NLMK.L Regulatory News (NLMK)

20 Jun 2006 12:00

OJSC Novolipetsk Steel20 June 2006 20.06.20061Q 2006 US GAAP RESULTS OJSC Novolipetsk Steel (NLMK), the LSE listed leading Russian steel producer,today announces its consolidated results for the 1st Quarter 2006. Highlights: - Strong 1Q 2006 financial results • Sales revenues were USD 1,123 million • Cash flows from operating activities were USD 159.1 million • EBITDA* margin was 35% • Cash and cash equivalents USD 2,271 million as of 31 March, 2006 - Dynamic asset portfolio management policy • Building up steel rolling capacity in core markets through the acquisition of DanSteel A/S, the Danish steel manufacturer, for USD 104 million; • Acquiring a controlling stake in OJSC Combinat KMAruda; • Disposal of minority share in OJSC Lebedinsky GOK, resulting in USD 298 million net income. - Total amount of capital expenditures for acquisition and reconstruction offixed assets was USD 91.2 million - Launching the implementation of the internal restructuring plan to optimizethe management structure and maximize operational efficiency as well as tooptimize NLMK's structure and to focus the Company's efforts on its corebusiness Financial highlights for the 1st Quarter ended 31 March, 2006 USD, million As of 31 March, 2006 As of 31 March, 2005 Change, %Sales Revenue 1,123 1,271 -12%Gross profit 444 654 -32%Operating income 380 610 -38%EBITDA 390 646 -40%EBITDA Margin, (%) 35% 51%EPS (earning per share) 0.0911 0.0710 28% NLMK's spokesman, Anton Bazulev, commented: "The company delivered a robust first quarter performance in the face ofdifficult market conditions with steel prices falling significantly during mostof the period. Our strategy of intensifying vertical integration, increasing theproportion of output from high value-added products and enhancing ouroperational effectiveness both enabled us to weather the impact from theseconditions and continues to position us for further progress. These attributes, together with the current revival in the market, lead us toexpect that 2006 revenues will be approximately 15% higher than in 2005 and thatcomparative profit levels will recover from the first quarter downturn. Ourstrong management team and our successful strategy of long-term sustainabledevelopment confirm our confidence in the future." * EBITDA = Net income (post minorities) + income tax +/- net interest +/-gains/(losses) on investment + depreciation Management Board Comments Over recent years Novolipetsk Steel (NLMK) remains 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 reducingdependence on market conditions, underlies the NLMK's continued stableperformance and allows meeting the challenges of unfavorable external factors ina flexible way. As the prices on the steel market took a downturn in the second half of 2005,NLMK's financial results decreased in the 1st Quarter 2006 as compared with the1st Quarter 2005. Sales revenues were USD 1,123 million, EBITDA was USD 390million. Net cash provided by operating activities totaled USD 159 million. Cash provided by operating activities and proceeds from the disposal offinancial investments in the 1st Quarter 2006 fully covered capital expendituresand acquisitions of new subsidiaries. Growth in cash and cash equivalents wasUSD 347 million for 3 months of the current year resulting in the free cash ofUSD 2,271 million as of the end of the 1st Quarter 2006. Production output of main steel products increased in the 1st Quarter 2006 ascompared with the same period of the previous year. Thus, steel manufacturingwas increased by 4.4% to 2.29 million tonnes. NLMK produced 2.12 million tonnesof finished steel products (+2.3% on 2005 level). Output of galvanized,pre-painted and grain-oriented steel increased by 55.7%, 69.2% and 19.3%,respectively, and reached 92, 81 and 35 thousand tonnes, respectively. Output ofmain steel products was maintained at almost the same level as in the 4thQuarter 2005. Steel Segment Steel segment continues to be the key segment of the Company. In the 1st Quarter2006, this segment generated USD 1,048 million sales revenue from externalcustomers and USD 336 million from operating activities. Steel segment includesthe primary production asset - OJSC NLMK, DanSeel A/S, steel rollingsubsidiary and other companies whose business is steel production procurementand sales of finished products. The share of steel segment was 93.3% inconsolidated revenues and 88.6% in operating income as compared to 93.5% and80.4%, respectively, in the 1st Quarter 2005. Consolidation of DanSeel A/S's(Danish steel-rolling company) financial results in the 1st Quarter 2006 servedas a factor which to certain extent compensated for the steel segment operatingincome decline. Though steel products prices increased slightly at the end of the 1st Quarter2006, on the average, these prices were significantly lower in the reportingperiod as compared to 1st Quarter 2005 level, thus, bringing the decline insales revenue from external customers by 11.8% and in operating income - by31.4%. 1st Quarter 2006 steel segment financial results differ insignificantly fromthose of the 4th Quarter, 2005. The steel segment revenue increased by USD 32.9million, or 3.2 %, gross profit increased by USD 21 million, or 5.9% andoperating income went down by USD 28.5 million, or 7.8 % in the reporting periodas compared to the previous quarter (results of retroactive consolidation ofDanSteel A/S from December). Mining segment As of the 1st Quarter 2006 NLMK's mining segment comprises OJSC Stoilensky GOK,OJSC Dolomite, OJSC Stagdok, and OJSC Combinat KMAruda that supply raw materialsfor NLMK' 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 1stQuarter 2006, it produced 2.72 million tonnes of iron-ore concentrate and 0.262million tonnes of sinter ore. In the 1st Quarter 2006, the output of Dolomitewas 0.405 million tonnes of flux dolomite. Stagdok, which supplies limestone,produced 0.72 million tonnes of fluxing limestone in the same period. In the 1st Quarter 2006, the mining segment's revenue from external customerswas USD 16.4 million, which is 48.2% lower than the level reached in 1st Quarter2005. The segment revenue, including intersegmental transactions, was USD 109.6million (-40.2% on the same period in 2005 and -3% on the 4th Quarter 2005).Revenue decline is attributable to the considerable decrease in iron-ore priceswhile the product output remained almost unchanged. As 85% sales volume (in value terms) of the mining segment is generated byintercompany transactions, this segment's share in the 1Q 2006 consolidatedsales revenue was 1.5%. Decreased iron-ore prices led to the mining segment's operating income reductionof 71% from USD 101 million in the 1st Quarter 2005 up to USD 30 million in thesame period of 2006. The segment's share in consolidated operating profitlowered by 40.8% or USD 21 million in comparison with the 4th Quarter 2005. Starting from March 2006, OJSC Combinat KMA Ruda (KMAruda) is a member of theNLMK Group. In the 1st Quarter 2006, OJSC Combinat KMA Ruda produced 0.44million tonnes of iron-ore concentrate. In February-March 2006, NLMK purchased43.37% of the outstanding common shares, which resulted in an increase of NLMK'sownership up to 76.26%. Group's ownership was subsequently increased up to84.85% in April 2006, as a result of acquisition of additional 8.59% shares fromminority shareholders. Stoilensky GOK together with KMAruda fully cover NLMK'srequirements for iron-ore concentrate, and concentrate surplus is sold to thirdparties. Other Segments Other segments include the financial results of OJSC Tuapse Commercial Sea Port(TMTP) - Black Sea port operator, the fifth-largest port in Russia, OJSCLipetskcombank, LLC LIS Chance and the Lipetskaya Municipal Energy Company(LMEC) that supplies electric power to the local population. In the 1st Quarter 2006, the other segment's revenue from external customers wasUSD 59.1 million, which is 15.7% higher than the level of the same period in2005 and 29.9% higher than in the previous quarter. Such increased revenue islargely attributed to the companies' output growth. In the 1st Quarter 2006, other segments' operating income totaled USD 13.3million, which is 4.3% lower than in the same period in 2005, as a result of theincreased cost of sales of goods and services by LMEC. Consolidated financial results In the 1st Quarter 2006, as a result of deteriorating steel market conditionscompared with the beginning of the previous year, sales decreased by 12% to USD1,123 million despite the steel products' sales growth. NLMK managed to avoid asharp decline in revenue thanks to its flexible sale policies. In the 1stQuarter 2006, the domestic market accounted for 42% of revenue as compared with34% in the same period in 2005. Similar to 2005, due to the greater volumes ofshipment of grain-oriented steel and pre-painted steel products, the proportionof products featuring high added value considerably increased in the structureof shipments from NLMK in the 1st Quarter 2006. As the prices for steel products stabilized, NLMK saw the increase of USD 42million or 3.9% in the sales revenue in the 1st Quarter 2006 as compared to theprevious period. The production cost went slightly up from USD 542 million to USD 605 million orby 11.5% in the 1st Quarter 2006 against the same period in 2005 (6.1% againstthe 4th Quarter 2005). As a result of higher production cost in the context oflower revenue, NLMK's operating income in the 1st Quarter 2006 decreased by37.7% as compared the same period in 2005 and amounted to USD 380 million. Inthe same time, the gross profit went up by USD 6.3 million, or 1.4% as comparedto the previous period and operating income was lower by 11.2% against the 4thQuarter 2005 result. In the 1st Quarter 2006, EBITDA was USD 390 million, EBITDA margin was 35%. Thedecrease in EBITDA margin in 1st Quarter 2006 is primarily attributable towardssubstantially lower steel prices as compared to the 1st Quarter 2005 andconsolidation of new assets with lower profitability. For comparison, in the1st Quarter 2005, EBITDA was USD 646 million and EBITDA margin was 51%, while inthe 4th Quarter 2005 these indicators were USD 467 million and 43%.respectively. In the 1st Quarter 2006, depreciation charges were almost the same as in the1st and 4th Quarters 2005 and amounted to USD 74 million. US dollar rate decrease had a negative impact on NLMK's financial results:foreign currency exchange loss was USD 57 million in the 1st Quarter 2006. Income before tax was USD 727 million in the 1st Quarter 2006, having increasedby 20.6% against the 1Q 2005 level. The growth was 62.9% in comparison with the4th Quarter 2005. In the 1st Quarter 2006, net income was USD 546 million that is 28% higher thanin the same period of the previous year and represented growth of 60.8% againstthe previous quarter. The January 2006 sale of the stake in Lebedinsky GOKserved as the main driver of higher profits. If the effect of the Lebelinsky GOKshare sale were eliminated, NLMK's net profit would have been USD 248 million inthe 1st Quarter 2006 or 42% lower against the same period in 2005. Thisdecrease is attributable to lower sales revenue and higher production costs. Earnings per share (EPS) were USD 0.0911 in the 1st Quarter 2006. Consolidated balance sheet data In the 1st Quarter 2006, NLMK's assets increased by 10% against 31 December 2005and reached USD 6,825 million. The Company's assets grew mostly by means of netprofit. Profitable business allows NLMK to finance its own activities and thedevelopment of the Group primarily from its own funds. A share of the Company'sown capital in the structure of the sources used to finance NLMK's operations ispermanently high and exceeded 80% over the last three years; at the end of the1st Quarter 2006, it was 84%. Highly liquid assets of NLMK substantially exceed the amount of its debt. TheNLMK's cash and cash equivalents position as at 31.03.2006 amounted to USD 2,271million. Over the last four years, the working capital ratio of NLMK did not drop below4.8. At the end of the 1st Quarter 2006, it reached 7.1. In the 1st Quarter 2006, annualized return on assets (ROA) was 34% andannualized return on equity (ROE) was 40%. These ratios are higher than in the1st and 4th Quarters 2005 due to an increase in the Company's net profit as aresult of the sale of its financial investments in the reporting quarterincluding divestment of interest in Lebedinsky GOK. In the 1st Quarter 2006, the Company's current assets increased by USD 429million or by 12% against the levels seen on 31 December 2005. Primarily thisgrowth was achieved through a rise in cash and cash equivalents which increasedby USD 347 million. Cash flow Net operational cash flow was USD 159 million in the 1st Quarter 2006, which isalmost 74.5% more than net cash used for fixed assets construction andacquisition that amounted to USD 91.2 million. In the 1st Quarter 2006, net cash flow from investing activities was USD 227million. Positive result of NLMK's investing activities was due to the sale ofits financial investments of USD 403 million. Since practically no loans or borrowings are used to finance the Company'soperations, the main cash outflow associated with the financial activities inthe 1st Quarter 2006 was caused by the Company's merger & acquisition projects,including USD 104 million spent on acquisition of DanSteel A/S (Danishsteel-rolling company). In the 1st Quarter 2006, the net increase in cash and cash equivalents wasapproximately USD 275 million, and NLMK's cash balance was USD 2,271 million asof the end of the 1st Quarter 2006. In addition, US currency weakening resultedin USD 72 million increase of NLMK's cash and cash equivalents for the firstquarter of 2006. Thus, the combined increase of cash and cash equivalents duringthe reporting period comprised USD 347 million. The Company's sustainable financial position allows for a flexible businessdevelopment strategy. Creation of additional shareholder values remains NLMK'spriority, and NLMK will continue to pursue the policy based on stringentfinancial discipline and balanced investment projects. Outlook Revival of the steel market at the end of the 1st Quarter 2006 allowedsteelmaking companies to increase selling prices. This recovery trend isexpected to continue in the 2nd and 3rd Quarters 2006. Afterwards the market islikely to stabilize. We estimate that average prices of NLMK in 2006 will be atthe levels seen last year. NLMK plans to increase its steel output to match 2004 levels. Production ofiron-ore concentrate at the Stoilensky GOK will increase. We expect that revenues in 2006 will be approximately 15% higher than in 2005.This will be influenced by bigger sales volumes and by adding new assets to theGroup. Profits from operations will remain at last year's levels. The sale of a stake in Lebedinsky GOK in January 2006 will be the key factordriving growth of the Company's profit before tax and net profit. NLMK's strategy for long-term sustainable development and its highly qualifiedteam of managers allow us to make a positive forecast and look confidently intothe future. PREPARED IN ACCORDANCE WITH ACCOUNTING PRINCIPLESGENERALLY ACCEPTED IN THE UNITED STATES OF AMERICA AS AT MARCH 31, 2006 AND DECEMBER 31, 2005AND FOR THE THREE MONTHS ENDED MARCH 31, 2006 AND 2005 Note As at March 31, As at December 31, 2006 2005ASSETS see Note 11(a) Current assetsCash and cash equivalents 2 2,271,264 1,924,148Short-term investments 22,892 27,040Accounts receivable, net 3 763,653 708,515Inventories, net 4 560,685 559,250Other current assets, net 5 237,941 208,920Restricted cash 8,174 7,979 3,864,609 3,435,852Non-current assetsLong-term investments 33,775 31,470Property, plant and equipment, net 7 2,586,216 2,415,001Intangible assets, net 20,370 21,086Goodwill 196,804 173,357Other non-current assets, net 5 123,265 133,747 2,960,430 2,774,661Total assets 6,825,039 6,210,513 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilitiesAccounts payable and other liabilities 8 510,777 571,265Current income tax liability 29,087 40,639 539,864 611,904Non-current liabilitiesDeferred income tax liability 311,969 300,712Other long-term liabilities 9 110,572 90,846 422,541 391,558Total liabilities 962,405 1,003,462 Commitments and contingencies 15 - - Minority interest 113,111 92,576 Stockholders' equityCommon stock, 1 Russian ruble par value - 5,993,227,240 221,173 221,173shares issued and outstanding at March 31, 2006 andDecember 31, 2005Statutory reserve 10,267 10,267Additional paid-in capital 1,812 1,812Accumulated other comprehensive income 265,274 72,129Retained earnings 5,250,997 4,809,094 5,749,523 5,114,475Total liabilities and stockholders' equity 6,825,039 6,210,513 Note For the three For the three months months ended ended March 31, 2005 March 31, 2006 Sales revenue 12 1,122,987 1,270,938 Cost of salesProduction cost (605,060) (542,421)Depreciation and amortization (73,762) (74,264) (678,822) (616,685) Gross profit 444,165 654,253 General and administrative expenses (37,794) (25,010)Selling expenses (16,155) (14,204)Taxes other than income tax (10,418) (5,098) Operating income 379,798 609,941 Loss on disposals of property, plant and equipment (1,492) (904)Gains / (losses) on investments, net 6 383,759 (5,273)Interest income 29,300 21,445Interest expense (4,541) (3,299)Foreign currency exchange loss, net (56,619) (20,622)Other (expense) / income, net (2,728) 1,867 Income before income tax and minority interest 727,477 603,155 Income tax (177,238) (163,835) Income before minority interest 550,239 439,320 Equity in net earnings of associate 483 - Minority interest (4,819) (13,818) Net income 545,903 425,502 Income from continuing operations per share (US dollars)basic and diluted 0.0911 0.0710 Net income per share (US dollars)basic and diluted 10 0.0911 0.0710 Note For the three For the three months ended months ended March 31, 2006 March 31, 2005CASH FLOWSFROM OPERATING ACTIVITIESNet income 545,903 425,502Adjustments to reconcile net income to net cash providedby operating activities:Minority interest 4,819 13,818Depreciation and amortization 73,762 74,264Loss on disposals of property, plant and equipment 1,492 904(Gains) / losses on investments (383,759) 5,273Equity in net earnings of associate (483) -Deferred income tax (benefit) / expense (6,857) 7,976Other movements 14,806 (19,568)Changes in operating assets and liabilitiesIncrease in accounts receivable (24,790) (231,784)Decrease / (increase) in inventories 22,158 (13,941)Decrease / (increase) in other current assets 4,317 (3,302)(Increase) / decrease in loans provided by the subsidiary (19,673) 4,045bank(Decrease) / increase in accounts payable and other (59,742) 36,030liabilitiesDecrease in current income tax payable (12,862) (24,258)Net cash provided by operating activities 159,091 274,959CASH FLOWSFROM INVESTING ACTIVITIESAcquisitions of subsidiaries, net of cash acquired of 11(b) (59,365) -$1,264Proceeds from sale of property, plant and equipment 2,744 1,796Purchases and construction of property, plant and (91,193) (99,517)equipmentProceeds from sale of investments 402,728 4,233Purchase of investments (27,948) (3,270)Movement of restricted cash 96 (2,134)Net cash provided / (used in) investing activities 227,062 (98,892)CASH FLOWSFROM FINANCING ACTIVITIESProceeds from borrowings and notes payable 8,096 6,403Repayment of borrowings and notes payable (14,870) (1,685)Payments to controlling shareholders for common control 11(a) (104,000) -transfer of interests in a new subsidiaryDividends to shareholders (398) (2,170)Net cash (used in) / provided by financing activities (111,172) 2,548Net increase in cash and cash equivalents 274,981 178,615Effect of exchange rate changes on cash and cash 72,135 (3,652)equivalentsCash and cash equivalents at the beginning of the period 2 1,924,148 1,348,615Cash and cash equivalents at the end of the period 2 2,271,264 1,523,578 Note Common Statutory Additional Accumulated Retained Total stock reserve paid-in other earnings stockholders' capital comprehensive equity incomeBalance at 221,173 10,267 680 242,387 3,745,984 4,220,491December 31, 2004 Comprehensive income: Net income - - - - 425,502 425,502 Other comprehensiveincome: Net unrealized gain - - - (39) - (39)on a change invaluation ofinvestments Translation - - - (11,465) - (11,465)adjustment Comprehensive income 413,998 Balance at 221,173 10,267 680 230,883 4,171,486 4,634,489March 31, 2005 Balance at 221,173 10,267 1,812 72,129 4,809,094 5,114,475December 31, 2005(see Note 11(a)) Comprehensive income: Net income - - - - 545,903 545,903 Other comprehensiveincome: Net unrealized gain - - - (1,201) - (1,201)on a change invaluation ofinvestments Translation - - - 194,346 - 194,346adjustment Comprehensive income 739,048 Payments to 11 - - - - (104,000) (104,000)controlling (a)shareholders forcommon controltransfer ofsubsidiary interests Balance at 221,173 10,267 1 812 265,274 5,250,997 5,749,523March 31, 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 Exchange