Good day, and welcome to the Norsk Hydro Q1 presentation. Today's conference is being recorded. At this time, I would like to turn the conference over to Stian Hasle. Please go ahead.
Thank you. good afternoon, everyone, and welcome to Hydro's Q1 2018 conference call. As always, we will start with a short introduction by President and CEO, Svein Richard Brandtzæg, followed by a Q&A session, also joined by CFO Eivind Kallevik. With that, I'll leave the word to you, Svein Richard.
Thank you, Stian, and good afternoon. Let me start with a brief overview of the key developments in the first quarter. Underlying EBIT was NOK 3.1 billion, up from NOK 2.3 billion in first quarter last year, but down from NOK 3.6 billion in the fourth quarter last year. The main explanation for the higher results in the first quarter of this year versus the first quarter of last year is higher all-in aluminum and alumina prices, with realized alumina and aluminum prices up NOK 62 and NOK 383 per ton respectively. This was partly offset by increased raw material costs. Extruded Solutions again delivered a strong quarter with continued improved underlying EBIT compared to the same quarter last year.
We are obviously maintaining a strong focus on the better improvements across the business areas and will do our utmost to reach the 2019 target. However, due to the situation in Brazil, we do not expect to meet the NOK 0.5 billion target this year. Towards the end of January, we started production at our world-class technology pilot at Karmøy, and we are currently ramping up. The starter cells are performing as we want them to do and expect to reach full production during the first half of 2018. Finally, when it comes to the market side, we see the global aluminum market moving towards a slight deficit in 2018, due to a lower expectation for supply growth and an increasing uncertainty following the U.S. trade tariffs and Rusal sanctions, together with the situation in Brazil.
We iterate that we expect the global primary demand to grow by some 4%- 5% in 2018. Let me end with my introductory comments with a few words on the situation in Brazil. As you know, we are currently running Alunorte, Paragominas, and Albras at 50% as a result of the embargo on Alunorte. It is comforting that both external and internal reports have concluded that there has been no overflow from the bauxite residue deposits area in Alunorte. It is also encouraging that both IBAMA and SEMAS and Ministério Público have supported this through public statements. IBAMA and SEMAS is the federal and the state, the ministry or the state authorities on environmental areas.
We believe this is an important fact base for the further process where we are seeking dialogue with all relevant authorities to find a common solution to this situation. We are constructive dialogue with the government of Pará including state environmental agency, SEMAS, and we believe an agreement will be an important stepping stone to lift the embargo at Alunorte. We are also seeking negotiations with the Ministério Público. As we have stated previously, this is a highly complex and demanding process, and the timing for resuming 100% production is still uncertain. However, with the fact that we now have in place and the measures that we have implemented, I'm confident that we will resolve this situation with the best for Alunorte and Hydro.
Thank you, Svein Richard. Operator, we're now ready for questions.
Thank you. Ladies and gentlemen, if you'd like to ask a question over the phone at this time, please press the star or asterisk key followed by the digi phone on your telephone. Please ensure that the mute function on your telephone is switched off to allow your signal to reach our equipment. If you find that your question has already been answered, you may remove yourself from the queue by pressing star two. Again, please press star one to ask a question over the phone. We will pause just for a moment to allow everyone the opportunity to signal. Our first person from the queue will be Menno Sanderse from Morgan Stanley. Please go ahead. Your line is now open.
Good afternoon. A couple of questions, please. First on the Brazilian situation. Norsk Hydro seems to be taking quite a rational approach to this. However, I think the other side seems to be taking a more political/emotional approach. For instance, the company still doesn't seem to have contact or negotiations with the Ministério Público, which has put this embargo on producing at 100%. How do you expect to overcome these two slightly different approaches that appear to be going on?
Well, it's there Menno, it's clear that it's different cultures here. I would say that in spite of these differences, there are also a good progress on dialogue. I would say that during the last couple of weeks, we have progressed a lot. I think Eivind can comment on that. It is no doubt that both parties also have interest in bringing Alunorte back to full production. That is the impression I have seen from my side with regard to both the government of Pará and SEMAS. With regard to Ministério Público, that the authority there is more like ombudsman status.
Of course, we are absolutely interested to find a good solution also with them. The main authorities here is the government of Pará and SEMAS, and there we have a very good dialogue. Maybe Eivind you can comment further on this.
No. Obviously it would be ideal, Menno, if we could strike a three-party deal where both Ministério Público and the government was part of the agreement. We will or would like, as you know, to have Ministério Público back to the negotiation table. The way that sits today is that that ball is in their court. We would welcome any further negotiations with them.
Okay. Thanks. A couple of others. First on the, if I look at the material balances across the group, clearly, bauxite, alumina, aluminum, and downstream, obviously there's now a shortfall upstream. If you look downstream, you seem to be quite balanced in terms of how much metal you produce and what you use downstream, but clearly you're selling to different parties. With respect to the whole Rusal situation, what is the risk that all these cross swaps and contracts that you have with different buyers lead to volume shortfalls or forced closure of smelters? You alluded to it a little bit this morning, but maybe you can provide a bit more detail on it's both on the smelter side and on the downstream side.
Of course, with regard to Rusal situation, it was quite, I would say, a dramatic decision that was made. Now it has been postponed until the 3rd of October, there is more time to find alternative solutions. For Hydro, it is both supply of bauxite. It's agreement of alumina to a couple of our plants. It's also very much on the coal metal side that we have had trading activities and purchased metal for as a sweetener in the remelt on remelter side and also in for the primary smelter. Now with the situation, where we have more time, it is absolutely possible to find alternative sources.
There are 12 million tons aluminum in the global market inventories. There should be possible to find metal. Of course, with the situation with Rusal now, it is difficult to count on Rusal as a long-term supplier here. We are already working on alternatives.
Okay. Finally, on rolling, there was clearly some improvement year-on-year, mainly due to noise and a bit of underlying. The underlying improvement still seems quite modest compared to the big negative last year from Hamburg and the slow start. Is that shortfall or is that only very gradual recovery still due to dramatic price pressure in some categories? Which categories are suffering from it?
Yeah. With regard to the rolled products, there are improvements. As you know, we are not happy with the fact that we are delayed on the ramp up of the used beverage can line, that, yeah, we have discussed previously. It's, what we see now is that, again, there are some technical bottlenecks that have to be resolved, and, the final bottleneck will require EUR 1.5 million to solve. That will be done within next weeks. The line has been demonstrating to run at full speed, for weeks. We are close to come to the level now where we can really do the final ramp up.
With regard to automotive line three, there are also a lot of progress. In fact, we are now above business plans on volumes, but it's also very much due to support from automotive line one and automotive line two. There is some higher cost in the production.
Oh, okay.
Meaning that there are still a lot to improve, but there has been improvements that is also sort of partly reflected on the bottom line. There are also some, I would say some mix changes here. There has been a lower sale of litho, lower sale of foil. That is, at least litho has been a high margin product, but there are both volume effects and margin effects here. Automotive has been growing with 21% body in white since the first quarter last year. That is definitely moving forward. It's from a margin point of view, a good product.
Okay. Thank you.
Thank you. I'll take our next person from the queue, Daniel Major from UBS. Please go ahead, your line is now open.
Hi, thanks for the call. Couple of questions. First one, you acquired quite a lot of alumina in the market in the last quarter. Actually, it looks like more than you sold or consumed internally. Can you give us any update on, firstly, what sort of inventory you hold of alumina currently, and what your intention is or what your estimate for the sourced alumina purchases will be in subsequent quarters?
I think the intention of the sourced, additional sourced volumes in Q1 is clearly to support our customers, our own internal needs. As we've talked about, when Alunorte runs at 50%, that leads to a shortfall also of alumina supplies internally through our equity production. We try to fill that through third-party contracts. That's the intention.
Would you expect to be sourcing similar, 1.1 million tons of alumina in the second quarter?
I think it all depends on the availability and also all depends on the progress we have in the negotiations with the governments and authorities in Brazil.
Okay, thanks. The next question on Alunorte and in Brazil, I mean, I think you answered on the call earlier, you need to get the embargo lifted by sort of state and federal and state authorities, and then the Ministerio Publicò . Will you start the refinery if you don't have the license for DRS2? Will you restart and ramp up to full capacity ahead of getting kind of clear visibility on the DRS2 license?
I think the first and the primary focus is of course to lift the production embargoes and to get to prove that we have the correct license on DRS2. The situation in Alunorte today or the capacity in DRS1 is so that we can produce for quite a bit of time with just utilizing DRS1 as well. There's no short-term issue with it, but obviously we are targeting to also get clarification on the DRS2 situation.
Is it fair to say that you, if you got the embargo lifted, you would restart under the hope that you could get the license back before DRS1 is full. Is that a fair assumption?
That would be a fair assumption, yes.
Thanks.
Thank you. Now we take our next person from the queue. Jatinder Goel from Citi. Go ahead, your line is now open.
Hi, good afternoon. A quick one on your spot or tax alumina exposure. Is it still 75% under the suspended production, or do you have to supply more LME linked on your third-party volumes? Thank you.
Yes, for all practical purposes, Jatinder, it's still 75/25.
Okay. Very clear. Thanks.
Thank you. Now we take our next person from the queue. Eugene King from Goldman Sachs. Please go ahead, your line is now open.
Just build on Daniel's question there about the alumina purchases that turned up in B&A. If you kind of, you know, if you sort of work out an assumption about the material you produced on and the cost of that using kind of historic fixed cost variable, and you kind of think about the purchasing of that additional alumina, it's kind of difficult to reconcile how you got to that EBITDA or where the costs of that, let's say 800,000 kind of incremental tons of alumina turned up. Am I sort of on the right track here? Could you sort of explain how those costs were accounted for, whether they're all in this period or whether they could turn up in the next period? We're just having a little bit of trouble kind of reconciling this quarter against previous.
I think it's, when it comes to all the sourcing that we've done in Q1, part of that hits the book, of course in Q1, but we're also sourcing for later periods, which will then appear in Q2 and Q3 when the, when the sourcing actually, is coming.
To Daniel's question earlier, the excess sort of, you know, amount has not been P&L expensed in this period. It's only the material that was sold on is being expensed?
What we actually bought and took ownership of course. There is, roughly 200,000- 300,000 ton discrepancy there between what we produced and what we sourced and what we actually sold, as you may have seen from those figures, which will then obviously be sold in later periods.
Okay, you'll recognize the cost of that material in later periods when it's sold, not in this period?
When we actually take delivery.
When we take the delivery.
Okay. We have a bit of a recce to in terms of this quarter in terms of whether the costs are in there or whether they're gonna turn up later because, which, you know, I can send to you and Svein, but it's sort of difficult-
Yep.
-to sort of reconcile, if those, if those tons have been P&L expensed, or not. We'll, we can sort that out. It's quite a sort of a detailed question. Then in terms of the material that, all the extra alumina units that you're gonna need for our primary metal are going to be acquired by the B&A Division and then moved up. I think you may have discussed it on the call this morning, but, certainly for us, the line dropped in and out, so we weren't sort of able to follow the product flow. We just wanna know whether we should be thinking about matching the acquisition of alumina, in B&A Division for what's gonna be required in primary, if the Alunorte shutdown continues.
Well, it's B&A that does the procurement of the alumina business in Hydro and that passes that off to Primary.
In terms of your total requirement for primary based on, you know, without Albras, et cetera, whatever you're kinda gonna need in your other smelters, we can kind of assume that if you produce at a certain run rate at Alunorte, you're gonna acquire the balance in the B&A division at market cost?
That's a fair assumption, yes.
Okay, great. Thanks very much.
Thank you. Now we take our next person from the queue, Dominic O'Kane from JP Morgan. Please go ahead, your line is now open.
Hello. Just a quick question on the purchase of Rio's aluminium smelter in Iceland. Do the market dynamics over the last couple of weeks change the intention to complete that transaction?
We have not changed our mind there. The closing progress is ongoing and within the next couple of months we will expect to close the deal as planned.
Okay, thanks.
Thank you. As a reminder, it's time for one last question over the phone. We'll take our next person who is Eivind Veddeng from DNB. Please go ahead. Your line is now open.
Yes. Hi, thank you for taking my question. Just a question on Alunorte. You mentioned there might be a need for an impairment test in Q2. How come it's necessary in Q2 already when it was not necessary at the current date, given that this is hopefully only a temporary event? Can you sort of help me understand the timeline there and why it's necessary already in Q2? Thank you.
I think we said that it may be necessary in Q2. It all goes down to how we view the likelihood of restarting the [Qatalum] 50% . Of course, we need to remember that Alunorte has a very long useful life, which also has to be taken into consideration when and if we actually do the impairment test. That will be based on, basically on our evaluation of whether or not we'll be able to restart in a shorter period of time.
Okay. How much value is placed on the assets in the balance sheet?
That of course I should remember off the top of my head, but, can I come back to you, Eivind, on that?
Yeah. Thank you. Okay. That's fine.
Thank you. Now we take our next person with a follow-up, Daniel Major from UBS. Please go ahead. Your line is now open.
Hi. Just a quick follow-up. I don't know whether you've got the answer to this, but, following the extension, I suppose, of the U.S. sanction deadline on Rusal, do you know if material is currently being shipped from their Irish refinery into the Atlantic market?
from the Aughinish refinery?
Yeah.
That is, as far as I know, Daniel, being traded as normal.
It's still being traded as normal. Okay, cool. Thanks.
Thank you. Now we take our next question from Pajmal Ahberg from Kepler Cheuvreux. Please go ahead. Your line is now open.
Hi. Thank you. Just a question on EBITDA in primary metal. You went from NOK 1.9 billion to NOK 1.349 billion in Q1. Aluminum prices was up a bit, dollar was down a bit, aluminum was up. Is it mainly the higher alumina cost that is impacting the negative development or is it something else in the costs?
We had a negative cost push in primary of NOK 1.6 billion compared to Q1 last year. Roughly NOK 1 billion was driven by alumina, NOK 400 million on pitch and coke, if you like, and roughly NOK 200 million on energy.
Okay. You don't have anything where compared to Q4 just to make it easier to compare the numbers or you will compare to?
Yeah. You would have NOK 600 million on alumina.
Yeah.
Roughly NOK 100 million on energy and some NOK 150 million on petcoke.
Okay. It's the alumina mainly that's coming with the lag there. Okay, perfect. Thank you.
Thank you. As there are no further questions over the phone at this time, I would like to hand the call back to our speakers for any additional or closing remarks.
Okay, thank you for joining us today. If you have any follow-up questions, please do not hesitate to contact us. Thank you and have a nice evening.
Thank you. Ladies and gentlemen, that we conclude today's Norsk Hydro Q1 presentation. Thank you for your participation. You may now disconnect.