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Good day, and welcome to the EVRAZ H1 2019 Financial Results Conference Call. Today's conference is being recorded.At this time, I would like to turn the conference over to Alexander Frolov, CEO. Please go ahead sir.
Thank you. So good afternoon, ladies and gentlemen. Today, Nikolay Ivanov and myself are here to present our first half 2019 results. I would like to start with first on safety this time. We're not at all satisfied with our performance this year. During the first 6 months, we have lost 13 lives, including 8 people who died in an incident with a crew bus at Raspadskaya open-pit mine. We will continue our efforts to import safety leadership by organizational management as well as training our employees in finding and mitigating the risks in continuously changing environment.Speaking about our financial performance. We have delivered a set of rather healthy results. Our EBITDA reached almost $1.5 billion, 22% decline on the year-on-year terms is a result of depressed vanadium prices and lower average coking prices. Despite this decline, free cash flow was down and raised $692 million. As a result, our Board has decided to declare $508 million as interim dividend.As you can see from Slide 8, we remain committed to our key strategic priorities, following the market trends, which in the first half of the year were determined by growth in steel demand and production in China, strong demand for long steel in Russia, global shortage of iron ore and metallurgical coal supply as well as lower vanadium prices. Our achievements during the first 6 months of the year are listed in Slide 9, and will now comment on some of them. First of all, our debt has increased slightly in comparison with the end of 2018. The only reason for that was some changes in accounting standards. Net debt-to-EBITDA ratio remains at comfortable level of 1.1.CapEx in the first half of the year reached $309 million, mostly directed to maintenance projects. Our major announced projects including rail and beam mill modernization and continuous capping machine no. 5 at EVRAZ NTMK, integrated freight casting and rolling complex at EVRAZZSMK, and long rail mill at EVRAZ Pueblo are currently in the equipment supplier selection stage or at the engineering phase.Nikolay will give you a little bit more color on CapEx in his part of the presentation.Now let's turn to Slide 10.Efficiency improvement programs have contributed $150 million towards EBITDA, $111 million are linked to yields and productivity improvements; $39 million are the results of our cost commercial activities, primarily with the development of new products and markets.Moving to Slide 11. As I've already mentioned, our debt has increased slightly due to the accounting standard changes. On a longer term, we remain committed to our policy not to increase net debt above $4 billion, and also to have net debt-to-EBITDA ratio below 2.Our year-end outlook is presented on Slide 12. We expect steel and raw material prices to be volatile. At the same time, we think Russia steel market will remain strong and expect sales will be supported by our high level of vertical integration and superior production cost.With that, I would ask Nikolay to continue. Thank you.
Thank you, Alexander, and good afternoon. Please turn to Slide 14. EVRAZ reported EBITDA of $1.5 billion for the first half of 2019 compared to $1.9 billion in the same period of the previous year reflecting more challenging operating environment characterized by rising raw material costs and weaker pricing levels for our products.A few comments on segment performance. In steel, the revenues dropped by 6% year-on-year to $4.2 billion. The decrease was mainly attributable to lower revenues from sales of steel products, which fell by 7% year-on-year due to a downturn in average sale prices, which was underpinned by unfavorable market conditions.Lower revenues from sales of steel products were partly offset by higher sales volume following the increase in production volumes at Russian mills.EBITDA decreased due to lower prices for vanadium, semi-finished and construction products and high prices for raw materials, including iron ore and scrap.In Coal, revenues declined by 9.3% year-on-year. 11.3% decline was attributable a slip in coal product sale prices of, which was partially offset by 2.6% increase in coal product sales volumes.Coal prices followed the downward trend led by global benchmarks in the period. EBITDA was down year-on-year amid lower coal product sales prices and higher transportation costs.Revenues from the steel North America segment increased by 14.3% year-on-year. The key growth driver was greater demand for semi-finished railway and other steel products. EBITDA was driven by greater revenues from sales of semi-finished, railway and other steel products, partly offset by higher cost of partial semi-finished products and staff cost.Moving to free cash flow on Slide 15. On this slide, we present the waterfall from EBITDA to free cash flow for the first half 2019. As you can see, our free cash flow generation remains strong at $692 million, a slight increase year-on-year.Net cash from operating activities climbed by 26% year-on-year to $1.175 billion, reflecting a stable level of working capital.Moving to the next slide, Slide 16. EVRAZ capital expenditures increased to $309 million versus $232 million in the first 6 months of 2018. This increase has been driven by maintenance expenses primarily, which amounted to $230 million.The largest maintenance project was the reconstruction of the blast furnace #6 at EVRAZ NTMK. Major announced projects are listed on this slide are currently at the equipment supply supplier selection stage or the engineering phase.Going to the next slide, Slide 17. Debt management. EVRAZ began 2019 with a total debt of $4.638 billion. We used our cumulative cash and part of our cash flows generated in the period to further reduce total debt and completed several transactions to expand our maturity profile.It is worth saying, again, that at January 1, 2018, as a result of application of the new accounting standard, the group recognized $118 million of lease liabilities which at recognition increased total debt. Under the previous accounting standard, this concept were accounted for as operating leases, and were not recognized as either assets or liabilities in the group balance sheet.This action together with the scheduled repayments of bank loans, reduced total debt in the first half of 2019 by $112 million. Recognition of lease liabilities under the new accounting standard also had an effect on our net debt, moving it slightly up by $79 million to $3.650 billion.Interest expense accrued in respect of loans, bonds, and notes amounted to $148 million in the period compared with $167 million in the first 6 months of 2018.The lower interest expense was mainly due to a gradual reduction of total debt as well as management's efforts to refinance existing indebtedness at more favorable terms.Moving to dividend slide, Slide #18. We are on track to continue with dividend payments. Hence the Board of Directors yesterday recommended another interim dividend of $0.35 per share. The Record Date for this is August 16, and the payment date is September 5.In the first half of 2019 EVRAZ paid over an interim dividend to its shareholders in the amount of $577 million or $0.40 a share.To finish off with the discussion, I would like to say that review our results as rather healthy. In response to the weaker operational environment and pressures on EBITDA, we will be taking steps to improve efficiency, retain leverage metrics and support the free cash flow.With this, I would like to thank you for listening to our presentation. And as usual, we have a few slides on our operational performance closing the presentation, which we decided not to talk through but instead give you more time for your questions. And now, we're ready for your questions. Thank you.
[Operator Instructions] Will take our first question from Daniel Shaw from Morgan Stanley.
Just 2 questions for me. The first one on CapEx. The first half around $300 million, guidance of $800 million, is that some downward [risk], that $800 million, or do you expect to see a bit of a step up in the second half on spending? That's the first question. Then second one more on market focus. I mean, there's been a little bit talk around the potential for the Russian government to spend a bit more on infrastructure. What's your kind of assessment of these rumors, I suppose? And have you had discussions or do you have a view whether this is something that could be quite material for this sector or is it too early to say?
This is Alexander Frolov. Starting from the second part of your question. I guess that any investment in infrastructure would definitely be positive for EVRAZ business as we are exposed to construction sector. On the other hand, I guess, it's too early to make any kind of calculation how big impact or how big volume or how big increase in the market it would mean. One thing I would talk probably after that, that during this year we have seen substantial growth in Russian steel market, primarily in long products. For majority of products, the goal was more so in the of level of 10% which is quite high number and quite good number for EVRAZ business. Speaking about CapEx, I think our guidance for the year being USD 800 million remains unchanged.
We'll take our next question from Anna Antonova from JPMorgan.
Three questions from our side. And I guess, for convenience, I'll ask them one by one. So our first question is on your Coal division cost. We have seen a 20% year-on-year growth in transportation cost in Coal division in H1. And you commented on press release that, that was due to higher mine drop volumes, transport and organization of coal storage at [ Alardinskaya ] . Our question is, what is [ one of the terms ] on cost increase? And can we expect this cost to go down and normalize to last year's levels in H2?
So let me refer to the Slide #7 of our presentation because the most, I think, important thing is to look at the average cash cost for the coking coal. And as you can see here on the slide, our cash cost actually decreased relative to the first half of 2018. And the key reason for that is the high volumes, both production and sales volumes. The increase in transportation cost, if I understood your question correctly, did take place but it was not very significant and close to the inflation.
All right, but just a clarification on that. But compared to H1 of last year, the EBITDA margin in Coal division decreased substantially. So if the production cash cost have gone down, what would be the reason for.
That is more of a function of weaker prices for coal.
Okay. Understood. The second question from our side is, you stated that all the 4 major CapEx projects currently in equipment supplier selection stage or engineering phase, so does this mean that they all have been approved by the Board, and the go-ahead investment decision has been made for these projects with the total CapEx of $1.3 billion? And if yes, what are your IRR estimates for each of these big 4 projects?
First of all, we never accept any project where IRR is below 20%. So it is our threshold. Speaking about major projects, typically approval is given in stages. Meaning that for example, engineering stage would be approved on the stand-alone, and it doesn't mean that it would then lead to the final approval of entire spending because even at the engineering stage, okay, some qualification could come and some changes with things like layout could come, which would finally lead to, I don't know, negative decision when, let's say, the decision will be presented to the Board. So answering your question, there is no firm commitment for $1.3 billion a year. It's all I say underdeveloped.
Okay. Thanks for clarification. And is there any time line for these -- for example, engineering stage approvals for all these 4 projects, i.e. when can we expect this staged approvals over the next 6 months, 12 months or depending on the project, what's the approximate time line here?
Roughly speaking, the earliest project is rail mill in the United States. And for this project, engineering stage should finish by the year-end. For the other projects, I think that this phase will lift up in the second half of 2020.
Understood. And the final question, the last question from our side. What can be the effect on your vanadium production and sales volumes that we can expect from the sale of that poor business?
So there is no impact because this facility was processing third-party material already for quite some time. And we did not recognize any revenue out of those sales. There will be no change.
We'll take our next question from Barry Ehrlich with Citi.
I have 3 questions, if I may. The first question is how do your order books and your inputs from customers on their buying needs in the Russian market, and with respect to export markets from Russian facilities compare to a year ago at this time? And what does that tell you about the sustainability of the strong end demand conditions that you've had so far this year? And then, if I may, I'll go on with the second question after you address that.
I don't think that we see any significant difference in our order book shape and no material change.
Okay. So does that imply that the strength of the first half won't be repeated, seasonally adjusted compared to previous first halfs, won't be repeated in the second half?
Look, I don't think that such conclusion should be made or could be made because length of our order book is normally equal to 1, well, 2 months of production. So it doesn't cover the second half of this year yet, with an exception of some products like large-diameter pipes in United States where we have much longer order book. But again, it's not a very big volume in comparison with the total anyway.
Okay. My second question is, how did the North American EBITDA per tonne see changes after the listing of 252? And then maybe you can give some comparison before and after.
So I don't think there is any kind of material change in EBITDA term. I think what's different is flow of material. So we have been able to redirect some volumes from Canadian market to U.S. market, which just give us additional volume, not necessarily additional margin.
Okay. And finally, what would drive the decision, whether there would be an interim dividend prior to March 2020? Or that's not under consideration under the current dividend policy?
Our current dividend policies says that we pay dividend twice a year. And then, of course, the Board could add some payments on the top of that depending on financial performance, which was done last year for example. But it doesn't mean that any conclusion could be drawn down from that for the future.
We'll take our next question from Nikolay Sosnovskiy with Prosperity Capital Management.
I have a couple of questions. First one is on the steel market performance in the first half. Can you please explain a little bit better maybe in more details regarding the construction market, which is consuming so nicely? What do you think is driving the demand in construction? Because the economy from what we see from rough start, is not doing very well. That's my first question.
I think that -- our understanding is that high demand is driven construction in Moscow and in Moscow region, one thing. And the second thing the reason for that is future change in legislation in case of residential construction with all these escrow accounts so on and so forth. So people are basically trying to complete all what happens in their portfolios ahead of those changes.And then we need a little bit more time to understand and to see whether this expense could be a longer-term impact.
And just based on what you just said, if they indeed brought forward some volumes anticipating this regulation changes, do you think that could mean some below-average demand going forward when they reach these stages?
As I said, it's too early to say.
Yes. Okay. My second question is on safety. Actually on Slide #6, there is number of fatalities in the first half of 2019, which is 13, and this is basically higher than for previous years in total for 12 months. Can you please explain what was the reason for such a hike in fatality number? Was is it because of 1 accident or multiple accidents? And what the company is doing to improve this metric?
Well, as I mentioned in my presentation, we had a multiple fatality at Raspadskaya open-pit mine in February this year when 8 people died after an accident. So again, on one side it is one-off event, on the other hand it's quite tragic event. And the reasons for this event, not only human factor, but also, let's say, some systematic weaknesses in our operational procedures.So basically what we do -- it's just things which everyone does in the industry. We train people. We control what we do. We work a lot with the management to make sure that they pay sufficient attention to what's going on, on the shop floor. And also we analyze the risks and we try to mitigate them basically as much as we can, but a lot should be done ahead.
Understood. In my final question is more of a strategic one on your investments. I know there is a strategy in place, but can you maybe specify a little bit what would be the market condition and your earnings level, let's say, in terms of EBITDA, when company and top management would start thinking of curtailing this CapEx, maybe delaying some growth projects. So going from the expansionary phase into more of a preservation phase are we there yet or how should we view this?
So well, look, as I said before, our plans, let's say, to continue with this project, this big project still remain in place. At the same time, obviously when we'll be making substantial commitment we will look again at market conditions and forecast available budget. So again, we do not invest just in order to build something new, we invest in order, let's say, to get good returns for our shareholders. So that's why we prefer to be as cautious as possible.
We'll take our next question from Boris Sinitsyn with VTB Capital.
I have a few questions. Firstly, on Coal division. In the press release you mentioned that as a result of semi-soft coal prices fall, you kind of cut or reduced output of semi-soft coal at your own operations. In this respect, what are our expectations for coking coal concentrate production for the second half compared with the first half? And how does it compare with the guidance for 2019 coal mining volumes? It's the first one. The second one is on your turnover. In terms of inventories we noticed some increase in first half both versus last year and versus historical normal level for inventories in terms of days of turnover. And so on this respect, what are your expectations for second half? And the last one is on your net debt-to-EBITDA ratio, if you have any target in mind. Because actually earlier in your presentation you mentioned that 1.1 is comfortable for you. So is it like -- do you have any upper limit for this ratio in mind? This is the last question.
Let me answer first to your question about coal volumes. Basically what has happened in July, we have reduced volumes with some third parties whom we used in open-pit mining. So we just use more of our own equipment. And regarding our washing facilities and, let's say, concentrate production, I do not expect any major decrease because we have certain stocks of raw coal in place. And I think those facilities will be fully loaded till the year-end. And because of that, I do not expect any material deviation in terms of sales volume in comparison with our, let's say, prior focus.Then about turnover and net debt, I think Nikolay would probably answer better than me.
Yes. Let me take the second and the third one. So your question on turnover. Yes, you're right, the inventory turnover increased slightly in the first half of 2019 relative to our historical levels. That's attributable primarily to our Coal division and our division in Canada. I believe it will be normalized through the year. And also let me point out that, overall, we believe that there was no any significant, I would say, negative changes to our working capital.If you look at the dynamic of our working capital for the last 2 reporting periods, you will see that our net -- our working capital -- net working capital to revenue level is at the level of 7.6%, 7.7%. And that number did not change. So we do not see a lot of issues with working capital. And taking your second one, yes, we are quite comfortable with the current level of net debt-to-EBITDA, which is just above 1. We keep saying that we do not want that number to go above 2.
Our next question comes from Timothy Riminton with Barclays.
So I have two questions, which I'll start with first, and then also a third one, but just start with the first two. What do you see is the outlook for sales volumes in your Russia Steel division into H2. In H2 '18 our sales volumes dropped off a bit. Do you expect this to happen again or is it looking at a bit firmer this year? And secondly, you mentioned that vanadium prices have come down due to de-stocking and increases in production, but do you expect the market to normalize in the medium term? What do you think the medium term would be? And what sort of price do you estimate as a sort of natural price in the current supply-demand environment?
Look, first of all starting from Russian steel market. As I mentioned again before, we see this year as a stronger year to compare with 2018. And we also believe that at least third quarter of this year should be a good quarter. At the same time we're not giving volume forecasts as our standard practice. Speaking about vanadium, we see some restocking now primarily in China, and basically prices there went up last week to the level of, what, $40 per kilo. Speaking about sustainable levels longer term, we believe that something around $40 could be a sustainable level.
Okay. And then my third question was on your Eurobond curve. You obviously issued the 2024 earlier this year at a pretty good price. The market now is indicating potential for even better prices for you. Have you had any thoughts about refinancing some of your other Eurobonds and taking advantage of the conducive market conditions?
So first of all, let me say that we have placed ruble bonds just recently, just actually a week ago. And the amount of this bond issue, it was ruble-denominated-bonds. The amount of this issue was RUB 20 billion, which is slightly more than $300 million. We're planning to use the proceeds from these bonds to refinance the more expensive bank debt. Speaking about any other potential issues of bonds, you shall take into account that if you look at our debt maturity profile, the total amount that we need to repay in the next 18 months is below $50 million. At the same time, we are always monitoring the market. And if the market will remain strong, I cannot guarantee, I cannot say, but we might consider another issuance to refinance the bonds.
[Operator Instructions] Your next question comes from Andrew with Wood & Company.
Just a question on dividend. You, on one of the previous calls, said that you're comfortable with your level of net debt and you didn't really want to reduce it further which implied to me that you were looking to pay out a 100% of free cash flow going forward, kind of in line with some of your peers. That wasn't the case in the first half. Could you give us some color on what your intentions are for dividends for the full year this year relative to the free cash flow? Should we be modeling it in line or slightly lower? It would help if you could give some idea about the dividend expectations this year. That's my first question.
Look, what we have been telling before, we have commitment for the minimum dividend payout. And if the Board decides to pay more, decision would be based on consideration of financial performance of the company, so saying -- but also future needs of the company. And for example, what we're doing now, as you mentioned yourself, we're not going to increase net debt. At the same time, we expect more CapEx for the second of 2019, and we expect in general more volatile market in the second half in comparison with the first half. So that's why I guess the Board made a prudent decision not to pay as much as you can see.
Understood. And just on some additional guidance for the second half of the year. What sort of dynamics are you expecting in terms of your cost base going forward in the second half? On the coal side, you're not expecting a decrease in volumes, I mean do you expect similar costs in second half? And in the steel division what sort of dynamics do you expect? We can see that iron ore had gone up, it's now falling, coal is falling. Could you give us some idea of your expectations for kind of how cash cost might develop in the second half? And also in North America, there has been a big jump in the EBITDA first half. Is that sustainable going into the second half? Or what sort of moving parts do you expect to impact on EBITDA in North American divisions in 2H?
Look, normally, we do not giving any forecast about our future financials. And I guess, in the case of North America, it would be a little difficult to do that because we are working in different segments and different geographies.Talking about Russian assets, coal and steel I don't think that we expect any big changes in the cost just because of our vertical integration.
We'll take our next question from Janna Anikina with BCP Securities.
A question about EBITDA. According to your presentation it was affected by rising raw material prices, specifically iron ore. Could you please remind us what's your self-sufficiency in iron ore? And you basically count into your cost at market prices. Is that correct?
Yes. Speaking about our self-sufficiency, we are fully covered in Europe division, so with the NTMK, with respect to iron ore, so we're 100% self-sufficient. Speaking about our Siberian assets, our self-sufficiency is approximately 60%.
So basically -- but in all cost calculations you input your own iron ore and whenever you're buying from third parties at market prices, that's basically is the case?
When we calculate the cash cost for steel, yes, we use the market prices.
And you mentioned that you're expecting CapEx to increase going into the second half of the year. Could you please kind of break it down what's for maintenance and why is an uptick in that?
First of all, yes, there'll be an increase in CapEx. So our guidance for the year 2019 is around $800 million. So we are looking about spending around $500 million. I would say that the majority of that will be still in the area of the maintenance CapEx, with increase in development CapEx as well as we speed up with the new projects.
[Operator Instructions]
Ladies and gentlemen, we see that there are no further questions. We like to thank you for this call today, and have a nice day.
And it does conclude today's conference. We thank you for your participation. You may now disconnect.