Q4 2019 Earnings Call
Ladies and gentlemen, thank you for standing by welcome to the Kaiser aluminum fourth quarter 2019 earnings conference call. At this time, all participants are not listen only mode. After the speakers presentation. There will be a question and answer session to ask a question during the session you'll need to press star one on your telephone as a reminder to these program may be recorded.
I would now like to introduce your host for todays program Melinda Ellsworth, Vice President of Investor Relations and corporate Communications. Please go ahead.
Thank you good afternoon, everyone and welcome to Kaiser aluminum fourth quarter and full year 2019 earnings conference call.
If you've not seen a copy of our earnings release. Please visit the Investor Relations page on our website at Kaiser aluminum Dot com.
We have also posted a PDF version of the slide presentation for this call.
Joining me on the call today are Chief Executive Officer, and Chairman, Jack Hockema, President and Chief operating Officer Keys Harvey.
Senior Vice President and Chief Financial Officer, Neil West and Vice President and Chief Accounting Officer, Jennifer Hewitt.
Before we begin I'd like to refer you to the first to slice of our presentation and 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 the forward looking statements. Please refer to the company's earnings release and reports filed with the Securities and Exchange Commission, including when filed the company's annual report on form 10-K for the full year ended December 31.
2013, 2019 schism the company undertakes no duty to update any forward looking statements to Conformis statement to actual results or changes in the company's expectations. 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 and you referenced in our discussion today to EBITDA means adjusted EBITDA, which exclude non run rate items for which we provided reconciliations in the appendix.
At the conclusion of the company's presentation, we'll open the call for questions I would like to turn the call over to Jack Hockema, Jeff. Thanks, Melinda welcome to everyone joining us on the call today.
We reported strong fourth quarter and record second half and full year 2019 results. These results were achieved despite planned and unplanned downtime at Trentwood and the first half the impacted the general Motors strike in the second half and a significant number of automotive model changeovers during the year.
During the headwinds aerospace demand was strong driven by restocking in the commercial aerospace supply chain and growing military airframe builds the strong demand provided a supportive market environment for pricing on non contract aerospace and Jim or general engineering products.
Turning to slide six and a recap of 29 team results, we achieved a number of important financial milestones, including record value added revenue record adjusted EBITDA and record adjusted net income and earnings per share.
These milestones were achieved despite approximately $20 million combined EBITDA impact from Trentwood downtime in the first half in the general Motors strike in the second half.
In addition, we experienced manufacturing inefficiency and reduced sales from the significant number of automotive model changeovers in 2019.
When we were proactive to enhance our long term financial and operational physician capitalizing on attractive credit markets. We successfully completed two new debt financings that increased liquidity.
This enhanced financial flexibility will support our strategic investment initiatives, ensuring our continued financial strength throughout the business any given economic cycles.
In addition, we recently finalized a new Labour agreement that extends through 2025 for our two largest facilities in trentwood and at Newark, Ohio.
Our continued confidence in the long term outlook for business is reflected in our decision to increase the quarterly dividend by 12%.
From the 9% increase in early 2019, marking the ninth consecutive year than we have increased our quarterly dividend.
Turning to slide 829 team was a record year for our aerospace shipments and value added revenue.
Although the 737 Mac situation will impact our aerospace shipments in Twentytwenty. Our aerospace order book is bolstered by increased dispense defense spending and demand for the F 35 joint strike fighter the F 18, Super Oregon, and other military applications.
For 2020, despite a single digit percent reduction for the record highs in 2019, we expect 2020 shipments and value added revenue to exceed any previous year other than 2019 for these applications.
Turning to slide nine as expected 2019 was a difficult year for automotive applications impacted by the numerous model changeovers and program delays and exacerbated by the unexpected General Motors strike late in the year and 2020, we expect north American build rates.
Similar to 2019, and we expect double digit year over year growth in our automotive shipments as new programs come on stream.
Turning to slide 10.
Strong pricing in 2019, offset lower general engineering shipments driven by reallocation of a portion of our plate capacity to meet our strong aerospace demand and by supplant supply chain de stocking for these applications in the second half.
In 2020, we expect strong demand driven by semiconductor applications and relief from the supply chain destocking that suppressed demand in the second half.
In addition, reduced aerospace demand related to the 737, Max will enable increased capacity allocation to our general engineering plate products, we expect to market conditions will continue to support the favorable pricing environment that we experienced in 2019.
Turning to slide 11 shipments for non core applications continued to decline in 2019, and we expect a 60% decline in 2020 as we continue to allocate capacity to more strategic extrusion applications. While this is a small portion of our product.
Mix, 60% decline represents about a 1.5% year over year decline in shipments and value added revenue in total.
Moving to slide 12, and a summary of our 2020 outlook, we expect that the impact from the Boeing 737, Mac situation will be offset by higher military general engineering, and automotive shipments, resulting in a low single digit 2020 year over year increase in both shipments in value added revenue.
We also expect to achieve record full year, EBITDA and EBITDA with EBITDA margin above 26% with a market environment continuing to support strong value added pricing along with expected efficiency gains in our automotive operations and at Trentwood.
Moving to slide 13, and our capital spending plans.
As we communicated throughout 2019, despite investments that have nearly tripled capacity for heat treat plate trentwood is operated at or near capacity since 2004.
2020, we expect to continue to operate at or near capacity at Trentwood. Despite the temporary curtailment of 737 Max builds while the 737 Max has short term demand up implications. We expect the result will be pumped up long term demand for global commercial aerospace applications.
In anticipation of strong long term demand growth for our heat treat plate products. In 2020, we will launch a 375 million dollar multiyear expansion and operational security investment project at Trentwood.
The first module in the $375 million project is a new $145 million heavy gauge plate stretcher that will relieve the load on the existing fleet Stretchered that has operated at production levels far greater that was that than was anticipated in 2005, when we develop the heavy gauge played initiative a trip.
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The new stretcher will provide increased capacity redundancy efficiency and operational security for this critical step in our process flow.
Timing of other smaller investor modules within the remaining $230 million will depend upon market conditions. Although we currently expect to complete the full program by 2025.
Expected benefits from the full $375 million project are an approximate 25% increase in aerospace in general engineering heat treat plate production capacity, plus enhanced quality cost and inventory efficiency.
2020 capital spending of 100 and to a $125 million is plan, including approximately $40 million spending for the new stretcher plus investments addressing plate processing bottlenecks as well as other quality efficiency and sustaining capex projects I'll now turn to Neal to.
Provide additional detail regarding the 2019 results Neil Thanks, Pat.
Turning to slide 15 record value added revenue for the full year 2019 of $856 million reflected a 3% or $28 million increase from prior year, driven by a strong aerospace order book and strong value added pricing, partially offset by the lower general engineering and automotive shipments.
Aerospace high strength contributed an incremental $56 million and value added revenue, reflecting a 12% increase year over year on a 10% increase in shipment.
You added revenue for General Engineering applications was essentially flat with 2018 on a 12% decrease in shipments as strong value add pricing offset the impact of lower shipments driven primarily by the allocation of general engineering plate capacity to meet strong aerospace demand.
Automotive value added revenue declined 20% on a 10% reduction in shipments due to transition from end of life program and delays in new program launches.
Value added revenue for other category was down approximately $5 million for 20% on a 36% reduction in shipments as we continue to exit nonstrategic business and as noted by back redirect that capacity to more strategic applications.
Value added revenue for the fourth quarter, 2019 was $213 million, reflecting similar full year trends.
Value added revenue quarter also reflected weakening industrial demand and supply chain Destocking of our general engineering applications and our automotive business was further impacted by the general Motors strike.
Additional detail and value added revenue in shipments by end market applications can be found in the appendix of this presentation.
Turning to slide 16.
EBITDA for the full year 2019 was a record $213 million, increasing approximately 4% for $8 million compared to the prior year.
Strong aerospace demand for our products and higher pricing on our non contract business more than offset the negative impact of approximately $15 million related trentwood downtime approximately $5 million related to the SSIEM strike and $1 million the costs associated with the ratification of the new you SW five year Labor agreement in addition to other costs.
Inefficiencies associated with the automotive program transitions.
Fourth quarter 2019, EBITDA of $52 million, while comparable to very strong 2018 fourth quarter reflected the combined impact of approximately $5 million related to the GM strike and new Labour agreement as previously noted.
Despite these headwinds EBITDA margin for the full year 2019 was 24.9% slightly higher than the 24, 4.7% from the prior year.
Moving on to slide 17.
Reported net income for 2019 was $62 million compared to 92 million for 2018.
Adjusted for non run rate items in both periods adjusted net income increased approximately 2% to $111 million in 2019 compared to adjusted net income of $109 million in 2018.
Reported net income for the full year 2019 included fourth quarter pre tax impact of an approximately 20 million dollar charge related to the early retirement of our five and 70% unsecured senior notes.
In a non cash goodwill impairment impairment charge of approximately $25 million related to the 2018 acquisition of Imperial machine tool.
For 2019, our effective tax rate was 23%, reflecting our blended federal and state tax rate of approximately 25% reduce primarily by a federal R&D tax credit, which was partially offset by an increase in rate for certain executive compensation and state valuation allowance.
Long term, we continue to believe our effective tax rate will be in a mid 20% range.
Our cash tax rate for 2019 was in a low single digits as we continue to utilize our and oil and other tax credits.
Our cash tax rate will remain in low single digits until we consume our federal and oil and available tax credits of approximately $121 million and $13 million respectively.
As reported earnings per diluted share were $3.83 in 2019 in $5.43 in 2018.
Adjusted earnings per diluted share were $6.85 and six hours and 48 cents for 2019 in 2018, respectively.
Reported earnings per share dilute diluted share in 2019 reflect the $2.14 after tax impact from the fourth quarter charges previously noted.
Turning to slide 18, and touching briefly on our fourth quarter 2019 var of $213 million was up slightly compared to the prior year quarter, while EBITDA of $52 million down for the prior year period, primarily due to the GM straight and costs associated with the new us W. labor.
Summit.
The reported net loss and loss per share reflect the early retirement of our senior note and noncash goodwill impairment charges as previously discussed.
Turning to slide 19.
Adjusted EBITDA of $213 million, an approximately $33 million from improved working capital funded all of our other cash requirements during the year, including capital investment interest dividend and approximately $44 million a share repurchases.
During the fourth quarter 2019, we further strengthened our financials think strength and flexibility successfully completing two significant refinancings.
Revolving credit facility in senior notes.
Our new $375 million senior secured credit facility maturing in 2024 increase the lending commitment by $75 million and provided more favorable pricing in greater flexibility than the previous facility.
The new 500 million dollar four and five 8% senior notes maturing in 2028 refinance the 375 million dollar five and 70% senior notes maturing in 2024, providing net proceeds of $100 million.
We continue to manage our business and liquidity to support our ongoing growth initiatives and return cash to shareholders through the business and economic cycles.
At year end 2019, total cash and short term investments of approximately $343 million and more than $353 million of borrowing availability in our revolving credit facility provided total liquidity of $696 million the facility remains undrawn.
Turning to slide 20.
During the year, we continue to allocate capital in a disciplined manner with a focus first on our reinvesting in our business capital spending in 2019 was $60 million as Jack mentioned in 2020 will begin to implement our Trentwood expansion plan and we expect capital spending to be a 100 million to 104.
The $5 million, primarily related to the investment in new stretcher. In addition to ongoing quality efficiency and sustaining capital spending across our platform.
Since 2011, we've continued to increase our quarterly dividend each year and most recently, we announced at 12% increase in our first quarter dividends to 67 cents per share which was paid in early February 2020.
As previously mentioned, we also continue to distribute cash to shareholders through our disciplined share repurchase program.
In 2019, we purchased 444 445000 shares of our common stock for $44 million at a weighted average price of $96, an 18 cents per share.
Approximately $106 million remained available for further share repurchases under our existing board authorization as of yearend 2019.
Now I'll turn the call back over to check for summary comment.
Thanks Neil.
Turning to slide 22, and a summary of our comments today. Despite headwinds we achieved record shipments value added revenue adjusted EBITDA adjusted net income and adjusted earnings per share in 2019, and 2020, we expect year over year shipments and value added revenue growth. Despite the Boeing 737.
Next production curtailment, and we expect to achieve record EBITDA margin.
As we look longer term, we expect continued secular demand growth for our aerospace and automotive applications and we are launching a multi year $375 million expansion program at trentwood to be prepared to address long term customer needs.
In addition, we expect to continue steady improvement in underlying manufacturing cost efficiency to further drive value for all of our stakeholders, our strong balance sheet and cash flow generation will support our growth and capital deployment priorities and provide sustainability through industry cycles. We will now open the call for questions.
Yes.
Certainly ladies and gentlemen, if you have a question at this time. Please press Star then one you touched on telephone. If your question has been answered that you'd like to remove yourself from the Q. Please press the pound key our first question comes the line of Matt Corn from Goldman Sachs. Your question. Please.
Hello, everyone thought Jack Neil.
Great Great to hear the optimism regarding next year with everything going on great to hear.
Let me ask as we always appreciate how you articulate the expected effects from things like the 15 million from Trentwood 5 million from GM.
At the end up being some moving pieces are you able to quantify given all we've heard from Boeing and the other suppliers and emerging consensus out there and build rates. What you would expect to be the year over year drag on VR or EBITDA from the Max as you look at things today.
No we are.
We're not going to.
Go to that level of detail.
What we said is that we had record record shipments and value added revenue from aerospace last year, and we expect to be down single digits. This year, but it's still going to be the second or the second strongest year better than any other year that we've had since 2019.
So so its a.
Single digits in Aero in total.
Got it alright.
And then we don't look for your decking on slide eight.
Bump in volumes, there and narrowed high strength stands out all the much more relative to history is there is there any particular product type there really took off over the year and then you can then you continue to highlight the military demand as the main tailwind could you would you breakout what did that market, particularly represent in terms of your your volumes are VR.
I'm going to let Keith Harvey address that question.
Yes, thank you well.
Quite frankly, we solved and stronger increase on all of our aerospace related products last year.
Definitely in our plate products out of the Trentwood Rolling mill.
But also in our in our extruded hard alloys shapes business from our Alexco operation and then in our hard alloy business. Overall, we saw really good indications as you saw in the numbers here year over year and 19.
All right. Great. Then just last for me are we effectively through all the speed bumps on the changeovers and you ought to go to platform.
I'll, let keys address that I'm I'm tired of being wrong [laughter].
Well.
Jack articulated all of last year, we added an interesting year with regard to new programs and old programs stopping with new programs launching.
But as you heard and the and the discussion earlier, we expect a very strong year and with multiple launches.
Plan throughout 2020 for automotive, we've got to really strong indication throughout the whole year.
We also had some programs that were slow to launch as we as we discussed last year. Those started late 2019, and we're starting to see the impact of those as they begin there the ramps in the early 2000 2000.
Okay, Alright folks thanks, all the best.
Okay. Thanks, Matt Thank you.
You are next question comes in line of Martin Englert from Jefferies. Your question. Please.
Hi, good morning, everyone.
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When thinking about the arrow and high strength volumes throughout 2020, given some of the longer lead time nominations would it be a scenario where and we should expect some continued volume growth maybe during the first half of the year than a decline year on year over the second half or is your guidance for single digit declines expected to try.
Quarterly throughout the full year.
Well, we actually expect.
Fairly strong shipments in Q1.
The discussions with Boeing regarding the 737, we're taking place all the second half of last year and early part of this year, we have a.
Clear runway of what the expected shipments now will be and what period of time and and so you would expect to see some of that alter and change throughout the year. However, along with the Boeing we also have a pickup as Jack mentioned on the on our military side of the business. So we're seeing that ramp up beginning.
Our early on and then of course, that's all been bolstered by the the strong demand. We've also noticed in our general engineering plate.
Okay. So may be the cadence as we still see aerohive strength to volumes positive year on year throughout the first quarter here, but then we start to see that.
Declines and second through fourth quarter, and equating to single digit declines year on year.
Well, it's tough to give it bye bye bye quarter at this point with the in the ramp up of the military along with some of the impact. We've worked we're working with Boeing as to the schedule and how they want the releases so.
At this time that granularity I really don't have but.
Full year, where we're anticipating the single digit.
Low lower than 2090.
Okay, and one of the things that key concerns here is in the past when there's been some changes with Aero plate demand. It's often resulted in some delayed impact and then subsequent channel destocking.
And.
Such that we saw with the mix shift from wide body to narrow body, what's your sense that the Max curtailment results in some inventory de stocking down the road here or perhaps the guidance is already accounting for that and you're adjusting your shipments to account for today.
This is Jack again, clearly there and we said this on the last call.
Because as they when they curtailed the Boeing production late last year to date.
The shipments continued at a strong pace and Thats what generated the.
Restocking and the record aerospace shipments last year. So there has to be some destocking in the supply chain, but Boeing as they've stated publicly many many times, they're really aware of the importance of the supply chain here and that are making certain that they don't damage the supply chain. So.
We are while we may see less than real demand at some point when they really begin to ramp up we don't expect that we're going to see severe implications.
Okay. So it sounds like it's largely accounted for in your volume guidance here for the year correct, Yes, yes.
Okay understood and then maybe.
And I know you don't want to get too much into quarterly as button. Some prior quarters, you helped us framed up.
Expected EBITDA on par better or worse than the prior quarter. The prior year any detail that you can provide around that.
No no detail, but just as Keith said, we're expecting a pretty positive first quarter.
Okay.
Excellent I appreciate the detail and congratulations on the record results in light of all the headwinds.
Thanks.
Thank you. Our next question comes from the line.
Worth from credit Suisse. Your question. Please.
Could you might have your phone on mute.
We're still not hearing you.
Seems to have dropped.
As a reminder, ladies and gentlemen, if you have a question at this time. Please press Star then one.
Our next question comes from the line of Josh Sullivan from Benchmark Company. Your question. Please.
Hey, good morning.
Josh.
We just had a longer term strategy program in effect.
I want to see your current Kaiser 2020 side or something along those lines.
Just curious how does that.
Clearly large equipment, you're fits into that longer term outlook, what you're thinking Kaiser looks like in the future.
It could it had a lot of success reinvesting in February but just curious if the investment includes any changes in that that strategic outlook.
You broke up a little bit there.
Right.
Sure.
Project.
Yes.
Any changes.
Yes, Theres, there's no change in strategy.
We've we've talked about this for the past couple of calls.
We're where we looked out earlier last year.
Look down 20 in 30 years, and really pushed ourselves and our team got innovative and came up with some really creative ideas that we think give us brown site expansion opportunities to satisfy demand 20 in 30 years out. So this 375 million.
In dollar expansion program is really just the first tranche of that we've got plans well beyond what now this becomes like a phase seven.
We got plans well beyond phase seven to continue to grow over the next to two or three decades with the marketplace.
Got it and then just on the structure investments specifically.
How should we think of that feathering into operations over the next year. So what kind of margin contribution should we think about or reduced maintenance.
Well it won't be onstream until 2022.
By itself it won't have a major margin impact.
It gives us some some efficiency and some quality benefits, but the primary.
Attributes of this particular investment our operational security number one because.
Ponderous of our plate, both general engineering and.
And aerospace goes through one stretcher today, so having the redundancy of two stretchers is important for operational security purposes, and then the second stretcher is a component there won't be another stretcher needed in the next 20 or 30 years. So it gives us capacity for long term growth. This one major investment.
All right. Thank you. Yes also this is Keith I might note that the structure that we're going to install also gives us some additional capability. It's roughly a 30, 333% more increase some pulling force than our current structure. So we expect that to open up.
It's up to some more opportunity with with our customer base.
Thank you. This does conclude the question and answer session of today's program I'd like to hand, the program back to Jack Hockema for any further remarks.
Okay. Thanks, everyone for joining us on the call. We look forward to updating you during our first quarter call in April Thank you.
Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program you may now disconnect good day.
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