Mechel 1Q 2008 results

• Mechel 1Q 2008 results press-release (PDF, 172 Kb)
• Mechel overview slide presentation (PDF, 194 Kb)
• A link to audio webcast link to audio webcast of Mechel1Q 2008 results conference call on July 14, 2008

MECHEL REPORTS RESULTS FOR THE 2008 FIRST QUARTER
 — Revenues increased 64.1% to $2.3 billion —
— Operating income increased 112.3% to $642 million —
— Net income increased 162.2% to $500 million, or $1.20 per ADR /diluted share —

Moscow, Russia – July 14, 2008 – Mechel OAO (NYSE: MTL), a leading Russian integrated mining and metals group, today announced financial results for the first quarter ended March 31, 2008.

Igor Zyuzin, Chief Executive Officer, commented, “Our final results for the 2008 first quarter came in as we expected, and reflect strong operational and financial performance.  Conditions in the markets we serve continue to be favorable and are driven by a combination of growth factors.  We are very pleased to have reported record revenue and we remain focused on the successful execution of our operating strategy.”

US$ thousand 1Q 2008 1Q 2007 Change Y-on-Y Revenues 2,328,201 1,418,590 64.1 % Net operating income 642,139 302,489 112.3 % Net operating margin 27.58% 21.32% - Net income 500,009 190,709 162.2 % EBITDA * 853,097 339,772 151.1 % EBITDA margin1 36.6% 24.0% -

* See Attachment A.

Consolidated Results

Net revenue in the first quarter of 2008 rose by 64.1% to $2.3 billion from $1.4 billion in the first quarter of 2007. Operating income rose by 112.3% to $642.1 million, or 27.58% of net revenue, in the first quarter of 2008, compared to operating income of $302.5 million, or 21.32% of net revenue, in the first quarter of 2007.

For the first quarter of 2008, Mechel reported consolidated net income of $500 million, or $1.20 per ADR / diluted share, an increase of 162.2% over consolidated net income of $190.7 million, or $0.46 per ADR / diluted share, in the first quarter of 2007.

Consolidated EBITDA rose by 151.1% to $853 million in the first quarter of 2008, compared to $340 million in the first quarter of 2007.

Mining Segment Results

US$ thousand 1Q 2008 1Q 20071 Change Y-on-Y Revenues from external customers 856,033 409,259 109.2 % Intersegment sales 194,095 168,421 15.2 % Operating income 416,182 176,606 135.7 % Net income 302,728 106,969 183.0 % EBITDA* 512,899 198,305 158.6 % EBITDA margin2 48.8% 34.3% -

* See Attachment A.

1 - 1Q 2007 results have been recalculated to reflect the separate reporting for the power segment.
2 - EBITDA margin is calculated as a percentage of consolidated revenues of the segment, including intersegment sales.

Mining Segment Output

Product 1Q 2008, thousand tonnes 1Q 2008 vs. 1Q 2007 Coal 7,279 + 60 % Coking coal 4,313 + 94 % Steam coal 2,966 + 27 % Iron ore concentrate 1,163 + 6 % Nickel 4.4 + 7 %

Mining segment revenue from external customers for the first quarter of 2008 totaled $856 million, or 36.8% of consolidated net revenue, an increase of 109.2% over segment revenue from external customers of $409 million, or 28.8% of consolidated net revenue, in the first quarter of 2007.

Operating income of the mining segment in the first quarter of 2008 increased by 135.7% to $416.2 million, or 39.6% of total segment sales, compared to operating income of $176.6 million, or 30.6% of total segment sales, in the first quarter of 2007. EBITDA in the mining segment in the first quarter of 2008 increased by 158.6% to $512.9 million compared to EBITDA of $198.3 million in the first quarter of 2007.  The EBITDA margin in the mining segment was 48.8% for the first quarter of 2008, compared to 34.3% in the first quarter of 2007. 

Steel Segment Results

US$ thousand 1Q 2008 1Q 20073 Change Y-on-Y Revenues from external customers 1,278,720 990,223 29.1% Intersegment sales 66,172 22,398 195.4% Operating income 197,825 130,708 51.3% Net income 183,981 89,543 105.5% EBITDA* 329,538 146,275 125.3% EBITDA margin4 24.5% 14.5% -

* See Attachment A.

3 - 1Q 2007 results have been recalculated to reflect the separate reporting for the power segment.
4 - EBITDA margin is calculated as a percentage of consolidated revenues of the segment, including intersegment sales.

Steel Segment Output 

Product 1Q 2008, thousand tonnes 1Q 2008 vs. 1Q 2007 Coke 917 - 4 % Pig iron 970 + 4 % Steel 1,563 + 5 % Rolled products 1,366 + 7 % Hardware 183 + 16 %

Steel segment revenue increased by 29.1% in the first quarter of 2008 to $1.28 billion, or 54.9% of consolidated net revenue, from $990 million, or 69.8% of consolidated net revenue, in the first quarter of 2007.

Operating income for the steel segment in the first quarter of 2008 increased by 51.3 % to $197.8 million, or 14.7% of total segment sales, compared to operating income of $130.7 million, or 12.9% of total segment sales in the first quarter of 2007.  EBITDA for the steel segment for the first quarter 2008 increased by 125.3% to $329.5 million compared to segment EBITDA of $146.3 million in first quarter of 2007. The EBITDA margin for the steel segment was 24.5% in the first quarter of 2008 compared to 14.5% in the first quarter of 2007.

Power Segment Results

US$ thousand 1Q 2008 1Q 20075 Change Y-on-Y Revenues from external  customers 193,448 19,108 912.4%   Intersegment sales 98,661 21,116 367.2% Operating income 27,585 3,498 688.6% Net income / (loss) 15,049 2,522 496.7% EBITDA* 33,508 3,667 813.8% EBITDAmargin6 11.5% 9.1% -

* See Attachment A.

5 - 1Q 2007 results for the power segment were previously reported as part of the mining and steel segments.
6 - EBITDA margin is calculated as a percentage of consolidated revenues of the segment, including intersegment sales.

Revenue from Mechel’s power segment in the first quarter of 2008 totaled $193.4 million, or 8.3% of consolidated net revenue, an increase of 912.4% compared to revenue from sales to external customers of $19.1 million or 1.3% of consolidated net revenue, in the first quarter of 2007.

Operating income for the power segment in the first quarter of 2008 was $27.6 million, or 9.4% of total segment revenues, an increase of 688.6% compared to operating income of $3.5 million, or 8.7% of total segment revenues, in the first quarter of 2007.  EBITDA for the power segment in the first quarter of 2008 increased  by 813.8% to $33.5 million, compared to EBITDA of $3.7 million in the first quarter of 2007.  The EBITDA margin in the segment was 11.5% in the first quarter of 2008, compared to 9.1% in the first quarter of 2007.

Recent Highlights

• In June 2008, Mechel announced that a groundbreaking ceremony marking the commencement of railroad construction was held at the 60th kilometer landmark of Verhny Ulak Station of the Baikal-Amur Mainline together with Transstroy Engineering Corporation ZAO. This spur-track will connect the Elga deposit with the Baikal-Amur Mainline.  The total length of the railroad will be approximately 315 kilometers. The railroad’s design includes approximately 420 engineering structures, including 194 bridges. The railroad’s throughput capacity after completion of all construction stages will be approximately 25.0-30.0 million tonnes annually. Commissioning of the railroad for permanent operations is expected to commence before September 30, 2010.
• In July 2008, Mechel announced the signing of a contract between its Chelyabinsk Metallurgical Plant OAO (“CMP”) subsidiary and Danieli to supply technology and equipment to construct a rail and structural steel mill at CMP. The mill’s capabilities will enable low cost production of high quality railroad rails up to 100 meters in length using state-of-the-art technologies for steel rolling, hardening, straightening, finishing, and rail quality control and a wide range of other products with steady geometric section parameters and lower metal consumption due to its precision and thermal strengthening.

Financial Position

Capital expenditure on property, plant and equipment and acquisition of mineral licenses for the first quarter of 2008 amounted to $175.5 million, of which $41.2 million was invested in the mining segment, $126.9 million in the steel segment and $7.4 million in the power segment.

For the first quarter of 2008, Mechel spent $0.7 million on the acquisition of minority interests in subsidiaries.

As of March 31, 2008, total debt amounted to $3.2 billion. Cash and cash equivalents amounted to $145.4 million and net debt amounted to $3.0 billion (net debt is defined as total debt outstanding less cash and cash equivalents) as of March 31, 2008.

The management of Mechel will host a conference call today at 3:00 p.m. New York time (8:00 p.m. London time, 11:00 p.m. Moscow time) to review Mechel’s financial results and comment on current operations.  The call may be accessed via the Internet at http://www.mechel.com, under the Investor Relations section.

To listen to the conference call via phone, please call the number below approximately 10 minutes prior to the scheduled time of the call, quoting Mechel, and the chairperson’s name, Alexander Tolkach.

Conference Call Phone Numbers:   US Toll: +1 913 312 1269 UK Toll Free:  0 800 051 7166 Russia Toll Free: 810 800 2544 1012  

A replay of the call will be available until 11:59PM New York time on July 22nd.  To access, please dial, US: +1 719 457 0820; UK: 0 808 1011 153, Russia: 810 800 270 210 12.  From all areas, enter: 2498919# to access.

***

Mechel OAO
Alexander Tolkach
Head of International Relations & Investor Relations
Mechel OAO

 

Phone: 7-495-221-88-88
Fax: 7-495-221-88-00
alexander.tolkach@mechel.com

***

Mechel is one of the leading Russian mining and metals companies. Mechel unites producers of coal, iron ore, nickel, steel, rolled products, and hardware. Mechel products are marketed domestically and internationally.

***

Some of the information in this press release 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, including our Form 20-F. These documents contain and identify important factors, including those contained in the section captioned “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements” in our Form 20-F, that could cause the actual results to differ materially from those contained in our projections or forward-looking statements, including, among others, the achievement of anticipated levels of profitability, growth, cost and synergy of our recent acquisitions, the impact of competitive pricing, the ability to obtain necessary regulatory approvals and licenses, the impact of developments in the Russian economic, political and legal environment, volatility in stock markets or in the price of our shares or ADRs, financial risk management and the impact of general business and global economic conditions.

Attachments to the 2008 First Quarter Earnings Press Release  

Attachment A

Non-GAAP financial measures. This press release includes financial information prepared in accordance with accounting principles generally accepted in the United States of America, or US GAAP, as well as other financial measures referred to as non-GAAP financial measures. The non-GAAP financial measures should be considered in addition to, but not as a substitute for, the information prepared in accordance with US GAAP.

Earnings Before Interest, Taxation, Depreciation and Amortization (EBITDA) and EBITDA margin. EBITDA represents earnings before interest, taxation, depreciation and amortization. EBITDA margin is defined as EBITDA as a percentage of our net revenues. Our EBITDA may not be similar to EBITDA measures of other companies is not a measurement under accounting principles generally accepted in the United States and should be considered in addition to, but not as a substitute for, the information contained in our consolidated income statement. We believe that EBITDA provides useful information to investors because it is an indicator of the strength and performance of our ongoing business operations, including our ability to fund discretionary spending such as capital expenditures, acquisitions and other investments and our ability to incur and service debt. While interest, depreciation and amortization are considered operating costs under generally accepted accounting principles, these expenses primarily represent the non-cash current period allocation of costs associated with long-lived assets acquired or constructed in prior periods. Our EBITDA calculation is commonly used as one of the bases for investors, analysts and credit rating agencies to evaluate and compare the periodic and future operating performance and value of companies within the metals and mining industry. EBITDA can be reconciled to our consolidated statements of operations as follows:

US$ thousands 1Q 2008 1Q 2007 Net income 500,009 190,709 Add: Depreciation, depletion and amortization Interest expense Income taxes 111,393 56,324 185,371   52,871 7,928 88,264 Consolidated EBITDA 853,097 339,772

EBITDA margin can be reconciled as a percentage to our Revenues as follows:

US$ thousands 1Q 2008 1Q 2007 Revenue, net 2,328,201 1,418,590 EBITDA 853,097 339,772 EBITDA margin 36.6% 24.0%

 

Consolidated Balance Sheets (in thousands of USdollars, except share amounts) March 31, 2008 (unaudited) December 31, 2007 Assets Cash and cash equivalents $ 145,397 $ 236,779 Accounts receivable, net of allowance for doubtful accounts of $27,622 as of March 31 2008 and $26,781 as of December 31, 2007 480,767 341,756 Due from related parties 15,989 4,988 Inventories 1,131,345 993,668 Deferred cost of inventory in transit 9,180 13,190 Deferred income taxes 15,468 12,331 Prepayments and other current assets 763,320 633,993 Total current assets 2,561,466 2,236,705 Long-term investments in related parties 96,124 92,571 Other long-term investments 56,881 58,595 Intangible assets, net 7,978 7,408 Property, plant and equipment, net 3,952,629 3,701,762 Mineral licenses, net 2,178,151 2,131,483 Other non-current assets 68,241 67,918 Deferred income taxes 9,407 16,755 Goodwill 954,269 914,446 Total assets $ 9,885,146 $ 9,227,643 Liabilities and Shareholders’ Equity Short-term borrowings and current portion of long-term debt $ 993,387 $ 1,135,104 Accounts payable and accrued expenses: Advances received 165,494 147,739 Accrued expenses and other current liabilities 222,549 144,083 Taxes and social charges payable 249,356 123,794 Unrecognized income tax benefits 76,915 79,211 Trade payable to vendors of goods and services 228,286 222,753 Due to related parties 4,397 3,596 Asset retirement obligation, current portion 5,995 5,366 Deferred income taxes 27,974 33,056 Deferred revenue 8,594 20,949 Pension obligations, current portion 66,636 63,706 Finance lease liabilities, current portion 12,767 11,708 Total current liabilities 2,062,350 1,991,065 Long-term debt, net of current portion 2,191,607 2,321,922 Asset retirement obligations, net of current portion 67,809 65,928 Pension obligations, net of current portion 284,229 266,660 Deferred income taxes 721,824 701,318 Finance lease liabilities, net of current portion 73,279 73,377 Other long-term liabilities 1,660 1,917 Minority interests 352,816 300,523 Shareholders’ Equity Common shares (10 Russian rubles par value; 497,969,086 shares authorized, 416,270,745 shares issued and outstanding as of March 31, 2008 and December 31, 2007) 133,507 133,507 Additional paid-in capital 415,070 415,070 Accumulated other comprehensive income 430,097 305,467 Retained earnings 3,150,898 2,650,889 Total shareholders’ equity 4,129,572 3,504,933 Total liabilities and shareholders’ equity $ 9,885,146 $ 9,227,643

 

Consolidated Income Statements (in thousands of USdollars, except share and per share amounts)  Three months ended March 31, 2008 (unaudited) 2007 (unaudited) Revenue, net (including related party amounts of $21,326 and $22,110 during three months 2008 and 2007, respectively) $ 2,328,201 $ 1,418,590 Cost of goods sold (including related party amounts of $9,684 and $49,111 during three months 2008 and 2007, respectively) (1,244,779) (873,453) Gross profit 1,083,422 545,137 Selling, distribution and operating expenses: Selling and distribution expenses (295,955) (121,813) Taxes other than income tax (21,526) (34,678) Accretion expense (822) (1,039) Provision for doubtful accounts (418) (2,043) General, administrative and other operating expenses (122,562) (83,075) Total selling, distribution and operating expenses (441,283) (242,648) Operating income 642,139 302,489 Other income and (expense): Income from equity investments 310 2,839 Interest income 4,937 1,076 Interest expense (56,324) (7,928) Other income, net 3,871 (2,387) Foreign exchange gain 128,776 9,278 Total other income and (expense), net 81,570 2,878 Income before income tax, minority interest, discontinued operations and extraordinary gain 723,709 305,367 Income tax expense (185,371) (88,264) Minority interest in income of subsidiaries (38,329) (26,439) Income from continuing operations 500,009 190,664 Income from discontinued operations, net of tax – 45 Net income $ 500,009 $ 190,709 Currency translation adjustment 128,139 16,804 Change in pension benefit obligation (2,049) (28) Adjustment of available-for-sale securities (1,460) 2,591 Comprehensive income $ 624,639 $ 210,076 Basic and diluted earnings per share: Earnings per share from continuing operations $ 1.20 $ 0.46 Income per share effect of discontinued operations 000 000 Net income per share $ 1.20 $ 0.46 Dividends declared per share $ 000 $ 000 Weighted average number of shares outstanding 416,270,745 416,270,745

Interim Consolidated Statements of Cash Flows (in thousands of US dollars) Three months ended March 31, 2008 (unaudited) 2007 (unaudited) Cash Flows from Operating Activities Net income $ 500,009 $ 190,711 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 86,285 48,535 Depletion and amortization 25,108 4,336 Foreign exchange gain (128,776) (9,278) Deferred income taxes (7,428) (6,213) Provision for doubtful accounts 418 2,043 Inventory write-down 115 1,506 Accretion expense 822 1,039 Minority interest 38,329 26,439 Gain on revaluation of trading securities – 14,760 Change in undistributed earnings of equity investments (310) 2,839 Non-cash interest on long-term tax and pension liabilities 5,479 1,245 Loss on sale of property, plant and equipment 2,207 4,812 Gain on sale of non-marketable securities (1,664) – Amortization of syndicated loan origination fee 1,639 – Income from discontinued operations – (45) Gain on accounts payable with expired legal term (858) (6,347) Gain on forgiveness of fines and penalties – (6,399) Pension service cost and amortization of prior period service cost 2,472 1,029 Net change before changes in working capital 523,847 271,012 Changes in working capital items, net of effects from acquisition of new subsidiaries: Accounts receivable (130,261) (75,756) Inventories (97,097) (803) Trade payable to vendors of goods and services (2,399) (29,759) Advances received 12,938 60,732 Accrued taxes and other liabilities 187,797 39,775 Settlements with related parties (10,322) 1,923 Current assets and liabilities of discontinued operations – 30 Deferred revenue and cost of inventory in transit, net (8,345) 16,496 Other current assets (104,502) (7,142) Unrecognized income tax benefits (3,322) 1,741 Net cash provided by operating activities 368,334 278,249 Cash Flows from Investing Activities Investment in Prommet and subsidiaries – (4,181) Acquisition of minority interest in subsidiaries (726) (15,577) Proceeds from disposals of non-marketable securities 4,070 – Proceeds from disposals of property, plant and equipment 976 848 Purchases of mineral licenses (809) (1,061) Purchases of property, plant and equipment (174,686) (57,986) Net cash used in investing activities (171,175) (77,957) Cash Flows from Financing Activities Proceeds from short-term borrowings 663,893 82,476 Repayment of short-term borrowings (991,987) (171,605) Proceeds from long-term debt 29,549 4,971 Repayment of long-term debt (2,083) – Repayment of obligations under finance lease (6,260) (2,416) Net cash used in financing activities (306,888) (86,574) Effect of exchange rate changes on cash and cash equivalents 18,347 2,097 Net (decrease) increase in cash and cash equivalents (91,382) 115,815 Cash and cash equivalents at beginning of period 236,779 172,614 Cash and cash equivalents at end of period $ 145,397 $ 288,429