Edited Transcript of NVL.TO^E07 earnings conference call or presentation 7-May-20 11:30am GMT

ATLANTA May 8, 2020 (Thomson StreetEvents) — Edited Transcript of Novelis Inc earnings conference call or presentation Thursday, May 7, 2020 at 11:30:00am GMT

Novelis Inc. – Senior VP & CFO

Novelis Inc. – Director of IR

* Steven R. Fisher

Novelis Inc. – President & CEO

* Amit A. Dixit

* Pinakin M. Parekh

* Rajesh V. Lachhani

Greetings, and welcome to the Q4 FY ’20 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded Thursday, May 7, 2020.

I would now like to turn the conference over to Megan Cochard, Director of Investor Relations for Novelis. Please go ahead.

Megan Cochard, Novelis Inc. – Director of IR [2]

Thank you, and good morning or evening, everyone. Welcome to Novelis’ Fourth Quarter and Full Fiscal Year 2020 Earnings Conference Call. Hosting our call today is Steve Fisher, our President and Chief Executive Officer; and Dev Ahuja, our Chief Financial Officer.

Following the presentation, the call will be open to analysts and investors for questions. This conference call is being broadcast on the Internet at novelis.com in the Investors section. A replay of this call will also be available on our website.

Before I turn the call over to Steve, let me remind you that today’s earnings release and presentation include forward-looking statements as defined in the Private Securities and Litigation Reform Act of 1995. These statements are subject to risks and uncertainties. These risks and uncertainties include but are not limited to those factors identified in the release and in our filings with the Securities and Exchange Commission.

Today’s presentation also includes certain non-GAAP measurements. Reconciliation of these measurements is provided in the financial statements included with our earnings release as well as in the appendix of our presentation.

Now let me turn the call over to Steve.

Steven R. Fisher, Novelis Inc. – President & CEO [3]

Thanks, Megan. And again, good morning or evening, everyone, and thanks for joining us today. I hope you and your families are all safe and healthy as we navigate through these uncertain times.

Novelis delivered record adjusted EBITDA for the fourth consecutive year, achieving nearly $1.5 billion in EBITDA in fiscal 2020. These outstanding results were driven by our consistent strategy, strong culture and world-class operations as well as broadly favorable demand for lightweight, sustainable aluminum solutions across end markets. In addition to our record performance, we maintained a relentless focus on further improving our business fundamentals, increasing operational efficiency to deliver quality products and excellent customer service, which led us to another year of delivering 3.3 million tonnes of flat-rolled products as we operate near upper ends of our total rolling capacity range.

We continue to strengthen our balance sheet and our overall financial profile, ending the year with strong liquidity. This included a successful bond refinancing in January, which reduced interest expense and allowed us to minimize the Aleris refinancing risk through a $400 million upsizing. In addition to our excellent financial and operational performance, we further advanced our purpose of shaping a sustainable world together by making the right strategic decisions to grow our business and invest in our culture and communities, extending our position as the leading producer of flat-rolled aluminum products and the world’s largest recycler of aluminum. Based on the strategic ground work we’ve laid over the past several years, we have the confidence and financial stability to safely and successfully navigate the uncertain road ahead.

One of the key pillars of our strategy is to defend and maintain our core businesses. Novelis is the only FRP producer to offer high-end automotive products in the 3 major auto producing areas of the world, the only FRP player with a presence across 4 continents to supply beverage can customers around the globe and a diverse specialties footprint in capabilities that allow us to meet specific regional needs. Several years ago, Novelis implemented a balanced focus to support its operations, prioritizing safety while applying a back-to-basics approach towards manufacturing excellence and improving return on capital employed. This included strict adherence to preventive maintenance at the plants in order to reduce unplanned downtime as well as improve operational efficiency, product quality and recovery.

We have also continued to strive to be the partner of choice for our customers, delivering products and services that meet their demanding standards for quality and on-time delivery while working alongside them to innovate next-generation solutions at our customer solution centers. As the world’s largest recycler of aluminum, Novelis has invested in our recycling capabilities to secure our metal supply, manage costs and support the sustainability goals of our customers by utilizing high levels of recycled content. For fiscal 2020, the percentage of recycled content in our products was 60%, a significant increase compared to 49% just 5 years ago.

The second tenet of our strategy is optimizing our product portfolio. This means growing in value-added categories like automotive and high-end specialties while exiting lower-value businesses. At the same time, we have maintained a strong presence in our core beverage can business. In fiscal ’20, can represented 66% of our shipments, providing a resilient backstop, as can is historically a more recessionary-resistant end market and strong cash generator. Looking forward, with the acquisition of Aleris, we have further diversified our portfolio with the addition of high-value aerospace and expanded specialties capabilities.

Lastly, we have strategically looked for growth opportunities to continue to expand our leadership position and capabilities. We remain committed to our 3 major organic expansions underway. These projects include new automotive finishing lines in the U.S. and China, which combined will add approximately 300 kilotonnes of additional automotive finishing capacity; as well as the rolling and recycling capacity expansion underway at our Pinda plant in Brazil.

As our expansion in Brazil continues to progress with commissioning expected in fiscal ’22, we will slow the ramp-up of our new automotive finishing facilities in Guthrie and Changzhou. While customer contracting for this new automotive capacity continues, many new vehicle launches have been delayed as a result of reduced demand and customer shutdowns related to COVID-19. As a result, we have decided to slow the commissioning of these plants until the second half of this fiscal year to align with demand and reduce costs, but we are prepared to ramp up sooner if customer demand accelerates. In parallel, we remain focused on our efforts to integrate Aleris’ employees and assets into Novelis. Bringing our companies together will drive synergies and value and introduce expanded product offerings and innovative ideas for new and long-standing customers.

Turning to Slide 5. While there is much uncertainty regarding COVID and its impact on the economy, let me share with you the actions Novelis has taken in response to the pandemic to help ensure safety and business continuity. Without a doubt, our top priority is to ensure the safety, health and well-being of our employees, our facilities and our communities. To that end, we quickly bolstered our protocols and aligned them with guidance from global health authorities and government agencies across our operations to ensure the safety of our employees, customers, suppliers and other stakeholders.

On the operational side, we’ve had to, at varying times, temporarily or partially shut down some of our plants across regions due to customer shutdowns or reduced demand or by government decree. We have also had to adjust plant schedules in line with customer demand. While this reduction in demand does not support moving forward with our automotive expansions as originally planned, we are actively controlling costs in the meantime.

A number of cost-cutting actions have been identified to help mitigate the recent downturn in sales. We are targeting approximately $250 million in cost reductions between operating fixed costs, SG&A and R&D, and we remain ready to take further actions based on longer-term customer demand trends. We are also strengthening our financial position by prioritizing CapEx spend, reducing it by approximately $100 million compared to last year. We also continue to proactively ensure we have strong liquidity, having ended fiscal 2020 with $2.6 billion.

Lastly, pinpointing end market demand is difficult in this fluid situation, and we continue working closely with our customers to adjust production based on their sales forecast. Let me provide a few comments on what we are seeing in the near term in our key end markets. Starting with beverage can.

This has historically been a relatively recession-resistant product, and it is expected to remain resilient in North America and Europe. In Asia, trade restrictions between countries is limiting our ability to export products from Korea while Asia as well as South America are facing challenges related to reduced tourism, fewer public events and gatherings and lower consumer spending as economic uncertainty grows.

The automotive industry, in particular, has taken a significant hit from the slowdown resulting from the COVID-19. Due to stay-at-home orders across North America and Europe, combined with an increasingly high number of people filing for unemployment, automakers, auto manufacturers are not selling vehicles at expected levels. All of the major U.S. and German automakers temporarily ceased production in March, but we expect them to restart this month.

Meanwhile, in China, we matched temporary production shutdowns in line with our auto customers in February with operations slowly resuming in March. We see some pockets of opportunity as a result of Europe’s supply chain disruptions and are encouraged by the growing demand for SUVs and EVs in the domestic market. While auto customer restarts are a positive sign, more broadly speaking, it is unclear how global recession concerns will impact overall near-term demand.

Demand for specialty products has been impacted since late March by temporary customer shutdowns, whether due to government stay-at-home restrictions or reduced demand. In aerospace, we are seeing significantly reduced production as consumer travel is expected to drive lower demand into next year. While COVID-19 has upset demand in the short term, our long-term outlook, strong financial profile, diverse product mix and footprint puts Novelis in a position to successfully weather the storm.

Before I turn the call over to Dev, let me spend a few minutes commenting on our recent acquisition of Aleris. Turning to Slide 6. We completed the acquisition of Aleris on April 14 and have begun integrating the business into Novelis. This is an exciting strategic acquisition that will drive significant synergies and many long-term benefits for our customers and the industry. While we would have liked to retain their automotive business, we have acquired a strategic set of assets and a talented workforce that complement Novelis’ global footprint and capabilities.

We can also leverage our deep manufacturing and recycling expertise and our experience ramping up new assets to drive additional operational efficiencies. The addition of Aleris provides entry into the high-value aerospace industry, one of the most technically demanding end markets, giving Novelis a strong leg up in a new field for the company. It will also allow us to enhance our sustainability focus with the addition of a high-recycled-content building and construction business as well as complement and enhance our existing operations in Asia. Additionally, the acquisition met or exceeded all of our financial requirements, leading to a strong pro forma financial profile that we expect to drive approximately $150 million in synergies.

Looking ahead, our main priority is the safety of our employees and the integration of our new facilities. We will also continue to work to divest the Duffel and Lewisport plants in Belgium and the U.S. We do not have a specific closing schedule for the sale of Duffel, which is subject to approval by the Chinese antitrust authorities, but the current best estimate is late first fiscal quarter.

In the U.S., given the challenging macro environment due to COVID-19, we are working with the U.S. Department of Justice to ensure that we have sufficient time to find a buyer that will value the strategic opportunity of acquiring Lewisport. We do not have a specific time line to share at this time. Until Lewisport and Duffel are sold, these assets will be ring-fenced, removed from pro forma financial statements and disclosed as discontinued operations in our financial results.

I now like to turn the call over to Dev for a more detailed review of our financials.

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Devinder Ahuja, Novelis Inc. – Senior VP & CFO [4]

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Thank you, Steve, and good morning or good evening. As a quick reminder, before I get started on Page 8, with the acquisition of Aleris complete in April, the financial results for the periods ending March 31 on the next few slides pertains to Novelis before the acquisition.

We reported net income attributable to our common shareholder of $63 million in the fourth quarter of fiscal 2020. Excluding tax-affected special items in both years, as outlined in the back of our earnings press release today, net income increased 18% to $153 million. The largest of the special items in the fourth quarter of fiscal 2020 is a $71 million pretax loss on extinguishment of debt related to our bond refinancing in January.

Net sales decreased 12% versus the prior year to $2.7 billion driven by lower average LME aluminum prices and local market premiums and a 7% decline in shipments. Total flat-rolled product shipments of 811 kilotonnes are below prior year in all markets — all end markets. While the current year quarter did have some relatively small initial impacts related to COVID-related customer shutdowns, the decline is more so related to an unusually strong prior year quarter in can and specialties.

In the prior year, U.S. specialties customers had ramped up purchases to ensure availability after the enactment of countervailing duties against imports. In can, there was some supply chain stocking related to Brexit as well as some other nonrecurring spot opportunities in Europe and North America.

Adjusted EBITDA increased 7% to $383 million. However, current quarter results include the favorable timing benefit related to a full year $29 million customer contractual obligation associated with full year fiscal 2020 results. This is a full year true-up taken entirely in the fourth quarter. Had this $29 million credit been booked evenly throughout the fiscal year, fourth quarter adjusted EBITDA would have increased approximately 1% versus the prior year.

As you can see in the EBITDA bridge of reported results, the impact of lower shipments was more than offset by favorable price and mix, which includes the full year customer credit benefit and lower operating cost driven by favorable metal costs and other cost efficiencies such as more optimized freight. Foreign exchange contributed another $10 million benefit, mainly due to favorable year-over-year hedged rates in Brazil. Lastly, the SG&A, R&D and other favorability is due mainly to lower employment costs.

Slide 9 provides highlights for the full year. Net income attributable to our common shareholder was $420 million. Excluding tax-effected special items, net income increased 26% to a record high $590 million. Net sales were down 9% versus the prior year to $11.2 billion, driven by lower average LME aluminum prices and local market premiums.

Total flat-rolled product shipments were in line with the prior year at 3,273 kilotonnes. Significantly higher can shipments were offset by lower specialty shipments due to slightly softer demand as compared to the prior year and portfolio optimization efforts. Despite flat shipments, adjusted EBITDA increased 7% to a record $1.47 billion, resulting in an average EBITDA per tonne of $450 for the fiscal year compared to $418 per ton in fiscal year ’19.

As you can see in the bridge, the improvement in EBITDA is driven primarily by portfolio optimization efforts and favorable pricing mainly in the U.S. specialties market earlier in the year. Cost efficiencies were partially offset by less favorable benefits from recycling due to consistently lower aluminum prices through the year. Foreign exchange contributed a positive $17 million benefit, mainly due to favorability between hedged rates in Brazil this year versus last. Lastly, SG&A, R&D and other costs were favorable and due mainly to some tax rulings earlier this year and lower employment costs.

Now let’s turn to free cash flow on Slide 10. Fiscal year ’20 free cash flow before capital expenditures increased 30% versus fiscal year ’19 to $983 million. This is mainly the result of higher adjusted EBITDA and a lower outflow of working capital. Capital expenditures in fiscal 2020 increased to $599 million, primarily to support ongoing capacity expansions in the U.S., China and Brazil.

A majority of our cash outlay in major expansions is already behind us. With further actions to preserve liquidity and cash, we will reduce fiscal year ’21 CapEx by approximately $100 million versus fiscal year ’20. We remain committed to completing our organic growth projects and are prioritizing capital spending to ensure Novelis can continue to drive sustainable growth. On a stand-alone basis, we reduced our net leverage ratio to 2.1x at fiscal year-end as compared to 2.5x at the end of fiscal 2019.

Turning to Slide 11. We also reported a very strong March 31 total liquidity position of $2.6 billion. In March, we drew approximately $555 million of borrowings under our ABL revolver as a precautionary measure to increase our cash position and preserve financial flexibility. The March 31 liquidity levels also included $400 million raised through our January bond refinancing, where we refinanced and upsized our previous $1.15 billion senior notes due 2024 with a 10-year $1.6 billion senior notes offering. We utilized this $400 million as well as other debt funding previously in place to close the Aleris transaction on April 14. Our current liquidity position at the end of April was approximately $2 billion.

Now with this, I’d like to turn the call back over to Steve.

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Steven R. Fisher, Novelis Inc. – President & CEO [5]

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Thanks, Dev. And again, in summary, we are well positioned after 4 consecutive years of record results and generating stand-alone adjusted EBITDA of $1.5 billion and nearly $1 billion of free cash flow before capital expenditures in fiscal 2020.

Novelis’ durable business model and strong net leverage and liquidity levels have put us in a favorable place to sustain operations and critical investments during challenging economic times while we integrate Aleris into the business. We are intensely focused on what we can control during these times of uncertainty and are taking all appropriate actions to protect our employees and our business for the long term.

With that, we are happy to take any of your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Matthew Fields with Bank of America.

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Matthew Wyatt Fields, BofA Merrill Lynch, Research Division – Director [2]

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Congratulations on closing the acquisition. I know it’s a long time coming and a lot of iterations and a lot of work. Just sort of a couple of details on that.

I know you guys have on the slide there that the sort of the funding is the $775 million term loan, the $1.1 billion unsecured facility and then a mix of ABL and cash. Can you possibly give us detail about that mix? Is it $400 million of cash and then the rest is ABL? I think in the 2030 doc, you said it was a $350 million ABL draw, but I think you need a little more, maybe like $500 million, to get the balance of the $2.8 billion.

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Devinder Ahuja, Novelis Inc. – Senior VP & CFO [3]

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All right, Matt. So let me just give you an overall view of all the sources and how we use the funds. So stepping back on the specific $400 million, just to go back into January. We did a $1.6 billion bond issue that had a component of $400 million, and that $400 million was part for the purpose of closing the Aleris deal. And that, we used when we did the closing on April 14. So that $400 million went away in that.

So basically, we closed the deal with an equity payout — with an equity portion of $825 million. And just as a reminder, the equity consideration baseline was $775 million. We also had to add $50 million, which was the additional payout because of the much better performance in North America, which was one of the deal conditions that we had, right? So that was funded with $775 million 5-year term loan and another $50 million which we funded from our liquidity.

And then the rest, the $1.1 billion was really a bridge loan. We took over a few of their small debts, like the ABL — so once again, the ABL was combined with our ABL. We had upsized our ABL from $1 billion to $1.5 billion, and that helped us to pay out the $350 million approximately of their ABL which we took over. So that was the third component. The $1.1 billion was a residual component along with about $150 million of other debt in China, right?

So the way to summarize this would be that we basically took over debt between notes and term loan of $1.1 billion. We took over their ABL of approximately $350 million. We paid them an equity consideration of $825 million, and that is what it was. So basically, that was all sourced from $1.1 billion plus the $775 million of debt, the rest being using some of our cash. I hope that it provides you the outline on all the flows of funds.

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Matthew Wyatt Fields, BofA Merrill Lynch, Research Division – Director [4]

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Yes, that’s helpful. Maybe just to sort of put a lid on it. What’s the ABL balance post closing?

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Devinder Ahuja, Novelis Inc. – Senior VP & CFO [5]

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I will not give you a specific balance of ABL post closing. All that I can say is that we drew $555 million on — after COVID, in the March 31 balance, we had withdrawn $555 billion just to fund our liquidity, and our total ABL facilities are $1.5 billion. And we have — I mean a broad range would be like availability of $1.2 billion, of which we drew substantial part of it at the end of March.

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Matthew Wyatt Fields, BofA Merrill Lynch, Research Division – Director [6]

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Okay. And then you mentioned that you still need approval from the Chinese authorities on the Duffel plant. Why do the Chinese authorities need to approve that transaction if it’s in Europe? Are you able to provide…

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Steven R. Fisher, Novelis Inc. – President & CEO [7]

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Yes, in order to obtain the — yes, Matt. In order to obtain the Chinese regulatory approval on the full transaction of acquiring Aleris, there was competition concerns between sales coming out of the Duffel plant and sales of auto inside of China from our facility. And so as a remedy, since we had already offered Duffel in the European Union — or European Commission for approval, we also offered up the remedy of Duffel in China, which allows the Chinese regulatory authorities to also approve the buyer of Duffel.

So the same thing the European Commission went through. They just do not start that process until after the European Commission finishes. And we feel very confident that they will approve Liberty House as the buyer.

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Matthew Wyatt Fields, BofA Merrill Lynch, Research Division – Director [8]

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Okay. All right. I appreciate the color on the auto plants restarting this month. On the aerospace side, a couple of your peers said that they expect shipments to be down this calendar year about 20%, 25%. Another one said 20% to 30%. I know you’re only a few weeks into the aerospace business, but do you see a similar type of trend? Or can you comment on that?

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Steven R. Fisher, Novelis Inc. – President & CEO [9]

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Yes, it is early. It’s early for anyone to be predicting exactly where it’s going to go in the near term, the medium term, but those ranges are probably appropriate ranges that we’re seeing. But it’s still early.

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Matthew Wyatt Fields, BofA Merrill Lynch, Research Division – Director [10]

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Okay. Great. And then lastly, given the uncertainty around COVID-19, is there a change to kind of the way you think about pro forma net leverage targets post the Aleris transaction?

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Devinder Ahuja, Novelis Inc. – Senior VP & CFO [11]

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All right. Let me take that, Matt. So here’s the thing. So if you take the pro forma net leverage, using the December trailing 12 months of both the companies, which is the last published numbers of Aleris, we will be at 3.3x. So taking the debt on close, we would be at — taking the Aleris debt on close, we will be at 3.3x.

Now we will be generating positive cash flow in this year. Again, even on a combined basis, we will be generating positive cash flow. The point about the ratio is the denominator. And obviously, this year is a very, very abnormal year when it comes to the EBITDA denominator, and it is difficult to talk about that at this time with all the given uncertainties.

What we can tell you is that we will generate positive cash. We will further reduce net debt in the year. The denominator for the purpose of the ratio is something to be figured out. So as a reminder, what we have said at the time of deal closing is that we will not exceed 4 at peak at close and we will come to less than 3 within 2 years. And against that 4, why don’t you think about 3.3 as a number at which we are closing based upon the December pro forma.

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Matthew Wyatt Fields, BofA Merrill Lynch, Research Division – Director [12]

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I appreciate that color. Congratulations again, and good luck starting the integration process.

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Devinder Ahuja, Novelis Inc. – Senior VP & CFO [13]

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Thank you, Matt.

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Steven R. Fisher, Novelis Inc. – President & CEO [14]

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Thank you.

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Operator [15]

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Our next question comes from the line of Rajesh Lachhani with HSBC.

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Rajesh V. Lachhani, HSBC, Research Division – Analyst [16]

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So first on Lewisport. So while you said that you have requested the U.S. authorities to extend the time line for the sale of Lewisport, what is the current time line? And how much do you expect it to be extended? Secondly, what is the valuation you’re expecting for Lewisport given the current macro environment?

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Steven R. Fisher, Novelis Inc. – President & CEO [17]

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Yes. So there’s no clear guidance necessarily from the Department of Justice as it relates to timing. Typically, they hope to accomplish asset divestitures and remedy situations in a relatively short period of time. We understand that to be somewhere in the 3 to 5 months. Clearly, they also understand the current environment with stay-at-home orders, and ability to execute in the short term is difficult for any company to do at this point in time. We expect, as we finalize the order coming out of the Department of Justice, to get somewhere in the 9- to 12-month time frame to execute the sale of Lewisport, which we believe and hope that, that will provide for really the ability for the appropriate valuation of this very, very strategic asset.

And as far as valuation goes, it’s just too early to provide anything further on that. We find — the asset, we obviously fought very hard to keep it. It’s had a lot of investment going to that asset over the past several years of, I think, approximately $450 million. And we believe in the right hands, it will be a very strategic asset. And so we’ll just have to go through the process and keep you updated as we learn more.

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Rajesh V. Lachhani, HSBC, Research Division – Analyst [18]

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Understood. But Steve, any guidance on what is the current EBITDA that we can attribute to Lewisport?

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Steven R. Fisher, Novelis Inc. – President & CEO [19]

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Yes. Not — we don’t — we’re not going to give out plant-by-plant EBITDA levels. If you go back to when we announced the transaction, what we did say at that point in time is that when Lewisport is fully ramped up and sold both of the auto finishing lines out, that we — Novelis believed it would be running at about $120 million of EBITDA per year. Clearly, they’re not fully ramped up at this point in time so that’s not reflected in their numbers that they are reporting, which have been very strong. As of their calendar year — or fiscal year 2019 numbers showed $388 million of EBITDA. So that’s about as far as the guidance that we’re going to be able to provide as it relates to Lewisport at this point in time.

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Rajesh V. Lachhani, HSBC, Research Division – Analyst [20]

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Understood. And on the automotive lines that you have, you have shut down some of the lines. Can you give us more clarity on how much capacity is currently operating? And what is the shutdown — the capacity that is shut down? And how much impact do you currently assess considering the current situation? We know there’s lots of uncertainty. But for CY ’20, what would be the impact on the automotive volumes?

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Steven R. Fisher, Novelis Inc. – President & CEO [21]

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Yes. So as we said in our prepared remarks, the vast majority, if not all, of the North American and European auto OEMs have shut facilities down in the middle of March and have signaled at least to begin production again at a moderated probably pace at the beginning some time in this month, probably mid-month to kind of later part of the month. So obviously, in North America and Europe, we’re significantly impacted. We’ve had to, because of the reduced demand, reduce shift patterns significantly at our auto producing facilities, Oswego, Sierre and Nachterstedt — Oswego in the U.S. and Nachterstedt and Sierre in Europe.

Still to be seen where — overall, how quickly the recovery comes. We can point to China, where China went through the COVID-19 impact first. And the March order book came back relatively strong, and we continue to see that into the first quarter. So it’s an area where we’re going to have to work with our customers to understand and be in a position to ramp up as appropriately as they come back up and then, on a long-term basis, really understand what the real demand is on the ground after everyone gets through COVID-19.

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Operator [22]

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Our next question comes from the line of Amit Dixit with Edelweiss Financial.

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Amit A. Dixit, Edelweiss Securities Ltd., Research Division – Financial Analyst [23]

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Congratulations for a good

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completing the Aleris transaction. So by

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you would see $29 million one-off item. Can

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across the geographies? Or is it concentrated only in one geography?

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Steven R. Fisher, Novelis Inc. – President & CEO [24]

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So you’re breaking up a little bit. I think you’re asking — maybe ask the question one more time. We believe you’re asking about the $29 million but that’s about all we got, in the fourth quarter.

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Amit A. Dixit, Edelweiss Securities Ltd., Research Division – Financial Analyst [25]

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Yes. Am I

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Steven R. Fisher, Novelis Inc. – President & CEO [26]

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Dev, do you want to just talk about the $29 million.

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Devinder Ahuja, Novelis Inc. – Senior VP & CFO [27]

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So yes, I can talk about the $29 million. We lost your voice in between. But really, just to step back on this. So this was a booking that we did for the entire year because we crystallized a customer obligation which was linked to them picking up a certain amount of volume, which they were unable to do so. But the gap between the minimum committed volume versus the actual volume at the end of the year was the trigger for us to take this $29 million benefit.

We had to wait until the end of the year because there was no way we could have known what would be the final outcome. And ideally, this should be spread over — almost evenly through the year, so roughly about $7 million a quarter, if you like. But really, for the reason that I mentioned, we had to take it at the end of the year. So in short, a contractual obligation cumulatively taken in the fourth quarter of the fiscal.

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Operator [28]

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Our next question comes from the line of Indrajit Agarwal with CLSA.

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Indrajit Agarwal, CLSA Limited, Research Division – Research Analyst [29]

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Carrying on from the previous question. So this true-up, was it concentrated only in Europe? Because Europe is where we have seen EBITDA jump massively this quarter versus last quarter. Or is it in every geography we can attribute?

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Devinder Ahuja, Novelis Inc. – Senior VP & CFO [30]

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Yes, it is concentrated in Europe.

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Indrajit Agarwal, CLSA Limited, Research Division – Research Analyst [31]

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All right. That is helpful. Second question is, if you can throw some color on scrap spreads. How has it been this quarter versus previous quarter? And how are the spot spreads versus what we have seen in the last quarter?

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Devinder Ahuja, Novelis Inc. – Senior VP & CFO [32]

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Scrap spreads have generally been positive, steady and positive. So the positive trend of scrap spreads continued all through the year. There were no major volatilities. It was all really positive, I would say.

The thing to remember, though, is that with a positive spread, we did have to take some beating on the metal prices. The metal prices went down, as you know, and particularly some of the premiums, like the U.S. premiums dropped sharply. So in terms of dollar benefit, we did have to take a beating on the dollar benefit. But in some cases, we got some better spreads and were able to offset it.

As you will see from the EBITDA per tonne, despite the pressure on metal prices, we were able to really sustainably deliver the EBITDA per tonne all through the year at very good levels. So that gives you an indication of what I’m trying to tell you.

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Indrajit Agarwal, CLSA Limited, Research Division – Research Analyst [33]

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Sure. But my understanding was based — the LME is almost back to back hedged. That does not impact our EBITDA. And whatever the physical premium reduction is there, that is reflected in metal price lag. So adjusted EBITDA will not have any of these 2 impacts. Is that understanding correct?

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Devinder Ahuja, Novelis Inc. – Senior VP & CFO [34]

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No, I think that you are missing 2 things. When it comes to LME hedge, that is for metal purchase. The scrap spread is a different matter. The scrap spread, there is not much we can do in terms of hedging scrap spread. So there, we do get exposed.

And as I was saying earlier, premiums, it’s also something to remember. So in premiums, there is no hedging — there is no hedge market except very little bit in North America. So that’s something to keep in mind.

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Indrajit Agarwal, CLSA Limited, Research Division – Research Analyst [35]

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All right. That is helpful. Last one for me. So you have guided for — just to confirm, you have guided for $100 million lower CapEx in FY ’21 versus FY ’20. Is that correct?

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Devinder Ahuja, Novelis Inc. – Senior VP & CFO [36]

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Correct.

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Indrajit Agarwal, CLSA Limited, Research Division – Research Analyst [37]

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And no guidance on volumes at this point?

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Devinder Ahuja, Novelis Inc. – Senior VP & CFO [38]

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No. It’s really difficult in this situation to give any volume guidance.

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Operator [39]

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Our next question comes from the line of Sumangal Nevatia with Kotak Securities.

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Sumangal Nevatia, Kotak Securities (Institutional Equities) – SVP [40]

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First question is with respect to the difference between EBITDA and adjusted EBITDA. Now if you see the reported EBITDA, we’ve not really grown in the year. But on adjusted EBITDA, we do see around $100 million growth. Now a large part of that is coming from restructuring impairment and also business acquisition and integration cost related, which is, put together, around $100 million of adjustment. So just want to understand what exactly are these. And do we expect these costs to discontinue now going forward from FY ’21?

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Devinder Ahuja, Novelis Inc. – Senior VP & CFO [41]

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Well — so the cost of restructuring was related to some work that we did in Europe in order to close down our German Ludenscheid plant. So that was really what went behind the restructuring cost.

Now restructuring costs always happen when we decide to rationalize a facility or sort of really do something to optimize product mix and so on. So these are not really predictable. These are opportunistic. We keep looking at opportunities in this direction.

But if you really see what happened between the EBITDA and the adjusted EBITDA, this restructuring was one, then metal price lag was the other. So as I was alluding to earlier, metal price did drop during the year, premiums did drop sharply. So we took a hit on metal price lag of almost $38 million for the full year.

And then there were the Aleris-related transaction costs. That was the third big element. You can see the $63 million there. Most of it is really the cost related to Aleris, which are not capitalizable costs. So these are the 3 big buckets in which you have to understand the gap between the EBITDA and the adjusted EBITDA.

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Steven R. Fisher, Novelis Inc. – President & CEO [42]

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And so if you think about recurring, nonrecurring, of course, the Aleris will not continue to recur. We’ve got some integration in this year so that will go away. Metal price lag is determined based on directional prices, though the prices, as low as they are today, it’s hard to see that to be a negative. And of course, restructuring, as Dev said, is going to be more opportunistic.

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Sumangal Nevatia, Kotak Securities (Institutional Equities) – SVP [43]

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Understand. And just curious, what sort of cost would we have incurred in FY ’20, and that is before the deal, with respect to some regulatory costs, et cetera? So with regard to Aleris, $63 million…

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Steven R. Fisher, Novelis Inc. – President & CEO [44]

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I didn’t catch that. Can you repeat?

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Sumangal Nevatia, Kotak Securities (Institutional Equities) – SVP [45]

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Yes. I’m just curious to understand the — yes, yes, yes, sorry. So the $63 million business acquisition cost you said is with respect to Aleris. So what sort of cost we would have incurred in FY ’20 with respect to Aleris? Is it with respect to some regulatory approval cost or something?

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Steven R. Fisher, Novelis Inc. – President & CEO [46]

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Yes. The majority of the cost that you would see in the FY ’20 period would be associated with the regulatory, antitrust, both the arbitration with the Department of Justice and trying to get clearance with the European Commission as well as the sale process for Duffle. There also would be some expenditures in there associated with integration as well. But the majority would be related to the antitrust work.

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Sumangal Nevatia, Kotak Securities (Institutional Equities) – SVP [47]

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Understood, understood. Okay. My second question is with respect to volumes. I missed the opening remarks, but is the understanding right that, at least on the beverage can, our volumes are quite intact and the main segment where we are facing headwinds with respect to COVID-19 is auto segment?

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Steven R. Fisher, Novelis Inc. – President & CEO [48]

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Yes, correct. We think — can has been very strong for us in fiscal ’20, and we continue to see that as a product that will be much more recessionary-resistant than other products, such as auto and aerospace. We’ve seen that in the past in ’08/’09 and continue to feel good about that as a base part of our business.

Where we’re seeing the impact associated with the current market conditions related to COVID-19 is clearly in the auto space, where North America and Europe auto manufacturers have basically shut down all their manufacturing facilities since the middle of March and are looking to restart middle of May and into early parts of June. And then the other is in the aerospace market, where, on a go-forward basis, now that we’ve acquired Aleris, we anticipate a much slower build rate associated with airplanes due to the overall market conditions for the airlines right now.

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Sumangal Nevatia, Kotak Securities (Institutional Equities) – SVP [49]

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Okay, Steve. And what — any color on the other segments such as specialty and truck and trailer, et cetera, which we’ve got from Aleris?

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Steven R. Fisher, Novelis Inc. – President & CEO [50]

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Yes. I mean specialty is a mixed bag. It’s much more regional-based, very specific to each product, too. We saw strong market conditions through really the end of March into COVID. There’s been situations where certain customers’ plants have had to be shut down because of COVID, which has caused demand reduction.

And we still are evaluating what overall demand looks like as everyone gets back to a normal environment. So it’s hard to really predict as we start to come out of COVID and give you any more specific guidance than that.

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Sumangal Nevatia, Kotak Securities (Institutional Equities) – SVP [51]

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Understood. And just last one with respect to beverage can. I mean we do read that off-premise sales of beverages are quite strong in U.S. and Europe. Now do we — I mean when we are shutting the auto lines in Oswego and Kingston, do we have the flexibility of producing more beverage can in these lines? Because I believe some of these lines earlier was beverage can lines.

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Steven R. Fisher, Novelis Inc. – President & CEO [52]

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Yes. You can’t turn them on and off immediately. But yes, for instance, at our Oswego facility in upstate New York, that has served beverage can in the past, and in that case, we’re able to shift some production levels where we have demand for it to those. But also understand that the can makers are running at full capacity as well. So it’s not as though — just because can demand is strong, trying to push it through the entire supply chain is also going to be a challenge as well. And then also in Europe, we’ve had the ability to ramp up some of our can capacity as well to help out where we’ve seen other issues in the supply chain from our competitors related to some ability to get can supply to our customers.

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Sumangal Nevatia, Kotak Securities (Institutional Equities) – SVP [53]

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Okay. Understood. Just the next question is, with respect to auto contracts, can you just explain a little bit better? I mean our FY ’20 — ’21 contracts as well have some take and pay — take-or-pay clauses in between. So eventually, we will have some offset to the volume loss. I mean what are the force majeure clauses, et cetera? Is it possible to share some color on this?

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Steven R. Fisher, Novelis Inc. – President & CEO [54]

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Listen, I mean, what we do with our customers is we reserve capacity for our customers and over long periods of time for auto. But this is an unprecedented situation that we all find ourselves in, and we need just to work with our customers right now and work through what this looks like and what the demand is. And we’re not going to get into specifics around what that looks like from a contractual basis. The first thing first is to understand what the market looks like and understand how we can best serve our customers, and that’s what we’re focused on right now.

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Sumangal Nevatia, Kotak Securities (Institutional Equities) – SVP [55]

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Understood. If I may just ask one last question with respect to employee costs. And what is the annual employee cost? Because the selling expense, which includes employee costs, around $500 million, looks to be less. So I believe there’s some amount of employee costs also included in COGS. So if you could just share that.

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Devinder Ahuja, Novelis Inc. – Senior VP & CFO [56]

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Well, let me say this, that employee cost all together for the company is in the range of $1 billion. We would not like to share too much specific information about costs. But if your question is towards flexibility in cost, I mean, I can just give you a directional answer on that, to say that we are working with plans which will help us to optimize about — or save about $250 million of our overall cost.

So I would rather tell you that than giving you information which we normally don’t share in public space. So that’s really what it is.

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Operator [57]

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Our next question comes from the line of Ashish Kejriwal with IDFC Securities.

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Ashish Kejriwal, IDFC Securities Limited, Research Division – Research Analyst [58]

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Sir, my question is on CapEx guidance, which you said that the CapEx guidance for FY ’21 is $100 million lower than FY ’20. But including Aleris, what should be our guidance for CapEx in FY ’21? And how can you get into…

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Devinder Ahuja, Novelis Inc. – Senior VP & CFO [59]

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So without giving the — as we said in our prepared remarks, that this whole discussion is going to be about Novelis stand-alone. At the right time, after the first quarter, we will be talking about Aleris. But if you go back to the Aleris releases, you can really see what their annual CapEx is, and you can make some conclusions from that.

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Ashish Kejriwal, IDFC Securities Limited, Research Division – Research Analyst [60]

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Okay. And secondly, sir, in our last call, you have given a sustainable EBITDA per tonne guidance of $420 to $440. Obviously, after that, COVID-19 had hit. So — but going forward, even excluding FY ’21, do you think that going forward, that is in FY ’22 when things normalize, we still are able to achieve that kind of EBITDA per tonne?

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Devinder Ahuja, Novelis Inc. – Senior VP & CFO [61]

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Yes. In a normal market situation, pre-COVID, I would have said that I hold the same guidance, we hold the same guidance of $420 to $440, fluctuations between quarters. But we’ll just have to cross through this COVID year. And after that, everything — in a normal situation, I would still say that, that should be the guidance.

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Ashish Kejriwal, IDFC Securities Limited, Research Division – Research Analyst [62]

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Okay. And sir, lastly, on beverage can demand. Because demand is still strong, is it possible to say about the global market demand — can we see some kind of growth in volume in beverage can which can offset somewhat losing volume in auto?

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Steven R. Fisher, Novelis Inc. – President & CEO [63]

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There will be pockets of opportunities of growth. I don’t know that you should be forecasting on a global basis a significant increase associated with it. What we’ve said is it’s a very recessionary-resistant product. We do think it will — it holds up in these periods where people take home beverages and consume in different patterns than maybe they do in a normal economy or normal situation. I think it’s just too early to say one direction or another in the near term.

Longer term, we see growth in beverage can. There’s no doubt about it. We see the sustainability trend, and we believe that aluminum beverage can packages coming in all sorts of sizes is the most sustainable package out there. And we do see long-term growth here. But in the near term, it’s — I think where we want to be positioned is recessionary-resistant and certainly will hold us up during this difficult period that we’re going to go through.

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Ashish Kejriwal, IDFC Securities Limited, Research Division – Research Analyst [64]

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Fair enough. And sir, lastly, one more question. You said that — in our flexibility in fixed cost and we are targeting $250 million of savings in FY ’21. Is it possible to share the base, which — what it was in FY ’20?

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Devinder Ahuja, Novelis Inc. – Senior VP & CFO [65]

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No, we would not share the base. That’s not information that we would give out in public space. But I think that if you just look at the P&L and triangulate a $250 million savings, it’s, I think, good information for any kind of modeling that you may want to do.

I gave you 2 indicators. I told you that employee cost is of the order of about $1 billion. And it’s not entirely inflexible because there is some flexibility to cut on — over time, there is some flexibility to cut on other variable contract costs, et cetera. So even in that, there’s some flexibility. But overall, we would just like to share what is the target cost cut that we are having for this year.

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Operator [66]

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Our next question comes from the line of Pinakin Parekh with JPMorgan.

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Pinakin M. Parekh, JP Morgan Chase & Co, Research Division – Associate [67]

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A couple of questions. My first question is that when we complete the divestment of the Duffel and Lewisport plants, the company would still have access to the cash flows that are accrued on generally in those businesses, right, even though it would essentially be shown in the P&L as either assets held for sale or discontinued operation?

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Devinder Ahuja, Novelis Inc. – Senior VP & CFO [68]

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The answer is yes. It will not be part of our core EBITDA. It will not be part of the adjusted EBITDA. It will be in the net income. The results will be in the net income, and the cash flow is all going to belong to us. So it will all be known as results from discontinued operations, to be clear, as I said in my prepared remarks, as Steve also mentioned.

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Pinakin M. Parekh, JP Morgan Chase & Co, Research Division – Associate [69]

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Understood. My second question is just trying to understand the next couple of quarters or FY ’21. Understandably, there cannot be any volume guidance because there are so many moving parts. Now for the last few quarters, Novelis has either delivered or beat that $450 adjusted EBITDA per tonne. Now as the volumes come down, should we — should one assume the margins to be disproportionately hit because of the operating leverage in fixed cost? Or is the margin number more sacrosanct because it’s a conversion margin business model and the volumes come off and to that extent, the earnings rate is only on the volume loss and not the margin decline? How should we look at this equation?

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Devinder Ahuja, Novelis Inc. – Senior VP & CFO [70]

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Well, there is just no way to avoid a hit on the margin per tonne because the impacted segment is auto, and directionally, you all know that auto has the premium margins. So until the time we have this COVID impact, any kind of $420 to $440 guidance that we give you is not a sustainable guidance. So that is just something to keep in mind.

And beyond that, just given the volume uncertainties because volume is a lever and while we are cutting costs, you cannot make up for everything through cost cuts. So we will be taking a hit on the margins. The thing that I want to remind everybody is that we are — based on everything that we know and see, we are pretty confident that we will not bleed cash, that we will be cash flow positive. And we are all working very hard to make sure that, that happens.

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Pinakin M. Parekh, JP Morgan Chase & Co, Research Division – Associate [71]

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Understood. And my last question is when I — back to the comments on automotive. The company says that customer shutdowns late March, expectation to resume operations in May. Now when your customers are expected to resume operations at May, should — is Novelis preparing for automotive shipments in the June quarter? Or given that they start plants in May, the auto shipments will only start with a 45- to 60-day lag to those plants?

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Steven R. Fisher, Novelis Inc. – President & CEO [72]

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No, no. We’ll — I wouldn’t assume much of a lag. I think we’ll actually be beginning to ramp up slightly ahead to make sure that we have the appropriate inventory in the supply chain for our customers. I also would just moderate that it’s not going to go from 0 to 100% immediately. This is going to be 1 shift to 2 shifts. It’s going to be understanding where market demands are, too. So it will be a gradual ramp-up, both at the manufacturing facilities for the auto manufacturers as well as us.

And again, it’s an unprecedented situation that we’re just going to have to work through for the remainder of this quarter and into the next quarter.

So unfortunately, we have a very tight schedule today. There are a few questions that we have not been able to get to. I will just remind everyone that Dev and myself will also be participating, as we have been, on the Hindalco earnings call when they release their earnings for the full year. So any of the remaining questions, if you would like to get on that call, we can address at that point in time.

But again, in closing, I’d like to thank all of our Novelis colleagues who have safely delivered an outstanding operational performance, not only this year but for the past 4 years. It is because of their commitment to our culture and purpose as well as executing our strategic vision that we are so well positioned to successfully manage this uncertain economic environment and integrate Aleris into Novelis. On a go-forward basis, we’re going to stay committed to serving our customers from an industry-leading position, leveraging this diverse product portfolio that includes significant mix weighted towards the recession-resistant beverage can market. We have a proven business model and, as Dev highlighted, a very strong balance sheet, strong liquidity position.

So again, I hope you all stay safe. And again, thank you for joining us today.

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Operator [73]

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That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line.

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