Economic downturn leads to first-quarter losses

Hydro had an underlying loss before financial items of NOK 493 million in the first quarter of 2009, down from an underlying EBIT of NOK 868 million in the previous quarter. The results reflect the deepening global economic downturn, with historically low aluminium prices and a further fall in already weak downstream markets.

April 29, 2009

Key financial information



NOK million, except per share data
First
quarter
2009
Fourth
quarter
2008
% change prior quarter First
quarter
2008
% change prior year quarter Year
2008
             
Revenue 16,854 21,368 (21) % 21,529 (22) % 88,643
             
Earnings before financial items and tax (EBIT) (1,598) (3,106) 49 % 1,179 >(100) % 1,194
Items excluded from underlying EBIT 1,105 3,975   853   4,815
Underlying earnings before financial items and tax (EBIT) (493) 868 >(100) % 2,032 >(100) % 6,009
    
Underlying earnings before financial items and tax (EBIT) : 
Aluminium Metal (476) 435 >(100) % 1,255 >(100) % 3,575
Aluminium Products (257) (239) (7) % 370 >(100) % 988
Energy 416 592 (30) % 399 4 % 1,736
Corporate, other and eliminations (176) 81 >(100) % 8 >(100) % (290)
Underlying earnings before financial items and tax (EBIT) (493) 868 >(100) % 2,032 >(100) % 6,009
      
Income (loss) from continuing operations (280) (5,845) 95 % 1,443 >(100) % (3,267)
 
Underlying income (loss) from continuing operations (480) (184) >(100) % 1,376 >(100) % 3,579
 
Earnings per share from continuing operations (0.29) (4.99) 94 % 1.21 >(100) % (3.04)
  
Underlying earnings per share from continuing operations (0.45) (0.29) (54) % 1.15 >(100) % 2.62
 
Financial data: 
Investments 685 2.749 (75) % 2,267 (70) % 9,012
Adjusted net interest-bearing debt (18,839) (15,440) (22) % 163 >(100) % (15,440)
 
Operating statistics
Realized aluminium price LME (USD/mt) 1,996 2,654 (25) % 2,450 (19) % 2,638
Realized aluminium price LME (NOK/mt) 13,393 16,904 (21) % 13,354 - 14,724
Primary aluminium production (kmt) 397 442 (10) % 433 (8) % 1,750
Rolled Products sales volumes to external market (kmt) 191 213 (10) % 253 (24) % 965
Extrusion sales volumes to external market (kmt) 96 103 (7) % 130 (26) % 488
Automotive sales volumes to external market (kmt) 17 18 (2) % 31 (43) % 105
Power production (GWh) 2,477 2,813 (12) % 2,850 (13) % 11,361


"We will ensure that our competitive position will be strengthened through the measures we are now taking in all business areas and throughout staff and support functions," Brandtzæg added."We have been in the forefront in our industry in taking swift and decisive action in response to the economic downturn. We do not see any short or medium-term upturn in the market, and we will continue to take necessary measures adjusting our operations and costs to the challenging market situation," Hydro's President and CEO Svein Richard Brandtzæg said.

 
Hydro decided during the quarter to temporarily shut down the oldest production line at its Sunndal smelter facility in Norway, which has an annual production capacity of 100,000 mt per year. This will bring total upstream capacity curtailments to about 500,000 mt a year, or close to 30 percent of production in 2008.
 
Earlier announced curtailments include the Neuss smelter, 50 percent of the part-owned Søral smelter, 10 percent of production at Slovalco and the permanent closure of the Søderberg line in Karmøy. Around 60 percent of the announced curtailments had been completed by the end of the first quarter, with the remaining due to be closed during the second quarter.
 
Hydro also announced a temporary shut down of its 35-percent-owned Alpart alumina refinery in Jamaica, with a total production of 1,650,000 mt alumina per year, which is expected to be fully closed by mid-May. The company's program to reduce costs and manning throughout its downstream operations progressed according to plan and provided a significant contribution in the first quarter.
 
"Qatalum was 73 percent complete at the end of the quarter and on schedule for start-up at the turn of the year. Once operational, Qatalum will be a solid foundation for Hydro as a competitive metal supplier," Brandtzæg said.
 
Aluminium Metal delivered an underlying loss of NOK 476 million in a quarter strongly affected by the sharp fall in global aluminium prices. Both fixed and variable costs related to the production of primary aluminium declined as capacity curtailments started to affect operating costs and key raw material prices fell. Results in Bauxite and Alumina fell sharply due to lower realized alumina prices, and Commercial Products continued to be impacted by weak sales volumes and low production in Hydro's remelters.
 
Aluminium Products incurred an underlying loss of NOK 257 million in the first quarter due to a further market deterioration from already depressed levels, resulting in sales volumes dropping further from the previous quarter and margins coming under increased pressure. Significant cost reductions only partly offset the market effects.
 
Energy had an underlying EBIT of NOK 416 million, down from the record results of the previous quarter. Spot prices declined from the exceptionally high level in the fourth quarter of 2008. Power production declined, but was seasonally high for the quarter.
 
Net cash used in operating activities was NOK 1.1 billion for the quarter, compared with net cash used in operating activities of NOK 0.8 billion in the previous quarter. Hydro had a net cash position amounting to NOK 1.7 billion at the end of the quarter.
 
Hydro had stand-by credit facilities of NOK 12.7 billion at the beginning of the year, and further strengthened its financial position by securing new financing during the first quarter, including a new EUR 750 million syndicated three-year revolving credit facility. The company also issued NOK 1 billion in commercial paper during the quarter with a six month maturity.

Reported EBIT and income from continuing operations
Reported EBIT for Hydro amounted to a loss of NOK 1,598 million for the first quarter including charges of roughly NOK 1,100 million comprised of negative metal effects of NOK 660 million, rationalization charges and closure costs of NOK 300 million and net unrealized derivative losses of about NOK 130 million. Reported EBIT amounted to a loss of NOK 3,106 million for the fourth quarter of 2008 including charges of roughly NOK 3,980 million, comprised of impairment losses of NOK 2,150 million, write-downs of roughly NOK 300 million relating to our minority interests in solar businesses, net unrealized derivative losses of about NOK 770 million and other net negative effects of roughly NOK 760 million.
 
Reported Loss from continuing operations amounted to NOK 280 million in the first quarter including net foreign exchange gains of about NOK 1,480 million mainly relating to intercompany balances denominated in Euro. These gains have no cash effect and are offset in equity by translation of the corresponding subsidiaries during consolidation. Reported Loss from continuing operations amounted to NOK 5,845 million in the fourth quarter including net foreign exchange losses of NOK 4,629 million. Approximately half of the losses related mainly to Hydro's US dollar hedging program. The remainder related to losses on intercompany balances denominated in Euro.

Market developments and outlook
The severe downturn in the global economy has led to a continued decline in demand for aluminium following a sharp fall in demand in the previous quarter and rapidly increasing inventory levels. Prices started the quarter at USD 1,536 per mt and closed at USD 1,405 per mt. At such levels, prices are lower than the cash cost of a substantial portion of global smelter production. In response, announced capacity curtailments have reached a global level of 3.4 million mt annually excluding China.
 
The market for metal products (extrusion ingot, sheet ingot, foundry alloys and wire rod) in Europe and North America has continued to decline following the dramatic weakening of these markets in the previous quarter. All major end-use markets have been impacted including automotive, building and general engineering.
 
Aluminium prices are expected to remain low in the medium-term, but forward visibility continues to be limited and there is significant uncertainty regarding developments. There are indications that the rate of increase in LME inventories is slowing as announced curtailments are put into effect. No substantial improvement in demand for metal products is expected in the coming months and there continues to be significant uncertainty regarding the timing of an eventual recovery.

Outlook for Hydro
Prices of key raw materials used in the production of primary metal have fallen in the past several months and Hydro has taken active steps to capitalize on this development. We expect a more substantial impact from the price declines in future quarters. Measures to significantly reduce costs and manning throughout our downstream activities are continuing which will enable us to partly mitigate the effects of the significantly lower market demand as the on-going recession in Europe and the US develops.
 
Hydro's water and snow reservoirs were lower than normal at the end of the first quarter, and considerably lower than the corresponding periods in 2008 and 2007. As a result, power production and financial results for Energy are expected to be significantly lower in the second quarter of 2009 compared to previous quarters.
 
During a maintenance shutdown in March, Hydro detected serious damage in the Suldal I power station at the Røldal-Suldal hydroelectric facility in Norway. As a result, Hydro's power production in 2009, and in particular in the second quarter, will be negatively impacted. The cost of repair and effects of the business interruption are covered by insurance, however, offsetting effects of the reimbursement will likely occur in later quarters than the negative effects of production losses.
 
At the end of first quarter, Hydro had sold 87 percent of its primary aluminium production for the second quarter of 2009 forward and expects to realize an average price of USD 1,426 per mt. Hydro expects a continued weak result in the second quarter of 2009.
 
In fourth quarter 2008 and first quarter 2009 Hydro made provisions for future rationalization and closure costs relating to the plant shut-downs of roughly NOK 400 million in total. These are reported as items excluded from underlying EBIT and will mainly have cash effects in future quarters. If it becomes necessary to permanently close plants that have been curtailed on a temporary basis, additional substantial closure costs would be necessary.
 
Hydro is in process of reviewing the size and structure of its administrative staff functions which are expected to result in reduced manning levels with corresponding rationalization costs in the coming quarters.
 
Our business activities expose us to the risk that one or more counterparties may default on their obligations, resulting in direct financial loss, an unexpected increase in market exposure or higher operating costs. The present weak and deteriorating economic conditions, combined with challenging financial markets, increase the risk of defaulting counterparties. So far we have not experienced any significant defaults and are carefully monitoring the situation.

Aluminium Metal
Aluminium Metal delivered an underlying loss of NOK 476 million for the quarter, a substantial decline from underlying EBIT of NOK 435 million in the previous quarter which included inventory write-downs amounting to NOK 700 million. Underlying results for the first quarter included inventory write-downs of about NOK 485 million as LME prices remain below our cost of production. The charge for the quarter, however, was more than offset by the effect of lower costs of goods sold due to the earlier write-downs, amounting to a net positive impact of about NOK 110 million.
 
Underlying EBIT for Primary Aluminium declined for the quarter heavily impacted by the sharp decline in LME prices, lower product premiums and lower sales of casthouse products. Realized LME prices declined significantly measured in both US dollars and Norwegian kroner impacting underlying EBIT by roughly NOK 1,500 million. Due to lower future sales volumes as a result of production curtailments, Hydro decided to realize a portion of hedge contracts (LME) resulting in a gain of approximately NOK 160 million. Fixed and variable costs were lower for the quarter having a positive influence on underlying results of roughly NOK 370 million and NOK 500 million respectively. Production declined about 45,000 mt in the first quarter as a result of capacity curtailments underway at Hydro's higher-cost smelters. During the quarter, Hydro closed down about 300,000 mt of annual capacity relating to planned curtailments of approximately 500,000 mt.
 
Hydro's Bauxite and Alumina business operated at a loss for the quarter declining significantly from a positive underlying EBIT in the fourth quarter of 2008. Underlying results for Alunorte fell sharply reflecting significantly lower realized alumina prices measured in US dollars due to declining LME prices. Alpart continued to operate at a loss for the quarter. Fifty percent of Alpart's production capacity was shut-down in the middle of January 2009 reducing output by about 70,000 mt compared to the previous quarter. In March, a decision was taken by the partners of Alpart to close down the remaining production. The temporary closure is expected to be completed by the middle of May 2009.
 
Underlying EBIT for our Commercial operations showed a substantial loss for the quarter, heavily influenced by negative currency effects due to a weaker Euro against the US dollar and Norwegian kroner. Underlying results for our Commercial Products operations continued to be impacted by very weak sales volumes with corresponding low production in our remelters.

Outlook
Aluminium prices are expected to remain low in the medium-term, but forward visibility continues to be limited. No substantial improvement in demand for metal products is expected in the coming months.
 
The significant drop in demand for aluminium has resulted in declining demand for raw materials and smelter input costs are falling.
 
Curtailed capacity and newly commissioned capacity is expected to come on stream in China during the next several months, increasing downward pressure on the SHFE aluminium price. As a result, the higher level of imports of primary aluminium into the Chinese market is not expected to be sustainable. Fiscal measures make China a self-contained market for primary metal in the long-term. As a result, the market balance for primary aluminium in China is not expected to have a significant impact on primary metal markets outside of China in the long-term.
 
Global primary aluminium consumption excluding China could decline by 15 - 20 percent in 2009 from a consumption level of 25 million mt in 2008. Supported by economic stimulus and recovery packages, Chinese consumption of primary aluminium in 2009 is expected to be in line with 2008 level of 12.5 million mt.

Outlook for Hydro
In response to the sharp fall in demand, Hydro has announced curtailments of about 500,000 mt of primary metal capacity representing just under 30 percent of Hydro's total capacity in 2008. As a result, production for the quarter was reduced by 45,000 mt at our higher cost smelters. By the end of the first quarter, roughly 300,000 mt of this capacity has been shut-down. The remainder will be idled during the second quarter.
 
In January 2009 approximately 50 percent of the production capacity of the Alpart alumina refinery was temporarily curtailed. In March, a decision was taken to temporarily close down the remaining production and the plant is expected to be shut-down by the middle of May. Hydro's share of Alpart's alumina production amounted to approximately 580,000 mt in 2008. The temporary shutdown of Alpart will further align Hydro's alumina balance, based on the announced curtailments in our smelter production system.
 
Electrolysis production at the Neuss smelter will be fully curtailed by the end of the second quarter of 2009. If it becomes apparent that we will not be able to resume production at the plant without sustainable profits over time, it will be necessary to consider permanent closure of the operations. A permanent shut-down would require substantial additional closure costs mainly for termination of the work force.
 
Prices for key raw materials have fallen in the past several months and Hydro has taken active steps to capitalize on this development. Alumina prices, which are normally linked to LME prices 1), have declined together with other important raw material prices such as petroleum coke.
 
Fluctuation in LME prices impact our alumina costs with a lag of about two to three months due to the timing of price indexing as well as transport and storage.

Aluminium Products
Our Aluminium Products business incurred an underlying loss of NOK 257 million for the quarter heavily impacted by the deepening global recession. All of our sub-segments operated at a loss for the period. Volumes declined further following a sharp drop in the previous quarter which was impacted by the negative economic developments in addition to seasonal declines. The effects from the drop in demand has been mitigated by cost saving measures such as manning reductions and procurement initiatives, but with the rapid decline in volumes the cost measures do not fully compensate for the market effects.
 
Underlying results for our Rolled Products business were impacted by lower volumes in all market segments (with the exception of lithographic products) and declining margins compared to the previous quarter. Volumes declined significantly for our Extrusion operating units but to a more limited extent for our Building Systems business. Margins declined for our European extrusion and Building Systems business from the previous quarter. Margins for our US operations improved for the quarter compared to the previous quarter which was negatively impacted by the reduction of higher priced raw material inventories increasing cost of goods sold. Underlying results for our South American operations continued to be positive, but at a lower level and continued to be negatively impacted by the stronger US dollar. Underlying results for our Automotive operations were heavily impacted by the extremely weak automotive market. However, underlying results improved from the substantial losses incurred in the previous quarter as cost reduction measures began to have a positive impact.

Outlook
Market developments, in particular the capital intensive transport and building markets, continue to be highly uncertain due to the deepening global recession.
 
Market demand for flat rolled products in Europe is expected to remain at the current low levels during the coming months, and there are few signs of improvement. The stronger US dollar versus the Euro compared to first half 2008 is expected to reduce pressure on margins from potential imports into European markets. However, we expect increasing margin pressure in general as a result of weakening demand. Cost pressure is expected to ease due to the negative economic developments and lower energy prices. However, developments are uncertain.
 
The overall outlook for the European extrusion market continues to be weak with lower demand across most market segments, in particular the automotive and transportation segments. The negative market outlook is expected to result in increased pressure on margins. In the US, extrusion markets are expected to remain severely depressed, with no signs of recovery. South American markets are expected to weaken, but demand in Brazil is expected to continue holding up fairly well.
 
Following prolonged holiday shutdowns at the end of 2008, a slight improvement in the European automotive market is expected but demand is expected to remain significantly below the levels of first half 2008. Demand in North America shows no signs of recovering from the very low levels experienced in the previous quarters. There are indications that demand in Asia and South America is weakening from the robust levels experienced last year.

Outlook for Hydro
Measures to significantly reduce costs and manning throughout our downstream activities are continuing. Our focused efforts to improve the profitability of these businesses have helped prepare us for the sudden and dramatic market developments which occurred towards the end of last year but can only partly compensate for the unprecedented fall in market demand. Actions across all of our business sectors have been identified including additional shift and manning reductions, procurement initiatives to capitalize on falling raw material prices as well as reductions in capital expenditures and working capital. These measures will enable us to partly mitigate the effects of the significant lower market demand as the on-going recession in Europe and the US develops.

Energy
Underlying EBIT decreased from the record high result in the fourth quarter of 2008, which was influenced by exceptionally high spot prices and high production. The decrease mainly resulted from by declining spot prices and lower production volumes, which were however high on a seasonal level. Underlying results improved somewhat compared to the first quarter of 2008, mainly due to higher spot prices.
 
Direct power production costs decreased moderately from the fourth quarter of 2009, partly due to somewhat lower maintenance activity during the winter months.
 
Hydro's solar activities reported an underlying loss of NOK 31 million in the first quarter of 2009 compared with a loss of NOK 52 million in the fourth quarter of 2008 and a loss of NOK 22 million during the first quarter of 2008. The improvement from the previous quarter was mainly due to lower research and development costs.

Outlook
By the end of the first quarter, the total water and snow balance in Norway was estimated to be approximately 10 percent lower than normal and about 10 percent lower than at the same time in 2008. Forward prices on the NordPool power exchange indicate that the spot price level at the end of the first quarter will continue well into the second quarter. The global economic recession will continue to impact power markets on the European Continent and in the Nordic region, with power prices influenced by lower thermal fuel costs and the effects of lower industrial power consumption.

Outlook for Hydro
Hydro's water and snow reservoirs were lower than normal at the end of the first quarter, and considerably lower than the corresponding periods in 2008 and 2007. As a result, power production and financial results for Energy are expected to be significantly lower in the second quarter of 2009 compared to previous quarters.
 
During a maintenance shutdown in March, Hydro detected serious damage to the high pressure shaft in the Suldal I power station at the Røldal-Suldal hydroelectric facility in Norway. The repair strategy and outage time are currently under evaluation but the plant is expected to be out of production for at least 6 months. Suldal I has an installed capacity of 160 MW and a normal yearly production of approximately 1 TWh. Hydro's power production in 2009, and in particular in the second quarter, will be negatively impacted. The cost of repair and effects of the business interruption are covered by insurance, however, offsetting effects of the reimbursement will likely occur in later quarters than the negative effects of production losses.

Corporate, other and eliminations
Underlying EBIT for Corporate, other and eliminations amounted to charge of NOK 176 million in the first quarter compared with a positive amount of NOK 81 million in the fourth quarter and a positive amount of NOK 8 million in the first quarter of 2008. Underlying EBIT included eliminations of changes in unrealized profit and loss on inventories purchased from group companies amounting to a credit NOK 155 million and NOK 273 million in the first quarter of 2009 and fourth quarter of 2008 respectively. Pension charges relating to Corporate and eliminations amounted to NOK 210 million for the first quarter and NOK 67 million for the previous quarter.

Items excluded from underlying EBIT and income from continuing operations
To provide a better understanding of Hydro's underlying performance, the items in the table below have been excluded from EBIT and income from continuing operations.
 
Items excluded from underlying EBIT are comprised mainly of unrealized gains and losses on certain derivatives, impairment and rationalization charges, effects of disposals of businesses and operating assets, as well as other items that are of a special nature or are not expected to be incurred on an ongoing basis.

Items excluded from underlying income from continuing operations



NOK million
First
quarter
2009
Fourth
quarter
2008
First
quarter
2008
Year
2008
         
Unrealized derivative effects on LME related contracts 727 1,984 (560) 1,120
Unrealized derivative effects on power contracts (580) (1,481) 1,291 768
Unrealized derivative effects on currency contracts (19) 265 9 314
Metal effect, Rolled Products 662 407 113 235
Significant rationalization charges and closure costs 305 109 - 109
Impairment charges (PP&E and equity accounted investments) 10 2,464 - 2,464
Loss provisions (power contracts) - 257 - 257
(Gains)/losses on divestments - (29) - (453)
Items excluded from underlying EBIT 1,105 3,975 853 4,815
Net foreign exchange (gain)/loss (1,478) 4,629 (854) 5,491
Calculated income tax effect 174 (2,943) (66) (3,460)
Items excluded from underlying income from continuing operations (199) 5,661 (67) 6,846

Finance
During the quarter, currency gains on intercompany balances denominated in Euro amounted to about NOK 1.5 billion due to weaker Euro against the Norwegian kroner. These gains have no cash effect and are offset in equity by translation of the corresponding subsidiaries during consolidation. 1) The net effect of other currency gains and losses relating to the Euro, US dollars and other currencies during the quarter was not significant.
 
At end of first quarter 2009 cash and cash equivalents amounted to NOK 3.1 billion down from NOK 3.3 billion at the end of fourth quarter 2008. During first quarter 2009 Hydro issued NOK 1 billion in commercial paper and drew-down EUR 100 million on an a new EUR 750 million syndicated 3-year revolving credit facility.
 
The Euro gains arise from group positions that create accounting gains recognized in the income statement of the parent company when the Euro depreciates against the Norwegian kroner. No corresponding losses are recognized in the income statement of the subsidiaries that use Euro as functional currency. This has no cash effect for the group. When the subsidiaries Euro financial statements are translated into NOK for consolidation, currency effects on the Euro intercompany deposits are included directly in consolidated equity in the balance sheet, offsetting the currency gains recognized through the income statement of the parent company.

Tax
Income taxes amounted to a charge of NOK 155 million in the quarter compared with a positive amount of NOK 1,748 million in the previous quarter and a charge of NOK 734 million in the first quarter of 2008.
 
Income taxes charges in the first quarter on pre-tax losses of NOK 126 million resulted mainly from the effects of power surtaxes and the results from equity accounted investments, which are recognized net of tax.

Press contact
Contact     Erik Brynhildsbakken
Telephone   +47 22538301
Cellular    +47 41751271
E-mail      Erik.Brynhildsbakken@hydro.com

Investor contact
Contact     Stefan Solberg
Telephone   +47 22539280
Cellular    +47 91727528
E-mail      Stefan.Solberg@hydro.com

*********
Certain statements included within this announcement 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.

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.


Updated: October 11, 2016