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Edited Transcript of NHY.OL earnings conference call or presentation 7-Feb-20 1:00pm GMT

Q4 2019 Norsk Hydro ASA Earnings Call (Afternoon)

Oslo 2 Feb 13, 2020 (Thomson StreetEvents) -- Edited Transcript of Norsk Hydro ASA earnings conference call or presentation Friday, February 7, 2020 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* 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

* Jason Robert Fairclough

BofA Merrill Lynch, Research Division - Head of the Developed & Emerging EMEA Metals and Mining Equity Research

* 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, ladies and gentlemen, and welcome to the Norsk Hydro Q4 presentation. For your information, today's call will be recorded.

At this time, I would like to turn the conference over to 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, and good afternoon, and welcome to this update on the Norsk Hydro's Fourth Quarter Results. We will start with a brief introduction by CFO, Pal Kildemo, followed by a Q&A session.

With that, I'll leave the word to you, Pal.

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Pal Kildemo, Norsk Hydro ASA - CFO [3]

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Good afternoon, everyone. I assume most of you have followed our results presentation in the morning already during the day, but let me first briefly address some of the key highlights for the fourth quarter of 2019.

Challenging markets weigh on the results with lower prices, both for aluminum as well as alumina and lower volumes. Our underlying EBIT of NOK 560 million for the quarter is in line with Q4 2018, and we see an EBIT of NOK 3.4 billion for the full year of 2019.

We have made some progress on the targets we set out at the Investor Day in 2019. We targeted NOK 500 million in improvements for 2019, and I'm happy that we're able to deliver better than that at NOK 1 billion in improvements. This is very much due to the successful and faster ramp-up of Alunorte. We've also worked hard to release cash during the year, and especially during the fourth quarter.

And for the whole of 2019, we are releasing and preserving cash to releasing NOK 5.6 billion in net operating capital, and through spending NOK 900 million less in CapEx compared to what we communicated at our Investor Day.

Despite these challenging markets that we are facing, we are also experiencing an increased pull for our low-carbon products and solutions, which I consider to be a highlight for the quarter.

Finally, the Board proposed a dividend for 2019 of NOK 1.25 per share, reflecting a robust financial situation, taking into the account a demanding year for the company as well as the volatility we are currently experiencing in the aluminum industry.

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

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Thank you, Pal. 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.

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Daniel Edward Major, UBS Investment Bank, Research Division - Director and Analyst [2]

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It's Dan Major from UBS. Two questions. The first on the extruded products business. You've obviously indicated the requirement or intention to do some more restructuring in order to preserve your P&L earnings. Can you give us any sense about what the expected negative restructuring or cash impact of that would be in -- if you did additional restructuring? And also a reminder of what the negative cash impact of restructuring you've already announced is expected to be in 2020?

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Pal Kildemo, Norsk Hydro ASA - CFO [3]

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Thank you, Dan, and thank you for your good questions. When it comes to Extruded Solutions, you're very right in the fact that we are undertaking measures in order to make our portfolio and improvement program more robust. As you know, for Extruded Solutions, we have a net EBIT program of delivering NOK 1 billion over the next years. And a large part of that was supposed to be delivered based on larger or smaller growth investments as well as the continuation of our value over volume strategy.

But what we see when the market is going against us is that some of these potentials are not as visible anymore, and we need to revert to other measures to make sure that we are still able to deliver on our improvement program for extrusion. And it's important for me to stress that we still believe that we will be able to reach our improvement targets in the year to come. And a large part of that is, as you say, it's selling of some facilities, which are not providing the earnings that we are looking for. It's also the closure of some and moving volumes over to sites, which are larger in size, so we can take out scale effects. And it's also outright closure.

When we close our books for the year, we have included all effects that we are aware of or that we view as a possibility that might occur. If we had other effects that we viewed as highly likely, we would account for them at the end of the year. But I cannot give you an expectation of further costs into the first quarter. What I, however, can answer is that of the NOK 650 million in rationalization, restructuring, et cetera, costs in 2019, NOK 300 million of these are expected to result in cash effect in 2020.

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Daniel Edward Major, UBS Investment Bank, Research Division - Director and Analyst [4]

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Okay. It's NOK 300 million at this point is the total restructuring costs you expect to incur in 2020. Is that correct across the group?

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Pal Kildemo, Norsk Hydro ASA - CFO [5]

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No, that is the positive effect. The restructuring cost is NOK 650 million. And of this, provisions in 2020 will be...

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Daniel Edward Major, UBS Investment Bank, Research Division - Director and Analyst [6]

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Through the cash flow statement, you expect to take an additional NOK 650 million in 2020, that's the number I'm looking for?

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Pal Kildemo, Norsk Hydro ASA - CFO [7]

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No, NOK 650 million, that's what we've communicated so far. Of this, some has been taken this year and some will be taken into the next year.

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Daniel Edward Major, UBS Investment Bank, Research Division - Director and Analyst [8]

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Right. But you can't provide any guidance specifically on how much cash you expect to flow through the cash flow statement this year through restructuring?

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Pal Kildemo, Norsk Hydro ASA - CFO [9]

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Not in 2020 at this time for Extruded Solutions. For Rolled Products, it's around NOK 600 million. But let me get back to Extruded Solution to you as we get that figure out.

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Daniel Edward Major, UBS Investment Bank, Research Division - Director and Analyst [10]

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Okay. Right. So just -- so Rolled Products is NOK 600 million, cash...

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Pal Kildemo, Norsk Hydro ASA - CFO [11]

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In provisions. Actually, impact for next year. Extruded Solutions is somewhat smaller, but I'll have to get back to you on that figure. And then as mentioned, the sales proceeds of around NOK 300 million are expected to impact 2020 also.

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Daniel Edward Major, UBS Investment Bank, Research Division - Director and Analyst [12]

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Okay. Great. And then second question is on Bauxite & Alumina. I understand in the fourth quarter because of the Paragominas outage, you fell short on selling some cargoes as own production and [added just] a little bit more third-party sales volume. Can you give us some -- any indication of what the P&L impacts of that was or the cost impact, whether you expect to see any reversal of that in the next quarter?

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Pal Kildemo, Norsk Hydro ASA - CFO [13]

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Yes. Well, there are some volumetric effects. But if -- I could rather take you through the whole B&A results because I know there has been some questions on it during the day. And to ensure that we are -- all have the same information. When we look at the B&A earnings in the fourth quarter compared to what we experienced in the third quarter, then we see a combined price and volume effect of around NOK 350 million negative. We have a positive effect on the currency side of around NOK 100 million, and this is largely offset by an increase in fuel oil prices, also close to NOK 200 million for the Bauxite & Alumina area.

The Paragominas, the power outage that we had impacted our results negatively by around NOK 75 million. And then we also had somewhat technical element, which impacted our results in the fourth quarter. If you look at the Bauxite & Alumina, when they deposit red mud or residue into the DRS1 or DRS2, depending on which deposit you deposit it into, it gets treated differently in our books.

As you know, DRS1 is in closure mode and DRS2 is new and (inaudible). So when we deposit materials into DRS1, then we eat off provision, and it doesn't have a cost impact in our P&L, whereas when we deposit into DRS2, it has a P&L impact.

So in the third quarter, we deposited residue into DRS1, basically helping to fill and close the parts of the deposit area. And that they did not have a P&L impact. But when we then moved over to DRS2, that has that P&L impact. And this will continue to vary a bit between the periods going forward, depending on how we deposit into DRS2 or DRS1. So that's not necessarily a cash effect, but more an accounting technicality, which makes our underlying EBIT worse this quarter than last quarter. In another way, you can say that the underlying EBIT in Q3 was a bit high on that element.

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Daniel Edward Major, UBS Investment Bank, Research Division - Director and Analyst [14]

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So can you quantify what the impact was this quarter of that...

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Pal Kildemo, Norsk Hydro ASA - CFO [15]

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Yes. That element was NOK 50 million to NOK 100 million this quarter. So if you add these elements together, price, volume, NOK 350 million; fuel oil, negative NOK 100 million; FX, positive NOK 100 million; Paragominas around NOK 50 million to NOK 100 million; and DRS1, DRS2 NOK 50 million to NOK 100 million, then you should be quite close to the deviation element from Q3 to Q4.

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Operator [16]

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We'll now take our next question.

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Amos Charles Fletcher, Barclays Bank PLC, Research Division - Director [17]

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It's Amos from Barclays here. I'm just giving -- I just had a couple of questions, I suppose. First of all, I mean following up on Dan's questions around Alunorte. Can you maybe talk around what is the medium-term cost potential that you see at the asset as we trend towards 100% capacity utilization from -- given we're at $255 a tonne level at Q4? Where do you think that can get to over the next sort of 4, 5 quarters?

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Pal Kildemo, Norsk Hydro ASA - CFO [18]

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Good question, Amos. Thank you for it. I'll be quite careful in guiding specifically on the cost level for Alunorte, also due to the fact that fixed costs we are in control of, but the fuel oil, caustic and bauxite can vary a bit, and it's not necessarily completely transparent from quarter-to-quarter, and we don't know in advance. But what I can say is that elements like, for example, the Paragominas power outage that we had this period will of course not be recurring in the next period, based on the information we have now. And also, there is some negative effect of volumes sold, not being as large as we saw an increase in the production side due to a couple of ships being delayed. So just those 2 elements should bring cost somewhat down, and then we will revert to the actual development as we ramp up during the year. But pure mathematics would indicate that a ramping up from 6 million to 6.3 million tonnes towards the end of 2020 should bring our costs somewhat more down.

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Amos Charles Fletcher, Barclays Bank PLC, Research Division - Director [19]

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Okay. And then I just wanted to ask a question about the -- what seems to me to have been a bit of inventory build within Primary Metal. So if you look at production versus sales volumes, there was quite a reasonable delta there. I was just wondering if you can explain whether there was, in reality, much inventory build. And can we expect that to be released going forward in Q1?

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Pal Kildemo, Norsk Hydro ASA - CFO [20]

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Yes. Typically, we see some inventory effects at the end of the year. But also be aware that shipments from Albras, landing on the one side or other could have quite a significant impact. But let me get back to that in more details if there are any specific one-off elements that I should mention.

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Amos Charles Fletcher, Barclays Bank PLC, Research Division - Director [21]

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Okay. And then just 1 or 2 others. I saw a news story about Hydro potentially taking -- or sorry, potentially abandoning or postponing the Karmøy project, can you comment on that?

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Pal Kildemo, Norsk Hydro ASA - CFO [22]

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Yes. We have -- when we build the Karmøy Technology Pilot, we also said that there was the possibility and potential for an expansion at Karmøy using the same technology. There is available site for that. But given the market that we see today and also in accordance with the strategic mode, which Primary Metal is placed in, we are not looking to expand the Primary Metal capacity with new greenfield projects in our value chain.

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Amos Charles Fletcher, Barclays Bank PLC, Research Division - Director [23]

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Okay. And then finally, I was just going to ask you, I guess it was asked a bit on the call earlier, but can you give us some indication on Q1 volumes for 2 downstream businesses? I think you say Rolled Products broadly flat, but then Extruded down. But I was just sort of trying to get a feel for how much down, are we talking double-digit-type percentages?

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Pal Kildemo, Norsk Hydro ASA - CFO [24]

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That's also a very good question, Amos, and if we have perfect answer -- foresight, I would give you a perfect answer. What we mentioned this morning is that given the current market, we have around 3 weeks visibility in Extruded Solutions. So we should expect the volumes to come up driven by seasonality. But given the year-on-year decline we saw in Q4 versus Q4 in the previous period, I think you should expect that we also expect a decline in Q1 versus Q1, which represents the market we have seen so far in 2019. The only thing I would like to remind you of when it comes to Extruded Solutions results for the first quarter is that 2019 was impacted by the cyberattack with around NOK 150-plus million negative effect and that you should take into account when you look at the quarter-on-quarter variance.

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Operator [25]

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(Operator Instructions) We'll now take our next question.

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Jason Robert Fairclough, BofA Merrill Lynch, Research Division - Head of the Developed & Emerging EMEA Metals and Mining Equity Research [26]

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It's Jason Fairclough at Bank of America. Just a couple of ones for me. Firstly, on impairments. You mentioned that some of the assets being written down here at downstream and I think in extrusions. I'm wondering if any of those were associated with the acquired Sapa business. And if so, I guess I'm wondering what has changed versus the assumptions at the time of buying in the Sapa stake.

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Pal Kildemo, Norsk Hydro ASA - CFO [27]

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Good question, Jason. We have conducted impairment tests across our portfolio. And as you know, those business areas, which have goodwill, they need to be tested every year. That means that for every year, we test the overall CGUs for Extruded Solutions and also for Bauxite & Alumina. And based on those tests, we still see coverage and more than a borderline in the Excluded Solutions operations. So when we do impairment, it is on a specific asset-by-asset basis. And we ask what has changed since the transaction. Well, since the transactions, we have seen quite a significant increase in margins and an uplift in earnings. But for some of our facilities, we see not the same development and that could be impacted by regional demand for a specific product. As you know, extrusion operations are affected very differently across our portfolio.

So for those assets that we see we could get more out of by, for example, moving volumes over to a larger asset or that we believe we could get more out of from selling than what we are seeing in the marketplace, we have impaired if what we get for them is lower than book values or if we result in closing them. But the overall goodwill for extrusion still stands in our books.

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Jason Robert Fairclough, BofA Merrill Lynch, Research Division - Head of the Developed & Emerging EMEA Metals and Mining Equity Research [28]

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Okay. Just a bit more of a general question. And I mean you mentioned quite a few times the tough markets and the lower prices. And I guess as people are looking at your company, this should be something that we can understand. But I'm interested in your thoughts as to how Street estimates for your earnings this quarter were so wrong. I mean your shares are down 12% today. Sometimes when we're that far off, companies put profit warnings out. And then was there no sort of discussion about putting in profit warning?

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Pal Kildemo, Norsk Hydro ASA - CFO [29]

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Good question, Jason. We -- if you look across our portfolio, then there's several different elements, which are important to evaluate when thinking about sending a profit warning or note. And what we will we typically do is that we look at the different business areas, we looked at general direction of guidance, and we look to see if something has developed in a different direction from what we guided. And based on that evaluation, we see that the biggest bit is more or less in Extruded Solutions, when you adjust for insurance. And there, the market has developed worse than maybe the markets [fall] at the summer. But in accordance to our guidance that it will be going in the negative direction. So some of the other bits -- or not bits, some of the other disappointments, for example, at Primary, is due to the fact that the consensus premiums are in the mid or high part of our range, whereas our actual premium realized has come out in the lower part of the range. So to answer your question on profit warning or not, we consider sending a profit warning if we believe we have guided in a significant different direction as to what has taken place in the underlying results.

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Operator [30]

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We will now take our next question.

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Unidentified Analyst, [31]

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Two from my side. The first on the cash flow situation. So you're guiding to higher CapEx this year, along with some restructuring costs. And at the same time, we're probably looking at a weaker earnings base for 2020. Based on current macros, do you expect free cash flow to fully cover the base dividend this year? And if not, are you comfortable maintaining the dividend going forward on that basis? And I'll leave it there for the first question.

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Pal Kildemo, Norsk Hydro ASA - CFO [32]

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Yes. I think I should be careful commenting on the exact cash flow expectations for the coming year. As you know, a 10% movement could be NOK 3.6 billion on our earnings generation. But I will rather answer quite clearly on your second question. Given our financial position and given our communicated floor level to the dividend, we do not foresee that we will cut dividend in the period to come. We have put in place a dividend floor and policy to allow predictability for our long-term shareholders to know that they will also have cash returns in periods when we are in the lower part of the cycle. That's the philosophy behind our strong balance sheet.

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Unidentified Analyst, [33]

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And the second question. Some of the suppliers to the European auto industry, such as the steelmakers are seeing a large restocking cycle in automotive sheet in Q1, are you seeing a similar trend at all in your downstream activities? Or is your guidance just reflecting stable stocks plus negative underlying demand?

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Pal Kildemo, Norsk Hydro ASA - CFO [34]

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Yes. As I note -- as I commented on, visibility is quite low for Rolled. We reflect, as you say, on the sheet side, the stable outlook, whereas for Extrusion, we are seeing a weaker development. We are also hearing some signs of some markets turning a bit more positive. But we're also hearing about markets that are going in the other direction. So we think it's too early to speculate and rather stick to our guidance of quite flat in Rolled and weaker in Extrusion.

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Operator [35]

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We'll now take our next question.

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Liam Fitzpatrick, Deutsche Bank AG, Research Division - Head of European Metals and Mining [36]

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Two questions from me. It's Liam Fitzpatrick from Deutsche Bank. Firstly, just on extruded and the profitability. Without the insurance gains, you made an EBIT loss in Q4, so I understand the uncertainties around volumes. But how would you kind of guide us on margins, perhaps with reference to 2019 when we're looking at the first half and the full year for 2020?

And secondly, on the Rolled Products, there is a comment about the ongoing review. Can you give us any flavor on the timing? Latest thoughts on the review of that business?

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Pal Kildemo, Norsk Hydro ASA - CFO [37]

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Yes. Thank you, Liam. If we start with the questions on the strategic review, then it is still ongoing. We are looking at all alternatives when it comes to how to create the most value for shareholders through our Rolled Products operations. And when we have formalized a decision on this, we will revert to the market.

What is important for me to mention about Rolled Products is that we are doing 2 things at the same time. We are performing a strategic review, but Einar and his team are moving full speed forward on the restructuring efforts. And the signals and the things that we have done so far in the fourth quarter makes us confident that the cost elements that we have promised, we should be able to take out in the year to come. And then we will get back to the strategic review.

The second question on Extruded Solutions. We believe in our value over volume strategy. And if you look at the development towards the end of the year, what hits us negatively is volumes. The margin on a year-on-year basis is actually improving as we're keeping prices. So we will still stick to this strategy in the period to come and expect negative developments to come from the volume side.

That being said, the improvement initiatives, which are being put in place in Extruded Solutions now are quite significant. We are running the restructuring efforts at full speed, which in our 2019 results, had NOK 150 million positive from the cost side, which is overshadowed of course by the negative developments in the volumes. And also going into next year, we're continuing this work, restructuring, fixed cost and also procurement efforts to try and compensate the lower volumes to ensure that we can deliver on our target for Extruded Solutions and net EBITDA improvement, which is still our base case.

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Liam Fitzpatrick, Deutsche Bank AG, Research Division - Head of European Metals and Mining [38]

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Maybe to briefly follow up, I mean given how rapidly volumes have fallen below your own expectations, is it fair to say that through H1, there will be a limited scope for you to offset the volume weakness through fixed cost reductions?

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Pal Kildemo, Norsk Hydro ASA - CFO [39]

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Well, we are offsetting parts of it through fixed cost reductions. But of course, as you see on the Q4 level, when you compare Q4 earnings to the year before, then it's tough to offset all of it.

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Operator [40]

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(Operator Instructions) We'll now take our next question.

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Jatinder Goel, Exane BNP Paribas, Research Division - Research Analyst [41]

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This is Jatinder from Exane BNP Paribas. A couple of questions. Firstly, on capital -- operating capital built into first quarter, you have released NOK 3.3 billion in fourth quarter and 6 -- NOK 5.6 billion in 2019. What's your expectation of build into first quarter, which you have indicated? But is there any quantification based on current price environment?

And second question, just on insurance claims. Do you expect claims to drag beyond first quarter as well? Or do you think everything will be visible if not cash received by the end of this quarter?

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Pal Kildemo, Norsk Hydro ASA - CFO [42]

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On the first one, we do expect a seasonal build. We haven't given an exact amount. If you look at previous years, this varies. Sometimes it's a couple of billion, sometimes it's a bit below or a bit higher. So that depends a bit on how prices and the market, maybe more the market develops. But usually, we have a build. And that being said, we are working hard to ensure that, that build is not larger than it needs to be, keeping stocks at absolute minimum.

The second question was insurance. Yes. As you saw, we received a net NOK 200 million or NOK 200 million plus in insurance so far. We expect this settlement to drag into 2020 and not be completed by the first quarter. And the reason for that is that in falling markets, it requires good documentation to separate out what is market fall and what is actually cyber impact. So it's a discussion on a plant-by-plant basis, which requires documentation and takes time.

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Operator [43]

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And our next question will take place now.

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Daniel Edward Major, UBS Investment Bank, Research Division - Director and Analyst [44]

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It's Dan from UBS. Quick follow-up. You mentioned you've closed 20% of Slovalco, plus you're continuing to wind back remelt volumes. Can you give us some more explicit guidance on where you would expect either casthouse production or sales to be this year based on those kind of moving parts?

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Pal Kildemo, Norsk Hydro ASA - CFO [45]

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Yes. Well, on a year-on-year basis, around 30,000 tonnes from the reduction of Slovalco. If you look at Q4 or Q3 cost out production, then we are running at pretty much as low levels as we can in our smelters. And we had some extended curtailments in our recyclers. But I think these 2 quarters represents a good baseline. If it ends up being lower than that, it's because we would have to curtail remelters over a longer period. We have one element, which is offsetting of course, and that's the ramp-up of Husnes. This will take place during the first half of 2020. But I don't have a concrete year-on-year volumetric effect until the final ramp-up plans are ready.

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Daniel Edward Major, UBS Investment Bank, Research Division - Director and Analyst [46]

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Okay. So the sales run rate we saw in Q3 and Q4, take that and then add on Husnes then we should be in about the right place, is that the way we should be looking at it?

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Pal Kildemo, Norsk Hydro ASA - CFO [47]

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Yes, it's on track, Slovalco also.

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Operator [48]

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And we'll now take our next question.

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Amos Charles Fletcher, Barclays Bank PLC, Research Division - Director [49]

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It's Amos from Barclays again. I just had a couple of follow-ups. First one was around depreciation. So we saw quite a big increase in B&A charge in the quarter, which I guess is a slight surprise given the write-downs. I was going to ask, is that sort of run rate stable going forward? And was there any sort of particular reason for the increase?

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Pal Kildemo, Norsk Hydro ASA - CFO [50]

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In the depreciation, in general, for the company, we have reported depreciation of NOK 9.5 billion. But if we adjust for impairment then underlying depreciation is around NOK 8.5 billion, which is somewhat higher than the level we guided for, which was around NOK 8 billion plus NOK 0.5 billion to NOK 0.6 billion in leases. The biggest increases is within B&A at Primary Metal and Extruded Solutions and the main reason is those leases that I just mentioned, NOK 400 million to NOK 500 million.

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Amos Charles Fletcher, Barclays Bank PLC, Research Division - Director [51]

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Okay. And then I guess also to follow up on one of Liam's questions about the timing of Rolled Products' strategic review, is there any update on that?

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Pal Kildemo, Norsk Hydro ASA - CFO [52]

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No update on the timing. When we have approached the next milestone, we will inform the market about this.

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Operator [53]

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So there are no further questions left in the queue. I'll hand the conference back over to your host for any additional or closing remarks.

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Stian Hasle, Norsk Hydro ASA - Head of IR [54]

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

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Operator [55]

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