Public Joint Stock Severstal : Severstal reports Q3 & 9M 2020 financial results

October 22, 2020 Severstal reports Q3 & 9M 2020 financial results

PAO Severstal (MOEX: CHMF; LSE: SVST), one of the world's leading steel and steel-related mining companies, today announces its Q3 & 9M 2020 financial results for the period ended 30 September 2020.

CONSOLIDATED FINANCIAL RESULTS FOR Q3 AND 9M 2020

$ million, unless otherwise stated	Q3 2020	Q2 2020	Change, %	9M 2020	9M 2019	Change, %
Revenue	1,875	1,590	17.9%	5,242	6,319	(17.0%)
EBITDA1	656	501	30.9%	1,712	2,203	(22.3%)
EBITDA margin, %	35.0%	31.5%	3.5 ppts	32.7%	34.9%	(2.2 ppts)
Profit from operations	538	382	40.8%	1,345	1,850	(27.3%)
Operating margin, %	28.7%	24.0%	4.7 ppts	25.7%	29.3%	(3.6 ppts)
Free cash flow2	382	190	101.1%	626	998	(37.3%)
Net profit	167	391	(57.3%)	630	1,393	(54.8%)
Basic EPS3, $	0.20	0.47	(57.4%)	0.76	1.69	(55.0%)
Net Debt/EBITDA4	0.77	0.82		0.77	0.43

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). A reconciliation of EBITDA to profit from operations is presented in Severstal's quarterly financial statements.
2. Free Cash Flow ('FCF') is determined as the aggregate amount of the following items: Net cash from operating activities, CAPEX, proceeds from disposal of PPE and intangible assets, interest received and dividends received. A reconciliation of FCF to net cash from operating activities is presented in Severstal's quarterly financial statements.
3. Basic EPS is calculated as profit for the period divided by the weighted average number of shares outstanding during the period: 825 million shares for Q3 2020 and Q2 2020, 9M 2020 and 824 million shares for 9M 2019.
4. Net Debt/EBITDA ratio is calculated as net debt divided by EBITDA for the last 12 months and is included in Severstal's quarterly financial statements. Net debt equals the total debt less cash and cash equivalents at the end of the reporting period.

Q3 2020 vs. Q2 2020 ANALYSIS:

• Group revenue increased by 17.9% q/q to $1,875 million (Q2 2020: $1,590 million) driven by steel prices recovery q/q and steel sales volumes growth.
• Group EBITDA increased by 30.9% q/q to $656 million (Q2 2020: $501 million), reflecting topline growth. Severstal's vertically integrated business model delivered an EBITDA margin of 35.0%, maintaining the Group's position of having one of the highest EBITDA margins in the steel industry globally.
• Free Cash Flow surged by 101.1% q/q to $382 million in Q3 2020 (Q2 2020: $190 million), primarily reflecting earnings growth and positive changes in net working capital q/q.
• Net profit was $167 million (Q2 2020: $391 million), including a FX loss of $262 million, which mainly reflects an accounting loss on the translation of USD debt balances due to the devaluation of the rouble in the third quarter.
• Cash CAPEX amounted to $341 million (Q2 2020: $331 million).
• Net debt declined to $1,782 million at the end of Q3 2020 (Q2 2020: $2,006 million).
• Severstal is committed to returning maximum value to its shareholders whilst managing and maintaining a comfortable level of debt. Severstal's financial position remains strong with a Net debt/EBITDA ratio of 0.77 as at the end of Q3 2020. The Board of Directors has therefore recommended a dividend of 37.34 roubles per share for Q3 2020. 9M 2020 vs.

9M 2019 ANALYSIS:

• Group revenue declined by 17.0% y/y to $5,242 million in 9M 2020 (9M 2019: $6,319 million). This drop in revenue y/y was due to weaker pricing dynamics for steel products and lower sales volumes in the period.
• Group EBITDA declined 22.3% y/y at $1,712 million in 9M 2020 (9M 2019: $2,203 million), primarily reflecting lower revenues, which were partially offset by a reduction in the cost of sales. The Group's EBITDA margin remained high at 32.7% (9M 2019: 34.9%).
• The Company generated $626 million of FCF in 9M 2020 (9M 2019: $998 million), mainly reflecting a decline in EBITDA and CAPEX growth y/y.

FINANCIAL POSITION HIGHLIGHTS:

• At the end of Q3 2020, cash and cash equivalents increased to $781 million (Q2 2020: $584 million).
• Gross debt remained almost unchanged at $2,563 million (Q2 2020: $2,590 million).
• Net debt declined to $1,782 million at the end of Q3 2020 (Q2 2020: $2,006 million). The Net debt/EBITDA ratio was 0.77 at the end of Q3 2020 (Q2 2020: 0.82). Severstal's Net debt/EBITDA ratio remains one of the lowest among steel companies globally and allows the Company to maintain a comfortable level of debt, whilst continuing to return value to its shareholders.
• The Group's liquidity position remains strong, with $781 million in cash and cash equivalents in addition to unused committed credit lines and overdraft facilities of $1,009 million, more than covering the Company's short-term principal debt of $556 million.

Alexander Shevelev, CEO of Severstal Management, commented:

'The health and safety of all Severstal employees remains our first priority. Our response to COVID-19 pandemic has proved effective so far, and we have avoided any large-scale outbreak of COVID-19 and our operations have continued without interruption. Considering the autumn increase in incidence, we have again decided to send our office personnel to remote working, cancelled all business trips; all staff continue to work adhering to our strict sanitary policies.

To our great regret, in Q3 2020 we have recorded one fatality of our employee. We remain committed to reach our 2025 safety goals, which are to eliminate fatalities and reduce LTIFR by 50% to 0.5. As of the end of 9 months of 2020 it stood at 0.68. In October 2020, we announced the appointment of a new Director for Health, Safety and Environment. We hope that his significant experience, expertise and leadership will help us make a significant step change in our improvement in the area of workplace safety.

Recovery in global markets impacted positively on steel price dynamics. Increase in revenues in Q3 enabled us to deliver EBITDA of $656 million and to increase EBITDA margin from 31.5% to 35.0%, which is the highest in the global steel industry.

Market-wise, favourable domestic price dynamics allowed us to reallocate a portion of our sales volumes to Russia in Q3 2020. The weighted average steel selling prices increased by 2% due to sales of HVA finished goods which reduced our stock levels. HVA share amounted to 49% in Q3.

We increased sales of steel products by 18% q/q, sales volumes of iron ore pellets and of iron ore concentrate increased by 3%. As a result, total revenue grew by 18% q/q.

Despite the COVID-19 pandemic our transformation programme continues and remains a very high priority for us.

Severstal's financial position remains strong with Net Debt/EBITDA ratio of 0.77 times at the end of Q3 2020, the Board remains confident in its outlook and is recommending a dividend of 37.34 roubles per share for Q3 2020'.

DIVIDEND

The Board of Directors is recommending a dividend of 37.34 roubles per share for Q3 2020. Approval of the dividend is expected to take place at the Company's EGM on 27 November 2020. The record date for participation in the EGM is 2 November 2020. The recommended record date for the dividend payment is 8 December 2020. The approval of the record date for the dividend payment is also expected to take place at the Company's EGM on 27 November 2020.

OUTLOOK

In Q3 2020 global steel demand recovered gradually in line with the lifting of lockdowns. Chinese steel demand increased by 6% in the year to date, while ex-China demand decreased by 14%. Global steel production bottomed in April 2020 with a year on year reduction of 13% and then started to catch up reaching 1% y/y in August. Iron ore prices remained elevated in Q3 due to high Chinese demand and limited supply. Restarts of ex-China BF capacities also pushed up coking coal prices.

Russian domestic steel demand moderately recovered in Q3 2020. Thus we are upgrading our outlook for the whole 2020. Though it would still be a decrease of steel consumption in Russia this year, it's likely to be in the range of 6% in 2020 versus the previous year. In addition, we are expecting global steel benchmark prices to remain solid in Q4 2020.

Despite the number of potential headwinds on both export and domestic markets, including a second wave of outbreaks of COVID-19, Severstal's low cost position allows us to be competitive and the Board remains confident in the resilience of the Company's business model relative to its local and global peers.

NOTES

Full financial statements are available at http://www.severstal.com/eng/ir/results_and_reports/financial_results/index.phtml