Thank you. Good afternoon, and welcome to Hydro's fourth quarter 2014 conference call. I'm sorry to inform you that our President and CEO, Svein Richard Brandtzæg, will not be able to attend as he needs to attend his father who is terminally ill. We will start with a short introduction by CFO Eivind Kallevik, followed by a Q&A session. 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, Eivind.
Thank you, Pål. Good afternoon, everyone. It is with great pleasure that we today could announce a Q4 result of 2014, which are the highest results that we reported since we became a pure-play aluminum company in 2007. The underlying EBIT for the quarter was NOK 2.9 billion, roughly 2x the NOK 1.4 billion from Q3, and up 6x compared to the fourth quarter last year. The increase from the third quarter was primarily driven by an increase in the all-in metal price, lifting the results for the primary smelters as prices increased by some 13% measured in NOK. In addition, the increase in LME price lifts the realized alumina price through LME link contracts, which still account for 75% of the contract portfolio for 2014.
We also saw an increase in the Platts Alumina Index price, which also contributed positively. For the second quarter in a row, we do see big improvements in operating costs in Alunorte and Paragominas in Brazil, as well as increased production levels. The improvement efforts are continuing to come through on the bottom line, and here, supported by the positive currency developments. I'm also happy to announce that, on the fourth of January, ESA, the EFTA Surveillance Authority, approved Enova's NOK 1.5 billion support to our Karmøy technology pilot. Provided that we're able to secure power agreements at competitive and sustainable prices, this plant will be built, and it will be a vital part of our long-term agenda of reducing energy consumption. The pilot plant will be the world's most efficient cell with the industry's lowest CO2 footprint.
Also, the board of directors in Hydro propose a dividend of NOK 1 per share for 2014, and this is for the annual general meeting to decide in May. Furthermore, we have also revised the dividend policy from 30%-40% of net income over the cycle. Both measures reflecting the commitment to return cash to shareholders, in addition to reflecting the strong balance sheet and positive earnings outlook going forward. If we then end up by summing up 2014, we continue to see tightening physical markets as demand in the world outside China has exceeded production and started to eat into the large inventories that we have seen. This has clearly been reflected in an increased all-in price and especially enhanced when you convert and translate this into Norwegian kroner.
As we said at the same time last year, we would stabilize Alunorte production, and we have stabilized and lifted both the Alunorte and Paragominas plants and at the same time reduced the cost basis. We have updated on the improvement programs at Capital Markets Day, and all of them are now at or ahead of the plan, delivering significant contributions to the bottom line. Now, if you look into 2015, we will obviously continue to work on the improvement efforts, both on the commercial and the operational side. As earnings outlook has improved, now is the time for us to really show the strength of the improvement culture. Delivering when you have to deliver is one thing, but the true culture is really reflected when deliveries are done in improved times.
We will also continue the strong focus on capital discipline going forward in these times of improved earnings. We will continue to high-grade the portfolio and perform selective growth in areas such as body-in-white and recycling, as well as smaller scale power operations. As I mentioned, we will increase our technological lead through the Karmøy technology pilot as another example. The technology pilot will also affect the last point, which is to lower our energy consumption and footprint to strengthen our future competitive climate advantage. That is, of course, to be carbon neutral by 2020.
Thank you, Eivind. Operator, with that, we are ready for questions.
Thank you. If you would like to ask a question at this time, please press star one on your telephone keypad. 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 pause for just a moment to allow everyone to signal. We will now take our first question from Hans-Erik Jacobsen from Nordea Markets. Please go ahead.
Thanks, operator. Good afternoon. My first question relates to premiums. We have seen premiums coming off. I would not say dramatically, but they have still come off in Europe. First question relates to what you see regarding market sentiment in Europe on the premium side.
Thanks, Hans-Erik. You're right, there is a small softening in the premium market the way we see this in Europe. But remember that the premium situation both in the U.S. as in Southeast Asia remains relatively strong. I think you also have to reflect on the fact that the premiums have been going up, you know, significantly from during all of 2014 and partly also in 2013. Even though it's down slightly, it's still at very high levels from a historical perspective. Now, we did see, I think the market and industry saw significant customer destocking towards tail end of 2014. I think it's really a little bit uncertain at the moment.
We will see now when customers come back to the market and start to price metal in Q1 and Q2, as to the significance of this softening. It's a little bit too early to say, but it's still at fairly high levels the way we see this.
Also on your products, I guess it was already mentioned that the premium on more value-added products hold up significantly better. Is that fair still to assume?
Yeah. I think you should expect over time, if there's a softening of the standard ingot premiums, it's not unnatural that that will have also an impact on the value-added products, over time. What we've guided on, however is that as we get into Q1 with the booking profile that we do have, and the bookings that we have done for the first quarter, which is roughly 80%-90% of the production, we expect an increase in our realized premium of another $60 in Q1 compared to the fourth quarter.
Yeah. Also if you look at the difference between the premiums on the European market and in the U.S., I guess, is there any reason why this difference should really remain? I mean, I'm not asking for a forecast on premiums, but the difference is quite abnormally high at this point, right?
Well, what we've seen in the past is that these things tend to balance out. I mean, you saw the same thing if you go back to fourth quarter of 2013, right? When the premiums in the U.S. started to pick up sharply, and European premiums were a little bit lower, and then Europe picked up shortly thereafter. I think you will find the premiums over time will balance out.
Thanks. My final question on the Karmøy, the plant that you are building. Just so I understand correctly, the net CapEx to Hydro is that the NOK 3.9 billion?
Well, the NOK 3.9 billion is the gross figure.
Okay.
We have the CapEx of NOK 1.5.
Perfect. Thank you. Thank you very much.
We will now take our next question from Jason Fairclough from BofA. Please go ahead.
I guess good afternoon. Thanks for the opportunity to ask the questions. Just a couple more questions on your new toy on Karmøy. Just wondering, how do you think about this? Is this an ongoing R&D drag on the business, or is this a proper asset that will generate its own return on capital?
Hi, Jason. Well, I don't think it is a toy, to be honest, if I can reflect on that first. It is a proper investment. First and foremost, of course, it is to demonstrate and verify the technology belief that we believe that we do have in this market. That plant, when operated, will also yield returns. In addition, of course, there will be technological spin-offs from the Karmøy pilot that can be implemented in the other operating plants that we have over time. It is a proper investment, but it is to verify the most climate-friendly and energy-efficient aluminum production in the world.
If you don't mind, could I just maybe push you a little bit on how to think about this? So you said first production in 2017. How long do you think before a plant like this would be covering its cost of capital? I guess in terms of power costs, is it appropriate to think about the power prices that we see in the Nord Pool at the moment?
I think we haven't. I mean, this is one of the outstanding issues, not the return on cost of capital, but the power, right? We've made the investment decision basically to move ahead with the project maturity even further, but it's still pending on what we call sustainable power supply, which certainly has to do with the power prices. The important part for us is of course to ensure that we have a competitive power sourcing that is sustainable and competitive in a global context where this plant will compete.
Okay. What about the return on capital?
You know, this plant will ramp up, and when we get into to full production, it should be able to earn its cost of capital the way we see this. 2017 is the earliest, right? We expect to do, if everything goes according to plan in terms of power sourcing, we will have a build decision in 2016, early 2016 at the earliest. 2017 is really the earliest time when we will see metal out of the plant.
Last question from me. Is this something we should put in our models today, or do we really need to wait until we get a final build decision?
We haven't made the build decision. That will not be made until first quarter 2016. I think you can start to model it from 2017 and onwards.
Okay. Thank you very much.
We now take our next question from James Gurry from Credit Suisse. Please go ahead.
Thanks very much, guys. Congratulations on a pretty good result today. Just quickly again, on that same smelter proposal. I think you've got growth CapEx this year of just under NOK 1 billion. Is your decision today going to affect that number at all, or is it more likely to fall into next year?
There will be some growth CapEx in 2015, more to the tune of NOK 100 million-NOK 300 million.
You'll be spending above the NOK 6.5 billion?
It's also what we've guided on so far.
Okay. Just quickly on the dividend policy, what's the real relevance of the 40% payout ratio given that, you know, your balance sheet meant that you were able to pay out a lot higher than the previous 30% payout ratio, so it wasn't really a relevant measure. Should we think about it as you've got a minimum dividend policy, and perhaps you'll aim at 40% if you ever get to a sort of steady state, consistent earnings basis?
I think you have to read this two ways. I think first and foremost, at least for me, it's important signal that we lift the absolute level to NOK 1 per share for 2014. Of course, we will work hard to maintain a stable dividend also going forward. The lift from 30%- 40% is also a signal that you know further proving that the commitment to serve the shareholders is very strong in the company and will remain also stronger going forward with cash returns.
Okay, thanks. That's all for me.
We now take our next question from Jatinder Goel from Citi. Please go ahead.
Hi, good afternoon, gents. Just two questions. Apart from seasonality, any additional comments you can make on the weakness of Rolled Products division for the fourth quarter, and how do you see it going forward into first quarter and the rest of 2015? That's one. Secondly, just on the dividend and capital return side, you said share buybacks and extraordinary dividends in the period of strong financials. Anything you can share on the quantitative side, how will you define the strong financials? And will that be considered only at the year-end, or would you look at returning excess cash by either way in the interims as well? Thank you.
Thanks, Jatinder. If you look at the Rolled Products side, first, clearly I think the volume in fourth quarter is probably somewhat lower than what the market expected, driven not only by seasonality, but I think also by customer destocking towards the end of the year, probably to a larger extent than what we've seen in the past. The way we read this is this is probably also driven by some customer uncertainty, in particular in Europe as to the strength of the economy, going into 2015. We do expect volumes to come back up in the first quarter of the year as normal seasonality kicks in.
Remember that we're starting from a somewhat lower volume point, first quarter 2015 compared to first quarter 2014. Probably slightly lower volumes, this quarter compared to the same quarter last year. On the dividend side, when it comes to share buybacks, that is something to do has to be approved by the annual general meeting in May. If that was up for decision, it is a fair assumption that that would been commented upon in today's presentation. I think you should expect to see that for this year.
Thank you.
We will now take our next question from Amit Sharda from Société Générale. Please go ahead.
Hi. Thanks for taking my questions. I have a couple of it. First is, could you please guide us on what is the net debt levels at Sapa and Qatalum? Second question would be, what kind of interest expense on pension liability do you see in 2015 given that your pension liability has increased? Lastly, on the market, what do you read from the inventory declines? What % of it do you think is going to the market for consumption, and what is going to the off-market storage? Those would be my questions. Thanks.
Yeah. If we start with the inventory, which I guess was your last question, Amit.
Yeah.
You know, we continue to see a decline in the reported inventories. We continue to see that throughout 2014, and we believe that we'll see that so far into 2015. The question, of course, the big question is where does that metal go? Does it all go into the physical market, or is it just being rolled into unreported inventories? It's probably a little bit of a mix, I think. Certainly parts of it goes into the physical market, then filling the gap between production and demand. We said for 2014 that the supply-demand gap or production-demand in the Western world or world outside China was roughly 1 billion tons.
In the same speed that we see in 2015. When it comes to the debt level in Qatalum and Sapa, the aggregated amount is some NOK 7.3 billion. Sapa in isolation is roughly NOK 1.6 billion.
Hmm.
What? Oh, for our share, yeah. Sorry, NOK 1 billion for our share in Sapa.
Right. On the interest expense and pension liabilities, do you see any kind of increase in 2015 compared to 2014 levels?
Not any significant change on it.
Just a follow-up on the investment, there is substantial increase in Primary Metal and Rolled Products in Q4 compared to previous quarters. What was driving that? If you can throw some light on that.
Yeah. That is also partly due to seasonality. In fourth quarter in Rolled Products, we basically partly shut down parts of plants for maintenance, and that's also when you do bigger investment upgrades.
Mm-hmm.
You typically also do. I think historically you will see that we also do more investments and maintenance investments in the primary smelters in fourth quarter compared to other quarters of the year.
Right. Thanks.
Mm-hmm.
We now take our next question from Eugene King from Goldman Sachs. Please go ahead.
Hi all. A couple of questions. Just on Paragominas run rate in Q4 is above nameplate. Can we model above that, or would we be safer at nameplate across the full year?
Hi, Eugene. We've guided into Q1 on stable volumes. I think you should, you know, at least we plan to see the same figure also for the first quarter. Whether that is 100% even, 101%-102% remains to be seen, but at nameplate capacity or slightly above.
Okay. Just a second question, just again on divvies. You know, the gross payout at the N OK a share is about NOK 2 billion, but your cash generation's probably, you know, at spot-ish everything is probably about NOK 8 billion-NOK 9 billion, which will leave you with a really big net cash position at the end of the year. At what kind of level do you think about introducing a buyback or utilizing that cash balance?
I think, you know, it's still early days, I think, of this very positive cash generation. We do have a positive earnings outlook, as you know, for the also in Hydro for for the year of 2015. I think we will have to come back with the cash usage on how to spend that, at the end of the year. It's quite clear, even with the NOK 2 billion dividend payout, we will very soon be into a positive net cash balance. We will watch that carefully and spend it wisely.
Thanks.
We now take our next question from Hjalmar Hellberg from Kepler Cheuvreux. Please go ahead.
Thanks. First a question on Paragominas payment. How much of this payment did you do in Q4, and how much remains?
Hi, Hjalmar. You know, we had two tranches for the acquisition of the Paragominas shares. Each tranche was roughly $200 million, or not roughly, it was $200 million, so $400 million in aggregate. If you look into what we actually paid for the first tranche, it's probably, it's not probably, it's closer to $50 million, as we have some guarantees from Vale on that asset. Roughly $50 million for the first tranche.
Okay. 30 remaining or so?
$200 million remaining for the second tranche. First one cost $50 million instead of $200 million.
Okay. Thank you. Looking at the realized alumina price, you were expecting raw material prices in primary metal division to go up. Would that also imply a higher realized alumina price in the bauxite and alumina division?
Yes, that is fair to assume. As we know, we sell roughly 50% of our production internally. As you see higher earnings and higher prices realized in bauxite and alumina, that also will have a positive impact in B&A and negative impact in primary metal. We also expect a somewhat higher ratio of PAX price volumes in 2015 compared to 2014, where roughly 30% will be based on the PAX. Again, lifting the earnings in B&A and slightly higher costs in primary metal.
Okay. A question on depreciation. It was up a bit in both Bauxite & Alumina and Primary Metal in Q4 versus Q3. Was that due to something special, and would these levels remain or will it go lower or higher in the next quarter?
Well, the changes you see in depreciation, Hjalmar, is very much to do with the currency development. As you translate, you know, BRL depreciation into NOK, it has gone higher because of the currency development.
Okay. Thanks. Just one last on alumina cash costs. You expect it to go up a bit in Q1. Will it go up to those levels seen in Q1 to Q3, or will it still remain lower than those levels?
I think we said it will go up somewhat compared to the Q4 results, which is not back to the Q3 results.
Thanks.
Somewhere in between.
Thanks.
We now take our next question from Rob Clifford from Deutsche Bank.
Yes. Good afternoon. Two questions, one on strategy and one on the market. The market question, you've benefited from FX, but so do others. Do you think Russia will hold the line and keep production offline, and keep the market tight?
The question on strategy, Karmøy, it's clearly a commercialization of a technology. How secret is this? Is this something that you're looking to go on and sell? Is it something you want to use yourself? Why haven't you gone to Qatar with this technology, given that there is power available there? Is it part of keeping the technology in-house to yourself or is it a CapEx decision there? Just some comments around the strategy for your smelting technology.
If you start with the Russian situation, clearly the Russian production, given basically the collapse in the ruble, has made that much more competitive, if you like. It is hard for us to sit on the outside of Rusal. It's not impossible, and we don't do that, of course, on the Russians' decisions. I think they've made some fairly clear comments themselves, in terms that they will not ramp up old Kitimat capacity, given today's market or given today's prices or the market balance in the world as it is today. That is what we have to base it on.
When it comes to Karmøy, we believe and the way we see the power prices in Norway at the moment is that it is actually globally competitive. As such, Karmøy is a very good place to build it all from a logistical and competence perspective. When it comes to, you know, selling the technology, one of the preconditions in the approval from the EFTA Surveillance Authority is that we have to license this technology within Europe or within the EU, should other parties want to license the technology. That, of course, we would do if that happened. This is only within the EU region.
What? That would be licensed to others. What about use for yourself? I mean, looking beyond this. This is just 'cause this is a small pipeline, basically.
Mm-hmm.
How else would you use it if it's successful?
Well, it is also to verify, you know, when the time is right to build a new smelter, whether that's a full expansion at Karmøy in due time, whether that is building Kopervik II, something else. This is the verification of the technology that we would, you know, if successful, be using at the new smelter site. That's a long time into the future.
Sure. For sure. Great. Thanks, Eivind Kallevik.
We will now take our next question from Jeff Largey from Macquarie. Please go ahead.
Yeah. Hi, good afternoon. I just have two questions, I guess both focused on bauxite and alumina. The first is just looking at the improvement program there from B&A. I mean, it seems to be, as you say, progressing ahead of schedule. I mean, is there upside scope to this, you know, NOK 1 billion program, or is it just simply that you may be delivering the savings, you know, ahead of the end of next, or this year, I should say, 2015?
Good afternoon, Jeff. I think we, as you say, we are ahead of plan. Original target for 2014 was NOK 600. We have communicated that we delivered NOK 700 at the end of the year, meaning that there is an additional NOK 300 to be delivered for the rest of 2015. Whether there is upside potential above that is, you know, is not something that we communicated so far. But from experience, it is often so that when you run these programs, you know, you get the mentality change in how to look for improvements and sustainable improvements, but typically you find something more. You know, if and when we get those quantified, we will of course communicate that to the market, but not as of yet.
Okay, that's helpful. The second question is just on back to Bauxite and Alumina and on ICMS. I mean, as you put in the presentation, the dialogue continues and this you know, these ICMS are gonna be revisited in July. I mean, you know, can you kind of, I mean, I guess, can you shed some light on the nature of the dialogue? Is it something that's a very active dialogue, or is it something that really is, you know, you really will kind of revisit in July and will have a decision at some point then?
No, it is clearly a situation where we have continuous dialogue. It's not something that there's no dialogue today, and then we'll sit down in July. As you know, the election long ago, the governor is in place and, you know, there are several meeting places with both the governor as well as his people on these topics, as we speak. It's an ongoing and active dialogue in Brazil.
I mean, is there any sense whether you think you have a case for some relief against these ICMS or too early to say?
I think it is too early to be conclusive. I think both parties understand the importance of this topic. We don't, you know, in Brazil and other places, nothing is concluded until it is concluded in a way. It's too early to guide on the specific outcome.
Okay. That's great. Congrats on the very good results. Thanks.
Thank you.
We'll now take our next question from Danielle Chigumira from UBS. Please go ahead.
Hi there, and thanks for the call. A couple of questions. Firstly, on the market, you said that you expect a deficit excluding China. Given the Chinese export data we've seen out of China continues to ramp up, how concerned are you that that finds its way into the rest of the market and upsets the positive fundamentals that we've seen outside of China? Perhaps to ask the balance sheet question a slightly different way, all else being equal, if we're here in a year's time and spot has prevailed.
You would have a substantial cash pile on your balance sheet. Unless something else material comes up, can you see yourselves in a year's time recommending a material buyback to shareholders?
Yeah. On the China question, first, as you know, we did see, I would say, quite a big increase in semis and fabricated exports out of China towards the tail end of the fourth quarter.
Yeah.
Of course it has an impact on the deficit in the Western world. The question, how sustainable is this export? That has very much to do with the difference or the metal advantage that the Chinese players have at the moment. We've had these situations in the past, and they've tended to normalize over time. It's a little bit too early to say in the year as to how this is going to play out. Obviously it is one of the concerns that we do have.
Okay.
On the balance sheet side, you know, if we sit here in a year's time with a big pile of cash, you know, we will have the discussions on how to spend that. It is, as we talked about in the past, there is a limit to how much cash I think even as a Hydro employee that we can sit with on the balance sheet, being non-productive. Whether that will find its way in buybacks of shares, extraordinary dividends, if that's the case, that is still too early to say. That's a debate we will have to take next year.
Okay. Can you give any further color on what that, the limits of that net cash would be? Is it NOK 2 billion or NOK 5 billion or NOK 10 billion?
Not as of today, Danielle. I think we will have to cross that bridge when we get there.
Sure. Okay. Thank you.
We'll now take our next question from Amit Singhal from Société Générale. Please go ahead.
Thanks. I just have one last question on the CapEx timeline for Karmøy. Suppose you find the power solution, then, how do you see the ramp-up in CapEx? Is 2016, 2017, 2015, 2017? How do you see the split in CapEx? Thanks.
We thought for this year that roughly NOK 100-NOK 300 for 2015, then the major part of the remaining share will obviously come in 2016, partly into 2017 as we ramp up production. Most of that would come in 2016.
Yeah. Thanks.
We'll now take our next question from Erik Maaløer Danske Markets. Please go ahead.
Hi. Congratulations on the very solid results today. I was just wondering if you could just comment a little bit on the Chinese export of semis. It's been quite vast volumes lately, and I was just wondering if you have, you know, changed any view on it.
Thanks, Erik. Again, as I believe we've said in the past, when it comes to primary, we believe China will be balanced on the primary side, and we see the risk is probably higher on the semi side. That's partly what we're seeing towards the tail end of fourth quarter. I think it is too early to judge whether this will stay at these levels or increase during 2015. I think we will have to wait until we, you know, pass Q1, pass Chinese New Year, and get a little bit into Q2 before we see if this is a sustainable amount.
At the end of the day, I think it's gonna come back down to the price differential or the metal advantage between the Chinese metal costs and the Western world price. That's gonna determine the level of exports.
Right. Thanks.
As a reminder, if you would like to ask a question, please press star one on your telephone keypad. We'll now take our next question from James Gurry from Credit Suisse. Please go ahead.
Thanks again. I just wanted to follow up with the situation in Brazil. The potential power rationing and the higher power costs are obviously impacting many companies. Can you give us a bit of a scenario on how much do you think the costs might go up in each of those situations just on higher power input cost? Or if you had to restrict your activities because you couldn't get power at all, you know, how might that impact the earnings?
If you look at the smelter side, remember that we have a power contract with a price agreement until 2024. The impact from the smelter is, in a way, purely gonna come if there is a curtailment or if there's a rationing of power and we don't get the power that we are entitled to. In which case, we probably have to take down capacity somewhat. We don't know the extent of this, if any, that this will have in the northern parts of Brazil. It's still so that the northern parts of Brazil is in a better situation when it comes to hydrological balance than certain other parts of Brazil, which is much more challenged.
When I refer to higher power costs in Brazil, that relates more to the Paragominas, the bauxite mine, where we have a power contract that has ended at the end of the year 2014, and they have to go to the market to source the energy needed for the year.
Have you provided previously on what the power expense is for Paragominas?
Now we've, you know, if you look at the power side, we expect that the impact is roughly NOK 50 million for Paragominas.
Thanks a lot. That's great.
We'll now take our next question from Eugene King from Goldman Sachs. Please go ahead.
Sorry, guys, just forgot a couple of things. Just sticking with the Brazil. Just wondering, am I right in assuming that you're off the rail hedge now and you're fully exposed to spot rail? And then secondly, in terms of excess bauxite, given Paragominas is running slightly above nameplate, is that predominantly spot sales into China? And what kind of price are you achieving on that?
When it comes to the currency hedge, which has been in place partly for 2013 and all of 2014, that is now completely out of the books, meaning that we're fully exposed to the exchange rates for 2015 and onwards. There's no new hedge in place. When it comes to bauxite sales, we do have some bauxite sales out of Brazil. We've had for quite some time. We haven't been very specific in terms of what kind of profits we have on that. It is in terms of EBITDA margins and other metrics. It's a very good business at the moment.
Just to be specific on it is not Paragominas bauxite that we can sell to the external world because that comes as a slurry to Alunorte. It's not allowed to ship it in that state out of the country due to shipping regulations. It's really bauxite out of the mine in Amapá that we would send and sell outside Brazil.
As there are no further question in the queue, I would like to turn the call back to the presenter for any further remarks.
Okay. I want to thank you everyone for taking the time and speaking to us today. Thank you very much and have a nice evening.
This will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.