Norsk Hydro Adr (OTCQX:NHYDY) Q4 2013 Earnings Conference Call February 12, 2014 2:30 AM ET
Inger Sethov – VP and Chief Communication Officer
Svein Richard Brandtzæg – CEO
Eivind Kallevik – CFO
Rikard Lindqvist – Head, IR
Welcome everyone to the presentation of Hydro’s Fourth Quarter Results 2013. Welcome also to all of you following us on the webcast today. Our results will be presented as usual by our CEO, Svein Richard Brandtzæg; and our CFO, Eivind Kallevik. And after the presentation, we will have a little bit of time, not that much, for Q&A and one-on-one interviews also. So please, Svein Richard.
Svein Richard Brandtzæg
Thank you very much. 2013 was a very important year for us where we crossed the finishing line with the US$300 program, which has improved our competitive position. Our employees has done a tremendous job, and I think they all deserve Olympic medal for delivering on our ambitions.
And as you have also seen previously improvements has been a trademark for our company, and I will continue to report on our improvements also in the coming quarters. Looking at the market situation, we see that there is a better balance today with the demand slightly above production. So I think we are off for a better year in 2014.
If you look at the underlying results NOK 483 million in the fourth quarter which is down NOK 180 million, compared to the third quarter, and up NOK 310 million compared to the fourth quarter in 2012.
We delivered on the US$300 program in the end of the year, which has an impact of NOK 1.5 billion on the bottom line. Alunorte production is now coming up to levels that we promised previously, but bauxite & alumina result was impacted by the ICMS tax charges.
In the Primary Metal, the result was lifted by the insurance proceeds, after the fire on the cooling water tower in the beginning of 2012.
Normally fourth quarter is a weaker quarter due to seasonal variations, which is normally impacting our downstream businesses like Rolled Products and the Sapa joint-venture. We saw the seasonality was less permanent in the Rolled Products in this quarter, but it still had an impact.
In the Energy, we had lower production in fourth quarter compared to the third quarter where it was record high collection for the third quarter in Energy.
The Board of Directors is proposing a dividend of NOK 0.75 per share, which again is reflecting our ambition to deliver cash return to our shareholders, but also to again reflecting the strong balance sheet, also the fact that we are able to deliver positive cash return, cash flow on lower aluminium prices. This will be decided in the Annual General Meeting in May 7.
If we then move over to the development in the marketplace and start with the standard ingot prices, which is now at record high levels. It started with announcements in July when the LME decided to change the warehousing rules to maximum 50 days for cancelled warrants. That will be introduced from April 1. Several customers expected then that the weakening of the standard ingot prices that we saw after that announcement would continue, but what happened was that it was a combination of curtailments, better industrial activity, and in the end, a situation where a lot of customers had to build metal for at very much higher ingot premiums than they expected. So what we see now is that in the U.S. market, the standard ingot premiums are now at US$450 per tonne, in the European market about US$350 per tonne.
Aluminium prices has been weakened through the quarter, trading between US$1,715 and US$1,900 per tonne. The realized price was US$1,802 per tonne coming down from US$1,822 in the previous quarter. And again in dollar terms, it was slightly lower prices in the fourth quarter compared to the third quarter, but due to strengthening of dollar in Norwegian kroner, it was slightly better. We have sold 50% of the metal for the first quarter at US$1,770 per tonne.
It is not easy to explain the development on LME based on the supply and demand balance. It’s not straight forward the explanation if you only look at the LME development. I think that LME normally has been a macro and sentiment driven, and we have seen also in several other commodities than aluminium that that’s been softening prices due to uncertainty in a macroeconomic picture but also uncertainty about China.
I think it’s better for us now to take a look at all-in aluminium price, when we take LME plus the ingot premiums and see the development there, because the ingot premiums now is a major factor. And if you look at the last week’s development, there has in fact been an improvement of total volume in metal price with 5% in the aluminium market in U.S., and about 1% in the European market, when we include now the standard ingot premiums. Again, showing that there is improvement in the metal balance and there is a fairly tight physical market.
If we then take a look at the inventories, the total reported inventories are south of seven million tonnes, and more than five million tonnes is registered in the LME inventories. But if then add up the unregistered inventories, we have seen a slightly reduction in volumes, again reflecting the metal supply demand balance.
If we then move over to the supply and demand balance to look at green area is the demand, 1% lower demand in the fourth quarter compared to the third quarter, but 4% higher demand in the fourth quarter 2013 compared to the fourth quarter 2012. And then in combination with the lower production, we see that there is a slight deficit, the demand is slightly exceeding the production this year.
We expect for 2014 demand of 2% to 4% in the world outside China. There are curtailments announced that is supporting again a better supply demand balance, but also ramp-ups, but all in all for this year, we expect that there will be a slight deficit in the market, but again there is an overhang of huge inventories.
The aluminium price again – alumina price has strengthened through the quarter, about US$6 compared to the third quarter, traded at average of US$323 per tonne. We are now trading at US$335 per tonne. So it’s improving even more now in the beginning of the first quarter this year.
We have all seen the announcement from Australia that the Gove alumina refinery will be closed, and also the fact that the Indonesian ore has introduced a ban on export of bauxite that will influence on the market.
If you look at the percentage of alumina price compared to LME, it’s at record high. It’s at 18.5%, but if we then include the ingot premium as a part of the metal price, then it’s around 16% but still record high levels.
China plays a very important role as we all know and we follow carefully the import/export balance from China. And what has been seen in 2013 is that it was a record year of bauxite import. We know that a lot of companies in China now has established themselves with huge inventories of bauxite due to the expectation of the ban from the Indonesia, so there are six to 12 months inventories of bauxite in China mainly, again preparing for the ban.
We saw some higher alumina imports in the fourth quarter this year compared to previous, which could be again a development, but it’s too early to say that if China will return into more import of alumina instead of bauxite, if bauxite will be even more tight.
If you look at the premium – the primary market, they were quite good balance between export/import in the semi-fabricated and fabricated products. It’s quite similar levels as we have seen previously on the export from China.
If you then take a closer look at imports of bauxite to China. This figure show the different sources, the green one is the bauxite from Indonesia, the blue from Australia and on top some other sources, among them bauxite from Brazil that’s where we also have contributed with small volumes, but again Indonesia is definitely the most important source of bauxite to China, 70% of the imported bauxite to China comes from Indonesia.
And we saw the effect when Indonesia introduced export restrictions in 2012, there was drastic reduction of bauxite, but that was reversed due to court ruling later so the export increased again, but from January 12, then the new ban was introduced.
It’s difficult to say the long-term effect of this, but of course there is a big inventory of bauxite in China. They will probably try to find other sources, but again this is a major change in the bauxite market that could also influence the alumina market.
If we then take a look at the situation in Brazil in our own alumina refinery, you will remember the power outages that we had there last year, two consecutive external induced power outages that influenced the production. We lost volumes in the second quarter and gradually build up.
In the Capital Markets Day, we referred to a level of 5.6 million tonnes speed in the fourth quarter, but we ended up at 5.8 million tonnes speed in the fourth quarter.
If you then recalculate this, you will easily see that we have been producing around six million tonnes of bauxite during the December and also that continues into 2014. That means that we are now come back to even higher levels than we had before the power outages, and that the operation improvements now has come to the level that we promised and expected, and we are now stabilizing the production at these levels, and also doing quite a lot of work to make the plant more robust, also if similar episodes should happen in the future. So the plant is now moving in absolutely in the right direction.
The B to A program, we announced previously, I would say that we lost the opportunities in 2013 due to the downturn of volumes, but we have not reduced our ambitions to deliver NOK 1 billion improvement in the bauxite & alumina business area, within the end of 2015, and the ambitions of improvements this year is NOK 600 million in bauxite & alumina.
And we announced in the end of January that the authorities in Brazil has introduced the ICMS tax that will impact bauxite & alumina. This is about fuel oil, where they have now changed the collection point of tax from distributors to oil refinery, and that means we have again to pay this tax which was a similar situation as we had in 2012 for some months.
We also have ICMS tax on electricity purchase. This will cost us NOK 20 million every quarter on fuel oil. It will cost us NOK 150 million every quarter. Of course we are working actively with authorities to minimize the effect of this. We are discussing different solutions and we will come back to that later, but we are very active now in Brazil to discuss the situation with the authorities, because this is a change of framed conditions.
We are supporting to develop all viable business in Brazil. We need stable long-term framed conditions and this is a major change for us. So again we are working on this.
Looking at Primary Metal again, the organization continued to deliver the improvements and Hydro’s MNR [ph] people delivered the US$300 program in the end of the year. Again showing that we have kept the momentum through the whole period, in fact we have – and I have stood here and reported 16 consecutive quarters the status of the US$300 program, and we now delivered on that in the end of the fourth quarter.
This means that we have improved our competitive situation. And if you look at our primary cash cost and margins, we have definitely improved, even if you look at the situation 2013 from 2012, where we had in 2012 US$2,080 per tonne average LME. In 2013, we have US$1,902. We have increased the EBITDA margin from US$300 per tonne to US$400 per tonne. So in the weaker market, we have improved our EBITDA margin.
This is of course also thanks to improved currency. It’s lower alumina price and in fact that there is lower aluminium price and also the fact that we have improved our margins in the cost analysis, so that means the metal products’ premiums, that’s also contributed favorable on this one.
We have also introduced a joint-venture improvement program, US$180 per tonne that is going to be delivered in the end of 2016, and we delivered US$75 per tonne on this program in 2013. So we’re also moving forward with our joint-ventures in Primary Metal.
If you then take a look at downstream in the fourth quarter compared to third quarter, it was in total for Rolled Products 3% less sales volumes, very much impacted by lower sales of beverage cans, which is quite natural when the temperature is low, there is less demand for beverage cans. In litho and automotive, we saw an improvement in the automotive. Litho, quite stable. General engineering, 4% improvement from the third quarter.
If you then take a look at fourth quarter, 2013 versus 2012, we have improvement in Can. Stable in foil. Somewhat down in litho, but improvement in automotive. And also 8% higher sales in general engineering. In total 4% higher sales in 2013 compared to 2012 in Rolled Products.
In our joint-venture of Sapa, we continued the restructuring efforts, but with regard to the market situation, we see improvements in the U.S., improved demand, especially in automotive and also in building which is quite important market. Industrial and transport was more stable in U.S. market, but I would say the development in U.S. is very positive in Sapa.
The European market is more challenging. Again the automotive is driving the demand, that is good, but we also have some weaknesses in building and construction, especially in Southern Europe, that is still a very weak building and construction market.
So again, we are following a tight agenda with regard to synergies and restructuring and we are moving according to plan.
If you take a look at Energy, we started the quarter below 10-year average reservoir levels, but with heavy rain in December in our areas, high precipitation, we ended up higher than the 10-year average.
If you take a look at price development, it was very stable throughout the whole year I would say, less volatility than normal on prices and we ended up with average price a bit below 30 [indiscernible], that means NOK 300 per megawatt overall in Energy. And again it’s in the end of the quarter, it was – the price was impacted by higher reservoir levels, more precipitation and also warmer weather.
So with this, I leave the floor to CFO, Eivind Kallevik. Please.
Thank you, Svein Richard. Good morning, everyone, and thank you all for joining us on this fourth quarter results presentation. We have no special reporting issues this quarter. So I suggest we just start straight into the figures.
The underlying result before financial items and tax in this quarter increased for Primary Metal as well as for Metal Markets, while it declined somewhat for the other business areas, giving us result of NOK 483 million, down NOK 176 million compared to third quarter in ’13.
From an overall perspective, the quarter has been impacted by the increased alumina production that we’ve seen in Alunorte, that is resulted in lower third-party sourcing of alumina in that quarter, thus reducing sourcing costs and improving the margins. We’ve also had a positive booking on the insurance case in Qatalum relating to the business interruption situation we have back in 2012 of roughly NOK 150 million.
This NOK 150 million principally has been offset by the increased ICMS charges in Brazil of NOK 170 million. We see relatively normal seasonal effects in our downstream operations also as Svein Richard referred to.
The third major or the last major item is really related to Energy, coming down somewhat on production compared to the historical high levels that we saw in the third quarter.
Let me also, in this slide give you some comments on the line called other and eliminations. In this quarter, we had a result of negative NOK 306 million, quite weakening from the NOK 87 million negative we had in the third quarter.
Our share of the Sapa joint venture comes into this line. And our share of the result this quarter is a negative NOK 140 million. The result of third quarter for the Sapa joint-venture which only included September was a positive NOK 10 million, so the variance is a NOK 150 million between the quarters.
The other quarter-on-quarter changes primarily relates to changes in eliminations of internal gains and losses of inventories, as well as somewhat higher seasonal costs on the corporate side. Adjusting for the internal gains and losses and Sapa, the result is about a NOK 135 million negative for common services and other businesses for this period. Somewhat higher than Q3, but very much in line with the guidance that we have given of roughly NOK 150 million in this area.
If we look at the high level quarterly result developments, we started the third quarter with NOK 700 million, compared to that we have NOK 300 million positive development on volumes and margins. That is primarily driven by the positive development we see in B&A, NOK 200 million, driven by volumes, and also the lower sourcing costs having a positive impact on margins in other area.
The other major contributor is the positive results in Metal Markets, roughly NOK 100 million, and then there were some smaller effects in the other business areas.
Energy volume and price, down NOK 100 million. We have NOK 163 million negative development coming from lower production. We have 584 gigawatt hours lower production in Q4 than we had in Q3. This is partly offset by the increase in prices roughly NOK 20 per megawatt on average increase between the quarters.
Fixed and variable costs increased by NOK 200 million, partly reflecting seasonal costs in metals and also some of higher seasonal maintenance costs in Rolled Products as expected.
Finally, there is Sapa and other, also NOK 200 million negative. In that column, we find the positive gain on the Qatalum insurance offset by the ICMS charge that we commented upon of NOK 170 million in Brazil, basically leading the negative change to the Sapa effects of NOK 140 million or NOK 150 million between the quarters and changes in internal gains and losses on inventories.
On key financials, we see that revenues are up roughly NOK 0.4 billion or 3% between the quarters. Again, it’s driven by the increased volumes in B&A, offset by the somewhat lower volumes or lower prices in the other areas.
This gives us, as I said, an underlying income of NOK 483 million for the quarter, down from NOK 659 million in the previous quarter. This quarter we have excluded NOK 485 million from our earnings to get to the underlying results.
If we back this out, we see that reported EBIT for this period is NOK 3 million negative or basically breakeven. I will get back to the underlying items in more detail on the later slide.
We have a negative financial income or expense in this quarter of NOK 766 million. This mostly related to unrealized currency losses on our inter-company Euro positions as well as our US dollar debt.
The loss before tax then becomes NOK 769 million, the calculated tax effect on that is a NOK 11 million positive. The positive gain that we get on the currency losses is basically offset by the power surtax that we get within the energy area.
From an underlying perspective, we have an underlying positive net income of NOK 140 million for the period.
If we take a quick look at the year, we see that we have about NOK 0.7 billion increase in revenues. This is mainly due to higher energy prices, partly offset by lower metal and alumina prices. The underlying EBIT improved by NOK 1.4 billion due to substantially lower costs within in metal area, improved results in Qatalum and also the improved product premiums that we’ve seen between the years. This of course was partly offset by the results in bauxite & alumina driven primarily from the operations disruptions that we saw during the year.
Also on currency, we see that there is a significant expense for the year, NOK 2.5 billion that also primarily relates to the strengthening of the dollar versus NOK and the strengthening of the Euro versus NOK.
This gives us a net income of negative NOK 800 million roughly, an improvement of NOK 0.5 billion compare to 2012 on a reported basis, while the underlying net income was approximately NOK 1.6 billion, an improvement of roughly NOK 1.2 billion compared to the year before.
Net financials as I mentioned, negative NOK 766 million compared to NOK 246 million for the previous quarter. These are by and large driven by unrealized currency losses driven by the strengthening of the dollar versus NOK, those when translated into Norwegian kroner on our balance sheet, we have an unrealized loss on this.
Basically the same effect on the Euro, strengthening Euro against the NOK affects our inter-company balances where our subsidiaries place Euros with the parent company. All other effects between the quarters are fairly stable.
As mentioned before, in the previous quarters, we do exclude certain elements from when we do discuss our online results to give a better understanding of what we believe is the actual underlying business and performance.
This quarter we have excluded the NOK 485 million from the underlying result versus NOK 62 million in the previous quarter. Now in this quarter, we only see small effects on power and raw material contracts of NOK 14 million. This is primarily driven by increased value of the stock cost contract driven by lower aluminium prices and lower coal process between the periods.
Second line on realized effects on LME related contracts. This quarter we’ve had mostly long contracts due to customer pricing out of time and then a decrease in LME environment, we do realize a loss here.
Third line is the metal effect of negative NOK 87 million for the quarter. This is also again due to the lower LME prices on sales reflected in revenues, compared to what was reflected in costs through inventories in the quarter also a normal effect on this one.
The fourth line though is rationalization charges and closure costs, which in this quarter is NOK 324 million. This relates, for all practical purposes to the Rjukan [ph] office complex. The value of the least contracts that Hydro has together with what we have as subleases at this complex is no less than what we have to pay to the Hydro pension scheme which is the all of the premises.
Based on the estimation of future lease income and lease costs we haven't calculated estimated loss on these leases for this period booked as an onerous contract for this quarter. For the same reason, we have taken NOK 80 million out for the complex this quarter.
The other effects of NOK 311 million positive that we have backed out basically three major items of pension, due to the fact that we have moved from defining benefit to define contribution plans is also related to Qatalum insurance. The property damage part of that insurance claim or settlement is backed out and that is roughly NOK 30 million.
Last line is NOK 172 million reflecting the restructuring costs in Sapa. And that plan is move – well that project is moving.
If we move to the business areas. Start with bauxite & alumina. We ended deliver a negative EBIT of NOK 379 million, which is basically sideways compared to Q3. From a production perspective, we have seen roughly 10% improvement in production as the efforts to recoup and recover Alunorte refinery is going according to plan, and as Svein Richard mentioned, we ended the quarter on quite high production than what we started with it.
This resulted in lower sourced alumina from third-parties, which then affected results quite positively. In addition, [indiscernible] Paragominas due to the installation of the [indiscernible].
Looking into first quarter, it is really about stabilizing the production at the speed that we have seen at the end of the fourth quarter and so far into first. And I would also just like to remind you that we will be then the ICMS charge as we told you in the press release on fuel oil. In fact its NOK 150 per quarter. It starts at February 1, so the affect for first quarter is NOK 100 million and then ongoing there is an additional charge on electricity of about NOK 20 million.
In Primary Metal, we saw an increase in the result from NOK 337 million to NOK 484 million. We saw a decrease of approximately US$20 per metric tonne of aluminium. This was basically offset by the strengthening of the dollar versus NOK.
Premiums are marginally down compared to Q3 reflecting the dip that we saw in premiums in that quarter. As we did guide in Q3, fixed cost for the fourth quarter is somewhat up as Q3 was seasonally low and there was also some more maintenance activity in Q4 compared to Q3.
This has an impact of roughly NOK 100 million. Lower variable cost contributed positively with roughly NOK 50 million, driven by reductions in alumina prices as well as offset by somewhat higher power costs that were experienced in Q3, but not look forward into Q4.
The largest positive contributor of course is the Qatalum insurance settlement of a NOK 150 million. So if you exclude that, the result between the periods, are relatively flat.
One interesting piece to note if you look between Q4 ’13 and Q4 ’12, you see Q4 ’13 has slightly lower LME prices compared to Q4 ’12 while the result is up NOK 430 million. Now of that NOK 430 million in a pricing environment that is basically the same, NOK 150 million of course is related to the Qatalum insurance, meaning that there is an underlying improvement of NOK 280 million. Roughly half of that can be contributed to the US$300 program. So I think there is clear evidence that the program also is reflected on the bottom line.
Looking into Q1, we have priced about 50% of the production at US$1,770 per metric tonne and that of course excludes Qatalum as normal.
Lastly on Primary Metal, and we have told you this before but let me just reiterate it, we did sign a new power contract for Slovalco at the end of 2013. That comes in effect starting January 1, 2014. That has the quarterly impact of roughly NOK 75 million in increased power cost product plant. It’s important when you’re analyzing estimate the results going forward for Primary.
In Qatalum, it continues a very good story. The production is stable and high, well above nameplate capacities. The underlying net income for that quarter is positive NOK 203 million, up NOK 172. And of that NOK 172, NOK 150 million is the insurance. So adjusting for that, there is positive development from a profitability perspective also in Qatalum.
Metal Markets. We delivered an underlying EBIT of a NOK 119 million versus NOK 111 million last quarter. Now, if we exclude the currency effects and inventory valuation gain, the result is a NOK 144 million, still up from NOK 71 million in Q3.
Two primary drivers behind that. One is the improved margins as we guided on in Q3. There was also some one-time effects in Q3, which is not put forward in Q4. The other part of that is significantly improved results within outsourcing and trading activities.
Looking into Q1, we do expect some seasonally higher remelt volumes, but at the same time, as we always do, I would like to just remind you that results in this business areas maybe volatile due to the currency and trading effects in activities in here, and in fourth quarter, the results were quite positive.
In Rolled Products, the underlying EBIT of NOK 111 million is down from NOK 182 million in the third quarter. We saw a 3% decline in shipments driven by seasonality and we also saw somewhat higher maintenance activities, also driven by normal seasonal activities.
If we look at the development between fourth quarter ’12 and fourth quarter ’13 then we see flat volumes, but we see 60% increase in underlying EBIT.
This increase is driven primarily by improved margins, somewhat offset by negative developments in the currency related on export sales, thus making the operational improvements quite strong between the quarters.
Looking forward, we as normal in Q1, we expect higher sales compared to Q4 and as well as somewhat lower operational costs.
In the Energy, as I mentioned, the underlying EBIT is down roughly NOK 102 million compared to the third quarter. The results are primarily down on lower production. Production is down 427 gigawatt hours while the net spot sales is down 584. Now the reason for this change is that there are higher concession sales in the fourth quarter which is typically for the winter periods.
Prices are up from roughly NOK 267 per megawatt hour to NOK 287 per megawatt in the NO2 pricing area, where we have two-thirds of our production situated.
If we look into Q1, we have relatively good reservoir levels which Svein Richard mentioned. You should also note that we plan to take the Rjukan station out for maintenance in second quarter, which means that we will also produce a lot of water in that reservoir in the first quarter which everything else equals should lead to higher production in Q1 than what you’ve seen in Q4.
However, as Q4 has been I think a very good example for – of volume and pricing uncertainty in this area is large so far. In this quarter the prices is approximately 5% lower than what we saw in Q4.
On Sapa, as you know this is the first full quarter where we include 50% of our share of the net income from the Sapa joint-venture in the line called other and eliminations.
The underlying EBIT as Svein Richard mentioned, certainly reflects a weaker seasonal quarter which is normal for the downstream businesses, but in addition it also reflects impairments of inventories and accounts receivables in particular within the building systems areas. This amounts to approximately half of the quarter-on-quarter decline from the Q3 pro forma figures.
Total sales for Sapa is somewhat higher compared to fourth quarter of last year, driven primarily by the U.S. as well as position to the volumes. Europe continues to be the weak part in particular within the building systems.
If we look at the net cash development between the quarters. We started the quarter with a NOK 0.5 billion of net debt. In this period, we generated underlying EBITDA of NOK 1.6 billion. We indicated that we expected positive release for net operating capital when we did the Q3 release. We see now its NOK 1.4 billion in positive effect, primarily driven by reduced receivables in B&A and Rolled Products.
There are some other effects of negative NOK 0.5 billion basically backing out on cash items from underlying EBITDA as well as on tax items. This gives us a net cash from operations of roughly NOK 2.5 billion in the period.
We have invested NOK 900 million in this period. This brings us on an annual basis up to NOK 2.9 billion in line with the guidance that we’ve given of roughly NOK 3 billion.
There are some negative development of NOK 0.4 billion in what we call, other and minorities. That is partly currency translation effects, but is also backing out the minority interests within the EBITDA figures, leaving us with a net cash position of NOK 0.7 billion at the end of the quarter, a positive development of NOK 1.2 billion between the two quarters.
At the Capital Markets Day, we said that we are as a company basically cash neutral at around US$1,900 LME before currency translations and operating capital. And now when we’ve concluded Q4, we can see that that actually holds true. We started the year with NOK 1.7 billion in cash. We generated NOK 7.1 billion in EBITDA. There are some other adjustments, tax and backing out non-cash items.
On this slide you see investments of NOK 2.5 billion, that is somewhat below what I said as NOK 2.9 billion in the previous slide. The reason is that we also saw some smaller activities driving this one down NOK 400 million in the quarter.
NOK 2 billion dividends, NOK 1.5 billion of course is servicing the shareholders of Hydro. The other half is basically the adjustments for minorities that’s on some of the transfers that we do have. So basically leaving us at the end of the year with NOK 1.8 billion in cash after servicing shareholders, but before operating capital changes and currency translations. So same level out of 2013 as we had in 2013.
There is an increased net pension liability for this period, which I would just like to comment briefly on. The projected benefit obligation is up NOK 1.6 billion between 2012 and 2013. This is of course the result of introducing the new mortality table K2013 that has a negative effect of roughly NOK 1.5 billion.
Offsetting that is the fact that I mentioned that we’ve transferred from defined benefit through defined contribution plan that has a positive effect of roughly NOK 400 million, offsetting that is currency translation effects on the German pension plans. So altogether amounting to the NOK 1.6 billion on the projected benefits obligations.
The value of plan assets has also increased in this period, driven mainly by increased return on assets. The effect of business roughly NOK 1 billion, thus net effect of this increased pension liability was NOK 0.5 billion between the start of the year and end of the year.
The pension cost is estimated to be approximately at the same level in 2014 as it has been in 2013.
As Svein Richard mentioned already, the Board proposes a dividend of NOK 0.75 per share for the year 2013, thus reflect the strong financial position that this company is in, that is also taking into consideration of uncertain market outlook that we still have.
If you look at underlying earnings, the payout ratio is roughly 115%. If you look at the five year average we are, it’s roughly 90% on reported earnings. The dividend policy of course is as we communicated before, roughly is 30% ratio over the cycle. The high payout ratio now reflects the difficult and challenging market conditions that we’ve been through.
The dividend also for ’13 reflects roughly NOK 1.5 billion to be paid out in May after the General Meeting on May 7.
Svein Richard Brandtzæg
Thank you, Eivind. So if we sum up 2013. It was another year with challenging markets with low returns for industry players. We responded with the dedicated improvement programs and delivered on the US$300 program which contributed on the bottom line with NOK 1.5 billion improvements compared to 2009.
That doesn’t mean that we are finished with the improvements fully on the smelters, that will continue, but we also continue with other programs with the joint-venture of bauxite & alumina and also in Rolled Products, and in addition to that the corporate sector.
Qatalum is continuously delivering good results, volumes above nameplate capacity. It is among the best smelters in the world. We improved the position in the first decile. So this is clearly on the top level in the growth and we continue to improve also in Qatalum.
For this year, it is important for us to now to stabilize the production in Brazil. Alunorte production close to six million tonnes make the plant robust and sustainable overtime at these levels that is the top priority, but also then to deliver on the improvement programs in Brazil in addition to the other improvement programs. That will be a top priority for us in 2014.
We see there are market opportunities, somewhat higher demand than the production entering 2014. So all in all, we are cautiously optimistic about the development for this year. Thank you very much.
Okay. Then we open for questions from the audience. There will be a microphone for you, and please introduce yourself for the people on the webcast. Any questions? We have a question from Rikard.
We have a question from Owen Scarrott of Goldman Sachs. Please can you comment on, how cost saving initiatives are progressing with JV assets? Is there potential for cost savings above those outlined in Capital Markets Day?
Svein Richard Brandtzæg
Okay, with regard to the JVs, we have introduced a program of US$180 per tonne improvements. That should be delivered by the end of 2016. The status so far is that we are on track, on plan, and we delivered US$75 per tonne improvements by the end of 2013. So far, we keep the US$180 program and we are, as I mentioned, on track for that.
I have more questions from the webcast. We can take one from Neil Sampat of Nomura. Since the New Year, have you already seen an upward momentum to the metal premium you are realizing in negotiation with customers following the spike in market ingot premium?
Svein Richard Brandtzæg
Yes, we are of course not producing mainly standard ingots but due to the fact that standard ingot premiums has spiked and got to record high level, that is also influencing our main products which is metal products like primary foundry alloys, extrusion ingots and sheet ingots. Sheet ingots are directly priced on top of the standard ingot premiums. So sheet ingots are priced on LME, plus the standard ingot premium plus a conversion premium for sheet ingot. So that goes directly through.
Extrusion ingots are priced on LME plus extrusion ingot premium and the same as well for PFA. What we have seen recently is that we also have record high premiums for extrusion ingots and also for primary foundry alloys.
I have no question from here. I am going to turn to webcast.
So we’ll take the last question from the webcast. It’s from Christian Kopfer of Nordea. Approximately how much of the alumina sales are exposed to spot prices versus contract in 2014?
Svein Richard Brandtzæg
I think for 2014, it is in line with what we said before. It’s roughly 20% of the net sales that’s exposed to the index pricing.
Okay. Are there any other questions from here? No. Then I would just like to say thank you very much for joining us today and see you next time. Thank you.
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