Good day, ladies and gentlemen, and welcome to the Norsk Hydro ASA Q1 presentation. For your information, today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Pål Kildemo. Please go ahead, sir.
Thank you. Good afternoon, and welcome to Hydro's first quarter 2016 conference call. We will start today with a short introduction by President and CEO, Svein Richard Brandtzæg, followed by a Q&A session where also CFO Eivind Kallevik will join. For those that did not see this morning's webcast of the results presentation, this is available on hydro.com. With that, I leave the word to you, Svein Richard.
Thank you, Pål , and good afternoon to all of you. Underlying EBIT for the first quarter of 2016 was NOK 1.5 billion, largely stable from the fourth quarter of 2015 and down NOK 1.7 billion from the first quarter last year. We have continued to see falling alumina and falling aluminum prices in the quarter, which weighed negatively on the results of Primary Metal and Bauxite & Alumina. But we have also seen record low implied cost upstream to a large extent, driven by falling alumina and carbon prices affecting Primary Metal and also lower fuel oil prices affecting Bauxite & Alumina. The continued high production in both Paragominas and Alunorte contribute to the alumina cost development as well as positive currency tailwinds.
This effect is much less significant than what we have experienced in the preceding quarters. Downstream results are seasonally stronger and are the strongest first quarter downstream results we have experienced since the closing of the Sapa joint venture back in 2013. The most significant contribution comes from Sapa, driven by the effect of the improvement programs as well as stronger margins. We continue to see high production in energy driven by high reservoir levels and combined with somewhat higher prices, and this led to increased results in the first quarter. Finally, when it comes to the market side, we continue to expect largely balanced market for the primary aluminum in 2016. Well underway with the 2016, our improvement ambitions remain high on the agenda.
In the world of volatile sales prices, raw material cost, currency, and inflation, it is important to be in control of the cost items which you influence yourselves, while at the same time ensuring that you innovate and adapt to taking market shares in high margin areas supported by positive long-term demand outlook. This is what our NOK 2.9 billion improvement ambition is all about, and we'll strive to deliver on this, as announced, which is also on track. Optimizing our research base for the long term is high on our agenda, and we are still working on the MRN due diligence and related processes to ensure we understand the value-creating potential to, as high an extent as possible before making a potential purchase decision for MRN.
We have two significant projects undergoing, the Automotive Line 3 in Germany and the Karmøy technology pilot in Norway, which we will deliver on time and on budget. Both are key in strengthening our relative industry position, and one will reduce the cost across our portfolio while the other will allow us to move into markets with positive long-term demand outlook and strong margins. We will deliver on all of this while at the same time ensuring that we maintain the financial strength to be able to meet whatever the market may send our way. Our financial strength is also key in allowing us to service our shareholders as announced, as well as safeguarding the flexibility necessary for creating the most value, long-term value for our shareholders.
Thank you, Svein Richard. Operator, we are now ready for questions.
Thank you, sir. If you would like to ask a question at this time, please signal by pressing star one on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, please press star one to ask a question. We will pause for just a moment to allow everyone an opportunity to signal for questions. We will now take our first question from Daniela Costa from UBS. Please go ahead.
Hi there. Thanks. A couple of questions. Firstly, in Bauxite and Alumina, at spot FX rates for the real, how would you expect the implied alumina cash cost to develop over the balance of the year? Secondly, given the relatively low CapEx in this quarter, how do you expect spend, especially on the growth projects, to develop for the rest of the year?
Hi, Daniela. On the BRL side, if you look at the sensitivity slide on page 112, I mean, we had roughly 3.90, somewhat north of that in Q1, and it's roughly trading around 3.50 at the moment, which is roughly a 10% decline. That should give us an effect of roughly around $10 per ton for the rest of the year if it stays where it is. It is highly volatile at the moment as you know.
On the CapEx side, it's relatively low, but remember that we just recently passed the Karmøy pilot decision, so we expect that to ramp up as we ramp up the CapEx spending as we go through the year, then taking us towards the target of roughly NOK 8 billion on aggregate for the company for the year.
We will now take the next question from Dominic O'Kane from JPMorgan. Please go ahead.
Good afternoon. Couple of questions on costs as well. So the Qatalum costs during Q1 came down about 10% quarter-on-quarter. It's the lowest it's been for, well, as far as my numbers go back. Is that sort of $1,280 a ton cost sustainable over the next few quarters? Could you just maybe give us a breakdown of the depreciation guidance that you expect in B&A for 2016? Then finally, could you maybe just give us a comment on the percentage of alumina sales on spot versus LME linked during Q1?
Sure. When it comes to the lower costs in Qatalum, that is very much related to lower alumina costs, as both the index price as well as the LME price has gone down in the quarter. It's a little bit following the trend that we saw in the rest of the primary on the cost side. As we said, the alumina market has picked up somewhat, so there should be an increased cost I think for Qatalum also coming into second quarter. Working in the other direction, there is some lower pet coke prices which should then indicate that we get some benefits on the anode side. On the depreciation in Alunorte alumina, we had a roughly.
It's around NOK 450 million for the quarter, and that is the expected speed, more or less that we expect to see for the rest of the year as well. You have to remember that this is converted back from local currencies into Norwegian kroner, so that will depend on the currency development as we go forward.
Yeah.
You had one more question, Dominic, I think.
Yeah, it was on the breakdown of alumina sales, spot versus LME linked.
This quarter was roughly 50/50. We expect that to tick up a little bit as we get through the year, somewhat higher index exposure towards the second quarter and for the rest of the year, but roughly 50/50 in Q1.
Okay. Excellent. Thanks.
We will now take the next question from Daniel Lurch from Exane. Please go ahead.
Hi, thanks very much for taking my question. The first one quickly on Qatalum, Sapa, you had very well improved results at Sapa. Could you give us an update on what your view is of a potential spin-off or IPO of the division? Is this something you are considering? The second question is generally on the industry. In the European steel industry, we have seen a lot of lobbying for anti-dumping measures against Chinese exports in recent months. Prices have since then recovered. There have been a couple of measures. Is this something you would also consider for the European aluminum industry? Is this something you're pushing for? Do you think it would help? Thank you very much.
Thank you, Daniel Lurch. With regard to Sapa, we have established an option for Hydro when we established a joint venture where we put our extrusion business together with the extrusion business of Orkla in one company, Sapa. We still maintain that option. We will make a decision on this what to do about it when the time is right. We will come back to that later. With regard to lobbying and anti-dumping, there are a couple of cases ongoing in the U.S. with regard to export of aluminum from China. There is a agreement in general for between China and U.S. of where China promised to reduce the subsidies on export goods and that also aluminum.
There are other examples where we see that trade issues are coming higher on the agenda in some parts of the world. With regard to the development in U.S., we follow carefully and of course also there are some discussions also in the European aluminum industry. We are working through associations with that. We don't have any conclusions on what we see as will happen. It is high on the agenda. That is for sure.
Thanks very much. Is there anything you can say on timing, is it in the next couple of months or is it end of the year you would target a statement in that regard?
No. I cannot specify any timing on that.
Okay. Thank you.
Our next question comes from Hjalmar Ahlberg from Kepler Cheuvreux. Please go ahead.
Thank you. Short follow-up on the trade case questions. I mean, if this would happen, what would you say could be the potential positive? Is that premiums increase in U.S. or what's the dynamic of any positive outcome of that?
Oh, yeah, that's a good question because as long as there are high inventories of standard ingots, I think that could be some limitation on the effects short term. Medium and longer term, it may have a bigger effect. It's difficult to speculate on that. We are certainly following that development carefully because it will have an impact, but I will not give any numbers because that will be purely speculation from my side.
Okay, thanks. Just look on China, you're saying that there might be some more restarts there. On the other hand, alumina prices are moving up. I guess there's some kind of dynamic there as well because I guess the cost curve shifts up if alumina price goes up, and that could on the other hand maybe increase the cost curve for the Chinese. What's your view on that?
Yeah. No, exactly, that is also our view that we see the alumina prices going up. At the same time, LME is increasing and the cost curve is changing. When we looked into the restarts, for example, and also the additional capacity, there has been some restarts but also less, I would say, new capacity in China. The appetite for building new capacity in China seems to be somewhat reduced. At the same time, we see that there has been curtailed capacity that has started to come back again due to the fact that the SHFE price, the Shanghai price is now coming up to higher levels than LME and becomes attractive for restart for some companies.
Again, that is balanced against the fact that the raw material cost is increasing. Again, we are following this carefully, and this will be interesting to see how it spells out in the coming months.
On primary metals, this ICMS tax, how should we interpret this? Is that kind of a one-time hit of NOK 100 million was it, I think, or is it something that is coming each quarter now going forward?
It's something less than 100, Hjalmar. Well, south of that I would argue. This is a catch-up from previous periods where we've had sales of excess power from the power contract that we've had. You should not see this as a going rate going forward, not by any means.
Okay. Then again, on the eliminations, it was discussed a bit earlier today, but I'm just gonna try one more twist to understand it better. Is it correct that these high eliminations now it means that the profits in this quarter for primary and Bauxite & Alumina is maybe lower than it would be if you wouldn't have that there? Or is it I mean, if you combine the two, this may be a more better proxy for what the
Yeah.
actual profits in the two boxes.
I mean to put this in a very generic term.
Yeah.
Normally I would rather like to see negative eliminations because that means that the margins are widening on the products that we produce. When eliminations turns positive, it means that the margins in the business areas are tightening a little bit.
Okay.
That is the reflection that we see in this quarter.
Okay. Just the last one on MRN. You're saying that you're now evaluating the value potential of a potential acquisition. Can you be specific on what kind of value you are evaluating?
I'm sorry, Hjalmar. We have not communicated that. Regarding MRN, I would say that we are absolutely not in any rush here. We have a lot of time, so we are not in a way speeding up any of the processes. We dig into the details and do proper due diligence, and that will continue.
All right. Thank you very much.
Again, ladies and gentlemen, as a reminder, to ask a question, it's star one on your telephone keypad. We will now take the next question from James Gurry from Credit Suisse. Please go ahead.
Thanks very much for the questions. Most of them have been answered, but maybe just two quick ones. What do you think the impact of the maintenance at Paragominas will be in the next quarter? I understand that the Alunorte alumina production won't be impacted, but what should we expect for the cost impact and the production numbers for bauxite? Just another perhaps curious question. You know, the biggest impact other than aluminum is obviously currency. Do you think you should present a view on where you think the currency's going to go over the coming months? Because it's obviously something that you probably do think about quite a lot.
Hmm.
Yeah. I'll start with the simplest part first, James, which is the Paragominas maintenance. We'll do the ball mill and the primary crushing as we normally do every year. We will change the gear in the ball mill at the beneficiation plant, the one that we had out for maintenance last year. This means that the Paragominas mine will be out in parts of June in terms of producing and shipping bauxite to Alunorte. We will pre-produce quite a lot, ensuring that we will not affect the production at Alunorte as such from an alumina perspective. The cost impact obviously with fixed cost at Alunorte, no, at the Paragominas plant will go up somewhat.
We don't expect this to have sort of significant earnings impact, if you like. Of course, there will be some negative impacts from it.
Okay.
On the currency, you're quite right that we spend a lot of time debating currency also internally in Hydro. Although predicting whether currencies will go up and down, it's, I would argue, even more difficult than saying whether LME is gonna go up and down, up or down. We don't really have an external view on that. I can't give-
A challenge.
Yeah.
All right, thanks.
Mm-hmm.
We will now take the next question from Dominic O'Kane from JP Morgan. Please go ahead.
Hi, just one quick follow-up on alumina. Sort of externally sourced alumina was sort of down a little bit quarter-over-quarter and a bit more down year-over-year. Should we still be thinking about 2.3 million tons being the appropriate externally sourced alumina volume?
We still expect to source 2.3, Dominic. You're quite right.
Yeah. Fine. Thanks.
Mm-hmm.
Ladies and gentlemen, again, as a reminder, please press star one to ask your question. We will now take the next question from Juraj Vakulko from Berenberg. Please go ahead.
Hello. Juraj Vakulko from Berenberg Bank. Quick question on your alumina sales. Could you give us any indication how spot and contracts are working and what's given more preference and how and for how long are you tied into spot contract sales, sorry?
We have about this year, we've guided on roughly 50% on the split between LME-based contracts and spot-based contracts. As the old contracts mature and run off, that should come up to some 65% next year, 75% the year after.
Sorry, could you repeat that? 60% this year and then going to 65%.
No, 50% this year, on average is expected for 2016, up to 65% next year and then 75% the year after.
Do you have any flexibility after the three-year period to opt out of this contract, or is it something that you would like to maintain on a long-term basis?
We very much believe that you know the tendency in our strategy is to move towards spot-based price contracts. We will do that as the old contracts mature. I stopped at 75% in 2018. Then when you get closer to the end of the decade, you should be north of 80-85% roughly, which will be on the index. There's very little opportunity to opt out of the LME related contracts. Those were fixed a long time ago. Of course, we honor the contracts that we entered into in the past.
Okay, many thanks.
Mm-hmm.
It appears there are no further questions at this time. Mr. Kildemo, I'd like to turn the conference back to you for any additional remarks.
Okay. As there seems to be no further questions, I suggest we end this quarter's call. From all of us here in Oslo, I would like to thank you for your attention today. If you have any follow-up questions, please do not hesitate to contact us. Thank you, and have a nice evening.
Ladies and gentlemen, this concludes today's conference call. Thank you all for your participation today. You may now disconnect.