Norsk Hydro: Second quarter 2022 - Record results and shareholder distribution, uncertain markets
News provided byNorsk Hydro
Jul 22, 2022, 1:00 AM ET
Hydro’s adjusted EBITDA for the second quarter of 2022 was NOK 11,594 million, compared with NOK 6,598 million for the same quarter last year, resulting in a 12-month rolling Adjusted RoaCE of 27 percent. Both Aluminium Metal and Extrusions delivered their strongest quarterly results on record.
- Strong markets in second quarter, increased uncertainty going forward
- Record results, improvement program according to plan
- Strong momentum on sales of greener products and recycling growth projects
- Significant contributions on decarbonization roadmap
- Capital structure update, propose additional shareholder distribution
Higher realized all-in metal and alumina prices, stronger margins in Extrusions and currency effects contributed positively to earnings but were partly offset by higher fixed and raw material costs upstream.
“I am pleased to see another record quarter for Hydro. The results are backed by strong markets, continued high demand for our greener aluminium products and our ambitious 2025 improvement program, which remains on track,” says President and CEO, Hilde Merete Aasheim.
“I am proud of our dedicated organization, who have delivered strong performance and good progress on our 2025 strategy. I am also pleased that we can return additional cash to our shareholders, given our strong balance sheet. Following a review of Hydro’s capital structure and targets, the Board of Directors has proposed an additional shareholder distribution. This consists of an additional cash dividend of NOK 3 billion and an introduction of a share buyback program of up to NOK 2 billion,” says Aasheim.
Compared to the first quarter, Hydro’s adjusted EBITDA increased from NOK 11,165 million to NOK 11,594 million in the second quarter 2022. Higher realized all-in metal and alumina prices, and positive currency effects were partly offset by higher raw material costs and lower production volumes in Energy.
“Going forward, we see increasing market uncertainty, with rising energy prices and a softening market for aluminium products. We continue to implement initiatives to support our 2025 strategy of low-carbon aluminium and renewable energy. This quarter we have pursued strategic recycling growth projects to meet increasing customer demand for low-carbon aluminium, and we have progressed on our decarbonization roadmap,” says Aasheim.
The war in Ukraine has affected second quarter growth and 2022 forecasts, with Europe being the most exposed to the resulting economic and social impact. Global supply-chain shortages, high energy prices, and concerns around inflation and increasing interest rates, continue to add uncertainty. Hydro is facing a new reality and the changes are happening faster than before.
Although realized aluminium prices and results were strong in the second quarter of 2022, the three-month aluminium price decreased during the quarter as fears of recession and weak demand in China led to a large drop in base metal prices. The outlook for some aluminium production capacity remains uncertain as high global energy prices put pressure on smelter margins, resulting in producers in Europe and the US curtailing parts of their production.
Nordic power prices increased significantly compared to the same quarter last year and are relatively stable compared to the previous quarter. Power prices in Southern Norway (NO1, NO2, NO5) increased due to weak hydrology and exposure to continental power markets. The continental power prices increased further due to rising gas and coal prices, influenced by concerns about energy security for the winter. In Southwestern Norway (NO2), the reservoirs were only 46 percent full, 24 percentage points below the normal level. The Norwegian transmission system operator, Statnett, has stated that energy security in Norway may be a concern towards the end of the year.
In these volatile markets, Hydro continues to address challenges and mitigate risks, while also continuing to position the company according to the Hydro 2025 strategy. Hydro is seizing opportunities to both strengthen its position in low-carbon aluminium, while also maturing and growing in new energy, in a market which is becoming increasingly short on renewable energy. At the same time, Hydro continues its efforts to ensure robustness across the value chain by focusing on reducing costs and improving operational excellence. Hydro’s 2025 improvement program is estimated to deliver on its 2022 target of NOK 7.0 billion.
Greener aluminium with a lower carbon footprint is seen as a key enabler for the green transition, and in the second quarter, Hydro continued to see increased demand for the greener products, Hydro CIRCAL and Hydro REDUXA. In the second quarter of 2022, sales were 89 percent higher year on year, supporting Hydro’s ambition to double sales of greener products by 2025.
Hydro is also progressing in the recycling area. In July, construction started for the expansion of the aluminium recycling plant in Rackwitz, Germany, enabling the plant to produce 25,000 tonnes of HyForge per year, and increasing recycling capacity of post-consumer scrap (PCS). In addition, Hydro made the decision to upgrade and restart the foundry alloy casthouse in Årdal, Norway, to increase capacity for recycling of PCS by 25,000 tonnes per year. The two investments support Hydro’s ambition to double recycling of PCS by 2025.
A significant step in Hydro’s recycling ambitions could be delivered by a successful acquisition of the Polish recycler, Alumetal S.A. Following the launch of a tender offer for 100 percent of the shares of the company in the start of the second quarter, Hydro announced in July that it will extend the subscription period to October 10, 2022, in order to provide additional information requested by the European Commission.
In the second quarter, Hydro Extrusions decided to invest NOK 300 million in a new extrusion press in Tønder, Denmark. The 12-inch press will serve the European automotive and electric vehicle market. The automotive customers continue to set ambitious decarbonization targets, and low-carbon and recycled aluminium will be key levers to meet Scope 3 emissions targets.
At the Capital Markets Day in December 2021, Hydro launched a new climate ambition, confirming the target of cutting own carbon emissions by 30 percent by 2030, and setting new ambitions of becoming net zero in terms of Scope 1 and 2 carbon emissions by 2050 or earlier. An important enabler to meet the ambition is the decarbonization of the Brazilian alumina refinery Alunorte, where the Alunorte fuel switch project to replace heavy fuel oil with natural gas is progressing according to plan.
In the second quarter, Hydro Rein announced two renewable energy projects in Brazil that will supply Hydro’s bauxite and alumina operations with renewable power for existing and planned electrical boilers, supporting Alunorte’s decarbonization efforts. Hydro Rein and Macquarie Asset Management’s Green Investment Group entered into agreements to form a joint venture to build and operate Feijão, a 586 MW combined wind and solar power project in the northeast of Brazil. Hydro Rein, together with Equinor and Scatec, also started construction activities for the 531 MW Mendubim solar project in Brazil.
Feijao and Mendubim will be important projects to reach Hydro’s target of a 30 percent CO2 reduction by 2030, and also to develop Hydro Rein for the planned capital raise in the second half of 2022. Given the uncertain capital markets, alternatives to an initial public offering are being considered to raise the capital required for further growth.
The transition to a lower-carbon society also provides opportunities for Hydro's new energy areas. In May, Hydro's 50/50 joint venture with Northvolt, Hydrovolt, commenced operations of its industrial scale battery recycling pilot in Norway. In parallel, Hydrovolt will, in the second half of 2022, be taking steps to develop production in Europe to support growing demand.
A central pillar in Hydro’s 2025 strategy is the financial framework, and the company’s profitability and sustainability agenda continues to guide capital allocation. Hydro continues its commitment to an investment grade credit rating and aims to keep adjusted net debt less than 2x adjusted EBITDA throughout the cycle.
Following a review of the company’s capital structure and targets, Hydro has updated its targeted capital structure, aiming to have adjusted net debt of around NOK 25 billion over the cycle. In line with this, the Board of Directors has proposed an additional shareholder distribution for 2021. The distribution will consist of an additional cash dividend of NOK 3 billion, as well as an introduction of a share buyback program of up to NOK 2 billion, over the next 12 months. The shareholder distribution is conditional upon an Extraordinary General Meeting approval.
Hydro strives to drive a cost of capital advantage based on the sustainability of its operations, and in the second quarter Hydro launched a green and sustainability linked financing framework, including a second party opinion by the Centre for International Climate and Environmental Research (CICERO). Hydro’s framework is ranked Medium Green by CICERO, the second greenest ranking after dark green, and can be used for future sustainability linked financing products.
Adjusted EBITDA for the first half year of 2022 increased compared to the same period last year. Higher realized all-in metal and alumina prices, record high results in Extrusions and positive currency effects were partly offset by higher fixed and raw material costs upstream.
Net income from continuing operations amounted to NOK 11,136 million in the second quarter and included a net foreign exchange loss of NOK 1,129 million, a NOK 988 million unrealized loss on power and raw material contracts and a NOK 6,697 million unrealized gain on LME related contracts.
Hydro's net cash position decreased from NOK 5.1 billion net cash to NOK 1.7 billion net debt at the end of the quarter. Net cash provided by operating activities excluding changes in short-term and long-term collateral and excluding purchases of money market funds amounted to NOK 6.4 billion. Net cash used in investment activities, excluding short term investments, amounted to NOK 2.0 billion. Dividends paid amounted to NOK 11.1 billion.
Adjusted net debt decreased from NOK 7.7 billion to NOK 6.3 billion, largely driven by a decrease in collateral requirements partly offset by a decrease in net cash position. The collateral requirements amounted to NOK 1.7 billion at the end of the quarter, mainly relating to strategic and operational hedging positions.
In light of large movements in currency rates, Hydro has updated its annual net capex guidance for 2022, to around NOK 12,5 billion, which includes capex carried over from the 2021 budget.
Hydro held NOK 24.5 billion in cash and cash equivalents at the end of the quarter. The revolving credit facilities of USD 1.6 billion and USD 1.3 billion were fully available at the end of the quarter.
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 quarterly report. Adjustments to EBITDA, EBIT and net income (loss) are defined and described as part of the alternative performance measures (APM) section in the quarterly report.
Certain statements included in this announcement contain forward-looking information, including, without limitation, information relating to (a) forecasts, projections and estimates, (b) statements of Hydro management concerning plans, objectives and strategies, such as planned expansions, investments, divestments, curtailments 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, and (i) qualified statements such as "expected", "scheduled", "targeted", "planned", "proposed", "intended" or similar.
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 businesses; 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.
The information is such that Hydro is required to disclose in accordance with the EU Market Abuse Regulation. The information was submitted for publication from Hydro Investor Relations and the contact persons set out above.
This information is subject to the disclosure requirements pursuant to Section 5-12 the Norwegian Securities Trading Act.