Kaiser Aluminum Corp (KALU) 2022 Q2 法說會逐字稿

Welcome to the Kaiser Aluminum Second Quarter 2022 Earnings Conference Call. My name is Darryl, and I will be your operator for today's call.

(Operator Instructions)

I will now turn the call over to Melinda Ellsworth. Melinda, you may begin.

Thank you. Good afternoon, everyone, and welcome to Kaiser Aluminum Second Quarter and First Half 2022 Earnings Conference Call. If you've not seen a copy of our earnings release, please visit the Investor Relations page on our website at kaiseraluminum.com. We have also posted a PDF version of the slide presentation for this call.

Joining me on the call today are President and Chief Executive Officer, Keith Harvey; Executive Vice President and Chief Finance Financial Officer, Neal West; and Vice President and Chief Accounting Officer, Jennifer Huey.

Before we begin, I would like to refer you to the first 3 slides of our presentation and remind you that the statements made by management and the information contained in this presentation that constitute forward-looking statements are based on management's current expectations. For a summary of specific risk factors that could cause results to differ materially from those expressed in the forward-looking statements, please refer to the company's earnings release and reports filed with the Securities and Exchange Commission, including the company's Annual Report on Form 10-K for the full year ended December 31, 2021. The company undertakes no duty to update any forward-looking statements to conform the statement to actual results or changes in the company's expectations.

In addition, we have included non-GAAP financial information in our discussion. Reconciliations to the most comparable GAAP financial measures are included in the earnings release and in the appendix of the presentation. Reconciliations of certain forward-looking non-GAAP financial measures to comparable GAAP financial measures are not provided because certain items required for such reconciliations are outside of our control and/or cannot be reasonably predicted or provided without unreasonable effort. Any reference in our discussion today to EBITDA means adjusted EBITDA, which excludes non-run rate items for which we've provided reconciliations in the appendix.

At the conclusion of the company's presentation, we will open the call for questions.

I would now like to turn the call over to Keith Harvey. Keith?

Thanks, Melinda, and thank you all for joining us for a review of our second quarter 2022 results. Our businesses delivered $41 million of EBITDA in the second quarter in what turned out to be a very challenging quarter due mainly to ongoing supply chain issues at our Warrick rolling mill, which supplies sheet for beverage and food packaging in the North American market.

In the last few quarters, we've been communicating how performance of our main supplier of magnesium, US Magnesium, and the Alcoa Warrick smelter, which supplies a portion of our metal requirements, have struggled to provide us with contracted, consistent and conforming supply of materials and have negatively impacted our results. And while we have worked diligently over the last several months to minimize the impact on our business and our customers, both issues worsened when US Mag abruptly stopped all shipments and the smelters performance deteriorated substantially in June. These worsening conditions have continued to negatively impact our ability to run low cost, efficient operations at the Warrick rolling mill.

In addition to a lengthy period of unacceptable performance by both suppliers, US Mag's abrupt and unexpected change forced us to declare force majeure on shipments of sheet products from the Warrick rolling mill for our packaging customers in early July. These 2 supply issues combined have been a drag on earnings of approximately $20 million through the first half of the year. Allow me to provide more detail on these supply issues and what actions we have and are taking to put these issues behind us.

Regarding our supply of magnesium and the events which led to our declaration of force majeure Warrick on July 7, as we previously stated, US Mag declared force majeure over 9 months ago in September of 2021. During this period, we have received a little to no communication on either the cause of the disruption or plans and timelines to hear their issues and return to normal operations. In the last 9 months, we have received approximately 50% of our expected contracted volumes until mid-June, when US Mag unexpectedly ceased all shipments to us.

Since US Mag's force majeure declaration, we have been establishing and qualifying a number of new suppliers to minimize our reliance on US Mag and make up more than the projected shortfalls in US Mag's deliveries based on their projected allocations.

With no pre warning at all to the cessation of all shipments of magnesium, we were unable to replace the remaining balance of US Mag's reduced supply to the work operation on such short notice. In the announcement to our customers, we stated we expect shipments in the month of July to be impacted as much as 30% to 40%, and as much as 50% for the balance of the third quarter in each case based on contracted deliveries of magnesium at that time and assuming no further deliveries from US Mag.

We are in daily communication with our customers on our efforts to establish new magnesium supplies and contain this issue to third quarter shipments. And the situation has improved over the last 2 weeks as US Mag has provided additional material and we continue to identify and qualify additional suppliers. We now believe shipments will be higher than the levels in our previous announcement based on the progress we've made and we expect to return to full production sooner than previously anticipated.

As we previously discussed, we initiated litigation against US Mag in April of this year in connection with US Mag's force majeure declarations.

Now moving to the supply and performance issues about Alcoa smelter on the Warrick site. We received approximately 30% of our metal supply for the Warrick rolling mill from the Alcoa smelter, mainly in the form of molten aluminum when the smelter is operating effectively. While the smelter's performance has negatively impacted the efficiency and financial performance of the rolling mill for several quarters now, the smelter's performance degraded further in the second quarter, resulting in the curtailment of 1 of the 3 operating lines due to reported operational challenges. Furthermore, replacement ingot to make up the shortfall in conforming molten metal deliveries was not delivered on a timely basis, further impacting our operations.

While we will continue to work with Alcoa to attempt to work through the operational challenges at the smelter and mitigate the impact of those challenges on the Warrick rolling mill, we are in the process of qualifying other hot metal sources for the Warrick rolling mill to ensure we will have alternative sources of supply.

The Warrick rolling mill has run successfully in the past without metal from the smelter. And going forward, we are preparing for the mill to run without the smelter as part of our plans to meet long-term financial and sustainability objectives and lower the carbon footprint of the rolling mill. With the intent to continue strengthening and diversifying work supply chain and meet the objectives we've set for our packaging business, there are a number of initiatives underway at the Warrick plant that will ultimately reduce our need for third-party magnesium and hot or cold prime metal source.

The Warrick plant has one of the largest and most sophisticated cast houses in the world. And we have plans to further improve its ability to utilize more scrap and rely less on current metal sources. Last week, we initiated start-up of our new coated scrap miller that will enable us to process in excess of 100 million pounds of painted and bare low-cost scrap annually. We are also developing and currently testing new alloys with significantly lower magnesium content and enhanced recyclability characteristics to meet our and our customers' needs for more highly sustainable products.

Commercially, all new negotiated contracts for beverage and food can sheet have increased closed loop return scrap provisions, thereby providing our business with a greater supply of low-cost scrap. These changes are impactful and provide insight into just a few of the areas we've already acted to strengthen this business. Again, these issues have mainly impacted operations at our Warrick rolling mill. All other operations have had no impact from the US Mag or Alcoa smelter issues.

Looking forward now, our market outlook for the remainder of the year, we anticipate continued strong demand in all markets with the exception of automotive, where despite continued tepid shipments due to supply chain shortages, we have been successful in improving prices. We delivered another solid quarter on improving aerospace shipments with continued strengthening demand in defense, commercial and business jets expected for the remainder of the year, and we have declarations reflecting continued improvement in these applications moving into 2023.

Our general engineering business remained strong with continued solid demand in semiconductor and other various applications for plate and extrusions along with improved pricing. Packaging demand remains exceptionally strong.

As noted in last quarter's earnings call, we have begun a long-planned multi-week outage at our Trentwood facility to refurbish our heavy gauge stretcher there. In addition, the new row coat line investment at Warrick continues to move forward with startup and qualification scheduled for the second half of 2023 with full production slated for early 2024.

I'll now turn the call over to Neal, to review the quarter in more detail and I'll be back with some closing comments. Neal?

Thanks, Keith. Good afternoon, everyone. Turning to Slide 8. Value-added revenue of $376 million for the second quarter 2022 increased $58 million or 18% and relatively flat shipments as compared to the second quarter of '21, primarily reflecting improved pricing to mitigate inflationary costs. Value-added revenue for the first half of 2022 of $747 million, increased $257 million or 53% with a 42% increase in shipments, driven by the inclusion of a full 6 months of packaging applications as compared to the first half of 2021, in addition to higher value-added revenue in our aerospace and high-strength and general engineering applications, which I will cover in the following slides.

Moving to Slide 9. Aerospace and high-strength value-added revenue of $97 million for the second quarter 2022 increased $17 million or 21%, on an 18% increase in shipments compared to the prior year period, reflecting improved pricing and continued improvements in underlying commercial aerospace shipments and steady strength in defense and business jet. Aerospace and high-strength value-added revenue for the first half of 2022 of $192 million, improved $41 million or 27% on a 22% increase in shipments compared to the first half of 2021. Compared to the second half of 2021, first-half 2022 value-added revenue was up $28 million or 17%, on an 11% increase in shipments. The increase in value-added revenue and shipments reflect continued strength in demand for our defense and business jet related applications and improving demand for commercial aerospace, as we continue to see the recovery in air travel and higher shipments of new commercial aircraft from both major airframe producers.

Moving to Slide 10. Second quarter 2022 packaging value-added revenue was $154 million, up $22 million or 17% and 3% lower shipments from the prior year period, reflecting improved contract pricing and increased surcharges to offset higher inflationary and commodity costs. For the first half of 2022, total packaging value-added revenue was $300 million and 355 million pounds of shipments, up from the first half of 2021. Value-added revenue of $132 million reflected a full 6 months of packaging revenue and shipments, following our acquisition of the Warrick rolling mill on March 31, 2021. Compared to the second half of 2021, value-added revenue increased 17% or $42 million and relatively flat shipments, reflecting improved pricing and increased surcharges to offset the inflationary and commodity costs.

Turning to Slide 11. General engineering, second quarter 2022 value-added revenue of $96 million increased $19 million or 25% and relatively flat shipments compared to the second quarter of 2021, reflecting continued strong demand for our GE applications, higher prices and alloy recovery to offset inflationary and commodity costs. General engineering value-added revenue of $198 million in the first half of 2022, increased $50 million or 33%, an 11% increase in shipments compared to the first half of 2021. Compared to the second half of 2021, value-added revenue also improved 34% on a 14% increase in shipments. The increase in value-added revenue and shipments continue to reflect strong underlying semiconductor plate, industrial machine tool demand, in addition to the improved pricing and alloy recovery.

Moving to Slide 12. Automotive value-added revenue for the second quarter 2022 was $26 million, relatively flat as compared to the prior year period, a little change in shipments, reflecting the continuing impact of ongoing semiconductor chip shortages and other supply chain disruptions in the automotive industry. Automotive value-added revenue for the first half of 2022 of $50 million, was down $3 million or 5% on a 7% reduction in shipments compared to the first half of 2021. Compared to the second half of 2021, auto value-added revenue was up $6 million or 13% on a 9% increase in shipments, reflecting improvement in pricing and a slight improvement in demand. Additional detailed value-added revenue and shipments by end market applications can be found in the appendix of this presentation.

Turning to Slide 13. Adjusted EBITDA for the second quarter 2022 was $41 million, down $18 million or 30% compared to the prior period quarter. The second quarter 2022 was primarily impacted by $17 million of incremental costs related to supply chain issues, as discussed by Keith, in addition to higher major maintenance, manufacturing, energy, and employee related costs. Our Warrick operations were materially impacted due to lack of consistent top metal delivery and quality related to the Alcoa Warrick smelter operational performance in addition to the higher alloy, energy and freight costs, which were partially offset by improved pricing and commodity and freight surcharges.

Adjusted EBITDA for the first half of 2022 was $96 million, which was equivalent to the first half of '21. The first half of 2022 EBITDA was impacted by approximately $30 million of incremental costs, including approximately $20 million driven by the Alcoa smelter operational performance and US Mag supply chain disruptions at our Warrick operations; $6 million higher than normal international freight costs out of our Trentwood operations, as discussed in the first quarter 2022 results; an additional inflation-driven higher energy, manufacturing and employee-related costs that were not fully recovered and timely through pricing actions.

Moving on to Slide 14. Reported operating loss for the second quarter 2022 was $2 million. Adjusting for approximately $16 million of non-run rate items, adjusted operating income was $14 million, down from the $33 million in the prior year quarter, primarily reflecting the changes in EBITDA as previously discussed and an additional $1 million of depreciation and amortization expense. Reported operating income for the first half of 2022 was $23 million. Adjusting for non-run rate items, adjusted operating income was $42 million, reflecting $15 million of additional depreciation and amortization as compared to the first half of 2021, primarily related to the Warrick acquisition made on March 31, 2021. Compared to the second half of 2021, adjusted operating income was down $3 million, reflecting $2 million of additional depreciation in addition to the changes in EBITDA, as previously discussed.

Reported net loss for the second quarter 2022 was $14 million compared to $22 million loss in a prior quarter. Adjusting for non-run rate items, adjusted net loss for the second quarter 2022 was $1 million, compared to the prior year quarter adjusted net income of $16 million. As a reminder, second quarter 2021 reported net loss reflected a $36 million charge related to the refinancing of our $350 million, 6.5% senior notes that were due in 2025 with our $550 million, 4.5% senior notes due in 2031.

As reported loss per diluted share were $0.87 in the second quarter 2022 compared to a loss of $1.42 in the prior year quarter, adjusted loss per diluted share was $0.03 for the second quarter of 2022 compared to an adjusted earnings per diluted share of $1 in the second quarter of 2021. As reported loss per diluted share were $0.36 and $1.13 for the first half of '22 and '21 respectively, adjusted reported earnings per diluted share were $0.63 and $1.64 for the first half of '22 and '21 respectively. Our effective tax rate for the second quarter '22 was 23%. For the full year and long term, we continue to believe our effective tax rate will be in the mid 20% range under the current tax regulations.

We anticipate our cash taxes paid will be approximately $6 million in 2022. The cash tax rate will remain below the statutory tax rate until we fully utilize our federal NOLs of $187 million as of year-end 2021.

Now moving to Slide 15. As of June 30, we had $235 million of cash and cash equivalents. Total availability under our recently amended $575 million revolving credit facility, which expires in 2027, was $551 million, providing total liquidity of $787 million. There were no borrowings under revolving credit facility in the quarter and the facility remains undrawn.

With the recent easing of aluminum prices as compared to the first quarter of 2022, we do not expect any cash requirements for working capital funding during the second half of the year. Our senior notes are fixed at an annual interest cost of $48 million and we have no debt maturing until 2028.

Capital expenditures for the first half of 2022 were $46 million. For the full year, we expect our capital expenditures to be between $180 million and $200 million, predominantly related to the previously announced additional row coater for our packaging operations.

And finally, we continue to remain confident in our long-term strategy and continuing ability to generate solid long-term returns. On July 14, we announced that our Board of Directors declared a quarterly dividend of $0.77 per common share, reflecting a $13 million quarterly return to shareholders. We have consistently paid quarterly dividend since 2007 and we have steadily increased each annual payment over the past 11 years.

And now I'll turn the call back over to Keith to discuss our business outlook. Keith?

Thanks, Neal. Turning to Slide 17, while the integration and the establishment of the Warrick rolling mill into a standalone business within Kaiser has had its challenges. We remain excited about the long-term profitable growth opportunities in packaging and the other markets we serve. The Warrick facility and organization has a proven history of being a market leader and important supplier to the packaging industry, and we are well along in executing our strategy to further strengthening that position. We are making a number of investments to support our strategy there and we have been successful in securing long-term agreements with our customers.

The market outlook remains very strong, and we are well positioned. We are confident we will achieve operational excellence at Warrick as we have achieved in our other businesses. And as discussed earlier, we are taking a number of actions to address the current supply chain issues moving forward.

The aerospace and high-strength markets have continued to steadily improve since the low watermark experienced in the second half of 2020. Demand for our products in defense and business jet have remained strong and we are experiencing improving demand in the commercial aerospace sector. Declarations of shipments for all aerospace and high-strength products for 2023 are the highest since 2019, and we expect strong demand to continue as air framers supply chain issues and regulatory hurdles are resolved. We remain on track to return to record levels experienced in 2019, in the 2023-2024 timeframe.

The general industrial markets have been quite robust. Recent market data shows inventory levels at service center slightly elevated over recent previous periods, suggesting supply is catching up to the strong demand we've been experiencing. Pricing and lead times for these products had risen to record levels with strong demand, especially in semiconductor applications continuing. We expect strong demand through the balance of the year for these applications.

Not much change is expected in automotive demand in the second half of the year from the first half. Periodic shutdowns at multiple assembly plants continue on relatively short notice, many times based on shortages of chips, but we understand other supply shortages have also impacted our customers. We remain in a strong position to grow as these issues with our customers begin to abate.

While concerns of a pending slowdown in the general economy have been widely discussed, at present, demand in our markets remain strong. We are prepared to quickly adjust for any downturn in our markets with plans in place to adjust our businesses as necessary. We continue to maintain a strong balance sheet with significant liquidity, and we have the playbook to quickly adjust costs and spending as conditions dictate. Our focus now is addressing Warrick supply chain issues, mitigate the impact of these events on our customers and achieve the level of performance expected in our operations there.

The expected outlook for EBITDA margins of 17% to 20% for the year will not be achieved due to the many supply chain issues we've encountered in the first half of the year. However, as these issues are resolved, the business is positioned to perform at these levels and better as we continue executing on our strategies, fix our supply issues and perform for our customers. As previously stated, we remain confident our portfolio of businesses are positioned to deliver approximately $2 billion in value-added revenue with EBITDA margins in the mid-to-high 20 percentage points, once the strategies, normal operations and planned investments are in place.

I'll now open the call for any questions you may have. Darryl?

(Operator Instructions) And our first question comes from Emily Chieng.

My first question, as you can imagine, is just around the US Mag announcement there. Given you are seeing some progress in terms of qualifying some new supply and you may be received some additional ad hoc supply from US Mag recently, could you provide some sort of glide path as to when you might anticipate the return to full production at Warrick? Is that a 4Q event or could that be early 2023 at this point?

Emily, thanks for that question. Our 8-K when we announced the force majeure, we felt at that time and we're looking at all of our suppliers and through the balance of the year, we felt that the numbers that we provided, the 30% to 40% at risk in July, and that's pretty much on track for that amount of shipments impact for July. But then we felt we could drill down as low as 50% for supply for the balance of the quarter.

We've had a tremendous amount of activity, as you might imagine, over the last 2.5 weeks in really moving forward, fast-tracking qualifications, looking at number of other sources. And we had a number of these underway prior to the force majeure event. So our focus going forward was then to -- let's look at what that supply base would be for the balance of the year without expectations of any more shipments from US Mag.

And with that activity that we've done in the qualification process and the hard work that's been going on at Warrick, we now feel that we can contain that possibly to the third quarter and should return to full shipments sometime in the quarter before the end of the quarter. As you might imagine, it's fluid right now, we have a number of qualifications underway, but the conditions have improved and we think we will limit it to the third quarter. And not only will we also secure those amounts of mag for the balance of the year, we're negotiating for full 2023 supply.

Great. Understood. That's really good to hear that. And perhaps a similar question but around the metal supply that was lost from the pot line closure at Alcoa, how easy has it been to replace those loss of volumes there because you've also seen other curtailments of domestic metal as well?

Well, Emily, our arrangement with Alcoa there, is that if they are unable to provide hot metal sources to us, so from their other locations, we're to receive cold prime metal. So other than the timing of receiving that metal as hot metal became reduced, they've been able to secure our needs with the use of cold prime and our use of additional scrap. Now what we are preparing to, and as I said in my prepared remarks, Emily, and as you can imagine, we're a little gun-shy at this point.

We're not going to wait for just that issue to cure itself or to improve and possibly improve. We are actively qualifying other hot metal sources that we will utilize going forward. And as I mentioned, we have a number of initiatives underway, like the coated scrap miller that I referred to my prepared remarks to really take our ourselves less dependent on any of the prime metal sourcing and move this business more to longer-term sustainable use of scrap as its primary metal source.

Understood. And maybe final question if I could squeeze one in. Are you able to share perhaps what percentage of your magnesium requirements at Warrick previously came from US Mag? And I'm clear you're shifting away from that with your upcoming qualifications, but perhaps where you would like to be on a normalized basis once this is all resolved?

Sure. Well, when we purchased the facility, Emily, the agreements with US Mag, were already established and they were very significant. I'll leave it -- I won't put a number to it, but they were significant supplier of US Mag to the Warrick facility. And another issue around the Warrick rolling mill, we utilize a lot more mag because of the applications that we serve. So by our supplying a significant amount of food can and other products which require a higher use of mag and we have a fairly large requirement there for that facility.

However, I will say, due to the issues that we've had and the success we've had in securing other sources, we're actually not putting them in any strategic level of supply for that facility moving forward. So we feel confident we're going to be able to find other suppliers more reliable and diversified supply, so that we are not faced with that by one individual supplier moving forward. And I would say that comment also reflects our position on metal sourcing as well.

(Operator Instructions) And our next question comes from Josh Sullivan from The Benchmark Company.

In the past, you mentioned when Warrick is run without hot metal. What's the cost differential to use cold metal as a source?

We have the ability, because of the cast house that we have at Warrick there, we can utilize cold metal pretty effectively as compared to the hot. And the reason that you've had a lot of hot metal there is because this was a fully integrated business when Alcoa owned at the time, Josh. So it was logical for them to use more molten aluminum, therefore, to utilize the metal from the smelter in that service. When the smelter was previously shuttered for a short amount of time, the facility was able to get the amount of hot metal they needed and utilize the additional sources from scrap. In that they saw no significant impact from being able to move sourcing.

Now I will tell you that we believe going forward and our focus on this business, we're going to significantly reduce the amount of cost from our metal sourcing by the use of lower cost scrap and the utilization of the material that we're generating from the coated scrap miller and other resources. So we actually believe we're going to be able to significantly improve our operating costs once we move away from the hot metal sourcing period.

Got it. And then, what are your thoughts on some of the recent industry capacity announcements for new rolling mills? Just how do you think those are going to enter the market?

Well, it's a surprising announcement that somebody really finally acted on the Brady initiative and we know there's been a couple of other announcements. But quite frankly, those decisions do little to deter or alter the strategies we have for this business. I think as you recall, we believe we purchased this business with a very good price. It's -- as opposed to a green site that has to be built, qualified and go through a number of things, this business has -- the Warrick rolling mill has 50 years of experience in supplying products with our customers. So they're a well-known quality house that is already existing, so therefore little risk from our customers' perspective.

The other thing, the others have mentioned that these are going to be multi-purpose mills that they're building, and Kaiser has got some experience in doing that in the past in the '90s. We weren't very successful doing that. We actually like the focused factory approach with having Warrick. Warrick is going to do and participate only in the packaging markets. We don't intend to divert in either capacity to automotive sheet and common alloy. So therefore, we won't be competing with these other mills.

And then ultimately, our strategy moving forward is to really focus this business in a niche area, and that's backed up by the investments we've made in our additional coater that we're putting in place to the new coating line. And we're going to be uniquely qualified and be able to strengthen our position with these investments, and with the long-term agreement that we have in place. So we intend to be further along in this strategy by the time any of the other mills are essentially built. So we like the investment, continue to like it. We made to acquire the rolling mill there at Warrick. We like the flat price in the fact that they are a market proven supplier.

Got it. And then a lot of these new players and existing players as well are focusing on using a lot more scrap. How do you see the recycling market for aluminum developing? Do you think the historical recycling ecosystems are going to be altered as Warrick and others demand more?

I think, absolutely, the availability of scrap is going to continue to rise. And I think all of us -- this isn't a big magic pill. We fully know that to utilize scrap moving forward, and that's not only securing that on the open markets ourselves, but in coordination with our customers who are also very, very privy and focused on sustainability and lowering the cost of the material. And I believe that there are strong positions in place and that there is additional scrap capacity will be generated that we should all have an availability.

Now that being said, we're fast at Warrick securing all of our metal needs, which include scrap. And so I think that's going to be a strategic position for any of the businesses moving forward, and I know we're thinking that way. And not only will that also support what we need from a sustainability, it's really how we're going to drive additional profits and financial returns on these businesses. So I believe we're all focused on the same thing, Josh. It's just making sure that we have a strong strategic position in place to support the business going forward.

Got it. And then just one last one, just to put the lawsuit against US Mag. Any key dates you can provide? And then, what damages are you pursuing? Is it quantifiable at this point?

Yes. Well, right now, the outlook is for the trial begins early in 2023. And when we filed the lawsuit in April, in the filings, we listed that roughly there been $10 million. But that's a running total. They certainly added to that in the second quarter with their performance and inability to meet their contractual obligations. And so that keeps running up. And then it's still to be determined whether or not additional cost will be rolled into even further on that litigation. So we believe we have a strong case. We're well prepared.

And I want to share this, we learned how not to treat customers when you go into a period of something like a force majeure. So unlike how we've been treated, we're communicating with our customers on a daily basis and we are absolutely focused on returning to full production very soon to minimize any impact short-term or long-term to any of our customers. So we take all of these very seriously and we intend to pursue these things with great earnest.

And our next question comes from Michael Glick from JPMorgan.

Just one question from me. How should we think about margin progressions in the half of the year?

Michael, you broke up on us. We didn't get that.

Sorry. Yes. How should we think about margin progression for the back half of the year?

Michael, you're still really breaking up. Can you try one more time? We understand it's about margins on something.

It looks like he has dropped off.

Okay.

We don't have questions in the queue. Oh, wait, we have got one more from Emily Chieng.

Keith and Neal, maybe just a follow-up on that prior question. I think it was around margin progression for the remainder of the year.

Yes. So the third quarter we know will be impacted by partial production from the packaging industry, packaging side of the business. So we really don't have an outlook right now of what that may be. We do anticipate, however, moving into the fourth quarter with hopefully production back to full levels and then we will have also the outages we have in our Trentwood facility. So we expect to be able to return back to those margins, I hope for the full year in the fourth quarter of this year. And the third quarter, it's to be determined based on how fast we can return to full production.

Understood. And maybe just to follow on the topic of costs. I think energy and labor and manufacturing costs continue to be elevated during the second quarter there. But any sort of line of sight to perhaps labor or manufacturing easing or what sort of -- the path ahead for those pieces?

Sure. Well, I quite frankly feel we're in really good position from a pricing perspective on all our products. In every category, we've been able to move costs through fairly securely and I think we've offset the majority of those costs. The few that have not and that impacted and that Neal reflected, it's really just a reflection of a lag of a cost. We expect some of these costs. If you remember, we put position the ability to move these costs, especially in packaging through on a shorter time line with our customers there than the annual contracts that allow.

And so there is a lag in securing those costs. But overall, we actually believe that we have covered most of our costs. We believe some of these efficiencies, when they get the supply chain issues behind us and some of the outages, we believe once we return to high efficiency levels, we're going to be able to actually begin cutting back on some of those costs. So labor is obviously a little higher, but we think we've offset those costs. So I think our position should be improving as we go into, especially the fourth quarter.

We have no more questions at this time. I'll turn it back to the speakers for any closing comments.

Okay. Well, thank you for joining us today. We look forward to updating you on our third quarter results later in the year. All right. Thank you.

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.