Norsk Hydro ASA

OSE:NHY

Earnings Call Transcript 2018-Q2

[Operator]

Welcome to each and every one, and welcome to our presentation of second quarter results 2018. They will, as usual, be presented by CEO, Svein Richard Brandtzaeg; and CFO, Eivind Kallevik. And after the presentation, we will have time for Q&A and for one-on-one interviews, as usual, and also from those of you on the webcast. Can we start?

[Svein Richard Brandtzæg]

[Audio Gap]this has partly been compensated by -- or offset by higher realized all-in metal prices and higher alumina prices. In fact, our alumina prices has been 40% higher than the second quarter last year, and all-in metal prices has been 15% higher than the second quarter last year.If you look at the downstream, we have better results in Rolled Products and also Extruded Solutions, very much due to a good combination of higher volumes and higher margins. Also, Energy delivering better results due to higher energy prices, but also higher production than the second quarter last year.We're, obviously, maintaining strong focus on our improvement program, the Better program, and we've had good progress. But due to the situation in Brazil, we are not able to deliver the target, which was NOK 0.5 billion improvement this year. We are, of course, having ambition to deliver on the 2019 target.We are very happy that Karmøy Technology Pilot is now in full production. We started the ramp-up in January, and we finished the ramp-up the 26th of June. So now we have all 60 cells at Karmøy in full operation producing aluminum at the lowest energy consumption in the world.With regard to the market situation, we are now in a deficit situation. There are some uncertainties in the market related to the trade situation, the tariffs that Rusal sanctions and, of course, also, the Alunorte situation. With regard to the total demand expectation for 2018, we maintained an expected growth of 4% to 5% in primary demand in 2018.If we then move on to Brazil and just repeat that we are now producing at 50% in Alunorte, and due to the embargo on Alunorte, we also had to take the bauxite production down to 50% in Paragominas. And the neighboring aluminum smelter, Albras, is also now taken down to 50%.We have continued dialogue with the government of Pará, with the state environmental agency, SEMAS and also Ministèrio Pùblico. And there are several other administrative, legal and political processes ongoing where Hydro is cooperating with all relevant authorities to find the solution.I would just like to reiterate that the third-party review that was done after the heavy rainfall in February and also the internal review that we had concluded that there has been no harmful pollution as the result of the extreme weather in February.It's also good to see that the environmental agencies, the state agency, SEMAS, and also the federal agency, IBAMA, has also concluded that there were no pollution after the heavy rainfall and no overflow of the bauxite residue area. And it's good also that there are external -- more external sources now that are supporting our view.With regard to the operations in Alunorte, we have introduced several measures, both short-term and also working on longer-term measures, to make sure that we can continue safe and sound operations. The biggest part of it is the investment of NOK 0.5 billion in expanded water treatment system. It will increase the capacity with 50%. The timing for resuming 100% production at Alunorte is still uncertain.With regard to operations in Paragominas. We announced on Wednesday last week that we are now adapting manning towards production with now suspending contracts for 80 of our own employees and 175 contractors.In Alunorte, we are currently now running 5 lines out of 7, with 2 lines in standby, but we are now assessing the possibility to curtail 3 lines out of 7. With the 2 lines in standby, we can restart the whole plant within 3 to 4 weeks. If we take 3 lines in curtailment status, we will spend 2 to 3 months before we can resume full production. This will lead to the suspension of work contracts for 150 employees and 250 contractors. And that will result in a cost reduction of about $10 to $15 per tonne. This has not been decided yet, but we are now considering this opportunity.If we then move on to the market and based on the demand growth of 5% and also -- since the second quarter last year, and also the flat production growth development since the second quarter last year, we are now in a deficit situation, as I said previously. There is about 0.5 million tonne deficit in China and about 1 million deficit outside China. We had about 6% growth in China and 3.7% growth in the area outside China. And all in all, when we also add the total picture to the 12 months rolling calculation, we see that we are in both 1.5 million tonnes deficit for the moment. And we are expecting then the market will grow in total, 2018, of 4% to 5%. If we take a closer look at the picture and then look at the demand growth in China, 4% to 6% expected this year. 3% to 4% growth in demand expected outside China. And then we are taking down the expected growth in production in China, from 3% to 4% to 2% to 3%. We have done the same outside China. It looks now that the growth in production will be lower this year than expected, so we have taken down from 3% to 4% to 2% to 3% outside China.So all in all, still fairly good demand growth and lower growth in production. So if we add this to the total supply-demand picture, we will end up this year, at the end of December, with a situation where we have between 1 million and 1.5 million tonnes in deficit in the world. And this means that the global inventories will go down, and we're expecting that the global inventories will end up closer to 11 million tonnes in the end of the year.If we then take a look at the aluminum price development, we had a peak in April as a result of the sanctions in -- with Rusal. The market price in the second quarter this year was $2,257 per tonne on LME. The realized price was $2,183 versus $1,902 per tonne in the second quarter of last year, so higher prices.We have seen a softening of prices during the quarter, and there's still quite a difference between the Chinese price and LME, which means that there is an arbitrage for export, and we see also higher levels of export during the quarter.If you take a look at the standard ingot premiums in the different markets, we see the effect of the import duty of aluminum to the U.S., so this is very much compensated by the increased standard ingot premium level, which has been going up to close to $500 per tonne, now trading close to $440 per tonne. And the European market, the standard ingot premium is now around $150 per tonne.If you then take a look at the alumina price. The market price in the second quarter this year was $521 per tonne. Realized price was $430 per tonne versus $295 per tonne in the second quarter of last year. The peak was, of course, due to the sanctions in -- with Rusal, but also the Alunorte situation contributing to that.We have seen moderating prices after this. We are now close to $500 per tonne, $295 -- $495 per tonne alumina price for the moment, which is still quite a high level. We have seen limited capacity for restocks outside China, and we also have seen that, due to the arbitrage, higher alumina prices outside China. There has been some exports, there are some logistical constraints, but we have seen around 300,000 tonnes of alumina exported out of China.We are actively operating in a third-party market and have secured sourcing for most of the year, 2018, for all the smelters in our system.If you then take a look at the downstream situation, Extrusion and Rolled Products, and then look at the European market compared to the North American market, we see about 3% higher demand in Extrusion in Europe and 5% higher demand in Extrusion in the U.S. Building and construction contributing very much, but in the U.S., we have seen a very high demand -- an increased demand in the heavy truck and trailer market, which has increased 6% since the second quarter last year. So substitution and higher demand is driving, in the different segments, is driving the development.If you look at Rolled Products, we have had about 4% higher demand in Europe and 4% higher demand in the U.S. market. And also, here, good contribution from both building and construction, but also very much in automotive and transport and truck and trailer market in the U.S.Just a couple of comments related to the import duties in the U.S. We have now, from 1st of June, a situation that there is a duty also versus imports to the U.S. from Europe and Canada. And as I've said, the standard ingot premium is very much compensating for this situation. So for export from our smelter in Qatalum and also our share of the Alouette smelter in Canada, we have been compensated by higher margins. And we, of course, have not seen any short-term financial or operational effect of this, but it remains to be seen, the longer effects of this trade situation as there are also responses in Europe and other countries there.With regard to 232, there was also started an investigation -- 232 investigation of imported autos, light trucks and auto parts in May. It is still too early to conclude on this as the investigation is not finalized.On top of this, we have the sanctions towards different Russian companies, and Rusal is a part of it. We have seen now, after the sanction was announced and also the prolongation of the wind-down period, that the metal flows has been normalized. We have multiple businesses or business relations with Rusal throughout the value chain, and we are now initiating mitigating actions to solve this situation. And also, here, we don't see any significant negative effects operationally or financially for Hydro.We have been talking about increased cost situation in our industry, actually in part of our industry for a couple of quarters, and this is the update from the previous quarter. If you take a look at the situation for alumina production, it is caustic soda that has been one of the main factors, more than doubling in cost compared to -- or during the last couple of years. We see now more leveling off of the price development and even some softening prices in the Asian market. But fuel oil and also steam coal is now traded at higher levels, and -- which will impact us in the coming quarters. There are 2 to 3 months' time lag here before the market price are changed, we see it on the bottom line of our businesses.With regard to aluminum metal production, it is alumina that has been the main factor that has gone up quite a lot. We see now that alumina is trading below the average market price in the second quarter. The average market price was, as I said, $521 per tonne in the second quarter, and we now see market price impacts around 3 -- $495 per tonne. But also petrol coke, which has increased quite a lot previously, but there, we see now moderate and even some softening in the market in some areas. But the most stable development for anode raw materials. So again, this is also affecting our businesses, and there are 2 to 3 months' time lag.If you then take a closer look at the business areas and the Bauxite Alumina cost situation. It is higher cost, very much due to increased external alumina sourcing cost, increased raw materials prices, but also fixed cost inefficiencies as we are running Alunorte at 50%.So cost has gone up, but also, the LME -- or the PAX price has gone up also substantially. Realized price, as I said, $430 versus $295 in the second quarter last year. So the margins are not far away from what we had in the second quarter of last year due to the price compensation.With regard to aluminum production, also, here, we have a similar effect, higher raw material prices, but also, here, higher LME that are partly compensating for this development. And we have no similar EBITDA margin in the second quarter as we had in the first quarter of this year. Realized price, $2,183 per tonne versus $1,902 per tonne in the second quarter last year.Rolled Product sales has improved 3% during the first half year compared to the first half-year of last year, and 5% in the quarter compared to the second quarter of last year. If you look at the first half year results, it's very much driven by can and automotive. In fact, we have increased automotive production with 27% during this period, very much due to higher volumes from automotive line #3, that is the new automotive line in Germany, but also the fact that we have resolved production issues in Alunorte, the big hot mill in Germany and -- excuse me, Alunorte, the big hot mill in Germany and also the Hamburg rolling mill, where we had some operational issues in the first half of 2017.We had 2% higher sales in this quarter compared to the previous quarter, which is very much a normal seasonal variation during the period.In Extruded Solutions, we have the value above volume strategy. And here, we have good development in Extrusion Europe and Extrusion U.S. billing system.In Precision Tubing, there are somewhat more moderate development last quarter due to the fact that we have now included the acquisition in Brazil, which has a negative contribution this quarter. So this is the reason why Precision Tubing is showing somewhat weaker results with regard to the margins, but overall, it is a very good development in Extruded Solutions, and we see better performance in this business area going forward.With regard to Energy, as I said, we had also better results in Energy. This is very much driven by higher coal and gas prices on the continent, but on top of that, we have a negative hydrological balance development during the quarter due to dry, warm weather. So we have now had higher prices in the Nordic market than what we had in Germany, this is quite unusual for the period. And also, we see that the hydrological balance is now 15 terawatt/hour below normal after the second quarter.As you probably have seen, we have announced that we have secured the power contracts from 2021 and onwards. We are going to be replacing the big contracts that are expiring in 2020 with new contracts. And for Hydro, it is very important to secure contracts with renewable energy suppliers. And it's a very good combination with wind power, that is unregulated, together with regulated hydropower.So we have now secured 8 terawatt/hour in total from 2021, 4.5 terawatt/hour of this is wind power to where we are then utilizing the flexible controlled or regulated production capacity in the hydropower system with unregulated wind power.The reason why we have a strategy to secure wind power is that there is a huge difference in CO2 emissions, of course, in electrolysis when we have included the emissions from energy production.In electrolysis, based on renewable energy, we have about 1.5 to 1.6 kilo CO2 per kilo aluminum emissions. If we have based our energy production on coal, it would be more than 10x higher. So this is a very important part of our renewable strategy.Then we have the Karmøy Technology Pilot. This is part of our strategy to be a leading company in the technology and innovation in our industry, and this is a big step forward for us where we are now producing aluminum with the lowest energy consumption and the lowest emissions in the world. We have 60 cells in operation, 48 electrolysis cells are operated and designed to produce aluminum at 12.3 kilowatt/hour per kilo aluminum, and we have 12 cells, electrolysis cells, that are going to produce aluminum with energy consumption of 11.5 kilowatt/hour per kilo aluminum, which is a big step forward.There are several spinoff effects from this pilot to the existing smelter portfolio, and it will take about 1 to 2 years before we are verifying all different or the major different technologies. But it will lead to higher production in our existing portfolio and also lower energy consumption.Then, Eivind, please?

[Eivind Kallevik, Executive VP & CFO]

Thank you. Thank you, Svein Richard. Good morning, everyone, and welcome from me as well. I will then take you through the Hydro second quarter financial results.This quarter, we delivered an underlying EBIT result before financial items and tax of NOK 2.7 billion. This is NOK 200 million down from the same quarter last year and NOK 400 million down from the first quarter of 2018.Please also note that in this quarter and going forward, we will focus on explaining results versus the same quarter the previous year, which was also what I did in Q1, not versus the previous quarter, which is what we have done in the past. That, of course, gives us a better possibility to discuss underlying performance rather than discuss seasonality every time we go through the numbers.If we look at the main factors contributing positively this quarter versus second quarter 2017, it is the higher realized alumina and aluminum prices. This all adds up to roughly NOK 2.4 billion in improved results. The realized aluminum prices increased by roughly $372 per tonne, from $2,175 per tonne to $2,547 per tonne. In total, this gives us an improvement of roughly NOK 1.5 billion.The realized alumina prices increased by $135 per tonne from the $295 we saw in the second quarter of '17 to the $430 that we realized this quarter, altogether contributing roughly NOK 900 million positively.The increased raw material cost in primary is mainly driven by higher alumina cost, higher carbon as well as power. Altogether, a cost increase of roughly NOK 1.4 billion. For B&A, this relates mainly to energy, bauxite as well as increased caustic cost, adding up to some NOK 600 million.In addition to this, we also have [ Audio Gap ] amounting to roughly NOK 400 million. We also see some negative effects from upstream volumes, roughly NOK 600 million. And this, of course, is primarily related to the 50% curtailment that we have in Alunorte and the subsequent production reduction in Albras and Paragominas.Happy to see good developments in the downstream areas. We see good volume and margin development, both in Rolled Products and in Extruded Solutions, contributing positively with NOK 200 million. The underlying of positive NOK 200 million consisting of several items, such as the positive consolidation effect of Extruded Solution, improved Energy results and also some negative currency effects relating to the weaker dollar versus NOK and euro and the weaker BRL.We take a quick look at the key financials. The revenue is up some NOK 17 billion compared to the second quarter last year, and this is primarily driven by the consolidation of Extruded Solutions. This quarter, we have reported EBIT of NOK 3 billion, of which we have excluded a loss of NOK 274 million related to the normal timing effects that we do exclude every quarter, giving us the underlying EBIT of roughly NOK 2.7 billion.We had a financial expense of NOK 0.4 billion. This includes a net foreign exchange loss of NOK 0.3 billion. This is mainly due to the weakening of the BRL versus the dollar, giving us an unrealized loss of NOK 1 billion on the dollar debt that we carry in Brazil. This is partly offset by the unrealized gain that we have on the embedded derivatives in the euro-denominated power contract on the back of the weakening euro versus NOK.We also see a somewhat increase in net interest expense as we now carry more debt on the balance sheet post the Sapa transaction. As a result of this, the income before tax for the second quarter was NOK 2.5 billion versus NOK 2 billion in the second quarter of '17.This quarter, we have a relatively low reported tax rate of 19%, that's clearly lower than the long-term guiding of 30% and this is primarily driven by the unrealized currency loss that we then have in Brazil for this period. This gives us a net income for the period of NOK 2.1 billion, up from roughly NOK 1.6 billion same period last year. The underlying EPS is also slightly up versus second quarter last year and is now NOK 1.02 per share.We then move to the business areas and start with Bauxite & Alumina. The underlying EBIT for the business area was down from NOK 662 million second quarter of '17 to NOK 364 million this quarter. And this is, obviously, impacted by the 50% production restriction at Alunorte and the subsequent curtailment at Paragominas. This, obviously, leads to significant volume -- less volumes in both parts and clearly has negative effects on the results for the quarter, both due to the volume shortfall, but also due to the fixed cost level in absolute terms remaining relatively stable between the periods. Raw materials costs continue to increase compared to the second quarter last year, in particular, on the bauxite, energy and the caustic side. To give you an indication, and it's an indication or a scenario, if you like, of the impact of the curtailment at Alunorte and Paragominas. If we had assumed that both Alunorte and Paragominas had produced at 100% for the second quarter and used -- and realized alumina price of $360 per tonne, which was the price level just before the production curtailment was introduced. And if we assume the same cost level that we have realized in the second quarter, the EBIT for B&A, would be roughly NOK 1.1 billion. Another scenario would be if we had assumed the realized alumina price that we had in Q2 of $430, all other assumptions being equal, that would lead to an EBIT for B&A for the second quarter of NOK 2 billion. But it's a clear assumption that the curtailment of Alunorte had a positive impact driving the price up to $430.Also worth noting that, this quarter, due to the situation, we had an above-average sourcing of third-party alumina to cover for the shortfall at Alunorte, and this is also something we should expect coming into Q3.If we look further into this third quarter, and as Svein Richard has already expected, we are in constructive dialogues with the authorities to find a solution for a restart at Alunorte, but it's still not possible to be more precise on the timing of such. On the cost side, we still are expecting an increased raw material cost situation in Alunorte, in, particular, on the fuel oil side, which we expect to increase roughly 15% between Q2 and Q3.We have also included this slide this quarter, to give you a little bit more insight into the cost composition at both Alunorte and Paragominas. And if we then start with Alunorte. As we previously communicated, roughly 15% to 20% of Alunorte is fixed cost, and then 80% to 85% is variable. What is proven through this situation is what we have defined previously as variable cost, truly is variable, but what we are also saying is that the fixed costs are sticking basically at the same levels as we saw prior to the curtailment situation.Now the reason for the fixed cost at Alunorte staying at the same level is, of course, the way we're operating the plant, running 5 lines, keeping 2 in standby and keeping all the manning at the sites. If we get into a situation where we more permanently curtail 3 lines, this will have an impact on the manning situation, as Svein Richard already alluded to, and also have an impact on the cost per tonne at the plant.For Paragominas, we -- it's a little bit of a different situation. We have roughly 60% to 70% fixed cost and 30% to 40% variable cost. What we're seeing here is that we see some abatement of the fixed cost as we have been able to take down maintenance as we're utilizing less of the rotating or mobile mining equipment. And as you've also seen in the paper and Svein Richard mentioned, we have temporally suspended 80 employees last week and we will take out some 175 contractors over the next coming weeks. And this, again, will help alleviate the fixed cost situation at the plant.Turning to Primary Metal. The underlying EBIT for this business area decreased in the second quarter compared to the second quarter '17, from close to NOK 1.5 billion down to NOK 755 million. We did realize significant higher all-in prices, up from the $21.75 last year to $25.47 per metric tonne this year. This, as a consequence then, has a very strong positive impact on the results. However, at the same time, we have also seen a very strong cost push in the primary division. This is primarily driven by alumina prices, but also, to a certain extent, by pet coke and energy prices.Fixed cost depreciation are also up in the second quarter, partly driven by the start-up of the Karmøy Pilot, which has then ended full depreciation, but from an earnings perspective still not at full production for the full quarter, but -- which is what we will see in the third quarter. It's also worth noting that there's quite a bit of currency effect as the stronger NOK versus the dollar has a significant impact on the earnings for this business area.We look into the third quarter. We have at the end of the second quarter sold roughly 60% of our primary production forward at the price level of $2,275 per tonne. At the same time, we have booked 65% of premiums for the third quarter at roughly $410 per tonne. Overall, we expect to realize premiums for the quarter to be in the range of $350 to $400 per tonne.Given the latest developments in both alumina and aluminum price, we both see effects also for this coming into the third quarter results for primary. Remember that aluminum price is realized with a 1- to 2-month time lag, while alumina takes about 2- to 3-month time lag.Given that the price development we've seen in alumina during the second quarter, we do expect a significant cost push on alumina into the third quarter for primary in the tune of NOK 400 million to NOK 450 million above what we saw in the second quarter.We turn to Metal Markets. We delivered an underlying EBIT of NOK 237 million, compared to NOK 244 million the same period last year. Now if we exclude the currency and inventory valuation effect, which was really the main deviation between the quarters, the result increased from NOK 152 million last year to NOK 224 million this quarter. This result improvement is driven by higher sales and improved margins as well in the remelters as well as good results in the sourcing and trading activities. And as far as outlook goes, as normal, let me just remind you that, due to the nature of trading, currency and LME prices, Metal Markets results are volatile.Turning to Rolled Products. We did see a good improvement compared to the second quarter last year, up from NOK 84 million to NOK 212 million this quarter. This improvement is driven in part by increased margins, volumes and, certainly, production performance and the key assets we have in Germany, partly offset by negative currency effects. The results from the Neuss smelter also improved on the back of improved all-in metal prices, partly offset by higher raw material costs, but again supported by the new power contract that came into effect as of January 1 this year.We look at the third quarter, we do expect continued healthy demand for Rolled Products, as Svein Richard indicated, certainly compared to the third quarter last year.There are some uncertainties when it comes to the trade effects on Rolled Products when we look at this on a global perspective, but it's too early for Rolled to conclude or give indication as to what the potential effect might be.And as always, when it comes to, Neuss, these results will be volatile and will swing in line with LME prices and raw material cost developments.Now if we turn to Extruded Solutions. To make Q2 results comparable to -- '17 results comparable to Q2 '18 results, I will discuss this on a pro forma basis. That, of course, means that you cannot take the historical figures of Sapa and compare them to the historical figures here as we have certain transaction related effects in these numbers. Most importantly, this relates to the increased depreciation or excess value depreciation of around NOK 300 million on an annual basis.Now if we look at the results as such, it's very encouraging, and I'm very happy to see that Extruded Solutions continue to deliver improvements quarter over the same quarter last year. And this time around, the results up NOK 121 million compared to the second quarter last year, from NOK 836 million to close to NOK 1 billion or NOK 957 million. The reason or background for these result increases are increased volumes and increased margins. And as Svein Richard has shown before, we see a continued positive trend in the net added value per kilo for Extruded Solutions.Also worth noting that the results this quarter is positively impacted by the change in -- significant change we had in Midwest premium impacting the realization of the inventory we had in Extruded North America, adding roughly $8 million to the bottom line.We look into the second quarter. Also, for Extruded Solutions, we see strong demand going into the third quarter. And we do expect a higher volume figure in Q3 compared to the one we had last year.When it comes to trade tariffs in North America, we do see some negative effects within Precision Tubing as well as Extrusion North America. This relates to the fact that they have businesses where they ship cross-border between Canada and the U.S. or between Mexico and the U.S., where tariffs are impacting the profitability.We turn to Energy. The Energy EBIT increased significantly from NOK 284 million second quarter last year to NOK 470 million this quarter. The main driver is, of course, the significantly higher power prices that we saw during the quarter. There was an increase from NOK 252 per megawatt hour in '17 up to NOK 369 per megawatt hour in second quarter of '18 in the NO2 area where we do sell most of our own production.The increased power production, both due to price signals as well as early snowmelt, also impacted net spot sales and, consequently, the results, positively. First quarter, please remember, was also somewhat lower due to the fact that we had one of our power plants out on maintenance outage. Also, commercial results for this quarter was very good.As we communicated in the past, Energy carries a negative effect compared to previous year's performance of roughly NOK 60 million due to the internal power contract with Rolled Products. Also here, let me just remind you that the earnings and profitability levels in Energy are highly volatile and depending on weather and precipitation, amongst others.We quickly turn to other and eliminations. This netted to a negative NOK 229 million in the second quarter, compared to a positive NOK 170 million second quarter last year and NOK 161 million in the first quarter. One factor reducing the result compared to the second quarter last year is, obviously, Extruded Solutions as we no longer include Sapa here as was the case up until the third quarter last year.The other line mainly contains corporate costs, in addition to some other elements like earnings from industrial parks and industrial insurance. And this was negative NOK 156 million this quarter. This is more or less in line with the updated guidance we gave you last quarter to expect a range of NOK 175 million to NOK 200 million on a quarterly basis.Finally, eliminations amounted to NOK 74 million negative this quarter. This mainly reflects the increased internal margins in B&A, partly offset by reduced stock of internally reduced -- internally sourced alumina.Then finally, if we look at the net debt development between the quarters. We started the quarter with NOK 3.6 billion of net debt. We had a relatively strong EBITDA contribution of NOK 4.6 billion as a major positive contributor. We saw a build of working capital in this period of NOK 2.2 billion. The majority of that was driven by currency as well as increase in prices, but we also saw some inventory build within Metal Markets and Extruded Solutions.Taxes and other primarily relates to tax payments, which is normally higher in the second quarter as well as reversal of results in Qatalum and the receipt of dividends from Qatalum. As a result of this, we had cash flow from operations of NOK 1.6 billion for this period.On the investment side, we invested NOK 1.6 billion for this period. We've also paid dividends in this quarter to our shareholders, NOK 1.75 per share, NOK 3.6 billion. Altogether, leaving us with a net debt position, still a very comfortable one, at NOK 7.5 billion at the end of second quarter.Thank you so much.

[Svein Richard Brandtzæg]

Thank you, Eivind. Just to remind you about the priorities what we do for the coming quarters. It is very much about safe and sound operations to bring the Brazilian operation back to full production, continued value-creating integration process that we have in Extruded Solutions and also successful project execution.So with that, thank you very much for your attention.

[Unknown Executive]

Okay then, we open for questions from the audience in Oslo and the webcast. Any questions? Yes, there will be a microphone for you. Please introduce yourself.

[Eivind Sars Veddeng, Analyst]

Eivind Veddeng, DNB Markets. Two questions, if I may. One on Alunorte. According to local media, it looks like you mostly agree on this and many things, and that the new contract has been shifted over to Oslo for review. Can you please elaborate on that and what do you disagree on, how you view this commentary made by Ministèrio Pùblico? Secondly, moving downstream on tariffs. Can you elaborate on your ability to pass this to customers and what effect would that -- would have on demand?

[Svein Richard Brandtzæg]

Yes, with regard to the discussions we have in Brazil, we had a dialogue with the authorities, the government of Pará and Ministèrio Pùblico. And we are moving forward, but it's still too early to say when we can expect lifting of the embargo. So if you think about the timing here, it's still uncertain, but we are still not clear about when we can expect lift of the embargo, but we have ongoing discussions. With regard to the effect of the 232 import duties on the downstream business, as also Eivind indicated, we have maintained the margins in the market. For Extrusion business, we have almost 600,000 tonnes Extrusion business in the U.S. market and of course, the outsourcing in metal. The metal cost has gone up due to this situation, but this cost is transferred to the customers. So it is the end users that are now paying for these duties.

[Eivind Kallevik, Executive VP & CFO]

I'll add to that, Svein Richard. What we also have is, in some cases, we have [indiscernible] extrusions manufactured in the U.S. going to Mexico for further manufacturing and work, and then is taken back to the consumers in the U.S. Then, you get tariffs on both sides. Not all of that is possible to pass onto the customer on day 1. So there will be a little bit of an impact, but it's not so significant that you will potentially see a big impact in the books, certainly not on EBIT level.

[Unknown Executive]

Okay, any other questions from Oslo? No? Then I know we have some questions from our webcast.

[Daniel Edward Major, Director and Analyst]

Question from Daniel Major, UBS. You plan to spend the NOK 750 million in water treatment plant and community projects. Can you give more detail on timing as well as confirming that Alunorte could potentially restart before completing these projects?

[Svein Richard Brandtzæg]

Yes, the major technical part, we are now under measures, we are now introducing is, as I said, to increase the water treatment capacity. This is a project of around NOK 0.5 billion. It will increase the water treatment capacity with 50%. And this is -- the plan is to be ready with this project within the first quarter of next year. And maybe Eivind, you can comment on the others.

[Eivind Kallevik, Executive VP & CFO]

And then, of course, CapEx spending would mostly follow that. So most of the CapEx that will -- will go in 2018 with some into 2019. When it comes to the SBI, our Sustainable Barcarena Initiative, the platform for when that money will be spent is not quite clear. The structure is being set up, the organization is being [ built ] up and firmed up, so we will spend that in a wise way when the organization is good and ready to do it.

[Svein Richard Brandtzæg]

But this will obviously be over more -- a longer period of time.

[Eivind Kallevik, Executive VP & CFO]

10-year period.

[Daniel Edward Major, Director and Analyst]

On the working capital increase, what was the main driver here? And how do you expect working capital to develop into the second half of '18?

[Eivind Kallevik, Executive VP & CFO]

If you look at the net operating capital increase, it's roughly NOK 2.2 billion. The majority of that is driven by currency and price increases for the material, a little bit of working capital inventory buildup in Extruded Solutions and Metal Markets in this period, but predominantly FX and currency. Now, due to normal seasonal patterns, we should expect then working capital relief in the third quarter compared to the second.

[Menno Gerard Cornelis Sanderse, Managing Director]

A question from Menno Sanderse, Morgan Stanley. When will Norsk Hydro take a decision around curtailing lines at Alunorte and what does it take -- to take this decision as well as does this indicate a step back in the negotiation process with the Brazilian authorities?

[Svein Richard Brandtzæg]

This is something we are now evaluating as it has already taken longer time than expected. And with the curtailment of 3 lines, it is, I would say, a more stabilized way of production. So there are many reasons why we could do that. And also, of course, reduce the cost. We don't have any view on the timing here, but it's based on the fact that it has taken a longer time than what we expected, so this is the reason for it.

[Menno Gerard Cornelis Sanderse, Managing Director]

On Rolled result for Q2, have you now seen a full recovery in the operations? Or is there still upside from operational improvements going forward?

[Svein Richard Brandtzæg]

In Rolled Products, we had several operational issues last year. I mentioned already the Alunorf issue, the Hamburg issue, which has not been resolved. We also had ramp-up issues related to automotive entry. This has now improved significantly. It's going much better than what we had just a few quarters ago. And we still have the UBC situation where we need to have installment of -- or modification of the UBC recycling line for cans where there is a dust issue where we are producing 7 weeks and then we had to stop for 1 week and then producing 7 weeks again, and stop. And the problem is the dust production in this integrated production line. So that will be also solved, but we are doing that in the end of the year. So there will be some limitation of production in the UBC during this year but there are, of course, also upsides going forward in this production line.

[Unknown Executive]

And then a final question from [indiscernible] Exane BNP and Jason Fairclough of Bank of America Merrill Lynch. You've previously been more optimistic about the restart of Alunorte, now you have layoffs. What has changed? What does it take for the authorities to give you a green light?

[Svein Richard Brandtzæg]

As I said, we don't know exactly what it takes for the authority to give us the green light, but since it has taken a longer time than what we expected previously, we are now implementing measures that we see will also smoothen the organization with regard to adapting the organizational capacity to the production capacity. And also with the curtailment of 3 lines in Alunorte, it will also be a smoother production, it will be a more stabilized production situation there.

[Unknown Executive]

Okay. No more questions, then we will say thank you very much for coming, and have a lovely day. Thank you.

[Svein Richard Brandtzæg]

Thank you.