Good day, and welcome to the conference call on Q2 2021 operating and financial results, hosted by Alexey Kulichenko, Chief Financial Officer. For your information, this conference is being recorded. At this time, I would like to turn the conference over to Alexey Kulichenko, Chief Financial Officer. Please go ahead, sir.
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 of the second quarter of 2021. For the next 10-15 minutes, I will briefly take you through our presentation, which is also available on our website, and then I will be happy to answer your questions.
As always, before I start, I will remind you that some elements of our presentation and my comments during this call are forward-looking and based on management's best view on the market at the moment.
If these projections change, we will not take responsibility for immediately updating the call's participants on those shifts. We also made some changes in the presentation format. I hope the new one will be more informative and useful for the participants as well.
Let us start with some sustainability highlight numbers on slide 2. We pointed out that health and safety remain the key priority for Severstal. Starting this year, we include also our contractors in our management KPI. By end of the second quarter, our LTFR for both our staff and contractors declined to 0.63.
However, the LTFR of our staff grew to 0.57 quarter-on-quarter. Regrettably, we had two fatalities in the second quarter of 2021, one among our staff and one among contractors. We investigate each of these cases thoroughly and to prevent them from reoccurring. As our goals, we remain committed to eliminate all work-related fatalities and reduce LTFR by 60% by 2025. Let us move to next slide number 3. You can see our update on our environmental targets.
We set up immediate goal to reduce the carbon intensity of CO2 emissions per ton of steel by 10% by 2030. Severstal will achieve that target by implementing a number of projects in our production processes and technical equipment. We previously announced our short-term goal to reduce GHG emissions intensity by 3% by 2023, and we continue to implement this plan. Let us move further to slide number 4 and 5.
We discuss the market situation and outlook. In Q2, steel prices reached another record level. Iron ore prices also tested all-time highs due to strong demand in China and recovery of declining production outside of China. We are still committed to our guidance regarding steel demand by region. We also expected the demand to be driven by external countries in 2021, with more than 9% growth year-on-year.
As for the Russian consumption, we anticipate it to increase by approximately 3% compared to 2020. Moving to page five. As you know, currently we see prices started a correction, losing approximately 10% from their maximum levels of the first half of 2021. That was driven mainly by moving Asian supply to Middle East and Europe as Asia entered the rainy season and also caused some weakening on export prices in legacy region.
As for domestic market landscape moving forward, Russia government is imposing a temporary 15% export duty on steel, which will come into force from 1st of August and will stay until the year ends. Let's move to slide six now, which summarizes our operational performance in the second quarter. Steel output decreased by 6% quarter-on-quarter to 2.78 million tons due to plant repairs.
However, consolidated steel sales were up by 2% quarter-on-quarter and amounted to 2.68 million tons, driven mainly by robust sales of high-value added products and service. High-value added product sales grew to 1.3 million tons, which is 7% higher than previous quarter, and a result the share of high-value added in our production mix increased to 49%.
Sales of hot-rolled steel and plates were limited due to scheduled repairs works in the first half. As for consolidated raw material sales, they were fueled by iron ore product deliveries to third parties, which grew 21% to 1.3 million tons, driven by strong demand for pellets in Europe. Coal sales decreased 18% to 0.28, driven by steam coal sales reduction on back of demand softening during summer season.
I want to remind you that we announced the termination of steam coal production starting from the first quarter of 2022. Now let's move to page seven and talk about our financial figures. Our revenue increased 33% quarter-on-quarter to $2.9 billion. EBITDA rose 42% to above $1.6 billion, and EBITDA margin expanded to 56%.
At the same time, net debt to EBITDA ratio was 0.37 at the end of the quarter. Our free cash flow reached a record level of $936 million, up by 88% quarter-on-quarter, which allow us to recommend dividends of 84.45 RUB per share for the second quarter of this year. On the next page, we see our sales volumes share to the Russian market increased 55%. Overall, we expect Russian market share to increase further.
The second largest source of our revenue is still European market with 36% of the total revenue. Let's now move to page nine. I'll give some color of main CapEx projects which we implemented in the reporting period. Our key project was our new electric arc furnace number one, which can both work with scrap and with liquid pig iron.
The share of pig iron can be as high as 85% of the furnace charge. The new equipment will enable us to process additional volume from hot metal from blast furnace number three, which was commissioned end of last year. I would also like to highlight our recent acquisition of 20% stake in Nizhne-Volzhsky Pipe Plant in Q2. It's a large pipe enterprise that currently covers 60% of construction pipe market in South Federal District.
That partnership will allow us to extend our range of small and medium diameter pipe products on that market. Now let's look at our cost structure on slide number 10. Non-integrated cash cost of slab per ton increased by 23% to $457, mainly as a result of growth of our input from materials.
At the same time, the integrated cash cost of slab decreased 5% quarter-on-quarter to $175 in favor of high vertical integration of our company into iron ore and coal. As for our resources division, cash cost of our coal concentrate in Vorkuta amounted to 90%, which is a 30% increase, mainly due to volume reduction in that facility. Cash cost of iron ore pellets increased by 14% to $33. Cash cost of iron ore concentrate decreased by 18% to $27 at Olcon facility. Let's move to page 11.
A few things to us about our free cash flow. As I mentioned already, it went up by 88% quarter-on-quarter to $936 million, driven by higher EBITDA and lower CapEx. Cash CapEx amounted to $273 million comparable to the previous quarter and broadly in line with our schedule. We'll stand on our CapEx guidance for 2021 of $1.35 billion.
Therefore, we anticipate increase in capital expenditures in the second half of 2021. Working capital buildup amount is $251 million due to mainly increased prices both in cost of our inventory and in our accounts receivable.
Finally, let's move to slide 12, which summarizes our liquidity position. Our cash equivalents decreased to $783 million back of dividend payments and convertible bonds. The infusion, at the same time, we reduced our total debt by 7%.
As a result, our net debt ratio is at 0.37 of net debt to EBITDA, and our net debt level remain unchanged at a level of $1.5 billion quarter-on-quarter. With that, I want to conclude my part, and I appreciate your attention, and I open the line for the Q&A part. Operator, please.
Thank you, sir. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you're using a speaker phone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star one to ask a question. We will now take our first question from Dan Shaw from Morgan Stanley. Please go ahead.
Hi. Thanks for the presentation. Just a couple of quick ones. The first one on the guidance you just said there you confirm the guidance of $1.35 billion. Can you just touch on some of the main drivers of the increase for 2H versus 1H as first question? And second
Sorry, your line is not very good. The first question was about CapEx, but I didn't catch what was the question.
What are the main drivers of the increase in the CapEx run rate spending in the second half versus the first half? I think you need to see a step-up to get to your guidance. That was the first question. The second question, there was this one small headline this morning that you see around $70 billion cost per year based on the current EU carbon regulations that we're seeing. The question is does Severstal have any plans to make investments that would help them try and reduce that number going forward or do you see that as just a cost of doing business at this stage?
Okay. Thank you for your questions. First of all, on our CapEx guidance, we didn't have any change in our plans. We announced our program of $1.35 billion earlier, end of last year. We're still committed to that program. The schedule of that, and as usual, we're very open with the CapEx projects in our company.
It is always I would say loaded to the second half of the year. From that perspective, just a schedule of the projects, which was an initial plan guidance, and it still remains core part of it. Nothing else here. In terms of CO2, definitely the estimate they gave you was as of today. Of course, going forward there are two elements I would say to that answer.
First of all, we have precise plan where we exactly know how to reduce emissions, and we included in our target, which we announced to the market. Secondly, of course, and I think that also very much relates to the whole industry, we keep researching what opportunities will appear in this area.
Because at the moment, there are no solutions how to make Still carbon neutral, but there are a lot of investigation and research happening in this place, including basically all areas of using hydrogen, storage of CO2, everything else. So I think our innovation research team basically exploring all opportunities, and I think going forward, we will add to our portfolio in terms of improvement of CO2 emissions.
But as long as we will clearly understand how its economic doses and what reduction it will allow us to achieve, we will add it to the program we already announced. For this program, obviously we also have understanding how we are moving and from that perspective, we plan to implement this reduction, which we announced in our targets.
Okay, great. Thanks for your answers, Cheers.
We will now take our next question from Yuriy Vlasov from Sova Capital. Please go ahead.
Thank you, and congratulations with the exceptionally good result. Two questions. One is, if we look at domestic steel prices, they went from 50,000 RUB- 100,000 RUB per ton of hot-rolled coil in the space of the last six months. How do you see them going in the second half of the year, and what was the major driver? Of course, that didn't happen in Russia, it happened outside.
But what was the major driver of such a strong price performance? The second question is about the recently introduced taxation. Will that in any way affect your future capital investment plans? Have you made any changes in your capital investment program in the next few years? Thank you.
Thank you for the question. First of all, on local prices. Obviously, drivers of that growth are exactly the same as we see on other markets. It's not a surprise that it's an open market with a lot of import and export trade, and Russia always have export alternative. That, of course, like the world's growing prices was the main driver of the price growth on the local market as well.
Though I want to remind that it's still lower than the growing benchmark. So at the moment, we still have the situation with a certain negative premium of Russian markets towards export levels. That's first thing. Second thing, going forward for me is always difficult to predict. Obviously, introduced duty on one hand will reduce export alternatives by the size of 15%, which was announced. In the second half, it will be a lot of other drivers.
First of all, we need to understand what will happen with the prices globally, because situation remains quite volatile. Secondly, we also need to understand what will be the strength of local demand and basically how it will fit with the local supply. I think that definitely it will have some impact, but I cannot at the moment relate to which extent it will influence sales prices.
One of the drivers to support that will be very tight supply chain, which we still see both globally and in Russian markets as well. In terms of duties and how it influence our capital projects, to be honest, I don't see any connection of that two elements at all. First of all our decisions to invest are based on long-term view of dynamics of prices, both for steel and for hero materials.
That is basically the, how to say? It's always very close to consensus. So none of them assumes, for example, the level of this year, which nobody assumes that it will stay in the long run. So we are in cyclical industry, and we remember that very clearly. All our decisions takes into account normalized, I would say, level of prices in the long run for capital investments.
To which extent duties will impact that? Of course, on one hand it definitely not help, I would say, predictability. So we understand that in each moment the state could change the rules and impose something new, which was not there when we make our decision on investment project. On the other hand, we see that these duties are introduced on the level of exceptionally high prices which are on the market.
And even being net from the impact, it still give us very good result, which I also don't believe will stay in the long run. So from that perspective, there is no connection between our outlook for steel prices and commodity prices going forward for investment projects and current level of prices and duties which we see on the market.
Thank you. A very quick follow-up. Do you think the introduction of extra taxes will in any way increase domestic consumption or will it just increase lower domestic prices?
Difficult for me to say about consumption. I think to the extent it will make local prices more attractive. Of course, it could increase maybe slightly some consumption or some demand as well. But I think it's more or less still driven by fundamentals and by pipeline of projects in the industry itself, which is still consuming industries, which I think, as I said, we expect around 3% growth of steel in Russia this year to previous year. So that kind of includes the recent trend on export duties as well.
Okay. Many thanks.
Thank you.
We will now take our next question from Anton Fedotov from Bank of America. Please go ahead.
Good afternoon. Thank you very much for your presentation. I have two questions. My first question relates to the current domestic steel prices in Russia. The HRC price is now trading at a premium to the export price, quite a significant premium based on the Metal Expert data. Would you expect this premium to decrease going forward, especially given the export duty introduction starting from August?
The second question relates to the recent press article indicating that the Russian government is talking about a tax increase starting from the next year and is considering an increase in the Mineral Extraction Tax.
If a Mineral Extraction Tax is increased on iron ore and coking coal, which are the raw material for the steelmaking process, what kind of impact would you expect on the prices in Russia and raw material prices and the profitability? Thank you. Overall, are you involved in these consultations with the government regarding the new taxation changes?
Okay. Let me start answering from the second part. Usually, we are involved. At the moment, it is too early. I mean, I put some general statements about the intentions, but not anything precise with any details, which I could comment on. I hope that we will have an opportunity to discuss the proposed mechanism of new taxation.
Until that happens, of course, we do not understand what will be details, levels, conditions, whatever on that. It is too early to comment at the moment. Second question was about price premium. I think it really depends on what data you compare, because for us, it is still the negative premium of Russian markets to the export alternative. Our export alternative is somewhat better than the classical FOB Black Sea. That may be another reason.
But going forward, for me, I think it is really the key driver for the answer will be dynamics of the global prices. If we see further growth of that, and obviously some adjustments for the duties which we announced as well, then we will have basically a comparable story, which also will be influenced by the strength of local demand.
Going forward, I, to be honest, think that for us, a negative premium will disappear. I hope to see a more healthy situation on the local market, but at the same time, that also we see some softening of global prices as well. It really will depend on the strength of local demand.
Thank you.
We will now take our question from Sergey Donskoy from Societe Generale. Please go ahead.
Yes. Thank you very much. Some of my questions have been answered. I have one which is of a general sort, so to say. I understand that it is too early to speak about ways how Severstal may approach the problem of carbon mitigation in the future. But looking at the options that are on the table today, which is hydrogen-based steelmaking, carbon capture, whatever else, do you see some of these options as more interesting or more promising than others?
Well, as I said, there are two elements of answers. There are things which we know, which are practical, which are scalable, and that has to do with our redesign of upstream operations with the close of our raw material, especially in iron ore and type of this iron ore we are using. So that we clearly understand, and that will contribute to the reduction we already committed to.
Technologies you mentioned are more like the early stage technologies. There is no proof that they are economical and scalable enough for the company, for example, of our size. Of course, we know, we see that today that when technologies are developing with a high focus and big investments, eventually they will become. Hopefully, they will be at that level.
But till that happens, it is more like the earlier stage trials, experiments, if you want, and some startups and all that type of activity. We participate in those activities very intensively, so our research team have it as a quite a high priority.
But which of them will play and will be more attractive eventually, I do not know now. I think, to be honest, nobody knows. There are a lot of talks, but if you really see the scale of those technologies at the moment is more like for me, the experiments which we need to see how well play to eventually to the scale of the big companies.
Understood. Thank you.
We will now take our next question from Boris Sinitsyn from VTB Capital. Please go ahead.
Thank you for the presentation and congratulations with the good results. Question from our side is on your sales guidance for 2021, given that you see increase in pig iron. Could you please specify what will be the sales guidance for 2021? I also ask the further question, what is your targeted domestic sales share for the second half? And probably the third, the last question is on your expected working capital movements in the second half, all other things being equal, again, the prices, et cetera.
Okay. In terms of sales guidance, do you mean volumes or what is your
Yes, volumes, please.
Well, we are fully utilized. We will have some additions of steel as a result of our current start, which I already mentioned in my presentation. So we expect a few hundred thousand tons of additional sales compared to previous year, and of production, we will see how it will influence the sales taking into account our potential stock movements.
In terms of pig iron, we see that at current market that we will sell pig iron and replacing it where possible with scrap. So that's like a no-brainer exercise to optimize EBITDA of the company. Second question about domestic share.
We do not have specific targets of that. It will really depend on the export alternative and strength of local market. I do not expect any major change from the levels which we have today. And in terms of working capital, obviously it depends.
I think our turnover work of all key elements of working capital is quite good. So the inflow outflow from the working capital completely will depend on the levels of price. If the prices stay more or less the same as you said, it will be neutral.
If we will see price drop, we definitely will release cash from working capital. If price will continue growth then further increase of working capital will be required. So that's kind of very simple function. I to be honest, expect some release from working capital, yeah. Mainly because as I said, we expect softening of market by the end of this year.
Fair enough. Thank you for this. One more simple question for me, please. So given there is a slight problem, misunderstanding on benchmarks of steel which Severstal was selling, could you please specify your average export benchmark price for the second quarter or just your spot FOB HRC price?
You mean for export?
Yes.
Well, it's two elements here, and the key difference between them is the lead time. If we speaking from the orders perspective, that's how we take decisions. Our export alternative, it used to be above $1,000 because we're selling mostly to Northern Europe.
Now it is moving slightly below that level. I think losing around 10% for the couple previous weeks. That's more or less the level where it stays now. Again, going forward is difficult for me to predict. We're speaking about, I would say $950 levels probably at the moment. Was it anything else in the question or I covered that?
No, that's it.
No, sorry. Yeah, second element. For the second, sorry, I missed the element of the P&L. In the P&L, it appears after two, three months usually. Now more closer to three months after order taken. If we take from a P&L of second quarter, of course it's much lower numbers because it's mostly volumes which were sold during first quarter. From that perspective, on average export prices in the P&L of Q3 will be higher than Q2.
Okay. That's very clear. Thank you.
Mm-hmm. Thank you.
We will now take our next question from Maria Martynova from Gazprombank. Please go ahead.
Good afternoon. This is Maria Martynova from Gazprombank. Congratulations with strong results. I have several questions. The first question is about European carbon tax. Today you mentioned that costs associated with this tax are estimated at $70 million per annum.
Could you please clarify the assumptions used for these calculations? My second question is about your forecast of Russian steel demand. During the recent capital markets day, you expected that steel demand in Russia to recover by 3% this year. Does this forecast remain in place? Could you please elaborate on the demand from different industries this year? Thanks.
Thank you for the question. I think I partly covered that, but I will repeat. If we speak about the market, we still think that the market will grow around 3%. In terms of split by industries, I think the main growth will come from investment return, obviously from construction.
I think it will be expected around 4%. Also in terms of machinery and automotive, I think recovery will be more strong, I think closer to 6. Oil & gas sector will generally be slightly weaker. Sorry, that was for CAP. For the year, we expect that to be around 6 and 4.5 respectively for those sectors. Altogether, we believe that growth will remain around 3%. Second question was about CO2.
Again, I want to remind you that there is a transition period, and during this transition period, obviously we will observe a lot of change, and the main assumption probably will be the levels of free quotas, which currently are received by steel makers in Europe, which is today around 75%. So calculation as of today, if we would pay today, is very simple.
That was this question about $70 million, was you just take our 2.5 million of exports multiplied by our 2.06 tons of CO2 per ton, and by 25% of the quota of the CO2 payment, which is I think EUR 55 per ton today. So that will give you roughly $70 million. But of course, going forward, we need to understand that, first of all, European Union declare that they will decrease the amount of free quotas on one hand.
Secondly, I think we will see obvious improvements of the companies in their CO2 footprint. So it will be number of actions which will happen for this few years as a temporary period. So from 2025, obviously numbers could be different taking these variables into account.
Thank you for your answers. I have one more question, which considers contracts with the governmental construction. These negotiations have been already finished or this process continues?
Sorry, can you repeat?
I have a question regarding specific contracts with the governmental construction. The negotiations with the government regarding this specific project. Has bidding already finished or this process continues?
No, that continues.
Okay, thanks. That's all for me.
Thank you.
We will now take our next question from Andrew Jones from UBS. Please go ahead.
Hi. I think most of my questions have already been answered, but just a couple more. One is on this investigation to the supposed price manipulation of flat steel that you, MMK, and NMMK were facing. Given we've got this export duty coming in, does the government kind of consider that to be their pound of flesh, or do you expect to have to potentially pay more as a result of this investigation? What's the latest would be my first question, and I'll ask my second in a minute.
Well, to be honest, I believe that with the new duties it should be now more simple to discuss it with the antimonopoly commission. Yeah, it's difficult for me to predict the outcome. We're in constant, very constructive dialogue with them.
They recently confirmed that in their quotes to press specifically for our company. So I hope that the investigation eventually will be successful for steel makers in Russia. But of course, we need to see the end of it, and we're in very close calculation, providing our data and outlook and so on for the authority.
When do you actually expect to see the outcome of that? Do we have any idea on timing at this point?
No, any guidance on timing so far.
Okay. Cool. Just on the second question, I think earlier on you said that you do not expect your domestic market split to change in the second half in response to this export duty. Is that a function of a large percentage of your domestic contracts being already agreed or committed to, so you do not really have much flexibility in your mix?
Or is it just that you are not taking a strong view on pricing now? How much flexibility is there to change the mix in that five-month period in response to this duty if the economics of export start to move against you?
If I get your question right, it was about do we see any major change in our share of sales, right? Between export and local market.
Yeah. It is about basically how much you could potentially change it in response to the changing economics within the constraints of the contracts and so forth you already have agreed. I mean,
I don't think it. Anyway, we're speaking about a few percent. If you take our historical larger share of sales, it will be around 50/50 of export to local markets, and vice versa to what I think in the best time of 2008, around close to 80% almost of local markets.
It never returned to that level, unfortunately. But yeah, so that's where our logistical capabilities are basically. In terms of contract level sale, I to be honest, think that it's always around 60/40 on average, and then it could be deviation depending on the situation of up to 10% in each type.
Okay, understood. That's clear. Okay, thank you.
Okay. Next question, please.
As a reminder, to ask a telephone question, please stick on by pressing star one. We will now take our next question from Anna Antonova from JP Morgan. Please go ahead.
Thank you. Alexey, thank you for the presentation and your comments. A quick follow-up question on this hot topic of taxation from our side. Do you think changes to domestic taxation regime, which is currently under review by the government as we understand that there are multiple options and mechanisms that can be implemented, can these changes fundamentally change the Russian steel market in the future, for example, shift domestic market pricing away from export parity to some other price-setting mechanism?
Well, it will very much depend on what exactly the new proposed measures will be. Theoretically, we can assume that it could be as severe as it could change it. We hope it will not, and I think that we hope that everybody will be reasonable. It really depends. We feel that the main purpose looks like today is really to increase the tax levels to the government, which I think they already have quite high. What is the intention for that? We will need to see.
Understood. Thank you.
There appears to be no further questions at this time. I would like to turn the conference back to the host for any additional or closing remarks.
Thank you, everybody. It was quite an intensive call today. Thank you for your questions. I hope we provide you enough details in our answers. A lot of unknown elements in the coming future, but we still believe that the fundamentals are quite solid for steel industry, and we will have a good result for the second half. With that, I want to conclude the call and say thank you and see you on our next calls. Bye.
This concludes today's call. Thank you for your participation. You may now disconnect.