Second quarter 2009: Solid cash flow and cost savings, markets remain weak

Hydro had an underlying loss before financial items of NOK 618 million in the second quarter, compared with a NOK 493 million loss in the first quarter, as the weak global economy continued to weigh on historically low aluminium markets. Results in downstream operations improved due to seasonally stronger demand and swift adjustments made early in the downturn.

July 22, 2009
  • Second quarter underlying loss before financial items of NOK 618 million
  • Focus on preserving cash, NOK 2.0 billion in operating cash flow in quarter
  • Aluminium demand apparently flattened out at low level after historic drop
  • Capacity curtailments of 460,000 tonnes a year completed
  • Solid progress on cost reduction program, significant savings in operating costs
  • Qatalum 84 percent complete by end-June, on schedule for start up around end of year

Energy posted an underlying EBIT of NOK 281 million in the quarter, down from NOK 447 million in the previous quarter due to lower production and spot sales.

"Although we are going through the most difficult period the aluminium industry has ever experienced, we see very positive effects from our significant cost and capacity adjustments," President and Chief Executive Officer Svein Richard Brandtzæg said.
 
"We remain cautious about the outlook for global aluminium demand ahead of the second half of the year, which is normally seasonally weaker than the previous six months, and will continue to execute our cost reduction program and maintain financial flexibility," he said. "With the substantial reduction in operating capital, reduced input costs and strengthened market positions, we are well-positioned for capturing opportunities."

Aluminium prices seem to have flattened out at historically low levels, following a small pick-up after one of the sharpest drops on record. Key end markets, most notably construction and transport, remain weak.

Due to Hydro's policy of forward selling, the company's average realized aluminium price was about USD 1,470 per tonne, down from around USD 2,000 per tonne in the previous quarter, as the weak market prices of the first quarter was reflected in the earnings of this quarter.
 
During the second quarter, Hydro completed previously announced capacity curtailments within primary aluminium production and reduced output by about 460,000 tonnes per year, or around 26 percent of 2008 production. Shutdown of the remaining 50,000 tonnes capacity at Neuss is currently on hold. Closure of the part-owned Alpart alumina refinery in Jamaica was also completed during the quarter.
 
"We have reached our targets in rightsizing the structure, manning and cost level of staff and support functions, expected to result in cost savings of NOK 700-800 million from 2010," Brandtzæg said. In total, Hydro will reduce manning by 4,500 positions by the end of 2009 compared with the middle of 2008.
 
The joint venture with Qatar Petroleum on the Qatalum smelter was 84-percent complete by the end of the quarter and on schedule for start up around the turn of the year. Once in operation, Qatalum will make a significant contribution towards lowering the average cost of Hydro's global smelter system.

Key financial information


NOK million, except per share data
Second
quarter
2009
First
quarter
2009
% change prior quarter Second
quarter
2008
% change prior year quarter First
half
2009
First
half
2008
Year
2008
                 
Revenue 17,123 16,854 2 % 23,980 (29) % 33,976 45,510 88,643
                 
Earnings before financial items and tax (EBIT) 410 (1,598) >100 % 708 (42) % (1,188) 1,887 1,194
Items excluded from underlying EBIT (1,029) 1,105   911   77 1,764 4,815
Underlying EBIT (618) (493) (25) % 1,619 >(100) % (1,111) 3,651 6,009
                 
Underlying EBIT :                
Primary Metal (895) (185) >(100) % 795 >(100) % (1,079) 1,733 2,732
Metal Markets 196 (245) >100 % 139 41 % (48) 502 703
Rolled Products (28) (53) 47 % 240 >(100) % (82) 387 651
Extruded Products (26) (204) 87 % 296 >(100) % (230) 518 338
Energy 281 447 (37) % 302 (7) % 728 723 1,865
Other and eliminations (146) (253) 42 % (153) 4 % (400) (212) (279)
Underlying EBIT (618) (493) (25) % 1,619 >(100) % (1,111) 3,651 6,009
                 
Income (loss) from continuing operations 282 (280) >100 % 902 (69) % 2 2,345 (3,267)
                 
Underlying income (loss) from continuing operations (572) (480) (19) % 1,311 >(100) % (1,052) 2,687 3,579
                 
Earnings per share from continuing operations 0.17 (0.29) >100 % 0.67 (74) % (0.11) 1.87 (3.04)
                 
Underlying earnings per share from continuing operations (0.53) (0.45) (18) % 1.00 >(100) % (0.99) 2.16 2.62
                 
Financial data:                
Investments 765 685 12 % 1,553 (51) % 1,450 3,821 9,012
Adjusted net interest-bearing debt (19,236) (18,839) (2) % (3,054) >(100) % (19,236) (3,054) (15,440)
                 
                 
Key operational information 
Primary aluminium production (kmt) 338 397 (15) % 437 (23) % 735 869 1,750
Realized aluminium price LME (USD/mt)    1,468    1,996 (26) %    2,610 (44) %    1,727    2,532    2,638
Realized aluminium price LME (NOK/mt)    9,598    13,393 (28) %    13,553 (29) %    11,456    13,451    14,699
Realized NOK/USD exchange rate 6.54 6.71 (3) % 5.19 26 % 6.63 5.31 5.57
Rolled Products sales volumes to external market (kmt) 187 191 (2) % 259 (28) % 378 512 965
Extrusion products sales volumes to external market (kmt) 99 96 3 % 133 (25) % 195 263 195
Automotive products sales volumes to external market (kmt) 21 17 23 % 31 (32) % 38 61 38
Power production (GWh) 1,809 2,477 (27) % 3,021 (40) % 4,286 5,871 11,361
                 


About Hydro's reporting
To provide a better understanding of Hydro's underlying performance, the following discussion of operating performance excludes certain items from EBIT (earnings before financial items and tax) and income from continuing operations. See "Items excluded from underlying EBIT and income from continuing operations" later in this report for more information on these items.
 
Effective from the end of March, Hydro has reorganized its business, dividing each of the former Aluminium Metal and Aluminium Products into two and increasing the number of operating segments from three to five including Primary Metal, Metal Markets, Rolled Products, Extruded Products and Energy. From the beginning of the second quarter, Hydro is presenting its financial results in accordance with the new structure. Prior periods presented in our report have been reclassified in accordance with the new structure.

Reported EBIT and income from continuing operations
EBIT for Hydro amounted to NOK 410 million for the second quarter including net positive effects of roughly NOK 1,030 million comprised of net unrealized derivative gains of about NOK 1,310 million, other positive effects of about NOK 60 million, negative metal effects of NOK 225 million, and rationalization charges and closure costs of NOK 117 million. Reported EBIT 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.
 
Income from continuing operations was NOK 282 million in the second quarter including net foreign exchange gains of about NOK 88 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.
 
Net cash generated from operating activities amounted to NOK 2.0 billion for the quarter, compared with net cash used by operating activities of NOK 1.1 billion in the previous quarter. Hydro had a net cash position amounting to NOK 3.0 billion at the end of the quarter.

Market developments and outlook
Following a sharp fall in the first quarter, demand for aluminium increased in China during the second quarter due to higher activity levels. Demand in the rest of the world was largely unchanged. LME inventories reached 4.4 million mt by the end of the second quarter, compared with a level of 3.5 million mt at the end of the first quarter, 2.3 million mt at the end of 2008 and 1.1 million mt at the end of the second quarter of 2008. LME three month prices started the quarter at USD 1,378 per mt and closed at USD 1,651 per mt.
 
In response to the falling demand, announced capacity curtailments reached a global level of 3.4 million mt annually in the first quarter excluding China. This represents about 13 percent of the 26 million mt produced in 2008. There were limited new curtailments announced during the second quarter. However, capacity has continued to decline as previously announced curtailments were put into effect.
 
Aluminium prices are expected to remain low. However, forward visibility continues to be limited and there is significant uncertainty regarding developments. Global primary aluminium consumption excluding China could decline by 15 - 20 percent in 2009 from a consumption level of 25 million mt in 2008.
 
The significant drop in demand for aluminium has resulted in declining demand for raw materials and smelter input costs have been falling globally.
 
The underlying demand for metal products (extrusion ingot, sheet ingot, foundry alloys and wire rod) in Europe and North America has remained weak during the second quarter 2009. There continues to be considerable uncertainty regarding timing of any significant recovery.

The decline in demand for flat rolled products in Europe appears to have reached the bottom in the second quarter of 2009 although transparency regarding pipeline effects is still low. Market demand is expected to be stable in the coming months. Demand for extruded aluminium products improved slightly from the previous quarter due to a seasonal increase and may have also been influenced by the replenishment of inventories. However, demand was significantly lower than the second quarter of 2008. The overall outlook for the European extrusion market continues to be weak across most market segments but there are signs that markets are stabilizing. However, we expect seasonally lower demand in the second half of the year.
 
Nordic spot prices for electricity continued to decline during the second quarter but stabilized 13 percent lower than the first quarter of 2009. Spot prices in Southern-Norway developed in parallel with the Nordic system price. By the end of the second quarter, the total water and snow balance in Norway was estimated to be approximately 19 percent lower than normal and about 25 percent lower than at the same time in 2008. Increasing spot prices toward the end of the quarter together with forward price developments on the NordPool power exchange indicate higher expected spot prices in the third quarter.
 
Outlook for Hydro
Hydro has taken active steps to capitalize on falling prices for key raw materials and expects further reductions in the second half of 2009. Fixed costs are expected to decline further as the full effect of announced curtailments as well as other cost savings initiatives comes into effect.
 
At the end of second quarter, Hydro had sold more than 90 percent of its primary aluminium production for the third quarter of 2009 forward at a price level of around USD 1,475 per mt. Hydro expects a continued weak result in the third quarter of 2009.
 
In fourth quarter 2008 and first half of 2009 Hydro made provisions for future rationalization and closure costs relating to the plant shut-downs of roughly NOK 450 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 incurred.
 
The curtailment of electrolysis production at the Neuss smelter in Germany was completed during the quarter with the exception of about 4.000 mt per month which will continue going forward.
 
Hydro's water and snow reservoirs were lower than normal at the end of the second quarter, and considerably lower than the corresponding periods in 2008 and 2007. The low reservoir levels, together with the outage of the Suldal I power plant, is expected to result in lower power production for the third quarter of 2009 compared to the second quarter and significantly lower than the third quarter of the previous year.
 
The Suldal I power station is currently being repaired and the plant is expected to be back in operation at the beginning of 2010. The cost of repair and lost revenues are covered by insurance. The outage will also result in production being moved from the fourth quarter of 2009 into 2010.
 
Our business activities expose us to the risk that counterparties may default on their obligations, resulting in direct financial loss, an unexpected increase in market exposure or higher operating costs. The present weak economic conditions increase the risk of defaulting counterparties. So far we have not experienced any significant defaults and are carefully monitoring the situation.

Primary Metal
Primary Metal incurred an underlying loss for the second quarter heavily impacted by a decline in realized aluminium prices impacting underlying results by roughly NOK 1,450 million compared to the first quarter. Inventory write-downs were significantly lower compared to the first quarter resulting in a positive effect of about NOK 300 million for the second quarter.
 
Lower variable costs at our smelters compared to the first quarter of 2009 had a positive effect on underlying EBIT of about NOK 300 million, primarily due to lower alumina costs and somewhat reduced costs for power and petroleum coke. Fixed costs at the smelters declined further by about NOK 60 million following a decline of NOK 375 million in the previous quarter.
 
Income from our equity accounted smelters declined during the quarter. Charges related to the build up of the operating organization at Qatalum amounted to NOK 90 million which was about the same level as the previous quarter.
 
Alunorte, our equity accounted alumina refinery, incurred an underlying loss for the quarter of NOK 69 million that was about the same level as the previous quarter despite the effect of the temporary measures implemented in March 1). Production declined somewhat mainly due to operational problems resulting from heavy rainfall. Energy costs increased slightly.
 
Result for alumina trading improved significantly from the first quarter due to increasing LME prices and higher traded volumes during the quarter.
 
1) In March the Board of Directors of Alunorte agreed on a set of temporary measures to address the challenging financial situation in the company. These measures include an increase in the alumina price Hydro and its partners pay to Alunorte amounting to about NOK 90 million for Hydro in the second quarter (alumina prices are adjusted monthly based on the average monthly LME three-month prices, applied with one month delay). The measures also include changes to the pricing formulas for bauxite purchased by Alunorte. The cost of alumina to our smelters has not been adjusted for these measures and the effect is excluded from the above discussion on developments in variable costs for our smelters. These measures will be effective for the remainder of 2009.

 
Metal Markets
Underlying EBIT for Metal Markets improved substantially from the loss incurred in the first quarter which was heavily impacted by negative currency effects 2).
 
Production and sales from our European remelters improved during the second quarter as a result of higher demand. Our North American remelter operations, however, continued to be negatively impacted by weak market conditions.
 
Total metal sales remained weak for the quarter, but increased somewhat towards the end of the period mainly due to higher shipments to customers in Europe. Average realized premiums for casthouse products were somewhat lower than in the first quarter, but remained relatively firm compared with historical levels.
 
Underlying results for our metal sourcing and trading activities 3) improved for the quarter primarily due to particularly good trading margins.
 
2) Currency exposure for our commercial activities is partly hedged internally with offsetting gains and losses recognized in Financial income and expense. Hydro manages its external currency exposure on a consolidated basis in order to take advantage of offsetting positions.
3) As part of the reorganization of Hydro's Business areas, results relating to our alumina trading activities are included in the underlying EBIT for Primary Metal.

Extruded Products
Underlying results for Extruded Products improved for the quarter compared to the first quarter due to a seasonal increase in volume supported by positive effects of cost reduction measures.
 
Our Extrusion business improved substantially from the poor results achieved in first quarter supported by cost cutting measures that were implemented at an early stage of the market downturn. Volumes increased slightly for our European extrusion business from the low levels experienced in the previous quarter mainly due to seasonal variations. Margins remained under pressure. Underlying results of our Building systems business continued to be positive with firm margins compared to both the previous quarter and the second quarter of the previous year. Underlying results for our American operations improved compared to the first quarter due to seasonally higher volumes and cost cutting measures resulting in a small positive contribution for the quarter. Margins improved from the low levels achieved in the previous quarter.
 
Our Automotive operations incurred an underlying loss for the quarter but improved from the substantial losses incurred in the previous quarter due to higher volumes and the ongoing cost reduction measures. Results were impacted, however, by the continued weak automotive market.

Rolled Products
Underlying EBIT for Rolled Products continued to be affected by the weak economy. However, results improved compared to the first quarter of 2009 supported by manning reductions and other production related cost reduction measures.
 
Personnel related costs have been reduced significantly by aligning manning to the lower production level. Cost reduction initiatives covering both fixed and variable costs have also been implemented throughout the organization.
 
Overall shipments were on the same level as the first quarter but declined for the litho market segment with corresponding increases for the beverage can segment. Margins were stable measured in Euro.

Energy
Underlying EBIT for Energy decreased from the first quarter result mainly due to significantly lower power production. Production was seasonally low and also impacted by lower than normal reservoir levels and the outage of the Suldal I power station. However, the effect of the lost production from Suldal was offset by proceeds from business interruption insurance.
 
Direct production costs continued to decline from the previous quarter, mainly due to lower transmission and maintenance costs. Internal contract volumes declined as a result of the production shut downs and capacity curtailments at Hydro's primary aluminium smelters.

Other and eliminations
Underlying EBIT for Other and eliminations amounted to a charge of NOK 146 million in the second quarter compared with a charge of NOK 253 million in the first quarter and a charge of NOK 153 million in the second quarter of 2008.
 
Hydro's solar activities incurred an underlying loss of NOK 29 million in the second quarter compared with an underlying loss of NOK 31 million in the first quarter of 2009.

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
Second
quarter
2009
First
quarter
2009
Second
quarter
2008
First
half
2009
First
half
2008
Year
2008
             
Unrealized derivative effects on LME related contracts (1,223) 727 (340) (496) (899) 1,120
Unrealized derivative effects on power contracts 118 (580) 1,997 (463) 3,287 768
Unrealized derivative effects on currency contracts (204) (19) (110) (223) (101) 314
Metal effect, Rolled Products 225 662 (247) 887 (133) 235
Significant rationalization charges and closure costs 117 305 - 423 - 109
Impairment charges (PP&E and equity accounted investments) 4 10 - 14 - 2,464
Loss provisions (power contracts) - - - - - 257
Insurance compensation (66) - - (66) - -
(Gains)/losses on divestments - - (389) - (389) (453)
Items excluded from underlying EBIT (1,029) 1,105 911 77 1,764 4,815
Net foreign exchange (gain)/loss (88) (1,478) (298) (1,566) (1,153) 5,491
Calculated income tax effect 262 174 (204) 436 (270) (3,460)
Items excluded from underlying income from continuing operations (854) (199) 409 (1,054) 342 6,846
             


Finance

During the quarter, currency losses on intercompany balances amounted to about NOK 177 million mainly due to a stronger Euro against the Norwegian kroner. These losses have no cash effect and are offset in equity by translation of the corresponding subsidiaries during consolidation. 4) Other net currency gains amounted to NOK 265 million which mainly related to Hydro's US dollar hedging program which has been discontinued as of the end of the quarter.
 
In the previous quarter, currency gains on intercompany balances denominated in Euro amounted to about NOK 1.5 billion due to weaker Euro against the Norwegian kroner.
 
At end of the second quarter of 2009 cash and cash equivalents amounted to NOK 4.9 billion up from NOK 3.1 billion at the end of the previous quarter.
 
4) The losses on intercompany balances arise from group positions that create an accounting loss recognized in the income statement of the parent company when the value of other currencies strengthen against the Norwegian kroner. No corresponding gains are recognized in the income statement of the subsidiaries that use other currencies as a functional currency. This has no cash effect for the group. When the subsidiaries financial statements are translated into NOK for consolidation, currency effects on intercompany deposits are included directly in consolidated equity in the balance sheet, offsetting the currency loss recognized through the income statement of the parent company.

Tax
Income taxes amounted to a charge of NOK 273 million in the quarter compared with a charge of NOK 155 million in the first quarter of 2009 and charge of NOK 248 million in the second quarter of 2008. Income taxes amounted to NOK 428 million and NOK 982 million for the fist half of 2009 and 2008 respectively.
 
For the fist half of 2009, income tax expense was roughly 100 percent of pre-tax income. The high tax rate resulted mainly from the effects of power sur-tax and the results from equity accounted investments, which are recognized net of tax.

Press contact
Contact     Inger Sethov
Telephone   +47 22532036
Cellular    +47 95022359
E-mail      Inger.Sethov@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