Good day, ladies and gentlemen, and welcome to the North Hydro Q4 Presentation. For your information, today's call will be recorded. At this time, I would like to turn the conference over to Sian Hasler. Please go ahead, sir.
Thank you, and good afternoon, and welcome to this update on North Quivios 4th quarter results. We will start with a brief introduction by CFO, Paul Ciedemont, followed by a Q and A session. With that, I leave the word to you, Paul.
Good afternoon, everyone. I assume most of you have followed our results presentation in the morning already during the day, but let me first briefly address some of the key highlights for the Q4 of 2019. Challenging markets weigh on the results with lower prices both for aluminum as well as alumina and lower volumes. Our underlying EBIT of NOK 560,000,000 for the quarter is in line with Q4 2018 and we see an EBIT of $3,400,000,000 for the full year of 2019. We have made some progress on the targets set out at the Investor Day in 2019.
We targeted NOK 500,000,000 in improvement for 2019, and I'm happy that we're able to deliver better than that at NOK 1,000,000,000 in improvements. This is very much due to the successful and faster ramp up of Alunorte. We've also worked hard to release cash during the year and especially during the Q4. And for the whole of 2019, we are releasing and preserving cash through releasing $5,600,000,000 in net operating capital and through spending SEK 900,000,000 less in CapEx compared to what we communicated at our Investor Day. Despite these challenging markets that we are facing, we are also experiencing an increased pull for our low carbon products and solutions, which I consider to be a highlight for the quarter.
Finally, the Board proposed a dividend for 2019 of NOK 1.25 per share, reflecting a robust financial situation, taking into the account a demanding year for the company as well as the volatility we are currently experiencing in the Alumina Ministry.
Thank you, Paul. Operator, we're now ready for questions.
Okay. Thank will now take our first question.
Hi, it's Dan Major from UBS. Thanks for the call. Two questions. The first on the Extruded Products business. You've obviously indicated the requirement or intention to do some more restructuring in order to preserve your P and L earnings.
Can you give us any sense about what the expected negative restructuring or cash impact of that would be in if you did additional restructuring? And also a reminder of what the negative cash impact of restructuring you've already announced is expected to be in 2020?
Thanks. Thank you, Dan, and thank you for your good questions. When it comes to Extruded Solutions, you're very right in the fact that we are undertaking measures in order to make our portfolio and improvement program more robust. As you know, for Excluded Solutions, we have a net EBIT program of delivering SEK 1,000,000,000 over the next years. And a large part of that was supposed to be delivered based on larger or smaller growth investments as well as the continuation of our value over volume strategy.
But what we see when the market is going against us is that some of these potentials are not as visible anymore, and we need to revert to other measures to make sure that we're still able to deliver on our improvement program for extrusion. And it's important for me to stress that we still believe that we will be able to reach our improvement targets in the year to come. And a large part of that is, as you say, it's selling of some facilities, which are not providing the earnings that we are looking for. It's also the closure of some and moving volumes over to sites, which are larger in size, so we can take out scale effects, and it's also outright closure. When we closed our books for the year, we have included all effects that we are aware of or that we view as a possibility that might occur.
If we have other effects that we view that's highly likely, we would account for them at the end of the year. I cannot give you an expectation of further costs into the Q1. What I, however, can answer is that of the SEK 650,000,000 in rationalization, restructuring, etcetera, costs in 2019, euros 300,000,000 of these are expected to result in cash effects in 2020.
Okay. So €300,000,000 at this point is the total restructuring costs you expect to incur in 2020, is that correct, across the group?
No, that is the positive effect. The restructuring cost is SEK 650,000,000 and of
these provisions in 2020 will be Through the cash flow statement, you expect to take an additional NOK 650,000,000 in 2020. That's the number I'm looking for.
No, NOK 650,000,000 that's what we've communicated so far. Of this, some has been taken this year and some will be taken into the next
year. Right. But you can't provide any guidance specifically on how much cash you expect to flow through the cash flow statement this year through restructuring?
Not in 2020 at this time for Excluded Solutions. For Rolled Products, it's around 600,000,000, but let me get back to Excluded Solutions to you as we get that figure out.
Okay. So it's just so Royal Products is 600,000,000 cash impact?
Yes, in provisions, cash impact for next year. CUDA Solutions is somewhat smaller, but I'll have to get back to you on that figure. And then as mentioned, the sales proceeds of around NOK 300,000,000 are expected to impact 2020 also.
Okay, great. And then second question, from AUGSAR and alumina. I understand in the Q4, because of the Paragominas outage, you fell short on selling some cargoes of own production and had to sell a little bit more third party sales volume. Can you give us some any indication of what the P and L impact, if that was or the cost impact, whether you expect to see any reversal of that in the next quarter?
Yes. Well, there are some volumetric effects. But if I could rather take you through the whole B and A results because I know there has been some questions on it during the day and to ensure that we all have the same information. When we look at the B and A earnings in the Q4 compared to what we experienced in the Q3, then we see a combined price and volume effect of around NOK 350,000,000 negative. We have a positive effect on the currency side of around NOK 100,000,000, and this is largely offset by an increase in fuel oil prices also close to SEK 200,000,000 for the bauxite and alumina area.
The Paragominas, the power outage that we had impacted our results negatively by around SEK 75,000,000. And then we also have a somewhat technical element, which impacted our results in the Q4. If you look at the bauxite and alumina, when they deposit a red mud or a residue into DRS 1 or DRS 2, depending on which deposit you deposit it into, it gets treated differently in our books. As you know, DRS1 is in closer mode and DRS N2 is new and new. So when we deposit materials into DRS 1, then we eat off a provision, and it doesn't have a cost impact in our P and L, whereas when we deposit into DRS 2, it has a P and L impact.
So in the Q3, we deposited residue into DRS 1, basically helping to fill and close parts of the deposit area, and that did not have a P and L impact. But when we then move over to DRS 2, that has a P and L impact. And this will continue to vary a bit between the periods going forward depending on how we deposit into DRS 2 or DRS 1. So that's not necessarily a cash effect, but more an accounting technicality, which makes our underlying EBIT worse this quarter than last quarter. In another way, you could say that the underlying EBIT in Q3 was a bit high on that element.
So can you quantify what
the impact was this quarter?
Yes. Of that element, it was SEK 50,000,000 to SEK 100,000,000 this quarter.
Okay. Thanks.
So if
you add these elements together, price volume, dollars 3.50, dollars fuel oil, dollars negative $100,000 FX positive $100,000 target mean at around $50,000,000 to $100,000 and 1, DRS 2 50 to 100, then you should be quite close to the deviation out of it from Q3 to Q4.
Okay. Thanks so much.
You're much welcome.
Thank you. We'll now take our next question. Please go ahead.
Yes. Hi, there. It's Amos from Barclays here. Just give me just a couple of questions, I suppose. First of all, I mean, following up on Dan's questions around Alunorte.
Can you maybe talk around what is the medium term cost potential that you see at the asset as we trend towards 100% capacity utilization from given we're at $2.55 a tonne level at Q4, where do you think that can get to over the next sort of 4, 5 quarters?
Good question, Amos. Thank you for it. I'll be quite careful in guiding specifically on the cost level for Alunorte also due to the fact that fixed costs we are in control of, but fuel oil, caustic and bauxite can vary a bit, and it's not necessarily completely transparent from quarter to quarter, and we don't know in advance. But what I can say is that elements like, for example, the Paragon Minas power outage that we had this period will, of course, not be recurring in the next period based on the information we have now. And also, there is some negative effects of volumes sold not being as large as we saw an increase in the production side due to a couple of ships being delayed.
So just those two elements should bring cost some lockdown, and then we will revert to the actual development as we ramp up during the year. But pure mathematics would indicate that ramping up from 6 to 6,300,000 tons towards the end of 2020 should bring our cost somewhat more down.
Okay. And then I just wanted to ask a question about the what seems to me to have been a bit of inventory build within Primary Metals. So if you look at production versus sales volumes, there was quite a reasonable delta there. I was just wondering if you can explain whether there was, in reality, much inventory build? And can we expect that to be released kind of coming forward into Q1?
Yes. Typically, we see some inventory effects at the end of the year, but also be aware that the shipments from Albras landing on the one side or other could have quite a significant impact. But let me get back to that in more details if there are any specific one off elements that I should mention.
Okay. And then just 1 or 2 others. I saw a new story about Heathrow potentially taking or sorry, potentially abandoning or postponing the Carmoid project. Can you comment on that?
Yes. As you know, we have when we built the Karma Technology pilot, we also said that there was the possibility and potential for an expansion at Karma using the same technology. There is available site for that. But given the market that we see today and also in accordance with the strategic mode, which primary metal is placed in. We are not looking to expand the primary metal capacity with new greenfield projects in our value chain.
Okay. And then finally, I was just going to ask you I guess it was asked a bit on the call earlier, but can you give us some indication on Q1 volumes for 2 downstream businesses? I think you're saying Rolled Products broadly flat, but then extruded down. But I was just sort of trying to get a feel for how much down? Are we talking double digit type percentages?
That's also a very good question, Amos. And if we had perfect answer no foresight, I would give you a perfect answer. What we mentioned this morning is that given the current market, we have around 3 weeks visibility in Excluded Solutions. So we should expect volumes to come up, driven by seasonality. But given the year on year decline we saw in Q4 versus Q4 in the previous period, I think you should expect that we also expect a decline in Q1 versus Q1, which represents the market we've seen so far in 2019.
The only thing I would like to remind you of when it comes to Extrudent's solutions result for the Q1 is that 2019 was impacted by the fiber attack with around 1 150 plus negative effect. And that you should take into account when you look at the quarter on quarter variance.
Okay. All right. I'll leave this to someone else. Thank you.
Thank you, Amos. Thank
you. We'll now take our next question.
Good afternoon, gents. It's Jason Fairclough at Bank of America. Just a couple of ones for me. Firstly, on impairments, You mentioned that some of the assets being written down here are downstream and I think in extrusions. I'm wondering if any of those were associated with the acquired Sapa business.
And if so, I guess I'm wondering what has changed versus the assumptions at the time of buying in the Sapa stake?
Yes. Good question, Jason. We have conducted impairment tests across our portfolio. And as you know, those business areas, which have goodwill, they need to be tested every year. That means that for every year, we test the overall CTUs for extruded solutions and also for bauxite and alumina.
And based on those tests, we still see coverage and more than a borderline in the Excluded Solutions operations. So when we do impairments, it is on a specific asset by asset basis. And we asked what has changed since the transaction. Well, since the transactions, we've seen quite a significant increase in margins and an uplift in earnings. But for some of our facilities, we see not the same development.
And that could be impacted by regional demand for a specific product. As you know, exclusion operations are affected very could get more out of by, for example, moving volumes over to a larger asset or that we believe we could get more out of from selling than what we are seeing in the marketplace, we have impaired if what we get for them is lower than book values or if we result in closing them. But the overall goodwill for Extrusion still stands in our books.
Okay. Just a bit more of a general question. And I mean you mentioned quite a few times the tough markets and the lower prices. And I guess as people looking at your company, this should be something that we can understand. But I'm interested in your thoughts as to how street estimates for your earnings this quarter were so wrong.
I mean, your shares are down 12% today. Sometimes when we're that far off, companies put profit warnings out. And then is there no sort of discussion about putting a profit warning?
Good question, Jason. We if you look across our portfolio, then there's several different elements which are important to evaluate when thinking about this ending up a profit warning or not. And what we typically do is that we look at the different business areas. We looked at general direction of guidance, and we look to see if something has developed in a different direction from what we guided. And based on that evaluation, we see that the biggest beat is more or less in extruded solutions when you're just for insurance.
And there, the market has developed worse than maybe the market saw at the summer, but in accordance to our guidance that it will be going in the negative direction. So some of the other beats or not beats, some of the other disappointments, for example, primary is due to the fact that consensus premiums are in the mid or high part of our range, whereas our actual premium realized has come out in the lower part of the range. So to answer your question on profit warning or not, we consider sending a profit warning if we believe we have guided in a significant different direction as to what has taken place in the underlying results.
Okay. All right. Thanks for that. Appreciate that, Tom.
Thank you.
Thank you. We will now take our next question. Please go ahead.
Thanks very much for taking my questions. 2 from my side. The first on the cash flow situation. So you're guiding to higher CapEx this year along with some restructuring costs. And at the same time, we're probably looking at a weaker earnings base for 2020.
Based on current macros, do you expect free cash flow to fully cover the base dividend this year? And if not, are you comfortable maintaining the dividend going forward on that basis? And I'll leave it there for the first question.
Yes. I think I should be careful commenting on the exact cash flow expectations for the coming year. As you know, our 10% movement, could be SEK 3,600,000,000 on our earnings generation. But I would rather answer quite clearly on your second question. Given our financial position and given our communicated floor level to the dividend, we do not foresee that we will cut dividend in the period to come.
We have put in place a dividend floor and policy to allow predictability for our long term shareholders to know that they will also have cash returns in period when we are in the lower part of the cycle. That's the philosophy behind our strong balance sheet.
And the second question, some of the suppliers to the European auto industry such as steelmakers are seeing a large restocking cycle in automotive sheet in Q1. Are you seeing a similar trend at all in your downstream activities? Or is your guidance just reflecting stable stocks plus negative underlying demand?
Yes. As I noted as I commented on, visibility is quite low for rolled. We reflect, as you say, on the sheet side, the stable outlook, whereas for extrusion, we are seeing a weaker development. We are also hearing some signs of some markets turning a bit more positive, but we're also hearing about markets going in the other direction. So we think it's too early to speculate and rather stick to our guidance of quite flat in rolled and weaker in execution.
Thank you very much.
Thank you. We'll now take our next question. Please go ahead.
Two questions from me. It's Liam Fitzpatrick from Deutsche Bank. Firstly, just on extruded and the profitability. Without the insurance gains, you made an EBIT loss in Q4. I understand the uncertainties around volumes, but how would you kind of guide us on margins, perhaps with reference to 2019 when we're looking at the first half and the full year for 2020?
And secondly, on the rolled products, there is a comment about the ongoing review. Can you give us any flavor on the timing, latest thoughts on the review of that business? Thank you.
Yes. Thank you, Liam. If we start with the questions on the strategic review, then it is still ongoing. We are looking at all alternatives when it comes to how to create the most value for shareholders through our raw products operations. And when we have formalized a decision on this, we will revert to the market.
What is important for me to mention about Rolled Products is that we're doing 2 things at the same time. We're performing for a strategic review, but Einar and his team are moving full speed forward on the restructuring efforts and the signals and the things that we have done so far in the Q4 makes us confident that the cost elements that we have promised, we should be able to take out in the year to come. And then we will get back to the strategic review. The second question on excluded solutions. We believe in our value over volume strategy and if you look at the developments towards the end of the year, what hits us negatively is volumes.
The margin on a year on year basis is actually improving as we're keeping prices. So we will still stick to this strategy in the period to come and expect negative developments to come from the volume side. That being said, the improvement initiatives which are being put in place in Excluded Solutions now are quite significant. We are running the restructuring efforts at full speed, which in our 2019 results had $150,000,000 positive from the cost side, which is overshadowed, of course, by the negative developments in the volumes. And also going into next year, we're continuing this work restructuring, fixed cost and also procurement efforts to try and compensate the lower volumes to ensure that we can deliver on our target for Excluded Solutions and net EBIT improvements, which is still our base case.
Maybe to briefly follow-up, I mean given how rapidly volumes have fallen below your own expectations, is it fair to say that through H1 there will be a limited scope for you to offset the volume weakness through fixed cost reductions?
Well, we are offsetting parts of it through fixed cost reductions. But of course, as you see on the Q4 level, when you compare Q4 earnings to the year before, then it's tough to offset all of it.
Okay. Thank you.
Thank you. We'll now take our next question. Please go ahead.
Hi. This is Jitendra from Exane BNP Paribas. A couple of questions. Firstly, on capital operating capital build into Q1, you have released CHF3.3 billion in 4th quarter and CHF 5,600,000,000 in 2019. What's your expectation of build into Q1, which you have indicated?
But is there any quantification based on current price environment? And second question, just on insurance claims. Do you expect claims to drag beyond Q1 as well? Or do you think everything will be visible, if not cash received, by the end of this quarter? Thank you.
On the first one, we do expect a seasonal build. We haven't given an exact amount. If you look at previous years, this varies. Sometimes it's a couple of SEK 1,000,000,000, sometimes a bit below or a bit higher. So that depends a bit on how prices and the market maybe more the market develops.
But usually, we have a build. That being said, we are working hard to ensure that, that build is not larger than it needs to be, keeping stocks at absolute minimum. The second question was insurance. Yes, as you saw, we received a net SEK 200,000,000 or SEK 200,000,000 plus in insurance so far. We expect this settlement to drag into 2020 and not be completed by the Q1.
And the reason for that is that in falling markets, it requires good documentation to separate out what is market fall and what is actually cyber impact. So it's a discussion on a plant by plant basis, which requires documentation and takes time.
Got it. Thank you so much.
You're welcome, Jatin.
Thank you. And our next question will take us now. Please go ahead.
Hi. It's Dan from UBS. Quick follow-up. You mentioned you've closed 20% of Slovakia, plus you're continuing to wind back remelt volumes. Can you give us some more explicit guidance on where you would expect either kasthaus production or sales to be this year based on those kind of moving parts?
Yes. Well, on a year on year basis, around 30,000 tonnes from the reduction Schuvalco. If you look at Q4 or Q3 cost out production, then we are running at pretty much as low levels as we can in our smelters, and we had some extended curtailments in our recyclers. But I think these two quarters represent a good baseline. If it ends up being lower than that, it's because we would have to recurcurtail remittance over a longer period.
We have one element which is offsetting, of course, and that's the ramp up of Husnes. This will take place during the first half of twenty twenty, but I don't have a concrete year on year volumetric effect until the final ramp up plans are ready.
Okay. So the sales run rate we saw in Q3 and Q4 take that and then add on hueseness and we should be in about the right place? Is that the way we should be looking at it?
It's on track to the right quarter.
Okay. All right. Perfect. Thanks.
Thank you. And we'll now take our next question. Please go ahead.
Yes. Hi there. It's Amos from Barclays again. I just had a couple of follow ups. First one was around depreciation.
So we saw quite a big increase in D and A charge in the quarter, which I guess was a slight surprise given the write downs. I was going to ask, is that sort of run rate sustainable going forward? And was there any sort of particular reason for the increase?
In the depreciation, in general, for the company, we have reported depreciation of SEK 9,500,000,000. But if we adjust for impairments, then underlying depreciation is around SEK 8.5 percent, which is somewhat higher than the level we guided for, which was around 8,000,000,000 plus €500,000,000 to €600,000,000 in leases. The biggest increases is within B and A, Primary Metal and Excluded Solutions. And the main reason is those leases that I just mentioned, dollars 4,000,000 to $500,000,000
Okay. And then I guess also to follow-up on one of Liam's questions about the timing of rolled products strategic review. Is there any update on
that? No update on the timing. When we have approached the next milestone, we will inform the market about this.
Okay, cool. Great. Thank you very much.
Welcome. Thank
you. So there are no further questions left in the queue. I'll hand the conference back over to your host for any additional or closing remarks.
Thank you for joining us today, and please let us know if you have any further follow-up questions. Thank you, and have a nice evening.
That will conclude today's conference call. Thank you for your participation. You may now disconnect.