Norsk Hydro ASA

Inger Sethov – VP and Chief Communication Officer Svein Richard Brandtzæg – CEO Eivind Kallevik – CFO

Hans-Erik Jacobsen – Swedbank First Securities

Welcome everyone to the presentation of Hydro’s Third Quarter Results. Welcome also to all of you following us on webcast today.

The results will be presented as usual by our CEO Svein Richard Brandtzæg; and CFO Eivind Kallevik. And we will have time as usual for questions from you after the presentations.

So please, Svein Richard.

Thank you, Inger. There are two main factors that are lifting the results in this quarter.

First of all, the lower cost in Primary Metal and the other one is higher production in Energy. On the other hand, there are weak results in Bauxite & Alumina due to low production in Alunorte.

I am happy to confirm for you again that we are on track with the $300 Program, and I think this is the 15th time I am confirming during the quarterly presentations that we are on track for the $300 Program that we are now finishing in the end of this year which is for fully on the smelters. We will continue with our improvements also after finishing that program and continuous improvements will continue in the company along the whole value chain with contributions from each employee, and that is what will make Hydro an industry leader going forward.

But let’s move over to the highlights from the quarter. The results of NOK 659 million is about NOK 140 million, NOK 150 million above the second quarter, about NOK 0.5 billion better than the third quarter last year.

Lower aluminum price, lower alumina price but also lower costs in Primary Metal. The Bauxite & Alumina result impacted by the low production in Alunorte as I mentioned, which is due to the power outages that we communicated earlier this year.

And this is also of course impacting the bauxite production in Paragominas. Higher production in Energy is supporting the result, and also the fact that we had fairly high prices for third quarter level.

I am also happy that we have now the Sapa joint venture on track. The deal was closed September 1.

The company was established, and is now on track to deliver on the synergies and also on the integration that is ongoing. If you go onto the aluminum prices, we saw levels between US$1,800 and US$1,900 per ton.

During the quarter, the realized price went down from US$1,926 to US$1,822 per ton. The market price went down from about US$1,870 to US$1,827.

And we have now priced about 50% of the volume for the fourth quarter at levels close to US$1,800 per ton. If you then take a look at the supply/demand balance outside China, we see that the market is now in a better situation.

We see that the demand has picked up somewhat in the quarter compared to the previous quarter. And we are now back to pre-crisis level on demand on aluminum.

If you look at the total growth that we have talked about also earlier this year, we talked about 2% to 4% after the second quarter. Now we see that the market will grow closer to 2%.

There are announced curtailments but also ramp-ups, some of the ramp-ups of new capacity is delayed, but all in all we expect that market will be largely balanced for the rest of the year. If you then take a look at the inventories, the fact that we have a balanced market also mean that we have quite stable inventory level about seven million tons inventories in the part [ph] that is registered and are all also some unregistered inventories, so all in all about 12 million tons altogether.

There is somewhat move – some movements between the registered and unregistered inventories, but all in all, due to the fact that the market is in balance, we see a fairly stable situation with regard to inventories. If you look at the inventory days outside China, we are talking about 90 days consumption altogether.

We have seen a quite steep reduction in standard ingot premium in the U.S. and the European market.

More stable in Japan. This can be ascribed to a fairly tight metal situation in Japan, but we also know that there has been announced possible changes in warehousing rules.

The LME warehousing rules maybe changed on the decision that we are expecting to be taken within this month. In July, when this was announced, the market reacted and we saw a decline in premiums for standard ingot in U.S.

and in European markets. So during the last days we have seen this and we’ve stabilized the warehousing rules that they are going to be changed will impact warehouse in U.S.

and also in Europe where they are accused of cancelled warrants of more than 300 days. If you then take a look at alumina price, also there are somewhat weakening situation.

We had prices down to US$317 in average from US$326 from the previous quarter, trading now at around US$320. In percentage of LME, alumina was priced from – the price of alumina went down from 17.5% in the quarter to 17.3% during the quarter.

If you then take a look at the export/import balance in China, we have again new record of bauxite import. As you know, there are expected to be restrictions of export of bauxite from Indonesia to China, which has been a very important source of raw material for the aluminum industry in China.

And China is preparing for this situation, and building up inventory. All in all, we see 48 million tons of bauxite inventory in China.

And to get over there on consumption, they will now have bauxite for a full-year and even a bit more than that. If you take a look at alumina import, small increase, but at low levels compared to the bauxite.

So obviously China has intention to convert the bauxite to alumina domestically. The Primary Metal is in balance, no major export/import in balance, zero.

We see scrap import continues as before and when we look at export of semi-fabricated products a bit lower in the third quarter and in the second quarter which can be ascribed to more seasonal valuation. Alunorte is on the way to improve, but this is the largest alumina refinery in the world and it takes some time.

We see improving data every week on volumes, but the power outages created a setback and we lost volumes, and we are now in the quarter operating. We had average of about 5.25 to 5.3 billion ton level.

And we will still need some time before we are up to the level before the power outages, which was around 5.8 billion tons, so that will also have a weight on the volumes, we will see in the fourth quarter. However, the improvement program will also continue and we have the ambition to deliver on the improvement program, the B to A program, which will reduce the cost to NOK 1 billion within the end of 2015.

This ambition has not been reduced. In Qatalum, the production is going as previous, above nameplate capacity, very good operational results on current efficiently [ph], energy consumption, annual consumption all the important operating compartment in Qatalum are very good.

We also see global cost in Qatalum with stable operation. We have a better cost position, cost development is good.

And I am also very happy that we have now received first dividend from Qatar, the first dividend was NOK 35 million. We’re also producing standard – we are also producing customer products, which is mainly extrusion ingots and primary foundry alloys in Qatar, which gives also additional contribution to the bottom line of Qatalum, as we have also seen improved premiums for the metal products during the quarter.

Then we look at the Primary Metal, the cash cost for the total portfolio is going down. In the second quarter we sat at US$1,600 per ton.

Now we are at US$1,550 and with the margin of US$375 per ton on the lower price that we have today. So we have created even more obvious situation with contribution of cost on the $300 Program but also the fact that we also have an improvement program for a joint ventures, the weakening currency in Brazil is supporting this also, good results in Qatar, and also the fact that the cash cost margins has also been lifted during this quarter.

So all in all, US$1,550 that’s the average cash cost for our Primary Metals. We announced earlier this month that we have signed a contract for Slovalco which means that we now have a power contract beyond 2013 for our smelter in Slovakia.

If you look at the downstream and Rolled Products, we had 5% lower volume in Rolled Products in the quarter, which is expected from seasonal valuation mainly weaker in Can and General Engineering. In Automotive, however, it was 10% increased volumes sales into automotive – from automotive sheet which is positive development.

If you look at quarter of this year compared to the quarter of last year, we have 5% improvement in sales, very much supported by good sales in Can and General Engineering. In the Energy, we started the quarter above the 10 years of average reservoir level ending up close to or a bit below the 10 year average on the reservoir level in the Southwestern Norway region.

And prices quite stable and as I mentioned on a quite good level for third quarter due to the precipitation. And finally, Sapa established.

It is now on track. Integration is ongoing.

We are also now working to realize the synergies, and of course there are also some restructure in Europe that is ongoing in this company. And with that, I leave the floor to Eivind Kallevik.

Thank you, Svein Richard. Good morning everyone, and thank you all for joining us on this third quarter results presentation.

To start with, I would like to draw your attention to one specific item from a reporting perspective this quarter. As Svein Richard already mentioned, we did close the Sapa transaction on September 1.

This means that the operating results for Hydro’s old extruded products will therefore for July, August still be presented as results, not to financial items in tax, as income from discontinued operations. And excluded from report in underlying EBIT from Hydro’s perspective.

Depreciation of property, plant and equipment is also excluded for these periods. Now following the completion, so for the month of September, Hydro’s share of operating results from the Sapa joint venture is included in share of profit/loss and equity accounted indexes and then included in the line called, other and eliminations, and reported as such in the quarterly results.

With those details, let’s dive straight into this quarter’s figures. The underlying results as Svein Richard mentioned for this quarter improved by a NOK 150 million to NOK 659 million.

We saw an increase in the business areas; Primary Metal, Energy and a slight increase within the Rolled Products segments. From an overall perspective, this quarter has been impacted by a lower LME measured in U.S.

dollars, which has been partly offset by the strengthening of dollars both versus NOK as well as the BRL. We see some increase in sourcing cost for alumina impacting the B&A results.

This on the other hand, we see partly offset by lower variable costs in particular in the business area of Primary Metal. Also as Svein Richard mentioned, we have very strong energy production for this period lifting results significantly.

Some more comments to other and eliminations. This quarter, we have an underlying EBITD of NOK 87 million versus negative NOK 70 million in the previous quarter, a difference of negative NOK 17 million.

As I mentioned before, our share of the underlying net income from the Sapa joint venture for the month of September is included in this line and that is NOK 10 million for this month in isolation. The other quarter-on-quarter changes on this line primarily relates to the gains and losses – eliminations of gains and losses on inventories.

That is a negative NOK 7 million for this quarter, while it was positive NOK 40 million for the previous quarter. Excluding this elimination and excluding the Sapa effect, we see that the charges for corporate costs and other businesses is roughly NOK 90 million for this period which is seasonal improvement compared to second quarter of roughly NOK 20 million.

If you look in on the high-level quarterly result development. As I said, we started with roughly NOK 0.5 billion at the end or in second quarter.

We have roughly NOK 200 million or NOK 0.2 billion improvement in Energy, about NOK 250 million improvement on the production side, somewhat lower prices of about NOK 40 million taking the net improvement down to NOK 200 million. On Primary Metal, we see cost improvement of roughly NOK 200 million, NOK 120 million of that is related to fixed costs, roughly half of that is related to more seasonal effects, while the other half reflects continued strong and good performance on fixed cost improvements.

Roughly NOK 60 million comes from variable cost improvements in Primary Metal. We see lower prices in Bauxite & Alumina which is negative for them.

The opposite side is of course that the sourcing cost for Primary Metal is improved and Alumina has the positive impact on this quarter’s variable cost. On the aluminum volume and price, we have a negative effect of NOK 100 million.

That of course is net of the negative effect of LME measured in dollars of roughly 250 million. The positive effect that we get on currencies offsets that with close to NOK 110 million, so the net effect measured in Norwegian kroner is negative NOK 100 million.

Bauxite & Alumina, very much related to lower prices as we indicated, driven by the LME link, but then also and even more so, there is a negative cost effect from the fact that we have to source additional volumes in the third-party market to satisfy the supply commitments as we have from a commercial perspective. And this is pretty much in line with what we’ve guided for in the second quarter results.

All in all that leaves us with third quarter results of NOK 0.7 billion or roughly NOK 700 million. If we take a quick look through the key financials, we see that revenues are pretty much flat compared to second quarter of this year.

The increased volumes that we have in Bauxite & Alumina as well as in Energy are offset by the lower prices and volumes in all other business areas. We have excluded NOK 62 million from the reported EBIT this quarter.

I will get back to that in more detail, but that gives us a reported EBIT of NOK 597 million for this quarter in isolation. Financial items.

Negative NOK 246 million, this includes currency losses of NOK 152 million. This of course is a significant improvement compared to what we delivered in second quarter, which had a negative financial items of NOK 1.367 billion.

And I will revert to that on the next slide. Income before tax for this period is NOK 351 million.

This results in a tax expense of roughly NOK 162 million. And again this is driven from the fact that the high proportion of our income before tax comes from the Energy segment, and thus we get a higher proportion of our power surtax impacting results.

This gives us a net income of NOK 321 million for the period, up from a loss of NOK 665 million in the last quarter. If you look on the financial income or expense, and then really point to the net foreign exchange loss.

That was roughly NOK 1.3 billion in Q2. That was of course primarily driven by the weakening NOK versus U.S.

dollar and Euro. Quite large changes in that quarter, in the third quarter between second – end of second and end of third, much smaller variations and primarily related to the Euro development, gives us an effect of NOK 152 million.

This of course is on this perspective an accounting effect mostly. All other effects on the financial issues are relatively stable between the quarters.

As we always mention, I have mentioned in all quarters, we do exclude certain elements from our reported EBIT to give you a better understanding of our underlying performance. In this quarter, we have excluded NOK 62 million altogether from our underlying results versus roughly NOK 144 million in the previous quarter.

In this quarter there was very limited effect on the unrealized effects on power and raw material contracts of NOK 7 million related to an embedded derivative in one of the power contracts that we have. Second line, unrealized derivative effects on LME related contracts.

This quarter we have a long position on LME due to customer pricing out in time and then with the pricing development in LME that we’ve seen between the end of the quarter, this gives us a positive effect in this line. Metal effect on Rolled.

As we normally see, it’s a negative number, declining LME environment typically also gives us a negative effect on this line. Limited rationalization charges and closure costs is basically reversal of NOK 9 million of some previous period’s charges.

Two more significant items, the new items in many ways, gains/losses on divestments, NOK 53 million. That all relates to the fact that we closed the Vigeland transaction in third quarter.

We held 50% of those shares already before the transaction, and this has been a revaluation gain of the shares we had at that point and we buckled that gain to give you a better understanding of the underlying result. Items excluded in equity accounted investments which is old Sapa, that for all practical purposes relates to unrealized derivative effects within their portfolio of metal hedges.

Turning to B&A. We had an underlying result, underlying EBIT for this quarter of NOK 370 million, which is a worsening of result of NOK 126 million compared to second quarter.

This was driven by lower realized alumina prices, aluminex [ph] and it’s driven by increasing cost of the source alumina as I mentioned. Also important to note that of course due to the low production at Alunorte, this has an impact on Paragominas and we see lower production at Paragominas this quarter than we did in the last quarter.

In this period we also have the effect that we have installed a new pump station in the middle of the pipeline, so we have to take down the pipeline for two weeks for this work, that was planned and anticipated, and that is now up and running according to plan. If we look a little bit more closely on the components of the underlying EBIT, the realized price for alumina is down some 3% this quarter, driven by the fall and decline in LME, but is partly offset by the strengthening of the dollar against the BRL.

In addition and probably more importantly in this quarter is the increase in apparent alumina cash cost. This is driven by significantly higher sourced volumes in the third-party market in order to satisfy the supply commitments that we have as a company.

And due to this increased sourced alumina, the net index exposure in this quarter is very limited. Looking forward, as Svein Richard already mentioned that we are expecting gradually increasing alumina production.

We do see the improvement efforts starting to take effect, but it will be a gradual improvement. Bauxite production will ramp-up according to alumina production in Alunorte as we have seen in the past.

Primary Metal delivers a strong result, given the current pricing environment. An increase in its underlying EBIT of NOK 100 million, from NOK 237 million to NOK 337 million.

The LME decrease of roughly NOK 100 million – US$100 per ton this quarter results in a negative effect from the smelter portfolio of course including Qatalum. This is partly offset by the strengthening of the dollar, which increased about 3% versus the NOK.

In addition, premiums lifted roughly 8% between those periods, measured again in Norwegian kroner and together these effects gives us a negative impact of roughly NOK 80 million combined. Helping the performance is the lower variable cost which contributes with roughly NOK 60 million between quarters, driven by two things; it’s really a reduction in the alumina input costs, and also some reduction in power costs in this period.

The reduction in power cost is partly one-time effect which you should be aware of. The largest contributor is really fixed costs, down NOK 120 million compared to the previous period, but as I said, partly due to seasonality, but also very much helped by the strong efforts in the $300 Program.

Looking into next quarter, we have sold about 50% of our production, priced at roughly US$1,800 per ton. We expect slightly lower sales volumes in the quarter and also seasonally higher fixed costs through increasing maintenance activities in that period.

Turning to Qatalum. And I think as Svein Richard already mentioned the fact that we have and continue to have very strong and stable performance well above nameplate capacity from a production perspective.

The net income is NOK 31 million for this period, down NOK 13 million from the second quarter, reflecting the anticipated lower sales price, but also helped by lower fixed costs and improvement in operational performance. So very good performance from a cash cost perspective.

And then, as Svein Richard mentioned, we are also extremely happy to see that the first dividend payment is coming from Qatalum, but I would like to highlight, its US$35 million on Hydro’s behalf which is quite a significant and good cash contribution. On Metal Markets, we see relatively or as anticipated we see some seasonally lower remelt volumes.

We delivered an underlying EBIT of NOK 111 million for this period, down NOK 37 million or NOK 36 million compared to second quarter. The currency and ingot valuation effects stable between the quarter.

So also excluding this, we see the same negative change in results of roughly NOK 36 million between the quarters. As I said, this is primarily driven by somewhat lower seasonal sales, and then slightly lower margins compared to second quarter.

Looking into fourth quarter, we expect volumes to remain at the level as we saw in third and then we expect to see slight increase in margins. But at the same time, as we always do, please remember that these results may be impacted by the trading results and the currency hedges that we do have in place.

So they are volatile and will have impacts, which is hard to predict before the quarter is over. Although, a flat EBIT between second and third quarter, which is relatively good performance considering that we have a 4% seasonal decline in sales.

This is the lowest sales as partly than offset by lower operating costs and improved contribution margin within the business that we operate. Looking forward into fourth quarter, please remember that fourth quarter within Rolled products is the weakest quarter from a production and sales perspective in a year, also that Q4 is the highest maintenance season in for Rolled products which will have an impact on results.

Energy, strong production. We have an EBIT increase of NOK 217 million compared to second quarter, which gives us an underlying EBIT of NOK 485 million.

The results are primarily up on increased production, which is partly offset by somewhat weaker prices. Production increased 748 gigawatt hours, but the net spot sales we see an increase of 844, and this then basically reflects somewhat lower concession off-take of power in that period.

Slight decrease in prices, although seasonally strong. Prices were down from NOK 296 in the second quarter to NOK 267 per megawatt hour in the energy pricing area where we still have about two-thirds of our production.

These spot prices which we said remains strong was basically supported by the higher power prices in Germany, outages of nuclear production in Sweden and a decline in hydrological balance throughout the quarter due to the lower than normal precipitation during the summer and the end of the summer. We look into fourth quarter given the lower precipitation and resulting in worsening hydrological balance, and we expect somewhat lower production in Q4.

In addition, please also remember that net spot sales are usually affected by higher concessional off-take in the fourth quarter, at least if you look at history. However, also in this area please remember that prices and sales and production is highly uncertain and very much depends on precipitation and price expectations going forward.

Now let’s spend one more minute on Sapa and Extruded products. It is a special quarter when it comes to the reporting for this area.

As I said, for July and August we reported Extruded products as discontinued operations. Whereas for September, we include our share of the net income of the joint venture under the heading of Sapa and in the other and eliminations line in the report.

If we start with Extruded products, we saw an underlying income from discontinued operations of a positive NOK 57 million for July and August. But if you look at reported income for that period, that is a NOK 132 million.

This period includes items excluded of NOK 75 million which is basically the positive transaction effects on that deal. If we then move on to the September figures and that differs on the 50% basis, as I mentioned before we have reported a net income of negative NOK 35 million, but when we exclude items excluded, we get to a underlying net income of NOK 10 million for that period which we report in our books.

If you look at this from an underlying EBIT perspective, the result would be roughly NOK 29 million. If we look at the market developments, we see that decline in the European general extrusion market is slowing down.

So whether this is the bottom of getting close to the bottom, it’s hard to say but it is slowing down. The growth in the U.S.

is still positive, also supported from the automotive sector. If you look at the pro-forma sales figures for the whole Sapa joint venture, we see a 1% increase in sales when we compare Q3, 2013 to Q3, 2012.

On the net cash and debt development, we started this quarter with a net debt of NOK 1.3 billion. During this quarter, we have a cash flow from operations of an aggregate of an NOK 1.1 billion, NOK 1.8 million coming from EBITDA and then NOK 0.5 billion in building of working capital.

This is primarily driven by increased sales within the Bauxite and Alumina business area and should – and depends very much on the timing of when the ship leaves [ph] so normally that should come back in fourth quarter. We have invested NOK 0.7 billion, NOK 700 million in this period, very much in line with our earlier guidance on keeping in touch on capital and the guidance of NOK 3 billion for the year.

Positive effect on other NOK 0.3 billion, very much currency translation effects due to currency development in the period, but leaving us at the end of the quarter with a NOK 0.5 billion in net debt or an improvement of NOK 800 million during the quarter. Finally, I would like to give you an update on the BRL hedge that we did or have done.

This of course is to secure the cost position in Brazil which in the low LME environment at least creates some stability and ensures that we keep the operational focus on improving performance. Particularly important for Alunorte giving all the challenges that we have talked about also this quarter.

The total hedged amount last quarter was roughly NOK 800 million and now it’s increased to roughly NOK 1.2 billion. Approximately NOK 350 million of that is relating to the second half of this year and the remaining NOK 870 million is related to 2014.

The average hedge rate is 2.3 for this year and 2.4 – to be precise, 2.41 for next year. Hedge accounting is applied for this, so you will see no mark-to-market effect, it comes straight into earnings.

And with that, Svein Richard, I will conclude the financial part of the presentation.

Thank you, Eivind. With regard to the main priorities for the coming quarter is of course, first of all, to lift performance in Alunorte.

Our improvement efforts have got traction and we see improvements moving in the right direction and lifting the production gradually, but as I mentioned, this is a huge refinery and it will take some time. Of course first of all, we will lift it up to the level we had before the power outages and after that, continue to lift it up the nameplate capacity which is 6.3 million tons.

We will then continue our efforts to strengthen the competitiveness of our smelters, and of course also deliver on the improvement programs that we have established along the whole value chain in a balanced market situation. But I will come back to all these details in the Capital Markets Day that we have at December 5, where you all are welcome.

Thank you very much.

Okay. Then we are opening for questions.

We have a microphone for you also I think. And please also – Hans-Erik Jacobsen.

Please introduce yourself also.

Hans-Erik Jacobsen from Swedbank. The cost reductions within the Primary Metal has been impressive.

In your view, where are you located on the global cost curve now after these cuts?

This is a difficult question, because the cost curve is quite dynamic, and the positions are moving continuously, but we are quite confident that we are at least below the 50% level on the cost curve, but exactly where we are on that quartile is difficult to say. But we have moved gradually down the cost curve and of course the portfolio is always much more robust even on those levels, we have $375 per ton in margin, but of course we still are continuing our efforts to make it even more robust.

So how this will end up in the cost curve is difficult to say, but we are below the 50% level now.

And If I may add, and I think if you – because the cost curve at least is the final concern, there are some uncertainties about it, but if you do this – if you look at different players and you take in cash cost perspective, on EBITDA margin basis, you see that our relative position and relative performance is quite good compared to the market in general.

Thanks.

Okay. Then we have a question from [indiscernible].

We have one question from the web. It’s Amit Pansari of Société Générale and Luc Pez from Exane BNP asking the same question.

Could you please elaborate on your exposure on the standard ingot premium? When should we see the effect from the drop in standard ingot premium on your realized premium and P&L?

We are producing standard ingots in Brazil. We have some joint ventures [indiscernible] is producing standard ingots.

We have also capacity for standard ingot in Qatalum, but the main strategy for our smelters is to produce metal products. And of course we see there is some relationship between the development in premiums on standard ingots and the premiums for the metal products.

First of all, it has a direct impact on the premium for sheet ingot, which is priced on top of the standard ingot premium. So the sheet ingot prices will have a direct impact on the level of the premium for the standard ingot.

But with regard to extrusion ingots and primary foundry alloys, we expect that there will be some months delay. How many months?

It’s difficult to say, but there will be several months before we see or expecting to see a decline in the premiums of extrusion ingots and foundry alloys which is the main products from our fully owned smelters.

Okay. And then other question on the third row there, out there.

[indiscernible] Capital Markets. Some are very much against changed LME regulations when it comes to reduction of this SKUs, different reasons behind that, but at least some says that the risk is that lot of metal is coming out from the registered inventories into the unregistered inventories.

But do you believe it’s possible to have regulations that would also hinder that?

I think that is difficult. And what will happen to the unregistered inventory is of course an unknown factor for us.

We know that LME is looking on the warehousing rules. We’re expecting in a few days’ time that they will decide on this.

And again the market is adjusting to new situation gradually. So whether this will lead to flow of metal out on the warehouses is difficult to say, but the constraints that we are seeing and we have hosted so far will probably be changed.

So how this will spell out, I will not speculate on that.

Okay. Any more questions for us this morning?

No. Then, I would like to say thank you very much for coming, and see you in December.