KALU - Earnings call transcript Q1 2018 | Kaiser Aluminum Corporation

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Operator

Good day, ladies and gentlemen and welcome to the Kaiser Aluminum First Quarter 2018 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to Melinda Ellsworth, Vice President of Investor Relations and Corporate Communications. Ma'am, you may begin.

Melinda Ellsworth

Thank you. welcome Aluminum's and earnings quarter everyone call. conference afternoon, to first Kaiser XXXX Good

seen of website a please not you've If copy Investor page visit our Relations' on kaiseraluminum.com. our at the release, earnings

this posted also of presentation PDF We call. have a the version slide for

Joining Vice are Executive West. President and Financial Dan Chairman, call and Officer Operating Officer, Vice today and Rinkenberger; Chief Neal Hockema; Chief President Chief the Accounting President Keith me and on Chief Jack Harvey; Officer, and Executive Officer,

I'd that Before you and the made begin, based this refer we like presentation management's are to statements in management on first to our presentation current of and by forward-looking that the contained two the slides information remind constitute you statements expectations.

Annual The the the forward-looking factors conform Company's XX-K materially to actual December the risk and forward-looking the cause For update in Company's Exchange statement earnings undertakes in results statements the expectations. the with including duty Company XX, any of that from please expressed to the and a to differ refer for to to release ended Securities Commission, full-year changes no statements, Company's or specific results those Report on filed Form could reports summary XXXX.

the the questions. would to Jack? from discussion non-GAAP of In turn appendix. At the over financial Company's our the in Jack EBITDA, to will presentation, adjusted most earnings the the which discussion. the measures the have the call I to in non-run addition, comparable in presentation. means reference conclusion today which are we we for our excludes appendix included Hockema. like in financial call and rate release open GAAP provided now have items of reconciliations we Any information Reconciliations to EBITDA included in

Jack Hockema

Melinda. Thanks

due squeeze. margin cushioning driven efficiency automotive applications in value-added mix, added value than costs, shipments some year-over-year margin as significant commercial benefit our in revenue well and a higher shipments general lower that quarter added compression certain engineering and declined continued contained industrial increase which metal slightly the prices Higher growth the to noncontract first as a Despite product squeezed supply mitigate value aerospace on were results conditions more costs market destocking improving Overall and rising begins have and provided destocking improvement manufacturing aerospace we freight from the squeeze demand are chain offset escalating to costs. and from metal growth shipments. to for growing to continued supply cost the extrusions metal Our the due as demand initiated pricing and impact moderate margin reflected by freight in actions chain. continued continued automotive in

rising will these pursue as additional actions We to costs. required continue address to

Trentwood headwinds During installation expect of projects recent from at through the handling furnace to the counteract equipment light additional improving the in implement as at from and the of the practice to plate full work the complete increasing realize changes cost potential efficiencies benefits investments. investments capacity served quarter we gauge partially and quarter. our first experienced to we and benefited the which continuing We're

discussing Before Dan? the additional Dan turn our on for I’ll to color outlook, first quarter.

Daniel Rinkenberger

to growth and you, softer total and destocking. Thank and X% demand value-added higher continued revenue year, the were shipments automotive chain our reflecting X% lower engineering shipments, Compared first general supply quarter Jack. XXXX to continued was lower prior aerospace in due value-added

pressure however added at growth first on in investment our value-added on on as Automotive engineering last sales. revenue prior first to as double-digit to year on quarter due compared revenue Trentwood shipments noncontract capitalize contained in the engineering noncontract certain compressed applications declined well value a were first improved a driven sales X% quarter strong we revenue demand certain in higher the from as higher X% in X% costs. on the Value-added in programs. value-added XXXX quarter revenue increase decline extrusion XXXX improved from of on for incremental aerospace a facility. year-over-year shipments, strong addition, metal In X% due X% year's capacity continued by general able X% to General quarter shipments bumper the price to

were quarter. the was by down metal in EBITDA EBITDA margin year. prior in XXXX year costs, due was quarter the underlying improvement increase First well in mentioned manufacturing XX.X% the from compared decline $XX rising of freight in that $XX million Jack quarter as contained was This as last partially million which cushioned efficiency. XX.X% to first costs to

hedging operating for net non-cash quarter. reported reflecting as operating X, non-cash mark-to- The $XX was quarter year. per and per year $XX $X was depreciation of items, million operating of prior to first as million, metal positions. impact $X.XX. of consolidated compares earnings income of the Adjusted prior of rate quarter predominantly of non-run This and in from escalating for of included year freight million $XX a $XX the to and Slide well million, on net million, the prior quarter was decline million as the non-run rate was market million expense last diluted gains $XX earnings year first income incremental to income $XX income gains in costs, $X Turning $X.XX share diluted million net income period share

year the quarter. adjusted comparable largely $XX rate prior in drops of the new the to The of which quarter operating XX% the tax federal in net rate reflecting decline from tax impact XX% first of primarily in income XXXX lower Our million this of the loss. resulting the first in adjusted year-over-year the tax was quarter effective in quarter year income offset to first

$X.X of earnings outstanding. to VEBA Salaried to $XX.X we the In paid totaling share first million. first lower per our $X.XX from adjusted in prior XXXX fewer and tax final in $X.XX quarter the diluted the increased Union and made shares However, quarter quarter both year the reflecting contribution rate million the the VEBA effective

the obligation full-year no continue we $X.X while in investment the was quarter continues approximately Capital of obligation will contribution per $XX we be Salaried funding spending year. maximum to with to a forward, Going have million anticipate $XX VEBA, and first million. further million VEBA Union the to our

we the end, shareholders and and million revolving our and facility $XXX quarter of strong quarter million $XX maintain through was During liquidity. dividends cash At availability continue repurchases investments totaled we share on first short-term returned cash borrowing to to and $XXX credit million.

first during we Lastly, accounting revenue XXX the the adopted of ASC XXXX. recognition new standard quarter

standard. that the turn incur affected for periods ASC effect practice our contracts. Jack impact recognize be trends this of past For XXXX this discuss sales, under of but the recognizing our standard to Slide old on financial now of is was a us our standard merely adoption, XX in to with delivery no the and million And But variability revenue new of applying retained types of the standard to detail the an and should some that to products increase December adopting consistent more prior The recorded contract XXXX be periods the necessary. requires new as customer comparisons cumulative to time market to a to upon timing certain call we manufacturing were effect $XX standard of is reflect period change new to change I'll especially over issue in under comparing of in costs. period the when back Upon the revenue there could adjustment XXXX we the presentation of outlook. XXX. earnings XX, appendix statement provides

Jack Hockema

Thanks Dan.

The the experienced destocking our Turning as conditions we've demand, higher comparable Slide combined strengthening automotive from applications historic we market destocking over prices been XXXX quarter, the recently, to value-added the the value-added approximately similar. XX engineering beginning conditions similarly conditions weeks. metal Section demand in we past expanded passing a margins this by noncontract costs. market chain current on additional the for steadily higher year Confirming In tariffs results additional costs. strengthening market were our to price higher sanctions earlier experienced for aluminum demand is in Rusal We've in from to strong the the XX Last certain leadtimes that to have supply lag on several have squeeze general two is first sales aerospace and past drove costs when plate experienced with when years is approximately primary similar unfavorable contained weeks over a X, and past quarters and level environment XXX revenue trending moderate. through and escalating our Meanwhile margins aluminum products. aerospace discussed intensified sales caused on to the have freight cost from were with products of lows year pressure more high the volatility.

created have in As and introduction significant even a volatility. leaner were price of aluminum aluminum XXXX. than result experienced first recent tariffs sanctions sales quarter we short-term The margins

long-term to positive. we As the fourth XXX neutral of impact quarter Section Kaiser we for believe earnings indicated tariffs our relatively during will call, be that

For our by foreign prices. U.S. shipments pass metal all are through long-term contracts with sales provisions virtually covered to

the on our industry XXXX first practices in from imported delayed South the uncertain announcement has typically For could is A implemented certain adapt. to margin markets and following of metal products although quarter. engineering costs providing the lag China impact general value-added eventually noncontract contained evidenced tariffs after on is consideration products sanctions time turbulence pass-through as Africa the products. price potentially on October significant of until high pressure implementation a and for shipments, there's on plate squeeze to domestic the Rusal serve by The positive been the U.S. moderate the the sanctions

costs nation. driver uncertainty federal the shortage truck new caused all a cost metal addition freight the much regulations across surrounding resulting in In higher have

we quarter, focus for and costs in precipitated execution volume contained we will to while manufacturing proactively through address steep increases all noted strategy we're continue prices grow margin I short-term. sales we efficiencies. our my success and continue confident increase manage during if noise further we our business to metal will in operating our the Despite squeeze the the some cost the and increase the of have invest even passing freight to the As price and that leverage on opening in remarks, by forego to

discussion Turning to Slide of markets. end our X and a

positive high unchanged. is Our and aerospace applications strength for outlook

to comments regarding Boeing We order rate build is course improving demand increases. through and backlog. to chain This its nine-year recent the and and large outlook rates Airbus continue manufacturers demand destocking of expect build and supply for the the by need address runs as both ramp-up by strength reinforced airframe XXXX as XXXX

Fighter, U.S. strengthens the new for and of demand In addition, and defense budget allies Strike Hornet military increased the applications. F-XX the from Super Joint the F/A-XX outlook other

chain well marketplace applications. expected in in moderate year, We’re we with our proceed year-over-year and single-digit for we expect through to these positioned the growth destocking mid supply shipments the as XXXX

year-over-year. X% is outlook American our XX, modestly or positive Slide North automotive rates improve to are for Turning to build extrusions also expected X% unchanged.

We year-over-year in single-digit expect and of these prepare for management, while chassis break applications revenue XXXX. our shipments significant growth for applications we price mid a and in number value-added launching new structures

applications XX, grown value-added X% growth the our for to rate have revenue shipments Slide Turning general compound past and at annual three years. engineering over a

X% As another his by applications quarter facilitated value-added Dan in increased year-over-year fourth the remarks, demand up at for revenue and capacity these indicated Trentwood. by recent was our strong investments driven

engineering be We cautiously optimistic outlook general applications. continue the to regarding for these

Slide our for is XX, Moving XXXX to overall unchanged. outlook

XXXX We throughout as we mitigate from of although aerospace be will engineering we moderate. margin always shipments price freight in as will have margin in the strong, metal and contained efficiency the price continuing focus our cost we year expect sales improving single-digit manufacturing proactive to to investments year-over-year demand begins And across previously general in increases growth Overall, squeeze. from for to pressure destocking applications the with we implementing value-added mid we as costs expect demand expect and platform. growth continue benefits on Automotive and escalating is in EBITDA cost the mid-XXs. and the rest revenue stated

today, chain summary these significant and that the comments although the we destocking, in experienced freight and XX headwinds expect costs in of contained continued particularly Slide to rising aerospace we first Turning our to markets quarter the demand applications as we are for and the supply metal and headwinds proceed form and automotive the on capitalize our engineering by general at our well-positioned encouraged moderate Longer-term, through secular we will growing growth demand aerospace for the our serve products. year. of are

all expect value further we to continue increasing to for cost stakeholders. addition at our our operations achieve In to drive manufacturing of efficiency

will questions. now call the We for open

Operator

question comes Sidoti & with first Edward Our Instructions] Marshall [Operator Company. from

You may begin.

Edward Marshall

you then imagine lit perspective had to that as environment the So I want you your would would quickly than to get follow-up. environment I and such allow Could I rising second that pricing. on bit your been catch recently. easier comment on have we've pricing a in we a a

Jack Hockema

a of your bit I I You broke most little got question. up Ed but there think

plate more we price that environment implemented from products We're the confident standpoint. will a few some our is I’ll the board now favorable you less on those to statements products modest in lead were think pricing manifestation broad that of months increases some take obviously the characterize not the We will weeks approximately aggressive May creates stick modest ago just which price that effective the on and XX so improving or across in times well We became on demand X. marketplace. April that X. implemented effect weeks increases one XX a which for to in pretty inferred my expanded as that our a strengthening that here made is remarks environment of I plate shows a which have

suffer some but marketplace to that we’re volume price dilution we from will seen these we As be we stick modest well. going pretty increases. although the accept short-term that these said may We've with think

Edward Marshall

I time significant And last sticky pricing added stayed type the a time. per for bit there you of inflation inflation? or in like be then period guess in Was in XXXX, the look and something material unusual pound it the subsided a value of quickly cost after this up little to trends that saw

Jack Hockema

extended we’re created where experiencing metal the in we destocking and demand general. over time which actually with months for with slack aerospace rising products aerospace what to or situation sharply in of a XXXX in products similar comparison so prices best last had conjunction The all XX over plate is period an

further in earnings - and then commented and margins rapid had historic of that that we terms sales hammered seeing strengthening saw increases price So in plus the and we’ve expansion calls our that cost I approaching the the exacerbated low sales get ability and in to But reached consequence we freight quarter. a we here. seeing quarter to saw we situation first as pretty Last XXXX we’re on really we now federal up stick moved in were prices the in that few as XXXX. of in indicated answer, first aggressively regulations lows just year us demand the and run margins prior times a the metal that we’re

here continue to as proactively the back So we go and forward we’ll to margins we depending that improvement expect on see up. act we’ll situation get our

Edward Marshall

auto just Finally launches wanted to ask the and programs. XXXX I about

think Does about existing over I typically X% you result as to XXXX these are X% programs? programs, talk a the rate penetration production. that increase cannibalizing new in of

Jack Hockema

that you new There this is ready just through launch will here, to because are lot not when of be than a replacements, I’m more big what at there quantify of go lots involved. stage a that variables get demand there

settle plenty that, get until we put really of you sure to into additional but color we’ll caveats as down. uncertain launches So things give really, I'll are February start on some because I'm

Operator

Bank. Deutsche with Kliewer Jeremy from comes question next Our

You may begin.

Jeremy Kliewer

up that was the in much the announced through quarter squeeze your at now follow in How on increased of prices up of a Just the have considering that versus as you April the XXX prepared remarks. end March margin well? built bps

Jack Hockema

freight was consistent costs, month-to-month recall on federal It spiked new it hammered the was penny quarter. the quarter changed because And in during actually effect freight or the same took metal January with X. a and January I up got so only the through pretty the - costs price as immediately only regulations it

the another margins and freight. our it really XXX points typical XXX points on over metal roughly If XXX it you bifurcate was was points basis what from

two two a bad got quarter. there first combination the was freight the it it world combination really worlds, in of we factors a was hammered that well with as of So

Jeremy Kliewer

your regards to do see need? where of Rusal, procuring cut and And kind you the then to you you with following from and replace you have any Russia are to of aluminum get units any to or moving forward of issues mental them October, off kind those

Jack Hockema

metal We we of very sources to don't the we’re as buy mix what our suppliers of the point disclose is that of are, so from our global number supply we secured question confident forward. but go really real a

Operator

next Cowen question Novid Company. with Rassouli from Our and comes

begin. You may

Novid Rassouli

of sense wanted to X. sounded with those I are just increases wanted April try price is aggressive ones on you effective to pricing get that those become to is in a increases the some what in are X on build the attacking? first we saw quarter effective some more Jack them the that that start it and Just were May then mentioning become

Jack Hockema

You the cost mean increases.

Novid Rassouli

Yes cost right increases.

Jack Hockema

metal the the to you been reflecting XXXX. It’s can of during back increasing that since it's included XXXX going early here a my environment steadily issues slide a number see shows price on we chart here, remarks and market

got increasing costs and So aerospace - because we now years we’ve we metal by an unfavorable got two really hammered destocking. had we've pricing environment costs and more than to the got freight of then get of

are of to So comparing the everything it's the capture here we don’t it receive at to demand looking at quantify based we’re the to April, we saw and But realistic is of what I May. freight point what on strengthening magnitude moves think pretty made price increases. the as but complete and some happening some what to costs really just what's significant we’re the it in made we on we quantify else want this capacity our to pick market moves and to hard pricing moves environment a metal to some point

Novid Rassouli

to sure it understand be, the guidance we and the dynamic at I’m to prices actually X for offsets the thus average margins that to seems we’re seems costs I XQ the take it if delta would really up given focus we because primarily improve it second fourth quarter And delta I like on on the the lags second Right look Rusal. all the in seems your than far. the is larger was in to the but end quarter first from the the just relative for so trying that like the where actually delta not seeing guess is so materially is what say just pricing quarterly pricing if I smaller your quarter quarter what trying I’m for tough because you mean increases

quarter quarter, the and if quarter the get so margin that sense bottom of your we guidance to saw And the to in so up the takes just fourth trying really in how I’m just second I’m just third to would this and puts first range understand of would pick in to and trying need that mean make there? of we’re in there that we get guidance range the that to

Jack Hockema

number number it, had you we quarters you major some on and product those number the wide quarter the orders has major when unusually than really some mix are what quarter margin. in a maintenance in experience. that mix that but that our I quarter didn't margin part There costs impact the at to are leaner typically were from There had were call of inside first looking start even we refer the lines to came part of we mix customer of and swings that mix when impacts compare I'll lean factors supplying an through you get compression big contracts on

in of the first negative we lot kind a of quarter. So factors had a of combination

so be point. we to as our in of give bad second full that XXXX this in gets but at there guidance and aggressively they're don’t we’re holding point going terms comfortable out still many on that's year forecast. pretty margins, it just and I quarter want confident just to moving feel I factors to the any as We’re sales

Novid Rassouli

to it kind question lags for see? through will last P&L to the those show us for - increases those then take to of long how price the And come

Jack Hockema

immediately. increase. price They’ll effective more others the passed contrary Also come we on other basis to earnings we use we’ll going orders that X increase immediate through years prices XX some difference than when a huge April as already will managers ago ours I price cost FIFO because listening immediately raised much that what May basis. effect their our through so versus more it start characterized implementing on on on in immediately there's unlike aggressive see taking calls that see X they're one and wanted My said I cost costs relatively establish a we our LIFO then our modest policy space. their effective all the become you is competitors effect on virtually a I books We're them up margins. wanted on pressure intentionally And I to when impact are of product and

month they intense incentive some of to prices had live or their for costs. kind So can our that of don't three four on pressure have move competitors they metal same of

Operator

Woodworth next Our Curt Suisse. question from comes Credit with

You may begin.

Curt Woodworth

the with guess goes cover May that the through where to to X pressure respect price So you you relative hike, metal that will contained I if today? see

Jack Hockema

to compared to back what… gets It

Curt Woodworth

points The that headwinds would which margin hike pretty XXX substantial, recapture in May was of said that X basis you contained pressure? XQ given the metal

Jack Hockema

these to wait I to so there And hang not and to - price just we get how - increases have may we go because want put what some and out try don't happens increases some to some out going may yet we volume. so the from there. competitors to total there mix aggressive capricious we're in going back be book off may lose acceptance there in don't short-term we’re orders price they are who know marketplace pretty we to some see we to much there

they’re impact right predict So what short-term factors now too be. just involved the many to will

over it we’re that back going belongs. to where get the long-term this equilibrium confident in just We’re

Curt Woodworth

a out you first the spread scrap talked comment last quarter? Year-to-date scrap business even the then And the on spreads spreads into tailwind what have benefit was about and a you lot. to can decent being year widened size in

Jack Hockema

first same margin as the full essentially from the for last profits we of quarter the is which average benefit year - exactly the year. sales as characterize same metal year the exactly the the and what last margin was the was scrap It spread

Curt Woodworth

widened that year-on-year? Why pretty out significantly be spreads would have

Jack Hockema

Again, have performance slice depends it reading. in very you're the or of we're alloys spreads you a variants we're you're and what talking what high typically. narrow remember, on to in about and Well market

So seeing read correlation no scrap on spreads. read to of those spreads have scrap and necessarily you what spreads with absolutely when they some those I scrap we’re

Curt Woodworth

your system? mix scrap your across versus product What’s between house cast or Ingot

Jack Hockema

made we by little varies was we throughout gain wider in plant on first held us but plant consumption we not significant last widening what first a in year the year quarter what year. quarter. by the buy, was scrap increasing first frankly see scrap the year And that then we first mix to we with product, that but in terms of product basically It in our our ago very spreads did consistent quarter and that the is it our utilization utilization a quarter. surprising we’re the We a mentioned expect spreads last

Curt Woodworth

in And it’s Would then general than the adjustable been has pipeline just of view. products one speculation your full comment to last say one is [Alaris] can M&A you you with potentially… appetite your just sort been you comment obviously on and can more on there environment,

Jack Hockema

not change outrageous other multiples is I expectation less certainly we that than won't not environment any think there we’re don’t and activity seeing anything that more or in we’re for real pay. seeing

Operator

question Our Instructions] with comes next Sood from Stanley. [Operator Piyush Morgan

begin. may You

Piyush Sood

are effectively raw unshaped material staying you pass premiums? regional boots, to on how mix, able through question, the premiums First

Jack Hockema

repeat you again could please. Piyush, that us for

Piyush Sood

or regional premiums both pass premium How hedge either pass them are through effectively or through amount? unshaped able to you

Jack Hockema

premiums? or premiums what and Regional

Piyush Sood

slab billet premiums? premiums premiums, Shape so

Jack Hockema

Midwest plus the premium through Midwest the pass the U.S. Premium. LME We

but freight. On passing don't So freight of all noncontract. of I’ll are U.S. the through our affects our built of cost about freight entire into contracts full for our well. that’s prime. not our We you Freight utilization on didn’t on product we distinction through our through just as on contracts pass the pricing freight what any We structure. predicated do prime scrap comment make not ask mix pass cost cost is

as and with increases that's we’re May impact implementing well. looking the that price effective So we’re that an X the to across board something address

Piyush Sood

any or through above passing which about up-charge billet kind is what premium Premium. over And of the slab Midwest and

Jack Hockema

all and scrap. - Yes, we basically prime manufacture buy we

So we make with and some ingot the in-house minor of exceptions. all billet

material, a of little negligible. bit purchase have We but it's

an don't that. seen issue the spreads We’ve So, on we really and market billet. ingot in the on have on open widening

Piyush Sood

it? the good the quantify recognition XQ and question EBITDA revenue headwinds you’ll or tailwind That’s to standard. able new know What the to if and the on was either in to

Jack Hockema

you if to recognition been And the old been were recognition. by to now would again or would have it as it million. million is $X what under current if would compare favorable net to $X using been the revenue this this have reported the we standard about was what revenue, Yes, EBITDA prior about on we've have that favorable been

Operator

Our Josh question Sullivan from comes next Seaport Global. with

begin. may You

Josh Sullivan

inventories taking the finally there where characterize or point that is - destocking the moderating there of just how Is slack? the customers of you less year. through more have any to hit way see aerospace the Is that from product acceleration an

Jack Hockema

measure combination here with times our They’re few the doubled inventories And ramp two. a it’s continuing past right think rates up I best and again months. the it's beginning way that the have can to the is to fact of now lead deplete. build the their we

Josh Sullivan

or you think pickup we about had we then quarter. additional mentioned the some through up capacity Trentwood focus XXXX? look at also And more you How more finish or as capacity here should gains of through these this for some margin projects on rest of just should Trentwood,

Jack Hockema

that completely into the from equipment we manufacturing a installed the this. last but tuned or lot get of and of perhaps months based efficiency full manufacture capacity practices, products the on rolling get even the the the from made we take we benefits and additional several bump get we’ll cost that that practices, the should got to - capacity a just revise of I’ll be before investments fine we year to We got our continue say the our as will over to practices whether course we benefit XXXX we

So see period extended time. over and we’re the an benefits to investment going Trentwood we of growth from continuing expect

Operator

to now like further currently over turn to Hockema Thank remarks. you. at Jack for questions I'd no time. the I'm And call back showing closing this

Jack Hockema

forward everyone Thank we you the on for joining today, our call to on in us and look Thanks call you. July. updating quarter second

Operator

Have Ladies conference. Thanks today's and for gentlemen, concludes day. a participation. wonderful your this

Melinda Ellsworth	VP, IR and Corporate Communications
Jack Hockema	Chairman and CEO
Daniel Rinkenberger	EVP and CFO
Keith Harvey	President and COO
Neal West	VP and Chief Accounting Officer
Edward Marshall	Sidoti & Company
Jeremy Kliewer	Deutsche Bank
Novid Rassouli	Cowen and Company
Curt Woodworth	Credit Suisse
Piyush Sood	Morgan Stanley
Josh Sullivan	Seaport Global

Kaiser Aluminum (KALU) 27 Apr 182018 Q1 Earnings call transcript