OREANDA-NEWS. September 07, 2009. Financial Results for the three months and six months ended 30 June 2009 (USD  million unless otherwise stated)

   Q2 2009 Q1 2009   H1 2009  H1 2008
 Revenue  2,852   2,796  5,648  10,719
 (Loss)/profit from operations  (228)  (395)  (623)  2,325
 EBITDA1  (5)  (156)   (161)   2,807
 Net (loss)/profit2   (290)  (654)   (944)  1,967
 EPS, USD  (0.29)  (0.65)   (0.94)  1.95
 DPS3, USD  0.00  0.00  0.00  0.97

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/(loss) 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 the Board of Directors.

4 These amounts reflect adjustments made in connection with completion of purchase price allocation and acquisitions from majority shareholder.

OAO Severstal (LSE: SVST; RTS: CHMF), one of the world’s leading steel and mining companies, with key assets in Russia, the US and Europe, today reports results for the three months and six months ended 30 June 2009.

Q2 Financial Highlights:
After a very challenging Q1, the benefits of cost savings initiatives and improving global market conditions led to improved Group performance in Q2
Revenue up slightly to USD 2,852 million in Q2 (Q1 09: USD 2,796 million)
Recovery in EBITDA to negative USD 5 million in Q2 (Q1 09: negative USD 156 million), driven by on-going cost saving initiatives and better performances at Severstal Russian Steel and Severstal Resources
Net loss was USD 290 million, including a USD 167 million pre-tax foreign exchange gain (Q1 09: net loss of USD 654 million, including a USD 381 million pre-tax foreign exchange loss)
No dividend proposed for Q2 or anticipated for FY 2009

H1 Financial Highlights:
Average prices and volumes for rolled products reduced by 29.6% and 25.7%, respectively, in H1 09 versus H1 08; very different market conditions reflected in year on year comparisons
Revenue of USD 5,648 million (H1 08: USD 10,719 million), as a result of lower sales volumes and a drop in average prices
Negative EBITDA of USD 161 million (H1 08: positive EBITDA of USD 2,807 million)
Net loss of USD 944 million, including a USD 214 million pre-tax foreign exchange loss (H1 08: net profit of USD 1,967 million, including an USD 8 million pre-tax foreign exchange gain)

Production volumes and prices started to improve by early July, indicating tentative improvements in market conditions
 
Funding position remains robust:
Cash, short-term deposits and committed unused credit lines of USD 3,361 million as at 30 June 2009, exceed current short-term debt obligations
Cash, cash equivalents and short-term bank deposits of USD 2,579 million as at 30 June 2009
H1 operating cash flow includes USD 1,036 million of working capital release; additional working capital release expected in Q3

Operational restructuring and cost saving initiatives accelerated, with focus on North America
Acceleration of restructuring in North American operations

o    Management is currently finalising strategy for North America

o    Warren and Wheeling facilities in the US are currently idle, leading to substantial labour cost savings

o    Release of working capital from raw material stocks at Warren and Wheeling facilities

•         Continued implementation of cost saving initiatives across the Group

o    Success of cost saving initiatives at Severstal Russian Steel and Severstal Resources contributed to more than doubling of Q2 EBITDA in these divisions; further cost savings expected in H2

o    Cost of billet production at European operations (Piombino) reduced by 4.4% quarter on quarter in Q2

•         Capital expenditure in H1 09 in line with USD 1.0 billion full year guidance

o    Q2 capital expenditure of USD 212 million; H1 capital expenditure of USD 477 million


Alexey Mordashov, Chief Executive of Severstal, said, “The first six months of 2009 was the most challenging period in the last 20 years for both Severstal and the global steel industry. 

The second quarter marked a turning point for the steel market, after prices reached their lowest levels in May. The combination of better market conditions, increased capacity utilisation and cost saving initiatives resulted in an improvement in performance during Q2.   

Since June, there have been indications of some improvements in our markets, with production volumes and prices increasing so far in Q3 across the Group. Although these developments are encouraging, they remain fragile.  A sustained recovery will depend on renewed global economic growth and discipline in production and pricing across the industry. With our very competitive cost structure in Russia, on-going cost saving and rationalisation programmes in our North American and European operations and solid financial position, we have a strong platform from which to compete in our core markets.”

Chief Executive’s Review of the three and six months ended 30 June 2009

Group revenue was USD 5,648 million in H1 (H1 08: USD 10,719 million). H1 EBITDA decreased to negative USD 161 million (H1 08: USD 2,807 million), producing an EBITDA margin of negative 2.9% (H1 08: 26.2%).

With steel markets having reached their trough in Q1 in terms of capacity utilisation, the Group’s performance improved in Q2. An improvement in EBITDA to negative USD 5 million (Q1 09: negative USD 156 million) was achieved, primarily due to strong performances at both Severstal Russian Steel and Severstal Resources. This improved result was achieved despite average steel and mining product prices being lower in Q2 than Q1. Production of rolled products increased at Severstal Russian Steel and Severstal Resources increased production of coal and iron ore in Q2. The Group is also benefiting from the cost reduction and rationalisation programmes that have been implemented.

The second quarter marked a turning point for steel market sentiment. Having reached the bottom in May, prices started to improve from June. At the beginning of July, global demand started to increase with sales volumes and prices rising further during August and September. Order visibility also improved over the summer.

Our cost control initiatives also yielded positive results during H1 09.  In Q2, general and administrative expenses were down 14.1% quarter on quarter, resulting in a 16.4% reduction for H1 2009. At both Severstal Russian Steel and Severstal Resources, the cash cost of production was down as a result of Ruble depreciation in Q1. In Q2, it was reduced through cost cutting measures and higher utilisation rates. We continue to closely monitor our markets in order to be able to adjust our production targets to increasing demand.
 
Capital expenditure in H1 2009 was USD 477 million, in line with our target of USD 1 billion for FY 2009.

Severstal has a strong cash position and committed unused credit lines in place to meet its short-term debt requirements. As at 30 June 2009, Severstal had USD 2,579 million of cash, cash equivalents and short-term bank deposits (as at 31 March 2009:  USD 2,653 million) and lenders were prepared to roll over credit facilities in Q2. As a result of a reduction in inventories and better cash management, the Group released a further USD 419 million of cash from working capital in Q2, bringing the total for the first half to USD 1,036 million. We are, therefore, on track to achieve our target of reducing working capital by USD 1.2 billion this year. Short-term debt was USD 1,693 million as at 30 June 2009. 

Severstal Russian Steel

Revenue increased by 15.8% in Q2 to USD 1,340 million (Q1 09: USD 1,157 million). Production volumes of crude steel and rolled products were, respectively, 2.6% and 6.6% higher in Q2 than in Q1.  Sales prices were marginally lower in rolled products in Q2 compared to Q1, while prices for downstream products rose quarter on quarter. Q2 EBITDA increased by an impressive 175% to USD 242 million (Q1 09: USD 88 million), producing an EBITDA margin of 18.1% (Q1 09: 7.6%).

Notwithstanding this strong performance in Q2, revenue for H1 decreased by 60.1% to USD 2,497 million year on year (H1 08: USD 6,256 million), primarily as a result of the unfavourable pricing environment and lower sales volumes.  Although domestic demand remained weak compared to historic levels, an increase in export sales year on year, which represented 48.9% of H1 revenue, led to increased capacity utilisation. EBITDA decreased to USD 330 million in H1 (H1 08: USD 1,819 million) with an EBITDA margin of 13.2% (H1 08: 29.1%).

During the first half of the year, this division was one of the most cost efficient producers in the world, with production costs going down quarter on quarter despite the appreciation of the Ruble in April and May.  H1 production costs were reduced by 38.8% year on year largely as a result of Ruble depreciation.

Severstal Resources

Q2 revenue grew 13.7% to USD 415 million (Q1 09: USD 365 million) as a result of increased sales volume of coking coal concentrate from Vorkuta and iron ore pellets.  EBITDA margin almost doubled quarter on quarter to 20.7% (Q1 09: 11.2%). Higher utilisation rates in coal and iron ore production and management initiatives to cut costs were the main drivers of this positive result.
 
H1 revenue was USD 780 million (H1 08: USD 1,309 million) due to lower production volumes of coal and coal concentrate as well as a reduction in iron ore and coal product prices. EBITDA decreased to USD 127 million (H1 08: USD 510 million) and the EBITDA margin decreased to 16.3% (H1 08: 39.0%).

Vorkutaugol’s production costs were reduced by 12.8% year on year in H1. Increased utilisation and cost cutting initiatives in Q2 resulted in a 25% drop in costs quarter on quarter. Olkon, a producer of iron concentrate, reduced production costs by 21.6% year on year in H1.  The unit production cost of pellets at Karelsky Okatysh was reduced by 22.4% in H1 09 versus H1 08. In Q2 09 unit costs for pellet production were 20.9% down quarter on quarter as utilisation rose and production optimisation led to a reduction in variable costs.

Severstal’s gold business contributed USD 60 million to EBITDA increment during H1, as a result of favourable gold prices and the consolidation of High River Gold in November 2008. The unit cost of production of gold was down 19.6% in H1 2009 versus the same period in 2008. 224 Koz of gold was produced in H1 (H1 08: 65 Koz).

Severstal International
 
In our North American operations H1 revenue increased to USD 1,884 million (H1 08: USD 1,654 million).  North American sales volumes and prices reached their lowest levels during Q2, leading to lower revenue quarter on quarter.   Production of rolled products in Q2 was 9.7% lower quarter on quarter and the average selling price for rolled products was down 11.9%.

Our North American operations reported negative EBITDA of USD 236 million in Q2 (Q1 09: negative USD 243 million).  For H1, this division reported negative EBITDA of USD 479 million (H1 08: USD 228 million), mainly as a result of lower volumes and prices.

The net profit was impacted negatively by a reduction in the deferred tax asset in North America of USD 169 million.

Management is currently finalising the Group’s North American strategy to address what will remain a challenging US steel market. Our goal is to ensure our US business is both profitable and cash positive in the current market environment.  We are committed to operating in North America, which is one of the world’s most important long-term markets for steel, and will retain our most efficient units with a view to making them even more flexible and efficient.
During the first half, the management of our North American business focused on operational restructuring and conserving cash through the use of existing inventories of raw materials and limiting capital expenditure. The Warren and Wheeling mills are currently idle and restructuring in North America will continue in H2.


A general comparison of production costs year on year in our North American operations is not relevant because of the differing financial periods in which the results of acquired companies were consolidated. However, our Columbus mill, which has the most flexible cost base, achieved an 8.3% reduction in quarter on quarter production costs of hot-rolled strip in Q2.     

In our European operations, Lucchini’s H1 revenue decreased to USD 841 million (H1 08:  USD 2,281 million) and EBITDA was negative USD 129 million (H1 08: USD 331 million). Lucchini’s performance deteriorated quarter on quarter in Q2 to negative EBITDA of USD 86 million (Q1 09: negative USD 43 million).  This was the result of a 6.9% reduction in the production of rolled products and an 11.3 % decrease in the average selling price quarter on quarter, reflecting a lack of improvement in European markets. De-stocking continued in European markets in Q2 and the demand environment only started to improve in July.  The cost of billet production at our European operations (Piombino) decreased by 4.4% quarter on quarter in Q2.

The pre-tax foreign exchange gain in Lucchini in H1 was USD 2 million (H1 08 loss: USD 2 million).

Financial Summary for the six months ended 30 June 2009

Group revenue decreased by 47.3% to USD 5,648 million (H1 08: USD 10,719 million), as a result of lower sales volumes and pricing. Cost of sales was USD 5,419 million (H1 08: USD 7,474 million).  This 27.5% decrease was primarily caused by lower volumes and a decrease in raw material prices. Loss from operations was USD 623 million (H1 08: profit of USD 2,325 million), as a result of lower capacity utilisation rates and a 29.6% drop in average prices for rolled products. Group operating margin decreased to negative 11.0% (H1 08: 21.7%).

EBITDA was negative USD 161 million (H1 08: USD 2,807 million). Net loss attributable to shareholders was USD 944 million (H1 08: net profit of USD 1,967 million).

EPS was negative USD 0.94 (H1 08: USD 1.95).

Net cash from operating activities was USD 355 million (H1 08: USD 1,602 million) which was attributable to a significant decrease in revenue, partially offset by a decrease in working capital and a reduction in costs. Net debt, calculated as total indebtedness less cash and cash equivalents, less short-term bank deposits, increased to USD 4,930 million as at 30 June 2009 (as at 31 December 2008: USD 4,784 million). Total indebtedness decreased to USD 7,509 million as at 30 June 2009 (as at 31 December 2008: USD 8,256 million). Cash, cash equivalents and short-term bank deposits decreased to USD 2,579 million as at June 30 2009 (as at 31 December 2008: USD 3,473 million).

Dividend
 
The Board of Severstal is not recommending payment of a dividend for Q2 2009. We do not anticipate dividend payments for the remainder of 2009.

Outlook

Since June, there have been signs of improvement in our markets, with production volumes and prices increasing in Q3 across the Group. Order visibility has also improved over the summer and we expect exports to remain an important source of revenue for Severstal Russian Steel.

Although the signs of improvement in the operating environment are encouraging, the positive developments we have seen so far in Q3 remain fragile.  We remain confident of the long-term prospects for the industry and believe that re-stocking in the US and Russia, as well as stimulus plans announced by many national governments will support demand for the remainder of the year. Further improvements, will, however, depend on the pace of global economic recovery and production and pricing discipline in the industry.