Good day, and welcome to the conference call on Q1 2020 operating financial results, hosted by Alexey Kulichenko, Chief Financial Officer. At this time, I will turn the conference over to Mr. Alexey Kulichenko, the Chief Financial Officer. Please go ahead, sir.
Good afternoon, everyone. Thank you for joining Severstal Q1 results call. I am Alexey Kulichenko, CFO of Severstal. Over the next 15 minutes, I will briefly take you through our presentation, which is available as usual on our website, then will open the line for your questions. From this quarter, Severstal began reporting quarterly financial results a week earlier than previously, shortening the gap at the end of the period and publication of our financial results. Accordingly, in future also with effects from Q1, Severstal quarterly operational and financial performance will be issued as a single document. Severstal was one of the first issuers of Russian market to publish its annual report at the same time that its full-year financial results. Similarly, we are adopting our practices to publish unified operational and financial results for your convenience. Hopefully, you will find this more practical.
Before I start, I also need to remind you that this call may contain projections and other forward-looking statements which reflect our view on company performance and markets at this moment. If this projection changes with the time, we do not take responsibility for events immediate update of the call's participants on those changes. With that, I want to start my presentation. Let us move to slide four of the presentation and slide five, which summarizes Severstal performance on the first quarter versus previous quarter and same quarter of 2020. Let me say a few words before about market situation. Obviously, the negative effect of the pandemic on the steel industry did not last for long. China, the world's biggest steel player, grew 10x in 2020.
Idling of some steel capacities across other markets and low product inventory and supply disruptions contributed to significant price rally, which is still continued and created steel product deficit as a result of quickly recovered demand. Global iron ore markets also was in deficit in Q1. We kept 26% quarter-on-quarter increase in price of iron ore fines, which was influenced by strong steel production in China and seasonal lower exports from Australia and Brazil. Coking coal benchmark price also rose 18% in first quarter due to restocking in Asia. In this environment, our revenue increased by almost 29% quarter-on-quarter to $2.2 billion. The main driver of that is pricing. To previous quarter, we also have a certain volume growth.
On pig iron side, we increased hot metal output as a result of launch of our blast furnace No. 3 , which is on ramp-up stage right now and a number of other initiatives. We also increased our share of steel export shipments to 52% from 35% in Q4. As a result, our EBITDA increased by 64% quarter-on-quarter to almost $1.2 billion. The EBITDA margin, which we delivered in first quarter, was 52.4%. The share of high-value-added products in our portfolio declined to 46%. In Q2, we plan to sell more locally and also want to benefit from the construction season in Russia. With the ramp-up of our continuous pickling line No. 4, we expect significant improvement of our mix and share of high-value-added in the coming quarters. Overall, as we mentioned at our Capital Market Day in March, our steel volumes will continue to grow.
In Q2, we are launching our new EAF No. 1 with a production capacity of 1.3 million tons of long products. We are replacing the old shaft furnace. The new furnace will allow us to work flexibly with pig iron and scrap, whatever is more efficient, and allow actually significant increase of pig iron usage in our charge. In Q1, cash CapEx amounted to $278 million. Despite working capital increase, our free cash flow increased by 134%. Working capital obviously grew as a result of pricing. It has a certain element of restocking, which we have because of the high lead times on our export deliveries. Still our free cash flow amounted to $497 million in first quarter, which we believe is a good result. Our net debt as a result declined to 0.52x of EBITDA.
With a result of such a price rally and high volatility on the market, we believe our position is very good and strong today. Board is confident on company's outlook and recommend a dividend of RUB 46.77 per share for the first quarter. Let's move to further slides. On slide seven, 10, and 12, you will see our divisional performance. I will remind you that these figures include intersegment sales as we are a vertically integrated business. Let's start with Severstal Russian Steel segment. Steel division revenue increased by 26% to $2.2 billion. Increased EBITDA is 74% quarter-on-quarter and reached $689 million, and EBITDA margin increased to 32%. Non-integrated cash cost of slab per ton at Cherepovets Steel Mill in Q1 increased to $372, affected by high input costs. Non-integrated increased by $25 per ton to $185.
Our sales mix change has a lower value of high-value-added because of increased export shipments, higher level of slabs because of reconstruction of our heating furnace. We have partly accumulated our stocks in high-value-added products on our supply chain to ensure the new lead times to the markets. The weighted average selling price for the whole range of products continued to rise, growing by 26% quarter-on-quarter, following increase of the previous quarter. This is the result of positive steel pricing dynamics for the export destinations, where the prices reached 10-year higher values due to steel deficit. However, we will remember that this is a volatile market and we will see different developments of this pricing going forward once we will reach the peak levels. Couple of comments on our Severstal Resource segment. Q1 in most cases is seasonably weaker for mining than in Russia.
This time, severe weather conditions were a serious obstacle for shipments of our mining products. Also, a number of disruptions which we had on rail stations actually decreased our share of delivered pellets compared to previous year. Steel revenue of our Resource division increased by 36% quarter-on-quarter to $ 747 million, with EBITDA growing by 52%, and EBITDA margin increased to 70% in Q1. On slide eight, in the status of our operational improvement programs, I want to tell you that despite the fact that we see a negative number comparing us to previous year performance, we see that we are doing quite good on costs. In terms of negative drivers, which you see on our product mix in the downstream, the reason I already explained was increased share of slabs and growth of our HRC stock transit to export.
On upstream side, it is those 250,000 tons of pellets which we accumulate on our stock, being not able to ship them during first quarter. On both of those lines, we expect strong performance improvements and positive impact compared to previous year in the coming quarters. I just want to highlight that negative operational efficiency as a result of those driver will turn into positive once we will fix our delivery problems with pellets and improve our products and market mix according to plans. Let us move now to financial section of our presentation on slide 16. Our working capital increased in Q1 due to shipment challenges and in the Resource segment and steel stock, still the main driver here is price. Our free cash flow, as I already mentioned, went up 134% quarter-on-quarter. Slide 17 summarizes our debt situation.
In terms of debt, our net debt- to- EBITDA declined to 0.52x at the end of Q2 as a result of strong free cash flow. Again, maturity profiles remain quite comfortable for our company. At the end of my introduction, I want to say a few words to summarize our view on the market. As I said in the beginning, I will not repeat that we are today in a very strong position of the industry in terms of price rally as a result of a mismatch between demand and supply. China, the world's biggest steel market, still ensures the high level of demand and high demand for raw material, of steel demand and high demand for raw material. Generally, we do not know how long this situation will last. At the moment, we are definitely doing our best to benefit from that.
Of course, we will remember that this is a volatile industry and that current levels and peak levels will be achieved in the market will then be adjusted once situation with demand and supply will be normalized. With that, I want to conclude and go back to operator to start our Q&A session.
Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal a chance to reach our equipment. Again, press star one to ask a question. We will now pause for just one moment. Okay, so we will now take our first question from Dan Shaw from Morgan Stanley. The line is now open. Please go ahead.
Hi. Thanks for the presentation and for taking my questions. Just a couple from me. The first one, just on the market. If we look at flat production in Russia, of course, it is yourselves, NLMK, MMK, pretty dominant overall. But if we look at the capacity outside of those big three, what is your view on whether or not there is an ability for increased flat production outside of those major players? Is that something that you think can come back and help to, at least domestically, provide a little bit more flat product into the market? That is the first question.
Well, first of all, I am not aware of any significant flat capacities available on the Russian market. Yes, you mentioned three players who represent most of the volumes, and they all run in full capacity, almost like with some idling schedule or some different type of their mills. From that, in terms of other players, as far as I know as well, those who has part of their capacities in flats, I am not sure it was not using them earlier. From that perspective, supply level, in Russia is relatively stable. Of course, we see from time to time different announcements about new plants, but that is something of a longer term taking into account potential lead time for investments.
Thank you. The second one, just a quick clarification on working capital, given that pricing continued to move in a positive direction. Is it fair for us to assume that we will see a further buildup in the second quarter?
Well, in working capital, there are two components. I would say the growth in absolute size and growth in value. Value will vary, in very simple way will follow the trend of the market. The more price we see on the market, the higher price we see, the more accounts receivable and inventory we obviously will have in terms of value. In terms of tons, we do not expect to grow it. We try to utilize our volumes and sell them to the market as much as possible and not really, how to say, accumulate anything because we don't know what development of the current situation will be. So from that perspective, in terms of tons on our inventory, we expect situation to remain pretty stable.
Okay. Very clear. Thank you. Just the last one. Is there anything you can say around some of the headlines we've seen on possibility of some sort of additional tax mechanism to be potentially applied to the sector? We've seen a few news stories around there. Have you had any discussions with the government or is there anything that you can comment at all on that?
Well, at the moment, we do not have anything specific on the table for discussion. We know that practices of implementation of such measures could be done, I would say, in different ways, like mineral extraction tax was implemented pretty quick, the growth which happened last August. So from that perspective, I cannot comment more than that. Nothing is here, but we of course, don't know what will happen in the future.
Understood. All right. Thank you very much. Cheers.
We will now take our next question from Nina Dergunova from Goldman Sachs. Please go ahead.
Good day, Alexey and team. First, I wanted to congratulate you on pioneering the earlier reports in this quarter. In the recent quarters, you've been steadily shortening periods from end of the quarter to financial reporting. I think it's a great initiative, and we hope all companies in our sector will follow. I have two questions for today. First, you already started talking about this answering Dan's question about net working capital, but can you expand your answer to other items for the second quarter and speak about early view on second quarter CapEx? Will you see acceleration from first quarter, sales volumes, any notable differences in the domestic versus export mix, for example? That's my first question. The second question is more broad. If spot macro sustains in next quarters, looks like Severstal will be generating record -high free cash flow this year.
Do you think this extra cash might lead the company to make any changes in their capital allocation priorities? If you could elaborate on this a little bit, it would be helpful. Thank you.
Okay. Thank you. Thank you for your note on timing and also for your questions. In terms of guidance for Q2, we do not provide any precise guidance. But again, we're running our business at full capacity. From that perspective, we do not expect any major change in terms of volumes. As I said, we expect improvement on mix once we are ramping up our new pickling line. We expect higher share of pig iron, also as a result of our blast furnace No. 3 and coke battery No. 11 ramp -up. In terms of inventory, again, it will be pure function of prices because that's what we see back in accounts receivable and in inventory back. I do not, again, expect any big change of the working capital elements in terms of tons.
Obviously, again, we do not make any changes to our CapEx program, especially for the quarter. It will go on normal schedule, taking into account the guidance which we provide for this year. As a result, obviously, taking into account that we still have a price rally, we can expect that we will see further improvement of results. In terms of your second question, the short answer is no. We do not anticipate to do any changes in our capital allocation as a result of high free cash flow. All investment programs we are doing, we are implementing as planned. Nothing is on hold from that perspective, so we will continue. That basically is all.
Good. Thank you very much. That is very clear. Have a great day.
Thank you.
We will now take our next question from Dmitry Smolin from SKB- Bank. Please go ahead.
Good afternoon. Alexey, thank you for your presentation. Just one quick question on another Russian steel producer, EVRAZ. Today, or it was yesterday, announced about potential spin-off, about preparation of spin-off of its coal business in Russia. The essence of Raspadskaya will be spin-off from EVRAZ. My question is, do you have any potential plans regarding the merger of your coal assets, I mean, Vorkutaugol? What are the rationales for Russian steel producer to separate coking coal assets from the company, in your view? Thank you very much.
Well, of course, the rationale of separation of EVRAZ would be better asked from EVRAZ. Definitely what we observe on the market is the continuous pressure from ESG part, which coal industry obviously challenged from that perspective. In terms of us, we do not make any specific plans on Vorkuta as a result of that change. It remains our core asset in terms of coking coal integration and a significant contributor to our vertical model. Of course, we will see how market will take EVRAZ experience, what it will have in terms of results once it will be implemented. For us, it's interesting to see and analyze the results after that will be done. We do not at the moment plan any decision on our side.
Thank you. Just one more question on domestic premium. What is the current domestic premium or discount in terms of HRC and other flat products? What premium or discount do you expect as average for the rest of the year? Thank you very much.
Well, thank you. Very good question. You see situation at the moment is very simple. Price rally on world market is so strong that price premium in Russia is definitely negative. We do not see the opportunity, unfortunately, to change that until we will see the current trends going off. The question is basically when it will change? The short answer, I don't know. But once we will have stabilization of the world prices, I think that will be the moment when Russia will catch up. If we will see decline as we are in volatile industry as we were always mentioning, of course, that will be the moment when it will be a quick adjustment. But it will not be a question for Russian prices to rise to achieve this premium.
It will rather be maybe a bit more stable during the period when global prices will go down. That is my assumption. I do not know when it will happen. But in current environment, Russian premium does not exist. That is first thing. Second, of course, what partly help is a different lead time. By the time when we have orders from the local market and export, the situation is more or less adjusted, so the price gap is not that big and sometimes even positive, but that is purely a lead time and timing element.
Thank you, Alexey.
We will now take our next question from Ivan Salkovskiy from VTB Capital. Please go ahead.
Oh, yeah. Hello, gentlemen. Thank you for the presentation and for the opportunity to ask a question. Most of our questions have been already replied, so just one from our side. What was your realized price for export HRC in April and maybe in some May contracts? Was there any spread with export benchmarks or it was just in line with, for example, HRC for Black Sea? Thank you.
Well, first of all, you probably speak about order taking or about actual sales. That is a different element and actual sales are sales of the past orders, which are not reflecting the prices of today. So they are a few months behind in terms of difference in the lead time. But I presumably think that you are speaking about order taking. So from that perspective—
Exactly.
—we more or less repeating the trend, which is on the market both for April and May. At the moment, we sell, I think, more or less for export, I think, in June production. And prices, I would say, slightly better than FOB Black Sea, for a simple reason that our market is more like a north port. So FOB Saint Petersburg and deliveries to Northern Europe and relative prices are slightly higher in that market than FOB Black Sea. But the trend is the same.
Thank you very much. Very clear.
We will now take our next question from Yuriy Vlasov from Sova Capital. Please go ahead.
Thank you so much. Two questions from me. One is, could you give us an indication how deep are your books covered, in terms of orders on the steel side? The second question is a bit more theoretical. Out of your steel portfolio, what is the percentage that you can sell both on the domestic market and on export market? I assume hot-rolled coil would be one of them, but can you expand into cold-rolled coil, then hot-dip galvanized? What is the average percentage of your portfolio that you can swing between domestic and export market? Thank you.
Yeah. Okay. Well, let me start with the second one. Obviously, we do not have limitation in the shift between export and local market in general. Of course, the easiest element to shift are slabs. We have few of them. HRC would definitely be the biggest category. Almost no opportunities on cold-rolled coil because import duties for cold-rolled coil in Europe are prohibited. Galvanized products is okay. So I think I would say, from that perspective, galvanized products and HRC and slabs would be the main elements where we could shift volumes in case they are more attractive to export. So that is—
Okay.
—Yeah. In terms of size, there are physically no limitations, but what we sell right now, I would say, is more or less an optimum between markets which we want to keep in Russia and our export opportunities. Your first question was about? Can you repeat?
How do your order books look at the moment?
Yes, order book. Yes, order book. Look, in this situation, we try to make it as short as possible. We do not want to sell that much in advance. We did it initially, and we understand that we were wrong because we thought market will start adjusting, and it is actually going even higher. So from that perspective, we want to go with the market. That practically means that in terms of export, we are selling more or less June production at the moment, and for local markets, May production. So that is how it works. It is a month's difference in lead time.
Okay. Many thanks.
We will now take our next question from Alexey [audio distortion] from Sberbank of Russia. Please go ahead.
Yes, good afternoon. Thank you for your presentation. How are you going with the Yakovlevskiy ramp- up? Could you remind what is production guidance for this year?
We are going according to our plans. Volumes of Q1 is slightly below 600 kilotons, and our plans, we want to exceed 3 million tons. It goes differently in different elements. There are some interruptions and issues and challenges which we need to basically deal with. But at the moment, in our forecast, we are still confident that we will deliver the plan of ramp-up, which is around 3+ million tons , I would say, slightly above 3 million tons of production for this year.
Thank you. The second question, global coking coal prices have briefly touched $160 per ton in Q1 and have recently fell back to $110 FOB Australia. What is the situation on the domestic market currently? Should we expect Q2 prices to be below Q1?
The short answer is no. I think iron ore keeps doing very well. In terms of coking coal, it is now two coking coal markets. As you see, there is FOB Australia and CFR China, and those are two different prices as Australia cannot sell to China for political reasons. That creates, of course, a growth for coking coal on all other markets than China, including Russia. From that perspective, coking coal price is also doing quite well. We do not expect that drop to happen in Q2.
Yes. Thank you. And final question. Do you have any update on this anti-dumping case with the European Commission?
No. That goes according to plan. We are providing data. We are preparing for verification visits. So it is all already, I would say, a procedure we understand very well. We are still confident that we do everything right, so let us see what will be the result. Of course, in this situation and lead times and pricing in Europe, it is very strange, we believe, to provide that kind of investigation, to come with such kind of investigation. But what is happening is happening, and for us, it is important just to do properly our part of the exercise and see what will be the results.
Thank you. I do not have any further questions. Congratulations with the good results.
Thank you.
Just a reminder, if you would like to ask a question, please press star one. We will now take our next question from Andrew Jones from UBS. Please go ahead.
Hi, gents. I just wanted to ask a couple of questions. First of all, on the mining volumes, aside from Yakovlevskiy, given they are quite low in terms of coking coal and the other mines, that is shipment data. Are we expecting those shipments to rebound in the second quarter? Is it purely seasonality or weather-related issues with shipping the product out? Is there any potential change in your guidance in terms of the volumes this year at those other assets? That is my first question. Just secondly, on steel volumes. We have noticed with a couple of the other producers that shipments were relatively light in 1Q. Are you seeing major demand erosion as a result of these high price levels from some of your customers? I just wonder, you say you are struggling to push through, obviously, the higher prices in the domestic market.
Can you try and quantify or give us some idea for whether or not there is major customer resistance in various different end market sectors as a result of these high prices?
Mm-hmm. Okay. Thank you for the question. First of all, in mining, if we speak mining volume specifically for Vorkutaugol, it also has the influence of specific change of the longwalls schedule. One of the longwalls did better, I would say, end of last year, and it was finished earlier. So it has a gap now compared to the previous quarter in terms of run-of-mine, but it will catch up once the new walls will be introduced. So from that perspective, we do not expect at the moment changes for our annual outlook for the volumes from Vorkutaugol. On Karelsky Okatysh on iron ore basically, specifically, I already mentioned that on production level, we do not have any reduction. So all that is purely in supply chain, and that will be fixed in the coming quarters.
In terms of steel demand and its influence by pricing, it is a very good question. The short answer is we do not expect that it will change the outlook. I am speaking specifically, of course, for Russia, as Russia also is recovering from the low levels of previous years. So we still expect that to deliver around 3% growth of steel, especially in the. A bit less in construction and a bit higher in segments like oil and gas and automotive and machinery. But in terms of specifically first quarter, I think we saw situation of markets being lower than previous quarter than Q1 of last year. I think that with such price rally, as long as it was okay from the stock perspective, a lot of customers took position just to wait and see how it will develop.
I don't think they could live with that long enough so they will resume their purchases. But in terms of, again, if we speak for the eventual steel users like construction, like other steel clients who consume steel, their share of steel is not that high and therefore. From that perspective, all the current noise is more, I think, a speculation rather than the real driver of their price growth. Like for example, it happens in real estate, I believe it's more like a growing demand and mortgages growth are by far more influencing factor than growth of specifically steel, which in construction share is relatively low.
To summarize, yes, we saw markets being lower than previous year in first quarter, but I think it's more like the temporary situation and for the year, we expect that to recover despite of the fact that we're facing this price increase on the market.
Okay. Yeah. That's clear. I wonder if, given what you said about steel not being a huge percentage of costs for, say, construction users, whether further price increases could be possible or whether the threat of higher taxation is maybe something that would hold you back from raising those prices. I mean, is there an element of that in your pricing policy?
We go with the market, and from that perspective, we will always have the market price. I think potential regulation will be a bad thing as any regulation in the economy, which I think at the moment is a market economy. From that perspective, I hope that we will not move in that kind of matters. But other than that, yeah, obviously we see flows of steel. We see that eventually that happens not only with steel but with other commodities as well. If those prices are changing, then the local price is still adjusting. You cannot create a major gap between that.
Mm-hmm. Just actually one more just on anti-dumping and so forth. Despite the fact that you are obviously much lower cost compared to, say, European producers, they still seem to be able to argue that you are dumping. The way they justify it is by saying that you sell at a different price in export markets compared to at home because of, and the domestic premium is effectively subsidizing your output. If there is now a large domestic discount and the market in Europe is obviously tight and short of material, do you see any scope for maybe appealing against some of those anti-dumping duties more broadly? Not just on the HRC, but on CRC and other products given how tight the European market is now. Have you investigated that or thought about appeals?
No, we did not investigate it specifically, for example, on cold-rolled coils. We tried a few times, but unfortunately did not succeed. Yes, I agree that eventually that has negative consequences, both in terms of volumes available, lead times, and prices eventually for the steel consumers in Europe. I am also struggling to understand what is the reason, basically, to pressure supply in this environment. Well, I think we will see. The question is what data will be used if they use retrospective data or current data. I think it can make a difference, but eventually, even previously, we never specifically discounted prices to Europe versus our local alternative. Yes, there is difference on logistics, which is obvious, in supply chain, which is obvious, but that is clear and that could be very clearly verified.
As I said, we are quite confident and if we will not have any politics interfering to the economics, we believe that it will be good results of investigation, which should not confirm that we are doing something inappropriate.
Understood. Thank you.
It appears there are no further questions at this time. Mr. Kulichenko, I will pass the call back over to you for any additional or closing remarks.
Thank you very much, everybody, for your questions, for your time. Again, we are in interesting period of development of the industry. We will see how it will continue. We are quite confident in our strategy, so we continue to work according to our plans, both in our operational developments and in our capital developments. So we will show you results of that in the quarter from now. Thank you. With that, I want to conclude the call. Bye.
This concludes today's call. Thank you for your participation. You may now disconnect.