Severstal · RUS:CHMF
Severstal — Investor Day (October 2016)
51 slides from Severstal's investor day presentation, Oct 28, 2016
Slide 1: Capital Markets Day
Capital Markets Day 1 November The London Stock Exchange, 10 Paternoster Square, London, EC4M 7LS 23 October 2015
Slide 2: Disclaimer
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 projec
Slide 3: Today's Presenting Team
Sakari Tamminen Vadim Larin Alexey Kulichenko Andrey Laptev Senior Independent Director, Chief Executive Chief Financial Head of Corporate Chairman of the Remuneration and Officer Officer Strategy Nomination Committee Today’s Presenting Team
Slide 4: Today's Agenda
Today’s Agenda 11.30 Presentations Sakari Tamminen, Senior Independent Director Andrey Laptev, Head of Corporate Strategy Vadim Larin, Chief Executive Officer Alexey Kulichenko, Chief Financial Officer Q&A 13.30 Buffet lunch
Slide 5: Introduction from Senior Independent Director
Introduction from Senior Independent Director Page 5 Sakari Tamminen Senior Independent Director, Chairman of the Remuneration and Nomination Committee
Slide 6: Corporate Governance, Sustainability and the Business System of Severstal
Photo: Rutgers Severtar, a JV of Severstal and Rutgers launched in Sep 2016 to process steelmaking by products into coal-tar. Corporate Governance, Sustainability and the Business System of Severstal
Slide 7: Corporate Governance development
Corporate Governance development Dedicated to leading International Standards of Corporate Governance Board aims for compliance with Russian and UK Corporate Governance Codes Board remains balanced with half being Independent Non-Executives In line with the best practice to refresh the Board
Slide 8: Continued improvement of environmental standards
Continued improvement of environmental standards Selected key areas of focus: Continued reduction of air emissions: installation of filters at BOFs and upgrade of aspiration units in sinter production; dust control measures at tailings facilities; Promote energy savings and CO2 emission reductio
Slide 9: Winning corporate culture embedded
Winning corporate culture embedded Strong corporate culture is a unique advantage with a long-lasting and growing value. It’s hard to replicate and helps to promote changes faster Safety at work is our top priority Incoming staff evaluation to ensure we employ people who share our values Visib
Slide 10: Andrey Laptev, Head of Corporate Strategy
Andrey Laptev Head of Corporate Strategy
Slide 11: Market update
Market update
Slide 12: Inflection point in 2016: steel capacities growth will be limited
Inflection point in 2016: steel capacities growth will be limited Global steel demand vs. capacities growth, 2008=100% Capacities Steel demand Global financial crisis Post-crisis Eurozone Chinese consumption Capacity closures Chinese stimulus package recovery recession starts declining intensified i
Slide 13: Steel demand is set to improve
Steel demand is set to improve Steel consumption dynamics in the main regions, y-o-y, % 5.3% 5.4% 5.7% 3.8% 3.0% 2.9% 0.9% 0.8% 1.4% 1.4% 0.2% 0.5% 0.5% -1.0% -1.2% -1.1% -2.0% -3.6% -3.0% -5.4% -8.3% -10.1% -14.4% 2015 2016 (f) 2017 (f) -16.9% Brazil Russia China USA World EU (28) Iran India Source
Slide 14: China: situation is gradually stabilizing
China: situation is gradually stabilizing Steel demand is stabilizing vs. end of 2015 Low steel inventories Chinese steel demand (annualized, mt) Steel inventories in Shanghai, mt 800 2.5 700 2 600 1.5 500 400 1 Dec-14 Dec-15 Apr-14 Apr-15 Apr-16 Feb-14 Oct-14 Feb-15 Oct-15 Feb-16 Oct-16 Jun-14 Aug-
Slide 15: Coking coal prices reached the highest level since 2011
Coking coal prices reached the highest level since 2011 driven by Chinese policies and supply disruptions Hard coking coal price, FOB Australia, $/t $300 China relaxed 276 days policy for 1/3 of producers $250 Extreme weather events both in China and Australia along with technological accidents caus
Slide 16: Coking coal prices are beginning to be passed to steel
Coking coal prices are beginning to be passed to steel and are increasing demand for high quality iron ore Raw material basket (pig iron), $/t HRC vs HCC prices, $/t Iron ore, CFR China $210 Coking Coal, FOB Australia $144 $90* +$66/t $89 $120** $55 Q2 2016 Q4 2016 * Assuming iron ore price at $56/t
Slide 17: Russian economy: macro stabilization, tentative signs of growth
Russian economy: macro stabilization, tentative signs of growth Oil price and Russian ruble stabilization Lower inflation and interest rates Central Bank of Russia Key Rate Brent Crude Oil Price, $/bbl USD/RUB: Monthly average Consumer price inflation, y-o-y, % Policy rate 20% 20% CPI 85 15% 15% 75
Slide 18: Steel demand growth is expected to resume in 2017
Steel demand growth is expected to resume in 2017 after three years of decline Russian apparent steel use, mt Construction and auto industry steel consumption, y-o-y, % Construction 2.4% 0.1% -4.5% -7.5% -12.6% 45.0 46.0 45.0 +2% 2013 2014 2015 2016F 2017F -6% 42.5 41.0 38.5 39.1 Auto market 5.8% 2.
Slide 19: Russian steel market expected to continue growth in mid-term
Russian steel market is expected to continue growth in mid-term on the back of post crisis recovery and import substitution Steel consumption in Russia, Mt +8 Mt 46 (+21%) 47 45 45 41 39 2012 2013 2014 2015 2016E 2021F Source: Metal Expert, Company estimates. Factors of growth: Post crisis recovery
Slide 20: Domestic shipments supported by import substitution and market share wins
Domestic shipments are supported by growing import substitution and market share wins Russian steel market, mt Severstal’s market share of the domestic steel market, % 16% 15% 11% 10% 10% 45 46 45 41 7 7 5 39 Import 4 4 Domestic 17% 17% shipments 15% 16% 12% 38 39 40 37 Import share 35 2012 2013 201
Slide 21: Vadim Larin, Chief Executive Officer
Vadim Larin Chief Executive Officer
Slide 22: CEO update
9] Severstal | CEO update ee
Slide 23: Today's Agenda
Today’s Agenda 10 years listing anniversary Misc. Page 23
Slide 24: 10 year anniversary!
Ly] 10 year anniversary! Severstal Page 24
Slide 25: Total Shareholder Return: Severstal vs global steel industry
Total Shareholder Return: Severstal vs global steel industry 150% Market capitalisation has increased from $10.4 bln* to $11.5 bln** in 10 100% years despite industry headwinds Paid >$6.2 bln*** of dividends 50% Outperformed the global steel +139% industry in TSR terms by 139% 0% -50% -100% De
Slide 26: Total Shareholder Return: Severstal vs Top Russian peers
Total Shareholder Return: Severstal vs Top 4 Russian peers Outperformed 260% all Top Russian peers 210% 160% 110% 60% +145% 10% -40% -90% Dec-06 Dec-12 Oct-16 Aug-08 Mar-10 May-11 May-12 Jan-14 Mar-16 Oct-10 Aug-14 Jan-08 Feb-09 Nov-11 Jul-07 Sep-09 Jul-13 Feb-15 Sep-15 Severstal Top-4 Peers Sourc
Slide 27: Our mission
Our mission To be the leaders in value creation Page 27
Slide 28: The lessons learnt
The lessons learnt Focus on existing assets Continuous improvement drives performance Sustain low cost global leadership Increase customer care and quality Be smart with CAPEX Page 28
Slide 29: The Severnaya mine accident
The Severnaya mine accident Blast on 25 February 2016 Death toll of 31 our miners + 5 rescue team The cause of the blast not yet clear, ongoing investigation with cause not yet identified Too dangerous to restore the mine, the reserves will be extracted through the adjacent Komsomolskaya min
Slide 30: LTIFR dynamics
LTIFR dynamics Excluding Severnaya accident, LTIFR has been declining over the last years 1.80* 1.35 1.33 1.38 1.27 1.11 0.99 1.04 2010 2011 2012 2013 2014 2015 9М 2016 * Reflects the Severnaya mine accident. All figures exclude Severstal North America and PBS Coals. Page 30
Slide 31: Coking coal: Vorkutaugol
Coking coal: Vorkutaugol Volumes and cash costs negatively affected by the Severnaya accident Focus on safety and operational improvements 2ZH coking coal production will decrease by ~20% in 2017 driven by the mine plan, will be back at 2016 level in 2018 Coal self-sufficiency will reduce fr
Slide 32: Iron ore: Karelsky Okatysh and Olkon
Iron ore: Karelsky Okatysh and Olkon New products generation at Karelsky Okatysh continues: • In 2015, launched new olivine pellets (1.2 mt); • In 2016, DRI pellets launched; • In 2017, high Fe content pellets output will increase by 20% and account for 54% of output. Both Karelsky Okatysh and O
Slide 33: Steel sales: threat of protectionism on the export markets
Steel sales: threat of protectionism on the export markets 78% of Russian HRC exports are …Relocation to other markets is possible under high protectionism risk… but could reduce margins by $30-$50/t Russian flat rolled steel export, mt Global flat rolled steel import by region in 2015, mt 9.8 Asia
Slide 34: Steel sales: Domestic market
Steel sales: Domestic market 2% growth forecast for 2017 after a 6% decline in 2016 Russia’s apparent steel use, mt 46.0 45.0 45.0 42.5 41.0 -6% +2% 39.1 38.5 2011 2012 2013 2014 2015 2016F 2017F Source: Severstal estimates, Metal Expert. Page 34
Slide 35: Focus on quality: two directions
Focus on quality: two directions Improvements to fix Targeted investments 1 2 operational issues to upgrade quality A new process to gather/rank/solve Hydraulic pressing units at stands #5-8 at quality issues, launched in April 2016 Mill 2000 to provide ½ EN thickness tolerance. CAPEX: $22 mln
Slide 36: Cost leadership
Cost leadership HRC production cash cost, $/t $700 $600 $500 $400 $300 $308/t - Severstal 2006 $200 $217/t - Severstal 2016* $100 $0 0 100 200 300 400 500 Cumulative HRC capacity, mmt Source: Severstal estimates, WSD. We have achieved cost leadership position We are prepared to sustain it throug
Slide 37: Large CAPEX projects review
Large CAPEX projects review We shall not exceed $700 mln a year of CAPEX even if all the projects are realized CAPEX Project Description/Effect Period Status estimate, $ mln Improved quality & 200kt extra 4-stand CR mill upgrade 2015-2016 Completed 50 capacity Capacity increase: HDG – 400kt, New H
Slide 38: Financial KPIs
Financial KPIs KPI FY2014 FY2015 9M 2016 Q3 2016 EBITDA, $ mln $2,211 $2,096 $1,383 $584 EBITDA Margin, % 26.7% 32.8% 32.4% 36.8% FCF, $ mln $1,232 $1,552 $633 $323 Page 38
Slide 39: Alexey Kulichenko, Chief Financial Officer
Page 39 Alexey Kulichenko Chief Financial Officer
Slide 40: Our targets remain consistent with a focus on increasing customer care
Our targets remain consistent with a focus on increasing customer care Middle-to-the-left position of all our On integrated basis: Achieved Cost Position assets on the cost curve Individual assets: Strong progress Targeting cycle-average EBITDA Delivered: Margins margin of c.20% 36.8% in Q3 16 Deliv
Slide 41: Delivering substantial and meaningful FCF
Delivering substantial and meaningful FCF* Free cash flow generation Free cash flow generation in Free cash flow generation in in FY2014, $mln FY2015, $mln 9M 2016, $mln (440) 124 (779) 81 1,930 1,868 1,552 (358) 55 1,232 936 633 OCF 2014 Capex 2014 Other adj. FCF 2014 OCF 2015 Capex 2015 Other adj.
Slide 42: Continued G&A reduction
Continued G&A reduction G&A expenses development at Severstal, $mln 118 116 101 84 85 77 77 68 60 60 63 Q1 14 Q2 14 Q3 14 Q4 14 Q1 15 Q2 15 Q3 15 Q4 15 Q1 16 Q2 16 Q3 16 Highlights: FY2014 G&A of $419 mln FY2015 G&A of $290 mln FY2016E G&A ~$289 mln Stable despite key Company development ini
Slide 43: Working capital dynamics
Working capital dynamics Net working capital dynamics and turnover 18.5% 16.4% 16.5% 15.6% 15.7% 14.2% 14.2% 14.0% 12.5% 12.0% 11.3% 11.0% 9.8% 10.1% 8.8% 67 60 57 57 60 52 52 51 46 44 41 37 40 36 32 Q1 13 Q2 13 Q3 13 Q4 13 Q1 14 Q2 14 Q3 14 Q4 14 Q1 15 Q2 15 Q3 15 Q4 15 Q1 16 Q2 16 Q3 16 Working ca
Slide 44: Working capital optimisation
Working capital optimisation Inventories, $mln and turnover days Payables, $mln and turnover days 64 days 86 days 32 days 43 days 859 425 721 366 Inventory levels control: stocks sell- off during Q2 and replenishment in End of Q3 15 End of Q3 16 End of Q3 15 End of Q3 16 Q3 16 Oil and gas receiv
Slide 45: Sensitivity to currency
Sensitivity to currency Element Its composition Revenues ~70% Rubles Share of RUB outflow and inflow broadly match All-in cost (COGS and SG&A) ~80% Rubles CAPEX ~62% Rubles Broadly positive effect of FX on EBITDA due to high share of export shipments with payment in USD and Euro General benefit
Slide 46: Cash at hand covers several years of debt maturities
Cash at hand covers several years of debt maturities Debt Maturity Schedule*, $m 835 643 551 57 2 1 2016 2017 2018 2019 2020 2021+ Notes: Debt represents the principal amount of debt. Debt for 2016 represents amount of debt as at 30 September 2016 *Figures exclude accrued interest and unamortized ba
Slide 47: Low level of gross and net debt
Low level of gross and net debt 2,577 2,504 2,452 2,434 2,084 0.5x 0.5x 0.4x 0.4x 0.3x 887 943 829 805 511 3Q 2015 4Q 2015 1Q 2016 2Q 2016 3Q 2016 Total debt, $m Net debt, $m Net debt/EBITDA, x Page 47
Slide 48: The dividend policy: further enhancing cash returns
The dividend policy: further enhancing cash returns Free cash flow is the main indicator of dividends decision as long as net debt/EBITDA ratio is between 0.5x-1.0x Should the ratio increase to higher than 1.0x, Severstal would return to its previous dividend payout of 25% of net profit Divide
Slide 49: CEO concluding remarks
CEO concluding remarks
Slide 50: Highlights
Highlights Markets: Global demand is improving in 2017 driven by developing countries Capacity cuts in China and consolidation should support global capacity utilization rate World steel prices dynamics: finding new equilibrium levels, supported by coking coal prices Domestic shipments are s
Slide 51: Severstal
~ Severstal