Norsk Hydro's (NHYDY) CEO Svein Richard Brandtzaeg on Q1 2016 Results - Earnings Call Transcript

| About: Norsk Hydro (NHYDY)

Norsk Hydro ASA (OTCQX:NHYDY) Q1 2016 Earnings Conference Call April 27, 2016 10:00 AM ET

Executives

Pal Kildemo - IR

Svein Richard Brandtzaeg - President and CEO

Eivind Kallevik - CFO

Analysts

Danielle Chigumira - UBS

Dominic O'Kane - JP Morgan

Daniel Lurch - Exane

Hjalmar Ahlberg - Kepler Cheuvreux

James Gurry - Credit Suisse

Operator

Turn the conference over to Mr. Pal Kildemo. Please go ahead, sir.

Pal Kildemo

Thank you. Good afternoon and welcome to Hydro’s First Quarter 2016 Conference Call. We will start today with a short introduction by President and CEO, Svein Richard Brandtzaeg, followed by a Q&A session where also CFO, Eivind Kallevik will join. For those that did not see this morning’s webcast of the results presentation, this is available on hydro.com.

And with that I leave the word to you, Svein Richard.

Svein Richard Brandtzaeg

Thank you, Pal, and good afternoon to all of you. Underlying EBIT for the first quarter of 2016 was 1.5 billion, largely stable from the first - fourth quarter of 2015 and down 1.7 billion from the first quarter last year. We have continued to see falling alumina and falling aluminum prices in the quarter which weights negatively on the results of primary metal and bauxite alumina. But we have also seen record low implied cost upstream through large extent driven by falling alumina and carbon prices affecting primary metal and also lower fuel oil prices affecting bauxite and alumina.

The continued high production in both the Paragominas and Alunorte contributed to the alumina cost development as well as positive currency tailwinds, but this effect is much less significant than what we have experienced in the preceding quarters. Downstream results are seasonally stronger and are the strongest first quarter downstream results we have experienced since the closing of the Sapa joint venture back in 2013. The most significant contribution comes from Sapa driven by the FX of the improvement programs as well as stronger margins.

We continue to see high production in energy driven by higher reservoir levels and combined with somewhat higher prices and this led to increased results in the first quarter. And finally, when it comes to the market side, we continue to expect largely balanced market for the primary aluminum in 2016.

Well underway with 2016 our improvement ambitions remain high on the agenda in a world of volatile sales prices, raw material cost, currency and inflation, it is important to be in control of the cost items which you influence yourself while at the same time ensuring that you innovate and adapt to keep track - taking market shares in high margin areas supported by positive longer term demand outlook. This is what our 2.9 billion improvement ambition is all about and we will strive to deliver on this as announced, which is also on track.

Optimizing our research base for the long term is high on our agenda and we are still working on the MRN due diligence and related processes to ensure we understand the value creating potential as high and extent as possible before making a potential purchase decision for MRN.

We have two significant projects undergoing, the automotive line 3 in Germany and Karmøy technology pilot Norway which we will deliver on time and on budget, both are key in strengthening our relative industry position and one will reduce the cost across our portfolio while the other will allow us to move into markets with positive long term demand outlook and strong margins.

We will deliver on all of this while at the same time ensuring that we maintain the financial strength to be able to meet whatever the market may send our way. Our financial strength is also key in allowing us to service our shareholders as announced as well as safeguarding the flexibility necessary for creating the most value long term value for our shareholders.

Pal Kildemo

Thank you, Svein Richard. Operator, we are now ready for questions.

Question-and-Answer Session

Operator

Thank you, sir. [Operator Instructions] We will now take our first question Danielle Chigumira from UBS. Please go ahead.

Danielle Chigumira

Hi, there. Couple of questions. So firstly in bauxite and alumina, FX rates for the real, how would you expect the implied alumina cash cost to develop over the balance of the year and secondly given the relatively low CapEx in this quarter, how would you expect spend especially on the growth projects to develop for the rest of year?

Svein Richard Brandtzaeg

Hi, Danielle. On the BRL side, if you look at the sensitivity slide on page 112, we had roughly 390, somewhat north of that in Q1 and its trading around 350 at the moment which is roughly a 10% decline. That should give us an effective work around $10 per ton for the rest of the year if it’s based where it is, so it is quite volatile at the moment.

Eivind Kallevik

On the CapEx side, it’s relatively low, but remember that we just recently [indiscernible] So we expect that to ramp as we ramp up the CapEx spending as we go through the year, then taking us to what the target of roughly 8 billion on aggregate for the company for the year.

Operator

We will now take the next question from Dominic O'Kane from JP Morgan. Please go ahead.

Dominic O'Kane

A couple of questions on cost as well, so the Qatalum cost during Q1 came down about 10% quarter on quarter. The lowest it's been for - as far as my numbers go back, is that sort of $12.80 a tonne cost sustainable over the next few quarters. On the - so could you just maybe give us a breakdown of the depreciation guidance that you expect to be in for 2016. And then finally could you maybe just give us a comment on the percentage of alumina sales on spot versus LME-linked during Q1?

Svein Richard Brandtzaeg

Sure, when it comes to the lower cost in Qatalum, that is very much related to lower alumina costs as both the index part as well as the LME prices have gone down in the quarter. So it's a little bit following the trend that we saw on the cost side. As we said, the alumina market has picked up somewhat, so this should be an increased cost I think for Qatalum also coming into second quarter. Working in the other direction there is some lower pet coke prices which should indicate that we get some benefits on the [indiscernible].

On the depreciation in bauxite and alumina, we had roughly, it’s around 450 million for the quarter and that is the expected speed more that we expect to see for the rest of the year as well. But then again you have to remember that this is converted back from local currencies into the regional krone, so that will depend on the currency department as we go forward. You had one more question Dominic I think.

Dominic O'Kane

It is on the breakdown of alumina sales, spot versus LME-linked?

Svein Richard Brandtzaeg

This quarter was roughly 50-50, and then we expect that to tag off a little bit as we get through the year somewhat higher index exposure towards the second quarter and for the rest of the year but roughly 50-50 in Q1.

Operator

We will now take the next question from Daniel Lurch from Exane. Please go ahead.

Daniel Lurch

The first one, quickly on Qatalum subway, you had made well improved results at Sapa, could you give us an update on what you have used of potential spinoff or IPO of the division, is there something you are considering. And the second question is generally on the industry in the European steel industry we have seen a lot of lobbying for entire dumping measures in some Chinese exports in recent months and prices have since then recovered, there have been a couple of measures. Is this something you would also consider for the European aluminum industry, is that something you are pushing for, these things would help? Thank you very much.

Svein Richard Brandtzaeg

Thank you Daniel, with regard to Sapa, we have established an option for redo when we established a joint venture, we put extrusion business together with extrusion business of - in one company Sapa and we still maintained that option and we will make decision on this, what to do about it when the time is right and we will come back to that later. If you go to lobbying and anti-dumping there are a couple of cases ongoing in the US leading up to export of aluminum from China there is agreement in general between China and US, where China promised to reduce the subsidies on export goods and also aluminum. And then on the examples where we see that the trade issues are coming higher on the agenda in some parts of the world and we do have the development in US you follow carefully and of course also we - there are some discussions also in the European aluminum industry. We are looking for associations with that and we don't have any conclusions on what we see, yes will happen but it is high on the agenda that is for sure.

Daniel Lurch

Is there anything you can saw on timing in the next couple of months or is it end of the year your target statement in that regard?

Svein Richard Brandtzaeg

No, I cannot specify any timing on it.

Operator

Our next question comes from Hjalmar Ahlberg from Kepler Cheuvreux. Please go ahead.

Hjalmar Ahlberg

Thank you. Short follow-up on the trading questions, I mean if this would happen what would you say could be the potential positive, is that premiums increased in US or what’s the dynamic or any positive outcome of that?

Svein Richard Brandtzaeg

That's a good question because as long as there are high inventories of standard ingots, I think that could be some limitation on the effects short term. Medium and longer term, it may have a bigger effect. So it’s difficult to speculate on that, but we are certainly following that development carefully, because it will have an impact, but I will not give any numbers, because that will be purely speculation from my side.

Hjalmar Ahlberg

Okay. Thanks. And then just looking on China, you are saying that you might do some more restarts there, and on the other hand, alumina prices are moving up and I guess there is some kind of dynamic there as well, because I guess the cost curve shifts up if alumina price goes up and that could may be increase the cost curve for the Chinese, what’s your view on that?

Eivind Kallevik

Exactly, that is also our view that we see the alumina prices going up. And at the same time, LME is increasing and the cost curve is changing and we - when we looked into the restarts for example, and also the additional capacity, there has been some restarts, but also less, I would say, new capacity in China also there, we thought for building new capacity in China, which seems to be somewhat reduced. At the same time, we see that there has been curtailed capacity that has started to come back again due to the fact that the Chinese, the Shanghai price is now coming up at higher levels than LME and becomes attractive for restart for some companies. But again, that is balanced against the fact that raw material cost is increasing. So again, we’re following this carefully and this will be interested to see how it spans out in the coming months.

Hjalmar Ahlberg

Okay. And then on primary metals, this ICM effects, how should we interpret this, is that annual one time hit over 100 million, or is it something that is coming each quarter now going forward?

Eivind Kallevik

No. It’s something less than the 100 Hjalmar. Well, it’s also the fact that we’d argue. And then this is a catchup from previous periods, where we’ve had sales of excess power from the power contractors that we’ve had. So you should not see this as a rate going forward.

Hjalmar Ahlberg

Okay. And then again on the eliminations, it was discussed a bit earlier today, but I’m just going to talk one more to understand about, so is it greatly that is the high eliminations, now, it means that the profits in this quarter for primary is maybe and bauxite alumina is lower than it would be if you wouldn’t have, I mean, if you combined the two, this may be a more better proxy for what the actual profits there was?

Svein Richard Brandtzaeg

I mean, to put this is in a very generic term, I would rather like to see negative eliminations because that means that the margins are widening on the products that we produce. When eliminations turn positive, it means that the margins in the business areas are tightening a little bit. And that is the reflection that we see in this quarter.

Hjalmar Ahlberg

Okay. And then just the last one on MRN, you’re saying that you’re now evaluating the value potential of the potential acquisitions. Can you give any specific on what kind of value you’re evaluating?

Svein Richard Brandtzaeg

I’m sorry, Hjalmar. We have not communicated and we’ve got the MRN obviously that we’re absolutely not in any rush. We have a lot of time. So we’re not in a way speeding up any of the processes, but we dig in to the details and do the proper due diligence, that will continue.

Operator

[Operator Instructions] We will now take the next question from James Gurry from Credit Suisse. Please go ahead.

James Gurry

Thanks very much for the questions. Most of them have been answered, but maybe just two quick ones, what do you think the impact of the maintenance at Paragominas will be in the next quarter. I understand that the Alunorte alumina production won’t be impacted, but what should we expect for the cost impact and the production numbers for bauxite. And just another perhaps curious question, the biggest impact other than aluminum is obviously currency, do you think you should present a view on where you think the currency is going to go over the coming months because it’s obviously something that you probably do think about quarter one?

Svein Richard Brandtzaeg

Yes, I will start with the safest part first James, which is the Paragominas maintenance. So we will do the pipeline picking as we normally do every year and then we will change the gear and the ball mill at the beneficiation plant, the one that we had up for maintenance last year. This means that the Paragominas mine will be out in parts of June in terms of producing and shipping bauxite to Alunorte. We will pre-produce quite lot ensuring that we will not affect the production at Alunorte such that from alumina perspective. The cost impact obviously with fixed cost at Paragominas will go up somewhat, but we don’t expect this to have significant earnings impact if you’d like, but of course there will be some negative impacts.

On the currency, you’re quite right, but we spend a lot of time just [indiscernible] predicating while the currencies will go up and down, it’s I would argue even more difficult in saying how alumina is going to go up or down, so we don’t really have a view on that, so I can’t give a direction now.

James Gurry

All right, thanks.

Operator

We will now take the next question from Dominic O'Kane from JP Morgan. Please go ahead.

Dominic O'Kane

Hi, just one quick follow up on alumina, externally sourced alumina, down little bit quarter-on-quarter and a bit more down year-on-year, so should we still be thinking about 2.3 million tons being the appropriate externally sourced alumina value?

Svein Richard Brandtzaeg

We still expect to source 2.3, Dominic.

Dominic O'Kane

Yes, thanks.

Operator

[Operator Instructions] We will now take the next question from [indiscernible] Berenberg. Please go ahead.

Unidentified Analyst

Hello. [indiscernible] from Berenberg Bank. Quick question on your alumina sales. Could you give us any indication how spot and contracts are working? And what is given more preferences and for how long are you tied into spot - contract sales?

Svein Richard Brandtzaeg

We have about - this year we have guided on roughly 50% on the split between alumina based contract and spot based contract that we expect them to - as deal contracts mature and run off, as we come up to some 65% next year, 75% the year after.

Unidentified Analyst

Sorry, could you repeat that 60% this year and then going to 65%?

Svein Richard Brandtzaeg

Well, 50% this year on average is expected for 2016, up to 65% next year and then 75% the year after.

Unidentified Analyst

And do you have any flexibility within after the three-year period to opt out of this contract or is it something that you would like to maintain on a long-term basis?

Svein Richard Brandtzaeg

We very much believe that the tendency in our strategy is to move towards the spot-based price contracts and we will do that as the old contracts mature. I will stop with 75% in 2018, but then when you get closer through the end of the decade, you should be north of 80%, 85% roughly, which will be on the index. There is very little opportunity, the upsell of the alumina related contracts, those are fixed long time ago and of course we honor the contracts that we are potentially entering.

Unidentified Analyst

Okay, many thanks.

Operator

It appears there are no further questions at this time, Mr. Kildemo, I would like to turn the conference back to you for any additional remarks.

Pal Kildemo

Okay. There seems to be no further questions. I suggest we end this quarter’s call. From all of us here Oslo, I would like to thank you for your attention today. If you have any follow-up questions, please do not hesitate to contact us. Thank you and have a nice evening.

Operator

Ladies and gentlemen, this concludes today’s conference call. Thank you all for your participation today. You may now disconnect.

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