Mechel's CEO Discusses F4Q11 Results - Earnings Call Transcript

Mechel OAO (MTL)

F4Q11 Earnings Call

May 10, 2012 10:00 am ET

Executives

Yevgeny V. Mikhel – Chief Executive Officer

Stanislav A. Ploschenko – Chief Financial Officer

Oleg V. Korzhov – Senior Vice President, Economics and Management

Analysts

Dmitry Smolin – UralSib Capital

George Buzhenitsa – Deutsche Bank

Sergey Donskoy – Societe Generale

Presentation

Operator

Thank you and good day everyone. We would like to welcome you to Mechel’s conference call to discuss our Full Year 2011 Results, which were reported today. With us from management today are: Mr. Yevgeny Mikhel, Mechel’s CEO, Mr. Stanislav Ploschenko, Mechel’s CFO, and Mr. Oleg Korzhov, Mechel’s Senior Vice-President for Economics and Management.

After management has made their formal remarks, we will take your questions to the presentation team. Please note that during this call, management will make forward-looking statements, some of which may have been made in the press release. Some of the information on this conference call 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 United States Securities and Exchange Commission, which contain and identify important factors that could cause the actual results to differ materially from those contained in our projections or forward-looking statements.

In addition, we will be using non-GAAP financial measures, including EBITDA in our discussion today. Reconciliations of non-GAAP financial measures to the most directly comparable U.S. GAAP financial measures are contained in the earnings press release, which is available on our website at www.mechel.com.

At this point, I would like to turn the call over to Mechel’s CEO, Mr. Mikhel. Please go ahead.

Yevgeny V. Mikhel

[Foreign Language]

Good day and good morning, ladies and gentlemen. Welcome to the conference call, where we will discuss the company’s performance in 2011.

[Foreign Language]

On the whole, 2011 was quite successful for the company. Despite an ambiguous price dynamics and high market volatility for our company’s key products, we took full advantage of the vertically integrated structure of the holding and achieved financial results that significantly surpassed those of the year before. Mechel’s consolidated revenue in 2011 increased by 29% and amounted to US$12.5 billion. EBITDA went up 19% to US$2.4 billion. Net income added 11% and amounted to $728 million.

[Foreign Language]

Strategic investment projects of the company peaked in 2011. This project aimed at upstream form in the company to make it more efficient and the leader in the industry. Today we can present concrete results of the investments made in the course of the last several years, in particular in August 2011, we started full scale mining of coal at Elga deposit and at the end of the year a railroad linking the deposit with Baikal-Amur Mainline was opened. That link will facilitate deliveries of cargo that is needed to increase coal production at Elga and lower transportation cost associated with shipments of coal to customers.

This year, we plan to complete construction of the seasonal coal washing facility at Elga. With that, we will be able to produce coking coal concentrate of the deposit, which will improve efficiency of the Elga coal complex and will open up new possibilities for direct delivery of Elga concentrate including its exports.

[Foreign Language]

Speaking about the performance of the Mechel mining division in the last year, I have to see the despite certain challenges caused by suspension of authorization of the ocean plant at the (inaudible) for one and a half month and with a favorable market price environment, since the stock of the year we spared no efforts to build out production. As a result, we raised sales of coking coal concentrate by 9% on the previous year. We managed to achieve an even better dynamics in the sales of anthracites and PCI coal, whose sales grew respectively by 36% and 332%. As of the end of the year, Mechel sold 16.8 million tons of metallurgical coal and [answered] top three of the leading global producers.

During the year, Mechel reaffirmed its leadership in reserves and resources. And audits based on (inaudible) extended showed that the company has coal reserves and resources of 3.3 billion tons and 4.4 billion tons respectively. We look confidently into the future as the Group’s strategy aimed at strengthening this leadership in mining of metallurgical coal is supported by a strong resource base.

[Foreign Language]

Implementation of the strategic project from the Mechel Steel Segment was no less intensive. In the last year, we made significant progress in our project for construction of the universal rolling mill and Chelyabinsk Metallurgical Plant. By this time, we have put into activation the first stage of this unique integrated steel processing facility. Now even as speak the plant produces high quality billets for the Universal Rolling Mill was all the properties that are required to manufacture 100 meters rails with increased (inaudible) resistance surface endurance and low temperature robustness.

I note pleasure that the steps that we were taking for the past two years to upgrade the Beloretsk Metallurgical Plant enable our steel works to report record figures in hardware production in 2011.

Team B has established itself firmly as the leader of the Russian hardware market. In 2011 alone measured sales of hardware products increased by 17% closely approaching the level of 1 million tons.

[Foreign Language]

Our services on sales network was also developing very actively. In 2011, Mechel

Service Global shipped more than 4.7 million tons of steel product, 57% more than in the previous year. Today Mechel Service Global has 160 offices in 16 countries, which enhances company’s flexibility and stability during seasonal fluctuations of the month for steel products in different regions.

It was demonstrated once again in the fourth quarter of the last year. Given Mechel Service Global mature infrastructure and growth patterns in the most appealing regions our current priority is to start developing intensively rather than extensively. We will do that by expanding our services in treatment of rolled products at the storage facility which will increase added value of product sold.

[Foreign Language]

Summing up the results of 2011, ladies and gentlemen I must say if you worked on how we see the development of our business. You must have already observed that in the last several years Mechel’s production was growing at an accelerated pace in many aspects. We significantly expanded our production base in terms of our geographical presence and product diversification. In parallel, with those activities we were implementing a rather ambitious investment program aimed at laying the foundation for the Group’s successful development in the years to come.

However, the reverse side of the synchronous accelerated development was at the mounting debts of the Mechel Group. This strategy was justified by the growing market. At the same time, since the fourth quarter of the last year we’ve witnessed a lot of market volatility. There are no clear indicators that Global economies growing at the rates that we enjoyed throughout the last decade. All that made us conclude that the current leverage ratio may impose considerable constraints on the development of business.

That is why one of the Group’s priorities today is reduction of debt. In order to achieve that objective we must remove the very driver over with further growth, extensive business development in all areas. In this connection, we decided to review the development strategy to put emphasis on the key elements of our business’ growth, our competitive advantages which offer the highest potential for increased over shareholder value.

[Foreign Language]

The new strategy is based as before on the cost concept over a vertically integrated mining and metallurgic holding. We shall prove in its merits in the context of industrial cycles and stability in the times of turbulence in the sales market. Our focus in the vertically integrated holding will be on the following objectives.

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