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Article Excerpt
OPERATOR: Ladies and gentlemen, thank you for standing by. And welcome to the Alumina Limited 2008 full year's result conference call. At this time, all participants are in a listen-only mode. There will be a presentation, followed by a question and answer session. I would like now -- I would now like to hand the conference over to your speaker today, Mr. John Bevan. Please go ahead, sir.
JOHN BEVAN, CEO, ALUMINA LTD.: Good afternoon, everybody, and welcome to the 2008 full year results for Alumina Limited. With me is Judith Downes, the recently appointed Chief Financial Officer for Alumina Limited who will present the financial results after my brief summary of the result. I will then cover the outlook, going forward.
2008 has been a tough year for the industry. Today we've declared a positive result, despite the turbulence in the market. The underlying earnings for Alumina Limited were AUD241m before the one-off adjustment for project costs related to deferred growth projects that we announced on January 13.
As you know, executing our growth projects has been a critical issue for us. I'm pleased to announce that our major capital projects in Brazil are nearing completion and will come on-stream in mid-2009, in line with our previous advice in terms of timing and in terms of costs.
In the second half of 2008 with the market changing, we moved early and quickly to respond. The focus of the organization has moved to driving operations for cash conservation, strengthening the balance sheet. And this will hold us in good position as the largest low-cost alumina producer, to see through the downturn.
In considering the 2008 result, the Board has decided not to declare a final dividend. This means that the total dividend for 2008 will represent an 82% payout of 2008 earnings, after the payment of a AUD0.12 dividend at the first half. This decision was made in light of the uncertain market conditions. And conserving balance sheet flexibility is very important at this time.
We entered 2009 in a sound position. We strengthened the balance sheet, as a result of strong operational cash flow in 2008 within AWAC, a successful equity raising for Alumina and a convertible bond issue. And today we've announced the renewal of our 2009 debt rollovers.
AWAC is the largest low-cost producer of alumina in the world and we've got flexible operations to deal with any further market volatility. We have moved early, and earlier than many others in the industry to adapt to these new market conditions. And therefore, we think we're well-prepared to deal with the expected volatility of 2009.
I draw your attention to our disclaimer on forward-looking statements included in the presentation. And I'd like now to hand over to Judith to cover the detailed results.
JUDITH DOWNES, CFO, ALUMINA LTD.: Thank you, John. It's a pleasure to be here presenting Alumina's result. I look forward to meeting many of those who are on the phone over the next few days.
I'll focus first on our underlying earnings which, consistent with prior periods, removed the impact of embedded derivatives in some of our long-term energy contracts and the impact of defined benefit schemes from our net profit result.
Our underlying earnings were AUD202m. The AUD39m write-off announced in January is included in our underlying earnings. Our full year results reflect the commodity cycle during 2008.
In the first half, demand was strong across the sector. The strong demand maintained prices for our output, but also pushed up prices of our input, particularly energy costs. As a result, our margins were lower than first half 2007. The strength of the dollar, which averaged [AUD0.92] in the first half, also contributed to margin compression.
Demand for aluminum reduced rapidly during the second half. And while curtailments have been announced towards the end of the year, the rapid reduction in demand and consequent buildup of inventory resulted in a sharp decline in alumina and aluminum prices.
Input costs remained high. And I'll go into that in more detail shortly.
We benefited in the first half from a tax credit. This credit arose after the Australian dollar strengthened and with the decline in the Australian dollar in the second half, is no longer recognized.
Our net profit after tax was AUD168m with a negative impact from AWAC pension liabilities, partially offset by a positive benefit from our embedded derivatives.
A half-on-half analysis of our earnings shows the composition of the change in profit. While price variances were positive in the first half, alumina prices then fell approximately 2% in the second half. Expected volume increases in the second half did not eventuate, due to curtailments late in the year.
The majority of cost increases were incurred in the first half. However, there were some additional increases in energy costs and in caustic costs in the second half. Our energy cost increased over 40% year-on-year, with most of the increases, 24%, occurring in the first half. Caustic costs increased by 15% over the year. Many of these price increases started to reverse very late in the year.
The balance sheet revaluations shown in the chart represent the impact of US dollar denominated receivables in Australia and contract payables in Brazil. Both the Australian dollar and the Brazil real appreciated in the first half and depreciated in the second half, resulting in the losses and gains shown above.
Our US dollar/real options, purchased in late 2008 to manage our exposure to funding requirements for our Brazilian growth projects, amortized partly during the year at a cost of AUD8m. The tax credit mentioned earlier reversed -- was recognized in the first half and then reversed in the second half.
Our input prices adjusted at different frequencies. The impact of changes in oil prices is felt within a quarter, whereas caustic soda generally only re-prices twice a year. Thus we see movements in fuel oil prices quite quickly reflected in our profit and loss, along with movements in exchange rate. However, recent weakening in caustic prices will not impact us in the first half of 2009.
As John mentioned, we've paid out 82% of this year's profits in our interim dividend of AUD0.12 per share. Given the current alumina prices and the volatile market conditions, our focus during 2009 is on cash conservation and no final dividend will be paid.
Our return on equity reflects the dampening effect of funding our investment in Brazil. We increased this investment by $533m during 2008. Return on equity, calculated by removing from equity the invested capital in Brazil, which is not yet earning, was 20%. Earnings from the new mine and expansion in the refinery in Brazil will commence during 2009.
And now just a quick review of our balance sheet activities during 2008. We were pleased to successfully complete both a bond raising and an equity raising during this very turbulent period. The convertible bond was issued in May 2008 at a fixed 2% coupon and matures in 2013.
Our funding activities during the year were focused on strengthening our liquidity and lengthening our maturity profile. The successful equity raising in September was well-supported by eligible institutional shareholders, 92% of whom took up their entitlements. 53% of our retail shareholders also took up their entitlements, which was a pleasing result in the uncertainty in market conditions of late 2008.
The year end Australian dollar/US dollar exchange rate was AUD0.69, compared to AUD0.87 in the prior year. Our borrowings are mainly funded in US dollars. While our debt level from December '07 to December '08 appears very consistent in A dollar terms, in US terms, we reduced the level of our drawn facilities by $110m.
The 2008 balance sheet actively...
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