Norsk Hydro ASA
Q1 2021 Earnings Call Transcript

Published: 27 Apr 2021

[Halvor:]

[Operator:]

Thank you. Good morning, and welcome to Hydro's Q1 2021 Presentation and Conference Call. We will start off with a presentation, followed by a Q&A session. Our CEO, Hilde Aasheim will start the presentation followed by our CFO, Pål Kildemo. The presentation slides we will walk through can be seen on the webcast. The link to the webcast as well as the slides can be found on hydro.com. Please note that you will need to dial into the conference call to be able to ask questions at the end. It's not possible to ask questions over the webcast. If there are any media inquiries for one-on-ones with Hilde or Pål after the presentation, please contact our Head of Media, Halvor Molland.

[Hilde Aasheim:]

Thank you Molena , and good morning and welcome from me as well. Let me start with the highlights for the quarter. Next slide please. I'm pleased to see earnings and returns picking up across most of our operations on higher margins and volumes, but also on continued low costs especially in exclusions. For Q1, we report an EBITDA of NOK 5.2 billion, while free cash flow came in at negative NOK 0.8 billion mainly driven by seasonal working capital build. In the first quarter of 2021, we saw a strong global recovery driven by the reopening of economies and substantial fiscal stimuli. As a result, we saw a decrease in oversupply in primary aluminum market and analyst now expects a large balanced market for 2021. Hydro execution have a record result this quarter, driven by strong volume growth, improved margins and continued cost savings from improvement program initiatives. Hydro energy also experienced a record quarter driven by higher pulp prices, production volumes and the expiry of legacy power contracts. I'm also pleased to see that our improvement program is ahead of plan and continues to be a focus area throughout the whole organization. A milestone in this first quarter was the announcement that Hydro entered into an agreement to sell its rolling business to KPS Capital Partners, completion of the transaction is expected to take place in the second or third quarter of 2021. The sale of Rolling will strengthen our ability to deliver on the 2025 strategy. Another important milestone this quarter is that we have made the investment decision for the fuel-switch project at the Alunorte refinery in Brazil. The fuel-switch project is an important enabler toward reaping our climate targets to reduce our CO2 emissions by 30% by 2030. Hydro has set out a clear strategic direction towards 2025 where we aim to strengthen our position in low-carbon aluminum, while exploring new growth opportunities in renewable energy. The new growth initiatives within Hydro Energy are progressing well. And last month, we announced our interest for hydrogen. We see a large potential for hydrogen replacing natural gas at our plants, and by that reducing our climate footprint. We will explore the potential for developing an operating hydrogen facility to meet the internal demand as well as serving an external market, leveraging the company's industrial and renewable power expertise. Let's turn to the next page please. Health and tested is our core priority in Hydro both for our employees and the communities where we operate. An injury-free environment is our ultimate goal and we are continuously working to avoid any incidents to happen.

[Pål Kildemo:]

Thank you, Hilda, and good morning from my side as well. I hope that you and yours are all keeping safe and well. Before we move into the details of the quarter, I would like to just make some comments on changes in our performance measures for 2021. We reviewed our key financial metrics used for performance follow-up and managing capital during 2020. The goals of the review were to achieve clear communication aligned with industry and peer practice and also, simplify where possible. Input from you, the key users of our reporting material was highly prioritized in this process. This process resulted in a decision to focus on EBITDA and adjusted EBITDA as the main performance measures going forward, moving from EBIT and underlying EBIT. We are moving from items excluded to adjusted items as this line also includes elements included in the results, such as currency elements from our strategic hedging contracts and from the embedded derivatives on a long-term energy sourcing contract moving into aluminum metal, which are now being realized from 2021 and upwards. In addition, on the 5th of March 2021, we announced an agreement to sell our rolling business to KPS Capital Partners. And following the agreement, operating results for the rolling business are presented net of financial items and tax as income or loss from discontinued operations and separated from Hydro's reported EBITDA and adjusted EBITDA in the first quarter reporting. Next slide please. Let me then move over to the high level result overview. Hydro's adjusted EBITDA for the first quarter of 2021 was NOK 5.182 billion compared with NOK 3.810 billion for the same quarter last year, an increase of NOK 1.4 billion. On the positive side, we see higher all-in metal prices, higher energy prices, volumes and new contracts in energy and improved margins and volumes in extrusions, which all contributed positively to the results. These positive elements were partly offset by higher raw material costs, mainly fuel, oil, energy, alumina and carbon. And in addition, we had negative currency effects on the strengthening NOK versus the dollar and additional maintenance-related costs in bauxite and alumina. Next slide please. If we then take a look at the key financials for the quarter then the revenues are stable at around NOK 32 billion for the first quarter. Adjusted EBITDA came in at NOK 5.2 billion, as explained on the previous slide. And the largest adjustment to EBITDA of a total NOK 1.1 billion are related to unrealized losses on LME-related contracts of NOK 1.2 billion. This is mainly related to our strategic hedging positions entered into over the latter quarters. This is offset by net foreign exchange gains and a positive gain on a leasing of a small thermal storage company that we hold and presenting. In addition, we had around $200 million adjusted from EBIT, driven by restructuring-related impairments in extrusions and accelerated depreciation related to the announced closure of the Allogene carbon AMO plant. Financial income for the quarter amounted to NOK 424 million related to positive currency effects on the embedded derivatives in the energy sourcing contract, as the NOK has strengthened compared to the euro, which is partly offset by interest expenses. Our tax expense was NOK 776 million for the quarter or about 29% of income before tax, in line with our long-term guidance of around 30%. Overall, this provides a net income from continuing operations of NOK 1.9 billion, up from negative NOK 1.7 billion, the same quarter last year. Adjusted net income from continued operations was positive NOK 2.4 billion, up from NOK 0.8 billion in Q1 '20. And consequently, adjusted earnings per share from continuing operations was NOK 1.15 per share, up from NOK 0.39 per share in Q1 '20. Now, let's move into the business area. Next slide please. If we start with bauxite and alumina, then adjusted EBITDA decreased slightly from NOK 1.102 billion in Q1 '20 to NOK 999 million in Q1, 2021. The quarter saw a positive effect of a higher realized alumina price, currency effects of weaker BRL against the dollar and higher alumina sales. These three categories in total impacting results around NOK 700 million. This was more than offset by higher raw material prices, impacting results around NOK 200, million mainly related to fuel oil. In addition, the higher costs related to the ship on loader event in Q4 and higher sourcing cost for alumina, impacted results in total of around NOK 600 million negative for the quarter. Despite high COVID contention rates in Brazil and the ship unloader event, our preventive measures has resulted improved production in the quarter for both bauxite and alumina with Paragominas producing at 11.4 million tonnes annualized speed and Alunorte at 6.2 million tonnes annualized. So in sum, all of these factors resulted in a higher implied alumina costs per tonne in Q1 2021 of NOK 243 million, which is $7 million above Q1 '20, while overall margins ended up at similar levels year-over-year. Compared to the fourth quarter, we have seen a slight decrease in costs and a $20 increase in margin. If we look into Q2, Denali Norte is expected to continue to operate at around nameplate capacity. We also expect costs associated with the sale in repair to come down to around NOK 100 million for the quarter, but this is more than offset by higher prices for fuel oil, and also maintenance of Paragominas, reducing bauxite volumes and listing maintenance. Next slide please. If we then move further upstream to aluminum metal, then adjusted EBITDA increased from NOK 1.197 billion in Q1 '20 to NOK 1.754 billion in Q1 2021. We experienced a $235 higher realized LME and higher premiums and sale volume. In total, this contributed with a NOK 1.5 billion effect. This was partly offset by a weaker NOK against the dollar of around NOK 600 million and higher alumina, carbon and power prices of around NOK 400 million. It is also worth mentioning, that we have booked a positive NOK 120 million risk-adjusted CO2 compensation, which reflects two months of eligible sales volume. Although, not all elements are approved by the relevant authorities at the end of March, based on the elements approved, we have concluded that estimates reflecting the uncertainty in final approved can be recognized. A full year of production is currently estimated to result in CO2 compensation of between NOK 700 million and NOK 1 billion. When it comes to the outlook for Q2, we have by the end of March sold approximately 65% of our primary production forward at a price level of around $2,108 per ton. This includes pricing from our strategic hedging program. On the premium side, we have secured around 59% at around $333 per ton. And we expect the premium level to rise to between $275 to $325 per ton. We are currently seeing strong development in the market premium, which will translate into further increases in premiums for the third and fourth quarter given our current booking setup. Given the market prices for raw materials, we also expect smaller increases in raw materials for the second quarter mainly carbon. This will partly be compensated by higher Tier 2 compensation, reflecting three and not two months for the second quarter. In addition, due to the continued ramp-up at our Husnes line B, and also improvements in production at Husnes line A at Albras and Inda, we expect primary aluminum production to increase by around 20,000 tonnes in the coming quarter. Next slide please. For metal markets, the adjusted EBITDA ended up at NOK 78 million, down NOK 209 million from NOK 296 million in last quarter. The results decreased mainly due to lower realized sales premiums in recycling and negative currency and inventory valuation effects. If we exclude the currency and inventory valuation effect, the result for the quarter was not NOK 161 million, which is up from NOK 119 million in Q1 2020 driven by stronger results in our commercial operations. Looking into the second quarter, we expect stronger results from our recyclers, but also remember that as always results from our commercial operations are by nature volatile. Next slide please. If we then move downstream, adjusted EBITDA per exclusion significantly increased from NOK 1.242 billion in Q1 2020 to NOK 1.744 billion in Q1 2021. We reduced fixed costs significantly following the COVID outbreak, and we still keep these costs low as the markets improve, also supported by significant improvement work and the restructuring undertaken last year. The results were also positively impacted by higher volumes driven by strong demand, increased margins, and also lower variable costs. It is also good to see that extrusions are now back above their long-term cost of capital on a 12-month rolling basis, after a couple of years of being right below, and the continued improvement in the coming year should ensure that extrusions continues generating economic value. Looking into the second quarter, we expect a continued strong demand and continuation of low fixed costs. I will also repeat Hilde's earlier guidance and that we should see a strong second quarter as our volumes are expected to grow more than what market analysts are currently estimating for the market as a whole. Next slide please. We end the business area review with energy, which delivers an adjusted EBITDA of NOK 841 million, increasing from NOK 505 million in the quarter of 2020. The quarter saw a seasonally high production at higher prices, due to below normal temperatures, and low wind power output compared to the same quarter last year prices of NOK 422 million quarter today. However, uncertainty is still large, and will depend on the hydrological balance going forward, and when the spring fall takes place. Next slide please. We now move from the business areas to the development in net debt. Overall, our net debt position increased by NOK 1.2 billion. We started Q1 with NOK 7.8 billion in debt. Then, we had an adjusted EBITDA of NOK 5.2 billion. Net operating capital increased by NOK 2.4 billion driven by the normal seasonal increase, but also strong customer demand in addition to increasing prices. Other operating cash flow adjustment amounted to NOK 2.3 billion, mainly driven by tax payments, bonus payments, interest expenses as well as also negative collateral effects from our hedging positions given the very – current very strong pricing environment. As a result, we generated a net cash flow from operations of positive NOK 0.5 billion in Q1. Then, we had investments coming in at NOK 1.3 billion. And then, we had other effects of NOK 0.7 billion, which are mainly driven by positive currency effects on debt. And finally, net cash used in discontinued operations amounted to negative NOK 1.1 billion impacted by increasing net operating capital in our rolling unit. At the end of the quarter, we ended with NOK 9 billion in net debt. If we also comment on adjusted net debt then remember that, the adjusted net debt definition reflects Hydro debt and liabilities only, and does not include the previous adjustment for Hydro's share of net debt in equity accounted investments. If we look at adjusted net debt at the end of the first quarter 2021 then it decreased by around NOK 10.3 billion compared to Q4 2020. I've just explained NOK 1.2 billion through the net debt increase. Of net passion liabilities decreased by NOK 10 billion mainly due to reclassification of liabilities in rolling and liabilities in the disposed group. Higher discount rates in Norway, as well as positive returns on pension plan assets in Norway also contributed positively. Other liabilities decreased by NOK 1.2 billion mainly due to reclassifications of asset retirements and restructuring liabilities in rolling. And with that the total adjusted net debt at the end of the first quarter of 2021 amounted to NOK 12.3 billion which is a reduction of 45% compared to Q4 '20 and 63% compared to the high level seen at the end of Q1 2020. Next slide please. Let me then end with an update on our strategic hedging program. Since the last quarterly presentation, Bauxite & Alumina has extended the dollar BRL head to cover 2023 as well, resulting in a 30% hedge for the years 2021 to '23. In addition another 100,000 tonnes per year of aluminum hedges have been placed for the year '22, '23 at price level seen in the middle of April. The total aluminium hedge amounts to 250,000 tones for 2021 and 350,000 tonnes for '22 and '23. Raw material costs have been partly secured using financial derivatives or fixed pricing on physical raw material contracts. In addition an amount of dollar NOK hedges are in place. And with that I give the word back to you Hilde. Next slide please.

[Hilde Aasheim:]

Thank you, Paul. Let's then conclude today with our key priorities going forward. Health and safety will always be our priority both for our employees and the communities where we operate. We will continue to capture opportunities from strong markets to grow both volumes and margins. The improvement program is an important enabler to deliver on our strategic selection and will continue with full force. Our cost program and commercial ambitions have strong momentum and is well anchored in the organization. We will execute on the 2025 strategy to strengthen our position in low-carbon aluminum and grow in recycling and expand and diversify in new energy areas including renewable growth batteries and hydrogen. We will reaffirm our ambition -- we reaffirm our ambitious target for climate and environment as sustainability is one of our competitive advantages and a key enabler for successfully delivering on our 2025 strategy.

[Halvor Molland:]

Thank you, Hilde. Then operator we are ready for questions.

[Operator:]

We take our first question today. Please go ahead. Caller, your line is now open.

[Liam Fitzpatrick:]

Good morning. It's Liam Fitzpatrick from Deutsche Bank and first question or 2 just on your new growth areas. I guess just a high-level question trying to understand your thinking. There's a lot to absorb in this release. And there's now three or four different growth avenues that you're considering. So the question is, do you think you're taking on too much given that the last two years has really been about cutting costs and simplifying the business? So interesting your thoughts on that. And then more specifically on hydrogen can you give any sort of details on how much equity ownership you want to keep of this new hydrogen company that you're setting up is the plan to keep over 50% ownership? And can you give any kind of feel for the level of investments we could see if you do proceed with some of the projects that you're considering over the next one to two years? And one final operational base one if I can. Just on the extrusions business which has had a very strong quarter. How much of this uplift that we're seeing in Q1 and that you're guiding to Q2 is driven by lower costs which will ultimately come back once travel restrictions and travel resumes? Thank you.

[Hilde Aasheim:]

So if I can start on your comment to the growth areas and your question, is this too much? That is obviously a question that is -- that we ask ourselves. But here that is one of the reasons why we have been very carefully in establishing separate entities refencing the initiative as well as realizing that the new entities within new energies has a lot to learn from each other. And we also see that these new initiatives also creates a lot of excitement in the rest of the organization, while when we see that as you said we have been in a cost focus mode for many years. We see that this creates opportunities for our people to move in the company. And so yes, it's a lot on the agenda, where I believe that with the way we have set this up in separate organizational entities with mobilizing the people from our own organization, but also coming from outside, because we realize that in some areas we also need to -- we need expertise from outside. I feel confident that we have the right focus, and let's say, the good basis for developing these renewable energy areas. When it comes to the -- perhaps you can comment on the equity. When it comes to the hydrogen area that is the newest and there's still a lot that we need to mature in terms of how we will set this up. We will organize it as a separate entity. We will bring in partners and -- but at this stage, it's still early days in, let's say, the financing of it. When it comes to the extrusion and the cost situation, yes, extrusion has done a fantastic job when it comes to working on the cost base both during the during 2019 and 2020, but now also focusing on to preserve as much as possible over has been gained through the SG&A initiatives, but also obviously, getting effect of the restructuring that was done in the two last years. So we are cautiously optimistic in the sense of preserving as much of the gains that has been made. And -- but then also continues to focus on an efficient cost base of the site.

[Pål Kildemo:]

Just to supplement Hilde on the equity ownership and capital expenditure side for both Dyne and the hydrogen ventures we are targeting majority of the ownership. And then for both of these entities we are working to set up a model, which limits the cash pull from the hydro company. So both of these ventures although given the ownership side CapEx, et cetera, will be consolidated in to Hydro's balance or what is done on the top level not what is on in special purpose vehicles. We still aim to do it through more or less cash neutral set up for Hydro. The new growth initiatives which will have a cash impact on Hydro in the short to medium-term is the batteries or battery initiative.

[Liam Fitzpatrick:]

Okay. Got it. Thank you.

[Operator:]

Thank you. We now move on to our next questioner. Please go ahead caller. Your line is now open.

[Jason Fairclough:]

Yep. It's Jason Fairclough at Bank of America. Thanks for presentation. And Pål just upfront I wanted to thank you for your revised approach on the reporting metrics. This is going to be very helpful for comparability with peers. Right. So thanks for that. Look two quick questions from me. First, in terms of the market, China is exporting less aluminium by the looks of things. So we're going to have tight markets outside China. Could you talk about what price would see you consider adding primary supply or what is the incentive price for you to build a new smelter? And then, second just in terms of the brands the low-carbon and the recycling. So volumes are picking up. But can you talk about, whether this is actually a premium product yet?

[Pål Kildemo:]

Thanks Jason. I can start on the upstream side. At the moment, we are not discussing increasing primary aluminum capacity within our portfolio. That being said, the integrated margin level for the Norwegian operations is that, a level would make smelter investment more robust than they have been for a very long period in time. But at the moment, we are running a sustained and improved focus on our upstream business areas, and also driven by the fact that we've seen investment costs in other parts of the world being much lower than in the western part of the world. So we will continue to follow development. And see how it plays out. But there's not a price level that figures up to make investments in the short-term, then on low-carbon products?

[Hilde Aasheim:]

Yeah. I can comment on that. Well, the low-carbon products are still in the early phase. And what we have been doing is that we have targeted market segments that appreciate the low-carbon such as, the bidding system and with the examples that I gave from the Google office. And here we see a willingness to pay a premium. But this is how we have to work to expand the interest and to -- and for the awareness of how the metal is produced and with the carbon footprint. So this is an ongoing work that we have to do. But we see that there is a trend out there. And these products get more and more traction.

[Jason Fairclough:]

Yeah. Thanks very much both. Could I just have a follow-up? In terms of adding volumes, can you just remind us, do you have any opportunities to increased primary metal production? Are there, -- is there multiple capacity, or do you have low capital intensity brownfield expansion potentially any of the smelters?

[Hilde Aasheim:]

Right now we are in the ramping up of the Husnes meter in Norway. It's a line that was closed in the financial crisis, but to then, and we will be up and full capacity during the summer this year. Other than that, we have some capacity out in several coal, but that's just a minor portion. That's some -- at this point, we are almost at -- operating at full capacity in the smelter portfolio.

[Pål Kildemo:]

So additions will be more related to increase initiatives by getting more out of existing capacity on top of what Hilde mentioned...

[Hilde Aasheim:]

And recycling.

[Pål Kildemo:]

And recycling.

[Jason Fairclough:]

Okay. Thanks very much both. I appreciate it.

[Operator:]

Thank you. We now move on to our next questioner. Please go ahead, caller. Your line is now open.

[Ioannis Masvoulas:]

Hello. Good morning. This is Ioannis Masvoulas from Morgan Stanley. Thanks very much for the presentation today. The first question from my side, just following up on Jason's question around, potential for aluminum growth within the portfolio, it sounds like a lot of it is going to come by recycling. And it's fair to say, that over the past six months you have been focusing a lot on diversifying away from primary aluminum into all the green growth areas you have been talking about today. If we were to fast forward to let's say, 2030, could you share with us your vision on how the earnings contribution from your B&A and smelting activities could change over the timeframe, relative to the 40% to 50% EBITDA share, we've seen in the past years. I'm also here for the first question.

[Hilde Aasheim:]

I think we have -- when it comes to the -- we have shown some potential in terms of both EBITDA and growth, when it comes to both the renewable energy batteries as well as now the new hydrogen. But still the low-carbon aluminum part will be -- will contribute a large part of the company. And that is why we have these two pillars that -- two pillars in the strategy to continue to grow on the low carbon with particularly growing in recycling and then, to develop these new opportunities with the potentials that we have illustrated.

[Ioannis Masvoulas:]

Okay. Great. Thank you very much. And just a couple more from my side. Just on the hedging side especially for primary metal. I guess that gives you more cash flow visibility as you look to reallocate capital in some of the growth areas. Could you remind us what's the upper range of percentage of volume that you are willing to hedge over the next few years? And separately just on Bauxite and Alumina, it looks like the crane damage continues to pose some additional costs into Q2, do you expect further costs into the second half? And how likely is insurance compensation given the size of the overall growth we've seen since Q4 last year?

[Pal Kildemo:]

Thank you Ioannis. I can answer those questions. If we start with the cash flow, no, if we started with the last one on the crane incident then this impact, the quarter have a bit more than what we had expected. And this is also driven by the fact that the solution to reduce costs have taken somewhat longer to get in than what we planned for. And so into Q1 -- Q2 we will be expecting another NOK100 million or so, but on a total level so quite a reduction from what we saw in the first quarter. And then in Q3 and Q4, we will have smaller figures probably around half of that again. So it's starting to become less significant. And what will change the situation is getting in place new solution because we're running more a temporary solution today. And we're still evaluating, which process will go with there thinking a bit longer-term also. Insurance compensation is difficult to comment on that at current stage, and I don't want to set any expectations in either directions, but this is handled as an expedience case. So we will revert there when we have some more clarity. If I start with the hedging -- and with the hedging question then we are reaching the ceiling for what we believe is targeted levels for the integrated margin hedge. We have said that we're moving up to 20%, 25%. That's where we believe we have a good balance between protecting and making the company somewhat more robust in the low case scenario while still leaving the majority of the portfolio open for positive price movement.

[Ioannis Masvoulas:]

Great. Thank you very much.

[Operator:]

Thank you. We now move on to our next questioner. Please go ahead.

[Amos Fletcher:]

Yeah, good morning. It's Amos Fletcher from Barclays here. I just had a couple of questions. The first one was around the net debt level. I just wanted to get a feeling for -- do you have in your minds a net level below, which you would seek to return surplus cash flow over and above the dividend policy? And then the second question is just on batteries. Just looking at your projections for potential CapEx and potential EBITDA, could you just give us some detail on where that EBITDA is coming from and I guess a little bit of a buildup behind the numbers that you've given there in terms of NOK600 million, NOK700 million pro rata by 2025? Thanks.

[Pal Kildemo:]

Yes. I can start here with the net debt level. Basically we are approaching a level, which is well within our targeted levels that we updated at the Investor Day in 2020. We don't have a trigger, which will result in the payout of extraordinary dividend or similar. But as we move forward now with the strategic process allocating capital to the different areas evaluating the possibilities that we see going forward, we will make an evaluation towards the dividend process at the end of next year or our Board will do so to set the level for 2021 as a whole, and there we need to ensure that there is a good balance between strength of balance sheet, available capital for investments and return to shareholders. And given the current earnings environment and our policy of a minimum of 50% over the cycle, there is, of course, a good room for a significant increase in dividend into next year. And the second question was on...

[Hilde Aasheim:]

Patricia…

[Pål Kildemo:]

Patricia, we -- all of these new growth areas that we operate in. We are working in the mode where we have quite a large pipeline of alternatives. So, we are maturing more ambitions than we believe we will end up with at the end of the day to ensure that that certain value is generated. So, splitting it up per contributor is a bit difficult, because some might fall out in some time, some might progress, some might be larger than what we expect currently. But the overall ambition has a long pipeline which allows for some flexibility in which projects we pursue. So, if you look at the 2025 ambition of NOK 2.5 billion to NOK 3 billion of investments delivering an EBITDA of between NOK 600 million and NOK 700 million, then the list is much longer than these levels. On the current initiatives, which we have visualized of course, the largest contributors in this setup as we see it today is, the joint venture we have with Panasonic and Equinor. Also Corvus is of a growing scale and the huge volt initiative has quite some potential, if we ramp up further than what we have in the current plant. So, these three are, of course, heavy contributors. But then, we have four or five initiatives or more that are not covered by this overview. And if some of these investments slow a bit down and we see that the business case doesn't stand up, we might be prioritized a bit within the portfolio. So we will keep you updated on a semi-annual basis through these strategic reviews on which projects are progressing well or not. And so far, Corvus Energy, we see development as Hilde mentioned. Hydro bolt is going up plant. And then we have some obstacles now in the joint venture with respect to rules of origin, but we will see if we can -- are able to cater for that risk over the coming year or not.

[Amos Fletcher:]

Okay. Thanks. So, I guess that pro rata EBITDA is that based on a target return on capital employed, or is there sort of more to it than that as it were?

[Pål Kildemo:]

Yes. Of course, all of these have a targeted return on capital employed, and we screen based on the best returning candidate. The same approach we run in recycling and the rain venture and hydrogen also.

[Amos Fletcher:]

Okay. Perfect. Thank you.

[Operator:]

Thank you. We now move on to our next questioner. Please go ahead caller.

[Dan Major:]

Hi, thanks. Dan Major from UBS. First question a follow-up from Jason slightly, just to clarify on the numbers around the green premium. If I look at page 11, you allocate 20% to the NOK 1.5 billion commercial ambition to new products, including greener brand. Is it fair to assume that that is effectively capturing your estimate of the financial upside from greener brands? Is that what you agree from that chart?

[Pål Kildemo:]

No, because that only covers the greener premiums that aluminum metal receives on their product. And then, there might be an additional effect when exclusions sell them further out in the market. So, as you know between these two business areas there's less differentiation possibilities in priming than there is in exclusion as it is more project based. So, as Hilde mentioned earlier, we are targeting premiums on the majority of our volumes. But for some of them, we will also target volumetric increases. And as this market moves forward, you will see that gradually reflected to a larger extent in our realized premiums overview at the end of the day. But of course, at the end of the day this is also a negotiation on a customer-by-customer basis. And as such, we don't want to disclose the exact details of these premium components.

[Dan Major:]

Okay. Thanks. Next question just on the indirect carbon compensation that you are beginning to accrue through the P&L, when do you expect to see that reflected in the cash flow statement?

[Pål Kildemo:]

I guess that is more towards 2022. The setup is currently so that you get paid in a year after you produced the material and consume the carbon in a way.

[Dan Major:]

Okay. And just to be -- sorry for the accounting question. So that I guess will be reflected you build a payable -- I'm sorry, receivable on the balance sheet? And then because you -- is that correct?

[Pål Kildemo:]

Yes. It will be Corporate now and then we'll reverse this next year and then you get the cash flow in.

[Dan Major:]

Okay. And that's about -- it would be about NOK 700 million to NOK 1 billion of cash flow that you'd received as a one-off payment in early 2022, I guess?

[Pål Kildemo:]

That will come in 2022.

[Dan Major:]

Okay. Great. Thanks. And just final question on Extruded. You obviously mentioned around kind of growth rates relative to market expectations, but on a year-on-year basis where we're talking about I'm quite a skewed base. If we just purely look sequentially relative to Q1, is it fair to assume you'd see higher volumes, higher EBITDA?

[Pål Kildemo:]

Yes, that's a good question. And I understand the challenging using the second quarter last year as the baseline and numbers become so big with respect to volume growth. I just want to stress that we expect higher volume growth than what the market is seeing as of this 36% and 30%, which CRU refers to and we will most likely end up a bit above that. And then I think your second question is rather relevant. If you look at historical developments and seasonality in our extrusion operations, we often come in higher in the second quarter than the first quarter. And as the market is playing out now with more normalization et cetera, we expect to see that trend also in the current year. The only risk element I would like to flag in that context, which could result in a different picture is, if we see some challenges on the supply side. As you know, markets are very tight currently and supply chains are tight. So if we get any form of global hiccup, which happens from time-to-time in the aluminum industry then that could impact what we get of earnings in second quarter. But the thing goes as planned, we should expect to see a seasonally stronger second quarter than first quarter.

[Dan Major:]

Excellent. Thanks a lot.

[Operator:]

Thank you. We now move on to our next questioner. Please go ahead caller, your line is now open. Please go ahead caller, your line is now open. Please ensure you’re not muted locally.

[Liam Fitzpatrick:]

Apologies. It's Liam Fitzpatrick again from Deutsche Bank. Two very quick questions hopefully. Just on premiums the Q2 guide given what we're seeing in terms of regional premiums looks low. Can you just give a bit of color there? Should we expect that premiums will move higher again as we look into Q3? And then just coming back to the CO2 point. So you haven't changed the guidance of up to $1 billion EBIT uplift. But since you provided that guidance, the CO2 price has gone up by over 50%. And my understanding was that there was a positive direct correlation there. Can you just give a bit of color in terms of how that's impacted your guidance?

[Pål Kildemo:]

Yes. On the premium side then it is true. We expect higher premiums in the third and fourth quarter if market remains where they are now. And most likely in most situations as we have already booked quite a lot into the third and fourth quarter. So there is quite a lag on the realized premiums. You know there's some full year contracts, some shorter contracts and then you get the total situation of three to four months or so. So we expect an increase in Q2, further in Q3, further in Q4. And if spot prices remain where they are now, you should see stronger premiums into next year also. In a historical context the billet premiums are very high enough approaching $900 billet for extrusion ingot. And the second question was on CO2 yes. No, within that the range is also development in the CO2 price and we are at current price levels, you're probably towards the higher end of that range than the lower end of that range.

[Liam Fitzpatrick:]

Okay. Thank you.

[Operator:]

Thank you. We now take our net questioner. Please go ahead caller. Your line is open.

[Jatinder Goel:]

Good morning. Jatinder Goel from Exane BNP Paribas. Just a question on wind solar and hydrogen. You've got a big hydro power portfolio as well, but its external exposure is limited because most of it gets used internally. Just to understand on your wind solar and hydrogen, because you have this opportunity to electrify in Brazil and also switch from gas to hydrogen in many of your operations as you indicated. What would be the eventual external exposure of wind solar and hydrogen, once you get to your stated ambition? How much will be used internally versus externally of your attributable share from these two businesses? Thank you.

[Pål Kildemo:]

Yeah. I think it's still a bit early days Jatinder. But to give some color on the total landscape, if you start with bauxite or Brazil and the repowering efforts that we're running there then for the smelter and the Bauxite & Alumina operations they both rely on external power as is the case today. And then as we progress on developing hydro or solar and wind projects down there, then a larger share will be based on a percentage of equity production depending a bit on one -- our ownership in the Topco and to the ownership of the Topco to the special purpose vehicle. And then how much of the external sourcing these plants end up consuming. And then you have a similar situation across the Nordics and through the hydrogen portfolio. We don't have the full details in place there yet, as we are developing on a portfolio basis negotiating contracts, negotiating ownerships. So we will have to update that as the pipeline becomes more concrete and we have a better view on what ownership we will have in the different operations. But it will not of course be 100% or even a percentage reflecting an ownership in the Topco because this will be built up in special purpose vehicles where the Topco also has a smaller ownership stake than 100%.

[Jatinder Goel:]

Sure. Thanks, Pål. That's very helpful. Just to get the thinking clearly, is the idea to go into these businesses to make more money for the businesses by going and serving the outside world, or is it more to home improvement and make your own operations exposed to greener energy over the medium term?

[Hilde Aasheim:]

I think the internal demand creates a substance to the projects and that we can build capability based on the internal demand. And then while we are doing that, we are also -- we can also approach the external markets. So it is both.

[Jatinder Goel:]

Okay. Thanks, Hilde. Very clear.

[Operator:]

Thank you. At this stage we have no further questions in the queue.

[Halvor Molland:]

Thank you. Thank you, operator. Then I would just wish to thank you all for joining our call today. And please don't hesitate to call us or send us an e-mail in Investor Relations, if you have further questions. Thank you and have a good day.