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Kaiser Aluminum Corp  (NASDAQ:KALU)
Q2 2019 Earnings Call
Jul. 25, 20191:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the Kaiser Aluminum Second Quarter 2019 Earnings Conference Call. [Operator Instructions] As a reminder, today's program may be recorded.

I would now like to introduce your host for today's program, Melinda Ellsworth, Vice President of Investor Relations. Please go ahead.

Melinda C. Ellsworth -- Vice President, Investor Relations & Corporate Communications

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 kaiseraluminum.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 Huey.

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 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 2018.

The Company undertakes no duty to update any forward-looking statements to conform the statements 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 we 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?

Jack A. Hockema -- Chief Executive Officer and Chairman

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 hot line 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 and lost production and shipments, substantially less than the previously anticipated $15 million impact.

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 reflected 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 include a negative impact of approximately $15 million from a combination of the planned 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 20s, further reinforcing our expectation for strong second half results.

Moving to slide 6 and a summary of our outlook. We anticipate normal major maintenance and industrial demand seasonality in the second half and we are well-positioned with a very strong aerospace order book and with new automotive product 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.

And I'll now turn the call over to Neal to provide additional detail on the second quarter. Neal?

Neal West -- Senior Vice President and Chief Financial Officer

Thanks, Jack, and good morning.

Value added revenue in the second quarter was slightly lower than prior year quarter and 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 on a 21% reduction in shipments and a shift to a lower value added mix. As noted during previous earnings calls, 2019 is a transitional year for automotive as all programs roll off and new programs launch and ramp up. The timing and visibility of transitions are often uncertain because they are driven by the OEMs.

General engineering 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 plates to meet the strong aerospace customer commitments. In addition, overall play capacity was temporally constrained by the planned Trentwood outage.

For the first six months of 2019, total value added revenue improved 4% on a 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 9. EBITDA for the second quarter 2019 of $48 million declined compared to $55 million in the prior year quarter, primarily reflecting the approximate $10 million EBITDA impact from the planned Trentwood outage. Improved pricing on non-contract sales was partially offset by lower automotive shipments and other cost inefficiencies. 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 in 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 an 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, non-cash losses, operating income for the second quarter of 2019 was $35 million compared to $44 million in the prior 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 $1.18 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 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 non-cash 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 deluded 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 million of cash to shareholders in the form of share repurchases and dividends.

At June 30, 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?

Jack A. Hockema -- Chief Executive Officer and Chairman

Thanks, Neal.

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 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.

Questions and Answers:

Operator

Certainly. [Operator Instructions] Our first question comes from the line of Martin Englert from Jefferies. Your question, please.

Martin Englert -- Jefferies -- Analyst

Hi. Good morning, everyone.

Jack A. Hockema -- Chief Executive Officer and Chairman

Hi, Martin.

Martin Englert -- Jefferies -- Analyst

So, while you've noted a strong second half aero 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 this the case where is it maybe being absorbed by other programs?

Jack A. Hockema -- Chief Executive Officer and Chairman

Well, I think it's -- 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 we think the supply chain got stretched very, very thin, and that's why we have a strong order book now in we have had for really the past 12 months or so. But we're really looking at strength in the second half and getting very, very strong indications about a very strong order book in 2020.

Martin Englert -- Jefferies -- Analyst

Okay. And can you provide a little bit more color on the inventory destocking headwinds? Do you think that's fully abated at this point and that your shipments in the back half of the year and going forward will be more reflective of true underlying demand?

Jack A. Hockema -- Chief Executive Officer and Chairman

Yes. But in fact, I think it's reflecting more than underlying demand right now because the destocking was overdone in our view. So, really the strong order book we're seeing now is making up for insufficient orders in 2017 and 2018.

Martin Englert -- Jefferies -- Analyst

So, fair to think of it as a combination of robust program demand, coupled with some inventory restock?

Jack A. Hockema -- Chief Executive Officer and Chairman

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.

Martin Englert -- Jefferies -- Analyst

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, I'd -- do you have any visibility on a sequential basis on how volumes might compare a trend in 3Q versus 2Q given the notable weakness in the 2Q volumes?

Jack A. Hockema -- Chief Executive Officer and Chairman

Right now, 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 certainly is up.

Martin Englert -- Jefferies -- Analyst

Okay. More comparable to prior quarters before 2Q here? Or exceeding that?

Jack A. Hockema -- Chief Executive Officer and Chairman

Yeah. I think you can really throw out 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 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 programs running off in the fourth quarter. 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.

Martin Englert -- Jefferies -- Analyst

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.

Jack A. Hockema -- Chief Executive Officer and Chairman

Yeah. Thanks, Martin.

Operator

Thank you. Our next question comes from the line of Josh Sullivan from Seaport Global. Your question, please.

Josh Sullivan -- Seaport Global -- Analyst

Hey, good morning.

Jack A. Hockema -- Chief Executive Officer and Chairman

Hey, Josh.

Josh Sullivan -- Seaport Global -- Analyst

Just following on the automotive trend there. What is the timeline for the automotive content growth in 2020, 2021? You kind of hit on it. But are those contracts in hand? And, is there any way you could say whether you're weighted to trucks, SUV or another category at this point?

Jack A. Hockema -- Chief Executive Officer and Chairman

Well, yes, it is bird in the hand, and yes, it's more heavily weighted to large vehicles than small. However, there is a significant portion of both.

Josh Sullivan -- Seaport Global -- Analyst

Okay. And then historically, I think you've talked about the aluminum penetration story in automotive being about 6% above SAAR. Is that still the metric? Or how are you thinking about just growth of penetration versus SAAR going forward?

Jack A. Hockema -- Chief Executive Officer and Chairman

Yes. Our outlook still is that 5.5% to 6% CAGR in terms of content growth.

Josh Sullivan -- Seaport Global -- Analyst

Got it. And then -- I understand you're moving some capacity around for the strong aerospace demand. But how does the general engineering market look in isolation outside of what you've moved around here?

Jack A. Hockema -- Chief Executive Officer and Chairman

Well, there are really two components here. One is that industrial growth is slowing. It's not negative but is slowing. Also, from some of the industry metrics we see that the distributor metrics are canary in a coal mine, which is [Indecipherable]. Actual distributor shipments to their customers are down slightly year-over-year and we think that's really supply chain rather than real demand. So there's 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.

Josh Sullivan -- Seaport Global -- Analyst

Okay. Thank you. I'll jump back in queue.

Operator

Thank you. Our next question comes from the line of Curt Woodworth from Credit Suisse. Your question, please.

Curt Woodworth -- Credit Suisse -- Analyst

Hey, good morning, Jack.

Jack A. Hockema -- Chief Executive Officer and Chairman

Hey, Curt.

Curt Woodworth -- Credit Suisse -- Analyst

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 ahead 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?

Jack A. Hockema -- Chief Executive Officer and Chairman

No, I wouldn't say it's higher pricing. I say it's comparable pricing in aerospace -- or auto, I'm sorry. In automotive, yeah, yeah.

Curt Woodworth -- Credit Suisse -- Analyst

Okay. So basically you'll have operating leverage, but the -- I guess the unit margin should be similar to what you've been seeing?

Jack A. Hockema -- Chief Executive Officer and Chairman

Correct. Yeah. We're not seeing margin expansion on automotive sales.

Curt Woodworth -- Credit Suisse -- Analyst

Okay. And then on aero -- could you just update us on what you think your capacity capability is? So, if next year, you have a very strong environment -- it looks like you will -- and then you get 737 MAX back into the mix, 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 allocating your highest margin products? Or are you seeing emergent demand where you can get quick, big margin spot sales? Basically just trying to formulate a little bit more of a view on next twelve months. Thank you.

Jack A. Hockema -- Chief Executive Officer and Chairman

Sure. Well, our expansion at Trentwood, the $150 million modernization, basically is complete. The equipment's in the ground and installed. However, we continue to have opportunities to capture the full potential there as we convert practices 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 that 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 have 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 longer-term, we're pleased with what we've seen out of the investment that we've made, particularly on the hot line. 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 add capacity as the market demands it in future years.

Curt Woodworth -- Credit Suisse -- Analyst

Great. Thanks very much. Appreciate it.

Operator

Thank you. [Operator Instructions] And 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.

Jack A. Hockema -- Chief Executive Officer and Chairman

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 -- up there. And 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 ceiling here looking forward to such strong results as we go forward. Look forward to updating you in the third quarter conference call in October. Thank you.

Operator

[Operator Closing Remarks]

Duration: 22 minutes

Call participants:

Melinda C. Ellsworth -- Vice President, Investor Relations & Corporate Communications

Jack A. Hockema -- Chief Executive Officer and Chairman

Neal West -- Senior Vice President and Chief Financial Officer

Martin Englert -- Jefferies -- Analyst

Josh Sullivan -- Seaport Global -- Analyst

Curt Woodworth -- Credit Suisse -- Analyst

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