Norsk Hydro ASA (OTCQX:NHYDY) Q2 2022 Earnings Conference Call July 22, 2022 2:30 AM ET
Company Participants
Line Haugetraa – Head, 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
Hello. And welcome to the Hydro Q2 2022 Presentation. My name is Jack, and I will be your coordinator for today’s event. For the duration of the call, your lines will be on listen-only. However, there will be the opportunity to ask questions. [Operator Instructions]
I will now hand over to your host, Line Haugetraa, to begin today’s call. Thank you.
Line Haugetraa
Thank you and good morning from us. And welcome to our Q2 2022 presentation and conference call. We will start off with a presentation by our CFO, Pal Kildemo, followed by a Q&A session. Note that you will need to be dialed into the conference call in order to ask questions at the end.
With that, I turn the microphone over to you, Pal.
Pal Kildemo
Thank you, Line. Good morning and welcome from me as well. Whether you’re still at work or you’re dialing in from your summer holidays, I look forward to sharing our results with you today. And I will jump straight into the highlights.
For Q2, we report a record EBITDA of NOK11.6 billion, while free cash flow came in at NOK4.4 billion, still impacted by building net operating capital on higher prices in NOK in the quarter.
The results are impacted by tight markets in the second quarter, especially in Aluminium Metal, Recycling, Extrusions and Energy. And once again we experienced the record results in Extrusions and Aluminium Metal, and for the company as a whole.
However, we have now seen the alumina and aluminium markets coming down from the highest levels on weaker demand and large uncertainty, while energy markets on the other side remain extremely strong, both in Scope but even more so towards the end of the year for the winter quarters.
In these volatile markets, we continue to address challenges and mitigate the risks, while also continuing to position the company according to the 2025 strategy, seizing opportunities to both strengthen our position in low carbon aluminium, while also maturing and growing in new energy in the market, which is becoming increasingly short on renewable energy.
In addition, our reports to ensure robustness across the value chain continues at full pace by focusing on reducing costs and improving operational excellence. Our 2025 improvement program is so far in 2022, progressing in line with the ambition to deliver NOK7 billion in improvements by the end of the year.
Sales of greener product for the second quarter of 2022 are 89% higher year-over-year and we are also moving forward on several existing, as well as new recycling projects this quarter. In addition, we have made significant progress on both the Rein project portfolio in Brazil, but subsequently also on Alunorte and Hydro decarbonisation part.
Finally, I’m happy to report that we have concluded or completed an update of our financial priorities, targeting a capital structure of around NOK25 billion in adjusted net debt over the cycle.
Based on our 2021 balance sheet, this results in the Board’s proposal to distribute an additional NOK5 billion for 2021, split between dividends and share buybacks, but conditional upon an extraordinary general meeting appropriately.
Then, let’s move to slide three. Since the Russian invasion of Ukraine, we see a new reality and changes are happening faster than before. The war has led to human sufferings and refugees in Europe as severe food crisis developing rapidly with consequences. And in addition to the 2020 and 2021 COVID pandemic, the energy crunch has led to record high energy price levels.
These changes are impacting global markets, not only individuals or single nations, and inflation is increasing in several countries fueled by high energy prices and tight labor markets, and there are growing concerns that rising inflation might lead to a recession.
U.S. inflation is driven by a strong economy with a peak expected by several market participants in the following month, but also here, increases in the price of energy has been become more significant over the last month.
Given us geographical exposure and dependence on Russian energy, the Euro zone is especially affected by the consequences arising from the war and soaring energy prices. Inflation rates have continued to surprise to the upside and pressure remains broad based. The elevated inflation rates are likely to sustain in the near-term due to effects from the war on commodity prices, including energy and agriculture.
And the consequences from the war is also visible different across regions when it comes to GDP growth. We also hear Europe being hit the hardest, with China and U.S. holding up a bit better. We have also seen the most abrupt slowdown in manufacturing PMI since the start of COVID for the U.S. and the Eurozone.
On the chart to the right here, we see that global GDP forecasts have been dragged down as many analysts view the economic environment to be more fragile driven by the elements just mentioned. So from the record results we have experienced in the second quarter, we now see more uncertainty going forward.
Move to slide four. The uncertainty that we just mentioned, is also becoming visible in the aluminium markets. Consumption estimates for 2022 have been downwards revised significantly since the last object due to rising risk of recession, supply chain issues and high energy prices. This has mostly affected China and Europe, with the U.S. still being seen as the strongest market. Further cuts to consumption estimates over the next month, especially for Europe could be expected.
The global balance has in line with lower demand numbers and stronger production growth in China being revised towards a more balanced market. There has been some minor additional costs to European production and more could be expected in Europe, given the extremely high energy prices, both in the stock, but also the forward market.
Also outside Europe, in the U.S., we have seen supply side reactions. In light of the high energy prices, there is significant capacity at risk and we see around 900,000 tonnes of European and U.S. capacity curtailed, but estimates that there is around another million tonnes of risk or curtailment.
As a result of these changing market fundamentals, we have also seen a significant decline in the prices for aluminium, although somewhat less, if we measure it in Norwegian kroner. At current market prices, we are estimating that we are pricing at the 65th percentile of the global cost curve, indicating a situation, which is usually not sustainable over time.
Please move to slide five. If we move to Energy, then prices in the European Energy markets remained high through the quarter due to tight gaps and cold markets. Towards the winter focus will be on Europe getting enough gas through both pipelines and as LNG and the risk of rationing of gas is moving higher on the agenda.
We also see this reflected in the Energy gap forward curves, which are at very high levels in the fourth quarter of 2022. We also experienced a tight situation in Southern Norway, which has remained drier than average through the quarter leading to low reservoir levels.
Statnett, the Norwegian transmission system operator has raised their risk level of security of supply to yellow. This means that the security of supply could be at risk in winter if there is significantly less rain than normal and if it’s not possible to import power from Continental Europe. Their view is currently that the risk remains small, but non-negligible.
On the other side, Central and Northern Norway are the exception, with low prices due to above normal precipitation giving high power production exceeding the grid capacity to move power South.
Let then move to slide six. In volatile markets, it is important to manage risk and opportunities in the short-term, while also maintaining the course for the long-term. Without 2025 strategy, we continue to strengthen our position in low carbon aluminium, while also maturing and delivering growth in new energy, two pillars that we believe are robust in those scenarios.
In addition to the examples I will go through later in the presentation, we have also delivered many other initiatives to strengthen our position in low carbon aluminium. Firstly, our sales of greener products are up 89% year-on-year and we will continue to grow here. So despite the high prices through the quarter, our customers continue to be climate focused when purchasing aluminium and they’re also willing to pay a premium for.
Recently we started construction to expand our recycling plant in Rackwitz, Germany, where post-consumer scrap is a major raw material for the 25,000 tonnes of increased HyForge capacity for the automotive industry. At Årdal in Norway we also decided to upgrade and restart the primary foundry alloy casthouse to increase the capacity for the recycling of post-consumer scrap by 25,000 tonnes per year. Both of these investments support our ambition to double recycling for post-consumer scrap by 2025.
A significant step in our recycling ambitions could be delivered by a successful acquisition of the Polish recycler, Alumetal. Following the launch of a tender offer for 100% of the shares of the company in the start of Q2, we announced in July that we will extend the subscription period to October 10. 2022, in order to provide additional information requested by the European Commission.
In Extrusions, we made an investment decision of NOK300 million for a new automotive press in Tønder, Denmark, serving the European automotive and electrical vehicle market based on recycled aluminium. And we are also aiming to grow sales of greener aluminium in the U.S., where we recently certified our first plant Hydro Commerce to produce Hydro CIRCAL.
Within the new energy area, we will get back to renewable, but within factories, we were pleased to start commercial recycling operation at Europe’s largest electrical vehicle battery recycling firm in Fredrikstad, Norway. Following this, Hydrovolt is now exploring an expansion of recycling capacity within Europe with a long-term target to recycle 70,000 tonnes of battery packs by 2025 and 300,000 tonnes of battery packs by 2030.
Let’s move to slide seven, please. In order to reduce our emissions, but also capitalize on the value of who is expected for producers of the lowest carbon aluminium, it is important to make progress across the value chain. Last quarter we talked about 100% post-consumer scrap recycling and how to remove the carbon from the aluminium electrolysis process with carbon capture and also our own carbon free electrolysis technology, HalZero.
This quarter, I would like to share several important developments for decarbonizing Alunorte initiatives, which in addition are important for the development of our renewable energy business, Hydro Rein.
Today, alumina represents about 1.4 kilos of CO2 in a kilo of aluminium. As you can see from the chart to the left, we have a long-term target to decarbonize the alumina production, which will be done in several steps.
Firstly, we are progressing according to plan on the fuel switch project to replace oil with liquid natural gas. We made the build decision for this project in December last year and the project is expected to be in operation in 2023. On the picture in the middle, you can see the structures of the natural gas holders at Alunorte.
Secondly, we will install three electrical boilers using renewable energy to replace fossil fuels. The first boiler is already operational and the second and third boilers are expected to be operational in 2024.
And finally, the final carbons will be taken out through electrifying the remaining boilers and to replacing natural gas with hydrogen.
Hydro Rein announced two major renewable projects in Brazil in the last period, the 586 megawatts combined wind and solar power project, Feijao and the 531 megawatt solar project, Mendubim, ensuring sufficient substance for the capital array in Hydro Rein.
Hydro’s Bauxite & Alumina assets in Brazil will be the main off taker for both projects, securing green energy for both the plant operations in Alunorte and Paragominas, as well as the three electrical boilers. The final investment decision for Mendubim was recently made, whereas for Feijao, it’s expected to be made in the fourth quarter of 2022.
Let’s then move to slide eight. A central pillar in our entire 2025 strategy is the financial framework for lifting returns and cash flow. This includes clear principles for capital allocation and now also clear targets around capital structure through the site. We continue our commitment to an investment grade credit rating and aim to keep adjusted net debt less than twice adjusted EBITDA through the cycle.
Following a review of our capital structure and targets through the cycle, we have supplemented our financial priorities with some extra guidance on capital structure. We aim to have adjusted net debt of around NOk25 billion over the cycle, somewhat above in cycle lows and somewhat below in cycle high.
We aim to keep consolidated debt relatively stable, whereas required liquidity to cover net operating capital and other fluctuations will fluctuate with the cycle, requiring more liquidity in cycle highs than in cycle lows. And the above should also still maintain our flexibility to act countercyclical.
Let’s move to slide nine please. As a result of our capital structure update and based on our 2021 figure, Hydro’s Board of Directors has proposed an additional shareholder distributions for 2021 to close 2021 in line with our new target and capital structure. This distribution would consist of an additional cash dividend of NOK3 billion, as well as the introduction of a share buyback program of up to NOK2 billion over the next 12 months. Both of these are conditional upon an extraordinary general meeting approval, which we aim to call shortly.
Let’s then move to slide 10. In line with our new targeted capital structure, which includes keeping the consolidated debt relatively stable going forward, our intention is to refinance expiring bonds in the coming years.
As I mentioned at our Capital Markets Day, we have been working to develop a comprehensive sustainable financing framework, which would improve our access to capital, lead to a cost of capital advantage as we deliver on our sustainability ambitions, support transparent reporting and also have a clear link to our sustainability strategy.
We have launched our sustainable financing framework, including a second party opinion by the Center for International Climate Environmental Research, CICERO Shades of Green, verifying the credibility, impact and alignment of the framework with a green and sustainability link bonds and long principles, also including an assessment of the EU taxonomy alignment.
The result is that Hydro’s governance procedures are scored Excellent and the sustainable financing framework is ranked Medium Green, which is the second highest green ranking after Dark Green.
Our two KPIs that we will use in the sustainability linked financing going forward are absolute reductions of Scope 1 and 2 GHG emissions and increased capacity for recycling of aluminium post-consumer scrap.
Let’s then dive into the results in some more detail and let’s move to slide 11. If we start with the quarterly EBITDA bridge, then adjusted EBITDA for the second quarter was NOK11.6 billion, up from NOK11.2 billion in the previous quarter.
On the positive side, we have continued to experience higher all-in metal and alumina prices, resulting in a NOK2.9 billion uplift. The 14% increase in realized LME and 11% increase in premiums positively contributed NOK2.3 billion, while the increase in realized alumina prices contributed another NOK600 million.
We have also have a significant increase of NOK0.8 billion from currency effects and NOK0.5 billion from higher gross downstream margins. Partly offsetting these developments are NOK1.54 billion in higher raw material costs upstream, NOK1600 million increased fixed costs in Aluminium Metal and Extrusion, and NOk1.4 billion in lower energy results driven by the negative spot purchase position that has to be covered at higher prices in Southwest Norway.
Lastly, we have other item eliminations which include the negative development eliminations of around NOk500 million quarter-on-quarter, mainly driven by margin development on internally sourced and produced alumina. We will dive into more details on this when going through each business area.
Please move to slide 12. If we then move to the key financials for the quarter, the year-over-year revenues increased by about 87% to NOK64.8 billion and compared to previous quarter revenues increased by 39%, driven primarily by higher prices.
Adjusted EBITDA came in at NOK11.6 billion, which for the quarter excluded the positive effects of NOK6 billion increasing the reported EBITDA to NOK17.6 billion. Adjusted items for the quarter are largely driven by positive unrealized derivative effects on LME related contracts, which are related to our strategic hedging activity have NOK6.7 billion and negative unrealized derivative effects on power and raw material contracts NOK1 million.
Moving on, we have adjusted depreciation and amortization of around NOK2.1 billion in the quarter, which results in adjusted EBIT of NOK9.5 billion. Financial expenses of NOK1.3 billion for the second quarter includes a net foreign exchange loss of NOK1.1 billion and interest expenses of NOK300 million.
Our tax expense amounted to NOK3 billion or about 21% of income before tax and the tax rate mainly reflects a high proportion of income in Norway. Overall, this provides a reported net income from continuing operations of around — of NOK11.1 billion, up from NOK2.4 billion in the same quarter last year and up from NOK6.4 billion in the first quarter.
Adjusted net income was NOK7.7 billion, compared to NOK3.2 billion last year in Q2 and NOK6.8 billion in the first quarter. This resulted in adjusted earnings per share of NOK3.63, up from NOK1.45 in Q2 last year and NOK3.17 in the first quarter.
Let’s then move to the next slide. If we then move over to the business areas and start with Bauxite & Alumina, then adjusted EBITDA increased from NOK855 million in Q2 2021 to NOK1.117 billion in Q2 2022. This is driven by around 50% higher realized aluminum sales prices.
The sales prices were partly offset by higher raw materials, the largest being caustic, fuel oil and coal, increasing cost by around NOK1.5 billion, with around 50% coming from the fuel oil and coal price movements. This has lifted the implied alumina posts from $244 to $378 per tonne.
We have also experienced the mortgage costs and other smaller one-offs around NOK100 million for the quarter and production at Alunorte was slightly below nameplate capacity at 1.5 million tonnes due to somewhat lower precipitation yield pent-up.
If we compare results to the first quarter of 2022, the adjusted EBITDA slightly decreased by around NOK150 million. Higher alumina prices will largely offset by raw material costs and negative currency effects from the appreciating BRL against the dollar. And compared to the first quarter, Alunorte raw material costs increased by around NOK575 million, which was slightly more than guided on last quarter.
Looking into Q3, Alunorte production is expected to continue at around nameplate capacity. And in addition compared to the second quarter current raw material prices based on market prices, indicates an increase of around NOK100 million to NOK200 million from increases in caustic and coal, partly offset by lower fuel oil prices.
Let’s then move to slide 14. For Aluminium Metals, in this quarter adjusted EBITDA increased from NOK2.8 billion to NOK7 billion compared to Q2 2021. The record results were mainly driven by higher oil and metal prices, and positive currency effects, partly offset by higher raw material and fixed cost.
Following the part curtailment of the Slovalco smelter earlier this year, the results includes around NOK180 million in positive effects from sale of power, which was partly offset by losses on sale of power at Albras, which will decrease as Albras ramps up.
Compared to the first quarter of 2022, adjusted EBITDA for Aluminium Metals increased NOK2.2 billion, driven by higher realized volume prices and positive currency effects. This was partly offset by higher raw material costs, especially aluminum carbon, amounting to around NOK800 million in line with our guidance from last quarter. In addition, we also had higher fixed costs in the quarter.
For Q3, 69% of primary production is priced at around $2,600 per tonne, while 49% of premiums affecting Q3 is booked at around $1,080 per tonne in total. For Q3 realized premium is expected to be in the range of $800 per tonne to $850 per tonne.
Compared to the second quarter, we expect slightly lower raw material prices in Q3 2022 and if we use expectations based on current market prices that’s accounts to around NOK100 million to NOK200 million, mainly driven by lower alumina price, partly offset by carbon [ph]. So in lots of setting the effects we mentioned in both sides of alumina.
Let’s then move to slide 15. This quarter, Metal Markets delivered an adjusted EBITDA of NOK705 million, compared to NOK335 million in Q2 last year. The improvements this quarter is driven by recycling on the back of increased sales premiums, lifting results with NOK423 million.
In addition, positive inventory valuation and currency effects contribute positively with NOK262 million. This is partly offset by NOK350 million in lower contribution from sourcing and trading activities on lower premiums and falling markets. This also includes around NOK130 million in inventory impairments, which will be reversed next quarter as the inventory hedges are realized. Excluding the currency and inventory valuation effects, the results for the quarter was NOK434 million.
When we look into the next quarter, as always, remember that trading results and currency effects in Metal Markets are by nature volatile. However, on the back of that continued high premiums, you should expect continued strong contributions from our recycling operations.
Let’s then move to slide 16. This last quarter, the overall market size for Extrusions in Europe has been upward revised by CRU based on input from the European Aluminium Association. 2021 market is now estimated at 3.8 million tonnes, compared to 3.4 million tonnes reported in the first quarter.
The growth has been stronger than expected in the regular residential building and construction products with low value often delivered through stockist segments. But specialized segments where Hydro Extrusions has a larger presence such as automotive and value-add industrial products have been growing largely as we expected.
The revisions have an impact on growth rates going into 2023. The growth from 2021 to 2022 is now estimated at minus 2 compared to positive 3 before. However, as you can see from the graph here, the total market size is estimated higher, which is good.
Extrusions demand for Europe is estimated to have been at a similar level in Q2 2022 as in Q2 2021, but expected to decrease 5% in Q3, with moderating demands in building and construction and industrial segments, and then gradual improvement in automotive, which is where we have more exposure. Growth rate in North America is expected to remain steady throughout 2022.
In North America, sales is expected to increase 6% year-over-year while in Europe sales are expected to decline 5% Our Extrusions sales for Q3 is expected to be slightly better for Europe, while slightly below for North America partly driven by labor constraints.
Next slide please. Extrusions shipments are stable in Q2 2022, compared to the same quarter last year, when we exclude the divested unit Lichtervelde welded tubes in Europe. Demand has continued to be positive for us in building and construction and industrial segments, while automotive segments are still impacted by supply chain issues, partly exacerbated by the war in Ukraine.
Extrusion Europe shipments are stable compared to the same quarter last year. While Extrusion North America saw the volume increase. Due to the building systems, leverage higher volumes in the building and construction segment, while Extrusion cubing was negatively impacted by the automotive sector.
Please move to slide 18. If we then move to the financial results of Extrusions, then adjusted EBITDA increased from NOK1.8 billion in Q2 2021 to NOK2.4 billion this quarter. As in the previous quarter, the integrated recycling operations contribute positively based on the increased billet premiums.
In addition to the recycling margins, increased gross margins were largely offset by increased variable and fixed costs, with energy costs amounting to a significant share. Fixed costs also include around NOK200 million extraordinary bonus to all employees following the strong contributions through the two years COVID period.
Relative to Q1 2022, the adjusted EBITDA was largely stable, with higher results from the recycler and higher gross margins, partly offset by lower volumes and higher fixed and variable costs
Looking into the third quarter, we expect lower volumes compared to the second quarter due to regular summer maintenance in Europe. In the current inflationary environment, we also expect some margin pressure. And in addition, we have seen premiums from some of them, which will impact recycling profitability. And as in last quarter, we would like to stress that the supply chain volatility remain and that we are back to a period with higher market uncertainty in the second half of this year.
Please move to slide 19. The last business area we work is Energy, where results slightly increased from NOK761 million in Q2 last year to NOK824 million this year. Income from record high price area differences of NOK1.2 billion were largely offset by around 30% lower power production, resulting in a 430-gigawatt hour short spot position, which needed to be covered in the market at very high prices in the Energy area.
The gains from the area price differences was driven by the increase in NO2, NO3 price areas spread from NOK1288 in Q1 to NOK1511 in Q2, in addition to a decrease long position in the SC1 and SC2 [ph] areas.
Compared to the previous quarter, the adjusted EBITDA decreased by NOK1.4 billion and this was due to lower volumes partly offset by higher prices and a larger price area difference gains of around NOK440 million.
Looking to the third quarter, the price and volume uncertainty are always large, and production and prices will depend on hydrological conditions in Norway. However, we currently see a continued weak hydrological balance in the South Norwegian areas where we produce and we expect low production in Q3 also, most likely leading to another quarter of negative spot sale.
It is also worth remembering that the quarters of low production now will be followed by a significant increase in production in the fourth quarter and third — first quarter where we expect the highest prices that we see on the current program.
As of yesterday, the quarter-to-date average difference between mid-Norway prices NO3 and Southwest Norway NO2 was at NOK2364 per megawatt hour, compared to NOK1516 on average for the second quarter, implying that earnings from price area differences will continue at the high or even higher level into Q3.
Let’s then move to slide 20. We’re looking at developments in our net cash position. Then based on the starting point of NOK5.1 billion in net cash from Q1, our overall net position decreased by NOK6.8 billion quarter-on-quarter to a NOK1.7 billion net debt position.
This is based on the following. In Q2, we generated NOK11.6 billion in adjusted EBITDA. Net operating capital increased by NOK2 billion, which can be broken down around following; around NOK3.6 billion is related to price and FX effects. This includes both on receivables but also on the value of our raw material inventories, which have increased more than what is offset by payables; around NOK1 billion is driven by Q2 compensation receivables and also higher inventories in Extrusions and this is offset by periodization effects and other minor pluses and minuses of NOK2.4 billion.
If we look at the full year estimates, we expect all as equal the NOK billed to be related to price and currency, with the only sizable non-market related bills being around NOK1 billion to NOK1.5 billion in safety stocks and the receivables on CO2 compensation.
If we use current market prices, the full year price related NOK billed is expected to be around NOK2.5 billion, resulting in around NOK4 billion full year billed compared to around NOK8 billion that we see year-to-date. So this can move with prices as the quarters move forward.
Other operating capital adjustments amounted to negative NOK3.2 billion, driven mainly by NOK1.6 billion in taxes paid and also NOK1.8 billion in reversal of positive unrealized derivative effects, which are included in EBITDA, which will be realized positive cash in the coming quarters.
Net investments were NOK2 billion for the quarter and we will get back to topics in more detail on the next slide. As a result, we generated free cash flow from operations of the positive NOK4.4 billion in Q2. We paid NOK11.1 in dividends, NOK5.4 per share on the 20th of May.
If we then move on to adjusted net debt, we start by adjusting for NOK1.7 billion in collateral for Q2, mainly related to strategic and operational hedging positions, which has decreased by NOK8 billion from last quarter due to decline in LME prices.
The next adjustment of negative NOK4.3 billion reflects among else asset retirement obligations, as well as assets in Hydro captive insurance company that are not available to service future debt.
And we have a net pension asset of NOK1.4 billion, up around NOK400 million from last quarter on this country in Norway and Germany. But this is partly offset by a loss on planned assets in our country. With these adjustments, we end up with an adjusted net debt position of NOK6.3 billion at the end of Q2 down from NOK7.7 billion at the end of Q1.
Let’s then move to slide 21. Our full year guidance for CapEx at our Capital Markets Day was around NOK11 billion for 2022. We ended up spending less than planned in 2021, resulting in an additional carryover of around NOK0.5 billion. This is on top of the NOK1.5 billion rollover from 2021 that was already included in the NOK11 billion communicated at the Capital Markets Day.
But since then, we are experiencing strong inflationary pressures and currency developments, which could impact the year-end figures, and so far, the currency effect amounts to around NOK1 billion primarily driven by the weaker NOK.
These two items lift the expected CapEx estimate for 2022 to around NOK12.5 billion. If we are successful with the Alumetal tender offer, this will come in addition to the NOK12.5 billion and the equity purchase price is estimated to approximately €232 million.
And you also know we have been successful in building substance in Hydro Rein, with several projects now moving forward towards construction and production. As such, we believe we are ready for raising capital in the second half of the year. Given the current slow IPO market, we are also looking into other alternatives to raise capital.
In a scenario where this is not successful for the second half of 2022, this would potentially result in a capital spent for the projects in the pipeline of NOK1 billion to NOK1.5 billion for 2022. As we have progressed through 2022, we have you today spent NOK3.5 billion in CapEx, but as you know, seasonally we tend to spend around 40% in CapEx in the fourth quarter.
Let’s then move to slide 22. I would like just to give a reminder, an update on our strategic hedging, the high volatility in the LME prices continues and during the quarter we have increased the hedge position in 2024 with 150,000 tonnes. In total, we have around 900,000 tonnes of integrated LME hedges for the period 2022 to 2024 at an average price of $2,300 per tonne.
I would also like to remind you that a certain share of raw materials like coal and fuel oil are locked in, which improves the total integrated margin results. As I mentioned several times earlier, I wouldn’t be happy if the hedge position ends up out of the money as we are then benefitting significantly more on the unhedged part. However, securing a part of the portfolio at historically high margins also makes us more robust in a potential downturn.
Let’s then move to slide 23, where we can conclude and summarize the quarter. At the end of Q2, we ended at NOK111 billion of capital employed and delivered an underlying 12-month rolling RoaCE of 27%, well above our target of 20% — 10% over the cycle.
Our balance sheet is in a strong condition, with a key ratio of adjusted net debt-to-EBITDA being at 0.2, well within our goal have less than two over the cycle and this is also one of the reasons we are in a position to suggest an extraordinary distribution for 2021.
Year-to-date, we have delivered free cash flow of NOK6.2 billion, but also a NOK billed of NOK8.1 billion, which we will now start to bill down during the year. In the first half of 2022, improvements of NOK400 million were realized, NOK6.7 billion in total on our improvement program.
And on that note, I would like to thank you all for joining the presentation and open the session up for questions.
Line Haugetraa
Thank you, Pal. We will then start the Q&A. Please note that you will need to dive into the conference call in order to ask questions, it will not be possible to ask questions over the webcast.
Operator, then we are ready for questions. Thank you.
Question-and-Answer Session
Operator
[Operator Instructions] The first question comes from the line of Liam Fitzpatrick from DB. Please go ahead.
Liam Fitzpatrick
Hi, Paul. Thanks for the presentation. And two or three questions. Firstly, on Rein, is it now more likely that you do go the private route, is that you’re sense? And the strategy has always been to keep this off balance sheet and to raise external capital, so how confident are you in raising capital in the second half, whether that be through the public or the private route? That’s the first question. Secondly, on the power division, I know there’s a lot of moving parts here, but I just wanted to give a bit of color on some areas. If the position remains the same in Q3 in terms of having small negative spot sales, will the results be stronger, just given how wide the regional spreads are? And the comment you made on kind of the Q4 uptick is that just based on the normal seasonal patterns where you expect better rainfall? And final question, if I can just on the shareholder returns, it’s very clear message to them. If we’re looking into February, in terms of your policy, how do you want the market to think about that NOK25 billion net debt target? Will that be a level that you will be kind of gearing back up to in terms of how much the dividends that you declare next year? Thank you.
Pal Kildemo
Thank you, Liam. Three large and relevant questions. If we start with the Energy side, I will not speculate on the likelihood of one or the other. Of course, you sit as high to this market as us and that there is more activity in the private capital markets than there currently is in the IPO market. And we’ve also seen renewable energy companies raising capital in the private capital markets after quite an attractive price level.
So and we are looking at several alternatives and also taking into account that there is a difference in these two markets and we are not sure if and when the IPO market will open up again. I guess when speaking to bankers, you get anything from September to February. So we think it’s prudent to look at the several alternative paths, as we’ve also briefly discussed earlier.
When it comes to the power division, it’s difficult to give a clear answer on whether the area price differences will offset the negative effects of the short spot position if we end up there. That being said, if price area spreads remain at where they have been so far in the quarter, that contributes quite a lot compared to what we’ve seen in this quarter. But the Hydro Rein NO2 also tends to correlate with how much is being produced. So you have a type of balancing effect also that tends to eat each other a bit off. So we will have to see as we move through Q3. But there are pluses and minuses, and the pluses is very big and let’s see how big the demand has become.
And when you look into Q4, yes, we expect the normal seasonal patterns. And as a power producer, you typically produce according to the hydrological profile have within the year, but you also have a certain ability to produce according to the price signals, whereas prices higher and lower. So, in periods with the extreme difference between low price and high price between summer and winter quarter, all else equal, you would see — you would aim to try and produce more in Q4 than in a quarter where the difference is not so large.
Another elements which could impact the fourth quarter is, of course, area — price areas spread differences, because the — it’s still a situation where the South is expected to be much tighter than the North.
We also just to be fully transparent that we are at a level now where Statnett, the transmission operator has been the hydrological deterioration to be stressed. It is still at a low risk level. But if we don’t get normal precipitation during the summer, this situation could become a bit more stressed.
When it comes to the capital structure, we aim to be clear on what to expect through the cycle and as you correctly resonate, the distribution we’re making now is based on 2021. So we’re not thinking of the earnings made in 2022, when suggesting the current distribution. So as 2022 finalizes, we have our dividend policies, which I said, minimum of or the high of NOK25 billion [ph] and 50% of net income.
And if that doesn’t bring us towards the targeted adjusted net debt level, when you take into account planned investments and also view on the market, then you should always equally expect a distribution on top of that to bring us closer to that target.
So this is an attempt to give some more transparency and understanding of how we think about that. You should take earnings in the year, planned investments, market outlook and balance towards these NOK25 billion.
Liam Fitzpatrick
Okay. Understood. Thank you.
Operator
The next question comes from the line of Ioannis Masvoulas from Morgan Stanley. Please go ahead.
Ioannis Masvoulas
Good morning. Thanks very much for the presentation. And my first question, just to, I guess, follow-up to Liam’s question around the capital allocation and the capital structure policy. So simplistically, this suggested netted number of NOK25 billion, in today’s terms, how does it translate to what you have announced? So it’s about NOK4.6 billion adjusted to net debt at the end of Q2, less the NOK5 billion of additional returns. So are you now effectively at NOK10 billion giving you a NOk15 billion buffer? Is that how we should think about it? Second question is around Energy. So can you just — if you can clarify, what was the benefit of the arbitrage in Q2 and the negative impact of the spot position that you had? And how are you thinking about your overall Energy position here, because it seems that we’re going into a phase where you could have more structural short positions going forward, it’s going to be probably the third quarter now in Q3 2022, where you are in a negative position. So would you be thinking about adding PPAs in order to manage this situation over the medium-term or do you think that’s more of an one-off situation and you should be in a good position based on the current energy mix today? And lastly, on the Alunorte fuel switch project, we were seeing the LNG market potentially looking a lot tighter over the coming years and you’re talking about now switching from fuel oil to LNG. How is the current situation impacting your thought process and whether you’re looking to keep maintain — to maintain some flexibility around what sort of fuel you’re going to be using at Alunorte depending on the LNG situation? Thank you.
Pal Kildemo
Thank you. And if we start with the capital structure first, then how you should be thinking about it is that the distribution that we propose now is tied to our 2021 earnings. So in 2021, we ended the year with a net debt position of around the NOk7 billion or so. And then we add the dividends that we paid for 2021, which was around NOK11 billion. And then we add the NOK5 billion that we proposed today. And that gets you to an adjusted net debt level, I guess, around the NOK23 billion or so, which is right below the NOK25 billion.
And as we said, in the higher part of the cycle, we want to be a bit below the NOK25 billion to and — to have a buffer for when you potentially move to the lower parts of the cycle. So that’s it, what we’ve done now is more or less than adjusting the dividend payments for 2021 to be in line with our new capital structure ambitions. And then when we move through 2022, we will do that exercise at the end of the year. So we’re not planning to introduce quarterly or half yearly distributions going forward. This is purely to adjust the balance accordance to our new policy given 2021 earnings.
When we move to Energy, the price area difference between the quarters was NOK1511 and that gave an effect of NOK1.2 billion. And so a bit higher than — NOK440 million higher than what we had the last quarter and it also a bit higher than what your pure sensitivities on NO2, NO3 price spreads changes would have been implied and that’s because the position we have in the different price areas changes somewhat during the year. So we have a bit lower long positions in SC1 and SC2 areas, which gave us a bigger contribution on the price area differences, not huge compared to what your sensitivities will give, but some hundreds millions, I guess.
And then when we look into the third quarter, the spreads so far year-to-date with extremely low power prices in the North is around NOK2300 to NOK2400. And if you use the sensitivity, you’re approaching 80% to doubling of what we have been in the second quarter. But remember, we’re quite short into the quarter and this can change quickly both in the South and in the North.
A valid question on Alunorte, we have a long-term gas contractor with ethics element or with an element of market exposure and the spreads has developed quite a bit lately. So we are still working to deliver on the decarbonisation targets and it becomes more and more important to take out potential challenging prices from the fuel oil spread in the sale of the product be that the price of aluminum or the price of aluminium at the end of the day.
We believe that there will be a large demand for greener products and we need to ensure that we price them according to the cost of production as this swings going forward. So that is how we aim to address changes in the Energy price markets.
Ioannis Masvoulas
Thanks very much for that. So just to clarify on the PPA structure in Norway, do you think there is scope to add further contracts…
Pal Kildemo
Yeah.
Ioannis Masvoulas
… to make sure you’re not going to be a short position going forward?
Pal Kildemo
Yeah. Well, we are shorter than we have been in a while in Energy as contracts have been dropping out and also due to the fact that we’ve made some structural changes over the years and we are constantly evaluating whether to take additional positions in the market. So I can’t confirm it, but can’t rule it out either.
As you know, there’s not been a lot of attractive opportunities in the Nordics after the wind power opposition increased a bit in Norway. There have been some potential in Sweden, which we have addressed through Rein, but this may change going forward. So we are evaluating and always on the lookout for effective energy contracts.
Ioannis Masvoulas
Thanks very much. Thanks again.
Pal Kildemo
Thank you.
Operator
The next question comes from the line of Amos Fletcher from Barclays. Please go ahead.
Amos Fletcher
Yeah. Good morning, Pal. Thanks for taking the questions. I had just a couple of them. I suppose the first one was on your longer term CapEx profile, which I noticed, you haven’t updated in today’s release, is that purely due to uncertainty over the FX, and perhaps, you can discuss with us what FX rate you’re assuming in the original guidance for this year and what you’re assuming now?
Pal Kildemo
Yeah. No. The changes that we’ve seen are purely FX related and they’re based on FX year-to-date, compared to the FX that we had in our business plan process last year, which was quite closer to currency rate at that point in time or at least how they developed through the end of the year. And we are about to move into our process of updating long-term assumptions and setting business plans. So we’ll get back at Capital Markets Days as to what currency rates we expect and we will guide on — in the years to come. But as all else equal, you should potentially expect some increase in the longer term guidance on the same currency element that we refer to in the second quarter.
Amos Fletcher
Okay. Thanks. And then I just wanted to ask about any physical exposure to natural gas in Europe. So, in the event, we have rationing of gas, are there any assets within the business that could be at risk?
Pal Kildemo
Well, we are quite exposed to physical gas in Europe to — in the casthouses at our operations, so for the extruders or Extrusions plants, but also for the standalone recyclers in Metals Markets. Some of these have the potential possibility to switch, for example, to LPG, but that is quite limited. So if there is a physical shortage of gas in Europe and the rationing is implemented, then there is a possibility of us being impacted in the index roofing and recycling operations.
Amos Fletcher
Okay. Thanks. And then most of us will ask about the Alumetal acquisition. Are there any sort of antitrust issues being raised by the EU and is any — would you — how would you go the risk of that transaction closing or otherwise?
Pal Kildemo
Yeah. No. We have received questions from the Commission, which is also the reason why we’ve extended the timeline. We are positive to this transaction and we are positive to how we will address these questions and our view on the markets. So we will proceed to answer our questions and then let’s see where that takes us as we come back after the summer and towards our Q3 results.
Amos Fletcher
Okay. And then just final one, I just wanted to ask, is there any possibility or flexibility in the Energy business to reduce the level of contracted sales volumes in the Southern Norway region to reduce the risk of having to be a net buyer in the market on a go-forward basis and over what’s…
Pal Kildemo
No. We have flex — limited flexibility there. I’m afraid that contracted sales that we have are largely to our own operations and we also sell concessioner — concessional power to the municipalities where we produce, so that portfolio remains quite constant.
I just like to remind that, yes, having — you can have a short position in the third quarter, it’s not necessarily negative from a full year perspective. Third quarter is usually when you have the lowest prices also when you look at the year as a whole. So, I guess, what I would be more concerned about is the absolute production level becomes much over and what we estimate.
Amos Fletcher
Okay. Got it. Thank you very much. I will live with that.
Pal Kildemo
Thank you, Amos.
Operator
The next question comes from the line of Daniel Major from UBS. Please go ahead.
Daniel Major
Hi. Hi, Pal. Yeah. Few questions, just on the working capital, can you just clarify what you said around the expected release in the second half of the year, all else equal, I didn’t got that?
Pal Kildemo
Yeah. And please be aware that this is guiding on how the market looks now and all elements of working capital are volatile with 10% to 15% movements happening within the space of a week. But if we look at than how it stands today then basically we have been built around NOK8 billion year-to-date in operating capital.
And if you took market prices, then the full year billed of NOK on market prices, especially on the revenue side could be expected to be around NOK2.5 billion. This is purely sensitivity based and getting this out of the system might be somewhat slower. It used to take three months to four months.
And then we have around NOK1 billion to NOK1.5 billion in safety stocks and receivable on CO2 compensation. So that would result in a full year billed of around NOK4 billion compared to NOK8 billion. But it might be somewhat higher, prices have come a bit up since we made the sensitivity and $100 means that quite a lot. But that’s how it looks actual.
Daniel Major
Very clear. Thanks. Just one more on the working capital, you billed quite a lot of working capital also in 2021. I think around NOK8 billion — also about NOK8 billion. Is it fair to assume given currency moves and potentially structurally higher input costs and aluminium prices, et cetera, that kind of we should be assuming that that working capital stays kind of locked up and doesn’t get released in 2023?
Pal Kildemo
Yeah. Well, it depends on your price expectations, as you say. What we are releasing — expecting to release during this year is based on what we see the market price being now. And as you know, for part of our value chain, the margins are becoming quite squeezed now, for example, in alumina, high raw material costs and low alumina price.
If that remains, then the possibility of release is quite limited. If raw material prices also starts falling a bit, then we can start eating up more of the billed this year and next year. So then if not apart from the NOK1 billion to NOK1.5 billion, I mentioned in inventory billed, that is mainly unknown, due to the fact that we close the Aluchemie anode plant and there we — and at the same time increase safety stocks as we’re importing much more from China now. Apart from that, it’s not a lot of structural billed in inventories, it’s pure price and FX.
Daniel Major
Got it. Thanks. And then next question on the Energy business and appreciate, it’s a bit of a lottery forecasting the earnings in the near-term. But if we look in 2023, 2024, and assume that you no longer have a short position in sort of purchases, but we have a structurally higher energy price in Europe and then therefore a structurally higher Southern European power price. Would that drive a structurally higher kind of pricing spread and therefore sustainably higher earnings for the Energy business, is what we should be thinking about in a scenario of higher for longer power in Europe?
Pal Kildemo
Yeah. It’s — I’d be careful to speculate. But I just firstly want to be clear that a large part of the energy price movement within the South of Norway now is given to the dry situation we have in a very long time.
But, of course, there is the link between prices in the Nordics and the Continent and especially in drier periods. So if you have a dry to normalized year or under a normalized year to wet year, you could lose a fair share of the area price differences that we see now, but in a normalized to drier year, you could keep some of those, because in some hours, you will be pricing on Continental prices, whereas in some hours, you will be pricing on a region higher prices.
We actually saw in the current quarter Nordic prices or NO2 prices going above the Continental prices, where it became Southwest Norway, which was the price setter and that just goes to show the fact that it’s really the dry situation that is the main driver of the huge spreads we see now and also the wet situation in the North of Norway.
We have a positive hydrological balance there. So I’m normally patient, we probably have result in elevated levels compared to what we’ve seen earlier, but a reduction from what we’ve experienced this year.
Daniel Major
Okay. Thanks. And last very quick one. Have you had communication from your larger shareholder whether they’ll take part in the buyback?
Pal Kildemo
Well, when we introduce a share buyback program, it is on the assumption that the largest shareholder will take their share in that program.
Daniel Major
Great. Thanks a lot.
Operator
The next question comes from the line of Jatinder Goel from BNP Paribas Exane. Please go ahead.
Jatinder Goel
Thanks. Very good morning, Pal. Just a question on steel companies getting into aluminium rolling. You exited that business, obviously, for very different reasons. But anything you can comment on the U.S. market? And will that be something which Norsk Hydro can look into on a forward basis, either organically or inorganically or anything you would like to offer given how bullish those companies are sounding, putting more than $2 billion of new project online?
Pal Kildemo
Thank you for your question, Jatinder. I am — we pick up the segment news, and of course, it’s interesting to read. But from their perspective, I don’t have good insight into the lines of thinking. Of course, it’s interesting markets, and of course, into automotive and we’re expecting that to stay strong, but it’s not doing anything to our view on whether to enter the rolling space or so that we have exited and we’re focusing on the other key business areas now.
Jatinder Goel
Excellent. Thank you so much.
Operator
There are currently no questions in the queue. [Operator Instructions] And the next question comes from the line of Ioannis Masvoulas from Morgan Stanley. Please go ahead.
Ioannis Masvoulas
Hi. Great. Thank you. Pal, just a quick follow-up for me on realized premiums. What should we expect on a spot basis to be realized, assuming everything resets to current market pricing?
Pal Kildemo
Yeah. It’s a good question. And we — the thing is that premium are trading in quite wide ranges now. If you look at the Extrusion ingot billet premium, for example, then it’s $200 to $300 range or so. So saying what it could be challenging, as you see we expect to be between $800 and $815 in the third quarter and we should expect that to come somewhat of in the fourth quarter with market coming down. But they haven’t moved significantly down. So we are talking towards the $700 or maybe more than $600 levels as we see it now.
Ioannis Masvoulas
Great. Thanks very much.
Pal Kildemo
Thanks.
Operator
The next question comes from the line of Liam Fitzpatrick from DB. Please go ahead.
Liam Fitzpatrick
Hi, Pal. Two follow-up questions, one just on the Aluminium Metal costs and apologies if I missed this, but I think you’re guiding them down into Q3, because of alumina, obviously, we don’t now see alumina costs in terms of the non-alumina costs into Q3, are they starting to peak and/or is that stuff still a kind of inflationary pressure into Q3 versus Q2? And then just on the buyback, is the plan going forward that this is going to the plan is basically to have a kind of rolling ongoing buyback that you can continue rather than just a one-off kind of NOK2 billion that you’ve been out today? Thank you.
Pal Kildemo
Yeah. I think if we start with the second question, first, we believe when introducing a buyback program that it makes sense to do over a period of time. However, as mentioned earlier, it all needs to be balanced within the framework that we have grown up. So if you revert to a situation where you’re looking at the dividend floor again, then it might be a bit more challenging than a more consensus situation in the marketplace today. So, no guarantees, but an ambition when we initiate such a program.
When you look at Aluminium Metal and the outlook into the third quarter, then, yes, we’ve seen the carbon costs flattening somewhat or the fees of increased are flattening somewhat, but we expect them to increase in the third quarter around NOK100 million also driven primarily by carbon.
Liam Fitzpatrick
Okay. Thank you.
Operator
There are no further questions in the queue. So I will hand call back to your host.
Line Haugetraa
Okay. Thank you. And thank you for joining us today and please don’t hesitate to contact us in Investor Relations if you have any further questions. And we wish you all a great summer. Thank you.
Pal Kildemo
Thank you.
Operator
Thank you for joining today’s call. You may now disconnect your lines.
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