“New” Hydro’s Q3 income lifted by currency gains, EBIT weaker

October 30, 2007


Condensed combined information "new" Hydro

  Third quarter Second quarter Third quarter 01.01-30.09 01.01-30.09 Year
NOK million, except per share data 2007 2007 2006 2007 2006 2006
 
             
Revenue 22,064 25,314 24,044 73,283 75,579 99,172
             
Earnings before financial items and tax (EBIT):            
Aluminium Metal 2,172 2,465 2,365 7,170 6,404 7,302
Aluminium Products (247) 355 (435) 1,423 377 (104)
Energy 242 396 324 926 1,042 1,457
Corporate and other (128) (57) (107) (496) 319 (1,109)
 
Earnings before financial items and tax (EBIT) 2,039 3,159 2,147 9,024 8,141 7,547
 
             
Financial income (expense), net 1,282 575 (136) 2,414 (28) 80
 
Income from continuing operations before tax 3,320 3,734 2,010 11,438 8,113 7,628
             
Income tax expense (699) (1,153) (656) (3,042) (2,596) (1,871)
 
Income from continuing operations 2,621 2,581 1,354 8,396 5,517 5,757
             
Earnings per share from continuing operations 1) 2) 2.10 2.00 0.90 6.60 4.20 4.40
 
             
Weighted average number of outstanding shares (million) 1,223 1,227 1,236 1,225 1,245 1,241
 
             
Financial data:            
 
Investments - NOK million 1,305 854 1,002 3,033 2,672 4,526
Adjusted net interest bearing debt (net cash) 3) 1,994 1,464 - 1,994 - (5,844)
 
             
1) Basic earnings per share are computed using the weighted average number of ordinary shares outstanding. There were no diluting elements.
2) Calulated using Income from continuing operations less net income attributable to minority interests.
3) Net interest-bearing debt adjusted for pension obligation (after tax) and present value of future obligations on operating leases.

 

“New” Hydro reported income from continuing operations of NOK 2,621 million in the third quarter of 2007, up from NOK 2,581 million in the previous quarter and NOK 1,354 million in the same quarter of 2006. Significant currency gains on hedging contracts lifted income from continuing operations.

Operating profits declined in the third quarter by NOK 1,120 million due to lower aluminium prices measured in Norwegian kroner and seasonally lower sales volumes for Hydro’s downstream operations. The decline in operating results was offset by currency gain of NOK 1,199 million, mainly related to currency hedging contracts.

Earnings before financial items and tax (EBIT) for “new” Hydro amounted to NOK 2,039 million in the third quarter, compared with NOK 3,159 million in the second quarter this year and NOK 2,147 million in the third quarter last year.
 
Results for Aluminium Metal, Hydro’s upstream aluminium business, declined compared with a strong result in the previous quarter, mainly due to lower realized prices measured in Norwegian kroner.
 
Aluminium Products, the company’s downstream operations, delivered satisfactory results from its Rolled Products, Extrusion Europe and Building Systems businesses, taking into consideration a seasonal decline in volumes and unrealized effects on operational hedges. Hydro’s Automotive and US Extrusion operations remained in a relatively weak state. Downstream market conditions in Europe remained stable, while the North American market continued to decline.
 
Hydro’s Energy business delivered lower results than the previous strong quarter, mainly because of lower spot power prices. The company’s solar power activities yield promising opportunities. Ascent Solar, in which Hydro holds a 23 percent interest, has started a pilot plant for the production of flexible thin-film solar cell modules.
 
“The third quarter marks the start of Hydro as a leading aluminium company, with a unique energy portfolio as a key competitive advantage,” said Hydro President and CEO Eivind Reiten. “We have been through a period of major change and are now set to grow, with continued focus on operational excellence across our business. We will build on our Norway-based expertise and traditions, with the world as our market. I have great ambitions for Hydro,” Reiten says.

 

Operating statistics
  Third quarter Second quarter % change prior Third quarter % change prior year 01.01-30.09 01.01-30.09 Year
  2007 2007 quarter 2006 2007 2006 2006
 
Primary aluminium production (kmt) 1) 435 435 - 449 (3)% 1,304 1,349 1,799
Realized aluminium price LME (USD/mt) 2,597 2,606 - 2,462 5 % 2,597 2,325 2,352
Rolled products sales volumes to external market (kmt) 253 262 (3)% 249 2 % 780 753 1,000
Extrusion sales volumes to external market (kmt) 123 135 (9)% 129 (5)% 392 403 526
Automotive sales volumes to external market (kmt) 2) 29 30 (5)% 40 (28)% 101 132 190
 
                 
1) Including Hydro's share of Søral volumes (equity accounted investment). 
2) Automotive sale is excluding magnesium. Castings volume included for two months in 2007. 

Aluminium Metal 
 
EBIT for Aluminium Metal amounted to NOK 2,172 million in the third quarter of 2007, declining 12 percent from the strong results in the second quarter of 2007 and 8 percent lower than the third quarter of 2006, mainly due to lower realized prices. Realized aluminium prices in US dollars were relatively unchanged compared with the second quarter of 2007, but declined by 4 percent measured in Norwegian kroner, reducing operating results by about NOK 285 million.
 
Realized aluminium prices in Norwegian kroner declined 1 percent, compared with the third quarter of 2006, reducing operating results by about NOK 80 million.
 
Hydro’s primary aluminium production, including its share of production from part-owned companies, was unchanged compared with the second quarter 2007, amounting to 435,000 tonnes for the quarter. Production was down 3 percent compared with the third quarter of 2006, mainly due to the closure of the Stade smelter in Germany and the Søderberg line in Årdal, Norway.
 
Aluminium Metal’s share of profits in equity-accounted investments amounted to NOK 275 million in the third quarter, compared with NOK 323 million in the second quarter of 2007 and NOK 385 million in the third quarter of 2006.
 
Operation of the 50/50 joint venture, Qatalum, between Hydro and Qatar Petroleum is expected to begin production late in 2009 and will add substantial cost-efficient production capacity. Total investment costs previously estimated at USD 4.8 billion (for the entire joint venture) are expected to increase by about USD 800 million. A significant number of major contracts for the project have now been placed, and the partners, together with these contractors, are in process of finalizing sub-contracts with suppliers. It has become evident that the high activity level in the construction market will result in cost increases for some of these subcontractors compared to previous estimates.
 
In September 2007 Hydro exercised an option under a long-term alumina agreement with Rio Tinto Alcan (formerly Comalco) increasing the volume supplied by Rio Tinto Alcan from 500,000 mt per year to 900,000 mt per year beginning 2011 and for the duration of the contract through 2030.
 
Aluminium Products
 
Aluminium Products incurred a loss before interest and taxes of NOK 247 million in the third quarter of 2007 compared with EBIT of NOK 355 million in the second quarter of 2007 and an operating loss of NOK 435 million in the third quarter of 2006. The results in the third quarter were heavily affected by substantial negative unrealized effects on operational hedges amounting to NOK 440 million in the quarter, compared with negative effects of NOK 31 million in the second quarter of 2007. Underlying operating results 1)  amounting to a positive NOK 288 million for the quarter were 41 percent lower than the second quarter of 2007, mainly due to seasonal declines in volumes. Underlying results improved 7 percent compared to the third quarter of 2006.
 
Demand conditions for rolled products remained healthy, but results for the quarter were affected by seasonally lower sales volumes and lower Euro margins compared to the second quarter of 2007. Continued good margins for Hydro’s European extrusion and building systems operations contributed to results for the quarter, offset by seasonally lower volumes compared to the second quarter. The U.S. extrusion market declined from an already depressed level following the sharp decline experienced during the first half of 2007. Hydro’s US extrusion volumes declined 12 percent in the third quarter compared to the second quarter, mainly driven by the lost volumes from the closure of the Ellenville plant. Operating results for U.S. operations improved slightly compared with the second quarter as a result of cost-reduction initiatives, but remain unsatisfactory.
 
Hydro is approaching the end of an extensive restructuring and divestment process relating to its downstream business, including total workforce reductions of around 3,500 people since the beginning of the year.

Energy
 
EBIT for Hydro’s Energy operations amounted to NOK 242 million in the third quarter of 2007, down NOK 154 million from the second quarter and NOK 82 million lower than the third quarter of 2006. Hydro’s power production in the third quarter was 3.3 TWh, 20 percent higher than the previous quarter and 71 percent higher than the third quarter of 2006. The increased production was more than offset, however, by significantly lower average spot power prices. Nordic spot prices declined by 14 percent compared with the second quarter of 2007 and 68 percent compared with the third quarter of 2006.
 
Business development within solar energy is progressing. Hydro holds a 23 percent ownership interest in US-based Ascent Solar Technologies Inc., which has an advanced position in thin-film technology. Hydro holds a 16 percent interest in Norsun AS, presently constructing an ingot pulling and wafering plant in Årdal, Norway, as well as a 49 percent interest in HyCore ANS, a partnership with Umicore SA of Belgium for development of new cost-efficient solar-grade polysilicon manufacturing processes.
 
 
Financial items
 
Net financial income in the third quarter of 2007 amounted to NOK 1,282 million, including a net foreign currency gain of NOK 1,199 million and a net interest income of NOK 64 million. The currency gain was mainly due to the weakening of the US dollar against the Norwegian kroner over the quarter, resulting in gains on the US dollar foreign currency contracts. The positive net interest income was a result of a strong cash position in excess of debt.
 
Net financial income in the second quarter 2007 amounted to NOK 575 million, including a currency gain due to weakening of the US dollar and a positive net interest income.
 
Third quarter 2006 financial income amounted to a loss of NOK 136 million, mainly due to currency losses resulting from appreciation of the US dollar during the period.
 
Cash exceeded interest bearing debt by NOK 7.6 billion at the end of the third quarter of 2007. Cash reserves of NOK 33.9 billion at the end of the quarter were reduced to NOK 7.8 billion after payment of the demerger debt of NOK 26.2 billion on Oct. 1, 2007 to StatoilHydro.

Tax
 
Income tax expense for “new” Hydro amounted to NOK 3,042 million for the first nine months of 2007, approximately 27 percent of Income from continuing operations before tax. Income tax expense in the third quarter was positively affected by a reduction of statutory tax rates in Germany, reducing recognized deferred taxes by around NOK 250 million.

Outlook 

With the exception of China, key economic indicators signal slower growth in all major regions. European industrial growth is expected to slow somewhat toward the end of the year. Economic outlook for North America remains weak. China continues its rapid development with industrial production currently increasing at a rate of about 16 to 18 percent on a year-on-year basis.
 
A combination of high LME prices and prevailing short-term alumina prices has led to increased smelter capacity utilization in China. Including the start-up of new production capacity, Chinese production is expected to increase by about 30 to 35 percent from 2006 to 2007. China’s apparent consumption of primary aluminium is forecast to increase more than 35 percent in the same period. Primary aluminium production is expected to grow about 4 to 5 percent in the rest of the world in 2007 compared with 2006, while corresponding consumption is expected to grow by about 1 percent.
 
A moderate increase in reported primary aluminium inventories is expected in 2007.
 
 
Casthouse products
Market conditions for extrusion ingot in Europe are expected to remain strong but to soften somewhat. Underlying conditions for sheet ingot and foundry alloys end-use sectors in Europe are expected to remain broadly healthy, however, some softening is expected. The market for casthouse products in the United States is expected to remain relatively weak.
 
In addition to the global aluminium market balance, the behavior of financial investors will continue to be an important factor affecting the development of primary aluminium prices.
 
Rolled products
The European market for rolled products remains healthy, but there are signals of a softening in the market. Consumption is expected to ease in the fourth quarter of 2007 due to seasonal effects. Consumption for 2007 as a whole is expected to decline slightly compared with 2006.
 
Extrusion Products
The overall outlook for the European extrusion market is mixed. Demand from the transportation sector remains strong, while a further slowdown in the European construction markets is expected. The German market remains solid, while the French and Italian markets are softening.
 
The outlook for the US extrusion market remains poor and an overall market decline for 2007 of 15 to 20 percent is expected compared with 2006. Continuing deterioration in the housing market and the recent turmoil in the financial and credit markets have increased uncertainty and the risk for further deteriorating economic developments. Margins are expected to be under increasing pressure the longer the current downturn continues.
 
The outlook for Hydro’s automotive business will be affected by weak US demand.
  
Energy
Operating results for Hydro’s Energy business are expected to be volatile in the coming quarters. Both production capacity and spot prices on the Nordic electricity market are heavily influenced by hydrological conditions. In addition, capacity constraints in the transmission grid expose hydropower producers to regional prices that sometimes differ from the Nordic spot price.
 
Average water reservoir levels in Norway were reported at 94 percent of full capacity at the end of the third quarter, 5 percent higher than the normal level at this time of the year. Driven by expectations of increased CO2-emission costs from January 1, 2008, the currently high forward price for 2008 compared with the remainder of 2007 may give hydropower producers incentives to defer production from the fourth quarter into 2008. 
  
Currency exchange
Hydro’s operating results are heavily influenced by changes in the value of the US dollar against the Norwegian kroner. A declining US dollar will have the effect of reducing EBIT, while an appreciating US dollar will have the opposite effect. As a result, Hydro has entered into foreign exchange forward  contracts in order to mitigate these effects. A decline of the US dollar amounting to NOK 1 will have the effect of reducing income before financial items and tax on an annual basis in the magnitude of NOK 3,200 million and increasing financial income (expense) net in the magnitude of NOK 2,800 million.

These amounts are based on a LME price of USD 2,748 per mt and a US dollar currency rate of NOK 6.16.

Consolidated results of operations - Hydro
 
 
Below is a table presenting Hydro’s actual consolidated results of operations for the third quarter of 2007, including the oil and gas activities that were merged with Statoil on Oct. 1, 2007.

Consolidated financial information Hydro

 

  Third quarter Second quarter Third quarter 01.01-30.09 01.01-30.09 Year
NOK million, except per share data 2007 2007 2006 2007 2006 2006
 
             
Revenue 44,420 46,529 48,565 137,814 148,053 194,436
             
Earnings before financial items and tax (EBIT):            
Oil & Energy 11,041 11,455 12,186 33,663 39,522 48,632
Aluminium Metal 2,172 2,465 2,365 7,170 6,404 7,302
Aluminium Products (247) 355 (435) 1,423 377 (104)
Other activities 164 32 30 224 110 274
Corporate and eliminations (547) (109) (217) (1,054) (81) (1,838)
 
Earnings before financial items and tax (EBIT) 12,584 14,198 13,928 41,426 46,332 54,266
 
             
Financial income (expense), net 2,264 820 (834) 3,825 602 1,356
 
Income from continuing operations before tax 14,847 15,018 13,094 45,251 46,934 55,622
             
Income tax expense (8,722) (9,115) (9,422) (27,767) (32,784) (38,258)
 
Income from continuing operations 6,125 5,903 3,672 17,485 14,150 17,364
Income from discontinued operations 296 157 186 590 423 569
Net income 6,421 6,060 3,858 18,075 14,573 17,933
 
             
Net income attributable to minority interests 106 108 238 317 265 273
Net income attributable to equity holders of the parent 6,315 5,952 3,619 17,758 14,308 17,660
 
             
Earnings per share attributable to equity holders of the parent 1) 5.20 4.90 2.90 14.50 11.50 14.20
 
             
Weighted average number of outstanding shares (million) 1,223 1,227 1,236 1,225 1,245 1,241
 
             
Financial data:            
 
Investments - NOK million 5,487 4,195 8,083 13,498 17,569 26,869
Adjusted net interest-bearing debt/equity 2) 0.04 0.15 0.11 0.04 0.11 0.22
Debt / equity ratio 0.20 0.22 0.25 0.20 0.25 0.24
 
1) Basic earnings per share were computed using the weighted average number of ordinary shares outstanding. There were no diluting elements.
2) Adjusted net interest-bearing debt divided by equity including minority interest, adjusted for pension obligation (after tax) and present value of future obligations on operating leases.
All comparative figures are for the corresponding period in 2006 unless otherwise stated.



****
Certain statements contained in this announcement constitute “forward-looking information” within the meaning of Section 27A of the US Securities Act of 1933, as amended, and Section 21E of the US Securities Exchange Act of 1934, as amended. In order to utilize the “safe harbors” within these provisions, we are providing the following cautionary statement.

Certain statements included within this announcement contain (and oral communications made by us or on our behalf may contain) forward-looking information, including, without limitation, those relating to (a) forecasts, projections and estimates, (b) statements of management’s plans, objectives and strategies for Hydro, such as planned expansions, investments or other projects, (c) targeted production volumes and costs, capacities or rates, start-up costs, cost reductions and profit objectives, (d) various expectations about future developments in Hydro’s markets, particularly prices, supply and demand and competition, (e) results of operations, (f) margins, (g) growth rates, (h) risk management, as well as (i) statements preceded by “expected”, “scheduled”, “targeted”, “planned”, “proposed”, “intended” or similar statements.

Although we believe that the expectations reflected in such forward-looking statements are reasonable, these forward-looking statements are based on a number of assumptions and forecasts that, by their nature, involve risk and uncertainty. Various factors could cause our actual results to differ materially from those projected in a forward-looking statement or affect the extent to which a particular projection is realized. Factors that could cause these differences include, but are not limited to: our continued ability to reposition and restructure our upstream and downstream Aluminium business; changes in availability and cost of energy and raw materials; global supply and demand for aluminium and aluminium products; world economic growth, including rates of inflation and industrial production; changes in the relative value of currencies and the value of commodity contracts; trends in Hydro’s key markets and competition; and legislative, regulatory and political factors. For a detailed description of factors that could cause our results to differ materially from those expressed or implied by such statements, please refer to the risk factors specified under “Risk review – Risk factors” on page 134 of our Annual Report 2006 (including Form 20-F) and subsequent filings on Form 6-K with the US Securities and Exchange Commission.

No assurance can be given that such expectations will prove to have been correct. Hydro disclaims any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.


 


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Updated: October 11, 2016