TMKS.L Regulatory News (TMKS)

28 Sep 2007 07:08

OAO TMK28 September 2007 TMK ANNOUNCES 1H 2007 REVIEWED IFRS RESULTS OAO "TMK" (TMK), one of the world's largest oil and gas pipe producers and themarket leader of the Russian pipe industry, today announces its reviewed IFRSfinancial results for the six months ended June 30, 2007. 1H 2007 Highlights Financials: •Revenue grew by 28% to USD 2,030.0 million •Gross profit came in at USD 657.9 million, an increase of 30% compared to first half 2006 results. •EBITDA up 27% to USD 499.5 million as a result of a strong pricing environment and increasing operating efficiency Sales Volumes: •Total pipe sales volumes were nearly 1.54 million tonnes, including 1.02 million tonnes of seamless pipes •Seamless pipe sales volumes rose 5.1%, OCTG pipes, the highest margin products, had a slight increase of 2.8% and amounted to 497 thousand tonnes. •Welded pipe sales volume grew by 5.9%, driven by an increase in sales of large-diameter welded pipes. Acquisitions / Joint Ventures: •On January 25, 2007, OAO "Seversky Pipe Plant" and Corinth Pipeworks S.A., the largest pipe manufacturer in Greece, established a company ZAO "TMK-CPW" for the production of longitudinally welded pipes to be used in the oil and gas, machine building and construction industries. OAO "Seversky Pipe Plant" holds 51% and Corinth Pipeworks S.A. holds 49% of the company. •On March 5, 2007, TMK purchased a 76.33% interest in OAO "Russian Research Institute of the Tube and Pipe Industries" ("RosNITI") for USD 3.1 million. "RosNITI" is the only pipe research institute in Russia. In June and July 2007, TMK purchased an additional 21.03% in "RosNITI" for USD 864.5 thousand increasing its stake to 97.36% •In the first six months of 2007, TMK purchased 0.15% of OAO "Sinarsky Pipe Plant" shares and 0.13% of OAO "Seversky Pipe Plant" shares for a total amount of USD 2.0 million Recent Developments: •On August 29, 2007, TMK signed an agreement for the purchase of 100% interest in OOO "Predpriyatiye "Truboplast" for USD 24.0 million via entities under common control with TMK who themselves acquired this interest in July 2007. Summary 1H 2007 Results(1) (Millions of U.S. dollars, except earnings per GDR) 1H 2007 1H 2006 Change, % ------------------ ------------- ------------- ----------- Net sales 2,030.0 1,584.3 28.1%Gross profit 657.9 505.8 30.1%Profit before tax 394.4 305.6 29.1%Net profit 289.1 229.9 25.8%Earnings per GDR(2), USD 1.28 1.00 28.0% EBITDA(3) 499.5 393.6 26.9%EBITDA margin(4), % 24.6% 24.8%------------------ ------------- ------------- ----------- (1) This information for 1H 2007 and 1H 2006 reflects the transfer of OAO "OrskyMachine Building Plant" to OAO TMK in 1H 2007. On January 31, 2007, OAO TMKobtained 75% interest in OAO "Orsky Machine Building Plant" in a transactionwith an entity under common control with OAO TMK. As this business combinationinvolved entities under common control, it was accounted for using the poolingof interests method and OAO TMK's consolidated financial statements have beenrestated as if the transfer of OAO "Orsky Machine Building Plant" to OAO TMK hadoccurred as of the beginning of the first period presented in the financialstatements. (2) 1 GDR represents 4 ordinary (local) shares (3) 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 profitbefore tax is as follows: (Millions of U.S. dollars) 1H 2007 1H 2006 Profit before tax 394.4 305.6Depreciation................................ 67.0 56.9Amortisation 1.2 1.2Finance costs 45.0 31.1Finance income (8.1) (1.2)EBITDA 499.5 393.6 (4) EBITDA margin represents EBITDA as percentage of revenue For further information please contact: TMK PR Department: Sergey Ilin Tel: +7 495 775 7600 ext. 2149 Email: pr@tmk-group.com Or visit: www.tmk-group.com Management Discussion and Analysis of Financial and Operating Results Overview TMK is among the world's three largest steel pipe producers with a relativelyhigh market share of approximately 12.5% in the seamless OCTG segment. In thefirst six months of 2007, TMK sold 1.54 million tonnes of steel pipes including1.02 million tonnes of seamless pipes of which 498 thousand tonnes was OCTG.Pipes for the oil and gas industry accounted for approximately 61% of TMK'stotal sales volumes in the first six months of 2007. TMK is also Russia'slargest exporter of pipes, with export of TMK's Russian plants representingaround half of total Russian exports. In the first six months of 2007, TMK'ssales outside of Russia accounted for approximately 31% of TMK's total salesvolume. In the first six months of 2007, TMK continued development of its seamless pipebusiness which has the highest margins and better growth opportunities, togetherwith a mixed growth/protection strategy in the welded segment. Industry Outlook The majority of TMK's steel pipe sales are carried out in Russia. Thus thegeneral level of volumes and prices for TMK's products is significantlyinfluenced by the Russian pipe market trends. The oil and gas sector remainedthe priority customer for TMK domestic pipe production. In the first six monthsof 2007, the demand for seamless and welded steel pipes from Russian oil and gasproducers was quite strong. According to TMK's market research, the generalconsumption of pipes for the oil and gas industry increased by approximately 30%during the first six months of 2007. At the same time, oil and gas analystsexpect exploration and production (E&P) expenditures to increase markedly in thecoming years, driven by the need of Russian oil and gas majors to deliver ontheir long-term production targets and the government's increasingly toughstance towards reserves replacement. Capital expenditures are expected to riseat an average CAGR of 11% in 2007-2010. Sales to oil and gas companies worldwide represent a high percentage of TMK'stotal sales and demand for seamless and welded steel pipes from the global oiland gas industry is a significant factor affecting TMK's results of operations,particularly sales volumes. In recent years, global demand for seamless and welded pipes has been increasingstrongly, driven by such factors as rising drilling activity and rig count andhigher well complexity. E&P spending by oil and gas companies worldwide hasincreased sharply in recent years predominantly due to high oil prices pushed byresilient global energy demand and the depletion of existing reserves. In thefirst six months of 2007, sales of steel pipes worldwide increased byapproximately 10% and particularly as a result of increasing expansion ofChinese producers. According to the International Energy Agency (IEA), global E&P spending will grow by 8% per annum in 2007-2010. IEA estimates thatapproximately 11% of E&P budgets are spent on OCTG pipes and approximately 40%of pipeline construction costs are spent on pipes. TMK management believes that, if global demand for oil and gas remains at thecurrent level, the factors which have resulted in the high oil prices and theincreased drilling activity and demand for pipes from the oil and gas industryshown in 2006 will persist in the near term due to the long lead times andsignificant capital expenditures required for the development of major new oiland gas reserves. Results of Operations Revenue In the first six months of 2007 as compared to the first six months of 2006, TMKrevenue increased by 28% and amounted to USD 2,030.0 million. TMK's consolidatedrevenue increased due to a combination of higher average selling prices andhigher sales volumes Sales volumes The following table shows TMK's pipe sales volumes. (In thousands of tonnes) 1H 2007 1H 2006 % change --------------- -------- -------- ---------- Seamless pipesRussia 679 648 4.8%Outside Russia 342 323 5.9% -------- -------- ---------- 1,021 971 5.1%Welded pipesRussia 378 403 (6.2)%Outside Russia 142 88 61.4% -------- -------- ---------- 520 491 5.9% --------------- -------- -------- ----------Total pipes 1,541 1,462 5.4%--------------- -------- -------- ----------of whichRussia 1,057 1,051 0.6%Outside Russia 484 411 17.8%--------------- -------- -------- ---------- TMK's seamless pipe sales growth of 5.1% in the first six months of 2007 ascompared to the first six months of 2006 was predominantly due to an increase insales of industrial seamless pipes which has been primarily driven by increasingdemand from machine-building companies. At the same time, sales volumes of thehighest margin products, seamless OCTG for the oil and gas industry, increasedby 2.8% in the first six months of 2007 as compared to the first six months of2006 due to the full load factor in seamless production capacity. An increase in welded pipes sales in the first six months of 2007 as compared tothe first six months of 2006 was predominantly attributable to increased salesof large-diameter welded pipes. Sales volumes fell in the first six months of2006 due to a decrease in sales to Gazprom resulting from production workshopstoppages for repairs at OAO "Volzhsky Pipe Plant". In the first six months of2007, sales of large-diameter welded pipes to Gazprom returned to a normal levelwhich partially compensated the relative decline in sales volumes of TMK'sindustrial welded pipes on the Russian market. At the same time, sales volumesof welded pipes outside Russia increased sharply due predominantly to the growthof sales volumes of large-diameter welded pipes to CIS countries. Revenue by business segment The following table shows TMK's revenue by business segment. (Millions of U.S. dollars) 1H 2007 1H 2006 % change ----------------- -------- -------- ---------- Seamless pipes 1,375.5 1,063.5 29.3%Welded pipes 543.0 393.7 37.9%Other operations 111.5 127.1 (12.3)%----------------- -------- -------- ----------Total revenue 2,030.0 1,584.3 28.1%----------------- -------- -------- ---------- Seamless Pipes In the first six months of 2007, TMK recorded both higher average selling pricesand higher sales volumes for seamless pipes which is largely attributable tostrong demand from the oil and gas industry and increasing demand frommachine-building companies. Average TMK selling prices for seamless pipes increased by 23% to USD 1,348 pertonne in the first six months of 2007 from USD 1,095 per tonne in the first sixmonths of 2006 principally reflecting the passing on of increased manufacturingcosts attributable to higher raw material costs. The volume of TMK's seamlesspipes sales increased by 5.1% in the first six months of 2007 as compared to thefirst six months of 2006, with sales volumes of OCTG increased approximately by2.8%. Welded Pipes In the first six months of 2007 as compared to the first six months of 2006, anincrease in TMK's welded pipe revenue was primarily attributable to an increasein the prices for medium- and small-diameter welded pipes as well as increasedsales volumes of large-diameter pipes driven by the increased demand from CIScountries and strong demand from Gazprom. Average TMK selling prices for welded pipes increased by 30% to USD 1,046 pertonne in the first six months of 2007 from USD 802 per tonne in the first sixmonths of 2006 principally reflecting the passing on of increased manufacturingcosts attributable to higher raw material costs, particularly increased pricesfor coils and plates, and change in the product mix. The volume of TMK's weldedpipes sales increased by 5.9% in the first six months of 2007 as compared to thefirst six months of 2006, with sales volumes of large-diameter welded pipesincreased approximately by 19%. Gross Profit TMK's gross profit, which represents net revenues less cost of sales, increasedby 30.1% in the first six months of 2007 as compared to the first six months of2006 as a result of overall selling price increases in excess of raw materialinput price increases, volume growth and improved operating efficiency. The table below illustrates our gross margin by business segment. 1H 2007 1H 2006 ------------------ -------- -------- Seamless pipes 40.2% 41.8%Welded pipes 18.1% 12.5%Other operations 5.9% 9.0%------------------ -------- --------Overall gross margin 32.4% 31.9%------------------ -------- -------- Seamless Pipes Gross margins for seamless pipes decreased slightly in the first six months of2007 as compared to the first six months of 2006 as a result of an increasedproportion of industrial seamless pipes, which generated lower margins than OCTGpipes, in the product mix. The proportion of OCTG products decreased due to asales volumes growth rate lower than for other seamless pipes resulting from thehigh load factor in production capacity Welded Pipes The increase in gross margins for welded pipes in the first six months of 2007as compared to the first six months of 2006 was primarily attributable to thegrowth in selling prices for medium- and small-diameter pipes in excess of theincreases in raw material costs. The increase in sales volumes of higher-marginlarge-diameter welded pipes in the first six months of 2007 as compared to thefirst six months of 2006 also contributed to the growth of the gross margin forwelded pipes. Raw Materials, Labour Costs and Energy Costs. Raw materials, labour costs and energy costs are the major components of thecost of production. •The prices TMK paid in Russia for several types of steel billets increased by approximately 11%-26% (depending on the type of the material), prices for purchases of steel coil increased by 19%-22% (depending on the type of the material) and scrap prices increased by 26%-35% (depending on the region in Russia) in the first six months of 2007 as compared to the first six months of 2006. •Labour costs constitute the second largest component of cost of sales. Labour costs include salaries and wages of production personnel and social and pension contributions attributable to these salaries and wages. The increase in labour costs in the first six months of 2007 as compared to the first six months of 2006 was driven principally by pay increases in line with inflation as well as increased production volumes, as the salaries of TMK's employees are linked to performance indicators. Average salary rates increased by 20%-35% (depending on the location of the subsidiary) in the first six months of 2007 as opposed to the first six months of 2006. The actual number of employees decreased by approximately 5% as at June 30, 2007 in comparison with June 30, 2006. •Energy costs include principally purchases of electricity from RAO UES and purchases of natural gas from Gazprom. Energy costs increased in the first six months of 2007 as compared to the first six months of 2006 principally due to increased production and higher energy prices. TMK's weighted average prices for natural gas increased by approximately 5%-13% (depending on the region of Russia) and electrical energy prices increased by approximately 18-22% in the first six months of 2007 as compared to the first six months of 2006. Net Debt Net debt(5) increased by 37.3% to USD 1027.6 million. Debt drawdowns wereprimarily used to finance the strategic investment programme and the increase inworking capital. TMK is very conscious of its degree of leverage and aims tokeep net debt below one and a half times EBITDA. The net debt to EBITDA ratioincreased to 1.13(6) in the 12-month period ended June 30, 2007, as compared to0.93 in 2006. The Net debt to Equity ratio rose to 0.53 compared to 0.43 in2006. The interest coverage ratio(7) decreased from 10.8 in the first six monthsof 2006 to 9.6 in the first six months of 2007. Net debt has been calculated as follows: ---------- --- ---------- At June 30 At December 31 2007 2006Net Debt calculation (millions of U.S. dollars)Add: Short-term loans and borrowings and current portion of 655.8 371.6 long-term loans and borrowings Finance lease liabilities, current portion 0.3 0.2 Long-term loans and borrowings, net of current portion 544.5 662.7 Finance lease liabilities, net of current portion 0.6 0.2Less: Cash and cash equivalents (70.1) (144.0) Short-term investments(8) (103.5) (142.0) ---------- ----------Net Debt 1027.6 748.7 ========== ========== (5) 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. (6) Calculated using LTM EBITDA (7) Interest coverage ratio is calculated as EBIT (profit before tax plus financecost minus finance income) divided by finance costs amount (8) Short-term investments include bank deposits, and exclude other items that cannot be classified as cash equivalents (USD 31.1 million in 1H 2006 and USD 32.5million in 2006) This information is provided by RNS The company news service from the London Stock Exchange