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Igor Levit, CEO of LSR Group comments:
“The first half of 2009 was definitely one of the toughest periods for our sector in recent years.
However, despite reduced demand both in the real estate the building materials market, we succeeded in ensuring stable operation of the company under difficult economic conditions.
In the first six months of 2009, our sales revenues decreased by 8% to RUR 20,330m, EBITDAwent down by 2% to RUR 5,696 million, and EBITDA margin grew from 26% to 28%.
In the first half of 2009, 65% of our revenues and 81% of our EBITDAwere generated by our Real Estate Development, Construction and Commercial Real Estate pision, and the share of our Building Materials, Aggregates and Construction Services pision was 35% of the total revenues and 19% of the Group’s EBITDA.
We refinanced the portion of our credit portfolio that was to mature in the first half of 2009. Moreover, already operating in difficult economic conditions we attracted long-term project financing to go on with the implementation of our strategic investment project, the construction of a cement plant.
Of late, we have recorded reduction of interest rates and more favourable terms of debt financing compared to the first six month of 2009.
In 2009, we obtainedgovernmental contracts in four major auctions for housing sale and construction in St. Petersburg and Moscow worth a total of around RUR 22Bn. As a result, we will be able to compensate to a significant extent for lower market demand for residential property and prefabricated construction services. Even though the above contracts provide for a modest margin level, they will enable us to increase the utilisation of our production and construction facilities thus improving our business efficiency and generating additional operating cash flows.
We developed and started implementing a corporate-wide cost reduction programme as early as in October 2008, and have carried on with it in 2009.
In addition, we mothballed part of our production capacities in response to the current level of demand, and also introduced flexible work schedules at our plants.
As a consequence, we managed to considerably cut some of our production costs as well as overheads, which resulted in better financial performance.
We continue the implementation of our strategic investment project of constructing a cement plant in the Leningrad region. In spite of the current sizable reduction in the demand for cement, we anticipate that there will be a significant growth in the demand for this product in the long-term.
The cement plant construction project is fully provided with long-term project financing. Besides, the cement project of LSR Group is included in the list of cement plant projects whose construction is supported by the Government.
The plant construction is being implemented as per original schedule, and we are planning to put it in operation in 2010.
In the first six months of 2009, the demand for housing and building materials declined significantly against the first half of 2008 when the market had rapidly grown.
Since the beginning of the financial crisis the situation in our product markets has been evolving in various ways.
For real estate, last year’s fourth quarter proved to be one of the hardest periods in terms of sales volume. Then in the 1st quarter of 2009, after the rouble devaluation was over, there was some increase in the housing demand that also continued in the 2nd quarter of 2009. According to market research agencies, since autumn 2008 up to date rouble housing prices in St. Petersburg have decreased by 15 to 17% in roubles (without account for inpidual discounts provided by developers).
Unlike real estate, there has been no one-time drop in the demand for building materials, and their sales have kept gradually shrinking since the autumn of 2008. Reduction in the sales was due both to the fact that many developers suspended the construction of new projects and the seasonality factor. Since the autumn of 2008 up to date, the building materials rouble prices have decreased by 15 to 25% depending on the product.
Since the spring of 2009, there has been a trend towards some increase in the demand for certain building materials, primarily to meet the needs of infrastructure construction and inpidual housing construction.
The second half of 2009 has seen an increase in the demand for residential property and some of the building materials. But from our perspective, it is still too early to state that a period of sustainable and significant growth of demand has set in.
In view of the above, the basic provisions of our strategy formulated at the end of 2008 remain unchanged.
Our key priorities include:
- maximisation of free cash flow is our top priority;
- cost cutting;
- efficient and effective working capital management.
- reduce prices but try to keep sales volumes thus ensuring cash flow generation and protection and increase of market shares;
- reduce capex but continue the construction of the cement plant;
- optimisation of capacity usage;
- focusing marketing and sales efforts to infrastructure demand.
Real estate development and construction:
- continue construction of all residential projects currently under construction;
- suspend development of office pipeline and reposition part of office projects to residential real estate;
- focus on the execution of public procurement contracts obtained by the company in 2009 and to participate in new acceptable governmental housing initiatives;
- continue designing new development projects to be able to open sales in a significant number of projects once the housing demand is restored.
Our current financial strategy consists in using the operating cash flow to service our debt and refinance the debt at our partner banks while aiming at access to longer term credit facilities.
We are not planning to substantially reduce our debt before there is a material improvement in the situation in our product markets as well as in the financial market. Conversely, the total amount of our debt will increase in 2009 due to the utilisation of loan facilities obtained for the cement plant construction.
We are convinced that LSR Group is in good position to overcome the current economic cycle.
We offer a variety of high-quality products and services. We have high-quality real estate development and manufacturing assets as well as professional and stable management. Our key top managers have been with the company since its establishment, and being its shareholders are highly motivated to preserve and develop the business. Despite the toughening competition we keep holding the leading positions in our core product markets.
The governmental contracts obtained by LSR will enable us to compensate to a significant extent for the reduced demand for residential property and ensure an additional operating cash flow.
Our flawless credit history and long-standing relations with the leading Russian financial institutions facilitate our access to debt financing.
In our view, the Russian market of real estate and building materials has asignificant long-term growth potential.
We believe that we will be one of the first companies to get long-term benefits as soon as the economic situation improves.”
Notes to Editors:
OJSC LSR Group is a real estate and building materials company founded in 1993 and operating in a number of complementary market segments. Its core business areas are building materials, real estate development and panel construction.
LSR Group operates in St. Petersburg, Moscow, Yekaterinburg, Lithuania, Latvia, Estonia, Ukraine and Germany.
In 2008, the sales revenues of LSR Group were RUR 49,813m (IFRS).
LSR Group is a public company, with its GDRs traded on the London Stock Exchange and its ordinary shares traded on MICEX and RTS.
In 2007, LSR Group was awarded ‘The Company of the Year’ National Award in the ‘Construction’ category.
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