Good day, and welcome to the Norsk Hydro Q1 2014 conference call. At this time, I would like to turn the conference over to Pål Kildemo. Please go ahead.
Thank you. Good afternoon, and welcome to Hydro's first 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 participate. For those that did not see this morning's webcast of the results presentations, 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 first quarter results before we open up for the questions. As you have seen, the underlying EBIT for the quarter was NOK 772 million. This is up NOK 300 million from the fourth quarter and down NOK 300 million from the first quarter last year. The increase in result is primarily driven by seasonality, higher sales volumes in all our metal business areas, primary metal markets, rolled products, as well as our extruded joint venture, Sapa. We experienced increased product premiums in primary metal, which were offset by higher Alumina and energy cost and lower realized LME prices. We experienced somewhat higher realized Alumina prices in Alunorte with stable Alumina production and increased production of Bauxite.
As we guided last quarter, production in the energy division was higher than normal and up approximately 600 GWh from the fourth quarter, partly in preparation for the Rjukan outage in parts of Q2 and Q3, which is important for the upgrade project at the Rjukan hydropower stations. This contributed positively, but that was somewhat offset by low prices for the first quarter viewed in a historical context. Based on increasing use of Aluminum in cars and rising demand for recycled metal, we are making investments in our rolled products business in Germany to expand our automotive and recycling capacity. This is in line with our strategy in rolled products of high-grading our product portfolio and expanding in transportation and other fast-growing markets.
In terms of market development, we stated last quarter that we were cautiously optimistic to the Primary Metal market as demand was expected to exceed production. Given the development through the last quarter with more announced containments, this viewpoint is further confirmed, resulting in the possibility for some inventory reductions in the world outside China going forward. Finally, if we sum up with our main priorities going forward, then we seek to lift and stabilize production at Paragominas Bauxite and Alunorte Alumina. We will continue with forceful improvement programs across all business areas, further enhancing our competitiveness, including the From B to A program, the $180 program in Primary Metal joint ventures and the Climb program rolled products. With that, Pål, we are ready for questions.
Thank you, Svein Richard. Operator, we are now ready for questions.
Thank you. If you would like to ask a question at this time, please press the star or asterisk key followed by the digit one 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. We will pause for just a moment to assemble the queue. We shall take our first question from Jason Fairclough, Bank of America Merrill Lynch. Your line is opened. Please go ahead.
Yeah. Thank you very much. Good afternoon, gentlemen, and congrats on the results. I just had two quick questions, if I may. The first one is just on what's going on in Indonesia. Your slides from this morning, slide 11 was quite interesting, talking about the imports of Chinese Bauxite. I'm just wondering what is the ability of Hydro to deliver either Alumina or Bauxite into that apparent shortfall that's coming in China? The second question, if I might, we've seen a large Russian Aluminum producer take legal action against the LME. I wondered if you had any thoughts on the LME's attempts to reform itself and the legal actions that have been taken.
Okay. Thank you, Jason. Good questions. With regard to Indonesia, it is a clear change for China that is now losing the main Bauxite source. It still remains to be seen if this ban will be effective over a long period of time. We have seen, especially in March, a dramatic drop. We believe that the ban will continue for some months going forward. It is still a question if China will make any attempts to open up for continued imports when China is really feeling low inventories for several months going forward. Today there is still some buffer in the system.
Again, it's a situation which is quite special and we are now sourcing China with Bauxite from Brazil. Of course our main product from Brazil is Alumina. We are producing Alumina for most of the Bauxite, but we also have some excess Bauxite that we are selling to China today. With regard to Alumina, of course we have communicated previously that we are in a situation where we are locked in with the contracts for about 80% of the total volume. We will be gradually released from these contracts from 2015 and onwards, and then we can increase the volumes that we're selling to the market. These contracts is, of course, a situation which will still influence on our results going forward. It is communicated. These are contracts that Vale entered into several years ago.
With regard to LME and U.K. ruling, which created a bit of a surprise, I think, that LME is not going to implement from first of April the complicated change of warehousing rules. We have noted that, again, the main problem for LME was the fact that the consultation was not according to what was at least ruled out and that that will have to be done in a different way going forward. We expect that the new warehousing rules will come into effect, but we don't know when that will happen.
To be clear then, do you support the action that was taken by Rusal or no?
We are not in a way in a situation where we are supporting or opposing these things. We just see that there is a change in the warehousing rules that is going to happen. We are following carefully with the development there.
Okay. All right. Thanks very much, Svein. We'll see you in Miami.
We see each other in Miami, yes.
We shall take our next question from Rob Clifford from Deutsche Bank. Your line is open. Please go ahead.
Yeah. Hi, Svein . Look, you've answered a lot of questions, so I apologize for asking a fairly dull numbers question. The Primary Metal business, you had a full year-on-year in the underlying EBITDA, and you've explained it sort of today and in the text. However, I'm just trying to reconcile the text. It doesn't make sense. Your received price in NOK was down 7%, but your sales volumes are up 10%, so they should have more than offset absolutely, and your costs have been coming down. What am I missing simplistically that's causing that big drop in your underlying EBITDA when your volumes are up more than offsetting your NOK received price down? If you wanna take this offline, that's fine too.
No, that we can give you some explanation there because I also explained that this morning that the increased premiums in metal products and for our products from Primary Metal has somewhat been offset by increased Alumina and energy costs. These are some important factors.
This was Q4 to Q1, was it, Rob, your question?
No, it was Q1 to Q1 actually.
Q1.
Because Q4 was distorted by the insurance payment. I was just looking at Q1 to Q1 year-on-year.
It's still energy cost that is influencing or explaining some of it and also increased Alumina cost.
Okay. All right. Thanks for that.
Thank you, Rob.
We shall take our next question from Amit Pansari from Société Générale. Your line is open. Please go ahead.
Hi. Hi, thanks for taking my questions. I have three questions, if I may. The first one is on Sapa. You earlier indicated that, Sapa, there is some NOK 1 billion savings program going on. If you can specify what is the timeline for that and, how is it progressing? That was my first question. Second one is on standard ingots premium. Do you think the premiums have peaked out, or do you see further upside to premiums from here? The last one is on Qatalum. Can you give us some idea of how the pricing is done in Qatalum? Because I'm finding it difficult to reconcile the realized price with the market prices. Thanks.
Okay. Thank you, Amit. We can share the questions here. I will take the first one with regard to Sapa. The $1 billion synergy program is moving according to schedule. Restructuring is moving according to plan, and it will be delivered within 2016. Then Eivind, maybe you can take the other two.
Yeah. When it comes to premiums, you know, it's hard to speculate. The way we see it at least partly reflects a very tight physical market for metal, both in Europe as well as in the U.S. We don't really see that softening at the moment. We foresee a relatively stable and strong premium level going forward as well. When it comes to Qatalum , it's a little bit of a different pricing scheme than what we have or pricing model than what we have in the rest of the primary business area that we have. It follows LME with a two-month lag.
Okay. LME spot or LME three months?
LME spot.
Okay, thanks. Thanks a lot.
As a reminder, ladies and gentlemen, to ask a question, please press star one. We shall take our next question from James Gurry from Credit Suisse. Your line is open. Please go ahead.
Hi, guys. Congratulations on a decent result. I wanted to ask a specific question about the Sapa joint venture. I think I remember when you put it together with your joint venture partner, it was very clear that there's provisions there for one or either of you to IPO the business sometime in the future. Given that there has been a pickup in capital markets activity this year, plenty of IPOs, and clearly the business has shown significant improvement, I wanted to get some indication from you about when perhaps you might think about doing something like that. Do we have to wait until the end of the restructuring program, or could you take a look at the markets and think, you know, now is a good time to perhaps IPO that business?
Thank you, James. A good question related to Sapa. We can just repeat what we have said previously, that we are now working with the restructuring program, realizing the synergies. We are going to realize these synergies and the restructuring program before we move on with this. Again, as I said, the program should be finished within the end of 2016, and after that, we will come back to what we are going to do with Sapa.
Okay, thanks.
We shall take our next question from Rob Clifford from Deutsche Bank. Your line is open. Please go ahead.
Yes. Hi again, just one final question just on strategy. You know, over decades, you and the others have competed on technology. I know you spend a lot of effort on your cell technology. Given, you know, the explosion of production out of China and all new productions in China, is there any value in research anymore in cell technology? Or is it better to let the Chinese do it and buy it off them, much like, you know, one would have once bought off Pechiney maybe? What's your strategy for technology going forward?
Thank you, Rob. The strategy for the cell technology is. We can divide that in two parts. One is a very important one, which is existing capacity. We are doing research to improve the existing capacity, and we have succeeded quite substantially with that. Because if you look at the $300 program, that's a substantial contribution from the development of technology in existing production lines. Again, if you think about the technology itself, it is no electrolysis cells in existing lines that are older than eight years, and we are changing the anodes every month, more or less. There is a continuous renewal of existing capacity, where we are utilizing the competence and the research from research and development.
The second part is more long term and is for new production capacities, which, of course, is not something the world will need today. New capacity can come later, but we are also seeing that there are a lot of spinoffs from this part of the research and development programs that can be utilized for existing lines. We are targeting specifically to reduce the energy consumption, and we have electrolysis cells now that are running at energy consumption down to 11.5-11.8 kWh per kilo of Aluminum, which is the lowest in the world. We see there are also very interesting spinoffs from that to existing lines.
So far, our efforts in research and development has given quite interesting results, and we are utilizing that to improve our competitiveness, not only long term, but definitely also short term.
That low energy consumption, is that at your standard amperage, or are you boosting that? Is that at elevated amperage?
We never let our electrolysis managers in peace. When we have stabilized the production in electrolysis, we immediately increase the amperage. At the same time, we are then stabilizing production at continuously lower and lower energy consumption. It's a quite interesting development there. I cannot go into the details with you there.
Okay, no problem. Thanks for the comment. Cheers.
As a reminder, ladies and gentlemen, if you wish to ask a question on today's call, please press star one on your telephone keypad. We shall take our next question from Jeff Largey from Macquarie. Your line is open. Please go ahead.
Yeah. Hi, good afternoon, and congratulations on the progress made to date. I just had a question on the flat roll division. You mentioned the headwinds from a certain percentage of the contracts not passing on the higher premiums. Now I think that's a small percentage of your overall flat roll business, like 10 or 20%. But I just wanted to see if there was any effort, and I think there is, but if there's any effort on these kind of fixed price or fixed premium contracts to roll them over to renegotiate them at more of a passthrough level. If so, you know, what's kind of the timeframe for these contracts to actually renegotiate?
Okay, here we are talking about 10%-20%, and it's multi-year contracts. We think that is the main also here.
Okay, yeah. There's no near-term opportunity for these to be renegotiated. If premiums stay where they are, these headwinds are gonna stay in place on this small percentage of contracts.
Yeah, just this is, actually the situation here. It's a gradual development there.
Okay, that's helpful. Thanks.
As a reminder, to ask a question, please press star one. We shall take our next question from Amit Pansari from Société Générale . Your line is open. Please go ahead.
Hi. I have just one more question, regarding electricity prices in Brazil. There were some talks last year about government planning to reduce electricity prices. Can you give us some update on that? What is the status? Is it still in pipeline or is it just the government has given up on the idea?
We have an electricity contract in Brazil. As you know, there is a situation in Brazil where in the southern part of Brazil, there is quite a lack of energy production these days. The spot prices are influenced by that, which can give opportunity for high energy-consuming users in Brazil to reduce production and sell electricity. If that is your question, we are definitely looking into the flexibility we have to do these things. We haven't made any conclusions on that yet. Again, there are some interesting commercial opportunities in this energy market where there is a strain on the supply these days.
Okay. My question was more towards the government efforts. I mean, they had published some scheme where they were trying to reduce electricity prices from, I mean, it's a very high levels in Brazil. Has there been any progress on that or that is just, I mean, the idea has been dropped by the government?
We are still working on that. We are talking about the long-term development.
Right. Yes, yes.
I would say, conclusions from these discussions that gives us any significant changes. We have-
Right.
We have continuous contact with authorities related to that tariff.
Right. Okay. Thanks. Thanks a lot.
Thanks.
As a reminder, to ask a question, please press star one. Ladies and gentlemen, should you wish to ask a question, please press star one on your telephone keypad. There are no further questions in the queue at this time.
Well, I think we can call it an evening then.
There are no further questions.
There are no further questions. We will say thank you very much and have a continuous nice day.
Thank you.
That will conclude today's conference call. Thank you for your participation, ladies and gentlemen.