Severstal · RUS:CHMF
Severstal — Investor Day (November 2019)
57 slides from Severstal's investor day presentation, Nov 7, 2019
Slide 1: Reinventing the Future of Steel
J, SS Reinventing ~~. . tre Fut of steel y Citi Bank a offices w é London ~ NOVEMBER, 7 aT SPECS EB a — “a + 108d
Slide 2: Sakari Tamminen
Sakari Tamminen Senior Independent Director, Chair of the Remuneration and Nomination Committee It is strictly forbidden to use, copy, disclose or distribute materials contained in this document (or appendices hereto) in any way whatsoever without due authorization. 2
Slide 3: Corporate governance
Corporate governance Corporate governance developments Adherence to the highest standards 01 Non-Audit Services Policy adopted 01 Unified, well-structured business supported by a focused corporate strategy External evaluation of the Board 02 performance scheduled for late 2019 Industry-leading discl
Slide 4: ESG ratings and initiatives
ESG ratings and initiatives Recognition by international ESG ratings Proactive participation in global ESG Joined the United Nations Global Compact in 2018: Score upgraded to 74 out of 100, ‘Outperformer’ 01 commitment to the principles and reporting 01 rank on progress Supporting United Nations Sus
Slide 5: ESG: What's next?
ESG: What’s next? Implementation of Long-Term Safety remains Severstal’s absolute priority Goals on Environment, Health and Safety Stronger response to climate action: improving efficiency of processes, reducing carbon footprint Active engagement with all stakeholders Further increase transparency a
Slide 6: Maxim Semenovykh
Maxim Semenovykh Head of Corporate Strategy It is strictly forbidden to use, copy, disclose or distribute materials contained in this document (or appendices hereto) in any way whatsoever without due authorization. 6
Slide 7: Global demand growth is mixed in 2019, ex China demand set to improve in 2020
Global demand growth is mixed in 2019, ex China demand is set to improve in 2020 Steel demand growth, % China 2019E 2020E 4.0 • 2019E: demand growth driven by residential construction 1.5 activity and government infrastructure stimulus Russia 1.1 • 2020F: growth to decelerate 7.8 from a high base 1.
Slide 8: Global market cycle: higher steelmaking capacity utilisation and stronger Chinese market
Global market cycle: higher steelmaking capacity utilisation and stronger Chinese market provides support Steel making margin*, $400 2015/2016 Production $300 down-cycle cost support LT average $200 $100 2012 2013 2014 2015 2016 2017 2018 2019 2020 Steel capacity Global steel capacity utilisation, u
Slide 9: Raw materials market remains tight due to disruptions and strong imports
Raw materials market remains tight due to disruptions and strong imports Iron ore fines 62% Fe, Iron ore seaborne balance, Iron ore pellet premium*, 01 Iron ore was overpriced in mid 2019 due to disruptions in Brazil $140 Market surplus (+)/deficit (-) 60 $120 02 Supply is recovering, 40 market to r
Slide 10: Russian demand to decelerate in 2020, transport modernisation offers upside
Russian demand to decelerate in 2020, transport modernisation offers mid-term upside Steel demand in Russia, Complex plan for modernisation and extension Further potential: residential XX% - CAGR of backbone transport infrastructure, building construction, +2.3% +1.5% 46.8 Railway transport and tran
Slide 11: Ready for the future: Severstal's development in line with global trends
Ready for the future: Severstal’s development in line with global trends Severstal response Circular economy Focus on ecology and environmental concerns New technologies Digital channels for accelerated growth Evolving customer Focus on solutions requirements • • Competing Disruptive technologies ma
Slide 12: Severstal business model: resilient through the cycle
Severstal business model: resilient through the cycle Current market trends Severstal’s position Demand slowdown Solid cost positions Ruble floating rate & markets and relentless cost control versus commodity downcycle volatility Raw material markets are Vertical integration tight on supply disrupti
Slide 13: Alexander Shevelev
Alexander Shevelev Chief Executive Officer Any unauthorized copying, disclosure or distribution of the materials contained in this document (or its annexes) is strictly prohibited. 13
Slide 14: Severstal at a glance
Severstal at a glance Solid financial platform Well-invested 51 17 4.8 12 thousand of million tonnes of million tonnes million tonnes integrated employees iron ore products of coking coal of crude steel assets concentrate 37% 3.1 0.4 2018, 1.6 Severstal $bn Low cost 130% 76% EBITDA FCF iron ore coal
Slide 15: Our goal and our vision
Our goal Our vision Leader in value creation, measured by TSR Leader of the steel industry of the future First choice for customers, employees and partners 01 03 Strategy for Sustainability 02 continued profitable growth Proven capital allocation policy It is strictly forbidden to use, copy, disclos
Slide 16: Health and Safety is our key priority
Health and Safety is our key priority Sustainability Proven capital allocation policy Strategy for profitable growth 1.77 By 2025, reduce LTIFR* by 50% compared with 2017 and ensure zero work-related fatality rate Implementation 01 LTIFR targets set annually for each asset 1.03 industry average*** A
Slide 17: Environment
Environment Sustainability Proven capital allocation policy Strategy for profitable growth Contribution to the Goal Progress on previously announced goals Key projects planned reduction Wastewater pollutants Overall completion by the Water discharged, end of 2019: 67% 01 Wastewater treatment system
Slide 18: Climate action
Climate action Sustainability Proven capital allocation policy Strategy for profitable growth GHG intensity level equal to 2.06 t CO2e/t crude steel in 2018 (CherMK), Current level of total Scope 1 GHG emissions, 3.63 2.43 51.7 11.5 11.6 11.7 12.0 43% 43.6 . 9.0 . 2.18 2.19 23.6 22.0 23.2 21.7 22.2
Slide 19: Capital allocation policy
Capital allocation policy Sustainability Proven capital allocation policy Strategy for profitable growth Strong balance sheet Smart Capex Proven Dividend policy 0.4x 30% 118% Any unauthorized copying, disclosure or distribution of the materials * The dividend policy uses given Net Debt/EBITDA level
Slide 20: Our growth strategy is generating value
Our growth strategy is generating value Sustainability Proven capital allocation policy Strategy for profitable growth In 2018 we adopted a new growth strategy… …and achieved ~$0.7 bn EBITDA improvement in 2 years additional structural EBITDA target* 1.4 2.1 ~ $0.7 bn EBITDA increase in two years ~0
Slide 21: Levers to achieve our financial target
Levers to achieve our financial target Sustainability Proven capital allocation policy Strategy for profitable growth $ 2.1bn total Cost Superior client leadership experience Volume growth & Winning over premium Investment projects markets and new customers End-to-end operations Differentiated propo
Slide 22: Volume growth outlook
Volume growth outlook Sustainability Proven capital allocation policy Strategy for profitable growth Boosting our vertical integration Ramping steel volumes up Increasing Vorkuta coal Coal concentrate sales, mt Increasing hot Hot metal nominal capacity without BF#3, mt 5.4 metal production BF#3 nomi
Slide 23: Investment projects in upstream
Investment projects in upstream Sustainability Proven capital allocation policy Strategy for profitable growth Blast Project info Start Yakovlevskiy Project info Start Increasing pig iron production 4Q2020 Increase in volumes up to 5 mt per year Ramp up 2018-2021, Furnace №3 (+3 mt per year) mine an
Slide 24: End-to-end operations improvement
End-to-end operations improvement Sustainability Proven capital allocation policy Strategy for profitable growth Reduced coke Downtime Energy self-sufficiency consumption reduction gained increased Increased the mass fraction of iron in raw materials; «Ideal Repair» project to reduce the duration En
Slide 25: Digital & IT platform
Digital & IT initiatives roll out to contribute up to $0.3bn EBITDA in operational efficiency, supply chain, quality and new product development Quality New products development, automatic certification of quality, optimisation of chemical composition Supply Chain New refined models of customer serv
Slide 26: Our strategy in downstream - getting closer to each client
Our strategy in downstream - getting closer to each client to provide unique selling propositions Sustainability Consistent capital allocation policy Strategy for profitable growth Russian steel and adjacent market size** Target customer Construction Machinery Energy segments $120bn* $64bn* $50bn* +
Slide 27: We have revised our focus to achieve greater business differentiation
We have revised our focus to achieve greater business differentiation Sustainability Proven capital allocation policy Strategy for profitable growth Asset divestment New business creation VS JV JV with with Tenaris Tenaris to to build build JV with RUSNANO and Sale of Mini-Mill aa welded welded pipe
Slide 28: Transformational changes in culture
Transformational changes in culture Sustainability Proven capital allocation policy Strategy for profitable growth Key changes How we work differently Impact on our business • Flexible staffing as a key factor to effective Cross-functional people allocation Speed self-managed client teams • New beha
Slide 29: Maria Shalina
Maria Shalina Marketing Director It is strictly forbidden to use, copy, disclose or distribute materials contained in this document (or appendices hereto) in any way whatsoever without due authorization. 29
Slide 30: Customers satisfaction and loyalty growing steadily
Customers satisfaction and loyalty growing steadily 61% 58% Achievements 2019 Net Promoter Score* 2018 2019 01 Feedback channels scaled-up Personal cabinet, contact centre, chats Quality of products** Discipline of supply** 83.9 84.5 70.1 71.2 Customers Experience 02 Center of Excellence started Bes
Slide 31: Prevalent behavioural trends of customers
Prevalent behavioural trends of customers 01 Take interest in innovative materials 02 Higher expectation for cost-saving solutions Search for solutions, not just products 03 Growing demand for ecologically friendlier products Customers tend* to 01 Expect B2B service to be in line with B2C services C
Slide 32: 2019 Performance
2019 Performance New products E-commerce Dynamic Pricing Production of new innovative materials launched: Online sales reached 30% Ongoing integrated price forecast modelling of Severstal Distribution’s total sales • Laser cutting steel for machinery building Real-time synchronisation of internal an
Slide 33: Russian Steel market and Severstal positioning
Russian Steel market and Severstal positioning Steel demand in Russia, Steel demand growth, CAGR 2018-2023E, 01 Metal consumption in Russia Construction 2.5 2.5 2.4 growing in all target industries Machinery building 13% 5.3 mt Energy sector 1.9 15% 02 The key drivers of metal consumption 6.3 mt 41.
Slide 34: Downstream. 2023 EBITDA growth
Downstream. 2023 EBITDA growth 2023 EBITDA key drivers 0.3 1.1 bn USD 0.2 0.2 0.4 Add EBITDA CAPEX projects Portfolio mix Solutions and partnerships Add EBITDA 2018-2019E 2020-2023E improvement 2020-2023E 2020-2023E 2018-2023E Target: develop production facilities Target: increase margin by expandin
Slide 35: Severstal performance. Energy sector
Severstal performance. Energy sector Key performance indicators Severstal sales data Key segments (expectations 2023) Market share Domestic sales, mt Export sales, mt 3.0 Sales in Russia increase up to 01 1.3 mt 01 Oil & Gas production 18% 8% 7% 02 Oil & Gas transportation 1.6 Growing market share i
Slide 36: Severstal performance. Machinery building
Severstal performance. Machinery building Key performance indicators Severstal sales data Key segments (expectations 2023) Market share Domestic sales, mt Export sales, mt 3.0 Sales in Russia increase 01 Automotive 17% 16% 20% 01 up to 1.5 mt 2.1 02 Home appliance Growing market share in Russia – 1.
Slide 37: Severstal performance. Construction
Severstal performance. Construction Key performance indicators Severstal sales data* Key segments (expectations 2023) Market share Domestic sales, mt Export sales, mt 15.0 Sales in Russia increase 01 up to 5.0 mt 01 Mass-Housing 13.5 14% 15% 15% 12.0 10.5 02 Non-Housing 9.0 8.0 7.9 7.6 Stable market
Slide 38: Evgeny Chernyakov
Evgeny Chernyakov Director for Sales and Business development of the Construction sector It is strictly forbidden to use, copy, disclose or distribute materials contained in this document (or appendices hereto) in any way whatsoever without due authorization. 38
Slide 39: Construction industry worldwide
Construction industry worldwide Global market Steel consumption by the construction industry Rolled products consumption Share of construction in steel for construction by region, consumption, More than half of global steel is 01 used for construction Global 824 51 China 405 55 EU 15* 53 40 USA 40 4
Slide 40: Construction industry in Russia
Construction industry in Russia Key opportunities Key opportunities and market hypotheses for growth and development in Russia Industry wallet in 2017-2023E, Mass housing Infrastructure Construction market in Russia Non-housing Single-family housing expected to grow with CAGR 01 ~2-3% until 2023, to
Slide 41: Severstal's Construction Team at a glance
Severstal’s Construction Team at a glance ~ 76% of sales generated by Key results of the Construction Team in 2018*, Construction Team (~8 mt) Markets 4.7 Wide range of products 2.7 (from slabs through to finished 0.6 products and steel solutions) Russia and CIS Europe Other export, incl. MENAT Inte
Slide 42: Severstal repositioning in Construction
Severstal repositioning in Construction Our goal is to become the company offering integrated solutions for end-users Currently Targeted Who Whoare areour our Who are our Distributors and major processors End-users and the entire processing chain customers? customers? customers? What do Rolled steel
Slide 43: Market Mix
1. Market Mix Markets by margin Sales volume by markets, Key initiatives and next steps Target markets Other markets Target Markets Target Markets ~8mt The most attractive markets due to • Logistics Long-term contracts with • Developed market channels • Established relationships with clients 62% 01
Slide 44: Channel mix
2. Channel mix Relative attractiveness of the channels by profit margin Sales volume by channels, Key initiatives and next steps Own Direct sales to processors distribution and large consumers Sales partners Sales to traders Expansion of own distribution Own Expansion of our warehouse network distri
Slide 45: Product mix
3. Product mix Relative average margin, Sales volume by products, % Key initiatives and next steps Steel Coated Tubes 2018 solutions products and pipes Development of new products Cold Hot Rebars Slabs in the next steps in the value chain Steel solutions rolled coil rolled coil 01 Introducing own va
Slide 46: Alexey Kulichenko
Alexey Kulichenko Chief Financial Officer It is strictly forbidden to use, copy, disclose or distribute materials contained in this document (or appendices hereto) in any way whatsoever without due authorization. 46
Slide 47: Strong financial platform supporting ambitious strategy
Strong financial platform supporting ambitious strategy Superb profitability through the cycle Our vertically integrated business model has delivered Cash cost of slab on an integrated basis, USD/t EBITDA margins of above 25% for the last several years, EBITDA margin, % 36.6% 34.9% 32.8% 32.3% 32.8%
Slide 48: Two years of sustainable EBITDA growth expect to deliver $696m
Two years of sustainable EBITDA growth expect to deliver $696m* $696m FY 2018 & 9M 2019 combined effects $163m ~$107m Q4 2019 expected $21m Sales & Marketing initiatives delivered an additional $381m. A price mark-up was supported $9m $170m by the increased share of sales via Severstal’s distribut
Slide 49: Key investment projects in upstream and continuous improvement
Key investment projects in upstream and continuous improvement: expect to deliver up to $1.0bn for 2018-2023E Key upstream investment projects presented in 2018 Upstream EBITDA effect for 2018 and expected 2019-2023E*, bn USD 0.2 1.0 0.5 0.3 ~$0.7bn ~$0.3bn Additional EBITDA CAPEX projects Continuou
Slide 50: Operational efficiency, supply chain, quality and new product development
Operational efficiency, supply chain, quality and new product development to deliver up to $0.3bn EBITDA supported by digital & IT platform Example “Quality”: Example “Quality”: roasting pellet Example “Operational efficiency”: detection of flat steel defects machine management prediction of silicon
Slide 51: Investment programme 2020 key projects
Investment programme 2020 key projects*. Introducing CAPEX 2020 flexibility Remaining 2021-2024 $1.7bn ~$1.7bn* CAPEX 2020, including ~$32m Rolling mills upgrade - productivity increase CAPEX 2020 ongoing projects of 2019 ~$49m Pickling shop upgrade ~$1.4bn ~$15m Shaft furnace #1 reconstruction Flex
Slide 52: Peak year extra-CAPEX is excluded from dividend base calculation
Peak year extra-CAPEX is excluded from dividend base calculation ~$1.7bn* $1.7bn ~$0.1bn shifted Peak years from 2019 extra-CAPEX, $1.4bn above $800m ~$0.1bn CAPEX 2020 is excluded settlement in 2020 flexibility of around 30-40% from total ~$0.8bn ~$1.3bn expected Base-line cash CAPEX outflow 2019E
Slide 53: Keep leverage low
Keep leverage low Total debt, mln usd Net debt, mln usd Net debt/EBITDA, x 5,000 4,500 2.0* Current view 4,000 on strategy below 4,754 and investment 3,500 3,000 programme existing policy allow to stay 1.5 below 1.5x times 2,500 3,429 Net Debt/EBITDA** 2,000 3,718 0.7 1,500 2,452 2,013 0.4 2,617 0.4
Slide 54: Cash at hand and credit lines cover all debt maturities
Cash at hand and credit lines cover all debt maturities and provide financial flexibility Credit ratings snapshot Debt principal Cash balances Available credit lines BBB (Stable) New bonds issue in 2019: 1,189 1,317 156 $156m RUB bond due 2024, @8.65% 233 $233m RUB bond due 2026, @8.65% Baa2 (Stable
Slide 55: Financing the growth: our capital allocation principles
Financing the growth: our capital allocation principles match strategic priorities New strategy financial Financial Current priorities targets progress ~100% adjusted FCF payout* ~$1.6bn** to be paid in 2019 Maintain dividend flow Keep leverage below 1.5x 0.4x at the end of Q3 2019 Maximise sharehol
Slide 56: CEO concluding remarks
CEO concluding remarks 56
Slide 57: CEO concluding remarks
CEO concluding remarks Safety remains key priority. Growth story with clear value drivers: additional $2.1bn 01 Enhanced focus on ESG performance 04 EBITDA for 2018-2023 Global leader in efficiency with solid 02 delivery track record 05 Maintain prudent capital allocation principles Temporary CAPEX