Annual Report 2013

Year ended 31 December 2013 results

Results of operations

In 2013, our sales volumes slightly increased, however our main financial indicators decreased yearon- year. Our profitability ratios remained relatively flat.

20132012ChangeChange
in mln USDin mln USDin %
Sales volume (in thous. tonnes)4,2874,238491%
Revenue6,4326,688(256)(4%)
Cost of sales(5,074)(5,209)135(3%)
GROSS PROFIT1,3581,479(121)(8%)
GROSS PROFIT MARGIN21%22%
Net operating expenses1(754)(811)57(7%)
(Impairment) / Reversal of impairment of assets(5)(8)3(37)%
Foreign exchange gain/(loss), net(49)23(72)-
(Loss)/gain on changes in fair value of derivative8(7)16-
financial instrument
Finance costs, net(245)(275)30(11)%
INCOME BEFORE TAX312400(88)(22)%
Income tax expense(98)(123)25(20)%
NET INCOME215278(63)(23)%
NET INCOME ADJUSTED FOR GAIN/(LOSS) ON CHANGES206285(79)(28)%
IN FAIR VALUE OF DERIVATIVE INSTRUMENT2
ADJUSTED NET INCOME MARGIN33%4%
ADJUSTED EBITDA9521,028(77)(7)%
ADJUSTED EBITDA MARGIN15%15%

1 Net operating expenses include selling and distribution, general and administrative, advertising and promotion, research and development, share of profit in associate, gain on disposal of subsidiary andnet other operating income/(expense).

2 For the purposes of this report, net income has been adjusted for gain or loss on changes in fair value of the derivative financial instrument to reflect management’s opinion in respect of the treatment of the conversion option (see “Change in fair value of derivative financial instrument”). We consider it an important supplemental measure of our performance.

3 Adjusted net income margin is calculated as the quotient of Net Income adjusted for gain or loss on changes in the fair value of derivative instrument divided by Revenue.

Sales

In 2013, our consolidated revenue decreased by 4% or 256 mln USD mainly as a result of lower sales volumes of seamless pipe in the Russian division and a negative currency translation effect in the amount of 97 mln USD.

Sales by reporting segments are as follows

20132012ChangeChange
in mln USDin mln USDin %
Russia4,4834,714(231)(5)%
America1,6651,650151%
Europe284324(40)(12)%
TOTAL PIPE6,4326,688(256)(4)%
20132013ChangeChange
in mln USDin mln USDin %
Russia3,0853,159(74)(2)%
America1,02790312414%
Europe175176(1)(0.3)%
TOTAL PIPE4,2874,238491%

Sales by group of products are as follows

20132012ChangeChange
in mln USDin mln USDin %
Seamless pipe3,9604,134(175)(4)%
Welded pipe2,2012,257(56)(2)%
TOTAL PIPE6,1606,391(231)(4)%
Other operations272296(25)(8)%
TOTAL REVENUE6,4326,688(256)(4)%
20132013ChangeChange
in thous. tonnesin thous. tonnesin %
Seamless pipe2,4222,495(73)(3)%
Welded pipe1,8661,7431237%
TOTAL PIPE4,2874,238491%

Russia

The division’s revenue decreased by 5% or 231 mln USD year-on-year mostly as a result of lower seamless pipe sales and a negative currency translation effect in the amount of 109 mln USD.

Revenue from sales of seamless pipe decreased by 103 mln USD mainly due to lower sales volumes as we completed supplies for several large projects in the MENA region. This negative effect was not fully compensated by higher sales volumes in the Russian market and favourable sales mix.

Revenue from sales of welded pipe decreased by 6 mln USD. Unfavourable sales mix and lower prices for small diameter pipe were partially offset by higher sales volumes.

Revenue from other operations decreased by 13 mln USD.

America

In the American division, revenue increased by 1% or 15 mln USD year-on-year.

A decline in the amount of active rig count coupled with higher imports resulted in lower prices for seamless and welded pipe and negatively impacted American division revenue.

Despite unfavourable pricing environment revenue from sales of seamless pipe increased by 24 mln USD as a result ofhigher sales volumes and better product mix.

Revenue from sales of welded pipe fell by 18 mln USD mainly due to unfavourable sales mix, which was not fully compensated by sales volumes growth.

Revenue from other operations, mainly from field services andsales of fishing tools, increased by 8 mln USD.

Europe

In the European division revenue decreased by 12% or 40 mln USD year-on-year, primarily on weaker pricing and lower sales of steel billets. The favourable currency translation effect amounted to 11 mln USD.

Revenue from sales of seamless pipe decreased by 32 mln USD compared to the last year as a result of an unfavourable pricing along with the stronger competition in the weak E.U. market.

Revenue from other operations, mostly from sales of steel billets, declined by 19 mln USD as compared to last year following lower sales volumes as a result of the worsening market environment.

Gross profit

In 2013,our consolidated gross profit amounted to 1,358 mln USD,an 8% decrease as compared to last year. The unfavourable currency translation effect was 24 mln USD. Gross profit margin decreased to 21% from 22% in the previous year due to lower profitability in the American and European divisions.

Gross profitresults by reporting segmentsare as follows

20132012Change
in mln USDin % to revenuein mln USDin % to revenuein mln USD
Russia1,09224%1,11924%(27)
America21213%28517%(74)
Europe5419%7523%(21)
TOTAL GROSS PROFIT1,35821%1,47922%(121)

Gross profit results by group of productsare as follows

20132012Change
in mln USDin % to revenuein mln USDin % to revenuein mln USD
Seamless pipe1,07727%1,08526%(8)
Welded pipe24611%34215%(96)
TOTAL PIPE1,32321%1,42622%(104)
Other operations3513%5218%(17)
TOTAL GROSS PROFIT1,35821%1,47922%(121)

Russia

The division’s gross profit decreased by 27 mln USD a result of negative currency translation effect. Gross profit margin stayed almost flat at 24%.

Favourable sales mix resulted in a 48 mln USD increase in gross profit of seamless pipe despite lower sales volumes.

Gross profit of welded pipe decreased by 41 mln USD due to unfavourable sales mix that was not offset by higher sales volumes.

Gross profit from other operations decreased by 7 mln USD.

America

The American division’s gross profit decreased by 74 mln USD as compared to 2012. Gross profit margin declined to 13% from 17%.

The negative effect of unfavorable pricing environment was partially offset by lower raw materials prices and higher sales volumes resulting in a 50 mln USD and a 17 mln USD decrease in gross profit from sales of welded and seamless pipe respectively.

Gross profit from other operations decreased by 7 mln USD.

Europe

Given the weak trends in the E.U.market, gross profit in the European division decreased by 21 mln USD. Gross profit margin decreased from 23% to 19%.

Net operating expenses

Net operating expenses were lower by 7% or 57 mln USD. The share of net operating expenses, expressed as a percentage of revenue, stayed almost flat at 12%.

The decrease in net operating expenses was primarily due to a 54 mln USD decline in freight costs in the Russian division as a result of lower share of sales with long distance delivery terms. Amortisation in the American division declined by 10 mln USD. Our staff costs rose by 19 mln USD.

The currency translation effect accounted for an 11 mln USD decrease in net operating expenses.

Adjusted EBITDA

In 2013, adjusted EBITDA margin remained almost flat at 15%.

2013 2012Change
in mln USDin % to revenuein mln USDin % to revenuein mln USD
Russia77617%75916%17
America1459%21813%(73)
Europe3111%5216%(21)
TOTAL ADJUSTED EBITDA95215%1,02815%(77)

Russia

Adjusted EBITDA was higher by 2% or 17 mln USD. Gross profit decrease of 27 mln USD was fully compensated by decrease in selling, general and administrative expenses and other operating expenses. Adjusted EBITDA margin increased from 16% to 17%.

America

Adjusted EBITDA decreased by 34% or 73 mln USD as a result of lower gross profit. Adjusted EBITDA margin declined from 13% to 9%.

Europe

Adjusted EBITDA declined by 40% or 21 mln USD followinga gross profit decrease. Adjusted EBITDA margin dropped from 16% to 11%.

Impairment of assets

We tested our assets for impairment during the year. As of 31 December 2013, we determined in respect of certain property in Russian division that the carrying value of the property and goodwill exceeds its recoverable amount. As a result, we recognised the impairment loss in the amount of 4 mln USD and 1 mln USD in respect of property and goodwill respectively.

Foreign exchange movements

In 2013, we recordeda foreign exchange loss in the amount of 49 mln USD compared to a 23 mln USD gain in 2012. In addition, we recognised a foreign exchange loss from exchange rate fluctuations in the amount of 65 mln USD (net of income tax) in 201 3as compared to a 48 mln USD gain (net of income tax) in 2012 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 decreasedby 15% or 45 mln USD mainly following lower interest expenseas a result of borrowing costs capitalization and improved credit portfolio structure. The weighted average nominal interest rate was 6.72% as of 31 December 2013 as compared to 6.99% as of 31 December 2012.

Finance income decreasedby 15 mln USD due to a decrease in dividend income.

As a result, our net finance costs decreased by 11% or 30 mln USD 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 2012 and 2013, 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 2013, a pre-tax income of 312 mln USD was reported as compared to 400 mln USD in 2012. Income tax expense of 98 mln USD was recognised as compared to 123 mln USD in 2012. Our effective income tax rate stayed almost flat at 31%.

Cash flows

The following table illustrates our cash flows.

20132012ChangeChange
in mln USDin mln USDin %
Net cash provided by operating activities703929(225)(24)%
Payments for property and equipment(397)(445)49(11)%
Acquisition of subsidiaries(38)(33)(5)16%
Dividends received314(12)(81)%
Other investments99(0.1)(1)%
Free Cash Flow280474(194)(41)%
Change in loans(93)(148)54(37)%
Interest paid(254)(263)10(4)%
Other financial activities(3)1(4)-
Free Cash Flow to Equity(70)64(134)(209)%
Dividends paid(57)(79)22(28)%
Effect of exchange rate changes(5)10(15)-
Cash and cash equivalents at the beginning of period225231(6)(2)%
Cash and cash equivalents at period end93225(132)(59)%

Net cash flows provided by operating activities decreased by 24% to 703 mln USD from 929 mln USD in 2012, mainly due to a decline in operating profit and higher increase in working capital in 2013 as compared to 2012. In 2013, working capital increased by 159 mln USD, while in 2012 it grew by 34 mln USD.

A net repayment of borrowings totalled 93 mln USD as compared to 148 mln USD of net repayment of borrowings last year.

Cash spent for acquisition of subsidiaries in 2013 relates primarily to the acquisition of Pipe Services and Precision Manufacturing Business in the U.S. and final payment for 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 pipe.

In 2013, we paid a full year dividend in respect of 2012 in the total amount of 53 mln USD to the shareholders of OAO TMK. 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 mln USD to the shareholders of OAO TMK. We paid dividends in the amount of 4 mln USD and 3 mln USD to our non-controlling interest owners in 2013 and 2012, respectively.

Indebtedness

The following table illustrates the maturity profile of our total financial debt, mln USD

1 year or less1 to 3 yearsOver 3 yearsUnamortised
debt issue costs
Total debt
As of 31 December 20133991,4711,837(12)3,694
As of 31 December 20121,0731,3511,474(14)3,885

Our overall financial debt decreased from 3,885 mln USD as of 31 December 2012 to 3,694 mln USD as of 31 December 2013. The depreciation of the Rouble against the U.S. dollar resulted in a decrease of the U.S. dollar equivalent of the Rouble-denominated loans and borrowings as of 31 December 2013. Net repayment in 2013 was 93 mln USD.

As of 31 December 2013, our debt portfolio comprised diversified debt instruments, including bank loans, bonds, convertible bonds and other credit facilities. As of 31 December 2013, the U.S. dollar denominated portion of our debt represented 64%, Rouble-denominated portion of debt represented 32%, euro-denominated portion of debt represented 4% and other currencies represented less than 1% of our total debt.

In April 2013, we completed a placement of 500 mln USD Eurobonds maturing in 2020 to refinance Rouble-denominated debt. As a result the share of our short-term debt decreased to 11% as of 31 December 2013 compared to 27% as of 31 December 2012. Eurobonds placement also caused a growth of U.S. dollar-denominated portion of debt.

As of 31 December 2013, our debt portfolio comprised fixed and floating interest rate debt facilities. Borrowings with a floating interest rate represented 579 mln USD or 16% of total debt, and borrowings with a fixed interest rate represented 3,063 mln USD or 84% of our total debt.

As of 31 December 2013, our weighted average nominal interest rate was 6.72%, which was a 27 basis poin tdecrease compared to 31 December 2012.

Our most significant credit facilities as of 31 December 2013 were as follows:

Type of borrowingBankOriginal currencyOutstanding
principal amount
Maturity period
in mln USD
7.75% bonds USD500January 2018
6.75% bonds USD500April 2020
5.25% convertible bonds USD413February 2015
LoanGazprombankUSD400June 2017
LoanGazprombankRUB274March 2019
LoanNordea BankUSD200January 2017
LoanSberbank of RussiaRUB183September 2015
LoanSberbank of RussiaRUB178September 2015
LoanGazprombankRUB153October 2016
LoanWells FargoUSD145August 2016
2,946
Other credit facilities 675
TOTAL LOANS AND BORROWINGS 3,622