Kaiser Aluminum Corp Q2 FY2024 Earnings Call

Greetings, and welcome to the Kaiser Aluminum Corporation Second Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Kim Orlando with Addo Investor Relations. Thank you. You may begin.

Thank you. Good morning, everyone, and welcome to Kaiser Aluminum's Second Quarter 2024 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; and Executive Vice President and Chief Financial Officer, Neal West. Before we begin, I would like to refer you to the first four 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, 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 to EBITDA in our discussion today means adjusted EBITDA, which excludes non-run rate items for which we have provided reconciliations in the appendix. Further, slide five contains definitions and terms and measures that will be commonly used throughout today's presentation. 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 second quarter 2024 results. Turning to slide seven. Operationally, our businesses generally performed very well in the quarter as demand met or exceeded expectations. As discussed previously, we have been focused on stabilizing operations, improving efficiencies, lowering costs, and aggressively managing working capital. As a result, we generated EBITDA of $54 million during the second quarter, which includes a noncash GAAP LIFO charge of approximately $9 million, reflecting significant inventory reduction during the quarter. Neal will provide more details on the quarterly results in his comments. To summarize activity in our end markets, aerospace and high-strength demand mirrored our strong first quarter results despite a reduction of large commercial jet builds in the quarter. This illustrates the strength of our diversified focus and product mix in this category, which includes defense, space, business jets, and industrial applications, all of which remained healthy. In packaging, underlying demand was stronger than expected, but we were unable to capitalize with improved shipments mainly due to extended planned outages from the first quarter and an unplanned outage in our hot mill during the second quarter, which reduced our shipments. In general engineering, demand and pricing remained stable, following 18 to 20 consecutive months of destocking that abated in April. While in auto, we expect to continue to benefit from modest demand improvements and improved pricing. For the remainder of 2024, we will remain focused on the execution of our growth strategy, improving efficiencies across facilities, and continuing to execute our metal sourcing strategy to drive enhanced margin performance. I'll now turn the floor over to Neal to discuss the quarter in more detail, and then I'll be back to discuss our outlook. Neal?

Thank you, Keith, and good morning, everyone. I'll begin on slide nine with an overview of our shipments and conversion revenue. Conversion revenue for the second quarter was $369 million, a decrease of $10 million or 3% compared to the prior year period. Looking at each of our end markets in detail. Aero and high strength conversion revenue totaled $133 million in the second quarter of 2024, reflecting a 2% improvement on a 3% decrease in shipments over the prior year quarter. The increase in conversion revenue was driven by an improved mix of our diversified products for this end market category. Package conversion revenue was $119 million, a decrease of 11% year-over-year on an 11% reduction in shipments, primarily due to the unplanned second quarter outage as noted by Keith. General engineering product conversion revenue was $83 million, up 2% year-over-year on a 6% increase in shipments as demand remained relatively stable during the quarter. In addition, the improvement in conversion revenue reflected a higher mix of plate products, which partially offset the decrease in price. And finally, automotive conversion revenue was $33 million, up 9% compared to the second quarter of 2023 on a modest increase in shipments on improved pricing year-over-year. Additional details in conversion revenue and shipments by end market application can be found in the appendix of this presentation. Now moving to slide 10. Reported operating income for the second quarter 2024 was $16 million. As noted by Keith, as a result of our continual focus on rightsizing our inventories and reducing our cash inventory working capital needs by $14 million in the second quarter of 2024, we recorded a noncash GAAP LIFO charge of $9 million during the quarter as we delayered a high-cost GAAP LIFO inventory layer. Also, following our annual in-depth strategic review of our operating portfolio, we made the decision to exit our Sherman, Texas facility as of June 30, 2024. This resulted in a non-run rate restructuring charge of approximately $7 million associated with employment benefit plan and severance payments, which will be paid out over the next few years. The impact on our ongoing financial performance will be immaterial as we reposition our customer orders to our other facilities. In addition, we recorded approximately $2 million mark-to-market non-run rate, noncash charge associated with certain hedges. After adjusting for the non-run rate charges of approximately $9 million, adjusted operating income was $25 million, down approximately $12 million or 34% year-over-year, predominantly driven by the GAAP LIFO charge and a quarter-over-quarter increase of approximately $3 million for depreciation and amortization expense. Our effective tax rate continues to be in the low to mid-20% range under current tax regulations. We anticipate that our 2024 cash tax or foreign and state taxes will be in the $4 million to $5 million range with no U.S. federal cash tax until we consume our federal NOLs, which as of year-end 2023 were $101 million. Reported net income for the second quarter of 2024 was $3 million or $0.19 net income per diluted share compared to net income of $18 million or $1.14 net income per diluted share in the prior year quarter. After adjusting for approximately $9 million of non-run rate charges previously mentioned and another $1 million of non-operating non-run rate items, adjusted net income for the second quarter 2024 was $11 million or $0.65 adjusted net income per diluted share compared to adjusted net income of $20 million or $1.26 adjusted net income per diluted share in the prior year quarter. Now turning to slide 11. Adjusted EBITDA for the second quarter 2024 was $54 million, down approximately $10 million or 16% from the prior year period, which was primarily the result of the aforementioned unfavorable noncash LIFO charge. Additionally, the $10 million reduction in our second quarter conversion revenue was offset by continued improvement in our metal sourcing strategy, which we have discussed in prior quarters, in addition to managing our overhead and manufacturing costs. Our resulting EBITDA margin was 14.5% compared to 16.8% last year. Now turning to a discussion of our balance sheet and cash flow. On June 30, 2024, total cash was approximately $70 million and approximately $548 million of borrowing availability in our revolving credit facility provided total liquidity of approximately $618 million, with no borrowing under our revolving credit facility during and at quarter end, and it remains undrawn. As of June 30, 2024, our net debt leverage ratio is 4.6x against our target leverage ratio of 2 times to 2.5 times. Turning to capital allocation. Capital expenditures for the second quarter totaled $44 million as we continued to invest in our roll coat number four project. Our full-year 2024 capital expenditures are still forecasted to be in a range of $170 million to $190 million. On July 15, we announced that our Board of Directors declared a quarterly dividend of $0.77 per common share, reflecting the confidence our Board and management team have in our strategy to improve our profitability and increase stockholder value over time. And now I'll turn the call back over to Keith to discuss our outlook.

Thanks, Neal. Now I'll turn to our outlook for the fiscal year of 2024. Beginning with aerospace on slide 13. Our positive long-term outlook for strengthening commercial aerospace demand remains unchanged, underscored by our customer relationships and platform-agnostic position in the market for over 75 years. I'd like to further highlight that our diversification strategy has allowed us to maintain a strong position and remain a key supplier in the defense, space, and business jet markets, as well as other industrial high-strength applications, all of which remain strong. However, as noted on our previous call, we revised our aerospace outlook for 2024 to reflect a more cautious stance on the market, primarily related to expected 2024 build rates for domestic large commercial jets and the widely reported Boeing and Airbus production challenges. Given continued lower-than-expected build rates by Boeing in the first half of the year and slightly lower build rates of approximately down 4% recently announced by Airbus expected for 2024, we are adjusting our outlook for shipments and the corresponding conversion revenue down slightly for the balance of the year. As a result of the lower commercial jet build rates announced for the second half of 2024, we now expect our full year 2024 aero and high strength shipments and conversion revenue to be down by approximately 2% to 3% versus 2023 levels. Now turning to packaging on slide 14. As mentioned, the outages we experienced in the first half of the year negatively impacted shipments. With the outages now behind us, we expect our packaging shipments to improve from current levels throughout the remainder of 2024. Further, we are excited to be nearing completion of the long-anticipated roll coat #4 line with expected qualifications beginning in the fourth quarter, in line with our internal plan. This significant investment remains on budget with production slated to begin in early 2025. As previously discussed, this project is estimated to convert approximately 25% of our existing capacity to higher value-added coated products, which we anticipate will benefit our total company margins by 300 to 400 basis points. Accordingly, we now expect our packaging conversion revenue to improve by approximately 3% to 4% year-over-year in 2024 due to improved pricing and product mix on a 2% to 3% increase in shipments, reflecting the impact of the extended outages incurred during the second quarter. Now turning to general engineering on slide 15. While demand has remained relatively stable and strong prices have largely held throughout the first half of the year, we are anticipating typical seasonality in the second half of the year, which is expected to be a slight headwind to demand and subsequent shipments. Further, we continue to forecast modest price compression in our outlook as demand has historically slowed in the second half of the year and pricing remains at historically high levels. Therefore, we anticipate our 2024 shipments to improve by approximately 3% to 4% year-over-year and the resulting general engineering conversion revenue to be flat to up 1% compared to 2023. Next, I'll turn to automotive on slide 16. While demand remains relatively flat compared to last year, price increases enacted in late 2023 have largely held. As a result, we continue to expect our 2024 automotive shipments and conversion revenue to increase in the 3% to 5% range versus 2023. Now turning to slide 17. I'll turn to our revised summary outlook for the full year 2024. We expect demand on the whole to remain flat to slightly up year-over-year. Accordingly, we now expect conversion revenue to be flat to slightly up by 1% compared to 2023. Concurrently, we expect to improve EBITDA margins by approximately 50 to 100 basis points year-over-year. In summary, we remain optimistic that the investments we are making today to support future growth positions us well for 2025 and beyond. Looking ahead, our focus remains on driving sustainable, profitable growth for the long term, which we will achieve through our strategic investments, stringent cost management, and continuous efforts to improve overall operating efficiencies. With that, I will now open the call to any questions you may have. Operator?

Thank you. We will now be conducting a question-and-answer session. Our first question comes from Bill Peterson, JPMorgan. Please proceed with your question.

Yes, good morning and thanks for taking the question. On aerospace, you now, I guess, taken down expectations a few quarters in a row. I guess what's changed in the last 90 days? What visibility do you have? I guess that this is maybe a new bottom. And when should we assume the segment could return to year-on-year growth?

Yes, Bill, this is Keith. As we discussed, a significant portion of our business has not experienced any negative impacts. We've observed strong activity in various sectors. Business jets continue to perform well, and the defense sector remains robust. However, we are facing challenges primarily due to the ongoing issues that Boeing is experiencing, and Airbus is also dealing with supply chain difficulties. We've noted positive long-term booking opportunities and a successful flow of orders during the Farnborough airshow. We expect that once these companies resolve their issues, which are not affected by our aluminum supply, their production rates will stabilize and return to expected levels. We anticipate that we will regain strength in that area. Currently, our build rates are lower than anticipated, and we foresee that this may eventually lead to a decrease in orders. From Kaiser’s standpoint, we have minimum commitments in place, and our outlook for 2025 has improved following recent announcements. So, for now, we are just working on filling the pipeline until we see those build rates increase again.

As we consider the EBITDA margin, I know you've been aiming to return to margins above 20%. Can you clarify the timeline for this? Some investors hope we might reach 20% next year. How do you see the transition from our current position to historical EBITDA margin levels? Given the operational and market challenges we're facing, how quickly do you think this can happen? Is it more likely to be a story for 2025, or more towards 2026 and beyond?

No. Yes, Bill, I'm very confident that we're on track back. We're going to be roughly around, I think, where we've been year-to-date, roughly around that 15% type margin. If you look at some of the things that we have underway, so we announced the change of the metal strategy, which is going to deliver 150 to 200 basis points. Then you move to the new strategy that we're invoking on coated strategy, which we've indicated is going to deliver 300 to 400 basis points. That puts us right back up around the 20-ish and above level on the margins. Again, we anticipate those things beginning to kick in beginning of 2025. Then you add on top of that the expected return to higher build rates on the commercial aero side. With the additional capacities that we're putting in on Phase 7, which are going to deliver another 5% to 6% on the relatively higher margin automotive side, then you can see our path going back into the 20% and back to the mid-20s and higher over the next 1 to 2 years. That's on top of getting the efficiencies back to where we historically had those, okay? We can see a rise of another 100 to 200 basis points just on getting efficiencies back where we've historically had them across the portfolio of businesses. We've got the outline pretty well directed. We're putting the investments in place. The markets have been a little bit up and down as we've seen with some destocking and restocking, but we don't see any major detriment to our growth plans in place. So I feel very confident that we're moving quickly back to the historic levels, and we've got the right things that we're pulling right now to put us in position to take advantage of those market opportunities.

Okay, I'll pass along and re-queue. Thanks for sharing the insights.

Thank you, Bill.

There are no further questions at this time. I would now like to turn the floor back over to Keith Harvey for closing comments.

Okay. Well, thank you for being with us today. I look forward to updating you on our third quarter 2024 results in October. Everyone, have a good day.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.