Ladies and gentlemen, thank you for standing by, and I would like to welcome you to Severstal's Q4 2021 Financial and Operating Results Conference Call on February 18, 2022. At this time, all participant lines are on listen-only mode. The format of today's recorded call will be a presentation by Severstal's management team, followed by a question-and-answer session. Without further ado, I would now like to pass the line to Severstal's CFO, Mr. Alexey Kulichenko. Mr. Alexey, the floor is yours.
Good afternoon, ladies and gentlemen. I am Alexey Kulichenko, CFO of Severstal. Thank you for joining us today on our conference call, discussing our operating and financial results for the fourth quarter and the whole 2021. Over the next 15 minutes, I will briefly take you through our presentation, which is also available on the website, and then will be happy to answer questions. Before we start, let me remind you that our materials and comments during this call can contain forward-looking statements. If these projections change, we will not take responsibility for immediate update. Now with that, let us start our presentation. As usual, discuss health and safety on page two. In Q4, our LTFR for both staff and contractors decreased by 20% quarter-on-quarter to 0.7, while LTFR for our staff fell by 20% to 0.74. There were no fatalities among staff and contractors in Q4 2021.
We remain committed to eliminate all work-related fatalities and reduce LTFR by 50% by 2025. To improve our performance in health and safety, we deployed a new contractor safety management and fatal injury avoidance project. Let us move to slide three to discuss market situation and the outlook. The rise of inflation around the world creates serious economic risks and can lead to lower steel consumption in 2021. Currently, we expect global steel demand to grow by 0.4% in 2022 due to declining mainly Chinese steel demand. Demand in Russia will likely increase by 3% in 2022. Looking at the iron ore price dynamics, I can mention that the price returned back to $130 CFR China due to supply chain disruptions because of rains in Brazil and Australia.
That creates a positive environment for steel prices, and we can also expect steel price environment improvements due to start of the construction season. Let us continue about market outlook on page four. Rapid resumption of economic activities and supply chain disruptions and global central banks money injections led to inflation surge around the world. Inflation in Russia amounted to 4.8% in 2022. To respond, the Central Bank of Russia raised its rate to 9.5% in February. This creates some risks for the real estate market, which is the biggest consumer of steelmakers. However, so far real estate data is positive. If we move to slide five, let us speak about our performance. You see from operation performance slide in Q4, steel output grew 5% quarter-on-quarter to 3 million tons due to the end of casting machines upgrade.
Consolidated steel sales increased by 15% quarter-on-quarter to 3.1 million tons, driven mainly by the growth of demand for commercial steel and high-value added projects. High-value added sales increased by 23%, mainly due to increase of demand in Russia, and high-value added share in product portfolio recovered to 46%. Coal sales decreased by 44% quarter-on-quarter to 70,000 tons, driven mostly by decline in our steam coal sales. Sales of iron ore products were lower by 17% quarter-on-quarter, driven by redistribution of sales to Cherepovets Mill due to higher hot metal output. Let's go to page 6. We're going to summarize our operational results for 12 months of 2021.
For the whole year, steel output grew by 3% year-on-year to 11.6 million tons due to EAF number one start up in April 2021, and completion of revamping of workshop and casting machines upgrade. Steel sales increased by 6% year-on-year to 11.1 million tons, followed by the growth of pig iron and crude steel production. High-value added sales increased 6% year-on-year. However, high-value added share in portfolio remained stable at 46%, affected by the rapid growth of sales. Raw material sales was lower both for coal and for iron ore projects. On page seven and eight, you see our financial results. Revenue increased 2% quarter-on-quarter to $3.3 billion due to higher sales volumes. Sales growth was primarily driven by domestic market sales of steel products, with increase of revenues from Russia by 16% quarter-on-quarter.
EBITDA decreased by 16% quarter-on-quarter to $1.5 billion on the back of narrowing spreads between raw materials and slabs. Profitability was also partially impacted by export duties imposed by Russian government, and EBITDA margin decreased by 10% quarter-on-quarter to 44%. On page eight, you see the annual results. Our revenue increased 69% year-on-year to $11.6 billion, while EBITDA rose by 147% to almost $6 billion, with EBITDA margin reaching a record level of 51% for the whole year. The net debt-to-EBITDA ratio fell to 0.23 at the end of the quarter. On page nine, you can see that steel prices in the Russian market normalize at steel sales on our Russian market normalize at 58%. The main reason for that was sharp economic recovery in the fourth quarter in 2021.
Russia remains the largest market for us, with 53% of the total revenue in 2021. On slide 10, you see our EBITDA gains in 2021. Macro environment contribute positive driver of $3.9 billion. From that, we paid around $280 million of export duties, which was not the case previously. Also from the performance perspective, we have positive operational efficiency of $224 and $11 of positive vertical integration effects of our upstream and 55% positive in other lines of our P&L. But the main driver, which eventually brought us the negative number, was our sales volume and production mix. The main impact was here, even the timing of volume as we receive reduction of volume to previous year in Q3, which was the quarter of the highest margins, and recover it only in Q4, where margins were already lower due to price decline.
Let's move to page 11, which represents our divisional cost structure. You see that total low integrated cash costs of slab for Cherepovets Steel Mill decreased by 19% quarter-on-quarter, mainly because of reduction of input material costs, including raw materials. Integrated cash costs of slab went up 8% quarter-on-quarter to $143. As for our resource division, cash costs of coal concentrators for Vorkutaugol amounted to $53, which is almost like a 48% quarter-on-quarter decline. Cash costs of iron ore pellets was 34% and remains flat. Olcon increased their costs from $28 to $34, which is mainly a seasonal impact because we start shipping material during winter season in order not to frozen during our delivery. Let's move to page 12 to discuss our guidance on CapEx.
For 2022, we're raising our guidance to $1.6 billion, which is $300 million higher than we announced during our capital market date. I'm sure there are a few drivers for that. On one hand, we have lower CapEx as a result of planned Vorkutaugol disposal. On the other hand, you know that we underspent our CapEx significantly in 2021, so around $115 million of that will be shifted into next year. We have blast furnace modernization plans change, so we want to make it with shorter period and to do it in 2024 as planned. We are shifting some of the works for earlier stages to be prepared for the quickest possible modernization when the time will come, so it gives us another $27 million. We have growth of costs of our overburden, so we capitalize overburden increase versus initial plans.
For number of projects, we have appreciation and scope change, which give another $89 million. We introduced number of new projects, which we plan to discuss more in detail during our next capital market date. These new projects add around $150 million specifically for 2022. The whole structure of our CapEx you see on the right side of the slide. You see that 55% of the scope is our development projects, and then we have 22% of maintenance and the rest is capitalized overburden, IT expenses and investment in environment and safety. I propose to move to slide 13 that speak about our cash flow and net working capital. This was a very successful year from the cash flow perspective, and I think we did a very good job managing our working capital.
As you see, our free cash flow increased 12% quarter-on-quarter despite of EBITDA declines, and we achieved $1.1 billion of free cash flow, driven mainly by working capital improvements. In 2021 itself, our free cash flow grew three times to reach $3.5 billion on the back of stronger sales, good performance in P&L, and good working capital management. Cash cost of CapEx for the quarter was $322 million, and for the whole year, $1,157 million, which is below our guidance and outlook. As I said earlier, part of that will be shifted into next year. Finally, on slide 14, I would like to say a couple words about our financial position. You see that our cash and cash equivalent increased 49% to $418 million on the back of strong operational cash flow.
Debt was unchanged at $128 million, and at the same time, net debt to EBITDA decreased 21% quarter-on-quarter and reached 0.23, which is below our lower threshold of 0.5. Overall, our liquidity remains very strong. We have $1.1 billion of unused committed credit lines and a very comfortable debt profile. I appreciate your attention and ready to answer your questions. Thank you for your patience.
Thank you very much for the presentation. We will now be moving to the Q&A part of the call. If you have any questions, please press star two on your keypad. That is star two on the keypad for any questions. You may also ask a voice or a text question if you are dialed in via the web. We will now give a minute or so for the questions to come in. Thank you very much. Our first question comes from Mr. Anton Terentiev from Bank of America. Please go ahead. Sir, your line is open.
Hi. Thank you very much for the presentation. I have two questions. My first question relates to the working capital release in the fourth quarter. What working capital dynamics do you expect in the first quarter of this year? My second question relates to your sale of the coal business. When do you expect to complete the sale? What level of coal prices are you expecting to pay after the sale of your coal business? Would the market rise or there is some agreement about protecting the company from significant fluctuations in the coal prices? Thank you.
Thank you for your questions. In terms of working capital, the main driver of working capital release were decrease of our inventory and improvement in accounts receivable turnover, mainly using financial tools like factoring. In terms of future perspective, including Q1, I think we already at quite good level of working capital, so there are not that much potential of further decrease. I think keeping it as in terms of days of turnover at this level will be a challenging target. It will change with the market. Obviously, if we will see price declines on the market, we will see release from the working capital as a result of price decrease and vice versa. In terms of potential, there are still few. A certain level of stock which we created last year, which we plan to utilize next year.
We will have some release from the inventory in Q1 and Q2. Not a big one, but it will definitely, like we are speaking about potentially $100 million level for next two quarters. For everything else, I would expect, as I said, that it will more or less stay the same and subject to market exchange situation. In terms of Vorkutaugol sale, it goes as planned. We expect Federal Antimonopoly Service approval. After that, the deal will be completed.
They took delay according to the law which they set for more detailed investigation of the provided information, and we expect that decision will be taken by end of Q1. In terms of price, there is a price agreement as a long-term contract based as a part of the deal. I cannot disclose details of it. But it has the elements of mutual protection of the buyer and seller from the big volatility on the coal market.
Thank you.
Thank you. Next question, please.
Thank you very much. Our next question comes from Mr. Sergey Donskoy from Sberbank CIB. Please go ahead, sir. Your line is open.
Yes, thank you. One question on CapEx. This provision for appreciation and scope change, it is fairly modest, on the order of 7%, compared to your previous guidance. Is it that you are seeing very modest indeed inflationary pressures on this front? Is there a risk that you will need to revise this upwards going forward? That is my first question. The second one is concerning the Federal Antimonopoly Service decision. Would you appeal it? Would you try to argue with them, or you just accept it as it is?
Mm-hmm. Thank you for your questions. First of all, on CapEx inflation or the appreciation of our projects as a result of price change. First of all, why the number is relatively low. Part of it is already there. You see that we are giving you a guidance compared to our previous guidance for 2022, where we already assumed that it will be certain inflation.
This kind of comes on top. The second, because definitely you are right, there were some elements which grew in price much more, but I think it is just a matter of timing. For the future years, I think we could see more in, I would say, impact from inflation. Specifically for 2022, a lot was already contracted in the pipeline. From that perspective, it is not that big. Going forward, I think we will see definitely part of it in the high inflation of equipment, but will be more a matter of future years, not 2022.
Thank you.
In terms of Federal Antimonopoly Service decision, of course, we are very disappointed with it. Absolutely do not agree with the decision, and we will appeal to the last opportunity which we have according to the law, because we think it is absolutely unfair.
Mm-hmm. Understood. Thank you.
Thank you very much. Our next question comes from Anand Agarwal from JP Morgan. Please go ahead, ma'am. Your line is open.
Yes. Thank you. Thank you for the presentation. Just two questions from our side. First, on the volumes outlook for this year, could you please shed some light whether we could expect some growth in steel production or iron ore production this year compared to last year? That's the first question. The second one relates to a follow-up on this year's CapEx target. Could you please maybe provide some comment around whether these kind of new project additions, whether these are more kind of ESG related or targeted at volumes growth either in upstream or downstream? That would be much appreciated. Thank you.
Mm-hmm. Okay. Thank you. First question was on volumes, right?
Yes. So whether we can expect some growth in steel production volumes, in iron ore, in concentrate or in pellets this year compared to last year.
Okay. Well, let's start with steel. In terms of steel production, this year will be alike. As I said, we are pretty much at the maximum level available. So we will see some very modest increase, which we're targeting for ourselves within 100,000 tons, probably size. On sales side of finished products, as I said, we will expect some destocking, so we will have higher numbers compared to previous years as a result of that. But it's more like not a production driven, rather the balance sheet driven story. In terms of other drivers, we definitely expect that we will ramp up our Yakovlevskiy mine further. So from that perspective, we plan significant increase of production there, and the target is for it to be close to 4 million tons, I would say around 3.9 million tons, compared to 2.5 million this year, which is around 1.4 million additional.
For [inaudible], it's pretty much running at the maximum level of capacity and it will be very moderate change. Again, maybe around 100,000 tons. We potentially can ramp it up from current levels to 12 million, but it will take a couple of years. So from that perspective, we're pretty much at the top of what they have. And on Olenegorsk GOK, we will do around 4 million tons. So from that perspective, it's not, again, any big change compared to this year. I would even say that it is a certain decline based on the run of mine plan which they have. So they did 4.2 million this year, and we probably have slightly smaller than that next year. That's on volume sides. Can you remind me the next one?
Yes, sure. Could you please maybe shed some light on this new project positions, your guidance, whether they will be kind of more ESG related or more targeted at volumes growth in upstream or downstream?
They actually have combinations of almost all of it. Yes, some of them relate to additional volumes, some relate to ESG, and some relates to further improvement of our cost structure. I think that for sake of efficiency and to keep some, I would say, work for us for the capital market day, I would not go too much into details. But as you remember, for example, just very few examples. We said that we're working on the project to add another million of liquid steel, including finished of steel capacity to our production. So the project is partly covering that. Then there are some utilities improvements to increase our level of self-sufficiency on energy. Some projects related to our improvement in our by-product quality in upstream, where we will allow to basically have high margins from that. Eventually, it's about cost efficiency.
Another one to mention probably would be the project that we are working on to start the production of HBI. That is a preliminary stage, so the number is relatively low, mostly related to project documentation stage, and we are still analyzing it. There are some expenses related to that already in this plan as well. That is very briefly and more in detail we will tell you later when we will present the strategy update.
Understood. Thank you very much.
Thank you. Next question, please. Operator, excuse me. No more questions?
We have one question from Yuriy Vlasov, Sova Capital. Yuriy, please go ahead. Your line is open.
Oh, thank you. Yes. Can you hear me?
Yes, we do.
A few questions from me. First is, where do you see new MET taxes for this year, for steel and iron ore in terms either percentage of your revenue or in million U.S. dollars? Second question-
Sorry, which taxes?
New MET and steel taxes.
You mean mineral extraction, yeah?
Yeah.
Okay.
The second question is on your redevelopment program at Cherepovets. At the moment, there is a mismatch between your steel making and rolling capacity. Well, to rephrase it, when will you stop producing semi-finished steel? In what quarter and what year? When your blast furnace capacity will be matched with your rolling capacity. The third question is on steel prices in first quarter. Currently, hot-rolled coil trades close to $900 per ton FOB Black Sea. How much of a domestic premium to these prices do you see at this particular time? Thank you.
Mm-hmm. Okay. Just because I was writing it down, I will ask you maybe to repeat the third one. Okay, first question. On taxes, the situation is very simple. There is a new rule of calculation, the mineral extraction tax, which is now linked to the benchmarking pricing of relative materials and steel excise tax, which also is linked to the benchmark price of HRC. If we would take consensus numbers as of the moment of introduction, that would represent around $280 million additional taxes, $280 million-$290 million additional taxes for our company compared to the previous year. If benchmark prices will change, the number will change correspondingly. I cannot tell you because I know this could be different scenarios, but I think it's a very easy calculation, which you can do depending what price for coal, HRC, or iron ore you believe in general for next year.
Okay.
Yeah. In terms of our production in Cherepovets, I would differentiate two things first of all. First of all, blast furnace capacities. As you know, the current ones which we have were the result of our intention to bring earlier blast furnace number three, which will save us during idling of blast furnace number five, which we shift again for another year, and now it's planned for 2024. As a result, we have some excess of pig iron at the moment. Pig iron now is a good product itself, so we're selling it and replacing it in our own production by scrap as much as possible. That's kind of a good standalone opportunity, which we plan to exercise further. We do not see any issues with that. It's just, I would say, the consequence of our decisions of the schedule of blast furnaces repairment.
In terms of BOF, which is more important, production of steel itself, both for BOF of course mainly, and for our electric arc furnaces. Definitely, there is a certain gap at the moment with the rolling capacities, and the main reason for that is our project of modernization of our heating furnaces in our rolling production. That will take a few more years, I think another two, and after that, the balance will be fixed, and we will have fully utilized, I would say our steel capacities will be fully utilized from the rolling perspective. The third one was about prices and premium, right?
Yeah. With the current prices, hot-rolled coil FOB at $900, do you see much scope for the domestic premium?
No, we don't. Unfortunately, we don't. Again, at the moment, prices went up on the export market, and we are in a situation of the negative price premium on the Russian market. It cannot follow such speed of growth. Basically, at the moment, we are selling to export more expensive than we do for local market.
Okay. Alexey, quick follow-up on my first question on MET. Can you give us any ballpark? What was your export tax at the last five months of the previous year? I'm just trying to see what would be the net effect of moving from-
Occasionally, it was exactly 280. From that perspective, the impact is neutral, yeah. I mean, although we expect that to be for the whole year and not for five months as it was for duties. Again, the calculation was based for I don't know price, I think of $120, and call price, I think of $150 or $180, if I'm not mistaken. For coking coal, it doesn't matter anymore for us. For HRC, I don't remember, but I think it was definitely a lower number than what we have today. From that perspective, of course, it will bring more taxes, but it will bring more revenues as well. That, I would say from percentage standpoint, will kind of be neutral.
Okay. Many thanks.
Okay, thank you.
Thank you very much. Our next question comes from Mr. Timothy Riminton from Barclays.
Hi. Thanks for your time this morning. Just two questions from me. Firstly, obviously the market is quite volatile at the moment, and there's a bit of a premium on Russian bonds. I'm just wondering if you've had any thoughts about the refinancing of your 2022 maturity in October this year. Secondly, a question on ESG. I understood from you last year that you plan in 2022 to announce your long-term carbon reduction strategy. Is that still the plan, and when can we expect further details on this? Thanks.
Yes, good questions. Thank you. First of all on First was on The second was ESG, but the first was?
The first question is on your Eurobond maturity at the end of the year or October.
Yeah. Bond maturity. Thank you. On bond maturity, yes, we definitely will refinance it. We are still discussing what is the right approach for that. Should we go for the fixed for the market, or should we maybe add some bilateral to our portfolio to manage better the right sellers? Different pros and cons, obviously. All options are available, so we are still analyzing.
We still have time to analyze, so we are not in a rush here. Of course, definitely on one hand, there are a lot of sentiment that rates will grow. But I think they are already in the pricing. From that perspective, we are still analyzing the opportunities. Let me put it that way. In terms of ESG, the reason why we shift capital market date to June was exactly to be ready with the long-term strategy on ESG. That is almost a direct answer to your question.
We will plan to present it in our capital market date, and it will not only contain the, I would say, middle-term plan which we have already by 2030, and which we announced in terms of CO2 reductions and other improvements which we have on the ESG side, and which will be in a large extent, the additional spend on the CapEx side, which we plan to have to deliver that. The second element, we also plan to announce more a long-term view how we will proceed with ESG agenda, including decarbonization. We need more time for that. It is currently under development.
Thanks. Did you say that the capital markets day will be in June?
Yes. We decided to be ready with the ESG. We decided to shift it because we were expecting that that will be the demand for that, and we need a few more months to complete it.
Great, thanks. Look forward to it.
Mm-hmm. Okay, thank you. Next question, please.
Thank you very much. Reminder, star two for any additional questions. The next question comes from Mr. Andrew Jones from UBS. Please go ahead, sir.
Hi, Alexey. Thanks for taking the time. Couple of questions. First one is just a slight clarification comment. I thought the new steel excise tax was based upon the FOB slab price, not HRC.
Sorry. I was wrong. Yeah, it is slab. Sorry. You're right.
Oh, okay. Good. Just checking I have the numbers right. This is more of a conceptual question. We've seen yourselves and others selling down or spinning off coal businesses recently. Obviously, we're seeing a pretty nice period of profits in this business. I just calculated your 4Q spread between price and cash cost in the coal division and multiplied it by the volume, and it comes to about $170 million of pseudo EBITDA in that one quarter alone versus the $200 million selling price without taking into account offtake.
Just conceptually, do you guys have any regrets over the pricing agreed for that spin-off, or has anything changed since that sale that may have changed the way you look at it aside from price? Because I think there was one concern around production levels being quite weak for most of last year, and there was obviously a big rebound in 4Q. Was that unexpected in any way? Broadly, how do you feel about the pricing now a few months on?
Well, very good question. First of all, obviously, I think you did the right calculation, and definitely did it for us as well. A few things. First of all, you are right. On economics, it is a good business, and it used to be a very good addition to our integrational model for decades in Severstal. But volatility is there, uncertainty is there, and risks of different types is also there. From that perspective, of course, we are not only considering economics, and especially economics on the peak level when we take strategic decisions. We believe Severstal eventually will be able to create more value being, I would say, purely focused on steel and iron ore.
At the same time, I would say, the pricing, which is the part of the long-term contract, represents more fair, I would say, justification of the value paid rather than what the peak volatility is which we see on the market. From that perspective, as I said, the contract actually has an element of both protection from the downside and upside volatility for the buyer and seller. From that perspective, will be somewhat safe. I cannot, again, disclose all details. But yeah, that is a significant element of the deal.
Okay. Understood. Thanks a lot.
Thank you very much. Looks like we are just given another 30 seconds. Looks like we have a follow-up question from Mr. Sergey Donskoy from Sberbank CIB. Please go ahead, sir.
Yes. Thank you. Can you hear me?
Yes.
Yes, Sergey.
Just one follow-up question, also on the sale of your coal business. Would it be possible to tell us what price benchmarks are you going to use to price now the coal that you will be buying from them? Will it be Australian benchmark or some U.S. Atlantic benchmark, just to understand which one we need to be following going forward.
Well, you actually asked me to disclose the contract, which we are not allowed, according to what we agreed. From that perspective, again, there is a price formula, but it says that on a very high market, we are safe. On a very low market, very safe, but I cannot tell you the precise numbers or precise formula.
Okay. Understood.
Thank you.
Okay. Thank you very much. It looks like we have no further questions at this point. I will pass the line back to the team for the concluding remarks.
Mm-hmm. Okay. Thank you all for your attention, for your questions, and time. I think generally it was definitely an excellent year from the financial standpoint. Not an easy year from a lot of other elements standpoint, including obviously regulation. But going forward, again, we believe that our strategy is right. We keep focusing on further improved strengthening of business model of Severstal, and we hope to bring you a lot of more positive news going forward. Thank you. On that, I want to conclude the call. Bye.
Thank you very much. This concludes today's conference call. We will now be closing all the lines. Have a great day. Goodbye.