Good afternoon, ladies and gentlemen, and welcome to the first quarter 2012 results conference call. My name is Maddie, and I will be your coordinator for today's conference. For the duration of the call, you will be on listen only. However, at the end of the presentation, you will have the opportunity to ask questions. If at any time you need assistance, please press star zero on your telephone keypad and you will be connected to an operator. I will now hand you over to Oleg Mukhamedshin, Deputy CEO, to begin today's conference. Thank you.
Thank you, and good morning and good afternoon, ladies and gentlemen. On behalf of RUSAL, I would like to welcome you to our first quarter 2012 results presentation and conference call. I am passing a word to Vladislav Soloviev, RUSAL's First Deputy CEO.
Good morning. Good afternoon. Thank you for joining us for this analyst investor call, and let me share with you our key highlights for the first quarter 2012. In the first quarter, we increased our production physical aluminum sales to 1,009,500 tons with a record high premium of $165 per ton. This was offset by weaker price environment, as you all know. At the same time, aluminum production decreased by 1% versus the previous quarter to 1,049,000 tons, with value-added products contributing up to 37% of total production volumes. The market environment was quite harsh for UC RUSAL in the first three months of 2012, though aluminum premiums remain supported by a tight physical market and the global capacity for tonnages.
At the same time, regional premiums reached their historical highs, being more than $200 per ton in Europe and hitting the $0.10 per pound mark in the United States. We consider global aluminum capacity cuts to be imminent as 25%-30% of the industry is cash negative at the current price levels, and strict cost control measures were in place despite upwards pressure from strong oil prices and the appreciating ruble. We managed to reduce operating expenses by 2% to the previous quarter, despite growing physical aluminum sales, and achieved a 15% reduction of the average weighted power tariff in the Aluminum segment as compared to the same period of the previous year, or 3.4% versus the previous quarter with $0.0312 per kilowatt. As a result, the Aluminum segment cost per ton remained almost flat in the first quarter of 2012 to the fourth quarter of 2011.
Moving on, our debt profile. We fulfilled all debt obligations for 2012 and introduced a non-testing period, providing more flexibility for us. In particular, $630 million were repaid on the PXF and other facilities in the first quarter, leaving us with no short-term debt obligation for the rest of 2012. An agreement was made with lenders on the period during which financial covenants are not applied starting from 1st January 2012 to provide more flexibility within the next 12 months, plus a 12-month recovery period. As always, we keep a special focus on the Chinese aluminum industry. We anticipate China to resume capacity cuts unless the Shanghai Futures Exchange rebound in the second or third quarter of 2012.
This is very well supported by the fact that Chinese smelters have on average been accumulating around $75 per ton losses since October in hope of expansionary policy and Shanghai Exchange rebound. What is also important, the new additions were materially offset by lower capacity utilization. Anyway, we assume net production growth in 2012 will be absorbed by domestic demand with no risk of exports. Finally, we are progressing towards the completion of key growth project in Siberia. As we promised, the construction of Boguchansky Energy and the smelter and Taishet are both on track. Now let me pass on to Mr. Evgeny Kornilov, our CFO, and he will share with you our financial and operational results.
Good afternoon, everybody. I will talk on slide five, which demonstrates our production performance. As you see, our production volumes are basically flat with some decrease in aluminum production, a slight decrease in alumina production, and insignificant increases in bauxite and nepheline production, which has allowed us to improve our self-sufficiency on the raw materials. The volume stood at 1,050,000 tons on aluminum, 2,034,000 tons on alumina. Moving on to slide number six. We have seen one more weak quarter in terms of LME performance, which is of course quite challenging for all aluminum industry. The average LME stood 13% below than the first quarter of the year 2011. As you see, the average LME stood at $2,177 per ton.
In terms of physical sales, you see that our physical sales were 9% higher than the previous quarter, the fourth quarter of 2011, and that is due to the fact that we have shifted some of the volumes from the fourth quarter into the first quarter. So these volumes have been sold in the first quarter 2012. Also, if you look at the product chart, you can see that the increase in the sales volume of aluminum was to some extent offset by a decrease in sales price due to quotation period shift effect. Since our actual sales are calculated not on average LME of the period, but there is a certain shift in our case around 45 days, based on which the sales revenue is calculated. As a result, you see that our revenues have demonstrated 3% growth compared to the fourth quarter of 2011.
Let's move to slide number seven. We clearly see that we have delivered very good performance on the cost side. If you look at the cost as reported by Aluminum segment, you will see that it has been just 0.6%, which is quite a good achievement given the fact that during the same period, oil continued to be very strong. In fact, you can see on the chart below that oil price has improved by 9.5% quarter-on-quarter, and we have quite a lot of raw materials which are linked to oil. At the same time, the ruble has strengthened. You can see that there is a 3.4% strengthening in the ruble in the respective period.
We had these two macroeconomic factors performing against us, but you can see, we'll come to that later on the next page, the major saving item for us was electricity cost, which I'll describe on the next page. If you look at cost of sales, in absolute figures, you need to remember that the volume is 9% higher than the fourth quarter, so therefore the cost of sales in absolute figures in million dollars is respectively higher. EBITDA stood at $237 million with 8% EBITDA margin. Looking at the next slide number eight, you can see on the bottom of the chart that we have seen the fourth consecutive quarter where we have achieved a decrease in the power tariff, and once again, this was achieved in, we are looking now at an average cost of $0.0312 cents to a kilowatt hour that we consume.
Again, it was the fourth quarter in a row due to a number of actions which the company has taken due to favorable performance in the wholesale market as well, and despite strengthening ruble. That was a pretty good thing, which allowed us to offset some other cost increases. As a result, we continue to see ourselves in the second quartile of the cost curve, which is a very good achievement and which allows us also to keep, let's say, our EBITDA at a very commendable level. With this, I would pass the work to Steve Hodgson, our Head of International Sales and Marketing. Steve?
Thanks, Evgeny, and good morning, good afternoon, everyone. Just in addition to Evgeny's commentary on the price, we see in Q1 2012 that the premium margin over the LME has maintained quite a high level of around 7.6%, which continues to reflect strong physical demand in the market in the first quarter, and we'll talk a bit more about that later. Three factors driving much of that physical demand include recoveries in both the U.S.A. and Japanese markets. The Chinese Shanghai Exchange LME arbitrage was open in the first quarter, which attracted metal units into that country. Of course, as you've heard before, the financial deals are still maintaining relatively tight metal supply in the major consuming regions. Europe, despite a lack of consumption growth in the first quarter, accounted for around 50% of our sales on a revenue recognition basis.
We have benefited from closures in the first quarter at Lynemouth in the U.K. and Vlissingen Smelters in the Netherlands. Sales to the U.S.A. remained stable compared to the fourth quarter, and in Asia, there's been a small reduction as we've channeled metal into higher premium markets in the first quarter. A very positive outcome, though, for the first quarter this year has been the bounce back in sales of the higher value products. These now account for around 37% of our total sales and quite a significant part of that $165 per ton premium. We've seen improvements, as I'll mention shortly, in the auto sector globally, packaging in North America and Europe, and building and construction in Asia.
The way that flows through to our product profile, not dissimilar to what you've seen previously, around about 62% of our metal is still sold on a commodity basis and 37%, 38% in the various products that support the consuming sectors. With that, I'll hand back to Evgeny to continue the results discussion.
Yes. Thank you, Steve. I'm now on slide number 10. We're talking about the debt situation. I think it's important to notice that as a result of our successful restructuring effort, which the company has taken in the end of last year, we now see decreased interest costs, which moved from $183 million per quarter in the first quarter of 2011 to $146 million. So it's a 20% improvement. Like Vladislav said earlier, the company has refinanced and repaid $630 million in the first quarter. That includes $500 million, which was refinanced from Sberbank and repaid to PXF. So that was no change in the debt position. On top of that, $130 million were repaid out of operating cash flow to the lender.
The company has decreased the outstanding debt by $130 million, which at this point of time covers all obligations which existed for the company for year 2012. There are no outstanding debt repayment obligations this year for the company. Also, as you know, the company has earlier negotiated a period where financial covenants were not supposed to be tested, and the company has used this option in the first quarter. So right now, starting from January 1st until the end of existing year, the company is not obliged to comply with the covenants. Of course, it was done as a part of the risk management. We understand that we currently face challenging macroeconomic situation, and we expect that such situation might continue for some time.
To avoid unnecessary, let's say, volatility and the pressure on the company, such a mechanism was agreed with the lenders, and right now it's in place and is being used by the company. I'm passing my word back to Steve.
Thanks, Evgeny. What I'd like to do is just take a few moments to look at the macro situation in the market. We estimate global consumption to have increased quarter-on-quarter by approximately 5%. As I've mentioned previously, largely driven by demand in the U.S., which we forecast to have grown by around 7% quarter-on-quarter. Japan growing post tsunami recovery by 8% quarter-on-quarter, and an India growth of 9% quarter-on-quarter. Of course, China remains the dominant driver of demand growth globally as a single region, accounting for around 65% of total new demand in 2012. Europe, on the other hand, has softened quarter-on-quarter. We estimate a contraction in demand of around 4%, although we note that aerospace and packaging are still strong growth segments at around 7% and 2% annually, respectively.
Overall, we're still forecasting a demand growth of around 7% year-on-year, largely driven by transportation globally as well as that continued recovery in Japan. Looking forward, the PMI, Purchasing Managers Index, does suggest a stronger demand than perhaps is implied in the current price. We are looking forward to a rebound in that price in the coming months. I'm now on slide 13. We'll just talk a little bit about inventory levels in the industry, where we've seen total stocks in the LME and producer sites remaining broadly constant quarter-on-quarter. LME stocks today are a shade under 5 million tons, which is about the level that we saw at the end of 2011. What has changed, however, is that in the early part of 2012, the profitability of financing that inventory has improved significantly.
Net of warehousing charges, the profitability is around about 7%. That kind of goes hand in hand with the sharp spike that we've seen so far in the first quarter of canceled warrants. This is largely, we believe, a consequence of metal owners relocating their metal to lower rent locations and thus maximizing their investment yield. Overall, we would say that the quantity of metal tied up in these financial deals on the LMEs remain broadly constant with Q4 at around about 65%, and would forecast that to continue well into 2014 with the current cheap level of financing for that stock. Moving on to slide 14. What we have seen is relatively strong buying activity along the forward curve, and this has lifted the contango spread, which is the forward price, the three-month price compared to the current price to over $40 per ton.
The forward curve is amongst the steepest that we've seen in over two years. That's important for us because it does also create positive conditions for holding metal. It also enables our consumers to compete for metal early, to store that metal in their own facilities. We're seeing that flow through to our business in terms of higher premiums. These premiums are now in nearly all markets at all-time highs with, as Vladislav said, the U.S. at $0.105 per pound currently. Europe is over $200 per ton, and current premiums in Japan are being quoted at around $ 150 - $170 a ton, which is a level that's not been seen before. A lot of competition in the market for available metal units in Asia.
What we're also seeing at the moment in that high premium number is a little bit of concern coming into the markets as to the future viability of the Australasian smelter industry, with various announcements there in the latter part of last year and first part of this year as to studies and curtailments in the wake of the increase in the carbon tax. Just to be clear, Australasia supplies around 50% of non-China Asian demand, so quite a significant development in the first quarter. Lastly for me, slide 15. Just looking at aluminum production cuts that we've seen so far. A feature of Q1 has been the steady release of news of smelter curtailments and shutdowns, largely due to economic factors. Around 1.7 million tons have been announced in Europe and Australasia year to date, with labor-related curtailments also taking place in North America.
That, coupled with a lower rate of operational maintenance has also affected, we believe, the number of cells that are in operation at the smelters that are operating, and that had an impact on utilization rate. We would expect that utilization rate to continue to fall to around 76%-78% as companies choose to operate the existing assets rather than to invest in new cells. We've identified around 300,000 - 600,000 tons of our own capacity that could be permanently withdrawn from the market over the next 12 - 18 months, with a corresponding reduction in alumina requirements as well. With that, I'll hand back now to Oleg Mukhamedshin, who's going to make some comments about China specifically, some near-term growth, project progress, as well as new corporate governance initiatives. Over to you, Oleg.
Thank you, Steve. I'm currently on page number 16, and we would like to say a few words about situation in China and how we see the potential development. First of all, as you know, Chinese smelters have on average, been accumulating losses of around $75 per ton since October 2011. We believe that they will resume production cuts unless Shanghai aluminum price rebounds in the second or third quarter of this year. China's total first quarter production was up 10% year on year to nearly 20 million ton per annum annualized. Outpacing a little bit. High production from newly added capacities was materially offset by lower capacity utilization in Henan, the largest aluminum producing province, where the output rate was decreased by 300 kilotons per annum instead of the announced 180 kilotons per annum. Also, it was an accident in China Hongqiao Group.
It's also important to learn that it resulted in stoppage of 240,000 tons per annum of total 400,000 tons capacity for at least two, three months. Also raising concerns over reliability of China's new technologies and production safety standards. In April, the Ministry of Industry ruled on forced closure of another 270,000 tons of capacities during 2012 as part of its 800,000 tons overall closure target for the 2012 five-year plan. Situation with their bauxite supply is also important. Indonesian bauxite export tariff means additional pressure on Chinese smelting cost up to $33-$35 per ton of aluminum, in case of 20% export tariff, which was announced recently. You can also have a look at the industry cost curve by country, where China is one of the most non-competitive aluminum producers according to Brook Hunt.
Having said that, we expect net capacity additions in 2012 to be likely fully absorbed by domestic demand with no risk of exports. RUSAL's growth project on track. You can see from page 18 the recent picture of the BEMO hydropower plant construction site, where we continue to make excellent progress. In 2012, we have completed the assembly of the main hydropower equipment for units one and two of the power plant. We closed three bottom gates at water discharge number one in April and May and started to fill the water reservoir. Also, we intend to launch the first three turbines this year, as mentioned before. A few changes on the corporate governance front, which is page number 20. First of all, one of the En+ representatives, Dmitry Troshenkov, resigned, so he is replaced by Dmitry Yudin, also representing En+.
RUSAL is steadily moving towards the targeted increase of the number of independent members of the Board. A new independent non-executive director recommended by the Board last Friday, Matthias Warnig, is expected to be elected at the AGM on June 15th, which will raise the number of finance to five in total. Mr. Warnig has been the Managing Director of Nord Stream since 2006. He's Chairman of the Board of Directors of Transneft since June 2011, and he also an independent member of Supervisory Council of VTB Bank since 2007. He's quite known by the investor community as an independent director representing a number of Russian big companies, as I mentioned. From early 90s to 2006, he held different positions at Dresdner Bank, including President, Chairman of the Board in Russian Chief Coordinator.
We expect Mr. Warnig to replace Mr. Tikhonov, who actually sent us a letter to resign from the Board Member position starting from June 15th. Thank you very much for your attention, and we are ready to take your questions.
Thank you. Ladies and gentlemen, if you would like to ask a question, please press star one on your telephone keypad. If you change your mind and wish to withdraw your question, please press star one again. You will be advised when to ask your question. Our first question comes from the line of Alexander Levinsky from Troika Dialog. Please go ahead with your question.
Hello, it's Mikhail Stiskin from Troika. I have two questions, if I may. What's your outlook for physical premiums in the next couple of quarters? Do you think premiums will be sustained at these levels? Second, what is the expected CapEx of the company in 2012, excluding BEMO Taishet? Do you actually have any plans to curtail capital spending given weak market conditions? Thank you.
I would like Steve Hodgson to address your first question.
Regarding premiums, given that we're already well into the second quarter, I can certainly say that premiums have continued to rise through this quarter from quarter one, and we see no conditions emerging on the market that would cause us to believe that premiums will fall going into Q3. So the outlook from our side is that premiums will maintain the current levels, if not a little higher.
Thank you, Steve. On CapEx, maybe Evgeny can address the question.
Yes. Mikhail, I would like to remind that we do not provide CapEx forecast for the full year, but I think what is important to understand that if you look at the CapEx, which we have reported in Q1, it is very much optimized to the current macroeconomic environment. So we are mostly focusing our CapEx on maintaining our existing levels of production. So it includes port rebuilds and includes unnecessary CapEx to maintain the existing equipment in a proper shape. As you can see, our development CapEx is pretty much trimmed down to only one project, Taishet, so we do not actually run any big development projects right now. So it is very much, let us say, minimum level of CapEx, which is in our view, required to maintain existing production levels.
Assuming for a quarter where LME is as weak, that is the right level. Of course, if we look forward and we would expect LME to start growing, it means company will generate more cash and would be considering to relaunch some of the growth projects which we have in the pipeline. But I think it very much will depend on how quickly the recovery in LME price would come.
Thanks.
Understood. Thank you.
Thank you. Our next question comes from the line of Andrew Jones from Renaissance Capital. Please go ahead with your question.
Hi, gents. A few questions. Just firstly on the planned closures, which plants are sitting at the top end of your internal cost curve at the moment, and what sort of cash costs do you see of those in the first quarter? If these were to close, what would your estimated effect be on EBITDA? Secondly, could you just outline where you see your power costs going in the short and medium term? Is there going to be an effect of this MRSK FSK merger? What effect might that have on some of your power costs? Also with grid tariffs due to jump up by 14%-15% or so at the half year stage, is there anything you can do to mitigate these rises?
Given the current low levels of profitability, is there a chance that the government may assist you in some way with regard to the long-term power contracts and the taxes you pay on those? Could you comment on that, please? Thank you.
Thank you, Andrew. I think I will comment on this. Let's start from the cost curve and our smelters, which are sitting on the top of that. It's still Bogoslovsky Aluminium Smelter and the Volkhov. It's two smelters in our Division West. As you remember, we tried to close one of them in December last year, but unfortunately, we didn't manage that at that time, and all this time, we're trying to find a solution with the generation company, KES, but unfortunately, still the solution is not in place. That's why I think we could come back to this discussion with the government very soon. Good news, but the effect on our profitability is not big. It's maximum, I would say maybe $5 million, $6 million per quarter. Because we do not produce much on these smelters.
It's 500,000 tons, which is a good news. We'll try to come back to this question in May, maybe early June, and I hope we can find a solution. Solution could be in a significant reduction in tariffs, or solution could be in the total closures of these insufficient smelters. Also, we had some step in our favor in the first quarter for both of these smelters. For the Bogoslovsky Aluminium Smelter, we received the reduction in transmission tariffs. They switched the MRSK tariff to FSK, which reduced our losses, help us. It's still negative, and we should manage this situation rather than closure or find another solution along with the tariff. It's not big. As for the merger, FSK and MRSK, we do not expect any input from us because we're working on the FSK tariffs.
That's why it just helps us to avoid any new discussions about why we should pay MRSK rather than FSK. We're working on other FSK tariffs. That's why we do not see any negative input from this. Power tariff in the second quarter, difficult to say now, but I hope it will be more or less flat. Maybe some small increase, but still, I hope it will be below their fourth quarter 2011 level, because the tariff is still good on the market now. Difficult to say about third quarter and the fourth quarter, because starting from 1st of July, definitely the government should change something, and I think we will see some increase. I can't say which one, but some increase will be. Second quarter, I think, will be more or less flat, maybe slightly higher than first, but below the fourth. What else?
I think I covered all your questions. Maybe I forgot something.
Yeah, that's great. Thank you.
Thank you. We have no further questions coming through, so another reminder, ladies and gentlemen, if you do wish to ask a question, please press star one on your telephone keypad now. Our next question comes from the line of Dennis S. from Prosperity. Please go ahead with your question.
Hello, gentlemen. This is Dennis from Prosperity Capital. Can you please explain this difference between your average realized aluminum price and LME? Basically, it does not fit into the premium you have reported of $165. How basically this premium is coming? My calculation shows that the actual premium, which is basically my calculation as your average realized price minus LME, is just little above $100.
It is Evgeny Kornilov here. I think what is important to pick, to understand how the realized price is calculated, it is
Of course, it's a combination of LME plus premium. So premium that we report is actual premium for the deals which we make in a given quarter. You normally should see them in realized price, in the same quarter. in respect of LME, there is a practice, which is not only common for us, but general practice in the market, to use the QP over a certain period in the history. In a typical contract, you would sell metal, let's say, for example, in the month of May, based on average of April. That's how majority of the deals in the international market have done.
So you take a QP over previous months, and depending on the geographical structure of our sales, for example, if you look for sales in States and you sell with a certain delay, therefore, when we access more remote markets, the QP becomes longer. So in our specific case, average QP is delayed approximately one and a half months from the LME, which you see average reported by the exchange. I hope it's clear.
Yeah, it helps. Thanks again. Another question is also about your alumina sales price. It seems from the numbers that the external price you were getting from your alumina was actually close to the spot price you report in the presentation. But the overall Alumina segment price, which means that internal price from Alumina segment to Aluminum segment was significantly lower than market spot price. How to explain this?
Well, I'm a bit surprised. I think in the current quarter, we've seen pretty low alumina price in the market.
Yeah.
So, I think that's pretty much how our contracts are priced. There are some long-term arrangements, but others are linked to the market. So you're right in this assumption.
Yeah.
As for the internal prices, it should be something 15% of LME's internal price, that's why.
Yeah. So it could stand-
Be more or less the same, maybe slightly lower. Mm-hmm. But let me check this. I would be surprised to see significant fluctuation. It might be because also we include sales of bauxite in the segment. Maybe that's why it starts to look irregular. Okay? We will check.
Yeah. Maybe. All right. Thank you.
Thank you. Our next question comes from the line of Erik Danemar from Deutsche Bank. Please go ahead with your question.
Yes. Good afternoon, gentlemen. I'd just like to ask you on the rather meaningful growth in alumina costs in your cost of sales, if you could provide some color on that. What were the main drivers of those costs, if there were any of the interruptions you saw in Guinea that drove that, and it could be considered partly temporary or if it's more a base effect in your cost structure? Second question, just in terms of net debt and over-covenant EBITDA, you usually provide that measure. You did not this time. If you can provide that including this quarter. For clarity, just when is your next debt repayment and what size will that be as you move into 2013? Thank you very much.
Yes. Your question in respect to alumina production cost, it's a fair question. Unfortunately, we see that the situation in alumina production cost has been negative for us, and I'm sure not only for us but for the whole industry, because it's defined to a big extent by three factors. Cost of oil, because mazut, as a derivative of oil used as a major energy source, and we have seen pretty strong performance of oil in the first quarter. As a result, mazut prices continue to be high and even growing to some extent. Secondly, caustic soda was quite high. We still expect to see the positive evolution, i.e. decrease in the cost of caustic soda. Unfortunately, it doesn't happen due to the situation in the market. The third element, currencies.
So lots of countries where alumina is produced, they are operating in currencies different from USD, and we have seen specifically Russia, for example, and some other countries, we have seen strengthening of local currencies, which created certain pressure on the cost. In terms of forecast, I think it is important, the biggest factor which would drive the situation in the direction of the decrease of the production cost would be clearly the oil price evolution. For example, if you look at the forward curve of mazut, you can see that this curve is in backwardation. So it generally proves that the market believes the cost of mazut should be going down, which should allow us decrease in the production cost looking forward. In terms of debt, yes, it is an oversight. We should have included the figure.
It stood at 3.76x, the net debt to EBITDA, in the way it is defined in our credit documentation. In terms of further repayment schedule, I think you can refer to our reports. It is closed there, so it stands at around $250 million per quarter, starting year 2015.
Thank you very much.
Thank you. We have no further questions coming through, so I will hand you back to your host, Oleg Mukhamedshin, to conclude this conference. Thank you.
Thank you very much for your attention, for your questions, and the management is ready to address any further questions you might have, so please contact us directly. Thank you very much again.
Thank you, ladies and gentlemen, for joining today's conference. You may now replace your handsets. Thank you.