Svein Richard Brandtzaeg – President and Chief Executive Officer
Jørgen C. Arentz Rostrup – Executive Vice President and Chief Financial Officer
Norsk Hydro Adr (NHYDY.PK) Q4 2012 Earnings Call February 12, 2013 2:30 AM ET
Unidentified Company Representative
Welcome, everyone, to presentation of Hydro's Fourth Quarter Results for 2012. Welcome also to all of you following us on webcast. The results will be presented as usual by the CEO, Svein Richard Brandtzæg, and CFO Jorgen Rostrup. And afterwards we will have time for Q&A as usual. Svein Richard?
Svein Richard Brandtzaeg
Thank you. 2012 has been a challenging year for the company. The gloomy economy was creating weak markets, low aluminum prices and our response to that situation is to react swiftly and significantly and adapt to the situation and the markets. And for 2013, our efforts to improve our operations will continue. In the first quarter, the underlying results of NOK138 million is both NOK157 million better than the previous quarter and the third quarter last it is about NOK 1 billion below the fourth quarter 2011. It was impacted by lower aluminium prices, higher alumina prices, but we also had lower input costs and even lower energy cost for both alumina and also lower energy cost and cost for petrol coke to primary metals.
In the old products we had impact of weaker markets, seasonally lower demand in the fourth quarter that is normal, but also supported by exports and also in the fourth quarter, we normally do the maintenance in Rolled Products which means that we also had higher cost in Rolled Products.
Energy was impacted by higher production and also metal prices due to the colder weather, higher consumption. The improvement program’s that I will come back to later are on track in all areas, and our board of directors are proposing a dividend of NOK 0.75 per share in light of the strong robust financial situation of the company.
I am not going to comment on the global economy, but I think it could be worthwhile to give some comments on the implications on aluminium. And let’s start with Europe; the demand in Europe has been weakening in the 2012 on the back of the weak situation in Europe, of course. We saw Germany better, helped by export and we see that in 2013, we should expect a stable situation but of course with high degree of uncertainty.
The U.S. market had a strong growth in 2012. We expect that it will continue. It is helped by transportation, but we also see now that there was also a good development in the construction market that will also support the growth in U.S. market going forward.
China is very important for us, 8% growth in demand in aluminum in 2012. We see that the new administration in place are now ready for new double-digit growth period. But we expect that for aluminum that the growth will continue at similar level as we saw in 2012. Rolled Products, 2% below 2011 in total for the year, 1% lower in the fourth quarter compared to the third quarter supported by exports, especially into South America and Asia. If you compare then the fourth quarter 2012 with the previous year fourth quarter, 5% better because fourth quarter 2011 was a specifically weak quarter in the Rolled Products.
If you look at the different market segments, we have taken some production capacity from heat exchanger, which is part of the automotive segment, into can because this helped us to improve the value creation. They were high yield margins in the can business. So, we reduced the total volumes in litho and can, although litho itself is its strong market. We are a global leader in litho.
General engineering, weak market, low margins and we have also reduced the production of general engineering reflecting very much the situation for the building and construction and general engineering market in Europe. We are a leader in foil, that has been quite stable and can business has improved during the quarter.
This figure shows the supply demand balance. The green area is the demand. As you see, some weakening in the quarter which is normal seasonal effect, but there are also some small adjustment of capacity increase in the end of the quarter due to restoring or restock of disrupted capacity, which was very much related to the production problems in Hillside in South Africa and Alma in Canada, they are back on stream now.
We expect a global growth in aluminium, ex-China to be about 2% to 4% in 2013 and we expect also the market to be balanced going forward in this year.
We have previously shown you the situation on inventories, what you see here on the left side is the global registered inventories. There are some changes between unregistered and registered inventories. So if you take a total picture, it is moving sideways in the quarter, very much also reflecting the balanced situation on supply and demand in the quarter.
On the other hand, we see a strong premiums on standard ingot, P1020 is record high premiums this quarter, reflecting a tight physical market. The fact that we have these high ingot premiums means that we are taking down remelt of standard ingots because of the profitability of that business now is significantly reduced due to other factors. We had to pay very high price for standard ingots, but of course, this is helping the primary production.
Volatile aluminum prices, you have seen it before. That continues at low level in the quarter. We see that we have (audio gap) LME of $1940 per ton in the quarter. We have already now priced both 60% of the volumes in the first quarter at the level of $2050. The realized price for the whole year in 2012 was $2018 per ton.
Alumina however is moving more stable and aluminum metal price in percentage of aluminum of course that varies according to the variation of the metal price, but the index price of alumina is stable, moving from about $315 per ton to $327 per ton during the quarter. It is now trading at about $350 per ton. If you calculate the percentages, it is about 15% to 17%. We are supporting very much index pricing, and we see now that contracts are more and more moving into index pricing instead of pricing of contracts related directly to LME price.
The next figure here shows export/import balance in China. It has been very interesting now to follow the bauxite input to China from Indonesia, after Indonesia installed a ban of export of bauxite from 2014 and had temporary restrictions already that came in effect in May last year.
We are seeing now that the export of bauxite from Indonesia to China is now increasing again. We still believe that the ban is valid from 2014. It confirms what we have said before that fight for raw materials are continuing, and that China is now looking for new sources. We have also announced that we have also sold bauxite to China from Brazil.
So, it shows the situation. There are also some disruptions short-term creating some concern which may also in fact supporting the price development of alumina. And on top products, also of course are long-term concerns living out the supply of bauxite to China longer term.
Semis and fabricated products quite stable, and we also see that China still continues to balance the supply demand on primary metal (audio gap) but China is not an importer or an exporter of primary metal.
I mentioned in my introduction that we saw lower input cost of raw materials for bauxite, alumina and also for primary metal. But if you look at the market prices, they are quite stable and looking at the development of LME compared to the raw materials prices, alumina price is lagging behind, and there is no relief especially on caustic soda which has increased substantially since the reference first quarter 2010.
In energy, we saw as expected a positive development of energy price in the Nordic market, after a weakening price during the first three quarters. Of course due to colder weather, we also had a peak and short peak due to very high consumption due to cold weather, but due to the Christmas holiday and holiday consumption and also milder weather this peak, came down to more normal levels.
With regard to water reservoir level, we started up with a 6 terawatt hour higher than normal in the Nordic system, ended up somewhat below the normal level after a reduction in total of 17 terawatt hour. We are now in the Norwegian reservoir level of about 70% of the capacity.
I'm happy to confirm that, Paragominas volumes are continuing to improve and we increased the volumes of bauxite production at Paragominas with 17% in the last year. We're now producing at the speed of 9.2 million tons.
In Alunorte, the production has been stable. We have identified both internal and external factors that we are now attacking to increase the production there, but the main job for us now in Brazil is to stabilize the production at similar levels as we had in Paragominas to stabilize that higher levels in Alunorte and reduce the costs. So the program that we have called from B to A in Brazil, is moving forward according to plan. The target is to reduce the cost at NOK1 billion and most or at least more than half of it will be executed and delivered this year.
If you then take a look at primary metal, we continued with the $300 program. We are moving according to plan. We have now reduced the costs at the end of 2012 of $235 per ton for our fully owned smelters and if you look at the situation for total portfolio in primary metal, we have reduced the cost to $225 per ton. Of course here, Qatalum is also helping a lot, after it was included in this equation from 2012. The EBITDA margin now is $300 per ton at the current situation and in what you had in 2012.
So this concludes my thoughts, so I will leave the floor to Jørgen to go through the numbers.
Jørgen C. Arentz
Thank you, Svein Richard and it’s good to see all here today. We are going then to run through the numbers as we always do. Let me start with underlying EBIT and I would like to draw your attention first to some reporting issues, that’s always a good start in the morning to talk about reporting issues. These are related to the joint venture work that we are carrying out with Orkla on extruded products and Sapa. We are reporting extruded products as discontinued operation in this quarter, from the date we signed the agreement, which was I believe 15th October, with implication that we have a separate line after income from continuing operations called discontinued operations.
We have not depreciated assets since we signed the agreement 15 of October according to IFRS and also quarterly and financial year information has been reclassified for 2/11 and 2/12 and many of you should have received that a few weeks back in preparation for the quarter.
The year, extruded product assets and liabilities are presented as assets held for sale in the consolidated balance sheet for 2012. And the Q4 report is amended and to reflect the new structure excluding extruded products, this goes for group underlying EBIT and EBITDA and it goes for market operational and overview information.
And then, in the back of that quarterly report, there is a separate extruded product pro forma section, which means that we are presenting it as if it was ordinary business with condensed market operational and financial information, so much for accounting information this morning.
Let me then continue with Hydro going forward. We had a result as Svein Richard said, NOK138 million, it’s up 157 quarter-on-quarter. I’m coming back to the business areas, just draw your attention on order and elimination where you see a significant change in the quarter. We have numbers of NOK305 million versus 64 minus as a charge in this area, our distributing area in third quarter, so that’s 240 in change.
The underlying charges for the businesses and the common services in this reporting area is at the same level in both quarters around $150 million according to also our guidance over a longer period. So the difference are these elimination on the gains and losses of internal inventory, meaning goods in production move through the value chain that has not been sold externally. Last quarter we had a gain – a positive effect here of $90 million, this quarter we have a negative effect of $150 million, that’s a delta of $240 million higher charge this quarter. So therefore the business area above this line, the bauxite, alumina, the primary metals et cetera, et cetera is actually performing $400 million better this quarter than last quarter.
Then let’s move to the high level waterfall analysis. Again they changed quarter-on-quarter, nets are limited so it’s a little bit awkward to talk about billions here, but still we keep the same format, variable cost as Svein Richard said, there is a relief of $0.3 billion two-thirds of this is related to primary metal, I will revert to that later and one third is related then to bauxite alumina.
Then energy volumes and prices constitute of $0.2 billion plus, this is predominantly energy prices through a more winter quarter, fourth quarter than the previous quarter.
The other way around is alumina and aluminum, volume and prices, there's actually a positive contribution on alumina from bauxite alumina. So these are large negative development through the quarter on primary metal due to the alumina and the contract structure we have there. And then other several effects obviously but the largest is the elimination of the gains and losses on inventory and we are rounding that off to $0.2 billion.
Let's then look at some key financial numbers. Revenues in the quarter, up $0.9 billion or approximately 6%, this is due to higher prices and volumes in bauxite alumina and energy while the other areas are seeing reduced volume and prices in the quarter. We have talked about the underlying EBIT, while the reported EBIT is positive $669 million, which implies that we are excluding $550 million approximately – $530 million from reported EBIT driving at the underlying EBIT which we think is more representative for the performance in the quarter.
So reporting wise result is $669 million, but we think that the number that we are showing you $138 million is more representative for the performance in the quarter.
These 532 in item excluded, I would give two comments to. One is that on Kurri Kurri there are some impairment effects and restructuring effects that are netting each other out, so you will see some effects in the details on Kurri Kurri, but basically we are running, we have closed down Kurri and the job is done.
And then there are some netted numbers equalling the total to zero, which leave the full positive effect on the item excluded, explained entirely by derivative effects in the quarter. One-third of these NOK 532 million derivative effects, it’s all is related to the Statkraft, predominantly to the Statkraft contract, which is an embedded derivative contract, meaning that we have seen a decline in dollar, a decline in LME and decline in coal through the quarter and the contract factors are so on that contract that give us a lower expected future cost in that contract and we take that as a item excluded in the quarter.
That’s one-third; two-thirds are related to operational hedges, simply the fact that we have entered these hedges as we do everyday through the quarter. We have entered in on a higher LME than what we see at the end of the quarter and you simply get that positive hedge effect on that. Going further down on the list, financial income has a charge of NOK 82 million for the quarter including a currency loss of NOK 102 million.
We should expect a gain from the development of Norske kroner compared to U.S dollar in the quarter and that we see, but we also have external loans in dollar versus Brazilian reais and there has been mostly opposite effect that, so that is netting each other out. The losses here is related to inter-company loans in the relationship of euro and U.S. dollar, euro has strengthened in the quarter and therefore we see a loss of NOK102 million; it’s all without cash, we have backed a non-cash effects where you have the opposite effect over the equity on the balance sheet.
Income before tax, positive NOK582 million; tax expense of NOK224 million, which is approximately little less than 40% related to the fact that we have higher share of income from the power surtax area, gives a net income of NOK113 million and up from negative NOK231 million in third quarter. And then you see the line loss from discontinued operation in this slide and I will revert to some more explanation on that.
I need to say two words on the year, it has been as Svein Richard said a challenging year for the industry and therefore also for Hydro, a negative development from the year before obviously, and LME has been down 16%, 17% on the year in total versus 2011 from the close to $2,500 to the just above 2000 level that we have seen as an average to ‘12. And therefore we also have a significant drop in underlying EBIT of all together NOK4.8 billion year-on-year, and then you compare the bottom line numbers, remember that the gain we had due to the reclassification of the Alunorte assets, that was a special accounting impact in 2011.
Okay, let’s move over to the business areas and we start as we always do with the bauxite and alumina. Underlying EBIT of minus NOK73 million, but an improvement of more than NOK 300 million from a very weak third quarter as we said last time we met. It is related to higher alumina prices, it is linked to lower energy costs, and is linked to higher results from our commercial operations, and you can divide that NOK 300 million approximately one-third each on those three elements. Prices were up in the range of 6% in the quarter, they moved from $270 to $285 in the quarter and that is approximately one third of the total improvement of NOK300 million.
Bear that in mind as Svein Richard said that prices on the spot index is now in the range of the NOK 340, NOK 350 which is 16%, 17%, 18% higher than the price we have achieved through our sales mix, and our sales mix constitute of only 20% of volume sold on this index, the rest on legacy contracts where the alumina prices is priced to the limit.
And then as we guided for in second-quarter cost at Alunorte came down, cash costs came down, it came down in $22 from $261 to $239 per ton, primarily due to the fact that state of Para decided to once again reinstate the ICMS tax exception on fuel oil, you'll remember that we talked about that in second and third quarter, but we have once again got the exception on that special tax. These together with the cost improvements in Paragominas accounts for then as I said the one-third of the improved results.
Then the final part is better commercial results in the commercial operations for two reasons; we have sold more high margin bauxite in the high premium bauxite in the period, and we have also had a better sourcing mix on the alumina from third parties, which has brought up a higher margin in our business.
Stable production levels Paragominas, we are producing through the quarter at the rate of 5.6 million tons annualized, which is quite satisfying, sorry 9.5 for Paragominas, but only 5.6 for Alunorte, which Svein Richard addressed earlier. We assume for first quarter a stable production, we’ll continue to work on Alunorte production issues of course, and there should be a small, should I say upside on the alumina price in first quarter due to LME development through this quarter.
Primary Metal, an improvement of NOK 63 million in the quarter to positive NOK 53 million, it’s still low results due to the price level in that part of our business. We see significantly lower realized prices through the quarter, and the effect of going from 2020-2022 to $1,940 per ton is all in all plus some volume effects more than 250 million negative on the quarter.
So then when we have an improvement they constitute of two main elements; one is raw material side it goes from everything alumina, power, carbon also other input factors, which is in the range of NOK 200 million, and we also have an improved, expected improved, but still quite satisfying result in Qatalum, I will revert to Qatalum on the next slide. We have sold about 60% of our primary production or we have priced it affecting the Q1 result at the level of 2050 and this exclude the volumes from Qatalum as you know in the calculation.
We are changing the pricing formula as we talked about on Capital Markets Day. We are now fixing their price one month ahead of production, and then there are some inventory effects, which means that on the average we’ll see our prices hit the P&L, 1.5 to 2 months after the spot price notification on the LME. This is primarily due to align more to the new customer pricing patterns that we see in the market, and that we have encouraged very much to have a shorter pricing horizon.
Let’s talk about then Qatalum, first of all, it’s very satisfying to see that we have achieved on our share more than 300 kilo tons of production in a year, where we still have had startup training and concentration on a large, large unit, and also the unfortunate fire in the cooling tower.
All in all production of 604 kilo tons done on a 100% basis, which is 3%, 3.5% above nameplate capacity in the second year of operation, and this is quite satisfying. Then, we have an underlying net income improvement of NOK 90 million compared to third quarter, mostly reflecting that we are now back to generating all the power we need through our own system.
So, the increased energy cost that we saw in second and third quarter, and we call that approximately NOK 70 million in effect in third quarter that has now gone, and that’s the main reason for the explanation. There are also some increased prices, volume cost are quite stable.
Let me comment one word on the cash cost of Qatalum. We have for many years talked about where we believe that cash cost will be on Qatalum, and where we are positioning in this new plant. And we have discussed with you that we believe we should aim at between 14 and 1,500 in cash costs when you have a reference on the LME of between 2,000 and 2,500. When we are looking at this number here and we are taking the average LME for 2012, we reach an apparent cash cost around NOK 14,050 for 2012, and then I can also tell you that what we have seen of development is that has not been a flat curve throughout the year, it has been a curve sliding downwards. So meaning we were a little bit over NOK 14,050 and we believe we now are a little bit below NOK 14,050.
So we feel that we very much are close to the targets that we set out. We still have work to do. It’s still a new plant and a new organization et cetera, et cetera. But all in all, it’s all reasons to be pleased with the work that Primary Metal and our partner Qatar Petroleum is carrying out in the Qatalum joint venture.
For Q1 then some increases in sales premiums hopefully on Qatalum and based on what I have just said, I should also hope and we believe on fairly stable costs in the quarter. Metal markets has an improvement in underlying EBIT of NOK 62 million to NOK 69 million underlying EBIT for the quarter.
However, you would see a large shift in currency and inventory evaluation effects, so if you withdraw that and look at the more performance result in these business, I think it’s fair to say that the business is performing less good in a way as expected in fourth quarter, the performance related result is more going from NOK 100 million, and then down to NOK 40 million; this is for two reasons as would be normal seasonal effects in the quarter lower volumes, and also somewhat lower margins also due to the fairly tough extrusion billet market in Europe, is one large effect. The other large effect is weak trading result in this quarter, positive results, but weak trading results, and as we know trading results will fluctuate from quarter-to-quarter.
We believe some increased re-melt volumes in next quarter. We believe the quarter will be seasonally stronger, but again bear in mind that in particular Europe is in general weak, we see that partly compensate it outside the Europe both in the North American market, and also in the Asian market, but it really get some effects from that.
Rolled products, last quarter we put up a small warning on earnings for fourth quarter rolled products, also due to the fact that third quarter was quite strong, so we said that the shift to quarter-on-quarter could be somewhat larger than what we had seen historically and I think that was a fair description. We are down NOK 143 million to NOK 71 million from a very robust third-quarter.
As Svein Richard said interesting enough sales volumes are fairly stable, quarter-on-quarter so the seasonality effect that we could expect was less, it was only 1% down from Svein Richard’s slide, but there is a shift in mix of products sold so therefore there is a high degree of lower margin volumes sold in fourth-quarter, and that is influencing the results.
Also we have said that a couple of quarters now, we have benefited in rolled products from our overseas sales in particular to North America, where the dollar has been strong and we will get an extra margin through the currency relationship. That has shifted now, so the overseas sales has also given less of a margin in the quarter. Another explanation is of course as always fourth-quarter is a heavy maintenance quarter in rolled products, so operational cost is increasing in the quarter and that's the second reason.
Again seasonally it should be higher volumes in Q1, but also here we are putting a slight warning on it, it is a softer market although nothing near what we see in extruded business, it's totally different market and it continues to be so into first quarter, but we should be prepared for some weakness in the first quarter compared to earlier first quarters going back.
Energy, we have an improvement of NOK 112 million to NOK 322 million, in fourth-quarter the volumes are up, prices are up, and obviously related to volumes, also some cost is up partly production related partly and not at least maintenance related in the quarter.
Prices are more down to NOK 100 million that you will see in net effect quarter-on-quarter. Production is up 300 gigawatt approximately, but only 100 gigawatt more in net spot sale into the market, and that is because concession sales has been seasonally higher. Our concession holders are typically taking out larger volumes when the power prices are high and we can’t blame them for doing so.
Volume, production wise has been high in the year in total. We have had a production of 10.3 terawatt hours it’s 7% up from the 9.6 terawatt hours normalized production in 2011, while prices has been significantly lower, 40% year-on-year to NOK 218 per megawatt hour compared to NOK 360 in 2011. So it’s the normal balance, high production, lower prices and this is the way it works.
We believe in higher production in first quarter. Prices are higher, they have been up north of NOK 400, they are now down to NOK 320, NOK 340 again, but high production and good earnings in a more normalized first quarter, the rest of our levels are close to normal.
Then we will show you one slide on discontinued operations, which is entirely extruded product. As I said this is the IFRS handling of an asset that is going out of the business and waiting for final approvals and we will just take you back to the pro forma underlying EBIT number, which you also have a specific table for in the quarterly report. Loss from discontinued operations we saw earlier was a NOK 251 million in the quarter, which is a reported number including what we call restructuring and rationalization charges.
So, it’s including what we normalize, what we call item excluded. So, reported net loss of NOK 251 million in the quarter. If you then deduct, NOK 193 million in item excluded, meaning the effect of the rationalization program primarily in Europe still taking place, and you add a little bit more or you deduct a little bit more for depreciation and taxes, you arrive at a underlying EBIT number pro forma of negative NOK 75 million. This NOK 75 million you can compare to the underlying EBITDA we reported last quarter of plus NOK 20 million, NOK 23 million, so, it’s approximately a NOK 100 million worsening in the underlying operational result of extruded product, quarter four compared to quarter three.
Quarter four is always weaker for extruded products, again, it’s predominantly seasonality that may ex this. But, again, this is due to a 10% to 12% lower volume in Europe primarily within general extrusion. So, fourth quarter has been a low quarter volume to us.
Then, if you look at net cash development, we started the quarter at zero net cash, net debt situation, we have generated from our operations, $2.8 billion in the quarter, that is $1.2 billion in EBITDA. So operating result before depreciation. Then we have a change in operating capital of $1 billion, it's partly prices obviously and volumes but it is also inventory build down to some extent. And then we this time have an positive other adjustment effect of $0.6 billion. It is partly derivative effects and it's also reimbursement of previously paid taxes – sales related taxes in Brazil.
Then we have an investment of $1 billion for the quarter and this is excluding extrusion. If you take the annualized number of this, we have invested excluding extrusion around 3.2 billion for the year 2012. If you then include 0.7 billion for extruded products we have invested approximately $4.1 billion in the full year 2012 and this is obviously again somewhat lower than what we guided for, also at Capital Markets Day last time we met.
Then, a couple of words about pension liabilities. We are seeing a significant decrease in our net pension liability as we account for it at the end of 2012, compared to 2011. 2011 here is including extruded products, 2012 is excluding extruded products. So that is obviously one effect. If we look at the benefit obligations, projected benefit obligations first, they are down in the range of NOK5 billion year-on-year, almost half of this is related to extruded products, the other half of this is related to what we discussed at length at Capital Markets Day namely that we have used covered bonds as the reference for our discount rates as opposed to governmental bonds due to the discussions that has taken place and the conclusions drawn from that discussion externally as you all know.
So, covered bonds are deep enough, there is enough market for it to allow us to use that and we feel that is a more representative discount factor than the government bonds. And that means that we have gone from 2.5% discount factor to 3.75% discount factor. Then, the discount factor in Germany has gone the opposite way and there are some elements but these are the main elements. And all in all, these take down the projected obligation by in order NOK5 billion.
Then if we look at the plan assets, they have decreased and that is entirely due to fact that we are taking out extruded products from this. So, there is a NOK1.7 billion decrease and that is extruded products. So, all in all this is going from 8.4 on a net pension liability at fair value to 4.8 or if you go to the bottom of the slide and see net of tax, the change is not of the same magnitude simply because of tax calculation in 2012, comes out a little bit different, but it’s still a significant drop of NOK2.6 billion. And that NOK4.3 billion that you see at the bottom of the slide is the number that we apply in the next – I will show you, the adjusted debt number for the company.
Just mentioned as we believe in a pension cost lower than what we guided for at Capital Markets Day also primarily due to the change in assumptions that I have just talked about. We believe in the range of NOK600 million in total pension costs for the year and one quarter of this 25% will be financial items and three quarter will be on underlying EBIT level.
Then the next slide is the adjusted net debt. We believe this is confirming what Svein Richard said, we have a robust balance sheet and a robust overall financial position we believe. We also by the way believe that, that is necessary in an industry like aluminum right now.
The adjusted net debt is down the way we see it by NOK12 billion from end of 2011 to 2012 and this is not due to the net cash net debt situation. You would see that was approximately at the same level 1.7 both in December 2011 and in December 2012. But then we have the pension liability at fair value, significantly down, NOK2.6 billion. We have also taken out Qatalum from this definition now, simply because there is no longer any completion guarantee towards the owners related to the project financing of Qatalum, that has bee signed off. There is no completion guarantee on us or on QP and therefore we believe it should no longer be included in adjusted net debt. This is also obviously the same way the rating company would do it. And then we have some lease arrangements and some extruded products elements and effects on the last item, all-in-all leading to this development and adjusted net debt of 8.3 billion.
Then I think Svein Richard said what needed to be said, the Board of Director are proposing a dividend of NOK0.75 a share for 2012 reflecting what we think is a very good operational performance in total and a robust financial position. However also taking into consideration the weak markets and uncertain market outlook.
And I think you will see on the calculation basis, the average five-year payout ratio is high, is 172% or whatever compared to the policy of being through the cycle around 30% and this is obviously reflecting that maintaining a dividend is crucial for us and there has been weak earnings in this period. So we should be above the average number but earnings have been very, very weak. Then it drips into payout of approximately 1.5 billion if approved by the Annual General Meeting.
Thank you. Svein?
Svein Richard Brandtzæg
If I said not, here we have been true, it is definitely the fact that this has been a challenging situation for aluminum industry and also for Hydro, with the weak markets especially in Southern Europe, pressure on margins, low LME and low and reduced volumes for some of our businesses areas.
This calls for new actions, really got adapting to the situation. At the same time we see that there is a robust growth of aluminum consumption globally and that I must also say I'm quite optimistic with the long-term development of the aluminum market globally, but it doesn't change the fact that there is a need to continue our efforts to create a global leader in aluminum to continue all efforts to reduce the costs like we’ve done, where we got $300 program that will be finished in 2015 that we also continue now with a B2A program in the books at alumina business area. And finally our first priority is to create competitive shareholder returns.
Thank you very much for your attention.
Unidentified Company Representative
Then we open for questions, if there are any questions from the audience here today. Seems to have been very clear, Svein Richard and Jorgen. So then before we finish up, it is the last quarter results presentation for Jorgen or for Hydro at this that is. So, how does that feel Jorgen?
Jørgen C. Arentz Rostrup
Well it feels sad and good at the same time and of course I should probably say here that the finest moments have obviously been together with the financial community. So it's good to end it here. I think we leave it there.
Unidentified Company Representative
Yes, just leave it there.
Jørgen C. Arentz Rostrup
And let me take – good, very good. Thank you. Thank you and let me also introduce our new CFO Eivind Kallevik. He comes directly from Brazil, and has been working through the whole value chain and lately Head of Finance in the Bauxite & Alumina business in Brazil and taking the role of CFO from the 15th of February.
Unidentified Company Representative
Okay. Thank you, then we’ll finish it off and questions to the CFO – current CFO or the CEO, will be taken down here in a bit. Thank you for coming.
[No Q&A session for this event.]
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