OREANDA-NEWS. August 29, 2014. Kuzbasskaya Toplivnaya Company OJSC (KTK, MICEX: KBTK), one of the largest producers and exporters of thermal coal in Russia, is pleased to announce its unaudited condensed interim consolidated financial statements under IFRS for the 6 months 2014.

Revenue
In H1 2014, revenue decreased by 9% to RUB 8,721 mln compared with the same period of 2013. Such a decline in revenue year-to-year was due to lower sales volumes in the domestic and European markets because of the warm winter.

Revenues in Q2 2014 decreased by 20% to RUB 3,887 mln. Under the influence of the seasonal decline in demand for coal, the reduction in revenue in the segment sales of own coal in the domestic market amounted to 44%. Revenue from export sales decreased by 7% compared with Q1 2014 and amounted to RUB 3,303 mln. Decrease in export revenue in Q2 due to structural changes in the model of coal sales on the Polish market. Management decided not to work with local traders in favor of a direct interaction with the end buyers. In consequence of these changes, KTK do not receive prepayments for coal from this market.

Operating profit and EBITDA
Compared with H1 2013, for first 6 months in 2014 operating income decreased by 36% to RUB 245 mln, and gross profit decreased by 10% to RUB 1,064 mln. The EBITDA showed a decline of 18%, reaching RUB 785 mln. The main influence on the above figure was a reduction in revenue. Cost of sales in H1 2014 decreased by 9% to RUB 7,657 mln as a result of optimization measures, carried out by the management. Cost of sales reduction occurred despite decline in coal production in comparison with the volume for H1 2013. Level of commercial, administrative and other expenses for H1 2014 increased by 2% to RUB 819 mln.

In Q2 2014, the Company showed an operating loss of RUB 60 mln. Gross profit decreased by 59% to RUB 312 mln. Quarterly EBITDA amounted RUB 167 mln. Together with income from sold unused land amounted RUB 88 mln that is enough to pay loans interest. Production cash costs and cost of sales decreased in Q2 by 12% to RUB 3,575 mln and RUB 599 per tonne, respectively. Commercial, administrative and other expenses decreased by 17% to RUB 372 mln.

Net profit
The Company shows a net loss in H1 2014, amounting to RUB 76 mln. The main factors influencing the financial result was a continued decline in the Asian markets. At the current price level of export sales to the Asia-Pacific region brings Company minor losses, but this shipments can not be interrupted in order to avoid the loss of an long-term attractive market and established customer base in South Korea and Japan. Management is convinced that if the global trend will change, key opportunities will be concentrated on this market. At the same time, thanks to the warm winter of 2014, the seasonal decline in demand for coal in the domestic market and in Poland turned out to be much more significant than in past years. System changes on the Polish market, capable in the medium term may have a positive impact on the Company's business. The domestic market, despite increased competition among Russian producers remains stable due to the existing distribution infrastructure of KTK. Gross margin in the domestic market increased from 28% in H1 2013 to 36% in H1 2014 the Company is implementing a number of projects to improve the domestic market share in the total volume of sales.

Due to the seasonality of coal consumption in the domestic market, Q2 is traditionally the weakest in the annual business cycle of the company. In Q2 2014, recorded a loss of RUB 91 mln. The company shows losses in Q2 for the third year in a row.

Debt portfolio management
Net debt at 30 June 2014 amounted RUB 6,117 mln increasing by 20% compared to the March 31, 2014. The net debt to EBITDA for the 12 months was 2.71. The main reasons for the growth of debt, including the short term part of the loan portfolio was the creation of its own coal reserves in warehouses in Poland, to be sold in Q3 2014 and cover the increased trade receivables. Management plans to decrease net debt to EBITDA in H2 2014.

The company is one of the most reliable and efficient borrowers in the sector, that reflect current interest rates for loans and credits. As of June 30, 2014, the average effective rate was 10.52% for loans denominated in RUB and 4.76% for loans denominated in USD.

In H1 2014 operating cash flow amounted RUB (1,390) mln, increasing by 515% compared to the same period in 2013. Investment cash flow decreased by 11% to RUB (256) mln. Investment in fixed assets amounted RUB 378 mln, most of which focus on modernization of the washing plant Kaskad 2 and retail network development. Net cash outflow from financial activities for H1 2014 amounted to RUB 975 mln. Net decrease in cash and cash equivalents raised by 65% to RUB 671 mln.

In Q2 2014 operating cash flow amounted RUB (643) mln. Investment cash flow in Q2 2013 amounted RUB (59) mln, for investment in fixed assets was spent RUB 182 mln. Net cash outflow from financial activities amounted RUB 975 mln. Net decrease in cash and cash equivalents amounted RUB 167 mln.

Key events in Q2 and after reporting date
Equipment modernization at washing plant Kaskad 1 is completed. Implemented a new technology of heavy medium separation, which will allow to receive stable quality of washed coal and increase the competitiveness of the product.

Maxim Ovcharov, the former Head of retail sales in the Kemerovo Region and the Altai appointed Deputy CEO for retail network. His area of responsibility includes the coordination and development of retail network in 4 regions of Western Siberia and Poland. Harmonization and standardization of business processes retail network will provide synergies and allow KTK to get to a new level of customer service.

The company has sold unused land assets and received RUB 88 mln on the result of closing the deal.

Commissioned an additional railway line from the station of Vinogradovsky open-pit mine with the inclusion of electric interlocking station.

Outlook for Q3 2014
In accordance with the production plan, the volume of coal production in the Q3 2014 will increase by 13%, to 2.81 mln tonnes, which is 12% higher than the same period of 2013. Such an increase in production is due to pent-up demand, which will increase its sales in Q3 2014.

Management expects the stripping ratio in Q3 to decline by 17% to 5.12.