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Edited Transcript of NHY.OL earnings conference call or presentation 28-Apr-17 6:30am GMT

Thomson Reuters StreetEvents

Q1 2017 Norsk Hydro ASA Earnings Presentation

Oslo Jun 9, 2017 (Thomson StreetEvents) -- Edited Transcript of Norsk Hydro ASA earnings conference call or presentation Friday, April 28, 2017 at 6:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Eivind Kallevik

Norsk Hydro ASA - CFO, EVP and Member of the Corporate Management Board

* Inger Sethov

Norsk Hydro ASA - EVP of Communication & Public Affairs and Member of Corporate Management Board

* Svein Richard Brandtzæg

Norsk Hydro ASA - CEO, President and Member of Corporate Management Board

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Conference Call Participants

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* Hans-Erik Jacobsen

Swedbank Norge AS, Research Division - Senior Financial Analyst

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Presentation

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Inger Sethov, Norsk Hydro ASA - EVP of Communication & Public Affairs and Member of Corporate Management Board [1]

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Good morning, everyone, and welcome to Hydro's First Quarter Results 2017. They will, as usual, be presented by our CEO, Svein Brandtzæg; and CFO, Eivind Kallevik. And after that, we will have time for Q&A and 1-on-1s and everything you need.

So then, let's start. Svein?

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Svein Richard Brandtzæg, Norsk Hydro ASA - CEO, President and Member of Corporate Management Board [2]

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Thank you very much, Inger. And before moving over to the quarterly presentation, just let me just say a few words about the tragic accident we had at Karmøy last week. Operational performance, financial performance and safety performance goes hand-in-hand, and we have improved a lot. But still, we experienced fatality of one of our subcontractors at Karmøy last week. Safety is a fundament for all our operations, and we continue to make sure that everyone comes home safely everyday.

Then I move over to the quarterly results, we had underlying EBIT of NOK 2.3 billion, up from NOK 1.8 billion in the previous quarter. The research is supported by higher aluminum and alumina prices. But we also experienced higher raw material input cost and also some operational issues in all products.

The improvement program, the Better program, is moving according to plan. And it got to NOK 2.9 billion in 2019 and also the yearly target of NOK 500 million is also on track, NOK 500 million.

The Karmøy Technology Pilot is also moving according to plan and ready for startup in the fourth quarter of this year. And we are on time and on budget for this project.

Our automotive line 3 in Germany, the body-in-white line is also now ramping up according to plan. There are qualifications ongoing among several customers. We are going to deliver also to BMW, Mercedes, Audi, Citroën and several other customers are waiting for metal from this production line. And this will be inaugurated next week with participation from Chancellor Angela Merkel and also Prime Minister Erna Solberg next Thursday.

We have adjusted the demand outlook for this year based on the higher consumption in China, especially. We said previously expected 3% to 5% growth. We are now expecting 4% to 6% growth globally. But we also see a higher production in China, so we still expect that supply demand balance will be largely balanced this year. I will come back to that in my next slides.

If you take a closer look at the demand side for the quarter, we experienced 3% lower demand than the previous quarter, resulting in an oversupply of both 700,000 tonnes. This is a normal seasonal variation due to the Chinese New Year. Although the build outside China has seasonal positive variation. China is now impacting the global market with a negative of 3% compared to the previous quarter. So this is now what we see more or less every year.

We experienced more than 8% higher demand in China this quarter compared to the previous quarter and almost close to 6% growth compared to the quarter -- first quarter last year. So it -- more than 8% higher demand in China first quarter compared to first quarter 2016.

In the world outside China, we see around 3% higher demand compared to the first quarter of 2016. So positive developments in several market segments. And we also -- and market areas and also see that Central and South America is also moving on a positive side, and of course, this I know with close to 5% growth.

If you take a look at the slide on the right -- on the curve on the right side of the slide, we see that 12 months holding average supply/demand balance is still negative, but less negative now, so this is due to higher supply from China especially. And we can take a closer look at this picture here, where we see the supply and demand balance in the world outside China where we still see 2% to 4% growth in demand outside China. That is what we also said in the previous quarter and 2% to 3% growth in supply outside China.

We have adjusted the demand in China from 4% to 6% to 6% to 8% this year. And we also have adjusted the supply-side from 7% to 9% to 10% to 12% supply additions in China this year. So when we add this altogether, we see that there will be oversupply in China and deficit outside China. And the world will end up with a slightly oversupply, but largely balanced for this year.

If we then move over to the metal price development, where we have experienced strong development on the positive side, the market average developed from [$709 per tonne] in the fourth quarter to $1,856 as average in the first quarter this year. The realized price developed positively from $1,647 per tonne to $1,757 per tonne in the first quarter. And there were some variations between the $1,689 to $1,960 per tonne in the quarter.

But if you take a look at all-in metal price, also there we had a positive development, of course, due to LME, but also improved ingot premiums. Ingot premiums in Europe improved from $131 per tonne in the previous quarter to $147 this quarter and now trading around $153. In U.S. market, we saw ingot premium from $168, coming up to $230 per tonne this quarter to -- and now trading around $214 per tonne. We see also prices in Norwegian kroner is even better development this quarter and also due to the fact that there are some weakening of the Norwegian currency compared to dollar.

If you then move over to China again and look at export of semi-fabricated products, we see that there are still exports. The preliminary figure for March shows that there could be higher export in March than in February because February was lower than January, but this can also be explained by the increased arbitrage that the gap is widening compared to the first quarter of last year. We saw the arbitrage was moving more positive for Chinese producers in the end of the fourth quarter. And we see the same development in the first quarter this year. So preliminary number shows that there will be somewhat higher export auto China. But we should also remember that China has surplus. There is a surplus production in China, and there is a significant deficit also in China, so it is not a big surprise that China's producers will utilize the possibility of exporting into market in a deficit situation.

If we then move over to alumina. We have seen market development moving from $308 per tonne in the fourth quarter to $340 per tonne in the first quarter this year. Realized price for us was $309 per tonne for alumina. We saw in the beginning of the quarter, around $340, quite stable and then weakening in the end of the quarter. In fact, the price in the end of the fourth quarter was closed to $349 per tonne. The weakening at the end of this quarter was very much related to the fact that they are restart of curtailed alumina capacity in China, so there are more curtailed capacity that is restarted and going back into the market.

If you look into the bauxite side, quite stable bauxite prices. And we see that China continued to import increased volumes. There are high volumes from Australia. We also see Atlantic is now coming up as a very important part of the supply to Chinese alumina producers. So bauxite from Atlantic has now increased from 7% of the total import in 2015 to 35% last year and now represent 40% of the total bauxite that comes into China. And here, of course, Guinea is playing a very important role in addition to volumes from Brazil. There are more [to win] of bauxite export from Malaysia is prolonged another 3 months.

If we then take a look at import/export balance in China and we got to the aluminum units, we see quite stable developments since the previous quarter. Again, high-volume imported of bauxite, quite stable on the fairly low level on alumina. We don't see any movements on primary metal. Scrap import, quite stable. And we see also that there are somewhat less fabricated products from the numbers here. But we should expect that this can increase somewhat in the next quarter as the arbitrage, as I mentioned, has been widening.

If we then move over to the improvement program, and the better ambition of improving Hydro with NOK 2.9 billion within 2019. All in all, we are on track for all the business areas. Bauxite & Alumina will, in fact, now have delivery of about 1 billion in total within 2017, so that is ahead of plan. All products is behind plan due to some operational issues.

In Hamburg, (inaudible) introduction of a new scrap product took some longer time to ramp up and also coal mill in Alunorf that also have been -- had -- after maintenance stop, had some operational issues. But this is on the way to be resolved now, so it's coming up in full production in the second quarter. But it will be influenced somewhat also in the -- after second quarter, remember what we experienced in the first quarter.

With regard to primary, we say that, in general, the operations in primary are running very well. But there is one smelter that is behind plan, and that is Albras, where they are backlog on maintenance of cranes. That is now focused on. And we are working with that. But all in all, Primary Metal is somewhat behind the plan on the improvement target. But for the long term for the 2019 target, we are on track and also on track to deliver 500 million in total improvements this year.

If we then move over to the business areas and the cost and margin development, we see higher cost in alumina this quarter, very much due to the increased cost of input factors like caustic soda and also fuel oil. There are also some higher alumina sourcing cost, and also there are some strengthening of the BRL that is increasing the cost in US dollars. But still, the margins are improved, $74 per tonne of margin compared to $60 in the previous quarter, of course due to higher prices -- higher ALS prices. And as I mentioned, ALS price was $309 per tonne in the quarter, which is then 17.2% of LME.

On Primary Metal, also here higher cost, but this is again the result of higher alumina cost. So we see costs moving up to $1,675 per tonne from $1,550 in the previous quarter; realized price, $1,757; and margin of -- EBITDA margin of $350 per tonne, improved from the previous quarter, of course, then supported of -- by higher aluminum prices and higher margins on (inaudible) ingots.

Rolled Products, seasonal variation. As we have talked about previously, the fourth quarter is a weak quarter. And first quarter is much better quarter, so 13% improvement compared to the last quarter and support from all different market segments. If we compare the first quarter this year with the first quarter last year, we had 5% higher sales, very strong development in packaging and can especially. But also if you take a look into the different segments, the body-in-white volumes have increased at almost 30% since the first quarter last year. And that is where we are now investing in Germany.

Moving over to extrusion. Also here, significant seasonal FX, which is not the big surprise. In U.S., close to 11% increase in volumes, similar increase in the Europe of demand in the first quarter compared to the fourth quarter. If you take year-on-year, 1.7% to North America, supported by automotive and light truck market and also positive development in building and construction. In Europe, it is automotive, transport support, 1.8% higher sales in the -- this quarter compared to the previous quarter, but also obviously, positive development in building and construction.

If you look at the improvements in Sapa, quite significant positive development over the years. And our share of the net income this quarter was NOK 281 million, which is 54% improvement since the first quarter last year. So Sapa has delivered consistently improvements, also after finalizing the synergy and the restructuring program. And now Sapa will continue to work with improvements, but we should be careful to expect that we can extrapolate the development from previous years into the future. But Sapa is, again, moving forward with more sales and value-added products. It's a strong cost focus, and in general, a good progress on improvements.

On energy, there are 2 main factors that are research and development in the quarter. One factor is related to higher energy prices on the continent and export of energy to the continent from Norway. The other factor is the improved hydrological balance, which works in the opposite direction. So the hydrological balance has been improved from 6 terawatt hour below normal to 3 terawatt hour below normal, so the hydrological balance has done -- put the pressure on prices. On the production side, we had more or less full production in January and February. And price signals [in fair] March has done -- taken down the production somewhat.

If we then look into the investments and stop at the Karmøy Technology Pilot, I've already mentioned that we are moving on track and planning to start up in the fourth quarter this year. It's 80% finished. We have now spent about NOK 2.8 billion, NOK 1.9 billion on the Hydro share and NOK 0.9 billion on Enova support. The total budget is NOK 4.3 billion. And here, we have support from Enova of, in total, NOK 1.6 billion.

Here, we are going to test out the next-generation technology for alumina production, which will give us the lowest energy consumption in the world and also with lowest emissions.

In Germany, we are still ramping up the used beverage can line. As we have communicated previously, we have had some technical issues in the beginning of the ramp-up period, which is now underway to be solved, so we are expecting full production of this line in the end of this year. With full production of this line, Hydro in total will have a capacity of 20% of all aluminum cans in Europe to be recycled in our system. And that will be brought back to value chain at full value and back as sheet and ghost for can production in our product system. So here, we will have a capacity of both 40,000 tonnes altogether.

And then the automotive line 3 in Germany is taking Hydro's body-in-white capacity from 50,000 tonnes to 200,000 tonnes. I already mentioned, some of the important customers that are now qualifying material from this line. And we will have inauguration of this line on Thursday, as I mentioned. And we are very happy to see that the ramp-up is moving forward according to plan. This has been on time, on budget. And we are now exciting -- excited to see the result of the qualification because this is quite impressive line and delivering very high-quality materials to the most advanced automotive customers in the world.

With that, I leave the word to CFO, Eivind, please.

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Eivind Kallevik, Norsk Hydro ASA - CFO, EVP and Member of the Corporate Management Board [3]

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Thank you, Svein. Good morning, everyone. And I suggest that we dive straight into the quarterly figures.

This quarter, we've delivered an underlying EBIT of some NOK 2.3 billion, which is NOK 0.5 billion compared to what we delivered in Q4 and roughly NOK 800 million up compared to what we delivered in the same quarter last year. The improvement is primarily driven by higher realized prices, in particular, 20% improvement in the alumina price, but also a 7% improved in realized -- improvements in LME, realized LME prices supported results. Altogether, this contributed roughly NOK 1.3 billion in results.

Raw material costs, also higher in Q1, primarily driven by higher alumina costs in Primary Metal as well as higher fuel costs and caustic costs within B&A, combined negative effect of about NOK 800 million. We saw some positive volume effects in this quarter, seasonally higher volumes in raw products as well as in Primary Metal, but then negative volume adjustments in Bauxite & Alumina on the back of the plan as well as announced maintenance stop we had in Paragominas and Alunorte.

Finally, combination of other items gave a negative effect of roughly NOK 100 million, main reason is that the positive contributions from energy, as well as in the Sapa joint venture, was more than offset by somewhat higher fixed cost, negative currency effects as well as -- I will give a little bit more color on each of the business areas later on in the presentation.

We turn to the key financials for the quarter. We see that the revenues increased by roughly NOK 2 billion compared to the fourth quarter, again primarily driven by the higher realized prices in the business areas.

This quarter, we excluded from the reported EBIT of about NOK 2.4 billion, some NOK 126 million in gain, to better reflect the underlying performance of the company. And again, I will come back to these items in more detail on the next slide.

Financial items for this quarter amounted to NOK 140 million positive. This includes an unrealized positive currency gain of NOK 220 million, partly reflecting the strengthening of the BRL versus the dollar, having an impact on the dollar debt that we carry in Brazil. But also the development of the euro NOK forward rates having an impact on the embedded derivative in the currency contracts that we carry -- on the power contracts we carry in Europe.

As a result, the income before tax was NOK 2.5 billion, up from NOK 1.8 billion in Q4. The income tax amounts to NOK 707 million, which is very close to 30%, and as such, in line with the guided level we give on tax on an annual basis. This gives us a net income of NOK 1.8 billion, up from NOK 1 billion in the fourth quarter. If you look at this from an underlying perspective, it gives us a net income this quarter of NOK 1.6 billion, a strong improvement compared to the underlying income of NOK 1 billion in the fourth quarter. As a consequence, the EPS, earnings per share, also improved to NOK 0.75 per share.

If we then quickly look at the items excluded, we will see that there is really 2 main items this quarter, being mostly impacted by the change in the LME price. First, increasing LME normally gives us an unrealized loss on the embedded derivatives in our power contracts as well as the LME positions that we carry. That is also the case this quarter. Secondly, we see the opposite effect when it comes to the metal effects that we calculate for Rolled Products, where we see a gain this quarter, as costs of good sold typically carries down a lower LME price compared to what is recognized in the revenues.

We then turn to the business areas. We see an improvement in the underlying EBIT for Bauxite & Alumina from NOK 711 million in Q4 up to NOK 756 million in this quarter. We have a 20% improvement in the realized alumina price. It's a combination of a 27% improvement in the alumina PAX index and a 7% increase in the LME-related contracts.

Also in this quarter, as we indicated in the fourth quarter, we're starting to see more PAX-related sales, roughly 65% of the volumes in this quarter is related to PAX. And that is what we will also plan to see -- expect to see for the rest of the year.

On the other hand, as announced, we did have lower production both in Paragominas as well as in Alunorte on the back of the planned maintenance stops we had in the quarter. Altogether, Paragominas was out of production some 11 days, according to plan.

On the back of this, we had lower sales due to lower production, but we also lifted less volumes from third-party sourcing contracts. As many of you know, some of those are very favorable -- favorably priced, which had an impact on external sales in the third quarter. The lifting patterns on these external contracts do vary from quarter-to-quarter, due to shipping patterns and lifting patterns. If you look at this on an annual basis, year-over-year, it should be relatively stable.

Raw material costs increased in accordance with global markets in Q1. We saw a price increase both when it comes to fuel oil consumption and fuel oil consumer in Brazil as well as caustic soda. Both cost increased roughly 15% compared to the Q4.

Please also keep in mind that Q4 last year, we did have a positive onetime effect of roughly NOK 150 million relating to the acquisition of the outstanding shares in Paragominas from Vale.

If we look into next quarter, we do expect production volumes in Alunorte and Paragominas to pick up as we have no planned maintenance stops for this period. And as mentioned before, we do also expect for next quarter to see roughly 65% of our sales being related to the PAX index price.

In Primary Metal, we saw strong increase in EBIT from roughly NOK 600 million in Q4 up to NOK 900 million in the first quarter. Higher realized prices, higher LME, higher premiums had a positive contribution of roughly NOK 600 million between the quarters. All in, metal prices was up 7% versus Q4. And if you measure it in NOK, it was up roughly 8%. The increased sales volumes were at approximately 10%, which has, of course, also a very strong contribution to the results between the quarters.

Partly offsetting this, as I've mentioned, were raw material costs. And for Primary Metal, it is primarily alumina, which is more expensive also as we guided, taking down the results with roughly NOK 0.5 billion.

Looking into second quarter, we have, at the end of Q1, sold roughly 55% of our metal forward at the price level of $1,875 per tonne, including Qatalum. On the premium side, we booked roughly 60%, again around $300 per tonne, including Qatalum. And overall, we expect the realized premium in Q1 to be in the range of $250 to $300 per tonne.

On the raw material cost, we expect to see continued cost pressure in Primary Metal. We still expect realized alumina cost for Primary Metal to be somewhat higher in Q1. We expect a slight increase in energy costs as we have annual price adjustments for the [Energy] contract in Albras in the second quarter. And we also expect pet coke costs to be somewhat higher in Q2.

We turn to Metal Markets. Here, we delivered an underlying EBIT of NOK 24 million compared to an underlying EBIT of NOK 152 million in the previous quarter. Now if we exclude the currency and inventory evaluation effects, the result decreased from NOK 149 million to NOK 83 million this quarter, very close to what we guide on NOK 100 million on a running basis.

The decline this quarter is primarily driven by reduced contribution from metal sourcing and trading activities. And then there's reduction results both when it comes to LME as well as ingot trading. The total metal sales increased this quarter, as we should expect according to normal seasonality.

Looking into next quarter, we do expect metal products. And metal sales continue to improve in terms of volumes as the second quarter is normally the strongest quarter in the year. At the same time, let me again remind you that the trading results and currency effects in Metal Markets, by nature, are volatile.

Then if we turn to Rolled Products. The results clearly improved from a very weak Q4 results to just about NOK 100 million. This is primarily driven by seasonally stronger volumes between Q4 and Q1 as one should expect. But the result this quarter is below comparable quarter last year and is below what we normally should expect based on the volumes that we delivered and produced this quarter. And as Svein mentioned, this is very much down to operational issues in Germany.

When we started the production following the year in maintenance, there were several and (inaudible) plants leading to additional costs and some loss of production. This -- we had our results impact in Q1 of somewhere between -- in the range of NOK 70 million to NOK 80 million altogether. The operational issues are partly related to Hamburg, where we had issues with the introduction of a new scalper, leading to higher production costs and more loss, also to a bleed-out in one of the furnaces that we have in Hamburg. In addition, we had some issues in ramping up the -- one of the largest coal mills that we have in Alunorf in Q4 -- in Q1.

If we look into the next quarter, we have resolved most of these issues. But you should expect that there will be some spillover into the second quarter results. If you look to sales volumes from a seasonal perspective, we do expect higher volumes in second quarter as normal. And also as normal, the Norsk smelter should continue to follow the normal market prices for alumina as well as for aluminum prices.

If we look at energy, we saw an improvement in the underlying EBIT from NOK 159 million in the last quarter up to NOK 423 million in this quarter. This result is clearly driven by higher spot sales, which was the biggest positive contributor to this quarter's results.

In addition to this, the area price differences in Norway narrowed due to better hydrological balances and export capacities and was virtually 0 in this quarter, which has a positive contribution of some NOK 19 million to NOK 20 million compared to Q4.

We had somewhat lower average prices of NOK 278 per megawatt hour, which had also a small negative effect on the results compared to last quarter. Production costs, somewhat higher in Q1. And then again, as we talked about before, this quarter is primarily due to property taxes, which swings from quarter-to-quarter. And Q4 is one of the 2 high quarters in the year.

If we look into the next quarter, let me again remind you about the volatility in terms of production and price expectations and also about the property taxes. Q2 is then normally lower than Q1.

If we turn to Sapa. As Svein said, Sapa continues the very strong improvement trend in Q1 this year, improving underlying net income by close to 70% compared to Q4 '16. But this has primarily been driven by normal seasonality improvements between the quarters. And this time, we see both very clearly, both in North America as well as in Europe.

When you compare to the same quarter last year, results continue to improve and our share of underlying net income on EBIT increased by roughly 50%. The main reason for this is clearly the continuation of the strategy to move more products into value-added, higher-margin segments. But we also see good volume increases, in particular, in Europe, where volumes are up some 5% compared to Q1 last year.

And you should also note that we have increased the disclosure and granularity for Sapa this quarter, also showing results per business area. And you will find more information and historical information in the quarterly presentation as well as normal investor presentation.

When it comes to outlook into second quarter, we do expect the demand to seasonally pick up in second quarter, following the usual season -- usual seasonality pattern. Also, Sapa will, in the second quarter, continue to work to shift its portfolio towards more value add, higher-margin segments, but we should also remember that we should not expect the same type of progress into Q2. We should not extrapolate the improvement lines that we've seen. It should be more a normal and gradual improvement of results going forward.

If we quickly touch on other eliminations, netted to 74 million positive this quarter compared to a very small negative in Q4. We've just been through the Sapa results. The other line, representing common services and other businesses, was NOK 140 million negative this quarter, close to what we have in Q4 of negative NOK 130 million and very close to what we guide on the quarterly basis of NOK 150 million.

Eliminations amounted to NOK 67 million negative this quarter. This reflects the higher B&A margins, which we then eliminate from the inventory that we carry. And this will then be realized in subsequent quarters to come.

On the cash side, we started the quarter with NOK 6 billion in cash. We produced roughly NOK 3.6 billion in underlying EBITDA, being a major positive contributor this quarter. We had an operating capital bill of NOK 1.7 billion. And you should always expect an operating capital bill in Q1 on the basis of higher sales. But this time, it's slightly larger than what you should expect, also driven by the price improvements or the higher prices in this quarter.

We paid taxes of approximately NOK 800 million in this quarter. This is partly offset by a dividend from Qatalum of some NOK 25 million I received in the quarter. As a result of this, we generated cash flow from operations of roughly NOK 1 billion. On the investment side, we've invested NOK 1.2 billion this quarter. This includes NOK 300 million investment in Karmøy Technology Pilot, net of the Enova grant. That leaves us at the end of the quarter with a relatively stable cash balance compared to where we started the quarter at NOK 5.9 billion.

Very quick look at adjustment -- adjusted net debt. We see a slight improvement this quarter coming from NOK 5.6 billion in Q4 to NOK 5.4 billion at the end of the quarter when you exclude -- deduct the net account -- in equity-accounted investments.

Net cash, relatively stable over the quarter. We saw a reduction in net pension liability, driven by small increase in interest rates or discount rates done in Germany as well as in Norway.

Net debt and equity accounted investments decreased by roughly NOK 200 million. This decrease is primarily explained by Qatalum net debt, driven by foreign exchange explanations as well as an increased cash position.

As a result of these developments, the total adjusted net debt in Hydro at the end of Q1 amounted to NOK 12.1 billion, a reduction of some NOK 400 million compared to the end of the year.

And with that, I'll give the word back to you, Svein.

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Svein Richard Brandtzæg, Norsk Hydro ASA - CEO, President and Member of Corporate Management Board [4]

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Thank you, Eivind. And just a summary of priorities going forward. Safety first, that is, of course, the fundamentals for our production wherever we are operating in the world. And this goes very much hand-in-hand with the improvement programs that we have to continuously, to do the work better today than yesterday. And we have improvement program now that are moving according to plan in regard to the NOK 2.9 billion ambition of 2019.

I'm looking forward to start up the technology pilot at Karmøy in the fourth quarter this year. That is also moving according to plan, very important strategic investment as well as our investment in automotive line 3 in Germany and also the used beverage can line in Germany, which all are now on the way to be delivered. And we are looking forward to the inauguration of the automotive line 3 next week and also the opening of the technology pilot this [autumn].

So with that, thank you very much for your attention.

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Inger Sethov, Norsk Hydro ASA - EVP of Communication & Public Affairs and Member of Corporate Management Board [5]

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Okay, then we will open for questions from the audience here in Oslo and also for all of you following us on the webcast, all the millions and millions of people out there following us on webcast.

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Questions and Answers

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Inger Sethov, Norsk Hydro ASA - EVP of Communication & Public Affairs and Member of Corporate Management Board [1]

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So first, here on the front row here. Thank you.

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Hans-Erik Jacobsen, Swedbank Norge AS, Research Division - Senior Financial Analyst [2]

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Hans-Erik Jacobsen, Swedbank. Could you comment a little bit on the expectations of higher production in China? Recently, we have seen that production is coming up. But on the other hand, a lot of us are expecting amendment of closures later on this year. Could you comment on that? And also your expectations to Chinese exports in view of somewhat more aggressive U.S. administration and the WTO, which may prevent China from exporting as much as they have done in the past? Also, given the title market balance that we are seeing, low-volume prices have increased and what, in your view, are the potential for restarts outside China?

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Svein Richard Brandtzæg, Norsk Hydro ASA - CEO, President and Member of Corporate Management Board [3]

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With regard to the capacity development in China, we see restarts of curtail capacity. There are less new projects coming up. We have even seen that some new projects has been stopped by the local governments. And still, we have taken up the expectation for the supply situation in China this year from 7% to 9% to 11% to 12% growth. With regard to the window environmental requirements to stop capacity, obviously, it remains to be seen what will happen. We have seen in other areas that they have been quite firm on this, but we will wait to comment on this before we really see what happens. On the WTO and China, we know that the case is ongoing, our investigations. But the only comment I can give is that we are following that carefully. We are [positive] to free and fair trade. And we are looking into this and following this development carefully. With regard to the export from China, that can also be impacted by WTO, what can happen there. But obviously, there is a deficit also in China. And I will not be surprised that China's players will take the opportunity to fill up the capacity and export where they see opportunities outside China as long as there is a significant deficit outside their own country. So China's players will utilize that.

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Inger Sethov, Norsk Hydro ASA - EVP of Communication & Public Affairs and Member of Corporate Management Board [4]

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Okay. Any other questions? Do we have questions from -- yes?

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Unidentified Company Representative, [5]

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We have a question from Fraser Jamieson from JPMorgan. In B&A -- what's the cost impact of maintenance in Q1? And to what extent can we expect to see an improvement in cost in Q2 as maintenance activity's reduced?

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Eivind Kallevik, Norsk Hydro ASA - CFO, EVP and Member of the Corporate Management Board [6]

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Fraser, I think the biggest cost changes that we saw in B&A is not necessarily related to maintenances. There's a lot of -- a lot of that cost is actually capitalized and depreciated over time. The biggest change we saw on the cost side was literally, it related to raw material costs, where we saw an increase in both the caustic soda market as well on the fuel oil market, both price on 15%.

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Unidentified Company Representative, [7]

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And what was the percentage of alumina price on index in Q1? And how will that develop throughout the year?

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Eivind Kallevik, Norsk Hydro ASA - CFO, EVP and Member of the Corporate Management Board [8]

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The percentage that we saw in Q1 was roughly 65%, which should be approximately the same level that you will see for the year as a whole as well. But maybe smaller swings between the quarters. But on average, it will be around 65%.

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Unidentified Company Representative, [9]

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Question from Reinout Goossens in Morgan Stanley. In terms of rolling, the EBIT margin is just below 2% this quarter. What is needed to lift this going forward? And if you exclude the operational issues, what is sort of a sustainable [mode]?

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Svein Richard Brandtzæg, Norsk Hydro ASA - CEO, President and Member of Corporate Management Board [10]

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I can comment on the first part. First of all, this is, I would say, disappointing result in the first quarter from all products. Normally all products have maintenance stop during the Christmas holidays. Well, there are normally plant maintenance that is executed and also sometimes, as we also did here, add new equipment, upgrade the equipment. And then when the equipment was started up in the beginning of the year, Rolled Products experienced problems that took a long, long time than normal to solve. So I would say that now we have solved several of these issues, but as we both said earlier, we -- it will be partly impacted also in the second quarter because we are not up to full speed in all areas. But we have control of the situation. And this is, again, a result of new modern equipment that is put in place and then some surprises that we have seen, but this equipment should be utilized. Have you got the numbers, Eivind?

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Eivind Kallevik, Norsk Hydro ASA - CFO, EVP and Member of the Corporate Management Board [11]

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I think when we look in the valuated downstream figures, I think it is important to decide what matter to look on. And I think one of the -- when we look at EBIT margins, that, of course, has a lot of influence with what LME has been in that quarter. And LME, is of course, a pass-through to the customer. So really what we have to look at is the value creation above the LME and the premium costs. And I think quite clearly in Q1, given the operational cost in Q4, when we talked about the margin pressure on our business, the returns are not satisfactory, but that also underpins the importance of the upgrades that we do both when it comes to the automotive investments that we do in Germany going into high margin, going into higher growth segments, also the importance of the UBC recycling line lowering the metal cost, taking the valuable metal back into the group.

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Unidentified Company Representative, [12]

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A few more question there from (inaudible) in ABG. The Qatalum expansion, is that something that is being evaluated currently?

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Svein Richard Brandtzæg, Norsk Hydro ASA - CEO, President and Member of Corporate Management Board [13]

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We are not planning to expand Qatalum as it is now. We see that again, looking at the global supply/demand balance, we see a largely balanced market. And we are not planning to invest in new capacity in Middle East, so we are running Qatalum now full speed, utilization of the assets there are at maximum level, running above nameplate capacity, good operations, but we are not planning to expand.

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Unidentified Company Representative, [14]

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Last question from me or from (inaudible). Sapa, what's your thought on today's ownership structure and your ownership of 50%?

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Svein Richard Brandtzæg, Norsk Hydro ASA - CEO, President and Member of Corporate Management Board [15]

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Sapa is still an option for Hydro. This joint venture has been quite successful. And when the time is right, there will be decision on whether we will join the other owner on an IPO or if we may take over the 50% of ownership, or if we even will have the minority share as a combination within IPO. So this is something that is still an option, as we have said earlier.

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Inger Sethov, Norsk Hydro ASA - EVP of Communication & Public Affairs and Member of Corporate Management Board [16]

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Okay, thank you very much. If there aren't any more questions from the audience, then I will finish it off. And thank you very much for coming, and have a wonderful day. Thank you.