Good day and welcome to the third quarter 2017 results announcement call. Today's conference is being recorded. At this time, I would like to turn the conference over to Yulia Chekunaeva. Please go ahead, madam.
Yes, thank you so much. Good day, ladies and gentlemen. This is Yulia speaking, and on behalf of UC RUSAL, I would like to welcome you to our third quarter 2017 financial results conference call. Let me briefly introduce UC RUSAL team presenting today. It's Vladislav Soloviev, our CEO, Oleg Mukhamedshin, Deputy CEO, Alexandra Bouriko , CFO, Ekaterina Kuleshova , Chief Operating Officer of our Sales and Marketing team, and Denis Nushtaev, Head of Markets Research. With this, I would like to pass over to Vladislav to kick off today's results presentation. Vladislav, over to you.
Thank you, Yulia, and good day, everyone. Thank you for attending our call today. This is third quarter 2017 results, RUSAL. We traditionally start with our key numbers overview. If you switch on slide number four, we'll start with in terms of operating results, our company continues to deliver strong and stable performance. Our smelting capacity utilization rate remains high. It's approximately 95%. Aluminum production in third quarter totals 931,000 tonnes, while production of value-added products reached 50% of our total volume. At the same time, aluminum sales decreased to 968,000 tonnes. This is quarter-on-quarter decline, is largely explained by increase of goods in transit due to ports and vessels availability. These volumes will be released in the next period. At the same time, we presented positive momentum in increasing share of value-added product sales.
In third quarter, sales of value-added products stood at 479,000 tonnes. The company, as per its strategy, continued to grow the value-added products sales, and we now stand at 50% in comparison with 45% in third quarter last year. If you look at the premium and on the price, the realized aluminum price increased by 2.1% quarter-on-quarter to $2,124 per tonne, largely driven by LME component growth. Turning to financial performance, we demonstrate another quarter of strong results. First of all, the continuous rise in aluminum price was balanced by minor delay in sales volumes, and as a result of RUSAL revenue stood at $2.5 billion, which is notable, +19.4% year-on-year growth. EBITDA increased by 7.6% quarter-on-quarter to $549 million, and we maintain EBITDA margin above 22% now. Also, in the third quarter, the company has generated a solid free cash flow.
Total free cash flow amounted to $566 million. This included dividends from [En+ Group]. On the back of this superior cash generation, our net debt currently stands below $7.6 billion. It is worth highlighting what recent share price performance of [En+ Group] means that our stake value stands at nearly $8.7 billion, which is 14% above the value of the net debt. Now, let us go further to the health and safety. Traditionally, we would like to give an update of the company performance in the health and safety area that continues to be one of our strategic priority. In overall, lost time accident frequency rate of RUSAL, which is shown on the chart, remains one of the lowest in the aluminum industry, and you can see with a further decline on the back of the nine months 2017 performance.
We keep on implementing all of the early announced initiatives, which allow us to further improve our standings on those metrics, which is, as I said, very important for us. Now let us go forward to slide six. On this slide, we would like to draw your attention to our strong commitment to the leading role we have taken in the fight to reduce greenhouse gas emissions in the aluminum industry. One of our strategic goals of this end is to reduce direct specific greenhouse gas emissions by 15%, as compared to the level in 2014 of our aluminum smelters. As you can see on the chart on this slide, we are making very good progress to achieve this target. We have reduced emissions year- on- year in 2016, and through the first nine months of 2017, we continued delivering our emission reduction.
Now, let us speak a little bit about low CO2 aluminum position of our company. This is a slide where we would like to bring to your attention what our commitments and vision with respect to sustainable business model stretching on all areas of our operations. Low carbon aluminum is a key element of the value proposition of our customers and the one we believe would allow us to achieve our value-added product growth strategy. We engage with the entire value chain of all end user sector, automotive, consumer products, packaging, construction, to stimulate the demands for product which is lower environmental footprint. At the same time, we often use sales contracts which certifies detailing the carbon footprint for their smelter for each of the metal delivered.
To this end, during the Aluminum Week this year, only a couple of weeks ago, we have launched a new brand of our low carbon aluminum, ALLOW. This, in our opinion, will accelerate the development and awareness among customers to support global sustainable development. Okay, now let us move forward to the review of our operational and financial result. I would like to pass the word to Ekaterina. Please.
Thank you, Vladislav, and welcome everyone. Let me just start RUSAL operational results overview with aluminum sales and price performance. As Vladislav already mentioned, RUSAL total aluminum sales in third quarter moderately decreased by 3.4% quarter-on-quarter and reached 968,000 tonnes. Just to emphasize that the decrease was attributable due to the longer transit time, and there were some bad weather conditions in the Black Sea region, with issues of the rail and the port. All these sales will be further shown in future periods. We continue to increase the sales of value-added products in our portfolios and work to increase their share of our end users. In third quarter, share of value-added products increased to 50% of the total portfolio and reached 479,000 tonnes. The key driver for that was the continuous upgrades in relevant capacities and improvement of productivity.
Third quarter average realized price increased to $2,124 per tonne, which is about 2% growth quarter-on-quarter. The only component reached $1,962 per tonne. Please, bear in mind the natural gap between the actual new levels and realization of the sales in quotation periods. Commodity grade premium was $72 per tonne, which was lower than the previous quarter because of the decrease of the regional premiums, but it was well compensated by the growth of the value-added products in the portfolio, and average upcharge per tonne of value-added product sales was $181 per tonne. Sales mix remained largely unchanged in comparison with the previous year, and as usual, European destination is the largest share in the mix of about 45%, and the rest sales go from Russia and the CIS, Asia, and America. Coming to slide 10. We would like to remind you about our value-added sales strategy.
As we already highlighted that the share of value-added products in third quarter amounted to 50%, and now we put the new target for ourselves, as you can see in the left-hand slide diagram, and it will be 60% for value-added products in the portfolio by 2021. How we can get to this goal? We will be investing into multiple directions, and of course, we will be investing into our marketing and distribution channels as well as into the new production capacity. What capacities were launched during 2017? First, it is 120,000 tonnes of large diameter billets at Krasnoyarsk. It is launched in a test mode at the moment. Second, 120,000 tonnes new foundry alloy capacity in Khakassia. Already, we passed successfully certain qualifications with our customers on these products. Also, there is a complex of furnaces for the hardening of wire rods at Kandalaksha.
At the right-hand slide, you can see that we are growing in all products. Important to mention that wire rods was mainly attributable to the growth of the Russian market, and slab growth was mainly driven by the automotive segment and packaging. Overall, a positive picture on the price and the sales structure. With that, I will pass the word to Alexandra Bouriko, who will comment on company's financial.
Our revenue structure in the third quarter. Our total revenue in the third quarter remained largely comparable to the previous quarter, totaling approximately $2.5 billion, driven by higher aluminum prices and slight decrease in volumes. The largest contributor, similarly to previous periods, is revenue from aluminum sales of just over $2 billion. Remaining revenues total $400 million. Revenue from aluminum sales to third parties decreased to $172 million, driven by lower sales volumes. Revenue from sales of foil and other aluminum products increased to $91 million due to higher volumes and realized prices. Revenues from other sales increased by 12% to $141 million due to higher sales of other materials. Let's move to slide number 12 and discuss our key segments cash cost per tonne.
I would like to remind you that from the start of 2017, we differentiate between our own operations and sales of third-party products, and now report our aluminum cash cost, excluding the impact of any aluminum resales. You can see here on the graph that our cash cost per tonne for aluminum segment increased marginally by 1.5% quarter-on-quarter, driven predominantly by higher energy prices and higher price of other raw materials, in particularly carbon raw materials, pitch, and coke. Overall, the energy cost dynamics are also present on the bottom of the slide. We can see that there was a slight seasonal increase in energy prices. Overall, we maintain a very good cost discipline in the quarter. Moving to slide number 13 now, with more details on energy cost dynamics.
In the third quarter, the average energy purchase price for the company was $0.0314 per kilowatt-hour, and the key elements contributing to energy cost dynamics were as follows. The marginal increase in day-ahead market pricing due to seasonal factors, as I mentioned. Capacity component increase was driven by the introduction of a governmental fee aimed at equalizing energy price in the Far East Federal District of Russia. That was starting from July 1st of 2017. Finally, with the other ruble-denominated costs, the energy costs saw a positive impact from the weakening of ruble versus U.S. dollar by approximately 3% quarter-on-quarter. Let's move to slide number 14, where we can see dynamics of our EBITDA in the quarter. On this slide, we traditionally summarize the key factors that contributed to our EBITDA dynamics.
As you may see from the top chart, the alumi component growth in aluminum price quarter-on-quarter on the back of favorable aluminum market momentum is offsetting aluminum sales volume decrease and sales structure impact, while other elements contributed positively. All in all, you can see that the third quarter EBITDA increased to $549 million, which represents a 7.6% increase quarter-on-quarter. We have increased our EBITDA margin to the level above 22%, which is one of the highest in the industry. In terms of the segment impact, aluminum segment remains the largest contributor to the group EBITDA. Let's move to slide number 15 and discuss our free cash flow now. In the third quarter, RUSAL continued to generate strong positive free cash flow in the amount of $566 million. The working capital-related cash movements total $73 million of overall inflows.
Major outflow elements were $91 million due to increase of inventories and $63 million due to increase in trade and other receivables, while an increase in payables of $236 million contributed positively to the overall change. The net investing cash flow was + $104 million, and the amount included dividends received from Norilsk Nickel of $310 million. The financing outflow total $150 million, where the largest portion was related to financing costs and $26 million were related to settlement of derivative instruments. Let's move to slide number 16 and discuss our capital expenditures during the quarter. On this slide, you can see an overview of our existing significant capital investment projects. In the third quarter, our total CapEx was $226 million, including maintenance CapEx of approximately $100 million. Our focus in terms of the projects remains relatively unchanged since the beginning of 2017.
There are four major areas we are investing into. First of all, bauxite self-sufficiency. Secondly, aluminum capacities expansion. Third is carbon material self-sufficiency. Finally, growth of value-added products. All projects are progressing very well. We would like to reiterate that our capital expenditures remain fully under control. We want to take this opportunity and update market that relative to the previous guidance, we believe that we are going to get closer to $700 million for the overall capital budget in 2017. This is higher than in 2016, yet given the inflationary trends we observed, we prioritized some of the work on the projects that we would like to improve our vertical integration faster. For example, anode plants and other similar projects. With this, I would like to pass the word to Oleg Mukhamedshin.
Thank you, Alexandra. Good afternoon to everybody. We are currently on page number 18, and I will speak briefly about our debt situation. As you can see from this slide, at the end of the quarter, gross debt declined to $8.7 billion due to net settlements of $250 million. As my colleagues already mentioned, we had a very solid financial performance and, as a result, our cash and cash equivalents grew to over $1.1 billion at the end of the quarter, up from just half a billion dollars at the beginning of the year. Hence, net debt declined to below $7.6 billion, which is a record low since, I would say, 2006. All in all, the company continues to deliver on its key priority in the capital allocation policy and notes a significant reduction of its gross debt levels that stood at, you remember, $11.3 billion in 2012.
Now, as I mentioned, it is just $8.7 billion. We reiterate our commitment actually to reduce this gross debt level to nearly $7 billion by 2020. Performance. The company was upgraded by our key credit rating agencies. We have announced in September, Moody's improved the company's outlook on the Ba3 rating to positive from stable, and in October, Fitch Ratings also upgraded RUSAL from B plus to BB minus with a stable outlook. Next page, number 19. On this slide, you can see the updated maturity profile and the key statistics for our debt portfolio outstanding. As we already discussed, the company achieved multiple improvements to its debt. In August, we amended facility agreement with Sberbank extending the maturity profile to 2024, reducing the interest rate by 100 basis points, and improving covenants package more or less in line with our PXF covenants.
In September 2017, we have placed the second tranche of panda bonds, again, for three years, with a coupon rate of 5.5% in RMB. So by the end of September, the leverage ratio under eurobond stands at 2.7 x, and the leverage ratio introduced by new PXF and other bilateral facilities stands at 1.4 x. To my debt structure provides for much lesser risks of refinancing and greater operational flexibility. We also want to draw your attention to the fact that post-reporting date, part of $1.1 billion of cash has been already used towards dividend distribution of circa $300 million. Moving to page number 20, talking about our dividend policy. You can see the track record in delivering returns to our shareholders over the past three years. We hope you will find it helpful. Just a few points to make here.
First, as approved earlier by our board, the company, as I mentioned, distributed $300 million in advance for 2017. Second, as you can see on the top right-hand side chart, UC RUSAL maintains an industry-leading cash conversion ratio when comparing to our historical free cash flow. We established a track record of distributing up to 33% of generated free cash flow. Approved dividend policy states that the total amount of dividends paid by UC RUSAL, as you remember, is up to 15% of covenant EBITDA per annum. Just as a reminder, our board approved an optionality for the dividends distribution on a quarterly basis, which will start from the second quarter of 2018. Obviously, the distribution of dividends going forward would depend on the financial position of our company and subject to compliance with the restrictions as per our current package. Page 21, a few words about Norilsk Nickel.
As we stated before, we are committed to our investment to Norilsk, which continues to generate very solid dividends flow. We have seen quite an uptick in the nickel prices, and we believe more upsides are yet to materialize on the global base metals market, and nickel is one of the key beneficiaries. The new developments in the automotive industry would boost demand for multiple metals, and nickel is probably the leading one. We will speak about it a bit later. But it is important to understand that NCA batteries are becoming a product of choice for the rapidly growing EV industry such as in Tesla's Model S vehicle, for example. While electrical vehicle sales in 2016 accounted for 2.4 million cars, it is important to understand that it will reach above 14 million in 2025 and going forward.
I would like to pass the word back to Ekaterina to speak about our key markets.
Thank you, Oleg. Now we are starting the market overview. Before moving to a particular slide, I would like to mention that all the regions showed very positive trends with the record high levels of PMIs and growth of aluminum demand. This is from minimum 3% + for international markets and 17% for Russian and CIS markets for nine months of this year. This is very well confirmed by the strong shape of our contracting for 2018. Now moving to slide 23 on European market. Manufacturing PMIs were their highest during the six and a half years and at a level of 57.4 in September. We see that the growth is there and the overall signal is very positive. Motor vehicle production has weakened between January and August 2017, and it is mainly due to the declines in Germany and the U.K.
However, Turkey is historically, as export-oriented European country, has performed positively by 18.2% year-on-year. European construction sector also grew, and production gained 3.6% in July 2017 year-on-year, and it was largely driven by the primary sector investments in infrastructure and construction. As a result, primary aluminum demand in Europe has mirrored this economic improvement and demand rose by 3.6% in the first nine months, and it was supporting the growth in building sheet and extrusions. Moving to slide 24, I would like to give you more color on the North America aluminum demand side. As Europe also PMI reached its highest level since 2004 in September, and that give us a very positive outlook for aluminum demand. Motor vehicle production was not so positive and was down by 3.7% year- to- date, despite the growth in Mexico.
However, important to mention that the overall content of aluminum in automotive industry was growing, so it offset the decline in the sector itself. Positively to mention, there was also positive improvement of truck trailer output that improved the extrusions and castings demand. U.S. housing stats showed growing into Q3, impacted by higher mortgage interest rates, so there were some interruption of the growth. But we expect that aluminum demand expected to remain firm for now given the lagged impact. Primary aluminum demand in North America rose by 3.4% in January to September, according to CRU. Can sheet demand has been sluggish, but slab producers moved to the production for automotive sector. PMI gains point to further demand growth ahead. On the next slide, number 25, will give some color on overall situation with aluminum demand in Asia ex- China region.
On Asia, all the countries of the region except Malaysia rounded off the third quarter on a firm note. Manufacturing PMI indices improved most in September, underpinned by strong international demand, which increased solidly. As usual, Japan is the key market for the region, and housing starts grew 1% year-on-year in January to August period. One of the reasons was the preparation for the Olympics and Paralympics in Tokyo, which grew the demand from the construction sector. Automotive production in Japan continued to be strong and showed 6.7% growth in the first eight months of the year. Strong indicators of manufacturing growth, along with more intense use of aluminum and vehicles, provide ground for primary aluminum demand growth of 3.5% in the first nine months of the year. Coming to the next slide on Russian and CIS markets.
It is important to note that we are comparing this slide with the low base of 2016, but nevertheless, the results are very positive. Industrial PMI index continues to remain above 50 points and has grown to 51.9 points in September. The light vehicle market have grown by 18% in September and by 10.6% in total for the nine months in 2017. Russia for now is the key market and will benefit a lot in our growth of value-added products and overall sales of aluminum in that region. Beginning from July 2017, the value of construction works has stopped decreasing, and a small increase is being observed. Aluminum cable production is growing by 17%. This is mainly due to the project of Rosseti, which is one of the largest operators of energy networks in the world, because they are building a new industrial object.
From the negative side, we see an increase in competition because of the ruble rate, and there is an encouragement of the growth of import of finished products and semis, which compete with our domestic products. Primary aluminum demand in Russia, as I told you before, grew by 17% year-on-year. By this, I would like to give the floor to Denis Nushtaev to discuss the developments in China.
Thank you, Ekaterina. Good day, everyone. Just would like to confirm our very positive outlook for global aluminum balance. We are expecting that for next year, deficit will double from this year. This was mainly as a result of growing supply deficit in China. This is on both sides as a basis for supply side reform and anti-pollution campaign, which we have very clear evidence as these steps are going forward with a very strict regulation in China and after our meetings in China and conversation, we definitely have an evidence of this. Outside of China, definitely do not see any significant projects. On the chart on the bottom, we see that despite some capacity ramp up in Middle East and India, we see lots of closures in North America, Australia, and South America and some in Europe.
As a result, that cumulative growth rate outside of China is growing just 0.4% over 10 years. Definitely, we are expecting that global balance to be in deficit of roughly 2 million tonnes going forward and demand at very healthy pace of 4.5% growth over the next five years. Supply resistance also turn into declining reported stocks. Now we see that global reported stocks outside of China at a historical low level, which is definitely supporting very healthy global aluminum industry situation. On the next slide, definitely, as I mentioned, that China is committed to their supply cuts as expected as of now, 4.5 million tonnes of legal capacity already cut. This is on top of winter closures, which are already on the way starting from November to March.
Definitely, this will lead to additional losses, roughly 1 million tonne for aluminum production in China, which is mostly there for alumina, which also will be losing more in case of production. We see aluminum spikes in China based on these expectations. On the next slide, we definitely seen that significant cost pressure, as I mentioned about alumina and others already turned into very thin margins for aluminum smelters in China, despite higher aluminum price. Just from the latest statistic today, we have seen even negative margins for many aluminum smelters in China. Also we see that not only alumina, but other carbon materials based on recent anti-pollution campaign are at a very high elevated levels, and we expect that tightness for carbon products and very high cost of pressure will be maintained in China during this winter season as well.
On the next slide, definitely, as Oleg mentioned, we see very positive growth and very high new technologies supporting aluminum growth and other materials. In case of aluminum, we see that very strong growth, not only inside of cars for light weighting, but also for surrounding infrastructure development, for EVs charging stations, for networking infrastructure, which will require significant volumes of new cables and development of new stations and so on. We are definitely seeing that aluminum is the best metal of choice for new trends, for light weighting, for electric cars, for new power generating and for alternative generation capacity going forward. With this, I will leave. Thank you. I am passing back to Alexandra for final comments.
Thank you very much, Denis. To conclude our presentation, I would like to give you a few highlights into the year-end. We are now on slide 31. In terms of production volumes, we expect stable operations and will achieve approximately 3.7 million tonnes of output with more than 50% share of value-added products in our product mix. We recognize that some of the macro factors indicate further cost inflation. However, we feel confident that in this environment of aluminum prices and with a bit of softening in Russian ruble, we would be able to maintain our industry leading margins. On capital expenditure side, we stick to our strict discipline and focus on strategic project realization to enhance our vertical integration and improve product mix. We estimate CapEx at about $700 million for 2017 overall due to expedited project works.
Lastly, we feel confident that in this environment, our strategy on continuous deleveraging highlighted by Oleg would contribute to our improved leverage position, as we are planning to make further debt repayments of at least $250 million - $350 million in Q4 of 2017. With this, thank you very much for your attention, and we will now open the line for questions.
Thank you, madam. Ladies and gentlemen, if you would like to ask a question over the phone at this time, please press the star or asterisk key followed by the digits on your telephone. Please note that if this function on your telephone is switched off to allow your signal to reach our equipment. Again, please press star one to ask a question over the phone. Leave your pause just for a moment to allow everyone the opportunity to signal. Now we take our first person from the queue. Kirtan Mehta from HSBC, please go ahead. Your line is now open.
Hello, this is Kirtan here. Thanks for taking my questions. I have a couple of questions on the aluminum industry as a whole. In the recent forecast, you have taken up the aluminum production forecast for 2019 to 2021 by around 200 kt- 600 kt, which are the new production that you are assuming. This is one question. Second question was about China. Normally, you have been sharing your forecast of supply demand balance in China. Is it possible to share also this quarter, the current estimate for China? There is also one more follow-up question on the alumina as well. The alumina prices have shot up to around $400 - $500 level on the back of developments in China. How do you see alumina market evolving over the next 6 - 12 months?
Denis Nushtaev will address your questions. Thank you.
Yes. On the electric cars, this is our very preliminary estimations because there are so many variation of estimations for EV sales. We have a very conservative view at this moment because we see that there are still some obstacles to be overcome, especially for cost of battery, or should be reduced significantly by engineers working on this very hard. At the same time, very strict environmental conditions create a very supportive environment for development of these cars. Surprisingly, China is the biggest market today in EVs, and we see this very promising because they have abundance of lots of materials and aluminum is very abundant in China, which is also very supportive for aluminum application in EVs, in China in particular.
In the case of supply-demand balance in China, we see that from the beginning of this year, we have a very clear surplus in China. In the first half of this year, which was a result of ramp up of some capacity of some private local producers, especially in Shandong. We see some surplus in the growth of semis export. In the second half, definitely we see an opposite situation where we see that some of production cuts coming on the way with some illegal capacity was cut and now we see some evidence of winter cutting. In aluminum, we see this as a clear evidence in production decline and decline in export of aluminum semis, which is more clear way to understand it. In the second half, we definitely see a moderation of surplus.
Overall, for the whole year, we still have a surplus in China, but very moderate and next year, we'll definitely see a decline in exports of semis to continue and a more balanced situation in China in this way. In case of alumina, we see that alumina prices today are maybe a bit overpriced as we see that some of alumina production to be restarted probably quicker. We see some projects. At the same time, there are some shortage of bauxite supply in certain provinces due to new environmental regulation and closure of illegal bauxite mines in China. Plus, we still see very high cost pressure from caustic soda, from logistic cost and bauxite cost as well to support higher alumina prices.
Thank you.
Next question please.
Thank you. As a reminder, ladies and gentlemen, star one to ask question over the phone. Now we take our next person, Anastasia Tikhonova from Renaissance Capital. Please go ahead. Your line is now open.
Good day, ladies and gentlemen. Thank you for the presentation and for the opportunity to ask questions. Actually, I have a few. The first one regarding the debt. Could you please provide the average cost of the debt portfolio at the moment? Are there any expectations on further increase of debt refinancing and probably raising some more debt through bonds by the year end apart from your repayment plans? The second question is regarding the Taishet project. Probably you could provide us an update with the state of the project financing. The last question is regarding the shareholder structure. Probably you could share your expectation on some changes that could come owing to the fact that Glencore could convert its shares into the shares of En+. Could other shareholders do the same? Just probably your thoughts on what you could provide. Thank you.
Thank you for your questions. Starting from first one, as I think mentioned in the presentation and in the announcement, the overall cost of our debt at the end of the quarter was 5% per annum. We expect some further reduction of our financing cost due to potential further refinancing of certain loans and negotiations with our existing lenders. Talking about overall debt, I think we also made a guidance here that it will be repaid by another $300 million by the year-end, at least. Addressing your question regarding Taishet, we are well-performed in our negotiations with a potential syndicate of the banks leading by VEB, Russian State Development Bank. Our plan is to complete the discussions and negotiations by the year-end, so we will inform the market accordingly.
And the third question, I think it is better to address to our shareholders because it is not us who is going to negotiate any potential equity swaps. Management cannot comment on that. Thank you.
Thank you very much. It is pretty clear. Thank you.
Thank you. As a reminder, ladies and gentlemen, star one to ask a question over the phone. There are no further questions over the phone at this time, so I would like to hand the call back to our host for any additional or closing remarks.
Well, thank you everyone for attending the call today. We very much appreciate your attention. If you have any follow-up questions, do not hesitate to contact the IR team of RUSAL. We are very happy to address any further requests on your side. With this, we would like to complete the call and wish you a lovely day. Thank you.
Thank you. So ladies and gentlemen, that will conclude today's third quarter 2017 results announcement call. Thank you for your participation. You may now disconnect.