Norsk Hydro's CEO Discusses Q3 2013 Results - Earnings Call Transcript

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Norsk Hydro ASA (OTCQX:NHYDY) Q3 2013 Earnings Conference Call October 23, 2013 10:00 AM ET


Rikard Lindqvist - Investor Relations

Svein Richard Brandtzaeg - President and Chief Executive Officer

Eivind Kallevik - Chief Financial Officer


Neil Sampat - Nomura

Daniel Lian - Bank of America Merrill Lynch

Ben Defay - JP Morgan

Jatinder Goel - Citi

James Gurry - Credit Suisse

Amit Pansari - Société Générale


Good day, ladies and gentlemen, and welcome to the Hydro quarter reports conference call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Rikard Lindqvist. Please go ahead sir.

Rikard Lindqvist

Thank you. Welcome to Hydro’s third quarter results presentation. Before we start the presentation, I’d like to draw your attention to the cautionary note in relation to forward looking statements, which is provided in the presentation material.

With that, I leave the word to President and CEO, Svein Brandtzaeg.

Svein Richard Brandtzaeg

Thank you, Rikard. And let me first talk with the underlying results for the quarter NOK 659 million, which is [helped by around NOK 120 million] from the second quarter and around NOK 0.5 billion compared to the third quarter last year.

The result was impacted by lower realized alumina and aluminium prices. However, the negative effect was offset by lower cost. The Bauxite & Alumina business was impacted by lower production levels at Alunorte alumina refinery following power outages that we have communicated earlier this year.

In Energy, the result was mainly driven by higher production and [spot] high prices. I am also happy that we now can -- have established Sapa joint venture, a group leader in extruded products which is also the largest extrusion company in the world.

Let us turn now to the aluminium price slide and we experienced prices between $1,800 and $1,900 per tonne in this quarter. The realized price went down from $19.26 in the second quarter to $18.22 per tonne. And for the fourth quarter we have sold forward 60% of the primary metals productions at $1,500 per tonne.

If you then take a look at the supply/demand balance outside China, we can see a better balance in this quarter. The total demand is a bit higher this quarter than the previously, also somewhat lower production. In total the demand now is back on the pre-crisis level, also bought 26.5 million tonnes outside China. The supply continued to decrease on both procurements and delays of new capacity more than offsetting the ramp up of new capacity.

We said earlier that the expected demand of 2% to 4% outside China this year. We now estimate the growth of 2% outside China. So this is mainly driven by lower than expected realized growth in emerging markets and our expectation for the fourth quarter has been changed compared to a quarter ago. We see the primary market outside China has largely balanced this year.

On inventory side, we see fairly balanced market so far and an expectation for balanced market for the full year. It results in stable inventories, inventory days outside China is somewhat down in the quarter. Reported inventories outside China is sort of 7 million tonnes whereof a bit more than 5 million tonnes is on LME. And if you take a look at the inventory space it is around 90 days for a moment.

If you then take a look at ingot premiums during last month we have received larger movements in Europe and U.S. and also LME proposed in U.S. housing dollars in July we still carried a fall into ingot prices. It seems like the prices have stabilized in last weeks in anticipation of the decision from LME expected to come later this month.

If you look at the recent quotes of ingot premiums, these are down 15% to 20% compared to the highest recorded levels and Japanese premiums are holding up around $250 per tonne. This could be affected by fairly tight ingot market in Asia but also the fact that there is no LME warehouses in Asia affected by the potential changes.

The two warehouses which would be affected by the proposed changes one in Europe and one is U.S. (inaudible) currently is breaking the queue approximately 300 days. The alumina price was fairly stable in the quarter around $320 per tonne and index price of alumina is currently also trading at about $320 per tonne.

The average price decreased $9 per tonne corresponded to 3% in the quarter. Alumina prices dropped 2% with effective alumina price has decreased marginally compared to LME from 17.5% of LME into high 17.3% of alumina price during the quarter.

With regard to the export/import balance in China, there is another, we see another all time high import of bauxite into China and we believe that this is in preparation for the export done on bauxite from Indonesia starting January 2014.

We saw similar stockpiling in the first half of 2012 prior to the temporary restrictions into used in Indonesia in May 2012. Bauxite stocks is now estimated to be around 48 million tonnes which correspond to more than one year supply in addition to what the also producer of bauxite in China.

Alumina imports increased in September but for the quarter imports continue at low levels. As we have said before on the primary side, there is not much new to. China continued to manage their supply in a month taking the net import/export close to zero. We expect this situation to continue throughout this year.

And then looking at the [semis] export we saw a small decrease from the second quarter which is seasonally expected and for 2013 we don't expect large changes compared to 2011 and 2012. If you can move over to Brazil and Alunorte, you already know that the experience to and related externally and use for voltages that caused the destruction to our alumina production at Alunorte.

As Alunorte sold offtake of bauxite from our bauxite mine Paragominas the lower production levels also affected the production levels in Paragominas. The mobilized resources to identify improvements and efforts in order to stabilize and increase the production and we see that this is now gradually go into right direction.

And I am pleased to see that the efforts starting to show result and we expect gradually increasing production in the fourth quarter. Overall production in the fourth quarter will be unsatisfactory and not at the same level as we had before the power outages, but it will slowly go into right direction as said. Although the production challenges impact 2013 target of the improving program on (inaudible) we maintained our ambition to deliver 1 billion in improvements by the end of 2015.

If you move on to Qatar and Qatalum and this metal is again showing strong performance. Qatalum is continuously producing above nameplate capacity. Third quarter production of liquid metal was approximately 607,000 tonnes on annual basis. Cash cost continue in a good track. Qatalum is also benefiting from the higher premiums of the metal products which expanded extrusion ingots and primarily foundry alloys product of LME. And we have (inaudible) dividend of $25 million or approximately NOK 200 million was received earlier this week. And Qatalum continuously generated solid cash despite low aluminium prices.

The $300 program for the fully-owned smelters is set to be concluded by the end of this year and this program is developing according to plan. The improvement therefore in our joint venture portfolio is also contributing to the positive or an improved cash cost receipt for Primary Metal business. In addition, we have seen positive effect of the cost position from exchange rate development especially in Brazil.

Now looking at the cash costs, it is trending downwards and so far at current cash cost is $1,550 per tonne on EBITDA margin in the quarter in the EBITDA margin so for this year of $375 per tonne. The EBITDA margin in the third quarter was on the same level as the first half, world LME prices dropped by more than $100 per tonne.

As you may have seen in early October, we announced at the (inaudible) Slovalco signed a program for the power supply beyond 2013.

If you look at downstream business rolled products, quarter-on-quarter we see a seasonal effect per se some rolled products were down 5% since the second quarter this year.

Compared to last quarter, sales in automotive segment increased by 10%, by sales in most of other segments experienced seasonal downturn and also saw customer destocking. If we compare total sales, year-to-date for rolled products, we see an increase of 5% compared to year-to-date 2012.

Beverage can and general engineering is contributing strongly while also Litho is marginally down. All those segments are fairly stable compared to year-to-year 2012.

On energy, we started the third quarter with the decimal levels above the 10 year average, low participation however in the quarter resulted in special loss below normal at the end of the quarter.

But the Nordic region results were 17 terawatt hour below normal. Water reservoirs in the Southwestern Norway where we have the two-thirds of our capacity are close to normal levels. The lower classification in the quarter supported prices giving an average cost of NOK 267 per megawatt hour in the Southwestern region of Norway which is fairly high for the quarter.

As I said, I am happy that we have now established a global leader on exclusive products, the 50-50 Sapa joint venture. Of the two months the focus in the company is to intimate the two organizations and of course to realize the synergies and drive for (inaudible) that is now ongoing in Europe.

So with that I leave the word to the CFO, Eivind Kallevik.

Eivind Kallevik

Thank you Svein Richard and good afternoon everyone and thank you for joining this afternoon’s phone conference. To start with, I would like to draw your attention to a specific reporting topic this quarter. As Svein Richard mentioned we did closed the Sapa transaction on the 1st of September this year.

The operating results for Hydro’s expedited were therefore for July and August still be presented net to financial items of tax as income or loss from discontinued operations and as such excluded from reported an underlying EBIT for Hydro. Depreciation of property, plants and equipments is also excluded for these periods.

Now following the completion of the transaction and going forward Hydro’s share of the operating results from Sapa in September included in share of profit and loss in equity accounted investment under the line other and eliminations.

With that out of the way, let’s get into some more of the details. The underlying results before financial items and tax increased for primary metal energy and for gold giving us a group result of $659 million for third quarter of $140 million from the second. Lower LME price is measured in used hours, were partly offset by the strengthening of the dollar against Norwegian kroner and Brazilian reals. Increased sourcing cost for alumina in the B&A segment was partly offset by lower fixed and variable costs in the other parts of the business. In addition and very importantly, we have that good and high energy production giving a good lift in results for this period.

We don’t further comment on the line other and eliminations. As you will see we have an underlying EBIT of the negative 87 billion versus negative 70 million in the previous quarter a change of 17 million.

As I mentioned before our share of the underlying net income from the Sapa joint venture is included in this line. And for this quarter there is a positive NOK 10 million affect reflected in this line. The other quarter-on-quarter changes mainly reflect changes in eliminations of internal gains and losses in inventories. For this period, the affect was negative 7 million versus the positive 40 million from previous quarter.

Adjusting for these internal eliminations on the Sapa effect, the result is NOK 90 million and charges of common services and other business had seasonal improvement compared to the second quarter.

If we turn to the high level quarterly resulted elements, as said we started, we left last quarter with 0.5 billion in underlying EBIT, and this quarter we saw an increase or an improvement in the energy volume and price of 0.2 billion, roughly 250 million is driven from higher production between the periods and that’s partly offset by somewhat lower prices taking the results back on to approximately 200 million.

Primary metal costs have an improvement of 200 million, roughly 60 million of that comes from improvement in variable costs where lower alumina cost is a big explanatory factor for that change.

The biggest cash though comes from lower fixed of 120 million of which half of it is seasonal effects where we have somewhat less maintenance activities in the finances during the summer period.

Aluminium volume and price is NOK 0.1 billion down between the quarters, we see that the LME measured in U.S dollars has a negative effect of about NOK 240 million that is partly offset by the dollar change which gives us a positive effect of roughly a NOK 130 million bringing us to the NOK 100 million change.

The Bauxite & Alumina volume pricing cost negative 0.1, primarily driven by somewhat lower alumina prices within that business area in addition to higher sourced external volumes for alumina to satisfy our supply contracts which has a higher price than what we saw last quarter.

On the key financial side, revenues are pretty much flat between the quarters. The increased volumes that we see in B&A and Energy is partly offset by the lower prices and volumes in the other business areas.

The underlying EBIT is as I said up from roughly NOK 0.5 billion to NOK 659 million for this quarter. We have excluded negative NOK 62 million from the underlying EBIT thus giving us a reported EBIT of NOK 597 million for this period.

Financial items for the quarter was a negative 246 million which includes currency losses of 152 million, a significant improvement from a negative 1.367 billion for the second quarter. This gives us an income before tax of 351 million, which results in the calculated tax expense of 162 million. Due a large share of the taxable income coming from energy the tax expenses influenced by the power of surtax that we have in this area resulting the tax percentage of 46%, somewhat up from the 28% calculated in the previous quarter. This gives us a net income of 321 million, up from a negative 665 million in the previous quarter.

Turning to the financial income slide. As said the net financials were negative 246 million for the quarter. As you will remember, in the last quarter we did experienced relatively large currency losses due to the weakening of the NOK versus euro and the dollar. That was in the previous period close to 1.3 billion and in this period it is 152 million and the 152 million is primarily driven by the weakening of the NOK versus the euro. All other effects between the quarters remained relatively stable.

Now on the slide items excluded from underlying EBIT, there are relatively smaller changes this quarter. We've excluded negative effects of about 62 million from the underlying results versus 144 million in the previous quarter.

If we work our way down the table, we see a relatively small effect this quarter on unrealized effects of power and raw material contracts of NOK 7 million negative in this quarter is related to an embedded derivative in one of the power contracts in our portfolio.

Second line, we did have a positive effect on unrealized derivative effects on alumina-related contracts that is driven from the fact that we have a long position out in time due to customer pricing. And then in the alumni environment we get the profit from that.

Third line, metal effects, again development which should be at this stage typically in the following aluminium market this launch should give us a negative effect, which we see. There is a small rationalization charge or actually a reverse local charge this quarter of NOK 9 million, which is reversing previous charges in our business areas.

On the gains, on divestments we have 53 million, which is basically reflecting the acquisition of Vigeland Metal Refinery, which is closed in the third quarter this year that gave us a re-evaluation gain of NOK 53 million on the shares that we held prior to the acquisition of the other 50% Rio Tinto.

Finally, items excluded in equity-accounted investments, Sapa 45 million, this is primarily related to derivative effects in that joint venture.

Now turning to the business areas, Bauxite and Alumina, we saw an underlying EBIT of negative NOK 370 million, down NOK 126 million compared to second quarter. This is primarily driven by the lower realized aluminium prices, as well as increased cost of the sourced alumina.

Due to the low production at Alunorte, Paragominas bauxite production is also low as Alunorte is the only customer of Paragominas. And in addition it had a two week maintenance period for the pipeline this quarter where we did a tie-in of the pump station number two in the middle of the pipeline. Also draw your attention to the fact that due to the increased sourced alumina for this period, the net index exposure was fairly limited in the quarter.

If we look forward, we do expect a gradual increase in alumina production during the fourth quarter. And following that, we should also see pick-up of the bauxite production at the Paragominas mine.

In addition with the higher production we also expect less externally sourced volumes in the fourth quarter, plus an isolation, it should have a positive effect on the current cash flows for the area.

In primary metal we saw an increase in the underlying EBIT from NOK 237 million in the second quarter to NOK 337 million this quarter. On the LME side we saw a decrease of roughly a $100 in realized prices resulting in a negative effect from this metal portfolio including Qatalum. This was as I’ve said before partly offset by the strengthening of the dollar against the NOK of approximately 3%. In addition we saw a lift in realized premiums on our products of 8% measured in NOK.

Altogether these three effects decreased the results by approximately 80 million. Offsetting this is lower variable costs which contributed positively with approximately NOK 60 million driven impart by reductions in the parts alumina for the metal price.

Largest positive contributor was fixed cost, about half of these were impacted by seasonal effects such as lower maintenance as I mentioned and in total this contribution is roughly NOK 120 million.

Looking into fourth quarter, roughly 50% of the production has been priced at around $1,800 per ton and that excludes the Qatalum sales. We expect slightly lower sales volumes for fourth quarter and we also expect somewhat higher fixed cost as we will have more maintenance in fourth quarter compared to the third quarter.

On Qatalum, we continued to see stable and higher production volumes well above metric capacity and stable cost of sales at the plant. The underlying net income was NOK 31 million, which is down roughly NOK 13 million from the second quarter reflecting lower sales price and somewhat offset by lower fixed cost.

I’d like to mention we are very happy with the continuous improvements in the underlying cash flows and of course as a CFO also very, very satisfied that we are now seeing the first dividend payment coming out probably to the owners.

On metal markets, we delivered an underlying EBIT of NOK 111 million versus NOK 147 million for the second quarter. This result decline of NOK 36 million is primarily driven by somewhat lower remelt volumes driven by seasonality and slightly lower margins.

Looking into fourth quarter, we expect the volumes to remain stable compared to third quarter. And we also expect slightly higher margins in the period. But at the same time, I am pleased to remind, let me please remind you that the results from trading activities due to the hedging and currency effects by nature can be volatile in any quarter.

For rolled products we have a good financial performance in a seasonally lower quarter, 4% seasonal decline in shipments driven by all segments with the exception of automotive and heat exchanger businesses. This was offset by higher margin contribution, as well as a continued lower operation cost per ton compared to second quarter.

Let me then remind you that fourth quarter is typically the weakest quarter when it comes to volumes in rolled products due to seasonality and it’s also the high season for maintenance activities. So there should be some increased cost also to that effect.

On the energy side, we have an improvement in underlying EBIT of NOK 270 million compared to second quarter leaving us with a result of NOK 485 million for the quarter. This result is primarily up on higher production which is somewhat offset by lower prices. The production increased by some 748 gigawatt hour, but the net spot sales increased by 844 plus indicating some lower concessional uptick volumes in this period.

Spot prices were held up relatively well in the period, held by higher power prices in Germany, continued outages of nuclear production and speeding and declining hydrological balance due to lower than normal precipitation in the quarter.

Looking into fourth quarter, we do expect somewhat lower production due to the declining hydrological balance. And then let me also remind you that in addition net spot sales are usually lower in fourth quarter as we typically expect and have higher concessional uptick in the fourth quarter.

On extruded products and the Sapa joint venture, for July and August as I said, we did report extruded products as discontinued operation, whereas for September we include our share of net income in the other and elimination section under the heading of Sapa.

Now if we start with extruded products, we saw an underlying income from discontinued operations of a positive NOK 57 million for July and August. But the reported income was NOK 132 million for the same period including items excluded a positive NOK 75 million which includes a positive transaction effects from the deal.

If we move to the September figures on the 50% basis, as I mentioned before, we have a reported net income of negative NOK 35 million is going to be exclude items excluded which for this period is mostly derivative effects we have listed in underlying net income of NOK 10 million. Our share of underlying EBIT for the joint venture is NOK 29 million.

If you look at the market developments, we see a slowdown and a decline of the general extrusion markets in Europe. The U.S. continues with the slow positive growth also helped by the automotive sector. And if we take a quick look at the pro forma sales figures for the Sapa joint venture, sales volumes were up 1% between Q3 2012 and Q3 2013.

If we turn quickly to the net cash/debt developments, we started this quarter with a net debt position of NOK 1.3 billion. We generated a net cash flow from operations of NOK 1.1 billion, NOK 1.8 billion coming from EBITDA which is partly offset by NOK 0.5 billion in increased working capital. This working capital is driven primarily from the fact that we have higher strong sales in this period.

We've invested 700 million which is very much in line. We communicated in the past keeping a tight capital shift and it is very much in line with the annual guidance of 3 billion for investments. This all leaves us with the net debt position at the end of the quarter of 0.5 billion, an improvement of 800 million during third quarter.

Finally, let’s have a look at the hedging of the U.S. dollar (inaudible) exposure. This, as we have said last quarter, was to secure the cost position, which in a low LME environment create stability and then just focus on improving operational performance which is in particularly important following the issues we mentioned earlier.

In total the hedged involves approximately $800 million at the end of second quarter and it has no increase approximately $1.2 billion. Of this approximately $350 million was hedged for the second half of ‘13 and approximately $870 million is hedged for 2014.

The average rate for ‘13 is roughly 2.30 and rate for ‘14 is roughly 2.41 and also please remember that hedging accounting is applied for these hedges.

And with that, I do conclude my presentation of (inaudible).

Svein Richard Brandtzaeg

So just to finalize overall presentation today is just to mention the priorities for the company. The number one is of course to increase the production in Alunorte. We see improved results of the efforts we have implemented week by week, but this is the biggest alumina refinery and growth and it will take some time before we have to add good capacity that we expect. And the first target is to take it up to the same level as we had before, the power outages is 5.8 million tonnes. We are approaching that it goes slowly in the right direction and offer that to lift the volumes of the nameplate capacity of Alunorte which is 6.3 million tonnes. We will continue to improve the smelter competitiveness. We are going to finalize the 300 program as I said in end of this year, but we are also realizing the improvement programs in the other parts of the value chain including the joint venture smelters, bauxite and alumina (inaudible) program. We have improvement programs in all products and energy and I will revert to these priorities and much more on the Capital Markets Day that is 12th December this year.

Rikard Lindqvist

Thank you Svein Richard and thank you Eivind. Operator then we open up for questions.

Question-and-Answer Session


(Operator Instructions). We will take our first question from Neil Sampat, Nomura. Please go ahead.

Neil Sampat - Nomura

Hi, good afternoon. I have two questions. Firstly on Primary Metals on the cost reductions that are taking place there. In terms of the fixed cost reduction, I think you basically said NOK 120 million down quarter-on-quarter, could you give us an indication as to how much of that is due to seasonality and how much of that was the $300 a tonne program that you’ve implemented?

And then a second question was on the capital and dividend, could you give us some sort of sense as to whether the (inaudible) dividend, is that an annual dividend and what we expect that to go and how frequently do we expect that to come in?

Eivind Kallevik

Thanks for the question Neil. First question first the 120 million and reduced fix cost, we have said that about half of that is due to seasonal effects. And I think the large part of the other part is part of the $300 programs without going into details on that, but the big part of this reflect in the $300 program.

Neil Sampat - Nomura

Okay, thank you.

Svein Richard Brandtzaeg

Sorry, there was one more question from Neil which was related to the Qatalum dividend. I think first and foremost I have said that we are very happy to see that we have not received the dividend from Qatalum. That is an important milestone from a very important plant (inaudible). So that is starting point. And then to come back and then I think we will use somewhat time before we come back on guiding what the annual dividend capacity is going to be when we potentially get the capital markets there.

So let’s first and foremost enjoy the 35 million and then reflecting the strong performance of the class and then we will come back to talk more about how this is going to be going forward.

Neil Sampat - Nomura

Great, thanks a lot.


Our next question comes from Daniel Lian of Bank of America Merrill Lynch. Please go ahead.

Daniel Lian - Bank of America Merrill Lynch

I just wanted to ask you a couple of questions on the premiums you realized in your Primary Metals business. I mean if we just kind of ignore what's going on with the LME warehousing rules for a second, I mean how sustainable do you feel your premiums in Q3 are just based on market fundamentals, I mean that they are quite high relative to a level of premiums received in the last two years? And then secondly we have seen some of your peers come out and make public statements against the (inaudible) warehouse rule changes, I was just wondering if we will, we can expect you to take a similar stance on these?

And secondly I just wanted to clarify a point on the accounting treatments of the extruded products business. I just to wanted to confirm that the depreciation for this business went to zero loss, it was (inaudible) discontinued operation and going forward when you'll be equity accounting the (inaudible) joint venture, the net income drive will increase depreciation again? Thank you

Svein Richard Brandtzaeg

Thank you for your questions. I can start with first one Daniel premiums and we will spell out going forward. As you know we have production of extrusion ingots, sheet ingots and primary foundry alloys as a main outfit from our casthouses and in Albras for example we have also stronger ingots. But with regard to the premiums for the metal products first of all, they are priced in a different way.

Let us start with the sheet ingots, which is based on LME plus standard ingot premium, plus sheet ingot premium on to product. So that means that for sheet ingot that goes to the holding mills. The pricing of sheet ingots has an impact immediately when the ingot price goes down. So, that is one case that is happening and for the pricing of sheet ingots.

The operational sheet ingots and foundry alloys, they’re priced on LME plus the premium for the product and we have some experience from the past that it takes some time before we see the response in the market for foundry alloys and extrusion ingots when changes on standard ingots. But we should expect that there will be a change and the delay it will probably take some ones. So and will not proportion that there is 1 to 100 relationship between changes in standard ingots and changes in extrusion ingot and foundry alloys but we are expecting some decline in metal products prices and we see a decline in standard ingot price as we are hoping as we have seen viewing the last few months.

And Eivind you may answer the last one.

Eivind Kallevik

Yes. On the question of depreciation on discontinued operations, I do say that when you do classify discontinued operations you have to stop depreciating assets. So for that period when that was classified as discontinued there were no depreciation impacted in the results, but of course changed again from September 1st, for the period after September 1st there will be depreciation impacting results of this period of the Sapa joint venture.

Daniel Lian - Bank of America Merrill Lynch

Okay. Thank you. And just one on the question about whether you’ll be, LME, you’ll be taking similar steps from those periods against the proposal LME rule change?

Svein Richard Brandtzaeg

We have just stated that transparency is very important there and we are supporting input transparency. And that's it that would be communicated in connection to the changing [webhosting] rules.

Daniel Lian - Bank of America Merrill Lynch

Okay. Thank you.


Thank you. Our next question comes from Ben Defay of JP Morgan. Please go ahead.

Ben Defay - JP Morgan

Yes good afternoon everyone. Most of my questions, I make sure have been answered, but maybe one question on the strong performance in your energy business that was partly driven to substantial increase year-on-year in Norwegian power prices, you mentioned outages in Swedish power plants as one of the reasons for that. Is this something that has been solved and hence should expect more stability in pricing in the fourth quarter or is that something ongoing? Thank you.

Svein Richard Brandtzaeg

Yeah that prices of energy in the Norwegian market is presenting on several effects of some cost and when some capacity is taken out and then it has the impact on prices, it is also the participation is important in addition to the [Tampa] job. Now we are approaching the colder climate with the late autumn early winter and we have seen that before has an impact on prices going forward. And we have seen that (inaudible) for France and Sweden is been taken in and out depending on maintenance programs. And of course, when they have a maintenance program capacity is going out and that impacts the prices all.

So it depends on several factors, I wouldn’t speculate on this, we’ll spell out in the coming quarter, but in general fourth quarter is quarter with colder climate and in the end it is the precipitation that nobody knows about that will also influences and also some external factors like the Swedish nuclear power stations.

Ben Defay - JP Morgan

Okay. Thanks.


Thank you. Our next question comes from Jatinder Goel of Citi. Please go ahead.

Jatinder Goel - Citi

Hi gents. Just a couple of questions firstly on your fixed cost improvement in the primary metal business, you say about half of 120 is due to seasonal maintenance, is that carried out in all three remaining quarters and you don’t spend that money only in third quarter or how should we look at it? And secondly on variable cost of 60 million, there was a comment made in the morning that part of it was due to the one-off items on energy pricing, could you please elaborate a bit on that? Thank you.

Eivind Kallevik

Yeah. If we do the variable cost first then yeah. Primarily driven by lower LME or alumina prices for primary metal in this period due to lower sourcing costs for them as LME has been going down. The second part on the energy side there are some one-off impacts on the sourcing costs or grid costs rather than the sale in this period which we don’t expect to come back. But that is not the significant part of the 60 million that is a part of it, but it’s not a significant point.

Svein Richard Brandtzaeg

And your question on maintenance again it’s seasonality and typically during the summer where all the experienced and long time worker go on vacation and all the engineers go on vacations, we spend less time and effort and money on maintenance in that period.

So you may say that that lower amount is you can only spread out through all the three quarters, but it is just a way it fluctuates during the year, third quarter is typically lower on maintenance.

Jatinder Goel - Citi

Okay. Yeah, if I could just start to follow up, could you give us the current run rate on your 300 program? You are saying, you will achieve it by the end of this year. How far have you been till the end of 3Q?

Svein Richard Brandtzaeg

So like as I said for the last, I think 50 courses, but we are following the targeted pace of the improvements? We were at 235 at the end of 2012 which is the last one we communicated specifically, but obviously we are getting closer towards the end of the year, so we should get very close to the 300 as we speak but we haven’t given a specific number as of today.

Jatinder Goel - Citi

Okay. So half of the 120 fixed cost is definitely not coming that sustainable amount, is that a fair assumption?

Svein Richard Brandtzaeg

More or less, in both strokes.

Jatinder Goel - Citi

Okay, great, thank you.


Thank you. And we will now take our next question from James Gurry of Credit Suisse. Please go ahead.

James Gurry - Credit Suisse

Hi, guys congratulation on the result and particularly the progress on the cost cutting the markets need to be taking it quite well. I just got two quick questions. Just on the premium, you have realized in this quarter, a record level of the premium. If the LME go ahead with their rule changes, do you think that premium will go back or your realized premium would go back towards the historical arrangement seems to be between 13% and 15% or is there restate of market lower than that.

And just the second set of questions, just related to your partner Violette in the Bauxite & Alumina division. Have you spoken to them about the MRN bauxite mine and do you seem to be the natural owner of it, but there is some peculiarities with your off-take agreement. Have you got any views if and when VAW might sell that and if that would impact your business given that you’ve got the off-take agreement there?

Svein Richard Brandtzaeg

Thank you, James. With regards to the first question, premiums going down from record high level, it is also impacting also the premiums for the metal products, which has also improved fairly better during the last months. And with regards to the volatility and what can happen going forward, I understand your question if we can go back to the low levels as we have seen before.

I will say that with regards to standard ingots, the reason for the standard ingots is the availability in different geographies that is setting more or less the premium for the standard ingots. It's a hot product, the effect of the warehouses that you can say has some influence. How that will develop in all warehousing [routes] and how that will influence on that premiums for the metal products will be more indirectly where lower cost for standard ingots means that the remelting of standard ingots becomes cheaper than what it is now, now it’s extremely expensive because of the high cost for the standard ingot and that has driven also the premiums for the metal products.

So when the standard ingot price or premium is going down then there will be more competition probably in metals, they’re also competing the primary [cost process]. So again it’s difficult to say how this will end up, but it will have some influence definitely also on the metal products again.

With regards to the discussion about MRN and VAW and the acquisition of course we never comment on merger and acquisitions. We have evergreen agreement, off-take agreement from MRN, so we have steady supply for the coming years from MRN on bauxite to have enough panels of bauxite and that we can sell, but we are not commenting on any changes on ownerships or also with regard to the shares VAW has, you have to ask VAW about that. Thank you.

James Gurry - Credit Suisse

Alright. Thanks a lot guys.


Thank you. We will now take our next question from Amit Pansari of Société Générale. Please go ahead.

Amit Pansari - Société Générale

Hi. I have a question on Sapa JV, when I looked at the slide 45 where you’re putting the pro forma numbers, quarter three underlying EBIT was NOK 24 million and for September only you’re saying that underlying EBIT is NOK 29 million. So just want to understand what has changed in between three months that your full quarter number is lower than just one month number? Thank you.

Eivind Kallevik

Just one second. Yeah, I mean this has a lot to do with against seasonality in this period. Typically there are variations during the quarter and during months, remember that the NOK 29 million is really only one month as you say. There is notification periods in Europe and other places where we operate during July in August. So that is really the reason why there is very limited result effect if any from July and August.

Amit Pansari - Société Générale

Okay. Thanks.


Thank you. (Operator Instructions). We have no further questions at this time.

Eivind Kallevik

Okay. Thank you. That concludes the call. Have a nice evening.


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

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