Year ended 31 December 2012 results

Results of operations

Our revenue, gross profit, and EBITDA have not changed significantly year-on-year. Net profit in 2012 was substantially lower as a result of the impairment of assets and changes in fair value of the derivative financial instrument. However, profitability ratios remained relatively flat.

20122011ChangeChange
in million dollarin million dollarin %
Sales volume (in thousand tonnes)4,2384,185531 %
Revenue6,6886,754(66)(1) %
Cost of sales(5,204)(5,307)103(2) %
GROSS PROFIT1,4831,446373 %
GROSS PROFIT MARGIN22 %21 %--
Net operating expenses1(811)(743)(68)9 %
(Impairment) / Reversal of impairment of assets(8)68(77)-
Foreign exchange gain/(loss), net23(1)24-
(Loss)/gain on changes in fair value of derivative financial instrument(7)45(52)-
Finance costs, net(275)(271)(4)1 %
INCOME BEFORE TAX405544(139)(26) %
Income tax expense(123)(159)37(23) %
NET INCOME282385(103)(27) %
NET INCOME ADJUSTED FOR GAIN/(LOSS) ON CHANGES IN FAIR VALUE OF DERIVATIVE INSTRUMENT2290340(50)(15) %
ADJUSTED NET INCOME MARGIN34 %5 %--
ADJUSTED EBITDA1,0401,050(10)(1) %
ADJUSTED EBITDA MARGIN16 %16 %--
20122011ChangeChange
in million dollarin million dollarin %
Sales volume (in thousand tonnes)4,2384,185531 %
Revenue6,6886,754(66)(1) %
Cost of sales(5,204)(5,307)103(2) %
GROSS PROFIT1,4831,446373 %
GROSS PROFIT MARGIN22 %21 %--
Net operating expenses1(811)(743)(68)9 %
(Impairment) / Reversal of impairment of assets(8)68(77)-
Foreign exchange gain/(loss), net23(1)24-
(Loss)/gain on changes in fair value of derivative financial instrument(7)45(52)-
Finance costs, net(275)(271)(4)1 %
INCOME BEFORE TAX405544(139)(26) %
Income tax expense(123)(159)37(23) %
NET INCOME282385(103)(27) %
NET INCOME ADJUSTED FOR GAIN/(LOSS) ON CHANGES IN FAIR VALUE OF DERIVATIVE INSTRUMENT2290340(50)(15) %
ADJUSTED NET INCOME MARGIN34 %5 %--
ADJUSTED EBITDA1,0401,050(10)(1) %
ADJUSTED EBITDA MARGIN16 %16 %--

Sales

In 2012, our consolidated revenue decreased as a result of the negative currency translation effect. Excluding the unfavourable currency translation impact of $318 million, total revenue growth is $252 million.

Sales by reporting segments are as follows:

20122011ChangeChange
in million dollarsin million dollarsin %
Russia4,7144,788(74)(2) %
America1,6501,590604 %
Europe324375(51)(14) %
TOTAL REVENUE6,6886,754(66)(1) %
      
20122011ChangeChange
in thousand tonnesin thousand tonnesin %
Russia3,1593,115441 %
America903892111 %
Europe176178(2)(1) %
TOTAL PIPE4,2384,185531 %
20122011ChangeChange
in million dollarsin million dollarsin %
Russia4,7144,788(74)(2) %
America1,6501,590604 %
Europe324375(51)(14) %
TOTAL REVENUE6,6886,754(66)(1) %
      
20122011ChangeChange
in thousand tonnesin thousand tonnesin %
Russia3,1593,115441 %
America903892111 %
Europe176178(2)(1) %
TOTAL PIPE4,2384,185531 %

Sales by group of products are as follows:

20122011ChangeChange
in million dollarsin million dollarsin %
Seamless pipe4,1343,9112246 %
Welded pipe2,2572,536(279)-11 %
TOTAL PIPE6,3916,446(55)-1 %
Other operations296307(11)-4 %
TOTAL REVENUE6,6886,754(66)-1 %
     
20122011ChangeChange
in thousand tonnesin thousand tonnesin %
Seamless pipe2,4952,3421537 %
Welded pipe1,7431,843(100)-5 %
TOTAL PIPE4,2384,185531 %
20122011ChangeChange
in million dollarsin million dollarsin %
Seamless pipe4,1343,9112246 %
Welded pipe2,2572,536(279)-11 %
TOTAL PIPE6,3916,446(55)-1 %
Other operations296307(11)-4 %
TOTAL REVENUE6,6886,754(66)-1 %
     
20122011ChangeChange
in thousand tonnesin thousand tonnesin %
Seamless pipe2,4952,3421537 %
Welded pipe1,7431,843(100)-5 %
TOTAL PIPE4,2384,185531 %

Russia. The division’s revenue decreased by 2% or $74 million year-on-year, primarily because of the negative currency translation effect in the amount of $274 million.

Sales of seamless pipe increased by $435 million mainly due to higher demand from Russian oil and gas companies driving an increase in sales volumes. Better pricing and sales mix, especially an increase in share of seamless OCTG, also had a significant positive effect on the revenue dynamics.

Revenue from sales of welded pipe decreased by $231 million on lower volumes and unfavourable sales mix as a result of an expected decrease in demand for LD pipe after completion of major pipeline projects and the postponement of new projects by our customers.

America. In the American division, revenue increased by 4% or $60 million year-on-year.

Sales of welded pipe increased by $33 million on higher volumes of primarily welded OCTG and welded line pipe due to favourable market conditions in the U.S. in the first half of 2012.

In spite of a decline in sales volumes of seamless pipe, revenue from sales of this group of products was higher by $3 million, reflecting a favourable changes in sales mix, particularly higher share of seamless OCTG. Prices mostly stayed flat year-on-year as a result of a growth in the first half and a decrease in the second half of 2012.

Revenue from other operations, mainly from premium threading services and sales of fishing tools, increased by $24 million.

Europe. In the European division, revenue decreased by 14% or $51 million year-on-year, primarily on the unfavourable currency translation effect and weaker pricing.

Revenue from sales of seamless industrial pipe increased by $6 million as compared to the last year. The adverse effect from lower volumes and unfavourable pricing in the weak E.U. market was compensated by improved sales mix as we sold more expensive pipe to the customers in North America in the first half of 2012.

Revenue from other operations, mostly from sales of steel billets, declined by $13 million as compared to last year as a result of the worsening market environment in the second half of the year.

Gross profit

In 2012, our consolidated gross profit amounted to $1,483 million, a 3% increase as compared to last year, despite the unfavourable currency translation effect of $76 million. Gross profit margin improved to 22%.

Gross profit results by reporting segments are as follows:

20122011Change
in million dollarsin %in million dollarsin %in million dollars
Russia1,12424 %1,03622 %88
America28517 %31120 %(26)
Europe7523 %10027 %(25)
TOTAL GROSS PROFIT1,48322 %1,44621 %37
20122011Change
in million dollarsin %in million dollarsin %in million dollars
Russia1,12424 %1,03622 %88
America28517 %31120 %(26)
Europe7523 %10027 %(25)
TOTAL GROSS PROFIT1,48322 %1,44621 %37

Gross profit results by group of products are as follows:

20122011Change
in million dollarsin %in million dollarsin %in million dollars
Seamless pipe1,08826 %1,07428 %14
Welded pipe34315 %34414 %(1)
TOTAL PIPE1,43122 %1,41822 %13
Other operations5218 %299 %24
TOTAL GROSS PROFIT1,48322 %1,44621 %37
20122011Change
in million dollarsin %in million dollarsin %in million dollars
Seamless pipe1,08826 %1,07428 %14
Welded pipe34315 %34414 %(1)
TOTAL PIPE1,43122 %1,41822 %13
Other operations5218 %299 %24
TOTAL GROSS PROFIT1,48322 %1,44621 %37

Russia. The division’s gross profit increased by $88 million, despite a $65 million negative currency translation effect. Gross profit margin improved from 22% to 24%.

Gross profit of seamless pipe increased by $122 million, to a large extent driven by higher volumes of seamless OCTG. Profitability of seamless pipe stayed flat.

Gross profit of welded pipe increased by $8 million. The adverse effect from drop in sales of welded pipe, specifically LD pipe, was fully compensated by improved profitability, following a significant drop in the average purchase price for steel coil.

Gross profit from other operations increased by $23 million.

America. The American division’s gross profit decreased by $26 million as compared to 2011; gross profit margin declined to 17% from 20%, primarily reflecting a negative sales mix impact from growth in sales of lower-margin welded pipe as opposed to drop in sales of higher-margin seamless pipe, and a decline in gross profit margin of seamless pipe.

Gross profit of welded pipe increased by $6 million as result of slight growth in sales volumes and prices, and changes in sales mix. Profitability was relatively flat.

Growth in the average cost per tonne of seamless pipe outpaced growth in the average selling price, and together with declining volumes of seamless pipe resulted in a $41 million decline in gross profit. Profitability was affected by higher fixed costs absorption.

Gross profit from other operations increased by $8 million mainly due to higher volume of premium threading services and higher sales of fishing tools.

Europe. Given the weak trends in the E.U. market, gross profit in the European division decreased by $25 million; profitability decreased from 27% to 23%. The currency translation effect provided a $10 million decrease in gross profit.

Net operating expenses

Net operating expenses were higher by 9% or $68 million; the share of net operating expenses, expressed as a percentage of revenue, increased to 12% from 11%.

The increase in net operating expenses was primarily due to a $52 million growth in freight costs in the Russian division as a result of increased transportation tariffs and higher share of sales with long distance delivery terms. Our staff costs rose by $18 million. Other expenses growth by $16 million was due to losses on disposal of certain items of property, plant and equipment.

In addition, in 2011, we received a $19 million gain from sale of TMK Hydroenergy Power S.R.L., which reduced our net operating expenses for the period. No such gain was recognised in 2012.

The currency translation effect accounted for a $38 million decrease in net operating expenses.

Adjusted EBITDA

In 2012, adjusted EBITDA margin remained flat at 16%.

20122011Change
in million dollarsin %in million dollarsin %in million dollars
Russia76216 %72115 %45
America12513 %26517 %(43)
EuropeЯ516 %6417 %(12)
TOTAL ADJUSTED EBITDA1,04016 %1,05016 %(10)
20122011Change
in million dollarsin %in million dollarsin %in million dollars
Russia76216 %72115 %45
America12513 %26517 %(43)
EuropeЯ516 %6417 %(12)
TOTAL ADJUSTED EBITDA1,04016 %1,05016 %(10)

Russia. Adjusted EBITDA was higher by 6% or $45 million. Gross profit increase of $88 million was partially offset by increase in selling, general and administrative expenses. Adjusted EBITDA margin increased from 15% to 16%.

America. Adjusted EBITDA decreased by 16% or $43 million as a result of both lower gross profit and higher other operating expenses. Adjusted EBITDA margin declined from 17% to 13%.

Europe. Adjusted EBITDA decrease by 19% or $12 million. Gross profit decrease of $25 million was partially offset by decrease in selling, general and administrative expenses. Adjusted EBITDA margin dropped from 17% to 16%.

Impairment of assets

As of 31 December 2012, we determined in respect of certain non-production assets in the Russian division that the carrying value of cash-generating unit exceeded its value in use. As a result, we recognised the impairment of these assets in the amount of $8 million.

As of 31 December 2011, we determined that the value in use of the European division cash-generating unit significantly exceeded its carrying value. As a result, we reversed the impairment loss recognised in 2008 and 2009 in respect of property, plant and equipment of the European division in the amount of $73 million.

Foreign exchange movements

In 2012, we recorded a foreign exchange gain in the amount of $23 million as compared to a $1 million loss in 2011. In addition, we recognised a foreign exchange gain from exchange rate fluctuations in the amount of $48 million (net of income tax) in 2012 as compared to a $54 million loss (net of income tax) in 2011 in the statement of other comprehensive income. The amount in the statement of comprehensive income represents the effective portion of foreign exchange gains or losses on our hedging instruments.

Net finance costs

Finance costs decreased by 2% or $6 million as result of the repayment of part of the debts in 2012 and the currency translation effect. At the same time, the weighted average nominal interest rate remained relatively flat at 6.92% as of 31 December 2011 as compared to 6.99% as of 31 December 2012.

Finance income decreased by 30% or $10 million due to a decrease in dividend income from an investee.

As a result, our net finance costs increased by 1% or $4 million year-on-year.

Income tax

TMK, as a global company with production facilities and trading companies located in Russia, the CIS, the United States, and Europe, is exposed to local taxes charged to businesses. In 2011 and 2012, the following corporate income tax rates were in force in the countries where our production facilities are located: 20% in Russia, 35% (federal rate) in the United States and 16% in Romania.

In 2012, a pre-tax income of $405 million was reported as compared to $544 million in 2011; an income tax expense of $123 million was recognised as compared to $159 million in 2011. Our effective income tax rate increased by 1% to 30% year-onyear.

Cash flows

The following table illustrates our cash flows:

20122011ChangeChange
in million dollarsin million dollarsin %
Net cash provided by operating activities92978714118 %
Payments for property and equipment(445)(402)(43)11 %
Acquisition of subsidiaries(33)(4)(29)-
Dividends received1425(11)-44 %
Other investments945147 %1
Free Cash Flow4744106416 %
Change in loans(148)4(152)-
Interest paid(263)(286)23-8 %
Other financial activities1(4)5-
Free Cash Flow to Equity64124(60)-48 %
Dividends paid(79)(49)(30)62 %
Effect of exchange rate changes10(2)12-
Cash and cash equivalents at the beginning of period2311587346 %
Cash and cash equivalents at period end225231(6)-2 %
20122011ChangeChange
in million dollarsin million dollarsin %
Net cash provided by operating activities92978714118 %
Payments for property and equipment(445)(402)(43)11 %
Acquisition of subsidiaries(33)(4)(29)-
Dividends received1425(11)-44 %
Other investments945147 %1
Free Cash Flow4744106416 %
Change in loans(148)4(152)-
Interest paid(263)(286)23-8 %
Other financial activities1(4)5-
Free Cash Flow to Equity64124(60)-48 %
Dividends paid(79)(49)(30)62 %
Effect of exchange rate changes10(2)12-
Cash and cash equivalents at the beginning of period2311587346 %
Cash and cash equivalents at period end225231(6)-2 %

Net cash flows provided by operating activities increased by 18% to $929 million from $787 million in 2011, mainly due to a much higher increase in working capital in 2011 as compared to the moderate growth in 2012. In 2012, working capital increased by $34 million, while in 2011 it grew by $156 million.

A net repayment of borrowings totalled $148 million as compared to $4 million of net proceeds from borrowings last year.

Cash spent for acquisition of subsidiaries in 2012 relates primarily to the acquisition of 55% of the voting shares of Gulf International Pipe Industry LLC, a company based in the Sultanate of Oman and specialising in the manufacturing of welded steel pipes.

In 2012, we paid a full year dividend in respect of 2011 and interim dividend in respect of the first half of 2012 in the total amount of $76 million to the shareholders of OAO TMK. In 2011, we paid a full year dividend in respect of 2010 and an interim dividend in respect of the first half of 2011 in the total amount of $47 million. We paid dividends in the amount of $3 million and $2 million to our non-controlling interest owners in 2012 and 2011, respectively.

Indebtedness

The following table illustrates the maturity profile of our total financial debt:

1 year or less1 to 3 yearsOver 3 yearsUnamortised debt issue costsTotal debt
in millions of U.S. dollars
As of 31 December 20122,0731,3511,474(14)3,885
As of 31 December 20112021,4681,740(23)3,787
1 year or less1 to 3 yearsOver 3 yearsUnamortised debt issue costsTotal debt
in millions of U.S. dollars
As of 31 December 20122,0731,3511,474(14)3,885
As of 31 December 20112021,4681,740(23)3,787

Our overall financial debt increased from $3,787 million as of 31 December 2011 to $3,885 million as of 31 December 2012. The appreciation of the Rouble against the U.S. dollar resulted in an increase of the U.S. dollar equivalent of the Rouble-denominated loans and borrowings as of December 31, 2012. The acquisition of a subsidiary with a $98 million debt on its balance also increased our debt. During 2012, the net repayment of loans and borrowings was $148 million (including partial repayment of the acquired subsidiary’s debt).

As of 31 December 2012, our debt portfolio comprised diversified debt instruments, including bank loans, bonds, convertible bonds, and other credit facilities. As of 31 December 2012, our Rouble-denominated portion of debt represented 46%, the U.S. dollar-denominated portion of debt represented 48%, euro-denominated portion of debt represented 5%, and other currencies represented less than 1% of our total debt.

The share of short-term portion of debt increased to 27% as of 31 December 2012 as compared to 16% as of 31 December 2011, as the convertible bond liability was included in our short-term portion of debt as of 31 December 2012 due to the bondholders’ right to request redemption of convertible bonds on the third anniversary following the issue date. However at the time of the issuance of this management discussion and analysis, we are aware that no bondholders have executed or will execute their rights to request redemption of the bonds1, and at the closest reporting date the convertible bonds will be classified as the longterm liability.

As of 31 December 2012, our debt portfolio comprised fixed and floating interest rate debt facilities. Borrowings with a floating interest rate represented $667 million or 17% of total debt, and borrowings with a fixed interest rate represented $3,165 million or 83% of our total debt.

As of 31 December of 2012, our weighted average nominal interest rate was 6.99%, which was a 7 basis point increase compared to 31 December 2011.

Our most significant credit facilities as of 31 December 2012 were as follows:

Type of borrowingBankOriginal currencyOutstanding principal amountMaturity period
in millions of U.S. dollars
7.75% LPNUSD500January 2018
LoanSberbank of RussiaRUR489September 2015
5.25% convertible bondsUSD413February 2015
LoanGazprombankUSD400January 2017
LoanAlfa-BankRUR336November 2016
LoanNordea BankUSD200January 2017
Bonds, series БО-01RUR165October 2013
LoanGazprombankRUR151March 2014
LoanSberbank of RussiaRUR145April 2016
LoanWells FargoUSD121August 2016
LoanGazprombankRUR113February 2014
LoanGazprombankRUR112January 2014
3,143
Other credit facilities  674 
TOTAL LOANS AND BORROWINGS3,817
Type of borrowingBankOriginal currencyOutstanding principal amountMaturity period
in millions of U.S. dollars
7.75% LPNUSD500January 2018
LoanSberbank of RussiaRUR489September 2015
5.25% convertible bondsUSD413February 2015
LoanGazprombankUSD400January 2017
LoanAlfa-BankRUR336November 2016
LoanNordea BankUSD200January 2017
Bonds, series БО-01RUR165October 2013
LoanGazprombankRUR151March 2014
LoanSberbank of RussiaRUR145April 2016
LoanWells FargoUSD121August 2016
LoanGazprombankRUR113February 2014
LoanGazprombankRUR112January 2014
3,143
Other credit facilities  674 
TOTAL LOANS AND BORROWINGS3,817

1 According to IAS 10 “Events after the Reporting Period”, this is a non-adjusting event.

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