Q2 2022 Kaiser Aluminum Corp Earnings Call
Yes.
Welcome to the Kaiser aluminum second quarter 2022 earnings Conference call. My name is Daryl and I will be your operator for today's call. At this time all participants are in a listen only mode. Later, we will conduct a question and answer session. During the question and answer session. If you have a question. Please press star zero one on you.
Touchtone phone I will now turn the call over to Melinda Ellsworth Melinda you may begin.
Thank you good afternoon, everyone and welcome to Kaiser aluminum second quarter and first half 2022 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 dotcom.
We have also posted a PDF version of the slide presentation for this call.
Joining me on the call today are president and Chief Executive Officer, Keith Harvey Executive Vice President and Chief Financial Financial Officer, Neal West and Vice President and Chief Accounting Officer, Jennifer Huey.
Before we begin I'd like to refer you to the first three slides 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 the company's annual report on Form 10-K for the full year ended December 31 2021.
The company undertakes no duty to update any forward looking statements to conform the statement to actual results or changes in the companys 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 reconciliations of certain forward looking non-GAAP financial measures to comparable GAAP financial measures.
Are not provided because certain items required for such reconciliations are outside of our control <unk> cannot be reasonably predicted or provided without unreasonable effort.
Any reference in our discussion today to EBITDA means adjusted EBITDA, which excludes non run rate items for which we've provided reconciliations in the appendix.
At the conclusion of the company's presentation, we will open the call for questions I would now like to turn the call over to Keith Harvey Keith.
Thanks, Melinda and thank you all for joining us for a review of our second quarter 2022 results.
Our business has delivered $41 million of EBITDA in the second quarter.
What turned out to be a very challenging quarter due mainly to ongoing supply chain issues at our award rolling mill, which supplies sheet for beverage and food packaging and the North American markets.
For the last few quarters, we've been communicating how performance of our main supplier of magnesium U S magnesium and they all called work smelter, which supplies a portion of our metal requirements.
Have struggled to provide us with contracted consistent and it's informing supply materials and have negatively impacted our results.
And while we have worked diligently over the last several months to minimize the impact on our business and our customers.
Both issues worsen when U S Mag.
<unk> stopped all shipments and the smelters performance deteriorated substantially in June .
These worsening conditions have continued to negatively impact our ability to run low cost.
Operations at the award Rolling Mill.
In addition to a lengthy periods of unacceptable performance by both suppliers.
U S Max abrupt and unexpected change forced us to declare force majeure.
Shipments of sheet products from the Warrick Rolling mill for our packaging customers in early July .
These two supply issues combined had been a drag on earnings of approximately $20 million through the first half of the year.
Allow me to provide more detail on these supply issues and what actions we have and are taking to put these issues behind us.
Regarding our supply of magnesium and the events, which led to our declaration of force Majeure at work on July seven as we've previously stated you Asthmatics declared force majeure over nine months ago in September of 2021.
During this period, we have received a little to no communication on view of the cause of the disruption or plans and timelines sure their issues and returned to normal operations.
In the last nine months, we have received approximately 50% of our expected contracted volumes until mid June when U S. Meg unexpectedly ceased all shipments to us.
Since U S. Max Force Majeure Declaration, we have been establishing and qualifying a number of new suppliers.
To minimize our reliance on U S Meg and make up more than the projected shortfall shortfalls in U S. Max deliveries.
On their projected allocations.
With no pre warning at all to the cessation of all shipments of magnesium we were unable to replace the remaining balance of U S. <unk> reduced supply so the work operation on such short notice.
And the announcement to our customers. We stated we expect shipments in the month of July to be impacted as much as 30% to 40%.
And as much as 50% for the balance of the third quarter.
In each case based on contracted deliveries of magnesium at the time Andrew.
And assuming no further deliveries from U S matters.
We are in daily communication with our customers on our efforts to establish new magnesium supplies.
And contain this issue to third quarter shipments.
And the situation has improved over the last two weeks as U S. Meg has provided additional material and we continue to identify and qualify additional supplies.
We now believe shipments will be higher than the levels in our previous announcements based on the progress we've made and we expect to return to full production sooner than previously anticipated.
As we previously discussed we initiated litigation against U S. Meg in April of this year in connection with U S. Max Force Majeure Declaration.
Now moving to the supply and performance issues about co smelter on the work site.
We receive approximately 30% of our metal supply for the Warrick Rolling mill from the Alcoa's smelter, mainly in the form of molten aluminum when the smelter is operating effectively.
While the smelters performance has negatively impacted the efficiency and financial performance of the Rolling mill for several quarters now the smelters performance degraded further in the second quarter, resulting in the curtailment of one of the three operating lines due to reported operational challenges.
Furthermore, replacement ingot to make up the shortfall in conforming molten metal deliveries was not delivered on a timely basis further impacting our operations.
While we will continue to work with Alcoa to attempt to work through the operational challenges at the smelter and mitigate the impact of those challenges on the Warrick Rolling mill.
We are in the process of qualifying other hot metal sources for the award Rolling Mill to ensure we will have an alternative sources of supply.
The Warrick Rolling Mill has run successfully in the past without metal from the smelter.
And going forward, we are preparing for the mill to run without this smelter as part of our plants to meet long term financial and sustainability.
Objectives, and lower the carbon footprint of the rolling mill.
With the intent to continue strengthening and diversifying work supply chain and meet the objectives, we've set for our packaging business.
There are a number of initiatives underway at the board plants that will ultimately reduce our need for third party magnesium and hot or cold Bryan metal sourcing.
The <unk> plant is one of the largest and most sophisticated tasked houses in the world.
And we have plans to further improve its ability to utilize more scrap and rework.
Les on current metal sources.
Last week, we initiated startup of our new Covid scrap Miller.
Will enable us to process in excess of 100 million pounds of painted and bear low cost scrap annually.
We are also developing and currently testing new alloys with significantly lower magnesium content and enhanced recyclability characteristics to meet our and our customers' needs for more highly sustainable products.
Commercially all new negotiated contracts for beverage and food can sheet have increased closed loop return scrap provisions, thereby providing our business with a greater supply of low cost scrap.
These changes are impactful and provide insight into just a few of the areas. We've already acted to strengthen this business.
Again these issues, mainly impacted operations our award rolling them.
All other operations have had no impact from the U S Meg or out cohort smelter issues.
Looking forward now on our market outlook for the remainder of the year.
We anticipate continued strong demand in all markets with the exception of automotive where despite continued tepid shipments due to supply chain shortages, we have been successful in improving prices.
We delivered another solid quarter on improving aerospace shipments with continued strengthening demand in defense commercial and business Jets expected for the remainder of the year.
And we are declarations, reflecting continued improvement in these applications moving into 2023.
Our general Engineering business remained strong with continued solid demand in semiconductor and other various applications for plate and extrusion.
Along with improved pricing.
Packaging demand remains exceptionally strong.
As noted in last quarter's earnings call. We have begun a long planned multi week outage at our <unk> facility to refurbish our heavy gauge structure there.
In addition, the new role coat line investment at Ward continues to move forward with startup and qualification schedule for the second half of 2023 with full production slated for early 2024.
I'll now turn the call over to Neil to review the quarter in more detail and then I'll be back with some closing comments Neil Thanks, Keith Good afternoon, everyone turning to slide eight value added revenue of $376 million for the second quarter, 2022 increased $58 million or 18%.
Relatively flat shipments as compared to the second quarter of 'twenty one.
Primarily reflecting improved pricing to mitigate inflationary costs.
<unk> revenue for the first half of 2022 $747 million increased $257 million or 53% with a 42% increase in shipments driven by the inclusion of a full six months of packaging applications as compared to the first half of 2021.
In addition to higher value added revenue in our aerospace and high strength and general engineering applications, which I will cover in the following slides.
Moving to slide nine.
Aerospace high strength value added revenue of $97 million for the second quarter, 2022 increased $17 million or 21% on an 18% increase in shipments compared to the prior year period.
Reflecting improved pricing and continued improvements in underlying commercial aerospace shipments and steady strength in defense and business jet.
Aerospace high strength value added revenue for the first half of 2022 of $192 million improved $41 million with 27% on a 22% increase in shipments compared to the first half of 2021.
Compared to the second half of 2021 first half of 2022 value added revenue was up $28 million or 17% on an 11% increase in shipments.
The increase in value added revenue and shipments reflect continued strength in demand for our defense and business jet related applications and improving demand for commercial aerospace as we continue to see the recovery in air travel and higher shipments of new commercial aircrafts from both major airframe producers.
Moving to slide 10.
Second quarter, 2022 packaging value added revenue of $154 million up $22 million or 17% on 3% lower shipments from the prior year period.
Reflecting improved contract pricing and increased surcharges to offset higher inflationary and commodity costs.
For the first half of 2022 total packaging value added revenue was $300 million.
On 355 million pounds of shipments up from the first half of 2021 value added revenue of $132 million reflected a full six months of packaging revenue and shipments following our acquisition of <unk> Rolling Mill on March 31 2021.
Compared to the second half of 2021 value added revenue improved 17% or $42 million and relatively flat shipments, reflecting improved pricing and increased surcharges to offset the inflationary and commodity costs.
Turning to slide 11.
General Engineering second quarter, 2022 value added revenue of $96 million increased $19 million or 25% on relatively flat shipments compared to the second quarter of 2021.
Collecting continued strong demand for our GE application higher prices and alloy recovery to offset inflationary and commodity costs.
General engineering value added revenue of $198 million in the first half of 2022 increased $50 million or 33% on an 11% increase in shipments compared to the first half of 2021.
Compared to the second half of 2021 value added revenue also improved 34% on a 14% increase in shipments.
The increase in value added revenue and shipments continue to reflect strong underlying semiconductor plate industrial machine tool demand. In addition to the improved pricing in our recovery.
Moving to slide 12.
Automotive value added revenue for the second quarter, 2022 was $26 million relatively flat as compared to the prior year period, a little change in shipments, reflecting the continuing impact of ongoing semiconductor chip shortages and other supply chain disruptions in the automotive industry.
Automotive value added revenue for the first half of 2022, a $50 million was down $3 million or 5% on a 7% reduction in shipments compared to the first half of 2021.
Compared to the second half of 2021 auto value added revenue was up $6 million or 13% on a 9% increase in shipments.
Collecting improvement in pricing and a slight improvement in demand.
Additional detailed value added revenue and shipments by end market applications can be found in the appendix of this presentation.
Turning to slide 13.
Adjusted EBITDA for the second quarter of 2022 was $41 million down $18 million or 30% compared to the prior year quarter.
The second quarter, 2022 was primarily impacted by $17 million of incremental costs related to supply chain issues as discussed by key in addition to higher major maintenance manufacturing energy and employee related costs.
Our work operations were materially impacted due to lack of lack of consistent top middle delivery and quality related to the Alco work smelter operational performance. In addition to the higher alloy energy and freight costs, which were partially offset by improved pricing and commodity and freight surcharges.
Adjusted EBITDA for the first half of 2022 was $96 million, which was equivalent.
Equivalent to the first half of 'twenty one.
The first half of 2022, EBITDA was impacted by approximately $30 million of incremental costs, including approximately $20 million driven by the El code smelter operational performance and U S based supply chain disruptions at our work operations.
$6 million higher than normal international freight costs out of our trip with operations as discussed in the first quarter of 2022 results.
An additional inflation driven higher energy manufacturing and employee related costs that were not fully recovered and timely through pricing actions.
Moving on to slide 14.
Reported operating loss for the second quarter 2022 was $2 million.
Adjusting for approximately $16 million of non run rate items adjusted operating income was $14 million.
Down from the $33 million in the prior year quarterly quarter, primarily reflecting the changes in EBITDA as previously discussed.
And an additional $1 billion of depreciation and amortization expense.
Reported operating income for the first half of 2022 was $23 million adjusting.
Adjusting for non run rate items, adjusted operating income was $42 million, reflecting $15 million of additional depreciation and amortization as compared to the first half of 2021, primarily related to the work acquisition made on March 31 2021.
Compared to the second half of 2021, adjusted operating income was down $3 million, reflecting $2 million of additional depreciation in addition to the changes in EBITDA.
Previously discussed.
We reported net loss for the second quarter, 2022 was $14 million compared to $22 million loss in the prior year quarter.
Adjusting for non run rate items adjusted net loss for the second quarter of 2022 was $1 million compared.
Compared to the prior year quarter, adjusted net income of $16 million.
As a reminder, second quarter 2021 reported net loss reflected a $36 million charge related to the refinancing of our $350 million six five senior notes that were due in 2025 with our $550 million four 5% senior notes due in 2031.
As reported loss per diluted share were 87 cents in the second quarter of 2022 compared to a loss of $1 42 in the prior year quarter.
Adjusted loss per diluted share was <unk> sort of second quarter of 2022 compared to an adjusted earnings per doodle per diluted share of $1 in the second quarter of 'twenty one.
As reported loss per diluted share were <unk> 36, and $1 13 for the first half of 'twenty, two and 'twenty one respectively. Adjusted reported earnings per diluted share were <unk> 63.
Dollars 64 for the first half of 'twenty, two and 'twenty one respectively.
Our effective tax rate for the second quarter 2002 was 23%.
For the full year and long term, we continue to believe our effective tax rate will be in the mid 20% range under the current tax regulations.
We anticipate our cash taxes paid will be approximately $6 million in 2022, and the cash tax rate will remain below the statutory tax rate in two until we fully utilize our federal Nols of $187 million as of year end 2021.
Now moving to slide 15.
As of June 30, we had $235 million of cash and cash equivalents.
Total availability under our recently amended $575 million revolving credit facility, which expires in 2027 was $551 million, providing total liquidity of $787 million.
There were no borrowings under our revolving credit facility during the quarter and the facility remains undrawn.
With the recent easing of aluminum prices as compared to the first quarter of 2022, we do not expect any cash requirements for working capital funding during the second half of the year.
Our senior notes are fixed at an annual interest costs of $48 million.
And we have no debt maturing until 2028.
Capital expenditures for the first half of 2022 were $46 million for the full year, we expect our capital expenditures to be between $180 million and $200 million.
Predominantly related to the previously announced additional ROE colder for our packaging operations.
And finally, we continue to remain confident in our long term strategy and continuing ability to generate solid long term returns on.
On July 14th we announced that our board of directors declared a quarterly dividend of <unk> 77 per common share reflecting.
Reflecting a $13 million quarterly return to shareholders.
We have consistently paid quarterly dividend since 2007, and we have steadily increased each annual payment over the past 11 years.
And now I'll turn the call back over to Keith to discuss our business outlook.
Thanks Neil.
Turning to slide 17.
While the integration and the establishment of the work Rolling mill into a standalone business within Kaiser has had its challenges.
We remain excited about the long term profitable growth opportunities and packaging and the other markets we serve.
Award facility and organization has a proven history of being a market leader an important supplier to the packaging industry.
And we are well along in executing our strategy to further strengthening of the acquisition.
We are making a number of investments to support our strategy there and we have been successful in securing long term agreements with our customers.
The market outlook remains very strong and we are well positioned.
We are confident we will achieve operational excellence at work as we have achieved in our other businesses and as discussed earlier, we are taking a number of actions to address the current supply chain issues moving forward.
The aerospace and high strength markets have continued to steadily improve since the low watermark experienced in the second half of 2020.
Demand for our products in defense and business jet have remained strong.
And we are experiencing improving demand in the commercial aerospace sector.
Declarations of shipments for all aerospace and high strength products for 2023.
The highest since 2019.
And we expect strong demand to continue as air framers supply chain issues and regulatory hurdles are resolved.
We remain on track to return to record levels experienced in 2019, and the 2023 2024 timeframe.
The general industrial markets have been quite robust.
Recent market data shows inventory levels at service centers slightly elevated over recent previous periods, suggesting supply is catching up to the strong demand we have been experiencing.
Pricing and lead times for these products have risen to record levels with strong demand, especially in semiconductor applications continuum.
We expect strong demand through the balance of the year for these applications.
Not much change is expected in automotive demand in the second half of the year from the first half.
Periodic shutdowns at multiple assembly plants continue on relatively short notice many times based on shortages of chips, but we understand other supply shortages have also impacted our customers.
We remain in a strong position to grow with these issues with our customers begin to abate.
While concerns of a pending slowdown in the general economy have been widely discussed.
At present demand in our markets remains strong.
We are prepared to quickly adjust for any downturn in our markets with plans in place to adjust our businesses as necessary.
We continue to maintain a strong balance sheet with significant liquidity.
And we have the playbook to quickly adjust cost and spending as conditions dictate.
Our focus now is addressing work supply chain issues.
<unk> mitigate the impact of these events on our customers.
And achieve the level of performance expected in our operations there.
The expected outlook for EBITDA margins of 17% to 20% for the year, we will not be achieved due to the many supply chain issues, we've encountered in the first half of the year.
However.
As these issues are resolved the business is positioned to perform at these levels and better as we continue executing on our strategies fix our supply issues and perform for our customers.
As previously stated we remain confident our portfolio of businesses are positioned to deliver approximately $2 billion in value added revenue with EBITDA margins in the mid to high 20 percentage points once the strategies normal operations and planned investments are in.
Place.
I will now open the call for any questions you may have dara.
If anyone has a question Andy is zero one on your Touchtone phone. Once again, if you have a question is zero one on your Touchtone phone.
And our first question comes from Emily Chang go ahead Emily.
Good afternoon, Keith and Neil and thank you for the update today.
First question as you can imagine is just around.
The U S Mag announcement that given you're seeing some progress in terms of qualifying some new supply and you may be received some additional AD hoc supply from yours Mag recently could you provide some sort of glide path as to when you might anticipate the return to full production at Warrick is that a full Q event or could that be.
Ali 2023 at this point.
Well good afternoon, Emily and thanks for that question.
Our our 8-K, when we announced the force majeure.
Felt at that time, and we're looking at all of our suppliers and through the balance of the year.
We felt that the numbers that we provide into the 30% to 40% at risk in July .
And thats pretty much on track for that that amount of shipments impact.
For July , but then we felt we could.
Go down as low as 50% up for supply for the balance of the quarter.
We've had a tremendous amount of activity as you might imagine over the last two five weeks.
And really moving forward fast tracking qualifications looking at number of other sources and we had a number of these underway prior to the force majeure event.
So our focus going forward was meant to let's let's look at what that supply base would be for the balance of the year.
Without expectations of any more shipments from U S. Meg.
And with that activity that we've done in the qualification process and the hard work that's been going on at work. We now feel that we can contain that possibly to the third quarter.
And could return to full shipments sometime in the quarter.
Before the end of the quarter.
As you might imagine it's fluid right now we have a number of qualifications underway.
But the conditions have improved and we think we will limit it to the third quarter and.
And not only will we also secure those amounts of Mac for the balance of the year, we're negotiating for full 2023 supply.
Great I understood that's really good to hear that.
Bob.
Question, but around the metal supply that with loss trends the potline closure at all color how easy has it been to replace those losses volumes because you've also seen all the curtailments of domestic model of Wow.
Well, Kimberly our arrangement with Alcoa, there that if they are unable to provide hot metal sources to us so from their other locations were to recede coal Prime method.
So other than the timing of receiving that metal as hot metal became rich.
<unk>.
<unk> been able to secure our needs.
With the use of coal prime and our use of additional scrap now.
Now what we are preparing to and as I said in my prepared remarks, Emily and as you can imagine we're a little gun shy at this point, we're not going to wait for just that issue to cure itself or to improve possibly improve.
We are actively.
Qualifying other hot metal sources that we will utilize.
Going forward and as.
As I mentioned, we have a number of initiatives underway like the coated scrap number that I referred to the my prepared remarks to really take ourselves less dependent on any of the crime metal sourcing and move this business more to longer term sustainable use of scrap.
Its primary metal source.
Understood and maybe final question, if I could squeeze one in.
Sure Pat what percentage of your magnesium requirements at Warwick previously came from your last Megan.
Clearly you're shifting away from that with your upcoming qualifications, but perhaps where you would like to be on a normalized basis. Once this is resolved.
Sure well.
We purchased the facility Emily.
Agreements with U S Mag.
Already established.
And they were a significant al.
Leave it I wont put a number to it but they were significant supplier of use of Mag. So the work facility.
And another issue around the Warrick Rolling mill.
We utilize a lot more mag because of the applications that we serve so by our supplying a significant amount of food can and other products, which require a higher use of Meg and we have a fairly large requirement there for that facility.
However, I will say due to the issues that we've had and the success we've had in securing other sources.
We're actually not putting them in and any strategic level of supply for that facility moving forward.
So we feel confident we're going to be able to find other supplies more reliable and diversified supply. So that we're not faced with back by one individual supplier moving forward and I would say that comment also reflects our position on metal sourcing as well.
Great that makes a lot of sense I appreciate the color. Thank you.
Thank you Emily.
And once again, if you have a question is zero one on your Touchtone phone and our next question comes from Josh Sullivan from the Benchmark Company go ahead Josh.
Hey, good afternoon.
Okay.
In the past you've mentioned when work is run without hot metal.
And what's the cost differential to use cold metal as a source.
We have the ability because of the cast house that we have that at work. There we can utilize the cold metal pretty effectively as compared to the hot and the reason that you've had a lot of hot metal. There is because this was a fully integrated business when al.
Co owned at the time.
Josh.
It was logical for them to use more molten aluminum therefore to utilize the metal from the smelter and that and that service when the smelter was previously shuttered for.
A short amount of time.
The facility was able to get the amount of hot metal they needed and utilize Meg.
The additional sources from scrap and that they saw no significant impact from being able to move sourcing now I will tell you that we believe going forward and our focus on this business.
Going to significantly reduce the amount of cost from our metal sourcing by the use of lower cost scrap and the utilization of.
The material that we're generating from the Covid scrap motor and other resources. So we actually believe we're going to be able to significantly improve our operating costs.
Once we move away from the hot metal sourcing period.
Got it.
And what are your thoughts on some of the recent industry capacity announcements for new Rolling Mills.
How do you how do you think those are going to enter the market.
Well it's.
It was a surprising announcement that somebody really finally acted onto the Brady initiatives.
And we know there's been a couple of other announcements.
But quite frankly, those decisions do little to deter or altered the strategies, we have for this business.
I think as you recall, we believe we purchased this business.
Very good price.
It's a as opposed to a green site that has to be built qualified go through a number of things. This business has the warrick Rolling mill as 50 years of experience.
And supplying products with our customers.
So there are well known quality house that alright.
Already existing so therefore little risk from our customers' perspective.
Other thing.
The others have mentioned that these are going to be multi purpose mills that they are building.
And.
Kaiser has got some experience in doing that in the past in the nineties.
We werent very successful doing that we actually like the focused factory approach with having award work is going to do.
Participate only in the packaging markets.
We don't intend to divert any other capacity to automotive sheet and common alloy. So therefore, we won't be competing with these other mills.
And then ultimately our strategy moving forward is to really focus this business in a niche area.
And that's backed up by the investments we've made in our.
Our additional coder that we're putting in place the new coating line and we're going to be uniquely qualified and be able to strengthen our position with these investments and with the long term agreement that we have in place.
So we intend to be further along in this strategy by the time of any of the other mills are are eventually built.
So we like the investment continue to like it.
We made to acquire the rolling mill there. It works, we like the price and the fact that there are market proven supplier.
Got it.
And then a lot of these new players and existing players as well.
Focusing on using a lot more scrap.
The recycling market for aluminum developing do you think the historical recycling ecosystems are going to be altered as work and others demand more.
I think absolutely.
The availability of scrap is going to continue to rise.
And I think all of US this isn't.
A big Magic pill, we fully know that utilize scrap moving forward and that's not only.
Securing that on the open markets ourselves, but in coordination with our customers who are also very very privy and focus on sustainability and lowering the cost of the materials.
And I believe that there are strong positions in place and that there is additional scrap capacity will be generated that we should all have in availability now that being said.
We're fast at work securing all of our metal needs, which includes scrap and so I think thats going to be a strategic position for any of the businesses moving forward and I know, we're thinking that way and not only will that also support what we need from a sustainability.
<unk>, it's really how we're going to drive additional profits and financial returns on these businesses.
I believe we're all focused on the same thing Josh It's just making sure that we have a strong strategic position in place.
To support the business going forward.
Got it got it and then just one last one just with the law suit against U S. Meg.
Key dates you can provide and then.
What damages or you're pursuing is it quantifiable at this point.
Yeah.
Well right now the outlook is for the trial to begin early in 2023.
And when we filed the lawsuit in April .
In the filings, we listed that roughly $10 million.
But that's a running total.
Certainly added to that in the second quarter with third performance and inability to meet their contractual obligations.
And so that that keeps running up.
And then it's still to be determined whether or not additional cost will be rolled into even further on that litigation. So we believe we have a strong case.
Well prepared and.
I want to share this.
We learned how not to treat customers when you go into it.
Periods of something like a force majeure. So unlike how we have been treated with.
We're communicating with our customers on a daily basis, and we are absolutely focused on returning to full production very soon.
To minimize any impact.
Short term or long term to any of our customers. So we take all of these very seriously and.
We intend to.
Pursue these things with great Ernest.
Okay. Thank you for the time.
Thank you Josh.
Our next question comes from Michael Glick from Jpmorgan go ahead Michael.
Hey, guys. Just one question from me, how should we think about margin progression half of.
For the year.
Up.
Michael you broke up on US we didn't get that sorry to ask the question.
How should we think about margin progression.
Yeah.
Hey, Michael Youre still really break it up can you try one more time.
We understand it's about margins on something.
It looks like he's dropped off.
Okay.
Okay.
And we don't have any more questions in the queue.
Wait.
We've got one more from Emily Chang go ahead Emily.
Hi, Keith and Neil again, maybe just to follow up on that prior question I think it was around margin progression for the remainder of Danielle.
Yes, so the third quarter, we know who will be impacted.
Bye.
By partial production.
From the packaging industry packaging side of the business. So we really don't have an outlook right now of what that may be.
We do anticipate however, moving into the fourth quarter with.
Hopefully production back to full levels and and then we will have also the outages we have at our current with facilities. So we expect to be able to return back to those margins are hopeful for the full year in the fourth quarter of this year.
And the third quarter.
To be determined based on how fast we can return to full production.
Understood and maybe just while we're on the topic of costs, I think energy and labor and manufacturing costs continue to be.
Elevated during the second quarter that but any sort of line of sight to perhaps labor manufacturing easing or what sort of the path ahead for those pieces.
Sure.
Yes.
Quite frankly, Phil we're in really good position from a pricing perspective on R. R.
Products in every category, we have been able to move cost through fairly securely.
Bob.
And I think we've offset the majority of those costs. The few that have not and that impacted in that Neil reflected it's really just a reflection of a lag.
Cost we expect some of these costs.
Remember, we put in a position to be ability to move these costs, especially in packaging through on a shorter timeline with our customers. There then the annual <unk>.
Contracts that allow.
And so there's a lagging.
Securing those those costs, but overall, we actually believe that.
We've covered most of our costs, we believe some of these efficiencies when they get the supply chain issues behind us and some of the outages. We believe once we return to high efficiency levels, we're going to be able to actually began cutting back on some of those costs.
So labor is obviously, a little higher but we think we have offset those costs.
So I think our position should be improving as we go into the especially the fourth quarter.
Understood. That's all for me thank you.
Thanks Emily.
We have no more questions at this time I'll turn it back to the speakers for any closing comments.
Okay, well, thank you for joining us today.
Look forward to updating you on our third quarter results in later in the year.
Alright, Thank you alright.
Alright.
Thank you ladies and gentlemen. This concludes today's conference. Thank you for participating you may now disconnect.
Okay.
Sure.
Okay.
Yes.
[music].
[music].
[music].