Welcome everyone here in Oslo, and also welcome to those of you following us on the webcast. Hydro's second quarter results will be presented by CEO Svein Richard Brandtzæg and CFO Eivind Kallevik. After the presentations, we will have time for questions and answers and also one-on-one interviews with the media present here in Oslo. Svein Richard .
The second quarter is from a volume point of view, the best quarter during a year. We also observe the seasonal effects this quarter. The main factor that are influencing the result of Hydro is of course, the global challenging situation for the aluminum industry. On the positive side, we see positive and good results of our improvement efforts with a temporary setback in Brazil, in Alunorte, and I will come back to that. Also we see continued growth and aluminum is still the fastest growing metal. The underlying result, NOK 518 million of the second quarter is about 0.5 billion less than the previous quarter. It's driven by lower alumina and lower aluminum prices. In energy, we had also lower result due to less production.
That is seasonal effect and also relative to first quarter, where we had a very high production in energy. In Bauxite & Alumina, we have had lower volumes due to external induced power outages that are influencing the alumina refinery, Alunorte, and also due to the fact that Paragominas is the supplier to Alunorte. It's also influencing the bauxite production in Paragominas. In Rolled Products, we had a clear seasonal effect with higher volumes than first quarter, but also higher volumes than the second quarter previous year. We also had a good result on cost per ton due to improvement and increased productivity. You are very well aware of the macroeconomic situation, but let me give some comments to the impact on the aluminum business.
It's clear that in spite of the challenging and uncertain macroeconomy in the world, we still see a solid demand growth in aluminum. Let's start with Europe, where we see a fairly flat development since last year. The European market is very weak, especially due to the building and construction market, which then is influencing very much the extrusion business, which is 50% exposed to the building and construction market, less influencing the rolled products business, which is 25% exposed to the building and construction market. We also see in Europe that there is increased penetration of aluminum in automotive and transport, and that is supporting the demand in Europe.
In U.S., we saw a strong growth in aluminum demand in 2012, and we see that continue also in this year with the driving forces, automotive transport. In U.S., we also now see improved development in building and construction. We see that the housing market in U.S. is now gaining some momentum. In China, it seems that China is in for a soft landing. The growth continues in aluminum. It was about 8% growth last year. So far in 2013, we have seen 9.3% growth in China with a GDP development of about 7.5% growth. We expect about 8%-10% growth in China this year.
If you then look at the supply demand balance, this curve we have shown before, and the blue line shows the supply, and the green area is the demand. First of all, we see that we are now slightly above the pre-crisis level on demand levels. We see clearly the seasonal effects every second quarter during the last years, starting with the second quarter, 2008 in the beginning of the curve. We have 2010, 2011, 2012, second quarter, that is the maximum on this curve during these years. This continues, but we also see that the market now is in fairly good balance.
When we see now also going forward the expected growth of about 2%-4% this year and with the announced new and potential curtailments and also the fact that we have seen the development so far, we expect a balanced market this year. The aluminum price went down from about $2,042 per ton - $1,870 per ton during the quarter as average market price. The realized price is $1,923, coming down from $2,042 in the first quarter. This is 8% reduction in prices during the quarter. Of course, the weaker currency of Norwegian kroner and Brazilian reais is influencing on the result.
In general, this is a level where we have to go back to 2009 to find similar low prices on aluminum. On the other side, we have record high ingot premiums, and, as we saw also in the previous quarter, this development continues. Ingot premiums, that is, around $250-$300 per ton, quite stable during the quarter. This comes on top of the LME price and is supporting high cost capacity to continue operations, which capacity could be closed down if it wasn't for the support from the ingot premium. The inventories remain at high levels. We have seen a movement from unreported or unregistered inventories into re-registered inventories. So that is the reason for the increasing level here.
Due to the fact that we have a balanced market, the inventory level in total is stable, and we expect that to continue also for the rest of the year. It is at a high level. However, when we look at the inventory days, as you see on this slide, inventory days are trending downwards due to increased consumption. If you look at the alumina price, we saw a weakening trend during the quarter, in line with the weakening commodity prices globally. About 4% less alumina, lower alumina price, during the quarter. Due to the fact that the aluminum price was 8% lower, alumina price 4% lower, that means that alumina price has increased up to 18% in comparison of the metal price. Now it's trading around 18% of LME.
If you then move to China and take a look at the export-import balance, we can start at the bottom and look at the semis and semi-fabricated products, which is similar, as we have seen in the second quarter of previous years. The primary metal, very much in balance. We see that China continue to be able to supply according to their own demand domestically. Import of scrap continues at similar levels as we have seen before. What we see as a continued trend is lower import of alumina, but we have an all-time high import of bauxite. This is very much in line with what we have seen in 2012 when Indonesia were announcing temporary restrictions on export of bauxite from Indonesia to China.
We know that China, that Indonesia has announced a ban of export from January 2014 to China. It remains to be seen how that will be handled. We assume that the record high import of bauxite to China this quarter is a part of stockpiling in preparation of that export restriction from Indonesia to China, which is also what we saw in the beginning of 2012. The raw material prices, the input prices for production of alumina and aluminum has been declining. Depending on where we are now putting the index, we have chosen to start the index in 2010. We still see that aluminum is the weakest, has the weakest development with regard to price, 15% down since first quarter of 2010.
Due to weakening currency, for example, here in Norway, we have some higher alumina cost and also raw material cost, which we also have to take into account, during this quarter. If you then move to Brazil and Alunorte, we had two sequential power outages due to external induced failures which we lost power in Alunorte for a while, which created problems. We have had similar events previously, but not two sequential events within two weeks. That has been creating some problems for us. We are now talking about 10% of big tanks.
We have 116 big tanks in Alunorte, and 10% of them we have now to clean up. It's about mechanical clean up or chemical dissolution that we normally also use in such situations. That takes time. It is not rocket science, but it takes time to fix this, and this is what we are now doing. We have put the teams on board to prioritize and make sure that we come back to normal operation as soon as possible in Alunorte. Due to the chemical dissolution rate of the settled material, it's still influencing also the third quarter and will have impact on the third quarter result. With regard to the improvement program that we have announced, we are not changing our ambitions.
We are still going to deliver NOK 1 billion in improvements from Bauxite & Alumina in total within 2015. The speed of this program will be influenced this year. We will have some lower effect this year than what we have expected previously. With regard to mitigating actions, we are now installing in Alunorte backup power systems that we can use in case new failures are coming, power failures are experienced. We're also taking now the opportunity to lift up the maintenance level in Alunorte while we have somewhat lower production. As I mentioned, we have from Paragominas supply of bauxite to Alunorte and with lower production in Alunorte, we also have now had to reduce somewhat the bauxite production in Paragominas.
Let us then move from Brazil to Qatar, where we have our strategically important Qatalum that are now consistently operating above nameplate capacity. I'm very pleased to see that we continue also in Qatalum to see reduced cost levels. There are cost reduction programs even in the new smelter of Qatalum, and we continue to succeed and are continuing moving down the cost curve with our efforts there. Of course, the cost level is due to the improvement efforts, but this plant is also supported by higher premiums for the metal products. I'm pleased also to see that almost the whole metal production is moved into value-added products that goes to U.S., Asia, Turkey and the Gulf region.
Of course this smelter is supporting our efforts to move down the cost curve in general as a company. If you look at the total picture now, we are at $1,600 per ton on the estimated cash costs for the total portfolio, meaning that we have a EBITDA margin within the first half year of $375 per ton. You should note that we had the EBITDA margin last year of $300 per ton when the LME was $100 higher than what we have now. The reason why we have higher EBITDA margin now is of course the effect of the improvement programs that are taking us further down the cost curve and give us the better EBITDA margin.
This is due to, of course, the $300 program that you have already seen, we have talked about previously. We are going to deliver another $65 per ton on this program this year. We deliver $235 per ton until the end of last year. We also have introduced improvement program for the joint venture smelters that also are ongoing, that is contributing. In addition to Qatalum, we also have improved cost margins for all our smelters that are supporting also our position. During the quarter, we also have signed a letter of intent on a renewal of a power contract for Slovalco. The very attractive power contract we had for Slovalco is expiring in the end of this year.
If you then move to Rolled Products, we saw better volumes than the first quarter due to seasonal effects, but also higher volumes than the second quarter last year. We had 4% higher sales in the quarter than the first quarter last year, very much driven by can business. Canned beverage is of course a seasonal product and due to the hot summer, that is a good development in the second quarter. In litho and auto, we saw that litho had somewhat lower volume in the second quarter compared to the first quarter. Automotive has increased again in Europe due to higher penetration of aluminum into automotive and transport due to light weighting of cars.
General engineering fairly similar as we had in the first quarter, but 11% higher than the second quarter last year. In general engineering, we have much lower margins today than what we had some years ago. In total, 6% higher sales year to date this year compared to same period last year. If you move over to energy, we had increasing energy prices in beginning of the year and the beginning of the quarter until we had higher than normal precipitation in the quarter, which improved the hydrological balance and put pressure on the energy prices. We had now declining prices, but much better hydrological balance. We started the quarter with about 4% below 10-year average hydrological balance, and we ended up 1% above the 10-year average level.
If you take a look at the reservoir filling level in Norway today, it's about 68% of maximum. The prices are also influenced by the lower German power prices. This is affecting the Nordic market. The 9th of July closed a transaction with Rio Tinto Alcan, where we acquired 50% of Vigeland Metal Refinery with the accompanying hydropower station. This is a very attractive deal for us where we get full control of the high purity metal refinery at Vigeland in addition to a hydropower station that produce 180 GWh hydropower every year.
The Vigeland Metal Refinery is producing 99.99% aluminum that goes into electronics, computers, telephone, mobile phones and tablets, in addition to LCD screens. This is a high-tech product and, with the hydropower station as a backdrop, this is a good deal for Hydro. I leave the word to CFO, Eivind Kallevik. Please.
Thank you, Svein Richard Brandtzæg. Good morning to everyone, and thank you all for joining us here for our second quarter result presentation in the middle of what I expect is summer holidays, at least for some of you. I'll suggest that we just dive directly into the financial results for the quarter. The underlying results before financial items and tax was NOK 580 million for the quarter, down NOK 559 million compared to the last quarter. This is reflecting low results in all business areas, with the exception of Metal Markets, which was flat, and seasonally higher results in Rolled Products. From an overall perspective, the results were impacted by declining metal prices, LME prices, as well as alumina prices.
This was partly helped and offset by a strengthening of the dollar against both the BRL and the Norwegian kroner. In addition, as Svein Richard said, much lower seasonal production within the energy area. I will get back to some more details on the individual business areas later on in the presentation. On this slide, let me draw your attention to the line called Other and Eliminations. This quarter, we have an underlying EBIT on this line of -NOK 70 million. Last quarter, it was -NOK 38 million. The development here is driven by changes in elimination of internal gains and losses of inventories. If you adjust for this variation, we see that there is, for this quarter, a charge of NOK 110 million for common services and other activities on the corporate level.
This is somewhat down, compared to first quarter of 2013. If we look at the high level quarterly results, as I said, NOK 0.5 Billion this quarter, down from roughly NOK 1.1 billion in the first quarter. Energy is the biggest block, about NOK 300 million, or NOK 0.3 billion. Roughly NOK 220 of that is coming from reduced energy production and lower net spot sales of 689 GWh, so that's NOK 220. Prices in the NO2 area, where we have most of our production, was also down NOK 15 per MWh, reducing the income on prices with roughly NOK 40 million.
On the alumina and aluminum price, as I said, both the LME as well as the alumina price per ton was reduced in dollar terms. This was partly offset by the strengthening of the dollar, giving a net result of -NOK 105 million for the period, or between the periods. The Bauxite and Alumina side with the currency effects, that is roughly -NOK 140 million net negative. This is offset by better margins and better premiums in particular on the Primary side, as well as some better premiums also on the bauxite sales side. The last block called Other is a negative development between the periods of -NOK 100 million. This is primarily driven by the lower volumes that we discussed in Primary Metal and Metal Markets and Bauxite & Alumina.
This is offset in part by the improved sales volumes that Svein Richard mentioned for the rolled business. If we look at the key financials, the revenue line is, for all practical purposes, flat between the two quarters. Again, it's the volume and price having a negative effect and then helped back to balance with the improved volumes in rolled products. This gives us an underlying EBIT of NOK 518 million, as I explained on the previous slide. This quarter, we have excluded, or we have items excluded of a - NOK 144 million that we've taken out resulting in a reported EBIT of NOK 375 million. I will get back to the items excluded on a later slide. Financial items this quarter is quite significant.
It is a negative item of NOK 1,367 million. Of this, there is a net currency loss of NOK 1,291 million. This is, of course, the reflection of the strengthening US dollar, then that has an impact on both euro positions as well as dollar positions. The income before tax is a - NOK 992 million for the quarter. This gives us a calculated tax for the period of a + NOK 279 million due to the currency losses. We do, of course, have power surtaxes in the period, that's offset principally by different tax rates on non-Norwegian operating entities.
This gives us a net income for the period of NOK 665 million reported, while the underlying net income reflecting the way we look at our business is a + NOK 426 million for the period. As I just said, the net financials negative of NOK 1,367 million. Primary driver of that is the currency situation giving us a net foreign exchange loss of NOK 1,291 million for the quarter. Of that, approximately NOK 500 million is revaluation of external dollar debt, typically in Brazil, most of that, with the remaining balance of about NOK 800 million comes from intercompany deposits or intercompany balances denominated in euro and dollars. All other effects between the quarters are relatively stable.
If we look at items excluded from underlying EBIT, and as we've mentioned both in previous quarter and probably all quarters before that, we do exclude certain items from reported EBIT to give you a better understanding of the underlying business. This quarter we excluded a - NOK 144 million from our underlying results versus roughly NOK 372 million- in the previous quarter. Now, if we try to work our way down the table, the first one is unrealized effects on power and raw material contracts. In this quarter, it is primarily driven by the falling LME in addition to reduced coal prices, thus affecting the mark to market of the embedded derivative in the Statkraft contract.
Unrealized derivative effects on LME related contracts of NOK 129 that reflects mark to market on a long position we have on LME, both in Primary as well as in Rolled Products reflecting the customer pricing. In a falling LME environment, that leads to a loss in the books. The metal effect in Rolled Products, - NOK 100 million, that is due to lower LME prices on sales reflected in revenues compared to what was reflected in cost through inventories in the quarter. We have NOK 86 million this quarter in rationalization charges and closure costs driven by two major factors, partly restructuring program within our Rolled Products business area, and partly driven by transaction costs related to the Sapa joint venture.
First quarter of 2013, the rationalization charges was mostly related to the corporate center improvement program, and if you go back to 2012, you see some significant impacts both on impairments as well as rationalization. That is for all practical purposes related to the mothballing of the Kurri Kurri smelter in Australia. If we turn to the individual business areas, we see that the B&A result, bauxite and alumina result, has a - EBIT of NOK 244 million this quarter, down NOK 181 million compared to Q1. That of course consists of lower realized alumina prices, which was partly offset in fact by lower apparent alumina cash cost for the quarter.
As Svein Richard Brandtzæg mentioned, the disruption at Alunorte did have a follow-on consequence for Paragominas, as Alunorte is the sole off-taker of that bauxite production, giving us 0.5 million tons of reduced production at Paragominas between the quarters. The realized prices for alumina were down approximately 8% this quarter, driven by LME, but as I said, was partly offset by the strengthening US dollar against the BRL. The negative impact on prices was offset by $5 on the cash cost, partly driven by a better energy mix at Alunorte in the quarter, but also helped by the currency, reducing the base BRL cost base, in particular in Paragominas. Due to the reduced alumina sales, that has also reduced the index exposure this quarter.
Most of the product that we have sold has been related to LME related contracts. If we do look at the next quarter, we say stable production volumes. It is of course stable at the very unsatisfactory level, as Svein Richard explained. What we should also look for in third quarter, given those production levels, we do need to source some more volumes in the market to satisfy supply contracts, so that will lift sourcing costs somewhat in that period. Realized prices for this area do follow the one-month lag to LME, meaning that in the current pricing environment, there is also a downside to the price on alumina compared to what we realized in second quarter.
If we turn to Primary Metal, we saw a decrease in the underlying EBIT of NOK 364 million in Q1 to NOK 237 million this quarter. We saw an approximate decrease in LME prices of $120, from $2,043 - $1,926 this quarter. This negative effect was then further enhanced by somewhat lower sales volumes between the quarters. This was partly offset by increased premiums between the quarters, as well as the strengthening dollars as mentioned before. Combined, these effects is roughly NOK 80 million of the variation of 120. The other part is an increase in raw material costs measured in Norwegian kroner.
If this was measured in dollars between the quarters, the development is basically flat. In addition, the lower fixed costs, or the fixed costs came down somewhat, in part helped by the $300 program. On this slide, and as Svein Richard Brandtzæg also mentioned, it is interesting if you look and compare this also to second quarter 2012. The LME differential between those two quarters is roughly NOK 1,400 lower in the second quarter of 2013 compared to 2012. While if you look at the final reported figure, underlying figure, it is basically flat between the quarters. Meaning that the reduced LME prices has been offset by improved premiums between the quarters. It has been improved by better performance and better cost positions in Qatalum.
Not least, we are really starting to see the good effects from the $300 program, improving the cost base for our primary smelters. For Qatalum, we continue to see stable and high production for the quarter, well above what we define as nameplate capacity when we introduced the plant. Sales were somewhat down, that is more reflecting the fact that we sold 3,000 tons out of inventory during first quarter. The underlying net income is down NOK 20 million compared to first quarter, reflecting lower sales price. Also in Qatalum, as Svein Richard mentioned, we see higher premiums as we are selling more value-added products from that plant.
We are I would say very very happy with the continued improvements in Qatalum, both from an underlying cash cost perspective, but also from a production level. We expect this strong performance also to continue going forward. Metal Markets, the results are for all practical purposes flat between the quarters, delivering NOK 147 million of underlying EBIT this quarter. If we exclude the currency and inventory valuation effect, we had a result of NOK 109 million this quarter, also flat against NOK 110 million in the last quarter. We see stable remelt volumes, somewhat higher margins in that business for this quarter, but then we have somewhat lower reduction from somewhat lower results from our sourcing and trading activities.
Looking into Q3 this is also a seasonal business. August is vacation period in Europe. We expect somewhat lower volumes in the remelters. Let me remind you that results in this business area is affected by volatile results in the sourcing and trading and the hedging results. Rolled Products, we saw a good improvement in underlying EBIT. It is up close to 20% compared to first quarter, ending at NOK 181 million + EBIT. Shipments up 4%, driven primarily by beverage can and foil applications. Average margin somewhat down. In particular, there is a pressure on the standardized products in general engineering.
Offsetting the margin pressure, we do see a lower operational cost per ton, and we see good, very good continued performance on productivity measures such as tons per man hour in the Rolled Products business. As many of you will remember, the first two quarters in Rolled Products are typically the best quarters in a year. As such, we do guide that it will be seasonally weaker volumes in third quarter. As we always say, we do also expect continued margin pressure in this business. In Energy, we saw a decrease in underlying EBIT of NOK 250 million - NOK 268 million for this quarter. That is primarily driven by lower production, as I said, 689 GWh lower net spot sales drives about NOK 220 million of that reduction.
The remaining part is primarily driven by lower prices. Q1, we had an average price of NOK 311 per MWh . This quarter is 296 in the NO2 pricing area, where about two-thirds of the production is situated. We entered this quarter, sorry, with high prices due to a somewhat constrained hydrological balance, as some of you will remember. Through the quarter, we experienced about 60% higher precipitation than normal, and spot prices almost halved at the end of the quarter compared to where they started in the beginning of the quarter. Due to this strong precipitation and good hydrological balance, we expect somewhat higher increased production in third quarter. Of course, volume and prices is highly uncertain.
So far prices is roughly 20% lower in third quarter compared to what we saw in the second quarter. Moving on to Extruded Products. In this period, we have realized an underlying income from discontinued operations of NOK 112 million. Let me just remind you quickly that underlying income from discontinued operation does not include depreciation, reflecting IFRS standards. If we do adjust for depreciation, taxes, and financial items, we have performed underlying EBIT of roughly NOK 50 million this quarter. That is an improvement of approximately NOK 70 million compared to first quarter 2013. We see seasonally higher sales volumes in all areas this quarter, measured against first quarter 2013.
Measured against second quarter of 2012, the volumes are still weak, as expected. Looking into third quarter, we continue to expect the weak volumes in the European extrusion market. However, in South America as well as in North America, we expect a growth measured year-on-year. We go to net cash and the net cash development between the quarters. Some of you will remember that we started the quarter with roughly NOK 400 million in positive cash. This quarter, we've had a positive net cash flow from operations of roughly NOK 1 billion. That is comprised by NOK 1.6 billion in underlying EBITs.
We have released NOK 0.5 Billion of net operating capital in this period, reflecting good operating capital management, but also somewhat lower prices in particular in the Primary Metal side of the business. We have to that backed out NOK 1 billion in negative effects. Half of that is reflecting cash tax payments for the period, in particular power surtax. The other half is basically non-cash items related to mark-to-market effects on LME positions in the Metal Markets area. We have invested NOK 0.5 billion This period. This is very much in line with the annual guidance of NOK 3 billion for CapEx, and it's also very much in line with the tight capital procedures that we are running at the moment in our business.
Even after investments, we have a positive cash flow of NOK 0.5 billion In this quarter. We have paid dividends this quarter to the shareholders of Norsk Hydro of about NOK 1.5 billion. The remaining NOK 0.2 billion that adds up to the 1.7 in this column is dividends to minority shareholders in equity accounted entities. The remaining half a billion is basically relating to currency translation effects driven by the strengthening dollars versus NOK. This gives us a net position at the end of the quarter of net debt of NOK 1.3 billion quarter. We do have one new item that we would like to inform you about this quarter that will impact Hydro's results in the coming quarters.
The joint ventures Alunorte and the Albrás aluminum smelter in Brazil have entered into US dollar forward sales for the second half of 2013, as well as for the year 2014, hedging parts of their currency exposures. This will then mitigate the risk of a stronger BRL against the dollars in these entities. This secures the cost position of these entities in the low LME environment that we have today, creating stability and ensuring focus on improving the operational performance, which is especially important for Alunorte given the issues that we have discussed earlier today. The total hedged amount is approximately $800 million.
Roughly $200 million of that is hedged for the second half of 2013, on an average price of BRL 2.25 to the dollar. The remaining $600 million is hedged for 2014, at an average rate of BRL 2.37 to the dollar. Important to note is also that we will apply hedge accounting for all these hedges that has been implemented. With that, I will leave the financial review and hand back to Svein Richard for his summary comments.
Thank you Eivind. As a summary I would just point to the fact that we have put the top priority to the efforts in Alunorte to stabilize and bring up the production level to where it should be, and also to continue to deliver on our improvement programs as we have discussed previously. We continue to keep a tight ship with strict capital discipline. Despite the macroeconomic uncertainty, I'm pleased to see that we have a healthy global demand in aluminum and also the fact that we now have a balanced supply-demand situation going forward. Thank you very much for your attention.
We open up for questions from the audience. We have a microphone here for the benefit of those following us on the webcast, so please wait for this. We'll also appreciate if you can introduce yourself. Anyone? Yeah.
Yes good morning Bengt Jonassen from Carnegie. On the alumina production, you are stating that you will see stable production quarter over quarter. When can we think that production will come back to the levels that we saw a couple of years ago, around 1.45 million tons instead of 1.25 million tons?
As I said this is influencing the third quarter result.
Mm-hmm.
the third quarter volumes. We have ambitions to lift that up towards the end of the year. It's too early to say exactly how this will be in the fourth quarter. We are just signaling today that it will have an impact in the third quarter.
Yeah.
Anne Gjøen Handelsbanken Capital Markets. It concerns new LME regulations with the intention to hinder the long queue for physical metals to come out of LME. I wonder if it's possible to give your comments when it come to the importance and impact of such change in regulations.
We are very well aware of these possible changes in regulations, and there has been some efforts from different parties to make this change happen. I think we will come back to the comments on this in the Capital Markets Day. We are expecting it could have some impacts. It's too early to say exactly how this will spell out, and we would like to come back to that at a later stage.
Could you give some comment on the timeline on this? When could we at the earliest expect to hear more from LME, for example?
Well Eivind maybe you could comment on that.
I think the status right now is that it's basically up for hearing among different industry players. That hearing will take place in the fall, in September. At the earliest, this will have an impact as of 2014, beginning of 2014.
Other questions? Okay we open up for one-on-one interviews with the media present here in Oslo on the floor, and I thank you all for coming and see you next time.