EVRAZ plc

EVRAZ ANNOUNCES UNAUDITED INTERIM FINANCIAL RESULTS FOR H1 2019

8 August 2019 - EVRAZ plc ("EVRAZ" or "the Group"; LSE: EVR) today announces its unaudited interim results for the six months ended 30 June 2019 ("the Period").

 

H1 2019 HIGHLIGHTS

•     Free cash flow generation remained strong at US$692m (H1 2018: US$661m).

•     Consolidated EBITDA totalled US$1,482m, down 22.2% from US$1,906m in H1 2018, driving the EBITDA margin down to 24.1% from 30.0% due to lower vanadium, coal and steel product prices.

•     EBITDA effect from cost-cutting and customer focus initiatives amounted to US$150m.

•     Total debt dropped by US$112m to US$4,526m (FY2018: US$4,638m), while net debt increased by US$79m to US$3,650m (FY2018: US$3,571m) due to the recognition under the new IFRS 16 Leases standard on the balance sheet of operating leases that were not recognised as a liability under the previous standard.

•     Net profit was US$344m, compared with US$1,145m in H1 2018.

•     The cash cost of steel and raw materials in Russia was mostly lower:

o  The cash cost of slabs decreased to US$230/t from US$248/t in H1 2018

o  The cash cost of washed coking coal fell to US$34/t from US$47/t in H1 2018

o  The cash cost of iron ore products was nearly flat at US$38/t (H1 2018: US$37/t)

•     In Q2 2019 the US lifted the 25% Section 232 tariffs on steel imports from Canada and Canada removed its retaliatory tariffs. The US anti-dumping duty for imports of line pipe (16" or greater) produced in Canada was reduced from 24% to 12%.

•     An interim dividend for 2019 of US$508.17m (US$0.35 per share) has been declared, reflecting the Board's confidence in the Group's financial position and outlook.

Financial Highlights

(US$m)	H1 2019	H1 2018	Change, %
Consolidated revenues	6,140	6,343	(3.2)
Profit from operations	913	1,731	(47.3)
Consolidated EBITDA1	1,482	1,906	(22.2)
Net profit	344	1,145	(70.0)
Earnings per share, basic (US$)	0.22	0.77	(71.4)
Net cash flows from operating activities	1,175	932	26.1
CAPEX1	309	232	33.2
	30 June 2019	31 December 2018
Net debt1	3,650	3,571	2.2
Total assets	9,826	9,373	4.8

¹ For the definition, see "Definitions of selected alternative performance measures".

                                                                                                                                                                         

 

 

Commenting on the results, EVRAZ' Chief Executive Officer, Alexander Frolov, said:

"We have finished the first half of the year with a set of rather healthy results, supported by positive trends in our key product markets. In Russia, we saw a recovery of the construction activity and, as a result, an increase in the consumption of most of our products.

Our EBITDA reached almost US$1.5 billion, a 22% decline in year-on-year terms, amid depressed vanadium prices and lower average coking coal prices. This resulted in a slight increase of the net debt to LTM EBITDA ratio to 1.1x times as at 30 June 2019, compared with 0.9 times as at 31 December 2018.

The efficiency programme generated US$111 million of additional EBITDA during the period, mostly through productivity growth, yield improvements and numerous savings projects. Together with customer focus initiatives, these amounted to $150 million in total.

Our total CAPEX reached US$309 million. Major investment projects are currently in the equipment supplier selection stage or the engineering phase. Overall, the Group invested US$79 million in development CAPEX in the first half of 2019.

Given the solid results, the Board of Directors are recommending an interim dividend for 2019 of US$0.35 per share, totalling roughly US$508 million, which is in line with the previously announced payout policy.

In the second half of 2019, EVRAZ expects the markets to be volatile. Our financial performance will be supported by the high level of vertical integration, the strength of the Russian steel market and our continuing efforts in efficiency improvements."

 

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.

 

 

CONFERENCE CALL

A conference call to discuss the results, hosted by Alexander Frolov, CEO, and Nikolay Ivanov, CFO, will be held on Thursday, 8 August 2019, at:

3 pm (London time)

5 pm (Moscow time)

10 am (New York time)

To join the call, please dial:

+44 (0)330 336 9411	UK
+7 495 646 9190	Russia
+1 929 477 0402	US

Conference ID: 6506107

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, www.evraz.com, on Thursday, 8 August 2019, at the following link:

https://www.evraz.com/en/investors/reports-and-results/financial-results/

An MP3 recording will be available on Friday, 9 August 2019, at the following link:

https://www.evraz.com/en/investors/reports-and-results/financial-results/

 

 

 

Table of contents

 

Strategic goals IN 2019

HEALTH, SAFETY and ENVIRONMENT

HUMAN CAPITAL

CUSTOMER FOCUS

ASSET DEVELOPMENT

EVRAZ BUSINESS SYSTEM

Market outlook

Global markets

Russian Steel

North America

Coal

2019 YEAR-END OUTLOOK

Financial review

Statement of operations

CAPEX and key projects

Financing and liquidity

Recent developments

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

 

 

Strategic goals IN 2019

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 the 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 strives to maintain a lost-time injury frequency ratio (LTIFR) of less than 1.0. During the period, EVRAZ focused on implementing its safety leadership development programme and risk management system, which together will serve as the basis for improving its safety culture. The Group has finished analysing its HSE system as the first step in a transformation programme, set to be launched in H2 2019 that aims to make cardinal changes in the safety culture. The LTIFR trend was negative compared with the same period last year at 2.07x in H1 2019 versus 1.76x in H1 2018. Tragically, there were 13 fatal accidents, including ten employees and three contractors in H1 2019. The most serious incident happened in February at the Raspadsky open pit, where eight employees died in an accident involving a crew bus in a quarry. EVRAZ remains committed to its ultimate goal of reaching zero fatalities at all sites.

HUMAN CAPITAL

The Group believes that the engagement and competence of its employees are the foundation for continuous improvement at its operations. During the period, EVRAZ continued its existing development programmes and launched several new initiatives. The Top-300 programme, a transformative journey for mine directors and shop superintendents, has finished its first wave of participants and proved to be successful. The next wave will start in October 2019 and will involve more than 100 people. EVRAZ has also conducted information days in May at almost every plant to communicate its strategy and performance results. Given the development plans for the coal business and various important investment projects ongoing, special recruitment centres have been established in the Coal and Siberia divisions. Among other new initiatives, a mentorship programme is ramping up at production facilities to teach more experienced workers how to mentor their junior colleagues. To better align salaries with performance, a new motivation system has been developed so employees can be paid more for reaching ambitious production targets. By the end of H1 2019, total headcount was 67,813. Labour productivity for steel products per person was 387t in the period, compared with 368t in H1 2018.

CUSTOMER FOCUS

EVRAZ strives to develop new types of products and secure its market shares to ensure that it remains the leading producer of infrastructure steel.

The Group continued to develop its programme aimed at promoting demand for beams and structural products in construction and improving the availability of its products to clients. EVRAZ' sales of beams climbed from 290kt in H1 2018 to 345kt in H1 2019.

Another major initiative of EVRAZ is a joint client project with Russian Railways. New types of services and technical requirements are being developed through the collaboration between the two companies. The Group strives to continuously provide better railway products and has posted a national record for its rails from EVRAZ ZSMK of 1.5 billion tonne-kilometres in gross tonnage moved at Russian Railways' research and development facility. EVRAZ' sales of rails from its Russian mills grew from 463kt in H1 2018 to 493kt in H1 2019.

The Russian steel market saw significant growth during the period of 10 -15% for major construction products, supported by a recovery on the real estate market. EVRAZ maintained strong market shares for key products of 68% in beams, 39% in structural products, 30% in railway wheels and 83% in rails.

On the coal market, the Group is expanding its shipments to export destinations after ramping up mining volumes. In addition to shipments via ports in Russia's Far East, EVRAZ is also increasing shipments to Baltic ports to meet client needs. In the period, the Group's sales to India, China and Vietnam rose. Total export sales grew from 3.9mt in H1 2018 to 4.2mt in H1 2019.

Given the strong demand for large-diameter energy pipe in the US and Canada, EVRAZ made a significant effort to boost its sales to the market. The re-launch of EVRAZ Portland's spiral mill and addition of EVRAZ Regina's Mill-5, gives the Group capacity  to profitably serve both the US and Canadian markets. Another two positive catalysts for the Group's business were the elimination of US Section 232 tariffs and Canadian retaliatory tarrifs between the two countries, as well as the reduction in US anti-dumping duties from 24% to 12% for line pipe in sizes greater than 16 inches imported into the US from Canada. Sales of large-diameter pipe (LDP) climbed from 76kt in H1 2018 to 157kt in H1 2019. While the domestic rail market was stable, EVRAZ was able to increase its sales from 202kt in H1 2018 to 221kt in H1 2019. Market share reached 40%, up from 38% in H1 2018.

In the vanadium segment, EVRAZ retained its target market shares in core regions during the period (30-35% in the EU, 10-15% in the US and 95% in the CIS) and further expanded its customer base in Asia and South America. The Group lowered the share of long-term contracts from 75% in H1 2018 to 70% to improve its participation on the spot market.

Altogether, customer focus initiatives generated additional EBITDA of US$39m during the period, mainly due to sales efforts in beams, grinding balls and vanadium, as well as to improvements in logistics efficiency.

ASSET DEVELOPMENT

EVRAZ focuses on developing its asset base through its annual efficiency improvement programme, which consists mainly of investment projects and operational improvements. During the period, the Group has been working on the announced investment programme, as well as on operational target setting for every stage of production. In H1 2019, internal and external benchmarking were performed and medium- and long-term technical KPI targets were set at most plants. The efficiency programme generated US$111m of additional EBITDA during the period, mostly through productivity growth, yield improvements and numerous savings projects.

Major announced projects, including the rail and beam mill modernisation and continuous casting machine no. 5 at EVRAZ NTMK, integrated flat casting and rolling complex at EVRAZ ZSMK, and long rail mill at EVRAZ Pueblo, are currently in the equipment supplier selection stage or the engineering phase.

In the Steel segment, EVRAZ has started reconstruction work at EVRAZ NTMK's blast furnace no. 6. Blast furnace no. 7, which was launched last year, reached its average monthly production target of 215kt. The Group also started stripping and infrastructure work for the development of the new Sobstvenno-Kachkanarskoye iron ore deposit at EVRAZ KGOK to ensure the long-term stability of mining volumes. The new deposit has higher iron and vanadium content than the existing Gusevogorskoye deposit.

In the Coal division, the Group is ramping up mining volumes at its existing Raspadskaya and Yuzhkuzbassugol facilities. The full-scale transition from room-and-pillar mining to longwall mining at Raspadskaya-Koksovaya and the open pit of the same mine will help to reach record volumes of 1.7mt by the end of the year. The Raspadskaya mine is expected to add 1mt by the end of the year due to increased efficiency.

At EVRAZ North America, EVRAZ Regina's steel and tubular operations are working at their target parameters. During the period, EVRAZ Regina's crude steel production reached 508kt, up 4% from 488kt in H1 2018. EVRAZ' LDP production (including EVRAZ Portland's operations) reached 159kt, up 52% from 105kt in H1 2018. EVRAZ Pueblo's newly launched seamless threading line is ramping up and is expected to reach the planned capacity of 120ktpa by the end of the year.

Overall, the Group invested US$79m in development CAPEX in H1 2019.

EVRAZ BUSINESS SYSTEM 

The EVRAZ Business System (EBS) methodology focuses on target setting, staff development, management system support, corporate culture, and process and infrastructure improvements. EBS transformations serve as the foundation that creates the infrastructure for continuous improvement at every shop of the plant.

In H1 2019, new transformations were launched at EVRAZ ZSMK's electric arc furnace and rail mill, Evrazruda's Tashtagol mine, EVRAZ NTMK's steelmaking shop, and throughout EVRAZ KGOK's entire production chain. Another new area for EBS is the logistics segment, including automobile and railway haulage. By the end of the year, EVRAZ plans to implement 38 active phases of EBS transformations in production areas, including 20 in the Siberia division, 14 in the Urals division and four in the Coal division.

Market outlook

Global markets

In H1 2019, global steel markets had a softer start in most regions of the world than in H1 2018. Steel prices, based on hot-rolled coil (HRC) FOB China contracts, dropped by 12% to US$523/t in H1 2019 from US$595/t in H1 2018 amid high inventory levels and production. In H1 2019, YoY steel production growth in China outpaced apparent steel use growth. At the beginning of the year, the Chinese government introduced several measures to support the economy, the effect of which became noticeable on steel markets in the middle of H1 2019, driving prices to recover. China also continues to impose output restrictions in its main steelmaking provinces to curb environmental pollution levels, not limiting them to the winter season. Meanwhile, global trade protectionism has helped to improve conditions for local producers, in particular on the US and EU markets, supporting capacity expansion.

In H1 2019, Chinese steel export volumes remained relatively stable compared with H1 2018, edging up by only 2% to 36mt. Apparent steel use in China grew by 11% YoY to 456mt due to higher than expected growth of fixed asset investment in the real estate sector.

Iron ore prices surged, breaching the US$100/t threshold in June for the first time since 2014. Vale's tragic dam accident that took place in Minas Gerais, Brazil, in January 2019 had a significant impact on the global iron ore market. As a result, Vale's iron ore production is expected to fall by around 60mt in 2019. There were also significant weather disruptions in northern Brazil and Australia, while Rio Tinto announced that it would reduce its output by some 20mt in 2019 due to operational challenges. The supply reduction, coupled with all these events, continues to push iron ore prices higher. In H1 2019, iron ore prices averaged US$91/t, up 31% from US$69/t in H1 2018. Chinese iron ore import volumes descended by 5% to 504mt due to the reduction in supply, which in turn was offset by a large increase in ore mining in China.

Coking coal prices remain high, primarily due to the tight supply and healthy demand. Coal supply from Australia was lower than expected at the beginning of the year amid harsh weather and logistical constraints. Hard coking coal prices (FOB Australia) edged down by 3% to US$202/t, compared with US$208/t in H1 2018. This led the spread between hard coking coal and semi-soft coking coal to expand by 15% during the period to almost US$100/t. The major reasons for this are the shortage of hard coking coal and partial correlation of semi-soft prices with steam coal, demand for which fell during the period. Chinese coking coal imports jumped by 30% to 38.5mt due to high levels of steel production.

In H1 2019, the average MB FeV price dropped by 14% to US$56.3/kgV, compared with US$65.5/kgV in H1 2018 (and down 42% from US$97.2/kgV in H2 2018). Global vanadium demand was estimated at around 46.4 thousand mtV in the period, up 7% YoY as a result of strong consumption growth from rebar producers in China, which was partly compensated by a sharp decline in demand from the steel industry outside China. The historically high price levels in 2017-18 led, particularly in China, to a 20% growth of vanadium production YoY in H1 2019. Together with heavy destocking by end users, this has swung the market into oversupply, pushing FeV prices down to US$30-40/kgV in Q2 2019. However, lower vanadium prices are stimulating demand from steelmakers and vanadium redox flow battery producers, which will re‑balance supply and demand in the medium term.

Russian Steel

In H1 2019, Russian steel consumption grew by 11% YoY to 22.5mt, mainly driven by growth in long and flat products.

Demand for long steel surged by 12%. In the railway segment, demand for wheels grew by a further 18% in H1 2019, driven by the continued elevated demand from new railcar producers and the higher number of overhauls due to growth in cargo turnover. Rail consumption edged down by 1% YoY. In construction steel, the beam market expanded by 12% and demand for rebar and wire rod climbed by 16% and 13%, respectively, while demand for structural products rose by 11%. Demand for construction steel is supported first by the renovation of the housing stock in Moscow and, second, by changes in the financing of housing construction that have compelled developers to try to complete their existing projects in a short time.

In H1 2019, Russian steel export volumes fell by 13% YoY to 13.4mt and domestic crude steel output remained at 36.2mt.

Overall, Russian steel prices followed trends on the global steel market. The CPT Moscow rebar price averaged US$488/t in the period, down 3% YoY. The price for channels fell by 20% to US$598/t, compared with US$750/t in H1 2018. Based on the CPT Moscow benchmark, HRC prices averaged US$553/t, down 9% from US$608/t in H1 2018, and plates averaged US$561/t, down 10% from US$622/t in H1 2018.

North America

In H1 2019, steel product consumption on the US market inched up by 1% to 54.1mt, compared with 53.4mt in H1 2018. Demand for long products increased by 14% YoY during the period, while consumption of flat and tubular products dropped by a respective 5% and 1%. Demand for oil country tubular goods (OCTG) pipes dropped by 6% to 2.2mt amid high inventory levels and pipeline constraints. Demand for LDP in North America was strong in H1 2019 and is expected to remain high in H2 2019. US pipeline demand is currently at record levels to keep pace with unprecedented crude and natural gas production. Plate demand in the US was down by 8%, while rod and bar demand increased by 16%. On 17 May 2019, the US and Canada reached a deal to remove US Section 232 tariffs on steel and aluminium, as well as Canada's retaliatory steel tariffs, which will have a positive impact on EVRAZ' sales.

In H1 2019, steel imports fell by a further 11% to 14.3mt, compared with 16.1mt in H1 2018. While domestic steel production rose by 6% to 44.7mt, many local producers announced new projects, especially in the flat segment.

US steel prices were up in YoY terms, as the effect from the introduction of duties under Section 232 continues to be felt. Average prices increased by 8% to US$1,012/t for plate, by 7% to US$1,480/t for OCTG and by 8% to US$793/t for rebar.

Coal

In H1 2019, Russian coking coal concentrate consumption grew by 2% YoY to 18.5mt. While no significant changes are expected on the Russian coking coal market, small fluctuations in consumption are possible due to the scheduled repairs of blast furnaces at Russian mills and changing demand for coke.

During the period, China imposed port restrictions on Australian coal that positively influenced export growth from Russia, pushing coking coal export up 33% to 14mt.

Total Russian coking coal mining volumes climbed by 11% YoY to 45.9mt amid rising mining volumes at the Uvalnaya mine and the commissioning of the Yubileinaya mine's second stage.

Global coking coal prices peaked in 2018 and the economic cycle is now entering a phase of decline due to a slowdown in supply and demand, and Russian prices are following the international benchmarks. In H1 2019, prices for premium Zh-grade coking coal averaged US$157/t FCA Kuzbass, down 8% from US$170/t in H1 2018. Prices for semi-hard GZh-grade coking coal also fell by 8% YoY to US$110/t.

2019 YEAR-END OUTLOOK

In H2 2019, EVRAZ expects trends in key product markets to remain in place with no significant deviations expected. The Group will remain focused on implementing efficiency improvement initiatives, executing planned investment projects to schedule and generating returns for all our stakeholders.

 

Financial review

Statement of operations

In H1 2019, EVRAZ' consolidated revenues declined by 3.2% to US$6,140m, compared with US$6,343m in H1 2018, primarily due to lower sales prices for semi-finished, construction and coal products, as well as reduced prices and volumes for vanadium products.

EVRAZ' consolidated EBITDA amounted to US$1,482m in the period, compared with US$1,906m in H1 2018, bringing the EBITDA margin down from 30.0% to 24.1%, while free cash flow increased to US$692m. The decrease in EBITDA is primarily attributable to lower prices for vanadium, semi-finished and construction products, as well as higher prices for raw materials, including iron ore, scrap and ferroalloys. This was partly offset by reduced expenses in US dollar terms because of the effect that ruble weakening had on costs in H1 2019 versus H1 2018, as well as the impact of cost‑cutting initiatives on efficiency.

In H1 2019, the Steel segment's revenues (including inter-segment) dropped by 6.0% YoY to US$4,159m, or 60.7% of the Group's total before elimination. The decrease was mainly attributable to lower revenues from sales of steel products, which fell by 7.0% YoY and to a downturn in average sales prices which was underpinned by unfavourable market conditions. The Group's lower revenues from sales of steel products were partly offset by higher sales volumes, which increased from 5.9mt in H1 2018 to 6.0mt in H1 2019 following the increase in production volumes at Russian mills amid higher demand.

In H1 2019, revenues from the Steel, North America segment increased by 14.3% YoY. Steel product revenues went up by 16.7%, 4.7% increase was attributed to the higher prices and 12.0% to the improved sales volumes. The key growth driver was greater demand for semi-finished, railway and other steel products.

The Coal segment's revenues declined by 9.3% YoY, 11.3% decline was largely attributed to a slip in coal product sales prices, which was partly offset by a 2.6% uptick in coal product sales volumes. Coal prices followed the downward trend set by global benchmarks in the period.

In H1 2019, the Steel segment's EBITDA decreased due to lower prices for vanadium, semi‑finished and construction products, and higher prices for raw materials, including iron ore, scrap and ferroalloys. This was partly offset by lower expenses in US dollar terms due to the effect that ruble weakening had on costs; and the impact of cost-cutting initiatives implemented in the period.

The Steel, North America segment's EBITDA was driven by greater revenues from sales of semi‑finished, railway and other steel products, partly offset by higher costs of purchased semi‑finished products and staff costs.

The Coal segment's EBITDA was down YoY amid lower coal product sales prices and higher transportation costs, partly offset by the impact of cost-cutting initiatives and lower expenses in US dollar terms due to the effect that ruble 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$m)
Segment	H1 2019	H1 2018	Change	Change, %
Steel	4,159	4,425	(266)	(6.0)%
Steel, North America	1,316	1,151	165	14.3%
Coal	1,128	1,244	(116)	(9.3)%
Other operations	249	279	(30)	(10.8)%
Eliminations	(712)	(756)	44	(5.8)%
Total	6,140	6,343	(203)	(3.2)%

 

Revenues by region, (US$m)
Region	H1 2019	H1 2018	Change	Change, %
Russia	2,152	2,309	(157)	(6.8)%
Americas	1,451	1,399	52	3.7%
Asia	1,438	1,331	107	8.0%
CIS (excl. Russia)	474	454	20	4.4%
Europe	576	703	(127)	(18.1)%
Africa and rest of the world	49	147	(98)	(66.7)%
Total	6,140	6,343	(203)	(3.2)%

 

EBITDA*, (US$m)
Segment	H1 2019	H1 2018	Change	Change, %
Steel	949	1,258	(309)	(24.6)%
Steel, North America	60	40	20	50.0%
Coal	518	670	(152)	(22.7)%
Other operations	9	10	(1)	(10.0)%
Unallocated	(67)	(65)	(2)	3.1%
Eliminations	13	(7)	20	n/a
Total	1,482	1,906	(424)	(22.2)%

*For the definition of EBITDA, please refer to Annex 1

 

 

The following table details the effect of the Group's cost-cutting initiatives.

Effect of Group's cost-cutting initiatives in H1 2019 (US$m)
Improving yields and raw material costs, including	43
Improving yields and raw material costs of Urals and Siberia divisions	27
Various improvements at coal beneficiating plants and mines	11
Improving yields and raw material costs of North American assets and other assets	5
Increasing productivity and cost effectiveness	67
Others, including	1
Reduction of general and administrative (G&A) costs and non-G&A headcount	1
Total	111

 

Revenues, cost of sales and gross profit by segment,

(US$m)

	H1 2019		H1 2018		Change, %
Steel segment
Revenues	4,159		4,425		(6.0)%
Cost of sales	(2,958)		(2,912)		1.6%
Gross profit	1,201		1,513		(20.6)%
Steel, North America segment
Revenues	1,316		1,151		14.3%
Cost of sales	(1,153)		(1,018)		13.3%
Gross profit	163		133		22.6%
Coal segment
Revenues	1,128		1,244		(9.3)%
Cost of sales	(543)		(533)		1.9%
Gross profit	585		711		(17.7)%
Other operations - gross profit	54		55		(1.8)%
Unallocated - gross profit	(6)		(5)		20.0%
Eliminations - gross profit	(40)		(61)		(34.4)%
Total	1,957		2,346		(16.6)%

 

 

Gross profit, expenses and results,

(US$m)

Item	H1 2019	H1 2018	Change	Change, %
Gross profit	1,957	2,346	(389)	(16.6)%
Selling and distribution costs	(446)	(443)	(3)	0.7%
General and administrative expenses	(282)	(274)	(8)	2.9%
Impairment of non-financial assets	(17)	(20)	3	15.0%
Foreign-exchange gains/(losses), net	(273)	147	(420)	n/a
Other operating income and expenses, net	(26)	(25)	(1)	4.0%
Profit from operations	913	1,731	(818)	(47.3)%
Interest expense, net	(166)	(180)	14	(7.8)%
Share of losses of joint ventures and associates	5	5	-	0.0%
Impairment of non-current financial assets	(56)	-	(56)	n/a
Gain/(loss) on financial assets and liabilities, net	(7)	3	(10)	n/a
Loss on disposal groups classified as held for sale, net	-	(10)	10	(100.0)%
Other non-operating losses, net	1	(6)	7	n/a
Profit before tax	690	1,543	(853)	(55.3)%
Income tax benefit/(expense)	(346)	(398)	52	(13.1)%
Net profit	344	1,145	(801)	(70.0)%

 

In H1 2019, selling and distribution expenses edged up slightly amid higher freight rates, mainly due to increased sales at EVRAZ North America, and greater port charges due to larger quantities shipped under CIF/CFR terms in 2019. This was partly offset by the effect of Section 232 duties on sales to the US amid a reduction in tariff costs as a result of a customer receiving a tariff exemption from the US government. General and administrative expenses rose by 2.9%, mainly due to higher staff costs at EVRAZ North America amid an overall increase in salaries and wages, as well as at Raspadskaya due to a headcount increase and wage indexation. This was partly offset by the effect that the ruble depreciation had on costs.

Foreign exchange losses amounted to US$273m, mainly related to intra-group loans denominated in rubles payable by EVRAZ plc to the Russian subsidiaries. The appreciation of the Russian ruble against the US dollar in H1 2019 led to exchange losses recognised in the income statements of non-Russian subsidiaries, which are not offset by the exchange gains recognised in the income statements of the Russian subsidiaries.

Interest expenses incurred by the Group decreased, mainly due to the gradual reduction of total debt, as well as the management's efforts to refinance existing indebtedness at more favourable terms during the reporting period. The interest expense amounted to US$166m in the period, compared with US$180m in H1 2018.

For the reporting period, the Group had an income tax expense of US$346m, compared with US$398m in H1 2018. The change reflects the worse operating results, and is affected by accrual of income tax expense for distributed and undistributed dividends.

Cash flow,

(US$m)

Item	H1 2019	H1 2018	Change	Change, %
Cash flows from operating activities before changes in working capital	1,224	1,526	(302)	(19.8)
Changes in working capital	(49)	(594)	545	(91.8)
Net cash flows from operating activities	1,175	932	243	26.1
Short-term deposits at banks, including interest	4	7	(3)	(42.9)
Purchases of property, plant and equipment and intangible assets	(309)	(226)	(83)	36.7
Proceeds from sale of disposal groups classified as held for sale, net of transaction costs	-	41	(41)	(100)
Proceeds from sale of other investments	-	92	(92)	(100)
Other investing activities	4	(15)	19	n/a
Net cash flows used in investing activities	(301)	(101)	(200)	n/a
Net cash flows used in financing activities	(1,081)	(1,391)	310	(22.3)
Effect of foreign-exchange rate changes on cash and cash equivalents	16	(4)	20	n/a
Net increase/(decrease) in cash and cash equivalents	(191)	(564)	373	(66.1)

 

 

Calculation of free cash flow,* (US$m)
Item	H1 2019	H1 2018	Change	Change, %
EBITDA	1,482	1,906	(424)	(22.2)
EBITDA excluding non-cash items	1,487	1,899	(412)	(21.7)
Changes in working capital	(49)	(594)	545	(91.8)
Income tax accrued	(253)	(360)	107	(29.7)
Social and social infrastructure maintenance expenses	(10)	(13)	3	(23.1)
Net cash flows from operating activities	1,175	932	243	26.1
Interest and similar payments	(177)	(158)	(19)	12.0
Capital expenditures, including recorded in financing activities and non-cash transactions	(309)	(232)	(77)	33.2
Proceeds from sale of disposal groups classified as held for sale, net of transaction costs	-	41	(41)	(100)
Other cash flows from investing activities	3	78	(75)	(96.2)
Free cash flow	692	661	31	4.7

*For the definition of free cash flow, please refer to Annex 2.

In H1 2019, net cash flows from operating activities climbed by 26.1% YoY to US$1,175m, driven by stable level in working capital.

CAPEX and key projects

During the reporting period, EVRAZ' capital expenditures rose to US$309m, compared with US$232m in H1 2018, driven by significant maintenance expenses.

Capital expenditures (including those recognised in financing activities) for H1 2019 in millions of US dollars can be summarised as follows.

 

(US$m)

Steel segment
Tashtagol mine expansion The project aim is to increase Tashtagol mining volumes.	5
Technical re-equipment of air heaters of blast furnace no. 2 Technical re-equipment of air heaters of EVRAZ ZSMK's blast furnace no. 2 aimed at increasing efficiency.	5
Blast furnace no. 7 construction at EVRAZ NTMK The project aim is to maintain stable pig iron production volumes during the capital repair of blast furnace no. 6.	4
Steel, North America segment
Long rail mill at EVRAZ Pueblo The project aim is to maintain technical leadership and continue shifting to a higher value product mix with production of 100-metre rails.	7
EVRAZ Red Deer heat treatment The project aim is to develop heat treatment capability to access a higher margin market.	5
Coal segment
Access and development of reserves in the Uskovskaya mine's seam no. 48 The project aim is to prepare the reserves in seam no. 48 for mining.	12
Access and development of reserves in the Esaulskaya mine's seam no. 29a The project aim is to relocate mining operations from seam no. 26 to seam no. 29a.	4
Other development projects	37
Maintenance - reconstruction of blast furnace no. 6 at EVRAZ NTMK	35
Other maintenance	195
Total	309

 

Financing and liquidity

EVRAZ began 2019 with total debt of US$4,638m. The Group used its accumulated cash and part of its cash flows generated in the period to further reduce total debt and completed several transactions to extend its maturity profile.

In March, EVRAZ completed issuer substitution, a capital markets transaction intended to substitute EVRAZ plc in place of Evraz Group S.A. as the issuer of the outstanding Eurobonds in accordance with their terms. Upon substitution, three major international rating agencies assigned EVRAZ plc and its notes credit ratings, which are in line with those of Evraz Group S.A. prior to the transaction.

In April, EVRAZ plc issued a US$700m Eurobond due in 2024 with a semi-annual coupon of 5.25%. The proceeds were used to fund the tender offer for the Eurobonds due in 2020 that was completed in April and the make whole call for the residual outstanding balance of these notes that was completed in May. With a series of these transactions, EVRAZ effectively shifted 2020 maturities to 2024.

In April, EVRAZ repaid US$50m in loans from Sberbank due in 2019.

In June, the Group repaid RUB15,000m of 12.95% ruble bonds due in 2019 and respective cross-currency swaps, which economically hedged the Group's exposure to currency risk.

At 1 January 2019, as a result of the application of a new accounting standard, the Group recognised US$118m of lease liabilities, which at recognition increased total debt. Under the previous accounting standard, these contracts were accounted for as operating leases, and were not recognised as either assets or liabilities in the Group Statement of Financial Position.

These actions together with scheduled repayments of bank loans reduced total debt in H1 2019 by US$112m to US$4,526m as at 30 June 2019.

In H1 2019, EVRAZ paid an interim dividend to its shareholders in the amount of US$577m (US$0.40 per share).

During H1 2019, net debt increased by US$79m to US$3,650m, compared with US$3,571m as at 31 December 2018, driven by the recognition of lease liabilities under the new accounting standard. Interest expense accrued in respect of loans, bonds and notes amounted to US$148m in the period, compared with US$167m in H1 2018. 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.

A decline of EBITDA in H1 2019 compared with H1 2018 resulted in a slight increase of the Group's major leverage metric, the ratio of net debt to LTM EBITDA, to 1.1 times as at 30 June 2019, compared with 0.9 times as at 31 December 2018.

As at 30 June 2019, debt with financial maintenance covenants comprised various bilateral facilities with a total outstanding principal of around US$1,008m. 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 2019, EVRAZ was in full compliance with its financial covenants.

As at 30 June 2019, cash amounted to US$876m, while short-term loans and the current portion of long-term loans stood at US$107m. Total scheduled debt maturities over the next 18 months are US$44m, which are comfortably covered by cash balances.

Recent developments

On 5 August 2019, EvrazHolding Finance LLC, a finance subsidiary of the Group, issued RUB20,000m (around US$317m at the exchange rate on the transaction date) in five-year, exchange-traded bonds due in 2024 with a 7.95% coupon payable semi-annually. To manage the currency exposure on the ruble-denominated bonds, the Group was able to economically hedge these transactions using cross-currency interest rate swaps, effectively converting the liability exposure to US dollars.

 

 

 

Review of operations by Segment

 

(US$m)	Steel		Steel, NA		Coal		Other
	H1 2019	H1 2018	H1 2019	H1 2018	H1 2019	H1 2018	H1 2019	H1 2018
Revenues	4,159	4,425	1,316	1,151	1,128	1,244	249	279
EBITDA	949	1,258	60	40	518	670	9	10
EBITDA margin	22.8%	28.4%	4.6%	3.5%	45.9%	53.9%	3.6%	3.6%
CAPEX	135	134	63	35	109	60	2	3

 

Steel segment

Sales review

Steel segment revenues by product
	H1 2019		H1 2018
	US$m	% of total segment revenues	US$m	% of total segment revenues	Change, %
Steel products, external sales	3,201	77.0%	3,443	77.8%	(7.0)%
Semi-finished products1	1,206	29.0%	1,346	30.4%	(10.4)%
Construction products2	1,059	25.5%	1,188	26.8%	(10.9)%
Railway products3	554	13.3%	484	10.9%	14.5%
Flat-rolled products4	204	4.9%	217	4.9%	(6.0)%
Other steel products5	178	4.3%	208	4.7%	(14.4)%
Steel products, intersegment sales	158	3.8%	174	3.9%	(9.2)%
Including sales to Steel, North America	152	3.7%	164	3.7%	(7.3)%
Iron ore products	124	3.0%	87	2.0%	42.5%
Vanadium products	410	9.9%	466	10.5%	(12.0)%
Other revenues	266	6.4%	255	5.8%	4.3%
Total	4,159	100.0%	4,425	100.0%	(6.0)%

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

 

 

Sales volumes of Steel segment
(kt)
	H1 2019	H1 2018	Change, %
Steel products, external sales	5,730	5,602	2.3%
Semi-finished products	2,572	2,505	2.7%
Construction products	1,837	1,809	1.5%
Railway products	710	658	7.9%
Flat-rolled products	323	310	4.2%
Other steel products	288	320	(10.0%)
Steel products, intersegment sales	301	303	(0.7%)
Total steel products	6,031	5,905	2.1%
Vanadium products (tonnes of pure vanadium)	8,620	9,270	(7.0%)
Vanadium in slag	2,836	2,814	0.8%
Vanadium in alloys and chemicals	5,784	6,456	(10.4%)
Iron ore products1	1,234	1,558	(20.8%)
Sinter	533	465	14.6%
Pellets	699	1,089	(35.8%)
Other iron ore products	2	4	(50.0%)

¹ The H1 2018 data have been adjusted

 

Geographic breakdown of external steel product sales
	US$m			kt
	H1 2019	H1 2018	Change, %	H1 2019	H1 2018	Change, %
Russia	1,603	1,672	-4.1%	2,537	2,493	1.8%
Asia	939	869	8.1%	2,002	1,616	23.9%
Europe	272	367	-25.9%	499	608	(17.9)%
CIS (excl. Russia)	280	244	14.8%	469	347	35.2%
Africa, America and the rest of the world	107	291	-63.2%	223	538	(58.6)%
Total	3,201	3,443	-7.0%	5,730	5,602	2.3%

 

In H1 2019, revenues from the Steel segment dropped by 6.0% to US$4,159m, compared with US$4,425m in H1 2018. This resulted from lower sales prices, primarily for semi-finished and construction products, as well as lower vanadium product prices and volumes.

Revenues from external sales of semi-finished products fell by 10.4%, a 13.1% reduction was attributed to average prices decline, which was partly offset by a 2.7% increase which was attributed to higher sales volumes. The decrease was mainly due to lower export prices for billets on the African, European and US markets and lower export prices for slabs on the US market.

Revenues from sales of construction products to third parties went down by 10.9%, a 12.4% decline was attributed to lower average prices. Prices were lower for rebar and channels on the Russian and European markets, rebar and wire rods in Asia, and channels and wire in the CIS, while sales volumes of channels to Africa were also down. This was partly offset by an increase in sales volumes of rebars (by 5.6%) and beams (by 23.0%), primarily on the CIS and Russian markets.

Revenues from external sales of railway products rose, 7.9% increase was attributed predominantly to increases in volumes and 6.6% increase was attributed to the higher prices. A key driver of higher prices and sales volumes of railway products during the reporting period was greater demand for wheels and other railway products on the Russian market and better demand for rails in the CIS and African markets, albeit partly offset by lower rail export volumes to the US market.

External revenues from flat-rolled products dropped by 6.0%, a 10.2% decrease was driven by  sales prices, while a 4.2% increase was attributed to the higher sales volumes amid an improving situation on the Russian market. This resulted from strengthening demand in Russia and greater production volumes at EVRAZ Palini e Bertoli.

Revenues from external steel product sales in Russia decreased by 4.1% YoY, primarily due to lower prices, which was partly offset by greater demand. The share of the Russian market in total external steel product sales edged up from 48.6% in H1 2018 to 50.1% in H1 2019. The increase in Asia's share of sales from 25.3% to 29.3% was due to higher sales volumes for billets and slab. The growing share of sales to Russia and Asia was also due to a shift from the European and US markets.

Steel segment revenues from sales of iron ore products, including intersegment sales, surged by 42.5%, a 63.3% jump was driven by sales prices, while a 20.8% decrease was attributed to slide in sales volumes. The main decrease in sales volumes was mainly due to lower volumes of pellets on the Russian market amid reduced demand.

In the reporting period, around 69.1% of EVRAZ' iron ore consumed in steelmaking came from its own operations, compared with 67.0% in H1 2018.

Steel segment revenues from sales of vanadium products, including intersegment sales, decreased by 12.0%, a 5.0% decline was attributed to the slide in average prices and 7.0% decline was attributed to lower sales volumes as a result of reduced consumption in the large-diameter pipe segment and FeV substitution with Niobium, as well as lower frame sales in North America in 2019.

 

Steel segment cost of revenues

Steel segment cost of revenues
	H1 2019		H1 2018
	US$m	% of segment revenues	US$m	% of segment revenues	Change, %
Cost of revenues	2,958	71.1%	2,912	65.8%	1.6%
Raw materials	1,351	32.5%	1,358	30.7%	(0.5)%
Iron ore	254	6.1%	211	4.8%	20.4%
Coking coal	583	14.0%	649	14.7%	(10.2)%
Scrap	290	7.0%	268	6.1%	8.2%
Other raw materials	224	5.4%	230	5.2%	(2.6)%
Auxiliary materials	166	4.0%	165	3.7%	0.6%
Services	131	3.1%	130	2.9%	0.8%
Transportation	230	5.5%	223	5.0%	3.1%
Staff costs	250	6.0%	263	5.9%	(4.9)%
Depreciation	120	2.9%	119	2.7%	0.8%
Energy	220	5.3%	232	5.2%	(5.2)%
Other*	490	11.8%	422	9.5%	16.1%

*Includes primarily goods for resale, inter-segment unrealised profit and certain taxes, semi-finished products and allowances for inventories

 

In H1 2019, 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 0.5%, primarily due to the lower cost of coking coal (-10.2%) and ruble weakness. This was partly offset by the greater cost of iron ore (+20.4%) and scrap (+8.2%) 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 0.6% amid greater consumption of auxiliary materials due to increased pig iron production and higher auxiliary materials prices. This was partly offset by the weaker ruble and a reduction of US$3m in costs following the disposal of EVRAZ DMZ in March 2018.

Service costs grew by 0.8%, primarily driven by rescheduling of capital repairs and maintenance, which was partly offset by the depreciation of the ruble.

Higher transportation costs were primarily due to greater volumes purchased from Russian mills, as well as increased transportation services costs.

Staff costs fell by 4.9%, largely because of the effect that ruble weakening had on costs.

Energy costs were lower due to the weaker ruble, albeit partly offset by higher tariffs and greater consumption volumes.

Other costs rose by 16.1%, largely due to accrual of allowances for vanadium stock amid lower vanadium prices, as well as higher goods for resale costs due to the weaker ruble.

 

 

Steel segment gross profit

The Steel segment's gross profit slid by 20.6% YoY, driven primarily by lower prices for vanadium, semi-finished and construction products, which was partly offset by the positive effect that ruble weakening had on costs.

Operational update

Russia: Urals

 

·    At EVRAZ NTMK, after building blast furnace no. 7, which was launched in February 2018, the major overhaul of blast furnace no. 6 is under way. The project aims to support EVRAZ NTMK's pig iron smelting capacity. The blast-furnace jacket and cowpers are currently being installed.

·    EVRAZ NTMK continues to expand its wheel production capacity. In 2019, a sixth full-profile wheel-machining production line is planned to be purchased and installed.

·    EVRAZ NTMK is implementing a project to install a top-pressure recovery turbine at blast furnace no. 7, which will help to reduce external purchases of electricity by producing it in house.

·    EVRAZ NTMK is considering a large investment programme aimed at manufacturing value-added products, mastering the production of new products and expanding rolling capacity. The main projects under the programme are the construction of continuous casting machine no. 5 and the major overhaul of the rail and beam shop. Design work and main contractor selection are currently under way.

·    EVRAZ KGOK continues to implement the reconstruction project for its tailings facility. The project will make it possible for the Group to ensure self-sufficiency in raw iron ore at the current level. In 2019, the plan is to complete the engineering survey work and develop the final design.

·    EVRAZ KGOK is implementing the project to develop the Sobstvenno-Kachkanarskoye deposit, which is aimed at replacing 13mt of retiring annual capacity from the Gusevogorskoye deposit by 2024. The site design, project documentation and site project analysis have been completed. Deforestation and road construction work are currently under way.

·    New products

o  Five H-beam sizes according to the EN standard for Russian customers

o  A 200x200 millimetre angle with a 25 and 30 millimetre shelf for the Russian market

o  Developed a fourth and fifth category of hardness in balls (d100 and d120)

o  Two new wheel profiles for Austria's railways

o  A EVRAZ-invented railway wheel profile for the EU market has been prepared for certification

 

Russia: Siberia

·    The modernisation project for the 100-metre rail finishing line has been completed, increasing the volume of 100-metre rails shipped to Russian Railways.

·    Installation of the dynamic electrode reflux system at electric arc furnace no. 2 in the electric furnace melting shop has been completed, making it possible to optimise electrode use when smelting steel.

·    At the Tashtagolskaya crushing and concentrating plant, the conical crusher has been replaced. The new equipment will allow the plant to double its productivity and reduce the grain size grade of its concentrate from 20 millimetres to 16 millimetres.

·    Design work and main contractor selection are currently under way under EVRAZ ZSMK's integrated flat casting and rolling facility construction project.

·    New products

o  The certificate of conformity for DT400IK R65 rails has been received and rails are ready to be launched into commercial production

o  Re115 rails profile for the Brazilian market

o  New lightweight no. 50 angles with a 3 millimetre shelf and 14U section

o  A 20х180 millimetre plate for turnouts production, as well as three small square profiles of 10, 12 and 14 millimetres for machinery

Vanadium

·    EVRAZ NTMK's vanadium slag production climbed by 6.7% YoY in H1 2019, mainly due to commissioning the new blast furnace during H1 2018, resulting in a production stoppage.

·    During the reporting period, EVRAZ Vanady Tula continued to implement its environmental programme: the new off-gas system has been installed and is entering the start-up process. The water treatment project has proceeded to the engineering stage.

·    EVRAZ Nikom's FeV 80% production was almost flat (up 0.3% due to improved yields).

 

 

 

Steel, North America segment

Sales review

Steel, North America segment revenues by product
	H1 2019		H1 2018
	US$m	% of total segment revenues	US$m	% of total segment revenues	Change, %
Steel products	1,260	95.7 %	1,080	93.8 %	16.7%
Semi-finished products1	96	7.3 %	5	0.4 %	n/a
Construction products2	115	8.7 %	113	9.8 %	1.8%
Railway products3	205	15.6 %	186	16.2 %	10.2%
Flat-rolled products4	302	22.9 %	290	25.2 %	4.1%
Tubular products5	542	41.2 %	486	42.2 %	11.5%
Other revenues6	56	4.3 %	71	6.2 %	(21.1)%
Total	1,316	100.0 %	1,151	100.0 %	14.3%

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
(kt)
	H1 2019	H1 2018	Change, %
Steel products
Semi-finished products	130	11	n/a
Construction products	136	142	(4.2)%
Railway products	223	208	7.2%
Flat-rolled products	282	302	(6.6)%
Tubular products	387	371	4.3%
Total	1,158	1,034	12.0%

 

The segment's revenues from the sale of steel products grew,  a 12.0% increase was attributed to higher sales volumes and a 4.7% increase was attributed to sales prices. This was mainly attributable to sales of tubular, railway and flat-rolled products.

Revenues from construction product sales edged up by 1.8%, a  6.0% increase was attributed to higher prices, while a 4.2% decline was attributed to a drop in volumes of as a result of lower demand for concrete reinforcing bar caused by inclement weather in the beginning of 2019 and a softer market.

Railway product revenues climbed by 10.2%, a 7.2% increase was driven by upticks in sales volumes and 3.0% increase was attributed to the higher prices amid increased market share growth, along with greater sales volumes of super premium APEX G2 rail.

 

Revenues from flat-rolled products increased by 4.1%, a 10.7% increase was attributed to a rise in prices and a 6.6% decrease was attributed to a fall in volumes amid weaker demand.

Revenues from tubular product sales grew by 11.5%, a 7.2% increase was attributed to the higher prices and a 4.3% increase was attributed to the higher volumes. The growth in sales volumes was driven by the timing of completion of large-diameter pipe orders, which was partly offset by lower OCTG demand and production delays caused by a temporary shutdown of EVRAZ Regina's coating operations.

Steel, North America segment cost of revenues

Steel North America segment cost of revenues
	H1 2019		H1 2018
	US$m	% of segment revenues	US$m	% of segment revenues	Change, %
Cost of revenues	1,153	87.6%	1,018	88.4%	13.3%
Raw materials	394	29.9%	402	34.9%	(2.0)%
Semi-finished products	263	20.0%	207	18.0%	27.1%
Auxiliary materials	120	9.1%	128	11.1%	(6.3)%
Services	88	6.7%	83	7.2%	6.0%
Staff costs	159	12.1%	142	12.3%	12.0%
Depreciation	55	4.2%	52	4.5%	5.8%
Energy	62	4.7%	57	5.0%	8.8%
Other*	12	0.9%	(53)	(4.6)%	n/a

  * Primarily includes transportation, goods for resale, certain taxes, changes in work in progress and fixed goods and allowances for inventories.

 

In H1 2019, the Steel, North America segment's cost of revenues rose by 13.3% YoY. The main drivers were as follows.

Raw material costs fell by 2.0%, primarily because of lower scrap prices and OCTG production.

Costs of semi-finished products surged by 27.1% due to higher slab costs amid increased market demand.

Auxiliary material costs fell by 6.3% due a drop in electrodes costs of US$14.4m, which was partly offset by higher production volumes of crude steel and finished products.

Service costs went up by 6.0%, driven by higher production volumes, as well as an increase in coating services of US$2.1m amid greater pipe sales.

Staff costs rose by 12.0% due to the restart of EVRAZ Portland's tubular line.

Depreciation grew by 5.8% due to major investment projects started to be depreciated in H1 2019.

Energy costs were higher for the reporting period, primarily due to greater consumption of electricity to support increased production volumes at EVRAZ Pueblo and higher cost of natural gas at EVRAZ Portland.

 

 

Steel, North America segment gross profit

The Steel, North America segment's gross profit totalled US$163m for H1 2019, up from US$133m a year earlier. The growth was driven primarily by higher sales prices of tubular, railway and flat-rolled products due to improving market conditions, albeit partly offset by increased costs for purchased semi-finished products and staff costs.

Operational update

Canada

·    During H1 2019, EVRAZ continued to focus on further improving the operational performance at EVRAZ Regina's facilities following upgrades. The mills are currently on track to meet their 2019 targets.

·    EVRAZ Red Deer's heat treat unit has been installed to meet demand for heat-treated pipe in Western Canada. The ramp up is scheduled to start in August.

·    EVRAZ Regina's pipe coating facility resumed full operations in Q2 2019 and is processing orders following a fire in February 2019 that temporarily halted production.

·    In Q1 2019, Canada's government announced funding from the federal Strategic Innovation Fund supporting multi-year capital investments into equipment upgrades and expansion at the company's mills in Regina, Saskatchewan, and Red Deer, Alberta, boosting steelmaking/tubular capacity, reducing emissions and improving efficiency.

·    Most of the provisional safeguards implemented by the Canadian government in Q3 2018 expired in Q2 2019, following an inquiry by the Canadian International Trade Tribunal. The provisional safeguards allowed to expire included safeguards on energy tubular products.

US

·    The new seamless pipe threading line at EVRAZ Pueblo is now in operation and is producing to customer orders.

·    The EVRAZ Pueblo rail mill modernisation project continues to advance. In H1 2019, EVRAZ reached agreements with global original equipment manufacturers to supply the equipment for all portions of the mill. Engineering work is on track to be completed in 2019.

·    EVRAZ Portland's spiral mill started commercial production in Q1 2019 to fulfil customer orders.

·    In May 2019, the US lifted the 25% Section 232 tariffs on imports of steel products from Canada and Mexico. The Canadian government lifted its retaliatory tariffs on steel the same day. Section 232 tariffs of 25% remain in place on several countries outside North America, including for steel slab imported from Russia to EVRAZ Portland.

·    In Q1 2019, the US Department of Commerce reduced from a preliminary rate of 24% to 12% the anti-dumping duty rate imposed on large-diameter welded pipe from Canada, which had been in place since Q3 2018.

 

 

Coal segment

Sales review

 

Coal segment revenues by product
	H1 2019		H1 2018
	US$m	% of total segment revenues	US$m	% of total segment revenues	Change, %
External sales
Coal products	724	64.2%	801	64.4%	(9.6)%
Coking coal	86	7.6%	72	5.8%	19.4%
Coal concentrate	638	56.6%	729	58.6%	(12.5)%
Intersegment sales
Coal products	383	34.0%	412	33.2%	(7.0)%
Coking coal	62	5.5%	63	5.1%	(1.6)%
Coal concentrate	321	28.5%	349	28.1%	(8.0)%
Other revenues	21	1.8%	31	2.4%	(32.3)%
Total	1,128	100.0%	1,244	100.0%	(9.3)%

 

Sales volumes of Coal segment
(kt)
	H1 2019	H1 2018	Change, %
External sales
Coal products	5,585	5,599	(0.3)%
Coking coal	943	807	16.9%
Coal concentrate and other products	4,642	4,792	(3.1)%
Intersegment sales
Coal products	3,169	2,932	8.1%
Coking coal	952	910	4.6%
Coal concentrate	2,217	2,022	9.6%
Total, coal products	8,754	8,531	2.6%

 

The Coal segment's overall revenues were down amid lower global sales prices, driven by availability of resources on the spot market and reduced demand and production in Europe. In addition, the fall in steam coal prices led to a drop in spot prices for semi-soft coking coal grades. At the same time, prices for high-quality hard coking coals remained relatively high.

Revenues from external sales of coal products fell,  a 9.3% decrease was attributed to the lower prices and a 0.3% decline was attributed to lower sales volumes: coking coal volumes rose by 16.9% amid an increase in sales of coking coal from the Uskovskaya and Mezhegeyugol mines, while coal concentrate volumes dropped by 3.1% due to lower demand on the East European markets and a lack of available Zh grade stock in Q1 2019.

Revenues from internal sales of coal products were down 7.0%, a 15.1% decrease was attributed to the lower sales prices, while a 8.1% increase was attributed to an uptick in volumes. Coking coal volumes rose by 4.6% due to the increased sales of the OS and K grades to EVRAZ ZSMK, driven by the switch to a new mining method (longwall) for K grade and sales of earlier accumulated stock. Coal concentrate volumes grew by 9.6% due to greater sales of the OS grade to EVRAZ NTMK, driven by a slight increase in production and sales of earlier accumulated stock.

In H1 2019, the Coal segment's sales to the Steel segment amounted to US$383m (34.0% of total sales), compared with US$412m (33.2%) in H1 2018.

During the reporting period, roughly 71.7% of EVRAZ' coking coal consumption in steelmaking came from the Group's own operations, compared with 68.2% in H1 2018.

Coal segment cost of revenues

Coal segment cost of revenues
	H1 2019		H1 2018
	US$m	% of segment revenues	US$m	% of segment revenues	Change, %
Cost of revenues	543	48.1%	533	42.8%	1.9%
Auxiliary materials	63	5.6%	68	5.5%	(7.4)%
Services	64	5.7%	60	4.8%	6.7%
Transportation	192	17.0%	160	12.9%	20.0%
Staff costs	107	9.5%	99	8.0%	8.1%
Depreciation	83	7.4%	85	6.8%	(2.4)%
Energy	26	2.3%	26	2.1%	0.0%
Other*	8	0.7%	35	2.8%	(77.1)%

* Primarily includes goods for resale, certain taxes, changes in work in progress and finished goods, allowance for inventory, raw materials and inter-segment unrealised profit 

The main drivers of the YoY growth in the Coal segment's cost of revenues were as follows.

The costs of auxiliary materials fell by 7.4%, mainly due to the impact on costs of the weaker ruble and lower prices for auxiliary materials. This was partly offset by greater consumption of auxiliary materials at the Raspadsky open pit amid higher mining volumes.

Costs for services climbed by 6.7% due to an increase in mining works at the Raspadsky open pit and the growth of service costs for longwall repositioning, although this was partly offset by the weaker ruble.

Transportation costs grew by 20.0% in the reporting period, primarily due to higher volumes of mined rock transportation amid increased mining at the Raspadsky open pit and open-pit mining at the Raspadskaya-Koksovaya mine, as well as organisation and maintenance of temporary coal storage sites at the Raspadskaya processing plant. This was partly offset by the depreciation of the ruble.

Staff costs were up because of wage indexation and higher headcount, albeit partly offset by the ruble weakening.

Depreciation and depletion costs lowered mainly due to the weaker Russian currency.

Other costs decreased in the reporting period, mainly due to lower goods for resale amid reduced volumes and costs of coal product purchases, as well as the effect of ruble depreciation. This was partly offset by higher taxes after the mineral tax rate was increased.

Coal segment gross profit

The Coal segment's gross profit for H1 2019 amounted to US$585m, down from US$711m a year earlier, primarily due to declining sales prices and sales volumes, as well as higher transportation and staff costs. This was partly offset by the positive effect that ruble weakening had on costs.

Operational update

Systematic integrated work of the Coal segment to improve its operational efficiency continues to bear fruit in the form of increased production volumes. In H1 2019, EVRAZ' raw coking coal output totalled 13.8mt, up 2.4mt YoY (+21%).

The long-term programmes aimed at improving production safety and productivity growth are continuing:

·   Reducing downtime and increasing loads on longwalls

·   Improving the development work rate

·   Boosting preliminary degassing efficiency

·   Improving work safety (including self-combustion and explosion safety, gas monitoring and injuries)

At the same time, the fall in prices for steam coals on the global market placed serious pressure on the prices of semi-soft coking coal (SSCC) during H1 2019. Under these conditions, the Coal segment had corrected the production of SSCC grades at the Raspadsky open pit by removing excess capacity through reducing the services of third-party mining contractors. That made it possible to reduce costs and prevent overproduction of SSCC.

Increasing production of hard-coking coal (HCC) and deficit grades remains the Group's strategic plan and is being successfully implemented. To strengthen market position and expand the product portfolio, open-pit mining at the site of the Raspadskaya-Koksovaya mine grew further, increasing resources of the deficit semi-hard OS grade. In H1 2019, the Raspadskaya-Koksovaya mine successfully made the transition from room-and-pillar mining to longwall mining to boost the output of the K grade.

Amid increasing production volumes, the implementation of de-bottlenecking initiatives in the areas of washing, warehouses and logistics remains relevant for the Group.

Raspadskaya

During the reporting period, Raspadskaya's raw coking coal output amounted to 7.1mt (up 1.7mt YoY and almost flat compared with the peak in H2 2018). The YoY increase was caused by the mine's planned transition from production at two longwalls to three longwalls and increased scale of mining at the Raspadsky open pit in Q1 2019. The Raspadskaya-Koksovaya mine successfully launched longwall mining in Q2 2019 to boost output of the K grade.

Yuzhkuzbassugol

In H1 2019, Yuzhkuzbassugol mined 6.1mt of raw coking coal, up 0.6mt YoY. Operations are going according to the annual plan.

Mezhegeyugol

During the period, Mezhegeyugol continued to develop room-and-pillar mining operations and paid close attention to the growth rate of development work. Raw coking coal output totalled 0.6mt, compared with 0.5mt in H1 2018.

 

 

Key RISKS AND UNCERTAINTIES

 

EVRAZ is exposed to numerous risks and uncertainties in its business. These may affect its ability to execute its strategy effectively in the remaining six months of the financial year and could cause the actual results to differ materially from expected and historical results. 

The directors consider that the principal risks and uncertainties as summarised below and detailed on pages 34-39 of the EVRAZ plc 2018 annual report, copies of which are available at www.evraz.com, remain relevant in 2019 and the mitigating actions described continue to be appropriate. 

Risks:

·    Global economic factors, industry conditions and cyclicality.

·    Product competition.

·    Cost effectiveness.

·    Compliance with trade regulations and sanctions regimes.

·    Functional currency devaluation.

·    HSE: environmental.

·    HSE: health and safety.

·    Potential government action.

·    Business interruption.

·    Cybersecurity and IT infrastructure failure.

At the same time, the management continues to monitor new developments and implement preventative measures to minimise the risks of any adverse effect on the Group's business. 

A number of safety incidents that the Group experienced in the first half of 2019 led to the complete review of our health and safety programmes. The management has been focusing on determining the causes of the incidents and preventing further incidents through improved measures and controls.

EVRAZ also continues to monitor and assess other risks and uncertainties that were not recognised as principal, eg employee risks, taxation, compliance risks, social and community risks, risks of climate change, risks related to respect for human rights and other risks. While the impact and probability analysis suggests that such risks could affect the Group's operations to some extent, the management believes they are being adequately managed and does not consider them as being capable of seriously affecting the Group's performance, future prospects or reputation.

EVRAZ continues to actively monitor the business risk environment and pursues strategies to mitigate the identified risks on a continuing basis.

 

DIVIDENDS

 

Given the performance throughout 2019, EVRAZ has announced an interim dividend.

On 7 August 2019, the Board of Directors voted to disburse a total of US$508.17m, or US$0.35 per share.

The record date is 16 August 2019 and payment date is 5 September 2019.

The interim dividend will be paid in US dollars, unless a shareholder elects to receive dividends in UK pounds sterling or euros. The last date for submitting a currency election will be 19 August 2019. All conversions will take place on or around 21 August 2019.

 

 

DIRECTOR'S RESPONSIBILITY STATEMENT

 

The directors confirm that, to the best of their knowledge, this consolidated interim financial information has been prepared in accordance with IAS 34 as adopted by the European Union and that the interim management report includes a fair review of the information required by DTR 4.2.7 and DTR 4.2.8, namely:

An indication of important events that have occurred during the first six months and their impact on the consolidated interim financial information, and a description of the principal risks and uncertainties for the remaining six months of the financial year; and material related-party transactions in the first six months and any material changes in the related-party transactions described in the last annual report.

 

By order of the Board

Alexander Frolov

Chief Executive Officer

EVRAZ plc

 

7 August 2019

 

 

Definitions of selected alternative performance measures

 

The Group uses alternative performance measures (APMs) to improve comparability of information between reporting periods and business units, either by adjusting for uncontrollable or one-off factors which impact upon IFRS measures or, by aggregating measures, to aid the user of this report in understanding the activity taking place across the Group's portfolio.

 

EBITDA

EBITDA is determined as a segment's profit/(loss) from operations adjusted for social and social infrastructure maintenance expenses, impairment of non-financial assets, profit/(loss) on disposal of property, plant and equipment and intangible assets, foreign exchange gains/(losses) and depreciation, depletion and amortisation expense.

 

See Note 3 of the consolidated financial statement for additional information and reconciliation with IFRS financial statements.

 

Free Cash Flow

Free Cash Flow represents EBITDA, net of non-cash items, less changes in working capital, income tax paid, interest paid and covenant reset charges, conversion premiums, premiums on early repurchase of bonds and realised gains/(losses) on interest payments under swap contracts, interest income and debt issue costs, less capital expenditure, including recorded in financing activities, purchases of subsidiaries, net of cash acquired, proceeds from sale of disposals classified as held for sale, net of transaction costs, less purchases of treasury shares for participants of the incentive plans, plus other cash flows from investing activities.

Free Cash Flow is not a measure under IFRS and should not be considered as an alternative to other measures of financial position. EVRAZ' calculation of Free Cash Flow may be different from the calculation used by other companies and therefore comparability may be limited.

Cash and short-term bank deposits

Cash and short-term bank deposits is not a measure under IFRS and should not be considered as an alternative to other measures of financial position. EVRAZ' calculation of cash and short‑term bank deposits may be different from the calculation used by other companies and therefore comparability may be limited.

Cash and short-term bank deposits calculation

 

US$m	30 June 2019	31 December 2018		Change	Change, %
Cash and cash equivalents	876		1,067	(191)	(17.9)
Cash and short-term bank deposits	876		1,067	(191)	(17.9)

 

 

Total debt

Total debt represents the nominal value of loans and borrowings plus unpaid interest, finance lease liabilities, loans of assets classified as held for sale, and the nominal effect of cross-currency swaps on principal of ruble-denominated notes. Total debt is not a measure under IFRS and should not be considered as an alternative to other measures of financial position. EVRAZ' calculation of total debt may be different from the calculation used by other companies and therefore comparability may be limited. The current calculation is different from that used for covenant compliance calculations.

Total debt has been calculated as follows:

US$m	30 June 2019	31 December 2018	Change	Change, %
Long-term loans, net of current portion	4,274	4,186	88	2.1
Short-term loans and current portion of long-term loans	107	377	(270)	(71.6)
Add back: Unamortised debt issue costs and fair value adjustment to liabilities assumed in business combination	22	20	2	10.0
Nominal effect of cross-currency swaps on principal of ruble-denominated notes	-	49	(49)	(100.0)
Lease liabilities, including current portion	123	-	123	100.0
Finance lease liabilities, including current portion	-	6	(6)	(100.0)
Total debt	4,526	4,638	(112)	(2.4)

 

At 1 January 2019, as a result of application of IFRS 16 "Leases", the Group recognised US$118m of additional lease liabilities, which increased total debt.

Under the previous standard, certain contracts were accounted for as operating leases and were not recognised as either assets or liabilities in the Group's Consolidated Statement of Financial Position.

 

Net debt

Net debt represents total debt less cash and liquid short-term financial assets, including those related to disposals classified as held for sale. Net debt is not a measure under IFRS and should not be considered as an alternative to other measures of financial position. EVRAZ' calculation of net debt may be different from the calculation used by other companies and therefore comparability may be limited. The current calculation is different from that used for covenant compliance calculations.

Net debt has been calculated as follows:

US$m	30 June 2019	31 December 2018	Change	Change, %
Total debt	4,526	4,638	(112)	(2.4)
Cash and cash equivalents	(876)	(1,067)	191	(17.9)
Net debt	3,650	3,571	79	2.2

 

CAPEX

Capital expenditure (CAPEX) is cash expenditure on property, plant and equipment. For internal reporting and analysis, CAPEX includes non-cash transactions related to CAPEX.

CAPEX has been calculated as follows:

 

US$m	30 June 2019	30 June 2018	Change	Change, %
Purchases of property, plant and equipment and intangible assets	309	226	83	36.7
Non-cash purchases (Note 12)	-	6	(6)	(100.0)
CAPEX	309	232	77	33.2

 

Labour productivity, US$/t

P=S/V

S - Labour Costs (asset and A-category subsidiaries), exclusive of tax, local currency (on Division consolidation sites with different currencies, US$)

V - production volume, tonnes (for steel assets: V - metal products shipped)

 

 

 

 

 

 

LTIFR

The KPI is calculated on a year-to-date basis for the company employees only.

LTIFR = X•1000000/Y

X is the total number of occupational injuries resulted in lost time among the company employees in the reporting period. Fatalities are not included.

Y is the actual total number of man-hours worked by all company employees in the reporting period.

Semi-finished products cash costs, US$/t

Cash cost of semi-finished products is defined as the production cost less depreciation, the result is divided by production volumes of steel semi-products. Raw materials from EVRAZ coal and iron ore producers are accounted for on at-cost-basis. Costs of semi-finished steel products of EVRAZ NTMK, EVRAZ ZSMK are then weighted averaged by the total saleable semi-finished products production volume.

Coking coal concentrate cash cost, US$/t

Cash cost of coking coal concentrate is defined as cost of revenues less depreciation and SG&A, the result is divided by sales volumes.

Iron ore products cash cost, US$/t

Cash cost of iron ore products is defined as cost of revenues less depreciation and SG&A, the result is divided by sales volumes.

Number of EBS transformations

Number of EBS transformations implemented at the key assets during the reporting year.

Customer focus and cost-cutting effects

Each project effect is calculated as an absolute deviation of targeted metriс year to year multiplied by relevant price or volume depending on project's focus.

 

 

 

 

 

 

 

 

 

 

 

EVRAZ plc

 

 

Unaudited Interim Condensed

Consolidated Financial Statements

 

 

Six-month period ended 30 June 2019