OREANDA-NEWS. Aleris Corporation today reported results for the three months and year ended December 31, 2015. Except as otherwise indicated, all amounts reflect the divested recycling and extrusions businesses as discontinued operations.

Fourth Quarter Summary

  • Adjusted EBITDA of $39 million, in line with the fourth quarter of 2014
  • Global automotive volumes up 33 percent compared to prior year
  • Global aerospace volumes up 15 percent compared to prior year
  • Solid productivity savings in North America and Europe
  • Challenging metal spread environment caused by continued depressed aluminum price
  • Lower year-over-year North America building and construction volumes
  • Stronger U.S. dollar positively impacted Europe profitability
  • Positive Adjusted EBITDA generated by Asia Pacific

Full Year Summary

  • Adjusted EBITDA of $223 million, up 26 percent compared to 2014
  • Completed divestitures of recycling and extrusions businesses for $583 million of net proceeds
  • Global automotive volumes up 25 percent compared to the prior year
  • Global aerospace volumes up 12 percent compared to the prior year
  • Stronger U.S. dollar positively impacted Europe profitability
  • Liquidity of $435 million as of December 31, 2015; paid down $125 million of Senior Notes

First Quarter 2016 Outlook

  • Year-over-year performance expected to be moderately lower than prior year, but moderately higher after excluding $10 million related to both first quarter of 2015 currency exchange gains and the impacts of tighter metal spreads in 2016
  • Global automotive and aerospace volumes expected to exceed prior year
  • Order patterns trending favorably in North America and Europe
  • Aleris Operating System expected to drive favorable productivity

"A better than projected fourth quarter caps off a strong 2015, during which we completed the transformation of Aleris into a global rolled products company, a strategy that has been validated by demand growth for both our aerospace and automotive products which has led to enhanced profitability and improved overall performance," Aleris President and CEO Sean Stack said. "With the successful implementation of our growth projects in Europe and Asia Pacific, and the progress we've made on our automotive expansion project in the U.S., we are well-positioned to continue to meet the projected increase in demand from these high-value industries as well as the building and construction industry in North America. We will continue to build on our momentum in 2016 by driving strong execution through our operational excellence initiatives and continued focus on technology and new product development, which will further enable us to serve our customers' needs."  

                 
   

For the three months ended

  

For the year ended
   

December 31, 2015

  

December 31, 2014

  

December 31, 2015

  

December 31, 2014

(Dollars in millions, metric tons in thousands)

  

(unaudited)

    

Metric tons of finished product shipped (1)

  

189

  

193

  

822

  

794

Revenue

  

$                             637

  

$                             733

  

$                          2,918

  

$                          2,882

Commercial margin

  

$                             278

  

$                             294

  

$                          1,204

  

$                          1,167

Segment income

  

$                               49

  

$                               56

  

$                             240

  

$                             242

(Loss) income from continuing operations

  

$                             (19)

  

$                               92

  

$                             (72)

  

$                               54

Adjusted EBITDA

  

$                               39

  

$                               39

  

$                             223

  

$                             176
                 

(1) Metric tons of finished product shipped excludes slab and billet sales from the Voerde and Koblenz cast houses.

    

Fourth Quarter 2015 Results

Adjusted EBITDA totaled $39 million for the fourth quarter of 2015 and 2014. Results were impacted by the following:

  • improved rolling margins in both North America and Europe increased Adjusted EBITDA by approximately $5 million;
  • productivity savings of $10 million more than offset base inflation of $5 million;
  • a stronger U.S. dollar contributed to higher margins in Europe and increased Adjusted EBITDA by approximately $6 million;
  • decreases in commodity pricing, primarily natural gas, increased Adjusted EBITDA by approximately $2 million;
  • unfavorable scrap spreads in North America caused by continued low aluminum prices and reduced scrap availability, as well as higher slab and hardener prices in Europe, decreased Adjusted EBITDA by approximately $12 million;
  • a more profitable mix of shipments, including 33 percent higher global automotive volumes and 15 percent higher global aerospace volumes, was offset by a decrease in building and construction volume in North America, resulting in a decrease of approximately $2 million of Adjusted EBITDA; and
  • 2014 benefited from $4 million of one time electricity tax and carbon dioxide emission credits.

Loss from continuing operations for the fourth quarter of 2015 was $19 million compared to income from continuing operations of $92 million for the fourth quarter of 2014. The decrease was primarily related to the following:

  • the benefit from income taxes in the fourth quarter of 2014 included the reversal of $146 million of foreign and domestic valuation allowances against deferred tax assets;
  • an $8 million unfavorable variation in metal price lag ($1 million favorable in the fourth quarter of 2015 compared to $9 million favorable in the fourth quarter of 2014). Metal price lag represents the difference between the price of primary aluminum included in our revenues and the price of aluminum impacting our cost of sales net of hedge gains and losses;
  • a $7 million unfavorable variation in currency exchange losses/gains on debt; and
  • a $6 million unfavorable change in unrealized gains on derivative financial instruments as a result of LME price movements and derivative settlements.

Partially offsetting these unfavorable items were:

  • a $14 million reduction in business development costs as a result of the finalization of the sale of the recycling and specification alloys and extrusions businesses in the first quarter of 2015;
  • an $8 million reduction in interest expense due to lower debt levels and increased capitalized interest;
  • a $4 million decrease in depreciation expense primarily related to the closure of the Decatur, Alabama facility in the first quarter of 2015;
  • costs of sales in the fourth quarter of 2014 included an additional $3 million associated with adjusting the inventory acquired in the April 2014 purchase of Nichols Aluminum, LLC to fair value; and
  • a $2 million decrease in stock compensation expense resulting from the forfeiture of unvested awards upon the departure of senior executives during 2015.

In the fourth quarter of 2015, capital expenditures were $139 million, the majority of which was spent on the Lewisport, Kentucky autobody sheet project and related spending to upgrade critical equipment and capabilities at the facility. That project continues to progress on schedule with shipments anticipated to commence in 2017.

As of December 31, 2015, Aleris had liquidity of $435 million, which consisted of approximately $373 million of availability under our 2015 ABL Facility plus $62 million of cash on hand.

North America

North America segment income decreased to $15 million in the fourth quarter of 2015 from $19 million in the fourth quarter of 2014. Segment Adjusted EBITDA decreased to $12 million in the fourth quarter of 2015 from $19 million in the fourth quarter of 2014. Performance drivers included:

  • rolling margin expansion increased segment Adjusted EBITDA approximately $4 million;
  • productivity savings, driven by improved scrap recovery and utilization as well as cost savings associated with our supply chain optimization efforts, increased segment Adjusted EBITDA by approximately $3 million;
  • a 10 percent overall volume decrease, due primarily to lower building and construction shipments, resulted in a decrease of approximately $6 million in segment Adjusted EBITDA. The reduction in shipments resulted from an uneven North America housing recovery and additional volumes in the prior year as customers placed orders ahead of our announced rolling margin increases; and
  • unfavorable scrap spreads resulting from low aluminum prices and the related tightening of supply decreased segment Adjusted EBITDA by approximately $7 million.

The decrease in segment income was driven by the factors that drove the decrease in segment Adjusted EBITDA, as well as the impact of recording the acquired inventory of Nichols at fair value, which increased cost of sales by $3 million in the fourth quarter of 2014.

Europe

Europe segment income was $32 million in the fourth quarter of 2015 compared to $37 million in the fourth quarter of 2014. Segment Adjusted EBITDA increased to $34 million in the fourth quarter of 2015 from $31 million in the fourth quarter of 2014. Performance drivers included:

  • a 13 percent increase in volumes, driven by a 20 percent increase in automotive volumes and a 20 percent increase in regional plate and sheet volume, increased segment Adjusted EBITDA by approximately $3 million;
  • currency changes increased segment Adjusted EBITDA by approximately $6 million as a result of the favorable impact that the stronger U.S. dollar had on margins and the translation of working capital balances, partially offset by the unfavorable impact on the translation of Euro-based results;
  • productivity savings of $5 million and commodity deflation of $1 million, resulting from decreased natural gas costs, were partially offset by $3 million of base inflation related primarily to employee costs. Net productivity savings increased segment Adjusted EBITDA by approximately $3 million;
  • improved rolling margins increased segment Adjusted EBITDA approximately $1 million;
  • higher slab and hardener prices, as well as decreased availability of scrap, decreased segment Adjusted EBITDA by approximately $5 million; and
  • one time benefits, including electricity tax and carbon dioxide emission credits, contributed approximately $4 million to the prior year segment Adjusted EBITDA.

The decrease in segment income was driven by an $8 million unfavorable variance in metal price lag due to decreasing aluminum prices during the fourth quarter of 2015 compared to increasing prices during the prior year, partially offset by the factors that drove the increase in segment Adjusted EBITDA.

Asia Pacific

Our Asia Pacific segment reported segment income and segment Adjusted EBITDA of $1 million in the fourth quarter of 2015. Asia Pacific shipped approximately 5,773 tons of plate, including aerospace plate, generating revenue of $27 million during the fourth quarter of 2015. As the segment's 2014 results were classified as start-up costs, comparisons to the prior year are not meaningful. The segment incurred $3 million of start-up costs during the fourth quarter of 2014. These costs, representing non-recurring losses during the start-up period, are excluded from segment income and segment Adjustment EBITDA.

Full Year Results

Key financial highlights for the year ended December 31, 2015 include:

  • Revenues of approximately $2.9 billion for the years ended December 31, 2015 and 2014. Factors impacting revenue included a stronger mix of higher value-added products sold, increased rolling margins, revenue from the Nichols acquisition and Asia Pacific segment revenues. These increases were offset by a stronger U.S. dollar, which reduced the translation of Euro-denominated revenue into U.S. dollars, and lower average aluminum prices included in our invoiced prices.
  • Adjusted EBITDA increased from $176 million in 2014 to $223 million in the current year as a result of stronger margins, increased volumes, a favorable mix of products sold, productivity savings that exceeded inflation, and the stronger U.S. dollar's impact on margins for European sales denominated in U.S. dollars. Partially offsetting these favorable items were lower scrap spreads in North America and higher raw material prices in Europe.
  • Loss from continuing operations of $72 million in the current year compared to income from continuing operations of $54 million in 2014. The change was primarily driven by a prior year benefit from income taxes resulting from the reversal of foreign and domestic valuation allowances against deferred tax assets. Also impacting the year-over-year results were an unfavorable variation in metal price lag, unrealized derivative losses, higher restructuring charges and lower currency exchange gains on debt. These decreases were partially offset by the factors that drove the $46 million increase in Adjusted EBITDA, as well as lower interest and stock-based compensation expense.
  • Cash provided by operating activities totaled $120 million compared to no cash provided by operating activities during the prior year period. The change in operating cash flows resulted primarily from the current year decrease in operating assets due, in part, to declining aluminum prices and improved working capital management in North America, as compared to a prior year increase in operating assets due, in part, to rising aluminum prices.
  • Capital expenditures increased to $314 million in 2015 from $165 million during the prior year as a result of the spending on the upgrade and expansion at our Lewisport facility.

Full Year Outlook

We expect that total segment income and Adjusted EBITDA will be higher in 2016 than 2015, resulting from improved demand for our automotive, aerospace and building and construction products as well as productivity savings from AOS. These increases should more than offset the impact of weaker scrap spreads and inflation. Segment income may also be favorably impacted by improved metal price lag should aluminum prices remain at current levels or increase. While we are optimistic that recent positive demand trends will continue, our performance will be dependent upon, in part, the performance of the global economy.

First Quarter Outlook

We estimate first quarter 2016 segment income and Adjusted EBITDA will be higher than the fourth quarter of 2015, due to normal seasonality. In addition, we estimate first quarter 2016 performance will be moderately lower than the first quarter of 2015 but moderately higher after excluding approximately $10 million related to both currency gains recorded in the first quarter of 2015 and the impact of tighter metal spreads expected in the first quarter of 2016. The currency gains resulted from a dramatic strengthening of the U.S. dollar in the quarter, which generated gains on the translation of U.S. dollar based working capital balances in Europe. North America metal spreads are expected to be weaker than the prior year due to depressed aluminum prices. Other factors influencing anticipated first quarter 2016 performance include:

  • Global automotive and aerospace volumes expected to exceed prior year;
  • Improved North America building and construction and distribution demand expected to be offset by lower truck trailer shipments following record first quarter demand in 2015;
  • North America and European regional order patterns trending favorably; and
  • Aleris Operating System expected to drive favorable productivity.

Capital expenditures during the first quarter of 2016 are expected to be higher than the first quarter of 2015 and lower than the fourth quarter of 2015 as work continues on the Lewisport, Kentucky autobody sheet project. We expect full year capital spending of approximately $350 million to $375 million in 2016.

 

About Aleris

Aleris is a privately held, global leader in aluminum rolled products production. Headquartered in Cleveland, Ohio, Aleris operates 13 production facilities in North America, Europe and Asia.