Metinvest announces financial results for 2014

Metinvest B.V., the parent company of a vertically integrated group of steel and mining companies (jointly referred to as “Metinvest” or “the Group”), today announced its audited IFRS consolidated financial statements for the 12 months ended 31 December 2014.

Financial results summary	2014	2013	Change, y-o-y
			US$m	%
Income statement highlights
Revenues	10,565	12,807	-2,242	-18%
Adjusted EBITDA	2,702	2,361	341	14%
Margin	26%	18%		8 pp
Net profit	159	392	-233	-59%
Margin	2%	3%		-1 pp
Cash flow highlights
Net cash from operations	1,489	1,465	1,465	2%
Net cash used in investing activities	-559	263	-822	-313%
incl. CAPEX	-549	-763	214	-28%
Net cash used in financing activities	-1,542	-1,476	-66	4%
incl. dividends	-388	-544	156	-29%

Financial results summary	31/12/2014	31/12/2013	Change, y-o-y
			US$m	%
Total debt	3,232	4,308	-1,076	-25%
Cash at period-end	114	783	-669	-85%
Key ratios
Total debt/EBITDA	1.2	1.8		-0.6x
Net DEBT/EBITDA	1.2	1.5		-0.3x
Interest cover	11.4	9.8		1.6x
Gearing (Indebtedness / TNW)	0.5	0.4		0.1x

Notes:
1) Adjusted EBITDA is calculated as profit before income tax before finance income and costs, depreciation and amortisation, impairment and devaluation of property, plant and equipment, sponsorship and other charity payments, share of results of associates and other expenses that the management considers non-core plus share in EBITDA of joint ventures. Adjusted EBITDA will be referred to as EBITDA throughout this release.
2) Net debt is calculated as the sum of long-term and short-term loans and borrowings and seller notes less cash and cash equivalents.
3) Due to rounding, numbers presented throughout this release may not add up precisely to the totals provided and percentages may not precisely reflect absolute figures.

Production results summary	2014	2013	Change, y-o-y
			'000 t	%
Crude steel	9,205	12,391	-3,186	-26%
Azovstal	3,599	4,468	-869	-19%
Ilyich Steel	3,544	5,035	-1,491	-30%
Yenakiieve Steel	2,062	2,888	-826	-29%
Iron ore concentrate	34,888	36,926	-2,038	-6%
Northern GOK	13,420	15,000	-1,580	-11%
Ingulets GOK	15,056	15,344	-288	-2%
Central GOK	6,412	6,582	-170	-3%
Coking coal concentrate	4,098	5,513	-1,415	-26%
Krasnodon Coal	1,522	2,788	-1,266	-45%
United Coal	2,576	2,725	-149	-5%

 
OPERATIONAL AND CSR HIGHLIGHTS

• The Group began rebuilding blast furnace no. 4 at Azovstal. When completed, the modernised furnace will ultimately produce an additional 1.5 million tonnes of hot metal a year, while cutting dust emissions by 340 tonnes annually.
• Yenakiieve Steel completed the overhaul of basic oxygen furnace no. 1, improving efficiency and reliability while reducing environmental impact.
• Yenakiieve Steel also completed a standby turbine air blower at the plant in August 2014.
• Metinvest-SMC opened new retail warehouses for steel products in Kharkiv, Kyiv Region and Mykolaiv.
• The Group opened a new sales office in Romania.
• Metinvest launched its 2014 “We Improve the City” social investment competition in nine cities in the Donetsk, Dnipropetrovsk and Luhansk regions. The annual competition allows local stakeholders to select and obtain funding for projects that promise to make the greatest difference to the lives of local residents.
• In the second half of 2014, the Group was affected by the conflict in parts of the Donetsk and Luhansk regions, as well as instances directly affecting Mariupol, where the Group’s main steel plants are located. In particular, the Group has experienced periodic interruptions in its production and supply chains, mainly due to logistical and electricity-related issues in the regions. This resulted in temporary suspensions or reduced volumes of production, beginning in the second half of August, worsening later in the year and continuing to the present.

CORPORATE STRUCTURE HIGHLIGHTS

•  In February, MetalUkr Holding Limited (Cyprus), a wholly owned subsidiary of Metinvest B.V., transferred 78.31% of Northern GOK, 99.48% of Central GOK, 0.25% of Azovstal and 1.21% of Khartsyzk Pipe to Metinvest B.V. to help the Group to reach its intended structure and improve business transparency and management efficiency.
• In July, the Group entered into numerous transactions with Smart Holding to acquire an effective interest of 46% in Southern GOK and non-controlling interests of 16.1% in Northern GOK and 14.1% in Ingulets GOK.
• In July, SCM and Smart Holding announced the completion of the merger of their metals and mining assets into the jointly managed Metinvest B.V. The two parties signed a shareholder agreement outlining the relevant and proportional corporate governance rights of each in Metinvest B.V. In addition, to conclude the transaction, Metinvest B.V. issued an additional share in favour of Smart Holding. As a result, SCM’s stake in Metinvest B.V. will be 71.24%, Smart Holding will own 23.76%, and Clarendale Limited (affiliated with the former owners of Ilyich Steel) will retain 5%.
• During April-July, the Group invested in total US$20 million and increased its share in Black Iron (Cyprus) Limited to 49%. Black Iron (Cyprus) Limited and Metinvest retain an option to participate in developing the Shymanivske iron ore project and Zelenivske iron ore project, representing a potential future investment of up to US$536 million for the Group.

Results of operations	12M14		12M13		Change, YoY
	US$m	% of revenue	US$m	% of revenue	US$m	%
Revenue	10,565	100%	12,807	100%	-2,242	-18%
Cost of sales	-8,240	-78%	-10,406	-81%	2,166	-21%
Gross Profit	2,325	22%	2,401	19%	-76	-3%
Selling expenses	-1,063	-10%	-1,121	-9%	58	-5%
General and administrative expences	-287	-3%	-391	-3%	104	-27%
Other operating income	130	1%	137	1%	-7	-5%
Operating Profit	1,105	10%	1,026	8%	79	8%
Finance income	25	0%	66	1%	-41	-62%
Finance costs	-902	-9%	-341	-3%	-561	165%
Share of results of associates and JV	142	1%	14	0%	128	914%
Profit before income tax	370	4%	765	6%	-395	-52%
Income tax	-211	-2%	-373	-3%	162	-43%
Net Profit	159	2%	392	3%	-233	-59%

Revenues
Metinvest’s revenues are generated from sales of its steel, iron ore and coal and coke products and re-sales of products from third parties. Unless otherwise stated, revenues are shown net of value-added tax and discounts and after eliminating sales within the Group.

Revenues by markets	2014		2013		Change, y-o-y
	US$m	% of revenues	US$m	% of revenues	US$m	%
Total revenues	10,565	100%	12,807	100%	-2,242	-18%
Ukraine	2,496	24%	3,678	29%	-1,182	-32%
Europe	2,496	24%	3,678	29%	-1,182	-32%
MENA	1,872	18%	2,166	17%	-294	-14%
CIS	1,074	10%	1,473	12%	-399	-27%
incl. Russia	721	7%	1,065	8%	-344	-32%
Southeast Asia	1,666	16%	1,956	15%	-290	-15%
Nort America	405	4%	331	3%	74	23%
Other regions	102	1%	119	1%	-17	-14%

In 2014, Metinvest's consolidated revenues fell by US$2,242 million y-o-y to US$10,565 million. Revenues from the Metallurgical division dropped by 16%, while those from the Mining division declined by 22%, mainly due to a slump in crude steel output followed by lower volumes sold and lower prices for iron ore products. The Metallurgical division accounted for 77% of external sales (76% in 2013) and the Mining division for 23% (24% in 2013).

In 2014, Metinvest’s revenues from Ukraine decreased by US$1,182 million y-o-y to US$2,496 million, or 24% of consolidated revenues. The main driver of the decrease in revenues was a drop in sales volumes of steel and iron ore products year-on-year amid lower demand in major steel consuming sectors (construction, machine-building and pipeline infrastructure) amid the conflict in eastern Ukraine and overall economic slowdown.

 Steel production in Ukraine decreased by 17.1% y-o-y to 27.2 million tonnes ¹ in 2014, as the domestic steel market remained weak and demand for Ukrainian steel products declined in Russia. In addition, consumption of steel products (excluding pipes) in Ukraine decreased by 22.2% y-o-y to 5.6 million tonnes. The main factor was a decline in construction, which fell by 20.4% y-o-y as Ukrainian businesses reduced capital expenditures amid financial instability and the conflict in the eastern regions. Another contributing factor was the crisis in the machine-building industry, which shrank by 20.6% y-o-y primarily due to a drop in orders from the Commonwealth of Independent States (CIS, excluding Ukraine). Notably, production of railcars in Ukraine fell by 76.2% y-o-y to 6.0 thousand units, while the pipe and hardware industries reduced production by 19.7% y-o-y and 19.0% y-o-y respectively.

 Regarding iron ore, a couple of Metinvest’s key customers in Ukraine decreased production dramatically during 2014 due to significantly lower domestic sales of iron ore products.

Amid the drop in domestic sales, the share of international sales at Metinvest increased by 5 pp y-o-y to 76% in 2014. Europe’s share rose by 4 pp y-o-y to 28% due to increased sales of flat products and pig iron. The proportion of sales to the Middle East and North Africa (MENA) rose by 1 pp y-o-y to 18%. The share of the CIS (ex Ukraine), mainly Russia, fell by 1 pp y-o-y to 10% amid lower volumes of flat and long products, mainly to Russia, which was partly compensated by greater sales of large-diameter pipes (LDP) to Turkmenistan and Kazakhstan. The proportion of sales to Southeast Asia grew by 1 pp y-o-y to 16% due to higher sales volumes of pellets. North America’s share rose by 1 pp y-o-y to 4% due to increased sales of pig iron.

Metallurgical division

The Metallurgical division generates revenues from sales of pig iron, steel and coke products and services. In 2014, its revenues decreased by US$1,562 million y-o-y to US$8,165 million. Sales of long products fell by US$766 million, flat products by US$632 million, slabs and billets by US$292 million, and coke and chemical products by US$131 million. This was partly compensated by increases in sales of pig iron by US$138 million and tubular products by US$156 million, primarily driven by higher volumes.

Metallurgical division Sales by market	12M14			12M13			Change, YoY		Change, YoY %
	US$m	% of revenue	'000 t	US$m	% of revenue	'000 t	US$m	'000 t	US$m	'000 t
Metallurgical division	8,165	100%	14,764	9,727	100%	16,816	-1,562	-2,052	-16%	-12%
Ukraine	1,578	19%	3,254	2,330	24%	4,092	-752	-838	-32%	-20%
Europe	2,751	34%	4,648	2,761	28%	4,635	-10	13	0%	0%
MENA	1,872	23%	3,476	2,131	22%	3,943	-259	-467	-12%	-12%
CIS	1,073	13%	1,628	1,471	15%	2,113	-398	-485	-27%	-23%
incl. Russia	721	9%	1,202	1,065	11%	1,714	-344	-512	-32%	-30%
Southeast Asia	516	6%	922	792	8%	1,482	-276	-560	-35%	-38%
North America	281	3%	677	153	2%	393	128	284	84%	72%
Other regions	94	1%	159	89	1%	158	4	2	5%	1%

Metallurgical division Sales by product	12M14		12M13		Change, YoY		Change, YoY %
	US$m	'000 t	US$m	'000 t	US$m	'000 t	US$m	due to price	due to volume
Semi-finished products	1,324	2,826	1,478	3,064	-154	-237	-10%	-3%	-8%
Pig iron	490	1,226	352	874	138	352	39%	-1%	40%
Slabs	483	916	717	1,417	-234	-500	-33%	3%	-35%
Square bi llets	351	684	408	773	-58	-89	-14%	-3%	-12%
Finished products	6,004	9,788	7,245	11,471	-1,242	-1,683	-17%	-2%	-15%
Flat products	4,550	7,583	5,182	8,543	-632	-960	-12%	-1%	-11%
Flat products - Zaporizhstal	1,557	2,794	1,467	2,567	90	227	6%	-3%	9%
Long products	1,216	1,965	1,982	2,846	-766	-881	-39%	-8%	-31%
Tubular products	237	240	81	82	156	158	191%	-2%	193%
Coke and chemical products	463	2,151	594	2,281	-131	-131	-22%	-16%	-6%
Coke products	290	1,664	334	1,678	-44	-14	-13%	-12%	-1%
Chemical products	172	486	259	604	-87	-117	-34%	-14%	-19%
Other products and services	376	N/A	410	N/A	-35	N/A	-8%	N/A	N/A
Total Met Division Sales	8,165	14,764	9,727	16,816	-1,562	-2,051	-16%	-4%	-12%

Pig iron

Despite a production decline in the third quarter due to raw material supply constraints at Azovstal and Ilyich Steel and the shutdown of operations at Yenakiieve Steel caused by the conflict in eastern Ukraine, sales of pig iron amounted to US$490 million in 2014, up 39% y-o-y. This increase was wholly attributable to greater sales volumes of 284 thousand tonnes to the US. Average selling prices remained unchanged, in line with the benchmark quotations for pig iron CIF USA, which were also stable y-o-y. The rise in sales volumes was in line with a 39% y-o-y increase in production of merchant pig iron. Overall, North America accounted for 82% of the sales growth. The rise in US sales was due to Metinvest maintaining its presence in the market, delayed payments being made and regular contracts being signed with key customers. Sales in Europe rose by 45% y-o-y, mainly due to work with regular customers in Italy, including the granting of indulgence.

Slabs

 In 2014, revenues from slabs slumped by 33% to US$483 million as sales volumes decreased by 35%, despite a slightly higher effective average selling price. Volumes fell by 500 thousand tonnes y-o-y to 916 thousand tonnes. This was mainly caused by a decline in volumes to Southeast Asia due to lower production volumes overall and the fact that the region is a swing buyer of steel products.

Square billets

In 2014, revenues from square billets decreased by 14% to US$351 million, as sales volumes fell by 12% and the effective average selling price declined. Sales volumes dropped by 89 thousand tonnes y-o-y to 684 thousand tonnes, largely due to production falling as the conflict intensified in the second half of the year. Average selling prices followed the trend of billet FOB Black Sea quotations, which also dropped by 3% y-o-y.

Flat products

 In 2014, revenues from flat products decreased by 12% y-o-y to US$4,550 million, as sales volumes declined by 11% (960 thousand tonnes) and the effective average selling price by 1%. Shipments to Ukraine, the CIS (ex Ukraine) and MENA were all down. On the domestic market, sales volumes dropped by 430 thousand tonnes y-o-y amid the conflict, crisis in the machine-building sector and hryvnia devaluation. In the CIS (ex Ukraine), the main reason for the drop in sales volumes, which fell by 240 thousand tonnes, was lower sales to Russia due to economic reasons: weak apparent consumption (down 1.3%), the fall in the ruble (down 46% against the dollar during 2014), the launch of new rolling facilities, and greater competition in Russia (Kashira steel galvanising plant put into operation). Volumes to MENA dropped by 253 thousand tonnes amid a decline in overall production and an implementation of new capacities in Turkey.

We note that the 11% decline in sales volumes cannot be directly compared with the 21% fall in output in 2014. The Group increased re-sales of flat products from Zaporizhstal by 227 thousand tonnes (the plant’s share in Metinvest’s sales of flat products increased by 6 pp y-o-y to 34%), and the sales volumes in 2014 included 163 thousand tonnes from stock. Effective average selling prices were largely in line with the benchmark quotations for HRC export FOB Black Sea.

Long products

In 2014, revenues from long products decreased by 39% y-o-y to US$1,216 million, as sales volumes declined by 31% and the average effective average selling price by 8%. Sales volumes decreased by 881 thousand tonnes y-o-y due to a drop in production amid the conflict in eastern Ukraine. Sales volumes to Russia fell,  mainly as demand for long products shrank and the market became less attractive overall due to the ruble devaluation, the launch of new rolling facilities and the overall strengthening of competition in Russia (NLMK Kaluga). Sales volumes of long products in other CIS countries (ex Ukraine) also declined y-o-y due to the termination of railway product sales in Kazakhstan and Belarus in 2014 (which caused a y-o-y decline of 147 thousand tonnes overall) ahead of the implementation of Russian technical standards for rails inside the Eurasian Economic Union. Sales volumes in Ukraine dropped by 411 thousand tonnes following an overall decrease in crude steel production at Yenakiieve Steel, a decrease in rolled steel demand amid the conflict and the economic slump.

Tubular products

In 2014, revenues from tubular products increased by 191% y-o-y to US$237 million, as sales volumes increased by 193% and the effective average selling price dipped slightly. Sales volumes rose by 158 thousand tonnes y-o-y to 240 thousand tonnes, mainly due to greater sales volumes to the CIS (ex Ukraine), which grew by 121 thousand tonnes and accounted for almost 95% of the overall figure. That increase was mainly attributable to orders for the second phases of both the East-West pipeline project in Turkmenistan and the Beineu-Shymkent project in Kazakhstan.

We note that the 193% y-o-y increase in sales volumes (from 82 thousand tonnes to 240 thousand tonnes) cannot be directly compared with the 6% decrease in output (from 315 thousand tonnes to 296 thousand tonnes), because in 2013, the Group produced 178 thousand tonnes of LDP via tolling agreements that were included in output, but not in sales volumes.

Coke and chemical products

In 2014, revenues from coke and chemical products decreased by US$131 million y-o-y to US$463 million, as sales volumes fell by 6% and the effective average selling price decreased by 16%. Sales volumes decreased by 131 thousand tonnes y-o-y to 2,151 thousand tonnes, primarily due to a slump in coke output in 2H 2014 after operations at Avdiivka Coke became restricted starting from July 2014. The selling price decline followed coal price trends and an increase in the share of less expensive coke breeze in total coke and chemical product volumes of 19 percentage points to 73% in 2014. Only in North America and MENA was the price trend positive, as the share of premium chemical products in total sales of coke and chemical products rose to 100%.

Mining division

The Mining division generates revenues from sales of iron ore, coal and other products and services. In 2014, its revenues decreased by US$680 million y-o-y to US$2,400 million. Revenues from sales of iron ore products fell by US$494 million and revenues from sales of coking coal concentrate by US$103 million y-o-y. 

Metallurgical division Sales by market	12M14			12M13			Change, YoY		Change, YoY %
	US$m	% of revenue	'000 t	US$m	% of revenue	000 t	US$m	'000 t	US$m	'000 t
Mining division	2,400	100%	23,746	3,080	100%	24,250	-680	-504	-22%	-2%
Ukraine	918	38%	9,366	1,348	44%	11,528	-431	-2,161	-32%	-19%
Europe	199	8%	2,217	323	10%	2,700	-124	-482	-38%	-18%
MENA	0	0%	0	35	1%	233	-35	-233	-100%	-100%
CIS	1	0%	1	2	0%	0	-1	1	N/A	N/A
incl. Russia	0	0%	0	0	0%	0	-1	1	N/A	N/A
Southeast Asia	1,150	48%	10,908	1,164	38%	8,237	-14	2,672	-1%	32%
North America	124	5%	1,170	178	6%	1,349	-53	-179	-30%	-13%
Other regions	7	0%	84	30	1%	205	-23	-121	-76%	-59%

Mining division Sales by product	12M14		12M13		Change, YoY		Change, YoY %
	US$m	'000 t	US$m	'000 t	US$m	'000 t	US$m	due to price	due to volume
Iron ore products	2,128	21,961	2,621	21,931	-494	30	-19%	-19%	0%
Merchant iron ore concentrate	1,156	13,571	1,518	13,937	-362	-366	-24%	-21%	-3%
Pellets	972	8,390	1,104	7,993	-132	396	-12%	-17%	5%
Coal products	172	1,786	275	2,158	-103	-372	38%	-20%	-17%
Coking coal concentrate	172	1,786	275	2,158	-103	-372	38%	-20%	-17%
Other products and services	101	N/A	184	162	-83	N/A	-45%	N/A	N/A
Total Mining Division Sales	2,400	23,746	3,080	24,250	-680	-504	-22%	-20%	-2%

Iron ore concentrate

In 2014, revenues from merchant iron ore concentrate declined by 24% y-o-y to US$1,156 million due to a 3% drop in sales volumes and a 21% decline in the effective average selling price. The latter dropped by 13% in Ukraine, 26% in Europe and 30% in Southeast Asia, following the Platts benchmark for 62% Fe iron ore fines CFR China, which decreased by 28% y-o-y. Sales volumes declined by 667 thousand tonnes in Ukraine and 255 thousand tonnes in Europe. The fall in domestic sales was due to a halt in production by a key client for iron ore concentrate amid the conflict in Eastern Ukraine. Metinvest successfully redirected most of the iron ore concentrate for Ukraine and Europe to Southeast Asia, raising its sales volumes in that region by 555 thousand tonnes y-o-y.

Pellets

In 2014, revenues from pellets decreased by 12% y-o-y to US$972 million, as the effective average selling price fell by 17% and sales volumes increased by 5%. Sales volumes rose by 396 thousand tonnes y-o-y to 8,390 thousand tonnes as inventory accumulated at the end of 2013 was destocked in 2014. Sales of pellets in Southeast Asia grew by 2,116 million tonnes y-o-y, mainly due to changes in the Group’s needs for raw materials and the redistribution of volumes from Ukraine (1,294 thousand tonnes) and Europe (194 thousand tonnes) amid lower demand. The effective average selling price in Southeast Asia dropped by 24% y-o-y, tracking the 28% decline in the Platts benchmark, which was partly compensated by new contracts with higher premiums on pellets.

Coking coal concentrate

 In 2014, revenues from coking coal concentrate dropped by 38% y-o-y to US$172 million, as sales volumes declined by 17% and the effective average selling price by 20%. Sales volumes fell by 372 thousand tonnes y-o-y, primarily due to United Coal’s volumes being redirected from external sales to internal consumption in response to logistical disruptions in supplies from Krasnodon Coal caused by the conflict in Eastern Ukraine. The effective average selling price decreased by 20% y-o-y due to trends in international market prices: the average quarterly contract price for hard coking coal FOB Australia fell by 21% y-o-y.

Cost of sales

Metinvest’s cost of sales consists primarily of the cost of raw materials and energy, including gas and electricity; payroll and related expenses for employees; amortisation and depreciation; repair and maintenance expenses; outsourcing; taxes; and other costs.

In 2014, Metinvest’s consolidated cost of sales declined by US$2,166 million y-o-y to US$8,240 million. The decrease was primarily driven by (i) favourable movements in the USD/UAH exchange rate, which accounted for US$1,142 million, and other factors excluding the forex effect; (ii) lower prices and consumption volumes of key raw materials, which saved US$879 million; (iii) a decline in energy costs of US$267 million, in particular, a reduction in natural gas consumption (US$135 million) and favourable gas price fluctuations (US$104 million); (iv) the change in WIP and FG amounted to minus US$229 million in 2014 due to a reversal of unrealised profit stemming from a decline in sales prices, partly offset by a decrease in physical stocks at steelmakers. In contrast, in 2013, the change in WIP and FG amounted to plus US$140 million as a result of higher sales volumes than production volumes in 2013. This was due to a shipment of steel products from stocks accumulated by Metinvest’s traders due to the market recovery, a shipment of iron ore products from stocks following favourable prices and strong demand in Europe and Southeast Asia, and a shipment of slabs from stocks accumulated by Ferriera Valsider, Trametal and Spartan and billets from Promet Steel’s stocks; and (v) a decrease in depreciation and amortisation of US$189 million.

The increase in the cost of sales were partly offset by the following factors excluding the forex effect (i) a rise of US$374 million in the cost of goods and services for resale, mainly flat products from Zaporizhstal; (ii) an increase in wages and salaries of US$154 million; (iii) a rise in impairment charges of U$110 million, attributable to Krasnodon Coal, United Coal and Central GOK; (iv) an increase in logistics costs of US$39 million and other costs of US$153 million.

As a percentage of consolidated revenues, cost of sales fell to 78% in 2014, from 81% a year earlier.

Distribution costs

Distribution costs consist largely of transportation costs, salaries paid to sales and distribution employees, and commissions paid by Metinvest’s European subsidiaries to third-party sales agents and trade offices for their services and costs of materials.

In 2014, distribution costs decreased by US$58 million y-o-y to US$1,063 million. This was mainly due to a y-o-y decline in transportation expenses and a positive effect from changes in the hryvnya exchange rate, which mainly affected wages and salaries, depreciation and amortisation, and other distribution costs. The decrease of US$40 million in transportation expenses was attributable to the declines in sales volumes of 12% in the Metallurgical division and 2% in the Mining division.

 As a share of consolidated revenues, distribution costs increased y-o-y by 1 percentage point to 10% in 2014.

General and administrative costs

 General and administrative costs consist largely of salaries paid to administrative employees; consultancy fees; audit, legal and banking services expenses; insurance costs; and lease payments.

In 2014, general and administrative expenses decreased by US$104 million to US$287 million, as wages and salaries fell due to the hryvnya’s devaluation, while spending on professional services and other costs dropped by US$51 million y-o-y due to the ongoing crisis. The former came despite an overall average salary increase of 10% following the annual review on 1 April 2014 and another 17% at the production enterprises on 1 June 2014.

 As a share of consolidated revenues, general and administrative expenses remained unchanged y-o-y and accounted for 3%.

Other operating income/expenses, net

 Other operating income and expenses consist primarily of sponsorship and other charity expenses, operating foreign exchange gains less losses, maintenance of social infrastructure, gains or losses on the disposal of property, plant and equipment, and gains or losses on sales of inventory. Social infrastructure expenses and sponsorship and other charity expenses include items such as maintenance of medical centres and recreational centres         

 In 2014, other operating income decreased by US$7 million to US$130 million. The y-o-y decrease was primarily attributable to an impairment charge of relating to goodwill and impairment of trade and other receivables that was almost fully offset by higher operating net forex gains, mainly due to the hryvnya’s fall and subsequent forex income from the revaluation of trade receivables and payables.

As a share of consolidated revenues, other operating income remained unchanged y-o-y and accounted for 1%.

Operating profit

 In 2014, operating profit rose by 8% y-o-y to US$1,105 million, giving a corresponding margin of 10%, compared with US$1,026 million and 8% in 2013. The y-o-y increase of US$79 million primarily reflected the reductions in cost of sales (US$2,166 million), distribution costs (US$58 million) and general and administrative expenses (US$104 million), which were was almost fully compensated by the falls in revenues (US$2,242 million) and other operating income (US$7 million).

EBITDA

In 2014, EBITDA rose by US$341 million y-o-y to US$2,702 million, giving a margin of 26%, up from US$2,361 million and 18% in 2013. The absolute increase reflected the greater contribution from the Metallurgical division, which was up US$849 million, while EBITDA from the Mining division fell by US$498 million y-o-y (both figures include the contribution of the share in EBITDA of the joint ventures). The EBITDA margin in the Metallurgical division increased to 14%, from 3% in 2013, while in the Mining division it remained unchanged at 43%.

EBITDA by segments	12M14		12M13		Change, YoY
	US$m	% of segment revenue	US$m	% of segment revenue	US$m	pp of segment revenue
Metallurgical segment	1,123	14%	274	3%	849	11
Mining segment	1,754	43%	2,252	43%	-498	0
Corporate o/hs & eliminations	-175		-165		-10
Total EBITDA	2,702	26%	2,361	18%	341	8

Finance income

Finance income includes interest income on bank deposits and loans issued, imputed interest on other financial instruments, gains from early repayment of assets and other finance income.

In 2014, Metinvest’s finance income amounted to US$25 million, down US$41 million y-o-y. The decline was largely attributable to income from imputed interest on other financial instruments (interest income on amortization of discount on financial assets) falling by US$13 million, other financial income falling by US$18 million due to recognised gain in 2013 on early repayment of loans issued and interest income from loans issued declining by US$8 million.

As a percentage of consolidated revenues, finance income decreased to 0.2% in 2014, from 1% in 2013.

Finance costs 

Finance costs include interest expenses on bank borrowings, debt securities and imputed interest, foreign exchange net losses from intragroup loans and dividends payable, interest cost on retirement benefit obligations and other finance costs

 In 2014, finance costs amounted to US$902 million, up US$561 million y-o-y. The rise was driven by a net foreign exchange loss from financing of US$593 million, which was attributable to intragroup dividends and loans denominated in US dollars. At the same time, interest expense on retirement obligations decreased by US$20 million to US$70 million in 2014 as a result of hryvnya devaluation. All other items that constitute finance expenses remained broadly unchanged y-o-y.

As a percentage of consolidated revenues, finance costs increased to 9%, from 3% in 2013.

Share of results of associates and joint ventures

In 2014, the share of net income from associates and joint ventures increased by US$128 million to US$142 million, largely due to a rise in net income at Zaporizhstal (US$50 million) and the inclusion of the net income of Southern GOK (US$85 million), which did not contribute in 2013.

Income tax expense

In accordance with the Tax Code of Ukraine, the current income tax rate in Ukraine is 18%. Metinvest’s overall income tax rate derives from the rates applicable to profits in the jurisdictions where it operates (Ukraine, the US and countries in Europe).

 In 2014, the income tax expense decreased by US$162 million to US$211 million. The fall stemmed mainly from a drop in current tax to US$198 million, from US$394 million in 2013, due to lower profitability, foreign exchange differences and a reduction in the corporate income tax rate in Ukraine from 19% in 2013 to 18% in 2014. These factors were partly offset by higher deferred tax of US$13 million in 2014, compared with minus US$21 million in 2013, due to a write-off of deferred tax assets. Metinvest's effective tax rate, calculated as income tax expense divided by profit before income tax, was 57% in 2014, compared with 49% in 2013.

Net profit

In 2014, net income dropped by US$233 million y-o-y to US$159 million mainly due to higher finance costs. As a result, the net margin totalled 2%, compared with 3% in 2013.

LIQUIDITY AND CAPITAL RESOURCES

Net cash from operating activities

In 2014, Metinvest’s net cash flow from operating activities increased by 2% y-o-y to US$1,489 million from US$1,465 million in 2013. The main reason for the rise was a lower increase in working capital (US$18 million), which was primarily attributable to an increase in inventories of US$267 million, partly offset by a rise in accounts payable of US$40 million and fall in accounts receivable of US$211 million. The increase in inventories was due to growth in iron ore and steel product stocks amid the conflict in eastern Ukraine and weaker markets, primarily the domestic one, during 2014. The decrease in trade receivables was primarily related to a fall in trade receivables from Zaporizhstal (US$229 million).

Net cash used in investing activities

In 2014, Metinvest used US$559 million of cash in investing activities, compared with US$263 million of cash generated from investing activities in 2013. This was driven by the settlement of receivables for bonds, promissory notes and deposit certificates (US$409 million) and for subsidiaries and associates (US$277 million) sold to related parties in prior periods, which together with some other items was offset by US$952 million in financing activities, used to pay for non-controlling interests in subsidiaries. The settlements relate to the transfers of stakes from SCM Group and Smart Holding to Metinvest in July 2013: 15.0% of Northern GOK, 23.5% of Central GOK, 26.0% of Zaporizhia Coke, 31.3% of Donetsk Coke, 40.0% of Yenakiieve Coke and 3.1% of Ingulets GOK, as part of the ongoing restructuring of Metinvest’s business.

 The increase in cash used for investing activities was partly offset by lower purchases of PPE and intangible assets due to changes in Metinvest's capital expenditure programme (US$214 million).

Net cash used in financing activities

In 2014, net cash used in financing activities increased by US$66 million y-o-y to US$1,542 million. This was primarily attributable to: (i) higher repayments of loans and borrowings, the total of which rose by 75% from US$542 million in 2013 to US$951 million in 2014 due to the start of repayments under three corporate term loan facilities in 2014 (US$1 billion, US$325 million and US$560 million) and repayment of a US$74 million non-bank loan in the third quarter of 2014; (ii) an increase in repayments of trade financing of US$557 million y-o-y to US$484 million, from proceeds of US$73 million in 2013. These factors were partly offset by: (i) lower dividend payment of US$156 million; (ii) lower proceeds from loans and borrowings of US$133 million, and; (iii) lower settlements for non-controlling interests in subsidiaries of US$877 million made in 2013.

As at 31 December 2014, total debt (loans, borrowings and seller notes) stood at US$3,232 million, down 25% from a year earlier.

 As a result of the abovementioned factors, Metinvest’s cash balance stood at US$114 million as at 31 December 2014, down 85% from a year earlier.

Capital expenditure

Metinvest is implementing a strategic capital expenditure programme aimed at modernising its production facilities to increase their efficiency. Capital expenditure decreased by 18% y-o-y to US$613 million in 2014. The Metallurgical division accounted for 45% of capital expenditure (42% in 2013) and the Mining division for 50% (48% in 2013).

In 2014, Metinvest continued implementing numerous investment projects in line with the Technological Strategy adopted in 2012 and updated in 2013. The 2014 capital investment programme was less than budgeted due to financing constraints and limited access to external financing, as well as the rescheduling of some projects in the conflict zone. The key investment projects are described below.

Metallurgical division

Major investment projects in 2014 (some of which continue to date) included: the continued construction of infrastructure for a new air separation unit at Yenakiieve Steel, as part of a joint venture with France’s Air Liquide, and the completion of a major overhaul of basic oxygen furnace no. 1, including the replacement of shell and off-gas ducts, in July; completion of construction of a standby turbine air blower for blast furnaces nos. 3 and 5 at Yenakiieve Steel in August; and the continued major overhaul of blast furnace no. 4, due to be completed in 2Q 2015.

Some projects were halted in the second half of the year, including construction of the PCI facilities at Yenakiieve Steel and Azovstal. The project at Yenakiieve Steel was more than 50% complete at the end of 2014, while the work at Azovstal was halted in its preliminary stages in January 2015, after the reporting period. In the same month, a project to replace turbine air blower at Azovstal also was frozen.

Mining division

Metinvest continues to implement investment programmes at Northern GOK, Ingulets GOK and Central GOK. These include the development of deep-quarry crusher and conveyor technology and the construction of the required facilities at Northern GOK and Ingulets GOK. Other notable ongoing projects are the reconstruction of the pelletising machines at Northern GOK.

¹ Source: Metal Expert