Okay, welcome to the Norsk Hydro Q4 2018 presentation. Today's conference is being recorded. At this time, I would like to turn the conference over to Stian Hasle. Please go ahead.
Thank you. Good afternoon, and welcome to this update on Hydro's fourth quarter results. We will start with a short introduction by President and CEO Svein Richard Brandtzæg, followed by a Q&A session. Please, Svein Richard.
Thank you, and let me comment on the key developments in the fourth quarter of 2018. Underlying EBIT for the fourth quarter was NOK 0.5 billion, down from NOK 3.6 billion in the fourth quarter last year, and also down from the NOK 2.7 billion in the third quarter of 2018. This quarter as well was negatively affected by Alunorte. Paragominas and Albras producing at 50%. The servicing in reduced volume as well as cost inefficiencies. The main factors affecting the results in the fourth quarter 2018 versus fourth quarter 2017 is, in addition to the Alunorte situation, mainly increased raw material costs in primary metal and bauxite alumina. Some stream results are down from fourth quarter last year, mainly on lower margins and somewhat reduced volumes.
Energy delivered a strong fourth quarter, NOK 50 million improvement from the same quarter last year, driven by strong prices. We are obviously maintaining strong focus on improvements across business areas, but as we also have communicated earlier, we did not meet our B-better target of 2018. Due to the Alunorte situation, we will not be able to meet our overall targets for 2019 either. If we could exclude the Alunorte effect, we will however be very close to the 2018 target. For 2018, Hydro Board of Directors proposes a dividend of NOK 1.25 per share, reflecting Hydro's robust financial situation as well as the demanding year we had for the company, and taking also into account the volatility of the aluminum industry.
Finally, when it comes to the market side, we see a global aluminum market in a deficit in 2019, as we also communicated at the Capital Markets Day. We expect the primary demand for 2019 of 2%-3% as well as a global primary production demand of 2%-4%. From a macro perspective, it is also evident that there are continued and maybe increased uncertainty related to potential trade and trade wars and also softening demand on softening demand growth in general. Resolving the Alunorte situation remains our key priority. It is positive that SEMAS issued a technical note on January 15th, attesting that Alunorte safely can resume normal operations, which was an important step forward and an important recognition that the operations at Alunorte are safe.
The decision is now very much in the hands of the federal court system, which still holds embargoes on both production and the use of DRS2, the new bauxite residue deposit area. We do not have a timeline to provide you with on the process for outcome of the court decision, hence the timing of restart at Alunorte remains uncertain.
Thank you, Svein Richard. Operator, we're now ready for questions.
Thank you. If you would like to ask a question, please press star one on your telephones to add. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach the equipment. A voice prompt on your phone line will indicate when your line is open. Again, if you do have a question, please press star one. We'll pause just a moment. We do have a question. Please go ahead.
Hi there. Can you hear me?
Yes.
We can.
Hi. Sorry. Hi, Svein. It's Emmanuel at Morgan Stanley. Just two questions, please. This is the first quarter in a long time that primary metal is EBITDA negative. I have no doubt you're not the only company. How long does Norsk Hydro operate at these types of profit levels before it starts to think about curtailing capacity? If you go down that path, how would you approach that process? The first one. Secondly, this morning in the prepared remarks, you both talked about extrusion slowing growth but still growing, rolling clearly a little bit more challenged, and therefore margins under pressure.
I don't seem to get a lot of urgency in terms of addressing the cost base, which clearly is somewhat out of kilter with the revenue developments if you look at the fourth quarter profits. Why are you so reluctant to take more action as a company quicker to try and regain some of that margin?
Thank you, Emmanuel. With regard to the situation in primary metal, it's obvious that the smelters in general, cannot continue forever with the situation as we have now. Globally, we expect that more than 40% of the capacity is below water. In China, we expect that more than 70% of the capacity is now losing cash. For Hydro, we have been in a situation in connection with the finance crisis where we had to take out capacity. As we see it now, we are of course evaluating the situation, but we don't have any plans for the moment to take out capacity. We are monitoring the situation going forward. With regard to rolling, it's obvious also here that we are now working with improvements.
There is now ongoing restructuring that has been initiated in foil. We also looking at other initiatives, of course, that we will come back to later. Rolling have had the negative development over time, and there has been improvement programs ongoing. We of course also now looking at alternatives that can be implemented going forward, and that is also something we will come back to later.
Okay. Thank you.
On the extrusion side, Mano, just to give a comment on that, it's a little bit of a different story. I mean, we have additional operational costs in when we're ramping up some of these more, let's say, advanced products. Now when we do get those products stabilized, then, full speed, that should improve the cost situation. It's a little bit of a different story I think.
Okay. Noted. Once again, if you would like to ask a question, please press star one. Once again, for just a moment. Go to our next question.
Hi, Liam Fitzpatrick from Deutsche Bank. Two questions for you. Firstly, just another one on the downstream. Just in broad terms, can you give us some guidance on 2019? In December, you were talking about a target of 10% per annum EBIT growth within Sapa, and also talking about a number of operational improvements. In light of the Q4 and what you're now seeing on the demand side, is it still realistic that we see 5%-10% EBIT growth for the downstream businesses in 2019? Secondly, just on Alunorte, on DRS2, I think you'd said last year that the strategy was to try and progress lifting the embargo on the tailings facility before looking at the broader or the bigger cap on production.
Is that still the strategy, and can you give any kind of update on DRS2? Thank you.
To answer the EBIT growth in extruded first, this is Ivan, by the way. You have to look at this on year-over-year, not necessarily quarter-by-quarter. When you look at 2018 versus 2017, remember that we did an acquisition of two Arconic plants in Brazil in 2018. If you adjust for the negative contribution during the restructuring phase of those plants, you would see that we have an EBIT growth of 8% versus 2017 of 7%. Obviously as we get into 2019, those results should improve.
When we look at the demand situation in the market in Q4, and when we look at economic data so far in 2019, there's nothing wrong with demand, so that's still there. It's at a slightly lower pace than what we saw in 2018, but there's still good demand growth in important markets in Europe and the U.S. So we stick to the EBIT growth that we announced to you all on Capital Markets Day just about a month and a half ago.
When you go to Alunorte, it is clear that the SEMAS, the State Environmental Agency, issued a technical note attesting that Alunorte can be operated safely at full capacity. They also issued another technical note that confirms the validity of the license for DRS2. Now, in fact, the decision is now in the hands of the federal judge in Belém. He will now, or the judge will now, make the final decision. We expect it will be the final decision on both DRS2 and the embargo on production volume.
I mentioned earlier today also that they have received independent review from Federal University of Campina Grande , which is stating that the Alunorte plant can be operating safely from the water management perspective, which was the critical part there. Again, we are now awaiting the decision at the judge because both IBAMA, the Federal Environmental Agency, and SEMAS has now given documents that and documenting and attesting that we can run safely. That, I think is very important step forward to resume full production.
Sorry, just a quick follow-up. Could you just remind us, how much life you've got left at DRS1? I think you talked about 2020, but can you be any more specific?
What we have said so far is that we have 12 to 18 months left of DRS1 when utilizing the press filter material. Then, of course, subject to further geotechnical studies, that lifetime may be extended, but what's verified at the moment is 12 to 18 months.
Okay. Thank you.
As a final reminder, if you have a question, press star one. At this time, there are no further questions in the queue. I'll turn the conference back over to management for any additional remarks.
Okay. That concludes the call for this evening. Thank you for joining us today. If you have any follow-up questions, please do not hesitate to contact us. Thank you. Have a nice evening.
That does conclude today's conference. Again, thank you for your participation.