Severstal Q2 profit hit by declining rouble

Revenue increased by 2.8% Q/Q to $3414M (Q12013 $3322M), driven primarily by higher sales volumes across all divisions.

EBITDA was up 11.4% Q/Q to $479M (Q1 2013: $430M), as a result of improved performances at Severstal Russian Steel and Severstal Resources. The EBITDA margin increased 1.1% to 14.0% (Q1 2013: 12.9%).

EBITDA at Severstal International (US operations) was lower Q/Q but this was the result of a $12M positive non-cash one-off item in Q1 2013. Adjusting for that one-off item the division’s EBITDA also increased Q/Q.
However, the company reported a net loss of $44M in Q2 2013, as compared to net profit of $44M in Q1 mainly due to $226M foreign exchange losses in the quarter due to the weakening of the rouble. Excluding these FX losses the company’s profit for the period would have been $182M.

Capital expenditure in Q2 2013 was $253M, 18.1% lower than in Q1, reflecting the Company’s flexible and prudent approach to capex. Russia is the main focus of investments in FY 2013 with key projects at Severstal Russian Steel including the Balakovo minimill, the development of specialised service centres and the modernisation of the Izhora pipe plant.

At Severstal Resources, which covers the Company’s iron ore and coal mining operations, major projects of the year include the construction of two incline shafts and the first stage of the preparation of plant capacity expansion project at Vorkutaugol and the construction of a steeply inclined conveyor at Olkon.

First half 2013

Comparing H1 2013 with H1 2012 revenue was down 8.9% y/y to $6736M (H1 2012: $7397M) as a result of lower selling prices.

EBITDA was reduced by 27.2% to $909M (H1 2012: $1249M) reflecting lower steel, iron ore and coking coal prices.
Again, the declining value of the rouble against the US dollar resulted in a breakeven profit in H! 2013 as compared to a net profit of $582M in H1 2012. FX losses accounted for $241M of the decline in profits. Excluding the FX losses the company’s profit for the period would be $246M.

Output

Steel sales volumes at Severstal Russian Steel increased by 4.2% in Q2 2013 Q/Q to 2.7Mt as a result of higher realised volumes of high value-added and long products. This helped offset a continuing downward pricing trend across the products, except for CRC, color-coated and semi-finished products and delivered a 3.1% increase in the division’s revenue to $2093M (Q1 2013: $2030M).

The share of high value added products in the division’s sales portfolio improved in Q2 to 45% against 43% in Q1, resulting from seasonally higher sales. The share of domestic sales in the division’s portfolio increased to 65% from 56%, which was also attributable to seasonality.

Severstal International

Severstal International which included the Company’s two operations in USA delivered another solid performance in Q2 2013, further increasing sales volumes by 5.2% to 1.2Mt as a result of strong US demand and customer base expansion by introduction of new products.

The division’s utilisation rate was almost 100%, compared to an average 78% for the US steel industry as a whole. However the impact of this was partly offset by some price correction, with prices down 2.6% Q/Q for the division’s steel products. The overall result was a 2.5% Q/Q increase in revenue to $953M (Q1 2013: $930M).

Increased revenue together with lower production unit costs and sales, general and administration expenses resulted in an EBITDA of $44M (Q1 2013: $50M). This Q/Q decrease in EBITDA was mainly attributable to a $12M positive one- off non-cash item recorded at Severstal International in Q1 2013. Adjusting for this item, which was the result of a settlement with a coking coal supplier, EBITDA has improved Q/Q. EBITDA margin remained relatively stable at 4.6% (Q1 2013: 5.4%).

With the US economy continuing to grow at a slow but steady pace in Q2, domestic steel demand remained strong, driven by the auto, construction and pipe and tube industries. June automotive sales reached the record high in recent years at 16 million units (on an annualised basis) and total construction spending in 1H 2013 was up 5% y/y, driven by a 20% increase in residential spending.