Results reflect continued weak markets, volumes rise on restocking

Tuesday, 27. October 2009 07:31
* Third quarter underlying loss before financial items of NOK
793 million
* Stable demand at low level, positively influenced by
restocking
* Upstream results remain weak due to low aluminium prices
and weakening US dollar
* Downstream results improve on higher volumes and continued
cost savings
* Capacity adjustments and cost reduction program delivered
as planned
* Agreement to divest automotive structures business signed
on October 26
* Qatalum 90 percent complete end-September, on schedule for
start-up around year-end

Hydro had an underlying loss before financial items and tax of NOK
793 million in the third quarter, compared with a loss of NOK 618
million in the previous quarter, reflecting the frail global economy,
low aluminium prices and a weakening US dollar. Downstream results
continued to improve, supported by higher volumes and cost saving
measures.

"In response to the market downturn, we have completed a substantial
program of capacity reductions and cost-cutting measures that are
helping to reposition our company," President and Chief Executive
Officer Svein Richard Brandtzæg said.

"Still, we remain cautious about the outlook for global aluminium
demand and are concerned about the weakening US dollar. In view of
these challenges, we will consider additional restructuring and
cost-saving measures," he said.

"Our main priority in the coming months is to bring Qatalum on stream
according to plan, which will improve Hydro's cost position and
robustness," he added.

Underlying results in Primary Metal were strongly affected by
continued low aluminium prices, resulting in substantial losses.
Operational improvements and stable production following the
completion of previously announced capacity curtailments contributed
to a further decline in fixed costs. Results in Hydro's alumina
operations improved due to rising alumina prices and stronger
performance.

Metal Markets' underlying results declined, heavily affected by the
weakening US dollar during the quarter. Sales volumes increased
moderately.

Underlying EBIT for Hydro's downstream operations, Rolled Products
and Extruded Products, continued to improve on rising volumes as well
as declining costs due to cost-cutting measures. Demand improved
slightly from the previous quarter as customers started to replenish
inventories, but remained well below year-ago levels. Margins were
stable during the quarter.

Hydro has entered into an agreement to divest its automotive
structures business to the German Benteler Automobiltechnik GmbH. The
agreement represents a solid, long-term industrial solution for
Hydro`s automotive structures activities, and is in line with Hydro's
strategy to focus its extruded activities on profiles solutions and
building systems. The transaction is expected to be cash neutral for
Hydro, and an estimated after-tax loss of NOK 250 million will be
recognized in next quarter's results.

Underlying EBIT for the Energy business area declined from the second
quarter of 2009, mainly due to lower spot prices. Production was
seasonally low.

The joint venture with Qatar Petroleum to build Qatalum, which will
be one of the most cost-effective smelters in the world, is
approaching completion. About 90 percent finished at the end of the
quarter and on schedule for start-up around the turn of the year.

Net cash generated from operating activities amounted to NOK 1.6
billion in the third quarter, compared with net cash generated by
operating activities of NOK 2.0 billion in the previous quarter.
Investments amounted to NOK 2.1 billion in the quarter, rising from
the previous quarter as Qatalum is being financed by equity
contributions from the owners in the second half of the year.
Investments relating to the Qatalum project in the third quarter were
about NOK 1.5 billion. Hydro had a net cash position of NOK 2.4
billion at the end of the quarter.


Key financial %
information Third Second % Third change First First
quarter quarter change quarter prior 9 9 Year
NOK million, 2009 2009 prior 2008 year months months 2008
except per share quarter quarter 2009 2008
data

Revenue 16 337 17 123 (5) % 21 765 (25) % 50 313 67 275 88 643

Earnings before
financial items 719 410 75 % 2 414 (70) % (469) 4 300 1 194
and tax (EBIT)
Items excluded (1
from underlying (1 512) (1 029) (924) 435) 840 4 815
EBIT
Underlying EBIT (793) (618) (28) % 1 490 >(100) (1 5 141 6 009
% 904)

Underlying EBIT
:
Primary Metal (760) (895) 15 % 906 >(100) (1 2 639 2 732
% 839)
Metal Markets (15) 196 >(100) (41) 64 % (63) 461 703
%
Rolled Products 51 (28) >100 % 170 (70) % (31) 558 651
Extruded 95 (26) >100 % 152 (38) % (136) 670 338
Products
Energy 217 281 (23) % 493 (56) % 945 1 216 1 865
Other and (381) (146) >(100) (191) (100) % (781) (403) (279)
eliminations %
Underlying EBIT (793) (618) (28) % 1 490 >(100) (1 5 141 6 009
% 904)

Income (loss) (3
from continuing 1 001 282 >100 % 233 >100 % 1 003 2 578 267)
operations

Underlying
income (loss) (1 222) (572) >(100) 1 075 >(100) (2 3 763 3 579
from continuing % % 274)
operations

Earnings per
share from 0.83 0.17 >100 % 0.06 >100 % 0.72 1.93 (3.04)
continuing
operations

Underlying
earnings per >(100)
share from (1.01) (0.53) (89) % 0.75 % (2.00) 2.91 2.62
continuing
operations

Financial data:
Investments 2 126 765 >100 % 2 443 (13) % 3 576 6 264 9 012
Adjusted net (19 >(100) (5 (15
interest-bearing ##### 236) 1 % (5 455) % ##### 455) 440)
debt



Key
Operational
information

Primary
aluminium 330 338 (3) 439 (25) 1 064 1 309 1 750
production % %
(kmt)
Realized
aluminium 1 4 % 2 (47) 1
price LME 523 1 468 848 % 667 2 632 2 638
(USD/mt)
Realized
aluminium 9 9 (1) (37) 10
price LME 480 598 % 15 114 % 851 13 976 14 699
(NOK/mt)
Realized (5)
NOK/USD 6.22 6.54 % 5.22 19 % 6.51 5.31 5.57
exchange rate
Rolled
Products (15)
sales volumes 205 187 10 % 240 % 583 752 965
to external
market (kmt)
Extrusion
products (14)
sales volumes 104 99 5 % 122 % 300 385 488
to external
market (kmt)
Automotive
products (13)
sales volumes 23 21 8 % 26 % 61 87 105
to external
market (kmt)
Power (7) (37)
production 1 682 1 809 % 2 677 % 5 968 8 548 11 361
(GWh)


Reported EBIT and income from continuing operations
Reported EBIT for Hydro amounted to NOK 719 million for the third
quarter including net positive effects of NOK 1,512 million comprised
of net unrealized derivative gains of NOK 1,562 million, positive
metal effects of NOK 141 million, other positive effects of NOK 95
million and impairment charges of NOK 286 million. In the previous
quarter, reported EBIT amounted to NOK 410 million including net
positive effects of NOK 1,030 million comprised of net unrealized
derivative gains of NOK 1,310 million, other positive effects of NOK
60 million, negative metal effects of NOK 225 million, and
rationalization charges and closure costs of NOK 117 million.

Income from continuing operations was NOK 1,001 million in the third
quarter including net foreign exchange gains of NOK 992 million
mainly relating to intercompany balances denominated in Euro. These
gains have no cash effect and are offset in equity by translation of
the corresponding subsidiaries during consolidation. Income from
continuing operations was NOK 282 million in the second quarter
including net foreign exchange gains of about NOK 88 million.

Market developments and outlook
The third quarter was marked by a strong positive development in
aluminium prices. During the quarter, LME three month prices ranged
from around USD 1,800 - USD 1,950 per mt. The US dollar weakened in
the quarter, mitigating the effect of the market price improvement in
Norwegian kroner.

Demand for aluminium increased in China as government actions and
initiatives relating to the financial crisis reached full effect
during the quarter. Demand for 2009 as a whole is expected to be
slightly higher than in 2008. Outside China demand increased slightly
from the low levels seen in the first half of the year. No
substantial further improvement is expected for the remainder of the
year and there continues to be significant uncertainty regarding the
timing and strength of an eventual recovery.

LME stocks stabilized at around 4.6 million mt in the third quarter
although analysts reports indicate that unreported stocks have been
increasing throughout the quarter.

In response to the falling demand, capacity curtailments reached a
global level of around 3 million mt annually in the first half of
2009 excluding China. Current production has stabilized around 23.8
million tonnes compared to a total production of about 26.4 million
mt in 2008 excluding China. No further curtailments were announced in
the third quarter.

The underlying demand for metal products (extrusion ingot, sheet
ingot, foundry alloys and wire rod) in Europe and North America
improved slightly during the third quarter 2009 compared to the
previous quarter but there is still uncertainty regarding the timing
of any significant recovery.

Demand for flat rolled products in Europe continued its upward trend
in the third quarter after apparently reaching bottom in the previous
quarter. Consumption and shipments are expected to continue on the
same level as third quarter for the final quarter of the year, with a
normal seasonal decline towards year end. European demand for
extruded aluminium products was seasonally lower compared to the
previous quarter. Demand in North America continued to improve from
the previous quarter following a long period of declining markets.
Demand in both regions was significantly lower than the third quarter
of 2008. The overall outlook for the European and US extrusion
markets continue to be weak, but stable across most market segments.
However, we expect seasonally lower demand in the fourth quarter of
the year.

Nordic spot prices for electricity declined during the third quarter
following a period of high precipitation that has restored the
hydrological balance in Norway close to normal after a long period of
significant deficit. Demand increased in the quarter due to restart
of industrial activities and increased demand for heating, but was
about 7 percent lower for the first nine months of 2009 compared to
the same period of last year. Colder temperatures in October have
supported prices by reducing inflow into reservoirs and increasing
demand.

Outlook for Hydro
Hydro has taken active steps to capitalize on falling prices for key
raw materials. However we expect that raw material prices will
stabilize at present levels for the remainder of 2009.

At the end of third quarter, Hydro had sold more than 90 percent of
its primary aluminium production for the fourth quarter of 2009
forward at a price level of around USD 1,800 per mt. A continuing or
increasingly weaker US dollar will have a negative impact on realized
aluminium prices measured in Norwegian kroner. Hydro expects a
continued weak result in the fourth quarter of 2009.

In fourth quarter 2008 and first half of 2009 Hydro made provisions
for future rationalization and closure costs relating to the plant
shut-downs of roughly NOK 450 million in total. These are reported as
items excluded from underlying EBIT. If it becomes necessary to
permanently close plants that have been curtailed on a temporary
basis, additional substantial closure costs would be incurred.

Charges related to the build up of the operating organization at
Qatalum will increase further in the fourth quarter compared to the
third quarter as final preparations for start-up of the plant are
completed.

Hydro's reservoir levels were higher than normal at the end of the
third quarter and also higher than the corresponding period in 2008.
The increased reservoir levels, together with lower maintenance
activity is expected to result in somewhat higher power production in
the fourth quarter compared to the third quarter of 2009. Spot prices
are expected to continue on low level. Power production in the fourth
quarter is expected to be significantly lower than the corresponding
period in 2008 mainly due to the outage at Suldal I power station.

Our business activities expose us to the risk that counterparties may
default on their obligations, resulting in direct financial loss, an
unexpected increase in market exposure or higher operating costs. The
present weak economic conditions increase the risk of defaulting
counterparties. So far we have not experienced any significant
defaults and are carefully monitoring the situation.

Primary Metal
Underlying EBIT improved slightly for Primary Metal in the third
quarter but results continued to be heavily impacted by low realized
aluminium prices. Realized prices increased measured in US dollars
but declined measured in Norwegian kroner impacting underlying
results by roughly NOK 40 million compared to the second quarter. The
change in inventory write-downs resulted in a positive effect of
about NOK 125 million for the third quarter on an isolated basis.

Variable costs at our smelters were stable compared to the second
quarter of 2009. Underlying results were positively influenced by
somewhat lower carbon costs.

Fixed costs at the smelters declined further by about NOK 100 million
due to the curtailments and the manning reductions that took place in
the first half of 2009 in addition to lower maintenance activities.

Underlying income from our equity accounted smelters was relatively
unchanged from the second quarter. Charges related to the build up of
the operating organization at Qatalum increased to about NOK 125
million from roughly NOK 90 million in the previous quarter as the
plant prepares for start-up.

Underlying EBIT for Alunorte, our equity accounted alumina refinery,
amounted to NOK 10 million, a substantial improvement compared with
underlying losses of NOK 69 million in the previous quarter. The
increase resulted mainly from higher alumina prices due to the
increase in LME prices combined with an improved operational
performance and higher production volumes. Temporary measures to
address the challenging financial situation in Alunorte introduced in
March continued to have a positive impact on underlying results for
the quarter.5)

Alumina commercial activities had another strong quarter, mainly due
to higher LME prices and despite lower external sales volumes.

Metal Markets
Metal Markets incurred an underlying loss for the quarter heavily
impacted by negative currency effects of roughly NOK 150 million due
to the weakening of the US dollar against Norwegian kroner.
Underlying results for the second quarter included limited net
currency effects. The negative third quarter result was also
influenced by significantly lower contributions from resale of third
party metal products.

Production from Metal Markets' remelter operations increased from the
second quarter, notwithstanding seasonally lower volumes during the
summer holiday period. Our European remelters operated at nearly full
capacity towards the end of the quarter, reflecting improved product
demand in our main markets. Remelter production also increased in the
US, but the market situation in North America continues to be weak.

Total metal product sales increased compared with the second quarter,
reflecting a moderate improvement in demand for extrusion ingots,
foundry alloys and sheet ingots in our main markets in Europe, Asia
and North America.

Operating margins continued to be strong for our metal sourcing and
trading activities but underlying results were significantly impacted
by the negative currency effects discussed above.
Rolled Products
Underlying EBIT for Rolled Products improved further in the third
quarter but continued to be impacted by the weak economy. The
positive result for the quarter was mainly due to higher volumes
together with the effects of ongoing cost reduction measures.

Shipments increased for most major product areas. Shipments of
industrial, packaging and automotive applications all experienced a
recovery contributing to the improved result, while shipments
declined for construction applications. Margins measured in Euro
declined slightly compared to the second quarter but were stable
compared to the level achieved during the first half year.

Extruded Products
Underlying results for Extruded Products improved for the quarter
mainly due to higher volumes and lower costs as a result of the cost
cutting measures that were implemented at an early stage of the
market downturn.

Volumes increased slightly for our European extrusion business from
the low levels experienced in the previous quarter. Expected seasonal
declines were more than offset by customer restocking activities.
Margins remained under pressure. Underlying results of our Building
Systems business continued to be positive with firm margins compared
to both the previous quarter and the third quarter of the previous
year. Underlying results for our American operations improved
compared to the second quarter. Higher volumes and cost cutting
measures resulted in a small positive contribution for the quarter.
Margins remained firm compared to the previous quarter.

Our Automotive operations had an underlying profit for the quarter
improving from the losses incurred in the previous quarter due to
higher volumes and the ongoing cost reduction measures. Results were
impacted, however, by the continued weak automotive market.

Energy
Underlying EBIT for Energy declined from the second quarter of 2009
mainly due to lower spot prices. Production continued to be
seasonally low and was also impacted by the outage of the Suldal I
power station. However, the effect of the lost production from Suldal
was offset by proceeds from business interruption insurance.

Other and eliminations
Underlying EBIT for Other and eliminations amounted to a charge of
NOK 381 million in the third quarter compared with a charge of NOK
146 million in the second quarter and a charge of NOK 191 million in
the third quarter of 2008. The increase in the quarter mainly related
to charges for the elimination of unrealized gains and losses on
inventories purchased from group companies.

Hydro's solar activities incurred an underlying loss of NOK 18
million in the third quarter compared with NOK 29 million in the
second quarter and NOK 18 million in the third quarter of 2008.
Items excluded from underlying EBIT and income from continuing
operations
To provide a better understanding of Hydro's underlying performance,
the items in the table below have been excluded from EBIT and income
from continuing operations.

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.


Items excluded from
underlying income Third Second Third First 9 First 9
from continuing quarter quarter quarter months months Year
operations 2009 2009 2008 2009 2008 2008

NOK million

Unrealized
derivative effects (1 406) (1 223) 35 (1 902) (864) 1 120
on LME related
contracts
Unrealized
derivative effects (54) 118 (1 038) (516) 2 249 768
on power contracts
Unrealized
derivative effects (102) (204) 150 (325) 50 314
on currency
contracts
Metal effect, Rolled (141) 225 (38) 746 (171) 235
Products
Significant
rationalization 30 117 - 453 - 109
charges and closure
costs
Impairment charges
(PP&E and equity 286 4 - 300 - 2 464
accounted
investments)
Loss provisions - - - - - 257
(power contracts)
Pension plan (52) - - (52) - -
amendment
Insurance (73) (66) - (139) - -
compensation
(Gains)/losses on - - (34) - (423) (453)
divestments
Items excluded from (1 512) (1 029) (924) (1 435) 840 4 815
underlying EBIT
Net foreign exchange (992) (88) 2 015 (2 559) 862 5 491
(gain)/loss
Calculated income 280 262 (248) 716 (517) (3 460)
tax effect
Items excluded from
underlying income (2 224) (854) 843 (3 277) 1 185 6 846
from continuing
operations


Finance
During the quarter, currency gains on intercompany balances amounted
to about NOK 1,101 million mainly due to a weaker Euro against the
Norwegian kroner. These gains have no cash effect and are offset in
equity by translation of the corresponding subsidiaries during
consolidation. Other net currency losses amounted to NOK 109 million
which mainly related to Hydro's working capital.

In the previous quarter, currency losses on intercompany balances
denominated in Euro amounted to about NOK 177 million due to stronger
Euro against the Norwegian kroner.

At end of the third quarter of 2009 cash and cash equivalents
amounted to NOK 2.9 billion down from NOK 4.9 billion at the end of
the previous quarter.

Tax
Income tax expense amounted to NOK 707 million in the quarter
compared with NOK 273 million in the second quarter of 2009 and NOK
201 million in the third quarter of 2008. Income tax expense amounted
to NOK 1,134 million and NOK 1,183 million for the first nine months
of 2009 and 2008 respectively.

For the first nine months of 2009, income tax expense was roughly 53
percent of pre-tax income. The high tax rate resulted mainly from the
effects of power sur-tax, results from equity accounted investments
which are recognized net of tax and the effect of certain operating
losses having no tax effect.

Press contact
Contact Erik Brynhildsbakken
Telephone +47 22538301
Cellular +47 41751271
E-mail Erik.Brynhildsbakken@hydro.com

Investor contact
Contact Stefan Solberg
Telephone +47 22539280
Cellular +47 91727528
E-mail Stefan.Solberg@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 announcement was originally distributed by Hugin. The issuer is
solely responsible for the content of this announcement.

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