Kaiser Aluminum Corp (KALU) 2008 Q1 法說會逐字稿

Good day, everyone, and welcome to the Kaiser Aluminum first quarter 2008 earnings results conference call. Today's call is being recorded.

At this time for opening remarks and introductions, I would like to turn the call over to Mr. Geoff Mordock. Please go ahead, sir.

Good afternoon, everyone, and welcome to Kaiser Aluminum's 2008 conference call. If you have not seen a copy of today's earnings release, visit the investor relations page at our kaiseraluminum.com website. We have also posted a PDF version of the slides for the Company's call. Joining me today are Chairman, President and Chief Executive Officer, Jack Hockema, Senior Vice President and Chief Financial Officer, Dan Rinkenberger and Chief Accounting Officer, Lynton Rowsell. Before we begin, I would 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 within the meaning of Private Securities Litigation Reform Act of 1995. Such statements include statements regarding the Company's anticipated financial and operating performance, relates future events and expectations, and involves 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 March 31st, 2008 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 factors and may not recur in future periods 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 benefit of the users of our financial statements. Management's intent is to neutralize the 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 a full year. Further, presentations including such terms as net 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 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 web site at kaiseraluminum.com. Slide five provides an overview of today's session. Our $244 million organic growth program continues on schedule and we have financial strength to fund additional growth initiatives. First quarter financial results reflected strong underlying performance and substantial non run rate benefit. Turning to slide six, and our $244 million organic growth program, the Trentwood expansion remains on schedule, Phases 1 and 2 are complete, as shown in the photo at the right that shows the exit end of the three new horizontal heat treat furnaces and the new stretcher that facilitates our capability to supply thicker plate. Installation of Phase 3 begins next month and involves taking a heat treat furnace out of production for several weeks to convert from batch processing to continuous processing. Our new state-of-the-art rod and bar operation will be located in Kalamazoo, Michigan and is scheduled to be operational at the end next year.

Slide seven provides an overview of the first quarter results which include significant non run rate benefit from mark-to-market gains in the primary aluminum segment. Fabricated products operating income was in line with prior year. Shipments were up 8% on improved volume from aerospace defense and general engineering applications. But the favorable impact from improved volume was offset by energy, currency, planned major maintenance expense and by increased depreciation linked to recent investments. Dan will provide additional color in the slides that follow.

Thanks, Jack. Turning to slide nine, our net sales consolidated basis for the first quarter of 2008 totaled $399 million, which was 2% higher than the first quarter of 2007. Fabricated product shipments were 8% higher than the first quarter of '07 on strong shipments of aerospace, defense and general engineering products. Record heat treat plate shipments were up slightly over the prior year quarter and up 4% from the average quarter of 2007, as we began to realize the benefit from new capacity provided by the completion of Phase 2 of the Trentwood expansion. Plate production was impacted by unscheduled downtime on the continuous heat treat furnace used for light gauge plate production, as well as a mix more heavily weighted toward very light gauge plate.

Net income is highlighted on slide ten. Net income of $39 million for the first quarter of 2008 reflected continued strong results in both operating segments as well as approximately $30 million of pretax non run rate items primarily related to mark-to-market gains on metal hedging positions. Earnings per share was $1.92 fully diluted, of which approximately $0.84 was attributable to these non run rate times. Net income included an effective tax rate of 43%. Operating income results are highlighted on slide 11. Operating income of $68 million in the first quarter of 2008 includes the $30 million of non run rate items that I previously mentioned. In the first quarter of 2008, operating income before non run rate items was slightly higher than the prior year, reflecting continued strong results in both fabricated products and primary aluminum.

Viewing our fabricated product segment on slide 12, our reported segment operating income was $40 million in the first quarter of 2008, essentially flat compared to the prior year quarter. The net favorable operating income impact of an 8% increase in shipments as well as value added pricing and mix was approximately $6 million. This was offset by higher energy costs, unfavorable Canadian currency exchange rate, higher planned major maintenance expense, and increased depreciation expense. Non run rate items were approximately $1 million worse than the prior year quarter.

Our reported primary aluminum operating income as presented on slide 13 was $41 million in the first quarter of 2008. This included approximately $31 million of non run rate items and these were primarily unrealized gains on metal hedging positions. Operating income before non run rate items of $10 million for the quarter improved over the prior year, due to favorable realized aluminum prices and improved aluminum costs partially offset by the effect of unfavorable currency exchange rates. On slide 14, we show the corporate expenses that are not allocated to the operating segments. Corporate expenses were essentially flat as compared to the first quarter of 2007. And on slide 15, we demonstrate that we have financial strength and flexibility to finance strategic growth, both organic and via acquisitions. And next I will ask Jack to provide some concluding remarks.

Thanks, Dan. Slide 17 and 18 address the near term outlook for the fabricated products business. Demand for aerospace plate is robust, but the ramp-up in demand for commercial airframe applications is slower than anticipated as a consequence of the well publicized delays and launch of the Airbus A380 and the Boeing 787. However, strong demand for armor plate is expected to continue to cushion that impact. Weakness in ground transportation and general industrial markets continues, as does restocking by service centers. The chart at the bottom of page 17 illustrates the impact of the service center stocking cycle, which shifted from destocking of aluminum rod and bar during the first eight months of last year to restocking over the past seven months.

slide 18 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 through the remainder of 2008. Installation of Phase 3 of the Trentwood expansion begins this summer, and we expect to be fully operational by the end of the year. Our current outlook is for heat treat plate shipments for the year to be up approximately 15% compared to prior year. General engineering rod and bar shipments have been bolstered by service center recycling and we expect the strong shipments trend to continue. Planned equipment upgrades at our Los Angeles, Chandler, Sherman and Tulsa plants will cause some production interruptions, but we are prepared to support strong demand from customers for our products.

Although North American automotive productions is expected to decline in 2008 compared to 2007, the impact for Kaiser will be softened by new programs and by export shipments to Europe facilitated by Kaiser's world-class capability and the favorable exchange rate. Slide 19 recaps today's report. Business conditions remain positive for most of our markets and applications. Implementation continues for our organic growth programs, with Phase 3 installation at Trentwood along with several other improvement projects scheduled this year. Our strong financial condition provides us with the capability to fund additional investments. And we continue to explore new opportunities for profitable growth. We will now accept questions.

Thank you. (OPERATOR INSTRUCTIONS) We'll pause for a moment. We will go first to Timna Tanners with UBS.

Hi. Thanks for the great detail on the cost side and for giving us the little, the amount that you did there. What I'm confused on is more on the average, weighted average selling price of your fabricated products business. And there was some mention in the press release of a weaker mix and then you just talked about strength of mix continuing. If you can talk a little bit about where there might have been weakness or how to thin about the pricing on the fabricated product side going forward.

I am not sure what you are talking about, Timna, unless you're just talking about the new realized price. And I think in Dan's remarks, he attributed the bulk of that to lower contained metal prices for the quarter year-over-year.

We do say something about I guess you would call it a weaker mix but it was really we did have some strength in lower value added price products during the course of the quarter, which caused some of the weighted average pricing to go also be lower than otherwise might have been expected. I think Jack is right when we talks about the strong mix we anticipate especially in the heat treat plate.

What does that mean lower value added products, is that the armor plate you see offsetting some of the aerospace demand.

No, Timna, we are talking more about the some of our extruded products. So, especially in the restocking that Jack mentioned for the -- during the quarter and the last seven months, we added a nice increase as we were hoping and expecting on the value-added or on the rod and bar products that are in the plants.

Okay. I think I understand. I might ask you to explain a little further later. It is just a little hard to understand the decline in the total weighted average selling price, unless there was something -- I mean, because I think that you have been talking about how the non heat treated plate side has been fairly steady and, with the restocking, it sounds like maybe the prices were just a little weaker still even though the volumes were up. Is that fair?

Just the absolute selling price on those products tends to be lower than our plate products.

Got it.

So when we increase the mix in that part of the product mix, it has an effect on our price too.

Okay. But you would have also been increasing amounts sold in the heat treated plate, just because of your capacity increase year over year as well, right?

Yes. And we discussed that, about it being slightly over the first quarter of 2007 and 4% over the average of last year.

Okay. Can you give us a little more granularity on the outages that you are expecting for the heat treated plate side, please? The timing?

We are scheduled to take down the heat treat number 2 I believe it's early June. And it will be down for approximately four months as we do the installation of two new zones and convert it from a batch furnace to a continuous furnace.

You talked about having a little bit of extra inventory at the investor day to prepare for that. Do you think the impact, then, would be more a third quarter?

Yes, we expect that the second quarter shipments will be higher and third quarter shipments will be the primary quarter impacted by those shipments, but it is really difficult to tell quarter to quarter. It's -- we've got inventory flows and we are meeting customer needs here.

Okay. Then I will hand off after this, but you did talk about the inventory restocking, but can you talk about underlying demand going forward then are you expecting some recovery -- are you expecting any recovery there outside of the auto side or are you expecting kind of stability going forward?

Well, we really see things pretty much the same as we have for the past two or three quarters. From a heat treat plate standpoint, we are still confident that we are going to sale every pound that we can produce this year. So we are really capacity constrained rather than market constrained in heat treat plate. Our rod and bar shipments are very strong, as we have shifted from destocking to restocking. And the demand from aerospace and defense for our plate -- our products other than plate continue to be very strong. So really, the only area of weakness that we have seen for the past six months or so is the continuing weakness in ground transportation, primarily truck and trailer, and then the deteriorating builds in terms of North American automotive. But as we have said, we are pretty much offsetting reduced builds in automotive with new programs that we have picked up and with some export opportunities that we have. So, the major impact is basically ground transportation continues to be soft as it has been for more than a year now.

Okay. Great. Thank you.

We will take the next question from Seaver Wang with Utendahl Capital Partners.

Hi, Seaver Wang, Utendahl Capital Partners. What is the year-over-year increase in capacity for heat treat that you expect for this year?

The question was about the year-over-year increase in heat treat capacity. And Seaver, this is Dan. We haven't quoted that obviously over the last 18 months when we have been asked about that in terms of pounds. But we do have a chart, I think it's even at the back of our presentation, but if not, it's on our web site, that shows as a percentage increase over our 2005 baseline. As I recall the numbers, 2007 was 1.6 times the 2005 baseline and 2008 is anticipated to be 1.9 times the 2005 baseline.

I do remember that chart. And then so, because of the delays in the A380 that was cited, do you guys anticipate somewhat of an acceleration further on in the year for the heat treat products?

Well, as I commented answering Timna's question, we are not market constrained this year. We are production constrained. And the outages we had in our -- the unplanned outages and the mix we had in light gauge plate in the first quarter actually took away some production. So, we are now saying that full-year production we expect to be up roughly 15%. That 1.9 to 1.6 that Dan gave was approximately 8%. So we have changed our outlook for the year, reduced it in terms of heat treat plate shipments by roughly 3%, compared to the year-over-year, as a consequence of the light gauge plate in the first quarter that we lost. But what is happening here in terms of the air frame delays has not impacted us. It has been more than offset by what's happening in armor plates. So demand continues to be very strong and we expect we are going be able to ship every pound that we can produce this year.

Okay. Thank you.

(OPERATOR INSTRUCTIONS) We will pause for just one moment. We will take the next question from [Daniel Small] with Platinum Partners.

Can you just talk about how much of an impact the non-planned outages had in terms of shipments or in terms of revenue?

Well, we had the full capacity online coming into the first quarter. So you go back to the numbers that Dan stated, the 1.9 over the 1.6. That full capacity was available. We now have said, rather than being up approximately 18% year-over-year, we will be up 15% year-over-year. And Dan commented in his remarks that first quarter production or first quarter shipments were up 4% over the run rate of last year. So you can take that gap between 4% and 18% and do that math and that's roughly what that lost production was in the first quarter. And basically, all of that was in our light gauge operations. It had nothing to do with the new installation. It was in our continuous furnace and the mix going through our vertical heat treat furnaces, our traditional facilities we had before the expansion.

Okay. Thank you.

(OPERATOR INSTRUCTIONS). We will go next to Tim Hayes with Davenport & Company.

Hey, morning.

Morning, Tim.

A few questions. Back on this unplanned outage, can you quantify what dollar hit you may have experienced during the quarter?

No, we haven't quantified that. But if you go do the math, we were pretty transparent last year in what the value of incremental volume was on heat treat plate. So, I think we have put enough numbers out there that you can do the math and come up with your own pretty reasonable estimate of the impact was.

Okay. And then.

It was a few million dollars.

Okay. And then, what about the year-over-year increase in energy cost? What, could you also try to quantify that, too, please?

Each one of those four items that we talked about was in the range of $1 million to $2 million.

Okay.

The currency, the energy, the major maintenance, and the depreciation. And the energy was closer to 2.

And then back to this -- the base capacity increases over the '05 base, so '08 is now is 1.9 X, it was 2.0 X.

We reduced that to 1.9 either fourth quarter, or I think we may have already done that third quarter of last year, because of what we saw with the production interruptions related today this Phase 3 expansion.

And what is the '09 now? Is that still 2.2 X?

Yes, the 2.2 is still good.

All right. Good. And then on the primary side, I was surprised that realizations were as high as they were. You had realizations of $1.35 a pound. That was down only about $0.04 I think from what you reported a year ago. Given what aluminum prices had done, I was looking for a bigger drop. Did something unusual go on there that you were able to maintain your realizations despite the decrease in aluminum prices that we saw?

No. I mean actually the -- both quarters that we are referencing were actually relatively strong quarters and it is really just an average price that we are reflecting there. I guess there can be a tad of a lag on some of the shipments, but -- and also keep in mind that, when we talk about the volume and pricing impact that happened within the fabricated products, we talk about our realized prices too, which could affect the hedge levels at which we were realizing on our internal and external hedges. All is laid out in the 10-Q pretty clearly, I think.

But the realization for primary is exclusive of hedging impacts, correct?

No, when you're talking about the price per sold, that's the as sold of actual product to third parties. When we talk about the bridge of the impact of what happened within primaries operations, our primary unit includes the operations of (inaudible) but also our hedging activities for metal.

Right. But the realization of $1.35 a pound.

$1.35 does not have any impact of hedging.

Right. Okay. And in terms of your sales, do you sell most of the stuff on a one month lag out of primary?

I think it is one month and I can't remember exactly if there's any other -- I think it is one month lag. I would have to confirm that for you.

Okay. And then final question, given Airbus' potential I don't think they with recognized an official delays but we have heard in the last week that they're likely to cut production for the A380, is it fair enough that for that model, that you would be -- the contracts you have for Airbus would be now back down to the minimum level in that contract or would it still be above the minimum?

I'm not going to comment on individual customer contracts. I will just say again that for this year, we are very confident we are going to be production constrained rather than market constrained and we remain very optimistic about our total outlook for 2009.

Do you think you will be production constrained in '09 as well?

I don't think so because, if you will recall, when we announced Phase 3, we indicated that our customer commitments quote in Phase 3 did not consume the entire capacity. So we will be depending on spot business and I haven't looked at our updated forecast. I am going to see one here in a couple of weeks in terms of what our sales forecast is for '09 versus capacity. But we expect we will have a good strong year in 2009.

Okay. Thanks for answering all of my questions.

Thanks.

We will take a follow up from Timna Tanners from UBS.

I just wanted to ask, on the SG&A line, I know you have talked in the past about being able to lower those numbers by about $2 million to $4 million per year as your transitional costs diminish and professional fees go away. Can you give us an update on that and what might have happened on the first quarter?

Well, I don't think the transition is complete. We are on our way, and on our path and I think that the direction that we have talked about before is still valid. It is just we are still in the mode of paying some of the fees that might have been higher during our SOX readiness process. As we move forward, I think we will get there.

Can you give us a little more update on the timing maybe?

I don't want to be held accountable to a particular quarter, but I think over the course of the next year we can probably get there.

Okay.

(OPERATOR INSTRUCTIONS). And at this time there are no further questions in the queue. I would like to turn the conference back over to Mr. Mordock for additional or closing remark.

Thank you everyone for joining with us today. A replay of this conference call will be available on the investor relations page at the kaiseraluminum.com website. Have a good afternoon.

thank you. That does conclude today's call. We thank you for your participation and you may disconnect at this time.