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RNS announcement

30 April 2009

NLMK Annual Report and Accounts 2008

Novolipetsk Steel (LSE: NLMK) is pleased to announce that copy of the following document has been submitted to the UK Listing Authority and will shortly be available for inspection at the UK Listing Authority's document viewing facility, which is situated at:

Financial Services Authority
25 The North Colonnade
London E14 5HS

Annual Report and Accounts 2008 (extract) 

This document will be  available on the Company's website at www.nlmksteel.com shortly. 

FY2008 US GAAP Results Announcement

The Company published its US GAAP Consolidated Financial Statements for the year ended 31 December 2008 on 24 March 2009. As required by the Disclosure and Transparency Rules of the UK Listing Authority in relation to an Annual Results Release, this announcement contains additional information that is extracted from the 2008 Annual Report.

President's review

The stable market growth experienced in the first three quarters of 2008 was followed by an unprecedented slump in steel markets. Nevertheless, the successful implementation of our balanced growth strategy allowed the Company to produce record operating and financial results in 2008. We recognize that the coming year will test the strength of the Company, and we are confident that we shall meet the challenges we face.

Overall Group Performance

Despite strong negative developments in the markets the Company has demonstrated a record operating and financial performance achieved through focus on its key competitive strengths and their further development. The implementation of a sustainable growth strategy and prompt response to the market challenges in terms of falling demand and prices helped us achieve successful performance in 2008. 

In 2008, the Group's businesses produced 10.5 million tonnes of steel, while total sales of steel and products grew by 11%, reaching 10.3 million tonnes. This growth was delivered by expanding the scale of Group operations through both organic growth and the acquisition of new assets.

Strong sales and high prices for steel during the first nine months of 2008 led to over 50 per cent growth in consolidated revenues, which reached USD11.7 billion. In 2008 EBITDA reached USD4.5 billion, with the EBITDA margin remaining strong at 39%. 

Financial stability is a key priority given the uncertainties in the global economy and the Company maintains an adequate liquidity position with USD2.2 billion in cash on our balance sheet. Our net debt at the end of 2008 was USD0.8 billion, and short-term debt stood at about USD1.1 billion. The Company currently holds the highest credit rating than its Russian peer companies. 

Capacity Expansion and Facilities reconstruction

Throughout 2008 the Group continued its technical upgrade program. As the steel producer with the lowest cost base in Russia, we have strengthened this competitive advantage by investing in upgrades and new technologies in order to increase production efficiency and reduce raw material consumption.

We invested across all stages of production including mining, casting and rolling as well as through expanding our product mix, increasing product quality and purchasing solutions dedicated to improving labour conditions and protecting the environment.

Last year we continued with the preparation work on the pellets production facility at Stoilensky which will cover our Lipetsk site requirements in iron ore. In 2008 we also invested in the construction of additional concentrate production facilities, expanding capacity and infrastructure.

At Lipetsk, we proceeded with the construction of a new blast furnace №7, the first of its kind since the end of the USSR. In addition, we increased efficiency of our sintering facilities; also our two continuous steel casting machines were reintroduced after technology upgrades. Also a new slab flame scarfing machine was commissioned. We upgraded a hot rolling mill increasing its capacity and improving the quality of our rolled products. A new air separating unit and turbogenerator were installed. 

Substantial investments were allocated to Maxi-Group. Berezovsky electrometallurgical plant located in the Urals region started its production which allows the company to shift from sales of billets to the production of higher value added long products. 

In response to the global economic downturn we have revised our investment program. Nevertheless, our focus on maintaining low cost production and enhancing production quality remains unchanged.

Operating Strategy

The consistent improvements of the Company's operating and financial performance is to a large extent, due to the continuing implementation of a balanced growth strategy.

Sales

The Company's key competitive advantage is its balanced marketing and sales system. The flexibility of the system and the ability to re-direct sales on a timely basis helped mitigate the impact of the severe market downturn in the forth quarter.

As a result of this, total sales of steel and products increased by 11% in 2008. Growth was attributed to higher long product sales by Maxi-Group. Notwithstanding the contraction in output in forth quarter, we maintained high value-added product sales at around 2007 levels, and saw an increase in sales for some product groups.

Throughout last year we have been consistently increasing our share of products sold domestically, and in 2008 our share of the Russian market increased from 31% to 37%. Our key export destinations included the EU and the Middle East.

Product Portfolio

Another area for company development involves the expansion of our product mix and increased sales of high value-added products. In 2008 we significantly increased long product sales which account for 12% of total sales. We have maintained high value-added product sales at the same level as the previous year, while being forced to reduce output of low value-added products. This year we shall continue to invest in the expansion of our product mix, and shall also allocate significant investments to improvements in product quality, primarily in grain-oriented steel, which should help us to significantly strengthen our position in this segment of the market.

Vertical Integration

We continue to develop vertical integration into raw material assets. In 2008 we significantly strengthened our positions in terms of being self-sufficient in scrap, which is crucial for electric furnace steel-making. At the end of 2008 we almost fully stopped relying on third-party iron-ore supplies, thereby significantly reducing cash outflows in times of crisis. In addition, in 2008 we painlessly decommissioned worn and environmentally unsafe coking batteries at our main production site, and the undersupply of coke was offset by increased deliveries from Altai-koks.

Managing the Crisis

In this difficult environment the Company's managers have taken a number of measures to reduce operating and investment expenses, encourage sales and streamline working capital. These measures have helped mitigate the negative impact on the NLMK Group stemming from negative steel market trends in late 2008.

In Q4 2008, against the backdrop of the crisis, the NLMK capital expenditure programme was adjusted by delaying some projects. On account of this, capital expenditure in 2008 amounted to US$ 1.9 billion, or 30% less than previously planned. 

The Company responded to the contraction in demand in the last quarter of 2008 with a sharp reduction in output of primarily low value-added products. During Q4, three of the five blast furnaces at the main site in Lipetsk were shut down for repairs, resulting in a 40% reduction in output in Q4 compared to Q3 2008. 

At the year-end, while steel prices continued to slump, we negotiated lower prices for raw materials, inputs and equipment with our suppliers. This allowed for the achievement of a significant reduction in operating and investment expenses.

In addition, NLMK managers have taken a number of measures to streamline company working capital. We have tightened controls over receivables, introduced stronger monitoring of our clients' financial standing, and restricted advances against purchases of goods, thereby limiting the exposure vis-à-vis receivables arrears. 

Reduced output and purchases of inputs, and reliance on in-house resources helped prevent the uncontrolled accumulation of inventory and additional use of cash in times of crisis.

These actions allowed the Company to adapt its operations to the changed market environment.  

Integrating Good Corporate Citizenship into the Overall Business Strategy

Improved corporate responsibility standards are a key part of our development strategy. We create an environment conducive to high productivity and provide for sustained improvements in the welfare and social protection of employees. Notwithstanding the forced output reductions in 2008 we were able to avoid significant layoffs by re-allocating personnel to maintenance activities and other operations. 

We help employees improve their skills in order to boost labour productivity and, when required, provide our employees with opportunities for training in other skills required by the Company. 

Social Responsibility

We continue to consistently improve our industrial safety standards and invest heavily in occupational health and safety. Last year this resulted in a fall in industrial accidents at our Lipetsk site of 14% compared to the year before. 

Annually, significant amounts are spent on various health improvement programmes for our employees and their families, their leave arrangements and the provision of high quality medical assistance.

Environmental Protection

We aim to prevent any negative impact that our production and economic operations may have on the environment. In 2008 we upgraded the water supply facilities at our Lipetsk site, decommissioned the environmentally unsound coke batteries and implemented several other environmental projects. We have undertaken extensive efforts to protect the environment and reduced our air emissions by 8% and effluent emissions by 16%.

Priority 

In order to mitigate the impact of the global economic crisis we shall focus on improving the efficiency and effectiveness of our production and reducing costs, streamlining our working capital, and improving customer satisfaction through the improved quality of our products and a wider product mix. In addition, we shall strive to reduce costs by relying on our own sources of raw materials, introducing savings-oriented modes of operations at our businesses, raising the effectiveness of each business unit and imposing reasonable reductions in general administrative expenses. We shall also continue to invest in the maintenance of sustainable and effective technology, protecting the environment and the industrial safety of our employees.

Outlook 

In recent years the Company has demonstrated continuous improvements in its operating and financial performance. We recognize that the Company is not immune from the trends that affect the sector and the economy in general, and we are conscious of the need to adjust, as and when required. Nevertheless, our strategy, based on our vertical integration, stable position in the markets and effectively balanced product mix will allow us to successfully emerge from this challenging period for the steel sector.

President (Chairman of the Management Board)

Mr. Alexey Lapshin, 

The OJSC NLMK management's opinion on the group consolidated US GAAP financial statements
The Management's Opinion stated below should be considered as an integral part of these consolidated financial statements of the OJSC Novolipetsk Steel (further - NLMK) prepared in accordance with the accounting principles generally accepted in the United States of America.

The NLMK management confirms its responsibility for the preparation of the consolidated financial statements of the Group as at and for the years ended December 31, 2008, 2007 and 2006 consisting of balance sheets, statements of income, statements of cash flows, statements of shareholders' equity and comprehensive income and notes to consolidated financial statements.

The NLMK financial statements, its subsidiaries and affiliated companies underwent an independent audit which confirms its compliance with the accounting principles generally accepted in the United States of America. Independent audit is held by the international company PricewaterhouseCoopers. While conducting their audits, independent auditors have access to the financial and other documents and also implement other tests needed to achieve sufficient confidence for expressing an opinion that the consolidated financial statements comply with the current legislation requirements and free of material misstatement.
Companies of the NLMK Group have an operating system of internal financial control, which major goal is to provide:

·         the most effective organization of accounting;

·         compliance with current legislation requirements;

·         safety of property and other assets.

On the completion of the internal and external control procedures, the appropriate reports were given to the NLMK management, confirming fair presentation of the financial position, results of operations and cash flows of the NLMK and its subsidiaries and affiliated companies in the consolidated financial statements and its conformity with the accounting principles generally accepted in the United States of America.

President (Chairman of the Management Board)                                                          Chief Accountant

A. Lapshin                                                                                                                              A.Sokolov

Responsibility statement 

Mr. Alexey Lapshin, President (Chairman of the Management Board), confirms on behalf of the management board of NLMK to the best of her knowledge that:

•   the financial statements, prepared in accordance with the applicable accounting standards, give a true and fair view of the assets, liabilities, financial position and net income or loss of the Company; and
•   the annual report includes a fair review of the development and performance of the business and the position of the Company, together with a description of the principal risks and uncertainties that the Company faces.

Neither Novolipetsk Steel (NLMK) nor the directors accept any liability to any person in relation to the management report except to the extent that such liability could arise under English law. Accordingly, any liability to a person who has demonstrated reliance on any untrue or misleading statement or omission shall be determined in accordance with Section 90A of the Financial Services and Markets Act 2000.

President (Chairman of the Management Board)

Mr. Alexey Lapshin, 

Consolidated financial statements as at and for the years ended December 31, 2008, 2007 and 2006

			As at  December 31, 2008		As at December 31, 2007		As at December 31,  2006
ASSETS
Current assets
Cash and cash equivalents			2,159,989		1,154,641		665,213
Short-term investments			8,089		153,462		37,261
Accounts receivable and advances given, net			1,487,847		1,696,451		1,150,492
Inventories, net			1,555,762		1,236,433		856,940
Other current assets			99,960		147,191		331,322
Restricted cash			-		-		8,372
Current assets held for sale			34,432		-		-
			5,346,079		4,388,178		3,049,600
Non-current assets
Long-term investments, net			815,527		818,590		810,350
Property, plant and equipment, net			6,826,139		6,449,877		3,988,128
Intangible assets, net			235,283		189,084		199,030
Goodwill			613,668		1,189,459		559,703
Other non-current assets			33,546		40,754		110,179
Non-current assets held for sale			194,286		-		-
			8,718,449		8,687,764		5,667,390
Total assets			14,064,528		13,075,942		8,716,990
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and other liabilities			1,879,213		1,394,934		664,319
Short-term borrowings			1,079,806		1,536,570		248,782
Current income tax liability			10,497		70,686		80,350
Current liabilities held for sale			10,959		-		-
			2,980,475		3,002,190		993,451
Non-current liabilities
Deferred income tax liability			296,875		585,567		537,647
Long-term borrowings			1,929,772		73,225		48,153
Other long-term liabilities			128,944		316,616		194,872
Non-current liabilities held for sale			5,393		-		-
			2,360,984		975,408		780,672
Total liabilities			5,341,459		3,977,598		1,774,123
Commitments and contingencies			-		-		-
Minority interest			33,100		106,813		133,425
Stockholders' equity
Common stock, 1 Russian ruble par value - 5,993,227,240 shares issued and outstanding at December 31, 2008, 2007 and 2006			221,173		221,173		221,173
Statutory reserve			10,267		10,267		10,267
Additional paid-in capital			52,395		52,395		1,812
Accumulated other comprehensive (loss) / income			(549,879)		1,181,546		589,986
Retained earnings			8,956,013		7,526,150		5,986,204
			8,689,969		8,991,531		6,809,442
Total liabilities and stockholders' equity			14,064,528		13,075,942		8,716,990

The consolidated financial statements were approved on March 23, 2009.

			For the year ended December 31, 2008		For the year ended December 31, 2007		For the year ended December 31, 2006
Sales revenue			11,698,661		7,719,061		6,045,625
Cost of sales
Production cost			(5,808,780)		(3,569,331)		(2,716,434)
Depreciation and amortization			(498,994)		(407,699)		(357,941)
			(6,307,774)		(3,977,030)		(3,074,375)
Gross profit			5,390,887		3,742,031		2,971,250
General and administrative expenses			(366,664)		(214,836)		(188,648)
Selling expenses			(734,489)		(442,657)		(325,361)
Taxes other than income tax			(100,025)		(79,977)		(57,215)
Accretion expense on asset retirement obligations			-		(6,190)		(19,765)
Impairment losses			(128,389)		-		(136,916)
Operating income			4,061,320		2,998,371		2,243,345
Loss on disposals of property, plant and equipment			(9,594)		(27,285)		(3,582)
Gains / (losses) on investments, net			(21,319)		(23,522)		400,696
Interest income			100,238		99,751		111,789
Interest expense			(217,270)		(31,417)		(29,692)
Foreign currency exchange, net			(366,984)		80,495		(74,975)
Gain from disposal of subsidiaries			-		83,122		-
Other expenses, net			(414,694)		(22,688)		(26,526)
Income from continuing operations before income tax and minority interest			3,131,697		3,156,827		2,621,055
Income tax			(703,474)		(837,003)		(706,605)
Income from continuing operations before minority interest			2,428,223		2,319,824		1,914,450
Minority interest			1,730		(23,490)		(25,773)
Equity in net earnings / (losses) of associates			(151,212)		(50,312)		501
Income from continuing operations			2,278,741		2,246,022		1,889,178
Discontinued operations
Gain from operations of discontinued subsidiary (including gain on disposal of $227,524 in 2006)			-		1,261		228,499
Income tax			-		-		(51,714)
Income from discontinued operations			-		1,261		176,785
Net income			2,278,741		2,247,283		2,065,963
Income from continuing operations per share (US dollars)
basic and diluted			0.3802		0.3748		0.3152
Income from discontinued operations per share (US dollars)
basic and diluted			-		0.0002		0.0295
Net income per share (US dollars)
basic and diluted			0.3802		0.3750		0.3447

			For the year ended December 31, 2008		For the year ended December 31, 2007		For the year ended December 31, 2006
CASH FLOWS FROM OPERATING ACTIVITIES
Net income			2,278,741		2,247,283		2,065,963
Adjustments to reconcile net income to net cash provided by operating activities:
Minority interest			(1,730)		24,592		25,773
Depreciation and amortization			498,994		407,699		357,941
Loss on disposals of property, plant and equipment			9,594		27,285		3,582
(Gains) / losses on investments, net			21,319		23,522		(400,696)
Gain from disposal of subsidiaries			-		(83,122)		(227,524)
Gain from operations of discontinued subsidiary			-		(1,261)		-
Equity in net (earnings) / losses of associates			151,212		50,312		(501)
Deferred income tax (benefit) / expense			(259,446)		37,925		(38,732)
Impairment losses			128,389		-		136,916
Loss / (income) on forward contracts			653,297		(58 708)		(6 125)
Settlement agreement on the dispute			234,000		-		-
Accretion expense on asset retirement obligations			-		6,190		19,765
Cash in assets held for sale			(11 431)		-		-
Other			68,285		16,348		21,386
Changes in operating assets and liabilities
Increase in accounts receivable			(698,002)		(33,325)		(135,234)
Increase in inventories			(364,316)		(200,074)		(159,995)
Decrease / (increase) in other current assets			45,690		(43,633)		(16,905)
Increase in loans provided by the subsidiary bank			-		(106,260)		(69,776)
Increase / (decrease) in accounts payable and other liabilities			89,776		242,830		(23,125)
(Decrease) / increase in current income tax payable			(63,610)		(33,700)		32,376
Net cash provided by operating activities			2,780,762		2,523,903		1,585,089
CASH FLOWS FROM INVESTING  ACTIVITIES
Acquisitions of subsidiaries, net of cash acquired of $422,841 in 2008, $25,047 in 2007 and $14,127 in 2006			(514,156)		-		(1,347,545)
Purchases of equity investments			(6,488)		-		(805,503)
Net cash acquired in business combination			297,905		24,038		-
Proceeds from adjustment of the original purchase price of subsidiaries			-		37,089		-
Proceeds from disposal of discontinued operations			-		-		302,526
Proceeds from sale of property, plant and equipment			9,789		12,278		15,565
Purchases and construction of property, plant and equipment			(1,934,274)		(957,719)		(618,677)
Proceeds from sale of investments and loans settled			95,803		11,606		465,274
Purchases of investments			(33,386)		(199,469)		(54,758)
Payment for acquisition of interests in new subsidiaries			(299,928)		-		-
Loan issued			(12,839)		(134,300)		-
Disposal of subsidiaries			-		(60,063)		-
Movement of restricted cash			(1,006)		(1,020)		339
Net cash used in investing activities			(2,398,580)		(1,267,560)		(2,042,779)
CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from borrowings and notes payable			3,735,078		268,844		224,870
Repayment of borrowings and notes payable			(2,248,720)		(451,802)		(183,305)
Capital lease payments			(90,675)		(3,066)		(379)
Proceeds from disposal of assets to the company under common control			-		78,469		-
Payments to controlling shareholders for common control transfer of interests in new subsidiaries			-		-		(104,000)
Dividends paid to previous shareholder of acquired subsidiary			-		-		(83,547)
Prepayment for disposal of assets to a company under common control			258,182		-		-
Dividends to minority shareholders of existing subsidiaries			(12,324)		(19,146)		(20,228)
Dividends to shareholders			(842,792)		(702,983)		(766,646)
Net cash provided by / (used in) financing activities			798,749		(829,684)		(933,235)
Net increase / (decrease) in cash and cash equivalents			1,180,931		426,659		(1,390,925)
Effect of exchange rate changes on cash and cash equivalents			(175,583)		62,769		131,990
Cash and cash equivalents at the beginning of the year			1,154,641		665,213		1,924,148
Cash and cash equivalents at the end of the year			2,159,989		1,154,641		665,213
Supplemental disclosures of cash flow information:
Non cash investing activities:
Capital lease liabilities incurred			107,793		448,731		8,460
Elimination of intercompany loan in business combination			161,023		-		-
Non cash investing and financing activities as a result of:
Fair value of net assets acquired from third parties in new subsidiaries, net of cash acquired of $422,841 in 2008, $25,047 in 2007 and $14,127 in 2006			514,156		533,468		1,347,545

ENDFR CKKKNPBKDAQN