Good day, ladies and gentlemen, and welcome to the Norsk Hydro Q4 Presentation. For your information, today's call will be recorded. At this time, I would like to turn the conference over to Stian Hasle. Please go ahead, sir.
Thank you. Good afternoon, and welcome to this update on the Norsk Hydro's fourth quarter results. We will start with a brief introduction by CFO, Pål Kildemo, followed by a Q&A session. With that, I leave the word to you, Pål.
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 fourth quarter 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 million for the quarter is in line with Q4 2018, and we see an EBIT of NOK 3.4 billion for the full year of 2019. We have also made some progress on the targets set out at the Investor Day in 2019. We targeted NOK 500 million in improvements for 2019, and I'm happy that we're able to deliver better than that at NOK 1 billion 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 fourth quarter. For the whole of 2019, we are releasing and preserving cash through releasing NOK 5.6 billion in net operating capital and through spending NOK 900 million 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 account a demanding year for the company, as well as the volatility we are currently experiencing in the aluminum industry.
Thank you, Pål. Operator, we are now ready for questions.
Okay. Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. A voice prompt on your phone line will indicate when your line is open. Please state your name before posing your question. Again, please press star one to ask a question. We 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&L earnings. Can you give us any sense about what the expected negative restructuring or cash impact of that would be if you did additional restructuring? 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 Extruded Solutions, we have a net EBIT program of delivering NOK 1 billion over the next years. 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. 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.
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. 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 close 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 had other effects that we view as highly likely, we would account for them at the end of the year. I cannot give you an expectation of further costs into the first quarter.
What I, however, can answer is that of the NOK 650 million in rationalization, restructuring, et cetera, costs in 2019, NOK 300 million of these are expected to result in cash effects in 2020.
Okay, thanks. NOK 300 million at this point is the total restructuring cost you expect to incur in 2020. Is that correct? Across the group?
No, that is the positive effect. The restructuring cost is NOK 650 million, and of these provisions in 2020 will be.
Let me say it this way. Through the cash flow statement, you expect to take an additional NOK 650 million in 2020. That's the number I'm looking for.
NOK 650 million, 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 Extruded Solutions. For Rolled Products, it's around NOK 600 million, but let me get back to Extruded Solutions to you as we get that figure out.
Okay. Rolled Products is NOK 600 million cash impact in.
Yes, in provisions. Cash impact-
Okay.
for next year. Extruded Solutions is somewhat smaller, but I'll have to get back to you on that figure.
Okay, great.
As mentioned, the sales proceeds of around NOK 300 million are expected to impact 2020 also.
Okay, great. Thanks. Second question, on Bauxite & Alumina. I understand in the fourth quarter, 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 any indication of what the P&L impact of that was, or the cost impact, and whether you expect to see any reversal of that in the next quarter?
There are some volumetric effects there, but I could rather take you through the whole B&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&A earnings in the fourth quarter compared to what we experienced in the third quarter, then we see a combined price and volume effect of around NOK 350 million negative. We have a positive effect on the currency side of around NOK 100 million, and this is largely offset by an increase in fuel oil prices also close to NOK 100 million for the Bauxite & Alumina area. The Paragominas, the power outage that we had impacted our results negatively by around NOK 75 million. We also had a somewhat technical element, which impacted our results in the fourth quarter.
If you look at Bauxite & Alumina, when they deposit a red mud or a residue into DRS1 or DRS2, depending on which deposit you deposit it into, it gets treated differently in our books. As you know DRS1 is in closer mode and DRS2 is new and open. When we deposit materials into DRS1, then we eat off a provision, and it doesn't have a cost impact in our P&L. Whereas when we deposit into DRS2, it has a P&L impact. In the third quarter, we deposited residue into DRS1, basically helping to fill and close parts of the deposit area, and that did not have a P&L impact. When we then move over to DRS2, that has a P&L impact. This will continue to vary a bit between the periods going forward, depending on how we deposit into DRS2 or DRS1.
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.
Can you quantify what the impact was this quarter?
Yeah, of that element, it was NOK 50 million-NOK 100 million this quarter.
Okay, thanks.
If you add these elements together, price volume NOK 350, fuel oil NOK -100, FX NOK +100, Paragominas around NOK 50 to NOK 100, and DRS1, DRS2 NOK 50 to NOK 100, then you should be quite close to the deviation analysis from Q3 to Q4.
Okay, thanks so much.
You're much welcome.
Thank you. We'll now take our next question. Please go ahead.
Hi there. It's Amos from Barclays here. I just had a couple of questions, I suppose. First of all, 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? Given we're at $255 a ton level at Q4, where do you think that can get to over the next four or five 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 is not necessarily completely transparent from quarter to quarter, and we don't know in advance. What I can say is that elements like, for example, the Paragominas power outage that we had this period will, of course, not be recurring in the next period based on the information we have now. 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.
Just those two elements should bring cost somewhat down, and then we will revert to the actual development as we ramp up during the year. But pure mathematics would indicate that a ramping up from 6 million tons to 6.3 million tons towards the end of 2020 should bring our cost somewhat more down.
Okay. I just wanted to ask a question about what seems to me to have been a bit of inventory build within Primary Metal. 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 going forward into Q1?
Yeah. Typically, we see some inventory effects at the end of the year. Also be aware that shipments from Albras landing on the one side or other could have quite a significant impact. Let me get back to that in more details if there are any specific one-off elements that I should mention.
Okay. Just one or two others. I saw a new story about Hydro potentially abandoning or postponing the Karmøy project. Can you comment on that?
Yeah. As you know, when we built the Karmøy technology pilot, we also said that there was the possibility and potential for an expansion at Karmøy using the same technology. There is available site for that. 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. 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 the two downstream businesses? I think you were saying Rolled Products broadly flat, but then Extruded down. I was just sort of trying to get a feel for how much down. Are we talking double digit type percentages? Thanks.
That's also a very good question, Amos. If we had enough foresight, I would give you a perfect answer. What we mentioned this morning is that given the current market, we have around three weeks visibility in Extruded Solutions. We should expect volumes to come up driven by seasonality. 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 Extruded Solutions result for the first quarter is that 2019 was impacted by the cyber attack with around NOK 150 million negative effect, and that you should take into account when you look at the quarter-on-quarter variance.
Okay, cool. All right, I'll leave it to someone else. Thank you.
Thank you, Amos.
Thank you. Again, as a reminder to ask a question, please press star one. We'll now take our next question.
Good afternoon, gents. It's Jason Fairclough at Bank of America. Just a couple ones from 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. If so, I guess I'm wondering what has changed versus the assumptions at the time of buying in the Sapa stake.
Yeah. Good question, Jason. We have conducted impairment tests across our portfolio. 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 CGUs for Extruded Solutions and also for Bauxite & Alumina. Based on those tests, we still see coverage and more than borderline in the Extruded Solutions operations. When we do impairments, it is on a specific asset-by-asset basis. You ask what has changed since the transaction. Well, since the transactions, we've seen quite a significant increase in margins, and an uplift in earnings. For some of our facilities, we see not the same development. That could be impacted by regional demand for a specific product.
As you know, Extruded Solutions operations are affected very differently across our portfolio. For those assets that we see we 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're 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. The overall goodwill for Extruded Solutions still stands in our books.
Okay. Just a bit more of a general question. 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. I'm interested in your thoughts as to how street estimates for your earnings this quarter were so wrong. Your shares are down 12% today. Sometimes when we're that far off, companies put profit warnings out. Is there no sort of discussion about putting a profit warning?
Good question there, Jason. If you look across our portfolio, there's several different elements which are important to evaluate when thinking about if sending up a profit warning or not. What we typically do is that we look at the different business areas. We looked at the general direction of guidance, and we look to see if something has developed in a different direction from what we guided. Based on that evaluation, we see that the biggest beat is more or less in Extruded Solutions when you adjust for insurance. 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.
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. To answer your question on a 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, Pål.
Thank you.
Thank you. We will now take our next question. Please go ahead.
Thanks very much for taking my questions. Two from my side. The first on the cash flow situation. You're guiding to higher CapEx this year along with some restructuring costs. At the same time, we're probably looking at weaker earnings pace for 2020. Based on current macros, do you expect free cash flow to fully cover the base dividend this year? If not, are you comfortable maintaining the dividend going forwards on that basis? I'll leave it there for the first question.
Yeah. I think I should be careful commenting on the exact cash flow expectations for the coming year. As you know, a 10% movement could be NOK 3.6 billion on our earnings generation. I would rather answer quite clearly on your second question. Given our financial position and given our communicated floor level to 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 periods when we are in the lower part of the cycle. That's the philosophy behind our strong balance sheet.
Thank you. The second question. Some of the suppliers to the European auto industry, such as steel makers, 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?
Yeah. 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 going a bit more positive, but we are also hearing about markets going in the other direction. We think it's too early to speculate and rather stick to our guidance of quite flat in Rolled and weaker in Extrusion.
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, 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. 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.
Thank you, Liam. If we start with the questions on the strategic review, it is still ongoing. We are looking at all alternatives when it comes to how to create the most value for shareholders through our Rolled Products operations. 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 two things at the same time. We're performing the strategic review, Einar and his team are moving full speed forward on the restructuring efforts. The signals and the things that we have done so far in the fourth quarter, makes us confident that the cost elements that we have promised, we should be able to take out in the year to come. We will get back to the strategic review.
The second question on Extruded Solutions. We believe in our value over volume strategy. If you look at the development 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. 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 Extruded Solutions now are quite significant. We are running the restructuring efforts at full speed, which, in our 2019 results, had NOK 150 million positive from the cost side, which is overshadowed of course, by the negative developments in the volumes.
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 Extruded Solutions and net EBIT improvement, which is still our base case.
Maybe to briefly follow up, given how rapidly volumes have fallen below your own expectations, is it fair to say that through H1, there'll 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. Again, as a reminder, star one to ask a question. We will now take our next question. Please go ahead.
Hi, this is Jatinder from Exane BNP Paribas. A couple of questions. Firstly, on operating capital build into first quarter. You've released NOK 3.3 billion in fourth quarter and NOK 5.6 billion in 2019. What's your expectation of build into first quarter, which you have indicated, but is there any quantification based on current price environment? Second question, just on insurance claims. Do you expect claims to drag beyond first quarter 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 billion, sometimes a bit lower or a bit higher. That depends a bit on how prices and the market, maybe more the market develops. Usually, we have a build. That being said, we are working hard to ensure that build is not larger than it needs to be, keeping stocks at the absolute minimum. The second question was insurance.
Yes.
As you saw, we received a net NOK 200 million or NOK 200+ million in insurance so far. We expect this settlement to drag into 2020 and not be completed by the first quarter.
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. 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, Jatinder.
Thank you. Our next question will take place now. Please go ahead.
Hi, it's Dan from UBS. Quick follow-up. You mentioned you've closed 20% of Slovalco, plus you're continuing to wind back remelt volumes. Can you give us some more explicit guidance on where you would expect either cast house production or sales to be this year based on those kind of moving parts?
Yeah. On a year-on-year basis, around 30,000 tons from the reduction of Slovalco. If you look at Q4 or Q3 cast house production, then we are running at pretty much as low levels as we can in our smelters. We had some extended curtailments in our recyclers. I think these two quarters represent a good baseline. If it ends up being lower than that, it's because we would have to curtail remelters 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 2020. I don't have a concrete year-on-year volumetric effect until the final ramp-up plans are ready.
Okay. The sales run rate we saw in Q3 and Q4, take that and then add on Husnes, and we should be in about the right place. Is that the way we should be looking at it?
Yeah. Subtract the volatile.
Okay. All right. Perfect. Thanks.
Thank you. We'll now take our next question. Please go ahead.
Yeah. Hi there. It's Amos from Barclays again. I just had a couple of follow-ups. First one was around depreciation. We saw quite a big increase in B&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? Was there any sort of particular reason for the increase?
In the depreciation in general for the company, we have a reported depreciation of NOK 9.5 billion, but if you adjust for impairments, then underlying depreciation is around NOK 8.5 billion, which is somewhat higher than the level we guided for, which was around NOK 8 billion + NOK 0.5 billion to NOK 0.6 billion in leases. The biggest increases is within B&A, Primary Metal, and Extruded Solutions. The main reason is those leases that I just mentioned, NOK 400 million to NOK 500 million.
Okay. 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.
Bye-bye.
Thank you. 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.