11

Interim results for the six months ended June 30, 2006

Date of publication: 12.10.2006

October 12, 2006 — Evraz Group S.A. (LSE: EVR), one of the leading vertically integrated steel production and mining businesses with operations mainly in Russia, today announces its unaudited interim results for the six months ended 30 June 2006 with both revenues and cash flow increasing to record levels.

1H 2006 Highlights:

Strong operational performance delivers solid results

  • — 2006 first half revenue was a record $3,825 million, up 5% from the corresponding period in 2005
  • — Consolidated steel sales increased by 23% to 8.3 million tonnes from 6.75 million tonnes in the first half of 2005
    • — Russian construction products sales volumes grew 23%
    • — Volumes of semi-finished steel products increased 21% due to growing slab production
  • — Higher value-added sales into attractive European and USA markets increased fivefold
  • — Adjusted EBITDA remains largely unchanged year-on-year at $1,096 million
  • — Net profit reduced marginally to $571 million from $612 million in 2005
  • — Further US$262 million investment in cost efficiency programme
  • — Further expansion of mining segment with an additional $225 million equity investment in OAO Raspadskaya


Six months to June 30
(US$ million unless otherwise stated)
1H 20061H 2005Change
Revenue3,8253,6325.3%
Adjusted EBITDA 11,0961,119(2.0%)
Profit from operations9381,005(6.7%)
Net profit 2571612(6.7%)
Earnings per GDR 3, US$1.631.88

1 Refer to Attachment 1 for reconciliation to profit from operations
2 Net profit attributable to equity holders of the parent entity
3 1 share is represented by 3 GDRs

Valery Khoroshkovsky, Evraz Group’s CEO, commented:

«Evraz achieved satisfactory results during the first six months of 2006 especially when compared with the exceptional performance supported by high steel prices in the first half of 2005.

Contributing to our record high revenues in the first half of 2006 was significant sales volume increase from the successful business integration of the European steel mills acquisitions coupled with strong organic growth in Russia delivered from the group’s capital investment programme.

Additionally, steel prices have shown good recovery starting from March 2006 from the lower levels seen in the second half of 2005 and the first quarter of 2006.

Evraz has continued to reduce its steel costs by increasing operational efficiency and achieving a higher level of production as a result of our capital investment programme.»

Commenting on the outlook for the remainder of 2006 and beyond Valery Khoroshkovsky said:

«In the second half of 2006, Evraz will continue to enhance its position as one of the most cost-effective and profitable integrated steel producing and mining groups in Russia and CIS while expanding and strengthening its presence in non-Russian markets. Evraz will continue to focus on cost management and ongoing efficiency improvements to enhance our competitiveness in the global steel market.

Evraz intends to deliver further benefits from the integration of the recent acquisitions, facilitating a gradual shift in product mix towards higher margin products.

Our volumes are expected to remain strong for the rest of the year with the rolled products output increasing 22% year-on-year to 10.8 million tonnes in the first nine months of 2006. We expect the price recovery which started in the second quarter of 2006 to continue on the back of growing demand.

The acquisition of Strategic Minerals Corporation in August will contribute both to the group’s revenue and profit growth and our equity investment in Highveld Steel and Vanadium Corporation will further support our earnings.»

Summary Results:

Evraz’s consolidated revenues increased by 5.3% to US$3,825 million in the first six months of 2006 from US$3,632 million in the first six months of 2005. The majority of this increase is attributable to the acquisitions of Palini e Bertoli and Vitkovice Steel, both of which produce mainly high value-added flat products, and to increased slab exports due to the commencement of production of a new slab caster at ZapSib. Total volumes of steel products sold in the first half of 2006 were 8.3 million tonnes, up 23% from 6.8 million tonnes in the first half of 2005.

In the first six months of 2006, consolidated cost of revenues amounted to US$2,520million compared with US$2,251 million in the first half of 2005. Cost of revenues as a percentage of consolidated revenues increased from 62.0% reported in the first half of 2005 to 65.9% in the first half of 2006. The increase was primarily attributable to the higher share of iron ore purchased from third parties to meet the increased production volumes of the group’s Russian steel mills. Gross profit was down 5.5% half-on-half at US$1,305 million from US$1,381 million.

In the first half of 2006, revenues from non-Russian sales amounted to US$1,925million, or 50.3% of total sales compared with US$1,558 million, or 42.9% in the first half of 2005. The increased share of non-Russian revenues was attributable to the growth in export sales volumes, provided by both Evraz Russian operations as well as the contributions of the recently acquired plate mills — Vitkovice Steel and Palini e Bertoli.

Profit from operations decreased by 6.7% to US$938 million in the first half of 2006 from US$1,005 million in the corresponding period of 2005. Profit from operations as a percentage of consolidated revenues decreased from 27.7% in the first half of 2005 to 24.5% in the first half of 2006. This reduction is largely attributable to the decrease in consolidated gross profit margin.

Consolidated EBITDA showed only a slight reduction of US$23 million (down 2.0%) in the first half of 2006 to US$1,096 million, or 28.7% of revenues compared with US$1,119million, or 30.8% in the first half of 2005.

In the first half of 2006, the Company reported consolidated net profit attributable to equity holders of Evraz Group of US$571 million vs. US$612 million in 2005. Lower net profit is mainly explained by a greater depreciation charge, as well as a higher effective tax rate. In the first half of 2006, the income tax charge amounted to $241 million, which is an effective tax rate of 28.3%, up from 26.0% in the first half of 2005. The increase in the effective tax rate reflects mainly the tax effect of higher dividend distribution of profits from Evraz’s Russian consolidated subsidiaries to Evraz Group S.A.

Review of Operations

Steel Segment Results

Six months to June 30
(US$ million unless otherwise stated)
1H 20061H 2005Change
Revenues3,7643,6612.8%
Profit from operations841 7768.4%
Adjusted EBITDA95785412.1%
Adjusted EBITDA margin25.4% 23.3%

Steel Segment Sales

Six months to June 30
(‘000 tonnes)
1H 20061H 2005Change
Semi-finished products4,1643,44320.9%
Construction sector2,1972,106 4.3%
Railway sector789828(4.7)%
Mining sector13912313.0%
Plates830194327.8%
Other finished products18156223.2%
Total8,3006,75023.0%


Six months ended 30 June
1H 20061H 20051H06 v 1H05
US$ million% of totalUS$ million% of total% change
Construction products99426.4%91425.0%8.7%
Vitkovice Steel contribution461.2%n/an/an/a
Railway products 45612.1%46212.6%(1.2)%
Mining products 661.8%621.7%5.9%
Semi-finished products 1,37036.4%1,40138.3%(2.2)%
Other steel products58115.4%1754.8%231.7%
Palini contribution1283.4%n/an/an/a
Vitkovice Steel contribution2757.3%n/an/an/a
Other products 2967.9%64617.7%(54.1)%

Steel segment revenues for the first half of 2006 were US$3,764 million, an increase of 2.8% year-on-year from US$3,661 million in 2005. Steel segment revenues were negatively affected by average lower prices for steel products in the first half of 2006 as compared with the first half of 2005. The increase of 23% in overall sales volumes in the first six months of 2006 mitigated lower average prices for some steel products.

Steel production from the recently acquired Palini e Bertoli (mid-August 2005), and Vitkovice Steel (mid-November 2005), provided a substantial growth of plate sales and contributed solidly to non-Russian sales of the Group.

In the first half of 2006, the steel segment profit from operations increased by 8.4% to US$841 million, or 22.3% of steel segment revenues, from US$776 million, and 21.2% of steel segment revenues in the first half of 2005.

In the first half of 2006 adjusted EBITDA in the steel segment totalled US$957 million and 25.4% of steel segment revenues, compared with $854 million, and 23.3% in the first half of 2005.

Mining Segment Results

Six months to June 30
(US$ million unless otherwise stated)
1H 20061H 2005Change
Revenues480594(19.2)%
Profit from operations106224(52.7)%
Adjusted EBITDA133253(47.4)%
Adjusted EBITDA margin27.7%42.6%

Mining Segment Production

Six months to June 30
(million tonnes)
1H 20061H 2005Change
Iron ore
Concentrate1.11.3(15.3)%
Sinter4.34.6(6.5)%
Pellets3.02.87.1%
Reference1
Coking coal (Raspadskaya)3.43.33.0%
Coal (Yuzhkuzbassugol)7.7n/an/a

Mining segment revenues fell by 19.2% to US$480 million in the first half of 2006, compared with US$594 million in the corresponding period in 2005. While sale volumes were relatively stable (-3.4%), revenue fell principally as a result of a decline in average prices of iron ore.

Almost all of Evraz mining segment sales consist of iron ore. Evraz mining segment supplied approximately 71% of the steel segment’s iron ore requirements. This decrease from 76% in the first half of 2005 in the proportion of iron ore sourced internally was caused by the substantial increase in steel production from the Russian steel mills in the first half of 2006.

The mining segment profit from operations decreased by 52.7% to US$106 million in the first half of 2006, or 22.0% of mining segment revenues. This compares with US$224million, or 37.7% of mining segment revenues in the corresponding period in 2005. The decrease is largely attributable to lower average prices of iron ore.

Adjusted EBITDA in the mining segment declined by 47.4% to US$133 million, or 27.7% of mining segment revenues in the first half of 2006 from US$253 million, or 42.6% in the corresponding period in 2005.

Consolidated Group Financial Position

Cash flow

Cash flow from operating activities increased by 24.3% year-on-year to US$904 million from US$727 million. The increase in net cash generated by operations was primarily due to a substantial decrease in net working capital requirement.

Cash used in investing activities was US$1,036 million in the first half of 2006 vs. US$657 million in the first half of 2005. This includes short-term deposits in the amount of US$264 million, the first payment of US$10 million for the acquisition of Stratcor as well as US$275 million paid as the last instalment for the shares of Yuzhkuzbassugol purchased in December 2005.

In the first half of 2006 capital expenditure amounted to US$262 million compared with US$280 million in the first half of 2005.

Balance sheet

Estimated Liquidity
(US$ million)
As of 30 June 2006As of 31 December 2005
Cash and cash equivalents482641
Amount available under credit facilities744716
Short-term bank deposits28716
Total estimated liquidity1,5131,373

Net debt increased when compared with 30 June 2005 by US$1,384 million to US$2,120 million as of 30 June 2006. Cash reserves decreased to US$482 million as of 30 June 2006 from US$641 million as of 31 December 2005.

Evraz has sufficient liquidity to support its current operations and meet its current debt obligations. Evraz estimated liquidity (defined as cash and cash equivalents, amounts available under unrestricted credit facilities and short-term bank deposits) amounted to US$1,513 million as of 30 June 2006 compared with US$1,373 million as of 31 December 2005. The cash balance, including US$287 million in short-term deposits, grew by 17% to US$769 million.

As of 30 June 2006, total assets amounted to US$7,317 million reflecting an increase of 9.8% to US$6,663 million as of 31 December 2005.

Parent shareholders" equity, including reserves and accumulated profits as at 30 June 2006, increased 24.6% to US$3,373 million from US$2,707 million as at 31 December 2005.

1 Please refer to Attachment 2 for calculation of net debt.

# # #

Note:

Percentage changes may not be exact due to rounding.

For further information:

Evraz Group

Corporate Affairs and Investor Relations

Irina Kibina
Tel: +7 495 232 1370
E-mail:IR@evraz.com

Attachment 1

Adjusted EBITDA

Adjusted EBITDA represents profit from operations plus depreciation and amortisation, impairment of assets and loss (gain) on disposals of property plant and equipment. Adjusted EBITDA is not a measure of financial performance under IFRS, and it should not be considered as an alternative to net profit as a measure of operating performance or to cash flows from operating activities as a measure of liquidity. Evraz’s calculation of Adjusted EBITDA may be different from the calculation used by other companies and therefore comparability may be limited.

Reconciliation of Adjusted EBITDA to profit from operations is as follows:

(Six month ended 30 June)
20062005
(in millions of US dollars)
Consolidated Adjusted EBITDA reconciliation
Profit from operations9381,005
Add:
Depreciation, depletion and amortisation137104
Impairment of assets102
Loss on disposal of property, plant & equipment118
Consolidated Adjusted EBITDA1,0961,119
Steel segment Adjusted EBITDA reconciliation
Profit from operations841776
Add:
Depreciation, depletion and amortisation10271
Impairment of assets5-
Loss on disposal of property, plant & equipment108
Steel segment Adjusted EBITDA957854
Mining segment Adjusted EBITDA reconciliation
Profit from operations106224
Add:
Depreciation, depletion and amortisation2727
Impairment of assets-2
Loss on disposal of property, plant & equipment1-
Mining segment Adjusted EBITDA133253
Other operations Adjusted EBITDA reconciliation
Profit from operations2412
Add:
Depreciation, depletion and amortisation86
Impairment of assets--
Loss on disposal of property, plant & equipment--
Other operations Adjusted EBITDA3318

Attachment 2

Net Debt

Net Debt represents long-term loans, net of current portion, plus short-term loans and current portion of long?term loans less cash and cash equivalents (excluding restricted deposits). Net Debt is not a balance sheet measure under IFRS, and it should not be considered as an alternative to other measures of financial position. Evraz’s calculation of Net Debt may be different from the calculation used by other companies and therefore comparability may be limited.

Net Debt has been calculated as follows:


PDFFull Text

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