Norsk Hydro ASA

OSE:NHY

Earnings Call Analysis

Revenue Growth and Strategic Partnerships Drive Positive Performance

The company reported a 7% revenue increase from Q1 to Q2, reaching NOK 51 billion, despite a 5% year-over-year decline. Adjusted EBITDA grew from NOK 5.4 billion in Q1 to NOK 5.8 billion in Q2. The Bauxite & Alumina segment saw adjusted EBITDA rise from NOK 817 million to NOK 1.6 billion year-over-year, while Aluminum Metal's adjusted EBITDA decreased due to higher costs. A notable strategic partnership with Porsche aims to decarbonize the automotive value chain. The company maintains a positive outlook, expecting continued benefits from higher alumina prices and ongoing cost management initiatives.

Introduction

The company's latest quarterly earnings call highlights both challenges and opportunities. The firm reported a positive net income of NOK 1.4 billion for the quarter, though this was a decrease from NOK 5 billion in the same quarter last year. Adjustments led to an EBITDA of NOK 5.8 billion.

Revenue and Costs

Revenue increased by approximately 7% from Q1 to Q2 but declined by 5% year-over-year, settling at NOK 51 billion. The higher revenue was attributed to improvements in revenue drivers contributing NOK 1.3 billion and higher upstream volumes adding another NOK 500 million. However, this was partly offset by significant raw material and energy cost increases amounting to NOK 450 million.

Segment Performance

The Bauxite & Alumina (B&A) segment saw a remarkable increase in adjusted EBITDA, from NOK 817 million last year to NOK 1.6 billion this quarter. This was driven by higher alumina prices and lower raw material costs. Conversely, the Aluminum Metal segment reported a drop in EBITDA, standing at NOK 2.5 billion compared to NOK 3.2 billion in the previous year, due to increased costs and reduced contributions from power sales.

Outlook for Q3 and Beyond

Looking ahead, the company expects stable output volume from its Alunorte plant and further positive impacts from higher realized alumina prices in Q3. However, fixed and other costs are anticipated to rise by NOK 100 million to NOK 150 million. Aluminum Metal's Q3 outlook includes expected raw material cost increases of NOK 400 million to NOK 500 million and a return to normalized sales volumes, which are projected to be lower compared to Q2.

Strategic Initiatives

The company underscored its commitment to decarbonization and positioning itself as a leader in low-carbon aluminum. A milestone partnership with Porsche was announced, allowing Porsche to reserve low-carbon aluminum capacity, potentially bringing a premium for Hydro. This business model, viewed as a game-changer, underscores the increasing importance of low-carbon materials in the industry.

Conclusion

Despite a challenging market environment, the company remains optimistic about the long-term demand for greener aluminum. The firm believes it is uniquely positioned to capture value from this trend, thanks to its extensive decarbonization efforts and strategic partnerships.

Earnings Call Transcript 2024-Q2

[Martine Hagen, executive]

Good morning, and welcome to Hydro's Second Quarter 2024 Presentation and Q&A. So we will start off with a presentation by our President and CEO, Eivind Kallevik before, our CFO, Trond Olaf Christophersen, will take you through a financial update.

Lastly, we will run our Q&A session. [Operator Instructions] Later on, when we're finished off with the presentations, I will ask your questions directly to Eivind and Trond Olaf on your behalf.

And with that, I leave the microphone over to you, Eivind.

[Eivind Kallevik, executive]

Thank you, Martine, and good morning, and welcome from me as well.

As you are reminded of every quarter, the safety and wellbeing of our people is the most important value at Hydro. It's something we work on every day, every hour and at every shift. As a company, we have an obligation to our people, to our customers and to our owners to uphold the highest standards for business practices. This begins with our people's and wellbeing.

Over the past years, we have seen a steady improvement on all key indicators for safety with a consistent low numbers of incidents. But sadly, 2 weeks ago we suffered a major setback. A contractor performing maintenance on an electrolysis cell at Hydro's joint venture in Albras passed away following an accident, and I'm deeply saddened about this tragic event. And this is another painful reminder of how critical safety is in everything that we do. And our deepest condolences go out to the family and affected colleagues.

For the second quarter, we reported an EBITDA of some NOK 5.8 billion. This gives us a free cash flow at roughly NOK 2.8 billion for the quarter.

Despite the still slow aluminum market, we continued to see positive indicators supporting the long-term opportunities in aluminum. The upward trend for our key revenue drivers continued also in this quarter, and this supports solid results on the upstream side of the business.

Slow demand as well as low recycling margins continued to results on the downstream side.

On the Energy side, we are happy to report that closing of the partnership with Macquarie Asset Management on the Hydro Rein joint venture was finalized this quarter. And with this last piece of the puzzle in place, Rein is now set up to continue its growth journey on a self-financing basis going forward.

Demand for Hydro's premium recycled product, Hydro CIRCAL, remained strong. This quarter has seen several new investment decisions supporting our growth strategy to meet the increased demand.

Finally, we were happy to announce a milestone in our efforts to shape the market for greener aluminum with a game-changing agreement in the partnership with Porsche. I will talk more about this later.

Today is my 71st day as the CEO of Hydro, and it's my first quarterly update in this role. And let me spend just a few minutes to reflect on where we stand and where we're heading. For me, this is an extremely exciting, but also unpredictable time to take over a company like Hydro. Our market is, whether we like it or not, in an environment where we are heavily influenced by external factors, all of which we cannot control.

This inherent volatility is nothing new, but the past few years have marked the level of disruption, which has not been present for decades. This is clearly about geopolitics as perhaps the most visible high-paced changes around us. But it's also about topics such as climate and nature where expectations have shifted from delivering ambitions to delivering tangible proof points of real change.

Last quarter, we did a deep dive on the influx of Chinese EVs to Europe. This is an example of how EVs also represents a new playbook for the automotive industry. On the one hand, representing exciting opportunities for material providers like Hydro. On the other hand, sparking a new and disruptive set of players into the game, challenging the establishment in the automotive industry and its supply chain.

And if we look at AI, it has literally gone from a concept in sci-fi movies to a household item in a matter of months. I believe we can't possibly imagine how integrated this technology will become in our daily lives, the economy and in industry such as ours.

So we really can't control what happens in the world around us. But for me, it is paramount that we understand what's going on around us that we are able to adapt swiftly, and most importantly, that we're able to seek out the opportunities behind these rapid transitions and turn seemingly challenging changes into commercial opportunities.

This will be the defining force behind Hydro's continued success in the coming years: identifying, understanding, adapting and seizing opportunities in the fast-changing environment. This understanding was also the basis for the revised strategic direction we presented at the Capital Markets Day in November last year, and this strategy remains in place with me as the CEO. I strongly believe in the bold vision we set out at the time, aiming at positioning Hydro as the uncontested pioneer in the green aluminum transition.

If we look beyond the current market downturn, the long-term trend is clear: demand for greener materials and greener energy is expected to be in high demand. Hydro is already playing a leading -- is already a leading player when it comes to sustainability. And this strategic direction is all about making the gap between Hydro and our competition even larger as we see that the race for green position continues towards the end of this decade.

To position the company for the long-term value creation opportunities, we are stepping up growth investments in recycling and extrusions to capture these market opportunities emerging from the green transition.

We are executing on the ambitions we have within renewable power generation.

We are executing on the decarbonization and technology road map while we step up our efforts to contribute to a nature-positive and just transition.

And finally, we are leveraging the sum of these efforts to shape the market for greener aluminum in partnership with our customers.

And for me, this strategy towards 2030 is, in its essence, really about accelerating. It is about accelerating growth in recycling, in extrusions and in the renewable energy space to support the decarbonization road map. It is about accelerating our ability to create value for all stakeholders, employees, society, customers and investors. And finally, it's about accelerating our efforts within sustainability because our competitors see what we are seeing in the long-term opportunities for aluminum in general and in greener aluminum specifically.

Hydro is today the market leader in low carbon and recycled aluminum and their solutions today. But we do need to accelerate and push forward on decarbonization, on nature and on just transition to ensure that we not only retain that position, but also strengthening it, thus, making the gap between Hydro and our competitors even larger, ultimately positioning Hydro as the uncontested provider of low-carbon and recycled aluminum solutions in the market. And through that, creating value for the shareholders and for the societies around us.

Out of all the external drivers, which influence the future of the alumina market, we believe that the green transition will be the defining force. And this follows two lines. Firstly, aluminum in itself is a key enabler for the green transition and we do expect the demand growth to enlarge to be a part of these transaction activities: electrical vehicles, renewable power and grid infrastructure, building and construction refurbishment for energy efficiency.

However, if we look deeper into the transition, it's becoming clear that it's just not about aluminum's material qualities. Customers are increasingly focused on the carbon content of the materials that they purchase. The agreement we just signed with Porsche is a good example of this, and I will get back to this in a little bit more detail later.

While aluminum demand is expected to grow some 3% annually towards 2030, low carbon and recycled aluminum is expected to experience a demand growth of some 20% per year in the same time period. That's a truly exciting opportunity to create value and one for Hydro is -- and where Hydro is uniquely positioned to take early positions and to capture from that.

The past years have really shown us how we can capture the value from our position as a fully integrated aluminum and renewable energy company. We are able to offer customers low-carbon aluminum accompanied with full traceability and transparency in every step of the value chain. This is quite unique in our industry and it's a competitive advantage towards the most advanced customers, few others in the aluminum industry can match.

With increased attention towards carbon intensity accompanied by similar expectations on nature and social impact from our customers, having the whole value chain in-house enables Hydro to drive change and create value on the shareholders of the green transition.

If we move to the quarter and start with recycling where we've seen challenging profitability these last quarters. This has, in large part, been driven by the tight spread between extrusion ingot premiums and standard ingot prices. During the second quarter, we see the spread average [ some ] $185 per tonne compared to roughly $135 per tonne in the first quarter.

Despite this improvement, the margin is still well below the historical average for the period of 2018 to '23. And even if we normalize for the exception of 2022, we're still at least $100 per tonne below that level.

Although we do remelt some standard ingots to billets, we primarily use process and post-consumer scrap with the latter to an increasing extent and roughly 440,000 tonnes in 2023.

That being said, scrap availability in Europe remains tight due to the overall scrap generation, and this is much driven by the slowdown in building and construction. Historically, scrap generation is closely correlated to the economic development, and as the economic conditions and industrial activity in Europe improve, we do expect the market to loosen and the prices to stabilize.

Despite the market challenges, Hydro's capabilities make us well positioned to succeed in the recycling market. The longer-term business case for recycling remains strong and particularly in the case of increased use of post-consumer scrap, which significantly lowers the metal input cost.

In the graph on the lower right, you can see a fundamental analysis of the relative cost advantage of increasing the use of post-consumer scrap versus the use of clean scrap. By utilizing our metallurgical competence and shorting technology, we are able to utilize complex scrap types, allowing us to significantly reduce the metal ingot costs versus our competitors.

Furthermore, we are well on the way in implementing advanced sorting technology, which together with existing sorting capacity, will increase our total capacity for sorting scrap by some 5 to 6x versus 2021. And this will enable us to use even more complex scrap, further improving our cost position from where we are today.

Finally, it's also encouraging to see a continuous growth in the demand for low-carbon products with Hydro CIRCAL products currently well above the target for 2024. And this development gives us good confidence to continue to strengthening our portfolio going forward.

On that note, in Europe, we are strengthening our capacity to produce Hydro CIRCAL by upgrading our facilities in Lucé in France and Atessa in Italy to meet the rising demand for Hydro CIRCAL in the European market.

In the U.S., we are seeing increased momentum for Hydro CIRCAL following the first large-scale introduction of the -- in the U.S. market with the opening of Cassopolis in November 2023. This quarter marked the first commercial sale of Hydro CIRCAL in the U.S.

I'm also really happy to report that the Alusort joint venture completed the HySort installation this quarter. And this will again strengthen our capacity to sort and utilize more post-consumer scrap in the U.S.

Our partnership with Brompton bikes is bearing fruits. And this quarter, we began supplying Brompton with Hydro CIRCAL 100R for their bicycle rims. Again, a good example of the applicability and quality of product made entirely from aluminum that has already been in use.

So all in all, we are well on track to deliver our 2030 targets for post-consumer scrap usage capacity as well as the EBITDA target of NOK 5 billion to NOK 8 billion by 2030.

Downstream, extrusion demand remains weak. This is much driven by the slowdown of the building and construction segments in Europe and North America as well as a continued worry industrial sentiment. Since 2021, demand has fallen by approximately 30% and 20% in Europe and North America, respectively.

As reported last quarter, Hydro Extrusions has and is continuing to counter the weaker market with firm and mitigating actions. Due to the range and scope of Hydro's large extrusion network, we have the flexibility to maneuver this more challenging market while at the same time we are continuing to position for long-term growth opportunities within Extrusions when the pace picks back up.

Likewise, we are progressing towards our EBITDA targets, growing with our customers with operational improvements and new processes delivering towards OEM contracts. On the latter note, 2 new OEM contracts were added to the portfolio during the second quarter, one in North America and one in China. This accumulates contracts worth some EUR 3.1 billion to EUR 3.3 billion since the beginning of 2023.

All in all, this includes what is in progress to be further achieved by the end of this year and Hydro Extrusions is positioned to deliver on the 2025 EBITDA target of NOK 8 billion when the markets recover, though recent extrusion demand forecast does indicate a delayed realization.

On the Energy side, we reached another milestone this quarter, marking the formal establishment of the Hydro Rein joint venture in partnership with Macquarie Asset Management. Hydro Rein has had an impressive journey of profitable growth over the past few years. And we are convinced that by joining forces with Macquarie Hydro Rein will be well set up to continue this journey with an ambition to be self-funded long term.

In addition to supporting Hydro's decarbonization agenda with long-term PPAs, Hydro Rein is also set to fill a void in the market as a renewable energy partner set up to serve a growing market for industrial offtake of renewable energy. Towards 2030, Hydro Rein will continue to pursue profitable growth focusing on growing in the Nordics, developing in selected European markets as well as maintaining their established foothold in Brazil.

We expect Hydro Rein to deliver sustainable and attractive risk-adjusted returns in the range of 10% to 20% in the period to come.

Now speaking of industrial decarbonization. Last quarter, we were happy to report that the gas was flowing from the FRSU Energos Celsius, at the docks of Barcarena. This quarter, we have started ramping up conversion in line with schedule and we are happy to report now that 10 boilers and calciners have already been converted and are all operating with liquefied natural gas. We expect the conversion to be complete, including the remaining 3 calciners by the end of fourth quarter 2024.

Upon full conversion, this will yield an annual reduction of CO2 emissions of some 700,000 tonnes annually, representing a significant contribution to our 2030 and 2050 decarbonization road map. Furthermore, it's also a good example of sustainability and profitability going hand-in-hand, representing an annual cost reduction in the range of $160 million to $190 million annually when fully implemented.

So we're proud to see the strong progress being made in Brazil at the beginning of our value chain. And that points to other good commercial opportunities that we have, which are building on the shoulders of our progress on the CO2 reductions.

Finally, this quarter marked a new chapter in our strategic partnership with Porsche and on our common agenda of decarbonizing the automotive value chain. I was really excited to travel to Zuffenhausen, Stuttgart just a few weeks ago to sign a new agreement with Porsche. And this represents a totally new business model in the aluminum industry. In short, Porsche will reserve capacity enabling their tier suppliers to source best-in-class low-carbon and recycled aluminum from Hydro.

Porsche will not be sourcing aluminum directly from us, but instead guarantees Hydro the offtake of certain volumes over time. Porsche has agreed to pay in premium as part of the service to keep low-carbon aluminum production reserved.

This business model is a game-changer in the aluminum industry and it's a tangible example of how low-carbon aluminum is increasingly perceived as a scarce resource. So ambitious players like Porsche are positioning themselves for access to early volumes and willing to pay a premium for this access.

For Hydro, this agreement proves the value of all the decarbonization efforts we do throughout the entire value chain and really supports our objective of realizing a greener earnings uplift potential towards 2030 of NOK 2 billion as we communicated at Capital Markets Day last year.

We really look forward to continuing the work we do with Porsche on the common objective of decarbonizing the entire automotive value chain.

And with that, I will give the word to Trond Olaf, who will then run you through the financials.

[Trond Christophersen, executive]

Thank you, Eivind, and good morning and welcome from me as well. So then let's start with the alumina market. And in the alumina market, we have seen quite some development in the recent months. The global alumina market balance is influenced by Chinese production challenges driving the Chinese alumina deficit up by 0.2 million tonnes from 2023 to a total of 0.8 million tonnes in 2024.

In China, domestic bauxite sourcing has been a challenge and this is driving increased demand for imported bauxite mostly met by higher shipments from Guinea.

In the world ex China, the full curtailment of the Kwinana refinery in Australia, together with production disruptions in Australia and India, has tightened the market and CRU estimates a surplus of 0.2 million tonnes for 2024 ex China. And this results in a net deficit for the global alumina market 0.6 million tonnes in 2024 according to CRU. Rebalancing is expected over time as new projects are in the development in India and Indonesia.

Regarding prices, the tightness in the alumina market has led to a strong increase in PAX peaking at USD 510 per tonne in late June. The price has since eased and is currently trading between USD 475 and USD 480. Also, the Atlantic premium is still fundamentally supported by Iceland, Argentina and Canada's need to import alumina from the Pacific basin.

Moving on to primary aluminum. In Q2 2024, the economic outlook continued to improve, reducing the risk of recessions and we saw the first rate cut by ECB amid easing inflation. Global primary aluminum demand was up 2% year-on-year during the second quarter, supporting a healthy global primary market with an estimated total growth of 3% year-on-year for 2024.

Growth during the second quarter was driven by a 3% demand increase in China, which has remained robust on demand from renewables and electrical vehicles and expectations are placing primary consumption growth from China to be around 4% year-on-year.

On the right-hand side of this slide, we can see the strong aluminum demand from solar photovoltaic, which has close to quadrupled since 2020. The demand is expected to continue to grow due to strong push from the Chinese government to decarbonize electricity production. The Chinese automobile sector is also experiencing demand growth where the EVs are dominating with battery electrical vehicles being the strongest driver. China's push for decarbonization and strong demand are placing it as the major driver behind the 3% expected growth overall in the world in 2024.

However, primary aluminum demand outside China slowed further in the second quarter and it is currently expected to remain flat for the year, driven by the overall economic conditions. Interest rate cuts are likely needed to promote positive growth in sectors such as building and construction and other industrial activities.

Moving downstream. Extrusion demand remained challenging in both Europe and North America during Q2. European extrusion demand is estimated to have decreased by 14% in Q2 '24 year-over-year, but increased 5% compared to the first quarter, partly driven by seasonality. Automotive extrusion demand has been challenged by lower growth in sales of electrical vehicles. Demand for residential building and construction and industrial segments have started to stabilize, but at a relatively weak levels. Extrusion demand has been relatively better in Southern Europe while demand in Germany continues to be weak.

Looking into Q3 '24, CRU estimates that the European demand for extrusions will decrease 2% compared to the same quarter last year. And overall, European extrusion demand is estimated to decrease by 8% in 2024 compared to 2023. For North America, extrusion demand is estimated to have decreased by 5% in Q2 '24 compared to the same quarter last year, but increased 1% compared to Q1.

The transport segment has been particularly weak, driven by lower trailer build rates. Automotive demand is facing headwinds due to weaker sales of electrical vehicles.

Demand continues to be moderate in the residential building and construction and industrial segments, but expected to gradually improve with lower interest rates and improved industrial sentiment.

In North America, extrusion demand is estimated to increase 3% in Q3 '24 compared to the same quarter last year. However, overall, North America extrusion demand is estimated to decrease 2% in 2024 compared to 2023.

Looking to our volumes. Hydro Extrusion sales volumes declined 11% in Q2, '24 year-over-year. Transport volumes have been particularly negatively impacted by weaker shipments to the truck and trailer market in the U.S.

In Q2, we also saw that our automotive sales further declined in both Europe and the U.S., driven by moderating production at some carmakers and weaker-than-expected sales of electrical vehicles. Growth for sales volumes in B&C and industrial segments is still negative, but overall volumes and orders have started to stabilize.

Then moving to the financials. And when looking at results, Q2 versus Q1, we see the positive effects of the strong improvements in revenue drivers contributing with NOK 1.3 billion. Higher upstream volumes, partly due to seasonality, impacted the results positively by another NOK 500 million. Both B&A and aluminum metal contributed to the positive volume effects. [ There is one ] upstream raw material cost increase of approximately NOK 100 million. The major drivers behind the costs were higher alumina and higher energy costs, partly offset by lower carbon costs and positive fuel switch effect.

The downstream segments experienced flat development with limited changes in volumes and margins in extrusions and recycling.

Furthermore, we saw a negative effect of NOK 600 million quarter-on-quarter due to seasonally lower production volumes in Energy. The quarter was also impacted negatively by higher fixed costs of NOK 300 million, largely driven by B&A.

Positive NOK 200 million currency effect impacted Q2, mainly driven by weakening of the NOK and BRL versus U.S. dollar.

The final negative effect for -- of NOK 500 million is mainly related to Other and eliminations. The eliminations this quarter itself amounted to approximately NOK 300 million on the strong improvement in B&A margins. CO2 compensation for Q2 was approximately NOK 800 million, which was at the same level as in Q1.

And this concludes the adjusted EBITDA development from NOK 5.4 billion in Q1 to NOK 5.8 billion in Q2.

If we then move to the key financials for the quarter. Comparing year-over-year, revenue decreased by approximately 5% to NOK 51 billion for Q2. Compared with Q1, revenue increased by approximately 7%. For Q2, there was around NOK 200 million effects adjusted out of EBITDA, which includes mainly unrealized derivative effects on LME contracts of NOK 570 million, partly offset by transaction-related effects of NOK 320 million and net foreign exchange gain of around NOK 150 million as well as other effects resulting in an adjusted EBITDA of NOK 5.8 billion.

Moving on, we recorded depreciation expenses of around NOK 2.5 billion in Q2, resulting in adjusted EBIT of NOK 3.3 billion. Net financial expense of NOK 1.4 billion for Q2 includes NOK 780 million in foreign exchange loss, primarily related to a loss from weaker BRL versus U.S. dollar negatively impacting U.S. dollar borrowing in Brazilian entities, partly offset by a gain from a stronger NOK versus euro affecting euro-embedded energy contracts and other liabilities denominated in euros.

In addition to that, we had interest expense of about NOK 935 million related to financial debt, partly offset by interest and other finance income of NOK 316 million. Then we have income tax expense amounting to NOK 739 million for Q2 '24 and the quarter was mainly impacted by a higher power surtax and losses in areas where deferred tax assets are not recognized.

Overall, this provides a positive net income of NOK 1.4 billion, down from the positive of NOK 5 billion in the same quarter last year and up from NOK 400 million in Q1.

Adjusted net income was NOK 1.7 billion, and consequently, adjusted earnings per share was NOK 0.97 per share.

Let's then give an overview per business area, starting with B&A. Adjusted EBITDA for Bauxite & Alumina increased from NOK 817 million Q2 '23 to NOK 1.6 billion in Q2 '24. This was mainly driven by higher alumina price, lower raw material costs partly offset by higher sales volume from lower production.

Compared to Q1 '24, the adjusted EBITDA increased from NOK 804 million, mainly driven by higher realized alumina price. Results were further lifted by lower raw material costs mainly driven by fuel switch implementation. This was, however, compensated by higher fixed costs of roughly NOK 280 million, driven by DRS2 operations and project development costs.

And then Q3 outlook. For Q3, Alunorte output volume is expected to remain stable. In addition, the higher realized alumina price should continue to impact our results positively. We expect raw material costs release of NOK 350 million to NOK 450 million, which will continue to be driven by the further implementation of the fuel switch. Fixed and other costs are expected to increase NOK 100 million to NOK 150 million.

Then moving to Aluminum Metal. Q2 adjusted EBITDA decreased from NOK 3.2 billion in Q2 '23 to NOK 2.5 billion this quarter. The decrease is mainly driven by a reduced contribution from power sales of NOK 650 million, increased alumina and energy costs and higher fixed costs, partly offset by reduced carbon costs.

Compared to Q1 '24, adjusted EBITDA for Aluminum Metal increased from NOK 1.95 billion to NOK 2.5 billion, thanks to higher all-in metal prices, higher sales volumes and positive currency effects, partly offset by increased alumina and energy costs.

The raw material cost increase we guided in Q1 ended higher than expected at NOK 450 million, driven by a combination of higher alumina costs and higher energy costs. The higher energy costs were due to LME-linked power contracts in Brazil and Canada.

On the positive side, carbon costs continue to decline, partly offsetting the other negative elements.

Fixed costs increased due to inflationary pressure as guided by NOK 100 million.

And then the Q3 outlook, both the LME and premiums have increased since Q1 and are expected to continue to impact positively the revenue side in Aluminum Metal. For Q3, Aluminum Metal has booked 63% of primary production at USD 2,432 per tonne, including the effects of our strategic hedging program. Furthermore, we have booked 42% of premiums affecting Q3 book at USD 494 per tonne. And we expect realized premium in the range of USD 380 to USD 430 per tonne.

On the negative side, we expect further increase in raw material costs, driven by alumina and partly offset by carbon of between NOK 400 million and NOK 500 million. We also expect the sales volume to return to normalized and be lower compared with Q2.

Fixed costs are expected to remain stable.

We continue to closely monitor the demand development, and we do not foresee any restarts of the curtailed primary volumes next quarter.

On CO2 compensation, we expect flat quarter development going ahead.

Adjusted EBITDA for Metal Markets decreased in Q2 from NOK 334 million in Q2 last year to NOK 309 million mainly due to lower results from recyclers and negative currency effects, partly offset by positive results from sourcing and trading activities.

Recycling margins declined through the year, driven by unfavorable movements in both premiums and scrap prices. The results were also impacted by negative currency effects year-over-year.

Furthermore, positive contribution from sourcing and trading activities partly offset the negatives.

Excluding the currency and inventory valuation effects, the results for Q2 was NOK 357 million, up from NOK 265 million in Q2 '23. Compared to Q1 '24, adjusted EBITDA for Metal Markets increased from NOK 211 million, mainly due to increased results from the sourcing and trading activities, partly offset by negative currency effects.

The outlook for Q3 continues to be challenging as we expect recycling margins continue to be squeezed on the lower scrap availability, keeping margins low. At the moment, the recycling margins are at an all-time low level and we expect those to return to normalized levels over time. However, as mentioned earlier, this is tied to the improvement in the industrial activity in our core markets.

We expect some improvement in margins to impact the next quarter. However, those are expected to be partly offset by seasonally lower volumes and largely dependent on the scrap market development.

For our commercial area, in Q3, we expect lower contribution from sourcing and trading activities, again, as always, reminding of the inherent volatility of the trading and currency effects.

Following the latest developments, we have decided to adjust our guiding for 2024 full year adjusted EBITDA for commercial, excluding currency and inventory valuation effects, to a range of NOK 600 million to NOK 800 million.

And then moving to Extrusions. In Extrusions, the adjusted EBITDA decreased year-over-year from NOK 2 billion to NOK 1.4 billion, driven by lower extrusion sales volumes, decreased margins from recyclers and negative currency effects. General inflation pressure on fixed and variable costs was partly offset by cost measures.

As mentioned earlier, we saw 11% lower sales volume, which were partly compensated by high margins. Lower remelt margins negatively impacted the results with around NOK 380 million as recyclers continued to be pressured with low billet premiums versus elevated scrap prices.

Compared to Q1 '24, adjusted EBITDA for Extrusions decreased only slightly due to lower sales volumes partly compensated by strong sales markets.

Looking into Q3, we should look towards the same quarter last year to capture the seasonal developments in extrusions. Compared with last year, due to continued soft extrusion markets in both Europe and North America, we expect lower sales volumes. We also expect continued strong sales margins. However, we should keep in mind that the remelt margins continue to be under pressure.

Combined with higher costs, we expect the negatives to be -- to more than offset the positives in Q3 when comparing year-over-year.

And the final business area is Energy where the adjusted EBITDA for Q2 decreased to NOK 611 million compared to NOK 854 million Q2 '23. The main drivers behind the lower results were lower production, lower prices and lower gain on price area differences. Those were partly offset by a positive impact from the expiry of an internal fixed price purchase contract from Aluminum Metal at a significant loss in the same period last year. Finally, compared with last year, we saw lower trading and hedging results.

Compared to the first quarter, adjusted EBITDA decreased by approximately [ NOK 450 million ] from NOK 1.15 billion, mainly due to lower production volumes. In the second quarter, external power sourcing volumes continued to be affected by disrupted volume deliveries from long-term power purchase in Markbygden, Sweden. The nondelivered volumes were 0.3 terawatt hours in Q2 '24 and 2.2 terawatt hours accumulated since the beginning of the disruptions. We continue to see compensation for the nondelivered volumes.

Looking into Q3, as always, we should be aware of the inherent price and volume uncertainty in Energy. For next quarter, production volumes are expected to be on a similar level while prices are expected to be lower in July and then gradually increase towards next winter. Furthermore, we expect the price area difference results to be of a similar level as in Q2.

Then let's move to the final financial slide this quarter. Net debt increased by NOK 2.3 billion since Q1. Based on the starting point of NOK 13.9 billion in net debt from Q1, the positive contribution for Q2 was a generation of NOK 5.8 billion in adjusted EBITDA. Due to increased upstream prices impacting account receivables and inventories, we saw an increase in net operating capital of NOK 900 million.

Under other operating cash flow, we have a negative NOK 300 million mainly driven by cash outflow for taxes related to 2023 income and voluntary payment of expected residual tax, partly offset by reclassification of CO2 receivables from long term to short term.

On the investment side, we have net cash effect -- effective investments of NOK 3.7 billion, offset by a cash inflow of NOK 1.8 billion related to repayment of shareholder loan from Hydro Rein. As a result, we had positive free cash flow of NOK 2.8 billion in Q2.

Furthermore, we saw a cash outflow of NOK 5 billion related to 2023 dividends. In addition, we paid out NOK 700 million to the Norwegian state for share repurchase and deletion related to the 2022 share buyback program. With that, our 2022 share buyback program is completed.

Finally, we also had some other positive effects of NOK 500 million. Those were mainly driven by positive foreign exchange effect and that's mainly explained by NOK-euro appreciation, partly offset by an opposite effect on cash denominated in U.S. dollar. In addition, we saw equity contributions from noncontrolling interest in Brazil.

When moving on to adjusted net debt, we start by adjusting for the following items. Hedging collateral and other has increased since Q1 '24 with NOK 500 million due to an increase in collateral related to short-term operational hedging positions. Since Q1 '24, net pension assets has turned to a slightly negative net position of NOK 100 million. And finally, we have an increase in other liabilities of NOK 700 million since 2024.

And with these adjustments, we end up with an adjusted net debt position of NOK 26.1 billion at the end of Q2.

And with this, I end the financial update and give the word back to Eivind.

[Eivind Kallevik, executive]

Thank you, Trond Olaf. So let me round off today's presentation with some reflections on our priorities going forward. Obviously, the health and safety of our people always comes first. This month, we were painfully reminded about the worst possible consequences. And as we set out on our agenda towards 2030, we will be accelerating that this must, however, be done with the highest regard for safety and wellbeing of our people. Nothing is more important than that.

Hydro is today in a good position. Despite experiencing a challenging market, we are not in a crisis mode. On the contrary, we are maneuvering mixed markets while continuing to focus on the long-term opportunities for Hydro for aluminum and for greener aluminum.

Hence, we are determined to continue to push forward on the ambitious agenda we have for growth in recycling, extrusions and within renewable energy. We do this in order to position ourselves for the long-term value creation opportunities we see in the market. We believe Hydro is uniquely positioned to capture the value from this.

We are continuing to push forward on the agenda for decarbonization with a high focus on executing on the decarbonization and technology road map.

Succeeding on the decarbonization agenda is crucial to maintain and even to enlarging the gap between Hydro and the competitors in the growing market for low-carbon aluminum. And that will finally enable us to continue to seize opportunities in the emerging market for greener aluminum at premium pricing, creating long-term value for shareholders, society and for our employees.

And thank you so much for the attention, and then I will hand the word over to you, Martine.

[Martine Hagen, executive]

Thank you, Eivind, and thank you, Trond Olaf. Then we are ready for Q&A. [Operator Instructions]

And Eivind, we already have quite some -- many questions in the chat. So let's get started. First questions are from Liam, Deutsche Bank. Two questions. First, on Extrusions. How are the second half '24 margin conditions shaping up compared to the same half in 2023? Similar, down or slightly materially?

And second question, smelter restarts in Norway. Given the margin environment for primary is already quite healthy, what will drive your decision to restart? And can you provide any guidance on potential timing?

[Eivind Kallevik, executive]

Yes. So two good questions. When it comes to Extrusions, as we have seen, the margin management in Extrusion is really good and really strong. And I think here we do have a good strategy in terms of keeping margins up even in a very competitive landscape as we see.

We saw a slight margin deterioration in the second quarter. And of the 3 options that you chose, stable, materially or slight, you may still see some slight challenges into Q3 and Q4, but it shouldn't be materially.

On the restart of smelters of [ sales ] on the West Coast, we are obviously monitoring the market closely when it comes to extrusion ingot premiums and metal premiums. And it's something that we are continuously evaluating and we will come back and update the market when we make a decision to do so.

[Martine Hagen, executive]

And then we have a question from Marina. You have guided for continued soft extrusion market. Do you still see your 2025 EBITDA target of NOK 8 billion achievable?

[Eivind Kallevik, executive]

I think what we have said for some time if and when we will reach the NOK 8 billion, it needs to be a market recovery to support that number. I think with the speed we see out of the second quarter this year and probably less of a market rebound in the second half of 2024 than what was expected just a quarter or 2 ago, the NOK 8 billion for 2025 will be challenged.

We still think it's achievable, very much so, but probably not at a speed out of 2025.

[Martine Hagen, executive]

And then we have a question from Ioannis on the B&A costs. You have guided of NOK 350 million to NOK 450 million lower raw material costs. Can you break down the moving parts?

And secondly, the EC has introduced tariffs on Chinese BEVs, do you see this as a clear positive development? Or are there risks related to European EV exports to China that may outweigh any benefits?

[Eivind Kallevik, executive]

You want to start with the B&A cost?

[Trond Christophersen, executive]

I can start on the B&A cost. So the NOK 350 million to NOK 450 million is mainly related to the fuel switch on the guiding. Other important raw material costs in B&A is caustic soda and coal and also now gas with the fuel switch, but the main driver behind that decrease is the fuel switch.

[Eivind Kallevik, executive]

I think when it comes to the tariffs and the auto sales, it's still too early to call. We see Chinese EVs hovering around 30%, 35% of the European EV market at the moment and it seems to be stabilizing at that level. But again, we still need to see the full impact of the tariffs.

The concern, in particular, for some of the German OEMs that, of course, is -- that there will be retaliation from the Chinese government, and as such, there will be a limit -- or more expensive to import European cars into China. How effectively this will work out, I think we will have a clearer picture for as we get towards the tail end of 2024.

[Martine Hagen, executive]

And then we have a question from Magnus. Higher elimination seems to drive a miss on consensus today. Do you see the current level of eliminations continuing into the coming quarter assuming that alumina prices remain relatively constant?

[Eivind Kallevik, executive]

So I think I'll put my old CFO hat on. So when we see an increase in eliminations like we see in this quarter, it's actually a pretty good story in the sense that we see continued or increasing margins in the B&A side, which is not realized until we sell the metal out of the company.

Now if we see margin levels staying at the same level as we see today, you will see relatively flat development in the period going forward. So we follow the development on PAX. Going forward, we'll give you an indication on how this develops.

[Martine Hagen, executive]

And then the other question from Amos, can you reorient Extrusions automotive sales book towards China to offset weakness in Europe, which could be structural?

[Eivind Kallevik, executive]

I think some of the weakness Hydro experienced in the automotive sales is really directed towards the EVs, if you like. And there we see some postponement or delays of the new platforms that we expect that will start up. So for me, it's more a timing question than a structural change.

But fundamentally, on the extrusion side, when you do these automotive platforms, you do also invest in specific tooling for those specific products and they will not be possible to send directly to China. Then of course, you also have the transportation cost, which will add to the complexity of competing in China with the European based or U.S. based, if you like.

So I think for now, the European stays -- European production stays in Europe. The U.S. production stays in North America.

[Martine Hagen, executive]

And then we have a question from Duncan. Could you please provide some color on how the Rio force majeure is impacting your business from a logistical and financial perspective?

[Eivind Kallevik, executive]

Yes. So far, we have not really seen any impact of the force majeure. So we have received it, but it was the force majeure notice, but it was not clear as to what kind of volumes it would impact and the timing for it. So from the time that we received a force majeure, we also received the alumina that we expected originally.

So as of this point, there is no consequence for Hydro. And then, of course, as we get closer to the end of the year, then we also expect the gas pipeline to be back up and operating and the plant to be back at 100%.

[Martine Hagen, executive]

And then a follow-up on the same topic received on e-mail. Can you remind us of the price structure of [ Tofte ]? And could Hydro have to buy in the market to fulfill the sale contracts? Does this create a risk for trading loss?

[Trond Christophersen, executive]

I mean, we have alumina portfolio that we're operating with our own equity production in Alunorte and then balancing other sources with supply to both the smelters in Atlantic Brazil, but also smelters like [indiscernible], et cetera. So this is sort of a balancing. So of course, if we have nondeliveries in certain contracts, then that could be a risk in the portfolio. But as Eivind said, currently, we do not see any consequences for us.

[Martine Hagen, executive]

And then we have a question from Ioannis. When do you expect to launch the new buyback program?

[Trond Christophersen, executive]

So this is something we are looking into, and we announced the share buyback program at -- or decided at the general assembly. So we will come back to that when we will start execution.

[Martine Hagen, executive]

And then a couple of questions from Bengt. B&A, what was the impact from fuel switch this quarter?

And secondly, fixed cost seems to continue to grow. How much of the increase is activity based and will be reversed. And also on Aluminum Metal, what was EBITDA contribution from net long on Energy? How do you see that playing out in Q3?

[Eivind Kallevik, executive]

So if we think -- if I start from Aluminum, [ if you like ]. If we think about the fuel switch contribution, that was slightly less than $20 million in the second quarter and then we expect that to increase to, give or take, $40 million in the third and up to $60 million in the fourth quarter. So that gives us a good run rate at the end of the year. And as I said during the presentation, that conversion to LNG is moving according to plan.

[Trond Christophersen, executive]

Yes. On the fixed cost in B&A, I mean, there are some special effects related to preparation for project execution and also linked to the bauxite residue storage area. But we also guided for the Q3 when it comes to fixed cost in the B&A, although fixed and other costs are expected to increase by NOK 150 million in Q3.

[Eivind Kallevik, executive]

Then when it comes to the long position in Energy in Aluminum Metal, we do have a long position given the fact that we have curtailed some capacity on the West Coast of Norway. That's a fixed price contract for power coming in and then we offload that into the spot market.

So I will not speculate on what the spot prices for energy will be in oil [ price ] regions in the third quarter. But if you follow that, that will give you an idea of the impact.

[Martine Hagen, executive]

And also a follow-up on the same latter topic over e-mail. What was the power sale impact in Aluminum Metal in Q2?

[Trond Christophersen, executive]

I think we need to come back on that number. I don't have the number...

[Martine Hagen, executive]

Roughly NOK 200 million.

[Trond Christophersen, executive]

NOK 200 million? Yes, okay.

[Martine Hagen, executive]

And then we have a question from Matt. And do you expect the cut production cited by Porsche today to impact second half '24 extrusions?

[Eivind Kallevik, executive]

I don't expect that to be any significant impact from Hydro's perspective, no.

[Martine Hagen, executive]

And then it doesn't seem to be any further questions. Not online, just checking e-mails as well. No, no further questions. So then I think we end it there.

So thank you all for joining us today. And if you have any further questions, please reach out to Investor Relations and we will support them back. And I wish you all a continuous nice day.