Norsk Hydro: Capital Markets Day 2022 - Unique position in a new realitySource: OMX
Hydro continues the journey of strengthening its position in low-carbon aluminium and growing in new energy. Hydro’s Capital Markets Day 2022 includes new improvement and growth targets, new ambitions to reduce CO2 footprint across the portfolio, delivering on the pathway to net-zero, and sustainable value creation.
- Expecting 20 percent annual demand growth for low-carbon aluminium in coming years
- Growing in recycling through increased 140kt use of post-consumer scrap to 620-770kt in 2027, stretching EBITDA target by an additional NOK 1 billion, to NOK 3.1 – 3.5 billion
- Lowering environmental footprint, targeting 30 percent reduction of Scope 3 emissions by 2030 on metal delivered to the market
- Lifting sales of low-carbon products, increasing ambitions by NOK 0.5 billion to NOK 3 billion in commercial ambitions by 2027
- Stretching and increasing improvement program by NOK 3.5 billion to NOK 11 billion by 2027
- Increasing annual rehabilitation targets and aiming to pilot new technology to reutilize bauxite residues in other industries
- Aiming to distribute 50 – 70 percent of adjusted net income for 2022
“Health, safety and the wellbeing of people is on the top of Hydro’s strategic priorities. To date, 2022 has been a record year when it comes to a low number of total recordable safety incidents and high risk incidents,” says President and CEO Hilde Merete Aasheim.
In 2019, Hydro set a clear ambition to lift profitability and drive the sustainability agenda. Hydro has taken important steps to increase robustness and position the company for growth and value creation.
“This positions us well in strong, as well as in weaker and more uncertain markets. I am also excited to see the high expected growth for low-carbon aluminium, which makes our strategy of strengthening our position in low-carbon aluminium and growing in new energy even more relevant today,” says Aasheim.
Customers decarbonize, increasing demand for greener aluminium
Greener aluminium with a lower-carbon footprint is seen as an important enabler for the green transition. Hydro’s customers across industry sectors such as transportation, construction, packaging and electrical are setting ambitious decarbonization targets. Low-carbon and circular aluminium is a key lever to reduce Scope 3 emissions for these industries.
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. External consultants expect low-carbon and recycled aluminium will make up a majority of the EU and American market in 2030.
Hydro continues to work in strategic customer partnerships to shape the market for low and near-zero carbon aluminium. The objective is to contribute to reducing the climate impact of our customers by utilizing the full potential of aluminium as a low-carbon solution.
Hydro announced today a new strategic partnership with Mercedes-Benz. 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.
Key progress on decarbonization path
Hydro’s primary aluminium produced on renewable energy is around 80 percent and has four to five times lower emissions than the world global primary average, placing it among the most carbon efficient aluminium in the world.
Hydro has the ambition of achieving net-zero carbon emissions by 2050. Key initiatives expected to be in place before 2030 include a combination of process improvements, switching from fossil fuel combustion to renewable energy and changing fuel source to less carbon intensive sources.
The fuel switch project to replace oil with liquid natural gas at the Alunorte alumina refinery is expected to be in operation in 2023. In addition, Hydro will install three electrical boilers, using renewable energy to replace fossil fuels. The first boiler is already operational, and the second and third boilers are expected to be operational in 2024.
The company is pursuing three decarbonization paths to further reduce the carbon footprint of aluminium.
To secure the value of existing smelters, Hydro is developing carbon capture and storage (CCS) solutions that can be retrofitted into existing aluminium plants. Hydro continues to collaborate with technology provider Verdox. The first test was successfully completed and a second test is planned to start in early 2023.
Another pathway more suited for greenfield smelters is Hydro’s proprietary HalZero technology. This is a technology based on converting alumina to aluminium chloride prior to electrolysis in a process where chlorine and carbon are kept in closed loops, resulting in a fully decarbonized process. Hydro aims to deliver the first zero-carbon primary aluminium from the HalZero process by 2026.
Recycling more post-consumer aluminium, is a third and faster pathway to zero-carbon aluminium. Using 100 percent post-consumer scrap, Hydro will be able to produce near-zero carbon products at a competitive abatement cost. In 2022, Hydro produced its first near-zero aluminum based on recycling of 100 percent post-consumer scrap.
Key steps to strengthen position in low-carbon aluminium
The 2025 strategy leverages Hydro’s competitive advantages to seize opportunities within the current megatrends, and positions the company to capture value from growing demand for greener and circular aluminium.
Reduced costs and improved operational excellence within Hydro’s asset base remain a competitive advantage. Hydro’s operations in Bauxite & Alumina and Aluminium Metal are in the 30th and 17th cost percentile respectively. Following the fuel switch project, which is expected to be finalized in 2023, the alumina refinery Alunorte’s cost position is expected to improve to the 20th percentile.
The improvement program and commercial initiatives are important to maintain Hydro’s competitive cost curve positions. Hydro will further increase the 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.
Low-carbon aluminium enables customers to meet their carbon reduction goals. Over the past year, Hydro has seen an increased demand for its low-carbon brand products Hydro CIRCAL and Hydro REDUXA, and has capacity to respectively triple and double sales in the mid-term, following five times growth since 2020.
In 2022, positive traction for greener products, improved product mix, higher margins and market share growth, have supported 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.
Extrusions, defined as a strategic growth area, has successfully improved their business over the last years and is on track to realize its 2025 target EBITDA of NOK 8 billion, despite the current market volatility.
Extrusions continues to position itself for future growth through key investments. In 2022, Extrusions added around 50kt of new capacity through investments across the portfolio. Last week, 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.
Recycling is an important enabler to strengthen Hydro’s position in low-carbon aluminium. Key investments into additional recycling capacity have been announced so far in 2022, increasing capacity by 335 kt including the proposed acquisition of Alumetal S. A. Hydro is well on track to deliver on the 2020 recycling ambition to double post-consumer scrap by 2025. Hydro now aims to further increase the recycling EBITDA growth target towards 2025 by NOK 500 million, and additional NOK 500 million by 2027, through lifting the ambition to recycle PCS by 140kt, requiring an increased capital allocation towards recycling in the range of NOK 2-2.5 billion.
Continues to execute on the new energy areas
The transition to a lower-carbon society also provides opportunities for Hydro’s new energy areas. Over the past year, Hydro has continued to execute on its strategy to grow in new energy areas that can decarbonize high emitting industries, including renewable energy production, investment in battery value chain and production of green hydrogen. Hydro continues to develop profitable projects and partnerships in these areas.
Hydro’s renewable energy company, Hydro Rein, is executing its portfolio strategy and has matured several large scale projects in Brazil and the Nordics. Hydro Rein is currently in the execution stage with four projects and the contracted revenues (PPAs) from these secured projects amount to approximately USD 2.7 billion. The EBITDA contribution in 2026 from these projects is estimated to around NOK 400 – 450 million. The process to raise capital for Hydro Rein is still ongoing.
Over the past year, Hydro has matured a more focused battery strategy concentrating on exploring opportunities within sustainable battery materials mainly in Europe. Hydro’s battery unit aims to achieve 3x value uplift on invested equity on average for its investments. The Hydrovolt recycling operations in Norway have started commercial production and received interest from both EU and OEMs in Europe. In addition, Hydro Batteries has a 30 percent share in Vianode, a company jointly owned with Elkem and Altor, producing synthetic graphite. Full scale production is expected to start in 2024.
Hydro’s green hydrogen unit, Hydro Havrand, seeks to develop, own and operate production sites for green hydrogen based on renewable energy to reduce emissions in hard to abate sectors. Hydro Havrand leverages Hydro’s 4GW large internal potential fuel switch from gas offtake, and Hydro’s broad energy expertise as a springboard to mature its portfolio and capture global opportunities. Hydro Havrand has commenced projects at Hydro’s Høyanger smelter in Norway. The company is working to support Vetlanda’s extrusions facility in Sweden to introduce green hydrogen into industrial processes and develop a potential hydrogen supply for the Alunorte refinery in Brazil.
Climate, environment and social ambitions
In 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. Hydro continues to strengthen its sustainability position with 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. The target combines the metal delivered from Aluminium Metal and Extrusions. 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 footprint of purchased metal.
Last year, Hydro set out new ambitions focusing on biodiversity and reducing our environmental footprint with ambitions on waste recovery, including a target to eliminate landfilling of recoverable waste by 2040. Work continues with Wave Aluminium to potentially build a pilot plant at Hydro Alunorte to process 50kt of bauxite residue per year, extracting metals from bauxite residue.
Hydro is also well on track with the 1:1 reforestation ambition. In 2023, we will also rehabilitate 100 hectares in our legal reserve. This is degraded land not impacted by Hydro operations. This comes in addition to the rehabilitation activities in the mining operations under the 1:1 ambition. Hydro is firmly committed to the ambition of achieving no net-loss of biodiversity in new projects in Hydro.
Hydro’s social ambition is to improve the lives and livelihoods wherever the company has operations. During the last few years, Hydro has made significant social investments in Brazil, building social centers in Pará and a technical school in Barcarena as one-off infrastructure investments.
Strong financial performance in 2022 and financial priorities
Hydro’s free cash flow generation from the fourth quarter 2021 to the third quarter 2022 was NOK 12.9 billion, supported by strong markets. In light of Hydro’s solid balance sheet and strong financials, the Board of Directors aims to propose to distribute 50-70 percent of 2022 adjusted net income to its shareholders, as a combination of dividends and share buybacks. Final distribution for 2022 will be proposed by the Board at the fourth quarter release in February 2023, and subject to approval by the Annual General Meeting in May 2023.
Hydro’s strategic agenda continues to guide capital allocation, and disciplined capital allocation remains a key financial focus to support execution of the 2025 strategy. For 2022, Hydro expects NOK 11.6 billion in investments. The updated capex guidance for 2023, excluding M&A and Hydro Rein, is NOK 13.5 billion, which includes a NOK 2.1 billion carry-over from 2022, and NOK 1.7 billon in fx and inflation effects. For 2024-2026, the guidance is NOK 12.5 billion, reflecting fx and inflation, in addition to strengthened growth ambitions within Recycling and Extrusion. The long-term sustaining capex is estimated at NOK 7.0 billion.
Hydro will continue to ensure efficient levels of working capital and has targeted a release of NOK 8 billion through fourth quarter 2022 and 2023, reflecting current market prices.
Hydro is consistently recognized by leading global ESG raters and have improved several ESG ratings during 2022. For the Morningstar rating Sustainalytics, which measures ESG risk level, Hydro is now rated as low ESG risk, as one of only three companies among the 200 companies in diversified metals.
Supporting Hydro’s new capital structure ambitions of NOK 25 billion adjusted net debt, including a target to keep our gross debt level relatively stable, Hydro established a Euro Medium Term Note (EMTN) program to streamline future bond issuances, allowing rapid utilization of our new sustainable financing framework. Recently Hydro utilized both sustainable financing framework and the EMTN program in a recent issuance of NOK 3 billion sustainability linked bonds, fixed and floating with 6 year tenor.
“We believe our sustainability position in an industry context is becoming a strong differentiator, also from a cost of capital advantage. In 2022, we launched our sustainable financing framework, incorporating both Green and Sustainability Linked Financing Frameworks. Last month Hydro issued the first sustainability linked bond issues in the Norwegian corporate investment grade market,” says Executive Vice President and CFO Pål Kildemo.
Hydro's ambition to deliver at least 10% RoaCE over the cycle, with all business areas delivering RoaCE above their minimum targets, remains in place. The updated capital allocation and improvement efforts, strengthens the robustness of the profitability roadmaps for each business area.
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.
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