Aleris Reports Third Quarter 2015 Results

Third Quarter Summary

• Adjusted EBITDA of $68 million, up 24 percent compared to third quarter of 2014
• Global automotive volumes up 29 percent compared to prior year
• Global aerospace volumes up 16 percent compared to prior year
• Solid productivity savings in North America led by Nichols integration and network optimization efforts
• Stronger U.S. dollar positively impacted Europe profitability
• Asia Pacific achieved positive Adjusted EBITDA
• Purchased $125 million in principal of Senior Notes; liquidity of $612 million as of September 30, 2015

Fourth Quarter Outlook

• Year-over-year performance in line with prior year after excluding $4 million of one time benefits from the fourth quarter of 2014
• Global automotive and aerospace volumes expected to exceed prior year
• Aerospace margins expected to benefit from a stronger U.S. dollar
• European regional order patterns trending favorably
• Continued year-over-year improvement in North America rolling margins
• Inventory de-stocking across North America customer base and weaker scrap spreads expected
• Aleris Operating System expected to drive favorable productivity

"We delivered a solid quarter driven by increased volume in high-value aerospace and automotive product lines," Sean Stack, Aleris President and Chief Executive Officer, said.  "Coupled with the success of a number of well-timed investments, including our aerospace plate mill in Zhenjiang, China, we continue to focus aggressively on optimizing operational performance across our global footprint, including the successful integration of the Nichols acquisition in North America."

Third Quarter 2015 Results

Adjusted EBITDA totaled $68 million for the third quarter of 2015 compared to $55 million for the third quarter of 2014. Results were impacted by the following:

• a more profitable mix of volume, due primarily to 29 percent higher global automotive volumes and 16 percent higher global aerospace volumes, more than offset the impact of lower North American building and construction volumes, leading to an increase of approximately $3 million of Adjusted EBITDA;
• improved rolling margins in both North America and Europe contributed $6 million of Adjusted EBITDA;
• unfavorable scrap spreads in North America and higher slab and hardener prices in Europe decreased Adjusted EBITDA by approximately $4 million;
• decreases in commodity pricing, primarily natural gas, increased Adjusted EBITDA by $3 million;
• productivity savings of $8 million more than offset base inflation of $4 million; and
• a stronger U.S. dollar contributed to higher margins in Europe and increased Adjusted EBITDA by approximately $2 million.

Loss from continuing operations for the third quarter of 2015 was $21 million compared to income from continuing operations of $8 million for the third quarter of 2014. Offsetting the impact of higher Adjusted EBITDA were:

• a $35 million unfavorable change in unrealized gains on derivative financial instruments ($21 million unfavorable in the third quarter of 2015 compared to $14 million favorable in 2014) as a result of LME price movements and derivative settlements;
• a $12 million unfavorable variation in currency exchange losses/gains on debt;
• a $6 million unfavorable variation in metal price lag ($4 million unfavorable in the third quarter of 2015 compared to $2 million favorable in 2014), as aluminum prices decreased during the third quarter of 2015 and increased during the prior year period (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 $3 million increase in start-up costs related to labor, consulting and other expenses incurred for the North America ABS project; and
• a $2 million reduction in the benefit from income taxes.

Partially offsetting these unfavorable items were:

• a $6 million decrease in depreciation expense primarily related to the closure of the Decatur, Alabama facility in the first quarter of 2015;
• a $4 million reduction in interest expense due to lower debt levels and increased capitalized interest;
• a $4 million decrease in stock compensation expense primarily from the forfeiture of unvested awards upon the departure of our former CEO; and
• costs of sales in the third quarter of 2014 included an additional $3 million associated with adjusting Nichols inventory, acquired with the April 2014 purchase of Nichols Aluminum, LLC, to fair value.

In the third quarter of 2015, $54 million was spent on capital expenditures; the majority being spent on the Lewisport upgrade and expansion project.

During the quarter, Aleris purchased $125 million principal amount of outstanding Senior Notes pursuant to an Asset Sale Offer. As of September 30, 2015 Aleris had liquidity of $612 million, which consisted of approximately $448 million of availability under our ABL Facility plus approximately $165 million of cash on hand. 

North America

North America segment income increased to $36 million in the third quarter of 2015 from $26 million in the third quarter of 2014. Segment Adjusted EBITDA increased to $34 million in the third quarter of 2015 from $31 million in the third quarter of 2014. Performance drivers included:

• rolling margin expansion in the third quarter led to a $4 million increase in segment Adjusted EBITDA;
• a 3 percent overall volume decrease, due primarily to lower building and construction shipments and customer uncertainty from declining aluminum prices, and unfavorable cost absorption resulting from lower production levels, resulted in a $3 million decrease in segment Adjusted EBITDA. Building and construction demand was impacted by an uneven recovery in the North America housing industry and additional volumes in the prior year as we worked down the order backlog acquired as part of the Nichols acquisition;
• unfavorable scrap spreads resulting from declining aluminum prices and the related tightening of supply decreased segment Adjusted EBITDA by $3 million;
• commodity deflation, due to lower natural gas prices, more than offset base inflation, including higher employee costs and pension expense, and increased segment Adjusted EBITDA by $1 million; and
• productivity savings, driven by improved scrap recovery and utilization and cost savings associated with our supply chain optimization efforts, increased segment Adjusted EBITDA by $5 million.

The increase in segment income was driven by the factors that drove the increase in segment Adjusted EBITDA, as well as a $4 million favorable variance in metal price lag and the impact of recording the acquired inventory of Nichols at fair value, which increased cost of sales by $3 million in the third quarter of 2014.

Europe

Europe segment income was $35 million in the third quarter of 2015 compared to $38 million in the third quarter of 2014. Segment Adjusted EBITDA increased to $41 million in the third quarter of 2015 from $34 million in the third quarter of 2014. Performance drivers included:

• a 4 percent increase in volumes and a favorable mix of products sold, resulting from a 16 percent increase in automotive volumes and a 4 percent increase in aerospace volumes, increased segment Adjusted EBITDA by $5 million;
• margin expansion resulting from greater automotive demand and higher spot pricing for aerospace products led to a $2 million increase in segment Adjusted EBITDA;
• higher slab and hardener prices decreased segment Adjusted EBITDA by $1 million;
• a stronger U.S. dollar had a favorable impact on margins, more than offsetting the unfavorable impact on the translation of working capital balances and Euro-based results. Currency changes increased segment Adjusted EBITDA by $2 million; and
• base and commodity inflation of $2 million, offset by productivity savings of $1 million, decreased segment Adjusted EBITDA by $1 million.

The decrease in segment income was driven by a $10 million unfavorable variance in metal price lag due to decreasing aluminum prices during the third 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. Asia Pacific continued to ramp-up production and shipped approximately 5,472 tons of plate, including aerospace plate, generating revenue of $24 million during the third quarter of 2015. As Asia Pacific's 2014 results were classified as start-up costs, comparisons to the prior year are not meaningful. Asia Pacific's start-up costs totaled $2 million in the third quarter of 2014.

Year-to-Date Results

Key financial highlights for the nine months ended September 30, 2015 include:

• Revenues of approximately $2,280.8 million compared to approximately $2,149.3 million for the prior year period. The increase of 6 percent was attributable to a stronger mix of higher value-added products sold, increased rolling margins, the increased average price of aluminum included in our invoiced prices in Europe, revenue from the Nichols acquisition and Asia Pacific segment revenues. These increases were partially offset by a stronger U.S. dollar which reduced the translation of Euro-denominated revenue into U.S. dollars.
• Adjusted EBITDA increased from $138 million in 2014 to $183 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. These increases were partially offset by unfavorable scrap spreads and higher raw material prices in Europe.
• Loss from continuing operations of $54 million in the current year compared to $38 million in 2014. The larger loss was driven by an unfavorable variation in metal price lag and unrealized derivative losses, higher restructuring charges and increased depreciation. These decreases were partially offset by the factors that drove the increase in Adjusted EBITDA of $45 million as well as benefits from the provision for income taxes and a decrease in stock-based compensation expense.
• Cash provided by operating activities totaled $71 million compared to cash used by operating activities of $37 million during the prior year period. The change in operating cash flows resulted primarily from the current year decrease in operating assets during the period due, in part, to declining aluminum prices, as compared to the prior year increase in operating assets due, in part, to rising aluminum prices.
• Capital expenditures increased to $175 million from $109 million during the prior period as spending on our Lewisport expansion has accelerated.

Outlook

We estimate fourth quarter 2015 segment income and Adjusted EBITDA will be lower than the third quarter of 2015, due to normal seasonality, and in line with the the fourth quarter of 2014 after excluding $4 million of one time benefits associated with electricity tax and carbon monoxide emissions credits that impacted the prior year. Factors influencing anticipated fourth quarter 2015 performance include:

• Global automotive and aerospace volumes expected to exceed prior year;
• Aerospace margins expected to benefit from a stronger U.S. dollar;
• European regional order patterns trending favorably;
• Continued year-over-year improvement in North America rolling margins;
• Anticipated de-stocking of inventory levels across our North America customer base as customers reduce metal exposure and position for 2016;
• Weaker North America scrap spreads due to declining aluminum prices; and
• Aleris Operating System expected to drive favorable productivity.

Capital expenditures during the fourth quarter of 2015 are expected to be significantly higher than the fourth quarter of 2014 and higher than third quarter of 2015 as work continues on upgrading and expanding our capabilities in Lewisport, Kentucky. We expect capital spending of approximately $275 million to $300 million in 2015, including the amounts spent in the first three quarters of the year.

Conference Call and Webcast Information

Aleris will hold a conference call and webcast on November 3, 2015 at 9:00 a.m. Eastern Time. Sean M. Stack, president and chief executive officer, and Eric M. Rychel, executive vice president, chief financial officer and treasurer, will host the call to discuss results.