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Edited Transcript of NHY.OL earnings conference call or presentation 23-Jul-19 1:00pm GMT

Q2 2019 Norsk Hydro ASA Earnings Call - Q&A Session

Oslo 2 Jul 30, 2019 (Thomson StreetEvents) -- Edited Transcript of Norsk Hydro ASA earnings conference call or presentation Tuesday, July 23, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Eivind Kallevik

Norsk Hydro ASA - Executive VP, CFO & Member of Corporate Management Board

* Hilde Merete Aasheim

Norsk Hydro ASA - President & CEO

* Stian Hasle

Norsk Hydro ASA - Head of IR

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Conference Call Participants

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* Daniel Edward Major

UBS Investment Bank, Research Division - Director and Analyst

* Ioannis Masvoulas

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 Quarter 2 Presentation. For your information, this call will be recorded. At this time, I would like to turn the conference over to Mr. Stian Hasle. Please go ahead, sir.

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

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Thank you. Good afternoon, and welcome to the update of Norsk Hydro's second quarter results. We will start with an introduction by President and CEO, Hilde Merete Aasheim, followed by a Q&A session. Also joined by CFO, Eivind Kallevik.

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 result presentation this morning. But let me briefly address the key highlights for the second quarter of 2019.

Underlying EBIT for the second quarter was NOK 875 million, down from NOK 2.7 billion in the second quarter last year and somewhat up from the NOK 559 million in Q1. I'm very happy to see that the ramp-up of our 3 assets in Pará after lifting the embargo is moving in a successful manner, steadily increasing their production output now. This is after production embargo lifted. Also we see encouraging results in Bauxite & Alumina results, impacted by higher production but obviously mostly offset by lower realized alumina prices.

Primary Metal results are down, primarily on lower realized aluminum prices compared to Q2 last year. And then the cyber attack that we have had in March has also had a negative impact on results in Q2, estimated at around NOK 250 million to NOK 300 million. That is somewhat higher than what we guided on, NOK 50 million higher than what we guided on after Q1. The main impact related to the cyber attack is Extruded Solutions with an estimated hit of around NOK 150 million to NOK 200 million.

The Downstream results are down this quarter both in Extruded and Rolled Products partly reflecting the cyber attack but also softening demand. Energy results came down this quarter, mainly explained by lower production and sales volume compared to a strong result in both the second quarter last year and Q1 this year with higher production and higher prices.

When it comes to the market side, we're seeing a deficit in the global primary aluminum market for 2019, more or less in line with what we have communicated earlier, 1 million to 1.5 million tonnes. And we expect the global primary demand growth for 2019 of 1% to 2%, which were taken down from our previous guidance of 1% to 3% after seeing signs of weakening in some of our market segments.

I know that many of you are interested in the ramp-up in Brazil. So let me give some more comments to the actual ramp-up. If you start with Alunorte, there, I will start by saying that ramping up such a huge plant like Alunorte is a big challenge after having been only producing at 50% level for more than a year. And the fact that we have been rotating, using all 7 production lines during the whole embargo period, was a great advantage once we were starting up because we had all land equipment and organization in place and was ready to the start from day 1 on May 21.

As you know, the commissioning of the new press filter technology was stopped for many months by the embargo. And the press filter alternative of (inaudible). As Q1, we guided on reaching 75% to 85% within 2 months. And we have already reached those levels. As there is variability from day-to-day and week-to-week, so we need to gain experience on operating the filters in an optimal way and stabilizing at even higher levels. Introduced new technologies is more demanding and just starting up.

Based on the experience from what we have today with running the press filters, we expect to be able to run stable at some 75% to 85% utilization within the 8 filters we have in place, roughly in line with where we are today. We see actually the last 4 weeks that we have been able to operate at 85% -- at 80% level. Then as communicated before, we will add a ninth press filter. The commissioning of the ninth press filter will start in September/October and will add another 10% capacity and bring the capacity utilization up to 85% to 95% level. Then when will we reach nameplate capacity will be the question. So the process optimization will continue to reduce downtime, maintenance schedule and cycle time of the press filters to reach the full capacity.

While we have been ramping up Alunorte, Paragominas is also ramping up to feed Alunorte. And in Albras, we have now started 52% of the cells that were idle and that all electrolysis cells will be ramped up by the end of Q3.

On socials and the situation, it is not completely resolved as we still have the court embargoes in place on our new bauxite residue of DRS2. This is the only long-term sustainable solution for Alunorte to use the new filter (inaudible) the new deposits with the press filters. And we are in constructive dialogue with Ministério Público and SEMAS to get this embargo lifted. But the timing remains uncertain.

We'll use the same content as we used for lifting the production embargo for Alunorte, trying together with Ministério Público reach a good framework to go to the judge, have a joint petition towards the judge to be able to lift the embargo. In the meantime, we will use DRS1. The estimated life of the old bauxite residue around DRS1 is about 1 year. And we are currently performing geotechnical studies to evaluate if the lifetime can be further expanded.

Finally, I would like to remind you that we will be hosting an Investor Day on September 24 to update on our key priorities going forward. We will welcome you all to join us here in Oslo, all 4 of us [near the coast] on September 24.

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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 take our first question from Liam Fitzpatrick of Deutsche Bank.

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

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Two questions from me. Firstly, on primary costs, do you think there's still much scope to take costs out of the business beyond raw material changes? So should we expect much more post Q3? And then secondly, on Rolled Products, that was one area of weakness in the Q2 numbers. Given the typical seasonal softness we see in the second half, I'm just curious what sort of delta we could see in the second half versus Q2. Could this business potentially move into a negative EBIT position? Those are my two questions.

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

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So if I can start on the primary costs then. Obviously primary has been influenced by the situation in Alunorte by having sourced many different qualities of alumina. So we will still see some effects of that in the next quarter. But assuming that the raw material costs will come back to the level we saw in Q4 2017, we believe that we will be able to come back to the level we had in Q4 2017 before the situation occurred in Alunorte. When it comes to Rolled Products, perhaps you, Eivind, can leave some comments on that?

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Eivind Kallevik, Norsk Hydro ASA - Executive VP, CFO & Member of Corporate Management Board [4]

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Sure. Liam, when it comes to rolled, remember that a big deviation versus Q2 last year relates to metal costs, roughly NOK 100 million of that is related to all-in metal prices. When it comes to the rolling business in terms of seasonal volumes, we actually expect volumes to stay relatively flat to a small uptick into Q3. As your question to whether rolling as such will go into negative territory, that, of course, still remains very much also driven by all-in metal prices as well as raw material costs. In Q3, we do expect there will be relief on raw material costs basically offsetting the somewhat weakened alumina prices we expect to see in Q3 for the rolling industry -- or the rolling assets.

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Operator [5]

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And we will take our next question from Ioannis Masvoulas of Macquarie.

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Ioannis Masvoulas, Macquarie Research - Analyst [6]

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Just a couple on the Bauxite & Alumina division. Can you provide any color on the exit production rate at Paragominas in June and whether you're looking to ramp up the bauxite mine to full capacity even if Alunorte remains constrained at 85% to 95% utilization? That's there for the first question.

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Eivind Kallevik, Norsk Hydro ASA - Executive VP, CFO & Member of Corporate Management Board [7]

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When it comes to Paragominas, that will ramp up at the same speed as Alunorte is ramping up. So we will not ramp that up to 100% production if Alunorte at present produces 85%. And the reason for that is, of course, the bauxite we produce in Paragominas is produced as slurry, so it can only be utilized at Alunorte. It cannot be shipped overseas or to anywhere else. And then as you saw, we produced 5.5 million tonnes of annualized Alunorte production in the last week. And that's about 85%. And you should expect Paragominas to produce at the same rate going out of June.

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Ioannis Masvoulas, Macquarie Research - Analyst [8]

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Second question on again the same division. In the report, you guided to NOK 1.5 billion on a sort of pro forma EBIT basis in Q2, assuming both Alunorte and Paragominas were running at 100%. Does that include any one-off ramp-up costs during the quarter? Or is it a clean number?

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Eivind Kallevik, Norsk Hydro ASA - Executive VP, CFO & Member of Corporate Management Board [9]

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It's clean enough. We don't really expect any significant ramp-up costs. Fixed cost will be somewhat higher in Q3 on an absolute level in Alunorte. But on a per tonne basis, you will see a cost relief on the fixed cost in Q3.

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Ioannis Masvoulas, Macquarie Research - Analyst [10]

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Sure. And then just the last question on working capital. You flagged the potential to release NOK 4 billion this year as production in Brazil normalizes. What would the potential incremental working capital release be, assuming spot prices for the rest of the year?

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Eivind Kallevik, Norsk Hydro ASA - Executive VP, CFO & Member of Corporate Management Board [11]

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Yes, what we said last -- or actually what we said last quarter is that we had an unusual, if you can call it that, working capital buildup in 2018 and into '19 of roughly NOK 4 billion. That was driven by the Alunorte embargo situation, where we carried more alumina inventory than what we otherwise would and we had a large safety stock of metal due to the threat of sanctions to get resolved.

Obviously, we would like to get that NOK 4 billion back as quickly as possible. What we see now in Q2 is that we released NOK 1.3 billion of operating capital. And that's a quarter where we normally see an operating capital buildup because that's the highest volume quarter in terms of sales. Roughly half of that NOK 1.3 billion is an underlying improvement. And roughly half of that is driven by prices. So we will continue to work hard on releasing more working capital as we go through 2019.

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Ioannis Masvoulas, Macquarie Research - Analyst [12]

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Okay. And there's no indication of potential additional working capital savings, at least not in...

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Eivind Kallevik, Norsk Hydro ASA - Executive VP, CFO & Member of Corporate Management Board [13]

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To that, we will have an Investor Day on September 24, where Hilde will give an update on the (inaudible) she's implemented. So we'll come back to that at that point in time.

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Operator [14]

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(Operator Instructions) We will take our next question from Daniel Major of UBS.

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Daniel Edward Major, UBS Investment Bank, Research Division - Director and Analyst [15]

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A question here for me, wondering if you could just walk us through the bridge a little bit on volumes and costs for primary aluminum. You previously mentioned NOK 200 million to NOK 250 million lower aluminum costs, NOK 200 million lower other costs. What should we be thinking in terms of volumes uplift in terms of aluminum sales through 3Q '19? Obviously, you say you expect to get all the potlines running at Albras by the end of the quarter. Can you give us any better indication just to make sure our volumes number are right? And then those numbers you've given in terms of reduced costs, they're on a total basis, so I'm assuming they are offset in part by lifting volumes. I'm just wondering if you can give us a better steer there.

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Eivind Kallevik, Norsk Hydro ASA - Executive VP, CFO & Member of Corporate Management Board [16]

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Yes. The cost is on a full basis for the business there, if you like. Obviously, when it comes to volumes, it depends, of course, on the ramp-up speed in Albras. As Hilde said, we expect all cells to be up and running at the end of the quarter. And then it depends on what kind of average we're able to run those cells at. So you shouldn't expect, let's say, annualized speed of 1 full quarter at Albras at the end of the quarter. It will be lower than that. And then it's too early to call whether that's 60%, 65%.

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Daniel Edward Major, UBS Investment Bank, Research Division - Director and Analyst [17]

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Okay. So somewhere around maybe 50% to 60% utilization of the additional capacity is a reasonable target there. Is that fair?

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Eivind Kallevik, Norsk Hydro ASA - Executive VP, CFO & Member of Corporate Management Board [18]

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Yes. That's not too far off, Dan.

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Daniel Edward Major, UBS Investment Bank, Research Division - Director and Analyst [19]

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Okay. Cool. And then next question, just want to clarify something, very useful commentary around your expectation. You can obviously get primary aluminum costs back to pre-disruption levels. You referenced fourth quarter 2017. If I just look back at your all-in costs during that period, they were like $1,850. But that was on the basis of a nearly $400 alumina price. Is there any specific reason you referenced the fourth quarter? Or should we be sort of assume the cost structure for 2017 and then obviously just adjust it for the alumina price? Can you just give some clarity on that? Because the cost were actually quite volatile throughout the full year of 2017?

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Hilde Merete Aasheim, Norsk Hydro ASA - President & CEO [20]

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There was no reason to take specifically fourth quarter.

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Eivind Kallevik, Norsk Hydro ASA - Executive VP, CFO & Member of Corporate Management Board [21]

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No, that was (inaudible) 2017.

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Operator [22]

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(Operator Instructions) We will take our next question from Jatinder Goel of Exane BNP Paribas.

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Jatinder Goel, Exane BNP Paribas, Research Division - Research Analyst [23]

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A couple of questions. On alumina, you mentioned higher fixed cost base in 3Q. But on per unit basis, you should get some dilution. But just to get an absolute sense, will it be lower quarter-on-quarter on unit cost basis for alumina in the third quarter versus second quarter? And second question, on primary aluminum, at spot aluminum and alumina prices, would you get to positive EBIT territory with your cost improvement after full capacity resumed across the value chain?

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Eivind Kallevik, Norsk Hydro ASA - Executive VP, CFO & Member of Corporate Management Board [24]

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Let me answer the first one first and then you have to ask the second one again, just so I get all the details. Yes, I do expect per unit cost in Alunorte to come down in the third quarter with the production levels that we're currently seeing.

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Jatinder Goel, Exane BNP Paribas, Research Division - Research Analyst [25]

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Okay. The second question was more on primary aluminum. Can we get to positive EBIT territory, not necessarily in 3Q but maybe in 4Q once full production is resumed, assuming aluminum and alumina prices don't move from today?

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Eivind Kallevik, Norsk Hydro ASA - Executive VP, CFO & Member of Corporate Management Board [26]

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That would be my expectation, yes.

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Jatinder Goel, Exane BNP Paribas, Research Division - Research Analyst [27]

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Okay. And maybe I can ask a separate question on DRS1 as well. Is the feasibility study to establish whether there is possibility of life extension? Or do we know how much life we can extend and it's more about whether you'll get the permitting in place and can it be executed in a reasonable time line?

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Eivind Kallevik, Norsk Hydro ASA - Executive VP, CFO & Member of Corporate Management Board [28]

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We have a fairly good idea of what the extended life is going to be. But we would like to conclude those studies before we go externally with a more precise number in terms of days, months and years. But as we've said in Q2, we are quite comfortable that we will be able to extend the life of DRS1 beyond the 1 year that we currently communicated.

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Jatinder Goel, Exane BNP Paribas, Research Division - Research Analyst [29]

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Sure. And would you need any permitting if you were to extend the life beyond that 12-month window that you're giving?

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Eivind Kallevik, Norsk Hydro ASA - Executive VP, CFO & Member of Corporate Management Board [30]

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We believe we have what we need to do, so it is more of getting the geotechnical studies completed.

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Jatinder Goel, Exane BNP Paribas, Research Division - Research Analyst [31]

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Okay. And will there be much capital implication?

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Eivind Kallevik, Norsk Hydro ASA - Executive VP, CFO & Member of Corporate Management Board [32]

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I do not expect a lot of capital needed for getting the expansion of DRS1.

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Operator [33]

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(Operator Instructions) It appears we have no further questions at this time. I would now like to turn the conference back to our speakers for any additional or closing remarks.

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Stian Hasle, Norsk Hydro ASA - Head of IR [34]

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Thank you for joining us today. And if you have any follow-up questions, please contact us. Thank you, and have a nice evening.

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Operator [35]

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This will conclude today's conference call. Thank you for your participation. You may now disconnect.