Third quarter 2018: Results up on realized prices, higher costs

Hydro's underlying earnings before financial items and tax increased to NOK 2,676 million in the third quarter, up from NOK 2,446 million for the same quarter last year, reflecting higher all-in aluminium and alumina prices, positive currency effects and strong contribution from the Energy business area. Continued production curtailment at the Alunorte alumina refinery and increased raw material costs had a negative impact.

October 24, 2018
Norwegian waterfall
  • Underlying EBIT of NOK 2 676 million
  • Alunorte, Paragominas and Albras producing at 50%, affecting results negatively. Technical and social agreements signed with Brazilian authorities
  • Higher realized all-in aluminium and alumina prices
  • Increased raw material and fixed costs
  • Higher power prices lift result in Energy
  • Stable downstream results
  • Better improvement program hit by Alunorte situation, will not reach 2018 target
  • 2018 global primary market expected in deficit
  • Continued market uncertainty on US tariffs, Rusal sanctions and Alunorte situation

"The third quarter reflected our continued challenges at Alunorte and increased raw material costs, while higher aluminium and alumina prices, as well as strong Energy results, contributed positively. The market for aluminium is tightening, and we expect the 2018 global primary market in deficit," says President and CEO Svein Richard Brandtzæg.

Underlying EBIT for Bauxite & Alumina increased compared to the third quarter of last year. Higher realized alumina sales prices and positive currency effects were partly offset by higher raw material prices and the effects of reduced production at both Alunorte and Paragominas.

An expense of NOK 519 million relating to the technical and social agreements was recognized as items excluded from underlying EBIT in Bauxite & Alumina in the third quarter.

"Signing the technical and social agreements in Brazil in September was a step in the right direction towards normalized production. We continue the dialogue with the authorities with the aim to resume full production at Alunorte, but the timing remains uncertain," says Brandtzæg.

Underlying EBIT for Primary Metal declined compared to the third quarter last year due to higher raw material and fixed costs, partly offset by higher all-in metal prices. In addition, there was a positive contribution from the sale of excess power following the production curtailment of the Albras smelter in Brazil.

Underlying EBIT for Metal Markets decreased compared to the third quarter of last year. Negative currency effects and a lower contribution from sourcing and trading activities were somewhat offset by improved results from the remelters.

Underlying EBIT for Rolled Products decreased slightly compared to the third quarter of 2017. Increasing margins and improved performance from automotive line 3 were offset by cost increases. Results for the Neuss smelter decreased, the positive effects of the new power contract, the UBC line and all-in metal price development were more than offset by increasing raw material prices.

Underlying EBIT for Extruded Solutions remained stable compared to the pro forma underlying EBIT for the third quarter 2017. The positive effect of higher margins and sales volumes were offset by increased production costs in connection with the ramp-up of new product lines in Europe, in addition to negative effects from a lower Midwest Premium and section 232 tariffs in North America. Additional costs due to the integration and restructuring of the two recently acquired Brazilian extrusion plants also had a negative effect on the quarter.

Underlying EBIT for Energy increased significantly compared to the same quarter in the previous year. The increase was mainly due to significantly higher prices and higher production, partly offset by negative effects from the repricing of an internal power contract with the Neuss smelter.  

Due to the situation in Alunorte, Hydro's "Better" improvement program will not reach the 2018 target of NOK 500 million.

Hydro's net debt position decreased from NOK 7.5 billion to NOK 6.5 billion at the end of the quarter. Net cash provided by operating activities amounted to NOK 2.6 billion. Net cash used in investment activities, excluding short term investments, amounted to NOK 1.5 billion.

In addition to the factors discussed above, reported earnings before financial items and tax (EBIT) and net income include effects that are disclosed in the below table. Items excluded from underlying EBIT and underlying net income (loss) are defined and described as part of the APM section in the quarterly report.

Key financial informationThird quarter 2018Third quarter 2017Change prior year quarterSecond quarter 2018Change prior quarterFirst 9 months 2018First 9 months 2017Year 2017
Key financial information  NOK million, except per share data
Revenue 39,766 22,799 74 % 41,254 (4) % 120,991 70,416 109,220
Earnings before financial items and tax (EBIT) 2,057 2,323 (11) % 2,986 (31) % 8,344 7,678 12,189
Items excluded from underlying EBIT 620 123 >100 % (274) >100 % 192 (18) (974)
 
Underlying EBIT 2,676 2,446 9 % 2,713 (1) % 8,535 7,660 11,215
 
Bauxite & Alumina 685 413 66 % 364 88 % 1,789 1,831 3,704
Primary Metal 861 1,298 (34) % 755 14 % 2,439 3,684 5,061
Metal Markets (3) 91 >(100) % 237 >(100) % 412 359 544
Rolled Products 82 95 (13) % 212 (61) % 526 285 380
Extruded Solutions 497     957 (48) % 2,188   284
Energy 652 368 77 % 417 56 % 1,347 1,075 1,531
Other and eliminations (97) 181 >(100) % (229) 58 % (165) 426 (289)
Underlying EBIT 2,676 2,446 9 % 2,713 (1) % 8,535 7,660 11,215
                 
Earnings before financial items, tax, depreciation and amortization (EBITDA)) 3,890 3,766 3 % 4,860 (20) % 13,942 11,863 18,344
Underlying EBITDA 4,510 3,889 16 % 4,586 (2) % 14,134 11,845 17,369
                 
Net income (loss) 925 2,184 (58) % 2,073 (55) % 5,074 5,585 9,184
Underlying net income (loss) 1,696 1,785 (5) % 2,096 (19) % 5,994 5,580 8,396
                 
Earnings per share 0,37 1.00 (63) % 1.03 (64) % 2.42 2.59 4.30
Underlying earnings per share 0.74 0.82 (10) % 1.02 (27) % 2.81 2.61 3.95
 
Financial data:
Investments 2,051 1,424 44 % 1,620 27 % 4,990 4,216 28,848
Net cash (debt) (6,471) 7,697 >(100) % (7,528) 14 % (6,471) 7,697 (4,118)
Adjusted net cash (debt) (18,380) (2,976) >(100) % (20,209) 9 % (18,380) (2,976) (17,968)
 
Key Operational information
Bauxite production (kmt) 1,286 3,043 (58) % 1,348 (5) % 4,960 8,386 11,435
Alumina production (kmt) 821 1,605 (49) % 829 (1) % 2,926 4,704 6,397
Realized alumina price (USD/mt) 460 297 55 % 430 7 % 417 300 326
Primary aluminium production (kmt) 497 527 (6) % 492 1 % 1,503 1,566 2,094
Realized aluminium price LME (USD/mt) 2,194 1,921 14 % 2,183 - 2,171 1,859 1,915
Realized USD/NOK exchange rate 8.16 8.07 1 % 7.92 3 % 7.99 8.35 8.30
Rolled Products sales volumes to external market (kmt) 235 236 - 251 (6) % 731 716 940
Extruded Solutions sales volumes to external market (kmt) 343 170 >100 % 373 (8) % 1,078 527 845
Power production (GWh) 2,888 2,509 15 % 2,550 13 % 7,871 7,746 10,835
Items excluded from underlying EBIT and net income NOK millionThird quarter 2018Third quarter 2017Second quarter 2018First 9 months 2018First 9 months 2017Year 2017
Unrealized derivative effects on LME related contracts 436 (30) (306) 17 80 220
Unrealized derivative effects on power and raw material contracts (183) 7 92 (178) 155 246
Metal effect, Rolled Products (153) 151 (60) (166) (273) (419)
Significant rationalization charges and closure costs - - - - - 210
Alunorte agreements - provision 519 - - 519 - -
Other effects - - - - - 212
Transaction related effects (Sapa) - - - - - (1,463)
Items excluded in equity accounted investments (Sapa) - (6) - - 19 19
Items excluded from underlying EBIT 620 123 (274) 192 (18) (974)
Net foreign exchange (gain)/loss 257 (520) 306 895 180 875
Calculated income tax effect (105) 123 (8) (167) (41) (564)
Other adjustments to net income - (125) - - (125) (125)
Items excluded from underlying net income 772 (398) 24 920 (5) (788)
             
Income (loss) tax rate 43 % 22 % 19 % 28 % 24 % 17 %
Underlying income (loss) tax rate 32 % 26 % 19 % 26 % 26 % 24 %


Cautionary note
 
Certain statements included in this announcement contain forward-looking information, including, without limitation, information relating to (a) forecasts, projections and estimates, (b) statements of Hydro management concerning plans, objectives and strategies, such as planned expansions, investments, divestments, curtailments or other projects, (c) targeted production volumes and costs, capacities or rates, start-up costs, cost reductions and profit objectives, (d) various expectations about future developments in Hydro’s markets, particularly prices, supply and demand and competition, (e) results of operations, (f) margins, (g) growth rates, (h) risk management, and (i) qualified statements such as “expected”, “scheduled”, “targeted”, “planned”, “proposed”, “intended” or similar. 

Although we believe that the expectations reflected in such forward-looking statements are reasonable, these forward-looking statements are based on a number of assumptions and forecasts that, by their nature, involve risk and uncertainty. Various factors could cause our actual results to differ materially from those projected in a forward-looking statement or affect the extent to which a particular projection is realized. Factors that could cause these differences include, but are not limited to: our continued ability to reposition and restructure our upstream and downstream businesses; changes in availability and cost of energy and raw materials; global supply and demand for aluminium and aluminium products; world economic growth, including rates of inflation and industrial production; changes in the relative value of currencies and the value of commodity contracts; trends in Hydro’s key markets and competition; and legislative, regulatory and political factors.

Updated: October 24, 2018