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spk00: Good morning and welcome to Hydro's second quarter 2024 presentation and Q&A. So we will start off with the presentation by our president and CEO, Ivan Kalevic, before our CFO, Trond Olav Kristoffersen, will take you through a financial update. Lastly, we will run a Q&A session. Like in previous quarters, if you would like to ask questions, you can use the chat that you see to the right on the screen, and you can start writing in your questions already now. Later on, when we're finished off with the presentations, I will ask your questions directly to Eivind and Trond Olav on your behalf. And with that, I leave the microphone over to you, Eivind.
spk01: Thank you, Martina, and good morning and welcome from me as well. As you are reminded of every quarter, the safety and well-being of our people is the most important value that we do. 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 safety and well-being. Over the past years, we've seen a steady improvement on all key indicators for safety with a consistent low numbers of incidents. But sadly, two weeks ago, we suffered a major setback. A contractor performing maintenance on an electrolysis cell at Hydros Joint Venture in Olbos 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 report an EBITDA of some 5.8 billion. This gives us a free cash flow of roughly 2.8 billion for the quarter. Despite the still slow aluminum market, we continue 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, continue to impact the results on the downstream side. On the energy side, we are happy to report that closing of the partnership with McCreary Asset Management on the HydroRain joint venture was finalized this quarter. And with this last piece of the puzzle in place, Rain is now set up to continue its growth journey on a self-financing basis go forward. Demand for Hydro's premium recycled product, HydroCecal, remains 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 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 a 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 Euro. 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 possibly imagine how integrated this technology will become in our daily lives, in the economy, and in industries 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 a 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 aluminium 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 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 decarbonisation and technology roadmap 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 green and 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 roadmap. 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 aluminium in general and in greener aluminium specifically. Hydro is today the market leader in low carbon and recycled aluminum. their solutions today. But we do need to accelerate and push forward on decarbonisation 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 aluminium 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 aluminum 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 part of these transition activities. electrical vehicles, renewable power and grid infrastructure, building and construction refurbishment for energy efficiency. However, if we look deeper into the decision, 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 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're 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 future to drive change and create value on the shoulders 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 averaging 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 ton 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 tons in 2023. That being said, scrap availability in Europe remains tight due to the low 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 in particular in the case of increased use of post-consuming 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-consuming scrap versus the use of clean scrap. By utilizing our metallurgical competence and sorting technology, we are able to utilize complex scrap parts, allowing us to significantly reduce the metal input 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 five to six times 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-succal 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 hydrocecal by upgrading our facilities in Lucerne, France, and in Tassin, Italy, to meet the rising demand for hydrocecal in the European market. In the U.S., we are seeing increased momentum for hydrocecal following the first large-scale introduction in the U.S. market with the opening of Cosopolis in November 2023. This quarter marked the first commercial sale of Hydro Cical in the U.S. I'm also really happy to report that the Aluzort joint venture completed a high sort 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 Cical 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 5 to 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 weary industrial sentiment. Since 2021, demand has fallen by approximately 30 and 20 percent 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 Hedo'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 precedents delivering towards OEM contracts. On the latter note, two 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 3.1 to 3.3 billion euro 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 Restoration is positioned to deliver on the 2025 EBITDA target of 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 Rain joint venture in partnership with the Macquarie Asset Management. Hydro Rain has had an impressive journey of profitable growth over the past few years. And we are convinced that by joining forces with Macquarie, Hydro Rain 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 Rain 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 Rain 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 either rain to deliver a sustainable and attractive risk-adjusted returns in the range of 10 to 20% in the period to come. Now, speaking of industrial decarbonisation, last quarter we were happy to report that the gas was flowing from the FRSU, and now it goes Celsius at the docks of Bacarena. This quarter, we've 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 three calciners by the end of fourth quarter 2024. Upon full conversion, this will yield an annual reduction of CO2 emissions of some 700,000 tons annually, representing a significant contribution to our 2030 and 2050 decarbonization roadmap. 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 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 Stoffenhausen, Stuttgart, just a few weeks ago to sign a new agreement with Porsche. And this represents a totally new business model in the aluminium industry. In short, Porsche will reserve capacity, enabling their tier suppliers to source best-in-class low-carbon and recycled aluminium from Hydro. Porsche will not be sourcing aluminium directly from us, but instead guarantees Hydro the offtake of certain volumes over time. Porsche has agreed to pay green 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 decarbonisation efforts we do throughout the entire value chain and really supports our objective of realising 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 decarbonising the entire automotive value chain. And with that, I will give the word to Trond Olav, who will then run you through the financials.
spk02: Thank you, Eivind, and good morning and welcome for me as well. So let's start with the alumina market. And in the alumina markets, we have seen quite some development in the recent months. Global aluminum market balance is influenced by Chinese production challenges, driving the Chinese aluminum deficit up by 0.2 million tons from 2023 to a total of 0.8 million tons 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 tons for 2024 ex-China. And this results in a net deficit for the global alumina market of 0.6 million tons in 2024, according to CRU. Rebalancing is expected over time, as new projects are under development in India and Indonesia. Regarding prices, the tightness in the aluminum market has led to a strong increase in Pax, peaking at 510 US dollars per ton in late June. The price has since eased and is currently trading between 475 and 480 US dollars per ton. Also, the Atlantic premium is still fundamentally supported by Iceland, Argentina and Canada's need to import alumna from the Pacific Basin. Moving on to primary aluminium. 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 aluminium demand was up 2% year on year during the second quarter, supporting a healthy global primary market with an estimated growth of 3% year on year for 2024. Growth during the second quarter was driven by a 3% demand decrease 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 side of this slide, we can see the strong aluminium demand from solar photovoltaic, which has closed 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 decarbonisation and strong demand are placing it as the major driver behind the 3% expected growth overall in the world in 2024. However, primary aluminium 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, exclusion demands remain challenging in both Europe and North America during Q2. European extrusion demand is estimated to have decreased by 14% in Q2 2024 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 relatively weak levels. Extrusion demand has been relatively better in southern Europe, while demand in Germany continues to be weak. Looking into Q3 2024, 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 2024 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 US. In Q2, we also saw that our automotive sales further declined in both Europe and the US, driven by moderating production at some carmakers and weaker than expected sales of electrical vehicles. Growth for sales volumes in BNC and industrial segments is still negative, but overall volumes and orders have started to stabilize. Then moving to the financials. And when looking at the results, Q2 versus Q1, we see the positive effects of the strong improvements in revenue drivers, contributing with NOC 1.3 billion. Higher upstream volumes, partly due to seasonality, impacted results positively by another NOC 500 million. Both BNA and aluminium metal contributed to the positive volume effects. We saw an upstream raw material cost increase of approximately NOC 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 effects. The downstream segments experienced flat development with limited changes in volumes and margins in extrusions and recycling. Furthermore, we saw a negative effect of NOx 600 million quarter-on-quarter due to seasonally lower production volumes in energy. The quarter was also impacted negatively by higher fixed costs of NOx 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 US dollar. The final negative effect of NOK 500 million is mainly related to order and eliminations. The eliminations this quarter itself amounted to approximately NOK 300 million on the strong improvement in BNA 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 EBTA, 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 US dollar, negatively impacting US dollar borrowing in Brazilian entities, partly offset by a gain from a stronger NOC versus euro, affecting euro-embedded energy contracts and other liabilities denominated in euros. In addition to that, we had interest expense of about NOC 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 2024. 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 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 0.97 NOK per share. Let's then give an overview per business area, starting with the B&A. Adjusted EBITDA for box-type and alumina increased from NOK 817 million Q2 2023 to NOK 1.6 billion in Q2 2024. This was mainly driven by higher alumina price, lower raw material costs, partly offset by higher sales volume from lower production. Compared to Q1 2024, 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, Alamorta output volume is expected to remain stable. In addition, the higher realized aluminum price should continue to impact our results positively. We expect raw material costs related release of NOC 350 to 450 million, which will continue to be driven by the further implementation of the fuel switch. Fixed and other costs are expected to increase NOC 100 to 150 million. Then moving to aluminum metal. Q2 adjusted EBITDA decreased from NOK 3.2 billion in Q2 2023 to NOK 2.5 billion this quarter. The decrease is mainly driven by 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 aluminium 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 costs 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 was due to LME-linked power contracts in Brazil and Canada. On the positive side, carbon costs continued to decline, partly offsetting the other negative elements. Fixed costs increased due to inflationary pressure as guided by NOC 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 aluminium metal. For Q3, aluminium metal has booked 63% of primary production at US$2,432 per ton, including the effect of our strategic hedging program. Furthermore, we have booked 42% of premiums, affecting Q3 book at US$494 per ton. And we expect realized premium in the range of 380 to 430 USD per ton. On the negative side, we expect further increase in raw material costs driven by alumina and partly offset by carbon of between NOK 400 and 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 developments, and we do not foresee any restarts of the curtailed primary volumes next quarter. On CO2 compensation, we expect flat quarterly 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 low 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 evaluation 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 resourcing 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 normalised levels over time. However, as mentioned earlier, this is tied to the improvement in 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 evaluation 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 remit margins negatively impacted the results with around NOK 380 million, as recyclers continued to be pressured with low billed premiums versus elevated scrap prices. Compared to Q1 24, adjusted epithelium 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 remit margins continue to be under pressure. Combined with higher costs, we expect the negatives 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 Aluminium 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 purchases in markbygden, Sweden. The non-delivered volumes were 0.3 terawatt hours in Q2 24, and 2.2 TWh accumulated since the beginning of the disruptions. We continue to seek compensation for the non-delivered 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 error 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 effective investments of NOK 3.7 billion, offset by a cash inflow of NOK 1.8 billion, related to repayment of shareholder loan from Hyderabad. As a result, we had positive free cash flow on NOK 2.8 billion in Q2. Furthermore, we saw cash outflow on 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 concluded. Finally, we also had some other positive effects of NOC 500 million. Those were mainly driven by positive foreign exchange effect, and that's mainly explained by NOC Euro appreciation, partly offset by an opposite effect on cash denominated in US dollar. In addition, we saw equity contributions from non-controlling 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 2024 with NOK 500 million due to an increase in collateral related to short-term operational hedging positions. Since Q1 2024, 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 Q1 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.
spk01: Thank you, Trond Olav. So let me round off today's presentation with some reflections on our priorities going forward. 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. But this must, however, be done with the highest regard for safety and well-being of our people. Nothing is more important than that. Peter 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 roadmap. Succeeding on the decarbonization agenda is crucial to maintain and even to enlarge the gap between Hydro and the competitors in the growing market for low carbon aluminium. And that will finally enable us to continue to seize opportunities in the emerging market for greener aluminum at premium price. 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, Martina.
spk00: Thank you, Ivan, and thank you, Trond Olav. And then we are ready for Q&A. As a reminder, If you want to ask questions, you can write your questions in the chat that you see to the right on the screen. And I think we already have quite 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?
spk01: Yeah, so two good questions. When it comes to extrusions, as we have seen, the margin management in extrusions 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 three options that you chose, stable materially or slight, you may still see some slight challenges into Q3 and Q4. But it shouldn't be material. On the restart of smelters of cells on the West Coast, we are obviously monitoring the market closely when it comes to extrusion angle 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.
spk00: And then we have a question from Marina. You are guided for continued soft extrusion market. Do you still see your 2025 EBITDA target of 8 billion knock achievable?
spk01: I think what we've said for some time, if and when we will reach the 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 two ago, the $8 billion for 2025 will be challenged. We still think it's achievable, very much so, but probably not as a speed out of 2025.
spk00: And then we have a question from Janice on the B&A costs. You have guided of 350 to 450 million or lower on material costs. Can you break down the moving parts? And secondly, the EC has introduced tariffs on Chinese BVs. 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?
spk01: I'm going to stop with that.
spk02: B&A costs? I can start on the B&A costs. So the 350 to 450 million is mainly related to the fuel switch on the guiding. Other important cost 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.
spk01: I think when it comes to the tariffs and the auto sales it's still too early to call and We see Chinese EVs hovering around 30, 35 percent 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, of course, is that there will be retaliation from the Chinese government, and as such, there will be 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.
spk00: 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 the Illumina prices remain relatively constant?
spk01: 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 if you follow the development on POCS going forward, we'll give you an indication on how this develops.
spk00: And then we have a question from Amos. Can you reorient Extrusion's automotive sales book towards China to offset weakness in Europe, which could be structural?
spk01: I think some of the weakness you're experiencing in the automotive sales is really directed towards China. 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 The transportation cost, which will add to the complexity of competing in China with a European base or a US base, if you like. So I think for now, the European production stays in Europe. The US production stays in North America.
spk00: 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 a financial perspective?
spk01: 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 our 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%.
spk00: And then a follow-up on the same topic received on email. Can you remind us of the price structure of the offtake? And could Hydro have to buy in the market to fulfill the sale contracts? Does this create risk for trading loss?
spk02: I mean, we have an alumina portfolio that we're operating with our own equity production in Alenorten and then balancing all the sources with supply to both smelters in Atlantic Basin, but also smelters like Katalum, et cetera. So this is sort of a balancing. So, of course, if we have non-deliveries in certain contracts, then that could be a risk in the portfolio. But as I've said, currently we do not see any consequences for us.
spk00: And then we have a question from Yanis. When do you expect to launch the new buyback program?
spk02: So this is something we are looking into, and we announced the share buyback program or decided that at the General Assembly. So we will come back to that when we will start execution.
spk00: And then a couple of questions from Bengt. B&A, what was the impact from fuel switch this quarter? And secondly, FIXCO seems to continue to grow. How much of the increase is activity-based and will be reversed? And also in aluminium metal, what was EBITDA contribution from net long on energy? How do you see that playing out in Q3?
spk01: So if you think, if I start, and then you fill in, if we think about the fuel switch contribution, that was huge. slightly less than $20 million in the second quarter. And then we expect that to increase to give or take 40 in the third and up to 60 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.
spk02: Yeah, 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 box site residue storage area. But we also guided for the Q3 when it comes to fixed cost in B&A. All the fixed and other costs are expected to increase by not 150 million in Q3.
spk01: Then when it comes to the long position on energy in aluminium 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 our price regions in third quarter. But if you follow that, that will give you an idea of the impact.
spk00: And also a follow-up on the same latter topic over email. What was the power sale impact in aluminium ethylene Q2?
spk02: Oh, I think we need to come back on that number.
spk00: I don't have the number in mind. 200 million.
spk02: Okay.
spk00: And then we have a question from Matt. Do you expect to cut production cited by Porsche today to impact second half 24 extrusions?
spk01: I don't expect that to be any significant impact from Hydra's perspective, no.
spk00: And then it doesn't seem to be any further questions. Not on just checking emails as well. No. No further questions. So then I... I think we ended 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. I wish you all a continuous nice day.
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