Good day, and welcome to the Norsk Hydro ASA Q1 presentation. This 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 and welcome to Hydro's Q1 2017 conference call. We will start as normal with a short introduction by President and CEO, Svein Richard Brandtzæg, followed by a Q&A session, also joined by CFO Eivind Kallevik . For those of you that did not see this morning's webcast of the results presentation, it is available on hydro.com. With that, I'll leave the word to you, Svein Richard Brandtzæg.
Good afternoon, and let me start with a brief overview of the key developments for this quarter, the first quarter of 2017. The underlying EBIT for the first quarter was NOK 2.3 billion, up from NOK 1.8 billion in the fourth quarter last year. The main explanation of the improved results is that we experienced higher realized prices in the quarter, both for aluminum and Alumina. This improvement was partly offset by higher raw material costs and certain operational issues in Rolled Products. I'm pleased to say that our NOK 2.9 billion EBITDA improvement ambition is progressing towards reaching the 2019 target with clear measures across the business areas. We also expect to reach the 2017 target of NOK half a billion in working capital, although with somewhat different developments within the business areas.
Our two large projects are running as planned. The Karmøy Technology Pilot is 80% completed and is on schedule for first metal in the fourth quarter this year. At the Automotive Line 3 , product qualification are progressing, and we will have the official opening of this plant next week, May 4th. Finally, when it comes to the market side, we are increasing our expectations of global demand growth for primary aluminum of 2017 from 3%-5%, as communicated previously, to 4%-6%. This is much driven by stronger demand in China. We are also expecting production to come in higher for the year than previously estimated, meaning we still expect a largely balanced market in line with what we said in the fourth quarter.
I would like to end my introduction today by summarizing our key priorities going forward. Safety is always number one priority, and a good financial and operational performance do not stand alone. It has to go hand in hand with safety performance. Last week, we experienced the most tragic kind of accident, a fatality. We must never lose the focus of our most important task, to ensure that everyone comes home safely every day. As I have mentioned for several years, and you will probably hear me mention for several years to come, our improvement ambitions remains very high on our agenda. Our Better program is about taking control of what we can influence ourselves by reducing cost and improving efficiency in our operations.
Here I must say that safety performance goes hand in hand with operational performance. The ambition is also about maintaining our technology lead and upgrading our product portfolio towards attracting high-margin and high-growth markets. Another priority of ours is to deliver on our main growth projects, which is first of all, the Karmøy Technology Pilot in Norway is moving as expected to deliver first metal in the fourth quarter of 2017. This pilot plant is crucial not only to improve cost for our entire portfolio, but also to stay ahead of the game in the long run. The Automotive Line 3 in Germany, which will be ramping up during this year, will allow us to establish a strong presence in the high growth automotive segment by becoming the second largest worldwide supplier in Europe.
Also an important step in fighting the competition we see in Rolled Europe, particularly in the more commodity segments. In addition, we are looking hard on rectifying the challenges we have had at the UBC facility. We are currently running below full speed, but aim at having ramped up the facility by the end of this year. This has been a temporary setback and has obviously not changed the strategic importance of the UBC line and the cost reduction potential and environmental benefits of recycling more post-consumer scrap. We will deliver on all this while at the same time ensuring that we maintain the financial strength to be able to handle the volatility in our cyclical industry.
Thank you, Svein Richard. Operator, we're now ready for questions.
Certainly. Thank you. If you'd like to ask a question at this time, please press star one on your telephone keypad. Please ensure that the mute function on your keypad 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. Once again, to ask a question on today's call, please press star one. We'll pause just for a moment to allow everyone an opportunity to signal. We now take our first question, which comes from James Gurry of Credit Suisse. Please go ahead. Your line is open.
Hi. Thanks for taking my call. I've got two quick questions. Just on Chinese supply growth, among all this debate in the market about curtailments in China, you've increased your estimate of supply this year. Does your new estimate, I think it's 11% at the midpoint, does that include any curtailments due to environmental pressures in China? My second question just relates to metal hedging. I think you've hedged 55% of the metal for the next quarter and 60% of the premiums. How does that compare to last quarter? It appears to be a little bit more than usual. Therefore, are you thinking more about a cautious outlook on aluminum prices at the moment?
Thank you, James. If you go to the first question now, I can answer that, and Eivind can take the second part. If you go to Chinese supply positions, we see that there are coming more metal out of the Chinese facilities. That's again based on increased restart of previously capacity. That's why we are taking up the estimated supplies from 7%-9% to 10%-12%.
We have, in our estimate, when we look at total supply and demand balance this year, we have included after there are some effects this part of the winter weather. Whether we are taking into account everything is difficult to say because we are not sure if it will happen as has been communicated. We are taking into account this as far as we believe we can do in the numbers where we end up saying that we see a largely balanced market with a few hundred maybe 200,000-300,000 tons oversupply in a global market of more than 60 million tons this year. Maybe Eivind you can answer the latter, the second part.
Sure. Hi, James. I think typically you will see that we, when we entered into or exit a quarter, we've typically sold around 60%, and I think you will find that several quarters going back to the time it's 65% and 60% or 60% on aluminum, 60% on premium. It's really not a big difference. Also remember that when we talk about the levels now, we talked about this including Qatalum. In the past, we talked about it ex- Qatalum, which is a big explanation factor here.
Okay. That makes it clear. Thanks.
Thank you. Once again, as a reminder, if you'd like to ask a question, please press star one. We now move to our next question, which comes from Daniel Lerm of ABG Sundal. Please go ahead.
Hi. Thanks very much for taking my question. Just two quick questions from my side. First, you seem to be a bit more bullish on the overall market look for aluminum. I remember you had some spare capacity in your production system in forming aluminum. Would you consider increasing production a bit to capitalize on currently higher prices and also attractive FX effects? And if yes, how long would it take you to increase capacity utilization? Second, quickly on Rolled Products, just to understand the impact of your one-off operational issues in Q1, could you give us a bit of a number, what the impact was here, and to understand what the approximate underlying profitability was in the first quarter?
What's the outlook on margins over the next couple of quarters? Thank you very much.
Thank you, Daniel. I will also take the first part and Eivind take the difficult part, the second part. After the global demand, you're right, we have increased expectation from 3%-5% to 4%-6%. Very much based on what we see in China today. Prices are at a level also where we could say that it's very effective to restart capacity. We will be cautious about that. Of course, we have about 90 TW capacity at Husnes that could be restarted. We have not made any decisions about that. We will certainly look into the opportunities to do it. We will also not only look at the price, but also on market balance.
As we have communicated, there is a substantial deficit of aluminum in our local markets in Europe, for example. As I said, we have not taken any final decision on Husnes yet, so that remains to be seen. If you go to all products, just to clarify what we're talking about here. It is operational issues after planned maintenance stop in the weeks of Christmas and New Year, which we normally do every year. Also, some of these issues are related to installation of a new and improved equipment like a Scalper in Hamburg, for example. We have an issue with restarting furnace in Hamburg.
That also was one of the programs in the first quarter that has been solved. We have an issue with the coal mill in Alunorte, which is also now on its way up to full capacity. The main effect has already been taken in the first quarter, but there will also be some minor effects of these issues in the second quarter. Maybe, Eivind, you could discuss further on this.
Yes. I think when you look at what the additional costs we had in Q1 and couple that with the small volume loss that we had as a consequence, that altogether amounted to NOK 70-NOK 80 million for the first quarter. If you add that to the reported EBIT or the underlying EBIT, we delivered up to NOK 106 million. We take it to NOK 186 million in Q1. NOK 76 million- NOK 86 million, which is pretty much in line with what the market expected for that quarter. Given what Svein Richard is saying, that we have resolved most of these issues, there will be a little bit of a carryover into Q2, which you'd see, let's call more normalized levels of profitability on the next quarter.
Great. Thank you.
Thank you. We'll take the next question. This comes from Hjalmar Ahlberg of Kepler Cheuvreux. Please go ahead.
Hi. I had a question on the cost of Alumina in primary metals going into Q2. How much of the increase have you realized in Q1 and can you say how much more will come in Q2, approximately?
Hi, Hjalmar Ahlberg. We think about NOK 500 million in increased Alumina costs for primary in the first quarter. We typically operate with a 2-3 month timeline on the Alumina cost, meaning that there is some increase to come in the second quarter, but significantly less than what we've seen in the first quarter. Probably around one third of that you would see as a continued increase or an additional increase in the second quarter.
Okay, thanks. On Bauxite and Alumina, if you look at the cost per ton coming into Q2, I mean, you will have higher volumes, but will you also have more raw material cost increase, or should the cost per ton come down in Q2 considering?
I think if you look at it from a raw material cost perspective, Hjalmar, we don't really see any significant increase between Q1 and Q2. From that perspective, it will stay relatively stable. Of course, as we will see some more lifting on some of the sourcing contracts, that should probably help somewhat.
Okay. Thank you.
Thank you. Once again, ladies and gentlemen, if you'd like to ask a question, please press star one. We'll now take our next question, which comes from Johannes Venzelius of Handelsbanken. Please go ahead.
Yes. Hi, everyone. It's Johannes from Handelsbanken. I would like to hear your thoughts on the Alumina market because the mining now has been pretty strong over the past few weeks, whereas we have seen weakness in Alumina. Just curious to hear your thoughts about that, looking ahead.
Yep. Thank you, Johannes. If you go to the Alumina market, we see now a weakening in Alumina prices, not the fact that the demand is going dramatically down, but the fact that restart of curtailed capacity is growing faster than it is absorbed in the metal production units in China. China is now pushing faster on restarting Alumina capacity than restarting metal production capacity. They are ahead of the curve, and that's why there is a weakening and softening price development. We see now Alumina prices below NOK 300 coming down from a NOK 340 in the beginning of this quarter and NOK 349 in the fourth quarter.
Again, if you look at the volatility, the Alumina market is quite substantial. It is very much again a function of the supply-demand balance in Alumina. There is no terminal market there, and Alumina is not a metal which is easy to store. When the production is too high, then the price comes down and the opposite when the production is too low. It is really a function of the balance between supply and demand in China.
Okay, thank you. When it comes to your realized average price, I think you were slightly more than NOK 300 on your realized Alumina sales for the first quarter, whereas market prices was slightly higher. Should we see this as there is a lag on the Alumina price here? I'm curious how we should be thinking about the second quarter in terms of realized Alumina price, yeah.
We have about a one-month lag when it comes to the price realizations in bauxite and Alumina.
All right. Also on the details on costs here, you were pretty precise here walking us through the different moving parts in costs of producing Alumina for you. How should we see the FX for Q2 versus Q1? Because I think there was a headwind for you in the first quarter.
Yes, it was. It's a slight headwind. It's been relatively stable since the quarter. Again, use the sensitivities that we give you in the investor presentation, and then look at how the spot rates develop in the period until closing of Q2.
Okay. Thank you very much for taking the questions.
Thank you.
Thank you. Thank you very much. Once again, as a reminder, if you'd like to ask a question, please press star one. We currently have no further questions in queue at this time.
Okay. As there seems to be no further questions, we can then end this quarter's call. 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 concludes today's conference call. Thank you for your participation. You may now disconnect.