Q2 2019 Earnings Call
Which require assistance during the program. Please press Star then zero on your Touchtone telephone as a reminder, todays program maybe recorded I would now like to introduce your host for today's program Linda Ellsworth Vice President Investor Relations. Please go ahead.
Thank you good afternoon, everyone and welcome to Kaiser aluminum second quarter, and first half 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, Keith Harvey Senior Vice President and Chief Financial Officer, Neal West and Vice President and Chief Accounting Officer, Jennifer Hewitt.
Before we begin I'd like to refer you to the first two 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 expectation.
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 Companys annual report on Form 10-K for the full year ended December 2018.
The company undertakes no duty to update any forward looking statements to conform the 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 any reference in our discussion today to EBITDA means adjusted EBITDA, which excludes non run rate items for which weve posted 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 Jack Hockema Jack.
Thanks, Melinda welcome to everyone joining us on the call today.
Our second quarter results were solid despite the impact of Trentwood planned maintenance outage on our largest casting complex the hotline and the large plate stretcher excellent planning and execution by our Trentwood team resulted in a one time EBITDA impact of approximately $10 million for maintenance costs operating inefficiencies in lost production and shipments substantially less than the previously anticipated 15 million dollar impact.
[noise] aerospace shipments continued to reflect the strength of our order book.
Similar to the first quarter General engineering shipments were constrained as we prioritized allocation of heat treat plate capacity to meet aerospace customer commitments.
Auto shipments in the second quarter reflect the transition from old to new programs, we expect new programs to gather momentum in the second half and we remain very optimistic for strong automotive content in 2020 and 2021.
While the first half results included a negative impact of approximately $15 million from a combination of the plant trentwood outage in the second quarter and unplanned downtime in the first quarter first half EBITDA, excluding the drag from the Trentwood downtime reflects an implied run rate of approximately $60 million per quarter and EBITDA margins in the high Twentys further reinforcing our expectation for strong second half results.
Moving to slide six and a summary of our outlook.
We anticipate normal major maintenance in industrial demand seasonality in the second half and we are well positioned with a very strong aerospace order book and with new automotive products ramping up.
Our outlook for the full year is unchanged as we continue to anticipate low to mid single digit percent year over year increase in both shipments and value added revenue with EBITDA margin above 25%.
Although timing for resolution of the Boeing 737, Max is uncertain, our second half Aerospace order book is robust we've had extensive communication with all of our strategic aerospace customers and we expect a very strong order book in 2020.
In addition, we expect significant growth in automotive Extrusions content in 2020 and 2021.
I will now turn the call over to Neal to provide additional detail on the second quarter Neil.
Thanks, Jack and good morning.
Value added revenue in the second quarter was slightly lower than prior year quarter on lower shipments, partially offset by improved pricing.
Aerospace value added revenue improved 6% from the prior year second quarter, and a 6% year over year increase in shipments, which was driven by our strong demand for aerospace products.
Automotive value added revenue decreased 32% compared to the second quarter of last year.
21% reduction in shipments and a shift to a lower value added mix.
As noted during previous earnings calls 2019, as a transitional year for automotive as old programs roll off and new programs launch and ramp up.
The timing of visibility of transitions are often uncertain, because they're driven by the Oems.
General engineering value value added revenue was up 3% year over year on a 13% reduction in shipments reflecting improved pricing.
The decline in shipments is primarily related to the reallocation of a portion of our heat treat plate capacity from general engineering to aerospace plate to meet the strong aerospace customer commitments.
In addition, overall plate capacity was temporarily constrained by the plan Trentwood outage.
For the first six months of 2019 total value added revenue improved 4% on the 5% lower shipments.
Reflecting improved pricing for non contract sales higher aerospace shipments and lower shipments for automotive and general engineering applications.
Turning to slide nine.
EBITDA for the second quarter 2019 of $48 million decline compared to $55 million in the prior year quarter, primarily reflecting the approximate $10 million EBITDA impact from the plan with outage.
Improved pricing a nine contracts sales was partially offset by lower automotive shipments and other costs and efficiency.
EBITDA margin for the second quarter was approximately 23%.
Compared to approximately 26% in the prior year quarter.
EBITDA for the first half 2019 of $104 million was comparable to the prior year period.
Reflecting continued strength and demand for our aerospace products and improved pricing on non contract sales that offset the negative impact of approximately $15 million related to the trentwood planned and unplanned downtime and lower automotive shipments due to program transitioning.
EBITDA margin decreased to 24% in the first half of 2019 as compared to approximately 25% in the prior year period, driven by the drag from the planned and unplanned downtime at Trentwood.
Turning to slide 10.
Operating income for the second quarter 2019 was $32 million.
Adjusting for $3 million of non run rate noncash losses operating income for the second quarter of 2019 was $35 million compared to $44 million in the prior year quarter.
Reflecting the items previously mentioned and an approximate $1 million year over year increase in depreciation expense.
Reported net income for the second quarter, 2019 was $19 million or one dollar an 18 cents per diluted share.
Reflecting an effective tax rate of 27%.
Adjusting for non run rate items net income for the second quarter was $23 million compared to $28 million in the prior year quarter again, due primarily to the planned downtime at Trentwood.
Adjusted earnings per diluted share in the second quarter declined to $1.40 from $1.68 cents in the prior year period.
For the first half 2019 operating income as reported was $75 million.
Adjusting for $4 million of non run rate noncash losses first half 2019 operating income was $80 million down slightly from $81 million in the prior year period. The decline primarily reflected an approximate $2 million increase in depreciation expense.
Reported net income for the first half 2019 was $47 million or $2.89 per diluted share.
Adjusting for non run rate items first half net income was $53 million compared to $56 million in the prior year period.
Adjusted earnings per diluted share for the first half 2019 was $3.24 compared to $3.28 for the first half of 2018.
Capital spending totaled $16 million for the second quarter and $30 million for the first half of 2019.
We expect capital spending for the full year will be approximately $75 million to $80 million.
During the first half of 2019, we returned $49 billion of cash to shareholders in the form of share repurchases and dividends.
At June Thirtyth.
Cash and short term investments totaled approximately $147 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 discuss our outlook Jack.
Thanks Neil.
Turning to slide 12, and a summary of our comments today, we had excellent execution of the planned outage by our team at Trentwood in the second quarter and we delivered solid results. Despite the short term challenges at Trentwood and the transition from old to new products in our auto operations.
Our outlook for 2019 remains unchanged and we continue to anticipate a strong second half and improved full year year over year over year results compared to 2018.
Demand for our aerospace products remains very strong and our robust order book for the second half is expected to continue into 2020.
While our automotive product mix transition resulted in weak shipments in the first half we expect growth to resume in the second half with strong content growth anticipated in 2020, and 2021 driven by the transition from expiring programs to new ones.
As we look longer term, we remain well positioned to capitalize on the secular demand growth for our aerospace and automotive applications. In addition, we expect continued steady improvement in underlying manufacturing cost efficiency to drive additional value for all stakeholders, our strong balance sheet and cash flow generation support our growth and capital deployment priorities and provides sustainability through industry cycles.
We will now open the call for questions.
Certainly ladies and gentlemen, if you have a question at this time. Please press Star then one on your Touchtone telephone. If your question has been answered and you'd like to remove yourself from the queue. Please press the pound key.
Our first question comes from the line of Martin.
From Jefferies. Your question please.
Hi, good morning, everyone.
Hi, Martin.
So whether you've noted a strong second half Arrow order book. Despite the Max grounding are you seeing any signs or changes in order activity or channel inventory adjustments associated with the Max program.
Or is no is worth.
Maybe being absorbed by other programs.
Well I think its a.
Certainly part of it is being absorption by other programs, but in our view and we made a comment on the prior call that.
It had begun to appear to us that the Destocking that we saw in 2017, and 2018 was overdone and as we've had a lot more conversation over the past couple of months with all of our strategic customers. We're more convinced that that's the case and it goes to a lot of the comments made by Boeing and others about the need to restore health to the supply chain. So so we think the supply chain got stretched very very thin and Thats why we have a strong growing order book now and we have had for really the last the past 12 months or so, but we're really looking as strength in the second half and getting very very strong indications about a very strong order book in 2020.
Hey.
Can you provide a little bit more color on the I know the inventory Destocking headwinds do you think thats fully abated at this point and that your shipments in the back half of the year and going forward, we will be more reflective of true underlying demand.
Yes, but in fact, I think it's reflecting more than underlying demand right now because the destocking was overdone and in our view.
So so really the strong order book, we're seeing now is making up for.
Insufficient orders in 2017 and 2018.
So fair to think of it as a combination of robust program demand coupled with some inventory restock.
Yes, that's exactly how I would characterize it and then the anticipation with once we get the Boeing 737 resolved.
And Boeing starts ramping up the builds on the 737 with all of the other ramp ups, we continue to see.
Really strong growth going forward here.
Okay. Thanks for all the color there and if I could one other on the automotive so while I understand there's uncertainty due to the program changeovers.
Do you have any visibility on a sequential basis on how volumes might.
Compare trend in Threeq versus Twoq, you given the notable weakness in the Twoq volumes.
Yeah, right now were our internal forecast is up substantially year over year in terms of shipments in the third quarter.
I won't give you a number but it is certainly is up.
Okay more compelling more comparable to more prior quarters before twoq here.
Or exceed yet.
Yes, I think you can really throw out the.
The first half of this year. This is when we really saw the big impact from.
Old programs coming off and now we're starting to see the new programs begin to ramp up so.
So the first half is really a flyer and frankly, there was some of that already in the fourth quarter last year, we had begun to see some some programs running off in the fourth quarter. So so we're pretty confident now as we move into the second half that we've got the curve headed the other way and we'll see strong year over year growth and we're really optimistic about 2020 and 2021.
Okay. Thanks for all the color there and congratulations on the outage execution in the quarter and looking forward to the second half results here.
Yes, Thanks Martin.
Thank you. Our next question comes from the line of Josh Sullivan from Seaport Global Your question. Please.
Hi, good morning.
Hey, Josh.
Just following on the automotive trend there.
What does the timeline for the automotive content growth from 2020, 2021, you kind of hit on it but are those contracts in hand and is there any way you can see with your weighted to trucks Cvs or another category at this point.
Yes. It is bird in the hand, and yes, it's more heavily weighted to large vehicles than small however, there's a significant portion of both.
Okay.
And then historically I think you've talked about the aluminum penetration story and automotive being about 6% above SAR is that still the metric or how are you thinking about growth penetration versus our going forward.
Yes, our outlook still is that 5.5% to 6% CAGR in terms of content growth.
Got it.
And then I understand you're you're moving some capacity around for for the strong aerospace demand.
How does the general engineering market look in isolation.
Outside of what you've moved around here.
Well there are really two components here.
One is that.
Industrial growth is slowing it's not negative, but but is slowing.
Also from some of the industry metrics, we see the distributor metrics.
Our our Canary in the coal mine, which is is rod and bar.
Actual distributor shipments to their customers are down slightly year over year, and we think thats really a supply chain rather than real demand. So theres a combination of those that really makes our demand in general engineering relatively flat compared to what was really robust demand last year, but it's still strong. It's just the growth has slowed compared to the really strong growth we had previously.
Okay. Thank you I'll jump back in the queue.
Thank you. Our next question comes from the line of Curt Woodworth from Credit Suisse. Your question. Please.
Hey, good morning, Jack.
Hey, Kurt.
I was wondering if you could talk about.
The I guess, how tight the extrusion market is looking so you obviously have a pretty compelling platform launch cycle.
Head of you, but do you think that will also translate into higher value add.
Revenue in terms of the pricing of that backlog relative to what has been rolling off.
No I wouldn't say, it's higher pricing I'd say, it's comparable pricing.
In aerospace.
Although I am sorry in automotive, yes, yes.
Okay. So.
Basically you have operating leverage but the.
I guess the unit margin should be similar to what you've done.
Seeing.
Correct, Yeah, we're not seeing margin expansion on automotive sales.
Okay.
And then on Aero.
Could you just update us on what you think your.
Your capacity capability is.
So if next year.
You have a very strong environment when it looks like you will and then you get 77 maxs back into the.
Mix.
What what do you view as kind of your potential volume there and then can you talk about.
Your strategy to optimize your mix in terms of.
You know.
Allocating your highest margin profits products or you seeing emergent demand, where you can get quick.
Big margin spot sales and basically just trying to formulate a little bit more of a view on.
Next 12 months, Thank you sure well.
Our expansion at Trentwood, the $150 million modernization basically is complete the equipments in the ground and installed.
However, we continue to have opportunities to capture the full potential there as we convert practices it over from the old.
Processing to the new way of processing and then the second component next year compared to this year is this year, we had the big planned outage here in the second quarter the restricted our capacity and we had the unplanned outage in the first quarter. So our throughput has been restricted compared to what our actual capacity is this year.
So yes, we expect to add more capacity next year than this year I won't put a number on it at this stage, but we certainly have opportunities to continue to grow our aerospace and and longer term. We're pleased with what we've seen out of the investment that we've made particularly on the hotline.
We're seeing a lot more hot rolling capacity potential from the investment that we made that bodes well for long term, we have a lot of downstream bottlenecks, but we know exactly where we need to go to to add capacity as the market demands it in future years.
Great. Thanks, very much appreciate it.
Thank you once again, ladies and gentlemen, if you have a question at this time. Please press Star then one on your Touchtone telephone.
And this does conclude the question and answer session of todays program I'd like to hand, the program back to Jack Hockema for any further remarks.
Thanks, everyone. We were pleased with the second quarter, and how well trentwood performed under some really difficult circumstances with the major outage they had out there at their end.
We're really really optimistic about the strong order book, we have going here in the second half and what we're hearing about 2020. So we think we've got some clear sailing here looking forward to some strong results as we go forward.
Look forward to updating you in the third quarter conference call in October 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.