Q3 2022 Kaiser Aluminum Corp Earnings Call
Welcome to the Kaiser aluminum third quarter 2022 earnings call. My name is Vanessa 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 have a question. Please press.
Zero then one on your Touchtone phone I will now turn the call over to Melissa Ellsworth you may begin.
Thank you good afternoon, everyone and welcome to Kaiser Aluminum's third quarter and first.
Nine months.
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 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 <unk>.
<unk>, 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.
For materials. The forward 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 2021 the.
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 to most comparable GAAP financial measures are included.
Put it in the Earth's really restoration.
There's a certain forward financial measures are not provided because certain items required for such reconciliation outside of our control <unk> cannot reasonably predicted are provided without unreasonable effort.
Any reference in our discussion today to EBITDA means.
<unk> 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 case.
Thanks for Linda and thank you all for joining us for a review of our third quarter results.
Turning to slide six.
While our third quarter results reflected significant headwinds primarily related to supply chain issues at our reward Rolling mill we.
We made tremendous progress to position Kaiser for success moving forward.
EBITDA declined to 31 million.
In the third quarter predominantly reflecting the headwinds associated with the U S Mag and Alcoa supply chain challenges at work and the planned outage at triplet in which we incurred incremental costs in the aggregate.
Totaling approximately $24 million for the quarter.
We believe these issues at our work operation, which has caused significant disruptions during most of the year are now resolved.
More on this topic in a moment.
With the actions taken and major work now complete we believe work Kirkwood and our other facilities are well positioned to operate it at a more normalized run rate for the balance of the year and what remains a very challenging environment.
As previously announced in early July we declared force majeure at our work Rolling mill due to the abrupt cessation of magnesium deliveries from U S. Max.
However, the force majeure was lifted in early September after we successfully secured and qualified magnesium from additional alternative sources.
At this point, we have secured all our magnesium requirements through 2023.
We're in the process of finalizing agreements for 2024 and beyond.
As a result, we believe our supply base is well diversified and we are no longer reliant on a single supplier or geographical region.
Litigation with U S. Meg continues but U S. Mag is no longer a factor in our magnesium supply base moving forward.
At the time, we have declared force majeure.
The anticipated production and shipments of certain beverage and food packaging products.
Could be reduced by 40% to 50% of previously expected shipments in the third quarter.
Our actual shipments were better than expected.
And with the security of our magnesium supply and board capacity now fully restored.
We'll work with our customers to return to more normalized production through the remainder of the year.
Worked with Alcoa continued during the quarter to improve the smelters performance, which negatively impacted the efficiencies and financial performance of the Warrick Rolling mill for several quarters.
These issues have now been addressed and.
And our cost performance and quality have improved back to acceptable levels.
As noted in our second quarter earnings call.
We continue to qualify additional molten metal sources, so further diversify our metal supply going forward.
And mitigate the risk of any further operational disruptions.
Longer term, we intend to increase the use of recycled materials as a percentage of our raw materials as we continue to migrate towards more sustainable raw material and power supplies.
Or.
During the quarter, we completed a long planned major outage at our <unk> Rolling mill.
There was significant work completed on our large stretcher.
The cast house and other areas within the mill with minimal disruption to our customers.
<unk> is well positioned for a strong finish to the year as we focus on satisfying and improving aerospace market.
And meeting continued strong demand for general engineering plate.
I want to congratulate the team there for the tremendous effort put forth to complete this body of work and prepare our operations for continued growth moving forward.
We also continue to make good progress on our Roku capacity expansion project for beverage in Bhutan applications at our award facility.
With the equipment on order, we are focused on a red again this site for installation and startup of the new Roku line.
To begin in late 2023, or early 2024 with production to be fully operational mid to late 2024.
In summary, I am pleased with the progress we've made to restore our operations to more normalized levels. Following the significant headwinds we experienced during the third quarter.
We have a strong and diversified portfolio and.
And demand has remained solid for the vast majority of the end markets we serve.
Which we expect to continue for the balance of the year.
While continued high inflationary conditions remain and are having an adverse impact on cost and efficiencies with our operations.
Our teams are focused on offsetting these higher cost and inefficiencies through cost reduction efforts.
This is the improvements in.
Continued commercial actions to improve our margins demonstrating.
Demonstrating the flexible nature of our cost structure.
I am confident our solid market position strong customer relationships and multiyear contracts with strategic partners, we'll continue to support the long term profitable growth for Kaiser.
I'll now turn the call over to Neil for more detail on the quarter Neil. Thank you Keith and good morning, everyone turning to slide eight.
<unk> revenue for the third quarter, 2022 of $356 million increased $50 million or 16% compared to the prior year period.
Predominantly reflecting improved pricing across our end markets to mitigate the impact of inflationary costs.
Our Aero high strength business value added revenue increased $4 million or 5% year over year, and 10% lower shipments, reflecting a higher mix of high value products, while shipments reflect the impact of the planned outage at our triplet facility.
Packaging value added revenue improved year over year by $21 million or 17% on 15% lower shipments.
Afflicting, the commodity surcharges and higher pricing, while lower shipments reflect the impact of the force majeure declared in July for our packaging products.
General engineering products improved $19 million or 26% year over year, reflecting higher pricing on 8% lower shipments, which was driven by softness in demand for extruded Rod and bar products ship to service centers.
Auto var continued improved $5 million or 25% and 23% increase in shipments.
Value added revenue.
$1 1 billion for the first nine months of 2022 increased $307 million or 39% compared to the first nine months of 2021.
Aero high strength value added revenue increased $45 million year over year on an 11% improvement in shipments, reflecting higher pricing and continued improvement in underlying commercial aerospace demand.
Packaging value add value add.
Revenue for the first nine months of 2022 was $447 million or $189 million higher reflecting a full nine months of the work acquisition commodity surcharges and higher pricing.
General engineering value added revenue improved year over year by $69 million.
Primarily driven by higher pricing with continued strong demand.
<unk> added value added revenue for automotive applications increased 3 million relatively flat as compared to the prior year first nine months, reflecting the ongoing semiconductor and auto and other automotive supply chain disruptions.
Additional detail on value added revenue and shipments by end market applications can be found in the appendix of the presentation.
Turning to slide nine.
Adjusted EBITDA for the third quarter, 2022 decreased $19 million compared to the prior year quarter.
Reflected in the current quarter, the current quarter, our $24 million of higher cost and inefficiencies due to the force majeure declared in our packaging operation in July and the planned outage at our <unk> facility.
In addition, we are continuing to be affected by higher inflationary driven costs, which we are aggressively moving to offset with cost reduction efforts efficiency improvement projects and pricing actions.
Our third quarter 2022, EBITDA margin of eight 8% declining from 16, 5% in the prior year period, reflecting the impact of the noted inefficiencies and higher costs.
Adjusted EBITDA for the first nine months of 2022 was $128 million.
A decrease of $19 million as compared to the first nine months of 2021.
The decrease reflects the higher value added revenue as discussed offset by higher major maintenance manufacturing energy and employee related costs as well as the $54 million of supply chain disruptions and incremental freight costs. We have discussed this in previous quarters, which have.
<unk> now been addressed that's noted by Keith.
Moving on to slide 10.
Reported operating income for the third quarter of 2022 was $3 million.
Adjusting for $3 million of non run rate charges. Adjusted operating income was $6 million down 78% from $26 million in the prior year third quarter, primarily due to the decrease in EBITDA as previously discussed.
In addition.
Operating income includes $1 million of incremental depreciation and amortization expense.
Chart reported net income for the third quarter 2022 was $3 million compared to a reported net loss of $2 million in the prior year quarter.
Adjusting for non run rate items noted above adjusted net income for the third quarter of 2022 was $10 million compared to adjusted net income of $9 million in the prior year quarter.
The third quarter of 2022 also reflected a $13 million of.
A pre tax other income primarily related to a sale of a non strategic legacy land assets.
For the third quarter of 2022, we recorded a tax expense of $1 million, reflecting the impact of the required tax adjustments.
For the full year of 2022, we now expect our effective tax rate to be in the low to mid single digits.
Over the long term, we continue to believe our annual effective tax rate before discrete items will be in the low to mid 20% range.
We anticipate that our cash taxes will remain in the low to mid single digits until we consume our federal NOL, which as of year end 2021 were $187 million.
As reported income per diluted share was <unk> 16 in the third quarter 'twenty, two compared to a loss per diluted share of <unk>.
Prior year quarter.
Adjusting for nonrecurring items adjusted income per diluted share was <unk> 60 for the third quarter 2022, compared to an adjusted income per diluted share of <unk> 57.
In the third quarter of 2021.
As of September 30th cash of approximately $129 million and more than $555 million of borrowing availability on our revolving credit facility provided total liquidity of approximately $684 million.
There were no borrowings under the revolving credit facility during the quarter and the facility remains undrawn.
For the first nine months of 2022 or $128 million of EBITDA and available cash funded $141 million of working capital usage predominantly related to inventory build.
$82 million of capital.
$34 million of interest $38 million of dividends paid to our shareholders and $5 million of Capex.
We expect working capital to be a source of funds over the next few quarters as the business adjust to a more normalized operating environment.
We have lowered our planned capital spending for the full year 2000, $22 million to $165 million to $175 million.
Due to the supply chain challenges and the timing of payments on certain projects.
And now I'll turn the call back over to Keith to discuss our fourth quarter 2022, and beyond business outlook, Keith Alright, Thanks, Neil and now for our outlook for the balance of the year.
Turning to slide 12.
We expect a solid fourth quarter in Aero and high strength shipments to end the year as the momentum continues.
In commercial aerospace towards full recovery from the pandemic.
Rate increases for singles have either been announced or are being planned in 2023 as supply chains improve.
Airline passenger miles increase and declarations by the airframe or support a stronger upcoming year.
Business jet production is strong yet not fully reflective of real demand due to limitations set by ongoing supply chain issues.
Even so there is a strong backlog for business jets with production increases set to grow each year over the next several years.
Defense is expected to remain strong led by increasing demand for the F 35.
And the other legacy platforms.
Support.
We remain well positioned to continue to support these programs.
Our <unk> mill, and our other facilities, which service the aerospace and high strength and markets are.
<unk> well to capitalize on the strong demand expected in the fourth quarter and beyond.
Turning to slide 13.
With the resolution of our magnesium and molten metal supply chain issues at our Warrick Rolling mill in early September and the return to a more normalized operating environment.
We expect to see shipments continue to improve in the fourth quarter.
Our capacity for 2023 is fully committed.
And our long term outlook remains intact.
As discussed earlier, our investment for a new role coat line is on track and expected to be fully operational in 2024.
Discussions with customers for continued supply through the balance of the decade continue.
And we remain encouraged with our long term outlook for profitable growth in packaging at war.
Now turning to general industrial in Slide 14.
During our second quarter earnings call, we noted inventory levels for extruded Rod and bar products at service centers were slightly elevated over recent previous periods, suggesting supply was catching up to the strong demand we've experienced over the previous 18% to 24 months.
During the third quarter inventories have appeared to flatten out slight and slightly decline from last quarter's higher levels.
But we believe this is more a factor of lower demand and resulting lower shipments from the mills to service centers and soft alloy extruded long products.
We now expect that softening in long products will continue into the fourth quarter.
Due to typical seasonality.
And inventories, becoming more imbalance with current demand.
However, we are not experiencing the same market dynamics with general engineering plate shipments.
Demand remains very strong and we anticipate strong shipments of general engineering plate will continue well into 2023.
Global factors continued to limit availability of these products from the typical importing mills into the North American market.
Allowing us to maximize our opportunities.
And with the <unk> outage behind US we are well positioned to serve these customers in the fourth quarter and beyond.
Turning to slide 15.
Automotive continues its slow recovery.
Due to various supply change shortages and at this point, we don't expect any meaningful recovery until 2023.
Now turning to slide 16.
Given the current outlook for our markets.
And our expected mix of shipments.
Along with continued strong inflationary pressures and an expected higher incremental spend of approximately $5 million of major maintenance in the fourth quarter.
We expect our fourth quarter, EBITDA and margins to improve to levels similar to the results we deliver in the first half of this year.
Now that our major supply chain issues have largely been resolved.
And in summary, turning to slide 18.
Over the longer term our strategy remains intact and we continue to believe we are well positioned to deliver value added revenue of approximately $2 billion.
And an EBITDA margin in the mid to high 20% range.
Timing of which remains subject to expected investments and macroeconomic conditions.
With that I will now open the call to any questions you may have.
NASA.
And thank you we will now begin our question and answer session. If you have a question. Please press zero then one on your Touchtone phone.
Wish to be removed from the queue. Please prestero then too.
Using a speakerphone please pick up the handset first before pressing the numbers. Once again, if you have a question. Please press zero then one our first question comes from Josh Sullivan with the benchmark company.
Hey, good afternoon.
Hey, Josh.
Just within the aerospace outlook, you get Boeing and Airbus experiencing some supply chain issues on the engine side.
How are you seeing what are you seeing as far as impact to the aerospace plate side for airframes or maybe how is your commercial airframe demand outlook evolved over the last nine months.
Well.
During the low point, Josh So our high point was the actually the end of the first quarter in 2020.
And during the periods I think when the depths of the pandemic, our aerospace and high strength shipments fell to about 40% below that high high level and actually if you looked at our full year 2019 is actually the the market there.
We recovered back we think we'll be down around <unk>.
30%, so we're recovering and moving back but we still we're still on track for that 2023 late 2020 through 2020 for recovery period that.
Thats really hinging on the recovery on commercial air.
Airframes.
In discussions with all of our major airframe customers. There, we're continuing to be encouraged with the demand for plate now theyre taking into account all the shortages that they are dealing with but we believe we're still on track and from our position, especially with <unk> and the other facility.
We have the <unk>.
Contracts are in place and as long as.
The demand in recovery continues and there is no other major surprises on supply chain issues.
We think we're on that track for recovery and look for more improvement next year on that road to recovery.
Yes.
Maybe sticking with high strength, what are you seeing as far as semiconductor capital equipment demand.
Of your exposures currently outside of North America, and then are you seeing any early indications of demand.
From some of these large domestic capacity projects that are coming online.
Yes, so there's a few big suppliers, you can point out like Lam and applied materials and others and they basically.
The products that we provide which provide chipmaking tooling.
For the end users. They are really all global so we have a lot in Asia. There is a lot in the U S. There's there's actually production for Europe , I think the production for Europe .
Especially for the U S are fairly strong and relatively secure theres certainly some question on on what the recent Biogen announcement would be regarding chip production in China, and I think a lot of our <unk> customers or are working through that so.
There could be some some silencing of demand based on that either from the government, but that's a wait and see.
But for now we.
Very strong demand we've had continued strong demand.
Expected for 2023.
And we'll go from there.
Got it.
And then just one last one whats your exposure to any potential ban on Russian aluminum imports.
You know, Josh we don't we don't buy anything from Russia.
No.
Now just because we don't doesn't mean that the market isn't insulated.
I can speak for Kaiser we have diversity in not only mag supply, but also metal supply in our purity and other alloys.
The lesson that we've had to learn from our experiences on Mag really made us focus and ensure that diversity not only of suppliers, but regionally.
<unk> is very well diversified so.
It could have some up and down spikes in the pricing, but as you know in the Kaiser model, we passed that through so so I really don't impact that or expect any of that impact on us and I feel very very.
Good about our diversity of supply bass for any of these maturities so whether it's whether it's something in Russia, whether it's something that happens in China. We're trying our best to insulate ourselves from all of these global macro conditions.
Great. Thanks for the time and congratulation on the quarter.
Yes, Thank you Josh.
Thank you as a reminder to enter the queue you can dial zero than one we have our next question from Emily Chang with Goldman Sachs.
Good afternoon, Keith and Neil and Thanks for taking my question. My first one is just around the margin outlook. There it looks like from your commentary Youre looking at somewhere in the low teens.
EBITDA margin on <unk> and <unk>.
Fourth quarter, but.
So as you look ahead into 2023.
Could you, perhaps outline what the biggest driver you'd need to see for margins to improve close towards the low to mid 20% range is that aerospace volumes is it commercial improvements offsetting cost inflationary pressures what else should we be thinking about here.
Well, we'll spend a lot of time on 2023 and February Emily, but it's <unk>.
I really think through your question, which is something we're actually addressing every day. So so.
We've put these major disruptions behind us and that's really impacted matter of fact, if you just reflect on where Kaiser would be today, it's neil called out the $54 million of.
The incremental cost that we incurred this year just on the business situation that we have today and on volumes.
If we have that $54 million back we would be at roughly a 17% margin on this business. So I'm encouraged about our ability to move pricing through you can see that in every market, even and ones, where we have long term contracts, we've been able to move prices through to the marketplace.
The one area that we've really and I believe that will continue.
As long as we don't have a significant change in the market dynamics, but what we're anticipating right now we believe that that will continue.
To be available to us.
The challenge, we have and what we're focusing on is stabilizing our operations, we want to get back to where the plants are running without these big large disruptions. They can start to recover on the on the efficiencies that all these disruptions have caused and once.
We do that we will get back into our normal cadence as we get back into normal cadence, we're going to have cost improve over where are we.
Most definitely where we are in 2022, and then as that continues and we see the recovery in aerospace, we expect improved pricing and packaging. We expect the general engineering up the business to still be robust, we believe that mix of products and the <unk>.
<unk> to bring those costs back in line are going to move us back to those more traditional margins, which we've experienced and then the major push will come once we get the new Roku line in place and we really execute that strategy award to move to a much higher margin type outs.
Put a product.
And we get the market's defined as we've discussed in aerospace back to the levels. We saw in 2019. That's when we think we're really going to be able to execute to these levels that we believe our business is scandal level.
Great that makes a lot of sense.
My follow up is just around the.
The <unk> value added revenue per pound levels across your different end markets.
It looks like the Arab packaging in General Engineering, these were up pretty meaningfully quarter over quarter would that be a good level to use going forward as we think about the look forward at all.
Sort of a mix.
Change that drove some of the quarter over quarter uplift.
Well, it's a good recognition there.
We are up in price across the board.
I looked at the numbers.
If for instance, Q3 versus the second half of last year and remember we've been playing catch up with these cost in passing through cost so shipments and mainly due to the force majeure issue, we were down about 13% in Q3 versus the second half of last year, but our value added revenue.
Was up 15%.
Okay. So so what we have been successful in doing is not only passing through costs and moving back prices in the right direction. We've also been very successful in passing this commodity surcharge prices through.
So if you recall when we bought.
Brought in more into the portfolio or a cat a lot of these contracts in place in which we could have annual recoup and reset of cost and certain pass through components of the business. What we've been successful in doing is moving those to a quarterly basis on resetting those.
Cost and not for all okay, but we have been successful in improving getting those cost recovered in a much time of your timeframe with all of the customers. There. So there have been a lot of actions that have taken place and you start to see it in the var per pound.
And so not all of that is just a mix. There is some mix associated with that but there is a certain amount of pass through on the come.
<unk> prices, there's cost that we've incurred.
One note Emily and the third quarter for Aero high strength, if you're looking at that commodity var per pound that is a little bit of a mix in there because of our because of the threat, we're being thats playing the outage aerospace plate was down but our other higher value extruded products for a bigger piece of the mix so that through.
A little bit of that bar per pump.
Okay.
Colin maybe just a quick follow up then outside of that mix component in Aero and high strength would it be fair to say that a lot of the.
Sequential quarterly change in value added revenue per pound is really justice charge rather than.
It may be sort of demand related price increases that you've been able to push through.
Well they'll certainly continue Emily so I wouldn't expect a dip.
Because now we've put those fundamentally in place with our customers. So those should continue now it's a little tough to differentiate between those costs and how much margin just pricing on conversion price increase, but we're certainly focused in that area as well so.
As we turnover new contracts in aerospace.
As we move through we're certainly looking at increased prices that will take place and there will be some margin expansion just on conversion price increase as we go through into new contracts and we can state that for Arrow, you can state that for automotive.
You can state that for packaging and while GE is more transactional we're certainly pushing pushing through prices.
Quicker there and there is some margin expansion based on price improvements on our conversions so.
So we're very mindful of moving that through as well.
Great that's really helpful. Thanks, Keith Neal.
Thanks Emily.
And thank you I see no further questions in queue.
Okay.
So thanks, everyone for being with US today I will look forward to updating you on our fourth quarter and full year results next February thank you very much.
And thank you ladies and gentlemen, this concludes our conference. We thank you for participating you may now disconnect.
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