Q3 2019 Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to Kaiser aluminum third quarter 2019, <unk> earnings Conference call.
At this time, all participants are in listen only mode.
The speaker presentation, there will be a question answer session to ask a question. During the session you will need to press star one on your telephone. Please be advised that today's conference is being recorded.
If you require any further assistance. Please press star zero I would now like to hand, the conference over to your Speaker today, Vice President Investor Relations and corporate Communications Melinda Ellsworth.
Please go ahead.
Thank you good afternoon, everyone and welcome to Kaiser aluminum third quarter in first nine months 2019 earnings conference call. If you've not seen a copy of our earnings release. Please visit the Investor Relations page on our website, a kaiser aluminum dot com.
We have also posted a PDF version of the slide presentation for this call.
Joining me on the call today, our Chief Executive Officer, and Chairman, Jack Hockema, President and Chief Operating Officer Keys, Harvey Senior Vice President and Chief Financial Officer, Neal West and Vice President and Chief Accounting Officer, Jennifer Hughley.
Before we begin I'd like to refer you to the first two flights of our presentation I'd remind you that the statements made by management and the information contained in this presentation that constitute forward looking statements are based on management's current expectations.
For a summary of specific risk factors that could cause results to differ materially from those expressed in forward looking statements. Please refer to the company's earnings release rent reports filed with the Securities Exchange Commission, including the Companys Annual report on Form 10-K for the full year ended December 31.
In 2018.
The company undertakes no duty to update any forward looking statements to conform to stick with <unk> actual results or changes in the company's expectation.
In addition, we have included non-GAAP financial information in our discussion reconciliations to the most comparable GAAP financial measures are included in the earnings release and in the appendix of the presentation.
Any reference in our discussion today to EBITDA means adjusted EBITDA, which excludes non run rate items for which we provided reconciliations in the appendix.
At the conclusion of the company's presentation, we will open the call for questions I would know loved to turn the call over to Jack Hockema Jack.
Thanks Finder welcome to everyone joining us on the call today.
Our third quarter results established new records for value added revenue and EBITDA driven by continued strengthen our aerospace or book and strong value added pricing.
The record quarterly results were achieved despite normal third quarter industrial and automotive seasonal demand weakness the general motors strike and delays in automotive program launches General engineering shipments also reflected allocation of a portion of our plate capacity to meet our strong aerospace demand and significant supply.
Chain de stocking that amplified the relatively modest decline into manufacturing economy.
While quarterly results are often lumpy record year to date value added revenue EBITDA and earnings per share results confirmed strong underlying momentum achieved despite approximately $15 million of EBITDA drag from planned and unplanned downtime at Trentwood. During the first half of this year and stiff headwinds from our automotive pro.
Mixed transitioning from end of life programs to new program launches.
Turning to slide six in a summary of our outlook driven by our strong Aerospace order book, we expect fourth quarter results similar to the exceptional fourth quarter 2018 results.
In addition to normal industrial and automotive seasonal demand weakness and slowing industrial demand, we anticipate that the general motors strike will have a negative EBITDA impact of $3 million to $6 million in the fourth quarter, depending upon how quickly demand ramps up in the supply chain.
Major maintenance expense in the fourth quarter is expected to be comparable to prior year.
Overall for the full year 2019, we continue to anticipate low to mid single digit percent year over year increase in value added revenue and EBITDA margin above 25%.
Shipments are expected to be down year over year as our mix has shifted toward higher value added aerospace products.
Although the timing for resolution of the Boeing 737, Max remains uncertain. Our aerospace order book is robust and we expect a very strong order book in 2020.
In addition, while we've experienced some delays in automotive program launches typical for any platform transition period, we expect to resume long term growth in automotive extrusion shipments in 2020 and 2021 as we exit the 2019 transition here.
Turning to slide seven our Trentwood facility has been operating near capacity for more than a decade as growing demand for our aerospace in general engineering plate has absorbed six spaces of capacity expansion.
As aerospace demand is further increased over the past 12 months. Our order book has been exceptionally strong as resulted in the need to reallocate some of our general engineering plate capacity to meet the strong aerospace demand.
As we look to 2020, we expect increased capacity compared to 29 team as we realize the full benefits of the Trentwood modernization investments. In addition to expecting significantly less planned and unplanned downtime than we experienced in the first half of this year.
However, the oversubscribed capacity has increased interest among investors regarding our plans for future capacity expansion.
With a focus on the secular demand growth that we expect for our heat treat plate applications. Our team has developed a future state vision for additional brown site expansions at Trentwood that can be implemented in phases to accommodate expected customer needs decades into the future and we've defined the next phases of expansion to.
Be compatible with that future state vision.
As we've discussed on several occasions, we continue to monitor the needs of our customers to determine when the next phases of expansion are justified.
I'll now turn the call over to Neil for additional insights regarding third quarter results Neil.
Extract value added revenue in a third quarter 2019 of $215 million increased 5% for $10 million compared to the prior year quarter, driven by strong aerospace demand and value added pricing.
Partially offset by lower general engineering and automotive shipments.
Aerospace value added revenue of $128 million improved approximately 13% or $15 million compared to the prior year third quarter on a 7% year over year increase in shipments driven by strong demand for our aerospace products.
General engineering value added revenue of $58 million declined approximately 1% for $1 million compared to the prior year period on an 8% reduction in shipments and improved year over year pricing.
The decline in shipments is due to the combination of weakening industrial demand supply chain de stocking and allocating a portion of our general engineering plate capacity to meet the strong aerospace customer demand.
Automotive value added revenue of $24 million decreased approximately 13% or $4 million compared to the third quarter last year on a 2% reduction in shipments due to the previously discussed delays and program launches and the impact of the GM strike.
For the first nine months 2019 total value added revenue of $642 million improved 4% for $25 million on a 4% decline in shipments, reflecting strong aerospace demand and a richer mix of sales, partially offset by lower shipments for automotive and general engineering applications as previously.
Scott.
In addition, overall plate capacity was temporarily constrained in the first half of 2019 due to the both planned and unplanned downtime at Trentwood.
Turning to slide 10.
EBITDA for the third quarter increased approximately 20% to a quarterly record of $57 million compared to $47 million in the prior year quarter, reflecting strong aerospace demand for our products and higher value added pricing.
EBITDA margin for the third quarter was approximately 26% compared to 23% in a prior quarter.
EBITDA for the first nine months at 2019 of $160 million was up approximately $10 million or 7% compared to prior year period, Despite the $15 million negative impact related to the Trentwood downtime in first half of 2019 and the impact of our automotive products transitioning from end of life to new pro.
Brand launches.
EBITDA margin for the first nine months at 2019 increased to approximately 25% compared to 24% in the prior year period.
Turning to slide 11.
Reported net income for the third quarter, 2019 was $25 million or $1.57 cents per diluted share, reflecting an effective tax rate of 26%.
Adjusting for non run rate items adjusted net income for third quarter was $29 million, an increase of 22% compared to the $24 million in the prior year quarter.
Adjusted earnings per diluted share in the third quarter increase to $1.82 cents from $1.43 cents in a prior year period.
Reported net income for the first nine months, a 2019 was $73 million or $4.47 per diluted share.
Adjusting for non run rate items adjusted net income for the first nine months of 2019 was $82 million compared to $80 million in the prior year period.
Adjusted earnings per diluted share for the first nine months in 2019 was $5 a six cents compared to $4.72 for the first nine months of 2018.
Our cash taxes for 2019 remain in low single digits as we continue apply an oil carry forwards to our pretax earnings.
Capital spending totaled $11 million for the third quarter and $41 million for the first nine months at 2019.
Due to timing a certain projects our capital spending for the first full year 2019 has been reduced and now is expected to be approximately $65 million to $70 million.
During the first nine months of 2019, we returned approximately $70 million a cash to shareholders in the form a share repurchases and dividends confirming our commitment to shareholder value.
As September Thirtyth cash and short term investments totaled approximately $197 million and borrowing availability on our revolving credit facility was approximately $292 million, providing us with significant financial flexibility.
And now I'll turn the call back over to Jack to summarize todays call. Thanks Neil.
Turning to slide 13, or the summary of our comments today. Despite headwinds we achieved record third quarter and year to date results driven by strong aerospace demand.
Our outlook is unchanged for 2019 value added revenue and EBITDA margin as we continue to anticipate a strong fourth quarter and record full year results.
Demand for aerospace products remains very strong and our robust order book is expected to continue into 2020.
While automotive shipments of faced headwinds in 2019 from the product transition and the general Motors strike, we expect content growth in both 2020, and 2021, driven both by new programs and the transition from expiring programs to new ones as is customary will provide more insight into our 2020 outlook on the next earnings.
All in February .
As we look longer term, we remain well position to capitalize on the secular demand growth for aerospace and automotive applications that represent roughly 70% of our value added revenue. In addition, we expect continued steady improvement in underlying manufacturing cost efficiency to drive additional value for all of our shareholders.
Our strong balance sheet and cash flow generation support our growth and capital deployment priorities and provide sustainability through industry cycles.
We will now open the call for questions.
As a reminder to ask a question you will need to press star one on your telephone.
Withdraw your question press the pound key please standby we've compiled the Q when a roster.
Our first question comes from the line.
Marin and glut of Jefferies. Your line is open.
Hi, Mark to Noncolor with Jefferies. Good morning, everyone Hi, Martin.
So I realize youre facing headwinds with the item on the automotive front can you discuss if you're seeing any incremental positive progress on this new program transition since the quarter ended I guess based on some of your commentary it seems like this might not to improve until early 2020, though.
Yeah, well, we're seeing a little progress, but frankly, we didnt see as much progress as we had hoped for in the third quarter and as soon as we've been saying all year when we've been reticent to give too much from forecast here. That's just the name of the game. When you go through this it's been.
Widely publicized.
Regarding forward and the launch of the explore from their standpoint just to.
Verifying some of the.
Issues that any any platform faces as we go through the launch process. So and in this case, we have a multitude of launches that we're dealing with.
But but two answers short answer to the question, Yes, we're seeing progress here, it's just not as rapidly as we expected.
Got it understood and on the GM strike related EBITDA headwind when you speak to the expectations of comparable results year on year on fourth quarter is that included within that guidance. Yes. It is yeah got it and then just circling background on the brownfield expansion comment.
Sure.
Can you provide a little bit more detail on such as maybe how much is could add to incremental capacity what would the timing look like and potential capex outlay.
Sure well well this really was precipitated where we've been putting these expansions out and we said in our prepared remarks, we've had six of these expansions over the past 10 or 12 years.
In each one has been incremental on its own but about a year ago. We took a step back because there have been some concerns among the investor base. When do we reached the end of the line at Trentwood and where our capacity is capped so we put together teams and really took a hard look and did a lot of brainstorming.
On what the potential of Trentwood is and we broke through with some ideas, which as we said in the prepared remarks, really we foresee being able to expand at trentwood to handle decades of growth and we're anticipating roughly a 3% CAGR in terms of aerospace demand.
Growth over over the long term here. So so we're very optimistic or or a pleased that we were able to come up with that vision.
And we'll be able to implement that vision in modules as we have in the past we've gone through six phases to get us up to almost three times capacity today versus what we had back in 2005, when we launched these expansion initiatives. So the next question was was.
Regarding the timing and the answer is the same as always we're continuously monitoring industry dynamics market dynamics in and conversations with our customers to determine the timing.
We're certainly not ready at this point to pull the trigger on expansion and we're expecting additional capacity next year, we still haven't realized the full potential of the modernization investment that we made a couple of years ago, and we had significant capacity taken away in the first half of this year with plans.
Unplanned downtime, so we think theres more capacity available no theres more capacity than what we've experienced this year.
And we'll continue to monitor the situation and determine what pointed in the future is right time to start moving to the next phase of expansion.
Understood I appreciate all the detail there and anything as far as the Capex outlay.
Maybe on an annual basis as you would pursue this and based on your comments and some capacity constraints alleviated next year versus this year. It sounds like this wouldn't be until post 2021 at the earliest.
Well, what we've been saying in the past about the future is we were expecting to be spending around $80 million a year.
We're still putting together our outlook for 420, 20, and we'll talk about that in more detail really give some view of what we're looking at over the next two or three years when we get to the February call. We're really not prepared to to change anything from what we've said in the past at this stage.
Okay understood and.
Quickly on the volumes and Arrow and high strength for the quarter do you feel based on the company's current capacity this would be kind of the high water Mark.
On a go forward basis.
It seemed like Arrow was pretty robust and you've taken away some from general engineering.
But ER or were able to eclipse this.
On a quarterly run rate going into 2020 here.
No. We don't think this is the limit because we still haven't realized the full potential of the modernization.
So there'll be more capacity there we were passed at the downtime in the third quarter.
We work to we weren't operating at full potential yet in the third quarter. So there's more there and there so as you related specifically to aerospace.
They are still.
The opportunity to shift more capacity if needed to general engineering and we've seen some are away from general engineering, we've seen some softening in general engineering, but it's also important to remember that heat treat plate only represents a portion of our aerospace and we've got ample capacity in our aerospace.
Long products. So so no we're certainly not at the limit in terms of our ability without further investment to increase our aerospace sales.
Within that business line do you think you can get above 75 million pounds on a quarterly run rate.
What we do this quarter Big 67.1.
I wouldn't I don't I wouldn't say off the top of my head, but I would say, we probably could get above that.
I appreciate sorry go ahead.
As it might it might cause us to shift is lower and some other areas, but but yes, we could continue to grow arrow.
Okay I appreciate all the color there in a very impressive results given the headwinds there I think it illustrates the underlying earnings power for the company.
Thank you Martin.
Okay. Thank you. Our next question comes from Matthew Korn Goldman Sachs. Your question. Please.
Hello, Jack Neal Blender, Thanks for taking my question. Thanks.
Hey, so.
For many many of US day to day news to Max is what we hear most of the era markets, but you and your peers have highlighted some notable strength.
Overall euro demand through the year.
Could you give any more granular for us to understand what's driving this what surprised is this particular programs, particularly components any any inside you could share would be great.
Yes.
I think we've said on the.
Certainly the last call it maybe the past couple of calls.
Our view is and we thought that for a long time that the de stocking was over done.
We had we had forecasted back in 2016 that we expected aerospace de stocking and we thought it would be relatively modest it actually ran through 2017 and most of 28 team and our view was that was over done and that's been manifest now in a reaction we see is seeking.
Nipigon efforts to replenish inventories in the supply chain and has been characterized at about the health of the supply chain.
In general the by Boeing and Airbus both have talked about about concerns about the supply chain to be able to meet their long term requirements.
But but in the case of our products. We think that this situation was exacerbated by running the destocking too far down. So part of this is reaction to the Destocking and part of it is just keeping the supply chain intact because I.
I believe Boeing remains confident from everything they've said that they're still going to ramp up to a much higher rate on the single aisle builds and Airbus can continues to plan to ramp up as well. So everyone sees this eventually being resolved and us returning to very very high demand rates and it's important to have the supply chain intact.
Got to some more signs that this is the long awaited we're seeing the result of along way to turn in the cycle it sounds like.
Everything I wanted to ask I couldn't tell from your opening comments from last Night's report the industrial weakening that you're seeing.
Is the seasonal is this something more than seasonal are there particular segments, where you see more.
Destocking emerging what's your view there.
Thank you for asking because this is one of my favorite topics that I haven't been able to address for about five years. So so one part of it is normal seasonality.
The other part is some weakening in real demand, but we've got we've got good metrics and good analysis to tell us that our demand for industrial products. It has a very high correlation with the index of industrial.
Index of industrial production for manufacturing.
But in the short term that's not true explained that in a minute, but the index of industrial production for manufacturing was down only 1% year over year in the third quarter. So it's a very modest weakening in the industrial economy. However, while weve been preoccupied with Destocking in aerospace for the last three or four or five.
Years, if you go back a few years most of these conversations about destocking used to be about what was happening in the general engineering supply chain and we've seen historically up big multiplier in terms of downs and ups, the destocking cycle and the restocking cycle.
When there's a change in the trend on industrial and.
Some of the metrics we've got several measures that we look at nothing thats precise, but it appears to us the demand for general engineering, Rod and bar, which really covers the industrial economy in North America was down more than 10% on the mills in the third quarter year over year more than 10% when industrial production.
It is down 1% and we saw similar phenomenon and distributor shipments of those products into their end markets. So there was de stocking in distributors. We believe strongly that there was also significant destocking downstream as everyone kept talking about a recession coming in menu.
Factoring we believe that we got a big reaction in the supply chain and by the time it backed up to US we were more than double digit down in demand year over year in the third quarter. When we think real demand was down only <unk> percent or too.
Got it do you think that that process that destocking process, given the things seem to be stabilizing overall is is nearing an end towards the end of that game or you still worried that that could continue as such and amplify level as you get into the next quarter well, it's hard to tell.
We would we would suspect, especially since it's the fourth quarter that we'll see some more de stocking in the distributor supply chain because a lot of them dress their balance sheets at the end of the year and Peel out a bunch of inventory.
So so that would be almost a normal phenomenon to see destocking and distribution what happens downstream looks to us like there was pretty significant destocking downstream in the third quarter and I think part of its going to be a function of what happens to the general manufacturing economy here does it continue to decline.
Modestly or does it start to stabilize here going forward. So that's a long way of saying not sure but at this point I would guess at there'll be a little bit of destocking and could be a little bit more depending on.
What the drum beat is on the manufacturing economy.
I appreciate it is going to be interesting election year. Good luck to all of you.
Thank you again, ladies and gentlemen to ask your question. Please press star one and you touched on telephone again Thats star one on your touched on telephone to ask your question.
Our next question comes from a line of Josh Sullivan.
Port Global.
Your question please.
Good afternoon.
Josh.
Just on the multitude of automotive launches coming up here, how does the margin profile typically progress on these new programs trying to think is their ramp we should be modeling in for next year is a step function as those volumes pick up.
Also understanding that the GM strikes like causing some near term noise here.
Yes.
As we've been saying consistently the most of the growth.
And with the new programs that are coming on is in the lower value added products and so we've seen a steady decline in our value added revenue per pound in the automotive product mix. So so we expect that to continue that.
While shipments grow we will see value added revenue grow at a much lower rate than we see the shipments growing.
In terms of the margin.
Frankly some of the.
Some of the higher margins that we have within automotive while they are relatively well balanced as we said about our whole product mix over time.
Some of the growth.
Applications that we have are slightly lower margin as a percent of value added revenue than than some of the higher value added revenue per pound, but generally it's pretty consistent it's mostly the fact that it's lower value added per pound mix that we're adding.
Yes.
And then just with the novella Soleris tie up looking like there could be some divestitures here, what's your appetite for any of those assets split.
No change in what we've said about M&A, we're always looking we're generally the preferred buyer when we when we enter a process.
Yes for US is it must be a strategic fit it must be a business that we understand and it must be value, creating in terms of the price we pay for our shareholders. So.
So no change in our outlook, we've been involved in virtually every significant process over the past 10 or 15 years.
But we Havent reached a point yet we're all of those criteria were met.
Yes.
And then just lastly can you update us on the auto wells and maybe when those might sunset.
Sure the noel's at the beginning year, we had $118 million event noel's on our balance sheet.
And probably through your own modeling, you'll get a good understanding how that 118 will lead out here in the next year. So.
Great appreciate it thank you.
Thank you. Your next question comes from Martin Englert of Jefferies. Your question. Please.
Thanks for the quick follow up here just wanted to touch based on the maintenance expect expense factored into the fourth quarter about how many million is that.
We never did describe what the actual amount of spending is but it's basically the same as fourth quarter last year.
Okay. Okay got it excellent thanks again.
Okay. Thanks Martin.
Thank you at this time I'd like to turn the call back over to Jack Hockema for closing remarks, Sir.
Thanks, everyone for joining us on the call today. Despite some significant headwinds we had record third quarter near to date results and we look forward to updating you on our fourth quarter end full year results on the next call in February . Thank you.
Ladies and gentlemen, this concludes todays conference call. Thank you for participating you may now disconnect.
Oh.