Norsk Hydro Asa · OSL:NHY
Norsk Hydro Asa — Investor Day (September 2007)
50 slides from Norsk Hydro Asa's investor day presentation, Sep 6, 2007
Slide 1: Financial policy and performance
Financial policy and performance John O. Ottestad, Executive Vice President and Chief Financial Officer September 6, 2007 1
Slide 2: Key messages
Key messages • Strong earnings outlook • Solid financial position • Shareholder return is a key priority • Rigorous focus on return on capital 2
Slide 3: Earnings
1 Earnings 3
Slide 4: Carve-out income statement
Carve-out income statement IFRS IFRS First half 2007 First half 2007 NOK million “new” Hydro Hydro Revenue 51 278 93 394 Share of the profit in equity accounted investments 575 633 Other income, net 911 1 377 Total revenue and income 52 764 95 404 Depreciation, amortization and impairment (1 894) (9
Slide 5: Segment earnings first half 2007
Segment earnings first half 2007 EBIT, IFRS Reported Adjusted1) Aluminium Metal 4 999 4 644 Aluminium Products 1 670 990 Energy 743 694 Corporate and other (367) (335) Total2) 7 045 5 993 EBITDA, IFRS Reported Adjusted1) Aluminium Metal 6 197 5 698 Aluminium Products 2 333 1 653 Energy 794 745 Corpo
Slide 6: Equity accounted investments
Equity accounted investments Strong underlying earnings contribution Alunorte Søral Alunorf 1 534 293 334 977 862 826 290 240 148 565 504 173 29 332 99 907 196 624 466 505 355 279 After tax EBITDA After tax EBITDA After tax EBITDA 2005 2006 First half 2007 US GAAP IFRS IFRS 6
Slide 7: Hedging policy
Hedging policy Hydro to remain exposed to LME prices • Partly natural hedge through alumina contracts and power contracts Operational LME hedging three months forward • Managing customers’ pricing • Marked-to-market valuations of positions result in unrealized gain/losses Currency exposure, mainly U
Slide 8: Price and currency sensitivities
Price and currency sensitivities Income NOK million before tax Net income Change Aluminium price per tonne 710 510 100 USD Aluminium price per tonne excl. strategic hedges 880 630 100 USD Income NOK million before tax Net income Change USD before financial items 3 210 2 280 1 NOK USD financial items
Slide 9: Capital structure and shareholder policy
2 Capital structure and shareholder policy 9
Slide 10: Carve-out balance sheet 30 June 2007
Carve-out balance sheet 30 June 2007 Assets IFRS IFRS NOK billion “New” Hydro Hydro Cash and cash equivalents1) 20.7 20.9 Short-term investments1) 6.6 6.3 Accounts receivable 18.2 35.6 Inventories 13.6 15.6 Other current assets 3.4 6.5 Asset held for sale 7.2 7.2 Equity-accounted investments 7.7 9.9
Slide 11: Carve-out balance sheet 30 June 2007
Carve-out balance sheet 30 June 2007 Liabilities IFRS IFRS NOK billion “New” Hydro Hydro Bank loans and other short-term interest-bearing debt 2.2 3.4 Trade and other payables 14.5 28.2 Taxes payable 2.3 18.6 Other current liabilities 4.5 9.3 Demerger debt 17.6 - Liabilities in disposal group 2.0 2.
Slide 12: Pensions
Pensions 31 December All funded plans well funded NOK million1) 2006 Projected benefit obligation (23 411) Main assumptions net pension Fair value of plan assets 16 564 liability Termination benefits and other (917) •Discount rate 4.5% Net pension liability (7 764) •Rate of compensation increase 3.4
Slide 13: Capital structure considerations
Capital structure considerations Balance sheet will be leveraged Financial ratios over the business cycle to cater for • Funds from operations • Growth opportunities to net debt > 40%1) • Efficient capital structure • Net debt to equity < 0.552) • Measures to adjust balance sheet to be announced wit
Slide 14: Solid financial position
Solid financial position NOK billion 30 June 2007 Expected major cash flows Cash and cash equivalents 20.7 Short-term investments 6.6 • Redemption of Norwegian State’s Short-term debt (2.2) shares NOK 2.8 billion Q3 2007 Long-term debt (0.3) Demerger debt (17.6) • Proceeds from Polymers sale NOK 5.5
Slide 15: Shareholder policy
Shareholder policy • Hydro aims to give its shareholders competitive returns compared to alternative investments in peers • Dividend payout ratio1) will average 30% over the cycle • Buyback of shares and extraordinary dividends • When earnings, liquidity position and capital structure allow 1) Divid
Slide 16: Competitive dividend yield
Competitive dividend yield 2007 2006 Statoil 5.6% Total 6.2% BP 3.7% Statoil 4.8% Total 3.4% Rio Tinto 4.1% Shell 3.3% Shell 4.0% Hydro 2.7% BP 3.3% Rio Tinto 2.7% CVRD 2.8% ConocoPhillips 2.3% Hydro 2.7% Alcoa 2.0% ConocoPhillips 2.2% ExxonMobil 1.8% ExxonMobil 2.1% BHP Billiton 1.6% Alcoa 2.1% CVR
Slide 17: Strong payout to shareholders
Strong payout to shareholders Total payout ratio 1) Dividend Share buyback • Current capital structure 58% 58% recognized as inefficient 15% 23% • Measures to adjust balance sheet 45% to be announced with Q4 results 44% 10% • Share buyback and dividend 35% 35% payout 2004 2005 2006 1) Dividend alloc
Slide 18: Capital allocation – upstream focus
Capital allocation – upstream focus NOK billion 11-12 ~80 percent of 2008 investments are upstream Qatalum: USD 2.4 billion • ~55 percent project financed • Completion Q4 2009 ~6.5 1.2 Alunorte 3: USD 300 million • Completion Q4 2008 3.9 1.0 4.1 New alumina project: USD 300 million 1.3 • Assumed com
Slide 19: Investment hurdles
Investment hurdles 3 000 • LME 1 900 USD/tonne 2 800 2 600 • NOK/USD 6.5 2 400 2 200 2 000 • NOK/EUR 8.0 1 800 1 600 • 8-10% IRR real after tax 1 400 • IRR after tax above Hydro’s cost of capital when risk is accounted for in 1 200 cash flows 1 000 800 600 Investment hurdle 400 LME (3-month avg.) 20
Slide 20: Financial performance
3 Financial performance 20
Slide 21: Return on capital employed – RoaCE
Return on capital employed – RoaCE 11.2% 10.2% 9.0% 7.8% 4.5% 2004 2005 2006 2006 2007 First half Jan-Jun figures are not annualized. 2004-2005 figures are US GAAP. IFRS from 2006 21
Slide 22: RoaCE by business area
RoaCE by business area Aluminium Metal Aluminium Products Energy 25.1% 18.0% 18.3% 12.2% 12.0%11.5% 11.4% 9.7% 7.9% 6.2% 3.3% 3.7% 2.7% -3.2% -0.7% 2004 2005 2006 2006 2007 2004 2005 2006 2006 2007 2004 2005 2006 2006 2007 First half First half First half Capital employed 30 June 2007 NOK 28.9 billi
Slide 23: Competitive return on capital
Competitive return on capital ROC 14% "New" Hydro Alcoa Alcan 12% 10% 8% 6% 4% 2% 0% 2004 2005 2006 2007 Source: Bloomberg return on capital methodology. 2007 figures are Q3 2006-Q2 2007. “New” Hydro figures are approximations to Bloomberg methodology. 23
Slide 24: Competitive share price development
Competitive share price development New York Stock Exchange 1 January 2002 to 31 August 2007 1 January 2005 to 31 August 2007 CVRD 1 238% CVRD 252% BHP Billiton 474% BHP Billiton 168% Hydro 394% Hydro 138% Statoil 320% Rio Tinto 136% Rio Tinto 253% Alcan 104% Alcan 174% ConocoPhillips 95% ConocoPhil
Slide 25: Performance culture
Performance culture • Operational excellence – safety culture • Fixed cost improvements • Capacity creep • Benchmarking between business units • Firmly address underperforming units • Adequate incentive systems 25
Slide 26: Additional information
Additional information 26 HYDRO
Slide 27: Carve-out principles
Carve-out principles The financial information for "New Hydro" is based on a carve-out methodology similar to the methodology described in "Hydro Information Memorandum – In connection with the demerger of Norsk Hydro ASA and the merger of Norsk Hydro ASA's petroleum acivities with Statoil ASA", ite
Slide 28: Carve-out income statement
Carve-out income statement IFRS IFRS US GAAP First half 2007 Year 2006 Year 2005 NOK million “New” Hydro “New” Hydro “New” Hydro Revenue 51 278 99 172 92 100 Share of the profit in equity accounted investments 575 736 491 Other income, net 911 558 924 Total revenue and income 52 764 100 465 93 515 D
Slide 29: Carve-out balance sheet
Carve-out balance sheet IFRS IFRS IFRS NOK million 30 June 2007 31 December 2006 31 December 2005 Cash and cash equivalents 20 735 6 609 10 266 Short-term investments 6 628 15 220 4 638 Accounts receivable 18 207 17 786 16 599 Inventories 13 611 14 220 12 952 Other current assets 3 363 3 662 4 025 A
Slide 30: Other income and financial expense
Other income and financial expense IFRS NOK million First half 2007 Revenues unrelated to sale of products and services 229 Gains/(losses) on sale of fixed assets (16) Gains/(losses) on divestments of businesses 658 Other income, net 871 IFRS NOK million First half 2007 Interest income 651 Interest
Slide 31: Reporting and segment information
Reporting and segment information Reporting segments Additional information Business activities included • Key earnings metrics • Alumina production • EBIT Aluminium • Primary metal production • EBITDA • Casthouse products (smelter Metal and remelter based) • Both reported and • Sourcing and Trading
Slide 32: Strategic LME hedge programs
Strategic LME hedge programs Second half 2007 2008 2009 2010 Volume tonnes 168 000 227 000 34 000 10 000 LME price USD/tonne 1 980 2 125 2 010 2 300 • Second half 2007 includes a NOK/USD hedge with USD 72 000 sold at 9.6 NOK/USD • Hedges in 2007 relate to Sunndal, Germany and Slovalco • Hedges in 20
Slide 33: Unrealized effects impact results
Unrealized effects impact results • Derivatives Unrealized derivative effects per quarter 1) • LME contracts – LME traded and NOK million physical contracts 1 272 • Power contracts – some indexation to power prices, LME prices and other commodities 506 185 • Currency contracts 110 71 Q1 Q2 Q3 Q4 Q1
Slide 34: Equity accounted investments
Equity accounted investments IFRS IFRS US GAAP NOK million First half 2007 Year 2006 Year 2005 Alunorte – alumina refinery owned 34% 466 624 279 Sør-Norge Aluminium – smelter owned 49.9% 99 240 196 Alunorf – hot rolling mill owned 50% - (2) 29 Other 10 55 (52) Divested and discontinued activities -
Slide 35: Tax
Tax Marginal tax rate excluding equity-accounted investments Marginal tax rate 31.0% 28.8% 27.5% ~30% 25.1% 23.8% Excluding equity 21.9% accounted investments 2005 2006 First half 2007 US GAAP IFRS IFRS • Share of profits in equity accounted investments is included after tax and no tax is paid by Hy
Slide 36: Aluminium Metal financials
Aluminium Metal financials IFRS First half IFRS US GAAP US GAAP NOK million 2007 2006 2005 2004 Revenue 33 267 68 259 54 579 51 957 Share of the profit in equity-accounted investments 559 854 272 281 Other income, net 52 154 - - Depreciation 1 179 2 192 1 687 3 798 EBIT2) 4 999 7 302 2 966 1 066 EBI
Slide 37: Aluminium Products financials
Aluminium Products financials IFRS First half IFRS US GAAP US GAAP NOK million 2007 2006 2005 2004 Revenue 27 931 53 588 42 477 43 533 Share of the profit in equity-accounted investments 6 (168) 47 68 Other income, net 750 175 - - Depreciation 634 2 159 2 913 1 848 EBIT1) 1 670 (104) (323) 1 142 EBI
Slide 38: Aluminium Products financials
Aluminium Products financials Rolled Products, Extrusion and Automotive Q1 Q2 Q3 Q4 Q1 Q2 First half NOK million, IFRS 2006 2006 2006 2006 2007 2007 2006 2007 Revenue Rolled Products 5 535 5 669 5 875 6 053 6 630 6 835 23 132 13 465 Extrusion 5 095 5 377 5 207 4 722 5 497 5 470 20 402 10 967 Automot
Slide 39: Aluminium Products financials
Aluminium Products financials Rolled Products, Extrusion and Automotive Q1 Q2 Q3 Q4 Q1 Q2 First half NOK million, IFRS 2006 2006 2006 2006 2007 2007 2006 2007 EBITDA Rolled Products 612 365 210 136 488 365 1 323 853 Extrusion (23) 399 270 243 366 281 889 647 Automotive 196 140 86 (187) 828 53 235 88
Slide 40: Energy financials
Energy financials IFRS First half IFRS US GAAP US GAAP NOK million 2007 2006 2005 2004 Revenue1) 2 850 7 309 6 614 4 108 Share of the profit in equity accounted investments 10 22 10 2 Other income, net 8 12 Depreciation 48 120 142 121 EBIT2) 743 1 457 1 133 743 EBITDA 794 1 582 1 283 875 Investments
Slide 41: Corporate and other financials
Corporate and other financials IFRS IFRS NOK million First half 2007 2006 Revenue (12 770) (29 984) Share of the profit in equity-accounted investments - 27 Other income 101 217 Depreciation 32 45 EBIT (367) (1 109) EBITDA (335) (1 080) 41
Slide 42: Hydro - reported earnings
Hydro - reported earnings Q1 Q2 Q3 Q4 Q1 Q2 First half NOK million, IFRS 2006 2006 2006 2006 2007 2007 2006 2007 Depreciation Aluminium Metal 507 497 494 694 530 649 2 192 1 179 Aluminium Products 437 552 462 709 332 302 2 159 634 Energy 35 35 34 16 28 20 120 48 Corporate and other 12 8 13 12 16 16
Slide 43: Hydro - adjusted earnings
Hydro - adjusted earnings Q1 Q2 Q3 Q4 Q1 Q2 First half NOK million, IFRS 2006 2006 2006 2006 2007 2007 2006 2007 EBIT adjusted for special items Aluminium Metal 1 832 2 120 1 928 1 812 2 399 2 245 7 691 4 644 Aluminium Products 367 398 269 260 498 492 1 294 990 Energy 558 229 383 294 325 369 1 464 6
Slide 44: Special items 2006-2007
Special items 2006-2007 NOK million, IFRS Q1 2006 Q2 2006 Q3 2006 Q4 2006 Q1 2007 Q2 2007 Closure costs Aluminium Metal 499 11 14 48 17 66 Impairment Ellenville 1) Aluminium Metal - - - 67 - 144 Unrealized (gains)/losses on LME contracts Aluminium Metal (422) (217) (208) 341 (272) (193) Unrealized (
Slide 45: Strong aluminium industry position
Strong aluminium industry position Integrated Emerging Market Mining & Metal Manufacturing 3 900 Primary Rolled Extrusions Other 3 552 3 406 3 151 Production in 1 000 tonnes in 2006 2 500 1 930 1 799 1 359 1 100 1 040 985 930 915 845 616 429 270 260 230 163 Alcoa¹ Alcan Hydro United Chalco BHP Rio C
Slide 46: Peer comparison 2006
Peer comparison 2006 Metal sales vs primary production (tonnes) Downstream in % of primary production Alcoa 156% Alcoa 98% Alcan 127% Alcan 39% Hydro 198% Hydro 95% 100% 100% Alumina ownership coverage Captive power * Alcoa 218% Alcoa 21% Alcan 74% Alcan 43% Hydro 55% Hydro 34% 100% 100% Source: Com
Slide 47: Aluminium value chain 2006
Aluminium value chain 2006 Million tonnes Bauxite Bauxite* 0.5 1.4 z MRN equity production – Brazil: 0.9 million tonnes z Alpart equity production – Jamaica: 1.3 million tonnes Alumina Alumina** 1.0 0.8 z Alunorte – Brazil: 1.3 million tonnes Aluminium z Alpart – Jamaica: 0.6 million tonnes Metal Pr
Slide 48: Good bauxite equity coverage for Hydro
Good bauxite equity coverage for Hydro Relative to primary aluminium Equity coverage Long term evergreen contract coverage 100% 80% 60% 45% 73% 74% 74% 75% 40% 20% 55% 27% 26% 26% 25% 0% 2000 2005 2006 2007E 2010E Consumption 3.3 8.1 8.4 8.4 9.6 Production 1.8 2.2 2.2 2.2 2.4 million tonnes * Equity
Slide 49: Strengthening captive alumina coverage
Strengthening captive alumina coverage Relative to primary aluminium Own production coverage Long-term contracts 100% 75% 29% 37% 71% 45% 63% 50% 57% 55% 43% 77% 25% 23% 0% 1998 2002 2006 2007E 2010E Consumption 2.4 2.8 3.5 3.3 3.9 Production 0.5 1.2 1.9 2.1 2.8 million tonnes 49
Slide 50: Cautionary note in relation to certain forward-looking statements
Cautionary note in relation to certain forward-looking statements Certain statements contained in this announcement constitute “forward-looking information” within the meaning of Section 27A of the US Securities Act of 1933, as amended, and Section 21E of the US Securities Exchange Act of 1934, as a