NLMK (MOEX:NLMK) — international metallurgical company, which is engaged in the production of high quality steel products. As of the end of 2020, the group took a share 19% in the global slab market and share 21% on the Russian steel market.
Financial results
21 October NLMK presented financial results for the third quarter of 2021, in which year on year showed a multiple increase in its performance.
Sales and prices. The company has published openly weak operating results. Total sales of steel products decreased by 7% from 4,443 thousand tons to 4,146 thousand tons against the backdrop of unconvincing performance of the main segment - Flat Products Russia - due to a drop in slab production as a result of an incident in the oxygen supply infrastructure of NLMK's steel production.
But these weak operating data were completely offset by high prices for steel products and strong results of the US and European directions - NLMK USA and NBH, whose sales increased by 17% amid increased demand.
As for steel prices, then in the third quarter of 2021 in all regions they behaved differently. For example, in the Russian Federation, there was a drop in quotations due to a decrease in orders from the construction and industrial sectors, in China, prices remained virtually unchanged despite increased regulatory measures by the state, and in the USA they increased against the backdrop of increased demand for metal products due to industrial growth in production.
Revenue and net profit. NLMK's revenue more than doubled from $2.229 billion to $4.56 billion compared to last year, and net income five times to $1.622 billion. The main reason is a multiple increase in sales prices of steel products. At the same time, if we compare the results with the second quarter of 2021, that results in a more modest growth: Total 10% in revenue and 19% at net profit.
In the fourth quarter of 2021, compared to the third quarter, management expects a recovery in financial results and production in Lipetsk, which will increase steel production at this site of the company by 10% at the end of the current year by 2020. The original plan was to increase 17%, but the accident in August disrupted these plans.
In this way, in the fourth quarter of 2021 we will see an increase in slab production in Russia, as well as an increase in performance: segment "Flat-rolled products Russia" and NLMK's revenue in Russia, That, probably, will restore its share in the overall results to the average values: 40—45% against 37% in the current quarter.
Revenue by segment, billion dollars
| Revenue | Share in overall results | |
|---|---|---|
| Flat rolled products of the Russian Federation | 2,422 | 53% |
| NLMK USA | 1,039 | 23% |
| Long products RF | 0,601 | 13% |
| NBH | 0,291 | 6% |
| NLMK Dunstil | 0,169 | 4% |
| Extraction and processing | 0,038 | 1% |
Revenue by region, billion dollars
| Revenue | Share in overall results | |
|---|---|---|
| Russia | 1,697 | 37% |
| North America | 1,133 | 25% |
| EU countries | 0,834 | 18% |
| Near East | 0,398 | 9% |
| South America | 0,218 | 5% |
| CIS | 0,125 | 3% |
| Asia | 0,105 | 2% |
| Other regions | 0,050 | 1% |
EBITDA and FCF. The company's EBITDA almost quadrupled compared to the previous year to $2.287 billion due to higher prices for steel products and retention of expense items: for example, business expenses increased by only 11%, and general economic and administrative - on 30%. Besides, NLMK has improved its operational efficiency, which is being implemented as part of the "Strategy 2022": it added $49 million to EBITDA in the third quarter.
Like other indicators, free cash flow (FCF) has multiplied in 4,7 times up to $1.1 billion. The main reason is the growth of EBITDA and the reduction of capital expenditures, which were partially offset by the replenishment of working capital.
Dynamics of EBITDA and FCF, million dollars
| EBITDA | EBITDA margin | FCF | |
|---|---|---|---|
| 3к2020 | 579 | 26% | 239 |
| 4к2020 | 890 | 37% | 229 |
| 1к2021 | 1166 | 41% | 452 |
| 2к2021 | 2052 | 50% | 864 |
| 3к2021 | 2287 | 50% | 1 114 |
net debt. This indicator compared to the second quarter of 2021 increased by 40% to 2.7 billion thanks to large dividend payments for the first and second quarters of 2021 and an increase in working capital.
Debt load of NLMK, million dollars
| net debt | net debt / EBITDA | |
|---|---|---|
| 3к2020 | 1946 | 0,87× |
| 4к2020 | 2495 | 0,94× |
| 1к2021 | 2087 | 0,65× |
| 2к2021 | 1963 | 0,42× |
| 3к2021 | 2739 | 0,43× |
Dividends and comparison with competitors
The main advantage, which Russian metallurgical companies attract retail investors, - huge dividend payouts. NLMK, according to its dividend policy, distributes 100% FCF, if the value of the coefficient "Net debt / EBITDA "is below 1.0 ×.
For the third quarter of 2021, this allowed the company's board of directors to pay a dividend of 13,33 R. Current Quarterly Dividend Yield — 5,9%. Register Closing Date - 7 December 2021.
Seeing huge dividend payments, which the management of commodity companies distributes to their shareholders, the Russian government decided to increase the tax burden on these enterprises. For metallurgical companies, an excise tax on liquid steel will be introduced from 2022, which will be 2,7%, and the MET rate for iron ore - 4,8%. According to NLMK calculations, in 2022 this will lead to a loss of 300-500 million dollars.
Besides, since 2023, the state has been discussing the introduction of an increased income tax, which would depend on investment activity and the volume of dividends paid in the previous five years. This may also lead to a decrease in the dividend base of metallurgists..
Comparison with competitors
| EV / EBITDA | P / E | EBITDA margin | net debt / EBITDA | |
|---|---|---|---|---|
| NLMK | 3,30 | 4,27 | 50% | 0,43× |
| Severstal | 3,83 | 5,33 | 54% | 0,29× |
| MMC | 2,79 | 3,95 | 38% | 0,04× |
| Cleveland-Cliffs | 4,24 | 5,58 | 32% | 1,30× |
| ArcelorMittal | 3,19 | 4,52 | 23% | 0,41× |
What's the bottom line?
Even taking into account the August accident, NLMK in the third quarter, thanks to the American division, showed the strongest financial results compared to Russian competitors. This allowed the Lipetsk company to return almost 6%.
In the fourth quarter, the metallurgist can show even more convincing results due to the restoration of production capacities at the Lipetsk site and high prices for steel products in Russia, America, Europe and China.
