NLMK Announced H1 2009 US GAAP Results
OREANDA-NEWS. August 28, 2009. 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.
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%.
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 USD413.8_million, 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% selfsufficient 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 writedown.
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.
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-onquarter
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 hotrolled 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 yearon-
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. 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% yearon- 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. 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% yearon-
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-onyear).
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 inprofit before minorities in the second quarter is largely attributable to the dividend payments accrued by the parent company from its subsidiaries.
For more diteiled information click here - http://www.nlmksteel.com/upload/Financials/H1%202009/Press-release%20H1%202009%20US%20GAAP%20_ENG_f.pdf
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