OREANDA-NEWS. OJSC Novolipetsk Steel (NLMK), the LSE listed leading Russian steel producer, today announces its consolidated results for the 1st Quarter 2007.

Highlights:

Strong Q1 2007 financial results

- Sales revenues amounted to USD 1,750.2 million (+61% YoY)
- Cash flows from operating activities were USD 459.3 million
- EBITDA* amounted to USD 748.1 million (+93% YoY);  EBITDA margin 43%
- Cash and cash equivalents USD 898.3 million as of 31 March, 2007

Recent Developments:

M&A and investment activities. The company continued to implement a dynamic M&A strategy and actively manage its asset portfolio in Q1 2007:

- Disposal of stakes in energy assets for USD 78.7 million in February 2007. According to the decision of the Board of Directors, NLMK’s stakes in energy assets were classified as non-core investments. Proceeds from the transaction will be directed to the modernization and development of in-house energy facilities.

- In April 2007, the Prokopievskugol Group of Coal Companies was sold to a Municipal State Company representing the City Administration of Prokopievsk. The transaction price was USD 1.

- NLMK-Duferco JV has reached an agreement to acquire substantially all the assets of Winner Steel INC. (Pennsylvania, USA) and certain of its liabilities. Winner Steel is one of the largest independent galvanized steel producers in the United States with combined annual capacity of around 1.2 million tonnes. The transaction was closed in June 2007.
The total value of investments in fixed assets for Q1 2007 amounts to USD 173.2 million.

The following major projects were realized under the Technical Upgrading Programme:

- Signing an equipment supply agreement with the Austrian company Andritz AG.  Andritz AG will supply two rolling mills, each with 110,000 tpy capacity, for the production of grain and non-grain-oriented steel and new hot-dip galvanizing line with 300,000 tpy capacity.

- Installation of a new coil slitting line with a capacity of 60 tpy. The new equipment will enable the company to introduce a new product – grain-oriented (GO) steel strip, with a width ranging from 80 to 400 mm, and a thickness of 0.23 to 0.30 mm.

- Re-commissioning of a 460,000 tonnes per year coke battery #2 after major renovation at the production site in Lipetsk.

Final dividend.
The Annual General Meeting (AGM) held on 5 June, 2007 approved the final dividend for 2006 of RUR 3.0 per ordinary share. Including the interim dividend of RUR 1.5 per ordinary share already paid for the first six months of 2006, the AGM approved the payment of an additional RUR 1.5 per ordinary share. Payment of the dividend on ordinary shares will be made before 3 September, 2007. NLMK will transfer funds for dividend payments on Global Depositary Shares (GDSs) to the depositary bank on 25 July 2007.

Commenting on NLMK’s US GAAP Q1 2007 results, Galina Aglyamova, Vice President Finance & CFO, said:

“NLMK has demonstrated strong financial results in Q1 2007. The EBITDA margin stood at 43% while operating income surged 70% on a year-on-year basis.  The company’s sound performance was driven by growing sales volumes particularly sales of high value-added products along with the favorable pricing environment in our core markets.

“At the beginning of the year, NLMK Group started to implement the next phase of the Technical Upgrading Program as part of our “Sustainable Growth Strategy 2007 - 2011”. The Company continued the process of enhancement and modernization of existing production facilities, value-chain optimization and integration of recently acquired assets into the Group structure. The consistent implementation of our strategy is a key element of NLMK’s successful development and long-term stability.

“We maintain a positive outlook on steel demand both on the domestic and world market in 2007.  The price growth started at the end of Q1 2007 and continued through Q2 2007, plateaued in June. While we may see possible price softening towards the end of the year we believe NLMK Group should again demonstrate record financial results and strengthen its position among world’s most profitable steelmaking companies in 2007.”

Management Comments

In recent years, NLMK has maintained its position as one of the most efficient steel producers in Russia and throughout the world. In 2007 the Company started to implement its “Sustainable Growth Strategy 2007-2011” that comprises the 2nd phase of the Technical Upgrading Program which is focused on further enhancement and modernization of existing production facilities and acquisitions of high quality rolling assets on core markets.

One of the factors contributing to the consolidated financial performance in Q1 2007 is an acquisition of Altai-koks and Prokopievskugol Group of Coal Companies in April 2006 and VIZ-Stal in August 2006.

Relatively favorable steel market conditions in Q1 2007 allowed the Group to increase sales volumes and prices compared to Q1 2006 and resulted in growth of sales revenue and financial results. Thus, sales revenue in Q1 2007 amounted to USD 1,750.2 million (+61% compared to Q1 2006), operating profit amounted to USD640.1 million (+70%) and EBITDA equaled USD748.1 million (+93%).

Furthermore, NLMK has changed export delivery conditions.  Starting from March 2006, transportation costs to customers, border terminal or sea port are included in product price.

Net profit in Q1 2007 amounted to USD 456.6 million, which is 16% less than in Q1 2006. The disposal of the Group’s interest in Lebedinsky GOK in Q1 2006 is the main reason for the decrease in Q1 2007. If we take net profit without proceeds from the disposal of the interest in Lebedinsky GOK, net profit in Q1 2007 grew by 84% compared to Q1 2006. Net profit in Q1 2007 compared to Q4 2006 increased by 20%.

Despite sales growth, average steel prices in Q1 2007 were lower than in Q4 2006. Thus, the growth of financial results was less significant compared to Q4 2006. Thus, the gross profit and EBITDA in Q1 2007 went down 11% and 7% compared to Q4 2006. At the same time, sales revenue in Q1 2007 compared to Q4 2006 grew by 4%, operating profit by 13% and net profit by 20%. The countermovement of financial indicators results from including impairment losses and accretion expense on asset retirement obligation primarily attributable to Prokopievskugol Group of Companies into Q4 2006 consolidated financial accounts. This factor affects gross profit and EBITDA while it has no impact on operating and net profit.

Profit (equity in net earnings) of the JV with Duferco Group amounted to USD 10.2 million in Q1 2007, which is shown in the consolidated income statement.

The Group is generating stable operating cash flow. In Q1 2007, net cash flow received from operating activities amounted to USD 459.3 million (+190% compared to Q1 2006).
The significant volume of available cash allowed the Group to repay short-term credits obtained in December 2006, which resulted in higher financial sustainability.

Steel Segment

The steel segment is the key segment of the Group. In Q1 2007 NLMK, Dansteel A/S and VIZ-Stal sales to external customers were the main contributors to the financial results of the segment. The steel segment’s share in consolidated revenue from external customers is over 90%.

In Q1 2007 the steel segment produced 2.3 million tonnes of crude steel, 0.9 million tonnes of saleable slabs and 1.3 million tonnes of rolled products.

Revenue from external customers in Q1 2007 amounted to USD 1,598.7 million, which is 52% higher than in Q1 2006, operating profit USD 519.9 million (+55% compared to Q1 2006). The major reason for this improvement is the growth of sales volumes and prices of main products.  An additional factor is the consolidation of VIZ-Stal in August 2006.

Sales revenue from external customers changed slightly compared to Q4 2006. Price increases for energy and basic raw materials in Q1 2007 compared to Q4 2006 resulted in cost price growth of 13% and caused operating profit to decrease by 15%. It should be noted that NLMK has already settled supply prices for coking coal concentrate, iron ore raw materials and energy until the end of the year.

Mining segment

In 2006, NLMK’s mining segment was comprised of OJSC Stoilensky GOK, OJSC Dolomite and OJSC Stagdok, companies that supply raw materials to NLMK’s production facilities in Lipetsk and which also sell certain volumes outside the Group.

Iron ore producer Stoilensky GOK, the principal mining company within the Group, produced 2.9 million tonnes of iron-ore concentrate and 0.4 million tonnes of sinter ore in Q1 2007. The output of Dolomite in the same period was 0.4 million tonnes of flux dolomite. Stagdok, which supplies limestone, produced 0.8 million tonnes of fluxing limestone in Q1 2007.

In Q1 2007, the mining segment’s revenue from external customers was USD 23.2 million, which is 12% higher than the level of the previous quarter. This increase was mainly due to increased prices for the segment’s products. Revenue from external customers went up 41% on a year-on-year basis as a result of growing iron ore concentrate and sinter ore production volumes and commissioning of new beneficiating facilities.

The segment’s revenue, including intersegmental sales, was USD 215.3 million in Q1 2007 (+2% and +97% compared to Q4 2006 and Q1 2006 respectively). This favorable performance resulted from growing prices for the segment’s products since Q3 2006. As 89% of the mining segment’s sales in value terms are internal sales within the Company, the segment’s share in NLMK’s consolidated external revenue in Q1 2007 was 1.3%.
Operating profit for the mining segment increased in Q1 2007 compared to Q1 2006 and Q4 2006 by 316% and 9% respectively due to sales revenue growth exceeding the growth rate of costs.

Coke-chemical segment

The coke-chemical segment is comprised of OJSC Altai-koks and its subsidiaries, consolidated within the Group from Q2 2006.  Altai-koks is one of the leading producers of coke in Russia. In Q1 2007, Altai-koks produced 879,000 tonnes of coke of 6% moisture.
In Q1 2007, the coking segment’s revenue from external customers was USD105.4 million, a decrease of 14% compared with Q4 2006. Operating profit amounted to USD3.2 million in Q1 2007, a decrease of 60% compared with Q4 2006. 

The decreased financial results in Q1 2007 are due to an unfavorable market environment in the coke market, together with the growth of coal concentrate prices in Q1 2007. 
The coke-chemical segment’s share of Q1 2007 consolidated revenue is 6%.

After putting into operation new coke battery #5 at the end of 2006, total production capacity of Alta-koks reached 5.0 million tonnes of coke per year.

Other segments

Revenue from other operating segments primarily includes revenue from three operational units, whose results do not exceed threshold values. These segments include sea port services, financial services, banking and insurance services, as well as coal mining and refinement by the Prokopievskugol Group of Coal Companies.

In Q1 2007, revenue from other segments from external customers was USD 22.9 million (+5% compared with Q1 2006). The revenue increase is mainly attributable to the consolidation of the financial results of Prokopievskugol Group of Coal Companies, which was selling a portion of its products to external customers, from Q2 2006.

In 2006, gross profit from other segments amounted to USD 13.8 million, a USD 1.8 million decrease compared with Q1 2006.  The operating loss in Q1 2007 was USD 17.6 million (USD 27.5 million less compared with Q1 2006). 

This operating loss was mainly caused by Prokopievskugol operating losses in Q1 2007 due to high production costs.

Income before minority interest rose in Q1 2007 amounting to USD 78.9 million which is primarily attributable to the waiver of Prokopievskugol obligations for the repayment of a loan. The additional driver was the profitable performance of subsidiaries of NLMK Group including insurance companies and banking unit.

In April 2007, NLMK Group divested Prokopievskugol Group of Coal Companies to a Municipal State company representing the City Administration of Prokopievsk.

Consolidated financial results

In Q1 2007, NLMK’s sales revenue reached USD 1,750.2 million, an increase of 61% compared with the corresponding period of the previous year. The key factors contributing to the level of revenue were:

- growth of production volumes and sales

- growth of average prices for the products sold by the Group in Q1 2007 compared with the corresponding period of the previous year

- consolidation of Altai-koks and Prokopievskugol Group of Coal Companies starting April 2006 and VIZ-Stal starting August 2006

- since March 2006 conditions for the delivery of exported products have changed.  The sales price for NLMK’s products now also include transportation costs customers, border terminal or sea port.

Gross profit in Q1 2007 amounted to USD817.4 million, an increase of 87% compared with Q1 2006.  Operating profit was USD640.1 million, an increase of 70%. The slowdown in the rate of operating profit growth compared with that of gross profit is due to an increase of sales, general and administrative (SG&A) expenses of USD115.5 million, which was led by a consolidation of assets in 2006 as well as by a change of export delivery conditions. 
Q1 2007 EBITDA amounted to USD 748.1 million, an increase of 93% compared with the corresponding period of the previous year. EBITDA margin for the first quarter 2007 was 43%, an increase of 7 percentage points compared with the first quarter 2006.

NLMK Group’s net profit in Q1 2007 amounted to USD456.6 million, a decrease of 16% compared with the corresponding period of last year due to a significant non-recurring income from the sale of stake in Lebedinsky GOK in Q1 2006. If the effect of the sale of interest in Lebedinsky GOK is eliminated, NLMK’s net profit in Q1 2007 would be84% higher than in Q1 2006.

In Q1 2007 revenue grew by 4% or USD63.1 million compared with Q1 2006.  The gross profit decrease by 11% or USD101.4 million compared with Q4 2006 is attributed to an increase of cost of goods sold due to increased basic raw materials and energy costs.
Compared with Q4 2006, operating and net profit for the first quarter of 2007 grew by 13% and 20% respectively which is attributed to recognition of impairment losses and accretion expense on asset retirement obligations in Q4 2006 that totaled USD156.7 million, which is mainly related to the operations of Prokopievskugol Group of Coal Companies.

Consolidated balance sheet data

At the end of Q1 2007, NLMK’s assets increased by 7% against 31 December 2006 to reach USD 9,304.5 million.  The share of the Company’s own capital in the structure of the sources used to finance NLMK’s operations is permanently high and at the end of Q1 2007 it was 80%.

The Group’s balance sheet structure reflects the financial stability of the company, which is confirmed by the obtaining highest credit ratings among Russian steelmakers. 
Highly liquid assets of NLMK substantially exceed the amount of its debt. NLMK’s cash and cash equivalents position as at 31 March, 2007 amounted to USD898.3 million, a 35% increase (or USD 233.1 million) compared to 31 December, 2006.

In the first quarter of 2007, annualized return on assets (ROA) was 20% and annualized return on equity (ROE) was 26%. These ratios are higher than in Q4 2006, but lower than in Q1 2006 due to additional non-recurring gain from the divestment of its interest in Lebedinsky GOK.

Cash Flow

In Q1 2007 net cash received from operating activities equaled USD459.3 million (+190% compared to Q1 2006). 

Stable generation of operating cash flow allows NLMK to finance the organic growth from its own cash funds without attracting substantial debt. In Q1 2007 net cash received from operating activities exceeded purchases and construction of property, plant and equipment by 170%.  

Cash outflow for investment activities in Q1 2007 amounted to USD166.5 million which is USD801.9 million less than in Q4 2006. Substantial cash outflow in Q4 2007 was associated with the financing of the creation of a joint venture with the Duferco Group. 
The main cash outflow for investment activities in Q1 2007 was associated with USD173.2 million investments in fixed assets. 

Net cash flows associated with financial activities in Q1 2007 amounted to USD70.3 million. The main cash outflows associated with financial activities are the repayment of short-term credits that amounted to USD170.3.  The main cash flow from financing activities is associated with the proceeds from disposal of stakes in energy assets that were classified by the Board of Directors of NLMK as non-core assets.  The proceeds from the transaction are USD78.7 million.

Cash and cash equivalents as of 31 March 2007 equaled USD898.3 million, which is 35% or USD233.1 million higher than the balance at 31 December 2006. 

The Company's sustainable financial position allows a flexible business development strategy. The creation of additional shareholder value remains NLMK’s priority, and NLMK will continue to pursue this policy based on stringent financial discipline and balanced investment projects.

Outlook
We believe that export prices for most of Group’s steel products, which have grown since the beginning of the year, reached maximum level in May. According to our estimates, there is a possibility of minor export price softening during the summer season. We expect prices to stabilize in September-October 2007. However, there is a possibility of further price softening towards the end of 2007. The pricing environment on the domestic market will be stable during the next several months. We expect domestic prices to soften only towards the end of Q3 2007 due to seasonal factors.    

In 2007 as a whole, we expect growth of sales revenue and operating profit. We also forecast 2007 EBITDA growth compared with 2006 numbers.

Since the beginning of 2007, the Group has been implementing its Sustainable Growth Strategy that includes Phase 2 of the Technical Upgrading Programme.  The implementation of this strategy will help the Company to maintain its leadership positions in terms of cost effectiviness and strengthen its key competitive advantages in the long-term perspective.