NLMK.L Regulatory News (NLMK)

7 Dec 2006 07:03

OJSC Novolipetsk Steel07 December 2006 07.12.2006 NOVOLIPETSK STEEL 9M 2006 US GAAP RESULTS OJSC Novolipetsk Steel ("NLMK", "the Company"), the LSE listed leading Russiansteel producer, today announced its consolidated US GAAP results for the firstnine months ended 30 September, 2006. Highlights: Strong 9M 2006 financial results • Sales revenues amounted to USD 4 358.5 million (+29.6% YoY) • Cash flows from operating activities were USD 1 029.5 million • EBITDA* amounted to USD 1 829.4 million (EBITDA margin 42%) • Net profit was USD 1 684.7 million (+ 61.1% YoY) • Cash and cash equivalents USD 1 342.4 million as of 30 September, 2006 Recent Developments: M&A and investment activities. The Company continued to actively manage itsasset portfolio following its M&A strategy and internal restructuring planapproved in Q1 2006: • Acquisition of VIZ-Stal, the second-largest electrical steelmanufacturer in Russia. VIZ-Stal is consolidated in NLMK's financial statementssince August 14, 2006. • Disposal of iron ore producer, KMA Ruda, for USD 302.5 mln inSeptember 2006. Proceeds from the disposal are to be invested in thedevelopment of the Company's key iron ore asset, Stoilensky GOK. Agreement to create a joint venture with Duferco Group. The joint ventureincludes one steel making plant and five steel rolling facilities with totalfinished steel output of 4.5 million tonnes in 2006 as well as a network ofsteel service centres. NLMK is to acquire its 50% interest in the joint venturefor approximately USD 805 million in cash. Transaction is expected to close bythe end of 2006. Interim dividends. The EGM held on 29 September, 2006 approved a dividendpayment in respect of the first six months of 2006 of RUR1.5 per ordinary share(1 GDS = 10 ordinary shares) recommended by the Board of Directors. NLMKtransferred funds for dividend payments on Global Depositary Shares (GDSs) tothe depositary bank on 23 November 2006. Corporate developments. In September 2006 the Board of Directors has approvedthe key parameters of the 2nd phase of the Technical Upgrade Program (2007 -2011) with total planned investments of USD 4.4 bn over 5 years. Key strategicgoal of the 2nd phase of the Program is balanced development of all businesssegments across the value chain. The program entails in particular: • Increasing annual crude steel production by 40% to 12.4 milliontonnes • Maintaining self-sufficiency in major raw materials to support theprojected increase in steel production • Increasing production of finished flat steel products pursuingstrategic acquisition opportunities in the core markets and throughmodernization of existing production facilities Key financials for nine months ended 30 September, 2006USD, million Q3 2006** Q2 2006** Change, % 9M 2006 9M 2005 Change, %Revenue 1 756.8 1 478.7 18.8% 4 358.5 3 362.8 29.6%Gross profit 899.7 708.6 27.0% 2 052.5 1 615.3 27.1%Operating income 752.9 545.5 38.0% 1 678.2 1 419.1 18.3%EBITDA* 836.1 603.4 38.6% 1 829.4 1 586.9 15.3%EBITDA Margin(%) 47.6% 40.8% 42% 47.2%Net profit 740.9 397.9 86.2% 1 684.7 1 045.8 61.1% * EBITDA = Net income (post share of minorities) + income tax +/- interestexpense/(income) + depreciation +/- losses/(gains ) on disposals of property,plant and equipment, +/- losses/(gains) on financial investments +/- losses/(gains) from discontinued operations; ** 9M 2006, H1 2006 and Q1 2006 are official reporting periods. Q3 2006 and Q22006 numbers are derived analytically. Commenting on the 9M 2006 results, Galina Aglyamova, NLMK's CFO, said: "NLMK has demonstrated strong financial results for the first nine months of2006. EBITDA margin for the 9M 2006 stood at 42%. The Company's soundperformance was driven by growth in steel output and consolidation of the newlyacquired assets, including those with increased share of higher value-addedproducts, supported by favorable steel market environment. NLMK's solidfinancial results demonstrate successful execution of the Company's strategyaimed at increasing vertical integration and supply of key raw materials,modernization of production facilities and stringent cost management. We aim to further strengthen NLMK's key competitive advantages in order toachieve sustained financial performance and improved efficiency in the future.In line with the corporate strategy for 2007-2011 NLMK aims to further improvevertical integration, maintain low cost slab production platform and increaseoutput of value-added products. Stable operating cash flow provides the Companywith financial flexibility necessary to implement its development strategy." Management Comments In the first nine months of 2006, NLMK's sales revenue amounted to USD 4 358.5million (+29.6% YoY), gross profit was USD 2 052.5 million (+27.1% YoY), netprofit (including the sale of financial assets) amounted to USD 1 684.7 million(+61.1% YoY), with EBITDA at a record USD 1 829.4 million (+15.3% YoY). EBITDAmargin in 9M 2006 was 42%. During the recent years, Novolipetsk Steel has maintained its positions as oneof the most efficient steel producers in Russia and worldwide. NLMK's strategyis aimed at increasing the Company's value, creating long-term competitiveadvantages and reducing dependence on market conditions. This is the cornerstoneof NLMK's strong performance which allows the Group to meet the challenges ofunfavorable market fluctuations. Increased production and sales volumes as well as consolidation of the newlyacquired subsidiaries - DanSteel A/S, Prokopievskugol Group of Coal Companies,Altai-koks and VIZ-Stal were the main drivers of NLMK's strong performance inthe first nine months of 2006. NLMK has changed terms of delivery for exportsales in steel products. The sales are performed on DAF, CPT and DDU basis sinceMarch 2006 with transportation costs included in the sales price. The aggregate impact of the above factors resulted in 29.6% increase in revenueover 9M 2006 as compared to 9M 2005. Total revenue for 9M 2006 amounted to USD4,358.5 million. Net income for 9M 2006 reached USD 1 684.7 million, (a 61.1% increase YoY). Thedisposal of Lebedinsky GOK and KMA Ruda stakes was the main factor behind theincrease of net profit in 9M 2006 over the corresponding period of last year.The net result from the disposal of Lebedinsky GOK and KMA Ruda wererespectively USD 306.3 million and USD 174.5 million, consequently net incomewithout those operations would be USD 1 203.9. Overall improvement in market environment, acquisition of VIZ-Stal and disposalof KMA Ruda in Q3 2006 were the main contributors to the Group's resultsimprovement over the previous quarter. Cash provided by operating activities in 9M 2006 amounted to USD 1 029.5 millionincluding USD 501.7 million in Q3 2006 and USD 368.7 million in Q2 2006. At theend of 2005 NLMK accumulated USD 1 924.1 million of cash on its balance sheet.As a result of acquisitions, as of 30 September, 2006 cash and cash equivalentsamounted to USD 1 342.4 million, a 30.2% decrease from 31 December 2005. Steel Segment The steel segment continues to be the key segment of the Company. In 9M 2006 thesteel segment generated USD 3 988.0 million in revenue from external customers,and USD 1 496.9 million of operating income. In 9M 2006, the steel segmentcomprised 91.5% of consolidated revenue and 89.2% of operating income. Sales revenue in 9M 2006 increased by USD 827.9 million or 26.2% over thecorresponding period of last year and gross profit was up by USD 453.1 millionor 34.6%. The following factors had a positive impact on the financial resultsin 9M 2006: - Consolidation of DanSeel A/S in December 2005 which resulted inincreased sales of finished steel products (heavy plates) in Europe; - Consolidation of VIZ-Stal in August 2006 which resulted in increasedsales of high value-added electrical steel products; - Growth of production and sales volumes in real terms at the mainproduction site in Lipetsk. Sales revenue in Q3 2006 amounted to USD 1 594.5 million, an increase of USD248.5 million or 18.5% compared to Q2 2006. Operating income in Q3 2006increased by USD 165.5 million or 33.3% over Q2 of 2006. Favorable market conditions in Q3 2006 allowed the Company to increase averageprices for almost all of its products compared to Q2 2006. As a result, averageprices in Q3 2006 exceeded the level of Q2 2006. Higher prices and theconsolidation of VIZ-Stal since 14 August, 2006 were the key factors behindgrowth in key financial metrics. Mining segment As of 30 September, 2006, NLMK's mining segment comprises OJSC Stoilensky GOK,OJSC Dolomite and OJSC Stagdok that supply raw materials for NLMK'smanufacturing facilities in Lipetsk and also sell a portion of raw materials tothird parties. Iron ore producer Stoilensky GOK is the principal mining company within theGroup. In 9M of 2006, it produced 8.45 million tonnes of iron-ore concentrateand 1.0 million tonnes of sinter ore. In 9M 2006, the output of Dolomite was1.36 million tonnes of flux dolomite. Stagdok, which supplies limestone,produced 2.4 million tonnes of fluxing limestone in the same period. In 9M 2006, the mining segment's revenue from external customers was USD 70.4million, which is 4.4% lower than the level reached in 9M 2005. The reductioncompared to the same period of last year was due to lower prices in the domesticiron-ore market early this year. In Q2 2006, the market environment improved andthis continued into Q3 2006, thus the revenue from external customers in Q3 2006was higher than in Q2 2006 by USD 0.6 million (+2.2%) and amounted to USD 27.3million. The segment's revenue, including intersegmental sales was USD 404.3 million in9M 2006 (a decrease of 8.6% YoY). The decrease in revenue was attributable tolower prices during the reporting period compared to 9M 2005. In Q3 2006, themining segment's revenue amounted to USD 153.9 million, which is USD 13.0million (or 9.2%) higher than in Q2 2006. As 82.6% of the mining segment's sales in value terms are internal sales withinthe Company, the segment's share in NLMK's consolidated external revenue in 9M2006 was 1.6%. The operating profit increased in Q3 compared to Q2 2006 by USD 35.0 million(59.2%) primarily due to growth in iron-ore prices, higher production volumesand production cost reductions. Coke-chemical segment Starting from Q2 2006, OJSC Altai-koks and its subsidiaries are consolidated inthe NLMK Group's results. OJSC Altai-koks is one of the leading producers ofcoke in Russia. After putting into operation of the new coke battery #5 inOctober 2006, total production capacity reached 5.0 million tonnes of coke peryear. The financial results of Altai-koks and its subsidiaries are shown in thecoke-chemical segment. In Q3 2006, Altai-koks produced 807.1 thousand tonnes of coke with 6% moisturecontent. In the Q3 2006, the coking segment's revenue from external customers andintersegmental sales was USD 108.9 million, which is USD 26 million or 31.6%higher compared to Q2 2006. The share of coke-chemical segment is 4.5% of theconsolidated revenue. The segment's operating profit amounted to USD 12.2 million in Q3 2006, anincrease of USD 8.6 million or 3.3 times compared to the previous quarter. The improvement in financial results is primarily attributable to growing salesvolumes. Coke exports amounted to 235.3 thousands tonnes in Q3 2006, which is4.9 times higher compared to Q2 2006. Other segments Other segments' revenue includes revenue from three operational units, theresults of which do not exceed threshold values. These segments include servicesof OJSC Tuapse Commercial Sea Port (TMTP) and its subsidiaries, financialservices, as well as banking and insurance services to business and individualsand mining and enrichment of coal by Prokopievskugol Group. In the first nine months of 2006, other segment's revenue from externalcustomers was USD 169.9 million (+31.6% YoY). The revenue increase is mainlyattributable to the consolidation of Prokopievskugol Group's financial resultsfrom Q2 2006. In the first nine months of 2006, other segments' gross profit amounted to USD41.8 million (+0.9% YoY). The operating loss in 9M 2006 was USD 9.2 million.Operating loss was due to consolidation of Prokopievskugol Group's financialresults. Prokopievskugol Group made a net loss in Q2 and Q3 2006 due tounfavorable market prices and substantial SG&A expenses. The Company isundertaking a restructuring program of Prokopievskugol aimed at reducing theseexpenses. In Q3 2006 external revenue from Other segments amounted to USD 56.4 million,which is USD 2 million or 3.6% higher compared to Q2 2006. Operating loss fromOther segments in Q3 2006 was USD 10.0 million, which is USD 2.5 million or19.7% lower compared to Q2 2006. The reduction of loss is primarily linked toProkopievskugol turnaround. Consolidated financial results In the first nine months of 2006 NLMK's sales revenue amounted to USD 4 358.5million (+29.6% YoY), gross profit was USD 2 052.5 million (+27.1%), net profit(including profit on sale of financial assets and from discontinued operations -disposal of Lebedinsky GOK and KMA Ruda for USD 306.3 million and USD 174.5million respectively) amounted to USD 1 684.7 million (+61.1%). EBITDA reached arecord of USD 1 829.4 million (+15.3%), EBITDA margin in 9M 2006 was 42%. The increase in revenue was primarily driven by growth in sales and productionvolumes as well as consolidation of financial results of Dansteel A/S for thefull reporting period, Prokopievskugol Group and Altai-koks starting from April2006 and VIZ-Stal starting from mid-August 2006. Sales revenue and gross profit in Q3 2006 increased by 18.8% and 27%respectively compared to Q2 2006. Growing prices for key products andconsolidation of VIZ-Stal since mid-August 2006 resulted in strong financialperformance over the reporting period. Lower SG&A expenses combined with growingrevenue led to 38% growth in operating profit and 38.6% growth in EBITDAcompared to the previous quarter. Consolidated balance sheet data At the end of 9M 2006, NLMK's assets increased by 33.5% from 31 December 2005and reached USD 8,290.1 million. Retained earnings were the primary source offinancing the increase in the Company's assets. Highly liquid assets on NLMK's balance sheet substantially exceed borrowings.NLMK's cash and cash equivalents as of 30 September, 2006 amounted to USD 1342.4 million, which is USD 581.7 million or 30.2% lower compared to the levelof 31 December, 2005. This decrease was mainly due to financing of theacquisitions of Dansteel A/S, Prokopievskugol Group, Altai-koks.and VIZ-Stal.NLMK will also acquire a 50% interest in the Duferco joint venture forapproximately USD 805 million. NLMK expects to finance the acquisition of itsshare in the joint venture with Duferco Group out of its existing cash funds. NLMK's balance sheet structure demonstrates high financial stability of theCompany and is confirmed by the highest credit ratings among the Russian steelcompanies. In 9M 2006, annualized return on assets (ROA) was 28.8% and annualized return onequity (ROE) was 36.5%, which is higher than in the first half of 2006. Cash Flow Stable generation of operational cashflows allows NLMK to support organicdevelopment of the Group's asset base as well as new acquisitions using its owncash funds without raising debt. In the 9M 2006 net cash received from operating activities amounted to USD 1029.5 million, almost 2.5 times higher than net cash used for purchase andconstruction of fixed assets, which amounted to USD 415.3 million. The Group actively implemented its vertical integration strategy aimed at theacquisition of new upstream assets resulting in high degree of self-sufficiencyin raw-materials and downstream assets enabling high-value added products outputgrowth. Over the first nine months of 2006 NLMK spent USD 1 348.1 million onacquisitions (net of cash acquired). Cash outflow from investment activities in 9M 2006 amounted to USD 1 074.4million compared to USD 391.1 million in 9M 2005. In Q3 2006, investment cashflow was positive at USD 501.7 million, in Q2 2006 it amounted to USD 368.7million. The main cash outflows associated with financial activities in 9M 2006 aredividend payments to shareholders. USD 126.9 million of cash outflows wasattributable to repayment of loans and promissory notes. The substantial part ofthese payments is attributed to the companies acquired by NLMK in 2006. The Company's sustainable financial position allows a flexible businessdevelopment strategy. Shareholder value creation remains NLMK's key priority.NLMK will therefore continue to pursue its policy of prudent financialdiscipline implementing its investment projects. Outlook Positive trends on global steel markets since the end of Q1 2006 enabled steelcompanies to take advantage of improved pricing. The upward trend in pricescontinued in Q2 and Q3 2006. Q4 2006, however, is characterized by pricesoftening in the global steel markets caused by high levels of US inventoriesand excess supply in the Chinese steel market. We expect that average prices ofour steel products in Q1 2007 will be slightly lower compared to Q4 2006. After major overhauls on the main production site conducted in 2005, NLMK plansto increase its steel output in 2006 to match 2004 levels. The total productionvolume in 2006 is expected to be 9 125 million tonnes. The acquisitions of DanSteel A/S, Prokopievskugol, VIZ-Stal and Altai-koks had apositive impact on the growth of Group's sales revenue in 2006. Taking into consideration the impact of the abovementioned factors, NLMK expectsits 2006 revenues to be higher by approximately 30-35%, compared to 2005. We areexpecting similar growth rate for our operating profit. We expect NLMK's EBITDAin 2006 to reach approximately USD 2.6 bn. The sale of non-core iron ore assets will be an additional factor contributingto the Company's profit before tax and net profit in 2006, which we expect willexceed 2005 levels by 60-65%. Disclaimer: This announcement may contain a number of forward-looking statements relatingto, among others, the financial condition and results of operations of theCompany. Such forward-looking statements involve a number of risks anduncertainties that could cause actual results to differ materially from thosesuggested by them and are based on assumptions regarding the Company's presentand future business strategies and the environment in which the Company and itssubsidiaries operate both now and in the future. Forward-looking statementsspeak only as at the date of this announcement and save as required byapplicable legal and/or regulatory requirements the Company expressly disclaimsany obligation to release publicly any updates or revisions to anyforward-looking statements. INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) PREPARED IN ACCORDANCE WITH ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THEUNITED STATES OF AMERICA AS AT SEPTEMBER 30, 2006 AND DECEMBER 31, 2005AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005 INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS As at As at December September 30, 2006 31, 2005 ASSETS Current assetsCash and cash equivalents 1,342,436 1,924,148Short-term investments 53,262 27,040Accounts receivable, net 1,100,058 708,515Inventories, net 750,637 559,250Other current assets, net 299,132 208,920Restricted cash 10,145 7,979 3,555,670 3,435,852Non-current assetsLong-term investments 5,379 31,470Property, plant and equipment, net 3,770,049 2,415,001Intangible assets, net 201,859 21,086Goodwill 635,647 173,357Other non-current assets, net 121,489 133,747 4,734,423 2,774,661Total assets 8,290,093 6,210,513 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilitiesAccounts payable and other liabilities 977,703 565,983Short-term borrowings 118,663 5,282Current income tax liability 136,097 40,639 1,232,463 611,904Non-current liabilitiesDeferred income tax liability 536,765 300,712Long-term borrowings 13,665 45,341Other long-term liabilities 55,029 45,505 605,459 391,558Total liabilities 1,837,922 1,003,462 Commitments and contingencies - - Minority interest 128,942 92,576 Stockholders' equityCommon stock, 1 Russian ruble par value - 5,993,227,240 221,173 221,173shares issued and outstanding at September 30, 2006 andDecember 31, 2005Statutory reserve 10,267 10,267Additional paid-in capital 1,812 1,812Accumulated other comprehensive income 485,017 72,129Retained earnings 5,604,960 4,809,094 6,323,229 5,114,475Total liabilities and stockholders' equity 8,290,093 6,210,513 INTERIM CONDENSED CONSOLIDATED STATEMENTS OF INCOME For the nine For the nine months ended months ended September 30, 2006 September 30, 2005 Sales revenue 4,358,488 3,362,770 Cost of salesProduction cost (2,055,714) (1,537,954)Depreciation and amortization (250,258) (209,555) (2,305,972) (1,747,509) Gross profit 2,052,516 1,615,261 General and administrative expenses (132,831) (111,918)Selling expenses (207,735) (47,759)Taxes other than income tax (33,749) (36,513) Operating income 1,678,201 1,419,071 Loss on disposals of property, plant and equipment (4,764) (6,923)Gains on investments, net 395,341 3,285Interest income 82,713 72,769Interest expense (19,404) (10,741)Foreign currency exchange loss, net (71,979) (18,970)Other expense, net (11,787) (9,152) Income from continuing operations 2,048,321 1,449,339 before income tax and minority interest Income tax (522,810) (391,253) Income from continuing operations before minority interest 1,525,511 1,058,086 Minority interest (15,807) (17,181) Equity in net earnings of associate 497 3,601 Income from continuing operations 1,510,201 1,044,506 Discontinued operations Gain from operations of discontinued subsidiary (including 225,852 1,282gain on disposal of $225,852)Income tax (51,334) - Income from discontinued operations 174,518 1,282 Net income 1,684,719 1,045,788 Income from continuing operations per share (US dollars)basic and diluted 0.2520 0.1743 Income from discontinued operations per share (US dollars)basic and diluted 0.0291 0.0002 Net income per share (US dollars)basic and diluted 0.2811 0.1745 INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS For the nine For the nine months ended months ended September 30, September 30, 2006 2005CASH FLOWS FROM OPERATING ACTIVITIESNet income 1,684,719 1,045,788Adjustments to reconcile net income to net cash providedby operating activities:Minority interest 15,807 17,181Depreciation and amortization 250,258 209,555Loss on disposals of property, plant and equipment 4,764 6,923Gains on investments (395,341) (3,285)Gain from operations of discontinued subsidiary (225,852) -Equity in net earnings of associate (497) (3,601)Deferred income tax (benefit) / expense (13,470) 12,716Other movements 26,008 21,097Changes in operating assets and liabilitiesIncrease in accounts receivable (155,745) (54,577)Increase in inventories (68,914) (40,712)Increase in other current assets (150) (10,817)Increase in loans provided by the subsidiary bank (64,512) (45,056)(Decrease) / increase in accounts payable and other (117,640) 76,277liabilitiesIncrease / (decrease) in current income tax payable 90,052 (49,198)Net cash provided by operating activities 1,029,487 1,182,291CASH FLOWS FROM INVESTING ACTIVITIESAcquisitions of subsidiaries, net of cash acquired of (1,348,063) -$14,127Proceeds from disposal of discontinued operations 274,563 -Proceeds from sale of property, plant and equipment 9,475 8,973Purchases and construction of property, plant and (415,320) (420,908)equipmentProceeds from sale of investments 450,493 54,617Purchase of investments (44,015) (30,766)Movement of restricted cash (1,534) (2,974)Net cash used in investing activities (1,074,401) (391,058)CASH FLOWS FROM FINANCING ACTIVITIESProceeds from borrowings and notes payable 12,026 17,045Repayment of borrowings and notes payable (126,862) (6,223)Payments to controlling shareholders for common control (104,000) -transfer of interests in a new subsidiaryDividends to shareholders (432,376) (174,643)Net cash used in financing activities (651,212) (163,821)Net (decrease) / increase in cash and cash equivalents (696,126) 627,412Effect of exchange rate changes on cash and cash 114,414 (43,284)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 1,342,436 1,932,743 INTERIM CONDENSED Common Statutory Additional Accumulated Retained TotalCONSOLIDATED stock reserve paid-in other earnings stockholders'STATEMENTS OF capital comprehensive equitySTOCKHOLDERS' EQUITY incomeAND COMPREHENSIVEINCOME Balance at 221,173 10,267 1,812 72,129 4,809,094 5,114,475 December 31, 2005 Comprehensive income: Net income - - - - 1,684,719 1,684,719 Other comprehensiveincome: Net unrealized gain - - - (1,187) - (1,187)on a change invaluation ofinvestments Translation - - - 414,075 - 414,075adjustment Comprehensive income 2,097,607 Dividends to - - - - (784,853) (784,853)shareholders Payments to - - - - (104,000) (104,000)controllingshareholders forcommon controltransfer ofsubsidiary interests Balance at 221,173 10,267 1,812 485,017 5,604,960 6,323,229 September 30, 2006 For further information: NLMKAnton Bazulev +7 495 915 1575 Financial DynamicsJon Simmons +44 207 831 3113 This information is provided by RNS The company news service from the London Stock Exchange