Mechel PAO
Q1 2018 Earnings Call Transcript

Published: 22 Aug 2018

[Operator:]

Good day, ladies and gentlemen and welcome to the Mechel Reports First Half 2018 Financial Results Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Alexey Lukashov. Please go ahead.

[Alexey Lukashov:]

Thank you and good day, everyone. I would like to welcome you to Mechel’s conference call to discuss our first six months 2018 results reported today. With us from management today are Mr. Oleg Korzhov, Mechel’s CEO; and Ms. Nelli Galeeva, Mechel’s CFO. After management has made their formal remarks, we will take your questions to the presentation team. Please note that during this call, management will make forward-looking statements, some of which may have been made in the press release. Some of the information on this conference call may contain projections or other forward-looking statements regarding future events or the future financial performance of Mechel as defined in the Safe Harbor provision of the United States Private Securities Litigation Reform Act of 1995. We wish to caution you that the statements are only predictions and that actual events or results may differ materially. We do not intend to update these statements. We refer you to the documents Mechel files from time-to-time with the United States Securities and Exchange Commission, which contain and identify important factors that could cause the actual results to differ materially from those contained in our projections of forward-looking statements. In addition, we will be using non-IFRS financial measures, including EBITDA, in our discussions today. Reconciliation of non-IFRS financial measures to the most directly comparable IFRS financial measures are contained in the earnings press release, which is available on our website at www.mechel.com. At this point, I would like to turn the call over to Mechel’s CEO, Mr. Korzhov. Please go ahead.

[Oleg Korzhov:]

[Foreign Language] Good afternoon, and good morning, ladies and gentlemen. Welcome to the conference call for the company's financial results of the first 6 months of 2018. [Foreign Language] The group's financial results improved both in the second quarter as compared to the first one and in this year's first half year-on-year. In the second quarter, revenue went up by 10%, while EBITDA grew by 25%. Net profit attributable to Mechel shareholders amounted to RUB 1.4 billion due to a negative impact from weak ruble. The group's Chief Financial Officer, Nelli Galeeva, will speak of the financial results in more detail later. [Foreign Language] Stabilization of mining volumes as Southern Kuzbass coal company and increase in mining at Elgaugol became an important factor of financial improvement. The group demonstrated a marked increase in metallurgical coal sales quarter-on-quarter and caution of mining plant is worth mentioning separately. It also boosted its production quarter-on-quarter by 48%. [Foreign Language] [indiscernible] undertaken since mid-last year and the renewable and replenishment of our mining equipment fleet yielded positive results. The only slump in mining was registered at Yakutugol Holding Company, which have accumulated sufficient stock piles for processing and shipping. In fact, Yakutugol accumulated as much as 900,000 tonnes of stock, which is more than monthly production rate of this facility. That's why we focus mainly at Yakutugol on stripping, which is preparatory for future coal mining, an stripping volumes increased by nearly 40% quarter-on-quarter. [Foreign Language] And in terms of coal mining, of course, we're not stopping at this and we will continue our efforts on restoring operational results. [Foreign Language] High construction activity is traditionally characteristic of the second quarter, which normally has a positive impact on our steel division's market. Early in the second quarter of 2018, market growth was restrained by high competition and our consumers' persistently low business activity. But by mid-period, demand has begun to pick up. As a result, prices for our products were higher than in the previous quarter and, today, in the third quarter, we see restored demand and further growth - price growth in the long growth market. [Foreign Language] We continue to implement investment projects at our steel making facilities that will enable us to substitute imprint and further improve our competitive advantages and profit margin. For example, Beloretsk Metallurgical Plant has begun assembling equipment to produce [indiscernible] Nearly all our facilities make use of the favorable market situation and [indiscernible] new types of products and expand into new markets. Chelyabinsk Metallurgical Plant rolling mill [indiscernible] production of several new types of beams and channels and the plain certificates for products [indiscernible] earlier as well as more certificates are expected for the new rail types and channels. In August, Chelyabinsk Metallurgical Plant set the record of producing 3,300 rails in a day. Euro's [indiscernible] plant production of some 40 new types of rings and (inaudible) for engineering innovation in the second quarter alone. [Foreign Language] In the first half of this year, Chelyabinsk Metallurgical Plant reduced the amount of rails shipped to Russian Railways due to prolonged talks on the new 2018 contract terms. In May, these talks were successfully completed and we signed a new contract with Russian Railways and set out to fulfill it. During the temporary slump in rail production, the universal rolling mill was fully loaded with other types of rolled sections with the profit margin exceeding even the rails. As a result, we managed to minimize the negative impact from a decrease in rail production. [Foreign Language] While implementing new projects, upgrading facilities and new types of products, the company considers work safety environmental security as its top priority. We have begun an environmental audit at our share based enterprises, an independent and well-known company, the independent experts will make a thorough examination of our production facilities. Mechel is conducting the voluntary environmental audit of its facilities as part of a trilateral agreement with Chelyabinsk regional authorities and Russia's Federal Supervisory of Natural Resources Management Service [indiscernible]. This agreement outlines a complex of measures for the next two years totaling almost RUB 1.5 billion. Following the independent environmental audit, the list of environmental measures is due to be expanded. [Foreign Language] Over this year, since half, we invested RUB 1.8 billion. In addition, we leased equipment for nearly RUB 1.3 billion more. So the overall investment amounted to some RUB 3.1 billion. In the second half of this year, we plan to invest over RUB 4 billion. And this increase is due to our conducted procurement procedures in the first half of the year as well as us starting two important projects that require considerable financing, which are the reconstruction, the upgrade of our glass furnace and replacement of a converter at Chelyabinsk. At this point,, I would like to give the floor to our Chief Financial Officer, Nelli Galeeva, who will give you details on the financial results of all our business segments. Thank you for your attention.

[Nelli Galeeva:]

[Foreign Language] Ladies and gentlemen, to our conference call. I will address the group's financial results on the call and by each segment. And after my presentation, we will be glad to answer your questions. And this presentation is available at the mechel.com website. [Foreign Language] In the first half of 2018, consolidated EBITDA totaled RUB 41.4 billion, demonstrating confident growth quarter-on-quarter as well as compared to the second half of 2017. The group's saturation profit in the second quarter also went up by RUB 5.9 billion quarter-on-quarter due to significant improvement of that mining and steel division's results. [Foreign Language] In the mining segment, revenue from sales to third parties in the second quarter 2018 was RUB 25.7 billion, which tops the previous quarter's result by RUB 3 billion or plus 15% due to an increase in sales volumes on all key products. This in turn had an impact on the growth of profit and EBITDA. Activation profit in the second quarter of 2018 amounted to RUB 12.6 billion, which is RUB 4.6 billion or 58% more than in the previous quarter. EBITDA in the second quarter 2018 went up by RUB 3.9 billion and reached RUB 14.4 billion. [Foreign Language] In the first half of the year, Elgaugol demonstrated profit of RUB 2.3 billion, which is RUB 700 million more year-on-year. The quarterly result also shows a growth of some RUB 100 million. A durational cash flow in the first half of 2018 was RUB 1.8 billion, which is nearly 5x the result of the first half of 2017. The quarter-on-quarter growth was 25%. Mining [indiscernible] in the first half of this year saw 2.5 million tonnes, which is 31% more year-on-year, while the quarter-on-quarter growth was 12%. The increase in coal production ensured Elgaugol's revenue of RUB 8.2 billion in the first half of 2018, which is RUB 2.1 billion more year-on-year. [Foreign Language] A favorable global trend of growing prices on steel products proved the major support of the steel segment's results. Revenue from sales to third-party went up by 11% [indiscernible] half a year as compared to the previous one and by 13% quarter-on-quarter, due both to price levels and to volume growth. The segment's expenditures on raw material didn't grow at pace and this left to an increase in gross profit, gross margin and EBITDA in the 3 periods compared. In the first half of 2018, EBITDA amounted to RUB 14.5 billion, which is 2.5x more year-on-year, while the second quarter's EBITDA reached RUB 8.3 billion with EBITDA margin of 16%. Major exchange rate losses on currency liabilities, which were due to the rubles weakening in the second quarter of 2018, had a negative impact on the segment's financial results. [Foreign Language] Considering an increase in operational cash flow quarter-on-quarter RUB 18.1 billion in the second quarter as compared to RUB 16.7 billion in the first quarter. Operational cash flow remains sufficient not only for ensuring the group's operational needs, but also for meeting all of our financial obligations. Trade working capital reached RUB 14.7 billion compared to RUB 11.8 billion as of December 31, 2018. This reflects the results of our efforts on increasing the share of high margin products in our production and sales structures, taking advantage of a favorable market situation, increasing production and sales volumes. [Foreign Language] Our financial expenses changed slightly from RUB 10.5 billion in the first quarter 2018 to RUB 11 billion in this reporting period. Interest paid in the second quarter amounted to RUB 8.4 billion including interest capitalized, which corresponds to the quarterly average. Current average interest rate through the debt portfolio is 8.1% and average paid interest rate amounts to 7.9%. The group's net debt, excluding fines and penalties and the auction, went up RUB 5 billion as compared to the amount fixed on the December 31, 2017, due to weaker ruble and accounting for effect of applying the new IFRS 9 standards starting in January 2018. The net debt-to-EBITDA ratio was 5.2 by the end of the second quarter compared to RUB 5.5 billion by the first quarter's end. It must also be noted that In this accounting period, due to our compliance with the debt repayment schedule on our credit lines, our fines and penalties to Gazprombank totaling RUB 7.3 billion were written off. The debt structure remains unchanged where the ruble denominated part is 65% of our debt and the rest is in foreign currency. [Foreign Language] We continue to restructure our debt portfolio. In July, we signed a new loan agreement in order to refinance our existing [indiscernible] loan facilities totaling some USD 1 billion. Regarding the remainder of our instruction debt, we are actually working with the lenders who granted loans on the insurance coverage by accredited agencies and we expect this work to be completed by the year's end. Thank you for your attention.

[Unidentified Company Representative:]

Thank you. We will now take questions. [Operator Instructions]

[Operator:]

[Operator Instructions] We'll take our first question from Dmitriy.

[Dmitriy Markov:]

[Foreign Language] The first question comes from Dmitriy Markov from LMS. When do you expect to be dividend for your subsidiary such as [indiscernible] plant? Are there any limitations set by the banks to payment of dividends for your subsidiaries?

[Oleg Korzhov:]

Maybe Nelli will answer.

[Nelli Galeeva:]

[Foreign Language] With respect to the companies that you mentioned, we don't expect to pay dividends in the nearest -- in the foreseeable future on these companies, because at the moment, the banks are interested mainly in reducing the debt that we have with them and it will be difficult for us - or challenging for us to obtain their permission to use the cash to pay out the difference. So it would look negative at the outflow of cash from the group. Therefore, our main priority right now is to reduce our debt to the banks.

[Oleg Korzhov:]

Next question please.

[Operator:]

We'll take our next question from Alexander [indiscernible]. Please go ahead.

[Unidentified Analyst:]

[Foreign Language] This question comes as a follow-up to the question that has just been answered. What are the objections that the creditors might have to you paying the dividends on the above-mentioned companies? Are there any in terms and conditions that they set out to the payment of dividends? And would you be able to confirm that you will stop paying out dividends around 2022?

[Oleg Korzhov:]

Nelli answer.

[Nelli Galeeva:]

[Foreign Language] The dividends - being out of the dividends, with respect to the companies that do not belong to the group, due 100% will require a special permission from the banks, like I said before. Because of the banks look negatively at the outflow of capital that is due to minority shareholders. According to our agreements with the banks, we might come back to this issue of paying the dividends once the group has settled its main debt, which means after 2022. And one other requirement that the banks have, which is us paying the dividends is that the debt-to-EBITDA ratio is below 3 or 2.5.

[Operator:]

Our next question from Dmitriy Markov with LMS.

[Dmitriy Markov:]

[Foreign Language] One other question from LMS. When do you expect to stop the [indiscernible] of channeling the cash from, say, Korshunovsky plant towards loans for the benefit of Mechel? And what is of the interest rate that is applied to these kinds of loans?

[Nelli Galeeva:]

[Foreign Language] We act in full accordance with the terms and conditions that we achieved with our banks. We are capable of redistributing the cash inside the group. And in order to do this, we use the tools that are approved by the creditor banks, including intergroup loans. The interest rate is calculated according to the methodologies that comes together with this agreement. In particular, the profit of Korshunovsky plant is increased in order to be able to, in the future, pay out the dividends for this facility. So we do believe that we are acting in violation of any of the covenants or other limitations or agreements with our banks.

[Operator:]

[Operator Instructions] It appears we have no further questions at this time. Actually, we do have a question from Dmitriy Markov, LMS.

[Dmitriy Markov:]

[Foreign Language] One other question from LMS with respect to Korshunovsky, a question of mining plant. Why do you think the revenue and the profits of Korshunovsky mining plant went down year-on-year? And what are your expectations? What are your projections for the profit and for the revenue of Korshunovsky plant by the end of the year?

[Oleg Korzhov:]

[Foreign Language] So okay, in the past, when Korshunov Mining Plant work at its plateau, if you will, the average production rate was around 400,000 tonnes of iron ore concentrate per month. Last year, as I've explained in my earlier presentation, we focused on investing into new equipment and production failed to 120,000, 130,000 tonnes a month. In the second part of 2017 and especially in the first half of 2018, we made intensive efforts into restoring our old equipment, repairing it and buying new equipment. As a result of this program, now we have new glasses, new bulldozers and new trucks. And of course, this could not but affect the volume of stripping that went at Korshunov. We focused our efforts, like I said, on repairing of the -- and upgrading of the equipment and on stripping as well. Stripping means that we are preparing new reserves for future production and processing. And for instance, productions since -- well, compared to last year, during the -- compared to year-on-year, production around August has already gone up by around 40%. For instance, last year, during the same period, the production there was around 120,000 tonnes a month, while in August, we have already reached 220,000 tonnes of iron ore concentrate. So yes, I agree, the first half of 2018 was quite a challenge for us. But all the effort did not go in vain and, already in June, we started building up our stripping volumes and production volumes. And we expect in the near future to bring up mining to 250,000 tonnes a month. Of course, we will continue stripping. There is still a lot of work to be down there in terms of, again, getting the reserves ready for future production.

[Operator:]

At this time, we have no further questions.

[Oleg Korzhov:]

Ladies and gentlemen thank you for joining Mechel's financial call today. A replay of the call will be available on Mitchell's website. If you have any further questions, please call the Investor Relations office. Thank you again from all the team here.

[Operator:]

Ladies and gentlemen, this concludes today's conference. We appreciate your participation.