US aluminum producer Novelis sees solid demand despite Q3 headwinds

US aluminum producer Novelis faced a challenging fiscal third quarter, with net sales down 6% from the year-ago period, but saw improved demand compared with last year and was optimistic about solid global demand moving forward, President and CEO Phil Martens said Tuesday.

In a third-quarter conference call with analysts, Martens said the company was hit not only by the usual seasonality challenges the quarter brings, but also by the Enterprise Resource Planning system implementation in two of its North American plants. He said there were more production and supply change issues than expected, but that the ERP implementation was "critical for growth strategy" and "largely behind us."

Martens said he expected improved operating performance for the rest of the year and said Novelis' can and automotive segments would lead the way in terms of increased demand and long-term growth opportunities.

Martens also reiterated that all current rolling and recycling expansions are progressing on time.

"This is a significant investment period for us and one that is necessary to ensure we capture the tremendous growth we see ahead," he said.

The company also said it would not be shy about curtailing assets if needed.

"To strengthen our business -- if it makes sense -- we will look to divest or close non-core or underperforming assets," Martens said, pointing to the recent announcement that Novelis would be closing its Ouro Preto pot line in Brazil.

Martens said the company's earnings were significantly impacted in Q3 due to a loss of shipments, reduced productivity and stabilization costs. Novelis was unable to meet shipment demand in October and November due to the ERP Implementation, but Martens said December and January production was "at near normal levels."

Chief Financial Officer Steve Fisher said on the conference call the company was increasing its capital expenditures for fiscal 2013 to $750 million from a previously stated $650 million to $700 million, primarily due to the timing of payments for Europeans recycling centers to take advantage of incentives.

Fisher also said Novelis estimated a free cash flow reduction to $250 million to $300 million from $600 million to $700 million due to a lower than expected EBITA and higher inventory levels across the business.

FISCAL Q3 SHIPMENTS FLAT

Total shipments in the fiscal third quarter were basically flat compared with a year ago at 647,000 mt versus 648,000 mt a year ago, Fisher said; however, shipments were up for all regions excluding North America.

Excluding the impact from ERP and a divested foil business in last year's results, shipments would have been up 5%, he said.

North American shipments were down 14% year over year, in part due to the loss of a large can customer earlier in the year, Fisher said, but neglected to say the name.

In Europe, shipments were up 2% year over year, and in Asia they were up 20% from the year-ago period due to stronger demand than last year when customers were experiencing destocking cycles.

Novelis South America shipments were up 7%, driven by record can sales, Fisher said.