OREANDA-NEWS. April 14, 2011. Joint Stock Company Chelyabinsk Tube-Rolling Plant (“ChelPipe”), a leading Russian producer of welded and seamless steel pipes and tubes, and supplier of integrated solutions for the Russian oil & gas industry as well as a variety of other industries in Russia, is pleased to announce its audited financial results for the year ended 31 December 2010.

2010 HIGHLIGHTS

·                52% revenue growth to RUR 85,401 million (2009: RUR 56,078 million)

·                EBITDA amounted to RUR 17,631 million, equivalent to 21% of revenue (2009: RUR 4,841 million, equivalent to 9% of revenue)

·                Net profit was RUR 4,724 million (2009: RUR 4,447 million net loss)

·                The increases in revenue, EBITDA and net profit in 2010 are primarily a result of the recovery in demand for pipe products from oil and gas companies, construction and power generation sectors and improvement of average steel pipe prices.

Commenting on the Company’s 2010 results, Mr. Sergei Moiseyev, Chairman and CFO of ChelPipe stated: “2010 was a year of modernization and integration. ChelPipe showed exceptional financial performance and profitability margins. 2011 is proving strong with ramped up new facilities and service platforms which are in line with our strategy of becoming an integrated solutions provider to the Russian energy sector”

CONSOLIDATED FINANCIAL RESULTS FOR THE YEAR ENDED DECEMBER 31

In millions of Russian Roubles

2010

2009

 

Change

Revenue

85,401

56,078

 

52%

Gross profit

26,308

16,075

 

64%

Gross margin

31%

29%

 

 

EBITDA

17,631

4,841

 

264%

EBITDA margin

21%

9%

 

 

Profit/(loss) before income tax

6,720

(4,685)

 

n/a

Net income/(loss)

4,724

(4,446)

 

n/a

Net profit margin

6%

n/a

 

 

Reconciliation of net income/(loss) to EBITDA is as follows for the periods indicated:

In millions of Russian Roubles

 

2010

2009

Net income/(loss)

4,724

(4,447)

Add:

 

 

Depreciation and amortization

3,062

2,345

Interest income

(1,220)

(1,953)

Interest expense

9,070

9,135

Income tax expense

1,996

(239)

EBITDA

17,631

4,841

REVENUE

Revenues for the year ended 31 December 2010 were RUR 85,401 million, a 52.3% increase compared to RUR 56,079 million for the year ended 31 December 2009. The increase in revenues was primarily due to an increase in steel pipe production revenues as a result of increased sales volumes and average selling prices per tonne for ChelPipe’s LDP products and seamless industrial steel pipe products, and increased sales volumes for ChelPipe’s OCTG products.

Steel Pipe Production

Revenues from the sale of steel pipe products and processed scrap for the year ended 31 December 2010 were RUR 73,517 million, a 60.5% increase compared to RUR 45,795 million for the year ended 31 December 2009. The increase in revenues was primarily due to increased sales volumes and average selling prices per tonne for ChelPipe’s LDP products, and increased sales volumes for ChelPipe’s OCTG and seamless industrial pipe products during 2010 compared to 2009.

For the year ended 31 December 2010 LDP sales volumes increased 64% compared to the year ended 31 December 2009. The increase in sales volume was primarily due to increases in pipeline construction activities by the Russian oil and gas industry during the 2010, including Transneft’s construction of the ESPO 2 Pipeline, BTS‑2 Pipeline and Purpe‑Samotlor Pipeline.

2010 OCTG sales volumes increased by 54% year on year. This was primarily due to an increase in demand for OCTG casing and tubing pipe which was in line with increases in oil and gas well drilling activities by the Russian oil and gas industry through the year.

Sales volumes for seamless industrial pipe increased by 21% in 2010 compared to 2009. The sales volume growth for seamless industrial pipe was driven primarily by increases in demand from the power‑generation, equipment manufacturing and construction industries, and the atomic power industry in particular.

Welded industrial pipe sales volumes decreased 31%, primarily due to management’s decision to focus on the production and sale of higher margin pipe in 2010.

Average selling prices for LDP, OCTG, seamless and welded industrial pipes increased by 36%, 5%, 21% and 28% respectively, compared to the previous year. The increases reflect raw materials price growth and an improved product mix.

Oilfield Services

2010 revenues from the sale of oilfield service products and services were RUR 7,669 million compared to RUR 7,087 million 2009, an 8.2% increase year on year. This revenue growth was primarily due to higher average sales price for ESPs and ESMs in 2010, which was partially offset by a decrease in sales volumes of ESPs Gray cast iron and ESMs.

The increase in average sales prices was driven by an increase in sales volumes of Ni‑resist cast iron ESPs, which are generally sold at higher prices than grey cast iron ESPs. This was the result of management’s strategy to focus sales on higher grade Ni‑resist cast iron ESPs. In 2010, total sales volumes for ESPs gray cast iron decreased by 59%, while sales volumes for profitable ESPs Ni-resist cast iron increased by 53% year on year. The decreases in total sales volumes of ESPs and ESMs came as a result of the continued depressed levels of newly developed producing oil and gas wells in Russia and the surrounding regions. This is primarily a result of the global financial crisis that began during the second half of 2008. 

COST OF SALES

In millions of Russian Roubles

2010

2009

 

Change

Raw materials

43,513

25,320

 

72%

Salaries and salary taxes

6,580

5,132

 

28%

Cost of goods for resale

3,666

4,087

 

-10%

Energy and utilities

2,643

2,109

 

25%

Deprecation and amortization

2,943

1,727

 

70%

Production overheads and repairs

2,444

1,671

 

46%

Changes in balances of work in progress and finished goods

(2,292)

543

 

-522%

Change in inventory allowance

(404)

(584)

 

-31%

Total cost of sales

59,093

40,004

 

48%

Cost of sales for the year ended 31 December 2010 was RUR 59,093 million, a 47.7% increase compared to RUR 40,004 million for the year ended 31 December 2009. The increase in cost of sales was primarily due to increases in sales volumes and raw material expenses in the year.

Raw materials

Raw material expenses for the year ended 31 December 2010 were RUR 43,513 million, a 71.9% increase compared to RUR 25,320 million for the year ended 31 December 2009. This was because of a year on year increase in steel pipe sales volumes in 2010, as well as an increase in the average price per tonne of steel plate and steel billet. The average price per tonne for steel plate and steel billet increased by 19% and 30% year on year. In 2010 the average purchased price for steel plate was RUR 25,161 (2009: RUR 21,223) and for steel billet was RUR 22,382 (2009: RUR 17,171).  

Salaries and salary taxes

Salaries and salary taxes accounted for about 11% of the total cost of sales for the twelve months ended 31 December 2010, as compared to 13% for the same period of previous year.

At RUR 6,580 million, this demonstrated a 28.2% increase on 2009 figures of RUR 5,132 million. This was because of the decision in 2010 to reverse 2009 cost-cutting measures to reduce headcount and wages at production facilities, as well as the start-up of Vysota 239 in H1 2010, and the acquisition of MSA, SOT and MZMZ in H2 2010. This reversal was in line with increased levels of operations during 2010. 
On 31 December 2010, ChelPipe employed 25,879 people (31 December 2009: 24,834).

Cost of goods for resale

The cost of goods for resale comprises the cost of seamless and welded industrial pipe as purchased by Chelpipe’s 12 trading houses from third party suppliers to service spot market customers and, purchases of trunk pipeline systems for resale to such companies (before the recent acquisition of the trunk pipeline systems businesses). At the end of 2010, cost of goods for resale was RUR 3,666 million, a 10.3% decrease on RUR 4,087 million for 2009. This decrease was due to a reduction in CHTPZ-KTS purchases of valves from MSA, resulting from a change in MSA’s sale structure that led to a decrease in sales to Russia.

Energy and utilities

Energy and utilities expenses for the year ended 31 December 2010 were RUR 2,643 million, a 25.4% increase compared to RUR 2,109 million in 2009. This was because of increased production activities, due in part to the start-up of Vysota 239 in 2010 as well as an increase of 17% in average natural gas prices.

GROSS MARGIN

Gross profit margin for the year ended 31 December 2010 was 30.8% compared to 28.7% for the year ended 31 December 2009. The change was due to a larger proportion of sales from higher margin steel pipe and oilfield services products during 2010, which was partially offset by the aforementioned increases in raw material costs, which ChelPipe was able to fully reflect in its sales prices to customers.

DISTRIBUTION COSTS

Distribution costs for the year ended 31 December 2010 were up 70% to RUR 6,499 million compared to 2009 costs of RUR 3,823 million. This increase was due to increases in sales volumes and transportation and customs expenses.

2010 transportation and customs expenses were RUR 4,570 million, a 117.9% increase on 2009 expenses of RUR 2,098 million. This came about as a result of increased sales volumes, including sales of LDP that were shipped to the far east of Russia for the ESPO 2 Pipeline and Russky Island Pipeline project, as well as a 9% increase in rail tariffs.

REVERSAL OF IMPAIRMENT/(IMPAIRMENT) OF ASSETS

For the year ended 31 December 2010 reversals of impairments of assets amounted to RUR 354 million compared to 2009 impairments of assets of RUR 2,617 million. The difference was due to trade and other receivables impairments relating to doubtful accounts with certain customers during 2009 that amounted to RUR 2,139 million, primarily with respect to sales of LDP products to the Uzbek conglomerate, Zeromax‑Arch Energy Ltd.

PROFIT (LOSS) FOR THE PERIOD

Profit for the year ended 31 December 2010 was RUR 4,724 million, compared to a loss of RUR 4,447 million for the previous year.

BORROWINGS

ChelPipe’s total outstanding borrowings as of 31 December 2010 amounted to RUR 85,837 million, of which RUR 46,465 million were current borrowings. ChelPipe’s current borrowings as of 31 December 2010 included RUR 11,248 million that were reclassified from non‑current to current borrowings as a result of breaches of covenants in certain of ChelPipe’s financing agreements as of 31 December 2010. As of 31 December 2010, RUR 73,066 million of ChelPipe’s borrowings were denominated in roubles, and RUR 12,771 million of ChelPipe’s borrowings were denominated in US dollars or Euros.