Financial and operating highlights

In 2011, our operating results demonstrated a positive trend as compared to 2010. The following table provides consolidated operating results for the periods presented:

  Year ended December 31  
  2011 2010 Change
  in millions of U.S. dollars %
1 “Operating expenses” include selling and distribution, general and administrative, advertising and promotion, research and development, impairment/reversal of assets, gain on disposal of assets held for sale and net other operating income/expense.
2 Net income adjusted for gain/loss on changes in fair value of derivative financial instrument is presented in the table because we consider it an important supplemental measure of our performance. Net income adjusted for gain/loss on changes in fair value of derivative financial instrument is not a measurement of performance under IFRS and should not be considered as an alternative to net income or any other performance measures derived in accordance with IFRS.
3 Adjusted net income margin is calculated as the quotient of Net Income adjusted for gain/loss on changes in fair value of derivative instrument divided by Revenue.
4 Adjusted EBITDA — See “Selected financial data”.
Sales volume (in thousand tonnes) 4,185 3,962 6%
Revenue 6,754 5,579 21%
Cost of sales (5,307) (4,285) 24%
GROSS PROFIT 1,446 1,293 12%
GROSS PROFIT MARGIN 21% 23%  
Operating expenses1 (675) (694) (3)%
Foreign exchange (loss)/gain, net (1) 10 (110)%
Gain/(loss) on changes in fair value of derivative financial instrument 45 (12) (475)%
Finance costs, net (271) (412) (34)%
INCOME BEFORE TAX 544 185 194%
Income tax expense (159) (81) 96%
NET INCOME 385 104 270%
NET INCOME ADJUSTED FOR GAIN/ (LOSS) ON CHANGES IN FAIR VALUE OF DERIVATIVE INSTRUMENT2 340 116 193%
ADJUSTED NET INCOME MARGIN3 5% 2%  
ADJUSTED EBITDA4 1,050 942 11%
ADJUSTED EBITDA MARGIN 16% 17%  

For the purposes of this report, net income has been adjusted for the gain on changes in fair value of the derivative financial instrument in the amount of $45 million in 2011 as compared to the adjustment for the comparable loss of $12 million in 2010 to reflect management’s opinion in respect of the treatment of the conversion option (see “Gain/loss on changes in fair value of derivative financial instrument”).

Following market growth and increased sales volumes, our financial performance and financial indicators improved in 2011. Our operating and financial results by quarter nevertheless demonstrated differing development trends. The following table sets forth information regarding certain key financial indicators as of the dates and for the quarters ended:

  December 31, 2011 September 30, 2011 March 31, 2011 December 31, 2010
  in millions of U.S. dollars
5 Net-Debt-to-EBITDA ratio is defined as the quotient of Net Debt at the end of the given reporting date divided by the Adjusted EBITDA for the 12 months immediately preceding the given reporting date. Adjusted EBITDA — See “Selected financial data”.
Sales volume 1,017 989 1,119 1,060 1,110
Revenue 1,603 1,604 1,878 1,669 1,648
Adjusted EBITDA 223 202 332 293 293
Adjusted EBITDA margin 14% 13% 18% 18% 18%
Net debt-to-EBITDA ratio LTM5 3.4 3.2 3.3 3.7 3.9

After two successful quarters, our financial and operating results were negatively affected in the third quarter of 2011 by lower sales of welded large-diameter pipe as a result of the completion of certain major projects in Russia. In addition to the decrease in sales volumes of large-diameter pipe shift in our product mix negatively affected the profitability of the Russian division. At the same time, the profitability of the U.S. welded pipe segment reduced as high cost inventory purchased in the second quarter was consumed. Repair expenses incurred at STZ, VTZ and SinTZ also adversely affected the profitability of the Group.

In the fourth quarter of 2011, our results of operations were higher than in the previous quarter, mainly because of the favorable changes in product mix. Share of seamless OCTG and seamless line pipe increased while share of seamless industrial and welded industrial pipe declined. However, sales volumes of the fourth quarter have not reached those of the first and second quarters, particularly, sales volumes of welded large diameter pipe remained flat as compared to those in the third quarter. At the same time, the decrease in the cost of scrap in the Russian division and the decrease in the cost of coil in the American division positively affected the cost per tonne of seamless pipe in the Russian division and the cost per tonne of welded pipe in the American division, respectively.

For the reasons mentioned above, Adjusted EBITDA decreased in the third quarter of 2011 and showed only moderate growth in the fourth quarter of 2011.

The decrease in our net debt as of December 31, 2011 as compared to December 31, 2010 was mainly due to the Russian rouble depreciation against the U.S. dollar, and increased cash balance. As a result the net debt-to-EBITDA ratio improved from 3.9 as of December 31, 2010 to 3.4 as of December 31, 2011.

Following the improvement in our operating performance and stronger financial position, we have resumed the payment of dividends. We distributed a final dividend in respect of 2010 and an interim dividend in respect of the first six months of 2011. No dividends have been paid since 2008.

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