Novelis Defies the Market and Reports Record Results How?

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No, this isn’t April Fool’s day though I did need to read the story twice! But sure enough, Novelis turned in impressive quarterly results as demand for flat rolled products within its key segments continued to rebound. Specifically, the firm reported a 15% increase in shipments to 746,000 tons and a 29% increase in net sales, according to a Reuters article. Although North American demand picked up last compared to other regions (Asia, the Middle East, Africa and South America), the US automotive and electronics segments did well for the month of June bringing Novelis production to at or near full capacity. How can Novelis post these types of results in a market that most people perceive as still short of stellar with some lurking economic uncertainty in the midst?

We took a look at their Q1 2011 earnings call presentation dated August 10 for some answers. First and foremost, volumes increased across all major Novelis sales regions. Aluminum price increases also helped (most metals companies both producers and distributors tend to perform better when prices rise). Price and product mix along with a focus on cost containment also aided results. But perhaps the most interesting aspect of the earnings announcement involves the Novelis’ corporate strategy. Specifically, the firm points to its highly focused business model and the fact that the majority of the products within its product portfolio consist of premium products.

Back in June we reported on two downstream sectors within the aluminum market the extrusion and can sheet market. Whereas at the time we wrote the extrusion market remains a “mixed bag we reported the can sheet market looked a lot more positive primarily due to two factors one supply and one demand. First, on the demand side though the can sheet market shrank by 1.6% in 2009, according to Joe Sasso, of JAS Consulting, the market will have grown in 2010 by 3.1%. On the supply side, we wrote that pricing power had shifted from the can makers (e.g. Rexam, Crown) back to the producers, e.g. Novelis. But perhaps the best depiction of why Novelis turned in such great earnings results this latest quarter appears in this chart taken from their earnings report:

Without exception, each of Novelis’ key sectors experienced growth. We can’t think of too many other metals companies that could take advantage of growth within most or all of its key segments.

Back in June, we had the pleasure of hearing Novelis’ Senior Vice President and Chief Strategy Officer, Erwin Mayr speak at the recent Harbor Aluminum conference. In his talk, Mayr pointed to several global aluminum consumption trends that he felt would drive the world of FRP (flat rolled products). Some of these trends include: growth in developing markets, urbanization (which would increase aluminum consumption for cars, cans, electronics, foods, building materials etc), the growth of annual income per capita and sustainability (Novelis is the largest aluminum can recycler in the world).

And though China may have experienced a small hiccup in recent growth figures, the long-term trends remain intact. Some of the macro trends for lighter cars will also help drive aluminum growth. Novelis remains an interesting company to watch over the next couple of years.

–Lisa Reisman

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