Severstal Reports Q2 & H1 2015 Financial Results

Severstal reports Q2 and H1 2015 financial results

- Sustained performance in an uncertain environment -

Moscow, Russia - July 23, 2015 - PAO Severstal (MICEX-RTS: CHMF; LSE: SVST), one of the world's leading steel and steel-related mining companies, today announces its Q2 and H1 2015 financial results for the period ended 30 June 2015.

CONSOLIDATED FINANCIAL RESULTS FOR THE QUARTER ENDED 30 JUNE 2015

Notes:

1) The amounts for Q1 2015 reflect adjustments arising from a change in the methodology for calculating the unrealised gain in inventory, reducing Q1 EBITDA by $7 million. The amounts  for H1 2014 reflect adjustments made in connection with the presentation of the discontinued operation and the change in the methodology for calculating the unrealised gain in inventory, increasing EBITDA by $8 million.

2) EBITDA represents profit 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 from continuing operations after FX fluctuations.

5) Basic EPS from continuing operations is calculated on the following basis: net profit from continuing operations divided by the weighted average number of shares outstanding during the period: 810.6 million shares for Q2 2015, Q1 2015, H1 2015 and H1 2014.

Q2 2015 vs. Q1 2015 ANALYSIS:

§ Group revenue increased 18.0% q/q to $1,806 million (Q1 2015: $1,531 million) mostly due to RUB appreciation leading to higher average USD-denominated selling prices and a moderate seasonal rebound in sales volumes on domestic and export markets both in steel and mining divisions;

§ Group EBITDA increased 0.9% q/q to $588 million (Q1 2015: $583 million). The impact of RUB appreciation on the Company's cost base was fully mitigated by higher average USD-denominated selling prices and ongoing efficiency improvements. Group EBITDA margin was reduced to 32.6% in Q2 2015, but remains amongst the highest in the industry;

§ Net profit of $469 million (Q1 2015: $337 million) was positively impacted by a FX translation profit of continuing operations of $130 million. Adjusting for this non-cash item, Severstal would have posted an underlying net profit of $339 million (Q1 2015: $368 million excluding FX translation losses);

§ Excellent progress has been made in our strategic priority of enhancing free cash flow, which increased a substantial 105.3% q/q to $429 million (Q1 2015: $209 million). This improvement was partially driven by much better dynamics in working capital compared with Q1 2015 on the back of improved seasonal demand as well as the delayed receipt of cash from sales during the previous quarter;

§ Cash outflow on capex of $111 million, 7.8% higher q/q (Q1 2015: $103 million), reflecting our prudent approach to investments;

§ Recommended dividend payment of 12.63 RUB per share for the three months ended 30 June 2015.

H1 2015 vs. H1 2014 ANALYSIS:

§ Group revenue decreased 20.1% y/y to $3,337 million (H1 2014: $4,178 million) as the impact of lower realized prices was only partially mitigated by moderate increases in sales volumes at Russian Steel and Resources;

§ Group EBITDA increased 20.3% y/y to $1,171 million (H1 2014: $973 million), driven by Russian Steel's operational enhancements, lower input costs and RUB devaluation y/y, more than offsetting lower deliveries at Resources;

§ Continued strong free cash flow at $638 million (H1 2014: $589 million);

§ Cash outflow on capex of $214 million, 51.5% lower y/y (H1 2014: $441 million).

FINANCIAL POSITION HIGHLIGHTS:

§ Severstal gross debt increased 0.3% since the end of Q1 2015 to $2,907 million (Q1 2015: $2,899 million);

§ As at the end of Q2 2015, cash and cash equivalents were $1,552 million (Q1 2015: $1,522 million).

§ Net debt declined 1.5% to $1,355 million as at the end of Q2 2015 (Q1 2015: $1,376 million). Net Debt/EBITDA ratio remained largely flat q/q at 0.6x at the end of Q2 2015 (Q1 2015: 0.6x), remaining one of the lowest amongst steel companies globally;

§ Strong liquidity with $1,552 million in cash and cash equivalents and unused committed credit lines of $684 million, more than covers short-term debt principal requirements of $462 million;

§ Put option on Convertible Bonds can be realized in September 2015. Outstanding principal is $452 million.

Vadim Larin, CEO of JSC Severstal Management, commented:

"I am pleased to report that Severstal has delivered a sustained performance in an uncertain environment during the first half of 2015, despite more limited visibility in both domestic and export markets.

Despite substantial fluctuations in the FX market and a subdued global steel and steel-related raw materials pricing environment, the Group has demonstrated that it continues to deliver an industry leading performance. The flexibility of our operations is an important competitive advantage enabling us to increase our export sales volumes to target full utilization whilst maintaining our focus on internal efficiency and profitability.

We are confident that by the consistent execution of our stated strategy which focuses on efficiency, low-cost production, optimizing investment, and by prioritizing customer care and product quality, we remain positioned to deliver long term shareholder value and maximize shareholder returns."

REVIEW OF THE SECOND QUARTER ENDED 30 JUNE 2015

In Q2 Severstal delivered a sustained performance driven by the strength of our operations and management's ongoing and relentless focus on enhancing efficiency. Despite RUB appreciation driving growth in production and G&A costs, Severstal's EBITDA marginally increased q/q in Q2 2015, to $588 million (Q1 2015: $583 million). This has been supported by ongoing operational improvements and growth in USD-denominated average selling prices both at Russian Steel and Resources divisions, with an 18.0% q/q growth in revenue to $1,806 million (Q1 2015: $1,531 million). Even though the Group EBITDA margin reduced 5.5 ppts q/q to 32.6% (Q1 2015: 38.1%), it is still significantly ahead of the industry cycle-average EBITDA margin of approximately 20%.

A seasonal uptick in demand both domestically and in export markets led to a 4% q/q increase in consolidated steel product sales, to 2.66 mnt. The latter has been achieved despite less pronounced seasonality and existing issues with steel consumption in the domestic market this year. Severstal's proximity to export markets, however, allowed it the flexibility to shift between domestic and export deliveries.

Severstal's gross debt reduction is currently largely maturity-driven, with around 90% of the Company's gross debt being public. In September 2015 Severstal can repay up to $452 million of Convertible Bonds, assuming the Put Option is realized.

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 H1 was down 51.5% y/y at $214 million (H1 2014: $441 million).

SEVERSTAL RUSSIAN STEEL

In Q2 2015 steel output decreased 4% q/q to 2.85 mnt due to short-term scheduled maintenance at the BOF#3 and continuous caster #2 and #4. Meanwhile, rolling facilities at the Cherepovets Steel Mill ran at almost full capacity in Q2 2015.

Despite anticipated weaker domestic steel consumption sales of steel products increased 4% q/q to 2.67 mnt partially due to moderate seasonal demand improvement. Moreover, Severstal's proximity to export markets enabled the Company to allocate additional volumes to exports. As a result, in Q2 2015 exports accounted for 41% of sales (Q1 2015: 38%).

Reflecting the abovementioned increase in export share within the sales portfolio and change to the product mix, Russian Steel Division ("RSD") recorded a 10% q/q increase in HRC sales against an 18% q/q reduction in sales of semi-finished products. Meanwhile, the share of high value-added products in the sales portfolio improved 1 ppt to 47% (Q1 2015: 46%) largely due to a 13% q/q increase in downstream products sales and a reduction in long products sales q/q.

Regardless of the downward trend in global steel prices as well as a comparatively soft domestic market, USD-nominated average steel prices for rolled products at RSD increased within a wide percentage range, depending on the product, as a result of RUB appreciation.

Reflecting all the abovementioned factors revenue increased 18.7% q/q to $1,657 million (Q1 2015: $1,396 million). This strong performance enabled Severstal Russian Steel to maintain its EBITDA level largely unchanged q/q with price and volume trends almost fully offsetting the negative impact of higher input prices and production costs driven by RUB appreciation. As a result, EBITDA decreased only 1.7% q/q to $468 million (Q1 2015: $476 million). At the same time, EBITDA margin compressed 5.9 ppts to 28.2% (Q1 2015: 34.1%).

The total non-integrated cash cost of slab production at the Cherepovets Steel Mill in Q2 increased $45/t q/q to $259/t (Q1 2015: $214/t) due to higher raw materials prices and rolling costs as a result of RUB appreciation as well as lower crude steel production volumes. The integrated cash cost of slab in Q2 increased $43/t q/q to $212/t.

SEVERSTAL RESOURCES

In Q2 2015 RUB strengthening significantly supported higher average USD-denominated selling prices despite challenging steel-related raw materials pricing environment.

The coking coal concentrate average selling price increased 42% q/q. This was partially a function of several rounds of RUB-nominated price upgrades which the Company introduced in the second half of Q1. For iron ore products, the iron ore concentrate USD-nominated price at Severstal Resources increased 9% q/q, with the negative impact of the global iron ore benchmark's 6% q/q decline being fully mitigated by RUB appreciation of around 15% q/q. Prices for iron ore pellets were less resilient due to the geographical structure of sales. Iron ore pellets price declined 2% q/q.

Despite a decrease in ROM-coal output volumes in Q2 at Vorkutaugol on the back of scheduled long-walls repositioning activity in June 2015, the division's total coking coal concentrate sales increased 15% q/q. This is largely as a result of a comparison with a low base, as the washing plant operations were negatively impacted by severe weather conditions in Q1 2015. Iron ore pellet and concentrate sales volumes increased 1% q/q and 9% q/q, respectively largely owing to production growth as well as the seasonal increase in demand for restocking.

As a result of these factors, Severstal Resources' revenue increased 23.2% q/q to $356 million (Q1 2015: $289 million). The increase in average USD-denominated prices and management's ongoing focus on improving efficiency fully balanced production cost inflation. Despite EBITDA margin reducing 7.1 ppts to 33.7% (Q1 2015: 40.8%), EBITDA increased 1.7% q/q to $120 million (Q1 2015: $118 million).

The majority of costs at Severstal Resources are RUB-denominated and therefore production cash costs across all mining assets in the last quarter were negatively impacted by RUB appreciation. At the same time, this has been partially offset by continuing efficiency improvement initiatives. Specifically, total cash costs (TCC) at Karelsky Okatysh increased to $29/t (Q1 2015: $22/t), while TCC at Olcon went up to $28/t (Q1 2015: $23/t). At the same time, TCC at Vorkutaugol has been negatively impacted by scheduled long-wall repositioning activity and increased to $52/t (Q1 2015: $33/t) despite solid sales volumes growth.

DIVIDEND

The Board is recommending a dividend payment of 12.63 roubles per share for the three months ended 30 June 2015.

Approval of the dividend is expected at the Company's EGM which will take place on 15 September 2015. The record date for participation in the EGM is 3 August 2015.

The recommended record date for the dividend payment is 28 September 2015. The approval of the record date for the dividend payment is expected at the Company's EGM which will take place on 15 September 2015.

OUTLOOK

Global steel markets remain under pressure. Despite steel capacity utilisation staying at subdued levels of 72% compared with 78% a year ago, weakening of the Chinese economy with steel demand falling 5.1% YTD and subsequent growth of steel products exports from China is putting pressure on steel and steel-related commodity prices. The spread between steel and raw material prices has been eroded to minimal levels. In this environment despite the risks, we believe Severstal stays in good shape and well-positioned for the future.

NOTES

1. 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.

 http://www.rns-pdf.londonstockexchange.com/rns/8565T_-2015-7-23.pdf http://www.rns-pdf.londonstockexchange.com/rns/8565T_1-2015-7-23.pdf

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 Q2 & H1 2015 results for investors and analysts hosted by Alexey Kulichenko, Chief Financial Officer, will be held on July 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: 24267788#

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: 660199#

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

***

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