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Kazakhstan Kagazy (KAG)

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Friday 28 August, 2009

Kazakhstan Kagazy

Interim Management Statement

Interim Management Statement

Kazakhstan Kagazy

KAZAKHSTAN KAGAZY PLC

UNAUDITED FINANCIAL RESULTS FOR THE SIX MONTHS
ENDED JUNE 30, 2009

Kazakhstan Kagazy plc (the “Group” or “Kagazy”), Central Asia’s largest producer of paper, corrugated board and packaging, and a leading operator of commercial warehousing and industrial infrastructure facilities in Central Asia, today announced its unaudited consolidated financial results for the six months ended June 30, 2009. These results have been extracted from condensed consolidated financial statements.

HIGHLIGHTS FOR THE FIRST HALF YEAR

  • Results were significantly impacted by the appreciation of US dollar against Kazakh tenge by 20% year on year in the first half of 2009
  • Consolidated revenues of US$ 30.3 million
  • Gross profit declined by 13.8% year on year to US$ 12.5 million with gross profit margin expanding to 41.3%
  • EBITDA, Operating profit and Net profit include US$ 3.8 million non-cash gain1 from the acquisition of Astana Contract
  • EBITDA2 decreased by 20.3% year on year to US$ 4.7 million with EBITDA margin constant at 15.5%
  • Operating profit decreased by 86.7% year on year to US$ 5.6 million with operating profit margin of 18.5%
  • Net loss amounted to US$ 25.6 million
  • Net profit of US$ 1.8 million excluding foreign exchange losses of US$ 27.4 million
  • Total assets declined by 18.8% year on year to US$ 684.8 million

Alexander Valitov, Chief Executive Officer of Kazakhstan Kagazy plc, commented: “Kagazy continued to operate in a challenging market environment. The Group’s performance was impacted by the downturn in the domestic market and devaluation of the national currency. The

Group generated net profit of US$ 1.8 million during the first half, excluding foreign exchange losses. Kagazy’s results included a non-cash gain of US$ 3.8 million arising from the decrease in the acquisition price paid for Astana Contract.

In line with our expectations, the paper business maintained its leading position in the Central Asian paper market and generated nearly 10% year on year increase in production volumes of corrugated packaging. The Group continued to benefit from import substitution of food and pharmaceuticals and the increased demand for domestic products by consumers.

The Group’s commercial warehousing and industrial infrastructure segment’s results were impacted by a decrease in occupancy rates and fall of basic rental rates for high class warehouse space as a result of the reduction in commercial activity. Despite current market conditions, Kagazy has continued the construction of Logistics Centre and a container terminal within Astana city limits.

Following the end of the reporting period, we have increased production volumes of our paper products. Specifically, the output of container board rose to 4,000 tons per month in the last two months from 2,800 tons per month on average during the first half. This was the result of both the rise in internal consumption by Kagazy’s corrugating and packaging plant and the increase in external sales.

Production output of corrugated packaging increased to 7.3 million square metres in July and is expected to reach 8 million square metres in August, compared to 6.1 million square metres per month on average produced in the first half of 2009.

Our warehousing and logistics infrastructure business continues to operate in a challenging market environment as a result of the significant fall in export-import transactions. Currently Kagazy has utilised approximately 40% of its B class and 24% of A class warehouse space.

Looking forward we expect to see a continued growth in our production volumes in the paper business in the second half of 2009, while warehousing and logistics infrastructure segment is anticipated to remain weak.”

FINANCIAL SUMMARY

(US$ millions)     Jan-Jun 2009   Jan-Jun 2008   Year on Year Change
Revenues 30.3   38.1   (20.5%)
Gross profit 12.5 14.5 (13.8%)
Gross profit margin 41.3% 38.1%
EBITDA 4.7 5.9 (20.3%)
EBITDA margin 15.5% 15.5%
EBIT 5.6 42.0 (86.7%)
EBIT margin 18.5% 110.2%
Net (Loss) / Profit (25.6) 40.7 -
 

OPERATING REVIEW

Group

Kazakhstan Kagazy's consolidated revenues decreased by 20.5% year on year in the first half of 2009 and were impacted by the economic recession in Kazakhstan and the appreciation of US dollar against Kazakh tenge by 20% year on year during the reporting period. The paper segment accounted for 85.8% of consolidated revenues in the first six months of 2009 and performed ahead of management expectations.

Kagazy’s gross profit decreased by 13.8% year on year with gross profit margin expanding to 41.3% compared to 38.1% in the previous period.

The Group EBITDA declined by 20.3% year on year with EBITDA margin remaining constant at 15.5% in the first half of 2009.

Selling and administrative expenses decreased by 3.8% year on year to US$ 10.9 million from US$ 11.4 million a year ago.

Consolidated depreciation and amortization expense was up by 6.2% year on year to US$ 3.0 million from US$ 2.8 million as a result of the increase in the depreciable value of fixed assets.

The Group operating profit decreased by 86.7% year on year, with an operating margin declining to 18.5% as a result of the recognition of US$ 47.6 million of negative goodwill in the first half of 2008. Operating profit in the reporting period included US$ 3.8 million non-cash gain received as a result of the decrease in the consideration paid for the acquisition of Astana Contract.

Net finance costs, comprising interest expense and foreign exchange losses after the deduction of interest income and foreign exchange gains, amounted to US$ 30.2 million in the first half of 2009, compared to net finance costs of US$ 1.2 million in the corresponding period of 2008. Finance costs included foreign exchange losses of US$ 27.4 million on Euro and US dollar denominated borrowings following the Kazakh tenge devaluation in February of 2009.

The Group generated a net loss in the first half of 2009, and its results were impacted by foreign exchange losses. Excluding losses from foreign exchange Kagazy generated a net profit of US$ 1.8 million in the first six months of the year.

The Group's cash balances totalled US$ 35.1 million as at June 30, 2009, as compared to US$ 9.9 million at June 30, 2008. Net debt amounted to US$ 220.4 million as at June 30, 2009, compared to US$ 171.7 million as at June 30, 2008. The Group's cash balances stood at US$ 24.5 million as at August 27, 2009.

Paper

Kazakhstan Kagazy is the largest producer of paper, corrugated board and packaging products in Central Asia.

Production Volume     Jan-Jun 2009   Jan-Jun

2008

  Year on Year Change
Corrugated packaging (square metres) ('000) 36,692   33,375   9.9%
Container board (tons) 16,787 21,859 (23.2%)
 

The paper business accounted for the majority of Kazakhstan Kagazy’s consolidated revenues and performed ahead of management expectations in the first six months of 2009. Segment revenue declined by 20.4% year on year to US$ 26 million in the first half of 2009, compared to US$ 32.6 million for the corresponding period of 2008.

Segment production volume of corrugated packaging increased by 9.9% year on year. Kagazy continued to benefit from import substitution of food and pharmaceuticals, following the devaluation of the national currency and the increased demand for domestic products by consumers.

The production of container board was down 23.2% year on year in the first six months due to the continued decline in domestic demand.

Paper business revenues were further impacted by the decline in sales of the paper trading division following the fall in demand as a result of the economic crisis and higher import costs.

Commercial Warehousing and Industrial Infrastructure

PEAK, one of the leading operators of commercial warehousing and industrial infrastructure facilities in Central Asia, has contributed US$ 0.5 million of revenue to Kagazy's results in the first half of 2009, compared to US$ 2.4 million in the corresponding period of 2008.

A significant slow down in retail trade and decline in import volumes in the region have led to a decrease in occupancy rates and reduction of basic rental rate for high class warehouse space during the first half 2009. Vacancy rates in existing Kagazy’s warehouses have increased up to 50%. Challenging macroeconomic environment and the subsequent fall in the consumer demand have continued to impact the commercial warehousing segment in the first half.

Kagazy expects to perform an independent valuation of its commercial warehousing business at the year end. As of this date, there has been no impairment review carried out. The falling rental income and occupancy rates during 2009 may result in an impairment charge against the Group’s warehousing and logistics infrastructure assets. The results of any revaluation will be included in the annual financial statements for 2009.

Container Terminal Business with Warehousing

Astana Contract contributed US$ 3.8 million of revenue to Kagazy's consolidated results in the first half of 2009, following its acquisition in April 2008.

In April 2009, Kagazy paid US$ 13 million for the acquisition of Astana Contract in accordance with an additional agreement which was signed in February 2009. The remaining US$ 2 million payment is expected to be paid by the end of 2010.

In May 2009, Kagazy has terminated its agreement with CALM LLP, the operator of the container terminal, and assumed the management of the terminal and its warehouses. Kagazy has undertaken a number of initiatives to grow its client base.

The container services market has been significantly impacted by the reduction in construction activity and decline in imports of cars and construction materials. Despite the current market conditions Kagazy has continued its construction activity of Logistics Centre in Astana and a container terminal within Astana city limits which was initiated this year. The project has a direct access to railroad and two major national highways (Astana-Pavlodar and Astana-Petropavlovsk).

SIGNIFICANT EVENTS FOLLOWING THE END OF THE REPORTING PERIOD

In July 2009, Kazakhstan Kagazy appointed Alexander Valitov as Chief Executive Officer. Alexander Valitov replaced Yuriy Bogday, who has served as Chief Executive Officer since April 2008. Mr Bogday will head new projects outside the Group. Mr Valitov served as General Director of Kagazy Recycling LLP since January 2008, and will continue to perform the same duties as he has to date.

***

For further information, please visit www.kazakhstankagazy.com or contact:

Kazakhstan Kagazy

Alessandro Manghi

Chairman

Tel: +7 727 244 8787

[email protected]

 

Shared Value Limited
Larisa Kogut-MillingsLarisa Kogut-Millings

Investor Relations
Tel. +44 20 7321 5010Tel. +44 20 7321 5010

[email protected]

Kazakhstan Kagazy plc runs Central Asia’s largest producer of paper, corrugated board and packaging products. It also operates one of the leading developers of commercial warehousing and industrial infrastructure facilities in Kazakhstan through PEAK LLP, which owns approximately 769 hectares of prime land, strategically located in newly created industrial zones in Almaty, Astana and Aktyubinsk. The Group’s assets totalled approximately US$ 684.8 million as at June 30, 2009 and consolidated revenues amounted to approximately US$ 30.3 million for the first half of 2009. Kazakhstan Kagazy Plc’s securities are listed under the symbol “KAG” on the London Stock Exchange.

This interim statement contains certain forward-looking statements with respect to the financial condition, results, operations and businesses of Kazakhstan Kagazy plc. These statements and forecasts involve risk and uncertainty because they relate to events and depend upon circumstances that will occur in the future. There are a number of factors that could cause actual results or developments to differ materially from those expressed or implied by these forward-looking statements and forecasts. Nothing in this interim statement should be construed as a profit forecast.

KAZAKHSTAN KAGAZY PLC
UNAUDITED CONSOLIDATED BALANCE SHEET AS AT 30 JUNE 2009
AND AUDITED CONSOLIDATED BALANCE SHEET AS AT 31 DECEMBER 2008
(Amounts in thousands of U.S. dollars)

  30 Jun 2009   31 Dec 2008
Assets Unaudited Audited
Non-current assets
Property, plant and equipment 403 495 485 727
Investment property 92 509 115 213
Intangible assets 2 272 3 565
Prepayments 22 371 15 049
Other loans 3 697 3 614
VAT recoverable 15 076 18 178
Other non-current assets 61 1 652
539 481 642 998
Current assets
Inventories 89 076 89 128
Prepayments 6 288 32 483
Other current assets 223 1 720
Trade and other receivables 14 608 13 874
Cash and cash equivalents 35 140 62 736
145 335 199 941
Total assets 684 816 842 939
Equity and liabilities
Equity
Share capital 10 470 10 470
Share premium 244 340 244 340
Revaluation reserve 86 637 85 755
Other reserves 81 181 81 181
Translation reserve (90 440) 5 275
Retained earnings 36 693 62 337
Total equity 368 881 489 358
Non-current liabilities
Interest bearing loans and borrowings 195 113 234 527
Deferred tax liabilities 26 810 32 601
Deferred consideration 1 979 29 038
223 902 296 166
Current liabilities
Interest bearing loans and borrowings 60 422 34 589
Trade and other payables 28 807 20 338
Corporate income tax payable 349 512
Other tax liabilities 1 955 1 942
Other current liabilities 500 34
92 033 57 415
Total liabilities 315 935 353 581
Total equity and liabilities 684 816 842 939
 

KAZAKHSTAN KAGAZY PLC
UNAUDITED CONSOLIDATED INCOME STATEMENT
FOR SIX MONTHS ENDED 30 JUNE 2009 AND 30 JUNE 2008
(Amounts in thousands of U.S. dollars)

    30 Jun 2009   30 Jun 2008
Unaudited Unaudited
 
Revenue 30 276 38 059
Cost of sales (17 818) (23 638)
Gross profit 12 458 14 421
 
Selling expenses (3 532) (2 365)
Administrative expenses (7 429) (9 026)
Other operating (expenses)/income 3 850 38 912
Profit from operations 5 347 41 942
 
Finance income 8 511 5 398
Finance costs (38 749) (6 563)
Profit before taxation (24 891) 40 777
 
Income tax expense (753) (101)
Profit for the year (25 644) 40 676
 
Attributable to:
Equity holders of the parent (25 644) 40 676
 

Earnings per share attributable
to the equity holders of theto the equity holders of the
parent during the year – basicparent during the year – basic
and diluted (2009: US cents perand diluted (2009: US cents per
share/ 2008: US cents per share) share/ 2008: US cents per share)

(24) 39
 

1 US$ 3.8 million non-cash gain resulted from the decrease in the consideration paid for the acquisition of Astana Contract.

2 EBITDA is defined as profit before interest, tax, amortisation and depreciation and other operating income and expenses as presented in the income statement.


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