Good day and welcome to the Hydro Quarter Reports conference call.
Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Rikard Lindkvis t. Please go ahead, sir.
Thank you. Good afternoon, and welcome to Hydro's Q4 2013 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 participate. 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 Brandtzæg.
Thank you, Rikard, and good afternoon, everybody.
I will just make a brief summary of the results before we open up for questions. Just to comment on the EBIT, which was NOK 483 million underlying for the quarter. It was down NOK 180 million from the Q2 and up NOK 310 million compared to the Q4 in 2012. I'm happy to comment on the increased production at Alunorte through the quarter, ending up at annualized pace of 6 million tons at the end of the quarter. In addition, as we completed the $300 program for the fully-owned smelters at the end of the year.
The results was impacted by the recently announced settlement with regards to ICMS tax on electricity purchase in Albras. However, this effect was offset by positive effects related to an insurance settlement in Qatalum relating to the fire in the cooling tower that we had in 2012. As we see every year, Q4 results were negatively impacted by just seasonality, mainly in our downstream operations, rolled products and the Sapa joint venture. For rolled products, the seasonal decline was, in fact, less than observed in 2012.
Production levels in energy in the quarter were down approximately 400 gigawatt hours from historically high levels in the Q2, which also contributed to the decline in results.
The Board of Directors in Hydro has proposed a dividend of 0.75 EUR or 7.5 NOK per share for 2013 for the annual general meeting to decide, the seventh of May.
The dividend level reflects Hydro's ambition to return cash to shareholders, also in difficult times, a strong balance sheet and an ability to be cash positive also in this low price situation. In terms of market development, we concluded 2013 with a slight undersupply situation outside China. With some expected new capacity and also payments and the 2% to 4% expected demand growth, we expect demand to continue to be slightly higher than the supply in 2014.
Focus areas for us going forward in this year is to stabilize the Alunorte production at the high levels that we have achieved so far and continue to improve the cost level in Brazil with the B to A program that we have announced previously. We will continue the further improvement programs along the whole value chain.
We have mentioned previously the delivery of the $300 program. We are now focusing on the joint venture smelters and also continuing the climb program, the improvement program in the rolled products. We will capitalize on the commercial opportunities that arise in the market situation going forward. With that, Rikard, we are ready for questions.
Perfect. Thank you, Svein Richard Brandtzæg. Operator? Thank you.
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 an opportunity to signal.
We will now take the first question from Jason Fairclough of Bank of America Merrill Lynch. Please go ahead.
Yeah, good afternoon, everyone. Thanks for this call.
Just two questions from me. First one's on CapEx. I see that your CapEx numbers went down this year. Is this now the trough in CapEx, and should we expect CapEx to increase from this point? The second question is just on your cash flow. You talk on slide three about being cash neutral at $1,900 a ton. Today we're well below $1,900 a ton, but you've talked about how this is being helped by the high physical premiums in the market.
Do you actually have primary facilities that are cash loss-making today, and are there any plans to close more facilities?
Thanks, Jason. This is Eivind.
On CapEx, you're right, we did reach a very low level in 2013. We did guide at Capital Markets Day just before Christmas that number will pick up somewhat in 2014. Part of that pickup is actually an accounting change at one of our joint venture rolling mills in Europe, the Alunorf rolling mill, lifting something on that, but that's mostly a technical accounting issue, not from a cash perspective. We also have some increased maintenance activities in 2014, primarily related to our activities in Brazil, in particular, renewal of the red mud deposit area.
In that meeting, we guided at something just above NOK 4 billion for 2014.
Okay, thank you.
On the smelter side, Jason, as we've been working hard on the $300 program and delivered that during the year.
Also now working hard to deliver the joint venture program of $180 per ton. Very critical component in terms of repositioning our smelter on the cost curve and making them robust over time. We are quite comfortable with the smelter portfolio that we have at the moment.
Can I just push you here? Are you saying then that none of the smelters are currently cash loss making?
We don't really comment on the smelter-by-smelter basis, Jason, but rest assured that we watch all smelters closely at all times.
Okay. Thank you very much.
Thank you. Again, as a reminder, if you would like to ask a question, please press star one.
We will now take the next question from Amit Bansal of Société Générale. Please go ahead.
Hi, this is Amit Bansal from Société Générale.
I just have a follow-up question on what Jason Fairclough was saying. In terms of Slovalco, the increased power prices, on my numbers will result in something like $300 per ton increase in production costs, just because of power prices. Even after this increase, is Slovalco EBITDA positive? And would you be considering selling out this smelter anytime soon?
Thank you.
Yeah, with regard to the Slovalco power contract, you have already observed the increased costs for the smelter. I think I would just turn to the presentation previously today, where we showed the cash costs for the total smelter portfolio, where we are now at the $1,500 per ton, which is of course much more robust than what we had the previous year.
This is due to several factors, which is also including the improvements that we have done in Slovalco, but also in general for our smelters, where we have reduced the costs significantly. It's also an effect of higher premiums for the metal products, so and also some currency related contribution in the right direction here.
All in all, the smelter portfolio now is more robust than what we have had previously. When you look at the cash costs for the smelters, you have also then to look at, of course, the comparable to the LME, but then also have to include the effect of the very high ingot premiums.
Fair enough. I have another question on dividends. I mean, since you have started receiving dividends from Qatalum, would you be considering some special dividend anytime soon to reward investors for your success at Qatalum?
I think referring back to Svein Richard Brandtzæg's comments, we have announced or proposed the board will propose to the general meeting 0.75 NOK per share for the year 2013. That I think is the basis for how we need to evaluate that for the year to come.
Okay. Thank you.
Thank you. Again, as a reminder, if you would like to ask a question, please press star one.
We will now take the next question from Benoit du Fay of JP Morgan. Please go ahead.
Hi, good afternoon, everyone.
Assuming you have to keep paying the ICMS tax for the future and stable alumina prices, what do you need for the Bauxite & Alumina division to return to profitability? Do you think you can achieve that if Alunorte runs at full capacity and if you complete the B to A cost savings program?
I think the important focus at Alunorte at the moment is to stabilize the production at the levels that we're currently seeing. We ended the year roughly around 6 million tons, and that's also where we started the year.
That is a key part of getting Alunorte back on track also towards profitability. On the ICMS case, it is clear that this is relatively similar to the case we had in 2012, where we, through close dialogue with the local government, was able to reverse that during the year. Whether we are successful with that for this year, all of this year remains to be seen, but we are in good dialogue with them. The third part of this is, of course, that you have to remember the index pricing.
This year and last year, we have roughly 20% of index pricing, with the rest being on LME, old LME contracts. That will change from 2016 quite significantly and even more so in 2018, providing a significant profit uplift for the B&A area.
Great. Thank you.
Thank you. We will now take our next question from Jeff Largey of Macquarie. Please go ahead.
Yeah. Hi, good afternoon. I think my answer's partially been answered. Sorry, my question's partially been answered, but I just wanted a little more color on the production outlook, specifically at Alunorte. I seem to recall that the guidance was that you'd be reaching the nameplate capacity by the end of 2015. already you've made some really good progress recovering from the outages from earlier last year.
When you say stable, are we looking at kind of a flat profile until 2015? Are you thinking you can reach that nameplate capacity at an earlier date?
As you have seen, Jeff, from the Capital Markets Day, we communicated 5.6 million ton rate for the first two months of the Q4. If you calculate then the effect in December, you're right, we are at 6 million tons.
For us now it's about stabilizing the production at levels of six and higher, but we are not driving to a level of 6.3 without making sure that this is on a sustainable basis. While we have increased the volumes, we have also worked hard to make Alunorte more robust towards similar incidents in the future, which is now the case that we have improved the robustness.
We have spent some time on maintenance and improved the basis for the plant going forward.
My comment is that we definitely have the ambition to reach nameplate capacity as early as possible stage, but we are doing this in a sustainable way, and this is the world's largest alumina refinery, so it definitely takes some time.
I'm very happy that we now are at the 6 million ton rate level, which we will of course make sustainable also going forward and then lift it further from there.
Okay. That's great. My second question I guess has more to do with the market overall and the LME warehouse rule changes set to take effect in April. I know, as a business, you're not quite as leveraged, say, to premiums as maybe some of your peers.
I'm just curious from an observation point of view. Have you seen any changes in behavior, in terms of your commercial activities, behavior from customers both say, on the physical side or even more just on the trading side?
It is very difficult to predict just how this will spell out, so it remains to be seen. We have also seen previously that there are movements between the reported, the registered inventories and the unreported inventories.
The queue of canceled warrants will have an influence on the outflow of the metal due to the new rules, but it doesn't necessarily mean that this will move directly into the physical market. We will expect that there will be changes in positions, but again, it's too early to conclude how this will end up. This is something we will follow very carefully going forward.
Okay, great. Thank you for the answers.
Thank you. Again, as a reminder, if you would like to ask a question, please press star one.
There are no further questions.
Okay, perfect.
That concludes the call. Thank you for dialing in.
That will conclude today's conference call.
Thank you for your participation, ladies and gentlemen.
You may now disconnect.