Norsk Hydro ASA (NHY) Earnings Call Transcript & Summary

Hello, and welcome to Norsk Hydro Quarter 1 2022 Q&A session. My name's Rean, and I'll be your coordinator for this event. You will now have the opportunity to ask questions throughout this call.

[Operator Instructions] So our first question comes from, from the line of Ioannis Masvoulas from Morgan Stanley, Please go ahead.

A few questions from my side. The first one on REIN. Can you provide an update on CapEx related to this initiative for 2022 and 2023, following the recent projects that you have announced here and maybe an update on the IPO timing, are you where you want to be on maturing the pipeline or is there more to go on that tone?

Thank you. And thank you for the question, on the REIN, as you saw today, we have announced, or we have progressed quite significantly on, on 3 projects. It's the project in Sweden. It’s [indiscernible] and these projects, we have a different ownership stage in today, in a situation where REIN is hundred percent owned, by Hydro. If you look at the CapEx for these 3 projects and you multiply have our ownership in them, then, then you are looking at a total CapEx of around, NOK 3 billion. We have a 33% ownership in [indiscernible], and we have a 25% ownership of stewardship. The ambition to finance this to, to a larger extent, through external capital rates is still targeted for 2022. What we see, however, currently is that the IPO window, is not very open and the possibility to IPO will depend on that opening going forward. When it comes to substance. I would say that we, we cross many thresholds this quarter. The fact that we have one Gigawatt on a hundred percent basis and now very close to sign PPAs on all 3, the fact that we've also sold an external contract to Telenor visualizing, the corporation between REIN and Hydro energy, to be able to provide the energy to third parties. And the fact that we've also been able to farm down parts of this project at 40% return on loan equity invested is very much in line with the strategic priorities we have within this company. So when we are at the level where maturity at a much more attractive level for an IPO when that window opens.

Great. That's very clear. A second question on aluminum metal and maybe also extrusions? What are you seeing on the ground in Europe? Have you been able to take market share as customers shy away from Russian material, and is that meaningful enough for the balance of the year?

What, what, what we see on the ground is really a continuation of the, the tight market in the current quarter, as we hit through—as we advised you in the last quarter, we don't have a lot of excess capacity in our system. Extrusion is basically pushing out, as much as possible and the bottleneck within the whole of the European system has been the rematch capacity, the ability to produce more billets and the like from standard or even scrap. So we see in extrusion that we are improving on market share. We have over a period and then in aluminum, it is more similar situation earlier. That being said, we do also observe that Russian metal is becoming harder to sell for those sitting on that. And we also hear stories of trading discount, at least in a European context or being offered at a discount. Sorry.

So our next question comes from the line of Jason Fairclough from Bank of America.

Look, 2 questions for me. First one's just on, hedging and cash flow. The second one's on recycling. So first, on the hedging, could you just talk a little bit about the cash outflow here related to the collateral and the margin requirements for your hedging activities? To what extent is this temporary and, you know, should we think about it reversing and I guess, you know, you and I have discussed this a lot in the past. Do you ever feel like you need to reconsider your hedging activities? Cause it does seem like there's a big sucking sound going on here.

Sorry. Jason, did you have a second question you want me to talk about?

Well, okay. The second one is just, in terms of the recycling business, you've just bought this business in Poland, where will it be reported? And is there a view to sort of reporting recycling as a standalone segment?

Okay. I've talked on—when it comes to the margin requirements, and you are aware of, we hedge an integrated margin. That means that we sell LME forward, and then we purchase a certain part of the raw material complex, in including, for example, power, in Samarco for 2022 and on the LME that we sell forward, that, for a significant part of it, it requires collateral. We have been working over the last half a year or so to reduce the collateral requirements. So going forward, there will be less of that than there has been historically. But still we are in a situation where that required collateral, but free in the fourth quarter and the first quarter, LME prices, moved quite significant. And, and the, at the higher part than what you see today, and that's resulted in the build in collateral of around NOK 4.4 million. We had positive movements on the mark to market of for example, of power in Slovakia also, and of raw materials. Of those are not necessarily, receiving a collateral that they might be no OTC exchange, but this is, will be reversed felony practice come down again. So since the close of the first quarter practice have perform quite significantly and that has taken away most of the collateral that was built up in the first quarter, if you look at current spot practice and the latest hedges have been entered into are, are actually in the moment, for 2024. When you look at the strategy per se, as I mentioned in today's call, we will continue, to remain open, for the majority on the upside and given the very strong margins in a historical context, we will continue to lock in a smaller share of the portfolio, to protect against the downside. Introducing such an activity and running it through an increasing pricing environment, and then stop it when prices are at a record high levels is not something I would something in current context.

I can comment on this, the recycling, first of all, I hope that we are successful in, acquiring the, the element, but we are not there yet. Then when that's due, when we are, we are successful, then this will be a part of the researching business in aluminum metal. When we report metal markets, there is this substantial researching activity in the result I can 4 pointed it, pointed to it this morning. But then obviously, we are carefully discussing how, how to integrate and how to make sure that we sustain the server, the really good commercial team and the capability of the metal going forward. So we, we are careful thinking about how to integrate in the best possible way if we are successful.

Okay. Just a quick follow up if I could, Pal, in terms of Slavoko how are you thinking about that business right now in the current power price environment? I mean, are you actually signing new hedges and, and locking in margin into 2023, or does it work right now? I mean, how should we think about that, that capacity going forward?

That's a good question, Jason, and basically if we haven't locked in the margin for so long for the current year, then we would most likely have to, to wrap down. It would be in the same situation as you see. Many of our, our European peer filters are, and as the current integrated margin, it doesn't look attractive enough to lock that in for 2023. So even though LME prices are the price of power in Europe has increased to a larger extent. So if this picture doesn't change, we are potentially looking at a reduction of production for 2023, I mean on the electrolyte side, then we have other parts of the, like the cost house or plant, which could see the produce for the rest of the portfolio and the market potentially.

Our next question comes from the line of Liam Fitzpatrick from DB.

Pal and Hilde, 3 questions from me. I'll give you all of them up front. First one, just on REIN. Just wanted to understand if the equity markets are not there for an IPO and given that you want to progress some of these projects from 2 for this year, what's the financing strategy. Will you look at other sources? Second question. Just on extrusions, I know you told us on the call earlier, but I didn't quite catch it. What, what is your guidance for Q2? Is it that we should see pretty similar results to the record we just seen in Q1 and finally, a detailed one on the cost front. I'm just trying to understand exactly what's gone on in aluminum metal. So looking at slide 27, the implied cost LME looks pretty slack, actually slightly down into Q1. But the other portion of the cost is up, up very significantly. So what's driven that is that kind of third party purchases. Is there something abnormal which is kind of come in the Q1 results relative to Q4?

Yes. I can start on the REIN question. If you look at the equity markets, those are the tracks that we we're following now. At top we are also evaluating if there are other sources of capital, if this window does not remain open. So IPO is still the best case in base case, but we are also evaluating other alternatives. When it comes to extrusion guiding, you are right in, in the positive negatives, they largely, offset each other as, as the market looks now. We expect a continued increase in the net value margin. We will also, if premiums remain at the high level, we will have strong recycling results, but on the other side, energy and other raw material fixed costs continue to increase. And as we mentioned that that report, we have a, one of, potential fixed cost of NOK 200 million, related to a bonus which was paid out to all employees, in Hydro of a thousand dollars per time for the contributions during the COVID period and extrusion higher than other business areas, because it what the managers intended. So as mentioned you have 2 sets of elements, which move against each other. But partly offsets each other today, but that could change a bit as we move through the quarter. On the final side, on aluminum metal and the cost, the site, the differences I would have to get back on might be related to the lower, liquid sales than expected. We've been having to pull more from inventory this quarter, then straight from production. Let's follow up on that and, and get back to you, to explain that. But in large on costs for aluminum metal, it should be very much in accordance to the guidance. I think we guided for around 650 million and we ended up around 600 or so.

Okay. Could I just follow up briefly to on REIN? Could you elaborate on these other sources of capital that you're thinking about? And certainly from an accounting point of view, regardless of the financing route, how should, how will you, how do you expect to account for these projects? Will it be on, will it be off balance sheet as an associate, or will it be, kind of JV type account?

No, I won't go into the, the different alternatives, but I guess, based on the alternatives, it should be within those that we evaluate if, if we not—if we were not successful to IPO before year end and we still carry these investments on the balance sheet, then they would be fully consolidated because then there's a hundred percent owned venture. The ambition is of course to keep it off, through an IPO. I will also have to spend some more time, looking into the ability to do that in an IPO setting, because at the end of the day we would still establish these adds, special purpose vehicles with nonrecourse owned under a top co company. But I guess if you own the higher ownership, you have the more discussions that you might have on balance sheet impact. So I need to get back to you on that.

You mean a hundred percent consolidation of your share of the CapEx, is that right?

Yes.

Our next question comes from Amos Fletcher from Barclays.

I just wanted to ask, first one on the hedging side, you mentioned in the slides you put in 75,000 tons of coal options as part of the hedging. Can you just talk through what's the benefit of that and what levels are they priced at?

Yes, during the quarter, right after Russia in Ukraine, you got a market which became very volatile -- our prices, exposure. So of course moved up to in $4,000, but you had other materials, where price movements were, were significantly higher. And our balance sheet is robust. We have mitigating measures in place for situations like these, both on operating capital and on the operational and strategic hedges and an invasion or war situation has something which can move things outside the sample space that most operate with. So in order to reduce some of the liquidity risk in that period, we purchased 75,000 tons of coal options for second half 2022 and also for 2023. And these are well out of the mileage to reduce the cost, but basically in current situation, if prices increase, then you will receive collateral on these coal options, which reduces or net out the collateral you have to post on the future or forward positions and the purchase price increases significantly, you could exercise that option also. But at the moment, they are out of the moment with the recent forwards in LME crisis.

And then, I wanted to ask on working capital, the bills was quite a lot bigger than expectations. Could you give us a sensitivity? So let's say spot prices prevail for the rest of this quarter, roughly speaking, what could we expect the working capital to do in Q2.

Yes, it's always a bit harder to guide exactly into the next period, but if you look at the year as a whole and the current pricing in environment, we saw a bill which was more close 33.8, than what we reported today. So already at that spot prices, we should expect a bigger price release. In general, I guess we, we operate with around 60,000 tons or so, let's back to the factor on that.

Okay. And last question was just on the energy business. Could you talk about the sustainability of the price area differentials, as you guys see over the next few years?

Well, at the current level, we are seeing, as at weak hydrological balance in the south of Norway, a strong hydrological balancing in the north. And that is what's maintaining is that as current levels and normalization of that could bring that somewhat down. But as you know, the price is very much tied to the continental price now. So in, in power production terms, you talk about control of production. When does a producer be in a situation where they're able to trade on or a produce on water values and not necessarily have to, to connect to the, the global prices. And, and as we, we, we see it now, it requires quite an improvement in, in that situation, for prices to become significantly down in the south of Norway. In all the grid capacity between the south and the north of Norway is not allowing for this to flow as much as it potentially could to balance prices. And that is not a quick fix. So it's hard to answer that question directly, but as long as European power practice remain elevated, there's probably a higher plausibility of regional practice also remaining at that high level.

Our next question comes from Jatinder Goel from BNP Paribas Exane.

I've got 2 question apologies if either, or both have been asked, I joined the call about 3 to 5 minutes late. First one on realized aluminum price on LME, it was below 4Q average. You did explain Pal during the call that it was to do with the lower spot exposure. Does that mean 2Q will have a bigger catch up or do we not see the spike that we saw in first quarter into realized prices and related to that, do we see continued lower exposure as it will only come to full production by, end of—into fourth quarter, I think you've said. That's the first one, second question is on hedging. Was there any particular reason to not add any forward sales, since you reported last time you've done in the first quarter, but that was all before you reported 4Q results.

Yes. Two areas. On the realized prices. Basically, we say that we are exposed on a 1 to 2 months' timeline lag, average 1.5. And this quarter, we were closer to the 2 month range. Why, if we should guess the consensus was closer to the 1 month range on the unhedged part and even a bit beyond that, then increase periods where prices move with some $400, it's quite difficult to exact get to the real amount because you, you realize on a per shipment basis and shipments can be every influenced by 1 day is also very high. And then maybe not as much as the other day when they're a bit lower. So that is the biggest part of the difference I would say is a like profile. The next is the fact that we have not producing a full capacity at Albras, and that will impact the secured ratio. And the last also, that we had lower liquid sales at some of our semesters, we were selling more from inventory, which impacted that like [indiscernible] and the totality of this explains the difference. And if we had all of these things before the quarter, we would actually just have had an exposure around 28% or 30% or so, which gives the EBIT ex-split. Well moving into the next quarter, we had not foreseen these elements to the same extent based on what we have guided now. So [indiscernible] part is of course, $3,155, and you could be exposed to more of the high prices given the same, like profile into the next quarter. But again, it depends on the given shipment, like per ship on a given day. And the second one was hedging and how we have acted through the third quarter and so we've added 80,000 tons on 2024. So we are 100,000 tons there and then the activity was somewhat more limited in the situation where we also were ensuring that we had the, the proper liquidity measures in place when prices were moving to quite extreme levels, on fields of Russian sanctions. So our first priority is always to ensure that the balance sheet is robust and then it is to continue the strategic activity. So as I mentioned, the latest prices entered into for 2024 are at quite escalated levels, compared to what stock is effectively at.

Just to follow up on the second point. I mean, you are still probably 70 cent plus long on your metal exposure, even if you did the forward sale at $4,000. So do you think it can realistically have any financial strain in terms of liquidity that you mentioned.

With all the measures we have implemented now -- no. But of course, if you get movements like you are observing the, or other type of materials, then these type of price movements can impact even very small collateral like positions. So in a normal sample space, no, it should be verified. And, but when you have, for example, an invasion of a country and a war situation, you see movements that you haven't observed over the last 15 years or so.

Our next question is a follow up question from Ioannis Masvoulas from Morgan Stanley.

Yes, a couple of questions left from my side, the first, going back to exclusions. If we look at the last presentation of the full year results, you were looking at Q1 of volume development Europe of minus 4%, and we ended up at plus 3% and for year Europe has been, upgraded from 3% to 4%, can you talk about the main drivers from, and demand point of view.

Yes. When we moved into the year, the absolute expectations of sorts, third party analyst, where needs different from what we are experiencing. And, and now those expectations have moved more towards our experience of the market, but of course it is uncertain and, and volatile. So it, it's hard to be very firm on all expectations. As you see, from the chart, it's really building and construction and industrial, and build residential, building and construction it's holding up well. So these areas are, are continued to be strong in current bookings also. Automotive is still the challenging area which impacts for example, position to being part of the remainder of the portfolio. And if you look towards the full year estimates, that we've included of 6% and 4%, these also do include, some improvement in automotive supply chain. If that doesn't materialize, then there could be some downside to these figures.

Okay. Very clear. And one more question on recycling. So on the back of the acquisition you announced, you have already hit your 20%, 25% growth targets, is there potential to do more on this front, or do you think you are done? And you're looking at other ways to deploy capital across the new energy initiatives you have been working on.

It's good that we have at this point reach our target, that we kept it back in 2020, but we would look more into, well, we could look into if there are more opportunities in recycling, it's really a nice business where we can use our capabilities and see how we can source more scrap also through these methods to replace standard ingot. So we will have another round and now that we have projects that actually meet our—the target that we set and then we'll update and come back on that.

Our next question comes from Krishan Agarwal from Citigroup.

Couple of questions on hedging has already been asked if I can ask a question on aluminum, primary metal, looking into the second half. I mean, we are—aluminum prices have come down 25% and we are looking for kind of a, you know, lower realization going into the Q3. In that context, what sort of visibility you are able to provide to the market on your cost that, the corresponding decline in the cost will also be there, or the cost visibility as of now is very, very low.

I think the cost visibility beyond the coming quarter is very much related to what you observe in the marketplace. If you start with aluminum metal, the alumina price has of course, come somewhat down which will relieve some pressure compared to what we saw, just a month ago, and power cost for, for our site doesn't move that much. So it's really, the carbon cost, which has been a strong driver outside of alumina. And there, we, we haven't seen movements in a negative direction yet. So more in line with our guidance for the second quarter, quite a significant increase.

Okay. I understand. And a kind of a very small housekeeping question. I can see the alumina cost, the unit cost, you have restated for Q4'2021, and then the Q3'2021 as well. So there is a big restatement by almost $35 on the upside. Can you explain what led that restatement?

I guess that's the amount of volumes which went into the calculation as a basis for those costs. I believe to get back to you on, on what volume, which was included, which was not in the original case.

Our next question comes from Amos Fletcher from Barclays.

I just wanted to ask a follow up question around the REIN CapEx number you mentioned of 3 billion. Could you give a bit of detail over the phasing of that CapEx between this year, next year, the year after? How much falls in each year?

Well, we haven't come out with details, this is for REIN and we want to, save it up for the potential IPO. Most, a large part of this, if we come into to next year, some of these projects reach a final investment decision in the latter part of all of this year. If we see, that this is, that are this case of an IPO, does not look possible, we will have to increase disclosure on potential details here. Also after we've evaluated all alternatives for capital contribution here. So we've given you the total number, somewhat less or a smaller part of that will be this a larger part next year.

We currently have one final question. [Operator Instructions] The next question comes from the line of Bengt Jonassen from ABG Sundal Collier.

I have 2 questions. If you were to mark to market adjust your premiums today, where would those be? And the second question would be related to slide 19 on the EBITDA on the post-consumer graph. And then on the announced project, EBITDA with 768, what is the commit behind those projects?

Yes, if we, if we start with the premium, we are looking at guided level into the second quarter is quite close to what we are seeing in the stock scenario. Now, there might be some, some kind of dollars above that based on some contracts over the year. But when you look at the total mix, it its quite -- a large chunk of that. On the CapEx side for recycling then, on the realized project, already announced projects that you see there, this accounts for OpEx of around the 2.5 billion to 3 billion.

We currently have no further questions in the telephone queue. One moment. We've just had one more come through. So the next question comes from Morten Normann from Carnegie.

Yes. Pal, a technical question maybe, looking at the P&L the minorities is quite big this time. What's the reason behind that.

Yes, I would to come on question. I don't have it on the back of my head. I'm sorry.

There are no further questions in the telephone queue.

Thank you, operator. And thank you all for joining our conference call today. Please go ahead. Please contact us @IR, if you have any further questions, wish you all a great day. Thank you.

Thank you for joining today's call. You may now disconnect your lines.