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Edited Transcript of NHY.OL earnings conference call or presentation 23-Oct-19 12:00pm GMT

Q3 2019 Norsk Hydro ASA Earnings Call (Afternoon)

Oslo 2 Oct 26, 2019 (Thomson StreetEvents) -- Edited Transcript of Norsk Hydro ASA earnings conference call or presentation Wednesday, October 23, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Hilde Merete Aasheim

Norsk Hydro ASA - President & CEO

* Pal Kildemo

Norsk Hydro ASA - CFO

* Stian Hasle

Norsk Hydro ASA - Head of IR

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Conference Call Participants

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* Amos Charles Fletcher

Barclays Bank PLC, Research Division - Director

* Daniel Edward Major

UBS Investment Bank, Research Division - Director and Analyst

* Danielle Chigumira

Macquarie Research - Analyst

* Jatinder Goel

Exane BNP Paribas, Research Division - Research Analyst

* Liam Fitzpatrick

Deutsche Bank AG, Research Division - Head of European Metals and Mining

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Presentation

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Operator [1]

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Good day, and welcome to the Norsk Hydro Q3 Presentation. For your information, this call will be recorded. At this time, I would like to turn the conference over to Stian Hasle. Please go ahead.

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Stian Hasle, Norsk Hydro ASA - Head of IR [2]

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Thank you. Good afternoon, and welcome to our update on the third quarter results. We will start with a brief introduction by President and CEO, Hilde Merete Aasheim, followed by a Q&A session. The Q&A session will also be joined by CFO, Pal Kildemo. And with that, I'll leave the word to you, Hilde.

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Hilde Merete Aasheim, Norsk Hydro ASA - President & CEO [3]

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Thank you, Stian, and good afternoon to all of you. I assume most of you have followed our results presentation this morning. But let me briefly address the key highlights for the third quarter of 2019. Underlying EBIT for the third quarter was NOK 1.366 billion, down from NOK 2.7 billion in the third quarter last year and up from NOK 875 million in Q2. I'm very happy to see that the final embargo on DRS2 has been lifted, ending a 19 months embargo period, which has restricted activities at the plant. DRS2, in combination with the press filter, is the only long-term sustainable solution at Alunorte.

It's encouraging to see that the results are positively impacted by higher volumes on the ongoing ramp-up in both Alunorte, Paragominas. In Alunorte reaching 83% capacity utilization in Q3 as well as Albras were now all back in operation.

The main explanatory factors in the results development from Q3 '18 to Q3 '19 are lower realized prices for aluminum and alumina, coming down by more than 20% and 30% respectively. On the flip side, as market prices fall, we also see lower raw material prices, partly offsetting the negative sales price effect.

On our Investor Day on September 23, we announced a new improvement program of NOK 6.4 billion to be delivered by 2023. NOK 500 million were delivered by 2019 and we are on track to deliver on our target, with somewhat faster ramp-up on the positive side, as the challenging market in extrusion working again.

When it comes to the market side, we are seeing increased uncertainty and have reduced our demand expectations for the year. We are now estimating a flat global primary aluminum demand growth expected in 2019, down from an estimated 1% to 3% demand growth communicated at the second quarter, but more in line with the communication at our Investor Day. However, we are still seeing the global primary market in a deficit for the year. We are also seeing a reduction in demand expectation downstream, most predominantly hitting extrusion, where we now expect a negative 2019 demand growth.

In these challenging markets, it is more important than ever to focus our efforts on what we can control ourselves, and we are taking forceful restructuring and optimization measures downstream as well as progressing on our improvement programs.

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Stian Hasle, Norsk Hydro ASA - Head of IR [4]

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Thank you, Hilde. Operator, we're now ready for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We will now take our first question.(Operator Instructions)

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Liam Fitzpatrick, Deutsche Bank AG, Research Division - Head of European Metals and Mining [2]

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It's Liam Fitzpatrick from Deutsche. And two questions from me. Firstly, just on the primary business, it was a very strong cost performance in Q3, and your Q4 guidance suggests that you're going to be back to sort of second half of '17 levels. So my question is what further scope is there to take costs out if we're looking into the first half of 2020? And then secondly, on the Extruded business, given the guidance on demand, should we be thinking about Q4 of last year as a reasonable guide for this Q4? Or could results be weakened there?

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Pal Kildemo, Norsk Hydro ASA - CFO [3]

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Yes. I think if we start with the Primary Metal, then as you correctly comment, the raw material prices and also the cost levels are coming down, raw material prices with the market and costs through the improvement efforts. And then if raw material prices continue to come down, then that can benefit us also into the first quarter as we've seen alumina prices have still been moving. However, if we think about more of the things we influence ourselves, then of course we launched our improvement initiative on the Investor Day, which also includes fixed cost consumption factors, et cetera, in Primary. And these, we expect to also continue to deliver positive improvement in the years following 2019. But these are more gradual of nature and not as big as the development in raw material costs.

The other question was on extrusion, what to expect and how to compare that, compared to last year. I guess, if you look at our volumetric visualizations of what we see in the marketplace, then we're seeing a quite lower demand expectations in the fourth quarter of '19 versus fourth quarter of '18, with up to 8% in Europe and the U.S. So how I would think about it, I would take 2018 as a starting point and then adjust for the difference in volume that we expect between these periods, taking a margin into account. And then I would also like to focus on that, the remelt margins have come somewhat in from what we experienced in the quarter of 2018. So these 2 elements combined should give you a well indication of results expectations to Q4 2019.

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Liam Fitzpatrick, Deutsche Bank AG, Research Division - Head of European Metals and Mining [4]

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Okay. That's very clear. If I could just follow-up on one separate point. Just on Metal Markets, has been very strong for the first 3 quarters of the year. I mean, do you still stick with the guidance on that business of around NOK 500 million, NOK 600 million EBIT? Or is it -- should we be thinking about a higher number going forward?

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Pal Kildemo, Norsk Hydro ASA - CFO [5]

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I think we will stick to the guidance. And I would like to explain why. You know Metal Markets consists of 2 main categories. One is the remelter results, which have benefited greatly during the year from both low, high fair value-add premiums, but also lower scrap prices. As you know, scrap has been trading at quite a discount to the LME as more scrap is available for the market. That has positively affected our results during this year.

In addition, we have strong results from sourcing and trading activities. And this is much influenced by currency and on a realized LME effect, but also driven by our backwardation risk mitigation strategy, which have benefits in periods of strong contangos. And during 2019, we've had quite good contango levels and also a good remelt spread. As we visualized it this morning, the value-add premium on extrusion ingot has come quite a lot down and more to the levels in the years that we've experienced before 2019. And when we set our guidance for this year, this was much based on what we have experienced so far and not how the market actually turned out. So I would use the guidance of around NOK 500 million per year or NOK 125 million per quarter as a guidance. And then sourcing and trading effects can come on top of this, but these are hard to predict in advance.

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Operator [6]

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We will now take the next question. (Operator Instructions)

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Danielle Chigumira, Macquarie Research - Analyst [7]

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It's Danielle Chigumira from Macquarie. Just a question on your comments around extrusion demand. And you made some comments around the regional split, but could you give us an idea on what product categories in particular are weaker now than you expected last quarter?

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Hilde Merete Aasheim, Norsk Hydro ASA - President & CEO [8]

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Well, I think on the extrusion side, I guide -- I commented this morning, when we look at the European part, we see in particular the automotive segment's coming into negative territory when it comes to growth, which is sort of a backdrop of what we hear from the European or particularly the German automakers. And then also the industrial segment, which is also very much linked to Germany, which has taken [the secondary] expectation down for the extrusion demand in Europe. Then when it comes to the North America region, it's the truck and trailer segment in the transport segment that's turned into a negative growth rate as well as the building and construction. We actually expect it to see an uptick in the building and construction over the summer, but that hasn't happened, and that is why this segment also is in the negative territory.

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Danielle Chigumira, Macquarie Research - Analyst [9]

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That's very helpful. Could you give us any further color in terms of the [quantum] of volume full year that you see year-on-year? You mentioned 8% in Europe. Is that a good measure to you across the whole business? Or could it be a lower full year-on-year than that?

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Pal Kildemo, Norsk Hydro ASA - CFO [10]

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If I -- sorry, Danielle, you're falling a bit in and out there. Did you ask if the 8% reduction in market growth that we see compared to 2018 is representable for the portfolio as a whole or if you should be expecting some different kind of ...

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Danielle Chigumira, Macquarie Research - Analyst [11]

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Exactly, yes.

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Hilde Merete Aasheim, Norsk Hydro ASA - President & CEO [12]

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For the fourth quarter.

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Pal Kildemo, Norsk Hydro ASA - CFO [13]

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So I think if you look at our growth portfolio, we have a somewhat higher exposure in Europe than in North America. And in the total, North America is experiencing a somewhat less of a -- or is expected to experience somewhat less of a demand decline in the fourth quarter compared to what Europe is. So there, we're seeing more levels of around 3%, whereas in Europe, you're closer to 8%. And so if you were to take the market as a whole, it will be somewhere in between those 2 levels. That being said, as a big producer, we will move with the market. But we are also taking additional measures to ensure that we are ahead of a potential negative market development. So as you've seen, we've already done some restructuring measures, and we will continue to look at that into the fourth quarter also if we see that the market deteriorates further. So at this stage, I cannot give you a clear guidance on the volume reduction for extrusion. But expecting somewhere around the market should not be wrong before you take into account restructures.

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Operator [14]

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We will now take our next question.(Operator Instructions)

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Jatinder Goel, Exane BNP Paribas, Research Division - Research Analyst [15]

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Jatinder from Exane BNP Paribas. A couple of questions, please. First one, on your NOK 2.7 billion upstream reversal improvements into next year, is that guidance still valid despite your good performance in 3Q '19 already and probably cost staying better in 4Q as well? Is that NOK 2.7 billion purely a function of incremental volumes and fixed cost dilution that you expect into next year, is the real question? Second one, on your 10% return on capital target, the forward price you had used was 19 50 is that price achievable with your 2% primary demand CAGR from 18 to 23 that you mentioned?

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Pal Kildemo, Norsk Hydro ASA - CFO [16]

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Hello, Jatinder, and thank you for good questions. I'll take the easy one first. On the reversal of curtailment effect that we guide on in 2020 of NOK 2.7 billion, then that will be influenced on how we ramp up this year. And so as you probably saw in the presentation material, we comment on that, we're somewhat ahead in B&A and Primary Metal. These are not a large amount, but somewhat ahead, and that will eat up some of the NOK 2.7 billion you see into next year.

So the faster we ramp-up, the more of that we deliver this year versus next year. But -- and that is a -- that is actually a combination of volume and operational parameters at the smelter portfolio. But this period, it's more driven by more volumes and less driven by better operational parameters than expected. When it comes to the price that we used in our larger scenarios, this price is not a Hydro forecast in any way. It's based on prices that we've seen realized over a period, experiencing both highs and lows in the market. And looking at just the price side per se is not necessarily adding a lot of value either. We need to focus on the margin as the alumina price is quite low now. So looking at only the LME price could give a wrong indication.

And I think we don't guide on prices going forward. But of course, the weaker the market becomes, the longer it takes before you potentially see an improvement in prices because you will have to see capacity come out or demand surprising on the upside.

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Jatinder Goel, Exane BNP Paribas, Research Division - Research Analyst [17]

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Sure. Thank you very much for the color. And if I could flip the question, second question, at today's raw material prices and alumina prices, what price would you need to get to that 10% return on capital, in that case? Because your sensitivity to alumina is positive for a 10% change, I think it was about NOK 440 million. So with lower alumina, you're also suffering not just benefiting?

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Pal Kildemo, Norsk Hydro ASA - CFO [18]

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Yes, that's very much true. And we will have to come back to you offline with the exact calculations to see what LME price you would need in order to reach 10%, given the raw material price we have, but -- and currency, of course, but we should be able to go through the sensitivities, and I get that up for you.

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Operator [19]

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We will now take our next question. (Operator Instructions)

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Amos Charles Fletcher, Barclays Bank PLC, Research Division - Director [20]

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It's Amos Fletcher here from Barclays. A couple of questions from me. So on bauxite and alumina, you mentioned unit costs are likely to flatten in Q4, but that you realize the raw material input prices with the 3-month lag. But when I look at those costs in the presentation on Slide '18, the prices fell quarter-on-quarter in Q3. So could you just explain the guidance for flat costs in both aluminum?

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Pal Kildemo, Norsk Hydro ASA - CFO [21]

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Amos, I think on the cost impact in B&A, it varies a bit from category to category. Some have a monthly lag, some are more on the 2-month lag and we've also been impacted a bit by inventory. But then if you look at the raw materials slide that we presented earlier today. If you start with caustic soda, then you see since Q2 and Q3, it's been flattening a bit and the market is really seeing a big fall in Q4 than in Q3. So I would expect effect, if anything, to come more into the first quarter if we see those price levels remaining. Among the other factors, we do see some cost lift but it's not to a big extent. And in total, based on what we see now, we expect more flat prices.

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Amos Charles Fletcher, Barclays Bank PLC, Research Division - Director [22]

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Okay, fair. It seems like a slowly [shorter line] perhaps. And then I was also going to ask around expectations for volume growth in 2020 for Rolled and extruded products?

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Pal Kildemo, Norsk Hydro ASA - CFO [23]

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So we haven't updated volume growth for extrusion and Rolled in 2020. But I guess when you see a primary market that is looking more balanced than what we expected earlier, then that will also impact the growth levels that we see in those 2 segments. So this year, we've seen demand coming a bit down from what we expected, and you see that very visibly in the Rolled and extrusion figures also. For next year, on the primary side, we expect 2020 to be around the balanced level. And that, of course, needs to be triggered by the demand from the extrusion and Rolled segments.

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Amos Charles Fletcher, Barclays Bank PLC, Research Division - Director [24]

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Okay. And then just last question. I was going to ask, you targeted around NOK 1 billion of EBIT improvement in extruded at the Investor Day that's reliant on market conditions to some degree. Is there some risk that deteriorating market conditions now could put those targets at risk, do you think?

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Hilde Merete Aasheim, Norsk Hydro ASA - President & CEO [25]

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Yes, that's the risk. And that is why we are forcefully now going through the portfolio and the restructuring that we already have announced, but that we also look into new initiatives in order to compensate for this risk. So that we are robust also in this weak market development.

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Pal Kildemo, Norsk Hydro ASA - CFO [26]

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And on the extrusion target levels, I'd also like to remind you that this is a NOK 1 billion target over some years. We have split it a bit between the years for the improvement program compact, but even if what we're not able to deliver on this year due to weakened markets, we expect either to be able to recover in the next year or the following year, depending a bit on how long the weaker markets last.

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Amos Charles Fletcher, Barclays Bank PLC, Research Division - Director [27]

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Okay. And then just to sort of round out on that, would you say there's any sort of market-related risk to the remainder of the EBIT improvement target that you gave, sort of outside of extruded?

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Pal Kildemo, Norsk Hydro ASA - CFO [28]

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Yes, I think if you pick up on Jatinder's question from earlier, the lower the margins become, the less some of our improvements are worth. As you know, there are some volume elements in that program. I think of the total improvement program, NOK 800 million is driven by increased volume and efficiency and NOK 300 million is driven by the Husnes restart. If margins are significantly lower than what we experienced in the years before we targeted this program, then the effects of this will be a bit lower. So that's the risk you should factor into account.

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Operator [29]

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(Operator Instructions) We will now take our next question. (Operator Instructions)

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Daniel Edward Major, UBS Investment Bank, Research Division - Director and Analyst [30]

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Dan Major from UBS. A few questions, please. You obviously announced the P&L impacts of the restructurings in Rolled Products and to an extent, extruded products. Can you give us a reminder of what we should be assuming flows through the cash flow statement with respect to these restructuring charges? And when they should be coming through into the cash flow statement? That's the first question.

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Pal Kildemo, Norsk Hydro ASA - CFO [31]

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Yes. I think if you start with extrusion, and then these restructuring costs are quite of a short-term nature. When we do restructurings and as we restructurings in one quarter, they might come 1 or 2 quarters lately on the cash flow side. You also know that there's a mix of impairment versus restructuring or redundancy costs there. And for Rolled, it's a bit of a different picture. And if you remember the slide that we showed at Investor Day, showing that we start getting effects from the improvements in 2020, 2021, 2022, then I think you should also think about the cash flow elements in a similar manner. So there will be a minor flow through the cash flow in 2019, and then the majority coming through in 2020 and 2021, and then a smaller impact in 2022 from a cash flow perspective based on our current expectation of demand in profile.

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Daniel Edward Major, UBS Investment Bank, Research Division - Director and Analyst [32]

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Okay. So what would that be? Somewhere in the region of NOK 1.5 billion next year negative cash impact, if I combine the two, would that be a reasonable number?

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Pal Kildemo, Norsk Hydro ASA - CFO [33]

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That sounds a bit on the high side. If you just look at the Rolled program, it's in provisions. We have around NOK 1.2 billion, where NOK 900 million of this is related to redundancy and NOK 200 million is related to cleanup and remediation. These NOK 200 million typically come quite late in the process. The NOK 900 million that we were focusing on, on redundancies. If you say that a small part of it is in 2019 and then the bigger part is split between 2020 and 2021, and the 2020 figure doesn't become so large. And on the extrusion side, then it's a good combination between impairments and also other restructuring costs. So I would say, somewhat on the lower side of the figure that we indicate for 2020.

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Daniel Edward Major, UBS Investment Bank, Research Division - Director and Analyst [34]

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Okay, that's useful. Second, you mentioned the volume uplift coming through in primary aluminum as a consequence of the continued ramp-up of Albras, et cetera. Can you give us a number there in terms of whatever cost, house sales or car sales production? What sort of delta we should be expecting in the fourth quarter to make sure we're in the right place on the numbers? Would it be a similar sort of rate change in sales as we saw sequentially in Q3?

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Pal Kildemo, Norsk Hydro ASA - CFO [35]

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I think when it comes to the volumetric side, then we are expecting an increase into the fourth quarter on Primary, driven by a full period of Albras available, and we also have some creep in there, but probably not to the same extent that we've seen from Q2 to Q3. If you're referring to from 486 to 522, but on the somewhat lower range of that.

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Daniel Edward Major, UBS Investment Bank, Research Division - Director and Analyst [36]

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And then just finally, just to make sure I've got the number right, would you say it was NOK 500 million expected sequential sort of cost saving in Primary from raw materials, NOK 400 million from alumina and NOK 100 million from other input costs. Is that the right number that you said?

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Pal Kildemo, Norsk Hydro ASA - CFO [37]

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Are you comparing Q3 or Q2? Then I guess we had NOK 200 million from alumina, NOK 200 million from less power sales, NOK 100 million from carbon and NOK 100 million from fixed costs and depreciation and NOK 100 million from currency.

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Daniel Edward Major, UBS Investment Bank, Research Division - Director and Analyst [38]

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Sorry, I thought you mentioned on the call earlier, your expectation on additional reductions at current prices. Did I misinterpret that?

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Pal Kildemo, Norsk Hydro ASA - CFO [39]

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Into Q4?

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Daniel Edward Major, UBS Investment Bank, Research Division - Director and Analyst [40]

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Q4.

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Pal Kildemo, Norsk Hydro ASA - CFO [41]

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Into Q4, sorry. That is NOK 400 million on the alumina side, NOK 100 million on the carbon side. And then we usually see a fixed cost increase. We also had a one-off in depreciation [in component]. So you should take out NOK 200 million for those.

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Operator [42]

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(Operator Instructions) As there are no further questions at this time, I would like to turn the call back for any additional or closing remarks.

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Stian Hasle, Norsk Hydro ASA - Head of IR [43]

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Thank you, and thanks for joining us today. Just let us know if you have any follow-up, and we will talk later. Thank you.

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Operator [44]

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That will conclude today's conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.