Mechel Reports The 9M 2018 Financial Results


Consolidated revenue 237.0 bln rubles (+6% compared to 9M 2017)
EBITDA* 60.6 bln rubles (+3% compared to 9M 2017)
Profit attributable to equity shareholders of Mechel PAO – 11.0 bln rubles

MOSCOW, Nov. 27, 2018 (GLOBE NEWSWIRE) -- Mechel PAO (MOEX: MTLR, NYSE: MTL), a leading Russian mining and steel group, announces financial results for the 9M 2018.

Mechel PAO’s Chief Executive Officer Oleg Korzhov commented:

“The Group’s nine months 2018 financial result from operating activities demonstrated a small growth year-on-year. The third quarter turned out weaker than the previous one.

“The key factors that impacted the dynamics of our results were the necessary planned repairs at our steelmaking facilities that have been put off in earlier periods due to lack of financing, as well as transport limitations due to railway car shortages. As the markets were favorable, this did not have a major impact on our revenue, but did increase operation costs and as such, brought down EBITDA and profitability.

“Later this year and next year we still have several major repairs ahead of us, necessary for increasing production and further expansion of our product range. In this reporting period, our steelmaking experts mastered and earned certificates for production of rails for speed railways, as well as mastered manufacturing of conductor rails for underground railway systems. We are also working on boosting production of stainless flats, which are much in demand.

“The mining division demonstrated stable levels of coal mining and a growth in iron ore concentrate production at Korshunov Mining Plant. Stripping volumes also demonstrated a marked increase throughout the division. Sales went down due to railcar shortages, coal was partly stored and will be sold in future periods. At the same time, coking coal concentrate sales to third parties demonstrated positive dynamics quarter-on-quarter. The decrease in shipments by third-party railcars was partially compensated by the growth in shipping using our own rolling stock. Later this year and next year we plan to expand our own railcar fleet to reduce our dependency on third-party operators.

“On a separate note, we have reached progress in restructuring our debt by refinancing our 1-billion-dollar pre-export syndicated loan. The unrestructured share of our debt portfolio is down to 9%. We continue working on restructuring the remainder of our loans and expect to complete this process next year.”

Consolidated Results For The 9M2018

Mln rubles9M’ 18 9M’ 17 % 3Q’ 18 2Q’ 18 % 
Revenue
from external customers
237,003 222,797 6% 79,965 82,186 -3% 
Operating profit47,802 46,415 3% 15,161 19,258 -21% 
EBITDA 60,646 59,148 3% 19,206 23,004 -17% 
EBITDA, margin26% 27%  24% 28%  
Profit
attributable to equity shareholders of Mechel PAO
10,997 11,114 -1% 6,304 1,400 350% 

Mining Segment

Mechel Mining Management OOO’s Chief Executive Officer Pavel Shtark noted:

“Escalation of the trade conflict between the United States and China, the drop in yuan exchange rate and introduction of limitations against coal imports in Chinese ports led to a correction in international market spot prices for coking coal early in the third quarter to $172 per tonne FOB Australia. Later the Chinese government announced an expansion in investment into the country’s railroad infrastructure, which spiked Chinese steel production to record highs and prompted an increase in coking coal consumption. In India steel production levels have also been high. As a result, increased global demand for coking coal coincided with logistical difficulties with coal shipments from major coal exporting states, and by the quarter’s end, spot prices once again topped $200 per tonne.

“During this period, our facilities continued to implement the program of repairing and upgrading equipment, acquiring new mining machines as well as making up for the lag in preparing reserves for mining. For example, thanks to new equipment and bringing in contractors with their own fleet, stripping volumes at our coal facilities went up in the third quarter by 23% quarter-on-quarter. At Korshunov Mining Plant, stripping went up by 33%, while iron ore concentrate production increased by 17% quarter-on-quarter.

“At the same time, in this reporting period there were difficulties with supplying the division with necessary number of railcars both for transporting run-of-mine coal to washing plants and for shipping ready products to our customers. This hampered our ability to process and sell coal. Some coal remained at our storages and will be sold later when the railcar situation becomes normal.

“The decrease in coal shipments was partially compensated by the growth of coke and iron ore sales, so the slump in revenue was minor. At the same time, the growth of operation costs as stripping and repair works became more intensive had a negative impact on the EBITDA and margin dynamics.”

Mln rubles9M’ 18 9M’ 17 % 3Q’ 18 2Q’ 18 % 
Revenue
from external customers
73,316 74,685 -2% 24,916 25,676 -3% 
Revenue
inter-segment
28,460 32,974 -14% 9,415 9,633 -2% 
EBITDA 36,582 47,336 -23% 11,691 14,408 -19% 
EBITDA, margin36% 44%  34% 41%  

Steel Segment

Mechel-Steel Management Company OOO’s Chief Executive Officer Andrey Ponomarev noted:

“As a result of these nine months, the division demonstrated growing revenue and EBITDA, primarily due to this year’s improvement in the market situation. The third quarter’s results showed negative dynamics compared to the previous quarter. The main reason was the decrease in product sales due to production cuts. Production limitations were due to an increase in current and overhaul repairs aimed at making our equipment operation more reliable and stable. Until this year’s end and next year we plan a series of other major repairs as well as measures aimed at expanding our product range. Chelyabinsk Metallurgical Plant will conduct repairs at its blast furnace #4 and replace its converter #1 and other facilities. More works are scheduled at the plant’s agglomeration equipment, converters, concasters and rolling mills. It should be noted that this includes measures aimed at improving the plant’s safety and ecological friendliness.

“Over these nine months we have increased production of stampings by 60% due to the growth in sales of wagon axles, as the demand from both domestic and CIS rolling-stock manufacturers was high.

“I would also like to note that in the third quarter we have restored rails production volumes at Chelyabinsk Metallurgical Plant’s Universal rolling mill, which have slumped in the first half of the year. In the third quarter, we have shipped a total of 90,500 tonnes of rails which is nearly equal to the amount shipped in the first half of the year. The Universal rolling mill also continued to master production of new types of products. The mill began producing new types of shaped rolls, which are due to receive certificates from Russia’s Federal Railway Transport Register by the end of this year.”

Mln rubles9M’ 18 9M’ 17 % 3Q’ 18 2Q’ 18 % 
Revenue
from external customers
143,842 129,377 11% 49,460 50,144 -1% 
Revenue
inter-segment
4,211 5,413 -22% 1,256 1,365 -8% 
EBITDA 21,960 12,175 80% 7,476 8,280 -10% 
EBITDA, margin15% 9%  15% 16%  

Power Segment        

Mechel-Energo OOO’s Chief Executive Officer Pyotr Pashnin noted:

“The third quarter is traditionally a slow one as the heating season is over. Also, this is the time of active preparation for the new fall-winter season and preventive maintenance works on our generating equipment. As a result, the quarter’s results demonstrated an expected slump quarter-on-quarter. At the same time, nine months 2018 financial results markedly exceeded those of the same period last year, for example, EBITDA grew by 40%, which is primarily due to an increase in selling prices and the drop in operation costs.”

Mln rubles9M’ 18 9M’ 17 % 3Q’ 18 2Q’ 18 % 
Revenue
from external customers
19,845 18,735 6% 5,589 6,365 -12% 
Revenue
inter-segment
11,173 11,911 -6% 3,552 3,584 -1% 
EBITDA 1,380 989 40% 180 463 -61% 
EBITDA, margin4% 3%  2% 5%  

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

Please dial the number below approximately 10 minutes prior to the scheduled time of the call.

Conference Call Phone Numbers:

International: +44 (0) 330 336 9411
US: +1 323-794-2575
Russia: +7 495 646 9190

Conference ID: 2937189

Alexey Lukashov
Director of Investor Relations
Mechel PAO
Phone: 7-495-221-88-88
Fax: 7-495-221-88-00
alexey.lukashov@mechel.com

Mechel is an international mining and steel company. Its products are marketed in Europe, Asia, North and South America, Africa. Mechel unites producers of coal, iron ore concentrate, steel, rolled products, ferroalloys, heat and electric power. All of its enterprises work in a single production chain, from raw materials to high value-added products.

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 9M 2018 Earnings Press Release

Attachment A

Non-IFRS financial measures. This press release includes financial information prepared in accordance with International Financial Reporting Standards, or IFRS, as well as other financial measures referred to as non-IFRS. The non-IFRS financial measures should be considered in addition to, but not as a substitute for the information prepared in accordance with IFRS.

Adjusted EBITDA (EBITDA) represents profit (loss) attributable to equity shareholders of Mechel PAO before Depreciation and amortisation, Foreign exchange loss (gain), net, Finance costs including fines and penalties on overdue loans and borrowings and finance lease payments, Finance income, Net result on the disposal of non-current assets, Impairment of goodwill and other non-current assets, Write-off of accounts receivable, Write-off of inventories to net realisable value, Allowance for expected credit losses on financial assets, Net result on the disposal of subsidiaries, Profit (loss) attributable to non-controlling interests, Income tax expense (benefit), Pension service cost and actuarial loss, other related expenses, Other fines and penalties, Gain on restructuring and forgiveness of accounts payable and write-off of accounts payable with expired legal term and Other one-off items. Adjusted EBITDA margin is defined as adjusted EBITDA as a percentage of our Revenue. Our adjusted EBITDA may not be similar to EBITDA measures of other companies. Adjusted EBITDA is not a measurement under IFRS and should be considered in addition to, but not as a substitute for the information contained in our interim condensed consolidated statement of profit (loss) and other comprehensive income. We believe that our adjusted 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 depreciation, amortisation and impairment of goodwill and other non-current assets are considered operating expenses under IFRS, these expenses primarily represent the non-cash current period allocation of costs associated with non-current assets acquired or constructed in prior periods. Our adjusted 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.

Our calculation of Net debt, excluding fines and penalties on overdue amounts** is presented below:

Mln rubles30.09.2018 31.12.2017 
Loans and borrowings, excluding interest payable, fines and penalties on overdue amounts392,831 380,541 
Interest payable7,683 20,420 
Non-current loans and borrowings14,649 17,360 
Other non-current financial liabilities43,344 40,916 
Other current financial liabilities- 734 
less Cash and cash equivalents(2,777) (2,452) 
Net debt, excluding finance lease liabilities, fines and penalties on overdue amounts 455,730 457,519 
   
Current finance lease liabilities5,818 7,476 
Non-current finance lease liabilities2,631 1,878 
Net debt, excluding fines and penalties on overdue amounts464,179 466,873 
   

EBITDA can be reconciled to our interim condensed consolidated statement of profit (loss) and other comprehensive income as follows:

 Consolidated Results Mining Segment *** Steel Segment*** Power Segment***
Mln rubles9m 20189m 2017 9m 20189m 2017 9m 20189m 2017 9m 20189m 2017
Profit (loss) attributable to equity shareholders of Mechel PAO10,997 11,114  10,385 16,873  618 (3,825)  365 (582) 
Add:           
Depreciation and amortisation10,159 11,041  5,702 6,262  4,088 4,446  369 333 
Foreign exchange loss (gain), net18,604 (3,601)  11,467 (3,664)  7,124 64  13 (1) 
Finance costs including fines and penalties on overdue loans and borrowings and finance leases payments31,729 36,273  22,707 26,452  9,732 10,683  414 664 
Finance income(20,561) (493)  (19,090) (1,403)  (1,808) (572)  (783) (44) 
Net result on the disposal of non-current assets, impairment of goodwill and other non-current assets, write-off of accounts receivable and write-off of inventories to net realisable value, allowance for expected credit losses on financial assets2,257 807  867 517  651 (15)  739 307 
Net result on the disposal of subsidiaries- (474)  (3) (474)  3 -  - - 
Profit attributable to non-controlling interests933 848  224 386  585 381  124 80 
Income tax expense6,188 2,806  4,545 1,889  435 831  109 85 
Pension service cost and actuarial loss, other related expenses108 96  88 76  18 17  2 3 
Other fines and penalties602 892  (49) 476  620 269  31 147 
Gain on restructuring and forgiveness of accounts payable and write-off of accounts payable with expired legal term(370) (161)  (261) (54)  (106) (104)  (3) (3) 
EBITDA60,646 59,148  36,582 47,336  21,960 12,175  1,380 989 
EBITDA, margin26% 27%  36% 44%  15% 9%  4% 3% 
            
            
            
 Consolidated Results Mining Segment *** Steel Segment*** Power Segment***
Mln rubles3q 20182q 2018 3q 20182q 2018 3q 20182q 2018 3q 20182q 2018
Profit (loss) attributable to equity shareholders of Mechel PAO6,304 1,400  9,102 1,013  (1,055) (370)  (278) 676 
Add:           
Depreciation and amortisation3,168 3,514  1,786 1,946  1,262 1,452  120 116 
Foreign exchange loss (gain), net7,024 12,088  3,675 8,289  3,353 3,783  (4) 16 
Finance costs including fines and penalties on overdue loans and borrowings and finance leases payments10,284 10,982  6,839 8,167  3,695 3,057  131 123 
Finance income(12,698) (7,770)  (12,920) (5,822)  (148) (1,553)  (12) (760) 
Net result on the disposal of non-current assets, impairment of goodwill and other non-current assets, write-off of accounts receivable and write-off of inventories to net realisable value, allowance for expected credit losses on financial assets721 295  391 111  142 74  188 113 
Net result on the disposal of subsidiaries310 (310)  - (3)  310 (307)  - - 
Profit attributable to non-controlling interests346 349  140 56  193 221  13 73 
Income tax expense (benefit)3,723 2,455  2,773 893  (388) 1,686  17 99 
Pension service cost and actuarial loss, other related expenses37 35  29 30  6 5  1 - 
Other fines and penalties293 (1)  114 (255)  173 248  5 7 
Gain on restructuring and forgiveness of accounts payable and write-off of accounts payable with expired legal term(306) (33)  (238) (17)  (67) (16)  (1) - 
EBITDA19,206 23,004  11,691 14,408  7,476 8,280  180 463 
EBITDA, margin24% 28%  34% 41%  15% 16%  2% 5% 
*** including inter-segment operations           


Attachment B

INTERIM CONDENSED CONSOLIDATED STATEMENT OF PROFIT (LOSS) AND
OTHER COMPREHENSIVE INCOME
for the nine months ended September 30, 2018
(All amounts are in millions of Russian rubles, unless stated otherwise) Nine months
ended
September 30,
 Nine months
ended
September 30,
  2018  2017 
  (unaudited) (unaudited)
     
Revenue 237,003  222,797 
Cost of sales (131,757)  (121,009) 
Gross profit 105,246  101,788 
     
Selling and distribution expenses (41,939)  (40,858) 
Loss on write-off of non-current assets (243)  (152) 
Allowance for expected credit losses on financial assets (806)  (355) 
Taxes other than income taxes (3,685)  (3,671) 
Administrative and other operating expenses (11,708)  (11,181) 
Other operating income 937  844 
Total selling, distribution and operating income and (expenses), net (57,444)  (55,373) 
Operating profit 47,802  46,415 
     
Finance income 20,561  493 
Finance costs including fines and penalties on overdue loans and borrowings and finance lease payments (31,729)  (36,273) 
Foreign exchange (loss) gain, net (18,604)  3,601 
Share of profit of associates, net 38  14 
Other income 401  648 
Other expenses (351)  (130) 
Total other income and (expense), net (29,684)  (31,647) 
Profit before tax 18,118  14,768 
     
Income tax expense (6,188)  (2,806) 
Profit for the period 11,930  11,962 
     
Attributable to:    
Equity shareholders of Mechel PAO 10,997  11,114 
Non-controlling interests 933  848 
     
Other comprehensive income    
Other comprehensive income to be reclassified to profit or loss in subsequent periods, net of income tax: 79  179 
Exchange differences on translation of foreign operations 79  179 
Other comprehensive (loss) not to be reclassified to profit or loss in subsequent periods, net of income tax: (5)  - 
Re-measurement of defined benefit plans (5)  - 
Other comprehensive income for the period, net of tax 74  179 
     
Total comprehensive income for the period, net of tax 12,004  12,141 
     
Attributable to:    
Equity shareholders of Mechel PAO 11,071  11,293 
Non-controlling interests 933  848 
     
Earnings per share    
Weighted average number of common shares 416,270,745  416,270,745 
Basic and diluted profit for the period attributable to common equity shareholders of Mechel PAO (Russian rubles per share) 26.42  26.70 


INTERIM CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION
 as of September 30, 2018
(All amounts are in millions of Russian rubles)
   September 30, 2018   December 31, 2017
   (unaudited)   
     
Assets    
Non-current assets    
Property, plant and equipment 194,352  197,875 
Mineral licenses 32,338  33,240 
Goodwill and other intangible assets 19,247  19,211 
Investments in associates 292  283 
Deferred tax assets 138  96 
Other non-current assets 674  758 
Non-current financial assets 200  202 
Total non-current assets 247,241  251,665 
     
Current assets    
Inventories 40,332  37,990 
Income tax receivables 248  107 
Trade and other receivables 18,746  18,762 
Other current assets 7,706  7,589 
Other current financial assets 494  562 
Cash and cash equivalents 2,777  2,452 
Total current assets 70,303  67,462 
     
Total assets 317,544  319,127 
     
Equity and liabilities    
Equity    
Common shares 4,163  4,163 
Preferred shares 833  833 
Additional paid-in capital 24,378  24,378 
Accumulated other comprehensive income 1,377  1,303 
Accumulated deficit (275,817)  (283,743) 
Equity attributable to equity shareholders of Mechel PAO (245,066)  (253,066) 
Non-controlling interests 9,861  8,933 
Total equity (235,205)  (244,133) 
     
Non-current liabilities    
Loans and borrowings 14,649  17,360 
Finance lease liabilities 2,631  1,878 
Other non-current financial liabilities 43,344  40,916 
Other non-current liabilities 124  138 
Pension obligations 3,664  3,512 
Provisions 3,525  3,814 
Deferred tax liabilities 12,949  11,494 
Total non-current liabilities 80,886  79,112 
     
Current liabilities    
Loans and borrowings, including interest payable, fines and penalties on overdue amounts of RUB 19,775 million and RUB 41,992 million as of September 30, 2018 and December 31, 2017, respectively 412,606  422,533 
Trade and other payables 30,874  33,469 
Finance lease liabilities 5,818  7,476 
Income tax payable 5,709  4,578 
Taxes and similar charges payable other than income tax 6,316  6,696 
Advances received 6,363  4,385 
Other current financial liabilities -  734 
Other current liabilities 79  69 
Pension obligations 980  849 
Provisions 3,118  3,359 
Total current liabilities 471,863  484,148 
     
Total liabilities 552,749  563,260 
Total equity and liabilities 317,544  319,127 
       


INTERIM CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
for the nine months ended September 30, 2018
(All amounts are in millions of Russian rubles)
  Nine months
ended September 30,
 Nine months
ended September 30,
  2018  2017 
  (unaudited) (unaudited)
Cash flows from operating activities    
Profit for the period 11,930  11,962 
Adjustments to reconcile profit to net cash provided by operating activities    
Depreciation of property, plant and equipment 9,079  9,743 
Amortisation of mineral licenses and amortisation of intangible assets 1,080  1,298 
Foreign exchange loss (gain), net 18,604  (3,601) 
Deferred tax expense (benefit) 2,234  (1,562) 
Allowance for expected credit losses on financial assets 806  346 
Write-off of accounts receivable 18  48 
Write-off of inventories to net realisable value 1,107  292 
Loss on write-off of non-current assets 243  152 
Loss (gain) on disposal of non-current assets 64  (9) 
Gain on restructuring and forgiveness of accounts payable and write-off of accounts payable with expired legal term (370)  (161) 
Pension service cost and actuarial loss, other related expenses 108  96 
Finance income (20,561)  (493) 
Finance costs including fines and penalties on overdue loans and borrowings and finance lease payments 31,729  36,273 
Income associated with disposal of Bluestone (3)  (481) 
Provisions for legal claims, on taxes other than income tax and other provisions (110)  (353) 
Other (46)  128 
     
Changes in working capital items    
Trade and other receivables (41)  (708) 
Inventories (4,236)  (2,448) 
Trade and other payables 43  (3,680) 
Advances received 1,868  (318) 
Taxes payable and other liabilities 3,335  3,509 
Other current assets (41)  (1,369) 
     
Income tax paid (3,062)  (3,202) 
     
Net cash provided by operating activities 53,778  45,462 
     
Cash flows from investing activities    
Loans issued and other investments -  (5) 
Proceeds from loans issued and other investments 9  144 
Interest received 142  129 
Proceeds from royalty and other proceeds associated with disposal of Bluestone 3  481 
Proceeds from disposal of subsidiaries, net of cash disposed -  82 
Proceeds from disposals of property, plant and equipment 140  275 
Purchases of property, plant and equipment (3,321)  (4,250) 
Purchases of intangible assets (150)  - 
Interest paid, capitalised (310)  (411) 
Net cash used in investing activities (3,487)  (3,555) 
     
Cash flows from financing activities    
Proceeds from loans and borrowings, including proceeds from factoring arrangement of RUB 1,959 million and nil for the nine months ended September 30, 2018 and 2017, respectively 67,228  16,809 
Repayment of loans and borrowings, including payments from factoring arrangement of nil and RUB 474 million for the nine months ended September 30, 2018 and 2017, respectively (83,904)  (28,366) 
Repayment of other current financial liabilities (442)  - 
Dividends paid to shareholders of Mechel PAO (1,386)  (856) 
Dividends paid to non-controlling interests (7)  (118) 
Interest paid, including fines and penalties (25,302)  (24,640) 
Repayment of obligations under finance lease (2,172)  (2,712) 
Deferred payments for acquisition of assets (540)  (272) 
Deferred consideration paid for the acquisition of subsidiaries in prior periods (3,340)  (2,430) 
Net cash used in financing activities (49,865)  (42,585) 
     
Effect of exchange rate changes on cash and cash equivalents 364  (415) 
Allowance for expected credit losses on cash and cash equivalents (32)  - 
     
Net increase (decrease) in cash and cash equivalents 758  (1,093) 
     
Cash and cash equivalents at beginning of period 2,452  1,689 
Cash and cash equivalents, net of overdrafts at beginning of period 1,223  1,453 
Cash and cash equivalents at end of period 2,777  2,239 
Cash and cash equivalents, net of overdrafts at end of period 1,981  360 
       

These interim condensed consolidated financial statements were prepared by Mechel PAO in accordance with IFRS and have not been audited by the independent auditor. If these interim condensed consolidated financial statements are audited in the future, the audit could reveal differences in our consolidated financial results and we cannot assure that any such differences would not be material.
There were certain reclassifications to conform with the current period presentation.

__________________________

* EBITDA - Adjusted EBITDA. Please find the calculation of the Adjusted EBITDA and other non-IFRS measures used here and hereafter in Attachment A.

** Calculations of Net debt could be differ from indicators calculated in accordance with loan agreements upon dependence on definitions in such agreements.