Solid cash flow and cost savings, markets remain weak

Mittwoch, 22. Juli 2009 07:30
* Second quarter underlying loss before financial items of
NOK 618 million
* Focus on preserving cash, NOK 2.0 billion in operating cash
flow in quarter
* Aluminium demand apparently flattened out at low level
after historic drop
* Capacity curtailments of 460,000 tonnes a year completed
* Solid progress on cost reduction program, significant
savings in operating costs
* Qatalum 84 percent complete by end-June, on schedule for
start up around end of year

Hydro had an underlying loss before financial items of NOK 618
million in the second quarter, compared with a NOK 493 million loss
in the first quarter, as the weak global economy continued to weigh
on historically low aluminium markets. Results in downstream
operations improved due to seasonally stronger demand and swift
adjustments made early in the downturn.

Energy posted an underlying EBIT of NOK 281 million in the quarter,
down from NOK 447 million in the previous quarter due to lower
production and spot sales.

"Although we are going through the most difficult period the
aluminium industry has ever experienced, we see very positive effects
from our significant cost and capacity adjustments," President and
Chief Executive Officer Svein Richard Brandtzæg said.

"We remain cautious about the outlook for global aluminium demand
ahead of the second half of the year, which is normally seasonally
weaker than the previous six months, and will continue to execute our
cost reduction program and maintain financial flexibility," he said.
"With the substantial reduction in operating capital, reduced input
costs and strengthened market positions, we are well-positioned for
capturing opportunities."

Aluminium prices seem to have flattened out at historically low
levels, following a small pick-up after one of the sharpest drops on
record. Key end markets, most notably construction and transport,
remain weak.

Due to Hydro's policy of forward selling, the company's average
realized aluminium price was about USD 1,470 per tonne, down from
around USD 2,000 per tonne in the previous quarter, as the weak
market prices of the first quarter was reflected in the earnings of
this quarter.

During the second quarter, Hydro completed previously announced
capacity curtailments within primary aluminium production and reduced
output by about 460,000 tonnes per year, or around 26 percent of 2008
production. Shutdown of the remaining 50,000 tonnes capacity at Neuss
is currently on hold. Closure of the part-owned Alpart alumina
refinery in Jamaica was also completed during the quarter.

"We have reached our targets in rightsizing the structure, manning
and cost level of staff and support functions, expected to result in
cost savings of NOK 700-800 million from 2010," Brandtzæg said. In
total, Hydro will reduce manning by 4,500 positions by the end of
2009 compared with the middle of 2008.

The joint venture with Qatar Petroleum on the Qatalum smelter was
84-percent complete by the end of the quarter and on schedule for
start up around the turn of the year. Once in operation, Qatalum will
make a significant contribution towards lowering the average cost of
Hydro's global smelter system.

Key financial %
information Second First % Second change First First
quarter quarter change quarter prior half half Year
NOK million, 2009 2009 prior 2008 year 2009 2008 2008
except per share quarter quarter

Revenue 17 123 16 854 2 % 23 980 (29) % 33 976 45 510 88 643

Earnings before (1
financial items 410 (1 598) >100 % 708 (42) % 188) 1 887 1 194
and tax (EBIT)
Items excluded
from underlying (1 029) 1 105 911 77 1 764 4 815
Underlying EBIT (618) (493) (25) % 1 619 >(100) (1 3 651 6 009
% 111)

Underlying EBIT
Primary Metal (895) (185) >(100) 795 >(100) (1 1 733 2 732
% % 079)
Metal Markets 196 (245) >100 % 139 41 % (48) 502 703
Rolled Products (28) (53) 47 % 240 >(100) (82) 387 651
Extruded (26) (204) 87 % 296 >(100) (230) 518 338
Products %
Energy 281 447 (37) % 302 (7) % 728 723 1 865
Other and (146) (253) 42 % (153) 4 % (400) (212) (279)
Underlying EBIT (618) (493) (25) % 1 619 >(100) (1 3 651 6 009
% 111)

Income (loss) (3
from continuing 282 (280) >100 % 902 (69) % 2 2 345 267)

income (loss) (572) (480) (19) % 1 311 >(100) (1 2 687 3 579
from continuing % 052)

Earnings per
share from 0.17 (0.29) >100 % 0.67 (74) % (0.11) 1.87 (3.04)

earnings per >(100)
share from (0.53) (0.45) (18) % 1.00 % (0.99) 2.16 2.62

Financial data:
Investments 765 685 12 % 1 553 (51) % 1 450 3 821 9 012
Adjusted net >(100) (19 (3 (15
interest-bearing (19 236) (18 839) (2) % (3 054) % 236) 054) 440)

Key operational
aluminium 338 397 (15) % 437 (23) % 735 869 1 750
production (kmt)
Realized 1
aluminium price 1 468 1 996 (26) % 2 610 (44) % 727 2 532 2 638
LME (USD/mt)
Realized 13 13 11
aluminium price 9 598 393 (28) % 553 (29) % 456 13 451 14 699
LME (NOK/mt)
Realized NOK/USD 6.54 6.71 (3) % 5.19 26 % 6.63 5.31 5.57
exchange rate
Rolled Products
sales volumes to 187 191 (2) % 259 (28) % 378 512 965
external market
products sales
volumes to 99 96 3 % 133 (25) % 195 263 195
external market
products sales
volumes to 21 17 23 % 31 (32) % 38 61 38
external market
Power production 1 809 2 477 (27) % 3 021 (40) % 4 286 5 871 11 361

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 income
from continuing operations. See "Items excluded from underlying EBIT
and income from continuing operations" later in this report for more
information on these items.

Effective from the end of March, Hydro has reorganized its business,
dividing each of the former Aluminium Metal and Aluminium Products
into two and increasing the number of operating segments from three
to five including Primary Metal, Metal Markets, Rolled Products,
Extruded Products and Energy. From the beginning of the second
quarter, Hydro is presenting its financial results in accordance with
the new structure. Prior periods presented in our report have been
reclassified in accordance with the new structure.

Reported EBIT and income from continuing operations
EBIT for Hydro amounted to NOK 410 million for the second quarter
including net positive effects of roughly NOK 1,030 million comprised
of net unrealized derivative gains of about NOK 1,310 million, other
positive effects of about NOK 60 million, negative metal effects of
NOK 225 million, and rationalization charges and closure costs of NOK
117 million. Reported EBIT amounted to a loss of NOK 1,598 million
for the first quarter including charges of roughly NOK 1,100 million
comprised of negative metal effects of NOK 660 million,
rationalization charges and closure costs of NOK 300 million and net
unrealized derivative losses of about NOK 130 million.

Income from continuing operations was NOK 282 million in the second
quarter including net foreign exchange gains of about NOK 88 million.
Reported Loss from continuing operations amounted to NOK 280 million
in the first quarter including net foreign exchange gains of about
NOK 1,480 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

Net cash generated from operating activities amounted to NOK 2.0
billion for the quarter, compared with net cash used by operating
activities of NOK 1.1 billion in the previous quarter. Hydro had a
net cash position amounting to NOK 3.0 billion at the end of the

Market developments and outlook
Following a sharp fall in the first quarter, demand for aluminium
increased in China during the second quarter due to higher activity
levels. Demand in the rest of the world was largely unchanged. LME
inventories reached 4.4 million mt by the end of the second quarter,
compared with a level of 3.5 million mt at the end of the first
quarter, 2.3 million mt at the end of 2008 and 1.1 million mt at the
end of the second quarter of 2008. LME three month prices started the
quarter at USD 1,378 per mt and closed at USD 1,651 per mt.

In response to the falling demand, announced capacity curtailments
reached a global level of 3.4 million mt annually in the first
quarter excluding China. This represents about 13 percent of the 26
million mt produced in 2008. There were limited new curtailments
announced during the second quarter. However, capacity has continued
to decline as previously announced curtailments were put into effect.

Aluminium prices are expected to remain low. However, forward
visibility continues to be limited and there is significant
uncertainty regarding developments. Global primary aluminium
consumption excluding China could decline by 15 - 20 percent in 2009
from a consumption level of 25 million mt in 2008.

The significant drop in demand for aluminium has resulted in
declining demand for raw materials and smelter input costs have been
falling globally.

The underlying demand for metal products (extrusion ingot, sheet
ingot, foundry alloys and wire rod) in Europe and North America has
remained weak during the second quarter 2009. There continues to be
considerable uncertainty regarding timing of any significant
recovery. The decline in demand for flat rolled products in Europe
appears to have reached the bottom in the second quarter of 2009
although transparency regarding pipeline effects is still low. Market
demand is expected to be stable in the coming months. Demand for
extruded aluminium products improved slightly from the previous
quarter due to a seasonal increase and may have also been influenced
by the replenishment of inventories. However, demand was
significantly lower than the second quarter of 2008. The overall
outlook for the European extrusion market continues to be weak across
most market segments but there are signs that markets are
stabilizing. However, we expect seasonally lower demand in the second
half of the year.

Nordic spot prices for electricity continued to decline during the
second quarter but stabilized 13 percent lower than the first quarter
of 2009. Spot prices in Southern-Norway developed in parallel with
the Nordic system price. By the end of the second quarter, the total
water and snow balance in Norway was estimated to be approximately 19
percent lower than normal and about 25 percent lower than at the same
time in 2008. Increasing spot prices toward the end of the quarter
together with forward price developments on the NordPool power
exchange indicate higher expected spot prices in the third quarter.

Outlook for Hydro
Hydro has taken active steps to capitalize on falling prices for key
raw materials and expects further reductions in the second half of
2009. Fixed costs are expected to decline further as the full effect
of announced curtailments as well as other cost savings initiatives
comes into effect.

At the end of second quarter, Hydro had sold more than 90 percent of
its primary aluminium production for the third quarter of 2009
forward at a price level of around USD 1,475 per mt. Hydro expects a
continued weak result in the third 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 and will mainly have cash effects
in future quarters. If it becomes necessary to permanently close
plants that have been curtailed on a temporary basis, additional
substantial closure costs would be incurred.

The curtailment of electrolysis production at the Neuss smelter in
Germany was completed during the quarter with the exception of about
4.000 mt per month which will continue going forward.

Hydro's water and snow reservoirs were lower than normal at the end
of the second quarter, and considerably lower than the corresponding
periods in 2008 and 2007. The low reservoir levels, together with the
outage of the Suldal I power plant, is expected to result in lower
power production for the third quarter of 2009 compared to the second
quarter and significantly lower than the third quarter of the
previous year.

The Suldal I power station is currently being repaired and the plant
is expected to be back in operation at the beginning of 2010. The
cost of repair and lost revenues are covered by insurance. The outage
will also result in production being moved from the fourth quarter of
2009 into 2010.

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
Primary Metal incurred an underlying loss for the second quarter
heavily impacted by a decline in realized aluminium prices impacting
underlying results by roughly NOK 1,450 million compared to the first
quarter. Inventory write-downs were significantly lower compared to
the first quarter resulting in a positive effect of about NOK 300
million for the second quarter.

Lower variable costs at our smelters compared to the first quarter of
2009 had a positive effect on underlying EBIT of about NOK 300
million, primarily due to lower alumina costs 5) and somewhat reduced
costs for power and petroleum coke. Fixed costs at the smelters
declined further by about NOK 60 million following a decline of NOK
375 million in the previous quarter.

Income from our equity accounted smelters declined during the
quarter. Charges related to the build up of the operating
organization at Qatalum amounted to NOK 90 million which was about
the same level as the previous quarter.

Alunorte, our equity accounted alumina refinery, incurred an
underlying loss for the quarter of NOK 69 million that was about the
same level as the previous quarter despite the effect of the
temporary measures implemented in March 1). Production declined
somewhat mainly due to operational problems resulting from heavy
rainfall. Energy costs increased slightly.

Result for alumina trading improved significantly from the first
quarter due to increasing LME prices and higher traded volumes during
the quarter.

1) In March the Board of Directors of Alunorte agreed on a set of
temporary measures to address the challenging financial situation in
the company. These measures include an increase in the alumina price
Hydro and its partners pay to Alunorte amounting to about NOK 90
million for Hydro in the second quarter (alumina prices are adjusted
monthly based on the average monthly LME three-month prices, applied
with one month delay). The measures also include changes to the
pricing formulas for bauxite purchased by Alunorte. The cost of
alumina to our smelters has not been adjusted for these measures and
the effect is excluded from the above discussion on developments in
variable costs for our smelters. These measures will be effective for
the remainder of 2009.

Metal Markets
Underlying EBIT for Metal Markets improved substantially from the
loss incurred in the first quarter which was heavily impacted by
negative currency effects 2).

Production and sales from our European remelters improved during the
second quarter as a result of higher demand. Our North American
remelter operations, however, continued to be negatively impacted by
weak market conditions.

Total metal sales remained weak for the quarter, but increased
somewhat towards the end of the period mainly due to higher shipments
to customers in Europe. Average realized premiums for casthouse
products were somewhat lower than in the first quarter, but remained
relatively firm compared with historical levels.

Underlying results for our metal sourcing and trading activities 3)
improved for the quarter primarily due to particularly good trading

2) Currency exposure for our commercial activities is partly hedged
internally with offsetting gains and losses recognized in Financial
income and expense. Hydro manages its external currency exposure on a
consolidated basis in order to take advantage of offsetting
3) As part of the reorganization of Hydro's Business areas, results
relating to our alumina trading activities are included in the
underlying EBIT for Primary Metal.

Extruded Products
Underlying results for Extruded Products improved for the quarter
compared to the first quarter due to a seasonal increase in volume
supported by positive effects of cost reduction measures.

Our Extrusion business improved substantially from the poor results
achieved in first quarter supported by 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 mainly due to seasonal
variations. 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 second quarter
of the previous year. Underlying results for our American operations
improved compared to the first quarter due to seasonally higher
volumes and cost cutting measures resulting in a small positive
contribution for the quarter. Margins improved from the low levels
achieved in the previous quarter.

Our Automotive operations incurred an underlying loss for the quarter
but improved from the substantial 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.

Rolled Products
Underlying EBIT for Rolled Products continued to be affected by the
weak economy. However, results improved compared to the first quarter
of 2009 supported by manning reductions and other production related
cost reduction measures.

Personnel related costs have been reduced significantly by aligning
manning to the lower production level. Cost reduction initiatives
covering both fixed and variable costs have also been implemented
throughout the organization.

Overall shipments were on the same level as the first quarter but
declined for the litho market segment with corresponding increases
for the beverage can segment. Margins were stable measured in Euro.

Underlying EBIT for Energy decreased from the first quarter result
mainly due to significantly lower power production. Production was
seasonally low and also impacted by lower than normal reservoir
levels and 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.

Direct production costs continued to decline from the previous
quarter, mainly due to lower transmission and maintenance costs.
Internal contract volumes declined as a result of the production shut
downs and capacity curtailments at Hydro's primary aluminium

Other and eliminations
Underlying EBIT for Other and eliminations amounted to a charge of
NOK 146 million in the second quarter compared with a charge of NOK
253 million in the first quarter and a charge of NOK 153 million in
the second quarter of 2008.

Hydro's solar activities incurred an underlying loss of NOK 29
million in the second quarter compared with an underlying loss of NOK
31 million in the first quarter of 2009.

Items excluded from underlying EBIT and income from continuing
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 Second First Second First First
from continuing quarter quarter quarter half half Year
operations 2009 2009 2008 2009 2008 2008

NOK million

derivative effects (1 223) 727 (340) (496) (899) 1 120
on LME related
derivative effects 118 (580) 1 997 (463) 3 287 768
on power contracts
derivative effects (204) (19) (110) (223) (101) 314
on currency
Metal effect, Rolled 225 662 (247) 887 (133) 235
rationalization 117 305 - 423 - 109
charges and closure
Impairment charges
(PP&E and equity 4 10 - 14 - 2 464
Loss provisions - - - - - 257
(power contracts)
Insurance (66) - - (66) - -
(Gains)/losses on - - (389) - (389) (453)
Items excluded from (1 029) 1 105 911 77 1 764 4 815
underlying EBIT
Net foreign exchange (88) (1 478) (298) (1 566) (1 153) 5 491
Calculated income 262 174 (204) 436 (270) (3 460)
tax effect
Items excluded from
underlying income (854) (199) 409 (1 054) 342 6 846
from continuing

During the quarter, currency losses on intercompany balances amounted
to about NOK 177 million mainly due to a stronger Euro against the
Norwegian kroner. These losses have no cash effect and are offset in
equity by translation of the corresponding subsidiaries during
consolidation. 4) Other net currency gains amounted to NOK 265
million which mainly related to Hydro's US dollar hedging program
which has been discontinued as of the end of the quarter.

In the previous quarter, currency gains on intercompany balances
denominated in Euro amounted to about NOK 1.5 billion due to weaker
Euro against the Norwegian kroner.

At end of the second quarter of 2009 cash and cash equivalents
amounted to NOK 4.9 billion up from NOK 3.1 billion at the end of the
previous quarter.

4) The losses on intercompany balances arise from group positions
that create an accounting loss recognized in the income statement of
the parent company when the value of other currencies strengthen
against the Norwegian kroner. No corresponding gains are recognized
in the income statement of the subsidiaries that use other currencies
as a functional currency. This has no cash effect for the group. When
the subsidiaries financial statements are translated into NOK for
consolidation, currency effects on intercompany deposits are included
directly in consolidated equity in the balance sheet, offsetting the
currency loss recognized through the income statement of the parent

Income taxes amounted to a charge of NOK 273 million in the quarter
compared with a charge of NOK 155 million in the first quarter of
2009 and charge of NOK 248 million in the second quarter of 2008.
Income taxes amounted to NOK 428 million and NOK 982 million for the
fist half of 2009 and 2008 respectively.

For the fist half of 2009, income tax expense was roughly 100 percent
of pre-tax income. The high tax rate resulted mainly from the effects
of power sur-tax and the results from equity accounted investments,
which are recognized net of tax.

Press contact
Contact Inger Sethov
Telephone +47 22532036
Cellular +47 95022359

Investor contact
Contact Stefan Solberg
Telephone +47 22539280
Cellular +47 91727528

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.

View document

View document
Related Links: Norsk Hydro ASA
Copyright GlobeNewswire, Inc. 2016. All rights reserved.
You can register yourself on the website to receive press releases directly via e-mail to your own e-mail account.