Q1 2027 Novelis Inc Earnings Call
Speaker #1: Good morning. Welcome to the first quarter fiscal year 2027 earnings call for Novelis. At this time, all participants are in listen-only mode. The question-and-answer session will follow the formal presentation.
Speaker #1: If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note that this conference is being recorded.
Speaker #1: At this time, I will now turn the conference over to Megan Kocard, Vice President, Treasury and Investor Relations. Thank you, Megan. You may begin.
Speaker #2: Thank you, Rob. Good morning or good evening, everyone. Welcome to Novelis’s first quarter fiscal year 2027 earnings conference call. Hosting our call today are Steve Fisher, our President and Chief Executive Officer, and Dev Ahuja, our Chief Financial Officer.
Speaker #2: 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.
Speaker #2: 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 Litigation Reform Act of 1995.
Speaker #2: 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.
Speaker #2: 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.
Speaker #2: Now, I'll turn the call over to Steve.
Speaker #3: Thanks, Megan. Good morning or evening, everyone, and thanks for joining us today. We are very pleased to start fiscal year 2027 with a strong first quarter.
Speaker #3: Adjusted EBITDA increased 24% year-over-year to $516 million, and adjusted EBITDA per ton increased 30% to $563. We are starting to receive substantial U.S. legal fire-related insurance recoveries, and this favorable timing resulted in a net positive fire impact in the quarter.
Speaker #3: But even excluding this net positive $18 million impact, adjusted EBITDA per ton would have been a solid $525. The underlying business continues to perform well, market demand remains broadly stable, and we are seeing the benefits of both our high-recycle content business model and disciplined cost actions.
Speaker #3: Through our Grow Global efficiency program, we have achieved more than $225 million in run-rate savings by the end of the first quarter, and remain firmly on track toward our target of $350 to $400 million of total savings by the end of the next fiscal year.
Speaker #3: On the operational side, we restarted the US legal hot mill in early June, and are transitioning back toward a more normal operating cadence. Meanwhile, our historic capital investment in Bay Minette also remains on track, with the commissioning process underway.
Speaker #3: Overall, we are encouraged by progress across the business and look forward to the completion of Bay Minette, a cornerstone of our long-term growth strategy. Turning to slide 4, I want to provide an update on our U.S. legal plant restart.
Speaker #3: The US legal hot milk restarted in June, product requalifications are complete, and we expect the hot milk will be back to full production capacity this quarter.
Speaker #3: I want to recognize the US legal team for their disciplined response and sustained focus throughout the restart. We are also grateful to our customers for their patience and partnership as we work through this disruption.
Speaker #3: With operations back online and the supply chain normalizing, the majority of the anticipated costs related to the fires have already been incurred. In addition, the plant is insured for property damage and business interruption losses related to such events.
Speaker #3: Subject to deductibles and policy limits. And we have received $300 million in insurance recoveries through the end of the first quarter. We estimate the cumulative negative free cash flow impact from the fires, net of insurance recoveries, has peaked at $1.4 billion in Q1.
Speaker #3: We expect this cumulative cash impact will continue to improve as we receive insurance recoveries in future periods. Overall, the most significant operational challenges from U.S. legal are behind us, and we are using this as an opportunity to strengthen our global operating standards even further.
Speaker #3: We are looking ahead with confidence. The team has responded exceptionally well, the recovery work has strengthened our operating discipline, and we are well positioned to support customer demand with greater stability, with U.S. legal back online.
Speaker #3: And now I'd like to turn the call over to Dev for a more detailed review of our financial results. Dev.
Speaker #4: Thank you, Steve, and good morning or good evening. Let's turn to slide 6 and our first quarter financial highlights compared to the prior year period.
Speaker #4: Net sales increased 23% year-over-year to $5.8 billion, primarily driven by higher average aluminum prices. Total rolled product shipments declined 5% year-over-year to 916 kilotons.
Speaker #4: Mainly as a result of an estimated shipment loss of 33 kt from US legal fire-related production disruption. Higher beverage packaging shipments, on continued strong demand, were offset by lower specialties and automotive shipments.
Speaker #4: Adjusted EBITDA increased 24% year-over-year to $516 million in the first quarter. I'll cover the drivers of the adjusted EBITDA improvement on the next slide, but I do want to note that this quarter's results include an $18 million net positive impact from the U.S. legal fires, resulting from $47 million in business interruption insurance proceeds, partially offset by an estimated $29 million of lost margin from lower production in the quarter.
Speaker #4: Adjusted EBITDA per ton, as reported, was up 30% to $563. Excluding the $18 million impact of the fires, adjusted EBITDA per ton would have been $525.
Speaker #4: Net income attributable to our common shareholder increased 71% year-over-year to $164 million. The increase was due primarily to higher adjusted EBITDA and favorable metal price lag resulting from higher metal prices, partially offset by $265 million in pre-tax net losses relating to the U.S. legal fires.
Speaker #4: Net income attributable to our common shareholder, excluding special items, was $265 million—up 128% year-over-year. Let's turn to the adjusted EBITDA bridge for Q1, on slide 7.
Speaker #4: We saw a negative contribution of $58 million from lower volume. Over two-thirds of this reflects the estimated lost shipments associated with the U.S. legal fires.
Speaker #4: Price and mix contributed $5 million, while operating cost contributed $86 million in EBITDA improvement. The favorable cost year-over-year was driven by a few items, including improved scrap and aluminum prices, idled fixed cost relating to the U.S. legal disruption, reclassed below EBITDA.
Speaker #4: And operating cost efficiency activities were partially offset by a higher net negative tariff impact in the current year period. While we do have a tariff mitigation strategy in place, due to temporary disruptions to our supply chains, as a result of the U.S. legal fires, we are using a higher level of interregional imports subjected to 232 tariffs.
Speaker #4: At the same time, aluminum prices have increased. We continue to expect that the net tariff impact will be mitigated after our supply chains have normalized.
Speaker #4: SG&A contributed $12 million, reflecting ongoing benefits from our structural cost reduction work, while currency and other contributed $55 million, including $47 million of US legal insurance proceeds.
Speaker #4: Moving to regional performance on slide 8. North America shipments were down 3% year-over-year, and adjusted EBITDA decreased 17%, affected by the estimated impacts from the U.S. legal fires.
Speaker #4: Higher beverage packaging shipments were offset by lower automotive and specialties shipments, driving unfavorable volume and product mix impacts in the quarter. These headwinds, as well as higher net negative tariffs and lower scrap consumption, were partially offset by favorable scrap prices and product prices, and a $47 million fire-related business interruption insurance benefit.
Speaker #4: In Europe, shipments increased 5% year-over-year, and adjusted EBITDA increased 44%. Results were supported by higher beverage packaging shipments and automotive shipments to help serve North American customer demand, along with favorable product price and mix, and favorable metal benefit.
Speaker #4: On slide 9, Asia shipments increased 8% year-over-year, and adjusted EBITDA increased 30%. The region benefited from higher overall beverage packaging, specialty, and aerospace shipments, including higher support to North America, as well as favorable metal benefit, partially offset by unfavorable product mix.
Speaker #4: In South America, shipments increased 7% year-over-year, and adjusted EBITDA increased 56%. The EBITDA increase was primarily driven by higher beverage packaging shipments to support North America and favorable metal benefit, due largely to higher aluminum prices.
Speaker #4: Turning to slide 10, our structural cost reduction initiative continues to deliver outstanding results. Through Q1 FY27, we have achieved more than $225 million of run-rate savings.
Speaker #4: We remain on track for approximately $300 million of run-rate savings by the end of fiscal year 2027, and are moving toward our ultimate target of $350 to $400 million in total savings by the end of fiscal 2028.
Speaker #4: The savings come from a combination of factors and initiatives, including a leaner organizational structure and technology-enabled process streamlining. We also are relentlessly focused on operational efficiencies—driving labor productivity, energy and variable cost optimization, procurement savings, and improved asset effectiveness.
Speaker #4: This program is building a simpler, more efficient operating model and providing sustainable benefits to our cost structure. Now, let's turn to adjusted free cash flow and net leverage on slide 11.
Speaker #4: Adjusted free cash flow was an outflow of $1.1 billion in Q1 FY27, compared with an outflow of $295 million in the prior year period.
Speaker #4: The year-over-year change was primarily driven by higher planned capital expenditures associated with Bay Minette, as well as higher working capital and other uses driven by higher metal prices and the timing of U.S. legal fire impacts.
Speaker #4: These factors were partially offset by stronger adjusted EBITDA and favorable metal price lag. As a result of the short-term timing effects from the U.S. legal fees and Bay Minette capital spend, net leverage increased to 4.5 times.
Speaker #4: However, liquidity remained solid at $2.1 billion, and we entered into a new $500 million term loan in July to provide additional flexibility as we move through this peak investment phase.
Speaker #4: We expect to pivot our focus towards deleveraging as Bay Minette capital spending winds down. For the full fiscal year, we continue to expect capital expenditures to be in the range of $2.1 to $2.4 billion, including approximately $350 million for maintenance capital.
Speaker #4: With U.S. legal restarted, insurance recovery underway, Bay Minette progressing, and the underlying business performing well, we continue to expect to return to a free cash flow positive position by the end of fiscal year '27.
Speaker #4: I'd now like to hand the call back to Steve for a market and business outlook. Steve.
Speaker #2: Thank you, Dev. Turning to slide 13, demand across end markets remains broadly stable and in line with our expectations. Beverage packaging, our largest end market, continues to be projected for long-term growth of approximately 4% annually.
Speaker #2: Near-term global beverage packaging demand remains solid across regions, with several regions stronger than expected. Energy drinks, carbonated soft drinks, and specialty aluminum cans remain key growth drivers, while beer is stabilizing in some markets.
Speaker #2: The South American market is a bit softer due to a weaker consumer and lower beer consumption trends. However, this is being offset by aluminum packaging share gains.
Speaker #2: In automotive, long-term demand is supported by lightweighting and performance-driven innovation. Near-term demand in North America remains positive, driven by continued strength in sales of larger truck and SUV platforms, which use a higher percentage of aluminum content.
Speaker #2: As well as now easing North American capacity constraints with the successful restart of US legal. However, the European market remains sluggish, reflecting weak economic conditions, while Asia aluminum demand softness is due to continued automotive market share gains by Chinese EV manufacturers.
Speaker #2: In aerospace, the long-term outlook remains positive, supported by multi-year OEM order backlogs and ongoing demand for new aircraft. We're also seeing signs that aerospace supply chain constraints continue to ease.
Speaker #2: In specialties, long-term growth is expected to track GDP-plus rates, supported by lightweighting, sustainability trends, and an undersupplied U.S. housing market. Near-term building and construction demand remains generally stable, but with some seasonal tailwinds.
Speaker #2: Meanwhile, after a prolonged cyclical downturn, we are seeing some signs of improved demand in certain segments that have been impacted by economic and tariff uncertainty.
Speaker #2: The truck trailer market is recovering, driven by stronger van and flatbed trailer demand, and the coffee capsule market is strengthening, while demand for batteries and foil is being driven by the growing energy storage sector.
Speaker #2: Overall, market demand remains resilient and broadly stable, and we remain well-positioned across our diverse, diversified end-market portfolio. Turning to slide 14, our new plant in Bay Minette is a critical step in addressing the capacity-constrained U.S. market.
Speaker #2: An activity to bring the plant online is progressing very well. As one of the most advanced aluminum rolling and recycling facilities in the world, Bay Minette will provide the flexibility, scale, and sustainability benefits to capitalize on long-term growth trends in beverage packaging, automotive, and other high-value end markets.
Speaker #2: We continue to achieve exciting milestones as we transition from the construction phase of the project to production. We expect to advance through project commissioning as this calendar year progresses, and then prepare for qualification of customer coils.
Speaker #2: We expect commercial shipments at Bay Minette to begin in the first quarter of next fiscal year. We are building Bay Minette to serve the next generation of aluminum demand.
Speaker #2: This is a transformational investment that reflects our deep commitment to innovation, decarbonization, and long-term partnership with customers, while strengthening our supply chain and creating a platform for growth for decades to come.
Speaker #2: Now, in summary, we delivered a strong first quarter with solid underlying performance driven by favorable market conditions and our cost efficiency program. With over $225 million in run-rate savings at the end of Q1, this program is delivering sustainable results.
Speaker #2: The U.S. legal hot mill restart was an important milestone, and we are now ramping up production to support customer demand. The operational disruption and impact is now behind us, and we are working diligently on normalizing supply chains and getting the recoveries from insurance.
Speaker #2: In Bay Minette, we continue to achieve exciting commissioning milestones on our path to commercial shipments next fiscal year. Combining all these factors, we are confident in our ability to return to free cash flow positive by the end of the fiscal year.
Speaker #2: With that, we're happy to take your questions, and I'll turn it back over to the operator.
Speaker #1: Thank you. We'll now be conducting a question-and-answer session. We ask that you please limit yourself to one question and one follow-up. You may re-queue with additional questions.
Speaker #1: If you would like to ask a question at this time, you may press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue.
Speaker #1: Press *2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
Speaker #1: Thank you. Our first question is from the line of Viva Zucci with J.P. Morgan. Please proceed with your questions.
Speaker #3: Yes, hi. Thanks for the opportunity, and congratulations on the quarter. First question is on the Bayminet ramp-up. When you say commercial shipments from 1QFI28, what does the timeline for these customer qualifications and any broad sense that you can give on utilization or overall volumes in FI28 from the plant?
Speaker #3: Thank you.
Speaker #2: Yeah, thank you for the question. So, as we said, we're in the middle of commissioning the plant right now, and that will take through the November timeframe of this year.
Speaker #2: At that point, we'll begin rolling coils and working on technical qualification inside of Novelis. We'll be able to ship coils to our customers in very early calendar 2027.
Speaker #2: And we think the process of qualification that we've worked with our customers is roughly two months, and then that will get us to a place where we'll be shipping commercial coils to our customers in the first quarter of fiscal 2028.
Speaker #2: Yes. And from there, let's come back as we get a little bit closer on exact utilization for next year. But as we've always said, the ramp-up of Bay Minette is roughly to get to full capacity in 18 to 24 months.
Speaker #2: So that gives you some guidance on the timeframe to ramp it up. We're very confident in the sales, and so we believe that commercially we can sell anything we can produce.
Speaker #2: And so we'll give a bit more guidance as we get closer to the end of the year for next fiscal year, specifically.
Speaker #3: Got it. Thank you, that's helpful. The second question is on South America, where the EBITDA per ton is going up very sharply. So, obviously, you mentioned that the scrap spreads are positive, and the premium is also there. Is there any element of the cost reduction initiatives that are going on? Just for a better understanding—how sustainable is this profitability level going forward?
Speaker #3: Thank you.
Speaker #2: Yeah. So one should not consider the EBITDA per ton of $1,114 as a sustainable number, to be clear. I mean, we are enjoying some very favorable tailwinds.
Speaker #2: Because of higher premiums, easier availability of scrap, and also some VAT benefits which we think will not last beyond the end of this year. So it's a combination of these things which are giving some tailwinds.
Speaker #2: Having said that, fundamentally, we feel extremely good about the South American market. We are gaining market share there versus glass. The fundamentals of the market remain very solid.
Speaker #2: I mean, we're not going to give regional guidance, to be clear. But all that I can say is that I mean, you should think about you should think about anything above 900 to 1,000 to be not generally sustainable.
Speaker #2: So this is broad strokes, but I assume that addresses your question.
Speaker #3: Sure, sure. Thank you. That's very helpful. Thank you. All the best.
Speaker #1: Our next question is from the line of Sumangal Navadiya with Kotex Securities. Please proceed with your questions.
Speaker #4: Yeah. Good morning and good evening. Thanks for the chance. First question: I just want to understand the bridge between what is reported as adjusted EBITDA in the release and in the presentation.
Speaker #4: There's a different number of $525. So, can you explain this bridge a bit more clearly? Because the opening remarks were a bit too fast to grasp.
Speaker #2: Yeah. So, Sumangal, last year was $416 million. This year, we are $100 million higher. All that we are telling you is that this year has some impacts of the fire, which are a net positive of $18 million.
Speaker #2: And that is embedded across multiple buckets. That $18 million is driven by the biggest factor being the favorability from the insurance recovery of $47 million, right?
Speaker #2: So basically, what we are saying is that if you want to isolate just the fire impact, the net fire impact, you should just take out $18 million, and what you will have as a result of that is $498 million.
Speaker #2: Now, 498, in short, is really X fire at the core. And what is happening there? One, we have a little bit from the core.
Speaker #2: I mean, the $58 million, most of it is the fire impact, but there is a little bit of a volume impact in that $498.
Speaker #2: The big positive there, which you should make note of, is the cost bucket, which is like the biggest—$86 million. Now, this cost bucket of $86 million—number one, the SG&A and operating efficiency cost benefits, which, as you heard from us, is at a run rate of $225 million.
Speaker #2: That is extremely sustainable and will keep growing. It will keep growing, to be clear, because our intended run rate is all the way up to 450.
Speaker #2: So that will keep growing. What will pull back is really, at some stage, as metal prices normalize—who knows when—we will see a bit of a pullback on the exceptional metal benefit we are getting as a result of the wider spreads.
Speaker #2: So the factors that will play off against each other are these two factors: savings going up, but some metal benefits pulling down. The other benefit that you will not easily be able to understand here is that, today, we are not running our assets in the most optimal way.
Speaker #2: And we are not servicing the market fully. So the volumes are getting a bit depressed, suppressed, because while the impact of the fire, one can say, is 33 KT, you have to understand that given the fact that the market demand is there and we are not running our assets with the best possible mix that we can to optimize production and productivity, it means that there is all that potential that is not represented in the volumes, the efficiencies, and the EBITDA.
Speaker #2: So just keep some of these factors in mind when you think about the performance.
Speaker #4: Understood, Dave. So, from the $498 to come to $525 per ton, what volumes are we using? Is that also adjusted?
Speaker #2: No, no, we are mixing per ton and absolutes, to be clear. I mean, 498 is the absolute number. If you're talking about per ton, the per ton numbers are 562 and 525.
Speaker #2: So, when you adjust for the fire, you get a per-ton cost of $525 versus the reported $562. And when you look at the absolute EBITDA, the $560 million needs to be backed down to $498 million.
Speaker #4: Got that. Got that. That's helpful.
Speaker #2: I was giving you—I was giving you the factors that we should keep in mind when you think about the performance. So, first, clean out the $18 million, and then the $498 million. I gave you what are the positive factors and what are the watch-out factors. The biggest watch-out factor, meaning that as metal prices normalize, we will have some pullback.
Speaker #2: And other than that, so that's on the negative side. But on the positive side, I mentioned a number of things that are not yet captured in this EBITDA.
Speaker #4: Okay, that's useful. Very clear. My second question is if we can now give some sort of volume and margin guidance given Oswego is now back to full capacity from Q2 onwards.
Speaker #4: And also, I mean, overall, given the market tailwinds, a few of our peers have been reporting record numbers and constantly upgrading guidance. Do we now expect normalization from Q2 onwards and some bit of catch-up in our performance also, once all these issues are behind us now?
Speaker #2: Yeah, Sumangal, so remember the 600. As things stabilize, we are not sort of assuming that we will keep having these favorabilities in the scrap spreads.
Speaker #2: The markets will normalize. So the anchor point is always the $600 per ton, which we have said at normalized metal prices. We are confidently heading towards that.
Speaker #2: Also, aided by all the cost-efficiency programs. So, to your point, should we expect that everything will be perfectly normal from the second quarter of the fiscal year?
Speaker #2: Not really, because, I mean, we have just completed qualifications and requalifications after the start of Oswego. So, really, this quarter will not represent the complete normal performance.
Speaker #2: The complete normal performance starts from more or less Q3, but kind of comes to its complete potential by Q4. And Q4 is really when we expect a lot of things to happen, besides what I just said.
Speaker #2: A very stable, normal quarter supported by very good market demand is number one. And then, on top of that, as we keep reminding you, from the fourth quarter we are going to be free cash flow positive.
Speaker #2: So, not to say that Q2 will not be an improvement, and Q3 will not again head in the right direction. But I'm saying that this is going to be like a step up—a step up because of all the reasons that I mentioned to you.
Speaker #4: All right. Thanks, I'll join the queue back. All the best.
Speaker #2: Thank you.
Speaker #1: The next question from the line of sight, Ed Jane with Ambit Capital. Excuse me, Anand Parikh with HHBC. Please proceed with your question.
Speaker #3: Yeah. Pankaj Naik, am I audible?
Speaker #2: Yes, Penaki, you're audible.
Speaker #3: Hello. Am I audible? Yeah. Sorry.
Speaker #2: Yes, please.
Speaker #3: So first, can you walk us through the very large working capital build in the quarter?
Speaker #2: Yes. And really.
Speaker #3: The very large working reversed?
Speaker #2: Yeah. So Penaki, the point right now is, are you able to hear me?
Speaker #3: Yes, I can hear you.
Speaker #2: Penaki? Okay. All right. Yeah. So here's the point to keep in mind.
Speaker #3: Yes, I can hear you.
Speaker #2: Right now, on working capital, we are carrying more inventories than normal—the reason being the long supply chains and the fact that we are not able to process a lot of the scrap that comes back from customers, or even the scrap that we generate during our manufacturing process.
Speaker #2: The long supply chains—the reason should be generally obvious to you—is that we are getting material from all over the world, from all our plants, in order to support customers in North America. This means much prolonged transit times, as a result of which we carry larger inventories.
Speaker #2: So, for these couple of reasons that I just mentioned, you see that elevation in working capital. Now, we expect that, quarter after quarter from here onwards, as Oswego gets to full production very soon in the coming weeks, working capital will get released.
Speaker #2: And we expect that somewhere by the end of this calendar year, we will start approaching normal working capital levels, which means release of cash, which further accentuates my point that that is also a good reason to expect that our cash flow momentum will just keep getting better as we progress from here onwards.
Speaker #3: Thank you. My second question is, if I look at the four moving parts over the course of the year: the CapEx was $775 million in one quarter, and the midpoint of the guidance, $2.2 billion, effectively implies a CapEx quarterly run rate of $500 million for the next three quarters.
Speaker #3: Oswego ramp-up means earnings should improve, working capital should be released, and there will be more insurance recovery. So is it fair to say that, at this point in time, the FY27 net debt number at March exit will be lower than what we have seen in the first quarter?
Speaker #2: So, 100%—I mean, absolutely. And, Pinaki, we are exactly around where we said we would be. We told you that at peak, net leverage will be in the high fours.
Speaker #2: We are more or less around sort of where we said, I mean, second quarter. Consider that there could be some 10 to 15 basis points of further elevation.
Speaker #2: But that's exactly as we thought. But to your point, absolutely. I mean, by the end of the year, I can tell you that we will get to below 4x net leverage versus the 4.5x.
Speaker #2: So yes, we are heading there.
Speaker #3: Got it. That is very helpful. Thank you very much.
Speaker #2: Sure.
Speaker #1: Thank you. Thank you. The next question is from the line of Site ED, Jane with Ambit Capital. Please proceed with your question.
Speaker #4: Hi, thank you. First of all, Damon, I just wanted to understand if the customer approval process would be similar for packaging and auto, which means that you would start both auto and packaging around the same time.
Speaker #4: And also, you did mention that it's an 18- to 24-month timeline. Let's say if you hit a 50% exit run rate by the end of FY28, what is the operating level you need to be break-even?
Speaker #4: So, is it possible that there is no EBITDA contribution from Bay Minet in FY28, given you need a certain level of production to be break-even?
Speaker #2: Yeah. So, qualification of the product is very similar to what we would do in any plant or when qualifying with a new customer. There are different qualification timeframes, likely differing by product.
Speaker #2: In our first fiscal year of commercial sales, we'll be focused more at Bay Minette on beverage packaging. That does not mean that we won't be working to qualify other products.
Speaker #2: We will be qualifying other products, but the focus will be to get very, very good at beverage packaging, which will allow us to get maximum throughput of the plant, and we'll begin to optimize the entire North America system with Bay Minette coming up.
Speaker #2: As I said before, let's not get ahead of ourselves. We are in a very good place with commissioning, and we see it right in front of us now—getting to sellable, commercial coils to our customers.
Speaker #2: We believe 18 to 24 months of ramping up is world-class. And ultimately, we will get to EBITDA in fiscal year '28. But let us come back with more specific guidance as we get a little bit closer. We're very excited about where we're at and what's in front of us.
Speaker #4: Sure. But operationally, is there a certain number you work with for you to be break-even? And would there be any startup costs this year for Bayminet?
Speaker #4: Any meaningful startup costs we should be looking at?
Speaker #2: Yeah. Penaki—oh, sorry, I'm sorry. Why am I saying Penaki? Basically, we will follow GAAP, US GAAP, and under that, when a plant is in the process of ramping up, the unabsorbed costs go into startup costs.
Speaker #2: I have said it at the time of the last call: my best estimate is that, through the ramp-up period, we could be having up to $150 million of costs that we call start-up, below EBITDA.
Speaker #2: I continue to maintain that guidance. We will need to get closer to the time to be more precise about that. But directionally, to your point, there will be EBITDA.
Speaker #2: Because EBITDA is calculated with taking into mind that all the unabsorbed startup costs go below EBITDA, okay? So, it is not like we will not have EBITDA.
Speaker #2: Now, I'm not getting into any break-even points. We always tell you, whenever asked, that our expectation of above $1,000 EBITDA per ton is a very, very confident expectation.
Speaker #2: Okay? So keep in mind that there are startup costs for unabsorbed fixed costs. And so EBITDA will be positive, but we will have, below the line, these startup costs which I gave you the estimate—up to $150 million as we see it now.
Speaker #2: That's the way we would think about it.
Speaker #4: Okay. And on South America and in Asia, very strong performance. You also recently mentioned that it was also aided to some extent by exports to the US.
Speaker #4: So, is South America also—are you seeing higher shipments given maybe some supply shortages to your own capacity coming up, and both North America, both Asia and South America, once you have Bay Minette coming in, these volumes need to be sold domestically?
Speaker #4: So, how do you see EBITDA contribution from some of these markets? You did talk about that. You mentioned some of the other things driving, maybe, scalp spread.
Speaker #4: But what about this inter-regional contribution, which is helping some markets and maybe hurting North America to some extent right now?
Speaker #2: Yeah, so let's start with South America. It's a growing market, and we are gaining share. Right now, we are in winter, and this is not like peak season.
Speaker #2: As we get to the end of this calendar year, the seasonal buying starts, so there is a lot more volume potential. This does not represent the volumes that we are expecting, which will be a ramp-up, right?
Speaker #2: So, on volumes, we are not concerned. We are not concerned. The market is a very nice market, and we feel good about it. As far as Asia is concerned, keep in mind that Asia has been supporting North America, as you have also alluded to, because of Bay Minette—pending Bay Minette—and also because of the Oswego situation. Once that backs away, there is a lot of potential in new areas in Asia around energy storage.
Speaker #2: So I will talk about that. I mean, we are going to make forays into new areas, which basically, directly or indirectly, cater to the high-growth segments, including data centers and the energy and infrastructure market, okay?
Speaker #2: So those are market developments on which we are working now. And we expect that we will be able to, including in Asia—and more pronounced in Asia, maybe—we will be able to cater to some of these markets as we release capacity.
Speaker #2: Number one. Number two, even in beverage packaging, we have actually constrained supplies to a number of customers—whom we can go back to once Oswego is back, of course, but also once Bay Minette comes online.
Speaker #2: So from a demand perspective, on our side, it's not such a big concern. There is potential out there.
Speaker #4: Okay. Thank you so much.
Speaker #1: All right. Next question from the all right. Next question comes from the line of Indrajeet Agarwal with CLSA. Please just use your questions.
Speaker #5: Hi, thanks for the opportunity. A couple of questions. First, what was the tariff impact on profitability this quarter? And how do you see that in the subsequent quarters as Oswego ramps up?
Speaker #2: Yeah. So, look, first I want to say that, theoretically, the tariff impact should be pretty much zero because, in an ideal situation, we do have enough capacity onshore.
Speaker #2: But as of this time, we do have a tariff impact, which is closer to $70 million. And we expect that as our supply chains normalize, and as Oswego starts up, we will need to have less dependence on some of the imports that are resulting in this burden.
Speaker #2: So, it's a matter of a bit of time, yes? In principle, the capacity is there. And these numbers, to be absolutely clear—and I think you understand—these results are despite absorbing those tariffs.
Speaker #5: Sure. Secondly, what kind of pricing change would we have seen this year in the beverage can, particularly? So what proportion of beverage can would have gotten repriced?
Speaker #5: And what is the ballpark, let's say, per ton or percentage increase we have seen so far this calendar year?
Speaker #2: Yeah. For the calendar year, as we've talked about in the past, as we contracted in order to fill the capacity for Bay Minette, we did that under long-term contracts.
Speaker #2: Contracts that go through the end of the decade—and those contracts obviously had a step-up in pricing in previous years. And, in this year, what you would see in the majority of the—and I’m talking in the North America contracts—is our typical price inflation clause increases.
Speaker #2: So, it's going to be much more in the area of, kind of, inflationary rates in North America.
Speaker #5: So, do we still have any capacity in Bay Minette which is left to be tied up? I remember there was about 180 KT which was still not tied up.
Speaker #2: Yeah, so I was speaking of beverage packaging, which I thought was where your question was. We are still obviously very confident in contracting in the auto market and in other high-value products.
Speaker #2: And we continue to feel very comfortable as we bring the capacity up, starting early next fiscal year, that over that 18 to 24 months, we will fill the full capacity of this facility with commercial sales.
Speaker #5: Thank you. That's awesome.
Speaker #1: The next question is from the line of Ablanda with Bank of America. Please proceed with your question.
Speaker #6: Good morning. Thank you very much for taking my question. Previously, you said the total impact of Oswego on shipments was 150 to 200, and EBITDA 100 to 150.
Speaker #6: Cash flow was 1.7 billion before insurance recoveries. Can you just update us on kind of what you on those numbers? And I believe you also said that the cumulative free cash flow impact so far is 1.4 billion and that that will decrease in Q2 and going forward?
Speaker #2: Yeah, yeah, absolutely. I can explain everything. So to keep it short, there is no change—and no material change—from all the guidance that we gave earlier.
Speaker #2: But the most important thing for you to know is, once again, that in the current numbers, now, the net Oswego impact that we have is of the order of $1.4 billion.
Speaker #2: Now, from here onwards, the insurance recoveries will take over. And while we'll have some costs in this quarter—some leftover costs—the insurance recoveries will far exceed them.
Speaker #2: And quarter after quarter, we expect very meaningful recoveries to keep happening. I mean, even this quarter, if you ask me—if you ask me, I mean, in this quarter, my best estimate is that we will have another about $200 million of insurance recovery in this quarter.
Speaker #2: So, all things remaining the same, this number of 1.4 now will come down further with this. So, let's say that the endpoint you should be looking at is that, at the end, what will remain to be absorbed by us, that will not be covered by insurance, could be in the range of about $600 million at the end.
Speaker #2: That will be something that will be absorbed by us. So between the current number of $1.4 billion and the ultimate $600 million, this $800 million, sort of, will keep coming over time.
Speaker #6: Okay. And that's a 12-month-plus process, I believe, in the two.
Speaker #2: Certainly, 12 months plus. I mean, certainly 12 months plus. These processes are not short processes, but we are extremely happy with the pace at which things are working right now.
Speaker #2: Our partners, our insurers, are working extremely cooperatively, and so basically, the progress is good. But be ready that this will cross into the next fiscal year.
Speaker #6: In July, you raised $500 million in unsecured term loans at what I would think are pretty attractive rates. You also increased the size of your revolver.
Speaker #6: Can you maybe update us on what your liquidity is today? What are your debt-raise plans going forward? And it sounds like you kind of expect leverage to maybe increase slightly from here, but then end below four times by year-end.
Speaker #6: So maybe.
Speaker #2: Yeah, I mean, I would say that we expect leverage to increase very slightly from here, and after that, we are on the deleveraging journey.
Speaker #2: We are not going to borrow any more. I mean, I want to be very clear—this is the last of the borrowings. And from here onwards, the $500 million that we borrowed so far, plus $120 million, are, rightly, very attractive.
Speaker #2: That is the last of the term borrowings, and the entire focus is going to shift from here onwards to deleveraging. So I think that that's really what you're asking for.
Speaker #2: So, no more debt raise. Even this debt that we have raised is basically a two-year paper. And the reason being that we don't expect that we will need this debt over a longer period.
Speaker #2: And the last piece, just to repeat, is that by the end of this year, our expectation is that we should be sub-4x on net leverage.
Speaker #6: Okay, that's it for me. Thank you so much.
Speaker #2: Thanks.
Speaker #1: Thank you. The next question is from the line of Ashish Jain with Macquarie. Please proceed with your questions.
Speaker #7: Hi, David. Hi, David. David, my first question is on net debt itself. So, is it right to think that all the working capital reduction that we will see in the second half, and the insurance money that we keep getting, is all going towards net debt reduction, right?
Speaker #7: I mean, there's no cost attached to any of these cash flows.
Speaker #2: Yeah, yeah, yeah, for sure. I mean, yes, all this will go towards net debt reduction. But remember, I mean, like—
Speaker #7: No, because I'm just.
Speaker #2: Go ahead.
Speaker #7: No, I was just wondering, if that is the case, then why are we talking about being net debt to EBITDA at around four? Should it not be much less?
Speaker #7: Because one-third of our capex is done, our core EBITDA should improve. Working capital and insurance money recovery—all that should bring us meaningfully below four.
Speaker #7: No?
Speaker #2: Yeah. Yeah. But again, inventories, we will also have some payables that will basically sort of go down. I mean, we are sitting with some we are sitting with some extra payables.
Speaker #2: So that will offset a part of the inventory reduction. So it's not like the entire net money goes straight out, right? So be careful.
Speaker #2: I mean, the number that we are giving you—of four or below four, to be clear—takes into account all the puts and takes.
Speaker #2: So I want to keep it simple. Inventory will come down, but we will also lose a bit of payables in the process. And so, net-net, it's good guidance to say that we will be below four.
Speaker #4: And don't forget, we're still spending on Bayman app for the next couple of quarters.
Speaker #2: Exactly. Exactly. There is high capex this year, so just keep that in mind. I mean, we'll have capex of up to $2.4 billion—the range that we have given.
Speaker #7: Right, right. Got it. Secondly, just for the quarter, did you say that the tariff impact is $1.7 million this quarter? Did I hear that number right?
Speaker #2: I said 70.
Speaker #7: That's for the quarter?
Speaker #2: Yes, unfortunately, yes. But it's extraordinary.
Speaker #7: So the final.
Speaker #2: Don't think about this as a sustainable run, right? It is extraordinary, because we have had to depend on that to keep our customers fully serviced, fully whole.
Speaker #2: We have had to really bring in more than the imports that we would normally do, and that has attracted tariffs. So yes, it seems like a bit of a startling number.
Speaker #2: But don't think about this as representing the future. On the ground, we have enough capacity to be able to more or less produce, once normalization happens, to more or less be able to produce what we need in North America.
Speaker #2: without having any net tariff impact.
Speaker #7: Right. So this $525 number includes the $70 million impact? The $525 per ton number includes the $70 million impact?
Speaker #2: Yes. It does include.
Speaker #7: Okay. Okay. Got it. Got it. Fine. Thanks a lot. I'll come back in.
Speaker #2: Yeah. And tariff will not go down to zero in the next quarter—I want to be clear. It will go down over time because even in this quarter, it was a qualifications quarter.
Speaker #2: So, tariff will unfortunately sort of taper down because optimization takes a bit of time. So, expect that this will taper down, but not entirely.
Speaker #2: So keep in mind some of these things.
Speaker #1: Our next question is from Amit Murarka with Axis Capital. Please proceed with your question.
Speaker #6: Yeah. Hi. Thanks for the opportunity. Just on the capex guidance of $2.1 to $2.4 billion, which includes $350 million of maintenance. So the growth capex is, ballpark, $2 billion.
Speaker #6: And the presentation says $775 million is already spent. So that just leaves about $1.2, $1.25 billion, which more or less actually looks to be only Bayman app.
Speaker #6: So is there nothing beyond Bayman app which you're doing in FY27? Just want to get clarity on where the $2.4 could be at risk later in the year.
Speaker #2: No, there are other things that we do. I mean, there is always—I mean, there are some leftover spendings from some of the other de-bottlenecking projects, which money has to still go out.
Speaker #2: So, we keep investing in other capexes relating to technology, relating to process improvements, relating to EHS, and so on. So, those capexes are there.
Speaker #2: It's not just entirely Bayman app plus maintenance.
Speaker #4: Primarily.
Speaker #6: So primary is Bay Minette. So the $5 billion that is slated for Bay Minette, will there still be some balance amount of that which will be disbursed, let's say, after FY27 in that case?
Speaker #2: Very little. Very, very little. I mean, for all practical purposes, you can consider that by the end of this fiscal year, Bay Min app would be done.
Speaker #6: So I'm not able to get the math then, because $3.8 billion is spent as of Q1. That leaves $1.2 billion and $775 million, all the spend in Q1.
Speaker #6: So, almost $2 billion is just coming with Q1 and balance of the Bayman app, and plus, there is $350 million maintenance. So, we are already reaching the upper end of the $2.4 billion then.
Speaker #6: And plus, you're saying that there will be additional spend—tail spend, whatever—for some other projects as well. So is there a possibility that the $2.4 billion could be reached, and maybe we go to a bit higher number by the end of the year?
Speaker #2: No, no. I mean, 2.4 includes everything. 2.4 includes 350 maintenance, it includes Bayman app, and basically some of the other items that I mentioned.
Speaker #2: Altogether, $2.1 to $2.4 billion is an all-inclusive guidance.
Speaker #6: Okay, sure. And also, when you say that the Bay Minette plant will fully ramp up in 18 to 24 months, the 600 KT capacity as of now is contracted, I believe, only for the beverage can sheets, and you also have an auto processing plant over there.
Speaker #6: So by when do you expect to kind of close the contracts on the auto facility, then?
Speaker #4: Yeah, so it's very easy for us to point to very long-term, very big contracts with beverage packaging. And we're very confident that we've got that fully sold out for the portion that we need through the end of the decade.
Speaker #4: And we continue to see a lot of growth in the beverage packaging market. On auto and other high-value products, other specialty products, the guidance we can give you is that we are very confident that we will sell the other portion of the additional capacity that will come into the North America marketplace in line with our commissioning of the facility.
Speaker #4: So, over that 18 to 24 months.
Speaker #6: Sure. Got it. And lastly, on the insurance bit—so if I got it right, you said $1.4 billion is the loss and $600 million will be absorbed.
Speaker #6: So that leaves roughly $800 million through the insurance claim. Is that number right?
Speaker #2: That is correct.
Speaker #6: Got it. So but that sounds a bit lower from, I think, the earlier numbers which I think we have been discussing. So I thought that the initially you had guided for a absorbed loss of maybe in the range of 400 million dollars ballpark and a billion dollars from insurance.
Speaker #6: So, I just wanted to get it right: why is it that the absorbed losses now are going up versus what we were anticipating earlier?
Speaker #2: I'm not sure about the $400 million. I'll have to go back and see how that number came. But listen, I mean, what I can tell you is that these numbers are now fairly robust numbers.
Speaker #2: Yes, I mean, we have had a little more cost to serve because—by 'cost to serve' I mean we have had to buy more third-party material.
Speaker #2: And based upon contractual limitations, deductions, etc., maybe we'll have to absorb that. But in my view, I mean, like, I thought our implied number that we were going to absorb was 500.
Speaker #2: I'm saying 600 now. And this 100 million is rarely exactly what I said. We have had to serve customers with external support for longer because we had to undergo a qualification period.
Speaker #2: As Oswego came back online on June 8th, after that, we have had to undergo some qualification period. So there is about $100 million, which we have had to absorb in short.
Speaker #2: And maybe that's where your understanding now should be clear. Maybe it's like 500, which has gone to 600. That we will absorb. Is actually—
Speaker #6: Sure, got it. Thank you very much, and best wishes.
Speaker #2: Thanks.
Speaker #1: Rahul Gupta with Morgan Stanley. Please proceed with your questions.
Speaker #7: Yeah. Hi. Thank you for taking my question. So a couple of questions. One, just continuing on the previous question on insurance recoveries. I remember last quarter you made a point that the overall impact could be in the range of 1.7 billion dollars.
Speaker #7: And you would be able to recover 70 to 75 percent of the overall impact. Am I right in understanding or am I missing something over here?
Speaker #7: And you would be able to recover 70 to 75 percent of the overall impact. Am I right in understanding, or am I missing something here? All right, that's my first question.
Speaker #7: And you would be able to recover 70 to 75 percent of the overall impact. Am I right in understanding or am I missing something over here? All right.
Speaker #2: I mean, we have had to incur some prolonged costs because of the qualification period to keep serving customers. And so, yeah, you are right.
Speaker #2: I mean, like there is a bit of an
Speaker #2: For this qualification period, higher cost to serve. So, directionally, you're thinking in the right way.
Speaker #7: Yeah. So just to understand this better—so there is slippage in cost, that's one thing, but is there any change in insurance recovery? Last question—maths as well?
Speaker #7: Yeah. So just to understand this better, so there is slippage in cost is one thing, but is there any change in insurance recovery Last question.
Speaker #7: dollar and 70 to 75 percent would be at least 1.2 billion dollars, right? So would you be able to
Speaker #7: dollar and 70 to 75 percent would be at least 1.2 billion dollars, right? So would you be able to recover that or is there any change in that?
Speaker #2: that.
Speaker #7: Got it. That's great to hear. My final question is a It's in the bit mathematical. Sorry. To bother. When you say that you have done 525 EBITDA per ton, can you help us understand your insurance recovery was 47 dollars?
Speaker #7: 47 million dollars, which implies around 50 dollars per ton. So that takes us to 575 versus 563 that was reported. So what's this delta of 12, 13 dollars?
Speaker #2: So I think what you need to do is, first, take the reported number, take out 18 million from that, take out 33 KT from the volume, and then recalculate the adjusted EBITDA per ton which is the 525.
Speaker #2: That's the way to start.
Speaker #7: this 525 to 563?
Speaker #2: So, as I said, step number one: from 516, take out 18. From the total reported volume, take out 33 KT. And do the math.
Speaker #2: Just contact Megan. I mean, the math works.
Speaker #7: Got it. Okay. Thank you so much.
Speaker #2: And just the numerator and denominator together and I'm giving you the number. I'm saying 498 dollars per ton. Sorry, yeah, I mean 498 million.
Speaker #2: That is the EBITDA you should consider. Expire. And from the volume, just reduce the 33 KT and the math will work for you.
Speaker #7: Got it. Got it. This is helpful. Thank you so much. Thank you.
Speaker #1: At this time, I'll turn the floor back to management for closing comments.
Speaker #3: Thank you, Rob. And thanks to everyone for attending our call today. I hope you hear the confidence in the trajectory in front of us underlying strength in the overall business.
Speaker #3: Obviously, very encouraged by the progress that we're making in Baymanet. And getting Oswego operationally behind us. Our focus is on reliably serving our customers as we move through fiscal 2027.
Speaker #3: And we look forward to, again, speaking after our second fiscal quarter. So, thank you.
Speaker #1: Thank you. This will conclude today's conference. Let me disconnect your lines at this time. We thank you for your participation. Have a wonderful day.
