Kaiser Aluminum Corporation (NASDAQ:KALU) Q1 2024 Earnings Call Transcript

Kaiser Aluminum Corporation (NASDAQ:KALU) Q1 2024 Earnings Call Transcript April 25, 2024

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Operator: Greetings, and welcome to the Kaiser Aluminum Corporation First 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. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Kim Orlando, ADDO Investor Relations. Thank you. You may begin.

Kim Orlando : Thank you. Good morning everyone, and welcome to Kaiser Aluminum’s first 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’d like to refer you to the first four slides of our presentation and remind you that the statements made by management any 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 reconciliation 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 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 : Thanks, Kim. And thank you all for joining us for our review of our first quarter 2024 results. Turning to Slide 7. The year is off to a good start, as our first quarter adjusted EBITDA of $62 million surpassed our internal expectations. Business conditions continued to normalize and operating efficiencies improved across all platforms. Both the general engineering and automotive end markets are off to a faster start than expected at the beginning of the year. Aerospace in the high strength, while stronger year-over-year was softer than our original expectations. Our efforts to control costs and implement our metal sourcing strategy gain traction in the quarter. As we move through the balance of 2024, we expect to continue to make progress on these initiatives, positioning the business for the next phase of our strategy with the full commissioning of the roll coat number four investment at our Warrick packaging facility in 2025.

I’ll now turn the call over to Neal to discuss the quarter in more detail and then I’ll be back to discuss our outlook. Neil?

Neal West: Thanks, Keith and good morning everyone. I’ll begin on Slide 9 with an overview of our shipments and conversion revenue. Conversion revenue for the first quarter was $367 million a decrease of $2 million, or 1% compared to the prior year period. Looking at each of our end markets in detail Aero and high-strength conversion revenue totaled $137 million in the first quarter 2024 reflecting a 12% improvement on an 8% increase in shipments over the prior year quarter. The improvement in conversion revenue reflects a mix of higher price products along with growth in shipments. Packaging conversion revenue was $118 million, a decrease of 11% year-over-year due primarily to a 7% reduction in shipments of higher-priced coated food products driven by the expected first quarter 2024 destocking.

General engineering products conversion revenue was $80 million, up slightly year over year and a 2% increase in shipments partially offset by a lower value mix. And finally, automotive conversion revenue was $31 million, which was relatively flat compared to the first quarter of 2023 driven by a 4% reduction in shipments, offset by improved pricing. Additional details and 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 first quarter 2024 was $33 million, after adjusting for an up for operating non-run-rate items of approximately $1 million. Adjusted operating income was $34 million, up 70% year over year on improved operating results, offset by a $2.5 million increase in depreciation.

Our effective tax rate continues to be in the low to mid 20% range under current tax regulations. We anticipate that our 2024 cash taxes for foreign and state taxes will be in the $3 million to $4 million range, with no US federal cash tax until we consume our federal NOLs, which as of year end 2023 were $101 million. Reported net income for the first quarter 2024 was $25 million or $1.51. Net income per diluted share compared to net income of $16 million or $0.99 net income per diluted share of the prior year quarter. After adjusting for approximately $1 million of operating non-run rate items previously mentioned. and other non-run rate income of $11 million primarily related to insurance settlements from prior-year claims. Adjusted net income for the first quarter 2024 was $17 million or $1.02 adjusted net income per diluted share compared to adjusted net income of $7 million or $0.42 adjusted net income per diluted share in the prior year quarter.

Now turning to Slide 11. Adjusted EBITDA for the first quarter of 2024 was $62 million, up approximately $16 million or 34% from the prior year period. Adjusted EBITDA as a percentage of conversion revenue improved approximately 430 basis points from the first quarter of 2023 to 17%. The improvement in adjusted EBITDA was primarily the result of improved operating efficiencies and cost controls in the business, as well as timing of certain annual planned maintenance events and lower freight costs, which was partially offset by higher employee benefit and incentive costs. Now turning to a discussion of our balance sheet and cash flow. On March 31 2024, total cash of approximately $102 million and approximately $517 million of borrowing availability on our revolving credit facility, provided total liquidity of approximately $619 million.

There were no borrowings on our revolving credit facility during and as of the quarter end and it remains undrawn. On March 31st 2024, our net debt leverage ratio continued to improve to 4.2 times as we continue to make progress towards our target leverage ratio of 2 to 2.5 times. Turning to capital allocation. Capital expenditures for the first quarter totaled $30 million. This is lighter than anticipated, attributed primarily to the timing of payments of invoices related to our Roll Coat 4 project, which remains on track for commissioning later this year. Our full year 2024 capital expenditures are still forecasted to be in a range of $170 million to $190 million. On April 15, we announced that our Board of Directors declared a quarterly dividend of $0.77 per common share, underscoring the continued confidence our Board and management team have in our long-term strategy to improve our profitability and increased stockholder value.

And now, I’ll turn the call back over to Keith to discuss our outlook. Keith?

Keith Harvey: Thanks, Neal. Now, I’ll turn to our outlook for the fiscal year of 2024. Beginning with aerospace on Slide 13, we have experienced strong momentum over the last several quarters in aero and high strength market demand, that has carried over into 2024. However, given recent developments, we are taking a more cautious outlook on expected build rates for the balance of the year, for domestic large commercial jet production. Our long-term outlook for continued strong demand for these platform remains unchanged. The diversity of our customer base and our ability to be agnostic on platforms is by design and positions us well regardless of market conditions. We remain a key supplier to all customers in the large commercial jet segment and maintain strong positions in other key segments of the aero and high-strength markets including defense, space, business jet and other industrial high-strength applications.

Based on current expectations, we now expect aerospace and high-strength shipments and conversion revenue to be flat year-over-year for 2024 versus 2023. Now turning to Packaging on Slide 14. Destocking from our food packaging customers ended in the latter half of the first quarter. Based on conversations with our customers, we now expect our shipments to continue to improve from these levels throughout the balance of 2024. Additionally, our new roll coater installation is progressing according to plan. The project remains on budget and is set for completion by the end of this year with production expected to begin in 2025. To date, we have a substantial portion of this capacity already committed with discussions well underway for the balance.

Accordingly, we continue to expect our packaging shipments and conversion revenue to improve by 5% to 7% year-over-year in 2024. Now turning to general engineering on Slide 15. We began to see an increase in order rates for all general engineering products with destocking ending late in the first quarter. Our supply levels are now aligned with current demand trends. We continue to expect improving demand for our general engineering products as we progress throughout the year, with our 2024 shipments anticipated to improve by approximately 5% to 6% year-over-year. However, we continue to forecast modest price compression in our outlook, as demand recovers and therefore, expect the resulting general engineering conversion revenue to be flat to up 1% compared to 2023.

Next, I’ll turn to automotive on Slide 16. Demand remains flat to slightly up versus last year’s levels, as higher build rates for trucks and light vehicles in North America drove a steady recovery into 2024. Further, recent price increases initiated late last year are anticipated to hold. As a result, we expect our 2024 auto shipments and conversion revenue to increase in the 3% to 5% range versus 2023. Now I’ll go into our summary outlook, turning to Slide 17. For the full year 2024, we expect demand will continue to improve across most of our end markets. As a result, we continue to expect conversion revenue to improve in the 2% to 3% range over 2023. Additionally, we continue to expect approximately 70 to 170 basis points of EBITDA margin improvement year-over-year.

In summary, we are off to a strong start to the year and continue to make solid progress on our growth initiatives, which position us well as we implement the next stage of our growth strategy in 2025. Looking ahead, our focus remains on successfully executing our revised metal sourcing strategy award, managing costs and improving operating efficiencies across all our businesses to drive profitable growth. With that I will now open the call to any questions you may have. Operator?

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Q&A Session

Operator: Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Curt Woodworth with UBS. Please proceed with your question.

Curt Woodworth: Yeah. Good morning, Keith, and appreciate all the details. First question is…

Keith Harvey: Good morning.

Curt Woodworth: Good morning. It seems like you’re making good progress around kind of improved metal sourcing and the flow path at work. But can you provide a little bit more detail about kind of the timing on when you see that optimized? And what level of margin or a cost-down impact you could see from those efforts. And then, I guess with respect to metal we’ve seen a pretty material increase in the LME, aluminum price this past month and then there’s been more discussions around potential trade tariff impacts, so I was wondering if you could provide any more color on how you could see that impacting your business going forward?

Keith Harvey: Okay. Well thank you Kurt and I’ll take your work question first. Yeah, we are continuing to make solid progress there. The first couple of years were a little troublesome with supply chain issues and whatnot. But — but as I mentioned in my in my comments we’re finally getting to some more normalized output here and operations. So the strategy change has really been picking up. We planned on looking at different metal sourcing that had been planned from day one and we just began initiating that in Q1. I expect that will continue to pick up through the balance of the year. The big strategy changes we’ve discussed earlier has been when we’re moving toward a more higher margin coated products which has really facilitated by this investment we’re making it work.

And while we’re making great progress there, that that strategy isn’t really initiated until the beginning of 2025 and as we said in some earlier comments beginning of the year that we expect the 300 basis points to 400 basis points impact, once we fully implement that strategy up at work. So we’ve got a good runway ahead of us, but I’m pleased that to be on the normalized side, we’re getting a hold of the operation and folks are beginning to operate very well. Quite frankly, the quarter could have been even better for us. But we were we had taken down some major pieces of equipment for some planned maintenance and work. And so we weren’t unable to take even more of the demand that was coming at us. So all in all very pleased with the progress we’re making there.

And I believe that that’s going to continue to improve, as we go out through the year and especially as we see demand improving in that area. Now moving to your second part of your question Kurt, on the trade tariff, we’ve prided ourselves in this Company of being on a pass-through basis with regards to metal we’ve got long term very diverse supply arrangements in place with metal providers. At the beginning, we haven’t utilized any Russian material since the beginning of the Ukrainian war. Even at that time it was a small amount. I know the impact on the LME is larger, because there was a good deal of that material available there. But quite frankly with the internal work that we’re focusing on with a higher use of recycled material, using more secondary metal as opposed to the prime.

And with our business pass-through strategy, I really don’t see a big impact to us with regards to tariffs on the metal itself. Now, we are susceptible to some of the products that come through, imports that will flow through. And so we’re very focused on work and stuff that the administration is discussing with regards to there’s some controls on inputs of unfair advantage material in the products that we survive. So we support those, and we’ll be — we’ll be watching those. But that’s why we continue to work on our cost and being very competitive how we are and we’ll continue to monitor the landscape and adjust accordingly. But I like how our business philosophy allows us to adapt all these changes.

Curt Woodworth: Okay. And then as a follow-up the aero high strength market it seems like you’re tempering your expectations modestly on a volume basis on the past when we’ve seen some slowdown in the aero of supply chain things again can get whipsawed pretty heavily on the inventory side. Can you just give us kind of your view on how do you think the aero supply chain is looking for sheet and plate? And then in terms of the more conservative outlook is that — I know Boeing is a pretty big customer and they’ve tempered their expectations a little bit on the 737MAX. But can you just kind of talk through how you see that supply chain evolving maybe into the second quarter and the back half of the year? Thank you.

Keith Harvey: Sure. I think your comment is something that we watch very closely with regard to inventories. I don’t hear it mentioned very often, but we follow those quite intently. And I believe for mainly a lot of the challenges that the big OEMs have discussed with supply chain issues and whether it was related to current issues that Boeing may be facing or even Airbus from a supply chain perspective, we had a little muted demand as expected compared to what we expected on the build rates. And so that was reason for a slight pause on our side. And as you pointed out Curtis, it’s about a 1% to 2% change in what we said two or three months ago. I think there’s a little caution in there. The good part here that I always refer back to is that over the last 15 or 20 years?

None of this has been a linear. We’ve always seen some pauses and operations either by certain platforms or by conditions that take place geopolitical or whatever. But I think I think the issues are going to be short-lived. I was recently at a supplier meeting with Boeing and they’re really putting emphasis on getting their supply chain and their operations in sync. And I believe they’re going to achieve that to fairly judiciously. They’ve they made strong commitments to not only their customers, but also to their suppliers. And I have a lot of confidence in that as well. And we know what the inventory levels are. We know what the little bit of the pause has been the uncertainty of when the ramp rate goes back on the MAX for instance. And that’s a little bit the reason for our caution.