Good day, welcome to the Norsk Hydro Q1 update call. Today's conference is being recorded. At this time, I would like to turn the conference over to Stian Hasle. Please go ahead, sir.
Thank you. Good afternoon, welcome to Norsk Hydro's Q1 conference call. We will start with an introduction by President and CEO Hilde Merete Aasheim, followed by a Q&A session. The Q&A session will also be joined by CFO Eivind Kallevik. With that, I'll leave the word to you, Hilde.
Thank you, Stian, good afternoon to all of you. Before I address the key highlights for the first quarter of 2019, I would like to briefly comment on my new agenda for Hydro. I'm excited to lead the next chapter for Hydro that will be based on the strong foundation that I'm inheriting. A strong company culture, 36,000 competent, engaged people, attractive assets, and sustainable and innovative products. While the foundation is solid, we cannot ignore the challenge that we are facing that have led to low earnings and returns for too long time, both for Hydro and for the industry. Part of the challenge is market-driven, now further complicated by the uncertain geopolitical situation impacting economy, trade, and growth. Part of it are extraordinary events we have faced, such as the situation in Brazil and the cyber attack. As a company, we need to address the profitability challenge.
We need to create a new momentum for change and improvement. My ambition is to make Hydro a robust and profitable industry leader built on innovation and sustainability. With that backdrop, here are my priorities for the coming months. Maintain safe and efficient operation as a key priority for Hydro. Now that the production embargo on Alunorte has been lifted, make sure that Alunorte, Albras, and Paragominas ramp up in a safe and sound manner. Perform restructuring, perform a strategic review of Rolled Products, where we will consider all options to get rolled back in a sustainable earnings level. Develop and expand and accelerate our improvement programs throughout the business areas and staff, making sure that Hydro returns to the position as industry benchmark for improvement.
In addition to that, we must make sure that our capital discipline and capital allocation is tighter going forward, particularly in the situation we are now with low prices. We will evaluate the way we work to simplify and optimize where we can. One of the projects initiated is to look at the corporate operating model simply to make sure that we have a structure to work in which supports the overall agenda going forward. I know that you are all eager to waiting more details on my priorities, That is why we plan on hosting an investor update in Oslo in September 24th to provide further information, I hope you can all participate on that. Let me say a few words on the key developments for the quarter.
Underlying EBIT for the first quarter was short of NOK 600 million, down from the NOK 3.1 billion in the first quarter last year, and at more or less the same level as the Q4. Q1 2019 continued to be negatively affected by Alunorte, Paragominas, and Albras producing at 50%, resulting in reduced volumes as well as some cost inefficiencies impacting the results in mined aluminum negatively versus Q1 2018. The cyber attack that hit us hard in March has also had negative impacts on results in Q1. Financial impact of cyber attack in Q1 is estimated to be some NOK 300 million-NOK 350 million. That is a little bit lower than what we guided on just a few weeks after the attack, where we said NOK 400 million-NOK 450 million. The main impact of the attack financially has come in Extruded Solutions.
When adjusting for the impact of the cyber attack, there was a strong performance in Extruded Solutions, in particular in our North American operation on strong market and improved margins. The main factors affecting the results in Q1 2019 versus Q1 2018, in addition to the Alunorte situation and the cyber attack, is the reduction in the results from Primary Metal, mainly due to lower all-in metal prices and higher raw material costs compared to Q1. Energy delivered a strong quarter. Improvement from same quarter last year is driven by strong prices. Finally, when it comes to the market side, we see the global aluminum market in a deficit in 2009. We have to say increased uncertainty related to potential trade wars and softening demand growth in general.
Let me also add that obviously we are very happy to say that in the middle of May, we got the good news that the production embargoes at Alunorte has been lifted by the federal court. This is the result of a long and hard work by our organization. Alunorte, Paragominas, and Albras are now in the process of ramping up production. We expect Alunorte to ramp up towards 75%-85% of the nameplate capacity to the eight available press filters within the next two months. Albras will take about three to four months to reach 100% capacity. Paragominas will be ramping up in line with Alunorte.
Unfortunately, the situation is not completely resolved as we will still have court embargoes in place on our new bauxite residue area, DRS2. This is the only long-term sustainable solution for Alunorte, and we are in close and constructive dialogue with Ministério Público to get this embargo lifted also, where we hope to be able to join forces with Ministério Público to go together to the federal court.
Thank you, Hilde. Operator, we're now ready for questions.
Thank you. If you would like to ask a question on today's conference, please signal by pressing star one on your telephone keypad. That's star one to ask a question. We will pause for one moment to allow everyone to signal. We can now take our first question. Please go ahead.
Afternoon. It's Liam Fitzpatrick from Deutsche Bank. Two questions. Firstly on Extruded and then on Primary. On the Extruded business, if we just strip out the impact of the cyber attack, it really was a very strong Q1 set of numbers. Was there anything exceptional in Q1 that won't be repeated into the rest of the year? When we think about Q2 and beyond, do we think this out-performance that we've seen in Q1 can be sustained, or would you expect the trend to revert back to where we were last year? Secondly, on the Primary business, could you give us some more guidance on where do you think all-in costs could fall to by the end of this year based on current inputs?
It still looks like all-in costs are very high compared to where we were at the back end of 2017 and early 2018, before the Alunorte issues began. Those are my questions. Thank you.
Okay. Hi, Liam. It's Eivind. When it comes to Extruded Solutions, I think we very much agree here, that the Q1 performance is actually quite strong. With the outlook we have, and it's always difficult to guide for a long period of time, we also expect second quarter to be relatively good. Slightly lower growth in Q2 and the rest of the year than what we saw last year, but still positive growth. That's good. I think it is important to note that the profitability, and in particular North America, which is performing strongly, partly also has to do with the remelt system they have. We know that scrap today, and we see that in the primary portfolio as well. Scrap is more available in the U.S., giving lower hot metal cost, also helping the financial performance of this business area. Nothing exceptional in the quarter.
If market conditions continue, we should continue to see good performance, also Extruded Solutions for the second quarter and onwards. When it comes to Primary Metal, I will be careful guiding for the year as such. We do see cost relief coming into the second quarter. I do expect alumina costs to come down to the tune of NOK 300 million-NOK 350 million. I expect energy pitch coke to come down another NOK 100 million, also in the second quarter. That gives you, I think, a clear indication at least one quarter ahead, and then I would be careful speculating further out in time.
Okay. Thank you. Just a quick follow-up. I understand you don't want to give us any more numbers on Primary Metal until your strategic update in September. Is it fair to say that if we look to where you would like to be by the end of this year, early 2020, there could still be sizable cost reductions compared to what you're expecting for Q2? Do you think we'll see the lion's share in the Q2 numbers?
When it comes to raw material costs, we will see a big share in the second quarter. Of course, on the alumina, pitch and coke, and energy, that will vary with the global market. You're back to the timeline of two to three months of what you can observe in the marketplace. Other sort of improvement programs or CapEx cuts or improvements, if you'd like, we will come back to in the September 24 meeting, when we have our Investor Day.
Okay. Thank you.
Again, that's star one to ask a question. Next question, please go ahead.
Hi, good afternoon. It's Mano here. Hilde, first of all, good luck, because clearly it's a long list of things that you have to do here. The first question really is, are there any taboos in your review? Is there any no-go area, or are you willing to shut things down, sell things, and so on?
I have stated that we have to face the brutal fact that our earnings have simply been too low for too long time. That is a good basis to create a new momentum now and to look for all areas where we can improve the profitability and make use of more of it.
Okay. Understood. First of all, then secondly, on how quickly you can act, the NOK 10 billion to NOK 10 and a half billion of CapEx that is guided for 2019. Clearly the run rate in Q1 was miles behind that's quite a normal year seasonality. Is there actually anything you can do to 2019, or is 2019 set in stone from a CapEx perspective?
We are reviewing that at the moment, both the working capital, which has also been a huge buildup during the crisis in Brazil. We're looking at releasing working capital, as well as looking at the whole CapEx portfolio.
Okay. Then you can still say.
To be fair, my numbers, no, I don't want to do. We'll update you on Investor Day in September.
Okay, great. On this morning, you highlighted again that you think production is running below consumption. Inventories are really to blame for the overall malaise in the industry. What level of confidence do you have in your intelligence on the actual level of inventories out there? Obviously they're not really visible. How confident are you that we are indeed going to those 50 days by the beginning of next year?
Well, the unreported global inventories are not scientifically documented. There are insecurities in these numbers.
To follow these inventories, that's been the same way to monitor it now for quite some time. At least it is an indication when inventory days go down slowly.
Yeah.
I think.
Okay, that's fair. Yeah.
I understand your question and of course there are uncertainties around it. I think the trend is quite clear and has been clear for quite some years that there's been under consumption or produced less than what has been consumed. Then, whether you're at 65 or 66 or 67 days today, or 62, in a way, yeah, that falls within sort of the error of margin. Again, the trend and the direction is clear.
Okay. All right. The last question. This morning, Hilde, you reiterated the company's viewpoint that was stated last year and the year before as well, that the company is a, let's call it, early second quartile producer on the cost curve. Which is interesting to note, because EBITDA has been negative for two quarters in a row, and it doesn't sound like Q3 is going to be any better given the small offset of cost, but the big depression on the top line. If a early second quartile producer in the cost curve is making negative EBITDA three quarters in a row already, do you think that basically, the losses of the rest are so high that you're going to see action of those players very shortly?
Are there other factors at play here why temporarily Norsk Hydro is showing earnings which maybe are a bit distorted because of all the other issues that are playing around the group?
Well, we have not been in a normal situation. We talk a lot about the situation in Brazil, but obviously the Brazil situation has had a big influence on Primary Metal. First of all, that we have had to source alumina all around the world, and that has also had an effect on our operations. We have lost productivity, lost on consumption factors. I hope to see a clean quarter to really come back to normal levels, to justify our position on the cost curve.
Okay. Thank you.
Next question, please go ahead.
Hi, it's Daniel Major from UBS. Few questions. Firstly, on the Bauxite & Alumina business, a similar question to Liam's in the Primary Metal business. Can you give us any more detail on where you expect your published cost to normalize out at? I would appreciate that incorporates the third-party alumina purchases that have inflated that level. If we look at that number, it was $240 a ton in 2017 before any of the outages. Assuming alumina price normalizes to a similar level, is there any reason to believe your costs in Bauxite & Alumina or your alumina business shouldn't return to that sort of level once production is restored at Alunorte?
There are several factors coming into play. Remember that, as I said, we've had a fixed cost ratio in Alunorte of roughly 15%-20%. We've kept most of the fixed costs in place for the last, what is it now, 15 months since the embargo started. You will get good fixed cost leverage as soon as we can ramp this production back up to 75%-85% in a couple of months' time. Whether we will hit exactly 240, obviously it depends on pitch and coke prices and lime and all these things. That we will get very close to that level, I think it's the expectation.
Okay, great. That's very clear. Thanks. Second, can I follow up on the working capital? You've obviously been clear that you expect to release quite a lot of the working capital that you've built up. If we just calculate the change in working capital from the balance sheet, I believe it's about NOK 5 billion last year, and it was also a decent build in 2017. Would you expect a full reversal of the working capital build in 2018, in 2019? Is that a fair assumption?
Yeah. When we look at the underlying build, we calculate roughly NOK 4 billion, which is related to the Alunorte situation and the resolve uncertainties in 2018. The target is clearly to have that reversed during this year.
Perfect, thanks. Just another sort of slightly technical modeling question, just I didn't quite hear it on the first call. Your depreciation has lifted because of the IFRS accounting changes. You say the run rate has lifted by about NOK 200 million per quarter. Was that correct?
Aggregated depreciation is roughly NOK 160, and then there is NOK 20 million or so in finance costs.
Okay. Just on the depreciation line, would that imply a run rate for the full year of somewhere around NOK 8? Would that be about right?
Yeah. NOK 160 times four, NOK 640 on a run rate. I mean.
No, I meant group depreciation would be running.
Oh, sorry
just above eight.
Yeah.
About NOK 2 billion a quarter. Yeah? Okay. A final question, just on the alumina market. We've seen news of quite a substantial potential environmental-related closure in China that seems to have sent the domestic Chinese alumina price up and had a sort of positive impact on the seaborne price. Have you got any insight on what you're seeing in the trade in the seaborne markets? Are the Chinese re-entering the market on concerns of shortages of domestic supply of alumina? Have you got any intel on that?
I think there's been a couple of cargoes which have been charted by Chinese players. I still think it's early days. It's 2.8 million tons which has been taken out, and then there is discussion on more capacity. Exactly how long these 2.8 million will stay out, I think remains to be seen. The company, of course, claims that there was no leakage, while the local population claims that there was, which sounds strangely familiar to the situation we had in Brazil 15 months ago. I think we'll have a situation where the environmental authorities will have to do their work, go through review, and then we will have to wait and see what the seriousness of the matter is. We've seen these kind of cases in China before, and they've been reversed relatively quickly.
Great. Thank you very much.
There are no further questions on the line at this time. I would now like to turn the call back to the host for any additional or closing remarks.
Thank you, thank you for joining us today. If you have any follow-ups, please do not hesitate to contact us. Thank you, and have a nice evening.
Thank you. That concludes today's conference. Thank you for your participation, ladies and gentlemen. You may now disconnect.