Kaiser Aluminum Corp Q4 FY2022 Earnings Call

Greetings, and welcome to the Kaiser Aluminum Corporation Fourth Quarter and Full Year 2022 Earnings Conference Call. It is now my pleasure to introduce your host, Kim Orlando, with Addo Investment Relations. Thank you. You may begin.

Thank you. Good morning, everyone, and welcome to Kaiser Aluminum's Fourth Quarter and Full Year 2022 Earnings Conference Call. If you have not seen a copy of our earnings release, please visit the Investor Relations page of 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 Financial Officer, Neal 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 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, 2022, which will be filed later today, February 23, 2023. 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 have 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, Kim, and thank you all for joining us for a review of our fourth quarter and full year 2022 results. Turning to Slide 6. Before we begin today, I wanted to remind everyone of our recently announced change to the presentation of our adjusted EBITDA to discontinue the use of adjustments to plant-level LIFO and the consequential impact on certain other non-GAAP measures. Please refer to our press release issued on January 26, 2023, as well as our earnings press release and supplemental slide presentation for further details on this matter. While 2022 was a highly challenging year for Kaiser amid unprecedented supply chain disruptions and ongoing inflationary cost pressures, we made remarkable progress to position the business for success. Beginning first with our results. As anticipated, the challenges at our packaging operations at Warrick continue to weigh on our performance in the fourth quarter. Adjusted EBITDA in the fourth quarter was relatively consistent with the prior quarter at approximately $30 million, primarily reflecting headwinds associated with our ability to increase prices to recover higher commodity and input costs, coupled with lower packaging shipments as we experienced some destocking, primarily by beverage customers at the end of the year. For the full year, adjusted EBITDA declined to $142 million due mainly to significant supply chain disruptions at Warrick that have since been resolved. Additionally, a compression in market-driven scrap discounts negatively impacted both the fourth quarter and second half of the year in 2022. In an effort to minimize the impact on our customers due to ongoing supply disruptions we experienced last year, we purchased metal in the second half of 2022 at a higher cost, which led to a metal inventory imbalance due to lower scrap utilization. We estimate incremental cost in the fourth quarter of $19 million due to inventory imbalance and unrecovered alloy costs. For the full year, total incremental cost of $73 million included those costs previously identified due to supply chain disruptions at Warrick, along with unusual freight and third quarter outage costs at our Trentwood facility. We expect the majority of these imbalances and the resulting higher costs associated with these actions to dissipate over the next several quarters. The demand environment for the quarter was mixed as we experienced destocking in general engineering rod and bar and packaging in the quarter. Aerospace demand continued to improve and shipments sharply increased in the quarter as our Trentwood facility resumed normal operations after successfully completing a major outage in the third quarter. Automotive demand remains steady as the industry continued to recover from its semiconductor and other supply chain challenges. Now turning to Slide 7. I'd like to now discuss some of the areas in which we've made significant progress in 2022 to position Kaiser for success. Beginning with Warrick. After completing this transformative acquisition in 2021 and resolving the various supply chain issues that hampered our performance in 2022, we have refined our strategy to best capitalize on the long-term growth opportunity ahead of us. First, we made changes to our organizational structure at Warrick, which went into effect at the beginning of this year, to augment the existing management team with several seasoned Kaiser leadership members. The combined team is highly focused on accelerating the integration of Warrick into Kaiser's operating system. Second, we made solid progress working with our packaging customers to negotiate improvements related to the timing of contained metal and alloy price adjustments facilitating the pass-through of higher commodity and input costs in existing customer contracts to help mitigate the quarterly impact of higher material and other inflationary costs on our business. While we were pleased to have successfully renegotiated certain of our contracts with key customers, additional discussions are ongoing. Third, we further diversified our supply base to lower our reliance on any single supplier or geographical region. Our new contracts enabled us to flex our volumes to better align with customer demand. And finally, we are prioritizing investments for growth through our roll coat capacity expansion project, which is expected to convert approximately 25% of our current output to higher-margin coated products. With the building mostly completed and equipment now beginning to arrive, we are focused on readying the site for startup in early 2024, with the goal of being fully operational by mid to late 2024. In addition, we are continuing to make progress with the physical separation of our Warrick facility from the adjacent Alcoa smelter and power plant, which we anticipate finalizing by early 2024. Longer term, we intend to increase our use of recycled materials as a percentage of raw materials at Warrick to increase the sustainability of our packaging products. Lastly, following the abrupt cessation of magnesium deliveries to Warrick last year from one of our suppliers, U.S. MAG, which led us to declare force majeure during the third quarter of 2022, we are actively pursuing damages through litigation. Currently, all of our magnesium requirements have been secured through 2023 and partially into 2024. We remain bullish on the long-term outlook for our packaging business, following the positive strides we made in 2022 and guided by our refined strategy as we move forward. Moving to Slide 8. Beyond our packaging operations, we remained well positioned to benefit from the recovery we've been experiencing in aerospace and continued demand for general engineering products following the completion of a long-planned major outage at our Trentwood facility in the third quarter of 2022. The mill is back up and running, with lead times remaining extended. In summary, 2022 was a pivotal year in Kaiser's evolution as we laid the necessary groundwork to position our company for long-term sustainable growth. I want to thank our team for their dedication and perseverance through the various supply chain disruptions and for maintaining a commitment to safety. Our teams achieved strong safety performance in 2022, even as we experienced historically high turnover rates, hiring and training more than 900 employees, a strong testament to our safety-minded focus and processes. While many monumental hurdles are now behind us, we believe that challenges will continue as they relate to broader macroeconomic uncertainty marked by ongoing inflationary pressures, supply chain inconsistencies and labor turnover. As such, we remain intently focused on continuing to pursue cost reduction efforts in our operations, improving efficiencies as our operations stabilize, and continued commercial actions to improve our margins. While our efforts will take time to manifest, we are confident in our go-forward strategy and our ability to execute, given our solid market position as a key supplier in diverse end markets with strong secular growth characteristics, strong customer relationships, and multi-year contracts with key strategic partners. I'll now turn the call over to Neal for more detail on the quarter.

Thank you, Keith, and good morning, everyone. Before I discuss our full year and fourth quarter 2022 results, as Keith highlighted, I want to remind everyone of our January 26, 2023 press release, where we announced changes to the presentation of certain non-GAAP financial measures following discussions with the Securities and Exchange Commission staff. Part of our discussion with the SEC staff, we renamed value-added revenue, or VAR, to conversion revenue and revised our presentation of adjusted EBITDA, adjusted operating income, adjusted net income and adjusted EPS to discontinue the use of non-run rate adjustment items identified as adjustment to plant-level LIFO. Separately, we revised our calculation for hedge costs of alloyed metal effective for the full year ended December 31, 2022. Please refer to the January announcement, our earnings release and slide presentation for additional details. Now let's turn to Slide 10. For the full year 2022, conversion revenue was $1.4 billion. Note that the impact of the changes we instituted beginning in 2022 to more fully reflect contained metal pass-through in our hedge cost of alloyed metal in comparison to our historical presentation conversion revenue resulted in roughly $112 million conversion revenue reduction in 2022. Turning to Slide 11 and reviewing our conversion revenue by end market. Aero high-strength conversion revenue totaled $103 million in the fourth quarter of 2022 after an $8 million adjustment for incremental alloyed metal, reflecting a 25% improvement on a 28% increase in shipments over the prior year quarter. Growth in shipments was driven by improving demand for commercial aerospace applications in addition to strong plate shipments following our third quarter plant outage at our Trentwood facility. For the full year 2022, aero high-strength conversion revenue totaled $356 million, up 13% over the prior year, after a $32 million adjustment for alloyed metals, reflecting a 15% increase in shipments driven by improving commercial aerospace demand and continuing strong demand for our biz jet and defense applications. Moving to Slide 12. Packaging conversion revenue was $134 million in the fourth quarter, up 2% year-over-year after a $23 million adjustment for alloyed metal. Shipments were 16% lower year-over-year as we work to return to a more normalized operation following the declaration of force majeure at our Warrick operation in the third quarter of 2022, in addition to lower shipments due to destocking in the beverage can markets. For the full year 2022, packaging conversion revenue was $555 million, up 42% after adjusting for $49 million for alloyed metal on a 21% increase in shipments over 2021. As a reminder, our packaging shipments in 2021 reflected only nine months of activity as the acquisition of Warrick closed on March 31, 2021. In addition, our full year 2022 shipments were negatively impacted by approximately $57 million due to the magnesium-related force majeure event that occurred during the third quarter of 2022. Now moving to Slide 13. General engineering products conversion revenue for the fourth quarter was $92 million after the impact of a $4 million alloyed metal adjustment. General engineering conversion revenue was up 26%, driven by higher pricing, coupled with a 7% reduction in shipments, which was predominantly due to normal seasonality and destocking at service centers for our extruded rod and bar products. For the full year 2022, general engineering conversion revenue was $367 million, up 23% after a $22 million impact for alloyed metal, led by higher pricing and a modest 2% year-over-year increase in shipments, given the destocking of our extruded rod and bar products and the impact of the third-quarter treatment planned outage. And moving to Slide 14. Auto conversion revenue was $25 million after a $2 million adjustment for alloyed metal, up 10% over the fourth quarter 2021, driven by a 6% increase in shipments and improved pricing. For the full year 2022, auto conversion revenue was $96 million after a $7 million adjustment for alloyed metal, relatively flat year-over-year on a modest 3% increase in shipments compared to 2021 as shipments remain stable amid persistent industry supply chain issues. Additional detail on conversion revenue and shipments by end-market applications can be found in the appendix of this presentation. Now turning to Slide 15. Reported operating income for the full year 2022 was $4 million, including $15 million of additional depreciation expense predominantly related to the Warrick acquisition. After adjusting for $31 million of non-run-rate charges, including a $24 million noncash impairment of goodwill and other intangibles related to our Warrick acquisition, a $3 million adjustment to our environmental reserves related to historical PCB cleanup activity at our Trentwood facility and a $2 million restructuring charge related to our corporate office relocation, adjusted operating income was $35 million, down 62% year-over-year. Moving forward, we are flexing our highly variable cost structure to match current demand, in addition to initiating staffing reductions in our corporate plant overhead structure as we complete the full integration of Warrick into our operations and finalize relocation of corporate headquarters at Franklin. As a result, we expect to take additional restructuring charges over the course of the next year as we identify and initiate these additional cost reduction actions. For the fourth quarter of 2022, reporting operating loss was $22 million. After adjusting for the $25 million of non-run-rate charges I just discussed, adjusted operating income was $3 million, down 85% year-over-year. For the full year 2022, our effective tax rate was 21.9% compared to 22.9% in 2021. For the full year 2023 and over the long tern, we expect our effective tax rate before discrete items to be in the low to mid-20% range under current tax regulations. Further, we anticipate that our cash taxes will remain in the low to mid-single digits until we consume our federal NOLs, which, as of year-end 2022, were $161 million. Reported net loss for the full year of 2022 was $30 million or $1.86 loss per diluted share compared to a net loss of $19 million or a loss of $1.17 per diluted share in 2021. After adjusting for the non-run rate items noted, adjusted net loss for '22 was $2 million or a loss of $0.14 per adjusted diluted share compared to adjusted net income of $33 million or $2.03 per adjusted diluted share in 2021. Reported net loss for the fourth quarter of 2022 was $26 million or $1.66 loss per diluted share compared to net income of $2 million or $0.11 income per diluted share in the prior year period. Adjusted for non-run rate items noted above, adjusted net loss for the fourth quarter of 2022 was $7 million or $0.45 loss per adjusted diluted share compared to adjusted net income of $5 million or $0.33 per adjusted diluted share in the prior year quarter. Turning to Slide 16. As Keith highlighted, adjusted EBITDA for the full year 2022 was $142 million, a decrease of $43 million compared to 2021. The decline predominantly reflects the impact of significant supply chain issues, specifically related to magnesium and hot metal supply in our packaging operation, which we have extensively discussed in prior quarter earnings calls. Reduced packaging and plate shipments due to the magnesium-related force majeure, we took in the third quarter, coupled with the third-quarter planned outage at our Trentwood operation, further impacted results as we discussed in our third quarter earnings release. In addition, higher inflationary driven costs during the year, which we are aggressively working to offset through pricing actions, cost reduction efforts, and efficiency improvement projects further impacted results. Adjusted EBITDA as a percentage of conversion revenue was 10.3% in 2022. Moving to Slide 17. Adjusted EBITDA for the fourth quarter 2022 was $30 million. Our fourth quarter adjusted EBITDA was relatively consistent with the third quarter of 2022 as anticipated and was down approximately $19 million from the prior year quarter. A year-over-year $91 million improvement in pricing and mix helped offset the impact of higher inflationary costs across our businesses, which we identified in manufacturing costs, including labor, energy, employee-related costs, and operating supplies. However, the quarter was impacted by lower scrap utilization and higher volume of purchase as we continued to recover from the supply chain disruption at our Warrick operation and higher unrecovered alloy costs, which, as indicated by Keith, was approximately $19 million. Our commercial teams remain focused on improving pricing to offset the impact of higher inflationary costs and have already achieved additional contract revisions towards the end of 2022 that will further assist us in operating in a higher cost environment as we move through 2023. Adjusted EBITDA as a percentage of conversion revenue was 8.4% in the fourth quarter of 2022. Now turning to a discussion on our balance sheet and cash flow on Slide 18. As of December 31, 2022, total cash of approximately $57 million and more than $558 million of borrowing availability on our revolving credit facility provide a total liquidity of approximately $615 million. There are no borrowings underneath the revolving credit facility during the fourth quarter. Subsequent to year-end, we elected to draw down on our revolver by approximately $19 million as we continue to invest in our growth capital projects, specifically the roll coat line and packaging. We believe our total liquidity remains strong with $539 million remaining available on our revolver and $33 million of cash, giving us confidence in our ability to be able to further our growth strategy and continue returns to our valued stockholders. As a reminder, our senior note interest costs are fixed at $48 million annually, and we have no debt maturing until 2028. For the full year 2022, our $142 million of EBITDA and available cash funded $170 million of working capital usage, of which $121 million predominantly related to inventory build. In addition, $143 million of capital, $46 million of interest, $50 million of dividends paid, and $6 million of cash taxes. We expect working capital to be a source of funds over the next few quarters as the business focuses on inventory rationalization, adjusting to a more normalized supply chain environment. On January 12, we announced our Board of Directors declared a quarterly dividend of $0.77 per common share, underscoring the confidence our Board and management have in our long-term strategy for profitable growth and increasing shareholder value. And now I'll just turn the call back over to Keith to discuss our 2023 outlook.

Thanks, Neal. Now I'll turn to our outlook for the first quarter of 2023. Starting with aerospace on Slide 20. We expect continued strong momentum for aero and high-strength shipments in the first quarter, with shipments sequentially approximately 5% higher in the first quarter versus the fourth quarter of 2022. And conversion revenue improving by 5% to 10% in the same period as the recovery continues in commercial aerospace towards pre-pandemic levels, which we believe should be attainable by year-end 2024. Rate increases for single aisle and wide-body jets are being planned for this year as supply chains improve, airline passenger miles continue to increase, and declarations by the airframers support a stronger 2023. The demand for business jet production remains strong and the backlog for business jets remains robust, with production increases set to grow each year over the next several years. Defense has been holding strong and is expected to continue as a result of increasing demand for the F-35 and other legacy platforms, which Kaiser is well positioned to support. Following the upgrades at our Trentwood mill and the competitive position of our other facilities servicing the aerospace and high-strength end markets, we remain bullish on our ability to service the incremental demand expected in the first quarter and beyond. Turning now to Slide 21, in packaging. With the most significant supply chain challenges experienced in 2022 at our Warrick rolling mill now behind us, we anticipate a return to more normalized operations in 2023 albeit with some lingering impacts of higher metal costs and a continued lag in price adjustments to fully pass through certain costs with one or two existing contracts. We expect continued destocking with some customers in the first quarter with those orders being moved into the balance of 2023. Shipments in the first quarter are expected to be flat to the fourth quarter of 2022, with conversion revenue down an expected 3% to 4% in the same period comparison due to a slightly unfavorable mix. As indicated previously, our capacity for 2023 remains fully committed, and our targeted growth investment in a new roll coat line is expected to become fully operational in 2024. Accordingly, we remain very excited about Warrick's long-term potential and competitive positioning in the packaging market. Now turning to general engineering on Slide 22. Demand for general engineering plate and rod and bar products has slowed as distributor inventories further increased in the fourth quarter with distributors taking advantage of lower metal prices to pull ahead orders during the fourth quarter of last year. Also announced late last year was the Biden administration's restrictions on semiconductor chip exports to China, which resulted in softening demand for semiconductor plate from previous strong levels. That said, the slowdown in semiconductor plate has opened capacity at our Trentwood facility to accommodate the rising aerospace demand, highlighting a key benefit of our unique diversification strategy. Longer term, we believe demand will remain steady, led by the continued trend towards reshoring for the domestic supply of semiconductors, industrial, and machine tool end-use applications. Pricing remains stable for these products, and we expect shipments and conversion revenue in the first quarter to be down approximately 5% to 7% sequentially compared to the fourth quarter of 2022. Now I'll turn to Slide 23 and a review on automotive. Despite pent-up demand and expected higher build rates for trucks and light vehicles in North America in 2023, we continue to expect a slow recovery due to persistent challenges facing the industry. Currently, we don't expect a meaningful recovery in this market until mid- to late 2023. We expect shipments in the first quarter to be up 3% to 4%, with conversion revenue up 10% to 15% sequentially versus the fourth quarter of 2022, driven by improved pricing and pass-through costs on certain programs. Turning now to Slide 24 and a summary of my outlook. Holistically, we believe Kaiser is well-positioned to navigate the current demand environment prevailing in our end markets. EBITDA margins in the first quarter of 2023 are expected to improve approximately 200 basis points over the previous quarter, and we are cautiously optimistic our EBITDA margins will continue to strengthen as we move throughout the year and return to more normalized cost, improved efficiencies, and continued commercial actions. However, given continued strong inflationary pressures, ongoing macroeconomic uncertainty, and recessionary concerns, we will not be providing our outlook for adjusted EBITDA and margins for the full year 2023. In addition, we believe the full year 2022 adjusted EBITDA and margins represent the trough as we move into 2023. Further, we are well-prepared to address economic adversity given our strong liquidity position and ability to flex our variable cost structure. At the same time, we believe it is prudent to continually take advantage of the growth opportunities ahead of us while continuing our long-standing focus of managing debt and delivering solid returns to our shareholders. Looking at our capital allocation strategy, we remain committed to supporting the growth of our business in 2023 while concurrently continuing our track record of stockholder returns through quarterly cash dividends, which we have paid for 16 consecutive years without reduction or suspension. Our total CapEx planned for 2023 is approximately $170 million to $190 million, with approximately 60% of that dedicated to our growth initiatives, including our roll coat #4 expansion at our packaging operations and other projects to improve our capacity, quality, and sustainability. Major maintenance spending is expected to be approximately $40 million for the year, with approximately 30% of that spending to occur in the first quarter. Now turning to Slide 26. In summary, I'm very pleased with the progress we've made to position Kaiser for a stronger future. Importantly, our longer-term strategy remains intact, and we continue to believe we can deliver conversion revenue of approximately $2 billion and an EBITDA margin in the mid- to high 20% range, the timing of which remains subject to expected investments and macroeconomic conditions. With that, I'll now open the call to any questions you may have.

Our first question comes from Timna Tanners with Wolfe Research.

I'm looking to understand the factors in 2023 that are preventing you from reaching your EBITDA margin goal. Specifically, I'd like to discuss packaging and destocking, which I believe is expected to improve. Additionally, are there any ongoing supply chain issues or problems in certain markets? Could you provide more detail on the challenges you're facing in achieving the EBITDA margin goal and your plans to address them?

Sure, I appreciate your question. Let's start with Warrick. We identified about $73 million in additional costs that affected us in 2022, but looking ahead to 2023, we believe that 60% to 70% of those costs will not reoccur. Those burdens are behind us, and we do not expect them to continue in 2023. The remaining costs are expected to decrease further over the next few quarters as we address some delayed costs related to alloys, and as we normalize our inventories. Last year, we procured significant inventory during the force majeure period to ensure we didn't disadvantage our customers, and we will be working to smooth that out in the coming quarters. Additionally, our Warrick facility is now operating more steadily. The disruptions we faced last year caused significant inefficiencies, but those are beginning to stabilize and revert to more normal rates. We anticipate these improvements as the year progresses and will focus heavily on cost reduction. We expect to achieve $8 million to $10 million in cost savings throughout the year. Our efficiency gains will allow us to realize this. Regarding our contract negotiations, especially in packaging, we've improved pricing and pass-through conditions to help counteract the costs we've encountered. Over the last four to five quarters, we've increased our sales margins by around 20% and more, achieving better pricing and improved pass-throughs. The primary challenge has been the costs we've faced. As for your question on destocking, while I’m not sure "transitory destocking" is the best term, we believe it is a temporary situation. There was excess material in inventory, and some changes in consumer behavior occurred. Our customers feel this will shift back toward the end of the year. Generally, the first quarter is one of the slower periods for packaging, so we expect activity to ramp up in the second and third quarters, returning to the levels we saw in the first quarter of last year. Our outlook remains positive; if the market remains stable, we have favorable conditions in place, including relatively good price increases and a stabilizing operational environment, which will help us to manage our costs effectively.

That's really helpful. So could we assume that if you see the sequential improvement that you described and for the reasons that you just gave, could you be closer to that targeted EBITDA margin exit 2023?

I see it this way, Timna. Looking back at 2022, we faced some challenges, but we achieved $142 million in EBITDA. If we account for the $73 million in additional costs and the LIFO impact adjustment of about $22 million on EBITDA, our business would have generated approximately $237 million in EBITDA, which translates to around a 17% margin. At the start of last year, we expected our business to deliver a margin between 17% and 20% before we faced unexpected challenges. I believe we are on the right path despite encountering several unique factors. The uncertainty for 2023 lies in the potential for a hard or soft landing regarding any recession. We have noticed a slight slowdown in the first quarter, but we are not uncertain about how the rest of the year will unfold. As we mentioned in our prepared statement, we believe Q4 was the lowest point, and we are working our way back up. If the year unfolds as we anticipate, we expect to see a consistent improvement returning to our historical margins.

Okay. Helpful. If I could squeeze one last one in. Can you provide any further detail on the mentioned lawsuit against U.S. MAG and your insurance recovery potential there?

I can't provide any comments, Timna, while that is in progress. We're in the early stages right now and expect to have a more definitive explanation by the end of the year. However, we believe there were damages that the force majeure was not under accepted conditions, and it has impacted our company. We are prepared to fight to recover those damages.

Our next question comes from Emily Chieng with Goldman Sachs.

My first question is about the Warrick roll mill and the roll coat line you are currently constructing. As you consider it coming online, do you have any thoughts on supply chain issues that might affect the timeline for when it will be operational? Additionally, before it starts up, will you need to take any time offline at Warrick to install and commission it?

Thank you for your question, Emily. The Warrick roll coat line has faced some challenges due to inflation and timing, but we are currently on track. While inflation has put some upward pressure on costs, such as steel, these are within our anticipated ranges. The building is up, and the equipment is starting to arrive, with expectations to have everything in place by early 2024. Our operations are completely segregated, so there should be no impact on day-to-day activities. We have a qualification plan to ensure we are fully operational and ready to begin supplying by mid to late 2024. We are particularly excited about the potential this investment brings, as it will significantly improve margins on coated products compared to non-coated, by more than three times. This enhancement will affect around 25% of our existing capacity, and a substantial portion of this business volume is already under contract. We're enthusiastic about the positive impact this will have on our earnings, both in the short term and into the next decade. Overall, everything remains on track.

Great. And then a follow-up. I'd just love to hear a little bit more color around sort of your contract discussions, and maybe if there's been any incremental progress made on getting improved pricing and pass-throughs on a couple of these different cost items there. What has progressed since the last quarter update? And then how do you think about what the components are that we should embed into this new hedged cost of alloyed metals? What are the alloys there specifically that we should start tracking more closely?

Yes, the contract negotiations are progressing well. We're experiencing better pricing on existing contracts that we purchased in 2021, and we're also seeing improvements in the current shorter-term contracts. We've noted over a 20% increase in conversion revenue per pound over the last five quarters. Looking ahead, we anticipate improved product mix and pricing opportunities, along with inflationary pass-throughs that will help us address the challenges we faced in 2022 and expect this year. Overall, the environment for improvement, pass-throughs, better mixes, and our ability to target high-margin niche areas while maintaining low-cost operations is strong. In 2022, we identified challenges but have made significant progress with customers on how to manage these costs. Typically, cost adjustments occur annually, but we've implemented strategies with our customers to evaluate quarterly impacts and expedite cost adjustments. Importantly, we've discovered more opportunities for commodity pass-throughs. We've identified some gaps in our contracts, particularly regarding magnesium, where not all costs were being passed through. We are actively working with our customers to correct these discrepancies. As for the alloys we're monitoring, we are looking at all types. Magnesium is a priority, but we are also tracking aluminum, manganese, copper, and energy costs. Supply disruptions in the second half of the year have impacted our ability to procure the right materials, such as more scrap and lower-cost units, forcing us into higher costs. Moving forward, we expect to manage these costs much more effectively.

That is all the time we have for questions. I'd like to hand it back to Mr. Keith Harvey for closing remarks.

Okay. Well, thank you for joining us today. We look forward to returning to more normalized operating conditions with stronger profitable growth in 2023. And I look forward to updating you on your progress in April. Have a great day.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.