First quarter 2010: Results recover on higher aluminium prices and rising demand

Hydro had an underlying result before financial items and tax of NOK 688 million in the first quarter 2010, improving significantly from a loss of NOK 651 million in the fourth quarter of 2009, reflecting increased aluminium prices, reduced costs and higher volumes in a seasonally stronger quarter.

April 27, 2010
  • NOK 688 million in first quarter underlying EBIT

  • Rising demand in seasonally strong quarter, supported by restocking

  • Upstream recovers on higher aluminium prices and alumina result

  • Downstream up on higher volumes and firm margins

  • Energy result rise on high prices and production

  • Qatalum ramp-up on schedule for full output in Q4, 20 percent of cells in operation

  • Outlook for 2010: 12 percent growth in aluminium demand in main markets

"We have seen rising aluminium prices and a partial demand recovery from previous weak quarters, supported by restocking. But global aluminium stocks remain high, indicating continued production overcapacity," Hydro's President and Chief Executive Officer Svein Richard Brandtzæg said.

"The official opening of the Qatalum plant in April was a milestone for an impressive project. At the end of the quarter, 20 percent of the production cells were in operation, and we are on track for full output in the fourth quarter this year. Qatalum will contribute significantly to Hydro's competitiveness and be an important door-opener to the rapidly growing Asian markets," Brandtzæg said.
 
Higher realized aluminium prices contributed to an improvement in underlying results for Hydro's primary aluminium operations. Underlying results for alumina and raw material operations were substantially higher, lifted by improved results from Alunorte and high margins from Hydro's commercial alumina activities. Significantly better performance and recaptured trading losses from the prior quarter lifted underlying results for the metal markets business.
 
Downstream sales were up on restocking and recovering markets. Higher volumes, combined with higher margins and lower costs contributed to a significant improvement in Hydro's rolled products business. Underlying EBIT for extrusion businesses was relatively unchanged for the quarter, adjusted for the divestment of Automotive Structures in the fourth quarter. Volumes increased for all operating units with the exception of a seasonal decline in building systems shipments. Margins were stable.
 
"Overall, we expect demand in our main upstream and downstream markets to grow around 12 percent in 2010. But there is challenging terrain ahead of us, and we will maintain a strong cost focus across our businesses to ensure efficient operations and continous improvements along our value chain," said Brandtzæg.
 
Underlying EBIT for Hydro's energy business increased substantially from the fourth quarter of 2009, mainly due to high spot power prices and high production.
 
Net cash generated from operating activities amounted to NOK 186 million for the quarter. Investments amounted to NOK 1.8 billion, including about NOK 1.1 billion relating to Qatalum. Qatalum investments are expected to be somewhat lower in the second quarter of 2010. Hydro had a net cash position of NOK 0.5 billion at the end of the first quarter 2010.

Key financial information


NOK million, except per share data
First
quarter
2010
Fourth
quarter
2009
% change prior quarter First
quarter
2009
% change prior year quarter Year
2009
             
Revenue 18,145 16,427 10 % 16,569 10 % 67,409
             
Earnings before financial items and tax (EBIT) 985 (938) >100 % (1,598) >100 % (1,407)
Items excluded from underlying EBIT (297) 287   1,105   (1,148)
Underlying EBIT 688 (651) >100 % (493) >100 % (2,555)
             
Underlying EBIT :            
Primary Metal (49) (717) 93 % (185) 73 % (2,556)
Metal Markets 65 (20) >100 % (245) >100 % (83)
Rolled Products 223 57 >100 % (53) >100 % 26
Extruded Products 117 68 71 % (204) >100 % (67)
Energy 588 295 99 % 447 32 % 1,240
Other and eliminations (255) (334) 24 % (253) (1) % (1,114)
Underlying EBIT 688 (651) >100 % (493) >100 % (2,555)
             
Net income (loss) 924 (587) >100 % (280) >100 % 416
             
Underlying net income (loss) 401 (791) >100 % (480) >100 % (3,066)
             
Earnings per share 0.72 (0.47) >100 % (0.29) >100 % 0.25
             
Underlying earnings per share 0.29 (0.64) >100 % (0.45) >100 % (2.64)
             
Financial data:            
Investments 1,766 2,371 (25) % 685 >100 % 5,947
Adjusted net interest-bearing debt (16,939) (15,645) (8) % (18,839) 10 % (15,645)
             
Key Operational information
Primary aluminium production (kmt) 339 332 2 % 397 (15) % 1,396
Realized aluminium price LME (USD/mt)    1,997    1,804 11 %    1,996 -    1,698
Realized aluminium price LME (NOK/mt)    11,542    10,452 10 %    13,393 (14) %    10,764
Realized NOK/USD exchange rate 5.78 5.80 - 6.71 (14) % 6.34
Metal Markets sales volumes to external market, excl. ingot trading (kmt)    414    375 10 %    320 29 %    1,468
Rolled Products sales volumes to external market (kmt) 231 211 9 % 191 21 % 794
Extruded Products sales volumes to external market (kmt) 128 116 10 % 107 20 % 453
Power production (GWh) 2,781 1,929 44 % 2,477 12 % 7,897



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 net income. See "Items excluded from underlying EBIT and net income" for more information on these items.

Reported EBIT and net income
Reported EBIT for Hydro amounted to NOK 985 million for the first quarter including net positive effects of NOK 297 million comprised of net unrealized derivative losses of NOK 42 million, positive metal effects of NOK 314 million and other positive effects of NOK 25 million.
 
In the previous quarter, reported EBIT for Hydro amounted to a loss of NOK 938 million for including net negative effects of NOK 287 million comprised of net unrealized derivative gains of NOK 429 million, positive metal effects of NOK 157 million, losses on divestments of NOK 684 million, and other negative effects of NOK 51 million. Reported EBIT also included impairment charges of NOK 138 million relating to solar activities including a write down of our shares in Norsun by NOK 135 million.
 
Net income amounted to NOK 924 million in the first quarter including net foreign exchange gains of NOK 515 million 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. In the fourth quarter of 2009, Hydro incurred a net loss of NOK 587 million including net foreign exchange gains of NOK 312 million relating to intercompany balances denominated mainly in Euro.

Market developments and outlook
Average LME prices increased during the quarter, but varied significantly. From a level of around USD 2,300 per mt in the beginning of the quarter prices declined to USD 1,980 per mt in early February and increased again to USD 2,320 per mt by the end of March 2010.
 
Demand for primary aluminium in China in the first quarter fell from record high levels in the fourth quarter of 2009. Production increased reaching a new record of around 17 million mt on an annual basis resulting in a surplus of metal in the quarter. China is expected to produce a modest surplus of metal in 2010. No significant imports of primary metal into China are expected during 2010.
 
Global demand for primary aluminium excluding China strengthened in the first quarter reaching an annualized consumption of around 22.8 million mt. Production outside China increased to 24.5 million mt on an annualized basis. The increase was mainly due to additional new production following the ramp-up of new capacity. Most of the more than 3 million mt of capacity that was curtailed in response to the sharp fall in demand at the end of 2008 and beginning of 2009 has still not been restarted. There will be a market surplus in 2010 unless there is a stronger than expected growth in consumer demand and/or customer restocking.
 
LME stocks were stable at around 4.6 million mt during the quarter. Industry analysis indicates that there has been a further increase of unreported stocks during the first quarter. Much of metal in stock is owned by financial investors, taking advantage of low interest rates, inexpensive warehousing and the contango in the aluminium forward market.
 
Demand for metal products (extrusion ingot, sheet ingot, foundry alloys and wire rod) continued to improve in the first quarter but consumption in both Europe and North America remains below levels experienced in 2007 and 2008.
 
The European flat rolled products market continued to improve, driven by customer restocking and a slight increase in consumer demand. Market demand is expected to be stable for the second quarter but remains below pre-crisis levels. Developments for second half of 2010 are uncertain. Developments in the North American market were similar but with some indications of a stronger recovery in the second half of 2010.
 
European demand for extruded aluminium products was stable following a slight increase in the normally seasonally lower fourth quarter due to customer restocking. However, demand continues to be below levels achieved in 2007 and 2008 and is weak within the construction sector. An expected seasonal increase in demand in the North American market did not occur. However, demand increased from the weak first quarter of 2009 and the market appears to be stable following a long period of decline. Market demand in South America continued to be positive, mainly in Brazil. The overall outlook for the European and US extrusion markets is expected to improve across most markets during the second quarter with the exception of the construction segment.
 
On a combined basis we expect demand in our main upstream and downstream markets to grow around 12 percent in 2010.
 
Nordic electricity spot prices reached record high levels during the first quarter of 2010, particularly in the Mid-Norway (NO3) area where the effects of record high deficits in the hydrological balance throughout Norway was exacerbated by outages in Swedish nuclear power supplies. High demand due to cold temperatures and corresponding high production depleted reservoirs. Exceptionally dry weather has resulted in snow accumulations of about 50 percent of normal levels in Southern Norway at the end of the quarter.
 
Power production is expected to be significantly lower than normal for several quarters in order to normalize reservoir levels. Prices are expected to decline somewhat during the second quarter.
 
Hydro has sold forward substantially all of its primary aluminium production for the second quarter of 2010 at a price level of around USD 2,175 per mt. The higher realized prices will further improve Hydro's results in the second quarter of 2010. However, the overall impact of LME price improvements for Hydro will be influenced by developments in the US dollar/Norwegian kroner currency exchange rates.
 
During 2009 Hydro curtailed production capacity and reduced production at several plants. If it becomes necessary to permanently close plants that have been curtailed on a temporary basis, additional substantial closure costs will be incurred.
 
Qatalum will continue incurring operating losses during the ramp-up of production at the site.
 
The risk of counterparty default continues under the present economic conditions. So far we have not experienced any significant defaults and are carefully monitoring the situation.

Primary Metal
Underlying EBIT increased significantly for Alumina and Raw Materials compared to the previous quarter. Our alumina commercial activities delivered substantially higher underlying results mainly due to improved margins on external contracts. Underlying EBIT was also influenced by unrealized gains on LME forward contracts compared with unrealized losses in the previous quarter.
 
Alunorte's underlying results improved somewhat during the quarter. Realized alumina prices declined due to the termination of temporary price increases and was not compensated by the higher LME prices. Lower raw material costs including bauxite and caustic more than offset the alumina price decline. Production declined due to technical problems with the plant's coal fired boilers and electrical facilities.
 
Underlying results for our Primary aluminium operations also improved significantly compared to the fourth quarter of 2009 but continued to operate at a loss. Higher realized aluminium prices improved underlying EBIT for our smelters by roughly NOK 355 million compared with the previous quarter.
 
Overall costs were stable. Variable costs increased somewhat compared to the fourth quarter of 2009, mainly due to higher alumina costs. The increase was however offset by declining fixed costs due to ongoing cost reduction measures.
 
Underlying results for Qatalum improved somewhat, mainly due to the ramp-up of production at the plant.

Metal Markets
Underlying EBIT for Metal Markets increased compared with the fourth quarter of 2009 due to significantly improved results from our sourcing and trading activities as previous trading losses were recaptured. These positive developments were partly offset by negative currency effects of around NOK 100 million due to the weakening Euro against US dollar.
 
Underlying results from our remelter operations were largely unchanged from the fourth quarter of 2009. Improvements due to increased production and sales volumes were offset by lower results from our US remelters and somewhat higher raw material costs relating to purchased metal for remelting.
 
Total metal sales from own production and third party contracts increased significantly compared with the fourth quarter of 2009, primarily reflecting seasonally higher shipments of extrusion ingots in Europe.
 
Underlying results for our metal sourcing and trading operations improved significantly during the quarter. In addition to a good operating performance, underlying results were positively impacted by realized gains on physical standard ingot inventories for which hedging losses were recognised in the previous quarter.

Rolled Products
Underlying EBIT for Rolled Products improved significantly compared to the fourth quarter mainly due to higher sales volumes. Higher margins and lower operating unit costs also contributed to the improved underlying results.
 
Shipments were substantially higher than expected seasonal improvements for all product segments supported by restocking effects and higher end user demand. Beverage can shipments improved by 26 percent supported by increasing market demand. Shipments for automotive products increased by 18 percent, mainly driven by higher car sales in the premium markets. Volumes for thin gauge foil were also higher compared to the fourth quarter mainly for the liquid packaging market sector due to restocking and stronger consumer demand. General engineering applications also benefited from improved market conditions and restocking effects, in particular in the transport and general industrial segments. Shipments for lithographic sheets were higher compared to the fourth quarter in 2009 but remained below 2008 levels. Cost reductions continued during the quarter with a focus on manning and non-personnel related operating costs. Labor productivity continued to develop positively and was back to levels experienced in 2008. Unit costs were down to 2008 level as well, although shipments are below 2008 levels. New measures have been initiated to counter pressure on cost increases from suppliers during the quarter.

Extruded Products
Underlying results for Extruded Products improved from the fourth quarter of 2009 which included losses from the automotive structures operations that were divested at the end of the year. Underlying EBIT for the remaining businesses declined somewhat due to lower underlying results from our building systems business, mostly offset by improvements in our other extrusion operations.
 
Total sales volumes increased compared to the previous quarter and to the first quarter of 2009. Volumes for our European extrusion operations increased significantly from the previous quarter mainly due to stronger demand. Volumes declined on a seasonal basis for our building systems operations. A normal seasonal increase in volumes improved the underlying results somewhat for our Americas operations compared to the fourth quarter. Our Precision tubing business experienced strong demand compared to the previous quarter. Margins remained stable for all sectors compared to the previous quarter and the first quarter of last year.

Energy
Underlying EBIT for Energy increased substantially compared to the previous quarter due to high production and high realized spot prices. Planned low maintenance activities and the scheduled start-up of Suldal 1 provided additional capacity to take advantage of the high spot prices experienced in the first quarter. High area price differences between Mid-Norway and Southern Norway had a negative impact on underlying EBIT in the quarter.

Other and eliminations
Underlying EBIT for Other and eliminations amounted to charge of NOK 255 million in the first quarter compared with a charge of NOK 334 million in the fourth quarter and a charge of NOK 253 million in the first quarter of 2009. Underlying EBIT includes the elimination of internal gains and losses on inventories purchased from group companies which amounted to a charge of NOK 116 million in the first quarter compared with a charge of NOK 39 million in the fourth quarter and an income of NOK 190 million in the first quarter of 2009.
 
Hydro's solar activities incurred an underlying loss of NOK 25 million in the first quarter compared with a loss of NOK 40 million in the fourth quarter and a loss of NOK 31 million in the first quarter of 2009.

Items excluded from underlying EBIT and net income
To provide a better understanding of Hydro's underlying performance, the items in the table below have been excluded from EBIT and net income.
 
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 net income


NOK million
First
quarter
2010
Fourth
quarter
2009
First
quarter
2009
Year
2009
         
Unrealized derivative effects on LME related contracts (253) (728) 727 (2,630)
Unrealized derivative effects on power contracts 272 318 (580) (198)
Unrealized derivative effects on currency contracts 23 (19) (19) (345)
Metal effect, Rolled Products (314) (157) 662 588
Significant rationalization charges and closure costs (19) 65 305 518
Impairment charges (PP&E and equity accounted investments) 61 138 10 438
Pension plan amendment - - - (52)
Insurance compensation - (13) - (152)
(Gains)/losses on divestments (67) 684 - 684
Items excluded from underlying EBIT (297) 287 1,105 (1,148)
Net foreign exchange (gain)/loss (468) (216) (1,478) (2,774)
Calculated income tax effect 241 (275) 174 441
Items excluded from underlying net income (523) (204) (199) (3,481)

 

Finance
During the quarter, currency gains on intercompany balances denominated in Euro amounted to NOK 515 million, due to a 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. Other net currency losses amounted to NOK 47 million.
 
In the previous quarter, currency gains on intercompany balances denominated in Euro amounted to NOK 312 million due to weaker Euro against the Norwegian kroner.
 
During the quarter Hydro sold its remaining interest in Production Partner which resulted in a gain of NOK 112 million.
 
At end of the first quarter of 2010 cash and cash equivalents amounted to NOK 2.5 billion, which is at the same level as at the end of the previous quarter.

Tax
Income tax expense amounted to a charge of NOK 605 million in the quarter compared with a positive amount of NOK 183 million in the fourth quarter and a charge of NOK 155 million in the first quarter of 2009.
 
For the first quarter income tax expense was roughly 40 percent of pre-tax income. The tax rate is influenced by the effects of power sur-tax and results from equity accounted investments which are recognized net of tax.

 

*********
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