Tag Archives: finance

Executives Pal Kildemo – Head, IR Svein Richard Brandtzaeg – CEO Eivind Kallevik – CFO Analysts Danielle Chigumira – UBS Menno Sanderse – Morgan Stanley James Gurry – Credit Suisse Jatinder Goel – Citigroup Hjalmar Ahlberg – Kepler Cheuvreux Norsk Hydro ASA ADR ( OTCQX:NHYDY ) Q2 2015 Earnings Conference Call July 21, 2015 10:00 AM ET Operator Good day. And welcome to the Norsk Hydro ASA Q2 conference call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Pal Kildemo. Please go ahead sir. Pal Kildemo Thank you. Good afternoon. And welcome to Hydro’s second quarter 2015 conference call. We will today start with a short introduction by President and CEO, Svein Richard Brandtzaeg followed by a Q&A session where also CFO, Eivind Kallevik will join. For those that did not see this morning’s webcast of the results presentation these are available on hydro.com. And with that, I leave the word to you Svein Richard. A – Svein Richard Brandtzaeg Thank you Pal. And good afternoon everybody. I will just make a brief summary of the second quarter results before we open up for questions. Underlying EBIT for the second quarter of 2015 was NOK2.7 billion down from — down by NOK0.5 billion from first quarter and up NOK2.1 billion from the second quarter last year. There are several elements which influenced the results this quarter throughout the value chain. And if we start with the bauxite and alumina the results are down on lower LME linked prices as well declining index prices for alumina. However, we are happy to observe that the May/June production at Paragominas has recovered well following the ball-mill maintenance that we had in April. And we are now operating at Paragominas at the impressive speed of here 10.4 million tons, which is the ball-mill net capacity. In primary metal the falling LME prices influenced earnings negatively. However, the biggest contributor was the lower realized premium that was down $100 in the quarter. I’m happy to see the effects of improvement programs and portfolio optimization paying off as we report record-high downstream research on seasonally stronger sales in the quarter. This includes both the joint venture Sapa and the rolled products business. And in energy we experienced lower production on late snowmelt and seasonally also affecting the price level. I am satisfied to announce that following the expiry of the previous ICMS deferral in [indiscernible]. We have now secured a 15 year ICMS framework for our operations in Brazil. I’m very happy to announce that we have secured part of the long-term sourcing framework required for Rhienwerk after the current solutions expires in 2017 at the very effective price level, bringing the rolled products smelters further down the cost curve. If we finish off with markets then the challenging markets we started to experience in the previous quarter have continued with the growth in the estimated level of global over-production. Chinese exports are still at high levels. And the global dynamic seems to have [halted] somewhat in the short to medium-term, making us more cautious about the outlook for demand I this period. And we expect the global demand to be around 5% this year. If we then end with the priorities going forward we see that in the third quarter we will continue to deliver on the NOK1.5 billion improvement program that was promised for 2015 and 2016. At the same time we are looking for additional measures to expand the efforts which are already part of the scope. As a part of the improvement work we continue our high focus on operating capital and work on reducing inventories to release capital. We reduced inventories to the tune of NOK800 million in the second quarter, and we seek to continue this positive development in the coming quarter. The ICMS discussion is now settled, but we still have many targets to deliver in Brazil. Their organization’s biggest area to focus in this region is to lift production in Alunorte. We see great volumetric potential there, and we will move across in a stable and controlled manner. We are [high upgrading] our portfolio through some very interesting downstream growth projects, including the automotive body in white line in Grevenbroich, as well as the UBC recycling facility in Rheinwerk. These will be delivered on time and on budget and they [could contribute] towards the high upgrading of our portfolio in the current market which can be described as challenging. Prices are now at levels where an increasing share of the industry is moving into cash neutral or cash negative territory. But as we have worked upon improving our [value] cost positions through the improvement programs as well as portfolio optimization we are in a much better shape to take on these markets than we were five years ago. And as we know, there are still some more to deliver. Pal Kildemo Thank you Svein Richard. Operator, we are now ready for questions. Question-and-Answer Session Operator And we will take our first question from Danielle Chigumira from UBS. Please go ahead. Your line is open. Danielle Chigumira Hi there, good afternoon. So a couple of questions from me, first of all you highlighted the potential for — and the nameplate Alunorte to get up to 6.6 million tons. Can you give us some color in terms of what timeframe you’d expect to achieve those production levels given we aren’t quite at the — yet at the current nameplate of 6.26. And in rolled products you obviously had a much stronger margin than consensus was perhaps expecting. How much of the margin strength that you realized there was due to the positive impact of declining premiums? And could you give some color, how much was the mix? And if there is also some underlying strength in those end markets. Svein Richard Brandtzaeg Okay, thank you very much Danielle. With regards to Alunorte [indiscernible] up to 6.6 million tons this is the potential going forward, and we see that towards 2018 that could be realized. So that is the sort of timeframe we are working with in this respect. And again this is the additional capacity where we are utilizing the existing infrastructure in an even better way with some minor investment. That can take the refinery up to 6.6 million tons yearly alumina capacity. With regard to rolled products the stronger margin is absolutely affected by the declining premiums, but we also see improvement in some of the rolled products market but in, as I mentioned also earlier today, in general engineering market. We have seen that there is higher demand. We have increased volumes significantly during the quarter, also not only from [of course] auto this year, to the second quarter this year but also comparing with the second quarter last year. And in general engineering there we have in fact also observed higher margin. Operator And we will now take our next question from Menno Sanderse from Morgan Stanley. Please go ahead, your line is open. Menno Sanderse Good afternoon. Two very brief ones, first on Brazil clearly an interesting and long-term tech settlement has been agreed. But could you give us some more clarity on — if this led to any change in the degrees of freedom that Norsk Hydro has with respect to the timing of all these compelling projects? I the past you said we will only do this [or they are] compelling and the market demands it. Is that still the case? Or have you now committed yourself to timetables that may not correspond with market demands? That’s the first one. And the second question is the reservoir levels clearly in zone two are going up, are still far below 2014. Nevertheless, prices are also far below 2014 which is just that’s due to over-capacity. Do you see any way out of this very big over-capacity and very weak energy price situation in Norway? Svein Richard Brandtzaeg Okay, thank you Menno. With regards to Brazil and the price [invest] that has now been decided on for the coming 15 years. We have in the agreement with the authorities promised to look into different projects that we have already been talking about with you also previously like the [cup] product, the expansion of Paragominas. But, of course, and this is — we can only do that provided that we have the right market conditions, that the market needs the volumes and that we also have profitable projects. So we are not committed or decided on anything beyond what we have talked about previously. The fact that we have discovered the potential of debottlenecking in Alunorte to 6.6 million tons is something we will do anyway. And that is something we will target to do towards 2018. So, again, we are not dealing from the market with regard the potential projects in Brazil. One element into this is for example that we will invest in — it is minor investment in primary foundry alloy facility in [Costos, in existing Costos] in Albras, which will be for the domestic market which is definitely a good business opportunity for us. So again there are some opportunities that we will do. But that way also we will take anyway. So I think the ICMS settlement is something we are quite happy with. With regard to the reservoir level in Norway we are in a very special situation this year, because of a very cold spring and early summer in Norway. If you come and visit us in Norway and drive your car across the mountains you will see that there are extremely high levels of snow in several areas, especially in areas where Hydro has the main power production. We have in the NO2 area, for example, we have two-thirds of our power production. And in this area there are in some of the precipitation areas for us two — there are 300% more snow than in normal level at this time of the year. So there has been no incentive to hold back power production because we have to give space for this water in our [vessel loss]. So there has been not incentive to hold back production even by — their prices has come down. And we are now trading around [NOK85] [indiscernible] of megawatt hour which is I would say extremely low prices. But we are also waiting for quite a big amount of water coming from the mountains now, so to have space for that we need the reservoir level to be quite empty. Menno Sanderse Okay. And when that reservoir fills up again then I presume producers will go back to a more normalized production rate which is more in line with market demand rather than –? Svein Richard Brandtzaeg Exactly that is what has not been done up till now because the possibility for flooding has been at a quite critical level. I think we are beyond the critical level now but we will still have to make room for a lot of water that is coming from melting of snow going forward. Operator And we will now take our next question from James Gurry from Credit Suisse. Please go ahead your line is open. James Gurry Thanks very much. Just want to ask, we seem to be back in sort of a 2012 situation where the industry is clearly, the capacity we seem to be waiting around for your peer group to potential curtail production to restore some balance in the market but China seems to progress unabated. Can you tell us in your view what might break this viscous chain or cycle that we are in at the moment for the industry? Svein Richard Brandtzaeg Thank you James for a good and important question. Of course, we are in a situation now where we have faced, we are facing global over-capacity. And as you probably know Hydro took out 26% of over-capacity during the finance crisis, and we closed down finally the Kurri Kurri smelter which was another 180,000 tons in 2013. So that means that with regard to our company we have taken out all the high cost smelters. And at the same time we improved the cost position for the smelters that we are operating quite significantly through a $300 program that we have delivered on and also the $180 program that is for the joint ventures. So we are in a much better cost position. We know that there are a bigger and bigger share of the global capacity that is now moving into — due to the low cash negative situation. And some of these smelters are located in China. So it depends very much on the financing going forward if these smelters will be able to operate at full speed or if something will happen. And it is too early to say what will be the outcome there. But I think the fact that there are some, I would say some US dollar exposed smelter capacity that is also negative territory. But I don’t know what the competitors is going to do with that. But with regard to old capacity we don’t have any plans to curtail any volumes as the situation looks now. James Gurry Okay, thanks. Sounds like a challenging situation. Svein Richard Brandtzaeg Yes, absolutely it is still a challenging situation that developed there. Operator And we will now take our next question from Jatinder Goel from Citigroup. Please go ahead your line is open. Jatinder Goel Hi, good afternoon. Just two questions from my side. Firstly on value added premiums. You mentioned a continuous decline there as well. Do you have a sense of where these might stabilize as a percentage of either LME or standard ingot premiums or in absolute terms where the historical number has been somewhere between $150 and $400 per ton. And secondly, just a financial question, you have laid out a couple of financial ratios free — sorry funds from operation to net debt and net debt to equity. At what point do you believe that your balance sheet will get lazy in terms of either these ratios or anything else which you measure internally? And for how long will you continue with a lazy balance sheet given the difficult market dynamic? Thank you. Svein Richard Brandtzaeg Thank you Jatinder. I will start with the premiums and the decline that we have seen. Of course, if you look at the level we have today it is more or less on the historical normal level. It was a quite unusual observing $525 per ton in premiums in the European and US markets. That was reflecting very tight physical markets. And what we see now is that we are back to normal. The adjustments have partly been as a result of export from China into our markets. And it is difficult to predict what is going to happen going forward now. But if the premiums is going to weaken further is one possibility, or if it will be stabilized or –. Again, the development is very much a correlation or a function of the tightness we see in the marketplace there. So with regards to Chinese export that is influencing this we saw a very high level in June, 450,000 tons. Probably these volumes were booked in a situation where the premiums were higher than what we see now. I showed in my presentation earlier today that the incentive now for China to export downstream material is close to [CRO], so they get [the gap] closed after a period of time where the incentives were quite significant. So I think we need still some months to go before we see what, is now the result of the closed gap with regard to incentives or exports, which I think is a major factor that will influence on the premium level going forward. Jatinder Goel My question was more about value-added premiums which are on slide 9 of your presentation. So do you have a sense of the product premiums over and above LME stabilizing at a particular level which has been in a volatile range as well historically? Svein Richard Brandtzaeg As you see on this slide we have observed a reduction of the value-added premiums. Not only on back of the standard ingot premiums but also the developing difference between the value-added premium and the ingot premiums has been reduced, and we see that there is a softening in this market. We still see that the markets where we are operating, where we have our main exposure is still moving positively. US market is strong and also in Europe we see still a positive development. But it’s again a bit early. We have seen I would say a significant production during the last couple of months. But it’s too early to say if that is going to continue in negative direction or not. So, of course, we also know in the seasonally strong period the third quarter could change this, as there will be at least some seasonal effect in Europe. We expect that US could continue at a similar rate as we have seen. But in the fourth quarter we expect both the US market and the European markets to be weaker than what we have now. With regards to the balance sheet you are right we have a very strong balance sheet. And we have seen that this has been also an advantage for us to have a strong balance sheet. But you can always argue that this balance is too strong, and what should we do with that. And, of course, this is something we are discussing also with the Board of Directors on the corporate level. And we will come back to more information about that at a later stage. Operator We will now take the next call from Menno Sanderse from Morgan Stanley. Please go ahead. Your line is open. Menno Sanderse Yes, sorry gentlemen I don’t want to drag this out, but while you’re there. Just on the CapEx ramp, obviously you answered it partly this morning but you did NOK2 billion in the first half, NOK6.5 billion is the target for the full year. That suggests a pretty big ramp-up of spending in the second half. What are the projects in particular that will be spent on in the second half? Is it body in white? Is it [Carmoys] test smelter? Can you give us a bit more insight there? Eivind Kallevik Sure Menno. It’s very little. Let me start with it’s very little on the [Carmoys] project this year. It’s mostly related in terms of growth projects it’s related to the body in white line in Germany. That’s the UBC line in Germany. And then there are minor there’s normally a seasonality when it comes to maintenance projects in our line of industry, meaning that you spend more capital in the second half of the year than what you spend in the first half of the year. Operator And we will now take our next question from Hjalmar Ahlberg from Kepler Cheuvreux. Please go ahead, your line is open. Hjalmar Ahlberg Yes, thanks. Just a question on alumina cash cost. You were down at $225 per ton in Q1 and up to $233 in Q2. Will you be able to get this down again in Q3 and onwards when volumes ramp up and maybe due to some positive currency benefits? Eivind Kallevik Hi Hjalmar. I think obviously we are working hard to get the cash cost down again. Then I think you have to look at the big — the particular challenges or the particular issues that hit Q2. Part of the reason for the cost increase is the Reintegra tax refund that was reduced from 3% to 1%. And that is the level that we will expect it to continue throughout the year, so that’s not going to come back. Another part that impacted of course adversely was the energy consumption in Alunorte, and of course we are working quite hard to get that back down to the levels we also saw in Q1. The third part impacting the cost was also higher bauxite costs for the period and that has to do with the pricing mechanism for the bauxite that we buy. And you should not expect that to come down at least not before — towards the end of the year into 2016. Hjalmar Ahlberg Okay thanks. And just a question on Qatalum it seemed to hold up margins very well. Was that, that premiums lagged even more there compared to the main primary metals division or anything else impacting? Eivind Kallevik Well this is pretty much a volume-driven effect in Q2. We have higher sales volumes in [Q] compared to Q1, the premiums and the alumina impacted Qatalum negatively in the quarter. Operator There are no further questions coming into the queue at this time. Pal Kildemo Okay, then with that I thank you very much for calling in. Have a nice day. Operator Thank you. That will conclude today’s conference call. Thank you for your participation. You may now disconnect. Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited. THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY’S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY’S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY’S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS. If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com . Thank you!