Norsk Hydro ASA

Stian Hasle - Head of Investor Relations Svein Richard Brandtzaeg - Chief Executive Officer Eivind Kallevik - Chief Financial Officer

Daniel Lurch - Exane Hjalmar Ahlberg - Kepler Cheuvreux

Thank you, operator. Good afternoon and welcome to Hydro's Third Quarter 2016 Conference Call.

We will start with a short introduction by President and CEO, Svein Richard Brandtzaeg followed by a Q&A session also joined by CFO, Eivind Kallevik. For those who that did not see this morning's webcast of the results presentation, it is available on hydro.com.

And with that, I leave the word to you Svein Richard.

Thank you, Stian, and good afternoon. Let me start with a brief overview of the key developments in the third quarter.

Underlying EBIT for the third quarter of this year was NOK 1.5 billion, down from NOK 1.6 billion in the previous quarter and around 30% down from the third quarter last year. We experienced the higher realized aluminum prices in the quarter, which realized alumina price remained stable.

Overall, the price effect from higher LME was offset by negative currency developments, mainly due to stronger Brazilian real impacting all Brazilian assets. Highlight of the third quarter is a strong operational performance in Bauxite & Alumina in Brazil.

Alunorte reached a record run rate alumina production of 6.5 million tons which is well above nameplate capacity of 6.3 million tons. Cost is in the refinery also improved during - due to a better raw material efficiency, all in all an impressive performance from Alunorte.

Bauxite production at Paragominas also continued to run above nameplate capacity and increased 11 million tons following the plant maintenance. As usually we saw seasonally weaker demand in the third quarter and as a result net sales lower in Primary Metal and Metal Markets, as well as in our downstream division old products and the joint venture Sapa.

I am pleased to say that we are making good progress on our main growth projects. We started the first five productions in our new automotive line 3 in Germany on schedule in October, while the Karmoy technology pilot was 40% completed by the end of the third quarter.

Overall NOK 2.9 billion better ambition is on track for the 2019 target of NOK 2.9 billion. So far this year, the better ambition in Primary Metal and Bauxite & Alumina are progressing as planned, while our Rolled Products are not expected to reach their 2016 target.

And finally, we are maintaining our expectations, so 45% global demand growth for primary aluminum in 2016 based on stronger demand and expected in China seen in the third quarter. We believe that we will come out of the year in the higher end of our current estimate of 45%.

We still expect largely balanced global market this year, however with a somewhat tighter market balanced and what we saw last quarter. I would then like to end my introduction today by summarizing all key products going forward.

And as always our improvement ambitions towards 2019 remained high under agenda. Our better program is about taking protocol of what we can influence ourselves by reducing cost and improving efficiency in our operations and equally about maintaining our technology lead and high grading our product portfolio towards attractive high margin and higher growth markets.

Developments in Alunorte that we saw in the third quarter are clearly illustration of the benefits we are getting from our real and plus improvement culture. Another priority of ours is to deliver one of two growth projects become a technology pilot in Norway and the automotive line 3 in Germany on schedule and on budget.

Testing the world's most climate and energy efficient production technology it's crucial, not only to improve cost for entire portfolio that also to stay ahead of the game in long run. And the new automotive line, which will now be ramping up then it allow us to establish a strong presence within the high growth automotive segment by becoming the second largest body in white supplier in Europe.

We will deliver all on this - of this while at the same time ensuring that we maintain the financial strength to be able to with our volatility in our cyclical industry. Our financial strength is key to provide a reliable payout were shareholders in long - in the short term as well as maintain flexibility necessary for creating the most value for our shareholders in long term.

Thank you, Svein Richard. Operator, we’re now ready for questions.

Hi Good afternoon, thank you for taking my questions. I have two questions from my side.

First of all despite the strong performance in B&A and alumina production, there were some management changes in this business, what was the rationale behind it, is it strategic? And then secondly, you’ve mentioned this morning that the risk on CapEx is on the downside, what is driving this, and is it higher capital efficiency, is it a matter of timing and will we see reversal of this in the coming years or is it fair to state?

Thank you.

Thank you Renoa [ph] for the question and first of all with regard to Brazil I can say that this is based on a mutual agreement. This was the time to make a change, and we will continue of course to develop further the strong position we have achieved during the last years with improved operations.

There are still potentials with those operations. We will maintain a stable and high production in Alunorte I'm not promising 6.5 million speed for the coming quarters that we are targeting to stabilize the production of nameplate capacity which is 6.3 million and also we will target again to continued efforts on cost reductions further.

So that is the comment on the Brazil case. Eivind, maybe you can comment on the CapEx.

Yeah on the CapEx side I mean I’ve guided on the risk on the down side, and I think at the end of there will see the produce size of that withstanding. But as we've done in previous years we always try to do what we call the CapEx optimizations, we can push that in maintenance projects for instance into next year we will always do so.

So you should probably look at this more from a timing perspective than anything else.

Okay, thank you very much.

Hi Good afternoon and congrats the team and thanks for taking my question. And just quickly on aluminum prices, you mentioned that you see the market been bit tighter and towards the end of the year and also in 2017, I think you mentioned in your presentation this morning.

Do you think that prices what not maintain their relatively positive momentum or do you think that there's a lot of incentives for restarts and may be connected to this is prices go up and if the market benefits the tighter, do you expect that there might be a bit of momentum in premiums and as well? My second question is quickly on the downstream, on automotive, there’s been a bit vary on a slowdown in some comp production particularly in North America, but also in other regions, do you see any impact here on your business?

Thank you very much.

Yeah. Thank you Daniel, with regard to aluminum price development of course, it's difficult to be specific on this, and we don't speculate on prices, but we are quite confident that as we look at the situation today the market balance is tight not so previously.

But I also mentioned earlier today that we have seen somewhat delay on restarts in China. And we receive the effect of these restarts in the fourth quarter and also into next year.

And then it's just matter of how this will spell out, because we all know sensitive prices are we got to describe them on balance. And we know also that the cost curve is changing currently while we speak due to the fact that's been substantial increases in coal prices in China, we know that the transport prices has gone up and also the alumina price has come up quite significantly.

And alumina price in China today is even higher that the index price including freight to China. So today are some changes that are happening these days that will change the cost terms, so if the speed of restarts of curtailed capacity will continue, it's difficult to say, but definitely the price development will be better much depended on what happens in China and especially the supply on balance they’re going forward.

There is a deficit of 1 to 1.5 million tons outside China and in the quarter we saw a surplus in China, but all in all we see that we are moving into a situation with the fairly balanced market largely balance market that with tendency to be in the short deficit situation for the end of the year. With regard to downstream and concerned about automotive car production in North America and also Europe of course that is something we follow carefully and we of course now in a situation where we are not able to produce enough contacts for the automotive customers and that's why we also very much looking forward to the wrap up and fill production in our automotive line 3 in Germany that we talked about.

And we see that order book we expect than what we expected, but we are not going to produce faster than what we can control technically and process-wise. So it will still take some at once before we have push the cash flow from our production in Germany.

But going forward we see that there are substitution of steel with aluminum continues and will be more and more cost that will be produced aluminum due to the development we see and also the requirements in both in the U.S. market and the European market.

So this is still growth situation which is of course depend on the number of cost that are produced but also number of the speed of replacing steel with aluminum which will continue for quite a while going forward.

Thank you.

Thanks. The question on the remaining investment in Carmoys NOK 2.6 billion, will it come quite split in the next three quarters out of the startup in second half 2017?

Hi Hjalmar, that is the anticipation that we do have, so relatively evenly split for the rest of this year and through 2017.

And you mention that the cost - cash cost going to China could be pushed upwards a bit, because in the latest increase in the alumina prices on coal and transportation, do you think it's still would be at nine percentile or would be the higher than that to say if you consider the latest increase in alumina and other cash cost increases?

I don't think - when we typically we refer to this [indiscernible] updated with the need of the latest alumina figures not the latest coal price increases that we’re seeing over the last few months if you like and particularly on the coal side. So that should potentially push the cost curve somewhat upwards.

Of course in that consideration we have to also go a little bit deeper to understand how big of a proportion of the Chinese market actually directly exposed to coal, how many are integrated themselves and how many product of how much part to upgrade. I think the rough calculation tells that above one third actually buys coal off the market that would be most exposed to this price increase and most directly exposed.

Okay, thanks. And then just the question your balance sheet is quite strong and you probably have less CapEx next year and going forward where do you see the best use of cash, now is it dividends buy backs or maybe acquisitions in new markets or new verticals?

That's a good question. As you know we never comment on acquisition, but in general, of course we will - depending on what happens going forward, we will now of course, discuss also in the Board of Directors what will be the final decision on this.

And whether its share buyback or external dividend that is something the board will recommend in the fourth quarter report and then the general meeting will decide on this in May next year.

Okay, thanks.

Okay, as it seems to be no further question; we can end this quarter’s call. From all of us here, I would like to thank you for joining us today.

And if you have any follow-up questions please do not hesitate to contact us. Thank you and have a nice evening.