Hydro had underlying earnings before financial items and tax (EBIT) of NOK 965 million in the third quarter, down from NOK 1,110 million in the second quarter. Seasonally lower sales volumes, weaker underlying results for Alumina and Raw Materials and losses for the Qatalum joint venture weighed down underlying results.
- Underlying EBIT NOK 965 million
- Volumes down on seasonal decline in demand
- Upstream weaker on lower alumina result and Qatalum power outage
- Midstream operating performance stable and positively affected by currency effects
- Downstream seasonally weaker, positive effects of internal measures
- Energy stable with continued low power production
- Takeover of Vale's aluminium business on track for closing in Q4
- Qatalum ramp-up expected to reach full output by end-Q1 2011
- 2010 ex-China growth outlook about 17 percent
"Market fundamentals show signs of improvement, but sales volumes are lower in line with the usual seasonal swings in the market. Based on higher-than-expected aluminium demand in the first nine months, we expect growth in demand outside China at about 17 percent in 2010 compared with 2009," Hydro's President and CEO Svein Richard Brandtzæg said.
"Hydro is in the middle of a transforming transaction, which will turn the company into a truly global and leading aluminium company. Our current focus is on integration planning and closing of the Vale transaction in the fourth quarter, while ramping up Qatalum production to full output by the end of the first quarter 2011," Brandtzæg said.
"At the same time, firm cost control will continue to drive Hydro's operational performance, and I am pleased to see that the work to cut costs in our smelter system is moving along toward the target of $300 per tonne aluminium," he said.
Underlying results for Primary Metal declined during the quarter, due to lower results for Alumina and Raw Materials. The Alunorte alumina plant, currently owned 34 percent by Hydro, incurred an underlying loss for the quarter as a result of lower LME-linked alumina prices and higher energy and raw material costs. Underlying results for alumina commercial activities declined in the third quarter.
The Qatalum aluminium plant, owned 50/50 by Hydro and Qatar Petroleum, incurred increased losses relating to lost production and sales due to a power outage halted production in August. Ramp-up of the plant resumed in mid-September, and the plant is expected to reach full production by the end of first quarter 2011. Insurance is expected to cover a majority of the costs and losses incurred including business interruption.
Underlying EBIT for Metal Markets increased during the quarter mainly due to positive currency effects resulting from the strengthening Euro against the US dollar.
Hydro's downstream operations, Extruded Products and Rolled Products, delivered lower underlying EBIT mainly due to seasonally lower sales volumes. Margins declined for Rolled Products due to increased freight and material cost and currency developments. Margins declined slightly for most business sectors within Extruded Products. Cost focus continued with further improvements in cost position for both Rolled Products and Extruded Products.
Underlying results for the Energy business area were stable in the third quarter, with continued low power production during the quarter.
Net cash generated from operating activities amounted to NOK 1.0 billion for the quarter. Investments amounted to NOK 1.6 billion, including about NOK 1.1 billion relating to Qatalum. Qatalum investments are expected to be at the same level for the fourth quarter. Hydro had a net cash position amounting to NOK 8.9 billion at the end of the quarter.
The planned takeover of Vale's aluminium business in Brazil, announced in May, is expected to close in the fourth quarter. Hydro has hedged the majority of the net aluminium price exposure in the acquired business until the end of 2011 at about USD 2,400 per mt. To partly finance the transaction, support the company's investment grade rating and capacity to implement future projects, Hydro launched a rights offering to strengthen its equity by NOK 10 billion. The rights offering were successfully completed on 16 July 2010.
For further information please refer to the Information Memorandum and Prospectus dated 2 June 2010 and 21 June 2010 respectively.
|Key financial information|
|NOK million, except per share data||Third
|% change prior quarter||Third
|% change prior year quarter||First 9
|Revenue||18,424||19,779||(7) %||16,795||10 %||56,348||50,982||67,409|
|Earnings before financial items and tax (EBIT)||274||1,157||(76) %||719||(62) %||2,417||(469)||(1,407)|
|Items excluded from underlying EBIT||690||(47)||(1,512)||347||(1,435)||(1,148)|
|Underlying EBIT||965||1,110||(13) %||(793)||>100 %||2,763||(1,904)||(2,555)|
|Primary Metal||399||657||(39) %||(760)||>100 %||1,007||(1,839)||(2,556)|
|Metal Markets||163||31||>100 %||(15)||>100 %||259||(63)||(83)|
|Rolled Products||227||309||(27) %||51||>100 %||759||(31)||26|
|Extruded Products||102||201||(49) %||95||8 %||420||(136)||(67)|
|Energy||169||177||(5) %||217||(22) %||934||945||1,240|
|Other and eliminations||(95)||(265)||64 %||(381)||75 %||(616)||(781)||(1,114)|
|Underlying EBIT||965||1,110||(13) %||(793)||>100 %||2,763||(1,904)||(2,555)|
|Net income (loss)||(63)||598||>(100) %||1,001||>(100) %||1,460||1,003||416|
|Underlying net income (loss)||545||530||3 %||(1,222)||>100 %||1,476||(2,274)||(3,066)|
|Earnings per share||(0.07)||0.40||>(100) %||0.79||>(100) %||0.93||0.68||0.24|
|Underlying earnings per share||0.33||0.34||(4) %||(0.96)||>100 %||0.94||(1.89)||(2.50)|
|Investments||1,591||1,261||26 %||2,126||(25) %||4,618||3,576||5,947|
|Adjusted net interest-bearing debt||(8,280)||(18,191)||54 %||(19,044)||57 %||(8,280)||(19,044)||(15,645)|
|Key Operational information|
|Primary aluminium production (kmt)||355||362||(2) %||330||8 %||1,055||1,064||1,396|
|Realized aluminium price LME (USD/mt)||2,179||2,200||(1) %||1,523||43 %||2,125||1,667||1,698|
|Realized aluminium price LME (NOK/mt)||13,503||13,302||2 %||9,480||42 %||12,753||10,851||10,764|
|Realized NOK/USD exchange rate||6.20||6.05||2 %||6.22||-||6.00||6.51||6.34|
|Metal Markets sales volumes to external market (kmt)||429||457||(6) %||395||9 %||1,300||1,093||1,468|
|Rolled Products sales volumes to external market (kmt)||239||242||(2) %||205||17 %||712||583||794|
|Extruded Products sales volumes to external market (kmt)||134||141||(5) %||118||13 %||402||337||453|
|Power production (GWh)||1,479||1,621||(9) %||1,682||(12) %||5,881||5,968||7,897|
About Hydro's reporting
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" for more information on these items.
Reported EBIT and net income
Reported EBIT for Hydro amounted to NOK 274 million for the third quarter of 2010 including net negative effects of NOK 690 million comprised of net unrealized derivative losses of NOK 524 million, negative metal effects of NOK 52 million and impairment charges relating to Qatalum amounting to NOK 114 million.
In the previous quarter, reported EBIT for Hydro amounted to NOK 1,157 million including net positive effects of NOK 47 million comprised of net unrealized derivative losses of NOK 292 million, positive metal effects of NOK 206 million and other positive effects of NOK 133 million, mainly related to changes in pension plans in Norway.
Hydro incurred a net loss for the quarter amounting to NOK 63 million including net foreign exchange losses of NOK 246 million. In the second quarter, net income amounted to NOK 598 million including net foreign exchange gains of NOK 59 million.
Market developments and outlook
LME prices increased during the quarter with some volatility. Three month prices started the quarter at a level of around USD 1,950 per mt and ended at USD 2,348 per mt. Average LME three month prices for the third quarter was stable compared to the second quarter.
Global demand for primary aluminium excluding China weakened in the third quarter due to seasonal effects as well as lower levels of customer restocking. Annualized consumption and production amounted to 23.7 million mt and 25.1 million mt respectively. Primary aluminium consumption outside China is expected to amount to about 24 million tonnes in 2010 representing around 17 percent growth from 2009. The current market surplus is expected to continue at a level around 1 million tonnes.
Demand for primary aluminium in China decreased from the previous quarter to around 17 million mt on an annual basis. Production also declined due to energy savings targets, resulting in a largely balanced market during the quarter.
LME stocks were relatively stable around 4.4 million mt during the quarter.
European demand for metal products (extrusion ingot, sheet ingot, foundry alloys and wire rod) was seasonally lower in third quarter compared to the second quarter while demand improved somewhat in the US market.
Consumption in the European flat rolled products market was seasonally lower in the quarter compared to the second quarter of 2010. Most of the demand recovery from the low levels experienced in the previous year appears to have been realized in the first nine months of 2010 and restocking activities are softening. Demand is expected to be stable or somewhat lower for the remainder of the year but with a normal seasonal decline.
European demand for extruded aluminium products was seasonally lower compared with the second quarter of 2010. Overall demand in the European and US extrusion markets is expected to be stable in the fourth quarter but with a normal seasonal decline. Demand recovery in the construction segment is expected to remain slow.
Nordic electricity spot prices were slightly higher in the third quarter compared with the second quarter. The Nordic hydrological balance continues to be negative in particular due to low reservoir levels in Norway.
Additional factors impacting Hydro
Hydro has sold forward substantially all of its primary aluminium production for the fourth quarter at a price level of around USD 2,050 per mt, excluding expected Qatalum production.
For the fourth quarter, Hydro expects its share of underlying results for Qatalum to amount to a loss of about NOK 400 million excluding any insurance reimbursement. Insurance is expected to cover a majority of the loss related to the power outage. The first payment from the insurers is expected to be requested during the fourth quarter of 2010.
In the autumn of 2009, Hydro launched a cost improvement program in order to reduce conversion costs by USD 100 per mt of primary aluminium produced by the end of 2011, compared to the 2009 level. The program is on schedule. To further improve the competitiveness of Hydro's wholly-owned smelters and restore their profitability to a sustainable level the improvement ambition has been increased to USD 300 per mt. The program is expected to be completed by the end of 2014.
Due to low power production during the second and third quarters, Hydro's reservoirs were approaching normal levels in the middle of October and we expect high power production in the fourth quarter.
During 2009, Hydro curtailed production capacity and reduced production at several plants. If it becomes necessary to permanently close plants that have been curtailed on a temporary basis, additional substantial closure costs will be incurred.
Underlying results for Primary Metal declined during the quarter compared to the second quarter mainly due to expected lower results for Alumina and Raw materials in addition to increased losses for Qatalum following a power outage at the smelter in August.
Alumina and Raw Materials' underlying results declined during the quarter as expected. Alunorte incurred an underlying loss for the quarter as a result of lower alumina prices and higher energy and bauxite costs. Energy costs increased more significantly due to a maintenance shutdown of the coal boilers at the plant that required the use of higher cost alternative fuel. Production volumes declined somewhat mainly due to maintenance activities. Underlying results in the second quarter were positively impacted by a settlement of a claim for business interruption insurance.
Underlying results for alumina commercial activities declined in the third quarter mainly due to lower volumes and unrealized losses on LME forward contracts compared to unrealized gains in the previous quarter. Related gains and losses on physical contracts are not recognized in underlying results until realized.
Underlying results for Primary Aluminium were impacted by increased losses for Qatalum relating to lost production and sales due to a power outage which stopped production at the plant. Impairment charges relating to the incident amounting to NOK 114 million, primarily related to damaged metal in the cells, are excluded from underlying EBIT. Ramp-up of the plant restarted in the middle of September. The plant is expected to reach full production at the end of the first quarter of 2011.
Realized aluminium prices were stable during the quarter declining slightly measured in US dollars but increasing somewhat measured in Norwegian kroner contributing about NOK 60 million to underlying EBIT compared to the second quarter. Higher realized premiums contributed roughly NOK 85 million. Seasonally lower sales volumes had a negative impact on underlying results amounting to around NOK 120 million for the quarter.
Variable costs increased by roughly NOK 100 million during the quarter mainly due to higher petroleum coke prices. Higher variable costs were offset by lower fixed costs for the quarter.
Underlying EBIT for Metal Markets increased during the quarter compared with the second quarter mainly due to positive currency effects amounting to approximately NOK 120 million resulting from the strengthening Euro against the US dollar. The positive effects were partly offset by lower underlying EBIT for our metal sourcing and trading operations. Currency effects in the second quarter were negative amounting to about NOK 140 million.
Underlying results from remelt operations were stable compared with the second quarter. Negative effects from lower production and sales volumes as a result of seasonal maintenance shutdowns were offset by higher operating margins.
Total metal sales from own production and third party contracts decreased somewhat compared with the second quarter of 2010 mainly due to seasonally lower shipments of extrusion ingots in all markets sectors.
Underlying EBIT declined for our metal sourcing and trading operations for the quarter. Operating margins improved but hedging losses relating to standard ingot inventories had a negative impact on underlying results amounting to NOK 70 million. Offsetting gains on physical inventories are not recognized in underlying results until realized. In the second quarter, realized gains on physical inventories amounted to NOK 60 million.
In total, currency effects and the inventory related hedging gains and losses had a net positive effect of about NOK 50 million in the third quarter compared with a net negative impact of NOK 80 million in the second quarter. Excluding these effects, Metal Markets' operating performance was stable for the quarter.
Underlying EBIT for Rolled Products declined compared with the second quarter of 2010 due to lower margins and somewhat lower sales volumes due to seasonality.
Most market segments experienced expected seasonal declines. General engineering sales volumes declined by 5 percent but underlying demand was stable. Volumes for automotive applications were 2 percent lower due to OEM's holiday period. Shipments for the construction segment were 15 percent lower also due to the holiday period. However, demand was firm and production was close to available capacities. Lithography shipments declined by 3 percent with somewhat weaker market demand at the end of the third quarter. Other product segments were stable or improved. Shipment of thin gauge foil applications increased 5 percent based on a good demand. Demand for the can beverage segment was strong but shipments were on same level as in the second quarter limited by capacity constraints.
Margins were negatively impacted mainly by higher metal premiums and inbound freight costs in addition to currency effects on export sales. Cost focus continued and cost per mt declined further compared with the second quarter. Labor productivity also continued to improve compared to the second quarter and was above the level achieved in 2008 even though volumes continued to be lower.
Underlying results for Extruded Products decreased compared with the second quarter of 2010 due to seasonally lower volumes, increased maintenance costs and slightly lower margins in most business sectors.
Our extrusion operations in Europe and the Americas delivered somewhat lower volumes compared with the second quarter reflecting lower seasonal demand. Volumes for our building systems operations declined about 14 percent as the recovery in the building and construction markets remains weak. In particular, demand in southern Europe fell in the third quarter partly due to reduced public spending. Volumes for our precision tubing business were also seasonally down falling by around 8 percent. Volumes were also impacted by capacity constraints at our plants in China and Brazil, where market growth is strong. Overall demand in the automotive market continued to improve but at a lower growth rate. Margins were somewhat lower for most business sectors. Planned shutdowns resulted in higher maintenance costs compared with the second quarter.
Underlying EBIT for Energy declined somewhat compared to the second quarter of 2010. Production declined further during the quarter influenced by low reservoir levels. Lower production costs partly offset the negative impact of the reduced production volumes.
Other and eliminations
Underlying EBIT for Other and eliminations amounted to a charge of NOK 95 million in the third quarter compared with a charge of NOK 265 million in the previous quarter and a charge of NOK 381 million in the third quarter of 2009. Underlying EBIT includes the elimination of internal gains and losses on inventories purchased from group companies which amounted to an income of NOK 24 million in the third quarter compared with a charge of NOK 85 million in the previous quarter and a charge of NOK 131 million in the third quarter of 2009. Underlying EBIT for Other and eliminations for the second quarter included costs related to the acquisition of Vale's aluminium operations of about NOK 50 million.
Hydro's solar activities incurred an underlying loss of NOK 19 million in the third quarter compared with a loss of NOK 47 million in the previous quarter and a loss of NOK 18 million in the third quarter of 2009.
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.
Linked to the agreement to acquire the majority of Vale's aluminium businesses in Brazil (Vale Aluminium) it was decided to hedge the majority of the net aluminium price exposure in Vale Aluminium until end 2011. The hedges are aimed at mitigating the risk of a weaker aluminium price and will secure a robust cash flow from the acquired assets in the transition phase. The hedges are not conditional upon completion of the transaction. The significant part of the positions expiring after closing of the transaction are subject to hedge accounting and included in other comprehensive income. Recognized unrealized and realized effects of positions not subject to hedge accounting are classified as items excluded from underlying EBIT.
|Items excluded from underlying net income|
|Unrealized derivative effects on LME related contracts||515||389||(1,406)||651||(1,902)||(2,630)|
|Derivative effects on LME related contracts (Vale Aluminium)||99||(320)||-||(221)||-||-|
|Unrealized derivative effects on power contracts||(25)||211||(54)||458||(516)||(198)|
|Unrealized derivative effects on currency contracts||(65)||12||(102)||(30)||(325)||(345)|
|Metal effect, Rolled Products||52||(206)||(141)||(468)||746||588|
|Significant rationalization charges and closure costs||-||18||30||(1)||453||518|
|Impairment charges (PP&E and equity accounted investments)||114||-||286||175||300||438|
|(Gains)/losses on divestments||-||-||-||(67)||-||684|
|Items excluded from underlying EBIT||690||(47)||(1,512)||347||(1,435)||(1,148)|
|Net foreign exchange (gain)/loss||246||(59)||(992)||(281)||(2,559)||(2,774)|
|Calculated income tax effect||(328)||38||280||(49)||716||441|
|Items excluded from underlying net income||608||(68)||(2,224)||16||(3,277)||(3,481)|
Financial expense amounted to NOK 218 million in the second quarter compared with financial expense of NOK 97 million in the previous quarter.
Interest income increased in the third quarter due to higher cash balances. In the second quarter, interest expense was higher due to interest on tax claims in Germany.
Currency losses in the third quarter mainly related to US dollar financial assets, due to weaker US dollar against the Norwegian kroner. There were no significant currency gains or losses on intercompany balances in the third quarter.1)
In the second quarter, currency gains on intercompany balances denominated in Euro amounted to NOK 151 million, due to a weaker Euro against the Norwegian kroner. Other net currency losses amounted to NOK 92 million.
Income tax expense amounted to a charge of NOK 119 million in the third quarter compared with a charge of NOK 462 million in the previous quarter and a charge of NOK 707 million in the third quarter of 2009.
For the first nine months of 2010 income tax expense was roughly 45 percent of pre-tax income. The high tax rate for the third quarter reflects mainly the losses in Qatalum, an equity accounted investment, in which earnings are recognized net of tax.
Contact: Halvor Molland
Cellular: +47 92979797
- Investor contact
Contact: Stefan Solberg
Cellular: +47 91727528