Severstal Q1 2015 Financial Results

Severstal reports Q1 2015 financial results

- Significant margins despite challenging market conditions -

Moscow, Russia - April 23, 2015 - PAO Severstal (MICEX-RTS: CHMF; LSE: SVST), one of the world's leading steel and steel-related mining companies, today announces its Q1 2015 financial results for the period ended 31 March 2015.

CONSOLIDATED FINANCIAL RESULTS FOR THE QUARTER ENDED 31 MARCH 2015

Notes:

1) These amounts reflect adjustments made in connection with the presentation of the discontinued operation.

2) EBITDA represents profit/(loss) from operations plus depreciation and amortization of productive assets (including the Group's share in depreciation and amortization of associates and joint ventures) adjusted for gain/(loss) on disposals of PPE and intangible assets and for share in associates' and joint ventures' non-operating income/(expenses).

3) Free cash flow excludes discontinued operation.

4) Net profit/(loss) attributable to shareholders of PAO Severstal after FX losses.

5) Basic EPS includes both continuing and discontinued operations. Basic EPS is calculated based on the following basis: weighted average number of shares outstanding during the period: 810.6 million shares for Q1 2015, Q4 2014 and Q1 2014.

Q1 2015 vs. Q4 2014 ANALYSIS:

§ EBITDA margin increased by 6.4 ppts q/q to a record 38.5% (Q4 2014: 32.1%), representing the highest level in Severstal's history as a public company and primarily reflecting ongoing efficiency improvements as well as lower input costs with RUB devaluation mitigating the impact of lower selling prices. Group EBITDA decreased a negligible 2.0% q/q to $590 million (Q4 2014: $602 million);

§ Group revenue decreased 18.5% q/q to $1,531 million (Q4 2014: $1,878 million) despite solid demand across both domestic and export markets reflecting a decline in global steel prices and steelmaking raw materials prices more than offsetting increases in RUB-denominated selling prices;

§ Net profit1 of $343 million (Q4 2014: net loss1 of $795 million) was marginally impacted by FX translation losses of continuing operations of $31 million. Adjusting for those non-cash items, Severstal would have posted a net profit of $374 million (Q4 2014: net profit of $534 million excluding impairments);

§ Free cash flow of $209 million (Q4 2014: $425 million) generated in line with our key strategic focus. Q/q decline of 50.8% primarily reflects an increase in stock to normalized level after divesting inventories during Q4 2014 against strong demand;

§ Capex2 of $103 million, 34.4% lower q/q (Q4 2014: $157 million) reflecting our prudent approach to investments as well as the completion of most large-scale development projects;

§ Recommended dividend payment of 12.81 RUB per share for the three months ended 31 March 2015.

Q1 2015 vs. Q1 2014 ANALYSIS:

§ Group revenue decreased 23.1% y/y to $1,531 million (Q1 2014: $1,991 million) primarily impacted by lower realized prices, which has been partially mitigated by significant increases in sales volumes at Russian Steel;

§ Group EBITDA increased 28.5% y/y to $590 million (Q1 2014: $459 million), driven by Russian Steel's operational enhancements, lower input costs and RUB devaluation, more than offsetting lower deliveries at Resources;

§ Continued strong free cash flow at $209 million (Q1 2014: $256 million);

§ Capex of $103 million2, 59.0% lower y/y (Q1 2014: $251 million).

FINANCIAL POSITION HIGHLIGHTS:

§ Severstal gross debt reduced by 15.5% since the end of Q4 2014 to $2,899 million;

§ This decrease by more than $0.5 billion partially reflects the buy back of $221 million of the Company's 2016 and 2017 Eurobond issues during a public tender offer in Q1 2015;

§ Committed unused credit lines returned to $688 million after $300 million of short-term debt raised in Q4 via committed facilities was repaid during Q1 2015;

§ As at the end of Q1 2015, cash and cash equivalents was $1,522 million (Q4 2014: $1,897 million). Combined with the abovementioned factors this resulted in a 10.2% q/q decrease in net debt as at the end of Q1 2015 to $1,376 million (Q4 2014: $1,532 million);

§ Net Debt/EBITDA ratio further decreased q/q to 0.6x at the end of Q1 2015 (Q4 2014: 0.7x), one of the lowest amongst steel companies globally;

§ Continued solid liquidity position with $1,522 million in cash and cash equivalents and committed unused credit lines of $688 million, more than covering short-term debt4 of $465 million.

Alexey Mordashov, CEO of JSC Severstal Management, commented:

"We are pleased to report a solid start to the year with strong margins, which are amongst the strongest in the industry globally. Our strategy of prioritizing internal efficiency and quality over volumes underpins this excellent performance.

Although visibility remains limited, we are seeing resilience in domestic steel demand supported by flexibility to choose between geographical shipment alternatives, which enables us to target full utilization.

We continue to focus on our customer care and product quality, to be the supplier of choice amid growing competition in both domestic and export markets."

CHIEF EXECUTIVE'S REVIEW OF THE FIRST QUARTER ENDED 31 MARCH 2015

I am pleased to report that the Group delivered another resilient financial performance in a quarter that was characterized by a challenging pricing environment. Despite an 18.5% q/q decline in revenue to $1,531 million (Q4 2014: $1,878 million), Severstal delivered a significant 6.4 ppts q/q EBITDA margin improvement to a very pleasing 38.5% (Q4 2014: 32.1%), which is one of the highest levels globally amongst our peers. This strong profitability in Q1 2015 has been largely driven by ongoing operational improvements, lower raw materials prices and the positive impact of RUB devaluation, with the vast majority of Group costs denominated in RUB.

In Q1 2015 the Group's total crude steel output increased 2% q/q. At the same time, sales of steel products contracted 4% q/q as the Russian Steel Division restored internal stock of high value-added products to normal levels after divesting inventories against strong demand in Q4 2014.

Although Vorkutaugol operations have been negatively affected by severe weather conditions in the region it has delivered another reduction in total cash costs to $33/t (Q4 2014: $40/t). This demonstrates the sustainability of the levels achieved and was one of the contributors to an expanded EBITDA margin at Severstal Resources, to 40.8%.

Severstal prioritizes dividend payments given its strong liquidity position and continued excellent free cash flow generation, whilst also reducing outstanding debt. A total of $221 million of the Company's 2016 and 2017 Eurobonds were redeemed during a public tender offer in Q1 2015. The Group's Net Debt/EBITDA ratio remained significantly below our mid term target of 1.5x, further decreasing to 0.6x at the end of Q1 2015.

We maintain a prudent and flexible approach to capex which is focused on operational efficiency and further improvement of product mix and customer service. Our FY 2015 capex has been set at RUB 30 billion, the overwhelming majority of our capital expenditure being RUB-denominated. That said, capex in Q1 was 34.4% lower than the previous quarter at $103 million (Q4 2014: $157 million).

SEVERSTAL RUSSIAN STEEL

Severstal Russian Steel increased its steel output in Q1 2% to 2.96mnt with all its rolling facilities at Cherepovets Steel Mill (CherMK) running at almost full capacity. However, steel products sales decreased 4% q/q to 2.56mnt. This allowed the Company to build up its internal stock of high value-added (HVA) products to normal levels following the divestment of inventory against strong demand and the temporary maintenance of BOF#3 during Q4.

Notwithstanding a decline in steel sales volumes, Severstal's proximity to export markets facilitated a shift from domestic to export deliveries. As a result, in Q1 2015 exports accounted for 38% of sales (Q4 2014: 29%).

Increased exports and increased domestic RUB-denominated sales prices in order to catch up with the USD-denominated parity helped to partially mitigate the negative impact of the sharp RUB devaluation on revenue. Moreover, given recent RUB appreciation certain types of products are currently trading at a premium to export prices.

Reflecting all the abovementioned factors revenue decreased 18.6% q/q to $1,396 million (Q4 2014: $1,715 million). Despite this substantial decrease Severstal Russian Steel has been able to mitigate the impact of lower selling prices through lower input prices in conjunction with reductions in production and G&A costs. As a result, EBITDA increased 2.4% q/q to $476 million (Q4 2014: $465 million), while EBITDA margin increased another 7.0 ppts to 34.1% (Q4 2014: 27.1%).

The total non-integrated cash cost of slab production at the Cherepovets Steel Mill in Q1 decreased another $41/t q/q to $214/t (Q4 2014: $255/t) due to lower raw materials' prices as well as higher crude steel production volumes and the positive impact of RUB devaluation. The integrated cash cost of slab in Q1 decreased $34/t q/q to $169/t due to improved profitability at Severstal Resources, offsetting lower sales prices.

SEVERSTAL RESOURCES

The pricing environment in Q1 remained challenging for steel-related raw materials, especially coking coal.

With Severstal's successful efforts to increase RUB-denominated prices since the beginning of the year, the Company has been able to partially mitigate the impact of a 15% q/q decline in the global iron ore benchmark and negative RUB devaluation effect. However, USD-denominated average selling prices for iron ore pellets and iron ore concentrate decreased only 4% q/q and 11% q/q, respectively. Coking coal concentrate average selling prices declined 16% q/q, reflecting a 30% q/q RUB devaluation. That was partially offset by another round of RUB-denominated prices increases, which took place in the second half of Q1.

The division's total coking coal concentrate sales decreased 13% q/q as a result of severe weather conditions during the period. The Company expects production volumes to recover in Q2 2015. Iron ore pellet sales volumes decreased 6% q/q against strong comparatives in Q4 2014, while iron ore concentrate sales volumes remained largely flat q/q.

As a result of these factors, Severstal Resources' revenue decreased 18.8% q/q to $289 million (Q4 2014: $356 million). Nevertheless, Q1 2015 EBITDA decreased only 11.9% q/q to $118 million (Q4 2014: $134 million) with EBITDA margin increasing 3.2 ppts to 40.8%.

This resilient performance has been achieved by management's continued focus on further reducing production costs across all mining assets and the positive effect of the RUB devaluation, with costs almost entirely being RUB-denominated. Specifically, total cash costs (TCC) at Karelsky Okatysh declined to $22/t (Q4 2014: $25/t), while TCC at Vorkutaugol decreased to $33/t (Q4 2014: $40/t). At the same time, TCC at Olcon improved substantially to $23/t (Q4 2014: $32/t) on solid production. This supported higher q/q sales volumes of iron ore concentrate to external customers by Olcon.

DIVIDEND

The Board is recommending a dividend payment of 12.81 roubles per share for the three months ended 31 March 2015.

Approval of the dividend is expected at the Company's AGM which will take place on 25 May 2015. The record date for participation in the AGM was 13 April 2015.

The recommended record date for the dividend payment is 5 June 2015. The approval of the record date for the dividend payment is expected at the Company's AGM which will take place on 25 May 2015.

OUTLOOK

Global steel markets are likely to continue to remain under pressure later in the year due to steel overcapacity, weakening of the Chinese economy and the softening of steel-related commodity prices. On another hand, theseasonal pick-up in construction-related demand globally is already being seen in Europe, declining steel exports from China and economic development acceleration in countries benefiting from the low oil price can provide some near-term support for steel prices.

In Russia, we saw better than initially expected steel demand both in Q1 and so far in Q2 2015 with pricing reaching export USD-denominated parity after the sharp RUB devaluation in Q4 2014. Though visibility of the steel demand remains low in Russia, we remain cautiously optimistic.

The company remains in good shape and well-positioned for the future. Our focus continues to be on cost reduction in mining and customer care initiatives in steel, allowing Severstal to steadily increase sales of high-value added products both domestically and for export.

http://www.rns-pdf.londonstockexchange.com/rns/0861L_-2015-4-23.pdf http://www.rns-pdf.londonstockexchange.com/rns/0861L_1-2015-4-23.pdf

NOTES

1. Net profit/ (loss) attributable to shareholders of PAO Severstal.

2. Represents cash outflow on capex in the period.

3. In January, 2015 part of the Group's entities were transferred from Severstal Resources segment to Severstal Russian Steel segment following a change in the Group's management structure. The comparative information had been presented as if the transfer occurred at the beginning of the earliest comparative period presented.

4. Represents principal amount of debt.

For further information, please contact:

Severstal Investor Relations

Vladimir Zaluzhsky

T: +7 (495) 926-77-66

[email protected]

Severstal Public Relations

Elena Kovaleva

T: +7 (495) 926-77-66

[email protected] 

Severstal's financial communications agent - Hudson Sandler

Andrew Hayes / Maria Ignatova / Alex Brennan

T: +44 (0) 20 7796 4133

A conference call on Q1 2015 results for investors and analysts hosted by Alexey Kulichenko, Chief Financial Officer, will be held on April 23, 2015 at 14.00 (BST London)/ 16.00 (Moscow).

International Dial in: +44 (0) 203 139 4830

Russian Toll-Free Dial in: 810 800 2136 5011

UK Toll-Free Dial in: +44 (0) 808 237 0030

Pin code: 60757783#

The call will be recorded and there will be a replay facility available for 30 days as follows:

International: +44 (0) 203 426 2807UK Toll Free: +44 (0) 808 237 0026

Reference: 656174#

Full financial statements are available at http://www.severstal.com/eng/ir/results_reports/financial_reports/ 

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PАО Severstal is one of the world's leading vertically integrated steel and steel related mining companies, with assets in Russia, Ukraine, Latvia, Poland, Italy and Liberia. Severstal is listed on RTS and MICEX and the company's GDRs are traded on the LSE. Severstal reported revenue of $8,296 million and EBITDA of $2,203 million in 2014. Severstal's crude steel production in 2014 reached 11.3 million tonnes. www.severstal.com