Investor Presentaiton
Management's Discussion and Analysis
Nine months ended September 30, 2011
An increase in prices for energy and utilities consumed in the pipe and steel
production process resulted in the energy costs growth of U.S.$22 million in
the first nine months of 2011 compared to the corresponding period of 2010.
In the first nine months of 2011 compared to the corresponding period of
2010, on average, the electricity and natural gas tariffs in the Russian
division increased 14% and 15%, respectively. In the American division, the
average electricity tariff increased marginally and the average natural gas
tariff decreased 7% due to the regressive tariffs system. The average
electricity and natural gas tariffs in the European division were up 37% and
13%, respectively.
The effect of translation from the functional to the presentation currency
accounted for a U.S.$14 million increase in energy costs.
Depreciation
Depreciation expenses increased U.S.$34 million in the first nine months of
2011 compared to the corresponding period of 2010. The effect of
translation from the functional to the presentation currency accounted for a
U.S.$9 million increase. The principal share of the remaining growth relates
to the reduction of the estimated useful lives of some open-hearth furnaces,
pilger mill and 2520 welded pipe mill in the Russian division due to the
planned replacement of this equipment with the new one before the end of
the initially assessed useful lives.
Other costs
Other costs include repair and maintenance, contracted manufacture,
transportation among production sites, taxes and other expenses. Growth of
other expenses was consistent with the operating activity dynamics.
The effect of translation from the functional to the presentation currency
accounted for a U.S.$8 million increase.
Change in finished goods and work in progress
The gradual growth of finished goods and work in progress balances for the
first nine months of 2011 and 2010 reflects growing prices for raw materials
and tubular products as well as the increased stock driven by the growth of
sales volumes.
Gross profit
The following table shows gross profit and gross margin by reporting
segment for the periods presented below:
Nine-month period ended
30 September
2011
2010
Change
in millions of
in millions of
in %
in %
U.S. dollars
U.S. dollars
in millions of
U.S. dollars
802
21.7%
656
23.6%
146
233
20.2%
215
22.0%
18
80
27.0%
GROSS PROFIT
1,115
21.6%
41
913
23.7%
39
23.2%
202
Russia
America
Europe
In the first nine months of 2011, gross profit increased 22% or
U.S.$202 million as compared to the first nine months of 2010, and
amounted to U.S.$1,115 million. The gross margin decreased to 21.6% in
the first nine months of 2011.
Russia. The gross margin in the Russian division declined from 23.6% in
the first nine months of 2010 to 21.7% in the first nine months of 2011,
reflecting lower gross margin of large-diameter welded pipe, in particular,
as a result of completion of some higher-margin projects. The projects
included long-distance delivery terms which resulted in higher selling prices
and additional selling and distribution expenses. However the decrease in
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