Kaiser Aluminum Corp (KALU) 2007 Q4 法說會逐字稿

Good day. Welcome to the Kaiser Aluminum Fourth Quarter and full year 2007 earnings results conference call. Today's call is being recorded. At this time for opening remarks and introductions, I'd like to turn the call over to Mr. Geoff Mordock. Please go ahead, sir.

Good afternoon everyone, and welcome to Kaiser Aluminum's Fourth Quarter and full year 2007 earnings conference call. If you have not seen a copy of today's earnings release, please visit the Investor Relations page on our kaiseraluminum.com website. We've also posted a PDF version of the slides that accompany this call.

Joining me today are Chairman, President and Chief Executive Officer, Jack Hockema; Executive Vice President and Chief Financial Officer, Joe Bellino; Vice President and Chief Accounting Officer, Lynton Rowsell; and Vice President and Treasurer, Dan Rinkenberger. Before we begin, I'd like to remind the audience that the information contained in this presentation includes statements based on management's current expectations, estimates, and projections that constitute forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements include statements regarding the company's anticipated financial and operating performance, relate to future events and expectations, and involve known and unknown risks and uncertainties. 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 for the quarter ended December 31, 2007, and reports filed with the Securities and Exchange Commission. All information in this presentation is as of the date of the presentation. 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.

Non run rate items to us are items that, while they may recur from period to period, are particularly material to results, impact costs as a result of external market factors, and may not reoccur in future periods if the same level of underlying performance were to occur. These are certainly part of our business and operating environment, but are worthy of being highlighted for the benefit of the user of our financial statements. Management's intent is to neutralize fabricated product segment from fluctuations in underlying metal prices. We characterize metal profits and LIFO charges as non-run rate items that eventually offset to a great extent over the course of the full year.

Further, presentations including such terms and income or operating income before non-run rate are not intended to be and should not be relied on in lieu of the comparable caption under Generally Accepted Accounting Principles or GAAP to which it is reconciled. Such presentations are solely intended to provide greater clarity of the impact of certain material items on the GAAP measure and are not intended to imply such items should be excluded. I would now like to turn the meeting over to Jack Hockema, who will provide overall commentary on Kaiser Aluminum. At the conclusion of the company's presentation, we will allow for questions and answers. Jack?

Thanks, Geoff. As Geoff mentioned, you may follow our remarks by viewing the slide presentation on our website at kaiseraluminum.com. My remarks begin with Slide 5. I will started today's session with a brief overview. Our organic growth program has strong momentum and has grown to $244 million with the recent announcement of projects at our Tulsa, Sherman, and Trentwood facilities. Our financial condition is strong and improving and we have significant financial capacity to fund additional growth initiatives. 2007 results were a step change from prior year, and the Trentwood expansion was the primary factor.

Turning to Slide 6 in the Trentwood expansion, Phase II is now fully operational and Phase III is scheduled to be fully operational late this year. Phase III construction is scheduled mid year and will have some impact on production during the construction phase.

Slide 7 summarizes the previously announced $91 million investment program, which has a focus on improving efficiencies within our rod, bar, and tube value streams. We plan to announce location of the Midwestern facility within the next few days and we expect the program to be fully implemented by the end of 2009.

Slide 8 summarizes $14 million in new organic growth initiatives announced last week. The Tulsa project provides needed capacity to supply growing aluminum extrusions demand for automotive applications and the Sherman and Trentwood projects are intended to provide additional manufacturing efficiencies.

Page 9 provides insights into key industry demand drivers. Demand for aerospace and defense applications was very strong in 2007 and had a very positive impact on our results. General engineering rod and bar shipments were down as a consequence of destocking by service centers during the first eight months of the year, but restocking late in the year softened the full year impact. Ground transportation was weak, especially for truck and trailer applications.

Turning to Page 10, consolidated operating income of $182 million was up 80% from prior year, and operating income from our core Fabricated Products business segment was a new record $169 million as illustrated on Slide 11. Fabricated product shipments were up 5% and the record operating income was up 39% from prior year. Joe will provide additional color in his remarks which follow. Joe?

Thanks, Jack. In terms of financial highlights, we have several key points to discuss. First, as Jack reviewed earlier, our operating income for 2007 was $182 million. Additionally, in 2007, we generated $130 million in cash flow from operations. This cash generated has funded capital spending of $62 million primarily of our Trentwood facility and enabled the early retirement of a $50 million term loan in early December. As a third highlight, we continued to strengthen our balance sheet and expand liquidity.

Turning to Slide 14, our net sales on a consolidated basis for 2007 were up 11% to $1.5 billion. During the year we benefited from very strong heat treat plate shipments, favorable product mix, and stronger value-added pricing.

Net income results are highlighted on Slide 15. Our strong performance in both Fabricated Products and primary product segments resulted in net income of $101 million for the full year 2007. Net income included an effective tax rate of 45%. Taking into account the use of tax attributes in the income statement, the cash tax rate would have been approximately 10%. Our 10-K will be released later this month and it will provide further details.

Operating income results are highlighted on Slide 16. Given our tax position, we believe operating income provides a much more meaningful metric for comparing results. Operating income of $182 million in 2007 includes $27 million in non-run rate items. Operating income before non-run rate items in 2007 was 74% higher year-over-year from strong results in both Fabricated Products and Primary Products. On the slides that follow, we'll discuss the financial performance of our three reporting segments in more detail.

Viewing our Fabricated Products business on Slide 17, our reported segment operating income was $169 million in 2007 compared to $122 million the prior year. Year-over-year, we have benefited from a $9 million improvement from non-run rate items. If we look at income before non-run rate items for the full year 2007, our underlying fab operating income was $166 million or $37 million higher than 2006. The year-over-year improvement in operating income was driven by heat treat plate products. We realized a favorable impact of $42 million from the combination of higher heat treat plate shipments and richer value-added pricing.

Our Primary Products results as presented on Slide 18 were stronger in 2007 as operating income before non-run rate items was $39 million versus $6 million a year ago. The drivers for the improved performance were higher realized aluminum prices net of hedging, improved alumina pricing, and favorable currency exchange net of hedging. On a reported basis for Fiscal 2007, Primary Products generated operating income of $46 million compared to the $23 million the prior year. Non-run rate items, primarily unrealized mark-to-market adjustments for metal and currency derivatives, were $9 million unfavorable in this most recent year compared to 2006. Of further importance in the second half of 2007, we received approximately $14 million in dividends from Anglesey.

On Slide 19, we display the corporate expenses, which are not allocated to the business segments. Excluding non-cash equity compensation and non-run rate items, corporate and other expenses were essentially flat compared to 2006. Next, I would like to ask Jack to provide some concluding remarks. Jack?

Thanks, Joe. On Slides 21 through 23, we address the near term outlook. Demand for aerospace plate is robust, but ramp up in demand is slower than anticipated as a consequence of the well publicized delay in the launch of the A380 and Boeing 787. However, continuing strong demand for armor plate is expected to cushion the impact. We expect the ground transportation and general industrial markets will continue to experience weakness through the first half of this year. The chart at the bottom of Page 21 illustrates the recent positive roller coaster effect of distributor inventory swings on demand for general engineering rod and bar mill products. The first eight months of 2007 were afflicted with heavy destocking by distributors while the pattern reversed to one of restocking during the last four months. Despite gloomy news regarding the economy, we expect strong industry shipments of general engineering rod and bar in the first quarter, continuing the trend that began late last year.

Slide 22 translates the market environment to Kaiser's situation in Fabricated Products. We expect that our very rich price and mix for heat treat plate will continue into the first half of 2008. As indicated in my earlier remarks regarding the Trentwood expansion, we anticipate that 2008 output will be impacted by planned heat treat furnace downtime related to Phase III construction scheduled mid year. Our current expectation is that first half shipments of heat treat plate will be up approximately 10 to 15% from prior year as we manage shipments and inventory to accommodate customer needs and Phase III construction. Despite forecast for reduced automotive production in North America, the impact for Kaiser will be softened by new programs that have launched and by export shipments facilitated by Kaiser's world class capability and the weak dollar. General engineering rod and bar shipments are expected to be very strong compared to the the first half of last year.

Slide 23 addresses the near term outlook for Primary Products. We've included a chart showing recent operating income trends to illustrate that 2007 income was a step change from the prior two years. We expect that 2008 will return to a level more like 2006 due to unfavorable impacts from currency and ocean freight costs.

Slide 24 recaps today's report. Financial results were very strong for both the quarter and full year, including record full year operating income for Fabricated Products. We expect that 2008 will continue to reflect the benefit of tailwinds from strong demand for aerospace and defense products. The organic growth program has momentum, and is delivering results. Our financial condition is strong and improving and we have financial capacity to fund additional growth initiatives beyond the $244 million organic growth program. We will now accept questions.

(OPERATOR INSTRUCTIONS) We'll take our first question from Timna Tanners with UBS.

Hi, thanks for the great detail. Was wondering if could you give us a little bit more information on the mention in your press release on exports for starters?

Sure, Timna. It relates to automotive and as you know, our London, Ontario facility is a world class supplier of automotive extrusions. And we frankly had a lot of interest in us exporting over the past few years, but we've never been able to reach a situation where it was economically feasible. But with the weakening of the dollar, we're now in a position where some of our automotive supply customers have requested we ship to Western Europe to supply their needs there. And we'll be doing that throughout 2008.

Okay, is that something that you could quantify a little bit in terms of volume or something that we could measure a little better?

I would quantify it in terms of the total that despite industry forecast that car builds, light vehicle builds will be down in 2008 versus 2007. We expect with our new programs and with our exports that we will not suffer any decline in shipments to the automotive sector and there may be some uptick.

Okay, that's interesting. Also, was wondering on the guidance that you gave for heat treat volumes which is helpful. Is there a reason that just first half -- is that because you're trying to incorporate the timing of the downtime? Is that more second half then?

Yes. What we expect is that the first three quarters actually will be production will be curtailed, if you look at the total first three quarters. And then in the fourth quarter, Phase III will have started up, so we expect to see a significant surge in shipments in the fourth quarter as the new production comes onstream. But during the first nine months of the year, we really, even in the first quarter while production will be stronger, shipments will probably be curtailed as we seek to level this out, supplying customer needs through the year.

Okay, so even with the curtailment you're saying you expect first half heat treat plate shipments to be up 10 to 15%?

Correct.

Okay, great, and then I guess I'll hand off after this, but it seems like we're waiting to hear what you'll do with this extra cash. You paid down your debt so you got net cash now. And in the past you talked about having a lot of acquisition opportunities. And maybe I'm reading too much into it but it sounds like you're focused more on organic growth. Can you at least clarify a little bit about the opportunities you're looking at?

Sure, good question. I'd be pleased to answer that. We continue to have organic growth as our first priority because those generally have a better return than acquisition opportunities. So we are scouring our business looking for every possible good organic growth project. But as I've said many times in the past, we don't think there are any more $100 million projects out there, but we would hope we continue to have a trickle of $10 million and $15 million and $20 million as we go forward. On the acquisition front, we still believe that we have a good platform for acquisitions. We've got a lot of lines in the water, but nothing that we've acted on at this point. But we continue to look to acquisitions and are optimistic that over the next year or two that we'll have some acquisitions that go into the portfolio. And then beyond those investments, and that's the first priority, but beyond that, our next priority would be to repurchase stock. And there are some issues related to the the NOLs with stock repurchases. But depending on excess cash, that would be our next alternative. And then lastly, and unlikely would be special dividends beyond the regular dividends. But clearly, the Board and the management do not plan to sit on the cash. We intend to put it in play or get it back to the investors through share repurchases or dividends.

Okay, thanks, Jack -- and maybe along those lines Joe can help us with a CapEx outlook for 2008?

Well, we're finishing that up, I would say Timna, currently with the third phase of the Trentwood expansion, it was the $35 million phase we talked about. And with a chunk of the overall $91 million rod and bar and our normal $12 million to $15 million capital spending to keep our facilities in excellent shape, right now, we probably, I would probably use $80 million to $90 million for next year.

Okay, thank you.

(OPERATOR INSTRUCTIONS) We'll go next to Timothy Hayes with Davenport & Company.

Good day.

Good day.

Just a question on the extrusion side, what you're hearing from Sapa they're starting to possibly increase conversion prices for certain products or extrusion products here recently. Have you heard of that, and if so, are you following such price increase and do you think the market can support it?

No, I don't have any comment on pricing right now related to extrusions, Tim.

Okay, thank you.

(OPERATOR INSTRUCTIONS) We'll go next to Meryl Witmer, with Eagle Capital.

Hi, guys, quick question. What was the major maintenance expense in the quarter roughly?

In the quarter? I don't know that I have it for the quarter.

Or, well --

It was, if you --

We have it for the year, it was approximately $5 million higher in major maintenance this year than last year.

This may help you actually, the sentence in the press release: Additionally, higher planned major maintenance expense and energy costs were largely offset by favorable general cost performance in the fourth quarter. Does that, was most of it -- of that $5 million should I assume most of it was fourth quarter?

Actually, Meryl, I only heard part of your question because I was getting someone signaling me on the fourth quarter. The major maintenance year-over-year in the fourth quarter was $1.5 million --

Higher.

Worse, yes. And then there were some additional energy costs and our cost performance basically offset those.

Right, so it was $1.5 million higher, but do we have a base amount by any chance?

No, I don't think we disclose that.

Okay. Thanks.

(OPERATOR INSTRUCTIONS) We'll take our next question from Sam Martini with Cobalt Capital.

Hi, guys. Could you give an update just -- I'm sure everyone else knows, but could you just give the latest state of Anglesey, what you're hearing from discussions or making a a lot of money here? And I know the power contract has another 18 to 24 months to run, but has there been any change? When we talked about this on the road show you thought this was really something that should be thought of as non-recurring. Is that evolving? Can you just give me sort of the latest there, thanks a lot.

Yes, Sam, the evolution here is that the Power Plant Wilfa, which is involved, it's unlikely that power plant will operate beyond 2010. There is the potential that we'll be able to get power beyond the September 2009 power contract and we're obviously in negotiations to try to make that happen, but we're not yet at the point that we have a price that would enable us to operate beyond September 2009, a power price.

Any new odds on what you think though, the likelihood is? It sounds certainly that it's shifting towards operating longer than we thought. Is that fair?

Yes, that's fair, but again, we have to get a power price and there are lots of political issues and utility issues and other things going on in the UK. So it's flip a coin at this point.

Are you speaking, would it be a change to another nuclear provider or would it be a different power source?

No, no, no, this is with with the Wilfa facility.

I'm sorry.

So it's unlikely that the facility will operate beyond 2010, although we obviously continue to explore those as well, but the odds are not high that we'll operate beyond 2010. And at this point, we can't give odds that we'll operate beyond the end of the power contract in September '09.

Okay, thank you.

We'll take our next question from Anthony [Girstein] with Baron Capital.

Hi, guys. Nice quarter. Just thought perhaps you could update us on the timeline with respect to the VEBA's ability to sell and the impact on the NOL and how to look at that again based on that formula you've given in the past.

The union VEBA's current timeline is they will not be permitted to sell any additional shares until January 31, 2010, which is the three year anniversary of the secondary.

Okay, and then with respect to the NOL and the formula you've always talked about in the past, can you just give me a recap on that?

Well, going back to the date of emergence in July 6 of '06, there's a restriction for two years that if there's any change in control prior to July 6 of 2008, the company would lose the benefit of all the NOLs. After that period of time there's a restriction under IRS Section 382, which -- and there's a formula based on the market cap and a Treasury rate that would limit the company's use of NOLs to somewhere between $60 million to $80 million per year. Based on the current market company ranges where our stock is trading in the last six months.

And that's July 6 of '08?

Yes.

Thank you very much.

You're welcome, Anthony.

We'll take our next question from Timna Tanners with UBS.

Just a follow-up, please, on the demand environment for heat treat. If you can tell us a little bit more about where the military demand or the armor plate demand, how sustainable you think that is or what's driving that, like how susceptible for example, is it to the potential Iraq pullout, that kind of thing? And then also on if there's anything more sinister you think going on with overall underlying demand for aerospace, how your outlook is there, please?

Sure, Timna. On the armor plate, we see that being strong certainly through the first half and really through most of 2008. And beyond that, it still is in question, although we think there's going to be pretty nice armor plate demand going on for a year or two here. So at least in the short-term that looks pretty good and we're actually working with a number of armor plate suppliers or armored vehicle suppliers as well as the government on future programs as well. So we're hopeful that's going to be a nice niche for us as we go forward.

From a broader standpoint, I presume that you also have seen the airline monitor forecast. They've just issued a new forecast. Not only did they increase the total number of builds, but importantly to us and to our investors who look at the potential cyclicality of this business, they significantly improved their forecasts out five and six years down the road, reduced the amount of downturn that they were forecasting. So as Airbus and Boeing say and has been our opinion, we think that this very strong market in aerospace really has good legs to it and has a while to run. We've heard comments that the single aisles -- the 737s and the 320s are sold out through 2015, which is a long long time. And we've got the 380 launching, the 787's going to launch. So the prospects are very very good. I mean Ellipse, very light jets, they're ramping up their production and still are full of orders. So it's hard to find anything negative in the aerospace sector other than the delays of the 380 and the 787. And all those have done in our view is to push the demand curve a little bit further to the right that just smooths out the cycle. So it's pretty much all good news from our view.

Okay, thank you.

(OPERATOR INSTRUCTIONS) We'll go next to Meryl Witmer, with Eagle Capital.

Hi. I'm wondering if you could give me a sense on the heat treat, how the first half '08 volume will compare with say the second half of '07? Rather than look at the year-over-year, I'd prefer to look at it sequential.

I want to say the two halves were just about the same.

No, no, 8/1/08, it hasn't happened, will be about the same?

No, H1 of '07 and H2 of '07 were basically the same, it was pretty much flat through the year.

Okay.

So that the 10 to 15% -- when I say 10 to 15%, the first half of '08 will be up 10 to 15% versus first half of '07, it's roughly the same versus the second half of '07 as well.

I understand, great. Thank you.

It appears we have no further questions at this time. I'd like to turn the call back over to our speakers for any additional or closing remarks.

Thank you, everyone for joining us today. A replay of this conference call will be available for 30 days on the Investor Relations page of the kaiseraluminum.com website. Have a good afternoon.

Thank you. Once again, that does conclude today's call. We do appreciate your participation. You may disconnect at this time.