NLMK GROUP Q3 2017 IFRS FINANCIAL RESULTS

NLMK GROUP Q3 2017 IFRS FINANCIAL RESULTS1

NLMK Group (MICEX and LSE: NLMK) is pleased to announce a 64% sequential growth in free cash

flow in Q3 2017, to $533 m, and a 7% growth in EBITDA to $648 m.

Key highlights

Group revenue in Q3 totalled $2.55 bn (flat qoq), driven by higher sales (+1% qoq) and 100% steelmaking capacity utilization rates (+2 p.p. qoq).

• Q3 EBITDA growth to $648 m (+7% qoq) was driven by the widening of spreads between steel product and raw material prices. 9M EBITDA increased by 31% yoy to $1,869 m, supported by Strategy 2017 projects, and growth of steel product prices. 

• Q3 free cash flow grew by 64% qoq to $533 m, driven by growth of financials, decrease in working capital, and conservative capex. 9M free cash flow grew by 18% yoy to $1,066 m.

• Net debt/EBITDA decreased to 0.3х, driven by higher profitability and lower net debt.

1 Consolidated financial results are prepared under IFRS. Reporting periods of the Company are 3M, 6M, 9M and 12M. Quarterly figures are derived by computational method, including segmental results. Figures for comparable periods can differ from figures published earlier as a result of rounding off to whole numbers.

2 EBITDA is defined as operating profit before equity share in net losses of associates and other companies accounted for using the equity method, impairment and write-off of assets, adjusted to depreciation and amortization. For detailed information and calculations for this indicator please refer to the Appendix.

3. Profit for the period attributable to NLMK shareholders.

4 Free cash flow is determined as net cash from operations plus interest received net of interest paid and capital investment. Free cash flow calculations are presented in the Appendix.

5 Net debt is calculated as the sum of LT and ST credits and loans less cash and cash equivalents, as well as ST financial investments at period end. Net debt / EBITDA is represented by net debt as at the end of the period and EBITDA is presented as Last 12 months EBITDA. Net debt calculations are presented in the Appendix.

NLMK GROUP Q3 2017 IFRS CONSOLIDATED FINANCIAL RESULTS

Key highlights

Comment from NLMK Group acting CFO Sergey Karataev:

"Q3 sales in our home markets hit an all-time high of 2.88 m t, ensuring high steelmaking capacity utilization rates.

"The Group posted solid financials. The widening of spreads between prices for steel products and raw materials, Strategy 2017 projects, including operational efficiency programmes, were the key drivers for EBITDA growth to $648 m (+7% qoq). EBITDA margin was 25% (+1 p.p. qoq).

"Q3 Strategy 2017 project gains were $105 m vs. $106 m in the previous quarter. 9M structural effect from Strategy 2017 execution was $269 m, or 103% of the 2017 target, including $84 m from operational efficiency programmes.

"Execution of investment projects planned as part of Strategy 2017 continues. Expansion of Stoilensky's beneficiation capacities, construction of a briquetting plant at NLMK Lipetsk, and a number of other projects will have a positive impact on the 2018 financials.

"Growth of operating cash flow, conservative capex, and efficient working capital management have enabled a 64% qoq increase in free cash flow to an all-time high of $533 m.

"In Q3, NLMK successfully bought back Eurobonds due in 2018 and 2019 for a total of $317 m with a coupon rate of 4.45% and 4.95%, respectively, using proceeds from a new 7-year Eurobond placement for a total of $500 m with a coupon rate of 4.0%.

"Net debt/EBITDA ratio decreased to 0.3х."

TELECONFERENCE

NLMK is pleased to invite the investment community to a conference call with the Company management:

Friday, 27 October 2017

· 10:00 a.m. - USA (New York)

· 3:00 p.m. - Great Britain (London)

· 5:00 p.m. - Russia (Moscow)

To join the conference call, participants are invited to dial:

US number:

+1 719-325-2202 (local access) // 800-239-9838 (toll free)

UK number:

 +44 (0)330 336 9105 (local access) // 0800 358 6377 (toll free)

Russian number:

+7 495 213 1767 (local access) // 8 800 500 9283 (toll free)

Conference code: 7076075

To connect to the webcast, please follow the link: http://www.audio-webcast.com/cgi-bin/visitors.ssp?fn=visitor&id=4987.

* We recommend participants start dialing in 5-10 minutes in advance to avoid waiting.

We recommend participants download the presentation in advance from NLMK's website: www.nlmk.com 

MANAGEMENT COMMENTS

Q3 2017 market overview

· Global steel production was up by +1% qoq to 431 m t.

· Chinese steel exports were down by 8% qoq and by 34% yoy driven by the recovering internal demand, trade restrictions, and cuts in steelmaking capacities.

· Demand in the US remained high due to stable demand from the construction, automotive and oil & gas sectors.

· Europe saw a seasonal weakening in demand in Q3; growth from the beginning of the year totaled about 2.5%.

· In Russia, consumption continued to recover qoq and yoy, supported by strong demand from the construction and pipe & tube sectors, as well as machine-building. Steel consumption grew by 6% from the beginning of the year compared to the same period in 2016.

 Q3 2017 prices

· Raw material prices: average global coal prices increased by 7% qoq (+37% yoy); iron ore prices increased by 13% qoq (+22% yoy).

· Market prices* for steel products: +1.5% qoq (+2-8% yoy) growth in the US; +5-8% qoq(+24-28% yoy) growth in the EU.

· Prices for steel products in the Russian market were lower by 5-10% qoq (+0-20% yoy). Prices recovered towards the end of Q3, driven by growing demand.

· Export prices (FOB Black Sea) grew by 10-20% qoq (+39-43% yoy), due to lower Chinese export.

* Market prices reflect the level of prices for a given calendar period and differ from the average sales prices of the Company and its segments due to the time lag of the production & sales cycle.

Output and sales mix

Q3 2017 highlights:

· Growth of steel output (with NBH): +6% qoq and +8% yoy, due to increased output at NLMK Lipetsk driven by stronger demand in the Russian and international markets. Group steelmaking capacity utilization rate grew by 2 p.p. to 100%**.

· Growth of sales (w/o NBH): +1% qoq (flat yoy), driven by the increase in sales in Russia (+21% qoq), supported by the seasonal uptick in demand in the construction sector, and growth of semis export.

· Sales breakdown: Sales of semis grew to 1.46 m t (+16% qoq, +1% yoy), due to the increase in pig iron export to 0.17 m t (x3 qoq, +67% yoy), driven by higher product margins, and growth of slab sales to pipe and tube manufacturers in Russia (+17% qoq and -1% yoy).

· Finished product sales decreased by 5% qoq to 2.78 m t (flat yoy), due to a high sales base in Q2, build-up of HRC stock for further processing ahead of Hot-rolling mill overhaul in Q4, and the delay in the recognition of a part of NLMK Lipetsk shipments to the next quarter. The share of finished products in total sales decreased to 66% (-4 p.p. qoq, flat yoy).  

· Slab deliveries to subsidiaries and affiliates (NBH) totalled 56% of total slab sales by NLMK Lipetsk; the 25% drop qoq (-6% yoy) to 0.96 m t was associated with inventory normalization at these facilities.

** Without production capacities that are undergoing planned maintenance

9M 2017 highlights:

· Steel output (with NBH) grew by 3% yoy to 12.8 m t, with capacities running at 98%.

· Sales to external customers decreased by 1% to 12. 1 m t, due to the increase in slab deliveries to the Group's companies and NBH by 12% yoy to 3.4 m t.

· Finished steel sales increased by 3% yoy to 8.16 m t, driven by the growth in HRC and HDG sales to the Russian and export markets.

Sales markets (with NBH)

· Group sales to its home markets in Q3 hit an all-time high at 2.88 m t (+8% qoq, +7% yoy), supported by the surge in sales in Russia (+21% qoq) and in the US (+2% qoq), with the share of 'home' markets growing to 67% (+3 p.p. qoq and +3 p.p. yoy). Sales to export markets decreased by 5% qoq to 1.42 m t (-5% yoy).

Delivery of Strategy 2017

· In Q3 2017, total impact on EBITDA from the execution of Strategy 2017 projects was $105 m; 9M 2017 impact was $269 m, or 103% of the 2017 annual target.

· Gains from investment projects in Q3 totalled $59 m, including $45 m from Stoilensky projects: Pelletizer and High Pressure Grinding Rolls technology at beneficiation sections 1&4. Gains from operational efficiency projects in Q3 totalled $46 m.

Debt management

· Decrease in net debt by 29% qoq to $743 m, driven by the growth of free cash flow by 64% qoq to $533. Net/EBITDA decreased to 0.3х.

· Total debt grew by 6% qoq (+2% yoy) to $2,555 m. In September, NLMK Group successfully bought back Eurobonds (7-year notes with a coupon rate of 4.95% for a total of $211 due in 2019 and 5-year notes with a coupon rate of 4.45% for a total of $396 due in 2018) for a total of $317 m, using proceeds from a new 7-year Eurobond placement for a total of $500 m with a coupon rate of 4.0%, and maturity in September 2024. As a result of these transactions, the Group's average debt maturity increased from 3.4 to 4.3 years, with the weighted average loan portfolio cost decreasing to 3.9%.

· Financial guarantees for NBH liabilities decreased to $293 m (-4% qoq) due to lower drawdown from the Company's revolving line.

· Growth of financial costs by 63% qoq to $31 m was associated with commission expenses for the early Eurobond repayment in Q3 2017.

Investment

· NLMK Group Q3 2017 investment grew by 9% to $120 m, due to a part of the payments being made for the installation of the pulverized coal injection system (PCI), and the growth in equipment maintenance capex at NLMK Lipetsk and Stoilensky.

Dividends

· At the Extraordinary General Shareholder Meeting (EGM) held on September 29, NLMK shareholders approved payment of Q2 2017 dividends of RUB 3.20 per share. (See Press release)

· In Q3 2017, cash outflow for dividend payments totalled $221 m.

NLMK GROUP KEY FINANCIALS

Revenue

Q3 2017 highlights

· Revenue in Q3 2017 was flat qoq at $2.55 bn (+15% yoy), driven by a 1% qoq increase in sales volumes. Weighted average sales prices went down, as the share of semis in the sales mix increased(+16% qoq, +1% yoy). The 15% yoy growth of revenue was supported by the 15% growth of average steel product prices, and the increase in sales volumes.

· Taking into account sales by associated companies (NBH), the share of Group's revenue from sales to home markets grew by 4 p.p. qoq to 72%. Russian market share in the Group's revenue increased by6 p.p. qoq, driven by the seasonal uptick in demand.

9M 2017 highlights

· 9M 2017 revenue increased by 28% yoy to $7.25 bn, driven by the 31% yoy growth in steel product prices. 

· Share of revenue from finished product sales climbed to 69%, supported by the 3% yoy increase in flat steel and HVA deliveries, coupled with a decrease in the share of semis sales.

· Share of revenue from sales to home markets grew to 70% (+1 p.p. yoy), the increase accounted for by the Russian (+21% yoy) and the US (+39% yoy) markets.

Operating profit

Q3 2017 highlights

· Operating profit* grew by 13% qoq to $501 m (-10% yoy), driven by the widening of spreads for steel products and raw materials, and Strategy 2017 gains.

· Growth of commercial expenses by 1% qoq (+2% yoy) to $197 m was associated with the increase in sales (+1% qoq and yoy).

· Decrease in G&A expenses by 11% qoq to $80 m was associated with a high Q2 base due to 2016 bonus payments, and the weakening of the RUB FX rate qoq.

9M 2017 highlights

· Operating profit* increased by 30% yoy, due to gains from Strategy 2017 operational efficiency programmes and investment projects, and the widening of price spreads.

· Growth of commercial expenses by 10% yoy to $577 m, driven by the increase in the Group's steel product export, and the strengthening of the RUB FX rate by 16% yoy.

· The 4% yoy growth of G&A expenses to $244 m was associated with 2016 personnel payments, and the strengthening of the RUB FX rate yoy.

* Operating profit before equity share in net losses of associates and other companies accounted for using the equity method of accounting, impairment and write-off of assets.

Net profit*

· Growth of net profit in Q3 by 4% qoq (-8% yoy) to $357 m was driven by growth of profit from operations that enabled offsetting the increase of financial expenses related to early repayment of debt.

· Net profit in 9M 2017 gained 63% yoy due to the growth in profit from operations.

* Profit for the period, attributable to NLMK shareholders

Free cash flow

Q3 2017 highlights

· Free cash flow hit an all-time high of $533 m (+64% qoq and +12% yoy) due to the growth of cash inflow from operations.

· Growth of operating cash flow by 47% qoq (+12% yoy) to $663 m, driven by the increase in sales margins, and efficient working capital management.

· Release of cash funds due to decrease in working capital totalled $109 m (vs. an outflow of $66 m in Q2 2017):

o improved accounts receivable turnover and growth of advance payments received against the backdrop of an increased share of flat steel sales in the Russian market;

o decrease in recoverable VAT budget debt;

· These factors behind the decrease in working capital were partially offset by the growth of semis and rolled steel inventories at the Group's facilities in the US to support the growth of sales, and the seasonal growth in scrap inventories at the Russian production sites.

·

NLMK Russia Flat Products

Q3 2017 highlights:

· Sales grew by 3% qoq to 3.42 m t (+4% yoy), driven by strong demand from the construction, machine-building, and white goods sectors; higher pig iron exports, and slab supplies to tube and pipe manufacturers in the domestic market. Q3 sales were affected by the build-up of HRC stock for further processing ahead of the Hot-rolling mill overhaul in Q4, and the delay in the recognition of a part of NLMK Lipetsk sales to the next quarter. The share of finished steel in total sales fell to 45%(-3 p.p. qoq, -2 p.p. yoy).

· Total revenue of the segment decreased by 1% qoq (+19% yoy) to $1.93 bn, due to the increase in the share of semis, resulting in lower average sales prices. Revenue growth yoy was driven by the 30%-40% growth of average semis prices, and 7%-12% growth of average rolled product prices.

· EBITDA climbed by 32% qoq to $453 m, due to the widening of spreads between prices for steel and main raw materials.

9M 2017 highlights:

· Sales in 9M 2017 remained flat yoy at 9.8 m t.

· Total revenue climbed by 35% yoy, driven by the recovery in steel product prices compared to the relatively low level at the beginning of 2016.

· EBITDA increased by 15% yoy to $1,167 m, driven by the 33% yoy growth of finished product prices, and gains from Strategy 2017 projects.

NLMK Russia Long Products 

Q3 2017 highlights:

· Sales in Q3 2017 dropped by 21% qoq (-15% yoy) to 0.74 m t, due to the effect of high base in Q2(Q2 sales hit an all-time high of 0.94 m t), and less intensive purchasing by traders that were destocking in Q3 ahead of the construction season wind-down.

· Total revenue in Q3 2017 was $460 m (-9% qoq and +12% yoy). The qoq decrease was associated with the drop in sales (-21%), offset by growth of export prices for commercial billets, and growth of rebar prices in the Russian market.

· EBITDA in Q3 2017 posted a 5-fold growth to $68 m, driven by the widening of spreads, affected by the growth of long product prices.

9M 2017 highlights:

· Sales of long products grew by 1% yoy to 2.1 m t, driven by higher export, supported by a wider sales geography.

· Revenue in 9M 2017 increased by 33% yoy to $1,231 m, due to the 32% yoy growth of long product sales prices.

· Revenue from intersegmental operations increased by 46% yoy, due to the increase in the volume and price of scrap supplied to NLMK Lipetsk.

· EBITDA grew to $100 m, (+2% yoy), due to the widening of price spreads for long products and raw materials.

Mining and Processing of Raw Materials

Q3 2017 highlights:

· Sales of iron ore in Q3 2017 totalled 4.39 m t (flat qoq and -5% yoy), including 1.68 m t of pellets(+6% qoq).

· Revenue in Q3 2017 totalled $209 m (-16% qoq and +23% yoy), against the backdrop of the decrease in average sales prices for iron ore concentrate and pellets by 16% qoq. Growth compared to Q3 2016 was associated with the growth of iron ore prices (+12%), the growth of sales (+10%), and the change in the sales mix related to the production and sale of pellets.

· EBITDA decreased by 24% qoq (+48% yoy) to $133 m due to the decrease in average iron ore prices.

9M 2017 highlights:

· Sales of iron ore remained flat yoy at 12.9 m t. There was a shift in the sales mix towards pellets.

· Revenue grew to $696 m (+65% yoy).

· EBITDA doubled yoy to $476 m.

NLMK USA

Q3 2017 highlights:

· Sales grew by 2% qoq to 0,57 m t (+28% yoy), driven by strong demand, including from OCTG producers.

· Revenue decreased by 3% qoq (+29% yoy) to $424 m, due to the decrease in average sales prices by an average 5% that was partially offset by the 2% qoq increase in sales. Growth of revenue compared to Q3 2016 was driven by the increase in sales prices for HVA products, with a 3 p.p. increase in the share of HDG in the sales mix.

· EBITDA was $38 m (-39% qoq, -52% yoy), driven by outstripping growth of slab prices.

· EBITDA margin was 9% (-5 p.p. qoq, -15 p.p. yoy), due to the narrowing of price spreads qoq.

9M 2017 highlights:

· Sales grew by 18% yoy to 1.7 m t due to the growth in demand for HRC and HDG in the US market. 

· Revenue grew by +43% yoy to $1,259 m, supported by the 21%-26% growth in steel product prices, and the 18% growth of sales.

· EBITDA stood at $168 m (+18% yoy), driven by the 18% increase in sales.

· EBITDA margin was down to 13%.

NLMK DanSteel

Q3 2017 highlights:

· Sales of thick plate decreased by 5% qoq (+10% yoy), due to the seasonal weakening in demand in the EU market.

· Revenue down by 6% qoq to $95 m (+36% yoy), due to the 5% decrease in sales. Growth of revenue compared to Q3 2016 was driven by the 10% growth of thick plate sales to the EU market, and the 23% growth of average sales prices.

· EBITDA was $3 m due to the widening of the thick plate/slab price spread.

9M 2017 highlights:

· Sales were down by 2% yoy to 0.35 m t, due to the decrease in accepted orders as a result of maintenance activities at the end of Q1 2017.

· Revenue grew by 28% yoy to $301 m, driven by the increase in thick plate prices in key sales markets.

· EBITDA grew to $8 m, supported by the widening of price spreads.

· EBITDA margin grew to 3%.

Associated company performance (NBH)

Q3 2017 highlights:

· NBH sales decreased by 20% to 0.45 m t (-8% yoy), due to the seasonal weakening in demand, and growth of competition with imports from Turkey, Indian, and S. Korea.

· Revenue decreased by 18% qoq to $338 m (+18% yoy), due to the decrease in sales.

· NBH EBITDA was -$21 m, due to the narrowing of spreads and the 20% drop in sales.

9M 2017 highlights:

· Sales in 9M 2017 decreased by 2% yoy to 1.60 m t.

· Revenue was up by 27% yoy to $1,146 m, driven by the growth of sales prices.

· EBITDA increased to $2 m vs. -$3 m the previous year, supported by higher prices and an improved sales mix.

Appendix #1. Operating and financial results

 (1) Sales market

(2) NLMK Russia Flat

(3) NLMK Russia Long

(4) Mining Segment

(5) NLMK USA

(6) NLMK DanSteel

(7) Sales by product

* w/o NBH

(8) Sales by region

(9) Revenue by region

(10) EBITDA*

* EBITDA used in NLMK's financial releases is calculated as operating profit before equity share in net losses of associates and other companies accounted for using the equity method of accounting, impairment and write-off of assets, adjusted to depreciation and amortization. EBITDA is not an indicator of operating profit, operating activity or liquidity under IFRS, and NLMK discloses it because equivalent indicators could be used by investors and analysts. That said, NLMK's EBITDA should not be viewed on a standalone basis, or in place of profit before tax, or cash flows from operations, as defined by IFRS, or as an indicator of operational efficiency, or as the sum of free cash funds that NLMK can invest into business development. NLMK's EBITDA margin and EBITDA might not be comparable to similar indicators disclosed by other companies as there are no commonly accepted rules for calculating them. For instance, NLMK's EBITDA is calculated similar to what is termed as 'Adjusted EBITDA' in other companies, as NLMK's EBITDA excludes other profit/loss items in addition to interest payments, income tax, depreciation and amortization.

** Operating profit before equity share in net losses of associates and other companies accounted for using the equity method of accounting, impairment and write-off of assets

(11) Free cash flow 

(12) Net debt 

(13) Production of main products* 

*W/o NBH

(14) Slab sales, including intra-group sales to NLMK Group companies

(15) Export shipments of steel products from Russian assets of the Group to third party consumers

(16) Segmental information 

 Balance figures presented as of 30.09.2017

 Balance figures presented as of 30.06.2017