MECHEL REPORTS 9-MONTH 2005 RESULTS — Revenues increased 17.6% to $2.91 billion — — Operating income of $452.03 million — — Net income $314.72 million, $2.34 per ADR or $0.78 per diluted share — — Corrects its 6-month and 3-month 2005 results to reflect the netting off of certain trading operations —
Moscow, Russia – December 16, 2005 – Mechel OAO (NYSE: MTL), a leading Russian integrated mining and steel group, today announced results for the nine months ended September 30, 2005.
US$ thousand |
9M 2005 |
9M 2004 |
Change Y-on-Y |
Revenues |
2,910,394 |
2,474,854 |
17.6% |
|
Net operating income |
452,027 |
509,364 |
- 11.3% |
|
Net operating margin |
15.5% |
20.6% |
- |
|
Net income |
314,717 |
420,815 |
- 25.2% |
|
EBITDA (1) |
569,016 |
618,709 |
- 8.0% |
|
EBITDA margin |
19.6% |
25.0% |
- | |
(1) See Attachment A.
Vladimir Iorich, Mechel’s Chief Executive Officer, commented: “In the third quarter 2005 we saw a slight improvement in market conditions, as compared to the second quarter, which enabled us to restore production in both segments to planned levels. Our programs targeted at efficiency growth in the steel segment started yielding positive results as well. This, along with the continuing performance of our mining segment, confirms the strength of our strategy aimed at increasing overall value across both segments.”
Consolidated Results
Net revenue in the first nine months of 2005 rose 17.6% to $2.91 billion from $2.47 billion in the first nine months of 2004. Operating income was $452.03 million, or 15.5% of net revenue, versus operating income of $509.36 million, or 20.6% of net revenue, in 2004, a decrease of 11.3%.
For the first nine months of 2005, Mechel reported consolidated net income of $314.72 million, or $2.34 per ADR ($0.78 per diluted share)
Consolidated EBITDA decreased 8.0% to $569.02 million in the first nine months of 2005 from $618.71 million a year ago, reflecting the negative impact of unstable market conditions on average realized prices for the main categories of our products. Please see the attached tables for a reconciliation of consolidated EBITDA to net income.
Mining Segment Results
US$ thousand |
9M 2005 |
9M 2004 |
Change Y-on-Y |
Revenues from external customers |
823,548 |
556,880 |
47.9% |
|
Operating income |
341,282 |
250,044 |
36.5% |
|
Net income |
266,581 |
240,676 |
10.8% |
|
EBITDA |
379,408 |
309,507 |
22.6% |
|
EBITDA margin |
46.1% |
55.6% |
- | |
Mining segment output
Product |
9M 2005, thousand tonnes |
9M 2005 vs 9M 2004, % |
Coal |
11,670 |
+ 2.0 |
|
Coking coal |
6,472 |
- 5.0 |
|
Steam coal |
5,198 |
+ 11.0 |
|
Iron ore concentrate |
3,374 |
+ 20.0 |
|
Nickel |
9 |
- 8.0 | |
Mining segment revenue for the first nine months of 2005 totaled $823.55 million, or 28.3%, of consolidated net revenue, an increase of 47.9% over segment revenue of $556.88 million, or 22.5%, of consolidated net revenue, in the first nine months of 2004. The increase in revenues reflects solid output, strong market positions, and an increase in sales of mining products to third parties.
Operating income for the first nine months of 2005 in the mining segment rose 36.5% to $341.28 million, or 41.4%, of total segment revenues, compared to operating income of $250.04 million, or 44.9%, of total segment revenues a year ago. This increase in profitability reflects Mechel’s control over costs and the overall efficiency of our mining operations. EBITDA in the mining segment for the first nine months of 2005 was $379.41 million, 22.6% higher than segment EBITDA of $309.51 million in the first nine months of 2004. The EBITDA margin of the mining segment was 46.1%.
Mr. Iorich commented on the results of the mining segment: “The negative trends we witnessed in major mining markets in the second quarter continued to affect our nine-month production. The slowdown in the coking coal market, caused by a decrease in production by a number of Russian steel companies, prompted our shift to increasing steam coal production. Declining iron ore prices also influenced the segment’s margin negatively. Nevertheless, with its strong profitability, mining continues to be of primary interest for Mechel.”
Steel Segment Results
US$ thousand |
9M 2005 |
9M 2004 |
Change Y-on-Y |
Revenues from external customers |
2,086,846 |
1,917,974 |
8.8% |
|
Operating income |
110,745 |
259,321 |
- 57.3% |
|
Net income |
48,135 |
180,139 |
- 73.3% |
|
EBITDA |
189,608 |
309,202 |
- 38.7% |
|
EBITDA margin |
9.1% |
16.1% |
- | |
Steel segment output
Product |
9M 2005, thousand tonnes |
9M 2005 vs 9M 2004, % |
Coke |
1,963 |
- 11.0 |
|
Pig iron |
2,475 |
- 10.0 |
|
Steel |
4,420 |
- 3.0 |
|
Rolled products |
3,450 |
+ 3.0 |
|
Hardware |
441 |
+ 4.0 | |
Revenue from Mechel’s steel segment increased 8.8% in the first nine months of 2005 from $1.92 billion to $2.09 billion, or 71.7%, of consolidated net revenue, as compared to the first nine months of 2004.
In the first nine months of 2005, the steel segment generated operating income of $110.75 million, or 5.3%, of total segment revenues, a decrease of 57.3% over operating income of $259.32 million, or 46.6%, of total segment revenues in the first nine months of 2004. EBITDA in the steel segment for the first nine months of 2005 was $189.61 million. The EBITDA margin of the steel segment increased from 6.9% in first half of 2005 to 9.1% in the first nine months of 2005.
Mr. Iorich commented, “The steel segment demonstrated an increase in EBITDA margin and net income over the previously reported period, reflecting the effect of a number of our ongoing improvement programs, including the commissioning of our new sinter plant at Chelyabinsk. We maintained our rolled product output by optimizing usage ratios, while reducing raw steel, pig iron, and coke output. We will continue to further improve usage ratios by putting our new continuous casting facilities into operation. At the same time, we see positive market trends, as steel products output has begun to pick up, and expect to fully restore production levels in the segment in response to growing demand.”
Recent Highlights
After a local water pump station failed on October 23, interrupting the supply of water to Chelyabinsk Metallurgical Plant, production at CMP was temporarily stopped. The plant’s personnel implemented all necessary emergency protocols to limit any negative consequences for the plant’s equipment and managed to fully restart production within two days, minimizing potential losses, which are not expected to exceed $1.5 million.
Mr. Iorich concluded, “The third quarter of 2005 remained a challenging time for us; however, we demonstrated that we are able to address the negative trends we saw this year by increasing sales volumes and the share of value-added products sales, as well as by raising the efficiency of the steel segment. Our overall profitability remains our focus, and we are confident that we will continue to see the positive impact of our ongoing modernization and efficiency-improvement programs in the coming year. We will concentrate on further lowering costs and improving usage ratios. We will also strive to increase our export of coal, thus increasing third-party sales of mining products, and at diversifying our product portfolio towards value-added products in the steel segment. Our extensive vertical integration, combined with management’s efforts and the continuation of our strategy, positions us well for the future.”
Financial Position
Cash expenditure on property, plant and equipment for the first nine months of 2005 amounted to $394.82 million, of which $199.77 million was invested in the mining segment and $195.05 million in the steel segment.
In the first nine months of 2005, Mechel spent $484 million on acquisitions, comprised of $411.2 million for 25%+1 share of Yakutugol Holding Company OAO, $3.5 million for 90.3% of the shares of Port Kambarka OAO, $15.7 million for 25.4% of the shares of Izhstal OAO, $50.2 million for 6.4% of the shares of Chelyabinsk Metallurgical Plant OAO, and $1.5 million for 10.3% of the shares of Korshunov Mining Plant and $1.9 million was spent on acquisition of minority interest in other subsidiaries.
As of September 30, 2005, total debt1 was at $386.9 million. Cash and cash equivalents amounted to $312.2 million at the end of the 9 months 2005 and net debt amounted to $(74.7) million (net debt is defined as total debt outstanding less cash and cash equivalents).
1Total debt is comprised of short-term borrowings and long-term debt
Correction of 6-Month and 3-Month 2005 Results
Mechel also announced today the correction of its 6-month and 3-month 2005 results. In connection with the preparation for its 9-month 2005 closing, Mechel identified, through its internal processes, an error in not netting off certain trading transactions within the steel segment. These transactions related to a series of trades in which Mechel bought back from one of its customers steel product which was then re-sold to third parties at the same price at which the product had been purchased by Mechel, resulting in no-margin trades. Previously, Mechel had included these resales as revenue, and the amount paid to the initial customer was included in cost of goods sold. As the total amount of such resales and purchases was the same in both periods, this correction has no effect on gross or net operating income, and affects only revenue, cost of goods sold, and margin percentages deriving from such for the consolidated, as well as steel segment, results. There is no effect on any other item in the financial statements, while affected lines should be corrected as follows:
Corrected Numbers for Six Months ended June 30, 2005
|
As previously reported |
Corrected by |
As corrected |
Revenue |
2,143,349 |
(64,130) |
2,079,219 |
|
Cost of goods sold |
(1,342,932) |
64,130 |
(1,278,802) |
|
Gross margin % - as it was |
37.3% |
(1.2%) |
38.5% |
|
Net operating margin |
16.9% |
(0.5%) |
17.4% |
|
Consolidated EBITDA margin |
19.7% |
(0.6%) |
20.3% |
|
Steel segment |
|
Revenues from external customers |
1,549,260 |
(64,130) |
1,485,130 |
|
EBITDA margin |
6.6% |
(0.3%) |
6.9% | |
Corrected Numbers for Three Months ended March 31, 2005
|
As previously reported |
Corrected by |
As corrected |
Revenue |
1,049,383 |
(9,927) |
1,039,456 |
|
Cost of goods sold |
(599,424) |
9,927 |
(589,497) |
|
Gross margin % - as it was |
42.9% |
(0.4%) |
43.3% |
|
Net operating margin |
21.6% |
(0.2%) |
21.8% |
|
Consolidated EBITDA margin |
26.7% |
(0.2%) |
26.9% |
|
Steel segment |
|
Revenues from external customers |
735,747 |
(9,927) |
725,820 |
|
EBITDA margin |
12.7% |
(0.2%) |
12.9% | |
The management of Mechel will host a conference call today at 11 a.m. New York time (4 p.m. London time, 7 p.m. Moscow time) to review Mechel’s financial results and comment on current operations. The call may be accessed via the Internet at https://www.mechel.com, under the Investor Relations section.
***
Attachments to the 9M 2005 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 |
9M 2005 |
9M 2004 |
Net income |
314,717 |
420,815 |
|
Add: |
|
|
|
Depreciation, depletion and amortization |
115,375 |
99,709 |
|
Interest expense |
43,669 |
42,007 |
|
Income taxes |
95,255 |
56,178 |
|
Consolidated EBITDA |
569,016 |
618,709 | |
EBITDA margin can be reconciled as a percentage to our Revenues as follows:
US$ thousands |
9M 2005 |
9M 2004 |
Revenue, net |
2,910,394 |
2,474,854 |
|
EBITDA |
569,016 |
618,709 |
|
EBITDA margin |
19.6% |
25.0% | |
MECHEL OAO CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 2005 AND DECEMBER 31, 2004
(in thousands of U.S. dollars, except share amounts) |
September 30, 2005 |
December 31, 2004 |
ASSETS |
|
|
|
|
|
Cash and cash equivalents |
$ |
312 239 |
$ |
1 024 761 |
|
Accounts receivable, net of allowance for doubtful accounts |
|
161 012 |
|
135 597 |
|
Due from related parties |
|
234 |
|
16 458 |
|
Inventories |
|
449 091 |
|
568 545 |
|
Deferred cost of inventory in transit |
|
91 904 |
|
0 |
|
Current assets of discontinued operations |
|
997 |
|
1 247 |
|
Deferred income taxes |
|
7 531 |
|
7 491 |
|
Prepayments and other current assets |
|
382 131 |
|
349 106 |
|
Total current assets |
|
1 405 139 |
|
2 103 205 |
|
|
|
|
|
|
|
Long-term investments in related parties |
|
411 975 |
|
9 270 |
|
Other long-term investments |
|
21 498 |
|
66 663 |
|
Non-current assets of discontinued operations |
|
100 |
|
165 |
|
Intangible assets |
|
5 445 |
|
6 379 |
|
Property, plant and equipment, net |
|
1 432 580 |
|
1 274 722 |
|
Mineral reserves, net |
|
248 553 |
|
166 483 |
|
Deferred income taxes |
|
20 097 |
|
11 940 |
|
Goodwill |
|
39 441 |
|
39 441 |
|
Total assets |
$ |
3 584 828 |
$ |
3 678 268 |
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS' EQUITY |
|
|
|
|
|
Short-term borrowings and current maturities of long-term debt |
$ |
170 508 |
$ |
348 880 |
|
Accounts payable and accrued expenses: |
|
|
|
|
|
Advances received |
|
75 617 |
|
94 964 |
|
Accrued expenses and other current liabilities |
|
70 193 |
|
69 847 |
|
Taxes and social charges payable |
|
164 929 |
|
145 527 |
|
Trade payable to vendors of goods and services |
|
209 744 |
|
186 233 |
|
Due to related parties |
|
2 145 |
|
2 048 |
|
Current liabilities of discontinued operations |
|
11 |
|
30 |
|
Deferred income taxes |
|
25 415 |
|
26 521 |
|
Asset retirement obligation |
|
6 109 |
|
8 219 |
|
Deferred revenue |
|
91 300 |
|
760 |
|
Pension obligations |
|
6 796 |
|
6 261 |
|
Dividends payable |
|
87 |
|
- |
|
Total current liabilities |
|
822 854 |
|
889 290 |
|
|
|
|
|
|
|
Restructured taxes and social charges payable, net of current portion |
|
56 261 |
|
87 364 |
|
Long-term debt, net of current portion |
|
216 390 |
|
216 113 |
|
Deferred income taxes |
|
103 651 |
|
105 330 |
|
Pension obligations |
|
42 080 |
|
40 720 |
|
Asset retirement obligation |
|
65 173 |
|
66 758 |
|
Other long-term liabilities |
|
87 |
|
240 |
|
|
|
|
|
|
|
Commitments and contingencies |
|
- |
|
- |
|
|
|
|
|
|
|
Minority interests |
|
139 952 |
|
214 824 |
|
|
|
|
|
|
|
SHAREHOLDERS' EQUITY |
|
|
|
|
|
Common shares |
|
133 507 |
|
133 507 |
|
Treasury shares, at cost |
|
( 4 187) |
|
( 4 187) |
|
Additional paid-in capital |
|
304 404 |
|
304 404 |
|
Other comprehensive income |
|
53 875 |
|
93 687 |
|
Retained earnings |
|
1 650 781 |
|
1 530 218 |
|
Total shareholders' equity |
|
2 138 380 |
|
2 057 629 |
|
Total liabilities and shareholders' equity |
$ |
3 584 828 |
$ |
3 678 268 | |
MECHEL OAO CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE PERIODS ENDED SEPTEMBER 30, 2005 AND 2004
(in thousands of U.S. dollars) |
9 months ended September 30, |
|
|
2005 |
|
2004 |
|
Cash Flows from Operating Activities |
|
|
|
|
|
Net income |
|
314 717 |
|
420 815 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
Depreciation |
|
106 368 |
|
78 104 |
|
Depletion and amortization |
|
9 007 |
|
19 488 |
|
Foreign exchange (gain) loss |
|
35 231 |
|
(1 095) |
|
Deferred income taxes |
|
(9 193) |
|
(8 803) |
|
(Recovery of) provision for doubtful accounts |
|
7 580 |
|
1 986 |
|
Inventory write-down |
|
1 943 |
|
488 |
|
Accretion expense |
|
1 806 |
|
2 946 |
|
Minority interest |
|
3 779 |
|
16 858 |
|
(Income) loss from equity investments |
|
(9 979) |
|
(3 831) |
|
Non-cash interest on long-term tax and pension liabilities |
|
8 176 |
|
14 160 |
|
Loss (gain) on sale of property, plant and equipment |
|
957 |
|
(1 953) |
|
(Gain) loss on sale of long-term investments |
|
(1 669) |
|
2 394 |
|
Loss from discontinued operations |
|
403 |
|
9 893 |
|
Gain on accounts payable with expired legal term |
|
(2 755) |
|
- |
|
Gain on forgiveness of fines and penalties |
|
(15 863) |
|
(17 958) |
|
Stock-based compensation expense |
|
- |
|
1 400 |
|
Amortization of capitalized costs on bonds issue |
|
1 171 |
|
1 140 |
|
Pension service cost and amortization of prior year service cost |
|
818 |
|
423 |
|
Net change before changes in working capital |
|
452 497 |
|
536 455 |
|
Changes in working capital items, net of effects from acquisition of new subsidiaries: |
|
|
|
|
|
Accounts receivable |
|
17 712 |
|
(34 267) |
|
Inventories |
|
111 745 |
|
(135 505) |
|
Trade payable to vendors of goods and services |
|
5 910 |
|
21 998 |
|
Advances received |
|
(13 016) |
|
69 971 |
|
Accrued taxes and other liabilities |
|
24 123 |
|
(47 601) |
|
Settlements with related parties |
|
13 936 |
|
3 138 |
|
Current assets and liabilities of discontinued operations |
|
(259) |
|
(8 169) |
|
Deferred revenue and cost of inventory in transit, net |
|
(1 354) |
|
(20 849) |
|
Other current assets |
|
(57 787) |
|
(97 455) |
|
Net cash provided by operating activities |
|
553 507 |
|
287 715 |
|
|
|
|
|
|
|
Cash Flows from Investing Activities |
|
|
|
|
|
Acquisition of subsidiaries, less cash acquired |
|
(3 497) |
|
(53 142) |
|
Acquisition of minority interest in subsidiaries |
|
(69 198) |
|
(16 282) |
|
Investment in Yakutugol |
|
(411 182) |
|
- |
|
Investments in other non-marketable securities |
|
(7 039) |
|
(1 665) |
|
Proceeds from disposal of non-marketable equity securities |
|
1 389 |
|
1 667 |
|
Proceeds from disposals of property, plant and equipment |
|
1 838 |
|
1 663 |
|
Purchases of property, plant and equipment |
|
(303 804) |
|
(192 698) |
|
Purchase of mineral licenses |
|
(91 012) |
|
- |
|
Net cash used in investing activities |
|
(882 505) |
|
(260 457) |
|
|
|
|
|
|
|
Cash Flows from Financing Activities |
|
|
|
|
|
Proceeds from short-term borrowings |
|
763 040 |
|
874 621 |
|
Repayment of short-term borrowings |
|
(938 222) |
|
(823 724) |
|
Dividends paid |
|
(194 154) |
|
(5 573) |
|
Proceeds from long-term debt |
|
3 124 |
|
3 059 |
|
Repayment of long-term debt |
|
(12 536) |
|
(29 454) |
|
Net cash provided by (used in) financing activities |
|
(378 748) |
|
18 929 |
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents |
|
(4 776) |
|
186 |
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
(712 522) |
|
46 373 |
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of year |
|
1 024 761 |
|
19 303 |
|
Cash and cash equivalents at end of period |
|
312 239 |
|
65 676 | |
MECHEL OAO CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
(in thousands of U.S. dollars, except share amounts) |
9 months ended September 30, |
|
|
2005 |
|
2004 |
|
Revenue, net |
|
2 910 394 |
|
2 474 854 |
|
Cost of goods sold |
|
-1 852 054 |
|
-1 506 660 |
|
Gross margin |
|
1 058 340 |
|
968 194 |
|
Selling, distribution and operating expenses: |
|
|
|
|
|
Selling and distribution expenses |
|
-341 689 |
|
-254 963 |
|
Taxes other than income tax |
|
-70 427 |
|
-35 993 |
|
Accretion expenses |
|
-1 806 |
|
-2 945 |
|
Provision for doubtful accounts |
|
-7 580 |
|
-1 986 |
|
General, administrative and other operating expenses |
|
-184 811 |
|
-162 943 |
|
Total selling, distribution and operating expenses |
|
-606 313 |
|
-458 830 |
|
Operating income |
|
452 027 |
|
509 364 |
|
Other income and (expense): |
|
|
|
|
|
Income from equity investees |
|
9 979 |
|
3 831 |
|
Interest income |
|
9 327 |
|
7 920 |
|
Interest expense |
|
-43 669 |
|
-42 007 |
|
Foreign exchange gain (loss) |
|
-35 231 |
|
1 095 |
|
Other income, net |
|
21 721 |
|
23 542 |
|
Total other income and (expense) |
|
-37 873 |
|
-5 619 |
|
Income before income tax, minority interest, discontinued operations, extraordinary gain and change in accounting principle |
|
414 154 |
|
503 745 |
|
|
|
|
|
|
|
Income tax expense |
|
-95 255 |
|
-56 178 |
|
Minority interest in (income) loss of subsidiaries |
|
-3 779 |
|
-16 858 |
|
Income from continuing operations |
|
315 120 |
|
430 709 |
|
Income (loss) from discontinued operations, net of tax |
|
-403 |
|
-9 894 |
|
Net income |
|
314 717 |
|
420 815 | |
|