Board of Directors' report

board of directors group photo
Left to right: Ove Ellefsen, Eva Persson, Inge K Hansen, Dag Mejdell, Finn Jebsen, Liv Monica Bargem Stubholt, Sten Roar Martinsen, Pedro José Rodrigues, and Billy Fredagsvik. Irene Rummelhoff was not present when the picture was taken.

Key developments and strategic direction 

Well positioned in challenging markets

After several years of significant operational and commercial improvements implemented throughout the value chain as well as continuous technological advancements, Hydro has strengthened its ability to create value and lifted the company's relative industry position in an environment of challenging market conditions.

By the end of 2015, Hydro's industry-leading improvement programs have contributed NOK 4.5 billion of annual improvements compared to 2011Footnote 1 including NOK 0.8 billion realized in 2015. This includes the completion of the "From B to A" improvement program in Bauxite & Alumina, completion of the Rolled Products "Climb" program one year ahead of schedule, additional improvements in fully owned smelters beyond the "USD 300 per mt" program and further progress on the "USD 180 per mt" joint venture improvement program in Primary Metal which is progressing according to plan. On top of the NOK 4.5 billion of annual improvements, by the end of 2015 Sapa delivered targeted restructuring improvements and synergies of NOK 1 billion on an annual basis one year ahead of plan. Building on the momentum achieved in earlier years, Hydro has introduced a new ambition targeting NOK 2.9 billion of additional annual improvements for the period 2016 through 2019, including NOK 1.1 billion which is expected to be delivered in 2016.

During the year, Hydro made further progress in securing the robustness of its operations in Brazil. In 2015, a dialogue with the Para authorities resulted in a renewal of a deferral of ICMS taxes on certain goods and services for a 15 year period. In addition, both Paragominas and Alunorte achieved record production levels in 2015. Hydro also made progress towards securing and developing bauxite resources for the future. In October 2015, Hydro signed a Letter of Intent (LoI) for the possible acquisition of Vale's 40 percent ownership interest in MRN.

Technological leadership underpins Hydro's pursuit of operational excellence and the company's ambition of becoming carbon neutral from a life-cycle perspective by 2020. In February, 2016, Hydro decided to proceed with the construction of the 75,000 mt technology pilot at Karmøy utilizing Hydro's next-generation HAL4e technology. In 2015, the company acquired WMR Recycling GmbH which has the most advanced aluminium scrap sorting technology in the world.

Securing long-term competitive power sourcing has been of critical importance to sustain the viability of Hydro's smelter portfolio. In 2015, Hydro entered into long-term power agreements for the annual supply of energy totaling 1.05 TWh to its Norwegian smelters over a 10 year period from 2021 onwards. This was on top of 2.7 TWh sourced in the previous year. In addition, Alouette, Hydro's part-owned aluminium plant in Canada, agreed on new terms and conditions extending the existing supply of electricity for a 13 year period to 2029. Hydro also secured a new power contract for part of the energy requirement of its Neuss aluminium plant in Germany for the period 2018 to 2025. 

After a year of improved market conditions in 2014, the global aluminium market deteriorated again in 2015 due to over-supply in China and increased exports of primary metal in the form of semi-fabricated products from China. These developments, together with lower industry costs, resulted in a continual decline in all-in metal prices and alumina prices during 2015. At the same time, a considerable weakening of the Norwegian kroner and Brazilian real against the US dollar, both major cost currencies for Hydro's operations, strengthened the company's competitive position.

Creating value by becoming better, bigger and greener

Hydro is committed to a proactive, strategic business approach aimed at strengthening the company’s ability to add value. This approach is reflected in Hydro's ambitious mid-term strategic goals reflecting the company's aspiration to become Better, Bigger, Greener.

Hydro will become Better by continuing to drive improvements focusing on all aspects within the company's control. These include health, safety, environment, corporate social responsibility and compliance, operational excellence, commercial expertise, customer satisfaction as well as product and process innovation, continuous technology advancements and the new NOK 2.9 billion improvement ambition. Tight capital discipline and competitive shareholder return will remain top priorities together with maintaining the company's robust financial position.

To become Bigger, selective, profitable growth opportunities will be evaluated to improve Hydro's relative industry position including investments in high-grading the products portfolio and strengthening recycling capabilities. Hydro is also maturing attractive growth projects for the future, mainly depending on developments in the balance between industry supply and market demand.

Hydro believes that sustainable business practices will make the company Greener and improve the company's ability to create shareholder value while making a positive difference wherever it operates. Hydro aims to reduce its environmental footprint and to enhance its social contribution through targeted initiatives within a range of areas, including biodiversity, recycling and water management, stakeholder engagement, community investments and promoting corporate social responsibility in its supply chain.

Operating performance

Underlying EBIT for 2015 improved significantly to NOK 9,656 million from NOK 5,692 million in the previous year. Bauxite & Alumina and Rolled Products achieved the best underlying EBIT since Hydro became a pure aluminium company in 2007, while Sapa's underlying results more than doubled compared to the previous year. Negative effects from lower realized LME prices and premiums were more than offset by positive currency effects from the stronger USD and ongoing improvement efforts. At the same time, Hydro further strengthened its financial position, ending the year with a net cash position of NOK 5.1 billion, compared to a net debt position of NOK 0.1 billion at the end of 2014.

The number of high risk incidents within Hydro's operations continued to fall in 2015, and Hydro's safety performance remains among the best in the industry. The company reduced its TRI rate (total recordable injuries per million hours worked) by 6 percent to 3.0. Although this was one of the best results in the company's history, it was not sufficient to meet the target of 2.8 for the year. In addition, one of Hydro's employees became a victim of the Germanwings flight crash during business travel.

Sapa Profiles Inc. Portland (SPI), a subsidiary of Sapa AS (owned 50 percent by Hydro) is under investigation by the United States Department of Justice (DOJ) Civil and Criminal Divisions regarding aluminum extrusions that SPI manufactured from 1996 to 2015 and delivered to a supplier to NASA. SPI is cooperating fully in these investigations. In response to these pending investigations, Sapa has performed audits of its quality assurance processes at all relevant extrusion operations in North America, and is in the process of finalizing audits of its extrusion operations in Europe. Quality issues identified in these audits have been, or are in the process of being, addressed with the affected customers and remediation actions are being undertaken. The investigations are currently ongoing, and, at this point, the outcome of the DOJ investigations and of the identified quality issues, including financial consequences on Sapa, is uncertain. Based on the information known to Hydro at this stage, Hydro does not expect any resulting liabilities to have a material adverse effect on its consolidated results of operations, liquidity or financial position. Hydro has also initiated a review of all of its relevant sites which will continue through 2016. Preliminary results are being further evaluated and followed up.

Priorities for 2016

Going forward, Hydro intends to continue to lift the performance and profitability of its operations while securing safe, sustainable business practices. Priorities in 2016 include:

  • Continuing to strengthen performance within health, safety, security and environment (HSE), compliance and corporate social responsibility (CSR)
  • Enhancing workforce performance, engagement and diversity
  • Strengthening relative industry position through improvement ambitions and leading R&D
  • Pursuing recycling opportunities to improve earnings and reduce environmental impact
  • Further developing high-margin growth segments through innovative and differentiated products
  • Securing long term access to raw materials including bauxite and energy
  • Maintaining capital discipline, reliable dividend level and strong financial position

Hydro is intensifying its efforts to further improve its TRI rate for 2016 based on leadership, employee involvement and defined risk mitigating activities. This includes further efforts to improve the safety performance of the Rolled Products business area. Continued strengthening of the company's compliance activities is also an important objective for 2016, including further awareness training and stronger emphasis on integrity risk management in the supply chain. To further improve social conditions in Barcarena, Brazil, Hydro is developing an infrastructure project that aims to have significant impact on the social development of the municipality.

Hydro will update its people strategy in 2016 to ensure that it continues to support the company's strategic goals. This will include new projects and further embedding of key people processes such as the internal performance and development process, and the employee engagement survey.

Following completion of its ambitious "From B to A" improvement program, reducing cost and increasing efficiency continues to be a key priority for Bauxite & Alumina, together with further lifting alumina and bauxite production through stable and robust operations. Targeting NOK 500 million of the NOK 1 billion "Better Bauxite & Alumina" improvement ambition in the coming year, Hydro will also concentrate on higher productivity, lower manning and further optimization of the company's sales portfolio. Hydro intends to continue increasing its share of alumina sales volumes at index pricing as old legacy LME-linked contracts gradually expire.

Hydro is committed to sustain realized improvements and to identify further potential as part of its "Better Primary Metal" ambition of NOK 1 billion by 2019. This includes savings and improvements of roughly NOK 400 million in 2016 comprised of NOK 100 million for the company's fully owned smelters and roughly NOK 300 million relating to the completion of the USD 180 per mt joint venture improvement program. In addition to further improving productivity and reducing costs, Primary Metal aims to lift production capacity at existing plants through proven technological developments. The 75,000 mt technology pilot at Karmøy, utilizing Hydro's next-generation HAL4e technology, is expected to contribute to reduced energy costs and lower greenhouse gas emissions. Experience gained from building and operating the plant will also enable further improvements in the productivity of the current smelter portfolio beyond lean operations.

Optimizing margins by focusing on high-premium products will continue to be high on the agenda for Hydro's Metal Markets operations. Implementation of new casting technology at the company's sheet ingot casthouses in Høyanger and Årdal, Norway, will also enable Hydro to target more advanced market segments including customers in the automotive segment.

Recycling is an important element supporting Hydro's ambition to become carbon-neutral by 2020. The company aims to be a leading player in this growing market segment to pursue commercial opportunities and reduce the environmental impact of its operations. Further increases in the capability and capacity to use post-consumer and other types of contaminated scrap are targeted together with increased sales of recycling friendly alloys. The most important projects currently include the ramp-up of a recently completed recycling line for used beverage cans at Hydro’s smelter in Neuss, Germany, and the completion of a plant upgrade in the Clervaux, Luxembourg, remelter.

Hydro intends to improve margins through high-grading its product portfolio and differentiation through innovation, quality and reliability. Based on strong demand in the automotive Body-in-White market segment, Rolled Products is investing in a new production line to lift its nominal capacity for aluminium car body sheet to 200,000 mt per year by 2017. Following the completion of the "Climb" improvement program one year ahead of plan, the "Better Rolled Products" improvement ambition is targeting NOK 900 million by 2019. Hydro expects to generate roughly NOK 200 million of this amount in 2016 through improved product mix, reduced metal cost due to increased recycling and further operational improvements.

Capturing the full value potential from Hydro's Norwegian hydropower assets and using its competence to secure competitive energy sourcing for the company's global activities are key elements of Energy's improvement strategy. Operational excellence will continue to be a priority to secure cost-effective, safe and reliable production. The Norwegian government has sent out a proposal on hearing relating to the organization of ownership of hydropower assets that would allow private entities physical hydropower offtake from ownership stakes below 33.4 percent in hydropower companies (ANS/DA model). If approved, this will enable Hydro to maintain access to physical power from RSK assets after reversion through restructuring the assets within a one-third ownership position in a company with liability.

Hydro aims to provide its shareholders with competitive returns compared to alternative investments in peer companies by lifting the cash flow generation potential in all of its business areas. The company will continue to focus on securing its financial position through exercising strong capital discipline while maintaining a sustainable level of capital expenditures to safeguard its operating portfolio. Offering a reliable dividend level to shareholders and preserving Hydro's investment grade credit rating continue to be key priorities.

Hydro is engaged in a systematic dialogue with local, state and federal politicians, industry associations and non-governmental organizations regarding the regulatory challenges facing its worldwide operations. In Brazil, the focus of the dialogue is on Hydro's contribution to a sustainable aluminium value chain in the state of Para and underlines the need for competitive and predictable framework conditions for Hydro's operations. Hydro is committed to support verticalization through the aluminium value chain, contribute to the development in the region and act as an enabler for sustainable growth in the state of Para.

Improved position in an industry with attractive potential

Growth in aluminium demand remains firm, despite volatile economic conditions, driven by a general increase in consumption as well as the increasing substitution of aluminium for other materials.  Aluminium products are important in all phases of economic development due to the diversified nature of applications such as capital investment in infrastructure and housing as well as consumer goods such as packaging, transportation, electrical and technical applications and household goods. Substitution effects are driving demand primarily in mature markets and in the transportation segment, while investments in infrastructure and construction and increasing consumption are supporting demand growth in emerging economies.

Hydro has strong positions throughout the value chain and a highly attractive asset base. This includes high quality bauxite and alumina, captive hydropower, a competitive smelter portfolio, European leadership in rolling operations, strong position in recycling and a world leading extrusion position through its investment in the Sapa joint venture. Following years of depressed earnings and unsatisfactory returns for the industry as a whole, continual improvement and restructuring efforts have strengthened Hydro's position relative to its industry peers and improved the company's position to utilize opportunities as the global economy evolves.

Hydro has an attractive project portfolio, including the possibility for a new alumina refinery in Barcarena, close to Alunorte, a possible expansion of the Paragominas bauxite mine, the potential of doubling the capacity of the Qatalum smelter and the possibility to expand the part-owned Alouette smelter in Canada. Hydro is actively working on opportunities within recycling to expand the business and source more challenging scrap material.  Partnerships and joint ventures across the value chain provide the potential for further developing Hydro's asset portfolio. Investments in these projects are, among other factors, dependent on ongoing developments in the balance between industry supply and market demand.

Climate, HSE, CSR and compliance remain high on Hydro's priority list and are considered key elements of the company's license to operate. Hydro is on track to deliver the industry's most ambitious climate target of becoming carbon neutral from a life-cycle perspective by 2020. The company's safety performance is among the best in the industry, and Hydro is aiming for further reductions to become the industry benchmark with a TRI below 2.0 by 2020. Hydro has been involved at all stages in the multi-stakeholder development of the Aluminium Stewardship Initiative's (ASI) standards and is participating to develop ASI's supporting systems for a credible and effective certification platform for responsible production, sourcing and stewardship of aluminium.
Hydro was highly ranked on corporate culture and tone from the top in a compliance comparison study undertaken on behalf of the company and plans further improvement to simplify, harmonize and strengthen its internal routines and controls.

Hydro is committed to maintain the viability of the company's global business operations and is working systematically to ensure stable, predictable framework conditions in the countries where it operates.

Footnote 1Except for the Primary Metal USD 300 per mt program which is compared to 2009.

About Hydro's Board of Directors

Dag Mejdell (Chairperson)
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: Chair of International Post Corporation, Chair of the Employers Association Spekter, deputy chair of SAS AB and directorships within the Posten group.

No. of Hydro shares: 35,000

See CV

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

• Position: Independent adviser
• Education: Degree in Economics and Business Administration
   (siviløkonom) from the Norwegian School of Economics (NHH)
• Current directorships: Chair of the board of Harding AS, Troms Kraft   AS, World Championship Biathlon 2016, Norsun AS, Gjensidige   Forsikring ASA, Hotell og Restauranthuset Continental,
  Core Energy AS, Nets AS and Arctic Securities AS, and is a board   member in Sissener AS and the Fram Museum.

• No. of Hydro shares: 12,000

Irene Rummelhoff
Irene Rummelhoff

• Position: Executive Vice President, New Energy Solutions in Statoil
• Education: Master of Science in Geology/Geophysics from the   Norwegian University of Science & Technology (NTNU)
• Current directorships: None

• No. of Hydro shares: 5,000

See CV

Liv Monica Stubholt
Liv Monica Stubholt

• Position: Partner, Advokatfirmaet Selmer DA
• Education: Candidate in Jurisprudence (cand. jur.), University of Oslo.
• Current directorships: Chair of the board of the Russian-Norwegian
  Chamber of Commerce, Rosneft Nordic Oil AS and Varanger
  Kraft AS. Board member of the German-Norwegian Chamber of
  Commerce, Solveig Gas Norway AS, Broadnet AS and
  VNG Norge AS. Norwegian Chamber of Commerce, Solveig Gas AS,
  Broadnet AS

• No. of Hydro shares: None

See CV

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 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: Independent businessman
• Education: Chemical Engineer from Fundação Armando Alvares   Penteado, São Paulo, Brazil
• Current directorships: Chairman of California
  Steel Industries (CSI), Cia Siderurgica do Atlantico (CSA)
  and VLI S.A.

• No. of Hydro shares: None

See CV

Eva Persson
Eva Persson

• 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: 8,083

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: 8,083

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: 4,754

See CV

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: 3,698

See CV

Updated: October 11, 2016