Q2 2021 Kaiser Aluminum Corp Earnings Call

July 22, 2021

[music].

Okay.

Welcome to the second quarter 2021 earnings Conference call. My name is Jackie and I will be your operator for today's call. At this time all participants are in a listen only mode. Later, we will conduct a question and answer session. During the question and answer session. If you'd have a question. Please press star.

And then 1 on you touched on the phone I would now like to turn the call over to MS. Melinda Ellsworth Ms. Osberg you may begin.

Thank you good afternoon, everyone and welcome to Kaiser aluminum second quarter, and first half 'twenty 'twenty 1 earnings conference call, if you've not seen a copy of our earnings release. Please visit the Investor Relations page on our website of 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 Executive 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 3 slides of our presentation and remind you that the statements made by management and the information contained on the presentation that constitute forward looking statements are based on management's current expectations for a summary of the specific risk factors that could cause results to differ materially from those.

The rest of 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, 2020 and forms 10-Q for the quarters ended March 31 and June 32021.

The company undertakes no duty to update any forward looking statements to conform the statement to actual results or changes in the companys expectations.

In addition, we have included non-GAAP financial information in our discussion reconciliations for the most comparable GAAP financial measures are included in the earnings release and on the appendix of the presentation reconciliation.

Reconciliations of certain forward looking non-GAAP financial measures to comparable GAAP measures are not provided because certain items required for the trucking filiation are outside of our control and cannot be reasonably predicted or provided without unreasonable effort.

Any reference in our discussion today to EBITDA means adjusted EBITDA, which excludes non run rate items for which we've provided reconciliations in the appendix.

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 Thanks for Melinda and welcome to the second quarter 2021, Kaiser aluminum earnings call.

Turning to slide 6.

Our second quarter results reflect the first time, we've included the financial impact of our work Rolling Mill acquisition, including revenue operating expenses and cost associated with integrating the business into the Kaiser.

We delivered strong value added revenue of $318 million and adjusted EBITDA of $59 million for the quarter.

We continue to see improving conditions in all of our end markets with automotive sales being the exception for the quarter as strong demand was offset by ongoing shortages of computer chips, but once again impacted north American light vehicle production.

And today's inflationary environment, our operations and commercial teams have been working diligently to identify and pass through rising cost associated with freight.

True.

In addition, while our workforce has risen to the challenge of meeting increasing demand we.

We're facing the same challenges as other employers, including the ability to efficiently attract and add labor to meet the demand, which has led to slightly higher labor cost.

Moving on to the current market conditions.

Aerospace and high strength sales continued to improve sequentially from the second half of last year.

As barriers for normalized air travel continue to fall before recovery of this business back to the record 2019 levels remains on track.

We expect better results in the third quarter and fourth quarter compared to the prior year quarters with steady gains continuing through the 2023.2024 time period.

Demand for our General Engineering project products continues to be robust.

Shipments in this category rose sequentially from the second half of 2020 and have offset slower commercial aerospace plate sales and automotive extruded production shortfalls.

We see continued strong demand from our service center customers and the customers they serve through the balance of 2021 and into 2022.

As I stated previously we experienced slightly lower sales in second quarter as compared to the first quarter for automotive extrusion applications due mainly to chip shortages affecting the automotive industry all while demand remained robust.

We feel the supply chain challenge will begin to abate in third quarter and sales should stabilize them recover but the situation continues to be dynamic.

Our projection of year over year value added revenue increase of 35% to 45% for automotive sales in 2021 remains intact at this time.

Our packaging business remains robust with multiple discussions underway with customers for future supply.

We are evaluating volumes price and mix as we discuss our options at work.

These discussions regarding strategic long term supply position support.

Additional profitable growth in the food and beverage packaging markets in future years.

I will have additional color commentary on our outlook for packaging in my later remarks.

The full integration of work in the Kaiser continues to go well and our teams are working diligently to completely transfer support services from our cohorts of Kaiser by the end of the year.

The seamless integration of the business combined with strong financial results to date further reinforces the award transaction was the right long term decision for Kaiser and its shareholders.

Neil will now provide more detail on our second quarter results and afterwards, I will provide an outlook of our major markets and actions, we intend to take to maximize our short and long term opportunities Neal.

Thanks, Keith and good morning, everyone turning to slide 8 value added revenue of $490 million for the first half of 2021 increased the $184 million or 60% compared for the second half of 2020.

Primarily reflecting the $132 million of value added revenue contributed from our first full quarter of the work acquisition. In addition to the continued improvement each of our other end market applications.

Value added revenue for the second quarter of 2021 of $318 million increase the $143 million for 82% compared to the prior year period, driven by the previously mentioned packaging applications and continued improvement on our general engineering and automotive applications.

Turning to slide 9.

Aerospace high strength of value added revenue for the first half 2021 of $151 million improved $14 million or 10% on a 31% increase in shipments compared to the second half of 2020.

As a reminder, the second half of 2020 included approximately $15 million of additional revenue related to modifications in the 2020 customer declarations under multiyear contracts.

The increase in value added revenue and shipments reflect continued strength in demand for our defense related applications and improving demand for commercial aerospace as we continue to see the recovery in air travel.

Aerospace high strength value added revenue of $80 million for the second quarter of 2021 declined $22 million or 22% on of 15% decline in shipments when compared to the prior year period, reflecting the COVID-19 impact on our commercial aerospace demand, partially offset by the <unk>.

The strength in demand for our defense related applications.

Moving to slide 10.

Automotive value added revenue for the first half 2021 of $53 million demonstrated continued improvement increasing to millions of dollars of 5% on a slight increase in shipments compared to the second half of 2020 the.

The improvements are driven by the ongoing launch and ramp up of new programs with demand being temporarily impacted during the second quarter due to the continuing impact of the semiconductor of shortage in the automotive industry.

Compared to the prior year quarter automotive value added revenue for the second quarter of 2021 was 25 million, increasing $16 million or 176% on a 148% increase in shipments, reflecting the impact of COVID-19 related automotive production shutdowns in the second quarter of <unk>.

2020.

Turning to slide 11.

General engineering value added revenue of $149 million in the first half of 2021 increase of $33 million of 28% on a 31% increase in shipments compared to the second half of 2020, reflecting continuing strong underlying semiconductor industrial and machine tool demand along with restocking in the <unk>.

Supply chain.

General Engineering second quarter, 2021 value added revenue of $77 million increase of $15 million or 25% on of 37% increase in shipments compared to the second quarter 2020, reflecting the strong service center demand restocking the supply chain and growth in underlying demand for semiconductor.

In automotive applications.

Additional detail on value added revenue on shipments by end market applications can be found in the appendix of this presentation.

Moving to slide 12.

Adjusted EBITDA for the first half of 2021 was $96 million, an increase of $36 million up 60% compared to the second half of 2020 the.

The increase reflects the higher value added revenue as discussed offset by higher freight benefit and incentive cost in addition to additional overhead cost.

As we continue to incorporate the work operations into our systems.

For the first half of 2021, our EBITDA margin was 19, 6%, reflecting the items noted above in addition to the impact of the slightly lower contribution margin of packaging products under current existing agreements.

Adjusted EBITDA for the second quarter, 2021 improved $24 million compared to the prior year quarter, reflecting the impact of packaging and improvements in our other end markets offset by higher manufacturing of corporate overhead cost.

Second quarter 2021, EBITDA margin of 18, 5% was down from 19, 7% EBITDA margin in the prior year quarter, reflecting increased operating cost and portfolio of product mix.

As previously noted by key our operation of commercial teams are working diligently to identify and continue the pass through inflationary driven rising freight manufacturing cost.

Furthermore, we expect that incremental transition aerie overhead cost will begin to moderate as we approach the end of the year and exit the transition service agreements with Alcoa related total work acquisition.

Yeah.

Moving to slide 13.

Reported operating income for the second quarter 2021 was $11 million.

Adjusting for $22 million of non run rate charges, including $3 million of additional work integration cost related to it and legal services and $19 million of noncash charges predominantly associated with onetime purchase accounting adjustments related to hedging and LIFO inventory adjusted operating income.

<unk> was $33 million up 54% from $21 million on a prior year second quarter, primarily due to the increase in EBITDA as previously discussed.

In addition, operating income includes $13 million of incremental depreciation and amortization charges, reflecting the impact of purchase accounting and the inclusion of work operations.

Reported net loss for the second quarter of 2021 was approximately $22 million compared to $7 million of net loss in the prior year quarter of.

Adjusting for non run rate items noted above and the $36 million pre tax impact associated with the refinancing of our $350 million 6.5% senior note adjusted net income for the second quarter 2021 was $16 million compared to adjusted net income of $6 million on the prior year quarter.

For the second quarter 2021, we recorded a tax benefit of approximately $60 million at an effective tax rate of 41% driven by discrete tax items.

Long term, we continue to believe our effective tax rate will be in the mid 20% range under the current tax regulations.

We anticipate that our cash tax rate will remain in the low single digits until we consume our federal Nols of $94.6 million as of the yearend 2020.

As reported earnings per diluted share were a loss of $1.42 in the second quarter 2021, compared to a loss of <unk> 41 of the prior quarter.

Adjusting for the non run rate items, including the $1.73 after tax per share impact related to the senior note refinancing adjusted earnings per diluted share for the dollar for the second quarter 2021, compared to adjusted earnings per diluted share of <unk> 36 cents for the second quarter 2020.

We continue to manage our business liquidity to support ongoing growth in the maintain financial strength and flexibility.

During the second quarter of 2021, we proactively refinanced our $350 million 6.5% unsecured notes due in 2025 with the new issuance of $550.550 million for 5% unsecured notes due in 2031.

The new financing service of significantly reduced the interest rate extend the maturity and increase liquidity, providing net proceeds of $160 million.

As of June 30th cash of approximately $283 million and more than $367 million of borrowing availability on our revolving credit facility provided total liquidity of approximately $650 million.

There are no borrowings underneath the revolving credit facility during the quarter and the facility remains undrawn.

With the addition of work we have further revised our anticipated capital spending for the for the full year of 2021 to be $80 million to $90 million, including growth initiatives to be discussed by Keith and the business outlook.

As we worked through the integration of the work at acquisition, we continue to manage several back office support operations under transition service agreements with Alcoa through the remainder of the year.

Higher overhead cost associated with the TSA, while also ramping up our staffing and other fees to be prepared for the handoff will continue to affect us through year end.

In addition to some higher corporate overhead cost as previously discussed we anticipate an additional $3 million to $4 million of non run rate cost related to the integration and project management support to also occur through the end of the year.

And now I'll turn the call back over to Keith to discuss our 2021 and beyond business outlook.

Thanks, Neil So, let's turn to slide 15.

So we are now seeing strong recovery from the pandemic and all the key markets we serve.

Aerospace is beginning to build momentum as our shipments on future bookings have started to increase as commercial air travel begins to recover.

As we have stated since the onset of the pandemic, we expect the aerospace market to recover to record 2019 levels by 2023 for 2024, and then resume its pre pandemic, 3% to 4% compound annual growth rate.

Our anticipated timing for this recovery aligns with that of our major customers and we expect the recovery to be the catalyst for restarting our previously announced phase 7 expansion of our wood Rolling mill to support the expected growth of heat treat plate for our aerospace and general engineering.

Customers.

Automotive growth is expected to remain strong with a greater than 5% compound annual growth range that continues to be driven by light weighting initiatives that we expect to increase.

As Oems continue to shift from internal combustion engines to more electrical vehicles. We expect these conversions to drive additional demand for extrusion as Evs are expected to have an even higher content of aluminum extrusion.

Okay.

Our general Engineering business continues to reflect the strongest activity we have seen in years.

It's led by the restocking at our service center customers, along with stronger end customer demand as the markets recover from the pandemic.

Demand is strong across our entire portfolio of flat rolled in hard and soft alloy extruded products.

As we previously stated we believe we are seeing a significant structural re shoring of supply lines in North America with Oems Rethinking supply strategies that have a larger portion of the material needs sourced domestically.

As the U S based manufacturer, we believe re shoring offer significant upside for Kaiser and we expect to continue to invest in capacity throughout the portfolio to meet the increasing demands of our service center and OEM customers.

Our reentry into packaging has exceeded our expectations.

As demand for food and beverage packaging continues to shift to aluminum in response to growing consumer demand.

In addition demand for North American aluminum packaging, which is strongly preferred in the marketplace is expected to outweigh supply for the foreseeable future.

Our customers are making substantial investments in new capacity and seeking to collaborate strategically with domestic suppliers like Kaiser who are willing to make the investments needed to meet the growing demand.

We've continued to review our market position and strategic options for our warrant Rolling mill and see significant opportunities to create value and grow through additional investments improved efficiencies and synergies to support customer demand.

We have stated all along that our portfolio of businesses focused on aerospace automotive and general engineering.

Provided a strong platform for investment and continued growth.

We also believe strongly that the acquisition of our Warrick Rolling mill with its strong position in the aluminum packaging markets would be transformative.

Adding another major growth leg and less cyclic markets with significant upside potential.

As we consider the impact of the work acquisition the anticipated aerospace recovery in the 2023.2024 time period.

The growing strength in our other businesses and our strong balance sheet position, we see significant opportunities for continued growth and investments in our businesses over the next several years.

Turning to slide 16.

We plan to meet the rapidly increasing needs of our packaging customers with the series of strategic investments backed by strong long term contracts, reflecting significant margin improvement facilitated by the current market environment.

We also anticipate improved efficiencies and expect the synergies as we continued to integrate warrant.

To that end, our initial investment will be of new role coat line at our warrant facility to provide additional coated capacity for food and beverage can applications.

We expect this to be an approximately $150 million investment and the equipment to be qualified and operational by early 2024.

This investment will be supported by long term agreements with improved pricing and margins for our coated products.

Turning to aerospace as you may recall in 2019, we announced our plans to launch our next aerospace expansion project phase 7 at our <unk> facility.

A planned 5 year $375 million of initiatives expected to increase our trip would rolling mills plate capacity by approximately 25% and provide improvements in quality and efficiencies.

While phase 7 was placed on hold when we entered the pandemic. The project remained on the shelf and ready to launch when supported by improving demand.

During 2020, we continued refining the project and have been able to reduce the planned spending from $375 million to approximately $225, while still achieving the previously planned benefits from the investments.

We achieved this by reengineering, our existing finishing capacity during the expected aerospace plate recovery period.

We expect to restart the planned phase 7 investment.

When warranted.

To meet the needs of our flat rolled aerospace and general engineering customers and.

And we expect the phase 7 investment to facilitate our ability to continue to meet their needs well into the remainder of this decade.

Finally, our positions in automotive and general engineering are expected to continue to improve as we support the planned growth in those markets with smaller targeted investments.

All told we expect to invest approximately $400 million on these growth initiatives over the next several years, along with an expected $60 million per year and sustaining capex spending.

Funding for these investments will be provided by our operations and supported by our strong balance sheet with the continued goal of meeting our net debt to adjusted EBITDA target of 2 times within the next 2 to 3 years.

Turning now to slide 17.

With the expected recovery rates of our major markets and the planned investments we've outlined the.

Kaiser portfolio is well positioned to deliver long term value added revenue approaching $2 billion.

With the expected adjusted EBITDA margins in the mid to high <unk>.

Turning to slide slide 19, and a summary of today's remarks.

Our key markets continue to recover and we see significant growth opportunities in our portfolio.

We have identified approximately $400 million of of investment initiatives to support that growth in our markets.

The consolidated business along with the planned investments will be positioned to deliver approximately $2 billion of value added revenue within an expected adjusted EBITDA margin in the mid to high <unk>.

We remain committed to our goals for maximizing the earnings potential of those businesses, where we are well positioned with our blue chip customer base.

To adhere to our capital priorities for organic then or inorganic and commitment to our dividend and to return excess cash to our shareholders.

Our outlook for the remainder of the year remains unchanged from our first quarter outlook.

And then finally, a disciplined approach to debt management with net debt to adjusted EBITDA targets at 2 times or better and a strong balance sheet with sufficient liquidity to service the growth of the business and to weather any significant downturn in our markets.

With that I will now open the call to any questions and I'll turn it back to Jackie.

Thank you we will now begin the question and answer session. If you have a question. Please press Star then 1 on your Touchtone phone if you wish to be removed from the queue. Please press the pound sign on the hash key there will be a delay for the first question is announced thank you of using a speakerphone you may need to.

Pick up the handset first before pressing the numbers once again, if you have a question. Please press Star then 1 on your Touchtone phone.

And our first question comes from.

Curt Woodworth with credit Suisse. Please go ahead.

Yes. Thank you good afternoon.

Hi, Kurt.

My first question is with respect to <unk> I wondered if you could.

Provide some more detail on on the expansion in terms of how much.

Incremental capacity Youll get from the new mill.

And with respect of sourcing substrate.

Can you talk to that 2 of the expectation that youll take on more metal.

From the Warrick smelter or are you looking for just more recycled material.

And then how do you see kind of the end product mix of that facility going forward.

Sure well the.

The volume focus here. This is more of a mix focus for the facility.

A good portion of that mill is already participating in coated products, we have a very strong position with many of our customers there and as we continue to see the growth ramp overall in food and beverage the coated side continues to be an area of that that we see significant opportunity.

<unk>.

During the due diligence process.

We highlighted this opportunity and we're determined as part of the acquisition strategy to try to initiate this growth going forward. So this provides us a significant amount more of mix for coated which for us is of higher margin opportunity.

As far as substrate goes Kurt.

We are obligated to take a portion of our business from the alcoa's smelter for a period of time and we will do so but the long term.

Expectations are that we will continue to bring in more scrap material more ubc's to manage that the end customers are requiring more sustainability.

The greenhouse gas the footprint carbon footprint. So the message is very clear, we will be moving over the years towards the more and more scrap based type substrate and other than that we do purchase some in and get it on the outside and we typically.

Manage that with.

With the other 2 items.

Under the understanding.

And then the third.

Third part Kirk could you tell me what remind me what the third part of your question was.

Yeah.

Well, just how the brand the product.

Yeah.

Yes currently currently a significant portion over half of our <unk>.

Business really focuses on coated materials.

The facility and we're large participants with not only beverage, but also food can.

And all of the customers that we continue to talk with continue to see growing demand the need and the desire for more domestic material and that not only covers the body stock, but it also covers the coded in stock and the other items, especially as they are relative to the food products. So so we.

We're seeing that demand and we're probably I think best suited to.

To take advantage of that opportunity and so we're moving in sync with our major customers to try to shore that up and provide more of that domestic product.

And those applications. So we see that mix, becoming a larger share of our total operating mix out of the award facility.

Okay great.

That's helpful and then with respect to the current I guess, the operating footprint you've got some obviously artificial issues with the auto with the chip shortage of we know arrow is basically at the bottom I was wondering can.

Can you talk to your current utilization rates across your system and how.

How successful have you been to be able to redeploy in the spend let's say thats fair aerospace capacity into other markets like.

The other types of play thank you.

Yes, actually we've been very successful.

And you can see that if you look in the the shipments and the breakout on the various markets that we're in you will see that our general engineering shipments are up substantially through the period end and we expect that to continue that is the ability that comes in 2 areas..1 is the Trent wood facility.

Which we ran into the situation, where we couldnt meet the aerospace demand and general engineering demand in 2019.

We're seeing very strong demand and the general engineering products and so we pivoted early last year and that just continues to expand every quarter at shrimp with so.

So we see that continuing on into 2022.

The other side that we're doing a very good job. The teams are doing an excellent job is on the automotive side. So on the automotive facilities that we participate they also.

I think every 1 of them also have a component of their business, where we supply to the general engineering to our service center customers and so as that demand has continued to meet levels as I stated the stronger than we've seen in many years, we've just pivoted that capacity from the auto and move those that that volume.

Through our presses over to supply the general engineering, and we have a pretty good supply chain to be able to provide that so that's been fairly seamless and it's been.

It's been an area of where it's been very profitable to the opportunity. There as we've stated with the cost that had been ratcheting up around freight and others. We have been rapidly increasing prices and passing through those cost and we've been able to do that through that general engineering side as well.

Okay, Great and then just 1 final on as I know you have the.

Excellent position within distribution day do you feel like the supply chain has.

Is there more restocking to go do you feel like.

Clearly in an era of there had been some excess inventory issues at the start of the year, but do you feel like the supply chain has restocked at this point or whats your sense for where we stand I know it varies among end product, but thank you, yes, it does but.

In the past Kirkland, when Jack with the answer this question.

We would follow the rod and bar from.

From the MSCI, we would look at watch inventories there in sales and shipments from mills to the service centers.

Haven't seen that in a couple of months, but the last time, we saw that we had our sales had started to ramp up in the fourth quarter of last year, maybe even part of the third quarter and as we watched in December I know on our first quarter call. We mentioned that look we're seeing significant increase in <unk>.

<unk> and bookings, but as we watched the inventory levels. The inventory levels are not coming up at the service centers. So.

And I anticipate as we know that the whole supply chain is in a restocking mode, but we're clearly seeing strong rebound from the pandemic as well so I think youre going to see restocking continue through the balance of the year.

And we think things will continue to be strong in 'twenty, 2 but we will we will keep our feelers out but for now I think with lead times of lead times in some of our long products are out to 20, plus weeks and then on our flat rolled products in that category, where out of 13 and 14 weeks. So we've got a pretty.

Good handle on that demand going forward and we think we think the balance of the year is going to be very strong and very tight.

That's great color, thanks, very much best of luck.

Thank you Kurt.

Thank you. Our next question comes from cash Josh Sullivan with benchmark. Please go ahead.

Hey, good afternoon.

Hi, Josh.

Just on the inflationary pressures can you detail what was labor and what was right just in the quarter.

And then on the on the labor side. Some of these capital investments you're planning are you designing in any more automation or other ways to combat labor inflation long term.

Yes, so you combine the the cost of few compare the the first quarter of where we were roughly.

2022% on our on our margins at the EBITDA margins in this quarter. We came in at roughly around 18, 5 that's about that's about the difference between mainly freight.

And additional plant overhead as we ramp up and some of the inefficiencies. So that really is the difference there in that category.

So.

And then absolutely.

Quite frankly, the who are the components that are that are very happy.

After the assertive have to be identified and have to be evaluated in any investment.

1.1 of the market conditions and do we have the support to get the return on the investment. So we remain very disciplined in looking at those and when we will launch these investments.

And then second we take a look not just on the commercial opportunity. We look at how do we improve efficiencies and or how we lower the cost. So automation is continuing to be a major part of what we look at.

Is the continued to be evaluated in every investment we look for and some of those opportunities of why we're able to launch the phase 7 and and get more productivity out with the lower lower investment upfront figure.

So so we take a look at that and then final another component that we're evaluating with every investment and everything we're doing is the sustainment potential.

How does that help on our carbon footprint, how does that help move us toward our objectives of what we're trying to achieve.

On our environmental social governance type focus. So every 1 of those questions have to be addressed with every investment and then we get a good idea of what the impact can be to the overall business.

Got it.

And then just with regard to the commercial aerospace plate outlook.

And you might of kind of answered it with <unk> question, but how does the breakdown between service distributor demand and then directly to the aerospace Oems.

And then just related to that Airbus has come out here with some longer term guidance given the industry. Some.

I think the teeth and do but can you detect the year level any discrepancies on plate pull through between the Oems at this point.

Well as we've stated all along Josh we've been talking with the Oems at the very beginning of the onset of the pandemic.

And some of the announced but we're also looking in speaking with them. So we're seeing the ramp up of their needs. We already have some clear clarity into next year, what their needs are going to be and then as we go forward and we are seeing a little bit of more urgency of putting that in place and positioning for.

We're looking at extensions of our major contracts.

So that give us that gives us more confidence in the volumes that are going to be required and the needs of our overall business, but 1 area that really stands out and I think it needs to be discussed more in.

In 2019, as we saw the the record levels for at the time for Aerospace and we expect to get back there as I stated in 'twenty 3 in 2020 for at that time, we were turning away business for General Engineering plate, and we werent able to meet the the satisfy the demand from our customers.

And we intend to address that with space.

In a big way so we're preparing not just for the return for aerospace, but we are preparing to continue the supply and grow our general engineering participation specifically with the service center customers. So that's going to be our commitment and another another area of quite frankly the.

The.

Making the.

Sure the investment is substantially backed.

Backed up with orders and that's our intent with the phase <unk> expansion.

We havent launched that yet we havent out of period, we're going to be evaluating the markets, we're going to be evaluating the needs, but again, we're looking at the aerospace recovery. We're looking at the growing general engineering demand for plate for domestic plate and we'll pull that shocked when it when it's time to do so.

Okay.

I guess, taking that all together the long term guidance or outlook that youre putting out there.

Should we think about the cadence or timeline.

Get to that.

Well if you follow the the.

The how we've outlined and if the markets behave as we expect.

We expect to be back to the 2019 levels at which time, we were squeezed on capacity for phase <unk> for phase 6 at the time.

Yeah.

It was really the impetus for launching phase 7 so we intend to get back there in $2023.2020 for we believe.

That may be pushed up if general engineering continues to grow and if indeed, there has been of change as we suspect with the need for domestic supply. So when we take a look at that we will have to back up 18% to 24 months to begin to place equipment orders and so forth to be prepared for.

For that demand in 2023 of 2024, so we will be evaluating this here over the next 6 to 12 months and see what the timing for that will be.

On the $150 million for work on the <unk> line.

That need is immediate it's urgent I wish I had it in the ground I wish we had started this the day we started our talks.

Our customers are have been very supportive.

And we're aware of.

The reason, we exited packaging in the Ninety's as that.

We could not sustain investments in.

And.

The market was a little bit on the demand supply side not going with us.

So we're being very cognizant of that growth going forward.

But as we see it we've stated we're sold out for 'twenty, 1 'twenty 2 through 'twenty for looks extremely strong and our customers are asking for more capacity and are willing to back that up with long term commitments. So.

We're going to start that we've already started that process and hope to begin it and we are beginning it and.

Plans are to have it in the ground and operational the early 2024, so as usual, we're being very disciplined on our approach, it's backed up by demand and when Thats, there and we can justify the investments.

We're going to act accordingly.

Got it.

And then just on the automotive side, you mentioned the lead times for it for aerospace and what do the lead times on the automotive side looked like just as the <unk> ramp on the OEM side picks up.

It's an interesting point, Josh and I was a lot more comfortable before the beginning of this morning, but general Motors came out this morning.

Prior to our call and announced that on the T..1 line, which is there light truck anticipation they are anticipating more shutdowns for third quarter.

And.

We're still seeing a number of new programs launched and those have been successful in growth, but this chip shortage continues to be around we're talking with customers, we're going to watch and evaluate.

But the.

The good thing for us at this moment, if we see continued decline on the automotive those plants can quickly go over and try to meet the general engineering need which is.

His strong robust and continues to have extremely long lead times comparatively speaking and so we'll adjust that capacity to meet the day meet the needs in general engineering.

Okay. Thank you for this debt.

Thank you Josh.

Thank you we have no further questions at this time I would like to turn the call over to Keith Harvey for closing remarks.

Okay well. Thank you for your interest in Kaiser aluminum. We appreciate your attendance here in.

Our interest in our company, we look forward to.

Talking with you next quarter on the third quarter outlook. So thank you and have a good day.

Thank you ladies and gentlemen. This concludes today's conference. Thank you for participating you may now disconnect.

Okay.

[music].

The.

[music].

Yes.

Okay.

Yes.

The.

Yes.

Okay.

Yes.

Sure.

[music].

Okay.

[music].

Okay.

[music].

Okay.

Yes.

Okay.

Yes.

Okay.

[music].

Yes.

Okay.

[music].

And you touched on the phone I would now like to turn the call over to MS. Melinda Ellsworth. That's all for you may begin.

We've also posted a PDF version of the slide presentation for this call.

Before we begin I'd like to refer you to the first 3 slides of our presentation and remind you. This the statements made by management and the information contained on this presentation that constitute forward looking statements are based on management's current expectations for summary of specific risk factors that could cause results to differ materially from those.

The press in 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, 2020 and forms 10-Q for the quarters ended March 31 and June 32021.

The company undertakes no duty to update any forward looking statements to conform the statement to actual results or changes on the companys expectations.

In addition, we have included non-GAAP financial information in our discussion reconciliations for the most comparable GAAP financial measures are included on the earnings release and on the appendix of the presentation reconciliation.

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 or cannot be reasonably predicted or provided without unreasonable effort.

Any reference in our discussion today to EBITDA means adjusted EBITDA, which excludes non run rate items for which we've provided reconciliations in the appendix.

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 Thanks for Melinda and welcome to the second quarter 2021, Kaiser aluminum earnings call.

Turning to slide 6.

We delivered strong value added revenue of $318 million and.

And adjusted EBITDA of $59 million for the quarter.

We continue to see improving conditions in all of our end markets with automotive sales being the exception for the quarter as strong demand was offset by ongoing shortages of computer chips that once again impacted north American light vehicle production.

In today's inflationary environment, our operations and commercial teams have been working diligently to identify and pass through rising cost associated with freight and materials.

In addition, while our workforce has risen to the challenge of meeting increasing demand. We are facing the same challenges as other employers, including the ability to efficiently attract and add labor to meet that demand, which has led to slightly higher labor cost.

Moving on to the current market conditions.

Aerospace and high strength sales continued to improve sequentially from the second half of last year.

As barriers for normalized air travel continue to for the full recovery of this business back to the record 2019 levels remains on track.

We expect better results in the third quarter and fourth quarter compared to the prior year quarters with steady gains continuing through the 2023.2024 time period.

Demand for our General Engineering project products continues to be robust.

Shipments in this category rose sequentially from the second half of 2020 and have offset slower commercial aerospace plate sales and automotive extruded production shortfalls.

We see continued strong demand from our service center customers and the customers they serve through the balance of 2021 and into 2022.

We feel the supply chain challenge will begin to abate in the third quarter and sales should stabilize them recover but the situation continues to be dynamic.

Our projection of year over year value added revenue increase of 35% to 45% for automotive sales in 2021 remains intact at this time.

Our packaging business remains robust with multiple discussions underway with customers for future supply.

We are evaluating volumes price and mix as we discuss our options at work.

These discussions regarding strategic long term supply position.

Support additional profitable growth in the food and beverage packaging markets in future years.

I will have additional color commentary on our outlook for packaging in my later remarks.

The full integration of work in the Kaiser continues to go well and our teams are working diligently to completely transfer support services from our cohorts of Kaiser by the end of the year.

The seamless integration of the business combined with strong financial results to date further reinforces the warrant transaction was the right long term decision for Kaiser and its shareholders.

You added revenue of $490 million for the first half of 2021 increased the $184 million or 60% compared for the second half of 2020 <unk>.

Value added revenue for the second quarter of 2021 of $318 million increased $143 million or <unk>, 82% compared to the prior year period, driven by the previously mentioned packaging applications and continued improvement in on our general engineering and automotive applications.

Turning to slide 9.

Aerospace high strength of value added revenue for the first half 2021 of $151 million improved $14 million or 10% on a 31% increase in shipments compared to the second half of 2020.

As a reminder, the second half of 2020 included approximately $15 million of additional revenue related to modifications in the 2020 customer declarations under multiyear contracts.

The strength in demand for our defense related applications.

Moving to slide 10.

Automotive value added revenue for the first half 2021 of $53 million demonstrated continued improvement increasing $2 million of 5% on a slight increase in shipments compared to the second half of 2020 the.

Compared to the prior year quarter automotive value added revenue for the second quarter of 2021 was $25 million, increasing $16 million or of 176% on a 148% increase in shipments, reflecting the impact of COVID-19 related automotive production shutdowns in the second quarter of <unk>.

1 of 20.

Turning to slide 11.

The supply chain.

And automotive applications.

Additional detail on value added revenue on shipments by end market applications can be found in the appendix of this presentation.

Moving to slide 12.

Adjusted EBITDA for the first half of 2021 was $96 million, an increase of $36 million up 60% compared to the second half of 2020.

The increase reflects the higher value added revenue as discussed offset by higher freight benefit and incentive cost. In addition to additional overhead cost as we continue to incorporate the work operations into our systems.

Second quarter 2021, EBITDA margin of 18, 5% was down from 19, 7% EBITDA margin in the prior year quarter, reflecting increased operating cost and portfolio of product mix.

As previously noted by key our operation of commercial teams are working diligently to identify and continue the pass through inflationary driven rising freight manufacturing cost.

Furthermore, we expect that incremental transition hurry overhead cost will begin to moderate as we approach the end of the year and exit the transition service agreements with Alcoa related total work acquisition.

Yes.

Moving to slide 13.

Reported operating income for the second quarter 2021 was $11 million <unk>.

Adjusting for $22 million of non run rate charges, including $3 million of additional work integration cost related to IP of legal services and $19 million of noncash charges predominantly associated with onetime purchase accounting adjustments related to hedging and LIFO inventory adjusted operating income was.

$33 million up 34% from $21 million on a prior year second quarter, primarily due to the increase in EBITDA as previously discussed and.

In addition, operating income includes $13 million of incremental depreciation and amortization charges, reflecting the impact of purchase accounting and inclusion of work operations.

Reported net loss for the second quarter of 2021 was approximately $22 million compared to $7 million of net loss in the prior year quarter.

For the second quarter 2021, we recorded a tax benefit of approximately $60 million at an effective tax rate of 41% driven by discrete tax items.

Long term, we continue to believe our effective tax rate will be in the mid 20% range under the current tax regulations.

We anticipate that our cash tax rate will remain in the low single digits until we consume our federal Nols of $94.6 million as of the year end 2020.

As reported earnings per diluted share were a loss of $1.42 in the second quarter of 2021 compared to a loss of <unk> 41 for the prior quarter adjusting.

Adjusting for the non run rate items, including the $1.73 after tax per share impact related to the senior note refinancing adjusted earnings per diluted share for the dollar.

For the second quarter 2021, compared to adjusted earnings per diluted share of <unk> 36 sort of second quarter 2020.

We continue to manage our business liquidity to support ongoing growth in the maintain financial strength and flexibility.

During the second quarter 2021, we proactively refinanced our $350 million 6.5% unsecured notes due in 2025 with the new issuance of $550.550 million for 5% unsecured notes due in 2031 the <unk>.

New financing service of significantly reduced the interest rate extend the maturity and increase liquidity, providing net proceeds of $160 million.

As of June 30th cash of approximately $283 million and more than $367 million of borrowing availability on our revolving credit facility provided total liquidity of approximately $650 million.

There are no borrowings under the revolving credit facility during the quarter and the facility remains undrawn.

As we work through the integration of the work at acquisition, we continue to manage several back office support operations under our transition service agreements with Alcoa through the remainder of the year.

Higher overhead costs associated with the TSA, while also ramping up our staffing and other fees to be prepared for the handoff will continue to affect us through year end.

In addition to some higher corporate overhead cost as previously discussed we anticipate on an additional $3 million to $4 million of non run rate cost related to the integration and project management support to also occur through the end of the year.

And now I'll turn the call back over to Keith to discuss our 2021 and beyond business outlook.

Thanks, Neil So, let's turn to slide 15.

So we are now seeing strong recovery from the pandemic and all of the key markets we serve.

Aerospace is beginning to build momentum as our shipments on future bookings have started to increase as commercial air travel begins to recover.

Customers.

Automotive growth is expected to remain strong with a greater than 5% compound annual growth rate that continues to be driven by light weighting initiatives that we expect to increase.

Okay.

Our general Engineering business continues to reflect the strongest activity we have seen in years.

Led by the restocking at our service center customers, along with stronger end customer demand as the markets recover from the pandemic.

Demand is strong across our entire portfolio of flat rolled in hard and soft alloy extruded products.

As the U S based manufacturer, we believe reassuring offers significant upside for Kaiser and we expect to continue to invest in capacity throughout the portfolio to meet the increasing demands of our service center and OEM customers.

Our reentry into packaging has exceeded our expectations as demand for food and beverage packaging continues to shift to aluminum in response to growing consumer demand.

In addition demand for North American aluminum packaging, which is strongly preferred in the marketplace is expected to outweigh supply for the foreseeable future.

We have continued to review of our market position and strategic options for our warrant rolling mill and see significant opportunities to create value and grow through additional investments improved efficiencies and synergies to support customer demand.

We have stated all along that our portfolio of businesses focused on aerospace automotive and general engineering.

Provided a strong platform for investment and continued growth.

We also believe strongly that the acquisition of our award Rolling Mill with its strong position in the aluminum packaging markets would be transformative adding.

Adding another major growth leg and less cyclic markets with significant upside potential.

As we consider the impact of the work acquisition the anticipated aerospace recovery in the 2023.2024 time period.

Turning to slide 16.

We also anticipate improved efficiencies and expect the synergies as we continue to integrate warrant.

To that end, our initial investment will be of new role coat line at our warrant facility to provide additional coated capacity for food and beverage can applications.

We expect this to be an approximately $150 million investment and the equipment to be qualified and operational by early 2024.

This investment will be supported by long term agreements with improved pricing and margins for our coated products.

Turning to aerospace as you may recall in 2019, we announced our plans to launch our next aerospace expansion project phase 7 at our <unk> facility.

The planned 5 year $375 million of initiatives expected to increase our trip would rolling mills plate capacity by approximately 25% and provide improvements in quality and efficiencies.

While phase 7 was placed on hold when we entered the pandemic. The project remained on the shelf and ready to launch when supported by improving demand.

We achieved this by reengineering, our existing finishing capacity during the expected aerospace plate recovery period.

We expect to restart the plant phase 7 investment when warranted.

To meet the needs of our flat rolled aerospace and general engineering customers and we expect the phase 7 investment to facilitate our ability to continue to meet their needs well into the remainder of this decade.

Okay.

Finally, our positions in automotive and general engineering are expected to continue to improve as we support the planned growth in those markets with smaller targeted investments.

All told we expect to invest approximately 400 million of.

On these growth initiatives over the next several years, along with an expected $60 million per year on sustaining capex spending.

Turning now to slide 17.

With the expected recovery rates of our major markets and the planned investments we have outlined.

On the Kaiser portfolio is well positioned to deliver long term value added revenue approaching $2 billion with expected adjusted EBITDA margins in the mid to high <unk>.

Turning to slide slide 19, and a summary of today's remarks.

Our key markets continue to recover and we see significant growth opportunities in our portfolio.

We have identified approximately $400 million of those investment initiatives to support that growth in our markets.

We remain committed to our goals for maximizing the earnings potential of those businesses, where we are well positioned with our blue chip customer base.

To adhere to our capital priorities for organic then or inorganic and commitment to our dividend and to return excess cash to our shareholders.

Our outlook for the remainder of the year remains unchanged from our first quarter outlook.

And then finally, a disciplined approach to debt management.

The net debt to adjusted EBITDA targets at 2 times or better and a strong balance sheet with sufficient liquidity to service the growth of the business and to weather any significant downturn in our markets.

With that I will now open the call to any questions and I'll turn it back to Jackie.

The handset first before pressing the numbers once again, if you have a question. Please press Star then 1 on your Touchtone phone.

And our first question comes from.

Curt Woodworth with credit Suisse. Please go ahead.

Yes. Thank you good afternoon.

Hi, Kurt.

My first question is with respect to the Warwick I wondered if you could.

Provide some more detail on the expansion in terms of how much.

Incremental capacity Youll get from the new mill.

And with respect of sourcing substrate.

Can you talk to that 2 of the expectation that youll take on more metal.

On the warrant smelter or are you looking at the more recycled material.

Then how do you see kind of the end product mix of that facility going forward.

Sure well the.

The volume focus here. This is more of a mix focus for the facility.

A good portion of that mill is already participating in coated products were very strong position with many of our customers. The here and as we continue to see the growth ramp overall in food and beverage the coated side continues to be an area that that we see significant on.

Opportunity.

During the due diligence process, we highlighted this opportunity and we're determined as part of the acquisition strategy to try to initiate this growth going forward. So this provides us a significant amount more of mix for coated which for us is of higher margin opportunities.

<unk>.

As far as substrate goes Kurt.

We are obligated to take a portion of our business from the alcoa's smelter for a period of time and we will do so but the long term.

Expectations are that we will continue to bring in more scrap material more ubc's to manage that the end customers are requiring more sustainability.

Green House gas the footprint carbon footprint. So the message is very clear, we will be moving over the years towards a more and more scrap based type of substrate and other than that we do purchase some <unk> on the outside and we typically manage that.

With the other 2 items and under.

Understanding.

And then the.

Third part Kirk could you tell me what remind me what the third part of your question was.

Well, just how the brown the product.

Yeah.

Yeah Yeah.

Yes currently currently a significant portion over half of our <unk>.

Business It really focuses on coated materials.

The facility and we're large participants with not only beverage, but also food can and all of the customers that we continue to talk with continue to see growing demand the need and the desire for more domestic material and that not only covers the batista.

But it also covers the coated in stock and the other items, especially as they are relative to the food products. So so we're seeing that demand and we're probably I think best suited to.

To take advantage of that opportunity and so we're moving in sync with our major customers to try to shore that up and provide more of that domestic product.

And those applications. So we see that mix, becoming a larger share of our total operating mix out of the award facility.

Okay great.

That's helpful and then.

With respect to the current I guess, the operating footprint, you've got some obviously artificial issues with the auto with the chip shortage of you know arrow.

The bottom I was wondering can.

Can you talk to your current utilization rates across your system and how.

How successful have you been to be able to redeploy in the spend let's say that's fair aerospace capacity into other markets like.

The other types of play thank you.

Yes, actually we've been very successful.

Which we ran into the situation, where we couldnt meet the aerospace demand and general engineering demand in 2019.

We're seeing very strong demand and the general engineering products and so we pivoted early last year and that just continues to expand every quarter at tremblant. So.

So we see that continuing on into 2022.

The other side that we're doing a very good job. The teams are doing an excellent job is on the automotive side. So on the automotive facilities that we participate they also.

I think every 1 of them also have a component of their business, where we supply to the general engineering to our service center customers and so as that demand has continued to meet levels. As I stated is stronger than we've seen in many years, we have just pivoted that capacity from the auto and move those that debt.

The volume through our presses over to supply the general engineering, and we have a pretty good supply chain to be able to provide that so that's been fairly seamless and it's been.

It's been an area of where it's been very profitable to the opportunity. There as we've stated with the cost that have been ratcheting up around freight and others. We have been rapidly increasing prices and passing through those cost and we've been able to do that through that general engineering side as well.

Okay, Great and then just 1 final 1 I know you have the.

Excellent position within distribution did do you feel like the supply chain has.

Is there a more restocking to go do you feel like.

In the past Kirkland, when the Jack with the answer this question.

We would follow the rod and bar from.

From the MSCI, we would look at watch inventories there in sales and shipments from mills to the service centers.

<unk> and bookings, but as we watched the inventory levels of the inventory levels are not coming up at the service centers. So.

And we think things will continue to be strong in 'twenty, 2 but we will we will keep our feelers out but for now I think with lead times lead times in some of our long products are out to 20, plus weeks and then on our flat rolled products in that category were up to 13% and 14 weeks. So we've got a pretty.

Good handle on that demand going forward and we think we think the balance of the year is going to be very strong and very tight.

That's great color, thanks, very much best of luck.

Thank you Kurt.

Thank you. Our next question comes from cash Josh Sullivan with benchmark. Please go ahead.

Hey, good afternoon.

Hi, Josh.

Just on the inflationary pressures can you detail what was labor and what was right just in the quarter.

And then on the on the labor side. Some of these capital investments you're planning are you designing in any more automation or other ways to combat labor inflation long term.

Yes, so you combine the the cost if you compare the the first quarter of where we were roughly.

2022% on our on our margins EBITDA margins in this quarter, we came in at roughly around 18, 5 that's about that's about the difference between mainly freight.

And additional plant overhead as we ramp up and some of the inefficiencies. So that really is the difference there in that category.

No.

And then absolutely.

Quite frankly here of the components that are that are very.

Have to be assertive have to be identified and have to be evaluated in any investment.

1 what are the market conditions and do we have the support to get the return on the investment. So we remain very disciplined in looking at those and when we will launch the.

These investments.

So so we take a look at that and then final another component that we're evaluating with every investment and everything we're doing is the sustainment potential.

How does that help on our carbon footprint, how does that help move us toward our objectives of what we're trying to achieve.

Got it.

Then just with regard to the commercial aerospace plate outlook.

And you might have kind of answered it with current question, but how does that breakdown between service distributor demand and then directly to the aerospace Oems.

And then just related to that Airbus has come out here with some longer term guidance given the industry. Some.

I'm going to think the teeth into but can you detect at your level of any discrepancies on plate pull through between the Oems at this point.

Well as we've stated all along Josh we've been talking with the Oems at the very beginning of the onset of the pandemic.

We're looking at extensions of our major contracts.

And we intend to address that with space.

The.

Making the.

Sure the investment is substantially backed.

Backed up with orders and that's our intent with the phase <unk> expansion, we havent launched that yet we haven't had a period, we're going to be evaluating the markets, we're going to be evaluating the needs, but again, we're looking at the aerospace recovery. We're looking at the growing general engineering demand for plate for domestic plate.

And.

We will pull that shot when it when it's time to do so.

And then I guess, taking that all together the long term guidance or outlook that youre putting out there.

Should we think about the cadence or timeline.

To that.

Well if you follow the the.

The how we've outlined and if the markets behave as we expect.

We expect to be back to the 2019 levels at which time, we were squeezed on capacity for phase <unk> for the phase 6 at the time.

It was really the impetus FERC.

Launching phase 7 so we intend to get back there in 2023.2020 for we believe.

That may be pushed up yes, if general engineering continues to grow and if indeed, there has been of changes we suspect with the need for domestic supply. So when we take a look at that we will have the back up 18% to 24 months to begin to place equipment orders and so forth to be prepared for.

For that demand in 2023 of 2024, so we will be evaluating this here over the next 6 to 12 months and see what the timing for that will be.

On the $150 million for warrant on the Roku line.

That need is immediate it's urgent I wish I had it in the ground I wish we had started this the day we started our talks.

Our customers are.

Are have been very supportive.

And we're aware of the reason we exited packaging in the Ninety's is that we.

We could not sustain investments in.

And.

The market was a little bit.

On the demand supply side, not going with us.

So we're being very cognizant of that growth going forward.

We're going to start that we've already started that process and hope to begin it and we are beginning it and.

Plans are to have it in the ground and operational the early 2020 for so.

As usual, we're being very disciplined on our approach, it's backed up by demand and when that's there and we can justify the investments.

Going to act accordingly.

Got it.

And then just on the automotive side, you mentioned the lead times for it for aerospace and what do the lead times on the automotive side looked like just as the <unk> ramp on the OEM side picks up.

It's an interesting point, Josh and I was a lot more comfortable before the beginning of this morning, but general Motors came out this morning.

The prior to our call and announced that on the T..1 line, which is the light truck anticipation they are anticipating more shutdowns for third quarter and.

The good thing for us at this moment, if we see continued decline on the automotive those plants can quickly go over and try to meet the general engineering need which.

His strong robust and continues to have extremely long lead times comparatively speaking and so we'll adjust that capacity to meet the day meet the needs in general engineering.

Okay. Thank you for that.

Thank you Josh.

Thank you we have no further questions at this time I would like to turn the call over to Keith Harvey for closing remarks.

Okay well. Thank you for your interest in Kaiser aluminum, we appreciate your attendance here and.

Our interest in our company, we look forward to.

Talking with you next quarter on the third quarter outlook. So thank you and have a good day.

Thank you ladies and gentlemen. This concludes today's conference. Thank you for participating you may now disconnect.

Q2 2021 Kaiser Aluminum Corp Earnings Call

Request a DemoDemo

KALU

Kaiser Aluminum

Earnings