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Edited Transcript of CHMF.MZ earnings conference call or presentation 18-Oct-19 9:00am GMT

Q3 2019 Severstal' PAO Earnings Call (IFRS)

Moscow Oct 21, 2019 (Thomson StreetEvents) -- Edited Transcript of Severstal' PAO earnings conference call or presentation Friday, October 18, 2019 at 9:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Alexey Gennadievich Kulichenko

PAO Severstal - CFO of AO Severstal Management & Director

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Conference Call Participants

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* Boris Krasnozhenov

Joint Stock Company Alfa-Bank, Research Division - Head of Research and Senior Metals & Mining Analyst

* Oleg Petropavlovskiy

BCS Financial Group, Research Division - Metals and Mining Senior Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to Severstal conference call on the third quarter 2019 results for investors and analysts, hosted by Alexey Kulichenko, CFO. Today's conference is being recorded.

At this time, I would like to turn the conference over to Alexey Kulichenko. Please go ahead.

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Alexey Gennadievich Kulichenko, PAO Severstal - CFO of AO Severstal Management & Director [2]

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Good afternoon, everyone. Thank you for joining our Q3 2019 Financial Results Call. I'm Alexey Kulichenko, CFO of Severstal. And over the next 15 minutes or so, I will briefly take you through our presentation before opening the call for your questions. Presentation is also available on our website.

Before I start, I hope to remind you that this call contains projections and other forward-looking statements, which reflect our view on company performance and markets at the moment. And if these projections will change with the time, we will not take responsibility for immediate update on the call's participants on those shifts. I also would like to invite you to join our Capital Market Day, which will be on 7th of November in London, where we will provide an update on our current strategic execution and further plans.

Let's start, as usual, with Slide 4 of the presentation, which summarize performance of our third quarter. Revenue declined 3% to $2.1 billion mainly driven by adverse selling price dynamics. Nevertheless, our group EBITDA increased 5% to $787 million, reflecting cost of sales decrease. And this allowed Severstal to maintain its EBITDA margin high at 37% level. In Q3 2019, Severstal domestic share of steel products remained at high level of 67% due to continuous attractiveness of domestic sales, positively impacted by local consumption in construction sector. The share of high value-added steel remained high at 45%.

Free cash flow was 346% -- $346 million, resulting from positive changes in net working capital quarter-on-quarter. And CapEx level was $311 million. Recommended dividend payout is RUB 27.47 per share for the third quarter. That reflects our commitment of paying free cash flow or more in the form of dividends, given that our leverage is at the moment below 0.5%. I will skip Slide 5, where you can find quarterly dynamics of EBITDA and revenue, and go to next slide, Slides 6 and 7, which summarize our performance for the 9 months of 2019.

You can see that our earnings were lower due to adverse market factors. However, on Page 7, we show that EBITDA in the first 9 months of 2019, additional improvements were $163 million. And we received negative macro additions, which resulted $308 million EBITDA decline due to mainly lower prices compared to last year. We were able to have revenues, mostly in sales and marketing activities, due to improvement of steel product mix, allocation of our product uses and high level of local markets.

We have minor impact on volume, which is reflected -- of $9 million, which is driven by 1% volume increase year-on-year. And our performance, net of improvements and growth, of course, were positive at $21 million. We improved our ferrum consumption -- ferrum content in iron ore agglomerate, achieved better coke structure, improved efficiency of blast furnace fuel composition. And part of that were offset by our cost in repairs and additional resources, which we used for growth of our personnel -- of our people. I also should highlight for 9 months 2019 cash flow for CapEx was $787 million on Page 6 with $1.45 billion initial target for 2019.

And let's now move to divisional review and start with Russian Steel on Slide 9. Steel product sales remained flat, which in combination with declining steel prices, resulted in revenue decrease, 2.3%. Russian Steel division EBITDA, however, increased to $433 million with EBITDA margin of 21%, which was mainly a result of a lower raw material cost. And on Slide 10, you can see dynamic of our slab costs at Cherepovets Steel Mill. Total nonintegrated cash cost of Cherepovets declined to $346, mainly due to high efficiency and lower raw material expenses. Integrated cash cost of slab was up to $208, following again decline of raw material price and EBITDA of Severstal Resources division as a result.

Moving to Severstal Resources on Page 11. We see that we increased coking coal concentrate sales volumes from Vorkutaugol by 41% quarter-on-quarter, reflecting our plans to restore production in Vorkutaugol. And we see also that iron ore pellet sales declined 15% at the moment with prices being very high and low demand for pellets on our core markets. For us, it's reversed decreasing share of pellet sales and increasing share of ore concentrate, which we use internally and replacing, in the same time, our third-party purchases. In the same time, combined sales of iron ore concentrate from Karelsky Okatysh, Olcon and Yakovlevskiy mine increased 35%, replacing this pellet reduction.

And let's look to our financial position. I already noted that free cash flow was $346 million, positively affected by working capital release. On Slide 14, you see our liquidity and debt highlights. We, in September, announced a placement of $800 million Eurobonds, which is due in 2024 at 3.15% coupon, which is the lowest coupon in the history of Severstal and even in the history of Russian corporates. And in Q3, we completed also disposal of our Balakovo mini-mill and received proceeds in the amount of $215 million, which also positively impacted our level of net debt, which at the end of the period of Q3, stayed at 0.4x and which also was the source of dividend recommendation for the third quarter.

And at the end of my short presentation, I want to say a few words about the outlook. We see that growth in global steel demand in 2019 was supported by China. While outside China, we see quite weak demand, particularly in Europe and MENA region. We also see that deficits on iron ore market is gradually disappearing. And coking coal market is also well supplied. And we see a continuous decline of coal product -- of coking coal prices. And also, we think global export steel prices are under significant pressure due to weak economic sentiment and declining raw material prices. Despite of potential headwinds on both export and domestic markets, we believe that our low-cost position will allow us to stay competitive in this environment. And the Board remains confident that the resilience of our model remains relative to its local and global peers.

With that, I want to conclude my introduction and give the floor to operator to start the Q&A session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from the line of Oleg Petropavlovskiy, BCS Global Markets.

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Oleg Petropavlovskiy, BCS Financial Group, Research Division - Metals and Mining Senior Analyst [2]

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Just one question for me. Where do you see Black Sea HRC prices right now? What are these offers, if you can share?

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Alexey Gennadievich Kulichenko, PAO Severstal - CFO of AO Severstal Management & Director [3]

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If we speak of today, it's $380 level for FOB, for base product, base HRC.

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Operator [4]

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I believe we will now move to our next question from Boris Krasnozhenov, Alfa-Bank.

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Boris Krasnozhenov, Joint Stock Company Alfa-Bank, Research Division - Head of Research and Senior Metals & Mining Analyst [5]

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Two questions on my side. First one is also about prices, where this can be observed recently that local prices, domestic prices drive very material and, I would say, abnormal premium to export prices. We just hear from different sources, different opinions. Do you expect some significant correction of domestic prices in the fourth quarter? Do you see that? Or is that going to be quite minor corrections? Some trades, we heard, are saying it might be RUB 1,000 or RUB 1,500 at maximum, they would say, at the HRC level. That's the first question.

And the second one, if I'm not mistaken, you recently upgraded your outlook for demand growth -- steel demand growth in Russia to 3% or 3.5%. Again, if I'm not mistaken, before, the average consensus was the growth around 1% in terms of steel demand in Russia. Could you highlight what was the reason for the upgrade of your view on steel demand?

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Alexey Gennadievich Kulichenko, PAO Severstal - CFO of AO Severstal Management & Director [6]

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Okay. Thank you for the questions. First question, yes, we think that taking into account where current ruble prices are, we could expect certain reduction going forward. But we believe it could be moderate in time, more or less sharing the guidance which you provided. Speaking about the market itself, obviously, we see that it was a higher market than we expect based on our 8 -- we do not have yet 9 months, but based on 8-month results, we see that market was growing faster. I think cumulatively, we went from 11% to 7% for 9 months -- or for 8 months.

And from that perspective, we see that if we just simply roll the year, assuming that we will not have any growth forward, going forward, we think that, that will mathematically give us 3%, 4% of annual growth of the Russian market. We, at the moment, also think that it's not a real growth, but it includes an element of restocking, which happened in construction industry mainly during that period. So from that perspective, we think that if we really gleam it from the stock element, we're still in line with our forecast of construction segment of real growth of close to 0% or maybe slightly above 0%, so closely related to stock movements.

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Operator [7]

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And there are no further questions in the queue. (Operator Instructions) And as there are no further questions in the queue, I would like to turn the call back to Alexey for any additional or closing remarks. Alexey, over to you.

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Alexey Gennadievich Kulichenko, PAO Severstal - CFO of AO Severstal Management & Director [8]

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Thank you. I think it was the shortest call in my history. Maybe information was quite self-speaking. But again, using the opportunity, I'm inviting everybody to our Capital Market Day in London, where we will be able to provide you further details on our strategy and plans. With that, I want to conclude the call. And yes, thank you for your time and questions.

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Operator [9]

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Thank you. That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.