Severstal Annual Report 2015 Home > Strategic Review > Severstal CFO’s Review

Severstal CFO’s Review

Dear Shareholders,
In 2015, Severstal delivered another set of strong financial results in an uncertain climate. The company retained its leading position in cost efficiency improvement whilst remaining focused on customer care and investment optimisation. Through these initiatives and our strong financial position the Company remains positioned to deliver long-term shareholder value.

Our rigorous focus on cost optimisation and our efficiency initiatives coupled with our vertically integrated business model and strong product portfolio enabled the Company to offset market headwinds and contributed substantially to our earnings performance in 2015.

While a substantial share of Severstal’s production and general and administrative costs are rouble-denominated, short-term rouble fluctuations have a broadly neutral effect on our EBITDA as long as rouble revenue approximately matches our rouble denominated costs.

Moreover, Severstal was able to release substantial net working capital due to effective inventory reduction, conservative shipment policies and proactive enhancement of payment discipline to prevent the accumulation of bad receivables as well as the use of factoring in order to improve payment terms. As a result, working capital turnover further improved in 2015, while net working capital as a proportion of last twelve months’ revenue was just 7.7% at the end of 2015 versus 8.9% at the end of 2014.

Reflecting our prudent approach to investments, Severstal reduced its cash capex by 44% against FY2014 to just US$440 million in 2015. This impressive decline reflects the fact that the majority of Severstal’s development projects were either completed or close to completion, while rouble devaluation provided additional positive impact as more than 60% of our capex program is rouble-denominated. As a result, in 2015 cash capex was equal to 24% of operational cash flow.

These factors enabled the Company to maintain a substantial level of free cash flow generation, which is one of Severstal’s key priorities. Free cash flow for FY2015 exceeded US$1.5 billion.

Further deleveraging as well as retaining the strength of the balance sheet remains one of the top priorities for Severstal as well. Despite the fact that our gross debt is predominantly public and proactive debt reduction is largely maturity-driven, Severstal reduced gross debt by almost US$1 billion. To ensure we maintain a strong balance sheet in the low-visibility macro-economic environment we retain more than US$1 billion of hard currency in cash and cash equivalents on the balance sheet. That said, the net debt/EBITDA ratio reduced to 0.4x by the end of 2015.

In 2015 we enhanced our treasury function via further significant improvement of the Company’s cash management. We have further extended our centralised cash pooling mechanism in Russia, which allows us to run the company with what is effectively a “zero” cash balance and enables us to enhance profits by having all available cash as bank deposits. We have started rolling out this mechanism to our remaining operations globally and expect this project to be completed in 2016.

Following the revision of our dividend policy in 2014, the Company started to pay out more than a 50% share of its net income in form of dividend. At Severstal we strive to maintain close dialogue with our investors who provide us with both constructive feedback and valuable insight on the market. These factors remain core to our decision-making and have become deeply embedded across our day-to-day operations. In the meantime, equilibrium between a strong financial position and the ability to generate substantial free cash flow enables Severstal to retain its leading position in terms of maximising shareholder returns.

Alexey Kulichenko
Chief Financial Officer

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