Company has returned a significant share of the proceeds to shareholders through a special dividend. The Board has also modified the Company's dividend policy to return 50% of net profit for a given reporting period to shareholders provided that the net debt/EBITDA ratio is below 1.0 times, reflecting Severstal's mission to maximize shareholder returns.
Whilst market conditions in 2015 will continue to be challenging both on global and domestic markets, we remain as rigorously focused as ever on delivering further progress and value to our shareholders by continuing to execute our strategy to be the most efficient steelmaker globally. We are confident that Severstal, with its highly efficient operations, vertical integration and customer focus, will be able to deliver a further year of progress."
CHIEF EXECUTIVE'S REVIEW OF THE TWELVE MONTHS ENDED 31 DECEMBER 2014
During 2014 Severstal strengthened its position as one of the global industry leaders in terms of profitability. This was a result of our relentless and ongoing efforts at enhancing efficiency as well as key strategic decisions taken by the Board during the year, most notably the sale of SNA. The sale of the Group's North American assets has structurally upgraded the Group's profitability due to the lower margin nature of SNA's operations.
I am pleased to report that the Group delivered a 21.2% y/y increase in EBITDA to $2,203 million (FY 2013: $1,818 million). This was achieved despite a 12.1% y/y reduction in revenue to $8,296 million (FY 2013: $9,434 million) impacted by decline in steel prices globally. Consequently Severstal delivered a significant 7.3 ppts y/y EBITDA margin improvement to a very pleasing 26.6% (FY 2013: 19.3%).
This strong profitability expansion in 2014 has been largely driven by ongoing operational improvements, lower raw materials prices and positive effect of RUB devaluation, with approximately 90% of Group costs denominated in RUB.
Even after increasing shareholder returns through the payment of a special dividend in Q4, the Group's net debt/EBITDA ratio remained significantly below our mid term target of 1.5x at 0.7x as at the YE 2014. Nevertheless, proactive reduction of gross debt remains a priority.
We maintain a prudent and flexible approach to capex which is focused on operational efficiency and further improvement of our product mix and customer services. Our FY 2015 capex has been set at RUB 30 billion, the overwhelming majority of our capital expenditures is RUB-denominated. Major ongoing development projects in 2015 include: the construction of a new coating line and the revamping of the four-stand continuous tandem cold rolling mill 1700, both at the Cherepovets Steel Mill. At Severstal Resources, the largest initiatives in 2015 include completion of the construction of an inclined shaft at Zapolyarnaya and improvements to the stripping works at Karelsky Okatysh. Maintenance investments will be at approximately RUB 14 billion.
SEVERSTAL RUSSIAN STEEL
$ million, unless otherwise stated | Q4 2014 | Q3 2014 | Change, % | FY 2014 | FY 2013 | Change, % |
Revenue | 1,703 | 2,085 | (18.3%) | 7,492 | 8,033 | (6.7%) |
EBITDA | 465 | 514 | (9.5%) | 1,634 | 1,008 | 62.1% |
EBITDA margin, % | 27.3% | 24.7% | 2.6 ppts | 21.8% | 12.5% | 9.3 ppts |
In FY14, total steel shipments at Severstal Russian Steel remained largely flat y/y at 10.6mnt, despite weaker end markets. At the same time, the division managed to further increase the share of high value-added ("HVA") products within the sales mix to 49% (FY 2013: 47%) and lower shipments of semi-finished products (down 24% y/y) in line with our strategy. The abovementioned factors provided additional support in order to offset steel price softening during the year with average selling prices for FY 2014 decreasing only 6.4% y/y to $631/t. As a result, the division's revenue decreased 6.7% y/y to $7,492 million (FY 2013: $8,033 million).
Despite lower revenue, the division delivered a decent 62.1% increase in EBITDA for FY 2014 to $1,634 million (FY 2013: $1,008 million) driven by lower input prices in conjunction with production and G&A cost reductions. The division's EBITDA margin was also up 9.3 ppts y/y to 21.8%.
In Q4, due to seasonal factors as well as marginal change to the product mix coupled with short-term maintenance at one of the mills Russian Steel division steel products sales decreased 3% q/q. In the meantime, share of high value-added products in the sales portfolio remained around historical record levels of 52% (Q3 14: 52%) reflecting our strategic focus on downstream development and despite the increase in the output of semi-finished products post the completion of repairs at one of the converters at the end of Q3. Specifically, downstream products sales volumes increased 6% q/q (sales of large diameter pipes (LDPs) increased 23% q/q).
Reflecting all the abovementioned factors as well as lower steel prices q/q revenue decreased 18.3% q/q to $1,703 million (Q3 2014: $2,085 million). Nevertheless, we highlight that despitethe seasonally low market, RUB-denominated prices continue to catch up with the export USD-denominated prices.
Q4 EBITDA of $465m was 9.5% lower q/q (Q3 2014: $514m) as effect of selling prices decline has been largely mitigated by lower raw materials prices. Furthermore, RUB devaluation provided an additional positive effect. That said, EBITDA margin expanded 2.6 ppts to 27.3%.
The total non-integrated cash cost of slab production at the Cherepovets Steel Mill in Q4 decreased $72/t q/q to $255/t (Q3 2014: $327/t) due to lower raw materials prices as well as a higher share of pig iron used in the steelmaking process substituting a portion of high cost scrap, as well as the positive effect on the back of RUB devaluation. The integrated cash cost of slab in Q4 decreased $77/t q/q to $203/t due to improved profitability at Severstal Resources offsetting lower sales prices.
SEVERSTAL RESOURCES
$ million, unless otherwise stated | Q4 2014 | Q3 2014 | Change, % | FY 2014 | FY 2013 | Change, % |
Revenue | 358 | 440 | (18.6%) | 1,851 | 2,665 | (30.5%) |
EBITDA | 135 | 116 | 16.4% | 556 | 813 | (31.6%) |
EBITDA margin, % | 37.7% | 26.4% | 11.3 ppts | 30.0% | 30.5% | (0.5 ppts) |
The pricing environment for steel-related commodities in 2014 remained challenging, both for coking coal and iron ore products, with realized prices down c.20% y/y. At the same time, coking coal concentrate sales volumes slid 25% y/y to less than 5.4 mt. Meanwhile, consolidated numbers have been distorted by PBS Coals performance, as Severstal continued to consolidate PBS coals results till mid-August 2014 (completion of the divestment process). Nevertheless, coking coal concentrate sales volumes at Vorkutaugol decreased 14% y/y to 4.8 mt (FY 2013: 5.6 mt) due to engineering and geological constraints in the H1 2014, which have already been resolved with 11 new coalfaces being commissioned across all the five mines in 2014.
As for the iron ore products volumes, pellets sales from Karelsky Okatysh increased 2% y/y to 10.6 mt (FY 2013: 10.5 mt) with higher internal off-take as CherMK increased consumption of higher Fe content pellets. At the same time, due to operational decision to cease production at one of the high open pits at Olkon iron ore concentrate sales volumes went down 4% y/y to 4.4 mt (FY 2013: 4.6 mt).
All the abovementioned factors resulted in Severstal Resources revenue decreasing 30.5% to $1,851 million (FY 2013: $2,665 million) and 31.6% drop on EBITDA line to $556 million (FY 2013: $813 million).
In Q4, notwithstanding Severstal's successful efforts to increase RUB-denominated prices, in dollar terms and due to the global iron ore benchmark decline, the Company's average selling prices for both iron ore pellets and iron ore concentrate decrease 25% q/q and 27% q/q, respectively. Coking coal concentrate average selling price decline of 19% q/q is purely a function of RUB devaluation partially offset by RUB-denominated prices upgrades by the company.
That said, Severstal Resources revenue declined 18.6% q/q to $358 million (Q3 2014: $440 million) largely driven by further decline in average selling prices. Negative effect has been partially offset by 14% q/q increase in coking coal concentrate sales volumes, despite iron ore concentrate sales volumes decrease of 14% q/q.
Nevertheless, Q4 EBITDA increased 16.4% q/q to $135 million (Q3 2014: $116 million) with EBITDA margin improving 11.3 ppts to 37.7% owing to better performance of Vorkutaugol, which achieved a successful turnaround, with run-of-mine coal (ROM coal) production volumes surpassing average 2013 levels. Moreover, Severstal idled one of the open pits at Olkon focusing on the least costly deposits.
Management's ongoing priority remains to reduce production costs across all mining assets, which has been supported by RUB devaluation in Q4 2014 as well. Total cash costs (TCC) at Karelsky Okatysh declined to $26/t ($37/t in Q3 14), while TCC at Olkon decreased to $32/t ($37/t in Q3 14). TCC at Vorkutaugol improved substantially to $40/t (Q3 14: $87/t) driven by increase in production volumes on the back of completed long walls repositioning program.
DIVIDEND
The Board is recommending a dividend payment of 14.65 roubles per share for the 12 months ended 31 December 2014.
Approval of the dividend is expected at the Company's AGM which will take place on 25 May 2015. The record date for participation in the AGM is 13 April 2015.
The recommended record date for the dividend payment is 05 June 2015. The approval of the record date for the dividend payment is expected at the Company's AGM which will take place on 25 May 2015.
OUTLOOK
In 2014, while global steel production increased 1.2% in 2014, global steelmaking capacity utilization remained low at an average of 76.3% which is even lower than in 2013. Furthermore, high levels of competition between major steel exporters continued to weigh on global steel prices.
Iron ore and coking coal markets continued to be oversupplied, with weak Chinese GDP data suggesting demand in China will remain subdued. Nevertheless, any further downside in steel prices is limited as the spread between steel and raw material prices has compressed substantially after a sharp increase in 2014.
Domestic steel consumption is expected to weaken in 2015, but this can be offset by higher exports.
Management's efforts in 2015 will be focused on delivering further improvements to earnings through the continued execution of our stated strategy. The Company will continue to focus on further increasing efficiency through operational enhancements. This, in conjunction with cautious investment, will enable Severstal to continue to deliver value through enhanced customers satisfaction, service and products.
Overall, despite the challenging trading environment, we are pleased to have made a satisfactory start to the new financial year in line with our plans.
NOTES
1. Net profit/ (loss) attributable to shareholders of PAO Severstal.
2. Represents cash outflow on capex in the period.
3. The amount includes balances of Severstal International segment.
4. The amount excludes Severstal International segment.
5. Represents principal amount of debt.
For further information, please contact:
Severstal Investor Relations
Vladimir Zaluzhsky
T: +7 (495) 926-77-66
vladimir.zaluzhsky@severstal.com
Severstal Public Relations
Elena Kovaleva
T: +7 (495) 926-77-66
elena.kovaleva@severstal.com
Severstal's financial communications agent - Hudson Sandler
Andrew Hayes / Maria Ignatova / Alex Brennan
T: +44 (0) 20 7796 4133
A conference call on Q4 and FY 2014 results for investors and analysts hosted by Alexey Mordashov, Chief Executive Officer and Alexey Kulichenko, Chief Financial Officer, will be held on February 18, 2015 at 14.00 (GMT London)/ 17.00 (Moscow).
International Dial in: +44 (0) 20 3139 4830
Russian Toll-Free Dial in: 810 800 2136 5011
UK Toll-Free Dial in: +44 (0) 808 237 0030
Pin code: 59518849#
The call will be recorded and there will be a replay facility available for 30 days as follows:
International: +44 (0) 20 3426 2807UK Toll Free: +44 (0) 808 237 0026
Reference: 653909#
Full financial statements are available at http://www.severstal.com/eng/ir/results_reports/financial_reports/
***
PАО Severstal is one of the world's leading vertically integrated steel and steel related mining companies, with assets in Russia, Ukraine, Latvia, Poland, Italy and Liberia. Severstal is listed on RTS and MICEX and the company's GDRs are traded on the LSE. Severstal reported revenue of $8,296 million and EBITDA of $2,203 million in 2014. Severstal's crude steel production in 2014 reached 11.3 million tonnes. www.severstal.com