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First quarter of 2016: better downstream results, but lower prices

Hydro's underlying earnings before interest and taxes fell to NOK 1.5 billion in the first quarter of 2016, compared to NOK 1.56 billion in the fourth quarter of 2015. The decline largely reflects the realized prices of the lower aluminum and alumina, which were partially offset by positive exchange rate effects, lower raw material costs and stronger seasonal results in the downstream segment.

  • Underlying NOK 1.5 billion for the first quarter

Realized price of alumina and aluminum lower

  • Implicit costs of primary aluminum and alumina with record low
  • Stronger seasonal results for the downstream
  • NOK 2.9 billion improvement ambition proceeds as planned
  • Overall, balanced primary metal market for 2016

"This first quarter was the strongest first quarter of operations since Sapa was created in 2013, thanks to higher seasonal sales volumes at Produtos Laminados and Sapa, as well as higher margins for value-added extrusion products, ”said President and CEO Richard Brandtzæg.

Compared to the fourth quarter of 2015, the underlying LAJIR of the Bauxite & Alumina was lower in this period, due to the lower realized alumina prices and lower sales volumes. However, the negative price development was partially offset by the positive exchange effects of a weaker real, lower fuel prices and lower depreciation due to the revaluation of the financial useful life of certain goods in 2015. The production of Alunorte and Paragominas showed a small drop, after reaching record levels of production in the last quarter 1) .

"I am very pleased to see that our ambition for NOK 2.9 billion improvements, launched last year, is progressing as planned, contributing to our position in the first quartile on the global cost curve. This progress is coupled with the high production maintained at Bauxita & Alumina and the significant improvements achieved in the joint companies of Metal Primário ”, said Brandtzæg.

The underlying LAJIR of the Primary Metal business area fell in the first quarter due to lower realized prices, higher fixed costs and additional costs linked to the ICMS tax on the sale of surplus electricity in Brazil in previous quarters. However, part of this loss was offset by a stronger US dollar, a certain reduction in alumina costs and the positive effect of Qatalum's after a negative adjustment for a delay in the quarter quarter of 2015.

The underlying LAJIR of Mercados de Metal, in turn, showed a certain increase in the first quarter of the year, driven by the positive exchange rate effects and better results in the remelting plants. This increase, however, was partially halted by weaker commercial activities.

With the divestment adjustments in the Slim rolling mill 2),  the Rolled Products business area had higher seasonal sales volumes in the first quarter and , together with reduced alumina costs at the Neuss smelting plant, contributed to greater profitability compared to the fourth quarter of 2015. The reduction in net margins, however, affected this positive effect.

The underlying LAJIR of the Energy business area increased compared to the previous quarter, due to the increase in production in the period, but was affected by higher production costs, caused by transmission costs and property taxes 3 ) .

Sapa, in turn, had a higher underlying EBITDA in the period, especially because of higher demand and better margins.

During the first quarter, the “Better” improvement ambition, a NOK 2.9 billion annual improvement program starting in 2019, progressed as planned.

Operating cash flow totaled NOK 0.1 billion in the first quarter, with an increase of NOK 1.8 billion in working capital already computed. The net cash used for investment activities totaled NOK 1.3 billion. Hydro's net cash position decreased by NOK 1.2 billion, amounting to NOK 3.9 billion at the end of the quarter. 

Earnings before interest and taxes declared were NOK 1.69 billion in the first quarter. In addition to the factors mentioned above, the declared LAJIR includes gains of NOK 224 million of unrealized liquid derivatives and a negative effect of the metal of NOK 43 million. The reported profits also include a negative adjustment of NOK 15 million related to the sale of the Slim rolling mill in the fourth quarter of 2015, in addition to a net gain of NOK 26 million from Sapa (Hydro's quota after tax), related especially to unrealized derivative gains.

In the previous quarter, earnings before interest and taxes declared amounted to NOK 725 million, including the amount corresponding to NOK 139 million from unrealized derivative net gains and negative effects of the metal. The reported results also include costs of NOK 285 million from the termination of the lease for the Vækeroe Park (head office building) and net divestment losses of NOK 365 million, including loss of NOK 434 million from the sale of the Slim and a total gain of NOK 69 million from the sale of other assets. The reported profits also include net costs of NOK 53 million from Sapa (Hydro's quota after tax), including NOK 88 million related to restructuring costs, NOK 73 million unrealized derivative gains and NOK 38 million net foreign exchange losses.

Net income totaled NOK 2.38 billion in the period, including a reduction in tax costs and interest income of NOK 700 million in total, resulting from the payment of a tax proceeding in April 2016. For more information on this point , see note 4 of Hydro's preliminary financial statements for the first quarter.

Net income includes net foreign exchange gains of NOK 1.03 billion, reflecting the strengthening of the Brazilian real to the detriment of the US dollar and influencing the obligations assumed in dollars in Brazil, as well as the strengthening of the Norwegian krone against the euro, which influences the obligations assumed in euros in Norway and foreign exchange derivatives contained in energy supply contracts.

In the previous quarter, net income was NOK 541 million, including a net foreign exchange gain of NOK 48 million, resulting mainly from the fluctuations and marginal exchange effects in the period, in addition to the significant reduction in the company's internal debt in dollars Americans.

  1. Since the acquisition of Vale's aluminum business in 2011.
  2. The divestment of the Slim rolling mill was completed on December 17, 2015.
  3. As of 2015, property tax is levied in the period in which it becomes an unconditional obligation which, in Norway, is when billing occurs. This new practice leads to periodic variations throughout the year, without affecting the annual level of tax.

NOK million, except per share data

First quarter 2016

Fourth quarter 2015

% change prior quarter

First quarter 2015

% change prior year quarter

Year 2015

Key financial information
Revenue 20,138 20,374 (1)% 23,290 (14)% 87,694
Earnings before financial items and tax (EBIT) 1,693 725 > 100% 3.206 (47)% 8,258
Items excluded from underlying EBIT (192) 841 > (100)% 2 > (100)% 1,398
 
Underlying EBIT 1,501 1,566 (4)% 3.208 (53)% 9,656
 
Bauxite & Alumina 189 532 (64)% 780 (76)% 2,421
Primary Metal 318 407 (22)% 2,012 (84)% 4,628
Metal Markets 167 152 10% 24 > 100% 379
Rolled Products 248 204 22% 292 (15)% 1,142
Energy 398 353 13% 382 4% 1.105
Other and eliminations 181 (83) > 100% (281) > 100% (19)
Underlying EBIT 1,501 1,566 (4)% 3.208 (53)% 9,656
 
Underlying EBITDA 2,716 2,969 (9)% 4,437 (39)% 14,680
Net income (loss) 2,382 541 > 100% 1,072 > 100% 2,333
Underlying net income (loss) 822 1296 (37)% 2206 (63)% 6.709
Earnings per share 1,12 0.23 > 100% 0.46 > 100% 0.99
Underlying earnings per share 0,39 0.59 (34)% 0.95 (59)% 2.98
Financial data:
Investments 1,970 2,556 (23)% 802 > 100% 5,865
Adjusted net interest-bearing debt (9,206) (8,173) (13)% (13,478) 32% (8,173)
Key Operational information
Bauxite production (kmt) 2,682 2,959 (9)% 2,135 26% 10,060
Alumina production (kmt) 1,517 1,577 (4)% 1,451 5% 5,962
Primary aluminum production (kmt) 514 521 (1)% 497 4% 2,046
Realized aluminum price LME (USD / mt) 1,497 1,555 (4)% 1,897 (21)% 1,737
Realized aluminum price LME (NOK / mt) 12,950 13,125 (1)% 14,383 (10)% 13,813
Realized USD / NOK exchange rate 8,65 8.44 3% 7.58 14% 7.95
Rolled Products sales volumes to external market (kmt) 229 229 - 227 1% 948
Sapa sales volumes (kmt) 174 156 12% 177 (1)% 682
Power production (GWh) 3,160 2,882 10% 3,071 3% 10,894

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