Alexander Frolov - CEO Pavel Tatyanin - CFO

Sergey Donskoy - Societe Generale Barry Ehrlich - Citibank Neri Tollardo - Morgan Stanley George Buzhenitsa - Deutsche Bank

Good afternoon dear ladies and gentlemen. I would like to welcome you to our conference call to discuss financial and operational results for EVRAZ for 2015.

I hope you have had an opportunity to download the presentation which is available on our website, EVRAZ.com, as we will be following it during the call. Additionally before I begin, I would like to remind everyone that as a matter of this conference call we will include forward-looking statements that are subject to many factors, risks and uncertainties that are declared in detail on the second page of the presentation.

We undertake no obligation to update any forward-looking statements. I'm joined on this call today by Pavel Tatyanin, our CFO.

I will begin this [indiscernible] update in our main highlight. I will then turn the call over to Pavel.

He will go through the results in detail and provide an update on the target for 2016. Turning to the key themes on slide 5, I would like to say that the year of 2015 was a challenging year, both for the global industry and for EVRAZ.

One of the most important point to mention is that despite the market down-turn, EVRAZ was able to maintain full capacity utilization due to its low cost position that covers the industry. Having low-cost operations is critical EVRAZ, especially in a period of declining steel and raw material processing.

Please see the details of our cost base on slide 6. We also maintained our premium product portfolio, helping to mitigate margin deterioration.

The group cost efficiency program and market initiatives helped to achieve an EBITDA margin of 16.4% in 2015, just 1.6 percentage points lower than in 2014. Total EBITDA was $1.438 billion, 38.9% lower than in 2014, mainly impacted by weak markets in Russia and North America.

I'm quite pleased, though, to see positive free cash flow generation and ongoing progress on net debt reduction. On slide 7, I would like to draw your attention to health and safety.

The lost time injury frequency rate in 2015 was 2.18. The growth of the frequency rate reflects our efforts to improve reporting transparency which resulted in an increased reporting of minor cases.

On slide 8, I would like to make a point about our continuous focus on previously stated strategy which allowed us to make notable progress on our objectives during the year. We start with the customer focus.

This year we already achieved additional EBITDA of $53 million as a result of our customer focus initiatives. That includes expansion of our sales geography, reaching markets in Brazil, Malaysia and others with EVRAZ products.

More than that, we improved the product portfolio of 100-meter rails with premium grades and increased production of high-value [indiscernible] slabs for tubular customers. The fundamental part of our strategy is to remain a low-cost producer.

We delivered $321 million of cost reduction since 2015. Despite the considerable progress made already, we are pursuing new initiatives which have the potential to make an impact similar to this year's result in 2016.

As a result of comprehensive review of the Company's investment program, we are trying to keep CapEx at a relatively low level, reducing to $428 million for 2015. Slide 9 shows our strong position in rails cut in Russia and North America.

In 2015, we have sold 500 for the five . Browse to Russian railroads and exported 150,000 tons of rails .

As part of our export Shoji's on the markets including contact in the Middle East asset decision and Latin America. Notably Europe signed a contract to deliver 15,000 tons of rail for high speed link in this Pakistan.

At the same time, EVRAZ remains the main supplier of Russian rails. Turning to construction still on slide 10, our sales finished product declined in 2015 .

Russian rebar sales fell by 20% year in year due to the slowdown in condition and slowing mortgage. Dropped by 24% year on year and by 18% due to lower domestic infrastructure investment it is worth mentioning that despite a slowdown in the domestic shipments 2015 we were able to observe our market share's.

Expanding into international presence in construction still, EVRAZ has exported it 1,600 tons of construction so part of the 2015 from which Russian Mills up by 80,000 from 2014. Moving to slide 11.

We have increased our sales of slots this year,? 's finished products were 195 were $195 per ton, 29 % lower than in 2014 due to operational improvements and instability in current devaluation.

At the same time we attempt to boost our share at the high grades and finished product market in Russian and overseas. The next slide describes our leading position in lumber and parts of North America and our anticipation of this market.

Products remained strong due to the demand from midstream infrastructure companies. Consumption of nearly doubled in 2015 reaching one half million tons, up 700 militants from the year before.

During 2015 we announced to project that our mail to continue quality and growing our leadership position . We expect the market continues to remain advantageous for the next 3 to 5 years due to the need of to develop infrastructure and the number of projects.

Slide 15 describes our coal business. As the largest reserve coking coal in.

EVRAZ considers this business to be a debt in a participant real estate one that brings and a strong base in Russian and abroad. 2015 we have sold 10 million total of cooking .

Russia half of which were external sales mostly covered by long term contracts. The decline in Russian sales of coking coal products from $6.2 million into the 14 to $5.2 million in 2015 is mainly attributable to the decreased demand for coking coal from Russian steel making companies have started to use more of their own captive coal supplies.

On the export side of things, we increased our sales to Ukraine kind Europe, South Korea and Japan from $1.9 million in 2014 to 2.7 million to Ukraine kind Europe, South Korea and Japan from $1.9 million in 2014 to $2.7 million in 2015 and managed to keep stable sales to China at $1 million. Our export sales to have increased by 44%.

Now I will hand over the call to Pavel Tatyanin. So Pavel Copley.

Thank you Alexander and good afternoon everybody. The slide presentation I would give a little overview of our results.

The group's consolidated revenue decreased by 32.9% to $8.766 million compared to $13.61 in 2014 primarily as a result of falling prices and depressed demand in 2015. However, we managed the cushion effect of market challenging conditions by implementing the cost efficiency program and market initiatives consequently EBITDA margin is just 1.6 percentage points lower than in 2014.

It was 16.4% in 2015 compared to 80% flat in 2014. As our CEO has already mentioned on this call.

Now moving to slide 15, our free cash flow for this year remains quite strong just $1 million short of $8 million and allowed us to reduce our debt by significant amount of $465 million. Net cash flows from operating activities decreased by 17% only with $329 million coming as a release in net working capital.

Moving to the next slide, slide 16 please. Our usual slide which outlines our progress in debt reduction.

Most important point to mention here I guess are with the leveraging our primary focus we've been us to reduce our net debt in 2014 and 2015 for the total significant amount of almost $1.2 billion. Our net debt has been reduced to $5.3 billion, net leverage increased to 3.7 times mainly due to our EBITDA decline.

With our continued focus in debt reduction we have undertaken several refinancing initiative during 2015 in various debt market to proactively extend our short term debt maturities and reduce the cost of debt. Our weighted average maturity profile improved in 2015 while keeping the cost of debt stable at 6.4%.

The next slide talks about main factors that impacted our overall performance in 2015 which are in fact generally negative steel price trends globally and depressed construction demand in Russia. This impact was partially offset by cost savings and favorable movements in the foreign exchange rates.

Despite these factors and our strong initiatives that have resulted in a $321 million of additional savings, our EBITDA decline a 38.9% to reach $1.438 billion. Moving on to the efficiency improvement plan of slide 19, as was already mentioned we have managed to implement our efficiency savings plan which resulted in $321 million of savings with their main contributors being improvements in yields and raw materials cost at steel mills and mining assets.

The fundamental part of EVRAZ strategy is to remain a low cost producer with streamlining and efficient operations. Going to the next slide, slide 20, I would like to elaborate on CapEx and our key projects.

In 2015, EVRAZ reduce our total capital expenditures to $428 million compared with $650 million in 2014 primarily due to currency fluctuations and the completion of capital intensive projects. All our ongoing projects are listed on the slide in the table and we target $375 million to $400 million of capital expenditure for 2016.

On slide 22, we summed up outlook for '16 . Generally, our view is such that we see the market quite challenging and we do not anticipate substantial improvements.

While taking advantage of the recent market pick up by increasing our exports and have a view that it's announced plans for capacity cuts and investments stimulus matters in China proved to be sustainable. This may lead to stabilization in the market and potential positive changes in global trends.

Given the current environment EVRAZ will remain focused on cost efficiency and product development which will support our financial stability and enable us to deliver stronger financial results once markets improve. Importantly, EVRAZ a continues to expect positive free cash flow and progress towards reducing net debt in absolute terms.

With this, I would like to thank you for listening to our presentation and we are now ready to take our questions. Thank you.

I have two questions. First, regarding your cost cutting plans that I was treated on, I think page eight of the slide presentation.

Could you specify this goal of $321 million what was set for last year. This was the cost savings achieved net that is after the effects of concentration or this was the cost effect before inflation, if you see what I mean.

And second question, could you explain what was this loss from derivatives, not designated as hedging instruments. Last year, I think it negatively affected the company stability to deleverage on the face of it.

Thank you.

Let me handle your first one to start with. The 321 was the actual number that we achieved in 2015.

The goal was slightly lower than that, I think the goal was about $280 million so we did outperform our original target for the year, we’re using fixed prices and fixed exchange rates to calculate that number because we believe that's fundamentally our management efforts shall not take into account the volatility of the short term macro elements therefore if ruble continues to devalue the real impact of our savings may be a little lower than that as it goes into our P&L but the fundamental elements such as G&A reduction for instance whether it is lower exchange rates or higher exchange rates all leads to a significant improvement of our bottom line. So we're basically taking out the inflationary and the foreign exchange elements out of that to take this to a more kind of predictable and less vulnerable methodology.

To address your item 2, our losses on hedging instrument are effectively the losses on the ruble dollar hedges that we bought as we placed the ruble bond several years back. As we believed that the fundamental nature of our business was a dollar business.

Every time we heard in ruble terms we tried to hedge that ruble exposure into U.S. dollars also to reduce the leverage dollar cost of our debt.

So as ruble devalued, the dollar translated difference, the dollar translated the value of our principle of our ruble bonds in particular diminished, but the fundamental nature of debt was dollar , therefore the corresponding amount of our hedging loss increased and that actually was reflected in our past years numbers. So the effects is only and exclusively attributable to the accounting treatment of the currency hedges that we bought to hedge our ruble debt exposure.

With the new bonds we placed in the middle of the year we accepted different treatment as the bonds were structured in a little different fashion and we’re treating this new hedges that we initiated in the course of July and August slightly different therefore the impact on that in our P&L is subdued. Going forward, we will decide on a case-by-case basis whether we will continue hedging our ruble debt exposure into dollars and we are not certain about that going forward.

Thank you.

A couple of questions from me. Do you have an estimate for Russian complexion demand in 2016, maybe the one you use internally just to share if you can.

And my second question is about your targets for cost-cutting in 2016. I think you have them same as for the previous year, maybe you can share what they are going to do with your assets maybe you plan some closures or no?

What I would like to say first of all that for our products, let's say situation is different for say let's say different types of material first of all, we seek strong demand from Russian Railways, for the rails I think the volume this year is expected to be higher than last year. Speaking about construction products, I mean like what they were rebars and beams, right now it's not the strongest part of the year but any already now some improvements in the market, prices are moving up a little bit and demand is also increasing.

It's I think driven mostly by positive developments in international markets. Speaking about our full-year projections, I think that we can only say that we do not expect 2016 to be much worse than 2015.

At least at this most moment we don't have any better clarity. Speaking about our cost cutting initiatives, I think they are mainly based on G&A cuts, I mean yield improvement and so on and we do not see or expect any closures this year.

This is Pavelm, just to add to that as far as the numbers are concerned, as far as our overall targets for cost improvement and revenue improvement, we shall be slightly over our 2015 numbers. We expect being between $350 and $380 million altogether.

Cost shall bring around 2/3rds of that number and customer revenue focus related items shall bring the remaining one 1/3rd.

Looking at slide 6, on slab and wash cooking coal cost, can you share what is your actual cost position now or perhaps comment on where you see that moving and also, I have a question on liquidities slide 17 and here you’ve talked about this of course in the past but I think I would like to ask again, can any banks unilaterally accelerate any of the debt coming due in the future or is there any way that the uncommitted facilities can be reduced? Thank you.

Let me start from the last item which is your liquidity question. As far as the acceleration risk, about 70% of our debt is capital markets which have largely which have only [indiscernible] covenant and [indiscernible] therefore basically we’re only limited as far as our ability to grow our total debt unless we are using this new debt to refinance the other maturities.

About 1/3rd of our debt is bank debt and those facilities contain a selection of various maintenance covenants which range from.5 net debt EBITDA to 5 times. We were and are in no breach of this covenants for now should we believe that -- should we believe that there is a material risk of not meeting the covenants by say June 30, 2016, we believe we have all possibility to actually proactively approach our banks.

We have already received full comfort from more than $500 million worth of bank debt holders as far as their view on our covenants. There is an ongoing discussion with bankers that represent about $750 million worth of our debt which are [Technical Difficulty] extremely well.

But to the extent that we -- there is a deterioration in the bankers mood towards us and our debt covenants, we have agreed a back stop facility of up to $300 million with a major bank which is a committed facility, committed line which together with the existing cash on hand that we have we will use to prepay some of the facilities where the covenants may become a potential issue. As far as the uncommitted lines, most of the uncommitted lines come from our trading operations in Switzerland and as well as the United States and Canada.

Those facilities despite their uncommitted by nature comp by their contractual nature, are normally never pulled and we've been having the same number of banks financing, our trading operations in the last 15, 18 years and those facilities were never used or pulled during the meltdown of 2008 for instance. So we don't expect those facilities to be reduced to disappear.

So we are pretty much relying that as our additional source of liquidity. On item 1, which is our current cash costs of the [indiscernible] and coal and iron ore, we are not disclosing that at the moment but the number that we're seeing now are lowered and the average number of 2015 that are presented on slide 6.

Neri Tollardo from Morgan Stanley, couple of questions from my side. First on the long steel market domestically, are you seeing any signs or any willingness of players to consolidate the market, we know it's a very fragmented where with little pricing power and second question is on CapEx, if you could share with us your CapEx plans for 2016 and maybe longer term as well and maybe just to follow on the cash costs could you maybe disclose what the [indiscernible] cash cost was in the second half of the year?

Thank you.

Starting for long steel market consolidation. We don't see any sign of major improvement there.

This market is fragmented again, [Technical Difficulty] again it all depends on the development of the market for the time being as I mentioned market is improving. So fragmentation does not create any problem but at the same time when market goes down, it's of course makes impact on profitability.

So I think it will all depend on the demand, if demand stays, I would say -- I won't say strong but at reasonable then I don't think that fragmentation should be an issue. Speaking about our capital expenditure plans, for 2016 we are mostly focused on our large diameter [ph] pipe projects in North America which I have already mentioned.

We also going to invest in further restructuring of [indiscernible] steel plant and the rest is maintenance which we're trying to keep it lowest possible level. So nothing major would happen in 2016 on the capital expenditure side.

Yes as far as cash costs and iron ore and coal is concerned, we had very similar numbers as we quoting for full year 2015 reported for the first half of 2015. So very little, half and half change from that perspective as far as semi-finished is concerned, the second half is probably between $175 million and $185 million.

If I could just follow up on CapEx, would you then expect CapEx to be roughly flat year on year?

Yes, that's probably again, I guess as we mentioned, we had our capital expenditure for 2015 about $430 million slightly under that. We are guiding for a range of $375 million to $400 million for a full year '16 of which mainly about 75% being maintenance CapEx and the balance being development CapEx all largely concentrated around the new [indiscernible] as well as the upgrade of our steel mill in Regina as well.

I wanted to ask about short term debt. Do you plan to primarily repay it and in what portion do you plan to refinance, if any?

So I propose we go to page 17. At the end of last year we had $708 million worth of debt maturing in the course of 2016 about 200 million of which is short term revolving trade finance related debt which contractually as I mentioned by nature is short term, but we keep rolling into year-by-year basis so we don't plan to redeem or reduce this facility.

So with that, we're left, we basically have to billion dollars of debt that matures in the course, the dominant part of which being the ruble bonds and the related ruble dollar swaps all come due late May 2016. We plan to redeem the respective ruble bonds from our cash and our cash flows and we plan to unwind our related slopes accordingly.

And we are not planning any refinancing of our 2015 debt as our cash on hand as well as our available liquidity allows us to fully meet all our 2016 redemption as well as the significant part if not the majority of 2017.

I have two questions. My first question, you saw quite a large working capital inflow in H2, I was wondering if you could give us some more detail on how that was achieved and I guess give us the expectations for what the capital going forward in 2016.

And we also noticed in your presentation and recent reports that your thinking of moving into more ruble debt and we just wanted to understand the logic behind that. Thanks.

I think as far as working capital at least it was a combination of better collection of receivables, although receivables were never too much of a problem for us as our bad debt ratios and amounts were quite small historically and have been quite small and were quite small in 2015 as well. Lower inventory values, lower receivable values on the back of overall decline in revenue and decline in the cost of sales were the key factors that allowed us to release significant amount of capital otherwise employed in the working capital.

I guess one noting worthwhile worth mentioning item was that we are able to extend our overall payables as we are trying to work proactively with our key suppliers to absorb, to get better terms for our business. In the current environment of the Russian economy we think that we have some additional market power which allows us to extract slightly better terms from our key suppliers.

As far as the ruble debt is concerned, I guess we have historically been driven in the selection of the immediate selection of instruments by a consideration such as duration and cost. The actual selection of instruments has been a secondary item for us to the extent that maturity profile was maintained or improved.

We moved quite substantially in the progress to improving our overall maturity profile. We returned to where we were in 2013 as far as the average maturities achieving that without any significant change in the average cost of debt it's through that 6.4% as I mentioned.

With that said we believe that the current market environment suggest that we are seeing certain delays in our ability to pass on the volatility of the exchange rate to our customers in the short term period which means that we would like to see -- we’re seeing a little more ruble exposure on the revenue side which doesn't have any corresponding elements in our liabilities, only 4% of our liabilities, 4% - 5% of our liability are ruble denominated and we would like to grow the number. We don't have a specific target but we think as far as new ruble denominated borrowings are concerned we will see more of that.

And it's very unlikely we will use a hedging instruments to cover that ruble exposure so as we borrow in rubles it will remain that uncovered.

I have one follow-up. It's kind of a question about maybe your longer term outlook.

The question is this. You produce more goods [indiscernible] and mining operations are as extensive or perhaps even bigger.

At the same time, your CapEx remains on an ongoing basis a fraction of I would say maybe fraction but it remains below what you're peer is spending and my question is this, taking a long term view if we assume that your CapEx remains at this level and your maintenance CapEx remains at the current level, is there any chance or risk that you will have to consider to reduce your steelmaking capacity? Thank you .

We don't think that there is immediate risk of that. What we should not forget about is that for example if we speak about steelmaking then there is some sort of cyclicality for instant it won't be any services, you don't have to spend a lot of money year-over-year but if it was a 15 years, you should spend substantial amount of money.

We don't have any sort of this event coming over the next year or two but again, in future they could be someone off increases in our CapEx due to this sort of situation to which I'm not repeatable every year but should be done in order to maintain order.

I have two questions on your last developed assets if I may call them like that. First one is on the deposits, the mezzanine [ph] deposit, can you please maybe update us on the progress of that deposit.

As far as I understand from your press release, that asset should reach 1.5 million tonnes of production by the end of 2016. Are there any plans beyond that?

And if so, how are you planning to finance that project? And also in terms of the economics of that, of the sales of [indiscernible] can you please specify what's the current EBITDA per tonne or what are the mortgage you’re making on the sales of coal.

And the second question is on Timir deposits, is there any update on the Timir project in terms of financing, in terms of the progress of the feasibility study, etcetera. Thank you.

Okay, starting from [indiscernible] question. I think that capital expenditures are mostly complete.

Right now, we are mining with singular speed of 500,000 tonnes a year. We may go for let's say, expansion upto 1.5 million tonnes per year which you’ve mentioned and it would not require any major CapEx but it will depend on the market situation and demand from the client for this call because right now this call is all of it is sold in Russia with relatively high margin, I would not be able to give you that number.

So again, if for example, overseas markets would improve in the future, then we would consider to increase the volumes there. Speaking about Timir I think on feasibility side of things we understand quite well what should be done there.

We understand the technology, we understand the CapEx, we have all regulatory approvals for construction. The two major issues we have are transportation cost and we are trying to work on that with the Russian Railways and of course the second thing is linked to the transportation cost it's obtaining of finance.

We're also quite well advanced in that but frankly speaking before transportation issue is resolved, we don't want let's say to bring this project to [indiscernible] because we don't want the project to be rejected. So this is like that, we still believe that this is good deposit.

It's well positioned to our steel plant in [indiscernible] but on the other hand on the current market conditions we are not sort of pushing the button, we have to wait and see how the situation will develop on the global markets.

Could you please share maybe some data in terms of good steel for good steel production for 2016. And what are your expectations on product mix this year?

What share of finished steel product do you expect?

We do not expect any major changes in terms of mix in semi-finished and finished. I would say it will probably remain similar to 2015.

For sure not more finished probably a little less, talking about coal, steel forecast I think that our mills remain fully loaded. So you know that last year we have deconsolidated highveld steel and it made an impact on the total coal production, it was a major contribution to the difference.

Then with an exception of South American operations and in all other places we expect steel production similar to 2015.

Yes. Just maybe a little bit of color from your side, so obviously we’ve seen this surge in export prices by $50 to $60 per tonne in fact what was weak, have you already started selling significant tonnages at those prices at the far east and if yes, what are your customers saying?

Do they see it as sustainable or are they sort of holding back waiting for prices to normalize? Thank you.

I would say that we have done of course some sales last week. We are not in a rush selling.

We are just trying to respond on the demand from our clients and I think the rise would depend on stock level and the demands. Some of them prefer to hold, some of them prefer to have some hedging.

So we have been able to again, to sell a significantly higher prices than we could have done let's say a few weeks before. Again, it's our regular tonnage.

I don't think that we are materially changing our normal speed of selling.

Well okay, if there are no further questions. We would like to thank everyone for the call and just finish it.

Thank you very much indeed. Enjoy the rest of your day and the rest of the week.

Thank you very much.

Thank you.