Ladies and gentlemen, thank you for standing by and welcome to the Kaiser Aluminum First Quarter 2020 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to introduce your host for today’s conference call, Ms. Melinda Ellsworth. You may begin.

Thank you. Good afternoon, everyone and welcome to Kaiser Aluminum’s first quarter 2020 earnings conference call. If you have not seen a copy of today’s 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 Chief Executive Officer and Chairman, Jack Hockema; President and Chief Operating Officer, Keith Harvey; Senior Vice President and Chief 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 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-Q for the 3 months ended March 31, 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 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. Any reference in our discussion today to EBITDA means adjusted EBITDA, which excludes non-run rate items, for which we have posted 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 Jack Hockema. Jack?

Thanks, Melinda. Hope everyone’s in health and safety today, welcome for joining us on the call. While our comments would normally focus on our record first quarter results; today, Keith, Neal, and I will focus on our preparedness and actions addressing the pandemic. Turning to Slide 6, adherence to our longstanding business cycle strategy has prepared us well for unexpected economic adversity. Execution of the strategy depends upon the strong preferred supplier position, ability to quickly flex our variable costs, strong liquidity and conservative leverage. Liquidity and leverage are the most critical features of the business cycle strategy. We focus on maintaining sufficient liquidity to fund our tactical and strategic needs through a severe economic downturn. In every board meeting, we review our 5-year contingency liquidity plan assuming a deep recession to ensure that as we make strategic investments, we have sufficient liquidity to remain strong through the economic cycles. Our guidelines for leverage are designed to provide financial flexibility and access to diverse sources of capital. Turning to Slide 8, in the current situation, the health and safety of our employees is and continues to be our first priority. We are classified as an essential business enabling all of our facilities to continue operations as they comply with social distancing and CDC guidelines. We have implemented steps to protect our employees and visitors to our sites; and where possible, our employees are working remotely. Keith will provide additional color regarding our operations and our procedures to maintain a safe and healthy operating environment in our facilities. With nearly $700 million of liquidity and a 0.7x net debt leverage, we are well positioned to navigate a recession without resorting to survival cost-cutting measures that could compromise our ability to promptly respond to our customers’ needs when the economic recovery begins.…

Thanks, Jack. The health and safety of our employees always is our top priority. However, our focus has been amplified with the onset of the COVID-19 virus. Our businesses are included in the critical manufacturing sector defined by the U.S. Department of Homeland Security and recognized as essential businesses by local and state authorities. We have continued to operate all of our facilities and have initiated a number of actions to best protect our employees and maintain a safe and healthy environment. We have implemented local, state and federal recommendations to reduce the spread of the virus at all of our facilities and continue to monitor recommendations for further actions. We are also working closely with our employees and local unions to stress the importance of following CDC guidelines to mitigate the risk of exposure to COVID-19. In addition, where possible, our employees are working remotely until we return to normal operations, and we have implemented additional health and safety protocols for all outside contractors and service providers required to enter our facilities. A number of our employees have displayed symptoms and have been tested and others have been quarantined or self-isolated since the pandemic began. To-date, we have had no employees test positive for COVID-19. Our employees and their families are concerned for their health, jobs, and financial security. As we flex operations in response to changes in business conditions, we have also taken initiatives to support our furloughed employees. We have revised our policies to provide any employee experiencing a job interruption, 60 days of continued benefits with the company waiving the premiums for the continued coverage. Combined with the enhanced unemployment benefits provided by the CARES Act, we expect our furloughed employees to receive unemployment compensation similar to their regular pay. Moving to our markets and operations,…

Thanks, Keith. Turning to Slide 15, as Jack discussed, our business cycle strategy and planning process always includes a severe recession stress test of our liquidity under a variety of scenarios to focus on sufficient liquidity to fund our operations, interest, taxes, regular dividends and both sustaining and strategic capital investments. As of March 31, our balance sheet remains strong with the current net debt leverage of 0.7 with approximately $346 million of cash and short-term securities. In addition, our $375 million revolving credit facility had approximately $342 million of borrowing availability for our total liquidity of $688 million as of quarter end. As of March 31, our revolving credit facility was undrawn and currently remains undrawn. As a reminder in November 2019, we replaced a previously existing revolving credit facility with a new $375 million senior secured revolving credit facility with the maturity date of October 2024. In addition, we issued $500 million of unsecured 4 5/8 senior notes with maturity dates of March 2028. Both our revolving credit facility and unsecured notes have covenants that allow us to operate our business with limited restrictions and significant flexibility. We currently do not anticipate any material change in our working capital requirements and our accounts receivables are supported by our strong customer base. In addition, we have ample credit lines with highly rated hedge counterparties. With financial strength and flexibility, we have continued to address the pandemic economy while also positioning for an economic rebound and potential opportunities that enhance our strong competitive position. Turning to Slide 16, value-added revenue for the first quarter of 2020 was approximately $217 million, down approximately 1% compared to the first quarter of 2019 on a 4% decline in shipments driven primarily by a planned exit of other non-strategic applications and lower automotive shipments…

Thanks, Neal. As Keith mentioned, commercial aerospace applications represent one-third of our – approximately one-third of our total value-added revenue and demand is ultimately driven by air passenger travel. Turning to Slide 19, in the history of airline travel, the current crisis is one of many over the past 60 years. In previous cases, despite the thought that maybe its different this time, travel returned to the long-term growth trend within a short time after the crisis. While this is a challenging time for the airlines, we expect that once again air travel will be restored to the long-term growth trend after a period of adjustment. Turning to Slide 20 and the commercial airframe order backlog, the industry has enjoyed a large and growing backlog since 2005. What we don’t often reference is that for decades prior to 2005 a much smaller backlog was normal. While it’s difficult to predict to what orders and build rates will be during and after the pandemic, the current 8-year backlog could decline more than 50% and still be in line with the long history prior to 2005. We are often asked for perspective to be gained from the great recession. Turning to Slide 21, the graph illustrates annual shipments from 2005 to 2019 for each of our major market segments. In 2009, our total shipments declined 23% from 2008 and it took 2 more years until 2011 to return to the prior peak. Kaiser’s aerospace and high strength shipments declined only 8% in 2009 from the prior year, while commercial airframe builds actually increased in 2009, the lower shipments were a result of supply chain destocking. Kaiser’s general engineering shipments declined 27% year-over-year in 2009 driven by weakening industrial demand and by reduced orders for armor plate as the Iraq war was winding…

[Operator Instructions] Our first question comes from Curt Woodworth with Credit Suisse.

Yes. Hey, Jack and everyone. How are you?

Good. Good morning.

Happy to hear that no one tested positive for COVID. On the aerospace outlook, could you just frame some of the parameters around the VAR potentially being down 20% to 25%, given the start to the year that would imply potentially down 30% to 40% in the back half of the year? And just kind of want to get a sense for what are you assuming for build rates? Are you assuming any destocking into that number as well? That’s my first question.

Well, let me say first, you didn’t get 30% or 40% from us, you got that somewhere else, because the only outlook we gave was that our total aerospace and high-strength would be down single digits, I believe, for the year. So, that was the only outlook that we gave. And Keith is talking specifically to just the commercial aerospace portion of the aerospace and high strength. And I will let Keith elaborate on the outlook.

Yes, good morning, Curt. We – the large commercial aerospace is the largest component of our total aero and high-strength total VAR, value-added revenue. The other components which we also look at are in the regional jets, business jets, and military applications. And we also have a subset of the – which is included in industrial and those are generally in high-strength structural components for auto and GE. So, we have a lot of these products that go into other than the large commercial airframe. That’s why we pulled out large commercial, it was because it’s such a large segment and it’s heavily identified with Boeing and Airbus.

Right. Sorry, I should have been more clear. Within the commercial piece of that, can you provide any color in terms of the assumptions on build rates that underlie just the commercial OE aspect of the guide?

Well, Keith and his team are heavily engaged with our major strategic customers in this case on a day-by-day basis. We are always heavily engaged, but things are changing dramatically. So, this is based on conversations with our major customers. And as he just said, that’s roughly one-third, actually a little – slightly higher than one-third of our total value-added revenue. And we expect based on extensive discussions with our customers that, that value-added revenue year-over-year will be down roughly 20% to 25%.

Right, okay. And then in terms of the inventory situation, can you talk to how you feel about that? I mean, I recall from I think early ‘17 to mid-to-late ‘18 we went through this sort of lengthy destocking process which I think at that time was very functional around the wide-body build rate cuts. Now, this is obviously much more pronounced. Do you have any sense of how the supply chain is sort of handling this? Would you expect significant de-stocking in the interim?

Well, let me just restate what we have said in the past, and I will let Keith give additional color, because again he is really close to all this. We did say that there was de-stocking in ‘17 and ‘18. We said at the time that we felt it was overdone and in fact it was. And that created two really, really strong orders in the second half of the year because the supply chain got stretched way too thin. So, we felt we were pretty close to equilibrium or maybe even still thin coming into this year, but then I will turn it over to Keith here.

Yes. And so, as Jack stated we are speaking daily and have been speaking daily with our customers in this area really since the beginning of the year. Some of our customers have experienced other things that they are working on, Boeing for instance on the 737 MAX as they are looking and remain focused to bring that platform back online, but we have generally looked at this and we have included with them. We have got mutual declarations that we have discussed, and our outlook includes those discussions which also include what their needs may be, their inventory situation, and all, so that’s inclusive of our comments on our outlook.

Okay. And then just one last one, on capital spending and free cash flow, could you quantify what the AMT credit could be and then how quickly can you flex capital spending down, and any update on, if you can, maybe what a good estimate for this year for CapEx would be? Thank you very much.

Yes. So, Neal in his comments said we spent $21 million CapEx in the first quarter. I said in my comments and we have said this for a long time that sustaining CapEx is roughly 75% on the average of depreciation, which would be roughly $35 million a year or in this case starting April 1, roughly $9 million per quarter, and I double underscore average on that basis. And we can flex that capital spending quickly. Keith has moved aggressively to put a cap on capital spending. The way I have characterized it when we are talking to investors is right now this is a battlefield. We are in a foxhole in this battlefield is covered with smoke. So right now, we are hunkered down in our foxhole and we are waiting for the smoke to clear, then we will decide where we go. But you can assume going forward although there may be some carryover from the first quarter, then we should be operating at $9 million, let’s say for the rest of the year $27 million or less as we go forward for the rest of the year.

And then -- in regards to your question on the AMT credits, as we go through the CARES Act, we are now looking at that to be in the area of $5 million to $10 million for this year.

Great. I really appreciate it. Stay well.

Yes. Thanks, Curt.

Our next question comes from Josh Sullivan with the Benchmark Company.

Hey, good morning.

Hey, Josh.

Just expanding on the variable cost there, can you talk a little bit about just what you are flexing there outside of CapEx? Anyway to help us understand the fixed cost to maybe utilization piece of that equation versus how much variable cost flex you are able to execute in the model?

Well, for the first time, you can mark this down as a historic day because we have been asked several thousand times over the past few years about our variable cost, but we are going to put some clarity on that today. So what I said in the prepared remarks is that when you look at COGS, the metal portion of COGS as everyone knows is 100% variable for us. The non-metal portion of COGS roughly actually more than two-thirds of the non-metal portion of COGS is variable. And we can flex that pretty quickly. There is always a tail when you start to flex or chasing volume down and then there is a tail of things like benefits and other costs, materials on order, those kinds of things, but it should stabilize relatively quickly after a month or two as soon as volume stabilizes. So, we did it during 2009. We chased it down. And then we get the opposite effect when we start to get to the economic recovery we start flexing back up. Again, there will be a tail. So we will actually get the benefit back when the economic recovery comes.

Got it. I really appreciate that. And then just as far as the defense business, are you seeing defense customers step into the void? Is there any pickup in ordering either to take advantage of the supply or just to support the industrial base?

Well, hi, Josh, it’s Keith. We are seeing a rise in defense orders. The programs that I mentioned earlier continue unabated and good strong outlook in front of those multi-year continued growth still being anticipated. There is also a segment in ours with munitions and other things that we cover, but we are seeing that order rate pickup quite frankly since the beginning of the year. I will say it’s not since the COVID-19, but at the beginning of the year, we are seeing a large pickup, yes.

[Technical Difficulty]

Josh, you are breaking up. Excuse me, Josh, you are breaking up. Can you try to ask the question again? We didn’t hear it.

[Technical Difficulty]

I am sorry. All I heard was preferred supplier.

Yes, we need to – you need to lean out the window there, Josh, and get a stronger signal so we can hear the question. Are you there?

Hey, it looks like his line got disconnected.

Well, okay, we lost Josh. Keith, he was asking about preferred supplier, why don’t you elaborate on that a little bit?

This has been a time, we have spent decades with our large customers, these close relationships. We have talked often about our performance metrics, our supply position, our – the performance of our products. We are really seeing a good strong dialog with these customers on our outlook. We are considered strategic with all of our major customers and the dialog has been continued even though a lot of that dialog has been what Josh just tried to work with is vis-à-vis working from home. So I would say that we are as close to these customers as they are. They are seeing a lot of smoke on the battlefield as well. And I think we are all working towards just as soon as we have clarity to being able to give a little better picture going forward.

And I am not showing any further questions on the phone lines at this time.

Okay. Well, let me wrap up with one final comment here. Just for those of you who didn’t follow all this, I will do a little bit of the algebra for you. We didn’t give an outlook here. But if you put together Keith’s two outlooks, he commented on the commercial aerospace and the military applications, which combined represent about 45% to 50% of our value-added revenue. And if you do the algebra on those that turns out to be roughly a 15% to 20% downturn in value-added revenue year-over-year on roughly half of our business with the remaining half, automotive and general industrial yet to be determined, but that’s the best outlook that we have now. We think we are very well prepared for this, but you never know. This could be a black swan event or severe black swan, so we are just hunkered down as we said and waiting for the smoke to clear and we are ready to move as soon as the smoke clears. Thanks for joining us on the call today and we look forward to updating everyone on our second quarter call in July. Thank you.

Ladies and gentlemen, this does conclude today’s presentation. You may now disconnect and have a wonderful day.