Q4 2020 Kaiser Aluminum Corp Earnings Call
Welcome to the fourth quarter 2020 earnings Conference call. My name is John and I'll. Your operator for today's call. At this time all participants are in a listen only mode.
And we will conduct a question and answer session. During the question and answer session. If you drove a question press Star then one on your touch tone phone.
And now and I'll turn the call over to Melinda Ellsworth.
Thank you good afternoon, everyone and welcome to Kaiser aluminum fourth quarter and full year 2020 earnings conference call. If you've not seen a copy of our earnings release. Please visit the Investor Relations page on our website at Kaiser aluminum Dot Com. We've 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 Senior Vice President and Chief Financial Officer, Neal West and Vice President and Chief Accounting Officer, Jennifer Huey.
Before we begin I'd like to refer you to the first three 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.
Really from those expressed and the forward looking statements. Please refer to the company and its 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 and 2020.
The company undertakes no duty to update any forward looking statements to conform the statement to actual results or changes and the companys expectations.
In addition, we have included non-GAAP financial information and our discussion rec.
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 measures are not provided because certain items required for such reconciliation are outside of our control and are cannot be reasonably predicted or provided without unreasonable effort and.
He referenced and our discussion today to EBITDA means adjusted EBITDA, which excludes non run rate items for which we've provided reconciliations in the appendix at.
At the conclusion of the company's presentation, we will open the call for questions.
I'd now like to turn the call over to Keith Harvey Keith.
Thanks, Melinda and welcome everyone to Kaiser aluminum fourth quarter and full year 2020 earnings call.
Our fourth quarter and second half results were slightly more favorable to the outlook. We have previously provided due to strength in the automotive and general industrial business and the Corp.
We delivered strong performance under severe business conditions as we navigated the significant decline and commercial aerospace demand during the back half of the year, while managing and strong demand for our general engineering automotive and defense products.
For the full year 2020 value added revenue of $697 million was down approximately 19% compared to our 2019 results, reflecting our strong first quarter, followed by significant COVID-19 related disruptions to our operations and end markets during the remainder of.
Of the year.
Despite the significant decline and value added revenue, we reported full year, adjusted EBITDA of $154 million and EBITDA.
Margin at a solid 22% and an extremely challenging environment.
Our results reflect solid execution of our business cycle strategy and our ability to quickly flex cost and operating levels. As we responded to rapidly changing business conditions throughout the year.
Aero and high strength demand experienced the most significant decline year over year.
And the global pandemic impact on commercial airline travel.
Ladies and recertification of the Boeing 737, Max and Destocking within the supply chain.
Value added revenue for our Aero and high strength applications for the full year of 2020 was down 28% compared to a record 2019, reflecting record performance and the first corner and strong contractual commitments that carried us through the remainder of the year.
While commercial aerospace demand fell sharply and the second half we continued to see strong demand for our products and the defense industry.
Specifically from the joint strike Fighter program and other legacy military aircraft programs throughout the year.
Automotive extrusion demand remained strong following temporary COVID-19 related supply chain shutdowns and the second quarter.
Planned program launches for multiple new platforms ramped up during the second half new programs and were awarded and overall demand improved as North American vehicle build rates increased to 13 million vehicles from $12 3 million vehicles as the industry had previously forecast.
Yes.
Value added revenue for our general engineered products, reflecting steady underlying demand driven in part by strength and semiconductor and automotive applications strong customer preference for our Kaiser select place and restocking and the supply chain.
Pricing remains stable.
At Kaiser as with many other companies that successfully navigated a year and and extremely challenging environment, we owe much of our success to our people and the way they followed our playbook and executed on our strategy.
There were a number of accomplishments I'd like to share.
First and foremost we operated our business safely not only did our organization and quickly move to mitigate the spread of COVID-19, and our facilities.
We did so by executing with record safety performance for the entire year.
It's a significant accomplishment and a testament to our people and the strength of our culture.
Our long term planning process facilitated a smooth CEO succession as well as the transition of our key senior management positions and the company.
We continued to maintain rigorous customer satisfaction metrics and strong customer relationships as we continue to deliver leading products and services to our customers.
Our strong balance sheet and financial flexibility and facilitated our ability to maintain our quarterly dividend and to opportunistically pursue further growth with our pending acquisition of the Warrick Rolling Mill, which is expected to close on March 31.
I'm very proud of the performance of the Kaiser team given the unprecedented challenges we faced in 2012.
I will now turn the call over to Neil to review additional detail for the fourth quarter and full year 2020, and then I'll return to discuss our outlook for 2021 Neil.
Thanks Keith.
Turning to slide eight.
Value added revenue per our full year of 2020 of $697 million declined from $856 million from 2019, reflecting the approximately 20% decrease and shipments primarily due to the significant COVID-19 related impacts and commercial aerospace demand.
In addition, during the second quarter virtually the entire North America automotive supply chain shutdown operations, which temporarily affected demand for our automotive applications.
Overall demand for our general engineering applications remained solid throughout the year.
Aerospace high strength value added revenue of $369 million declined approximately 28% year over year on a 37% decline and shipments compared to the strong demand levels experienced in the prior year.
The benefit of a record first quarter 2020 strong demand for our defense related applications and the $15 million of additional revenue recognized in the third quarter related to the modifications to 'twenty and 'twenty customer declarations under multiyear contracts, partially offset the COVID-19 impact and our commercial aerospace.
Demand and a significant second half decline and shipments.
Automotive value added revenue of $83 million declined approximately 11% year on year on and 11% decrease and shipments reflecting strong first quarter shipments followed by the impacts of the OEM shutdowns and our second quarter due to Covid and a sharp recovery that began late in the second quarter and continue.
Throughout the second half of the year as the auto supply chain returned to full production and new program launches began to ramp up.
General engineering value added value added revenue of $239 million increase approximately 3% year on year and <unk>.
Relatively flat shipments and stable pricing throughout the year.
Value added revenue for the fourth quarter 2020 of $152 million reflected continued strength and demand for our general engineering automotive and defense related applications.
Additional detail and value added revenue and shipments by end market applications can be found in the appendix from this presentation.
Turning to slide nine.
Adjusted EBITDA for the full year 2020 of $154 million declined approximately $59 million from $213 million and 2019.
Primarily reflecting a negative sales impact of approximately $74 million.
And $14 million and manufacturing inefficiencies.
All set by $17 million reduction plant and corporate overhead costs, and a $12 million of lower major maintenance and incentive expense.
Despite the significant decline in sales full year 2020, EBITDA margin of 22, 1% compared favorably to the 24, 9% and the prior year, reflecting our variable cost structure, and strong execution, and flex and costs and operations with changes and market dynamics.
Adjusted EBITDA for the fourth quarter, 2020 was $29 million, reflecting.
Reflecting and EBITDA margin of 18, 8%.
Moving on to slide 10.
Reporting reported operating income for 2020 of $81 million.
Adjusting for $21 million of non run rate charges adjusted operating income was $102 million.
And from a $164 million and the prior year.
The decline and operating income as adjusted primarily reflected the decrease in EBITDA previously discussed and approximately $3 million of higher depreciation expense.
The $21 million of non run rate charges, primarily reflected an $8 million restructuring charge for severance and benefit costs.
And $5 billion reserve increase for ongoing legacy environmental cleanup projects and approximately $6 million related to diligence and legal fees associated with the work acquisition.
Reported net income for 2020 was $29 million compared to $62 million from 2019.
Adjusted for non run rate items from both periods. Adjusted net income was $48 million and 2020 compared to adjusted net income of $111 million and 2019.
The $48 million adjusted net income reflected the impact of the lower operating income and an increase of approximately $16 million of pretax interest related to our recent bond offerings.
For 2020, our effective tax rate was 26%, reflecting our expected Leonard blended federal and state tax rate.
Long term, we continue to believe our effective tax rate will be and the mid 20% range under the current tax regulations.
Our net federal cash tax refund in 2020 was $12 million.
Related to monetization of our A&P and other tax credits.
We anticipate that our cash tax rate will remain and the low single digits until we consume our federal Nols of approximately $94 $6 million as of year end 2020.
As reported earnings per diluted share were $1, 81, and 2020 and $3 83 and 2019.
Adjusted earnings per diluted share were $3 from <unk>.
And $6 85 for 2020 and 2019, respectively.
Turning to slide 11.
Adjusted EBITDA of $154 million funded all other cash requirements during the year, including capital investments interest dividends and share repurchases.
Working capital reduction was driven by reduced inventory and customer receivables due to lower shipments.
During the second quarter 2020, we further strengthened our liquidity and financial flexibility.
Issuing $350 million of six 5% senior unsecured notes that mature in 2025.
Capital spending for the full year was approximately $52 million.
Primarily related to critical sustaining capital projects and other organic investment opportunities to further our automotive growth and enhanced efficiencies throughout our operations.
For the full year total cash return to shareholders was $56 million, reflecting $43 million and quarterly dividends and approximately $13 million and share repurchases.
As a reminder, we suspended our share repurchases and early March 2020.
Management, and our board of directors continue to remain committed to maintaining and increasing our quarterly dividend we.
We announced a seven 5% increase and our first quarter 2021 dividend to <unk> 72 per share which was paid in early February 2021.
This increase follows the 12% increase and our quarterly dividend and early 2020.
At year end 2020, total cash of approximately $780 million.
And more than $252 million of borrowing availability and our revolving credit facility.
Provided total liquidity of $1 billion.
There are no borrowings under our revolving credit facility during the quarter and the <unk>.
<unk> remains undrawn.
As Keith mentioned, we anticipate closing the acquisition of the work Rolling Mill and related operations on March 31 2021.
Each time, we will utilize $587 million of cash on hand to fund the transaction and we will assume approximately $83 million of other post retirement benefit liabilities.
And now I'll turn the call back over to Keith to discuss our 2021 and outlook.
Thanks Neil.
I'll now review, our 'twenty one outlook beginning on slide 13.
Although we expect continued improvement from the second half of 2020 run rate, we anticipate full year 2021 value added revenue to be down 5% to 8% year over year. Following a record first quarter and strong first half 'twenty and 'twenty.
As demand and commercial aerospace aerospace continues to slowly recover and Destocking continues and the supply chain.
We are encouraged by positive signs supporting long term recovery and this mark including the recertification of the 737, Max late last year, and an expected, 20% to 30% increase and build rates for the joint strike fighters and 2021, we.
We expect shipments to continue to improve throughout the year.
Ongoing dialogue with our commercial aerospace customers continues as we work to manage short term needs and plan for longer term opportunities as we anticipate a full recovery and the 2023 2024 timeframe.
We continue to believe that aerospace demand will return to a long term, 3% to 5% compound annual growth rate and remain committed to meeting the long term needs of our customers.
Although we've placed our previously announced tripling capacity expansion plans on hold we will continue to evaluate market conditions and we'll be prepared to move forward with our investments as we gain more visibility and clarity around the expected recovery for large commercial aerospace demand.
Moving to slide 14.
We anticipate exceptionally strong shipments and value added revenue for our automotive extrusion applications and 2021.
North American build rates are expected to increase from 13 million vehicles in 2020 to over 16 million vehicles, and 2021 and for several years beyond that.
While we experienced lower demand in 2020, due to COVID-19 disruptions and the supply chain.
We successfully initiated multiple program launches and the second half of the year.
With more program launches planned throughout 2021, combined with low inventories of vehicles, we expect shipments and value added revenue both to increase 35% to 45% year over year and 2021.
As we look forward, we anticipate growth for our aluminum extrusion and at a 10% 20% compound annual growth rates for Kaiser content growth over the next three years with long term growth returning to the mid to high single digits.
Moving to slide 15.
Our outlook for General Engineering continues to reflect strong demand for our products driven by a number of end markets, including semiconductor manifold bar automotive applications and a strong demand from our service center customers, who are working hard to meet the needs of their customers and restock.
And their inventories.
We anticipate value added revenue and shipments for our general engineering applications will increased 10% to 15% year over year.
And by strong demand and a continued trend towards re shoring of OEM supply chains to minimize risks and further disruptions.
Moving to slide 16, and a summary of our 2021 outlook.
For the full year of 2021, we anticipate continued improvement from the second half run rate with total value added revenue up 5% to 10% year over year, and and adjusted EBITDA margins comparable to 2020.
We anticipate capital spending for 2021 will be $50 million to $60 million.
Primarily focused on sustaining capital investment.
We will provide further updates to our capital spending for 2021 following completion of the pending acquisition of awards as we have identified additional organic growth opportunities during the diligence process.
Moving to slide 17, and a brief discussion around our pending acquisition award as we announced in late 2020, and the outlook for North American beverage and food and packaging industry.
We anticipate closing on the transaction on March 31, and look forward to welcoming the work employees to the Kaiser family.
Our planned acquisition of the Warrick Rolling Mill provides an opportunity for further value creation with strong secular growth and the non cyclical packaging industry.
The transaction is expected to be immediately accretive to earnings and cash flow.
As we noted at the time of the announcement or generated value added revenue of approximately 500 million.
And adjusted EBITDA of approximately $90 million for the last 12 months ending September 32020.
We will provide a further update on our consolidated full year outlook for 2021 during our first quarter earnings call in April.
The outlook for beverage and food packaging markets is strong and favorable demand and industry dynamics driving growth for the foreseeable future.
Demand for these products was up 5% year over year in 2020 and is projected to increase and additional 3% to 5% and 2021.
The North American food and beverage can market.
<unk> to be supplemented with import materials due to demand versus domestic supply and balances and these domestic supply and deficits are expected to continue through 2025 at current forecast driven by the growing demand and recognition of aluminum as the material of choice due to its <unk>.
Net recyclability and a preference for its use and growing specialty drinks and some stillwater products by consumers and can makers.
The Warrick Rolling Mill is one of only four dedicated can sheet mills in North America, and we expect to become a significant participant and the supply chain solutions and meeting the growing North American demand.
Turning to slide 19, and a summary of our closing remarks.
We finished a turbulent 2020 with solid performance, a strong balance sheet with a $1 billion and liquidity.
We entered into a definitive agreement to complete a transformational acquisition, which is anticipated to close on March 31, and.
And is expected to be immediately accretive to earnings and cash.
The work acquisition Diversifies, our portfolio into non cyclic packaging industry.
It's highly complementary to our aerospace automotive and general industrial cyclic and markets and provides excellent opportunities for long term growth.
We have strong positions with blue chip customers and each of our served markets and our per poised for further growth.
And while commercial aerospace demand has slightly longer path to recovery, we have solid long term agreements in place to secure our positions with full recovery expected in 2023 and 2024.
Our long term defense contracts are expected to continue to partially offset lower commercial aerospace demand with solid growth expected in 2021.
Both automotive and general engineering markets are expected to be robust and 2021, and we are well positioned with capacity new programs long term supply agreements and strong relationships with our automotive and service Center partners.
Our title.
And we are Kaiser business cycle strategy, which guides us and operating and volatile market condition has us well positioned and poised to improve margins and our operations as volumes and market conditions improve.
Our balance sheet remains solid and is expected to remain so after the closing of the warrant transaction.
We recently announced our 10th consecutive year for dividend increases with and announced seven and 5% increase and 2021, following a 12% increase and 2020.
Our commitment to return excess capital to our shareholders remains one of the pillars of our capital allocation priorities.
As we look forward 2021 will be a very exciting year for our company.
And we celebrate our 70 <unk> anniversary this year and I think our founder Henry J Kaiser would be proud of how we have positioned the company for continued success for years to come.
We remain focused on executing our strategy, while continuing to work safely and a very tough environment disrupted by the pandemic.
But our future is bright and theres, a growing excitement as we add a thriving packaging business and to the Kaiser portfolio and welcome. The 1200 Ward Rolling mill employees to Kaiser aluminum.
With that I'll now open the call to any questions you may have.
Thank you and now begin the question and answer session. If you do have a question press Star then one on your touch tone phone.
Once again Thats Star then one on your Touchtone phone.
And our question is from Josh Sullivan from the benchmark company.
Hey, good morning.
And Josh.
Just on the Warrick acquisition and the operations can you can you tell us about any customer and customer contracting that.
And it might be up for renegotiation. This year, just just what we should be thinking about as far as the contracting cycle at work.
Sure.
And the contracts for that packaging business appears to what we've seen to be and the two to three year type framework.
We know that as soon as the diligence there were already began negotiation with some contracts and 2020 and that is continuing through 2021.
And the short term most of the contracts are filled and facility is basically book for the balance of this year.
And there are currently looking out through the 2023 2024 timeframe.
Yes.
And then as you.
Think about those expansion efforts that were previously just focused on truckload.
And now you have the Warrick operations can you talk about how youre going to think about the expansion between or how are you going to allocate those capital improvement dollars as we go down the road.
Sure.
The pandemic created a pause for us, which may turn out to be quite beneficial.
As I mentioned and my remarks during the diligence process.
They've done a great job its award facility, we see opportunities for some immediate investment to further that growth and momentum and thats going on there.
And we're able to do that and the pause of where aerospace is in.
And all of our planning processes and so our capital prioritization, we're looking at being able to fund both growth legs in that area so and.
And when the aerospace comes back we fully intend to.
Free instigate that program and put that capacity in place to meet and long term needs of our customers.
Got it.
And then just one on automotive.
The growth Youre looking at with the new product launches here can you talk a little bit about the penetration of aluminum content on those new models I think in the past you've talked about aluminum penetration growing at about 8% above Saar.
Just curious what the new models suggest as far as that kind of penetration story.
Well it's.
That's a great question we have.
Look at Sars growth year over year.
Yes.
Roughly a 23% increase year over year expect and so we're announcing a 30 to 40.
And $35, 30% to 40% type of increase you can see that our penetration is in that 8% to 10% and above range that we talked about long term. So so that's still in line and we're actually seeing that accelerate slightly over the next few years.
Okay.
And then just one last one on the general engineering side.
And the semiconductor exposure.
Can you talk about the visibility there do you think.
And how much of a cycle should we see and kind of demand for that is they build a little capacity here.
Yes, and everything we see and hear Josh is that this thing which is had legs in 2020.
We see this continuing throughout 2021.
And well publicized the shortages of semiconductor chips and all of that and.
And what we're seeing is continued growing demand.
We expect it to probably place even more growth and the GE business as we go forward this year because of that demand and so we see that well through 2021, maybe into 2022.
Got it thank you.
And then.
Thank you.
And we have no further questions at this time and I'll now turn it back to Keith Harvey for final remarks.
Well. Thank you very much for your time and interest and Kaiser aluminum I'll look forward to updating you on our first quarter results and our outlook and plans for the balance of 'twenty. One during our first quarter earnings call in April having a day.
Thank you, ladies and gentlemen that concludes today's call. Thank you for participating and you may now disconnect.
Okay.