Kaiser Aluminum - Q2 2024

Transcript

Operator (participant)

Greetings, and welcome to the Kaiser Aluminum Corporation's Q2 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. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. 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.

Kim Orlando (Senior Managing Director)

Thank you. Good morning, everyone, and welcome to Kaiser Aluminum's Q2 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'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, 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?

Keith Harvey (President and CEO)

Thanks, Kim, and thank you all for joining us for a review of our Q2 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 Q2, which includes a non-cash 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 Q1 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 jet, 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 Q1 and an unplanned outage in our hot mill during the Q2, which reduced our shipments. In general engineering, demand and pricing remained stable, following 18-20 consecutive months of destocking that abated in April. While in auto, we continued 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?

Neal West (EVP and CFO)

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 Q2 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 Q2 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 Q2 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 product, which partially offset the decrease in price. And finally, automotive conversion revenue was $33 million, up 9% compared to the Q2 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 Q2 of 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 Q2 of 2024, we recorded a non-cash 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 30th, 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 of 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, non-cash 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 federal and state taxes will be in the $4 million-$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 Q2 of 2024 is $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 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 Q2 of 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 Q2 of 2024 was $54 million, down approximately $10 million or 16% from prior year period, which was primarily the result of the aforementioned unfavorable non-cash LIFO charge. Additionally, the $10 million reduction in our Q2 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 of 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 4.6 times against our target leverage ratio of 2 to 2.5 times. Turning to capital allocation. Capital expenditures for the Q2 total $44 million as we continue to invest in our Roll Coater No. 4 project. Our full-year 2024 capital expenditures are still forecasted to be in a range of $170 million-$190 million.

On July fifteenth, 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. Keith?

Keith Harvey (President and CEO)

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%-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're excited to be nearing completion of the long-anticipated Roll Coat No. 4 line, with expected qualifications beginning in Q4, 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 300-400 basis points. Accordingly, we now expect our packaging conversion revenue to improve by approximately 3%-4% year-over-year in 2024, due to improved pricing and product mix on a 2%-3% increase in shipments, reflecting the impact of the extended outages incurred during the Q2. 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%-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%-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 50-100 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?

Operator (participant)

Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. One moment please while we poll for questions. Our first question comes from Bill Peterson, JPMorgan. Please proceed with your question.

Bill Peterson (Senior Equity Research Analyst)

Yeah, good morning, and thanks for taking the question. On aerospace, you know, 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, this is maybe a new bottom, and, and when should we assume the segment is, you know, could return to, to year-over-year growth?

Keith Harvey (President and CEO)

Yeah. Good morning, Bill. This is Keith. You know, we, as we talked, considerable side of our business has really not shown any detrimental activity, Bill. We've seen really good movement in space. Business jet continues very strong, defense remains strong, and the area that's been somewhat challenged has been those well-documented, well-publicized challenges that Boeing continues to have. And, you know, Airbus is challenged with some of their supply chain issues. We've noted continuing bookings of opportunities longer term. You know, there's been a pretty successful flow of orders at the Farnborough Air Show.

But, you know, we're expecting, as soon as those guys get those issues and other challenges, those challenges are not being impacted by supply of raw materials, at least on our end, from aluminum. But when those build rates get steady and return back to expected levels, then we anticipate, you know, being back in the strength on that side of the coin. We continue to have build rates lower than expected, and we're anticipating that at some point in time, that will flow into reduced orders. Now, from a Kaiser perspective, we have minimums in place. We have expect... You know, there are commitments that are made, and our outlook is improved for 2025, per the declarations that have been made.

So we're just anticipating, right now, that until we get those build rates back up, we're just filling the pipeline a little bit right now.

Bill Peterson (Senior Equity Research Analyst)

Great. Thanks for that. As we think about the EBITDA margin, and I, I think, you know, you have long wanted to return to kind of above 20% type of EBITDA margins. I guess, can you help bridge, I know some investors were hoping that could even occur to reach 20% sometime next year. I guess, can you help bridge the where we are today with getting back to more historical levels of EBITDA margin? How fast can that occur, given where we are today with some of the operational challenges and market challenges you have? You know, is this a 25 story, or is this more like, you know, 26 or beyond?

Keith Harvey (President and CEO)

No, yeah, Bill, I feel very confident that we're on the track back. You know, we're gonna be roughly around, you know, I think, where we've been year to date, roughly around that 15% or so tight margin. And, if you look at some of the things that we have underway, so we announced the change of the metal strategy, which is gonna deliver 150-200 basis points. And then you move to the new strategy that we're invoking on coated strategy, which we've indicated are gonna deliver the 300-400 basis points. That puts us right back up around the, you know, the 20-ish and above level on the margins. And, 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, and then with the additional capacities that we're putting in on phase VII, which are gonna deliver another 5%-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 1-2 years. And that's on top of, you know, getting the efficiencies back to where we've historically had those, okay? And we can see a rise of another 100-200 basis points just on getting efficiencies back where we've historically had them across the portfolio of businesses. So we've got the outline pretty well directed.

We're putting the investments in place. You know, 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, you know, 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.

Bill Peterson (Senior Equity Research Analyst)

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

Keith Harvey (President and CEO)

Thank you, Bill.

Operator (participant)

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

Keith Harvey (President and CEO)

Okay. Well, thank you for being with us today. I look forward to updating you on our Q3 2024 results in October. Everyone, have a good day.

Operator (participant)

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