Norsk Hydro: First quarter 2022 - Strategic growth and record results
The Russian invasion of Ukraine, slower Chinese growth, global supply-chain shortages, high energy prices, and concerns around inflation continue to add uncertainty in the first quarter of 2022.
Hydro’s adjusted EBITDA for the first quarter of 2022 was NOK 11,165 million, up from NOK 5,182 million for the same quarter last year, resulting in a 12-month rolling Adjusted RoaCE of 23 percent. Higher all-in metal and alumina prices, record high quarterly results from Hydro Energy and Hydro Extrusions, contributed positively to earnings, but were partly offset by higher fixed costs and raw material costs upstream.
- Tight markets with strong prices and high volatility
- Record results in Aluminium Metal, Energy and Extrusions
- Strong growth in volumes of greener products, first near-zero aluminium produced in Clervaux
- Significant growth in recycling
- Hydro Rein growing portfolio beyond 1 GW
“Hydro is delivering both strong financial results and good progress on our strategic objectives of strengthening our position in low-carbon aluminium and growing in new energy. We see strong growth in demand for our low-carbon offerings, Hydro REDUXA and Hydro CIRCAL. This is strengthening our competitive position in a marketplace where we anticipate that aluminium, and especially greener aluminium, will be in high demand,” says President and CEO Hilde Merete Aasheim.
Russia invaded Ukraine on February 24, 2022. Hydro has no employees, operations or investments in Russia, and will not enter new contracts linked to Russian counterparts. Hydro has reduced its contractual commitments and is further reducing the remaining commitments for 2022. Hydro condemns the Russian invasion of Ukraine and supports sanctions by the European Union and the international community.
The Russian invasion of Ukraine, slower Chinese growth, global supply-chain shortages, high energy prices, and concerns around inflation continue to add uncertainty in the first quarter of 2022. The invasion further impacted GDP growth rates, with Europe being the most exposed to the resulting economic and social impact. Global supply-chain shortages continue to impact growth, and China’s current zero Covid policy is causing short term disruptions. During the first quarter, various key markets have reported their highest inflation rates for the past 20 years.
“Dedicated efforts by Hydro’s 31,000 employees the past years delivering on our improvement program have also continued into Q1. This makes Hydro well positioned and more resilient in the face of a more unpredictable global environment,” says Aasheim.
Hydro has made important progress on the 2025 strategy during the start of 2022, both strengthening position in low-carbon aluminium and growing in new energy areas.
Hydro’s sustainability ambitions are key drivers for future competitive positioning. The ambition to achieve net zero carbon emissions by 2050 or earlier is pursued through three decarbonization paths to reduce the carbon footprint of aluminium to net zero.
“Developing state-of-the-art sustainable products is a key part of our positioning towards delivering on increasing demand for greener aluminium. Demonstrating our capabilities in recycling, Hydro produced the first 130 tonnes of Hydro CIRCAL 100R at the Clervaux plant in Luxembourg. The volume is based on 100 percent post-consumer scrap with a footprint <0.5 kg CO2/kg Al. Work is ongoing to optimize production and discussions have been initiated with customers on first commercial application,” says Aasheim.
In line with Hydro’s target to double sales volumes for greener products over the next five years, Hydro has increased sales of Hydro CIRCAL and Hydro REDUXA by 83 percent compared to the first quarter last year, and continues to work closely with customers to create products with a smaller environmental impact.
Recycling is one of Hydro’s main growth areas towards 2025. On April 29, 2022, Hydro announced a tender offer for the acquisition of 100 percent of the shares of Alumetal S.A, a company listed on the Warsaw Stock Exchange, for PLN 68.4 per share in cash (the “offer price”), representing an aggregate equity purchase price of approximately PLN 1.066 billion (approx. EUR 232 million).
“With this transaction Hydro is making an important step in delivering on the 2025 strategic agenda. Following the acquisition of Alumetal, Hydro will increase the use of post-consumer aluminium of 150,000 tonnes per year, which together with recently announced recycling projects, will enable Hydro to meet its ambition to double recycling of post-consumer aluminium by 2025,” says Aasheim.
The transaction implies an Enterprise Value of approximately PLN 1.332 billion (approximately EUR 290 million) based on latest reported net debt as of FY2021 and dividends payable of PLN 106 million (approximately EUR 23 million), with dividend payment date on July 27, 2022. With the transaction, Hydro will strengthen its recycling position in Europe and widen its product offering in the low-carbon and scrap-based foundry alloy market.
Hydro also continues to make progress on greenfield recycling projects. In April, construction was initiated on the Cassopolis recycling plant in Michigan. The plant will be the first large-scale production of low-carbon Hydro CIRCAL extrusion ingot in North America. Total recycling capacity for the plant is 120,000 metric tons per year. The plant will strengthen Hydro’s ability to supply car makers and other industries in the U.S.
In addition to the climate targets, Hydro has made progress on the ambition to protect biodiversity and reduce its environmental footprint. Hydro has several initiatives to reduce waste from our processes. In April, Hydro signed a MOU with Wave Aluminium to build a pilot plant for testing a pioneering and disruptive industrial technology, successfully developed in batch testing scale, for converting residue from alumina refining to recoverable and saleable minerals. If successful, this could significantly reduce the need for residue deposits going forward.
Hydro’s social ambition to improve the lives and livelihoods where the company operates is progressing. In light of the ongoing tragedy in Ukraine, Hydro in Poland has organized group transport to and from the Ukrainian border for those of 400 employees from Ukraine who want to bring their families to Poland. The extrusion plants have also offered temporary accommodations for the families arriving in Poland, and employees are volunteering to support the many who are fleeing Ukraine. A two-week fundraising campaign initiated by Hydro’s unions in support of UNICEF’s activities helping families and children in Ukraine raised NOK 1 million. With an additional donation from Hydro, the total amount raised was NOK 10 million.
The Russian invasion of Ukraine has resulted in energy prices continuing at elevated levels in European markets, supported by increased fears of disruption to gas flows. In response, the European Commission published its “RePowerEU” plan, which aims at making Europe independent of Russian fossil fuels before 2030. Independence from Russian gas is expected to strengthen EU demand for renewable energy and hydrogen, supporting Hydro’s ambition to grow in new energy.
Hydro continued to mature and develop business opportunities in these areas and Hydro Rein reached important milestones towards contract certainty for the first GW of renewable power. Hydro Rein has partnered with Atlas Renewable Energy to develop and build a 435 MW solar project, Boa Sorte, in Minas Gerais, Brazil. Total investments are estimated to USD 320 million (100% basis) and Hydro Rein will have a 33.3% ownership in the joint venture. Construction is planned to start in fourth quarter 2022, and operations will commence in fourth quarter 2023.
The Albras primary aluminium plant has signed a power purchase agreement with the Boa Sorte solar power plant for annual supply of about 93 MW power in the period 2025-2044, denominated in USD. The agreement represents 90 percent of the expected power production at Boa Sorte (P50) and covers 12 percent of Albras’ annual power consumption.
Hydro Rein, together with partner Eolus, sold 75 percent of the 260 MW wind power project Stor-Skälsjön to MEAG. The transaction enables Hydro to optimize capital allocation and the return on our investment while retaining a significant stake (25%) in the project, consistent with our long-term ownership and portfolio strategy.
Hydro continues to build its battery portfolio through industrial partnerships. In April, Hydro, Elkem and Altor announced a partnership to accelerate the growth of Vianode, a Norwegian producer of sustainable battery materials. Vianode’s range of synthetic graphite products offers unique performance characteristics and are produced with up to 90 percent lower CO2 emissions than today's standard materials. An investment decision for a potential first-phase plant at Herøya, Norway, is expected in the first half of 2022. Total investments in the first-phase plant and preparations for a potential full-scale plant are estimated at be around NOK 2 billion. Hydro will have 30 percent ownership in Vianode.
Hydrovolt, the joint Hydro-Northvolt battery recycling facility in Fredrikstad, is conducting test operations, which have performed well, and will start commercial production in May. The plant is one of the most technologically advanced battery recycling plants globally and the largest facility in Europe.
The quarter was dominated by tight markets with strong prices and high volatility. The Platts alumina index (PAX) increased throughout the first quarter. The Russian invasion of Ukraine caused the Mykolaiv alumina refinery to shut down and combined with Australia banning bauxite and alumina exports to Russia, has disrupted 3 to 4 million tonnes of global alumina trade flows.
The three-month aluminium price increased during the quarter, starting at USD 2,808 per mt and ending at USD 3,491 per mt. The price was volatile, with a price range between USD 2,808 per mt and USD 3,849 per mt, as the Russian invasion of Ukraine increased the fear of sanctions on Russian producers and significant disruptions to metal flows. Also, rising gas and power prices have led to an increase in production costs in Europe, followed by several smelter curtailments.
Nordic power prices were significantly higher compared to same quarter last year and relatively stable compared to the fourth quarter. Power prices in Southern Norway increased as weak hydrology and export capacity to UK and the continent continues to support higher prices. The continental power prices increased further due to rising gas and coal prices, influenced by fear of supply disruptions due to the Russian invasion of Ukraine. Prices in the northern part of the Nordic market were low due to strong hydrology, high wind power production and limited transmission capacity towards the South. Hence, significant price area differences in the Nordic region have continued during the first quarter.
Hydro continues to increase the range of green and sustainable financing products. In the first quarter, Alunorte signed a USD 200 million sustainability-linked loan and interest rate swap, to finance the fuel switch project. The pricing of the loan and the swap is linked to the performance of the Alunorte greenhouse gas emission reduction target. The sustainability-linked swap is the first to be executed in the Brazilian market.
On April 27, 2022, Norsk Hydro ASA signed a USD 1,300 million short-term revolving multi-currency credit facility. The facility, which is available for general corporate purposes, carries a 12-month maturity with two six-month extension options at Hydro’s discretion. The entire amount is available as a sub-facility swingline to cover short-term liquidity needs.
Compared to the fourth quarter 2021, Hydro’s adjusted EBITDA increased from NOK 9,011 million to NOK 11,165 million in the first quarter 2022. Higher all-in metal and alumina prices, improved margins and volumes from Extrusions and better results from Energy contributed positively to adjusted EBITDA. This improvement was partly offset by higher raw material costs.
Net income from continuing operations amounted to NOK 6,411 million in the first quarter. In addition to the factors described above, Net income from continuing operations included a net foreign exchange gain of NOK 2,379 million, a NOK 1,418 million unrealized gain on power and raw material contracts and a NOK 4,448 million unrealized loss on LME related contracts.
Hydro's net cash position increased from NOK 3.2 billion to NOK 5.1 billion 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 3.0 billion. Net cash used in investment activities, excluding short-term investments, amounted to NOK 1.2 billion.
Adjusted net debt increased from NOK 7.0 billion to NOK 7.7 billion, largely driven by an increase in collateral requirements, partly offset by an improvement in the net cash position and a decrease in pension obligations. The collateral requirements amounted to NOK 9.7 billion at the end of the quarter, mainly relating to strategic and operational hedging positions.
Hydro held NOK 21.2 billion in cash and cash equivalents and NOK 1.5 billion in time deposits, included in short-term investments, at the end of the quarter. Time deposits are normally available at short notice. The revolving credit facility of USD 1.6 billion was 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.
Cautionary note
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.
This information is subject to the disclosure requirements pursuant to Section 5-12 the Norwegian Securities Trading Act
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