Novelis Inc (NVL) Q1 2022 Earnings Call Transcript

Novelis Inc (OTC:NVL) Q1 2022 earnings call dated Aug. 04, 2021.

Corporate Participants:

Megan Cochard — Director of Investor Relations

Steven R. Fisher — President and Chief Executive Officer

Devinder Ahuja — Senior Vice President and Chief Financial Officer

Analysts:

Amit A. Dixit — Edelweiss Securities Ltd. Singapore — Analyst

Pinakin M. Parekh — JPMorgan — Analyst

Vishal Chandak — DAM Capital — Analyst

Satyadeep Jain — Ambit Capital — Analyst

Indrajit Agarwal — CLSA. — Analyst

Kirtan Mehta — BOB Capital Markets — Analyst

Ritesh Shah — Investec — Analyst

Presentation:

Operator

Greetings everyone, and welcome to the Novelis Q1 FY ’22 Earnings Conference Call. [Operator Instructions] Please note, today’s conference is being recorded, Wednesday, August 4, 2021. It is now, with pleasure that I turn today’s presentation over to Megan Cochard, Director of Investor Relations for Novelis. Please go ahead.

Megan Cochard — Director of Investor Relations

Thank you, Bridget. And good morning or evening everyone. Welcome to Novelis’ First Quarter Fiscal Year 2022 Earnings Conference Call. Hosting our call today is Steve Fisher, our President and Chief Executive Officer; and Dev Ahuja, our Chief Financial Officer.

Following the presentation, the call will be open to analysts and investors for questions. This conference call is being broadcasted on the Internet at novelis.com in the Investors section. 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 and Litigation Reform Act of 1995. 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.

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.

Now let me turn the call over to Steve.

Steven R. Fisher — President and Chief Executive Officer

Thanks, Megan, and good morning or evening to everyone. And thanks for joining us today. I hope you and your families are safe and healthy as we all continue to manage through the challenges associated with the coronavirus pandemic. I am pleased to share that Novelis delivered very strong financial and operational results in the first quarter of the new fiscal year. Our diverse product portfolio and global footprint enabled strong shipment performance in the quarter capturing strong demand for aluminum flat rolled products across end markets. As a result of continued robust shipments and favorable market conditions, Novelis achieved a milestone in its history, exceeding $2 billion in adjusted EBITDA on a trailing 12-month basis and further improved net leverage down to 2.5 times. In addition to strong market tailwinds, our teams continue to make incredible progress with the ongoing integration of Aleris, achieving a $100 million in run rate cost synergies by the end of the quarter and preparing to launch a major investment in China to capture strategic synergies associated with the acquisition.

At the same time we are meeting major capital project timeline targets related to three organic expansions that will help us meet growing customer demand in the automotive and beverage can sheet markets. This also includes a recycling expansion in Brazil that will be another step in our sustainability journey towards becoming a fully circular business.

Let me provide a brief product in market outlook on Slide 4. Our near-term demand outlook across most end markets remains very positive and we continue to work closely with our customers to adjust production based on their sales forecast. Beverage can continues to benefit from high-at-home consumption and consumer preference for sustainable packaging options. We continue to expect a very strong customer demand for volumes for the foreseeable future as can makers announce plans for new capacity over the next couple of years across regions.

In automotive, the mid to long-term outlook remains robust supported by growing consumer demand for vehicles that use a higher share of aluminum like XUVs, trucks and electric vehicles. However, the semiconductor shortage impacting the automotive industry is having an impact on demand for aluminum sheet in the near term. We continue to monitor the impact the global semiconductor shortage is having on our customers and we are prepared to meet their ongoing production needs. In addition, our diverse customer base in geographical footprint as well as our ability to repurpose capacity to other end markets like can and specialties will help mitigate the impact for the full year.

Moving to specialties, customer demand is strong across markets, including building and construction, commercial transportation segment, heat exchangers, painted products, consumer electronics and container foil packaging.

And lastly, while demand for premium aerospace sheet from OEMs is expected to remain muted as consumer travel remains pressured due to the pandemic. We are encouraged that the recovery, although uneven around the world is accelerating. The long-term fundamentals remain intact and we will have potential for EBITDA per ton expansion when aerospace rebounce.

Turning to Slide 5. We have invested in several organic growth projects to help capture the strong market demand we see. To the automotive market, we have expanded our total automotive finishing capacity to approximately 1 million tons globally with the recent completion of our newest automotive finishing lines in the U.S. and China. Those facilities are now capable of producing commercial shipments and we continue to work closely with our customers on material qualification to meet strong demand. Meanwhile, our capacity expansion in Brazil to support strong demand for aluminum beverage cans also continues to progress extremely well. The 100 Kt rolling and recycling capacity upgrade is nearly complete, providing the ability to ramp capacity to meet local customer demand for the next three to four years.

Recycling, an increase in the use of recycled content is the cornerstone of our sustainability journey and projects like this that will help pave the way toward our ambition to create a fully circular business. The new remelt area in Pinda casted it’s first ingot in July and the additional recycling capacity is coming online as we speak.

Moving to Slide 6. While we are still finalizing plans and discussions with the government, I wanted to share a few more details about our plans to expand and integrate capacity in China. The ability to capitalize on underutilized capacity in the state of the art Aleris Zhenjiang hot mill in China was one of our key strategic priorities and our acquisition business case and we are excited to launch this project in the coming months.

In addition, we will maintain our current aerospace and commercial plate production capacity to meet demand for these high value end markets as well.

Through an approximately $375 million capital investment, we will expand Zhenjiang capacity and capabilities to produce automotive coils to feed our existing automotive finishing cash lines in Changzhou, which is only about 80 kilometers away. The investment entails a new automotive casthouse including recycling and re-melt capabilities, expanded hot mill capacity and the implementation of a new technologically advanced cold mill to fully feed our cash line in China, as well as some minor finishing and other facilities costs. As a result, we will fully integrate our automotive business in Asia, proving to our customers our long-term commitment to the region and driving cost in strategic synergy benefits. The significant capital investment will provide access to local metal sourcing and structural cost advantages of operating efficiently in China, which include lower operating and transportation costs and the elimination of import duties. It also supports our sustainability strategy by creating efficiencies with scrap consumption and the opportunity to develop closed loop recycling with our customers in China.

In addition, this releases capacity in our Korean rolling mills providing the ability to capture growing market opportunities. All in, we now estimate this will unlock over $100 million in synergies.

Let’s move to Slide 7 to take a look at all acquisition synergies in a bit more detail. The strategic synergy from the China investment combined with fantastic combination cost synergies, out teams have identified a driving significant total acquisition synergy benefits. First on the combination synergy side, we have already achieved a $100 million in run rate combination synergy savings by the end of Q1, well ahead our original base case estimate to achieve $85 million in total. Our teams continue to work diligently to realize incremental synergies, which we currently forecast will exceed $120 million on a run rate basis.

Second, as we have dug more into our China investment case in the benefits and strategic synergies it can deliver, we now estimate we can achieve over $100 million transformational synergies by integrating us in China as I outlined on the previous slide. In total, we now forecast our total synergy potential to be above $220 million.

And now I’d like to turn the call over to Dev for a more detailed review of our financial results. Dev?

Devinder Ahuja — Senior Vice President and Chief Financial Officer

Thank you, Steve and good morning or good evening.

So on Slide 9, Q1 of the prior fiscal year of course was severely impacted from customer-related shutdowns resulting from the pandemic. Net income from continuing operations increased significantly over the prior year to $303 million in Q1 compared to a net loss of $61 million. Excluding tax effected special items as outlined in the back of today’s earnings press release, net income from continuing operations increased to $260 million compared to $22 million in the prior year. This year’s first quarter also include a $63 million loss on discontinued operations reflecting a fair value write-down of the Duffel receivable to EUR45 million. This is the result of management’s proposal to come to a settlement and avoid elongated legal and arbitration proceedings for both parties.

Net sales increased 59% to $3.9 billion, driven mainly by a 26% increase in total flat rolled product shipments to 973 kilotonnes. The increase in shipments reflects continued strong demand for beverage packaging and specialty shipments as well as the automotive shipment level doubled the prior year, which was heavily impacted by the pandemic. Adjusted EBITDA also more than doubled versus the prior year, increasing to $555 million. The current year quarter includes a $47 million one-off gain related to a favorable decision in the Brazilian tax litigation in regards to inclusion of VAT for calculation of PIS and COFINS, which are a type of social security tax.

Q1 EBITDA is still a record quarter even when excluding this benefit. EBITDA per ton shipped is $570 in the first quarter or $522 per ton after adjusting out the litigation benefit.

Turning to the EBITDA bridge on Slide 10. The positive impact from the soft prior to year shipment comparison as well as strong demand in the current year drove the vast majority of our EBITDA improvement year-over-year in volume. Favorable price and mix also was a significant contributor at $84 million driven by a sharp automotive market recovery relative to prior year, but dampened by semiconductor shortages in fiscal year ’22. The increase in operating cost is a factor of higher volume related production costs compared to a well-planned cost reduction actions in the prior year and inflationary cost pressure this year, particularly in coatings and spray. These costs were largely offset by favorable recycling benefits as a result of higher LME aluminum prices and historically high local market premiums.

The $37 million increase in SG&A and R&D is mainly employee-related costs such as variable pay and higher share-based compensation on the improved Hindalco share price. Currency contributed a favorable $70 million driven mainly by favorable translation in Europe and the favorable other column here include the $47 million favorable decision in the Brazilian VAT tax litigation matter.

Let’s turn to Slide 11 and Q1 performance by segment. Starting with North America. Total FRP shipments increased 32% year-over-year and adjusted EBITDA by 121%. This is mainly due to higher shipment across markets compared to the prior year, which was significantly impacted by temporary customer shutdowns as well as favorable metal costs, partially offset by inflation and higher production volume related operating costs. Europe saw a 32% increase in shipment and significant improvement in segment income to over $100 million. The story in Europe is similar to North America. Higher volumes compared to prior year, customer shutdowns and favorable metal, partially offset by inflation and increased production related operating costs. The region also benefited from a favorable currency translation rate compared to the prior year.

Turning to slide 12. Asia shipments grew 4% year-over-year in Q1 and EBITDA grew 17% to a record high $88 million. This was driven by strong demand across end markets as well as favorable metal costs, which more than offset cost headwinds resulting from an inflationary price environment and supply chain disruptions.

Lastly, South America shipment grew 39%, driven by strong demand for beverage packaging compared to prior year pandemic related customer shutdowns. EBITDA grew 154%, but includes the $47 million favorable decision in tax litigation I spoke of earlier. Notably even excluding this benefit, segment income in the region is an all-time record driven by strong volume, favorable metal and to a lesser extent favorable currency.

Now let’s turn to free cash flow on Slide 13. Free cash flow from continuing operations was an outflow of $30 million compared to an outflow of $146 million in the prior year and what is seasonally a low cash flow quarter. The improvement versus the prior year is driven mainly by the significant improvement in EBITDA. The other main driver of free cash flow this quarter is the significant increase in aluminum prices over the past few months, creating a sizable working capital headwind with some offset in metal price lag. I’m also very pleased to report that we have reached our target 2.5 times net leverage ratio at the end of Q1 far ahead of expectations. We also continue to maintain adequate liquidity level ending the quarter with $2.3 billion.

Turning to Slide 14. Let me touch quickly on our progress against our commitment to reduce gross debt by $2.6 billion from our Q1 fiscal year ’21 peak. As previously reported $2 billion had already been repaid in fiscal year ’21 and in the first quarter of fiscal 2022, we repaid $124 million of Aleris Zhenjiang term loans and we plan to repay the 2017 term loan balance still outstanding before its maturity in 2022, after which we will have no debt maturing in the next four years. In July, we capitalized on favorable market conditions and Novelis has proven financial performance to refinance $1.5 billion of 5.875% senior unsecured notes due 2026, the two new senior unsecured note issuances at $750 million each. We secured new 5-year and 10-year bond at extremely favorable rates reducing annual interest by $35 million and providing flexibility in our balance sheet. We’re also pleased to receive a credit rating upgrade from S&P Global Ratings at the end of July to BB from BB minus, recognizing the continued steady improvement in our business and markets.

I’d now like to turn the call back over to Steve.

Steven R. Fisher — President and Chief Executive Officer

Thanks, Dev. In summary, Novelis delivered another record quarter as a result of our diversified product portfolio, outstanding operational performance and leading global presence. We are capturing near and long-term favorable demand trends for aluminum FRP across end markets by bringing new sustainably focused production capacity online. We remain focused on capturing value through acquisition synergies and are excited to launch our strategic investment in China in the coming months. And we see many more significant opportunities to continue to invest and grow with our customers as we work towards achieving our ambition to be the world’s leading provider of low carbon sustainable solutions.

With that, we’re happy to take any of your question.

Questions and Answers:

Operator

Thank you very much. [Operator Instructions] And our first question comes from the line of Amit Dixit of Edelweiss, Singapore. Please proceed with your question.

Amit A. Dixit — Edelweiss Securities Ltd. Singapore — Analyst

Thank a lot for the opportunity and congratulations for a very good set of numbers. I have two questions. The first one is on your auto specifically. So now we have hit 1 million ton capacity in auto. So how do you see the capacity utilization now and when do we ramp it up to 1 million ton?

Steven R. Fisher — President and Chief Executive Officer

Yeah. Thank you, Amit. So as I said in the prepared remarks, we have both the new U.S. auto finishing lines and the China finishing lines delivering commercial coils to our customers. We are working on qualification with many of the customers on those lines and that’s going extremely well. So as we think about the case of how we expected these to ramp up, we expect them to ramp up ahead of that time frame in our original plan. In China, we’ll ramp probably quicker than the U.S. line does and so I’d expect that to be in full utilization within about a year and a half. And then, I think, the U.S. line will be a little bit slower just based on contractual commitments and that one will take a few years to get to full utilization, but again all in line with what we had originally planned for both of these and quite frankly ahead of expectations as it relates to the strong customer pull and contractual sales that we’ve been able to book of these lines.

Amit A. Dixit — Edelweiss Securities Ltd. Singapore — Analyst

Yeah. Thanks. The second question is essentially on your guidance. So we have been very circumspect if we look at the guidance part, I mean we have hit USD500 per ton plus EBITDA for a few quarters in a row now, and given that some of our [Indecipherable] have increased their guidance, in fact for the whole year. So how do you see your EBITDA per ton guidance in light of all this?

Steven R. Fisher — President and Chief Executive Officer

Dev, do you want to take that?

Devinder Ahuja — Senior Vice President and Chief Financial Officer

Yes. So, Amit, we are at this stage not giving any new guidance, we are again repeating that the EBITDA per ton at levels above 500 is very well sustainable. And the reason why at this point in time, we are kind of not wanting to really start revising guidance is the following. I’m sorry, I’m getting an echo, give us a moment please. Let me try now, I hope this works. — So the reason why we are staying at 500 and above, but not revising yet more specifically is we have a lot of loading happening right now if we see external condition on the one side, on the positive side is demand is very robust across all segments and metal prices are high, so these tend to really benefit us. On the other side, inflation is becoming a bit of a wildcard and unknown. We know that at some stage it has to settle, but we are just waiting to see how all this plays out, supply chain disruptions occur. We want to see how this plays out and also semiconductor, while we will see an improving situation every quarter from here onward, but we are not at the end of that. So it will be at least some time before we see the end of all the semiconductors shortage situation, so we would rather wait before again revising guidance. So that is really some background for you.

Amit A. Dixit — Edelweiss Securities Ltd. Singapore — Analyst

Okay, fair enough. Thanks and all the best.

Devinder Ahuja — Senior Vice President and Chief Financial Officer

Thank you.

Operator

And our next question comes from the line of Pinakin Parekh of JP Morgan. Please proceed with your question.

Pinakin M. Parekh — JPMorgan — Analyst

Thank you very much. My first question is there has been a very material working capital build in this quarter. Now with aluminum prices trending the way they are. How should we look at working capital through the course of the year, especially given that we’ll have two new facilities, which will also be ramping up?

Steven R. Fisher — President and Chief Executive Officer

Yeah, thank you for the question, Pinakin. I think that’s an important question. So yes, the increase in metal prices LME and historically high premium, so look at U.S. and Midwest has gone to levels we could not really imagine $700 per ton plus. So, given the situation, we think that we will have a drag on cash flows from working capital. And if you really want some more color on this, last year we delivered a free cash flow of $740 million, had everything stayed constant on the metal, we would have delivered a nicely higher free cash flow — a significantly higher free cash flow this year, but given where metal is, I would say that in the current situation, we will be flat to lower on the free cash flow for this year and it is still going to be robust, but metal is going to be a drag in short. And we have always told you that you should think about every $100 in metal prices impacting us by around $60 million to $65 million, so just keep that in mind.

Pinakin M. Parekh — JPMorgan — Analyst

Sure. Thank you. My second question is on rolled products shipment. At what point of time over the next two to three quarters can we see the full benefit of the entire project commissioning. I’m just trying to understand that over the last few years we have been broadly in 3.2 million ton 3.3 million ton rolled product shipment range excluding Aleris. When can we decisively break into the 4 million ton 4.2 million ton annualized run rate?

Steven R. Fisher — President and Chief Executive Officer

Yeah. So, Pinakin, that’s a good — very good question. And as you know, we’re running at about 4 million metric tons on an annual basis. We continue to do everything we can to debottleneck, small projects through world-class manufacturing, through digital initiatives to get more capacity out of the assets and that’s gone very well over the past several years to get us into this position, we will continue to drive on that and so you’ll get some incremental there. As it relates to larger chunks of capacity coming in, the next one is the Pinda rolling expansion, which is 100 Kt commission later this year on the rolling side. The casting and recycling will commission little bit earlier, and then that will ramp over the next couple of years. And then the next large chunk will come from the China integration expansion and when that’s complete, so hopefully we’ll begin that project here in the next few months, it’s likely 2.5 to 3 years to build and then will immediately be able to integrate the capacity downstream to the cash line 80 kilometers away at Changzhou and that frees up our capacity also in our Ulsan joint venture in South Korea to re-utilize that capacity for can and specialty, so growing the incremental tie by another 200 Kt. So those are the big chunks that we’ve announced so far and when they would come in.

Pinakin M. Parekh — JPMorgan — Analyst

Understood. Just one more question and this is slightly medium term. If I look at what Novelis is saying and what your competitors are saying, it looks that the main constraint is effectively the capacity that the companies have. And if you put in the context of where U.S. and European economies are and a potential $1 trillion infrastructure stimulus coming through. Over the next 12 to 18 months, do you think capacity will be the key constraint for the downstream industry and if that is the case then how does demand get met, U.S. and Europe see more imports coming out of China, or do we see new players entering the industry?

Steven R. Fisher — President and Chief Executive Officer

Yeah. So, overall, I think you’re spot on — depends on each end market a little bit in the capabilities of each of the assets, but overall the hot mill capacity for the industry is becoming extremely tight outside of China. And so with the opportunities we see and not only the infrastructure that you’ve mentioned, but sustainability trends that drive continued growth in auto, I mean packaging. This is something that we’re in active discussions with our customers to think about what that’s going to mean from additional capacity on the rolling side. Unfortunately, that additional capacity I just outlined for you will take some time to put into the ground and bring up to speed. And so in the meantime, we have to do everything we can to debottleneck the current assets to bridge towards potential further growing capacity expansions.

Pinakin M. Parekh — JPMorgan — Analyst

Thank you. Thank you. This is very helpful.

Operator

Our next question comes from the line of Vishal Chandak of DAM capital. Please proceed with your question.

Vishal Chandak — DAM Capital — Analyst

Yeah. Thanks. Congratulations on an excellent set of results. Given the line of free cash flows that we have, do you plan to revise your capex guidance, given that even after repatriating about 8% to 10% of the free cash flow, you still have enough cash flows. So how do you plan to spend that additional cash flow? Would it be through prepayment of debt or increasing the capex on the growth projects?

Devinder Ahuja — Senior Vice President and Chief Financial Officer

Yeah, so let me take that, Vishal.

Vishal Chandak — DAM Capital — Analyst

Okay.

Devinder Ahuja — Senior Vice President and Chief Financial Officer

So, as you know, a couple of months ago when we had our communications with investors, we basically said that we are going to be spending on an average about $300 million on maintenance and altogether — per annum and over the next five years, we have identified capex projects of about $1.5 billion. Now, as me speak, we are working on a number of projects in the pipeline, which include debottlenecking, capacity, recycling, sustainability as just a few examples. It’s too early to sort of call [Phonetic] out specifics of this project, but what we can tell you is that there is enough opportunity to deploy more cash on all the kinds of things that I have just mentioned. In time, we will get more specific about that, but the point is that now that as you you’ve identified the cash flows are good, we have reached our range of leverage target, it gives us a lot of flexibility on the balance sheet to deploy cash towards growth and that is what we are going to be completely focused on. So, wait for more to come, we will come back as we have more specifics, I mean one of the things that Steve alluded to is the China investment. So, we are kicking that off as one of the first few which was part of the $1.5 billions. But there will be more news coming over time on opportunities to deploy cash on additional capex.

Vishal Chandak — DAM Capital — Analyst

Got it. That’s quite helpful. So my second question was with respect to China, so we’ve seen huge amount of floods in China in the recent times. And is there any impact on our facilities or on our customers in a material way that could hamper the second quarter shipments or third quarter shipments that you are foreseeing?

Steven R. Fisher — President and Chief Executive Officer

I’m sorry, I didn’t hear the news that you’re referring to coming out of China.

Vishal Chandak — DAM Capital — Analyst

So recently, because of the floods in China, especially in the aluminum zone — aluminum production zone, have we seen any disruption in our production facilities there or in the other competitors production facilities or in our customers areas that you can forecast or see?

Steven R. Fisher — President and Chief Executive Officer

Yeah, so far we have not had any in our facilities nor any material in any of our customers. And so we don’t see that necessarily being inside of China a significant impact in Q2 for us.

Vishal Chandak — DAM Capital — Analyst

Sure. Thanks. That’s all from my side.

Operator

And our next question comes from the line of Satyadeep Jain of Ambit Capital. Please proceed with your question.

Satyadeep Jain — Ambit Capital — Analyst

Hi. Thank you for the opportunity. Couple of questions, the first one on the China expansion. If I understand it correctly, I think when you initially announced the expansion plan, it was supposed to be about $300 million, subsequently raised to 2025 to $375 million for a $65 million benefit on a 200 Kt ore line and that frees up the capacity Ulsan. I think the capex guidance is somewhat higher, the synergies are definitely higher, has there anything something change compared to your earlier expectations, are you adding more capacity, are you adding something else in addition to what you announced earlier?

Steven R. Fisher — President and Chief Executive Officer

Let me take that one. So, a couple of things have happened. Essentially, we had done our assessment of the cost of the China expansion largely at the time when we did the acquisition and from then to now a couple of things have happened. One is just strengthening of the RMB, that is a factor. Number two, higher metal prices, higher wage inflation, that’s a global issue right now as you see. These are two major factors that have resulted in some higher costs. But outside of that on the positive side, the plant is actually going to be far more technologically advanced than we had conceived at that time, far more digitally equipped than we had conceived at that time. So a combination of some of these things has resulted in higher costs. And I must very quickly add that from a payback perspective, we are actually going to be in a nice place, because remember that we had said that the synergies that we will get from China expansion would be in the region of $65 million, now that the synergies are going to be in excess of $100 million and that is because we discovered more opportunities also because the plant is going to be more digitally equipped, more technologically upgraded, we are going to have cost efficiencies. So basically the cost efficiencies and synergy opportunities overall are going to more that make up for the higher capital costs with more than $100 million of synergy opportunity. So that’s the way to think about it.

Satyadeep Jain — Ambit Capital — Analyst

Okay, thank you for clarifying that. Secondly on the beverage can, I think one of the competitors actually mentioned recently that the can sheet pricing is now at level where at least investment in debottlenecking mix. And so, what kind of inflation have you experienced in the pricing for can sheet and you also have debottlenecking opportunities. Do you believe that their pricing is for can sheet and given the relatively less cyclicality for can, is there a case for you also to make some investments in debottlenecking your can, what can also in addition to ABS?

Steven R. Fisher — President and Chief Executive Officer

Yeah. So as we’ve said on the last several calls, we see a very significant opportunity in beverage can as a package of choice for sustainability trends for — and medium to long-term growth, we feel very comfortable with. And as we talked about before, the overall supply is very tight for can sheet right now. So we’re having active discussions with our customers of how we can support them through debottlenecking which we are already doing have been for some time, we are investing in South America to increase capacity there and we’re looking at, as Dev just said further opportunities to continue in that journey. And as far as pricing goes, I think we’ve been clear that the trend towards higher margins on beverage can sheets has been occurring for the last couple of years. And based on the supply-demand right now, we believe we will continue to be in a place that will make sense for continued investment in this space and we continue to be very supportive of that.

Satyadeep Jain — Ambit Capital — Analyst

Okay, thank you so much.

Operator

Thank you. And our next question comes from the line of Indrajit Agarwal, of CLSA. Please proceed with your question.

Indrajit Agarwal — CLSA. — Analyst

Hi, good morning, thanks for the opportunity. I have few questions. First on the South America segment of business. In spite of adjusting for the one-off this quarter that has continued to actually improve quarter over quarter. So what is your sense of sustainability of these kind of margins and EBITDA in that segment and what could be like a shocker for us what could actually [Indecipherable]?

Steven R. Fisher — President and Chief Executive Officer

So, Indrajit, here is the thing. After adjusting for the one-off from the VAT litigation outcome, you also need to remember the very high metal prices and premiums. So if you just do the math and out of segment number of $193 million, you take out the $47 and get to $146 million on shipments of $157, you will get $1,075 per ton. But that includes the current high metal prices. So, what I would tell you is that, think about quarter four fiscal year ’21 number, which was somewhere around $825, somewhere in that vicinity is not a bad number I would say.

Indrajit Agarwal — CLSA. — Analyst

Sure. That’s helpful. Second, like in last quarter you had some take or pay benefits in the auto sheet segment in Europe, is that any benefit this quarter that is built?

Steven R. Fisher — President and Chief Executive Officer

No. Nothing in this quarter.

Indrajit Agarwal — CLSA. — Analyst

All right. And thirdly, it’s more a medium term kind of question. Like as you have mentioned number of times, both the metal prices and physical premium has been like significantly higher levels than what we have seen in the recent past. So, at what point or are you already getting a sense of that impact in the demand from our downstream consumers, not — may not be that can producers, but the consumers of can for any level, are you seeing demand getting impacted?

Steven R. Fisher — President and Chief Executive Officer

Yeah, no, we don’t, and what you have to remember is that even with aluminum prices rising, other commodities are rising too. So as from a competition standpoint of competing against other materials, we’ve not seen any in-market demand by higher aluminum prices at this point in time, and don’t foresee that in the near future in that medium term.

Indrajit Agarwal — CLSA. — Analyst

Yeah. Thanks a lot. That’s all from my side.

Operator

Thank you. [Operator Instructions] Our next question comes from the line of Kirtan Mehta of BOB Capital Markets. Please proceed with your question.

Kirtan Mehta — BOB Capital Markets — Analyst

Thank you, sir, for giving me this opportunity. I have a question of Aleris contribution during this quarter. Previously you indicated that Aleris contributed around $60 million in Q4 and $200 million in FY’21, what will be the correct number this quarter?

Devinder Ahuja — Senior Vice President and Chief Financial Officer

So, as we have told you in the last fiscal that because it was the first year of acquisition, you know we were providing you separate numbers, but now as we are fully integrated, we are not doing that anymore. But I can remind you of what we have been saying just to ensure that that message is always captured that in our acquisition case we had said that we will be able to get a $360 million run rate EBITDA from Aleris and we are repeating that we will go to that point in the next two years. So things are progressing steadily, they are progressing very well. The BNC market is doing very well, aerospace is progressively kind of going to get better, it will take time for a complete recovery, high metal prices are obviously helping because of the high recycled content and the BNC business as an example. So all the fundamentals are very favorable and we are very confident about the original guidance that we gave you on achieving the run rate EBITDA. So that’s where I would leave it.

Kirtan Mehta — BOB Capital Markets — Analyst

Thank you. One more question is coming from me. Basically on the specialty segment, could you give us a color probably visibility that you have of continuation of the strong margin that you can see in the market at this time?

Steven R. Fisher — President and Chief Executive Officer

Yes, of course. So we think that all the fundamentals are very favorable in the specialty market, i.e. the U.S. building and construction market is really doing very well in Europe. A lot of home renovation activity has been happening and that is driving demand. We don’t see any signs of any slowdown there. If you watch all the news coming out of the U.S. on the infrastructure spending plans, we think that all the fundamentals are extremely favorable for the largest part of the of the specialty businesses that we have. Remember also that the growth in EV is going to help demand for battery plate, which is also an important sub-segment in other specialties now. So with everything that we see and know, we think that we are on very strong grounds for continued nice demand and you should feel good about it.

Kirtan Mehta — BOB Capital Markets — Analyst

Thank you. Can I take one more question and [Indecipherable] if possible.

Steven R. Fisher — President and Chief Executive Officer

Surely.

Kirtan Mehta — BOB Capital Markets — Analyst

Would you maybe kind of elaborate bit more in detail in terms of what is the existing specialty in China and what are actually the upgradation that we would be doing, what would be the current capacity and how would that capital feels post expansion of $375 million?

Steven R. Fisher — President and Chief Executive Officer

Dev, do you want to take that?

Devinder Ahuja — Senior Vice President and Chief Financial Officer

So, here is what is going to happen post expansion. So, post expansion, we will be basically be able to cater to the two cash lines, one which is just in the process of getting commission and the one that we had earlier, which is like 200 Kt, we will be able to get all the production consolidated in China with the addition of the of the cash line and overall upgrade — with addition of the coil mill and overall upgrade of hot mill and finishing to get to that. So essentially, China will be fully integrated, which was part of our acquisition case. So really that in short what is going to happen post the expansion in China. What will come out of that is also that in Ulsan, we will be releasing the capacity that is being used right now for supplying coal coils to China, and that is going to be deployed between specialties, also some can and so that is really in a sense, what is going to happen after we do the China expansion.

Kirtan Mehta — BOB Capital Markets — Analyst

Thanks [Indecipherable]

Devinder Ahuja — Senior Vice President and Chief Financial Officer

Thank you.

Operator

And our next question is a follow-up from the line of Vishal Chandak of DAM Capital. Please proceed with your question.

Vishal Chandak — DAM Capital — Analyst

Sorry, my question is got answered.

Operator

Thank you. [Operator Instructions] We do have a follow-up question from the line of Indrajit Agarwal. Please proceed with your question.

Indrajit Agarwal — CLSA. — Analyst

Yeah, hi. Thanks for taking my question again. One question on the Duffel divestment, now that we have taken the $45 million write-off. So what is the kind of visibility we have of getting the remaining, I think, $55 million is still left over there after that write-off, right. So what is the progress or any update over there that you can share?

Steven R. Fisher — President and Chief Executive Officer

Yeah, sure. So, as you will recall, when we sold the Duffle plant, we have initiated an arbitration with [Indecipherable] House Group to seek the final EUR100 million from the original purchase price. That arbitration continues. We feel very, very good about the merits of our case, nothing has changed there at all. With that said, it’s a very long process, it’s a distraction to management, you just never know how an arbitrator is going to rule. So we were willing or willing to settle this for EUR45 million in the very near future to avoid a long protracted distraction of the arbitration. We continue to work with the parties involved here, it’s a bit complex right now with everything that’s going on with the Group and we’ll continue to monitor our ability to see if we can get to a settlement over the next short period of time. If we don’t get to a settlement, we continue with arbitration and we again, feel very, very good about our ability to succeed in arbitration, it just will take some time.

Indrajit Agarwal — CLSA. — Analyst

Yeah. Thank you.

Operator

Thank you. And our final question for today comes from the line of Ritesh Shah of Investec. Please proceed with your question.

Ritesh Shah — Investec — Analyst

Hi, thank you. Thanks for the opportunity. Couple of questions. First is, I think congratulations on the pricing of the recent notes pretty commendable. Just wanted to understand is there further scope for refinancing and how much it could be on interest cost savings going forward?

Devinder Ahuja — Senior Vice President and Chief Financial Officer

Well, so really if you look at the interest rates at which our current debt is financed, all the notes are financed, really does not seem like it could get any better. I mean the rates that we got in the recent refinancing 3.25% and 3.875% are rates that we could not have imagined. I think that we are in a pretty good state now with no near-term maturities, I mean we will have the next maturity coming in ’25 and that is the floating rate debt of $775 that we took of it’s like $750 would be outstanding. So that’s the floating rate debt with the low LIBOR right. Things are looking very, very good on that as an example. So really then the rest of the debt is really — already refinanced at pretty attractive pricing, not much that we can do at this point beyond that. The saving that you can expect from the recent refinancing on an annualized basis is like $35 million. So I think in short, we are in a very good place from a cost of debt and maturity perspective, most of our maturities are very long dated running close to the end of the decade.

Ritesh Shah — Investec — Analyst

Sure. Just to clarify, the June ’22 maturity of $1.7 billion, that’s also refinanced?

Devinder Ahuja — Senior Vice President and Chief Financial Officer

So basically the June ’22 maturity, we raised green bonds and we basically partly refinanced the debt with another Asian term loan in the month of March. So basically what is remaining now is what we will repay in next year, that was our commitment, we will likely replay within this fiscal, but not later than one year from now, which will basically bring us to the $2.6 billion of the gross debt reduction that we spoke about.

Ritesh Shah — Investec — Analyst

Sure. That’s helpful. My second question is, I think it was partly touched upon earlier. What is the worst case outcome on back of the semiconductor issues. How should one analyze or visualize that scenario if the semiconductor supply chain do not get back to normal, how is the management planning the portfolio mix or the volumes probably say six to nine months out?

Devinder Ahuja — Senior Vice President and Chief Financial Officer

Yeah. Let me take that quickly. So, first, we are actually sort of finding that what we saw in the first quarter of the fiscal was really pretty much the lowest point. As we see the flow of orders, as we see the outlook, things will keep getting better quarter-on-quarter. We don’t think that they will get worse. I mean, never say never, but all the indications are that this will be an improving situation quarter after quarter. So, the worst behind us in the quarter that we just closed. Now having said that, we will continue to monitor the situation adding long-term capacity in the semiconductor industry is going to take some time and the problem will linger on. We don’t expect that it will get to any kind of the situation that we saw earlier this year and that’s what I would like to say. Now as the news happens, we will keep talking about it.

Ritesh Shah — Investec — Analyst

That’s useful. And lastly can you provide some color on the LME scrap spreads, where it is right now during the quarter and how do you see it trending going forward?

Steven R. Fisher — President and Chief Executive Officer

All right. Let me do that. So scrap spreads across the world are actually in a very good place. The small exception is that on continuous cast a lower grade scrap in the U.S. we see tightness in the spread, but the tightness in the spread because of more competition for the lower grade scrap, is actually way more than offset by the higher metal prices and premiums. And so from the point of view of spread, we are in a very good place generally with the exception that I just mentioned. Now the other thing is that we do see logistical issues off and on and that is because of all the broken supply chains across the world, and what we are trying to do is be a bit cautious by trying to buy more and ahead of time and that is also part of the reason why we have some elevated inventory levels. So we are trying to be a bit cautious in how we stock up for scrap. So, overall we are pretty satisfied with the current situation on spreads and availability overall.

Ritesh Shah — Investec — Analyst

Sure. That’s quite useful. Thank you so much and I wish you good luck.

Steven R. Fisher — President and Chief Executive Officer

Sure.

Operator

Thank you. And that does conclude today’s question and answer session. I will now turn the call back to Mr Steve Fisher, please continue, sir.

Steven R. Fisher — President and Chief Executive Officer

Great. Thank you and thank all of you joining us today. I think as you can see our financial results and our outlook in the overall market, really show that we are well positioned to continue serving customers with infinitely recyclable aluminum solutions and pursue our growth strategies to advance to a more circular economy. So, again thank you and I hope all of you remain safe and healthy.

Operator

[Operator Closing Remarks]