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Kaiser Aluminum Corp (KALU 1.33%)
Q3Â 2019 Earnings Call
Oct 24, 2019, 1:00 p.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Ladies and gentlemen, thank you for standing by, and welcome to Kaiser Aluminum Third Quarter 2019 Earnings Conference Call. [Operator Instructions]
I would now like to hand the conference over to your speaker today, Vice President, Investor Relations and Corporate Communications, Melinda Ellsworth. Please go ahead, ma'am.
Melinda C. Ellsworth -- Vice President, Investor Relations & Corporate Communications
Thank you. Good afternoon, everyone, and welcome to Kaiser Aluminum's third quarter and first nine months 2019 earnings conference call. If you've not seen a copy of our earnings release, please visit the Investor Relations page on our website 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 to 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, 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 nonrun 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 Jack Hockema. Jack?
Jack A. Hockema -- Chief Executive Officer and Chairman of the Board of Directors
Thanks, Melinda. Welcome to everyone joining us on the call today. Our third quarter results established new records for value-added revenue in EBITDA, driven by continued strength in our aerospace order book and strong value-added pricing. The record quarterly results were achieved despite normal third quarter industrial and automotive seasonal demand weakness, the General Motors strike and delays in automotive program launches.
General engineering shipments also reflected allocation of a portion of our plate capacity to meet our strong aerospace demand and significant supply chain destocking that amplified the relatively modest decline in the manufacturing economy. While quarterly results are often lumpy, record year-to-date value-added revenue, EBITDA and earnings per share results confirm strong underlying momentum achieved despite approximately $15 million of EBITDA drag from planned and unplanned downtime at Trentwood during the first half of this year and stiff headwinds from our automotive product mix transitioning from end-of-life programs to new program launches.
Turning to Slide six and a summary of our outlook. Driven by our strong aerospace order book, we expect fourth quarter results similar to the exceptional fourth quarter 2018 results. In addition to normal industrial and automotive seasonal demand weakness and slowing industrial demand, we anticipate that the General Motors strike will have a negative EBITDA impact of $3 million to $6 million in the fourth quarter, depending upon how quickly demand ramps up in the supply chain.
Major maintenance expense in the fourth quarter is expected to be comparable to prior year. Overall, for the full year of 2019, we continue to anticipate low to mid-single digit percent year-over-year increase in value-added revenue and EBITDA margin above 25%. Shipments are expected to be down year-over-year as our mix is shifted toward higher value-added aerospace products.
Although the timing for resolution of the Boeing 737-MAX remains uncertain, our aerospace order book is robust, and we expect a very strong order book in 2020. In addition, while we've experienced some delays in automotive program launches, typical for any platform transition period, we expect to resume long-term growth in automotive extrusions shipments in 2020 and 2021 as we exit the 2019 transition year. Turning to Slide seven. Our Trentwood facility has been operating near capacity for more than a decade, as growing demand for our aerospace and general engineering plate has absorbed 6 phases of capacity expansion. As aerospace demand is further increased over the past 12 months, our order book has been exceptionally strong and resulted in the need to relocate some of our general engineering plate capacity to meet the strong aerospace demand.
As we look to 2020, we expect increased capacity compared to 2019 as we realize the full benefits of the Trentwood modernization investments in addition to expecting significantly less planned and unplanned downtime than we experienced in the first half of this year. However, the oversubscribed capacity has increased interest among investors regarding our plans for future capacity expansion.
With a focus on the secular demand growth that we expect for our heat treat plate applications, our team has developed a future state vision for additional brownside expansion at Trentwood, that can be implemented in phases to accommodate expected customer needs decades into the future. And we've defined the next phases of expansion to be compatible with that future state vision. As we've discussed on several occasions, we continue to monitor the needs of our customers to determine when the next phases of expansion are justified.
I'll now turn the call over to Neal for additional insights regarding third quarter results. Neal?
Neal West -- Senior Vice President and Chief Financial Officer
Thanks, Jack. Value-added revenue in the third quarter of 2019 of $215 million increased 5% or $10 million compared to the prior year quarter, driven by strong aerospace demand and value-added pricing, partially offset by lower general engineering and automotive shipments. Aerospace value-added revenue of $128 million improved approximately 13% or $15 million compared to the prior year third quarter on a 7% year-over-year increase in shipments, driven by strong demand for our aerospace products.
General engineering value-added revenue of $58 million declined approximately 1% or $1 million compared to the prior year period on a 8% reduction in shipments and improved year-over-year pricing. The decline in shipments is due to the combination of the weakening industrial demand, supply chain destocking and allocating a portion of our general engineering plate capacity to meet the strong aerospace customer demand. Automotive value-added revenue of $24 million decreased approximately 13% or $4 million compared to the third quarter of last year and a 2% reduction in shipments due to the previously discussed delays in program launches and the impact of the GM strike.
For the first nine months of 2019, total value-added revenue of $642 million, improved 4% or $25 million on a 4% decline in shipments, reflecting strong aerospace demand and richer mix of sales, partially offset by a lower shipments of automotive and general engineering applications as previously discussed.
In addition, overall plate capacity was temporarily constrained in the first half of 2019 due to the both planned and unplanned downtime at Trentwood. Turning to Slide 10. EBITDA for the third quarter increased approximately 20% to a quarterly record of $57 million compared to $47 million in the prior year quarter, reflecting strong aerospace demand for our products and higher value-added pricing. EBITDA margin for the third quarter was approximately 26% compared to 23% in the prior year quarter.
EBITDA for the first nine months of 2019 of a $160 million was up approximately $10 million or 7% compared to the prior year period, despite the $15 million negative impact related to the Trentwood downtime in the first half of 2019 and the impact of our automotive products transitioning from end-of-life to new program launches.
EBITDA margin for the first nine months of 2019 increased to approximately 25% compared to 24% in the prior year period. Turning to Slide 11. Reported net income for the third quarter 2019 was $25 million or $1.57 per diluted share, reflecting an effective tax rate of 26%. Adjusting for nonrun rate items, adjusted net income for the third quarter was $29 million, an increase of 22% compared to the $24 million in the prior year quarter. Adjusted earnings per diluted share in the third quarter increased to $1.82 from $1.43 in the prior year period.
Reported net income for the first nine months of 2019 was $73 million or $4.47 per diluted share. Adjusting for nonrun rate items, adjusted net income for the first nine months of 2019 was $82 million compared to $80 million in the prior year period.
Adjusted earnings per diluted share for the first nine months of 2019 was $5.06 compared to $4.72 for the first nine months of 2018. Our cash taxes for 2019 remain in low single digits as we continue to apply and alone carry it forward to our pre-tax earnings. Capital spending totaled $11 million for the third quarter and $41 million for the first nine months of 2019. Due to timing of certain projects, our capital spending for the first full year of 2019 has been reduced and now is expected to be approximately $65 million to $70 million.
During the first nine months of 2019, we returned approximately $70 million of cash to shareholders in the form of share repurchases and dividends, confirming our commitment to shareholder value. On September 30, cash and short-term investments totaled approximately $197 million and borrowing availability in our revolving credit facility was approximately $292 million, providing us with significant financial flexibility.
And now I'll turn the call back over to Jack to summarize today's call.
Jack A. Hockema -- Chief Executive Officer and Chairman of the Board of Directors
Thanks, Neal. Turning to Slide 13 and a summary of our comments today. Despite headwinds, we achieved record third quarter and year-to-date results driven by strong aerospace demand. Our outlook is unchanged for 2019 value-added revenue and EBITDA margin as we continue to anticipate a strong fourth quarter and record full year results.
Demand for aerospace product remains very strong, and our robust order book is expected to continue into 2020. While automotive shipments have faced headwinds in 2019 from the product transition and the General Motors strike, we expect content growth in both 2020 and 2021, driven both by new programs and the transition from expiring programs to new ones.
As is customary, we will provide more insight into our 2020 outlook on the next earnings call in February. As we look longer term, we remain well positioned to capitalize on the secular demand growth for our aerospace and automotive applications that represent roughly 70% of our value-added revenue.
In addition, we expect continuous steady improvement in underlying manufacturing cost efficiency to drive additional value for all of our shareholders. Our strong balance sheet and cash flow generation support our growth and capital deployment priorities and provide sustainability through industry cycles.
We will now open the call for questions.
Questions and Answers:
Operator
[Operator Instructions] Our first question comes from the line of Martin Englert of Jefferies. the line is open.
Martin Englert -- Jefferies -- Analyst
Martin nightclub with Jeffrey is good morning, everyone. Martin Englert with Jefferies. So I realized you are facing headwinds with the -- on the automotive front. Can you discuss if you're seeing any incremental positive progress on this new program transition since the quarter ended? I guess based on some of your commentary, it seems like this might not improve until early 2022 though.
Jack A. Hockema -- Chief Executive Officer and Chairman of the Board of Directors
Yes. Well, we're seeing a little progress, but frankly, we didn't see as much progress as we had hoped for in the third quarter. And as we've been saying all year, when we've been reticent to give too much of a forecast here that's just the name of the game when you go through this. It's been widely publicized regarding Ford and the launch of the Explorer from their standpoint, just verifying some of the issues that any platform faces as we go through the launch process.
So -- and in this case we have a multitude of launches that we're dealing with. But to answer -- short answer to the question, yes, we're seeing progress here. It's just not as rapidly as we expected.
Neal West -- Senior Vice President and Chief Financial Officer
Got it. Understood. And on the GM strike related EBITDA headwind, when you speak to the expectations of comparable results, year-on-year on fourth quarter, is that included within that guidance?
Jack A. Hockema -- Chief Executive Officer and Chairman of the Board of Directors
Yes, it is.
Martin Englert -- Jefferies -- Analyst
Yes. Got it. And then just circling back around on the brownfield expansion commentary. Can you provide a little bit more detail on it such as may be, how much this could add to incremental capacity? What would the timing look like and potential capex that way?
Jack A. Hockema -- Chief Executive Officer and Chairman of the Board of Directors
Sure. Well, this really was precipitated where we've been putting these expansions out, and we said in our prepared remarks we've had 6 of these expansions over the past 10 or 12 years. Each one has been incremental on its own. But about a year ago, we took a step back because there has been some concerns among the investor base, when do we reach the end of the line at Trentwood?
And where our capacity is capped? So we put together teams and really took a hard look and did a lot of brainstorming on what the potential of Trentwood is. And we broke through with some ideas, which has we said in the prepared remarks, really we foresee being able to expand at Trentwood to handle decades of growth. And we're anticipating roughly a 3% CAGR in terms of aerospace demand growth over the long term here.
So we're very optimistic or pleased that we were able to come up with that vision. And we'll be able to implement that vision in March as we have in the past. We've gone through 6 phases to get us up to almost 3x capacity today versus what we had back in 2005 when we launched these expansion initiatives. So the next question was regarding the timing. And the answer is the same as always, we're continuously monitoring industry dynamics, market dynamics and conversations with our customers to determine the timing, we're certainly not ready at this point to pull the trigger on expansion. And we're expecting additional capacity next year, we still haven't realized the full potential of the modernization investment that we made a couple of years ago. And we had significant capacity taken away in the first half of this year with planned and unplanned downtime. So we think there's more capacity available, know there is more capacity than what we have experienced this year. And we'll continue to monitor the situation and determine what point in the future is the right time to start moving to the next phase of expansion.
Martin Englert -- Jefferies -- Analyst
Understood. I appreciate all the details there. And anything as far as the capex out way, maybe on an annual basis as you would pursue this and based on your comments and some capacity constraints alleviated next year versus this year, it sounds like this wouldn't be until post 2021 at the earliest.
Jack A. Hockema -- Chief Executive Officer and Chairman of the Board of Directors
Well, what we've been saying in the past about the future is we were expecting to the spending around $80 million a year. We're still putting together our outlook for 2020. And we'll talk about that in more detail, really get some view of what we're looking at over the next two or three years when we get to the February call. We're not really prepared to change anything from what we said in the past at this stage.
Martin Englert -- Jefferies -- Analyst
Okay. Understood. And quickly on the volumes in aero and high strength for the quarter. Did you feel based on the company's current capacity, this would be kind of the high watermark on a go-forward basis? It seemed like aero was pretty robust and you've taken away some from general engineering that -- but -- are we able to clip this on a quarterly run rate going into 2020 here?
Jack A. Hockema -- Chief Executive Officer and Chairman of the Board of Directors
No, we don't think this is the limit. Because we'll -- we still haven't realized the full potential of the modernization. So there will be more capacity there, we were past the downtime into the third quarter, but we weren't operating at full potential yet in the third quarter. So there's more there.
And there's, and as you related specifically to aerospace, there's still is the opportunity to shift more capacity if needed to general engineering. And we've seen some -- away from general engineering, we've seen some softening in general engineering, but it's also important to remember that heat treat plate only represents a portion of our aerospace. And we've got ample capacity in our aerospace long product. So no, we're certainly not at the limit in terms of our ability without further investment to increase our aerospace sales.
Martin Englert -- Jefferies -- Analyst
Within that business line, do you think you can get above 75 million pound on a quarterly run rate?
Jack A. Hockema -- Chief Executive Officer and Chairman of the Board of Directors
What we did this quarter?
Martin Englert -- Jefferies -- Analyst
667.1.
Melinda C. Ellsworth -- Vice President, Investor Relations & Corporate Communications
I wouldn't -- I don't -- I wouldn't say off the top of my head, but I would say, we probably could get above that. Yes. It might cause us to ship lower at some other areas. But yes, we could continue to grow aero.
Jack A. Hockema -- Chief Executive Officer and Chairman of the Board of Directors
Thank you, Martin.
Martin Englert -- Jefferies -- Analyst
Thank you.
Operator
Our next question comes from Matthew Korn of Goldman Sachs. Your question, please. Hello, jack Neil. Belinda. Thanks for taking my question.
Matthew Korn -- Goldman Sachs -- Analyst
Hey, So for -- many of us day-to-day news, the MAX is what we hear most about the aero markets. But you and your peers have highlighted some notable strength in overall aero demand through the year. Could you get any more granular for us to understand what's driving this, what surprise is this particular programs, this particular components, any insight you could share would be great?
Jack A. Hockema -- Chief Executive Officer and Chairman of the Board of Directors
Yes. I think we've said on the -- certainly in the last call or maybe the past couple of calls, our view is and we've thought that for a long time that the destocking was overdone. We had forecasted back in 2016 that we expected aerospace destocking. And we thought it would be relatively modest. It actually ramped through 2017 and most of 2018. And our view was that it was overdone. And that's been manifest now, in our reaction we see significant efforts to replenish inventories in the supply chain.
And it's been characterized about the health of the supply chain in general by Boeing and by Airbus, both have talked about -- about concerns about the supply chain to be able to meet their long-term requirements. But in the case of our products, we think that the situation was exacerbated by running the destocking too far down. So part of this is reaction to the destocking and part of it is just keeping the supply chain intact. Because I believe Boeing remains confident from everything they've said that they're still going to ramp up to a much higher rate on the single aisle builds, and Airbus continues to plan to ramp up as well. So everyone sees this eventually being resolved and us returning to very, very high demand rates. And it's important to have the supply chain intact.
Matthew Korn -- Goldman Sachs -- Analyst
Got it. So more signs that this is the long-awaited -- well, we're seeing the results of long-awaited turn in the cycle, it sounds like. Everything I wanted to ask, I couldn't tell from your opening comments from last night's report, the industrial weakening that you're seeing, is this seasonal? It is something more than seasonal? Are there particular segments where you see more destocking emerging? What's your view there?
Jack A. Hockema -- Chief Executive Officer and Chairman of the Board of Directors
Thank you for asking because this is one of our favorite topics that I haven't been able to address for about five years. So one part of it is, normal seasonality. The other part is some weakening in real demand. But we've got good metrics and good analysis to tell us that our demand for industrial products has a very high correlation with the index of industrial production for manufacturing. But in the short term, that's not true, and I'll explain that in a minute. But the index of industrial production for manufacturing was down only 1% year-over-year in the third quarter.
So it's really modest weakening in the industrial economy. However, while we've been preoccupied with destocking in aerospace for the last three or four or five years, if you go back a few years, most of these conversations about destocking used to be about what was happening in the general engineering supply chain. And we've seen historically a big multiplier in terms of downs and ups the destocking cycle and the restocking cycle, when there is a change in the trend on industrial. And some of the metrics we've got several measures that we look at, nothing that's precise, but it appears to us that demand for general engineering rod and bar which really covers the industrial economy in North America was down more than 10% on the mills in the third quarter year-over-year, more than 10% when industrial production was down 1%.
And we saw a similar phenomenon in distributor shipments of those products into their end markets. So there was destocking in distributors. We believe strongly that there was also significant destocking downstream as everyone kept talking about a recession coming in manufacturing. We believed that we've got a big reaction in the supply chain and by the time it backed up to us, we were more than double-digit down in demand year-over-year in the third quarter when we think real demand was down only 1% or 2%.
Matthew Korn -- Goldman Sachs -- Analyst
Got it. Do you think that process that destocking process, given the things seem to be stabilizing overall is nearing an end? Are we toward the end of that game? Or are you still worried that that could continue at such an amplified level as you get into the next quarter?
Jack A. Hockema -- Chief Executive Officer and Chairman of the Board of Directors
Well, it's hard to tell. We would suspect, especially since it's the fourth quarter that we'll see some more destocking in the distributor supply chain because a lot of them address their balance sheets at the end of the year and peel out a bunch of inventory. So that would be almost a normal phenomenon to see destocking in distribution. What happens downstream looks to us like there was a pretty significant destocking downstream in the third quarter.
And I think a part of it is going to be a function of what happens to the general manufacturing economy here, does it continue to decline modestly or does it start to stabilize here going forward. So that's a long way of saying, not sure. But at this point, I would guess that there will be a little bit of destocking and could be a little bit more depending on what the drumbeat is on the manufacturing economy.
Martin Englert -- Jefferies -- Analyst
I appreciate it. It's going to be an interesting election year. Good luck to all of you.
Operator
[Operator Instructions] Our next question comes from the line of Josh Sullivan of Seaport Global. Your question please.
Josh Sullivan -- Seaport Global -- Analyst
Good afternoon. Just on the multitude of automotive launches you got coming up here, how does the margin profile typically progress on these new programs? I'm trying to think, is there a ramp we should be modeling in for next year? Is it a step function as those volumes pick up? Also, understanding that the GM strikes likely causing some near-term delays here?
Jack A. Hockema -- Chief Executive Officer and Chairman of the Board of Directors
Yes. Well, as we've been saying consistently, the -- most of the growth in -- with the new programs that are coming on is in the lower value-added products. And so we've seen a steady decline in our value-added revenue per pound in the automotive product mix. So we expect that to continue that -- while shipments grow, we'll see value-added revenue grow at a much lower rate than we see the shipments growing.
In terms of the margin, frankly, some of the higher margins that we have within automotive, while they're relatively well balanced as we said about our whole product mix over time. Some of the growth applications that we have are slightly lower margin as a percent of value-added revenue than some of the higher value-added revenue per pound. But generally, it's pretty consistent, it's mostly the fact that is lower value-added per pound mix that we're adding.
Josh Sullivan -- Seaport Global -- Analyst
Got it. And then just with the Novelis-Aleris tie up, looking like there could be some divestitures here. What's your appetite for any of those assets to explain?
Jack A. Hockema -- Chief Executive Officer and Chairman of the Board of Directors
Well. There's no change in what we've said about M&A. We're always looking. We're generally the preferred buyer when we enter a process. The must for us is it must be a strategic fit, it must be in business that we understand. And it must be value creating in terms of the price we pay for our shareholders. So no change in our outlook, we've been involved in virtually every significant process over the past 10 or 15 years. But we haven't reached the point yet where all of those criteria were met.
Matthew Korn -- Goldman Sachs -- Analyst
Got it. And then just lastly, could you update us on the NOLs and maybe when those might sunset?
Neal West -- Senior Vice President and Chief Financial Officer
Sure. The NOLs, at the beginning of the year, we had $118 million of annual NOLs on our balance sheet. And probably through your own modeling, you get a good understanding of how that $118 million will lead out here in the next year or so.
Matthew Korn -- Goldman Sachs -- Analyst
appreciate it. Thank you.
Neal West -- Senior Vice President and Chief Financial Officer
Thank you.
Operator
You're next question comes from Martin Englert of Jefferies. your question please.
Martin Englert -- Jefferies -- Analyst
Thanks for the A quick follow up here. Just wanted to touch based on the maintenance expect -- expense factored into the fourth quarter, about how many million is that?
Melinda C. Ellsworth -- Vice President, Investor Relations & Corporate Communications
We never described what the actual amount of spending is, but it's basically the same as fourth quarter last year.
Martin Englert -- Jefferies -- Analyst
Okay. Okay. Got it. Excellent. Thanks again.
Jack A. Hockema -- Chief Executive Officer and Chairman of the Board of Directors
Okay. Thanks, Martin.
Operator
At this time, I'd like to turn the call back over to Jack Hockema for closing remarks.
Jack A. Hockema -- Chief Executive Officer and Chairman of the Board of Directors
Okay. Thanks, everyone, for joining us on the call today. Despite some significant headwinds, we had record third quarter and year-to-date results. And we look forward to updating you on our fourth quarter and full year results on the next call in February. Thank you.
Operator
[Operator Closing Remarks]
Duration: 30 minutes
Call participants:
Melinda C. Ellsworth -- Vice President, Investor Relations & Corporate Communications
Jack A. Hockema -- Chief Executive Officer and Chairman of the Board of Directors
Neal West -- Senior Vice President and Chief Financial Officer
Martin Englert -- Jefferies -- Analyst
Matthew Korn -- Goldman Sachs -- Analyst
Josh Sullivan -- Seaport Global -- Analyst
