Good day, and welcome to the North Hydro Quarter 2 Presentation. For your information, this call will be recorded. At this time, I would like to turn the conference over to Mr. Sveen Hessler. Please go ahead, sir.
Thank you. Good afternoon, and welcome to the update of Norske Hydro's 2nd quarter results. We will start with an introduction by President and CEO, Hilde Marietta Osheim, followed by a Q and A session, also joined by CFO, Ivan Kalarik. And with that, I'll leave the word to you, Hilde.
Thank you, Sian, 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 Q2 of 2019. Underlying EBIT for the Q2 was SEK 875,000,000, down from SEK 2,700,000,000 in the Q2 last year and somewhat up from the SEK 559,000,000 in Q1. I'm very happy to see that the ramp up of Y3 assets in Para after the lifting of the embargo is moving in a successful manner, steadily increasing the production output now since we got the production embargo listed. Also, we see encouraging results in bauxite and alumina results impacted by higher production, but obviously mostly offset by lower realized alumina prices.
Primary metal results are down primarily on lower realized aluminum prices compared to Q2 last year. And then the cyber attack that we had in March has also had a negative impact on results in Q2, estimated at around SEK 250,000,000 to SEK 300 1,000,000. That is somewhat higher than what we guided on, NOK 50,000,000 higher than what we guided on after Q1. The main impact related to the cyber attack is Extruded Solutions with an estimated hit of around SEK 150,000,000 to SEK 200,000,000. The downstream results are down this quarter, both in extruded and rolled products, partly affected the cyber attack but also softening demand.
Energy results came down this quarter, mainly explained by lower production and sales volume compared to a strong result in both the Q2 last year and Q1 this year with higher production and higher prices. When it comes to the market side, we're seeing a deficit in the global primary aluminum market for 2019, more or less in line with what we have communicated earlier, 1,000,000 to 1,500,000 tonnes. But we expect the global primary demand growth for 2019 of 1% to 2%, which we have taken down from our previous guidance of 1% to 3%, as we are seeing signs of weakening in some of our market segments. I know that many of you are interested in the ramp up in Brazil, so let me give some more comments to the actual ramp up. If we start with Alunorte, here I will start by saying that ramping up such huge plants like Alunorte is a big challenge after having been only producing at 50% level for more than a year.
But the fact that we have been rotating using all 7 production lines during the whole embargo period was a great advantage once we were starting off because we had all land equipment and organization in place and was ready to start from day 1 on May 21. As you know, the commissioning of the new press filter technology was stopped for many months by the embargo, and the press filter are currently debottlenecked to get an impact capacity. At Q1, we guided on reaching 75% to 85% within 2 months, and we have already reached those levels. But there is variability from day to day and week to week, so we need to gain experience on operating the filters in an optimal way and stabilizing at even higher levels. To introduce new technology is more demanding than just starting up.
Based on experience from we have today with running the PETS filters, we expect to be able to run stable at some 75% to 85% utilization within the 8 filters we have in place, roughly in line with where we are today. We see actually the last 4 weeks that we have been able to operate at 80% level. Then as communicated before, we will add 9th press filter. The commissioning of the 9th press filter will start in September, October, and will add another 10% capacity and bring the capacity utilization up to 85% to 95% level. Then when will we reach nameplate capacity will be the question.
Further process optimization will continue to reduce downtime, maintenance schedule and cycle time of the press filters to reach the full capacity. While we have been ramping up Alunorte, Paragominas is also ramping up to feed Alunorte. And in Albras, we have now started 50% of the sales that were idle, and we expect all electrolysis sales to be ramped up by the end of Q3. Unfortunately, the situation is not completely resolved as we still have the court embargoes in place on our new bauxite procedure at the ARS 2. This is the only long term sustainable solution for Alunorte to use the new filter to reduce the new deposit with the press filters, and we are in constructive dialogue with Minister Pobuko and CMS to get this embargo listed, but the timing remains uncertain.
We will use the same concept as we used for listing the production embargo for Alunorte, trying to together with Ministerial Publico, reach a good framework to go to the judge, have a joint petition towards the judge to be able to lift the embargo. In the meantime, we will use the RS-one. The estimated life of the old bauxite residue area of the RS-one is about 1 year, and we are currently performing real technical studies to evaluate if the lifetime can be further extended. Finally, I would like to remind you that we will be hosting an Investor Day on September 24 to update on our key priorities going forward. We will welcome you all to join us here in Oslo or from us via webcast on September 24.
Thank you, Hilda. Operator, we're now ready for questions. Thank
We will take our first question from Liam Fitzpatrick of Deutsche Bank. Please go ahead. Your line is open.
Afternoon. Two questions from me. Firstly, on primary costs. Do you think there's still much scope to take costs out of the business beyond raw material changes? So should we expect much more post Q3?
And then secondly, on Rolled Products, that was one area of weakness in the Q2 numbers. Given the typical seasonal softness we see in the second half, I'm just curious what sort of delta we could see in the second half versus Q2? Could this business potentially move into a negative EBIT position? Those are my two questions. Thank you.
So if I can start on the primary costs, then obviously, primary has been influenced by the situation in Alunorte by having sourced many different qualities of alumina. So we will still see some effect of that in the next quarter. But assuming that the raw material costs will come back to the level we saw in Q4 2017, we believe that we will be able to come back to the level we had in Q4 2017 before the situation occurred in Alunorte. When it comes to raw products, perhaps, you, Ivan, can you make some comments on that?
Sure. Hi, Liam. When it comes to roll, remember that a big deviation versus Q2 last year relates to metal cost. Roughly SEK 100,000,000 of that is related to all in metal prices. When it comes to the rolling business in terms of seasonal volumes, we actually expect volumes to stay relatively flat to a small uptick into Q3.
As your question to whether rolling as such will go into negative territory, that, of course, still remains very much also driven by all the metal prices as well as raw material costs. In Q3, we do expect there will be relief on raw material costs, basically offsetting the somewhat weakened alumina prices we expect to see in Q3 for the rolling industry other rolling assets.
Okay, very clear. Thank you.
We will take our next question from Ionis Moschopoulos of Maguire. Please go ahead.
Good afternoon and thanks for taking my questions. Just a couple on the Boxat and Alumina division. Can you provide any color on the exit production rate at Paragominas in June? And whether you're looking to ramp up the bauxite mine to full capacity even if I do not remains constrained at 85% to 95% utilization? And I'll stop there for the first question.
When it comes to Paragominas, that will ramp up at the same speed as Alunorte is ramping up. We will not ramp that up to 100% production if Alunorte, for instance, produces 85%. And the reason for that is, of course, the box that we produce in Parraminas is produced as slurry. So it can only be utilized at Alunort that cannot be shipped overseas or to anywhere else. And then as you saw, we produced 5,500,000 tonnes of annualized Alunorte production in the last weeks, and that's about 85%.
And you should expect all of the propabiners to produce at the same rate going out of June.
I see. Thanks for that. And second question on, again, the same division. In the report, you guided to NOK 1,500,000,000 on a sort of pro form a EBIT basis in Q2, assuming both as you know, North and Puerto Dominas were running at 100%. Does that include any one off ramp up costs during the quarter?
Or is it a clean number?
It's clean enough. We don't really expect any significant ramp up costs. Fixed costs will be somewhat higher in Q3 on an absolute level in Alunorte. But on a per ton basis, you will see a cost relief on the fixed cost in Q3.
Sure. And then just the last question on working capital. You flagged the potential to release NOK 4,000,000,000 this year as production in Brazil normalizes. What would the potential incremental working capital release be assuming spot prices for the rest of the year?
Yes. What we said last or actually what we said last quarter is that we had an unusual, if you can call it that, working capital buildup in 2018 and into 2019 of roughly SEK 4,000,000,000. That was driven by the Alunorte embargo situation, where we carried more alumina inventory than what we otherwise would, and we had largely safety stock of metal due to the threat of sanctions against Rusal. Obviously, we would like to get that SEK 4,000,000,000 back as quickly as possible. What we see now in Q2 is that we released SEK1.3 billion of operating capital, and that's a quarter where we normally see an operating capital buildup because that's the highest volume quarter in terms of sales.
Roughly half of that 1.3 is an underlying improvement and roughly half of that is driven by prices. So we will continue to work hard on releasing more working capital as we go through 2019.
Okay. And there's no indication of potential additional working capital savings, at least not in the future?
For that, have an Investor Day on September 24, where Hilde will give an update on the measures he's implementing. So we'll come back to that at that point in time.
Thank you very much.
We will take our next question from Daniel Major of UBS. Please go ahead.
Hi, guys. First question is from me. Wondering if you could just walk us through the bridge a little bit on volumes and costs for primary aluminum. You previously mentioned €200,000,000 to €250,000,000 lower, NOK lower alumina costs, €200,000,000 lower other costs. What should we be thinking in terms of volumes uplift in terms of aluminum sales through 3Q 'nineteen.
Obviously, you expect to get all the pipelines running at Albras by the end of the quarter. Can you give us any better indication just to make sure our volume numbers are right? And then those numbers you've given in terms of reduced costs, are they on a total basis? So I'm assuming they are offset in part by a lift in volumes. Just wondering if you could give us a bit of steer there.
Yes. The cost is on a full basis for the business area, if you like.
Okay.
Obviously, when it comes to volumes, it depends, of course, on the ramp up speed in Albras. As I said, we expect of us. As I said, we expect all cells to be up and running at the end of the quarter. And then it depends on what kind of amperage we're able to run those cells at. So you shouldn't expect, let's say, annualized speed of 1 full quarter at all costs at the end of the quarter will be lower than that.
And then it's too early to call whether that's 60%, 65%.
Okay.
So somewhere maybe 50% to 60% utilization of the additional capacity is a reasonable target there. Is that fair?
That's not too far off then.
Okay, cool. And then next question, just wanted to clarify something very useful commentary around your expectation. You can obviously get primary aluminum costs back to pre disruption levels. You referenced Q4 2017. If I just look back at your all in costs during that period, they were like 18 about $18.50 but that was on the basis of a nearly $400 alumina price.
Is there any specific reason you referenced the 4th quarter? Or should we be sort of assume the cost structure for 2017? And then, obviously, just adjust it for the alumina price. Can you just get some clarity on that because the costs were actually quite volatile throughout the full year of 2017?
There was no reason to take specifically 4th quarter.
No. So that was
just to get an extra deposit of 27%.
Yes. Perfect. Thank you very much.
We will take our next question from Jatin Goll of Exane BNP Paribas. Please go ahead.
Hi, good afternoon. A couple of questions. On alumina, you mentioned higher fixed cost base in 3Q, but on per unit basis, you should get some dilution. But just to get an absolute sense, will it be lower quarter on quarter on unit cost basis for alumina into Q3 versus Q2? And second question on primary aluminum.
At spot LME and alumina prices, would you get to positive EBIT territory with your cost improvement after full capacity is resumed across the value chain? Thank you.
Let me answer the first one first and then you have to ask the second one again, just so I get all the details on it. Yes, I do expect per unit cost in Alunorte to come down in the Q3 with the production levels that we're currently
seeing. Okay. Yes, on the second question was more on primary aluminum. Can we get to positive EBIT territory, not necessarily in 3Q, but maybe in 4Q, once full production is resumed, assuming LME and alumina prices don't move from today?
That would be my expectation, yes.
Okay. And maybe I can ask a separate question on DRS-one as well. Is the feasibility study to establish whether there is possibility of life extension? Or do we know how much life we can extend? And it's more about whether you'll get the permitting in place and can it be executed in a reasonable time line?
We have a fairly good idea what the extended life is going to be, but we would like to conclude those studies before we go externally with a more precise number in terms days, months and years. But as we said in Q2, we are quite comfortable that we will be able to extend the life of DRS-one beyond the 1 year that we currently commit.
Sure. And would you need any permitting if you were to extend the life beyond that 12 month window that you're given?
We believe we have what we need to do, what we need to. So it's more of getting the geotechnical studies completed.
Okay. And will there be much CapEx implications?
I do not expect a lot of capital needed for getting the expansion of the DRS-one, I think.
It appears we have no further questions at this time. I would now like to turn the conference back to our speakers for any additional or closing remarks.
You for joining us today. And if you have any follow-up or questions, please contact us. Thank you, and have a nice evening.
This will conclude today's conference call. Thank you for your participation. You may now disconnect.