EVRAZ plc (OTCPK:EVRZF) Q4 2021 Earnings Conference Call February 25, 2022 7:00 AM ET

Alexander Frolov - Former Chief Executive Officer

Irina Bakhturina - Investor Relations

Aleksey Ivanov - Chief Executive Officer

Nikolay Ivanov - Chief Financial Officer

Alexander Kuznetsov - Head, Strategy and Performance Management

Dan Shaw - Morgan Stanley

Yuri Vlasov - Sova Capital

Boris Sinitsyn - Renaissance Capital

Good day and welcome to the EVRAZ Full Year 2021 Financial Results Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Irina Bakhturina. Please go ahead.

Good afternoon, ladies and gentlemen and welcome to the conference, which is dedicated to EVRAZ full year 2021 results.

We would like to start with a shared presentation about the results, which is uploaded to our website or you can use the audio webcast to view it. Today on the call, we have Aleksey Ivanov, EVRAZ CEO; Nikolay Ivanov, EVRAZ CFO; and Alexander Kuznetsov, Head of Strategy and Performance Management. After the presentation, we would be happy to answer your questions.

So, I guess with this, I will pass the floor to Aleksey. Aleksey, please. Thank you.

Thank you, Irina. Good day, everyone. Thank you very much for joining today’s call. On this call today, Nikolay Ivanov, Alexander Kuznetsov, and myself will be guiding you through our operation and answering our presentation and answering your questions. I will briefly discuss the key market trends and walk you through the company’s highlights.

So, let us start from Slide #5. In the reported period, both iron ore and coking coal prices spiked to new highs. We have witnessed very strong first half of the year, followed by policy shifts in China. Specifically, our local authorities kept production in the second half of the year after steel output was growing 11% year-on-year in the first half of last year, which led to flat steel output in 2021 compared to previous year, the level which in our view, Chinese government will continue to use as a benchmark for future production. This development had influenced seaborne trade of iron ore, swinging markets into surplus and getting the prices across value chain from iron ore to steel products.

Nevertheless, prices remain elevated versus the previous cycles. Last time, we have seen comparable price levels, was in 2007 and ‘08. At this time, it’s a transformation of the second large economy into greener one that drives prices, a structural trend that will support both demand and price levels in the medium-term. As for the coal price, Chinese domestic supply tightness and disruptions in coking coal import drove prices to new record highs in 2021. The country’s ban on coal imports from Australia affected demand and changed trade flows, increasing price volatility. The premium hard coking coal price rose to a high late in October. However, after government intervention and improvements in supply, it tumbled and had almost got up with the Australian benchmark in December.

Now, let’s move on to financial results in 2021. Today, we have reported our best set of results since 2008. Revenue increased by 45% to $14.2 billion, with sales on the Russian CIS and Asian markets contributing the most to the growth. These strong results are mainly attributed to higher sales prices of steel products, coal and vanadium. EBITDA reached $5 billion and EBITDA margin improved to 35%. Given stronger results on the cash side, our free cash flow reached $2.3 billion, enabling the company to pay dividends of $1.5 billion and significantly reduced net debt. We continue to prudently manage our debt position with a net debt to EBITDA ratio standing at 0.5.

Health and safety of our employees remains at the top of the management agenda. It is my said duty to report that we had 8 fatalities in our business last year. And I personally regret the losses of EVRAZ teammates as it happened on my watch. We have thoroughly investigated the root causes of these incidents and introduced corrective measures to mitigate occurrence similar risks in the future. We also provided the necessary support and assistance to families affected. With the significant focused efforts across the company, we managed to reduce our lost-time injury frequency rate, including contractors to 1.21 in the last year down from 1.58 in 2020. We are currently rolling our modules to contain the incidents across the company as part of our risk management project and we are seeing positive results. It’s my top priority as CEO to ensure that we address internal processes and constantly educate our employees on safety, making sure that every one of our colleagues and every contractor working with us can return home safely after their shift.

At EVRAZ, we believe that sustainable development plays a vital role in our success. So, we strive to incorporate ESG principles into our operations and decision-making practices. Our company produces steel, an important component for global infrastructure build as people look to improve the quality of their lives in the years to come. Steel is a crucial material in the transition towards a circular low-carbon economy. We recognize our responsibility to produce it in a way that minimizes the impact on the environment, while responding to the needs of our stakeholders. We continuously review every aspect of our business to identify where we could do better, leading the resources and technologies available.

Our TEG developments in 2021 were: firstly, in the beginning of 2021, our Board of Directors agreed a new set of targets for 2030. Secondly, HSE Committee of the Board of Directors was transformed in the Sustainability Committee to reflect the Board’s increasing oversight of sustainability matters across the group as well as upping the bar of responsibility and scope of work. Next, we created a separate sustainability focused body at the management level to supervise and monitor the performance across corporate functions. Also, EVRAZ commenced work and we are making a good process developing the preliminary decarbonization plan until 2060 corresponding to the global agenda of reaching net zero. Lastly, we incorporated an internal carbon price to accurately budget and plan capital expenditures to address a rapidly changing environment on climate regulation. The CO2 footprint and other environmental parameters like A emissions and freshwater consumptions are additional metrics during investment projects assessments.

Moving to the next slide. Our strategic focus remain unchanged, lower cost position in the industry, development of product portfolio and customer base, and capital allocation, debt, CapEx and dividends. In 2021, our cost cutting projects help us to save $335 million. Customer-driven initiatives improved profitability by $255 million. We proceed with a number of important CapEx projects to drive future growth, kept leverage in check, while simultaneously rewarding our shareholders with significant dividends.

Finally, regarding our key priorities for 2022, price levels of both input materials and steel products largely remains outside of our control. What we are busy with is the prudent management on the cost side and nourishing a culture of ongoing improvements, which translates in savings for the company. We will press ahead with alignment of our operations with best practices. Lastly, our focus is on timely execution of 2022 investment program, upgrading our footprint, upping the value in focusing on a royal mill in North America, vanadium processing, our rail and beam mill and rolling mill. Finally, we are cautious of the current geopolitical circumstances. We continue to monitor the situation, and we will keep you up to date regarding any material development that can influence our business.

Now, let me hand over to the Nikolay to run you through our financial performance in more detail. Thank you.

Thank you, Aleksey. Good day, everybody. I’m on Slide 12. Positive market fundamentals are reflected in our revenues and EBITDA. On a full year basis, revenues were up 45% to $14.2 billion. EBITDA increased 127% from $2.2 billion to $5 billion, boosting the EBITDA margin from 23% last year to 35% this year. The increase in EBITDA was primarily attributable to higher steel, vanadium and coal product sale prices.

Looking at our segments, in 2021, at least the Steel segment revenues rose by 46% year-on-year to $10.2 billion. Despite an increase in cost of sales, Steel segment’s EBITDA almost doubled to $3.6 billion, on high prices for semi-finished construction and vanadium products. For Steel North America, revenues increased by 31% year-on-year to $2.3 billion. The segment’s EBITDA increased to $321 million due to higher revenues from sales of flat rolled, construction and railway products. In Coal division, revenues went up by 56% year-on-year to $2.3 billion, mainly driven by an increase in coal product sales prices, as a result, in EBITDA from the segment reaching $1.3 billion.

Moving to Slide 13. Turning to free cash flow, in the reporting period, our free cash flow showed by 121% year-on-year to $2.3 billion. Strong free cash flow generation was supported by EBITDA growth. However, it was partly offset by working capital outflow in prices as well as growth in capital expenditures in 2021 compared to 2020, an increase in accrued taxes.

Slide 14. As we said earlier, we are actively looking for efficiencies in our daily operations that will contribute to our financial performance. Most of the projects aim to reduce costs, enhance customer experience and optimize the use of input materials. In 2021, an EBITDA effect from cost-cutting initiatives reached $335 million. The customer focus initiatives generated an EBITDA effect of $255 million as a result of sale efforts in beams as well as improvements in the efficiency of the logistics, procurement optimization and sales improvements. A large part of the effect comes from the Steel division. We plan to achieve further efficiencies in the order of at least 3% of the cost of sales per annum.

Moving to Slide 15, CapEx. In 2021, we invested $920 million, of which $517 million was spent on maintenance projects and $403 million on development. The 40% rise in CapEx program compared to the prior year was driven by higher development expenses. In Russia, we are working on a new integrated flat casting and rolling facility at Siberia. We are now developing the project documentation and signing equipment contracts with suppliers. Once completed, the mill will produce around 2.5 million tons of finished steel products per year. This is a key project allowing us to significantly increase the share of finished products in our portfolio to 77%. Once commissioned, which is due in 2026, it will add around $130 million to our EBITDA.

EVRAZ NTMK made progress with the feasibility study on its rail and beam mill upgrade, an important project that we will cater to domestic customers. As part of extending our value chain in the vanadium business, in 2021, we have started a vanadium processing plant construction with a design capacity of 8.6 million tons of slack per year to reduce tolling practices. This will add $60 million to our EBITDA by 2026.

And in North America, we are constructing a high-efficiency long product mill at Puebla at Colorado, which will produce 100-meter rails using solar power. This will help to maintain our technical leadership and contribute to the shift to a higher value-added product mix. We expect that we will be able to launch the mill in 2023. Our long-term CapEx program will help us to maintain a diversified product portfolio in the niches, where the company retains leading positions as well as to remain at the low end of the cost cut. Looking into the following year, our target CapEx is around $1.1 billion.

Slide 16. On debt management, we have significantly reduced our debt position during the year. Total debt fell by 18% to $4.1 billion as of year-end. The vast majority of our debt is U.S. dollar-denominated and a split into bank debt, 56%; and Eurobonds, 43%. The notable transactions we have made last year are the following: We signed a $150 million sustainability linked loan with ING also a $350 million 5-year amortizing loan was signed with Intesa available for utilization until May 2022. As of the year-end, this facility remained unutilized. In October of 2021, we finalized a macro call on EVRAZ 2022-euro bonds. And now we have no significant maturities until first quarter of 2023. Our leverage reduced significantly through the year from 1.5 to 0.5, and this allowed us to pay a good dividend.

Slide 17. We introduced our current dividend policy in 2017, and we are committed to upholding it for the foreseeable future. In 2021, we faced a strong rebound in the commodity cycle, and this resulted in a strong financial performance and allowed us to distribute over $1.5 billion of dividends last year. In December of 2021, EVRAZ announced another interim dividend to its shareholders, $292 million or $0.20 per share, which were paid in January of 2022. And on February 24, yesterday, the Board voted to disburse a total of $729 million or $0.50 per share. The de-merger of EVRAZ’s coal business is currently expected to complete in late March. It is anticipated that Raspadskaya will announce dividends according to its guidance during the publication of the consolidated IFRS financial statements for 2021 in the amount not less than 100% of free cash flow.

With this, I would like to thank you for listening and pass the floor to Alexander, who will provide you with Raspadskaya demerger update.

Thank you, Nikolay. Hello everyone. I’m on Slide #19. And the purpose of this slide is just to remind all shareholders that in order to receive Raspadskaya shares on 1st of April, which is a planned settlement date, a shareholder should do some steps. First, you need to ensure that you hold an eligible account with direct or indirect participation of Europe, Clearstream or national settlement depository and you can accept Raspadskaya sales on this account.

Second and you need to do it as soon as possible. Then you need to provide the information on this account to compute share, and we need to do it by 15th of March. And third, you need to instruct your broker to accept Raspadskaya shares, and you need to do it by 31st of March. In other case, if you not do it, then you will become a participant of sale facility, and you will receive cash when all shares of Raspadskaya will be sell through sales facility. So this is all from my side, and I think we are ready for Q&A session. Thank you.

Thank you. [Operator Instructions] We will take our first question from Dan Shaw of Morgan Stanley. Please go ahead.

Hi, thanks for the presentation. Just a couple of questions from my side. The first one, can you give an update on your liquidity position post year-end and after the spin-out of Raspadskaya, what’s your cash balance and committed facilities? And is this generally held with European or Russian banks? That’s the first question. And then just following on from that, can you talk about the actions that you have taken in recent weeks or months to sort of ensure your business continuity going forward? Obviously given the current geopolitical tensions, I’m thinking sort of with regards to inventory levels, banking relationships and things like that. Thank you.

Okay. Let me take the first one. So the – as you can see from the information contained in our annual report, our – the amount of cash and cash equivalents on our balance sheet is slightly in excess of $1 billion. Today, this amount increased. They have two quite good months, January and February. Answering about the position, the majority of cash are now concentrated within the Russian banks.

Okay. And I will answer the second question. This is Aleksey Ivanov. So since 2014, actually, we have known how to work with the restriction framework. So we are quite prepared with that and we have a strong compliance service to monitor transactions regarding this kind of situation. We are proceeding our business as usual, just review certain deposits maybe we will have certain steps to increase our stocks in that’s probably from my side on the second question.

We will take our next question from Timothy Riminton of Barclays. Please go ahead.

Hello. Thank you and good afternoon. Unfortunately, I have got more questions on sanctions. So, I am just trying to understand, do you currently have any exposure to the Russian banks that have been targeted by U.S. sanctions? And what do you plan to do with any loans you might have outstanding with those banks given that we are now in a fairly narrow one wind down period?

Okay. Currently, we are analyzing the impact of potential sanctions imposed just last night. So, we believe it will not have a significant effect on the company.

Okay. Do you believe you will be able to continue having a relationship with these institutions in the future then?

I think it is too early, again, as I said, to talk about it. The sanctions were announced just very, very recently, and we need significantly more time to analyze and find what’s the right forward for us?

Okay. Could you provide any comments on how you believe the sanctions so far might impact the business? I mean have been the announcements on restrictions on semiconductors. Is that something that you believe might affect your ability to do business and your CapEx programs?

Yes, as Nikolay said, we are currently analyzing all our inventory positions. At the moment, it’s pretty much early to say that we see any consequences of that. However, as we said before, we will inform the market accordingly if we understand that any such circumstances, we have material effect on our business. Thank you for your question.

We will now take our next question from Yuri Vlasov from Sova Capital. Please go ahead.

Thank you very much for the opportunity. It’s not going to be the question anyway related to sanctions. Have you got any changes in your plans regarding your flat rolling steel mill that you are going to contract? Thank you.

Yuri, hi, happy to hear you, Aleksey Ivanov. Look, no, we don’t have any changes in our plans for the moment. We are in the engineering stage, that we will finish autumn this year. And then we will make our final decision to proceed. And at this point of time, we haven’t had a strong intention to go forward for the additional stage. And we do also certain preparational work on our side.

Thank you. Aleksey, nice to hear from you as well.

[Operator Instructions] We will take our next question from Boris Sinitsyn of Renaissance Capital. Please go ahead.

Hi team. Thank you. Congratulations with the strong results. Two questions from my side. Firstly, on North America, what’s your like general outlook for 2022 performance? And in particular, do you expect any recovery in tubular volumes and improvement in flat steel product mix and prices? That’s the first question.

Yes. Thanks for the question. We see a very strong demand on the tubular side for North America, especially in OCTG segment. It will be better than the last year. However, on a flat product side, we see some softening in demand in the first quarter of this year, and we foresee that it will be – it will be more in – starting from the second quarter for this year. The price environment is still strong in U.S., and we expect having a good business this year in our North American operation.

Okay. Thank you. Thank you very much. Maybe just a follow-up on flat steel prices, like looking at the U.S. price in 2021 versus the benchmark like of various industry sources. It looks like a discount of U.S. price actually expanded quite a lot in 2021. Do you expect this gap to narrow in 2022?

I think it all depends on a particular mix as well as region of sale. So, kind of we – when we sell in the region of – because predominantly, we sell in Canadian market and in the U.S. market in Portland, and we see – we sell in according to the benchmarks and market price at this part of the sales regions for us.

That’s helpful. And my second question is on basically dividend policy. I know the management confirmed that there remains in place, but still, do you think that after the Raspadskaya demerger and basically demerger of highly volatile business in terms of revenues, right? I do expect that you might adjust or make dividend policy, I would say, more detailed closer to your Russian steel peers.

Yes. Thank you for the question. No, currently, we do not plan to make any changes to the existing dividend policy after the demerge of coal business.

Okay. Thank you. That’s it from my side.

We now have a follow-up from Dan Shaw of Morgan Stanley. Please go ahead.

Hi. Thanks. Yes. Just a quick follow-up on the CapEx that you are saying $1.1 billion, I think, for this year. Could you just give a few words on the main projects that are included within that number, please? Thank you.

Yes. So Dan, this is – the main project for this year is Palmer. It’s a royal new project in North America in our investment portfolio. Then we have Vanady-Tula. This is a vanadium processing mill into the region. And also the third part is Alegre, the project we – for our second wheel shop in as well as we have development of our new Kachkanarsky deposits. This is basically the shift from current operations to the new open pit at Kachkanarsky There are also several not significant investment projects in our portfolio, all the rest is the ecology and maintenance CapEx.

And we also have a follow-up from Timothy Riminton of Barclays. Please go ahead.

Yes. Just a follow-up on your ESG plans, could you give any indication of when and if you plan to announce a longer term decarbonization strategy potentially looking forward beyond 2030, and can you provide any sort of indication on how you are thinking about the long-term risk there?

Yes. Thanks for your important – very important question. Actually, we are now – we identify kind of a roadmap for long-term decarbonization and it includes, first of all, reduction due to emissions by our mills by 20% by 2030. Those mainly will be based on energy efficiency programs, some green energy purchases and additional initiatives to substitute coke in our blast furnaces. Going forward, we are researching in an opportunity to produce zero from Kachkanarsky book. And we have already started researching all these materials for the opportunity to get this material. And based on the results, we plan further to what would be the rules to use these materials in our assets. Also, we have certain – we have a close look at the green energy development. And finally, we are researching opportunity for carbon usage capture and storage. So also, we are looking for new technologies. We are carefully watching what’s going on, on hydrogen usage, for instance, those technologies are quite premature stage and it will take a significant amount of time in our opinion to get economically justified results for this route of steel production. So, this is basically our ideas on a CO2 reduction plan.

That’s really helpful. And do you have any idea of when we might get the full plan from you?

I think we will be ready to present at close of year-end.

[Operator Instructions] It appears there are no further questions at this time. I would like to hand the call back to the speakers for any additional or closing remarks.

Yes. Thank you. We also see that there are no further questions. We would like to thank everybody for being on this call with us today. And have a great end of the day and the weekend ahead. Thank you. Bye.

Thank you very much. Bye-bye.

Thank you. That now concludes the call. Thank you for your participation. You may now disconnect.