Board of Directors' report

Key developments and strategic direction

Well positioned in an industry with attractive long term potential

In 2012, Hydro strengthened its ambitious repositioning drive with improvement programs across the value chain. New and existing initiatives delivered significant cost reductions partly offsetting weak market developments and high costs for key raw materials.

Following five years of major repositioning initiatives, the construction of Qatalum and the acquisition of Vale Aluminium, Hydro announced a major joint venture agreement, Sapa, aimed at transforming its extrusion operations. The transaction is expected to improve the global reach of the combined operations, create a stronger foothold in North America and several important emerging markets and generate annual synergies of roughly NOK 1 billion.

A favorable industry position, captive sources of key raw materials combined with financial strength and flexibility place Hydro in a strong position within an industry with solid long-term fundamentals.

Responding to challenging market conditions

Weak global economic conditions have contributed to low and volatile aluminium prices. Economic developments for Hydro's core European markets in particular have resulted in weaker downstream demand. Developments in North America are gradually improving but uncertain.

Relentless focus on reducing cost and improving operations have generated substantial savings partly offsetting the negative market effects. Savings and improvement programs have been established for all business areas including substantial new initiatives for Bauxite & Alumina. Extruded Products generated cost savings close to EUR 60 million for 2012. Primary Metal's improvement program contributed more than NOK 1 billion to underlying results in real terms compared to 2009. In February, 2013, Hydro announced a new improvement program targeting savings for its corporate center in Oslo.

Hydro decided to close production at its Kurri Kurri plant in Australia due to the weak economic environment, low metal prices together with the strong Australian dollar. Higher cost remelting at smelter casthouses has been significantly reduced. Substantial curtailments, closures and divestments have been executed within downstream extrusion operations.

Underlying operating performance

Underlying EBIT declined significantly to NOK 1,158 million in 2012 compared with NOK 5,982 million in 2011. Underlying net income fell to NOK 504 million from NOK 3,947 million in the previous year. Low aluminium and alumina prices had a significant effect on underlying results for the year.

Bauxite production reached record levels for the year due to improved operational stability. However, underlying results for Bauxite & Alumina declined, heavily influenced by low LME-linked alumina prices and increased energy costs. Low realized aluminium prices impacted underlying EBIT for Primary Metal. However, operating costs declined, influenced by lower LME-linked alumina prices and cost improvement initiatives. During the year, Qatalum delivered a strong production performance and operating costs within the first quartile on the industry cost curve.

Excluding inventory and currency effects, underlying EBIT for Metal Markets decreased somewhat mainly due to lower sales volumes. Rolled Products underlying results declined somewhat but remained solid despite weak market developments and slightly lower shipments. Underlying EBIT for Energy decreased compared to 2011 due to significantly lower prices.

Pro forma underlying operating results for Extruded Products were heavily influenced by weakening markets. Costs declined due to significant improvement efforts.

Hydro reached its most important target in 2012 - no fatal accidents. The company will not reach its most important target in 2013. A contractor employee lost his life following an accident in an extrusion plant in France. Total recordable injuries per million hours worked (TRI rate) declined from 3.8 in 2011 to 3.4 in 2012, although the target for 2012 was not reached. Hydro's key high risk incidents indicator also improved for the year. Further improvements relating to the reforestation program in Paragominas emphasizing biodiversity protection were initiated.

Hydro's Code of Conduct, which is approved by the board of directors, was thoroughly revised in 2012. The Danish Institute of Human Rights supported Hydro in completing a human rights risk mapping and gap analysis. Most gaps were closed in 2012, and during 2013 we aim at closing remaining gaps.

Priorities for 2013

As a resource rich, global aluminium company, Hydro is aiming to become the benchmark in the industry. Securing the performance of the company's continuing operations while completing the transformation of its extrusion business will be key priorities in the coming year including:

  • Further improve our performance within health, safety, security and environment (HSE) and corporate social responsibility (CSR)
  • Deliver on targeted cost reduction and improvement programs
  • Continue responding to market developments to improve operating results
  • Achieve successful completion of the Sapa joint venture
  • Maintain capital discipline

Safe operations continue to be of paramount importance, and the ambition of no fatal accidents remains Hydro's top priority. Hydro is targeting further improvement of its TRI rate for 2013 based on leadership, employee involvement and defined risk mitigating activities. The biodiversity and reforestation program in Paragominas will be further developed and strengthened.

Within the CSR area, employee training in the revised Code of Conduct and the development of grievance mechanisms for our activities in Barcarena, Brazil will be prioritized. Implementation of Hydro's people strategy will continue in 2013 with an emphasis on revitalizing the company's leadership development and appraisal dialog system, and initiating the implementation of a company-wide diversity awareness program.

Delivering significant cost reductions for Bauxite & Alumina will be a main goal in the coming year. A new improvement program, "from B to A", encompasses all major operating activities focusing on increased production, higher productivity, lower operating costs and lower manning as well as more effective procurement activities and increased commercial earnings. Approximately half of the total annual targeted savings and improvements of NOK 1 billion is expected to be achieved by the end of 2013 with completion planned for 2015 .

Continuous improvement of smelter efficiency while constantly addressing cost challenges is a key strategic focus for Primary Metal. Hydro's "USD 300 program" generated accumulated savings and improvements of USD 235 per mt compared to 2009. Completing the final phase of the program will be a top priority in the coming year. Working with joint venture partners, Hydro is also targeting improvements within part-owned operations. In particular, the company will focus on operational improvements at Albras together with further streamlining of production and cost optimization at Qatalum.

Execution of Extruded Products expanded improvement program, "Mission 1000", targeting increased cost reductions and operational improvements will be a key priority to strengthen Hydro's Extruded Products operations for the planned Sapa joint venture.

Securing increasing returns for Rolled Products continues to be a key priority under the segment's "Climb 10" improvement program. Measures aimed at reducing operating costs and the cost-effective procurement of materials and supplies will continue in the coming year together with efforts to further increase the efficiency of production systems.

Hydro aims to provide its shareholders competitive returns compared to alternative investments in peer companies, and is maintaining its dividend policy of paying 30 percent of net income in ordinary dividends over the business cycle. The company will continue to focus on securing its financial position through exercising capital discipline to ensure an optimal level of operating capital, and to maintain a sustainable level of capital expenditures safeguarding the company's operating portfolio. Strong cash generation and preserving Hydro's investment grade credit rating continue to be key priorities.

Shaping the future

The current economic environment represents a significant challenge in obtaining a satisfactory return on capital for the industry as a whole. However, Hydro is well positioned for growth as the global economy evolves.

Hydro has an attractive project portfolio including a potential new alumina refinery in Barcarena, close to Alunorte; the possible expansion of the Paragominas bauxite mine; the potential of doubling the capacity of the Qatalum smelter and the possibility to expand the low-cost Alouette smelter in Canada. Partnerships and joint ventures across the value chain provide the potential for further developing Hydro's asset portfolio. However, investments in these projects will require an improvement in the balance between industry production capacity and market demand.

Hydro intends to develop the value of its Norwegian energy assets and to use Hydro's competence to secure competitive energy sources for its global activities. Hydro is committed to maintaining the viability of the company's global smelter portfolio, which is heavily dependent on securing adequate supplies of competitively priced energy. Identifying opportunities for long-term, competitive energy sources to protect and develop the company's portfolio, taking into consideration license reversion in Norway and emission legislation in general, continues to be an important priority for Hydro.

 Underlying EBIT for both periods excludes the operating results for Extruded Products which has been reclassified as Income (loss) from discontinued operations. However, we are providing supplemental pro forma information on developments in underlying EBIT for Extruded Products on the basis of continuing operations consistent with reporting periods prior to the announced Sapa joint venture.

Savings and improvements compared to 2011 cost levels will be determined excluding the effects of changes in currency exchange rates, LME price developments and price developments for key raw materials.

About Hydro's Board of Directors

Terje Vareberg (Chairperson)
Terje Vareberg

• Position: Independent businessman.
• Education: Master of Science in business, Norwegian School of 
  Economics and Business Administration (NHH).
• Current directorships: Chairperson of Bergli Rådgivning AS, TS Eiendom AS, T Stangeland Maskin AS, NorDan AS, Malthus AS, Ipark AS, Aarsland Møbelfabrikk AS, Fabrikkveien II AS, Aarsland Holding II AS, Solstad Trading AS. Board member of Solstad Offshore ASA, Energy Ventures IV AS, Lærdal Finans AS and Farsund Vekst AS. Member of the supervisory board of SpareBank 1 SR Bank ASA.

• No. of Hydro shares: 18,391.

Inge K. Hansen (Deputy chairperson)
Inge K. Hansen

• Position: Independent adviser.
• Education: Master of Science in business, Norwegian School of Economics and Business Administration (NHH).
• Current directorships: Chairperson of Bertel O. Steen AS, Norsun AS, Gjensidige Forsikring ASA, Hotell og Restauranthuset Continental, Core Energy AS and AIM Norway SF. Board member of Jiffy International AS, Master Marine AS, Johan G, Olsen AS, Sissener AS and the Fram Museum.

• No. of Hydro shares: 12,000.

Finn Jebsen
Finn Jebsen

• Position: Independent businessman
• Education: Degree in Economics and Business Administration
  (siviløkonom) from the Norwegian School of Economics (NHH).
  Master's degree in Business Administration from the
  University of California, Los Angeles
• Current directorships: Chairperson of Kongsberg Gruppen ASA and
  Kavli Holding AS; board member of A. Wilhelmsen AS, Norfund,
  Future Subsea AS and his wholly-owned company Fateburet AS.

• No. of Hydro shares: 53,405 including shares owned by Fateburet AS

See CV

Pedro José Rodrigues
Pedro José Rodrigues

• Position: Global Director of Vale S.A.
• Education: Chemical Engineer from Fundação Armando Alvares Penteado, São Paulo, Brazil
• Current directorships: None

• No. of Hydro shares: None

See CV

Eva Persson
Eva Persson

• Position: Executive Vice President and General counsel for the Volvo Group.
• Education: Master of Law from the University of Lund, Sweden.
• Current directorships: Board member of Handelsbanken region
  Western Sweden

• No. of Hydro shares: None.

Ove Ellefsen (Employee representative)
Ove Ellefsen

• Position: Project Supervisor / full-time union official representing the Central Cooperative Council (Sentralt Samarbeidsråd).
• Education: Certificate of apprenticeship in electrochemistry. 
  Work supervisor training.
• Current directorships: None

• No. of Hydro shares: 2,844

See CV

Liv Monica Stubholt
Liv Monica Stubholt

•  Position: Senior Vice President of Strategy & Communications in Kværner ASA
• Education: Master's degree in law (cand. jur.), University of Oslo.
• Current directorships: Board member of the Norwegian-German Chamber of Commerce.

See CV

Sten Roar Martinsen (Employee representative)
Sten Roar Martinsen

• Position: Process operator / full-time union official representing the Norwegian Confederation of Trade Unions (LO)
• Education: Certificate of apprenticeship in electrochemistry.
  Work supervisor training.
• Current directorships: None

• No. of Hydro shares: 3,515

See CV

Victoire de Margerie
Sten Roar Martinsen

• Position: Independent business woman
• Education: Master in Management from Ecole des Hautes Etudes Commercials, France. Political Sciences degree from Institut d'Etudes Politiques, France. PhD Management Science, Université de Paris, France.
• Current directorships: Chairperson of Rondol Industrie SA and Rondol Technology Ltd 

• No. of Hydro shares: None.

Billy Fredagsvik (Employee representative)
Billy Fredagsvik

• Position: Process operator / full-time union official. Represents the Norwegian Confederation of Trade Unions (LO)
• Education: Trade school (mechanics)
• Current directorships: None

• No. of Hydro shares: 2,459

See CV

Dag Mejdell
Dag Mejdell

• Position: President and CEO of Posten Norge AS
• Education: Master degree in Business Administration from
  the Norwegian School of Economics & Business Administration (NHH)
• Current directorships: Chairperson of International Post Corporation,
  and for of the Employers Association Spekter, deputy chair of Avry AS and  SAS AB.

• No. of Hydro shares: 13,400

See CV

Updated: October 11, 2016