Hydro had an underlying loss before financial items and tax of NOK 793 million in the third quarter, compared with a loss of NOK 618 million in the previous quarter, reflecting the frail global economy, low aluminium prices and a weakening US dollar. Downstream results continued to improve, supported by higher volumes and cost saving measures.
- Third quarter underlying loss before financial items of NOK 793 million
- Stable demand at low level, positively influenced by restocking
- Upstream results remain weak due to low aluminium prices and weakening US dollar
- Downstream results improve on higher volumes and continued cost savings
- Capacity adjustments and cost reduction program delivered as planned
- Agreement to divest automotive structures business signed on October 26
- Qatalum 90 percent complete end-September, on schedule for start-up around year-end
The business areas"In response to the market downturn, we have completed a substantial program of capacity reductions and cost-cutting measures that are helping to reposition our company," President and Chief Executive Officer Svein Richard Brandtzæg said.
"Still, we remain cautious about the outlook for global aluminium demand and are concerned about the weakening US dollar. In view of these challenges, we will consider additional restructuring and cost-saving measures," he said.
"Our main priority in the coming months is to bring Qatalum on stream according to plan, which will improve Hydro's cost position and robustness," he added.
Underlying results in Primary Metal were strongly affected by continued low aluminium prices, resulting in substantial losses. Operational improvements and stable production following the completion of previously announced capacity curtailments contributed to a further decline in fixed costs. Results in Hydro's alumina operations improved due to rising alumina prices and stronger performance.
Other issuesMetal Markets' underlying results declined, heavily affected by the weakening US dollar during the quarter. Sales volumes increased moderately.
Underlying EBIT for Hydro's downstream operations, Rolled Products and Extruded Products, continued to improve on rising volumes as well as declining costs due to cost-cutting measures. Demand improved slightly from the previous quarter as customers started to replenish inventories, but remained well below year-ago levels. Margins were stable during the quarter.
Hydro has entered into an agreement to divest its automotive structures business to the German Benteler Automobiltechnik GmbH. The agreement represents a solid, long-term industrial solution for Hydro`s automotive structures activities, and is in line with Hydro's strategy to focus its extruded activities on profiles solutions and building systems. The transaction is expected to be cash neutral for Hydro, and an estimated after-tax loss of NOK 250 million will be recognized in next quarter's results.
Underlying EBIT for the Energy business area declined from the second quarter of 2009, mainly due to lower spot prices. Production was seasonally low.
The joint venture with Qatar Petroleum to build Qatalum, which will be one of the most cost-effective smelters in the world, is approaching completion. About 90 percent finished at the end of the quarter and on schedule for start-up around the turn of the year.
Net cash generated from operating activities amounted to NOK 1.6 billion in the third quarter, compared with net cash generated by operating activities of NOK 2.0 billion in the previous quarter.
Investments amounted to NOK 2.1 billion in the quarter, rising from the previous quarter as Qatalum is being financed by equity contributions from the owners in the second half of the year. Investments relating to the Qatalum project in the third quarter were about NOK 1.5 billion. Hydro had a net cash position of NOK 2.4 billion at the end of the quarter.
|Key financial information|
NOK million, except per share data
|% change prior quarter||Third quarter
|% change prior year quarter||First 9
|Revenue||16,337||17,123||(5) %||21,765||(25) %||50,313||67,275||88,643|
|Earnings before financial items and tax (EBIT)||719||410||75 %||2,414||(70) %||(469)||4,300||1,194|
|Items excluded from underlying EBIT||(1,512)||(1,029)||(924)||(1,435)||840||4,815|
|Underlying EBIT||(793)||(618)||(28) %||1,490||>(100) %||(1,904)||5,141||6,009|
|Underlying EBIT :|
|Primary Metal||(760)||(895)||15 %||906||>(100) %||(1,839)||2,639||2,732|
|Metal Markets||(15)||196||>(100) %||(41)||64 %||(63)||461||703|
|Rolled Products||51||(28)||>100 %||170||(70) %||(31)||558||651|
|Extruded Products||95||(26)||>100 %||152||(38) %||(136)||670||338|
|Energy||217||281||(23) %||493||(56) %||945||1,216||1,865|
|Other and eliminations||(381)||(146)||>(100) %||(191)||(100) %||(781)||(403)||(279)|
|Underlying EBIT||(793)||(618)||(28) %||1,490||>(100) %||(1,904)||5,141||6,009|
|Income (loss) from continuing operations||1,001||282||>100 %||233||>100 %||1,003||2,578||(3,267)|
|Underlying income (loss) from continuing operations||(1,222)||(572)||>(100) %||1,075||>(100) %||(2,274)||3,763||3,579|
|Earnings per share from continuing operations||0.83||0.17||>100 %||0.06||>100 %||0.72||1.93||(3.04)|
|Underlying earnings per share from continuing operations||(1.01)||(0.53)||(89) %||0.75||>(100) %||(2.00)||2.91||2.62|
|Investments||2,126||765||>100 %||2,443||(13) %||3,576||6,264||9,012|
|Adjusted net interest-bearing debt||(19,044)||(19,236)||1 %||(5,455)||>(100) %||(19,044)||(5,455)||(15,440)|
|Key Operational information|
|Primary aluminium production (kmt)||330||338||(3) %||439||(25) %||1,064||1,309||1,750|
|Realized aluminium price LME (USD/mt)||1,523||1,468||4 %||2,848||(47) %||1,667||2,632||2,638|
|Realized aluminium price LME (NOK/mt)||9,480||9,598||(1) %||15,114||(37) %||10,851||13,976||14,699|
|Realized NOK/USD exchange rate||6.22||6.54||(5) %||5.22||19 %||6.51||5.31||5.57|
|Rolled Products sales volumes to external market (kmt)||205||187||10 %||240||(15) %||583||752||965|
|Extrusion products sales volumes to external market (kmt)||104||99||5 %||122||(14) %||300||385||488|
|Automotive products sales volumes to external market (kmt)||23||21||8 %||26||(13) %||61||87||105|
|Power production (GWh)||1,682||1,809||(7) %||2,677||(37) %||5,968||8,548||11,361|
Reported EBIT and income from continuing operations
Reported EBIT for Hydro amounted to NOK 719 million for the third quarter including net positive effects of NOK 1,512 million comprised of net unrealized derivative gains of NOK 1,562 million, positive metal effects of NOK 141 million, other positive effects of NOK 95 million and impairment charges of NOK 286 million. In the previous quarter, reported EBIT amounted to NOK 410 million including net positive effects of NOK 1,030 million comprised of net unrealized derivative gains of NOK 1,310 million, other positive effects of NOK 60 million, negative metal effects of NOK 225 million, and rationalization charges and closure costs of NOK 117 million.
Income from continuing operations was NOK 1,001 million in the third quarter including net foreign exchange gains of NOK 992 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. Income from continuing operations was NOK 282 million in the second quarter including net foreign exchange gains of about NOK 88 million.
Market developments and outlook
The third quarter was marked by a strong positive development in aluminium prices. During the quarter, LME three month prices ranged from around USD 1,800 - USD 1,950 per mt. The US dollar weakened in the quarter, mitigating the effect of the market price improvement in Norwegian kroner.
Demand for aluminium increased in China as government actions and initiatives relating to the financial crisis reached full effect during the quarter. Demand for 2009 as a whole is expected to be slightly higher than in 2008. Outside China demand increased slightly from the low levels seen in the first half of the year. No substantial further improvement is expected for the remainder of the year and there continues to be significant uncertainty regarding the timing and strength of an eventual recovery.
LME stocks stabilized at around 4.6 million mt in the third quarter although analysts reports indicate that unreported stocks have been increasing throughout the quarter.
In response to the falling demand, capacity curtailments reached a global level of around 3 million mt annually in the first half of 2009 excluding China. Current production has stabilized around 23.8 million tonnes compared to a total production of about 26.4 million mt in 2008 excluding China. No further curtailments were announced in the third quarter.
The underlying demand for metal products (extrusion ingot, sheet ingot, foundry alloys and wire rod) in Europe and North America improved slightly during the third quarter 2009 compared to the previous quarter but there is still uncertainty regarding the timing of any significant recovery.
Demand for flat rolled products in Europe continued its upward trend in the third quarter after apparently reaching bottom in the previous quarter. Consumption and shipments are expected to continue on the same level as third quarter for the final quarter of the year, with a normal seasonal decline towards year end. European demand for extruded aluminium products was seasonally lower compared to the previous quarter. Demand in North America continued to improve from the previous quarter following a long period of declining markets. Demand in both regions was significantly lower than the third quarter of 2008. The overall outlook for the European and US extrusion markets continue to be weak, but stable across most market segments. However, we expect seasonally lower demand in the fourth quarter of the year.
Nordic spot prices for electricity declined during the third quarter following a period of high precipitation that has restored the hydrological balance in Norway close to normal after a long period of significant deficit. Demand increased in the quarter due to restart of industrial activities and increased demand for heating, but was about 7 percent lower for the first nine months of 2009 compared to the same period of last year. Colder temperatures in October have supported prices by reducing inflow into reservoirs and increasing demand.
Outlook for Hydro
Hydro has taken active steps to capitalize on falling prices for key raw materials. However we expect that raw material prices will stabilize at present levels for the remainder of 2009.
At the end of third quarter, Hydro had sold more than 90 percent of its primary aluminium production for the fourth quarter of 2009 forward at a price level of around USD 1,800 per mt. A continuing or increasingly weaker US dollar will have a negative impact on realized aluminium prices measured in Norwegian kroner. Hydro expects a continued weak result in the fourth 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. If it becomes necessary to permanently close plants that have been curtailed on a temporary basis, additional substantial closure costs would be incurred.
Charges related to the build up of the operating organization at Qatalum will increase further in the fourth quarter compared to the third quarter as final preparations for start-up of the plant are completed.
Hydro's reservoir levels were higher than normal at the end of the third quarter and also higher than the corresponding period in 2008. The increased reservoir levels, together with lower maintenance activity is expected to result in somewhat higher power production in the fourth quarter compared to the third quarter of 2009. Spot prices are expected to continue on low level. Power production in the fourth quarter is expected to be significantly lower than the corresponding period in 2008 mainly due to the outage at Suldal I power station.
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.
Underlying EBIT improved slightly for Primary Metal in the third quarter but results continued to be heavily impacted by low realized aluminium prices. Realized prices increased measured in US dollars but declined measured in Norwegian kroner impacting underlying results by roughly NOK 40 million compared to the second quarter. The change in inventory write-downs resulted in a positive effect of about NOK 125 million for the third quarter on an isolated basis.
Variable costs at our smelters were stable compared to the second quarter of 2009. Underlying results were positively influenced by somewhat lower carbon costs.
Fixed costs at the smelters declined further by about NOK 100 million due to the curtailments and the manning reductions that took place in the first half of 2009 in addition to lower maintenance activities.
Underlying income from our equity accounted smelters was relatively unchanged from the second quarter. Charges related to the build up of the operating organization at Qatalum increased to about NOK 125 million from roughly NOK 90 million in the previous quarter as the plant prepares for start-up.
Underlying EBIT for Alunorte, our equity accounted alumina refinery, amounted to NOK 10 million, a substantial improvement compared with underlying losses of NOK 69 million in the previous quarter. The increase resulted mainly from higher alumina prices due to the increase in LME prices combined with an improved operational performance and higher production volumes. Temporary measures to address the challenging financial situation in Alunorte introduced in March continued to have a positive impact on underlying results for the quarter.5)
Alumina commercial activities had another strong quarter, mainly due to higher LME prices and despite lower external sales volumes.
Metal Markets incurred an underlying loss for the quarter heavily impacted by negative currency effects of roughly NOK 150 million due to the weakening of the US dollar against Norwegian kroner. Underlying results for the second quarter included limited net currency effects. The negative third quarter result was also influenced by significantly lower contributions from resale of third party metal products.
Production from Metal Markets' remelter operations increased from the second quarter, notwithstanding seasonally lower volumes during the summer holiday period. Our European remelters operated at nearly full capacity towards the end of the quarter, reflecting improved product demand in our main markets. Remelter production also increased in the US, but the market situation in North America continues to be weak.
Total metal product sales increased compared with the second quarter, reflecting a moderate improvement in demand for extrusion ingots, foundry alloys and sheet ingots in our main markets in Europe, Asia and North America.
Operating margins continued to be strong for our metal sourcing and trading activities but underlying results were significantly impacted by the negative currency effects discussed above.
Underlying EBIT for Rolled Products improved further in the third quarter but continued to be impacted by the weak economy. The positive result for the quarter was mainly due to higher volumes together with the effects of ongoing cost reduction measures.
Shipments increased for most major product areas. Shipments of industrial, packaging and automotive applications all experienced a recovery contributing to the improved result, while shipments declined for construction applications. Margins measured in Euro declined slightly compared to the second quarter but were stable compared to the level achieved during the first half year.
Underlying results for Extruded Products improved for the quarter mainly due to higher volumes and lower costs as a result of the 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. Expected seasonal declines were more than offset by customer restocking activities. 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 third quarter of the previous year. Underlying results for our American operations improved compared to the second quarter. Higher volumes and cost cutting measures resulted in a small positive contribution for the quarter. Margins remained firm compared to the previous quarter.
Our Automotive operations had an underlying profit for the quarter improving from the 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.
Underlying EBIT for Energy declined from the second quarter of 2009 mainly due to lower spot prices. Production continued to be seasonally low and was also impacted by 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.
Other and eliminations
Underlying EBIT for Other and eliminations amounted to a charge of NOK 381 million in the third quarter compared with a charge of NOK 146 million in the second quarter and a charge of NOK 191 million in the third quarter of 2008. The increase in the quarter mainly related to charges for the elimination of unrealized gains and losses on inventories purchased from group companies.
Hydro's solar activities incurred an underlying loss of NOK 18 million in the third quarter compared with NOK 29 million in the second quarter and NOK 18 million in the third quarter of 2008.
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|
|Unrealized derivative effects on LME related contracts||(1,406)||(1,223)||35||(1,902)||(864)||1,120|
|Unrealized derivative effects on power contracts||(54)||118||(1,038)||(516)||2,249||768|
|Unrealized derivative effects on currency contracts||(102)||(204)||150||(325)||50||314|
|Metal effect, Rolled Products||(141)||225||(38)||746||(171)||235|
|Significant rationalization charges and closure costs||30||117||-||453||-||109|
|Impairment charges (PP&E and equity accounted investments)||286||4||-||300||-||2,464|
|Loss provisions (power contracts)||-||-||-||-||-||257|
|Pension plan amendment||(52)||-||-||(52)||-||-|
|(Gains)/losses on divestments||-||-||(34)||-||(423)||(453)|
|Items excluded from underlying EBIT||(1,512)||(1,029)||(924)||(1,435)||840||4,815|
|Net foreign exchange (gain)/loss||(992)||(88)||2,015||(2,559)||862||5,491|
|Calculated income tax effect||280||262||(248)||716||(517)||(3,460)|
|Items excluded from underlying income from continuing operations||(2,224)||(854)||843||(3,277)||1,185||6,846|
During the quarter, currency gains on intercompany balances amounted to about NOK 1,101 million mainly 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 109 million which mainly related to Hydro's working capital.
In the previous quarter, currency losses on intercompany balances denominated in Euro amounted to about NOK 177 million due to stronger Euro against the Norwegian kroner.
At end of the third quarter of 2009 cash and cash equivalents amounted to NOK 2.9 billion down from NOK 4.9 billion at the end of the previous quarter.
Income tax expense amounted to NOK 707 million in the quarter compared with NOK 273 million in the second quarter of 2009 and NOK 201 million in the third quarter of 2008. Income tax expense amounted to NOK 1,134 million and NOK 1,183 million for the first nine months of 2009 and 2008 respectively.
For the first nine months of 2009, income tax expense was roughly 53 percent of pre-tax income. The high tax rate resulted mainly from the effects of power sur-tax, results from equity accounted investments which are recognized net of tax and the effect of certain operating losses having no tax effect.