OREANDA-NEWS. May 15, 2009. OAO Severstal (LSE: SVST; RTS: CHMF), today reports results for the three months ended 31 March 2009.

Q1 2009 Highlights:

•         Q1 performance impacted by difficult global economic and operating environment throughout the quarter

•         Q1 revenue of USD 2,796 million, a 30.4% decline compared to Q4 2008

•         Q1 negative EBITDA of USD158 million compared to positive USD298 million in Q4 2008  

•         Q1 net loss of USD644 million including USD381 million pre-tax foreign exchange loss compared to USD1,208 million loss in Q4 2008, a reduction of losses from Q4 which was impacted by impairment charges and adjustments on inventories to Net Realisable Value (NRV)

•         Cash, cash equivalents and short-term bank deposits decreased from      USD3,472 million as of December 31, 2008 to USD2,653 million as of March 31, 2009 due to the USD325 million repayment of the 2009 Eurobond and other scheduled debt amortisation

•         Q1 free cash flow positive at USD278 million

Continued decisive and proactive responses to the difficult current environment:

•         Decisive management actions to optimise cash costs and manage production in line with demand:

o    Strict control over capital spending: USD265 million of capex for Q1 in line with USD1.0 billion guidance for FY2009 and compared to USD661 million in Q4 2008

o    Idling production capacities to adjust to reduced demand from the market

o    Headcount reduction programme underway across the group – significant cost savings already achieved, with further savings to be realised in Q2 and Q3  

•         Strong cash position and financing structure in place

o    Cash, short-term deposits and committed facilities exceed current debt obligations

o    Operating cash flow includes USD617 million of working capital release in Q1 2009

•         Expiring credit facilities renewed in Q1 as planned

•         No dividend proposed for Q1 2009 and no FY 2009 dividend payments anticipated unless conditions improve

Alexey Mordashov, Chief Executive of Severstal, said, “We continue to act decisively to reduce fixed costs and improve working capital management, with benefits already coming through in the first quarter. Although we have seen an increase in consumption from restocking in Q1, weak economic conditions continue to affect demand for our products. Despite current difficulties we are well-positioned to weather the challenging year ahead given our robust financial position and competitive cost structure.”

Chief Executive’s Review of the three months ended 31 March, 2009

Group revenues in Q1 2009 decreased to USD2,796 million from USD4,019 million in Q4 2008, or 30.4% quarter-on-quarter. Q1 2009 EBITDA decreased to negative USD158 million from positive USD298 million in Q4 2008. Q1 2009 EBITDA margin was negative 5.7% compared to positive 7.4% a quarter earlier.

Responses to the current environment

We have seen an improvement in orders in Q1 2009, following the dramatic destocking in November and December 2008 as government funded infrastructure projects led to increase in steel consumption. The lack of demand in Russia was compensated by higher export deliveries. Reduced raw material costs and Ruble depreciation helped Russian steel producers become among the most competitive mills globally. Share of export sales at Severstal Russian Steel has increased. We continue to monitor our markets closely. Higher steel production rates supported growth in volumes of coal and iron ore production at Severstal Resources.

In February 2009, Severstal announced the temporary cessation of operations at Severstal Warren. Further to that announcement, all production and finishing operations at Warren will be idled indefinitely until there is an improvement in market conditions. At Severstal Wheeling both the blast and electric arc furnaces remain idle. We decided to suspend restoration of blast furnace “B” at Dearborn, in order to balance production with reduced demand from our US customers. Sparrow’s Point resumed operations on the back of consistent demand for tin products. Overall capacity utilisation rates in our North American operations improved in Q1 2009 vs. Q4 2008.

Capital expenditures in Q1 2009 were USD265 million, in line with our reduced target of USD1 billion for FY 2009.

Severstal has a strong cash position and committed facilities in place to meet 2009 debt requirements. As at 31 March 2009, Severstal had USD2,653 million of cash, cash equivalents and short-term bank deposits, USD819 million less than as at December 31, 2008. This was primarily due to the repayment of USD325 million of the 2009 Eurobond in February and other scheduled debt amortisation. In Q1 2009, the company released USD617 million of cash from working capital as a result of a reduction in inventories, and better cash management. We are on track to achieve our target of USD1.2 billion of working capital reduction this year. The short-term debt was USD2,029 million as at 31 March 2009. 

Severstal commenced a headcount reduction programme across the group during Q1 2009. Cost reduced in Q1, with more savings to be realised in Q2 and Q3.

Severstal Russian Steel

Severstal Russian Steel saw a 34.6% fall in revenue quarter-on-quarter from USD1,770 million in Q4 2008 to USD1,157 million in Q1 2009 mainly as a result of the unfavourable pricing environment. EBITDA decreased by 69.2% quarter-on-quarter to USD88 million in Q1 2009 from USD286 million in Q4 2008. Domestic demand remained weak compared to historical levels. Export sales played important role for capacity utilisation at the Russian Steel division representing 53% of revenues. EBITDA margin was 7.6% in Q1 2009 compared to 16.2% in Q4 2008. Production of crude steel increased by 24.9% in Q1 2009 compared to Q4 2008 due to higher shipments to export markets.

Severstal Resources

At Severstal Resources, Q1 2009 revenues were down 16.1% quarter-on-quarter from USD435 million in Q4 2008 to USD365 million in Q1 2009, due to lower production volumes in coal and coal concentrate as well as a reduction in prices for both iron ore and coal products. EBITDA decreased 7.1% quarter-on-quarter from USD42 million to USD39 million. EBITDA margin increased to 10.7% in Q1 2009 from 9.7% in Q4 2009. Quarter-on-quarter, production of iron ore products increased by 2.6% as our Russian Steel division sourced all of its raw materials from Severstal Resources, while production of coal was down by 12.6%.

Severstal’s gold business contributed USD33 million to EBITDA increment year-on-year as a result of higher gold prices and consolidation of High River Gold in November 2009.

Severstal International

In our North American operations revenues decreased from USD1,353 million in Q4 2008 to USD972 million in Q1 2009 due to lower prices and sales volumes. Production of crude steel in Q1 2009 was 34.2% higher quarter-on-quarter, as a result of restocking in the North American market.

Our North American operations showed USD243 million of negative EBITDA in Q1 2009 compared to USD74 million of negative EBITDA in Q4 2008 due to reduction in sales volumes and prices.

We have taken a number of actions at our North American business in response to the challenging environment, focused on conserving cash, limiting capital expenditure and balancing supply and demand of raw materials across our facilities. We have idled several production units, including Warren operations and steelmaking at Wheeling. Sparrows Point and Dearborn have increased production quarter-on-quarter in response to some improvements in their respective markets.

In our European operations, Lucchini’s EBITDA decreased in Q1 2009 to negative USD43 million from negative USD1 million in Q4 2008. Revenues were down by 31.8% to USD455 million in Q1 2009 compared to Q4 2008. Lucchini produced 21.1% less crude steel in Q1 2009 than in Q4 2008 as a result of lower demand, production of rails was down 6.9 % quarter-on-quarter.

Financial Summary the three months ended 31 March, 2009

Severstal’s revenues decreased by 30.4% to USD2,796 million in Q1 2009 compared to USD4,019 million in Q4 2008, as a result of lower sales volumes and unfavourable pricing. Cost of sales were USD3,987 million in Q4 2008 compared to USD2,740 million in Q1 2009, a decrease of 31.3%, caused primarily by lower volumes and a decrease of raw materials prices. Cost of sales as a percentage of consolidated revenues decreased to 98.0% in Q1 2009 compared to 99.2% in Q4 2008. Loss from operations was USD375 million in Q1 2009, as a result of lower capacity utilisation rates and a substantial drop in steel prices. Operating margin decreased to negative 13.4% in Q1 2009 from negative 0.7% in Q4 2008.

In Q1 2009 EBITDA was negative USD158 million compared to positive USD298 million in Q4 2008. Net loss attributable to shareholders was USD644 million in Q1 2009 compared to USD1,208 million in Q4 2008.

EPS was negative USD0.64 in Q1 2009 compared with negative USD1.20 in Q4 2008.

Net cash from operating activities was USD148 million in Q1 2009 compared to USD1,300 million in Q4 2008. This decrease in cash flow was attributable to a significant decrease in revenues, partially offset by the decrease in working capital as well as a drop in costs. Net debt, calculated as total indebtedness less cash and cash equivalents, less short-term bank deposits, increased from USD4,783 million as at 31 December 2008 to USD4,872 million as at 31 March 2009. Total indebtedness decreased from USD8,256 million as at 31 December 2008 to USD7,524 million as at 31 March 2009. Cash, cash equivalents and short-term bank deposits decreased from USD3,472 million as at 31 December 2008 to USD2,653 million as at 31 March 2009. We have redeemed USD325 million of 2009 Eurobond in Q1 and made other scheduled debt payments.

Dividend

The board of Severstal is not recommending payment of a dividend for Q1 2009. Unless current conditions improve, we do not anticipate dividend payments in 2009.

Outlook

The restocking and increased government investment in infrastructure seen in Q1 is likely to continue to support steel demand this year. However, since the market visibility remains limited we will not be providing earnings guidance until such visibility improves.