SVST.L Regulatory News (SVST)

Severstal reports Q2 & H1 2014 financial results

- Robust performance driven by continued efficiency enhancements and steel market improvement -

Moscow, Russia - July 30, 2014 - OAO Severstal (MICEX-RTS: CHMF; LSE: SVST), one of the world's leading steel and steel-related mining companies, today announces its Q2 and H1 2014 financial results.

CONSOLIDATED FINANCIAL RESULTS FOR THE QUARTER ENDED 30 JUNE 2014

Notes:

1) 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).

2) Net (loss)/ profit attributable to shareholders of OAO Severstal.

3) Basic EPS is calculated based on the following basic weighted average number of shares outstanding during the period: 810.6 million shares for Q2 2014, Q1 2014, H1 2014 and H1 2013.

Q2 2014 vs. Q1 2014 ANALYSIS:

§ Group revenue increased 8.2% q/q to $3,253 million (Q1 2014: $3,007 million) driven by a strong seasonal rebound in steel product sales volumes as well as a moderate recovery in steel prices;

§ Group EBITDA increased 13.5% q/q to $606 million (Q1 2014: $534 million) and Group EBITDA margin grew 0.8 ppts q/q to 18.6% (Q1 2014: 17.8%). This margin represents the highest level since Q3 2011 and primarily reflects a combination of ongoing operational enhancements, a recovery in domestic steel prices and lower raw materials input costs at our steel operations;

§ Net loss2 of $661 million (Q1 2014 loss of $100 million) includes expected non-cash losses preliminary estimated at $1,066 million on the disposals5 of Severstal Dearborn LLC, Severstal Columbus LLC, PBS Coals Ltd. and a positive FX gain of $199 million. Excluding these non-cash items, Severstal would have posted a net profit of $206 million (Q1 2014: net profit of $221 million excluding non-cash items);

§ Excellent progress against strategic focus of enhancing free cash flow which increased a substantial 105.9% q/q to $486 million (Q1 2014: $236 million);

§ Capex of $211 million1, 20.1% lower q/q (Q1 2014: $264 million) reflecting our flexible approach to investments as well as the completion of the Balakovo Mini-Mill project;

§ Recommended dividend payment of 2.14 roubles per share (approximately $0.06) for the 6 months ended 30 June 2014.

H1 2014 vs. H1 2013 ANALYSIS:

§ H1 2014 revenue was 7.1% lower y/y at $6,260 million (H1 2013: $6,736 million) as Russian Steel and Resources divisions experienced lower realized prices and sales volumes;

§ EBITDA increased 25.4% y/y to $1,140 million (H1 2013: $909 million) driven by an ongoing focus on operational enhancements, improved performance at Severstal International and lower raw materials input costs at our steel operations;

§ H1 2014 net loss2 was $761 million (H1 2013: Breakeven) includes expected non-cash losses preliminary estimated at $1,066 million on the disposals5 of Severstal Dearborn LLC, Severstal Columbus LLC, PBS Coals Ltd. and a negative FX loss of $121 million (H1 2013: FX loss of $241 million). Excluding these non-cash items, Severstal would have posted a net profit of $426 million (H1 2013: $241 million);

§ Strong improvement in free cash flow to $722 million (H1 2013: $133 million), in line with strategic focus;

§ Capex3 of $475 million, 15.5% lower y/y (H1 2013: $562 million), representing 48.7% share of 2014 target capex of $976 million.

FINANCIAL POSITION HIGHLIGHTS:

§ Deleveraging remains on track with gross debt declining 13.1% to $3,860 million since the end of Q1 2014;

§ Cash and cash equivalents as at the end of Q2 was $780 million (Q1 2014: $892 million);

§ Given the Group's strong financial position, during Q2 Severstal announced a public tender offer to buy back its 2016 and 2017 Eurobonds. A total of approximately $288 million of both bond issues was purchased from the total outstanding $500 million and $1,000 million of the 2016 and 2017 Eurobonds respectively

§ Net debt at the Q2 end was $3,080 million, 13.3% lower q/q (Q1 2014: $3,552 million);

§ Net Debt/EBITDA ratio reduced q/q to 1.3x at the end of Q2 (Q1 2014: 1.6x), which is below our mid-term target of 1.5x;

§ Continued solid liquidity position with $780 million in cash and cash equivalents and committed unused credit lines of $1,070 million, more than covering the short-term debt4 of $115 million.

POST PERIOD END HIGHLIGHTS:

§ In July 2014, the Group completed the acquisition of 50% stake in Mountain State Carbon LLC from a third party, increasing its ownership interest up to 100%.The consideration payable by the Group includes cash of US$30.0 million and cancellation of the promissory note receivable from the same third party with a face value of US$100.0 million and a carrying value of nil at June 30, 2014. At the date of the issue of Q2 consolidated interim condensed financial statements, the Group has not finalized the fair market value assessment of the Mountain State Carbon LLC net assets. Mountain State Carbon LLC is included into the Severstal International reporting segment to be disposed, as noted below.

§ In July 2014, the Group entered into an agreement to sell to a third party 100% stake in PBS Coals Ltd, а U.S. coal mining company, included in the Severstal Resources reporting segment. The cash consideration receivable by the Group under this sale agreement amounts to US$60.0 million, subject to certain adjustments upon the deal closure. The expected loss on the disposal has been preliminary estimated at the amount of US$153.9 million and recognized in Q2 consolidated interim condensed financial statements as impairment of property, plant and equipment. The transaction has not been completed at the date of the issue of Q2 consolidated interim condensed financial statements.

§ In July 2014, the Group entered into agreements to sell to third parties 100% stakes in Severstal Dearborn LLC and Severstal Columbus LLC, comprising, together with their subsidiaries and investments in joint ventures and associates, the Severstal International reporting segment. The cash consideration receivable by the Group under these sale agreements amounts to US$2,325.0 million, including settlement of certain external and intercompany debt, subject to adjustments upon the deal closure. The expected loss on the disposal has been preliminary estimated at US$911.9 million and recognized in Q2 consolidated interim condensed financial statements primarily as impairment of property, plant and equipment. The transaction has not been completed at the date of the issue of Q2 consolidated interim condensed financial statements.

Alexey Mordashov, CEO of Severstal, commented:

"I am pleased to report that Severstal has delivered another solid set of finanial results during the first half of 2014. This performance reflects the strengths of our vertically integrated business model and world class operations as well as our ongoing and relentless focus on enhancing efficiency and continued progress from our Business System projects. Together, this has helped enable Severstal to deliver an impressive EBITDA margin in Q2 of almost 19%.

The expected divestment of our assets in the USA enables the Group to fully concentrate on our most profitable assets. Following an important period of transformation, Severstal is fully on track to deliver its stated strategic objective of being one of the most efficient steelmakers globally. The strength of our balance sheet reflects the Group's resilience and we reduced our Net Debt/EBITDA to 1.3x, comfortably below our target level of 1.5x.

We currently anticipate stable conditions in our key markets in Q3 and are confident that the consistent execution of our stated strategy focused on effieciency, low-cost production, optimizing investment and delivering value to customers, all underpinned by highly effiecient assets and our vertically integrated model, means that we are well positioned to deliver long term shareholder value."

CHIEF EXECUTIVE'S REVIEW OF THE SECOND QUARTER ENDED 30 JUNE 2014

In Q2 Severstal delivered a robust performance driven by the strength of our operations and management's ongoing and relentless focus on enhancing efficiency. The Group's performance was supported by a strong outcome from the Russian Steel Division, which benefitted from a moderate recovery in domestic steel prices, growth in the Russian construction market as well as the proximity of key assets to major steel consuming regions. The division's revenue increased an impressive 16.1% q/q to $1,990 million (Q1 2014: $1,714 million), which helped drive Group revenue in Q2 2014 up 8.2% q/q to $3,253 million (Q1 2014: $3,007 million).

At Severstal Resources, management's ongoing focus on enhancing operational efficiency and reducing costs resulted in improved operational performances at all mining assets except for Vorkutaugol, which experienced lower production due to tougher geology and planned mine works. Profitability at the Severstal Resources Division was weaker q/q as a result of a sharp decline in raw materials prices (both coking coal and iron ore). However, decreased iron ore prices benefited profitability at the Russian Steel Division where EBITDA margin expanded 4.6 ppts to 19.8% (Q1 2014: 15.2%), demonstrating the merits of our vertically integrated model.

The completion of the Balakovo Mini-Mill project meant that capex in Q2 2014 decreased 20.1% q/q to $211 million (Q1 2014: $264 million). We will maintain our prudent and flexible approach to investments and our FY2014 capex (in USD) may be lower than our previously stated target of $976 million due to the weakening RUB.

SEVERSTAL RUSSIAN STEEL

Sales volumes of steel products at the Russian Steel Division in Q2 grew by 12% q/q driven by seasonal improvements to domestic and export demand, growth in the Russian construction market as well as the proximity of the division's key assets to major steel consuming regions. Rolled and downstream products demonstrated solid q/q sales growth of 10% and 12% respectively, largely driven by sales of long products (up 27% q/q), colour coated coils (up 43% q/q) and metalware products (up 21% q/q). The share of high value added products in the Severstal Russian Steel sales portfolio remained strong at 47% (Q1 2014: 47%).

The share of sales volumes to the domestic market in Q2 2014 increased to 64% (Q1 2014: 60%), once again demonstrating the favourable geographic location of our key assets which provides the flexibility to shift the sales mix to increase domestic sales when local pricing reaches attractive levels.

The division's revenue increased 16.1% q/q to $1,990 million (Q1 2014: $1,714 million). EBITDA of $395 million was 51.9% stronger q/q (Q1 2014: $260 million) supported by lower raw materials costs coupled with ongoing cost reduction initiatives. EBITDA/t increased substantially q/q by 35.8% to $144/t while EBITDA margin was 4.6 ppts higher against Q1 at 19.8% on the back of continued cost reductions and improved average selling prices which were up 4.0% q/q to $644/t (Q1 2014: $619/t). H1 2014 EBITDA at the division of $655 million respresented an impressive 55.6% increase y/y (H1 2013: $421 million).

Total non-integrated cash cost of slab production at the Cherepovets Steel Mill in Q2 increased by $35/t q/q to $ 361/t (Q1 2014: $326/t), primarily due to an increase in the manufacturing of sophisticated slabs for the South Stream gas pipeline construction. Integrated cash cost of slab in Q2 increased by $71/t against Q1 to $318/t.

The Balakovo long products mini-mill is ramping up production to respond to increased demand from strong real estate construction across Russia as well as the major national infrastructure projects anticipated over the coming years.

SEVERSTAL RESOURCES

Iron ore pellet sales volumes at Severstal Resources in Q2 remained broadly flat with only a 2% decline q/q, while sales of iron ore concentrate increased 10% q/q partially reflecting growth in export shipments and soft seasonal comparatives in Q1. Production volumes at Vorkutaugol were impacted by the longwall repositioning which resulted in a q/q decline of coking coal sales of 16%. We expect these mining works to be completed by the year end and Vorkutaugol to return to its normal production levels in Q3 already.

The pricing environment in Q2 remained challenging for both iron ore and coking coal. Coking coal prices at Vorkutaugol contracted 3% q/q to $93/t (Q1 2014: $96/t). Prices for iron ore pellets declined even further, by 17% q/q to $89/t (Q1 2014: $107/t). Iron ore concentrate prices at Olkon also decreased, by 10% q/q to $63/t (Q1 2014: $70/t).

This overall q/q pricing decline meant that despite the growth in sales volumes of iron ore concentrate, Severstal Resources' Q2 2014 revenue decreased 14.3% to $486 million (Q1 2014: $567 million). H1 2014 revenues of $1,053 million were 24.2% lower y/y (H1 2013: $1,390 million) due to lower sales volumes and softer pricing.

Q2 EBITDA of $108 million was 45.2% lower q/q (Q1 2014: $197 million) with the division's EBITDA margin down 12.5 ppts q/q to 22.2% mostly due to weaker pricing as well as Vorkutaugol's weaker performance. H1 2014 EBITDA was 24.1% lower y/y at $305 million (H1 2013: $402 million).

Management's ongoing priority remains to reduce production costs across all of our mining assets. The positive impact of this relentless focus on operational enhancement continues: total cash costs (TCC) at Olkon in Q2 2014 declined to $39/t (Q1 2014: $47/t). TCC at Karelsky Okatysh remained broadly flat q/q ($45/t in Q2 2014 vs. $42/t in Q1 2014). We continue to see further potential in separate iron ore beneficiation, which allows us to increase the manufacture of higher-grade fluxed pellets (Fe 66%). TCC at Vorkutaugol temporarily increased to $125/t (Q1 2014: $93/t) on lower production due to tougher geology as well as planned mine works. In May, Severstal launched a gas-reciprocating power plant running on methane (a coal by-product) at the Severnaya mine (Vorkutaugol). The power plant will supply around 80% of the electricity used by the Severnaya mine and approximately half of the mine's required thermal power. The launch of the project is expected to increase electricity savings at Vorkutaugol by up to 12%.

TCC at PBS Coals increased to $116/t (Q1 2014: $109/t).

SEVERSTAL INTERNATIONAL

Severstal International delivered significant growth in sales volumes of rolled products, which jumped 6% q/q. Average selling prices decreased by a marginal 1.0% to $827/t (Q1 2014: $835/t), which is partially attributable to a lower share of HVA products in the sales portfolio (44% in Q2 2014 vs. 46% in Q1 2014).

Revenue of $1,066 million (Q1 2014: $1,016 million) was up 4.9% q/q driven by higher sales volumes. H1 2014 revenue of $2,082 million was also up, by 10.6% y/y, on better pricing and higher utilization rates (H1 2013: $1,883 million).

Q2 EBITDA was 33.3% higher q/q at $100 million (Q1 2014: $75 million) primarily reflecting improvements at Dearborn's operations as well as seasonally softer comparatives in Q1. Results at the Columbus operations remained strong, with EBITDA/t firm at $108/t (Q1 2014: $113/t).

EBITDA of the whole division in H1 2014 was up 86.2% y/y at $175 million (H1 2013: $94m) with EBITDA margin growing 3.4 ppts to 8.4% and EBITDA/t also increasing by 75.6% to $72/t (H1 2013: $41/t).

DIVIDEND

Reflecting the Group's robust performance and the Board's confidence in the outlook for the business it is recommending a dividend payment of 2.14 roubles per share (approximately $0.06) for the 6 months ended 30 June 2014.

The Company's EGM will consider the approval of the dividend on 10 September 2014. The record date for participation in the EGM is 25 July 2014.

The recommended record date for the dividend payment is 22 September 2014. The approval of the record date for the dividend payment is expected at the Company's EGM which will take place on 10 September 2014.

Further to the Company's previous announcement that it has entered into agreements to sell Severstal Dearborn LLC and Severstal Columbus LLC together with their subsidiaries and investments in joint ventures and associates for a cash consideration of US$2,325.0 million, and subject to the closing of these transactions, the Board of Directors announces its intention to increase shareholder returns through the following initiatives:

· To return approximately US$1 billion to shareholders via a special dividend after the closing of these transactions. The remainder of the expected proceeds from the divestment of Severstal Dearborn LLC and Severstal Columbus LLC is intended to remain in Severstal for further deleveraging.

· To modify Severstal's existing dividend policy of quarterly dividend payments of not less than 25% of the net profit for the reporting period. Severstal intends to move to a dividend policy of quarterly payments of not less than 50% of the net profit for the reporting period provided that the net debt/12-month trailing EBITDA ratio is below 1.0 times. Should the ratio increase to higher than 1.0 times, Severstal would return to its previous dividend policy of 25% of the net profit for the reporting period until the ratio returns to 1.0 times or below.

Final decision on the special dividend and the modification of the dividend policy has not been taken yet. It will be taken in line with the relevant legal and corporate procedures after the closing of the US assets divestment transactions.

OUTLOOK

Global steel demand and production grew by 2.2% in H1 2014 y/y, while global capacity utilization hovers at 78.5%. Steel production keeps growing in China by 3% in the year to date which increases export pressure concerns. At the same time, the European economy and steel market are recovering with steel output growing by 3.8% in the year to date.

In Russia, steel consumption is slightly down y/y. However, current momentum is quite positive due to the active construction season. Specifically, residential construction is the main driver of domestic steel demand in the current environment. Separately, demand for large diameter pipes for the oil & gas industry remains solid on the back of the South Stream project development.

We currently anticipate stable conditions in our key markets and expect management's continued focus on vigorous cost control and production efficiency initiatives coupled with a prudent approach to capex to deliver further earnings growth.

NOTES

1. Represents cash outflow on capex in the period.

2. Net profit/ (loss) attributable to shareholders of OAO Severstal.

3. Represents cash outflow on capex in the period.

4. Represents principal amount of debt.

5. In July 2014, the Group entered into agreements to sell PBS Coals Ltd., Severstal Dearborn LLC and Severstal Columbus LLC.

http://www.rns-pdf.londonstockexchange.com/rns/6985N_-2014-7-30.pdf

http://www.rns-pdf.londonstockexchange.com/rns/6985N_1-2014-7-30.pdf

For further information, please contact:

Severstal Investor Relations

Vladimir Zaluzhsky

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

vladimir.zaluzhsky@severstal.com

Severstal Public Relations

Elena Kovaleva

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

elena.kovaleva@severstal.com 

Severstal's financial communications agent - Hudson Sandler

Andrew Hayes / Maria Ignatova / Alex Brennan

T: +44 (0) 20 7796 4133

A conference call on Q2 and H1 2014 results for investors and analysts hosted by Alexey Kulichenko, Chief Financial Officer, will be held on July 30, 2014 at 13.00 (BST London)/ 16.00 (Moscow).

International Dial in: +44 (0) 20 3139 4830

Russian Toll-Free Dial in: 810 800 2136 5011

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

US Toll-Free Dial in: 1 718 873 9077

Pin code: 91626361#

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

International: +44 (0) 2034262807UK Toll Free: 08082370026

Reference: 649464#

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

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ОАО Severstal is one of the world's leading vertically integrated steel and steel related mining companies, with assets in Russia, the USA, 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 $13,312 million and EBITDA of $2,063 million in 2013. Severstal's crude steel production in 2013 reached 15.7 million tonnes. www.severstal.com