ALROSA Discusses 2019 Challenges at Analyst Briefing

ALROSA hosted an analyst briefing where the company’s management discussed the key industry challenges faced in 2019 and how it managed to navigate through them, provided an update on most recent financial performance and progress regarding the implementation of its strategic initiatives
 
Managing through the Industry Challenges
 
2019 was a challenging year for diamond industry due to a combination of factors, which resulted in weaker demand for rough diamonds:
Excessive inventory build-up at the beginning of 2019 driven by overoptimistic expectations following high demand in 2017/2018
Weaker demand from India’s midstream due to tightening of borrowing terms for manufactures
Increase in share of online sales disrupting traditional marketing channels and approach to inventory management
 
To address these market challenges, ALROSA introduced a number of initiatives based on “price over the volume” approach and aimed at maximisation of its free cash flow. The company adjusted the minimum allowed contract allocation level, decreasing it from 80% to 55%, adhered to prudent supply side management by reducing production at the highest cost/low margin mines and scaled down its investment program.
 
The diamond industry came out of 2018/2019 crisis year healthier, with balanced stocks, disciplined supply management across the chain, and a more financially sustainable mid-stream segment. However, in the short-term certain headwinds, which are exogenous to the industry such as COVID-19 outbreak, could decelerate demand recovery, which started to materialize in the second half of 2019.
 
The management’s outlook for the diamond industry remains optimistic in the mid- to long-term, which is supported by expanding demand fueled by the expanding middle class, continued growth of disposable income and tightening supply.
 
Overview of FY2019 results
 
Alrosa’s 2019 sales decreased by 12% to 33.4 m cts following the implementation of its ‘price over volume’ approach in sales, while Q4 diamond sales increased by 28% q-o-q to 8.2 m cts as the market was gradually turning back into balance. Revenue from rough and polished diamond sales for FY2019 decreased by 26% to $3,338 m on lower sales volumes and higher demand for smaller stones. 2019 output increased by 5% to 38.5 m cts as the Company was ramping up newly launched facilities, and increasing productivity at existing assets. Net debt to EBITDA ratio was within the target range and stood at 0.7x. EBITDA margin was 45%, which is twice the industry average. The market in 2019 stress-tested the Company’s ability to generate free cash flow in tough market environment, and in 2019 the free cash flow did not fall below $0.7bn.
 
Safety in the workplace remains key priority for ALROSA. Prevention programme launched in 2017/2018 to enhance transparency and disclosure of accidents continues delivering tangible results including significant drop in “serious” accidents in 2019.The management will strive to reduce it further and targets to achieve zero accident rate in the long term.
 
The בompany retains leading positions by water recycling and CO2 emission among metals and mining companies globally and continues to implement its environmental programme aimed at further reduction of carbon footprint. ALROSA plans to keep supporting local communities through charitable and infrastructure development initiatives. According to the study, conducted by PWC in 2019, ALROSA tops the list of the companies in diamond and gold mining industries with the highest share of social investments. In 2019, ALROSA was honoured with Community Stewardship from Diamond Empowerment Fund for its social projects.
 
ALROSA continued implementing its operational efficiency programme and achieved a 6% decrease in production costs in 2019 (in real terms). The number of initiatives surpassed 260 projects (187 in 2018) across the entire production chain with a number of them delivering impressive results including 33% production growth at Nyurba division and 68% increase in capacity of Udachny division. The next step is to replicate and scale up those successful initiatives across other divisions and functions of the Company through the launch of Alrosa Production System in 2019, programme aimed to make transformation initiative systemic.
 
Following the global best practice, ALROSA has also centralised the maintenance and supply management functions and created a shared service center, both of which are expected to deliver tangible financial results in the near term. The management sees strong potential for further efficiency gains that would help reinforce the company’s status of the most profitable player in the industry.
 
The company is launching the Digitalization Programme aiming at unlocking untapped value of its assets through productivity improvements, efficiency growth and enhanced sustainability and safety of the operations. The program is to be launched this year, and aims to cover all operations and functions of the business.
 
ALROSA’s marketing plan involves launch of a number of marketing initiatives in cooperation with jewelry retailers in USA and China, as well as support of the regional sales offices in the key markers, promotion of niche product categories of rough diamonds, along with the promotion of the diamonds polished by ALROSA, and development of the digital initiatives. The Company is currently testing diamond digital twin technology which is anticipated to increase stones turnover and substantially reduce the time and efforts spent on sales sessions. 
 
ALROSA is also participating in a number of marketing initiatives implemented under the auspices of the International Diamond Manufacturers Association (DPA) aimed to maintain and enhance long-term demand for natural diamond jewelry, while also drawing a distinction between the natural and synthetic diamond markets.