Kaiser Aluminum Corporation

Welcome to the third quarter 2020 Kaiser Aluminum Earnings Conference Call. My name is John Aube, your operator for today's call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. During the question-and-answer session, if you do have a question, press star then 1 on your touchtone phone. And now I'll turn the call over to Melinda Ellsworth.

Good afternoon, everyone, and welcome to Kaiser Aluminum's third quarter and first nine months 2020 earnings conference call. If you have 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, Senior Vice President and Chief Financial Officer Neil West, and Vice President and Chief Accounting Officer Jennifer Huey. Before we begin, I'd like to refer you to the first three 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, 2019, and Form 10-Qs for the quarters ended March 31, 2020, and June 30, 2020. 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've included non-GAAP financial information in our discussion. Reconciliations for the most comparable GAAP financial measures are included in the earnings release and in the appendix of the presentation. Any reference to 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 good morning, everyone. We delivered solid third quarter results driven by a rebound in automotive demand and continued strength in demand for our defense and general engineering applications. Following the onset of COVID, we have continued to aggressively flex costs to align with changes in market conditions. Although demand for our commercial aerospace applications in the third quarter dropped sharply from the strong first half of the year, We continue to reiterate the outlook for the second half of 2020 given in our second quarter earnings call. Strong execution by our employees enabled us to deliver solid third quarter results in very challenging conditions as we continue to deal with varying market dynamics influenced heavily by the impact of COVID. Total liquidity remains strong at $1 billion. Our capital allocation priorities and our financial guidelines remain unchanged, and we continue to sustain our quarterly dividend. Let me comment briefly on the end markets. As we noted on our second quarter earnings call, we anticipated the full year decline in demand for our commercial aerospace applications would be reflected in our second half results as the large commercial aircraft manufacturers continued to deal with production interruptions and slowing deliveries as a result of significantly reduced domestic and international air travel. During the quarter, we quickly moved to lower costs in our aerospace and high-strength focus facilities and pivot available capacity to other markets where possible. In addition, we continued working with our customers on modifications to existing declarations. As we have previously noted, we have long-term strategic relationships with our customers, many with multi-year agreements in place that allow both parties to mitigate the short-term impact of changing market conditions and meet agreed-upon commitments. The continued strength in demand for our defense applications has partially offset the decline in commercial aerospace and we have been successful in adjusting capacity and lead times to meet double-digit, year-over-year growth in demand for these applications. Turning to automotive, as we expected, our automotive extrusion shipments and resulting value-added revenue bounced back strongly in the third quarter to mirror our strong first quarter results as new program launches resumed. These launches and other recently awarded programs are expected to continue to drive growth through 2021 and beyond. With these expected increases in automotive demand, we have recalled virtually all furloughed employees in our automotive-focused facilities. We are well positioned to manage the expected longer-term growth for these applications with minimal additional investments. Our general engineering business continues to remain strong despite normal seasonal demand weakness in the second half. Solid service center demand for our Kaiser Select products and continued strength in the semiconductor and automotive in-market applications drove third quarter results. As I mentioned earlier, our ability to pivot aerospace plate capacity to meet the demand for general engineering applications enabled us to better meet demand and improve lead times for our customers. Pricing for these applications continued to remain stable during the quarter as the industry has responded to changing demand with adjustments to operating levels. I am pleased with how our employees aggressively address costs and manage spending in the quarter given the different dynamics in each of our end markets. While our aerospace and high strength facilities were ramping down to align with lower commercial aerospace demand, the opposite was occurring for those facilities serving automotive and general engineering markets, where we were ramping up to meet improving demand. Despite the challenge in managing our operations with these significant swings in demand, our results reflect our ability to flex our variable cost structure to changing levels and demand in an efficient and effective manner. As business levels improve, we expect increased operating leverage will drive margin improvement as incremental cost will lag volume increases. In addition to strong execution and aggressively managing the impact of the COVID virus in our facilities, our employees are also achieving record safety performance. I'm extremely proud of the work they're doing and the manner in which they're achieving these results. Turning now to our outlook on aero and high strength on slide number seven. We see a continued slow recovery for large commercial aerospace applications driven by longer than expected recertification of the 737 MAX, slower recovery in domestic and international air travel, and destocking in the supply chain. Destocking also occurred in the business jet supply chain as manufacturers dealt with temporary production delays due to COVID-19 outbreaks in late second quarter and early third quarter. As we reassess the full year outlook for these applications, we anticipate value added revenue for commercial aerospace will now be down approximately 30 to 35% year over year from our record year 2019 versus the 20 to 25% previously anticipated. Demand for our defense applications remains strong and is expected to continue into 2021. Moving to slide number eight, strong demand for our automotive exclusions is expected to continue in the fourth quarter with value added revenue and shipments similar to our strong third quarter results. Build rates for North American vehicles are currently projected to increase approximately 18% from a 12.9 million vehicle production rate in 2020 to over 15.2 million vehicles in 2021. In addition, we expect continued growth in aluminum extrusion content as consumer preference towards larger vehicles and light trucks drive demand. Moving on to slide number nine, We see continued strength in demand for our general engineering applications despite second-half normal seasonal demand weakness. In addition to strong service center and in-market demand, we continue to see the emerging trend for OEMs re-establishing domestic supply chains. Our KaiserSelect rod, bar, and plate products and our long-term service center partnerships uniquely position us to capitalize on these opportunities as they continue to develop. On slide number 10 and a review of our outlook summary, looking at the balance of the year, we reiterate our outlook for the second half of 2020 as communicated on our second quarter earnings call. We anticipate total value-added revenue in the second half will be down approximately 10 to 15 percent from the second quarter rate driven by lower aerospace and high strength sales, offset by continued strength and demand for defense, automotive, and general engineering applications, with EBITDA margin expected to be in the mid-teens. We have reduced costs to align with demand levels across the organization in our operations, and in support functions that will provide significant operating leverage as business levels continue to improve. As discussed in our second quarter earnings call, in addition to capital spending for critical, sustaining projects, we resume spending for other organic investment opportunities to further support automotive growth and enhance efficiencies throughout our operations. We continue to expect capital spending for the full year will be in the approximately $50 to $60 million. I'll now turn the call over to Neal to discuss the third quarter in more detail. Neal?