OREANDA-NEWS. April 21, 2008. Novolipetsk Steel (“NLMK”, “the Group”), the LSE-listed leading Russian steel producer, today announced its preliminary consolidated US GAAP results for the year ended 31 December 2007.

Key financial highlights

 USD, million    2007  2006   Changes,  %  
 Revenue  7 719.1  6 045.6    28% 
 Gross profit  3 742.0  2 971.3   26%
 Operating income  2 998.4  2 243.3   34%
 EBITDA*  3 366.2  2 631.2   28%
 EBITDA Margin(%)   44%  44%
 Net profit**  2 247.3  2 066.0   9%
 Net profit ex. one-off items  2 184.9  1 596.5   37%
 EPS  0.3750    0.3447    9%

* EBITDA = Net income (post share of minorities) + income tax ± interest expense/(income) + depreciation ± losses/(gains ) on disposals of property, plant and equipment ± losses/(gains) on financial investment ± losses/(gains) from discontinued operations + impairment losses + accretion expense on asset retirement obligations;

** Net profit during 2006 is increased by one-off non-operating factors, mainly proceeds from disposal of stakes in Lebedinsky GOK and KMA Ruda in 2006.

Recent Developments
In 2007, NLMK continued its dynamic development through the implementation of the 2nd Phase of the Technical Upgrading Program, optimization of the existing Group structure and continuation of its dynamic M&A activities:

The 2nd Phase of Technical Upgrading Program aims to enhance, modernize and raise the efficiency of production facilities. The investment capex for 2007 – 2011 is expected at the level of USD4.4 billion. Capital expenditure, including the acquisition and construction of property, plant and equipment amounted to USD 957.7 million in 2007. NLMK started the implementation of following projects during the reporting period:

Blast furnace and steelmaking segment:
- NLMK has signed contract on the supply of two new ladle furnaces for the Company's main site in Lipetsk.
- NLMK has signed contract on the construction of Blast Furnace No.7 with 3.4 million tonnes capacity. This project will enable the production of crude steel at NLMK’s main site to increase to 12.4 million tonnes by 2012.

Rolling segment:
- NLMK has started construction of the third pre-painting line with an annual capacity of 200,000 tonnes. After the project completion, NLMK will increase coating capacity to 1.1 million tonnes, including 0.6 million tonnes of pre-painted steel.

- NLMK has started construction of two new transformer and dynamo steel rolling mills, each with an annual capacity of 110,000 tonnes, and one hot-dip-galvanizing line of 300,000 tonnes capacity.

- NLMK has upgraded its reversing cold rolling mill for the production of electrical grain-oriented steel to raise its capacity from 67,000 to 130,000 tonnes.

- NLMK has commissioned a new 300,000 tpy pickling line for hot rolled transformer and carbon steel at the main production site in Lipetsk.

Optimization of the existing Group structure:
- Disposal of shareholdings in energy assets for USD 78.7 million in February 2007. Proceeds from the transaction were directed to the modernization and development of in-house energy facilities.

- Disposal of the Company’s 54.88% stake in Lipetskcombank for USD 47.7 million in June 2007.

M&A transactions:
- In December 2007, NLMK acquired a 50%+1 share stake in Maxi-Group. The acquisition price is approximately USD 558 million. Maxi-Group comprises several enterprises from collecting and processing scrap to manufacturing long products. The production facilities of existing sites comprise billets (2.4 million tonnes), rebar (1.3 million tonnes) and metal-ware (0.55 million tonnes). The Scrap Collection division includes 300 scrap collection yards with total capacity of 3.0 million tonnes.

Logistics segment and service centers:

- NLMK’s subsidiary NTK, which ensures the timely supply of raw materials for metallurgical processes and the shipment of finished products to both domestic and international customers, increased its fleet of rented and owned railcars to 2,809. 

- In November 2007, NLMK entered into an agreement with TBEA, the major Chinese transformer producer, to create a joint service centre to process (cutting and packing) and sell transformer and dynamo steels in China. The service centre project is aimed at increasing sales volumes and service quality in the rapidly developing Chinese market.

Joint venture with Duferco Group:
- The combined annual crude steel production of joint venture facilities as of September 2007 is 2.2 million tonnes while sales of finished products were 4.8 million tonnes.

- Duferco U.S. Investment Corporation, wholly-owned subsidiary of Steel Invest & Finance S.A. (Luxembourg), acquired Sharon Coating (former Winner Steel) based in Pennsylvania, USA. The acquisition price was approximately USD 212 million. Winner Steel is one of the largest independent galvanized steel producers in the United States. Its operations are located on a single site in Pennsylvania and include three galvanizing lines with combined annual capacity of more than 1.0 million tonnes.

- The coke production facilities at Carsid S.A. were shut down. NLMK now supplies 100% of the coke requirements of the Duferco JV facilities.

- The total capex and acquisition costs for the year ended September 2007 were EUR 345.2 million.

Dividends
The Board of Directors recommends a 2007 total dividend payment of RUR 3.0 per ordinary share (1 GDS = 10 ordinary shares). Taking into account the interim dividend payment of RUR 1.5 per ordinary share (approved by the EGM held on 28 September, 2007) the Board is recommending the payment of an additional RUR 1.5 per ordinary share. The final dividend payment is subject to the approval of the annual shareholders meeting in June 2008.

Commenting on the 2007 results, Alexey Lapshin, NLMK’s President, said:

“2007 proved to be a very successful year for NLMK. An increase in sales of high value-added products coupled with growing demand for steel products as well as ongoing production costs control enabled NLMK to achieve a high level of operating profit. 

“Highly professional management and sustainable steel demand have encouraged the company’s more efficient use of existing capacity: steel-making and rolling facilities have been operating at almost 100% capacity.”

“The decrease of semi-finished product share in total sales volume and further development of high value-added product portfolio are key targets of NLMK’s strategy. In 2007, the company has made a significant progress in this area. The total sales during the year amounted to 9.2 million tonnes of steel products while the sales of high margin products, hot dip galvanized and grain-oriented steel went up 13% and 45%. At the same time, the sales of semi-finished products decreased by 10%.These developments combined with upward pricing trends in key markets allowed us to remain profitability leader in the global steel industry.”

Commenting on the 2007 results, Galina Aglyamova, NLMK’s CFO, said:

“NLMK Group has demonstrated record financial results last year. The consolidated sales revenue for 2007 reached USD 7,719.1 million. All Group segments showed increase in production volumes and financial results.  The consistent implementation of the company’s growth strategy and utilization of our competitive strengths helped us to achieve a record financial performance. EBITDA improved by 28% to USD 3 366.2 million, with an EBITDA margin of 44%”

“The liquidity crisis at the end of last year did not affect NLMK’s financial results. During 2007, we continued to finance organic growth and acquisitions by group cash-flow. This year, we do plan to use debt to finance dynamic development of the company through asset acquisitions and capital expenditures. Given the company’s robust financial position and high credit ratings we are confident of the effectiveness of this approach.”

Outlook
Prices for steel products continued to grow in Q1 and Q2 of 2008 following the increase in raw material costs. We currently anticipate a mid-year flattening of steel prices.

In 2008, steel production volume at our main production site in Lipetsk is expected to reach 9.4 million tonnes. As a result of the increase in production volumes, price growth and Maxi-Group consolidation we expect revenues to grow up to 60% year-on-year. According to our preliminary estimates, EBITDA could exceed the 2007 level by 35-40%.