Earnings Call Transcript - KALU Q2 2025

Operator, Operator

Greetings, and welcome to the Kaiser Aluminum Corporation Second Quarter 2025 Earnings Conference Call. 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.

Kimberly Orlando, ADDO Investor Relations

Thank you. Hello, everyone, and welcome to Kaiser Aluminum's second quarter 2025 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 Chairman, President and Chief Executive Officer, Keith Harvey; and Executive Vice President and Chief Financial Officer, Neal West. Before we begin, I'd 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, 2024. 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 5 contains definitions of terms and measures that we 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?

Keith A. Harvey, CEO

Thanks, Kim, and thank you all for joining us today. Turning to Slide 7 for our second quarter update. I'm pleased to report that Kaiser delivered second quarter results that exceeded our expectations, leading us to increase our full year EBITDA outlook. While favorable metal pricing provided a positive tailwind, our performance reflects deeper strength in our underlying business fundamentals, which continue to improve across the board. Importantly, our performance in our key end markets remained in line with our projections, and we sustained margin levels above 19% in the first half of 2025, roughly 180 basis points stronger than in the prior year's same period. Continued strong pricing and an improving product mix were the primary drivers of strength, along with our persistent emphasis on enhancing operating efficiencies and cost management. We remain focused on our long-term goal for our consolidated businesses to deliver mid- to high-20% EBITDA margins, and we expect continued progress towards that goal to become increasingly evident as we advance through demand cycles and bring our investments fully online over the next several quarters. It's important to note that our working capital requirements, especially those tied to metal pricing, came in above what we anticipated when we originally provided guidance in February. Neal will speak in more detail shortly, but based on current projections, we now expect free cash flow for full year 2025 to be between $50 million and $70 million. Meanwhile, customer sentiment was impacted by tariff-related uncertainty during the quarter, particularly in our Automotive segment. That said, conditions moderated late in the second quarter, and we saw improvements in overall demand. We do recognize, however, that the broader policy and geopolitical landscape remains fluid and continues to introduce pockets of volatility in ordering patterns throughout the business. Given this uncertainty, especially as it relates to tariffs, we continue to believe the impact of projected tariff levels will continue to have a neutral to slightly favorable impact on our earnings. Let's now turn to our growth strategy. As we look ahead, we continue to make meaningful progress on our strategic initiatives at our Trentwood and Warrick rolling mills. These two platforms represent a significant portion of our total conversion revenue dollars and the outlook across our aerospace, packaging and general engineering end markets continues to be strong. Each investment is foundational to the next phase of Kaiser's margin expansion, which we anticipate will continue to improve in 2026. Starting with the Trentwood Phase VII investment. The project is advancing on schedule, on budget and its completion remains closely aligned with supporting the growing demand for both aerospace and general engineering plate products in 2026 and beyond. We expect the additional production capacity to come online early in the fourth quarter of this year. Next, I'll turn to an update on our new coating line investment at our Warrick rolling mill. We have moved to the material qualifications phase of the start-up process, albeit later than initially planned. And while the line is not yet running at full slated capacity, we expect continued improvement in line speeds and customer qualifications throughout the remainder of the year. Accordingly, we now anticipate reaching our full run rate in late fourth quarter of this year and expect the revised timing of qualifications to have a slightly negative impact on our second half 2025 packaging shipments and conversion revenue dollars outlook, which I will discuss later in the call. Above all, I want to reaffirm our unwavering commitment to quality and being a best-in-class supplier for coated products. The equipment we've deployed at our Warrick operations is instrumental to maintaining our position as North America's leading coated supplier for aluminum packaging solutions. While we are all anxious for the new capacity to become fully available, we will not compromise on our standards or bypass any critical steps during the qualification phase with customers. Finally, I'm proud to share that we finalized one of our key outstanding multiyear packaging customer contracts for coated products. This agreement reflects not only the confidence our customers place in us, but also the strength of the underlying market and our leadership position within it. In summary, operations continue to improve. We are strengthening our position in our key markets, and we continue to invest for long-term value creation. With that, let me hand the call over to Neal for further detail on our second quarter results. Neal?

Neal E. West, CFO

Thank you, Keith, and good morning, everyone. I'll now turn to Slide 9 for an overview of our shipments and conversion revenue. Conversion revenue for the second quarter was $374 million, an increase of about $5 million or 1% compared to the same period last year. In detail, aerospace and high-strength conversion revenue totaled $127 million, down $6 million or roughly 5%, mainly due to a 4% decline in shipments from last year. As mentioned earlier, disruptions in commercial aircraft OEM production patterns from the prior year have affected the aluminum supply chain, which is currently undergoing a destocking phase. Nonetheless, demand for our other aerospace and high-strength applications, including those in business jets, defense, and space, has remained robust. Packaging conversion revenue was $130 million, up $11 million or about 9% year-over-year, attributed to a better mix of higher value-added products. Shipments for the quarter increased 8% sequentially but decreased 3% from the previous year, primarily due to a shift in product delivery mix as we ramp up the new roll coat line and qualify products for our customers. As discussed, the base demand for our products is strong, and we are collaborating closely with our customers during this transitional period. General engineering conversion revenue for the second quarter was $86 million, an increase of $3 million or 3% year-over-year, driven by a 5% rise in shipments. Broader market factors, like reshoring opportunities, continue to foster a positive operating environment in the general engineering sector, driving higher demand and solid pricing for both our long and plate products. Finally, automotive conversion revenue was $32 million, a 4% decline year-over-year on a 15% drop in shipments, largely due to tariff-related uncertainties affecting the automotive industry. This decreased demand has been partially mitigated by better pricing and improved product mix. Additional details on conversion revenue and shipments by end market applications can be found in the appendix of this presentation. Now moving to Slide 10. Reported operating income for the second quarter was $38 million, an increase of about $2 million from $36 million in the prior year’s quarter. As a reminder, the second quarter of 2024 included operating non-run rate charges of approximately $9 million, mainly related to restructuring costs. After adjusting for these non-run rate charges, our second quarter 2025 adjusted operating income was down $7 million from the prior year. Our effective tax rate for the second quarter was 22%, compared to 23% in the same quarter of the previous year. For the full year 2025, we still expect our effective tax rate before discrete items to be in the low to mid-20% range, not accounting for any impact from the recently signed tax bill. Additionally, we anticipate our cash tax payments for federal, state, and foreign taxes for 2025 will be in the $5 million to $7 million range. Reported net income for the second quarter was $23 million or $1.41 per diluted share, compared to $19 million or $1.15 per diluted share in the prior year. After adjusting for a non-operating non-run rate benefit of around $3 million net of tax related to insurance settlements from prior year claims, adjusted net income for the second quarter of 2025 was $20 million or $1.21 per diluted share. This compares to adjusted net income of $27 million or $1.63 per diluted share in the prior year period. Now turning to Slide 11. Adjusted EBITDA for the second quarter was $68 million, down about $6 million from the previous year. Our results for the second quarter of 2025 reflect positive sales momentum, indicating an increase in pricing and a better mix of higher value-added products. However, this was offset by higher operating costs, primarily related to start-up expenses for a fourth roll coat line and the timing of certain major maintenance projects compared to the second quarter of 2024. As we continue to advance the start-up of our new roll coat line at Warrick and complete the Phase VII investment at Trentwood, we expect our operating costs to stabilize and improve. Now, regarding our balance sheet and cash flow. On June 30, 2025, our total cash was approximately $13 million, with about $525 million available to borrow from our revolving credit facility, resulting in a strong liquidity position of about $538 million. At the end of the quarter, borrowings under our revolving credit facility stood at $33 million. Our senior notes interest costs are fixed at $48 million annually, and we have no notes maturing until 2028. At the end of the second quarter, our net debt leverage ratio increased by 30 basis points to 4.2 from 3.9 at the end of the first quarter. In terms of capital allocation and free cash flow, we generated $16 million in cash flow from operations during the second quarter, while our capital expenditures were $44 million. For the full year 2025, we still expect capital expenditures to range from $120 million to $130 million, which includes remaining costs for the fourth coating line project at Warrick and the completion of our Phase VII expansion at Trentwood. We expect free cash flow for the full year 2025 to be around $100 million. Although we have successfully reduced total inventory pounds, which significantly contributed to our earlier projections, recent trade policy actions and their substantial impact on our working capital utilization have led us to adjust our expectations. We are now projecting to generate approximately $50 million to $70 million of free cash flow for the entire year of 2025. Finally, on July 15, we announced that our Board of Directors declared a quarterly dividend of $0.77 per common share, reinforcing confidence in our long-term strategy for driving profitable growth and maximizing shareholder value. I'll now turn the call back over to Keith for further discussion on our outlook.

Keith A. Harvey, CEO

Thanks, Neal. As we continue throughout the year, we're encouraged by the momentum we see across our business and the clarity we're gaining in our markets. Let me now walk you through our outlook by end market. Starting on Slide 13 with aerospace and high strength. The pace of commercial aircraft deliveries stepped up again in the second quarter. We're seeing continued signs that the supply chain is recovering. And while select areas such as engines and interiors are still experiencing disruption, those pockets are steadily moderating. Aluminum inventory at the customers remains elevated in the channel for now, but as build rates ramp, we expect that inventory to be absorbed rapidly. Demand in defense, space and business jet remained consistently strong throughout the quarter. Longer term, we believe Kaiser's positioning remains highly advantaged as a leading global supplier of aluminum products to these end markets and our capital investments support the durability of that leadership well into the future. Accordingly, our outlook for both shipments and conversion revenue remains unchanged from February for a projected decline of approximately 5% to 7% year-over-year due mainly to inventory destocking underway in the large commercial jet supply chain. Let's move on to packaging on Slide 14. We are refining our outlook for packaging conversion revenue to increase year-over-year by approximately 15% to 20%, while shipments are expected to decline approximately 3% to 5% year-over-year. I want to be very clear, this adjustment is driven entirely by the commissioning timeline for our new coating equipment and underperformance from our coating converters who have struggled to meet their commitments to us through the first half of the year. We expect improved performance in all areas as we progress into the second half of the year. As previously discussed, North American demand far exceeds available supply, and that dynamic is expected to continue well beyond 2025. Our team remains fully committed to accelerating increased capacity throughput from our value stream to meet the growing needs of our customers well into the future. Turning now to general engineering on Slide 15. Our performance continues to be strong. Shipments are up mid-single digits and pricing remains solid, supporting growth in conversion revenue. While tariffs are not directly impacting our volume, we are seeing some month-to-month variability in order patterns as customers adjust to the implications of the Midwest premium. Broadly speaking, both plate and long products have shown robust activity, making the first half of 2025 one of our strongest periods since 2018, aside from the unusual activity in the post-COVID environment in the 2021, 2022 period. Looking ahead to the second half, we expect continued strength in shipments, supported by a favorable mix shift toward plate products, which is a positive for conversion revenue. We continue to expect full year shipments and conversion revenue to be up year-over-year by 5% to 10%. Finally, turning to automotive on Slide 16. Our outlook for the remainder of the year remains steady. Industry build rates have fluctuated with tariff developments, starting the year with expectations of about 15.7 million units. Current build rates are expected closer now to the mid-14 million range. Despite the macro uncertainty, Kaiser's exposure is concentrated in key platforms, particularly SUVs and light trucks, where demand has remained healthy. As a result, we expect our second half shipments and conversion revenue to hold steady compared to the first half of 2025. Now turning to our summary outlook on Slide 17. In summary, the outlook for our end markets remains intact despite the uncertain operating environment. Based on first half results, our total conversion revenue guidance for 2025 remains unchanged at a 5% to 10% year-over-year improvement. However, our margin performance is slightly better than we initially anticipated. And as a result, we're raising our full year EBITDA outlook by 5% versus our outlook in February to now reflect growth of 10% to 15% year-over-year. This marks a strong step forward and reflects both solid execution and a resilient market backdrop, along with favorable tailwinds provided by sharply rising metal prices to date. Importantly, 2025 will be a turning point for Kaiser towards meeting our long-term conversion revenue and EBITDA margin goals. And this is without fully benefiting from the targeted investments and strategic positioning we've pursued over the past several years. With momentum accelerating for full deployment of our investments in 2026, along with continued strength in our end markets, we look forward to showcasing the full potential of these businesses in the years ahead. With that, I will now open the call to any questions you may have. Operator?

Operator, Operator

Our first question comes from the line of Bill Peterson with JPMorgan.

William Chapman Peterson, Analyst

I have a few questions here. Maybe first starting with packaging. I guess what's driving the delay in the commissioning? And what's giving you confidence in the current target? I guess, is the sole driver of lower packaging guidance? You mentioned, I think, some coating delays. I'm just trying to get a sense for the shipping new guidance you're providing.

Keith A. Harvey, CEO

Thank you, Bill. We are currently experiencing some common start-up challenges with a complex piece of equipment that we have just installed. The equipment is operational, and we have begun the qualification periods, which are crucial as they typically involve a three-phase process before we can fully qualify and start regular production. We are also working on multiple coatings simultaneously and debugging the equipment to reach optimal performance. This has led us to adjust our expectations slightly; while we still anticipate a full outlook by the end of the year, the ramp-up is taking longer than we initially discussed in February. On a positive note, demand remains very strong, and we are working through these processes. However, we expect packaging volume to decrease by about 3.5 million pounds or percent, whereas conversion revenue is expected to rise by 15% to 20%. Additionally, I mentioned some underperformance from a few of our converters, which has contributed to our shortfalls and adjustments in our volume expectations for the year. We are anticipating a recovery in that area, which we need, as the market remains robust, and we expect improvements in the second half of the year.

William Chapman Peterson, Analyst

Okay. And then, as mentioned that the aero inventories are beginning to rightsize, but yet inventories are still elevated. I guess at this stage, what visibility do you have here? I guess, when do you see or foresee the destocking coming to an end? We're hearing obviously kind of positive news flow from the commercial aerospace side in terms of their own ramps, but I wanted to get a sense for when you think this destocking thing will run its course.

Keith A. Harvey, CEO

Yes. Well, on that front, Bill, we continue to welcome the good news that comes from the large jet manufacturers. Obviously, they're continuing to ramp. That ramp is consistent and holding. We're hopeful for another ramp increase announcement toward the end of the year. Obviously, the faster we ramp up, the more healthier the supply chain will be and that inventory bubble can dissipate. Right now, we're on track for what we expected for the year. I expect 2026 to be in much better shape. And I think we'll have some more visibility on that. That won't be necessarily reflective in our third quarter outlook, Bill. Trentwood is going down for the bulk of the quarter and a good bit of that impact could be shipments. So it won't necessarily be reflective that, that's happening. But with us delivering less in the third quarter, that's going to help that bubble as well. So at this point, I think that bubble is going to dissipate by the end of this year as expected. And if demand is as we expect in 2026 at this point, we should be well through that and the supply chain should be ramping up pretty rapidly to meet the increased demand.

William Chapman Peterson, Analyst

And maybe before jumping back in the queue, kind of tying in some of your previous comments, how should we think about the cadence of EBITDA in the back half of the year? Will the third quarter be a trough based off what you mentioned about Trentwood and your prior comments around packaging?

Keith A. Harvey, CEO

Well, quite frankly, we're seeing aerospace will be down slightly in the third quarter compared to the second quarter and even the first half run rate. It will be down slightly period-to-period, but we're going to see that ramp come up on packaging to offset that. The conversion revenue will start to offset any of that. So I expected the trough in the second quarter. And our performance, and we mentioned the tailwinds from metal and then really the performance we had was better than we expected. So I believe the second half is going to look pretty much as we predicted when we talked about it in February. So we're reiterating what the second half looks like, Bill, in this quarter.

Operator, Operator

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

Joshua Ward Sullivan, Analyst

Just a question on the aerospace inventory levels. At this point, is that inventory being held at the distributor customers? Or is it at the OEMs?

Keith A. Harvey, CEO

Earlier in the year and late last year, issues were present in both parts of the supply chain. However, in the first half of the year, we've observed that the service center side has improved its supply stability. This has contributed to a reduction that we've mentioned. Currently, the challenges are primarily with the OEMs, which, as you may remember, increased their production last year but faced some obstacles. A significant amount of metal is still with the OEMs. That's why we're optimistic about the outlook as they continue to increase their production rates. We know they are using more of that metal, indicating that the situation is improving, at least in the second half of the year.

Joshua Ward Sullivan, Analyst

Got it. And then just if we think about past cycles, destock to restock with aerospace, is that signaling that you're getting? Is that similar to previous cycles? Or is there anything different necessarily about this cycle that we might want to think about as we ramp up?

Keith A. Harvey, CEO

No, I believe it all comes down to build rates, Josh. As these operations begin to scale up, we know they have the necessary backlog and are enhancing their supply chains and productivity to reach higher levels. Looking ahead, we anticipate a ramp-up from 2026 onward throughout the decade. This was a key factor in our decision to initiate the next phase of investment at Trentwood, which we believe will coincide with favorable timing. Additionally, if we experience positive developments in semiconductors or continued growth at GE, that will further strengthen our capacity. We've undergone a reset in the last 12 to 18 months, and I expect the next 3 to 4 years will be quite robust, placing significant demands on the aerospace supply chain.

Joshua Ward Sullivan, Analyst

Got it. And then just one last question on defense. The F-35 as far as the domestic rates, there's some questions around that. Obviously, strong on the international side and then the overall question about drones and new programs coming in. How exposed are you to one program versus the other versus kind of the general trend in rising defense spending?

Keith A. Harvey, CEO

We believe the F-35 is currently taking a slight pause. This isn't the first time it's experienced a slowdown, but with NATO allies and increased foreign production, we see a similar trend to what Boeing did when China halted shipments; they quickly adjusted and filled the backlog with other demands. The same is happening with the F-35. Looking ahead is always uncertain; we had expected the F-22 to be much larger than it eventually became. The future of the F-47 is unknown. However, from our perspective at Kaiser, we remain well-positioned in the market across all available platforms, both rotary and fixed wing. We continue to supply materials for F-16 builds that were planned over a decade ago, and we are witnessing a healthy production rate. We observe the same with the F-15, and we believe there is still significant potential for growth with the F-35. Additionally, there have been talks about not only resuming cargo operations but also military cargo at some point. Our position throughout that supply chain is strong. I also appreciate that our capacity is complemented by robust general engineering capabilities, such as for semiconductors and space, which are still expanding. Therefore, we have various alternatives to address any short-term transitions. This stability is reflected in our consistent performance in aerospace, allowing us to leverage our ongoing growth investments swiftly.

Operator, Operator

We have no further questions at this time. Mr. Harvey, I'd like to turn the floor back over to you for closing comments.

Keith A. Harvey, CEO

Thank you, operator. Look, we're excited for the future at Kaiser, and we're positioning the company for continued improvement on our progress when we report our third quarter results in October. Have a good day.

Operator, Operator

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