Mechel PAO
Q1 2013 Earnings Call Transcript

Published: 18 Jun 2013

[Operator:]

Good afternoon, ladies and gentlemen and [welcome to] Mechel's Q1 Financial Results Conference Call. My name is Kate, and I'll be your coordinator for today's conference. The (Inaudible), will be on listen-only. However, after the call there will be opportunity to ask questions. (Operator Instructions). I'll now hand it to your host to begin.

[Vladislav Zlenko:]

Thank you and good day, everyone. I would like to welcome you to the Mechel's conference call to discuss our first quarter 2013 results which were reported today. With us from management today are Mr. Yevgeny Mikhel, Mechel’s CEO; Mr. Stanislav Ploschenko, Mechel’s CFO; and Mr. Oleg Korzhov, Mechel’s Senior Vice-President for Economics and Management. 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 provisions of the U.S. Private Securities Litigation Reform Act of 1995. We wish to caution you that these 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 U.S. 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 or forward-looking statements. In addition, we will be using non-GAAP financial measures, including EBITDA in our discussion today. Reconciliations of non-GAAP financial measures to the most directly comparable U.S. GAAP financial measures are contained in the earnings press release, which is available on our website at mechel.com. At this point, I would like to turn the call over to Mechel's CEO. Mr. Mikhel, please go ahead.

[Yevgeny Mikhel:]

[Foreign Language] Good afternoon and good morning, ladies and gentlemen. We are glad to welcome you at the conference call on the company's results for first quarter 2013. [Foreign Language] This year, we managed to significantly boost our slumping sales which have had their impact on our financial results in last year's fourth quarter, particularly results of Mechel's mining division. Today, we also see the effect of Mechel's aimed at maximizing profit in the Steel and Ferroalloys divisions. For example, disposal or halting of several loss making steel enterprises enabled us to finish this quarter with a positive EBITDA in all of the groups divisions. [Foreign Language] And, as a whole, in the first quarter, we saw mixed dynamics on our key market. Prices in our steel products were fairly stable considering seasonal factors and at the same time demand for raw materials for steel making such coking coal and iron ore was in some ways restored, so stepping up our export sales allowed us to significantly improve Mechel's financial results quarter-on-quarter. In first quarter 2013, Mechel's consolidated revenue was some U.S. $2.5 billion. EBITDA was at $210 million, and net loss went down to $321 million. [Foreign Language] Since this year's beginning, we made a great deal of effort in structuring the group's business in accordance with the renewed development strategy. After the disposal of loss making, Romanian enterprises, we managed to make significant headway in negotiations to sell Mechel's chrome assets in Russia and Kazakhstan as well as Donetsk Electrometallurgical Plant in several of Mechel's service global European based assets. We have also decided to shutdown the loss making Southern Ural's nickel plant. These measures will help the group to attract major funds, creating conditions for deleveraging as well as free up managerial resources that we would be able to focus on those directions that are most important for the company's gradual development. [Foreign Language] We have also achieved serious results in implementing one of our priority investment projects, construction of the universal rolling mill at Chelyabinsk Metallurgical plant. After successful hot testing of the mill in early May, when its first product 25SH1-type bar was produced and sheet off to our customers, we have very recently also succeeded at rolling the 100-meter R-65 rails. Before the year's end, we plan to master and pass inspection of all kinds of product due to be produced as a new including all parts and sizes of rail products with the equipment suppliers. [Foreign Language] Besides active assets on optimizing production and aligning our product range with the market, this year we took measures to optimize sales policies. For example, as demand for metallurgical coals on the Asian market resurged, we managed to significantly increase our coal sales to Japan, South Korea and China. As a whole, the volume of coking coal export sales went up by 21% quarter-on-quarter, which also helped to improve the group's financial results. [Foreign Language] Considering the drawn out corrections at export markets for metallurgical coals with a special attention to making long-term contracts with our key customers, this year we have signed such contracts with the world's leading steel makers, POSCO, Baosteel and Shasteel. These contracts provide for annual supplies of between 500,000 to 1 million tonnes of metallurgical coal and enable us not only to ensure for load for our mining enterprises, but also consolidate Mechel's status as one of the world's largest exporters of metallurgical coal. Mechel's competitive advantages such as diversity of metallurgical coal grade, high mining production efficiency, close proximity to key market and our own logistics give us the opportunity to continue increasing our supplies to Asia-Pacific, where the steel making industry is expected to demonstrate the best development in the near-future. [Foreign Language] Despite fairly complicated macroeconomics, global steel production and consumption of raw materials for steel making are growing, and we plan to continue focusing on improving our production efficiency, diversifying our market and expanding our client base thus increasing Mechel's shareholder value. [Foreign Language] Now, let me hand the microphone over to our Chief Financial Officer, Stanislav Ploschenko, who will review our financial results and all of our business segments in more detail. Thank you.

[Stanislav Ploschenko:]

Good morning and good evening ladies and gentlemen. Despite the fact that difficult market conditions for the global mining industry continues during the first quarter, the relative stabilization of the pricing environment helped our mining segment to achieve much better results than in Q4. Overall mining revenue was up 14%. Coking coal sales contributed 58% of the balance with a 19% volume increase and 3% price increase with high shipments volumes to China and South Korea. PCI and Anthracites revenue added an additional 33% million to the overall increase with a 3% decrease in pricing more than offset by a 26% volume increase. The principle geographies for the additional shipments were Brazil and Asian markets. On FCA basis, PCI and anthracite pricing was off by 9% to $63 a ton. Thermal coal sales were up 6% in physical volumes, however a $3 correction in average sales price less the revenue from third parties virtually unchanged. Iron ore sales also contributed to the overall revenue improvement as the average sales price recovered from the chart seen in Q4, reaching $92 per ton on FCA basis versus just $59 in the compared period. The price dynamics partially offset by lower export volumes, where were due to the massive non-recurring stock sell off in Q4, still resulted in a 17% revenue growth. Coke sales were up 16% with lower domestic volumes being partially offset by increased exports albeit at an FCI price that was lower quarter-on-quarter by nearly 20%. Intersegment sales were down by 4% principally due to lower shipments to Chelyabinsk steel mill. Cost of sales were nearly flat at $527 million an increase of less than 1%. Cash cost at our mining operations experienced a seasonal increase driven by the more expensive winter fuel cost and drying as well as higher share of coking coal in the production mix. Another factor that adds to an increase in cash cost in Q1 every year is the payment of personnel social taxes which are front-loaded towards the beginning of the year. The cash cost of iron ore concentrate was also inflated as fixed cost rose due to lower sales volumes. These increases were largely offset by significant decrease in cost at our U.S. operations on the back of substantially higher volumes as mining operations partially resumed. The results on the gross income was a hefty 28% growth quarter-on-quarter with the gross margin improving by almost six percentage points to 42% of the revenue. Sales and distribution expenses grew quarter-on-quarter by 24% increasing from 26% to 29% of the segment revenue. That was mostly due to expansion of coking coal and met coal sales in Q1, predominantly to China, which is down on CIF basis. Other operational and G&A expenses were down by 15% mainly due to the absence of a number of one-off charges booked during Q4. All of the above lead to an EBITDA for the quarter of $124 million, a dramatic almost four times increase over the previous period. The net results however posted $104 million loss, which with income tax and interest expenses mostly unchanged was all due to the FX loss of $69 million in Q1 versus nearly the same amount, but with a positive sign in the previous periods. For the Steel segment, the first quarter was traditionally marked by a seasonal slowdown, partially accounted by continuing carryover effects from shutdown or disposal of ineffective businesses. While pricing environment was generally stable, the volumes were slightly down rebar by 9% and wire by 5% due to deconsolidation of Romanian mills in February following the disposal. Billet was down by 9% due to suspension of DEMZ activities in Q4 as well as the decrease in resale operations of billet from Estar mills. That led to quarter-on-quarter reduction of revenue from third parties by 8% to $1,430 billion in reported period. Intersegment sales were only slightly down by 4% at $69 million due to seasonal factors. All of the cash cost trends reflect quarter-on-quarter, the cost of sales were comfortably down by 10%, all thanks to the reduction of the share of less sufficient business in the sales which resulted in the gross income edge 3% up to $252 million, an improvement of 17% of the revenue versus 15% in Q4. The selling and distribution expenses were 7% up quarter-on-quarter largely due to the sell down of stock of billets with higher railway tariff from Chelyabinsk to the seaport as opposed to the pervious sales of billets from Estar plant situated closer to the FOB basis. Provision for doubtful accounts posted an increase by $5.5 million largely due to deterioration in payment discipline in Ukraine and Romania. A 28% growth in administrative expenses is largely attributed to the events of previous periods and on non-recurring. In Q4, certain previously capitalized bank charges were reclassified from administrative to interest expenses on P&L, due to loan repayment with a one-time decrease administrative expenses. At the same time, depreciation at DEMZ was reclassified from cost of sales to operating expenses following suspension of this activity since December 2012. The growth in SG&A expenses was the biggest factor behind the reduction of EBITDA to $57 million in Q1 or 4% of the revenue. The net income was also affected by a loss from disposal of Romanian assets of $96 million that mainly consist of other comprehensive income accumulated on net asset and goodwill of the Romanian plants since the time of their acquisition. The nature of this income comes from the difference between the measurement currency, which is Romanian lei and reporting currency which is U.S. dollar. This income can be recognized in the profit and loss account only in the period when the assets are disposed off. The mills were sold in the first quarter as you know. There were no goodwill or long-lived assets impairment in the reported period as well as no additional related party provisions that results in reduction of the net loss by 78% to $205 million, thereof $12 million of FX loss due to ruble depreciation versus the American currency. The Ferroalloys segment continued with its turnaround in Q1 following the shutdown of the nickel plant in 2012, and adjustment of operations at Tikhvin ferrochrome plant. The FCI price of chrome and chrome concentrate improved by 6% and 9%, respectively in reported period which led us to a re-launch of third furnace at Tikhvin towards the end of the quarter that however was too late to have any effect in the reported period. The volumes of chrome sales were down by 41% quarter-on-quarter after a massive stock clear up in Q4. At the same time, the sales volumes of chrome ore were 37% up as price and cost environment was more favorable towards concentrate sales rather than ferrochrome. The average price for ferrosilicon was flat as third-party sales volumes were up 3% quarter-on-quarter. There were non-equal sales in Q1 as the plants remains idle and stock cleared out. That's along with the reduction of chrome sales resulted in 21% quarter-on-quarter downward dynamics in revenue from third parties to $54 million. Intersegment's revenue was down only 6% on the back of lower chrome sales. The gross income however improved dramatically to $5 million due to improvement in the efficiency. Cash cost of ferrosilicon demonstrated moderated growth of 6% caused by the increase in electricity tariffs. Chrome cash costs were stable and chrome concentrate cash costs grew up by 12% due to increase of electricity tariffs and changed geological conditions. SG&A expenses were three times down in the reported period due to the absence of the one-off provisions for the layoff of personnel at the nickel plant posted in the fourth quarter. There was no bad debt provision recorded in Q1 either. That all resulted in the EBITDA turn positive for the first time since the first quarter 2011, even now taking the steel segment in terms of EBITDA margin. The net loss decreased almost five-fold to $90 million also held by $6 million FX gain. For the Power segment, the first quarter was expected to be the strongest. Both, the revenue from third parties and intersegment sales were up 3% quarter-on-quarter driven primarily by Southern Kuzbass power station which increased its electricity sales volumes by 21% and capacity sales volumes by 40% while the tariffs grew 6% and 28%, respectively. The cost of sales edged up only 1% resulting in a 10% growth in the gross income, pushing the gross margin up to 28% of the revenue. SG&A expenses were stable at the level of $80 million, the EBITDA improved by 55% to $24 million, or almost 7% of the revenue, the best result in the reported period after the Mining segment. The net results of the fourth quarter was negatively affected by the loss on discontinued operations related to the sale of the Toplofikatsia Rousse. There was no such item recorded in Q1, which helped to drive the net result back into the Black with $7 million result. On a consolidated basis, the revenue was only slightly down 2% to $2,481 billion as the revenue reduction in Steel and Ferroalloys segment were almost compensated by the growth in the Mining and Power segments' top line. However, due to efficiency improvements, disposal and shutdown of cost making assets has lower stabilization of the price environment. In the mining segment, the gross income went up 15% to $738 million or 30% of the revenue versus only 25% in Q4. EBITDA stood up by impressive 72% to $210 million, almost all thanks to the Mining and the Ferroalloys segment, slightly aided by the Power one, which was more than enough to compensate for the lower steel segment's results. The EBITDA margin improved from 5% in Q4 to almost 9% in the reported period. The net interest expenses remained mostly unchanged as net debt was kept under control. The depreciated ruble for the periods resulted in a $75 million FX loss versus an $83 million gain in the previous quarter. The income tax expense changed only by $7 million, which can be regarded as insignificant. The improvement in profitability as well as absence of goodwill and long-lived assets impairment in Q1 resulted in a dramatic reduction of the net loss from over $1.1 billion in Q4 to $321 million in the reported periods. Turning to the cash flow analysis, I must acknowledge that the first quarter was expected to be not as strong in cash flow generation as the previous periods. On the one hand, it is explained by the fact that the first quarter of the year is seasonally on a slow side in steel sales. On the other, most of the working capital release had already taken place in 2012, which naturally left less room for further performance at the same higher rates. Nevertheless, we still managed to reduce inventory by another $155 million in the reported period, albeit almost offset by increased receivables as we had to extend the terms of payments in the Mining segment in order to boost sales in the Asian markets, and thus the cash flow from operations generated only $69 million in the reported period. The investments used up $192 million, $171 million thereof for property, plant and equipment as we were finalizing the modernization of Port Posiet and most importantly the last preparations for the launch of the universal rolling mill at Chelyabinsk. It is worth noting though that only $105 million thereof was direct investment, the balance falling on capitalized interest on work in progress. However, as ruble depreciated, the net debt increased only by an increasable 1% to $9,665 million including financial leasing. The structure of debt continue to improve, up to five-year RUB 40 billion loan from VTB that we announced in April, we signed $1 million worth of three to five year facilities Gazprombank, which will be used to replace the debt maturing in 2013 and 2014. As you can see from the slide number 14, we already began to apply our refinancing efforts not only to the current year, but to the following years with the aim to push the maturities of our debt beyond the 12-month horizon in order to create a solid cushion for our cash flow during the period of uneasy markets until we complete the restructuring business. To recap, ladies and gentlemen, despite the traditional low season for steel, the first quarter demonstrated a marked improvement business as commodity markets stabilized and our efficiency improvement efforts bore fruit in the steel and ferroalloy segments. We are committed to continue on that path until we can report the complete turnaround of our business, which we expect to take place until the year end. Thank you for your attention, ladies and gentlemen, and we will be welcoming your questions now.

[Vladislav Zlenko:]

We will now take questions. We'd ask that participants please state their name and company before asking their question and allow some time after for translation. When questions are answered in Russian, they will be followed by translation. So, you may ask your questions in Russian also and we will translate. Please go ahead.

[Operator:]

(Operator Instructions). Your first question comes from the line of [Dmitriy] from Morgan Stanley. Please go ahead.

[Unidentified Analyst:]

Hi. Thank you very much for the presentation. My question is regarding the press release that came out a few minutes ago regarding your buyback. I was wondering if you could sort of give us some color and the rationale and why for example this cash was not invested in paying down debt or, say, the development Elga. Thank you.

[Yevgeny Mikhel:]

[Foreign Language] Yes. The board of directors took a decision to approve buyback of the company's ordinary shares up to $100 million, because the board believes that the current market capitalization might not reflect the fundamentals of the company. They believe that this action will be in the best interest of the company shareholders in the current environment. [Foreign Language]

[Vladislav Zlenko:]

Next question please?

[Operator:]

Thank you. Your next question comes from the line of Sergey from Societe Generale. Please go ahead.

[Sergey Donskoy:]

Yes. Hello, everyone. Sergey Donskoy, Societe Generale. I have four questions if I may. First of all, regarding your CapEx in the first quarter amounted to approximately $170 million. I may be wrong, but I think that earlier you provided a guidance for this year, which was something to the tune of $400 million. Does it mean that we should expect a dramatic decline in your CapEx outlay in the coming quarters or your CapEx budget for the current year has been increased? Second question, given that the results of the Steel division were affected by several one-offs, could you please give me a grand total of what was the total effect of one-offs that affected the segment EBITDA? Question number three. On your balance sheet, I am seeing long-term investments being released at parties and the amount of $175 million. I think there was no such thing as of last year. Could you provide some comments on what this thing means. And, lastly, on Bluestone, could you provide us some numbers? What were the sales of coking and thermal coal at Bluestone in Q1, and what was the average selling price? Thank you.

[Yevgeny Mikhel:]

[Foreign Language] Stanislav Ploschenko will answer the first three questions.

[Stanislav Ploschenko:]

As I said, we spent about $105 million in direct investments during Q1, which fully corresponds with the CapEx guidance announced earlier on. The difference between the direct investment and what you can see in the investment cash flow falls on the capitalized interest on the work in progress, which is substantial in the company usually. If the direct investments go down, this difference tends to increase because the work in progress doesn't change much. Answering the second question, there were really only two items which you can call one-off effect in the EBITDA or the difference between the EBITDA for the first quarter and fourth one. There was a reduction of about $6.5 million in the administrative expenses in Q4 due to the fact that the capitalized interest on certain loan expensed against the P&L due to the loan repayment, which wasn't the case in Q1. And, another factor was it is reflected in the provision for bad debt in amount of $6 million in Q1, which wasn't present in Q4. As far as your third question is concerned, recent long-term investments reflect our investment in stock share in Port Vanino, which we have obtained the title, but we haven't paid because the terms of our arrangement with the minorities was that the payment would be deferred. The company has the put option to sell this stock just like we did with the shares in Vanino that the company acquired in January this year. And, Oleg Korzhov will answer the question about (Inaudible).

[Oleg Korzhov:]

[Foreign Language] In the volume of production and sales from Bluestone were not terribly big, because as you know that it was not from the start of the year that we were operating the asset, so the production of the coking concentrate was at the level of 700,000 during the first quarter and thermal coal about 200,000. As far as the sales prices are concerned from Bluestone, these are exports and domestic market added works flow in Q1 that the sale price for the high level coal was at the level of $120 and $125 FOB, and the sale price for the low volume coal was at about the level of $140, $150. If anybody is interested in FCA, this is minus 15. So, the volumes and contracts and their prices have been fixed and so the sales price for the high level coal were $95 on FCA and the low volume $130.

[Sergey Donskoy:]

I may ask just two follow ups, if I may. First, regarding CapEx. Do I understand correctly that bearing in mind this capitalized interest which went to increase CapEx, the total actual cash paid to banks was significantly higher than $173 million on your intro statement and something closer to $240 million. And, some question on Bluestone. Could you just roughly maybe give us some idea, what is the breakdown between domestic and export sales for coking coal? Thank you.

[Vladislav Zlenko:]

First question will be answered by Stanislav Ploschenko.

[Stanislav Ploschenko:]

As the matter of fact it's difficult to answer this question in a simple way, because we are talking about U.S. GAAP measurements, which reflect the interest paid by the company in the P&L, so the interest you see on the P&L is the interest the company pays on bank loans. The capitalized interest, which you can see in investment cash flow is usually calculated in simplistic terms by taking the CapEx and process and multiplying by the average interest rate, but if you are interested in what the company pays from its income to the banks. That's the item you can find in the P&L.

[Yevgeny Mikhel:]

[Foreign Language] As far as the thermal coals from Bluestone, 100% into the domestic market coking concentrate about 30% to 70%, whereby 30% goes into domestic market and about 70% is being exported.

[Vladislav Zlenko:]

Next question please.

[Operator:]

Thank you. Your next question comes from the line of Victor from VTB Capital. Please go ahead.

[Victor Drozdov:]

Yes. Hi. This is Victor Drozdov from VTB Capital. Thank you for your presentation. I have several questions. Could you please comment on current status of 25% sale in Elga project, and as well do you have any specific comments on divestments from non-core assets, particularly on Urals Nickel Plant. And, one more question. Again, recent information on Mechel applying for Elga's development planned amendments to Rosnedra. Could you please provide information on 2013 Elga production plant plans? Thank you. [Foreign Language]

[Vladislav Zlenko:]

First question will be answered by Stanislav Ploschenko.

[Stanislav Ploschenko:]

We are continuing to investigate for an opportunity to attract a strategic investor in Elga. However, we are not pressing forward with it at the time being because are going through an alternative road mainly the attraction of the project financing from VTB, which is currently being discussed and is at the stage of due diligence by the [Bank], and we have high expectations about finally getting this project finance done. If we are successful in that, then we will be more relaxed in terms or more demanding as to the terms of a potential transaction for minority stake in Elga, and the remaining part of the question will be answered by Yevgeny Mikhel.

[Yevgeny Mikhel:]

[Foreign Language] As you might know, we started with [nickel] and its operations were put on hold by the end of last year, and so currently there is a procedure underway for the reduction of the headcount. And against the current price environment, we do not envisage any potential future re-launching of this particular operation in the mode that it operated in before the crisis came. So, currently there is a commission visiting this location, which considered different ways of how this operation can be disposed of. We can see and look into the possibility of divesting from 100% of this property in favor of interested parties and there are parties like that who are considering this possibility, but at the same time, we do not rule out any other possible venues of what we can do with it in the future looking into the various technology upgrades and quite possibly we may dispose it as a non-core asset in terms of its possible applications into non-core operations in the future. But in that case, the final decision is going to be made as a result of the current considerations and the financial calculations. As far as the amendments are concerned into the Elga license, respective amendments into the current license agreement have been submitted according to which the timeframe and the timing for the license is going to be changed have been signed between the respective government authority and yet could evolve on June 18 this year, which is today.

[Vladislav Zlenko:]

Next question please.

[Victor Drozdov:]

I am sorry. I have a follow-up question if I may. Could you just specify your production volumes expected for some '13 at Elga? Thank you.

[Vladislav Zlenko:]

Oleg Korzhov will answer.

[Oleg Korzhov:]

[Foreign Language] So, as has been previously mentioned, as of today we have the opportunities to produce out of this facility of up to 2 to 2.5 million tonnes of coal a year. And, just to speak about 2013 is a bit difficult and there are two reasons behind it. Firstly, as we have previously stated, there are two ways of the way we can dispose all the product. First thermal application and coking concentrate. As far as the thermal coals are concerned, we are watching it and not because it is economically not viable. And as of today, we have entered into five contracts with companies which burn coal. These are the far eastern generating companies' plants that were supposed to supply 90,000 tonnes for a trial burning. And, so respectively, after we pass through this test and the coal process, we receive the respective review. That would enable us to participate in the tendering for the supply of the thermal coals for the heating season of 2013-2014, and so respectively in terms of how much to produce thermal coal would depend upon the extent to which all of our coals will pass through these procedures and will be deemed to be compliant with the subsequent thermal application as far as the coking concentrate is concerned as we've stated it will all depend upon the way the seasonal workshop period is going to work, because we've intended to launch it by the end of this month. And, because of the technical considerations and reasons, we are currently running through some fine-tuning, and so in June we are finishing this fine-tuning and then are planning to launch it in August. And, so the amount of coal that we are going to produce will depend upon the way this unit operates. And so within these subsequent periods, we will see how good it is in terms of the productivity and the quality of coal. So, in terms of any specific targets, we are not yet setting them up, because we are working on the current situation in terms of the sales that we are envisaging based on what kind of production we will be able to envisage based on what we are currently doing.

[Vladislav Zlenko:]

Next question, please.

[Operator:]

Thank you. Our next question comes from the line of (Inaudible). Please go ahead.

[Unidentified Analyst:]

(Inaudible). A few questions just taking into account huge debt of the company and do you see a possible conflict between created to companies Mechel is unable to pay the interest for the debt? So, to [both] your buyback program. Sounds like your viewpoint of the creditor initiation of buyback were deemed considered as first in time of clock. Do you see any other reasons fundamental to initiate this buyback in the recent market positions? Thank you. [Foreign Language]

[Vladislav Zlenko:]

Stanislav Ploschenko will answer.

[Stanislav Ploschenko:]

I'll begin with the second question. No. We don't see any other fundamental reasons. We believe that the market is right for such a program and it's not our, the management's belief. It's the belief of the independent board of directors. Answering the first question, we do not see any possible conflict with the creditors, because the company has been able to pay its interest and so the debt successfully even in the first quarter of this year, where the cash flows are usually subdued, so we don't see any ground for the worries that we wouldn't be able to service our debt.

[Unidentified Analyst:]

Thank you. [Foreign Language]

[Vladislav Zlenko:]

Next question please?

[Operator:]

Thank you. Your next question comes from the line of Renaissance Capital. Please go ahead.

[Unidentified Analyst:]

Good evening, gentlemen. (Inaudible) of Renaissance Capital. A several small questions on buyback program are to follow-up. Has this program got any time constraints? Is it one-year program or no time constraint? Second, what's the source of money for this buyback program? Is it your cash flow or any other sources? Also, it looks like kind of looking on both roughly enough to buy 25% of free flow to the company, so in case you buyback any shares, ADRs or do plan to [come forward with] shares? Also, if you are buying any shares ADRs do plan to update the market on the size of buyback on the weekly, quarterly or monthly basis? That's the question on the buyback and also one more question on your P&L, about SG&A dynamics. We see that the growing new expenses with the fixed cost from the first quarter and roughly flat sales and distribution cost. SG&A in the first quarter is roughly 26% of revenue, so assuming that you have been divesting non-core or assets like the Toplofikatsia and the Romanian steel mills? Can we assume that Mechel to found really on fixed cost side, but are we going to see that on the second quarter? Do you have any plans how to pass these costs basically? Thank you. [Foreign Language]

[Vladislav Zlenko:]

Stanislav Ploschenko will answer.

[Stanislav Ploschenko:]

Unfortunately, we cannot disclose any more details about the buyback plan other than what was in the press release, so I can only say that we plan to use our own funds to carry out this buyback. As far as the second question is concerned, naturally SG&A expenses will change with the alterations in the business that may happen due to the asset disposal, however as far as Toplofikatsia Rousse is concerned, which you mentioned in your question. It has been deconsolidated accounted for as discontinued operations in December last year, so you saw that in the results of the full year 2012, therefore any business related to Toplofikatsia Rousse is out of our accounts already and you will not see it again. Obviously, with the disposal of the Romanian plants, the SG&A expenses related to them will be taken off the P&L in the following period. The same concerns any asset that is going to be disposed off.

[Unidentified Analyst:]

Thank you very much. [Foreign Language]

[Vladislav Zlenko:]

Next question please?

[Operator:]

Thank you. You have a follow-up question from the line of Sergey from Societe Generale. Please go ahead.

[Sergey Donskoy:]

Thank you. Yes. I have two follow-up questions. Firstly, could you please provide some more details about the amended Elga license of what are the new production targets that you have to achieve? What are your production plans for the next year and longer term? That's question one. And, also to which extent this may or may not change your CapEx strategy towards this project? And my second question, one small follow-up on your CapEx program for the year. Given that this capitalized interest is a significant part of the total CapEx that you incur during the period, should we imply that in the following quarters you will incur more or less the same amount? Thank you. [Foreign Language]

[Vladislav Zlenko:]

Oleg Korzhov will answer the first question.

[Oleg Korzhov:]

[Foreign Language] As far as the license agreement is concerned, basically the items there remain primarily the same. We are only talking about carrying forward the execution of the project and so on different line items in it registration is different, but generally speaking it's going to be carried forward by about two to three years in terms of the production, which is the second question for 2013. I may only repeat by saying that up to 2 to 2.3 million tonnes is what we can produce, but in terms of how much we are going to produce next year will depend up on the kind of contracts we will have for the thermal coals and how this seasonal workshop installation would work. We will definitely join, do our best to load us up in the full entirety of the capacity as long as it would be profitable to produce.

[Vladislav Zlenko:]

Next question will be answered by Stanislav Ploschenko.

[Stanislav Ploschenko:]

As a matter of fact, the capitalized interest depends directly on the construction progress on the balance sheet. Bearing in mind the fact that we have reduced our CapEx program substantially and most of the projects that we financed in the previous years are put in operations this year and namely the universal rolling mill and the certain equipment Port Posiet as soon as you put in operations what you have previously account for as construction progress, it gets reclassified on our balance sheet and the capitalized interest reduces accordingly. Therefore, it would be fair to say that over the passage of time throughout this year, the construction and progress will be gradually transferred or put in operations and the capitalized interest will go down.

[Sergey Donskoy:]

Thank you. [Foreign Language]

[Vladislav Zlenko:]

Next question please?

[Operator:]

There are no more questions coming for today.

[Vladislav Zlenko:]

Okay. Thank you. Ladies and gentlemen, thank you for taking the time to join Mechel's first quarter 2013 financial results conference call today. The replay of the call will be available on Mechel’s website. If you have any further questions please contact the IR office. Thank you again from all the team here. Good bye.

[Operator:]

Thank you for joining today's call. You may now replace your handset.