Good day, welcome to the Norsk Hydro Quarter Two presentation. For your information, this call will be recorded. At this time, I would like to turn the conference over to Mr. Stian Hasle. Please go ahead, sir.
Thank you. Good afternoon and welcome to the update of Norsk Hydro's second quarter results. We will start with an introduction by President and CEO Hilde Merete Aasheim, followed by a Q&A session, also joined by CFO Eivind Kallevik. With that, I'll leave the word to you, Hilde.
Thank you, Stian, 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 second quarter of 2019. Underlying EBIT for the second quarter was NOK 875 million, down from NOK 2.7 billion in the second quarter last year, and somewhat up from the NOK 559 million in Q1. I'm very happy to see that the ramp-up of our three assets in Pará after the lifting of the embargo is moving in a successful manner, steadily increasing the production output now, since we got the production embargo lifted. Also, we see encouraging results in the 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.
The cyberattack that we suffered in March has also had a negative impact on results in Q2, estimated at around NOK 250 million-NOK 300 million. That is somewhat higher than what we guided on, NOK 50 million higher than what we guided on after Q1. The main impact related to the cyberattack is Extruded Solutions with an estimated hit of around NOK 150 million-NOK 200 million. The downstream results are down this quarter, both in extruded and rolled products, partly affected the cyberattack 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 second quarter 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, 1-1.5 million tons. We expect a global primary demand growth for 2019 of 1%-2%, which we have taken down from our previous guidance of 1%-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, let me give some more comments to the actual ramp-up. If we start with Alunorte, here I would start by saying that ramping up such a huge plant like Alunorte is a big challenge after having been only producing at 50% level for more than a year.
The fact that we have been rotating using all seven production lines during the whole embargo period was a great advantage once we were starting up, because we had all the equipment and organization in place and was ready to start from day 1 on May the 21st. 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 the bottleneck to get the nameplate capacity. At Q1, we guided on reaching 75%-85% within two months, and we have already reached those levels. 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 the experience we have today with running the press filters, we expect to be able to run stable at some 75%-85% utilization within the eight filters we have in place, roughly in line with where we are today. We see actually the last four weeks that we have been able to operate at 80% level. As communicated before, we will add a ninth press filter. The commissioning of the ninth press filter will start in September, October, and will add another 10% capacity and bring the capacity utilization up to 85%-95% level. When we will 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.
In Albras, we have now started 50% of the cells that were idle, and we expect all electrolysis cells 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 residue at the DRS2. This is the only long-term sustainable solution for Alunorte to use the new deposit with the press filters. We are in constructive dialogue with Ministério Público and SEMAS to get this embargo lifted, but the timing remains uncertain. We will use the same concept as we used for lifting the production embargo for Alunorte, trying to together with Ministério Público, 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 DRS1, the estimated life of the old bauxite residue area, DRS1, is about one year, and we are currently performing geotechnical 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 24th to update on our key priorities going forward. We will welcome you all to join us here in Oslo or follow us via webcast on September the 24th.
Thank you, Hilde. Operator, we are now ready for questions.
Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you are using a speakerphone, please pick up the headset or just make sure your mute function is turned off to allow your signal to reach our equipment. Again, it is star followed by one in order to ask a question. 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? Should we expect much more, post Q3? 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.
If I can start on the primary cost, obviously primary has been influenced by the situation in Alunorte by having sourced many different qualities of alumina. We will still see some effects of that in the next quarter. Assuming that the raw material cost 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 Rolled Products , perhaps Eivind can give some comments on that.
Sure. Hi, Liam. When it comes to rolled, remember that a big deviation versus Q2 last year relates to metal cost. Roughly NOK 100 million 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-in 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 LME prices we expect to see in Q3 for the rolling industry or the rolling assets.
Okay, very clear. Thank you.
We will take our next question from Ioannis Masvoulas of Macquarie. Please go ahead.
Good afternoon, and thanks for taking my questions. Just a couple on the bauxite and alumina division. Can you provide any color on the exit production rate at Paragominas in June? Whether you're looking to ramp up the bauxite mine to full capacity, even if Alunorte remains constrained at 85%-95% utilization? 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%. The reason for that is, of course, the bauxite we produce in Paragominas is produced as slurry. It can only be utilized at Alunorte, it cannot be shipped overseas or to anywhere else. As you saw, we produced 5.5 million tons of annualized Alunorte production in the last weeks, and that's about 85%. You should expect Paragominas to produce at the same rate going out of June.
I see. Thanks for that. A second question on, again, the same division. In the report, you are guided to NOK 1.5 billion on a sort of pro forma EBIT basis in Q2, assuming both Alunorte and Paragominas 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 cost. Fixed cost will be somewhat higher in Q3 on an absolute level in Alunorte. On a per ton basis, you will see a cost relief on the fixed cost in Q3.
Sure. Just a last question on working capital. You flagged the potential to release 4 billion NOK 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.
Yeah. What we said last quarter is that we had an unusual, if you can call it that, working capital build-up in 2018 and into 2019 of roughly NOK 4 billion. That was driven by the Alunorte embargo situation, where we carried more alumina inventory than what we otherwise would, and we had larger safety stock of metal due to the threat of sanctions against Brazil. Obviously, we would like to get that NOK 4 billion back as quickly as possible. What we see now in Q2 is that we released NOK 1.3 billion of operating capital. That's a quarter where we normally see an operating capital build-up because that's the highest volume quarter in terms of sales. Roughly half of that NOK 1.3 billion is an underlying improvement, roughly half of that is driven by prices.
We will continue to work hard on releasing more working capital as we go through 2019.
Again, there's no indication of potential additional working capital savings, at least not until.
We will have an investor day on September 24th, where Hilde will give an update on the measures she is implementing. We'll come back to that at that point in time.
Thank you very much.
As a reminder, it is star followed by one on your telephone keypad to ask a question. We will take our next question from Daniel Major of UBS. Please go ahead.
Hi, guys. First question 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 NOK 200 million-NOK 250 million lower alumina cost, NOK 200 million other costs. What should we be thinking in terms of volumes uplift in terms of aluminum sales through 3Q 2019? Obviously, you say you expect to get all the potlines 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? Those numbers you've given in terms of reduced costs, they're on a total basis. 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.
Yeah. 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 Hilde 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. You shouldn't expect, let's say, annualized speed of one full quarter at Albras at the end of the quarter will be lower than that. It's too early to call whether that's 60%, 65%.
Okay, thanks. Somewhere maybe 50%-60% utilization of the additional capacity is a reasonable target there. Is that fair?
That's not too far off then.
Okay, cool. Next question, just want to clarify something, very useful commentary around your expectation you can obviously get primary aluminum costs back to pre-disruption levels. You referenced fourth quarter 2017. I just look back at your all-in costs during that period, they were about $18.50, but that was on the basis of a nearly $400 alumina price. Is there any specific reason you referenced the fourth quarter, or should we assume the cost structure for 2017 and then obviously just adjust it for the alumina price? Can I just get some clarity on that? The costs were actually quite volatile throughout the full year of 2017.
There was no reason to take specifically fourth quarter.
No, because that was.
No
2017.
Yeah.
Yeah. Perfect. Thank you very much.
Yeah.
Once again, it is star followed by one to ask a question. We will take our next question from Jatinder Goel of Exane BNP Paribas. Please go ahead.
Hi, good afternoon. A couple of questions. On alumina, you mentioned higher fixed cost base in 3Q. On per unit basis, you should get some dilution. Just to get an absolute sense, will it be lower quarter-on-quarter on unit cost basis for alumina into third quarter versus second quarter? 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.
Sure.
Yes, I do expect per unit cost in Alunorte to come down in the third quarter with the production levels that we're currently seeing.
Okay. Yeah. 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. That's good to know as well. Maybe I can ask a separate question on DRS1 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 timeline?
We have a fairly good idea what the extended life is going to be. We would like to conclude those studies before we go externally with a more precise number in terms of days, months, and years. As we said in Q2, we are quite comfortable that we will be able to extend the life of DRS1 beyond the one year that we currently communicate.
Sure. Would you need any permitting if you were to extend the life beyond that 12-month window that you're giving?
We believe we have what we need to do or what we need to. It's more of getting the geotechnical studies completed.
Okay. Will there be much CapEx implication?
I do not expect a lot of capital needed for getting the expansion of DRS1 in place.
Great. Thank you very much.
As a reminder, it is star one to ask a question. We will pause for just a moment to allow everyone an opportunity to signal. 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.
Thank you for joining us today, and if you have any follow-up 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.