Good day, and welcome to the Norsk Hydro ASA Quarter three presentation. This conference is being recorded. I would like to turn the conference over to Mr. Kildemo. Please go ahead.
Thank you. Good afternoon, and welcome to Hydro's third quarter 2014 conference call. We will start 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, everybody. I will just make a brief summary of the third quarter results before we open up for the questions. As you have seen, the underlying EBIT is NOK 1.49 billion, up NOK 946 million from the second quarter and up NOK 832 million from the third quarter last year. The increase from the second quarter was primarily driven by an increase in the aluminum metal price, lifting results from our primary smelters as prices increased by 13% in Norwegian krone terms. In addition, the increase in the LME price lifts our realized alumina price through the LME-linked contracts, which still accounts for 75% of our contract portfolio.
I'm very pleased to announce that the effects from the B&A improvement program in bauxite alumina are coming through the bottom line as maintenance costs following the power outages are coming down. We can observe a reduction in cost in Alunorte for the third quarter. A continuation of the B&A program was a high priority, and you should continue to expect positive developments within this business area. Energy prices in southwestern Norway increased by almost 50% from the second quarter, which contributed positively but was somewhat offset by lower spot sales. We have lifted our expectation for primary aluminum demand growth in the world outside China from 2%-4% to 3%-4% for this year. So far, we have seen 3.5% up to now.
As demand continue to exceed supply in the world outside China, the markets continue to be tight, and the effects are very visible in this quarter's results. If we sum up with our main priorities and outlook going forward, then into the fourth quarter, we will continue to lift production in our bauxite mine in Brazil, the Paragominas mine, and refinery Alunorte. Developments so far in October are positive, and we should see the effects of this at the fourth quarter reporting. Improvement efforts continue, and we should continue to receive bottom line effects going forward, especially for the Bauxite & Alumina business area, but also for the other improvement programs. The $180 million programs for our joint ventures and the Climb program in all products are contributing to the bottom line.
Finally, we continue to pleasantly observe the situation in the primary market, where demand exceeds production. We are continuing with an active margin management, ensuring we are getting most value out of our metal. I will also remind you about our Capital Markets Day, which is taking place the 27th and the 28th of November, and I hope to see as many of you as possible over there. With that, Paul, we are ready for the questions.
Thank you, Svein Richard. Operator, we are ready for questions.
To ask a question at this time, please press star one followed by the digit one on your telephone. As a reminder, to ask a question at this time, please press star one followed by the digit one on your telephone. We will take now our first question from Hjalmar Ahlberg. Please go ahead. Hjalmar Ahlberg , your line has been opened. Please go ahead.
Thank you. On the aluminium division, is the sustainable cash cost level of NOK 2,525.2 sustainable for the next few quarters? What was the biggest impact on cost reduction this quarter?
Okay, with regard to the cost reductions, this quarter, it is very much related to maintenance. We had extraordinary maintenance costs due to the fact that we lost the current last year, and we had to empty some of the production system, which took several months. Also the secondary effect of this was that we had extraordinary maintenance costs. This is one issue that we have now improved and solved. We will expect lower maintenance costs going forward. Of course, in connection with the B&A program, it is also substantial de-manning that is included, and we have also started to implement that. That is another factor.
Productivity will be and is a very important part also of this.
Again, there are several different areas of improvements that we are targeting. I would say that the productivity and also maintenance cost is the two main factors.
Okay, thank you. On investments for this year, I think you said earlier you're looking for NOK 4 billion and around NOK 2.2 billion year to date. Are you still looking for NOK 4 billion or is it lower now?
We will give an update on Capital Markets Day. I think it is fair to say, if I can answer it in a roundabout way, you know, it is probably more likely that we will end south of NOK 4 billion than on the north side of NOK 4 billion. As to the precise number, we will give an indication on Capital Markets Day.
Okay. The last question on bauxite. You have growing production or you sell more on the spot markets, or is it just going internally?
Well, the increased production that we will see in fourth quarter compared to third will be, for the most part, consumed internally at the Alunorte refinery. You should not expect to see any significant increase in the bauxite exports out of Brazil.
Okay, thanks. That's all for me.
As a reminder, to ask a question at this time, please press star one. There are no questions on the telephone at this time. There's one more question. We will take it just now from Amit Pansari, Société Générale. Please go ahead.
Hi, thanks for taking my question and congratulations on such a good set of results. Good to know that you're going to stay for quite some time here in Hydro, and we will be hearing you more often. My first question here is on the hedging in the B&A segment. Am I correct to understand that the hedging gain is being booked in this segment? If that is so, what is the impact in the third quarter? I would like to understand if the cost reduction of part of it is due to the higher commercial benefits from bauxite shipments that you do in the external market outside of Alunorte. Those would be my questions.
Thanks, Amit. I'll try to answer the hedging question. The hedging level for the BRL dollar hedge was roughly 241, 240 for the third quarter, as it is for the rest of the year. The spot exchange rate was pretty much close to that during the quarter, so there's limited effects on the P&L for the third quarter.
Okay.
Yeah. Okay. Your question was on the B&A improvement program, was it?
Yes.
It was related to bauxite sales and if that.
Right.
impact, the cost level. Yeah, there are some impacts from bauxite sales, but it's not significant for the third quarter.
Okay, fair enough. One more question. I was trying to calculate the minority interest on the underlying levels because you report the underlying EPS and net income, and I see there is substantial increase in the minority interest in the third quarter compared to first and second quarter. Is that correct calculation? If that is so, can you just, I mean, because Alumina division, the earnings have improved obviously, but, I mean, does this justify such a high level of minority interest in the third quarter? Is it coming from Alumina division or Aluminum division? Where is this coming from?
It is really coming out of two parts. Parts of it is coming out of Alunorte, which has significantly improved earnings in the third quarter, and parts of it is coming out of the Slovalco factory in Europe. You're correct.
Oh, is it? Okay. Okay. Thanks for that. Thanks for clarification.
There are no more questions in the queue.
Okay. I would like to thank you for listening in today, and thank you for your questions. We hope to see as many of you as possible at our Capital Markets Day, the twenty-seventh and twenty-eighth of November. Thank you.
This does conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.