Annual Report 2007 - Severstal

Our strategy for growth is to:
– Retain our position as one of the top global steel
companies by profit
– Pursue organic growth coupled with a disciplined
approach to M&A
– Increase international diversification and vertical integration
– Focus on high-value-added and niche steel products
– Build a strong global platform for profitable growth
I am pleased to report that Severstal achieved a strong financial
performance for the year ended 31 December 2007. The company
made good progress, posting record revenues for the year and
growing net profit by over 33% compared with the previous year.
We also increased EPS by over 22% year-on-year.
EBITDA for 2007 increased by 24.5% compared with the
same period last year. This was due to positive price trends, a
booming Russian economy prompting healthy domestic demand
for steel, and stability in European steel markets. Our increasing
focus on operational efficiency also enabled us to improve the
quality of our operations and pass cost inflation on to our
customers.
Based on our strong earnings and cash flow, the Severstal
Board decided to increase the dividend payout to 40.1% of net
profit, in line with our stated dividend policy of paying at least
25% of consolidated net profit.
With the exception of Severstal North America, all of our
businesses performed well during the year.
Severstal Russian Steel
Russian Steel continued to lead our growth, achieving a 26.8%
increase in EBITDA year-on-year to US$2,530 million, with an
EBITDA margin of 31.8% in 2007 compared with 31.6% in 2006.
In Metalware, our unit which manufactures steel wire and other
downstream products from wire rod, our new strategy of moving
to high-value-added products paid off. We achieved 2007 EBITDA
of US$87 million, an increase of 77.6% compared with 2006.
In April 2007, we announced plans to invest US$77 million at
our Cherepovets Steel Mill to improve one of our galvanising lines.
The investment is in response to growing customer demand for
improved galvanised steel – particularly from the Russian
construction industry – and will double the line’s capacity.
In June 2007, we announced construction of the second
polymer coating line in Cherepovets. Capable of manufacturing
up to 200,000 tonnes of coated products a year, the line will supply
the domestic construction industry.
Izhora Pipe Mill, our large diameter pipe manufacturer,
performed well, building on the strong foundations set in 2006.
Sales volumes rose to 301,000 tonnes in 2007 as this new business
ramped up to its full production capacity; it reported EBITDA of
US$150.6 million and a 2007 EBITDA margin of 27.3%.
Severstal Resources
In our Resources division, 2007 EBITDA was up 13.3% to
US$501 million partly due to higher prices compared with 2006.
Iron ore concentrate production was up by 4.0% year-on-year.
During the year Severstal Resources acquired two gold mines
in Russia and extraction and exploitation licences in Russia and in
Kazakhstan. Severstal Resources also acquired the entire share
capital of Celtic Resources, a gold mining company, for a total
consideration of US$308.6 million during 2007 and the first
quarter of 2008.
Our strategy for the gold market is based on making relatively
small, opportunistic investments to exploit the synergies and
expertise in our existing core mining business. Severstal aims to
invest in gold mining businesses at attractive valuations and to
supplement these with new licence grants.
Severstal International
In our International division, Severstal North America’s (SNA)
results for the year were impacted by weaker market conditions
in North America and a planned outage related to the relining
of C-Blast Furnace. As a result, EBITDA declined to $21.5 million.
The relining of SNA’s C-Blast Furnace from July to October
2007 cut production volumes, which were partially compensated
by purchased slabs. Demonstrating of our focus on operational
performance improvements, the newly built furnace was
commissioned three days ahead of schedule and production
resumed immediately afterwards. Over time we expect to reduce
operating costs by introducing new technologies.
Also in the US, we announced plans to accelerate the
expansion of our SeverCorr steel mill in Mississippi. SeverCorr is a
unique combination of the mini-mill steelmaking technology with
an integrated finishing process. It produces high-quality steel
from steel scrap, instead of iron ore, by melting it in an electric arc
furnace feeding a thin-slab caster coupled with a high-powered
hot strip mill. Further processing of steel is accomplished at a
highly sophisticated cold rolling mill and galvanising line. We are
currently investing in a second production line to increase capacity
to 3.0 million tonnes of high-quality steel. We consolidated our
holding in SeverCorr in January 2008 when we acquired 74.2%
of this promising new business.
At our European business, Lucchini, we increased EBITDA by
23.8% to US$416 million compared with the previous year. This
was due to higher prices and a favourable dollar-euro exchange
rate. Revenues rose by 11.9% year-on-year, resulting in an increase
in EBITDA margin to 11.1% in 2007 compared to 10.0% in 2006.
Severstal Annual Report 2007 9