OREANDA-NEWS. December 7, 2009. Novolipetsk Steel (LSE: NLMK), the LSE©\listed leading Russian steel producer, today announces its consolidated US GAAP results for the first nine months of 2009.

Key financials
9M 2009 operating highlights:

Steel production: 7.7 million tonnes (©\12% year©\on©\year);
 Sales: 7.8 million tonnes (©\7% year©\on©\year).

Outlook

Q4 2009 steel production is expected to reach 2.8 million tonnes, a 4% decline quarter©\on©\quarter. While the EBITDA margin is expected to decline to 25% driven by higher prices for raw materials. We confirm our forecast for NLMK¡¯s steel production in 2009 to reach 10.5 million tonnes. We expect that strong sales and improved financial performance in the H2 2009 result in a FY2009 EBITDA margin of 22©\25%.


Increase in production and sales volumes

The demand for steel in the third quarter was at a historically high level for NLMK. The Group successfully used its competitive advantages and the partial recovery on the main markets to increase its Q3 2009 steel production volumes by 11% quarter©\on©\quarter and 3% above Q3 2008.

Q3 2009 sales volume grew 20% year©\on©\year, while 9M 2009 sales volumes totaled 8.3 million tonnes, 7% down year©\on©\year. The growth in sales volumes in Q3 2009 is mainly driven by improved demand in both domestic and export markets, and by a contribution of Beta Steel which is consolidated as of Q4 2008.


Q3 2009 sales volume reached its maximum levels with 40% growth quarter©\onquarter. Slab sales totaled 1,049 thousand tonnes in Q3 2009, a 28% increase quarter©\onquarter. This growth was to a large extend attributed to deliveries to Steel Invest and Finance (NLMK ©\ Duferco JV) which grew 71% to 338,000 tonnes in Q3 2009. Sales of rolled products rose 29% and amounted to 1.39 million tonnes. This was partly due to a slight recovery in both local and international demand for the whole product range. Demand in developed countries grew, thereby increasing the proportion of sales generated by NLMK in these markets.


In Q3 2009 the utilization rate of VIZ©\Stal (a transformer steel producing plant) increased to 70% mainly attributable to improved demand for transformer steel. Growth of the utilization rate at VIZ©\Stal coupled with the restart of production at the transformer steel plant in Lipetsk led to a sequential increase in output and sales by 50% and 5% respectively.


In Q3 2009 our long products sales grew by 30% quarter©\on©\quarter due to improved demand on the domestic market and growing share of exports. The long products division¡¯s financial performance improved driven mostly by sales and prices growth as well as by an increased share of high©\value added products. Beta Steel performance in Q3 2009 also improved with sales doubling quarter©\onquarter. This was primarily due to growing demand from tube and pipe makers and service centers. The capacity utilization of the plant grew to around 90% in the third quarter.

Investments

During the third quarter 2009 the Company continued implementation of the Technical Upgrade Program with the main goals to increase of crude and rolled steel output, raise product quality, improve production efficiency and increase the output of high value©\added products. In 9M 2009, total investments, including maintenance capex reached USD708_million, down 51% year©\on©\year.


The Group continues with its main investment projects including the construction of a new Blast Furnace #7, modernization and expansion of its steelmaking operations (construction of vacuum degasser, ladle©\furnace, etc.)  construction of pre©\painting line ¡í3 and the projects to further increase energy self sufficiency at the main production plant.

In Q3 the Company successfully completed an upgrade of the transformer steel shop at the main production site in Lipetsk. A new hot deep galvanizing line #4 with a total annual capacity of 300,000 tonnes is being hot©\tested to be commissioned in the near future. The Group continues the construction of its EAF mini©\mill in Kaluga region (some 100 kilometers from Moscow).
FY2009 investment capex (excluding maintenance) is expected to be above USD1 billion, but still 50% lower year©\on©\year.


Debt restructuring

NLMK continued to implement its policy targeted at decreasing overall interest expenses benefiting from the favorable conditions in the financial markets and the Company¡¯s solid cash position. As a result the Company¡¯s total debt has contracted by nearly 16% since the start of the year. Loan restructuring allowed the Group to reduce Q3 2009 interest expenses by 36% quarter©\on©\quarter.


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 9M 2009, the Group had unrealized forward contracts for an aggregate notional amount of USD887 million, with a fair value of ¨CUSD153 million.

The major quarter©\on©\quarter decrease of the fair value of unrealized forward contracts in Q3 2009 is due to a decline in the notional amount, as the forward contacts were fulfilled during the quarter and further strengthening of RUR against EUR and USD occurred during the quarter.

The financial result of the forward FX position in 2009 will depend on movements in the RUR/USD and RUR/EUR exchange rates. No FX hedging contracts for 2010 were concluded.

Steel Invest and Finance S.A. (NLMK ©\ Duferco JV)

In 9M 2009 the net loss of Steel Invest and Finance S.A. was USD344 million resulting mainly from one©\off items such as revaluation of inventory accumulated in the beginning of the year as well as from the low capacity utilization. During the nine months of 2009, NLMK granted a USD334 million loan to Steel Invest and Finance S.A. and its subsidiary to finance its current operations and increase working capital. Proportional financial support is also provided by the joint venture partner, Duferco Group.

Subsequent events

Bonds issue
On the 30 October OJSC NLMK closed the order book for its first installment of the bond issue with 3 years maturity and total amount of RUR10 billion. The bond¡¯s annual coupon rate was set at 10.75%.


CFO comments

Ms Galina Aglyamova, Chief Financial Officer, said: ¡°In the third quarter of 2009 the global economic environment allowed NLMK to increase sales both in the domestic and export markets. The management efforts aimed at further improvement of the production efficiency of our assets, control over raw materials prices and an active sales strategy helped us to increase the EBITDA margin to 28%.
Q3 2009 operating cash flow amounted to USD324 of which USD74 million was received from further working capital release.

In Q3 2009 cash cost was USD199 per tonne of steel produced demonstrating a sequential decrease driven mainly by stable raw materials prices, continuous management efforts to increase production efficiency and supported by high capacity utilization at our production facilities.


The Company has a low level of debt and strong liquidity position. Debt ratios are in line with covenants, providing us a substantial safety margin. Further short term debt restructuring including the bonds issuance will contribute to lower interest payments.


Given the production and sales cycle we believe that our financial performance for Q4 2009 will to a large extend reflect the favorable market environment observed in Q3 2009. We confirm our previous outlook for the 2009 production which is expected to remain flat year©\on©\year basis reaching 10.5 million tonnes¡±.

CONSOLIDATED FINANCIAL RESULTS
Consolidated income statement

Sales revenue


In 9M 2009 the sales revenue of the Group reached USD4,325 million, a 55% decrease year©\on©\year. This decline is attributable to the weak market environment started from the end 2008. However a recovery in production and sales volumes through Q3 2009 to pre©\crisis levels helped to improve overall 9M 2009 performance.

Q3 2009 sales revenue exceeded the previous quarter by 35% reaching USD1,739 million. During the quarter the Group increased sales volumes in practically all its core markets exceeding the pre©\crisis level.

Production costs


9M 2009 production costs (excluding depreciation and amortization) amounted to USD2,673 million (©\41% year©\on©\year). The decline in expenses was mostly attributable to lower raw material prices from third parties as well as to cost reduction measures that were partially offset by the inventories accumulated in high pricing environment of the last year.


Q3 2009 production costs grew by USD207 million (+26% quarter©\on©\quarter) while the sales volume increased by 37%. Our approach in planning for raw material purchases and higher utilization rates allowed us to maintain Q3 2009 production cost of 1 tonne of steel slightly below the previous quarter level decreasing it from USD203 in Q2 2009 to around USD199.

SG&A

9M 2009 SG&A dropped by 22% year©\on©\year. This decrease was mainly driven by lower sales volumes and management initiatives directed to reduce overall administrative and general expenses. In Q3 2009 the Group managed to keep its SG&A costs of USD270 million nearly flat with a 2% increase quarter©\on©\quarter despite a 30% growth in sales volumes. This was mainly achieved through the implementation of cost reduction initiatives by the management.

Operating profit

Operating profit for the first nine months of 2009 was USD545 million, down 86% year©\on©\year. The operating profit margin declined to 13%, a 27 p.p. decrease year©\on©\year. However in Q3 2009 the Company improved its operating profit by 3.2x quarteron©\quarter, and the operating profit margin reached 20%. This improvement is mainly attributable to an increase in sales volumes and prices, and lower production costs.

Interest expenses

In 9M 2009 interest expenses arising from the loans held on the balance sheet totaled USD132 million. The replacement of expensive debt allowed the Company to reduce interest expenses from USD54 million in Q1 2009 to USD31 million in Q3 2009. This reduction in interest expenses is mainly attributable to a refinancing of high cost short term debt the Long products segment.

Net FX gain/loss

In 9M 2009, the net FX loss amounted to USD78 million. The Company¡¯s Q2 and Q3 2009 FX gain totaled USD12 million and USD23 million respectively. This is mainly attributable to the revaluation of the fair value of the forward contracts during the quarter as well as other FX gains received by the Group.

EBITDA

9M 2009 EBITDA totaled USD917 million, a 77% decrease year©\on©\year , and 9M 2009 EBITDA margin was 21%, a 21 p.p. decline year©\on©\year. Q3 2009 EBITDA demonstrated more than 100% growth reaching USD486 million. The Q3 2009 EBITDA margin improved by 10p.p. to 28%. This increase was mainly driven by growth in sales volumes, prices and further reduction in costs per tonne.

Net loss

In 9M 2009 the Company incurred a net loss amounting to USD79 million, which was mainly attributable to the recognition of a share in the losses of the joint venture company Steel Invest and Finance S.A. that reached USD344 million. Significant growth in Q3 2009 operating profit allowed the Group to improve its performance on a bottom line level resulting to Q3 2009 net profit of USD164 million. Q3 2009 net profit margin improved to 9%.

Consolidated balance sheet

As of 30 September 2009 the Group¡¯s assets totaled USD12,450 million, a 11% decrease compared to 31 December, 2008. The key factors contributing to this decline were the change in the RUR/USD exchange rate, a significant decrease in working capital driven by lower raw material prices and work©\in©\progress.
These factors along with the reduction of debt burden resulted in a Shareholder¡¯s equity share growth to 68%, a 6 p.p. from the beginning of the year. Net debt as of 30 September 2009 totaled USD761 million (a 10% decrease comparing to the 2008 year end). Net debt declined due to the repayment of loans during the first nine months of 2009 according to the debt payment schedule and stable cash flow generated by the Group during the period.


The 9M 2009 net debt/LTM EBITDA ratio reached 0.5. Long©\term liabilities make up 61% of the Company¡¯s debt. Current assets fell by 28% and amounted to USD3,854 million, which is attributable to lower volume of receivables, inventories, cash and cash equivalents.


The accounts receivables reached USD908 that is 39% lower than at the 2008 year end. The decrease was driven by receivables settlements and lower prices. Inventories fell by 32% and totaled USD1,052 million. This decline is largely driven by lower prices for raw materials, as well as contraction of work©\in©\progress and finished products inventories.


Accounts payable decreased by USD882 million and reached USD997 million. This was caused by recognition in Other creditors as of 31 December 2008 of the pre paiment by the company under the joint control for the shares of TMTP (Tuapse sea port company) amounting USD242 million and the settlement amount paid to DBO Holdings Inc. of USD234 million.

Cash flow statement

Operating cash flow

Operating cash flow in 9M 2009 amounted to USD1,251 million, down 34% year-on©\year, influenced by changes in working capital. The Group released USD421 million from the decrease in inventories, additional USD504 million were released from the decrease in accounts receivable. Changes in other operating assets and liabilities as well as accounts payable contributed additional USD52 million to operating cash flow.


Cash flow from investment activity

The 9M 2009 total cash outflow from investment activities was USD1,274 million. For the acquisition and construction of property, plant and equipment (PPE) the Company allocated USD708 million. USD234 million was paid by NLMK under the settlement agreement with DBO Holdings Inc. 9M 2009 financial investments amounted USD511 million, these are mostly short term deposits in Russian state©\owned banks and foreign banks. In Q3 2009 a bulk portion of deposits were released to settle the Company¡¯s debts (see cash flow from financing activities).


In 9M 2009 NLMK granted a USD334 million loan to Steel Invest and Finance S.A. (NLMK ¨C Duferco JV) and its subsidiary. Duferco Group, NLMK¡¯s partner in the joint venture, also provides the financial support to the joint venture.

Cash flow from financial activities

Net cash used in financial activities in 9M 2009 amounted to USD480 million. In the reporting period the Group actively optimized its debt portfolio. Its short term debt that bears high interest rates was being refinanced and partially repaid which resulted in a cash outflow of USD440 million allocated for settlements. The Group¡¯s cash position as at 30 September 2009 amounted to USD1,642 million, representing a USD518 million decline as compared to the beginning of 2009. As of the end of the reporting period an aggregate of the cash and cash equivalents capture and short©\term investments stood at USD1,768 million.

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