Full Year 2014 Mechel OAO Earnings Call (US GAAP)

Apr 28, 2015 AM EDT
MTLR.MZ - Mechel PAO
Full Year 2014 Mechel OAO Earnings Call (US GAAP)
Apr 28, 2015 / 03:00PM GMT 

Corporate Participants
   *  Alexey Lukashov
      Mechel OAO - Deputy Director, IR
   *  Oleg Korzhov
      Mechel OAO - CEO
   *  Andrey Slivchenko
      Mechel OAO - CFO

Conference Call Participants
   *  Sergey Donskoy
      Societe Generale - Analyst

Operator   [1]
 Good day, ladies and gentlemen, and welcome to the Mechel reports 2014 full-year financial result conference call. For your information, today's call is being recorded.

 At this time I would like to turn the call over to Mr. Alexey Lukashov, Deputy Director of Investor Relations. Please go ahead, sir.

 Alexey Lukashov,  Mechel OAO - Deputy Director, IR   [2]
 Thank you, and good day, everyone. I would like to welcome you to Mechel's conference call to discuss our full-year 2014 results, which were 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 the call Management will make forward-looking statements, some of which may have been made in the press release. Some of the information on this conference call may contain projections or other forward-looking statements regarding future events or the future financial performance of Mechel, as defined in the Safe Harbor provision of the US 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 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 discussions 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 would like to turn the call over to Mechel's CEO, Mr. Korzhov. Please go ahead.

 Oleg Korzhov,  Mechel OAO - CEO   [3]
 (interpreted) Good morning, ladies and gentlemen, and good day. We're happy to welcome you at the conference call on the results of activities of the Company in 2014.

 Consolidated revenue was $6.4 billion; consolidated EBITDA, $709 million. Last year was very highly volatile in terms of the impact of market economic factors on the activities of our Group.

 The first half-year, we saw the fall of the prices for our main products, which is the coking coal, to -- down to the level of $120 FOB, and stabilization of those prices at this mark until end of the year.

 Iron ore raw materials also became cheaper very rapidly, and the fall accelerated towards the end of the year. This was bound to affect the results of our mining division, even considering the fact that the rest of market of coking coal was rather stable in 2014.

 Our division was supported by demand for coke. The price for coke arose by the middle of the year. We increased utility -- capacity utility of our coke chemical enterprises and increased the offloading of the marginal coke. For these purposes, we reallocated from weakened markets -- some of the coking coal from the weakening markets towards inter-Group consumption.

 At the same time, the year was favorable for metal-makers against the background of steady demand, devaluation of the ruble, and limited shipments from Ukraine, with the growth of price for metal products from the beginning of the year. It continue until the end of year.

 Then, situation became more stable; but then, as the ruble fell, the price became more attractive. With the cheapening of the incoming commodities, these factors had positive impact on the financial results of the entire metal-making division.

 For the first time in the history of the Company, contribute of our metal-making division to EBITDA was equal to the share of mining division, which was reduced against the background of lower prices. Also needs to note that, in 2014, the Company concluded the year with operational income, which was the first time since 2011.

 I'd like to note some of the -- some of our main investment projects of 2014. At Elgin field, more than 1,200,000 tonnes of coal were produced at -- more than 700,000 tonnes were processed at the mill. The volume of the mining in 2015 is scheduled to be around 3.5 million, 3.8 million tonnes.

 At the universal metal-making plant of Chelyabinsk, new products are being mastered. The procedure of certification is coming to a close. In 2014 more than 120,000 tonnes of products were offloaded from this mill.

 In the current year, the capacities will be more utilized. In particular, after the first quarter of 2015, the -- almost twice as many products have been produced at this mill compared to the first quarter of last year.

 Overall, I'd like to say that Port Posiet has practically completed its first stage of upgrade, and the result of 2014 -- its turnover freight exceeded 5 million tonnes of coal. Overall, we have effectively concluded our investment projects except, naturally, for Elga, whose funding is driven by Vnesheconombank.

 An important event of this year was closing a deal to sell American coal company, Bluestone. The sale of this asset enabled us to minimize our risks, significantly worth quite large sums of money; and all the claims and suits have been discontinued with the family of Justice, based on this.

 American producers currently are in a difficult situation and are very -- have low competitive because of high costs. The continuation of the Bluestone activities would require of us new costs in terms of permits and also serious investment.

 Considering that we're actively engaged in developing Elga project, we were not prepared for an investment into American economy. So, to sell -- so, we decided to sell this asset, which we did successfully earlier this year.

 Also, high-level indebtedness of the Company -- as is known, end of last year we turned our creditors to restructure our indebtedness. Currently, fairly vigorous negotiations are underway with all the lenders. I would like to -- as far as the larger of the lenders, I would point out relationships with three banks -- Gazprom, VTB Bank, and Sberbank -- and I would like to talk in more detail on -- about these.

 With Gazprombank, the level of the top management -- we have agreed on general indicative conditions and a schedule of restructuring of indebtedness. I feel we're very close to signing term sheets with Gazprombank.

 With VTB, at the level of working groups with Mechel and the bank, we have agreed on general principles and approaches to restructure indebtedness of the Mechel Group before the bank, including also timeline of restructuring and the schedule of redemption of structure of collateral.

 With Sberbank, the Mechel Group attracted independent consultants in the form of [Rochel] Company, who prepared financial models for -- until 2025, and various scenarios of schedules of restructuring, depending on the preconditions and conditions of market, and conduct negotiations with the bank. However, we have yet to come to an agreement with Sberbank.

 Parallel to that, we're conducting negotiations with a syndicate of foreign banks. A coordinating committee has been set up, consisting of five banks of the syndicate, and negotiations to restructure this credit are being pursued quite vigorously today.

 Besides, the Company intends to restart the use of funding of VEB within the credit line to fund Elgin project. For this purpose, we are currently fulfilling our conditions precedent under this agreement signed, and are planning to fulfill them by the end of the year with a whole number of large banks -- of smaller banks, we have already been able to reach agreement on restructuring.

 In dealing with debt issues, we were helped by the ruble devaluation last December -- December last year, and the first quarter of this year.

 The effect of the devaluation was not yet as apparent in the results of the first quarter, but will be more prominent in the -- subsequently. We have a high share of sales in mining divisions, where we received substantial growth operational income because of the growth of revenue in ruble denomination, and with the costs nominated largely in rubles.

 Considering these favorable conditions, we were able to reduce parameter -- net-debt-to-EBITDA, improve payment discipline, maintain the volume of production, and sale of products at the target levels at the majority of our enterprises. Thus, we made a significant step forward towards reaching agreements with lenders.

 Now I'd like to hand over to Vice President for Finance, Andrey Slivchenko, who will talk in more detail about the financial results of -- across all segment of our business. Thank you.

 Andrey Slivchenko,  Mechel OAO - CFO   [4]
 Ladies and gentlemen, good morning and good afternoon. In the interest of time, I will speak English.

 I would like to thank you all for being with us at this call today. Although the year 2014 is already a quarter behind, nevertheless I assume there is a great deal of interest towards how the Company performed last year.

 First of all, I would like to note that the profitability increased over the past year despite the decline in coal prices and revenues. EBITDA margin has increased from 8.6% to 11% Group-wise, in the fourth quarter hitting 14.8% in mining and 15.4% in the metals division.

 Secondly, the Company continues as a going concern. Although we had to reclassify most of our indebtedness to short term, and given certain improvements in the operations of the Company, we hope to reach agreements with all of our lenders on restructuring of our debt portfolio.

 Thirdly, we have seen a significant decrease in the indebtedness, mainly due to the devaluation of ruble, although a weaker ruble has significantly deteriorated our P&L and balance sheet, now [top down].

 We have been reporting a decrease in prices throughout the whole year. The coal prices reached a 7-year minimum. The metals prices were falling in the first half of the year but took up in autumn, and continued to grow as the ruble was devaluating.

 However, in dollar terms, they failed to catch up. Devaluation of ruble, though, alleviated the decline in revenues, and -- which is more important -- helped improve the operating margins.

 We have seen revenues in the mining segment drop only 20% year on year and EBITDA by 32%. However, the fourth quarter, EBITDA recovered with 14.8% versus 12.8% for the whole year.

 In metals, we have seen a decrease of 29% in revenues but a 64% growth in EBITDA from 3.7% in 2013 to 8.6% in 2014, reaching 15.4% in the fourth quarter.

 Overall revenues were down 25% from $8.5 billion to $6.4 billion. The EBITDA was $709 million, which is only 3% lower than a year before.

 In 2014, exports amounted to 34% of revenues, pretty much the same as in 2013. Revenues from exports were down by 23.4%.

 Margins -- operating margins and net profit. The gross margin was also up from 31.3% in 2013 to 37% in 2014. The Group showed operating profit, as was mentioned, of $126 million in 2014, versus a loss of $657 million in 2013.

 In 2014, the Group accounted for about $200 million of impairment of long-lived assets, provisions, and other write-offs and accruals. The respective amount in 2013 was approximately $950 million. If cleared of such provisions, adjusted operating income would amount to $327 million versus $290 million a year ago, or a 13% increase in the adjusted operating income.

 Further, in the beginning of 2015, as was mentioned, the Company disposed of its American asset, Bluestone Group of companies, as the operations of this Group were loss-making for a few previous years due to low coal prices, and these operations were suspended a year ago. Mechel realized loss from the discontinued Bluestone in the amount of [$100.48 billion].

 Coupled with the effect from the devaluated ruble of $2.4 billion, this ultimately brought to net loss of the Group in 2014 of $4.3 billion, which is up 48% from the 2013 net loss, and resulted in negative equity of $2.6 billion.

 As was mentioned, devaluation of ruble was positive for the profitability of sales as well as for the reevaluation of indebtedness. As at the end of the year 2014, net bank debt amounted to $6.77 billion, which is 22% lower than in the beginning of the year. Net repayments were only $370 million, and the rest is purely a forex effect.

 As you may well know, last year we started talks with our lenders on restructuring of our debt as the decreasing profits were not sufficient to service the debt as per original schedules. We sought aid with the government and VEB. So far, we ended up finding comprehensive solutions with just two major banks.

 As at the end of the year, we defaulted on most of our credit agreements, so we reclassified most of our indebtedness into short-term debt. Now, we're continuing negotiations with the banks and hope to successfully refinance or restructure the debt.

 As was discussed, no major investments were financed in 2014 except for the Elga project. Nevertheless, including capitalized interest, capital expenditures amounted to $433 million. Net cash outflow from financing activities was $438 million.

 As purely operating cash was not enough to cover those expenses, we had to decrease our working capital, and the devaluation of ruble by the end of the year, and growing revenues and margins towards the end of the year, helped us cover the deficit with only $1.15 billion of the change in the trade working capital.

 That's pretty much all I wanted to point out with respect to our annual financials. Thank you for your attention, and we welcome you to ask your questions.

Questions and Answers
 Alexey Lukashov,  Mechel OAO - Deputy Director, IR   [1]
 Ladies and gentlemen, we will now take questions. We would 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 it.

Operator   [2]
 (Operator Instructions). Sergey Donskoy, Societe Generale.

 Sergey Donskoy,  Societe Generale - Analyst   [3]
 (interpreted) Sergey Donskoy, (inaudible) Generale. (spoken in Russian). Several questions on different subjects. First, your plans regarding coal, and for coal and iron ore for this year, perhaps by separate enterprises, as far as coal.

 Oleg Korzhov,  Mechel OAO - CEO   [4]
 (interpreted) There are quite a lot of questions. Covering all of them might require the entire time for -- of conference call. This is just a joke, but let's take one question at a time and try to deal with all of this.

 Now, the first question, which has just been translated. So, as for the production of coal and iron core for 2015 -- according to the budget, our plan is production of coal will be about 25 million, 26 million tonnes, including 20.5 million to be produced in South Kusbass and about 13 million we plan to produce in Yakutogol, including, as I mentioned, Elga, 3.5 million, 3.8 million tonnes. Those are our plans for mining production for 2015.

 As for iron ore production, our plan is at the level of 3.5 million, 3.7 million tonnes, depending on the market conditions and depending on the situation that will develop as far as the prices for such products.

 As for capital investment, budget for next year -- we envisions our investment plans will be about $150 million. That's about the level of 2014. Including, we plan to maintain to the tune about $40 million, $45 million, and some other -- a number of other ideas we need to finish up as far as investment projects. Our plan is to allocate from $100 million to $110 million there.

 Our plans of investment, if we might say it, for 2015, are as follows. Projects. Considering that we have yet to come to an agreement with VEB on -- for credit facility to build Elga, in the first half-year we'll have to divert some of the funding towards this project of Elga in order to increase production at Elga. So, our budget envisions about one-third of this sum, about $30 million, to be spent on continuing this project.

 Besides, we have some unfinished business as far as our universal rolling mill. That's about $15 million to $18 million to be spent on this. Also, our plans have envision a construction conversion workshop which we began several years ago, and we continue it by and by.

 Besides, we're considering the possibility of reconstructing one of the furnaces at the Bratsk plant of ferrous alloys, considering good price for ferrous alloys and the ruble exchange rate, and we've -- and also, the fact that we've basically purchased all the equipment for this. So, we plan to spend -- to divert about $10 million towards this project.

 But, in any case, as I mentioned before, all these projects -- all these plans -- we are funding on the residual principal on our -- so, it will all depend on the cash flow the Company will command. So far we can see that the -- it would be a good idea for us to do those projects. But, as for final decisions, we'll be taking the decisions as we go along, when we see how -- what specific cash flow we have.

 I'll move to the third question, which concerned the prices of the sale in the first quarter -- in the fourth quarter of last year, first quarter of this year, according to the types of products and their markets.

 I will quote prices that we contract on two basis -- on sales, and also I'll mention logistics, to make it clear. The different specialties make different calculations, so I will quote both types of prices.

 As for our coal production, the coal of the K9 type, which is our Yakut Coal, in the fourth quarter the price point -- China for -- on CIF conditions -- were about $100, $105.

 In the first quarter, the price of sale was $95 to $100, and logistics was at the level of $36, $38. The coal of the same type, we sell not just to China, but also Japan, and to the countries of Southeast Asia and the -- and Korea -- were on FOB conditions -- the sales of -- were about -- in the first quarter -- fourth quarter were $105, in the first quarter $97, $105. Logistics was about $21, $23.

 As for the coal of PCI grade, we sell quite a lot of this to markets -- Southeast Asia and China; also, Japan, Korea, on FOB conditions. Fourth quarter, the price was $91, $95; in the first quarter, $92, $95. So, about the same price. Logistics accounted for about $30.

 Similarly, we sell the same grade to China on CIF conditions, and fourth quarter price was $98, $100; in the first quarter, $90, $95. Logistics was also about $30 here.

 As for the anthracite grade of coal, mostly we sell it to Europe on -- under FOB conditions. Fourth quarter price was about $120. In the first quarter, the price increased by about $10. Logistics was about $40.

 If we speak about steam coal prices -- so, when we -- on the internal market with -- on domestic we sell it by RUB1,050 and -- in the fourth quarter. In the first quarter the price was RUB1,600 rubles. For -- on export, we sell it to China on CIF basis. In the fourth quarter the price was $65 to $72, and the first quarter price was $50 to $57, down.

 As for iron ore concentrate, which we sold, as I mentioned, in small amounts for export, the main markets were China. Under DAF conditions, in fourth quarter, price was $75, then gradually went down to $55 by end of year. In the first quarter, the price was around end of 2014, at which it was $53, $56 under DAF conditions. And logistics was about $18 to $20.

 As for the universal rolling mill results of 2014, the mill produced a -- in sum total of about 150,000 tonnes of beam and about 110,000 of rail for sum total of about 250,000 tonnes. During the entire year, the volume of production and sale of such products, primarily beams, of course, gradually increased. End of year we reached stable volume of about 13,000 tonnes.

 This year, we started also, just as we finished last year, with about 13,000 tonnes every month as the volume we produce and sell, considering that, as of the second half of this year, we plan to expand our assortment of such products.

 So, we plan to produce at least 160,000 to 180,000 or 200,000 tonnes of beams and of -- as of today, we plan to produce, differently, rails at this mill, as the main product line.

 As of today, we are completing the stage of certification and tests for the railway company. We plan to finish those tests within the next one or two weeks, and after this we'll move on to the next stage, which will be acceptance testing, which will be done -- which we will be doing jointly with railway company for the possibility of the production and sale of such products of -- with a certain volume.

 Our plan is, if we have -- when we have passed all of tests, the second half-year of -- starting in June, we should go to start shipments of our rail products. And so far, our plan is to produce about 140,000, 150,000 tonnes of products.

 But there are certain limitations here, because first we need to complete certification; and also, we need to agree with railway company on price and on volumes.

 If we agree on price and volumes, and we're -- both parties are interested, then we'll be prepared to produce 140,000, 150,000 to produce and to sell. But we're going to talk about this specifically after we've done all certification and testing.

 And the question number 5 concerned the operation of the Elga coal in 2014 and 2015. As for 2014, the volume of production was 1,225,000 tonnes. Processing was some 114,000 tonnes. Finished products from the current production was 416,000 tonnes.

 Considering that we had some stockpiles in stores as of beginning of the year, and in the course of 2014 we were selling not only the coal from production lines, but we also increased our -- (inaudible) our stockpiles. So, even though production was about 416,000 tonnes, we were able to sell about twice as much.

 So, we sold about -- and shipped off about 1 million tonnes. That included 1 million tonnes that was shipped off, of the coking concentrate; also, about 30,000 tonnes, we sold, of coking coal in its ordinary form; and about 720,000 tonnes that was the offloading of energy and industrial product.

 Sergey Donskoy,  Societe Generale - Analyst   [5]
 (spoken in Russian)

 Oleg Korzhov,  Mechel OAO - CEO   [6]
 (interpreted) 2015 -- the volume of production plan is at the level of 3.5 million, 3.8 million tonnes. Processing plan is for 1,700,000 tonnes. Our plan is -- offloading of finished products will be about 2.4 million, 2.5 million tonnes. That includes, this offloading -- about 70% will be accounted for by energy industrial products, about 30% of coking concentrates.

 As far as prices, I don't think I need to repeat myself. I already quoted the prices of the sale of Elga coal that correspond to the sales of other products that we sell.

 Sergey Donskoy,  Societe Generale - Analyst   [7]
 (interpreted) A followup question. If you could, besides describing the situation on export markets, coal markets, might be good to also talk about what was happening with the prices for coking coal in Russia, how the prices were changing in the first quarter, and what are the situation in the first quarter too. Thank you.

 Oleg Korzhov,  Mechel OAO - CEO   [8]
 (interpreted) As for the domestic market, during the first 9 months of 2014 the price were about the -- on about the same level, which was about RUB3,150 per tonne on the -- on [CCC] basis.

 In the first quarter, because of the exchange rate of the ruble changing, the price began to grow, by end of year reaching about RUB3,700. In the first quarter the dynamics of the price increases continued, and the price of sale was about RUB4,100, RUB4,400 per tonne on an [FSC] basis. That's as far as the (inaudible) grade of the coal.

 Sergey Donskoy,  Societe Generale - Analyst   [9]
 (interpreted) Was it by end of the year, or was it an average price?

 Oleg Korzhov,  Mechel OAO - CEO   [10]
 (interpreted) This is the price that developed in the course of the first quarter. It started out at about RUB4,100 and then went on to reach RUB4,400.

 Sergey Donskoy,  Societe Generale - Analyst   [11]
 (spoken in Russian)

 Alexey Lukashov,  Mechel OAO - Deputy Director, IR   [12]
 Next question, please.

Operator   [13]
 (Operator Instructions). It appears that we have no further question at this point.

 Alexey Lukashov,  Mechel OAO - Deputy Director, IR   [14]
 Ladies and gentlemen, thank you for taking the time to join Mechel's full-year 2014 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.

Operator   [15]
 That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.

Editor   [16]
 Portions of this transcript that are marked (interpreted) were spoken by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.

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