Firm cost control in seasonally weak quarter

Wednesday, 27. October 2010 07:30
* 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


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.

"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
% change First
NOK million, Third Second % change Third prior First 9 9
except per quarter quarter prior quarter year months months Year
share data 2010 2010 quarter 2009 quarter 2010 2009 2009
--------------------------------------------------------------------------------


Revenue 18 424 19 779 (7) % 16 795 10 % 56 348 50 982 67 409



Earnings
before
financial
items and tax (1
(EBIT) 274 1 157 (76) % 719 (62) % 2 417 (469) 407)

Items
excluded from
underlying (1 (1
EBIT 690 (47)   (1 512)   347 435) 148)
--------------------------------------------------------------------------------
Underlying (1 (2
EBIT 965 1 110 (13) % (793) >100 % 2 763 904) 555)
--------------------------------------------------------------------------------


Underlying
EBIT :

(1 (2
Primary Metal 399 657 (39) % (760) >100 % 1 007 839) 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 (1
eliminations (95) (265) 64 % (381) 75 % (616) (781) 114)
--------------------------------------------------------------------------------
Underlying (1 (2
EBIT 965 1 110 (13) % (793) >100 % 2 763 904) 555)
--------------------------------------------------------------------------------


Net income
(loss) (63) 598 >(100) % 1 001 >(100) % 1 460 1 003 416
--------------------------------------------------------------------------------


Underlying
net income (2 (3
(loss) 545 530 3 % (1 222) >100 % 1 476 274) 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)
--------------------------------------------------------------------------------


Financial
data:
--------------------------------------------------------------------------------
Investments 1 591 1 261 26 % 2 126 (25) % 4 618 3 576 5 947

Adjusted net
interest- (19 (15
bearing debt (8 280) (18 191) 54 % (19 044) 57 % (8 280) 044) 645)
--------------------------------------------------------------------------------


Key
Operational
information


--------------------------------------------------------------------------------
Primary
aluminium
production
(kmt) 355 362 (2) % 330 8 % 1 055 1 064 1 396

Realized
aluminium
price LME                    2    1    1
(USD/mt)    2 179 2 200 (1) %  1 523 43 % 125 667 698

Realized
aluminium
price LME                10
(NOK/mt)  13 503 13 302 2 % 9 480 42 %  12 753 851 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                          1    1    1
market (kmt) 429    457 (6) %    395 9 % 300 093 468

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.

Primary Metal
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.

Metal Markets
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.

Rolled Products
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.

Extruded Products
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.

Energy
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 Third Second Third First 9 First 9
quarter quarter quarter months months Year
NOK million 2010 2010 2009 2010 2009 2009
--------------------------------------------------------------------------------


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

Pension - (151) (52) (151) (52) (52)

Insurance compensation - - (73) - (139) (152)

Impairment (Qatalum) 114 - - 114 - -

(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)
--------------------------------------------------------------------------------

Finance
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.

Tax
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.

Investor contact in Hydro
Contact     Stefan Solberg
Cellular    +47 91727528
E-mail      Stefan.Solberg@hydro.com

Press contact in Hydro
Contact     Halvor Molland
Cellular    +47 92979797
E-mail      Halvor.Molland@hydro.com


                                         *********
Certain statements included within this announcement contain forward-looking
information, including, without limitation, those relating to (a) forecasts,
projections and estimates, (b) statements of management's plans, objectives and
strategies for Hydro, such as planned expansions, investments 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, as well as (i) statements preceded by "expected", "scheduled",
"targeted", "planned", "proposed", "intended" or similar statements.

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 aluminium business;
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.

No assurance can be given that such expectations will prove to have been
correct.  Hydro disclaims any obligation to update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.

This information is subject of the disclosure requirements acc. to §5-12 vphl
(Norwegian Securities Trading Act)


[HUG#1455553]








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