28 Aug 2009 07:00
Press-release
28 August 2009
NLMK H1 2009 US GAAP Results
Novolipetsk Steel (LSE: NLMK), the LSE-listed leading Russian steel producer, today announces its consolidated US GAAP results for the first six month of 2009.
Key financials
| USD million | Q2 2009* | Q1 2009 | % |
| H1 2009 | H1 2008 | % | |
| Sales revenue | 1,292.9 | 1,293.3 | 0% | 2,586.3 | 5,883.6 | -56% | ||
| Gross profit | 371.3 | 322.3 | 15% | 693.7 | 2,649.2 | -74% | ||
| Operating profit | 105.5 | 99.1 | 6% | 204.6 | 2,069.7 | -90% | ||
| EBITDA** | 234.3 | 196.7 | 19% | 431.0 | 2,234.1 | -81% | ||
| EBITDA margin (%) | 18% | 15% | 17% | 38% | ||||
| Net (loss)/profit | (49.1) | (193.8) | (242.9) | 1,530.8 | ||||
| Operating cash flow | 545.0 | 382.2 | 43% | 927.2 | 1,184.2 | -22% | ||
| Net debt | 736.5 | 915.1 | -20% | 736.5 | 179.1 | 311% | ||
| Net debt/EBITDA*** | 0.27 | 0.24 | 14% | 0.27 | 0.04 | 505% |
* Н1 2009, Q1 2009 and H1 2008 are official reporting periods. Q2 2009 figures are derived by computational method. This assumption is related to calculation of segmental financial results.
** Ebitda reconciliation is presented at p. 18
*** Net debt/EBITDA ratio is calculated as Net debt as at the end of the reporting period divided by trailing 12 months EBITDA.
H1 2009 operating highlights:
Steel production: 4.8 million tonnes (-19% year-on-year);
Sales: 4.6 million tonnes (-19% year-on-year).
Outlook
In Q3 2009 we expect to see a significant improvement in our financial and operating performance following the stabilization, and then positive dynamics in prices which started at the end of Q2 2009
We believe that our Q3 2009 steel production will reach 2.9 million tonnes, representing 8% growth quarter-on-quarter. In FY2009 our production is expected to reach 10.5 million tonnes, 4% higher than we previously planned.
Our Q3 2009 EBITDA margin is expected to be in the range of 20-25%.
Disclaimer:
This announcement may contain a number of forward-looking statements relating to, among others, the financial condition and results of operations of the Company. Such forward-looking statements involve a number of risks and uncertainties that could cause actual results to differ materially from those suggested by them and are based on assumptions regarding the Company's present and future business strategies and the environment in which the Company and its subsidiaries operate both now and in the future. Forward-looking statements speak only as at the date of this announcement and save as required by applicable legal and/or regulatory requirements the Company expressly disclaims any obligation to release publicly any updates or revisions to any forward-looking statements.
MANAGEMENT COMMENTS
Our production and financial performance demonstrated resilience amidst weak market conditions, once again proving the effectiveness of our long-term strategy aimed at continuous improvement of production efficiency, diversification of our product portfolio and end markets and efficient vertical integration.
In the first six months of 2009 the key objectives for the management team were to increase sales volumes by pursuing an active sales policy of flexibly reacting to changes in demand in the company's core markets and to decrease production costs through stringent cost management along the value chain.
Investments
In 2009 management decided to continue implementing those projects of its Technical Upgrade Program that had already been initiated and which were aimed at improving product quality, raising production efficiency and increasing the output of high value-added products. At the same time, NLMK decided to defer investment into a number of projects within its Technical Upgrade Program.
In H1 2009, total investments, including maintenance capex reached USD413.8million, down 50% y-o-y. In FY 2009 total capex will reach USD1 billion, a 48% decrease year-on-year. Nearly 70% of the investment capex was allocated to NLMK's Lipetsk production site during the first six months of 2009, including the construction of a new Blast furnace #7, revamping converter #1 and upgrading of the transformer steel shop.
Dismantling obsolete facilities
In February 2009, NLMK decommissioned two coke batteries with a combined capacity of around 0.7 million tonnes per year at its main production site. This decision was driven by a decrease in coke consumption coupled with the high level of obsolescence of the batteries. The Company still remains 100% self-sufficient in coke with 7.3 million tonnes of total coke production capacity. NLMK's total coke requirements will be met by supplies from coke production facilities at the Lipetsk site and from its subsidiary Altai-koks, with an annual capacity of 2.7 million tonnes and 4.6 million tonnes of coke respectively.
Production increase
In Q2 2009 steel demand showed signs of improvement. As a result, NLMK increased its export sales mainly to South-East Asia, including China, as well as sales to its domestic customers. These factors contributed to a 24% sequential growth of Q2 2009 crude steel production.
In February and May, we restarted previously idled blast furnaces with an annual capacity of around 3.6 million tonnes. Currently our Lipetsk site is running at around 100% capacity.
In April due to demand deterioration our transformer steel shop at Lipetsk production site was stopped for upgrading to improve product quality and increase production efficiency. At the same time we increased production at our Urals based transformer steel plant VIZ-Stal where orders from the Lipetsk plant were transferred.
Termination of the agreement for the acquisition of John Maneely Company
As previously announced, in March 2009, NLMK and DBO Holdings, Inc. signed a settlement agreement stipulating full mutual release and discharge of NLMK and DBO Holdings from their claims arising from the agreement to acquire John Maneely Company which was reached in August 2008. In accordance with the terms of the settlement agreement, NLMK paid DBO a settlement amount of USD234 million.
NLMK acquired stakes in Maxi-Group subsidiaries
In June 2009 NLMK acquired a batch of shares in Maxi-Group subsidiaries, including stakes in NSMMZ (32%), Uralvtorchermet (100%) and UZPS (47.99%) for USD44.6 million in an open loans-for-shares auction.
In July 2009 NLMK acquired an additional stake in NSMMZ thus increasing its direct holding in the company to a controlling share.
This acquisition will enable NLMK to more efficiently manage its subsidiaries which comprise its long steel segment. Moreover, since the responsibility for financing the investment and operational activities of Maxi-Group's assets lies with NLMK, the acquisition of the stake in the major production asset of Maxi-Group allows NLMK to provide guarantees while investing in Maxi-Group assets.
FX hedging policy
Since 2006 NLMK has been hedging its currency risks to reduce losses arising from the appreciation of the ruble (RUR). As of the end of 2008, the Group had unrealized forward contracts for an aggregate notional amount of USD2,327.5 million, with a fair value of -USD495.5 million.
In H1 2009, the loss from realized forward exchange contracts was USD271.7 million. As of the end of H1 2009, the Company had unrealized forward contracts for an aggregate notional amount of USD1,707.1 million, with a net fair value of -USD325.2 million. The decrease of the fair value of unrealized forward contracts of USD119.6 million is due to a decrease in the notional amount as the forward contacts were executed in H1 2009 and decrease in the USD/RUR exchange rate.
The financial result of the forward FX position in 2009 will depend on movements in the RUR/USD and RUR/EUR exchange rates.
Financial performance of JV with Duferco Group (Steel Invest and Finance S.A.)
In H1 2009 NLMK recognized its share in losses recorded by Steel Invest and Finance S.A., amounting to USD258.8 million. Loss incurred during the six months of 2009 resulted from one-off inventory revaluations due to the weak market conditions.
During the reporting period, NLMK granted a USD315.2 million loan to Steel Invest and Finance S.A. and its subsidiary to finance its current operations and increase working capital. A proportional financial support was also granted by the joint venture partner, Duferco Group.
During the first six months of 2009, the companies of Steel Invest and Finance S.A. continued implementing measures aimed reducing operating costs and optimizing investment plans. Certain positive dynamics in the operating results of JV with Duferco in Q2 2009 should be highlighted. We believe that JV with Duferco will demonstrate a better performance in the second half of 2009 as the pricing environment and demand improves in the key sales markets of the joint venture companies coupled with lower production cost after a massive one-off write-down.
In the EU, a process of destocking is still underway, however we saw steel demand gradually stabilizing and July and August steel prices improving.
Dividends
In June 2009 the Annual General Meeting of Shareholders approve a decision to declare dividends for 2008 of RUR2.0 in cash per ordinary share or around 20% of the net profit for the year. According to the provisions of the company's dividend policy and given the current production and financial performance of the Company, the Board of Directors proposed that no dividend be paid for the second half of 2008. This decision is fully in line with NLMK's dividend policy.
CFO comments:
Ms Galina Aglyamova, Chief Financial Officer, said:
"In the first half of 2009 the global economic environment remained subdued. But at the end of the second quarter, following stabilization of the global economy, steel demand revived primarily in South East Asia and the Middle East coupled with improvement in steel prices.
That said, we should recognize that the production and sales cycle of the company means that our H1 financial performance largely reflects the effects of the depth of the crisis of the steel sector that was reached in Q4 2008 and Q1 2009. However, efforts to increase the production efficiency of our assets, reduce raw materials prices and an active sales strategy helped us increase EBITDA margin by 3pp to 18%. Q2 2009 operating cash flow sequentially grew 43% to USD545 million spurred by an effective working capital management. Debt ratios are in line and are very sustainable.
Despite a 19% year-on-year decrease in H1 2009 steel output, NLMK was one of the first companies to swiftly raise its steel output at the beginning of the second quarter of 2009, by 24% quarter-on-quarter thus raising its capacity utilization to 100% at the end of the period. This fact will positively influence our financial performance in H1 2009.
We can declare that in the midst of the global financial crisis, NLMK has demonstrated swift and effective reactions to the challenges of the market.
We believe that in the second half of 2009 our financial performance will improve primarily driven by increased sales volumes and improved pricing environment as well as by resumed sales positions in high value added products - coated and electrical steels - markets where NLMK traditionally holds leading positions both in the domestic and export markets.
In 2009 our crude steel production will remain at the same level as last year and reach 10.5 million tonnes".
Comments
The unprecedented decline in global steel demand which started in Q4 2009 and continued into Q1 2009 was followed by a tentative signs of demand revival in Q2 2009 as the global economy stabilized and process of destocking in the key steel consuming markets ended.
According to the World Steel Association's report, in the first half of 2009 global steel production declined 21% year-on-year, while in the Q2 2009 global steel production increased 8% quarter-on-quarter. In Q2 2009 domestic steel production was up 8% quarter-on-quarter, however this is still 25% below Q2 2008 numbers. The Q2 2009 utilization rate of Russian steel-makers sequentially grew to 75%.
Further steel demand and hence steel production will largely depend on the rate of recovery of the global economy and on the success of support programs from the governments of the developed and emerging nations aimed at stimulating investment in the real economy.
Management action plan
Active sales strategy and rebalanced sales product portfolio. Steel sales volumes reached 4.6 million tonnes, a decrease of 19% year-on-year. In Q2 2009, slabs sales significantly increased totalling 822,000 tonnes due to higher production volumes and corresponding decrease in flat steel sales. As Russian steel demand remained subdued in Q2 2009, NLMK increased its export sales, which accounted for 62% of total sales revenue as compared to 58% in Q2 2008.
In Q2 2009 slabs sales to Duferco JV companies (Steel Invest and Finance S. A.) amounted to 197,000 tonnes. In 2009 NLMK plans to supply over 1 million tonnes of slabs to Duferco JV facilities.
Growth was mainly seen in sales of slabs and pre-painted steel. A recovery in demand, occurring primarily in South-East Asia, including China, drove our exports to this region to 740,000 tonnes.
Our Q2 2009 domestic sales stood at 648,000 tonnes.
Working capital management. In H1 2009 our balanced approach to working capital management allowed us to release an additional USD903 million largely due to a significant decrease in accounts receivable and a lower level of inventories.
Repairs and decommissioning of obsolete equipment. In view of the declining demand for a key product of the Company - transformer steel -management took the decision to idle the Lipetsk transformer steel production facility for repairs and upgrade aimed at boosting product quality and cutting costs. Currently, transformer steel is being produced at VIZ-Stal, which enables an increase in utilization and reduced costs.
Due to a sharp drop in coke consumption and to avoid additional costs, two obsolete coke batteries, with a total capacity of about 0.7 million tones, were decommissioned (this was previously planned for 2010 - 2011). This allowed an enhanced utilization rate at the more efficient coke-producing capacities in Altai-Koks.
Production costs cuts. To keep the company stable during the downturn in demand, NLMK has optimized headcount, with measures including early retirement and a temporary freeze on new recruitment. Also, to this end, the Group has divested some of its units. The headcount at the main production site in Lipetsk was decreased by 2,400 people year-on-year to reach 32,000 people in Q2 2009.
Capex program revised. Due to the deteriorating market environment at the beginning of the year, NLMK declared a 50% cut to its 2009 capex program. Management decided to postpone a number of investment project previously planned to be started in 2009. We temporarily stopped investing in a number of projects that could be realized later without any essential losses. We are also planning to receive additional cost savings coming from lower contract prices for maintenance services and substantial discounts on engineering equipment. Total investment capex for the first half of 2009 was USD413.8 million, a two-fold decrease year-on-year. At the same time our strategy remains unchanged. We are going to continue our investments into our efficient production assets, including the expansion of crude steel capacities, increase high value added output and further product quality improvement.
Consolidated financial results
Sales revenue
In H1 2009 the sales revenue of the Group reached USD2,586.3 million, a decrease of 56% year-on-year. The key drivers behind the weaker financial performance were as follows:
Pricing environment deteriorated. Average sales prices of steel products fell to USD492. In Q2 2009, average sales prices declined by a further 7% quarter-on-quarter to USD475 per tonne. The improved sales and better pricing environment seen in Q2 2009 were not fully reflected in the financial performance for the first six months of 2009 since export sales are recognized at our account at least one month after they are sent from the plant to the customer.
Lower sales volumes: a 19% decrease year-on-year. The major decline was in pig iron (-78%) and high-value added products (galvanized -45%, transformer steel -61%, dynamo steel -60%), sales which largely represent the specific application of those types of products as well as a significant drop in demand at final customers. Sales of commodity type steel products - slabs (-3%) and hot-rolled steel (-1%) - were more resilient in the current environment. An additional support for slab sales came from sales to Duferco JV companies.
Changes in regional sales structure. Sales in the domestic market in physical terms fell to 26% (about 1,218,000 tonnes), caused by reduced demand market despite a seasonal revival of the construction sector. Sales to South-East Asia and the EU jumped from 8% and 17% in H1 2008 to 27% and 21% respectively.
On a quarterly basis sales revenue remained at the level of the previous quarter reaching USD1,292.9 million. In Q2 2009 NLMK's Long steel and Mining divisions increased sales to external customers partially offsetting weaker average selling prices in Q2 2009 and a slight decline in steel sales volumes.
Production costs
H1 2009 production costs (excluding depreciation and amortization) amounted to USD1,669.9 million (-44% year-on-year).
Q2 2009 production costs dropped by USD78.9 million (-9% quarter-on-quarter). Given this, the Q2 2009 average costs per tonne of slabs amounted to around USD200, a decline of 20% quarter-on-quarter. This decline in Q2 2009 production costs was mainly attributable to the use of raw materials purchased at lower prices. An additional driver of lower production cost was the high utilization rate of the production facilities and production optimization.
SG&A
H1 2009 SG&A dropped to USD489.1 million, down 16% year-on-year. This decrease was mainly driven by lower volumes of export sales of the Coke-chemical segment as well as other management initiatives directed to reduce overall administrative and general expenses.
Operating profit
Operating profit for the first six months of 2009 was USD204.6 million, down 90% year-on-year. The operating profit margin declined to 8%, a 27 p.p. decrease year-on-year. In Q2 2009 the company improved its operating profit delivering USD105.5 million, a 6% increase quarter-on-quarter. This improvement is mainly attributable to lower production costs and increased utilization rates of the production facilities.
Net FX gain/loss
In H1 2009, the net FX loss amounted to USD89.5 million, however in Q2 2009 the company posted a USD23.5 million FX gain. This is mainly attributable to the revaluation of the fair value of the forward contracts on the back of RUR strengthening during the quarter.
The overall loss of the execution of these contracts during H1 2009 was partially mitigated by the foreign currency exchange gains of USD52.9 million coming from the operating activities of the parent company and its subsidiaries (Altai-koks and VIZ-Stal) as well as by the revaluation of the fair value of unrealized forward contracts by USD136.9 million.
EBITDA
H1 2009 EBITDA declined to USD431 million, a decrease of 81% year-on-year, and H1 2009 EBITDA margin was 17%, a 21 p.p. decline year-on-year.
Q2 2009 EBITDA demonstrated a sequential growth of 19% reaching USD234.3 million. The Q2 2009 EBITDA margin improved 3pp to 18%. This growth was mainly driven by lower production costs in the second quarter and increased sales of high value added products.
Net loss
In H1 2009 the Company incurred a net loss amounting to USD242.9 million, which was due to net FX rate loss of USD89.5 million and recognition of USD258.8 million as a share in losses of the joint venture company Steel Invest and Finance S.A. (more details on page 3).
Consolidated balance sheet
As of 30 June, 2009 the Group's assets totaled USD12,339.4 million, a 12% decrease compared to 31 December, 2008. The key reasons are the change in the RUR/USD exchange rate in the reporting period, a significant decrease in working capital driven by lower raw material prices and work-in-progress and corrections in the terms of operating and trade agreements with partners in the weak economic environment.
The share of shareholders equity in the Group's liabilities as of 30 June, 2009 amounted to 65%, rising by 3pp as compared to the start of 2009.
Net debt as of 30 June, 2009 reached USD736.5 million (a decrease of USD105 million or 12% compared to the 2008 year end). Net debt declined due to debt repayment during the first six month of 2009 conducted according to the debt payment schedule and stable cash flow generated by the Group during the period.
The H1 2009 net debt/EBITDA ratio reached 0.27. Long-term liabilities make up 60% of the Company's debt. Short-term liabilities are distributed evenly throughout 2009.
Working capital fell 22% and amounted to USD4,161.1 million, which is attributable to lower volume of receivables and inventories.
The Accounts receivables dropped to USD882.3 that is 41% lower than at the 2008 year end. This decrease in receivables was mainly driven by lower volumes and weaker prices during the period.
Inventories fell by USD524.5 million and totaled USD1,031.3 million due to cuts in volumes and cost of raw materials stocks, work-in-process and volumes of finished products.
Accounts payable decreased by USD769.9 million and reached USD1,109.3 million. This was caused by recognition in Other creditors as of 31 December 2008 of the pre-paid expenses to the company under the common control for the TMTP shares amounting USD241.8 million and the settlement amount paid to DBO Holdings Inc. of USD234.0 million.
Streamlining of working capital across the Group enabled it to release USD902.7 million.
Return on assets (ROA) and return on equity (ROE) are negative as the Group recorded net loss in H1 2009.
Cash flow
Operating cash flow
Operating cash flow in H1 2009 amounted to USD927.2 million, down 22% year-on-year, influenced by changes in operating assets primarily in inventories and liabilities as well as cuts in raw materials prices. Having cut its inventories, the Group released funds of USD401.5 million; having changed its receivables, the Group got USD494.7 million.
Cash flow from investment activity
The H1 2009 cash outflow from investment activities was USD1,324.2 million. For the acquisition and construction of property, plant and equipment (PPE) the Company allocated USD413.8 million.
USD234.0 million was paid by NLMK under the settlement agreement with DBO Holdings Inc.
H1 2009 financial investments amounted USD508.4 million, these are mostly short term deposits in Russian state-owned banks and foreign banks.
Also in H1 2009 NLMK granted a USD315.2 million loan to Steel Invest and Finance S.A. (JV with Duferco) and its subsidiary. Duferco Group, NLMK's partner in the joint venture, also provided the same financial support to the joint venture.
Cash flow from financial activities
Net cash used in financial activities in H1 2009 amounted to USD159.2 million. The cash outflow from financial activities occurred mainly due to loan and notes repayment.
Net cash decrease reached USD556.3 million. Cash and cash equivalents at the end of Q2 2009 totaled USD1,590.5 million.
The Group's cash position as at 30 June 2009 amounted to USD2,057.9 million, including short term financial investments, representing a 5% decline as compared to the beginning of 2009. Despite adverse economic conditions, the Company maintains its sound financial position.
Steel segment
| USD, million |
| Q2 2009 | Q1 2009 | % | H1 2009 | H1 2008 | % |
| Revenue from external customers |
| 1,078.8 | 1,136.3 | -5% | 2,215.1 | 4,698.1 | -53% |
| Revenue from intersegmental operations |
| 24.1 | 18.2 | 32% | 42.3 | 152.4 | -72% |
| Gross profit |
| 272.2 | 267.6 | 2% | 539.9 | 1 989.7 | -73% |
| Operating profit |
| 73.7 | 91.2 | -19% | 165.0 | 1 605.6 | -90% |
| Profit/(loss) before minorities |
| 506.5 | (63.0) |
| 506 | 2 082.8 | -76% |
The Group's financial performance is largely defined by the performance of the steel segment, which comprises NLMK, VIZ-Stal (a producer of electrical steel), DanSteel A/S (a thick plates producer), Beta Steel (since October 2008, US-based steel and flats producer), trading companies Novexco Limited, Cyprus and Novex Trading S.A., Switzerland (since May 2008), as well as a number of service companies (Logistics company NTK and Trading House NLMK).
In H1 2009, the steel segment companies produced 4.0 million tonnes of steel (-18% year-on-year), including 1.5 million tonnes of commercial slabs (-14% year-on-year) and 2.3 million tonnes of flat products (-20% year-on-year). Beta Steel Corp. sold 0.14 million tonnes of rolled products in H1 2009 which equaled its H1 2008 production volume.
Independent Transportation Company (NTK), which provides transportation services to the Group, transported 23 million tonnes of cargo, an 11% decrease year-on-year. This captive transportation company, which has 4,900 units of owned and leased rolling stock, allows the company to increase its self-sufficiency in logistics and decrease transportation costs.
H1 2009 revenue from external customers amounted to USD2,215.1 million, which was 53% lower year-on-year. Operating profit was USD165 million (-90% year-on-year). The decrease in the headline numbers is driven by the plunge in prices and sales volumes attributable to weaker demand.
Revenue in Q2 2009 decreased quarter-on-quarter mainly due to lower prices.
Another factor to drive down the financials was the usage in Q1 2009 of inventories formed in 2008 and accounted for at high cost. A drastic increase in profit before minorities in the second quarter is largely attributable to the dividend payments accrued by the parent company from its subsidiaries.
Long products segment
| USD, million |
| Q2 2009 | Q1 2009 | % | H1 2009 | H1 2008 | % |
| Revenue from external customers |
| 130.1 | 102.5 | 27% | 232.5 | 756.8 | -69% |
| Revenue from intersegmental operations |
| 63.5 | 49.7 | 28% | 113.2 | 232.1 | -51% |
| Gross profit |
| 14.8 | 6.3 | 137% | 21.1 | 323.6 | -93% |
| Operating profit /(loss) |
| (29.5) | (25.6) | 15% | (55.2) | 224.1 | |
| Profit/(loss) before minorities |
| (66.0) | (97.1) | -32% | (163.2) | 43.9 |
The Long products segment includes the Maxi-Group companies. The core activities of these companies are scrap collection and processing, steel-making and long products and metalware production.
In H1 2009 Maxi-Group produced 0.82 million tonnes of steel, a 22% decrease year-on-year. In H1 2009 the enterprise produced 0.13 million tonnes of billets, 0.57 million tonnes of long products, and 0.085 million tonnes of metal-ware. Total H1 2009 volumes of Maxi-Group ferrous and non-ferrous scrap sales amounted to 0.93 million tonnes, including 0.6 million tonnes sold within the Maxi-Group.
H1 2009 revenue from external customers amounted to USD232.5 million, a 69% decrease year-on-year, while the operating loss reached USD55.2 million against the operating profit of USD224.1 million in H1 2008. The segment's lower H1 2009 financials are attributable to a significant downturn in sales volume and price softening during the period.
Q2 2009 revenue from external customers demonstrated a sequential growth of 27% driven mostly by higher sales volumes of primarily high value added products spurred by improved demand. In Q2 2009 sales volumes of metalware and high quality rebar increased by 36% and 13% correspondingly.
The Q2 2009 loss before minorities reached USD66.0, a sequential decline of 32%.
Mining segment
| USD, million |
| Q2 2009 | Q1 2009 | % | H1 2009 | H1 2008 | % |
| Revenue from external customers |
| 48.5 | 12.5 | 288% | 60.9 | 41.2 | 48% |
| Revenue from intersegmental operations |
| 111.3 | 76.7 | 45% | 188.0 | 491.4 | -62% |
| Gross profit |
| 67.3 | 34.1 | 97% | 101.4 | 353.2 | -71% |
| Operating profit |
| 49.2 | 24.0 | 105% | 73.1 | 315.6 | -77% |
| Profit before minorities |
| 41.3 | 25.0 | 65% | 66.3 | 268.8 | -75% |
During H1 2009 NLMK's Mining segment comprised Stoilensky GOK, Dolomite and Stagdok. These companies mainly supply raw materials to NLMK's production facilities in Lipetsk and also sell limited volumes outside the Group.
In the reporting period, Stoilensky GOK, the principal mining company within the Group, produced 5.1 million tonnes of iron ore concentrate (-14% year-on-year) and 0.8 million tonnes of sinter ore (+1% year-on-year).
An unfavourable market environment triggered a slump in average prices for Stoilensky GOK's products and weaker financial performance in H1 2009.
H1 2009 revenue from external customers increased to USD60.9 million, an increase of 48% year-on-year, mainly driven increased sales volumes.
Lower supplies of iron ore raw materials to the NLMK main production site, as a result of cuts in steel production volumes at the Lipetsk site in H1 2009 influenced the decrease in revenue from intersegmental operations in H1 2009 (-62% year-on-year).
Improved financial performance in Q2 2009 on a quarterly basis is mainly attributable to increased supplies to Lipetsk production site that increased steel production during the quarter and sales of iron ore concentrate stocked from the previous period to the external customers.
As 76% of sales of the Mining segment are made within the Group, the segment's share in the H1 2009 consolidated revenue is less than 2%.
Coke-chemical segment
| USD, million |
| Q2 2009 | Q1 2009 | % | H1 2009 | H1 2008 | % |
| Revenue from external customers |
| 35.3 | 38.0 | -7% | 73.3 | 346.1 | -79% |
| Revenue from intersegmental operations |
| 78.7 | 43.1 | 83% | 121.8 | 223.3 | -45% |
| Gross profit |
| 18.0 | 6.6 | 173% | 24.6 | 128.8 | -81% |
| Operating profit /(loss) |
| 9.2 | (3.4) | 5.8 | 74.3 | -92% | |
| Profit/(loss) before minorities |
| (6.0) | 8.2 | 2.3 | 47.3 | -95% |
The Coke-chemical segment comprises Altai-koks and its subsidiaries. Altai-koks is one of the largest Russian coke producers with H1 2009 output of 1.3 million tonnes of dry coke, a 25% decrease year-on-year.
In H1 2009 sales volumes of Altai-koks amounted to 1.4 million tonnes of coke, a decrease of 24% year-on-year. As the Lipetsk production site decommissioned four of its coke batteries, coke sales to Lipetsk operations grew by 48% to 0.8 million tonnes. Export sales amounted to 0.3 million tonnes of coke, a year-on-year decrease of 70%.
H1 2009 revenue from external customers amounted to USD73.3 million (-79% year-on-year). The revenue decreased primarily due to lower coke sales volumes and prices.
As four coke-batteries were decommissioned at NLMK's main production site during Q4 2008 and Q1 2009 and steel production volumes grew, Q2 2009 sales of coke to NLMK site in Lipetsk grew by 93% quarter-on-quarter, which offset lower sales to other customers.
Q2 2009 operating profit hit positive territory reaching USD9.2 million. The key drivers of this growth were higher sales volumes and increased utilization rate of the production facilities coupled with the lower priced coking coal purchased in 2009.
Altai-koks' Q2 2009 profit before minorities, amounting to USD6.0 million, is mainly attributable to the one-off expenses incurred during the period.
Others
| USD, million | Q2 2009 | Q1 2009 | % | H1 2009 | H1 2008 | % | |
| Revenue from external customers |
| 0.3 | 4.1 | -93% | 4.4 | 41.4 | -89% |
| Revenue from intersegmental operations |
| - | - | - | 2.5 | -100% | |
| Gross profit |
| 0.1 | 1.8 | -93% | 2.0 | 20.7 | -90% |
| Operating profit /(loss) |
| (0.1) | 1.8 | 1.7 | 20.7 | -92% | |
| Profit before minorities |
| 0.3 | 2.4 | -90% | 2.7 | 15.9 | -83% |
The Others operating segment primarily includes three operational units with operating results not exceeding the materiality threshold. These segments include commercial seaport services (TMTP stake disposal was completed in January, 2009), insurance and other services.
The lower financials of others segment in Q2 2009 as compared to the previous quarter are attributable to the TMTP disposal in January 2009.
The full version of consolidated financial statements (US GAAP) for H1 2009 can be found on the group web-site at: www.nlmk.com.
Reference information
(1) NLMK Group US GAAP H1 2009 financial statements (Link)
(2) US GAAP H1 2009 financial statements presentation (Link)
About NLMK
Novolipetsk Steel (LSE: NLMK) is one of the world's leading producers of steel, with 2008 revenue exceeding USD11 billion, output over 10.5 million tonnes. The key production facilities located in Russia, the EU and USA employ over 70,000 people.
The company produces a wide range of steel products, including slabs and billets, hot-rolled, cold-rolled, galvanized and electrical steel and other HVA products. In 2008 NLMK delivered its products to customers from 70 countries.
NLMK shares are traded in Russia on MICEX and RTS, and GDRs - on the London Stock Exchange.
Novolipetsk Steel
Interim condensed consolidated balance sheets
as at June 30, 2009 and December 31, 2008 (unaudited)
(All amounts in thousands of US dollars, except for share data)
| As at June 30, 2009 | As at December 31, 2008 | ||||||||||
| ASSETS | |||||||||||
| Current assets | |||||||||||
| Cash and cash equivalents | 1,590,511 | 2,159,989 | |||||||||
| Short-term investments | 467,342 | 8,089 | |||||||||
| Accounts receivable and advances given, net | 882,295 | 1,487,847 | |||||||||
| Inventories, net | 1,031,256 | 1,555,762 | |||||||||
| Other current assets | 94,233 | 99,960 | |||||||||
| Deferred income tax assets | 95,418 | - | |||||||||
| Current assets held for sale | - | 34,432 | |||||||||
| 4,161,055 | 5,346,079 | ||||||||||
| Non-current assets | |||||||||||
| Long-term investments, net | 748,477 | 815,527 | |||||||||
| Property, plant and equipment, net | 6,611,587 | 6,826,139 | |||||||||
| Intangible assets, net | 213,440 | 235,283 | |||||||||
| Goodwill | 576,704 | 613,668 | |||||||||
| Other non-current assets | 28,184 | 33,546 | |||||||||
| Non-current assets held for sale | - | 194,286 | |||||||||
| 8,178,392 | 8,718,449 | ||||||||||
| Total assets | 12,339,447 | 14,064,528 | |||||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||||||
| Current liabilities | |||||||||||
| Accounts payable and other liabilities | 1,109,279 | 1,879,213 | |||||||||
| Short-term borrowings | 1,126,035 | 1,079,806 | |||||||||
| Current income tax liability | 28,932 | 10,497 | |||||||||
| Current liabilities held for sale | - | 10,959 | |||||||||
| 2,264,246 | 2,980,475 | ||||||||||
| Non-current liabilities | |||||||||||
| Deferred income tax liability | 358,410 | 296,875 | |||||||||
| Long-term borrowings | 1,668,359 | 1,929,772 | |||||||||
| Other long-term liabilities | 122,681 | 128,944 | |||||||||
| Non-current liabilities held for sale | - | 5,393 | |||||||||
| 2,149,450 | 2,360,984 | ||||||||||
| Total liabilities | 4,413,696 | 5,341,459 | |||||||||
| Commitments and contingencies | - | - | |||||||||
| Stockholders' equity | |||||||||||
| NLMK stockholders' equity | |||||||||||
| Common stock, 1 Russian ruble par value - 5,993,227,240 shares issued and outstanding at June 30, 2009 and December 31, 2008 | 221,173 | 221,173 | |||||||||
| Statutory reserve | 10,267 | 10,267 | |||||||||
| Additional paid-in capital | 117,896 | 52,395 | |||||||||
| Accumulated other comprehensive loss | (1,065,769) | (549,879) | |||||||||
| Retained earnings | 8,713,092 | 8,956,013 | |||||||||
| NLMK stockholders' equity | 7,996,659 | 8,689,969 | |||||||||
| Non-controlling interest | (70,908) | 33,100 | |||||||||
| Total stockholders' equity | 7,925,751 | 8,723,069 | |||||||||
| Total liabilities and stockholders' equity | 12,339,447 | 14,064,528 |
Novolipetsk Steel
Interim condensed consolidated statements of income
for the six months ended June 30, 2009 and 2008 (unaudited)
(All amounts in thousands of US dollars, except for earnings per share amounts)
| For the six months ended June 30, 2009 | For the six months ended June 30, 2008 | ||||||||||
| Sales revenue | 2,586,261 | 5,883,616 | |||||||||
| Cost of sales | |||||||||||
| Production cost | (1,669,866) | (2,988,536) | |||||||||
| Depreciation and amortization | (222,745) | (245,884) | |||||||||
| (1,892,611) | (3,234,420) | ||||||||||
| Gross profit | 693,650 | 2,649,196 | |||||||||
| General and administrative expenses | (165,486) | (171,191) | |||||||||
| Selling expenses | (274,705) | (343,663) | |||||||||
| Taxes other than income tax | (48,898) | (64,626) | |||||||||
| Operating income | 204,561 | 2,069,716 | |||||||||
| Loss on disposals of property, plant and equipment | (8,059) | (580) | |||||||||
| (Losses) / gains on investments, net | (1,580) | 3,948 | |||||||||
| Interest income | 34,637 | 45,369 | |||||||||
| Interest expense | (101,376) | (110,379) | |||||||||
| Foreign currency exchange (loss) / gain, net | (89,515) | 36,449 | |||||||||
| Other expenses, net | (73,617) | (54,099) | |||||||||
| (Loss) / income from continuing operations before income tax | (34,949) | 1,990,424 | |||||||||
| Income tax expense | (26,437) | (474,960) | |||||||||
| (Loss) / income from continuing operations, net of income tax | (61,386) | 1,515,464 | |||||||||
| Equity in net (losses) / earnings of associate | (258,805) | 42,774 | |||||||||
| Net (loss) / income | (320,191) | 1,558,238 | |||||||||
| Less: Net loss / (income) attributable to the non-controlling interest | 77,270 | (27,422) | |||||||||
| Net (loss) / income attributable to NLMK stockholders | (242,921) | 1,530,816 | |||||||||
| (Loss) / income per share - basic and diluted: | |||||||||||
| (Loss) / income from continuing operations attributable to NLMK stockholders per share (US dollars) | (0.0405) | 0.2554 | |||||||||
| Net (loss) / income attributable to NLMK stockholders per share (US dollars) | (0.0405) | 0.2554 | |||||||||
| Weighted-average shares outstanding, basic and diluted (in thousands) | 5,993,227 | 5,993,227 |
Novolipetsk Steel
Interim condensed consolidated statements of cash flows
for the six months ended June 30, 2009 and 2008 (unaudited)
(thousands of US dollars)
| For the six months ended June 30, 2009 | For the six months ended June 30, 2008 | ||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | |||||||||||
| Net (loss) / income | (320,191) | 1,558,238 | |||||||||
| Adjustments to reconcile net (loss) / income to net cash provided by operating activities: | |||||||||||
| Depreciation and amortization | 222,745 | 245,884 | |||||||||
| Loss on disposals of property, plant and equipment | 8,059 | 580 | |||||||||
| Losses / (gains) on investments, net | 1,580 | (3,948) | |||||||||
| Equity in net losses / (earnings) of associate | 258,805 | (42,774) | |||||||||
| Deferred income tax benefit | (22,598) | (63,206) | |||||||||
| Gains on unrealized forward contracts | (136,919) | - | |||||||||
| Other | 12,984 | 47,734 | |||||||||
| Changes in operating assets and liabilities | |||||||||||
| Decrease in accounts receivable | 494,731 | 183,443 | |||||||||
| Decrease in inventories | 401,532 | 74,123 | |||||||||
| Increase in other current assets | (146) | (17,829) | |||||||||
| Decrease in accounts payable and other liabilities | (11,014) | (870,745) | |||||||||
| Increase in current income tax payable | 17,597 | 72,665 | |||||||||
| Net cash provided by operating activities | 927,165 | 1,184,165 | |||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES | |||||||||||
| Proceeds from sale of property, plant and equipment | 5,053 | 6,209 | |||||||||
| Purchases and construction of property, plant and equipment | (413,847) | (822,424) | |||||||||
| Settlement of abandoned acquisition | (234,000) | - | |||||||||
| Proceeds from sale of investments and loans settled | 143,172 | 19,671 | |||||||||
| Placement of bank deposits and purchases of other investments | (508,434) | (24,503) | |||||||||
| Loans issued | (316,191) | - | |||||||||
| Acquisitions of stake in existing subsidiaries | - | (126,144) | |||||||||
| Payment for acquisition of interests in new subsidiaries | - | (299,928) | |||||||||
| Net cash received in acquisition of interests in new subsidiaries | - | 297,905 | |||||||||
| Movement of restricted cash | - | (12,529) | |||||||||
| Net cash used in investing activities | (1,324,247) | (961,743) | |||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES | |||||||||||
| Proceeds from borrowings and notes payable | 374,288 | 937,238 | |||||||||
| Repayment of borrowings and notes payable | (505,774) | (976,767) | |||||||||
| Capital lease payments | (26,679) | (53,374) | |||||||||
| Dividends to minority shareholders of existing subsidiaries | (4) | (5,628) | |||||||||
| Dividends to shareholders | (1,031) | (3,233) | |||||||||
| Net cash used in financing activities | (159,200) | (101,764) | |||||||||
| Net (decrease) / increase in cash and cash equivalents | (556,282) | 120,658 | |||||||||
| Effect of exchange rate changes on cash and cash equivalents | (13,196) | 50,043 | |||||||||
| Cash and cash equivalents at the beginning of the period | 2,159,989 | 1,154,641 | |||||||||
| Cash and cash equivalents at the end of the period | 1,590,511 | 1,325,342 |
Appendix 1.
(1) EBITDA reconciliation
| USD, million | H1 2009 | H1 2008 | Q2 2009 | Q1 2009 |
| Net profit1 | -243 | 1,531 | -49 | -194 |
| Minus: | ||||
| Equity in net losses of associate | -259 | 43 | -116 | -143 |
| Net interest expense | -67 | -65 | -31 | -36 |
| Income tax | -26 | -475 | -28 | 1 |
| Loss on disposal of fixed assets | -8 | -1 | -6 | -2 |
| Impairment losses | - | - | - | - |
| Accretion expense on asset retirement obligation | - | - | - | - |
| Depreciation and amortization | -223 | -246 | -126 | -97 |
| Net foreign currency exchange | -90 | 36 | 23 | -113 |
| Gains (losses) from financial investments | -2 | 4 | 0 | -1 |
| EBITDA | 431 | 2,234 | 234 | 197 |
1. H1 2008 and 2009 - net profit (NLMK's shareholders only)
(2) Sales by regions (in ,000 tonnes)
| Region | Q1 2008 | Q2 2008 | Q3 2008 | Q4 2008 | 2008 | Q1 2009 | Q2 2009 |
| Russia | 1,010.3 | 1,140.5 | 1,1095 | 504.7 | 3,765.1 | 570.4 | 647.9 |
| EU | 464.8 | 517.7 | 404.1 | 293.0 | 1,679.7 | 572.8 | 378.7 |
| Middle East incl. Turkey | 557.7 | 673.5 | 414.6 | 320.8 | 1,966.6 | 532.4 | 428.4 |
| North America | 292.8 | 317.6 | 239.7 | 257.8 | 1,107.9 | 97.0 | 63.0 |
| Asia | 137.6 | 313.4 | 361.1 | 340.7 | 1,152.9 | 493.4 | 740.1 |
| Other | 142.6 | 147.8 | 133.8 | 164.7 | 588.8 | 69.8 | 34.6 |
| Total | 2,605.8 | 3,110.5 | 2,662.8 | 1,881.8 | 10,261.0 | 2,335.8 | 2,292.6 |
(3) Sales by product (in ,000 tonnes)
| Product | Q1 2008 | Q2 2008 | Q3 2008 | Q4 2008 | 2008 | Q1 2009 | Q2 2009 |
| Pig iron | 266.3 | 204.3 | 97.3 | 48.4 | 616.3 | 89.6 | 15.2 |
| Slabs | 589.0 | 917.8 | 837.2 | 763.9 | 3 108.0 | 645.2 | 822.4 |
| Hot-rolled thick plates | 136.3 | 153.2 | 104.3 | 110.1 | 504.0 | 71.9 | 50.8 |
| Hot-rolled steel | 423.8 | 478.7 | 346.0 | 146.2 | 1 394.6 | 562.6 | 494.4 |
| Cold-rolled steel | 376.2 | 434.9 | 398.2 | 229.5 | 1 438.8 | 337.4 | 336.6 |
| Hot-dip galvanized steel | 96.5 | 118.8 | 124.4 | 80.0 | 419.6 | 58.2 | 59.7 |
| Color-coated steel | 79.6 | 99.6 | 100.2 | 60.4 | 339.8 | 57.8 | 81.1 |
| Transformer steel | 82.5 | 88.6 | 91.3 | 79.9 | 342.3 | 36.3 | 30.3 |
| Dynamo steel | 79.4 | 100.3 | 88.7 | 56.5 | 324.9 | 34.4 | 36.6 |
| Billets | 121.3 | 162.5 | 147.5 | 109.9 | 541.2 | 71.9 | 56.8 |
| Long products | 327.6 | 300.9 | 292.9 | 164.8 | 1 086.2 | 334.7 | 259.3 |
| Metal-ware | 27.3 | 50.9 | 34.8 | 32.3 | 145.3 | 35.9 | 49.4 |
| Total | 2,605.8 | 3,110.5 | 2,662.8 | 1,881.8 | 10,261.0 | 2,335.8 | 2,292.6 |
2. Sales revenue by region in H1 2009
| Region | Q1 2009 | Q2 2009 | ||
| ,000 tonnes | % | ,000 tonnes | % | |
| Russia | 406 | 31.4% | 492 | 38.0% |
| EU | 326 | 25.2% | 184 | 14.2% |
| Middle East incl. Turkey | 247 | 19.1% | 182 | 14.1% |
| North America | 68 | 5.3% | 29 | 2.3% |
| Asia and Oceania | 202 | 15.6% | 300 | 23.2% |
| Other | 45 | 3.5% | 106 | 8.2% |
| Total | 1,293 | 100% | 1,293 | 100% |
3. Production cost in H1 2009.
| Item | Q1 2009 | Q2 2009 | ||
| USD, million | % | USD, million | % | |
| Iron ore | 20.5 | 2.3% | 30.9 | 3.9% |
| Coke and coal | 153.1 | 17.5% | 147.5 | 18.5% |
| Scrap | 106.8 | 12.2% | 102.5 | 12.9% |
| Ferroalloys | 36.7 | 4.2% | 37.5 | 4.7% |
| Other materials | 61.6 | 7.0% | 70.0 | 8.8% |
| Electric energy | 55.7 | 6.4% | 71.6 | 9.0% |
| Natural gas | 38.6 | 4.4% | 38.2 | 4.8% |
| Other fuel materials | 12.5 | 1.4% | 7.9 | 1.0% |
| Labour | 110.4 | 12.6% | 129.7 | 16.3% |
| Other | 174.1 | 19.9% | 93.2 | 11.7% |
| Changes in balances in finished and semi-finished products. work-in-progress and deferrals | 104.1 | 11.9% | 66.6 | 8.4% |
| Total | 874.4 | 795.4 | ||
4. Working capital in H1 2009.
| USD, million | 30.06.2009 | 31.03.2009 | 31.12.2008 |
| Current assets | 4,161 | 4,271 | 5,346 |
| Cash and cash equivalents | 1,591 | 1,546 | 2,160 |
| Short-term financial investments | 467 | 338 | 8 |
| Accounts receivable | 882 | 1,187 | 1,488 |
| Inventories | 1,031 | 1,050 | 1,556 |
| Other current assets, net | 190 | 149 | 134 |
| Current liabulities | 2,264 | 2,279 | 2,980 |
| Accounts payable | 1,109 | 1,162 | 1,879 |
| Short-term loans | 1,126 | 1,090 | 1,080 |
| Other current liabilities | 29 | 27 | 21 |
| Working | 1,897 | 1,993 | 2,366 |