Severstal' : Severstal reports Q4 & FY2017 fiacial results

2 February 2018

PAO Severstal (MICEX-RTS: CHMF; LSE: SVST), one of the world's leading steel and steel-related mining companies, today announces its Q4 & FY2017 financial results for the period ended 31 December 2017.

CONSOLIDATED FINANCIAL RESULTS FOR THE QUARTER ENDED 31 DECEMBER 2017

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) Net profit after FX fluctuations and other non-cash items.

3) Basic EPS is calculated on the following basis:net profit divided by theweighted average number of shares outstanding during the period: 811.4 million shares for Q3 2017, 814.0 million shares for Q4 2017; 810.6 million shares for 2016 and 811.7 million shares for 2017.

Q4 2017 vs. Q3 2017 ANALYSIS:

• Group revenue increased 10.4% q/q to $2,178 million (Q3 2017: $1,972 million) as the decline in sales volumes was mitigated by the significant growth in steel and raw material average selling prices in Q4 2017.
• Group EBITDA improved 22.4% q/q to $754 million (Q3 2017: $616 million) as top line growth was marginally offset by increased raw materials expenses. Group EBITDA margin gained 3.4 ppts to 34.6% (Q3 2017: 31.2%). Severstal's EBITDA margin continues to be one of the highest in the global industry despite commodity and steel market headwinds.
• Free cash flow was $434 million (Q3 2017: $507 million) which represents a decline of 14.4% q/q after a boost in Q3 free cash flow when Severstal sold off stocks of HVA produced in H1 2017. Free cash flow generation remains one of the Company's key strategic financial priorities.
• Net profit of $563 million (Q3 2017: $297 million). Adjusting for non-cash and one-off items, Severstal would have posted an underlying net profit of $439 million (Q3 2017: net profit $320 million).
• Cash CAPEX of $170 million increased 18.1% q/q (Q3 2017: $144 million) due to seasonal growth. In December 2017, Severstal launched a production line for polymer coated rolled steel products at Cherepovets Steel Mill Metal Coating Workshop number 3 ('MCW#3'). Investment in MCW#3 amounted to approximately 8 billion rubles. The new workshop is installed with equipment for a polymer coating line and hot dip galvanizing unit. This equipment is expected to produce 200,000 tonnes of polymer coated steel per year and 400,000 tonnes of galvanized steel per year.
• Net debt increased 51.1% to $1,062 million by the end of Q4 2017 (Q3 2017: $703 million) reflecting a reduction in cash balances due to the dividend payout. In Q4 Severstal paid off Eurobonds of $594 million.
• Recommended dividend payment of 27.72 RUB per share for the three months ended 31 December 2017.

2017 vs. 2016 ANALYSIS:

• Group revenue was up 32.7% y/y at $7,848 million (FY2016: $5,916 million). In 2017 the Company benefited from a favourable steel and commodities pricing environment, which enabled Severstal to achieve significant revenue growth y/y.
• Group EBITDA grew 34.9% y/y to $2,577 million (FY2016: $1,911 million) driven by topline growth.
• The Company generated $1,393 million of free cash flow which was an increase on the previous year (FY2016: $1,021 million) primarily reflecting stronger pricing y/y.
• The Group maintained its prudent approach to CAPEX with investment of $591 million, 12.6% higher y/y (FY2016: $525 million) which mainly reflects RUB appreciation y/y.

FINANCIAL POSITION HIGHLIGHTS:

• At the end of Q4 2017, cash and cash equivalents totalled $1,031 million (Q3 2017: $1,990 million) reflecting the net effect of free cash flow generation, debt and dividend payout q/q.
• Gross debt declined 22.3% to $2,093 million (Q3 2017: $2,693 million) reflecting Eurobond 2017 of $594 mln payment.
• Net debt was up 51.1% to $1,062 million by the end of Q4 2017 (Q3 2017: $703 million) reflecting the cash balance decrease. The Net Debt/EBITDA ratio marginally increased to 0.4x at the end of Q4 2017 (Q3 2017: 0.3x). Severstal's Net Debt/EBITDA remains one of the lowest amongst steel companies globally and enables Severstal to maintain a low level of debt whilst returning value to its shareholders.
• The liquidity position remains strong, with $1,031 million in cash and cash equivalents and unused committed credit lines of $1,072 million, more than covering the short-term principal debt of $563 million.

Alexander Shevelev, CEO of Severstal Management, commented:

'As was previously indicated, Q4 2017 has become Severstal's strongest quarter of 2017. We achieved this despite seasonally weaker steel demand as our performance benefited from a favourable pricing environment, the strength of our operations and our vertically integrated business model, which have enabled Severstal to deliver revenue and earnings growth and margins above c.30% for the last three years. Our strong financial performance in Q4 2017 was supported by both export and domestic prices, which caught up with global benchmarks. In line with our effort to lead by Total Shareholder Return, the Board of Directors is recommending a dividend of 27.72 RUB for Q4 2017.

The Company strives to being a world-class producer, remains focused on enhancing operational efficiency through innovation and committed to sustainable development and corporate governance. Safety and customer care are our key priorities and our key goal is to eliminate all fatalities at our assets. Our strategic objective is to be a leader in value creation for all of our stakeholders.

In 2018 we continue to forecast global steel growth. In 2017 Russian steel demand increased 5% and is expected to be 3-4% higher in 2018, supported by GDP growth and gradual economic recovery. With the flexibility to distribute shipments quickly between domestic and export markets, Severstal is well positioned to benefit from the local steel demand recovery'.

In Q4 the Company maintained a steady performance supported by positive trend within the global steel and commodities markets during the period. This reflected the strength of our operations and the management's ongoing focus on enhancing efficiency. The share of HVA in the product sales mix remained at a record 47%, and the Company sold-off stocks of HVA products accumulated in previous quarters. With the improved profitability of export deliveries, the share of export shipments increased to 42%. Severstal's proximity to both its main export and domestic consumers allows it to shift flexibly between export and domestic sales depending on the market environment.

Stronger Group revenue was due to increased average selling prices, which followed global benchmarks in Q4 2017. EBITDA in Q4 2017 surged by 22.4% q/q. Severstal's free cash flow of $434 million benefited from a working capital decrease. The Company's high quality assets and efficient business model enabled Severstal to maintain one of the highest EBITDA margins of 34.6% and deliver solid cash generation to maximise shareholder returns.

Severstal is committed to returning value to its shareholders whilst managing and maintaining a low debt level. Severstal's financial position remains strong with its Net debt/EBITDA ratio at 0.4x as at the end of Q4 2017. As a result, the Board of Directors is recommending a dividend of 27.72 roubles per share for Q4 2017.

SEVERSTAL RUSSIAN STEEL (RSD)

RSD steel product sales declined 3% to 2.79 mln tonnes compared with the previous quarter (Q3 2017: 2.87 mln tonnes) after significant stock sell-off in Q3. Meanwhile, the Company replenished stocks of steel products at its export subsidiaries in Q4. Semi-finished product volumes growth was driven by Mill-2000 maintenance works and increased demand for billets in Q4.

The Company increased export sales volumes to 42% (Q3 2017: 35%) due to higher profitability of export deliveries in Q4. The share of high value-added (HVA) products within the sales portfolio remained high at 47% (Q3 2017: 49%) driven by the continued destocking of large diameter pipes (LDP).

The sales volumes decline of HDG, colour-coated and cold-rolled coil products was due to the replenishment of stocks after the Q3 sell-off. LDP sales volumes continued to grow by 35% q/q, followed by Q3 2017 111% q/q growth, on the back of a destocking of finished goods produced in H1 2017 at Izhora Pipe Mill. Meanwhile, Izhora Pipe Mill remains at full capacity and continues to supply LDPs to Gazprom, Rosneft and other major customers.

Average selling prices for the majority of steel products followed global trends in Q4. The Company has achieved a recovery in prices in Q4 after a decline in previous months. Domestic prices were catching up with global price trends but with a time lag, and this contributed to a growth in average selling prices. Steel prices growth led to a revenue increase of 5.9% q/q to $1,956 million (Q3 2017: $1,847 million). EBITDA improved 18.7% q/q to $533 million (Q3 2017: $449 million). The EBITDA margin increased 2.9 ppts to 27.2% (Q3 2017: 24.3%).

The total non-integrated cash cost of slab production at the Cherepovets Steel Mill in Q4 2017 increased $19/t q/q to $321/t (Q3 2017: $302/t) as a result of raw material prices growth. The integrated cash cost of slab in Q4 2017 was almost flat at $243/t (Q3 2017: $241/t) as a result of higher EBITDA in the Resources division.

SEVERSTAL RESOURCES

Сoal concentrate sales volumes from Vorkutaugol declined 10%, impacted by the long-wall repositioning at the Komsomolskaya mine and the normalisation of production volumes of 'Concentrate K' coal after an uptick in Q3.

Iron ore pellet sales increased 39% and totalled 3.30 mln tonnes (Q3 2017: 2.38 mln tonnes) due to the sale of finished goods in transit in Q4.

Iron ore concentrate sales increased 6% q/q to 1.14 mln tonnes (Q3 2017: 1.08 mln tonnes). Iron ore concentrate sales improvement in Q4 reflected the consolidation of the Yakovlevskiy mine.

Reflecting the q/q increase in volumes, revenue of the Resources division grew 32.4% q/q, to $474 million (Q3 2017: $358 million) and EBITDA increased 32.3% to $205 million (Q3 2017: $155 million).

Given the fixed cost nature of the mining business, lower processing volumes at Vorkutaugol due to the long-wall repositioning at Komsomolskaya mine, brought Q4 total cash costs (TCC) up to 92$/t (Q3 2017: $71/t). At the same time, TCC at Karelsky Okatysh remained almost flat at $27/t (Q3 2017: $26/t). TCC at Olcon were up $7/t at $34/t (Q3 2017: $27/t) due to higher repair expenses as well as seasonal factors.

The Board is recommending a dividend payment of 27.72 roubles per share for the three months ended 31 December 2017.

Approval of the dividend is expected at the Company's AGM which will take place on 8 June 2018. The record date for participation in the AGM is 14 May 2018.

The recommended record date for the dividend payment is 19 June 2018. The approval of the record date for the dividend payment is also expected at the Company's AGM which will take place on 8 June 2018.

Efficient conversion of high EBITDA margins into free cash flow supports our commitment to be a quarterly dividend payer with up to 100% FCF payout, provided that net debt/EBITDA level is below 1.0x.

OUTLOOK

Global export steel prices remained high on the back of Chinese production restrictions in the November-March heating season and decreased exports. Russian export prices followed global trends and are expected to increase in Q1 2018.

In 2017, steel consumption in Russia increased by 5% on the back of growth in construction activity and auto production. Low inflation allows the Central Bank of Russia to decrease interest rates which is a positive driver for investment activity. We anticipate Russian steel demand to grow further by 3-4% in 2018 with the solid pricing momentum to continue in Q1 2018.

Having a solid high-value added products portfolio, being low cost and close to export routes, Severstal remains well positioned to adapt quickly to changing market conditions and capture attractive pricing both domestically and globally. In this environment the Board is confident that Severstal continues to be well placed relative to both local and global peers.

NOTES

1. Full financial statements are available at http://www.severstal.com/eng/ir/results_and_reports/financial_results/index.phtml
2. The Annual Report 2017 will be available on 2nd February at http://www.severstal.com/eng/ir/results_and_reports/annual_reports/index.phtml