Norsk Hydro: Unique position in a new reality

14 Feb 2023 08:15 CET

Hydro entered 2022 on the back of the strongest aluminium markets in decades
following the aftermath of the Covid-19 pandemic. However, the year would soon
be dominated by a devastating war in Europe, an energy crisis, spiking inflation
and a global economic slowdown, including a significant fall in aluminium
demand. We are pleased to present Hydro's best financial result ever during what
turned into a challenging year.

The past year has once again shown us how fast things can change in our business
environment, how important it is to be robust and resilient, and not to lose
sight of the long-term opportunities.

Our people are the foundation on which we are built

Hydro's most precious asset is our workforce of 32,000 highly skilled and
engaged employees around the world. We see a direct link between the health,
safety and wellbeing of our people, our performance culture, and the progress of
our strategic agenda.

Coming out of the pandemic, we have seen an encouraging safety performance. The
2022 total recordable injury rate (TRI) was 2.4, which is a strong improvement
from 3.3 in 2021, and the lowest level ever reported in Hydro. The high-risk
incidents rate (HRI) improved to 0.8 in 2022, compared with 1.4 the previous
year. We cannot rest though. Ensuring a safe work environment is a continuous
job, which needs focus and attention by everyone, every day, at every shift.

A record year and a solid basis to meet uncertainty and pursue opportunities

In a turbulent year, we benefitted from our strong cost position and our
improvement efforts as well as from the high prices for aluminium and energy. We
delivered record results in 2022, with an adjusted EBITDA of NOK 39.7 billion
and a corresponding return on capital (RoaCE) of 22.2 percent, well above our
target of 10 percent over the cycle.

Much of this is attributed to our organization's solid improvement drive. In
2019, we launched an ambitious improvement program, delivering improvements of
NOK 7.3 billion annually by 2023. Last year we reached our target well ahead of
schedule and decided to increase our improvement ambitions to NOK 10 billion by
2025 and NOK 11 billion by 2027.

We also raised our commercial target by NOK 0.5 billion, already materializing
in the form of greener products, better product mix, higher margins and market
share growth, aiming to improve results with NOK 3 billion by 2027.

Our low and robust cost positions are on the thirtieth percentile within alumina
and at the seventeenth percentile in aluminium, with ambitions to further
improve. In an industry seeing a steeper cost curve, this can enable improved
margin generation going forward.

A competitive shareholder return is important to ensure that Hydro remains
attractive to investors. We are pleased to convey that the Board of Directors
proposes to allot 62 percent of adjusted net income in 2022, as a combination of
dividends and share buybacks.

Megatrends present new challenges and opportunities

Going forward, we see two megatrends which will have a great impact on our
business environment, posing new risks, but also opportunities.

First, we see a new geopolitical reality with increased rivalry between powers,
weaker global institutions, a decline in trust and increased polarization within
societies. This may have a significant impact on the global economy affecting
trade, economic cooperation, supply chains and global development.

The vulnerability in global supply chains was revealed by the pandemic and is
further amplified by the Russian invasion of Ukraine. In our view, proven long-
term security of supply, affordability and access to energy, minerals and
strategic materials will become an increasingly important strategic advantage.

Secondly, amid all the uncertainty going forward, one thing seems certain: We
see higher climate ambitions and greater attention to sustainability. These are
being turned into stronger regulations and business commitments, and higher
expectations to the industry among politicians and regulators. This is most
noteworthy though among customers, investors and financiers, and current and
potential new employees.

The current energy crisis has demonstrated how crucial access to affordable
renewable energy is for society and industry to succeed with the green
transition. Markets are increasingly concerned about how products are made, and
we expect sustainability frontrunners to be appreciated and preferred.

We are not only committed to contributing to change, but we are also committed
to drive change. More importantly, we increasingly see sustainability as our
path to profitability. We continue to pursue our strategy to strengthen our
position in low-carbon aluminium, as well as growing in new energy solutions.

Shaping and serving the markets for greener products

The transition towards net-zero emissions is expected to be a key driver for
aluminium demand towards 2030. Even in a challenging market, we expect 2.8
percent annual growth towards 2030, of which a large part is coming from the
automotive segments. Demand for recycled aluminium is expected to grow at double
the rate with an annual growth at 5.4 percent.

It is encouraging that demand for low-carbon primary aluminium is accelerating
and set to outpace the rest of the market at a 20 percent annual growth rate
from 2022 to 2030. In fact, we expect greener and recycled aluminium to make up
a majority of the EU and North American market by 2030.

In order to successfully deliver on our decarbonization strategies and achieve
our ambitions on shaping the market for low and near-zero carbon aluminium, we
have teamed up with frontrunners in the value chain to develop creative,
innovative and sustainable solutions. The strategic partnerships with Mercedes-
Benz and Polestar, and window solutions provider VELUX, enable smarter solutions
with a lower-carbon footprint.

In Extrusions, we grow together with our customers, particularly in the
automotive market segment, and have positioned Hydro CIRCAL to be the standard
bearer in building and construction. The decisions to build new extrusion
presses in Szekesfehervar (Hungary), Rackwitz (Germany) and Tønder (Denmark),
together with the acquisition of German building systems and extrusion business
Hueck, are firm steps to strengthen our position in important European growth
segments within automotive and construction.

Commitment to zero-emission aluminium

To strengthen our position, we aim to demonstrate not only ambitions and targets
related to sustainability, but real deliverables which have a positive impact
for the climate, the environment and the society at large.

We are pleased to see that the green transition is indeed on its way. The fuel
switch projects, changing energy sources from fuel oil and coal to natural gas
and electricity at our alumina refinery Alunorte, are progressing well. It is
especially encouraging that the significant reductions of greenhouse gas
emissions go hand in hand with reduced operating costs. In parallel, we are
developing and maturing the technologies needed to reach net-zero greenhouse gas
emissions in 2050 or earlier.

For existing primary aluminium plants, we aim to eliminate emissions through
carbon capture and storage, and are currently running test projects to verify
the efficiency at selected plants.

For new primary aluminium capacity, Hydro's technologists have worked for the
past six years to develop a breakthrough zero-emission technology, the
proprietary HalZero. We aim to construct a test facility to further mature the
technology concept, with a bold aspiration to deliver our first batch of HalZero
aluminium by 2026. Once CCS and HalZero are in place, it is finally realistic to
speak of zero-emission primary aluminium.

In addition, recycling will play a vital role in the transition towards a low-
carbon economy. For us, recycling represents an opportunity for new profitable
growth. Furthermore, recycling of post-consumer scrap is reducing the carbon
content in the products we bring to the market. We are excited that Hydro
produced its first prime quality, near-zero aluminium based on recycling of 100
percent post-consumer scrap in 2022.

We are encouraged by higher demand for recycled aluminium, strong margins and
attractive returns, and have a comprehensive project pipeline. Last year, we
made the decisions to establish new recycling capacity at Cassopolis, Cressona
and Henderson in the US, Rackwitz in Germany and Szekesfehervar in Hungary,
together with our bid to acquire the Polish recycling company Alumetal. These
are important steps for implementing our profitable growth ambitions.

In addition to addressing own emissions, Hydro has launched a new target to
reduce upstream scope 3 emissions per tonne aluminium delivered to the market by
30 percent by 2030. These are emissions produced by our suppliers, and the
target will be reached mainly through greener sourcing of raw materials and
metals.

Growing in new energy

Availability of renewable power is more critical than ever to meet global
climate targets. For Hydro, the contribution of Hydro Rein to bring forward more
power production is crucial. Hydro Rein has made significant progress during the
last year and are now executing four projects with contracted revenues amounting
to USD 2.7 billion. We continue our active process for raising external capital
for Hydro Rein.

Hydro Rein and Hydro Havrand are working together with the respective business
areas to contribute to strengthening their position in low-carbon aluminium
through renewable sourcing and decarbonization. Through Hydro Havrand, we aim to
produce green hydrogen that may replace the use of natural gas in our own
production and help external customers decarbonize their hard to abate
emissions.

We continue to pursue our ambition to take an active part in batteries and
energy storage solutions. Through our 30 percent stake in the graphite producer
Vianode, we are taking a role in the production of more sustainable raw
materials for electric vehicle batteries. The synthetic graphite materials from
Vianode will be produced with up to 90 percent lower CO2 emissions than today's
standard materials.

Europe's largest electric vehicle battery recycling plant, HydroVolt, a 50/50
joint venture between Hydro and Swedish EV battery producer NorthVolt, has now
been in commercial operation for almost a year.

Driving sustainability: Future-proofing our company

It is fundamental for every business to know its impact on nature and people,
and to protect and uphold human rights in local operations as well as in global
supply chains. This contributes to the health and livelihoods of people and
communities in times of transition. Responsible businesses will less likely
waste time and resources on crisis and conflict, and more likely get access to
new projects, new markets, the most attractive partners and win the battle for
the best employees.

Hydro has a 117 year history of partnerships in the communities we are a part of
and base our company on our values of Care, Courage and Collaboration. We are
committed to invest in education, support just transition by contributing to
economic and social development in societies where we operate, and ensure
transparency and responsible business practices in our supply chains.

In 2022, we were especially proud to open the new Technical School in Barcarena,
also benefiting Hydro by expanding and qualifying the local workforce. We also
continue to support the long-term collaborative platform Sustainable Barcarena
Initiative and programs for local entrepreneurship, education, health and
environmental initiatives.

We have also seen that by educating our suppliers in Pará, we are not only
ensuring that our own supply is sourced responsibly, we also enable our
suppliers to grow and become preferred suppliers to other businesses in Brazil.
This is truly a win-win situation for both Hydro and society.

Working to improve industry standards for human rights, transparency and
responsible production, we are engaging with a range of international
organizations. We are also a signatory member of the UN Global Compact and a
committed member of the Aluminium Stewardship Initiative (ASI).

On the environmental side, we are committed to reducing the footprint of our
mining operations, rehabilitate forests and protect biodiversity, and to
eliminate landfilling of recoverable waste by 2040.

Well positioned for future value creation

Facing a more unpredictable global economy and an urgent need to drive the green
transition, Hydro is well positioned to navigate through turbulence in the
short-term without losing sight of our strategic positioning for the long-term
opportunities.

We have a highly skilled and motivated workforce, low and robust cost positions
with ambitions to improve, a pathway to net-zero aluminium products through
targeted technology development, strong market positions and a portfolio of
profitable growth projects. We also have ambitious and concrete sustainability
targets integrated in our business strategy and operations.

This is all supported by a solid financial framework, ensuring financial
strength and flexibility, while also enabling competitive shareholder
distribution.

On this basis, we believe Hydro has a unique position to create value in a new
reality, developing industries that matter.

Investor contact:
Line Haugetraa
+4741406376
line.haugetraa@hydro.com

Media contact:
Halvor Molland
+47 92979797
Halvor.Molland@hydro.com

This information is subject to the disclosure requirements pursuant to Section
5-12 the Norwegian Securities Trading Act

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582305_Norsk Hydro ASA - Annual Report 2022.pdf