SVST.L Regulatory News (SVST)

Severstal reports Q3 & 9M 2014 financial results

- Robust performance in the Russian operations driven by continued efficiency enhancements -

Moscow, Russia - November 5, 2014 - OAO Severstal (MICEX-RTS: CHMF; LSE: SVST), one of the world's leading steel and steel-related mining companies, today announces its Q3 and 9M 2014 financial results for the period ended 30 September 2014.

CONSOLIDATED FINANCIAL RESULTS FOR THE QUARTER ENDED 30 SEPTEMBER 2014

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

5) Basic EPS includes both continuing and discontinued operations. Basic EPS is calculated based on the following basic weighted average number of shares outstanding during the period: 810.6 million shares for Q3 2014, Q2 2014, 9M 2014 and 9M 2013.

Q3 2014 vs. Q2 2014 ANALYSIS:

§ Group revenue increased 2.4% q/q to $2,240 million (Q2 2014: $2,187 million) driven by further improvements at Russian Steel on the back of higher share of HVA products sales coupled with marginal price increase;

§ Group EBITDA increased 25.7% q/q to $636 million (Q2 2014: $506 million) and Group EBITDA margin grew 5.3 ppts q/q to 28.4% (Q2 2014: 23.1%), representing the highest level since Q3 2008 and primarily reflecting a combination of ongoing operational enhancements at both Russian Steel and Resources division, a decline in raw materials input costs at our steel operations and further RUB depreciation;

§ Net loss1 of $45m (Q2 2014: net loss1 of $661m), has been primarily affected by FX losses of continuing operations of $453 million and a gain on disposal of $85 million of the discontinued operation. Adjusting for those non-cash items, Severstal would have posted a net profit of $323m (Q2 2014: net profit of $206m excluding FX gain in Q2 2014 of $199m and impairment of $1,066m for continuing and discontinued operations);

§ Continuous robust free cash flow generation of $218 million is in line with our key strategic focus (Q2 2014: $333 million);

§ Capex2 of $181 million, 4.7% lower q/q (Q2 2014: $190 million) reflecting our disciplined approach to investments as well as the completion of the vast share of large-scale development projects. The FY2014 capex target has been reduced to $868m, reflecting the disposal of Severstal North America (SNA) and weaker RUB (the currency in which the majority of our capex is nominated);

§ Recommended record high dividend payment of 54.46 RUB (approximately $1.37) per share (including special dividend ) for the nine months ended 30 September 2014, reflecting the previously announced intention to return to shareholders a portion of the SNA sale proceeds via dividends.

9M 2014 vs. 9M 2013 ANALYSIS:

§ 9M 2014 revenue decreased 9.0% y/y to $6,418 million (9M 2013: $7,052 million) as Russian Steel and Resources experienced lower realized prices and sales volumes y/y;

§ EBITDA increased 23.2% y/y to $1,601 million (9M 2013: $1,300 million) driven by strong results from Russian Steel on the back of operational enhancements and lower input costs;

§ 9M 2014 net loss1 was $807 million (9M 2013: net profit1 of $157m) has been impacted by FX losses of continuing operations of $593 million, impairments for continuing and discontinued operations of $1,091 million and a gain on disposal of $85 million of the discontinued operation. Excluding these non-cash items, Severstal would have posted a net profit of $792 million (9M 2013: net profit of $431 million, excluding FX losses and impairment for both continuing and discontinued operations);

§ Strong improvement in free cash flow to $807 million for 9 months 2014 (9M 2013: $115 million), in line with strategic focus;

§ Capex2 of $622 million for the first nine months of 2014 was 20.7% lower y/y (9M 2013: $784 million), representing 71.7% of the updated FY2014 capex target of $868 million.

FINANCIAL POSITION HIGHLIGHTS:

§ Deleveraging remains on track with gross debt declining 8.6% since the end of Q2 2014 to $3,528 million partially reflecting the repayment of SNA's external debt following the closure of the deal;

§ Cash and cash equivalents at the end of Q3 increased to $2,753 million (Q2 2014: $7803 million) on the back of SNA sale;

§ Proactive debt reduction: between now and the year end Severstal will repay $457 million of bank debt maturing in 2015, 2016 and 2017;

§ Net debt at the end of Q3 was $775 million, 74.8% lower q/q (Q2 2014: $3,0803 million). Net debt will increase following the recommended nine month 2014 dividend payment;

§ Net Debt/EBITDA ratio reduced sharply q/q to 0.4x at the end of Q3. This ratio will probably be marginally higher at the end of FY2014 due to the recommended nine month 2014 dividend payment but is expected to remain within the stated leverage plan target range of 0.5-1.5x;

§ Continued solid liquidity position with $2,753 million in cash and cash equivalents (notwithstanding the recommended dividend payout to be made prior to the end of FY2014) and committed unused credit lines of $569 million, more than covering the short-term debt4 of $218 million (excluding the aforementioned early repayment of bank debt maturing in 2015, 2016 and 2017).

POST PERIOD END HIGHLIGHTS:

On 9 October 2014, the Board approved the Company's dividend policy modification, moving to a dividend policy of dividend payouts of average equivalent of 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 a dividend policy of dividend payouts of average equivalent of 25% of the net profit for the reporting period until the ratio returns to 1.0 times or below.

Alexey Mordashov, CEO of Severstal, commented:

"We have made excellent further progress against our strategy to be one of the most efficient steelmakers globally. Our assets combination continues to provide structural competitive advantage in various market conditions.

The solid set of results was also supported by the disposal in September of our US business, which unlocked significant value for Severstal's shareholders and enhances the Group's overall profitability. The Board has also modified the Company's dividend policy to return 50% of net profit for a given reporting period to shareholders, reflecting Severstal's mission to maximize shareholder returns.

We will continue focusing on further cost reduction, while also expect huge upside potential from our dedicated customer care and quality improvement initiatives to be seen already in 2015.

Heading into Q4, we anticipate continued solid demand for our products. We are confident that Severstal, underpinned by its highly efficient operations and vertical integration, is now positioned better than ever to capitalize on both domestic and export opportunities to fast-growing economies to deliver sustainable long term growth."

CHIEF EXECUTIVE'S REVIEW OF THE THIRD QUARTER ENDED 30 SEPTEMBER 2014

In September Severstal completed the sale of Severstal Columbus and Severstal Dearborn, collectively known as Severstal North America (SNA), which has structurely upgraded the Group's profitability due to the lower margin nature of SNA's operations.

Overall, Severstal delivered a robust Q3 performance, driven by the strength of our operations as well as management's ongoing and relentless focus on enhancing efficiency. The Group's performance was supported by a strong outcome from Russian Steel, which benefitted from a higher share of high value added (HVA) products in the sales portfolio as well as the proximity of its operations to domestic clients and export markets alike. This provided Russian Steel with the flexibility to increase domestic shipments, capitalizing on a moderate recovery in domestic steel prices coupled with growth in the Russian construction market. The division's revenue increased by 4.8% q/q to $2,085 million (Q2 2014: $1,990 million), which helped drive Group revenue up by 2.4% q/q to $2,240 million (Q2 2014: $2,187 million), despite somewhat weaker revenues from Severstal Resources.

At Severstal Resources, management's ongoing focus on enhancing operational efficiency and reducing costs resulted in improved operational performances across our mining assets, which was also supported by further RUB devaluation. Notwithstanding a weak pricing environment, profitability at Severstal Resources improved with EBITDA margin increase by 4.2 ppts q/q to 26.4% (Q2 2014: 22.2%). Meanwhile, and demonstrating the merits of our vertically integrated model, further decreases in raw materials input costs coupled with ongoing efficiency improvement initiatives supported profitability improvements at Russian Steel where EBITDA margin increased by 4.9 ppts to 24.7% (Q2 2014: 19.8%).

The completion of the sale of SNA enabled Severstal to substantially improve its net leverage position with net debt decreasing as at the end of Q3 74.8% q/q (Q2 2014: $3,0803 million). The Net Debt/EBITDA ratio reduced to 0.4x. However, both the net debt and the net debt/EBITDA ratio are due to increase before the end of FY2014 on the back of the payment of the recommended nine-month 2014 dividend.

SEVERSTAL RUSSIAN STEEL

The share of HVA products in the sales portfolio increased substantially to 52% (Q2 2014: 47%) on the back of lower sales of semi-finished products due to oxygen converters' scheduled maintenance. Sales volumes of rolled and downstream products increased by 4% and 16% q/q respectively reflecting a seasonally robust market environment. There was solid growth in sales of hot-rolled plates (up 14% q/q), galvanized and metallic coated coils (up 23% q/q) and color coated coils (up 20% q/q).

Proximity to domestic clients and export markets provided Russian Steel with the flexibility to increase the share of domestic sales to capitalize on moderate growth in local prices. Consequently, the share of sales volumes to the domestic market in Q3 2014 increased to 71% (Q2 2014: 64%).

All the abovementioned factors led to revenue increasing 4.8% q/q to $2,085 million (Q2 2014: $1,990 million).

EBITDA of $514 million was 30.1% higher q/q (Q2 2014: $395 million) driven by lower raw materials costs, the higher share of HVA products sales, ongoing cost reduction initiatives and RUB depreciation. EBITDA/t increased substantially q/q by 29.9% to $187/t while EBITDA margin was 4.9 ppts higher q/q at 24.7%. Average selling prices increased 5.7% q/q to $681/t (Q2 2014: $644/t). 9M 2014 EBITDA at the division of $1,169 million represented an impressive 62.6% increase y/y (9M 2013: $719 million).

Total non-integrated cash cost of slab production at the Cherepovets Steel Mill in Q3 decreased $34/t q/q to $327/t (Q2 2014: $361/t) due to lower raw materials prices as well as a higher share of pig iron used in the steelmaking process substituting a portion of high cost scrap. The integrated cash cost of slab in Q3 decreased $38/t q/q to $280/t due to improved profitability at Severstal Resources offsetting lower sales prices.

SEVERSTAL RESOURCES

Sales volumes of iron ore pellets at Severstal Resources in Q3 increased 8% q/q driven by higher demand from export markets, while sales of iron ore concentrate contracted by 6% q/q.

Operational improvements at Vorkutaugol resulted in three new coal faces being commissioned in Q3 resulting in coking coal concentrate sales volumes increase by 18% q/q. By the end of FY2014, Vorkutaugol is expected to commission 11 new coalfaces across all five of its mines, with two faces have already been commissioned at the end of October at the Komsomolskaya mine.

The pricing environment in Q3 remained challenging for both iron ore and coking coal. Prices for iron ore pellets at Karelskiy Okatysh decreased by 18% q/q to $73/t (Q2 2014: $89/t), while prices for iron ore concentrate at Olkon decreased 22% q/q to $49/t (Q2 2014: $63/t).

The overall q/q pricing decline resulted in Severstal Resources' revenue decrease by 9.5% q/q to $440 million (Q2 2014: $486 million). 9M 2014 revenue of $1,493 million were 25.2% lower y/y (9M 2013: $1,995 million) due to substantially lower prices.

Q3 2014 EBITDA of $116 million was 7.4% higher q/q (Q2 2014: $108 million) with the division's EBITDA margin expanding 4.2 ppts q/q to 26.4% primarily due to a better performance from Vorkutaugol. Moreover, Olkon has ceased external shipments of iron ore concentrate in Q3 2014 to preserve profitability. 9M 2014 EBITDA of $421 million was 28.3% lower y/y (9M 2013: $587 million).

Management's ongoing priority remains to reduce production costs across all mining assets. Total cash costs (TCC) at Karelsky Okatysh declined to $37/t ($45/t in Q2 2014) on higher volumes, while TCC at Olkon remained broadly flat q/q ($37/t in Q3 2014 vs. $39/t in Q2 2014). TCC at Vorkutaugol improved substantially, declining to $87/t (Q2 2014: $125/t) with excellent progress in the long wall repositioning driving production volumes up in Q3 2014 with further progress expected in Q4 2014.

DIVIDEND

Reflecting the Group's robust performance and the Board's previously announced intention to return to shareholders a portion of the proceeds from the sale of SNA, the Board has recommended a record dividend payment of 54.46 roubles per share (approximately $1.37) for the nine months ended 30 September 2014.

Approval of the dividend is expected at the Company's EGM which will be held by absentee voting on 14 November 2014. The record date for participation in the EGM was 6 October 2014.

Subject to the dividend payments being approved at the EGM, the record date will be 25 November 2014.

OUTLOOK

Though overcapacity issues remain, global steelmaking profitability has substantially improved this year as a result of relatively resilient steel prices and sharply falling raw materials prices. Global steel demand is expected to remain stable in Q4 2014, with slight growth by 1.0% y/y in 2015, as forecasted by the Worldsteel Association.

Steel consumption in Russia has marginally decreased in the year to date due to lower levels of non-residential construction, automotive and machinery production. Nevertheless, we continue to see strong demand coming from the residential construction and large diameter pipes. Supportive as well is lower steel imports to Russia since the start of 2014 and growing export competitiveness of the Russian steelmakers due to the RUB weakening.

Overall, the Board remains confident that Severstal's vertically integrated business model, proven strategy, continuing effective cost control and production efficiency initiatives well position Severstal to deliver further growth.

NOTES

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

2. Represents cash outflow on capex in the period.

3. The amount includes balances of Severstal International segment.

4. Represents principal amount of debt.

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 Q3 and 9M 2014 results for investors and analysts hosted by Alexey Kulichenko, Chief Financial Officer, will be held on November 5, 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

Pin code: 50337794#

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

International: +44 (0) 20 3426 2807UK Toll Free: +44 (0) 808 237 0026

Reference: 651320#

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, Ukraine, Latvia, Poland, Italy, Liberia and Brazil. Severstal is listed on RTS and MICEX and the company's GDRs are traded on the LSE. Severstal reported revenue of $9,434 million* and EBITDA of $1, 818 million* in 2013. Severstal's crude steel production in 2013 reached 10.7 million tonnes*. www.severstal.com

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