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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning, and welcome to Hydro's First Quarter 2023 Presentation and Q&A. So our CEO, Hilde Merete Aasheim, will start off with the presentation; followed by our CFO, Pål Kildemo. After the presentation, we will run a Q&A. [Operator Instructions] But before that, we have a presentation, and I leave the floor to you, Hilde.
Good morning, and welcome from me as well. It's a pleasure to present our first quarter results today, and I will start with the key highlights.
For Q1, we reported an EBITDA of NOK 7.53 billion, while free cash flow came in at NOK 1 billion negative. We reported continued positive trend in the 12 months rolling RoaCE of 18% in Q1, well above our overall profitability goal of 10% over the cycle.
I believe we delivered a robust result despite increasing volatility in the market and weaker demand in some sectors. Aluminum markets are largely balanced and combined with falling raw material prices, this means improving margins. Hydro's position in low carbon and recycled aluminum is enabling us to capture new opportunities in a market expected to outpace the general demand growth for aluminum. And I will revert to some examples of recent developments in Hydro's positioning in this growing market.
Recycling is an important part of our ability to serve the market for greener aluminum and an area where we are making several strategic investments. This week, we relaunched the tender offer for the acquisition of the Polish recycler, Alumetal S.A., after the first offer expired during the European Commissions extended merger renewed, which is still pending.
We also continue our strategic growth in extrusions. The acquisition of Hueck, which was finalized in February following approval from German and Austrian competition authorities. This acquisition strengthened Hydro's foothold in the German and European market and is expected to bring strong operational and commercial synergies.
Finally, yesterday morning, we were pleased to announce that we have signed an agreement with Glencore to further develop our Brazilian alumina refinery, Alunorte, together as partners. And before I continue to report from the first quarter, let's have a closer look at what this transaction entails.
So Glencore will acquire 30% of Alunorte and our 5% ownership of the Brazilian bauxite producer, MRN. Glencore would also acquire an additional 40% of MRN, currently owned by Vale. The 40% stake will be acquired by Hydro from Vale and immediately sold to Glencore on a back-to-back basis.
The strategic rationale behind this transaction is to adjust our long position in bauxite and alumina to match our smelter capacity. Hydro will continue to be long alumina, but now more balanced in relation to the demand for alumina from our aluminum smelter portfolio.
The proceeds from the transaction will be used for strategic growth investments according to our Hydro 2025 strategy, as well as for shareholder distribution. And additional information about this will be provided when we close the transaction.
Alunorte remains a core strategic asset for Hydro and will continue to be a key source of low-carbon alumina supply to the adjacent Albras smelter and the Norwegian primary aluminum smelters. This transaction will have a total enterprise value of USD 1.15 billion, which shall be adjusted for Alunorte's net debt as of June 30, 2023.
After this transaction, Hydro will remain the largest shareholder of Alunorte with 62% ownership. Glencore will own 30%, while the remaining 4 minority shareholders will collectively own 8%. Hydro will, after this transaction, no longer have an ownership position in MRN. However, bauxite from MRN will continue to supply around 1/3 of Alunorte's bauxite needs, while the remaining share is supplied from Hydro's fully owned Paragominas bauxite mine.
Finally, the transaction will have no impact on the physical supply contracts or cost to Hydro aluminum metal. Let me then continue the Q1 report and talk about health and safety, which is our most important priority in Hydro. Our ultimate goal is to have an injury-free environment for our 32,000 employees around the world. I'm happy to see the number of total recordable incidents continuing its steady decline. And we are seeing the same development in terms of high-risk incidents, where the number of incidents is coming down to record lows.
Even though I'm happy for these numbers and the efforts which have been made throughout the organization to create a safer work environment, there is no time to rest when it comes to safety. Our target is 0, and safety requires constant attention every hour and every minute of the day. Let's move to another area where the whole organization has mobilized to deliver results. And then I'm talking about the improvement programs.
And let me start by saying that a safe working environment and stable operation is the fundament for our continuous improvements. You can simply not improve if you are in a firefighting mode. Our business system supports us in having the focus of being in control and capable, supporting stable processes.
Traveling around in the company, I'm impressed about all the initiatives ongoing to continuously look for ways to improve in the areas that we can influence. The improvements come from improved operational parameters at our plants, efficiency improvements through robotization and automation, large procurement savings, and much more. Our ambitious improvement programs and commercial initiatives are expected to deliver on our 2023 targets.
The continuous improvements strengthen the robustness of our portfolio and earnings. And we have an ambition to deliver NOK 0.6 billion in additional improvements in 2023, supporting our overall 2027 target of NOK 11 billion.
For B&A, the majority of improvements come from changing from fuel oil to natural gas at the Alunorte refinery. Unfortunately, the Ukraine conflict has caused an upheaval in the global gas market, which will delay the dry docking of the FSRU that would service Alunorte, the Golar Celsius.
However, the Celsius is now in the shipyard in Singapore, and first gas will be delivered in December this year, around a half year later than originally forecasted, which will stretch our improvement program as this needs to be compensated by other improvements.
On the ground in Barcarena, the service terminal has been completed and both the gas distribution infrastructure and refinery conversion are on schedule and on budget. Let's then take a look at the market development the last quarter and start with the alumina market.
The Platts alumina index increased for the first quarter to current price levels of around USD 355 from an average of USD 317 in the fourth quarter. Prices have been supported by alumina production curtailments in Australia due to a natural gas supply shortage and bauxite mine permitting challenges in Western Australia. In addition, following a period of low refinery margins outside China, the main raw material prices have now come significantly down through the first quarter and are now closer to Chinese price levels, increasing margins for non-Chinese producers, including ourselves.
European thermal coal prices have declined significantly since second half of 2022, following natural gas price trends. The caustic prices have remained resilient over a longer period, but weaker than anticipated demand in China has resulted in more caustic soda being made available, pressuring prices in Asia resulting in imports into Europe, leading to price pressures also in the U.S. market.
Also in the bauxite market, we are seeing significant developments with curtailments in Western Australia and with the Indonesian bauxite export ban to start in June.
Moving on to the aluminum markets. Then we expect these to be largely balanced for 2023. Due to the high energy prices, we have seen continuous curtailments of aluminum production in Europe with 2 more smelters recently announced in curtailments. So far, 1.3 million tonnes of smelter capacity has been curtailed in Europe, which represents more than 50% of total European capacity. And we expect another 500,000 tonnes to be at risk of curtailment.
Even though energy prices have continued to fall, we do not expect any major restart any time soon as power prices remain too high for smelters as well as following LME and product premium pricing. Demand in China has disappointed for a while, as many were putting a lot of hope on the pre-COVID recovery after zero-COVID measures were abolished.
The ongoing hydropower crisis in South China is also leading to primary cuts, here exemplified by water levels at the Three Gorges Dam. As we see it, the water crisis in land is getting worse rather than better. And there has been nearly 2 million tonnes of annualized production cuts in this region.
In the longer term, the consensus in the market is that the aluminum market will be balanced or in deficit towards the end of the decade, but with the risk of water supply if Indonesia is building more capacity than currently anticipated.
On the price side, the 3 months aluminum price remained fairly stable throughout the first quarter of 2023, starting the quarter at USD 2,378 per tonne and ending at USD 2,430 per tonne. Input premium have recovered from their lows at the end of 2022, driven by better-than-expected demand and rather tight supply situation.
U.S. premium have lost some ground recently, but remained elevated. In Europe, billet premiums have stopped their downturn and are increasing again, mostly due to improved demand conditions and tight recycling margins. Let's finish the market section by moving downstream, where our extrusion business saw a 13% decrease in sales volume in Q1 compared to Q1 2022.
European demand for extrusions in the first quarter 2023 is estimated to have decreased 18% compared to the same quarter last year. Demand for residential building and construction and industrial segment have continued to weaken into the first quarter, while growth in automotive demand is gradually improving as supply chain issues are easing.
Some subsegment such as solar is also showing robust growth. CRU estimates that the European demand for extruded products will decrease 14% in the second quarter of 2023 compared to the same quarter last year, due to continued softness in D&C and Industrial segment.
Overall, demand is estimated to decrease by 7% in 2023 compared to 2022. North American extrusion demand is estimated to have decreased 10% during the first quarter of 2023 compared to the same quarter last year. Demand is weakening in the building and construction sector as higher interest rates lead to a softer housing market, while the automotive segment is improving as vehicle production is picking up. CRU estimates that the North American demand for extruded products will decrease 6% in the second quarter of 2023 compared to the same quarter last year, mainly due to development in the P&C and Industrial segment.
Overall, extrusion demand is estimated to decrease by 3% in 2023 compared to 2022. We expect largely similar developments in our extrusion business with a slightly better performance in Europe. When we launched our strategy towards 2025 back in 2020, we defined a set of strategic priorities where we saw that we have the potential to seize opportunities following megatrends in the macro environment. And we have executed on this strategy. And I will, in the next few slides, explain more about how we have strengthened our position in low-carbon aluminum and taken initiatives to grow in Energy Solutions.
Return-seeking capital have primarily been allocated to ensuring a low-cost and carbon position upstream, selective growth in recycling and extrusions, and supporting the development of our new energy growth areas, until we have raised capital for Hydro REIN and Hydro Havrand. The recently announced transaction to sell 30% of Alunorte and 5% in MRN, which support further allocation of capital to our strategic growth areas.
One of the most exciting developments we are seeing in the market today is the pull for increasingly greener aluminum. The automotive industry is a good example of how demand for aluminum has followed the industry's effort to improve fuel efficiency, reduce emissions and ultimately transition towards electric vehicles.
Weight is the key lever for improving the efficiency and performance of vehicles. Looking forward towards 2030, we expect aluminum usage in cars to increase further. In particular, the need for more advanced solutions following the EV transition contributes to accelerating the use of extruded solutions in automotive during the same period. We also see increased attention among many of the world's leading companies when it comes to the climate footprint of the materials they source.
With the advent of Scope 3 reduction targets, we experience customers increasingly requesting materials with lower and lower embedded emissions from mine to metal. And towards 2050, we expect demand for aluminum in Europe to increase by some 5 million tonnes, much driven by increased demand from EVs as well as electric infrastructure following the green transition.
This, combined with increased attention towards Scope 3 emissions, gives rise to some exciting opportunities in the market, which favor those that can deliver low and ultimately 0 carbon materials. Let's have a closer look at the one such example through this video.
[Audio/Video Presentation]
So this week, we signed a letter of intent with Porsche to work together to reduce the carbon footprint of Porsche's fleet by using recycled and low-carbon primary aluminum from Hydro. In addition, we signed a collaboration agreement to explore an innovative value chain concept for battery materials and recycling.
On the battery side, we will cooperate in developing a road map to produce and recycle battery materials in Europe, where one of the key elements will be to investigate how to build efficient closed-loop solutions for Porsche's EV batteries. We are really excited about this partnership because it represents a trend we are seeing in the marketplace, where customers are increasingly looking for long-term partners to drive down emissions and lift sustainability in their value chains.
In December last year, we signed a similar agreement with Mercedes-Benz and have for some time already worked together with Polestar as a material partner as they plan to produce the world's first carbon-neutral car by 2030. Being one of the few fully integrated aluminum companies in the world, Hydro are uniquely positioned to serve these customers, utilizing the full effect of our capabilities in the whole company, going to market as one Hydro and by that, capturing the expected increase in demand and premiums for greener and ultimately, green aluminum.
On that note, our customers, along with society at large, is becoming more and more focused also on the broader sustainability agenda in addition to climate. To succeed going forward, we need not only to provide a credible path to work decarbonization in our operations, but also a credible agenda for contributing positively to the environment and society. And again, being a fully integrated company like Hydro, we have from mine to metal, Hydro is in a position to provide full transparency of what comes embedded in our products, be it CO2, impact on nature, human rights, or other societal impacts. We have everything under one roof. Speaking about CO2, we are making good progress on our technology road map to 0 carbon aluminum production. On the primary side, we are investing in 2 technologies, which we are confident represent a credible path towards reducing and ultimately decarbonizing our primary production.
Carbon capture and storage will enable us to take out the carbon from our existing plants. And last year, we decided to invest and partner with a U.S. technology company, Verdox, which is developing a capture technology suitable for our off gases with low CO2 concentration.
Our first test of the technology were run in Sunndal in 2022 with promising results, leading us to take the next step and commission a test facility for CO2 capture, which will go live this year. In parallel with testing the capture technology, we are also rolling out our capture ready cell technology, which is an enabler for more cost-efficient capture as this technology will increase the CO2 concentration in RF gas.
We believe we are on track to reach our targets of industrial scale pilot volumes based on CCS by 2030. We're also seeing good progress have being made on our proprietary HalZero technology, which we believe will enable us to produce primary aluminum with no CO2 emissions at all from the electrolysis. Lab scale testing has been a success, and we are preparing now to build a test facility at Herøya in Norway, which has also been granted NOK 140 million from the Norwegian government via Enova, with construction expected to start in 2023.
In parallel, we have already started early preparation for a third stage test facility. And in this stage, we plan to increase the scale of volume and optimize the interconnection between the 4 process steps of the HalZero process: the chlorination, the separation, the conversion, and the electrolysis, to further mature the technology towards industrialization.
With this, we should be able to deliver small test volumes of HalZero aluminum by 2025 and industrial scale volumes by 2030. I'm very excited about this technology's initiatives, and I believe HalZero is our most groundbreaking technology initiative to date.
But moving from the longer horizon to the shorter horizon, the third leg of our technology road map towards net zero aluminum is recycling. Increasing the use of post-consumer scrap is the fastest way to ultra-low carbon content, and we are continuing to develop this concept in parallel. We want to grow in recycling, and we have now relaunched the tender offer process for the acquisition of 100% of the shares of the Polish recycler Alumetal S.A. The tender offer was first launched in April 2022, but expired due to the European Commission's extended merger review.
The tender offer process is for 100% of the shares, representing an aggregate equity purchase price of approximately PLN 1.2 billion, which is around EUR 260 million. With the transaction, Hydro will strengthen its recycling position in Europe and also widen its product offering in the low carbon and scrap-based foundry alloy market. If we are successful with the acquisition, we will increase the post-consumer scrap usage with around 150,000 tonnes per year. And by that, exceeding our ambition of doubling the use of post-consumer scrap by 2025.
Speaking about our recycling growth strategy, let's have a look at how we are progressing here. Global aluminum demand is expected to grow by some 2.7% per year towards 2030, with consumption of recycled aluminum expected to outpace primary aluminum with a factor of around 4.
Hydro's strategy for growth in recycling entails adding some 1 million tonnes of new recycling capacity to our portfolio by 2027, making us well positioned in Europe and North America to capture shares of this rapid demand growth. This is both increasing our recycling capacity to bring back clean scrap from our customers, but first and foremost, to increase our use of post-consumer scrap, which amounts to roughly half of this capacity increase.
The increase in recycling capacity is taking place both in extrusions as well as in aluminum metal with a number of projects now ongoing, such as the new greenfield plant in Casopolis in the U.S., as well as the new casthouse in Hungary. In line with our climate target of delivering net zero products, our approved project pipeline will more than double PCS usage towards 2025 and 2027. And likewise, we are well on track to more than double EBITDA uplift by 2027.
Extrusions is an important growth area for Hydro and has delivered strong earnings improvements over the past 8 years from NOK 1.9 billion in adjusted EBITDA in 2014 to NOK 7 billion in 2022, and is well underway now to deliver NOK 8 billion in adjusted EBITDA by 2025. This has been driven by sustainable improvements like portfolio optimization, pricing, productivity gains, and growth in recycled volumes and margin.
And despite current weaker market, margins are continuing to improve, partly driven by favorable currency, but also based on our strong improvement and commercial drive. Several initiatives have contributed and will further contribute to the positive development. Efficiency and cost saving programs, including procurement, automation and technology development. Commercial activities leveraging position to grow in selected segments and improve product mix through value-added activities and customer partnerships.
Then also realization of the sustainability agenda, including CIRCAL and EcoDesign. And the recent Hueck transaction will strengthen further and is expected to bring operational as well as commercial synergies.
Then to the second pillar on Hydro's strategic growth agenda. The past year's energy shock, especially in Europe, following the Russian invasion of Ukraine, have illustrated the critical role renewable energy will play going forward, both in terms of decarbonizing industries and society, but also its importance in lifting security of supply and driving energy independence.
Hydro continues to execute on our strategy to grow the new energy areas, including renewable energy production, battery value chains, and production of green hydrogen. In REIN, 4 projects are under construction, 3 in Brazil and 1 in Sweden. They are progressing well.
In total, the gross capacity is 1.7 gigawatts, and our ownership share in these projects represents almost 1.5 terawatts. Hydro is an active owner in these projects and participates with key competence in project management, HSE, CSR, commercial aspects, financing and procurement, and all projects are on time and on budget. And the plan remains for Hydro REIN to be capital light and the process to raise capital is ongoing.
Hydro's green hydrogen unit, Hydro Havrand's main focus is to mature the world's first pilot of green hydrogen and aluminum, now in Herøya in Norway. Havrand will then continue to focus on decarbonization opportunities within Hydro in our casthouses as well as in our recycling facilities, subject to overall attractive profitability.
And then batteries continue to develop its portfolio. Hydro Volt has successfully continued to ramp up in terms of the nameplate capacity, while Vila Nova has started to construct a pilot plant at Herøya to qualify materials for customers. In addition, Hydro recently announced an investment in a 12% share in E-magy, a developer of silicon anode materials, as well as a 12% stake in Lithium de France, exploring novel lithium extraction in France. These investments will strengthen Hydro's portfolio within sustainable battery materials.
And here, I will end my presentation and hand over the word to our CFO, Pål Kildemo, for the financial update. Please, Pål.
Thank you, Hilde, and a very good morning from my side also. Let me start with a detailed walk-through of our financials for the quarter and the developments from the fourth quarter of 2022.
Adjusted EBITDA for the first quarter of 2023 was NOK 7.5 billion, up NOK 0.3 billion from the fourth quarter in '22. On the positive side, we have NOK 0.4 billion higher results from 7% higher realized alumina prices and 2% higher realized LME prices, partly offset by 13% lower realized premiums.
Extrusions and recycling margins contributed with NOK 0.4 billion positively and NOK 0.6 billion from seasonally higher volumes. Positive currency developments as the NOK further weakened against the dollar contributed with another NOK 0.5 billion.
In addition, we had NOK 0.3 billion in higher CO2 compensation and NOK 0.5 billion in other effects across the portfolio. These are mainly related to stronger results from our sourcing and trading activities in metal markets, partly offset by higher eliminations and negative effects from currency hedging on corporate level.
Variable and fixed cost developments in total for the portfolio are quite stable over the quarter, and the increased positive impact from sales of power from aluminum metal to energy is largely offset by larger losses on sales of this power from energy and into the spot market.
On the negative side, lower upstream volumes reduced results by around NOK 0.7 billion. This is driven by lower production, sales volumes and also inventory valuation effects in aluminum metal, uncurtailed capacity at the Norwegian smelters, and lower bauxite and alumina volumes.
In energy, lower area price differences and lower prices, partly offset by higher production, reduced EBITDA further by NOK 0.3 billion. And finally, we had NOK 1.5 billion lower results from mainly sales of power from Slovalco, which supported our results in the fourth quarter.
If we then move to the key financials for the quarter, the year-over-year revenues increased by around 4% to NOK 48.5 billion for the first quarter, mainly due to large unrealized losses on strategic hedging positions in the first quarter of 2022. Compared to the fourth quarter, the revenues increased by 10% on higher prices and volumes.
For the quarter, there was around NOK 1 billion negative effects adjusted out of EBITDA, which includes mainly negative unrealized effects on LME and raw material contracts, partly offset by a net foreign exchange gain. There were also some smaller rationalization costs in extrusion and transaction-related costs related to the Hueck and also the Alumetal transaction process. This results in our reported EBITDA of NOK 7.5 billion.
Moving on, we had adjusted depreciation and amortization of around NOK 2.2 billion in the quarter, resulting in an adjusted EBIT of NOK 5.4 billion. Financial expenses of NOK 2.2 billion for the first quarter includes NOK 2 billion in net foreign exchange loss, reflecting a weaker NOK against the euro, affecting euro embedded energy derivatives and other liabilities denominated in euro, partly offset by a gain from stronger dollar versus NOK, positively impacting net dollar assets.
Then we have an income tax expense for the quarter amounting to NOK 0.9 billion, around 43% of income before tax. This is impacted by higher power surtax and losses in areas where deferred tax assets are not recognized. Overall, this provides a net income from continuing operations of around NOK 1.1 billion, down from NOK 6.4 billion in the same quarter last year and up from NOK 158 million in the fourth quarter.
Adjusted net income was NOK 3.3 billion compared to NOK 6.8 billion last year in Q1 and NOK 2.4 billion in the fourth quarter. As a result of this, adjusted EPS was NOK 1.70, down from NOK 3.17 in the first quarter last year and NOK 0.99 in the fourth quarter of 2022. Let's then give an overview per business area, and let's start with Bauxite & Alumina.
Adjusted EBITDA for Bauxite & Alumina decreased from NOK 1.3 billion in Q1 '22 to NOK 437 million in Q1 '23, mainly driven by lower realized alumina prices and higher raw material costs, primarily caustic prices. This was partly offset by lower port expenses and some positive currency effects.
If we compare to the fourth quarter of '22, the adjusted EBITDA increased by NOK 300 million, and this is mainly driven by higher realized alumina prices and commercial margins, which lifts results by around NOK 600 million. These effects were partly offset by lower Alumina & Bauxite volumes. And raw material costs were largely stable overall, a bit higher than guided, mainly driven by caustic soda, which has taken a bit longer to come down than what we expected last quarter.
Fixed and other costs have come down more than what we guided for and as a total, come down around NOK 200 million. For the second quarter, Alunorte is expected to remain around nameplate capacity. And based on current market prices, we expect a good releasing cost of around NOK 400 million with a somewhat higher share from energy prices than from caustic prices.
Fixed and other costs are expected to increase around NOK 150 million. If we move on to aluminum metal, then adjusted EBITDA decreased from NOK 4.8 billion last year to NOK 4 billion in Q1 '23. The decline was mainly driven by lower all-in metal prices, higher carbon costs and lower volumes, partly offset by positive contributions from power sales related to curtailed capacity and higher CO2 compensation.
Around 130,000 tonnes of capacity is curtailed at Karmøy And Husnes in the first quarter, and the resulting gain on power sales from aluminum metal to energy was around NOK 1.5 billion. If we compare the results to the fourth quarter in '22, then they decreased from NOK 4.8 billion due to lower all-in aluminum price, lower sales volumes, and stock effects, and lower power sales of around NOK 700 million due to no sales of power from Slovalco, being partly offset by higher power sales from Karmøy And Husnes.
We experienced lower raw material costs of around NOK 400 million, in line with our guiding of around NOK 400 million to NOK 500 million lower. However, the composition has changed as carbon costs are NOK 250 million higher than guided due to higher realized prices compared to what was expected at that time, but this is partly offset by lower alumina and energy costs.
We also experienced lower fixed costs of around NOK 200 million, in the low range of our guidance from last quarter, and this is mainly periodical as our full year estimates for fixed costs remain the same.
For the second quarter, 69% of primary production is priced at USD 2,287 per tonne, and 53% of premiums effect in Q1 are booked at USD 513. And in total, Q1 realized premium is expected to be in the range of USD 425 to USD 475 per metric tonne.
Compared to the first quarter, we expect higher sales volume on stronger markets. At current market prices, we expect somewhat lower raw material costs, mainly driven by carbon and energy, partly offset by higher alumina costs, but in total, lower costs of around NOK 100 million to NOK 200 million.
Fixed costs are expected to remain largely stable, and we expect around NOK 600 million to NOK 700 million lower results from sales of power on lower locked in prices towards energy at NOK 2,100 per megawatt hour in Q2 versus NOK 3,800 per megawatt hour in Q1.
Adjusted EBITDA for metal markets increased in the first quarter from NOK 525 million in Q1 to NOK 669 million due to higher results from sourcing and trading activities, positively supported by a reversal of an inventory impairment and reevaluation reversal effects in line with what we guided last quarter.
Results from recycling are down by NOK 260 million with around 25% of this driven by volume and 75% of this driven by lower margins on falling sales premiums. Excluding the currency and inventory valuation effects, the results for the quarter were NOK 38 million, down from NOK 630 million in Q1 2022.
Looking into the next quarter. As always, remember that trading results and currency effects in metal markets are by nature volatile. However, based on the current market, we expect lower recycling margins of higher sales on somewhat stronger markets than expected. At current prices, we expect full year results in metal markets, excluding currency and inventory effects, to be around NOK 1.3 billion to NOK 1.5 billion, which is NOK 300 million to NOK 500 million higher than what we expected last quarter, which stood at around NOK 1 billion. And this is due to better markets than expected and commercial, which you also know fluctuates quite a bit.
In extrusion, adjusted EBITDA for the first quarter slightly decreased compared to the same quarter last year, driven by 13% lower sales volumes and lower recycling margins. This was partly compensated by higher sales margins, positive currency effects and around NOK 100 million in one-off metal effects on higher American premiums.
Compared to the fourth quarter of 2022, the adjusted EBITDA increased due to seasonally higher sales volumes, stronger sales margins and NOK 300 million in positive metal effects. This was partly offset by lower recycling margins.
Looking into the second quarter and compared to the first quarter, we expect higher gross margin and higher volumes. But these we expect to be more than offset by lower recycling margins and higher variable and fixed costs. In addition to this, we also expect a lower metal effect of around NOK 200 million on the current market premium pricing.
In energy, adjusted EBITDA decreased from NOK 2.2 billion in Q1 '22 to NOK 0.7 billion in Q1 '23. The net loss on an internal fixed price contract entered into in early October with aluminum metal to sell the power from their smelter curtailments in the market accounted for around NOK 800 million.
In addition, lower production and prices contributed negatively in addition to NOK 300 million lower gains on area price differences. In the first quarter, external power sourcing volumes were affected by a disruptive delivery of volume from a long-term power purchase agreement in the northern part of the North Pole area, and the nondelivered volumes were around 0.3 terawatt hours in the quarter.
Compared to the fourth quarter, the majority of factors were similar, except for higher production, partly offsetting some of the negatives. And price area gains were around NOK 100 million lower and loss on internal power contracts was NOK 600 million higher than in the fourth quarter.
Looking into Q2, the price and volume uncertainty is, as always, large, and production and prices will depend on hydrological conditions. At the moment, we see largely balanced hydrological balances in the Nordics, up from around 13 terawatt hours negative at the end of Q4. And in addition, we are expecting large ramp-up of neutral capacity with, among others, the long-awaited Olkiluoto 3 coming online.
Based on the current outlook, we expect lower gains from the NO2, NO3 spread differential. And at current spot prices, the estimated negative effect is around NOK 100 million compared to the current quarter. In addition, we expect a significant decrease in losses on the aluminum metal buyback contract versus first quarter as the average locked in price towards aluminum metal is around NOK 2,100 per megawatt hours for around 394 gigawatt hours. And the current estimated NO2 price for Q1 is around NOK 812. We have a NOK 30 million hedge gain on system price, which in total results in a net loss of around NOK 470 million, NOK 370 million lower than in Q1 based on current estimated NO2 prices. Let's then end with the developments in net cash, which turned to net debt during the quarter.
Based on the starting point of NOK 1.3 billion in net cash in Q4, our overall net position declined by NOK 3 billion quarter-on-quarter to NOK 1.7 billion in net debt based on the following. As we have been through, we generated NOK 7.5 billion in adjusted EBITDA in Q1.
Net operating capital increased by NOK 1.1 billion due to higher sales volumes, increase in receivables, weakened NOK, increase in balance sheet values, and this was partly offset by lower inventories of finished good stocks.
Last quarter, we guided for a NOK release of around NOK 4 billion in 2023, following a NOK 2 billion release in Q4. Unfortunately, that is now estimated at around NOK 2 billion, mainly due to developments in aluminum metal and metal markets. And this includes NOK 1.3 billion, driven by higher changes in currency rates and NOK 0.6 billion in higher volumes than expected across the portfolio.
Other operating cash flow adjustments amounted to NOK 3.6 billion, mainly driven by NOK 1.4 billion in taxes paid, NOK 0.8 billion in performance-related pay, NOK 0.9 billion in accrued CO2 compensation, which impacts long-term receivables when it's more than 1 year until delivery, and NOK 0.5 billion in interest, mark-to-market reversals and others.
Net investments were NOK 3.9 billion for the quarter with NOK 1.5 billion upstream, NOK 1.3 billion in recycling and extrusion, and NOK 0.8 billion in energy and NOK 0.4 billion in others. As a result, we generated free cash flow from operations of negative NOK 1.0 billion in Q1.
We are still sticking to our CapEx guidance for 2023. However, in the current currency environment, the large depreciation of the NOK against the dollar, all else equals, increases the expected CapEx for 2023.
In the quarter, we bought back shares of NOK 0.6 billion, completing our NOK 2 billion share buyback program after the termination of the government's proportional share. And finally, we had a negative NOK 1.4 billion in other, mainly coming from new leases of around NOK 1.3 billion and NOK 0.5 billion in currency effects on debt and cash. We also had NOK 0.4 billion in many other smaller positive FX.
If we move to adjusted net debt, we start by adjusting for the NOK 1.9 billion in collateral included in the net debt for Q1. This is mainly related to strategic and operational hedging positions, and this is NOK 0.7 billion lower than last quarter. And all else equal, you should expect this position to decline in stable markets as all new hedges are being rolled over on uncollateralized mandates.
The next adjustment of negative NOK 4.7 billion reflects, among else, asset retirement obligations as well as assets in Hydro's captive insurance company that are not available to service Hydro debt. This has increased by NOK 0.2 billion from last quarter due to increased provisions for ARO.
And we have a small pension liability of NOK 0.1 billion, which has decreased NOK 0.2 billion from last quarter's assets on remeasurements of pension assets and decrease of deferred tax on pension assets. With these adjustments, we end up with an adjusted net debt position of NOK 8.5 billion at the end of Q1, up NOK 2.5 billion from the end of Q4.
And with that, I would like to give the word back to Hilde to end the presentation.
Thank you, Pål. Let me then finish off with some final reflections. We are in the midst of a more unpredictable and volatile macro environment in the short term. But I believe that Hydro is well positioned in this environment to tackle the short-term challenges and then to capture the long-term exciting opportunities that we see in the market. First of all, we are in a robust position due to continued execution on our improvement programs, long positions in the energy market and the low carbon product offering, which is increasingly valued by the marketplace. And this enables us to continue pursuing the long-term opportunities regardless of the short-term uncertainties.
So to achieve this, we will continue to build on our unique positioning to secure premium pricing for our greener offerings. We will continue to execute on our improvement programs and commercial ambitions with unwavering focus and dedication. And finally, continue to drive down emissions in line with our pathway to net zero, while upholding our commitment to deliver on our portfolio of profitable growth projects, including new energy.
So with that, thank you, and over to you, Martine.
Thank you. So we are now ready for Q&A. [Operator Instructions] So then I think we're ready. I see that we have some names and some questions in the chat already.
So first question is from Daniel Major. Okay. So I see here, Daniel has written down some questions in the Q&A, so I can read them out loud. First one, you continued to build working capital in Q1. Is guidance still NOK 4 billion working capital release for the fiscal year 2023?
Thank you, Daniel. And as I just went through, for the full year, we have reduced our guidance of operating capital release. We have taking it down by NOK 2 billion, and that is mainly driven by aluminum metal and metal markets. So the continued depreciation of the krona against the dollar accounts for majority of this. But as I also mentioned, we have seen somewhat stronger markets. So the increase in sales volumes compared to our original expectations, of course, contributes positively on the EBITDA, but negatively on the operating capital. So our full year estimate for release in 2023, based on market prices, all else equal, is NOK 2 billion now.
Do we have Daniel on the line? I think the second question is from Daniel also. So I read that one as well. So can you give an indication on the timeline for restarting the 130,000 tonnes of smelter capacity in Norway? And do you expect of the restarts in Europe at current forward power prices?
Well, we are obviously following the market very closely. And at this point, we have not taken any decision to restart. As I said, the market is volatile. And so we are evaluating, but no decision has been made. And it's hard to give any indication of timeline. We have to see how the market evolves.
And then with respect to restarts in the continent in general, we still expect the environment to not be positive for bringing back capacity. As you saw from our presentation today, when you take the average smelter margins, given the movements that we've had in LME and premiums, and also the developments on the energy side, margin is still negative for an average smelter.
So we've seen more curtailments take place during the quarter, both in Germany, but also in other European countries. So our expectations now is that there is still 500,000 tonnes of capacity at risk in Europe.
And the next question is from Liam Fitzpatrick. Liam, will you join the call? Or should I ask the question? Just give a second.
Sorry, I'm just checking whether you can hear me?
Yes. Perfect.
Okay. I'm the leader on IT. There you go. Sorry, I had to do this on my iPad. Just on the working capital, Pal. So you gave us some good color there. But I just wanted to recheck that other line. So you gave us the component parts. But I take it, this is just timing and that won't repeat later in the year. And then just to be clear on, I guess, the normal working capital, based on what you're saying, for the remaining quarters, that's a NOK 3 billion release. So can you -- is that going to come through in Q2? Or is it just going to be steady through the year?
Well, as we see it now, we expect parts of it to come through in Q2, a sizable share compared to what we normally expect in Q2. And that is partly periodical, as you say. We have sold a lot more than what we thought in the first quarter. And then you typically see a positive development in the fourth quarter of size. So Q2 and Q4 are my best estimates of the good release quarters, as the market stands today.
Okay. I've got 2 more questions, if that's okay. So on the extrusion, so I heard the guidance clear in terms of, it's going to be lower Q-over-Q. I mean, if you could give a little bit more granularity in terms of the quantum. I mean, will it still be kind of north of USD 2 billion? That would be helpful.
And then just on aluminum metal. That seemed to be the one division that missed expectations, which I think was mainly on costs. You had been guiding to lower costs in Q1. So why didn't that come through? And apologies if I missed it, but what sort of quantum of cost reduction could we see in Q2?
I think if we start with extrusions, then we are benefiting a lot from the stronger margins now. But there is also cost pressure, and especially in the recycler. So remelters, we see that margins are getting more squeezed as the lower premium is gradually flowing through. I'm not seeing a fall on the scrap side there to the same extent.
So how I would think about Q2, as we see the world today, is that the positive effects from margins, et cetera, these will be more than compensated by impacts of fixed and variable costs. And then in addition, you have, for example, NOK 200 million in lower metal effects. So yes, if you take this quarter as a starting point, there is at least the downside by this NOK 200 million, potentially a bit more, but not significantly more as we see the world today.
In aluminum metal, you are right, our developments were not fully as expected, and that was primarily on the carbon side. So even if we were a bit into the quarter, the anodes and other raw materials for anodes are partly priced upon delivery based on price developments in the quarter.
So here, the price became higher than what we had expected. So carbon is the main deviating item. On the other side, this was partly compensated by alumina prices a bit lower, as you have seen this trend down in the market, and also energy prices a bit lower.
Looking into the next quarter, we expect to get the carbon costs more flowing through. So we are probably around NOK 100 million to NOK 200 million lower on the variable costs in Q2 versus Q1 as we see the market today. Fixed cost, we expect to be pretty flat between the periods.
If I could be cheeky and just ask 1 more. Just on REIN. It's, I think, exactly what you told us 3 months ago. Can you just tell us where that process is? I mean, should we be expecting something fairly soon? Or is this just going to be kind of more of a medium-term sort of event?
What I can say on that, Liam, is that we are working on the capital raise. The process is ongoing, and I cannot say anything about the timeline, but that we are committed to have REIN as capital light, and we will not take any new feed investments or decisions when it comes to new projects before we have a finalization of the capital raise for REIN.
So it has taken time, yes. There are reasons for that, particularly in the market. But I can confirm that we are working on the process, and we will have to report when we have something to report.
Thank you, Liam. So next one, Christian Kopfer. Do you want to join with audio? Should I ask the question? Then I ask the question. Just for reference, is it fair to say that your sensitivity scenarios, those communicated at Capital Markets Day, with different EBITDA indications for 2023 and 2027, are still relevant ballpark-wise?
Yes. Ballpark-wise, they are. Of course, there are changes to the composition of the portfolio, which may mature during the year, which would impact that. But the biggest things which impacts the sensitivity is, of course, their starting price on prices.
So if you look at, for example, our LME sensitivity, that was based on the LME price at the time of our Capital Markets Day. And we are very visible in disclosing what that price was. So if you were to use that sensitivity based on, for example, first quarter results, then you would need to make an adjustment for the price changes since that time. And that adjustment is done in our quarterly book that we update every quarter. So high level portfolio composition, correct. To get the exact details on prices and currencies, then I would use our Q1 book as a guidance.
And then some further questions from Daniel. Just a delay to the fuel switch means that Hydro will not realize the guided USD 80 per tonne per quarter cost saving until 2024?
Yes, that is what it means. So although we're with a caveat that today that figure is not USD 80 million. It was USD 80 million at our Capital Markets Day in Q4, where we took it down further. And I think if you use current market prices, this is more to the tune of USD 20 million to USD 30 million per quarter. So the benefit depends on what is the fuel price and the natural gas price at any given point in time.
So if you first take the price adjustment, you should expect around NOK 30 million in positive effect in the rest of this year because you were supposed to ramp up during 2023. But now you move the ramp-up out until the start of 2024. So all else equal, you lose around USD 30 million from the delay. And that is the reason why we say the improvement program is a bit stretched.
And then we have another question from Daniel. You said the NOK 8 billion of proceeds from Alunorte will help fund new energy growth. Should we, therefore, expect additional spend M&A above the NOK 2.5 billion guidance for spending then in 2023? And any changes to your NOK 25 billion net debt target in your modified cash return policy?
Well, Pål, you can answer the net debt question. I could comment on the proceeds. We said yesterday that the proceeds will be distributed in the sense that we will look at how we can allocate capital now to the growth areas that we have early communicated in our strategy for 2025, which is we are very much interested to invest more in recycling, selective growth in extrusion. And then we have the new growth areas in energy.
Having said that, when it comes to REIN and to Havrand, we stick to the capital light. And as I also said on the question from Liam, that we have said that if you are not able to raise capital for REIN, it will be a NOK 2.5 billion CapEx. But we will not go by on that. We will not take any more feed decisions that increase that number before we have a solution to the capital raise. And then you can comment on the net debt.
The net debt target remains, and the thinking of how we operate around this should also remain.
And then we have a question from Amos Fletcher. Will you join with audio? No. Then I read the question. So why has the Alumetal acquisition price increased 15%?
Well, first of all, the Alumetal has done well in their markets. But then also, we see Alumetal as a very interesting acquisition in terms of expanding our product portfolio in terms of recycled aluminum, particularly in the foundry alloy area, and we see how now the market is developing in terms of green premiums. So we see even more prospects in terms of having the opportunity to bring Alumetal into our portfolio. So that is the 2 main reasons why we have increased our offer in terms of hopefully being successful in including Alumetal in our portfolio.
Very good. And then next question is from Ioannis. Will you join with audio? No. Then I read the question. So extrusions, quarter 1 EBITDA margin of 10% was exceptionally strong, especially in the context of weak volume development. Can you talk about the underlying drivers and whether this is sustainable in Q2?
Well, in one of my slides, I talked about the evolution of the margins and the EBITDA development in extrusion. And over the years, the extrusion organization has worked really hard to optimize the portfolio, to make the portfolio more robust, but then also to target specific market segments like automotive, but then now also infrastructure.
And so it's a sum of hard work in terms of improving the whole extrusion systems. We have more concentration on market platforms in terms of leveraging the local plants, but at the same time, working towards targeted customer segments. So we believe that the extrusion portfolio is more robust and then also better positioned to deliver on the NOK 8 billion target that has been set out for 2025.
So next question from Bengt Jonassen. Do you want to join the call with audio?
Yes, I have 2 questions. One is, let's say, I repeat, if there are any loss or gain on power sales from Alumetal, then do you have NOK 800 million in the first quarter. Are there any similar effects in the second quarter?
And then maybe elaborate a little bit on why there seems to be an increased time lag on the carbon cost. It seems that market prices are down, but it seems that there is a longer timeline before you realize them in the same magnitude as maybe the earnings sensitivities suggest.
That's 2 good questions, Bengt, and I can start with the latter one. There is probably a bit longer time lag on the carbon and anode side. As you may recall, when we closed our Aluchemie factory, we also said that we would increase the inventories of anodes somewhat because there was -- we have the supply chain constraints in the world. There is increased risk from a geopolitical side.
So in general, we're running with a bit higher inventories on both black materials and alumina for the time being. That might change going forward, but that's the only structural change that we've undertaken that could impact the lag profile somewhat.
When it comes to the estimated loss on sales of energy in the second quarter, these are around NOK 450 million to NOK 500 million.
And then we have time for 1 last question. So Srivathsan Manoharan, do you want to join with audio? No. Then I read the questions. So I believe 70% of your smelter portfolio is powered by renewable power. There we have, Sri, hello.
Yes, can you hear me?
Yes.
Three quick questions from me. Firstly, a strategic question. I believe 70% of the smelter portfolio is powered by renewable power. So are you considering divesting your stake in any other smelters that do not produce green metal? Or in other words, do you have any noncore assets in your portfolio?
And secondly, are the improvement programs for 2023 on track, given the delays to the Alunorte fuel switch project? And the last question is on adjusted tax rates, which came in at 35% for Q1. So how should we think about taxes for rest of the year?
Thank you. I can start with the first question. Thank you for that. In our portfolio, we have 9 smelters, and 5 of them are in Norway, which is based on renewables. Then we have Qatalum, which is based on gas. And then we have a 20% stake in Alouette in Canada, which is based on renewable. And we have 12.4% stake in Tomago, which is based on coal.
So I would say that the marginal asset or the position we have in Tomago in Australia is the one that is exposed particularly to the high carbon, while Qatalum has gas, which has a carbon footprint of 7 compared to the 4 that we have for the renewables. And here, we're working, together with our partner, Qatar Petroleum, to see if there are opportunities for solar energy going forward in order to reduce the carbon footprint.
When it comes to your second question on the improvement programs, which I said in my presentation, yes, when you have a delay in the Alunorte fuel switch, that, of course, creates a gap in our program. So that makes it stretch. But it's early in the year yet. So we have areas in other business areas that are ahead of the plan. So we still believe that we will be on track at the end of the year. I will not relieve any pressure on the organization on that.
And then when it comes to the tax question, it's a bit special situation we are in when it comes to taxes in the first quarter. As you know, we have a high resource rent tax in the energy portfolio. And the underlying energy results, which are eligible for the resource rent tax, are of course, quite a bit higher than what we deliver in EBITDA, because we have the large losses on the buyback contract from aluminum metal. So this results in a higher effective tax rate than what you would otherwise have expected.
In Q2, you get a bit of the same picture because there we're still having the buyback program contract in place. But all else equal, second quarter results in energy are usually lower on lower prices and lower production. So we should gradually trend more towards our guided rate of 30% towards the year as a whole.
So we need to round it off here. And thank you so much, everyone, for joining us today. And don't hesitate to contact us if you have any questions. So contact the Investor Relations for that. And I wish you all a great day and a great weekend when the time comes. Thank you.