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| Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
|---|---|---|---|---|---|
| Evraz Plc | LSE:EVR | London | Ordinary Share | GB00B71N6K86 | ORD USD0.05 |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 0.00 | 0.00% | 82.68 | 0.00 | 01:00:00 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| Bitmns Coal Undergrnd Mining | 14.16B | 3.03B | 2.0799 | 0.40 | 1.21B |
From Apr 2019 to Apr 2024
TIDMEVR
RNS Number : 2634X
Evraz Plc
09 August 2018
EVRAZ plc
EVRAZ ANNOUNCES UNAUDITED INTERIM FINANCIAL RESULTS FOR H1 2018
9 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").
H1 2018 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 H1 2017. -- 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
H1 2018
-- A second interim dividend for 2018 of US$577.34 million (US$0.40 per share) has been declared, reflecting the Board's confidence in the Group's financial position and outlook.
Financial Highlights
Hot Features
Premium
(US$ million) H1 2018 H1 2017 Change, %
------------------------------------------ ------------- ----------------- ----------
Consolidated revenue 6,343 5,106 24.2%
------------------------------------------ ------------- ----------------- ----------
Profit from operations 1,731 831 n/a
------------------------------------------ ------------- ----------------- ----------
Consolidated EBITDA(1) 1,906 1,152 65.5%
------------------------------------------ ------------- ----------------- ----------
Net profit 1,145 86 n/a
------------------------------------------ ------------- ----------------- ----------
Earnings per share, basic (US$) 0.77 0.04 n/a
------------------------------------------ ------------- ----------------- ----------
Net cash flows from operating activities 932 746 24.9%
------------------------------------------ ------------- ----------------- ----------
CAPEX(1) 232 289 (19.7)%
------------------------------------------ ------------- ----------------- ----------
30 June 2018 31 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.
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.
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)330 336 UK 9411 +7 495 646 9190 Russia +1 646 828 8193 US
Conference ID: 1336898
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, 9 August 2018, at the following link:
http://www.evraz.com/investors/financial_results/presentations/
An MP3 recording will be available on Friday, 10 August 2018, at the following link:
http://www.evraz.com/investors/financial_results/conference_calls/
Table of contents
Strategic goals IN 2018
HEALTH, SAFETY and ENVIRONMENT
HUMAN CAPITAL
CUSTOMER FOCUS
ASSET DEVELOPMENT
EVRAZ BUSINESS SYSTEM
Market outlook
Global markets
Russian Steel
North America
Coal
2018 YEAR- OUTLOOK
Financial review
Statement of operations
CAPEX and key projects
Financing and liquidity
Review of operations by Segment
Steel segment
Steel, North America segment
Coal segment
Key RISKS AND UNCERTAINTIES
DIVIDS
DIRECTOR'S RESPONSIBILITY STATEMENT
Definitions of selected alternative performance measures
UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 H1 2017. 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 H1 2017 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 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 H1 2017.
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 H1 2017 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 H1 2018 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 2019. 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 45-50 thousand tonnes to 140-150 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 H1 2018 and expects to spend another US$92 million in H2 2018.
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). EBS-transformations 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 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 H1 2018 from US$474 per tonne in H1 2017. 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 H1 2017. 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 anti-dumping 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 H1 2017. 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 H1 2017. 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 H1 2017. 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.
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 2014-16. 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 H2 2018. 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 H1 2017. 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 H1 2017.
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 H1 2017. 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 H1 2018. 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.
2018 YEAR- 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 H1 2018 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 H1 2017 to 5.9 million tonnes in H1 2018. 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.
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 H1 2018 H1 2017 Change Change, % ---------------------- -------- -------- ------- ---------- Steel 4,425 3,645 780 21.4% ---------------------- -------- -------- ------- ---------- Steel, North America 1,151 879 272 30.9% ---------------------- -------- -------- ------- ---------- Coal 1,244 1,121 123 11.0% ---------------------- -------- -------- ------- ---------- Other operations 279 222 57 25.7% ---------------------- -------- -------- ------- ---------- Eliminations (756) (761) 5 (0.7)% ---------------------- -------- -------- ------- ---------- Total 6,343 5,106 1,237 24.2% ---------------------- -------- -------- ------- ---------- Revenues by region, (US$ million) Region H1 2018 H1 2017 Change Change, % ------------------------------ -------- -------- ------- ---------- Russia 2,309 2,054 255 12.4% ------------------------------ -------- -------- ------- ---------- Americas 1,399 1,086 313 28.8% ------------------------------ -------- -------- ------- ---------- Asia 1,331 985 346 35.1% ------------------------------ -------- -------- ------- ---------- CIS (excl. Russia) 454 330 124 37.6% ------------------------------ -------- -------- ------- ---------- Europe 703 533 170 31.9% ------------------------------ -------- -------- ------- ---------- Africa and rest of the world 147 118 29 24.6% ------------------------------ -------- -------- ------- ---------- Total 6,343 5,106 1,237 24.2% ------------------------------ -------- -------- ------- ---------- EBITDA*, (US$ million) Segment H1 2018 H1 2017 Change Change, % ---------------------- -------- -------- ------- ---------- Steel 1,258 526 732 n/a ---------------------- -------- -------- ------- ---------- Steel, North America 40 14 26 n/a ---------------------- -------- -------- ------- ---------- Coal 670 659 11 1.7% ---------------------- -------- -------- ------- ---------- Other operations 10 10 - 0.0% ---------------------- -------- -------- ------- ---------- Unallocated (65) (63) (2) 3.2% ---------------------- -------- -------- ------- ---------- Eliminations (7) 6 (13) n/a ---------------------- -------- -------- ------- ---------- Total 1,906 1,152 754 65.5% ---------------------- -------- -------- ------- ----------
*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 2018
(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 operations 15
----------------------------------------------------------------- ---------
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)
Change,
H1 2018 H1 2017 %
--------------------------------- -------- -------- --------
Steel segment
--------------------------------- -------- -------- --------
Revenues 4,425 3,645 21.4%
--------------------------------- -------- -------- --------
Cost of sales (2,912) (2,904) 0.3%
--------------------------------- -------- -------- --------
Gross profit 1,513 741 n/a
--------------------------------- -------- -------- --------
Steel, North America segment
--------------------------------- -------- -------- --------
Revenues 1,151 879 30.9%
--------------------------------- -------- -------- --------
Cost of sales (1,018) (772) 31.9%
--------------------------------- -------- -------- --------
Gross profit 133 107 24.3%
--------------------------------- -------- -------- --------
Coal segment
--------------------------------- -------- -------- --------
Revenues 1,244 1,121 11.0%
--------------------------------- -------- -------- --------
Cost of sales (533) (460) 15.9%
--------------------------------- -------- -------- --------
Gross profit 711 661 7.6%
--------------------------------- -------- -------- --------
Other operations - gross profit 55 49 12.2%
--------------------------------- -------- -------- --------
Unallocated - gross profit (5) (4) 25.0%
--------------------------------- -------- -------- --------
Eliminations - gross profit (61) (61) 0.0%
--------------------------------- -------- -------- --------
Total 2,346 1,493 57.1%
--------------------------------- -------- -------- --------
Gross profit, expenses and results,
(US$ million)
Item H1 2018 H1 2017 Change Change, % ------------------------------------------------------------ -------- -------- ------- ---------- Gross profit 2,346 1,493 853 57.1% ------------------------------------------------------------ -------- -------- ------- ---------- 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 1,731 831 900 n/a ------------------------------------------------------------ -------- -------- ------- ---------- Interest expense, net (180) (222) 42 (18.9)% ------------------------------------------------------------ -------- -------- ------- ---------- Share of profits/(losses) of joint ventures and associates 5 3 2 66.7% ------------------------------------------------------------ -------- -------- ------- ---------- Gain/(loss) on financial assets and liabilities, net 3 (51) 54 n/a ------------------------------------------------------------ -------- -------- ------- ---------- Loss on disposal groups classified as held for sale, net (10) (265) 255 (96.2)% ------------------------------------------------------------ -------- -------- ------- ---------- Other non-operating losses, net (6) (2) (4) n/a ------------------------------------------------------------ -------- -------- ------- ---------- Profit before tax 1,543 294 1,249 n/a ------------------------------------------------------------ -------- -------- ------- ---------- Income tax expense (398) (208) (190) 91.3% ------------------------------------------------------------ -------- -------- ------- ---------- Net profit 1,145 86 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 H1 2017. 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 H1 2017.
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.
For the reporting period, the Group had an income tax expense of US$398 million, compared with US$208 million in H1 2017. The change reflects the improved operating results, including accrual of income tax expense for distributed and undistributed dividends.
Cash flow,
(US$ million)
Item H1 2018 H1 2017 Change Change, % ----------------------------------------------------------------------------- -------- -------- ------- ---------- Cash flows from operating activities before changes in working capital 1,526 906 620 68.4% ----------------------------------------------------------------------------- -------- -------- ------- ---------- Changes in working capital (594) (160) (434) n/a ----------------------------------------------------------------------------- -------- -------- ------- ---------- Net cash flows from operating activities 932 746 186 24.9% ----------------------------------------------------------------------------- -------- -------- ------- ---------- Short-term deposits at banks, including interest 7 3 4 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 41 361 (320) (88.6)% Proceeds from sale of other investments 92 - 92 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 2018.
For more details see Note 4 of the financial statements.
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 H1 2018 H1 2017 Change Change, %
----------------------------------------------------------------------------- -------- -------- ------- ----------
EBITDA 1,906 1,152 754 65.5%
----------------------------------------------------------------------------- -------- -------- ------- ----------
EBITDA excluding non-cash items 1,899 1,177 722 61.3%
----------------------------------------------------------------------------- -------- -------- ------- ----------
Changes in working capital (594) (160) (434) n/a
----------------------------------------------------------------------------- -------- -------- ------- ----------
Income tax accrued (360) (256) (104) 40.6%
----------------------------------------------------------------------------- -------- -------- ------- ----------
Social and social infrastructure maintenance expenses (13) (15) 2 (13.3)%
----------------------------------------------------------------------------- -------- -------- ------- ----------
Net cash flows from operating activities 932 746 186 24.9%
----------------------------------------------------------------------------- -------- -------- ------- ----------
Interest and similar payments (158) (265) 107 (40.4)%
----------------------------------------------------------------------------- -------- -------- ------- ----------
Capital expenditures, including recorded in financing activities and
non-cash transactions (232) (289) 57 (19.7)%
----------------------------------------------------------------------------- -------- -------- ------- ----------
Proceeds from sale of disposal groups classified as held for sale, net of
transaction costs 41 361 (320) (88.6)%
----------------------------------------------------------------------------- -------- -------- ------- ----------
Other cash flows from investing activities 78 (4) 82 n/a
----------------------------------------------------------------------------- -------- -------- ------- ----------
Free cash flow 661 549 112 20.4%
----------------------------------------------------------------------------- -------- -------- ------- ----------
*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$289 million in H1 2017 when significant expenses were incurred for the blast furnace no. 7 project. EVRAZ NTMK continued to implement its two main projects: constructing blast furnace no. 7 and the grinding ball mill construction project. EVRAZ North America began implementing two projects aimed at reducing costs that are scheduled for completion in 2019.
Capital expenditures (including those recognised in financing activities) for H1 2018 in millions of US dollars can be summarised as follows.
Capital expenditure in H1 2018
(US$ million)
--------------------------------------------------------------------------------------------------------------------
Blast furnace no. 7 38 The construction of EVRAZ NTMK's blast furnace no. 7 has been in
progress since Q3 2016 and
was completed in
H1 2018.
-------------------------------------- ---- ---------------------------------------------------------------------
Wheel resurfacing capacity expansion 8 The project has been in progress at EVRAZ NTMK since Q2 2017 and was
completed in July 2018.
The installation of four full-profile machining tools is expected to
increase wheel production
capacity.
--------------------------------------- ---- ---------------------------------------------------------------------
Seamless Threading 8 Project has been in progress since Q3 2017 at EVRAZ Pueblo and is
due to be completed in Q2
2019. It is expected to reduce the total threading cost and improve
the yield.
-------------------------------------- ---- ---------------------------------------------------------------------
Red Deer Heat treat 5 Project has been in progress since Q3 2017 at EVRAZ Red Deer and is
due to be completed in
Q2 2019. It is expected to expand the capacity, making it possible
to increase market share,
prevent new entrants and reduce annual logistics costs
--------------------------------------- ---- ---------------------------------------------------------------------
Grinding ball mill construction 2 The construction of new grinding ball mill has been in progress
since Q2 2015 at EVRAZ NTMK
and was launched in February 2018.
--------------------------------------- ---- ---------------------------------------------------------------------
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 2020. 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 H1 2018 by US$646 million to US$4,786 million as at 30 June 2018.
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 2017. Interest expense accrued in respect of loans, bonds and notes amounted to US$167 million in the period, compared with US$210 million in H1 2017. 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 H1 2018 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 2017.
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$349 million. Cash-on-hand and committed credit facilities are sufficient to cover all of EVRAZ' refinancing requirements for the remainder of 2018 and 2019.
Review of operations by Segment
(US$ million) Steel Steel, NA Coal Other
--------------- ------------------- ------------------- ------------------- ---------------------
H1 2018 H1 2017 H1 2018 H1 2017 H1 2018 H1 2017 H1 2018 H1 2017
--------------- --------- -------- --------- -------- --------- -------- --------- --------
Revenues 4,425 3,645 1,151 879 1,244 1,121 279 222
--------------- --------- -------- --------- -------- --------- -------- --------- --------
EBITDA 1,258 526 40 14 670 659 10 10
--------------- --------- -------- --------- -------- --------- -------- --------- --------
EBITDA
margin 28.4% 14.4% 3.5% 1.6% 53.9% 58.8% 3.6% 4.5%
--------------- --------- -------- --------- -------- --------- -------- --------- --------
CAPEX 134 168 35 59 60 59 3 3
--------------- --------- -------- --------- -------- --------- -------- --------- --------
Steel segment
Sales review
Steel segment revenues by product
H1 2018 H1 2017
------------------------------------- -------------------------------------- ----------
US$ % of total segment US$ % of total segment
million revenues million revenues Change, %
--------------------------- --------- -------------------------- --------- --------------------------- ----------
Steel products, external
sales 3,443 77.8% 2,967 81.4% 16.0%
--------------------------- --------- -------------------------- --------- --------------------------- ----------
Semi-finished products(1) 1,346 30.4% 1,211 33.2% 11.1%
--------------------------- --------- -------------------------- --------- --------------------------- ----------
Construction products(2) 1,188 26.8% 1,019 28.0% 16.6%
--------------------------- --------- -------------------------- --------- --------------------------- ----------
Railway products(3) 484 10.9% 431 11.8% 12.3%
--------------------------- --------- -------------------------- --------- --------------------------- ----------
Flat-rolled products(4) 217 4.9% 141 3.9% 53.9%
--------------------------- --------- -------------------------- --------- --------------------------- ----------
Other steel products(5) 208 4.7% 165 4.6% 26.1%
--------------------------- --------- -------------------------- --------- --------------------------- ----------
Steel products,
intersegment sales 174 3.9% 141 3.9% 23.4%
--------------------------- --------- -------------------------- --------- --------------------------- ----------
Including sales to Steel,
North America 164 3.7% 134 3.7% 22.4%
--------------------------- --------- -------------------------- --------- --------------------------- ----------
Iron ore products 87 2.0% 94 2.6% (7.4)%
--------------------------- --------- -------------------------- --------- --------------------------- ----------
Vanadium products 466 10.5% 223 6.1% n/a
--------------------------- --------- -------------------------- --------- --------------------------- ----------
Other revenues 255 5.8% 220 6.0% 15.9%
--------------------------- --------- -------------------------- --------- --------------------------- ----------
Total 4,425 100.0% 3,645 100.0% 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
Sales volumes of Steel segment
('000 tonnes)
-------- --------------------
H1 2018 H1 2017 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 658 656 0.3%
----------------------------------------------- -------- -------- ----------
Flat-rolled products 310 238 30.3%
----------------------------------------------- -------- -------- ----------
Other steel products 320 294 8.8%
----------------------------------------------- -------- -------- ----------
Steel products, intersegment sales 303 303 0%
----------------------------------------------- -------- -------- ----------
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 2,605 10.7%
----------------------------------------------- -------- -------- ----------
Vanadium in alloys and chemicals 6,456 8,123 (20.5)%
----------------------------------------------- -------- -------- ----------
Iron ore products 1,093 1,416 (22.8)%
----------------------------------------------- -------- -------- ----------
Pellets 1,089 637 71.0%
----------------------------------------------- -------- -------- ----------
Other iron ore products 4 779 n/a
----------------------------------------------- -------- -------- ----------
Geographic breakdown of external steel product sales
US$ million '000 tonnes
------------------------------ ------------------------------
H1 2018 H1 2017 Change, % H1 2018 H1 2017 Change, %
------------------------------------------- -------- -------- ---------- -------- -------- ----------
Russia 1,672 1,428 17.1% 2,493 2,426 2.8%
------------------------------------------- -------- -------- ---------- -------- -------- ----------
Asia 869 689 26.1% 1,616 1,645 (1.8)%
------------------------------------------- -------- -------- ---------- -------- -------- ----------
Europe 367 361 1.7% 608 827 (26.5)%
------------------------------------------- -------- -------- ---------- -------- -------- ----------
CIS (excl. Russia) 244 224 8.9% 347 441 (21.3)%
------------------------------------------- -------- -------- ---------- -------- -------- ----------
Africa, America and the rest of the world 291 265 9.8% 538 638 (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 H1 2017. 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 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 H1 2017 to 48.6% in H1 2018. 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 H1 2017. 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.
Steel segment cost of revenues
Steel segment cost of revenues
H1 2018 H1 2017
------------------------------------ ------------------------------------ ----------
US$ million % of segment revenues US$ million % of segment revenues Change, %
-------------------------- ------------ ---------------------- ------------ ---------------------- ----------
Cost of revenues 2,912 65.8% 2,904 79.7% 0.3%
-------------------------- ------------ ---------------------- ------------ ---------------------- ----------
Raw materials 1,358 30.8% 1,372 37.6% (1.0)%
-------------------------- ------------ ---------------------- ------------ ---------------------- ----------
Iron ore 211 4.8% 239 6.6% (11.7)%
-------------------------- ------------ ---------------------- ------------ ---------------------- ----------
Coking coal 649 14.7% 706 19.4% (8.1)%
-------------------------- ------------ ---------------------- ------------ ---------------------- ----------
Scrap 268 6.1% 226 6.2% 18.6%
-------------------------- ------------ ---------------------- ------------ ---------------------- ----------
Other raw materials 230 5.2% 201 5.5% 14.4%
-------------------------- ------------ ---------------------- ------------ ---------------------- ----------
Auxiliary materials 165 3.7% 158 4.3% 4.4%
-------------------------- ------------ ---------------------- ------------ ---------------------- ----------
Services 130 2.9% 116 3.2% 12.1%
-------------------------- ------------ ---------------------- ------------ ---------------------- ----------
Transportation 223 5.0% 232 6.4% (3.9)%
-------------------------- ------------ ---------------------- ------------ ---------------------- ----------
Staff costs 263 5.9% 258 7.1% 1.9%
-------------------------- ------------ ---------------------- ------------ ---------------------- ----------
Depreciation 119 2.7% 119 3.3% 0.0%
-------------------------- ------------ ---------------------- ------------ ---------------------- ----------
Energy 232 5.2% 229 6.3% 1.3%
-------------------------- ------------ ---------------------- ------------ ---------------------- ----------
Other* 422 9.6% 420 11.5% 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 2017.
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.
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 full-profile wheel processing line was installed, including four machines and an overhead manipulator, and the line was launched in July 2018.
-- 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 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 ( ) 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(2) 0(3) converted at third parties). EVRAZ Nikom doubled its capacity for non-standard packaging types.
Steel, North America segment
Sales review
Steel, North America segment revenues by product
H1 2018 H1 2017
% of total segment % of total segment
US$ million revenues US$ million revenues Change, %
-------------------------- ------------ ------------------------ ------------ ------------------------ ----------
Steel products 1,080 93.8 % 835 95.0% 29.3%
-------------------------- ------------ ------------------------ ------------ ------------------------ ----------
Semi-finished
products(1) 5 0.4 % 4 0.5% 25.0%
-------------------------- ------------ ------------------------ ------------ ------------------------ ----------
Construction products(2) 113 9.8 % 81 9.2% 39.5%
-------------------------- ------------ ------------------------ ------------ ------------------------ ----------
Railway products(3) 186 16.2 % 167 19.0% 11.4%
-------------------------- ------------ ------------------------ ------------ ------------------------ ----------
Flat-rolled products(4) 290 25.2 % 224 25.5% 29.5%
-------------------------- ------------ ------------------------ ------------ ------------------------ ----------
Tubular products(5) 486 42.2 % 359 40.8% 35.4%
-------------------------- ------------ ------------------------ ------------ ------------------------ ---------- Other revenues(6) 71 6.2 % 44 5.0% 61.4% -------------------------- ------------ ------------------------ ------------ ------------------------ ---------- Total 1,151 100.0 % 879 100.0% 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)
H1 2018 H1 2017 Change, %
----------------------------------------------- -------- -------- ----------
Steel products
----------------------------------------------- -------- -------- ----------
Semi-finished products 11 7 57.1%
----------------------------------------------- -------- -------- ----------
Construction products 142 126 12.7%
----------------------------------------------- -------- -------- ----------
Railway products 208 206 1.0%
----------------------------------------------- -------- -------- ----------
Flat-rolled products 302 271 11.4%
----------------------------------------------- -------- -------- ----------
Tubular products 371 340 9.1%
----------------------------------------------- -------- -------- ----------
Total 1,034 950 8.8%
----------------------------------------------- -------- -------- ----------
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.
Revenues from flat-rolled products increased by 29.5% due to a rise in prices of 18.1% and volumes of 11.4% because of improved demand, which was mainly driven by the impact of Section 232 import tariffs.
Revenues from tubular product sales grew by 35.4% due to an increase in prices of 26.3% and volumes of 9.1%. The growth in sales volumes was due to higher demand and favourable sales terms for small-diameter line pipe.
Steel, North America segment cost of revenues
Steel North America segment cost of revenues
H1 2018 H1 2017
------------------------------------ ------------------------------------ ----------
US$ million % of segment revenues US$ million % of segment revenues Change, %
------------------------- ------------ ---------------------- ------------ ---------------------- ----------
Cost of revenues 1,018 88.4% 772 87.8% 31.9%
------------------------- ------------ ---------------------- ------------ ---------------------- ----------
Raw materials 402 34.9% 286 32.5% 40.6%
------------------------- ------------ ---------------------- ------------ ---------------------- ----------
Semi-finished products 207 18.0% 133 15.1% 55.6%
------------------------- ------------ ---------------------- ------------ ---------------------- ----------
Auxiliary materials 128 11.1% 57 6.5% n/a
------------------------- ------------ ---------------------- ------------ ---------------------- ----------
Services 83 7.2% 53 6.0% 56.6%
------------------------- ------------ ---------------------- ------------ ---------------------- ----------
Staff costs 142 12.3% 108 12.3% 31.5%
------------------------- ------------ ---------------------- ------------ ---------------------- ----------
Depreciation 52 4.5% 47 5.3% 10.6%
------------------------- ------------ ---------------------- ------------ ---------------------- ----------
Energy 57 5.0% 54 6.1% 5.6%
------------------------- ------------ ---------------------- ------------ ---------------------- ----------
Other* (53) (4.6)% 34 3.9% n/a
------------------------- ------------ ---------------------- ------------ ---------------------- ----------
* Primarily includes transportation, goods for resale, certain taxes, changes in work in progress and fixed goods and allowances for inventories.
In H1 2018, the Steel, North America segment's cost of revenues rose by 31.9% YoY. The main drivers were as follows.
Raw material costs rose by 40.6%, primarily because of higher prices of scrap and ferroalloys, accompanied by greater consumption due to higher sales volumes of tubular products amid the market recovery seen in the reporting period.
Costs of semi-finished products grew by 55.6% due to higher prices for purchased semi-finished products (slabs and coils) and increased sales volumes of steel products.
Auxiliary material costs climbed by 124.6%, as production volumes of crude steel and finished products were higher YoY, accompanied by an increase in electrode costs of US$31.6 million due to a global shortage of the input.
Service costs went up 56.6% driven by an increase in outside repair services, consulting and other services, and product testing, in line with the YoY rise in sales volumes.
Staff costs rose by 31.5% due to higher production and sales headcount in the period to meet increasing demand. A new collective agreement with the union also increased staff costs.
Depreciation grew by 10.6% due to major investment projects capitalised and depreciated in H1 2018.
Other costs were down for the reporting period, primarily due to changes in work in progress and finished goods and allowances for inventories.
Steel, North America segment gross profit
The Steel, North America segment's gross profit totalled US$133 million for H1 2018, up from US$107 million a year earlier. The growth was driven primarily by higher sales prices for construction and tubular products due to improving market conditions, partly offset by higher prices for auxiliary materials and purchased semi-finished products.
Operational update
Canada:
-- Ramp-up of new equipment in EVRZ Regina is ongoing. Upgrade of Steelmaking and new large-diameter pipe mill allow production of thick-wall LD pipe required by North America customers and should bring significant cost savings as well as 100kt of incremental steelmaking and 160kt of pipemaking capacity.
-- New coating facility is fully operational and is on track to achieve productivity targets by the end of the year.
-- EVRAZ Red Deer' heat treat unit will be installed and started up in the second half of 2018. It will allow to address lucrative alloy segment of OCTG market and increase EVRAZ' capacity of heat treatment by 110kt.
United States:
-- New seamless pipe threading line in EVRAZ Pueblo will be operational in the second half of 2018. The line will allow to insource threading operation and significantly decrease operational as well as logistics cost for more than 100kt of seamless pipe produced annually.
Coal segment
Sales review
Coal segment revenues by product
H1 2018 H1 2017
% of total segment % of total segment
US$ million revenues US$ million revenues Change, %
-------------------- ------------ --------------------------- ------------ --------------------------- ----------
External sales
-------------------- ------------ --------------------------- ------------ --------------------------- ----------
Coal products 801 64.4% 607 54.1% 32.0%
-------------------- ------------ --------------------------- ------------ --------------------------- ----------
Coking coal 72 5.8% 79 7.0% (8.9)%
-------------------- ------------ --------------------------- ------------ --------------------------- ----------
Coal concentrate 729 58.6% 528 47.1% 38.1%
-------------------- ------------ --------------------------- ------------ --------------------------- ----------
Intersegment sales
-------------------- ------------ --------------------------- ------------ --------------------------- ----------
Coal products 412 33.2% 439 39.2% (6.2)%
-------------------- ------------ --------------------------- ------------ --------------------------- ----------
Coking coal 63 5.1% 35 3.1% 80.0%
-------------------- ------------ --------------------------- ------------ --------------------------- ----------
Coal concentrate 349 28.1% 404 36.0% (13.6)%
-------------------- ------------ --------------------------- ------------ --------------------------- ----------
Other revenues 31 2.4% 75 6.7% (58.7)%
-------------------- ------------ --------------------------- ------------ --------------------------- ----------
Total 1,244 100.0% 1,121 100.0% 11.0%
-------------------- ------------ --------------------------- ------------ --------------------------- ----------
Sales volumes of Coal segment
('000 tonnes)
-------------------------------------- ------------------------------
H1 2018 H1 2017 Change, %
-------------------------------------- -------- -------- ----------
External sales
-------------------------------------- -------- -------- ----------
Coal products 5,599 4,686 19.5%
-------------------------------------- -------- -------- ----------
Coking coal 807 933 (13.5)%
-------------------------------------- -------- -------- ----------
Coal concentrate and other products 4,792 3,753 27.7%
-------------------------------------- -------- -------- ----------
Intersegment sales
-------------------------------------- -------- -------- ----------
Coal products 2,932 2,884 1.7%
-------------------------------------- -------- -------- ----------
Coking coal 910 606 50.2%
-------------------------------------- -------- -------- ----------
Coal concentrate 2,022 2,278 (11.2)%
-------------------------------------- -------- -------- ----------
Total, coal products 8,531 7,570 12.7%
-------------------------------------- -------- -------- ----------
The Coal segment's overall revenues increased amid stable sales prices as global market trends remained favourable. This was driven by solid demand and logistical constraints in the US and Australia.
Revenues from external sales of coal products rose due to the growth in prices of 12.5% and sales volumes of 19.5%. Coking coal volumes dropped by 13.5% amid lower demand from customers and following the better market conditions seen in H1 2017. Coal concentrate volumes rose by 27.7% due to a change in the sales mix and improved demand.
Revenues from internal sales of coal products decreased by 6.2%, mainly because of a 7.9% reduction in sales prices, partly offset by an uptick in volumes of 1.7%. Coking coal volumes surged by 50.2% due to the increased of share of in-house coal supplies in the coal charge, including the OS grade from the open-pit at the Raspadskaya-Koksovaya mine since H2 2017. Coal concentrate volumes decreased by 11.2% due to the disposal of EVRAZ DMZ.
In H1 2018, the Coal segment's sales (including other revenues) to the Steel segment amounted to US$414 million (33.3% of total sales), compared with US$457 million (40.8%) in H1 2017.
During the reporting period, roughly 68.2% of EVRAZ' coking coal consumption in steelmaking came from the Group's own operations, compared with 58.2% in H1 2017.
Coal segment cost of revenues
Coal segment cost of revenues
H1 2018 H1 2017
------------------------------------ ------------------------------------ ----------
US$ million % of segment revenues US$ million % of segment revenues Change, %
---------------------- ------------ ---------------------- ------------ ---------------------- ----------
Cost of revenues 533 42.8% 460 41.0% 15.9%
---------------------- ------------ ---------------------- ------------ ---------------------- ----------
Auxiliary materials 68 5.5% 53 4.7% 28.3%
---------------------- ------------ ---------------------- ------------ ---------------------- ----------
Services 60 4.8% 54 4.8% 11.1%
---------------------- ------------ ---------------------- ------------ ---------------------- ----------
Transportation 160 12.9% 101 9.0% 58.4%
---------------------- ------------ ---------------------- ------------ ---------------------- ----------
Staff costs 99 8.0% 95 8.5% 4.2%
---------------------- ------------ ---------------------- ------------ ---------------------- ----------
Depreciation 85 6.8% 77 6.9% 10.4%
---------------------- ------------ ---------------------- ------------ ---------------------- ----------
Energy 26 2.1% 26 2.3% 0.0%
---------------------- ------------ ---------------------- ------------ ---------------------- ----------
Other* 35 2.8% 54 4.8% (35.2)%
---------------------- ------------ ---------------------- ------------ ---------------------- ----------
* 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 increase in the Coal segment's cost of revenues were as follows.
The consumption of auxiliary materials rose by 28.3% amid increased longwall repositioning, higher prices for auxiliary materials (diesel fuel and petrol), larger volumes of re-sale of third-party materials and greater consumption of spare parts due to wear of the main process equipment, partly offset by the impact on costs of the weaker rouble.
Costs for services climbed by 11.1% due to an increase in open-pit mining works at the Raspadskaya-Koksovaya mine, the rescheduled longwall repositioning at Yuzhkuzbassugol's mines and the growth of service costs for longwall repositioning, partly offset by the weaker rouble.
Transportation costs grew by 58.4% in the reporting period, primarily due to an increase in tariffs for the supply of wagons and higher shipments from the Esaulskaya and Erunakovskaya mines, partly offset by the depreciation of the rouble.
Staff costs were up because of wage indexation, forming and using own drift crews and additional contributions to the pension fund for underground workers from 2018. This was partly offset by the rouble weakening.
Depreciation and depletion costs rose due to the increase in coal production volumes at the Erunakovskaya, Alardinskaya and Uskovskaya mines, partly offset by the weaker Russian currency.
Other costs decreased in the reporting period, mainly due to changes in work in progress and finished goods. This was partly offset by higher taxes after the mineral tax rate was increased, as well as the effect of rouble depreciation.
Coal segment gross profit
The Coal segment's gross profit for H1 2018 amounted to US$711 million, up from US$661 million a year earlier, primarily due to increases in sales prices and sales volumes, as well as the positive effect that rouble weakening had on costs.
Operational update
The Coal segment continues to implement its strategic plans.
In an effort to strengthen market position and expand the product portfolio, open-pit mining at the site of the Raspadskaya-Koksovaya mine grew further, which helped to meet internal demand for the deficit semi-hard OS grade. To boost the output of the K grade, the Raspadskaya-Koksovaya mine is also preparing to transition in H2 2018 from room-and-pillar mining to longwall mining.
Ongoing long-term programmes aimed at improving production safety and productivity growth included:
-- 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)
To ensure the gradual expansion of EVRAZ' coal mining operations, the management has begun to focus on eliminating future potential bottlenecks in logistics, warehousing and enrichment. To this end, the division has developed and is beginning to implement de-bottlenecking programmes.
In H1 2018, EVRAZ' raw coking coal output totalled 11.4 million tonnes, down 0.3 million tonnes year-on-year.
Raspadskaya
During the reporting period, Raspadskaya's raw coking coal output amounted to 5.4 million tonnes (down 0.6 million tonnes year-on-year and flat compared with H2 2017). The year-on-year decrease was caused by the mine's planned transition from production at three longwalls to two longwalls. Additionally, in May 2018, there was a short stop at one longwall to improve the level of industrial safety in the developed space. While the underground mining operations produced 2.8 million tonnes (down 0.8 million tonnes year-on-year), this was partly offset by the increased scale of open-pit mining. Output of raw coking coal in the K and OS grades from the Raspadskaya-Koksovaya mine (including open-pit operations) increased to 1.0 million tonnes (up 0.7 million tonnes year-on-year).
Yuzhkuzbassugol
In H1 2018, Yuzhkuzbassugol mined 5.5 million tonnes of raw coking coal, up 0.2 million tonnes year-on-year. 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 works. Raw coking coal output totalled 0.5 million tonnes, compared with 0.4 million tonnes in H1 2017.
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.
Despite the ongoing market volatility described in the Market Outlook section, the directors consider that the principal risks and uncertainties as summarised below and detailed on pages 36-40 of the EVRAZ plc 2017 annual report, copies of which are available at www.evraz.com, remain relevant in 2018 and the mitigating actions described continue to be appropriate.
Risks:
-- Global economic factors, industry conditions and cyclicality. -- Product competition. -- Cost effectiveness. -- Treasury: availability of finance. -- Functional currency devaluation. -- HSE: environmental. -- HSE: health and safety. -- Potential government action. -- Business interruption. -- Cybersecurity and IT infrastructure failure.
The Group has also continued to monitor and assess other risks and uncertainties, including compliance with trade, anti-monopoly and anti-dumping regulations, as well as sanctions regimes.
In early March 2018, the US announced new tariffs, which included a 25% tariff on steel and a 10% tariff on aluminium products. In subsequent developments, the initiative was expanded to include Canada, Mexico and the European Union, which were previously excluded from the tariffs. The full effect on the steel and aluminium industry is unclear, as other countries have begun imposing retaliatory measures, including Canadian tariffs on US steel products and some consumer goods. While rails exported from the US were excluded from these tariffs, plate and coil exports were not. Such trade limitations create an overall short-term turbulence for the industry and heighten concerns of further trade-related initiatives during the rest of the year.
On 6 April 2018, the US further expanded the list of individuals and entities subject to sanctions, which has led to increased volatility on financial and commercial markets. It has also resulted in re-pricing of Russian risks and negatively impacted equity and debt capital markets for issuers that have a significant portion of their assets in Russia. This indicates a potential increase of the Group's cost of capital in the future, as some of the Group's and its counterparties' assets are located in Russia.
While no significant damage has been caused by these risks to date, the management continues to monitor new developments and implement preventative measures to minimise the risks of any adverse effect on the Group's business.
EVRAZ continues to actively monitor the business risk environment and pursues strategies to mitigate the identified risks on a continuing basis.
DIVIDS
Given the performance throughout 2018, EVRAZ has announced a second interim dividend.
On 8 August 2018, the Board of Directors voted to disburse a total of US$577.34 million, or US$0.40 per share.
The record date is 17 August 2018 and payment date is 6 September 2018.
The second 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 20 August 2018. All conversions will take place on or around 22 August 2018.
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
08 August 2018
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 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 noncash 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 gain/(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$ million 30 June 2018 31 December 2017 Change Change, %
------------- ----------------- -------- ----------
Cash and cash equivalents 902 1,466 (564) (38.5)%
----------------------------------- ------------- ----------------- -------- ----------
Cash and short-term bank deposits 902 1,466 (564) (38.5)%
----------------------------------- ------------- ----------------- -------- ----------
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 rouble-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:
30 June Change Change, %
US$ million 2018 31 December 2017
-------- ----------------- ------- ----------
Long-term loans, net of current portion 4,381 5,243 (862) (16.4)%
-------------------------------------------------------------------- -------- ----------------- ------- ----------
Short-term loans and current portion of long-term loans 349 148 201 n/a
-------------------------------------------------------------------- -------- ----------------- ------- ----------
Add back: Unamortised debt issue costs and fair value adjustment to
liabilities assumed in
business combination 23 28 (5) (17.9)%
-------------------------------------------------------------------- -------- ----------------- ------- ---------- Nominal effect of cross-currency swaps on principal of rouble-denominated notes 26 5 (21) n/a -------------------------------------------------------------------- -------- ----------------- ------- ---------- Finance lease liabilities, including current portion 7 8 (1) (12.5)% -------------------------------------------------------------------- -------- ----------------- ------- ---------- Total debt 4,786 5,432 (646) (11.9)% -------------------------------------------------------------------- -------- ----------------- ------- ----------
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:
30 June Change Change, %
US$ million 2018 31 December 2017
-------- ----------------- ------- ----------
Total debt 4,786 5,432 (646) (11.9)%
--------------------------- -------- ----------------- ------- ----------
Cash and cash equivalents (902) (1,466) 564 (38.5)%
--------------------------- -------- ----------------- ------- ----------
Net debt 3,884 3,966 (82) (2.1)%
--------------------------- -------- ----------------- ------- ----------
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:
30 June 30 June Change Change, %
US$ million 2018 2017
-------- -------- ------- ----------
Purchases of property, plant and equipment and intangible assets 226 284 (58) (20.4)%
------------------------------------------------------------------ -------- -------- ------- ----------
Non-cash purchases (Note 12) 6 5 1 20.0%
------------------------------------------------------------------ -------- -------- ------- ----------
CAPEX 232 289 57 (19.7)%
------------------------------------------------------------------ -------- -------- ------- ----------
Labor productivity, US$/t
P=S/V
S - Labor Costs (asset and A-category subsidiaries), exclusive of tax, local currency (on Division consolidation sites with different currencies, $)
V - production volume, tn. (for steel assets: V - metal products shipped)
LTIFR
The KPI is calculated on a year-to-date basis for the company employees only.
LTIFR = X--1000000/Y
X is the total number of occupational injuries resulted in lost time among the company employees in the reporting period. Fatalities are not included.
Y is the actual total number of man-hours worked by all company employees in the reporting period.
Semi-finished products cash costs, US$/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 costcutting effects
Each project effect is calculated as an absolute deviation of targeted metriñ 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 2018
EVRAZ plc
Unaudited Interim Condensed Consolidated Financial Statements
Six-month period ended 30 June 2018
Contents
Report on Review of Interim Condensed Consolidated Financial Statements
Unaudited Interim Condensed Consolidated Financial Statements
Unaudited Interim Condensed Consolidated Statement of Operations ...................................................
Unaudited Interim Condensed Consolidated Statement of Comprehensive Income ...............................
Unaudited Interim Condensed Consolidated Statement of Financial Position .........................................
Unaudited Interim Condensed Consolidated Statement of Cash Flows ..................................................
Unaudited Interim Condensed Consolidated Statement of Changes in Equity ........................................
Selected Notes to the Unaudited Interim Condensed Consolidated Financial Statements ......................
Independent Review Report to EVRAZ plc
Introduction
We have been engaged by EVRAZ plc (the Company) to review the condensed set of financial statements in the interim report for the six months ended 30 June 2018 which comprises the Interim Condensed Consolidated Statement of Operations, Interim Condensed Consolidated Statement of Comprehensive Income, Interim Condensed Consolidated Statement of Financial Position, Interim Condensed Consolidated Statement of Cash Flows, Interim Condensed Consolidated Statement of Changes in Equity and related notes 1 to 15. We have read the other information contained in the interim report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.
This report is made solely to the Company in accordance with guidance contained in International Standard on Review Engagements 2410 (UK) 'Review of Interim Financial Information Performed by the Independent Auditor of the Entity' issued by the Auditing Practices Board. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company, for our work, for this report, or for the conclusions we have formed.
Directors' responsibilities
The half-yearly financial report is the responsibility of, and has been approved by, the Directors. The Directors are responsible for preparing the half-yearly financial report in accordance with the Disclosure Guidance and Transparency Rules of the United Kingdom's Financial Conduct Authority. As disclosed in note 2, the annual financial statements of the Group are prepared in accordance with IFRSs as adopted by the European Union. The condensed set of financial statements included in this interim financial report has been prepared in accordance with International Accounting Standard 34, 'Interim Financial Reporting', as adopted by the European Union.
Our responsibility
Our responsibility is to express to the Company a conclusion on the condensed set of financial statements in the interim financial report based on our review.
Scope of review
We conducted our review in accordance with International Standard on Review Engagements 2410 (UK), 'Review of Interim Financial Information Performed by the Independent Auditor of the Entity' issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.
Conclusion
Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2018 is not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the Disclosure and Transparency Rules of the United Kingdom's Financial Conduct Authority.
Ernst & Young LLP,
London,
8 August 2018
Unaudited Interim Condensed Consolidated Statement of Operations
(In millions of US dollars, except for per share information)
Six-month period
ended 30 June
Notes 2018 2017
Revenue
Sale of goods 3 $ 6,185 $ 4,959
Rendering of services 3 158 147
--------- --------
6,343 5,106
Cost of revenue (3,997) (3,613)
Gross profit 2,346 1,493
Selling and distribution costs (443) (335)
General and administrative expenses (274) (264)
Social and social infrastructure
maintenance expenses (13) (15)
Loss on disposal of property, plant
and equipment (4) (6)
Impairment of assets 5 (20) (15)
Foreign exchange gains/(losses),
net 147 (7)
Other operating income 15 12
Other operating expenses (23) (32)
--------- --------
Profit from operations 1,731 831
Interest income 7 8
Interest expense (187) (230)
Share of profits/(losses) of joint
ventures and associates 8 5 3
Gain/(loss) on financial assets and
liabilities, net 3 (51)
Gain/(loss) on disposal groups classified
as held for sale, net 4 (10) (265)
Other non-operating gains/(losses),
net (6) (2)
Profit before tax 1,543 294
Income tax expense 6 (398) (208)
--------- --------
Net profit $ 1,145 $ 86
========= ========
Attributable to:
Equity holders of the parent entity $ 1,112 $ 53
Non-controlling interests 33 33
--------- --------
$ 1,145 $ 86
========= ========
Earnings/(losses) per share:
for profit/(loss) attributable to
equity holders of the parent entity,
basic, US dollars 11 $ 0.77 $ 0.04
for profit/(loss) attributable to
equity holders of the parent entity,
diluted, US dollars 11 $ 0.76 $ 0.04
The accompanying notes form an integral part of these unaudited interim condensed consolidated financial statements.
Unaudited Interim Condensed Consolidated Statement of Comprehensive Income
(In millions of US dollars)
Six-month period
ended 30 June
Notes 2018 2017*
Net profit $ 1,145 $ 86
Other comprehensive income
Other comprehensive income to be
reclassified to profit or loss in
subsequent periods
Exchange differences on translation
of foreign operations into presentation
currency (516) 106
Recycling of exchange difference
to profit or loss on disposal of
subsidiaries 4 63 609
Net gains/(losses) on cash flow
hedges 1 5
(452) 720
Effect of translation to presentation
currency of the Group's joint ventures
and associates 8 (7) 2
---------- -------
Share of other comprehensive income
of joint ventures and associates
accounted for using the equity method (7) 2
Items not to be reclassified to
profit or loss in subsequent periods
Net gains/(losses) on equity instruments
at fair value through other comprehensive
income* 11 59 15
Gains/(losses) on re-measurement
of net defined benefit liability 2 22
Income tax effect (1) (5)
---------- -------
1 17
Total other comprehensive income (399) 754
---------- -------
Total comprehensive income, net
of tax $ 746 $ 840
========== =======
Attributable to:
Equity holders of the parent entity $ 727 $ 807
Non-controlling interests 19 33
---------- -------
$ 746 $ 840
========== =======
*In connection with the adoption of IFRS 9 (Note 2) net gains/(losses) on available-for-sale financial assets, which were previously presented as reclassified to profit or loss in subsequent periods, were transferred to net gains/(losses) on equity instruments at fair value through other comprehensive income within Items not to be reclassified to profit or loss in subsequent periods.
The accompanying notes form an integral part of these unaudited interim condensed consolidated financial statements.
Unaudited Interim Condensed Consolidated Statement of Financial Position
(In millions of US dollars)
30 June 31 December
Notes 2018 2017
Assets
Non-current assets
Property, plant and equipment 7 $ 4,470 $ 4,933
Intangible assets other than goodwill 235 259
Goodwill 887 917
Investments in joint ventures and
associates 8 77 79
Deferred income tax assets 125 173
Other non-current financial assets 129 151
Other non-current assets 51 39
------------ -------------
5,974 6,551
Current assets
Inventories 1,390 1,198
Trade and other receivables 883 731
Prepayments 135 89
Loans receivable 11 11
Receivables from related parties 9 1 12
Income tax receivable 14 50
Other taxes recoverable 213 225
Other current financial assets 35 47
Cash and cash equivalents 10 902 1,466
------------ -------------
3,584 3,829
Total assets $ 9,558 $ 10,380
============ =============
Equity and liabilities
Equity
Equity attributable to equity holders
of the parent entity
Issued capital 11 $ 1,507 $ 1,507
Treasury shares 11 (196) (231)
Additional paid-in capital 2,473 2,500
Revaluation surplus 111 111
Unrealised gains and losses 10 39
Accumulated profits 1,220 635
Translation difference (3,223) (2,777)
------------ -------------
1,902 1,784
Non-controlling interests 261 242
------------ -------------
2,163 2,026
Non-current liabilities
Long-term loans 12 4,381 5,243
Deferred income tax liabilities 297 328
Employee benefits 255 284
Provisions 244 269
Liabilities under put options for
shares of subsidiaries 63 61
Other long-term liabilities 41 54
------------ -------------
5,281 6,239
Current liabilities
Trade and other payables 1,086 1,128
Advances from customers 154 272
Short-term loans and current portion
of long-term loans 12 349 148
Payables to related parties 9 187 256
Income tax payable 101 67
Other taxes payable 196 212
Provisions 41 32
2,114 2,115
Total equity and liabilities $ 9,558 $ 10,380
============ =============
The accompanying notes form an integral part of these unaudited interim condensed consolidated financial statements.
Unaudited Interim Condensed Consolidated Statement of Cash Flows
(In millions of US dollars)
Six-month period
ended
30 June
2018 2017
Cash flows from operating activities
Net profit $ 1,145 $ 86
Adjustments to reconcile net profit/(loss)
to net cash flows from operating activities:
Deferred income tax (benefit)/expense 38 (48)
Depreciation, depletion and amortisation 285 278
Loss on disposal of property, plant and
equipment 4 6
Impairment of assets 20 15
Foreign exchange (gains)/losses, net (147) 7
Interest income (7) (8)
Interest expense 187 230
Share of (profits)/losses of associates
and joint ventures (5) (3)
(Gain)/loss on financial assets and liabilities,
net (3) 51
(Gain)/loss on disposal groups classified
as held for sale, net 10 265
Other non-operating (gains)/losses, net 6 2
Bad debt expense 2 7
Changes in provisions, employee benefits
and other long-term assets and liabilities (15) 10
Expense arising from equity-settled awards 8 8
Other (2) -
1,526 906
Changes in working capital:
Inventories (301) (177)
Trade and other receivables (140) (37)
Prepayments (63) (14)
Receivables from/payables to related parties (11) 65
Taxes recoverable 4 (10)
Other assets - (1)
Trade and other payables (9) (16)
Advances from customers (114) (44)
Taxes payable 45 79
Other liabilities (5) (5)
Net cash flows from operating activities 932 746
Cash flows from investing activities
Proceeds from sale of other investments
(Note 11) 92 -
Purchases of subsidiaries in business combinations - (5)
Proceeds from repayment of loans receivable,
including interest 1 -
Issuance of loans receivable to related
parties - (1)
Restricted deposits at banks in respect
of investing activities - (1)
Short-term deposits at banks, including
interest 7 3
Purchases of property, plant and equipment
and intangible assets (226) (284)
Proceeds from disposal of property, plant
and equipment 2 1
Proceeds from sale of disposal groups classified
as held for sale, net of cash disposed and
transaction costs (Note 4) 41 361
Dividends received 6 1
Other investing activities, net (24) 1
Net cash flows from/(used in) investing
activities (101) 76
Continued on the next page
Unaudited Interim Condensed Consolidated Statement of Cash Flows
(continued)
(In millions of US dollars)
Six-month period
ended
30 June
2018 2017
Cash flows from financing activities
Contribution of a non-controlling shareholder
to share capital of the Group's subsidiary $ - $ 2
Proceeds from bank loans and notes 807 1,224
Repayment of bank loans and notes, including
interest (1,590) (1,782)
Net proceeds from/(repayment of) bank overdrafts
and credit lines, including interest 1 (135)
Restricted deposits at banks relating to
financing activities 13 -
Gain/(loss) on derivatives not designated
as hedging instruments 1 1
Gain/(loss) on hedging instruments 6 7
Payments under finance leases, including
interest (1) (1)
Dividends paid by the parent entity to its
shareholders (617) -
Other financing activities (11) (11)
Net cash flows used in financing activities (1,391) (695)
Effect of foreign exchange rate changes
on cash and cash equivalents (4) (1)
Net increase/(decrease) in cash and cash
equivalents (564) 126
Cash and cash equivalents at beginning of
year 1,466 1,157
Decrease/(increase) in cash of disposal
groups classified as assets held for sale - 2
Cash and cash equivalents at end of period $ 902 $ 1,285
=========== ===========
Supplementary cash flow information:
Cash flows during the period:
Interest paid $ (171) $ (216)
Interest received 6 3
Income taxes paid (270) (194)
The accompanying notes form an integral part of these unaudited interim condensed consolidated financial statements.
Unaudited Interim Condensed Consolidated Statement of Changes in Equity
(In millions of US dollars)
Attributable to equity holders of the parent entity
----------------------- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Additional Unrealised
Issued Treasury paid-in Revaluation gains Accumulated Translation Non-controlling Total
capital shares capital surplus and losses profits difference Total interests Equity
----------------------- ------------------------ ------------------------ ---------------------- ----------- ---------------------------- -------------------------- ------------------------ ---------------------- ------------------------
At 31 December
2017 $ 1,507 $ (231) $ 2,500 $ 111 $ 39 $ 635 $ (2,777) $ 1,784 $ 242 $ 2,026
Net profit/(loss) - - - - - 1,112 1,112 33 1,145
Other
comprehensive
income/(loss) - - - - 60 1 (446) (385) (14) (399)
Transfer of
realised gains
on sold equity
instruments
to accumulated
profits
(Note 11) - - - - (89) 89 - - - -
Reclassification
of additional
paid-in capital
in respect
of the disposed
subsidiaries - - (35) - - 35 - - - -
Total
comprehensive
income/(loss)
for the period - - (35) - (29) 1,237 (446) 727 19 746
Transfer of
treasury shares
to participants
of the
Incentive Plans - 35 - - - (35) - - - -
Share-based
payments - - 8 - - - - 8 - 8
Dividends declared
by the
parent entity to
its shareholders
(Note 11) - - - - - (617) - (617) - (617)
At 30 June 2018 $1,507 $ (196) $ 2,473 $ 111 $ 10 $ 1,220 $ (3,223) $ 1,902 $ 261 $ 2,163
======================= ======================== ======================== ====================== =========== ============================ ========================== ======================== ====================== ========================
The accompanying notes form an integral part of these unaudited interim condensed consolidated financial statements.
Unaudited Interim Condensed Consolidated Statement of Changes in Equity (continued)
(In millions of US dollars)
Attributable to equity holders of the parent entity
------------------------ -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Additional Unrealised
Issued Treasury paid-in Revaluation gains Accumulated Translation Non-controlling Total
capital shares capital surplus and losses profits difference Total interests Equity
------------------------ ------------------------ ------------------------ ---------------------- ----------- -------------------------- -------------------------- ------------------------ ---------------------- ------------------------
At 31 December
2016 $ 1,507 $ (270) $ 2,517 $ 112 $ - $ 415 $ (3,790) $ 491 $ 186 $ 677
Net profit/(loss) - - - - - 53 - 53 33 86
Other
comprehensive
income/(loss) - - - - 20 17 717 754 - 754
Reclassification
of revaluation
surplus to
accumulated
profits in
respect of the
disposed items
of property,
plant and
equipment - - - (1) - 1 - - - -
Total
comprehensive
income/(loss)
for the period - - - (1) 20 71 717 807 33 840
Derecognition of
non-controlling
interests on
sale of
subsidiaries - - - - - - - - (5) (5)
Derecognition of
non-controlling
interests under
put options - - - - - (56) - (56) (4) (60)
Contribution of a
non-controlling
shareholder to
share capital
of the Group's
subsidiary - - - - - - - - 2 2
Transfer of
treasury shares
to participants
of the
Incentive Plans - 39 - - - (39) - - - -
Share-based
payments - - 8 - - - - 8 - 8
At 30 June 2017 $ 1,507 $ (231) $ 2,525 $ 111 $ 20 $ 391 $ (3,073) $ 1,250 $ 212 $ 1,462
======================== ======================== ======================== ====================== =========== ========================== ========================== ======================== ====================== ========================
The accompanying notes form an integral part of these unaudited interim condensed consolidated financial statements.
Selected Notes
to the Unaudited Interim Condensed Consolidated Financial Statements
Six-month period ended 30 June 2018
1. Corporate Information
These interim condensed consolidated financial statements were authorised for issue by the Board of Directors of EVRAZ plc on 8 August 2018.
EVRAZ plc ("EVRAZ plc" or "the Company") was incorporated on 23 September 2011 as a public company under the laws of the United Kingdom with the registered number 7784342. The Company's registered office is at 5(th) Floor, 6 St. Andrew Street, London, EC4A 3AE, United Kingdom.
The Company, together with its subsidiaries (the "Group"), is involved in the production and distribution of steel and related products and coal and iron ore mining. In addition, the Group produces vanadium products. The Group is one of the largest steel producers globally.
Lanebrook Limited (Cyprus) is the ultimate controlling party of the Company.
2. Significant Accounting Policies
Basis of Preparation
These interim condensed consolidated financial statements have been prepared in accordance with International Accounting Standard ("IAS") 34 "Interim Financial Reporting", as adopted by the European Union. Accordingly, these interim condensed consolidated financial statements do not include all the information and disclosures required for a complete set of financial statements, and should be read in conjunction with the Group's annual consolidated financial statements for the year ended 31 December 2017, which were prepared in accordance with International Financial Reporting Standards, as adopted by the European Union.
The interim condensed consolidated financial statements do not constitute statutory accounts as defined by Section 435 of the Companies Act 2006. The financial information for the full year is based on the statutory accounts for the financial year ended 31 December 2017. Statutory accounts for the year ended 31 December 2017 have been filed with the Registrar of Companies. The auditor's report under section 495 of the Companies Act 2006 in relation to those accounts was unqualified, did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying their report and did not contain a statement under section 498(2) or (3) of the Companies Act 2006.
Operating results for the six-month period ended 30 June 2018 are not necessarily indicative of the results that may be expected for the year ending 31 December 2018.
Going Concern
These interim condensed consolidated financial statements have been prepared on a going concern basis.
2. Significant Accounting Policies (continued)
Changes in Accounting Policies
In the preparation of the interim condensed consolidated financial statements, the Group followed the same accounting policies and methods of computation as compared with those applied in the complete consolidated financial statements for year ended 31 December 2017, except for the adoption of new standards and interpretations and revision of existing IAS as of 1 January 2018.
New/Revised Standards and Interpretations Adopted in 2018:
-- IFRS 9 "Financial Instruments"
Starting from 2018, the Group applies IFRS 9 "Financial Instruments" that replaced IAS 39 "Financial Instruments: Recognition and Measurement". The impact of the adoption of IFRS 9 to the Group's consolidated financial statements was as follows:
(a) Classification and measurement
IFRS 9 contains a new classification and measurement approach for financial assets that reflects the business model, in which assets are managed and their cash flow characteristics. IFRS 9 includes three principal classification categories for financial assets: measured at amortised cost, at fair value through other comprehensive income and at fair value through profit or loss. It eliminates the existing IAS 39 categories of held to maturity, loans and receivables and available-for-sale financial assets.
The Group continued measuring all financial assets, which were previously measured at fair value, at fair value through profit or loss with the exception of equity investments in Delong Holdings Limited, which were classified as available-for-sale at 31 December 2017 (Note 11). At 1 January 2018, the Group has irrevocably designated these investments as measured at fair value through other comprehensive income. For such financial instruments all subsequent changes in fair value are reported in other comprehensive income, no impairment losses are recognised in profit or loss and no gains or losses are recycled to profit or loss upon derecognition.
Loans and trade receivables are held to collect contractual cash flows and are expected to give rise to cash flows representing solely payments of principal and interest. The Group analysed the contractual cash flow characteristics of those instruments and concluded that they meet the criteria for amortised cost measurement under IFRS 9. Therefore, reclassification for these instruments was not required.
(b) Impairment
Under IFRS 9, the new impairment model requires the recognition of impairment provisions based on the expected credit losses rather than only incurred credit losses under IAS 39. The expected credit losses represent measures of an asset's credit risk. This requires considerable judgement about how changes in economic factors affect expected credit losses, which is determined on a probability-weighted basis.
The new impairment model applies to the Group's financial assets, including, but not limited to, trade and other receivables, loans receivable, restricted deposits, cash and cash equivalents.
Loss allowances are measured on either of the following bases:
-- 12-month basis - these are expected credit losses that result from default events on a financial instrument that are possible within the 12 months after the reporting date; or
-- lifetime basis - these are expected credit losses that result from all possible default events over the expected life of a financial instrument.
This did not impact on the loss allowance for trade debtors and other financial assets held at amortised cost.
2. Significant Accounting Policies (continued)
Changes in Accounting Policies (continued)
The Group's cash and cash equivalents have low credit risk based on the external credit ratings of banks and financial institutions. Therefore, the Group determined that no additional allowances are required at 31 December 2017 in connection with the adoption of the new impairment model under IFRS 9.
(c) Hedge accounting
The Group made a choice to continue applying IAS 39 "Financial Instruments: Recognition and Measurement" to all existing hedge contracts.
-- IFRS 15 "Revenue from Contracts with Customers"
IFRS 15 establishes a five-step model to account for revenue arising from contracts with customers. Under IFRS 15, revenue is recognised at an amount that reflects the consideration to which an entity expects to be entitled in exchange for transferring goods or services to a customer. The new revenue standard superseded all previous revenue recognition requirements under IFRS. The Group analysed the impacts of IFRS 15 on its consolidated financial statements considering the following:
(a) Sale of goods and services
For contracts with customers in which the sale of goods produced by the Group is generally expected to be the only performance obligation, adoption of IFRS 15 had no any impact on the Group's revenue and profit or loss. The Group continued to recognise the revenue at the point in time when control of the asset is transferred to the customer, generally on dispatch or shipping of the goods.
Some contracts with customers provide a right of return, trade discounts or volume rebates. The Group recognises revenue from the sale of goods measured at the fair value of the consideration received or receivable, net of the estimated returns and allowances, trade discounts and volume rebates. IFRS 15 requires the estimated variable consideration to be constrained to prevent over-recognition of revenue, i.e. variable consideration should be recognised to the extent that it is highly probable that a significant reversal in the amount of cumulative revenue recognised will not occur when the uncertainty associated with the variable consideration is subsequently resolved. The application of the constraint did not result in any effects as the Group applied similar principles.
(b) Advances received from customers
Under certain contracts, the Group produces steel products specifically for the needs of some customers. The Group has enforceable rights to payment of 100% of the contract price if the contract is cancelled after the pipe manufacturing process has begun. The Group recognises revenue from such contracts at the moment of the transfer of ownership rights. The Group analysed whether these contracts require the recognition of revenue over the period of manufacturing the products and concluded that the performance obligation under these contracts does not meet criteria for the recognition over time. The Group concluded that the customers do not simultaneously receive and consume the benefits provided by the Group's performance nor do the customers control the assets as it is created or enhanced. Also despite the steel products are manufactured under customer specifications, they can be sold to another customer without any rework at a market price or with a discount.
The Group receives only short-term advances from its customers. No interest is accrued on the advances received under the Group's accounting policy. The Group decided to use the practical expedient provided in IFRS 15, which allows not to adjust the promised amount of consideration for the effects of a significant financing component in the contracts where the Group expects, at contract inception, that the period between the Group's transfer of a promised good or service to a customer and when the customer pays for that good or service will be one year or less. Therefore, for short-term advances, the Group will not account for a financing component even if it is significant.
2. Significant Accounting Policies (continued)
Changes in Accounting Policies (continued)
(c) Principal versus agent considerations
The Group enters into contracts with its customers, under which the Group provides transportation and handling services using third party providers (i.e. the Group selects suitable firms and manages the shipment and delivery). These services are provided to the customers before, or after, they obtain control over the goods. The cost of services is included in the contract price.
Under IFRS 15, transportation and handling services rendered by the Group before control over the goods is transferred to the customers do not represent a separate performance obligation. Therefore, the Group continued to recognise these services at the moment when the right of ownership over the goods is passed to the customers.
With respect to the contracts when the Group provides transportation and handling services after obtaining control over the goods by the customers, the Group concluded that these services represent a separate performance obligation and the Group acts as a principal rather than an agent. Consequently, the control over its services is transferred over time. This change in the accounting policies had no significant impact on the Group's consolidated financial statements and, therefore, the Group did not adjust its consolidated financial statements or the comparative amounts at the date of initial recognition of IFRS 15.
(d) Presentation and disclosure requirements
For the performance obligations under transportation and handling services rendered by the Group in contracts in which it acts as a principal, it was decided to continue presenting revenues from these services within the caption "Sales of goods" in the consolidated statement of operations.
(e) Other adjustments
The recognition and measurement requirements in IFRS 15 are also applicable for recognition and measurement of any gains or losses on disposal of non-financial assets (such as items of property and equipment and intangible assets), when that disposal is not in the ordinary course of business. There were no such transactions in the reporting period.
-- Amendments to IFRS 2 - Classification and Measurement of Share-based Payment Transactions
The IASB issued amendments to IFRS 2 "Share-based Payment" that address three main areas: the effects of vesting conditions on the measurement of a cash-settled share-based payment transaction; the classification of a share-based payment transaction with net settlement features for withholding tax obligations; and accounting where a modification to the terms and conditions of a share-based payment transaction changes its classification from cash settled to equity settled. On adoption, entities are required to apply the amendments without restating prior periods, but retrospective application is permitted if elected for all three amendments and other criteria are met. These amendments do not have any impact on the Group's consolidated financial statements.
2. Significant Accounting Policies (continued)
Changes in Accounting Policies (continued)
-- IFRIC 22 "Foreign Currency Transactions and Advance Consideration"
The Interpretation clarifies that, in determining the spot exchange rate to use on initial recognition of the related asset, expense or income (or part of it) on the derecognition of a non-monetary asset or non-monetary liability relating to advance consideration, the date of the transaction is the date on which an entity initially recognises the non-monetary asset or non-monetary liability arising from the advance consideration. If there are multiple payments or receipts in advance, then the entity must determine a date of the transactions for each payment or receipt of advance consideration. This Interpretation does not have any impact on the Group's consolidated financial statements as the Group applies the same accounting practice.
3. Segment Information
The following tables present measures of segment profit or loss based on management accounts.
Six-month period ended 30 June 2018
Steel,
US$ million Steel North America Coal Other operations Eliminations Total
--------- -------------- ------- ---------------- ------------ ---------
Revenue
Sales to external
customers $ 4,688 $ 1,155 $ 354 $ 92 $ - $ 6,289
Inter-segment sales 175 - 695 147 (1,017) -
--------- -------------- ------- ---------------- ------------ ---------
Total revenue 4,863 1,155 1,049 239 (1,017) 6,289
========= ============== ======= ================ ============ =========
Segment result -
EBITDA $ 1,334 $ 55 $ 662 $ 11 $ (47) $ 2,015
========= ============== ======= ================ ============ =========
Six-month period ended 30 June 2017
Steel,
US$ million Steel North America Coal Other operations Eliminations Total
--------- -------------- ------- ---------------- ------------ ---------
Revenue
Sales to external
customers $ 3,805 $ 888 $ 420 $ 40 $ - $ 5,153
Inter-segment sales 143 - 595 143 (881) -
--------- -------------- ------- ---------------- ------------ ---------
Total revenue 3,948 888 1,015 183 (881) 5,153
========= ============== ======= ================ ============ =========
Segment result -
EBITDA $ 562 $ 29 $ 647 $ 10 $ (57) $ 1,191
========= ============== ======= ================ ============ =========
3. Segment Information (continued)
The following table shows a reconciliation of revenue and EBITDA used by management for decision making and revenue and profit or loss before tax per the consolidated financial statements prepared under IFRS.
Six-month period ended 30 June 2018
Steel,
North Other
US$ million Steel America Coal operations Eliminations Total
--------- --------- --------- ----------- ------------ ----------------
Revenue $ 4,863 $ 1,155 $ 1,049 $ 239 $ (1,017) $ 6,289
Reclassifications and
other adjustments (438) (4) 195 40 261 54
Revenue per IFRS financial
statements $ 4,425 $ 1,151 $ 1,244 $ 279 $ (756) $ 6,343
EBITDA $ 1,334 $ 55 $ 662 $ 11 $ (47) $ 2,015
Unrealised profits adjustment (61) 1 (1) - 40 (21)
Reclassifications and
other adjustments (15) (16) 9 (1) - (23)
--------- --------- --------- ----------- ------------ ----------------
(76) (15) 8 (1) 40 (44)
--------- --------- --------- ----------- ------------ ----------------
EBITDA based on IFRS
financial statements $ 1,258 $ 40 $ 670 $ 10 $ (7) $ 1,971
Unallocated subsidiaries (65)
----------------
$ 1,906
================
Social and social infrastructure
maintenance expenses (12) - (1) - - (13)
Depreciation, depletion
and amortisation expense (125) (70) (86) (3) - (284)
Impairment of assets (20) - - - - (20)
Loss on disposal of property,
plant and equipment and
intangible assets (1) (2) (1) - - (4)
Foreign exchange gains/(losses),
net 24 (42) 9 2 - (7)
--------- --------- --------- ----------- ------------ ----------------
1,124 (74) 591 9 (7) 1,578
Unallocated income/(expenses),
net 153
----------------
Profit/(loss) from operations $ 1,731
Interest income/(expense),
net (180)
Share of profits/(losses)
of joint ventures and
associates 5
Gain/(loss) on financial
assets and liabilities 3
Gain/(loss) on disposal
groups classified as
held for sale, net (10)
Other non-operating gains/(losses),
net (6)
Profit/(loss) before
tax $ 1,543
================
3. Segment Information (continued)
Six-month period ended 30 June 2017
Steel,
North Other
US$ million Steel America Coal operations Eliminations Total
--------- -------- --------- ----------- ------------ ----------------
Revenue $ 3,948 $ 888 $ 1,015 $ 183 $ (881) $ 5,153
Reclassifications and
other adjustments (303) (9) 106 39 120 (47)
Revenue per IFRS financial
statements $ 3,645 $ 879 $ 1,121 $ 222 $ (761) $ 5,106
EBITDA $ 562 $ 29 $ 647 $ 10 $ (57) $ 1,191
Unrealised profits adjustment (32) - 1 - 63 32
Reclassifications and
other adjustments (4) (15) 11 - - (8)
--------- -------- --------- ----------- ------------ ----------------
(36) (15) 12 - 63 24
--------- -------- --------- ----------- ------------ ----------------
EBITDA based on IFRS
financial statements $ 526 $ 14 $ 659 $ 10 $ 6 $ 1,215
Unallocated subsidiaries (63)
----------------
$ 1,152
================
Social and social infrastructure
maintenance expenses (14) - (1) - - (15)
Depreciation, depletion
and amortisation expense (128) (65) (81) (2) - (276)
Impairment of assets (12) (4) 1 - - (15)
Loss on disposal of property,
plant and equipment and
intangible assets (2) - (4) - - (6)
Foreign exchange gains/(losses),
net (5) 9 22 26
--------- -------- --------- ----------- ------------ ----------------
365 (46) 596 8 6 866
Unallocated income/(expenses),
net (35)
----------------
Profit/(loss) from operations $ 831
Interest income/(expense),
net (222)
Share of profits/(losses)
of joint ventures and
associates 3
Gain/(loss) on financial
assets and liabilities (51)
Gain/(loss) on disposal
groups classified as
held for sale, net (265)
Other non-operating gains/(losses),
net (2)
Profit/(loss) before
tax $ 294
================
In the six-month period ended 30 June 2018, the Group recognised an allowance for net realisable value of inventory in the amount of $19 million.
The material changes in property, plant and equipment during the six-month period ended 30 June 2018 other than those disclosed above are presented below:
Steel,
US$ million Steel North America Coal Other operations Total
------- -------------- ------ ---------------- -------
Additions $ 108 $ 41 $ 75 $ 1 $ 225
3. Segment Information (continued)
The revenues from external customers for each group of similar products and services are presented in the following table:
Six-month period ended
30 June
US$ million 2018 2017
------------ -----------
Steel
Construction products $ 1,188 $ 1,019
Flat-rolled products 217 141
Railway products 484 431
Semi-finished products 1,346 1,211
Other steel products 208 165
Other products 200 183
Iron ore 87 94
Vanadium in slag 73 25
Vanadium in alloys and chemicals 393 198
Rendering of services 33 19
------------ -----------
4,229 3,486
Steel, North America
Construction products 113 81
Flat-rolled products 290 224
Railway products 186 166
Tubular products 486 360
Other products 60 41
Rendering of services 16 6
------------ -----------
1,151 878
Coal
Coal 801 607
Other products 17 13
Rendering of services 12 44
------------ -----------
830 664
Other operations
Other products 36 -
Rendering of services 97 78
------------ -----------
133 78
$ 6,343 $ 5,106
============ ===========
3. Segment Information (continued)
Distribution of the Group's revenues by geographical area based on the location of customers for the years ended 31 December was as follows:
Six-month period ended
30 June
US$ million 2018 2017
------------ -----------
CIS
Russia $ 2,309 $ 2,054
Ukraine 228 141
Kazakhstan 123 116
Others 103 73
------------ -----------
2,763 2,384
============ ===========
America
USA 951 557
Canada 255 381
Mexico 102 143
Others 91 5
------------ -----------
1,399 1,086
============ ===========
Asia
Taiwan 224 227
Philippines 286 119
Indonesia 228 139
Republic of Korea 269 126
Thailand 47 81
Japan 83 96
China 67 71
Others 127 126
------------ -----------
1,331 985
============ ===========
Europe
European Union 537 351
Turkey 149 171
Others 17 11
------------ -----------
703 533
============ ===========
Africa
Egypt 77 25
Kenya 55 71
Others 14 18
------------ -----------
146 114
============ ===========
Other countries 1 4
------------ -----------
$ 6,343 $ 5,106
============ ===========
4. Changes in Composition of the Group
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 $35 million. The consideration is payable in several instalments: $25 million was received in the reporting period upon signing of the transaction documents and the rest will be received by 15 December 2018.
Prior to disposal the subsidiary was included in the steel segment. The Group recognised a $(10) million loss on sale of the subsidiary, including $(60) million of cumulative exchange losses reclassified from other comprehensive income to the consolidated statement of operations. The result was included in the Gain on disposal groups classified as held for sale caption of the consolidated statement of operations. Cash disposed with the subsidiary amounted to $2 million.
Sukha Balka
At 31 December 2017, the Group's receivables included an unpaid consideration of $15 million plus $3 million of interest accrued relating to the sale of Sukha Balka. This amount was fully received in the first half of 2018.
5. Impairment of Non-current Assets
For the purpose of the impairment testing as of 30 June 2018 the Group assessed the recoverable amount of each cash-generating unit ("CGU") where indicators of impairment were identified. Also the Group performed an analysis of its property, plant and equipment for functional obsolescence.
The recoverable amount has been determined based on a value-in-use calculation using cash flow projections based on the actual operating results and business plans approved by management and appropriate discount rates reflecting the time value of money and risks associated with respective cash-generating units. For the periods not covered by management business plans, cash flow projections have been estimated by extrapolating the respective business plans' results using a zero real growth rate. The key assumptions used by management in the value-in-use calculations with respect to the cash-generating units where indicators of impairment existed are presented in the table below.
Average Average
price price
of commodity of commodity Recoverable Carrying
Period Pre-tax per per amount amount
of forecast, discount tonne tonne of CGU, of CGU,
years rate, % Commodity in 2018 in 2019 US$ million US$ million
------------- ------------ ------------- ------------- ------------- ------------- -------------
Steel North
America
Large
diameter steel
pipes 5 10.37 products $1,001 $1,046 936 882
Oil Country
Tubular steel
Goods 5 11.06 products $1,197 $1,153 410 358
Evrazruda -
Sheregesh
mine 20 13.08 iron ore $58 $53 155 49
The impairment test models take into account the tariffs imposed by the US and Canada against each other on import of steel and steel products, whose effect is assumed to be temporary and impacts only 2018 (Note 13).
5. Impairment of Non-current Assets (continued)
The estimations of value in use are most sensitive to the following assumptions:
Discount Rates
Discount rates reflect the current market assessment of the risks specific to each cash-generating unit. The discount rates have been determined using the Capital Asset Pricing Model and analysis of industry peers. Reasonably possible changes in discount rates could lead to an impairment in the Large Diameter Pipes and Oil Country Tubular Goods cash-generating units. If the discount rates were 10% higher, this would lead to an impairment of $99 million.
Sales Prices
The price assumptions of the products sold by the Group were estimated using industry research using analysts' views published by AME, Citigroup, CRU, Credit Suisse, Deutsche Bank, Goldman Sachs, ING, Jefferies, JP Morgan, Macquarie, Morgan Stanley, RBC, Renaissance Capital, Sberbank, UBS, VTB and WSD during the period from March to June 2018. The Group expects that the nominal prices will grow with a compound annual growth rate of (1.6)%-3.7% in 2018 - 2023 and 2.5% in 2024 and thereafter. Reasonably possible changes in sales prices in the 2nd half of 2018 and 2019 would not lead to any impairment.
Sales Volumes
Management assumed that the sales volumes of steel products would increase by 16.0% in 2018 and future dynamics will be driven by gradual market recovery and changes in assets' capacities. Reasonably possible changes in sales volumes in the 2nd half of 2018 and 2019 would not lead to any impairment.
Cost Control Measures
The recoverable amounts of cash-generating units are based on the business plans approved by management. A reasonably possible deviation of cost from these plans could lead to an impairment in the Large Diameter Pipes cash-generating unit. If the actual costs were 10% higher than those assumed for the 2nd half of 2018 and 2019, this would lead to an impairment of $26 million.
For the cash-generating units, which were not impaired in the reporting period and for which reasonably possible changes could lead to impairment, the recoverable amounts would become equal their carrying amounts if the assumptions used to measure the recoverable amounts changed by the following percentages:
Discount Sales Sales Cost control
rates prices volumes measures
--------- -------- --------- -------------
Steel North America
Large Diameter Pipes 3.4% - - 6.8%
Oil Country Tubular Goods 8.3% - - -
6. Income Taxes
Major components of income tax expense were as follows:
Six-month period
ended 30 June
US$ million 2018 2017
--------- --------
Current income tax expense $ (364) $ (254)
Adjustment in respect of income tax of
previous years 4 (2)
Deferred income tax benefit/(expense)
relating to origination and reversal of
temporary differences (38) 48
Income tax expense reported in the consolidated
statement of operations $ (398) $ (208)
========= ========
At 30 June 2018 and 31 December 2017, the Group recognised a deferred tax asset of $70 million and $73 million, respectively, related to unutilised interest expenses in the USA previously incurred on intra-group loans. As a result of the enactment of the Tax Cuts and Jobs Act ("TCJA") in the USA on 22 December 2017, uncertainty existed as to whether these unutilised interest expenses would be deductible against future taxable earnings under the new tax law and, therefore, whether the deferred tax asset would be recoverable. The Group's interpretation of the new legislation at 31 December 2017 was that the deferred tax asset would be recoverable and, consequently, the Group did not create an allowance against this balance. On 2 April 2018, the US Department of Treasury and the Internal Revenue Service released Notice 2018-28 to clarify the uncertainty created by the TCJA regarding the unutilised interest expenses. The Notice indicates that it will allow the unutilised interest expenses to be carried forward indefinitely.
7. Property, Plant and Equipment
The movement in property, plant and equipment for the six-month period ended 30 June 2018 was as follows:
Buildings Transport Assets
and Machinery and motor Mining Other under
US$ million Land constructions and equipment vehicles assets assets construction Total
------ ---------------- -------------- ---------- ------- ------- ---------------- ---------
At 31 December
2017,
cost, net of
accumulated
depreciation $ 107 $ 926 $ 1,906 $ 87 $ 1,349 $ 9 $ 549 $ 4,933
Additions - - - - - - 225 225
Assets put into
operation - 128 175 13 23 1 (340) -
Disposals - (1) (4) (1) - - - (6)
Depreciation and
depletion
charge - (41) (166) (12) (46) (2) - (267)
Impairment
losses
recognised in
statement
of operations (1) (4) (7) - (6) - (3) (21)
Impairment
losses
reversed
through
statement of
operations - - 1 - - - - 1
Transfer to
assets
held for sale - (20) (33) - - - (10) (63)
Change in site
restoration
and
decommissioning
provision - - 1 - 1 - 1 3
Translation
difference (3) (68) (113) (7) (110) - (34) (335)
------ ---------------- -------------- ---------- ------- ------- ---------------- ---------
At 30 June 2018,
cost, net of
accumulated
depreciation $ 103 $ 920 $ 1,760 $ 80 $ 1,211 $ 8 $ 388 $ 4,470
====== ================ ============== ========== ======= ======= ================ =========
8. Investments in Joint Ventures and Associates
The movement in investments in joint ventures and associates during the six-month period ended 30 June 2018 was as follows:
US$ million Timir Streamcore Other associates Total
------ ---------- ---------------- ------
At 31 December 2017 $ 21 $ 47 $ 11 $ 79
Share of profit/(loss) (1) 4 2 5
Translation difference (1) (4) (2) (7)
------ ---------- ---------------- ------
At 30 June 2018 $ 19 $ 47 $ 11 $ 77
====== ========== ================ ======
9. Related Party Disclosures
For the Group related parties include associates and joint venture partners, key management personnel and other entities that are under the control or significant influence of the key management personnel, the Group's ultimate parent or its shareholders. In considering each possible related party relationship, attention is directed to the substance of the relationship, not merely the legal form.
Amounts owed by/to related parties were as follows:
Amounts due from Amounts due to
related parties related parties
---------------------- ----------------------
30 June 31 December 30 June 31 December
US$ million 2018 2017 2018 2017
-------- ------------ -------- ------------
Dividends receivable
Yuzhny GOK $ - $ 6 $ - $ -
Trade balances
Nakhodka Trade Sea Port - - 5 6
Vtorresource-Pererabotka - 2 91 52
Yuzhny GOK - 4 88 195
Other entities 1 - 3 3
1 12 187 256
Less: allowance for doubtful
accounts - - - -
-------- ------------ -------- ------------
$ 1 $ 12 $ 187 $ 256
======== ============ ======== ============
In addition to the balances disclosed above, at 30 June 2018 and 31 December 2017, non-current financial assets included a loan receivable from Timir, the Group's joint venture, $7 million and $8 million, respectively.
Transactions with related parties were as follows for the six-month periods ended 30 June:
Sales to Purchases from
related parties related parties
-------------------
US$ million 2018 2017 2018 2017
--------- -------- --------- --------
Genalta Recycling Inc. $ - $ - $ 8 $ 7
Interlock Security Services - - 3 9
Nakhodka Trade Sea Port - - 39 -
Vtorresource-Pererabotka 3 4 248 202
Yuzhny GOK 14 20 48 60
Other entities 1 1 1 1
--------- -------- --------- --------
$ 18 $ 25 $ 347 $ 279
========= ======== ========= ========
Compensation to Key Management Personnel
In the six-month periods ended 30 June 2018 and 2017, key management personnel totalled 30 persons. Total compensation to key management personnel was included in general and administrative expenses and consisted of the following in the six-month periods ended 30 June:
US$ million 2018 2017
----- -----
Salary $ 8 $ 8
Performance bonuses 8 9
Social security taxes 3 3
Share-based payments 4 4
$ 23 $ 24
===== =====
10. Cash and Cash Equivalents
Cash and cash equivalents were denominated in the following currencies:
30 June 31 December
US$ million 2017 2017
-------- ------------
US dollar $ 800 $ 1,253
Russian rouble 34 163
Others 68 50
-------- ------------
$ 902 $ 1,466
======== ============
The above cash and cash equivalents mainly consist of cash at banks.
11. Equity
Share Capital
30 June 31 December
Number of shares 2018 2017
-------------- --------------
Issued and fully paid
Ordinary shares of $1 each 1,506,527,294 1,506,527,294
On 10 July 2018, EVRAZ plc reduced the nominal value of its shares from $1 to $0.05 each. The amount of the cancelled share capital ($1,431 million) became distributable reserves.
Treasury Shares
30 June 31 December
Number of shares 2018 2017
----------- ------------
Number of treasury shares 63,177,187 74,474,663
Earnings per Share
Earnings per share are calculated by dividing the net income attributable to ordinary shareholders by the weighted average number of ordinary shares in issue during the period. Diluted earnings per share amounts are calculated by dividing the net profit attributable to ordinary equity holders by the weighted average number of ordinary shares outstanding during the period plus the weighted average number of ordinary shares that would be issued on the conversion of all the potential dilutive ordinary shares into ordinary shares.
The following reflects the profit and share data used in the basic and diluted earnings per share computations:
Six-month period
ended 30 June
-------------------------------
2018 2017
Weighted average number of ordinary shares outstanding during the period 1,435,235,898 1,423,045,129
Effect of dilution: share options 23,934,800 30,251,983
-------------- ---------------
Weighted average number of ordinary shares adjusted for the effect of dilution 1,459,170,698 1,453,297,112
Profit/(loss) for the period attributable to equity holders of the parent entity,
US$ million $ 1,112 $ 53
Basic earnings/(losses) per share $ 0.77 $ 0.04
Diluted earnings/(losses) per share $ 0.76 $ 0.04
There have been no other transactions involving ordinary shares or potential ordinary shares between the reporting date and the date of completion of these interim condensed consolidated financial statements.
11. Equity (continued)
Dividends
Dividends declared by EVRAZ plc during the six-month period ended 30 June 2018 were as follows:
To holders Dividends
registered declared, US$ per
Date of declaration at US$ million share
--------------------- ------------- ------------- --------
Second Interim for
2017 28/02/2018 09/03/2018 429.6 0.30
Interim for 2018 24/05/2018 08/06/2018 187.6 0.13
Unrealised Gains and Losses
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). At that date the investments in Delong were classified as available-for-sale and measured at fair value based on market quotations of the Singapore Exchange. The carrying value of these investments amounted to $33 million, including a $30 million increase in the fair value recognised in other comprehensive income.
At 1 January 2018, the Group irrevocably designated these investments as measured at fair value through other comprehensive income. For such financial instruments all subsequent changes in fair value are reported in other comprehensive income, no impairment losses are recognised in profit or loss and no gains or losses are recycled to profit or loss upon derecognition.
In June 2018, the Group sold its ownership interest in Delong to the major shareholder of the entity for cash consideration of $92 million. According to the agreement, if within 12 months from the completion date the purchaser makes an offer to acquire all the remaining shares of Delong on the open market, the Group will be entitled to an additional consideration in the amount of excess of the offer price over $5.283 per share. This additional consideration has not been recognised, as the Group considers such event to be very unlikely.
Market value of the equity instruments at the date of sale was $71 million. Total gain, comprising the change in market value until the sale and the excess of the sale price over the market value of the investments at the sale date, amounting to $59 million was recognised in other comprehensive income. Upon sale the Group transferred the realised gains accumulated in other comprehensive income ($89 million) to accumulated profits.
12. Loans and Borrowings
Short-term and long-term loans and borrowings were as follows:
30 June 31 December
US$ million 2018 2017
---------- ------------
Bank loans $ 1,495 $ 2,113
US dollar-denominated
6.50% notes due 2020 700 700
8.25% notes due 2021 750 750
6.75% notes due 2022 500 500
5.375% notes due 2023 750 750
Rouble-denominated
12.95% rouble bonds due 2019 239 260
12.60% rouble bonds due 2021 239 260
Unamortised debt issue costs (23) (28)
Interest payable 80 86
---------- ------------
$ 4,730 $ 5,391
========== ============
12. Loans and Borrowings (continued)
Some of the loan agreements and terms and conditions of notes provide for certain covenants in respect of EVRAZ plc and its subsidiaries. The covenants impose restrictions in respect of certain transactions and financial ratios, including restrictions in respect of indebtedness and profitability.
The movement in loans and borrowings were as follows:
US$ million 2018 2017
---------- ----------
1 January $ 5,391 $ 5,894
Cash changes:
Cash proceeds from bank loans and notes,
net of debt issues costs 807 1,224
Repayment of bank loans and notes, including
interest (1,590) (1,782)
Net proceeds from/(repayment of) bank
overdrafts and credit lines, including
interest 1 (135)
Non-cash changes:
Change in the balance of debt issues
costs paid in subsequent reporting period - (1)
Non-cash proceeds 6 5
Interest and other charges expensed 167 210
Interest capitalised - 4
Accrual of premiums and other charges
on early repayment of borrowings 1 62
Transfer to disposal groups held for
sale - (6)
Effect of exchange rate changes (53) 39
30 June $ 4,730 $ 5,514
========== ==========
Pledged Assets
The Group's pledged assets at carrying value included the following:
30 June 31 December
US$ million 2018 2017
-------- ------------
Property, plant and equipment $ 72 $ 66
Inventory 581 438
Unutilised Borrowing Facilities
As of 30 June 2018, the Group had unutilised bank loans in the amount of $1,908 million, including $100 million of committed facilities.
13. Commitments and Contingencies
Operating Environment of the Group
The Group is one of the largest vertically integrated steel producers globally and the largest steel producer in Russia. The Group's major subsidiaries are located in Russia, the USA and Canada. Russia is considered to be a developing market with higher economic and political risks.
The unrest in the Southeastern region of Ukraine and the economic sanctions imposed by the USA and the European Union on Russia in 2014 and later on caused economic slowdown in Russia and reduced access to international capital markets. Further sanctions imposed on Russia could have an adverse impact on the Group's business.
13. Commitments and Contingencies (continued)
Operating Environment of the Group (continued)
Steel consumption is affected by the cyclical nature of demand for steel products and the sensitivity of that demand to worldwide general economic conditions. During the first half of 2018, growing global demand and supply optimisation in China supported positive steel and raw material price growth but markets remain volatile.
In March 2018 the United States placed 25% tariffs on imports of most steel products from several countries, including Russia, while granting temporary exemptions for others, including Canada, Mexico, and the European Union. On 31 May 2018, the U.S. announced the end of temporary exemptions for Canada, Mexico, and the European Union, putting 25% tariffs on imports from those jurisdictions effective 1 June 2018. In response, the government of Canada introduced 25% tariffs effective 1 July 2018 on selected steel products from the U.S., but not including rail steel.
The Group has cross-border transactions between US and Canadian subsidiaries. The entities of the Steel North America segment import steel for further processing and final products for selling to domestic customers. After introduction of the tariffs, U.S. and Canadian subsidiaries must pay tariffs on imported steel and final products. The Goup has applied for "product exclusions" for imports to exempt from tariffs with the governments of the United States and Canada where justified and possible. No outcomes have been decided on product exclusions by either government as of the date of authorisation of these consolidated financial statements for issue.
Management believes it is taking appropriate measures to support the sustainability of the Group's business in the current circumstances.
The global economic climate continues to be unstable and this may negatively affect the Group's results and financial position in a manner not currently determinable.
Taxation
Russian and Ukrainian tax, currency and customs legislation is subject to varying interpretations, and changes, which can occur frequently. Management's interpretation of such legislation as applied to the transactions and activity of the Group may be challenged by the relevant regional and federal authorities.
Management believes that it has paid or accrued all taxes that are applicable. Where uncertainty exists, the Group has accrued tax liabilities based on management's best estimate of the probable outflow of resources embodying economic benefits, which will be required to settle these liabilities. Possible liabilities which were identified by management at the end of the reporting period as those that can be subject to different interpretations of the tax laws and other regulations and are not accrued in these financial statements could be up to approximately $54 million.
Contractual Commitments
At 30 June 2018, the Group had contractual commitments for the purchase of production equipment and construction works for an approximate amount of $172 million.
In 2010, the Group concluded a contract with PraxAir for the construction of an air separation plant and for the supply of oxygen and other gases produced by PraxAir at this plant for a period of 20 years (extended to 25 years in 2015, when the construction was completed). This supply contract does not fall within the scope of IFRIC 4 "Determining whether an Arrangement Contains a Lease". At 30 June 2018, the Group has committed expenditure of $582 million over the life of the contract.
13. Commitments and Contingencies (continued)
Contractual Commitments (continued)
In 2018, the Group concluded a contract with Air Liquide for the construction of an air separation plant and for the supply of oxygen and other gases produced by Air Liquide at this plant for a period of 20 years. The contractual price comprises a fixed component and a variable component. The total amount of the fixed component approximates $382 million, which is payable within 20 years starting upon commencement of production in 2021 in proportion to the amounts of the variable component. The variable component is determined based on the actual purchase of gases and is estimated at $382 million during the life of the contract. Based on the management's assessment this supply contract does not fall within the scope of IFRIC 4 "Determining whether an Arrangement Contains a Lease" as the Group has no access to the equipment and has no rights neither to operate the assets nor to design them in order to predetermine the way of their usage. In addition, Air Liquide will construct the system of trunk and auxiliary
pipelines, distribution stations and other equipment for products delivery, which will be leased by the Group for a period of 20 years and accounted for as a finance lease. The cost of construction of the products delivery system is estimated at $109 million.
Social Commitments
The Group is involved in a number of social programmes aimed to support education, healthcare and social infrastructure development in towns where the Group's assets are located. The Group budgeted to spend approximately $10 million under these programmes in the second half of 2018.
Environmental Protection
In the course of the Group's operations, the Group may be subject to environmental claims and legal proceedings. The quantification of environmental exposures requires an assessment of many factors, including changing laws and regulations, improvements in environmental technologies, the quality of information available related to specific sites, the assessment stage of each site investigation, preliminary findings and the length of time involved in remediation or settlement.
The Group has a number of environmental claims and proceedings which are at an early stage of investigation. Environmental provisions in relation to these proceedings that were recognised at 30 June 2018 amounted to $21 million. Preliminary estimates of the incremental costs indicate that such costs could be up to $186 million. The Group has insurance agreements, which would be expected to provide reimbursement of the costs to be actually incurred up to $228 million, of which $21 million relates to the accrued environmental provision and has been recognised in non-current financial assets at 30 June 2018. Management believes that, as of now, an economic outflow of the additional costs is not probable and any pending environmental claims or proceedings will not have a material adverse effect on its financial position and results of operations.
In addition, the Group has committed to various environmental protection programmes covering periods from 2018 to 2024, under which it will perform works aimed at reductions in environmental pollution and contamination. As of 30 June 2018, the costs of implementing these programmes are estimated at $126 million.
Legal Proceedings
The Group has been and continues to be the subject of legal proceedings, none of which has had, individually or in aggregate, a significant effect on the Group's operations or financial position. At 30 June 2018, possible liabilities were estimated at $22 million.
13. Commitments and Contingencies (continued)
Issued Guarantees
In June 2018, EVRAZ plc and EVRAZ West-Siberian Metallurgical Plant issued a joint guarantee in the amount of up to 30 billion roubles ($478 million at the exchange rate as of 30 June 2018) to nine companies owned by Sibuglemet in respect of management services provided by one the Group's subsidiaries to these entities. Sibuglemet is a producer of coking coal and operator of coal refineries in the Kemerovo region of Russia.
The management company committed to perform all management functions including, inter alia, all the decisions required to carry out the day-to-day operations of these coal companies, their investment and procurement activities. The guarantee matures on 31 December 2030.
14. Fair Value of Financial Instruments
The Group uses the following hierarchy for determining and disclosing the fair value of financial instruments by valuation technique:
-- Level 1: quoted prices (unadjusted) in active markets for identical assets and liabilities;
-- Level 2: other techniques for which all inputs which have a significant effect on the recorded fair value are observable, either directly or indirectly; and
-- Level 3: techniques which use inputs which have a significant effect on the recorded fair value that are not based on observable market data (unobservable inputs).
The carrying amounts of financial instruments, such as cash, short-term and long-term investments, short-term accounts receivable and payable, short-term loans receivable and payable and promissory notes, approximate their fair value.
The Group held the following financial instruments measured at fair value:
30 June 2018 31 December 2017
----------------------- ----------------------
Level Level Level Level Level Level
US$ million 1 2 3 1 2 3
------- ------ ------ ------ ------ ------
Assets measured at fair value
Financial assets at fair value
through other comprehensive
income - - - 33 - -
Derivatives not designated
as hedging instruments - 1 - - 3 -
Hedging instruments - - - - 1 -
Liabilities measured at fair
value
Hedging instruments - 21 - - 3 -
The following table shows fair values of the Group's bonds and notes.
US$ million 30 June 2018 31 December 2017
------------------- -------------------
Carrying Fair Carrying Fair
amount value amount value
USD-denominated
6.50% notes due 2020 $ 707 $ 727 $ 707 $ 752
8.25% notes due 2021 775 828 774 873
6.75% notes due 2022 513 532 512 560
5.375% notes due 2023 758 747 757 792
Rouble-denominated
12.95% rouble bonds due 2019 239 250 260 280
12.60% rouble bonds due 2021 247 275 269 302
$ 3,239 $ 3,359 $ 3,279 $ 3,559
========= ======== ========= ========
The fair value of the non-convertible bonds and notes was determined based on market quotations (Level 1).
15. Subsequent Events
Dividends
On 8 August 2018, the Board of directors of EVRAZ plc declared a second interim dividend for 2018 in the amount of $577 million, which represents $0.40 per share.
This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.
END
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