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Executives

Stefan Solberg - IR

Svein Richard Brandtzaeg - CEO

Jørgen Rostrup - EVP and CFO

Analysts

Rob Clifford - Deutsche Bank

Norsk Hydro ASA (NHY) Q2 2010 Earnings Call July 27, 2010 10:00 AM ET

Stefan Solberg - Investor Relations

Good afternoon everyone and welcome to the Hydro earnings presentation for the second quarter 2010 and welcome to those who are here to at the presentation center and those of you who are following us on the web. Hi, my name is Stefan Solberg, I am head of IR in Hydro.

We released our earnings today at 7.30 at Central European Time and the presentation we will use today and the second quarter report is available on our website hydro.com. Today’s presentation will be given by President and CEO, Svein Richard Brandtzaeg; and Chief Financial Officer, Jørgen Rostrup.

After the presentation, there will be an opportunity to ask questions. Those of you following of the web can ask questions via the web.

Before we start, I would like to direct your attention to the cautionary note in relation to forward-looking statements, which we have provided in the presentation material.

And with this brief introduction, I'm pleased to handover to Svein Richard Brandtzaeg, who will take us through the first part of the presentation. Mr. Richard?

Svein Brandtzaeg

First of all, if you take your first slide and the highlights from this quarter it's very much related to increased volumes, increased demand of aluminum, beyond what is normal for the seasonal valuation for the second quarter. The second quarter of the year is normally a good quarter, upstream and downstream, and we have seen development this quarter that goes beyond debt.

That gives also some guiding to the third and fourth quarter and we will come back to that. We haven’t had solid operations to the whole quarter that did production and give production result that also contributed to the value creation from the business. That’s then result, it's never much influenced by good alumina result and also the higher LME compared to the first quarter. The downstream result is very much influenced. Good volumes, good demand, good margins and firm management.

Energy is delivering result far below than what some of you had expected. The result is of course lower production due to the fact that precipitation of snow in Norway was the lowest, in 100 years. So this is that what we are [fragmenting] now. The time and we announced the volume aluminum deal this quarter and we will also come back to that and we are also finished that the right this year of 10 billion Norwegian kroner in connection with this big deal.

This is a delicate detail and aluminum markets in the downstream old products we saw 5% in average increased volumes compared to the first quarter. A good demand in foils which covers the flexible packaging. 1% increase in litho about the fact that there is capacity implementation in lithography integrated production and there we are serving the big customer to (inaudible) and one of other main suppliers.

In packing and building 6% definitely not influenced on increased tank production. It has been reviewed it is not surprising when there are similar report, so can it increase 11% this quarter.

Automotive, heat exchanger and general engineering, also had a good development this quarter, driven very much by automotive markets that increased the demand with 86%.

In extrusion in average 10% increase in volumes, 12% in extrusion in Europe driven very much by customers I would say Germany is the driving factor. In billing system we had a good development also compared to the weak first quarter which is not surprising, the winter time its always great being slower development in billing system and this quarter it has been developing positively.

In the extrusion ingots there has been strong demand in Brazil, South America, Argentina also is good and in US we see that the markets now is coming under right track recovery from a low level which goes strongly in the right direction.

Precision Tubing 2% not probably impressive growth, but also in Precision Tubing we have the same situation as in litho it is close to full capacity utilization in the different production unit sale.

So all in all, good development 74% increase compared to the first half last year and in the total 7% increase demand compared to the previous quarter. You can then take some (inaudible) from what we call the 2010 agenda where we decided to come out of the crisis as a stronger company.

We have done quite strong cost management during the last I would say 16 - 18 months and we are able now to deliver higher volumes and keep the cost down. So in the case with the whole products 36% of the volume effect go directly to the bottom line. Another example from extrusion 23% increased volumes, compared to the first half of last year and only 5% increase cost in [Hydro] production, so 78% of the volume effect and extrusion goes directly to the bottom line. And that is reflected by the fact that we have good margin development in both foil products and extrusion and delivering good return.

As with sales it's of course very much reflected in the downstream development, the extrusion goes to the internal business. Half of it goes externally, so of course it came along from 12% increase compared to the previous quarter, 4% increase in shipping is affecting the increase in all products in general that was 5% and 11% primarily loss is reflected and the fact that automotive business is developing very positively in several parts of the market.

So, 17% increase, compared to the first half year in 2009 and 9% in the previous quarter.

The aluminum price has been quite volatile during the quarter coming from $2,350 per ton. It was peaked at $2,482 per ton. At that time we did the hedging of the additional exposure related to the Vale deal and we will come back to that later, 3% annual peak of 400. It ended up at $1,964 per ton and realized. Aluminum prices in the second quarter was $2300 cutoff. The realized price in the third quarter its $2,175 per ton, so that’s pricing for the coming quarter.

If you take a look at the market situation in the old side China there is still [projection] there we are producing too much compared to the fund. The GAAP is about one million ton and we expect that this gap is probably something new unless demand is fixed cost and then what we are seeing so far.

The curtailed capacity, we are expecting it to be capital of more than 3 million tons curtailed capacity. And it’s been present by China about 400,000 tons as previously being weak profit. In here we don’t see any recent installed curtailed capacity so we are keeping the production level at the moment.

Lithography new capacity we should keep in mind that there are new capacity coming from Middle East and also some new capacity from India.

Inventory levels, if you take a look at LMEs inventories, they are gradually slow coming down from 4.6 million to 4.4 million tons, during the quarter but all in all, I would say that we have a stable inventory situation with a very high level 6 billion tons registered inventories, it’s a very high level. We are probably below 6 million tons today, but there was also signals that I was interested inventories are still increasing.

What is going to happen with these inventories is always the question. It is held by financially institutions indexed funds and other financial investors and of course the margins here are slim, but still positive with the contango market and the low interest rate and also, the low warehouse of course.

We believe that inventory will be dealt into the markets, because there are no incentives to destroy the value of the metal itself and the thin margins. Although the metal has to be kept and if you take a look at what has happened previously with these inventories, they are sourced gradually into the market when the demand picks up. We have reason to believe in all that the contracts are more shorter-term than what we've seen as previously.

One reason to believe that this inventory (inaudible) so we have interest opinions still going at rational levels of $300 a month in June continuing to increase also at the US and mostly that will impact your fund. But the high premium of standard ingots shows that that this inventory the (inaudible) is not typical in the physical.

Then coming on we have seen previously that trying those buying through the demand and I think China will continue to be useful. It has been announced product mix in China due to the fact that aluminum has gone down and China has several aluminum spend for some portfolio cost, it make sense that tells approved daily capacity in China, but there is also new capacity coming obviously in China on projects that was planned and executed lately.

We expect that there will be a modest production surplus this year. That they are most expensive for China, the result of the fiscal policy, the export final as well into the market outside China. So we believe that China will still be the next quarter of aluminum scrap and export in probably fabricated products and finished products out of the country.

The market outlet of this year is actually said in the first quarter, we expect this year 30% compared to last year ending up at about NOK23 million. The China consumption today is about NOK17.6 million, we are talking about the global aluminum market that’s about NOK41 million altogether. We expect that we'll still be surplus capacity at least in the countries outside China and that the total capacity is unlikely to be restarted in at least in this year. A limited new capacity coming up still as I mentioned in Middle East and India and in China, we believe that China will still try to balance their supply and demand operation.

Energy, we have had the (inaudible) in Norway for about 100 years, so it's influencing the production, the production has been (inaudible) in this quarter and as we have said previously, energy is a volatile business depending very much on the nature of the weather but finally if we take a look at just off of 2010, compared to first half of 2009, it is not too different and we expect that also in the coming quarters energy will continue to demonstrate solid important part of the integrated (inaudible).

We are continuing to reduce the cost I have seen, high margin aluminum production is to let in the cost gain and we need to continue to cut the cost. We have the $100 program that was introduced previously, they are going to be in the $40 platform this year and I don't see deliver the cost of the rest of the $100 programs in the end of 2011.

Quatalum is contributing the flow of cost, than existing fuel productions in 2011. It will be on fuel production in fourth quarter but we'll get full benefit of the year first year and 2011. Now, we are more than half way on the wrap off cycle, we are stopping (inaudible) every day it’s both accordingly to schedule as we have said previously, Quatalum will be in full production in the fourth quarter. The focus now is very much on completing their follow-up count. We have access to the grid but we will intentionally produce all the energy needed for almost 600,000 tons aluminum spent in (inaudible) to our own gas fuel station and that is now into completion.

We had the safe and good contract of electrolysis than one, electrolysis held in its 15 operation, it goes up to 100% capacity utilization immediately. So we are gradually now introducing more and more results in total, and (inaudible) earlier more than 50% finish in the ramp up. There is a stable operation in the carbon trunk. We have produced our own efforts for aluminum production in Qatar and also in the costs and we got the feedback from the customers in Asia and North America, they are very happy with the quality of the products on the company’s center.

In the quarter two result, we work in the and see a breakeven, we had a negative result of NOK137 million in the second quarter and since we are now utilizing more and more of the invested assets in Quatalum, also the negotiation is now increasing every quarter which also of course, influence on the working market.

The pricing in the (inaudible) aluminum asbestos is normally three months forward plus another four weeks in the casthouse, almost four months delay. Here we are one month forward, so it won't lag in the pricing relative difference in the casthouse with regard to (inaudible) compared to the rest of the (inaudible) business.

The Vale deal was signed on the 2nd of May and we immediately saw the planning of integration. We all don’t integrate 3,600 (inaudible) and we have been well received in Brazil. I have very positive feeling in regard to the progress of integration planning and we are ready to integrate the whole organization at closing and we expect the closing to be at the fourth quarter of this year.

We said, when we announced, the steel that we needed a consent from the (inaudible) aluminum company, the Japanese joint venture partner in (inaudible) that consent is now given. They had a good understanding of how to run this further and with regards to the government and the regulatory application that is moving according to plan, we don’t expect any surprises here and we expect a close connection with the in fourth quarter of this year.

So then we’ll hear the numbers, please?

Jørgen Rostrup

Lets then go through some of the financials in the way several of our used too, if you look at the underlying EBIT number, it is as (inaudible) said the NOK1,110 million, its up more than 60% from previous quarter and we are back in solid black numbers again. The reason for this are mainly four, main reason for this improvement from first quarter. It is the high alumina price, it is the improved performance in both item and alumina. It is the improved volumes and being able to hold back cost in the downstream segments and then it is on the other side with negative numbers or negative development it is much lower production in energy. I would come back to the business areas in particular later on, I would suggest we take it then, by just drawing our attention to the other elimination segment, the last segment on the list which is the corporate and general cost, which is some pension charges and which also is elimination of internal gains on inventories within the value chain of our system.

This has more or less the same charge as last quarter negative 265 versus 665 last quarter and several of the elements are similar. There are two differences within these same relative number. One is that we have this quarter charged NOK51 million related to the Vale acquisition in this line. So in the NOK265 it is included NOK61 million in cost related to the acquisition of the Vale aluminum assets. There will be some more minor charges that is given today in third and fourth quarter and then the only way is that the negative elimination on gains on inventories within business setups is still negative this quarter but similar NOK50 million lower than previous quarter. So that is more or less the same. In that NOK51 million is not included the cost related to the right issue itself so that cost be charged directly to the equity on the balance sheet in the third quarter.

If you then look at the earnings spread and take the main elements explaining our changes, LME price and currency in the primary metal area gives us due to the change of $200 USD or NOK1760 gives us close to NOK0.6 billion in positive effect. And then on top of that we have higher volumes actually in old part of our businesses that is also in this context talking about but in particular in the downturn area, approximately NOK0.3 billion and then in addition to that they have a margin improvement again spend around aluminum assets and that even some in managing side, value of that $0.3 billion. Down the way around goes a negative effect of power production value that's close to NOK0.6 billion which is 40% lower production in the hydro power production system. This quarter I will refer to that also.

We will look at key financials. We had a 9% increase of client revenues this quarter from last quarter. The numbers are 12% increase from second quarter last year and year-to-date it is 11% increase in our revenue, reflecting the volume changes and the price changes in the market. Then we said NOK1.110 billion in underlying EBIT, and then we adjust that number with this item excluded that I will revert you on the next slide and only minor corrections in the numbers had a positive effect, NOK47 million. That gives us reported EBIT of NOK1.157 billion.

And then if you look at financial income and taxes, there are some changes quarter-on-quarter that we should dwell on in a few seconds. We had our negative charge on the finances of NOK 97 million in this quarter, compared a positive on NOK 545 million last quarter. Obviously, our net debt situation has not changed to that degree at all. So this is not representing any significant change in our finances as such. The two or three main reasons are others. One reason is that we have an inter company loan that we have commented on earlier. It's a loan between companies in the group from euro to Norwegian kroner.

Last quarter, we had a gain on those loans on the profit and loss of NOK 500 million. This was due to the lower euro compared to Norwegian kroner in first quarter. This quarter we have a gain also, it's only NOK 150 million. For the same reason, the euro has decreased in value to Norwegian kroner.

But the change quarter-on-quarter is then negative if you want to NOK 350 million. And then we have reminded you and others that this has no cash effect. It has an opposite translation effect directly to the equity when they consolidate our accounts. So it’s more a technical effect.

The two other reasons are high gains on sale on some shares and the companies in first quarter, and we had some losses on our investment portfolio, on our securities in the captive company this quarter, so that changes NOK 160 million negative. And then we have some interest on an old German tax case that we lost, that has been charged to accounts, its NOK 40 million.

That gives us income before tax of NOK 1060 million, and then we have a NOK 460 million set aside for taxes. That is in the high end of your expectations I would assume, and also in the high end of our expectations. We had a catch up effect, we had to assume somewhat different and higher sur-taxes on energy for the year, than what we assumed based on earlier calculations. So there is a catch up effect in this quarter, that is unfortunate. In addition there is that tax case in Germany.

If you look at tax rates for the two quarters in total 40%, that is more sensitive for the situation and earnings profile in those two quarters. Still a high number, but then influence of the fact that surtaxes of energy are dominating because earnings in total for energy has been a large part of the earnings picture so far. As soon as we make more money from the aluminum side and less from the energy side, the tax rate should go down or even below 40%.

I am not going to take you through the whole list of item excluded, simply because many of the items, first of all, we obviously describe them to a larger detail in the report. The elements are much the same that you have been aware of earlier. For those of you, who are not that familiar, I would just like to say that we do this every quarter. We do it based on the same principles every quarter, and we have a very thorough process. And the reason why we do some exclusions from the earnings and from the EBIT numbers is to provide a better understanding of the underlying performance of the company. So you take out some unrealized gains and some one-time elements.

The two elements that I would like to mention is that included in charge-off NOK 81 million of the LME and derivative effect is the gain of NOK 320 million related to the development in LME prices related to the hedge that Svein Richard also mentioned, the hedge we did when we announced the Vale acquisitions.

We took the two first years of exposure on the metal side related to the Vale acquisition, and sold it forward basically. We sold two-thirds of that volume forward, and the last one-third we did that put/call option on. We sold forward approximately on 2,400 and we did a put/call with a flow of around up to 200 and a top of 2,500, a cost that I might call it.

A significant part of that hedge is nothing, which means that we will not see it on the P&L, the mark-to-effect is directly to the equity and the balance sheet and we will only see it on P&L when we realize the hedges, but one part of this, the part that soon will be realized prior to closing the transaction during the fourth quarter we cannot do hedge account for that part, so that is related to this 320. The 320 is then the mark-to-market positive effects of this hedge as you see it at the end of the quarter first and also the positive effect including the hedge accounting is NOK 1.5 billion due to the fact that the LME has gone down while we’ve hedged this volume.

So the hedges and the money right now, obviously we would rather like to see high LME prices and even take a loss on the hedge itself. The reason why we did the hedge was to get some robustness on their earnings side of the transaction, but so far the hedge is in the month.

If you then look at the business areas and we start with the Primary Metal group which includes the bauxite and alumina area and that will change when we close the transaction over the Vale assets and bauxite and alumina will become a separate business area which we will start detailing out in some more detail. But for now it is included here, there is a separate slide on it after this one, but the highlight is NOK 657 million in underlying EBIT, an improvement of more than NOK 700 million from first quarter.

As I said, roughly NOK 600 million of this is related to the $200 million in increase in prices that we saw in the quarter and the rest is due to the volume increase. Total sales is up 5% and also premiums as I said contributing positively. There is an increase of variable cost of NOK 120 million primarily due to alumina increase costs again due to the LME development in that period.

That will then adjust downwards somewhat slightly due to again LME development going forward. And Richard touched or he talked quite detailed about Qatalum and we have now started out at 50%, there is a charge of 137 in this quarter. Remember that what we see is that, on EBITDA so we are operational cash positive or neutral but we are raising depreciation in the process of setting more and more of assets in operations.

And then at the end of Q2, we had sold the Q3 volumes for approximately $3175 per ton and we’ll be prepared to see somewhat increase in raw materials, not significant we believe, but there should be expected some increase in raw material and then Qatalum is expected to still deliver weak results more or less on present level. There is also again as Svein Richard said, only a month price lag, so Qatalum is incurring of the lower price level on LME for third quarter.

If you then take a look at alumina and raw materials, we think we had quite a solid performance, but as expected in this area. We improved this also in Alunorte with NOK70, million, half of it related to a settlement on an insurance plane, but half of it related into volume and sales increases and then we also this quarter see a fairly strong commercial results on performance. Even stronger than what we saw in first quarter and we also then describe that performance as strong.

Then for the outlook for second half, first of all, the three first bullet points relates to Alunorte again. Alunorte has a one month time lag in its pricing structure out of the Alunorte company, related to the LME. development. So we will quite soon see a somewhat lower revenue in Alunorte, based on the lower LME.

Then if you look at the raw material side of Alunorte and the bauxite costs, it’s in the same range with 35% to 40% of cash costs in Alunorte and that has a very different pricing structure. There is a certain relationship to LME also in those contracts for sourcing of bauxite and that has a year price reference on the LME, minus the last quarter. So if you go back a year and you take for third quarter 2010, the LME effect in the raw material cost of bauxite through Alunorte’s quarter three 2009, quarter four 2009, quarter one, 2010 and not quarter two 2010. So there’s a year time lag LME reference minus the last quarter, which means that we are on an increasing LME for the cost side and that the picture is right now, a decreasing LME on the revenue side.

Obviously on net view, it is unfortunate the combination of pricing mechanisms, but for commercial reasons at the time they were negotiated. And then there is some of the increasing corporate costs, we also say that the commercial results that you have seen through first quarter, we don’t expect to see them for third quarter.

Net market performance once again overshadowed by large currency effect. Then keep in mind that to a large degree, these currency effects are hedged transaction-by-transaction in the business area, but then under financial items. This is related to buying in dollars and selling in euros, metals and not at least.

There is a negative development of NOK 34 million in the quarter and the currency development was from negative 100 last quarter to 140 this quarter. So the change is all due to the larger negative currency effects and excluding this currency effects, that would be an earning base, to put it very roughly of 200 million here. We are capacity utilization wise and margins have maintained a firm level in the quarter. That is despite increasing raw material that we have seen either through the ingot, or through the scrap sourcing.

If you then look at the two downstream areas, I think the development is fairly similar, as Svein Richard told for both these areas. And we are particularly pleased once again I should say to see the performance in particular rolled products. Here we have a 5% volume increase and we have a 40% improvement of EBIT underlying from up to NOK309 million. That change is dominated by the volume increase, but there is also large significant cost effect having been able to keep cost down and improve the cost per ton picture.

I think Svein Richard went thoroughly through the market. I am not going to comment on that. Let's say that we expect that this market as we see today to continue. And here we had strong traction and some visibility now. So we expect it to continue in third quarter but also we wouldn’t be surprised if we saw the same market continue in fourth quarter.

That is however with the important comment. In addition to that, we will see seasonality as we normally do in a normal year, and there is a holiday season coming up now, and that will influence the lower sales in third quarter and also in fourth quarter compared to the second quarter.

Exterior products much the same picture as I said, a 10% volume increase and improvement also hereof with somewhat more than NOK80 million in the quarter to NOK2,001 million for the quarter in underlying EBIT, an improvement of 70%,.

Volumes again very much driven by Germany in Europe and Brazil and southern part of America and with at least seasonal upswing in the US markets as well. We are maintaining the same outlook description as for rolled, commonly with a somewhat lower or shorter visibility. So if we again concentrate on third quarter in particular here, same market the way we see it today, but then seasonal lower sales due to that and I think with the holiday season.

Svein Richard talked about Energy, and the much lower production. We talked quite extensively about that in our first quarter presentation. As you can see here, production is down 40%, which is significant. And if you look at net spot sales, which is external net spot sales that goes on top of the contracts that we have, and the contracts that we have is predominately internal contract priced at an arm length principle at the time they were entered into. And then we have some minor external contracts. But the net spot sale on top of that, which is the earning engine on top of the base earnings is on a net basis close to zero, because of the low production.

If we look at the half year versus the half-year earnings in total is slightly better than first half of 2009, due to the record high first quarter. We decided to take out significant volumes in first quarter, and that was a record production, a record earnings quarter and that is simply because of the tight picture that we saw in the market. And when we test our decisions now in hindsight, they were the right decisions the way it looked to pan out.

Going forward, we must say and repeat that our reservoirs are still low. This is a volatile business based on how much snow and rain we have and the production and therefore the earnings will be weak for some quarters going forward; in particular we think third quarter also will be a weak quarter. But this is the nature of this business and we don't think anything has changed through the very large importance of having this as aluminum business and also the values attached to these assets and to these earnings, slightly independent of how markets are moving on the aluminum side.

Cash flow; we have NOK1.6 billion generated from operations in the quarter that includes an increased cash need related to working capital of NOK0.3 billion in the quarter. If you look at that operating capital number for this quarter and last quarter, we had close to NOK1.6 billion into capital requirement, third quarter; NOK0.3 billion this quarter, so it's approximately NOK1.9 billion on the half year, which we should compare to the release of cash related to operating capital of last year of NOK5.8 billion. So we are very confident about the development in operating capital.

We think our inventories are kept at a low and efficient level. Inventories based are also kept at efficient level for business and normal development related to the price and volumes that has moved upwards this half year.

Investment; NOK1.2 billion, which of NOK0.7 billion is related to Qatalum, and then we also have on the dividend and the share repurchase line NOK0.85 billion in dividend paid out. This is little bit more than NOK1.6 billion paid out to shareholders of Hydro, and on top of that is the dividend paid through minority shareholders of (inaudible) smelter due to the fact that we are taking home dividends from that smelter to the (inaudible).

So if we then look at my final slide, the financial position. We are in a slight net debt situation with NOK100 million, so we are, for all practical purposes, zero net cash and net debt as of this quarter. The change of NOK0.6 billion quarter-on-quarter could then be compared to the NOK0.6 billion paid out to shareholders in dividends. And then we have shown you the development in adjusted net debt, and that is due to the net cash development plus the fact that dollar has increased in its value and we then are converting home, our share of debt being of aluminum and Alunorte and other companies, companies that also follow it. The simple translation of the dollar debt will increase adjusted net debt. So there is no increase in debt in this company as of this quarter, its that dollar translation effect. Svein Richard.

Svein Brandtzaeg

Thank you, Arentz. Just a few comments before questions. As I mentioned in the beginning, the second quarter has been seasonally a good quarter but it's also a demand situation that is going beyond the seasonal evaluation. So if you look into the situation for the third quarter where we have the summer holidays, the fourth quarter, Christmas also will come this year, and with the normally lower demand than in the third quarter. We should expect that with the pricing we have seen so far and adding all the variables and the parameters, you could expect that the second quarter could be the best quarter of 2010.

So even if we are celebrating a good and solid improvement of result this quarter, so I'm now waiting for us to relax. We are now in a terrain where we can run faster and we are continued to do all our efforts to improve our cost position, to improve productivity and also to take all opportunities that is possible to do in the marketplace. So thank you very much for your attention and we are now ready for questions.

Question-and-Answer Session

Rob Clifford - Deutsche Bank

Rob Clifford, Deutsche Bank. Just a couple of questions. Firstly, it looks like you've done some significant alumina trading in the quarter. Can you comment on what you're seeing in the price development, particularly as you announced that is one of the reasons for the Vale transaction, the movement in alumina prices away from the linkage that company that you're now actively driving or participating in? And the second question was again, I guess on trading, just understanding why you're pricing the Qatalum metal differently to the other metals?

Jørgen Rostrup

Let me try the first one and Svein Richard will do the other on the Qatalum. I think we need to separate your first question in two parts because they are a little bit detached to each other. The rationale for the transaction was that we wanted a broader raw material base. We saw profitability having developed and to continue to develop in such way that's being long in alumina, should be an advantage and has been something that they wanted to pursue for longer time, and it is also a base for developing further along the value chain either by expanding into more smelters or by staying long in alumina and that is to be seen.

And we have seen the percentage of LME going up and there has been the description that you are referring to, how will this develop in the longer picture. We had to wait and see for that. We will try to make the most out of our acquisitions when that comes. The activity that we see in this quarter is purely based on the fact that they had had high volumes, relatively high volumes going through the system. They have been somewhat active and we have seen an LME level that has supported higher earnings, simply for the mechanisms that we know of in the alumina business, you know, the percentage of LME that has helped also. But that is a different issue than the acquisition itself.

Svein Brandtzaeg

Okay. The second [couple] was related in pricing and couple of million in the capelin and during the web period, if it’s [with the folks], you have one month forward pricing than three months forward pricing. So, that is agreed with our partner, Qatar Petroleum and we are going to continue with that for a period, but if that is going through a good change, we will come back later.

Unidentified Analyst

(inaudible) from Bank of America Merrill Lynch. And I just wanted to ask a question on the cost savings in the two downstream divisions? And could you give us more detail on where the cost savings are coming from, and how much is sustainable going forward?

Svein Brandtzaeg

The cost savings varies very much. The effect that we had reduced the manning downstream with several thousand people, importantly as we are used to manning with 4,500 people (inaudible) during the crisis period. Most of these people have been working in the downstream business. So when the volumes, they are coming back now. In some cases, we had to add some people to restock production lines, extrusion lines for example that was taken down during the difficult period. But in most of the cases, now we have been able to raise the production level to almost pre-crisis level, without adding manning and also without adding additional costs there.

So, it has been the result of the cost improvement program that we did through the 2010 agenda that was introduced in the beginning of 2009. And it’s now giving us results on the bottom line. So it is about improving productivity, keeping down the maintenance cost and also to not add people to the production line as we had previously done in Extrusion and [raw products].

Unidentified Analyst

I would like to know of the China figures? You said that China is balanced, that China has become a net importer of aluminum. And you say they are importing aluminum stock, but nothing else or so. And some people expect that the trade of China goes on to import more and more aluminum?

Svein Brandtzaeg

I think that is absolutely the logical conclusion, looking at the cost picture in China, where (inaudible) both on top of the global cost curve and China is also in a situation where they need to import bauxite and alumina. So, I think that is the reason why also we have heard announcement from China is planning to curtail capacity.

Whether China will be a net importer of aluminum short-term, it’s difficult to say. But logically, and I think we could expect longer term that China could be a net importer, because there are alternatives outside China where the cost base is much lower and China could benefit from importing aluminum instead of producing everything themselves. But so far, it seems that the quality in China has been to balance supply-demand domestically. They have been able to do so more or less. Last year, they imported 1.3 million tons. This year, we are [probably] in the back. So, it is difficult to say and give any decision of course at least short-term, I believe that’s right. China will probably a net importer. But that is going to happen, that will be difficult to say.

Unidentified Analyst

The second question is not China, but Germany. You said that some of the demand was driven by German buyers. [What is the] that are you giving with your activities in Germany. You plan to close down some facilities or is that confirmed now?

Svein Brandtzaeg

If you are thinking about the downstream demand, in some cases we are not able to produce enough products in German for the German demand. So we are (inaudible) [capacity] utilization in several [markets]. So there is a fall rate that has been very fast and Germany has is really been the machine in Europe, they are driving and they covered in total. In Southern Europe, the situation is very different. In Spain, Portugal, Italy, Greece, of course, influenced on the on the debt situation for the countries, and where we last year. So, some of the government support for different market segments, building, construction, automotive that will [ship] this year. So, Germany is a very important driver for the development and I don’t think we have seen a very positive demand for our products.

Unidentified Analyst

Can you update us quickly on margins for the (Inaudible) Nuess in Germany, your German smelter? And the second one it’s a bit of an unfair question given you are ramping up. But are the Qatalum costs still coming in where you think they will? Clearly, there are startup costs. But are you still planning to level out at your regional operating cost?

Svein Brandtzaeg

I’m not sure that it’s completed to the low capacity and we all go to keep that level. We don’t see any reason to restart the (Inaudible) market center as it is now. The (Inaudible) smelter and the (Inaudible) smelter, the base is much lower, and China could benefit from importing aluminum instead of producing everything themselves. But so far, it seems that the [priority] in China has been to balance supply/demand situation that we see that there are too much being produced in the world outside China today. We are going to keep the production level as it as well in Germany. I think we need to see a significant factor of balance and also that the inventory level, is going down before changing our position in November.

Jorgen Rostrup

If you go to Qatalum.

Stefan Solberg

No I think it’s a very valid question. We see now as you are hinting at ramping cost of this. So it is not the right moment as we are making that final analysis. Our plan is to indicate that we will go for those levels that we had earlier, but as I said and obviously that will take out startup cost and ramp up volumes and they will then see. So this is not something we will experience in 2010, and that was never their intention, especially for how quickly in 2011 when we are up from July fourth quarter and top of full capacity, how quickly in 2011 we will be able to level out on those levels. That is little bit earnest to say and we will have to come back but the ambition is still the same.

Operator

More questions? No. Okay that completes our presentation today. Thank you for joining us and we look forward to meeting and discussing the review very soon again. Thank you.

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Source: Norsk Hydro ASA Q2 2010 Earnings Call Transcript
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