Trading update for the first quarter of 2018

The information in this press release has been prepared based on preliminary financial results. Intragroup transactions have been eliminated in consolidation. This announcement does not contain sufficient information to constitute a full set of financial statements. The following preliminary results may differ from financial statements prepared in accordance with International Financial Reporting Standards (IFRS). The numbers in this press release have not been audited or reviewed. Metinvest B.V. publishes consolidated financial statements prepared in accordance with IFRS for the six months ending 30 June and for the year ending 31 December. Due to rounding, numbers presented throughout this release may not add up precisely to the totals provided and percentages may not precisely reflect absolute figures.

FINANCIAL HIGHLIGHTS

Revenues

In 1Q 2018, Metinvest’s consolidated revenues increased by 63% y-o-y to US$3,019 mn, driven primarily by higher selling prices, which followed global benchmarks. In addition, stronger demand spurred greater sales volumes of pig iron, slabs, flat products, coke and pellets. Moreover, the Group started resales of square billets and long products to compensate lower sales volumes of these products manufactured at seized facilities.

Revenues in Ukraine amounted to US$837 mn in 1Q 2018, up 81% y-o-y, primarily due to increased selling prices, as well as higher sales volumes of flat products (+166 kt) amid greater local demand, as the economic upturn continued. Moreover, sales of coke and pellets increased by 375 kt and 494 kt, respectively, amid stronger demand from Zaporizhstal, as well as another customer, which resumed operations in 3Q 2017. As a result, the share of Ukraine in consolidated revenues rose by 3 pp y-o-y to 28%.

International sales increased by 57% y-o-y to US$2,182 mn in 1Q 2018, accounting for 72% of consolidated revenues. Sales to Europe rose by 55% y-o-y amid higher realised prices of steel products and pellets, as well as greater sales volumes of semi-finished products (+343 kt) and iron ore products (+874 kt). At the same time, Europe’s share in consolidated revenues amounted to 35%, down 2 pp y-o-y. Sales to the Middle East and North Africa (MENA) climbed by 87% y-o-y amid higher selling prices of flat products and greater sales volumes of square billets (+264 kt), flat products (+129 kt) and pig iron (+52 kt). As a result, MENA’s share in consolidated revenues increased by 3 pp y-o-y to 19%. Sales to the CIS (ex Ukraine) rose by 25% y-o-y, primarily due to higher selling prices and volumes of flat and long products, while the region’s share decreased by 2 pp y-o-y to 7%. Sales to North America almost tripled y-o-y due to higher prices and volumes of pig iron (+275 kt), which increased the region’s share by 2 pp y-o-y to 6%. Sales in Southeast Asia dropped by 30% y-o-y, mainly due to lower volumes of iron ore products (-855 kt), reducing the market’s share by 5 pp y-o-y to 3%.

Metallurgical segment [6]

The Metallurgical segment generates revenues from sales of pig iron, steel and coke products and services. In 1Q 2018, its top line rose by 76% y-o-y to US$2,588 mn, driven by higher selling prices of steel and coke products, as well as stronger demand and greater resales (pig iron, square billets, flat and long products). Sales of flat products rose by US$393 mn, pig iron by US$240 mn, square billets by US$168mn, slabs by US$64 mn, long products by US$44 mn, coke by US$139 mn and other products and services by US$68 mn. In 1Q 2018, the segment accounted for 86% of external sales, up 6 pp y-o-y.

Pig iron 

In 1Q 2018, sales of pig iron increased by 4.5 times y-o-y to US$308 mn due to higher realised prices and volumes. Sales volumes rose by 606 kt y-o-y to 816 kt, driven by stronger demand for pig iron produced at Metinvest’s facilities (+298 kt) and greater resales of pig iron produced by Zaporizhstal (215 kt) and other steel producers (93 kt). Sales to all markets climbed y-o-y, primarily to North America (+275 kt) and Europe (+190 kt) following greater orders from existing and new customers.

Slabs 

In 1Q 2018, sales of slabs increased by 68% y-o-y to US$157 mn, of which 37 pp was attributable to a higher average selling price and 31 pp to greater sales volumes. Volumes rose by 68 kt y-o-y to 291 kt amid steady demand from European customers. The increase in the average selling price followed the benchmark for slabs (FOB Black Sea), which rose by 33% y-o-y.

Square billets 

In 1Q 2018, sales of square billets soared seven-fold y-o-y to US$195 mn, driven by higher selling prices and greater sales volumes. Volumes rose by 315 kt y-o-y to 383 kt due to the launch of resales (383 kt), which compensated lower volumes of own products following the loss of control over Yenakiieve Steel (68 kt). All available volumes were sold to MENA and Europe. The average selling price followed the square billet FOB Black Sea benchmark, which climbed by 33% y-o-y.

Flat products 

In 1Q 2018, sales of flat products increased by 43% y-o-y to US$1,305 mn, of which 23 pp was attributable to a higher average selling price and 20 pp to greater sales volumes. Total volumes rose by 338 kt y-o-y to 2,034 kt. At the same time, resales of Zaporizhstal’s flat products climbed by 192 kt y-o-y to 807 kt, driving their share in total sales volumes by 4 pp y-o-y to 40% in 1Q 2018. Sales to Ukraine increased by 166 kt amid weaker competition in local market. Sales volumes to MENA rose by 129 kt due to strong demand and lower competition from Chinese producers. The average selling price were in line with the HRC FOB Black Sea benchmark, which climbed by 24% y-o-y.

Long products 

In 1Q 2018, sales of long products rose by 22% y-o-y to US$241 mn, driven by a higher average realised price. Sales volumes decreased by 10% y-o-y (or 40 kt) to 362 kt due to lower production and the loss of control over Yenakiieve Steel, which was partly compensated by higher resales (124 kt). Meanwhile, volumes were allocated between markets to maximise margin. The positive y-o-y price trend on all markets for long products was due to stronger billet quotations.

Tubular products

In 1Q 2018, sales of tubular products fell by 6% y-o-y to US$16 mn, driven by a decline in sale volumes (-17 pp), which was partly compensated by an increase in the average selling price (+11 pp). Volumes dropped by 5 kt y-o-y to 24 kt, given weaker demand in the CIS.

Coke 

In 1Q 2018, sales of coke tripled y-o-y to US$203 mn, reflecting a similar move in sales volumes, which rose by 375 kt y-o-y to 585 kt amid stronger demand in Ukraine. At the same time, the average selling price increased by 38% y-o-y.

Mining segment

The Mining segment generates revenues from sales of iron ore, coal and other products and services. In 1Q 2018, its top line increased by 14% y-o-y to US$431 mn, primarily due to higher sales of pellets (US$64 mn), which have higher margins than iron ore concentrate. Consequently, sales of iron ore concentrate dropped by US$18 mn. At the same time, sales of coking coal concentrate decreased by US$7 mn due to higher intragroup consumption. In 1Q 2018, the segment accounted for 14% of external sales, down 6 pp y-o-y.

Iron ore concentrate

In 1Q 2018, sales of merchant iron ore concentrate decreased by 11% y-o-y to US$155 mn, primarily caused by lower sales volumes. Total volumes dropped by 183 kt y-o-y to 1,990 kt, driven by a y-o-y production decline. Given the premiums in Europe and weaker demand in Ukraine, sales to Europe increased by 457 kt y-o-y, resulting in lower sales in Ukraine (-214 kt) and Southeast Asia (-426 kt). The average realised price followed the 62% Fe iron ore fines CFR China benchmark, which dropped by 14% y-o-y to an average of US$74/t in 1Q 2018, down from US$86/t a year earlier.

Pellets

 In 1Q 2018, sales of pellets soared by 46% y-o-y to US$203 mn, primarily driven by a 41% y-o-y rise in sales volumes to 1,653 kt. Sales in Ukraine rose by 494 kt amid stronger demand from Zaporizhstal, as well as another customer, which resumed operations in 3Q 2017. Sales to Europe rose by 417 kt, spurred by stronger demand and a focus on this premium market, which is one of Metinvest’s strategic priorities. The balance was sold to Southeast Asia, which is an opportunistic market for this product. The average selling price rose by 5% y-o-y amid strong pelletising and quality premiums in Ukraine and Europe.

Coking coal concentrate

In 1Q 2018, sales of coking coal decreased by 27% y-o-y to US$19 mn, driven by a 58% y-o-y drop in volumes to 98 kt amid greater internal consumption. This resulted in lower sales in North America.

EBITDA

In 1Q 2018, Metinvest’s consolidated EBITDA increased by US$247 mn y-o-y to US$649 mn, mainly amid a rise in the Metallurgical segment’s contribution of US$294 mn. The Mining segment’s EBITDA fell by US$89 m and corporate overheads and eliminations by US$42 mn.  

The increase in consolidated EBITDA was primarily attributable to greater sales volumes (US$752 mn) and realised price growth (US$414 mn). These factors were partly offset by:

• increased cost of goods and services for resale (US$590 mn) due to higher prices and volumes;
• greater logistics costs (US$105 mn), mainly amid an increase in railway expenses in the US related to internal coal supplies, upward tariff indexation by the Ukrainian state railway operator and greater rail shipments;
• higher cost of raw materials (US$100 mn) amid greater spending on coking coal, driven by a 38% y-o-y rise in coke output and purchased billets as feedstock to roll at Promet Steel;
• more spending on energy (US$27 mn), due to higher natural gas prices (+10% y-o-y) and electricity tariffs (+10% y-o-y), as well as greater consumption of natural gas amid a 9% y-o-y increase in hot metal output; and
• lower contributions from the JVs (US$34 mn).

In 1Q 2018, the Group’s consolidated EBITDA margin decreased by 1 pp y-o-y to 21%. The Metallurgical segment’s EBITDA margin rose by 8 pp y-o-y to 14%, while the Mining segment’s declined by 4 pp y-o-y to 40%.

Debt management 

At the end of 1Q 2018, gross debt amounted to US$3,086 mn, net debt to US$2,356 mn and the cash balance to US$261 mn. The increase in both gross and net debt was mainly due to a change in the IFRS accounting standard requiring recognition in profit and loss of all costs incurred due to a modification of borrowings. Therefore, US$56 mn of the previously capitalised effect of the debt restructuring in March 2017 was reclassified as retained earnings in 1Q 2018.

In April, after the reporting date, Metinvest completed the refinancing of its US$2,271 mn of debt, consisting of two tranches of bonds and the amendment and restatement of its pre-export finance (PXF) facility. As a result, the Group issued US$1,592 mn in new bonds and secured US$765 mn in the PXF facility. The bond issue is Metinvest’s largest to date, with its lowest ever coupon and longest maturity. It is also the largest by a Ukrainian corporate. The deal received strong support from the global investor community and top European financial institutions.

The transaction was market-driven and had the aim of effectively managing and extending Metinvest’s debt maturity profile. It also sought to take advantage of favourable conditions to refinance bonds to decrease total funding costs and provide for a longer-term capital structure, while untying the bonds and PXF facility, lowering refinancing risks. Further, the contractual terms of the bond financing have been aligned with standard market terms for similarly rated issuers.

New incremental proceeds from the combined transaction amounted to around US$205 mn, which the Group partly used to voluntarily repay ahead of schedule the amount due under the PXF facility in the first year after the transaction. Following this repayment, the total outstanding under the PXF facility is US$624 mn, while certain PXF agreement restrictions have been eased, including restricted payments.

Capital expenditure

In 1Q 2018, Metinvest’s capital expenditure doubled y-o-y to US$216 mn, as the Group continued scheduled maintenance of its facilities and the implementation of its Technological Strategy to 2030. In 1Q 2018, the split between maintenance and expansion projects was 61% to 39% (89% to 11% in 1Q 2017). The Metallurgical segment accounted for 73% of capital expenditure (28% in 1Q 2017) and the Mining segment for 27% (71% in 1Q 2017). Capital expenditures on corporate overheads amounted to US$1 mn in 1Q 2018, unchanged y-o-y.

 Major ongoing strategic investment projects at Ilyich Steel include the construction of continuous casting machine no. 4, basic engineering development for the reconstruction of the 1700 hot strip mill, and the reconstruction of the sinter plant. At Azovstal, the construction of the PCI unit at blast furnace no. 3 is advancing in parallel with a major overhaul of the machine.

At the iron ore producers, key ongoing strategic projects include the construction of crusher and conveyor systems at Northern GOK (the second facility for rock transportation at the Pervomaisky quarry) and Ingulets GOK (Vostochny conveyor line), as well as the replacement of gas cleaning units on the Lurgi 552-B pelletising machine at Northern GOK.