Resilience through operational excellence

Transcription

1 Resilience through operational excellence 23 October 2015

2 Disclaimer These materials are confidential and have been prepared by PAO Severstal (Severstal) solely for your information and may not be reproduced, retransmitted or further distributed to any other person or published, in whole or in part, for any other purpose. These materials may contain projections and other forward-looking statements regarding future events or the future financial performance of Severstal. You can identify forward-looking statements by terms such as expect, believe, estimate, intend, will, could, may or might, or other similar expressions. Severstal cautions you that these statements are only predictions and that actual events or results may differ materially. Severstal will not update these statements to reflect events and circumstances occurring after the date hereof. Factors that could cause the actual results to differ materially from those contained in projections or forward-looking statements of Severstal may include, among others, general economic and competitive environment conditions in the markets in which Severstal operates, market change in the steel and mining industries, as well as many other risks affecting Severstal and its operations. These materials do not constitute or form part of any advertisement of securities, any offer or invitation to sell or issue or any solicitation of any offer to purchase or subscribe for, any securities of Severstal in any jurisdiction, nor shall they or any part of them nor the fact of their presentation, communication or distribution form the basis of, or be relied on in connection with, any contract or investment decision. No representation or warranty, express or implied, is given by Severstal, its affiliates or any of their respective advisers, officers, employees or agents, as to the accuracy of the information or opinions or for any loss howsoever arising, directly or indirectly, from any use of these materials or their contents.

3 Sakari Tamminen Senior Independent Director, Chairman of the Remuneration and Nomination Committee Vadim Larin Chief Executive Officer Alexey Kulichenko Chief Financial Officer Today s Presenting Team

4 Today s Agenda Presentations Sakari Tamminen, Senior Independent Director Vadim Larin, Chief Executive Officer Alexey Kulichenko, Chief Financial Officer Q&A Sandwich lunch

5 Introduction from Senior Independent Director Page 5 Sakari Tamminen Senior Independent Director, Chairman of the Remuneration and Nomination Committee

6 Highlights about our business Safety is our top priority One of the lowest cost producers in the world Ability to switch rapidly between domestic and export markets Unique vertically-integrated business Continued progress in cost cutting High share of HVA products Focus on customer care and quality Minimal debt and strong cashflow generation Enhanced sustainable dividend policy Page 6

7 Corporate Governance

8 Corporate Governance development Internal reorganization of the Company to enhance efficiency and transparency by reducing management layers, centralization of administrative functions and removing duplication New dividend policy demonstrates commitment to shareholder value Dedicated to leading international standards of corporate governance In line with the best practice to refresh Boards, Christopher Clark, Martin Angle, Rolf Stomberg retired after 9 years of service Board remains balanced with half being Independent Non-Executives Alexey Mordashov stepped down as CEO of Severstal to be Chairman Board aims for compliance with UK Corporate Governance Code Commitment to investor engagement including annual Capital Markets Day Page 8

9 Sustainability

10 Steel is 100% recyclable. Helping to promote the world s transition towards a closed loop economy Page 10

11 Ongoing transformation of assets for more environmentally friendly operations Total investment in environmental projects is almost 6.6 billion RUB ( , and 6M 2015). Selected key initiatives both completed and in progress: Steel operations: Cherepovets: Installation of filters at BOFs and upgrade of aspiration units in sinter production Reconstruction of the single filtration station Energy consumption reduction; growth in proprietary energy generation Neva-Metall: construction of new water treatment facilities Mining: Karelsky Okatysh: Construction of a new production waste recycling unit Air protection initiatives to cut sulphur dioxide emissions Vorkutaugol: Improved filtration of coal flotation tailings Recultivation of soil at several mines Olkon: Fast-track biological recultivation of the dust areas of the tailings Dust control measures at tailings facilities Page 11

12 Continuous improvement of the culture and involving leadership Embedded excellence through the Business System of Severstal Performance review process covers 100% of our employees 360 feedback and HR committees for all managers providing focus on values, leadership imperatives and promotion for the role models The Pulse of Severstal to monitor satisfaction and engagement (a 23% growth in the level of staff engagement vs. last year due to a comprehensive organizational improvement plan in place) Leadership development programs at all management levels: Mini MBA for senior managers with the leading Business School in Russia Achieve More Together training program for middle managers and Severstal Business Academy modules for follow-up School of Supervisors for production line managers to learn people and operational management A Total Rewards System to motivate employees to set new ambitious targets Page 12

13 Severstal s Young Resources program Range of initiatives focused on developing young people s interest in engineering, steel and mining Targeted at students in secondary schools, training colleges, technical schools and universities Severstal s Students & Graduates Program creates a continuous system of education, professional development and motivation for young people by offering: Specialized classes in secondary schools Funding of student scholarships Internships New employee support, training and mentoring program Fast career development (possibility to build a career as a technical EXPERT or as a Manager) Comfortable living conditions Participation in corporate social, volunteer and sports activities Page 13

14 Vadim Larin Chief Executive Officer

15 Sustaining high profitability in the low markets

16 The two key areas of discussion 1. What is the market situation that we are facing at the moment? 2. How are we going to retain the position of one of the most profitable steel companies globally in this environment? Page 16

17 Safety is our top priority Strategic objective to eliminate all fatal accidents LTIFR dynamics HSE is supervised by a dedicated Board Committee Steady movement to the low level of 1.0 and below Main focus on underground coal mining where 2015 LTIFR is M 2015 * LTIFR stands for Lost Time Injury Frequency Rate. **All figures exclude Severstal North America and PBS Coals. Page 17

18 Our domestic market is >10% down this year All segments are down excluding only large-diameter pipes (LDP). Russia s apparent steel use, mln tonnes Construction market consumption, y-o-y, % 0.1% F -4.5% -12.7% F Auto market consumption, y-o-y, % 5.8% LDP consumption, y-o-y, % 53% F -12.5% 2% 15% -25.0% F Source: Company data, Worldsteel. Page 18

19 Export market is at its historical lows Global capacity utilization fell to 68% in August 2015, which is not far from the 63% level of Q Prices are declining due to Chinese exports growth (114 mln tonnes YTD in Aug 2015 annualized ) Global steel capacity utilization rate, % HRC price dynamics, $US/t 77.9% 77.7% $ % 73.1% $515 $615 $611 $688 $582 $577 $540 $552 $531 $458 $ % $367 $349 $312 $281 FY2012 FY2013 FY2014 H Q Source: Worldsteel YTD HRC price, FOB China Source: SBB, Metal Expert. HRC price, FOB Black Sea Sep 2015 Page 19

20 Trade barriers as a modern response to the market weakness? Hot-Rolled Steel Duty already introduced USA, August 2015 Turkey, August 2015 India, September 2015 Duty being considered Canada Malaysia Cold-Rolled Steel EU USA Page 20

21 However our financial KPIs are strong We have managed to maintain and increase our profitability due to: RUB devaluation Operational enhancements KPI FY2013* FY2014* H Q EBITDA, $US mln $1,821 $2,211 $1,171 $524 EBITDA Margin, % 19.3% 26.7% 35.1% 31.5% Cash CAPEX, $US mln $1,084 $779 $214 $103 FCF, $US mln $381 $1,232 $638 $609 * These amounts reflect adjustments made in connection with the change in the unrealized gain in inventory calculation methodology. Page 21

22 We have one of the best cost positions in the industry globally With the integrated HRC cash cost of less than $200/t, we are in the very beginning of the global cost curve World HRC cost curve, $US/t $600 $500 $400 $300 $200 Severstal $100 $ HRC cumulative capacity, mmt Source: World Steel Dynamics. Page 22

23 Our domestic market share is growing Severstal s share of the domestic market (excluding LDP), % Severstal s share of the domestic market (excluding LDP and long products), % +2.1 ppts 19.0% +1.4 ppts 21.3% 16.9% 19.9% E E Source: Company data. Page 23

24 Vorkutaugol In 2015, achieved record production volumes and lowest costs No new large projects, just steady operational improvements Komsomolskaya life of mine extended till 2022 Raw coal output, thousand tonnes 9,260 8,364 8,136 8,164 7,726 7,593 6,926 6,684 3,518 3,425 3,701 3,726 4,250 3,781 3,001 3, E 2ZH coking coal grade GZHO coking coal grade K coking coal grade Vorkutaugol operational highlights E Raw coal output, mt Hard coking coal (2Zh grade) concentrate production, mt Hard coking coal (2Zh grade) concentrate total cash cost, $/t Page 24

25 Karelsky Okatysh and Olkon Karelsky Okatysh New products now a reality: High Fe content pellets (+2.3%) now account for 50% of the total output In 2015, launched new olivine pellets (1.2 mt) Extra hard pellets in the pipeline New volumes (+250 kt) and cost records are planned for 2016 Olkon Updated mine development program extends life of the mines for 12 more years till 2026 Two large projects completed: high-angle conveyer and a new dryer Focus on steady cost improvement as stripping ratio is going down Karelsky Okatysh E Pellet output, mt Stripping ratio, m3/t Pellet cash cost, $/t Olkon E Concentrate production, mt Stripping ratio, m3/t Concentrate cash cost, $/t Page 25

26 Cherepovets Steel Mill Hot Metal Record volumes and costs due to higher coke quality, higher pellets Fe content, operational improvements New projects being carefully considered: Blast Furnace #3 to replace BF#1 and BF#2 before their 1 st category overhaul Coke battery #11 to replace old batteries #9 and #10 1 st category overhaul of BF#5 in Cherepovets Steel Mill E Hot metal volume, kt 8,759 9,076 ~9,230 Hot metal cash cost, $/t $274 $209 ~$145 Page 26

27 Our key investments in quality and HVA Modernization of the 4-stand CR Mill Effects: CRC capacity to increase by 200 kt Cost reduction and quality improvement Approx. capex: RUB 3.2 bln Launch: Q Current capacity (increase): 2.8mnt per annum (+7%) New HDG/Coating lines Effects: HDG capacity to increase by 400 kt Coating capacity to increase by 200 kt Approx. capex: RUB 7.6 bln Launch: 2017 Current capacity (increase): 1.2mnt per annum (+33%) Color 600kt per annum (+33%) Import substitution potential: Russia s galvanized and color-coated steel imports totaled 1.6 mt in FY2014 Page 27

28 CAPEX will remain within the limits We reconfirm $700 mln as the upper limit for our annual CAPEX (both maintenance and development) going forward CAPEX highlights: Major part of our CAPEX is RUB-denominated Development projects in mining to be completed in 2016 No mining greenfields Prudent control over maintenance costs Page 28

29 Three focus areas 1. Current high profitability 2. CAPEX within limits 3. Customer care Page 29

30 Alexey Kulichenko Chief Financial Officer Page 30

31 Focus on shareholder returns and customer care

32 Our targets remain intact with a focus on increasing customer care Cost Position Margins FCF CAPEX Net Debt Middle-to-the-left position of all our assets on the cost curve Targeting cycle-average EBITDA margin of c.20% Stable positive free cash flow Mid-term target below $1.0bn a year Striving to keep Net debt/ebitda below 1.5x On integrated basis: Achieved Individual assets: Strong progress Delivered: 33.9% for 9M 15 Delivered: $1,247 mln for 9M 15 Delivered: FY2015 target CAPEX of 30 bln RUB Delivered: 0.4x as of Q3 15 Dividends Customer care Payout of not less than 50% of the net income* Lead in Russia in the level of service and quality Delivered A comprehensive system in place * Not less than 50% of the net profit for the reporting period provided that Net debt/ebitda is below 1.0x. Should the ratio increase to higher than 1.0x, Severstal would return to its previous dividend payout of 25% of net profit. Page 32

33 Delivering substantial and meaningful FCF Free cash flow* generation in FY2013 Free cash flow* generation in FY2014 Free cash flow* generation in 9M ,930 1, ,232 1, ,247 (779) (317) (1,084) OCF 2013 Capex 2013 Other adj. to FCF FCF 2013 OCF 2014 Capex 2014 Other adj. to FCF FCF 2014 OCF 9M 15 Capex 9M 15Other adj. to FCF FCF 9M 15 Highlights: Capex traditionally covered by operational cash flow FCF used for dividend payments and further deleveraging * Free cash flow is determined as an aggregate amount of the following lines: Net cash from operating activities continuing operations, CAPEX, proceeds from disposal of PPE, interest received and dividends received Page 33

34 Continued G&A reduction G&A expenses development at Severstal, $m Q1 13 Q2 13 Q3 13 Q4 13 Q1 14 Q2 14 Q3 14 Q4 14 Q1 15 Q2 15 Q3 15 Highlights: FY2014 G&A of $419 mln FY2015E G&A of ~$300 mln Proactive cost-cutting and RUB weakening help G&A reduction Page 34

35 Working capital dynamics Net working capital dynamics and turnover** 18,5% 16,4% 60 14,2% ,2% 52 15,6% 57 12,5% 46 11,3% 41 9,8% 36 15,7% 14,0% ,1% 37 Q1 13 Q2 13 Q3 13 Q4 13 Q1 14 Q2 14 Q3 14 Q4 14 Q1 15 Q2 15 Q3 15 Working capital turnover, days NWC/Revenue, % * Excludes SNA in Q Q ** These amounts reflect adjustments made in connection with the change in the unrealized gain in inventory calculation methodology. Highlights: Despite market volatility, WC turnover in 2015 remains below the average levels Use of more complex tools with better payment terms to finance purchases (factoring, etc.) Proactive engagement with customers Conservative shipment policies prevent accumulation of bad receivables Page 35

36 Working capital optimization Inventories ($US mln) and days of inventory turnover* 64 days 1, days (204) (203) Unusual trader activity in anticipation of further RUB-denominated prices to catch up with the export parity in Q Seasonal uptick in apparent consumption on the domestic market in Q End of Q3 14 Q4 14 Q1 15 Q2 15 Q3 15 End of Q3 15 Receivables ($US mln) and days of receivables turnover 34 days days (171) 503 (229) End of Q3 14 Q4 14 Q1 15 Q2 15 Q3 15 End of Q3 15 Payables ($US mln) and days of payables turnover 33 days 33 days 516 (3) 366 (92) (8) (47) End of Q3 14 Q4 14 Q1 15 Q2 15 Q3 15 End of Q3 15 Revenue decline due to weaker pricing Prompt reallocation of sales volumes to the domestic market due to favorable location of our key producing units, which positively effected the recognition of sales Conservative shipment policies in order to prevent accumulation of bad receivables RUB FX rate volatility is causing pressure on RUB-denominated costs which inflate with the FX rate * These amounts reflect adjustments made in connection with the change in the unrealized gain in inventory calculation methodology. Page 36

37 Sensitivity to currency Element Its composition Revenues All-in cost (COGS and SG&A) CAPEX ~70% Rubles ~80% Rubles ~62% Rubles Share of RUB outflow and inflow broadly match Broadly positive effect of FX on EBITDA due to high share of export shipments with payment in USD and Euro Generally benefit from the RUB weakening as a result of the export net back parity effect on the local pricing Page 37

38 Cash at hand covers several years of debt maturities Debt Maturity Schedule*, $m Notes: Debt represents the principal amount of debt. Debt for 2015 represents amount of debt as at 30 September 2015 Figures exclude accrued interest and unamortized balance of transactional cost We had $1,675m of cash and cash equivalents as of the end of Q Debt structure is dominated by public debt (90% of the total) Page 38

39 Reduction in both gross and net debt 0.7x 0.6x 0.6x 0.4x 3,429 2,899 2,907 2,504 1,532 1,376 1, Q Q Q Q Total debt, $m Net debt, $m Net debt/ebitda, x Page 39

40 The dividend policy: further enhancing cash returns Severstal is committed to predictable dividends Since October 2014, Severstal is committed to paying of not less than 50% of the net profit for the reporting period provided that Net debt/ebitda is below 1.0x Should the ratio increase to higher than 1.0x, Severstal would return to its previous dividend payout of 25% of net profit Page 40

41 CEO concluding remarks

42 Severstal s investment profile Safety continues to be our top priority One of the lowest cost producers on the global cost curve Industry leading margins and strong free cash flow generation Proximity to export routes enables flexibility to shift volumes between markets Well-diversified product mix with a share of HVA in the portfolio of more than 50% Operational enhancements since 2010 with further potential gains Intense focus on customer care and quality should drive market share expansion Minimal debt and a dedicated dividend policy High level of corporate governance, sustainability and shareholder engagement Part of the MSCI Russia index Page 42

43 Q&A