Severstal Presents Good Nine Months Results

OREANDA-NEWS. November 18, 2008. Good nine months results. Strong management actions to address challenging new market conditions

Financial Results for the nine months ended 30 September, 2008
(USD million unless otherwise stated)

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 9m 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 nine months to 30 September 2008.
Nine months 2008 Highlights

Revenues up 60.6% to USD18,152 million
EBITDA of USD4,981 million, up 69.4% year-on-year including USD156 m of one-off events
Net profit up 112.5% to USD3,243 million including USD620 million of one-off gains
EPS up 112.5% to USD3.22 from USD1.51 year-on-year
Q3 dividend per share of USD0.26, or 7.17 rubles
Outlook and management actions
Uncertain global economic outlook impacting steel consuming industries
Operating cash flow and committed facilities in place to meet debt requirements
Strong management actions taken to address tougher market environment:
- 2008 capex reduced by 20%; majority of the planned 2009-2011 USD8bn investment programme deferred until market visibility and conditions improve
- Production is being reduced further, reflecting market conditions
- Headcount reduction programme underway across the group

Alexey Mordashov, Chief Executive of Severstal, said,

“Severstal achieved strong results for the first nine months of 2008, with significant growth in all our markets driven by price increases, volume growth and margin improvement.

However, in light of the uncertain global economic outlook and its impact on the world's steel consuming industries, we have put in place a series of strong management actions to allow the group to continue to operate profitably in a tougher environment.

We have reduced production and cut back our planned capital investment programme.

In light of the current tougher market conditions, we now expect EBITDA for the current year to be in the range of USD5.1-USD5.3 billion”
Chief Executive’s Review of the nine months ended 30 September 2008

Severstal Russian Steel

In the first nine months of 2008, Russian Steel benefited from favourable prices, a strong domestic market, increased export prices and growth in production volumes. This resulted in a 44.1% increase in EBITDA for the division year-on-year from USD2,071 million to USD2,985 million. Revenues were up by 48.5% to USD9,172 million in 9m 2008 compared with USD6,177 million in 9m 2007. EBITDA margin was 32.5% for the first nine months of the year, compared to 33.5% for the same period last year, although it increased to 39.3% in the third quarter due to higher selling prices.

Izhora Pipe Mill demonstrated significant year-on-year growth, with EBITDA increasing 170.8% to USD241 million in 9m 2008 from USD89 million in 9m 2007. EBITDA margin increased from 28.5% in 9m 2007 to 30.5% in 9m 2008. Pipe production was higher year-on-year and quarter-on-quarter due to strong demand and significant price increases.

Severstal Resources

Severstal Resources saw an 110.8% rise in EBITDA year-on-year from USD390 million to USD822 million, benefiting from increases in coal and iron ore prices. EBITDA margin increased to 40.8% from 29.1% in the same period last year. The production of iron products (pellets and concentrate) increased by 6% year-on-year. Coal production was down, reflecting sale of Kuzbassugol in Q2. At the same time production in Vorkutaugol saw continued steady growth in Q2 and Q3.

We acquired PBS Coals, a Pennsylvania-based coal company, in November. This acquisition is an important step in the implementation of our vertically integrated strategy, increasing our self-sufficiency in coking coal in US. The total cash consideration was CAD 1,006 million (USUSD 829.5 million at the transaction date exchange rate).

Severstal International

In Severstal International, our North American operations showed USD449 million of EBITDA, including USD156 m of one-off events, in 9m 2008 compared with USD5 million of negative EBITDA in the same period of 2007. This increase and the growth in revenues from USD1,303 million to USD3,966 million reflect the changing scale and efficiency of the business after consolidation of newly acquired steel making capacities in Q3 2008 and successful ramp-up of Severstal Columbus plant. EBITDA margin was 11.3%, compared to -0.4% in the same period last year. Production of crude steel was 174% higher at 4.1 million tonnes, with hot metal production up 114% at 2.6 million tonnes.

In our European operations, Lucchini’s EBITDA in 9m 2008 increased by 19.7% compared with the same period last year to USD431 million. This was due to price increases for finished goods, while production of rolled products was 1% up and semi-finished products 12% down year-on-year. Revenues were up by 19.2%. EBITDA margin remained stable at 13.0% in 9m 2008 and 12.9% in 9m 2007.
Financial Summary for nine months ended 30 September 2008

Severstal’s revenues increased by 60.6% to USD18,152 million in nine months of 2008 compared with USD11,303 million in 9m 2007. Strong price increases and volume growth were the main drivers of this growth, as well as consolidation of new US assets in Q2 and Q3.

Cost of sales were USD12,382 million in 9m 2008 compared with USD7,689 million for the same period of 2007, an increase of 61.0%, caused primarily by increases in the costs of raw materials. Cost of sales as a percentage of consolidated revenues increased to 68.2% in 9m 2008 compared with 68.0% in 9m 2007.

Profit from operations increased by 80.7% to USD4,179 million in 9m 2008. This increase was due to strong prices, higher production volumes and efficient control over COGS, SG&A and distribution costs. Group operating margin increased to 23.0% in 9m 2008 from 20.5% in 9m 2007. The additional operating income (mainly one-offs in North America) improves operating margin in 9m 2008.

EBITDA increased by 69.4% to USD4,981 million in nine months of 2008 from USD2,941 million in 9m 2007. In nine months of 2008, Severstal reported an increase in consolidated net profit attributable to shareholders of 112.5% to USD3,243 million from USD1,526 million in 9m 2007. Net profit attributable to shareholders for 9m 2008 includes negative goodwill gain of USD219 million from acquisition of Sparrows Point, USD12 million from acquisition of Wheeling and USD33 million from acquisition of WCI. We also saw a net gain after tax of USD255 million from the disposal of Kuzbassugol, and a USD101 million net gain after tax from the termination of a long-term electricity supply contract at SNA.

EPS increased to USD3.22 in 9m 2008 from USD1.51 in 9m 2007.

Net cash from operating activities was USD 2,137 million in 9m 2008 compared with USD1,996 million in 9m 2007. Increase in cash flow attributable to significant increase in revenues partially offset by increase in a working capital related to the expansion of our operations as well as a significant growth in costs.    

Net debt, calculated as total indebtedness less cash and cash equivalents, less short-term bank deposits, increased from USD1,500 million as at 31 December 2007 to USD3,568 million as at 30 September 2008. Total indebtedness increased from USD3,786 million as at 31 December 2007 to USD6,784 million as at 30 September 2008. Cash, cash equivalents and short-term bank deposits increased from USD2,286 million as at 31 December 2007 to USD3,216 million as at 30 September 2008.

In light of the current turmoil in world financial markets, Severstal has suspended its share buy back programme. The company will keep the situation under close and constant review and will inform the market once it resumes the buy back programme.
Dividend

The board of Severstal is recommending a dividend of USD0.26, or 7.17 rubles, per share for Q3 2008. This represents a 20% payout ratio for the Q3 and a payout ratio of 38.2% on a nine months basis.

Approval of the dividend is expected at the EGM which will take place on 26 December 2008.

Outlook

The financial turmoil over recent months has affected economic growth prospects across global markets, resulting in weakening demand for steel. In light of these more difficult market conditions, the Board of Severstal now expects EBITDA for the full year to be in the range of USD5.1-USD5.3 billion.