2 Oct 2008 08:52
NOT FOR DISTRIBUTION, DIRECTLY OR INDIRECTLY, IN OR INTO THE UNITED STATES, AUSTRALIA, CANADA OR JAPAN
For immediate release
| 02 October 2008 |
PRESS RELEASE | St. Petersburg |
Revenues of LSR Group for the First Half of 2008 Grew by 53% and EBITDA Increased by 83%
On 1 October 2008, the Board of Directors of OJSC LSR Group (LSE: LSRG, MICEX, RTS: LSRG) approved the consolidated financial statements for the first half of 2008 prepared in accordance with IFRS. The independent review of the financial statements was carried out by KPMG.
In the first half of 2008, LSR Group recorded the following financial results:
Revenues increased by 53% to US$940 million.
EBITDA grew by 83% to US$243 million and EBITDA margin was up by 4% to 26%.
Normalised operating profit grew by 89% to US$205 million.
Normalised net profit grew by 96% to US$124 million
A loss of US$159 million arising from an investment property revaluation was recognised in the income statement (non-cash item)
The market value of the real estate and land asset portfolio, according to the independent valuer DTZ as at 30 June 2008, reached US$6.6 billion, 17% more than as at 31 December 2007 (approx. US$5.7 billion).
Chief Executive Officer LSR Group Igor Levit commented:
"We are pleased with the operational results of the first half of 2008 that convincingly demonstrate the profitable growth of the company and its ability to generate strong operating results. In the first half of this year we continued the execution of our strategy to strengthen our positions in all the segments of our home market of St Petersburg and to expand our presence in other regions that are of key importance for us. In particular, in the Urals, we acquired building materials production capacities and the leading panel construction company with a dominant market position and also proceeded with the acquisition of a major developer in the region with a sizable land bank.
We continued the execution of our investment programme to enhance the performance, to modernise and to expand the capacity of our business units. This will help us to take full advantage of the opportunities created by the high demand in the infrastructure construction sector now actively developing in Russia."
Notes to Editors:
OJSC LSR Group is a diversified construction company founded in 1993 and operating in a number of complementary market segments. Its core business areas are building materials, construction and real estate development. The Group includes enterprises for extraction and processing of aggregates, production and transportation of building materials, and housing construction - from mass market large-panel housing to elite property built after designs made by leading domestic and foreign architects.
LSR Group has operations and offices in a number of cities in the Leningrad region, in St. Petersburg, Moscow, Yekaterinburg, Lithuania, Latvia, Estonia, Ukraine and Germany. LSR Group employs around 18,000 people.
In 2007, the sales revenues of LSR Group were US$ 1,403 million.
LSR Group is a public company, with its GDRs listed on the London Stock Exchange and its shares listed on MICEX and RTS.
LSR Group has two credit ratings: B1; outlook - Stable, assigned by Moody's Investors Service, and B+; outlook - Stable, assigned by Fitch Ratings.
In December 2007, LSR Group was awarded 'The Company of the Year' National Award in the 'Construction' category.
For more details please contact:
Kliment Falaleev, Director of Investor Relations
Tel: +7 812 571 7850
Mob: +7 921 953 1641
Fax: +7 812 312 8565
Email: falaleev@lsrgroup.ru
Julia Sokolova, Director for Corporate Communications and PR
Tel: +7 812 314 1044
Email: press@lsrgroup.ru
www.lsrgroup.ru
Key financial results
| US$ M | 6m 2007 | 6m 2008 | Change | 2007 |
| Sales revenue | 616 | 940 | 53% | 1,403 |
| Cost of sales | -393 | -589 | 50% | -934 |
| Gross profit | 223 | 351 | 58% | 469 |
| Gross margin, % | 36% | 37% | 33% | |
| Distribution expenses | -31 | -48 | 54% | -69 |
| Administrative expenses | -77 | -95 | 23% | -150 |
| Changes in the fair value of investment property (non-cash item) | 193 | -159 | 315 | |
| Other revenues and expenses | -5 | -3 | -50% | -1 |
| Normalised operating profit | 109 | 205 | 89% | 248 |
| Normalised operating profit, % | 18% | 22% | 18% | |
| Operating profit | 301 | 46 | -85% | 563 |
| Net financing costs | -27 | -38 | 41% | -74 |
| Profit before tax | 275 | 8 | -97% | 489 |
| Income tax | -65 | -5 | -92% | 130 |
| Normalised net profit | 63 | 124 | 96% | 120 |
| Net profit | 209 | 3 | -99% | 359 |
| EBITDA | 133 | 243 | 83% | 309 |
| EBITDA % | 22% | 26% | 22% | |
| Net debt | 653 | 1,094 | 629 | |
| Net debt / EBITDA | 3.1 | 2.6 | 2 | |
| Gross cash flow | 137 | 243 | 77% | 308 |
| Depreciation and amortisation | 24 | 37 | 56% | 61 |
| Capitalised capital expenditure | 100 | 202 | 102% | 255 |
| Normalised earnings per share | US$ 0.69 | US$ 1.33 |
| US$ 1.23 |
| Earnings per share | US$ 2.43 | US$(0.04) |
| US$ 3.98 |
Normalised operating profit equals to operating profit less the effect of revaluation of investment property, which is a non-cash item.
EBITDA equals to operating profit plus depreciation and amortization of fixed assets and intangible assets less changes in the fair value of investment property. EBITDA margin equals to the ratio between EBITDA and sales revenue.
Normalised net profit calculated as net profit excluding effect of revaluation of investment property (incl. recalculation of deferred tax).
Normalised earnings per share calculated as earnings per share excluding effect of revaluation of investment property (incl. recalculation of deferred tax).
Total debt calculated as the sum of non-current loans and borrowings, current loans and borrowings and bank overdraft.
Gross cash flow represents operating profit before changes in working capital and provisions
Net debt calculated as total debt minus cash and cash equivalents.
Total debt/ EBITDA and Net debt/ EBITDA ratios are calculated on annualised basis
The measures described above are not defined in the International Financial Reporting Standards and should therefore be regarded only as supplementary information.
The financial indicators in this press release are rounded to whole numbers in US$ millions, and percentage changes in indicators are calculated using data in US$ thousands.
Complete Consolidated Financial Statements of LSR Group for the first half of 2008 are available at www.lsrgroup.ru/results
Revenues
In the first half of 2008 versus the first half of 2007, revenues grew by US$324m or 53% to US$940m. The growth was due to both increased sales volumes and product pricing growth supported by high demand for products.
Cost of sales
The cost of sales grew by US$196m or 50% to US$589m.
The increase in the cost of sales in all segments was driven by the following main factors:
- above all, increased direct expenses as a result of increased volumes of sales;
- an increase in depreciation charges as a result of the commissioning of new fixed assets during the period;
- growth of direct costs related to the rising market prices for raw materials;
- growth of wages and salaries.
Gross profit
The gross profit grew by US$128m or 58% from US$223m in the first half of 2007 to US$351 m in the first half of 2008.
The gross margin grew by 1% mainly due to improved business results of the Real Estate Development and Construction segments. The significant increase in the margin of the Real Estate Development segment was due to the fact that the financial statements recognised the increase in house prices that took place in St. Petersburg in recent years. In the Construction segment the margin grew due to the growing prices of panel construction services, the completion of several low margin contracts in the first half of 2007 and the results of the Betfor plant acquired in Yekaterinburg and included in the financial statements of LSR in the second quarter of 2008.
Distribution and administrative expenses
Distribution expenses grew by US$17m or 54% to US$48m in the first half of 2008. The main factor in the increase in distribution expenses was increased goods delivery expenses driven by increased sales volumes.
The administrative expenses grew by US$18m or 23% from US$77m in the first half of 2007 to US$95m in the first half of 2008. The increase was primarily due to a considerable increase in personnel costs. Thus, under this item, the expenses in the first half of 2008 were US$57m, a growth of US$26m or 84% compared to the first half of 2007. A significant increase in the personnel costs resulted from the general rise in wages as well as considerable growth of the scope of the Group's activities.
Changes in fair value of investment property
The income statement for the first half of 2008 revenue recognises a loss from the revaluation of investment property of US$159m. The investment property revalued includes three operating office centres and four office centre projects under development. The loss from the revaluation of operating business centres to the amount of US$15m is due to the application of more conservative valuation assumptions by the valuer while most of the loss from the revaluation of properties under development to the amount of US$145 is due to the rephasing of the implementation schedule and construction budget of the major Electric City office project. Previously the project was to have been completed and put into operation in four phases in different years but after the project plan was finalised it was decided to make it operational as a whole once the construction is completed and as a result the cash flow schedule was revised which negatively affected the valuation.
EBITDA and Operating Profit
EBITDA grew by 83% from US$133m in the first half of 2007 to US$243 m in the first half of 2008. The EBITDA margin rose from 22% to 26%.
The normalised operating profit grew by 89% from US$109m in the first half of 2007 to US$205m in the first half of 2008. The normalised operating margin rose from 18% in the first half of 2007 to 22% in the first half of 2008.
Net Financing Costs
Net financing costs increased by US$ 11m or 41% from US$27m in the first half of 2007 to US$38m in the first half of 2008.
The increase in the net financing costs was due to increased debt resulting from the need to finance the investment programme of the Group.
Income Tax Expenses
Income tax expenses decreased by US$60m or 93% from US$65m in the first half of 2007 to US$5m in the first half of 2008 mostly as a result of reduced deferred taxes during the said period. The reduction in the deferred taxes was primarily due to a non-cash loss from the revaluation of investment property in the first half of 2008. The statutory rate of income tax remained unchanged at 24%.
Net Profit
Normalised net profit grew by 96% to US$124m.
Net profit including the non-cash loss from the revaluation of investment property was US$3m.
Cash Flow
Gross cash flow (Cash flow from operations before changes in working capital) were US$243m and increased by 77% against the first half of 2007. Working capital grew by US$245m, out of which US$205m was accounted for increased inventories primarily due to increased investments in real estate development in progress, and also due to the growing building materials business. Accounts receivable grew by US$209m and accounts payable grew by US$166 million. The increase in accounts receivable and payable resulted from a significant growth of the scope of the company's business.
Income tax expenses in the first half of 2008 were US$53m, US$37m or 218% more than for the previous year due to increased revenues and profitability of the company's business.
Interest payments for the first half of 2008 were US$49 million, up by US$21m or 75% compared to the first half of 2007. The increase in the above payments is due to the general increase in the credit portfolio of the Group to implement the investment programme.
Cash outflows from investment activities were US$309m, US$190m or 161% more than in the past year. In the first half of 2008 we spent US$135m to acquire other companies including US$108m spent on strategic acquisitions in Yekaterinburg. We also paid US$189m as capital expenditures on the fixed assets for our production facilities.
Cash flows from financial activities were US$364m due to the growth of the credit portfolio of the company.
Net cash outflows as a whole for the first half of 2008 were US$50m, up by US$24m compared to the first half of 2007.
Debt
The gross debt of the company grew by US$433m or 44% from US$984m as at 31 December 2007 to US$1,417m as at 30 June 2008. The substantial increase in the amount of borrowings was due to the execution of the investment programme.
As at 30 June 2008, cash and cash equivalents stood at US$323m including an irrevocable secured letter of credit under the loan facility terms for the supply of equipment to the cement plant construction project to the amount of US$166m.
The net debt as at 30 June 2008 was US$1,094m versus US$629m as at 30 December 2007.
Net debt/EBITDA ratio as at 30 June 2008 was 2.6 (based on the 12-month EBITDA).
Capital Expenditures
In the first half of 2008, we continued investing in equipment modernisation and production capacity expansion.
During the first half of 2008 we capitalised US$202m of investment in fixed assets, up by 102% on the level of the first half of 2007.
Capital expenditures were used to expand capacity and modernise existing equipment. The capitalised investments in two major investment projects - the construction of a cement plant and a brick plant in the first half of 2008 were US$49m and US$67m respectively.
FINANCIAL RESULTS BY BUSINESS SEGMENTS AND PRODUCT BUSINESS UNITS
Building Materials
| US$ M | 6m 2007 | 6m 2008 | Change, % | 2007 |
| Revenues from sales to external customers | 248 | 380 | 53% | 606 |
| Revenues from inter-group sales | 12 | 29 | 136% | 38 |
| Revenues | 260 | 409 | 57% | 645 |
| Operating profit | 44 | 57 | 31% | 108 |
| Operating profit, % | 17% | 14% |
| 17% |
| Depreciation and amortisation | 8.5 | 14 | 68% | 21 |
| EBITDA | 52 | 71 | 37% | 130 |
| EBITDA, % | 20% | 17% |
| 20% |
Revenues in the building materials segment grew 57% from US$260m in the first half of 2007 to US$409m in the first half of 2008.
EBITDA increased by 37% from US$52m in the first half of 2007 to US$71m in the first half of 2008. The EBITDA margin decreased by 3% from 20% in the first half of 2007 to 17% in the first half of 2008 driven by a reduction in the margin of the aerated concrete business.
Reinforced Concrete
| US$ M | 6m 2007 | 6m 2008 | Change, % | 2007 |
| Sales volume (th cub.m) | 260 | 288 | 11% | 578 |
| Revenues from sales to external customers | 78 | 111 | 42% | 194 |
| Revenues from inter-group sales | 8.6 | 20 | 131% | 24 |
| Revenues | 86 | 130 | 51% | 217 |
| Operating profit | 17 | 25 | 47% | 48 |
| Operating profit, % | 20% | 19% |
| 22% |
| Depreciation and amortisation | 2.4 | 4.2 | 71% | 7 |
| EBITDA | 19 | 29 | 50% | 55 |
| EBITDA, % | 22% | 22% |
| 25% |
In the first half of 2008, the sales of reinforced concrete products increased by 11% to 288 th cub.m.
Ssales revenues grew by 51% from US$86m in the first half of 2007 to US$130m in the first half of 2008.
EBITDA increased by 50% from US$19m in the first half of 2007 to US$29m in the first half of 2008. The EBITDA margin remained unchanged at 22%.
The increase in the revenues and EBITDA resulted from both higher prices and increased sales.
Ready-Mix Concrete
| US$ M | 6m 2007 | 6m 2008 | Change, % | 2007 |
| Sales volume (th cub.m) | 698 | 757 | 8% | 1,600 |
| Revenues from sales to external customers | 68 | 117 | 72% | 188 |
| Revenues from inter-group sales | 4.8 | 2.6 | -45% | 11 |
| Revenues | 72 | 119 | 65% | 199 |
| Operating profit | 4.5 | 5.4 | 20% | 12 |
| Operating profit, % | 6% | 5% |
| 6% |
| Depreciation and amortisation | 2.8 | 5.3 | 90% | 6.9 |
| EBITDA | 7.3 | 11 | 46% | 19 |
| EBITDA, % | 10% | 9% |
| 10% |
In the first half of 2008, the sales of ready-mix concrete increased by 8% to 757 th cub.m.
The revenues increased by 65% from US$72m in the first half of 2007 to US$119m in the first half of 2008.
The key drivers of the increased revenues were increased product prices as well as an increase in sales volumes.
EBITDA grew by 46% from US$7.3m in the first half of 2007 to US$11m in the first half of 2008. The EBITDA margin changed ingignificantly to 9% in 1st half of 2008.
Bricks
| US$ M | 6m 2007 | 6m 2008 | Change, % | 2007 |
| Sales volume (millions of units) | 134 | 147 | 10% | 289 |
| Revenues from sales to external customers | 39 | 60 | 50% | 90 |
| Revenues from inter-group sales | 2 | 1.6 | -18% | 4 |
| Revenues | 41 | 61 | 50% | 94 |
| Operating profit | 10 | 19 | 94% | 27 |
| Operating profit, % | 24% | 31% |
| 29% |
| Depreciation and amortisation | 1 | 1.9 | 93% | 2.9 |
| EBITDA | 11 | 21 | 94% | 30 |
| EBITDA, % | 27% | 34% |
| 32% |
In the first half of 2008, brick sales increased by 10% to 147 million units.
Revenues increased by 50% from US$41m in the first half of 2007 to US$61m in the first half of 2008.
The increase in revenues was driven by both the price rise and the increased sales of bricks.
EBITDA increased by 94% from US$11m in the first half of 2007 to US$21m in the first half of 2008. The EBITDA margin grew by 7% from 27% in the first half of 2007 to 34% in the first half of 2008.
The reasons for increased profitability are price increases and improvements in production efficiency.
The brick business unit continues the construction of a new brick plant in the Leningrad region with a total capacity of 220m bricks per year.
Aerated Concrete
| US$ M | 6m 2007 | 6m 2008 | Change, % | 2007 |
| Sales volume (th cub.m) | 313 | 429 | 37% | 555 |
| Revenues from sales to external customers | 30 | 52 | 78% | 60 |
| Revenues from inter-group sales | 0.6 | 0.9 | 44% | 2 |
| Revenues | 30 | 53 | 77% | 62 |
| Operating profit | 7 | 6 | -18% | 13 |
| Operating profit, % | 24% | 11% |
| 21% |
| Depreciation | 2 | 2.6 | 25% | 4.4 |
| EBITDA | 9.3 | 8.6 | -8% | 17 |
| EBITDA, % | 31% | 16% |
| 28% |
In the first half of 2008, sales of aerated concrete increased by 37% to 429 th cub.m.
The sales revenues of aerated concrete grew by 77% from US$30 million in the first half of 2007 to US$53 million in the first half of 2008.
The considerable increase in revenues was primarily due to the fact that in view of increased demand for aerated concrete, LSR Group acted as a distributor, reselling aerated concrete manufactured by another local producer, the KZhBI 211 plant. This strategy helps the company to expand its customer base in the growing market. In addition, in the first half of 2008 LSR Group acted as a distributor for a Ukrainian aerated concrete producer, OJSC Obukhiv Porous Concrete Plant, in the Ukrainian market.
EBITDA decreased by US$0.8m or 8% from US$9.3m in the first half of 2007 to US$8.6 million in the first half of 2008. EBITDA margin decreased by 15% from 31% in the first half of 2007 to 16% in the first half of 2008.
The reduction in the profitability was due to two factors:- products manufactured by other producers are resold at a lower profit (distributor margin) than our own products;- in the first half of 2008, due to reduced demand in the Baltic States where we have two aerated concrete plants, we reoriented supplies from the Baltic States to the St. Petersburg market, resulting in a significant increase in transportation costs.
In 2008, the Aerated Concrete business unit continued the construction of the largest aerated concrete plant in Ukraine, Berezan (70 km from Kiev, the capital of Ukraine). The design capacity of the plant is 400,000 cub.m and the total investment planned is EUR43 million. The plant is scheduled to go into operation in October 2008.
Cement
Currently the Cement business unit of LSR Group ensures centralised procurement of cement both for the needs of the Group and for selling it to external customers to form a customer base. The Cement business unit is executing an investment project to construct its own cement plant in the Leningrad region with an annual capacity of 1.85 million tons to come into operation in 2010.
Aggregates
| US$ M | 6m 2007 | 6m 2008 | Change, % | 2007 |
| Revenues from sales to external customers | 69 | 112 | 62% | 177 |
| Revenues from inter-group sales | 17 | 28 | 68% | 39 |
| Revenues | 86 | 140 | 63% | 216 |
| Operating profit | 23 | 41 | 81% | 62 |
| Operating profit, % | 27% | 30% |
| 29% |
| Depreciation and amortisation | 7 | 9 | 25% | 16 |
| EBITDA | 30 | 50 | 68% | 78 |
| EBITDA, % | 35% | 36% |
| 36% |
The revenues in the aggregates segment grew by 63% from US$86m in the first half of 2007 to US$140m in the first half of 2008.
EBITDA increased by 68% from US$30m in the first half of 2007 to US$50m in the first half of 2008. The EBITDA margin grew by 1% from 35% to 36%.
Sand
| US$ M | 6m 2007 | 6m 2008 | Change, % | 2007 |
| Sales volume (millions cub.m) | 5,397 | 7,264 | 35% | 13,451 |
| Revenues from sales to external customers | 41 | 62 | 50% | 107 |
| Revenues from inter-group sales | 4 | 7.2 | 80% | 9 |
| Revenues | 45 | 69 | 53% | 116 |
| Operating profit | 16 | 25 | 56% | 39 |
| Operating profit, % | 35% | 36% |
| 33% |
| Depreciation | 4.7 | 4.9 | 6% | 10 |
| EBITDA | 21 | 30 | 45% | 49 |
| EBITDA, % | 45% | 43% |
| 42% |
In the first half of 2008, sales of sand increased by 35% to 7.3 million cub.m.
Sales revenues increased by 53% from US$45m in the first half of 2007 to US$69m in the first half of 2008. The increase in the revenues was driven by an increase in sales volumes and prices.
EBITDA increased by 45% from US$21m in the first half of 2007 to US$30m in the first half of 2008. The operating margin grew by 1$ to reach 36%, and the EBITDA margin decreased by 2% to 43% while the depreciation level remained approximately unchanged.
An increase in the demand for sand was mainly driven by increased volumes of infrastructure construction.
Crushed Granite
| US$ M | 6m 2007 | 6m 2008 | Change, % | 2007 |
| Sales volume (millions cub.m) | 1,832 | 2,507 | 37% | 4,275 |
| Revenues from sales to external customers | 28 | 50 | 79% | 70 |
| Revenues from inter-group sales | 13 | 21 | 64% | 31 |
| Revenues | 41 | 71 | 74% | 101 |
| Operating profit | 7.4 | 17 | 123% | 24 |
| Operating profit, % | 18% | 23% |
| 23% |
| Depreciation and amortisation | 2.3 | 3.7 | 64% | 6 |
| EBITDA | 10 | 20 | 109% | 30 |
| EBITDA, % | 24% | 29% |
| 30% |
In the first half of 2008, sales of crushed granite increased by 37% to 2.5 million cub.m.
The sales revenues of crushed granite increased by 74% from US$41m in the first half of 2007 to US$71m in the first half of 2008.The growth was due to increased sales volume and prices as well as due to an increase in the share of more costly items in the sales structure. The demand for crushed granite in St. Petersburg, the key geographical market for the sales of LSR Group grew as a result of the growth of housing, commercial and infrastructure construction in the region.
EBITDA increased by 109% from US$10m in the first half of 2007 to US$20m in the first half of 2008. The EBITDA margin increased by 5% from 24% in the first half of 2007 to 29% in the first half of 2008.
The growth of profit and profit margin reflected the increased share of high margin items in the sales structure combined with a higher operational efficiency ensured through the commissioning of a new crushed granite plant with a capacity of over 600 th cub.m of crushed granite per year in the Zabolotnoye area of the Gavrilovo deposit in the Vyborgsky district, Leningrad region.
Construction Services
| US$ M | 6m 2007 | 6m 2008 | Change, % | 2007 |
| Revenues from sales to external customers | 25 | 41 | 62% | 40 |
| Revenues from inter-group sales | 11 | 17 | 58% | 19 |
| Revenues | 36 | 58 | 61% | 59 |
| Operating profit | 4.8 | 10 | 103% | 12 |
| Operating profit, % | 13% | 17% | 20% | |
| Depreciation | 3.7 | 5.6 | 53% | 7.5 |
| EBITDA | 8.5 | 15 | 81% | 19 |
| EBITDA, % | 24% | 27% | 33% |
Revenues in the construction services segment increased by 61% from US$36m in the first half of 2007 to US$58m in the first half of 2008.
EBITDA increased by US$6.9m or 81% from US$8.5m in the first half of 2007 to US$15 million in the first half of 2008. The EBITDA margin grew by 3% from 24% in the first half of 2007 to 27% in the first half of 2008.
Changes in the financial performance were driven by the reorganisation of the building materials transportation business unit while the tower crane services and pile driving business units recorded steady growth in their performance indicators.
Real Estate Development
| US$ M | 6m 2007 | 6m 2008 | Change, % | 2007 |
| Revenues from sales to external customers | 209 | 234 | 12% | 384 |
| Revenues from inter-group sales | 12 | 1.5 | -88% | 14 |
| Revenues | 221 | 236 | 7% | 398 |
| Normalized operating profit | 42 | 89 | 111% | 96 |
| Normalised operating profit, % | 19% | 38% | 24% | |
| Operating profit | 193 | -56 | -129% | 363 |
| Operating profit, % | 87% | -24% | 91% | |
| Depreciation | 0.7 | 0.5 | -28% | 0.8 |
| Gain from investment property revaluation | 151 | -145 | -196% | 268 |
| EBITDA | 43 | 89 | 109% | 97 |
| EBITDA, % | 19% | 38% | 24% |
Sales revenues in the real estate development segment grew by 7% from US$221m in the first half of 2007 to US$236m in the first half of 2008.
EBITDA increased by 109% from US$43m in the first half of 2007 to US$89m in the first half of 2008. The increase in EBITDA resulted from a significant growth of real estate prices in recent years that was recorded in the statements for the first half of 2008 after transferring properties to the customers.
The EBITDA margin doubled from 19% in the first half of 2007 to 38% in the first half of 2008.
The financial results of the Real estate Development segment recognise a loss from the revaluation of investment property under development to the amount of US$145m. Most of the loss from revaluation is attributable to the rephasing of the construction schedule and construction budget of the Electric City office project. Previously the project was to have been completed in four phases in different years but after the project plan was finalised it was decided to put into the project into operation as a whole once construction has been completed and as a result the cash flow schedule has been revised, negatively affecting the valuation..
Elite Real Estate
| US$ M | 6m 2007 | 6m 2008 | Change, % | 2007 |
| New contract sales: - net sellable area (th sq.m) | 6.6 | 13.5 | 105% | 18.4 |
| - parking spaces (units) | 71 | 84 | 18% | 145 |
| Transferred to customers: - net sellable area (thousands sq.m) | 27 | 13 | -52% | 41 |
| - parking spaces (units) | 269 | 159 | -41% | 494 |
| Revenues from sales to external customers | 61 | 101 | 67% | 121 |
| Revenues from inter-group sales | 12 | 0 | -100% | 12 |
| Revenues | 73 | 101 | 38% | 133 |
| Normalised operating profit | 17 | 47 | 176% | 51 |
| Normalised operating profit, % | 23% | 46% | 38% | |
| Gain/loss from investment property revaluation | 151 | (145) | -196% | 268 |
| Depreciation and amortisation | 0.3 | 0.4 | 29% | 0.6 |
| EBITDA | 17 | 47 | 173% | 51 |
| EBITDA, % | 24% | 46% | 39% |
In the first half of 2008, pre-sales contracts were signed for 13.5 th sq.m of net sellable area (NSA) and 84 parking spaces.
A total of 13 th sq.m of net sellable area and 159 parking spaces were transferred to customers. The reduction in the NSA transferred to customers compared to the first half of 2007 was due to the implementation schedule of the development projects.
The revenues from elite real estate transferred to customers increased by 38% from US$73m in the first half of 2007 to US$101m in the first half of 2008.
EBITDA increased by 173% from US$17m in the first half of 2007 to US$47m in the first half of 2008. The EBITDA margin grew by 22% from 24% in the first half of 2007 to 46% in the first half of 2008.
The increase in revenues and EBITDA resulted from a significant growth of real estate prices that took place in recent years and was recognised in the statements for the first half of 2008 after the properties completed were transferred to customers.
The loss from revaluation investment property under development was US$145m.
Mass Market and Business Class Real Estate
| US$ M | 6m 2007 | 6m 2008 | Change, % | 2007 |
| New contract sales: - net sellable area (thousands sq.m) | 36.8 | 85 | 131% | 123.3 |
| - parking spaces (units) | 15 | 20 | 33% | 42 |
| Transferred to customers: - net sellable area (thousands sq.m) | 69 | 43 | -38% | 132 |
| Revenues from sales to external customers | 86 | 104 | 22% | 177 |
| Revenues from inter-group sales | 0.4 | 0.9 | 98% | 1.2 |
| Revenues | 86 | 105 | 22% | 178 |
| Operating profit | 13 | 31 | 131% | 30 |
| Operating profit, % | 15% | 29% | 17% | |
| Depreciation and amortisation | 0.4 | 0 | -85% | 0.1 |
| EBITDA | 14 | 31 | 126% | 31 |
| EBITDA, % | 16% | 29% | 17% |
In the first half of 2008, pre-sales contracts were signed for 85 th sq.m of net sellable area and 20 parking spaces.
A total of 43 th sq.m of net sellable area were transferred to customers. The reduction in the NSA transferred to customers compared to the first half of 2007 was due to the implementation schedule of development projects.
The sales revenues of mass market real estate increased by 22% from US$86m in the first half of 2007 to US$105m in the first half of 2008.
EBITDA increased by 126% from US$14m in the first half of 2007 to US$31m in the first half of 2008. The EBITDA margin increased by 13% from 16% in the first half of 2007 to 29% in the first half of 2008.
The increase in the revenues and EBITDA resulted from a significant growth of real estate prices that took place in recent years and was recognised in the statements for the first half of 2008 after the properties completed were transferred to customers.
Real Estate in Moscow
| US$ M | 6m 2007 | 6m 2008 | Change, % | 2007 |
| New contract sales: - net sellable area (thousands sq.m) | 1.1 | 1.4 | 27% | 3.2 |
| - parking spaces (units) | 5 | 20 | 300% | 65 |
| Transferred to customers: - net sellable area (thousands sq.m) | 12 | 2.3 | -81% | 15 |
| - parking spaces (units) | 94 | 8 | -91% | 108 |
| Revenues from sales to external customers | 58 | 19 | -66% | 48 |
| Revenues from inter-group sales | 0 | 0 | -15% | 0 |
| Revenues | 58 | 19 | -66% | 48 |
| Operating profit | 13 | 11 | -16% | 12 |
| Operating profit, % | 23% | 58% | 26% | |
| Depreciation and amortisation | 0 | 0 | -33% | 0 |
| EBITDA | 14 | 11 | -16% | 12 |
| EBITDA, % | 23% | 58% | 26% |
In the first half of 2008, pre-sales contracts were signed for 1.4 th sq.m of net sellable area (NSA) and 20 parking spaces.
2.3 th sq.m of net sellable area and 8 parking spaces were transferred to customers.
The company finished the transfer of flats at its first development project completed in Moscow, House at Davydovskaya.
The sales revenues were US$19m. The reduction in revenues is due to the fact that most of the flats at House at Davydovskaya were transferred to customers in the first half of 2007, and only the remaining flats were transferred in the first half of 2008.
EBITDA in the first half of 2008 versus the first half of 2007 decreased from US$14m to US$11m. The EBITDA margin grew by 25% to 58% in the first half of 2008. The EBITDA margin growth resulted from a significant growth in real estate prices that took place in recent years and was recognised in the statements for the first half of 2008 after the properties completed were transferred to customers.
The company was selling flats in this period at the second development project in Moscow currently under construction, the Grunwald project.
Gated Communities
In the first half of 2008, pre-sales contracts were signed for 1.7 th sq.m of net sellable area in gated communities in the suburbs of St. Petersburg.
The sales revenues of gated community developments in the first half of 2008 were insignificant and amounted to US$1.1m. LSR Group transferred to customers 0.5 th sq.m of net sellable area. In view of the fact that the volume of properties completed and the revenues received were insignificant and insufficient to cover the fixed costs, the loss from operating activities was US$0.4m.
Construction
| US$ M | 6m 2007 | 6m 2008 | Change, % | 2007 |
| Sales volume (thousands sq.m) | 145 | 216 | 49% | 311 |
| Revenues from sales to external customers | 63 | 170 | 168% | 191 |
| Revenues from inter-group sales | 19 | 71 | 276% | 58 |
| Revenues | 82 | 241 | 193% | 250 |
| Operating profit | (2) | 48 | -2,580% | 30 |
| Operating profit, % | - | 20% | 12% | |
| Depreciation and amortisation | 3 | 7 | 130% | 9.4 |
| EBITDA | 1 | 55 | 4,994% | 40 |
| EBITDA, % | 1% | 23% | 16% |
216 th sq.m of panel housing were transferred to customers in the first half of 2008, up by 49% compared to the volume of 145 th sq.m transferred in the first half of 2007.
Sales revenue in the first half of 2008 grew by 193% compared to the same period last year from US$82m to US$241m.
EBITDA grew from US$1m in the first half of 2007 to US$55m in the first half of 2008. The EBITDA margin increased by 22% from 1% in the first half of 2007 to 23% in the first half of 2008 due to the rising prices for panel construction, completion of a number of low-margin contracts in the first half of 2007 and the inclusion of the results of the Betfor plant acquired in Yekaterinburg.
In the second quarter of 2008, LSR Group acquired the Betfor reinforced concrete products plant, the leader in prefabricated panel construction in Yekaterinburg and the Sverdlovsk region also producing reinforced concrete, ready-mix concrete and aerated concrete. Revenues in the second quarter of 2008 were US$27m and EBItDA was US$6m. Sales volumes of Betfor in the second quarter of 2008 was 6,000 cub.m for concrete; 35 th cub.m for aerated concrete and 56 th cub.m for reinforced concrete products (including 28 th cub.m of prefabricated panels).
Commercial Real Estate
| US$ M | 6m 2007 | 6m 2008 | Change, % | 2007 |
| Revenues from sales to external customers | 1 | 3.4 | 256% | 3.3 |
| Revenues from inter-group sales | 0 | 0.5 |
| 0.4 |
| Revenues | 1 | 3.9 | 308% | 3.7 |
| Normalized operating profit | 0.4 | 2 | 353% | 0.5 |
| Normalized operating profit, % | 45% | 50% | 13% | |
| Gain from investment property revaluation | 42 | -15 | -135% | 47 |
| Depreciation and amortization | 0 | 0 | -66% | 0 |
| EBITDA | 0.5 | 1.9 | 303% | 0.5 |
| EBITDA, % | 51% | 50% | -1% | 13% |
The net leasable area of the operating office centres in the first half of 2008 was 11 sq.m. sq.m
The occupancy rate of business centres in the first half of 2008 stood at 99%.
The revenues from leasing commercial real estate grew from US$1m in the first half of 2007 to US$3.9 million in the first half of 2008 due to the completion of a new A class business centre. EBITDA was US$1.9 million.
The loss from investment property revaluation recognised in the income statement was US$15 million and resulted from more conservative valuation assumptions applied by the valuer.
IMPLEMENTATION OF MAJOR INVESTMENT PROJECTS. GEOGRAPHICAL GROWTH
The basic principle of our geographical growth strategy is concentrating our managerial and financial resources on obtaining leading positions in a number of large promising markets where we are able to gain leading positions within the foreseeable future. Our business development in the new markets is conducted through both the acquisition of existing regional players wherever there are good acquisition opportunities and the potential to obtain high market shares available, and the implementation of greenfield projects.
Our geographical growth in the first half of 2008 was based on the above strategy. We continued the strengthening of our positions in the four regions we consider of key importance for us: our home market of St. Petersburg and the Leningrad region, and also Moscow (and the Moscow region), Yekaterinburg and the Urals region, and Ukraine.
St. Petersburg and the Leningrad region
In the first half of 2008, LSR Group continued the implementation of two projects in the Leningrad region: a brick plant and a cement plant.
1. New cement project
We entered into a construction work contract with OOO Cement Northwest, a subsidiary of Hefei Cement Research and Design Institute, China. The contract value is €163 million including VAT. The transaction was approved by the Board of LSR Group in March 2008.
At present the plant construction site is fully ready, with all the necessary infrastructure connected to it, construction design work is in progress as well as pile driving and foundation work, with the equipment design work nearing completion. The first batches of equipment were shipped in summer 2008.
2. New brick project
We signed the following contracts:
- with CERIC international group for the amount of €71 million including VAT for the supply of brick plant equipment
- with ZAO Kompakt to act as the general construction contractor for the complete scope of the brick plant construction work. Under the contract the total value of all work to be done is €95 million including VAT.
- with TECTON GmbH Keramikanlagen, Germany for a total amount of €30 million including VAT for the supply of a line of new types of special ceramic products and facing bricks to meet the growing demand from individual housing construction outside the city. The contract provides for designing, manufacturing, supplying, installing and starting up a production line with a capacity of 25 million bricks of new types per annum.
The construction and installation work of the brick plant project is carried out according to schedule, the zero-cycle work is nearing completion, columns are being erected; roofing work , equipment design work and manufacturing are in progress.
In addition, in the first half of 2008, with a view to strengthen its position in the Northwest crushed stone market as well as to increase its market share LSR Group put into operation a new plant with a capacity of over 600,000 cub.m of crushed granite per year in the Zabolotnoye area of the Gavrilovo deposit in the Vyborgsky district, Leningrad region.
Yekaterinburg and the Urals Region
In 2008, LSR Group continued its entry and the strengthening of positions in the Yekaterinburg construction market (the Urals region of Russia), where it proceeded with the acquisition of assets in the segments of real estate development, construction and building materials production. In the first half of 2008, LSR Group finalised the following acquisitions:
- 100% of the share capital of OOO Promrezerv, a company holding a long-term lease of a land plot of more than 9.8 hectares. We propose to use the land for neighbourhood real estate developments including a mass market residential compound with built-in and attached non-residential premises, a garage complex and a Class B office building. According to the development concept, the total building area is estimated at 147,000 sq.m.
- 87% of the share capital of OJSC Betfor Reinforced Concrete Factory, the largest prefabricated construction company in Yekaterinburg manufacturing prefabricated construction panels (with a capacity of 200,000 sq.m per year). In addition, the Company has manufacturing facilities to turn out reinforced concrete products (120,000 cub.m a year), aerated concrete (120,000 cub.m a year), concrete and dry mixes (50,000 cub.m a year). In 2007, Betfor's market share of the panel construction segment in Yekaterinburg was 79%. Betfor has been the No.1 prefab construction company for several years now. The company is also one of the market leaders in building materials production. Thus, according to its own estimates, its share of the Yekaterinburg and the Sverdlovsk region market is 30% for aerated concrete, 37% for reinforced concrete products and 5% for ready-mix concrete.
Ukraine
In the first half of 2008, LSR Group continued the implementation of its plans to enter the Ukrainian aerated concrete market. We are now completing the construction of the largest aerated concrete plant in Ukraine with a design capacity of 400,000 cub.m per year in Berezan (70 km from Kiev, Ukraine's capital). The production start-up is scheduled for mid-October this year.
In addition, in March 2008, LSR Group proceeded with the acquisition of OJSC Obukhiv Porous Concrete Plant, a major player in the Ukrainian aerated concrete market and the key supplier to the Kiev region. The plant is located in Obukhiv, a city 40 km from Kiev. In 2007, the volume of the company's production and sales was 150,000 cub.m. Currently, work is nearing completion to increase the plant capacity to 350,000 cub.m per annum and upgrade the production process to the highest level. According to independent research, in 2007 OJSC Obukhiv Porous Concrete Plant had an 18% share of the total Ukrainian aerated concrete market. In the Kiev region the plant products account for over 50% of today's volume of the aerated concrete market limited by the supply volume.
Subsequently we are planning to make ample use of the synergy of both plants by means of promoting and distributing aerated concrete products under a single brand - AEROC, as well establishing specialisation between the two Ukrainian plants in their range of products to more flexibly meet customer needs.
Moscow (and the Moscow region)
In the first half of 2008, we entered into a contract to acquire two companies - OOO Triada Agency and OOO Centaur Management owning rights for plots of land totalling 1.8 hectares at Leningradskoye Shosse in Moscow. We are planning to use the site acquired for building a multi-purpose complex with offices and residential apartments. The total area to be developed is 129,000 sq. m.
REAL ESTATE PORTFOLIO
As at 30 June 2008, the property portfolio of LSR Group included 48 development projects in the residential elite class, business class and mass market property, gated communities and commercial property segments. The net sellable area of the projects included in the portfolio was 8,538,000 sq.m.
The real estate development projects of LSR Group are located in St. Petersburg, the Leningrad region, Moscow and Yekaterinburg.
Valuation of the property portfolio
The market value of LSR's holdings in the current property portfolio as at 30 June 2008 was US$6,630 million and the total portfolio value without deducting third party holdings was US$6,746 million.
The valuation of the property portfolio as at 30 June 2008 was conducted by DTZ independent appraisers. The valuation was performed in compliance with the standards of the Royal Institution of Chartered Surveyors and the International Valuation Standards.
Complete reports on the LSR Group property portfolio valuations are available on our website at www.lsrgroup.ru/results
Real estate portfolio by segments
The real estate portfolio of LSR Group is well balanced in different property segments.
In terms of net sellable area, approximately 78% of the portfolio accounts for mass market property (including land plots held for future development) always characterised by sustainable demand and large construction volumes.
From the perspective of its market value, the portfolio is diversified across different segments so that it is possible to offer property to different consumer types.
| Class of property | Net sellable area,thousands sq.m | Market value,US$ M | ||
| 30 June 2008 | Percentage, % | 30 June 2008 | Percentage, % | |
| Mass market | 4,211 | 49.3% | 1,694 | 25.5% |
| Business class | 458 | 5.4% | 322 | 4.8% |
| Elite class | 457 | 5.4% | 1,599 | 24.1% |
| Gated communities* | 65 | 0.8% | 141 | 2.1% |
| Commercial property (under development) | 458 | 5.4% | 1,745 | 26.3% |
| Operating commercial property | 22 | 0.3% | 157 | 2.4% |
| Held for future development | 2,867 | 33.6% | 972 | 14.7% |
| TOTAL | 8,538 | 100.0% | 6,630 | 100.0% |
* exclusive of 982,000 sq.m of land
Note: The "Operating Commercial Property" segment includes 6 business centres, 3 of them being used by LSR Group for its own needs.
Real estate portfolio by stages of development
Approximately 73% of our property portfolio in terms of net sellable area is at the stage of initial concept design and design and permitting, and 75% of this percentage accounts for the project in St. Petersburg known under the conventional name of 'Tsvetnoy Gorod/Ruch'i.' In terms of the portfolio market value, most of the projects are to be implemented within the next 5 to 7 years. Approx. 18% of the portfolio market value is made up of projects that were already at the construction stage at the time of valuation, and around 39% at the design stage. The reason is that the net sellable value of the portfolio is for the most part made up of the Tsvetnoy Gorod/Ruch'i long-term project with a market value per square meter, which is much lower, according to the DTZ valuation, than that of projects with shorter completion times.
| Development stage | Net sellable area,thousands sq.m | Market value,US$ M | ||
| 30 June 2008 | Percentage, % | 30 June 2008 | Percentage, % | |
| Initial concept design | 6,271 | 73.4% | 2,449 | 36.9% |
| Design and permitting | 1,482 | 17.4% | 2,598 | 39.2% |
| Under construction | 704 | 8.2% | 1,256 | 18.9% |
| Completed and partially sold | 60 | 0.7% | 170 | 2.6% |
| Operating commercial property | 22 | 0.3% | 157 | 2.4% |
| TOTAL | 8,538 | 100.0% | 6,630 | 100.0% |
Note: The "Operating Commercial Property" segment includes 6 business centres, 3 of them being used by LSR Group for its own needs.
Real estate portfolio by regions
Most of the properties - over 90% of our portfolio both by area and value - are located in our home market in St. Petersburg.
As at 30 June 2008, we also had four projects at different stages of completion in Moscow and two projects in Yekaterinburg.
| Development stage | Net sellable area,thousands sq.m | Market value,US$ M | ||
| 30 June 2008 | Percentage, % | 30 June 2008 | Percentage, % | |
| St. Petersburg | 7,732 | 90.6% | 5,971 | 90.1% |
| Leningrad region | 76 | 0.9% | 166 | 2.5% |
| Moscow | 131 | 1.5% | 384 | 5.8% |
| Yekaterinburg | 600 | 7.0% | 110 | 1.7% |
| TOTAL | 8,538 | 100.0% | 6,630 | 100.0% |
CORPORATE GOVERNANCE
11 meetings of the Board of Directors of OJSC LSR Group and 2 shareholders meetings were held during the first half of 2008.
7 February - Extraordinary Meeting of Shareholders of OJSC LSR Group:
- approved the new composition of the Board of Directors of 7 members (including 3 independent directors)
- approved amendments to the Charter of OJSC LSR Group whereby in order to strengthen the role of the Board of Directors all transactions made by LSR Group subsidiaries to acquire or sell shares/stakes in other companies as well as major transactions require a special approval of the Board of directors.
26 June - Annual Meeting of Shareholders of OJSC LSR Group:
- reelected the entire Board of Directors
- reelected the company's CEO for a new term
- approved the annual report of OJSC LSR Group for 2007 prepared according to Russian standards
- elected Revision Committee members
- approved company auditors for 2008 (IFRS financial statements - KPMG, RAS statements - ZAO Audit-Servis)
- in view of the substantial investment programme is was decided not to declare any dividends on ordinary registered shares of the Company for 2007.
On 26 June, the Board of Directors of LSR Group reelected the chairperson and the members of the Audit Committee, Strategy and Investments Committee, and Human Resources and Compensations Committee. All the three committees are headed by independent directors with extensive experience of work for the boards of directors of a number of major Russian and foreign companies. Seppo Juha Remes was elected Chairman of the Audit Committee, Sergey Skaterschikov was elected Chairman of the Human Resources and Compensations Committee and Lauri Ratia was elected Chairman of the Strategy and Investments Committee.
Debt market
1. On 17 March 2008, OOO Cement (a subsidiary of LSR Group) signed a loan agreement of EUR 114 m with ABN AMRO Bank N.V. and HSBC guaranteed by the Danish export agency. The funds borrowed are intended for financing equipment procurement for the cement plant.
2. On 7 August 2008, OJSC LSR Group placed 4th bond issue of OJSC LSR Group of Series 02 worth RUB5 billion at the coupon rate of 13.25% in roubles.
3. On 14 July 2008, OJSC LSR Group and the Northern Capital branch of ZAO Raiffeisenbank entered into a loan facility agreement with a limit of US$85 million for two years.
EVENTS AFTER THE REPORTING DATE
Geographical Development
LSR Group completed the acquisition of several companies in Yekaterinburg: ZAO Nova-Stroy, the major developer in the local real estate market; OOO SMU NOVA-Stroy, the largest construction contractor; OOO PKU NOVA-StroyProekt design office; and OOO Uralscheben, a leading crushed stone producer. To manage the assets acquired LSR Group founded LSR Urals Management Company (OOO UK LSR Urals) in Yekaterinburg. LSR Urals will turn into a separate business division and regional office of LSR Group.
Legal disclaimer:
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