Norsk Hydro ASA

OSE:NHY

Earnings Call Transcript 2020-Q2

[Operator]

Good day, and welcome to the Norsk Hydro Q2 Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Line Haugetraa. Please go ahead.

[Line Haugetraa, Head of Investor Relations]

Good morning, and welcome to Hydro's Q2 presentation and conference call. Today, we'll run similar to Q1 2020 where we will start with a presentation by CEO, Hilde Merete Aasheim; followed by CFO, Pal Kildemo, before we end with a Q&A session. The presentation slides we will walk through can be seen on the webcast. The link to the webcast, as well as the slides, can be found on hydro.com. Please note that you will need to dial in to the conference call to be able to ask questions at the end. It will not be possible to ask questions over the webcast. If there are any media inquiries for one-on-ones with either Hilde or Pal after the presentation, please contact Head of Media, Halvor Molland. Please change to Slide 2. With that, I turn the microphone over to you, Hilde.

[Hilde Merete Aasheim, President & CEO]

Good morning, and welcome from me as well. So let's have a look at the second quarter results and some highlights for the quarter. Underlying EBIT for the second quarter was NOK 949 million, up from NOK 870 million in second quarter last year. The quarter was indeed heavily influenced by COVID-19's negative impact on the global economy, through large forced and voluntary closedown across the world, resulting in reduced consumer spending and a huge drop in aluminum demand. As a response, we have taken strong measures to maintain and adjust our operation and cost base with the lower demand, always with a healthy and safe working environment as our top priority. In terms of our results for this quarter, the weaker global demand negatively impacted our downstream demand, with large reductions in volumes compared to second quarter last year. In addition to this, the weaker demand has reduced prices for alumina as well as aluminum compared to last quarter. On the other side, our result is positively impacted by a weaker BRL and Norwegian kroner, in addition to lower raw material prices in our upstream businesses. These raw material prices have contributed to a particularly strong quarter in bauxite and alumina where our production costs at Alunorte are at a record low levels, which is also supported by improved operations. We are focused on taking down costs and safeguarding our cash flow during the quarter and improvement initiatives are ongoing with full speed. We expect to reach our improvement target of NOK 4.1 billion for 2019 and 2020 with cost efficiency and restructuring initiatives being the main enablers. Despite very challenging markets, the reduced costs, lower investments than planned and released operating capital have resulted in a free cash flow of around NOK 1 billion for the quarter. The challenging market environment highlights the need for Hydro to continue to focus on lifting profitability, driving sustainability, positioning the company for the future. We believe our position as a low-carbon producer of aluminum is an increasingly important competitive differentiator while also growing and diversifying our portfolio where Hydro's capabilities match megatrends such as in recycling, renewables and batteries.Next slide, please. Since the outbreak of the pandemic, our top priority has been the health and safety of our employees, contractors, customers, suppliers and local communities. And we have followed the advice of authorities and implemented strict precautionary measures throughout the whole company. Special focus has been in Brazil. To sustain operation in Paragominas and Alunorte and Albras while at the same time, supporting the local communities to reduce the spread and effect of the virus. Our teams have spent countless of hours to assemble and deliver more than 36,000 baskets of food, water and hygiene supplies to the local communities. In addition, we have also donated funds to build nearly 1,000 field hospital beds, as well as equipment to support the local hospitals. As we mentioned last quarter, specific financial measures have been taken to improve our robustness and protect our liquidity during these times with large uncertainty which includes freezing CapEx, delaying dividend payments and issuing a NOK 7 billion bond. Forced closure and demand-driven capacity reductions have mostly affected our downstream operations. Despite the fact that many countries now have opened up after lockdown, the majority of our extrusion plants are still operating at reduced capacity, and we also see reduced capacity utilization in our rolled products plant. However, we have seen improvement trend during the quarter and current order intake is now around 75% to 80% for Extruded Solutions and around 80% for Rolled Products. Production at metal markets recycling facilities is largely back to normal after curtailment in second quarter. Our upstream operations, on the other hand, have been operating mostly as normal, obviously, with fixed precautionary measures to avoid the spread of the virus. Let me now move to the market. Please move to Slide 4. COVID-19 has created a global recession, and as such, negatively impacted the demand for aluminum. On the left-hand side, you see estimates for 2020 GDP, which has been further revised downwards over the last couple of months, from the levels seen in dark blue to the lighter blue. We also see that industrial production worldwide is showing the same downward trend as GDP but to an even larger extent, negative 8% growth worldwide in industrial production. Indications show that the bottom could have been reached, however, the length of time towards recovery remains uncertain and a strong second wave of the virus could further worsen the situation. Among this challenging landscape, however, China has shown a sign of recovery. It is the only country predicting a GDP increase in 2020 and development in second quarter has exceeded expectations. As you see on the right-hand side, key indicators for aluminum demand in China in Q2 have already begun to approach 2019 levels again. As the first market to experience and emerge from the COVID shutdown, Chinese -- China's positive development are a good sign for the global economy. Next slide, please. The global aluminum market is expected to be in significant surplus through 2020 driven by COVID-19. Starting with the left-hand side and where we look at the quarterly supply-demand balances, we see a continuation of the global surplus which emerged in the first quarter 2020. However, the surplus is 1.7 million tonne lower in the second quarter compared to the previous quarter. This is due to the global demand increase of around 10% compared to the first quarter, consisting of approximately 40% rise in China, which was tempered by a 20% decline in the world outside China. Over the same period, supply remained flat worldwide. When looking at these figures, we also need to take into account the Chinese New Year effect, which normally results in oversupply in the first quarter, followed by a deficit in the second quarter. Looking ahead to the balance of the full year 2020 on the right-hand side, we point to the balance estimate from 3 different consultancies, which are in the range of 3 million to 4.7 million tonnes with surplus both in China and the world outside China. As we saw last quarter, there remains some variations between the consultancy, indicating the uncertainty currently in the market. However, the valuation is lower than observed the last quarter. As you know, in response to the forecasted surpluses, we have delayed the restart of business.Now let's take a look at how COVID is impacting our downstream markets. Please change to Slide 6. As mentioned at the start, second quarter was particularly challenging for our downstream business areas. Starting with Extruded Solutions, we saw a 30% decline in our sales volume compared to second quarter last year. This decline exceeded the market estimates of 30% to 32% for North America and Europe, respectively, which is due to our high exposure to those market segments most strongly affected such as automotive and transport, both in Europe as well as in the U.S. We saw a drop in sales across all customer segments with automotive and transport segment being hit the hardest as we observed shutdowns and curtailments on many OEMs in the first half of 2020. It is worth noting, however, as you see on the right-hand side, that external market expectations are indicating signs of recovery for Q3. And this is also supported by our order intake, which has improved from low levels of around 50% to 55% to now being between 75% to 80%. Now let's take a look at Rolled Products, and please change to Slide 7. Within Rolled Products, we see an 18% decline in our sales from the level of second quarter last year. Here, our performance outperformed the market estimates of 26% to 29% decline for Europe and North America, respectively, as we see to the right-hand side of the slide. This is primarily due to can, foil and GE performing better than overall market. In can, our volumes actually grew 11% compared to the second quarter last year, while the market for can actually contracted 19%. This is driven by our strategy to shift more volumes into can but also us taking some market share in the second quarter due to competitors' closures. Similar to the Extruded Solution, we see indicators that the market is entering into a slight recovery for the second half of 2020 following Q2 lows. Again, external consultancies are forecasting that third quarter will be weaker than third quarter last year, but to a lesser extent than the reduction observed in the last quarter. Our Q3 outlook for Rolled Products is, however, slightly more conservative. Rolled Products volume are expected to decline more than the market compared to the third quarter last year as we expect that our competitors are bringing back their production for can and we reduce our market share. Expectation for continued lower [ liter ] volume will also contribute negatively. We should also note that the third quarter last year was a strong quarter due to positive result in can, and this will increase the relative decline in the third quarter this year. Next slide, please. Let's take a look at -- quick look at the sales prices. Our average sales prices were down in the second quarter compared to the first quarter, very much influenced by the immediate drop in demand. Second quarter average 3 months LME was USD 1,524 per ton, while the tax average was USD 244 per tonne for the second quarter. Prices impact and LME improved throughout the quarter, reflecting stronger demand in China. Currently, PAX is trading at $280 per tonne, and the 3 months LME was close to $1,700 yesterday. Next slide, please. As with revenue drivers, cost elements are also impacted by the general market development. If we look at the main costs for producing primary aluminum on the left-hand side of the slide, we see a slightly improved cost base compared to the first quarter. As mentioned on the previous page, alumina spot has been trending upwards since April, and as I said, currently trading above the second quarter average. On the right-hand side, you see the main raw material cost for producing alumina with prices falling significantly for main energy inputs, fuel oil and coal. For caustic soda, market prices rose. However, we remind you that we typically have a time lag of 1.5 months between market price and realized price. Based on prices we see in the market for caustic and fuel oil, this will negatively impact our cash cost in the second -- in the third quarter. Let me then move to Slide 10. As shown on the last slide, the market prices for primary metals raw material has trended slightly downward in the second quarter versus first quarter. In addition, primary metals cost base benefited from slightly lower fixed costs and positive currency development, resulting in a lower implied cost. However, during the same period, realized LME prices fell 10%. Realized premium also fell by 10% from Q1 to Q2, driven mainly by lower demand for aluminum in general, and as we see on the right-hand side, lower demand for our high-margin, value-added products. Primary metal has historically sold 70% to 75% value-added products. Whereas in the second quarter, primary metal sold less than 60% value-added products, showing also our flexibility to adjust our production to where we see demand. We expect these trends to continue in the third and fourth quarter. As prices and premiums fell faster than primary metal cost base, margin fell to $175 per tonne in the quarter. Next slide, please, Slide 11. In Bauxite & Alumina, the implied alumina cost has continued to decline from 2018 peak levels to this quarter, USD 192 per tonne. This is the lowest implied alumina cost for the last 4 years, and the lowest Alunorte cash cost since [ we just recover ] in 2011. The reduced cost is driven primarily by reduced raw material costs, especially in fuel oil which fell 47% compared to Q1. However, which I'm pleased to report that we have also worked hard to lift production and improve our own performance, as shown in the graph on the right-hand side, visualizing the reduced energy consumption, representing a saving of more than $5 per tonne compared to 2018 levels. When operating at nameplate capacity, this can provide a savings of USD 30 million per year. This reduced cost base more than compensates for the 6% fall in realized alumina prices from Q1 to Q2, leading to a margin increase of around $17 per tonne. The power outage at Paragominas in June has been rectified, and operations has resumed at both Paragominas and Alunorte. But the power outage, together with the rescheduled maintenance into Q3, will lead to somewhat reduced alumina production in Q3, estimated at around 85% to 95% of full capacity utilization. But we still aim to be at nameplate capacity by year-end. Let's then turn to Slide 12. Our improvement efforts now focus mainly on cost efficiency and restructuring initiatives, are on track to deliver on the target of NOK 4.1 billion for 2019 and 2020. Our overall improvement target of NOK 7.3 billion remains unchanged for 2023. The largest contributor to the improvement programs come from the curtailment reversal after the embargo, especially at Alunorte. As mentioned earlier, Alunorte is expected to reach nameplate capacity by year-end. In terms of operational improvements, optimization efforts are well underway in all business areas. I'll just explain the improvement in energy consumption in B&A as an example. The same focus we see in primary, with improved technical production parameters, including a positive effect of a consistent alumina quality compared to the Alunorte embargo period. Our staff and improved procurement initiatives are also underway in all business areas. This is anchored by our Fit for Future program with a target of delivering on first quarter staff cost position for HR, ISIT and the finance function. Ambitious procurement initiatives are also ongoing, enabled through procurement excellence, but also scale and full value chain potential. Organizational and portfolio restructuring has primarily taken place downstream in Rolled Products and Extruded Solutions. And over the latter 2 quarters, we have taken out significant costs well above targeted levels. The portfolio review starting in 2019 in Extruded Solutions have resulted in divestments of 3 sites and permanently closed 12 plants since 2019. Restructuring in Rolled Products related to the closure of the 2 foil lines in Grevenbroich and the related de-manning is also well underway. Here, I should also mention that the strategic review for Rolled Products, looking for potentially other more value-creating opportunities, is progressing. However, the COVID situation has impacted the speed. Next slide, please. We continue to track our sustainability performance the same way as we do with all other target sets for the company. This quarter, I will highlight our safety performance. If we look in the upper left corner of the chart, you see our safety record in total reported injuries, 5 million hours year-to-date. The current 2020 levels of 2.3 injuries per million hours worked is our lowest level in years. And we have managed to maintain these high standards despite the challenging COVID situation. Ensuring the safety of our people, we always remain our top priority. Next slide, please. So the main focus throughout the quarter has been protecting our people and communities from the spread of the virus. At the same time, keeping the wheels turning and generating cash. As you've seen today, we have managed to protect our people and supporting communities. And in doing so, kept the wheels turning at our sites. And we have managed to generate a free cash flow of NOK 1 billion from operating with strict focus on working capital and CapEx. I attribute these achievements to the organization and our business areas with swift responses to the challenging situation, discipline and flexibility in a very special quarter. Now before I round off, I would like to give you a couple of examples on how we are working to position Hydro for the future in line with our profitability and sustainability agenda. Please change to Slide 15. Our ambition is to be a leading sustainable industrial company, creating value for all stakeholders. We will do so by strengthening our position with low-carbon aluminum. At the same time, as we will explore new business opportunities where our capabilities match the megatrend. The starting point is differentiation based on our low carbon position and low-carbon products. The Hydro CIRCAL, with high recycled content, and Hydro REDUXA with low CO2 footprint. We see clearly that our low-carbon aluminum is the differentiator and that the low-carbon products start to get traction in the market. The CIRCAL example, to the left. With the new facade contract for the 99 West Tower in Frankfurt, developed by BNP Paribas, to be delivered by Extruded Solutions. Hydro REDUXA is also gaining traction, climbing its way to new market segments, along with changing consumer behavior. Swedish stroller company, Emmaljunga, is a small, but illustrative example of new markets for Hydro REDUXA.The last example I would like to mention is that we are now pleased to bring Hydro CIRCAL into the beverage can industry with a new strategic partnership with the German HELL ENERGY Group, a producer of energy drinks, soft drinks and iced coffee. But Hydro CIRCAL is produced -- sorry, used beverage can recycling line at Neuss, in Germany. We enable health of the consumers in more than 50 countries the opportunity to enjoy their drink with historical low tier 2 footprint. Next slide, please, Slide 16. At the same time, as we are strengthening our position with low carbon aluminum in the market, we aim to grow and diversify our portfolio, where Hydro's capabilities match the megatrends, such as in recycling, renewables and batteries. As we see more demand for recycled content, we are raising our recycling ambition. At our Spanish recycling plant Azuqueca, we are now ramping up production of Hydro CIRCAL after installing a new de-lacquering unit and melting furnace to process more consumer scrap. In recent years, we have expanded our renewable power portfolio to also include a significant portion of wind power in addition to hydropower. Our collaboration at the Tonstad wind farm in Norway represent an exciting opportunity to build on our competence. We will operate the plant. We are responsible for market operations, and we will buy most of the power for an original aluminum portfolio. As I said, we are also exploring opportunities in the fast-growing battery sector. Today, we have a 26% stake in Norwegian cell manufacturer, Corvus Energy, producing batteries for the maritime sector. And we have a small position in Swedish Northvolt, producing battery cells for cars. We recently announced a joint venture with Northvolt, Hydro Volt, to develop a pilot for recycling the aluminum scrap coming from batteries from electric cars here in Norway. Before I hand it over to Pal, I would also like to touch upon the external framework conditions, which are critical for our way forward and our strategic road map. Please change to Slide 17. Hydro is well positioned in the political landscape that increasingly favors sustainable solutions. We work actively to build and protect our competitive position. The Green Deal plays the basis for decarbonization of Europe, which will increase the need for low carbon and circular products and solutions. Hydro's aluminum meets all key pillars in EU's climate ambitions. At the same time, we are working actively to protect our low-carbon aluminum position in the next phase in the EU emission trade system. The EU is currently is in final stages of revising guidelines for computation of CO2 costs in power price. We are working to ensure that the revised EU guidelines continue with a robust and predictable compensation mechanism. Trade defense is another focus area. On the 14th of February, the commission opened an investigation into imports of extruded products from China with the conclusion expected in Q3. Hydro welcomed the swift use of trade defense instruments when injury has been caused in the marketplace. Finally, we closely follow now the EU recovery plan process. We are pleased that it recognized the importance of low-carbon, energy-intensive industries, and we welcome the plan as an effort to kickstart demand after COVID-19. With that, I turn the word to you, Pal, our CFO, for our financial update.

[Pal Kildemo]

Thank you, Hilde. Good morning, everyone, and welcome from me as well. In my presentation today, I will walk you through Hydro's financial results for the second quarter of 2020. Let me first start with a high-level overview. The results for the second quarter were slightly up from the second quarter last year. We saw positive effects from reduced raw material costs of NOK 2.2 billion, of which NOK 0.6 billion relates to Bauxite & Alumina, and NOK 1.4 billion relates to primary metal. This reflects a reduction in all raw material costs. But most importantly, energy costs for B&A and alumina for primary metal. Fixed costs came down this quarter, primarily related to cost initiative downstream. This is the second quarter in a row with downstream costs out well above expectations. Currency contributed with NOK 1.6 billion compared to the second quarter of 2019, primarily the depreciating reals and NOK versus the dollar, which positively impacts B&A and also primary metal. In addition, we had a positive volume impact on the continued ramp-up of our operations in Brazil. In B&A, volume improved results by NOK 0.5 billion, whereas volumes in primary contributed around NOK 0.2 billion. Not surprisingly, these positive developments were, to a very large extent, offset by negative COVID-19-induced market impacts.In our downstream divisions, we saw a negative impact of NOK 2 billion, primarily due to reduced volumes, where the largest negative impact came from Extruded Solutions. Realized prices came significantly down compared to Q2 last year, both for alumina and aluminum, with a respective drop of around 30% and 15%. This has a negative impact of NOK 3.4 billion and is evenly split between the 2 upstream business areas. The largest element in the other category of positive NOK 0.2 billion is insurance compensation and positive deviation and other elimination being partly offset by lower energy results reflecting record-low energy prices. If we switch to the next slide, please. Then let me compare the Q2 results to the previous quarter, focusing primarily on Bauxite & Alumina and primary metal. Starting with prices, we saw a negative impact on alumina and all-in metal prices of around NOK 1.3 billion, reflecting a $17 drop in realized alumina prices and a $220 drop in all-in aluminum prices. This impacted bauxite and alumina negatively with NOK 0.3 billion, and primary by NOK 0.9 billion. Volumes came somewhat down in the second quarter with the majority of the negative impact being seen in primary. Raw materials continued to see a positive trend, around NOK 0.3 billion in B&A and NOK 0.2 billion in primary methods. In Bauxite & Alumina, the largest impact was a 47% reduction in fuel oil, whereas Primary saw a decline in energy and carbon. The depreciating NOK and BRL versus the dollar has a positive impact of NOK 0.7 billion, primarily in B&A. Finally, for our 2 upstream businesses, we had a positive impact of NOK 0.2 billion on fixed costs, primarily in primary metal being a mix of onetime effects and also some seasonal variations. The downstream businesses, Rolled Products and Extruded Solutions, were both heavily hit by declining markets on the back of COVID-19, with a negative impact of NOK 0.4 billion and NOK 0.6 billion, respectively. Energy results came down on significantly lower prices due to strong hydrology in Norway, but also, in addition, we had the record-high commercial results in energy in our first quarter. The other category consists of a negative deviation of metal markets results being more than offset by a positive deviation in Other and eliminations. If we then take a look at the key financials for the quarters, then revenues were down by more than NOK 8 billion compared to the second quarter of 2019, mainly reflecting reduced volumes in our downstream segments and lower prices upstream. Underlying EBIT came out at NOK 0.9 billion, as I have just explained on the previous slides. And depreciation of around NOK 2.1 billion, adds up to an underlying EBITDA of NOK 3.1 billion. Financial income amounted to NOK 0.5 billion for the second quarter, which included a net foreign exchange gain, mainly unrealized, of NOK 0.7 billion. This primarily reflects a stronger NOK versus euro affecting the embedded derivatives in Norwegian power contracts which are denominated in euro. And these positive effects were partly offset by the currency loss on dollar-denominated debt in Brazil due to a weaker BRL versus dollar, and the currency loss on dollar assets in Norway due to a stronger NOK versus USD. The tax expense for the quarter amounted to NOK 342 million, reflecting the power surtax in energy, nontax deductible impairment on goodwill and Extruded Solutions, positive income tax before tax in countries -- positive income before tax in countries with higher-than-average tax rate, as well as some write-downs of deferred tax assets. Overall, this provides a negative net income of NOK 1.5 billion, down from a negative NOK 0.2 billion in the same quarter last year. Underlying EBIT -- underlying net income was therefore positive of NOK 0.2 billion compared to NOK 0.3 billion last year. And translating that into earnings per share resulted in NOK 0.1 for this quarter, down from NOK 0.19 per share in the second quarter of 2019. We then move to next slide, then let me get back to the NOK 2.6 billion that we exclude from underlying EBIT this quarter. As normal, we exclude some timing effects in the second quarter, and in total had these sum up to negative NOK 0.7 billion. Of the largest items excluded from underlying EBIT this quarter relates to impairments. On the back of the significant negative market developments from COVID-19 and the uncertainty mainly represented in the near and medium term, we performed a large number of impairment tests during the second quarter, in total representing 80% of the carrying value of our long-lived assets. Certain assumptions have been changed in light of the current recession and uncertainty on the timing of a recovery led to impairments both in Extruded Solutions and Primary Metal. NOK 1.5 billion in impairments in Extruded Solutions were primarily taken in Extrusion North America, driven by weaker growth expectations in key market segments which is influenced by the COVID-19 effect and expected recovery. NOK 0.5 billion impairment in Primary Metal was related to Slovalco, and was driven by challenging profitability on a weakening market environment, cost position and the uncertainty on the renewal of a power contract after the expiry in 2021. The other units that were tested shows sufficient coverage despite deteriorating short and medium-term assumptions. Other effects this quarter relates to insurance fund for property damage in Neuss and Albras of respectively, NOK 26 million and NOK 12 million, as well as a reversal of provision earlier recognized related to the cost in case in Germany of NOK 26 million. If we then move over to more detailed business area explanations, we change the slide and start with Bauxite & Aluminum. Underlying EBIT for Bauxite & Alumina increased from NOK 415 million in the second quarter of '19 to NOK 1,047 million in the second quarter of 2020. The ramp-up of Alunorte is progressing successfully and there was a positive volume effect in Q2 from higher alumina and bauxite production, contributing some NOK 0.5 billion. Alunorte annualized production came in at around 5.8 million tonnes, somewhat impacted by the power outage at Paragominas, which also impacted Alunorte. Power was restored as of early July and ramp-up at Alunorte is in progress, but this quarter's production in Q3 will also reflect maintenance which has been moved into the quarter. During the quarter, production cost per tonne at Alunorte decreased mainly driven by lower raw material prices as well as positive scale effects on fixed costs, which contributes by around NOK 0.7 billion. Finally, there was also a positive currency effect from a stronger dollar against the BRL during the period, contributing by around NOK 1.1 billion. The results were partly offset by lower realized alumina sales prices, impacting negatively by NOK 1.6 billion. If we look into the third quarter, we expect to see an increase in the main raw material, which has been falling for many quarters in a row now. Prices have come up for fuel oil and caustic and based on current prices observed in the market, costs are expected to increase between 20% and 30% for these 2 raw material prices, whereas coal is expected to be relative flat. Alunorte production in the Q3 will be impacted by the Paragominas power interruption and maintenance moved into the third quarter, and is expected to be at between 85% to 95% of full production capacity. We are still targeting nameplate capacity by the end of 2020. The lower production and also rescheduled maintenance will also increase the fixed cost price level in the third quarter. If we change slides and move on to Primary Metals, then underlying EBIT for Primary Metals improved from a loss of NOK 604 million in Q2 2019 to a loss of NOK 37 million in Q2 2020. Improved result was driven mainly by lower raw material prices, contributing positively by NOK 1.5 billion in total. Reduction in alumina was the largest contributor, followed by reduced prices for pet coke and paper. In addition, positive currency effects from depreciating NOK and BRL and increased sales volumes contributed with approximately NOK 0.8 billion positively. The positive cost effects were partly offset by 8% lower realized aluminum prices as well as more than 30% lower premiums, taking the results down by NOK 1.2 billion. When it comes to the outlook for the third quarter, we have, by the end of March, sold approximately 60% of our primary aluminum production forward at a price level of around $1,530 per ton. On the premium side, we have secured about 55% at around $260, and as a consequence, we expect a further decline in realized premiums in Q3 towards the range of $175 to $225 per ton. When it comes to the cost side, we are reflecting some further relief in raw material costs, primarily due to alumina, which has a time lag of 2 to 3 months. It is also worth mentioning that there are -- that we are expecting somewhat higher fixed cost in the third quarter compared to the second quarter, primarily related to positive one-offs and seasonal effects in the second quarter. If we then move on to metal markets and we change slides, then this quarter, metal markets delivered an underlying EBIT of NOK 21 million compared to NOK 299 million in the second quarter of last year. However, if we exclude the currency and inventory valuation effect and look at performance EBIT, the result for the quarter was NOK 135 billion which is down from NOK 352 million in the second quarter of '19. This quarter, lower results from the recycling facilities were the main factor explaining the result deviation, both related to volume as well as margins. In addition, we have also had lower contributions from our sourcing and trading activity. If we look into the next quarter, then there is a large uncertainty on the back of COVID-19. However, our recycling facilities have now been operating at close to full capacity at the end of Q2, and as the market looks now, we expect that to continue into the third quarter also. In addition, remember that our trading results and currency effects in metal markets are, by nature, volatile. Let's then move on to the next slide and the results of Rolled Products. The results in Rolled Products decreased to negative NOK 57 million in Q2 '20 compared to NOK 75 million in Q2 '19. The main impact in the second quarter was a significantly reduced sale volume coming down with close to 20%. We also saw lower margins. However, this was offset by positive contribution from the cost improvement efforts in Rolled Products this quarter. The results from the Neuss smelter also improved on lower raw material costs. Looking forward, there is high uncertainty with respect to estimated sales for the third quarter. As Hilde mentioned, external analysts expected Rolled Products market to be down by 7% and 11% in North America and Europe, respectively. And based on current internal forecasts, we expect to be somewhat worse than this as we will get back some of the market shares we gained in the second quarter when our peers needed to close down facilities. And in addition, the litho market is more challenging than the average market, and we have a higher market share here, and we also had an especially good Q3 last year due to some cyber catch-up volumes following a weak second quarter in '19. Current order intake in Rolled Products is around 80%. If we then move over to the second quarter results for Extruded Solutions, then underlying EBIT for Extruded Solutions decreased from NOK 772 million in the second quarter of '19 to NOK 89 million in the second quarter of 2020. COVID-19 has reduced sales volume and impacted operations to a large extent with significant lower capacity utilization and volumes dropping by 36% from the second quarter of 2019. The results this quarter were also, as in Rolled Products, positively impacted by reduced costs from the ongoing improvement effort as well as positive product currency effects. In addition, this quarter, we have received NOK 190 million in insurance compensation related to the cyberattack of 2019. Looking into the next quarter, we expect to see continued market uncertainty and weak demand due to COVID-19, as mentioned earlier. Although we are seeing a positive trend from the lowest level seen in Q2 and our current order intake is here around 75% to 80%. At the same time, Extruded Solutions are working very hard to support their earnings in challenging markets with the ongoing portfolio optimization, fixed cost reduction initiatives and procurement optimization, which we expect to also contribute positively into the third quarter. If we move on to the final business area and go through the Q2 results of energy on the next slide, then underlying EBIT for energy decreased by -- from -- by -- from NOK 176 million in the -- decreased by NOK 176 million -- from NOK 176 million in the second quarter to NOK 53 million in the second quarter of 2020. The quarter saw a significant drop in prices mainly attributed to strong hydrological balance, with prices averaging NOK 50 per megawatt hour compared to NOK 360 per megawatt hour in the second quarter last year.Reservoir levels are high going into the third quarter, and we are seeing very low power prices in the Nordic region with an average NO2 spot price of NOK 15 per megawatt hour so far in July. Please, let me also remind you that NO2 spot prices are publicly available, and the realized price levels for the company should not deviate significantly from the prices observed on the Nordic Power Exchange for NO2. Let's then change slides and move over to other and eliminations. Other and eliminations netted out to negative NOK 166 million in the second quarter compared to a negative NOK 258 million in Q2 last year and negative NOK 560 million in the first quarter. Other is mainly compromised of head office costs and costs related to holding companies as well as earnings from Hydro's industrial insurance company. Other also includes costs related to the cyberattack in 2019. This quarter, we had NOK 109 million in costs compared to NOK 253 million last year and NOK 219 million in the first quarter. And the first quarter, as you might remember, was impacted by high costs in our captive insurance company. This quarter's eliminations amounted to negative NOK 58 million mainly reflecting improved volume and margins on the internal alumina sales between Bauxite & Alumina and Primary Metal. Let's then move slides and have a look at the net debt development since the last quarter. Overall, our net debt position decreased by NOK 2 billion, a very welcome development in the current market environment and the result of high cash focus this quarter. We started Q2 with NOK 15.2 billion in net debt. We generated underlying EBITDA of NOK 3.1 billion, and we then had a release of working capital of around NOK 1.2 billion. This is positively impacted by prices and FX, but also how we work with inventory management across our system. Other operating cash flow adjustments of a negative NOK 2.0 billion reflects tax and interest payments, cash effects on provisions, as well as noncash elements included in the underlying EBITDA. As a result, we generated net cash flow from operations of a positive NOK 2.2 billion in Q2, which is a solid operating cash flow in a very challenging market. Investments came in at around NOK 1.2 billion this quarter. And finally, we saw currency impacts of NOK 1.1 billion, reflecting an appreciation of the NOK and BRL versus the dollar during the quarter. And with that, we ended Q4 with NOK 13.2 billion in net debt. If we move on to the adjusted net debt on the next slide, then it also decreased to the tune of NOK 4.7 billion compared to the first quarter. As I mentioned, net debt decreased by NOK 2 billion and net pension liabilities decreased by NOK 1.3 billion, primarily on positive currency impact from converting German pensions to NOK and positive return on Norwegian planned assets. Other adjustments were down by NOK 0.4 billion, while net debt in CAP Alum decreased on currency and positive cash generation. And with that, the total adjusted net debt included equity-accounted investments at the end of the second quarter amounted to NOK 34.6 billion, down from NOK 39.3 billion at Q1 2020. If we move to the next slide. The left mean the situation we are in remind you of our strong liquidity as well as measures we have taken to safeguard liquidity in response to COVID-19. At the end of the second quarter, after several months of very challenging markets, we have NOK 15.4 billion in cash and cash equivalents. We also have a USD 1.6 billion multi-currency revolving credit facility maturing in 2025, which is currently undrawn. It is important for us to maintain a strong liquidity given the significant uncertainty surrounding us. And we have taken strong measures to maintain and improve that situation. We have had to temporary curtail or reduce utilization at several plants, reduce cost level through temporary layoffs and cost discipline across the company, knowing that we might need to do more to adapt to whatever might happen in the world around us. We have reduced the CapEx estimates for 2020 through costing or postponing CapEx, both related to sustaining and growth projects and our CapEx estimate for 2020 stands at NOK 7.5 billion to NOK 8 billion. Also on the May 11, the annual General Meeting approved the amendment of the original dividend proposal of NOK 1.25 per share and granted the power of attorney to the Board to distribute dividends at a later stage if it deems that market conditions and Hydro's financial situation allows for this. And no decision on dividend has been made this quarter. Finally, in May of this year, we raised NOK 7 billion in the bond markets to further safeguard liquidity in case the situation deteriorated further. So currently, our liquidity looks robust, and we hope that it stays like this. However, if the market should experience a strong second wave, we are well-prepared from a financial perspective. If we then move over to my final slide, then we will finish with an update on our capital return dashboard which summarizes our key financial targets and priorities. At the end of the second quarter, we delivered a rolling 12-month underlying RoaCE of 3.8%. The Alunorte situation, the cyberattack, as well as the weak markets and high market uncertainty are still impacting our 12-month rolling RoaCE. However, we maintain our target of 10% over the cycle, and we recently confirmed to our annual internal strategy update that such road maps are in place for all business areas at conservative margins and very much supported by our ongoing improvement efforts. If we look at our balance sheet and the key ratio of funds from operations to adjusted net debt, then we have been around 29% over the last period. And this compares to our target of 40% over the cycle. This reflects the cash generation and this is what we need to lift towards the 40% in order to ensure that we meet the rating agencies hurdles for investment-grade credit rating and also have a more robust earnings to that situation going forward. We have been supporting this with initiatives that we can influence ourselves this quarter, and the NOK 1.1 billion in free cash flow which was generated in very challenging markets supports the development towards a sustainable cash flow generation level. On the improvement program Hilde has already mentioned, we are seeing continued progress on the levers we can control ourselves and we are on track to deliver on these improvements by end 2020. And on that note, I would like to give the word back to Hilde for her final remarks.

[Hilde Merete Aasheim, President & CEO]

Then let's change to the last slide. Our top priority remains the health and safety of our employees and communities going forward. We will continue to follow advice provided by local authorities and assume my role as a good neighbor and supporter of the communities where we operate. We will continue to monitor the demand situation and conditions which would support our return to full capacity. But in the meantime, we are managing the areas where we can influence, like our improvement programs, to protect our cash flow. Despite the COVID situation, we will continue positioning Hydro for the future, focusing on that agenda to lift profitability, driving sustainability and to support our goal of becoming the leading sustainable industrial company, creating value for all stakeholders.

[Line Haugetraa, Head of Investor Relations]

Then, operator, we are now ready for questions. Thank you.

[Operator]

[Operator Instructions] We will take our first question.

[Ioannis Masvoulas, Equity Analyst]

This is Ioannis Masvoulas from Morgan Stanley. First of all, well done on the results. Just a couple of questions from my side. First of all, in terms of Extruded Solutions, you took the impairment during quarter, quite a large number there. How should we think about implications for the medium-term profit outlook, especially given the relatively constructive guidance you have given in the past? And then secondly, can you talk about the mix in Primary Metal? You did give the split in Q2. Is this going to be the trough in terms of value-add share or would Q3 be worse on a sequential basis? And then how we should think about the realized premium on that basis?

[Pal Kildemo]

If we start with the latter question first, then we expect a similar split between alloys and alloyed products into the third and fourth quarter. If markets develop stronger, then there could be some upside to this, but you also know that the contracts are not bound on a daily basis. So our best guidance currently is for a similar outlook into the third and fourth quarter. And that is the basis for the premium guidance that we've given of $175 to $225. If the markets stand at current levels, we should probably be in the middle part of that range. If premiums move up, then we could be in the higher part. And if they move down, we could be in the lower part. So this is based on how we see the markets today. On the first question, when it comes to the impairment in North America and Extruded Solutions, then as you are, of course, well aware of, when testing for the coverage in our balance sheet, we take into account what is possible to generate from what we have in our books today. And when you see a decline in the -- for example, automotive segment that we have experienced, and I guess the market consensus is that it will take some years before we are back to the levels that we were expecting before COVID-19, then this will impact the value -- internal valuation negatively. Already in the fourth quarter, we had quite limited coverage at Extruded Solutions in North America. So any significant change since that would most likely result in an impairment as we see now. When it comes to how we view this going forward, then it doesn't necessarily change our thoughts around the capital allocation and other thoughts with respect to Extruded Solutions. Some segments are maybe a bit less attractive, whereas other segments are more attractive. And as you know, within every segment, there are past opportunities also. So even if automotive might be looking a bit tougher, there might be parts of the automotive market where we can take market share or where we can deliver more advanced products. A lot of the positive opportunities are -- we are not able to bring into an impairment test. So that would be an upside, if realized going forward. But in sum, we still see a good potential for return generation in Extruded Solutions, and it is still a strategic growth area within our portfolio.

[Ioannis Masvoulas, Equity Analyst]

Pal, and maybe if I can push you a little bit here, I think in the past, you've indicated that 2021, maybe that Extruded Solutions could be close to the 2019 level adjusted for one-offs. Is that still achievable from today's point of view or is it more of a, let's say, 2022 story at this stage?

[Pal Kildemo]

Yes, and that's a good question and hard to give concrete guidance on given that we're in the middle of the recovery. And you see that the big spread in expectations only into the third quarter. However, as we mentioned last quarter, the possibility to deliver on the original improvement efforts in the short term, which includes the market effects, has been taken somewhat down, whereas the cost out procurement initiative and restructuring has compensated to some extent. But in 2020, we'll not be close to compensating enough. And without the being too forward-leaning into 2021, it still looks like the current macro environment will have quite a big effect on -- especially Europe and North America, as you can see from the latest updates from IHS, for example. So we're not in a situation to give concrete guidance on 2021. But based on external recovery in GDP, it looks like 2021 could still experience some challenging market developments. But let us get back to that at our Investor Day towards the end of the year also.

[Operator]

We'll take out next question.

[Daniel Edward Major, Director and Analyst]

It's Dan Major from UBS. Couple of questions. Firstly, on Alunorte, you obviously gave some guidance on lifting costs of energy and caustic into the third quarter. Can you give us a bit more specific guidance around either unit cost expectations or sort of the delta on a NOK or U.S. dollar basis based on your sort of current assessment? That's, I guess, the first part of the question. And then once, I guess, things normalize to an extent, is that low 200s cost for B&A or for Alunorte a reasonable assumption? That's the first question.

[Pal Kildemo]

Well, if we look into the third quarter, then please be aware that any indications will be partly based on realization and partly based on how the market develops. And as you remember from the second quarter, we realized that somewhat lower fuel oil than what we expected when we had this guiding call a quarter ago. So it won't be exact. But as mentioned earlier, we -- when we look at current market prices, time lags, et cetera, then we expect fuel oil prices to increase by up -- towards the 30% in the third quarter versus the second quarter. And similarly for caustic soda, but somewhat lower, maybe closer to the 20% mark as we see today. If you take these 2 things into account, then that could impact our cash costs by closer to $15 to $20 into the third quarter.

[Daniel Edward Major, Director and Analyst]

Very clear. And is -- in terms of sort of the structural cost position in the low 200s, once sort of things -- inputs normalize a reasonable assumption?

[Pal Kildemo]

If you take market prices as they are today and you look at an implied cash cost of $192, and you expect also that production should come somewhat up reducing it, then somewhere north to 200-ish sounds fair based on those assumptions. But somewhat above just the $190 plus $15 to $20 less some dollars on increased production and lower fixed cost per tonne would result in somewhat above $250.

[Daniel Edward Major, Director and Analyst]

Very clear. And then second, quick part of the question, you've obviously announced some additional impairments. Can you give us an update on what you expect the cash impact of restructuring charges previously taken in the downstream businesses, particular to be in the balance of this year and into next year?

[Pal Kildemo]

Yes. As you know, the majority of the impairments we took were noncash-related. So for Slovalco and Extruded North America, which is a goodwill impairment, we won't have any cash effect. So what you're left with is really the restructuring efforts related to Europe and Extruded Solutions. The impairment in Brazil also don't have a cash effect. So if we look into affecting -- or effects of the restructuring efforts, et cetera, and provisions taken in 2019 and this year and effects in current year, then the profile is still around NOK 600 million in 2020 and around NOK 500 million in 2021.

[Daniel Edward Major, Director and Analyst]

Great. And how many -- how much of that have you taken in the first half on the 2020 number of the NOK 600 million? How much has already been incurred?

[Pal Kildemo]

Yes. We'll get back to that later.

[Operator]

We'll take our next question.

[Richard James Hatch, Analyst]

Yes. It's Richard Hatch from Berenberg, and I've got 2 questions. First one, just wondering whether you would be able to give us a bit more, kind of your thought process around the premium and how you see that evolving over time. Sort of you've been very clear on sort of the Q3 into Q4. But perhaps we can just talk a little bit out into 2021 and how you see that evolving and what kind of factors there are that could drive that? And also what levers you've got internally that potentially could enable you to maximize value from what you're producing? And then the second one is just on the bauxite price. Could you be able just to give us your thoughts on bauxite here and what your outlook is on the price there?

[Pal Kildemo]

Well, if we start with premiums, it's difficult to give a long-term view on it. But I guess your question related a bit more to the dynamics which you should keep in mind. And as you know, the premium consists of 2 large elements. It's the standard ingot premium, and it's also the upcharge, which translates into the value-added premium. And the standard ingot premium typically reflects the physical tightness in the market. So in periods with a lot of metal available, we've typically seen lower standard ingot premiums. And then when you have supply shortages that, at times, increases. But typically within some form of range, you've had special situations historically driven by inventory financing, et cetera, where you have long queues out of inventories, which really drives up standard ingot premiums. We see some signs of that now, but there's still rules in place by the LME, which should restrict the length compared with what we've seen in earlier years. The value-add premium is, of course, also driven by supply and demand. And at the moment, value-add premium and upcharges are quite low because there is a lot of value-add metal available, which you see producers like ourselves now having to adjust their demand accordingly and produce unalloyed material instead. So in order to see that premium increase again, you would need to see a more balanced market for value-add premiums. And at current level, I guess producers like ourselves, have a lot of capacity to increase value-add premiums. So I think, typically, you would need to see a more balanced situation than what we see currently and into next year before you should expect a physical increase in those premiums at least. So our ability to impact that is, of course, present. We capture value-added customers through quality in products. We capture value-added customers through technical support and similar. And on historical benchmark studies, et cetera, Hydro typically performed very well there. So we believe that when the market improves again, we, as a producer, are well-equipped to be able to regain that market share. But we have to work for it.

[Richard James Hatch, Analyst]

Can I just ask one follow-up on that? Would you say, therefore, we're at kind of a trough value-added product premiums, just kind of looking at it on a cycle basis?

[Pal Kildemo]

Well, all my comments are reflecting markets now, and I think you have started seeing some increases in some value-add premiums in Europe on the back of somewhat stronger demand. So that could indicate a drop. But I'm very, very hesitant to call a bottom as you could have a second wave or similar, which again, impacts demand. But yes, it seems to have been flattening out and our sales forecast for Extruded Ingot has improved over the latter weeks and months.

[Richard James Hatch, Analyst]

That's very helpful. And then just on the bauxite?

[Pal Kildemo]

Yes. Bauxite markets have been quite stable price-wise. They also came down a bit with the development we have seen in all markets. And as you know, we've seen quite some shifts in bauxite, and there's been some impacts to larger mines. But in general, most large nations seem to be running quite high bauxite production. And as we have adjusted down aluminum demand, alumina demand compound. And of course, it impacts their bauxite there also. So we haven't seen any short-term large disruptions or triggers currently.

[Richard James Hatch, Analyst]

Okay, so prices probably see some form of downward pressure, just with supply being quite buoyant and demand sort of coming off a bit?

[Pal Kildemo]

That's what we've seen in all our markets. Typically, aluminum and those markets, they react a bit faster to positive developments like we've seen now out of China. That might transfer over to bauxite. Or if input costs go up, it could impact bauxite. But so far, it's more flattish to negative.

[Operator]

[Operator Instructions] It appears there are no further questions at this time. Ms. Line Haugetraa, I'd like to turn the conference back to you for any additional or closing remarks.

[Line Haugetraa, Head of Investor Relations]

Thank you, and thank you for joining us today. If you have any follow-up questions, please do not hesitate to contact us. Thank you, and have a nice day.