Solid cash flow and cost savings, markets remain weak>
Solid cash flow and cost savings, markets remain weak
(Thomson Reuters ONE) - * 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 yearHydro had an underlying loss before financial items of NOK 618million in the second quarter, compared with a NOK 493 million lossin the first quarter, as the weak global economy continued to weighon historically low aluminium markets. Results in downstreamoperations improved due to seasonally stronger demand and swiftadjustments 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 lowerproduction and spot sales."Although we are going through the most difficult period thealuminium industry has ever experienced, we see very positive effectsfrom our significant cost and capacity adjustments," President andChief Executive Officer Svein Richard Brandtzæg said."We remain cautious about the outlook for global aluminium demandahead of the second half of the year, which is normally seasonallyweaker than the previous six months, and will continue to execute ourcost reduction program and maintain financial flexibility," he said."With the substantial reduction in operating capital, reduced inputcosts and strengthened market positions, we are well-positioned forcapturing opportunities."Aluminium prices seem to have flattened out at historically lowlevels, following a small pick-up after one of the sharpest drops onrecord. Key end markets, most notably construction and transport,remain weak.Due to Hydro's policy of forward selling, the company's averagerealized aluminium price was about USD 1,470 per tonne, down fromaround USD 2,000 per tonne in the previous quarter, as the weakmarket prices of the first quarter was reflected in the earnings ofthis quarter.During the second quarter, Hydro completed previously announcedcapacity curtailments within primary aluminium production and reducedoutput by about 460,000 tonnes per year, or around 26 percent of 2008production. Shutdown of the remaining 50,000 tonnes capacity at Neussis currently on hold. Closure of the part-owned Alpart aluminarefinery in Jamaica was also completed during the quarter."We have reached our targets in rightsizing the structure, manningand cost level of staff and support functions, expected to result incost savings of NOK 700-800 million from 2010," Brandtzæg said. Intotal, Hydro will reduce manning by 4,500 positions by the end of2009 compared with the middle of 2008.The joint venture with Qatar Petroleum on the Qatalum smelter was84-percent complete by the end of the quarter and on schedule forstart up around the turn of the year. Once in operation, Qatalum willmake a significant contribution towards lowering the average cost ofHydro's global smelter system.Key financial %information Second First % Second change First First quarter quarter change quarter prior half half YearNOK million, 2009 2009 prior 2008 year 2009 2008 2008except per share quarter quarterdataRevenue 17 123 16 854 2 % 23 980 (29) % 33 976 45 510 88 643Earnings before (1financial items 410 (1 598) >100 % 708 (42) % 188) 1 887 1 194and tax (EBIT)Items excludedfrom underlying (1 029) 1 105 911 77 1 764 4 815EBITUnderlying 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 703Rolled Products (28) (53) 47 % 240 >(100) (82) 387 651 %Extruded (26) (204) 87 % 296 >(100) (230) 518 338Products %Energy 281 447 (37) % 302 (7) % 728 723 1 865Other and (146) (253) 42 % (153) 4 % (400) (212) (279)eliminationsUnderlying EBIT (618) (493) (25) % 1 619 >(100) (1 3 651 6 009 % 111)Income (loss) (3from continuing 282 (280) >100 % 902 (69) % 2 2 345 267)operationsUnderlyingincome (loss) (572) (480) (19) % 1 311 >(100) (1 2 687 3 579from continuing % 052)operationsEarnings pershare from 0.17 (0.29) >100 % 0.67 (74) % (0.11) 1.87 (3.04)continuingoperationsUnderlyingearnings per >(100)share from (0.53) (0.45) (18) % 1.00 % (0.99) 2.16 2.62continuingoperationsFinancial data:Investments 765 685 12 % 1 553 (51) % 1 450 3 821 9 012Adjusted net >(100) (19 (3 (15interest-bearing (19 236) (18 839) (2) % (3 054) % 236) 054) 440)debtKey operationalinformationPrimaryaluminium 338 397 (15) % 437 (23) % 735 869 1 750production (kmt)Realized 1aluminium price 1 468 1 996 (26) % 2 610 (44) % 727 2 532 2 638LME (USD/mt)Realized 13 13 11aluminium price 9 598 393 (28) % 553 (29) % 456 13 451 14 699LME (NOK/mt)Realized NOK/USD 6.54 6.71 (3) % 5.19 26 % 6.63 5.31 5.57exchange rateRolled Productssales volumes to 187 191 (2) % 259 (28) % 378 512 965external market(kmt)Extrusionproducts salesvolumes to 99 96 3 % 133 (25) % 195 263 195external market(kmt)Automotiveproducts salesvolumes to 21 17 23 % 31 (32) % 38 61 38external market(kmt)Power production 1 809 2 477 (27) % 3 021 (40) % 4 286 5 871 11 361(GWh)About Hydro's reportingTo provide a better understanding of Hydro's underlying performance,the following discussion of operating performance excludes certainitems from EBIT (earnings before financial items and tax) and incomefrom continuing operations. See "Items excluded from underlying EBITand income from continuing operations" later in this report for moreinformation on these items.Effective from the end of March, Hydro has reorganized its business,dividing each of the former Aluminium Metal and Aluminium Productsinto two and increasing the number of operating segments from threeto five including Primary Metal, Metal Markets, Rolled Products,Extruded Products and Energy. From the beginning of the secondquarter, Hydro is presenting its financial results in accordance withthe new structure. Prior periods presented in our report have beenreclassified in accordance with the new structure.Reported EBIT and income from continuing operationsEBIT for Hydro amounted to NOK 410 million for the second quarterincluding net positive effects of roughly NOK 1,030 million comprisedof net unrealized derivative gains of about NOK 1,310 million, otherpositive effects of about NOK 60 million, negative metal effects ofNOK 225 million, and rationalization charges and closure costs of NOK117 million. Reported EBIT amounted to a loss of NOK 1,598 millionfor the first quarter including charges of roughly NOK 1,100 millioncomprised of negative metal effects of NOK 660 million,rationalization charges and closure costs of NOK 300 million and netunrealized derivative losses of about NOK 130 million.Income from continuing operations was NOK 282 million in the secondquarter including net foreign exchange gains of about NOK 88 million.Reported Loss from continuing operations amounted to NOK 280 millionin the first quarter including net foreign exchange gains of aboutNOK 1,480 million mainly relating to intercompany balancesdenominated in Euro. These gains have no cash effect and are offsetin equity by translation of the corresponding subsidiaries duringconsolidation.Net cash generated from operating activities amounted to NOK 2.0billion for the quarter, compared with net cash used by operatingactivities of NOK 1.1 billion in the previous quarter. Hydro had anet cash position amounting to NOK 3.0 billion at the end of thequarter.Market developments and outlookFollowing a sharp fall in the first quarter, demand for aluminiumincreased in China during the second quarter due to higher activitylevels. Demand in the rest of the world was largely unchanged. LMEinventories 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 firstquarter, 2.3 million mt at the end of 2008 and 1.1 million mt at theend of the second quarter of 2008. LME three month prices started thequarter at USD 1,378 per mt and closed at USD 1,651 per mt.In response to the falling demand, announced capacity curtailmentsreached a global level of 3.4 million mt annually in the firstquarter excluding China. This represents about 13 percent of the 26million mt produced in 2008. There were limited new curtailmentsannounced during the second quarter. However, capacity has continuedto decline as previously announced curtailments were put into effect.Aluminium prices are expected to remain low. However, forwardvisibility continues to be limited and there is significantuncertainty regarding developments. Global primary aluminiumconsumption excluding China could decline by 15 - 20 percent in 2009from a consumption level of 25 million mt in 2008.The significant drop in demand for aluminium has resulted indeclining demand for raw materials and smelter input costs have beenfalling globally.The underlying demand for metal products (extrusion ingot, sheetingot, foundry alloys and wire rod) in Europe and North America hasremained weak during the second quarter 2009. There continues to beconsiderable uncertainty regarding timing of any significantrecovery. The decline in demand for flat rolled products in Europeappears to have reached the bottom in the second quarter of 2009although transparency regarding pipeline effects is still low. Marketdemand is expected to be stable in the coming months. Demand forextruded aluminium products improved slightly from the previousquarter due to a seasonal increase and may have also been influencedby the replenishment of inventories. However, demand wassignificantly lower than the second quarter of 2008. The overalloutlook for the European extrusion market continues to be weak acrossmost market segments but there are signs that markets arestabilizing. However, we expect seasonally lower demand in the secondhalf of the year.Nordic spot prices for electricity continued to decline during thesecond quarter but stabilized 13 percent lower than the first quarterof 2009. Spot prices in Southern-Norway developed in parallel withthe Nordic system price. By the end of the second quarter, the totalwater and snow balance in Norway was estimated to be approximately 19percent lower than normal and about 25 percent lower than at the sametime in 2008. Increasing spot prices toward the end of the quartertogether with forward price developments on the NordPool powerexchange indicate higher expected spot prices in the third quarter.Outlook for HydroHydro has taken active steps to capitalize on falling prices for keyraw materials and expects further reductions in the second half of2009. Fixed costs are expected to decline further as the full effectof announced curtailments as well as other cost savings initiativescomes into effect.At the end of second quarter, Hydro had sold more than 90 percent ofits primary aluminium production for the third quarter of 2009forward at a price level of around USD 1,475 per mt. Hydro expects acontinued weak result in the third quarter of 2009.In fourth quarter 2008 and first half of 2009 Hydro made provisionsfor future rationalization and closure costs relating to the plantshut-downs of roughly NOK 450 million in total. These are reported asitems excluded from underlying EBIT and will mainly have cash effectsin future quarters. If it becomes necessary to permanently closeplants that have been curtailed on a temporary basis, additionalsubstantial closure costs would be incurred.The curtailment of electrolysis production at the Neuss smelter inGermany was completed during the quarter with the exception of about4.000 mt per month which will continue going forward.Hydro's water and snow reservoirs were lower than normal at the endof the second quarter, and considerably lower than the correspondingperiods in 2008 and 2007. The low reservoir levels, together with theoutage of the Suldal I power plant, is expected to result in lowerpower production for the third quarter of 2009 compared to the secondquarter and significantly lower than the third quarter of theprevious year.The Suldal I power station is currently being repaired and the plantis expected to be back in operation at the beginning of 2010. Thecost of repair and lost revenues are covered by insurance. The outagewill also result in production being moved from the fourth quarter of2009 into 2010.Our business activities expose us to the risk that counterparties maydefault on their obligations, resulting in direct financial loss, anunexpected increase in market exposure or higher operating costs. Thepresent weak economic conditions increase the risk of defaultingcounterparties. So far we have not experienced any significantdefaults and are carefully monitoring the situation.Primary MetalPrimary Metal incurred an underlying loss for the second quarterheavily impacted by a decline in realized aluminium prices impactingunderlying results by roughly NOK 1,450 million compared to the firstquarter. Inventory write-downs were significantly lower compared tothe first quarter resulting in a positive effect of about NOK 300million for the second quarter.Lower variable costs at our smelters compared to the first quarter of2009 had a positive effect on underlying EBIT of about NOK 300million, primarily due to lower alumina costs 5) and somewhat reducedcosts for power and petroleum coke. Fixed costs at the smeltersdeclined further by about NOK 60 million following a decline of NOK375 million in the previous quarter.Income from our equity accounted smelters declined during thequarter. Charges related to the build up of the operatingorganization at Qatalum amounted to NOK 90 million which was aboutthe same level as the previous quarter.Alunorte, our equity accounted alumina refinery, incurred anunderlying loss for the quarter of NOK 69 million that was about thesame level as the previous quarter despite the effect of thetemporary measures implemented in March 1). Production declinedsomewhat mainly due to operational problems resulting from heavyrainfall. Energy costs increased slightly.Result for alumina trading improved significantly from the firstquarter due to increasing LME prices and higher traded volumes duringthe quarter.1) In March the Board of Directors of Alunorte agreed on a set oftemporary measures to address the challenging financial situation inthe company. These measures include an increase in the alumina priceHydro and its partners pay to Alunorte amounting to about NOK 90million for Hydro in the second quarter (alumina prices are adjustedmonthly based on the average monthly LME three-month prices, appliedwith one month delay). The measures also include changes to thepricing formulas for bauxite purchased by Alunorte. The cost ofalumina to our smelters has not been adjusted for these measures andthe effect is excluded from the above discussion on developments invariable costs for our smelters. These measures will be effective forthe remainder of 2009.Metal MarketsUnderlying EBIT for Metal Markets improved substantially from theloss incurred in the first quarter which was heavily impacted bynegative currency effects 2).Production and sales from our European remelters improved during thesecond quarter as a result of higher demand. Our North Americanremelter operations, however, continued to be negatively impacted byweak market conditions.Total metal sales remained weak for the quarter, but increasedsomewhat towards the end of the period mainly due to higher shipmentsto customers in Europe. Average realized premiums for casthouseproducts were somewhat lower than in the first quarter, but remainedrelatively firm compared with historical levels.Underlying results for our metal sourcing and trading activities 3)improved for the quarter primarily due to particularly good tradingmargins.2) Currency exposure for our commercial activities is partly hedgedinternally with offsetting gains and losses recognized in Financialincome and expense. Hydro manages its external currency exposure on aconsolidated basis in order to take advantage of offsettingpositions.3) As part of the reorganization of Hydro's Business areas, resultsrelating to our alumina trading activities are included in theunderlying EBIT for Primary Metal.Extruded ProductsUnderlying results for Extruded Products improved for the quartercompared to the first quarter due to a seasonal increase in volumesupported by positive effects of cost reduction measures.Our Extrusion business improved substantially from the poor resultsachieved in first quarter supported by cost cutting measures thatwere implemented at an early stage of the market downturn. Volumesincreased slightly for our European extrusion business from the lowlevels experienced in the previous quarter mainly due to seasonalvariations. Margins remained under pressure. Underlying results ofour Building systems business continued to be positive with firmmargins compared to both the previous quarter and the second quarterof the previous year. Underlying results for our American operationsimproved compared to the first quarter due to seasonally highervolumes and cost cutting measures resulting in a small positivecontribution for the quarter. Margins improved from the low levelsachieved in the previous quarter.Our Automotive operations incurred an underlying loss for the quarterbut improved from the substantial losses incurred in the previousquarter due to higher volumes and the ongoing cost reductionmeasures. Results were impacted, however, by the continued weakautomotive market.Rolled ProductsUnderlying EBIT for Rolled Products continued to be affected by theweak economy. However, results improved compared to the first quarterof 2009 supported by manning reductions and other production relatedcost reduction measures.Personnel related costs have been reduced significantly by aligningmanning to the lower production level. Cost reduction initiativescovering both fixed and variable costs have also been implementedthroughout the organization.Overall shipments were on the same level as the first quarter butdeclined for the litho market segment with corresponding increasesfor the beverage can segment. Margins were stable measured in Euro.EnergyUnderlying EBIT for Energy decreased from the first quarter resultmainly due to significantly lower power production. Production wasseasonally low and also impacted by lower than normal reservoirlevels and the outage of the Suldal I power station. However, theeffect of the lost production from Suldal was offset by proceeds frombusiness interruption insurance.Direct production costs continued to decline from the previousquarter, mainly due to lower transmission and maintenance costs.Internal contract volumes declined as a result of the production shutdowns and capacity curtailments at Hydro's primary aluminiumsmelters.Other and eliminationsUnderlying EBIT for Other and eliminations amounted to a charge ofNOK 146 million in the second quarter compared with a charge of NOK253 million in the first quarter and a charge of NOK 153 million inthe second quarter of 2008.Hydro's solar activities incurred an underlying loss of NOK 29million in the second quarter compared with an underlying loss of NOK31 million in the first quarter of 2009.Items excluded from underlying EBIT and income from continuingoperationsTo provide a better understanding of Hydro's underlying performance,the items in the table below have been excluded from EBIT and incomefrom continuing operations.Items excluded from underlying EBIT are comprised mainly ofunrealized gains and losses on certain derivatives, impairment andrationalization charges, effects of disposals of businesses andoperating assets, as well as other items that are of a special natureor are not expected to be incurred on an ongoing basis.Items excluded fromunderlying income Second First Second First Firstfrom continuing quarter quarter quarter half half Yearoperations 2009 2009 2008 2009 2008 2008NOK millionUnrealizedderivative effects (1 223) 727 (340) (496) (899) 1 120on LME relatedcontractsUnrealizedderivative effects 118 (580) 1 997 (463) 3 287 768on power contractsUnrealizedderivative effects (204) (19) (110) (223) (101) 314on currencycontractsMetal effect, Rolled 225 662 (247) 887 (133) 235ProductsSignificantrationalization 117 305 - 423 - 109charges and closurecostsImpairment charges(PP&E and equity 4 10 - 14 - 2 464accountedinvestments)Loss provisions - - - - - 257(power contracts)Insurance (66) - - (66) - -compensation(Gains)/losses on - - (389) - (389) (453)divestmentsItems excluded from (1 029) 1 105 911 77 1 764 4 815underlying EBITNet foreign exchange (88) (1 478) (298) (1 566) (1 153) 5 491(gain)/lossCalculated income 262 174 (204) 436 (270) (3 460)tax effectItems excluded fromunderlying income (854) (199) 409 (1 054) 342 6 846from continuingoperationsFinanceDuring the quarter, currency losses on intercompany balances amountedto about NOK 177 million mainly due to a stronger Euro against theNorwegian kroner. These losses have no cash effect and are offset inequity by translation of the corresponding subsidiaries duringconsolidation. 4) Other net currency gains amounted to NOK 265million which mainly related to Hydro's US dollar hedging programwhich has been discontinued as of the end of the quarter.In the previous quarter, currency gains on intercompany balancesdenominated in Euro amounted to about NOK 1.5 billion due to weakerEuro against the Norwegian kroner.At end of the second quarter of 2009 cash and cash equivalentsamounted to NOK 4.9 billion up from NOK 3.1 billion at the end of theprevious quarter.4) The losses on intercompany balances arise from group positionsthat create an accounting loss recognized in the income statement ofthe parent company when the value of other currencies strengthenagainst the Norwegian kroner. No corresponding gains are recognizedin the income statement of the subsidiaries that use other currenciesas a functional currency. This has no cash effect for the group. Whenthe subsidiaries financial statements are translated into NOK forconsolidation, currency effects on intercompany deposits are includeddirectly in consolidated equity in the balance sheet, offsetting thecurrency loss recognized through the income statement of the parentcompany.TaxIncome taxes amounted to a charge of NOK 273 million in the quartercompared with a charge of NOK 155 million in the first quarter of2009 and charge of NOK 248 million in the second quarter of 2008.Income taxes amounted to NOK 428 million and NOK 982 million for thefist half of 2009 and 2008 respectively.For the fist half of 2009, income tax expense was roughly 100 percentof pre-tax income. The high tax rate resulted mainly from the effectsof power sur-tax and the results from equity accounted investments,which are recognized net of tax.Press contactContact Inger SethovTelephone +47 22532036Cellular +47 95022359E-mail Inger.Sethov(at)hydro.comInvestor contactContact Stefan SolbergTelephone +47 22539280Cellular +47 91727528E-mail Stefan.Solberg(at)hydro.com *********Certain statements included within this announcement containforward-looking information, including, without limitation, thoserelating to (a) forecasts, projections and estimates, (b) statementsof management's plans, objectives and strategies for Hydro, such asplanned expansions, investments or other projects, (c) targetedproduction volumes and costs, capacities or rates, start-up costs,cost reductions and profit objectives, (d) various expectations aboutfuture developments in Hydro's markets, particularly prices, supplyand demand and competition, (e) results of operations, (f) margins,(g) growth rates, (h) risk management, as well as (i) statementspreceded by "expected", "scheduled", "targeted", "planned","proposed", "intended" or similar statements.Although we believe that the expectations reflected in suchforward-looking statements are reasonable, these forward-lookingstatements are based on a number of assumptions and forecasts that,by their nature, involve risk and uncertainty. Various factors couldcause our actual results to differ materially from those projected ina forward-looking statement or affect the extent to which aparticular projection is realized. Factors that could cause thesedifferences include, but are not limited to: our continued ability toreposition and restructure our upstream and downstream aluminiumbusiness; changes in availability and cost of energy and rawmaterials; global supply and demand for aluminium and aluminiumproducts; world economic growth, including rates of inflation andindustrial production; changes in the relative value of currenciesand the value of commodity contracts; trends in Hydro's key marketsand competition; and legislative, regulatory and political factors.No assurance can be given that such expectations will prove to havebeen correct. Hydro disclaims any obligation to update or revise anyforward-looking statements, whether as a result of new information,future events or otherwise.http://hugin.info/106/R/1330168/314310.pdfhttp://hugin.info/106/R/1330168/314311.pdfThis announcement was originally distributed by Hugin. The issuer is solely responsible for the content of this announcement.
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