Sales
In 2015, our consolidated revenue decreased by $1,882 million or 31% mainly as a result of a negative currency conversion effect in the amount of $1,828 million. Excluding this effect our revenue decreased by $54 million year-on-year.
Sales by reporting segments are as follows:
| 2015 | 2014 | Change | Change | |
|---|---|---|---|---|
| in thousand tonnes | in thousand tonnes | in % | ||
| Russia | 3,252 | 3,198 | 54 | 2% |
| America | 440 | 1,019 | (579) | (57)% |
| Europe | 178 | 185 | (6) | (3)% |
| TOTAL PIPE | 3,871 | 4,402 | (531) | (12)% |
| in million dollars | in millions dollars | in % | ||
| Russia | 3,189 | 3,973 | (784) | (20)% |
| America | 742 | 1,766 | (1,024) | (58)% |
| Europe | 196 | 270 | (74) | (27)% |
| TOTAL REVENUE | 4,127 | 6,009 | (1,882) | (31)% |
Sales by group of products are as follows:
| 2015 | 2014 | Change | Change | |
|---|---|---|---|---|
| in thousand tonnes | in thousand tonnes | in % | ||
| Seamless pipe | 2,410 | 2,560 | (150) | (6)% |
| Welded pipe | 1,461 | 1,842 | (381) | (21)% |
| TOTAL PIPE | 3,871 | 4,402 | (531) | (12)% |
| in million dollars | in millions dollars | in % | ||
| Seamless pipe | 2,598 | 3,748 | (1,151) | (31)% |
| Welded pipe | 1,346 | 1,998 | (652) | (33)% |
| TOTAL PIPE | 3,944 | 5,747 | (1,803) | (31)% |
| Other operations | 183 | 262 | (79) | (30)% |
| TOTAL REVENUE | 4,127 | 6,009 | (1,882) | (31)% |
USD 845 mconsolidated gross profit of TMK in 2015by USD 423 mrevenue from sales of seamless pipe increased due to better pricing and product mix in the Russian Division
Russia.
The division’s revenue decreased by $784 million or 20% year-on-year as a result of a negative currency conversion effect in the amount of $1,821 million. Excluding this effect revenue increased by $1,037 million.
Revenue from sales of seamless pipe increased by $423 million mainly due to better pricing and product mix.
Revenue from sales of welded pipe grew by $560 million due to a significant growth in large diameter pipe sales volumes, also resulted in a better product mix.
Revenue from other operations increased by $54 million reflecting a significant growth in billets sales.
America.
In the American division, revenue decreased by $1,024 million or 58% year-on-year.
Lower drilling activity and reduced exploration and production expenses in North America caused a significant drop in sales volumes, primarily OCTG, and weaker pricing. As a result of unfavorable market environment revenue from sales of both seamless and welded pipe fell by $395 million and $590 million respectively.
Revenue from other operations decreased by $39 million.
Europe.
In the European division, revenue decreased by $74 million or 27% year-on-year. Unfavorable currency conversion effect amounted to $6 million.
Revenue from sales of seamless pipe decreased by $49 million as compared to the last year mostly as a result of weaker pricing.
Revenue from other operations, mostly from billets sales, declined by $19 million as compared to previous year following lower sales volumes.
Gross profit
In 2015, our consolidated gross profit decreased by $325 million or 28% year-on-year and amounted to $845 million. The unfavorable currency conversion effect was $432 million. Excluding this effect our gross profit increased by $107 million. Gross profit margin increased to 20% from 19% in the previous year.
Gross profit results by reporting segments are as follows:
| 2015 | 2014 | Change | |||
|---|---|---|---|---|---|
| in million dollars | in % to revenue | in million dollars | in % to revenue | in million dollars | |
| Russia | 817 | 26% | 891 | 22% | (74) |
| America | (18) | (2)% | 223 | 13% | (241) |
| Europe | 46 | 24% | 55 | 21% | (9) |
| TOTAL GROSS PROFIT | 845 | 20% | 1,169 | 19% | (325) |
Gross profit results by group of products are as follows:
| 2015 | 2014 | Change | |||
|---|---|---|---|---|---|
| in million dollars | in % to revenue | in million dollars | in % to revenue | in million dollars | |
| Seamless pipe | 657 | 25% | 907 | 24% | (250) |
| Welded pipe | 170 | 13% | 239 | 12% | (69) |
| TOTAL PIPE | 826 | 21% | 1,146 | 20% | (320) |
| Other operations | 18 | 10% | 23 | 9% | (5) |
| TOTAL GROSS PROFIT | 845 | 20% | 1,169 | 19% | (325) |
by 4%gross profit margin increased in the Russian Division
Russia.
The division’s gross profit decreased by $74 million as a result of a negative currency conversion effect in the amount of $430 million. Excluding this effect gross profit increased by $356 million. Gross profit margin increased from 22% to 26%.
Gross profit of seamless pipe increased by $225 million as a result of better pricing and product mix.
Gross profit of welded pipe increased by $127 million due to favorable sales mix following higher LD share in sales volumes.
Gross profit from other operations increased by $5 million.
America.
The American division’s gross profit decreased by $241 million as compared to 2014. Gross loss for 2015 amounted to $18 million.
Gross profit from both seamless and welded pipe sales decreased by $156 million and $84 million respectively on the back of unfavorable market environment resulted in lower sales volumes and weaker pricing. A drop in prices wasn’t fully offset by a decrease in raw material prices. Gross loss from welded pipe sales was $64 million.
Gross profit from other operations decreased by $2 million.
Europe.
Gross profit in the European division decreased by $9 million as a negative effect of unfavorable pricing environment was not fully offset by lower raw material prices. Gross profit margin grew from 21% to 24% as a result of higher seamless pipe share in total sales volume.
Net operating expenses
Net operating expenses were lower by $170 million or 24% due to a negative currency translation effect. The share of net operating expenses, expressed as a percentage of revenue, was 13% compared to 12% in 2014.
Adjusted EBITDA
In 2015, adjusted EBITDA margin increased to 15% from 13% in the previous year following better results of our Russian division.
| 2015 | 2014 | Change | |||
|---|---|---|---|---|---|
| in million dollars | in % to revenue | in million dollars | in % to revenue | in million dollars | |
| Russia | 629 | 20% | 614 | 15% | 15 |
| America | (23) | (3)% | 159 | 9% | (181) |
| Europe | 30 | 15% | 32 | 12% | (2) |
| TOTAL ADJUSTED EBITDA | 636 | 15% | 804 | 13% | (168) |
by 3%Adjusted EBITDA in Russian Division grew in 2015
Russia.
Adjusted EBITDA was higher by $15 million or 3%. Gross profit decrease was compensated by lower selling, general and administrative expenses. Adjusted EBITDA margin increased from 15% to 20%.
America.
Adjusted EBITDA was negative and amounted to minus $23 million. Adjusted EBITDA decreased by $181 million as compared to 2014 following a decline in gross profit.
Europe.
Adjusted EBITDA decreased by $2 million as compared to 2014. Adjusted EBITDA margin improved from 12% to 15%.
Impairment of assets
We tested our assets for impairment during the year. As at December 31, 2015, we recognised the impairment loss of $352 million, which mostly related to impairment of American division goodwill. In 2014, the impairment loss was $153 million.
Foreign exchange movements
In 2015, we recorded a foreign exchange loss in the amount of $141 million as compared to a $301 million loss in 2014. In addition, we recognised a foreign exchange loss from exchange rate fluctuations in the amount of $184 million (net of income tax) in 2015 as compared to a $482 million loss (net of income tax) in 2014 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
Net finance costs increased by $43 million or 19% mainly following higher interest expense. The weighted average nominal interest rate was 9.06% as of 31 December 2015 as compared to 7.26% as of 31 December 2014.
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 2014 and 2015, 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 2015, a pre-tax loss of $443 million was reported as compared to $201 million pre-tax loss in 2014. Income tax benefit of $75 million was recognised as compared to $15 million of income tax expense in 2014.
Cash flows
The following table illustrates our cash flows:
| 2015 | 2014 | Change | |
|---|---|---|---|
| in million dollars | in million dollars | ||
| NET CASH PROVIDED BY OPERATING ACTIVITIES | 684 | 595 | 89 |
| Payments for property and equipment | (208) | (293) | 85 |
| Acquisition of subsidiaries | (2) | (60) | 58 |
| Dividends received | 0 | 0 | 0 |
| Other investments | 25 | 10 | 15 |
| FREE CASH FLOW | 498 | 252 | 246 |
| Change in loans | (193) | 154 | (347) |
| Interest paid | (274) | (251) | (24) |
| Other financial activities | 128 | 95 | 33 |
| FREE CASH FLOW TO EQUITY | 158 | 251 | (92) |
| Dividends paid | (41) | (51) | 10 |
| Effect of exchange rate changes | (65) | (40) | (25) |
| Cash and cash equivalents at the beginning of period | 253 | 93 | 160 |
| Cash and cash equivalents at period end | 305 | 253 | 52 |
by USD 422 moverall financial debt decreased as compared to 2014
Net cash flows provided by operating activities increased by 15% to $684 million from $595 million in 2014, mainly due to working capital changes. In 2015, working capital decreased by $105 million compared to a $159 million increase in 2014.
Net repayment of borrowings totalled $193 million as compared to $154 million of proceeds from borrowings in 2014.
Growth in other financial activities was caused by proceeds from sales of treasury shares.
Cash and cash equivalents at the end of the period amounted to $305 million as compared to $253 million at the end of 2014.
Indebtedness
Our overall financial debt decreased from $3,223 million as of 31 December 2014 to $2,801 million as of 31 December 2015 partially influenced by the depreciation of the rouble against the U.S. dollar. Net repayment of borrowings in 2015 was $193 million. Our net debt decreased to $2,496 million as compared to $2,969 million as of 31 December 2014.
As of 31 December 2015, our debt portfolio comprised of diversified debt instruments, including bank loans, bonds and other credit facilities. As of 31 December 2015, the U.S. dollar-denominated portion of our debt represented 63%, rouble-denominated portion of debt represented 34%, euro-denominated portion of debt represented 3% of our total debt.
The share of our short-term debt decreased to 21% as of 31 December 2015 compared to 24% as of 31 December 2014.
As of 31 December 2015, our debt portfolio comprised fixed and floating interest rate debt facilities. Borrowings with a floating interest rate represented $261 million or 9% of total debt, and borrowings with a fixed interest rate represented $2,494 million or 91% of our total debt.
As of 31 December of 2015, our weighted average nominal interest rate was 9.06%, which was a 180 basis point increase compared to 31 December 2014.
Our most significant credit facilities as of 31 December 2015 were as follows:
| Type of borrowing | Bank | Original currency | Outstanding principal amount | Maturity period |
|---|---|---|---|---|
| in millions of U.S. dollars | ||||
| 6.75% bonds | USD | 500 | April 2020 | |
| 7.75% bonds | USD | 409 | January 2018 | |
| Loan | Gazprombank | USD | 400 | June 2017 |
| Loan | Gazenergobank | RUR | 233 | September 2025 |
| Loan | Sberbank of Russia | RUR | 178 | December 2016 |
| Loan | Alfa Bank | USD | 150 | January 2019 |
| Loan | Sberbank of Russia | RUR | 137 | August 2019 |
| Loan | Gazprombank | RUR | 123 | March 2019 |
| Loan | Wells Fargo | USD | 80 | August 2016 |
| Loan | Alfa Bank | USD | 80 | April 2018 |
| 2,291 | ||||
| Other credit facilities | 447 | |||
| TOTAL LOANS AND BORROWINGS | 2,738 | |||
Development trends
For the full year 2016, we anticipate OCTG consumption in Russia to be almost flat compared to 2015. We also believe LDP demand to remain high to meet maintenance needs and support trunk pipeline construction projects. Overall, the Russian division margin is expected to be nearly unchanged compared to the level of 2015.
In the U.S., market conditions continue to be challenging, with weak demand for oil and gas pipe due to low drilling volumes, large inventories, and continued low-priced imports. The American pipe market is not expected to recover before 2017.
Pipe consumption in the European pipe market is also expected to remain low in the first quarter of 2016 with a gradual improvement no earlier than the second half of 2016.