Welcome to the Hydro Q2 2022 presentation. My name is Jess, and I'll be your coordinator for today's event. For the duration of the call, your lines will be on listen only. However, there will be the opportunity to ask questions. This can be done by pressing star one on your telephone keypad to register your question at any time. If at any point you require assistance, please press star zero, and you will be connected to an operator. I will now hand over to your host, Lena Hackethal, to begin today's call. Thank you.
Thank you. Good morning from us, and welcome to our Q2 2022 presentation and conference call. We will start off with a presentation by our CFO, Pål Kildemo, followed by a Q&A session. Note that you will need to be dialed into the conference call in order to ask questions at the end. With that, I turn the microphone over to you, Pål.
Thank you, Lena. Good morning, and welcome from me as well. Whether you're still at work or you're dialing in from your summer holidays, I look forward to sharing our results with you today. I will jump straight into the highlights. For Q2, we report a record EBITDA of NOK 11.6 billion, while free cash flow came in at NOK 4.4 billion, still impacted by a build in net operating capital on higher prices in NOK in the quarter. The results are impacted by tight markets in the second quarter, especially in aluminum metal, recycling, extrusions, and energy. Once again, we experienced the record results in extrusions and aluminum metal and for the company as a whole. However, we have now seen the alumina and aluminum markets coming down from the highest levels on weaker demand and large uncertainty.
While energy markets on the other side remain extremely strong, both in spot, but even more so towards the end of the year for the winter quarters. In these volatile markets, we continue to address challenges and mitigate risks, while also continuing to position the company according to the 2025 strategy, seizing opportunities to both strengthen our position in low carbon aluminum, while also maturing and growing in new energy in a market which is becoming increasingly short on renewable energy. In addition, our efforts to ensure robustness across the value chain continues at full pace by focusing on reducing cost and improving operational excellence. Our 2025 improvement program is so far in 2022 progressing in line with the ambition to deliver NOK 7 billion in improvements by the end of the year.
Sales of greener products for the second quarter of 2022 are 89% higher year-over-year, and we are also moving forward on several existing as well as new recycling projects this quarter. In addition, we have made significant progress on both the Rein project portfolio in Brazil, but subsequently also on Alunorte and Hydro's decarbonization path. Finally, I'm happy to report that we have concluded or completed an update of our financial priorities, targeting a capital structure of around NOK 25 billion in adjusted net debt over the cycle. Based on our 2021 balance sheet, this results in the board's proposal to distribute an additional NOK 5 billion for 2021, split between dividends and share buybacks, but conditional upon an extraordinary general meeting approval. Let's move to Slide 3. Since the Russian invasion of Ukraine, we see a new reality and changes are happening faster than before.
The war has led to human sufferings and refugees in Europe, a severe food crisis developing rapidly with consequences. In addition to the 2020 and 2021 COVID pandemic, the energy crunch has led to record high energy price levels. These changes are impacting global markets, not only individuals or single nations, and inflation is increasing in several countries, fueled by high energy prices and tight labor markets, and there are growing concerns that rising inflation might lead to a recession. U.S. inflation is driven by a strong economy with a peak expected by several market participants in the following months. Also here, increases in the price of energy have become more significant over the last months. Given its geographical exposure and dependence on Russian energy, the Eurozone is especially affected by the consequences arising from the war and soaring energy prices.
Inflation rates have continued to surprise to the upside, and pressure remains broad-based. The elevated inflation rates are likely to sustain in the near term due to effects from the war on commodity prices, including energy and agriculture. The consequences from the war is also visibly different across regions when it comes to GDP growth, with also here Europe being hit the hardest, with China and U.S. holding up a bit better. We have also seen the most abrupt slowdown in manufacturing PMI since the start of COVID for the U.S. and the Eurozone. On the chart to the right here, we see that global GDP forecasts have been dragged down as many analysts view the economic environment to be more fragile, driven by the elements just mentioned.
From the record results we have experienced in the second quarter, we now see more uncertainty going forward. Move to Slide 4. The uncertainty that we just mentioned is also becoming visible in the aluminum markets. Consumption estimates for 2022 have been downwards revised significantly since the last update due to rising risk of recession, supply chain issues, and high energy prices. This has mostly affected China and Europe, with the U.S. still being seen as the strongest market. Further cuts to consumption estimates over the next month, especially for Europe, could be expected. The global balance has, in line with lower demand numbers and stronger production growth in China, been revised towards a more balanced market. There have been some minor additional cuts to European production, and more could be expected in Europe, given the extremely high energy prices, both in the spot, but also the forward market.
Also outside Europe, in the U.S., we have seen supply side reactions. In light of the high energy prices, there is significant capacity at risk, and we see around 900,000 tons of European and U.S. capacity curtailed, but estimates that there is around another 1,000,000 tons of risk of curtailment. As a result of these changing market fundamentals, we have also seen a significant decline in the prices for aluminum, although somewhat less if we measure it in Norwegian krone. At current market prices, we are estimating that we are pricing at the 65th percentile of the global cost curve, indicating a situation which is usually not sustainable over time. Please move to Slide 5. If we move to energy, then prices in the European energy markets remained high through the quarter due to tight gas and coal markets.
Towards the winter, focus will be on Europe getting enough gas through both pipelines and as LNG, and the risk of rationing of gas is moving higher on the agenda. We also see this reflected in the energy gas forward curves, which are at very high levels in the fourth quarter of 2022. We also experienced a tight situation in southern Norway, which has remained drier than average through the quarter, leading to low reservoir levels. Statnett, the Norwegian transmission system operator, has raised the risk level of security of supply to yellow. This means that the security of supply could be at risk this winter if there is significantly less rain than normal and if it's not possible to import power from continental Europe. Their view is currently that the risk remains small but non-negligible.
On the other side, Central and Northern Norway are the exception, with low prices due to above normal precipitation, giving high power production exceeding the grid capacity to move power south. Let's move to Slide 6. In volatile markets, it is important to manage risk and opportunities in the short term while also maintaining the course for the long term. With our 2025 strategy, we continue to strengthen our position in low carbon aluminum while also maturing and delivering growth in new energy, two pillars that we believe are robust in all scenarios. In addition to the examples I will go through later in the presentation, we have also delivered many other initiatives to strengthen our position in low carbon aluminum. Firstly, our sales of greener products are up 89% year on year, and we will continue to grow here.
Despite the high prices through the quarter, our customers continue to be climate focused when purchasing aluminum, and they're also willing to pay a premium for it. Recently, we started construction to expand our recycling plant in Rackwitz, Germany, where post-consumer scrap is a major raw material for the 25,000 tons of increased high forge capacity for the automotive industry. At Årdal in Norway, we also decided to upgrade and restart the primary foundry alloy cast house to increase the capacity for the recycling of post-consumer scrap by 25,000 tons per year. Both of these investments support our ambition to double recycling of post-consumer scrap by 2025. A significant step in our recycling ambitions could be delivered by a successful acquisition of the Polish recycler Alumetal.
Following the launch of a tender offer for 100% of the shares of the company in the start of Q2, we announced in July that we will extend the subscription period to October 10, 2022 in order to provide additional information requested by the European Commission. In Extrusions, we made an investment decision of NOK 300 million for a new automotive press in Tønder, Denmark, serving the European automotive and electric vehicle market based on recycled aluminum. We are also aiming to grow sales of greener aluminum in the U.S., where we recently certified our first plant, Hydro Commerce, to produce Hydro CIRCAL. Within the new energy area, we will get back to renewables, but within batteries, we were pleased to start commercial recycling operation at Europe's largest electric vehicle battery recycling plant in Fredrikstad, Norway.
Following this, Hydro Volt is now exploring an expansion of recycling capacity within Europe with a long-term target to recycle 70,000 tons of battery packs by 2025 and 300,000 tons of battery packs by 2030. Let's move to Slide 7, please. In order to reduce our emissions, but also capitalize on the value pool expected for producers of the lowest carbon aluminum, it is important to make progress across our value chain. Last quarter, we talked about 100% post-consumer scrap recycling and how to remove the carbon from the aluminum electrolysis process with carbon capture and also our own carbon-free electrolysis technology, HalZero. This quarter, I would like to share several important developments for decarbonizing Alunorte, initiatives which in addition are important for the development of our renewable energy business, Hydro Rein. Today, alumina represents about 1.4 kilos of CO2 in a kilo of aluminum.
As you can see from the chart to the left, we have a long-term target to decarbonize the alumina production, which will be done in several steps. Firstly, we are progressing according to plan on the fuel switch project to replace oil with liquid natural gas. We made the build decision for this project in December last year, and the project is expected to be in operation in 2023. On the picture in the middle, you can see the structures of the natural gas project at Alunorte. Secondly, we will install three electrical boilers using renewable energy to replace fossil fuels. The first boiler is already operational, and the second and third boilers are expected to be operational in 2024. Finally, the final carbon will be taken out through electrifying the remaining boilers and through replacing natural gas with hydrogen.
Hydro Rein announced two major renewable projects in Brazil in the last period, the 586 MW combined wind and solar power project Feijão, and the 531 MW solar project Mendubim, ensuring sufficient substance for the capital raise in Hydro Rein. Hydro's bauxite and alumina assets in Brazil will be the main off-taker for both projects, securing green energy for both the plant operations in Alunorte and Paragominas, as well as the three electrical boilers. The final investment decision for Mendubim was recently made, whereas for Feijão, it is expected to be made in the fourth quarter of 2022. Let's then move to Slide 8. A central pillar in our Hydro 25 strategy is the financial framework for lifting returns and cash flow. This includes clear principles for capital allocation and now also clearer targets around capital structure through the cycle.
We continue our commitment to an investment-grade credit rating and aim to keep adjusted net debt less than twice adjusted EBITDA through the cycle. Following a review of our capital structure and targets through the cycle, we have supplemented our financial priorities with some extra guidance on capital structure. We aim to have adjusted net debt of around NOK 25 billion over the cycle, somewhat above in cycle lows and somewhat below in cycle highs. We aim to keep consolidated debt relatively stable, whereas required liquidity to cover net operating capital and other fluctuations will fluctuate with the cycle, requiring more liquidity in cycle highs than in cycle lows. The above should also still maintain our flexibility to act countercyclical. Let's move to Slide 9, please.
As a result of our capital structure update and based on our 2021 figure, Hydro's board of directors has proposed an additional shareholder distribution for 2021 to close 2021 in line with our new target and capital structure. This distribution will consist of an additional cash dividend of NOK 3 billion as well as the introduction of a share buyback program of up to NOK 2 billion over the next 12 months. Both of these are conditional upon an extraordinary general meeting approval, which we aim to call for shortly. Let's move to Slide 10. In line with our new targeted capital structure, which includes keeping the consolidated debt relatively stable going forward, our intention is to refinance expiring bonds in the coming years.
As I mentioned at our Capital Markets Day, we have been working to develop a comprehensive sustainable financing framework, which will improve our access to capital, lead to a cost of capital advantage as we deliver on our sustainability ambitions, support transparent reporting, and also have a clear link to our sustainability strategy. We have now launched our sustainable financing framework, including a second-party opinion by the Center for International Climate and Environmental Research, CICERO Shades of Green, verifying the credibility, impact, and alignment of the framework with the green and sustainability-linked bond and loan principles, also including an assessment of the EU taxonomy alignment. The result is that Hydro's governance procedures are scored excellent, and the sustainable financing framework is ranked medium green, which is the second highest green ranking after dark green.
Our two KPIs that we will use in the sustainability-linked financing going forward are absolute reductions of Scope 1 and 2 GHG emissions and increased capacity for recycling of aluminum post-consumer scrap. Let's then dive into the results in some more detail, and let's move to Slide 11. If we start with the quarterly EBITDA bridge, then adjusted EBITDA for the second quarter was NOK 11.6 billion, up from NOK 11.2 billion in the previous quarter. On the positive side, we have continued to experience higher all-in metal and alumina prices, resulting in a NOK 2.9 billion uplift. The 14% increase in realized LME and 11% increase in premium positively contributed NOK 2.3 billion, while the increase in realized alumina prices contributed another NOK 600 million.
We have also a significant increase of NOK 0.8 billion from currency effects and NOK 0.5 billion from higher gross downstream margins. Partly offsetting these developments are NOK 1.54 billion in higher raw material cost upstream, 1,600 million increased fixed costs in aluminum metal and extrusion, and NOK 1.4 billion in lower energy results, driven by the negative spot purchase position that had to be covered at higher prices in Southwest Norway. Lastly, we have other item eliminations, which includes a negative development eliminations of around NOK 500 million quarter-over-quarter, mainly driven by margin development on internally sourced and produced alumina. We will dive into more details on this when going through each business area. Please move to Slide 12.
If we move to the key financials for the quarter, year-over-year revenues increased by about 87% to NOK 64.8 billion, and compared to previous quarter, revenues increased by 39%, driven primarily by higher prices. Adjusted EBITDA came in at NOK 11.6 billion, which for the quarter excluded a positive effect of NOK 6 billion, increasing the reported EBITDA to NOK 17.6 billion. Adjusted items for the quarter are largely driven by positive unrealized derivative effects on LME-related contracts, which are related to our strategic hedging activity of NOK 6.7 billion and negative unrealized derivative effects on power and raw material contracts of NOK 1 billion. Moving on, we have adjusted depreciation and amortization of around NOK 2.1 billion in the quarter, which results in adjusted EBIT of NOK 9.5 billion.
Financial expenses of NOK 1.3 billion for the second quarter includes a net foreign exchange loss of NOK 1.1 billion and interest expenses of NOK 300 million. Our tax expense amounted to NOK 3 billion, or about 21% of income before tax, and the tax rate mainly reflects a high proportion of income in Norway. Overall, this provides a reported net income from continuing operations of around NOK 11.1 billion, up from NOK 2.4 billion in the same quarter last year and up from NOK 6.4 billion in the first quarter. Adjusted net income was NOK 7.7 billion compared to NOK 3.2 billion last year in Q2 and NOK 6.8 billion in the first quarter.
This resulted in adjusted earnings per share of 3.63 NOK, up from 1.45 NOK in Q2 2021 and 3.17 NOK in the first quarter. Let's move to the next slide. If we move over to the business areas and start with bauxite and alumina, adjusted EBITDA increased from NOK 855 million in Q2 2021 to NOK 1.117 billion in Q2 2022. This is driven by around 50% higher realized alumina sales prices. The sales prices were partly offset by higher raw materials, the largest being caustic, fuel oil and coal, increasing costs by around NOK 1.5 billion, with around 50% coming from the fuel oil and coal price movement. This has lifted the implied alumina cost from $244- $378 per ton.
We have also experienced demurrage costs and other smaller one-offs around NOK 100 million for the quarter, and production at Alunorte was slightly below nameplate capacity at 1.5 million tons due to somewhat lower precipitation yield than planned. If we compare results to the first quarter of 2022, the adjusted EBITDA slightly decreased by around NOK 150 million. Higher alumina prices were largely offset by higher raw material costs and negative currency effects from the appreciating BRL against the dollar. Compared to the first quarter, Alunorte raw material and costs increased by around NOK 575 million, which was slightly more than guided on last quarter. Looking into Q3, Alunorte production is expected to continue at around nameplate capacity.
In addition, compared to the second quarter, current raw material prices based on market prices indicate an increase of around NOK 100-200 million from increases in caustic and coal, partly offset by lower fuel oil prices. Let's then move to Slide 14. For aluminum metal, then this quarter, adjusted EBITDA increased from NOK 2.8 billion- NOK 7 billion compared to Q2 2021. The record results were mainly driven by higher all-in metal prices and positive currency effects, partly offset by higher raw material and fixed costs. Following the partial curtailment of the Slovalco smelter earlier this year, the results include around NOK 180 million in positive effects from sale of power, which was partly offset by losses on sale of power at Albras, which will decrease as Albras ramps up.
Compared to the first quarter of 2022, adjusted EBITDA for aluminum metal increased NOK 2.2 billion, driven by higher realized all-in prices and positive currency effects. This was partly offset by higher raw material costs, especially alumina and carbon, amounting to around NOK 800 million, in line with our guidance from last quarter. In addition, we also had higher fixed costs in the quarter. For Q3, 69% of primary production is priced at around $2,600 per tonne, while 49% of premiums affecting Q3 is booked at around $1,080 per tonne in total. Q3 realized premium is expected to be in the range of $800-$850 per tonne. Compared to the second quarter, we expect slightly lower raw material prices in Q3 2022.
If we use expectations, based on current market prices, that amounts to around NOK 100-NOK 200 million, mainly driven by lower alumina price, partly offset by carbon. In large part offsetting the effects we mentioned in bauxite and alumina. Let's move to Slide 15. This quarter, metal markets delivered an adjusted EBITDA of NOK 705 million compared to NOK 335 million in Q2 last year. The improvements this quarter is driven by recycling on the back of increased sales premiums, lifting results with NOK 423 million. In addition, positive inventory valuation and currency effects contribute positively with NOK 252 million. This is partly offset by NOK 315 million in lower contribution from sourcing and trading activities on lower premiums and falling markets.
This also includes around NOK 130 million in inventory impairments, which will be reversed next quarter as the inventory hedges are realized. Excluding the currency and inventory valuation effects, the results for the quarter was NOK 434 million. When we look into the next quarter, as always, remember that trading results and currency effects in metal markets are by nature volatile. However, on the back of the continued high premiums, you should expect continued strong contributions from our recycling operations. Let's then move to Slide 16. Since last quarter, the overall market size for extrusions in Europe has been upwards revised by CRU based on inputs from the European Aluminium Association. 2021 market is now estimated at 3.8 million tons, compared to 3.4 million tons reported in the first quarter.
The growth has been stronger than expected in the regular residential building and construction products with low value add, often delivered through stock segment, while specialized segments where Hydro Extrusions has a larger presence, such as automotive and value-added industrial products, have been growing largely as we expected. The revisions have an impact on growth rates going into 2022. The growth from 2021- 2022 is now estimated at -2%, compared to +3% before. However, as you can see from the graph here, the total market size is estimated higher, which is good. Extrusion demand for Europe is estimated to have been at a similar level in Q2 2022 as in Q2 2021, but expected to decrease 5% in Q3, with moderating demand in building and construction and industrial segments, and a gradual improvement in automotive, which is where we have more exposure.
Growth rates in North America are expected to remain steady throughout 2022. In North America, sales are expected to increase 6% year-over-year, while in Europe, sales are expected to decline 5%. Our Extrusions sales for Q3 are expected to be slightly better for Europe, while slightly below for North America, partly driven by labor constraints. Next slide, please. Extrusions shipments are stable in Q2 2022 compared to the same quarter last year when we exclude the divested unit, Lister Welded Tubes in Europe. Demand has continued to be positive for us in building and construction and industrial segments, while the automotive segments are still impacted by supply chain issues, partially exacerbated by the war in Ukraine. Extrusions Europe shipments are stable compared to the same quarter last year, while Extrusions North America saw their volumes increase.
Hydro Building Systems leveraged higher volumes in the building and construction segment, while Precision Tubing was negatively impacted by the automotive sector. Please move to Slide 18. If we then move to the financial results of Extrusions, adjusted EBITDA increased from NOK 1.8 billion in Q2 2021 to NOK 2.4 billion this quarter. As in the previous quarter, the integrated recycling operations contribute positively based on the increased billet sales premiums. In addition to the recycling margins, increased gross margins were largely offset by increased variable and fixed costs, with energy costs amounting to a significant share. Fixed costs also include around NOK 200 million extraordinary bonus to all employees following the strong contributions through the two-year COVID period.
Relative to Q1 2022, the adjusted EBITDA was largely stable, with higher results from the recycler and higher gross margins, partly offset by lower volumes and higher fixed and variable costs. Looking into the third quarter, we expect lower volumes compared to the second quarter due to regular summer maintenance in Europe. In the current inflationary environment, we also expect some margin pressure. In addition, we have seen premiums come somewhat down, which will impact the recycler profitability. As in last quarter, we would like to stress that the supply chain volatility remains, and that we are back to a period with higher market uncertainty in the second half of this year. Please move to Slide 19. The last business area walkthrough is energy, where results slightly increased from NOK 761 million in Q2 last year to NOK 824 million this year.
Income from record high price area differences of NOK 1.2 billion were largely offset by around 30% lower power production, resulting in a 430 GWh short spot position, which needed to be covered in the market at very high prices in the NO2 area. The gain from the area price differences was driven by the increase in NO2-NO3 price area spread from NOK 1,288 in Q1- NOK 1,511 in Q2. In addition to a decreased long position in the SE1 and SE2 areas. Compared to the previous quarter, the adjusted EBITDA decreased by NOK 1.4 billion, and this was due to lower volumes, partly offset by higher prices and a larger price area difference gain of around NOK 440 million.
Looking to the third quarter, the price and volume uncertainty are always large, and production and prices will depend on hydrological conditions in Norway. However, we currently see a continued weak hydrological balance in the South Norwegian areas where we produce, and we expect low production in Q3 also, most likely leading to another quarter of negative spot sales. It is also worth remembering that the quarters of low production now will be followed by a significant increase in production in the fourth and first quarter, where we expect the highest prices that we see on the current forward curves.
As of yesterday, the quarter-to-date average difference between mid Norway prices, NO3, and South West Norway, NO2, was at 2,364 NOK MWh compared to NOK 1,516 on average for the second quarter, implying that earnings from price area differences will continue at a high or even higher level into Q3. Let's move to Slide 20. When looking at developments in our net cash position, based on the starting point of NOK 5.1 billion in net cash from Q1, our overall net position decreased by NOK 6.8 billion quarter on quarter to a NOK 1.7 billion net debt position. This is based on the following. In Q2, we generated 11.6 billion in adjusted EBITDA. Net operating capital increased by NOK 2 billion, which can be broken down around the following.
Around NOK 3.6 billion is related to price and FX effects. This includes both on receivables, but also on the value of our raw material inventories, which have increased more than what is offset by payables. Around NOK 1 billion is driven by CO2 compensation receivables and also higher inventories in extrusions. This is offset by periodization effects and other minor pluses and minuses of NOK 2.4 billion. If we look at the full year estimates, we expect all else equal, the NOK build to be related to price and currency, with the only sizable non-market-related build being around NOK 1 billion-NOK 1.5 billion in safety stocks and the receivables on CO2 compensation.
If we use current market prices, the full-year price-related NOK build is expected to be around NOK 2.5 billion, resulting in around NOK 4 billion full-year build compared to around NOK 8 billion that we see year to date. This can move with prices as the quarters move forward. Other operating cash flow adjustments amounted to negative NOK 3.2 billion, driven mainly by NOK 1.6 billion in taxes paid and also NOK 1.8 billion in reversal of positive unrealized derivative effects, which are included in EBITDA, which will be realized as positive cash in the coming quarters. Net investments were NOK 2 billion for the quarter, and we will get back to CapEx in more detail on the next slide. As a result, we generated free cash flow from operations of a positive NOK 4.4 billion in Q2.
We paid NOK 11.1 billion in dividends, 5.4 per share on the 20th of May. If we then move on to adjusted net debt, we start by adjusting for the NOK 1.7 billion in collateral per Q2, mainly related to strategic and operational hedging positions, which has decreased by 8 billion NOK from last quarter due to the declining LME prices. The next adjustment of -4.3 billion reflects, among other, asset retirement obligations as well as assets in Hydro's captive insurance company that are not available to service Hydro debt. We have a net pension asset of 1.4 billion, up around NOK 400 million from last quarter on discount rates in Norway and Germany. This is partly offset by a loss on plan assets in our pension fund.
With these adjustments, we end up with an adjusted net debt position of NOK 6.3 billion at the end of Q2, down from NOK 7.7 billion at the end of Q1. Let's then move to Slide 21. Our full-year guidance for CapEx at our capital markets day was around NOK 11 billion for 2022. We ended up spending less than planned in 2021, resulting in an additional carryover of around half a billion. This is on top of the NOK 1.5 billion rollover from 2021 that was already included in the NOK 11 billion communicated at the capital markets day. Since then, we are experiencing strong inflationary pressures and currency development which could impact the year-end figures. So far, the currency effects amount to around NOK 1 billion, primarily driven by the weaker NOK.
These two items lift the expected CapEx estimate for 2022 to around NOK 12.5 billion. If we are successful with the Alumetal tender offer, this will come in addition to the NOK 12.5 billion, and the equity purchase price is estimated to approximately EUR 232 million. As you also know, we have been successful in building substance in Hydro Rein, with several projects now moving forward towards construction and production. As such, we believe we are ready for raising capital in the second half of the year. Given the current slow IPO market, we are also looking into other alternatives to raise capital.
In a scenario where this is not successful for the second half of 2022, this would potentially result in a capital spend for the project in the pipeline of NOK 1 billion-NOK 1.5 billion for 2022. As we have progressed through 2022, we have year to date spent NOK 3.5 billion in CapEx, but as you know, seasonally, we tend to spend around 40% in CapEx in the fourth quarter. Let's move to Slide 22. I would like just to give a reminder and update on our strategic hedging. The high volatility in the LME prices continues, and during the quarter, we have increased the hedge position in 2024 with 150,000 tons.
In total, we have around 900,000 tons of integrated LME hedges for the period 2022- 2024 at an average price of $2,300 per ton. I would also like to remind you that a certain share of raw materials, like coal and fuel oil are locked in, which improves the total integrated margin results. As I mentioned several times earlier, I will be happy if the hedge position ends up out of the money as we are then benefiting significantly more on the unhedged part. However, securing a part of the portfolio at historically high margins also makes us more robust in a potential downturn. Let's move to Slide 23, where we can conclude and summarize the quarter.
At the end of Q2, we ended at NOK 111 billion of capital employed and delivered an underlying twelve-month rolling ROACE of 27%, well above our target of 10% over the cycle. Our balance sheet is in a strong condition, with our key ratio of adjusted net debt to EBITDA being at 0.2%, well within our goal of less than two over the cycle. This is also one of the reasons we are in a position to suggest an extraordinary distribution for 2021. Year to date, we have delivered free cash flow of NOK 6.2 billion, but also a NOK build of NOK 8.1 billion, which we will now start to build down during the year.
In the first half of 2022, improvements of NOK 400 million were realized, NOK 6.7 billion in total on our improvement program. On that note, I would like to thank you all for joining the presentation and open the session up for questions.
Thank you, Pål. We will then start the Q&A. Please note that you will need to dial into the conference call in order to ask questions. It will not be possible to ask questions over the webcast. Operator, we are ready for questions. Thank you.
If you would like to ask a question, please press star one on your telephone keypad. Please ensure your line is unmuted locally as you will be advised when to ask your question. The first question comes from the line of Liam Fitzpatrick from Deutsche Bank. Please go ahead.
Hi, Pål. Thanks for the presentation. Two or three questions. Firstly, on Rein. Is it now more likely that you do go the private route? Is that your sense? You know, the strategy has always been, you know, to keep this off balance sheet and to raise external capital. How confident are you in raising capital in the second half, whether that be through the public or the private route? That's the first question. Secondly, on the power division, I know there's a lot of moving parts here, but I just wanted to get a bit of color on some areas. If the position remains the same in Q3 in terms of having, you know, small negative spot sales, will the results be stronger just given how wide the regional spreads are?
The comment you made on kind of the Q4 uptick, is that just based on the normal seasonal patterns where you expect better rainfall? Final question, if I can, just on the shareholder returns. It's a very clear message today. If we're looking into February, in terms of your policy, how do you want the market to think about that NOK 25 billion net debt target? Will that be a level that you will be kind of gearing back up to in terms of how much, you know, the dividend that you declare next year? Thank you.
Thank you, Liam. Three large and relevant questions. If we start with the energy side, I will not speculate on the likelihood of one or the other. Of course, you sit as tight to this market as us and you know that there is more activity in the private capital market than there currently is in the IPO market. We've also seen renewable energy companies raising capital in the private capital markets at quite attractive price levels. We are looking at several alternatives and also taking into account that there is a difference in these two markets, and we are not sure if and when the IPO market will open up again.
I guess when speaking to bankers, you get anything from September to February. We think it's prudent to look at the several alternative paths, as we've also briefly discussed earlier. When it comes to the power division, it's difficult to give a clear answer on whether the area price differences will offset the negative effect of the short spot position if we end up there. That being said, if price area spreads remain at where they have been so far in the quarter, that contributes quite a lot compared to with what we've seen in this quarter. The high price for NO2 also tends to correlate with how much is being produced.
You have a type of balancing effect also that tends to eat each other a bit up. We will have to see as we move through Q3. There are pluses and minuses, and the plus is very big, and let's see how big the minus becomes. When you look into Q4, yes, we expect the normal seasonal patterns. As a power producer, you typically produce according to the hydrological profile within the year. You also have a certain ability to produce according to the price signals, where prices are higher and lower.
In periods with extreme difference between low price and high price between summer and winter quarter, all else equal, you would see. You would aim to try and produce more in Q4 than in a quarter where the difference is not so large. Another element which could impact the fourth quarter is, of course, price area spread differences, because the. It's still a situation where the south is expected to be much tighter than the north. We also just to be fully transparent, we are at a level now where Statnett, the transmission operator has, deemed the hydrological situation to be stressed.
This is still at a low risk level, but if we don't get normal precipitation during the summer, this situation could become a bit more stressed. When it comes to the capital structure, we aim to be clearer on what to expect through the cycle. As you correctly noted, the distribution we're making now is based on 2021. So we're not thinking of the earnings made in 2022 when suggesting the current distribution. As 2022 finalizes, we have our dividend policies, which sets a minimum of or the height of 1.25% and 50% of net income.
If that doesn't bring us towards the targeted adjusted net debt level when you take into account planned investments and also view on the market, then you should all else equal expect a distribution on top of that to bring us closer to that target. This is an attempt to give some more transparency and understanding of how we think about that. You should take earnings in the year, planned investments, market outlook, and balance towards these NOK 25 billion.
Okay. Understood. Thank you.
The next question comes from the line of Ioannis Masvoulas from Morgan Stanley. Please go ahead.
Good morning. Thanks very much for the presentation. My first question, just to, I guess, follow up to Liam's question around the capital allocation and the capital structure policy. Simplistically, this adjusted net debt number of NOK 25 billion in today's terms, how does it translate to what you have announced? It's about NOK 4.6 billion adjusted net debt at the end of Q2, plus the NOK 5 billion of additional returns. Are you now effectively at NOK 10 billion, giving you a NOK 15 billion buffer? Is that how we should think about it? Second question is around energy.
Can you just if you can clarify what was the benefit of the arbitrage in Q2 and the negative impact of the spot position that you had and how are you thinking about your overall energy position here? Because it seems that we're going into a phase where you could have more structural short positions going forward. It's gonna be probably the third quarter now in Q3 2022 where you are in a negative position. Would you be thinking about adding PPAs in Norway to manage this situation over the medium term? Or do you think that's more of a one-off situation and you should be in a good position based on the current energy mix today?
Lastly, on the Alunorte fuel switch project, we were seeing the LNG market potentially looking a lot tighter over the coming years. You're talking about now switching from fuel oil to LNG. How is the current situation impacting your thought process and whether you're looking to maintain some flexibility around what sort of fuel you're gonna be using at Alunorte, depending on the LNG situation? Thank you.
Thank you. If we start with the capital structure first, then how you should be thinking about it is that the distribution that we propose now is tied to our 2021 earnings. In 2021, we ended the year with a net debt position of around NOK 7 billion or so. Then we add the dividend that we paid for 2021, which was around NOK 11 billion. Then we add the NOK 5 billion that we propose today. That gets you to an adjusted net debt level, I guess around the NOK 23 billion or so, which is right below the NOK 25 billion.
As we said, in the higher parts of the cycle, we want to be a bit below the 25% to have a buffer for when you potentially move to the lower parts of the cycle. That is what we've done now is more or less adjusting the dividend payment for 2021 to be in line with our new capital structure ambitions. Then when we move through 2022, we will do that exercise at the end of the year. We're not planning to introduce quarterly or half-yearly distributions going forward. This is purely to adjust the balance in accordance with our new policy given 2021 earnings.
When we move to energy, the price area difference between the quarters was NOK 1,511 million, and that gave an effect of NOK 1.2 billion. A bit higher, or NOK 440 million higher than what we had the last quarter. It's also a bit higher than what your pure sensitivities on NO2, NO3 price spread changes would have implied. That's because the position we have in the different price areas changes somewhat during the year. We have a bit lower long positions in SE1 and SE2 areas, which gave us a bigger contribution on the price area differences.
Not huge compared to what your sensitivities would give, but some hundred millions NOK, I guess. When we look into the third quarter, the spread so far year to date with extremely low power prices in the north is around 2,000 NOK-2,400 NOK. If you use the sensitivity, you're approaching 80% to doubling of what we had in the second quarter. Remember, we're quite short into the quarter, and this can change quickly both in the south and in the north. A valid question on Alunorte.
We have a long-term gas contract with a fixed element or with an element of market exposure. The spread has developed quite a bit lately. We are still working to deliver on the decarbonization targets. It becomes more and more important to take out potential challenging prices from the fuel oil spread in the sale of the product. Be that the price of alumina or the price of aluminum at the end of the day.
We believe that there will be a large demand for greener products, and we need to ensure that we price them according to the cost of production as this swings going forward. That is how we aim to address changes in the energy price markets.
Thanks very much, Pål. Just to clarify on the PPA structure in Norway, do you think there is scope to add further contracts to make sure you're not gonna be in a short position going forward?
Well, we are shorter than we've been in a while in energy. Contracts have been running out and also due to the fact that we made some structural changes over the years. We are constantly evaluating whether to take additional positions in the market. I can't confirm it but can't rule it out either. As you know, there's not been a lot of attractive opportunities in the Nordics after the wind power opposition increased a bit in Norway. There have been some potential in Sweden which we have addressed through Rein. This may change going forward.
We are evaluating and always on the lookout for attractive energy contracts.
Thanks very much. Thanks again.
The next question comes from the line of Amos Fletcher from Barclays. Please go ahead.
Yeah, morning, Pål. Thanks for taking the questions. I had just a couple of them. I suppose the first one was on your longer term CapEx profile, which I noticed you haven't updated in today's release. Is that purely due to uncertainty over the FX? Perhaps you can discuss with us what FX rate you're assuming in the original guidance for this year and what you're assuming now.
Yeah. No, the changes that we're seeing now are purely FX related. They're based on FX year to date compared to the FX that we had in our business plan process last year, which was quite close to currency rate at that point in time, or at least how they developed through the end of the year. We are about to move into our process of updating long-term assumptions and setting business plans. We'll get back at Capital Markets Day as to what currency rates we expect and we'll guide on in the year to come.
All else equal, you should potentially expect some increase in the longer term guidance on the same currency element that we referred to in the second quarter.
Okay, thanks. I just wanted to ask about any physical exposure to natural gas in Europe. In the event we have rationing of gas, are there any assets within the business that could be at risk?
Well, we are quite exposed to physical gas in Europe in the cast houses at our operations. For the extruders or extrusion plants, but also for the standalone recyclers in metal markets. Some of these have the potential possibility to switch, for example, to LPG, but that is quite limited. If there is a physical shortage of gas in Europe and the rationing is implemented, then there is a possibility of us being impacted in the Extrusions and recycling operations.
Okay, thanks. I just wanted to ask about the Alumetal acquisition. Are there any sort of antitrust issues being raised by the EU? You know, how do you regard the risk of that transaction closing or otherwise?
No, we have received questions from the European Commission, which is also the reason why we've extended the timeline. We are positive to this transaction, and we are positive to how we will address these questions and our view on the markets. We will proceed to answer the questions, and then let's see where that takes us as we come back after the summer and towards our Q3 results.
Just final one. I just wanted to ask, is there any possibility or flexibility in the energy business to reduce the level of contracted sales volumes in the Southern Norway region to reduce the risk of, you know, having to be a net buyer in the market on a go-forward basis?
Over what sort of?
No, we have quite limited flexibility there, Amos. The contracted sales that we have are largely to our own operations. We also sell concessional power to the municipalities where we produce. That portfolio remains quite constant. I just would like to remind that yes, you can have a short position in the third quarter. It's not necessarily negative from a full year perspective. Third quarter is usually when you have the lowest prices also when you look at the year as a whole.
I guess what I would be more concerned about is if the absolute production level becomes much lower than what we estimate.
Okay. Got it. Thank you very much. I'll leave it there.
Thank you, Amos.
The next question comes from the line of Daniel Major from UBS. Please go ahead.
Hi, hi Pål. Yeah, a few questions. Just on the working capital, can you just clarify what you said around the expected release in the second half of the year, all else equal? I didn't catch it.
Yeah. Please be aware that this is guiding on how the market looks now and all elements of working capital are volatile with 10%-50% the movement happening within the space of a week. If we look at how it stands today, then basically we have built around NOK 8 billion year to date in working capital. If you took market prices, then the full year build of NOK on market prices, especially on the revenue side, could be expected to be around NOK 2.5 billion. This is purely sensitivity based and getting this out of the system might be somewhat slower. It usually takes two.
Three-four months. Then we have around NOK 1-1.5 billion in safety stocks and receivable on CO2 compensation. That would result in a full year build of around NOK 4 billion compared to NOK 8 billion. It might be somewhat higher. Prices have come a bit up since we made these sensitivities, and $100 means quite a lot. That's how it looks at the moment.
Very clear. Thanks. Well, just one more on the working capital. You built quite a lot of working capital also in 2021. I think around eight, also about NOK 8 billion. Is it fair to assume, given currency moves and potentially structurally higher input costs and aluminum prices, et cetera, that kind of we should be assuming that that working capital stays kind of locked up and it doesn't get released in 2023?
Well, it depends on your price expectations as you say. What we are expecting to release during this year is based on what we see the market price being now. As you know, for part of our value chain, the margins are becoming quite squeezed now, for example, in alumina. High raw material costs and a low alumina price. If that remains, then the possibility of release is quite limited. If raw material prices also starts falling a bit, then we can start eating up more of the build this year and next year. It’s not apart from the NOK 1 billion-NOK 1.5 billion I mentioned in inventory build.
That is mainly anodes due to the fact that we closed the other chemical anode plant, and, at the same time, increased safety stocks as we're importing much more from China now. Apart from that, it's not a lot of structural builds in inventories. It's pure price and FX.
Got it. Thanks. Next question on the energy business, and I appreciate it's a bit of a lottery forecasting the earnings in the near term. If we look into 2023- 2024 and assume that you no longer have a short position in sort of purchases, but we have a structurally higher energy price in Europe, and then therefore a structurally higher Southern European power price. Would that drive a structurally higher kind of pricing spread and therefore sustainably higher earnings for the energy business? Is that what we should be thinking about in a scenario of higher for longer power in Europe?
I'll be careful to speculate, but I just first want to be clear that a large part of the energy price movement we see in the south of Norway now is due to the dry situation we have for a very long time. Of course, there is a link between prices in the Nordics and the continent, and especially in drier periods. If you have a dry to normalized year or a normalized year to wet year, you could lose a fair share of the area price differences that we're seeing now.
In a normalized to drier year, you could keep some of those because in some hours you will be pricing on continental prices, whereas in some hours you will be pricing on Norwegian power prices. We actually saw in the current quarter Nordic prices or NO2 prices going above the continental prices, where it became southwest Norway, which was the price setter. That just goes to show the fact that it's really the dry situation that is the main driver of the huge spread we see now. Also the wet situation in the north of Norway. We have a positive hydrological balance there.
A normalization would probably result in elevated levels compared to what we've seen earlier, but a reduction from what we've experienced this year.
Okay, thanks. Last very quick one. Have you had communication from your largest shareholder whether they'll take part in the buyback?
Well, when we introduce a share buyback program, it is on the assumption that the largest shareholder will take their share of that program.
Great. Thanks a lot.
The next question comes from the line of Jatinder Goel from BNP Paribas Exane. Please go ahead.
Thanks, operator. Good morning, Pål. Just a question on steel companies getting into aluminum rolling. You exited that business obviously for very different reasons, but anything you can comment on the U.S. market, and will that be something which Norsk Hydro can look into on a forward basis, either organically or inorganically or anything you would like to offer given how bullish those companies are sounding, putting more than $2 billion of new project online?
Thank you for your question, Jatinder. We picked up the same news, and of course it is interesting to read. From their perspective, I don't have good insight into their lines of thinking. Of course, it's interesting markets. A lot goes into automotive, and we're expecting that to stay strong. It's not doing anything to our view on whether to enter the rolling space or so that we have exited, and we're focusing on the other key business areas now.
Excellent. Thank you so much.
There are currently no questions in the queue. As one last reminder, please press star one if you would like to ask a question. The next question comes from the line of Ioannis Masvoulas from Morgan Stanley. Please go ahead.
Hi. Great. Thank you. Pål, just a quick follow-up from me on realized premiums. What should we expect on a spot basis to be realized, assuming everything resets to current market pricing?
It's a good question. The thing is that premiums are trading in quite wide ranges now. If you look at extrusion ingot billet premium, for example, then it's $200-$300 ranges. So saying what is spot could be challenging. As you see, we expect to be between $800 and $850 in the third quarter. We should expect that to come somewhat off in the fourth quarter with markets coming down. They haven't moved significantly down, so we're talking towards the $700 or maybe north of $600 levels, as we see it now.
Great. Thanks very much.
The next question comes from the line of Liam Fitzpatrick from Deutsche Bank. Please go ahead.
Hi, Pål. Two follow-up questions. One, just on the aluminum metal costs, and apologies if I missed this, but I think you're guiding them down into Q3 because of alumina. Obviously we can all see alumina costs. In terms of the non-alumina costs into Q3, are they starting to peak or is that still a kind of inflationary pressure into Q3 versus Q2? And then just on the buyback, is the plan going forward basically to have a kind of rolling ongoing buyback that you can continue rather than just a one-off kind of small NOK 2 billion that you've announced today? Thank you.
Yeah. I think if we start with the second question first, we believe when introducing a buyback program that it makes sense to do over a period of time. However, as mentioned earlier, it all needs to be balanced within the framework that we have drawn up. If you revert to a situation where you are looking at the dividend floor again, then it might be more challenging than a more consensus situation in the marketplace today. No guarantees but an ambition when we initiate such a program.
When you look at the aluminum metal and the outlook into the third quarter, then yes, we've seen the carbon cost flattening somewhat, or the speed of increase flattening somewhat. We expect them to increase in the third quarter around NOK 100 million or so, driven primarily by carbon.
All right. Thank you.
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Okay. Thank you. Thank you for joining us today. Please don't hesitate to contact us in Investor Relations if you have any further questions. We wish you all a great summer. Thank you.
Thank you.
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