Norsk Hydro's (NHYDY) CEO Svein Richard Brandtzaeg on Q4 2015 Results - Earnings Call Transcript

| About: Norsk Hydro (NHYDY)

Norsk Hydro ASA (ADR) (OTCQX:NHYDY)

Q4 2015 Earnings Conference Call

February 17, 2016, 11:00 AM ET

Executives

Inger Sethov - EVP, Communication & Public Affairs

Svein Richard Brandtzaeg - President and CEO

Eivind Kallevik - EVP and CFO

Analysts

Eivind Veddeng - DNB Markets

Hans-Erik Jacobsen - Swedbank

Eirik Melle - Danske Markets

Bengt Jonassen - Carnegie

Operator

Welcome to Hydro's fourth quarter presentation, also a warm welcome to those of you following us on webcast. As you already have seen, Hydro's Board of directors has taken the final build decision on the Karmoy technology pilot. Therefore, the presentation today will be slightly different from what you are used to. The presentation by CEO, Svein Richard Brandtzaeg will be done from Karmoy, followed by a presentation by CFO, Eivind Kallevik, in this room. Since we cannot take all of you to Karmoy on short notice, we'll do it the other way around and bring Karmoy to you, both in the auditorium and on the webcast. After the presentation we'll continue with questions and answers by CFO, Eivind Kallevik, in this room.

And now, it's a pleasure to bring in an excited crowd at Karmoy. Welcome Karmoy, and welcome Inger.

Inger Sethov

So thank you everyone. Before I give the word to our CEO, Svein Richard Brandtzaeg to present the results for you, I would like to show you guys in Oslo and the people following us on webcast a little bit about how the atmosphere is here at Karmoy today.So, if you all have a look at this great gang who's going to take this pilot into the future, let me ask you one question. Are you ready?

Unidentified Company Representative

[Multiple Speakers] Yes.

Inger Sethov

Thank you. Then I'll leave the floor CEO, Svein Richard Brandtzaeg. Over to you.

Svein Richard Brandtzaeg

Thank you very much, Inger. And it's a great pleasure to present the quarterly results here from Karmoy, following the decision of the Board of Directors last night to make a final build decision on the Karmoy technology pilot.

Let me then move over to the main results from the fourth quarter and also the annual results, where we ended up with the earnings, EBIT of NOK9.7 billion last year, which is the best result Hydro has achieved since Hydro became a pure aluminum company in 2007. The quarterly results ended up at approximately NOK1.6 billion, which is NOK600 million below the third quarter results of 2015 and NOK1.3 billion below the fourth quarter result of 2014. Due to the improvement in the cash flow in the Company, the Board of directors decided to maintain the steady dividend or NOK1. That will be -- the final decision for that will be taken by general meeting in May.

Operationally this quarter went very well, and especially in Brazil, where we had record production of bauxite at 11.7 million ton speed, and also a record production of alumina, which ended up at a speed of 6.3 million tons annually for the fourth quarter. This implies lower costs, but also we experienced weakening prices, both on alumina and also in metal. This also was followed by some advantages on currency area, with the weakening of the Norwegian krone and also weakening Brazilian real. We had higher Nordic energy prices and also good production, which influenced the result in energy.

And also the build decision has been announced already, and we had in the end of the fourth quarter delivered NOK800 million in 2015 of improvements in total. That means that up to 2015, from 2011, we have achieved NOK4.5 billion in improvements in total.

We have taken down the expectation for the demand in 2016 from 4% to 5% to 3% to 4%, but when we look at the supply/demand balance, we see improvements and we expect that the market will be largely balanced in the end of 2016. If we then take a further look into the supply/demand balance, we saw in the fourth quarter a somewhat weaker demand than the previous quarter, still 4% growth in total demand compared to 2014. And also in the fourth quarter of 2015 compared to the fourth quarter of 2014, we experienced 4% growth, with regional differences, with China growing in demand 6%. We experienced 2% in North America. If we exclude Mexico, it was 3%. And we experienced 3% growth in Europe. The weakest markets were in South America, with 16% negative growth. When we add up the supply/demand balance, we see that there is over-supply in China of 2.1 million tons and under-supply outside China of about 0.9 million tons, and a gap with about 1.2 million tons' over-supply, which means that there has been a build-up of the global inventories during 2015.

When we then take a further look into the supply balance for 2016, we have seen that China has implemented more curtailments than expected. Since the Capital Markets Day in December it was announced 1 million tons' additional curtailments. So all in all we see that there are about 1.4 million tons more curtailments in China that we announced in the Capital Markets Day. If we include then what has been announced and also what CRU is expecting of curtailments going forward, we see that there is a significant deficit of 1.5 million to 2 million tons outside China and a surplus in China of a similar 1.5 million to 2 million tons. All in all, we expect 2016 to be balanced plus/minus 0.5 million tons.

The surplus of aluminum production in China also leads to export out of China, and we see that there has been increased export during the quarter, also driven by higher incentives due to the fact that the all-in prices outside China is higher than the prices in China. So there are some correlations there, some weakening in the incentives lately, but still quite high export of semi-fabricated or fabricated products, and also some primary metal is part of this picture.

When we then look into the metal prices, we see that the prices has come down from about $1,623 per ton in the third quarter to $1,509 per ton in the fourth quarter. The achieved price was about $1,555 per ton. So the realized aluminum price in the quarter was $1,555 per ton. We see now that aluminum is trading around $1,520 per ton. All-in metal prices have also been reduced, and this shows that there is again recent of over-supply, with some tightening in the quarter. This has also led to lower premiums of metal products, and as you know, Hydro is mainly exporting metal products, as execution and sheeting and only alloys. The steepest drop in prices we saw in alumina, where alumina prices dropped from $292 per ton all the way down to $208 per ton and even went down to $197 per ton during the quarter. At this level we expect that about half of the alumina production globally is below water.

If we then move over to the supply/demand balance in China, or the export/import balance, we see the quite steady import of bauxite. A lot of that bauxite comes from Malaysia, but Malaysia has now introduced moratorium of export of bauxite, which is not critical short term for China. We know China has quite some inventories in bauxite. And we also see some higher import of alumina in the quarter. Export of semi-fabricated, as I mentioned, is higher and we see also some lower import of scrap in the quarter.

On our operations side I'm very happy to see that we have a very steady and good development in Brazil. As I mentioned, record high production of bauxite of 11.7 million tons and also 6.3 million ton speed of alumina production is the best we have had since we took over the assets in 2011.

This implies a reduction of cost, but also we saw lower sourcing cost of alumina and also low currency in Brazil that is helping us on the cost side. So the margins on, EBITDA margins on alumina is even a bit higher this quarter than the previous quarter, even with a significant reduction in prices. We finalized the B to A program in the end of last year, but we have now lifted the bar and established a new program of NOK1 billion, and NOK0.5 billion will be the improvement program for 2016.

On the primary side we continue with improvements. There are some lower variable costs during the quarter, mainly alumina, as the alumina price is going down, but also here we are helped by weakening currencies. EBITDA margin in the quarter $275 per ton. Early this quarter we early in the first quarter this year we experienced the power outage in Ordal. We were able to maintain the production, with 90% of the cells, but 10% of the electrolyte cells has to be shut down. And we have already restarted some of these cells so we are back in full production in the second quarter of 2016. Customers will not be affected as we compensate the loss of the 10% electrolysis metal with extended re-melting of cold metal.

The $180 program, as we have mentioned before is continuing, but that will be part of the total package of 2.9 billion improvements that this program that goes from 2016 to 2019. Then the decision about the Hydro technology pilot here at Karmoy was made yesterday and that is a pilot where we are going to produce 75,000 tons. It is not the volume itself that is important with the pilot, but the importance here is that we are going to test the most advanced aluminum production technology the world has ever seen.

We have targeted the world lowest energy consumption. So we are now having in cells that will produce aluminum at 11.5 kilowatt to 11.8 kilowatt hour per kilo aluminum. There will be significant spin-off effects from this pilot into the existing capacity that we have in Norway, and also the joint venture abroad, and we will then verify the next generation production technology through this pilot. Net CapEx is 2.7 billion and we are very happy with the support from Enova, and the total support from Enova was NOK1.6 billion and the total CapEx is NOK4.3 billion.

If you then move downstream and, as normal, seasonal variation in the fourth quarter, 8% lower sales in the fourth quarter compared to third quarter. And if you look at the fourth quarter 2015, with one year before, it was 7% higher sales. Good development in packaging, good development in auto, but lower in litho and heat exchanger, and also very good development in general engineering, but we should remember that the fourth quarter of 2014 was very weak in general engineering but in total 7% higher sales. Then in extrusion, also there significant seasonal effects, 9% down in North America and 7% in Europe. In total 5% growth in extrusion in 2015 in North America and quite stable growth situation in Europe.

Our joint venture, Sapa, our joint venture company, Sapa, where we have 50% ownership, has now delivered their synergy program of NOK1 billion. That also added additional programs, which means they have now moved into higher-added-value products, improved capacity utilization and productivity, which reduces the fixed cost with NOK400 million. So this work continues in Sapa and we see the progress continuously. If we then move over to the hydro power production, we started a vessel wall level in the Nordic area with 6 terawatt hour above normal and ended up 12 terawatt hour above normal. Prices improved on the third quarter from NOK122 to NOK204 per megawatt hour. So that influenced of course the result of energy in the quarter.

Then just a summary of the improvements, as I mentioned, NOK4.5 billion has been delivered in improvements in Hydro from 2011 to 2015, and we have now established a program of NOK2.9 billion that goes up from 2016 to 2019. And then the different business areas are going to deliver respectively bauxite alumina NOK1 billion, primary metal NOK1 billion, and the rolled products NOK0.9 billion in improvements in the coming years. Then the proposed dividend from the Board of Directors yesterday is NOK1 per share, which is again showing our commitment to return cash to shareholders.

It's also a clear signal of the strong financial situation, the result of our improvements. The reported result of earnings per share was NOK0.99 per share in 2015. So here we are talking about 101% dividend, but underlying it will be about 34% compared to earnings per share. Dividend overall the last five years is 110% payout ratio and the policy is as we established last year, 40% dividend over the cycle. Dividend this year for NOK1 represent about NOK2 billion in payout, and again the decision will be taken in a general meeting in May.

That concludes the quarterly presentation here from Karmoy, and then I leave the word to my CFO, Eivind Kallevik in Oslo. Thank you very much for your attention.

Eivind Kallevik

Good morning also from me. Then I will take you through more detail the financial results for the fourth quarter. This quarter we delivered an underlying result before financial items and tax of NOK1.6 billion, which is NOK600 million below the third quarter result and a little more than half of what we delivered in the fourth quarter last year.

Falling prices affected revenues, were by far the major negative influence of this quarter, reducing the result by some NOK1.2 billion. The LME price came further down, impacting both the realized metal price as well as the alumina price. In addition, the realized PAX index continued the downward trend. It was down $54 per ton compared to the third quarter. Realized premiums also declined in the period, but have started to stabilize and we also saw a small uptick during the quarter.

Overall these developments led to a 9% decrease in realized all in metal prices and a 10% decline in the realized alumina price. On the other hand, we got some support from currency as it continued to move in our favor as both the Brazilian real as well as the Norwegian krone continued to weaken against the U.S. dollar. The net currency effect this quarter was less profound than what we've seen in the previous quarters, but it still contributed with roughly NOK300 million this quarter, with approximately half of this coming from the real.

We had lower costs also contributing positively, with roughly 400 million between the quarters. This is primarily a result of declining raw material costs, due to the fall in LME and the PAX, in addition to lower fixed costs, both in primary metal as well as in energy. The operating costs Paragominas and Alunorte were somewhat higher, while cost in rolled products stayed relatively flat, despite the fact that we're in the midst of the maintenance season.

We had positive cost developments. driven very much by the improvement programs, as we completed the B to A program in bauxite and alumina, we completed the Climb program in rolled products, and we continue to deliver according to plan on the $180 program in our primary joint ventures. Higher product prices in energy contributed positively together with some small uptick in volumes of roughly NOK150 million.

Finally, there is a combination of other effects, the largest which includes higher depreciation in bauxite, alumina of around NOK200 million. This, together with some negative currency effects in metal markets, took the results down by some NOK300 million. I will get back to the different business areas in some more detail later on in the presentation.

If we take a quick look at the key financials for the quarter, the revenues for the fourth quarter were down by approximately NOK1.2 billion compared to the third quarter. This of course is a result of the weakening alumina and aluminum prices, which has partly been offset with the strengthening of the dollar as well as the higher energy prices, or the prices realized in energy segments. Metals and downstream products, and the shipments, were seasonally lower, as should be expected, while bauxite and alumina sales increased somewhat.

This quarter we have excluded a loss of NOK841 million in nonrecurring and timing effects from the reported EBIT of NOK700 million and I will get back to these on the next slide. Financial items for this quarter were NOK70 million negative compared to the negative NOK3.3 billion in Q3. This reflects the change in net currency effects from a loss of NOK3.2 billion in the third quarter to a small gain this quarter of NOK48 million, and this of course mainly reflects the marginal currency fluctuations for this period. As a result, the income before tax for the quarter was positive NOK655 million compared to the NOK1.7 billion negative in the third quarter.

Income tax amounted to NOK113 million in the fourth quarter compared to a tax income of NOK367 million in the third quarter, which was primarily related then to the large negative unrealized currency losses, in that period. That gives us a net income of NOK541 million positive, up from the NOK1.3 billion in the last quarter. The underlying net income, excluded the currency gain for the period, amounted to NOK1.3 billion positive, some NOK80 million or relatively flat from the NOK1.4 billion in the previous quarter.

Consequently, earnings per share declined slightly from last quarter to NOK0.59 per share. For the full year of 2015 the underlying EPS almost doubled, to NOK2.98 from the NOK1.55 delivered in 2014. We then get back to the items excluded of NOK841 million, that we exclude to get a better grip on and better describe the actual performance for the business. And I will just go through the main items.

In rolled products, we had a negative metal effect of NOK177 million, which reflects on the negative development in LME and premiums when you measure these in euro. We had a net divestment amount of NOK365 million this quarter. That reflects the reflects the sale of the rolling mill in Slim of NOK434 million in a loss, partly offset by some smaller transactional gains on several small divestments. Other effects include an accrual of NOK285 million related to the termination of the lease agreement here at the Vaekero Park office buildings. That means that when we go forward we now have a new lease agreement in place covering Hydro's actual needs. Items excluded in Sapa amounted to a net charge of NOK53 million after tax. That includes some restructuring charges as well as unrealized derivative gains and some net currency losses.

Now that we've been through the financials, let's start looking at the different business areas. In B&A we have delivered an underlying EBIT of NOK532 million, which is approximately NOK100 million down compared to the third quarter. To a large extent the Q4 results were negatively impacted by the 10% lower realized alumina price. This has been driven both the drop in LME as well as in the PAX index. LME has dropped about 7% while the PAX relevant PAX index in the period has dropped some 17% between the quarters. On a positive side, both alumina output as well as bauxite production increased significantly in the fourth quarter. Paragominas continues to produce stable and well above the nameplate capacity at a new record rate of annualized speed of 11.7 million tons.

Alunorte also - finally reached its nameplate capacity of 6.3 million tons, which is the first time since the acquisition back in 2011. In BRL terms fixed costs in Brazilian operations were negatively impacted by the high inflation in the country. On the other hand, there was also some higher bauxite and caustic prices for the period, which was partially offset by lower energy prices as well as a better cost and energy consumption in the quarter.

Exchange rates developments continued to impact the cost in B&A positively, as approximately 50% to 60% of the cost base in B&A on the short term basis are impacted by the BRL developments. The 8% weakening of the BRL against the dollar had a positive impact about NOK175 million for the quarter.

In Q4 we also realized a historically low implied alumina cost of $187 per ton, a reduction of $30 per ton compared to the previous quarter. Higher production together with lower alumina sourcing costs in the period due to the declining prices, helped to bring this number down.

Let me then just spend a few words on the Hydro depreciation that you see in this quarter in B&A. It increased some NOK200 million compared to Q3. During the quarter we have performed a reassessment of the useful life of certain assets, in order to more accurately reflect the lifetime of these assets. As a result, we have shortened the lifetime of the existing tailing dam, the existing right model deposit [ph] area and certain mining equipments. The depreciation in fourth quarter then also reflects some corrections and catch-ups from previous periods.

If we look at the first quarter of 2016, then you should be aware that we will continue to shift our sales portfolio from LME-linked contracts into PAX contracts. For 2016 on average we expect to have about 50% linked to the PAX, compared to 35% for 2015. When it comes to production, we are at nameplate capacity in Alunorte. The target is now to stabilize around that level. In Paragominas we are significantly above the nameplate capacity and there the target will be to stabilize, but then there is a possibility for slightly lower production in the next quarter. Also on the bauxite sales, we do expect sales margins to come somewhat down in Q1 with approximately $5 per ton as well as somewhat lower sales volumes.

We turn to primary metal. We see an EBIT that almost halved from the NOK762 million in the third quarter to NOK407 million in the fourth quarter. Now the drop in primary metal is largely explained of course by the fall in all-in prices. LME prices fell by some 7% while the Hydro realized premium fell by 15%. Overall the decline in the all-in price reduced the results by some NOK900 million between the quarters including Qatalum. The negative price effect somewhat offset by changes in currency. We had a 3% weaker NOK versus the dollar, giving a result improvement of some 100 million NOK.

At the same time, we've seen positive cost developments in local currency. Fixed costs are lower. Raw material cost decreased primarily due to falling alumina prices and this had a positive impact of some NOK400 million. Also as normally in Q4, slightly lower sales volumes. If you look into Q1, we have sold approximately 50% of the LME or metal production in Q1 at around $1,500 per ton. If you look to premiums, we expect them to be largely stable compared to what we have in Q3, and we guide on a range of between $250 and $300 per ton. Seasonal up-tick should be expected in terms of sales volumes as the downstream markets come back in full speed. And for the cost side, bear in mind that alumina prices have come further down and that this should have a positive impact on the cost side in primary metal.

If we quickly turn to Qatalum, our share of net income declined from NOK26 million positive in Q3 to NOK167 million negative in Q4. On the operational side the Qatalum plant is operating stable and well about the nameplate capacity. We also had somewhat higher sales volumes at that plant and slightly lower costs in Q4. However, the plant was impacted by the falling all-in prices for the quarter. Qatalum saw a significantly steeper decline in realized premiums in the fourth quarter due to a time lag in the recognition of the realized premiums. The Qatalum results for the quarter will continue to be affected by the development of course in the all-in metal price, partly offset by the fall and decline in alumina costs. Sales volumes are expected to be slightly lower in Q1 than in Q4.

In metal markets, we delivered an underlying EBIT of NOK152 million, down from NOK291 million in the third quarter. Now if you exclude currency and inventory valuation effects, the result was a NOK180 million, pretty much in line with the NOK189 million we delivered in Q3. Remelters delivered a stronger result against expectation for a weaker fourth quarter. Both volumes and margins increased from the third quarter on the back of better market conditions at the end of 2015. In addition, the slight increase in standard ingot premiums during the fourth quarter also supported the metal markets results.

If we look into the next quarter, we do expect seasonally higher volumes, sales volumes at the remelters both in Europe as well as in the U.S. and we still maintain the quarterly guiding of about NOK100 million in underlying EBIT for this segment. But at the same time, and as we always do, please be reminded that results due to the currency and the trading effects in this area are by nature volatile.

In rolled products, we saw a seasonal decline also in results, down by NOK127 million from the third quarter, down to NOK204 million for the quarter. Shipments in the fourth quarter were down some 20,000 tons due to the seasonal activities. Margins, though, were relatively stable, helped by a strong performance within the general engineering segment, partly offsetting the seasonal weakness in the other segments.

Costs were also stable for rolled products in the fourth quarter, despite the fact that the fourth quarter is the higher maintenance season. In addition, the rolled products results were reduced with lower Rheinwerk contribution in the fourth quarter, compared to Q3 reflecting the fall in all-in metal prices, only partly offset by the improved sourcing cost for alumina.

Looking into Q1, we do expect seasonally higher shipments for the quarter. At the same time, we also expect cost to come somewhat up compared to the fourth quarter. During 2015, rolled products saw stronger margins which were partly supported by the strengthening dollar to the euro. However, when we get to Q1, we do expect margins to decline somewhat from what we have realized in the fourth quarter.

In Energy, we saw an EBIT that almost doubled from the NOK191 million in Q3 to the NOK353 million we delivered in Q4. This increase is primarily driven by the higher spot prices that we've seen in Q4, which almost doubled from Q3, despite the fact that we had very high reservoir levels and high power generation in the Nordics. The price effect alone lifted the results by approximately NOK130 million, but from historical context the price level still remains low. The production in Q4 remains strong and high, same level as we had in Q3, about 2.9 terawatt hours.

There is also some positive cost developments contributing to the results. First of all, the production costs decreased in Q4, which is mainly driven by the lower property tax in the quarter. The property tax and privatization of this will be in 2016 following the same pattern as we have seen in 2015. Secondly, the pricing area cost was also lower in Q4 as the price differential between the main pricing areas in Norway, or our main pricing areas were more narrow compared to Q3. Looking into the first quarter, we do expect continued high production and strong production, as indicated by the high reservoir levels. Property taxes will then also go up somewhat in Q1 compared to Q4, driving production costs higher.

Last but not least, there is as always a large uncertainty around the power prices. We started the quarter with high reservoir levels and average prices so far this quarter is NOK225 per megawatt hour in southwestern Norway, and some NOK240 per megawatt hour in the NO3 area, also very low price levels for the quarter or for this period of the year.

In Sapa, the underlying EBIT declined seasonally compared to the previous quarter, by lower demand both in Europe as well as in North America. However, compared to the same quarter last year, underlying EBIT improved by NOK91 million to positive NOK64 million, and this improvement clearly demonstrates the synergy work that was -- synergy target of NOK1 billion, which was completed in 2015, one year ahead of time. Bear also in mind that at the same time the underlying EBIT for the fourth quarter was also negatively affected and impacted by Sapa's measures to address the consequences of the unsanctioned quality testing practices that we've uncovered in North America.

During the quarter, we have announced the sale of Heroya Industrial Park to Oslo Pensjonsforsikring, and we do expect to close this transaction within the first half of 2016. The industrial park is part of the legacy assets in Hydro from the time when Hydro was an industrial conglomerate. As we no longer have any production at the park, it is part of streamlining Hydro even more to become a pure play aluminum company. The sale is expected to result in a book gain of around NOK350 million and is expected to have a cash contribution of about NOK450 million.

If we then turn to other and eliminations, they declined during the quarter from a small positive NOK12 million in Q3 to negative NOK83 million in the fourth quarter. We've already been through the Sapa results and then let's just have a quick look on internal gains and losses on inventories. Eliminations was in this quarter positive NOK17 million in the fourth quarter, which was an increase from the NOK13 million negative in the third quarter, and as such remains at relatively low levels. Now if we adjust for the eliminations and the Sapa results, there is a NOK169 million in charge for common services and other businesses for this quarter. This is an increase from the NOK95 million that we saw in Q3, which is very much in line with the NOK150 million guidance that we've given for the quarter in the past, which is also a guidance that we will uphold for 2016.

If we then look at the net cash development since the last quarter, I am very happy to say that we have increased the net cash position for Hydro up to NOK5.1 billion at the end of the year. As, we started the quarter with NOK3.3 billion in net cash. We have delivered an underlying EBITDA of NOK3 billion. Also very happy to see that we now have a release of net operating capital of NOK1.7 billion, of course partly driven by the falling prices of our products but also driven by optimization and release of inventory and working capital in the different business areas.

Taxes and other adjustments, noncash items and EBITDA reduced the net cash by some NOK300 million. We have invested NOK2.1 billion, which is above the NOK1.2 billion in Q3, but very much in line with the guidance that we gave at the Capital Markets Day at the beginning of December. Finally, there was a combination of currency effects on dollar denominated net debt and dividends paid to minorities of some NOK 400 million, and when you put all these factors together, we then get to the net cash position of 5 billion.

We then take a quick look for the year, we started with a negative or net debt of NOK100 million at the beginning of 2015. We generated an EBITDA for the year of NOK15 billion approximately, which is approximately NOK5 billion more than what we generated in 2014. We reduced net operating capital compared to 2014 with NOK800 million, following the inventory buildup above normal operating levels that we saw in the beginning of 2015. We have worked hard to release this. It's partly of course again price driven, but it's also very much about taking out inventory and particularly successful in metal markets as well as in rolled products. Taxes and adjustments for noncash items and EBITDA reduced net cash by NOK1.1 billion. And please remember that this number includes a positive NOK1.5 billion of reimbursed VAT taxes in Brazil.

Investments in 2015 amounted to 5.4 billion, net of divestments, and this is also very much in line with the guidance that we gave at the Capital Markets Day when you adjust for the divestments and noncash items such as asset retirement obligations. We have paid NOK2 billion to the shareholders in dividends. And then finally, a combination of mainly currency effects on the net debt in dollars, but also dividends paid to minorities added up to a negative effect of NOK 1.7 billion. Again, we get to a net cash at the end of the period of NOK5.1 billion or a cash flow generation of NOK5.2 billion during 2015.

Then very quickly just a few words on adjusted net debt. This was further reduced by NOK1.1 billion to NOK8.2 billion at the end of the fourth quarter. The main reason for the decline is of course the higher net cash position that I've just been through on the previous slide. This has been partly offset by a higher net pension liability, which increased from NOK7.1 billion to NOK8 billion at the end of the fourth quarter primarily driven by the lower discount rates in Norway. If we include the net debt in Qatalum and Sapa, which remained unchanged between Q3 and Q4, the total adjusted net debt is also down NOK1.1 billion to NOK16.2 billion at the end of the quarter.

I would then like to end today's presentation by summing up 2015, and looking a little bit into 2016. 2015 for us has been a year of many records. We have had record B&A results, we have record downstream results, we have record low implied cash costs in Alunorte and record production at Alunorte as well as Paragominas. Some of these effects of course driven by market effects or supported by market effects, but many of those are also driven on the things that we control ourselves, and that brings me a little bit further on to what we believe is a key part of the Hydro story. That of course is continuous improvement. Since 2011 we have delivered NOK4.5 billion in improvement across the value chain. These have been both operational as well as commercial improvements. These are not just simple cost-cutting measures, but it's also finding better and improved ways and more structured ways to work, always looking to find that extra kilo of products or that extra NOK to take to the bottom line.

And this year, this has been in particular valid for bauxite and alumina. The 6.3 million tons at Alunorte in the fourth quarter and the 11.7 million tons in annual speed at Paragominas are large contributors, together with currency, to the implied cost of $187 per ton. This, in combination with the secured ICMS framework in July this year, allows for significant value creation also going forward. Currently, as you know, we are experiencing low alumina index price but aftermarkets rebound, as they typically do on the alumina side. We expect the upside potential from moving alumina prices over to index again to reappear.

If we look into 2016, we will continue to work hard on the factors that we control ourselves. We are in a first-quartile position both on the alumina side, as well as the primary side, and we will deliver the NOK1.1 billion out of the better ambition in Hydro until 2019 of NOK2.9 billion. The decision to build the Karmoy technology pilot is an important part of maintaining and strengthening the technology position that we have as well as securing the position that we have on the cost curve. Both on the bauxite side and the energy side, securing of resources is crucial and important. A potential milestone in 2016 would be a decision to go ahead with the MRN transaction, but as the due diligence is still ongoing, there are of course two outcomes, two potential outcomes of that.

On the energy side we still have a sourcing gap to fill after the Statkraft contract expires in 2020. A potential positive decision on the industrial ownership law proposal for us to secure our captive portfolio for long-term industrial use and will increase our flexibility for the future. We will continue to high-grade the portfolio on rolled products. And at the end of this year we should be ready to produce the first automotive body sheet from the automotive line 3 in Grevenbroich to satisfy the large and growing need for aluminum for the car consumers and car companies in Europe.

And then finally, as the last and recent months have reminded us, we do operate in cyclical markets, and the importance of having a strong financial position is a clear competitive advantage for us in our industry. We continue to have this as a main priority, also allowing us to pay a safe and reliable dividend also going forward.

Thank you all and then we open up for questions.

Question-and-Answer Session

Operator

Yes, please. Then we will have questions and answers from both the auditorium and also from the web. And there is a microphone in this room and please state your name and affiliations. Any questions from the room?

Eivind Veddeng

Yes. Good morning. Eivind Veddeng from DNB Markets. Two questions. First on the global market outlook. You are taking down your demand expectation to 3% to 4%, but you're seeing a more balanced market. How should we look at that? Should we interpret that you're now becoming a bit more positive on the markets versus the capital markets day? Any color on that is appreciated. Also secondly, on rolled products, can you maybe bridge the year-on-year development in terms of cost, prices and also the trend in the Rheinwerk smelter?

Eivind Kallevik

On your first question, you are right. We have taken down the demand expectations from 5% to 4%, or 4% to 5%, to 3% to 4%. Now the primary driver behind that is the economic development in China. Outside China we are still at the same growth expectations as we had at the Capital Markets Day. I think when you look inside China you still see very positive developments within the transportation sectors and other segments. So where you are starting to see weakening is within the building and construction or continued weakening is within the building and construction. Now the building and constructions amounts to some 30%, 35% of the total market of aluminum in China. So that's where you are starting to see the weakening.

The good parts when we look into 2016 is that a lot of the discussions on the curtailing capacity actually starts to appear. So we've seen curtailment starting to take place in China. We see quite a lot of announcement in North America of course and some other smaller delays on projects, meaning that compared to what we had at the Capital Markets Day in the beginning of December, we actually expect that there's a larger likelihood for a more balanced market in 2016 compared to what we saw in -- that we expected in December, giving a little more of a positive viewpoint on 2016, compared to what we had two months ago. But it's still, as Svein Richard said, it's in the range of plus/minus 0.5 million tons. So there's still uncertainty around this.

And then your question on rolled more specifically, the Rheinwerk smelter of course follows the all-in metal price. So they are exposed to [indiscernible] as well as the sheet ingot price. On the other hand, they source alumina at market terms. So they should also from a cost perspective then follow the development, as you see, on the alumina price index. When it comes to margins in rolled, that of course is still a very competitive market, and what we see in certain areas of our product portfolio is that there will be a decline in margins as we get into Q1.

Operator

Then we have a question in front and then on the side.

Hans-Erik Jacobsen

I'm Hans-Erik Jacobsen at Swedbank. You have given some guidance on production volumes in bauxite and alumina in the first quarter. Could you take -- give us some guidance regarding a little bit further in the future? And also how much of the potential increase in production from current levels is made up the NOK1 billion cost improvement, development in that division?

Eivind Kallevik

I think if you look at the production levels in Alunorte, we have now had one quarter of 6.3 million tons. And a lot of the mantra that we've been talking about when it comes to Alunorte has been to stabilize the production, get down the variability on a day-by-day production level. That we are starting to see and that's what we reap the benefits of in Q4. So when we look into Q1/Q2, the target is still to keep that level. And then we have a longer-term target when you look towards 2017/2018 to lift that more towards 6.6 million, 6.7 million tons. But that's a longer-term target. I think for now the key focus is to stabilize the production.

At Paragominas, again, we produce 1.7 million tons or 17% above nameplate capacity. It is hard to foresee that we can take major steps beyond that, but there will always be continuous operational improvements of course. So, again, it's about stabilizing and securing the operations. And then your second question, Hans-Erik.

Hans-Erik Jacobsen

You have a NOK1 billion improvement program. How much of that is related to increased production from current levels?

Eivind Kallevik

There is some. But when it looks for -- when you look at this from a 2016 perspective, it's not necessarily production. It also has a lot to do with energy efficiency and energy metrics that we do. We are currently revamping the cold boilers that we have in Alunorte. We've completed one, one is in the process of being completed and the third one will be completed a little bit later first half. That will improve the energy mix and energy usage in Alunorte, significant impact on the costs.

Operator

Then on this side...

Eirik Melle

Eirik Melle, Danske Markets. Two questions regarding volumes. One is a follow-up from Hans-Erik. How sustainable is it apart from the target of increasing the nameplate capacity at Paragominas to sustain at levels like 11.7 million, not just one or two quarters, but in the years coming? And the second one is on the rolled products volumes. Even though with the seasonal order, then Q3 is quite much better than the Q4 last year. Can you comment something? Was the Q4 last year weak or can we interpret some positives into these Q4 2015 figures?

Eivind Kallevik

I think when it comes to Paragominas, we've had several good production quarters. And we think it is -- and I'm not getting into the decimals, if it's 11.6 million or 11.8 million. But we do believe it's sustainable to keep the production levels north of 11 million tons all the time. Then of course you will get into maintenance periods where you have to take out the capacity for shorter periods of time to clean the pipeline. That will have an impact. But from an operational perspective, yes, we believe that is sustainable. When it comes to the rolled results, it is fair to assume that the fourth-quarter results last year was relatively weak, also from a performance perspective and shipping perspective. So that explains part of the uptick in the results Q4 on Q4.

Operator

We have one in the back here.

Bengt Jonassen

Bengt Jonassen from Carnegie. I have three questions. On the bauxite alumina, is there an increased time lag on realized prices? Secondly, on the increased depreciation, should that affect the normalized CapEx levels going forward and increase them? And finally, the judgments on the dividends, is that more related to the actual net profit line or the adjusted net profit line? And then if it's the adjusted net profit line, it's 34% payout. Does that mean that the last year was an over-the-cycle performance for you guys?

Eivind Kallevik

Okay. I'll see if I remember all three of questions, Bengt. The first one was in terms delay in prices in bauxite alumina. No, there is no change in that. It follows the same pattern as we've had in the past. When it comes to the increase in depreciation in Alunorte and Paragominas, no we should not expect that to have any significant or meaningful impact on CapEx levels going forward. And the last question was the dividend. The question was if

Bengt Jonassen

Is it related to the net profit line or the net profit adjusted line?

Eivind Kallevik

Normally when we communicate the 40% over the cycle we relate it to the reported line, not the underlying line. That's the way we think about it.

Operator

Then we have some questions from the web, with [indiscernible].

Unidentified Analyst

Yes. First I have a question which both James Gurry in Credit Suisse and Menno Sanderse in Morgan Stanley has asked. Is there possible to give any additional update on the MRN process?

Eivind Kallevik

We are in the middle of the due diligence process. As we've said along the way since we announced the LOI is that we will do a good and thorough due diligence process. We've had these in place. So there's no other update and the process is going according to plan and we will announce something as soon as we have more concrete messages to give.

Unidentified Analyst

Then a question from Jason Fairclough in Merrill Lynch. How much of the alumina price fall is reflected in Q4 numbers and is there still quite a bit to come?

Eivind Kallevik

There is still a bit to come also in Q1. It was down $54 on the PAX side in Q3 and there is still some terms of dollars to come in Q1.

Unidentified Analyst

A final question from Hjalmar Ahlberg in Kepler Cheuvreux. What are your expectations for premium into the first quarter?

Eivind Kallevik

We booked approximately 50% of the premium for Q1 at some $335 per ton. The other half of that is more related to the standard ingot premiums. So that will drag that $335 down. So there's a guidance at approximately the same level as we delivered in Q4 in the range of $250 to $300 per ton.

Svein Richard Brandtzaeg

Are there any other questions from the audience here at Vaekero? It seems not. And then I thank you all for coming. Thank you for following us on the webcast. We will continue with one on one interviews with media here on the scene.

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