Mechel Reports the 1Q 2019 Financial Results


Consolidated revenue 74.9 bln rubles (0% compared to 1Q2018)
EBITDA* 15.3 bln rubles (-17% compared to 1Q2018)
Profit attributable to equity shareholders of Mechel PAO – 11.3 bln rubles

MOSCOW, Russia, May 23, 2019 (GLOBE NEWSWIRE) -- Mechel PAO (MOEX: MTLR, NYSE: MTL), a leading Russian mining and steel group, announces financial results for the 1Q 2019.

Mechel PAO’s Chief Executive Officer Oleg Korzhov commented:

“The first quarter’s financial results demonstrated positive dynamics compared to previous period. Upon stable revenue, EBITDA went up by 2%, while operating profit and profit attributable to Mechel PAO’s shareholders showed major growth.

“As a key factor impacting the company’s results in this reporting period, I must note that the mining division restrained mining dynamics as planned to offload accumulated product stocks. At the same time, the division increased sales to third parties of practically all product types except anthracites, and demonstrated financial growth. The steel division did not allow any major slumps in revenue despite the winter inactivity in construction markets, but its results were subject to a negative impact of iron ore prices growth.

“Later this year we continue to consistently pursue measures aimed at upgrading our mining fleet to restore and then increase coal mining volumes, as well as a large-scale repair program at our steel division’s facilities.”

Consolidated Results For The 1Q2019

Mln rubles1Q’ 191Q’ 18%1Q’ 194Q’ 18%
Revenue
from contracts with external customers
74,856 74,852 0% 74,856 75,571 -1% 
Operating profit10,837 13,383 -19% 10,837 1,978 448% 
EBITDA 15,322 18,436 -17% 15,322 15,021 2% 
EBITDA, margin20% 25%  20% 20%  
Profit
attributable to equity shareholders of Mechel PAO
11,336 3,293 244% 11,336 1,631 595% 

Mechel PAO’s Chief Financial Officer Nelli Galeeva commented:

“Consolidated EBITDA in 1Q2019 was 15.3 billion rubles, which is 2% more quarter-on-quarter. Profit attributable to Mechel PAO’s shareholders went up nearly seven times in 1Q2019 quarter-on-quarter to reach 11.3 billion rubles. Growth of foreign exchange gains on foreign currency debt had a major impact on this indicator’s dynamics as the ruble strengthened against US dollar and euro in this reporting period.

“Despite a minor decrease in cash flow from our core operations, the operating cash flow remains sufficient not only for ensuring the Group’s operational needs, but also for bringing down its leverage. The Group’s net debt excluding penalties, fines and other non-current financial liabilities went down by 12 billion rubles as compared to where it stood as of December 31, 2018, totaling 411 billion rubles.

“The debt’s decrease was partly offset by our recognition of additional long-term lease obligations of 3.8 billion rubles under IFRS 16 Leases standard was applied starting January 1, 2019.

“Our financial expenditure went down by 0.2 billion rubles from 10.3 billion rubles in 4Q2018 to 10.1 billion rubles in this reporting period due to lower average foreign currency exchange rates. Interest paid in 1Q2019, including PIK interest, went down by 5% quarter-on-quarter and totaled 7.7 billion rubles.

“Net debt to EBITDA ratio was 5.7 by the end of 1Q2019.

“In our mining segment, 1Q2019 revenue from sales to third parties totaled 24.5 billion rubles, which is 4% higher quarter-on-quarter. Gross profit also went up by nearly 2 billion rubles or 11%, and EBITDA by 2.1 billion rubles or 23% quarter-on-quarter. This was due to an increase in coal volume product sales.

“In 1Q2019, steel product sales remained at the previous quarter’s level, but the seasonal price slump on the steel division’s key products combined with high iron ore and ferroalloys prices led to a decrease in gross margin from 22% in 4Q2018 to 16% in this reporting period, and a 46% quarter-on-quarter decrease in EBITDA from 6.0 billion rubles to 3.3 billion rubles.”

Mining Segment

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

“Our mining facilities’ operational plans for the first quarter were amended to include a decrease in mining volumes as we have accumulated major coal stockpiles by last year’s end due to railcar shortages. As a result, mining volumes went down by 19% quarter-on-quarter. At the same time, coking coal concentrate sales to third parties went up by 3%, PCI sales increased by 7% and thermal coal sales went up by 45%. This enabled us to reduce significantly our stocks while cutting down unit costs in most of the division’s facilities, partly by optimizing equipment repair expenses, which are traditionally high in extremely low winter temperatures. Overall, coal stockpiles went down by nearly 30% in the first quarter.

“As a result, in 1Q2019 the division demonstrated improvement in financial results both quarter-on-quarter and year-on-year. As revenue from sales to third parties grew by 4% quarter-on-quarter, EBITDA went up by 23%.

“One of the division’s key tasks for this year is increasing mining volumes. To do so we continue to upgrade and grow our mining equipment fleet and prepare our resources for mining. I would like to note that in 2019 we will see the launch of such major equipment as EKG-18 and ESh-20/90 excavators which will enable us to improve mining and stripping efficiency.”

Mln rubles1Q’ 191Q’ 18%1Q’ 194Q’ 18%
Revenue
from contracts with external customers
24,545 22,724 8% 24,545 23,566 4% 
Revenue
inter-segment
9,473 9,412 1% 9,473 9,089 4% 
EBITDA 10,986 10,483 5% 10,986 8,934 23% 
EBITDA, margin32% 33%  32% 27%  

Steel Segment

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

“This reporting period was characterized by a seasonal slump in demand for construction products which account for a major share in the division’s sales. This factor did not lead to a significant quarter-on-quarter decrease in overall sales volumes tonnage-wise, but had a negative impact on price levels. As a result, revenue from sales to third parties went down by 5% quarter-on-quarter. Higher iron ore prices due to the global growth of ore prices as well as the strengthening of our national currency led to increased production costs, which were reflected in a lower EBITDA and EBITDA margin quarter-on-quarter.

“In the second quarter, iron ore prices continue to grow as market participants worry over news of pessimistic forecasts for iron ore production in Australia, especially as iron ore supply from Brazil is expected to plunge. The persisting escalation of a trade conflict between the United States and China also supports the price growth trend. At the same time, by the second quarter’s end, we are expecting business activity on Russia’s construction steel market to recover and that may bring up prices for our division’s products.

“We have planned a whole series of major repairs and equipment maintenance for our facilities. This will enable us to maintain stable output of steel and finished products as well as reduce our facilities’ impact on the environment. At the same time, our plans for output of the most high value-added products envisages a year-on-year production growth.”

Mln rubles1Q’ 191Q’ 18%1Q’ 194Q’ 18%
Revenue
from contracts with external customers
42,062 44,238 -5% 42,062 44,076 -5% 
Revenue
inter-segment
1,595 1,590 0% 1,595 1,654 -4% 
EBITDA 3,259 6,204 -47% 3,259 6,030 -46% 
EBITDA, margin7% 14%  7% 13%  

Power Segment        

Mechel-Energo OOO’s Chief Executive Officer Denis Graf noted:

“The division’s 1Q2019 financial results grew predictably quarter-on-quarter as the heating season peaked and sales on the capacity market went up. The division demonstrated a year-on-year revenue growth due to increased electricity and capacity sales, but outstripping growth of production costs linked to increased prices for electricity purchased led to a lower EBITDA.”

Mln rubles1Q’ 191Q’ 18%1Q’ 194Q’ 18%
Revenue
from contracts with external customers
8,249 7,891 5% 8,249 7,929 4% 
Revenue
inter-segment
4,400 4,037 9% 4,400 4,298 2% 
EBITDA 234 737 -68% 234 166 41% 
EBITDA, margin2% 6%  2% 1%  

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 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 (gain) loss, net, Finance costs including fines and penalties on overdue loans and borrowings and lease payments, Finance income, Net result on the disposal of non-current assets, Impairment of goodwill and other non-current assets, Write-off of trade and other receivables, Allowance for expected credit losses on financial assets, Provision (reversal of provision) for doubtful accounts, Write-off of inventories to net realisable value, Net result on the disposal of subsidiaries, Profit (loss) attributable to non-controlling interests, Income tax expense (benefit), Effect of pension obligations, Other fines and penalties, Gain on restructuring and forgiveness of trade and other payables and write-off of trade and other payables 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 rubles31.03.2019 31.12.2018 
Loans and borrowings, excluding interest payable, fines and penalties on overdue amounts382,280 402,417 
Interest payable8,052 7,749 
Non-current loans and borrowings11,510 6,538 
Other non-current financial liabilities45,432 44,510 
less Cash and cash equivalents(2,745) (1,803) 
Net debt, excluding lease liabilities, fines and penalties on overdue amounts 444,529 459,411 
   
Current lease liabilities6,025 5,880 
Non-current lease liabilities6,031 2,413 
Net debt, excluding fines and penalties on overdue amounts456,585 467,704 

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 rubles3m 2019 3m 2018  3m 2019 3m 2018  3m 2019 3m 2018  3m 2019 3m 2018 
Profit (loss) attributable to equity shareholders of Mechel PAO11,336 3,293  5,988 913  6,935 992  (220) (42) 
            
Add:           
Depreciation and amortisation3,658 3,477  2,069 1,970  1,467 1,373  122 134 
Foreign exchange (gain) loss, net(11,979) (508)  (2,611) (497)  (9,350) (12)  (18) 1 
Finance costs including fines and penalties on overdue loans and borrowings and leases payments10,085 10,463  6,247 7,700  3,875 2,979  164 158 
Finance income(232) (93)  (262) (348)  (163) (108)  (8) (11) 
Net result on the disposal of non-current assets, impairment of goodwill and other non-current assets, write-off of trade and other receivables, allowance for expected credit losses on financial assets, provision (reversal of provision) for doubtful accounts and write-off of inventories to net realisable value512 1,241  210 364  180 437  122 440 
Profit attributable to non-controlling interests378 238  180 29  197 172  1 37 
Income tax expense (benefit)1,131 10  (960) 237  (77) 189  (42) 2 
Effect of pension obligations48 36  40 29  7 6  1 1 
Other fines and penalties440 310  125 92  202 199  113 19 
Gain on restructuring and forgiveness of trade and other payables and write-off of trade and other payables with expired legal term(55) (31)  (40) (6)  (14) (23)  (1) (2) 
EBITDA15,322 18,436  10,986 10,483  3,259 6,204  234 737 
EBITDA, margin20% 25%  32% 33%  7% 14%  2% 6% 
            
            
 Consolidated Results Mining Segment *** Steel Segment*** Power Segment***
Mln rubles1q 2019 4q 2018  1q 2019 4q 2018  1q 2019 4q 2018  1q 2019 4q 2018 
Profit (loss) attributable to equity shareholders of Mechel PAO11,336 1,631  5,988 918  6,935 75  (220) (2,996) 
            
Add:           
Depreciation and amortisation3,658 3,700  2,069 1,919  1,467 1,651  122 130 
Foreign exchange (gain) loss, net(11,979) 7,171  (2,611) (696)  (9,350) 7,845  (18) 23 
Finance costs including fines and penalties on overdue loans and borrowings and leases payments10,085 10,323  6,247 6,447  3,875 4,093  164 169 
Finance income(232) (13,495)  (262) (5,368)  (163) (8,065)  (8) (448) 
Net result on the disposal of non-current assets, impairment of goodwill and other non-current assets, write-off of trade and other receivables, allowance for expected credit losses on financial assets, provision (reversal of provision) for doubtful accounts and write-off of inventories to net realisable value512 7,889  210 3,929  180 1,192  122 2,768 
Net result on the disposal of subsidiaries- (3)  - -  - (3)  - - 
Profit (loss) attributable to non-controlling interests378 (25)  180 (42)  197 53  1 (37) 
Income tax expense (benefit)1,131 (3,507)  (960) 1,395  (77) (966)  (42) (192) 
Effect of pension obligations48 440  40 427  7 12  1 1 
Other fines and penalties440 952  125 35  202 168  113 749 
Gain on restructuring and forgiveness of trade and other payables and write-off of trade and other payables with expired legal term(55) (55)  (40) (30)  (14) (25)  (1) (1) 
EBITDA15,322 15,021  10,986 8,934  3,259 6,030  234 166 
EBITDA, margin20% 20%  32% 27%  7% 13%  2% 1% 
*** including inter-segment operations 
  

Income tax, deferred tax related to the consolidated group of taxpayers are not allocated to segments as they are managed on the group basis.

Attachment B

INTERIM CONDENSED CONSOLIDATED STATEMENT OF PROFIT (LOSS)
AND OTHER COMPREHENSIVE INCOME for the three months ended March 31, 2019

(All amounts are in millions of Russian rubles)
  Three months
ended March
31,
2019
  Three months
ended March
31,
2018
 
  (unaudited)  (unaudited) 
     
Revenue from contracts with customers 74,856  74,852 
Cost of sales (45,248)  (41,556) 
Gross profit  29,608  33,296 
     
Selling and distribution expenses (13,574)  (14,451) 
Loss on write-off of non-current assets (77)  (132) 
Allowance for expected credit losses on financial assets (120)  (344) 
Taxes other than income taxes (1,137)  (1,267) 
Administrative and other operating expenses (4,096)  (3,959) 
Other operating income 233  240 
Total selling, distribution and operating income and (expenses), net  (18,771)  (19,913) 
Operating profit  10,837  13,383 
     
Finance income 232  93 
Finance costs including fines and penalties on overdue loans and borrowings and leases payments (10,085)  (10,463) 
Foreign exchange gain (loss), net 11,979  508 
Share of profit (loss) of associates, net 7  18 
Other income 55  31 
Other expenses (180)  (29) 
Total other income and (expense), net  2,008  (9,842) 
Profit before tax  12,845  3,541 
     
Income tax expense (1,131)  (10) 
Profit for the period  11,714  3,531 
     
Attributable to:    
Equity shareholders of Mechel PAO 11,336  3,293 
Non-controlling interests 378  238 
     
Other comprehensive income    
Other comprehensive loss that may be reclassified to profit or loss in subsequent periods, net of income tax:  (387)  (443) 
Exchange differences on translation of foreign operations (387)  (443) 
Other comprehensive income not to be reclassified to profit or loss in subsequent periods, net of income tax:  14  3 
Re-measurement of defined benefit plans 14  3 
Other comprehensive loss for the period, net of tax  (373)  (440) 
     
Total comprehensive income for the period, net of tax  11,341  3,091 
     
Attributable to:    
Equity shareholders of Mechel PAO 10,963  2,852 
Non-controlling interests 378  239 
     


INTERIM CONDENSED CONSOLIDATED
STATEMENT OF FINANCIAL POSITION as of March 31, 2019
(All amounts are in millions of Russian rubles)
  March 31,
2019
  December 31, 2018 
  (unaudited)    
     
Assets    
Non-current assets    
Property, plant and equipment 191,345  189,879 
Mineral licenses 31,882  32,068 
Goodwill and other intangible assets 16,942  16,883 
Investments in associates 307  293 
Deferred tax assets 6,582  5,488 
Other non-current assets 654  630 
Non-current financial assets 179  244 
Total non-current assets  247,891  245,485 
     
Current assets    
Inventories 43,603  43,423 
Income tax receivables 64  121 
Trade and other receivables 20,146  17,612 
Other current assets 7,501  8,673 
Other current financial assets 257  508 
Cash and cash equivalents 2,745  1,803 
Total current assets  74,316  72,140 
     
Total assets  322,207  317,625 
     
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 1,398  1,771 
Accumulated deficit (263,696)  (274,186) 
Equity attributable to equity shareholders of Mechel PAO  (232,924)  (243,041) 
Non-controlling interests 10,110  9,846 
Total equity  (222,814)  (233,195) 
     
Non-current liabilities    
Loans and borrowings 11,510  6,538 
Lease liabilities 6,031  2,413 
Other non-current financial liabilities 45,432  44,510 
Other non-current liabilities 116  120 
Pension obligations 3,723  3,819 
Provisions 3,875  3,719 
Deferred tax liabilities 13,597  13,506 
Total non-current liabilities  84,284  74,625 
     
Current liabilities    
Loans and borrowings, including interest payable, fines and penalties on overdue amounts of RUB 10,198 million and RUB 9,877 million as of March 31, 2019 and December 31, 2018, respectively 392,478  412,294 
Trade and other payables 36,267  34,800 
Lease liabilities 6,025  5,880 
Income tax payable 7,742  6,425 
Taxes and similar charges payable other than income tax 7,242  6,106 
Advances received 5,194  5,028 
Other current liabilities 64  68 
Pension obligations 793  772 
Provisions 4,932  4,822 
Total current liabilities  460,737  476,195 
     
Total liabilities  545,021  550,820 
Total equity and liabilities  322,207  317,625 
     




INTERIM CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
for the three months ended March 31, 2019
(All amounts are in millions of Russian rubles)
  Three months
ended March
31,
2019
  Three months
ended March
31,
2018
 
  (unaudited)  (unaudited) 
Cash flows from operating activities    
Profit for the period 11,714  3,531 
Adjustments to reconcile profit to net cash provided by operating activities    
Depreciation of property, plant and equipment 3,301  3,086 
Amortisation of mineral licenses and other intangible assets 357  391 
Foreign exchange (gain) loss, net (11,979)  (508) 
Deferred income tax benefit (822)  (1,761) 
Allowance for expected credit losses on financial assets 120  344 
Write-off of trade and other receivables -  56 
Write-off of inventories to net realisable value 291  680 
Loss on write-off of non-current assets 77  132 
Result from disposal of non-current assets (67)  29 
Gain on restructuring and forgiveness of trade and other payables and write-off of trade and other payables with expired legal term (55)  (31) 
Effect of pension obligations 48  36 
Finance income (232)  (93) 
Finance costs including fines and penalties on overdue loans and borrowings and leases payments 10,085  10,463 
Provisions for legal claims, taxes and other provisions 1,485  931 
Other 75  (68) 
     
Changes in working capital items    
Trade and other receivables (3,323)  (2,834) 
Inventories (1,850)  (3,120) 
Trade and other payables 2,300  2,739 
Advances received 224  1,572 
Taxes payable and other liabilities 1,935  2,521 
Other current assets 851  (122) 
     
Income tax paid (522)  (1,304) 
     
Net cash provided by operating activities 14,013  16,670 
     
Cash flows from investing activities    
Interest received 49  37 
Proceeds from loans issued and other investments 272  5 
Proceeds from disposals of property, plant and equipment 145  42 
Purchases of property, plant and equipment (1,082)  (1,013) 
Purchases of intangible assets -  (75) 
Interest paid, capitalised (30)  (132) 
Net cash used in investing activities (646)  (1,136) 
     
Cash flows from financing activities    
Proceeds from loans and borrowings, including proceeds from factoring arrangement of RUB 132 million and RUB 5,303 million for the three months ended March 31, 2019 and 2018, respectively 840  6,539 
Repayment of loans and borrowings, including payments from factoring arrangement of RUB 1,694 million and nil for the three months ended March 31, 2019 and 2018, respectively (4,304)  (12,456) 
Dividends paid to non-controlling interests (6)  (1) 
Interest paid, including fines and penalties (7,632)  (8,515) 
Repayment of lease obligations (515)  (680) 
Deferred payments for acquisition of assets (39)  (187) 
Deferred consideration paid for the acquisition of subsidiaries in prior periods (361)  (1,058) 
Net cash used in financing activities (12,017)  (16,358) 
     
Foreign exchange (gain) loss on cash and cash equivalents, net (364)  40 
Changes in allowance for expected credit losses on cash and cash equivalents 5  - 
     
Net increase (decrease) in cash and cash equivalents 991  (784) 
     
Cash and cash equivalents at beginning of period 1,803  2,452 
Cash and cash equivalents, net of overdrafts at beginning of period 380  1,223 
Cash and cash equivalents at end of period 2,745  1,277 
Cash and cash equivalents, net of overdrafts at end of period 1,371  439 
       

There were certain reclassifications to conform with the current period presentation. 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.
____________________

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.