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Executives

Alexander Tolkach - Head of International Relations and IR

Igor Zyuzin - CEO

Vladimir Polin - CEO of Mechel Management Company OOO

Stanislav Ploschenko - Acting CFO

Analysts

Yuri Vlasov - Renaissance Capital

Sergey Donskoy - Troika Dialog

Andrei Navikov - Goldman Sachs

Dmitry Kolomytsyn - UniCredit

Dmitry Smolin - URALSIB Capital

Asgani Gregoriatte - BCS Asset Management

Jack Dzierwa - US Global Investor

Martin Zaninovic - Alfa-Bank

Mechel OAO (MTL) Q3 2007 Earnings Call December 11, 2007 10:00 AM ET

Operator

Good day, ladies and gentlemen and welcome to the Mechel nine months results conference call. For your information, this conference is being recorded.

At this time I would like to turn the call over to your host today Mr. Alexander Tolkach. Please go ahead, sir.

Alexander Tolkach

Thank you and good day and good evening everyone. I would like to welcome you to Mechel's conference call to discuss our nine months 2007 results, which were reported today. With us from the management today are Mr. Igor Zyuzin, CEO; Mr. Vladimir Polin, CEO of Mechel Management Company OOO; and Mr. Stanislav Ploschenko, our Acting 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 Provisions of the US Private Securities Litigation Reform Act of 1995. We wish to caution you that these statements are only predictions 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 US 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. Reconciliation of non-GAAP financial measures to the most directly comparable US GAAP financial measures are contained in the earnings press release, which is available on our website at www.mechel.com.

At this point, I'd like to turn the call over to Mr. Igor Zyuzin. Mr. Zyuzin, please go ahead.

Igor Zyuzin

[Translated]. Good day and good morning, ladies and gentlemen. We are pleased to welcome you to our conference call reporting our financial results for the first nine months of 2007. I will start today's presentation with a general overview of our performance and then pass the microphone to the CEO of Mechel Management OOO, Mr. Vladimir Polin who will provide more insight on our achievements and plans of the company. After that our CFO Mr. Stanislav Ploschenko will review the financial results.

First of all for the first nine months of 2007 it is clear that Mechel has achieved impressive financial results which have already surpassed the record results reported for the full year 2006 that came as our business continues to expand. During the third quarter we announced acquisitions of Bratsk Ferroalloy Plant and seaport Temryuk-Sotra on the Sea of Azov and those acquisitions we had discussed in detail during our last earnings call. But only two days after our last call, we have made another major acquisition. That will comprise Yakutugol Mining Company, and one of the world's largest untapped coking coal field, Elgaugol.

By acquiring Yakutugol, Mechel became the first Russian producer of hard coking coal, and the third coking coal exporter engineer in Russia. And after we develop the Elgaugol deposits, we expect to become the producer of the most expensive and most deficit grade of coking coal. These will make Mechel a leading producer of coke production raw materials in Russia, and one of the major players in international market, especially in the Asia-Pacific region.

Apart from acquisitions, we have executed a number of projects to modernize and improve our production across most of our assets. We have started implementing our new CapEx program, which will extend our reach to new markets and grow opportunities and strengthen our existing position. And as a result, the first nine months of 2007 yielded strong financial and operational results.

The net revenue amounted to more than $4.6 billion, consolidated EBITDA more than $1.2 billion, and net income more than $706 million. And looking at the qualitative side of Mechel's business, we maintained a high operational margin of 22.6%. And we will continue to move forward with our brands for enhancing Mechel's effectiveness, increase its scale and continue to grow our shareholder value.

And now, I'll give over to Mr. Vladimir Polin, CEO of Mechel Management Company, who is in charge of our operational management, and he will provide more details on our operation. Thank you for your attention. Mr. Polin, please go ahead.

Vladimir Polin

[Translated]. Good day, and good evening, ladies and gentlemen. We are pleased that our company has performed very well in the first nine months of this year. We continue to implement important projects, improve the abilities of our company, and drive expansion, in existing and new markets.

Here is the highlighted performance of the production. In the first nine months of 2007, we're continuing to increase and maintain the pace which we have demonstrated in the beginning of the year. Compared to the first nine months of 2006, we increased the coal production by 8%, nickel production by 22%, steel production by 3%, rolled products production by 10%, and hardware production by 14%.

And with the acquisition of the Moscow Coke and Gas Plant, and commissioning of the new coke battery in CMP, the coke production rose by 77%, if compared to nine months of the last year. And since we actually started to produce more coal and mining products, we continue to improve the logistic operations within both domestic and international sales.

Facing a significant shortage in the Russian railroads rolling stock, due to seasonal factors, we had to lower shipments of our steam coal. However, in order to reduce dependence on the neighboring countries ports and seasonality factors, in August of this year, we have acquired the seaport Temryuk-Sotra on the Sea of Azov, and presently, we are redirecting part of our traffic to this port. We're also working on some other projects of organizational and technical nature that will improve our logistics.

And I would also like to talk, briefly, about the energy segment of our operations. Our segments of Southern Kuzbass Power Plant, with installed capacity of 554 megawatts, as well as Kuzbass Power Sales Company, we approached the level when generation and sales of electricity constitute separate business of Mechel, since total power generating capacity of the group subsidiaries is now over 800 megawatts.

And we decided to officially report our energy operations as a new segment. And today is the first time when we have disclosed this segment separately. Of course, this segment is still very new and young, and has to go through development, modernization, and deep integration into the company's overall business. We are currently establishing the base for developing an efficient and sizable energy business in the company. It is worth noting that even today, Mechel's Energy segment demonstrates profitability. If we exclude interest payments on intersegment loans which were granted to Mechel Energo, the subsidiary of Mechel, for the recent acquisitions by the holding company. And if we eliminate those payments for the first nine months of 2007, the segment contributed almost $12 million through consolidated EBITDA.

And after becoming part of Mechel Energy segment, the Southern Kuzbass Power Plant has increased its power generation volumes and outperformed its initial production plan by more than 1.5 times. Having acquired Kuzbass Power Sales Company, we have managed to increase electricity sales and get a better feeling of Siberia's huge energy market. In other words, we see both sides of our energy business steadily developing, generation and sale of electricity.

And as expected, at this stage, in the segment development, current profitability in the energy segment is by far lagging behind the stability of our other two segments. However, we continue to develop the energy segment of Mechel's business by increasing the capacity and efficiency of the existing generating facilities. In addition, we are also planning to develop the segment from new acquisitions of energy assets that will be integrated into the group's business using the existing synergy potential in production and logistics. Investments in energy are very promising ones, and given the fact that consumption and shortage of electricity have been on the rise.

And now, I would like to say a few words on the operational results of few segments. The third quarter was somewhat more challenging for us, compared with the first half of the year, given the fact that the restructuring of our two subsystems. As I mentioned before, we changed our strategy from selling steel rolled products to wholesale traders, and to invest into development of our own service, retail structure called Mechel Service, specialized in reaching the final customers.

But to conduct this change in our cargo flows, we needed to undergo a period of lower rolled product sales, at the same time filling the gap with a temporary increase in billets sales. This resulted in a temporary decrease in the segment's margin. Overall, although we increased the total sale volumes, but we didn't improve the segment's margin, if compared to the previous year.

Of course, the margin was also affected by the general decline in the constructional steel market in Russia. But we are already seeing a stabilization of the situation and we are already able to gradually increase our sales prices for the rolled products. Besides during this quarter, Mechel Service managed to commission new warehouses and sales force continuing to cement our position on the retail market.

And now, I would like to turn the call over to Stanislav Ploschenko, who will discuss in more detail our financial results, and market overview. Thank you for your attention.

Stanislav Ploschenko

Good morning, and good afternoon, ladies and gentlemen. Once again, I am pleased to report another successful financial period which by far beats the similar nine months results of the year 2006reasserting the advantages of the growth strategy we chose. During the reported periods, our consolidated revenue grew by 48%, versus the same period of 2006, to a record $4.65 billion.

Our recent acquisitions in the energy sector contributed $217 million there. At the same time, the market situation undoubtedly played a significant role in the revenue growth, bringing $1.17 billion, while the increase in sales volume fetched another $115 million. The price factor was, by far, dominating in the mining segment, pushing the revenue up 33%, to $1.266 billion. The significant negative impact from the reduction in volumes was due to the increase of intersegmental sales, in particular intra-group. Sales of coking coal went up by 59%, and iron ore concentrate up by 27%. The steel segment demonstrated even better dynamics, with revenue up 45%. The price factor contributed $769 million, while $205 million came from the growth in sales volume.

Now, we'll look into the segment performance in greater detail on the following slides. In steel segment, we continue to concentrate on the more promising Russian markets, whose share in our sales increased from 55%, a year-ago, to 60%. Overall, we witnessed a certain slowdown in the market dynamics in the third quarter of the year, and after that unprecedented growth in the first half, especially coming from the construction sector. Our strategy of gradual cost reduction, and shift towards higher-margin products, allowed us to demonstrate significant growth in the main financial indicators in the first nine months. EBITDA is up 47%, to $594 million, and net income up 55%, to $360 million.

The share of high margin products consistently grew. Stainless sheets, from 4%-5% of the segment revenue, stampings and forgings from 8% 9%. Although the share of hardware decreased insignificantly in absolute numbers, the volume of sales increased by 19% year-on-year, due to the launch of modern equipment in our main hardware plants this year.

As Mr. Polin already mentioned, in 2007 we undertook restructuring of our sales policy in the steel segment, walking away from wholesales or the large traders, and concentrating on deliveries to the final consumers of our products through our retail subsidiary, Mechel Service, which works on the open market, not only with our plants, but also with third parties.

Today, we can already say that after certain transitional period this policy is beginning to pay back, and we strongly expect that in near future, it will translate into tangible financial results.

Our mining segment demonstrated even more convincing results. EBITDA grew more than 2.5 times, and amounted to $654 million. Net income increased by three times, and it reached nearly $400 million.

Despite the fact that nickel prices came down significantly in the third quarter from the historical highs reached in the second one, we managed to take advantage of our mining business diversification and maintain the high profitability reached in the first half of the year on growing coal and iron ore prices.

Our flexible sales strategy added to the success through increase of sales to Europe, particularly sales of steam coal, as well as the increase of sales to CIS markets in Ukraine in the first quarter of 2007. We also began to ship low quality steam coal to the recently acquired South Kuzbass Power Plant, which helped us to increase sales profitability of our coal operations, through usage of logistical advantages.

Besides following low spot prices in the Northern China, we decided to enter this strategic market, as well, and began shipping concentrate there. At present, our monthly sales to China make up 150,000-200,000 tonnes. Thus, we can say today, that our strategy based market approach in sales- both towards internal consumers and third parties proved to be efficient, and contributed to our success.

We are also convinced of the fact that our recent acquisitions, namely Yakutugol, which is Russia's largest producer and exporter of hard coking coal; and Elgaugol, with the world's largest reserves of high quality caking coking coal, will provide our mining segments with unique opportunities, not only on the Russian markets, but also on the global ones, which will, fundamentally, change our company's market position.

On the cost side, we have managed to keep our cost of sales structure in both mining and steel segments virtually unaltered, despite changing conditions in 2007 in all the input markets. We also made further progress on the path to self sufficiency, having acquired Bratsk Ferroalloy Plant, which fully covers our need for ferrosilicon in the steel segment.

Taking into account the fact that 4 to 6 kilogram of ferrosilicon is consumed in production of one tonne of steel, this acquisition not only increased our independence, but also made us one of the major suppliers of ferrosilicon to the entire metallurgical industry.

Comparing the results of our two main segments, I would like to draw your attention once again to the benefits of our growing business model. We succeeded to take full advantage of growth in coking coal and iron ore prices increasing the profitability of our mining segment with operating margins doubling to exceed to 34%, and EBITDA margin growing to almost 37%. At the same time, despite growing raw material costs and certain price correction in the steel markets in the third quarter, we managed to maintain the profitability of our steel segment consistently following our strategy discussed earlier.

As for the new energy segment, we believe it's just too early to judge from the results since it was only formed during the last six months, and it will take some time to fully integrate this asset into our business, and make the most of all expected synergies.

We view this segment as an important investment into the future in the light of the pending electricity price liberalization and ever-growing energy deficit, both in Russia and Europe. At present, we are reviewing the modernization program of power generation assets, as well as power capacity increase to maximize the benefits of the two mentioned factors.

Moving from the segments results to the consolidated ones, I would like to reemphasize that the fact that the nine months results of 2007 exceeded the full 2006 year results in all financials terms, both absolute and relative ones, reaching the maximum level for the last three years. Consolidated gross margin grew to 39%. Operating profit exceeds $1 billion for the first time, and represented 25% of the revenue. EBITDA grew to over $1.2 billion, or 26% of revenue, and the net income doubled, to post $706 million.

As far as the balance sheet of the group is concerned, we would like to point out the operating cash flow of $843 million for the reporting period, set the new historical maximum for our group. Despite the growing investment activity in 2007, our business has generated sufficient cash inflow for financing our acquisitions. As a result of insignificant growth of debt item on our balance sheet, which was used to finance some of our first quarter acquisitions, the cash and cash equivalent balances as of the reporting date exceeded $400 million, and it also was important in the light of preparation for the auction for Yakutian and Elgaugol.

Despite the increase in debt balances on the end of the third quarter of 2007, the debt burden continued to be insignificant with the net debt to EBITDA ratio of just 0.64. Thus we were well prepared for the auction to acquire the Yakutian assets. Largely, that was a result of our continuous efforts to optimize our debt portfolio by increasing the share of long-term debt and decreasing the share of secured debts, which reached the record low of 13%. The success of this strategy became even more obvious after our victory at the auction, which took place at not the best of times for the global financial markets, as you know.

To sum it up, we're satisfied with the first nine months of the year, which beats again the historical financial results of the company. Such stable positive results measured against different trends in global markets testify to the validity of our strategy aimed at asset modernization and expansion in key markets.

Taking into account our recent acquisitions, which will allow us not only to enter new markets, but also to solidify our position on the existing ones, we remain convinced that there is still lot of potential for further growth and improvement in our company's performance.

Thank you for your attention, ladies and gentlemen. And now we will be pleased to answer your questions.

Alexander Tolkach

Thank you. And we will now take the questions. We would ask that participants please state their name and company before asking their question, and allow us sometime after the question for translation. All questions will be answered in Russian with simultaneous translation into English. So, if you wish you may ask the question in Russian also and we will translate for you. Thank you.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from Yuri Vlasov with Renaissance Capital. Please go ahead.

Yuri Vlasov - Renaissance Capital

[Translated]. So I'll translate for our English speaking audiences. First question was on the Yakutugol and its volumes and trends of mining for nearly three years and how much of it will be sold in the Russian markets? Second question was about internal consumption of our mining products? And third question, of possible trends of IPO in the mining segments? Thank you. We will answer the questions in the row. Mr. Zyuzin will answer this question

Igor Zyuzin

Okay, I'll translate. So The Yakutugol trends for mining, we are trying to increase the mining output of Yakutugol operations from current, slightly more than 10 million tonnes of coal per year to a maximum of 15 million tonnes of coal per year. And next year, 2008, we will increase production by 1 million or 1.5 million tonnes of coal per year and these levels of production of up to 15 million tonnes per year will be maintained till the depletion of the reserves there.

So as far as the markets are concerned for the equity in coal, current portfolio of about 50% export, 50% domestic sales plus/minus 10% we see as an optimal one at present. But, of course, we may shift it somewhat if we see higher prices for coking coal domestically available, sell more coking coal domestically. And we currently see higher prices for the steam coal, so if we could do well on the export markets then, of course, we will export them. So we'll continue to maintain this operational level. And now the second question of internal consumption of our mining products. Mr. Polin will answer that.

Vladimir Polin

So, as for internal consumption of our mining products, during the first nine months of 2007 we shipped about 2.7 million tonnes of coking coal to our coal production facilities at Chelyabinsk at Moscow Coke and Gas Plant. We shipped roughly the same amount, 2.7 million tonnes of iron ore concentrate to our Chelyabinsk Metallurgical Plant and as for steam coal, taken into account the acquisitions of Southern Kuzbass Power Plant, total in nine months we have shipped about 400,000 tonnes of steam coal to our generating facilities. And now to the third question about mining segments. Zyuzin will answer the third question.

Igor Zyuzin

So we are currently studying the possibilities of doing a separate IPO of our mining segment, but we are not excluding such possibility, but no final decision has been made. So we are just having the -- what, how can we do that.

Thank you. And next question please.

Operator

The next question comes from Sergey Donskoy with Troika Dialog. Please go ahead.

Sergey Donskoy - Troika Dialog

So, first question was if we can divide our gross margin and amortization into different segments? Second question, in our quarter reporting it seems that our productional costs and commercial costs have increased, so the question is it true? Third question is [Technical Difficulty]? And the fourth question was on our debt situation at present time. Thank you.

Vladimir Polin

Gross profit for the mining segments made up $920 million to-date in the first nine months of this year, the steel segment $846 million and the energy segment $89 million. Depreciation, depletion and amortization item was respectively, $83 million for the mining segment, $90 million for the steel segment, and $11 million for the energy segment.

And answering to the second question, the increase in commercial expenses, most of the increase came on the accounts of energy segments and was related to the distribution of electricity to the consumers through the network of (inaudible).

Stanislav Ploschenko

Let me answer the fourth question before the third one. The question was about the amount of debt on our books as of today, taking into account the acquisition of Yakut and Elgaugol. The amount of debt as of today is approximately $3 billion.

Sergey Donskoy - Troika Dialog

[Foreign Language].

Igor Zyuzin

[Foreign Language].

Alexander Tolkach

[Translated] Let me translate, the increase of the cost of sales interest came in the accounts of the energy segments mostly. And now on the third question, considering the coal shipments on the Southern Kuzbass Power Plant, Mr. Polin will answer.

Vladimir Polin

[Translated]. So, we have been shipping our steam coal from the Southern Kuzbass Power Plant since July 2007, and of course, we can't give you exact numbers at the moment, but these shipments increase gradually month-over-month considering, the fact that we also have to make some surplus for the winter months. Thank you. What I hear is somebody's heavy breathing in the line. I guess, our call is very important today.

Sergey Donskoy - Troika Dialog

[Translated]. So, the question was considering the possible depletion of Yakutugol coal reserves, and considering our plans to increase production up to 15 million tonnes per year, so when will we foresee the depletion? Thank you. Mr. Zyuzin will answer that question.

Igor Zyuzin

So, we plan to finish production at the Yakutugol operation in the term of 15 to 20 years. Thank you. Next question, please.

And also additional – I am sorry – and during these 15-20 years, as we finish operation at Yakutugol, we will transfer our operations, equipment, manpower, et cetera to Elga operations, which we will be developing. Thank you. Next question please.

Operator

We will now move to [Andrei Navikov] with Goldman Sachs. Please go ahead, sir.

Andrei Navikov - Goldman Sachs

Yeah. Hi. I have a few questions regarding your coal assets. What kind of spot prices you currently see for the coking coal in Russia for J, K and KS grades? And to what extent these prices can exceed that you think will translate into contracts in ‘08 in Russia?

Second question, what amount of the coking coal is currently sold in Ukraine, and at what prices? And what do you think these both numbers will be in ‘08? And the third question, what salary inflation, do you have for the coke subsidiary and steel subsidiary, right now, and what is expectations for ‘08? Thank you.

Alexander Tolkach

Sir, could you repeat the grades of coal you asked in the first question?

Andrei Navikov - Goldman Sachs

I am talking about grade J, K and KS?

Alexander Tolkach

All right. Thank you. The first question will be answered by Mr. Zyuzin.

Igor Zyuzin

[Translated]. So, for the coking coal prices, they are currently both for Russia and Ukraine within spot prices for them, within the level of 140 to $150 on FCA basis, and in 2008, of course, we foresee them to increase. And Mr. Polin will answer the third question.

Vladimir Polin

[Translated]. So, as far as salary inflation is concerned, we offset the salary inflation by increasing the productivity of the manpower and optimizing the total amount of people working in our subsidiaries. So, currently our salary inflation is higher than overall inflation in Russia, but we are dropping off some obsolete and inefficient production, and thus we decreased the manpower level, and we maintain the most professional people working both in steel and mining segment. Thank you. The next question, please.

Operator

The next question comes from Jack Dzierwa with US Global Investors. Please go ahead. Hello, Mr. Dzierwa, your line is now open. Seems the line of Mr. Dzierwa is muted. So, I will take now a question from Dmitry Kolomytsyn from UniCredit. Please go ahead.

Dmitry Kolomytsyn - UniCredit

[Translated]. The first question was on our further steam coal shipments to the Southern Kuzbass Power Plant, and its capacity, and also our plans for generating volumes there. The second question was today it was announced the possible increase of taxes for mining companies, and if it can affect our operations.

The third question on the general prices in fourth quarter compared to the third quarter, and how we see our financial results going forward? And the fourth question about we announced very recently our sales of iron ore concentrate to Northern China, so the other question was how it proceeds? Thank you. We will answer them one-by-one. The first question will be answered by Mr. Zyuzin.

Igor Zyuzin

So, we plan to ship about 1.5 to 2 million ton of our coal to the Southern Kuzbass Power Plant. And in 2008, we planned generation out there at 2.3 million kilowatt hours. Thank you. Now the next question. No, we will answer the next question.

So, on the second question, unfortunately we cannot comment now since the news was published recently, but we will study that issue, and we will return back with an answer. Now for the third question, which we will answer.

So, to answer for that fourth question about our iron ore concentrate deliveries to China, our current FCA prices reached US$100 per ton on the FCA basis for the dry concentrate, and it's now on the general prices question.

So, in the fourth quarter, we witnessed declines -- some declines for the steel products and nickel, and increase in prices for coals and iron ore concentrate. Thank you and next question, please.

Dmitry Kolomytsyn - UniCredit

[Translated]. So the question was on our possible IPO of mining segment, if this new entity will comprise only coal mining assets or other mining assets?

Igor Zyuzin

So, we are not excluding the possibility of uniting all of our mining assets that we should currently have in the company, and actually now we are studying different possibilities to come to the best possible solution. Thank you. Now, next question please?

Operator

We will now take a question from [Dmitry Smolin] with URALSIB Capital. Please go ahead.

Dmitry Smolin - URALSIB Capital

[Translated]. The question was on our new energy segments, so what were the financial results purely for the third quarter? Thank you. We'll answer that.

Igor Zyuzin

Translating, for the energy segment in the third quarter of this year, the revenue made up to $112 million; gross profits, $83 million; operating profits, $340,000; EBITDA, $5.4 million; and net loss of around $6.8 million mostly on the accounts of the interest payments on inter-company loans. Thank you.

Dmitry Smolin - URALSIB Capital

[Translated] So the question is on our coking coal prices. As we at our operation, if we can save the significant increase already in the fourth quarter or on the beginning of 2008 after Yakutugol company changes its sales to the new long-term contracts? Thank you. We'll answer the questions.

Igor Zyuzin

So, we hope that even in the fourth quarter, we have already witnessed it has a increase in sales prices for Yakutugol's operations, for which we have their both spot and long-term contracts, and while we'll have to finish the long-term contracts as of the end of the year, we will be able to increase prices on the spot basis. Thank you, and next question please.

Operator

We'll now move to [Asgani Gregoriatte] with BCS Asset Management . Please go ahead.

Asgani Gregoriatte - BCS Asset Management

[Translated] The first question was long-term contracts in our mining segments, on that base in the total portfolio in prices, and when they expire? And the second question was on the possible mining volumes of our new mining assets, including Elga? Thank you. We'll answer those.

Igor Zyuzin

So, approximately the total portfolio of long-term contracts in our overall coal sales are less than 60% and they expire, although the latest of them expire by April 1, 2008. Thank you.

Asgani Gregoriatte - BCS Asset Management

[Foreign Language]?

Igor Zyuzin

So, this year, we should see a production of coking coals on existing operations in Southern Kuzbass and Yakutugol up to 16 million tonnes, and next year, we see a possibility to mine about 18 million tons of coking coals in all our different assets. Thank you. Now, next question please.

Operator

We will now take a question from Jack Dzierwa with US Global Investor. Please go ahead.

Jack Dzierwa - US Global Investor

Hey. Yes. Good evening, gentleman. I joined the conference call late, so I apologize, if it has been already discussed, but in your steel segment only can you comment about EBITDA margin outlook for the next couple of years, as well as your plans in terms of return on invested capital? Thank you.

Alexander Tolkach

Thank you.

Stanislav Ploschenko

[Translated]. We do not give financial forecasts, therefore, we would like to draw your attention to the current figures and draw your own conclusions.

Alexander Tolkach

And just a second we will finish answering the question.

Stanislav Ploschenko

[Translated]. As far as the return on capital is concerned, so we also can give you only the current figure. We will report it in a few minutes, if you don't mind.

Jack Dzierwa - US Global Investor

[Translated]. Thank you.

Alexander Tolkach

Thank you. Now while we are calculating that can we move to the next question please?

Operator

(Operator Instructions). We will now move to Sergey Donskoy with Troika Dialog. Please go ahead.

Sergey Donskoy - Troika Dialog

[Translated]. So a question again about possible IPO of the mining assets, and the question is, if we will maintain the control over our mining assets even after IPO or we will separate those two businesses completely? Thank you. Mr. Zyuzin will answer.

Igor Zyuzin

We do not look into possibility of dividing our segments into two businesses completely. In case we do an IPO of our mining segment, this will be only the IPO of minority stake, and we will make sure our – we will maintain the control over it. Thank you.

Alexander Tolkach

And now Stanislav Ploschenko is ready to answer the previous question on return on investments.

Stanislav Ploschenko

[Translated]. We can give you an answer on the return of assets at the moment for the steel segment, which is around 12% for the nine months.

Sergey Donskoy - Troika Dialog

Thank you.

Alexander Tolkach

Thank you and next question please.

Operator

We will now move to Dmitry Kolomytsyn with UniCredit. Please go ahead.

Dmitry Kolomytsyn - UniCredit

[Translated] The first question is when we state that we will increase Yakutugol's production up 15 million tons a quarter year, if we will maintain the same portfolio as currently above 50% of coking coal and 40% of steam coal? And the second question is regarding the cost in the third quarter. So, while we don't give financial forecast the question is if the energy segment will continue to increase our production costs, and the same question goes for the cost of goods sold for commercial goods? Thank you.

Igor Zyuzin

So, the first question, now we have two big mining companies; first is Southern Kuzbass coal mining company, which now produce about 40% of coking coal of the total output; and Yakutugol coal mining company, which currently produces about 70 to 80% of coking coal used alone. But on Yakutugol, we will increase the proportion of coking coals mined, so there we have reached the level of 15 million tons per year. We will produce mostly only coking coal at Yakutugol assets.

Alexander Tolkach

Thank you, now, we move to the second question on the third quarter.

Stanislav Ploschenko

[Translated]. Talking about the increase of cost of sales, we see this natural circumstances when the company is growing extensively through acquisitions, and this is the message, which you can take as the basis for the calculations. And coming back to the question on the return of assets, we give a small direction, it will be in the 12 to 16% as of the nine months of this year. Thank you.

Alexander Tolkach

Thank you. Now the next question please.

Operator

Our final question comes from [Martin Zaninovic] with Alfa-Bank. Please go ahead.

Martin Zaninovic - Alfa-Bank

[Translated] The question was on the prices for steel products given in today's presentation. Stanislav Ploschenko will answer it.

Stanislav Ploschenko

[Translated]. Unfortunately, in this presentation, which is now being made available on the website, it contains incorrect figures of the average price for the steel segment products in the nine months. The correct figures are already contained in the presentation in PDF format, which is already on the website, I hope, and will be available for your usage. For your [express] purposes I can say that the rebar price, average rebar price on FCA basis for the nine months was $645 [wirerods], $555 for stainless flat, [$5,223] and the rest of the figures you can see from the presentation which is on the website.

Alexander Tolkach

All right. Thank you. Now the next question, please.

Operator

As we have taken our final question, I would like turn back the call over to you for any additional or closing remarks.

Alexander Tolkach

Thank you for all your questions. Ladies and gentlemen, thank you for taking time to join Mechel's nine months 2007 financial results conference call today. And the replay of the call will be available for the next 30 days, and you can find it on our website, and if you have any further questions, please always feel free to contact our Investor Relations office. Thank you again from all the team here, and bye.

Operator

Ladies and gentlemen, that would conclude today's conference call. You may now disconnect.

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Source: Mechel Q3 2007 Earnings Call Transcript
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