Norsk Hydro ASA (OTCQX:NHYDY) Second Quarter 2022 Earnings Conference Call July 22, 2022 12:30 a. m. m. , Eastern Time
Participating companies
Line Haugetraa – Head of Investor Relations
Pal Kildemo – Chief Financial Officer
Conference Call Participants
Liam Fitzpatrick – DB
Ioannis Masvoulas – Morgan Stanley
Amos Fletcher – Barclays
Daniel Major – UBS
Jatinder Goel – BNP Paribas Exane
Operator
Bonjour. Et welcome to the hydro Q2 presentation 2022. Je my call is Jack and I will be your coordinator for today’s event. For the duration of the call, your lines will only listen. However, it will be imaginable to ask questions. [Operator Instructions]
I will now give the floor to your host, Line Haugetraa, to begin today’s call. Thank you.
Haugetraa Line
Thank you and good morning from us. And welcome to our presentation and call to the second quarter of 2022 convention. We will start with a presentation through our CFO, Pal Kildemo, followed by a Q&A session. Keep in mind that you’ll want to connect to the convention call to ask questions in the final.
With that, I give you the microphone, buddy.
Pal Kildemo
Thank you Line. Hello and welcome from me as well. Whether you’re still painting or calling after your summer vacation, I look forward to sharing our effects with you today. And I’m going to jump straight to the highlights.
At the moment, we recorded record EBITDA of NOK 11. 6 billion, while loose cash flow was NOK 4. 4 billion, still impacted by net operating capital accumulation in NOK cost accumulation in the quarter.
Results were impacted by tight markets in the current quarter, in Aluminum Metal, Recycling, Extrusions and Energy. And once again, we achieved record effects in extrusions and metallic aluminum, and for the corporate in general.
However, we have now noticed that the alumina and aluminium markets are falling from grades due to weaker demand and great uncertainty, while the energy markets, on the other hand, remain incredibly strong, either on the perimeter and even more towards the end of the year for winter quarters.
In these volatile markets, we continue to face demanding situations and mitigate risks, while proceeding to position the company in line with the 2025 strategy, taking advantage of the opportunities for our position in low-carbon aluminum, while we mature and expand towards a new market power, increasingly deficient in renewable energy.
In addition, our reports to ensure that the robustness of the entire price chain continues at full capacity with a focus on price reduction and operational excellence. Our improvement program for 2025 is so far in 2022, progressing in line with the ambition to supply NOK 7 billion in innovations by the end of the year.
Sales of greener products for the current quarter of 2022 increased by 89% year-over-year and we are also making progress on several existing recycling allocations as well as new allocations this quarter. In addition, we have made significant progress both in the Kidney Allocation Portfolio in Brazil, but also in the decarbonization component of Alunorte and Hydro.
Finally, I am pleased to announce that we have completed or completed an update of our monetary priorities, a capital design of approximately NOK 25 billion of cyclically adjusted net debt.
Based on our 2021 balance sheet, this translates into the Board’s proposal to distribute an additional NOK 5 billion by 2021, divided between dividends and buyback percentages, but subject to an appropriate ordinary general meeting.
So let’s move on to slide three. Since the Russian invasion of Ukraine, we are seeing a new truth and adjustments are happening faster than before. The war has led to human suffering and refugees in Europe as a severe food crisis unfolds with consequences. And in addition to the 2020 and 2021 COVID pandemic, the energy crisis has led to record levels of energy prices.
These adjustments are impacting global markets, only U. S. or individual nations, and inflation is rising in several countries, driven by high energy costs and hard labor markets, and there is a growing fear that emerging inflation could lead to a recession.
Inflation in the United States is driven by a solid economy with a peak expected by several market participants next month, but here too, the increases in the value of energy are more significant in the last month.
Given our geographical exposure and dependence on Russian energy, the eurozone is affected by the consequences of war and rising energy prices. Inflation rates have continued to rise and tension remains widespread. the effects of the war on commodity prices, adding energy and agriculture.
And the consequences of the war are also visible in all regions in terms of GDP growth. We also hear that Europe is the hardest blow, with China and the United States resisting a little better. We also saw the steepest slowdown in the production PMI since the onset of COVID for the US. The US and the euro area.
In the chart on the right, we see that the global GDP forecast has been revised downwards as many analysts consider the economic environment to be more fragile due to the elements we just mentioned. So, based on the record effects we had at the time. Quarter, now we see more uncertainty in the future.
Go to slide four. The uncertainty we have just discussed is also visual in the aluminium markets. Consumption estimates for 2022 have been revised downwards, especially since the last item, due to the growing threat of recession, supply chain problems and high energy prices. This has basically affected China and Europe, being the US. U. S. the most powerful market. Further discounts on consumption estimates are expected over the next month, specifically for Europe.
The global balance is in line with lower demand and more powerful production expansion in China, which has been revised towards a more balanced market. There have been some additional lower prices for European production and more can be expected in Europe, given the incredible better energy prices, both in inventory and also in the futures market.
Also outside of Europe, in the United States, we have noticed reactions on the source side. In light of high energy prices, there is significant capacity at risk and we see some 900 000 tonnes of European and US capacity reduced, but we estimate that there are around millions of tonnes of threat or reduction.
Due to the conversion of market fundamentals, we have also noticed a significant drop in aluminium prices, albeit slightly less, if measured in Norwegian kroner. At existing market prices, we estimate that we are estimating at the 65th percentile of the overall charge. curve, indicating a scenario that is not sustainable over time.
Continue to slide five. If we move to energy, costs in European electricity markets remained at the top of the quarter due to tight spreads and blood-free markets. Towards the winter, the focus will be on Europe getting enough fuel through the two pipelines and the fact that LNG and the threat of fuel rationing are increasingly on the agenda.
This is also reflected in the long-term curves of the energy gap, which are at very high degrees in the fourth quarter of 2022. We also experienced a tense scenario in southern Norway, which remained drier than the quarter average, resulting in low reservoir grades. .
Statnett, the Norwegian transmission formula operator, has raised its source security threat point to yellow. This means that the safety of the source can be threatened in winter if there is much less rain than normal and if it is not imaginable to import electricity from continental Europe. Lately, his view is that the threat remains low, but not negligible.
On the other hand, central and northern Norway are the exception, with low costs due to above-normal rainfall, resulting in superior electric power generation exceeding the grid’s ability to move electric power south.
So let’s move on to slide six. In volatile markets, it is vital to manage short-term dangers and opportunities while staying the long-term course. Without a 2025 strategy, we continue to strengthen our position in low-carbon aluminum, while maturing and generating expansion in new energies. , two pillars that we are physically powerful in those scenarios.
In addition to the examples I will talk about later in the presentation, we have also introduced many other projects to strengthen our position in low-carbon aluminum. First, our sales of greener products have increased by up to 89% year over year and will continue to grow here. Therefore, despite the higher costs of the quarter, our consumers continue to take the weather into account when buying aluminum and are also willing to pay more.
We recently began structuring to expand our recycling plant in Rackwitz, Germany, where post-consumer waste is an uncooked primary load consistent with HyForge’s 25,000 tons of construction capacity for the automotive industry. In Årdal in Norway, we also made a decision to upgrade and restart the number one smelting of foundry alloys to increase the recycling capacity of post-consumer waste through 25,000 consistent tons per year. These two investments are our ambition to double post-consumer waste recycling by 2025.
A vital step in our recycling ambitions can be achieved through a successful acquisition of polish recycler, Alumetal. Following the launch of a tender offer for 100% of the company’s shares at the beginning of the current quarter, we announced in July that we would extend the subscription period until 10 October 2022, to provide the additional information requested by the European Commission.
In Extrusions, we made an investment resolution of NOK 300 million for a new automotive press in Tønder, Denmark, serving the European market for electric and motor cars based on recycled aluminum. And we also aim to increase sales of greener aluminum in the United States, where we recently qualified our first Hydro Commerce plant to produce Hydro CIRCAL.
In the new energy picture, we will return to renewables, but in the factories we were very happy to launch an advertising recycling operation at the largest European electric vehicle battery recycling company in Fredrikstad, Norway. Following this, Hydrovolt is now exploring an expansion of recycling capacity in Europe with the long-term goal of recycling 70,000 tonnes of batteries by 2025 and 300,000 tonnes of batteries by 2030.
Let’s move on to slide seven, please. To decrease our emissions, but also to capitalize on the price of what is expected of low-carbon aluminum producers, it is vital to move forward across the price chain. consumer waste and how to remove carbon from the carbon capture aluminium electrolysis procedure, as well as our own carbon-free electrolysis technology, HalZero.
This quarter, I would like to share several advances for Alunorte’s decarbonization initiatives, which are also for the advancement of our renewable energy business, Hydro Rein.
Today, alumina accounts for about 1. 4 pounds of CO2 in a kilo of aluminum. As you can see from the graph on the left, we have the long-term purpose of decarbonizing alumina production, which will be done in several stages.
First, we are moving forward with the fuel change allocation plan to upgrade the oil with liquid herbal fuel. We made the resolution for this allocation in December last year and the allocation is expected to be operational in 2023. In the central photo you can see the structures of the herbarium fuel tanks in Alunorte.
In a step moment, we will install 3 electric boilers of renewable energies to upgrade fossil fuels. The first boiler is already operational and the timing and 3rd boiler are expected to be operational in 2024.
And finally, the last coals will be removed by electrifying the remaining boilers and replacing the herbal fuel with hydrogen.
Hydro Rein announced two primary renewable projects in Brazil in the last period, the combined 586-megawatt wind and solar project, Feijao, and the 531-megawatt solar project, Mendubim, which offer enough substance for Hydro Rein’s capital grid.
Hydro’s bauxite and alumina assets in Brazil will be the main customer of both projects, offering green energy for the operations of the Alunorte and Paragominas plants, as well as for the 3 electric boilers. The latest investment resolution for Mendubim was made recently, while for Feijao it is expected to be made in the fourth quarter of 2022.
So let’s move on to slide eight. A central pillar of our entire 2025 strategy is the monetary framework for generating returns and cash flow. This includes transparent principles for capital allocation and now also transparent objectives around site-wide capital design. We continue our commitment to a premium credit score and aim to maintain adjusted net debt at less than twice adjusted EBITDA during the cycle.
Following a review of our capital design and targets for the cycle, we have complemented our monetary priorities with greater direction in capital design. Our goal is to have adjusted net debt of around NOk 25 billion during the cycle, slightly above lows and slightly below cycle highs.
Our goal is to maintain strong consolidated debt, while the liquidity needed to hedge net operating capital and other fluctuations will vary with the cycle, requiring more liquidity at cycle highs than at cycle lows. And this also deserves to maintain our flexibility to act in a countercyclical manner.
Let’s move on to slide nine, please. Following the update of our capital design and based on our 2021 figure, Hydro’s Board of Directors has proposed additional distributions to shareholders for 2021 to close 2021 in accordance with our new target and capital design. This distribution would consist of an additional monetary dividend of NOK 3 billion, as well as the advent of a percentage buyback program of up to NOK 2 billion over the next 12 months. Both are conditional on the approval of an ordinary general meeting, which we intend to convene shortly.
Next, let’s move on to slide 10. In line with our new target capital structure, which includes maintaining strong consolidated debt going forward, we aim to refinance maturing bonds in the coming years.
As I discussed our Capital Markets Day, we have been working on crafting a comprehensive sustainable financing framework, which would improve our access to capital, lead to a capital merit charge as we realize our sustainability ambitions, aid transparent reporting, and a transparent link to our sustainability strategy.
We present our sustainable investment framework, adding a momentary opinion from the International Centre for Climate and Environment Research, CICERO Shades of Green, verifying the credibility, effect and alignment of the framework with a green and sustainable link, obligations and long-term principles. adding an assessment of the alignment of the EU taxonomy.
The result is that Hydro’s governance procedures have an Excellent rating and the sustainable financing framework has a Medium Green rating, which is the momentary green rating after Dark Green.
Our two KPIs that we will use in financing related to long-term sustainability are absolute discounts on Scope 1 and 2 GHG emissions and an increased ability to recycle post-consumer aluminum waste.
Let’s then look at the effects in more detail and move on to slide 11. If we start with the quarterly EBITDA bridge, the adjusted EBITDA for the current quarter is NOK 11. 6 billion, compared to NOK 11. 2 billion in the last quarter.
On the plus side, we continued to see an accumulation in all-inclusive costs for metals and alumina, resulting in a buildup of NOK 2900 million. The accumulation of 14% in learned EML and 11% in premiums definitely contributed to NOK 2. 3 billion, while the construction in learned alumina contributed another NOK six hundred million.
We also recorded a significant build-up of NOK 800 million due to currency effects and NOK 0. 5 billion due to higher descending gross margins. NOK 1600 million in constant prices in aluminum, steel and extrusion and a minimum of NOK 1400 million in energy functionality due to the negative spot purchase position that will have to be hedged at a higher price. prices in southwest Norway.
Finally, we have other item deletions that come with negative progression deletions of approximately NOk 500 million quarter-over-quarter, basically due to margin progression in the original and self-produced alumina. each activity domain.
Continue with slide 12. Si then move on to the core monetary knowledge for the quarter, year-over-year revenue increased approximately 87% to NOK 64. 8 billion and, compared to the previous quarter, revenue increased 39%. basically because of the higher prices.
Adjusted EBITDA amounted to NOK 11. 6 billion, for the quarter the positive effects of NOK 6 billion brought the reported EBITDA to NOK 17. 6 billion. Adjusted portions for the quarter were largely due to positive unrealised derivative effects on LME-like contracts, which are similar to our SKR 6. 7 billion strategic hedging business and unrealised negative derivative effects on NOK 1 million electric power and raw materials contracts.
We then adjusted depreciation by approximately NOK 2100 million in the quarter, resulting in an adjusted EBIT of NOK 9500 million. Financial expenses of NOK 1300 million for the current quarter come with a net foreign exchange loss of NOK 1100 million and interest expense of NOK three hundred million.
Our tax expenditure amounted to NOK 3 billion, or about 21% of the pre-tax revenue source, and the tax rate basically reflects a higher proportion of the revenue source in Norway. Overall, this provides a reported net profit from ongoing operations of approximately NOK 11. 1 billion, compared to NOK 2. 4 billion in the same quarter last year and NOK 6. 4 billion in the first quarter.
Adjusted net profit NOK 7. 7 billion, compared to NOK 3. 2 billion last year in the current quarter and NOK 6. 8 billion in the first quarter. This resulted in adjusted earnings consistent with a consistent percentage of NOK 3. 63, compared to NOK 1. 45 in the current quarter of last year and NOK 3. 17 in the first quarter.
So let’s move on to the next slide. If we then move into commercial spaces and start with bauxite and alumina, adjusted EBITDA will increase from NOK 855 million in the current quarter of 2021 to NOK 1117 million in the current quarter of 2022. This is due to approximately 50% higher learning costs of promoting aluminum.
Sales values were partly offset due to consistency with raw materials, with caustic soda, fuel oil and coal being the maximum, which increased the rate by around NOK 1. 5 billion, of which about 50% came from movements in the value of oil and coal. pieces of alumina from $244 to $378 consistent with ton.
We also incurred loan prices and other smaller unique pieces of around one hundred million NOK for the quarter and production at Alunorte was below the nominal capacity of 1. 5 million tonnes due to lower rainfall production.
Comparing the effects in the first quarter of 2022, adjusted EBITDA decreased by around NOK 150 million. The accumulation of alumina costs will be more than offset through the costs of uncooked curtains and the negative currency effects of brL appreciation against the dollar. And compared to the first quarter, Alunorte’s raw curtain costs increased by around NOK 575 million, more than expected compared to the last quarter.
In the third quarter, Alunorte’s production is expected to continue at approximately nominal capacity. In addition, in the current quarter, the existing costs of uncooked fabrics based on market costs imply an accumulation of around one hundred million NOK to NOK two hundred million by increases in caustic soda and coal, partly offset by lower oil costs.
For aluminum metals, this quarter, adjusted EBITDA increased from NOK 2800 million to NOK 7 billion compared to the second quarter of 2021. compensated through superior uncooked fabrics and constant costs.
Following the partial relief of the Slovalco smelter earlier this year, the effects come with around NOK 180 million positive effects from the sale of electric power, which were partly offset by losses in the sale of electric power to Albras, which will be minimized as Albras grows.
Compared to the first quarter of 2022, Aluminium Metals’ adjusted EBITDA increased by NOK 2200 million, driven by higher learned volume costs and positive currency effects. , in line with our forecast for the last quarter. In addition, we also had constant costs higher than the quarter.
For the third quarter, 69% of the number one production is priced at approximately $2600 per tonne, while 49% of Q3 premiums are recorded at approximately $1080 per tonne in total. with ton and $850 consistent with ton.
Compared to the current quarter, we expect a slight low in commodity values in the third quarter of 2022 and if we have expectations based on existing market values, this represents around NOK 100 to 200 million, basically due to the minimum in the value of alumina, partially offset by carbon [ph]. So, in many settings, the effects we discuss on both sides of alumina.
Next, let’s move on to slide 15. This quarter, Metal Markets achieved adjusted EBITDA of NOK 705 million, to NOK 335 million in the current quarter of last year. This quarter’s innovations are due to recycling thanks to the accumulation of sales. premiums, extending the effects to NOK 423 million.
In addition, the positive valuation of inventories and foreign exchange effects definitively contributed NOK 262 million. This is partly offset by a decrease in the contribution of NOK 350 million from commercial and sourcing activities in declining premiums and declining markets. This also includes around NOK 130 million of stock impairment, which will be cancelled in the next quarter when the stock hedges are made. Excluding the effects of currency and stock valuation, the quarter’s effects amounted to NOK 434 million.
As you look into the next quarter, as always, don’t forget that industry effects and currency effects on steel markets are inherently volatile. However, given those still high premiums, he expects continued strong contributions from our recycling operations.
Turning to slide 16. In the last quarter, the total length of the extrusion market in Europe was revised upwards through CRU founded on contributions from the European Aluminium Association. The 2021 market is now estimated at 3. 8 million tonnes, to 3. 4 million tonnes reported in the first quarter.
Growth was stronger than expected in ordinary low-value residential structures and structural products delivered through reseller segments. our expectations.
The revisions have an effect on expansion rates through 2023. Growth from 2021 to 2022 is now estimated at minus 2 compared to more than 3 previously. However, as you can see from the chart here, the total length of the market is estimated. be taller, which is good.
Extrusion demand for Europe is estimated to have been at a similar point in the second quarter of 2022 to the second quarter of 2021, but is expected to decline by as much as 5% in the third quarter, with moderate demand in the structure and structure and commercial segments, followed by a slow improvement in the automotive industry, which is where we have the most exposure. The rate of expansion in North America is expected to remain strong in 2022.
In North America, sales are expected to increase by 6% year-over-year, while in Europe, sales are expected to decline by 5%. Restrictions.
Next slide please. Extrusion shipments were solid in the current quarter of 2022, compared to the same quarter last year, Lichtervelde’s seam pipe unit sold in Europe. supply chain problems, partly exacerbated by the war in Ukraine.
Extrusion Europe shipments are strong compared to the same quarter last year. While Extrusion North America has noticed an increase in volume. Due to the structure systems, it is due to the higher volumes in the structures and structures segment, while cube extrusion had a negative impact on the automotive sector. .
Continue with slide 18. Si then move on to Extrusion monetary results, adjusted EBITDA increased from NOK 1800 million in the current quarter of 2021 to NOK 2400 million this quarter. As in the last quarter, the incorporated recycling operations definitely contributed to the construction base in billet premiums.
In addition to recycling margins, the accumulation of gross margins was more than offset by the accumulation of variable and constant prices, and energy prices accounted for a significant share. Fixed prices also come with approximately NOK 200 million in ordinary bonuses for all workers after heavy contributions during the two-year COVID period.
Compared to the first quarter of 2022, adjusted EBITDA remained largely stable, with higher recycling effects and higher gross margins, partially offset by decreasing volumes and higher constant and variable costs.
For the third quarter, we expect volumes to be minimized compared to the current quarter due to normal summer maintenance in Europe. In the existing inflationary environment, we also expect some tension in the margins. In addition, we have noticed premiums for some of them, which will have an effect on the profitability of recycling. And as in the last quarter, we must emphasize that supply chain volatility remains and that we are back in an era of increased market uncertainty right now part of this year.
The last business domain we painted on is power, where the effects increased from NOK 761 million in the current quarter of last year to NOK 824 million this year. Revenue from differences in areas of record value of NOK 1200 million was more than offset by a reduction of around 30% in electricity production, resulting in a short position of 430 gigawatt hours, which had to be hedged in the market with very high power values.
Gains from zone value differences were driven by accumulation in the NO2 and NO3 value zones from NOK 1288 in the first quarter to NOK 1511 in the second quarter, in addition to a reduction in the long position in SC1 and SC2 [ph].
Compared to the last quarter, adjusted EBITDA decreased by NOK 1400 million, reflecting a decrease in volumes offset by higher values and higher earnings from value differences of approximately NOK 440 million.
For the third quarter, value and volume uncertainty remains high, and production and values will depend on hydrological situations in Norway. However, lately we are seeing a still weak hydrological balance in the southern Norway spaces where we produce and we also expect low production in the third quarter, which will likely result in a quarter of negative spot sales.
It should also be remembered that low production quarters will be followed by a significant increase in production in the fourth quarter and third quarters, when we expect the higher costs we see in the existing program.
Yesterday, the average difference since the beginning of the quarter between NO3 values in central Norway and NO2 values in southwestern Norway was NOK 2364 consistent with megawatt hour, compared to an average of NOK 1516 for the current quarter, implying that it benefits from value zone differences. will continue in or even be consistent with the third quarter.
Next, let’s move on to slide 20. We take a look at the evolution of our net monetary position. Then, at the starting point of NOK 5100 million of net money in the first quarter, our overall net position decreased to NOK 6800 million in the previous quarter. quarter to a net debt of NOK 1,700 million.
This is based on the following. In the current quarter, we generated NOK 11. 6 billion in adjusted EBITDA. Net operating capital exceeding NOK 2 billion, which can be reduced as follows; about NOK 3. 6 billion is similar to the value and effects of the exchange rate. This includes accounts receivable but also the cost of our raw inventories, which have more than is offset through debt; around NOK 1 billion is due to second quarter claims and also higher stocks in extrusions, which is offset by periodization effects and other minor benefits and damages of NOK 2. 4 billion.
If we take a look at the full-year estimates, we expect all NOKs billed to be similar in value and currency, with significant off-market bills of approximately NOK 1-1. 5 billion in protection actions and CO2 compensation claims.
If we use existing market values, the full year value related to the value of NOK charged will be approximately NOK 2500 million, or approximately NOK 4 billion billed throughout the year, compared to approximately NOK 8 billion since the beginning of the year. this can be replaced with values as the quarters go by.
Other operating capital changes amounted to NEGATIVE NOK 3. 2 billion, basically due to NOK 1. 6 billion in taxes paid and NOK 1. 8 billion in cancellation of unlearned positive derivatives, which are included in EBITDA, which will be learned in positive money in the coming quarters.
Net investment was NOK 2 billion in the quarter and we will return to the topics in more detail on the next slide. As a result, we generated positive NOK 4400 million consistent with loose money in the current quarter. We paid NOK 11. 1 in dividends, or NOK 5. 4 consistent with the stock, on May 20.
If we then move to adjusted net debt, we start by adjusting the nok 1700 million pledges for the current quarter, basically similar to the strategic and operating hedging positions, which decreased by NOK 8 billion compared to the last quarter due to the decline in the LME. prices.
The upcoming negative NOK 4300 million adjustment reflects, among other things, the asset decommissioning obligations as well as the assets of the captive insurance company Hydro that will not be held for long-term debt service.
And we have net pension assets of NOK 1400 million, about NOK 400 million more than the last quarter in this country in Norway and Germany. But this is partly offset by a loss in planned assets in our country. With those adjustments, end up with adjusted net debt of NOK 6. 3 billion at the end of the current quarter, to NOK 7. 7 billion at the end of the first quarter.
Next, let’s move on to slide 21. Our full-year CapEx forecast on our Capital Markets Day is around NOK 11 billion by 2022. We ended up spending less than expected in 2021, resulting in an additional transfer of approximately NOK 500 million. This is in addition to the transfer of NOK 1500 million from 2021 that was already included in the NOK 11 billion reported on Capital Market Day.
But since then, we have been experiencing strong inflationary pressures and financial developments, which can have an effect on the year-end figures, and so far the exchange rate effect amounts to around NOK 1 billion, basically due to the weakness of the NOK.
These two elements bring the estimate of CapEx expected for 2022 to around NOK 12. 5 billion. If we are successful in alumetal’s takeover bid, this will add up to NOK 12. 5 billion and the acquisition value of the shares is estimated at around €232 million.
And he also knows that we have controlled to create substance in Hydro Rein, with several projects now moving towards structure and production. As such, we expect to be in a position to raise capital in the current part of the year. Given the current slow speed of the IPO market, we are also in other opportunities to raise capital.
In a situation where this is not successful for the time being part of 2022, this could result in capital spent on projects in progression from NOK 1000 million to NOK 1500 million by 2022. As we move into 2022, we spend NOK 3500 million on CapEx today, however, as you know, we have a tendency to spend around 40% on CapEx in the fourth quarter.
Next, let’s move on to slide 22. Me would like to make a reminder, an update of our strategic hedging, the maximum volatility of LME securities continues and the quarter we increased the hedging position in 2024 to 150,000 tonnes. In total, we have approximately 900,000 tons of LME blankets incorporated for the consistent period from 2022 to 2024 at an average value of $2,300 per ton.
I would also like to point out that a certain proportion of uncooked fabrics such as coal and fuel oil are blocked, which enhances the effects of the overall margin incorporated. As I mentioned several times before, I would not be satisfied if the hedging position ends up out of the money, because we get many more advantages from the exposed party. However, securing a portion of the portfolio with traditionally high margins also makes us more physically powerful in the event of a potential recession.
Then, let’s move on to slide 23, where we can summarize and summarize the quarter. At the end of the current quarter, we ended up with NOK 111 billion in contracted capital and achieved a 12-month underlying mobile RoaCE of 27%, above our target. 20% — 10% during the cycle.
Our balance sheet is in a false state, with key adjusted net debt to EBITDA of 0. 2, well below our target of having less than two during the cycle and this is also one of the reasons we can recommend an ordinary distribution. by 2021.
Since the beginning of the year, we have generated a loose cash flow of NOK 6200 million, but also a billed amount of NOK 8100 million, which we will now start charging downwards during the year. In the first part of 2022, NOK innovations were achieved 400 million, for a total of NOK 6. 7 billion in our improvement program.
And on that note, I need to thank you all for the presentation and open the consultation to questions.
Haugetraa Line
Thank you, Pal. Then we will start the Q
Operator, then we are in a position to answer questions. Thank you.
Q&A session
Operator
[Operator Instructions] The first comes from THE LIAM Fitzpatrick LINE of DB. Continue.
Liam Fitzpatrick
Hi, Pablo. Thanks for the presentation. And two or 3 questions. First about Rein, you are now more likely to go the personal route, are you correct? And the strategy has been to keep that off the balance sheet and raise outside capital, so how confident are you about raising capital in the middle of the moment, whether through public or personal channels? This is the first question. Secondly, in the strength division, I know there are a lot of moving parts here, but I was just looking to give some areas a little bit of color. If the position holds in Q3 in terms of small negative money sales, will the effects be stronger, given the magnitude of the regional variations? And the comment you made about the fourth quarter rate of increase is just based on general seasonal patterns where higher precipitation is expected? And the last question, if I’m just referring to shareholder returns, it’s a very transparent message to them. If we take a look at February, in terms of your policy, how do you expect the market to think about that net debt target of NOK 25 billion? Will this be a point that you will prepare for in terms of the amount of dividends you will claim next year? Thanks.
Pal Kildemo
Thank you, Liam. Three big applicable questions. If we start with the energy side, I would possibly not speculate on the probability of one or the other. Of course, you are as superior as we are in this market and there is more activity in the personal capital markets than lately. in the IPO market. And we’ve also noticed that renewable energy companies raise capital in private equity markets after a value level.
So we take a look at several options and also take into account that there is a difference between those two markets and we don’t know if and when the IPO market will reopen. I guess when he communicates with the bankers, he gets something from September to February. Therefore, it is prudent to take a look at the other paths of choice, as we also briefly discussed above.
As far as the electric power department is concerned, it is difficult to give a clear answer as to whether the differences in value across the zone will compensate for the negative effects of the short position if we are located there. That said, if value spreads remain where they were so far in the quarter, it contributes a lot compared to what we’ve noticed in this quarter. But Hydro Rein NO2 also has a tendency to correlate with the amount produced. So, it also has a kind of balancing effect that has a tendency to eat at each other a little bit. So we’re going to have to see as we move into the third quarter. But there are pros and cons, and the pros are very vital and let’s see how big the call is for it has become.
And when you take a look at the fourth quarter, yes, we expect overall seasonal trends. And as a producer of electrical energy, it produces according to the hydrological profile it has in the year, but it also has a certain ability to produce based on value signals. , as values rise and fall. So, in periods with an excessive difference between the low value and the maximum value between the summer quarter and the winter quarter, all other things being equal, I would see: I would try to pay to produce more in the fourth quarter than in a quarter where the difference is not so great.
Another detail that can have an effect in the fourth quarter is, of course, the zone: the value zones distribute the differences, because this is a scenario in which the South deserves to be much stricter than the North.
We also want to be completely transparent about the fact that we are now at a point where Statnett, the shipping operator, has been hydrological deterioration to highlight. It is still at a low threat point. But if we don’t have widespread rainfall in the summer, this scenario may become a little more tense.
When it comes to capital structure, we aim to be transparent about what to expect from the cycle and, as it resonates correctly, the distribution we are making now is based on 2021. Therefore, we do not think about the profits made in 2022, when what the existing distribution suggests. So, at the end of 2022, we have our end-of-division policies, which I said, minimum or maximum of NOK 25 billion [ph] and 50% of net income.
And if that doesn’t get us towards the target adjusted net debt level, when you take into account the planned investments and also the market vision, it also deserves to expect a distribution in the most sensitive part of that to get closer to that. goal.
So, it’s an attempt to provide a little more transparency and understanding of how we think about it. It takes the year’s profits, planned investments, market prospects and balance towards those NOK 25 billion.
Liam Fitzpatrick
It is ok. Heard. Thank you.
Operator
The next one comes from Morgan Stanley’s Ioannis Masvoulas line. Continue.
Ioannis Masvoulas
Hello. Thank you very much for the presentation. And my first query, just to, I guess, answer Liam’s query on capital allocation and capital design policy. So, simplistically, this recommended net figure of NOK 25000000000, in today’s terms, how does that translate into what he has announced? This is therefore approximately NOK 4. 6 billion adjusted for net debt at the end of the current quarter, less the additional NOK 5 billion yield. So are you now good at NOK 10 billion giving you a NOK 15 billion cushion? Is this the way to think about it? The moment consults power considerations. So can you just — if you can clarify, what were the advantages gained from arbitrage in the second quarter and the negative effect on the cash position that it had? And how do you feel about your overall power position here because it looks like we’re getting into a phase where you might have more structural shorts going forward it’s probably going to be Q3 now Q3 2022 where you’re at a negative position? So are you thinking of adding PPAs to manage this scenario in the medium term or do you think it’s more of a one-off scenario and deserves to be in a smart position based on the existing power mix today? And finally, in the Alunorte fuel transfer project, we saw that the LNG market looked potentially much tighter in the coming years and now there is talk of transferring fuel oil to LNG. What is the effect of the existing situation on your idea process and if you are looking to maintain, maintain some flexibility in the type of fuel that you are going to use in Alunorte depending on the LNG situation? Thanks.
Pal Kildemo
Merci. Et if we start with capital design first, then think about it, is that the distribution we’re proposing now is similar to our 2021 earnings. So, in 2021, we ended the year with net debt of around NOk 7 billion. And then we charged the dividends we paid for 2021, which was around NOK 11 billion. And then we load up the NOK five billion that we’ve proposed today. And that brings it to an adjusted net debt level, I guess, of around NOK 23 billion, which is just under NOK 25 billion.
And as we said, at the most sensible point of the cycle, we need to be a little below NOK 25 billion for and. . . have a reserve for when you potentially move to the lower parts of the cycle. So there you have it, what we’ve done now is pretty much adjust the end-of-division bills for 2021 to be in line with our new capital design ambitions. And then, as we move into 2022, we’ll do this exercise at the end of the year. plans to introduce quarterly or semi-annual distributions in the future. This is only to adjust the balance according to our new policy taking into account the 2021 revenue.
When we moved on to energy, the value zone difference between quarters was NOK 1511, which gave an effect of NOK 1200 million. So, a little more than -440 million NOK more than we had in the last quarter and also a little bit more than what your natural sensitivities would be about the adjustments in the other NO2, NO3 values would have been implicit and that’s because the position we have in the other value zones adjusts throughout the year. Therefore, we have slightly lower long positions in the SC1 and SC2 zones, which gave us a greater contribution to the differences of the value zone, not massive compared to what their sensitivities will give, but a few hundred million, I suppose.
And then when we take a look at the third quarter, the differences so far since the beginning of the year with incredibly low electric power costs in the north are about NOK 2300 to NOK 2400. And if you use sensitivity, it’s reaching 80% double what we were in the current quarter. But remember, we are close to a quarter and this can temporarily replace both the South and the North.
A valid query about Alunorte, we have a long-term fuel entrepreneur with a moral detail or with a detail of market exposure and the spreads have grown a lot lately. Therefore, we are still racing to achieve the decarbonisation targets and it is vital to eliminate the potentially misleading values of the diffusion of fuel oil in the sale of the product, whether it is the value of aluminium or the value of aluminium at the end of the day.
There will be a strong demand for greener products and we want to make sure that we will configure them according to the production rate as it evolves in the future. This is how we intend to cope with changes in energy price markets.
Ioannis Masvoulas
Thank you very much for that. So, just to explain the design of the PPA in Norway, do you think it is imaginable to load other contracts. . .
Pal Kildemo
Yes it is.
Ioannis Masvoulas
. . . to make sure it won’t be a short position in the future?
Pal Kildemo
Ouais. Eh well, we are shorter than we have been for some time in energy, because contracts have been deserted and also because we have made structural adjustments over the years and we are comparing whether to take more positions in the market. So I can’t prove that, but I don’t rule it out either.
As you know, there haven’t been many attractive opportunities in the Nordic countries after opposition to wind power increased a bit in Norway. There have been some prospects in Sweden, which we have addressed through Rein, but which they may replace in the future. Therefore, we are comparing and looking for effective energy contracts.
Ioannis Masvoulas
Thank you so much. Thanks again.
Pal Kildemo
Thank you.
Operator
The next comes from the lineage of Amos Fletcher of Barclays. Continue.
flecher masters
Yes. Hey, buddy. Thank you for answering the questions. I only had a few. I guess the first one on your long-term CapEx profile, which I noticed, didn’t update in today’s version, it’s just because of the uncertainty about FX, and maybe, you can talk to us about the exchange rate that’s in the initial forecasts for this year and what do you assume now?
Pal Kildemo
The adjustments we have noticed are purely currency-related and were based on the replacement rate since the beginning of the year, compared to the update we had in our business plan procedure last year, which was quite close to the replacement rate. rate at that time or at least how they evolved until the end of the year. And we are about to begin our procedure of updating long-term assumptions and drawing up business plans. So we will return to the Capital Markets Days for the replacement rates that we will be waiting for and on which we will advise ourselves in the years to come. But like all other things all things equal, you might expect some buildup in longer-term forecasts on the same financial element we are referring to in the quarter of a moment.
flecher masters
It’s bien. Merci. Et and then I just wanted to ask about any physical exposure to herbal fuel in Europe. So, in case of fuel rationing, are there assets within the company that may be at risk?
Pal Kildemo
Well, we are exposed to physical fuel in Europe to. . . in the foundries of our operations, therefore for extruders or extrusion plants, but also for autonomous recyclers in the steel markets. Some of them have the prospective option of switching, for example, to LPG, but this is limited. So if there is a physical shortage of fuel in Europe and rationing is established, then there is the option that we will be affected in the index’s hedging and recycling operations.
flecher masters
It is bien. Merci. Et and then the maximum of us will ask about the acquisition of Alumetal. Is there any antitrust issue raised through the EU and is it there, would you, how would you threaten to close this deal or otherwise?
Pal Kildemo
Yes. No. We have won questions from the Commission, which is why we have also extended the deadline. We have this transaction and we are confident in how we will solve those problems and our view of the markets. So we’re going to answer our questions, and then we’re going to see where that takes us after the summer and third-quarter results.
flecher masters
It is ok. And then just one last question, I just wanted to ask, is there any option or flexibility in the energy sector to decrease the point of contract sales volumes in the southern region of Norway to decrease the threat of having to be a network?customer in the market on a prospective basis and on what is. . .
Pal Kildemo
We have flexibility, limited flexibility there. I’m involved in that the contract sales we have are largely in our own operations and we also sell concessional electric power to the municipalities where we produce, so that portfolio remains constant.
I just want to remind you that yes, having – you can have a short position in the 3rd quarter, it’s not necessarily negative from a total year point of view. The 3rd quarter is the one where you have the lowest prices, also when you look at the year as a total. So, I guess what would worry me most is that the absolute point of production far exceeds what we estimate.
flecher masters
It’s bien. me they gave it Very much thanks. I’m going to live with that.
Pal Kildemo
Thank you Amos.
Operator
The next one comes from the line of Daniel Major of UBS. Continue.
Daniel Mayor
Hello, hello, friend. Yes. Some questions, only about current capital, can you explain what you said about the planned exit at the time of year, all other things being equal, I didn’t understand?
Pal Kildemo
Keep in mind that this provides insight into the current appearance of the market and that all elements of current capital are volatile, with movements of 10% to 15% within a week. But if we take a look at what it is today, we’ve built around NOK 8 billion since the beginning of the year in working capital.
And if you took the market prices, then the full year charged in NOK on market prices, especially on the earnings side, may be around NOK 2. 5 billion. This is solely due to sensitivity and getting it out of the formula can be a bit slower. It used to take 3 to 4 months.
And then we have about NOK 1 to 1500 million stocks of protection and to get CO2 offset. This would result in a full year billed at around NOK 4 billion compared to NOK 8 billion. But maybe it’s a little higher, the costs have gone up a bit since we did the sensitivity and $100 means a lot. But that’s how it looks real.
Daniel Mayor
Very clear. Just one more on current capital, you charged quite a bit of current capital also in 2021. I think of NOK 8 billion, also NOK 8 billion. Do we deserve to assume that this current capital remains stuck and will not be released in 2023?
Pal Kildemo
Ouais. Eh, well, it depends on your value expectations, as you say. What we publish, we plan to publish this year, is based on what we are seeing recently in the market value. And as you know, for part of our cost chain, margins are getting smaller and smaller, for example, in alumina, high raw curtain costs and low alumina values.
If that remains, the release option is limited. If commodity values also start to fall a bit, then we can start consuming more of the bill this year and next. , I discussed in the invoiced inventory, it’s more commonly unknown, because we closed the Aluchemie anodes plant and there we — and at the same time we accumulated the protective stocks because we now import much more from China. Other than that, there’s not much design loaded into stocks, it’s natural value and FX.
Daniel Mayor
I compris. Merci. Et then the next query on the energy sector and I appreciate, it’s a bit of a lottery forecasting short-term gains. But if we look at 2023, 2024, and assume that it no longer has a short position in the types of purchases, we have a structurally higher energy value in Europe and a structurally higher electricity value in southern Europe. Would this lead to a structurally higher value differential and sustainably superior benefits for the Energy business?
Pal Kildemo
Sí. Es – I would be careful to speculate. But first of all, I must make it clear that much of the power worth moving in southern Norway is ultimately due to the dry scenario we have been experiencing for a long time.
But, of course, there is a link between the values in the Nordic countries and the continent, and especially in the drier periods. So, if you have a dry to normalized year or a normalized to rainy year, you might lose a lot of the value differences per domain that we’re seeing lately, but in a normalized to drier year, you might only keep some of them, because in a few hours you’ll set values at continental values, while in a few hours it will set higher values in a region.
We have noticed in the existing quarter that Nordic costs or NO2 costs exceed continental costs, where it has become southwest Norway, which sets the costs and only shows that it is literally the dry scenario that is the main driving force of the massive gaps we are seeing now and also the rainy scenario in northern Norway.
We have a positive water balance there. So I’m patient, we probably have the best titles compared to what we saw before, but a relief compared to what we experienced this year.
Daniel Mayor
bien. Merci. Et Have you won a communication from your largest shareholder about whether they will participate in the purchase?
Pal Kildemo
Well, when we introduce a percentage buyback program, we assume that the largest percentage holder will take their percentage in that program.
Daniel Mayor
Super. Thank you so much.
Operator
The next one comes from the Jatinder Goel line of BNP Paribas Exane. Continue.
Jatinder Goel
Thank you. Good morning, friend. Just a few metallurgical corporations that are embarking on aluminum rolling. You left that company, of course, for many other reasons. And is this something Norsk Hydro can see in the future, organically or inorganically or anything else it would like to offer given how positive those corporations seem, putting more than $2 billion into new projects online?
Pal Kildemo
Thank you for your question, Jatinder. Je am: we take the news from the segment and of course it is attractive to read it. But from his point of view, I don’t have an intelligent concept of thought lines. Of course, those are attractive markets and, of course, in automotive and we expect it to stay strong, but that doesn’t replace our opinion on whether to enter the rolling area or exit and now we’re focusing on the other key business regions.
Jatinder Goel
Excellent. Thank you so much.
Operator
Lately there are no emails in the queue. [Operator Instructions] And the next one comes from Morgan Stanley’s Ioannis Masvoulas line. Continue.
Ioannis Masvoulas
Hello. Super. Thank you. Friend, just a little follow-up for me on the premiums made. What do we expect for the one time, assuming everything is restored to existing market prices?
Pal Kildemo
Yes. That’s a smart question. And we, the fact is that premiums are now quoted in wide ranges. If you look at the extrusion ingot billet premium, for example, it’s between $200 and $300. So to say what might be difficult, as you can see, we’re expecting to be between $800 and $815 in the third quarter and we deserve to expect that to happen a little bit in the fourth quarter with the market down. But they haven’t gone down much. So we’re talking about the degrees of $700 or maybe over $600 as we see now.
Ioannis Masvoulas
Super. Thank you so much.
Pal Kildemo
Thank you.
Operator
The next one comes from DB’s Liam Fitzpatrick line. Continue.
Liam Fitzpatrick
Hey, buddy. Two follow-up questions, one about aluminum metal prices and sorry if I missed that, but I think it’s guiding them into the third quarter, because of alumina, obviously, now we don’t see the prices. of alumina in terms of non-alumina prices in the third quarter, are they starting to peak and/or is there still some kind of inflationary stress in the third quarter compared to the second quarter?And then, just in the purchase, the long-term plan is that the plan is essentially to have some kind of uninterrupted buyback that can continue that just a kind of NOK 2 billion that you launched today?Thank you.
Pal Kildemo
Ouais. Je I think that if we start with the question of the moment, first, we think that when introducing a buyback program, it makes sense to do it for an era of time. However, as discussed above, everything will have to be balanced in the environment in which we grew up. So, if you go back to a scenario where you look back at the dividend terrain, it could be a bit more complicated than a more consensual scenario in the current market. So, there are no guarantees, but it is an ambition when we put in place such a program.
When you take a look at the aluminium metal and the forecast for the third quarter, then, yes, we have noticed carbon prices flattening or emerging prices flattening, but we expect around a hundred million NOK also driven mainly through carbon to accumulate in the third quarter.
Liam Fitzpatrick
It is ok. Thank you.
Operator
There are no questions in the queue. So I will give the reminder to your host.
Haugetraa Line
You are bien. Merci. Et, thank you for joining us and feel free to contact us in Investor Relations if you have any additional questions. And we wish you all a beautiful summer. Thank you.
Pal Kildemo
Thank you.
Operator
Thank you for today’s call. Now you can disconnect your lines.