EVRAZ ANNOUNCES UNAUDITED INTERIM FINANCIAL RESULTS FOR H1 2018

Transcription

1 EVRAZ plc EVRAZ ANNOUNCES UNAUDITED INTERIM FINANCIAL RESULTS FOR H August 2018 EVRAZ plc ( EVRAZ or the Group ; LSE: EVR) today announces its unaudited interim results for the six months ended 30 June 2018 ( the Period ). H HIGHLIGHTS Strong free cash flow of US$661 million (H1 2017: US$549 million). Consolidated EBITDA of US$1,906 million, up 65.5% from US$1,152 million in H1 2017, driving the EBITDA margin from 22.6% to 30.0% due to higher vanadium, coal and steel products prices, accompanied by the effects of cost-cutting initiatives. Continued debt reduction: total debt reduced by c.us$646m to c.us$4,786m, net debt reduced to US$3.9 billion (FY2017: US$4.0 billion). Cost saving of US$117 million due to ongoing productivity improvements and cost-cutting initiatives. Net profit of US$1,145 million vs. US$86 million in H Cash-cost of steel and raw materials in Russia slightly increased: o cash cost of slabs increased to US$248/t from US$247/t in FY2017; o cash cost of washed coking coal increased to US$47/t from US$42/t in FY2017; O cash cost of iron ore products increased to US$37/t from US$34/t in FY2017. Solid dividends of c.us$617 million were paid out to shareholders during H A second interim dividend for 2018 of US$ million (US$0.40 per share) has been declared, reflecting the Board s confidence in the Group s financial position and outlook. FINANCIAL HIGHLIGHTS (US$ million) H H Change, % Consolidated revenue 6,343 5, % Profit from operations 1, n/a Consolidated EBITDA 1 1,906 1, % Net profit 1, n/a Earnings per share, basic (US$) n/a Net cash flows from operating activities % CAPEX (19.7)% 30 June December 2017 Net debt 1 3,884 3,966 (2.1)% Total assets 9,558 10,380 (7.9)% 1 For the definition see section Definitions of selected alternative performance measures. 1

2 Commenting on the results, EVRAZ Chief Executive Officer, Alexander Frolov, said: In the first half of 2018, the Group delivered a solid financial performance, supported by the ongoing improvement in the global steel market environment. Consolidated EBITDA totalled US$1.9 billion, up 65.5% year-on-year driven by our continuous operational efficiency improvements and a stronger price environment. On the balance sheet side, net debt has reduced to US$3.9 billion at the end of June. This brought the net-debt-to-ebitda ratio to 1.1x, well below our target. Given the solid results, the Board of Directors are recommending a second interim dividend for 2018 of 40 cents per share totaling c.us$577 million, in line with the previously announced payout policy. We are proud of our strong ongoing performance and will remain focused on delivering further improvements. In the second half of the year, despite possible price correction, we expect market conditions to remain positive overall. FORWARD-LOOKING STATEMENTS THIS DOCUMENT CONTAINS FORWARD-LOOKING STATEMENTS, WHICH INCLUDE ALL STATEMENTS OTHER THAN STATEMENTS OF HISTORICAL FACTS, INCLUDING, WITHOUT LIMITATION, ANY STATEMENTS PRECEDED BY, FOLLOWED BY OR THAT INCLUDE THE WORDS TARGETS, BELIEVES, EXPECTS, AIMS, INTENDS, WILL, MAY, ANTICIPATES, WOULD, COULD OR SIMILAR EXPRESSIONS OR THE NEGATIVE THEREOF. SUCH FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER IMPORTANT FACTORS BEYOND THE GROUP S CONTROL THAT COULD CAUSE THE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS OF THE GROUP TO BE MATERIALLY DIFFERENT FROM FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING, INCLUDING, AMONG OTHERS, THE ACHIEVEMENT OF ANTICIPATED LEVELS OF PROFITABILITY, GROWTH, COST AND SYNERGY OF RECENT ACQUISITIONS, THE IMPACT OF COMPETITIVE PRICING, THE ABILITY TO OBTAIN NECESSARY REGULATORY APPROVALS AND LICENSES, THE IMPACT OF DEVELOPMENTS IN THE RUSSIAN ECONOMIC, POLITICAL AND LEGAL ENVIRONMENT, VOLATILITY IN STOCK MARKETS OR IN THE PRICE OF THE GROUP S SHARES OR GDRS, FINANCIAL RISK MANAGEMENT AND THE IMPACT OF GENERAL BUSINESS AND GLOBAL ECONOMIC CONDITIONS. SUCH FORWARD-LOOKING STATEMENTS ARE BASED ON NUMEROUS ASSUMPTIONS REGARDING THE GROUP S PRESENT AND FUTURE BUSINESS STRATEGIES AND THE ENVIRONMENT IN WHICH THE GROUP WILL OPERATE IN THE FUTURE. BY THEIR NATURE, FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES BECAUSE THEY RELATE TO EVENTS AND DEPEND ON CIRCUMSTANCES THAT MAY OR MAY NOT OCCUR IN THE FUTURE. THESE FORWARD-LOOKING STATEMENTS SPEAK ONLY AS AT THE DATE AS OF WHICH THEY ARE MADE, AND EACH OF EVRAZ AND THE GROUP EXPRESSLY DISCLAIMS ANY OBLIGATION OR UNDERTAKING TO DISSEMINATE ANY UPDATES OR REVISIONS TO ANY FORWARD-LOOKING STATEMENTS CONTAINED HEREIN TO REFLECT ANY CHANGE IN EVRAZ S OR THE GROUP S EXPECTATIONS WITH REGARD THERETO OR ANY CHANGE IN EVENTS, CONDITIONS OR CIRCUMSTANCES ON WHICH ANY SUCH STATEMENTS ARE BASED. NEITHER THE GROUP, NOR ANY OF ITS AGENTS, EMPLOYEES OR ADVISORS INTENDS OR HAS ANY DUTY OR OBLIGATION TO SUPPLEMENT, AMEND, UPDATE OR REVISE ANY OF THE FORWARD-LOOKING STATEMENTS CONTAINED IN THIS DOCUMENT. 2

3 CONFERENCE CALL A conference call to discuss the results, hosted by Alexander Frolov, CEO, and Nikolay Ivanov, CFO, will be held on Thursday, 9 August 2018, at: 3 pm (London time) 5 pm (Moscow time) 10 am (New York time) To join the call, please dial: +44 (0) UK Russia US Conference ID: To avoid any technical inconvenience, it is recommended that participants dial in 10 minutes before the start of the call. The presentation for the call will be available on the Group s website, on Thursday, 9 August 2018, at the following link: An MP3 recording will be available on Friday, 10 August 2018, at the following link: 3

4 TABLE OF CONTENTS STRATEGIC GOALS IN HEALTH, SAFETY AND ENVIRONMENT... 5 HUMAN CAPITAL... 5 CUSTOMER FOCUS... 5 ASSET DEVELOPMENT... 6 EVRAZ BUSINESS SYSTEM... 6 MARKET OUTLOOK... 7 GLOBAL MARKETS... 7 RUSSIAN STEEL... 7 NORTH AMERICA... 8 COAL YEAR-END OUTLOOK... 9 FINANCIAL REVIEW... 9 STATEMENT OF OPERATIONS... 9 CAPEX AND KEY PROJECTS FINANCING AND LIQUIDITY REVIEW OF OPERATIONS BY SEGMENT STEEL SEGMENT STEEL, NORTH AMERICA SEGMENT COAL SEGMENT KEY RISKS AND UNCERTAINTIES DIVIDENDS DIRECTOR S RESPONSIBILITY STATEMENT DEFINITIONS OF SELECTED ALTERNATIVE PERFORMANCE MEASURES UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

5 STRATEGIC GOALS IN 2018 EVRAZ remains committed to its strategy of maintaining leadership in infrastructure steel products with low-cost production along the value chain. The strategy focuses on five success factors: Health, Safety and Environment (HSE); Human Capital; Customer Focus; Asset Development; and the EVRAZ Business System. HEALTH, SAFETY AND ENVIRONMENT Employees health and safety are and always will be EVRAZ foremost priority. The Group s strategic goal is to achieve and maintain a lost-time injury frequency ratio (LTIFR) of less than 1.0. In this reporting period, HSE initiatives were focused on the safety conversations programme and on developing standard safe operating procedures. EVRAZ has also begun to implement a contractor safety programme and an HSE leadership project aimed at changing managers attitudes towards HSE. The LTIFR was 1.76x in H1 2018, compared with 1.98x in H Tragically, there were seven fatal accidents at facilities in the period. Working groups at the sites have carefully analysed each case to understand and address the root causes of these tragic events to prevent them in the future. Throughout its work, the Group remains committed to its ultimate goal of reaching zero fatalities at all sites. HUMAN CAPITAL EVRAZ prioritises developing its people and continuously improving labour productivity with a special focus on enhancing employee engagement and the staff motivation system. To keep employees informed of the strategy, performance and ongoing developments in the company, the Group conducts Information Days at its assets twice a year. In terms of motivation, EVRAZ has incorporated a feedback system into its corporate culture through training sessions for its production staff. For the period, human capital efforts focused mainly on implementing the Top 300 programme, which aims to achieve a complex transformation of production leaders behaviour. The content of the program is based on the standard management practices and tools of the EVRAZ Business System. In H1 2018, the labour productivity per person for steel products remained stable at the level of 368 tonnes per person in year-on-year terms. CUSTOMER FOCUS Customer-focused sales and product development policies are the key to sustaining market leadership in infrastructure steel products. In the local steel market, the Group is focused on increasing the demand for beams and structural products, providing additional services and building long-term relationships with clients. As part of its efforts to improve demand for beams, EVRAZ is developing direct sales to large infrastructure facilities, building communications with project institutions and encouraging customers to substitute beams for other products. During the reporting period, the Group s beam sales grew by 15% year-on-year. The Russian steel market remained at the level of H and EVRAZ retained its strong domestic position with market shares of 26% in railway wheels, 81% in rails, 43% in structural products and 61% in beams. The Group has also signed a new long-term, five-year contract to supply rails to Russian Railways and three-year contracts to supply pipe blanks to Chelyabinsk Pipe and TMK. In the coal market, EVRAZ also concentrates on providing all customers with a high level of service and improving its reputation as a customer-oriented supplier. In particular, the Group applies quality standards to each coal grade to improve transparency and quality control. In the 5

6 export coal markets, EVRAZ is working to expand sales to India. In H1 2018, the Group s coal exports grew to 3.9 million tonnes, compared with 2.3 million tonnes in H In the vanadium segment, EVRAZ retained its target market shares in core export directions during the period 30-35% in the EU, 25% in the US and 95% in the CIS and expanded its customer base in Europe, Asia and South America. The Group decreased the share of long-term contracts to 75% from 83% in H to increase participation on the spot market. Altogether, customer focus initiatives generated additional EBITDA of US$20.7 million during the period. ASSET DEVELOPMENT EVRAZ focuses on developing its asset base through selective investment, disciplined capital allocation and cost-improvement programmes. The efficiency programme generated US$117 million of additional EBITDA during the period through yield improvements, supply chain management and numerous projects to optimise operations. The Group disposed the Dneprovsk Metallurgical plant (Ukraine) in H in order to finalise the execution of its strategic decision to exit the Ukraine and to focus on the development of key assets in Russia and North America. In addition, EVRAZ sold its c.15% stake in Delong Holdings Limited in the reporting period. See pages 13,14 for details. In H1 2018, the Group launched blast furnace no. 7 at EVRAZ NTMK to maintain pig iron production volumes at the plant and simultaneously stopped blast furnace no. 6 ahead of planned repairs in In February, EVRAZ NTMK also finished major construction works and put into operation the new grinding ball mill. To meet the growing demand for wheels from Russian consumers, EVRAZ NTMK has completed the expansion of its railway wheel machine shop. In the Coal division, the Group plans to launch the longwall at the Raspadskaya-Koksovaya mine by the end of the year and initiated pre-construction activities in February. The investment project will allow to triple production of high quality HCC (grade K) at this mine from thousand tonnes to thousand tonnes of coal per month. At EVRAZ North America, operational improvements at the EVRAZ Regina steel mill in Canada brought the plant s monthly slab production to an average of 90 thousand tonnes. The mill is also working on reaching the targeted LDP production volumes. Overall, the Group invested US$84 million in development CAPEX in H and expects to spend another US$92 million in H EVRAZ BUSINESS SYSTEM The EVRAZ Business System (EBS) is a combined approach to the Group s operations and incorporates target setting, people development, process improvements, management system support, culture principles and implementation of necessary infrastructure improvements. The Group is implementing the system through a series of EBS-transformation projects, which are currently continuing in the Siberia division (Steel segment). In H1 2018, new transformations were launched in the Urals (Steel segment) and Coal divisions (Coal segment). EBStransformations are aimed to facilitate generation of improvements from the workers level. Example of a bottom-up initiative is an installation of the excess water conduit between the radial thickeners at Raspadskaya coal washing plant, which will allow to reduce water losses and prevent the flooding of marks. Effect from this improvement is estimated at more than US$1 million. By the end of the year, EVRAZ plans to execute 24 EBS transformations in 6

7 production areas, including 16 in the Siberia division, five in the Urals division and three in the Coal division. MARKET OUTLOOK GLOBAL MARKETS The steel industry has continued to benefit from favourable global economic conditions and strong steel demand in China, combined with the government s policy of winter heating season controls and environmental initiatives. Steel prices, based on hot-rolled coil (HRC) FOB China contracts, increased by 26% to US$595 per tonne in H from US$474 per tonne in H Meanwhile, global trade protectionism, particularly US trade policy, is creating significant uncertainty in the steel markets. In H1 2018, Chinese steel export volumes fell by 14% to 35.5 million tonnes, compared with 41.0 million tonnes in H This decline was the result of ongoing successful efforts to liquidate excess capacity, a more attractive value proposition on the domestic market with high margins and firm demand, as well as growing trade tensions on foreign markets in the form of antidumping and safeguard investigations. Apparent steel use in China grew by 7.8% year-on-year to 416 million tonnes due to the growth of fixed asset investment in real estate development in urban areas. While iron ore prices were strong at the beginning of the year, prices decreased slightly as restocking activities in China stopped and seaborne supply from Australia and Brazil improved following disruptions. In H1 2018, iron ore prices averaged US$69 per tonne, down 7% from US$74 per tonne in H Chinese iron ore import volumes fell by 2% to 531 million tonnes. A shortage continues to be seen on the pellet market amid strong demand, driving the pellet premium to record high levels. While it remains unclear when Samarco will restart operations, the pellet deficit is expected to continue. During the reporting period, hard coking coal price (FOB Australia) averaged US$208 per tonne, compared with US$176 per tonne in H Chinese coking coal imports dropped by 20% to 28.9 million tonnes due to heating season restrictions and ecological policies. While demand fell in China, it increased in other markets, including Germany, India, the US, Brazil, Argentina and South Africa, as steel producers further increased capacity utilisation to take advantage of market conditions. In H1 2018, the average MB FeV price soared by 151% to US$65.6 per kgv, compared with US$26.1 per kgv in H Global vanadium demand was estimated at around 42.5 kmtv in the period, down 2.2% year-on-year as result of ferroniobium substitution in the steelmaking segment and vanadium redox battery projects being postponed due to high prices for vanadium. Production issues and ongoing environmental inspections in China led to a reduction in ferrovanadium output of 17% year-on-year in H1 2018, which has severely affected stocks (down 90% year-on-year in the period) and pushed prices higher. Meanwhile, China s recently approved high-strength rebar standard will come into effect in November and could trigger additional vanadium demand of around 5-10 kmtv a year. RUSSIAN STEEL In H1 2018, overall Russian steel consumption increased by 2% in year-on-year terms to 18.3 million tonnes. 7

8 Demand for long steel remained stable at 8.0 million tonnes in the period. In the railway segment, demand for wheels improved by 37% in H1 2018, driven by the new railcar production cycle and restocking following a prolonged period of weak consumption in While rail consumption fell by 16% year-on-year, this is a temporary effect, caused by the process of agreeing on supplies and will be offset in H In construction steel, the beam market decreased by 3% and demand for rebar and wire rod grew by 4% and 7%, respectively. Meanwhile, demand for structural products was down 18% as consumer activity and long product logistics were affected by the FIFA World Cup football tournament. In H1 2018, Russian steel export volumes climbed by 5% year-on-year to 15.2 million tonnes and domestic crude steel output improved by 2% to 36 million tonnes. Russian steel prices were driven by positive trends in the global steel market. The CPT Moscow rebar price averaged US$502 per tonne in the period, up 19% year-on-year. The price for channels rose by 34% to US$751 per tonne, compared with US$561 per tonne in H Based on the CPT Moscow benchmark, HRC prices averaged US$609 per tonne, up 7% from US$570 per tonne in H1 2017, and plates averaged US$622 per tonne, up 14% from US$544 per tonne in H NORTH AMERICA In H1 2018, steel product consumption in the US market increased by 3% to 53.4 million tonnes, compared with 52.0 million tonnes in H While demand for long products remained stable in year-on-year terms during the period, consumption of flat and tubular products climbed by a respective 4% and 17%. Demand for OCTG pipes soared by 17% to 2.3 million tonnes against the backdrop of further growth in drilling activity in the US oil and gas market. Demand for LDP in North America remained relatively stable in H Plate demand in the US increased by 29%, while rod and bar demand remained stable. In H1 2018, the 25% tariff enacted by the US under Section 232 drove steel imports down 3% year-on-year to 16.1 million tonnes. Domestic steel production increased by 3% to 41.8 million tonnes. US steel prices continued to rise in response to the imposition of tariffs on steel imports and healthy domestic demand. Average prices surged by 23% to US$941 per tonne for plate, by 16% to US$1388 per tonne for OCTG and by 24% to US$937per tonne for wire rod. COAL Overall, consumption of coking coal in Russia remains generally stable and sharp changes are not expected. However, in H1 2018, Russian coking coal concentrate consumption dropped by 5% to 18.2 million tonnes, compared with 19.0 million tonnes in H1 2017, due to the general overhaul of a blast furnace at MMK and reduced coke production. Export levels remained unchanged at 11 million tonnes in the period. In H1 2018, total Russian coking coal mining volumes increased by 1% year-on-year to 41.4 million tonnes. Domestic coking coal prices remain high, in line with international benchmarks. During the reporting period, prices for the premium Zh-grade coking coal averaged US$170 per tonne FCA Kuzbass, up 3% from US$166 per tonne in H1 2017, while prices for the semi-hard GZh-grade coking coal fell by 3% year-on-year to US$120 per tonne. 8

9 2018 YEAR-END OUTLOOK In H2 2018, EVRAZ anticipates that market prices could decline, particularly international coal and steel benchmarks. However, the Group s overall financial performance should remain solid, driven by its pipeline of internal improvements and supported by a generally strong pricing environment relative to the average levels seen in the last three years. FINANCIAL REVIEW STATEMENT OF OPERATIONS In H1 2018, EVRAZ consolidated revenues climbed by 24.2% to US$6,343 million, compared with US$5,106 million in H1 2017, primarily due to higher prices for semi-finished and construction steel products. EVRAZ consolidated EBITDA amounted to US$1,906 million in the period, compared with US$1,152 million in H1 2017, boosting the EBITDA margin from 22.6% to 30.0% and free cash flow to US$661 million. The improvement is primarily attributable to higher steel product prices, lower expenses in US dollar terms because of the effect that rouble weakening had on costs in H versus H1 2017, as well as the impact of cost-cutting initiatives on efficiency. This was partly offset by an increase in prices for raw materials, including scrap, electrodes and ferroalloys. In H1 2018, the Steel segment s revenues (including inter-segment) surged by 21.4% YoY to US$4,425 million, or 62.3% of the Group s total before elimination. The growth was mainly attributable to higher revenues from sales of steel products, which rose by 16.4% YoY, largely due to an upturn in average sales prices of 21.4% which was underpinned by favourable market conditions. The Group s higher revenues from sales of steel products were partly offset by lower sales volumes, which dropped from 6.3 million tonnes in H to 5.9 million tonnes in H The primary causes of the YoY decline in sales volumes were lower pig iron production at EVRAZ NTMK due to the planned technical modernisation of an existing blast furnace and the launch of the new blast furnace no. 7, as well as the disposal in March 2018 of Ukrainian asset EVRAZ DMZ. In H1 2018, revenues from the Steel, North America segment soared by 30.9% YoY. Steel product revenues went up by 29.3%, driven by higher prices which up 20.5% and improved sales volumes (up 8.8%) The key growth driver was greater demand for all steel products. The Coal segment s revenues climbed by 11.0% YoY, supported largely by a 12.7% uptick in sales volumes amid stable demand and improved productivity, partly offset by a 1.7% slip in sales prices. Coal prices followed global benchmark trends in the period. In H1 2018, the Steel segment s EBITDA rose due to an increase in steel prices and higher sales volumes of steel products; lower expenses in US dollar terms due to the effect that rouble weakening had on costs; and the impact of cost-cutting initiatives implemented in the period. This was partly offset by an increase in prices for raw materials, including scrap, electrodes and ferroalloys. The Steel, North America segment s EBITDA was driven by greater revenues from sales of construction, tubular and flat-rolled products, partly offset by higher prices for scrap and purchased semi-finished products. 9

10 The Coal segment s EBITDA grew YoY amid higher sales volumes, the impact of cost-cutting initiatives and lower expenses in US dollar terms due to the effect that rouble weakening had on costs. Eliminations mostly reflect unrealised profits or losses that relate to the inventories produced by the Steel segment on the Steel, North America segment s balance sheet, and coal inventories produced by the Coal segment on the Steel segment s balance sheet. Revenues, (US$ million) Segment H H Change Change, % Steel 4,425 3, % Steel, North America 1, % Coal 1,244 1, % Other operations % Eliminations (756) (761) 5 (0.7)% Total 6,343 5,106 1, % Revenues by region, (US$ million) Region H H Change Change, % Russia 2,309 2, % Americas 1,399 1, % Asia 1, % CIS (excl. Russia) % Europe % Africa and rest of the world % Total 6,343 5,106 1, % EBITDA*, (US$ million) Segment H H Change Change, % Steel 1, n/a Steel, North America n/a Coal % Other operations % Unallocated (65) (63) (2) 3.2% Eliminations (7) 6 (13) n/a Total 1,906 1, % *For the definition of EBITDA, please refer to Annex 1 10

11 The following table details the effect of the Group s cost-cutting initiatives. Effect of Group s cost-cutting initiatives in H (US$ million) Improving yields and raw material costs, including 55 Improving yields and raw material costs of Urals and Siberia divisions 31 Improving yields and raw material costs of North American assets and vanadium 15 operations Various improvements at coal beneficiating plants and mines 9 Increasing productivity and cost effectiveness 53 Others, including 9 Reduction of general and administrative (G&A) costs and non-g&a headcount 9 Total 117 Revenues, cost of sales and gross profit by segment, (US$ million) H H Change, % Steel segment Revenues 4,425 3, % Cost of sales (2,912) (2,904) 0.3% Gross profit 1, n/a Steel, North America segment Revenues 1, % Cost of sales (1,018) (772) 31.9% Gross profit % Coal segment Revenues 1,244 1, % Cost of sales (533) (460) 15.9% Gross profit % Other operations gross profit % Unallocated gross profit (5) (4) 25.0% Eliminations gross profit (61) (61) 0.0% Total 2,346 1, % 11

12 Gross profit, expenses and results, (US$ million) Item H H Change Change, % Gross profit 2,346 1, % Selling and distribution costs (443) (335) (108) 32.2% General and administrative expenses (274) (264) (10) 3.8% Impairment of assets (20) (15) (5) 33.3% Foreign-exchange gains/(losses), net 147 (7) 154 n/a Other operating income and expenses, net (25) (41) 16 (39.0)% Profit from operations 1, n/a Interest expense, net (180) (222) 42 (18.9)% Share of profits/(losses) of joint ventures and associates Gain/(loss) on financial assets and liabilities, net Loss on disposal groups classified as held for sale, net % 3 (51) 54 n/a (10) (265) 255 (96.2)% Other non-operating losses, net (6) (2) (4) n/a Profit before tax 1, ,249 n/a Income tax expense (398) (208) (190) 91.3% Net profit 1, ,059 n/a In H1 2018, selling and distribution expenses grew by 32.2%, reflecting higher freight rates, an increase in the rail car hire charge, a change in shipment directions, the effect of Section 232 duties on sales to the US and the disposal of the Nakhodka Trade Sea Port ( NTSP ) in H General and administrative expenses rose by 3.8%, mainly due to higher services, partly offset by the effect that the rouble depreciation had on costs. The foreign exchange gain amounted to US$147 million and was mainly related to intra-group loans denominated in roubles and payable by Evraz Group S.A. to the Russian subsidiaries. The depreciation of the Russian rouble against the US dollar in the period led to exchange gains recognised in the income statements of non-russian subsidiaries, which were not offset by the exchange losses recognised in the equity of the Russian subsidiaries. Interest expenses incurred by the Group decreased, mainly due to the gradual reduction in total debt and refinancing of existing indebtedness at more favourable terms during the reporting period. The interest expense for bank loans, bonds and notes amounted to US$167 million in the period, compared with US$210 million in H A net loss of US$10 million on disposal groups classified as held for sale was caused by the disposal in March 2018 of EVRAZ DMZ, which was sold to a third party for a cash consideration of US$35 million. The Group recognised a US$10 million loss on the subsidiary s sale, including US$60 million of cumulative exchange losses reclassified from other comprehensive income to the consolidated statement of operations. The result was included as a loss on disposal groups classified as held for sale on the consolidated statement of operations. 12

13 For the reporting period, the Group had an income tax expense of US$398 million, compared with US$208 million in H The change reflects the improved operating results, including accrual of income tax expense for distributed and undistributed dividends. Cash flow, (US$ million) Item H H Change Change, % Cash flows from operating activities before changes in working capital 1, % Changes in working capital (594) (160) (434) n/a Net cash flows from operating activities % Short-term deposits at banks, including interest n/a Purchases of property, plant and equipment and intangible assets (226) (284) 58 (20.4)% Proceeds from sale of disposal groups classified as held for sale, net of transaction costs (320) (88.6)% Proceeds from sale of other investments n/a Other investing activities (15) (4) (11) n/a Net cash flows from/(used in) investing activities (101) 76 (177) n/a Net cash flows from/(used in) financing activities (1,391) (695) (696) n/a Effect of foreign-exchange rate changes on cash and cash equivalents (4) (1) (3) n/a Net increase/(decrease) in cash and cash equivalents (564) 126 (690) n/a Changes in working capital are largely explained by the increase in inventories and receivables at trading companies of Steel segment and in the Steel, North America segment (driven by output expansion in the view of positive market sentiment as well as by higher coal, vanadium and steel products sales prices). Changes in net cash flows used in financing activities are largely explained by the dividends paid out in the reporting period. Disposal of Dneprovsk Metallurgical Plant On 6 March 2018, the Group sold Dneprovsk Metallurgical plant (Ukraine), in which it had a 97.73% ownership interest, to a third party for cash consideration of US$35 million. The consideration is payable in several instalments: US$25 million was received in the reporting period upon signing of the transaction documents and the rest will be received by 15 December For more details see Note 4 of the financial statements. 13

14 Sale of investments in Delong At 31 December 2017 the Group held approximately 15% in Delong Holdings Limited ( Delong ), a flat steel producer headquartered in Beijing (China). In June 2018, the Group sold its ownership interest in Delong to the major shareholder of the entity for cash consideration of US$92 million. For more details see Note 11 of the financial statements. Calculation of free cash flow,* (US$ million) Item H H Change Change, % EBITDA 1,906 1, % EBITDA excluding noncash 1,899 1, % items Changes in working capital (594) (160) (434) n/a Income tax accrued (360) (256) (104) 40.6% Social and social (13) (15) 2 (13.3)% infrastructure maintenance expenses Net cash flows from % operating activities Interest and similar (158) (265) 107 (40.4)% payments Capital expenditures, (232) (289) 57 (19.7)% including recorded in financing activities and noncash transactions Proceeds from sale of (320) (88.6)% disposal groups classified as held for sale, net of transaction costs Other cash flows from investing activities 78 (4) 82 n/a Free cash flow % *For the definition of free cash flow, please refer to Annex 2. In H1 2018, net cash flows from operating activities climbed by 24.9% YoY to US$932 million, driven by better operational results. Free cash flow for the period was US$661 million (US$549 million in H1 2017). CAPEX AND KEY PROJECTS During the reporting period, EVRAZ capital expenditures fell to US$232 million, compared with US$289 million in H when significant expenses were incurred for the blast furnace no. 7 project. EVRAZ NTMK continued to implement its two main projects: constructing blast furnace no. 7 and the grinding ball mill construction project. EVRAZ North America began implementing two projects aimed at reducing costs that are scheduled for completion in Capital expenditures (including those recognised in financing activities) for H in millions of US dollars can be summarised as follows. 14

15 Capital expenditure in H (US$ million) Blast furnace no Wheel resurfacing capacity expansion 8 Seamless Threading 8 Red Deer Heat treat 5 Grinding ball mill construction 2 The construction of EVRAZ NTMK s blast furnace no. 7 has been in progress since Q and was completed in H The project has been in progress at EVRAZ NTMK since Q and was completed in July The installation of four full-profile machining tools is expected to increase wheel production capacity. Project has been in progress since Q at EVRAZ Pueblo and is due to be completed in Q It is expected to reduce the total threading cost and improve the yield. Project has been in progress since Q at EVRAZ Red Deer and is due to be completed in Q It is expected to expand the capacity, making it possible to increase market share, prevent new entrants and reduce annual logistics costs The construction of new grinding ball mill has been in progress since Q at EVRAZ NTMK and was launched in February Other development projects 23 Maintenance 148 Total 232 FINANCING AND LIQUIDITY EVRAZ began 2018 with total debt of US$5,432 million. During H1 2018, the Group used the cash flows generated in the period to further reduce debt and completed several transactions to extend its maturity profile. In February, EVRAZ repaid US$500 million in loans, comprising US$200 million from Alfa Bank due in 2019, US$200 million from Alfa Bank due in 2023 and US$100 million from Sberbank due in The Group financed these repayments with a combination of its cash balances and a new five-year, US$300 million term loan from Alfa Bank. These transactions helped to extend the maturity profile and reduce interest charges. Between April and June, to reduce its interest charges, the Group completed an early repayment of its outstanding loans to VTB with principal amounts of US$495 million using cash accumulated on the balance sheet. These actions together with scheduled repayments of bank loans, partly offset by certain drawdowns under a revolving credit facility in North America, reduced total debt in H by US$646 million to US$4,786 million as at 30 June

16 In H1 2018, EVRAZ paid two dividend payments to its shareholders. In March, the Group paid a second interim dividend for 2017 of US$429.6 million (US$0.30 per share). In June, recognising the better than anticipated operational performance in Q1 2018, EVRAZ paid an interim dividend for 2018 of US$187.6 million (US$0.13 per share). During H1 2018, net debt decreased by US$82 million to US$3,884 million, compared with US$3,966 million as at 31 December Interest expense accrued in respect of loans, bonds and notes amounted to US$167 million in the period, compared with US$210 million in H The lower interest expense was mainly due to a gradual reduction of total debt, as well as the management s efforts to refinance existing indebtedness at more favourable terms, which offset the effects of increases in base US dollar rates. The strong performance delivered in H drove EBITDA growth and further debt reduction, helping to significantly improve the Group s major leverage metric, the ratio of net debt to LTM EBITDA, which fell to 1.1 times as at 30 June 2018, compared with 1.5 times as at 31 December As at 30 June 2018, debt with financial maintenance covenants comprised various bilateral facilities with a total outstanding principal of around US$1,068 million. Maintenance covenants under these facilities include two key ratios calculated using EVRAZ plc s consolidated financials: a maximum net leverage and a minimum EBITDA interest cover. As at 30 June 2018, EVRAZ was in full compliance with its financial covenants. As at 30 June 2018, cash amounted to US$902 million, while short-term loans and the current portion of long-term loans stood at US$349 million. Cash-on-hand and committed credit facilities are sufficient to cover all of EVRAZ refinancing requirements for the remainder of 2018 and

17 REVIEW OF OPERATIONS BY SEGMENT (US$ million) Steel Steel, NA Coal Other H H H H H H H H Revenues 4,425 3,645 1, ,244 1, EBITDA 1, EBITDA margin 28.4% 14.4% 3.5% 1.6% 53.9% 58.8% 3.6% 4.5% CAPEX STEEL SEGMENT Sales review Steel segment revenues by product H H US$ million % of total segment revenues US$ million % of total segment revenues Change, % Steel products, external sales 3, % 2, % 16.0% Semi-finished products 1 1, % 1, % 11.1% Construction products 2 1, % 1, % 16.6% Railway products % % 12.3% Flat-rolled products % % 53.9% Other steel products % % 26.1% Steel products, intersegment sales % % 23.4% Including sales to Steel, North America % % 22.4% Iron ore products % % (7.4)% Vanadium products % % n/a Other revenues % % 15.9% Total 4, % 3, % 21.4% 1 Includes billets, slabs, pig iron, pipe blanks and other semi-finished products 2 Includes rebars, wire rods, wire, beams, channels and angles 3 Includes rails, wheels, tyres and other railway products 4 Includes commodity plate and other flat-rolled products 5 Includes rounds, grinding balls, mine uprights and strips, tubular products 17

18 Sales volumes of Steel segment ( 000 tonnes) H H Change, % Steel products, external sales 5,602 5,977 (6.3)% Semi-finished products 2,505 2,932 (14.6)% Construction products 1,809 1,857 (2.6)% Railway products % Flat-rolled products % Other steel products % Steel products, intersegment sales % Total steel products 5,905 6,280 (6.0)% Vanadium products (tonnes of pure vanadium) 9,341 10,728 (12.9)% Vanadium in slag 2,885 2, % Vanadium in alloys and chemicals 6,456 8,123 (20.5)% Iron ore products 1,093 1,416 (22.8)% Pellets 1, % Other iron ore products n/a Geographic breakdown of external steel product sales US$ million 000 tonnes H H Change, % H H Change, % Russia 1,672 1, % 2,493 2, % Asia % 1,616 1,645 (1.8)% Europe % (26.5)% CIS (excl. Russia) % (21.3)% Africa, America and the rest of the world % (15.7)% Total 3,443 2,967 16,0% 5,602 5,977 (6.3)% In H1 2018, revenues from the Steel segment climbed by 21.4% to US$4,425 million, compared with US$3,645 million in H The segment s revenues were driven by rising steel sales prices, primarily for semi-finished, flat-rolled and construction products. Revenues from external sales of semi-finished products grew by 11.1%, underpinned by a 25.7% upswell in average prices, partly offset by a 14.6% decrease in sales volumes. Most of the incremental revenues came from higher export prices on the Asian and African markets for billets and slabs. The considerable surge in export prices was accompanied by a shift in export sales volumes from the European (billets and slabs) and American (slabs) markets to Asia (slabs) and Africa (billets), the latter two markets seeing greater sales. Revenues from sales of construction products to third parties went up by 16.6% due to an upswing of 19.2% in average prices. The increased revenues were supported by higher prices for rebar and channels on the Russian and European markets, channels and beams in Asia, and 18

19 rebar and beams in the CIS, as well as improved rebar sales volumes to Russia and Europe. This was partly offset by a reduction in sales volumes of channels (by 19.2%) and angles (by 13.2%), primarily on the Russian and CIS markets. It was also impacted by the disposal in March 2018 of EVRAZ DMZ. Revenues from external sales of railway products rose predominantly due to a 12.0% increase in prices. A key driver of higher prices and sales volumes of railway products during the reporting period was greater demand for wheels on the Russian market, which has entered a new railcar production cycle. A decline in sales volumes of rails in Russia and the CIS was partly compensated by higher rail export volumes, mainly to the American market. External revenues from flat-rolled products surged by 53.9%, driven by a 30.3% increase in sales volumes and a 23.6% rise in average prices (mostly due to higher sales of gauges) amid an improving market situation on the European market. This resulted from strengthening demand in Europe and greater production volumes at EVRAZ Palini e Bertoli. Revenues from external steel product sales in Russia grew by 17.1% YoY, primarily due to higher prices amid strong demand, which in turn was supported by a limitation of supplies and a 2.8% increase in sales volumes. The share of the Russian market in total external steel product sales edged up from 48.2% in H to 48.6% in H The increase in Asia s share of sales from 23.2% to 25.3% was due to higher prices for steel products, partly offset by a minor drop in sales volumes. The growing share of sales to Russia and Asia was also due to a shift from the European and American markets. Steel segment revenues from sales of iron ore products, including intersegment sales, fell by 7.4% due to a 22.8% reduction in sales volumes. The main decrease in sales volumes was on the CIS and Russian markets due to the disposal in June 2017 of EVRAZ Sukha Balka. This was partly offset by an increase in sales volumes of pellets produced by EVRAZ KGOK, which in turn resulted from a drop in iron ore consumption by EVRAZ NTMK due to the launch of blast furnace no. 7. In 1H 2018, prices for pellets stabilised at a lower level than was seen in 1H2017, in line with global benchmarks. In the reporting period, around 67.0% of EVRAZ iron ore consumed in steelmaking came from its own operations, compared with 66.7% in H The increased internal consumption in 2018 was attributable to the disposal in March 2018 of EVRAZ DMZ, where external purchases accounted for a predominant share of iron ore consumption. Steel segment revenues from sales of vanadium products, including intersegment sales, jumped by 109.0% due to an upsurge in average prices of 121.9% and a drop in sales volumes of 12.9%, as well as to the disposal in April 2017 of Strategic Minerals Corporation and reduced oxide production. The positive price trend was in line with global benchmarks, which were driven by stronger demand amid changes to China s environmental policy and a scarcity of production facilities. 19

20 Steel segment cost of revenues Steel segment cost of revenues US$ million H H % of segment revenues US$ million % of segment revenues Change, % Cost of revenues 2, % 2, % 0.3% Raw materials 1, % 1, % (1.0)% Iron ore % % (11.7)% Coking coal % % (8.1)% Scrap % % 18.6% Other raw materials % % 14.4% Auxiliary materials % % 4.4% Services % % 12.1% Transportation % % (3.9)% Staff costs % % 1.9% Depreciation % % 0.0% Energy % % 1.3% Other* % % 0.5% *Includes primarily goods for resale, inter-segment unrealised profit and certain taxes, semi-finished products and allowances for inventories In H1 2018, the Steel segment s cost of revenues was almost flat YoY, although there were changes in the amounts of constituent parts included in the total cost of revenues. The cost of raw materials fell by 1.0%, primarily due to the lower cost of iron ore (-11.7%) and coking coal (-8.1%) following the disposal of EVRAZ DMZ in March 2018 and Yuzhkoks in December 2017, as well as to the weaker rouble. This was partly offset by the higher cost of scrap (+18.6%) and other raw materials (+14.4%) due to higher prices and crude steel production volumes. The decrease in raw material costs was also accompanied by cost-cutting initiatives, which reduced consumption. Costs for auxiliary materials grew by 4.4% amid higher prices for electrodes, refractories and fuel, as well as greater consumption of auxiliary materials due to increased pig iron production. This was partly offset by the weaker rouble and a reduction of US$9 million in costs following the disposal of EVRAZ DMZ in March 2018 and EVRAZ Sukha Balka in June Service costs grew by 12.1%, primarily driven by an increase in the volume of raw material manufacturing services (blowing sinter processing for EVRAZ NTMK s blast furnace no. 7 and processing slag), higher costs and rescheduling of capital repairs and maintenance, partly offset by the depreciation of the Russian currency. Lower transportation costs were primarily due to a reduction of US$9 million following the disposal of EVRAZ Sukha Balka in June 2017, as well as by the rouble s depreciation. Staff costs climbed by 1.9%, largely because of wage indexation and higher one-off payments, partly offset by the effect that rouble weakening had on costs. Energy costs were higher due to increased tariffs in local currencies, partly offset by the weaker rouble. 20

21 Steel segment gross profit The Steel segment s gross profit surged by 104.2% YoY, driven primarily by higher steel and vanadium prices and the positive effect that rouble weakening had on costs. This was partly offset by a rise in prices for purchased raw materials and services. Operational update Russia: Urals EVRAZ NTMK has completed the expansion of its railway wheel machine shop. The shop s advantages include new software, a system for safely removing filings, reduced manual labour and lower maintenance costs. In H1 2018, all the equipment for the fullprofile wheel processing line was installed, including four machines and an overhead manipulator, and the line was launched in July EVRAZ NTMK has completed the construction of its new blast furnace no. 7. The project was designed to maintain the plant s pig iron smelting capacity while blast furnace no. 6 is being rebuilt. On 28 February 2018, the blast furnace was ignited. Production is currently being ramped up to the design parameters. EVRAZ NTMK has also completed the construction of its ball mill, which will increase the plant s output of grinding balls. The main construction, installation and commissioning work has been completed. In February 2018, the mill was launched and the first batch of balls were produced. The mill is currently being ramped up to ship finished products to customers. EVRAZ KGOK continues to implement the reconstruction project for its tailings facility. This project will allow the Group to maintain its current level of in-house iron ore raw material supplies. New products: o Five new I-beam sizes o One circular steel profile with diameters of 156 mm and 180 mm o One railway wheel profile Russia: Siberia The upgrade of electric-arc furnace no. 2 has been completed at EVRAZ ZSMK. The more efficient new technology will make it possible to increase steel supplies for railway production by 82 thousand tonnes a year and reduce steel production costs. The first stage of the 100-metre finishing line upgrade has been completed at EVRAZ ZSMK, which will make it possible to boost production of 100-metre rails to 40 thousand tonnes a month. The UKR-25 non-destructive testing system has been launched at EVRAZ ZSMK, which will inspect metro rails and switch-point rails for railroad switches. The new system will improve product quality and help EVRAZ to maintain its leading position in this market segment. It will also make it possible to re-inspect R65 rails, reducing the amount of rejected material. Implementation began of the investment programme to reconstruct the Tashtagolsky deposit at the -280m horizon at Evrazruda. In May 2018, tunnel excavation began using 21

22 highly efficient self-propelled equipment to work off reserves with a new sub-floor caving system. New products: o A pilot batch of type DT400IK R65 rails with improved durability and surface endurance has been produced and certification procedures are under way. o Positive results have been received from initial testing of type DT350VS400 R65 rails for high-speed lines and certification procedures are under way. o The new lightweight no. 50 angles with a 4 mm shelf and no. 100 angles made from 14HGNDC (ХГНДЦ) steel for bridge construction have been developed and launched into commercial production. Vanadium In H1 2018, EVRAZ Vanady Tula s oxide production went down 2.8% year-on-year, mainly due to the operational shutdown of the hydrolyser as a result of planned maintenance being performed. Output of FeV 80% fell by 8.9%, mainly due to reduced overall oxide availability amid lower oxide conversion from slag at 3rd parties. During the reporting period, EVRAZ Vanady Tula continued to make progress on its environmental programme: the first stage of the new off-gas system has been installed, equipment has been chosen for the second stage and the water treatment project is in the design phase. EVRAZ Nikom s FeV 80% production was almost flat (down by 0.2%) due to a slightly different feedstock mix (enhanced consumption of V 20 3 converted at third parties). EVRAZ Nikom doubled its capacity for non-standard packaging types. 22

23 STEEL, NORTH AMERICA SEGMENT Sales review Steel, North America segment revenues by product US$ million H H % of total segment revenues US$ million % of total segment revenues Change, % Steel products 1, % % 29.3% Semi-finished products % 4 0.5% 25.0% Construction products % % 39.5% Railway products % % 11.4% Flat-rolled products % % 29.5% Tubular products % % 35.4% Other revenues % % 61.4% Total 1, % % 30.9% 1 Includes slabs 2 Includes beams, rebars 3 Includes rails and wheels 4 Includes commodity plate, specialty plate and other flat-rolled products 5 Includes large-diameter line pipes, ERW pipes and casing, seamless pipes, casing and tubing, and other tubular products 6 Includes scrap and services Sales volumes of Steel, North America segment ( 000 tonnes) H H Change, % Steel products Semi-finished products % Construction products % Railway products % Flat-rolled products % Tubular products % Total 1, % The segment s revenues from the sale of steel products grew significantly due to an increase in sales prices of 22.1% and sales volumes of 8.8%. This was mainly attributable to improved demand for construction and railway products and small-diameter line pipe, as well as improved demand for flat-rolled products, which was also positively impacted by the Section 232 tariffs. Revenues from construction product sales surged by 39.5% due to growth in prices of 26.8% and volumes of 12.7% a result of improved demand. Railway product revenues climbed by 11.4%, driven by an uptick in prices of 10.4% and volumes of 1.0% amid improved demand. 23