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Edited Transcript of NHY.OL earnings conference call or presentation 28-Apr-17 2:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Norsk Hydro ASA Earnings Call

Oslo 2 May 2, 2017 (Thomson StreetEvents) -- Edited Transcript of Norsk Hydro ASA earnings conference call or presentation Friday, April 28, 2017 at 2:00:00pm 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

* Stian Hasle

Norsk Hydro ASA - Head of IR

* 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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* Daniel Lurch

Exane BNP Paribas, Research Division - Analyst

* Hjalmar Ahlberg

Kepler Cheuvreux, Research Division - Equity Research Analyst

* James Gurry

Crédit Suisse AG, Research Division - Research Analyst

* Johannes Grunselius

Handelsbanken Capital Markets AB, Research Division - Research Analyst

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Presentation

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Operator [1]

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Good day, and welcome to the Norsk Hydro ASA Q1 Presentation. Today's conference is being 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. Good afternoon, and welcome to Hydro's Q1 2017 Conference Call. We will start as normal with a short introduction by President and CEO, Svein Richard Brandtzæg, followed by a Q&A session also joined by CFO, Eivind Kallevik.

For those of you that did not see this morning's webcast of the results presentation, it is available on hydro.com.

And with that, I'll leave the word to you, Svein Richard.

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

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Good afternoon, and let me start with a brief overview of the key developments for this quarter, the first quarter of 2017.

The underlying EBIT for the first quarter was NOK 2.3 billion, up from NOK 1.8 billion in the fourth quarter last year. The main explanation of the improved result is that we experienced higher realized prices in the quarter, both for aluminum and alumina. This improvement was partly offset by higher raw material costs and certain operational issues in Rolled Products.

I'm pleased to say that our NOK 2.9 billion Better ambition is progressing towards reaching the 2019 target, with the clear measures across the business areas. We also expect to reach the 2017 target of NOK 0.5 billion, with somewhat different developments within the business areas.

Our 2 large projects are running as planned. The Karmøy Technology Pilot is 80% completed and is on schedule for first metal in the fourth quarter of this year. At the Automotive Line #3, product qualification are progressing, and we will have the official opening of this plant next week, May 4.

And finally, when it comes to the market side, we are increasing our expectations of global demand growth for primary aluminum of 2017 from 3% to 5%, as communicated previously, to 4% to 6%. This is much driven by stronger demand in China. We are also expecting production to come in higher for the year than previously estimated, meaning we still expect a largely balanced market in line with what we said in the fourth quarter.

I would then like to end my introduction today by summarizing our key priorities going forward. And safety is always #1 priority. And a good financial and operational performance do not stand alone. It has to go hand-in-hand with safety performance. And then lastly, we experienced the most tragic kind of accident, a fatality. And we must never lose the focus of what's most important to us: to ensure that everyone comes home safely every day.

As I have mentioned for several years and you will probably hear me mention for several years to come, our improvement ambitions remains very high on our agenda. Our Better program is about taking control of what we can influence ourselves by reducing costs and improving efficiency in our operations. And here, I must say that the safety performance goes hand-in-hand with operational performance. And the ambition is also about maintaining our technology lead and high-grading our product portfolio towards attractive, high-margin and high-growth markets.

Another priority also is to deliver on our main growth projects, which is, first of all, the Karmøy Technology Pilot in Norway is moving as expected to deliver the first metal in the fourth quarter of 2017. And this pilot plant is crucial not only to improve cost for the entire portfolio but also to stay ahead of the game in the long run.

The Automotive Line #3 in Germany, which will be ramping up during this year, will allow us to establish a strong presence within the high-growth automotive segment by becoming the second largest body-in-white supplier in Europe.

Also, an important step in fighting tough competition we see in world -- Europe is -- particularly in the more commodity segments.

In addition, we are looking how to -- on rectifying the challenges we have had at the UBC facility. We are currently running below total speed but aim at having ramped up the facility by the end of this year. This has been a temporary setback and does obviously not change the strategic importance of the UBC line and the cost reduction potential and environmental benefits of recycling more post-consumer scrap.

We will deliver on all these while, at the same time, ensuring that we maintain the financial strength to be able to handle the volatility in our cyclical industry.

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

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Thank you, Svein Richard. Operator, we are now ready for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll now take our first question, which comes from James Gurry of Crédit Suisse.

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James Gurry, Crédit Suisse AG, Research Division - Research Analyst [2]

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I've got 2 quick questions. Just on Chinese supply growth, amongst all this debate in the market about curtailments in China, you've increased your estimate of supply this year. Does your new estimate -- I think it's 11% at the midpoint, does that include any curtailments due to environmental pressures in China? And my second question just relates to metal hedging. I think you've hedged 55% of the metal for the next quarter and 60% of the premiums. How does that compare to the last quarter? It appears to be a little bit more than usual. And therefore, are you taking more of a cautious outlook on aluminum prices at the moment?

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

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Thank you, James. Let me go through the first question. I can answer that. So Eivind, you can take the second part. With regard to Chinese supply additions, we see that there are coming more metal out of the Chinese facilities. And that's, again, based on increased restart of previously curtailed capacity. And that's why we are taking up the estimated supplies from 7% to 9% to 10% to 12%. We have in our estimate -- when we look at the total supply-demand balance in this year, we have included that there are some effects this -- after the winter. Whether we are taking into account everything, it's difficult to say because we are not sure if it'll happen as been communicated. But we are taking into account this as far as we believe we can do in the numbers, where we end up saying that we see a largely balanced market with -- a few hundred, maybe 200,000, 300,000 tonnes oversupply in a global market of more than 60 million tonnes this year. And maybe Eivind, you can answer the last -- the second part.

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Eivind Kallevik, Norsk Hydro ASA - CFO, EVP and Member of the Corporate Management Board [4]

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Sure. Well, I think typically, you will see that we -- when we entered into -- or exit a quarter, we've typically sold around 50%, from what I think you will find out several quarters going back to (inaudible) 55% and 60% -- or 55% in aluminum, 60% in premium. It's really not a big difference. Also remember that when we talk about the levels now, we talk about this including [copper alum]. In the past, we talked about it ex copper alum which is a big explanation factor here.

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Operator [5]

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(Operator Instructions) We'll now move to our next question, which comes from Daniel Lurch of Exane.

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Daniel Lurch, Exane BNP Paribas, Research Division - Analyst [6]

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Just 2 quick questions from my side. Firstly, you seem to be a bit more bullish on the overall market outlook for aluminum. The -- I remember you had some spare capacity in your production system in primary aluminum. Would you consider increasing production a bit to capitalize on currently higher prices and also attractive FX? And if yes, how long would it take you to increase capacity utilization? And secondly, quickly on Rolled Products, just to understand the impact of your one-off operational issues in Q1. Could you give us a bit of a number what the impact was here and to understand what the approximate underlying profitability was in the [first] quarter? And what's the outlook on margins over the next couple of quarters?

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Svein Richard Brandtzæg, Norsk Hydro ASA - CEO, President and Member of Corporate Management Board [7]

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Thank you, Daniel. I will also have to take the first up, and Eivind, take the difficult part, the second part. Ready to go. For the global demand, you will likely have the increased expectation from 3% to 5% to 4% to 6%, that image based on what we see in China today. And the prices are at the level. So well, you could say that it's very effective to reach that capacity. We would be cautious about that. But of course, we have about 90 kilotonnes capacity at Husnes that could be restarted. And we have not made any decisions about that, but we will simply look into the opportunities to do it. But we will also not only look at the price but also on the market balance. But, as we have communicated, there we see a substantially -- substantial deficit of aluminum in our local markets in Europe, for example. But as I said, we are not taking any final decision on Husnes yet. So that remains to be seen. If we go to Rolled Products, just to clarify what we are talking about there, it is operation issues after maintenance -- planned maintenance back in the weeks of Christmas and New Year, which we normally do every year. But also, some of these issues are related to installment of new and improved equipment like (inaudible) in Hamburg, for example. We have an issue with a recycling furnace in Hamburg that also was one of the problems in the first quarter that has been resolved. We have an issue with the coal mill in Alunorf, which is also now on its way up to full capacity. So the main effect has already been taken in the first quarter, but there will also be some minor effects of these issues in the second quarter. So maybe, Eivind, you could discuss further on this.

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

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Yes. I think when you -- when we look at what the additional costs we have in Q1 and couple that with a small volume loss that we had as a consequence, that altogether amounted to some NOK 70 million, NOK 80 million for the first quarter. Well, if you add that to the reported EBIT or the underlying EBIT we delivered at NOK [106] million, it will take you to NOK 186 million for Q1, [NOK 176 million to NOK 186 million], which is pretty much in line with what the market expected for that quarter. And then given what Svein Richard told you, that we've resolved most of these issues, there will be a little bit of a carryover into Q2, which you'd see, let's call it, more normalized levels of profitability for the next quarter.

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Operator [9]

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We'll move to our next question, which comes from Hjalmar Ahlberg of Kepler Cheuvreux.

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Hjalmar Ahlberg, Kepler Cheuvreux, Research Division - Equity Research Analyst [10]

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I had a question on the cost of alumina into primary metals going into Q2. I mean, how much of the increase have you realized in Q1? And could you say anything, how much more will come in Q2 approximately?

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

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We took about NOK 500 million in increased alumina costs for primary in the first quarter. Then we typically operate with a 2- to 3-month time lag on the alumina costs, meaning that there is some increase to come in the second quarter but significantly less than what we've seen in the first quarter. So probably around 1/3 of that, that you would see as a continued increase or an additional increase in the second quarter.

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Hjalmar Ahlberg, Kepler Cheuvreux, Research Division - Equity Research Analyst [12]

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Okay. And then on bauxite and alumina, if you look at the cost per tonne coming into Q2, I mean, you will have a higher volumes, but will you also have more raw material cost increase or should the cost per tonne come down in Q2 considering that?

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Eivind Kallevik, Norsk Hydro ASA - CFO, EVP and Member of the Corporate Management Board [13]

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I think if you look at it from a raw material cost perspective, Hjalmar, we don't really see any significant increase between Q1 and Q2. So from that perspective, it's going to stay relatively stable. Then of course, as -- we will see some more lifting on some of the sourcing contracts that should probably help somewhat.

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Operator [14]

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(Operator Instructions) We'll now take our next question, which comes from Johannes Grunselius of Handelsbanken.

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Johannes Grunselius, Handelsbanken Capital Markets AB, Research Division - Research Analyst [15]

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It's Johannes from Handelsbanken. I would like to hear your thoughts on the alumina market because aluminum now has been pretty strong over the past few weeks, whereas we have seen weakness in alumina. Just curious to hear your thoughts about that looking ahead.

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Svein Richard Brandtzæg, Norsk Hydro ASA - CEO, President and Member of Corporate Management Board [16]

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Thank you, Johannes. With regard to the alumina market, we see now a weakening in alumina prices, not the fact that the demand is going dramatically down, but the fact that the restart of curtailed capacity is going faster than what is absorbed in the metal production units in China. So China is now pushing faster on restarting alumina capacity than restarting metal production capacity. So they are ahead of the curve, and that's why there is a weakening and softening price development. Then we've seen alumina prices below $300, coming down from the $340 in the beginning of this quarter and $349 in the end of the fourth quarter. So again, if you look at the volatility in the alumina market, it is quite substantial, and it is very much, again, a function of the supply-demand balance in alumina. There is no [turmoil] in the market there, and alumina is not a material which is easy to store. So when the production is too high, then the price goes down and opposite when the production is too low. So it is really the -- a function of the balance of -- between supply and demand in -- and then in China.

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Johannes Grunselius, Handelsbanken Capital Markets AB, Research Division - Research Analyst [17]

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Okay, okay. And when it comes to your realized average price, I think you were slightly more than 300 on your realized alumina sales for the first quarter, whereas market prices were slightly higher. Should we see this as there is a lag on the alumina price here? I'm curious how we should be thinking about the second quarter in terms of alumina -- realized alumina price, yes.

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Eivind Kallevik, Norsk Hydro ASA - CFO, EVP and Member of the Corporate Management Board [18]

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So we have about a 1-month lag when it comes to price realizations in bauxite and alumina.

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Johannes Grunselius, Handelsbanken Capital Markets AB, Research Division - Research Analyst [19]

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Okay. All right, all right. Also, on the details on costs here, you were pretty precise here, walking us through with the different moving parts in costs of producing alumina for you. How should we see the FX for Q2 versus Q1? Because I think that was a headwind for you in the first quarter.

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Eivind Kallevik, Norsk Hydro ASA - CFO, EVP and Member of the Corporate Management Board [20]

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Yes, it was. But it's a slight headwind, and then it's been relatively stable since the quarter. So it's -- again, use the sensitivities that we gave you in the investor presentation, and then look at how the spot rates develop in the period until closing of Q2.

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Operator [21]

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(Operator Instructions) We currently have no further questions in the queue at this time.

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Stian Hasle, Norsk Hydro ASA - Head of IR [22]

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Okay. Since there seem to be no further questions, we can then end this quarter's call. Thank you for joining us today. And if you have any follow-up questions, please do not hesitate to contact us. Thank you, and have a nice evening.

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Operator [23]

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Thank you. Ladies and gentlemen, that concludes today's conference call. Thank you for your participation. You may now disconnect.