OREANDA-NEWS. September 4, 2008. Financial Results for the six months ended 30 June, 2008

(USD million unless otherwise stated)

  H1 2008   H1 2008 Change, y-o-y 
 Revenue  10.547 7.739  36.3% 

 Profit from

operations

  2.254  1.678  34.3%
 EBITDA  2.784  2.071  34.4%
 Net profit  1.940  1.148  69.0%
 EPS, USD  1.92  1.14  68.4%
 DPS, USD  0.97  0.49  98.0%

Notes:

1 EBITDA represents profit from operations plus depreciation and amortisation adjusted for gain (loss) on disposals of property plant and equipment

2 Net profit attributable to shareholders

3 Dividends announced on the basis of respective period results, translated at the exchange rate as of the date of recommendation by Board of Directors
4 H1 2007 numbers have been restated to reflect the consolidation of Severstal Columbus (formerly SeverCorr) as of 1 January, 2007 and to reflect the change in the accounting policy for property, plant and equipment from the revaluation model to the cost model

OAO Severstal (LSE: SVST; RTS: CHMF), today reports results for the six months to 30 June 2008. 

H1 2008 Highlights:

Revenues up 36.3% to a record USD 10,547 million
EBITDA of USD 2,784 million, up 34.4% year-on-year
69% increase in net profit, including significant non-recurring one-off gains:
USD 219 million negative goodwill gain from acquisition of Sparrows Point
USD 255 million net gain from the sale of Kuzbassugol
EPS up to USD 1.92 from USD 1.14 year-on-year a 68.4% increase
Strong domestic and global demand for coking coal and iron ore drive excellent performance in Severstal Resources
Positive pricing environment for steel products lifts EBITDA at Russian Steel and  Severstal International
Breakthrough achieved in the scale and capability of our North American business
Q2 dividend per share of USD 0.75, or 18.35 rubles, a 98.0% increase in dollar terms in H1 2008 year-on-year, reflecting significant increase in net profit in H1 2008 compared with H1 2007


Note: Comparable periods are H1 2008 on H1 2007 

Alexey Mordashov, CEO of OAO Severstal, said, “I am pleased to report very good interim results across all divisions. We grew significantly in all our markets in the first half of the year driven by both price increases and volume growth.”
“Our most important strategic initiative so far this year has been to enlarge the scope and scale of our North American operations, making them a significant part of the company’s business.”
“We are now well positioned as an international player with a strong balance sheet and an integrated business model. With a favourable outlook for pricing, we are confident in our ability to deliver strong results for the full year 2008. We expect EBITDA for the year to be within the range of USD 5.8 to USD 6.1 billion.”

Chief Executive’s Review
Severstal Resources
Severstal Resources saw an 83.2% rise in EBITDA year-on-year from USD 291 million to USD 533 million, benefiting from increases in coal and iron ore prices, especially in Q2 2008. Positive changes in the production mix and increased production in Q2 compared with Q1 at our Vorkutaugol mine improved the financial results of this division.

Last month we entered into an agreement to acquire PBS Coals, a Pennsylvania-based coal company. Securing the stable supply of high-quality of raw materials, both iron ore and coal, is critical if we are to maximise the full potential of our U.S. business. The acquisition of PBS will help ensure that Severstal controls its operating costs by providing a guaranteed supply of coking coal for our coke-making operations in the U.S. The integration of our upstream production, from coal and coke making to steel making, will allow us to sustain profitability through-cycle and return value to shareholders.

Severstal Russian Steel
In H1 2008 Russian Steel benefited from favourable prices, a strong domestic market, increased export prices and growth in production volumes. This resulted in a 8.9% increase in EBITDA for the segment year-on-year from USD 1,402 million to USD 1,527 million. We also saw strong growth in profitability in the second quarter compared with the first.

Our Izhora Pipe Mill also demonstrated significant year-on-year growth, with EBITDA increasing 238.5% to USD 132 million in H1 2008 from USD 39 million in H1 2007. EBITDA margin increased from 24.6% in H1 2007 to 30.6% in H1 2008. Pipe production was higher year-on-year and quarter-on-quarter due to strong demand and significant price increases.

Severstal International


In Severstal International, our North American operations achieved USD 228 million of EBITDA including USD 128 million of one-off events in H1 2008 compared with USD 38 million of EBITDA in H1 2007. Severstal Columbus (formerly SeverCorr) reached its projected capacity in seven months from start up, the most rapid ramp-up in the steel industry. The results of North American operations in H1 2008 were stronger than our projections for H1 2008, especially in Q2 2008. Both Dearborn and Columbus had a strong second quarter due to favourable pricing and solid demand. 

Strong prices and an increase in production volumes supported very positive results in our North American operations, with average selling prices up by 23.6% quarter on quarter. By enhancing our product offer for non-automotive customers, we significantly increased revenues from other sectors of the North American market, successfully diversifying our customer base.  

Our strategy has provided us with a strong platform in the U.S., the second largest steel market in the world. We consolidated Severstal Columbus (formerly SeverCorr) where we now own 91.8%, and, in May 2008, we acquired Sparrows Point. In July 2008, we acquired a 100% stake in WCI Steel Inc and in August 2008, we acquired 100% stake in Esmark. With our recent acquisitions and the Severstal Columbus greenfield project, Severstal has created the 4th largest steel producer in the U.S. with an annual crude steel production capacity of 12.2 million tonnes, and further upside potential of 13.7 million tonnes per year by the end of 2009. 

Our current objective is the integration of our existing and recently acquired assets into a combined company geographically balanced between the mature markets in the Northern United States and the fast-growing markets in the Southern States.  Our immediate focus is to realise the expected synergies through optimising our manufacturing facilities and product offerings, growing market share, reducing conversion costs and controlling the input cost base.

In our European operations, EBITDA in H1 2008 at Lucchini increased by 18.6% compared with the same period last year. This was due to price increases for finished goods, offset by inflation in raw materials. Revenues were up by 14.3%, and EBITDA margin increased to 14.5% from 14.0% in H1 2007. The European market remains strong and we are positive on the outlook for the remainder of 2008.

In all divisions, we maintained a strong focus on cost control measures and efficiency improvements. This ensures that we sustain our margins in an environment of rising energy and raw materials costs.

Financial Summary for 6M ended 30 June 2008


Severstal’s consolidated revenues increased by 36.3% to USD 10,547 million in the first half of 2008 compared with USD 7,739 million in H1 2007. Strong price increases and volume growth were the main drivers of this growth.

Cost of sales were USD 7,393 million in the first half of 2008 compared with USD 5,186 million for the same period of 2007, an increase of 42.6%, caused primarily by sector wide increases in the costs of raw materials. Cost of sales as a percentage of consolidated revenues increased to 70.1% in H1 2008 compared with 67.0% in H1 2007. Raw materials price inflation occurred mainly in Q1 with exception of Lucchini, where new contract prices were introduced in Q2 2008.

Gross profit increased by 23.6% to USD 3,154 million in the first half of 2008 compared with USD 2,552 million for the same period of 2007. This increase was due to strong prices for coking coal, iron ore and steel products, as well as higher production volumes. Profit from operations increased by 34.3% to USD 2,254 million in the first half of 2008. Group operating margin decreased slightly to 21.4% in H1 2008 from 21.7% in H1 2007. 

Consolidated EBITDA increased by 34.4% to USD 2,784 million in the first half of 2008 from USD 2,071 million in the first six months of 2007. This growth was driven largely by the performance of Severstal Resources and North America which demonstrated 83.2% and 500.0% growth respectively. Russian Steel achieved an 8.9% increase in EBITDA year-on-year.

In the first half of 2008, Severstal reported an increase in consolidated net profit attributable to shareholders of 69.0% to USD 1,940 million from USD 1,148 million in the first half of 2007. Net profit attributable to shareholders for the first half of 2008 includes negative goodwill gain of USD 219 million from acquisition of Sparrows Point  and a net gain after tax of USD 255 million from the disposal of Kuzbassugol.

EPS increased to USD 1. 92 in H1 2008 from USD 1.14 in H1 2007.

Net cash from operating activities was USD 1,581 million in H1 2008 compared with USD 1,668 million in H1 2007. Cash flow was impacted by a working capital increase related to the expansion of our operations as well as a significant growth in prices.     

Net debt, calculated as total indebtedness less cash and cash equivalents, less short-term bank deposits, decreased from USD 1,500 million as at 31 December 2007 to USD 1,337 million as at 30 June 2008. Total indebtedness increased from USD 3,786 million as at 31 December 2007 to USD 5,022 million as at 30 June 2008. Cash, cash equivalents and short-term bank deposits increased from USD 2,286 million as at 31 December 2007 to USD 3,685 million as at 30 June 2008.
Quarterly divisional EBITDA performance: Q2 2008 vs. Q1 2008

At a group level, there was strong EBITDA growth between the first and second quarters of 2008 with EBITDA up 68.7% quarter on quarter. The low purchase price of Sparrow’s Point resulted in negative goodwill. This in turn brought about a gain of USD 219 million in net profit at the group level. This effect is apparent in the Q2 numbers. In addition, the sale of our Kuzbassugol mines resulted in a USD 255 million net gain after tax in Q2.

Russian Steel demonstrated an EBITDA increase of 134.1% between the first and second quarters of 2008, mainly due to positive price dynamics in both the domestic and export markets. EBITDA at Izhora Pipe Mill increased by 122.0% quarter-on-quarter, driven by price increases and volume growth.

In Severstal Resources, EBITDA increased by 52.6% between the two quarters due to increased selling prices. Lucchini, the European operations of Severstal International, showed a 33.1% increase in EBITDA. The quarter on quarter decline in EBITDA in North America can be ascribed to substantial positive one-offs in Q1. Removing the effect of these events, underlying North America EBITDA was higher in Q2.

Estimated production volumes: full year 2008

We expect to see growth in sales volumes across all of our businesses for the remainder of 2008. We estimate total production volumes for the full year of 2.7 million tonnes of coal, 4.6 million tonnes of coking coal concentrate, 4.9 million tonnes of iron ore concentrate, 10.3 million tonnes of pellets, 23.0 million tonnes of crude steel and 21.9 million tonnes of rolled products.
Dividend

At the meeting held on 28 August 2008, Severstal Board of Directors recommended a dividend of USD 0.75, or 18.35 rubles, per share for Q2 2008 with the record date of 20 August 2008. This corresponds to a pay-out ratio of 50% and an increase in dividend per share 98.0% in dollar terms in H1 2008 year-on-year.

Approval of the dividend is expected at the AGM which will take place on 30 September 2008.

Outlook

Severstal is now well positioned as an international player with a strong balance sheet and an integrated business model. With a favourable outlook for pricing, we are confident in our ability to deliver strong results for the full year 2008. We expect EBITDA to be within the range of USD 5.8 to USD 6.1 billion.