Mechel PAO announces financial results for the 9M 2016

Mechel PAO’s Chief Executive Officer Oleg Korzhov commented on the 9M 2016 results:

“This reporting period is characterized by significant volatility in prices for our key products. At the beginning of this year, prices for most of our products hit historical lows both domestically and internationally. The market situation fluctuated throughout these three quarters, but mostly market changes were favorable for Mechel, which found its reflection in our financial results. As a result of these nine months, our operating profit went up by 31% if compared to the same period of the previous year, reaching 28.8 billion rubles, EBITDA went up by 16% to 41.6 billion rubles, and EBITDA margin reached 21%. The group demonstrated net profit attributable to Mechel PAO’s shareholders of 5.5 billion rubles and a stable cash flow.

“This spring’s bullish price dynamics on the global market of steel and coal products also led to a revival of the domestic market. The group remains dependent on the external market environment, but on its part did its best to utilize the favorable market situation by controlling and cutting costs and improving production and sales efficiency, as well as adapting its sales policy to growing demand and investing in projects aimed at diversifying our product range and increasing production volumes.

“In this favorable market situation, the group is already generating a cash flow sufficient for servicing its debt obligations within the framework of agreements on restructuring and restoring working capital. The effect from the price growth will be even more tangible as results from the fourth quarter come in. We will use this opportunity to the maximum to finance our operations and reach agreements on restructuring our remaining financial debt. If any free cash flow arises, it will be used to bring down our debt burden, thus helping to increase our company’s shareholder value.”

Consolidated Results For The 9M 2016

Mln rubles	9M’16			9M’15			%			3Q’16			2Q’16			1Q’16
Revenue from external customers		196,350			194,039			1	%		66,153			67,965			62,232
Operating profit		28,761			22,018			31	%		11,561			10,867			6,333
EBITDA		41,571			35,845			16	%		15,850			15,747			9,974
EBITDA, margin		21	%		18	%					24	%		23	%		16	%
Net profit (loss) attributable to shareholders of Mechel PAO		5,543			(74,585	)					(2,757	)		7,988			312

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

Mining Segment

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

“In early 2016, prices on coking coal, our division’s main product, were at their longtime lows. Steam coal prices were also extremely low. Later during the first half of the year, the market situation gradually improved, as benchmark and global indexes demonstrated stable growth, with our contract prices growing accordingly. However, in the second half of this year we witnessed an unprecedented hike in prices on high-quality coking coal. If benchmark contract prices for hard coking coal supplied by Australian producers to Japan were set at 92 US dollars per tonne in the third quarter, for the fourth quarter they were set at 200 US dollars per tonne. It is impossible to give an unequivocal explanation to this price hike, but experts mostly agree that it was caused by a deficit of premium coal grades on China’s domestic market due to mining limits imposed on Chinese coal producers. Force majeure events on several Australian facilities as well as damage to the transport infrastructure in China and Australia added to this. Coal stocks in Chinese ports were at their historical lows. At the same time, spot prices on high-quality coking coal continued to grow and are currently set at their historical highs, topping 300 US dollars per tonne, at a significant difference with contract prices set for the fourth quarter. Negotiations for the first quarter 2017 basic prices will start shortly, and considering the spot market indicators, we can expect the contract price level for the first quarter to be significantly higher quarter-on-quarter.

“The rapid growth of coal prices, which began in mid-summer, didn’t have time to make a full impact on the third quarter’s financial results. We saw this hike’s reflection in our contracts only by the very end of this reporting period. Still, the division’s EBITDA has grown by 22% quarter-on-quarter, despite a small slump in revenue. The EBITDA margin reached 34% in the third quarter. The margin’s growth is largely due to a decrease in costs. The current favorable market situation will definitely be reflected in the results of the fourth quarter and future periods.”

Mln rubles	9M’16			9M’15			%			3Q’16			2Q’16			1Q’16
Revenue from external customers		59,990			62,384			-4	%		19,931			20,202			19,857
Revenue inter-segment		22,481			20,661			9	%		7,770			7,652			7,059
EBITDA		23,979			19,908			20	%		9,541			7,832			6,606
EBITDA, margin		29	%		24	%					34	%		28	%		25	%

Steel Segment

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

“The volume of the division’s product sales in tonnes has grown by less than 1% if compared to the same period of the previous year with the divisions revenue up by 6% and EBITDA by 8%. The stable level of prices for our steel products in the second and third quarters was a key factor in this positive dynamics. However, changes we made in the production and sales structure had a most important impact on the results’ improvement. We have significantly decreased sales of billets and wire rods while increasing sales of rails and beams. This was mostly due to increased production at Chelyabinsk Metallurgical Plant’s universal rolling mill. The increase in revenue from this production segment is on the whole comparable to the overall growth in the division’s revenue. Within nine months of 2016, the universal rolling mill produced over 350,000 tonnes of products, and will reach 500,000 tonnes by the end of this year. Considering that the mill’s load is planned to grow further next year, the share of high value-added products in our sales structure will only increase.”

Mln rubles	9M’16			9M’15			%			3Q’16			2Q’16			1Q’16
Revenue from external customers		118,900			112,387			6	%		41,296			42,456			35,148
Revenue inter-segment		5,296			5,028			5	%		1,677			1,727			1,892
EBITDA		15,845			14,636			8	%		6,325			7,867			1,653
EBITDA, margin		13	%		12	%					15	%		18	%		4	%

Power Segment        

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

“Comparatively mild weather conditions led to a decrease in electricity and heat sales to third parties and thus the division’s revenue. Additional repairs to Southern Kuzbass Power Plant’s equipment as part of the overall preparation for the upcoming fall-winter maximum load, as well as other factors, will help to improve efficiency of the division’s operations in the future periods. At the same time, the increase of electricity fees not only partly compensated the slump in revenue, but also enabled us to increase EBITDA and EBITDA margin comparing with the same period of the previous year.”

Mln rubles	9M’16			9M’15			%			3Q’16			2Q’16			1Q’16
Revenue from external customers		17,460			19,268			-9	%		4,925			5,307			7,228
Revenue inter-segment		11,423			10,844			5	%		3,524			3,662			4,237
EBITDA		2,102			1,761			19	%		88			370			1,644
EBITDA, margin		7	%		6	%					1	%		4	%		14	%

 

 

Our calculations of Net debt, excluding fines and penalties on overdue amounts** and trade working capital are presented below:

Mln rubles		30.09.2016			31.12.2015
Interest-bearing loans and borrowings, excluding interest, fines and penalties on overdue amounts		400,754			444,199
Interest payable		21,463			27,269
Non-current interest-bearing loans and borrowings		12,371			4,308
Other non-current financial liabilities		35,246			-
less Cash and cash equivalents		(2,350	)		(3,079	)
Net debt, excluding finance lease liabilities, fines and penalties on overdue amounts		467,484			472,697
Finance lease liabilities, current portion		11,558			13,507
Finance lease liabilities, non-current portion		106			481
Net debt, excluding fines and penalties on overdue amounts		479,148			486,685
Mln rubles		30.09.2016			31.12.2015
Trade and other receivables		18,166			16,013
Inventories		34,042			35,189
Other current assets		7,743			8,191
Income tax receivables		437			603
Trade current assets		60,388			59,996
Trade and other payables		44,605			54,602
Advances received		3,242			3,492
Provisions and other current liabilities		1,833			2,558
Tax payable other than income tax		9,718			8,034
Income tax payable		3,439			5,549
Trade current liabilities		62,837			74,235
Trade working capital		(2,449	)		(14,239	)

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

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

	Consolidated Results							Mining Segment ***							Steel Segment ***							Power Segment ***
In millions of Russian rubles	9m 2016			9m 2015				9m 2016			9m 2015				9m 2016			9m 2015				9m 2016			9m 2015
Net profit (loss) attributable to shareholders of Mechel PAO		5,543			(74,585	)			(2,439	)		(47,080	)			8,051			(26,448	)			284			(598	)
Add:
Depreciation, depletion and amortization		10,022			10,253				5,813			6,331				3,947			3,631				262			291
Foreign exchange (gain) loss, net		(19,738	)		43,011				(11,719	)		29,851				(7,950	)		12,927				(69	)		233
Finance costs, including fines and penalties on overdue loans and borrowings and finance leases payments		43,247			47,956				32,134			26,827				13,212			20,332				794			1,749
Finance income		(3,963	)		(121	)			(3,959	)		(766	)			(2,856	)		(268	)			(41	)		(39	)
Net result on the disposal of non-current assets, impairment of goodwill and other non-current assets, write-off of accounts receivables, allowance for doubtful accounts and write-off of inventories to net realisable value		1,818			1,788				830			429				389			1,259				599			100
Loss (profit) after tax from discontinued operations, net		343			(1,013	)			(84	)		(723	)			407			(309	)			20			19
Net result on the disposal of subsidiaries		(191	)		75				-			-				(191	)		75				-			-
Income (loss) attributable to non-controlling interests		1,153			330				298			(217	)			735			467				122			80
Income tax expense (benefit)		2,427			6,914				2,698			4,711				(364	)		2,282				93			(79	)
Pension service cost and actuarial loss, other expenses		124			126				91			92				31			29				2			5
Fines and penalties		847			1,270				319			454				492			817				36			(1	)
Gain on write-off of accounts payable with expired legal term		(61	)		(159	)			(3	)		(1	)			(58	)		(158	)			-			-
EBITDA		41,571			35,845				23,979			19,908				15,845			14,636				2,102			1,761
EBITDA, margin		21	%		18	%			29	%		24	%			13	%		12	%			7	%		6	%
In millions of Russian rubles	9m 2016			9m 2015				9m 2016			9m 2015				9m 2016			9m 2015				9m 2016			9m 2015
Net profit (loss) attributable to shareholders of Mechel PAO		5,543			(74,585	)			(2,439	)		(47,080	)			8,051			(26,448	)			284			(598	)
Add:
Impairment of goodwill and other non-current assets		374			-				374			-				-			-				-			-
Loss (profit) after tax from discontinued operations, net		343			(1,013	)			(84	)		(723	)			407			(309	)			20			19
Net result on the disposal of subsidiaries		(191	)		75				-			-				(191	)		75				-			-
Effect on (loss) income attributable to non-controlling interests		(61	)		49				-			-				(61	)		49				-			-
Foreign exchange (gain) loss, net		(19,738	)		43,011				(11,719	)		29,851				(7,950	)		12,927				(69	)		233
Pension service cost and actuarial loss, other expenses		124			126				91			92				31			29				2			5
Fines and penalties		847			1,270				319			454				492			817				36			(1	)
Gain on write-off of accounts payable with expired legal term		(61	)		(159	)			(3	)		(1	)			(58	)		(158	)			-			-
Net (loss) profit, net of income tax		(12,820	)		(31,226	)			(13,461	)		(17,407	)			721			(13,018	)			273			(342	)
Operating profit		28,761			22,018				16,913			12,386				10,996			8,741				1,207			1,352
Add:
Impairment of goodwill and other non-current assets		374			-				374			-				-			-				-			-
Loss on write-off of property, plant and equipment		303			125				293			59				10			66				-			-
Pension service cost and actuarial loss, other expenses		124			126				91			92				31			29				2			5
Fines and penalties		847			1,270				319			454				492			817				36			(1	)
Adjusted operating profit		30,409			23,539				17,990			12,991				11,529			9,653				1,245			1,356
*** including intersegment operations

	Consolidated Results							Mining Segment ***							Steel Segment ***							Power Segment ***
In millions of Russian rubles	3q 2016			2q 2016				3q 2016			2q 2016				3q 2016			2q 2016				3q 2016			2q 2016
Net (loss) profit attributable to shareholders of Mechel PAO		(2,757	)		7,988				(2,682	)		1,756				415			6,890				(385	)		(340	)
Add:
Depreciation, depletion and amortization		3,456			3,644				2,025			2,117				1,344			1,441				87			86
Foreign exchange (gain) loss, net		(2,296	)		(8,874	)			(1,711	)		(5,084	)			(592	)		(3,771	)			7			(19	)
Finance costs, including fines and penalties on overdue loans and borrowings and finance leases payments		13,447			15,886				9,984			11,823				5,059			4,371				256			269
Finance income		(76	)		(3,432	)			(409	)		(2,810	)			(1,519	)		(1,124	)			-			(74	)
Net result on the disposal of non-current assets, impairment of goodwill and other non-current assets, write-offs of accounts receivables,  allowance for doubtful accounts and write-offs of inventories to net realisable value		588			586				494			215				34			59				58			314
Loss (profit) after tax from discontinued operations, net		99			108				(43	)		2				137			101				5			5
Net result on the disposal of subsidiaries		(136	)		3				-			-				(136	)		3				-			-
Income (loss) attributable to non-controlling interests		291			691				25			156				270			466				(3	)		69
Income tax expense (benefit)		3,057			(1,447	)			1,877			(675	)			1,146			(795	)			34			23
Pension service cost and actuarial loss, other expenses		41			42				30			31				10			10				1			1
Fines and penalties		179			552				(46	)		301				197			216				28			35
Gain on write-off of accounts payable with expired legal term		(43	)		-				(3	)		-				(40	)		-				-			-
EBITDA		15,850			15,747				9,541			7,832				6,325			7,867				88			370
EBITDA, margin		24	%		23	%			34	%		28	%			15	%		18	%			1	%		4	%
In millions of Russian rubles	3q 2016			2q 2016				3q 2016			2q 2016				3q 2016			2q 2016				3q 2016			2q 2016
Net (loss) profit attributable to shareholders of Mechel PAO		(2,757	)		7,988				(2,682	)		1,756				415			6,890				(385	)		(340	)
Add:
Impairment of goodwill and other non-current assets		374			-				374			-				-			-				-			-
Loss (profit) after tax from discontinued operations, net		99			108				(43	)		2				137			101				5			5
Net result on the disposal of subsidiaries		(136	)		3				-			-				(136	)		3				-			-
Effect on loss attributable to non-controlling interests		(22	)		(16	)			-			-				(22	)		(16	)			-			-
Foreign exchange (gain) loss, net		(2,296	)		(8,874	)			(1,711	)		(5,084	)			(592	)		(3,771	)			7			(19	)
Pension service cost and actuarial loss, other expenses		41			42				30			31				10			10				1			1
Fines and penalties		179			552				(46	)		301				197			216				28			35
Gain on write-off of accounts payable with expired legal term		(43	)		-				(3	)		-				(40	)		-				-			-
Net (loss) profit, net of income tax		(4,561	)		(197	)			(4,081	)		(2,994	)			(31	)		3,432				(344	)		(318	)
Operating profit (loss)		11,561			10,867				7,061			5,098				4,705			6,151				(99	)		(63	)
Add:
Impairment of goodwill and other non-current assets		374			-				374			-				-			-				-			-
Loss on write-off of property, plant and equipment		182			114				182			103				-			11				-			-
Pension service cost and actuarial loss, other expenses		41			42				30			31				10			10				1			1
Fines and penalties		179			552				(46	)		301				197			216				28			35
Adjusted operating profit (loss)		12,337			11,575				7,601			5,533				4,912			6,388				(70	)		(27	)
*** including intersegment operations

Attachment B

Interim condensed consolidated statement of financial position
(All amounts are in millions of Russian rubles)
		September 30, 2016				December 31, 2015
		(unaudited)				****
Assets
Current assets
Cash and cash equivalents			2,350				3,079
Trade and other receivables			18,166				16,013
Inventories			34,042				35,189
Income tax receivables			437				603
Other current financial assets			94				45
Other current assets			7,743				8,191
Total current assets			62,832				63,120
Non-current assets
Property, plant and equipment			209,254				215,844
Mineral licenses			37,132				38,517
Non-current financial assets			151				194
Investments in associates			300				284
Deferred tax assets			1,352				1,492
Goodwill			21,305				21,378
Other non-current assets			987				1,243
Total non-current assets			270,481				278,952
Total assets			333,313				342,072
Equity and liabilities
Current liabilities
Interest-bearing loans and borrowings, including Interest payable, fines and penalties on overdue amounts of RUB 41,535 million and RUB 47,475 million as of September 30, 2016 and December 31, 2015.			442,289				491,674
Trade and other payables			44,605				54,602
Advances received			3,242				3,492
Provisions			1,799				2,532
Pension obligations			1,120				1,120
Finance lease liabilities			11,558				13,507
Income tax payable			3,439				5,549
Tax payable other than income tax			9,718				8,034
Other current liabilities			34				26
Total current liabilities			517,804				580,536
Non-current liabilities
Interest-bearing loans and borrowings			12,371				4,308
Provisions			3,686				3,439
Pension obligations			3,688				3,746
Finance lease liabilities			106				481
Deferred tax liabilities			13,624				11,090
Other non-current liabilities			555				189
Other non-current financial liabilities			35,246				-
Income tax payable			-				137
Total non-current liabilities			69,276				23,390
Total liabilities			587,080				603,926
Equity
Common shares			4,163				4,163
Preferred shares			833				833
Additional paid-in capital and other reserves			28,216				28,322
Accumulated other comprehensive income			1,773				445
Accumulated deficit			(295,954	)			(301,565	)
Equity attributable to equity shareholders of Mechel PAO			(260,969	)			(267,802	)
Non-controlling interests			7,202				5,948
Total equity			(253,767	)			(261,854	)
Total equity and liabilities			333,313				342,072

****there were certain reclassifications to conform with the current period presentation

Interim condensed consolidated statement of profit (loss) and other comprehensive income
(All amounts are in millions of Russian rubles)		9 months ended September 30,
			2016				2015
		(unaudited)				(unaudited)
Continuing operations
Revenue			196,350				194,039
Cost of goods sold			(108,274	)			(114,123	)
Gross profit			88,076				79,916
Selling and distribution expenses			(41,237	)			(39,427	)
Loss on write-off of of property, plant and equipment			(303	)			(125	)
Impairment of goodwill and other non-current assets			(374	)			-
Allowance for doubtful accounts			(740	)			(1,049	)
Taxes other than income taxes			(4,197	)			(4,471	)
Administrative  and other operating expenses			(12,975	)			(12,941	)
Other operating income			511				115
Total selling, distribution and operating income and (expenses), net			(59,315	)			(57,898	)
Operating profit			28,761				22,018
Finance income			3,963				121
Finance costs including fines and penalties on overdue loans and borrowings and finance leases payments of RUB 5,254 million, RUB 15,883 million for the periods ended September 30, 2016 and 2015, respectively			(43,247	)			(47,956	)
Foreign exchange gain (loss), net			19,738				(43,011	)
Share of profit of associates			22				19
Other income			379				593
Other expense			(150	)			(139	)
Total other income and (expense), net			(19,295	)			(90,373	)
Profit (loss) before tax from continuing operations			9,466				(68,355	)
Income tax expense			(2,427	)			(6,914	)
Profit (loss) from continuing operations			7,039				(75,269	)
Discontinued operations
(Loss) profit after tax from discontinued operations, net			(343	)			1,013
Profit (loss) for the period			6,696				(74,256	)
Attributable to:
Equity holders of the parent			5,543				(74,586	)
Non-controlling interests			1,153				330
Other comprehensive income
Other comprehensive income to be reclassified to profit or loss in subsequent periods, net of income tax:			1,244				48
Exchange differences on translation of foreign operations			1,244				40
Net gain on available for sale financial assets			-				8
Other comprehensive income not to be reclassified to profit or loss in subsequent periods, net of income tax:			-				7
Re-measurement gain on defined benefit plans			-				7
Other comprehensive income for the period, net of tax			1,244				55
Total comprehensive income (loss), net of tax			7,940				(74,201	)
Attributable to:
Equity holders of the parent			6,787				(74,546	)
Non-controlling interests			1,153				345

Interim condensed consolidated statement of cash flows
(All amounts are in millions of Russian rubles)		9 months ended September 30,
			2016						2015
		(unaudited)						(unaudited)
Cash Flows from Operating Activities
Net profit (loss)			6,696						(74,256	)
Loss (profit) after tax from discontinued operations, net			343						(1,013	)
Net profit (loss) from continuing operations			7,039						(75,269	)
Adjustments to reconcile net profit (loss) from continuing operations to net cash provided by operating activities:
Depreciation			8,607						8,976
Depletion and amortization			1,415						1,277
Foreign exchange gain (loss), net			(19,738			)			43,011
Deferred income taxes			2,632						6,882
Allowance for doubtful accounts			740						1,049
Write-off of accounts receivable			80						122
Write-off of inventories to net realisable value			292						684
Revision in estimated cash flows of rehabilitation provision			(44			)			(40	)
Loss on write-off of property, plant and equipment			303						125
Impairment of goodwill and other non-current assets			374						-
Loss (gain) on sale of property, plant and equipment			29						(70	)
Gain on sale of investments			(130			)			-
Gain on write-off of accounts payable with expired legal term			(61			)			(159	)
Pension service cost and actuarial loss, other expenses			124						126
Finance income			(3,963			)			(121	)
Finance costs, including fines and penalties on overdue loans and borrowings and finance leases payments			43,247						47,956
Other			159						458
Changes in working capital items:
Trade and other receivables			(3,633			)			1,743
Inventories			(430			)			3,040
Trade and other payables			(3,419			)			(2,593	)
Advances received			(51			)			(1,110	)
Taxes payable and other current liabilities			644						(463	)
Other current assets			349						358
Income tax paid			(1,364			)			(1,086	)
Net operating cash flows of discontinued operations			(436			)			177
Net cash provided by operating activities			32,765						35,073
Cash Flows from Investing Activities
Monthly installments for acquisition of DEMP			(3,636			)			(3,557	)
Proceeds from disposal of securities			3						143
Loans issued and other investments			(5			)			(22	)
Interest received			25						61
Proceeds from disposal of subsidiaries			227						168
Proceeds from loans issued			20						10
Proceeds from disposals of property, plant and equipment			156						301
Purchases of property, plant and equipment			(2,398			)			(3,143	)
Interest paid, capitalized			(459			)			(679	)
Net cash used in investing activities			(6,067			)			(6,718	)
Cash Flows from Financing Activities
Proceeds from loans and borrowings			4,133						2,515
Repayment of loans and borrowings			(37,922			)			(9,641	)
Interest paid, including  fines and penalties			(25,756			)			(19,412	)
Dividends paid			(5			)			(4	)
Dividends paid to non-controlling interest			(2			)			(1	)
Proceeds from disposal of non-controlling interest in subsidiaries with put option granted to non-controlling interest shareholders			34,300						-
Repayment of obligations under finance lease			(1,868			)			(1,531	)
Net cash used in financing activities			(27,120			)			(28,074	)
Effect of exchange rate changes on cash and cash equivalents			(122			)			(1,075	)
Net decrease in cash and cash equivalents			(544			)			(794	)
Cash and cash equivalents at the beginning of period			3,079						3,983
Cash and cash equivalents net of overdrafts at the beginning of period			891						1,344
Cash and cash equivalents at the end of period			2,350						2,377
Cash and cash equivalents net of overdrafts at the end of period			347						550