Good day, and welcome to the North Hydro Q3 Presentation. For your information, this call will be recorded. At this time, I would like to turn the conference over
to Stian Hafsler.
Please go ahead. Thank you. Good afternoon, and welcome to our update on the Q3 results. We will start with a brief introduction by President and CEO, Hil den Retofey followed by a Q and A session. The Q and A session will also be joined by CFO, Paul Kjerdabond.
And with that, I leave the word to you, Hilde.
Thank you, Christian, and good afternoon to all of you. I assume most of you have followed our results presentation this morning, but let me briefly address the key highlights for the Q3 of 2019. Underlying EBIT for the Q3 was NOK 1,366,000,000,000, down from NOK 2,700,000,000 in 3rd quarter last year and up from NOK 875,000,000 in Q2. I'm very happy to see that the final embargo on the Ares 2 has been lifted, ending a 19 month embargo period, which has restricted activities at the plant. The Ares 2, 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 and Pergomenas. In Alunorte reaching 83% capacity utilization in Q3 as well as Albras, where now all sales 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 23, we announced a new improvement program of NOK 6,400,000,000 to be delivered by 2023.
NOK 500,000,000 to be delivered by 2019. And we are on track to deliver on our target with some of faster ramp up on the positive side as a challenging market in Extrusion working again. When it comes to the market side, we are 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 2nd quarter, but more in line with the communication at our Investor Day. However, we are still seeing the global primary market in the 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, And we are taking forceful restructuring and optimization measures downstream as well as progressing on our improvement programs. Thank you, Hilde.
Operator, we're now ready for questions.
Thank
It's Liam Fitzpatrick from Deutsche. Two questions from me. Firstly, just on the primary 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 twenty seventeen levels. So my question is, what further scope is there to take costs out if we're looking into the first half of twenty twenty?
And then secondly, on the extruded 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 weakened there? Thank you.
Yes. 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 costs through the improvement efforts. And then if raw material prices continue to come down, then that can benefit also into the Q1 as we've seen alumina prices have still been moving. However, if we think about more the things we ourselves, then of course, we launched our improvement initiative on the Investor Day, which also includes fixed cost consumption factors, etcetera and primary. And these, we expect to also continue to deliver positive improvements in the years following 2019.
But these are more gradual of nature and not as big as the development in raw material costs. The other question was on exclusion, 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 Q4 of 2019 versus Q4 of 2018 with up to 8% in Europe and somewhat in the U. S. So 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.
And then I would also like to focus on that the re melt margins have come somewhat in from what we experienced in the quarter of 2018. So 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 1st three quarters of the year. I mean, do you still stick with the guidance for that business of around €500,000,000 €600,000,000 EBIT?
Or is it 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 consist of 2 main categories. 1 is the remelter results, which have benefited greatly during the year from both low 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 benefit in periods of strong contangos. And during 2019, we've had quite good contango levels and also good remelt spreads. As we visualized this morning, the value add premium on exclusioning has come quite a lot down and more to the levels in the years that we've experienced before 2019. And when we set our guidance for this year, this was much based on what we have experienced so far and not how the market actually turned out.
So I would use the guidance of around $500,000,000 per year or $125,000,000 per quarter as 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.
We will now take your
next question. Caller, your line is open. Please go ahead.
Hi, there. That's me. It's Daniel Chukumira from Macquarie. Just a question on your comments around extrusion demand. You made some comments around the regional split, but 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 exclusion side, I commented on 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. And then also the Industrial segment, which is also very much linked to Germany, which has taken us taking the expectation down for the exclusion demand in Europe. Then when it comes to the North America region, it's the truck and trailer segment in the transport segment that has turned into 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 you 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 fall year on year than that?
Sorry, Daniel, 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 a whole or if you should be expecting some different kind of growth
for Q4?
No, I think if you look at our broad portfolio, we have a somewhat higher exposure in Europe than in North America. And in total, North America is experiencing somewhat less of or expected to experience somewhat less of a demand decline in the Q4 compared to what Europe is. So there, we're seeing more levels of around 3%, whereas in Europe, you're closer to 8%. And so 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.
So as you've seen, we've already done some restructuring measures, and we will continue to look at that into the Q4 also if we see that the market deteriorates further. So at this stage, I cannot give you a clear guidance on the volume reduction for extrusion. But 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 €2,700,000,000 upstream reversal improvements into next year. Is that guidance still valid despite your good performance in 3Q 2019 already and probably cost staying better in 4Q 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. 2nd one, on your 10% return on capital target, the forward price you had used was 19.50 dollars Is that price achievable with your 2% primary demand CAGR from 18% to 23% that you mentioned?
Hello, Jatinder. 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 SEK 2,700,000,000 and then that will be influenced on how we ramp up this year. And so as you probably saw in the presentation material, we comment on that we're somewhat ahead in B and A and Primary Metals.
These are not large amounts, but somewhat ahead, and that will eat up some of the SEK 2,700,000 you see into next year. So the faster we ramp up, the more of that we deliver this year versus next year. But and that is actually a combination of volume and operational parameters at the smelter portfolio. But 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 huge growth forecast in any way.
It's based on prices that we've seen realized over a period, experiencing both heightened and loss in the market. And 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. So looking at only the alumina price, that could give a wrong indication. And I think we don't guide on prices going forward.
But 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 SEK440,000,000. So with lower alumina, you're also suffering, not just benefiting.
Yes. 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 and currency, of course. But 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.
Yes, afternoon, guys. This is Amos Fletcher here from Barclays. A couple of questions from me. So 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 3 month lag. But when I look at those costs in the presentation on Slide 18, the prices fell quarter on quarter in Q3.
So could you just explain the guidance for flat costs
in bauxite and aluminum? Thanks.
B and A, it varies a bit from category to category. Some have a monthly lag, some are more on the 2 month lag, and we've also been impacted a bit by inventory. But then 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 seen a bigger fall in Q4 than in Q3. So I would expect effects, if anything, to come more into the Q1 if we see those price levels remaining. Among the other factors, we do see some cost relief, but it's not to a big extent.
And in total, based on what we see now, we expect more flat prices. Okay. Fair enough.
Yes, it seems like a slightly shorter lag perhaps. And then I was also going to ask around expectations for volume growth in 2020 for rolled and extruded products?
So we haven't updated volume growth for execution and rolled in 2020. But 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. So this year, we've seen demand coming a bit down from what we expected, and you see that very visibility in the gold and exclusion figures also. For next year, on the primary side, we expect the 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. And then just last question I was going to ask. You targeted around SEK 1,000,000,000 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?
Yes. 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.
And on the extrusion target, I would also like to remind you that this is SEK 1,000,000,000 target over some years. We have split it a bit between the years for the improvement program context. But even if what we're not able to deliver on this year due to weaker 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. And then just to sort of 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?
Yes. I think it's 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, SEK 800,000,000 is driven by increased volume and efficiency. At SEK 300,000,000 is driven by the Husqvist restart.
If margins are significantly lower than what we experienced in the years before we targeted this program, then the effect of this will be a bit lower. So that is a risk you should factor into account. Okay. Very clear. Thank you.
We will now take our next question. Caller, your line is open. Please go ahead.
Hi. Dan Major from UBS. A few questions. Firstly, you obviously announced the P and L impacts of the restructurings in raw products and to an extent, Extruded products. Can you give us a reminder of what we should be assuming for those through the cash flow statement with respect to these restructuring charges and when they should be coming through the into the cash flow statement?
That's the first question.
Yes. I think if you start with exclusion, then these restructuring costs are quite of short term nature. When we do the restructuring announced restructurings in 1 quarter, they might come 1 or 2 quarters lately on the cash flow side. And you also know that there's a mix of impairment versus restructuring or redundancy costs there. And for Rold, it's a bit of a different picture.
And 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. So there would be a minor flow through the cash flow in 2019 and then the majority coming through in 2020 2021 and then a smaller impact in 2022 from a cash flow perspective based on our current expectation of the mining profile.
Okay. So what would that be somewhere in the region of SEK 1,000,000,000,000, SEK 1,500,000,000 next year negative cash impact if I combine the 2? Would that be a reasonable number?
That sounds a bit on the high side. If you just look at the rolled program, it in provisions, we have around SEK 1,200,000,000, where SEK 900,000,000 of this is related to redundancy and $200,000,000 is related to cleanup and remediation. These $200,000,000 typically come quite late in the process. The 900 that we're focusing on redundancies, if you say that a small part of it is in 2019 and then the bigger part is split between 2020 2021, then the 2020 figure doesn't become so large. And on the extrusion side, then it's a good combination between impairments and also other restructuring costs.
So I would say somewhat on the lower side of the figure that you indicate for 2020.
Okay. That's useful. 2nd, you mentioned the volume uplift coming through in primary aluminum as a consequence of the continued ramp up of our brass, etcetera. Can you give us a number there in terms of whatever karst house sales or karst house production, what sort of delta we should be expecting in the Q4 to make sure we're in the right place on the numbers? Would it be a similar sort of rate of change in sales as we saw sequentially in Q3?
I think when it comes to the volumetric side, then we are expecting an increase into the 4th quarter on primary, driven by a full period of Albras available. And we also have some creep in there, but probably not to the same extent that we've seen from Q2 to Q3, if you're referring to from 486 to 522, but on the somewhat lower range of that.
Thanks. And then just finally, just to make sure I got the number right, would you say it was €500,000,000 expected sequential sort of cost saving in primary from raw materials, €400,000,000 from alumina and €100,000,000 from kind of other input costs. Is that the right number that you said?
Are you comparing to Q3 or Q2, then I guess we had the $200,000,000 from alumina, SEK 200,000,000 from less power sales, SEK 100,000,000 from carbon and SEK 100,000,000 from fixed costs and depreciation and SEK 100,000,000 from currency.
So I thought you mentioned on the call earlier your expectation on additional reductions at current prices. Did I misinterpret that?
Into Q1. Into Q1. Sorry. Saw that it's $400,000,000 on the alumina side, dollars 100,000,000 on the carbon side. And then we usually see fixed cost increase.
We also had a one off in depreciation in Catalent, so you should take out $200,000,000 for those.
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