Constellium (NYSE:CSTM) is the best company for exposure to increasing aluminum usage in light vehicles and aircraft. The company reported adjusted first quarter EBITDA of €63 million, below the consensus of €70 million. The company reported headline EBITDA of €71 million included the impact of metal price lag (€2 million), restructuring cost (€3 million), and start-up cost (€3 million).
This earnings miss did not warrant the negative reaction as one-time events like adverse weather and production issues adversely affected the company's first-quarter results. The results would have been better than the consensus estimates if not for the equipment outage at Ravenswood. Operational issues at the company's Ravenswood facility caused a five-day production loss; however, the company has since resolved the issue and it will have no effect on its second-quarter results. Furthermore, despite the earnings miss, long-term growth drivers, including auto sheet demand growth, Airware volumes, and packaging growth in Europe remain in place.
Aerospace and transportation
A temporary equipment outage affected the aerospace and transportation segment, as this limited shipments. In addition, the company had to use express freight more extensively due to demand and bad weather. Higher aluminum premiums and less favorable hedged rates on the U.S. dollar also affected its quarterly results.
Although the company fully hedges its exposure to LME aluminum prices, premium pass-through has a different structure. Of the premium, 70% is passed through immediately, 20% lags by a quarter, and Constellium consumes the remaining 10%. There should not be any further headwinds if premiums do not change; however, a decline in premiums will create a tailwind for Constellium.
Going forward, aerospace-sector demand should remain strong with backlogs at aircraft original equipment manufacturers, or OEMs, such as Boeing (NYSE:BA) and Airbus (OTC:EADSY) at all-time highs. Alcoa (NYSE:AA), the largest U.S. based aluminum producer, also expects the aerospace sector to register strong growth. Alcoa recently increased its 2014 growth estimate for the aerospace sector to 8%-9% from 7%-8% previously.
New body-in-white mill
The company's packaging and automotive rolled products segment results, on the other hand, reflected the positive effect of the shift in the product mix toward automotive products. Finally, the automotive structures and industry segment results reflected strong automotive demand and the company's exit from the soft alloys market in France.
As the company builds its new body-in-white, or BIW, mill in the U.S. with European BIW facility expansion planned by 2016, demand for BIW remains a strong stock driver. Constellium is expanding its capacity in Europe by 140,000 tons to 200,000 tons, of which it expects to commission 40,000 by the end of 2014. The U.S. BIW joint venture with Japan's UACJ will be located in Bowling Green, Kentucky with an initial target capacity of 100,000 tons. Moreover, the facility design will support further expansion. The company plans to invest approximately $150 million total in both projects. The company expects to begin production in the first half of 2016 and reach full capacity by 2018.
Laurent Musy, President of Constellium's packaging and automotive rolled products business unit, said, "Bowling Green is the right place for this plant, particularly because its central location will allow us to serve automotive OEMs across the US with our advanced and innovative range of products."
BIW products already account for a significant portion of EBITDA for the packaging and automotive rolled products segment. While investors have begun to appreciate developments in the BIW market, the rising penetration of aluminum extrusions in automotive crash management systems is another strength for Constellium. Constellium expects automotive crash management systems, primarily comprised of aluminum extrusions, to grow at a CAGR of 11% for the rest of this decade. This strong growth trend has also been demonstrated in Kaiser Aluminum's recent quarterly results.
High-margin Airware products
On the other hand, acceleration in the company's highest-margin Airware products should further drive the company's aerospace margins over the coming years. Constellium's new Airware aluminum-lithium product will remain instrumental in helping aerospace OEMs achieve weight reductions. Constellium has witnessed stronger-than-expected demand for Airware, which has prompted the company to build two additional cast houses to accelerate production. Constellium expects aerospace aluminum demand to grow at a CAGR of 8% over the next several years.
Operational issues in the company's Ravenswood facility had a negative impact on its results and more than offset the stronger-than-expected results in the company's automotive business. However, this does not alter the positive story. Constellium provides investors with attractive exposure to the growing aerospace and automotive markets. While aluminum prices have been weak over the past couple of years, Constellium has minimal commodity price exposure since the majority of the company's product sales have commodity price pass-throughs or are hedged against commodity price volatility.