Strong operational performance, weak US dollar weighs down

Tuesday, 22. April 2008 07:30

Key financial
First Fourth % change First %
NOK million, except quarter quarter prior quarter change Year
per share data 2008 2007 quarter 2007 prior 2007
Revenue 21,529 21,651 (1)% 25,657 (16)% 94,316
Earnings before
financial items and 1,179 338 >100% 3,672 (68)% 9,025
tax (EBIT)
Items excluded from 853 1,359   (790)   1,128
underlying EBIT
Underlying earnings
before financial items 2,032 1,697 20% 2,883 (30)% 10,153
and tax (EBIT) 
Underlying earnings
before financial items            
and tax (EBIT) :
Aluminium Metal 1,255 1,331 (6)% 2,375 (47)% 8,265
Aluminium Products 370 74 >100% 498 (26)% 1,352
Energy 399 341 17% 266 50% 1,184
Corporate and other 8 (50) >100% (257) >100% (647)
Underlying earnings
before financial items 2,032 1,697 20% 2,883 (30)% 10,153
and tax (EBIT) 
Income from continuing 1,443 527 >100% 3,258 (56)% 9,158
Underlying income from 1,442 1,402 3% 2,345 (38)% 8,015
continuing operations
Earnings per share
from continuing 1.20 0.40 >100% 2.60 (54)% 7.20
Underlying earnings
per share from 1.20 1.10 9% 1.80 (33)% 6.20
continuing operations
Financial data:            
Investments  2,267 2,173 4% 873 >100% 5,206
Adjusted net interest
bearing debt to equity (0.07) (0.02)   0.05   (0.02)
/ Adjusted equity

The merger of Hydro's petroleum activities into the combined oil and
gas company StatoilHydro was finalized on 1 October 2007. The
following discussion is a summary of results of operations for
Hydro's ongoing business, which includes the Aluminium Metal,
Aluminium Products and Energy operations. Comparisons to periods
prior to 1 October 2007 exclude the demerged oil and gas activities.
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.

Operating statistics
First Fourth % change First %
  quarter quarter prior quarter change Year
2008 2007 quarter 2007 prior 2007
Realized aluminium 2,442 2,447 (0)% 2,588 (6)% 2,559
price LME (USD/mt)
Realized aluminium 13,309 13,921 (4)% 16,480 (19)% 15,522
price LME (NOK/mt)
Primary aluminium 433 439 (1)% 433 0% 1,742
production (kmt)
Rolled Products sales
volumes to external 253 246 3% 266 (5)% 1,030
market (kmt)
Extrusion sales
volumes to external 130 117 11% 134 (4)% 508
market (kmt)
Automotive sales
volumes to external 31 29 9% 29 7% 117
market (kmt)
Power production (GWh) 2,850 2,321 23% 2,654 7% 11,018

Hydro's underlying income from continuing operations amounted to NOK
1,442 million in the first quarter of 2008, up from NOK 1,402 million
in the previous quarter and down from NOK 2,345 million in the first
quarter last year. Solid operational performance in all business
areas combined with higher sales volumes and margins for Hydro's
downstream business lifted results, while weaker realized aluminium
prices in Norwegian kroner had a negative impact.
Global aluminium prices remained strong, but Hydro realized lower
prices in Norwegian kroner during the quarter compared with
the previous quarter and the same period last year, due to a weaker
US dollar against the NOK.
"Hydro's performance during the first quarter underpins our
operational and financial strength, and we are continuously
evaluating a range of growth opportunities," says Hydro President and
CEO Eivind Reiten.
"Aluminium Metal is posting satisfactory results after a dynamic
first quarter, marked by a significant upward shift in
aluminium prices which will start to impact our results from the
second quarter," Reiten says, adding: "I'm also pleased to see our
Aluminium Products area showing strong performance, demonstrating
that recent restructuring efforts are taking effect."
During the first quarter, Hydro completed the sale of its polymer
business to UK-based Ineos. Hydro also signed an agreement to sell
its maintenance, project and service providers Hydro Production
Partner and Hydro Production Services to German Bilfinger Berger
Industrial Services AG.
Underlying EBIT in the first quarter was NOK 2,032 million, up from
NOK 1,697 million in the previous quarter but lower than the strong
performance in the first quarter of 2007.
Underlying results for Aluminium Metal, Hydro's upstream aluminium
business, declined from the previous three-month period and the first
quarter of 2007, mainly due to lower realized aluminium prices
measured in Norwegian kroner. Hydro's joint venture with Qatar
Petroleum on the 585,000-tonne Qatalum smelter project, in
which Hydro owns 50 percent, was about 17 percent complete by the end
of the first quarter and on track for start-up around the end of
For Aluminium Products, Hydro's downstream operations, underlying
results rose in the first quarter from a seasonally weak fourth
quarter, along with higher volumes and improved
margins. First-quarter results for Aluminium Products were somewhat
weaker than the same year-earlier period, which benefited
from favorable market conditions. Hydro's European Extrusion
operations continued to deliver strong results.
Hydro's Energy business, which includes power production and solar
power investments, delivered higher underlying results in the first
quarter than both the first and fourth quarters of 2007, mainly due
to higher power production in Norway. Hydro increased its investment
in US-based thin-film company Ascent Solar Technologies Inc. and
Norwegian wafer producer NorSun AS, contributing to an enhanced
position in the solar industry and confirming Hydro's commitment in
the area. 
Reported EBIT and income from continuing operations
EBIT for Hydro amounted to NOK 1,179 million in the first quarter, up
from NOK 338 million in the previous quarter.  EBIT was impacted by
significant net unrealized losses on power and LME derivative
contracts as a result of a significant upward shift in LME forward
prices during the quarter, combined with developments in the
forward prices for coal and power. EBIT in the fourth quarter of 2007
was also impacted by significant unrealized losses on derivative
contracts, as well as higher negative metal effects and other
negative non-recurring effects.   
Income from continuing operations amounted to NOK 1,443 million in
the first quarter, up from NOK 527 million in the previous
quarter. Income from continuing operations included net foreign
exchange gains amounting to NOK 854 million compared to net foreign
exchange gains of NOK 74 million in the previous quarter.   
Summary market developments and outlook
Aluminium prices on the LME increased significantly throughout the
quarter in a volatile market impacted by production curtailments in
China and South Africa, the weakening US dollar and
increased activity from financial investors. Aluminium inventories
are currently low compared to consumption, reflecting a favorable
market balance. Hydro expects the production disruptions to reduce
supply by about 600,000 mt in 2008. 
Continued cost pressures on primary production relating to higher
energy and raw material prices, together with the expectation of a
potential tighter market balance in 2009 and a continued weak US
dollar, are expected to support high LME price levels throughout
2008. Total demand for primary aluminium in 2008 is expected
to grow by 8-9 percent, driven mainly by strong growth in China.
Hydro expects a moderate market slowdown for semi-fabricated products
in Europe, mainly impacting business in the second half of the
year. In the US, Hydro expects the market
for semi-fabricated products to remain
at the current depressed levels. The development of the US economy
and its potential global impact represents a major uncertainty in
Hydro's market outlook.
Aluminium Metal
Underlying EBIT for Aluminium Metal amounted to NOK 1,255 million in
the first quarter of 2008, down 6 percent compared with fourth
quarter of 2007 and 47 percent from the very strong first quarter of
2007. Developments for the quarter were mainly driven by lower
realized aluminium prices measured in Norwegian kroner. Primary
aluminium production volume was relatively stable compared to
previous quarters.
Results from our Bauxite and Alumina operations declined somewhat
compared with fourth quarter and were substantially lower than the
first quarter of 2007. Lower volumes due to planned maintenance
impacted results compared with the fourth quarter, while higher LME
linked bauxite prices influenced the decline compared with the first
quarter of 2007. Higher energy costs contributed to the weak results
compared to both the fourth and first quarters of 2007. Underlying
EBIT for our Commercial operations increased substantially in the
quarter, compared with the fourth quarter of 2007 which was
negatively impacted by losses in our North American remelt
Aluminium Products
Underlying EBIT for Aluminium Products amounted to NOK 370 million
for the first quarter, up by NOK 300 million from the seasonally weak
fourth quarter results in 2007. Shipments increased mainly in the
high added-value foil and lithographic segments, also contributing to
improved margins for our rolled products operations, while our
extrusion volumes increased 11 percent mainly driven by a 15 percent
increase from our European extrusion business. Margins remained
strong within our extrusion market segment. Results for our US
extrusion operations improved but the market remains at depressed
levels. Operating results for our automotive structures activities
improved but remain challenging.
Underlying EBIT declined by NOK 128 million or 26 percent compared to
the first quarter of 2007 which included net operating profits from
divested operations of around NOK 50 million. Volumes for our rolled
products business declined somewhat in the first quarter of 2008.
Slightly higher operating costs had a negative impact on the
underlying results for our European extrusion operations. Lower costs
from measures implemented at our US operations combined with improved
results from our South American business more than offset a volume
decline of 15 percent for our North American operations.
Underlying EBIT for Energy amounted to NOK 399 million in the first
quarter, up NOK 58 million from the fourth quarter of 2007 and up NOK
133 million from the same quarter last year. The increase from the
fourth quarter is primarily due to higher production, increased spot
sales and increased revenues from contract sales, which have more
than offset the effects of lower spot prices. Compared with the first
quarter of 2007, the results are positively impacted by increased
spot prices, higher production and lower production costs.
Hydro's power production in Norway was 2.9 TWh in the first quarter
of 2008, 23 percent up from the fourth quarter of 2007 and 7 percent
higher than in the first quarter of 2007. Net spot sales,
representing the net of volumes sold and purchased, amounted to 1.0
TWh, up 30 percent from the previous quarter and 19 percent higher
than in the same quarter last year.
Hydro's Solar business incurred a loss of NOK 22 million in the first
quarter of 2008 compared with a loss of NOK 49 million in the fourth
quarter of 2007. Results for Solar activities include our share of
profit/loss in equity accounted investments, and the losses reflect
that our partnership companies are in a developing phase and have not
yet started production.
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 (earnings
before financial items and tax) and income from continuing
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. Derivative
contracts include various financial contracts entered into for
operational hedging purposes as well as derivatives embedded in
commercial contracts. Unrealized gains and losses on derivatives can
be substantial and highly volatile depending on open positions and
market price developments.
In order to present Income from continuing operations on a basis
comparable with our underlying operating performance, we have
calculated the income tax effect of items excluded from underlying
EBIT based on Hydro's effective tax rate for the corresponding
periods presented. We have also excluded unrealized gains and losses
on all foreign denominated contracts included in our balance sheet
for the periods presented. The amounts included in the table below
mainly relate to forward currency contracts used to hedge net future
cash flows from operations, sales contracts and working capital
mainly by selling US dollars and Euro where hedge accounting is not
applied. We have also excluded certain tax credits which are deemed
to be non-recurring in nature.

Items excluded from underlying income
from continuing operations
First Fourth First Year
NOK million quarter quarter quarter 2007
2008 2007 2007
Unrealized derivative effects on LME (560) 101 (294) 131
related contracts
Unrealized derivative effects on 1,291 664 360 928
power contracts
Unrealized derivative effects on 9 (5) (33) (137)
currency contracts
Metal effect, Rolled Products 113 300 (149) 235
Significant rationalization charges - 55 17 224
and closure costs
Impairment charges - - - 144
Gains/(losses) on divestments - (5) (691) (641)
Correction of elimination of profit - 296 - 291
in inventory
Germany, change in tax rate - (47) - (47)
Items excluded from underlying EBIT 853 1,359 (790) 1,128
Net foreign exchange (gain)/loss (854) (74) (464) (2,254)
Calculated income tax effect 0 (359) 341 283
Germany, change in tax rate - (50) - (300)
Items excluded from underlying income (1) 876 (913) (1,143)
from continuing operations

The main developments impacting items excluded from underlying EBIT
for the first quarter of 2008 reflect a significant upward shift in
LME forward prices resulting in substantial unrealized gains on LME
derivatives relating to operational hedges.
The LME forward developments, together with developments in the
forward prices for coal and power, also resulted in substantial
unrealized losses on derivatives which are embedded in power
Net financial income for the first quarter of 2008 amounted to NOK
998 million, including a net foreign currency gain of NOK 854
million. The currency gain was mainly due to a weakening of the US
dollar against the Norwegian kroner during the quarter, resulting in
gains on Hydro's foreign currency contracts. Net currency gains
amounted to NOK 74 million in fourth quarter 2007 and NOK 464 million
in first quarter 2007, also mainly due to weakening of the US dollar.
The currency gains result mainly from Hydro's currency hedge program,
primarily related to currency derivatives.
Income tax expense amounted to NOK 734 million in the first quarter
of 2008 compared to a positive amount of NOK 58 million in the fourth
quarter and NOK 1,225 million in the first quarter of 2007. The
fourth quarter of 2007 included positive effects from a reduction of
statutory tax rates in Germany amounting to about NOK 50 million.
Income tax expense was 34 percent of Income from continuing
operations before tax in the first quarter of 2008 compared with 27
percent in the first quarter of the previous year. The main reason
for the change in the tax percent relates to lower levels of income
from equity accounted investments in the first quarter, compared with
the first quarter of 2007.
Aluminium Metal
Several factors indicate a positive outlook for aluminium price
developments in US dollars in the coming quarters. There are
uncertainties, however, linked to the developments of the US economy
and the potential global impact.
China's apparent consumption of primary metal is forecast to increase
by 22 percent for the full year of 2008, down from an annual growth
of 38 percent in 2007, due to lower growth in the production of
semi-finished products for export. Growth in Chinese production of
primary metal is expected to reach 18 percent in 2008, compared with
a growth rate of 35 percent last year.
Primary aluminium consumption and production in the rest of the world
is expected to grow by about 2 percent and 6 percent, respectively,
from 2007 to 2008.
Market conditions for extrusion ingot in Europe are expected to
remain at the same level in the coming months, with a slightly weaker
demand especially from the building and construction sector. The US
market for extrusion ingot in 2008 is expected to be slightly below
the 2007 level mainly due to a continued weak demand from the
residential building and construction sector. For sheet ingot in
Europe the expected demand outlook remains positive with some slowing
possible in the second half of 2008. Demand for foundry alloys in
Europe is expected to stabilize for the rest of the year with a
slight trend towards increased  market demand.
Aluminium Products
Market demand for flat rolled products in Europe is expected to be
stable for the coming months. US market demand is expected to remain
depressed. Combined with a weak US dollar, this could lead to
increased imports and put pressure on European margins for rolled
The overall outlook for the European extrusion market indicates a
softer demand in 2008, driven by the weakening construction market
segment in Europe. The market outlook in Germany continues to be
strong, in particular within the engineering and transportation
market segments. The general softer demand combined with a volatile
LME could put further downward pressure on margins in the months to
The outlook for the US extrusion market shows no signs of recovery.
South American markets are expected to post another strong year, with
consumption in Brazil and Argentina expected to grow around 6-7
The outlook for the automotive market is mixed with a stable to
strong European market while the North American market is expected to
remain weak for 2008. Automotive markets in Asia and South America
are expected to continue growing.
By the end of the first quarter, the total water and snow balance in
Norway was estimated to be approximately 15 percent higher than
normal. High reservoir inflows from melting snow are expected to put
pressure on spot prices during the summer months. In addition,
reduced export/import capacity from Norway due to outages in central
grid transmission lines could have a negative impact on the Southern
Norway area prices in the second quarter.
Press contact
Contact     Inger Sethov
Telephone   +47 22532036
Cellular    +47 95022359
Investor contact
Contact     Stefan Solberg
Telephone   +47 22539280
Cellular    +47 91727528
Norsk Hydro ASA
Drammensveien 264
N-0240 Oslo
Telephone: +47 22538100
Fax: +47 22532725
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.

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