Mechel OAO (NYSE:MTL) Q4 2015 Earnings Conference Call May 13, 2016 11:00 AM ET
Alexey Lukashov - Deputy Director, Investor Relations
Oleg Korzhov - Chief Executive Officer
Andrey Slivchenko - Chief Financial Officer
Oleg Petropavlovskiy - BCS
Anatoly Dzumailo - Kommersant
Ksenia Svetlova - BNP Paribas
Good day and welcome to the Mechel Reports FY 2015 Financial Results Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Alexey Lukashov, Deputy Director of Investor Relations. Please go ahead.
Thank you and good day everyone. I would like to welcome you to Mechel’s conference call to discuss our full year 2015 results, which we reported today.
With us from management today are Mr. Oleg Korzhov, Mechel’s CEO and Mr. Andrey Slivchenko, 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 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 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 or 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 our 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.
Good afternoon and good morning, ladies and gentlemen. We are glad to welcome you to the conference call for the company’s 2015 financial results.
I should begin by noting that presently, the company will start filing its financial results according to the international financial reporting standards and not use GAAP we have used since 2004. Besides, the reporting currency for the consolidated financial statements has been changed to the Russian rubles. Consolidated revenue in the past year amounted to RUB253 billion, with consolidated EBITDA RUB46 billion.
2015 was a complicated year for our company, but nevertheless, a vital one. Our key event was reaching agreements in principle with the majority of our lenders on restructuring our debt. Even though not all official documents were signed in 2015, our chief efforts and talks on restructuring conditions were undertaken in that period.
As of now, the company has announced signing deals with major vendor banks as well as reaching an agreement with Gazprombank, which is the bank acquiring a share in the Elga project. So we may consider that the restructuring’s pivot point has been passed. Of course, we still have a lot of work ahead of us. We must complete the syndicated loans restructuring with the syndicated global banks as well as finish our negotiations with other vendors. Restructuring of three series of bonds is currently underway.
Besides, we still have to meet several suspensive conditions, including those which will enable us to put off the maturity of our main body of debt from 2017 to 2020. And at the same time, resolution of the thorniest issues with our lenders will enable the company to start implementing other steps to reduce our debt.
During this hard work with our lenders, the company successfully continued its operations. In 2015, we increased production of coal by 2%, pig iron by 3% and steel by 1% year-on-year. In 2015, our revenue went up by 4%, EBITDA increased by 54% with EBITDA margin up to 18% and operating income up by 140% year-on-year.
Mechel’s operational and financial results improved to a large extent due to the fact that our key projects whose implementations had caused our company’s debt growth are reaching target capacity utilization levels and increased returns on invested capital.
I would like to note that in 2015, the trend in steelmaking commodity markets was mostly negative. China’s demand for coal imports took a constant downturn as steelmaking facilities faced massive closures. Imports were pushed out by local Chinese producers. Australian producers persisted in the policy of tough price competition with other global suppliers for the share in the market. Spot prices for coking coal plummeted. As a result, the price for coking coal concentrate on the global market fell by more than 30% from $117 FOB in first quarter 2015 to $81 FOB in first quarter 2016 further than it has been for many years.
In these conditions, our mining segment faced constant metallurgical coal sales. The chief decrease was in export sales, especially to China. At the same time, the company increased coal supplies for internal use. For example, Elga coal has replaced those coals that the group’s enterprises used to acquire from third-parties.
At Elga Coal Complex, 4 million tons of coal were mined last year with coking coal accounting for two-thirds of that amount. 5 million tons are planned to be mined in 2016. We can confidently say that the deposit’s first development stage reached its project capacity. It is not much compared to the goals we set for the deposit’s maximum mining capacity, but even now, it’s a decent figure for any mining facility. Our key foreign consumers have already had a chance to sample Elga coal’s superior quality and show interest in its supplies. The deposit’s steam coal was being actively exported to China throughout the year.
The steel division faced equally tough market conditions in 2015. Throughout practically all of the last year, we had to cope with weakened demand for steel products in the construction industry, which is crucial for this segment’s sales structure. Russian long-term steel market in 2015 went down by 14%. Despite a significant decrease in visible consumption of construction grade long steel in Russia, we managed to increase our share at this strategically important market. We also optimized our sales portfolio, increasing the share of high value-added products.
The growth of the load on Chelyabinsk Metallurgical Plant’s universal rolling mill has been a major contribution to the success. In 2015, the mill produced 175,000 tons of high-quality products, and we expect to nearly triple this amount in 2016. Starting in 2016, we began supplying rails produced by Chelyabinsk Metallurgical Plant’s universal rolling mill to Russian Railways, which will enable us to fully utilize the mill’s potential for producing high margin products. Rail supplies to Russian Railways may amount from 150,000 to 250,000 tons this year. The mill’s overall output is expected to total over 500,000 tons in 2016.
I would also like to note the success of our company’s yet another important investment project, Port Posiet, which is our logistical chain’s key link in delivering coal to our clients in the strategic Asian markets. It’s reached the capacity of 7 million tons. Now it not only successfully ships the company’s coal, but also brings in additional profit by offering services to other Russian producers.
In the second quarter of 2016, we see an improvement in all of our key markets in terms of the present environment. Contract prices for coking coal demonstrated positive dynamics for the first time in several years. Spot prices for coal in April and May went up by nearly one-third. Prices for chief products of our steel division have also grown significantly. We think that this growth has a speculative component linked to the Chinese state support of steelmakers and, thus, is subject to some adjustment. Nevertheless, we do not expect prices to return to the level of this year’s beginning. Considering all of the above, the current situation enables us to confidently conduct our operations and sales and fulfill our financial obligations with a view to the company’s further development.
Now, I would like to give the floor to our Chief Financial Officer, Andrey Slivchenko, who will give details on the financial results for all of our business segments. Thank you for your attention.
Ladies and gentlemen, good morning and good evening. In order not to repeat most of what’s been said just now, I would reiterate the major happenings for the year ended 2000 – for the year 2015. And we will dwell upon revenues and margins by segments as well as the debt and cash position of the company at the end of 2015. Today, we are presenting the financials for the year 2015 under IFRS, and I would remind you that we changed the reporting currency to Russian ruble.
Last year, we managed a solid platform for restructuring of our major borrowings with the state banks to finalize them at the beginning of 2016. We also showed a significant growth in EBITDA by 54% in ruble terms, which – such a high rate is due to the exchange rate depreciation. And consolidated revenues remained pretty much stable, with a slight increase by only 4% year-on-year. Here, the effect of the depreciated ruble absorbed the effect of the drop in sales volumes. As was mentioned, our revenues are dependent on the exports markets and on the economic situation in Russia. And last year, we were highly influenced by the fall in the value of the Russian currency, like the year before.
In the mining segment, the revenues were as well driven by the slowdown of the Chinese market dominating the world’s demand in prices for the steelmaking commodities. We saw a significant drop in our coal exports. However, ruble devaluation compensated for the revenue’s fall out. And for the mining segment revenues, we even saw a 1% increase from RUB79.5 billion to RUB80.6 billion. Despite slight inflation, costs were kept stable, and selling and general expenses have a loss of 15%. This resulted in additional 4% to the gross profit margin, reaching 52.8% and made the segment EBITDA double from RUB13.4 billion to RUB26.8 billion. EBITDA margin increased from 16.8% to 33.3%.
In metals, we were affected by the slowdown of the shrinking domestic construction market as was mentioned. Sales drop in the steel segment was lower than the market contraction, only by 7% and we managed to increase our market share. Ruble depreciation had a positive effect on selling prices. This not only compensated for the dropped out volumes, but also pushed revenues by 5% from RUB139 billion to RUB146 billion.
And like in the mining segment, in the steel segment, costs are more sensitive towards the exchange rate fluctuations. Cost of goods sold increased by 4%, eating up the price increase and leaving gross margin at pretty much the same level of 21.8%. SG&A expenses for the segment were held back, leaving the segment EBITDA margin with a 1% increase at 11.7%. The EBITDA for the segment increased from 14.9% to RUB17 billion.
Power segment was quite stable, with slight increase on revenues from RUB25.8 billion to RUB26.5 billion and operating profit – EBITDA grew from $1.4 billion to $2 billion. Overall, consolidated EBITDA was up 54% from RUB29.8 billion to RUB45.7 billion and EBITDA margin increased from 12.2% to 18%. As far as our debt position is concerned, as was already mentioned, our main efforts were used last year to find comprehensive solution on the debt restructuring issue. Although, as at the end of the year, we signed restructuring agreements with only VTB, negotiations led in 2015 allow us to finalize the restructuring this year.
As at the end of the year, net debt amounted to RUB506.9 billion, including RUB14 billion of lease obligations. This also comprises RUB27 billion of the restructured interest payable and RUB20 billion of fine and penalties, which as discussed last year are subject to our compliance with the restructuring terms and can be waived later on. The significant increase from RUB407 billion of net debt from last year was primarily due to the ForEx effect and accrued penalties and fines. In the beginning of 2016, we covered a large – we converted a large portion of our debt into rubles arriving at two-thirds of the debt being denominated in rubles as of now.
In most of the restructured agreements, cost of debt will be linked to the Russian Central Bank key rate. Dollar and euro-denominated loans remained linked to LIBOR and Euribor which are relatively low. Under the restructured – under the restructuring agreements, limited capitalization of interest is envisaged, which will save some cash in the future and align our debt service with available cash flows. Interest expenses in 2015 amounted to RUB40 billion. On top of that, financial costs associated with fines and penalties added another RUB19 billion of the accrued cost.
Cash, we almost have no capital expenditures, leaving predominantly maintenance and development CapEx at Elga, totaling RUB5 billion. Financial cash outflow was significantly smaller than in previous years, RUB700 million versus RUB16 billion due to the restructuring efforts. Last year, we also managed to finance our trade working capital in the amount of RUB3.3 billion. This all became possible due to our successful negotiations with the banks on restructuring and managing debt service payments with our cash flow possibilities.
So in conclusion, I would really like to thank all our creditors with whom we have already agreed and those who have been patient enough, for their understanding and collaboration. Thank you for your attention and interest.
Thank you. We will now take questions. We would ask that participants please state their name and company before asking their questions and allow some time after for translation. When questions are answered in Russian, they will be followed by translation. So you may ask your question in Russian also and we will translate. Thank you.
Thank you. [Operator Instructions] We will now take our first question from Oleg Petropavlovskiy.
Yes, good evening gentlemen. Thank you for the presentation. Couple of questions for me. First of all, could you please clarify how much of penalties from banks maybe left or will be left by the end of 2016 or I don’t know, what are the conditions for restructuring regarding those fees? And my second question is what your level – what your – what guidance can you give for rails and beams production in 2016? Thank you.
The first question will be answered by Andrey Slivchenko.
And as far as the fines and penalties are concerned, that amounts to approximately RUB 20 billion as of the end of 2015. Out of which, basically, the write-offs as far as these penalties are concerned do depend upon the way we fulfill our obligations in terms of the restructuring, which also includes paying on our debt according to the current existing schedule. In the course of 2016 and 2017, we plan to act on these plans, and so we’re hopeful that the fines and penalties are going to be written off in the course of this period. Now in terms of precisely how much of the penalties and fines shall remain towards the end of the year, I won’t be able to tell you because that will be dependent upon the way we fulfill all the conditions written into them.
Second question will be answered by Oleg Korzhov.
So as far as the output volumes are concerned, I indirectly mentioned that in my presentation, we have currently reached the volumes of production. For the beams, it is about 20,000 tons, which in total throughout the year, there is a possibility to produce about 250,000 tons. And so as far as rails are concerned, the volume here will depend upon our agreements with Russian railroad company. As I stated, potentially, we have an understanding that it’s going to be in between 150,000 to 250,000 worth of rails that we will be able to ship to the Russian railroads. An additional amount of about -- in between 3,000 to 5,000 tons monthly we will produce and ship not to the Russian railroads, but to third-party buyers. So approximately, we have set ourselves a bar for this year to produce approximately 500,000 tons of products.
Next question please.
Thank you. [Operator Instructions] There are no further questions. I would like to turn the call back to you. Apologies, we have just received another question from [indiscernible]. Please go ahead.
The question is currently Mechel has an option for the buyback of its shares and the assets related to the Elga project. Could you share with us what are the terms and conditions and as to when this buyback will have to take place? In terms of the related net worth with it and all of the future possible components of this particular project, are there any suspensive conditions that are attached to it?
According to the agreement that we have with Gazprombank, which is related to the Elga project, indeed there are certain options that are available. But we are not in a position to disclose the terms and conditions of these options because that is what is stated in our agreement with Gazprombank.
Next question please.
Okay. We will now take our next question as [indiscernible] has a follow up. Please go ahead.
And the additional question is that as far as the Elga project is concerned, could you possibly disclose to us the following thing? According to the term and conditions of the Elga project that you have as your obligations with VEB bank, there was a very precise time frame mentioned but it was not met. So, are there any penalties or fines or any other sanctions, which otherwise maybe imposed upon you now that, let’s say, these terms and conditions have not been fulfilled? And if so, which are they?
Now in the credit agreement with Vnesheconombank, there are indeed certain suspensive conditions, which when fulfilled by Mechel and Elga project, we are entitled to receive funding for this project. Currently, we haven’t met all of these suspensive conditions within this credit agreement, but there are no penalties envisaged. And after all of these suspensive conditions are met, theoretically the funding may further be extended. We are currently in negotiations with Vnesheconombank to start the main line of credit arrangements, but certainly once all of these suspensive conditions are fulfilled.
Next question please.
We will now take our next question from Anatoly Dzumailo from Kommersant.
The question comes from the Kommersant. I would like to ask you to specify the situation related to the forthcoming approval by the minority shareholders of the restructuring proceedings related to the yesterday’s news that the 12% stake belonging to the main shareholder and his family was illegally or legally alienated. And so respectively, what is the way that the quorum is going to be calculated from now on? And how this particular contentious stake is going to be accounted for? If there is an understanding that this particular stake is no longer being controlled, is not – cannot be disposed of by the previous owner, what kind of quorum there should be in March? And do I understand correctly that due to the fact that this particular stake could be a contentions one, there are some additional considerations and decisions that we shall be looking forward to see and hear?
I will try and give you my answer in bits and pieces because, frankly speaking, I hadn’t been able to write everything down. Nothing has changed. Quorum is going to be 50% from non-related shareholders. Now in terms of the number of those non-related shareholders that will be defined closer to the meeting. Now taking into account these changes in the stakes currently based on our expectation this year would amount to approximately 90 million votes.
Additionally, I should say that right now we are doing a lot of work in relationship to our shareholders in terms of – about voting and about approving various deals with the banks, explaining what’s the agenda convincing them to participate in the voting. This time, we have extended the time necessary for votes to take place, so company shareholders will have this additional time. And so we hope that they will participate actively. We also conducted a roadshow where we have traveled to meet with the holders of our shares, explaining the company’s position. In other words, we are undertaking all of the necessary efforts and we look forward to quorum necessary to approve the transactions at the shareholders’ meeting to be effective. So we are very much hopeful that we will be able to gather all the necessary votes.
Next question please.
We will now take our next question from Ksenia Svetlova from BNP Paribas.
Good afternoon. Could you please kindly advise the status of the bond restructuring? And in particular, if there is any stress not to meet any – not to analyze the restructuring of the coupons from the offers which fall in June and August and maybe you are planning to redeem some portions of the bonds from the market? Thank you.
Andrey Slivchenko will answer.
First of all, I would like to say that we are doing the best we can to enact on our commitments – and as far as the restructuring of our loans and the bonds are concerned. So now in terms of the question whether we are true to our coupon in our payments that is something that is exactly the case.
And secondly and as far as the bond restructurings are concerned, we started work to produce various proposals to all of the bondholders and as far as the un-restructured issues are concerned. And so in due time, we make the necessary announcements, which will disclose the conditions that we will be offering folks such a restructuring.
Next question please.
Thank you. [Operator Instructions] We have no further questions. I would like to turn the call back to the speakers for any additional or closing remarks.
Ladies and gentlemen, thank you for taking the time to join Mechel’s full year 2015 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 Investor Relations office. Thank you again from all the team here.
That will conclude today’s conference call. Thank you for your participation ladies and gentlemen. You may now disconnect.
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