Good day, and welcome to the Norsk Hydro ASA Q4 conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Pål Kildemo. Please go ahead, sir.
Thank you. Good afternoon, and welcome to Hydro's fourth quarter 2015 conference call. We will start with a short introduction by President and CEO, Svein Richard Brandtzæg, followed by a Q&A session, where also CFO, Eivind Kallevik, will join. For those that did not see this morning's webcast of the results presentation, this is available on hydro.com. With that, I leave the word to you, Svein Richard.
Thank you, Pål. The underlying EBIT for 2015 of NOK 9.7 billion is one of the best results we have delivered since becoming a pure aluminum company back in 2007, and is NOK 4 billion higher than last year's results. The solid result and our strong financial position allows us to deliver on our policy of providing a safe and reliable dividend to our shareholders, even though market developments have been more challenging. The board has proposed a dividend of 1 NOK per share for 2015, which will be decided by the general meeting in May.
Underlying EBIT for the fourth quarter of 2015 was NOK 1.6 billion, down by NOK 600 million from the third quarter and down NOK 1.3 billion from the fourth quarter last year. Just as in the third quarter, the most impressive developments are again within the Bauxite & Alumina business area, with record annualized production at Alunorte since we took over the assets in 2011 at 6.3 million tons, and historically record high annualized bauxite production at 11.7 million tons at Paragominas. This results in the reporting of the historically low implied alumina cost of $187 per ton, driven by lower sourcing costs and weaker BRL. These effects were partly offset by lower realized alumina prices.
The declining oil price continues to affect primary results, but we are still benefiting from a Norwegian krone and BRL currency tailwind, as well as lower raw material costs. Downstream, results are seasonally weaker, driven by reduced sales volumes in the fourth quarter. However, compared to the fourth quarter last year, the combined results from our downstream operations has almost quadrupled on the back of improvement efforts, market developments, and currency. Energy experienced a doubling of prices in the fourth quarter, driven by seasonally colder weather, almost doubling results. I'm happy to announce that the board of directors have just made a build decision for the primary technology pilot. Primary metal has been a frontrunner and benchmark in improvement work, continuously reducing cost to the $300 program and the ongoing $180 program for joint ventures.
After several rounds of cost reduction, you are taking the low-hanging fruits, and technology then becomes the key to unlocking the next improvement ambition. By building and running this pilot, we will not only be building a competitive smelter, not only be verifying the next generation smelter technology when it comes to energy consumption and carbon emissions, but we will also be testing and gradually implementing spin-off effects to utilize the rest of our portfolio, resulting in the additional 100,000-ton creep ambition, which we announced at our Capital Markets Day last year. This comes on top of the earlier announced 100,000 tons, bringing the total creep capacity in Hydro to 200,000 tons, spread among our fully owned and joint venture smelters.
The main drivers behind the crete ambitions are larger anodes, new cathode technology, improved process control system, mathematical modeling tools, and continued focus on our business system, Aluminum Metal Business System. If we look at the CRU's 2016 price assumptions, then the additional spin-off effects have an annual value of NOK 400 million per year. We will spend NOK 2.7 billion, or around $4,000 per ton, which is a net of around NOK 1.6 billion grant from Enova. This is somewhat higher than the previously communicated figure due to inflation and currency movements since the investment decision was announced a year ago. In an international context, this is competitive CapEx per ton, especially taking into account the limited size of the smelter and the build cost of our Årdal recent technology projects.
The project is now proceeding, and we will expect the first liquid metal to be poured in the second half of 2017. As we indicated at Capital Markets Day, we have completed the B2A program in Bauxite & Alumina, and also the World Class Improvement program. In total, we have delivered around NOK 4.5 billion in improvements since 2011, with NOK 800 million of these in 2015. Finally, when it comes to the market side, then we have reduced our 2016 global primary demand outlook from 4%-5% to 3%-4%, reflecting a weaker demand growth in China. However, we have also seen a significant supply side response, also mainly here in China, with results in largely balanced market expectation for 2016.
If we look into 2016, we will continue influencing the factors which we control ourselves. We are in a first quartile position on the cost curve, both for alumina and aluminum. We will deliver NOK 1.1 billion in 2016 of the better ambition of NOK 2.9 billion, to further strengthening our relative industry position. The decision to build a Karmøy technology pilot is an important part of maintaining and strengthening our position in the primary cost curve. Both on the bauxite and energy side, the securing of resources is important. A potential milestone in 2016 will be a decision to go ahead with the MRN transaction. As the due diligence is still ongoing, there are still two potential outcomes here.
On the energy side, we have still a sourcing gap to fill after the Statkraft contract expiry in 2020. A potential positive decision on the industrial ownership law proposal is important for us to secure our own captive portfolio for long-term industrial use and increases our flexibility for the future. We will continue to high-grade our portfolio and rolled products. At the end of this year, we should be ready to produce the first automotive body sheet for aluminum- hungary car customers in Europe from the AL3, Automotive Line three production line in Germany. Finally, as recent months have shown us, we operate in cyclical markets, and the importance of a strong financial position is a clear competitive advantage in our industry. We continue having this as a priority, allowing us to maintain a safe and reliable dividend also going forward.
Thank you, Svein Richard.
Operator, we are now ready for questions.
Thank you. If you would like to ask a question at this time, please press the star or asterisk key followed by the digit one on your telephone. Please ensure that the mute function on your telephone is switched off to allow your signal to reach our equipment. If you find that your question has already been answered, you may remove yourself from the queue by pressing star two. Again, please press star one to ask a question. We will pause for just a moment to allow everyone to signal. We will now take our first question from James Gurry from Credit Suisse. Please go ahead. Your line is open.
Thanks very much. Congratulations on a good result. Just a quick question about Karmøy. I know the CapEx per ton has gone up a little bit. Tell us about. I think, is this 75,000 tons? What ultimate capacity and what steps would you see this possibly being built out into a large smelter? And would you expect that CapEx per ton to be a little bit lower if you were to take that decision a few years down the track?
Thank you, James. With regard to the Karmøy technology pilot, we are now focusing on establishing the pilot and ready to start the production and pilot in the end of 2017. And then we are going to test out several technology elements. We already have some testing ongoing, and that has been ongoing in our research center in Årdal in Norway. But we are now going to do this in the pilot scale. How long time it will take before we are ready to expand depends also on the timing that is necessary to test out all technology elements that we are planning. And also, the market situation at the moment, where we are ready to conclude on the testing.
It is clear that, having built the rectifier or the infrastructure for the pilot, it becomes a good investment case for expansion. We are talking about at least after 2020. We are not in a short-term hurry to do that. Also the market is not ready for such a big investment and capacity, because then we are talking about 200,000 tons plus on top of what we have now. With regard to investment cost, of course, this will be very attractive from investment cost point of view, but we will come back to that later, how much that will be.
We are talking about quite interesting figures.
Thanks for that.
We will now take our next question from Menno Sanderse from Morgan Stanley. Please go ahead. Your line is open.
Oh, hi, gentlemen. Good afternoon. A couple of questions. Not so much about growth, because I think nobody really wants growth at the moment, unfortunately, but that's the way it is. Just on two statements that the company makes on slide 36. Actually three. The first one is the company talks about securing resources. You talked about MRN a little bit. Is there anything else at MRN you're looking at in terms of securing your resources, or are you really only referring to that possible transaction?
Thank you very much, Menno. With regard to resources, we are on raw material side, we are talking about MRN.
Yep.
Also talking about energy resources.
Okay.
We have one of the power plants in Norway, the Røldal-Suldal power plant is for reversion in 2022.
Yep. Yep.
With the new legislation in Norway, it will be possible for us to
To keep industrial ownership of that capacity.
Okay.
That was the second part to it.
Okay, great. Do you think you can do MRN and maintain financial stability given the rating review you're now undergoing despite having net cash, and given, you know, how volatile credit markets are at the moment?
Hi, Menno Sanderse.
Hi.
This is Eivind Kallevik. Yeah, I think we're pretty comfortable with the balance sheet that we have at the moment.
Mm-hmm.
The way we look at earnings for the year that we could consummate the MRN deal without risking the balance sheet.
Okay.
for the company.
Okay. Finally, the last point on slide 36, the company talks about high grading the portfolio, and this morning you referred, I think, to the rolling division, which makes sense. Italy is sold, body-in-white is up and coming already. Is there anything that you actually need to do to high grade or can do to high- grade that portfolio further?
What we will do, Menno, is to continue to look at things that's similar to what we've done in the past. I mean, we're just wrapping up the Used Beverage Can facility in Germany at the moment.
Yeah.
We did a small acquisition with WMR Recycling GmbH last year. We do the body-in-white. We will look for pockets of growth organically or through smaller acquisitions where we can improve the margin situation and the competitive situation. It's those kinds of investments and high gradings that you would be looking for.
To the capital requirements, given this is already in Norsk Hydro's history an enormous CapEx year, is that going to add more to the CapEx or within the budget that you've set for the next three years?
I think the CapEx budget of roughly NOK 8 billion that we set.
Yeah.
For this year is of course including the known projects.
Okay.
Any acquisitions on that would come on top of that. As we said before, you know, we still have a lot of work to do completing the Automotive Line three in Germany, as well as then starting to construct and build the Comet UBC. You know, this is not something that we spend a lot of time at the moment.
I know. Okay. Understood. Thank you.
We'll now take our next question from Daniel Major from UBS. Please go ahead. Your line is open.
Hi there. Good afternoon. A Couple of questions from me. Firstly, on the dividend policy, what's the thinking behind basing it on reported earnings rather than underlying, especially given with your reported earnings have been repeatedly hit by non-cash FX losses, which you obviously don't control? Secondly, at spot commodity and currencies, given your increase in CapEx this year, the potential MRN transaction, divestments, et cetera, where would you expect net cash or net debt to be at the end of 2016?
Daniel, I think even if you look at the underlying EPS or underlying earnings for 2015, you still get to some 34%-35% as a payout ratio, which is fairly close to the over the cycle target of 40%. Even if you look at this from that angle, I think we're, you know, comfortably there where we guide, so to speak. When it comes to the net cash position, still. Well, it's hard to say. It depends on what you assume.
If you use today's spot prices and do the sensitivities on the Q4 earnings, then it's fair to assume that the net cash position will be somewhat lower by the end of 2016, but still at a comfortable level, we think.
Okay, thanks.
We will now take our next question from Hjalmar Aalberg from Kepler Cheuvreux. Please go ahead. Your line is open.
Thank you. First a question on the effect of alumina prices in both primary metals and bauxite and alumina. As I understand it, the lag is a bit more in primary compared to bauxite and alumina. If it's fair to assume that costs will decrease a bit more due to lower raw material prices, then revenue will decrease in bauxite and alumina next quarter with current alumina prices.
It's right. In B&A, we have about a one-month lag to the LME, while in primary metal, we have about a two-month lag to the LME. I think that gives you a fairly good indication as to how this will trend into Q1.
Okay, great. Then looking at the cost savings program that is ongoing in Bauxite and Alumina, how will this develop in 2016? Do you see it more back-end loaded or is it something coming already in the first half of the year, do you think?
We are talking about the cost reduction program of NOK 1 billion that is going to be delivered in Bauxite & Alumina over the next years. Half a billion is going to be delivered this year. I think we should expect that it will be gradual development of this through the year.
Okay, thanks. Then a question on Albras. You have a negative EBIT around NOK 100 million, and you talked about the time lag effect on premiums. Was that some kind of one-time effect or is it just will still be recurring in Q1? The question is actually, will EBIT be flat with current pricing next quarter or will it improve if we have the current price for next quarter in Albras?
You should see that more as a one-time effect, Hjalmar, and then go pretty much in a normal development as of from today and out.
Okay. Perfect. Then just trying again on the aluminum premiums. You guided for stable levels in Q1, but the pre-booked are down around $50. That still implies somewhat lower levels than Q4, I guess. Is that fair to assume, or have you seen standard premiums coming back up a bit?
Yeah. Standard ingots premiums have come up somewhat. Which is part of the reason when we compare this also to what we booked so far, which is about 60% of the exposure. We guided between $250 and $300 per ton for the quarter as such. Those are levels that we're fairly comfortable that we will hit when we close out the quarter.
Okay. Perfect. Thank you very much.
We will now take our next question from Rob Clifford from Deutsche Bank. Please go ahead. Your line is open.
Thanks, gents. Three questions. First, ramp up on Karmøy. I might have missed it. What to get to 75,000, what sort of ramp-up are you expecting in that from the second half of 2017? Second question is on alumina contracts. You talked today about the rolling off the old contracts. We've known about that for some time. We've now got spot price plummeting. How do you think about how you're gonna contract your alumina tonnage going forward in terms of linking it into, you know, long-term offtake agreements and pricing it? Are you fixated on sticking with spot, is the second question. The third is just on the scrap sorting business you picked up in Germany. What are you seeing out of that?
Is that something you can roll forward and get benefits out of from the rest of the system, or has it turned out that that doesn't have such leverage?
Thank you, Rob. When you got the ramp of the pilot, we restart the first liquid production in the end of 2017. There are many ways of doing that. Normally we can start a couple of electrolysis cells per day. Here we are talking about a technology pilot where there'll be new technology elements, so it could take some more time. If you think we are talking about 60 cells altogether, it will take some months before we reach full production. We're talking about the end of the first quarter and somewhat into the second quarter of 2018 then we should be at full capacity in the technology pilot.
It depends very much on also some testing we are doing now. At least in the second half of 2018, we should be in full production.
What's the limitation there? Is the heat upgrades on the cathode, I take it?
Yeah. The limitation is to establish the isotherms in the cathode, they're in the right positions, and make sure that the heat-up of these huge electrolytic cells goes smoothly, so we achieve the lifetime of the cathode that we want to achieve. Then we are talking about at least seven to eight years. Here we are talking about also quite well-developed technology, I would say, where you're talking about also energy consumption that have never been tested before at these big cells down to 11.5-11.8 kWh per kilo aluminum. That will require a bit of smooth startup procedures.
As I said, in the second half of 2018, we will be running full speed.
Does that mean you're not running at 11.5 DC kilowatts per kilogram at Årdal already?
Well, we have a very limited number of testing or at that level, but we have verified that it is possible, but we haven't verified that at pilot scale, and that is why we will now do it at pilot scale at Karmøy.
Sure.
Rob, on your alumina contracts, it is, as we stated this morning, roughly 50% will then be available for shorter term pricing, on average in 2016. We're quite comfortable doing that at, you know, PAX prices, which we believe are closely related to the market and represents a good market basis. Now, whether that will be long-term or short-term contracts, it could be both, or it could be medium-term. The important part of it is that, for us at least, you get the market reference in there and not link it as a simple percentage to LME, which really doesn't represent the cost of producing alumina.
Sure. Okay.
Very good. We got to your third question on scrap sourcing technology and the possibility of rolling that out to a wider setup. I assume you are thinking about utilizing that technology for the different remelters we have distributed in Europe and U.S. Definitely that is possible. We have no technology, but it is possible to separate aluminum from other metals, but also technology where it's possible to differentiate between different aluminum alloys. That is really the way where you can upgrade the value of mixed scrap. We can buy mixed scrap for very low value and upgrade the scrap into different alloys and utilize these alloys for product production.
We of course also are utilizing these alloys and the different aluminum alloys for alloying elements into primary metal. We also save alloying materials. There are several benefits of developing this further because this technology has a great potential, and we see that this has a very
Interesting and also a very important development further into achieving access to metal units in the different markets where we have our remelters.
What's the sort of size of the prize you're talking about here in terms of talking margins? You know, remelting reasonably low, lower margin business. How many percentage points margin increase do you think is possible out of this, potentially?
It's difficult to give you an exact figure because there we are talking about also market price of scrap that varies quite a lot. Of course, our target there is to achieve a situation where we can buy cheaper and cheaper aluminum metal units in a mixed scrap and produce higher and higher added value products out of it. The difference between, like, metal cost and also the product value is increasing, and that gives us interesting potential for further value creation.
Great. Thanks, guys. I appreciate the opportunity.
We will now take our next question from Daniel Lurch from Exane BNP Paribas. Please go ahead. Your line is open.
Hi. Thanks very much for taking my questions. Just two quick questions from my side. In relation to your 2016 CapEx guidance of around NOK 8 billion, could you explain a bit what the FX exposure is here? Is there any headroom if current spot FX rates remain where they are? The second question is, in terms of M&A, when you're currently investigating the potential increase in your stake in MRN, are there any other? I mean, you've got the balance sheet availability. Are there any other areas where you could consider increasing your exposure? I mean, is there any geographic areas where you would be interested in, would rolling assets make sense to you, or more on the upstream, on the primary side?
Thank you very much.
When it comes to the CapEx figure first, we haven't given an exact split in the past, but the majority of the split is related to the Brazilian reais as we are doing the upgrade of the red mud or building a new red mud deposit area in Brazil, as well as the new tailings dam area in Paragominas. To a large extent not related of course to the Karmøy pilot. I mean, the Karmøy pilot is pretty much in 2016 and 2017. About one-third of that is related to euro exposure. It is a mix, let me put it that way.
B&A pretty much all BRL, primary metal to a large extent, NOK, but 30% of the Karmøy technology pilot is euro- exposed.
When it comes to the question about M&A activities, it is really the MRN we are talking about, and have also communicated. We have quite a long list of CapExes, as you know, that we have communicated. The Karmøy pilot is a big one. We are now ramping up the UBC line in Germany, and we are going to finalize the automotive line for body-in-white production in Germany for our European automotive customers. We are quite busy with these projects. We are following carefully what is happening in the market, but we are not communicating anything around what is going on when it comes to M&A besides what I already mentioned.
Okay, thanks very much.
We will now take our next question from Christian Kopfer from Nordea Markets. Please go ahead. Your line is open.
Thanks, operator. Good afternoon. Just two quick follow-ups for me. Firstly on input costs, obviously, we've seen oil prices more or less collapsing over the last year. However, looking at fuel oil, for example, or and also caustic soda, those seems to be more sticky for you. What are the trends that you see on those? Is it quite significant lagging effect, for example, on fuel oil for you to gain on the falling underlying oil price?
When it comes to the fuel oil, Christian, this is what we buy in Brazil, of course. This is not spot price, so it doesn't necessarily follow the international oil market from day to day. It does, however, follow the trend over time. What we've seen in the last period is that the price is coming down. There's still a gap down to the international fuel oil market.
Right.
There's still a little bit of a potential to come. When it comes to the caustic price market or the caustic market, that has also been coming down quite a bit. There's a little bit of an uptick in Q4, but not significant.
Right. Thanks. Finally for me, for example, on the steel market, we have seen EU investigating potential dumping of the standard steel from Chinese producers. Can you update us, what's going on on aluminum on the anti-dumping side, please?
On the anti-dumping side, we are following this, of course, carefully, that these initiatives that are normally taken by associations, aluminum associations. There are some dumping activities ongoing. Of course, we know that the criteria for dumping is that it has to be price levels below cost of production for the sellers and also that they are damaging the industry. There are some criteria that are already fulfilled, but we are following this carefully, but we don't have anything new to communicate in that respect.
Right. Okay. Thank you very much.
As a reminder, to ask a question at this time, please press star one. We will now take our next question from James Gurry from Credit Suisse. Please go ahead. Your line is open. Please go ahead, caller. Your line is open. Please unmute your line, caller. Your line is open.
Oh, hi. Can you hear me?
Yeah, we can hear you, James.
Just one quick follow-up question in Brazil. Can you explain what happened in Q4 and what you expect to happen going forward with the payment and the collection of tax related to the ICMS? I think you alluded to last year that you might have some timing differences between what you'll have to pay and then potentially what you can charge domestically.
Yeah, we're in a situation, as you say, we pay on the electricity consumed at Albras, and then we can offset that or we get credit, if you like, on the domestic sales. We are progressing on the domestic sales, and we anticipate to cover, if not all, at least most of the ICMS charges that we see for the year of 2016. But there may be a little bit of a time lag, but it's progressing quite well.
You might have more of a cash flow outflow rather than a cash flow inflow that might be a little bit lagged?
Might be a little bit lagged, but I don't think you will find it to be so significant that it's going to make a huge pop in your estimates.
Okay, thanks.
As a reminder, to ask a question at this time, please press star one. There are no further questions in the queue at this time. I would like to turn the call back to our host for any additional or closing remarks.
Thank you. Well, as there seems to be no further questions, I suggest we end this quarter's call. From all of us here in Oslo, I would like to thank you for your attention today. If you have any follow-up questions, please do not hesitate to contact us in IR. Thank you, and have a nice evening.
That will conclude today's conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.