ALROSA Reports Q2 2019 IFRS Financial Results Amidst Evolving Diamond Market Dynamics
ALROSA, the world’s leading diamond mining company, today announced its International Financial Reporting Standards (IFRS) financial results for the second quarter of 2019. The report reveals a period characterized by notable shifts in financial performance, largely influenced by a challenging global diamond market environment. While the company demonstrated resilience in certain operational aspects, key financial indicators experienced significant year-over-year and quarter-over-quarter declines, reflecting broader industry headwinds.
Key Financial Highlights from Q2 2019
The second quarter of 2019 presented a complex financial landscape for ALROSA. Several core metrics indicated a contraction compared to both the previous quarter and the same period in 2018. These declines underscore the pressures faced by the diamond industry globally, impacting sales volumes, revenue generation, and overall profitability.
- Revenue Decline: In Q2 2019, revenue experienced a 19% quarter-on-quarter (q-o-q) decrease, settling at RUB 57 billion. This significant drop was primarily driven by a 22% q-o-q decline in diamond sales volumes. On a year-over-year (y-o-y) basis, revenue fell by 21%, a consequence of an 8% y-o-y reduction in sales volumes and an unfavorable shift in the sales mix.
- EBITDA Performance: Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) for Q2 2019 stood at RUB 25 billion. This represented a 20% q-o-q decline and a substantial 39% y-o-y decrease, directly correlating with the lower top-line revenue performance.
- EBITDA Margin Stability: Despite the decrease in absolute EBITDA, the EBITDA margin remained stable quarter-on-quarter at 44%. This indicates a consistent level of operational efficiency relative to revenue, even in a contracting market.
- Free Cash Flow Contraction: Free Cash Flow (FCF) in Q2 2019 dramatically reduced to RUB 2.4 billion, a sharp contrast to RUB 26 billion recorded in Q1 2019. This contraction was attributed to a combination of factors including a decline in operating cash flow, a seasonal increase in capital expenditures (capex), and an expansion in working capital requirements.
- Net Profit Reduction: Net profit saw a 44% q-o-q decrease, amounting to RUB 13 billion. The primary drivers for this reduction were the lower revenue figures and a high base effect from one-off foreign exchange (FX) gains recorded in Q1. Year-over-year, net profit declined by 47%, stemming from decreased revenue and a significant 13 percentage point (pp) reduction in margins.
- Healthy Leverage Ratio: ALROSA maintained a low leverage profile, with the Net Debt / EBITDA ratio holding steady at 0.3x at the end of Q2 2019, consistent with the previous quarter. This robust financial position provides flexibility for strategic decisions, including dividend payouts.
- 2019 Guidance Update: The company revised its full-year 2019 guidance, reflecting adjustments to market conditions and operational forecasts:
- Production is now expected to reach 38.5 million carats, an upward revision from the previously estimated 38 million carats.
- Sales volumes are projected to be between 32-33 million carats.
- Capital expenditures (Capex) have been revised downwards to RUB 23.4 billion, from an earlier estimate of approximately RUB 28 billion.
Detailed Financial Performance Overview (RUB bn)
The table below provides a comprehensive snapshot of ALROSA’s financial metrics for Q2 2019, alongside comparative data from previous periods. This granular view helps in understanding the magnitude and direction of the changes across key performance indicators.
| RUB bn | Q2 2019 | Q1 2019 | q-o-q | Q2 2018 | y-o-y | 6M 2019 | 6M 2018 | y-o-y |
|---|---|---|---|---|---|---|---|---|
| Diamond sales, million carats, incl. | 8.3 | 10.6 | (22%) | 9.0 | (8%) | 18.9 | 22.4 | (16%) |
| gem-quality | 6.0 | 7.9 | (24%) | 6.3 | (5%) | 13.9 | 16.4 | (15%) |
| industrial | 2.3 | 2.7 | (15%) | 2.7 | (15%) | 5.0 | 6.0 | (17%) |
| Revenue | 57.4 | 70.5 | (19%) | 72.2 | (21%) | 127.9 | 168.2 | (24%) |
| EBITDA | 25.1 | 31.4 | (20%) | 41.3 | (39%) | 56.5 | 89.1 | (37%) |
| EBITDA margin | 44% | 44% | (0%) | 57% | (13%) | 44% | 53% | (9%) |
| Net profit | 13.4 | 24.1 | (44%) | 25.4 | (47%) | 37.5 | 58.3 | (36%) |
| Free cash flow | 2.4 | 25.9 | (91%) | 20.9 | (89%) | 28.3 | 62.0 | (54%) |
| Net debt | 35.4 | 33.8 | 5% | 6.0 | 487% | 35.4 | 6.0 | 487% |
| Net debt / EBITDA | 0.3x | 0.3x | – | 0.04x | – | 0.3x | 0.04x | – |
Market Dynamics and ALROSA’s Strategic Response
Alexey Philippovskiy, ALROSA’s Deputy CEO, provided insightful commentary on the Q2 2019 results, contextualizing the financial performance within the broader diamond market. He highlighted that the market continued to grapple with several negative factors that had begun to emerge in the latter half of the previous year. Understanding these external pressures is crucial for appreciating ALROSA’s operational adjustments.
“The diamond market continued to be affected by a number of negative factors that had first emerged as early as the second half of the previous year,” Philippovskiy noted. He elaborated on these challenges, which paint a picture of an industry undergoing significant shifts:
- Slowdown in Jewellery Sales: Following a period of robust performance in 2017-2018, global jewellery sales experienced a deceleration. This trend is particularly influenced by shifts in consumer spending habits and broader economic uncertainties that lead consumers to postpone discretionary luxury purchases.
- Global Macroeconomic Uncertainties and Trade Wars: Escalating trade wars and general macroeconomic instability have created an environment of caution. Such uncertainties often translate into reduced consumer confidence, directly impacting the demand for luxury goods like diamonds. Businesses and consumers alike become more conservative in their spending, preferring to save or invest in less volatile assets.
- Elevated Inventories Across the Supply Chain: Both mid-stream players (cutters and polishers) and retailers found themselves with elevated inventory levels. This overstocking reduces the urgency for new purchases from rough diamond producers like ALROSA, leading to slower sales and price pressure. Companies become hesitant to acquire more stock when existing inventory is moving slowly.
- Financing Challenges in India’s Cutting and Polishing Sector: India plays a pivotal role in the global diamond industry, processing a significant portion of the world’s rough diamonds. Persistent difficulties in securing affordable financing for the cutting and polishing businesses in India have constrained this critical segment of the supply chain, impacting demand for rough diamonds.
- Growing Share of Online Jewellery Sales: A new and increasingly important trend identified by Philippovskiy is the growing share of online jewellery sales, particularly in the US market. While this represents an evolution in retail, it also presents challenges for traditional brick-and-mortar stores and requires the entire industry to adapt its sales and marketing strategies to the digital landscape. This shift can impact pricing, distribution, and brand engagement for diamond products.
Against this backdrop of challenging external conditions, ALROSA’s sales in Q2 2019 decreased by 22% quarter-on-quarter to 8.3 million carats, with total revenue declining by 19% q-o-q to RUB 57.4 billion. The EBITDA figure similarly dropped by 20% q-o-q to RUB 25.1 billion. However, the maintenance of a flat EBITDA margin at 44% indicates that the company managed to control operational costs effectively in relation to its revenue, demonstrating a degree of internal efficiency despite the top-line pressures.
Resilience in Cash Flow and Shareholder Value
Despite the weaker operating cash flow and a concurrent seasonal rise in capital expenditures (up 17% q-o-q to RUB 4.5 billion) and working capital (up 15% q-o-q, or RUB 11.9 billion), ALROSA successfully maintained a positive free cash flow of RUB 2.4 billion. This resilience in generating positive cash flow, even under adverse conditions and increased seasonal spending, highlights the underlying strength of ALROSA’s operational model and financial management. This is particularly important for ensuring long-term stability and funding future growth initiatives.
Furthermore, the company’s leverage position remained robust, with the net debt / EBITDA ratio holding steady at a healthy 0.3x at the end of Q2. This low leverage is a significant positive for investors and provides ALROSA with considerable financial flexibility. According to the company’s Dividend Policy, this strong financial health empowers the management to propose to the Supervisory Board a dividend payment of up to 100% of the Free Cash Flow generated in the first half of 2019, totaling RUB 28.3 billion. This commitment to returning value to shareholders underscores ALROSA’s confidence in its long-term stability and prudent financial stewardship, even during periods of market volatility.
Navigating the Future: Outlook and Strategic Adjustments
ALROSA’s updated guidance for 2019 reflects a measured and adaptive approach to the prevailing market conditions. The upward revision of production to 38.5 million carats from approximately 38 million carats suggests continued operational capacity and, potentially, an opportunistic stance on future demand or efficiency gains. Concurrently, the expected sales range of 32-33 million carats acknowledges the current demand environment, while the downward revision of capital expenditure to RUB 23.4 billion from RUB 28 billion indicates a strategic focus on cost optimization and disciplined investment in light of market uncertainties. These adjustments are designed to ensure the company remains agile and financially sound as it navigates the complexities of the global diamond trade.
Conclusion
ALROSA’s Q2 2019 IFRS financial results clearly demonstrate the impact of a challenging global diamond market on even the industry’s largest player. While revenue and profitability faced significant headwinds from reduced sales volumes, macroeconomic uncertainties, and supply chain inventory issues, ALROSA demonstrated resilience through stable operational margins and positive free cash flow generation. The company’s proactive adjustments to its production and capital expenditure guidance, coupled with its commitment to shareholder returns via a robust dividend policy, reflect a strategic and adaptable approach to current market dynamics. As the diamond market continues to evolve, ALROSA remains focused on maintaining its leadership position and delivering long-term value through operational efficiency and financial discipline.