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Stefan Solberg – Head, IR

Svein Richard Brandtzæg – President and CEO

Jørgen Christian Arentz Rostrup – EVP and CFO


Luc Pez – Exane

Rob Clifford – Deutsche Bank

Cedar Barnes – Merrill Lynch

Jonathan Schroer – Unicredit

Jørgen Christian Rostrup

Timothy John Weaver – Redburn Partners

Norsk Hydro ASA (OTCQX:NHYDY) Q3 2011 Earnings Call October 27, 2011 10:00 AM ET


Ladies and gentlemen good day and welcome to the Hydro’s Q3 Conference Call. Today’s conference is being recorded. At this time I would like to turn the conference over to Mr. Stefan Solberg, Head of Investor Relations. Please go ahead sir.

Stefan Solberg

Good afternoon ladies and gentlemen and welcome to Hydro’s earnings presentation and conference call for the third quarter 2011. We released our earnings today at 7:00 a.m., Central European Time and the presentation material we will use on this call and the third quarter report is available on our website Today’s presentation will be given by President and CEO, Svein Richard Brandtzaeg; and Executive Vice President and CFO, Jørgen Rostrup.

After the presentation, there will as usual be an opportunity to ask questions.

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 short introduction, I’m pleased to handover to Svein Richard Brandtzæg, who will take us through the first part of the presentation.

Svein Richard Brandtzæg

Thank you very much Stefan, the headlines for this quarter was first of all, that we achieved the full production at the Qatalum and the 21st of September we started the last electrolysis cell of the 704 that we have now in operation. This represents the major milestone for Hydro and for Qatalum. Secondly we improved performance in bauxite & alumina with higher volumes and bauxite mine Paragominas and Alumina refinery Alunorte.

And the third quarter represented an additional important step towards the nameplate capacities. But we also are seeing the development in the macro economy has – now impacting the market beyond what is not only a seasonal weaker quarter. We also see that our customers are more cautious and the uncertainty is now gradually affecting the market situation.

Highlights from the third quarter is of course done that we have underlying habit of 1.646 million which is 260 million less than the second quarter and 700 million above the third quarter last year. Bauxite and alumina production increased with respectively 13% and 7% during the quarter, which adds to the improvement we did from the first to the second quarter this year.

In different parts of the value chain, we see raw material cost pressure which affects the results. The energy business delivered strong result, in fact highest overall result for the third quarter with lower prices were more than compensated by higher volumes. And we see as a seasonal decline as we have summer holiday in the third quarter, but in addition we see somewhat softening market situation and I will come back to the portfolio streamlining that we have done during the quarter.

If you take a look at the fabricated products and especially the downstream part where we have seen a 5% reduction in the volumes compared to the second quarter but the year-to-date 1% higher in total than the year-to-date, the same period last year. We see in the rolled products which had 6% lower demand this quarter compared to previous quarter, a destocking in general engineering and foil, a seasonal reduction in automotive and heat exchanger, a lower demand in packaging and building and improved demand on the litho and can beverage.

In extruded products we had 4% lower demand than previous quarter. The Extrusion Eurasia had normal seasonal softening, but also weakening building and construction and especially building systems is very much affected by the very soft building and construction market in Southern Europe. The Iberia is stable, but at a very low level and we now see also weakening in Italy and France.

Extrusion North America improved due to higher demand in automotive transport, but also less import and Extrusion South America is minus 7% this quarter but off to a 16% improvement in second quarter this year. We saw a seasonal reduction in demand for – in position to bring which is very much towards the automotive industry.

If you look at the aluminum prices, we realized price in the quarter was $2592 per ton, and second quarter it was $2509 per ton. The situation in the quarter was quite volatile where we saw prices between $2200 and $2650 per ton. The market prices that we observed in the third quarter will mainly be reflected in the Hydro fourth quarter results.

The global inventory is stable and inventory days are going down due to increased consumption, but total volume has been a quite stable during the quarter. Estimated total reported and reported volumes is about 11 million tons. This number is uncertain but fairly well known in the market and in total represent the three months of consumption. A lot of volumes is locked in financial deals which are looking at the metal which is still profitable on a short-term duration due to the Contango and the low interest rate currently.

If you take a look at the Ingot premiums, we saw a quite stable situation in Europe. We saw last quarter surge on premiums in the U.S. market up to lots $200 per ton. But the Midwest premium in the U.S. now has leveled out to $175. In Japan the situation has been quite stable and the high premiums observed in the market assures that in spite of a high inventory level this metal is not available in the physical markets, so there is still a tight metal market. But we also saw in the end of the quarter that there is some weakening of Ingot premiums but a few dollars and it’s too early to say if this will continue into the fourth quarter hurdle.

In China we up sell the – still balancing situation with less than 20 million tons supply and demand. There is new capacity coming on stream in north and west part of China replacing high-cost production capacity in south and east.

We expect China to continue to be in balance during the quarter. Export from China in semi-fabricated products we have seen an increasing amount of volumes coming out of China since last year. During the last month there has been some moderation, but we still see that there are quite high level of high volumes of semi-fabricated products coming out of China mainly to the Asian market. We see there are small volumes coming into Europe and into the U.S. market.

If you look at the growth outside China, the annual price demand is about 25.7 million tons and the production is about 800 tons higher. So there is oil capacity in the world outside China. We estimate the demand in China to be about 13% this year and world outside China a growth of 7% this year. We said in the Capital Market’s Day that there will be estimate of the growth outside China will be between 5% and 9% this year, in average 7% at the moment I would say that we are expecting the growth to be in the lower part of the range and so probably below 7% than above 7%. And of course the uncertainty due to the macro-economic situation adds to the picture. So we are expecting volatile environment in the market going forward into the fourth quarter.

If you look at the alumina market and we have also there a quite volatile situation but in general it has followed the LME with the softening alumina prices during the quarter, but not to the extent as we see on the LME. So in percentage of LME the alumina price has strengthened, there we see levels between 16% and 16.5% of LME currently. We estimate that the alumina market going forward is clearly balanced.

On energy we started the quarter with clearly high prices compared to the what we expected in this part of the season and we sold also – that the prices came back again during the quarter and not for the quarter to which is now in the energy prices in now at the level of $300, excuse me NOK300 per megawatt hour. This is then reflecting uncertainty due to the energy situation in Germany where the nuclear power stations but also that the market is over in the dollar situation with regard to consumption and also with regard to the seasonal demand. This is our level in south-western Norway has improved during the quarter.

In Norway and Southwest on Norway we have reservoir level of 86% currently, which is normal level but 18% higher than the level last year. Over the last months, the uncertainty in the market has increased significantly even we can’t say it’s a positive decision that has been made in the European Union during the last night, but there are still several factors influencing on the situation and we see that our confidence indicators that are pointing downwards, they are still and uncertainty in the financial market.

And as I mentioned previously, we have seen that there is a softening in the market beyond the seasonal evaluation that we normally see in the third quarter. So we are expecting that the markets on now restored than what has been a normal situation. So for us it is at least benefit that we have very strong financial situation if the markets are going to be further softening. But we are also prepared to do capacity adjustment measures where necessary and we have a flexible re-melt system, which also was fully utilized during the previous crisis in 2008 and 2009.

We will privatize margin management, meaning that we will take down volumes to keep up the margins. And of course we – in this situation we also have strengthened focus on our improvement programs, a $300 program in primaries is well-known. We have a restructuring and building system and we have also several other cost reduction initiatives along the value chain.

So we also continue to have a strong financial discipline including focus on operating capital on CapEx and of course also following closely the account of other risk in the market. The books at production increased at 15% this quarter which adds to the improvement we also did in from the first to the second quarter. The level for the production rates during the quarter ended at 8.7 million tons per year.

In Alunorte alumina refinery we were able to increase the volumes with 7% in the quarter which means that Alunorte was very close to nameplate capacity and today have a production rate of 6.2 million tons per year.

We continued to focus on implementing the Hydro production system focused on implementing the maintenance system and are very focused also on stabilizing the production in the fourth quarter at the current level and make the production robust at the level we have as we are now entering into rainy season in province of Brazil.

The improvement program in Primary Metal continues and we are happy to confirm that we are moving according to plan. We delivered $50 improvement last year and to target this year is $125 per ton, in total meaning $175 per ton improvement compared to 2009.

On the other hand, the cash cost is at $250 per ton from 2010 due to raw material cost increases very much due to Alumina which accounts for about $100 per ton but also due to energy, petrol, coke, weaker dollar and other factors that is increasing the cost curve for the aluminum industry in general.

If we continue to focus Alumina cost production in primary and we are focused on delivering the fuel program, which will be finished in 2013. Qatalum marked a milestone in 21st of September and we are now in full production. We produced 120 kilo tons of metal in the third quarter. In the fourth quarter, full production we will be able to produce close to 150,000 tons and focus is now to optimize the production at full production levels.

We are gradually demobilizing the additional workforce that has been supporting the startup processes in the electrolysis. And we are now targeting the cost position among the world-class smelters that this process that will continue during the next quarters. And it’s clear that Qatalum will become a highly efficient smelter with a world class cost position.

During the quarter we have – we had a tax-free gain of NOK 658 million due to the sale of SKS minority Produksjon stake that was completed in the quarter. The price of energy that was sold was at the level of NOK 3.4 billion per terawatt hour. So in total, it was a consideration of NOK1 billion for that sale. We also agreed with Rusal to sell our Alpart’s stake 55% in the Jamaica Alpart refinery.

This deal is expected to be closed in the fourth quarter and will give us a gain of NOK 400 million as a gain and recognized in the fourth quarter. With regard to the curtailed capacity we restarted a capacity macro-economic situation and instability in the market. So then I leave to Jørgen.

Jørgen Christian Arentz Rostrup

Thank you Svein Rick and thanks for joining us today. If we then turn to the financial numbers, let me start by saying that we had an underling EBITDA that Svein has said on this, NOK 1.646 billion down some NOK 250 million from last quarter and Bauxite Alumina was little bit up 11%. The Primary Metal down to downstream activities were down quarter-on-quarter energy at that Svein has said, significantly up and we also had low charges this quarter on other eliminations.

Let me start with latter one and then and then move into the further analysis. On Other and eliminations, we had as I said also this quarter low charges of NOK 73 million compared to NOK 65 million last quarter. This is below the normalized level of 150 million that we have indicated. This quarter we have positive effects from elimination of internal inventory gains and losses and therefore the charge is at a low side of the guiding.

If I then turn over to the more aggregate analysis and look at the waterfall analysis, LME prices and higher LME prices and energy result was this quarter more than offset by lower sales volumes and raw material cost increases.

Aluminum prices in currencies had a positive effect of NOK 0.2 billion and energy volume and prices had also an effect of approximately NOK 0.2 billion volume significantly more and then prices as Svein had said is going the other way somewhat negative, but all-in-all possibly a NOK 0.2 billion.

Then variable cost that I will refer to later in my presentation had a negative impact of 0.2 billion and volumes fairly even distributed from Primary Metal and to the downstream business areas had a negative impact of 0.3 billion.

This is the seasonality and the softening markets that Svein was alluding to. And then we have margin effects and some other cost elements been reminding GAAP down to 1.6 billion this quarter.

Key financials. We shouldn’t spend too much time on this. But it’s a 3% to 4% decrease in revenues and NOK 900 million, which then indicates that the volume decrease is larger than the price increase this quarter compared to last quarter.

We have reported EBIT in IFRS, EBIT in the range of NOK2.2 billion. So that means that in order to focus on the performing result, underlying EBIT, we are excluding positive elements of NOK576 million. The main element in this is by far the positive gain from the divestment of the shares in the power company in Northern Norway called SKS Produksjon. So this was a large positive gain on that sale and that has been excluded from our underlying EBIT. There are also some derivative – unrealized derivative effects due to the decreasing LME through the quarter, but those numbers are smaller.

If you go further down on the key financial list, you will see that financial income is quite significant this quarter at NOK1.36 billion, which is a high number for a quarter compared to previous quarters. The reason for this is that there is NOK1.2 billion in net foreign exchange losses this quarter.

As you know, our income side is very much exposed to dollars and therefore, we also tend to have our loans in dollar currency. And with the appreciating dollar that we have seen through the quarter, we have a net foreign exchange loss then in the range of NOK1.2 billion, some NOK300 million is related to intercompany loans and intercompany balances but the remaining is external loan arrangements.

This gives income before tax NOK859 million, tax expense of NOK62 million which is low compared to the income level before tax is only 7%, but then corrected for the tax free gain after the sales of the power shares we are at the 33% tax rate which is where we have been in the last few quarters.

Then if we move to the business areas, I would first like to say that remember that pro forma – that both bauxite, alumina and also for primary metal, we are discussing on this on the pro forma basis due to the acquisition of Vale. Nevertheless, for quarter two and quarter three, those numbers are equal to the real numbers. So this is more for your reference when you compare to the Q3 in 2010.

If you look at bauxite and alumina, we had an improvement in the result of 11% of some NOK30 million to NOK302 million underlying EBIT. This is entirely due to the improved production performance that Svein Richard spent some time on.

On the other – in the other direction, we see further increased cost, I will refer to that, some increase in bauxite costs which has for purchased bauxite from the MRN mine, which has a typical longer time lag to the LME and then also some increase in maintenance cost. We have lower realized alumina price which has only a month or a month and a half time lag to the LME on the income side.

I’m also happy to see that we have further improved the result from the commercial activities. So there is a very good and active commercial activity out of

If we look at the outlook, we are as Svein Rick have said more now concerned about stabilizing production at the present levels for next quarter. So while we have guided two quarters on the increased production, we this quarter guide on that you should expect more stable production. Not to read out of that that we don’t want to move further on, but the next quarter after having two consecutive quarters with significant increase, we think it’s more prudent of us to now stabilize at this level and then move on from there.

We are also reminding on the fact that we had last part of the hedge that we entered into, the strategic hedge described to be at around 2,400 levels – U.S. dollar level. We had the remaining part of that left for the last quarter of 2011.

If we then move over to primary metal, you will see that we had NOK653 million in underlying EBIT, a decrease of 15% or NOK112 million from last quarter and there are some movements both ways in these numbers.

Prices and premiums, we have said to be a positive effect of NOK150 million in the quarter. But then we had a decreased sales volumes in spite of higher primary aluminum electrolysis production of 3%, we have sales down 3% primarily due to lower mix of re-melt and coal metal in the cost houses in this business and that is a response to the market as we have seen it in the third quarter. So this – it is a negative effect of NOK90 million and then we have a raw material cost impact of NOK115 million, partly alumina and partly carbon costs.

If we look at fourth quarter, we have sold 85% of the production at US$2,475 per ton compared to the US$2,592 on the average for third quarter – second quarter, excuse me – no third quarter, and this is US$120 down, plus the fact that the results are then again 50% more to be sold at what we right now look at lower LME levels. And we have guided previously and through the last Capital Markets Day that US$100 in change on the LME is approximately on a yearly basis US$800 million in underlying EBIT.

If you look a little bit on the raw material side, I will show you – share with you two slides on this and I will start on the bauxite and alumina area. If you look at the pie chart to the right, two-thirds of the cost structure is energy and bauxite, but the results show significant other parts and one is caustic soda and the other is of course part of the other cost salary and other local cost in – for predominately Brazil.

On the left-hand side, we have shown you revenue and the cost driver, or development in raw material prices comparing year-to-date 2011 versus 2010. The alumina price on the income side for bauxite and alumina is our own realized prices comparing these two periods.

To the right, the bars for caustic soda, fuel oil and coal and bauxite are nominated prices in the market, our global market prices. Nevertheless, it’s quite evident from this chart that we are experiencing a cost pressure in the bauxite and alumina business. Nothing of this we regard as Hydro specific. We believe this is an industry phenomenon and it’s a situation where you have an industry that in spite of a fairly good growth, Svein Richard talked about 7% this year and it was significantly higher last year. In spite of that, we still have over capacity that we have all discussed and then we have raw material prices that our – that has driver outside its aluminum industry and therefore has a different pattern in this situation.

Caustic soda increased between 40% and 50%, energy related raw materials and input factors increased in the range of 40%. And caustic as an example, it’s obviously a combination of caustic and chlorine and depending on what is the driver, we could expect that now the caustic side is the driver for the return in that industry more than the more building and construction related chlorine product.

And therefore we see, quite an extensive price increase in our raw materials in bauxite alumina. If you look at the same for primary metal, cost structure to the right, energy and alumina are two third’s, carbon is here a significant added raw material where petroleum coke Petcoke consist of – it spent 60% to 70% of the carbon cost as we see it.

To the left we have compared our realized LME prices with petroleum coke market prices, the global market prices here in the U.S. Gulf coast prices. And again it’s a refining by product. It’s influenced by aluminum demand but it’s also heavily influenced by the refining mix – the mix coming in – production mix coming out of refineries on a global basis. Both for caustic and petroleum coke we have fairly short-term price setting in our contracts. So we are up for at least two to – between 2 and 4 price submissions in each year in these contracts.

Okay, if you then look briefly at the other business area, our market is down. It looks like it is quite significantly down from NOK244 million to NOK93 million then we should remember that we had currency and inventory valuation effects in second quarter of NOK100 million, we have a fairly neutral currency and inventory valuation effects in this quarter. So if you take away the NOK100 million there is that performing result gap of NOK50 million, NOK60 million between second and third quarter.

This is entirely due to the reduction in remelt production and remelt sales. In the quarter, it’s down 12% and here we are back to the fact that we have met somewhat the softer market and the seasonality in the market by utilizing the flexibility in the remelting system and taken down production in that system. And you should anticipate that we will continue to do so to the degree it’s necessary also for the quarters going forward.

And if we then look at rolled products, there is a decline of the result of NOK100 million down to NOK124 million. Two-thirds of this decline is due to lower volume. Volume is down 6% predominately on seasonality but also what we call some destocking in this segment in particularly in foil and general engineering. We are aware of the fact that some of our customers have taken down their inventories during the quarter and then it is speculation whether this is a temporary thing or whether this is the start of also softening markets that we are prepared that it could be the latter.

The last one third is due to somewhat lower margins and the production and sales mix that we have in the quarter. Then I must say there is another weak quarter for extruded products, NOK40 million, obviously also hit by seasonality. So the pattern is not uncommon but at low levels primarily due to the fact that the building industry – building and construction industry in Europe has not improved and are still at those low levels in particular in Southern Europe that we spoke of.

We have been able to take out some cost, we are working further on that in particular in the hydro building system business parts where we take out fixed cost in the southern part of Europe to quite a magnitude and you would see more effect from that in the quarters going forward.

Then finally, on the business areas, we had very good result in energy. We’ve had a quite interesting change from a very dry year towards the summer and then moving into a very wet year in the summer and during the fall so far. So, we have moved from very low reservoirs to very high or for the season very normal reservoir and so that means that we have produced 50% more in Hydro in this quarter compared to last quarter. We have sold

60%, 70% more than last quarter in the market and we have an underlying EBIT improve by 40%.

I believe that going forward and into fourth quarter we should see production at the level or slightly below the level that we saw in third quarter still fairly high production and it looks like prices have moved back to the range that we saw them in the first part of last quarter before they significantly dropped. So, it’s not necessarily high prices for the winter season but at least it is acceptable prices the way we see it.

And let me round off by just commenting on cash development and net debt. We have generated from operations NOK 3.4 billion, NOK 3 billion to the sales and operating results and NOK 0.8 million of this also from operating capital and then we paid some taxes in the quarter. If you then look at the investments, we have cash from divestments offsetting the cash used in investments and then we have the dollar appreciation effect on net debt being in the ratio NOK 0.7 billion in the quarter.

All in all, we are at NOK 0.1 billion net debt in the company NOK in the company at the end of the third quarter and we also have the NOK 7 billion cash at hand at the end of the quarter. Svein Richard?

Svein Richard Brandtzæg

Thank you. So the priorities going forward is, first of all, to stabilize the production in Brazil and Paragominas and Alunorte obtained the levels and make it robust at the higher levels and then continue the focus on $300 programs and program in primary metal which will position our smelters on the cost curve and of course the fact that we now have Qatalum in full production will also support that development as an additional effect.

But then we followed carefully the development in the market and we are prepared to adapt to the capacity needed in the market and we will focus very much on margins and ready then to reduce the production volumes according to the market needs. Thank you very much.

Stefan Solberg

Thank you, Svein Rick, and we are ready to take questions.

Question-and-Answer Session


Thank you. (Operator Instructions) We will take our first question from Luc Pez from Exane. Please go ahead.

One question, if I may. Could you elaborate perhaps a bit further or provide a new guidance for the targeted cost at Qatalum in view of the industry-wide cost inflation you were referring? Thank you.

Svein Richard Brandtzæg

(Inaudible) to the Qatalum cost, as I mentioned, we are not demobilizing the additional cost that has been established to ramp up the production to full capacity and we are gradually moving towards the targeted cost level. It is difficult to give you exact number but it’s clear that all our target is to, of course, to have a good position in the first quartile on the cost curve. So this will be smelter and they will be very cost competitive in the market.

Luc Pez – Exane

Thank you.


We will now take our next question from Rob Clifford from Deutsche Bank. Please go ahead.

Rob Clifford – Deutsche Bank

Good afternoon, gentlemen. Just two quick questions. One on your curtailed capacity. How long does it stay curtailed before you shut it? Can you talk about your decisions on closing that capacity and what political issues there are around that and how much that would cost? That’s the first one. The second one is just a much simple question. You talked about winding back your re-melts capacity. What does that mean in practice? Does that just mean you’re melting less, you’re doing less scrap collection. How does that work physically?

Svein Richard Brandtzæg

Thank you, Clifford. I will first talk about curtailed capacity because we have in Norway and in Germany, curtailed capacity as a result of the previous financial crisis. And we are not going to the restart that capacity now in the current market situation. So when we see the market is softening, first of all, we take down re-melting of external ingots, duty-paid ingots in the re-melters in Europe. That is the first step.

The second step is to reduce the re-melting of duty-unpaid ingots in the Norwegian – which we do in the Norwegian smelters. The third level which we haven’t reached yet is to reduce the purchase of scrap from the market, meaning that will also take down the metal units accordingly and then we are down to a level we are then we need to evaluate few of the curtailment of electrolysis capacity. We are definitely not at that level yet but the priorities in that respect will be very much as we did last time that we are looking at the highest cost production lines and then, prepared to curtail that capacity. If we go to the cost of curtailing capacity is, I would say, is not very much in the sense to take down the capacity but it costs more money to bring it back again.

And so far, we have not brought back the capacity that we took out in 2008, 2009. We are not planning to take more capacity out as it looks now, but if it is necessary and needed we are prepared to do it. And of course we are taking old capacity in Norway and Germany and if you think about political issues related to that, yes of course very much related to the work force that has to be temporarily out of their jobs and they are all on the established support systems both in Norway and Germany in that respect. So we have some experience in executing curtailing of capacity and are prepared to do that also if necessary if the development goes in that direction.

Rob Clifford – Deutsche Bank

Thanks Svein. I guess the question was how do you take the next step forward in Norsk for instance, what you need to do to actually shut it permanently, to go from Qatalum to permanent closure, what decision do you need to make and how much would that cost?

Svein Richard Brandtzæg

In Norsk, it is very much depending on the CO2 compensation system that is now going to be decided during this autumn because the initial trade scheme will stop in Europe in 2013 and European Union has opened up for compensation and it’s going to be decided this autumn. If we don’t get any compensation at all it is definitely not the long future for the Norsk smelter.

We will turn the smelter into a remelter, where we will then still utilize the cost of production and sourcing sheeting goes to the world’s largest hot metal that is across the fence in. But we are not at that level to give you any guidance yet because we don’t know exactly how the CO2 compensations will look like. It looks like there will be some compensation but we don’t know exactly how it will be. So it’s too early to comment on the end gain for Norsk but as I mentioned if there is no compensation there will be a short life time for Norsk as we see it now.

Rob Clifford – Deutsche Bank

Thank you.

Svein Richard Brandtzæg

Rob, also the reason we didn’t estimate a couple of years back that we have referred to a couple of times in dialog with you guys of some €60 million, €70 million costs. If we had to close down operation permanently. But that is not an updated number, I just give it for your reference so you have a ball park figure the way you will looked at in an old scenario. But it’s not an updated number and as (inaudible) said they are still different alternatives for this. And right now we are concentrating on the running at zero cost burden and then, seeing what comes out of the – in general for us very important discussion around the CO2 protection in Europe.

Rob Clifford – Deutsche Bank

Thank you and I appreciate it.


And we will take our next question from Cedar Barnes from Merrill Lynch

Cedar Barnes – Merrill Lynch

Hi gentlemen, thanks very much for taking a conference call. Just two questions, one on future disposals. We have obviously seen quite a big disposal gain coming through from the sale of your energy assets and are there potential future gains coming through which would be positive particularly in quite a soft demand environment that we appear to be going into? And then secondly a question on your cost savings plan, costs crept up in the first nine months of this year, you highlighted the reasons why, what is in your control to actually try and drive those cost savings, will drive the cost down and actually achieve those cost savings because it appears that a lot of that has got to do with sort of commodity price exposure and out of your control. So what kind of efficiency gains can Hydro make to achieve those cost saving targets? Thanks.

Svein Richard Brandtzæg

Yes thank you Cedar for those questions. To your first question regarding disposal, I think what you have seen and now is some smaller actions to what we have described as a portfolio streamlining. A company of size and history always has some assets that you could find alternatives for and if we see more of that kind we will do it when time is right but we don’t have any plans and we as you know also we don’t in general comment on actions of this nature.

And I think we are now at this stage after some years of doing these streamlining where we at least have a clearly defined business areas with belonging assets to it. So the structure you see is the structure we work with. When it comes to the cost issue you are right what we have discussed today is not at least cost elements that are outside our immediate span of control.

(Inaudible), on the other side talked quite a lot about the cost program that we launched a couple of years back, the $300 program. We have similar programs in although, kind of a smaller magnitude in the downstream, midstream business areas. But the $300 is the key program, which we think we have conducted so far quite successfully. The dilemma has then been, as you are pointing to, that there are other cost elements that we are in less control of that has gone the other way around, not at least due to the fact that the raw materials and commodities in general have had a more, a better development than what we have been able to attract to the aluminum pricing.

We don’t have a quick answer for you and a good solution. What we can say is that first of all, we think it is a common situation for the whole industry. So, if we are facing this, we believe others are facing the same. That is not helping much but it’s helping a little bit because then whatever we can do on our side will improve the situation in relative terms. But also we believe that this cost pressure that we see in the raw material side will start to kind of stress the industry a little bit at the price levels that you see today.

Cedar Barnes – Merrill Lynch

Okay, thanks gentlemen.


(Operator Instructions). We will take our next question Jonathan Schroer from Unicredit.

Jonathan Schroer – Unicredit

Hi, yes good afternoon. I have three questions the first is, you mentioned production stabilizing in Bauxite and Alumina current level that would indicate a run rate of 6.2 million tons for Alunorte, is that reasonable for 2012 or could you see production increasing from that level across a year.

And secondly one hoping for a further update on the $300 cost program and where you are right now if you have seen any progress may be in even in the recent quarter. in particular I was wondering about on the slide 20 where you have the margin and other, was that was a negative effect if that has any relation where I would guess I would assume the program might offset something like that, if could give a little more detail on what that is and where you stand with that program and then finally with the road products whey was the EBIT so much lower there again than in previous quarters, you mentioned higher personal and maintenance and I wonder you might have pulled forward some maintenance program that typically tends to happen in the fourth quarter? Thanks.

Svein Richard Brandtzæg

Moving onto production in Alunorte, we have said that we would like to step a nice, the production at the current level, which as of no way we – correction, for 6.2 million tons per year. And we are not finished with the business plan for the next year yet. So, I couldn’t say what’s our target in all but it will be in this range or maybe a bit higher. But we are approaching the mid-level rate capacity of Alunorte. So, we are definitely not leveling down our ambitions letting off the production rate in this world’s largest alumina refinery.

So, we will stabilize and make the production robust in both Paragominas and Alunorte. Moving onto the $300 program, we are moving according to plan and it is difficult to give you exact figure what was the effect of the change in the third quarter. But we are gradually reducing the cost in the system and you should also remember that this is only for the full year of net expenses. So, when we are talking about and the best position for you in general this comes on top of the $300 program. Moving onto the last question, Jørgen?

Jørgen Christian Rostrup

Yeah. Jonathan I will briefly give you a comment on roll products, which I believe was your third question. And you were asking about the level of those roll product results. Let’s just discuss a little bit, first of all, we agree that the level is on the low side and it’s definitely lower than the last year. It is better than previous years but we are not at a level where we should be and that is disappointing.

And when it comes to the shape of it normally we would expect third and fourth quarter to be lower than the first half of the year, partly for holiday reasons whether its summer holiday or its towards the end of year type of holidays and slowdown in the market or the other reason being the cost level in particular the maintenance cost level that we see that it’s typically concentrated than on the lower season – in the lower season. So, that is making the second half of the year normally somewhat softer than the first half of the year.

When we looked at the quarter on the quarter, quarter three versus quarter two and the 100 million in deviation, my intention was to point to approximately two-thirds of that deviation being volumes and one-third being margins partly softer margins in the market but also partly the product mix that Svein kind of talked about in his introduction.

Cost were between those two quarters was stable or actually a little bit better in the third quarter compared to second quarter. If you compare to last year you would see that the three quarters, not the first quarter, we come back to first quarter but still quarters are lower than the similar quarters last year. And it is a little bit on the volume and margin side but is predominately on the cost side actually and we came out ‘09 and 2010 with maintenance and cost levels on the lower side of what we think we need to run at that.

And we have also had smaller cost elements that has moved all in the same direction without that being a very big issue, but when we can’t see tend development on the market side then that every dollar counts in that respect.

So, that is not an alarming situation I think, what we had seen is that this business area has turned up to certain degree the margin and the earnings a little bit over the last two or three years and the whole industry seems to have done that but then we see now that we have a softening in the market that is unfortunate.

Jonathan Schroer – Unicredit

Is that softening, I mean, are you saying it is mainly related into volumes rather than pricing, correct?

Jørgen Christian Rostrup

Yeah, it’s for the last quarter versus – for this quarter compare to last quarter it’s predominately volumes and at fair share of that volume decrease of the 6% volume decrease that we are calling is normal seasonality. We are just pointing to the fact that we believe that on top of seasonality there is a softening in the market which we for roll product have called a de-stocking effect with our customers and more than the fact that things are stopping up but we have to watch this carefully into fourth and first quarter.

Jonathan Schroer – Unicredit

Okay, thank you very much.

Jørgen Christian Rostrup

Thank you.


(Operator Instructions). We will take our next question from Tim John from Redburn Partners.

Timothy John Weaver – Redburn Partners

Good afternoon. Just wanted to get your views on where the current aluminum prices sitting in terms of the global cost curve. How far into the cost curve do you see the prices at the moment and how quickly do you see – do you expect the industry to respond to that. That’s my first question and the second one is does plan to spin off those assets impact your stake in the (inaudible)

Svein Richard Brandtzæg

I may start considering you. Thank you for the question we will go off to the current aluminum price, we see that due to the surge in the raw material cost there are number of smelters that there is nowhere below water, that is difficult to say expect because this picture is very dynamic.

We see that the cost always is changing over the time may be the raw material costs and also that the alumina. But there is a certain capacity now that are quite in a stressed situation. So, when – if you take a look back on what happened in 2008, 2009, some of the companies took out capacity, like we do, we took out both the 26% built capacity, the Chinese took down capacity very, very quickly also. And there were also some other companies that took down the capacity, but in general, the aluminum industry didn’t adapt to the situation according to the demand.

So, we created almost price situation for quite a while in that, in during the crisis, which also resulted in the buildup of the stocks that we are seeing today. It is difficult to state what this really the outcome of the current situation at the current price level, but as I mentioned there definitely some other capacities now that are quite stressed.

But we got for the spin-off of the and what is going to happen there I think you have to ask them about that. We normally don’t comment on what our competitors are doing. But it is hopefully a change in the industry structure that we are seeing now.

Timothy John Weaver – Redburn Partners

Any (inaudible) at the moment?

Svein Richard Brandtzæg

Could you say that again.

Timothy John Weaver – Redburn Partners

Any of hydro smelter is currently underwater did operate?

Svein Richard Brandtzæg

No, they are not.

Timothy John Weaver – Redburn Partners

Okay, thank you.

Svein Richard Brandtzæg

We are floating in (inaudible)

Timothy John Weaver – Redburn Partners

Thank you.

Svein Richard Brandtzæg



(Operator Instructions). There are no further questions in the queue.

Svein Richard Brandtzæg

Okay. Thank you everyone for joining up for this call and the good questions. Before we leave here, I would like to mention that there will be (inaudible) from November 1. Mr. (inaudible) is taking over my position. For myself, it has been a pleasure working with you all these years and I would also like to remind you that we are arranging a (inaudible) our annual capital markets bank in December 1, you will find more information about that on our website and we hope to see you there. Thank you.


That will conclude today’s conference call ladies and gentlemen. Thank you for your participation, you may now disconnect.

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