OJSC Novolipetsk Steel (NLMK), the LSE listed leading Russian steel producer, today announces its consolidated results for the first half of 2007.

Highlights:

Strong H1 2007 financial results

- Sales revenues amounted to USD 3,609.1 million (+42% YoY)

- Cash flows from operating activities were USD 1,366.9 million (2.6 times YoY)

- EBITDA* amounted to USD 1,570.6  million (+59% YoY);  EBITDA margin 44%

- Cash and cash equivalents USD 1,348.6  million as at 30 June, 2007

Recent Developments:

- Continued progress in implementing the Group’s internal restructuring plan to  divest assets classified as non-core asset according to a decision of NLMK’s Board of Directors:

 Disposal§ of stakes in energy assets for USD 78.7 million in February 2007. Proceeds from the transaction were directed to the modernization and development of in-house energy facilities.

 Disposal of the Company’s 50% stake in OJSC Lipetskcombank for USD 47.7 million.§

- Prokopievskugol Group of Coal Companies was sold to a Municipal State Company representing the City Administration of Prokopievsk for USD1 in April 2007.

- Total capex in H1 2007 reached USD 395.4 million. In Q2 2007 the major projects under way within the Phase 2 of the Technical Upgrading Programme were as follows:

 Contract§ signed with Siemens VAI (Germany) to supply two new ladle furnaces, each with 160 tonnes capacity, for BOF production at the Company's main site in Lipetsk. The contract is valued at around EUR23 million. The new ladle furnaces will substantially expand NLMK’s product mix enabling the Company to better supply the automotive industry, white goods producers and the electrical engineering industry.

 Upgrading§ the reversing cold rolling mill for production of electrical grain-oriented steel at the main production site in Lipetsk. This will raise its capacity and enable an increase in the production of high value-added grades of grain-oriented steel with advanced magnetic properties.

 NLMK signed an equipment supply agreement with§ Andritz AG (Austria) to supply two new grain- and non-grain-oriented steel rolling mills, each with an annual capacity of 110,000 tonnes and one hot-dip-galvanizing line of 300,000 tonnes capacity.

 - At the Annual General Meeting held on 5 June, 2007 shareholders approved the total 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. (1 Global Depositary Share = 10 ordinary shares).

- The Board of Directors, at the meeting held on 24 August 2007, recommended for the approval by shareholders an interim dividend in respect of the first six months of 2007 of RUR 1.5 per ordinary share. Payment of the dividend is subject to shareholder approval at the Extraordinary General Meeting of NLMK on 28 September 2007.
 
- At the Annual General Meeting held on June 5, 2007, Bruno Bolfo, President of Duferco Group, was elected to the Board of Directors of Novolipetsk Steel (NLMK) as an independent director. Currently, the Company’s Board of Directors has four independent directors, or 50% of the total composition of the Board excluding the Chairman, which corresponds to best practice corporate governance.
 
Key financials for H1 2007

* EBITDA = Net income (post share of minorities) + income tax ± interest expense/(income) + depreciation ± losses/(gains ) on disposals of property, plant and equipment ± losses/(gains) on financial investment ± losses/(gains) from disposal of subsidiaries + accretion expense on asset retirement obligations – gains on loan restructuring 
 ** H1 2007 and Q1 2007 and H1 2006 are official reporting periods. Q2 2007 numbers are derived by computational method. 

Commenting on NLMK’s US GAAP H1 2007 results, Galina Aglyamova, Vice President Finance & CFO, said:

“NLMK has demonstrated strong financial results in H1 2007. The EBITDA margin stood at 44%, five percentage points higher than in H1 2006. Operating income surged 50% on a year-on-year basis.  The company’s sound performance was driven by the favorable pricing environment in our core markets, asset consolidation and a well-balanced sales structure.
“We believe NLMK Group should demonstrate strong financial results and strengthen its position among world’s most profitable steelmaking companies in the remainder 2007.
“At present, we observe signs of deterioration in steel market conditions that may result in possible price weakness towards the end of the year. However, NLMK’s diversified sales structure, strong balance sheet and stable cash flow should enable us to reduce these risks and secure the company’s operational stability.”

Management comments

In recent years, NLMK has maintained its position as one of the most efficient steel producers in the world. The main drivers contributing to the Company’s efficiency were both the favorable pricing environment in the steel market and implementation of the 2nd phase of the Technical Upgrading Programme of Company’s “Sustainable Growth Strategy 2007-2011”.  

The “Sustainable Growth Strategy 2007-2011” was approved in 2006. The key targets of the strategy by 2012 are an increase of crude steel production to 12.4 mln tpy (+40%), an increase of flat rolled steel production by 90%, securing 100% self-sufficiency for major raw materials, further development of high value-added product portfolio and an increase of energy self-sufficiency at the major production site in Lipetsk. 

In H1 2007, NLMK substantially increase the sales of high value-added products. The commissioning of the new hot dip galvanizing line enabled the Group to increase the production of hot dip galvanized and pre-painted steel. The consolidation of VIZ-Stal since August 2006 contributed to the growth of electrical steel production in H1 2007. The production of the electrical steel at the Group level amounted to 365 thousand tonnes representing a 125 thousand tonnes increase (+52%) compared with H1 2006.

The crude steel production in Q2 2007 decreased by 139 thousand tonnes due to the temporary underperformance of blast furnace ?6. The temporary underperformance resulted in a decrease of the production level during April – August. At present, the blast furnace is functioning at a regular capacity.

The geographical sales structure at the group level has undergone substantial changes in H1 2007 compared with H1 2006. We observed an increase of rolled steel domestic sales. In H1 2007, the rolled products sales volume on the domestic market was 1.33 million tonnes. This represents a 41.2 thousand tonnes increase compared with H1 2006. The sales of higher value-added products demonstrated the most substantial growth. The sales of coated and electrical steel increased by 71.9 thousand tonnes (+28%) and 24.5 thousand tonnes (+62%) compared with H1 2006 respectively. The decrease of sales in North America in H1 2007 was caused by the worsening of the market situation in the region compared with NLMK’s traditional export markets such as European Union (EU), Turkey and the Middle East.

Favorable steel market conditions in H1 2007 were the main factor that resulted in a substantial growth of sales revenue and financial results as compared to H1 2006. Thus, sales revenue in H1 2007 amounted to USD 3,609.1 million (+42% compared to H1 2006), operating profit amounted to USD1,384.1  million (+50%) and EBITDA equaled USD1,570.6 million (+59%).

The acquisition of Altai-koks in April 2006 and VIZ-Stal in August 2006 as well as the disposal of non-core assets have also contributed to the growth of consolidated financial results in H1 2007.

Furthermore, NLMK has changed export delivery conditions.  Starting from March 2006, transportation costs to customers, border terminal or sea port are included in the product price.
Net profit in H1 2007 amounted to USD 1,065.0 million.  This was 13% ahead of H1 2006.

Net profit was impacted by the disposals of Lebedinsky GOK in H1 2006 and Lipetskcombank and Prokopievskugol Group of Coal Companies in H1 2007. If we exclude the results of these one-off activities, the Company’s net profit in H1 2007 grew by 57%.

The growth of steel prices in Q2 2007 resulted in an increase of 33% of the net profit of the Group compared with Q1 2007.

The Group is generating robust operating cash flow. In H1 2007, net cash flow received from operating activities amounted to USD 1,366.9 million, an increase of 160% compared to H1 2006. The Group’s strong operating cash flow ensures its high level of financial sustainability. 

 Steel Segment

The steel segment is the key segment of the Group. In H1 2007 NLMK, DanSteel A/S and VIZ-Stal sales to external customers were the main contributors to the financial results of this segment. The steel segment’s share of consolidated revenue from external customers was over 90%.

In H1 2007 the steel segment produced 4.5 million tonnes of crude steel, 1.7 million tonnes of saleable slabs and 2.7 million tonnes of rolled products.

Revenue from external customers in H1 2007 amounted to USD 3,278.4 million, which is 37% higher than in H1 2006, operating profit USD 1,131.4 million (+36% compared to H1 2006). The major reason for this improvement is the increase of prices of main products.  An additional factor is the consolidation of VIZ-Stal in August 2006.

Proceeds from the disposal of a stake in Lebedinsky GOK obtained in H1 2006 and loss associated with the restructuring of loan to the Prokopievskugol Group of Coal Companies in Q1 2007 resulted in a USD 122.2 million (or 13%) decrease of profit before minorities in this segment compared with H1 2006.

Sales revenue from external customers in Q2 2007 accounted for USD 1,679.7 million, an increase of 5% q-o-q. The main reason for the sales revenue improvement was the growth of steel product prices and sales volumes of VIZ-Stal.

In Q1 2007 prices for coal concentrate, iron ore and electricity, which were fixed until the end of the year, contributed to production costs stabilization and revenue growth in Q2 2007. 
A sharp increase of profit before minorities in Q2 2007 as compared with the previous quarter, an increase of USD228.6 million (+82%), is mainly attributable to costs incurred from restructuring the loan granted to Prokopievskugol Group of Companies in Q1 2007.

Mining segment

In H1 2007, NLMK’s mining segment comprised OJSC Stoilensky GOK, OJSC Dolomite and OJSC Stagdok.  These companies mainly supply raw materials to NLMK’s production facilities in Lipetsk and which also sell limited volumes outside the Group.

Iron ore producer Stoilensky GOK, the principal mining company within the Group, produced 5.8 million tonnes of iron-ore concentrate and 0.8 million tonnes of sinter ore in H1 2007. The output of Dolomite in the same period was 0.9 million tonnes of flux dolomite. Stagdok, which supplies limestone, produced 1.6 million tonnes of fluxing limestone in H1 2007.
  The mining segment’s revenue from external customers remained at the level of the previous period and equaled USD 43.1 million.

Intersegmental sales in H1 2007 rose by USD 180.6 million reaching USD 388.0 million. This increase resulted from price rises and volumes of iron ore concentrate shipped to NLMK. 
The segment’s revenue in Q2 2007, including intersegmental sales, remained at the level of the previous which resulted from stable volumes shipped and iron ore concentrate prices.
Operating profit in this segment in the second quarter of 2007 amounted to USD130.6 million, an increase of 5% q-o-q due to decrease of energy and maintenance costs.
As 90% of the mining segment’s sales in value terms are internal sales, the segment’s share of NLMK’s consolidated external revenue in H1 2007 was 1%.

 Coke-chemical segment

The coke-chemical segment comprises OJSC Altai-koks and its subsidiaries, which were consolidated within the Group from Q2 2006.  Altai-koks is one of the leading producers of coke in Russia. In H1 2007, Altai-koks produced 1,924,000 tonnes of coke of 6% moisture. The coke production volume in Q2 2007 was 1.1 million tonnes, which represents a 166.2 thousand tonnes increase compared with Q1 2007.

In H1 2007, the coking segment’s revenue from external customers was USD 243.2 million, while operating profit amounted to USD8.5 million. 

A 31% increase in sales revenue from external customers in Q2 2007 is attributable to the growth of sales volumes and prices both in the domestic and world markets.   
The coke-chemical segment’s share of H1 2007 consolidated revenue was 7%.

After putting into operation new coke battery #5 in Q4 2006, total annual production capacity reached 5.0 million tonnes of coke of 6% moisture.

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).
 In H1 2007, gross profit from other segments amounted to USD 24.4 million. It represents a decrease of USD 1.5 million compared with H1 2006. 

Income before minority interests rose in H1 2007 amounting to USD 135.7 million, which is primarily attributable to the waiver of Prokopievskugol obligations for the repayment of a loan within the framework of debt restructuring. The additional driver was the recognition of financial results on disposal of Prokopievskugol Group of Coal Companies and Lipetskcombank, recorded in “Gain from disposal of subsidiaries” line.

In Q2 2007 gross profit from other segments was USD 10.6 million, operating profit USD 6.1 million compared with an operating loss in the previous quarter of USD 17.6 million. The positive result of operating profit in Q2 2007 is attributable to disposal of the Prokopievskugol Group of Coal Companies.

Consolidated financial results

In H1 2007, NLMK’s sales revenue reached USD 3,609.1 million, an increase of 42% compared with the corresponding period of the previous year. The key factors contributing to the level of revenue and profit were:

 prices increases for the products sold by the Group§

 consoli§dation of Altai-koks 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 to customers, border terminal or sea port.

Gross profit in H1 2007 amounted to USD 1,748.2 million, an increase of 52% compared with H1 2006.  Operating profit was USD 1,384.1 million, an increase of 50%. 
H1 2007 EBITDA amounted to USD 1,570.6 million, an increase of 59% compared with the corresponding period of the previous year. The EBITDA margin for the first half 2007 was 44%, an increase of 5 percentage points compared with the first half 2006.

NLMK Group’s net profit in H1 2007 amounted to USD 1,065.0 million, an increase of 13% compared with the corresponding period last year. The decrease of net profit growth rates is due to a significant non-recurring income from the sale of stake in Lebedinsky GOK in H1 2006. If the effect of the non-recurring sale of assets is eliminated, NLMK’s net profit growth in H1 2007 would be 57%.

In Q2 2007 revenue grew by 6% or USD 108.7 million compared with Q1 2007. 

In Q1 2007 NLMK settled supply prices for coking coal concentrate, iron ore raw materials and energy until the end of the year, which resulted in stabilizing of costs and increase of  profit growth rates in Q2 2007.

Gross profit increased by 14% or USD 113.5 million compared with Q1 2007, while operating profit grew by 16% or USD 103.8 million.

Compared with Q1 2007, net profit for Q2 2007 grew by 33% which is attributable to recognition of financial results on disposal of Prokopievskugol Group of Coal Companies and Lipetskcombank in Q2 2007 that totaled USD 81.5 million. 

The consolidated income statement for H1 2007 recognizes equity in net earnings of Steel Invest and Finance S.A. (JV with Duferco Group) with total amount of USD 7.7 million.
According to unaudited IFRS financial statements of Steel Invest and Finance S.A. prepared by the management, H1 2007 revenue was USD 1,878.8 million, EBITDA USD142.6 million, and net profit USD 55.9 million

The financial results of Steel Invest and Finance S.A. are recognized in NLMK’s income statement with a reference to NLMK share in company’s authorized capital (50%), as well as adjustments in accordance with US GAAP principles. After completion of a fair valuation of the fixed assets of Steel Invest and Finance S.A and agreement of the final value of NLMK’s share the amount of corrections could be changed.

 Consolidated balance sheet data

 As of 30 June 2007, NLMK’s assets reached USD 9,411.5 million, an increase of 8% compared with 31 December 2006. 
The share of the Company’s own capital in the sources used to finance NLMK’s operations is permanently high and at the end of H1 2007 was 82%.

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.
NLMK’s highly liquid assets substantially exceed the amount of its debt. NLMK’s cash and cash equivalents position as at 30 June, 2007 amounted to USD 1.348,6 million, an increase of 100% (or USD 683.3 million) compared to 31 December, 2006.

In the first half of 2007, the annualized return on assets (ROA) was 23% and annualized return on equity (ROE) was 29%. These ratios are lower than in H1 2006 due to additional non-recurring gain from the divestment of NLMK’s interest in Lebedinsky GOK in Q1 2006.
 
Cash Flow
In H1 2007 net cash received from operating activities equaled USD1.366,9 million, a 160% increase compared with H1 2006.
Strong generation of operating cash flow allows NLMK to finance organic growth from its own cash funds without attracting substantial debt. In H1 2007 net cash received from operating activities exceeded purchases and construction of property, plant and equipment by 3.5 times. 

Cash outflow for investment activities in H1 2007 amounted to USD573.7 million, which is USD66 million less than in H1 2006.
The main cash outflow for investment activities in H1 2007 was associated with USD395.4 million investments in fixed assets.

Net cash flows associated with financial activities in H1 2007 amounted to USD130.6 million. The main cash outflows associated with financial activities are the repayment of short-term credits that amounted to USD225.4 million. The main cash flow from financing activities is associated with the proceeds from the 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 were USD78.5 million.

Cash and cash equivalents as at 30 June 2007 equaled USD1,348.6 million, which is double or USD683.3 million higher than as at 31 December 2006. 

Outlook
We expect to see the traditional softening of the Russian flat steel market due to seasonal factors towards the end of 2007. The world market is expected to be saturated with flat products, also due to the traditional slowdown at the end of the year. This will increase the risk of price falls in both export and domestic markets.

Despite this, in 2007 as a whole, we expect growth of sales revenue and operating profit. We are also forecasting 2007 EBITDA growth compared with 2006 numbers.