Norsk Hydro's CEO Discusses Q4 2012 Results (Analyst Presentation) - Earnings Call Transcript

| About: Norsk Hydro (NHYDY)

Norsk Hydro ASA (OTCQX:NHYDY) Q4 2012 Earnings Call February 12, 2013 10:00 AM ET

Executives

Rikard Lindqvist – Head, IR

Svein Brandtzæg – President and CEO

Jørgen Rostrup – CFO

Analysts

Scarrott Owen – Goldman Sachs

Knut-Ivar – Deutsche Bank

Jat Goel – Citi

Operator

Welcome to Hydro ‘s Fourth Quarter Results presentation. With me here today to present the result is President and CEO Svein Brandtzæg, and CFO, Jørgen Rostrup. But before we turn to the presentation, I would like to draw your attention to the cautionary note in relation to forward-looking statement, which is provided in material.

With that, I will the leave the word to you Svein Brandtzaeg, President and CEO.

Svein Brandtzæg

Thank you, Lindqvist. The result of this quarter was NOK 138 million, which is NOK 157 million better than previous quarter. And approximately NOK 1 billion less than the fourth quarter in 2011. The result is impacted by lower aluminum prices, higher alumina prices, some lower input costs to bauxite alumina and primary aluminum production and both lower energy cost to both areas.

The rolled products had a seasonal somewhat weaker situation in the fourth quarter, but also higher cost due to the yearly maintenance that is done normally in December. Energy had higher volumes and higher production and also better higher prices in the fourth compare to the third quarter.

Well our improvement programs are moving according to plan, and finally the Board of Directors will recommend dividend at the same level as last year. As we go to in line what we communicated in the capital markets day of NOK 0.75 per share. I’m not going to comment on the global economy, but just as some comments on implications for the alumina and the aluminum industry. In Europe, it was a very weak development during 2012 in some of the areas, especially Southern Europe. Germany was supported by the export industry, so Germany for us was a better market. With regard to the expectation for 2013, we expect that this will be a sideways development, stable on the similar levels as we had last year.

In U.S., we see improvements supported by the transport industry, we also see improvements now in the construction industry which is also improving the demand for aluminum. There was a strong demand and strong development of demand of aluminum in the U.S. in 2012 and we expect that all continue in – during this year.

China is back on track, I think the turning point was in the third quarter and we see that the industry production levels are also showing good figures. The demand increased in China last year was about 8%. And we expect that also to be at similar or maybe even higher levels this year.

If you take a look at the rolled products business, 2% below 2011 in total volumes, 1% lower volumes in the fourth quarter compared to the third quarter, seasonal effect but it was also supported by more export of can business especially to south America and Asia, a 5% better in the fourth quarter of 2012 compared to the fourth quarter of 2011.

But there were also some differences between different market segments. We moved some production capacity from heat exchanger business into the can business area due to optimization of margins, low margins in heat exchanger business and higher margins in can business. So, we improved or increased the area of oil and can with 3% of oil more stable, but we increased especially the can production.

We are the global leader in litho that was strong development last year. General engineering however and although assisted with now it’s reflecting a weak situation in general engineering and also the building in construction market specially in Europe.

This figure is showing the supply demand balance outside China and if you take closer look at demand in the fourth quarter, somewhat weaker demand on seasonal valuations and also somewhat higher production in the fourth quarter compared to the third quarter. Small valuations, the deviation of production is very much adopted the previous disrupted capacity like in South Africa and Canada is now back on work. We expect the balanced market in 2013 and we wrote of about 2%, 4% outside of China.

If we start on the left side and then comment on the inventories first. We see that the total global inventories are quite stable reflecting a better balance between supply and demand. But if you look at ingot premiums, we see still that there was a tight physical market. There are very high premiums, record high in Europe close to $300 upon which again is reflecting the situation on the physical market side, very much also reflecting the booking next in the LME inventories.

Aluminum price continued to be volatile. Also in the quarter, we realized aluminum price of $1,940 per ton in the quarter. We have in 2012 realized the total full year price of $2,080 per ton and we have sold now about 60% of the volumes in the first quarter at the level of $2,050 per ton.

Alumina price on the index – scale on Platts index continued to be – to strengthen during the quarter. Alumina is now traded at about $350 per ton, moving up from $315 to $327 per ton during the quarter. In percentage of LME, of course, very volatile due to the LME price. But we are supporting very much the Platts index price and we see a positive development in that respect. In percentage of LME, LME continue – aluminum price continue in the range of 15% to 17%.

This figure shows the import and export balance in China. As you have seen in the third quarter, there was a significant reduction of import of bauxite, especially from Indonesia, it has been decided to put the ban on export from 2014. We see some release of that during the fourth quarter, but we believe that the ban on 2014 is still valid, I mean that China is looking for new sources of bauxite.

We also saw that the alumina import to China increased from 2011 to 2012 from 2 million to 5 million tons, which we see as a positive development from our side.

Semi-fabricated products, stable export as we’ve seen before and we also see that on the primary metal side, they are China is balancing this quite well. So the net share of export of primary metal and zero import.

I mentioned that there has been reduced raw material input costs, both in bauxite, alumina and primary production. But if you take a look at market prices on different raw materials, well aluminum production and aluminum production it is quite stable. Alumina or aluminum price is significantly lagging behind the development of other raw materials. And as you see there is absolutely no relief on the caustic price. And we see that there is still firm development or stable development of the other main input factors for our industry.

If you take a look at situation for energy, price developed positively in the fourth quarter after some weakening during the first quarter of – first quarters of 2012. We could take a look at the rest of the world level, the total rest of the world situation was reduced by large during the quarter. If you take a comparison at a normal level, the quarter started above normal level and then that’s somewhat below normal level. Then rest of the world level of the new region hydrological balance is showing both 70% of the total – of the capacity as it is now.

I’m pleased to see the development of the bauxite production in Paragominas. We are now at 9.2 million tons production it has been improved over the year and it was a net increase of 13% compared to 2011.

Alunorte production was quite stable 5.8 million tons through the year. And we have introduced improvement program in bauxite alumina which we called from what we will come back to that. But we are targeting NOK1 billion in improvement in that program and a bit more than of it will be executed and delivered this year. According to power plants and we are also planning to stabilize the production at Paragominas at similar level as 2012. In Alunorte we are planning to increase production.

The primary production we have delivered according to plan our $300 program, which is now under $225 million per ton in end of year 2012. And we will finish off this program in 2013.

If we take a look at the total smelter portfolio, we have been able to reduce the cost of $225 per ton. The Qatalum is of course a major area, which was introduced in that equation for 2012, and now we are operating the EBITDA margin of $300 per ton for our total smelter portfolio.

So, with that I give the words to Jørgen, please.

Jørgen Rostrup

Thank you Svein Richard. So, let’s move over to some financial information, and I may follow the same format as most of you are familiar with. First to draw your attention to one reporting issue and this is related to the Orkla joint venture ambition where we this quarter are reporting extruded products, as discontinued the operations. And it has been reported in our books from 15 October that way, that was the date of signing. It means that we have one separate line of income on discontinued business in the P&L.

Assets are not depreciated from 15 of October and the quarters and fiscal year 2011 and 2012 has been reclassified and most of you have obviously seen that, we have sent out messages and information about it. So, assets and liabilities, are held as assets held for sale in the consolidated balance sheet for 2012. The Q4 report is amended, so extruded products is taken out from the overview here, as you see on this page, it’s taken out from the group underlying EBIT, EBITDA and is taken out from the over viewing market sections. And then in the report, there is separate extruding products pro forma information, where we include market financial and operational information.

And you could have said approximately $150 million improvement from Q3 to Q4. If you here look at the last dismiss reporting area, other than eliminations, you will see that there is a major negative development there quarter-on-quarter. The charges for common services and businesses in that area is the same as last quarter namely the guided $150 million. So, that the change here is related to eliminations of internal gains and losses on inventories. Inventories that’s floating through the value chain and we are eliminating the gains order losses of that on this line. That was the positive contribution in last quart of NOK90 million and a negative effect NOK150 million range this quarter. So, all in all that’s a NOK240 change quarter-on-quarter, so if you put on that on top of that a change of NOK150, on the total you see that the other business areas are performing in the area of a range of NOK400 million factor this quarter, compared to last quarter.

We did multiple analysis and you will see that it’s small changes, and are still NOK14 billions, because that’s the that a format we use here, but we get helped this quarter on variable cost by NOK0.3 billion, two-thirds of that is related to primary metal, I will come back to it and the last one-third is related to bauxite, alumina and I’ll also revert to that.

Then, energy volume and prices are giving us NOK0.2 billion, the other way around, aluminum volume and prices in particular are in a negative more than NOK0.2 billion and some help on the alumina side in the quarter and that we have the elimination effects and obviously some other effects in the last part. So, all in all a fairly minor change but there are some factors underneath.

Revenues are up NOK0.1 billion, 6% quarter-on-quarter, this is due to increased volumes and prices in bauxite, alumina and energy and other business areas are reducing on the revenue line. We have talked about 138 and then you will see that we had a reported EBIT in the quarter of NOK 669 million, which means that we are excluding positive elements of NOK 532 million that is in the quarter. This is entirely due to derivative effects. Two-thirds of this is related to our operational LME hedges. They are lower at the end of the quarter than they were when entered into. And one-third is related to so called embedded derivative contracts is the Statoil – contract where we have elements of the pricing mechanism and being the LME, the dollar and the coal.

And we have had decline in the quarter although do factors and therefore in this contracts give us a gain, which we don’t think is necessarily reflecting underlying performance and therefore we’re take it that from the numbers that we focus our analysis on.

Financial income minus 82 in the quarter including NOK 100 million currency loss in this quarter versus a large currency gain in last quarter. Then income before tax reported is NOK 587 million and some NOK 224 million in tax is implying close to 40% tax rate. This is the energy surtax area, which gives that higher tax number than the average corporate tax level should imitate.

Just one comment on the year. It’s a significant drop both in revenues of NOK 7.3 billion and in underlying EBIT of some NOK 4.8 billion. The prime reason for this is obviously LME prices from close to 2,511 to 2,080, that’s an average price in 2012. So, a significant drop in earnings due to the LME development.

Let us move into the business areas, and I will start as normal with the bauxite alumina. And alumina as we sold more than NOK300 million improvement quarter-on-quarter, till negative NOK73 million. This is influenced by alumina prices, LME-linked by energy cost and by commercial result improved and NOK300 million could be attributed one-third to each of those elements. Prices were up 6% in the quarter going from – our achieved prices going from US$270 a ton for alumina to US$285 in fourth quarter. This explains about one-third of the NOK300 million in improvement.

Then bear in mind that this US$285 a ton is still significantly below the range that Svein talked about, when he said in international 340, 350 a ton on the spot market. We are selling legacy contracts out of our portfolio around 80% and the alumina index 20% of our total sales. So due to this, we are 16%-17% short to the spot market prices that we see today. This is also according to how we saw the acquisition in Brazil at the time of acquisition.

Then as we guided on previous quarter, the apparent alumina cash costs were supposed to come down, it has come down by US$22 from US$261 to US$239, primarily due to the state of product decision to reinstate the ICMS tax exemption on fuel oil. You might recall that we have couple of quarters have discussed the ICMS issue and the fact that we didn’t seem to be exempted for a period and that brought extra cost to the refinery. But we are once again confirmed exempted from this and that has a significant impact on our earnings.

The last one-third of the financial result is in the commercial area, it’s improved margins both on alumina and bauxite due to more efficient and better sourcing and also that we have increased bauxite sales of high margin – on high margin contracts.

Then if I’m said production Paragominas price – the rate in fourth quarter compares to 9.5 million tonnes and as we said 9.2 million tonnes produced in the year. For Alunorte we have a lower rate, it’s approximately 5.5 million tonnes and that is something to work on going forward. We do expect stable production volumes in the first quarter from this business area.

Primary metal, a slight improvement of NOK67 million to NOK53 million positive in the quarter in spite of a quite significant negative effect from reduced prices and also seasonality effects on the volume side.

The effect of those two elements are more than NOK250 million negative quarter-on-quarter. Then we’ve got some support and help on the raw material side, NOK200 million approximately lower raw material costs or input costs spread around different factors. It’s on the alumina, it’s on power, it’s on carbon and it’s also on other input factors. And then, we have an improved result in Qatalum by NOK90 million, I will refer through that.

As you might recall from capital markets, there we have changed our pricing method for metal sales, and we’re now adjusting it to the shorter pricing horizon that we and our customers are applying. So we are now fixing mainly one month – fixing the prices mainly one month ahead of production, which means including hedging of inventories that we will realize prices with 1.5 months to 2 months lag to the LME spot prices. We have a priced 60% of our primary production for Q1 at US$2,050 and we also do expect next quarter somewhat higher sales volume simply for seasonality reasons.

If we then look at the Qatalum, we are quite pleased first to see that the production is high and has been high and very stable throughout 2012. So the Qatalum organization together with the Qatar Petroleum and Hydro had managed to really put now production on a good start fairly early in a long life of Qatalum. We are producing for 604 kiloton on a 100% basis, which is 3%, 4% above nameplate capacity and that also in a year, where had had the fire in the cooling towers. So, it’s we are actually quite pleased with the production side of it.

It came in NOK 90 million as I said and approximately NOK 70 million on underlying EBIT in the quarter. And if you recall, we had approximately NOK 70 million extra charge as we communicated it in third quarter due to increased energy costs since we had to buy electricity and buy gas from outside the plant because of the cooling tower rebuilt. This is now gone and to get it with some increased in the prices and a fairly stable some of lower cost level. This is the reason behind that improvement.

If you look at 2012 in total, you might recall that since 2008 we have talked about that our target is to reach at cash cost level, of that in the range of NOK 1400 to NOK 1500 on this smelter at LME reference prices between NOK 2000 and NOK 2500.

When we do calculations based on the information that you have here and you use an average LME price for 2012, we see an average apparent cash cost of US$1,450 for the year. And it was higher in then and in the start of the year, that are lowering going level now towards the end of the year. So we basically feel that we have come very close to the level that we set out to reach. And are pleased with that, and then we are the first to acknowledge that there remains a lot of work and it’s still a big and good unit, but we have to continue to work on it to make it a good unit, it’s supposed to be.

Metal markets, it looks like a significant improvement at low levels from 7 million to 69 million. We tend to say that, that is very much influenced by currency and ingot valuation effect. So more financial implications on those, so if you look at the underlying performance result and it is more decreased from approximately $100 million to $40 million in the quarter.

We are seeing both seasonality effects and also the weak European extrusion billet markets, hitting our remelters, so that is one reason behind it and the another reason is a fairly weak, positive, but a fairly weak trading result in the quarter. Going forward we anticipate obviously higher volumes from this business in the first quarter due to the amount picking up for the new year.

Rolled products, in spite of season and seasonality swings, which should indicate lower volumes, talked about 1% down only quarter-on-quarter here and still as we said in the third quarter, we said that we’ve regarded the third quarter is, so that’s fairly strong. And we gave a guidance that the change to fourth quarter should be anticipated to be larger than what we had seen in the last few years. So there is NOK140 million reduction and the result down to the NOK71 million.

As I said, stable volumes but the production mix had changed somewhat leading to a weaker margins in this business this quarter and other reason is also that we have both in second and third quarter talked about a strong and good margins from overseas, export sales due to the strong dollar, the dollar has now weakened in the quarter, and therefore so our margins from that export sale is lower.

Also as we know rolled products always have a significant maintenance work in fourth quarter and that is also hitting the numbers a little bit. We do expect higher seasonal sales and volumes in first quarter, but the market there looks to us also now, in rolled, a little bit soft amongst other thing on the automotive side. So we should expect maybe a lower sales down in the similar quarter a year before.

Energy, improvement in result of NOK102 million to NOK322 million for the quarter, picking up predominantly because of prices and also production and produced 300 gigawatt more in the quarter however only 100 gigawatt more sold in spot market due to higher concession sales and it’s quite natural that this concession holders are taking out larger volumes while prices are higher in the winter season.

Some improvement doubling in the price picture from NOK131 per megawatt hours to 168 still not a very solid price picture due to large available water resources in the quarter and temperature has been – until new year quite – has been warm and nice winter season at the end of 2012. It has been a colder season, now prices has picked up, they have actually been at peak doubled the 250 level, that is now down to NOK340, NOK350 per megawatt hour level. But we still expect first quarter to move up both on realized prices obviously on volumes and thereby also on the earnings.

It’s also worth mentioning that we have produced 10.3 terawatt hours in 2012 versus 9.6 terawatt hours in 2011. And price has been 40% lower actually the average of the year. So the negative correlation between volume and prices has still be in there as expected.

Then the last of these slides, the one that we now called discontinued operations, which is extruded products in totality. We are just trying to take you down here and give you what we call a pro forma underlying EBIT numbers. So, you can compare with previous quarter although we are not reporting it that way, but they are also information for you in the report some more information.

Basically, I just think I need to say that there has been – if you see the calculation, you will see that we have a pro forma underlying EBIT, number of negative NOK 75 million in the quarter. This is a NOK 100 million reduction from the previous quarter. This is predominantly due to much softer volumes. In Europe primarily seasonality effects, but also reflecting the very weak market in the Southern part of Europe. And it’s, I think the extrusion – the general extrusion market in Europe for Hydro is down in the range of 10% plus in the quarter.

Then if you look at the cash development, debt/cash development in the quarter, we started the quarter with the zero balance net cash or net debt. Then we have generated NOK 2.8 billion in the quarter from operations, where underlying EBITDA is NOK 1.2, and operating capital is NOK 1 billion.

We have invested NOK 1 billion. This number is again excluding extrusion products. In total for the year we have invested I believe NOK 3.4 billion for the business excluding extrusion, and including extrusion NOK4.1 billion, so still lower than what we guided for, also lost capital markets there. So we’ve been able to renew and develop our business to some degree with the low CapEx numbers.

A different more technical topic, but nevertheless, important as we all know is the development in pension liability and we are quite pleased to see that we have a decrease in pension liability calculated this year. Bear in mind then that 2011 here to the right we see including extruded products and 2012 excluding extruded products, and that is one of the reason why we see a decrease, but there is also another one.

If we take the benefit obligation first, the effect of extruded products taken out is more than NOK2 billion on this NOK5 billion calculated decrease in benefit obligation. The rest comes from changes in assumptions where they moved from governmental bonds to covered bonds, using covered bond interest rate as the reference for the discount factor – is the most key factor of changing these number.

Then we had some changes in salary and pension increase assumptions and we are seeing an opposite effect by reduced discount rates in Germany, but all in all, this gives more than NOK2 billion in effect lower pension obligation. Plant assets are down 1.7 predominantly due to the Extruded Products being now a taken out as a separate issue from discontinued business. All in all net, pension liability is going down from 8.4 to 4.8 or if you go net of tax at the bottom of the table, its going down by NOK2.6 billion. This is the number at the bottom of the table, it’s number that we use into our adjusted debt key number.

I would also like to mention here that we have a pension cost estimate of NOK600 million for 2013, also again down from what we guided at Capital Markets day, primarily due to the changes in assumptions. One quarter of this is viewed to hit the financial line and the three quarter remaining will be an EBIT, underlying EBIT charge in our P&L.

That brings us to adjusted net debt, which we see down to now NOK8.3 billion, compared to NOK19.9 billion at the end of last year and that’s kind of a significant change in the key number like this. Obviously needs some explanations but they are very distinct and clear items and rationale for it.

As you can see, net cash is at the same level as last year of NOK1.7 billion. So it’s not – it’s not the net cash net debt that makes this, it’s their additional lines below, it’s the adjustments. We have already talked about one of those and taking down NOK3.6 billion on that pension liability the way I described for you. Then we have taken out associated businesses or Qatalum. We’ve taken out our share of debt in Qatalum, our share of the project financing from this and the reason is simply that there are no longer completion guarantees from the banks related to the project financing on Hydro and Qatar Petroleum anymore. They have been signed off as of last summer and therefore we have no guarantees that we are responsible for and therefore we are taking out of this key number.

This is the way we understand it also according to how the rating companies would do it. And there are some other adjustments, some lease arrangements that has been revalued and so on at the bottom giving us that NOK8.3 billion in adjusted net debt number. Then I will finish off with just repeating what we said on dividend, the Board of Directors are proposing to maintain the level from last year of NOK0.75 per share. This will hopefully be approved at Annual General Meeting in May. It will give the NOK1.5 billion in payout. And the payout ratio is way above the stated policy obviously of 30% simply because markets and earnings have been such that, that is only one guiding and the other guiding is to acknowledge that we have a fairly solid operational performance, solid financial position and very much wanted to maintain the dividend level.

Svein Brandtzæg

Okay. Thank you, Jørgen, then we’ll open up for questions.

Question-and-Answer Session

Unidentified Analyst

Just one question. You talked about regional ingot premiums as we’re moving up about $300 a ton. But obviously if you look at your realized pricing, you see the price of aluminum, why that premium really moved up? So let me – can you talk a little bit more about that how you actually are factoring that, is it where do you expand actually metal, supposedly it’s the large number now? And secondly, I guess moving forward how you transfer price back between the rolled products and both metal to extruded product? And I guess the third element of that is, can you pass that on to customers, or are you actually seeing that sort of get flowed through margin?

Svein Brandtzæg

That’s a very good question, because there are also differences between different products from our cost ounces. The metal products from bauxite consists of sheet ingots, rolling industry, extrusion ingots for extruders and foundry alloys. And from the alloys and extrusion ingots are priced based on LME plus the premium. Sheet ingots priced on LME plus ingot premium plus a conversion premium for sheet ingots.

That means that when the standard ingot premium is going up, the price for sheet ingots is following accordingly. So that means that we surely get the benefit of the standard ingot premiums increase on sheet ingots. On foundry alloys and extrusion ingots, we see that premiums of these products have not followed the same development as the development of some standard ingots. So, that is also why we have taking down remelting of the standard ingots to produce the extrusion ingots, that is not profitable anymore. And we are also now trying to lift up the margin and it is coming up to higher levels, that’s not to the same extent and the same speed as we have seen this standard ingot premium has developed into it.

Obviously this is going to be adjusted over time, because there are lot of capacity of extrusion ingots and for the alloys based on remelting and that is not profitable and it is also after a while we will – we expect to see higher premiums of these two products, but on sheet ingots, it is already in place. So, that’s at least – the challenge now is to elected to founder alloys, primary founder alloys and extrusion ingot.

Operator

Okay. We have a question from Scarrott Owen from Goldman Sachs.

Scarrott Owen – Goldman Sachs

Just regarding the Norwegian krona, obviously strengthened quite a lot lately, it’s 5.5, is there anything you can do to mitigate against that? And then secondly on what kind of alumina, your apparent cash cost, are there some other costs in there because if you just do revenue minus EBITDA, you don’t really – you can’t reconcile that?

Jørgen Rostrup

I think first of all when we got the Norwegian krona because we are going to meet and do whatever we like, but it’s not possible for us to influence on the currency of course. But on the other hand, the reason for introducing the $300 program for our fully owned smelters, which is mainly located in Norway is actually to compensate for the strong currency and also obviously also the high labor cost in Norway and we have succeeded that program. So, what we’ve delivered in Norway the $300 program so far $235 per ton improvement is at least what we can influence on to compensate for the disadvantages being in Norway in operating smelters. The second question.

Svein Brandtzæg

Let me at least see if I got your question. For the apparent cash flows on alumina, this is a mixed number, it’s a total number of not only the Paragominas volume and activity in Alunorte, but it also is the sourcing of alumina from third parties and is the sourcing of bauxite from MRN mine et cetera. So it’s a total number reflecting the cash cost for our total operation in bauxite alumina business area.

Operator

Question from Knut-Ivar, Deutsche Bank.

Knut-Ivar – Deutsche Bank

Just couple of simple numbers question. There was a NOK 100 million write back in the special items for the primary metals business.

Svein Brandtzæg

Yeah.

Knut-Ivar – Deutsche Bank

So, I just wanted to know what that was, first one. Second one is related to the question you just answered actually it was the huge trading that goes on in your company only new other business that you’re selling some of the alumina as well. You able to tell us roughly where the Alunorte thought comes out in terms of the underlying it is versus the trading EBIT. And first is just on the dividend policy how – how far we can defend the NOK75 even if that were to improve, we would you continue to, will that be the floor?

Svein Brandtzæg

Yeah. Should I start with the 100 million observation that we made. We have effects related to the current closure, that is all together on net basis, zero, but there are two different elements to it. We are reversing some previous impairments simply because we have got an update of the valuation also on property and equipment, that is left on the site and in what residual value is it in or et cetera, et cetera. So, we are similarly reversing that, that is the 100 million of number that you observed.

The other way, there is some increased write-offs or taking cost that we expect to be coming on the environmental side in order to handling the site and that’s why I didn’t mention it on item excluded simply because there was netting out, but observation is quite good. Then when you go to the dividend again, just to say that for me and my management team, it is the most important to deliver competitive shareholder returns. So, dividend is of course an important part of it and we of course have ambitions to deliver more than what we are going to do this year, but I kind of promise that we are going to deliver 170% dividend going forward, but at least we feel this is the level we can defend now due to the fact that we have robust situation and we are also optimistic after the long-term future of aluminum.

Knut-Ivar – Deutsche Bank

And then there was a question about separating out Alunorte and commercial results, and I’m not very keen to comment very much more on it. Clearly the core preparation in the bauxite alumina area is the integrated business units, Paragominas and Alunorte. And that is also giving the biggest swings in earnings due to whether, raw materials are changing or price picture are changing. And therefore we try to illustrate fairly firmly what that change is giving of effect. And I indicated around NOK100 million this quarter and following this or some quarters, you can now write down, but we prefer to keep it related to the commercial area. Also simply because it is a large handling of these volumes through the commercial area, so there is always a tight relationship between those.

Operator

Any final questions? Its Jat Goel from Citi again.

Jat Goel – Citi

I guess a couple of, and one you talked about Indonesian export ban. It was a little bit more based on that you think 2014, is there is any ability or is there anyone, the Chinese or you’re looking at putting refining capacity in Indonesia. We don’t see if you want to on both sides you put in refining the capacity? Well, over the mic, secondly just you talked I think well at the beginning that you think some improvements in sort of residential, non-res constructions, but if you look through the products and business it looks like and what we expect was in Q4 results was good, is it seasonal or are you seeing any improvements in sort of extruded for international? Also, you made some comments on your percentage the U.S. on the extrusion upside.

And just sorry, third question, how is your cost cutting and cost saving, you said you actually got lower alumina process coming through in the quarter, results chart showing the alumina process going up and linkage prices going up. So, assume that, that’s due some of your historical legacy contract, which has got LME linkages, which is not same designed for both are linked to LME prices with ingot prices going up. But if you could remind us or give communication in terms of those legacy contracts I think is great. And how long they are actually wise, isn’t the risk that they write and you actually say your aluminum price is not keeping up.

Svein Brandtzæg

Okay. So, three important questions, and let’s talk about Indonesia first. Of course, the intention of Indonesia is that they want to have more value creation on the raw materials. So, we shouldn’t be a surprise to see alumina capacity being built in Indonesia preparing for export of alumina to China instead of bauxite to China.

So, that is the natural development. But it’s also quite interesting do you know the China is looking further and able to get hold of raw materials and we have even sold bauxite from Brazil to China recently. So, it remains we would seeing how this will develop, but it is clearly that despite the raw materials it’s continued to be developed and get us in good procession with regard to that development.

Second question about the products and situation in Europe as I said it is Europe is in a weak situation. We have no reason to believe that would be a short-term pickup of demand in building infrastructure markets in Europe, some activities in Germany, that’s on very low level in Southern Europe. And we expect that to remain on a low level, at least for some time into the future and it’s possible to say how long time that will be, but at least for 2013, I’m not very optimistic that there’ll be growth in Europe.

The question was the differences between the European and U.S. markets, first of all, it was a strong demand development in the U.S. market of aluminum last year supported by transportation, and again we see now that the building and construction market is now starting to be more lively and more demand into that segment. So that is supporting the demand going forward of course. So we believe that the development we saw last year in the U.S. market will continue this year.

And finally about alumina and contracts that we have, we have already announced and communicated the fact that we are honoring the contracts that Vale have entered before we signed contract and the deal with the Vale. And most of these contracts will be – or at least some of them will be released from 2015 onwards. So that means until 2015, we don’t have significant amount of alumina to sell into the market. So we are delivering now contracts according to the Vale agreements and they’re all very much linked to LME and percentage of LME. And results from Brazil will be quite different, we’d say at least – we were really least at volume today until $350 per ton, which is the market price today, but we are not in that situation, so at least until 2015, we’re locked in with big volumes, and then from there on we will be able to sell more at the market level.

Jørgen Rostrup

And then if you look at our own earnings, there are some timing differences on alumina, so bauxite alumina would typically incurred the LME effect with a month’s delay, and while the cost side and primary metal has some longer lead times and inventories and so on, so they saw a relief in primary metal or alumina cost this quarter while the earnings due to the LME development in bauxite alumina business area was high price and at an improved earnings in the quarter. So at this time, timing difference has made it two different effects actually?

Svein Brandtzæg

One more question? Yeah (inaudible) from Citi Bank.

Unidentified Analyst

Are you able to give any comments around 22% stake held by Vale, and do you have any sort of engagement with Vale at this stage or what would you – what would be your potential standpoint depending on what Vale comes up with, what are the options that Vale potentially be looking at given they’ve already taken some impairments on your stake? That’s my question, thanks.

Jørgen Rostrup

I am not in a position to speculate on what Vale is going to do and this is ownership question that you have to ask Vale. The only thing I can say is that we have been happy with Vale, as we all know, we have one person on the Board of Directors that is still there. And again it will make – make some decision on what Vale is going to do into the future about their position.

Svein Brandtzæg

Anymore questions? If not, I will just take opportunity to thank Jørgen for 22 years in Hydro and especially for last four years as a CFO in the company. And this is his last representation here in London, and I think we should give him a big hand.

Jørgen Rostrup

Thank you very much.

Svein Brandtzæg

And let me also then take opportunity to present the new CFO, Eivind Kallevik that is coming directly from Brazil and he’ll take over his position from the 15th of February. Thank you for your attention.

Jørgen Rostrup

Thank you.

Svein Brandtzæg

Thank you.

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