Statement of operations

Nikolay Ivanov Chief Financial Officer
EVRAZ consolidated EBITDA improved amid higher vanadium and steel product prices, lower expenses in US dollar terms as well as the impact of cost-cutting initiatives on efficiency.

Nikolay Ivanov Chief Financial Officer

In its full-year financial results for 2018, EVRAZ reported an increase of 18.6% year-on-year in consolidated revenues, which were US$12,836 million compared with US$10,827 million in 2017. This performance was driven mostly by an upswing in prices for vanadium and steel products amid more favourable market trends.

EVRAZ consolidated EBITDA amounted to US$3,777 million in the period, compared with US$2,624 million in 2017, boosting the EBITDA margin from 24.2% to 29.4% and free cash flow to US$1,940 million. The improvement is primarily attributable to higher vanadium and steel product prices, lower expenses in US dollar terms because of the effect that rouble weakening had on costs in 2018 versus 2017, as well as the impact of cost-cutting initiatives on efficiency. This was partly offset by an increase in prices for raw and auxilliary materials, including scrap, electrodes and ferroalloys.

The Steel segment’s revenues (including inter-segment) climbed by 14.7% year-on-year to US$8,879 million, or 62.2% of the Group’s total before elimination. The growth was mainly attributable to higher revenues from sales of vanadium products, which rose by 111.4% year-on-year, 124.6% increase was attributed to surges in average sales prices. Ongoing vanadium production restrictions together with China’s new high-strength rebar standard and strong global demand from steelmakers has severely affected stockpiles and pushed up price indices. Sales of steel products also increased by 5.8% due to higher sales prices, primarily for finished products.

The Steel, North America segment’s revenues increased by 38.6% year-on-year. Prices and volume went up by 22.6% and 14.4%, respectively. The key drivers of this growth were improved demand across product segments, particularly for tubular products driven by recovery in oil prices and drilling activity and the start of new major pipelines construction in Canada and the US.

The Coal segment’s revenues grew by 5.6% year-on-year, supported largely by higher sales volumes, which were up 4.8% due to stable demand and improved productivity at the Raspadskaya-Koksovaya mine.

Revenues, US$ million
Segment 2018 2017 Change Change, %
Steel 8,879 7,743 1,136 14.7
Steel, North America 2,583 1,864 719 38.6
Coal 2,337 2,214 123 5.6
Other operations 472 462 10 2.2
Eliminations (1,435) (1,456) 21 (1.4)
Total 12,836 10,827 2,009 18.6

Revenues by region, US$ million
Region 2018 2017 Change Change, %
Russia 4,564 4,255 309 7.3
Americas 3,009 2,201 808 36.7
Asia 2,716 2,162 554 25.6
Europe 1,426 1,128 298 26.4
CIS (excl. Russia) 936 812 124 15.3
Africa and rest of the world 185 269 (84) (31.2)
Total 12,836 10,827 2,009 18.6

In 2018, the Steel segment’s EBITDA rose due to an increase in steel and vanadium prices; 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 and auxilliary materials, including scrap, electrodes and ferroalloys.

The increase in volume and metal spreads of the Steel, North America segment’s was more than offset by the effect of tariffs and duties on Canadian large-diameter and line pipe sales into the US, as well as due to operational challenges at EVRAZ Regina facility that resulted in lower EBITDA.

The Coal segment’s EBITDA declined slightly year-on-year mainly due to higher cost per tonne amid more complex geological conditions, rise in auxiliary materials prices and higher involvement of contractors. This was partly offset by sales prices rising in line with global benchmarks; the impact of cost-cutting initiatives; and lower expenses in US dollar terms as a result of 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.

EBITDA, US$ million
Segment 2018 2017 Change Change, %
Steel 2,672 1,483 1,189 80.2
Steel, North America 14 58 (44) (75.9)
Coal 1,218 1,226 (8) (0.7)
Other operations 17 21 (4) (19.0)
Unallocated (135) (131) (4) 3.1
Eliminations (9) (33) 24 (72.7)
Total 3,777 2,624 1,153 43.9

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


Effect of Group’s cost-cutting initiatives in 2018, US$ million
Improving yields and raw material costs, including 132
Improving yields and raw material costs of Urals and Siberia divisions 74
Various improvements at coal washing plants and mines 15
Improving yields and raw material costs of North American assets and vanadium operations 43
Increasing productivity and cost effectiveness 132
Others, including 9
Reduction of general and administrative (G&A) costs and non-G&A headcount 9
Total 273

In 2018, selling and distribution expenses increased by 41.3%, mostly due to increased freight costs, tariffs imposed on steel exports to US customers of EVRAZ North America and higher sales volumes, partly offset by the weakening of the rouble. General and administrative expenses edged up by 1.o wage indexation, partly offset by the effect that rouble depreciation had on costs.

Foreign exchange gains amounted to US$361 million and were primarily related to intra-group loans denominated in roubles payable among Russian and non-russian subsidiaries. The depreciation of the Russian rouble against the US dollar in 2018 led to exchange gains mainly recognised in the income statements of EVRAZ plc and East Metals A.G., which were not offset by the exchange losses recognised in the income statements or the equity of the Russian subsidiaries.

Interest expenses incurred by the Group decreased, mainly due to the gradual reduction in total debt and the refinancing of existing indebtedness at more favourable terms during the reporting period. Gains on financial assets and liabilities amounted to US$13 million and were mostly related to gains on hedging instruments.

Revenues, cost of sales and gross profit by segment, US$ million
2018 2017 Change, %
Steel segment
Revenues 8,879 7,743 14.7
Cost of sales (5,613) (5,795) (3.1)
Gross profit 3,266 1,948 67.7
Steel, North America segment
Revenues 2,583 1,864 38.6
Cost of sales (2,215) (1,656) 33.8
Gross profit 368 208 76.9
Coal segment
Revenues 2,337 2,214 5.6
Cost of sales (1,042) (973) 7.1
Gross profit 1,295 1,241 4.4
Other operations – gross profit 15 104 (85.6)
Unallocated – gross profit (8) (8)
Eliminations – gross profit (111) (151) (26.5)
Total 4,825 3,342 44.4

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 a current income tax expense of US$679 million, compared with US$484 million a year earlier. The change reflects the Group’s better operating results and taxes withheld on dividends distributed within the Group.

Gross profit, expenses and results, US$ million
2018 2017 Change Change, %
Gross profit 4,825 3,342 1,483 44.4
Selling and distribution costs (1,013) (717) (296) 41.3
General and administrative expenses (546) (540) (6) 1.1
Impairment of assets (30) 12 (42) n/a
Foreign-exchange gains/(losses), net 361 (54) 415 n/a
Other operating income and expenses, net (69) (57) (12) 21.1
Profit from operations 3,528 1,986 1,542 77.6
Interest expense, net (341) (423) 82 (19.4)
Share of losses of joint ventures and associates 9 11 (2) (18.2)
Gain/(loss) on financial assets or liabilities, net 13 (57) 70 n/a
Loss on disposal groups classified as held for sale, net (10) (360) 350 (97.2)
Other non-operating gains/(losses), net 2 (2) 4 n/a
Profit before tax 3,201 1,155 2,046 n/a
Income tax benefit/(expense) (731) (396) (335) 84.6
Net profit 2,470 759 1,711 n/a

In 2018, net cash flows from operating activities climbed by 34.5% year-on-year. Free cash flow for the period was US$1,940 million.

Cash flow, US$ million
2018 2017 Change Change, %
Cash flows from operating activities before changes in working capital 3,063 2,111 952 45.1
Changes in working capital (430) (154) (276) n/a
Net cash flows from operating activities 2,633 1,957 676 34.5
Short-term deposits at banks, including interest 11 7 4 57.1
Purchases of property, plant and equipment and intangible assets (521) (595) 74 (12.4)
Proceeds from sale of disposal groups classified as held for sale, net of transaction costs 52 412 (360) (87.4)
Other investing activities 80 9 71 n/a
Net cash flows used in investing activities (378) (167) (211) n/a
Net cash flows used in financing activities (2,606) (1,479) (1,127) 76.2
Including dividends paid (1,556) (430) (1,126) n/a
Effect of foreign-exchange rate changes on cash and cash equivalents (48) (2) (46) n/a
Net decrease in cash and cash equivalents (399) 309 (708) n/a

Calculation of free cash flow, US$ million
2018 2017 Change Change, %
EBITDA 3,777 2,624 1,153 43.9
EBITDA excluding non-cash items 3,773 2,627 1,146 43.6
Changes in working capital (430) (154) (276) n/a
Income tax accrued (683) (485) (198) 40.8
Social and social infrastructure maintenance expenses (27) (31) 4 (12.9)
Net cash flows from operating activities 2,633 1,957 676 34.5
Interest and similar payments (298) (453) 155 (34.2)
Capital expenditures, including recorded in financing activities and non-cash transactions (527) (603) 76 (12.6)
Proceeds from sale of disposal groups classified as held for sale, net of transaction costs 52 412 (360) (87.4)
Other cash flows from investing activities 80 9 71 n/a
Free cash flow 1,940 1,322 618 46.7