TMKS.L Regulatory News (TMKS)

21 May 2007 11:43

OAO TMK21 May 2007 TMK ANNOUNCES 2006 IFRS CONSOLIDATED RESULTS OAO TMK ("TMK" or "the Company"), one of the world's leading steel pipeproducers, announces its IFRS audited consolidated results for the full year2006. 2006 Highlights Financials: •Revenue grew by 15.2% to U.S.$3,384 million on robust demand for tubular products both in Russia and internationally •Gross profit came in at U.S.$1,034 million, an increase of 38.5% compared to 2005 •EBITDA up 49.2% to U.S.$794 million as a result of a strong pricing environment and increasing operating efficiency Sales Volumes: •Total pipe sales volumes were nearly 3 million tonnes, including 1.93 million tonnes of seamless pipes •Seamless pipe sales volumes climbed by 1.8%, OCTG pipes, the highest margin products, grew by 15.7% to a total of 946 thousand tonnes •Welded pipe sales volume increased by 2.2%, boosted by growing demand for industrial welded pipes in Russia driven by the booming construction industry and infrastructure building Corporate developments: •In 2006, TMK established its presence in the European Union, through the 100% acquisition of Sinara Handel GmbH, which owns controlling stakes in the Romanian plants - Artrom and Resita •TMK was assigned credit ratings by Standard & Poor's and Moody's and successfully placed a U.S.$300 million Eurobond •Following the initial public offering, around 23% of TMK shares were listed on the London Stock Exchange (in the form of GDRs) and the Russian Trading System Summary 2006 Results (Millions of U.S. dollars, except earnings per GDR) 2006 2005 Change, %Revenue 3,384.47 2,938.19 15.2%Gross profit 1,034.00 746.43 38.5%Profit before tax 618.49 350.05 76.7%Net profit 460.60 254.17 81.2%Earnings per GDR(1), U.S.$ 2.04 1.12 82.1%EBITDA(2) 793.86 532.05 49.2%EBITDA margin(3), % 23.5% 18.1% ------------------------- (1) 1 GDR represents 4 ordinary (local) shares (2) EBITDA is calculated as profit before tax plus finance costs minus financeincome and plus depreciation and amortization EBITDA is a measure of operating performance that is not required by, orpresented in accordance with, IFRS. EBITDA is not a measurement of operatingperformance under IFRS and should not be considered as an alternative to grossprofit, net profit or any other performance measures derived in accordance withIFRS or as an alternative to cash flow from operating activities or as a measureof liquidity. In particular, EBITDA should not be considered as a measure ofdiscretionary cash available to the Company to invest in the growth of itsbusiness. EBITDA has limitations as an analytical tool, and potential investors should notconsider it in isolation, or as a substitute for analysis of operating resultsas reported under IFRS. Some of these limitations include: - EBITDA does not reflect the impact of financing or financing costs onoperating performance, which can be significant and could further increase ifTMK was to incur more debt. - EBITDA does not reflect the impact of income taxes on operating performance. - EBITDA does not reflect the impact of depreciation and amortisation onoperating performance. The assets of TMK's businesses which are beingdepreciated and/or amortised will have to be replaced in the future and suchdepreciation and amortisation expense may approximate the cost to replace theseassets in the future. By excluding this expense from EBITDA, EBITDA does notreflect TMK'sfuture cash requirements for these replacements. - Other companies in the pipe industry may calculate EBITDA differently or mayuse them for purposes different from those of TMK, limiting their usefulness ascomparative measure. TMK compensates for these limitations by relying primarily on its IFRS operatingresults and using EBITDA only supplementally. Reconciliation of EBITDA to netprofit is as follows: (Millions of U.S. dollars) Year ended December 31 2006 2005 Profit before tax...... 618.5 350.1 Depreciation........... 112.4 104.8 Amortisation........... 2.3 0.8 Finance costs.......... 76.5 78.2 Finance income..... (15.8) (1.8) --------- --------- EBITDA................... 793.9 532.1 For further information please contact: TMK PR Department:Sergey IlinTel: +7 495 775 7600 ext. 2149Email: pr@tmk-group.comOr visit: www.tmk-group.com Gavin Anderson & Company:Dick Millard/Robert Speed/Michael TurnerTel: +44 207 554 1400Email: tmk@gavinanderson.co.uk Market background In 2006, strong fundamentals in the buoyant energy-related markets reflected thecontinuing demand for TMK tubular products, particularly from the oil and gasindustry. TMK is among the three global leaders and has established itself asthe leading Russian supplier of pipe products to the energy industry. Further consolidation of the Romanian plants has expanded TMK's industrialstructure and strengthened the Company's global reach. Throughout the year, global demand for seamless OCTG (oil country tubular goods)and line pipes remained strong, supported by higher exploration and productionactivities in the oil and gas industry, particularly in Russia, the CaspianRegion, and the Middle East. Sustained high oil and gas prices led major state and international companies toimplement comprehensive mid-term investment programs to offset the decline rateof mature fields and explore new reserves. Drilling activity in TMK's traditional markets is currently shifting to more drilling intensive services. According to the M-I SWACORig Count, there was a52% growth of active rigs in Russia in 2006 compared tothe previous year. TMK'smanagement believes that TMK is entering a period ofdouble-digit drilling growth in Russia and the Caspian Region. The major drivers behind OCTG consumption are looking increasingly favourable.TMK's management estimates that global apparent consumption of OCTG and linepipes grew by approximately 13% compared to 2005, and growth should come ataround 10% per year over the next three years. TMK continued to benefit from solid demand for its industrial seamless pipeswithin Russia, boosted by domestic mechanical engineering industry recovery andlarge scale investments in the energy and power sectors and oil refining. Demand for industrial seamless pipes supplied from the Romanian site was definedby strong orders in Europe and North America. Demand for TMK's welded pipe products benefited from a healthy economicenvironment in Russia, experiencing high GDP and investment growth in 2006. With ongoing and upcoming pipeline projects in TMK's traditional Russian andCentral Asian markets as well as growing expenditures for the maintenance andrepair of existing transportation systems, TMK adjusted large diameter weldedpipe deliveries to provide more efficient capacity utilization and bettereconomic results. An increase in construction activity coupled with improvements in TMK's domesticdistribution supported the growth in industrial welded sales. In 2006, in order to meet the increasing demand for high quality products andlooking to expand our global commercial presence, TMK continued investing in itsplants to increase production capacity of high value added products. Higher results in 2006 were also a result of well balanced portfolio activities,in terms of industrial and commercial presence, and geographical distribution. By placing greater emphasis on high value added products, TMK obtained acompetitive edge over its competitors in Russia and by taking advantage of theproduction facilities' flexibility, TMK was able to quickly satisfy customerdemand. ----------------------------(3) EBITDA margin represents EBITDA as a percentage of revenue Results of operations In 2006, TMK revenue increased by 15% and amounted to U.S.$3,384.5 million. Sales volumes The following table shows TMK's pipe sales volumes for the years ended December31: (Thousands of tonnes) -------------------------------------------------------------------- 2006 2005 % change -------------------------------------------------------------------- Seamless pipes Russia 1,266 1,154 9.7% Outside Russia 662 740 (10.5)% --------------------------------------- 1,928 1,894 1.8% Welded pipes Russia 839 949 (11.6)% Outside Russia 230 97 137.1% ---------------------------------------- 1,069 1,046 2.2% ------------------------------------------------------------------- Total pipes 2,997 2,940 1.9% ------------------------------------------------------------------- of which Russia 2,105 2,103 0.1% Outside Russia 892 837 6.6% ------------------------------------------------------------------- Seamless pipe sales growth has been primarily driven by the continuing strongdemand from oil and gas companies as a result of increased drilling activity inthe oil and gas sector, largely attributable to higher oil prices. Inparticular, sales volumes of the most profitable products, seamless OCTG for theoil and gas industry, increased by approximately 16% compared to 2005. In 2006,seamless pipes production operated at full capacity, explaining the relativelysmall increase in seamless pipe sales over the previous year. In 2006, TMK hadlower sales of industrial seamless pipes than in the prior year as there was aredeployment of seamless production capacity to focus on the production of OCTG. There was a relative redistribution of seamless pipe sales volumes between thenon-Russian and Russian markets. A decrease in exports of seamless pipes fromRussia attributable to antidumping procedures established in the European Unionwas compensated by sales in the Russian market. Increase in welded pipe sales in 2006 was predominantly attributable toincreased sales of industrial welded pipes. Industrial welded pipe sales growthhas been driven by increasing demand from the building sector. The decrease oflarge-diameter welded pipe sales in the Russian market was compensated by agrowth of sales volumes in Central Asia & the Caspian Region driven by theKazakh government's gas pipe lines modernisation program (Central Asia-Centerpipeline). Revenue by business segment The following table shows TMK's revenue by business segment for the years endedDecember 31: (Millions of U.S. dollars) ------------------------------------------------------------------------------- 2006 2005 % change-------------------------------------------------------------------------------- Seamless pipes 2,216.1 1,788.0 23.9% Welded pipes 949.0 912.9 4.0% Other operations 219.4 237.3 (7.5)%-------------------------------------------------------------------------------- Total revenue 3,384.5 2,938.2 15.2%-------------------------------------------------------------------------------- Seamless Pipes. In 2006, TMK recorded both higher average selling prices and higher salesvolumes for seamless pipes, largely attributable to increasing demand from theoil and gas industry in light of globally high levels of hydrocarbons prices. The increase in seamless pipe revenue was primarily attributable to increases inthe prices for seamless pipes as well as increased sales volumes of TMK'shighest priced product, seamless OCTG. Average selling prices for seamless pipesincreased by 22% to U.S.$ 1,151 per tonne in 2006 from U.S.$ 944 per tonne in2005 principally reflecting product mix improvement and better commercialcoordination coupled with passing on of increased manufacturing costsattributable to higher raw material costs. Welded Pipes. As a result of changes in product mix, caused by the increase in sales volumesof medium and small diameter pipes with lower margin and the decrease in salesvolumes of higher margin large diameter pipes, total welded pipe revenue andaverage selling price increased slightly. Average welded pipe selling pricesincreased by 2% to U.S.$ 889 per tonne. The following table provides an analysis of TMK's revenue growth attributable tochanges in prices and pipe volume: (Millions of U.S. dollars, and percentages)-------------------------------------------------------------------------------- Welded Seamless Total pipes pipes -------------------------------------------------------------------------------- 2006 as compared to 2005========================Changes in price 15.5 43% 390.0 91% 405.5 87% Changes in volumes 20.6 57% 38.1 9% 58.7 13%--------------------------------------------------------------------------------Total change 36.1 100% 428.1 100% 464.2 100%-------------------------------------------------------------------------------- Other Operations principally include sales of steel billets and varioussupplementary services to third parties, such as energy distribution. Net salesfrom other operations decreased by 7.5% compared to 2005 principally reflectingTMK's strategy of focusing on seamless pipe production and, hence, a decrease insales of steel billets. Revenue by geographical segment The following table shows TMK's revenue by geographical area based on thelocation of the customer for the years ended December 31: (Millions of U.S. dollars, except percentages) ------------------------------------------------------------- 2006 2005 % change -------------------------------------------------------------Russia 2,308.5 2,041.5 13.1%Outside Russia 1,075.9 896.7 20.0%----------------------------------------------------------------------------Total revenue 3,384.4 2,938.2 15.2%---------------------------------------------------------------------------- The increase in revenue from pipe sales in Russia compared to 2005 was primarilydue to the increase in average selling prices in the Russian markets, evidencingstrong growth in the Russian oil and gas industry. The significant increase in sales to Central Asia and the Caspian Region over2005 is credited to growing sales to Uzbekistan and Kazakhstan by TMK'ssubsidiary TMK-Kazakhstan, driven by an increased demand from the oil and gassector. The increase in sales to the Middle East and the Gulf region over 2005is primarily attributable to commenced sales to Saudi Aramco and increased salesprices. A slight decline in sales to the Americas was predominantly attributableto reallocation of seamless pipes sales to the Middle East. Sales to Asia, FarEast and Africa remained insignificant. Gross profit Gross profit, representing revenue less cost of sales, increased by 38.5% toU.S.$1,034 million compared to 2005 as a result of an overall selling priceincrease in excess of raw material prices growth. Sales volume increases,improved product mix and improved operational efficiency also contributed togross profit growth. The table below illustrates TMK's gross margin by business segment for the yearsended December 31: ------------------------------------------------------------- 2006 2005 ------------------------------------------------------------- Seamless pipes 39.6% 33.3% Welded pipes 15.1% 14.1% Other operations 6.1% 9.6% ------------------------------------------------------------- Overall gross margin 30.6% 25.4% -------------------------------------------------------------- Seamless Pipes Gross margins for seamless pipes increased from 2005 as a result of anincreasing proportion of higher-priced OCTG products in TMK's product mix andimproved efficiency at the pipe rolling mills due to the continuingmodernisation programs carried out in the plants. Welded Pipes The increase in the gross margin for welded pipes compared to 2005 was primarilyattributable to significant increases in margins for medium and small diameterpipes driven by a favourable market environment, particularly affected by higherselling prices. Other operations Gross margins generated by other operations, compared to 2005, decreasedprincipally due to relatively lower growth of prices for steel billets, themajor component of sales of other operations, together with a significantincrease in prices for metal scrap, the major raw material of other operations.Moreover, share of sales of higher-margin billets produced by TMK's Russianplants decreased, whereas share of lower-margin Resita billets sales increasedin 2006 compared to 2005. Cost of production Raw materials, labour and energy costs are major components of TMK's cost ofproduction. Raw materials and add-on materials of production Raw materials costs and costs of add on materials of production remainedconstant or increased slightly compared to 2005, reflecting the reducing trendin prices for certain materials in the first six months of 2006. In the secondhalf 2006, raw material prices increased compared to the first half of 2006, butin general in 2006 they grew less than prices for TMK finished products. Whereasaverage prices for some raw materials, such as coils and plates, slightlydecreased in 2006, average prices for scrap, a key input in seamless pipeproduction, increased by 19%-27% (depending on the region in Russia) in 2006 asopposed to 2005. Labour cost and salaries and wages The increase in labour costs from 2005 was driven principally by salary and wageincreases in line with inflation as well as increased production volumes; thesalaries of employees are based on performance indicators. The actual number ofworkers decreased by 0.2% as at 31 December 2006 in comparison with 31 December2005. At the same time, salary and wage average rates increased by 10%-20% incompliance with the annual salaries indexation programme. Energy and Utilities Energy costs, increased from 2005 due to higher production and energy prices. Weighted average prices for natural gas and electrical energy increased byapproximately 10-12% over 2005 average prices. Utility costs increased in 2006as compared to 2005 principally due to higher energy and utilities prices. Net profit Net profit increased to U.S.$460.6 million in 2006, up 81% from 2005. TMK recorded income tax expenses of U.S.$157.9 million in 2006, compared toU.S.$95.9 million in 2005. However, effective tax rate, defined by income taxexpense as a percentage of profit before tax, decreased from 27.4% in 2005 to25.5% in 2006. Cash Flow In 2006, the net increase in cash was U.S.$95.9 million. Net cash flows from operating activities increased by 3.7% to U.S.$429.7million. Even though operating cash flow before working capital changes rose by41.1%, the increase in working capital put some pressure on cash flows. Net cash used in investing activities nearly tripled to U.S.$519.6 million asopposed to U.S.$138.1 million in 2005. U.S.$140 million of this increase werebank deposits, representing funds that came to the Company after the repaymentof loans by our controlling shareholder after the IPO which were not spent untilyear end. Capital expenditures came at U.S.$335.9 million, of which U.S.$231.4million were strategic investments (net of VAT). Net cash flows from financing activities were U.S.$182.6 million in 2006compared to net cash used in financing activities of U.S.$241.8 million in theprevious year. This change came from a growth in borrowings - net borrowings ofU.S.$340.1 million as opposed to U.S.$127.4 million of net repayments in 2005.Despite having significant cash amounts in deposits, TMK preferred to use lowinterest rate investment-related financing. Capital Expenditure TMK has a strategic capital expenditure programme, which began in 2004 andextends through 2010, and is aimed at increasing seamless pipe production,increasing the efficiency of production facilities, improving the quality andrange of products and increasing production of high value-added products. The following table provides the breakdown of TMK's capital expenditures bytypes of activities for the years ended December 31: (Millions of U.S. dollars)-------------------------------------------------------------------------------- 2006 2005 %change------------------------------------------------------------------------------- Seamless pipes 251.2 119.6 110%Welded pipes 5.9 1.7 247%Other operations 1.9 4.2 (55)%Unallocated 112.9 13.8 718%-------------------------------------------------------------------------------Total capital expenditures 371.9 139.3 167%------------------------------------------------------------------------------- The principal portion of capital expenditures in 2006 and 2005 was related tothe installation of new continuous casting machines at Taganrog MetallurgicalWorks and Seversky Tube Works, a new reducing mill at Sinarksy Pipe Plant, a new rolling mill at SC TMK-Artrom, upgrades of electric furnace and continuous casting machine at Volzhsky Pipe Plant and improvements of the heat treatment and finishing capacity of the pipe plants. The significant increase in capital expenditures summarized under line item "Unallocated" was primarily attributableto the purchase of a new office building in Moscow. TMK expects to continue to finance most of its capital expenditure needs throughoperating cash flows, existing cash balances, as well as debt financing andother sources as appropriate. Net Debt Net debt(4) increased by 28.7% to U.S. $740.3 million. Debt proceeds wereprimarily used to finance the strategic investment programme and an increase inworking capital. TMK is very conscious about its degree of leverage and aims tokeep net debt below one time EBITDA. Even with an increase in borrowings theleverage ratios improved in 2006. Net debt to EBITDA ratio came down to 0.93times from 1.08 times in 2005.Net debt to Equity ratio improved to 0.42 comparedto 0.46 in 2005. Interest coverage ratio(5) increased from 5.45 to 8.88 in 2006. -------------------(4) Net debt represents long-term loans and borrowings plus short-term loans andborrowings plus financing lease liabilities less cash and cash equivalents andbank deposits classified as short-term investments. Net debt is not a balancesheet measure under IFRS, and should not be considered as an alternative toother measures of financial position. Calculation of net debt given herein maydiffer from the methodology used by other companies and therefore comparabilitymay be limited. Net Debt is a measure of operating performance that is not required by, orpresented in accordance with, IFRS. Although net debt is a non-IFRS measure, itis widely used to assess liquidity and the adequacy of a company's financialstructure. We believe Net Debt provides an accurate indicator of an ability tomeet financial obligations, represented by gross debt, from available cash. NetDebt allows to show investors the trend in net financial condition over theperiods presented. However, the use of Net Debt effectively assumes that grossdebt can be reduced by cash. In fact, it is unlikely that TMK would use all ofcash to reduce its gross debt all at once, as cash must also be available to payemployees, suppliers and taxes, and to meet other operating needs and capitalexpenditure requirements. Net Debt and its ratio to equity, or leverage, areused to evaluate financial structure in terms of sufficiency and cost ofcapital, level of debt, debt rating and funding cost, and whether financialstructure is adequate to achieve business and financial targets. TMK'smanagement monitors the net debt and leverage or similar measures as reported byother companies in Russia or abroad in order to assess TMK's liquidity andfinancial structure relative to such companies. TMK's management also monitorsthe trends in our Net Debt and leverage in order to optimise the use ofinternally generated funds versus funds from third parties. Net Debt has been calculated as follows: (Millions of U.S, dollars) At 31 December 2006 2005Net Debt calculationAdd:Short-term loans and borrowings and current portion of long-term loans and borrowings ............. 364.5 456.9Finance lease liabilities, current portion.............. 0.2 1.3Long-term loans and borrowings, net of current portion........661.0 164.9Finance lease liabilities, net of current portion........... 0.2 0.1Less:Cash and cash equivalents........... (143.7) (47.8)Bank deposits ..................... (142.0) -Net Debt............. 740.3 575.4 ----------------(5) Interest coverage ratio is calculated as EBIT (profit before tax plusfinance cost minus finance income) divided by finance costs amount This information is provided by RNS The company news service from the London Stock Exchange