Results rise further on higher aluminium prices and solid sales

Tuesday, 27. July 2010 07:32
* NOK 1,110 million in second quarter underlying EBIT
* Solid demand in seasonally strong quarter
* Upstream improves on higher aluminium prices and alumina performance
* Downstream rises further with strong sales, firm margins and improved
productivity
* Energy falls on significantly lower power production
* Qatalum ramp-up on schedule for full output in Q4, 48 percent of cells in
operation end-Q2
* Takeover of Vale's aluminium business on track for Q4 closing
* NOK 10 billion rights offering successfully completed
* 2010 outlook for growth in Hydro's main markets unchanged at 12 percent


Hydro had underlying earnings before financial items and tax of NOK 1,110
million in the second quarter, rising from NOK 688 million in the first quarter.
Higher realized aluminium prices, continued improvements in alumina operations
and higher downstream sales lifted underlying results for the quarter.

"The solid results are attributable to higher sales volumes, combined with firm
margins and tight cost control in a seasonally strong quarter. This quarter
confirms Hydro as a strong market performer," Hydro's President and Chief
Executive Officer Svein Richard Brandtzæg said.

"Full output at Qatalum and closing of the takeover of Vale's aluminium business
are expected in the fourth quarter. Combined, these moves will strengthen Hydro
in all parts of the value chain and make us an even more robust player in an
industry poised for growth," said Brandtzæg.

Underlying results for Primary Metal improved during the quarter compared to the
first quarter, due to higher realized aluminium prices. Hydro's alumina and raw
materials business showed improved underlying results, mainly due to the
Alunorte alumina refinery which posted higher sales volumes as a result of more
stable production. Variable costs increased for Hydro's smelter operations
during the quarter.

Metal Markets' underlying results declined in the second quarter, mainly due to
an increase in negative currency effects as a result of the weakening Euro
against the US dollar. Capacity utilization and margins remained firm in the
quarter despite increased raw material costs.

Underlying EBIT for Rolled Products increased substantially compared to the
first quarter, mainly driven by higher sales volumes. Higher margins and lower
operating costs per tonne also contributed to the improved underlying results.
Extruded Products also delivered significantly better underlying results on
seasonally higher volumes and firm margins in all business sectors.

Underlying EBIT for Energy decreased substantially compared to the previous
quarter due to significantly lower hydropower production.

The ramp-up of the Qatalum aluminium plant in Qatar continued during the quarter
with about 48 percent of the 704 cells operating at the end of June 2010.
Production from the plant's remaining cells will be phased in during 2010 and
the ramp-up is expected to be completed in the fourth quarter this year.

Net cash generated from operating activities amounted to NOK 1.6 billion for the
quarter. Investments amounted to NOK 1.3 billion, including about NOK 740
million relating to Qatalum. Qatalum investments are expected to be somewhat
lower in the second half of 2010 compared with the first half, as the project
nears completion. Hydro's net debt amounted to NOK 0.1 billion at the end of the
quarter.

On 2 May 2010, Hydro announced an agreement to take over the majority of
Brazilian metals and mining company Vale's aluminium business. The transaction
is expected to close in the fourth quarter 2010. In order to mitigate the risk
of a weaker aluminium price and secure a robust cash flow, 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 was successfully
completed with the proceeds received by Hydro on 16 July, and the new shares
delivered to the subscribers and admitted to trading on the Oslo Stock Exchange
and London Stock Exchange on 19 July. For further information about the
transaction and the rights offering, please refer to the Information Memorandum
and Prospectus dated June 2, 2010 and June 21, 2010 respectively.

Key financial
information %
% change
NOK million, Second First change Second prior First First
except per share quarter quarter prior quarter year half half Year
data 2010 2010 quarter 2009 quarter 2010 2009 2009
--------------------------------------------------------------------------------


Revenue 19 779 18 145 9 % 17 617 12 % 37 924 34 186 67 409



Earnings before
financial items (1 (1
and tax (EBIT) 1 157 985 17 % 410 >100 % 2 142 188) 407)

Items excluded
from underlying (1
EBIT (47) (297)   (1 029)   (344) 77 148)
--------------------------------------------------------------------------------
(1 (2
Underlying EBIT 1 110 688 61 % (618) >100 % 1 798 111) 555)
--------------------------------------------------------------------------------


Underlying EBIT :

(1 (2
Primary Metal 657 (49) >100 % (895) >100 % 607 079) 556)

Metal Markets 31 65 (52) % 196 (84) % 96 (48) (83)

Rolled Products 309 223 39 % (28) >100 % 532 (82) 26

Extruded Products 201 117 72 % (26) >100 % 318 (230) (67)

Energy 177 588 (70) % 281 (37) % 766 728 1 240

Other and (1
eliminations (265) (255) (4) % (146) (81) % (520) (400) 114)
--------------------------------------------------------------------------------
(1 (2
Underlying EBIT 1 110 688 61 % (618) >100 % 1 798 111) 555)
--------------------------------------------------------------------------------


Net income (loss) 598 924 (35) % 282 >100 % 1 523 2 416
--------------------------------------------------------------------------------


Underlying net (1 (3
income (loss) 530 401 32 % (572) >100 % 931 052) 066)
--------------------------------------------------------------------------------


Earnings per
share 0.40 0.68 (42) % 0.17 >100 % 1.08 (0.11) 0.24
--------------------------------------------------------------------------------


Underlying
earnings per
share 0.34 0.27 26 % (0.51) >100 % 0.61 (0.94) (2.50)
--------------------------------------------------------------------------------


Financial data:
--------------------------------------------------------------------------------
Investments 1 261 1 766 (29) % 765 65 % 3 028 1 450 5 947

Adjusted net
interest-bearing (19 (18 (19 (15
debt (18 191) (16 939) (7) % 236) 5 % 191) 236) 645)
--------------------------------------------------------------------------------


Key Operational
information


--------------------------------------------------------------------------------
Primary aluminium
production (kmt) 362 339 7 % 338 7 % 701 735 1 396

Realized
aluminium price                    2    1    1
LME (USD/mt)    2 200  1 997 10 %  1 468 50 % 099 727 698

Realized
aluminium price                  11
LME (NOK/mt)  13 302  11 542 15 % 9 598 39 % 12 401 456 10 764

Realized NOK/USD
exchange rate 6.05 5.78 5 % 6.54 (7) % 5.91 6.63 6.34

Metal Markets
sales volumes to
external market,
excl. ingot                                    1
trading (kmt) 457     414 10 %    375 22 % 871  695 468

Rolled Products
sales volumes to
external market
(kmt) 242 231 5 % 187 30 % 473 378 794

Extruded Products
sales volumes to
external market
(kmt) 141 128 10 % 112 26 % 269 218 453

Power production
(GWh) 1 621 2 781 (42) % 1 809 (10) % 4 402 4 286 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 1,157 million for the second quarter of
2010 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.

In the previous quarter, reported EBIT for Hydro amounted to NOK 985 million
including net positive effects of NOK 297 million comprised of net unrealized
derivative losses of NOK 42 million, positive metal effects of NOK 314 million
and other positive effects of NOK 25 million.

Net income amounted to NOK 598 million in the second quarter including net
foreign exchange gains of NOK 151 million 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. In the first
quarter, net income amounted to NOK 924 million including net foreign exchange
gains of NOK 515 million relating to intercompany balances denominated in Euro.

Market developments and outlook
Average LME three month prices declined during the second quarter and ended with
the LME three month price at USD 1,954 per mt.

Global demand for primary aluminium excluding China strengthened in the second
quarter reaching an annualized consumption of around 24 million mt. Production
outside China increased to 25 million mt on an annualized basis. Demand for
primary aluminium in China increased from the previous quarter to around 17.6
million mt on an annual basis. Production was relatively stable at around the
same level resulting in a balanced market during the quarter.

LME stocks declined somewhat to around 4.4 million mt at the end of the second
quarter compared to 4.6 million mt in the beginning of the quarter.

Demand for metal products (extrusion ingot, sheet ingot, foundry alloys and wire
rod) during the second quarter continued above levels experienced in the same
quarter of last year.

Consumption in the European flat rolled product market improved by 5 percent in
the second quarter of 2010 compared with the previous quarter. Order levels have
remained firm, reflecting growth in end use demand compared to 2009. Demand in
the North American market showed similar developments. Demand is expected to be
stable in the third quarter but with a normal seasonal decline.

European demand for extruded aluminium products declined slightly from the first
quarter which was influenced by customer restocking. North America experienced a
seasonal increase in demand compared with the first quarter of 2010 and the weak
second quarter of 2009 and the market appears to be improving following a long
period of continuous decline. Market demand in South America continued to be
positive, mainly in Brazil.

On a combined basis we continue to expect demand in our main upstream and
downstream markets to grow around 12 percent in 2010.

Nordic electricity spot prices decreased during the second quarter due to a
decline in demand following a record cold winter. Dry spring weather in Southern
Norway has resulted in lower reservoir levels in this region than in Northern
Norway and Sweden. Power production is expected to be lower than normal until
reservoir levels are normalized.

Additional factors impacting Hydro
Hydro has sold forward substantially all of its primary aluminium production for
the third quarter of 2010 at a price level of around USD 2,175 per mt, excluding
expected Qatalum production.

Qatalum will continue incurring operating losses during the ramp-up of
production. Qatalum prices production with a one month lag to LME prices. As a
result, declining aluminium price during the second quarter 2010 is expected to
negatively affect Qatalum's results in the third quarter of 2010. High
depreciation relative to actual production is also expected to impact results
for the quarter.

Underlying results for Hydro's Alumina and raw materials business are expected
to decline in the second half of 2010 as a result of lower expected realized
alumina prices due to a lower LME, and higher raw material costs due to time-lag
effects in the pricing formula for bauxite which is partly linked to LME prices.
In addition, a decline in the results for alumina commercial activities is
expected in the second half of 2010 from the strong performance in the first
half of 2010. The decline is due to lower expected margins.

Low snow accumulations in Southern Norway have resulted in a low replenishment
to Hydro's reservoirs. As a result, power production is expected to remain at a
low level in the third quarter unless there is a higher than normal level of
precipitation.

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.

The risk of counterparty default continues under the present economic
conditions. So far we have not experienced any significant defaults and are
carefully monitoring the situation.

Primary Metal
Underlying results for Primary Metal improved during the quarter compared to the
first quarter due to higher realized aluminium prices and improved performance
in Alumina and Raw Materials.

Alumina and Raw Materials' underlying EBIT increased further in the second
quarter from the improved performance in the first quarter. Underlying results
improved significantly for Alunorte mainly due to higher sales volumes as a
result of more stable production. Realized alumina prices were relatively
unchanged during the quarter while operating costs declined somewhat. Underlying
results were positively impacted by a settlement of a claim for business
interruption insurance.

Underlying results for alumina commercial activities improved in the quarter
following a strong performance in the first quarter mainly due to higher volumes
on external contracts. Margins remained good but declined somewhat from the
previous quarter. Underlying EBIT was positively influenced by unrealized gains
on LME forward contracts.

Underlying results for Primary Aluminium improved significantly in the second
quarter with higher realized aluminium prices contributing roughly NOK 600
million compared with the previous quarter. Higher sales volumes and product
premiums also made a positive contribution to underlying EBIT for the quarter.

Variable costs increased by roughly NOK 120 million during the quarter mainly
due to higher alumina costs and somewhat higher power costs. Other costs were
overall stable.

Underlying results for Qatalum improved slightly, but were still negative due to
a substantial increase in depreciation charges combined with low output during
ramp-up of production at the plant.

Metal Markets
Underlying EBIT for Metal Markets declined in the second quarter mainly due to
an increase in negative currency effects as a result of the weakening Euro
against the US dollar. Negative currency effects amounted to about NOK 140
million in the second quarter compared with negative effects of approximately
NOK 100 million in the previous quarter.

Underlying results from remelt operations declined slightly compared to the
first quarter. Positive effects from higher production and sales volumes were
offset by higher raw material costs.

Total metal sales from own production and third party contracts increased
significantly compared with the first quarter of 2010 mainly due to seasonally
higher shipments of extrusion ingots in all markets and increased sales from
Qatalum.

Underlying results for our metal sourcing and trading operations were largely
unchanged from the first quarter, with good operating performance and positive
results in both periods.

Rolled Products
Underlying EBIT for Rolled Products increased substantially compared to the
first quarter mainly driven by higher sales volumes. Higher margins and lower
operating costs per mt also contributed to the improved underlying results.

Shipments improved across all market segments except for lithographic sheet
which was stable. Beverage can shipments improved by 11 percent supported by
continued good market demand. Automotive products shipments increased by 8
percent influenced by a continued strength in the market for premium cars.
Shipments of thin gauge foil products improved 7 percent compared to the first
quarter, mainly driven by strong demand in the liquid packaging market. General
engineering shipments increased by 5 percent.

Cost focus continued and cost per mt declined further compared to the first
quarter. Labour productivity also improved further compared to the first quarter
of 2010 and was above the level achieved in 2008 even though volumes were below
2008 levels.

Extruded Products
Underlying results for Extruded Products improved from the first quarter of
2010 due to seasonally higher volumes and stable margins in all business
sectors.

Sales volumes for our extrusion operations in Europe and the Americas increased
significantly from the previous quarter mainly as a result of stronger seasonal
demand. Volumes for our building systems operations were also seasonally higher
compared with first quarter, but the recovery of the building and construction
market segment is slow compared to other market segments. Our precision tubing
business delivered somewhat higher volumes compared to the previous quarter
supported by a continued strong demand from the automotive segment. Margin and
cost developments were stable for all sectors compared to the previous quarter.

Energy
Underlying EBIT for Energy decreased compared to the previous quarter due to
substantially lower production. The corresponding reduction in net spot sales
had a negative impact on underlying EBIT amounting to NOK 565 million. High
realized spot prices, low area price differences and lower transmission costs
offset the negative impact to some extent.

Other and eliminations
Underlying EBIT for Other and eliminations amounted to a charge of NOK 265
million in the second quarter compared with a charge of NOK 255 million in the
previous quarter. Underlying EBIT includes the elimination of internal gains and
losses on inventories purchased from group companies which amounted to a charge
of NOK 85 million in the second quarter compared with a charge of NOK 116
million in the previous quarter.

Hydro's solar activities incurred an underlying loss of NOK 47 million in the
second quarter compared with a loss of NOK 25 million in the previous quarter.

Underlying EBIT for Other and eliminations in the second quarter also included
costs related to the acquisition of Vale's aluminium operations amounting to
about NOK 50 million.

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.

During second quarter some of Hydro's Norwegian employees accepted an offer of
transferring their pension agreements from a defined benefit plan to the new
defined contribution plan. The transition resulted in curtailment and settlement
gain of the funded plans related to these employees. The recognized gain has
been excluded from underlying EBIT.

Items excluded from underlying net
income Second First Second First First
quarter quarter quarter half half Year
NOK million 2010 2010 2009 2010 2009 2009
--------------------------------------------------------------------------------


Unrealized derivative effects on
LME related contracts 389 (253) (1 223) 136 (496) (2 630)

Derivative effects on LME related
contracts (Vale Aluminium) (320) - - (320) - -

Unrealized derivative effects on
power contracts 211 272 118 483 (463) (198)

Unrealized derivative effects on
currency contracts 12 23 (204) 35 (223) (345)

Metal effect, Rolled Products (206) (314) 225 (520) 887 588

Significant rationalization
charges and closure costs 18 (19) 117 (1) 423 518

Impairment charges (PP&E and
equity accounted investments) - 61 4 61 14 438

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

Insurance compensation - - (66) - (66) (152)

(Gains)/losses on divestments - (67) - (67) - 684
--------------------------------------------------------------------------------
Items excluded from underlying
EBIT (47) (297) (1 029) (344) 77 (1 148)
--------------------------------------------------------------------------------
Net foreign exchange (gain)/loss (59) (468) (88) (527) (1 566) (2 774)

Calculated income tax effect 38 241 262 279 436 441
--------------------------------------------------------------------------------
Items excluded from underlying net
income (68) (523) (854) (592) (1 054) (3 481)
--------------------------------------------------------------------------------

Finance
Financial expense amounted to NOK 97 million in the second quarter compared with
financial income of NOK 545 million in the previous quarter.

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. 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 92 million.

In the previous quarter, currency gains on intercompany balances denominated in
Euro amounted to NOK 515 million due to weaker Euro against the Norwegian
kroner.

Tax
Income tax expense amounted to a charge of NOK 462 million in the second quarter
compared with a charge of NOK 605 million in the previous quarter and a charge
of NOK 273 million in the second quarter of 2009. Tax expense in the second
quarter included approximately NOK 30 million relating to tax claims in Germany.

For the first half of 2010 income tax expense was roughly 41 percent of pre-tax
income. The tax rate is influenced by the effects of power sur-tax and results
from equity accounted investments which are recognized net of tax.

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

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

*********
This announcement is not an offer for sale of securities in the United States or
any other country. The securities referred to herein have not been registered
under the U.S. Securities Act of 1933, as amended (the "U.S. Securities Act"),
and may not be sold in the United States absent registration or pursuant to an
exemption from registration under the U.S. Securities Act. Any offering of
securities will be made by means of a prospectus that may be obtained from Hydro
and that will contain detailed information about the company and management, as
well as financial statements. Copies of this announcement are not being made and
may not be distributed or sent into the United States, Canada, Australia, Japan
or any other  jurisdiction in which such distribution would be unlawful or would
require registration or other measures.

In any EEA Member State that has implemented Directive 2003/71/EC (together with
any applicable implementing measures in any member State, the "Prospectus
Directive"), this communication is only addressed to and is only directed at
qualified investors in that Member State within the meaning of the Prospectus
Directive.


This announcement is only directed at (a) persons who are outside the United
Kingdom; or (b) investment professionals within the meaning of Article 19 of the
Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the
"Order"); or (c) persons falling within Article 49(2)(a) to (d) of the Order; or
(d) persons to whom any invitation or inducement to engage in investment
activity can be communicated in circumstances where Section 21(1) of the
Financial Services and Markets Act 2000 does not apply.

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#1434107]





Presentation Q2 2010: http://hugin.info/106/R/1434107/379782.pdf
Report Q2 2010: http://hugin.info/106/R/1434107/379781.pdf



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Source: Norsk Hydro via Thomson Reuters ONE
Related Links: Norsk Hydro ASA
Author:
Hugin
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