Norsk Hydro: Hydro Capital Markets Day 2021 - Sustainable value creation

Rhea-AI Summary

Hydro announces new improvement targets and sustainability ambitions at its Capital Markets Day 2021. The company aims for net zero carbon emissions by 2050, launching a near-zero carbon aluminum product based on 100% complex post-consumer scrap by 2022. Hydro reports strong operational and financial performance in 2021, planning to distribute 70-80% of adjusted net income to shareholders. With an increasing demand for greener aluminum, Hydro is well-positioned to leverage its sustainability initiatives for competitive advantage and growth in new energy sectors.

Positive

• Achieved strong operational and financial performance in 2021.
• Plans to distribute 70-80% of adjusted net income to shareholders.
• Set ambitious targets for net zero carbon emissions by 2050.
• New near-zero carbon product to be available in 2022.
• Increased demand for low-carbon aluminum products is expected to drive growth.

Negative

• Continued reliance on complex supply chains may pose risks amid market fluctuations.
• The transition to low-carbon solutions requires substantial investment and execution risk.

Hydro continues to strengthen the company in terms of profitability and sustainability and is announcing new improvement targets as well as new sustainability ambitions. Along with an update on the strategic direction toward 2025 on low-carbon aluminium and new energy, these will be key topics at Hydro’s Capital Markets Day 2021.

During 2021, Hydro has continued to deliver on its 2025 strategy, including further strengthening its low-carbon aluminium position as well as maturing business opportunities within new energy solutions. Hydro has long been recognized as a leader in sustainability, and the new sustainability ambitions launched at the Capital Markets Day will be a key driver for Hydro’s competitive positioning going forward.

Hydro has the ambition of achieving net zero carbon emissions by 2050 or earlier and is pursuing three decarbonization paths to reduce the carbon footprint of aluminium to net zero. Hydro will have the first commercial volumes of near zero carbon product (defined as less than 0.5kg Co2 per kg aluminium) available in 2022 based on using 100% complex post-consumer scrap.

Strong operational and financial performance in 2021

“We set a clear ambition in 2019 to lift profitability and drive the sustainability agenda after several years of weak development, and I am pleased with the strong operational and financial performance during 2021. We kept the wheels turning during the pandemic and our organization has lifted profitability across all our business areas and delivered the full-year improvement program target ahead of time,” says President and CEO Hilde Merete Aasheim.

Hydro’s profitability and sustainability agenda continues to guide capital allocation. During the year, Hydro concluded the strategic review and divestment of Hydro Rolling, releasing capital that will be allocated to profitable growth opportunities in Recycling and Extrusions, and further strengthened the balance sheet. In addition, strong results have contributed to greater cash generation in 2021.   

In light of Hydro’s robust balance sheet and strong financials, the Board of Directors aims to propose to distribute 70-80% of 2021 adjusted net income to its shareholders, as a combination of ordinary dividends and either extraordinary dividends, or a combination of extraordinary dividends and share buybacks. Final distribution for 2021 will be proposed by the Board at the Q4 release in February 2022, and subject to approval by the Annual General meeting in May 2022.

Customers decarbonize, increasing demand for greener aluminium

The transition to a lower-carbon society is expected to increase demand for aluminium. The demand for aluminium semis outside China is estimated to rise 4% annually until 2030, with similar overall growth rates in key sectors like automotive and building and construction. Recycled aluminium production is expected to grow 5% annually until 2030 and become a larger share of total aluminium production.

Greener aluminium with a lower carbon footprint is seen as an important enabler for the green transition. Hydro’s customers across many sectors such as automotive, packaging, building and construction and electronics are setting ambitious decarbonization targets and low-carbon and circular aluminium is a key lever to reduce Scope 3 emissions for these industries. A differentiation of the market is expected, where demand for greener and circular aluminium will outpace the demand for aluminium from non-renewable energy sources.        

“We will reduce emissions in society at large by providing more climate-friendly solutions. The EU has defined key areas to deliver on climate objectives and enable green transition. Cleaner energy, more energy-efficient buildings, green mobility and longer-lasting products that can be recycled are examples. All areas drive the need for more aluminium and more renewable energy, and we are ready to contribute. In the use phase, aluminium contributes to reducing climate emissions from transport, increasing the range of electric cars and making buildings more energy efficient,” says Aasheim.

“In addition, we produce close to 10TWh of renewable hydropower annually, and we are developing wind projects and solar projects, as well as green hydrogen projects, that can replace the use of fossil-based natural gas,” says Aasheim.

Hydro’s decarbonization path

Hydro is launching a new climate ambition, confirming the target of cutting own carbon emissions by 30% by 2030 and setting new ambitions of becoming net zero in terms of Scope 1 and 2 carbon emissions by 2050 or earlier.

Hydro’s roadmap to net zero by 2050 for the upstream business includes planned activities to replace fuel oil with natural gas and electrify boilers at the Alunorte alumina refinery in Brazil where we also plan to pilot using hydrogen for calcination. Achieving near zero emissions throughout the full value chain also requires an energy shift toward an even higher renewable share of the smelter portfolio as well as use of renewable fuel like hydrogen, direct electricity or biogas in the casthouses and recyclers.

Hydro is pursuing three technology pathways towards near-zero aluminium.

To secure the value of existing smelters, Hydro is developing carbon capture and storage (CCS) solutions that can be retrofitted into aluminium plants in operation. Hydro has evaluated more than 50 CCS technologies and developed plans for testing and piloting the most promising up to industrial scale. The most likely outcome will be a combination of off-gas capture and direct air capture to eliminate 100% of the emissions, with industrial-scale pilots planned before 2030.  

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 has been working on lab-scale development of this technology for five years and has now developed a concrete roadmap for piloting this to industrial scale before 2030.

A third and faster pathway to zero-carbon aluminium is by recycling more post-consumer aluminium. Using 100% complex post-consumer scrap, we will be able to produce a near zero carbon product at a competitive abatement cost. This will be made possible by Hydro’s patented aluminium sorting technology and alloying expertise, in combination with replacing natural gas with hydrogen or electrical heating at recyclers and casthouses. Already in 2022, near-zero aluminum based on recycling of 100% complex post-consumer scrap, should be commercially available. Production volumes will depend on customer demand for this material.

“Since we launched our low-carbon products Hydro CIRCAL and Hydro REDUXA, the market has embraced low-carbon aluminium, as it enables our customers to meet their abatement goals. I view this development as a great opportunity to further position Hydro. This shows that when the market starts to pull for greener products, the decarbonization challenge turns into commercial opportunities and incentivizes us to invest in innovative solutions to reduce our carbon footprint further,” says Aasheim.

Environment and social ambitions

Hydro is setting new sustainability ambitions in the areas of environment and social responsibility. Within environment, the ambitions include protecting biodiversity and reducing the environmental footprint. For biodiversity, Hydro has set an ambition to achieve no net loss of biodiversity for all new projects in Hydro, in addition to the existing 1:1 rehabilitation target. With regards to waste, the existing 2030 targets for increased utilization of bauxite residue and reduced landfilling of spent pot lining are supplemented with ambitions to eliminate the need for new permanent bauxite residue storage by 2050 and to eliminate landfilling of all other recoverable waste by 2040.

Hydro’s social ambition is to improve the lives and livelihoods wherever we operate. The existing target of empowering 500,000 people with education and skills development by 2030 is supplemented with business-specific targets to support just transition, and ensure responsible business practices throughout Hydro’s supply chain, providing traceability and transparency of key sustainability data for Hydro’s products.

Strengthening position in low-carbon aluminium

Hydro’s 2025 strategy aims to strengthen Hydro’s position in low-carbon aluminium and explore growth opportunities in new energy. The strategy leverages Hydro’s competitive advantages to seize opportunities within the current megatrends and positions Hydro to capture value from growing demand for greener and circular aluminium.

Reduced costs and improved operational excellence within Hydro’s asset base remain a priority. Hydro’s operations in Bauxite & Alumina and Aluminium Metal are already in the first quartile of their respective cost curves. Hydro has increased its current improvement program by NOK 1.1 billion to a new 2025 improvement target of NOK 8.5 billion. The 2025 target includes around NOK 5.7 billion which has been delivered through Q3 2021.

In addition, Hydro has increased its commercial improvement ambition from NOK 1.5 billion to NOK 2.5 billion by 2025. These are market-driven initiatives where Hydro will leverage its solutions and partnerships to increase market shares in key segments, in addition to growing margins. The commercial potential also comes from leveraging Hydro’s sustainability position to shape demand for Hydro’s greener product portfolio. Over the past year, Hydro has seen increased demand for its low-carbon brand products Hydro CIRCAL and Hydro REDUXA, and expects to double sales of these products by 2025.

Over the past year, Hydro Extrusions has restructured its portfolio and implemented cost savings and productivity programs to improve profitability. Hydro Extrusions is now positioning itself for future growth through key investments. In 2021, Extrusions added over 200,000 tonnes of new capacity through investments across the portfolio.

At the 2020 Capital Markets Day, Hydro set a strategic ambition to double its recycling of PCS. Hydro currently has a portfolio of 25 recyclers with an annual capacity of 1.8 million tonnes. The 2025 ambition to double PCS recycling will provide EBTIDA uplift of NOK 0.7 billion to 1.1 billion. Key investments into additional post-consumer scrap recycling capacity of 85,000 tonnes have been announced so far in 2021, increasing total casthouse production by 305,000 tonnes. Volumes from some of these projects are expected in 2022.

Growing in new energy

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, batteries, and 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 has invested in a 260MW wind power plant in Stor-Skälsjön, Sweden, with Eolus. Hydro REIN has several projects in late-stage development in Brazil. Hydro REIN aims to supply Hydro’s 10TWh repowering needs by 2025, while also serving customers outside Hydro, in addition to providing energy solution services for Hydro sites and external customers. Hydro REIN anticipates an IPO during 2022.

Hydro’s green hydrogen unit, Hydro Havrand, will develop green hydrogen based on renewable energy to cut emissions in hard to abate sectors. Hydro Havrand leverages Hydro’s 4GW potential offtake and energy expertise as a springboard to mature its portfolio and capture global opportunities. Hydro Havrand has commenced projects at Hydro’s Årdal, Norway, smelter and Vetlanda, Sweden, extrusions facility to introduce green hydrogen into industrial processes.     

Hydro’s battery unit continues to build a sustainable and competitive battery business. Hydro’s 50/50 joint venture with Northvolt, Hydrovolt, is on track to commence operations at the start of 2022. Hydro’s battery unit has built a pipeline of investment opportunities within recycling, cell and pack solutions, and anodes. Hydro’s battery unit aims to achieve 3x value uplift on invested equity on average for its investments with an aim to invest NOK 2.5 billion to NOK 3 billion by 2025.

Financial priorities

“Hydro remains committed to driving long-term value for our shareholders. We have lifted profitability across all our business areas and improved our returns, resulting in a RoaCE of about 13% over the last year. On the back of this, the Board of Hydro aims to propose an annual shareholder distribution of 70-80% of adjusted net income for 2021,” says CFO Pål Kildemo.

Hydro’s cash generation from Q4 2020 to Q3 2021 was NOK 9.5 billion, supported by strong markets and good improvement program performance. This, with the reduced pension liabilities and cash proceeds from the divestment of Hydro Rolling, contributes to the reduction of adjusted net debt and net debt positions, from NOK 23 billion and NOK 8 billion, respectively, to NOK 11 billion and NOK 1 billion.

Disciplined capital allocation remains a key financial focus to support execution of the 2025 strategy. For 2021, Hydro expects NOK 7 billion in investments. The updated capex guidance for 2022 is NOK 11 billion, which includes a roll-over from 2021. For 2023-2025, the guidance is NOK 10 billion. Hydro will continue to ensure efficient levels of working capital.

“We believe our sustainability position in an industry context is becoming a strong differentiator, also from a cost of capital perspective. Hydro expects a strong taxonomy position relative to peers. Our initial analyses, based on half-yearly 2021 figures, indicate an eligible share of revenue of 40-50%, with aligned share between 22 and 27%, and for CAPEX we estimate an eligible share of around 50% with an aligned range between 30 and 35%, increasing to 40-50% in the 2022-2025 period,” says Kildemo.

Hydro's ambition to deliver at least 10% RoaCE over the cycle, with all business areas delivering RoaCE above their cost of capital, remains in place. The 2025 strategy strengthens the robustness of the profitability roadmaps for each business area.

Contact details:

Investor contact:
Line Haugetraa
+47 41406376

Media contact:
Halvor Molland
+47 92979797

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

Attachment

• Capital Markets Day 2021 Presentation

FAQ

What are Hydro's new sustainability ambitions announced in 2021?

Hydro aims for net zero carbon emissions by 2050 and plans to launch a near-zero carbon aluminum product by 2022.

What percentage of adjusted net income will Hydro propose to distribute to shareholders?

Hydro aims to distribute 70-80% of its adjusted net income for 2021 to shareholders.

How did Hydro perform financially in 2021?

Hydro reported strong operational and financial performance in 2021, contributing to greater cash generation.

What is Hydro's strategy for low-carbon aluminum?

Hydro's strategy focuses on enhancing its low-carbon aluminum position and exploring growth opportunities in new energy.

What is the expected demand growth for aluminum semis outside China?

Demand for aluminum semis outside China is estimated to rise by 4% annually until 2030.