Norsk Hydro: 2022 record results, Q4 down on lower prices
Strong results and aluminium margins, lower upstream prices and higher costs
Hydro’s adjusted EBITDA for the fourth quarter of 2022 was NOK 7,184 million, compared with NOK 9,011 million for the same quarter last year, resulting in an Adjusted RoaCE of 22 percent for 2022. Lower all-in metal and alumina prices, and higher raw material costs were partly offset by positive currency effects and a gain from the sale of excess power.
- Strong results and aluminium margins, lower upstream prices and higher costs
- Focus on cash release and margin management in weaker markets
- Improvement program and commercial ambition delivered above target for 2022
- Good progress on decarbonization agenda
- 53 percent cash dividend payment and new NOK 2 billion share buyback program
Hydro experienced record results for the full year 2022, with an Adjusted EBITDA of NOK 39.7 billion. This is a 42 percent increase from 2021. Higher realized all-in metal and alumina prices, record high results in both Extrusions and Energy, and positive currency effects were offset by higher fixed and raw material costs upstream.
“Having concluded a strong fourth quarter of 2022, I am very satisfied to see Hydro completing a year of record results both financially and safety wise. This demonstrates the results of our improvement efforts and strong margin management throughout the whole organization,” says President and CEO Hilde Merete Aasheim.
Health and safety is Hydro’s top priority for both employees and the communities where Hydro operates. An injury free environment is the ultimate goal, and Hydro is continuously working to avoid incidents. The 2022 total recordable injury rate (TRI) was 2.4, which is a strong improvement from 3.3 in 2021, and the lowest TRI level ever reported in Hydro.
“Looking into 2023, we see a more unpredictable landscape, yet with a more positive outlook in terms of inflationary pressure and macroeconomic development than just few months ago. In the longer-term we expect demand for our greener offerings to outpace the general demand growth for aluminium,” says Aasheim.
The war in Ukraine, energy crisis in Europe and high inflation continues to impact economic growth. Monetary policy tightening, combined with high energy prices and disruptions from China’s zero-Covid policy, put downward pressure on global growth in the fourth quarter. Forecasts of GDP growth for 2023 have been adjusted upwards to around 3 percent as inflation concerns ease and macroeconomic environment improves in line with the reopening of the Chinese economy.
“Hydro is in a unique position to capitalize on the long-term growth in demand for low-carbon and recycled aluminium. Our organization has delivered robust improvements exceeding our 2022 target, giving us tailwind to steer safely through short-term unpredictability, while continuing to invest and position the company towards capitalizing on the growth opportunities we see in the market towards 2030,” says CFO Pål Kildemo.
Nordic power prices are on average higher in the fourth quarter compared to the same period last year, but declined significantly compared to the third quarter of 2022. Significant price area differences in the Nordic region have continued, however they were considerably lower compared to the third quarter. Adjusted EBITDA for Energy decreased compared to the same quarter last year, mainly due to loss on internal fixed price contract, lower production and lower gain on price area differences, partly offset by higher prices.
The average Platts alumina index (PAX) decreased in the fourth quarter of 2022 to USD 317 per mt, compared to USD 338 per mt in the third quarter 2022. Adjusted EBITDA for Bauxite & Alumina decreased significantly compared to the fourth quarter of 2021, mainly driven by lower alumina sales prices, and higher caustic and energy prices, partly offset by positive currency effects.
The three-month aluminium price increased in the fourth quarter of 2022, starting the quarter at USD 2,162 per mt and ending at USD 2,378 per mt. Uncertainty remains for certain aluminium production facilities as high global energy prices and volatile market conditions continue to put pressure on smelter margins. As a result, many producers in Europe and the US have curtailed parts of their production. For 2022, external sources are estimating a global deficit of primary aluminium of around 0.3 million mt, and a surplus of around 0.1 million mt for 2023.
Hydro is addressing the volatile market landscape, and completed the curtailment of 130 thousand tonnes of primary aluminium production at Hydro Husnes and Hydro Karmøy in response to reduced market demand for aluminium billets in Europe in the fourth quarter. Adjusted EBITDA for Aluminium Metal improved slightly in the fourth quarter of 2022, compared to the fourth quarter of 2021, mainly due to positive contribution from power sales and positive currency effects, partly offset by lower all-in metal prices, lower sales volumes, and higher raw material cost and fixed cost.
European demand for extrusions in the fourth quarter of 2022 is estimated to have decreased 16 percent, compared to the same quarter last year, and 9 percent compared to the third quarter of 2022, partly driven by seasonality. North American extrusion demand is estimated to have decreased 8 percent during the fourth quarter of 2022, compared to the same quarter last year, and decreased 14 percent compared to the third quarter of 2022. CRU estimates that the European and North American demand for extruded products will decrease 18 percent and 4 percent respectively for the first quarter of 2023. Adjusted EBITDA for Extrusions increased in the fourth quarter, compared to the same quarter last year, due to increased results from the recyclers driven by higher sales premiums. This was partly offset by lower sales volumes, and higher fixed and variable costs.
Hydro continues to position the company to capture value from growing demand for greener and circular aluminium. Greener aluminium with a lower-carbon footprint is an important enabler for the green transition. The demand for aluminium towards 2030 in Hydro’s main markets is set to grow at around 3 percent per year, and low-carbon aluminium demand is expected to outpace the rest of the market, with a current estimate of 20 percent compound annual growth rate (CAGR) from 2022 to 2030. We expect low-carbon and recycled aluminium will make up a majority of the EU and American market in 2030.
Addressing the growing demand for greener aluminium, Hydro announced a new strategic partnership with Mercedes-Benz in the fourth quarter. In 2023, Hydro will deliver REDUXA 3.0 (defined as below 3.0 kg CO2 / kg Al from mine to metal) to a range of Mercedes-Benz models, ultimately reducing the material carbon footprint.
Recycling is a key strategic growth area and an important enabler to strengthen Hydro’s position in low-carbon aluminium. Hydro is well on track to deliver on the 2020 recycling ambition to double post-consumer scrap by 2025. The announced acquisition of the Polish recycler Alumetal is currently in Phase II with the European Commission. The provisional deadline for a Phase II decision is the end of May 2023. At the Capital Markets Day in the fourth quarter, Hydro further increased the recycling EBITDA growth target towards 2025 by NOK 500 million, and an additional NOK 500 million by 2027, through lifting the ambition to recycle PCS by an additional 140kt, requiring an increased capital allocation towards recycling in the range of NOK 2-2.5 billion.
Extrusions is another important growth area and Hydro continues to position itself for future growth through key investments. In the fourth quarter, Hydro announced its acquisition of Hueck building systems and extrusion business. The acquisition will strengthen Hydro’s presence in Germany and other European markets, and create a solid platform for further growth of the combined businesses. The transaction is expected to close in late first quarter.
In order to deliver on Hydro’s 2025 strategy, a strong commitment to reduce costs and improve operational excellence is critical. Hydro has delivered above the improvement program target for 2022, and at the company’s Capital Markets Day, Hydro announced further increasing its improvement target for 2025, from the original target of NOK 8.5 billion to NOK 10 billion by 2025, and NOK 11 billion by 2027. Positive traction for greener products, improved product mix, higher margins and market share growth, support the 2025 commercial ambition of NOK 2.5 billion. Towards 2027, Hydro aims to further increase the commercial ambition by NOK 500 million up towards NOK 3 billion, with NOK 1.4 billion to be delivered in the coming years.
In the fourth quarter, Hydro continued to strengthen its sustainability position by launching new Scope 3 ambitions where the company aims to reduce upstream Scope 3 emissions per tonne aluminium delivered to the market by 30 percent. On total upstream Scope 3 emissions, Hydro aims to reduce emissions by 15 percent by 2030. The new Scope 3, 2030 targets will mainly be achieved by lowering the footprint of purchased metal. In 2023, Hydro will rehabilitate an additional 100 hectares in its legal reserve, which comprises degraded land not impacted by Hydro operations, and aims to pilot new technology to reutilize bauxite residues in other industries.
The transition to a lower-carbon society also provides opportunities for Hydro’s new energy areas. In the fourth quarter, Hydro, Eviny and Zephyr announced a partnership to explore an onshore wind project located in the area between Høyanger and Sunnfjord in Norway. The renewable power will be used by existing industry and enable new industrial development in the region.
In the fourth quarter, Hydro Havrand announced a 5 MW green hydrogen pilot project at Hydro’s Høyanger smelter in Norway. Hydro Havrand is maturing the project, which is pending funding support from Enova.
Hydro’s renewable energy company, Hydro Rein, is delivering on its portfolio strategy. The EBITDA contribution in 2026 from the four projects currently in construction is estimated to around NOK 400 – 450 million. In the fourth quarter, Hydro Rein and Commerz Real entered into an agreement on forming a joint venture to acquire and develop two early phase solar projects in Jylland, Denmark. Construction is expected to commence in 2024, with production starting in early 2026, and the ambition is to grow the portfolio to 1 GW. The process to raise capital for Hydro Rein is still ongoing.
Capex for 2022 was NOK 11.5 billion. Capex for 2023, excluding Mergers & Acquisitions and Hydro Rein, is estimated to be NOK 13.6 billion. This includes a NOK 2.2 billion carry over from 2022, and NOK 1.7 billion in currency and inflation effects compared to 2022. For 2024-2026, the guidance is NOK 12.5 billion, reflecting currency and inflation, in addition to strengthened growth ambitions within Recycling and Extrusions. The long-term sustaining capex is estimated at NOK 7.0 billion.
In the fourth quarter, Hydro utilized its sustainable financing framework and EMTN program in the issuance of NOK 3 billion sustainability linked bonds, fixed and floating with 6-year tenor. This was the first sustainability linked bond issued in the Norwegian corporate investment grade market.
In light of Hydro’s solid balance sheet and strong financials, the Board of Directors propose to distribute NOK 13.5 billion in shareholder distribution which represents 61.6 percent of 2022 adjusted net income, as a combination of NOK 5.65 per share of cash dividends and NOK 2 billion of share buybacks. The final shareholder distribution for 2022 is subject to approval by the Annual General Meeting on May 10, 2023.
Hydro’s existing share buyback program, initiated on September 23, 2022, covers purchase of up to 100,000,000 shares with a maximum value of NOK 2,000 million, inclusive of the proportional redemption of shares owned by the Norwegian State. As of February 6, 2023, Hydro has purchased 13,494,000 own shares and owns a total of 29,946,403 shares, corresponding to 1.45 percent of Hydro’s share capital. The redemption and cancellation of shares held by the Norwegian state is subject to approval by the Annual General Meeting on May 10, 2023.
Other key financials
Compared to the third quarter, Hydro’s adjusted EBITDA decreased from NOK 9,721 million to NOK 7,184 million in the fourth quarter 2022. Lower realized all-in metal and alumina prices were partly offset by increased production volumes from Energy. In addition, results for the third quarter 2022 were positively impacted by a revision of the prior periods CO2 compensation.
Net income from continuing operations amounted to NOK 158 million in the fourth quarter. In addition to the factors described above, net income from continuing operations included a net foreign exchange gain of NOK 356 million, a NOK 2,538 million unrealized loss on power and raw material contracts, and a NOK 486 million unrealized loss on LME related contracts.
Income tax expense amounted to NOK 1,519 million for the fourth quarter of 2022, about 91 percent of income before tax. The quarter was mainly impacted by the reassessment of recoverability of deferred tax assets resulting in a net charge of about NOK 1,400 million related to tax losses carried forward.
Hydro's net debt declined from NOK 3.1 billion at the end of the third quarter to a net cash position of NOK 1.3 billion at the end of the fourth quarter. Net cash provided by operating activities of NOK 8.4 billion included an increase of NOK 1.5 billion in collateral requirements. Net cash used in investment activities, excluding short term investments, amounted to NOK 4.2 billion.
Adjusted net debt decreased from NOK 7.8 billion to NOK 6.0 billion, largely driven by turning the third quarter net debt position to a net cash position in fourth quarter, partly offset by increased collateral of 1.3 billion and a decrease in pension assets of 1.2 billion. The collateral requirements amounted to NOK 2.6 billion at the end of the quarter, mainly relating to strategic and operational hedging positions.
Investor contact:
Line Haugetraa
+4741406376
[email protected]
Media contact:
Halvor Molland
+47 92979797
[email protected]
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.
Attachments
