TMK Announces Preliminary Results for 2007

This trading update contains forward looking statements concerning future events. Forward looking statements are based on current information and assumptions of TMK management concerning known and unknown risks and uncertainties. Preliminary financial figures have not been audited and can differ from actual results. TMK will present audited IFRS full year 2007 results in May 2008.

 

2007 was a successful yet challenging year for the Company given the scale of ongoing investment projects at its mills. Nevertheless, TMK managed to continue improving its production and overall financial results.

 

For FY 2007, TMK expects revenues to exceed $4 bln, an increase of about 20% over 2006, on the back of strong demand for pipes and a favourable pricing environment. Increase in EBITDA for 2007 is expected to be in the area of 15%; EBITDA margin for the full year is expected to be slightly lower than for the first half of 2007 and the full year 2006. Profitability in the second half of 2007 was negatively affected by the ongoing installation of a PQF mill at Tagmet. A related seamless rolling mill stoppage since October, necessary to install the new mill, resulted in deteriorating product mix and increasing share of fixed costs.

 

As previously stated, in 2007 TMK increased shipments of tubular goods by 1.9% over 2006. Seamless pipes shipments increased by 4.2% compared to 2006. It is worth noting that this growth in seamless pipe shipments was achieved during the extensive upgrading of production facilities.  

 

In 2007, TMK managed to achieve higher than expected prices for its products. TMK’s prices for seamless OCTG pipes increased by 20% during 2007, while TMK’s prices for seamless line pipes rose by 14%. Seamless industrial pipe prices grew by around 12%.

 

Growth in TMK’s large diameter welded pipe prices was in the area of 20%, above trends in the prices of coils and plates. Prices for industrial welded pipes were relatively flat in 2007 as a result of intensifying competition.

 

Despite some weakness observed in the global markets, particularly in North America, the Russian seamless pipe market remained strong, fuelled by increasing E&P spending from Russian oil and gas companies. The Russian pipe market grew by 13%, while the seamless OCTG pipes market increased by 15%.

 

Given the more favourable situation in the Russian market, TMK increased its domestic sales by decreasing exports from its Russian plants by 8%. Consequently, the share of non-Russian sales volumes decreased to 28.5%.

 

The largest customers for TMK’s pipes in the Russian market remained TNK-BP, Gazprom, Surgutneftegas, Rosneft, and Lukoil.

 

In 2007, for the second year in a row, prices for scrap increased considerably. TMK prices for scrap and pig iron increased by as much as 30%.

 

Increase in prices for coils and plates in the fourth quarter 2007 compared to the fourth quarter 2006 was in the area of 6-7% with a notable spike in the middle of this period.  

 

2008 promises to be a key year for the development of TMK capacities with four major equipment launches in the pipeline – a PQF mill at Tagmet, a large diameter longitudinal pipe mill and a seamless capacity upgrade at Volzhsky and an electric arc furnace at Seversky. Despite significant additional capacity coming online, TMK expects moderate growth in volumes since the new equipment requires several months to attain operational capacity. This will provide for capacity debottlenecking by the beginning of 2009.

 

TMK expects the situation on the global pipe markets to improve, as the destocking in the U.S. seems to be coming to end.

 

As a result, the Company expects visible improvements in financials; however, rapidly rising steel prices might constrain margins. Launching new capacity will have a positive impact on the Company’s product mix and profitability starting from 2009.