Norsk Hydro ASA (NHY) Earnings Call Transcript & Summary

Hello, and welcome to the Hydro Q2 2022 Presentation. My name is Jeff, and I'll be your coordinator for today's event. [Operator Instructions] However, there will be the opportunity to ask questions. [Operator Instructions] I will now hand over to your host, Line Haugetraa, to begin today's call. Thank you.

Thank you, and good morning from us, and welcome to our Q2 2022 presentation and conference call. We will start off with a presentation by our CFO, Pal Kildemo, followed by a Q&A session. Note that you will need to be dialed into the conference call in order to ask questions at the end. With that, I turn the microphone over to you, Pal.

Thank you, Line. Good morning, and welcome from me as well. Whether you're still at work or you're dialing in from your summer holidays, I look forward to sharing our results with you today, and I will jump straight into the highlights. For Q2, we report a record EBITDA of NOK 11.6 billion, while free cash flow came in at NOK 4.4 billion, still impacted by building net operating capital on higher prices in NOK in the quarter. The results are impacted by tight markets in the second quarter, especially in aluminum metal recycling, extrusions and energy. And once again, we experienced record results in extrusions and aluminum metal and for the company as a whole. However, we have now seen the alumina and aluminum markets coming down from the highest levels on weaker demand and large uncertainty, while energy markets on the other side remain extremely strong, both in spot, but even more so towards the end of the year for the winter quarters. In these volatile markets, we continue to address challenges and mitigate risks while also continuing to position the company according to the 2025 strategy, seizing opportunities to both strengthen our position in low-carbon aluminum while also maturing and growing in new energy in the market, which is becoming increasingly short on renewable energy. In addition, our reports to ensure robustness across the value chain continues at full pace by focusing on reducing costs and improving operational excellence. Our 2025 improvement program is so far in 2022 progressing in line with the ambition to deliver NOK 7 billion in improvements by the end of the year. Sales of greener products for the second quarter of 2022 are 89% higher year-over-year. And we are also moving forward on several electricity as well as new recycling projects this quarter. In addition, we have made significant progress on both the Rein project portfolio in Brazil, but subsequently also on Alunorte and Hydro decarbonization path. Finally, I'm happy to report that we have concluded or completed an update of our financial priorities, targeting a capital structure of around NOK 25 billion in adjusted net debt over the cycle. Based on our 2021 balance sheet, this results in the Board's proposal to distribute an additional NOK 5 billion for 2021, split between dividends and share buybacks, but conditional upon an extraordinary general meeting approval. Then let's move to Slide 3. Since the Russian invasion of Ukraine, we see a new reality, and changes are happening faster than before. The war has led to human suffering and refugees in Europe as severe food crisis developing rapidly with consequences. And in addition to the 2020 and 2021 COVID pandemic, the energy crunch has led to record high energy price levels. These changes are impacting global markets, not only individuals or single nations, and inflation is increasing in several countries, fueled by high energy prices and tight labor markets, and there are growing concerns that rising inflation might lead to a recession. U.S. inflation is driven by a strong economy with a peak expected by several market participants in the following months. But also here, increases in the price of energy has been -- become more significant over the last months. Given its geographical exposure and dependence on the Russian energy, the Eurozone is especially affected by the consequences arising from the war and soaring energy prices. Inflation rates have continued to surprise to the upside and pressure remains broad-based. The elevated inflation rates are likely to sustain in the near term due to effects from the war on commodity prices, including energy and agriculture. And the consequences of the war is also visible different across regions when it comes to GDP growth with also here Europe being hit the hardest, with China and U.S. holding up at this better. We have also seen the most abrupt slowdown in manufacturing PMI since the start of COVID for the U.S. and the Eurozone. On the chart to the right here, we see that global GDP forecasts have been dragged down as many analysts view the economic environment to be more fragile, driven by the elements just mentioned. So from the record results we have experienced in the second quarter, we now see more uncertainty going forward. Move to Slide 4. The uncertainty that we just mentioned is also becoming visible in the aluminum market. Consumption estimates for 2022 have been downwards revised significantly since the last object due to rising risk of recession, supply chain issues and high energy prices. This has mostly affected China and Europe, with the U.S. still being seen as the strongest market. Further cuts to consumption estimates over the next month, especially for Europe, could be expected. The global balance has in line with lower demand numbers and stronger production growth in China being revised towards a more balanced market. There has been some minor additional cuts to European production, and more could be expected in Europe, given the extremely high energy prices, both in the spot, but also the forward market. Also outside Europe, in the U.S., we have seen supply side reactions. In light of the high energy prices, there is significant capacity at risk, and we see around 900,000 tonnes of European and U.S. capacity curtailed, but estimates that there is around another 1 million tonnes of risk of curtailment. As a result of these changing market fundamentals, we have also seen a significant decline in the prices for aluminum, although somewhat less if we measure it in Norwegian krone. At current market prices, we are estimating that we are pricing at the 65th percentile of the global cost curve, indicating a situation, which is usually not sustainable over time. Please move to Slide 5. If we move to energy, then prices in the European energy markets remained high through the quarter due to tight gas and coal markets. Towards the winter, focus will be on Europe getting enough gas through both pipeline and as LNG, and the risk of rationing of gas is moving higher on the agenda. We also see this reflected in the energy gas forward curves, which are at very high levels in the fourth quarter of '22. We also experienced a tight situation in Southern Norway, which has remained drier than average through the quarter, leading to low reservoir levels. Statnett, the Norwegian transmission system operator has raised the risk level of security of supply to yellow. This means that the security of supply could be at risk this winter if there is significantly less rain than normal and if it's not possible to import power from Continental Europe. Their view is currently that the risk remains small, but non-negligible. On the other side, Central and Northern Norway are the exception with low prices due to above normal precipitation, giving high power production exceeding the grid capacity to move power South. Let's then move to Slide 6. In volatile markets, it is important to manage risk and opportunities in the short term, while also maintaining the course for the long term. With our 2025 strategy, we continue to strengthen our position in low-carbon aluminum, while also maturing and delivering growth in new energy, 2 pillars that we believe are robust in all the Norsk. In addition to the examples I will go through later in the presentation, we have also delivered many other initiatives to strengthen our position in low-carbon aluminum. Firstly, our sales of greener products are up 89% year-on-year, and we will continue to grow here. So despite the high prices through the quarter, our customers continue to be climate focus when purchasing aluminum, and they're also willing to pay a premium for it. Recently, we started construction to expand our recycling plant in Rackwitz, Germany, where post-consumer scrap is a major raw material for the 25,000 tonnes of increased HyForge capacity for the automotive industry. At Årdal, in Norway, we also decided to upgrade and restart the primary foundry alloy casthouse to increase the capacity for the recycling of post-consumer scrap by 25,000 tonnes per year. Both of these investments support our ambition to double recycling of post-consumer scrap by 2025. A significant step in our recycling ambitions could be delivered by a successful acquisition of the Polish recycler Alumetal. Following the launch of a tender offer for 100% of the shares of the company in the start of Q2, we announced in July that we will expand the subscription period to October 10, 2022, in order to provide additional information requested by the European Commission. In Extrusions, we made an investment decision of NOK 300 million for a new automotive press in Tønder, Denmark, serving the European automotive and electrical vehicle market based on recycled aluminum. And we are also aiming to grow sales of greener aluminum in the U.S., where we recently certified our first plant, Hydro Commerce, to produce Hydro CIRCAL. Within the new energy area, we will get back to renewables. But within factories, we were pleased to start commercial recycling operation at Europe's largest electrical vehicle battery recycling plant in Fredrikstad, Norway. Following this, Hydrovolt is now exploring an expansion of recycling capacity within Europe with a long-term target to recycle 70,000 tonnes of battery packs by '25 and 300,000 tonnes of battery packs by 2030. Let's move to Slide 7, please. In order to reduce our emissions, but also capitalize on the value pool expected for producers of the lowest carbon aluminum, it is important to make progress across our value chain. Last quarter, we talked about 100% post-consumer scrap recycling and how to remove the carbon from the aluminum electrolysis process with carbon capture and also our own caron-free electrolysis technology, HalZero. This quarter, I would like to share several important developments for decarbonizing Alunorte, initiatives which in addition are important for the development of our renewable energy business, Hydro REIN. Today, alumina represents about 1.4 kilos of CO2 in a kilo of aluminum. As you can see from the chart to the left, we have a long-term target to decarbonize the alumina production, which will be done in several steps. Firstly, we are progressing according to plan on the fuel switch project to replace oil with liquid natural gas. We made a build decision for this project in December last year, and the project is expected to be in operation in 2023. On the picture in the middle, you can see the structures of the natural gas project at Alunorte. Secondly, we will install 3 electrical boilers using renewable energy to replace fossil fuels. The first boiler is already operational, and the second and third boilers are expected to be operational in 2024. And finally, the final carbon will be taken out through electrifying the remaining boilers and through replacing natural gas with hydrogen. Hydro Rein announced 2 major renewable projects in Brazil in the last period: the 586-megawatt combined wind and solar power project, Feijão; and the 531-megawatt solar project, Mendubim, ensuring sufficient substance for the capital raise in Hydro Rein. Hydro’s bauxite and alumina assets in Brazil will be the main offtaker for both projects, securing green energy for both the plant operations in Alunorte and Paragominas, as well as the 3 electrical boilers. The final investment decision for Mendubim was recently made, whereas for Feijão it is expected to be made in the fourth quarter of 2022. Let's then move to Slide 8. A central pillar in our 2025 strategy is the financial framework for lifting returns and cash flow. This includes clear principles for capital allocation and now also clear targets around capital structure through the cycle. We continue our commitment to an investment-grade credit rating and aim to keep adjusted net debt less than twice adjusted EBITDA through the cycle. Following a review of our capital structure and targets through the cycle, we have supplemented our financial priorities with some extra guidance on capital structure. We aim to have adjusted net debt of around NOK 25 billion over the cycle, somewhat above in cycle lows and somewhat below in cycle high. We aim to keep consolidated debt relatively stable, whereas required liquidity to cover net operating capital and other fluctuations will fluctuate with the cycle, requiring more liquidity in cycle highs than in cycle lows. And the above should also still maintain our flexibility to act counter cyclical. Let's move to Slide 9 please. As a result of our capital structure update and based on our 2021 figure, Hydro's Board of Directors has proposed an additional shareholder distribution for 2021 to close 2021 in line with our new targeted capital structure. This distribution will consist of an additional cash dividend of NOK 3 billion, as well as introduction of a share buyback program of up to NOK 2 billion over the next 12 months. Both of these are conditional upon an extraordinary General Meeting approval, which we aim to call shortly. Let's then move to Slide 10. In line with our new targeted capital structure, which includes keeping the consolidated debt relatively stable going forward, our intention is to refinance expiring bonds in the coming years. As I mentioned at our Capital Markets Day, we have been working to develop a comprehensive sustainable financing framework, which would improve our access to capital, lead to a cost of capital advantage as we deliver on our sustainability ambitions, support transparent reporting and also have a clear link to our sustainability strategy. We have launched our sustainable financing framework, including a second-party opinion by the Center for International Climate Environmental Research, CICERO Shades of Green, verifying the credibility, impact and alignment of the framework with the green and sustainability-linked bond and loan principle, also including an assessment of the EU taxonomy alignment. The result is that Hydro's governance procedures are scored excellent and the sustainable financing framework is ranked medium green, which is the second highest green ranking after dark green. Our 2 KPIs that we will use in the sustainability-linked financing going forward are absolute reductions of Scope 1 and 2 GHG emissions and increased capacity for recycling of aluminum post-consumer scrap. Let's then dive into the results in some more detail, and let's move to Slide 11. If we start with the quarterly EBITDA bridge, then adjusted EBITDA for the second quarter was NOK 11.6 billion, up from NOK 11.2 billion in the previous quarter. On the positive side, we have continued to experience higher all-in metal and alumina prices, resulting in a NOK 2.9 billion uplift. The 14% increase in realized LME and 11% increase in premium positively contributed NOK 2.3 billion, while the increase in realized alumina prices contributed another NOK 600 million. We have also have a significant increase of NOK 0.8 billion from currency effects and NOK 0.5 billion from higher gross downstream margins. Partly offsetting these developments of 1.5 -- NOK 1.4 billion in higher raw material cost upstream, NOK 1,600 million increased fixed costs in aluminum metal and extrusion and NOK 1.4 billion in lower energy results driven by the negative spot purchase position that has to be covered at higher prices in Southwest Norway. Lastly, we have other items and eliminations, which includes a negative development eliminations of around NOK 500 million quarter-on-quarter, mainly driven by margin development on internally sourced and produced alumina. We will dive into more details on this when going through each business area. Please move to Slide 12. If we then move to the key financials for the quarter, then year-over-year, revenues increased by about 87% to NOK 64.8 billion. And compared to previous quarter, revenues increased by 39%, driven primarily by higher prices. Adjusted EBITDA came in at NOK 11.6 billion, which for the quarter excluded a positive effect of NOK 6 billion, increasing the reported EBITDA to NOK 17.6 billion. Adjusted items for the quarter are largely driven by positive unrealized derivative effects on LME-related contracts, which are related to our strategic hedging activity of NOK 6.7 billion and negative unrealized derivative effects on power and raw material contracts of NOK 1 billion. Moving on, we have adjusted depreciation and amortization of around NOK 2.1 billion in the quarter, which results in adjusted EBIT of NOK 9.5 billion. Financial expenses of NOK 1.3 billion for the second quarter includes a net foreign exchange loss of NOK 1.1 billion and interest expenses of NOK 300 million. Our tax expense amounted to NOK 3 billion, or about 21% of income before tax, and the tax rate mainly reflects a high proportion of income in Norway. Overall, this provides a reported net income from continuing operations of around NOK 11.1 billion, up from NOK 2.4 billion in the same quarter last year and up from NOK 6.4 billion in the first quarter. Adjusted net income was NOK 7.7 billion compared to NOK 3.2 billion last year in Q2 and NOK 6.8 billion in the first quarter. This resulted in adjusted earnings per share of NOK 3.63, up from NOK 1.45 in Q2 last year and NOK 3.17 in the first quarter. Let's then move to the next slide. If we then move over to the business areas and start with bauxite and alumina. The adjusted EBITDA increased from NOK 855 million in Q2 '21 to NOK 1.117 billion in Q2 '22. This is driven by around 50% higher realized alumina sales prices. The sales prices were partly offset by higher raw materials, the largest being caustic, fuel oil and coal, increasing costs by around NOK 1.5 billion, with around 50% coming from the fuel oil and coal price movements. This has lifted the implied alumina costs from $244 to $378 per tonne. We have also experienced the mortgage costs and other smaller one-offs around NOK 100 million for the quarter, and production at Alunorte was slightly below nameplate capacity at 1.5 million tonnes due to somewhat lower precipitation yield than planned. If we compare results to the first quarter of '22, the adjusted EBITDA slightly decreased by around NOK 150 million. Higher aluminum prices were largely offset by higher raw material costs and negative currency effects from the appreciating BRL against the dollar. And compared to the first quarter, Alunorte raw material costs increased by around NOK 575 million, which was slightly more than guided on last quarter. Looking into Q3, Alunorte production is expected to continue at around nameplate capacity. And in addition, compared to the second quarter, current raw material prices based on market prices indicates an increase of around NOK 100 million to NOK 200 million from increases in caustic and coal, partly offset by lower fuel oil prices. Let's then move to Slide 14. For aluminum metal, then this quarter, adjusted EBITDA increased from NOK 2.8 billion to NOK 7 billion compared to Q2 '21. The record results were mainly driven by higher all-in metal prices and positive currency effects, partly offset by higher raw material and fixed costs. Following the part curtailment of the Slovalco smelter earlier this year, the results includes around NOK 180 million in positive effect from sale of power, which was partly offset by losses on sale of power at Albras, which will decrease as Albras ramps up. Compared to the first quarter of '22, adjusted EBITDA for aluminum metals increased NOK 2.2 billion, driven by higher realized all-in prices and positive currency effect. This was partly offset by higher raw material costs, especially alumina and carbon amounting to around NOK 800 million, in line with our guidance from last quarter. In addition, we also had higher fixed costs in the quarter. For Q3, 69% of primary production is priced at around $2,600 per tonne, while 49% of premiums effects in Q3 is booked at around $1,080 per tonne in total. But Q3 realized premium is expected to be in the range of $800 to $850 per tonne. Compared to the second quarter, we expect slightly lower raw material prices in Q3 '22. And if we use expectations based on current market prices, that accounts to around NOK 100 million to NOK 200 million, mainly driven by lower alumina price, partly offset by Hydro, so in large offsetting the effects we mentioned in bauxite alumina. Let's then move to Slide 15. This quarter, Metal Markets delivered an adjusted EBITDA of NOK 705 million compared to NOK 335 million in Q2 last year. The improvement this quarter is driven by recycling on the back of increased sales premiums, lifting results with NOK 423 million. In addition, positive inventory valuation and currency effects contribute positively with NOK 252 million. This is partly offset by NOK 315 million in lower contribution from sourcing and trading activities on lower premiums and falling markets. This also includes around NOK 130 million in inventory impairments, which will be reversed next quarter as the inventory hedges are realized. Excluding the currency and inventory valuation effects, the results for the quarter was NOK 434 million. When we look into the next quarter, as always, remember that trading results and currency effects in Metal Markets are by nature volatile. However, on the back of the continued high premiums, you should expect continued strong contributions from our recycling operations. Let's then move to Slide 16. This last quarter, the overall market size for extrusions in Europe has been upward revised by CRU based on input from the European Aluminum Association. 2021 market is now estimated at 3.8 million tonnes compared 3.4 million tonnes reported in the first quarter. The growth has been stronger than expected in the regular residential building and construction products with low value-add often delivered through stock segment, while specialized segments, where Hydro extrusions has a larger presence, such as automotive and value-add industrial products, have been growing largely as we expected. The revisions have an impact on growth rate going into 2022. The growth from '21 to '22 is now estimated at minus 2 compared to positive 3 to 4. However, as you can see from the graph here, the total market size is estimated higher, which is good. Extrusion demand for Europe is estimated to have been at a similar level in Q2 '22 as in Q2 '21, but expected to decrease 5% in Q3 with moderating demand in Building & Construction and Industrial segment and a gradual improvement in Automotive, which is where we have more exposure. Growth rates in North America is expected to remain steady throughout 2022. In North America, sales is expected to increase 6% year-over-year, while in Europe, sales are expected to decline 5%. Our extrusion sales for Q3 is expected to be slightly better for Europe, while slightly below for North America, partly driven by labor constraints. Next slide, please. Extrusion shipments are stable in Q2 '22 compared to the same quarter last year, when we exclude the divested unit listed by the welded tubes in Europe. Demand has continued to be positive for us in Building & Construction and Industrial segment, while the Automotive segment are still impacted by supply chain issues, partially accelerated by the war in Ukraine. Extrusion Europe shipments are stable compared to the same quarter last year, while extrusion North America saw their volumes increase. Hydro Building Systems leveraged higher volumes in the Building & Construction segment, while Precision Tubing was negatively impacted by the automotive sector. Please move to Slide 18. If we then move to the financial results of extrusions, then adjusted EBITDA increased from NOK 1.8 billion in Q2 '21 to NOK 2.4 billion this quarter. As in the previous quarter, the integrated recycling operations contributed positively based on the increased billet sales premiums. In addition to the recycling margins, increased gross margins were largely offset by increased variable and fixed costs with energy costs amounting to a significant share. Fixed costs also include around NOK 200 million extraordinary bonus to all employees following the strong contributions through the 2-year COVID period. Relative to Q1 '22, the adjusted EBITDA was largely stable with higher results from the recycler and higher gross margins, partly offset by lower volumes and higher fixed and variable costs. Looking into the third quarter, we expect lower volumes compared to the second quarter due to regular summer maintenance in Europe. In the current inflationary environment, we also expect some margin pressure. And in addition, we have seen premiums come somewhat down, which will impact recycler profitability. And as in last quarter, we would like to stress that the supply chain volatility remains and that we are back to a period with higher market uncertainty in the second half of this year. Please move to Slide 19. The last business area walk-through is Energy, where results slightly increased from NOK 761 million in Q2 last year to NOK 824 million this year. The income from record high price area differences of NOK 1.2 billion were largely offset by around 30% lower power production, resulting in a 430 gigawatt hour short spot position, which needed to be covered in the market at very high prices in the NO2 area. The gain from the area price differences was driven by the increase in NO2, NO3 price area spread from [ NOK 1,288 ] in Q1 to [ NOK 1,511 ] in Q2, in addition to a decreased loan position in the SD-1 and SD-2 areas. Compared to the previous quarter, the adjusted EBITDA decreased by NOK 1.4 billion, and this was due to lower volumes, partly offset by higher prices and a larger price area difference gain of around NOK 440 million. Looking to the third quarter, the price and volume uncertainty are always large, and production and prices will depend on hydrological conditions in Norway. However, we currently see a continued weak hydrological balance in the South Norwegian areas where we produce, and we expect low production in Q3 also, most likely leading to another quarter of negative spot sale. It is also worth remembering that the quarters of low production now will be followed by a significant increase in production in the fourth and first quarter, where we expect the highest prices that we see on the current forward curves. As of yesterday, the quarter-to-date average difference between mid-Norway prices, NO3, and Southwest Norway, NO2 was at NOK 2,364 per megawatt hour compared to NOK 1,516 on average for the second quarter, implying that earnings from price area differences will continue at a high or even higher level into Q3. Let's then move to Slide 20. We're looking at development in our net cash position. Then based on the starting point of NOK 5.1 billion in net cash from Q1, our overall net position decreased by NOK 6.8 billion quarter-on-quarter to a NOK 1.7 billion net debt position. This is based on the following. In Q2, we generated NOK 11.6 billion in adjusted EBITDA. Net operating capital increased by NOK 2 billion, which can be broken down around the following. Around NOK 3.6 billion is related to price and FX effects. This includes both on receivables, but also on the value of our raw material inventories, which has increased more than what is offset by payables. Around NOK 1 billion is driven by Q2 compensation receivables and also higher inventories in extrusions, and this is offset by periodization effects and other minor pluses and minuses of NOK 2.4 billion. If we look at the full year estimates, we expect, all else equal, the NOK build could be related to price and currency with the only sizable nonmarket-related build being around NOK 1 billion to NOK 1.5 billion in safety stocks and the receivables on Tier 2 compensation. If we use current market prices, the full year price-related NOK build is expected to be around NOK 2.5 billion, resulting in around NOK 4 billion full year build compared to around NOK 8 billion that we see year-to-date. So this can move with prices as the quarters move forward. Other operating cash flow adjustments amounted to negative NOK 3.2 billion, driven mainly by NOK 1.6 billion in taxes paid and also NOK 1.8 billion in reversal of positive unrealized derivative effects, which are included in EBITDA, which will be realized as positive cash in the coming quarters. Net investments were NOK 2 billion for the quarter, and we will get back to CapEx in more detail on the next slide. As a result, we generated free cash flow from operations of a positive NOK 4.4 billion in Q2. We paid NOK 11.1 billion in dividends, NOK 5.4 per share on the 20th of May. If we then move on to adjusted net debt, we start by adjusting for the NOK 1.7 billion in collateral per Q2, mainly related to strategic and operational hedging positions, which has decreased by NOK 8 billion from last quarter due to the declining LME prices. The net adjustment of negative NOK 4.3 billion reflect among else asset retirement obligations as well as assets in Hydro's captive insurance company that are not available to service here today. And we have a net pension asset of NOK 1.4 billion, up around NOK 400 million from last quarter on discount rates in Norway and Germany, but this is partly offset by a loss on planned assets in [ our country ]. With these adjustments, we end up with an adjusted net debt position of NOK 6.3 billion at the end of Q2, down from NOK 7.7 billion at the end of Q1. Let's then move to Slide 21. Our full year guidance for CapEx at our Custom Markets Day was around NOK 11 billion for 2022. We ended up spending less than planned in '21, resulting in an additional carryover of around NOK 0.5 billion. This is on top of the NOK 1.5 billion rollover from '21 that was already included in the NOK 11 billion communicated at the Capital Markets Day. But since then, we are experiencing strong inflationary pressures and currency development, which could impact the year-end figures. And so far, the currency effect amount to around NOK 1 billion, primarily driven by the weaker NOK. These 2 items lift the expected CapEx estimate for 2022 to around NOK 12.5 billion. If we are successful with the Alunorte tender offer, this will come in addition to the NOK 12.5 billion and the equity purchase price is estimated to approximately EUR 232 million. As you also know, we have been successful in building substance in Hydro REIN with several projects now moving forward towards construction and production. As such, we believe we are ready for raising capital in the second half of the year. Given the current slow IPO market, we are also looking into other alternatives to raise capital. In a scenario where this is not successful for the second half of 2022, this would potentially result in a capital spend for the project in the pipeline of NOK 1 billion to NOK 1.5 billion for 2022. As we have progressed through 2022, we have year-to-date spent NOK 3.5 billion in CapEx. But as you know, seasonally, we tend to spend around 40% in CapEx in the fourth quarter. Let's then move to Slide 22. I would like just to give a reminder and update on our strategic hedging. The high volatility in the LME prices continues. And during the quarter, we have increased the hedge position in 2024 with 150,000 tonnes. In total, we have around 900,000 tonnes of integrated LME hedges for the period '22 to '24 at an average price of $2,300 per tonne. I would also like to remind you that a certain share of raw materials, like coal and fuel oil, are locked in, which improves the total integrated margin results. As I mentioned several times earlier, I will be happy if the hedge position ends up out of the money as we are then benefiting significantly more on the unhedged part. However, securing a part of the portfolio at historically high margins also makes us more robust in a potential downturn. Let's then move to Slide 23, where we can conclude and summarize the quarter. At the end of Q2, we ended at NOK 111 billion of capital employed and delivered an underlying 12-month rolling RoaCE of 27%, well above our target of 10% over the pipe. Our balance sheet is in a strong condition with our key ratio of adjusted net debt to EBITDA being at 0.2, well within our goal of less than 2 over the cycle. And this is also one of the reasons we are in a position to suggest an extraordinary distribution for 2021. Year-to-date, we have delivered free cash flow of NOK 6.2 billion, but also a NOK build of NOK 8.1 billion, which we will now start to build down during the year. In the first half of '22, improvement is NOK 400 million were realized, NOK 6.7 billion in total on our improvement program. And on that note, I would like to thank you all for joining the presentation and open the session up for questions.

Thank you, Pal. We will then start the Q&A. Please note that you will need to dial into the conference call in order to ask questions. It will not be possible to ask questions over the webcast. Operator, then we are ready for questions.

[Operator Instructions] The first question comes from the line of Liam Fitzpatrick from DB.

Two or 3 questions. Firstly on Rein. Is it now more likely that you do go the private route? Is that your sense? And the strategy has always been to keep this off balance sheet and to raise external capital. How confident are you in raising capital in the second half, whether that be through the public or the private route? That's the first question. Secondly, on the Power division. I know there's a lot of moving parts here, but I just wanted to get a bit of color on some areas. If the position remains the same in Q3 in terms of having small negative spot sales, will the results be stronger just given how wide the regional spreads are? And the comment you made on kind of the Q4 uptick. Is that just based on the normal seasonal patterns where you expect better rainfall? And final question, if I can, just on the shareholder returns. It's a very clear message to them. If we're looking into February in terms of your policies, how do you want the market to think about that NOK 25 billion net debt target? Will that be a level that you will be kind of gearing back up to in terms of how much the dividend that you declared next year?

Thank you, Liam. Three large and relevant questions. If we start with the energy side. I will not speculate on the likelihood of one or the other. And of course, you sit as tight to this market as us, and you know that there is more activity in the private capital markets than there currently is in the IPO market. And we've also seen renewable energy companies raising capital in the private capital markets at a quite attractive price levels. So we are looking at several alternatives and also taking into account that there is a difference in these 2 markets, and we are not sure if and when the IPO market will open up again. I guess when speaking to bankers, you get anything from September to February. So we think it's prudent to look at several alternative paths, as we've also briefly discussed earlier. When it comes to the Power division, it's difficult to give a clear answer on whether the area price differences will offset the negative effect of the short spot position if we end up there. That being said, if price area spreads remain at where they have been so far in the quarter, that contributes quite a lot compared to what we've seen in this quarter. But the high firebrand NO2 also tends to correlate with how much is being produced. So you have a type of balancing effect also there that tends to eat its other a bit up. So we will have to see as we move through Q3. But there are pluses and minuses, and the plus is very big, and let's see how big the minus becomes. And when you look into Q4, yes, we expect the normal seasonal patterns. As a power producer, you typically produce according to the hydrological profile within the year. But you also have a certain ability to produce according to the price signals where is prices higher and lower. So in periods with extreme difference between low price and high price, between summer and winter quarter, all else equal, you would see -- you would aim to try and produce more in Q4 than in a quarter where the difference is not so large. Another element which could impact the fourth quarter is, of course, price areas differences because the -- it's still a situation where the South is expected to be much tighter than the North. We also, just to be fully transparent, we are at a level now where Statnett, the transmission operator has been the hydrological deterioration to be stressed. This is still at a low risk level. But if we don't get normal precipitation during the summer, this situation could become a bit more stressed. When it comes to the capital structure, we aim to be clearer on what to expect through the cycle. And as you correctly resonate, the distribution we're making now is based on 2021. So we're not thinking of the earnings made in 2022 when suggesting the current distribution. So as 2022 finalizes, we have our dividend policies, which said minimum of -- or the highs of 1.25% and 50% of net income. If that doesn't bring us towards the targeted adjusted net debt level when you take into account planned investments and also view on the market, then you should all else equal, expect a distribution on top of that to bring us closer to that target. So this is an attempt to give some more transparency and understanding of how we think about that. You should take earnings in the year, planned investments, market outlook and balance towards this NOK 25 billion.

The next question comes from the line of Ioannis Masvoulas from Morgan Stanley.

My first question, just to, I guess, follow up to Liam's question around the capital allocation and the capital structure policy. So simplistically, this adjusted noted number of NOK 25 billion, in today's terms, how does it translate to what you have announced? So it's about NOK 4.6 billion adjusted net debt at the end of Q2, plus the NOK 5 billion of additional returns. So are you now effectively at NOK 10 billion, giving you a NOK 15 billion buffer? Is that how we should think about it? Second question is around energy. So can you just, if you can clarify what was the benefit of the arbitrage in Q2 and the negative impact of the spot position that you had? And how are you thinking about your overall energy position here? Because it seems like we're going into a phase where you could have more structural short positions going forward. It's going to be probably the third quarter now in Q3 '22 where you are in a negative position. So would you be thinking about adding PPAs in Norway to manage this situation over the medium term? Or do you think that's more of a one-off situation and you should be in a good position based on the current energy mix today? And lastly, on the Alunorte fuel switch project, we were seeing the LNG market potentially looking a lot tighter over the coming years. And you're talking about now switching from fuel oil to LNG. How is the current situation impacting your thought process and whether you're looking to keep -- to maintain some flexibility around what sort of fuel you're going to be using at Alunorte depending on the LNG situation?

. If we start with the capital structure first, then how you should be thinking about it is that the distribution that we propose now is tied to our 2021 earnings. So in 2021, we ended the year with a net debt position of around NOK 7 billion or so. And then we add the dividends that we paid for '21, which was around NOK 11 billion. And then we add the NOK 5 billion that we propose today, and that gets you to an adjusted net debt level, I guess, around NOK 23 billion or so, which is right below the NOK 25 billion. And as we said, in the higher parts of the cycle, we want to be a bit below the NOK 25 billion to have a buffer for when you potentially move to the lower parts of the cycle. So that is -- what we've done now is more or less adjusting the dividend payment for 2021 to be in line with our new capital structure ambitions. And then when we move through 2022, we will do that exercise at the end of the year. So we're not planning to introduce quarterly or half yearly distributions going forward. This is purely to adjust the balance accordance to our new policy, given 2021 earnings. When we move to energy, the price areas differences, that's between the quarters was NOK 1,511. And that gave an effect of NOK 1.2 billion. So a bit higher than -- NOK 440 million higher than what we had in the last quarter, and it's also a bit higher than what your pure sensitivities on NO2 and NO3 price spread changes would have implied. And that's because the position we have in the different price areas change somewhat during the year. So we have a bit lower loan position in SD-1 and SD-2 areas, which gave us a bigger contribution on the price area differences. Not huge compared to what your sensitivities would give, but some NOK 100 million, I guess. And then when we look into the third quarter, the spread scope part year-to-date with extremely low power prices in the North is around NOK 2,300 million to NOK 2,400 million. And if you use the sensitivity, you're approaching 80% to doubling of what we have in second quarter. But remember, we're quite short into the quarter, and this can change quickly, both in the South and in the North. A valid question on Alunorte. We have a long-term gas contract with a fixed element -- with an element of market exposure, and the spread has developed quite a bit lately. So we are still working to deliver on the decarbonization targets, and it becomes more and more important to take out potential challenging prices from the fuel oil spread in the sale of the product, be that the price of alumina or the price of aluminum at the end of the day. We believe that there will be a large demand for greener products, and we need to ensure that we price them accordingly to the cost of production as these swings going forward. So that is how we aim to address changes in the energy price markets.

And sorry, just to clarify on the PPA structure in Norway. Do you think there is scope to add further contracts to make sure you're not going to be in short position going forward?

Well, we are sorted, and we've been in a while in energy as the contracts have been ramping out and also due to the fact that we've made some structural changes over the years. And we are constantly evaluating whether to take additional positions in the market. So I can't confirm it, but can't rule it out, either. As you know, there's not been a lot of attractive opportunities in the Nordics after the wind power opposition increased a bit in Norway. There have been some potential in Sweden, which we have addressed through Rein, but this may change going forward. So we are evaluating and normals on the lookout for attractive energy contracts.

The next question comes from the line of Amos Fletcher from Barclays.

I had just a couple of them. I suppose the first one was on your longer-term CapEx profile, which I noticed you haven't updated in today's release. Is that purely due to uncertainty over the FX and perhaps you can discuss with us what FX rate you're assuming in the original guidance for this year and what you're assuming now?

Yes. No, the changes that we're seeing now are purely FX related. And they're based on FX year-to-date compared to the effects that we have in our business plan process last year, which was quite close to currency rate at that point in time, or at least how they develop through the end of the year. . And we are about to move into our process of updating long-term assumptions and setting business plans. So we'll get back at Capital Markets Day as to what currency rates we expect and we'll guide on in the years to come. But all else equal, you should potentially expect some increase in the longer-term guidance on the same currency element that we referred to in the second quarter.

Okay. And then I just wanted to ask about any physical exposure to natural gas in Europe. So in the event we have rationing of gas, are there any assets within the business that could be at risk?

Well, we are quite exposed to physical gas in Europe to -- in the casthouses at our operations. So for the excluders -- or extrusion plants, but also for the standalone recyclers in Metal Markets. Some of these have the potential possibility to switch, for example, to LPG, but that is quite limited. So if there is a physical shortage of gas in Europe and the rationing is implemented, then there is a possibility of us being impacted in the extrusions and recycling operations.

Okay. And then I just want to ask about the Alumetal acquisition. Are there any sort of antitrust issues being raised by the EU? And is there any -- could you -- how would you have the risk of that transaction closing or otherwise?

Yes. No, we have received questions from the commission, which is also the reason why we've extended the timeline. We are positive to this transaction, and we are positive to how we will address these questions and our view on the markets. So we will proceed, answer asked questions and then let's see where that takes us as we come back after the summer and towards our Q3 results.

Okay. And then just final one. I just wanted to ask, is there any possibility or flexibility in the energy business to reduce the level of contracted sales volumes in the Southern Norway region to reduce the risk of having to be a net buyer in the market on a go-forward basis? I know for what's...

No. We have quite limited flexibility there. The contracted sales that we have are largely to our own operations, and we also sell concessioner -- concessional power to the municipalities where we produce. So that portfolio remains quite constant. I just would like to remind that, yes, having -- you can have a short position in the third quarter. It's not necessarily negative from a full year perspective. Third quarter is usually when you have the lowest prices, also when you look at the year as a whole. So I guess what I would be more concerned about is, if the absolute production level becomes much lower than what we estimate.

The next question comes from the line of Daniel Major from UBS.

Yes, a few questions. Just on the working capital. Can you just clarify what you said around the expected release in the second half of the year, all else equal? I didn't catch that.

Yes. And please be aware that this is guiding on how the market looks now and all elements of working capital are volatile with 10% to 50% movement happening within the space of a week. But if we look at how it stands today, then basically, we have built around NOK 8 billion year-to-date in operating capital. And if you took market prices, then the full year build of NOK on market prices, especially on the revenue side, could be expected to be around NOK 2.5 billion. It is purely sensitivity based. And getting this out of the system might be somewhat slower. It usually takes 2 -- 3 to 4 months. And then we have around NOK 1 billion to NOK 1.5 billion in safety stocks and receivable on CO2 compensation. So that would result in a full year build of around NOK 4 billion compared to NOK 8 billion, but it might be somewhat higher. Prices have come a bit up since we made the sensitivities, and $100 means quite a lot. But that's how it looks as a whole.

Very clear. I guess just one more on the working capital. You built quite a lot of working capital also in 2021, I think, around NOK 8 billion -- or so about NOK 8 billion. Is it fair to assume, given currency moves and potentially structurally higher input costs and aluminum prices, et cetera, that kind of we should be assuming that, that working capital stays kind of locked up and doesn't get released in 2023?

Yes. Well, it depends on your price expectations, as you say, what we are releasing -- expecting to release during this year is based on what we see the market price being now. And as you know, for part of our value chain, the margins are becoming quite sweet now for the company in alumina, high raw material costs and low alumina price. If that remains, then the possibility of release is quite limited. If raw material prices also starts falling a bit, then we can start eating up more of the build this year and next year. So it's not -- apart from the NOK 1 billion to NOK 1.5 billion I mentioned in inventory build, that is mainly anodes due to the fact that we closed the Aluchemie anode plant and there we and at the same time, increased safety stocks as we're importing much more from China now. Apart from that, it's not a lot of structural build in inventories. It's pure price and FX.

Got it. And then next question on the Energy business. And appreciate -- it's a bit of a lottery forecasting the earnings in the near term. But if we look into 2023, 2024 and assume that you no longer have a short position in sort of purchases, but we have a structurally higher energy price in Europe and then, therefore, a structurally higher Southern European power price, would that drive a structurally higher kind of pricing spread and therefore, sustainably higher earnings for the energy business? Is that what we should be thinking about in a scenario of higher for longer power in Europe?

Yes, it's -- I'll be careful to speculate, but I just first want to make clear that a large part of the energy price movement we see in the South of Norway now is given to the dry situation we have in a very long time. But of course, there is a link between prices in the Nordics and the continent and especially in drier periods. So if you have a dry to normalized year -- or a normalized year to wet year, you could lose our fair share of the area price differences that we see now. But in a normalized to drier year, you could keep some of those because in some hours, we will be pricing on continental prices, whereas in some hours, we will be pricing on Norwegian prices. We actually saw in the current quarter, Nordic prices or NO2 prices going above the continental prices, where it became Southwest Norway, which was the price setter. And that just goes to show the fact that it's really the right situation, that is the main driver of that huge spread we see now and also the wet situation in the North of Norway, we have a positive hydrological balance there. And normalization will probably result in elevated levels compared to what we've seen earlier, but a reduction from what we've experienced this year.

Okay. And last very quick one. Have you had communication from your largest shareholder, whether they will take part in the buyback?

Well, when we introduce a share buyback program, it is on the assumption that the largest shareholder will take their share of that program.

Your next question comes from the line of Jatinder Goel from BNP Paribas.

Just a question on steel companies getting into aluminum rolling. You exited that business, obviously, for very different reasons. But anything you can comment on the U.S. market? And will that be something which Norsk Hydro can look into on a forward basis, either organically or inorganically? Or anything you would like to offer, given how bullish those companies are sounding putting more than $2 billion of new project online?

Thank you for your question, Jatinder. We pick up the same news. And of course, it's interesting to read. But from their perspective, I don't have good insight into their lines of thinking. Of course, it's interesting markets. A lot goes into automotive, and we're expecting that to stay strong, but it's not doing anything to our view on whether to enter the rolling space so that we have exited, and we're focusing on the other key business areas now.

Currently no questions in the queue. [Operator Instructions] And the next question comes from the line of Ioannis Masvoulas from Morgan Stanley.

Pal, just a quick follow-up for me on realized premiums. What should we expect on a spot basis to be realized, assuming you have everything resets to current market pricing?

Yes, it's a good question. And we -- the thing is that premiums are trading in quite wide ranges now. If you look at extrusion of the billet premium, for example, then it's $200 to $300 range. So saying what is spot could be challenging. As you see, we expect to be between $800 and $850 in the third quarter, and we should expect that to come somewhat up in the fourth quarter with market coming down. But they haven't moved significantly down. So we're talking towards $700 or maybe north $600 levels as we see it there now.

The next question comes from line of Liam Fitzpatrick from DB.

Pal, 2 follow-up questions. One, just on the aluminium metal costs, and apologies if I missed this. But I think you're guiding them down into Q3 because of alumina, obviously, with North Sea alumina costs. In terms of the non-alumina cost into Q3, are they starting to peak? Or is that still kind of inflationary pressure into Q3 versus Q2? And then just on the buyback, is the plan going forward that this is going -- the plan is basically to have a kind of rolling ongoing buyback that you can continue rather than just a one-off kind of small NOK 2 billion that you've announced today?

Yes. I think if we start with the second question first, we believe when introducing a buyback program that it makes sense to do over a period of time. However, as mentioned earlier, it all needs to be balanced within the framework that we have drawn up. So if you revert to a situation where you're looking at the dividend floor again, then it might be more challenging than a more consensus situation in the marketplace today. So no guarantees, but an ambition when we initiate such a program. When you look at aluminum metals and the outlook into the third quarter, then yes, we have seen the carbon cost flattening somewhat or the speed of increase flattening somewhat, but we expect them to increase in the third quarter around NOK 100 million or so, driven primarily by carbon.

Now no further questions in the queue. So I will hand the call back to your host.

Thank you, and thank you for joining us today. And please don't hesitate to contact us in Investor Relations if you have any further questions. And we wish you all a great summer. Thank you.

Thank you.

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