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Third quarter of 2011: Better production results, higher raw material costs

Hydro had an underlying profit before interest and taxes (LAJIR) of NOK 1,646 million in the third quarter, compared to NOK 1,906 million in the second quarter. In the quarter, the Bauxita & amp; Alumina showed better production results, however, low seasonal and higher raw material costs had a negative influence on the results. The Energy business area reported its best quarterly result ever.

  • NOK 1,646 million underlying LAJIR
  • Best production results from Bauxita & amp; Alumina
  • Pressure of raw material prices
  • Solid contribution from the energy business
  • Qatalum in full production
  • Wiping out the portfolio through unlinking
  • Seasonal sales decline and weakened market
  • Greater macroeconomic uncertainty

"Efforts to improve the operations of Bauxita & amp; Alumina have given solid results and both Paragominas and Alunorte report an increase in production in the quarter. We are strengthening our cost improvement programs, but the pressure of raw material costs for the aluminum industry continues, "says Hydro President Svein Richard Brandtzæg.
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" The current macroeconomic restlessness makes it difficult to know how the market will develop. We maintain our expectations of growth in demand for aluminum outside China by 7%, however, due to the weakening of the market at the end of the year, growth may be a little weaker ", says Brandtzæg.
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Bauxite's underlying LAJIR & amp; Alumina increased compared to the second quarter, especially due to better production results and better results from commercial activities.
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Metal Primário's underlying LAJIR was lower than in the second & nbsp; quarter, due to lower sales volumes and higher raw material costs, which was partly offset by higher realized aluminum prices. The gradual increase in production from Qatalum, an equal-quoted association between Qatar Petroleum and Hydro, is finally complete; factory production reached full capacity, contributing to the increase in production in the quarter.
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"I am very pleased that Qatalum has reached full production. The factory is already producing with the capacity for which was conceived and our focus now will be to improve operations, to take better advantage of the factory's potential ", says Brandtzæg.

Hydro's downstream activities showed weaker underlying results compared to the previous quarter, which was influenced by a very positive assessment of ingot inventories and exchange effects. The lower underlying results of the remelting operations also negatively influenced the results for the third quarter.
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The underlying results of LAJIR for Hydro's downstream activities were weak, influenced by seasonal downturn and weak market. The rationalization measures implemented and underway at Sistemas de Construção have started to show results and the program will be carried out in the next quarter.
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Again, Energia presents solid underlying results, the best of all times for a third quarter due to high production throughout the quarter and relatively high prices in July and August.
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Hydro completed the sale of its non-strategic stake in the energy company SKS Produksjon AS . The sale resulted in a tax-free profit of NOK 658 million in the third quarter. In addition, Hydro signed an agreement on the sale of its 35% stake in the Alpart aluminum refinery in Jamaica. The sale is expected to close in the fourth quarter.

Operating cash flow totaled NOK 3.4 billion in the quarter, including a reduction of NOK 0.8 billion in net operating capital. The money earned from unbundling offset the money used for investments in the quarter. At the end of the quarter, Hydro's net debt position was NOK 0.1 billion.

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Key financial information
NOK million, except per share data Third quarter 2011 Second quarter 2011 % change prior quarter Third quarter 2010 % change prior year quarter First 9 months 2011 First 9 months 2010 Year 2010
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Revenue 23,829 24,728 (4)% 18,424 29% 69,695 56,348 75,754
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Earnings before financial items and tax (EBIT) 2,222 2,111 5% 274 & gt; 100% 10,189 2,417 3,184
Items excluded from underlying EBIT (576) (206) & gt; (100)% 690 & gt; (100)% (5,189) 347 167
Underlying EBIT 1,646 1,906 (14)% 965 71% 5,000 2,763 3,351
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Underlying EBIT:
Bauxite & amp; Alumina 302 272 11% 71 & gt; 100% 729 521 633
Primary Metal 653 765 (15)% 318 & gt; 100% 2,002 531 617
Metal Markets 93 244 (62)% 163 (43)% 480 259 321
Rolled Products 124 232 (46)% 227 (45)% 588 759 864
Extruded Products 40 96 (58)% 102 (61)% 241 420 444
Energy 506 363 40% 169 & gt; 100% 1,442 934 1,416
Other and eliminations (73) (65) (13)% (85) 14% (482) (661) (945)
Underlying EBIT 1,646 1,906 (14)% 965 71% 5,000 2,763 3,351
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Underlying EBITDA 2,985 3,229 (8)% 1,720 74% 8,628 5,037 6,420
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Net income (loss) 797 1,546 (48)% (63) & gt; 100% 7,498 1,460 2,118
Underlying net income (loss) 1,071 1,168 (8)% 545 96% 3,071 1,476 1,852
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Earnings per share 0.49 0.69 (29)% (0.07) & gt; 100% 3.84 0.93 1.33
Underlying earnings per share 0.50 0.52 (4)% 0.33 53% 1.47 0.94 1.14
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Financial data:
Investments 1,125 1,085 4% 1,591 (29)% 43,836 4,618 6,231
Adjusted net interest-bearing debt (18,389) (20,777) 11% (8,280) & gt; (100)% (18,389) (8,280) (6,427)
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Key operational information
Alumina production (kmt) 1,553 1,448 7% 491 & gt; 100% 3,774 1,483 1,976
Primary aluminum production (kmt) 522 505 3% 355 47% 1,443 1,055 1,415
Realized aluminum price LME (USD / mt) 2,592 2,509 3% 2,179 19% 2,494 2,125 2,113
Realized aluminum price LME (NOK / mt) 14,225 13.803 3% 13,503 5% 13,906 12,753 12,674
Realized NOK / USD exchange rate 5.49 5.50 - 6.20 (11)% 5.58 6.00 6.00
Metal Markets sales volumes to external market (kmt) 527 533 (1)% 429 23% 1,527 1,300 1,717
Rolled Products sales volumes to external market (kmt) 228 242 (6)% 239 (5)% 714 712 945
Extruded Products sales volumes to external market (kmt) 137 142 (4)% 134 2% 415 402 529
Power production (GWh) 2,737 1,830 50% 1,479 85% 6,875 5,881 8,144

Pro forma underlying financial and operating results

There are no differences between Hydro's actual and proforma underlying financial and operating results for the third and second quarter comparative periods in 2011. Please see the Profoma information section later in this report for a discussion on developments compared to earlier periods.

Key financial information
NOK million & nbsp; Third quarter 2011 Second quarter 2011 % change prior quarter Third quarter 2010 % change prior year quarter First 9 months 2011 First 9 months 2010 Year 2010
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Revenue 23,829 24,728 (4)% 21,133 13% 71,372 64,682 87,272
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Earnings before financial items and tax (EBIT) 2,222 2,111 5% 289 & gt; 100% 5,937 2,735 3,696
Items excluded from underlying EBIT (576) (206) & nbsp; 941 & nbsp; (847) 561 445
Underlying EBIT 1,646 1,906 (14)% 1,230 34% 5,090 3,296 4,141
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Underlying EBITDA 2,985 3,229 (8)% 2,555 17% 9,094 7,237 9,450
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Net income (loss) attributable to Hydro shareholders 997 1.405 (29)% 157 & gt; 100% 3,183 1,475 2,220
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Key operational information
Alumina production (kmt) 1,553 1,448 7% 1,442 8% 4,337 4,357 5.805
Primary aluminum production (kmt) 522 505 3% 469 11% 1,518 1,391 1,867

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About Hydro's reporting

Underlying EBIT

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" later in this report for more information on these items.

Acquisition of Vale's aluminum business

On February 28, 2011 Hydro completed the take-over of the majority of Vale's aluminum business in Brazil. Effective from the first quarter of 2011, we are including a new operating segment, Bauxite & amp; Alumina, in our reporting structure in addition to our other five operating segments. In addition to the assets acquired from Vale, Hydro's bauxite and alumina activities previously included in the Primary Metal segment have been transferred to the new Bauxite & amp; Alumina segment and prior periods have been restated. Primary Metal includes the Albras aluminum plant in addition to Hydro's pre-transaction primary aluminum production activities. Effective from the first quarter of 2011, elimination of internal gains and losses on alumina previously included in the Primary Metal segment is included in Other and Eliminations, and prior periods have been restated.

The following discussion on reported and underlying operating results includes the acquired bauxite and alumina activities from Vale from March 1, 2011. Amounts relating to previous periods have not been restated to reflect the reported and underlying results of the acquired assets.

Pro forma information related to acquisition of Vale's aluminum business

To provide a presentation of Hydro's performance on comparable basis, certain pro forma financial and operating information is also presented in this report based on including the results of the acquired Vale assets for the full calendar quarter and for all previous periods presented in this report. See "Second quarter report 2011" for more information on the acquisition and the pro forma information included in our second quarter report.

Reported EBIT and net income

Reported EBIT for Hydro amounted to NOK 2,222 million in the third quarter including net unrealized derivative gains of NOK 6 million, negative metal effects of NOK 77 million, rationalization and closure costs of NOK 28 million and gains on divestments of NOK 674 million .

In the previous quarter, reported EBIT for Hydro amounted to NOK 2,111 million including net unrealized derivative gains of NOK 266 million, positive metal effects of NOK 28 million and other net negative effects of NOK 87 million comprised of rationalization and closure costs, impairment charges and gains on divestments.

Net income for the third quarter amounted to NOK 797 million including net foreign exchange losses of NOK 1,248 million.

In the second quarter net income amounted to NOK 1.546 million including net foreign exchange gains of NOK 334 million.

Market developments and outlook

Bauxite and alumina

Global demand for alumina outside China was slightly higher in the third quarter compared to the second quarter mainly due to the ramp-up of new production capacity. Annualized alumina production outside China amounted to about 54 million mt.

Alumina demand and production in China continued to increase in the third quarter compared to the previous quarter, mainly due to commissioning of new primary aluminum production and alumina projects.

Platts alumina spot prices have been trading around USD 370 per mt during the quarter, representing a range of roughly 15.3-15.8 percent of LME.1)

1) Due to existing sales contracts, Hydro has limited volumes available for sale for the next few years. As a result, short-term alumina market developments have limited influence on Hydro's earnings for this period.

Primary aluminum

LME prices fell in the third quarter compared to the second quarter. Prices started the quarter at a level around USD 2,500 per mt and ended around USD 2,200 per mt. Prices measured in NOK and EUR have declined to a lesser extent due to a strengthening of the USD during the quarter.

Demand for primary aluminum in the world outside China declined during the third quarter compared to the second quarter, amounting to an annualized consumption of 25.7 million mt. Supply of primary aluminum has continued to increase as new projects come on stream. Annualized production amounted to 26.5 million mt in the third quarter. Although market sentiment has weakened during the quarter due to growing economic uncertainty, we continue to foresee an overall market growth of about 7 percent in 2011.

Consumption of primary aluminum in China decreased slightly in the third quarter following a historically high level in the previous quarter. Annualized consumption in the third quarter amounted to 19.7 million mt. The primary aluminum market in China is expected to be largely balanced for 2011.

LME stocks increased slightly from 4.5 million mt in the second quarter to 4.6 million mt in the third quarter. A large portion of the metal in warehouses continue to be owned by several large financial investors.

Demand for metal products (extrusion ingot, sheet ingot, primary foundry alloys and wire rod) in Europe weakened compared to the previous quarter. Germany and the Benelux countries are performing better than most countries in Southern Europe but the overall market sentiment has deteriorated as a result of the weaker macroeconomic outlook.

Rolled products

European demand for rolled products decreased in the third quarter of 2011 compared to the previous quarter due to seasonality in general and destocking by distributors in the general engineering market segment in particular.

Demand for rolled products within the automotive segment remained healthy in the third quarter, benefiting from high car exports to China. Overall consumption within the building and construction segment was slightly below the volumes seen in the second quarter. Low demand in the southern part of Europe and the UK was mostly compensated by sound demand in Germany and the Benelux countries. Consumption in the beverage can segment was firm compared to the second quarter of 2011. The European market for thin gauge foil softened mainly due to seasonality and high inventory levels. Chinese imports continued at high levels overall and within the general engineering segment in particular.

Consumption for rolled products is expected to be impacted by further destocking mainly within the general engineering market segment, and seasonal declines in general during the fourth quarter. Demand within the automotive segment is forecasted to decline due to declining demand for cars in Europe. However, demand for premium cars in China is expected to remain on a high level. Consumption of thin gauge foil is expected to remain stable at a low level.

Extruded products

European demand for extruded aluminum products declined seasonally in the third quarter of 2011, but was higher than the same quarter of 2010. Demand remained weak within the building and construction sector, and in Southern Europe in particular. Demand within the engineering and transport segments remained strong in most European markets. Margins continued to be under pressure in Europe.

Demand for extruded products in North America was slightly lower on a seasonal basis compared with the second quarter of 2011, and was also somewhat lower than the third quarter of 2010 despite high demand in the transport and automotive segments. Imports into the US have fallen significantly compared to the third quarter of 2010 as a result of duties on Chinese products. Demand in South America continued on a level similar to the same quarter of last year. As a result, margins are under pressure due to increased production capacity in a market experiencing lower growth than anticipated.

Demand in the precision tubing segment continued to be strong for the season, driven by demand for premium cars, but growth is slowing down.

Further seasonal declines are expected in the European and US extrusion markets in the fourth quarter. Currently we see no recovery in the building and construction segment in Southern Europe and we expect continued low demand for building systems in this region. Automotive production in Europe is expected to decline in the fourth quarter due to reduced demand for cars in Europe. However, the market for premium cars in China is expected to remain firm. Demand is expected to remain stable in North America supported by transport and automotive segments. The market outlook for South America remains positive.

Energy

Nordic electricity spot prices were volatile throughout the third quarter. Spot prices were relatively high in July and August, while in September, prices declined to low levels due to high precipitation.

Water reservoir levels in Norway increased to 86 percent of capacity at the end of the third quarter. This is around normal level and 18 percentage points above the corresponding period of the prior year.

As consumption increases towards the winter season, Nordic spot prices are expected to gradually increase.

Additional factors impacting Hydro

Hydro has sold forward around 85 percent of its expected primary aluminum production for the fourth quarter at a price level of around USD 2,475 per mt. This excludes expected volumes from Qatalum. Hydro has also hedged the majority of the net aluminum price exposure in the business acquired from Vale until the end of 2011. For the final quarter of 2011 the hedged volumes for Bauxite & amp; Alumina amount to about 90,000 mt of aluminum, priced at about USD 2,400 per mt.

Hydro's water reservoirs increased to a level well above normal in the third quarter and significantly higher than the corresponding period in 2010. As a result, production is expected to remain high through the forth quarter 2011.

During the third quarter Hydro signed an agreement to divest its share of the Alpart alumina refinery in Jamaica. The transaction is expected to be completed in the fourth quarter with a gain of about NOK 400 million.

Bauxite & amp; Alumina

Underlying EBIT for Bauxite & amp; Alumina increased compared to the second quarter primarily due to improved production performance and better results for our commercial activities.

Please also see the section on Pro forma information - Bauxite & amp; Alumina later in this report.

Primary Metal

Underlying EBIT for Primary Metal declined compared to the second quarter due to lower sales volumes and higher raw material costs. Higher realized aluminum prices partly offset the negative developments. Please also see the section on Pro forma information - Primary Metal later in this report.

Higher realized aluminum prices partly offset by lower premiums had a net positive effect on underlying results amounting to about NOK 150 million for the quarter. Volume declines had a negative effect of about NOK 90 million. Higher raw material costs relating to alumina and coke in particular, had a negative impact of roughly NOK 150 million. Our USD 300 per mt cost improvement program targeted to reach USD 175 per mt by the end of 2011 continued according to plan.

Production volumes increased compared to the second quarter mainly due to additional volumes from Qatalum which reached full production capacity on September 21.

Underlying results for Qatalum improved, mainly due to the higher production volumes.

Metal Markets

Underlying EBIT for Metal Markets decreased compared to the previous quarter which was influenced by significant positive ingot inventory valuation and currency effects. Excluding currency and ingot inventory valuation effects, underlying EBIT declined for the quarter mainly due to seasonally lower volumes for remelt operations, together with lower margins. Underlying results from sourcing and trading activities were also somewhat lower.

Total metal product sales excluding ingot trading exhibited an expected seasonal decline due to the summer holidays but was also influenced by weaker demand.

Rolled Products

Underlying EBIT for Rolled Products was significantly lower compared to the second quarter mainly due to seasonally lower sales volumes and softening demand. Lower margins also contributed to the decline partly offset by lower personnel and other operating costs.

Volume declines for general engineering and thin gauge foil were mainly driven by customer destocking activities. Automotive shipments were seasonally lower. Can beverage volumes increased, supported by firm demand.

Extruded Products

Underlying EBIT for Extruded Products decreased significantly in the third quarter compared with the previous quarter due to seasonally lower sales volumes and lower margins partly offset by lower fixed costs.

Lower volumes and margins resulted in further weakening of the results for our building systems operations. Rationalization measures have started to have a positive impact however, and fixed costs declined during the quarter. Additional rationalization measures have been implemented in the third quarter and will be further expanded in the fourth quarter.

Underlying EBIT for our extrusion operations and precision tubing business declined mainly due to seasonally lower volumes and lower margins.

Energy

Energy delivered solid underlying results due to high production throughout the quarter and relatively high prices in July and August. Production levels were influenced by high precipitation during the quarter.

Other and eliminations

Eliminations comprises mainly unrealized gains and losses on inventories purchased from group companies which fluctuates with product flows, volumes and margin developments throughout Hydro's value chain.

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 Third
quarter
2011
Second
quarter
2011
Third
quarter
2010
First 9
months
< strong> 2011
First 9
months
2010
Year
2010
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Unrealized derivative effects on LME related contracts 50 (35) 515 94 651 489
Derivative effects on LME related contracts (Vale Aluminum) (32) (89) 99 (79) (221) (166)
Unrealized derivative effects on power contracts (25) (162) (25) (227) 458 609
Unrealized derivative effects on currency contracts - - (65) (1) (30) (50)
Unrealized derivative effects on raw material contracts 1 20 - 37 - (156)
Metal effect, Rolled Products & nbsp; 77 (28) 52 (127) (468) (560)
Significant rationalization charges and closure costs 28 75 - 104 (1) 130
Impairment charges (PP & amp; E and equity accounted investments) & nbsp; - 56 114 56 175 187
Pension - - - - (151) (151)
Insurance compensation & nbsp; - - - - - (91)
(Gains) / losses on divestments & nbsp; (674) (44) - (718) (67) (74)
Transaction related effects (Vale Aluminum) - - - (4,328) - -
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Items excluded from underlying EBIT (576) (206) 690 (5,189) 347 167
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Net foreign exchange (gain) / loss 1,248 (334) 246 944 (281) (513)
Calculated income tax effect & nbsp; (399) 162 (328) (181) (49) 80
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Items excluded from underlying net income 273 (378) 608 (4,427) 16 (266)

Finance

Net financial income (expense) amounted to negative NOK 1,363 million in the third quarter compared with positive NOK 194 million in the previous quarter.

Net currency losses of NOK 1,248 million in the third quarter mainly related to losses on debt denominated in USD. Of the total, approximately NOK 330 million related to intercompany balances.

Tax

Income tax expense amounted to a charge of NOK 62 million in the third quarter compared to a charge of NOK 759 million in the previous quarter and a charge of NOK 119 million in the third quarter of 2010.

For the first nine month of 2011 income tax expense was 16 percent of pre-tax income. The low tax rate results from a tax-free gain on the sale of the shareholding in SKS Produksjon AS in the third quarter and the tax-free gain from the revaluation of Hydro's previous ownership interests in Alunorte and the CAP joint-venture recognized in the first quarter.

Pro forma information

Underlying EBIT and EBITDA
Per business area Third quarter 2011 Second quarter 2011 Third quarter 2010 Year
2010
& nbsp; EBIT EBITDA EBIT EBITDA EBIT EBITDA EBIT EBITDA
& nbsp; & nbsp; & nbsp; & nbsp; & nbsp; & nbsp; & nbsp; & nbsp; & nbsp; & nbsp;
Bauxite & amp; Alumina 302 775 272 756 348 813 1,225 3,061
Primary Metal 653 1,206 765 1,313 306 850 816 3,006
Metal Markets 93 118 244 269 163 189 321 428
Rolled Products 124 235 232 339 227 338 864 1,318
Extruded Products 40 165 96 222 102 236 444 987
Energy 506 543 363 392 169 201 1,416 1,540
Other and eliminations (73) (57) (65) (62) (85) (72) (945) (889)
Underlying EBIT / EBITDA 1,646 2,985 1,906 3,229 1,230 2,555 4,141 9,450

Bauxite & amp; Alumina

Underlying EBIT for Bauxite & amp; Alumina increased compared to the second quarter primarily due to improved production performance and better results for our commercial activities.

Both alumina and bauxite production increased compared to the second quarter due to improved operational stability. Operating costs at the Paragominas mine improved somewhat as a result of the higher production volumes while operating costs at Alunorte increased somewhat driven by higher raw material prices.

Realized alumina prices declined slightly having a negative impact on underlying EBIT for the quarter. Caustic and bauxite costs increased somewhat compared to the second quarter.

Underlying results from our Commercial operations improved compared to second quarter, mainly as a result of good margins on our contract portfolio.

Primary Metal

Underlying EBIT for Primary Metal declined compared to the second quarter due to lower sales volumes and higher raw material costs. Higher realized aluminum prices partly offset the negative developments.

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    • Investor contact
      Contact: & nbsp; Rikard Lindqvist
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      Email: & nbsp; & nbsp; & nbsp; & nbsp; Rikard.Lindqvist@hydro.com

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