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Second quarter of 2010

Hydro had underlying revenues before financial items and taxes of NOK 1,110 million in the second quarter, with NOK 688 million recorded in the first quarter. Such basic results for the quarter were elevated due to higher realized aluminum prices, continued improvements in alumina operations and higher distribution sales.

  • NOK 1,110 million in basic EBIT in the second quarter.
  • Solid demand in the seasonally strong quarter.
  • Production improvements with higher aluminum prices and performance in alumina production.
  • Higher distribution with strong sales, steady margins and improved productivity.
  • Drop in energy consumption due to significantly less energy production.
  • Growth in production at the Qatalum plant on schedule for full production in the 4th quarter; 48% of vats in operation at the end of the 2nd quarter.
  • Acquisition of Vale's aluminum business in progress for completion in the 4th quarter.
  • Offer of shares in the order of NOK 10 billion was successfully concluded; growth forecast for Hydro's main markets unchanged at 12%.

"The solid results are attributed to the higher sales volume, combined with firm margins and strict cost control in a seasonally strong quarter. In this quarter, Hydro has established itself as a strong player in the market," said the President and CEO Hydro, Svein Richard Brandtzæg.

"The full production of the Qatalum plant and the closing of the acquisition of Vale's aluminum business are scheduled for the fourth quarter. Combined, these actions will strengthen Hydro in all parts of the value chain and make us an actor increasingly robust in an industry ready to grow, "said Brandtzæg.

The basic results of Primary Metal improved during the second quarter, compared to the previous quarter, due to the higher prices charged for aluminum. Hydro's alumina and raw materials business showed better basic results, mainly due to the Alunorte alumina refinery, which recorded higher sales volumes as a result of more stable production. Variable costs increased for Hydro's reduction operations during the quarter.
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The basic results of the Metal Markets decreased in the second quarter, mainly due to an increase in the negative effects of the exchange rate, as a result weakening of the Euro against the US dollar. The utilization of installed capacity and margins remained firm in the quarter, despite the increase in raw material costs.

Basic EBIT for Rolled Products increased substantially in relation to the first quarter, driven mainly by higher sales volume. Higher margins and lower operating costs per ton also contributed to the improvement in basic results. Extruded products also showed significantly better basic results based on seasonally higher volumes and firm margins in all business sectors.

Basic EBIT for Energy decreased substantially compared to the previous quarter due to significantly lower hydropower production.

The growth of the Qatalum aluminum plant in Qatar continued during the second quarter, with around 48% of the 704 vats in operation at the end of June 2010. Production of the remaining vats at the plant will be incorporated during 2010 and the completion of plant growth is scheduled for the fourth quarter of this year.
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The net cash generated by operating activities totaled NOK 1.6 billion in the quarter. Investments totaled NOK 1.3 billion, including about NOK 740 million related to Qatalum. Investments at the Qatalum plant are expected to be slightly lower in the second half of 2010, compared to the first half, as the project approaches completion. Hydro's net debt totaled NOK 0.1 billion at the end of the quarter.
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On May 2, 2010, Hydro announced an agreement to assume the majority position in the aluminum business of the Brazilian metals company and Vale mining. The transaction is expected to close in the fourth quarter of 2010. In order to mitigate the risk of a lower aluminum price and ensure a robust cash flow, Hydro hedged most of the net aluminum price exposure in the business acquired up to the end of 2011 of around USD 2,400 per mt.
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To partially finance the operation, support the company's investment level classification, as well as its ability to implement future projects, Hydro launched a offering of shares to strengthen its share capital of NOK 10 billion. The stock offering was successfully completed, with the earnings received by Hydro on July 16, and the new shares were delivered to underwriters and admitted to trading on the Oslo Stock Exchange and the London Stock Exchange on July 19. For more information on the transaction and the offering of shares, see the Regulations and Prospectus, dated June 2, 2010 and June 21, 2010, respectively. & nbsp;

Key financial information
NOK million, except per share data Second
quarter
2010
First
quarter
2010
% change prior quarter Second
quarter
2009
% change prior year quarter First
half
2010
First
half
2009
Year
2009
& nbsp; & nbsp; & nbsp; & nbsp; & nbsp; & nbsp; & nbsp; & nbsp; & nbsp;
Revenue 19,779 18,145 9% 17,617 12% 37,924 34,186 67,409
& nbsp; & nbsp; & nbsp; & nbsp; & nbsp; & nbsp; & nbsp; & nbsp; & nbsp;
Earnings before financial items and tax (EBIT) 1,157 985 17% 410 & gt; 100% 2,142 (1,188) (1.407)
Items excluded from underlying EBIT (47) (297) & nbsp; (1,029) & nbsp; (344) 77 (1,148)
Underlying EBIT 1,110 688 61% (618) & gt; 100% 1,798 (1,111) (2,555)
& nbsp; & nbsp; & nbsp; & nbsp; & nbsp; & nbsp; & nbsp; & nbsp; & nbsp;
Underlying EBIT: & nbsp; & nbsp; & nbsp; & nbsp; & nbsp; & nbsp; & nbsp; & nbsp;
Primary Metal 657 (49) & gt; 100% (895) & gt; 100% 607 (1,079) (2,556)
Metal Markets 31 65 (52)% 196 (84)% 96 (48) (83)
Rolled Products 309 223 39% (28) & gt; 100% 532 (82) 26
Extruded Products 201 117 72% (26) & gt; 100% 318 (230) (67)
Energy 177 588 (70)% 281 (37)% 766 728 1,240
Other and eliminations (265) (255) (4)% (146) (81)% (520) (400) (1,114)
Underlying EBIT 1,110 688 61% (618) & gt; 100% 1,798 (1,111) (2,555)
& nbsp; & nbsp; & nbsp; & nbsp; & nbsp; & nbsp; & nbsp; & nbsp; & nbsp;
Net income (loss) 598 924 (35)% 282 & gt; 100% 1,523 2 416
& nbsp; & nbsp; & nbsp; & nbsp; & nbsp; & nbsp; & nbsp; & nbsp; & nbsp;
Underlying net income (loss) 530 401 32% (572) & gt; 100% 931 (1,052) (3,066)
& nbsp; & nbsp; & nbsp; & nbsp; & nbsp; & nbsp; & nbsp; & nbsp; & nbsp;
Earnings per share 0.40 0.68 (42)% 0.17 & gt; 100% 1.08 (0.11) 0.24
& nbsp; & nbsp; & nbsp; & nbsp; & nbsp; & nbsp; & nbsp; & nbsp; & nbsp;
Underlying earnings per share 0.34 0.27 26% (0.51) & gt; 100% 0.61 (0.94) (2.50)
& nbsp; & nbsp; & nbsp; & nbsp; & nbsp; & nbsp; & nbsp; & nbsp; & nbsp;
Financial data: & nbsp; & nbsp; & nbsp; & nbsp; & nbsp; & nbsp; & nbsp; & nbsp;
Investments 1,261 1,766 (29)% 765 65% 3,028 1,450 5,947
Adjusted net interest-bearing debt (18,191) (16,939) (7)% (19,236) 5% (18,191) (19,236) (15,645)
& nbsp; & nbsp; & nbsp; & nbsp; & nbsp; & nbsp; & nbsp; & nbsp; & nbsp;
Key Operational information
Primary aluminum production (kmt) 362 339 7% 338 7% 701 735 1,396
Realized aluminum price LME (USD / mt) 2,200 1.997 10% 1,468 50% 2,099 1,727 1,698
Realized aluminum price LME (NOK / mt) 13.302 11,542 15% 9,598 39% 12.401 11,456 10,764
Realized NOK / USD exchange rate 6.05 5.78 5% 6.54 (7)% 5.91 6.63 6.34
Metal Markets sales volumes to external market, excl. ingot trading (kmt) 457 414 10% 375 22% 871 695 1,468
Rolled Products sales volumes to external market (kmt) 242 231 5% 187 30% 473 378 794
Extruded Products sales volumes to external market (kmt) 141 128 10% 112 26% 269 218 453
Power production (GWh) 1,621 2,781 (42)% 1.809 (10)% 4.402 4,286 7,897

About Hydro's report

In order to provide a better understanding of Hydro's basic performance, the following discussion of its operating performance excludes certain items from EBIT (earnings before financial items and taxes) and net income. See "Items excluded from basic EBIT and net income" for more information on such items.

Reported EBIT and net income

Hydro's reported EBIT totaled NOK 1,157 million for the second quarter of 2010, including positive net effects of NOK 47 million composed of net unrealized losses from derivatives, amounting to NOK 292 million, positive effects of NOK 206 metal million, and other positive effects of NOK 133 million, mainly related to changes in Norwegian pension plans.
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In the previous quarter, Hydro's reported EBIT totaled NOK 985 million, including positive net effects NOK 297 million made up of unrealized losses net of NOK 42 million, positive effects of NOK 314 million, in addition to other positive effects of NOK 25 million.
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Profit net reached NOK 598 million in the second quarter, including net foreign exchange gains of NOK 151 million referring to intercompany balances denominated in Euro. These gains have no cash effect and are offset in capital by the translation of the corresponding subsidiaries during consolidation. In the first quarter, net income reached NOK 924 million, including net foreign exchange gains of NOK 515 million related to intercompany balances denominated in Euro.

Development and market outlook

Average three-month prices on the London Stock Exchange (LME) decreased in the second quarter and ended with the three-month price on the LME at $ 1,954 per mt.

Global demand for primary aluminum, excluding China, strengthened in the second quarter, reaching an annual consumption of around 24 million tonnes.

Production outside of China increased to 25 million tons / year.
Demand for primary aluminum in China increased from the previous quarter to about 17.6 million tons per year. Production was relatively stable, around the same level, resulting in a balanced market during the quarter.

Shares in the LME fell slightly to around 4.4 million tonnes at the end of the second quarter compared to 4.6 million tonnes at the beginning of the quarter.

Demand for metallic products (ingot for extrusion, sheets, casting alloys and wire rod) during the second quarter continued above the levels recorded in the same quarter last year.
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consumption in the European flat rolled products market improved by 5% in the second quarter of 2010, compared to the previous quarter. Order levels remained steady, reflecting the growth in demand in end use compared to 2009. Demand in the North American market showed similar developments. Demand is expected to remain stable in the third quarter, but with a normal seasonal decline.

European demand for extruded aluminum products decreased slightly compared to the first quarter, which was influenced by the reshaping of customer inventories. North America experienced a seasonal increase in demand compared to the first quarter of 2010 and the weak second quarter of 2009, and the market appears to be improving after a long period of continuous decline. Demand in the South American market continued to be positive, mainly in Brazil.

On a combined basis, we continue to expect demand in the main production and distribution markets to grow by around 12% in 2010.

The price for immediate delivery (spot) of Nordic electricity decreased during the second quarter, due to a drop in demand after a record cold winter. Dry spring weather in southern Norway has resulted in lower reservoir levels in this region than in northern Norway and Sweden. Energy production should be lower than normal until reservoir levels are normalized.

Other factors that impact Hydro

Hydro sold in advance almost all of its primary aluminum production for the third quarter of 2010, at a price level of around USD 2,175 per mt, excluding expected production from the Qatalum plant.

Qatalum will continue to experience operating losses during the initial production period. Qatalum's production prices are one month behind the LME prices. As a result, the declining aluminum price during the second quarter of 2010 is expected to negatively affect Qatalum results in the third quarter of 2010. The high depreciation in relation to real production is also expected to also impact the quarter's results .

The basic results of Hydro's alumina and raw materials business are expected to decline in the second half of 2010, as a result of lower expected prices for alumina, due to a lower LME and higher raw material costs, due to lag effects in the pricing formula for bauxite, which is partly related to LME prices. In addition, a decrease in the results of commercial alumina activities is expected in the second half of 2010 in relation to the strong performance in the first half of 2010. The decline is due to lower forecasted margins.

Low snow accumulations in southern Norway have resulted in low replenishment of Hydro reservoirs. As a result, energy production is expected to remain at a low level in the third quarter, unless a higher-than-normal level of precipitation occurs.

During 2009, Hydro reduced its production capacity and reduced production at several plants. If it is necessary to definitively close down plants that have been temporarily reduced, significant additional closing costs will be incurred.

The risk of default by the other party in the contracts continues, based on current economic conditions. So far we have not had any significant defaults and we are following the situation closely.

Primary Metal

The primary results of Primary Metal improved during the quarter, compared to the first quarter, due to higher aluminum prices and better performance in alumina and raw materials.

The basic EBIT of Alumina and Raw Materials increased further in the second quarter, in line with the improved performance in the first quarter. Basic results improved significantly in relation to Alunorte, mainly due to higher sales volumes as a result of more stable production. The realized alumina prices remained relatively unchanged during the quarter, while operating costs decreased slightly. The basic results were positively impacted by the liquidation of an insurance action for interruption of activity.

The basic results of the commercial activities of alumina improved in the quarter after strong performance in the first quarter, mainly due to the higher volumes of external contracts. Margins remained good, but decreased slightly compared to the previous quarter. Basic EBIT was positively influenced by unrealized gains on future contracts at LME.

The basic results of primary aluminum improved significantly in the second quarter, with higher aluminum prices, contributing approximately NOK 600 million, compared to the previous quarter. Higher sales volumes and product premiums also made a positive contribution to basic EBIT for the quarter.

Variable costs increased by NOK 120 million during the quarter, mainly due to higher alumina costs and higher energy costs. Other costs were globally stable.

Qatalum's basic results improved slightly, but were still negative due to a substantial increase in depreciation rates, combined with low production during the development phase (ramp-up) at the plant.

Metal Markets

The basic EBIT of the Metal Markets decreased in the second quarter, mainly due to an increase in the negative effects of the exchange rate, as a result of the weakening of the Euro against the US dollar. Negative exchange effects added up to around NOK 140 million in the second quarter compared to the negative effects of around NOK 100 million in the previous quarter.

The basic results of remelting operations decreased slightly compared to the first quarter. The positive effects of higher production and sales volumes were offset by the increase in raw material costs.

Total sales of metals from own production and third-party contracts increased significantly compared to the first quarter of 2010, mainly due to seasonally higher shipments of extrusion ingots in all markets and increased sales from the Qatalum plant.

The basic results for our metal supply and commercial operations have been largely unchanged since the first quarter, with good operating performance and positive results in both periods.

Laminates

Basic EBIT for Rolled Products increased substantially in relation to the first quarter, driven mainly by the higher sales volume. Higher margins and lower operating costs per mt also contributed to the improvement in basic results.

Shipments improved in all market segments, except for lithographic plates, which remained stable. Shipments of beverage cans grew 11%, supported by continued good market demand. Automotive product shipments increased 8%, influenced by a continued strengthening in the luxury car market. Shipments of thin plates improved 7% over the first quarter, driven mainly by strong demand in the liquid packaging market. Engineering shipments in general increased by 5%.

The focus on cost continued and the cost per mt decreased even more compared to the first quarter. Labor productivity also improved compared to the first quarter of 2010 and was above the level reached in 2008, despite the fact that the volumes of rolled products were below the levels of 2008.

Extruded

Basic results for Extruded Products improved from the first quarter of 2010, due to higher seasonal volumes and stable margins in all business sectors.

Sales volumes for our extrusion operations in Europe and the Americas increased significantly compared to the previous quarter, mainly as a result of strong seasonal demand. The volumes for our construction systems operations were also seasonally higher when compared to the first quarter, but the recovery in the civil construction market is slow compared to other market segments. Our precision pipeline business had slightly higher volumes compared to the previous quarter, supported by continued strong demand from the automotive segment. Margin and cost developments remained stable for all sectors compared to the previous quarter.

Energy

Basic EBIT for Energy decreased compared to the previous quarter, due to substantially lower production. The corresponding reduction in net cash sales had a negative impact on basic EBIT of NOK 565 million. High spot prices, small differences in area prices and lower transmission costs offset the negative impact to some extent.

Others and eliminations

Basic EBIT for Others and eliminations amounted to NOK 265 million in the second quarter compared to a rate of NOK 255 million in the previous quarter. Basic EBIT includes eliminating internal gains and losses on inventories purchased from group companies, reaching a rate of NOK 85 million in the second quarter compared to a rate of NOK 116 million compared to the previous quarter.

Hydro's solar activities suffered a basic loss of NOK 47 million in the second quarter compared to a loss of NOK 25 million in the previous quarter.

Basic EBIT for Others and eliminations in the second quarter also included costs related to the acquisition of Vale's aluminum operations, in the amount of approximately NOK 50 million.

Items excluded from basic EBIT and net income

In order to provide a better understanding of Hydro's basic performance, the items in the table below have been excluded from EBIT and net income.

Items excluded from basic EBIT are mainly comprised of unrealized gains and losses with certain derivatives, depreciation and rationalization charges, effects of the sale of business and operating assets, as well as other items of a special nature or which should not be contracted continuously.

Linked to the agreement to acquire the majority of Vale's aluminum business in Brazil (Vale Aluminum), it was decided to hedge most of the net aluminum price exposure at Vale Aluminum by the end of 2011. Such hedges they are intended to mitigate the risk of a lower price of aluminum and to guarantee a robust cash flow from assets acquired in the transition phase. Hedges are not subject to the conclusion of the transaction. The significant part of the positions that ends after the closing of the transaction is subject to hedge accounting and included in other comprehensive income. Unrealized and realized effects of positions not subject to hedge accounting are classified as items excluded from basic EBIT.

During the second quarter, some Norwegian Hydro employees accepted an offer to transfer their retirement contracts from a defined benefit plan to the new contribution plan. The transition resulted in the cut and gain of settlement of the financed plans related to such workers. The recognized gain was excluded from basic EBIT.

Items excluded from underlying net income
NOK million Second
quarter
2010
First
quarter
2010
Second
quarter
2009
First
half
2010
First
half
2009
Year
2009
& nbsp; & nbsp; & nbsp; & nbsp; & nbsp; & nbsp; & nbsp;
Unrealized derivative effects on LME related contracts 389 (253) (1,223) 136 (496) (2,630)
Derivative effects on LME related contracts (Vale Aluminum) (320) - - (320) - -
Unrealized derivative effects on power contracts 211 272 118 483 (463) (198)
Unrealized derivative effects on currency contracts 12 23 (204) 35 (223) (345)
Metal effect, Rolled Products (206) (314) 225 (520) 887 588
Significant rationalization charges and closure costs 18 (19) 117 (1) 423 518
Impairment charges (PP & amp; E and equity accounted investments) - 61 4 61 14 438
Pension (151) - - (151) - (52)
Insurance compensation - - (66) - (66) (152)
(Gains) / losses on divestments - (67) - (67) - 684
Items excluded from underlying EBIT (47) (297) (1,029) (344) 77 (1,148)
Net foreign exchange (gain) / loss (59) (468) (88) (527) (1,566) (2,774)
Calculated income tax effect 38 241 262 279 436 441
Items excluded from underlying net income (68) (523) (854) (592) (1,054) (3,481)

Finance

Financial expenses totaled NOK 97 million in the second quarter, compared to financial income of NOK 545 million in the previous quarter.

In the second quarter, gains in intercompany balances, denominated in Euro, amounted to NOK 151 million, due to the weaker Euro in relation to the Norwegian krone. These gains have no cash effect and are offset in equity by the translation of the corresponding subsidiaries during consolidation.
Other net foreign exchange losses totaled NOK 92 million.

In the previous quarter, gains in foreign currency on intercompany balances, denominated in Euro, totaled NOK 515 million due to the weaker Euro against the Norwegian Krone.

Taxes

Income tax expense totaled NOK 462 million in the second quarter compared to a fee of NOK 605 million in the previous quarter and a fee of NOK 273 million in the second quarter of 2009. Tax expenses in the second quarter included approximately NOK 30 million, relating to tax proceedings in Germany.

In the first half of 2010, income tax expense was approximately 41% of pre-tax income. The tax rate is influenced by the effects of the energy surcharge and by the results of investments accounted for in equity, which are recognized net without taxes.

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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, involves risk and uncertainty. & nbsp; 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. & Nbsp; Factors that could cause these differences include, but are not limited to: our continued ability to reposition and restructure our upstream and downstream aluminum business; changes in availability and cost of energy and raw materials; global supply and demand for aluminum and aluminum 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. & nbsp; Hydro disclaims any obligation to update or review any forward-looking statements, whether as a result of new information, future events or otherwise.

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