Mechel OAO (MTL) signed a memorandum for a long-term partnership with German business management software provider SAP AG (SAP) to increase the efficiency of the company’s key processes.
The deal provides for the gradual implementation of SAP software solutions, based on specialized industry packages in Mechel’s mining, steel and sales divisions, in order to increase the efficiency of the company’s key processes.
In addition, Mechel and SAP will implement an Enterprise Resource Planning (ERP) project in all of Mechel’s sales network business units. ERP is expected to be deployed and fully functional in the sales units within the next 18 months. The financial details of the deal were not disclosed.
Based on SAP software, the project of a consolidation system for Mechel OAO was launched in 2007 and included all of Mechel’s segments. It enabled the group to optimize a number of important financial processes and standardize collection and processing of the holding’s consolidated financial accounting.
In June 2011, the company reported its results for first-quarter 2011. The company recorded a net income of $309.1 million in the quarter, comprehensively beating last year’s consolidated net income of $82.6 million, a jump of 274.3% year over year.
Revenues in the first quarter of 2011 soared 54.4% year over year to $2.9 billion based on the company’s relentless efforts to increase production.
Throughout the quarter, the company made concerted efforts to boost the coal production volumes by modernizing production facilities, perfecting the marketing structure, developing new high value-added products and lastly, by implementing strategic investment projects, which strengthened its market position.
Operating profits in the reported quarter climbed more than three times the first quarter profit in 2010 and amounted to $448.4 million compared with the operating income of $147.6 million in the first quarter of 2010. Operating margin was 15.28% in the first quarter of 2011 versus 7.77% in the first quarter of 2010.
Mechel is a leading domestic steel and coal producer with a strong position in key businesses, including production of specialty steel and alloys. The company has the largest coal reserve base in Russia. It is focusing on growth and cost-cutting measures.
Mechel has also entered into various agreements to supply its rail products to large Russian metal mining companies. We are positive on the company’s favorable business profile with a high degree of backward integration and low-cost structure. Mechel’s key assets are located close to the major steel consuming markets.
In addition, the company owns and controls essential infrastructure, including ports, rolling stock and power plants, which provide access to export markets. However, Mechel’s large capital-spending program, high debt and substantial interest burden are matters of concern.
Currently, Mechel has a short-term (1 to 3 months) Zacks #3 Rank (Hold rating) and a long-term (6 months) Neutral recommendation.
Mechel faces stiff competition from Arcelor Mittal (MT) and Norilsk Nickel Mining and Metallurgical Co.
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