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Operator: Good day and welcome to the Mechel Reports the First Quarter 2018 Financial Results Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Alexey Lukashov. Please go ahead.
Alexey Lukashov: Thank you and good day, everyone. I would like to welcome you to Mechel’s conference call to discuss our first quarter 2018 results, which we reported today. With us from management today are Mr. Oleg Korzhov, Mechel’s CEO; and Ms. Nelli Galeeva, Mechel’s CFO. 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 provision of the United States Private Securities Litigation Reform Act of 1995. We wish to caution you that the 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 of forward-looking statements. In addition, we will be using non-IFRS financial measures, including EBITDA, in our discussions today. Reconciliation of non-IFRS financial measures to the most directly comparable IFRS 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. Korzhov. Please go ahead.
Oleg Korzhov: Dear ladies and gentlemen, welcome to our conference call devoted to Mechel Group financial results demonstrated in the first quarter 2018. So unfortunately this accounting period showed somehow weak results in those of the previous quarter due to a number of objective reasons that I am going to elaborate on further. Revenue decreased by 2% quarter-on-quarter and EBITDA decreased by 16%, of that Mechel’s net profit attributable to shareholders was RUB 3.5 billion. The main reason for the weaker results demonstrated in this accounting period was a shrinkage of sales volumes in the Mining segment. During our previous conference call, when we discussed the results of 2017 which took place not so long ago, we elaborated in detail on the situation we faced and on the measures taken by us to improve it. Let me remind you briefly on that discussion. The reason for the falling volumes of coal mining shipments faced by us in the previous accounting period was insufficient financing of stripping and repair and maintenance works, especially in the year 2015 and 2016, the years that turned out to be the most difficult and critical for us. In order to recover the shrinking volumes starting from the middle of the last year, we have been implementing the program of the mining machinery and equipment replenishment and of the preparation of reserves to mining. We made contracts with contracting agencies that have started mining operations using their own mining equipment. The measures taken have already started to payback, so stripping volumes grew significantly. Coal mining volumes got stabilized quarter-by-quarter. Some slight growth in coal mining volumes has already been demonstrated in the first quarter this year as compared to the fourth quarter last year. Nevertheless, we should also mention railcars reached shortage in Kuzbassand the restrictions imposed on the transportation of cargo to the Far East ports. This factor as well as the shutdown of Neryungrinskaya Washing Plant at Elga for plant repair works caused a decrease in the sales volumes of coking coal concentrate and accumulation of run-of-mine coking coal in the warehouses of the Yakutugol, which influence the financial results demonstrated by a Mining segment. We should also note that during the account in period, the situation in the market of met coal remain favorable, contractual prices were at the level of US$237 per tonne and even in view of some slight decrease in spot prices, the average price levels were higher than those in the previous quarter. Steel segment operated more stable. We manage to sustained the plant production volumes and reached the product line ramped up the production of products with high added value including by means of mustering new types of profiles of various sizes that can be manufactured by universal structural mill at Chelyabinsk Metallurgical Plant and as a result Steel segment demonstrated a slight increase, EBITDA shrinkage was mainly due to a growing cash cost and high prices for raw materials. By implementing the program of recovery in the volumes in the Mining segment and maintaining stable operations of this two segment. We expect to improve the Group's financial results and to increase the free cash flow that could be used to reduce the debt load to include the shareholder value of the Company and for further development of the Company. The above mentioned purpose can be achieved not only by means of result until the production related tasks, but also by looking for hidden reserves that could be used to improve our own efficiency by implementing lean principles and by implementing new incentives schemes to motivate the staff to contribute to the enhancement of the whole chain of business processes. To solve this task, we as an example, cooperated with such company as McKinsey. This is a leading consulting company specializing in solving tasks related to strategic management. Why it never stops and is in constant development and the new digital technologies appear, making it possible for the major market players to significantly reduce their costs and of course, we try to follow the modern trends of digitalization and it was decided last year to create a separate business unit within the Group that will work on it. Several large scale projects have already been in the process of the implementation in Russia by us based on the above mentioned business unit. The first one is the project of complete shift into a digital legally valid document flow, both between the Group enterprises and with third parties. And there is also one more project related to document flow for the purpose of storage and approval of primary accounting and HR documentation, and the timeline set for this project is three years and this project will be implemented at all Group enterprises. The second major project is the accounting process at major industrial facilities based on platform 1C ERP Enterprise Management. That's where we started the implementation of these large scale project and we are planning to implement it at all our mining and steel enterprises. And the third project is related to human resources management and incentive plans to improve the effectiveness of organization of the work of our staff. This project implies the installation of system 1C ZUP that is payroll and staff management. We started this project last year and we have already implemented it at 43 of our enterprises and expect it to be implemented at 31 more enterprise by the year 2019. Taking into consideration the world's practices, we primarily assume that the implementation of the HR and big data approaches will make it possible for us to review sources for significant saving of resources and to use the existing cash flow more efficiently within the Group. So I think that was all I wanted to say in my presentation. And I give the floor to Nelli Galeeva, our Chief Financial Officer. Thank you for your attention.
Nelli Galeeva: Dear ladies and gentleman, welcome to our conference call. Let me proceed to the question of the Group financial results in general and distributed by segments. After my presentation, we will be glad to answer your questions. My presentation is available on our corporate website mechel.com. Consolidated EBITDA in the first quarter 2018 was RUB 18.4 billion and the Group demonstrated at RUB 2.6 billion growth in operating profit in the first quarter versus the fourth quarter, including things to a significant improvement of two segment results. The Group net profit attributable to shareholders increased more than seven times in the first quarter of 2018 up to RUB 3.3 billion as compared to the result of the last quarter. Difficulties with cargo transportation to port as consequences of introducing temporary admission conventions and railcars fleet charters resulted in a decrease in revenue of the Mining segment, which in turn resulted in a decrease in gross profit and EBITDA. Nevertheless, we took timely measures and planned a number of respective activities and therefore managed to mitigate the negative effect and to retain our main financial indicators at a deal level. Reduction in coal sales volumes had an impact upon the effectiveness of the Mining segment in the first quarter 2018, which was partially compensated for by slight price growth in the global and Russian domestic markets. When it comes to the most marginal product of the Mining segment that is coking coal concentrate, its sales volumes in the accounting period as compared to the previous quarter reduced by 11% due to a number of the above mentioned infrastructure restrictions. That is why some part of shipments was postponed to April, but mining volumes remained at the same level. Revenues of the Mining segment from sales to third parties in the first quarter 2018 amounted to RUB 22.7 billion, which is 11% less than in the fourth quarter 2017. Operating profit amounted to RUB 8.0 billion, which is comparable to the result of the previous quarter. EBITDA reduced by RUB 3.6 billion and amounted to RUB 10.5 billion. They have been providing our enterprises with a great number of new equipment based on lesson scheme during the whole last year and in the first quarter this year, which makes it possible to dwell on relatively small capital investments due to putting more machinery and equipment into operation. As a result, we managed to stabilize the mining volumes and expect a stable growth in the production of coal products that will be clearly demonstrated in the second half of this year. Elgaugol demonstrated RUB 1.1 billion of operating profit in the first quarter 2018. Additional operating cash flow amounted to RUB 800 million. 1.2 million tonne of coal remain that Elga coal deposited in the accounting period, which is 8% more than in the fourth quarter of 2017. The revenue of Elgaugol grew by RUB 800 million as compared to the previous period due to growth in coal mining volumes and amounted to RUB 4 billion. Steel segment demonstrated positive dynamics of its sales in the first quarter versus the same period but last year. Growing prices for BelAZ and ferrosilicon changes in sales structure and decrease in purchase prices for raw materials resulted in a 44% growth of the gross profit and 38% growth of the gross margin. EBITDA almost doubled and totaled up to RUB 2.6 billion. The financial results in the first quarter 2018 are quite good and stable as compared to the results of the fourth quarter 2017. EBITDA and gross profit remained almost at the same level as in the previous quarter. Operating profit grew 2.5 times and totaled up to RUB 4.2 billion, which resulted in the net profit of the segment amounting to RUB 2 billion. In spite of a reduction in the revenue from operational activities RUB 16.6 billion in the first quarter of 2018 versus RUB 17.8 billion in the fourth quarter of 2017. Operating cash flow remains sufficient. Not only to cover the Group’s operational needs, but also to reduce the debt load, trade circulating capital remained at the level of 2017 and amounted to RUB 11 billion, which makes it possible to finance the investment activities and to ensure payments related to financial activities. Our financial expenses reduced from RUB 11.3 billion in the fourth quarter 2017 to RUB 10.5 billion and the counting period. The main factor that caused the above mentioned reduction is the key rate of the Central Bank of the Russian Federation that declined by 0.5 percentage points and thus the interest rate on our debt reduced from 8.70% to 8.40%. The amount of interest paid in the first quarter 2018 was RUB 8.6 billion, including capitalized interest which is RUB 1.2 billion more than in the previous quarter. Such increase in payment was mainly caused by renewal of interest payment on the syndicated loans for pre-export financing within the restructuring agreement that was signed at the end of 2017. The indebtedness of the Group by net debt, excluding [fines], penalties and options reduced by RUB 3 billion during the first quarter 2018 and amounted to RUB 423 billion. Net debt to EBITDA ratio amounted to 5.5 by end of the first quarter. The debt structure remained the same, 67% is in rubles and the remaining part is in foreign currencies. We continue the restructuring of our credit portfolio. Currently, we are on the final stage of documenting the restructuring and signing of respective documents by syndicate of the banks that provided us with pre-export financing. We also hold negotiations with the lenders that provided us with the loans based on guarantees of export credit agencies. Thank you for your attention.
Alexey Lukashov: Thank you. We will now take questions. We would ask that participants please state their name and company before asking their question and allow some time after for translation. When questions are asked in Russian, it will be followed by translation. Therefore, you may ask your questions in Russian also and we will translate.
Operator: Thank you. [Operator Instructions] We will hear first from Oleg Petropavlovskiy with BCS. Please go ahead.
Oleg Petropavlovskiy: [This was the question from Oleg Petropavlovskiy. So he got a couple of questions]. The first question is related to the shipments which were performed in April and May, and he wants to know what was the situation with these shipments? And what are the plans for June? And also, are there any problems with the infrastructure in Kuzbass and the Far East? And what are the plans for the sales for the second quarter? And the second question is related to Korshunov Mining Plant. As far as I understand, it’s not at all economically advantageous to buy concentrate there, and to transport this concentrate to Chelyabinsk. What plans do you have for this assets and how long is it possible for this asset to exist if we take into consideration the reserves owned by it?
Alexey Lukashov: The question will be answered by Oleg Korzhov.
Oleg Korzhov: So unfortunately we didn't manage to note down all the questions. So we are going to give some partial answers, okay? Because your question included several questions. So first of all about the situation with the shipments in April and May, as far as we can see the situation with shipments got somehow stabilized versus to the results shown during the first quarter, mainly it was due to the elimination of the deficiency with the railcars, especially when it comes to Southern Kuzbass. And therefore, we will manage to increase the shipments of course for the second quarter. And when it comes to our plans for June, we are planning to ship 4,006,000 tonne. And if we compare these with the figures for the previous quarter, we can see that the shipment volumes are going to be increased by 500,000 tonne in the second quarter. So when it comes to the question related to Korshunov Mining Plant, first of all we should bear in mind that it is one of our strategically important assets and it has always been our strategically important asset, and unfortunately here when it comes to their production volumes that Korshunov Mining Plant. We are much dependent on the negotiations with the suppliers. And right now we are not talking even about the prices, but we are talking about the absence of this product in the market. So our main task for today is to find these concentrate and to increase its production. So we should also mention such factor, such parameter as the cash cost. During the fourth quarter last year, the cash cost was RUB 3,200 whereas during the fourth quarter this year, this parameter reached RUB 4,200. It means that the growth in the cash cost is RUB 1,000. The main factor to – this result was the acquisition of the new equipment and they increase in the volume of stripping works. In the first quarter their stripping coefficient was 1.15, whereas in another quarter, the stripping volumes were 1.64. We can see that there is there growth in the volume of the stripping works. And of course we had to do these because we planned to increase their production of the concentrate and besides it's important to mention that during the fourth quarter, we were implementing a large scale repair program, which included the repair of such equipment as the excavator, the drilling rigs, the dump trucks.
Alexey Lukashov: Next question please.
Operator: And we’ll hear next from Nikolay Sosnovskiy with Prosperity Capital. Please go ahead.
Nikolay Sosnovskiy: [So that was Nikolay Sosnovskiy from Prosperity Capital Management]. So the question was about coking concentrate as far as we see during the second quarter, their production of coking concentrates increased by 500,000 tonne and how you see the situation which will happen during the remaining three quarters of the year? And another question is related to the stripping works. You mentioned the fact that you managed to increase significantly the volume of the stripping works and how long do you plan to follow such strategy with such a large scale stripping works volumes? So – and one more question in respect of the stripping volumes. How do you account for these stripping volumes? Do you capitalize them? Or do you accrue them to the cash cost?
Oleg Korzhov: So first of all I would like to talk about the coking concentrate, about the figure of 1.6 million in the first quarter. So the fact is that when I mentioned such figures as 500 tonne or 600 tonne, I didn't mean the coking concentrate. I was talking just about the shipment of coal, in general all types of coal. So when it comes to the coking concentrate, there was some problem in the first quarter related to the difficulties in the transportation of coking concentrate, and therefore, huge volumes of concentrate accumulated at Elga’s warehouses, and of course, we are planning to process these concentrate and therefore to increase their production volumes due to these accumulated concentrate in the warehouses. When it comes to the plant for the second quarter, we are planning to ship from 2 million tonne to 2.2 million tonne of concentrate in the second quarter. Of course it will be possible in case of stable operation of the equipment which we're having there. And now about the stripping volumes, the situation differs when it comes to the stripping volumes at our enterprises. So when it comes to Elga, the situation with the stripping is quite stable there and therefore we are not planning to increase the stripping volumes at Elga. When it comes to Yakutugol, the situation differs much there. Last year, the stripping ratio was quite small there, and therefore we needed to increase the stripping volumes in order to prepare the reserves for mining. Besides, there were some peculiarities of the scene there. And the second task for Yakutugol was the acquisition of the equipment. We managed to acquire new equipment there for mining purposes and we managed to sign contracts with the contractors. When it comes to Southern Kuzbass, the stripping coefficient is going to be quite stable there and we are planning to increase the stripping volumes there in the three or four months term, because we are planning to start development of the two new pits there. The first one is called Berezovsky and the second one is called Sibirginsky. When it comes to Berezovsky, we managed to sign a contract with some contractor for the performance of the complex works and that means that the contractor is going to perform all range of works required there including stripping and mining works. And we are also in the process of the performance of the tender and procedures at Sibirginsky pit. We're also trying to select a contractor for the performance of complex works including everything starting from stripping and drilling works, and mining operations. So we can conclude that we are planning to perform all these above mentioned activities in order to increase the production volumes on both the sides. When it comes to the prospects for their volumes of the strippings, we cannot hope that the stripping volumes are going to be decreased and when it comes to their reflection of their stripping works in the book accounting, we reflect it as cash cost, not as capitalized. During the fourth quarter, we reflected some part of the stripping works as capitalized by Elga Coal deposit, but due to some peculiarities of the book accounting, we should not do so. So we are reflecting it as cash cost.
Alexey Lukashov: Next question, please.
Operator: [Operator Instructions] We will hear next from Boris Krasnojenov with Alfa Bank. Please go ahead.
Boris Krasnojenov: [So the next question was from Alfa Bank. So this is a more technical question in order to figure out some information about the cash cost and the prices]. The first question was about the prices in the first quarter. So what were the average export price for coking coal in the first quarter? And the FOB or other base prices? So the second question is related to the sales of coking coal during the first quarter. So what was the share of the coal – of premium brands and of other brands of coal? And the third question was about the cash cost, so what was the cash cost in U.S. dollars? The cash cost for coking and for steam coals by all assets during the first quarter?
Oleg Korzhov: So the average price during the first quarter, FOB price was $163. When it comes to shipment in the first quarter, it was as follows. It was approximately 40% accounted for the coking coal, 9% accounted for anthracite, 9% for PCI, and 42% for steam coal.
Alexey Lukashov: The question regarding cash cost will be answered by Nelli Galeeva.
Nelli Galeeva: [So the question about the cash cost is answered by our Chief Financial Officer, Nelli Galeeva.] So the fact is that we are calculating the cash cost for each enterprise individually without any split by product types. And therefore, just we cannot answer your question right now. And if you need detailed information with the split and by type of products and by each particular enterprise, it is possible for us to prepare it in writing and to share it with you.
Alexey Lukashov: Next question please. End of Q&A
Operator: [Operator Instructions] And it appears there are no further questions at this time. I would like to turn the call back over to Alexey Lukashov for any additional or closing remarks.
Alexey Lukashov: Ladies and gentlemen, thank you for taking the time to join Mechel’s first quarter 2018 financial results conference call today. The replay of the call will be available on Mechel’s website. If you have any further questions, please contact the Investor Relations office. Thank you again from all the team here.
Operator: Once again that does conclude today’s conference. Thank you for your participation. You may now disconnect.