Norsk Hydro ASA

Stefan Solberg -- Head of IR Svein Richard Brandtzaeg -- President and CEO Jorgen Arentz Rostrup -- EVP and CFO

Jason Fairclough -- Banc of America Securities-Merrill Lynch Rob Clifford -- Deutsche Bank Jeff Largey -- JPMorgan

Welcome to the presentation for the second quarter 2009. Welcome to our (inaudible).

My name is Stefan Solberg and I’m Head of IR in Hydro. We released our earnings today at 7.30 Central European Time.

And the presentation materials we will use of the second quarter report is available on our Web site, hydro.com. Today’s presentation will be given by President and CEO, Svein Richard Brandtzaeg, and Chief Financial Officer, Jorgen Rostrup.

After the presentation, there will be an opportunity to ask questions. If you are following us from the web, you have the possibility to submit questions via the web.

And let me be sure before we start, I would like to draw your attention to the cautionary notes in relation to forward-looking statements, which are provided in the presentation material. With this short introduction, I'm pleased to hand over to Svein Richard Brandtzaeg, who will take us through the first part of the presentation.

Thank you very much. I hope you can hear me well.

And I will just start this presentation with the situation for aluminium industry because the financial crisis hit us very hard in the end of second half 2008 and into this year and putting aluminium industry to the most challenging situation we have seen ever. We are now presenting results with the same backdrop as in the first quarter based on the challenging global economical situation.

I will go through this now in detail and CFO, Jorgen Rostrup, will go through the numbers in a short while. But there are certain things you should remember after this presentation.

I would say, first of all, Hydro recognized this crisis early and we did an early step to curtail capacity to reduce manning to cut down the cost. And we are now seeing the results of that in the second quarter.

Going forward, we can see a flattening out of the markets, but not necessarily improvement in the marketplace. But the downturn may now in a way not continue in the same way as we’ve seen so far with first and second quarter.

So maybe we are now seeing the bottom. But it’s still with some question marks.

And the third message is that Hydro took particular effort in taking good care of the cash and that is also why we have been able now to generate NOK 2 billion in cash flow from operations in the second quarter by keeping the capital expenditure at a low level, taking out working capital and doing what we should also on the operations side. Getting off to the highlights for this quarter, first of all our efforts in meeting the crisis is giving some results now.

The corrective measures gives significant cost savings along the whole value chain. We have strong cash flow for operations as mentioned and we have generated NOK 2 billion from the operations.

As mentioned, the market is now flattening out, but underlying EBIT is down 25% compared to the first quarter. So this is very much affected by the reduction in London Metal Exchange aluminium prices, about 28% drop compared to the first quarter.

We have improved the results downstream, and we also had a solid contribution from energy, although the energy production from our hydropower stations are lower in the second quarter than in the first quarter. And I’m happy also to present, Qatalum, 84% complete, going according to plan and we are going to start up this big mega project in Qatar in the year-end 2009, the beginning of 2010.

That will be ramped up through the first quarter of 2010. Moving off to the market, we see some improvements, but we also in the second quarter, which normally has a seasonal battle downstream demand than the first quarter.

In total 1% only, but we should not forget that compared to the second half of 2008, we are talking about 25% reduction in demand. We have seen some improvements in automotive structures and precision tubing, partly driven by the incentives from the German government of recycling old cars and for people to buy new cars.

We have seen a stable development in the building system, and building system is the area where we have seen in a way the strongest performance during this downturn. Also affected by government initiatives for improving or keeping the unemployment at a controllable level.

Initiatives that are refurbishing buildings and we have solutions in aluminium. We are in fact European’s largest player in aluminium and glass building systems.

Looking at the upstream sales, again from the first half of 2008, we’re talking about 24% reduction in demand, but we also see an increasing demand through the second quarter of metal products. So in total 7% improvement compared to first quarter.

This has reflected in the fact that the demand for especially extrusion ingots has increased during the quarter and also foundry alloys. Foundry alloys is going mainly into the automotive business, but we also have increased the production of standard ingots compared to the first quarter of 2009.

Sheet ingot, minus 16%. This is in fact reflected by de-stocking of sheet ingots in the downstream holding business.

You know as well as me that the prices are more or less gone down to half the level of the top level last year. So it has been a tough situation to adapt to much lower prices, taking down costs in all areas.

Its average realized LME level of $1,470 per ton in the second quarter of 2009. We started the quarter with the metal price of $1,405 per ton and ended at 1,651.

And this is again reflecting then the pricing and the guiding I can give you for the third quarter; we have three months forward pricing. And also then on top of that three to four weeks inventories or production time in the casthouses, so it means that there are certain delay on pricing, but already now I can say that you should be able to calculate the prices for the third quarter from these numbers.

The inventories are a concern, still increasing. Yesterday the inventories went upward 35,000 tons just as an example.

Now we are seeing more than 4.5 million tons of aluminium in the LME inventories. You have to go back to the beginning of the ‘90s after the fall of the Soviet Union to find similar up levels and we should also remember that there are much more unregistered stocks of aluminium.

So there are still a level of days in inventories today that are comparable to beginning of ‘90s. But if you see the speed of the buildup this year, it is difficult to find any comparison for previous downturns.

But the message is also that the speed of buildup of inventories are reducing, they are going down partly also due to the fact that China are helping us in the Western world; they are now importing and I will come back to that. You see it in fact in this slide.

From being a net importer of aluminium, China is now from being a net exporter of aluminium, China is now a net importer. There are incentives on the Shanghai Metal Exchange for about $100 per ton, incentives to import aluminium into China.

We saw China reacting swiftly on the downturn curtailing capacity. Chinalco curtailed about 30% during the first prior year downturn and they are now restarting some of this capacity and we expect that China will restart about one to two million tons capacity during the next quarters due to increased domestic demand in China.

So China has now imported until the end of May officially 750,000 tons and unofficially additional 250,000 tons in June. That is the numbers we got a couple of days ago.

So talking about one million tons of import from the West, that is of course helping us, and if you then think about what could happen with the inventories on LME if China did not import one million tons, of course the picture will be inverse. So going forward I’m not sure if we should in a way calculate that China will continue to import that amount of metal.

We expect that China will probably try to restart their capacity and try to balance their own needs at least short term. Longer term, we can question if China can use so much energy domestically on producing aluminium instead of importing aluminium, which is sort of importing energy in solid state.

The announced capacity curtailments are shown here and you see that China contributed a bit more than half of the curtailed capacity of almost seven million tons. We haven’t seen announcements of significant volumes to be curtailed in the second quarter.

But it has been now, the announced capacity has now been realized, and taken out, and Hydro contributed with a 7% of the total global curtailments. In other figures we are talking about 26% overall in capacity has now been curtailed.

If you look at the supply/demand balance, there are still oversupply, as I mentioned, and there are many factors and variables and parameters to be put into the equation to calculate what is the real overcapacity in western world today. And we had one figure that we have converged towards.

But this figure may not be completely the final and accurate figure. But we expect that about three million tons of investment capacity should be taken out still to get better balance in the western markets.

So there are still overcapacity in the west. Getting now to power production in Norway and power prices, we have seen a stable situation on power prices in the second quarter compared to the second quarter last year when we had the downturn of prices.

This downturn in prices last year was very much related to the fact that there were more water in the reservoirs, and also it was to transport lines of electrical energy into Sweden and the continent, that it didn’t work in the second quarter last year. So it was in a way oversupplied energy situation in Norway.

So this second quarter it has been improved the array of energy prices. With regard to water reservoirs in Southern Norway where we have the main capacity, it’s about 19% below normal levels and 25% below the level we had in 2008.

The outlook for next year, it’s very much related to the fact that we expect prices to remain low, the visibility is low. But we still see that LME inventories are increasing, so that is not supporting increased prices, and we don’t see a substantial pick-up in demand, although we see that market is now more flattening out than what we have seen previously.

So if you calculate again, in percentage, what this decline compared to last year, we are talking about 15 to 20%. And these numbers may be different from other companies and that depends on what’s really the figure that was the real production figure or consumption figure in 2008 compared to the level today.

The advantage here on the cost side is that the input costs are coming down. We are talking about 25% reduction in petroleum coke prices.

There are other input factors like alumina with some delays that are now coming into effect. That will also continue into the second half.

This is showing some of the corrective actions that we have taken. We have cut down the capital expenditures for 2009 with 40% and we continue to cut in 2010 with additional 15%.

With regards to operating capital, we have reduced at least NOK5 billion during the first half of 2009; production curtailments 26% primary production and 22% in alumina production, which is related to the temporary shutdown of the Jamaica Alpart alumina refinery. We are taking down the (inaudible) with 70% and reduced external cost.

In total we are delivering the target of 750 million tons of that exercise, which was previously communicated, which will be in full effect in 2010. And we are talking in excess of NOK 800 million in cost reduction due to that exercise.

With regard to demanning, we are continuing to reduce demanning and adapting to the lower demand and from the financial crisis and economic crisis started last year and until the end of this year we will reduce the manning in our company with 4,500 full-time equivalents, which means fixed manning, temporary manning and contractors. In addition to that we are talking about a substantial reduction of input cost of raw materials and also alloys, freight and maintenance cost.

If you look at into the curtailments we have shut down the Soderberg line at Karmoy 120,000 tons with the capacity of 120,000 tons, that production line will not be restarted and that was a permanent shutdown. We’re taking down the Neuss smelter in Germany from 230,000 tons to 50,000 tons and we are keeping that 50,000 tons now due to the signals from the government in Berlin that are now going to support energy-intensive industry in Germany and they were talking about aluminium industry in Germany and at least one primary zinc producer.

If we get that support, we will continue with (inaudible) at least until as long as we get the support from Germany at the level that they are signaling now, for at least the coming months, 50,000 tons and with the option to increase to full capacity when the market comes back again. Sunndal 3 line has shut down temporarily 100,000 tons.

We are taking off 50% of the Soral plant in Norway, which is a 50-50 joint venture with Rio Tinto and we are taking off capacity in Slovalco in Slovakia in total 460,000 tons. And then we have Alpart, Jamaica that has now been temporary closed, but with a capacity of 578,000 tons capacity.

All in all the curtailments, the demanning and cost cutting has resulted in cost of production of primary aluminium of 25%, that is 80% of the target we communicated earlier this year of 30% cost reduction. So we are ahead of our own plans with regard to cost cutting and that means that we are not changing the target, we are going to deliver the target and continue to cost cutting in the coming months.

But this is quite important for us to be able to deliver on, because with the low LME we need to adapt to lower level of cost in (inaudible) production substantially. There is a timeline on raw material as mentioned and that will come also into effect in the second half.

If you look at the total system now we produced 1.35 million tons in the second quarter compared to 1.6 million tons in the first quarter. In 2010 the capacity will be 1.3 million tons that we are still operating.

We have the option to restart 330,000 tons and on top of that the Qatar volume will come into effect when we are producing full capacity at Qatar, which is 290,000 tons. So the speed out of 2010 will be 1.92 million tons of primary capacity.

If you look at the Remelt system, we had curtailed half of the capacity during the first quarter. We started to see improved demand of metal products during the second quarter.

Mainly that’s the gradually increased capacity of remelters and we are in fact in the end of the second quarter running the remelters at full capacity. And that again is focused on executioning.

So this is a very flexible system and then we’re talking about the huge LME inventory that consisted of P1020 aluminium standard ingot which has to be remelted through the system as we have heard. So this will be quite interesting going forward.

This is an asset light, flexible system producing metal products with good margins into the marketplace, total capacity of more than one million tons in the Remelt system today. We are continuing our efforts in research and development and we are not cutting our budgets in research and development in the Hydro corporate.

And we have delivered good results from our efforts and we opened our first energy-neutral building last month based on the project during the last few years that we decided to come up with energy-efficient solutions on building system in the marketplace. And our research people came up to a solution, which is shown here, it was opened officially a few weeks ago in Bellenberg in Germany.

This is a building that produces energy during the summer time due to photovoltaic solar energy. It consumes the same amount of energy during wintertime.

We are also producing geothermal energy or utilizing geothermal energy from that building. So over 12 months, it’s zero energy consumption and it’s zero CO2 emission.

And that is again to position ourselves to build a system in the marketplace that will be quite interesting in the future, when we are moving into new restrictions on building system in Europe, not only for new buildings, but also for the refurbishment of old buildings. So this is just one example of innovation and research and development in Hydro.

If we go further south to Qatalum, we are now happy to show you some pictures of what is coming up there. This is a mega project that we have been working with for some years, and now we are in the last phase of the project.

You can see pictures of the power plants here and the heat recovery units that will increase the output from the power plant. The paste plant is one of the biggest that I’ve ever been to, and the cost of this also is huge.

All in all, Qatalum is the biggest smelter that has ever been built in one step and it is a huge project managed by our own project people. We are now in the end of the second quarter, 84% complete.

We are according to plan to start up this plant in the years 2009, 2010. There are more than 20,000 people on the site today and working at quite high temperatures, high humidity, so it’s a tough situation.

We are still constructing building, its installation equipment, and we are now developing the operational organization that we’re going to start up the electric life. There’s one small adjustment on the last digit, we had communicated at cost of $5.6 billion previously.

You know adjusting that after last estimate to 5.7, so it’s a minor adjustment, which I’m now happy to communicate, because it’s quite important also that we are able to deliver this project on cost. So it’s ready for start up and didn’t – then we have looked further into the cost situation for this front.

This will be among the 10% most cost-efficient plants in the world. So, then we go into the numbers, I’m now happy to introduce my new CFO, Jorgen Rostrup.

Okay. Thank you.

Let me start by reminding ourselves about the new reporting structure that we are following as of second quarter this year. The reporting structure is obviously reflecting the management structure and business structure in Hydro.

We used to have three business area of operating segments, which was upstream, downstream and then the energy area. We have done some changes to that.

The upstream area has been split into two parts. One part called primary metal area, which consists of the former bauxite and alumina area.

And also then primary aluminium, which are the smelters and some remelters located close to the smelters. In addition, we have taken alumina trading out of the commercial area and also included that in primary metal going forward.

Then metal market is except from the alumina trading activity reflecting the previous commercial area in the upstream segment, which is then the major bulk of the re-melting activity and also a significant trading and sourcing activity. On the downstream area, we have split the aluminium products area into two, one which is the rolled business primarily in Europe and reflecting the underlying rolled business, as you know it, from previous times.

And then the remaining part is extrusion business, which, are in the extrusion system in Europe. But it’s the building system business that we have and it’s also the automotive business included in this reporting segment and business area.

Energy is similar to energy as it was with one exception; the solar activity has now being included in the other segment. If you look at underlying EBIT, we have loss before financial items of NOK 618 million, somewhat down from the loss of 493 million as of previous quarter.

Heavily impacted by the lower aluminium prices that you heard we have more than US$500 per ton decrease in aluminium prices. On the positive side are lower write-downs of inventories and also variable costs as Brandtzaeg was talking about.

Primary metal incurred a loss of NOK 895 million on underlying sharply then affected by decline in aluminium prices. Metal markets delivered an underlying positive EBIT result of NOK 196 million, substantially up from first quarter, somewhat related to positive trading results and trading margins, even more important so was that first quarter was heavily impacted by negative currency effects on the EBIT level and they are, should we say, neutral this quarter and there is a 400 million effect out of that.

Rolled product incurred a loss of NOK 28 million underlying its improvement from 53 million last quarter, it is more than accounted for by effect from our cost reduction programs that was initiated several months ago. And that is partly also the explanation for the next business area, which is extruded products.

We had a loss there of NOK 26 million and more substantial improvement from 204 previous quarter. There are fixed costs and other costs effects in that, but there are also volume effects that I will revert to.

We think the major bulk of the volume effects are seasonality, but we can discuss that later. Energy had an underlying positive result of NOK 281 million.

It is down from previous quarter. We talked about that last quarter and it is all accounted for when you look at the lower production volumes.

At last, we have the other segment, which is the mix of some businesses, corporate activity and also some elimination elements. There are some mark-to-market effects in that.

We have said that this segment should incur losses of approximately 200 to 250 per quarter as the last part of our business. This time it is slightly lower due to variations in some of those effects, but we still maintain that the number is between 200 and 250 on a forward going basis.

So if you then look at some key financials, the revenue side has been fairly stable in the quarter. One effect is obviously that lower aluminium prices lead to lower revenue; on the other side, we have had higher volumes both on the aluminium side and also in our trading and sourcing business, so that is balancing out the revenue line.

We haven’t talked about underlying EBIT and we will revert to that; but if you adjust underlying EBIT of minus 618 with the positive so-called items excluded of more than a billion, 1,029 billion positive effect. We have a reported EBIT of positive 410 in the quarter compared to 1.6 negative last quarter.

I think you should take a look at items excluded. We are excluding some items when we are discussing underlying performance in Hydro because we think it provides for us all a better understanding of how the underlying operational business is developing.

These are unrealized currency and metal effects, and it’s also one-off special items such as impairment restructuring and other effects. As I said, this quarter we had a gain of approximately NOK 1 billion on items excluded compared to a loss of 1.1 billion as of last quarter.

We have previously talked that we have some power contracts that are accounted for as derivatives in our books, and effects of a forward rise in aluminium and coal prices has incurred us a loss of 118 million mark-to-market on these contracts, no cash effects in the short-term. Then we have unrealized LME effects, we have a gain there, for two main reasons.

In order to ensure margins on our downstream business, we have significant long positions on LME. This meaning that we are buying metal forward.

These long positions are in a market situation, when the LME is lifting, giving gains in the order of half of the total gain that we see on the slide. And then upstream metal do sell forward as you know in our business in order to achieve average prices over the quarter, which means that we have short positions in the upstream segment.

At the beginning of the quarter, we had a quite substantial unrealized losses on these positions, these positions has been realized during the quarter and are reversing these losses are giving us. Well, it is presented as a gain in our books.

If we then look at the Rolled business on the next line, metal effects, characteristic for our long business is one of the characteristic at least is that we have fairly long production processes and we also have thereby significant inventories. We are technically adjusting the prices of cost of products produced by moving some of the alumina variations from underlying results to item excluded.

We do this both when we get a gain from it, and we get a loss from it, we do it on a regular basis. This is to bring the inventory cost of product produced closer to the market prices as we see in the market.

Then we have 117 million in restructuring and rationalization charges in the quarter and this together with 305 from previous quarter adds up to the approximately 450 million in total charges so far that Brandtzaeg was talking about. Finally, we have gained, being an insurance compensation, for the Suldal I power plant.

This is not for loss production, this is insurance for the asset damages that was on that plant. Going back then to our key financial overview that brings us to 410 in reported EBIT; we have financial income of NOK 145 million in the quarter.

This is in a way reflecting the interest income on our cash positions and the interest cost on our debt. There are a couple of comments to that.

We also had some mark-to-market effects on some share positions that we hold in our captive. They gave us a gain in the period of a couple of tens of million Norwegian kroner.

And then we have a gain on our US dollar hedge program that we have ended this quarter of approximately NOK 200 million. In the opposite direction, it’s an unrealized loss, due to the intercompany loans from euro from different companies in the group with euro and Norwegian unrealized loss on these loans this quarter.

It has no cash effect and it is also neutralized to equity adjustments when we consolidate our numbers. This brings us down to results before taxes of NOK 555 million.

We have our tax calculated of NOK 273 million, which gives us an average percentage tax of 49%. It is in the high-end and that is primarily due to energy surtaxes on top of normal tax rate in Norway.

So if we then move to the different business areas, I want to take them briefly one-by-one. If we look first at Primary Metal.

We had an underlying loss of NOK 895 million, compared to 185 previous quarter. That is the net change of approximately 700 million negative.

This is due to the 25% lower prices in realized aluminium prices in the quarter or negative 28% if you measure it in Norwegian kroner. The effect of this price decrease in the quarter is in the excess of NOK 1.4 billion.

And then to get to approximately 700 in net effects, there is a positive effect from reduced variable cost of approximately NOK 300 million. And we have less inventory write-downs in the quarter, in the same order of magnitude, approximately NOK 300 million.

And then we have other effects netting out of approximately100 million. So if you look at production numbers, they are down some 60 kilo tons in the quarter, but sales has remained fairly stable and as a matter of fact, a slight increase in sale, but more or less stable in the quarter, which implies that we have been able to bring down inventory further.

And this is the main reason why we have been able to generate substantial cash in the quarter. Going forward, we still expect some contribution from lower cost, although we have to say that, as was mentioned by Brandtzaeg, the major part of our cost reduction program has taken place.

We have taken out 25% of the 30 that we had as a goal. And we will take out whatever we can going forward.

But the bulk has been taken down. We expect carbon costs to come down a little bit.

And we also expect some full-time effects of the capacity curtailments and other things on the fixed cost side. So there are some more to go for.

Primary production should go down a little bit also in third quarter. We are thinking in terms of 10 kilo tons, because there will be a full quarter effect of all the curtailments.

And then we have sold more than 90% of our metal for the third quarter at prices around $1,475. If we then move over to metal markets.

We had an underlying EBIT of NOK 196 million compared to a loss in previous quarter of 245 million, which is an improvement of approximately NOK 450 million. Last quarter was heavily impacted by negative currency impact, both because of a weakening euro and also towards Norwegian kroner and towards dollars.

That effect was in total NOK 400 million affecting last quarter’s EBIT. Then we said last quarter that this is an EBIT effect for performance – operational performance leases, the unit is hedging this currency, but then on financial items.

So it goes below the EBIT level. Second quarter had currency effects going against each other.

So the net effect is more or less neutral. That means that 400 out of the 450, approximately is due to this differences in currency effects on our EBIT.

In addition to that, we have had quite solid trading and sourcing results with solid good trading margins in the quarter and that is the remainder of the explanation. We see still weak markets.

We see limited pick-up in demand. We see some tightening towards the end of the quarter, in particular, shipments to European customers, partly due to spot sales and partly due to maybe some inventory build up with some customers.

But we stress that going forward we think we still will see weak and low demand. It is probably leveling out now and maybe we should hope for modest improvement.

But it’s just that so far we see it very modest. If we move to rolled products, we see underlying EBIT of minus 28 million in the quarter compared to minus 53 million last quarter.

So these results are also reflecting a weak economy and obviously are still at an unsatisfactory level. And I think we see that the change from quarter to quarter is more than accounted for by cost measures taken in the rolled system, it is reduction of manning and other costs in order to adapt to the lower production level.

We see stable shipment levels in Europe, slight adjustments in the product mix, but there is a flat stable situation at these low levels and we think this will continue going forward. We think as Brandtzaeg was saying that we are touching the bottom of this downturn marketwise in this area but how it will develop depends to be seen.

Extruded Products, we have negative underlying EBIT of NOK 26 million, it is an improvement from the negative NOK 204 million underlying last quarter of approximately 170, NOK 175 million. There are few comments to this.

The building system may still be able to deliver positive results with acceptable margin, which means that we still have a combination of old contracts for new builds with good margins and then we have been able to replace slower business on the new build side with attractive upgrading business partly probably stimulated by incentive packages on the continent. We see improvement in results quarter-on-quarter in all other business areas within this extruded products group, but we have to say that we think that is primarily due to seasonality in the extrusion system.

The normal pattern in a normal market situation would be that first quarter and second quarter are the strongest quarters with second quarter the strongest quarter and then that third and fourth quarter are weaker. We think we have seen still in this more clouded market, we think we still see some of that seasonality pattern also this year and hence we are warning a little bit about third and fourth quarter in that respect.

The second reason is the pick-up in automotives, strongest in the U.S., but also in Europe obviously driven both by a very low inventory in the automotive industry throughout last winter and also then incentive programs on the automotive side. Yeah, there are, obviously, also cost effects in this positive development, probably accounted for one-fourth of total improvement.

In the Energy area, we have an underlying EBIT of NOK 281 million compared to a 447 million last quarter. This is due to lower production we had production down 27% and spot prices also down approximately 13%.

We said last quarter that we expected lower production in second and third quarter and so this was as according to our expectations. We have lowest of our levels as we speak.

They were 18% lower than normal at the end of the quarter; they have probably improved a little bit. But they are still 10 to 12% below normalized level.

In addition, we have one power plant Suldal 1; it is called out of production due to damages. And that is also reducing their production in gigawatt-hours terms.

But it is not having a major implication and influence over the Norwegian kroner result, this it’s representing. This is due to the fact that we have been able to take into revenues insurance payments for lost water in the quarter, so it’s not influencing our financial numbers.

Going forward, as I said, we will have to live, we think, with lower reservoirs for the next quarter or two, Suldal I will be out until first quarter 2010, also for third quarter we should be able to have insurance money accounted for in our P&L. For fourth quarter that will not be the case.

The water that we are not producing through this power plant in fourth quarter will be moved into the next year, and so for fourth quarter we will have both the lower production and lower revenues from this damage. Except from that, prices are picking up a little bit in Norway, both the spot prices and the forward curve.

So this could indicate at somewhat higher price level for third quarter. Then I’m going to round off before I leave it back to Brandtzaeg to conclude by giving a few comments on our cash flow from this quarter.

We had a net cash flow from operations generated of NOK 2 billion this quarter. That was primarily due to released cash from our net operating capital in the range of NOK 2.9 billion.

If you add this to the release of cash from previous quarter on net operating capital basis of NOK 2.1 billion that means that we in total so far this year has freed up NOK 5 billion in cash. We have maintained our strict discipline when it comes to capital investments, and we have investments of NOK 724 million, almost to the dollar at the same level as previous quarter.

There are some adjustments on the debt side and all in all this means that we have change in cash of 1.6 and change in net cash of 1.3 billion positive for the quarter. Then there are two important comments to this.

For this half year, when it comes to Qatalum, financed the Qatalum activity, the investment program and activity taking place outside Doha through our project finance program in that joint venture. So this first half year investment activity has fully been financed through our project financing, and this is according to our plans and according to the numbers that we have given to the market previously.

Thereby project financing program is now moving towards its end and according to plan we are now financing the remaining part of the projects, the 15, 16 last percentage of the project through equity financing, equity injections by the two owners. So that will change cash flow generation and the cash flow situation for the company going forward.

The other comment is obviously that also having released 5 billion in net operating capital over two quarters, there are limited potential to have substantial releases going forward. And as I talked to, as I said, 3 billion net cash position for the company, we have approximately 18 billion in facilities undrawn and as you see we have a slight change in what we have defined as adjusted net interest-bearing debt and that is primarily then due to the Qatalum project financing activity taking place it the quarter.

Svein Richard?

Thank you very much. With regard to the further priorities in the current year, we continue to reduce the cost and adapt to a difficult market situation.

We are taking off more manning, we are testing the working capital and also keeping the focus on counterparty risk, which will now become even more important going forward with the situation for our customers, that becomes quite challenging also. We maintain the focus on generating cash.

So that is a very high priority for us to continue to generate positive cash by the different measures we are implementing. We have a strong focus in operations, safe operations, improving operations day-by-day, continuous improvements doesn’t stop even in this situation and we are keeping a close eye on the execution of the Qatalum project where there are still 16% left to be done and finalizing the project in the end of the year and ready to start up in the years of 2009, 2010.

This is not only about cost cutting, manning, but this is also about developing the future for the company, so we are working hard in the marketplace. We are high-grading the product portfolio, continue with the research and development and make sure that we come out of this crisis as a stronger company compared to our competitors.

So thank you very much for your attention. We are now ready to start questions, if you have anything you want to ask about.

Thank you.

Hi. Jason Fairclough from Banc of America Securities-Merrill Lynch.

Just a couple of questions on Qatalum, if I may. I mean it looks like it’s going to be a pretty impressive facility.

Obviously it’s a project that you inherited it from the – before your time as CEO. If you look at the total price tags, it looks a little steep.

I mean at $5.7 billion it’s probably the most expensive smelter that’s ever been built on a per ton of annual capacity basis. What do you think of this as an investment?

Would you build this today if you could choose? If you’re looking Phase II and you had Phase II on the same terms, would you invest in Phase II?

I would say that when this is finished, this operation will be among the 10% best in the world cost-wise. So it’s definitely a very important strategic investment for Hydro.

And we would do it again. We’re also very aware of the fact that expansion of this plant, we are locked into the investment a lot like infrastructure already in the first half.

It means that the second half, the expansion of Qatalum would be very profitable. So it is again establishing a strategic foothold in important area with low energy cost, and then also preparing for further development of this – this operations.

(inaudible) answers. I’ll just push you a little bit, if that’s okay.

Your predecessor talked about Phase II as having limited economies of scale. So there was limited advantages in terms of infrastructure, because you were already so huge in Phase I.

Do you have a different view on that?

The limited economy of scale is very much related to the fact that this electrolysis lines cannot be expanded very much. They are 1.25 kilometer long and they are utilizing their technical capacity on the rectifiers to the maximum.

So normally when you are talking about the Brownfield expansion, it’s expansion of electrolysis lines, which is again a low-cost expansion. This – an expansion of Qatalum means that we will build parallel electrolysis lines, meaning that we also have to invest in new rectifier and high-voltage systems, which is important part, 20% approximately of total investment cost.

But there are a lot of infrastructure now on this site that can be utilized in the next phase. And we have the raw material, the picture there, for example, showing the storage for raw materials.

We have transport systems; we have a lot of facilities that can be also utilized for the second part. But again, this economy of scale cannot be utilized in the way as you normally think about an expansion.

Prolonging electrolysis lines suspension cannot be done in this case.

Thank you.

Hi, Rob Clifford, Deutsche Bank. I’ve got three questions.

One is you mentioned the risk of big closure costs, if you had to permanently close some of this, shutter capacity. Can you give some sort of ballpark what that risk is, and is that provisioned?

You are talking about the closure costs of curtailed capacity that we have taken out now?

That’s right.

Then it’s difficult to give a firm answer on that, because for example, in Rhineland if we had to shut down completely the electrolysis in Rheinmark, we would still continue with the casthouse. That means that we will keep the site and run the casthouse, because this casthouse is a word-to-word casthouse to the Alunorf rolling mill, which is the biggest rolling mill in the world and the most cost-efficient rolling mill, which will need still sheet ingots for production.

So again, exact figure, sir, is very difficult to give, because they are depending on how this will be done.

Okay. Alright.

The second question then was, can you give some indication on what your traded ingot volumes are and what sort of margin you made in the quarter on those? Your tonnage of the quarter, excluding traded ingot?

Volumes of traded ingots, I’m not sure if we had that figure here, obviously not.

Okay.

As you saw in my presentation, we have increased the production of standard ingots...

Yes.

... compared to the last quarter.

And this is, of course, a way for us to reduce the working capital also.

Okay. I will launch into the final one, which is just on strategy.

You talk about moving down the cost curve as you ramp up Qatalum, so effectively I’d say this is a move of aluminium production from old world to new world. If you step out,, that’s happening globally, and so how do you compete in the future in a world that’s moving to low-cost production areas where a big chunk of your capacity is tied to the old world?

Of course, we are following carefully the cost curve and we will do whatever we can to move down the cost curve with our Norwegian assets and all the assets we have in what you call the old world. Qatalum, as I mentioned, will be among the most cost-efficient plants in the world and will be a benchmark for our company.

So how this will end is difficult to say, but I can assure you that we keep very high pressure on reducing costs in existing facilities. And so far we have also curtailed the highest cost capacity in our company.

So already by doing that we are then improving our cost position in average, but Qatalum will be a major step in the right direction for us.

I guess it’s a bit tough to compete with the big mix of production coming on in the Middle East, in India, in China that will step right into the bottom of the cost curve as well. Do you have any plans beyond Qatalum to bring the average down because the cost reduction is all creeping reduction, this will give you a step change in costs?

That will be a big step, of course, and it is difficult to give, anyway to promise a similar step in our 16 facilities, but there are still potentials to improve, and we are taking whatever we can to move down that cost curve also with existing facilities. So, where our existing plants will end up in the cost sphere, it’s difficult to say, but there is a very strong pressure on the moving down in old facilities.

Concerning Asia, this year you started to talk about Asia aluminium, and then suddenly you pulled out. Could you tell us something about the reason?

Have you lost interest or not or what are you planning there? Second question is I don’t really understand why you are so skeptical about the aluminium prices.

If you take the figures from the LME, yesterday’s figures, compared with the week before, the aluminium prices are quite nicely up in spite of the inventory.

With regard to the first question, we don’t comment on possible contractions. So I’m not commenting on Asian aluminium specifically, but in general we are of course keeping a close eye on China, and we already have one facility in China in precision tubing and automotive structures.

And we are happy to see that this development is moving forward in an interesting way. But of course there are other challenges in China than in our other markets that we also have to be realistic about.

But I’m not in a way going to comment specifically on Asia aluminium. The other question you mentioned now, that was related to?

LME prices.

LME prices, yes, and the reason why I am not too optimistic about it is the fact that we are building up LME inventories every day. Yesterday, it was additional 35,000 tons into the LME inventory demonstrating clearly that we are producing, the industry are producing too much aluminium in the West.

And in the second quarter, we didn’t see any significant additional curtailments that was announced. In the first quarter and second quarter the curtailments that was announced were realized, and we have seen the effect of that.

But still, if we calculate all that and just plug into the equation all the parameters and the variables that we can see, there are about three million tons too much production in the West compared to the demand. So that is why I’m a bit cautious about being too optimistic about LME.

We are happy for the situation now. But I’m not sure if that is sustaining for the longer term, unless there will be a better balance between supply and demand.

Hi. Jeff Largey from JPMorgan.

I have a question on the cash costs and it stems from really page, I guess, 15. When I see where the cost savings are coming from, it looks like a lot of them are truly more variable costs that the whole industry, to some extent, is benefiting from.

I guess when I think about the 30% cut that you expect in the cash costs, now how much of that is really fixed costs coming out of the system and I assume most of that comes from the permanent production curtailments?

I’m not sure if we have divided that into details in (inaudible). Jorgen, you can comment on that.

What we might say at least it’s on the upstream side, we have reduced fixed costs with approximately close to NOK 450 million so far this year compared to last year. And then you also have fixed cost reductions in the downstream area.

But I would like to add it up all of the time, so there are significant fixed cost reductions also in that number. But you are right.

I mean the major bolt is obviously variable costs and the major bolt is alumina, which is kind of partly hit by the lower demand of aluminium and also it’s priced in a relation – in a percentage of the aluminium, so that should come down. And for several of those trends, we would see a similar effect with other players in the industry.

So as the price is recovering, the aluminium price, are we concerned that this is going to be a headwind for alumina as we go into the second half of the year?

When aluminium, LME prices, are picking up, that will have an effect eventually on the alumina costs for us as for everybody else, yes.

Just a follow-up question. I think it’s interesting how you’re talking about the capacity cuts coming from the different regions in the world, and you seem to be talking about China as something which is completely insulated from the world.

Should we be talking about aluminium as not a non-ferrous metal, but maybe more comparable to steel? I mean is it such a regional market?

I tend to think of it as bit of a more global market.

It is definitely a global market. But China has at least so far tried to balance their supply and demand domestically, increasing capacity according to the increasing demand in China.

Even for quite a long time in export of aluminium, while we all know right after the curtailments and downturn, they see upturn again, domestically in China, and they are not able to reach that – this – the electrolysis production as fast as they were able to close down their production. That’s why there are probably now and we see that with their incentives on the Shanghai Exchange, that $100 incentive to import into China, handle their lost net gains from LME.

So again, that we are talking about one million ton of imports only in the first half year, so it is substantial amounts. So it is influencing the rest of the world.

So we are following China carefully and trying to figure out what China will do. So far the signal is that they would like to take care of their own demand, but longer term we believe that China will be a net importer of aluminium, Jorgen?

Yeah. I just thought I would add to it.

Our thinking in this respect, right or wrong, is that aluminium is such an important material for development of China and its industry, both for infrastructure purposes and also to produce finished goods that they sell into the global markets. The fact is probably that they wouldn’t – you know, if they were to have sourced their needs and the growth for aluminium over the last few years, they would have kind of destroyed the global metal aluminium market, because there is little chance that the rest of the world would have been able to increase capacity in the speeds that the Chinese has needed the material.

So the consequence of that would just be that they would have had to source very expensive aluminium for their needs. So what kind of options do you then have?

Well, you either do that or you use your own coal and you produce energy, which is also in a way highly priced. But still you can control that in a better way and then you produce material, as Brandtzaeg is saying that is enough to kind of balance out the market that you are focusing on.

We think this has been a careful laid out policy over time and we think the numbers are supporting that. Whether they will be able or continue that strategy, we don’t know, but we tend to think that they will maintain their market fairly balanced.

And then the thinking is, then the rest of the world will have to kind of also keep a balanced or a solid market for the remaining large volumes. The Chinese market is one-third of the total market.

Okay. Thank you.

Any more questions? No?