Severstal Reports 2008 Results, Further Adaptations to Struggling Market
03/12/2009 - Severstal reported a net loss of $1.208 billion on revenues of $4.019 billion for the fourth quarter, and net profit of $2.034 billion on revenues of $22.393 billion for the year ended December 31, 2008.
Severstal reported a net loss of $1.208 billion on revenues of $4.019 billion for the fourth quarter, and net profit of $2.034 billion on revenues of $22.393 billion for the year ended December 31, 2008.
Full Year Results—Net profit of $2.034 billion reflects a 9.9% increase compared to net profit of $1.850 billion in 2007. (This and all other 2007 numbers have been restated to reflect the consolidation of Severstal Columbus (formerly SeverCorr) and ZAO Trade House Severstal Invest as of January, 1, 2007) Current results reflect $821 million of one-off gains. Earnings per share, $2.02, reflect a 9.8% increase compared to earnings of $1.84 in 2007.
Revenues, $22,393 million, reflect a 44.4% increase compared to revenues of $15,503 million in 2007. According to Severstal Chief Executive Alexey Mordashov, this was due to strong demand in the first nine months of the year, a favorable price environment, and the consolidation of our assets in North America.
EBITDA, at a record $5.366 billion, reflects a 45.5% year-on-year increase, including $423 million of one-off gains. EBITDA margin was 24.0%, which compares to 23.8% a year earlier.
“There was an exceptional drop in the demand for steel in Q4 2008,” said Mordashov. “This, combined with valuation adjustments of $411 million on inventories to NRV and a $1.540 billion of impairment of non-current assets, contributed to a net loss of $1.208 billion in the last quarter.
The company reported a net non-operating loss of $279 million from foreign exchange differences. Net cash flow from operations was $3.435 billion, a $1.199 billion increase over net cash flow from operations of $2.236 billion in 2007.
Cash, cash equivalents and short-term bank deposits were $3,472 million as at December 31, 2008, reflecting a $1.183 billion increase over cash, cash equivalents and short-term bank deposits of $2,289 billion as at December 31, 2007.
Fourth Quarter Results—The net loss of $1.208 billion reflects $411 million in adjustments of inventories to Net Realizable Value (NRV), and a $1.540 billion impairment of non-current assets. EBITDA was $298 million.
Cash, cash equivalents and short-term bank deposits of $3,472 million reflect a $247 million increase as compared to $3.225 billion as of September 30, 2008. Free cash flow was positive at $639 million.
Response to Market Conditions—“Severstal achieved good results in 2008 as we benefited from volume growth, price increases and margin improvement,” commented Severstal Chief Executive Alexey Mordashov. “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,” continued Mordashov. “We are looking at our fixed costs across the business and have implemented more efficient working capital management.”
Responding to current economic conditions, the company announced a number of decisive management actions to optimize its cash position and preserve liquidity, including the continued re-alignment of production with market conditions, an ongoing headcount reduction program, and reduction of the 2009 capex to $1.0 billion (from a forecast of $3 billion), focused only on critical maintenance.
Production cuts started in October 2008. Continuing to align production with market conditions, the company lowered its capacity utilization in December 2008 to 50% in Russia, 40% in the U.S. and 60% in Europe. Although capacity utilization rose sharply at the beginning of 2009, the company continues to closely monitor its markets and is prepared to continue adjusting 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.
Severstal decided in the fourth quarter of 2008 to reduce its 2009 capex program to $1.0 billion, including approximately $600 million of maintenance capex, down from the $3 billion original forecast.
The company also commenced a headcount reduction program across the group during the fourth quarter, and continues to keep the situation under constant review, allowing the business to maintain appropriate staffing levels for current production capacity.
Severstal noted it 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 $951 million in total. In 2009, management also expects to release $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.
Sector Results—The company said that Severstal Russian Steel had benefited from favorable prices, a strong domestic market, increased prices and growth in production volumes. This resulted in a 33.3% increase in revenues (to $11.246 billion) and a 29.7% increase in EBITDA (to $3.389 billion). EBITDA margin was 30.1%, which compares to 31.0% in the previous year, a minor deterioration driven by the events of Q4. Production of crude steel was down 48.0% in the fourth quarter (quarter-on-quarter), mainly due to lower domestic demand.
Izhora Pipe Mill demonstrated significant year-on-year growth, with EBITDA increasing by 50.3% (to $227 million). EBITDA margin increased from 27.4% in 2007 to 27.5% in 2008. Pipe production was 46.0% higher year-on-year, but in Q4 it fell by 13.0% quarter-on-quarter.
Severstal Resources demonstrated a 72.8% rise in EBITDA year-on-year (to $859 million) benefiting from increases in coal and iron ore prices. Revenues were up 32.7% (to $2.453 billion), while EBITDA margin increased to 35.0% from 26.9% in 2007. Production of iron products (pellets and concentrate) decreased by 5.0% year-on-year mainly due to a drop in production in Q4, while coal production was down by 21.0% year-on-year, reflecting the sale of Kuzbassugol in Q2 and production cuts in Q4.
Severstal Resources acquired Pennsylvania-based PBS Coals in November for a total cash consideration of $877 million. In Q4, the production of coking coal concentrate and steaming coal of the newly acquired company helped to support the production levels of coal in this division. Also in November, Severstal Resources acquired a controlling stake in High River Gold for a total consideration of $63 million.
At Severstal International, the company’s North American operations showed $377 million of EBITDA compared with negative $50 million in 2007. This includes a $156-million one-off gain relating to the buyout of a long-term electricity supply at Dearborn, a $267-million one-off gain relating to an award from A.T. Massey Coal Co. (regarding a breach of a contract with Wheeling-Pittsburgh Steel Corp.) and a $152-million portion of insurance settlement proceeds (net of losses) related to an incident at Blast Furnace B in Dearborn.
Results were unfavorably impacted by a $308-million adjustment on inventories to NRV and a $72-million provision related to onerous contracts.
The growth in revenues to $5,319 million (from $1,805 million in 2007) reflects the changing scale of the business after consolidation of newly-acquired steelmaking capacities in Q3 2008 and ramp-up of the Severstal Columbus plant. EBITDA margin increased to 7.1% (from negative 2.8% in 2007). Production of crude steel was 128.7% higher than in 2007, but in Q4 it dropped 52.0% from the Q3 level as a result of lower demand in the North American market.
The company said that it has taken a number of actions at its North American business in response to the challenging environment, focused on conserving cash, limiting capital expenditure to critical maintenance and balancing the supply and demand of raw materials across our facilities. The company lowered its capacity utilization in the U.S. to 40% in December 2008. In February 2009, the company also announced the temporary cessation of operations of the steel galvanizing line at Severstal Warren until conditions improve, and has adjusted the size of its workforce in line with this reduced level of production.
Severstal Sparrows Point and Wheeling have maximized utilization of their tinplate production in response to an increase in demand in 2009. In addition, the company also negotiated an increase in prices with North American automotive and tin customers for 2009.
In the company’s European operations, Lucchini’s EBITDA increased to $430 million, growing by 3.4% compared with the previous year, with revenues up by 6.2%. In the first nine months, Lucchini saw an increase in production and prices due to strong demand in the European market. It produced 37% less crude steel in Q4 than in Q3 as a result of worsening economic conditions. The production of rails was up 84.0% quarter-on-quarter.
Outlook—Noting that the global operating environment remains challenging and visibility remains limited, the company commented that it had, however, seen some signs of improvement in the beginning of 2009 relative to the last quarter of 2008.
Severstal said that in Russia, its long product lines were operating at full capacity in January and February of 2009 due to improved demand from the construction segment. Government-controlled banks have also provided financing to large construction companies to complete existing projects. In addition, the company anticipates that the re-stocking and stimulus plans announced by many national governments are likely to support demand for steel in 2009.
The company said that although it remains confident in industry’s long-term prospects, it believes it would be inappropriate to provide guidance for 2009 until visibility and global economic conditions improve. For the same reason, the company said it also was not recommending payment of a dividend for Q4 2008, and that it does not currently anticipate payment of dividends in 2009.
