Norsk Hydro ASA
Q4 2020 Earnings Call Transcript

Published: 12 Feb 2021

[Line Haugetraa:]

Thank you, and good morning, and welcome to Hydro's Q4 Presentation and Conference Call. We will start with the presentation, followed by a Q&A session. Both will be hosted by our CFO, Pål Kildemo, who will be presenting Q4 and Q2 going forward, while our CEO will also present at Q1 and Q3, which will include more of a strategic focus. The presentation slides we will walk through can be seen on the webcast. A 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 will not be possible to ask questions over the webcast. If there are any media inquires for one-on-one for this call after the presentation, please contact Head of Media, Halvor Molland.

[Pål Kildemo:]

Good morning, and welcome from me as well. I hope you and yours are keeping well and healthy in these unprecedented times. Before getting into the quarter, I would like to briefly let you know of the revision to our business area names. To reflect our new strategic direction, we have simplified and updated the names of our business areas to better reflect the business. For instance, Primary Metal is now Aluminium Metal, reflecting that the business area holds both primary and recycled metals. The other business areas are Bauxite & Alumina, Energy, Rolling and Extrusion. Now let's get into the quarter, where we are pleased to report that we have exceeded our 2020 goal for the improvement program, and again, similar to Q3, generated a strong cash flow. Move to Slide 2, please. Underlying EBIT for the fourth quarter was NOK 1.449 billion, up from NOK 560 million in the same quarter last year. While our free cash flow also increased from last year, ending up at NOK 3.4 billion for the quarter, reflecting our focus on cash generation. In the fourth quarter, we were pleased to see an overall continuation of the economic recovery following the contractions caused by COVID-19 earlier in the year. Aluminum demand, especially in China, remained strong, resulting in a year-end surplus that was lower than what was originally forecasted. These fundamentals have resulted in a strong LME development during the fourth quarter and also a continued recovery in the downstream market, where the year-over-year volume declines each quarter have continued to be less and less through the year. Within our downstream businesses, both Extrusions and Rolling reported volumes, which exceeded the market outlook for Q4, with Extrusions growing 7% compared to Q4 '19 and Rolling staying flat year-over-year. This has been supported by recovery in key downstream segments, like automotive, through the second half of 2020. We are also pleased to announce that we have achieved and even exceeded our improvement target for 2020, reporting NOK 4.2 billion in savings compared to our NOK 4.1 billion target. This is particularly satisfying as we were slightly behind our target in Q3 due to the pipeline maintenance in Bauxite & Alumina. Another positive development this quarter has been the Lyse Kraft transaction. On December 31, 2020, Hydro's RSK hydropower asset was merged with part of Lyse's production to form a joint hydropower company. The new company leads Lyse Kraft DA, of which we now own 25.6%, secures an access to renewable hydropower for our aluminum production and ensures that RSK does not revert to state ownership in 2022. I will cover some of the details of this transaction later in the presentation.

[Line Haugetraa:]

Thank you, Pal. Operator, we are now ready for questions. Thank you.

[Operator:]

We'll take our first question from a participant.

[Jason Fairclough:]

It's Jason Fairclough from Bank of America. Two quick ones for me. First, through the COVID downturn, you were selling LME-grade products to traders. I was wondering if you can confirm that this is finished? And then second and probably related, we are hearing of shortages of certain sorts of products, and I guess particularly can stock. Any similar product shortages that you're seeing across your product suite?

[Pål Kildemo:]

Thank you, Jason. Good questions. If we start with the shortages, the latter ones, then we see across the system that the demand recovery is stronger than most players had expected, both when it comes to can, automotive and building and construction. As you see from our operating capital figures, these are at lower levels than we thought, and that is much driven by reductions in inventory beyond the levels that we normally keep at the minimum stock levels. So we are able to supply most of our customers, but we are actually having to move some delivery a bit out in time because demand is so strong. And if we have had more rolling slots, for example, available in the system, then we could be able to increase the production to even more than what we are doing today. So it is not causing an issue for us. It is a good trend, but ideally we will be able to ship out more and not have to delay a bit into next year. And the first question was on?

[Jason Fairclough:]

Sorry -- was you were selling commodity-grade products to traders.

[Pål Kildemo:]

Yes. Exactly. We have seen the value-add premium product sales increased. So we are selling less standard ingots typically to traders or to others through finance. But as you know, part of our operations are on a normalized level, also producing standard ingots, and those are being continuously sold to different market participants. But we are moving there and have moved the value-add product production more towards the normal levels for our portfolio. So linking it a bit back to the comment on sheet ingots, we also see the same picture on extrusion ingots. We are producing and selling at capacity and running everything at and also ramping up the Husnes as fast as we can. And compared to earlier quarters, when we spoke, when a lot of this was driven also by destocking, we see more signs now of this being under-supported by fundamental demand figures also. So a bit more sustainable demand based on what we're delivering, but still uncertainty in the months following January and upwards.

[Jason Fairclough:]

Just if I could follow up. So if we look at other commodities, what we're seeing is that the premiums or the spot prices are rallying quite hard as lead times extend. Do you feel like you're fully taking advantage of this type of market environment in terms of premiums and pricing?

[Pål Kildemo:]

I think as you will have seen from Aluminium Metals' results, that premiums moved up and they moved up to the higher part of our guided range and also a bit about market expectations based on what we've done in Q3. So with these increased volumes, we are also seeing an increase in premiums. You're seeing increases driven by demand, and you're seeing increases in premium driven by more regulatory matters, for example, like in the U.S., where the Midwest premium is now up at the record high level. So we are able to benefit from that, as you will also see into our Q1 guidance, and we will continue to ensure that we will work for increasing those premiums as long as the market tightness continues. As you also are aware of LME prices are and have been trading quite a bit above the 90% on the cost curve, reflecting at least the tightness we're seeing in the market now.

[Operator:]

We'll take our next question from next participant.

[Liam Fitzpatrick:]

It's Liam Fitzpatrick from Deutsche Bank. Two or 3 questions from me. Firstly, on Rolled Products. Even without the duties, it's pretty close to breakeven. So it seems like it could have a better owner elsewhere. Can you give any more color on at least the timing on when you think you will have made a decision either way to keep or sell? Second question on CO2 compensation for the Norwegian smelters. In terms of timing, when do you think we get more clarity on the numbers for 2021 and beyond? . And final, hopefully, a quick one on alumina costs. If we ignore the crane or the maintenance impact in terms of the net effect into Q1 versus Q4, do you expect overall costs to be down just given the lower sourcing costs?

[Pål Kildemo:]

Yes. If we start with a question on Rolling as it is now called, if we just start with the underlying results. Yes, on an EBIT level, excluding the antidumping duties, we are still around breakeven levels. However, it's important to remember that this also includes effects of the cleanup and the restructuring, which are ongoing, represented by, for example, higher depreciation related to curtailment of certain parts of the operations. And the EBITDA development in a year impacted by quite a significant COVID-related effect as have been very much under-supported by the NOK 0.5 billion in improvements delivered by annual run rate organization. And if we look at the strategic review, then like earlier sessions, we will announce to the market when that is completed, and we hope that, that is in not the too distant future. On CO2 compensation, I unfortunately can't answer on behalf of the Norwegian authorities. The ball is in their court now. And they need to make a decision before the annual budget for 2022. So anywhere between now and at the end of the summer is the timing that they will spend to do this is our expectation. Looking into Bauxite & Alumina and development into the first quarter, of course, the fact that we don't have to source extraordinary aluminum equipment to supply our customers on their contracts will have quite a large net effect close to NOK 300 million. But if we look at the other elements and market prices, then fuel oil is a bit up, and coal is flat to somewhat up and caustic soda is also remaining weak. So there's not a lot of other cost cuts apart from fuel oil. So the totality should still be a good positive development in costs for the first quarter, even if you include the NOK 200 million in cost.

[Operator:]

We will take our next question from next participant.

[Jatinder Goel:]

Jatinder from Exane BNB Paribas. A couple of questions, Paul. Just one on hedging. Again, is 10% meant to reflect any sort of level, which represents only your external volumes from Hydro Aluminium? Or is there any other thinking behind 10%? And is there a potential to change that number to a higher level? Second question on dividends. Good to see minimum payout being lifted on the floor of NOK 1.25. Is there any scenario where management or Board could think about lifting that floor as well?

[Pål Kildemo:]

Thank you, Jatinder. If we start on the hedging, the absolute percentage does not reflect our external position or similar. What we are looking at is we want to remain majority exposed to the movement in the market. But given the cyclicality and given the absolute integrated margin that we're seeing now, utilizing some of the better years to safeguard the capital for potential lower cyclical years is something which we believe over the cycle could make sense. 10% is what we have committed to now as we've been building up the strategy and program, ensuring that we have the right system in place. And this could increase somewhat in the coming period. If we have seen that we are able to sufficiently keep our margins, but not significantly above the levels that you are seeing today. When it comes to the dividend, we have the floor, as you are aware of and, of course, that provides a form of predictability and a certain yield over the cycle. But being a cyclical exposed company, we would rather report shareholders in times where the cash flow is available for doing that instead of committing to large payments in periods where we are on the cyclical low side. We have seen during COVID, which is maybe an exceptional circumstance there, how big that dividend payment can be of the total balance sheet outlook and the reviews from rating agencies. So we -- as we see it today, given the current cyclicality in that portfolio, we would rather keep the floor at this level and give extra back when earnings improve. Over time, if we look forward with the strategic direction and more diversification in earnings, we might think differently about that, but that is not currently something we're evaluating today.

[Operator:]

We'll take our next question from next participant.

[Amos Fletcher:]

It's Amos Fletcher from Barclays here. Just a couple of questions. I just wanted to ask around -- so firstly, the NOK 1.8 billion incremental cost reduction in 2021 that you're targeting, can you split that out by business area? And then the second question was just around working capital. Is there a risk that you have to rebuild working capital during the course of '21, given your comments around inventories being run down? And then the final question is just also around the headlines about the collective lawsuit that was -- that's been brought against you in the Netherlands. Is there anything you can sort of say about that in terms of potential impacts, provisions, et cetera?

[Pål Kildemo:]

Thanks, Amos. Good questions. If I start backwards and moving to the top, when it comes to the Cainquiama lawsuit, then our entities received a notification about a Dutch lawsuit, and we will respond as requested before the Dutch court. However, it's worth noting that the matters brought forward are already being discussed before Brazilian courts and Brazilian authorities. And that the Cainquiama association has, since 2017, died -- 5 losses in Brazil against different legal entities in Brazil. So we are looking into the case now. And we will follow up that as we should. On the other elements, working capital, there is an expectation from our side that a large part of what has been released this year should come back into 2021. If we see markets remaining where we see them today and the volumes coming back as the external analysts, they expect. And so as you saw from our report, there is an expectation of quite a decent growth in year-on-year volumes in Extrusions and Rolling. That will drive some operating capital. We are ramping up the Husnes smelter and completing the ramp-up of Hydro. That will drive some operating capital. And then you have the price effect on top. So yes, already into the first quarter, you could typically see a build above seasonality on operating capital. If we look at the improvement program and the amounts that you talked about for next year, then around on NOK 1 billion of these are improvements in the business areas and around NOK 900 million is reflecting a ramp-up in B&A volumes. So we're not running at nameplate, but 87% for the year as a whole. You still have a ramp-up effect into next year. Positive NOK 1 billion in improvement, that is spread quite well among the business area. But with a larger share in Extrusion, Rolling and Aluminium Metal and lastly B&A primarily has the volume effect into next year.

[Operator:]

We'll take our next question from next participant.

[Ioannis Masvoulas:]

This is Ioannis Masvoulas from Morgan Stanley. Most of my questions have been answered. But just have a couple for you. The first one is in terms of the Primary Metal or Hydro aluminum business, what sort of cost progression should we be expecting across the various moving parts sequentially for Q1? And secondly, given the new -- the accounting changes in the Energy division, what sort of depreciation base should we be assuming for the group going forward?

[Pål Kildemo:]

Yes. If we start with the cost development in Primary Metal, then the energy cost is the biggest moving element there into the first quarter. As you saw from the Energy slides, that the higher prices on power contracts internally has a negative effect in Aluminium Metals, which is now compared to 2020, not compensated by other high-cost expiring contracts. So depending a bit on what currency rate you use and the starting point, you could see between NOK 100 million and NOK 200 million in increased energy cost for Aluminium Metals Q4 versus Q1. And that is before you potentially take in anything on the CO2 compensation side. The other elements with the market, alumina prices are somewhat up compared to what we saw in the fourth quarter. If prices remain there, that could be around $30 or so per tonne. And then carbon costs are also somewhat up. And if prices remain where we see in the market now, that could also be around $30 or so per tonne. And when it comes to the -- and then you have fixed cost, which also typically increases a bit into the first quarter. If you look at depreciation, then the Lyse Kraft transaction per se shouldn't really be impacting depreciation to a large extent. As you know, the RSK assets were so written down that they didn't add a lot to the depreciation in the existing system. But when we write up these assets, this is the increased effect that we're talking about between -- which is between NOK 100 million and NOK 200 million for the year as a whole, which will not hit depreciation, but it will hit the EBITDA line as we account EBITDA as an equity accounted investment. So the overall depreciation line should be marginally reduced by the Lyse Kraft transaction, but then the increased depreciation effect is higher, but it will not be a depreciating much. However, we can spend some time with IR to go through the spreadsheet and the details which we will go through.

[Operator:]

There are no further questions at this time. Dear speaker, please go ahead.

[Line Haugetraa:]

Great. Thank you, everyone, for joining us today. And please don't hesitate to contact us if you have any questions afterwards. Thank you very much, and have a good day.