Alexander Frolov - Chief Executive Officer Giacomo Baizini - Interim Chief Financial Officer

Seth Rosenfeld - Jefferies International Oleg Petropavlovskiy - BCS Investment Bank Barry Ehrlich - Citi Andrew Jones - Wood

Thank you very much. Dear ladies and gentlemen, I would like to welcome you to our conference call to discuss financial and operating results for EVRAZ for the first half of 2016.

I hope that 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. Traditionally, before I begin, I would like to remind everyone that the matters discussed on this call will include forward-looking statements that are subject to many factors, risks and uncertainties that are described in detail on the second page of the presentation.

We undertake no obligation to update any forward-looking statements. Giacomo Baizini joins me on this call today.

As you probably know, EVRAZ CFO Pavel Tatyanin left the company in July to pursue other opportunities. While we’re in the process of an executive search, Giacomo will be acting as an Interim CFO.

Now, let’s turn to the presentation. I will begin by outlying key messages of today’s presentation, following by a strategic update.

I will then turn the call over to Giacomo; he will go through the financial and operating results in detail and provide an update on the targets for 2016. Let us start with the key themes on slide 5, in the first half of 2016, we have clearly seen improvement in the steel market conditions and supportive pricing environment driven by a combination of Chinese government investment stimulus, low inventory levels and speculative activity on futures markets, which positively influenced EVRAZ performance primarily in the second quarter.

As a result, we have reported EBITDA of $577 million, a drop of [38%] year on year reflecting the lagged effect of weak steel pricing in the beginning of the year. Our coal business has demonstrated an outstanding result, growing its EBITDA almost 26% and improving margin to reach 40% on the back of healthy demand and productivity improvements.

We have continued efforts to [indiscernible] lowest-cost producer position. We delivered $138 million of cost reductions in the first half of 2016 and expect to reach $300 million of savings by the end of 2016.

I’m also very pleased to say that we are very comfortable with our debt maturity profile. [indiscernible] debt reduction, we have managed to extend the duration of our debt and we are now comfortable to cover maturities for 2016 and 2017 using free cash flow and committed credit facilities.

Further debt reduction remains to be our focus. Turning to slide 6, EVRAZ continues to pursue a vertically integrated business model, therefore having low-cost operations is extremely important for us.

The significant progress in cash cost reduction that we demonstrated is a result of our continued implementation of cost-cutting initiatives and ruble devaluation. In the next slide, as usual, I’d like to draw your attention to health and safety.

The lost-time injury frequency rate in the first half of 2016 was 2.48x. The growth of the frequency rate reflects our effort to improve reporting transparency which resulted in an increased reporting on minor cases.

Our strategic goal is to achieve and maintain a lost-time injury frequency rate of less than one. On slide 8, I’d like to make an update on the progress to achieve our strategic goals.

Our first priority is customer focus. This year customer focus initiative generated additional EBITDA of $46 million.

In the local market, we have made great effort to provide flexible shipment terms and additional services and develop long-term relationships with our clients. Despite the contract in the Russian steel market and intense competition in long steel products, EVRAZ was able to sustain its market share for almost all key products.

The market share for rails declined, with no negative effect on volume, the competitor ramped up a mill in the first half of 2016. In overseas sales development, EVRAZ has increased export of rails by 45%, export of high-quality premium slabs also surged by 70%.

Commitment to our cost cutting initiative and CapEx optimization remains the other top priority for the company. Now, I will hand over the call to Giacomo Baizini for financial performance update, followed by an operational update and 2016 outlook.

Giacomo, please?

Thank you, Alexander. Hello everyone.

So I’d like to start with an overview of our financial performance on page 10. Our EBITDA in the first half 2016 was $577 million, a 14% increase on the second half of 2015, mainly due to improved market conditions in the second quarter of 2016.

Our EBITDA margin also recovered to 16.3% in the reporting period as a result of the cost-efficiency measures, market initiatives and further weakening of the ruble on average. Steel segment performance in the first half of 2016 saw some comparatively worse market condition than in the first half of 2015 giving $382 million of EBITDA for the current reporting period.

The coal segment on the other hand benefited from healthy demand and productivity improvements leading to an increase of EBITDA to $216 million. Please now turn to page 11 for our free cash flow.

Starting from our first half 2016 EBITDA of $585 million, we can look at our cash generation and usage before arriving to our free cash flow of $102 million. $27 million was released in working capital due to a number of factors; income tax accrued was $67 million and this compares to $99 million for the whole of 2015 and this is mostly due to the net effect of foreign exchange fluctuations on the debt of subsidiaries and currencies different from their functional currencies.

Social expenses of $12 million are in line with the figure for last year, for the whole of last year of $28 million. Interest and similar payments was $239 million.

These are increasing as we refinance cheaper shorter-term debt with more expensive longer-term debt. The CapEx of $200 million we will comment later.

A final $8 million of proceeds from small disposals of property, plant and equipment brings us to $102 million of free cash flow. Now, please turn to page 12 for the use of this free cash flow.

Net debt was $5.316 billion on June 30, 2016 and shows a reduction from [$5.349 billion] at the beginning of the year. This was achieved mainly by the use of our $102 million of free cash flow to extinguish debt.

But this was mitigated by the negative effect of ruble revaluation on our un-swapped portion of ruble debt as well as the premium paid for repurchasing of our outstanding bonds, shown in the chart as other changes in net debt. Looking a little further back, we have achieved a reduction in net debt of over $1.2 billion in the period since the beginning of 2014.

However, our net leverage increased to 4.9 times on June 30, 2016 due to the reduction in our last 12 month EBITDA to $1.083 million. For this period, the net leverage maintenance covenants will not be considered, [trusting] will resume starting with the reporting of the 2017 financial year.

Now, please turn to page 13 for a discussion of our debt. As well as repaying debt from free cash flow, we also extended our maturities significantly with a number of transactions in the first half of 2016.

We repurchased $744 million of 2017 and 2018 Eurobonds on the market and these were refinanced with a ruble bond equivalent to approximately $221 million and a $500 million Eurobond issue. As a result of these efforts, our average maturity rose to about three years for the first time, but our average cost of borrowing also rose to approximately 7%.

Liquidity on June 30, 2016 was $868 million, would be sufficient to cover all debt maturities until 2018. Subsequent to the end of the reporting period, on August 1, we recalled our 2017 Eurobonds at a make whole redemption price, further reducing 2017 maturities by approximately $180 million.

Now, please turn to page 14 for an overview of our CapEx. Thanks to the expected reinvestment program of the last few years, EVRAZ now has a well invested asset base.

In addition, over 60% of our CapEx is normally in rubles, so we’re also helped by the effect of ruble devaluation. This has allowed us to reduce CapEx in the first half of 2016 to $200 million, which is a 20% reduction on CapEx compared to the first half of 2015.

The target for the whole of 2016 is $375 million to $400 million, which compares to a spending in 2015 of $428 million. In 2016, we will largely complete the investment in upgrade the steel making of large-diameter pipe production in North America.

Currently, the only planned new investment is the construction of blast furnace #7 at NTMK. The expected cost of this is $170 million in 2017/2018.

Let us now turn to page 16 for the slide – for the first slide of the operational update. Revenues from external sales of construction products declined by 23% to $819 million compared to first half of 2015.

This was due to lower average prices and volumes due to lower demand. You can also see here the effect of the marketing initiatives in relation to channels, beams and angles which all showed an increase in sales volumes.

Please turn to page 17, rail consumption in Russia increased 34% to 525,000 in the first half of 2016, mainly through additional demand by Russian Railways. The majority of this increase was taken up by a competitor, leaving shipments by EVRAZ [to RZD] largely unchanged.

At the same time, we’re able to increase our export sales by 45% to 54,000 tons. Now, please turn to page 18.

Revenues from external sales of semi-finished products fell by 37% to $720 million in the first half of 2016 due to lower average prices and lower volumes. The volumes were affected by the plant stoppage at blast furnace #1 in May, which reduced pig iron production by 300,000 tons.

As a result of management’s initiatives the export sales of premium slabs increased by 70% to 458,000 tons. Now, please turn to page 19.

Our results in North America suffered from broadly weaker markets compared to the first half of 2015. This resulted in a 34% decline in sales revenue to $770 million.

Flat-rolled products returned to profitability; however, tubular products and rails continued to show difficulties. Now, please turn to page 20.

Overall revenues in the coal segment increased slightly in the first half of 2016 to $544 million. This was driven mostly by an increase in total coal volumes of 9%.

Management has been focusing on productivity increases including faster execution of longwall repositionings and [indiscernible]. These efforts have led to the increase in mine volumes of coal.

Let us now turn to page 22 for a summary outlook. EVRAZ expects its results to be affected by the positive dynamics in global steel markets.

While EVRAZ does not anticipate significant improvements in Russian steel demand in the second half of 2016 due to moderate investment activity and economic environment, it anticipates that current steel prices will gradually increase to the average seen in 2015. In the second half of 2016, the North American segment will likely experience headwinds from large volumes of dumped and subsidized large diameter pipe imports into Canada, which will extend into 2017 and 2018 should no trade remedies be put into place against unfairly traded large diameter pipe from China and Japan this October.

In addition, results may be negatively impacted by delays in approvals of key large pipeline projects in the US and Canada and continuing weak demand for rails. In the second half of 2016, EVRAZ expects coking coal concentrate prices to be supported by stable demand on the domestic market and key export destinations, as well as the temporary high-volatility grades coal deficit.

The group continues to pursue customer focus and cost-cutting initiatives. As a result, EVRAZ expects positive free cash flow and progress towards reducing net debt in absolute terms by the year-end.

Thank you for listening. We’re now ready to answer any questions.

A couple of question in the outlook for pricing, you mentioned that you expect H2 prices to gradually increase towards its average in 2015. Can you just give a little bit more detail on what drives this level of confidence and how you expect preps interplay between the domestic Russian market and export market in Southeast Asia as being some of the offsets to get us there?

And then separately, can you just talk a bit about your recognition of the year to date recovery in global prices within the P&L, I’d like to get a bit of detail for whether or not some of the recent rally is yet to be seen in your average sales prices in the second half of this year because in either contract structure or there is longer lead times to your deliveries?

Why we are cautiously positive about further development of the market is because we believe that the price levels which we have seen in the beginning of the year are not sustainable prices for what majority of steel play out globally, primarily in China and that’s a high spike which we have seen in the second quarter, which was in a way unprecedented since 2008, have been followed by some production in the market towards the end of the second quarter, but after that prices have started to increase again. So it leads us to conclusion that it’s not just very short term thing, it would probably last for longer term.

At the same time, we’re not saying that something have changed structurally indeed, we still see a lot of overcapacity and we still believe that we should not, let’s say, decrease our focus [indiscernible] keeping our cost reduction as low as possible. Regarding prices domestically and outside Russia, what we can say is that, of course, Russian prices are mostly following the international prices and we have been able to increase our selling prices for construction steel in April and May quite substantially with prices in line to the highest price we have seen globally.

And, of course, since the peak period, Russian prices [indiscernible] substantially higher than the beginning of the year and we expect that would continue for construction steel primarily because September, October is already going to be end of construction season and this is a really key product, this could decrease which we’d basically see every year. At the same time, there are some positive lagging effects on the pricing of our rails, which was sold to Russian Railroads for example, because the prices are based on the formula and one of the variables in this formula is the scrap price, basically that’s why we expect some improvement in our selling price for rails in the third and fourth quarter just because the formula would reflect earlier increase in scrap prices.

So otherwise, obviously we would remain [indiscernible] to choose between exports and domestic sales depending on the price situation and we will try to maximize our margin. At the same time, we are of course keeping commitment with our clients.

It’s basically what we have been doing.

One quick follow-up, outside of Russian rails, are there other products you would highlight where there is more of a lag effect to your ASP recognition, given the rising prices you saw in Q2?

I think rails is the best and it’s the most sizable example.

Several questions from me. First of all, in your cash flow statement, you’re showing that you had $244 million of losses from derivatives, could you please explain us who this works and what you have on next?

Also, I have a question on Raspadskaya, today they’re unused. If you change the ownership structure of this company, do you plan any actions with this subsidiary?

And also, what is the progress on your other non-core assets, M&A deals [indiscernible] things like that? And my last question is about your second half steel product volume target, how many tons are you willing to sell?

We don’t give any precise guidance tonnage wise. Just kind of general observation, we have had some scheduled maintenance in our blast furnaces in the first half of 2016 [indiscernible] so this should make a positive effect on our production volume for the second half.

Regarding M&A deal, could you clarify your question, because I’m not sure that I have caught it precisely? I think there were two parts to that, one was on Raspadskaya, one was on the other progress on non-core assets, just to clarify on Raspadskaya, you mentioned an announcement, but could you be more specific?

My questions could be simplified, are you planning to buy out Raspadskaya minorities or do something else with the remaining shares of this subsidiary?

They are not as planned, no. So let me then go back to your question on the loss from derivatives.

So if you want more details, it’s probably best to go offline, but basically what is happening in there is the hedging on ruble bonds themselves and the hedging goes with them and the way they are accounted for. So until relatively recently when we issued ruble bonds, we immediately swapped the vast majority of the principal and the interest payment for the duration of the bond.

But because these were done on different entities, not always are we able to eliminate the effect of that on the account. So sometimes these two things get separated.

So the effect on the – that you see in the cash flow statement is from the unwinding of these swaps as the bonds come to maturity.

So going forward we should not expect such losses or gains in the second half?

No for two reasons: one is that we have a much lower volume in general ruble bonds that we have because as of June 30 we had in dollar terms just $500 million worth of ruble bonds outstanding. And the other reason is that we did not swap our latest issued ruble bonds.

So [indiscernible] amount of swap is less.

About M&A deals with your other non-core assets?

What is exactly your question?

I mean, what is the progress with Highveld and other assets you wanted to sell?

First of all, Highveld, we are not planning to sell; Highveld is on an external management at the moment. The operation was shutdown already last year and now external management is trying either to sell the company in part or liquidate it.

What we will have on it is not very clear, but we are not taking part in any of those processes. And regarding others, again, don’t know what exactly you mean, we don’t have any major disposals in the pipeline at the moment.

Three questions from my side, please. The first one is on your CapEx plans for 2017, so could you please provide your estimation of guidance for the next year and more specifically the structure if you could provide some highlights, namely maintenance and expansion and given that you’re going to start construction of a new blast furnace and the Russian assets?

The second question is on your expectations on the working capital movements for the second half of 2016, if you could provide the amount of increase or decrease will be very helpful. And third question is on your treasury share, so could you please remind us what are your current plans regarding these shares – treasury shares held on the balance sheet?

Starting from your question about CapEx, I guess it’s the most rational assumption to look at 2017 as similar to 2016. Maintenance would probably remain at the same level.

The only thing which happen in terms of the development, we will complete reconstruction of our large diameter pipe mainly in Canada and probably comparable amount of money would be spent on the new blast furnaces [indiscernible] which we are going to build during 2017-2018. Regarding working capital, I’m not sure that we would be ready to give you any guidance straightaway because again we don’t expect any extraordinary things happen there, we always strive to be light with our working capital, on the other hand it’s obviously subject to price levels which we will see at the end of the year and again, we don’t have any crystal ball to set exact numbers for 2017-2018 in advance.

Regarding treasury shares, we don’t have any specific plans. We just keep it on our balance sheet and we don’t expect particularly any specific with the treasury shares.

I want to ask to a little bit more detail on the inventories within different product lines, how they might have moved over the periods, having noticed that your coking coal sales were up 9% in the period, but you had a much stronger growth in raw coking coal mined, and so I'm wondering whether you've built some inventory in coking coal products and perhaps ran down some inventory in steel, I'm trying to get a sense of what sort of excess inventory that might be coming into the second half that might enable higher sales volumes in different product lines?

First of all [indiscernible] we don’t expect any major increase, even though [indiscernible] we have sufficiently strong demand [indiscernible], but I don’t expect that we’re still facing. Same thing basically for steel, the market is [indiscernible] will be ready to provide you with further details.

I had one question about a statement which is in the press release and it was talking about the renegotiation of the covenants with the banks and it said that as part of the agreement it was subject to compliance with additional restrictions on indebtedness and dividends. I was just wondering if you could give us a bit more information about those m and what those additional restrictions are?

So the additional restrictions, I guess the main additional restriction is the limit on bad debt to $6 billion until the covenants, let’s say until the testing resumes at the end of 2017.

And anything on the dividend side specifically?

There are also restrictions on dividends.

Is that perhaps linked to net debt or really to cash flow or something?

That is linked to basically until we again return to testing, we’re not able to pay dividends. If you want to get really details, if we want to, we can voluntarily go back to the previous levels of testing and able to pay dividends earlier, but it’s not a scenario that we’re looking at at the moment.

I remember from previous calls, the debt covenant was something around 4, 4.5, is that the kind of level that you would have to get to before you could go back to the old regime?

Yes. I mean currently the covenants will return to a level of 5 times at the end of 2017 and then 4.5 in the middle – at the end of 2017 and 4.5 in the middle of 2018.

No, there’s nothing. I forgot to mute it.

I just wanted to clarify on the covenants point, it’s extended for [indiscernible] from the first half of 2016, so does that mean that you will basically be able to hedge covenants sometime in 2018 if you have it based upon the full 2017 financial year or is that the earliest number [indiscernible] 2017 or did I got that wrong?

That is correct. In actual fact, again getting into more details, but I guess I have to be factually accurate.

We’re talking about the net leverage covenants, so the actual fact on the interest cover ratio, there is one outstanding facility that has an interest cover ratio of 1.5 times, but generally I don’t mention that, we’re always very comfortable on that.

So that’s basically the 2017 financial year, tested in 2018, that mean net debt to EBITDA in 2017 based on the testing at the start of 2018 [indiscernible]?

Correct.

This is Barry Ehrlich from Citibank. I have a follow up question, can I go ahead?

Yes, please go ahead.

[indiscernible]. You expect the second half of the year to be better, would you mind providing maybe guidance for the full 2016 in terms of EBITDA that you may expect?

And the second question, I didn’t hear the answer about Raspadsky that one of the participants asked earlier, would you mind commenting on that Raspadsky situation, that’s an opportunity of ownership?

So in regards to EBITDA guidance, we don’t give any EBITDA guidance for the year, sorry about that. In terms of Raspadsky change of ownership the answer that we gave is that there are no current plans to change or to do anything about the minorities.

Two questions. One is the current – if you look at the first half, what amount of let’s say slab or billet did you not produce that you could have?

And what’s preventing you from increasing production and sales to that higher level given that it is clear that your costs are well below at least benchmark export slab and billet prices?

So to clarify your question, you're saying where we still need to book – or putting it in other way, where we fully utilize in steelmaking in the first half of 2016?

Yes, and what was the unutilized portion in tonnage?

That is simple. We have been fully utilized in our steelmaking and again in production of semi products.

So we’re talking about Russia now?

We were not fully utilized in North America. North America is slightly a different story.

But Russian and Ukraine we were 100% utilized.

And is there cost argument for bringing up utilization in North America, given current slab and billet prices?

First of all, our North American business is not a business where we sell semi-finished products. They are basically in the high evaluated stuff like whatever, large-diameter pipes, putting rails, use plates to reblast in the worst case, so the possibilities to increase production there unfortunately are limited by the market size and of course we’re trying to produce as much as we can, but we are below full utilization.

And so can you just explain on the semi side, maybe I’m missing something, I’m just looking at slide 18, and the sales volumes from the CIS operations at slab are down by about 200,000 tons year over year.

We mentioned that a couple of times. We had a blast furnace, new blast furnace maintenance in the first half of 2016.

So as you see the total volumes [indiscernible] total volumes are down by about 210,000 tons [indiscernible] is due to the blast furnace maintenance [indiscernible] where you see the slabs coming down and billets going up, basically we have a choice in that piece or rather we have a bottleneck of – steel production, or we have more capacity to do slab and billets than we have capacity to produce steel. So depending on market conditions, we can switch to steel that we produce to a certain extent in between slab and billets and that is what happened and that’s the difference you see between the first half of 2015 and the first half of 2016.

So depending on the attractiveness of the relative markets, we will produce more of one or more of the other, but the total is constrained by the steel production. I hope that was clear, but if it was not, we’re always happy to meet and go through that.

Any further questions? Operator, are there any further questions?

Okay. If we don’t have any questions, I would like to thank everybody who was on the call with us today and you will be more than welcome to have you on our next result presentation which will be in 2017.

Thank you very much.

Thank you.