Rolled product shipments increased by 3% ATLANTA, Aug. 10
/PRNewswire-FirstCall/ -- Novelis Inc. (NYSE: NVL; TSX: NVL) today
reported second quarter 2005 net loss of $18 million, or fully
diluted loss per share (EPS) of ($0.24) compared to net income in
the carve-out statements as a part of Alcan Inc., our former
parent, for the second quarter 2004 of $45 million (EPS $0.61).
"While the results for the quarter were disappointing I am pleased
with the strength of the business fundamentals," commented Brian
Sturgell, President and Chief Executive Officer. "Indicative of the
strength of the business operations, we continued to generate
strong cash flows which allowed us to reduce debt by an additional
$98 million. This was driven by rolled products volume growth of
3%, an increase in pricing, an improvement in our product mix and
control of our costs. The weakness in Regional Income was mainly
due to three factors in the quarter: the movement and timing of
metal prices primarily in North America, the strengthening
Brazilian Real and unrealized losses on the change in market value
of derivatives." The comparison of Net Income / (loss) between the
second quarter of 2005 and that of 2004 was largely influenced by
the following items on an after-tax basis: -- Gain on the
monetization of cross-currency interest rate swaps of inter-company
debt amounting to $37 million in 2005; -- Gain on the sale of land
in our Asia region of $11 million in 2005; -- Unrealized losses on
the change in market value of derivatives of $57 million in the
second quarter of 2005, compared to unrealized losses in the second
quarter of 2004 amounting to $18 million; -- Foreign currency
balance sheet translation losses of $25 million in the second
quarter of 2005, mainly in South America, compared to a gain of $6
million in the second quarter of 2004; -- Gain in the second
quarter of 2004 of $13 million on a change in the pension plan for
our South American operations; and -- As a stand-alone company our
interest increased by $20 million in the second quarter of 2005
compared to the 2004 carve-out allocations from Alcan. Rolled
product shipments climbed to 731 thousand tonnes (kt) for the
second quarter of 2005, a 3% increase over the 709 kt shipped in
the equivalent period in 2004. The increase in shipments is
attributed to strong market demand, largely in South America and
Asia, as well as improvements in Europe, particularly in the
beverage can and lithographic markets. Sales and operating revenues
rose nearly 13% for the second quarter of 2005 over the same
quarter of 2004 while cost of sales and operating expenses
increased by 16%. In addition to the higher shipments, the major
contributing factor to increases in both sales and operating
revenues and cost of sales was a rise in London Metal Exchange
(LME) aluminum prices, which were up approximately 7% from the
year-ago quarter. During the quarter, sales and operating revenues
in North America were also impacted by the can price ceiling. Sales
contracts, currently representing approximately 20% of our annual
sales, provide for a ceiling over which metal prices cannot
contractually be passed through to our customers. This resulted in
our being unable to pass through the complete increase in metal
prices sold under these contracts. Although we attempt to mitigate
this risk through the purchase of options, this hedging policy was
not totally effective given the relatively high and sustained metal
prices since the fourth quarter of 2004. Selling, general and
administrative expenses (SG&A) were $76 million in the second
quarter, up $26 million from the year-ago quarter. Included in
SG&A in 2005 are additional corporate head office costs, which
we incurred as a new stand-alone company. The 2004 quarter included
$10 million of the $19 million total benefit from the change in the
South American pension plan. Interest expense at $50 million in the
second quarter of 2005 was significantly higher than the interest
allocated from Alcan in the carve-out statements in the second
quarter of 2004. A comparison to interest expense in the second
quarter of 2004 is not meaningful as it did not reflect the level
of debt, nor the associated interest costs that Novelis would have
incurred had it operated on a stand-alone basis at that time.
"Other expenses (income) - net" was an expense of $11 million in
the second quarter of 2005 and included a realized gain of $45
million on the monetization of certain cross-currency interest rate
swaps that were put in place to hedge inter-company loans
denominated in currencies other than the U.S. dollar, and an $11
million gain on the sale of land in Asia. In addition, we had
unrealized losses on the change in market value of derivatives of
$76 million. The second quarter of 2004 included unrealized losses
on the change in market value of derivatives of $27 million.
Additionally, the 2005 second quarter included foreign currency
balance sheet translation losses of $11 million compared to foreign
currency balance sheet translation gains of $1 million in the
second quarter of 2004. Income taxes for the second quarter of 2005
were $15 million on break-even results for Income before income
taxes and other items. In 2004, the effective tax rate for the
second quarter was 33% compared to the composite statutory rate of
36%. The main reasons for the second quarter 2005 income taxes were
an $11 million pre-tax exchange loss on the translation of net
monetary liabilities denominated in local currency, for which there
was no related income tax recovery, and a tax liability of $10
million on translation of U.S. dollar debt into local currency, for
which there was no related income, both mainly in South America.
The historical 2004 unaudited combined financial statements are
presented in U.S. dollars using United States (U.S.) Generally
Accepted Accounting Principles (GAAP) and have been derived from
the accounting records of Alcan using the historical results of
operations and historical basis of assets and liabilities of the
businesses now comprising Novelis. However, the historical
unaudited combined financial statements included herein may not
necessarily be indicative of our results of operations, financial
position and cash flows in the future or what its results of
operations, financial position and cash flows would have been had
Novelis been a stand-alone company during the historical periods
presented. As these historical combined financial statements
represent a portion of the businesses of Alcan which did not at the
time constitute a separate legal entity, the net assets of Novelis
have been presented as Alcan's net investment in the businesses.
Alcan's investment in the businesses includes the accumulated
earnings of the businesses as well as cash transfers related to
cash management functions performed by Alcan. Subsequent to the
spin-off from Alcan, the financial statements no longer reflect
Alcan as a related party. For more information on the basis of
presentation of the historical combined financial statements, see
note 2 to the audited combined financial statements included in the
Novelis annual report filed on Form 10-K for the year ended
December 31, 2004. Regional Results See Attachment A for a
description of Regional Income and a reconciliation of Regional
Income to Income before income taxes and other items. Total
Regional Income 2nd Qtr 2nd Qtr % Chg 1st Qtr % Chg ($ in millions)
2005 2004 2005 Sales 2,173 1,929 12.6% 2,118 2.6% Regional Income
140 195 (28.2)% 182 (23.1)% Rolled Product Shipments (kt) 731 709
3.1% 712 2.7% Regional Income per Tonne 192 275 (30.2)% 256 (25.0)%
Depreciation 57 57 0.0% 58 (1.7)% Capital Expenditures 33 39
(15.4)% 23 43.5% Total Assets 5,341 6,920 (22.8)% 5,667 (5.8)% The
operating fundamentals of the Company continued to be strong in the
second quarter of 2005 and were reflected in 3% higher rolled
product shipments, increasing conversion prices, and continued
emphasis on cost control. However, Regional Income decreased by $55
million for the second quarter of 2005 versus the prior year period
on a pre-tax basis due to three main factors: The adverse effect of
metal prices impacted both the can price ceiling in North America
and metal timing differences. This accounted for approximately $28
million of the variance while negative impacts from foreign
currency movements, mainly in Brazil, accounted for a further $21
million of the decrease. Finally, during the second quarter of
2004, there was a $19 million gain on conversion to a defined
contribution pension plan in Brazil that unfavorably impacts the
comparison of Regional Income to 2005. Novelis North America North
America 2nd Qtr 2nd Qtr % Chg 1st Qtr % Chg ($ in millions) 2005
2004 2005 Sales 840 749 12.1% 827 1.6% Regional Income 34 72
(52.8)% 57 (40.4)% Rolled Product Shipments (kt) 284 289 (1.7)% 283
0.4% Regional Income per Tonne 120 249 (51.8)% 201 (40.3)%
Depreciation 18 17 5.9% 18 0.0% Capital Expenditures 9 6 50.0 % 8
12.5% Total Assets 1,415 2,879 (50.9)% 1,480 (4.4)% Regional Income
of Novelis North America was $34 million for the second quarter of
2005, a decrease of $38 million, or 53%, from the second quarter of
2004. This reduction was mainly due to the movements in metal
prices which adversely impacted the can price ceiling. Cost
increases, mainly freight and energy costs, were partially offset
by improved conversion selling prices in most product lines, as
well as by continued improvements in optimizing our product
portfolio. The 2% decline in shipments was due primarily to
industrial products such as automotive. Novelis Europe Europe 2nd
Qtr 2nd Qtr % Chg 1st Qtr % Chg ($ in millions) 2005 2004 2005
Sales 833 767 8.6% 807 3.2% Regional Income 58 56 3.6% 57 1.8%
Rolled Product Shipments (kt) 264 256 3.1% 252 4.8% Regional Income
per Tonne 220 219 0.5% 226 (2.7)% Depreciation 25 24 4.2% 26 (3.8)%
Capital Expenditures 12 22 (45.5)% 8 50.0% Total Assets 2,193 2,372
(7.5)% 2,469 (11.2)% Regional Income of Novelis Europe was $58
million for the second quarter of 2005, an increase of $2 million
or nearly 4% compared to the second quarter of 2004. This increase
was supported by a stronger euro on the translation of Regional
Income and the result of restructuring initiatives along with
continued emphasis on cost control. These improvements, together
with higher shipments and a better product portfolio mix, more than
offset higher energy costs and the adverse impact of inventory
reduction measures. Novelis Asia Asia 2nd Qtr 2nd Qtr % Chg 1st Qtr
% Chg ($ in millions) 2005 2004 2005 Sales 360 298 20.8% 338 6.5%
Regional Income 29 23 26.1% 30 (3.3)% Rolled Product Shipments (kt)
123 115 7.0% 114 7.9% Regional Income per Tonne 236 200 18.0% 263
(10.3)% Depreciation 11 11 0.0% 12 (8.3)% Capital Expenditures 7 4
75.0% 3 133.3% Total Assets 986 948 4.0% 987 (0.1)% Regional Income
of Novelis Asia was $29 million for the second quarter of 2005, an
increase of $6 million, or 26%, over the $23 million in the second
quarter of 2004. In the second quarter of 2005, we experienced
better pricing in addition to increased shipments, which more than
offset the adverse impact of metal timing differences. Productivity
improvements contributed to our results as de-bottlenecking in our
Korean production facilities allowed us to increase capacity and
output levels. Novelis South America South America 2nd Qtr 2nd Qtr
% Chg 1st Qtr % Chg ($ in millions) 2005 2004 2005 Sales 144 117
23.1% 149 (3.4)% Regional Income 19 44 (56.8)% 38 (50.0)% Rolled
Product Shipments (kt) 60 49 22.4% 63 (4.8)% Regional Income per
Tonne 317 898 (64.7)% 603 (47.4)% Depreciation 11 12 (8.3)% 11 0.0%
Capital Expenditures 5 4 25.0 % 2 150.0% Total Assets 761 808
(5.8)% 766 (0.7)% Regional Income of Novelis South America was $19
million for the second quarter of 2005, a decrease of $25 million,
or 57%, compared to the second quarter of 2004. This drop resulted
primarily from two specific factors: a $19 million gain resulting
from our conversion to a defined contribution pension plan that
occurred in the second quarter 2004 and a $19 million negative
impact from the 14% strengthening of the Brazilian Real in the
second quarter of 2005. Sixty percent of this impact resulted from
the effects of the foreign currency balance sheet translation,
which has no immediate cash impact on the business. The operating
results of the business remained sound with Regional Income
benefiting from higher shipment volumes and conversion prices and
the favorable impact of higher metal prices on production from our
smelters. Cash from Operating Activities Cash from operating
activities was $176 million for the second quarter of 2005 with a
positive change in working capital, deferred items and other-net of
$135 million. This represents a $215 million improvement in cash
from operating activities compared to the same quarter in 2004. The
change in working capital, deferred items and other-net for the
same period in 2004 was ($137) million. Free cash flow for the
second quarter of 2005 was $135 million, representing a $214
million improvement from the second quarter of 2004, which was
($79) million. Cash Flow 2nd Qtr 2nd Qtr 1st Qtr ($ in millions)
2005 2004 2005 Cash from Operating Activities 176 (39) 112
Dividends (8) (1) (13) Capital Expenditures (33) (39) (23) Free
Cash Flow(1) 135 (79) 76 (1) "Free cash flow" consists of cash from
operating activities less capital expenditures and dividends.
Dividends include those paid by our less than wholly-owned
subsidiaries to their minority shareholders and dividends to the
common shareholders of Novelis. Management believes that free cash
flow is relevant to investors as it provides a measure of the cash
generated internally that is available for debt service and other
value creation opportunities. However, free cash flow does not
necessarily represent cash available for discretionary activities,
as certain debt service obligations must be funded out of free cash
flow. The Company's method of calculating free cash flow may not be
consistent with that of other companies. Financing and Investment
Activities At the spin-off from Alcan, Novelis had $2,951 million
of debt and capital leases which was reduced by $70 million in the
first quarter of 2005. With the strength of free cash flows in the
second quarter of 2005, Novelis further decreased its debt position
by $98 million to $2,783 million at June 30, 2005, for a total
year-to-date debt reduction of $168 million or 6%. Capital
expenditures totaled $33 million for the second quarter of 2005 and
$39 million in the same quarter of last year representing capital
reinvestment rates of 58% and 68% of depreciation, respectively.
The majority of Novelis' capital expenditures for the quarter was
spent on keeping our quality and technology advantage in the
market, increasing productivity, finding additional cost reductions
and undertaking small projects to increase capacity. 2005 Outlook
The guidance for 2005 was based on three primary components. First,
the fundamental drivers of the business which are volume, price,
product portfolio and cost. The second component is metal, which
includes any impact from the can price ceiling or metal timing
differences. The last component is currency which includes both
income statement and balance sheet translation. When developing
guidance for 2005, we relied on the LME forward price curves for
the metal component and internal perspective and the external
outlook for currencies. Clearly, these two items moved well outside
of our projections, with the Real strengthening significantly and
metal showing high and sustained prices since late 2004. The
volatility in metal prices and currency movements limits our
ability to provide new guidance. However, year-to-date our
fundamental drivers showed strong improvement. We still expect to
show a positive increase year over year in the second half of the
year on the elements of regional income which we control; volume
growth, price, product portfolio and cost. Attachment A The
following table summarizes the reconciliation of Regional Income to
Income before income taxes and other items. Second Quarter First
Quarter ($ in millions) 2005 2004 2005 Regional Income Novelis
North America 34 72 57 Novelis Europe 58 56 57 Novelis Asia 29 23
30 Novelis South America 19 44 38 Total Regional Income 140 195 182
Corporate office * 34 (10) (27) Other Adjustments Equity-accounted
joint ventures (11) (10) (11) Change in fair market value &
reclassifications of derivatives (66) (27) 19 Restructuring,
rationalization & impairment 10 (2) 1 Depreciation &
amortization (57) (57) (58) Interest (50) (19) (44) Income before
income taxes and other items 0 70 62 * Corporate office costs
include a $45 million gain realized on monetization of
cross-currency interest rate swaps in the second quarter 2005.
Regional Income is the measure by which management evaluates the
performance of our operating segments. Regional Income comprises
earnings before interest, taxes, depreciation and amortization
excluding certain items, such as corporate office costs and asset
and goodwill impairments, restructuring, rationalization and the
change in fair market value of our derivatives, which are not under
the control of the regional groups. These items are managed by the
company's head office, which focuses on strategy development and
oversees governance, policy, legal compliance, human resources and
finance. Financial information for the regional groups includes the
results of certain joint ventures on a proportionately consolidated
basis, which is consistent with the way the regional groups are
managed. Under U.S. GAAP, these joint ventures are accounted for
under the equity method. Therefore, in order to reconcile to Income
before income taxes and other items, the Regional Income
attributable to these joint ventures is removed from Total Regional
Income for the company and the net after-tax results are reported
as equity income. The change in the fair market value of
derivatives, with the exception of unrealized gains or losses on
certain cash flow hedges, has been removed from individual regional
results and is shown on a separate line. This presentation provides
a more accurate portrayal of underlying regional group results and
is in line with the company's portfolio approach to risk
management. Novelis Inc. CONSOLIDATED AND COMBINED STATEMENTS OF
INCOME (unaudited) (in millions of US$, except per share amounts)
Periods ended June 30 Second Quarter Six Months 2005 2004 2005 2004
Sales and operating revenues - third parties 2,173 1,805 4,291
3,523 - related parties - 124 - 216 2,173 1,929 4,291 3,739 Costs
and expenses Cost of sales and operating expenses, excluding
depreciation and amortization noted below - third parties 1,968
1,578 3,852 3,083 - related parties - 112 - 192 Depreciation and
amortization 57 57 115 118 Selling, general and administrative
expenses 76 50 152 110 Research and development expenses 11 18 19
28 Interest - third parties 50 10 94 21 - related parties - 9 - 17
Other expenses (income) - net - third parties 11 4 (3) 8 - related
parties - 21 - (22) 2,173 1,859 4,229 3,555 Income before income
taxes and other items - 70 62 184 Income taxes 15 23 44 66 Income
(loss) before other items (15) 47 18 118 Equity income 2 1 4 3
Minority interests (5) (3) (11) (7) Net income (loss) (18) 45 11
114 Earnings (loss) per share Net income (loss) per share - basic
(0.24) 0.61 0.15 1.54 Net income (loss) per share - diluted (0.24)
0.61 0.15 1.53 Dividends per common share 0.09 - 0.18 -
Supplemental information (note 1): Net income (loss) attributable
to consolidated results of Novelis from January 6 to June 30, 2005
- increase (decrease) to Retained earnings (18) - 41 - Net loss
attributable to combined results of Novelis from January 1 to 5,
2005 - decrease to Owner's net investment - - (30) - Net Income
(loss) (18) - 11 - Novelis Inc. CONSOLIDATED AND COMBINED BALANCE
SHEETS (in millions of US$, except number of shares) June 30,
December 31, As at 2005 2004 (unaudited) (audited) ASSETS Current
assets Cash and cash equivalents 129 31 Trade receivables (net of
allowances of $32 in 2005 and $33 in 2004) - third parties 1,030
710 - related parties - 87 Other receivables - third parties 249
118 - related parties 35 846 Inventories Aluminum 962 1,081 Raw
materials 18 20 Other supplies 142 125 1,122 1,226 Total current
assets 2,565 3,018 Deferred charges and other assets 235 193
Long-term receivables from related parties 82 104 Property, plant
and equipment Cost (excluding Construction work in progress) 5,282
5,506 Construction work in progress 117 112 Accumulated
depreciation (3,218) (3,270) 2,181 2,348 Intangible assets (net of
accumulated amortization of $10 in 2005 and $9 in 2004) 30 35
Goodwill 248 256 Total assets 5,341 5,954 LIABILITIES AND
SHAREHOLDERS'/INVESTED EQUITY Current liabilities Payables and
accrued liabilities - third parties 1,302 859 - related parties 37
401 Short-term borrowings - third parties 23 229 - related parties
- 312 Debt maturing within one year - third parties 3 1 - related
parties - 290 Total current liabilities 1,365 2,092 Debt not
maturing within one year - third parties 2,757 139 - related
parties - 2,307 Deferred credits and other liabilities 486 472
Deferred income taxes 198 249 Minority interests 144 140
Shareholders'/Invested equity Common shares, no par value -
unlimited number of shares authorized; issued and outstanding:
73,993,006 shares - - Additional paid-in capital 434 - Retained
earnings 27 - Accumulated other comprehensive income (loss) (70) 88
Owner's net investment - 467 391 555 Commitments and contingencies
Total liabilities and shareholders'/invested equity 5,341 5,954
Novelis Inc. CONSOLIDATED AND COMBINED STATEMENT OF CASH FLOWS
(unaudited) (in millions of US$) Six months ended June 30 2005 2004
OPERATING ACTIVITIES Net income 11 114 Adjustments to determine
cash from operating activities: Depreciation and amortization 115
118 Deferred income taxes (17) 15 Equity income (4) (3) Stock
option compensation 1 1 Change in operating working capital,
deferred items and other - net 182 (146) Cash from operating
activities 288 99 FINANCING ACTIVITIES Proceeds from issuance of
new debt from third parties 2,750 441 Debt repayments - third
parties (1,633) (28) - related parties (1,180) - Short-term
borrowings - net - third parties (468) (129) - related parties (74)
8 Dividends - common shareholders (14) - Dividends - minority
interest (7) (3) Net receipts from (payments to) Alcan 104 (17)
Cash from (used for) financing activities (522) 272 INVESTING
ACTIVITIES Purchase of property, plant and equipment (56) (59)
Proceeds from disposal of business, investments and other assets,
net of cash 9 - Change in other receivables - third parties 341
(311) Change in long-term and other receivables - related parties
42 - Cash from (used for) investment activities 336 (370) Increase
in cash and cash equivalents 102 1 Effect of exchange rate changes
on cash balances held in foreign currencies (4) - Cash and cash
equivalents - beginning of period 31 27 Cash and cash equivalents -
end of period 129 28 Novelis Inc. CONSOLIDATED AND COMBINED
STATEMENT OF SHAREHOLDERS'/INVESTED EQUITY (unaudited) (in millions
of US$, except number of shares which is in thousands) Additional
Common Shares Paid-in Retained Shares Amount Capital Earnings
Balance at December 31, 2004 - - - - Net income - six months ended
June 2005 - - - 41 Comprehensive loss - - - - Dividends - - - (14)
Transfer (to)/from Alcan - net - - - - Issuance of common stock in
connection with the distribution 73,989 - 434(a) - Issuance of
common stock in connection with stock plans 4 - - - Balance at June
30, 2005 73,993 - 434 27 Accumulated Other Comprehensive Owner's
Net Income (Loss) Investment Total Balance at December 31, 2004 88
467 555 Net income - six months ended June 2005 - (30)(b) 11
Comprehensive loss (158) - (158) Dividends - (7) (21) Transfer
(to)/from Alcan - net - 4 4 Issuance of common stock in connection
with the distribution - (434) - Issuance of common stock in
connection with stock plans - - - Balance at June 30, 2005 (70) -
391 (a) Represents the amount of owner's net investment after
transfers (to)/from Alcan - net and the net loss from January 1 to
January 5, 2005. (b) Refer to note 1 - Background Basis of
Presentation. Novelis Inc. (in millions of US$) 1. BACKGROUND AND
BASIS OF PRESENTATION Background On May 18, 2004, Alcan Inc. and
its subsidiaries (Alcan) announced its intention to separate its
rolled products business into a separate company and to pursue a
spin-off of that business to its shareholders. The rolled products
businesses were managed under two separate operating segments
within Alcan; Rolled Products Americas and Asia and Rolled Products
Europe. Alcan and its subsidiaries contributed and, on January 6,
2005, transferred to a new public company, Novelis Inc. (the
Company, Novelis, we, us or our), substantially all of the aluminum
rolled products businesses operated by Alcan prior to its 2003
acquisition of Pechiney, together with some of Alcan's alumina and
primary metal-related businesses in Brazil, which are fully
integrated with the rolled products operations there, as well as
four former Pechiney rolling facilities in Europe, as their end-use
markets and customers are more similar to those of Novelis.
Novelis, which was formed in Canada on September 21, 2004, acquired
the abovementioned businesses on January 6, 2005, through the
reorganization transactions described above. On January 6, 2005,
the spin-off occurred following the approval by Alcan's Board of
Directors and shareholders, and the receipt of other required legal
and regulatory approvals. Alcan shareholders received one Novelis
common share for every five Alcan common shares held. Common shares
of Novelis began trading on a "when issued" basis on the Toronto
(TSX) and New York (NYSE) stock exchanges on January 6, 2005, with
a distribution record date of January 11, 2005. "Regular Way"
trading began on the TSX on January 7, 2005, and on the NYSE on
January 19, 2005. The Company together with its subsidiaries
produces aluminum sheet and light gauge products where the end-use
destination of the products includes the construction and
industrial, beverage and food cans, foil products and
transportation markets. The Company operates in four continents,
North America, South America, Asia and Europe through 36 operating
plants and three research facilities in 11 countries. In addition
to aluminum rolled products plants, the Company's South American
businesses include bauxite mining, aluminum refining and smelting
facilities that are integrated with the rolling plants in Brazil.
In 2004 and prior years, Alcan was considered a related party due
to its parent-subsidiary relationship with the Novelis entities.
However, subsequent to the spin-off, Alcan is no longer a related
party as defined in Statement of Financial Accounting Standards
(SFAS) No. 57, Related Party Disclosures. Post-transaction
adjustments The agreements giving effect to the spin-off provide
for various post- transaction adjustments and the resolution of
outstanding matters, which are expected to be carried out by the
parties by the end of 2005. These adjustments, for the most part,
will be reflected as changes to shareholders' equity and could
include items such as working capital, pension assets and
liabilities and adjustments to opening balance sheet accounts.
Agreements between Novelis and Alcan Novelis has entered into
various agreements with Alcan for the use of transitional and
technical services, the supply of Alcan's metal and alumina, the
licensing of certain of Alcan's patents, trademarks and other
intellectual property rights, and the use of certain buildings,
machinery and equipment, technology and employees at certain
facilities retained by Alcan, but required in Novelis's business.
Basis of presentation The consolidated and combined financial
statements for the six months ended June 30, 2005 include the
results for the period from January 1 to January 5, 2005 prior to
the Company's spin-off from Alcan, in addition to the results for
the period from January 6 to June 30, 2005, as described below. The
unaudited combined financial results for the period from January 1
to January 5, 2005 represent the operations and cash flows of the
Novelis entities on a carve-out basis. The unaudited consolidated
results as at June 30, 2005 and for the period from January 6 (the
date of the spin-off from Alcan) to June 30, 2005 represent the
operations, cash flows and financial position of the Company as a
stand-alone entity. All income earned and cash flows generated by
the Novelis entities as well as the risks and rewards of these
businesses from January 1 to January 5, 2005 were primarily
attributed to Novelis and are included in the unaudited
consolidated results for the period from January 6 to June 30,
2005, with the exception of mark-to-market losses of $30 on
derivative contracts primarily with Alcan. These mark-to-market
losses for the period from January 1 to 5, 2005, were recorded in
the unaudited consolidated and combined statements of income for
the six months ended June 30, 2005, and are reflected as a decrease
in Owner's net investment. The historical combined financial
statements as at December 31, 2004 (audited) and for the second
quarter and six months ended June 30, 2004 (unaudited) (hereafter,
"the historical combined financial statements") have been derived
from the accounting records of Alcan using the historical results
of operations and historical basis of assets and liabilities of the
businesses subsequently transferred to Novelis. Management believes
the assumptions underlying the historical combined financial
statements, including the allocations described below, are
reasonable. However, the historical combined financial statements
included herein may not necessarily reflect the Company's results
of operations, financial position and cash flows or what its
results of operations, financial position and cash flows would have
been had Novelis been a stand-alone company during the periods
presented. Alcan's investment in the Novelis businesses, presented
as Owner's net investment in the historical combined financial
statements, includes the accumulated earnings of the businesses as
well as cash transfers related to cash management functions
performed by Alcan. In the opinion of management of the Company,
the unaudited consolidated and combined and historical combined
financial statements reflect all adjustments (including normal
recurring adjustments) necessary for a fair statement of the
financial position and the results of operations and cash flows in
accordance with accounting principles generally accepted in the
United States of America (U.S. GAAP), applied on a consistent
basis. The presentation of financial statements in accordance with
U.S. GAAP requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those
estimates. The results reported in these unaudited consolidated and
combined financial statements are not necessarily indicative of the
results that may be expected for the entire year. As Novelis was
not a stand-alone company and operated as a part of Alcan prior to
2005, the historical combined financial statements include
allocations of certain Alcan expenses, assets and liabilities,
including the items described below. General Corporate Expenses
Alcan allocated general corporate expenses to the Company based on
average head count and capital employed. Capital employed
represents Total assets less Payables and accrued liabilities and
Deferred credits and other liabilities. These allocations are
reflected in Selling, general and administrative expenses in the
historical combined statements of income for the second quarter and
six months ended June 30, 2004. The general corporate expense
allocations are primarily for human resources, legal, treasury,
insurance, finance, internal audit, strategy and public affairs and
amounted to $9 and $17 for the second quarter and the six months
ended June 30, 2004, respectively. Total head office costs,
including the amounts allocated, amounted to $10 and $20 for the
second quarter and six months ended June 30, 2004, respectively.
The costs allocated are not necessarily indicative of the costs
that would have been incurred if the Company had performed these
functions as a stand-alone company, nor are they indicative of
costs that will be charged or incurred in the future. Subsequent to
the spin-off, the Company performs the majority of these functions
using its own resources or purchased services; however, for an
interim period, certain services will continue to be provided by
Alcan. It is not practicable to estimate the amount of expenses the
Company would have incurred for the second quarter and six months
ended June 30, 2004 had it been a stand-alone entity, unaffiliated
with Alcan. Pensions and Post-Retirement Benefits Prior to the
spin-off, certain Novelis entities had pension obligations mostly
comprised of defined benefit plans in the U.S. and the U.K.,
unfunded pension benefits in Germany and lump sum indemnities
payable upon retirement to employees of businesses in France, Korea
and Malaysia. These pension benefits are managed separately and the
related assets, liabilities and costs are included in both the
consolidated and combined and historical combined financial
statements. Prior to the spin-off, Alcan managed defined benefit
plans in Canada, the U.S., the U.K. and Switzerland that include
some of the entities of the Company. The Company's share of these
plans' assets and liabilities is not included in the historical
combined balance sheet as at December 31, 2004. The historical
combined statements of income for the second quarter and six months
ended June 30, 2004, however, include an allocation of the costs of
the plans that varies depending on whether the entity was a
subsidiary or a division of Alcan at that time. Pension costs of
divisions of Alcan that were transferred to Novelis were allocated
based on the following methods: service costs were allocated based
on a percentage of payroll costs; interest costs, the expected
return on assets, and amortization of actuarial gains and losses
were allocated based on a percentage of the projected benefit
obligation (PBO); and prior service costs were allocated based on
headcount. The total allocation of such pension costs amounted to
$3 and $6 for the second quarter and six months ended June 30,
2004, respectively. Pension costs of subsidiaries of Alcan that
were transferred to Novelis were accounted for on the same basis as
a multi-employer pension plan whereby the subsidiaries'
contributions for the period were recognized as net periodic
pension cost. There were no contributions by the subsidiaries for
the second quarter and six months ended June 30, 2004. Prior to the
spin-off, Alcan provided post-retirement benefits in the form of
unfunded healthcare and life insurance benefits to retired
employees in Canada and the U.S. that include retired employees of
some of the Company's businesses. The Company's share of these
plans' liabilities is included in the historical combined balance
sheet as at December 31, 2004 and the Company's share of these
plans' costs is included in the historical combined statement of
income for the second quarter and six months ended June 30, 2004.
Subsequent to the spin-off, certain changes were made to the Alcan
plans covering Novelis employees and new pension plans were also
established by Novelis. Income Taxes Income taxes for 2004 were
calculated as if all of the Company's operations had been separate
tax paying legal entities, each filing a separate tax return in its
local tax jurisdiction. For jurisdictions where there was no tax
sharing agreement, amounts currently payable were included in
Owner's net investment. Cash Management Cash and cash equivalents
in the historical combined balance sheet as at December 31, 2004
are comprised of the cash and cash equivalents of the Company's
businesses, primarily in South America, Asia and parts of Europe,
that perform their own cash management functions. Historically,
Alcan performed cash management functions on behalf of certain of
the Company's businesses primarily in North America, the United
Kingdom, and parts of Europe. Cash deposits from these businesses
were transferred to Alcan on a regular basis. As a result, none of
Alcan's cash and cash equivalents were allocated to the Company in
the historical combined financial statements. Transfers to and from
Alcan were netted against Owner's net investment. Subsequent to the
spin-off, the Company is responsible for its own cash management
functions. Interest Expense The Company obtains short and long-term
financing from third parties, and prior to the spin-off, from
related parties. Interest is charged on all short and long-term
debt and is included in Interest in both the consolidated and
combined and historical combined statements of income.
Historically, Alcan provided certain financing to the Novelis
entities and incurred third party debt at the parent level. This
financing is reflected in the historical combined balance sheet as
at December 31, 2004 within the amounts due to Alcan and is
interest-bearing. As a result of this arrangement, the historical
combined financial statements for the second quarter and six months
ended June 30, 2004 do not include an allocation of additional
interest expense. The Company's interest expense as a stand-alone
company is higher than reflected in the historical combined
statements of income for the second quarter and six months ended
June 30, 2004. Derivatives The Company primarily enters into
derivative contracts to manage a portion of its foreign exchange,
commodity and interest rate risks. These contracts are reported at
their fair value on the balance sheet. Changes in the fair value of
these contracts are recorded in the statement of income, included
in Other expenses (income) - net. Stock Options Stock option
expense and other stock-based compensation expense in the
historical combined statements of income include the Alcan expenses
related to the fair value of awards held by certain employees of
Alcan's Rolled Products businesses during the periods presented as
well as an allocation, calculated based on the average of headcount
and capital employed, for Alcan's corporate office employees. These
expenses are not necessarily indicative of what the expenses would
have been had the Company been a separate stand-alone entity in
2004. Earnings Per Share Prior to the spin-off, the Company was not
a separate legal entity with common shares outstanding. Earnings
per share for 2004 have been presented using the Novelis common
shares outstanding immediately after completion of the spin-off on
January 6, 2005. 2. RELATED PARTY TRANSACTIONS The Company enters
into transactions with related parties in the ordinary course of
business. Alcan is the primary supplier of prime and sheet ingot to
the Company as well as the counterparty to all of the Company's
metal derivatives. The Company also sells inventory to Alcan and
certain equity- accounted investees. In 2004 and prior years, Alcan
was considered a related party to Novelis. However, subsequent to
the spin-off, Alcan is no longer a related party, as defined in
SFAS No. 57, Related Party Disclosures. In 2004, all related
parties balances on the statement of income represent principally
transactions between Alcan and Novelis. Subsequent to the spin-
off, Novelis repaid its net obligation to Alcan at December 31,
2004 from the proceeds of third party financing. At June 30, 2005,
balances due to and from related parties comprise balances between
Novelis and its equity-accounted investees. Atlanta, Georgia August
10, 2005 Novelis, which was spun off by Alcan effective January 6,
2005, is the global leader in aluminum rolled products and aluminum
can recycling, with 36 operating facilities in 11 countries and
more than 13,000 dedicated employees. Novelis has the unique
ability to provide its customers with a regional supply of high-end
rolled aluminum throughout Asia, Europe, North America, and South
America. Through its advanced production capabilities, Novelis
supplies aluminum sheet and foil to automotive, transportation,
beverage and food packaging, construction, industrial and printing
markets. Please visit http://www.novelis.com/ for more information
on Novelis. Statements made in this news release which describe the
Company's intentions, expectations or predictions may be
forward-looking statements within the meaning of securities laws.
The Company cautions that, by their nature, forward-looking
statements involve risk and uncertainty and that the Company's
actual results could differ materially from those expressed or
implied in such statements. Important factors which could cause
such differences include global supply and demand conditions for
rolled aluminum products, changes in the relative value of various
currencies, changes and volatility of LME aluminum prices and other
raw materials we use, demand and pricing within the principal
markets for the Company's products, changes in government
regulations, particularly those affecting environmental, health or
safety compliance, economic developments, relationships with (and
financial or operating conditions of) customers and suppliers,
competition from other aluminum rolled products producers as well
as from substitute materials such as steel, glass, plastic and
composite materials, changes in the market value of derivatives,
and the level of our indebtedness and ability to generate cash and
other factors relating to the Company's ongoing operations.
Reference should be made to the Company's 2004 annual report on
Form 10-K for a summary of major risk factors. NOTE TO FINANCIAL
MEDIA Novelis executives will discuss the company's performance
during a conference call today with financial analysts beginning at
8:00 a.m. ET. Reporters are invited to listen to the call. To
access the call, U.S. callers should dial 888-396-2369.
International callers should dial 617-847-8710, passcode for both
numbers is 45030965. Beginning at 10:00 a.m. ET today, a replay of
the presentation will be available until midnight on Wednesday,
August 17, 2005. To access the replay, U.S. callers should dial
888-286-8010, international callers should call 617-801-6888. The
access code for U.S. and International is 44286661. The conference
call will also be webcast on the Novelis Investor Relations website
at http://www.novelis.com/. A presentation will be available during
the webcast and a downloadable version will be accessible on the
Novelis website. DATASOURCE: Novelis Inc. CONTACT: Media: Charles
Belbin, +1-404-814-4260, Investor: Holly Ash, +1-404-814-4212, both
of Novelis Inc. Web site: http://www.novelis.com/
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