NLMK released 2Q 11 US GAAP financial results yesterday, which as we expected were strong and at the top of consensus market estimates. The improvement in quarterly financials was mainly driven by higher average prices, backed by seasonal growth of steel consumption and demand and better product mix.
As such, NLMK reported 2Q 11 revenues growth of 26% q-o-q to USD 2.98bn, while EBITDA increased by 43% q-o-q to USD 837mn and net income rose 50% to USD 587mn compared to 1Q 11. The company managed to increase profitability by 3ppt compared to 1Q 11 and posted a healthy EBITDA margin of 28% and a net income margin of 20%. Please see the table below for details.
Seasonally higher prices and better product mix behind strong results. During 2Q 11 NLMK saw its average selling price increase by 11% q-o-q to USD 826 per tonne driven by seasonally increased demand for steel, accompanied by 13% q-o-q higher sales volumes (of 3.1mn tonnes) with increased share of HVA products sales.
Although slab cash costs during the period also rose by 12% q-o-q (to USD 406 per tonne), we note that almost half of the apparent increase was related to a stronger rouble and only the remainder driven by increases in raw materials prices. Thus, it did not prevent NLMK from posting improved financials.
Weaker 3Q 11 margins are expected. According to NLMK management, 3Q 11 financials are expected to be slightly weaker compared to 2Q 11: revenue growth is expected to be about 10-15% q-o-q (with stable sales volumes) and EBITDA margin is expected to be in a lower 20-25% range.
One of the main reasons for the weaker outlook is apparently subdued demand in key export markets (e.g. Europe), which account for more than 60% of the company's sales, on the back of generally worse global macroeconomic conditions.
NLMK also expects increased pressures on the cost side with slab cash costs to rise further by 5% q-o-q in 3Q 11. The planned consolidation of Steel Invest and Finance European rolling division results should put additional pressure on overall production and operating costs in the short term with no significant additions to consolidated EBITDA figure.

Overall we remain positive about NLMK prospects in the medium and long term. The capacity extensions and modernization programs proceed according to schedule, while vertical integration should help the company cap the negative impact of raw materials prices growth.

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