OREANDA-NEWS. March 11, 2009. Severstal reports good FY 2008 results; takes decisive action for the current challenging environment. OAO Severstal (LSE: SVST; RTS: CHMF), today reports results for year ended 31 December 2008.

2008 Highlights:

Revenues up 44.4% year-on-year to USD 22,393 million from USD 15,503 million
EBITDA of USD 5,366 million, up 45.5% year-on-year including USD 423 million of one-off gains
Net profit up 9.9% to USD 2,034 million including USD 821 million of one-off gains
Net non-operating loss of USD 279 million from foreign exchange differences
EPS up 9.8% to USD 2.02 from USD 1.84 year-on-year
FY08 dividend up 61.8% to USD 1.23; payout ratio of 60.9%
Net cash flow from operations increased by USD 1,199 million from USD 2,236 million in 2007 to USD 3,435 million in 2008

Cash, cash equivalents and short-term bank deposits increased by USD 1,183 million from USD 2,289 million as at 31 December 2007 to USD 3,472 million as at 31 December 2008.

Net debt/LTM EBITDA ratio of 0.9x as at December 31, 2008

Q4 2008 Highlights:
Q4 revenue of USD 4,019 million
Q4 EBITDA of USD 298 million
Q4 Net loss of USD 1,208 million due to deteriorating economic conditions and adjustments of USD 411 million on inventories to Net Realisable Value (NRV), as well as a USD 1,540 million impairment of non-current assets
Cash, cash equivalents  and short-term bank deposits increased by USD 247 million in Q4 from USD 3,225 million as of September 30, 2008 to USD 3,472 million
Q4 free cash flow positive at USD 639 million

Responses to the current environment:

Decisive management actions to optimise cash positions and preserve liquidity:

Production aligned with market conditions

2009 capex reduced to USD 1.0 billion from forecast USD 3 billion, focused on critical maintenance

Headcount reduction programme across the Group

Strong cash position and financing structure in place

Anticipated operating cash flow, cash on accounts and deposits  and committed facilities exceed our current debt obligations
Operating cash flow includes USD 995 million net working capital release in Q4

  Financing cash flow includes PXF draw down of USD 1,200 million, USD 1,231 million debt repayment and USD 598 million cash dividends
Unused long–term credit lines of USD 951 million as at 31 December 2008
No dividend proposed for Q4 2008; no FY 2009 dividend payments anticipated unless conditions improve

Alexey Mordashov, Chief Executive of Severstal, said, “Severstal achieved good results in 2008 as we benefited from volume growth, price increases and margin improvement.

However, the unprecedented slump across all our markets in the last quarter has resulted in weakening demand for steel and subsequent falling prices.

We have taken decisive action in the light of these new challenges, reducing production and cutting our capital expenditure programme for 2008 and 2009. We are looking at our fixed costs across the business and have implemented more efficient working capital management.”

Chief Executive’s Review of the year ended 31 December 2008

Group revenues for 2008 increased to USD 22,393 million from USD 15,503 million, or 44.4% year-on-year. This was due to strong demand in the first nine months of the year, a favourable price environment and the consolidation of our assets in North America.

EBITDA was up 45.5% year-on-year to a record USD 5,366 million. EBITDA margin was 24.0% in 2008 compared to 23.8% a year earlier.

There was an exceptional drop in the demand for steel in Q4 2008. This, combined with valuation adjustments of USD 411 million on inventories to NRV and a 1,540 million of impairment of non-current assets, contributed to a net loss of USD 1,208 million in the last quarter.

Response to the current environment

Severstal’s management has taken decisive action to mitigate the impact of the global economic downturn on the company and preserve cash. Production cuts started in October 2008. We continued to align production with market conditions and lowered our capacity utilisation in December 2008 to 50% in Russia, 40% in the US and 60% in Europe. Capacity utilisation rose sharply at the beginning of 2009. We are monitoring our markets closely and are able to adjust production to meet demand.

In February 2009, Severstal announced the temporary cessation of operations of the steel galvanizing line at Severstal Warren. Both the galvanizing line and the mill, which has been offline since October, will remain idle while the company balances production volume to match current demand.

In Q4 2008, Severstal decided to reduce its 2009 capex programme to USD 1.0 billion, including approximately USD 600 million of maintenance capex, down from the USD 3 billion original forecast. Severstal has a strong cash position and committed facilities in place to meet 2009 debt requirements. As at 31 December 2008, Severstal had unused long–term credit lines of USD 951 million in total. In 2009, management also expects to release USD 1.2 billion of cash from working capital as a result of a reduction in inventories, lower sales and purchase prices and better cash management.

Severstal commenced a headcount reduction programme across the group during Q4 2008. The situation is kept under constant review and allows the business to maintain appropriate staffing levels for current production capacity.