Q1 2024 Kaiser Aluminum Corp Earnings Call

Participants

Kim Orlando; IR; ADDO Investor Relations

Keith Harvey; President, Chief Executive Officer, Director; Kaiser Aluminum Corp

Neal West; Chief Financial Officer, Executive Vice President; Kaiser Aluminum Corp

Curt Woodworth; Analyst; UBS AG

Josh Sullivan; Analyst; The Benchmark Company, LLC.

Bill Peterson; Analyst; JPMorgan Chase & Co

Presentation

Operator

Greetings, and welcome to the Kaiser Aluminum's Corporation First Quarter 2024 earnings conference call. (Operator Instructions) As a reminder, this conference is being recorded and 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, Kaiser, aluminum's.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 based on management's current expectations. For a summary of specific risk factors that could cause results, I'm 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. You conform these statements 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 comparable GAAP financial measures are not provided because certain items required affiliations are outside of our control and our cannot be reasonably predicted or provided without unreasonable. Any reference to EBITDA in our discussion today means adjusted EBITDA. It 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 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 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 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 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 2times 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 road called for 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

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 road Coke 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 what 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 basis points 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, thank you.

Question and Answer Session

Operator

(Operator Instructions) Curt Woodworth, UBS.

Curt Woodworth

Yes, good morning, Keith, and appreciate all the details on. First question is Good morning. Um, 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 particularly your question first.
Yes, 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 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 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 care. 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 from 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. And 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 and 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 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 there 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 and I know, Boeing is a pretty big customer and they've they've tempered their expectations a little bit on the seven three seven MAX. 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 and 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 but I think I think the issues are going to be short-lived.
I was recently at a supplier meeting with with Boeing, and they're really putting emphasis on getting their their supply chain and their operations in sync. And I believe they're going to achieve that to fairly 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.
But I believe all that's going to be handle post haste and that we're still in a very strong position. And it's just really going to depend on how fast they ramp back up on the sales as to whether or not we'll see any further impact on the outlook. But for now, again, it's the reason we've always emphasize our diversity in this field, focusing on defense and bizjet and the other outlets for our products, including space, which is growing. I think that helps minimize anything that's been going on lately a lot more than perhaps it did with us four or five years ago.

Curt Woodworth

Great. Thank you for that.

Keith Harvey

Thank you.

Operator

(Operator Instructions) Josh Sullivan, The Benchmark Company.

Josh Sullivan

Good morning. if we think of those buckets within Aerospace, you just mentioned your large commercial biz jet defense and space. How have those different buckets folded in the guide for the year yes.

Keith Harvey

So how we've looked at those various components and you can imagine they move a little bit. But we said that the commercial large commercial jets had been between 50% and 60% of the total our demand outlook for aerospace for us and then the other buckets move around and that remaining 40% to 50% up. For instance, defense is been growing a little bit. Biz jet has been strong, but now we're starting to see a space drive a stronger modifier to those numbers. So when we're talking commercial aerospace, the large commercial aerospace, that's a sizable portion of our business.
And so obviously, we monitor all these components very well, including the stocking and destocking that take place. And so I would say that right now on the non commercial aerospace, we're in very good position from a stocking and inventory perspective, and demand is still holding up very strong. So so we've got good confidence in that the balance of the year. And I think what you saw, Josh, on the on our comments there, I think short term we like for Boeing on this 90 day quality analysis assessment with the FDA. They're about halfway through that. And I don't foresee them really going back to launching to the build rates of where they're focused on right now [38] until after that period is over.
So I think that could probably have a continued impact on perhaps more of the second quarter. But then I believe that Boeing is absolutely committed to making the changes required and adjustments. And I think they're going to be more focused and back toward those expected build rates toward the second half of the year.

Josh Sullivan

And then just as far as kind of heading into this week's announcement with Boeing, I mean, were the service centers and distributors? I mean, were they already hearing and their body language and their ordering cadence. When did that kind of turn? Or did it turn ahead of the announcement?

Keith Harvey

No, I would say it really it hasn't turned so much in that and I give great credit to this. Boeing is reached out to their top suppliers and really had a good conversation as to what they intend to do. They can't tell exactly because they're working with other principals to trying to put things in place, but they've been very focused on ensuring that the supply base and everything has been transparent.
Good communication, good open discussion about where inventory levels are due to build rates and then and then expectations going forward. And what I really appreciate is of the openness of having a dialogue instead of just actions and resulting and us just reacting to their actions. So I believe there's strong management of this process and I believe any impact that will fill at all should be minimum.

Josh Sullivan

Great. Thank you for that.

Keith Harvey

Thank you.

Operator

(Operator Instructions) Bill Peterson, JPMorgan.

Bill Peterson

Hi, good morning, everyone. Thanks for taking the questions this morning, but I saw that on the first. I think a nice job in the first quarter margins and the reiteration for the full year. But I guess if we were just a flat line, you'd actually come in even above that expectation. So I'd like to understand that trajectory from here. Maybe what was sort of one-time in nature in the first quarter that maybe doesn't repeat in the second quarter of any sort of color on how to think about the margin progression for the balance of the year would be helpful.

Keith Harvey

Certainly, well, a few things happened in the first quarter build that were a pleasant surprise to us. One, we had talked about the concern about compression in pricing as we as we had gone into the year, we really did not experience that in the first quarter. Now I'm not taking that away. I still believe with some of the North America being one of the strongest markets out there. We tend to attract a lot of other players and other countries that aren't doing so well.
So there's always that the outlook there, a little concern about some price compression. And so we work that into the to the outlook going forward. The teams did a great job from a cost control perspective, so so big, big outlook for us on that normalizing of operations. So we're really starting to get back into the the tone of how we like to operate our businesses, which is managing cost, strong efficiencies, good efficiencies improving across the board. And I think that that's something that will continue on itself.
And the other thing was the final thing that we took into account. We had very strong aerospace for the quarter, especially as you compare to the first quarter of last year. And as we've stated, we've now got four or five quarters of good, strong improvement on the aerospace and high strength. And I think for the balance of the year, just what we just got finished talking about with the large commercial production and perhaps some up some pauses or I would call it a general pause or something which just gives us a little bit of caution as we go through the balance of the year.
But but what I'm really focused on is that we're acting toward the plan and where we expected to be it perhaps got out ahead of a little bit on the first quarter, which is good news, and we'll see how the balance of the year goes. But it's always better to be off to a great start and having some deploying some some tactics and strategies in place that, you know, are moving you to your ultimate goal.

Bill Peterson

Okay, thanks for those insights. On the general engineering, it's nice to see the improvement in the business that you're expecting. I guess I'm trying to understand how what you're seeing in the segment that gives you confidence. Is there anything to call out general industrial improvement semiconductors. I mean, perhaps you could speak to the visibility you have considering especially 90 days ago, your you are more confident about aero and now you're less. So just any visibility would be helpful in this segment.

Keith Harvey

Yes. And I'll preface the comment on aero bill. I mean, we've just moved down from the up 1% to 2% to just flat year over year. And I'll remind everyone, last year was the best year we've had probably since 2019, and it actually even exceeded 2019. So it's at a pretty good level.
But then back to your point about general engineering, we've talked about it for years, though, we track inventory levels at our service centers and certain products and we've got canaries in the coal mine that help us understand where we are in certain phases of the markets. And I can tell you we've been tracking we've gone through like 14-months of destocking, one of our key product lines, which has been our rod and bar products six in the extrusion side of business well for the first time in March, we actually saw inventories begin to rise again. And that really gets into my comment in the notes we made that that look, we believe destocking has ended and albeit while we're at a lower pace than perhaps we were a year and a half ago. I believe that the supply and demand are in sync at this point and we saw some fairly solid numbers for the first quarter. So I believe that bodes well going forward for the balance of the year typically has always done that.
And then the same comments I made on packaging. We have been talking about destocking on the food pack side of our business.
It was pretty important. We had gone through about 12-months on the beverage side, and we anticipated that we would be ending in the destocking in the first quarter on that on the on those products. And indeed, we did see destocking in it and we could have sold more had. We not had the outages that I discussed. So those two big markets, the destocking is ended. And and so we're seeing a rebound that gives us really good confidence for the balance of the year. And you mentioned one other market that we traditionally comment on, and that's the semiconductor and we have been in a destock mode on semiconductors?
Well, I wouldn't say that we've seen that demand tremendously improve, but we are seeing green shoots of that improving. And that's helpful for us, especially as we have to marry up the our general engineering and our aerospace and our sheet and plate business. So I think that's going to improve as we go forward. But certainly, we saw it on the rod and bar segment. So that's some of the data behind our outlook for general engineering.

Bill Peterson

Okay. That's helpful. And if I can sneak in one more on CapEx, is a little bit light in the first quarter. I guess how should we think about the trajectory here in the second quarter and the back half of the year?

Neal West

Hey Bill as Neil Yes, definitely, the first quarter was lighter to anticipate.
We thought the quarters would be a little bit more equally spread, but we now see that the second quarter will really be the highest spend of the year for CapEx and then the last two quarters of the year, kind of back normalizing to probably equal to the way the first quarter was. So really look at the second quarter is where we're going to have the big spend as we get that [ROE] coat line contractors and all that paid as they start delivering and a lot of their completions.

Bill Peterson

Okay. Thanks for that additional color.

Operator

Yes, 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

Alright for you, and thanks, everyone, for being with us today, and I look forward to updating you on our second quarter 2024 results. When we meet again in July. Have a good day.

Operator

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