Kaiser Aluminum Corp (KALU) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Kaiser Aluminum first quarter earnings conference call. At this time, all participants are in a listen-only mode. Later we'll conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions) As a reminder this conference call is being recorded. I would now like to hand the conference over to your host, Ms. Melinda Ellsworth. Ma'am, you may begin.

Thank you. Good afternoon, everyone, and welcome to Kaiser Aluminum's first quarter 2010 earnings conference call. If you have not seen a copy of our earnings release, please visit the Investor Relations page on our website at www.kaiseraluminum.com. We have also posted a PDF version of the slide presentation for this call. Joining me today are President, CEO and Chairman, Jack Hockema, Senior Vice President and Chief Financial Officer, Dan Rinkenberger, and Vice President and Chief Accounting Officer, Neal West. Jack and Dan will review the results and at the conclusion of our presentation we'll then open the call for questions. Before we begin I'd like to remind the audience that the information contained in this presentation includes statements base 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 the specific risk factors that could cause results to differ materially from those expressed in the forward-looking statement's, please refer to the Company's earnings release for the first quarter of 2010 and reports we have filed with the Security and Exchange Commission, including the Company's Form 10-K for the full-year ended December 31, 2009, and current report on form 8-K filed with the Security and Exchange Commission on March 29, 2010. All information in this presentation is as of the date of the presentation and the Company undertakes no obligation or duty to update any forward-looking statement 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 recur 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 users of our financial statements. Management's intent is to significantly 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, operating income, before non-run-rate or after adjustments or earnings before interest, tax, depreciation and amortization, EBITDA, are not intended to be and should not be relied on in lieu of the comparable caption under generally accepted accounting principles 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 call over to Jack Hockema. Jack?

Thanks, Melinda, and good afternoon, everyone. Thanks for taking the time again to listen to our conference call for the first quarter of 2010. My opening comments are summarized on slide number five. Our first quarter results improved compared to the past few quarters on higher value-added revenue and additional improvements in our manufacturing efficiencies. While we have not yet seen meaningful improvement in real demand other than for automotive and semiconductor applications, supply chain inventories are reaching equilibrium resulting in reduced destocking and improved pull for our products. We continue to be encouraged by the progress at our new world-class rod and bar extrusion facility in Kalamazoo, Michigan and the project remains on schedule to be fully operational late this year. We are also pleased to have secured a new revolving credit line and convertible debt offering to further enhance our financial strength and flexibility. Dan will now provide highlights regarding our first quarter results and the new capital structure. Dan?

Thanks, Jack. The consolidated financial highlights are shown on slide seven. Consolidated operating income before non-run-rate items increased $7 million sequentially to $16 million in the first quarter 2010, compared to $9 million in the fourth quarter 2009. In addition to sequential, higher sequential operating income for our fabricated products segment, we also had more favorable realized hedging results in the hedging business unit during the quarter. Corporate costs were $2 million higher than the quarterly trend due to various non-cash reserve adjustments. We anticipate for the balance of 2010 that corporate costs will remain comparable to the level of recent quarters. Reported net income was approximately $9 million or $0.44 per fully diluted share. Adjusting for non-run-rate items, first quarter net income would have been slightly higher and fully diluted EPS would have been $0.47 per share.

Our effective tax rate for the first quarter was approximately 41%, however, the cash tax rate remains in the mid-single digit percentages, reflecting the usage of net operating loss carryforwards and other tax attributes, which applied mainly against pretax US income. During the quarter we implemented a new financing structure comprised of a $200 million revolving credit facility and $175 million convertible net offering to further finance -- to further our financial strength and flexibility. The financings and the concurrent repurchase of shares were completed in March of 2010 and had very little impact on our first quarter results. However, net income and earnings per share will be impacted as a result of these transactions beginning in the second quarter. And now I'll provide some further details on the financing transactions later in the presentation.

Slide eight focuses on our fabricated products result, excluding non-run-rate items. Fabricated products operating income improved by $4 million on a sequential basis to $27 million in the first quarter of 2010 from $23 million in the fourth quarter of 2009. The increase in operating income reflected higher value-added revenue and the benefit of continued improving trends in manufacturing efficiencies. Higher demand in select market segments and lower levels of inventory destocking were the primary drivers of the increase in value-added revenue. As we had mentioned in our fourth quarter earnings call, operating income in the first quarter was negatively impacted by approximately $3 million related to start-up costs for the Kalamazoo extrusion facility and a onetime signing bonus associated with the new five year labor agreement with the United Steel Workers that was ratified earlier this year.

Non-run-rate items within the fabricated products segment during the quarter were primarily related to non-cash mark-to-market losses on natural gas hedge transactions. Non-run-rate items are shown in detail on slide 28 in the appendix. Slide nine provides a summary of the quarterly sales analysis by end market application. In the first quarter it was encouraging to see both value-added revenue and shipments increase sequentially for each of our end market segments. Shipments for aerospace and high strength applications increased slightly from the fourth quarter, as service center destocking abated for these products. As Jack mentioned previously, increased demand in select market segments drove higher shipments and value-added revenue for general engineering and automotive products. However, we have not yet seen any meaningful improvement in real underlying demand. Slide ten discusses the financing transactions we completed at the end of March.

Our primary objective related to our financing activities was to arrange a new revolving credit agreement to replace the facility maturing in July, 2011. In conjunction with the new revolver, we sought to obtain flexible terms and conditions, use our assets more efficiently to collateralized existing and future financing arrangements and maintain or enhance our liquidity. We entered into a $200 million, four-year revolving credit facility secured by working capital assets, with overall terms and a covenant structure that significantly improved our flexibility. In addition, since we eliminated property, plants and equipment from the collateral pool for the revolver, the size of the revolver commitment and borrowing availability were also reduced. In order to maintain a comparable level of liquidity, we arranged funded debt through an offering of cash convertible senior notes with a five-year maturity.

The convertible debt market provided desired covenant flexibility, enabled us to diversify our funding sources, allowed us to manage the issuance size and the amount of balance street leverage and offered a reasonable cost to financing. The note offering was extremely well received in the market, which allowed us to up-size the issuance from the original amount of $130 million to $175 million, including the over allotment exercised by the initial purchasers. Simultaneously with the note issuance we entered into option transactions that effectively increased the conversion premium from Kaiser's perspective from 26% to 60% for a conversion price of $61.36 per share. In addition, as a result of the increased amount of the offering, we chose to apply $44 million of the net proceeds to concurrently repurchase approximately 1.2 million shares through privately negotiated off-market transactions with purchasers of the notes.

The remaining $108 million of net proceeds increased cash to be used for general corporate purposes. Cash interest payments will be based on the notes 4.5% coupon rate. However, since the balance sheet will reflect a sizeable issuance discount for the notes, interest expense will also include non-cash amortization of that discount. We have provided more detail on the GAAP accounting treatment for the financing transactions on slides 24 and 25 in the appendix. Overall, we are very pleased with the results of the financings. With enhanced financial flexibility and a moderate degree of leverage, we are well positioned to continue to support our ongoing business needs and longer term strategic growth objectives. And now I'll turn the call back over to Jack to provide some additional comments.

Thanks, Dan. Slide 12 provides context for a discussion of our outlook for aerospace and high strength applications. We remain bullish on the long-term fundamentals for commercial and defense aerospace. The order backlog for commercial aircraft is robust and, as many of you know, both Boeing and Airbus have announced plans to begin ramping up production later this year and in 2011. In addition, service center destocking pressure is lessening for aerospace and high strength products and we expect that significant destocking by large airframe manufacturers this year will abate in 2011. In the near-time we're also encouraged by the fact that our first quarter volume for aerospace and high strength applications improved more than 10% compared to the run-rate established during the last three quarters of 2009 and we expect that our shipments in the second quarter will be similar to the first quarter for these applications.

Our outlook for general, engineering and automotive applications is summarized on the next slide, number 13. Service center inventories for our general engineering products have stabilized and automotive build rates are improving. Our shipments and value-added revenue trends for these applications have shown steady improvement from the bottom that was established in the first quarter of 2009, and this trend accelerated in the first quarter of 2010. At this point we anticipate that the second quarter demand will be similar to the first quarter for these applications. As those of you who have been following the Company are aware, supply chain destocking has been generating downward pressure on our shipments for several quarters and we're glad to see this pressure subside. We look forward to the inevitable phase in the economic recovery when demand is sufficient to stimulate restocking throughout the supply chain.

Slide 14 summarizes our second quarter outlook for the fabricated products business. We expect that volume and value-added revenue will be similar to the first quarter and start-up costs for Kalamazoo will also continue at a pace similar to the first quarter. In addition, as we continue to bring equipment on line related to the Kalamazoo investment, quarterly depreciation expense will increase approximately $1 million beginning in the second quarter. While our short term visibility remains limited due to the still soft broader economic environment, we remain optimistic about the Company's future both in the near and the long-term. The long-term fundamentals for aerospace are excellent and the full benefit from our Trentwood expansion has yet to be realized in light of recent soft market conditions.

Our new Kalamazoo facility's an important next step in advancing our competitive cost position and it will also provide capacity to facilitate profitable sales growth for automotive applications driven by increasing use of aluminum extrusions to achieve more fuel efficient vehicles. The Kalamazoo project in combination with capital improvements recently completed at Trentwood and several other facilities rounds out our platform of focus facilities to position Kaiser Aluminum as a supplier of choice and a low cost producer for aerospace, automotive and general engineering applications. With attractive markets and a strong financial and competitive profile, Kaiser is well positioned for profitable growth. We will now open the call for questions.

(Operator Instructions) Our first question comes from Phil Gibbs from KeyBanc Capital.

Hi, good afternoon, guys.

Good afternoon.

Just had a question on the automotive and the general engineering markets and what you've seen, I think, is a pretty decent pickup in results from a volume standpoint. And, Jack, you said that you believe that the underlying demand was kind of now in line with the shipments. Would that be accurate at this point in time? We kind of saw a snap-back the last couple of quarters?

Yes, that's correct, Phil. We have not seen, certainly, from a service center standpoint restocking. It looks like their inventories are holding fairly constant at this point and we don't believe there is significant destocking beyond the service center. So that all relates back to, yes, we think we are seeing real demand at this point in general, engineering and automotive.

Okay. And then the start-up costs should be somewhat minimized going forward for Kalamazoo. How should we think about that?

Well, in the first quarter and I'm comparing to the run-rate last year, so in the first quarter we had $2 million of additional drag at Kalamazoo and we had roughly $1 million due to the signing bonus on the labor agreement. The signing bonus won't occur in the second quarter, but we think our start-up costs are going to be order of magnitude the same at Kalamazoo in the second quarter, hopefully a little bit less, but basically in the same ballpark and then hopefully by the second half we'll see that go away.

Okay. And what are the -- and just lastly here on the commercial aerospace side, what are your service center customers telling you about their needs as we move through the year? Would you expect that to firm or this rate of, this kind of shipment rate kind of foreseeable until 2010?

Yes, that's how it looks at this point. We've been pleased that they're -- that the service centers for aerospace, that those -- the heavy destocking we saw, appears to have abated. I think there is still some pockets of destocking going there, so we're not at full equilibrium, but I think this pace is sustainable.

Perfect. Thanks, guys. Good luck.

Thank you.

Thanks, Phil.

Our next question comes from Timna Tanners from UBS.

Hi, good afternoon.

Hi, Timna.

Hi, Timna.

The detail's really helpful. I was just wondering on the next potential sale by Veba Trust?

Sure, well as you may have seen, if you look at the form 4s that are filed, in the last couple weeks the Veba has been selling shares, part of the 1.3 million that they, roughly 1.3 million that they're entitled to sell during the course of 2010, roughly. I think at this point they are -- they have sold about 800,000 shares and of that 1.3 there remains about 0.5 million shares that they can sell and I think that goes between now and March of 2011.

Okay. Great. So then there would be maybe another allocation after that?

Well, the mechanism really is 1.3, I think it is 1.32 million shares that can be sold over any rolling 12-month period without board approval for something beyond that.

Okay. That is helpful. Thank you. Wanted to just take a step back and ask you about if you think there would be any potential problems with ownership of Ravenswood or if there would be any FTC violations given your position with Trentwood?

You mean would there be FTC implications --

Exactly.

-- if we were to acquire Ravenswood.

Exactly.

We don't know for sure, but I think there most likely would be some FTC implications, but we have not done that math.

Okay. And then finally, I think we've talked about the refinancing that you did put some in, yourselves in better position. Some of that, I imagine, would go to working capital when you do ramp up your operations with the recovering economy. But can you just give us an update on kind of how you're thinking about uses of cash, please?

Sure, well we had approximately a little over $100 million of increased cash as a result of the transactions, but part of that was actually just to keep us on a level playing field with our liquidity position before the financings. The revolving credit that we now have is smaller and we have a lower amount of availability under that revolver just to keep on a level plane we needed to have some funded debt in order to stay where we needed to be. I think broadly speaking, though, we need to remember that we need to have a liquidity cushion, that some amount of cash and our borrowing availability into the revolver gives us to manage through and actually be strong in a downturn. We don't think there a double-dip in the offing, but it could happen and that is what we have to have the cash for. We also need to be able to have some level of cash for low commodity prices because that could impact our margin positions. Broadly speaking, though, I don't think we have any specific uses for the cash beyond that at this point.

Understood. Thank you very much.

(Operator Instructions) Our next question comes from Tony Rizzuto from Dahlman Rose.

Thank you very much. Good afternoon, or good morning.

Good afternoon, Tony.

Got a couple questions. The first question I have is the guidance for basically demand, second quarter demand, to be in line or steady with the first quarter demand. How should we read that from a volume standpoint? Should I read that to be volumes kind of flattish or is that -- you have been pretty conservative in the past. Should we read that to be a modest uptick in the 5% range or thereabouts?

I think it's, at this point, Tony, I'd say it's flat to up a little bit. It was a really strong first quarter, stronger than we anticipated, and a lot of that surged at the end of March. So while we don't think anything got stolen from the first, second quarter into the first quarter, it is still yet to be determined. I can say that April and May are strong, but, again, as we get into the second quarter, when you get into June it becomes problematic because people start looking at summer shutdowns in July and those things. So at this point, flat to slightly up, it would be our best estimate.

All right, Jack. And then just to give us semantics in the comments you made about the destocking by the airframe manufacturers. You expect that will abate in 2011. Could you be a little bit more precise? I know it is very difficult, but obviously it is so important for you guys, more so than anyone else. In terms of the timing, do you expect that we'll see that cleaned out by year-end heading into 2011, or do you still expect that at this pace that this could linger into 2011? Because I think it is going to have, when I look at your volumes and it has to do also with that value-added revenue as well, I think.

Yes, I would characterize it, rather than specifically saying where I think their inventories are going to be, because frankly I don't know, but what we do anticipate at this point is we expect we'll see stronger -- that -- let me say it a different way. We expect that 2010 will be the weakest volume that we'll see for the OEMs. It is down pretty significantly from where we were in 2009. We think that 2011 will be quite a bit better than 2010 and we think that by the time we get to 2012, that we'll be seeing very, very robust demand.

That's very helpful. And if you could relate that to, in the past I've always had to ask you about that operating rate at Trentwood and how that might relate in 2011 to an operating rate. Is that a level that you know -- in that '11 period you might be able to get back to more normal operating rate there, capacity utilization at Trentwood?

Yes, again, 2011 still is a long ways away and there are a lot of things that could happen. But if you pushed me for an outlook now, I would say 2011 would look similar to 2009, similar to or maybe even a little bit better, but in the same ballpark as 2009.

All right, Jack. That's helpful. I take that when I look at your value-added revenue on a price-per-pound basis, it looks like the reason that's declining -- it appears that some of it has been mix related, but is there anything else going on in there in terms of that on a per-pound basis?

Most of it is mix related. And Tony, just clarify, are you talking total value-added revenue or are you talking aerospace and high strength specifically?

Really the aero, I think it was the aero and high strength. Let me just go back here. Yes.

Yes, the aero and high-strength some of that is, most of that, frankly, is mix related, although we're getting some metal squeeze on some of the very high value-added products that don't move so much in line with metal. And the second thing that we've seen, there is still a substantial portion of aerospace and high-strength that goes through service centers and there was quite a bit of spot business in there and there has been some degradation in some of the spot prices there. Most of it is mix, a little bit of metal price squeeze and a little bit of degradation in the spot pricing.

Thank you, Jack.

(Operator Instructions) Our next question comes from Adam France from 1492 Capital.

Yes, thank you for taking my call. Jack, could you refresh my memories in terms of the overall capacity in terms of shipments out of Kalamazoo and when that's running as you hope it will, how it's going to change your mix of shipments or is it still a little early on that one?

Well, we've not stated a capacity out of Kalamazoo, but what we have said is that Kalamazoo is not a capacity play other than what capacity might be allocated to automotive. Basically we'll just be shifting our traditional rod and bar volume from other plants into the Kalamazoo facility.

Okay. Thank you.

Yes.

(Operator Instructions) I'm showing no further questions. I'd like to turn the conference back over to Mr. Jack Hockema.

Thank you. Reiterating our comments today, we're encouraged by the positive momentum in our markets and our results and we're very excited about the future outlook. We have a well-positioned platform for growth in attractive markets and we have financial strength and flexibility to support continued growth. Thanks for joining us on the call. We look forward to updating you again on our second quarter call in three months. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. Today's conference will be available for replay. You may all disconnect and have a wonderful day.