2nd Apr 2007 07:38
OAO Severstal02 April 2007 SEVERSTAL FOR IMMEDIATE RELEASE RESULTS FOR THE YEAR ENDED DECEMBER 31, 2006 POSITIVE YEAR FOR GROWTH OF SEVERSTAL April 2, 2007 - OAO Severstal (LSE: SVST; RTS: CHMF), today announces itsaudited results for the year ended 31 December 2006. Financial Results for the year ended December 31, 2006($ million unless otherwise stated) The year ended December 31, The year ended December 31, Change 2006 2005 y-o-y Revenue 12,423 10,432 19.1% Revenue onpro-formabasis1 11,574 7.3% EBITDA2 2,987 2,853 4.7% EBITDA onpro-formabasis1 3,054 (2.2%) Profitfrom 1,954 2,320 (15.8%)operations Net 1,181 1,696 (30.4%)profit3 EPS, $ 1.27 1.86 (31.7%) DPS, $ 0.39 0.53 (26.4%) Notes: 1 Financial results of Lucchini were included in the consolidated financialstatements for the year ended December 31, 2006 from the end of April 2005.Accordingly, consolidated financial results for 2005 include only eight monthsof financial results of Lucchini. Pro-forma information is presented solely to facilitate comparability andincludes financial results of Lucchini for the whole of 2005. Pro-formainformation is unaudited but it is based on audited consolidated financialstatements of OAO Severstal and of Lucchini S.p.A. 2 Refer to Attachment 1 for reconciliation to profit from operations 3 Net profit attributable to shareholders 2006 Highlights: •Positive year of growth for Severstal •Consolidation of steel and mining assets under the Severstal umbrella •Investments in Severgal and coating line yielding good financial result •Izhora pipe mill commissioned in July 2006 revenues up 7.3% on 2005 to a record US$12,423 m on pro-forma basis due to: •A stable pricing environment across all market segments •Improved product mix •Increase in steel and mining product volumes 2006 EBITDA marginally down at $2,987 m versus US$3,054 m on pro-forma basis in 2005 due to: •Cost inflation in raw materials, energy and labour •Weaker mining sector performance •Increase in selling, general and administrative expenses and distribution costs •H2 2006 stronger than H1 2006 The main reason for the net profit reduction to US$1,181 m from US$1,696m in 2005 was: •The revaluation of fixed assets giving rise to additional depreciation of approximately $300 million $1,244 m invested in volume growth, efficiency and product mix improvements •Solid platform for future growth on a continuous basis •GDR listing on LSE in November 2006 •New corporate governance structure in place •Healthy start in 2007 and strong outlook for the whole year Chris Clark, Non - Executive Chairman, OAO Severstal, commented: "Our 2006 results demonstrate Severstal's healthy fundamentals, and our abilityto rise to the challenges of operating in new markets. From a financial andstrategic perspective, we are now well placed to drive further growth in 2007,delivering attractive returns to our shareholders". Alexei Mordashov, CEO of OAO Severstal, commented: "2006 was a year of change and consolidation for Severstal. Our GDR listing onthe London stock exchange and the adoption of a new corporate governancestructure positions the company well with investors. We also completed theconsolidation of all of our steel and mining interests during the year. A stable pricing environment in all geographies helped us to achieve recordrevenues in 2006, and, although our net profit was affected by a challengingstart to the year, all of our businesses demonstrated significant progress inthe second half. EBITDA for the full year is marginally down year on year,primarily due to cost inflation in raw materials. Net profit was negativelyaffected by depreciation resulting from fixed asset revaluation, as required byIFRS, and several one-offs, including various modernisation projects inCherepovets. The results of the revaluation of fixed assets reflect the highquality of these assets (see Appendix II). In the context of change and consolidation, Severstal reports a solid set ofresults for 2006, especially when compared with its exceptional performance in2005 which was supported by high steel prices. In June we acquired several mining companies, which are the principal suppliersof iron ore, pellets and coal concentrate to the Russian Steel segment. InOctober we increased our share in the successful Lucchini Group from 20% to70.8%. Taking into account the asset expansion, 2006 is the first year in whichSeverstal delivered improved results across all segments of its business. Thisprogress was driven by operational efficiencies delivered by achieving higheraverage realised prices and rigorous cost controls. Sales at the Russian Steel segment increased by 5.2% to $6,274 m from $5,964 min 2005. The Severstal North America segment increased revenues by 2.5% to$1,868 m. Our European Steel segment, represented by Lucchini Group, added$3,357 m in revenues to the top line during 2006 compared to $1,848 m in 2005. Sales in our Mining segment amounted to $1,464 m in 2006 - a y-o-y increase of6.7%. This increase in revenues was the result of volume growth supported byimproved pricing in2H 2006. In the Russian Steel segment, the major capital projects commissioned in thefirst half of the year supported revenue growth in the second half of the year.The modernization of the cold roll shop in Cherepovets, the introduction ofSevergal, the only Russian producer of high-quality HDG steel for exposed carparts, and several other investment projects on a smaller scale contributed tothis growth. Revenues were helped by higher average steel prices, especially inthe second half of 2006. Higher prices for energy, alloys and labour were offsetby reductions in consumption and efficiency improvements. The consolidation of the steel industry in North America made the market moredisciplined and predictable. Integrated steel producers in the USA cut volumesin 3Q 2006 to support steel prices. The operating margin in the Severstal NorthAmerica segment increased from 4.5% in 2005 to 7.2% in 2006. In Europe, the market for high-quality long steel products was stable throughoutthe year. Lucchini's substantial share of niche and value-added products helpedsupport its profitability. and operating margin increased from 2.9% in 2005 to6.2% in 2006. In the Mining segment, the annual contracts between the Russian Steel and Miningsegments improved the profitability of steel operations. After a weak first halfof the year, the market for iron ore and coal recovered in the second half of2006, which resulted in a substantially stronger performance than in 1H 2006 asspot prices and volumes were on a growing trend. The outlook for 1H 2007 ispositive due to a continuation of this favourable pricing trend. The SeverstalMining segment supplied approximately 70% of the Russian Steel segment's ironore and pellets, and 85% of coal requirements - broadly in line with historicallevels. Severstal has followed its long-term dividend policy of paying at least 25% ofthe net profit as a dividend. $194.5m was paid for the first nine months of2006. The final dividend of5 Rubles ($0.19) per share has just been approved by the Board and will be paidout after it has been approved by shareholders at our AGM in Cherepovets inJune." Commenting on the outlook for 2007 and beyond Alexei Mordashov said: "The changes and consolidation we have brought about in 2006 provide us with avery strong platform for growth. The outlook for Severstal is positive for 2007 supported by solid expectationsfor steel prices in all major regions. We will continue to drive value throughstrong organic growth and a disciplined approach to M&A. We are confident thatour results for the current year will be at least in line with consensus marketexpectations." For further information: Severstal Dmitry Druzhinin, Investor Relations Olga Antonova, Public Relations +7 495 540 7766 Tulchan Communications Andrew Grant/Celia Gordon Shute +44 207 353 4200 Severstal will be holding a conference call for analysts and investors at 5 pmMoscow Time on Monday 2 April 2006. Dial-in details are: Russia dial-in: 810 800 2177 4011 UK dial-in: 0870 737 9888 US dial-in: 1866 9665335 International dial-in for other countries: +44 20 3003 2663 Participant code: 232150 Summary Results: Severstal's consolidated revenues increased by 19.1% to $12,423 million in 2006from $10,432 million in 2005, attributable to a stable price environment in allgeographies and product mix improvements, as well as the effect of consolidationof Lucchini, which was included only for eight months for 2005. Consolidated cost of sales, amounted to $8,943 million in 2006, compared with$6,833 million in 2005. Cost of revenues as a percentage of consolidatedrevenues increased to 72.0% (2006), from 65.5% in 2005. The primary driversbehind this change were higher growing energy and labour costs, as well asincrease in depreciation after the revaluation of PP&E (property, plant &equipment) primarily in Russian Steel segment. PP&E is periodically revalued tobe stated at fair market value. Gross profit was down 3.3% y-o-y at$3,479 million from $3,599 million in 2005. Revenues from non-Russian sales amounted to $7,519, or 60.5% of total salescompared with $6,687 million, or 64.1% the previous year. The increased share ofRussian revenues was attributable to strong price dynamics in the Russian marketand structural changes in sales within the Russian Steel segment in favour ofthe domestic market. Profit from operations decreased by 15.8% to $1,954 million in 2006 from $2,320million in 2005. This decrease was largely due to pricing for raw materials andsteel in 1H 2006 in the domestic Russian market. In Q3 2006 Russian spot steelprices, as well as prices for iron ore, pellets and coal concentrate recoveredfrom the year's low in Q2, and continued to be steady through the year. On theother side, operating profit was under cost pressure from higher energy andlabour costs. The negative influence of cost inflation was partially offset bymanagement gains in consumption efficiency and technological optimization. Groupoperating margin went down to 15.7% in 2006 from 22.2% in 2005. Consolidated EBITDA increased to $2,987 million (up 4.7%) in 2006 from $2,853million in 2005. Increase in EBITDA reflects the fact, that financial result ofLucchini in 2005 was consolidated for 8 months (it was consolidated by Severstalfrom end of April 2005). On a comparable basis, EBITDA in 2006 declined 2.2%against pro-forma EBITDA of$3,054 million in 2005. EBITDA margin of 24.0% in 2006 was lower than in 2005,when it was 27.3%. In 2006, the income tax charge amounted to $543 million, which gives aneffective tax rate of 31.0%, up from 23.6% in 2005. In 2006, Severstal reported consolidated net profit attributable to shareholdersof$1,181 million vs. $1,696 million in 2005. The lower net profit was affected byan increase in depreciation and one-off items, such as gain on reversal ofimpairment of property, plant and equipment in 2005, and gain on restructuringof tax liabilities in 2005. 2006 EPS amounted to US$1.27, or $0.59 lower than in 2005. Net debt, calculated as the difference between cash and cash equivalents plusshort-term bank deposits and financial debt decreased from $922 million to $154million. Increase in total indebtedness from $2,924 million to $3,002 millionwas counterweighted by increase in cash, cash equivalents and short-term bankdeposits from $2,002 million to $2,848 million. This increase is mainlyattributable to proceeds from the share issue in November. Review of Operations Revenues by segment ($ million unless otherwise stated) Year ended December 31, Year ended December 31, Change 2006 2005 y-o-y Russian Steel 6,274 5,964 5.2%SNA 1,868 1,823 2.5%Lucchini 3,357 1,848 81.7%Metalware 839 619 35.5%Mining 1,464 1,372 6.7%Other andintersegment (1,381) (1,193) n.a. Total 12,423 10,432 19.1% Russian Steel Russian Steel segment revenues for 2006 were $6,274 million, an increase of 5.2%y-o-y from $5,964 million in 2005. Steel segment revenues were affected byhigher average prices for steel, especially in 2H 2006 as compared with 1H 2006. Key financials ($ million unless otherwise stated) Year ended December 31, Year ended December 31, Change y-o-y 2006 2005 Revenues 6,274 5,964 5.2%Profit fromoperations 1,422 1,776 (19.9%)Operatingmargin,% 22.7% 29.8%EBITDA 2,014 2,039 (1.2%)EBITDAmargin,% 32.1% 34.2% In 2006, segment profit from operations decreased by 19.9% to $1,422 million, or22.7% of segment revenues, from $1,776 million, and 29.8% of segment revenues in2005. In 2006 higher prices for energy, alloys and labour depressed margins,while rigorous management of consumption rates and sales structures helped toprevent further deterioration in margins. EBITDA in the steel segment totaled$2,014 million, 1.2% lower than in 2005. SNA North American Steel segment revenues for 2006 were $1,868 million, an increaseof 2.5%y-o-y from $1,823 million in 2005. A drop in spot prices in 3Q 2006 was offsetby substantial share of contracted sales. Consolidation in the North Americansteel industry added discipline to the market. In 4Q 2006 spot prices wererestored. Overall average revenue rates were higher by $15 per tonne in 2006over 2005. Key financials ($ million unless otherwise stated) Year ended December 31, Year ended December 31, Change y-o-y 2006 2005 Revenues 1,868 1,823 2.5%Profit fromoperations 134 82 63.4%Operatingmargin,% 7.2% 4.5%EBITDA 143 89 60.7%EBITDAmargin,% 7.7% 4.9% In 2006, segment profit from operations increased by 63.4% to $134 million, or7.2% of segment revenues, from $82 million, and 4.5% of segment revenues in2005. 2006 EBITDA in this steel segment totaled $143 million, 60.7% higher thanin 2005. Rigorous operational management helped to improve margins. Increases inzinc and pellets prices were balanced by favourable coke and scrap pricing.Reduction in selling, general and administrative expenses by 6.7% also helped toincrease both operating and EBITDA margins. Lucchini Lucchini revenues for 2006 were $3,357 million, an increase of 81.7% y-o-y from$1,848 million in 2005. This increase in sales reflects the fact that Lucchiniin 2005 was consolidated for 8 months only. On a pro-forma basis Lucchini'srevenues increased by 12.2% in 2006 compared with 2005. Average sales priceswere stable y-o-y. Key financials ($ million unless otherwise stated) Year ended December 31, Year ended December 31, Change y-o-y 2006 2005 Revenues 3,357 1,848 81.7%Profit fromoperations 208 53 292.5%Operatingmargin,% 6.2% 2.9%EBITDA 336 134 150.7%EBITDAmargin,% 10.0% 7.3% In 2006, segmental profit from operations increased by 292.5% to $208 million,or 6.2% of segment revenues, from $53 million, and 2.9% of segment revenues in2005. 2006 EBITDA in the segment totaled $336 million, 150.7% higher than in2005. This increase in EBITDA reflects the fact, that Lucchini in 2005 wasconsolidated for 8 months only. On a pro-forma basis EBITDA of Lucchini was 1.2%higher in 2006 compared with 2005. Metalware The metalware segment's revenues for 2006 were $839 million, an increase of35.5% y-o-y from $619 million in 2005. Key indicators ($ million unless otherwise stated) Year ended December 31, Year ended December 31, Change y-o-y 2006 2005 Revenues 839 619 35.5%Profit fromoperations 17 (10)Operatingmargin,% 2.0%EBITDA 49 12 308.3%EBITDAmargin,% 5.8% 1.9% In 2006, segment profit from operations amounted to $17 million, or 2.0% ofsegment revenues, compared to a $10 million loss in 2005. 2006 EBITDA in thesegment totaled $49 million, 308.3% higher than in 2005. Mining The Mining segment supplied approximately 70% of the Russian Steel segment'siron ore and pellets, and 85% of coal requirements. Mining segment revenues for2006 were $1,464 million, an increase of 6.7% y-o-y from $1,372 million in 2005.This increase in revenues was attributed to volume growth in 2H 2006 aftermarket recovery and an improved product mix. Key indictors ($ million unless otherwise stated) Year ended December 31, 2006 Year ended Change y-o-y December 31, 2005 Revenues 1,464 1,372 6.7%Profit fromoperations 168 438 (61.6%)Operating margin,% 11.5% 31.9%EBITDA 440 598 (26.4%)EBITDA margin, % 30.1% 43.6% The mining segment profit from operations decreased by 61.6% to $168 million in2006, or 11.5% of mining segment revenues. This compares with $438 million, or31.9% of mining segment revenues in 2005. EBITDA in the mining segment declinedby 26.4% to $440 million, or 30.1% of mining segment revenues in 2006 comparedwith $598 million, or 43.6% of revenues in 2005. Margins decreased mainly due tothe fact that prices for pellets, iron ore and coal in the annual contracts withthe Russian Steel segment were fixed in January 2006, at which point theydropped after strong performance in 2005. A further factor was inflation ofenergy and labour costs, which was partially balanced by consumption efficiencyimprovements. Consolidated Group Financial Position Attachment I EBITDA EBITDA represents profit from operations plus depreciation and amortisation, andloss (gain) on disposals of property plant and equipment. EBITDA is not ameasure of financial performance under IFRS, and it should not be considered asan alternative to net profit as a measure of operating performance or to cashflows from operating activities as a measure of liquidity. Severstal'scalculation of EBITDA may be different from the calculation used by othercompanies and therefore comparability may be limited. Reconciliation of EBITDA to profit from operations is as follows: ($ million unless otherwise stated) Year ended December 31, Year ended December 31, Change y-o-y 2006 2005 Profit fromoperations 1,954 2,320 (15.8%)Depreciationandamortisation 963 497 93.8%Loss ondisposal ofPP&E 70 37 89.2%ConsolidatedEBITDA 2,987 2,853 4.7% EBITDA by segment ($ million unless otherwise stated) Year ended % of total Year ended % of total Change December 31, 2006 EBITDA December 31, 2005 EBITDA y-o-y Russian 2,014 67.4% 2,039 71.5% (1.2%)SteelNorthAmerican 143 4.8% 89 3.1% 60.7%SteelLucchini 336 11.2% 134 4.7% 150.7%Mining 440 14.7% 598 21.0% (26.4%)Metalware 49 1.7% 12 0.4% 308.3%Other andintersegment 5 0.2% (19) (0.7%) n.a. Total 2,987 100% 2,853 100% 4.7% Attachment II Net Debt Net Debt is not a balance sheet measure under IFRS, and it should not beconsidered as an alternative to other measures of financial position.Severstal's calculation of Net Debt may be different from the calculation usedby other companies and therefore comparability may be limited. Net Debt is as follows: (US$ million unless otherwise stated) December 31, 2006 December 31, 2005 Long-term financial debt 2,048 1,932Short-term financial debt 954 993 Cash and equivalents 1,700 1,327Short-term bank deposits 1,147 675 Net Debt 154 922 Attachment III Net Debt and EBITDA are not balance sheet measures under IFRS, and they shouldnot be considered as alternative to other measures of financial position.Severstal's calculation of Net Debt and EBITDA may be different from thecalculations used by other companies and therefore comparability may be limited. Credit Ratios are as follows: December 31, 2006 December 31, 2005Net Debt/EBITDA 0.05 0.32 Appendix I Balance Sheet December 31, 2006 December 31, 2005 Current Assets 7,493 5,992Non-current Assets 11,313 9,342Total Assets 18,806 15,334Current Liabilities 2,955 3,162Non-current Liabilities 4,173 3,775Shareholders Equity 11,678 8,397Total Liabilities and ShareholdersEquity 18,806 15,334 Appendix II Income Statement December 31, 2006 December 31, 2005 Change y-o-y Sales 12,423 10,432 19.1%Cost of Sales (8,943) (6,833) 30.9%Profit from Operations 1,954 2,320 (15.8%)Operating Margin 15.7% 22.2%Profit before tax 1,753 2,316 (24.3%)Net Profit 1,181 1,696 (30.4%)Net Margin 9.5% 16.3%EPS 1.27 1.86 (31.7%) Appendix III Cash Flow Statement 2006 2005 Profit before financing and taxation 1,862 2,514Cash generated from operations 2,621 2,691Interest paid (excluding banking operations) (215) (199)Income tax paid (677) (557)Net Cash Flow from operating activities 1,729 1,934Cash Flow used for investing activities, including (2,169) (1,178)Additions to PP&E (1,244) (1,204)Cash provided from/ (used for) financing activities,including 726 (449)Proceeds from share issues 1,105 -Effect of exchange rates on cash and cash equivalents 86 (71)Net increase in cash and cash equivalents 373 237Cash & cash equivalents at beginning of the year 1,327 1,090Cash & cash equivalents at end of the year 1,700 1,327 This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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