SVST.L Regulatory News (SVST)

Severstal reports Q4 & FY 2015 financial results

- Achieving success in an uncertain environment -

Moscow, Russia - February 3, 2016 - PAO Severstal (MICEX-RTS: CHMF; LSE: SVST), one of the world's leading steel and steel-related mining companies, today announces its Q4 and FY 2015 financial results for the period ended 31 December 2015.

CONSOLIDATED FINANCIAL RESULTS FOR THE QUARTER ENDED 31 DECEMBER 2015

Notes:

1) The amounts for FY 2014 reflect adjustments made in connection with 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 amortisation 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 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 Q4 2015, Q3 2015, FY 2015 and FY 2014.

Q4 2015 vs. Q3 2015 ANALYSIS:

§ Group revenue decreased 16.1% q/q to $1,396 million (Q3 2015: $1,663 million). This primarily reflects a further decline in average selling prices and seasonally weaker sales volumes at Russian Steel. The decline was partially offset by an improved performance within the Resources division.

§ Despite the group EBITDA margin compressing 2.8 ppts q/q to 28.7% (Q3 2015: 31.5%), it remained one of the highest in the industry. Group EBITDA decreased 23.5% q/q to $401 million (Q3 2015: $524 million);

§ The net loss of $114 million (Q3 2015: $130 million) reflects a FX loss of $208 million and non-current assets impairment of $173 million. Adjusting for these non-cash items, Severstal would have posted an underlying net profit of $267 million (Q3 2015: $394 million excluding FX losses and non-current assets impairment);

§ Free cash flow decreased 49.9% q/q to $305 million (Q3 2015: $609 million), while strong free cash flow remained a strategic focus;

§ Cash outflow on capex of $122 million, 18.4% higher q/q (Q3 2015: $103 million);

§ Recommended dividend payment of 20.27 RUB per share for the three months ended 31 December 2015.

FY 2015 vs. FY 2014 ANALYSIS:

§ FY 2015 revenue decreased 22.9% y/y to $6,396 million (FY 2014: $8,296 million) as a result of lower realised prices y/y at Russian Steel and Resources, which was only partially mitigated by an increase in sales volumes y/y;

§ EBITDA decreased 5.2% y/y to $2,096 million (FY 2014: $2,211 million). The impact of lower deliveries from Resources was partially offset by a further improved performance at Russian Steel driven by operational enhancements, lower input costs and RUB devaluation;

§ The abovementioned operational improvements drove 6.1 ppts y/y EBITDA margin increase to 32.8% (FY 2014: 26.7%);

§ FY 2015 net profit of $562 million (FY 2014: net loss of $795 million) was impacted by FX losses on continuing operations of $624 million and non-current assets impairment of $183 million. Excluding these non-cash items, Severstal would have posted a net profit of $1,369 million (FY 2014: net profit of $1,304 million excluding FX losses and non-current assets impairment);

§ Continued strong improvement in free cash flow at $1,552 million for the FY 2015 (FY 2014: $1,232 million), is in line with the Company's strategic focus;

§ Capex of $440 million for the FY 2015 was 43.5% lower y/y (FY 2014: $779 million), reflecting our prudent approach to investments. Severstal's FY 2016 capex target is RUB 43 billion, subject to FX fluctuations.

FINANCIAL POSITION HIGHLIGHTS:

§ As at the end of Q4 2015, cash and cash equivalents were at $1,647 million (Q3 2015: $1,675 million) as strong free cash flow generation more than offset cash outflows on the quarterly dividend payment;

§ Severstal's gross debt decreased a marginal 2.1% at the end of Q4 2015 to $2,452 million (Q3 2015: $2,504 million) largely reflecting FX fluctuations;

§ Net debt continued to reduce to $805 million as at the end of Q4 2015 (Q3 2015: $829 million). The Net Debt/EBITDA ratio remained largely unchanged at 0.4x at the end of Q4 2015 (Q3 2015: 0.4x), which is one of the lowest amongst steel companies globally. During FY 2015 the net debt/EBITDA ratio reduced to 0.4x (YE 2014: 0.7x) driven primarily by the substantial reduction in net debt;

§ Strong liquidity, with $1,647 million in cash and cash equivalents and unused committed credit lines of $683 million, more than covers short-term debt principal requirements of $476 million.

Vadim Larin, CEO of JSC Severstal Management, commented:

"This year we have made further progress in our strategy to be one of the most efficient steelmakers globally, and in an uncertain climate have delivered another set of strong financial results. We have maintained our relentless focus on improving production efficiency at all our business units and have continued to benefit from our asset structure which has underpinned our flexibility and resilience.

Despite limited visibility in both domestic and export markets, the company is consistent in the execution of its stated strategy focusing on customer care and product quality improvement, cost efficiency, and investment optimisation. This combined with a strong financial position enables the company to constantly deliver long-term shareholder value".

REVIEW OF THE TWELVE MONTHS ENDED 31 DECEMBER 2015

Severstal's resilient performance was again underpinned by the management's relentless focus on enhancing efficiency as well as by the quality of our operations. The strategic location of Severstal's key producing assets and their proximity to key consuming regions enabled Severstal to react effectively to a 12% y/y decrease in Russian steel consumption by reallocating sales volumes between domestic and export markets, and the company increased steel product sales volumes 4% y/y. This partially mitigated the impact of the decline in average selling prices in USD terms. Group revenue reduced 22.9% y/y to $6,396 million (FY 2014: $8,296 million).

As a substantial share of Severstal's production and G&A costs are RUB-denominated, the currency devaluation partially offset negative price movements in EBITDA. Coupled with ongoing operational improvements and lower raw materials prices Severstal's EBITDA decreased only 5.2% y/y to $2,096 million (FY 2014: $2,211 million), while the EBITDA margin further expanded 6.1 ppts to a pleasing 32.8% (FY 2014: 26.7%), which is the strongest in the global steel industry.

Further deleveraging remains a priority for Severstal, whose debt is predominantly public. Group gross debt over the last year decreased by almost $1 billion to $2,452 million (YE 2014: $3,429 million) on the back of a successful public tender offer to buy back 2016 and 2017 Eurobonds at the beginning of 2015 and the execution of a put option on Convertible Bonds in Q3 2015.

The Company substantially enhanced free cash flow generation, to $1,552 million in 2015 (2014: $1,232 million). Severstal was able to release substantial net working capital due to effective inventory reduction and conservative shipments policies preventing the accumulation of bad receivables, and this supported earnings y/y. Severstal maintained a prudent and flexible approach to capex which is focused on operational efficiency and further improvement of our product mix and customer services.

SEVERSTAL RUSSIAN STEEL (RSD)

Steel product sales decreased 13% q/q to 2.63 mln tonnes due to seasonal factors and short-term scheduled maintenance at the hot-rolling shop at Cherepovets Steel Mill.

Despite seasonally weaker demand, the share of domestic sales volumes within the sales mix decreased only marginally to 64% (Q3 2015: 67%), reflecting Severstal's ability to efficiently reallocate sales volumes between markets and target higher margin domestic sales.

Moreover, the share of HVA products within the sales mix remained at 47%, despite seasonally lower demand for galvanised and metallic coated coil and colour coated coil.

Reflecting the continuing downward adjustment in global steel prices and a seasonally soft domestic market, which resulted in Russian steel producers reducing their prices, USD-denominated average steel prices for rolled products at RSD decreased q/q for almost all products (except for LDPs). Ongoing RUB devaluation put additional pressure on USD-denominated prices.

Reflecting all of the abovementioned factors, revenue decreased 17.7% q/q to $1,256 million (Q3 2015: $1,527 million). The negative impact of lower selling prices and volumes was further exacerbated by higher raw material input prices and only partially mitigated by lower production costs on the back of RUB devaluation. As a result, EBITDA decreased 26.5% q/q to $313 million (Q3 2015: $426 million) and the EBITDA margin compressed 3.0 ppts to 24.9% (Q3 2015: 27.9%).

The total non-integrated cash cost of slab production at the Cherepovets Steel Mill in Q4 decreased $3/t q/q to $203/t (Q3 2015: $206/t) as the positive effect of further RUB devaluation and ongoing efficiency improvements was negatively impacted by lower crude steel production volumes, triggering fixed costs growth. The integrated cash cost of slab in Q4 decreased $12/t q/q to $164/t as a result of better delivery performance from Resources.

SEVERSTAL RESOURCES

Coking coal concentrate sales volumes increased 1% q/q to 1.48 mln tonnes (Q3 2015: 1.46 mln tonnes) reflecting a substantial increase in ROM-coal output volumes in Q4 2015 at Vorkutaugol. Average coking coal concentrate selling prices increased 11% q/q despite a 4% q/q decline in hard coking coal benchmark contract prices in Q4 and an 8% q/q decline in global coking coal spot prices. This is primarily a function of an upward revision of coking coal contract prices in the domestic market fully offsetting the RUB devaluation of 5% during the quarter.

Iron ore pellet sales decreased 1% q/q to 2.70 mln tonnes (Q3 2015: 2.73 mln tonnes), while iron ore concentrate sales volumes decreased 15% q/q to 0.96 mln tonnes (Q3 2015: 1.13 mln tonnes) both reflecting lower internal procurement and seasonally weaker demand. Pricing-wise, average USD-denominated selling prices of iron ore concentrate at Olkon increased 3% q/q against a 15% q/q decline of the global iron ore benchmark (China, CFR). This was largely driven by a marginal increase in RUB-denominated prices offsetting RUB devaluation during the period. Prices for iron ore pellets at Karelsky Okatysh were less resilient (declining 4% q/q) due to the geographical structure of sales.

All of the abovementioned factors resulted in largely unchanged revenue q/q at $299 million (Q3 2015: $296 million). Marginal RUB devaluation q/q led to further production cost reduction, while a substantial increase in ROM-coal output volumes in Q4 at Vorkutaugol with completion of the scheduled long-wall repositionings had an additional positive impact on production costs given the fixed-cost nature of the mining operations. That said, EBITDA increased 26.0% to $97 million (Q3 2015: $77 million). The EBITDA margin expanded 6.4 ppts to 32.4% (Q3 2015: 26.0%).

Reflecting the robust rebound in ROM-coal production volumes at Vorkutaugol following completion of the scheduled long-wall repositionings at several mines at the beginning of the period, total cash costs (TCC) at Vorkutaugol decreased sharply to $47/t (Q3 2015: $59/t). TCC at Karelsky Okatysh decreased marginally to $23/t (Q3 2015: $24/t), which was primarily a function of the RUB devaluation as the majority of costs at Severstal Resources are RUB-denominated. At the same time, TCC at Olkon increased to $24/t (Q3 2015: $21/t) on the back of lower output and seasonal factors.

DIVIDEND

The Board is recommending a dividend payment of 20.27 roubles per share for the three months ended31 December 2015.

Approval of the dividend is expected at the Company's AGM which will take place on 24 June 2016. The record date for participation in the AGM is 10 May 2016.

The recommended record date for the dividend payment is 5 July 2016. The approval of the record date for the dividend payment is expected at the Company's AGM which will take place on 24 June 2016.

OUTLOOK

Global steel production has fallen 2.8% y/y in 2015 driving global capacity utilisation down to 64.6% in December 2015. In the meantime, Chinese steel demand remains week with exports from China increasing 20% y/y in 2015. Further Chinese demand decline is forecast by World Steel Association in 2016 and the existing overcapacity issues add pressure on steel and steel-related commodity prices.

Further oil price deterioration could put additional pressure on the Russian economy in 2016, with visibility for domestic steel demand in 2016 remaining low. In addition, increasing protectionism globally might exert pressure on export deliveries and margins. The Board remains confident, however, that as a result of the Company's vertically integrated business model, high quality and cost competitive operations, low debt level, and a sizable share of high-valued added products in the portfolio, Severstal remains well positioned compared with both local and global peers.

NOTES

1. In January, 2015 some of the Group's entities were transferred from the Severstal Resources segment to the 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.

For further information, please contact:

Severstal Investor Relations

Victor Drozdov

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

victor.drozdov@severstal.com

Severstal Public Relations

Anastasia Mishanina

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

anastasia.mishanina@severstal.com 

Severstal's financial communications agent - Hudson Sandler

Andrew Hayes / Elena Garside / Alex Brennan

T: +44 (0) 20 7796 4133

A conference call on Q4 & FY 2015 results for investors and analysts hosted by Alexey Kulichenko, Chief Financial Officer, will be held on February 3, 2016 at 14.00 (BST London)/ 17.00 (Moscow).

International Dial in: +44 (0) 203 1394 830

Russian Toll-Free Dial in: 810 800 2136 5011

UK Toll-Free Dial in: +44 (0) 808 2370 030

Pin code: 45835823#

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: 667211#

Full financial statements are available at http://www.severstal.com/eng/ir/results_and_reports/financial_results/index.phtml

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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 $6,396 million and EBITDA of $2,096 million in 2015. Severstal's crude steel production in 2015 reached 11.5 million tonnes. www.severstal.com