Novelis builds on its footprint

After you finish that can of beer or soda, if you toss it in the recycling bin, odds are good that it’ll end up as one bit of Atlanta-based Novelis’ campaign to turn itself into one of the world’s greenest — and most profitable — aluminum processors.

Only a few years ago, after it was acquired in 2007 by an Indian conglomerate, Novelis was racking up losses that eventually totaled more than $2 billion.

But since then, the world’s largest maker of aluminum sheet metal, with nearly $11 billion in revenue, says it has largely retooled itself into a profitable company.

Now it wants to grow, and it’s investing heavily to double the percentage of recycled aluminum in the sheet metal it sells to makers of drink cans, autos, cellphones, televisions, appliances and other products.

Those efforts are paying dividends locally.

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By mid-year, Novelis expects to open a new research and development center in Kennesaw that will eventually employ up to 140 well-paid engineers, metallurgists and technicians. Most are transferring from other locations that Novelis is closing as part of its cost-cutting efforts.

But the company also expects to hire about 40 people for the highly skilled jobs, where annual pay often tops $120,000.

Novelis has almost 11,000 employees in 11 nations and produces about 19 percent of the sheet aluminum used each year worldwide. Its biggest customers include British can-maker Rexam Plc., Anheuser-Busch and Coca-Cola.

At Novelis’ 125-employee recycling plant in Greensboro, about 70 miles east of Atlanta, plant manager David Davis is planning to install a more efficient replacement for one of the operation’s three furnaces by year-end.

He hopes more investments and possible expansion will follow as Novelis increases its recycling capacity.

Currently, the 40-year-old facility — Novelis’ first dedicated recycling plant — melts down more than a million pounds a day of used pop cans and other aluminum scrap, turning it into 50,000-pound-plus ingots that are trucked to Novelis’ sheet metal rolling mill in Russellville, Ky.

But Novelis’ appetite for recycled aluminum is insatiable, partly because it takes about 95 percent less energy — by far the biggest cost — to recycle aluminum as it does to produce it from raw ore. The energy savings from recycling 40 pounds of cans instead of smelting ore could propel a car about 400 miles, the company said.

“The more we can make, the less we have to buy elsewhere,” said Davis.

Indeed, such costs savings are a key reason Novelis is hoping to boost its recycled output from about 35 percent now to 50 percent in 2015 and 80 percent by 2020.

The savings are “extremely attractive but not easy to do,” Novelis CEO Philip Martens said in an interview.

The company is investing $100 million in two new recycling plants in Brazil and South Korea, but to get to 50 percent, “realistically we’ll have to spend another $200 [million] to $300 million” on other plants, said Martens.

Each $100 million investment in new recycling capacity promises to lower Novelis’ annual material costs by 10 percent to 15 percent, he said.

“It really does require us to change how we operate our business,” said Martens.

But Novelis has already been through a lot of big changes — some engineered by Martens.

The former Ford executive was hired in 2009 to turn around Novelis, which had been hobbled by rising aluminum prices it couldn’t pass on to some of its major customers. It had lost more than $2 billion in the three years after its 2007 acquisition by Indian firm Hindalco Industries, a unit of Mumbai-based Aditya Birla, in a $6.2 billion deal.

Martens led efforts to streamline Novelis’ operations and rewrite its biggest customers’ contracts to stop the company’s hemorrhaging.

From annual losses that topped $1.9 billion in 2009, Novelis turned a $465 million profit in 2010. Net income dipped to $160 million in its 2011 fiscal year ending last March, but profits are up again so far in the first half of its current fiscal year.

Now, besides its recycling push, Novelis also hopes to capitalize on the auto industry’s growing use of aluminum, and perhaps to expand in China.

“We are very pleased with the resilience of our business model,” Martens said. “We can sustain the growth initiatives quite well.”

That said, Novelis could face some challenges as it widens its niche in the rough-and-tumble aluminum industry, which has been going through a major shake-out.

The last few years have been rougher than a crumpled sheet of foil for most parts of the aluminum industry.

During the depths of the recession, the price of refined aluminum plunged 60 percent, to about $1,250 a ton. The price has since partly recovered to more than $2,000 per ton.

But industry analysts say aluminum prices are still soft because Chinese producers have doubled their output since 2006 and dramatically expanded their exports.

The shares of rival Alcoa, one of the world’s largest aluminum producers, are down roughly 80 percent from their high in 2007. After losing $1.1 billion in 2009, Alcoa embarked on turnaround efforts that included closing smelters in Texas and Alcoa, Tenn., and cutting production at two other plants in Spain and Italy.

Despite its huge losses in the past, Novelis is now largely immune from aluminum’s price swings, said Martens, because it renegotiated its major customers’ contracts to eliminate that risk.

Still, Novelis’ parent company has likewise struggled with the price swings of aluminum. The metal accounts for roughly 40 percent of revenue at copper and aluminum producer Hindalco Industries, the flagship company of the Aditya Birla conglomerate. Hindalco’s shares have dropped about 40 percent over the past year.

Even though all Novelis’ stock is owned by its Indian parent, it still reports its financial results to the U.S. Securities and Exchange Commission because its debt is publicly traded in this country.

Novelis’ debt carries junk bond ratings, partly as a legacy of its heavy losses in 2006-2009.

But Novelis’ long-term debt also jumped by almost two-thirds, to $4 billion. That was a result of a $1.7 billion dividend Novelis paid to its Indian owners as part of a debt refinancing in late 2010.

Typically, junk bond ratings increase a company’s borrowing costs and high debt levels can mean a company faces a higher risk of defaulting on its debt or worse.

However, through a spokesperson, Novelis said it benefited from the 2010 debt moves because it refinanced at better terms and still had sufficient cash to pay for its expansion and recycling investments.

Some industry analysts said Novelis is on solid financial footing, despite the junk bond rating and large debt. That’s because, they said, it can easily cover its debt payments and has roughly $1 billion in cash or available credit as reserves.

“The company is still in very good shape financially,” said Brett Levy, managing director in leveraged finance research at Jefferies & Co.

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About Novelis

The Atlanta-based company, a unit of Indian conglomerate Aditya Birla, is the world’s largest recycler and producer of aluminum sheet metal used in beverage cans, food containers, auto parts, electronics and other products.

Headquarters: Buckhead.

Employees: Some 10,850 in 11 countries.

Sales: $10.6 billion in fiscal 2011.

Profit: $160 million.

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