14 May 2010 07:00
14 May 2010
OAO Severstal reports Q1 results
Underlying market conditions continued to improve during Q1 with benefits of price increases anticipated for Q2
OAO Severstal (LSE: SVST; RTS: CHMF), one of the world's leading integrated steel and mining companies, today reports results for the three months ended 31 March 2010.
Financial Results for the three months ended 31 March 2010 ($ million unless otherwise stated)
|
|
| Q1 20103 | Q4 20093 | Change, q-o-q | Q1 20093,4 | Change, y-o-y |
| Revenue |
| 3,142 | 3,389 | (7.3%) | 2,343 | 34.1% |
| Profit/(loss) from operations |
| 298 | 390 | (23.6%) | (321) | n.a. |
| EBITDA1 |
| 492 | 620 | (20.6%) | (117) | n.a. |
| Net loss 2 |
| (785) | (162) | n.a. | (656) | n.a. |
| EPS, $ |
| (0.78) | (0.16) | n.a. | (0.65) | n.a. |
Notes:
1 EBITDA represents profit from operations plus depreciation and amortisation adjusted for gain/(loss) on disposals of property plant and equipment.
2 Net loss attributable to shareholders.
3 As at 31 March 2010 Lucchini was classified as held for sale and reported as a discontinued operation. Lucchini's results have therefore been excluded from revenue, profit/(loss) from operations and EBITDA figures in the the table above for Q1 2010, Q4 2009 and Q1 2009, and in the commentary below. The net loss and EPS figures for all periods include Lucchini's losses.
4 These amounts reflect adjustments made in connection with the completion of purchase price allocation and discontinued operation.
Q1 Summary (comparisons are vs. Q4 2009 unless otherwise stated):
·; Group revenue decreased by 7.3% to $3,142 million (Q4 09: $3,389 million) as a result of lower sales volumes in the Russian Steel and Resources divisions and lower pricing for steel across all markets
o Russian Steel sales volumes affected by impact of severe weather conditions reducing the level of exports from port of St. Petersburg
o North American operations posted further volume improvements
o Strong price growth in Resources division
·; Underlying market conditions are expected to improve, with the effects of recently announced steel price increases expected to come through in Q2
·; Costs up in all divisions primarily due to increases in raw material, energy and transport costs.
·; EBITDA decreased by 20.6% to $492 million (Q4 09: $620 million), mainly as a result of the seasonal effects referred to above and higher input prices
·; Net loss of $785 million (Q4 09: net loss $162 million) includes effect of discontinued European operations of $855 million
·; Strong performance from Resources division: EBITDA margin up to 30.1% (Q4 09: 27.5%)
·; $206 million invested in Q1 with an acceleration in spending expected in Q2, as spring conditions enable additional construction and exploration activities
Funding position remains strong:
·; Cash, cash equivalents and short-term bank deposits of $2,323 million as at 31 March 2009 (as at 31 December 2009: $2,949 million)
·; Unused committed credit lines of $497 million
·; Q1 2010 operating cash flow of negative $219 million (excluding discontinued operations) due to increased scale of operations across all businesses and higher inventories at Russian Steel resulting from weather related back logs in export shipments
·; Net debt broadly flat at $4.3 billion (exclude Lucchini 's balances*) as at 31 March 2010
Alexey Mordashov, Chief Executive of Severstal, said: "Q1 2010 saw improving underlying trading conditions although our results were affected by increased input costs and a backlog of exports created by bad weather. These results also show a significant improvement on the same period in 2009, underscoring the success of management initiatives put in place to address the downturn that started in late 2008.
In the current trading environment, our flexible cost base, vertically-integrated model and solid financial position provide us with competitive advantage to benefit from growing demand for steel and invest in long-term growth."
Chief Executive's Review of the three months ended 31 March 2010
Severstal's European business, Lucchini, has been treated as held for sale during this period.
Revenue was $3,142 million for Q1 2010 (Q4 09: $3,389 million). EBITDA was $492 million (Q4 09: $620 million), producing an EBITDA margin of 15.7% (Q4 09: 18.3%).
The fall in EBITDA in Q1 was mainly due to lower sales in the Russian Steel and Resources divisions as a result of bad weather. The Russian Steel operation was left with substantial inventories of finished steel products for export that could not be shipped from St. Petersburg. In the Resources division, the decline in pellet sales to third parties was a result of increased internal consumption, with pellets partially replacing iron ore concentrate in the sinter feed. Iron ore prices grew strongly in Q1 and coal prices were strong too across all markets.
Our North American operations delivered higher revenue, primarily as a result of higher sales volumes. North American volumes continued to improve in Q1 on the back of re-stocking and stronger end-user demand.
In a period of rapidly-increasing raw materials prices, our vertical integration proved its worth during Q1. Our Resources division provides over 90% of Russian Steel's coking coal requirements and sells excess volumes of pellets to third party customers. Sales volumes at PBS Coals fell during the quarter because of heavy snow in January and February that affected open pit operations. Production levels had largely recovered by March and further improvements are expected in Q2. Vertical integration remains one of the key elements of our long-term strategy.
*As at 31 March 2010 Lucchini was classified as held for sale and reported as a discontinued operation
Capital expenditure was $206 million in Q1 2010, below our target. Some projects are behind schedule as poor weather in Russia affected construction and exploration activities. We plan to accelerate capital spending in Q2 in order to achieve our target of $1.4 billion for the year. These investments will support the Company's organic growth and enhance our competitive position. They are focused on developing our competitive advantages in areas such as: developing our upstream activities to enhance our vertically integrated model; targeting growth in the Russian infrastructure and construction markets through additional mini-mill capacity; and improving our competitive position in higher value-added markets in the US.
Severstal has a strong cash position and committed unused credit lines in place to meet its short-term debt requirements. As at 31 March 2010, Severstal had $2,323 million of cash, cash equivalents and short-term bank deposits (as at 31 December 2009: $2,949 million).
Net debt was broadly flat at $4,281 million (exclude Lucchini 's balances*) as at 31 March 2010 (as at 31 December 2009: $4,278 million) with short term debt of $1,104 million (as at 31 December 2009: $1,478 million).
In Q1 2010 we diversified our financing through the issue of a further RUR15 billion of 3-year corporate bonds in February. Part of the proceeds from this issue was used during Q1 to reduce corporate debt. We were also pleased to announce the placing of $525 million of 8-year senior notes issued in February by the Severstal Columbus mill in the US that were used to refinance existing bank loans at Columbus.
Severstal Russian Steel
Severstal Russian Steel is a one of the most efficient producers on the global cost curve. It is a world-class asset delivering strong margins. Further development of this part of the business remains an investment priority.
Higher input costs and lower sales volumes during the quarter were the main drivers of the quarterly results. Sales volumes were impacted by a reduction in export shipments and an increase in domestic demand was not sufficient to offset this.
Revenue decreased by 14.8% in Q1 2010 to $1,664 million (Q4 09: $1,954 million). Average sales prices and sales volumes were, respectively, 2.5% and 13.3% lower in Q1 compared to Q4 2009. Q1 EBITDA was $404 million (Q4 09: $555 million), producing an EBITDA margin of 24.3% (Q4 09: 28.4%). Increasing raw material costs led to a cost per unit of slab produced (including depreciation and amortisation) of $340 in Q1 2010 versus $296 in Q4 2009.
As part of our capital expenditure programme in 2010, we have started construction works at a mini-mill in Balakovo (Saratov region). By 2013 this mini-mill is expected to produce 1 million tonnes of long steel per year. We also plan to invest in downstream expansion in Russia to improve our product mix and further differentiate us from other Russian steel producers.
*As at 31 March 2010 Lucchini was classified as held for sale and reported as a discontinued operation
Severstal Resources
Q1 2010 revenue was $594 million (Q4 09: $621 million) as a result of lower sales volumes, partially offset by strong selling prices for iron ore and coking coal concentrate. Changes in the structure of the sinter used in our Russian Steel division resulted in a decrease in sales of iron ore concentrate and an increase in internal sales of pellets. Shipments of pellets to third parties were lower in Q1 due to unacceptable terms of delivery offered by Asian customers. Vorkutaugol reported stable sales volumes.
Q1 2010 EBITDA increased to $179 million (Q4 09: $171 million) and the EBITDA margin was 30.1% (Q4 09: 27.5%).
Our gold business has continued to deliver strong margins. In Q1 2010, the EBITDA margin was 49.6% compared to 47.1% in Q4 2009. The cash cost per ounce of production decreased by 2.8% quarter-on-quarter to an average of $562 in Q1 2010 from $578 in Q4 2009. Sales volume was 123 Koz from 161 Koz in Q4 2009 due to seasonal factors and when warmer weather returns to Russia we expect to ramp up production. Our focus for this business is to further improve operational and financial efficiencies as well as volume growth.
Severstal International
US
In our North American operations, Q1 2010 revenue was up 10.5% to $1,170 million (Q4 09: $1,059 million). Sales volumes grew by 13.8% as a result of improved demand in Q1 compared to the last quarter of 2009, although average selling prices were slightly lower. EBITDA in our North American operations was negative $83 million in Q1 (Q4 09: negative $97 million, including $52 million of restructuring expenses). The results were affected by increasing costs of main raw materials, iron-ore pellets, scrap and coke; idling expenses; excessive operating and maintenance costs related to weather influenced production interruptions at Sparrows Point; and start-up costs at steel-making and hot rolling operations at Warren. The improvement in revenue rates in Q1 partially offset the cost increases. We continue to focus on improving production efficiencies at our US assets by increasing capacity utilization and reducing fixed costs at both idled and operating facilities.
The restart of operations at Warren has been successfully executed in accordance with the planned schedule. Coupled with the successful re-start of Wheeling finishing facilities the resumption of operations at Warren will help increase capacity utilisation and should improve the profitability of our North American operations in Q2. Over the longer term, we expect the cost position of our North American business to improve as a result of further investment in manufacturing efficiencies, higher utilisation rates and fixed cost reduction through labor restructuring and other initiatives. We believe that North American market conditions will continue to improve in Q2 due to better end-user demand and low inventories at processors. We expect to see further increases in key raw material prices driven by stronger demand for raw materials in the global markets.
Europe (Lucchini)
As at 31 March 2010 this business was classified as held for sale and is presented as a discontinued operation in the Company's accounts.
For information purposes only we report that Q1 2010 revenue was $579 million (Q4 09: $533 million) and negative EBITDA was $1 million (Q4 09: positive $9 million). In the first two months of the quarter, this operation was affected by the time lag between increasing raw material costs and the implementation of higher revenue rates. During March, the situation improved considerably, returning the operation to profitability for the last month of the quarter.
The loss from discontinued operations was $855 million in Q1 2010*.
Financial Summary for the three months ended 31 March 2010
Company revenue was $3,142 million (Q4 09: $3,389 million), as a result of lower sales volumes in the Russian Steel and Resources divisions and lower pricing for steel across all markets. Profit from operations was $298 million (Q4 09: $390 million). Companyoperating margin was 9.5% (Q4 09: 11.5%).
EBITDA was $492 million (Q4 09: $620 million; Q1 2009: negative $117 million). Net loss attributable to shareholders was $785 million, including a $855 million loss from Lucchini and a $120 million pre-tax foreign exchange gain (Q4 09: net loss of $162 million, including a $44 million pre-tax foreign exchange loss and $200 million deferred tax expense).
The loss per share was $0.78 (Q4 09: loss per share of $0.16).
Net cash from operating activities was negative $219 million (excluding discontinued operations), mainly due to an increase in working capital. The main reasons for this are the enhanced scale of operations and higher inventories in the Russian Steel and Resources divisions. Net debt, calculated as total indebtedness less cash and cash equivalents and short-term bank deposits, was $4,281 million (exclude Lucchini 's balances**) as at 31 March 2010 (as at 31 December 2009: $4,278 million). Total indebtedness reduced substantially during Q1 to $6,604 million as at 31 March 2010 (as at 31 December 2009: $7,227 million). Cash, cash equivalents and short-term bank deposits were $2,323 million as at 31 March 2010 (as at 31 December 2009: $2,949 million).
Dividend
The Board of Severstal is not recommending payment of a dividend for Q1 2010. The Board will keep the resumption of dividends under review.
Outlook
The outlook for 2010 continues to improve as economic growth in emerging markets and a gradual recovery of demand in mature markets is accelerating. In Q2 we expect further improvements in the market environment as price increases announced in Q1 will come into effect in the quarter. The release of inventories by the Russian Steel division should also improve sales volumes. In other markets we expect re-stocking to continue and end-user demand to be healthier. A strong raw material market, expected for the remainder of the first half of 2010 gives Severstal strong competitive advantage through our Resources division.
In Russia, we expect further recovery in the oil and gas and construction sectors. The Russian "cash for clunkers" programme started successfully in March and we expect additional demand from automotive producers to meet increasing appetite for steel products. Export markets will also continue to be an important source of sales for Russian Steel. In Q2 we expect to increase export shipments as weather and trading conditions improve.
* Under IFRS, the decision to sell Lucchini requires this disposal group to be re-measured at fair value less costs to sell. Previously, the long-term assets of the Group were assessed based on their long-term value in use. This re-measurement results in a loss which is recognised in, and substantially comprises, loss from discontinued operations.
** As at 31 March 2010 Lucchini was classified as held for sale and reported as a discontinued operation
With the re-start of Warren in North America, we plan to increase sales volumes in that market and achieve better capacity utilisation. We have seen moderate recovery in North American markets to date this year and believe this will continue in Q2.
At the same time we see significant uncertainty in the global steel markets for the second half of the year.
We are in a process of negotiations to divest Lucchini and expect to update the market as appropriate in the next six months.
For further information:
Severstal
Dmitry Druzhinin, Investor Relations
Olga Antonova, Public Relations
+7 495 926 7766
Hudson Sandler
Andrew Hayes/Jessica Rouleau/Maria Ignatova
+44 (0)20 7796 4133
A conference call for investors and sell side analysts will be held on Friday, 14 May 2010 at 5.30pm (Moscow), 2.30pm (London), 9.30am (US East Coast).
Dial-in details:
UK Standard & International: +44 (0) 1452 555 566Russia Free call: 8108 002 097 2044 UK Free call: 0800 694 0257 USA Free call: 1866 966 9439 Conference ID: 72720668The call will be recorded and there will be a replay facility available as follows:International Dial in: +44 (0) 1452 55 00 00UK Free Call Dial In: 0800 953 1533USA Free Call Dial In: 1866 247 4222Replay Access Number: 72720668#
Full financial statements and further information on Severstal are available at www.severstal.com
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