12th Sep 2006 07:04
OJSC Novolipetsk Steel12 September 2006 12.09.2006 NOVOLIPETSK STEEL H1 2006 US GAAP RESULTS OJSC Novolipetsk Steel (NLMK), the LSE listed leading Russian steel producer,today announces its consolidated US GAAP results for the first half of 2006. Highlights: - Strong H1 2006 financial results • Sales revenues were USD2,601.7 million • Cash flows from operating activities were USD527.8 million • EBITDA* margin was 38% • Net profit was USD943.8 million • Cash and cash equivalents USD1,385.6 million as of 30 June, 2006 - Consistent strategy to increase self sufficiency in raw materials: • Acquisition of Altai-koks, the largest independent coke producer inRussia, located in Western Siberia. • Acquisition of Prokopievskugol, a coal mining company producing highquality coking coal in Western Siberia. - Commencement of the second phase of the technical upgrading program(2006-2010). Total value of investments in fixed assets for H1 2006 amounts toUSD239.8 million. - The Board of Directors recommended dividend payment in respect of the firstsix months of 2006 of RUR1.5 per ordinary share (1 GDS = 10 ordinary shares).The dividend payment is subject for the approval of shareholders meeting on 29September, 2006. The Annual General Meeting (AGM) held on 6 June, 2006 hasapproved final dividends for 2005 of RUR2.0 per ordinary share. Includingearlier paid interim dividend of RUR1.0 per ordinary share for the first sixmonths of 2005, the total dividend for 2005 is RUR3.0 per ordinary share. - Within the framework of the previously announced internal restructuring plan,the AGM approved Mr. Alexey Lapshin as the President of NLMK (Chairman of theManagement Board) on 6 June, 2006. The membership of the Management Board wasapproved by the Board of Directors as advised by the President. Financial highlights for the first half ended 30 June, 2006 USD, million Q2 2006 Q1 2006 Change, % H1 2006 H1 2005 Change, %Sales Revenue 1 478,7 1 123,0 32% 2 601,7 2 377,1 9%Gross profit 708,6 444,2 60% 1 152,8 1 208,9 -5%Operating income 545,5 379,8 44% 925,3 1 106,9 -16%EBITDA* 603,4 389,9 55% 993,3 1 231,2 -19%EBITDA Margin(%) 41% 35% 38% 52%Net profit 397,9 545,9 -27% 943,8 838,4 13% * EBITDA = Net income (post minorities) + income tax +/- net interest +/-gains/(losses) on investment + depreciation +/- gains/(losses) on disposals ofproperty, plant and equipment Galina Aglyamova, NLMK's CFO, commented: "The successful implementation of NLMK's strategy of maintaining and furtherincreasing company's profitability, together with the improvement in the steelmarket, resulted in high profit margins. EBITDA margin in H1 2006 amounted to38%. NLMK maintains one of the highest EBITDA margins in the global steelindustry. Stable cash flow from operating activities ensures the Company'sfinancial flexibility within the framework of corporate strategy. During the reporting period, important steps were taken to implement NLMK'svertical integration strategy. Prokopievskugol, a producer of high-qualitycoking coal, and Altai-koks, the largest independent coke producer in Russia,were acquired in the first half of the year. As a result of these acquisitions,NLMK currently covers more than 100% of its current requirements in coke and 50%in coking coal. The company has substantially strengthened its raw materialsbase, which is crucially important for maintaining the company's sustainablegrowth". Management Board Comments In recent years, Novolipetsk Steel (NLMK) has remained one of the most efficientsteel producers in Russia and worldwide. NLMK's strategy, aimed at increasingthe Company's value, creating long-term competitive advantages and reducing itsdependence on market conditions, supports NLMK's continued stable performanceand allows the group to meet the challenges of unfavorable external factors in aflexible way. Sales revenue growth in the first half of 2006 over the corresponding periodlast year is explained by the production volume increase and metal productshipment, and the impact of consolidating acquired assets - DanSteel A/S,Prokopievskugol Group of Coal Companies and Altai-koks. In addition, since March2006 conditions for the delivery of exported products has changed, now that thesales price for NLMK's products also includes payment for cargo transportationup to border crossing points or port stations. Despite the increase in steel prices at the end of Q1 2006, in H1 2006 as awhole the price level remained on average 15% less than in H1 2005. The poormarket conditions have exerted influence on company's financial performance inH1 2006. The improvement of the market environment, sales volumes growth, acquisition ofcoal and coke producers in Q2 2006 contributed to the Group's key financialresults improving over the previous quarter. Cash provided by operating activities in H1 2006 amounted to USD527.8 million,USD159.1 million of which was in Q1 2006 and USD368.7 million in Q2 2006. At theend 2005, USD1,924.1 million was accumulated on NLMK's balance sheet. Part of itwas directed to asset acquisitions, hence as of 30 June, 2006 cash and cashequivalents amounted to USD1,385.6 million, 28% less than as of the end ofDecember 2005. Steel Segment The steel segment continues to be the key segment of the Company. In the firsthalf of 2006, this segment generated USD2,393.6 million sales revenue fromexternal customers and USD833.9 million from operating activities. The share ofsteel segment in H1 2006 was 92% of consolidated revenues and 90% of operatingincome. Sales revenue growth was USD165.7 million or 7% higher over the correspondingperiod last year, and gross profit up by USD20.2 million or 2%. Consolidation ofDanSeel A/S in December 2005 had a positive impact on the financial results inthe first quarter 2006 and served as a factor which increased sales of finishedsteel product (steel heavy plates) in Europe and created additional valuethrough the development of high value-added segment. Sales revenue in Q2 2006 amounted to USD1,346.0 million, which isUSD298.5million or 29% higher than in Q1 2006. Operating income growth in Q22006 over Q1 2006 amounted to USD161.2 million or 48%. The steel segment revenueand operating income increase in Q2 2006 was due to steel prices and salesvolumes growth. Mining segment As of the first half 2006, NLMK's mining segment comprises OJSC Stoilensky GOK,OJSC Dolomite, OJSC Stagdok, and OJSC Combinat KMARuda that supply raw materialsfor NLMK's manufacturing facilities in Lipetsk and also sell a portion of rawmaterials to third parties. Stoilensky GOK is the principal mining company within the Group. In the firsthalf of 2006, it produced 5.54 million tonnes of iron-ore concentrate and 0.642million tonnes of sinter ore. In the first half of 2006, the output of Dolomitewas 0.893 million tonnes of flux dolomite. Stagdok, which supplies limestone,produced 1.546 million tonnes of fluxing limestone in the same period. In the first half of 2006, the mining segment's revenue from external customerswas USD43.1 million, which is 27% lower than the level reached in first halflast year. The segment's revenue reduction compared to the same period last yearwas due to lower prices in the domestic iron-ore market this year. In Q2 2006, the market environment improved, thus the revenue from externalcustomers in Q2 2006 was higher than in Q1 2006 by USD10.3 million (+63%) andamounted to USD26.7 million. The segment revenue, including intersegmental transactions in H1 2006, wasUSD250.4 million (-25% as compared to H1 2005). In Q2 2006, it amounted toUSD140.9 million, which is USD31.3 million (+28.6%) more than in Q1 2006. As 83% of the mining segment's sales in value terms accounts for operationswithin the Company, the segment share in NLMK's consolidated revenue in H1 2006was 1.7%. In Q2 2006 the operating profit increase due to iron-ore prices growth andproduction volumes amounted to USD29.4 million (+98% as compared to Q1 2006),which offset its low level in Q1 2006. Coke-chemical segment Starting from Q2 2006, OJSC Altai-koks and its subsidiaries are consolidatedinto NLMK Group. OJSC Altai-koks is the leader among producers of coke inRussia. Its current production facilities are 3.9 million tonnes of coke peryear. Financial results of Altai-koks and its subsidiaries are shown inCoke-chemical segment. In the Q2 2006, the coking segment's revenue from external customers was USD51.6million, which is 2% of the consolidated revenue. The segment's revenue fromintersegmental transactions was USD31.1 million, operating profit amounted toUSD3.7 million and income before minority interest was USD1.8 million. Low financial results in H1 2006 were caused by unfavorable market environmentin the domestic and world coke markets, together with the export duty on coke,which led to coke exports decreasing from 1,114.3 thousands tones in H1 2005down to 135.6 thousand tones in the reporting period. At present, the managementis seeking to improve operating results. Other Segments Other segments' revenue, the results of which do not exceed threshold value,includes three operational segments of the Group. These segments includeservices of OJSC Tuapse Commercial Sea Port (TMTP) and its subsidiaries,financial services, as well as banking and insurance services to business andindividuals and mining and enrichment of coal by Prokopievskugol Group. In the first half of 2006, other segment's revenue from external customers wasUSD113.5 million, which is 26% higher than the level of the same period in 2005.Such increased revenue is largely attributed to the consolidation ofProkopievskugol Group from Q2 2006. In the first half of 2006, other segments' gross profit amounted to USD31.7million, which is 18% higher than the level of the same period last year.Operating income in H1 2006 totaled USD0.8 million. Low operating income wasalong with Prokopievskugol Group consolidation, which had negative financialresults in Q2 2006 due to low price environment and significant commercial,general and administrative expenses. At the moment, the Company is undertaking areview designed to reduce these expenses. Consolidated financial results In the first half of 2006, compared with the corresponding period of theprevious year NLMK's sales revenue increased by 9%. The growth of productionvolumes and sales was partially leveled down by lower prices for the product.The key factor, attributed to the level of revenue was the consolidation ofDansteel A/S, Prokopievskugol Group and Altai-koks starting April 2006. The lower prices on the main product of the Group, compared to H1 2005 led togross and operating profit decrease of 5% and 16% respectively. In H1 2006,NLMK's revenue amounted to USD2,601.7 million, gross profit was USD1,152.8million, net profit (including the sale of financial assets) amounted toUSD943.8 million, with EBITDA at a record USD933.3 million. EBITDA profitabilityin H1 2006 was at the level of 38%. Net profit increased 13% to USD943.8 million as compared to H1 2005. The Q1 2006sale of the 12% stake in Lebedinsky GOK served as the main driver of higherprofits. At the end of Q1 2006, the steel market environment slightly improved. Priceincrease contributed to NLMK's financial results growth in Q2 2006. This,together with volumes of shipment increase by Novolipetsk Steel, as well asconsolidation of Prokopievskugol and Altai-koks, led to revenue growth by 32% ascompared to Q1, gross profit increase by 60%, operating profit went up by 44%,EBITDA by 55%. EBITDA profitability in Q2 2006 increased from 35% up to 41% ascompared to Q1. In the second quarter 2006, net income decreased by 27% due to significantnon-recurring income from the sale of stake in Lebedinsky GOK. If the effect ofthe Lebedinsky GOK share sale were eliminated, NLMK's net profit the secondquarter of 2006 would have been 60% higher than in Q1 2006. Earnings per share (EPS) were USD 0.1575 in H1 2006. Consolidated balance sheet data At the end of H1 2006, NLMK's assets increased by 19% against 31 December 2005and reached USD7,374.2 million. The net income was the primary source ofincrease in Company's assets. The profitability of the business allows NLMK to finance its own activities andthe development of the Group primarily from its own funds. The share of theCompany's own capital in the structure of the sources used to finance NLMK'soperations is permanently high and at the end of the H1 2006 it was 79%. Highly liquid assets of NLMK substantially exceed the amount of its debt. NLMK'scash and cash equivalents position as at 30 June, 2006 amounted to USD1,385.6million. The cash reduction compared to 31 December, 2005 was due to thefinancing of the transactions of Dansteel A/S, Prokopievskugol Group andAltai-koks. NLMK's balance sheet structure shows the financial stability of the Company. Thestable financial position is confirmed by the highest credit ratings among theRussian steel companies. In the second quarter of 2006, annualized return on assets (ROA) was 22% andannualized return on equity (ROE) was 28%. These ratios are lower than in thefirst quarter 2005 when it received additional non-recurring proceeds from thedivestment of its interest in Lebedinsky GOK. Cash FlowStable generation of operational cashflow allows NLMK to finance the developmentof the assets of the Group as well as new acquisitions from its own cash fundswithout attracting debt. In the H1 2006 net cash received from operating activities equaled USD527.8million which is almost 2.2 times higher than net cash used for purchase andconstruction of fixed asset, which amounted to USD239.8 million. The Group actively implements its vertical integration strategy aimed at theacquisition of new upstream assets that enable the Company to achieveself-sufficiency in raw-materials and downstream assets to enable growth ofproduction of high-value added products. In 2006, the second phase of theTechnical Upgrading Programme has been launched. Cash outflow for investmentactivities in the first half of 2006 amounted to USD639.8 million againstUSD257.0 million year on year. In Q1 2006, investment cash flow was positivereaching USD227.1 million due to proceeds from disposal of a stake in LebedinskyGOK. Expanded investment activities in Q2 2006 resulted in cash outflow used ininvestment activities of USD866.9 million. The main cash outflows associated with financial activities in H1 2006 aredividend payments to shareholders and M&A projects. USD93.2 million wasallocated to repay the loan. In H1 2006, the net decrease of cash and its equivalents, due to operational,investment and financial activities of Novolipetsk Steel, amounted nearly toUSD636.9 million. Cash and cash equivalents as of 30 June 2006 equaled USD1,385 million, which is28% below 2005 numbers. The Company's sustainable financial position allows a flexible businessdevelopment strategy. The creation of additional shareholder values remainsNLMK's priority, and NLMK will continue to pursue the policy based on stringentfinancial discipline and balanced investment projects. Outlook The steel market improvements that started at the end of Q1 2006 enabled NLMK toincrease sales prices. In Q3 2006 this upward trend will be maintained, and inQ4 2006 we expect the market to stabilize with a possible correction. After major overhauls on the main production site conducted in 2005, NLMK plansto increase its steel output to match 2004 levels. In 2006, NLMK activelyimplemented its strategy of vertical integration, with the acquisitions ofDanSteel A/S, Prokopievskugol Coal Company, VIZ-Stal and Altai-koks. These willlead to increasing production capacity and coke output after commissioning thenew coke battery. Based on this outlook, NLMK foresees that 2006 revenues should exceed 2005levels by approximately 30-35%. The operating income is also likely to be highercompared to the level of 2005. The sale of a stake in Lebedinsky GOK in January 2006 and KMA Ruda in Q3 2006within the framework of the Company's asset structure optimization will alsocontribute to the Company's profit before tax and net profit. The Board of Directors recommended interim dividends for the six-month periodended 30 June, 2006 of 1.5 Russian ruble per ordinary share (1GDS=10 ordinaryshares). The payment of dividends is subject to shareholders' approval at theExtraordinary General Meeting on 29 September, 2006. INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)PREPARED IN ACCORDANCE WITH ACCOUNTING PRINCIPLESGENERALLY ACCEPTED IN THE UNITED STATES OF AMERICA AS AT JUNE 30, 2006 AND DECEMBER 31, 2005AND FOR THE SIX MONTHS ENDED JUNE 30, 2006 AND 2005 INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS As at As at December June 30, 2006 31, 2005 ASSETS Current assetsCash and cash equivalents 1,385,593 1,924,148Short-term investments 20,786 27,040Accounts receivable, net 966,059 708,515Inventories, net 643,027 559,250Other current assets, net 263,037 208,920Restricted cash 8,907 7,979 3,287,409 3,435,852Non-current assetsLong-term investments 6,799 31,470Property, plant and equipment, net 3,340,863 2,415,001Intangible assets, net 19,796 21,086Goodwill 588,640 173,357Other non-current assets, net 130,660 133,747 4,086,758 2,774,661Total assets 7,374,167 6,210,513 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilitiesAccounts payable and other liabilities 692,556 565,983Short-term borrowings 141,800 5,282Current income tax liability 58,226 40,639 892,582 611,904Non-current liabilitiesDeferred income tax liability 421,755 300,712Long-term borrowings 16,796 45,341Other long-term liabilities 69,666 45,505 508,217 391,558Total liabilities 1,400,799 1,003,462 Commitments and contingencies - - Minority interest 125,764 92,576 Stockholders' equityCommon stock, 1 Russian ruble par value - 5,993,227,240 221,173 221,173shares issued and outstanding at June 30, 2006 andDecember 31, 2005Statutory reserve 10,267 10,267Additional paid-in capital 1,812 1,812Accumulated other comprehensive income 414,254 72,129Retained earnings 5,200,098 4,809,094 5,847,604 5,114,475Total liabilities and stockholders' equity 7,374,167 6,210,513 INTERIM CONDENSED CONSOLIDATED STATEMENTS OF INCOME For the six For the six months ended June months ended June 30, 2006 30, 2005 Sales revenue 2,601,736 2,377,146 Cost of salesProduction cost (1,290,476) (1,027,940)Depreciation and amortization (158,449) (140,284) (1,448,925) (1,168,224) Gross profit 1,152,811 1,208,922 General and administrative expenses (88,145) (44,539)Selling expenses (117,642) (32,106)Taxes other than income tax (21,690) (25,411) Operating income 925,334 1,106,866 Loss on disposals of property, plant and equipment (2,719) (6,639)Gains / (losses) on investments, net 390,463 (4,143)Interest income 58,673 46,813Interest expense (10,637) (6,903)Foreign currency exchange loss, net (69,791) (11,466)Other (expense) / income, net (9,288) 4,877 Income before income tax and minority interest 1,282,035 1,129,405 Income tax (326,842) (281,614) Income before minority interest 955,193 847,791 Equity in net earnings of associate 492 2,800 Minority interest (11,900) (12,200) Net income 943,785 838,391 Income from continuing operations per share (US dollars)basic and diluted 0.1575 0.1399 Net income per share (US dollars)basic and diluted 0.1575 0.1399 INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS For the six For the six months ended June months ended June 30, 2006 30, 2005CASH FLOWS FROM OPERATING ACTIVITIESNet income 943,785 838,391Adjustments to reconcile net income to net cash providedby operating activities:Minority interest 11,900 12,200Depreciation and amortization 158,449 140,284Loss on disposals of property, plant and equipment 2,719 6,639(Gains) / losses on investments (390,463) 4,143Equity in net earnings of associate (492) (2,800)Deferred income tax benefit (7,343) (2,232)Other movements 21,414 (16,700)Changes in operating assets and liabilitiesIncrease in accounts receivable (137,577) (130,622)Increase in inventories (4,357) (84,348)Increase in other current assets (1,276) (849)Increase in loans provided by the subsidiary bank (42,000) (36,115)(Decrease) / increase in accounts payable and other (41,369) 66,891liabilitiesIncrease / (decrease) in current income tax payable 14,387 (56,804)Net cash provided by operating activities 527,777 738,078CASH FLOWS FROM INVESTING ACTIVITIESAcquisitions of subsidiaries, net of cash acquired of (809,655) -$1,836Proceeds from sale of property, plant and equipment 2,926 7,561Purchases and construction of property, plant and (239,845) (265,437)equipmentProceeds from sale of investments 419,647 24,415Purchase of investments (12,416) (20,852)Movement of restricted cash (417) (2,707)Net cash used in investing activities (639,760) (257,020)CASH FLOWS FROM FINANCING ACTIVITIESProceeds from borrowings and notes payable 8,391 8,218Repayment of borrowings and notes payable (93,156) (2,226)Payments to controlling shareholders for common control (104,000) -transfer of interests in a new subsidiaryDividends to shareholders (336,114) (7,661)Net cash used in financing activities (524,879) (1,669)Net (decrease) / increase in cash and cash equivalents (636,862) 479,389Effect of exchange rate changes on cash and cash 98,307 (55,347)equivalentsCash and cash equivalents at the beginning of the period 1,924,148 1,348,615Cash and cash equivalents at the end of the period 1,385,593 1,772,657 INTERIM CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME Common Statutory Additional Accumulated Retained Total stock reserve paid-in other earnings stockholders' capital comprehensive equity income Balance at 221,173 10,267 680 242,387 3,745,984 4,220,491December 31, 2004 Comprehensive income: Net income - - - - 838,391 838,391 Other comprehensiveincome: Translation adjustment - - - (153,677) - (153,677) Comprehensive income 684,714 Dividends to - - - - (172,086) (172,086)shareholders Balance at 221,173 10,267 680 88,710 4,412,289 4,733,119June 30, 2005 Balance at 221,173 10,267 1,812 72,129 4,809,094 5,114,475December 31, 2005 (a)) Comprehensive income: Net income - - - - 943,785 943,785 Other comprehensiveincome: Net unrealized gain on a - - - (1,196) - (1,196)change in valuation ofinvestments Translation adjustment - - - 343,321 - 343,321 Comprehensive income 1,285,910 Dividends to - - - - (448,781) (448,781)shareholders Payments to controlling - - - - (104,000) (104,000)shareholders for commoncontrol transfer ofsubsidiary interests Balance at 221,173 10,267 1,812 414,254 5,200,098 5,847,604June 30, 2006 For further information: NLMKAnton Bazulev +7 495 915 1575Financial DynamicsJon Simmons +44 207 831 3113 This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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