Ladies and gentlemen, thank you for standing by. Welcome to the UC RUSAL first quarter 2014 results announcement conference call on the 14th of May, 2014. Throughout today's presentation, all participants will be in a listen-only mode. After the presentation, there will be an opportunity to ask questions. If any participant has difficulty hearing the presentation, please press the star followed by the zero on your telephone for operator assistance. I now hand the conference over to Oleg Mukhamedshin, please go ahead, sir.
Thank you very much. Good morning, ladies and gentlemen, and good afternoon. This is Oleg Mukhamedshin from UC RUSAL. I would like to start our call and present RUSAL's first quarter results. I am passing a word to Mr. Vladislav Soloviev, our First Deputy CEO.
Thank you, Oleg. Good morning, good afternoon, ladies and gentlemen. I will start with the highlights as usual, and then my colleagues will follow with some details of our first quarter 2014 results. First of all, I would like to say within the reporting quarter, we noticed positive trend in market conditions with realized premium increasing to the record high $336 per ton versus $277 per ton in fourth quarter last year. As compared to first quarter 2013, the premiums went up by more than 27%, and as I said, this is a record high level to date. Share of the value-added products increased to 44% of total aluminum production for the first quarter, in comparison with 43% for the last quarter or with 40% of the first quarter of the previous year. That is why you see what we are still rising in the value-added products mix.
Primary aluminum production in the first quarter of 2014 decreased to 883,000 tons by 2.3% or by 21,000 tons, as compared to 904,000 tons in the last quarter of the preceding year. By 12.3% or by 124,000 tons as compared to 1,007,000 tons in the first quarter of 2013, reflecting the implementation of capacity curtailments program and was mostly attributable to the multiple production at certain least efficient smelters located in European part of Russia and Urals. Due to reduction of inefficient capacities, RUSAL reduced its aluminum segment cash cost in the first quarter to $1,741 per ton, the lowest level since 2010. Cost of sales decreased by 20% to $1,792 per ton in first quarter 2014, versus first quarter 2013, following lower energy alumina cost along with Russian ruble depreciation.
Energy expenses reduced further by 5% quarter-by-quarter and by 28% year-on-year, mainly driven by efficiency improvement and reduction of power tariff to $0.029 per kilowatt. Other operating expenses down by 18% year-to-year due to lower administrative and distribution expenses. At the same time, average aluminum transportation tariff decreased by 4.4% quarter-by-quarter to $56.8 per ton. As a result, the company managed to maintain a robust aluminum segment EBITDA margin to 13.2% for first quarter 2014, in line with the industry's best producers and first quarter 2013 level as usual. Speaking about refinancing program, we can say the negotiation with the lenders are at the final stage, and the company had agreed to refinancing of almost 70% of its debt. Negotiations on the ECA loans are at the final stage, as I said.
Now let me pass to Oleg Mukhamedshin, our Deputy CEO, and he will share with you our operational performance results.
Thank you, Vladislav. We are currently on page number five. As you can see, our production of aluminum has been reduced for the fifth consecutive quarter under the inefficient capacity curtailment program in order to cut costs and improve our margins. As Vladislav just mentioned, if we compare the first quarter of 2014 and the previous year, a significant reduction of around 125,000 tons can be observed. Production of value-added products, on the other hand, is growing and the share of overall aluminum output, a record 44%, was reached in the first quarter. We reserve the intention to increase the production share of the Siberian region as one of the best positioned for aluminum production worldwide, to our opinion. The region's share grew nearly 10 percentage points in the first quarter as compared to the same period last year.
Before speaking about the market, I would like to give the floor to Alexandra Bouriko, Chief Financial Officer, who will speak about our financial performance.
Thank you, Oleg. We are now on slide number six where you can see the EBITDA bridge. As we have already stated, the EBITDA and the profit continued to be pressured by a low aluminum price. However, that was partially offset by the depreciation of Russian national currency, as well as higher sales premium and better sales structure with higher share of value-added products. In addition to that, the company's efforts to mothball inefficient capacity at its smelters in the European part of Russia, along with the record high realized premiums, support the EBITDA growth in first quarter 2014 compared to the last quarter of the previous year. Moving to slide number seven. As was already noted, in the past quarter, the company managed to decrease the aluminum segment cash cost per ton even further compared to the last quarter of previous year, to the lowest level since 2010.
The cash cost per ton decreased by almost 7% and it's now down to $1,741 per ton. Further measures to enhance cash cost optimization, along with strong ruble depreciation against U.S. dollar, resulted in this cost reduction, and allows the company to maintain its competitive position among its key peers. As a result of these measures, we hold a stable position global cash cost curve, sitting now in the middle of the second quartile next to Rio Tinto and Norsk Hydro. We believe that our continuous cost-cutting measures yield improving production efficiency. Now I would like to hand over to Roman Andryushin, Director of Russia and CIS Sales, who will speak about the market environment.
Thank you, Sasha. Hello, everyone. Let me start from page number nine and our view on the global market, which is, well mentioned, performing pretty well. We believe and see strong growth through the next five years, at least towards 2018. This year, remarkably grew by 6% at least, and probably will reach even higher level of growth looking forward to the second half of the year. The best performance traditionally stays in the Asian region, in China, just to confirm their demand growth up to 10% with a recovery in Europe, which slowly coming back to the market and to the supply growth with the most and the best performing countries, Germany and Turkey. As well as U.K. performing also good and we've seen first quarter in which sectors U.K. supply and demand is on the health side.
Next slide, number 10, shows our view on the European market. As mentioned, it's quite a recovering market right now. The European growth showing 2.5% up-to-date growth for first quarter. And we think it will continue the remaining of the year with the highest performance Germany with 2.6% growth and Turkey more than 3.5% growth according to recovery European manufacturer sector extending almost already nine months. And PMI also performing very well on the quarterly basis despite of some slowness in the winter months, February. As an average for first quarter, it's still 53.4% on the positive side. Industrial output in Eurozone increased by 1.7% and the strongest economy, Germany, reported 3.4% rise February after the even higher jump, more than 4% in the previous month. By and large, Germany together with Turkey and the U.K. are the drivers of the European recovery.
We believe that production sector will continue to perform very well. The most driving sector, automotive sector, will recover at the highest rate, increasing by still one digit, but closer to 9%, 8% for the remaining of the year. Germany, of course, performing probably in two digits, closer to 11%, 12% of growth coming quarters, the same as it was at first quarter. Next slide is about the U.S. market. It started recovering even earlier than European and Asian regions, as we remember last year. Despite the severe weather conditions in first quarter, we see and just to confirm, pretty healthy demand in this region with a 5.3% increase in first quarter versus previous year first quarter. That is extremely good results for the U.S. sector with annual growth last year, as we remember, much lower. This year may be remarkably high.
Even the previous forecast with 2%, 3% of American growth may reach a higher level, closer to 4.5%, 5%. Despite the slowness in the U.S. housing starts, still performing pretty well on the up-to-date basis. We may say that even after slowdown in first months, after March, data is still on track of recovery and it is growing versus first quarter and previous year as well. Automotive sector is performing extremely good. On the annual basis, we may restate that first quarter shows a higher number of automobiles produced than the previous year.
It is about 16.4 million cars which may be produced in the U.S. and which the U.S. production and most beneficial sectors within the automotive sales and production, of course, it is trucks and minivan sales, which is performing extremely good right now in the U.S. together with the economical recovery and strong growth in the small and average business sector of this country. Next slide is about Asia. Again, we are strongly believer in ASEAN countries and South Pacific region, where we sell and then to which is our strategic region of interest. Japan is firm with economical growth and demand coming up to the level which we have seen before crisis and then [helmet doubt] before in the previous years. ASEAN countries is also growing pretty high, in the higher range than Japan. Automotive production is at the record levels as well.
Due to that increase, we may reconfirm that supply and consumption of foundry alloys and automotive-oriented aluminum production increased in this region. We believe it will continue towards next quarters. If we go to the global balance and slide number 15 in our presentation, we see continuous improvement on the global balance side and ex-China aluminum balance getting firmer. We confirm it currently as well as we already mentioned and made statements in our previous reports. Up to date, annual deficit in this year estimated already more than 270,000 tons. My colleagues will continue with this subject in further reports. It will not stay the same level, the deficit ex-China deficit will go up. Since 2012, around 5% capacity was shuttered down and curtailed.
This number will be growing to be scrutinized the demand side and the economic of the supply in all growing regions. At the same time, ex-China capacity utilization rate fallen by 75%. Again, comes both due to the slowdown in the production on the production side and curtailments in many regions, as well as still low LME price, which does not give support to the capacity production expansion. Next slide is about premiums and everything that touch economic of sales. Again, average LME price during first quarter was not significantly changed from previous low levels. But even though premium was not captured, the gap, the drop in price from fourth quarter. If you take own price for first quarter, it was lower than fourth quarter previous year.
The only good signs we see right now, probably in April, with a coming up the level of 1,750 hundreds price and still strong premiums in all regions. It supports by still healthy contango, which provides quite enough grounds for financial deals altogether with the tightening of physical market and commodity market due to the increasing of overall global consumption and alloys supply to the physical consumers and regional markets. That is all in all from my side, and with these words, I am passing back to Denis Nushtaev, Head of Research, who will give you a brief update to Chinese aluminum market sector overview. Thank you.
Okay. Thank you, Roman. Just very brief discussion about situation in China. Situation in Chinese aluminum market still remains tough, but we see some signs of improvement, especially in March and April, based on preliminary data. Despite 10% growth consumption in the first quarter of this year, steel production growth was exceeding 12.8%, resulting some metal surplus in the market. This is despite production cuts of around 1.4 million tons. By end of this quarter, steel net operating capacity is increasing and grew by a net 769,000 tons. This was mainly in the cheap cost producing provinces, mainly in Xinjiang. By this capacity utilization rate in China, smelter still remains pretty high at level of 85% versus rest of the world at 75%. These actual factors on the next slide. These factors led to domestic aluminum stocks rise and sharp decline in domestic aluminum price.
It was down by 27%. The low aluminum price made around 57% of China's aluminum capacity unprofitable, underwater. This actually made many producers to announce production cuts, especially state-owned companies. We know as for now, around 1.4 million tons of tap out production was cut, and we are expecting around 2 million tons of Chinese aluminum production to be cut this year. On the next slide, as I mentioned before, we have already seen many positive signs of Chinese aluminum market development, which was a result of production cuts and measures taken by the central government to tackle this overcapacity. If you look at this slide, Chinese production start declining as well as utilization rate declined from 88% in January to 84% in March. This is a very positive sign.
Domestic market turned into deficit in March after surplus in January, February, which is also a seasonality factor. This actual factor supporting strong recovery in domestic aluminum price in April, May, and declined domestic aluminum stocks. We actually expect this trend to continue in the second quarter of this year and to be much stronger translated in the second half of this year. Overall, we expect Chinese aluminum market to be balanced this year. Now I'm passing back to Oleg Mukhamedshin.
Thank you, Denis, and thank you to all the management team for the presentation. We are now opening the floor to your questions. Please introduce yourself, and we're happy to start the Q&A session.
Thank you, sir. If any participant would like to ask a question, please press the star followed by the one on your telephone. If you wish to cancel this request, please press the star followed by the two. Your questions will be polled in the order they are received. The first question comes from Dmitriy Kolomytsyn from Morgan Stanley. Please go ahead.
Yes. Hi. Thank you very much for the opportunity to ask the questions. I have three questions. First, could you tell us how many people do you currently employ and how many people, for example, you employed in January 2013? I would just like to see the dynamics, how many people you were able to cut. The second question that I'd like to ask is regarding your updated sensitivity to ruble dollar. I know that I asked this question last time, but I'd just like to see whether you have an updated number considering the measures that you've implemented in the first quarter and the cost-cutting initiatives that you did. Also, I would like to ask how sustainable is your cash cost of $1,741? Can we expect the same level in the second quarter, or is it going to be lower?
Assuming obviously that ruble average is the same RUB 35 per dollar in the second quarter. The final question that I have for now is, would you be able to provide the latest information on your BEMO smelter? How much do you plan to produce, how much aluminum you plan to produce this year, and how much you plan to produce next year? Whether you plan to proceed with the second stage. Thank you.
Dmitriy, thank you so much. I think we can start with Alexandra Bouriko.
Okay. Dmitriy, the first question with regards to our average headcount. The current average headcount is just over 61,000 people, and that is approximately 12% reduction with the average before we started the production curtailment program. This is the level that we expect to sustain in the foreseeable future. The second question on the sensitivity to ruble dollar exchange rate. I think during our previous conference, we estimated that our reduction due to depreciation of Russian ruble should amount to approximately 5%-6%. As you can see, we've achieved an economy compared to the fourth quarter of 6.6%. That was just actually slightly better than our estimate. We expect to sustain this level of cash cost, obviously, assuming that the exchange rate will average at the same level as for the first quarter. That was just below RUB 36 per dollar.
The sensitivity, the impact on EBITDA annualized is approximately just over $100 million if you annualize the impact of depreciation of Russian ruble that we've seen in the first quarter.
Can I build?
Okay. Yeah. I already said.
Thank you, Alexandra. Talking about BEMO, I think we have no change of our plans so far. We expect to start production at BEMO smelter in the third or fourth quarter of this year. It will be the first phase of the project, which means that BEMO smelter production will reach 147,000 tons by the end of 2015. The overall plans for RUSAL can be announced a bit later. As you know, Taishet project is still on hold, so we do not expect any increase of production this year. Also next year should be more or less in line with 2014. Thank you.
Okay. Thank you very much.
Thank you. The next question comes from Sergey Donskoy from Societe Generale. Please go ahead.
Hi, everyone. Thank you for this presentation. I have three questions. First of all, during the previous conference call, you provided CapEx guidance for the year at around $600 million. Do you still think this is the correct number given the ruble devaluation and other factors? Second, could you provide us the average power tariff for your Siberian plants which was in Q1 and the average for the last year? Finally, speaking of the Siberian smelters, some of them are supplied by power by affiliated parties under long-term contracts with tariffs linked to LME aluminum prices, which are becoming increasingly irrelevant as a market indicator, as we know. Do you have any ideas of, for instance, replacing these agreements by new ones where contracts could be linked to some other price indicators, for instance, all-in price or something like that? Thank you.
Okay. Thank you. We should start addressing your first and second question. Alexandra, please go ahead.
Mm-hmm. Yeah. With the overall investment budget standing at approximately $600 million, we do not expect any principle changes, but you're right that it is sensitive partially to Russian ruble. If the ruble stays at the same level as we've seen during the first quarter, we will probably realize some savings. I would estimate 5%-10% of the overall amount of the investment program. The next one on the power tariff. In the first quarter of 2014, we reduced the average tariff further to just under $0.03 per kilowatt, so approximately $0.029 per kilowatt hour. That is the result of also the ruble depreciation. Finally, can you repeat your last question, please?
Well, first, if possible could you also provide the average power tariff for 2013 for the Siberian operations? My last question was about the long-term power supply contracts that you have with related parties. As far as I remember, these contracts and their tariffs are linked to LME aluminum prices which are becoming rather irrelevant given the decoupling of the all-in price and LME, and with premiums, physical premiums playing an increasingly prominent role. My question is, given all this, do you think about amending those contracts and, for instance, changing the way how those tariffs are set with LME prices being replaced by some other price indicators?
Okay. The first sub-question on the average power tariff for 2013 for the company overall was $0.037 per kilowatt hour. For Siberian smelters separated out of that amount, it would be slightly below, but just over $0.03 per kilowatt hour. We see a reduction in 2014. As for our long-term contracts, at this point in time, we have no intention to change to all-in price or any other changes. At this moment we are going to stick with what we have.
Thank you. Next question, please.
Thank you. The next question comes from Oleg Petropavlovsky from BCS. Please go ahead.
Good day, gentlemen. Thank you for your presentation. I have a couple of questions. First of all, in the beginning of April, you signed a contract with Renaissance, which should evaluate and sell your non-core assets. Could you please elaborate on this? Can we have names of these assets? My second question is about your expectations on the second quarter of 2014. I know that you do not give any guidance, but should we expect any improvement? Maybe you can, a little bit, talk about this. What should we see in the second quarter?
Thank you for your questions. I will address the first one. RUSAL is constantly looking at the portfolio of our assets, and we are always trying to optimize it, so if there is a possibility or a good reason to sell any of our non-core assets, we can obviously consider it. RUSAL uses a number of financial advisors who are working with us on certain projects, including potential disposals, and RenCap is just one of them. Talking about potential improvements in the second half of 2014, as you rightly mentioned, we do not provide any guidance. If you look at the market section of our quarter result presentation, which was presented by Roman Andryushin, you can see the view of the management about potential improvements on the aluminum market overall.
I think the expected deficit of 1.4 million tons ex-China is quite a positive signal for the market, as well as the expected curtailments and further production cuts in China itself. We expect Chinese market, as already mentioned by Denis, being balanced. That is the view.
Thank you. You cannot tell us what you are going to sell, what you would like to sell?
Once we have any deals approved by the board, it will be obviously announced. You can guess what kind of non-core assets RUSAL owns among its asset portfolio. Obviously, the principal aluminum smelters in Siberia and our largest alumina refineries we consider as a core business, so all the remaining assets theoretically can be considered as non-core or potential assets for disposal. Thank you. Next question, please.
Thank you. As a reminder, if you would like to ask a question, please press the star followed by the one on your telephone. The next question comes from Barry Ehrlich from Citi. Please go ahead.
Yes, hello. What is your view on the likelihood
Hello?
Yes, hello. Can you hear me?
Yes, go ahead.
What is your view on the likelihood of further measures to deregulate the Siberian electricity market? If you can give us some idea what you might expect in terms of timing, measures, and impact, if you have any idea. Thank you.
Okay, thank you for your question. As you may have heard, that effective from 1st of May, we actually had some improvements in that the tariffs for hydropower stations are no longer applicable for 65% of volumes sold by Siberian hydropower stations. We are currently in discussions with our counterparties as to what volumes we will be able to purchase under direct contract. That should have a positive impact on our overall electricity cost, starting from May 2014, as I said.
Do you expect what percentage of your electricity purchases you expect might be converted to deregulated prices?
It is too early to say at this point in time. We are currently, as I said, in discussions with our counterparties.
Okay, thank you.
Thank you. The next question is a follow-up question from Dmitriy Kolomytsyn from Morgan Stanley. Please go ahead.
Yes, hi. I have another question for you. Could you tell us what is the latest update regarding the aluminum fund in Russia? Has there been any progress in terms of creating this fund? Also, the other question that I have is, can you update us on your capacity closure program and are there any plans that you can actually shut down in Russia permanently, dismantle, I mean? And the last question that I have is, can you tell us whether there is any impact from the Indonesian disruptions that you have seen and whether there has been any impact on either bauxite or alumina prices? Thank you.
Thank you, Dmitriy. Quite comprehensive questions as usual. Talking about aluminum fund, as we reported before, this idea is actively under discussion with relevant government authorities in Russia. The idea was basically supported by the government. As usual, the key question is the source of financing, and this currently is a topic for further consideration. On the Indonesian raw material ban, I think the key industry who is benefiting is the nickel industry. As you can see, the price of nickel has reached quite a high level since the reported ban of nickel export from Indonesia. On the bauxite market, we expect we can see certain changes in the second half of this year when the stocks created by Chinese aluminum producers will go. It is still about six to eight months of production is available.
But we think that Chinese producers are pretty much affected by the Indonesian raw material export ban already, and we can see the increased activity of Chinese players in other markets, including Africa, Latin America, et cetera. Our view is that the ban will be sustainable. The second question was about the potential production cuts. I am giving the floor to Alexandra.
Thank you. In terms of the production cuts, as you know, we have cut just over 640,000 tons of capacity. Approximately half of that we have already seen as a reduction to our production in 2013, and another 300,000 tons we will see in 2014. We do not expect any further shutdowns or mothballing of any of our production facilities, since they are all operating at a positive margin. As far as dismantling goes, certain separate production lines will be dismantled and sold as basically stock, but no significant plans for overall dismantling of facilities.
Okay. Thank you very much.
Thank you. The next question is a follow-up question from Oleg Petropavlovsky from BCS. Please go ahead.
Hi again. One more question from me. Regarding this situation in Ukraine, do you expect or do you see any problems with Nikolaev Alumina Plant, and what are your expectations and what is current capacity utilization rate at it?
Well, thank you for your question. Nikolaev Refinery is running at 100% of capacity, and we do not have any interruptions of either bauxite supply or gas supply to the refinery. Obviously the exchange rate of hryvnia versus U.S. dollar has a negative impact on the price. Sorry, has a positive impact on the cost of production. At the same time, increase of gas price in Ukraine has a negative impact. I think both impacts are more or less in balance. But politically-wise, we do not see any risks of interruption of Nikolaev Refinery.
Thank you.
Thank you. There appear to be no further questions. Please continue.
There are no more questions. We would like to close the line. Thank you for joining us today for this call, and our IR team are available for any follow-up questions at your convenience. Thank you so much.
Thank you. This concludes the UC RUSAL first quarter 2014 results announcement conference call. Thank you for participating. You may now disconnect.