Good day, welcome to the Norsk Hydro Q3 presentation. For your information, this call will be recorded. At this time, I would like to turn the conference over to Stian Hasle. Please go ahead.
Thank you. Good afternoon, welcome to our update on the third quarter results. We will start with a brief introduction by President and CEO Hilde Merete Aasheim, followed by a Q&A session. The Q&A session will also be joined by CFO Pål Kildemo. With that, I'll leave the word to you, Hilde.
Thank you, Stian, and good afternoon to all of you. I see most of you have followed our results presentation this morning. Let me briefly address the key highlights for the third quarter of 2019. Underlying EBIT for the third quarter was NOK 1,366 million, down from NOK 2.7 billion in the third quarter last year, up from NOK 875 million in Q2. I'm very happy to see that the final embargo on the DRS2 has been lifted, ending a 19-month embargo period, which has restricted activities at the plant. The DRS2, in combination with the press filter, is the only long-term sustainable solution at Alunorte. It's encouraging to see that the results are positively impacted by higher volumes on the ongoing ramp-up in both Alunorte, Paragominas.
In Alunorte, reaching 83% capacity utilization in Q3, as well as Albras, where now all cells are back in operation. The main explanatory factors in the results development from Q3 2018 to Q3 2019 are lower realized prices for aluminum and alumina, coming down by more than 20% and 30% respectively. On the flip side, as market prices fall, we also see lower raw material prices, partly offsetting the negative sales price effect. On our Investor Day on September 23rd, we announced a new Improvement Program of NOK 6.4 billion to be delivered by 2023. NOK 500 million to be delivered by 2019. We are on track to deliver on our targets, with somewhat faster ramp-up on the positive side, but with challenging market and extrusion working against. When it comes to the market side, we're seeing increased uncertainty and have reduced our demand expectations for the year.
We are now estimating a flat global primary aluminum demand growth expected in 2019, down from an estimated 1% to 2% demand growth communicated at the second quarter, more in line with the communication at our Investor Day. We are still seeing the global primary market in a deficit for the year. We are also seeing a reduction in demand expectation downstream, most predominantly hitting extrusion, where we now expect a negative 2019 demand growth. In these challenging markets, it is more important than ever to focus our efforts on what we can control ourselves, we are taking forceful restructuring and optimization measures downstream, as well as progressing on our improvement programs.
Thank you, Hilde. Operator, we are now ready for questions.
Thank you. If you wish to ask a question at this time, please press star one on your telephone keypad. Please ensure the mute function on your telephone is switched off to allow your signal to reach our equipment. We will now take our first question. A voice prompt on your telephone will tell you when your line is open. Caller, please go ahead.
Afternoon. It's Liam Fitzpatrick from Deutsche Bank. Two questions from me. Firstly, just on the Primary Metal business, it was a very strong cost performance, in Q3, and your Q4 guidance suggests that you're going to be back to sort of second half of 2017 levels. My question is, what further scope is there to take costs out if we're looking into the first half of 2020? Secondly, on the extrusion business, given the guidance on demand, should we be thinking about Q4 of last year as a reasonable guide for this Q4, or could results be weaker than that? Thank you.
I think if we start with the Primary Metal, then as you correctly comment, the raw material prices and also the cost levels are coming down. Raw material prices with the market and cost through the improvement efforts. If raw material prices continue to come down, then that can benefit us also into the first quarter, as we've seen alumina prices have still been moving. However, if we think about more the things we influence ourselves, then of course, we launched our improvement initiative on the Investor Day, which also includes fixed cost consumption factors, et cetera, in Primary Metal. These, we expect to also continue to deliver positive improvements in the years following 2019. These are more gradual of nature and not as big as the development in raw material costs.
The other question was on extrusion, what to expect and how to compare to last year. I guess if you look at our volumetric visualizations of what we see in the marketplace, then we're seeing quite lower demand expectations in the fourth quarter of 2019 versus fourth quarter of 2018, with up to 8% in Europe and somewhat the U.S. How I would think about it, I would take 2018 as a starting point, and then adjust for the difference in volume that we expect between these periods, taking a margin into account. I would also like to focus on that the remelt margins have come somewhat in from what we experienced in the quarter of 2018. These two elements combined should give you an indication of results expectations to Q4 2019.
Okay. Thank you. That's very clear. If I could just follow up on one separate point, just on Metal Markets, that's been very strong for the first three quarters of the year. Do you still stick with the guidance for that business of around NOK 500 million-NOK 600 million EBIT? Or should we be thinking about a higher number going forward?
I think we will stick to the guidance, and I would like to explain why. Metal Markets consists of two main categories. One is remelt results, which have benefited greatly during the year from both high value-add premiums, but also lower scrap prices. As you know, scrap has been trading at quite a discount to the LME as more scrap is available for the market. That has positively affected our results during this year. In addition, we have strong results from sourcing and trading activities, and this is much influenced by currency and unrealized LME effects, but also driven by our backwardation risk mitigation strategy, which benefits in periods of strong contangos. During 2019, we've had quite good contango levels and also good remelt spreads.
As we visualized this morning, the value-add premium on extrusion ingot has come quite a lot down and more to the levels in the years that we've experienced before 2019. When we set our guidance for this year, this was much based on what we had experienced so far, not how the market actually turned out. I would use the guidance of around NOK 500 million per year or NOK 125 million per quarter as a guidance, and then sourcing and trading effects can come on top of these, but these are hard to predict in advance.
Okay. All right. Thank you.
Thank you, Liam.
We will now take the next question. Caller, your line is open. Please go ahead.
Hi there. Astem, that's me. It's Danielle Chigumira from Macquarie. Just a question on your comments around extrusion demand. You made some comments around the regional split. Could you give us an idea on what product categories in particular are weaker now than you expected last quarter?
Well, I think on the extrusion side, I commented on that this morning. When we look at the European part, we see in particular the automotive segments coming into negative territory when it comes to growth, which is sort of a backdrop of what we hear from the European or particularly the German automakers. Also the industrial segment, which is also very much linked to Germany, which has taken the expectation down for the extrusion demand in Europe. When it comes to the North America region, it's the truck and trailer segment in the transport segment that has turned into a negative growth rate, as well as the building and construction. We actually expected to see an uptick in the building and construction over the summer, but that hasn't happened, and that is why this segment also is in the negative territory.
Thank you. That's very helpful. Could you give us any further color in terms of the quantum of volume for year to see year-on-year? You mentioned 8% in Europe. Is that a good measure to use across the whole business, or could it be a lower full year-on-year than that?
Sorry, Danielle, you're falling a bit in and out. Did you ask if the 8% reduction in market growth that we see compared to 2018 is representable for the portfolio as the whole? Or if you should-
Yes
be expecting some different kind of growth?
Exactly, yeah.
It's the fourth quarter.
No, I think if you look at our broad portfolio, we have a somewhat higher exposure in Europe than in North America. In total, North America is experiencing somewhat less of a, or is expected to experience somewhat less of a demand decline in the fourth quarter compared to what Europe is. There, we're seeing more levels of around 3%, whereas in Europe, you're closer to 8%. If you were to take the market as a whole, it would be somewhere in between those two levels. That being said, as a big producer, we will move with the market, but we're also taking additional measures to ensure that we are ahead of potential negative market development.
As you've seen, we've already done some restructuring measures, and we will continue to look at that into the fourth quarter also if we see that the market deteriorates further. At this stage, I cannot give you a clear guidance on the volume reduction for extrusion. Expecting somewhere around the market should not be wrong before you take into account restructurings.
Okay, thanks. That's useful color. Thank you.
We will now take our next question. Caller, your line is open. Please go ahead.
Hi, good afternoon. Jatinder from Exane BNP Paribas. Couple of questions, please. First one on your 2.7 billion upstream reversal improvements into next year. Is that guidance still valid despite your good performance in Q3 2019 already and probably costs staying better in Q4 as well? Is that 2.7 purely a function of incremental volumes and fixed cost dilution that you expect into next year, is the real question. Second one, on your 10% return on capital target, the forward price you had used was NOK 1,950. Is that price achievable with your 2% primary demand CAGR from 2018 to 2023 that you mentioned?
Hello, Jatinder, and thank you for good questions. I'll take the easy one first. On the reversal of curtailment effects that we guide on in 2020 of NOK 2.7 billion, that will be influenced on how we ramp up this year. As you probably saw in the presentation material, we comment on that we're somewhat ahead in B&A and Primary Metal. These are not large amounts, but somewhat ahead, and that will eat up some of the NOK 2.7 you see into next year. The faster we ramp up, the more of that we deliver this year versus next year. That is actually a combination of volume and operational parameters at the smelter portfolio. This period is more driven by more volumes and less driven by better operational parameters than expected.
When it comes to the price that we used in our larger scenarios, this price is not a Hydro forecast in any way. It's based on prices that we've seen realized over a period, experiencing both highs and lows in the market. Looking at just the price side per se is not necessarily adding a lot of value either. We need to focus on the margin as the alumina price is quite low now. Looking at only the LME price could give a wrong indication. I think we don't guide on prices going forward. Of course, the weaker the market becomes, the longer it takes before you potentially see an improvement in prices, because you will have to see capacity come out or demand surprising on the upside.
Sure. Thank you very much for the color. If I could flip that question, second question. At today's raw material prices and alumina prices, what price would you need to get to that 10% return on capital in that case? Because your sensitivity to alumina is positive for a 10% change. I think it was about NOK 440 million. With lower alumina, you're also suffering, not just benefiting.
Yeah. That's very much true, and we will have to come back to you offline with the exact calculations to see what LME price you would need in order to reach 10%, given the raw material price we have. Currency, of course. We should be able to go through the sensitivities and get that up for you.
Great. Thank you so much.
We will now take our next question. Caller, your line is open. Please go ahead.
Yeah. Afternoon, guys. It's Amos Fletcher here from Barclays. Couple of questions from me. On bauxite and alumina, you mentioned unit costs are likely to flatten in Q4, but that you realize the raw material input prices with the three-month lag. When I look at those costs in the presentation on slide 18, the prices fell quarter-on-quarter in Q3. Could you just explain the guidance for flat costs in bauxite and alumina? Thanks.
Hello, Amos, thank you for your question. I think on the cost impact in B&A, it varies a bit from category to category. Some have a monthly lag, some are more on the two-month lag, and we've also been impacted a bit by inventory. If you look at the raw materials slide that we presented earlier today, if you start with caustic soda, then you see since Q2 and Q3, it's been flattening a bit, and the market is really seeing a bigger fall in Q4 than in Q3. I would expect, effect, if anything, to come more into the first quarter, if we see those price levels remaining. On the other factors, we do see some cost leap, but it's not to a big extent. In total, based on what we see now, we expect more flat prices.
Okay. Fair enough. Yeah, it seems like a slightly shorter lag, perhaps. I was also going to ask around the expectations for volume growth in 2020 for rolled and extruded products.
We haven't updated volume growth for extrusion and rolled in 2020. I guess when you see a primary market that is looking more balanced than what we expected earlier, then that will also impact the growth levels that we see in those two segments. This year, we've seen demand coming a bit down from what we expected, and you see that very visibility in the rolled and extrusion figures also. For next year on the primary side, we expect 2020 to be around the balance level, and that, of course, needs to be triggered by the demand from the extrusion and rolling segments.
Okay, thanks. Just last question I was going to ask, you targeted around NOK 1 billion of EBIT improvements in Extruded at the Investor Day that's reliant on market conditions to some degree. Is there some risk that deteriorating market conditions now could put those targets at risk, do you think?
That's a risk, and that is why we are forcefully now going through the portfolio and the restructuring that we already have announced, but that we also look into new initiatives in order to compensate for this risk, so that we are robust also in this weak market development.
On the extrusion target, I would also like to remind you that this is a billion target over some years. We have split it a bit between the years for the improvement program context. Even if what we're not able to deliver on this year due to weakened markets, we expect either to be able to recover in the next year or the following years, depending a bit on how long the weaker markets last.
Okay, thanks. Then just to round out on that, would you say there's any sort of market-related risk to the remainder of the EBIT improvement target that you gave, sort of outside of extruded?
I think if you pick up on Jatinder's question from earlier, the lower the margins become, the less some of our improvements are worth. As you know, there are some volume elements in that program. I think of the total improvement program, NOK 800 million is driven by increased volume and efficiency, and NOK 300 is driven by the Husnes restart. If margins are significantly lower than what we experienced in the years before we targeted this program, then the effects of this will be a bit lower. That is a risk you should factor into account.
Okay. Very clear. Thank you.
As a reminder to ask a question, please press star one on your telephone keypad. We will now take our next question. Caller, your line is open. Please go ahead.
Hi. Daniel Major from UBS. A few questions, please. You obviously announced the P&L impacts of the restructurings in Rolled Products and to an extent, extruded products. Can you give us a reminder of what we should be assuming flows through the cash flow statement with respect to these restructuring charges and when they should be coming into the cash flow statement? That's the first question.
Yeah. I think if you start with extrusion, then these restructuring costs are quite of a short-term nature. When we do restructurings, announce restructurings in one quarter, they might come one or two quarters lately on the cash flow side, and you also know that there's a mix of impairment versus restructuring or redundancy costs there. For rolled, it's a bit of a different picture. If you remember the slide that we showed at Investor Day, showing that we start getting effects from the improvements in 2020, 2021, 2022, then I think you should also think about the cash flow elements in a similar manner. There would be a minor flow through the cash flow in 2019, and then the majority coming through in 2020 and 2021, and then a smaller impact in 2022 from a cash flow perspective, based on our current expectation of demanding profile.
Okay, thanks. What would that be? Somewhere in the region of one, NOK 1.5 billion next year, negative cash impact, if I combine the two, would that be a reasonable number?
That sounds a bit on the high side. If you just look at the rolled program, in provisions, we have around NOK 1.2 billion, where NOK 900 million of this is related to redundancy and NOK 200 million is related to cleanup and remediation. These NOK 200 million typically come quite late in the process. The NOK 900 million that we're focusing on redundancies, if you say that a small part of it is in 2019, then the bigger part is split between 2020 and 2021, then the 2020 figure doesn't become so large. On the extrusion side, it's a good combination between impairment and also other restructuring costs. I would say somewhat on the lower side of the figure that you indicate for 2020.
Okay, thanks. That's useful. You mentioned the volume uplift coming through in primary aluminum as a consequence of the continued ramp-up of Albras, et cetera. Can you give us a number there in terms of whatever cast house sales or cast house production, what sort of delta we should be expecting in the fourth quarter to make sure we're in the right place on the numbers? Would it be a similar rate of change in sales as we saw sequentially in Q3?
I think when it comes to the volumetric side, we are expecting an increase into the fourth quarter on primary, driven by a full period of Albras available. We also have some creep in there, probably not to the same extent that we're seeing from Q2 to Q3, if you're referring to from 486 to 522, on the somewhat lower range of that.
Thanks. That's. Finally, just to make sure I've got the number right. Did you say it was NOK 500 million expected sequential cost saving in Primary Metal from raw materials, NOK 400 million from alumina and NOK 100 million from other input costs? Is that the right number that you said?
Are you comparing to Q3 or Q2? I guess we have NOK 200 million from alumina, NOK 200 million from less power sales, NOK 100 million from carbon, and NOK 100 million from fixed cost and depreciation, and NOK 100 million from currency.
Sorry, I thought you mentioned on the call earlier your expectation on additional reductions at current prices. Did I misinterpret that?
Into Q4?
Into Q4.
Into Q4. Sorry. I thought it was Q2. That is NOK 400 million on the alumina side, NOK 100 million on the carbon side, and then we usually see a fixed cost increase. We also had a one-off in depreciation in Karmøy, you should take out NOK 2,200 million for those.
Perfect. Thanks.
As a reminder, to ask a question, please press star one. We will pause for a moment to allow everyone to signal. As there are no further questions at this time, I would like to turn the call back for any additional or closing remarks.
Thank you, and thanks for joining us today. Just let us know if you have any follow-up, and we will talk later. Thank you.
Thank you. That will conclude today's conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.