Mechel 1H 2007 results

• Mechel 1H 2007 results press-release (PDF, 126 Kb)
• Mechel overview slide presentation (PDF, 346 Kb)
• A link to audio webcast of Mechel 1H 2007 results conference call to be held in Moscow on October 03, 2007
  

MECHEL REPORTS FIRST HALF 2007 FINANCIAL RESULTS

 -- Revenues increased 55% to $2.99 billion --
-- Operating income more than tripled to $738.9 million --
-- Net income increased 169% to $489.5 million, $3.53 per ADR or $1.18 per diluted share --

Moscow, Russia – October 3, 2007 – Mechel OAO (NYSE: MTL), a leading Russian integrated mining and steel group, today announced results for the first half ended June 30, 2007.   

US$ thousand 1H 2007 1H 2006 Change Y-on-Y Revenue 2,986,862 1,926,516 55.0% Net operating income 738,986 209,475 252.8% Net operating margin 24.7% 10.9% - Net income 489,456 181,664 169.4% EBITDA(1) 813,681 344,741 136.0% EBITDA margin 27.2% 17.9% -

 ⁽¹⁾See Attachment A.

Igor Zyuzin, Mechel’s Chief Executive Officer, commented: “During the first half of 2007, Mechel continued to move forward with its plans for scaling up production volumes and increasing profitability.  In addition, the Company expanded its existing production capacity and acquired new assets that complement Mechel’s current operations. The Company’s operational progress, coupled with the ongoing favorable market conditions, enabled Mechel to achieve record financial results for the first half of 2007, tripling its operating income when compared to the same period last year.”

Consolidated Results

Net revenue in the first half of 2007 rose 55.0% to $2.99 billion, from $1.93 billion in the first half of 2006, reflecting increased production volumes and strong selling prices across the Company’s primary product categories. Operating income rose by 252.8% to $738.9 million, or 24.7% of net revenue, versus operating income of $209.5 million, or 10.9% of net revenue, in the first half of 2006.

For the first half of 2007, Mechel reported consolidated net income of $489.5 million, or $3.53 per ADR ($1.18 per diluted share).

Consolidated EBITDA rose by 136.0% to $813.7 million in the first half of 2007 from $344.7 million a year ago. Please see the attached tables for a reconciliation of consolidated EBITDA to net income.

Mining Segment Results

US $ thousand 1H 2007 1H 2006 Change Y-on-Y Revenues from external customers 897,766 613,478 46.3% Operating income 419,312 96,417 334.9% Net income 263,078 77,981 237.4% EBITDA 449,699 146,977 206.0% EBITDA margin(1) 36.3% 19.2% -

⁽¹⁾EBITDA margin calculation is based on the total revenues of the segment including intersegment sales.

Mining Segment Output

Product 1H 2007, thousand tonnes 1H 2007 vs. 1H 2006 Coal 8,870 10% Coking coal 4,223 (6)% Steam coal 4,647 29% Iron ore concentrate 2,376 (1)% Nickel 8.4 20%

Mining segment revenue from external customers for the first half of 2007 totaled $897.8 million, or 30.1%, of consolidated net revenue, an increase of 46.3% compared with segment revenue from external customers of $613.5 million, or 31.8%, of consolidated net revenue, in the first half of 2006. The increase in revenues reflects increased total output, strong market positions, and a favorable pricing environment.

Operating income for the first half of 2007 in the mining segment rose 334.9% to $419.3 million, or 33.9% of total segment revenue, compared to operating income of $96.4 million, or 12.6% of total segment revenues a year ago. This increase in profitability reflects Mechel’s enhanced cost control efforts, as well as the overall efficiency of the Company’s mining operations as revenue levels increased. EBITDA in the mining segment for the first half of 2007 was $449.7 million, 206.0% higher than segment EBITDA of $146.9 million in the first half of 2006. The EBITDA margin for the mining segment increased to 36.3% compared to 19.2% in the same period of last year.

Mr. Zyuzin commented on the results of the mining segment: “Mechel’s efforts to effectively manage costs and increase mining segment output yielded positive operating performance for the first half of 2007.  Coal output during the period increased by 10% year-on-year, driven by new production from the Olzherasskaya-New Mine, which was commissioned at the end of last year, and ongoing upgrades of mining equipment as part of the Company’s technical equipment modernization program.  In addition, we continued to optimize new technology processes in the segment, which enabled us to increase nickel production by 20%. Net income in the mining segment increased by 237.4% compared with first half results a year ago, due to the positive trends that we continue to see in key customer markets.  Supported by the current favorable pricing environment and the outlook for the coal and iron ore markets, we intend to maintain our pace of production output in line with our annual plan, and anticipate continued strong operating performance from the mining segment through the remainder of this year".

Steel Segment Results

US $ thousand 1H 2007 1H 2006 Change Y-on-Y Revenues from external customers 2,089,096 1,313,038 59.1% Operating income(2) 348,393 113,567 206.8% Net income(2) 255,097 104,188 144.8% EBITDA(2) 392,702 198,267 98.1% EBITDA margin(1) 18.6% 15.0% -

⁽¹⁾EBITDA margin calculation is based on the total revenues of the segment including intersegment sales.
⁽²⁾Data for the first half of 2006 has been recalculated in accordance with a new segment calculation method. According to the previous methodology, the results of the steel segment were calculated after the elimination of the unrealized profit of the mining segment in the stock of the trading and producing entities of the steel segment - the approach did not provide the full picture of the steel segment performance on a stand-alone basis. According to the new methodology, the steel segment results are given before this elimination, which will be shown in the segment accounting separately.

Steel Segment Output

Product 1H 2007, thousand tonnes 1H 2007 vs. 1H 2006 Coke 1,935 80% Pig iron 1,865 8% Steel 2,987 4% Rolled products 2,527 11% Hardware 336 17%

Revenue from external customers in Mechel’s steel segment increased 59.1% in the first half of 2007 to $2.1 billion, or 69.9% of consolidated net revenue, compared to revenue from external customers of $1.3 billion, or 68.2% of consolidated net revenue reported for the first half of 2006. 

In the first half of 2007, the steel segment generated operating income of $348.4 million, or 16.5% of total segment revenue, an increase of 206.8% over operating income of $113.6 million, or 8.6% of total segment revenue in the first half of 2006.  EBITDA in the steel segment for the first half of 2007 increased 98.1% to $392.7 million, compared with $198.3 reported in the first half of 2006.  EBITDA margin for the steel segment rose to 18.6% in the first half of 2007, compared with 15.0% reported in the same period of last year.

Mr. Zyuzin commented, “The steel segment continued to benefit from our program to reduce production costs and increase operating efficiencies, as well as a strong pricing environment for our products.  These factors enabled us to more than double the segment’s net income in the first half of 2007, compared with the same period last year.  In line with our objective to improve our product sales mix, we increased output of high value added products, which also added to the segment’s profitability during the period. Commodity coke output increased by 80%, which was supported by Mechel’s acquisition of Moscow Coke and Gas Plant and the commissioning of a new coking battery at Chelyabinsk Metallurgical Plant at the end of last year.  While we expect year-over-year growth rates to remain robust, by the end of the year we expect some decline in demand for steel products, explained largely by typical seasonality patterns.  However, based on Mechel’s diversified product portfolio and our expectation that any pricing softness would be limited, we anticipate good results for the segment overall for the year.”

Recent Highlights

• In March, Mechel OAO announced the acquisition of a controlling stake of 93.4% of Southern Kuzbass Power Plant OAO.  The transaction amount totaled approximately US$270 million. The acquisition of Southern Kuzbass Power Plant was in line with Mechel's strategy to further develop its mining segment.
• In August, Mechel OAO acquired all the charter capital of Bratsk Ferroalloy Plant OOO, the largest enterprise in Eastern Siberia producing high grade ferrosilicon.
• In September, Mechel OAO acquired all outstanding shares of the Temryuk-Sotra seaport, located at the Taman shore of the Sea of Azov. The seaport is primarily utilized for small tonnage river-sea type vessels in the Southern Russia.
• In August, Mechel OAO announced that its trading company, Mechel-Service OOO, opened new warehouses in July and plans to further expand its distribution network. In total, the new warehouses have capacity of approximately 15,000 to 20,000 tonnes of metal products every month.
• In July, Beloretsk Metallurgical Plant (BMP) commissioned new equipment and laid the foundation for a new steel wire-rope complex. The capacity of the lines can reach 27 thousand tonnes per year depending on the product range.

First half cash expenditure on property, plant and equipment amounted to $146.4 million, of which $58.4 million was invested in the mining segment and $88.0 million in the steel segment.

In the first half of 2007, Mechel has spent $321.1 million on acquisitions, including $270 million (net of cash acquired) for 93.4% of the shares of Southern Kuzbass Power Plant OAO, and $37  million (net of cash acquired) for 49% of the shares of Kuzbass Power Sales Company OAO. 

As of June 30, 2007, total debt¹  was at $383.3 million. Cash and cash equivalents amounted to $315.2 million at the end of the first half of 2007 and net debt ² amounted to $68.1 million.

The management of Mechel will host a conference call today at 6:00 p.m. Moscow time (10:00 a.m. New York time, 3:00 p.m. London 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.

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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.

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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.

¹Total debt is comprised of short-term borrowings and long-term debt
²Net debt is defined as total debt outstanding less cash and cash equivalents

Attachments to the 1H 2007 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. 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, Depreciation and Amortization (EBITDA) and EBITDA margin. EBITDA represents earnings before interest, 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 statement of operations. 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 1H 2007 1H 2006 Net income 489,456 181,664 Add: Depreciation, depletion and amortization Interest expense Income taxes   115,834 19,708 188,684   85,650 22,538 54,890 Consolidated EBITDA 813,681 344,741

 

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

US $ thousands 1H 2007 1H 2006 Revenue, net 2,986,862 1,926,516 EBITDA 813,681 344,741 EBITDA margin 27.2% 17.9%

 

Consolidated Balance Sheets

(in thousands of U.S. dollars, except share amounts) June 30, 2007 December 31, 2006 Assets         Cash and cash equivalents $ 315,233 $ 172,614 Trading securities   -   270,964 Accounts receivable, net of allowance for doubtful accounts of $25,016 as of 30/06/2007 and $19,592 as of 31/12/2006    248,689   191,172 Due from related parties   2,702   545 Inventories   785,912   653,079 Deferred cost of inventory in transit   11,539   14,125 Current assets of discontinued operations   9   9 Deferred income taxes   7,025   7,922 Prepayments and other current assets   340,170   332,946 Total current assets   1,711,279   1,643,376           Long-term investments in related parties   435,045   429,206 Other long-term investments   47,547   44,392 Non-current assets of discontinued operations   111   108 Intangible assets, net   5,661   4,746 Property, plant and equipment, net   2,332,149   2,012,828 Mineral licenses, net   262,504   269,851 Deferred income taxes   11,280   6,983 Goodwill   220,753   45,914 Total assets $ 5,026,329 $ 4,457,404           Liabilities and Shareholders' Equity         Short-term borrowings and current portion of long-term debt $ 41,262 $ 166,517 Accounts payable and accrued expenses:         Trade payable to vendors of goods and services   188,494   183,485 Advances received   102,423   96,624 Accrued expenses and other current liabilities   83,287   84,632 Taxes and social charges payable   117,611   143,037 Urecognized income tax benefits 65,279 - Dividends payable 317,651 - Due to related parties   3,743   2,353 Current liabilities of discontinued operations   523   508 Asset retirement obligation, current portion   4,067   3,444 Deferred income taxes   24,698   58,820 Deferred revenue   40,025   7,183 Pension obligations, current portion   11,999   11,044 Finance lease liabilities, current portion   8,325   6,066 Total current liabilities   1,009,387   763,713           Long-term debt, net of current portion   342,021   322,604 Restructured taxes and social charges payable, net of current portion   355   7,782 Asset retirement obligations, net of current portion   97,209   88,914 Pension obligations, net of current portion   66,013   59,170 Deferred income taxes   201,485   136,154 Finance lease liabilities, net of current portion   60,235   51,068 Other long-term liabilities 325 - Minority interests   244,417   163,036           Shareholders' Equity         Common shares (10 Russian rubles par value; 497,969,086 shares authorized, 416,270,745 shares issued and 416,270,745 and 416,270,745 shares outstanding as of June 30, 2007 and December 31, 2006)   133,507   133,507     Additional paid-in capital   415,070   412,327 Accumulated other comprehensive income   228,097   188,218 Retained earnings   2,228,208   2,130,911 Total shareholders' equity   3,004,882   2,864,963 Total liabilities and shareholders' equity $ 5,026,329 $ 4,457,404

 

Consolidated Income Statements

(in thousands of U.S. dollars, except share and per share amounts) 6 months ended June 31, 2007 2006 Revenue, net(including related party amounts of $56,557 and $36,325 during six months 2007 and 2006, respectively) 2,986,862 $ 1, 926,516 Cost of goods sold (including related party amounts of $94,117 and $63,701 during six months 2007 and 2006, respectively) (1,761,482) (1,318,787) Gross profit 1,225,380 607,729 Selling, distribution and operating expenses: Selling and distribution expenses (254,120) (217,074) Taxes other than income tax (57,034) (56,806) Accretion expense (2,098) (1,546) Provision for doubtful accounts (1,900) (2,701) Provision for short-term investments (3,507) - General, administrative and other operating expenses (167,735) (120,127) Total selling, distribution and operating expenses (486,394) (398,254) Operating income 738,986 209,475 Other income and (expense): Income from equity investments 2,360 1,963 Interest income 4,744 3,671 Interest expense (19,708) (22,538) Other income (expenses), net (3,456) 9,688 Foreign exchange gain 22,698 35,410 Total other income and (expense), net 6,638 28,194 Income before income tax, minority interest, discontinued operations  745,624 237,669 Income tax expense (188,684) (54,890) Minority interest in income of subsidiaries (67,714) (1,669) Income from continuing operations 489,226 181,110 Income from discontinued operations, net of tax 230 554 Extraordinary gain, net of tax – – Net income 489,456 $ 181,110 Currency translation adjustment 39,098 93,596 Unrealized gain on available-for-sale securities 781 169 Comprehensive income 529,335 $ 275,429 Basic and diluted earnings per share: Earnings per share from continuing operations 1.18 $ 0.45 Gain per share effect of discontinued operations 0.00 0.00 Net income per share 1.18 $ 0.45 Weighted average number of shares outstanding 416,270,745 $ 403,218,566

Consolidated Statements of Cash Flows

(in thousands of U.S. dollars) 6 months ended June 30,  2007 2006 Cash Flows from Operating Activities         Net income $ 489,456 $ 181,664 Adjustments to reconcile net income to net cash provided by operating activities:         Depreciation   106,096   76,006 Depletion and amortization   9,738   9,644 Foreign exchange gain   (22,698)   (35,410) Deferred income taxes   (11,243)   (164) Provision for doubtful accounts   1,900   2,701 Inventory write-down   222   679 Accretion expense   2,098   1,546 Minority interest   67,714   1,669 Loss on sale of trading securities   18,813   – Income from equity investments   (2,360)   (1,963) Non-cash interest on long-term tax and pension liabilities   2,360   8,594 Loss on sale of property, plant and equipment   721   218 Loss (gain) on sale of long-term investments   2,490   (503) Gain from discontinued operations, net   (230)   (554) Gain on forgiveness of fines and penalties   (17,471)   (5,825) Stock-based compensation expenses   -   209 Amortization of capitalized costs on bonds issue   –   661 Pension service cost and amortization of prior year service cost   2,076   1,389 Provision for unrecoverable short-term loans issued   3,507   -     Changes in current assets and liabilities, net of effects from acquisition of new subsidiaries:         Trading secuities   252,151   – Accounts receivable   (49,760)   (16,212) Inventories   (117,369)   (24,604) Trade payable to vendors of goods and services   (20,194)   (101,233) Advances received   5,352   92,189 Accrued taxes and other liabilities   (132,769)   (21,272) Settlements with related parties   (771)   (1,332) Current assets and liabilities of discontinued operations   (79)   (152) Deferred revenue and cost of inventory in transit, net   35,427   1,155 Other current assets   97,831   96,902 Unrecognized income tax benefits   (10,128)   - Dividends received   2,804   994 Net cash provided by operating activities   715,684   266,996           Cash Flows from Investing Activities         Acquisition of SKPP, less cash acquired   (270,018)   - Acquisition of KES, less cash acquired   (37,413)   - Acquisition of Transkol, less cash acquired   (7,165)   - Acquisition of other subsidiaries, less cash acquired   (4,181)   (2,153) Acquisition of minority interest in subsidiaries   (2,280)   (1,569) Investments in other non-marketable securities   -   (760) Investments in other marketable securities   (3,203)   – Proceeds from disposal of long-term investments   –   3,247 Proceeds from disposals of property, plant and equipment   4,060   169 Purchases of mineral licenses   (2,235)   (6,382) Purchases of property, plant and equipment   (144,160)   (247,210) Net cash used in investing activities   (466,595)   (254,658)         Cash Flows from Financing Activities         Proceeds from short-term borrowings   191,632   526,166 Repayment of short-term borrowings   (318,510)   (757,474) Repayment of obligations under finance lease   (8,841)   (3,280) Proceeds from long-term debt   16,082   228,957 Proceeds from disposal of treasury stock   –   1,248 Repayment of long-term debt and long-term portion of restructured taxes and social charges payable   (2,633)   (1,203) Net cash used in financing activities   (122,270)   (5,586)           Effect of exchange rate changes on cash and cash equivalents   15,800   12,749           Net increase in cash and cash equivalents   142,619   19,501           Cash and cash equivalents at beginning of period   172,614   311,775 Cash and cash equivalents at end of period $ 315,233 $ 331,276