Operating Expenses

Selling and distribution expenses

Resulting from the 61% rise in revenues, the percentage of selling and distribution expenses to revenue decreased from 9% in 2009 to 7% in 2010. The following table sets out TMK’s selling and distribution expenses for the twelve-month periods ended 31 December:

  2010 2009 Change Change
  in millions of U.S. dollars in %
Russia 292 187 105 56%
America 92 110 (18) (16)%
Europe 19 16 3 19%
TOTAL SELLING AND DISTRIBUTION EXPENSES 403 313 90 29%

The table below provides a breakdown of TMK’s selling and distribution expenses for the twelve-month periods ended 31 December:

  2010 2009 Change Change
  in millions of U.S. dollars in %
Freight 207 118 89 75%
Depreciation 81 100 (19) (19)%
Staff costs 54 45 9 20%
Other expenses 61 50 11 22%
TOTAL SELLING AND DISTRIBUTION EXPENSES 403 313 90 29%

Russia. Selling expenses growth was foremost caused by the considerable increase in freight costs as a result of increased sales volumes, transportation tariffs and certain Transneft large-diameter supply contracts with extended delivery terms that contributed U.S.$76 million to the expenses growth. Growing wages, salaries, bonuses and related taxes resulted in U.S.$5 million growth. Other expenses rose by U.S.$11 million. The effect of translation from the functional to presentation currency accounted for U.S.$13 million of the increase.

America. There was a decrease in depreciation expense of U.S.$18 million. The greater part of the value of the intangible asset “Customer relationships” was amortised in prior years due to the amortisation method used. The asset was amortised using the diminishing balance method which reflected the pattern of consumption of the future expected economic benefits that the assets provided. Moderate increases in salaries and wages, bonuses and related taxes, as well as freight costs were offset by reductions in other selling expenses, resulting in no combined net impact on the total change.

Europe. Enhanced selling activity in the European division caused freight expenses to grow by U.S.$4 million. The effect of translation from the functional to presentation currency accounted for a U.S.$1 million expenses decrease.

General and administrative expenses

The share of general and administrative expenses in revenue decreased from 6% in 2009 to 4% in 2010. The following table sets out TMK’s general and administrative expenses for the twelve-month periods ended 31 December:

  2010 2009 Change Change
  in millions of U.S. dollars in %
Russia 166 145 21 14%
America 57 49 8 16%
Europe 9 10 (1) (10)%
TOTAL GENERAL AND ADMINISTRATIVE EXPENSES 232 204 28 14%

The table below provides a breakdown of TMK’s general and administrative expenses for the twelve-month periods ended 31 December:

  2010 2009 Change Change
  in millions of U.S. dollars in %
Staff costs 126 101 25 25%
Professional services 48 45 3 7%
Depreciation 13 16 (3) (19)%
Travel 9 6 3 50%
Other expenses 36 36 - -
TOTAL GENERAL AND ADMINISTRATIVE EXPENSES 232 204 28 14%

Russia. The growth in general and administrative expenses was primarily the result of increased salaries and wages, bonuses and related taxes that contributed U.S.$10 million to the change. The effect of translation from the functional to presentation currency and changes in other expenses accounted for a U.S.$7 million and U.S.$4 million respectively.

America. Dramatically improved operational and selling activity in the American division in 2010 as opposed to poor results in 2009 had an impact on staff costs. Increase in salaries and wages, bonuses and related taxes to management contributed U.S.$11 million to the total growth of general and administrative expenses. In 2009 intangible asset “Backlog” was fully depreciated that caused U.S.$4 million expenses decline in 2010. Changes in other general and administrative expenses had an effect of U.S.$1 million increase.

Europe. In 2010, the European division’s general and administrative expenses were at the prior year levels. The effect of translation from the functional to presentation currency accounted for a U.S.$1 million expenses decrease.

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