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•Macro uncertainty amid Covid-19, strong measures in response
•Positive cost developments, weaker prices and downstream volumes
•Record-low production costs at Alunorte
•Improvement initiatives running at full speed
•Positioning Hydro for the future
Hydro’s underlying EBIT for the second quarter was NOK 949 million, compared with NOK 875 million for the same quarter last year. The ramp-up of Alunorte’s production and reduced costs, including record low production cost at Alunorte, contributed positively to the second quarter results. These positive elements were partly offset by reduced realized alumina and aluminium prices in addition to reduced downstream volumes.
“We are maneuvering through a very demanding period, and I’m pleased by our ability to protect people and operations, keeping the wheels turning while preserving cash. At the same time, we are positioning the company for the future,” says President and CEO Hilde Merete Aasheim.
“We aim to strengthen Hydro’s position as a leading sustainable industrial company, through our low-carbon aluminium, represented by Hydro CIRCAL and Hydro REDUXA. We will also aim to grow and diversify our portfolio where Hydro’s capabilities match the megatrends, such as recycling, renewable energy and batteries,” says Aasheim.
Hydro has taken forceful actions in response to the uncertain situation, including strict precautionary actions to ensure health and safety, extensive social and community support, financial measures to protect liquidity and operational measures to adjust capacity, curtail production and cut costs.
“As we have observed the epicenter of Covid-19 move from Europe to the Americas, sustaining our operations in Brazil is a top priority. We have taken extensive precautionary measures to ensure the health and safety of our people and maintain stable operations. Operations at Paragominas, Alunorte, and Albras are running as normal, and risks are being assessed and managed on an ongoing basis,” says Aasheim.
“We will continuously evaluate further measures as the situation develops,” says Aasheim.
The Covid-19 situation continues to cause significant market uncertainty, with global GDP and industrial production falling during the quarter, leading to a reduction in aluminium demand. Although uncertainty remains high, several countries, and especially China, are showing signs of recovery towards the end of the second quarter.
The global fall in demand and government-imposed restrictions have directly affected certain operations in Hydro. Extruded Solutions, Rolled Products and recycling facilities were impacted the most, with capacity utilization starting to improve towards the end of the quarter. Extruded Solutions and Rolled Products are operating at reduced capacity utilization. Metal Markets recycling facilities were operating under a combination of full curtailments or reduced capacity utilization during the quarter but were largely back to normal operations by the end of the quarter.
Bauxite & Alumina, Primary Metal and Energy have been operating largely as normal during the quarter.
Hydro’s improvement efforts, targeting NOK 4.1 billion by 2020 and NOK 7.3 billion by 2023, are moving forward with full speed, focusing on the cost levers Hydro can control in these uncertain times. Although results are being negatively impacted by the Covid-19 induced market effects, we are seeing positive contributions from cost improvement initiatives across the portfolio, as well as the ramp-up of the Brazilian operations. Alunorte remains on target to reach name-plate capacity by the end of 2020. These efforts have supported the positive cash flow generation in the quarter, a key priority in light of the current uncertain market environment.
Extruded Solutions recognized an impairment of NOK 1.5 billion in the second quarter, reflecting weaker growth expectations in key market segments driven by the negative macroeconomic effects of Covid-19. Primary Metal’s majority-owned primary aluminium plant, Slovalco, recognized an impairment of NOK 0.5 billion in the second quarter, reflecting the continued weak market environment combined with Slovalco’s relatively high cost position.
Hydro had strong liquidity at the end of the second quarter 2020 and held NOK 15.4 billion in cash and cash equivalents, including NOK 7 billion raised in the bond market, and NOK 4.2 billion in short-term deposits, included in short-term investments. The revolving credit facility of USD 1.6 billion was fully available at the end of the quarter.
Hydro's net debt position decreased from NOK 15.2 billion to NOK 13.2 billion at the end of the quarter. Net cash provided by operating activities amounted to NOK 2.2 billion. Net cash used in investment activities, excluding short-term investments, amounted to NOK 1.2 billion.
In addition to the factors discussed above, reported earnings before financial items and tax (EBIT) and net income include effects that are disclosed in the attached quarterly report. Items excluded from underlying EBIT and underlying net income (loss) are defined and described as part of the alternative performance measures (APM) section in the quarterly report.
Hydro has halted operation of the pipeline transporting bauxite from Hydro’s Paragominas bauxite mine to the alumina refinery Alunorte for extended maintenance, temporarily halting production at the mine, and reducing production at Alunorte.
Hydro had scheduled the replacement of two sections of the pipeline in Q3 and Q4 2020, as part of the long-term maintenance plan for the pipeline. During the planned maintenance work in Q3, it was discovered that a section of the pipeline had deteriorated faster than expected. Based on a technical assessment, it was decided today to extend the maintenance and replace this section of the pipeline earlier than initially scheduled.
The work will commence immediately, and operations are expected to resume within two months.
During this period, production at Alunorte will be reduced, expected to a level between 35-45 percent of full capacity, to balance bauxite inventories. The reduced production will impact the financial results for Q3 2020.
Hydro is taking all necessary measures to mitigate any customer impact.
Olstad replaces Svein Kåre Sund as one of the Board's three employee representatives. Sten Roar Martinsen and Arve Baade were re-elected for a period until next election of employee representatives in 2022.
After Thursday’s election, the Board of Directors in Hydro consists of chair Dag Mejdell, deputy chair Irene Rummelhoff, Rune Bjerke, Thomas Schulz, Liselott Kilaas, Marianne Wiinholt, Peter Kukielski, and the employee-elected board members Sten Roar Martinsen, Arve Baade and Ellen Merete Olstad.
The European Commission announced September 22 its intention to impose provisional antidumping duties on aluminium extrusions originating in China.
Products covered by the duties are profiles, rods, bars, extruded tubes and pipes. Duty rates vary from 30.4 to 48%.
“For Hydro’s around 40 extrusion plants in Europe, the antidumping action is a move that will mitigate unfair competition. For our customers, this will contribute to making sure Europe continues to have a viable extrusion industry which will still have a high level of competition due to its many competitors,” says Egil Hogna, Head of Extruded Solutions in Hydro.
The duties are an outcome of an investigation opened in February 2020. The European Commission has now found that Chinese extrusions have been sold in the European Union at prices so low that they can be considered dumping and unfair competition to domestic producers.
While the provisional duties are expected to be enforced by mid-October, the investigation of the Commission will continue and is expected to be finalized in April 2021. At that point, the tariffs may be confirmed as definitive, modified or removed. If confirmed, the tariff will normally be in place for five years.
Hydro is collaborating in a project in Norway that is developing the world’s first fully electrical passenger ferry, with aluminium playing a central role.
The ferry is part of a European Union-funded program – The TrAM Project (Transport Advanced and Modular) – to make shipbuilding more efficient, and Hydro is part of the partnership including industry, government and research organizations.
Today, ships are built in various custom designs, even though they serve similar functions. By taking a modular approach – like car makers do with common platforms for many models – costs in engineering and production would be slashed.
“Standardization allows us to use the same components and designs, which can be used in various applications,” says Thomas Svendsen, Market Manager in Hydro Extruded Solutions’ Marine & Offshore business.
“This lowers the cost of designing and engineering a ship, dealing with sub-contractors, and constructing the vessel. But it is also makes shipbuilding more flexible, meaning you can have standard bow and stern modules, and simply add modules in the middle for more passenger capacity,” Svendsen says.
One ferry, to be built by Fjellstrand AS, near Bergen as part of the TrAM project, is destined for service in the Stavanger region. It will be operated by the Rogaland County Council and Kolumbus, the regional transportation company. Two other ferries may be built for London and Belgium under the EU project.
Shipyard work is slated for 2021-2022, and the ferry is expected to be in operation in 2022-2023.
One ferry can contain 25-30 tonnes of aluminium. For Hydro, the project would include extrusions, panels, friction-stir welding, robotic welding, bending larger panels, optimizing CAD (computer-aided design) services and modular design.
It is also an opportunity for Hydro to lead the development of a new industry standard, as well as using our low-carbon aluminium extrusion ingot and sheet ingot products like Hydro CIRCAL and Hydro REDUXA, which improve the environmental performance even further.
Svendsen says, “The new system will lower costs, while strengthening our position in the value chain.”
Heavy batteries, light aluminium
The benefits of an all-aluminium, electrical battery-driven ferry are many. Chief among them is CO2 emissions. Traditional ferries are powered by diesel engines, leading to unwanted pollution, especially when in port. The TrAM ferry has no diesel generator on board, and will charge batteries while in Stavanger port.
Kolumbus operates around 10 vessels on fast-ferry routes. The CO2 emissions from these vessels equal the emissions from all 450 buses that operate Kolumbus’ bus routes in Rogaland, according the TrAM Project, illustrating the importance of zero-emission technology for fast ferries.
Focus on environmental performance was also a driver for aluminium as a building material for the ship. (That Norway uses hydropower for electricity generation makes this solution even better in environmental performance.)
Batteries are heavy, and weight is a challenge when considering speed on water. The need to cut weight is essential, which means using light aluminium in the structure is key to cutting the overall weight significantly. In addition, aluminium is highly corrosion-resistant, making it ideal for marine applications.
The TrAM ferry
•Capacity: about 150 passengers, 20 bicycles
•Fully electrical battery-driven
•Speed: 23 knots service speed
•When in operation, will have 11 stops from Stavanger city center
TrAM project partners
•Rogaland County Council (Norway)
•Maritime Clean Tech (Norway)
•Apply Leirvik (Norway)
•National Technical University of Athens (Greece)
•Fraunhofer Society (Germany)
•University of Strathclyde (UK)
•Hamburgische Schiffbau-Versuckanstalt (Germany)
•Wärtsilä Netherlands B.V. (Netherlands)
•Fjellstrand AS (Norway)
•Collins River – MBNA Thames Clippers (UK)
•Waterwegen en Zeekanaal (Belgium)
Warton (59) will report to President and CEO Hilde Merete Aasheim and join the Corporate Management Board. He will start his new position on February 1, replacing Egil Hogna, who will leave Hydro to become CEO at Nordic consultancy Norconsult.
Warton has extensive experience from the aluminium industry, including different leadership positions in US-based aluminium company Alcoa and in aluminium extrusions company Sapa, now a part of Hydro. He has worked in Constellium since 2010, where he is currently global business unit president for Automotive Structures and Industry. He holds a degree in production engineering from the University of Birmingham and an MBA from London Business School.
Hogna will leave Hydro on December 1. Erik Fossum, Head of Precision Tubing in Extruded Solutions, will act as EVP of Extruded Solutions until Warton joins Hydro on February 1, 2021.
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President & CEO Hilde Merete Aasheim and EVP & CFO Pål Kildemo will host an audio webcast and a conference call, in English, at 08:30 CEST the same day. Due to the Covid-19 situation, there will be no press conference at our corporate headquarters.
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Underlying EBIT NOK 1,407 million
Strong cash generation
Markets continue recovery from Q2 lows
Extruded Solutions uEBITDA up 28% vs Q3 2019
Paragominas maintenance finalized, Alunorte ramping up to nameplate capacity
RSK value secured through Hydro-Lyse transaction
Positive developments in EU regulatory framework
“Our top priority is the health and safety of our people and the communities where we operate. Hydro’s organization is maneuvering the Covid-19 situation, protecting people and operations while generating cash. I am pleased to see strong cash generation as a result of our efforts. At the same time, we are pursuing our profitability and sustainability agenda, strengthening our low-carbon position and exploring new growth areas,” says President and CEO Hilde Merete Aasheim.
Extruded Solutions experienced a faster-than-expected recovery, especially in Europe, a favorable cost position and insurance compensation of NOK 192 million related to the cyber-attack in 2019. Reduced raw material costs, improved fixed costs and positive currency effects, as both the NOK and BRL weakened against the USD and EUR, all contributed positively to the third quarter result. The positive elements were offset by a lower result from Bauxite & Alumina, due to the Paragominas maintenance and reduced realized alumina and aluminium prices.
On August 18, Hydro halted operation of the pipeline transporting bauxite from Paragominas to Alunorte for extended maintenance to replace a section of the pipeline earlier than planned, temporarily halting production at Paragominas and reducing production at Alunorte to 50 percent of full capacity. On October 8, Paragominas resumed production. Alunorte is now ramping up production towards nameplate capacity.
“I am happy to see Alunorte back on track and ramping up production. We have also decided to resume full production at our Husnes plant in Norway by end of November, after running at half capacity since the financial crisis in 2009. Husnes is among the most climate-efficient aluminium plants in the world, producing a material acknowledged by the European Union as an essential building block for the low-carbon, circular society,” says Aasheim.
Global GDP and industrial production have recovered during the quarter, but the Covid-19 situation continues to cause market uncertainty. The global fall in demand and government-imposed restrictions have negatively affected operations during the quarter. The Covid-19 situation has mostly affected Extruded Solutions and Rolled Products, although order intake and capacity utilization have improved. Bauxite & Alumina, Primary Metal, Metal Markets recycling facilities and Energy have been operating largely as normal during the quarter.
Hydro’s improvement efforts are moving forward with full speed, focusing on the cost levers we can control in these uncertain times. The target NOK 4.1 billion by 2020 is behind plan due to the pipeline maintenance. However, the overall 2023 goal of NOK 7.3 billion in improvements remains.
The EU's revised guidelines for CO2 compensation pave the way for continued production of low-carbon aluminum in Norway. For Hydro's renewable energy-based aluminum production, predictable and robust compensation of the actual CO2 surcharge in power prices will make a critical contribution to our operations. “Low-carbon aluminium products can play a crucial role in reducing global CO2 emissions, meeting the growing demand for these products in a number of sectors, including transport and construction,” says Aasheim.
In addition, The European Commission announced on September 22, 2020, its decision to impose provisional antidumping duties on aluminium extrusions originating in China. The duties are an outcome of an investigation opened in February 2020. The European Commission has now found that Chinese extrusions have been sold in the European Union at prices so low that they can be considered dumping and unfair competition to EU producers.
For Hydro’s around 40 extrusion plants in Europe, the antidumping action is a move that will mitigate unfair competition. For Hydro’s customers, this will contribute to making sure Europe continues to have a viable extrusion industry which will still face strong competition due to the many players in the market.
Hydro's net debt position decreased from NOK 13.2 billion to NOK 9.9 billion at the end of the quarter. Net cash provided by operating activities amounted to NOK 4.5 billion. Net cash used in investment activities, excluding short term investments, amounted to NOK 1.5 billion.
Hydro held NOK 17.5 billion in cash and cash equivalents and NOK 4.2 billion short-term deposits, included in short-term investments, at the end of the third quarter. The revolving credit facility of USD 1.6 billion was fully available at the end of the quarter.
Head of Investor Relations,
Senior vice president, Media Relations
This information is subject to the disclosure requirements pursuant to Section 5-12 the Norwegian Securities Trading Act