Q1 2023 Kaiser Aluminum Corporation Earnings Call
Question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad. As a reminder, this conference is being recorded it is now my pleasure to introduce your host Kim Orlando with <unk> Investor Relations. Please ma'am you may begin.
Thank you good afternoon, everyone and welcome to Kaiser aluminum first quarter 2023 earnings conference call.
If you have not seen a copy of our earnings press release. Please visit the Investor Relations page on our website at Kaiser aluminum Dot com.
<unk> 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.
Before we begin I'd like to refer you to the first three slides of our presentation and remind you that the statements made by management and the information contained in this presentation that constitute forward looking statements are based on management's current expectations.
For a summary of specific risk factors that could cause results to differ materially from the forward looking statements.
Please refer to the company's earnings release, and reports filed with the Securities and Exchange Commission, including the company's annual report on Form 10-K for the full year ended December 31 2022.
The company undertakes no duty to update any forward looking statements to conform the statements to actual results or changes in the companys expectations.
In addition, we have included non-GAAP financial information in our discussion.
Reconciliations to the most comparable GAAP financial measures are included in the earnings release and in the appendix of the presentation.
Reconciliations of certain forward looking non-GAAP financial measures to comparable GAAP financial measures are not provided because certain items required for such reconciliation are outside of our control <unk> cannot be reasonably predicted or provided without unreasonable effort.
Any reference to EBITA and our discussion today it 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, Kim and thank you all for joining us for a review of our first quarter 2023 results.
Turning to slide six.
Our focus on execution, coupled with continued traction on pricing and favorable demand trends in certain of our markets drove better than expected first quarter results, despite ongoing macroeconomic and specific business challenges.
Our first quarter adjusted EBITDA increased 57% over the fourth quarter of 2022 to approximately $47 million.
Primarily reflecting continued strength in pricing the mix of products sold across our portfolio of businesses and our strong focus on reducing cost across our platform.
Our EBITDA margin improved 430 basis points sequentially over the fourth quarter of 2022, despite higher planned major maintenance expenses and continued higher commodity and input costs in the quarter.
As a reminder, in an effort to minimize the impact of 2022 supply disruptions on our packaging customers, we purchased higher cost metal units in the second half of last year.
These purchases along with reduced sales in the second half of 2022 led to a higher than anticipated metal inventory balance at the end of the year.
We expect this inventory imbalance and the resulting higher cost associated with those purchases to normalize over the next several quarters.
The demand environment for the first quarter was mixed but overall met or exceeded our expectations.
Aerospace demand continued to improve with both shipments and conversion revenue surpassing our expectations.
With generally good multiyear pricing in place for most of these products first quarter results reflected an exceptionally robust mix of products and customers served with strong accompanying pricing, which resulted in higher conversion revenue than anticipated.
And many of our facilities, we were able to flex available capacity to satisfy strengthening aerospace demand as general engineering demand softened.
Which led to positive results for not only Kaiser but for our valued customers.
We remain well positioned to service these customers moving forward.
In packaging Destocking with beverage customers continue as consumer purchasing traits continue to adjust to the post COVID-19 environment with higher cost being passed onto the consumer.
However, shipments met our expectations and conversion revenue was better than expected due to improved pricing and a better mix of products sold in the quarter.
In General Engineering, we continued to see a slowdown in semiconductor plate and other general engineering long products as distributor inventories continue to rebalance to match current demand.
Prices were better than expected as our commercial teams continued to do an excellent job properly pricing the value of our market preferred Kaiser select products, where our quality and customer satisfaction focus continues to earn a premium in the marketplace.
And finally automotive demand modestly improved as the industry continued to recover from its semiconductor and other supply chain challenges.
Shipments and conversion revenue in this market also came in significantly better than expectations as improved pricing on existing and new programs was evident in the quarter.
I would now like to turn to a brief update on work following the details we outlined on our February call to position this business for success.
We have implemented a number of initiatives to normalize our operations at the Warrick Rolling Mill now that it has begun to stabilize and continues to recover for many of the challenges we faced last year.
For example, we are making solid progress in our contract renegotiations with our packaging customers to improve the timing of contained metal and alloy price adjustments to facilitate the pass through of higher commodity and input cost.
We believe these necessary measures will help mitigate the quarterly impact of higher material and other inflationary cost on our business moving forward and.
In discussions remain ongoing.
Additionally, our role Coke capacity expansion project, which is expected to convert roughly 25% of our current output to higher margin coated products remains on track.
However, we are experiencing higher inflationary cost on the project due mainly to continued rising steel prices and other construction related costs.
Our target to be fully operation on oil.
By mid to late 2024 remains intact.
We remain optimistic on the long term outlook for our packaging business, given our niche market focus on coated packaging products. The significant investments we are making in the business and the continued secular shift to aluminum as the substrate of choice in the North American beverage and food.
Industry.
As we look ahead, we believe our refined strategy, coupled with our strong customer relationships and multiyear contracts will support margin improvement and continued long term growth.
In summary.
We had a better than expected start to the year following a highly challenging 2022.
I'd like to thank our team for their continued commitment and dedication to strong operational execution and working safely.
Our operations.
<unk> are stabilizing and both underlying demand and pricing have been holding up well.
While broader macroeconomic uncertainty stemming from ongoing inflationary pressures supply chain and consistency and the threat of a slowing economy remain the.
The secular growth trends expected in our markets give us confidence that we are well positioned to benefit longer term.
We look forward to continuing to yield positive results from focused execution against our strategic plan to reinvigorate profitable growth in 2023.
I'll now turn the call over to Neil for more detail on the quarter Neil. Thank you Keith and good morning, everyone. I'll begin on slide eight with an overview of our conversion revenue.
<unk> revenue for the first quarter of 2023 was $369 million, an increase of $16 million or 4% compared to the prior year period.
Looking at each of our end markets in detail.
Aero high strength conversion revenue totaled $122 million in the first quarter 2023, reflecting a 39% improvement on a 28% increase in shipments over the prior year quarter, and a 19% improvement on a 6% increase in shipments over the fourth quarter of 2022.
The improvement in conversion revenue over both periods reflects higher pricing along with growth in shipments driven driven by the strengthening demand for commercial aerospace applications.
Packaging conversion revenue was $133 million in first quarter down 8% year over year due to a 12% reduction in shipments, resulting predominantly from destocking in the beverage can markets offset by improved pricing per pound.
On a sequential basis first quarter conversion revenue was down 1% on relatively flat shipments over the fourth quarter of 2022.
General Engineering products conversion revenue for the first quarter was $80 million down 17% year over year due to a 35% reduction in shipments offset by higher pricing to offset inflationary costs sequentially first quarter 2023 conversion revenue was down 13.
Sent on 15% lower shipments.
As expected lower shipments over both periods were predominantly due to destocking at service centers for our extruded Rod and bar products. In addition to softer demand from plate due to the impacts of the semiconductor chip export restrictions.
Automotive conversion revenue was $31 million up 43% over the first quarter of 2022, driven by a 19% increase in shipments.
First quarter 2023 conversion revenue improved 24% on a 10% improvement shipments over the fourth quarter of 2020 to the.
The improvement in conversion revenue over both periods was driven by higher shipments as well as improved pricing.
Additional details on conversion revenue and shipments by end market applications can be found in the appendix of this presentation.
Turning to slide nine reported operating income for the first quarter 2023 was $19 million.
After adjusting for corporate restructuring costs and other non run rate items of $1 million adjusting operating income was $20 million down 18% year over year.
Our effective tax rate for the first quarter 2023 was 24% compared to 29% in the prior year period.
For the full year 2023 and over the long term, we continue to expect our effective tax rate before discrete items to be in the low to mid 20%.
<unk> under current tax regulations.
In addition, we anticipate that our cash taxes will remain in the low to mid single digits until we consume our federal Nols, which as of year end 2022 were $161 million.
Reported net income for the first quarter 2023 was $16 million.
Our 99 per diluted share compared to a net income of $8 million or <unk> 51 per diluted share in the prior year quarter.
After adjusting for the $1 million non run rate items previously mentioned and other pre tax income of $14 million related to our legacy land sale. Adjusted net income for the first quarter of 2023 was $7 million or <unk> 42 per adjusted diluted share compared to adjusted net income of.
$1 million or.
Or <unk> 53 per adjusted diluted share in the prior year quarter.
Now turning to slide 10.
Adjusted EBITDA for the first quarter of 2023 was $47 million up.
Ultimately $17 million from the fourth quarter of 2022 and down approximately $6 million from prior year quarter.
As Keith highlighted the sequential increase was driven by our ongoing efforts to offset higher inflationary costs through pricing actions cost reductions and efficiency improvement projects.
Adjusted EBITDA as a percentage of conversion revenue was 12, 7% in the first quarter 2023, which surpassed our expectations by improving extracts really 430 basis points from the fourth quarter 2022.
The outperformance reflected the improved cost recovery from pricing actions taken during the prior year as well as moderating input costs.
On a year over year basis, adjusted EBITDA was impacted by $7 million of increased planned major maintenance activity associated with furnace rebuilds, partially offset by lower freight costs.
In addition, our margin performance continues to be hindered by higher metal input costs associated with ongoing inventory imbalance along with the time lag for passing through certain other commodity and production costs within our packaging operations.
Now turning to a discussion on our balance sheet and cash flow.
March 31, 2023, total cash of approximately $32 million and more than $514 million of a borrowing availability on our revolving credit facility provided total liquidity of approximately $546 million.
There were $39 million of outstanding borrowings under the revolving credit facility as of March 31, as we continued to invest in growth capital projects, most notably the role coal capacity improvement project in packaging as well to meet our working capital requirements.
Notwithstanding our use of cash during the quarter, we believe our total liquidity position remains strong.
As a reminder, our senior notes interest costs are fixed at $48 million annually and we have no debt maturing until 2028.
In regards to our capital allocation strategy, we remain focused on supporting <unk> growth in 2023, while continuing to make returns to our stockholders through quarterly cash dividends.
On April 12, we announced that our board of directors declared a quarterly dividend of <unk> 77 per common share reinforcing the confidence our board and management have in our long term strategy for profitable growth and increasing stockholder value.
For the full year 2023, we anticipate our capital expenditures to be in the range of $170 million to $190 million and now I will turn the call back over to Keith to discuss our outlook Keith.
Thanks, Neal now I'll turn to our outlook for the second quarter of 2023.
Beginning with aerospace on slide 12.
We anticipate the strong momentum we've been seeing in Aero and high strength shipments to continue into the second quarter.
The recovery in commercial aerospace in particular has continued to ramp towards pre pandemic levels, which we continue to believe should be attainable in 2024.
Now turning to slide 13.
Build rate increases for single aisle and wide body jets are being planned for this year as supply chains improve.
Airline passenger miles continue to increase and declarations by the air Framers support a stronger 2023.
As such we expect our second quarter shipments will sequentially improve by approximately 3% to 5% versus the first quarter in 2023.
Conversion revenue is expected to be flat over the same period as we are not anticipating as strong of a mix of products as we experienced in the first quarter.
Underlying demand for business Jets defense and space related sales are expected to remain strong.
As mentioned previously we remain well positioned to support incremental aerospace and high strength demand in the second quarter and beyond following the investments and upgrades, we continue to make in our facilities along with our ability to pivot existing capacities to adjust with market demand.
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Turning to packaging on slide 14.
As mentioned earlier, our packaging operations are stabilizing following the significant supply chain challenges, we experienced in 2022 at our Warrick Rolling mill.
Looking ahead in 2023, we expect operations to continue to normalize with some lingering impacts from higher metal cost and our continued lag in price adjustments to fully pass through certain costs with a few remaining customer contracts.
Destocking and beverage products is expected to continue into the second quarter.
However, we anticipate second quarter shipments and conversion revenue to improve approximately 3% to 5% compared to the first quarter of 2023.
We remain bullish on the longer term prospects for improved packaging margins guided by our niche focus and positioned in the market our targeted growth investment in the new role coat line and strong customer relationships.
Now turning to general engineering on Slide 15.
Okay.
Sales and conversion revenue for general engineering products in the second quarter are expected to be similar to the first quarter.
We expect continued softening in plate due mainly to reduced demand for semiconductors and in our rod and bar products as distributors continue to reduce inventories to match lower sales.
Pricing is expected to come under more pressure going forward as more domestic capacity becomes available due to slowing semiconductor demand and availability increases from imported plate suppliers.
We remain confident our highly differentiated Kaiser select products.
And industry, leading customer satisfaction metrics.
Broad product offering.
And strong long term customer relationships will continue to warrant a premium for these products.
On a more positive note the.
The slowdown in semiconductor plate has opened capacity at our current would rolling mill to accommodate rising aerospace demand highlighting a key benefit of our unique diversification strategy.
While general engineering markets have long been first movers to decline as the economy slows there is growing support that with the re shoring of certain manufacturing industries back to North America.
And the strong dislocations associated with long supply chains domestic.
Supply of these products is in a stronger position than in the past and the depth of any trough in demand will be more shallow than in the past.
Our Differentiators mentioned previously are expected to minimize the impact of any slowdown for kite.
Next I'll turn to automotive on slide 16.
Demand for automotive has been modestly recovering in 2023 on higher build rates for trucks and light vehicles in North America.
That being said, we expect shipments and conversion revenue to mirror, our first quarter, which as a reminder were higher than expected. When we gave our outlook in February for the first quarter.
Currently we don't expect a more meaningful recovery in automotive until at least mid to late 2023.
Okay.
Turning to slide 17.
We believe Kaiser is well positioned to execute in the current demand environment, given our solid market position as a key supplier in diverse end markets that require products that can technically challenging applications and multiyear contracts with key strategic partners.
We remain intently focused on managing elements within our control, including pursuing cost reductions in our operations improving manufacturing efficiencies as our operations stabilize and continuing commercial actions to improve our margins.
As such we expect our second quarter 2023, EBITDA and margins will be flat to slightly positive compared to our first quarter results as we improve efficiencies continued to successfully pass through higher input and commodity cost and rebalance our inventories as previously discussed.
Importantly, we are prepared to address economic adversity and market cyclicality, given our strong liquidity position and demonstrated ability to flex our highly variable cost structure if needed.
We remain responsible stewards of capital to take advantage of the growth opportunities are ahead of ahead of us while continuing to manage debt and deliver solid returns to our shareholders.
Now turning to slide 19, and a summary of today's remarks.
I am pleased with our start to the year as we continued to execute against our long term strategy for sustainable and profitable growth.
We remain confident this portfolio can deliver conversion revenue approaching $2 billion and an EBITDA margin on conversion revenue in the mid to high 20% range.
The timing of which remains subject to expected investments and macroeconomic conditions.
With that I'll now open the call to any questions you may have operator.
Thank you we will now be conducting a question and answer session.
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One moment, please while with poll for questions.
Our first question comes from Emily Shanks with Goldman Sachs. Please go ahead.
Good morning, Keith and Neil Thank you for taking my questions. This morning.
I wanted to come back to your comments around being cautiously optimistic for the full year in terms of both the EBITDA margin profiling and EBITDA generation.
Are you able to put some numbers I'll frame of reference around cautiously optimistic might translate to in terms of that margin outlook and what's the level of confidence you have in the volume pricing and cost out potential in the second half of the year.
Yes, good morning, Emily and thanks for the question well as we mentioned in our comments Emily we're still seeing pretty <unk>.
Positive.
Indicators out there on our markets.
And plenty of discussion out there about how the economy, whether or not we have a harder soft landing that's really been that coupled with the challenges. We had last year have given us caution about going out beyond the second quarter.
But I will tell you we're fixated on continuing to move forward on the pricing opportunities to really negate these inflationary costs.
You also mentioned late last year, and we're seeing that come to fruition that we expected 60% to 70% of those incremental costs that impacted us last year, we think are behind us and so it's really about a cost play for us improving cost passing through the cost that we have there.
A lag on the input and metal costs associated with the situation. We saw in the second half so we're going to be living with those higher higher cost.
The first few quarters of the year.
But I think as you can see from comments and from the markets that are starting to move our markets are positive and we're well positioned here as those markets continue to go we think any any depression that might come at us is hopefully going to be shallow and we think we're well positioned.
Especially in the general engineering side too to weather any storm, perhaps better than anyone with a broad product offering that we have in these long relationships that have been in place for over 70 years. So I think we're seeing very positive trends right now and I think we're moving to.
Area again, what we mentioned that we're stabilizing our businesses and we're very focused on really.
Performing and Thats going to be the focus for our year. So so our outlook right now remains solid and positive on our outlook as we mentioned pricing is holding up well demand has held up well and I think as we stabilize our business obviously our intent.
<unk> is to see that margin continually to move up.
To where we were a minimum where we were early last year and perhaps beyond the moving back up to that 17% to 20% range and those are targets that we have but there is going to be a period of time to get there.
Great that's very helpful.
A follow up just around the Warrick Rolling line actually I think you mentioned that there might have been some inflation potential pushing that capex number higher can you remind us what the capital outlay.
For the <unk> line and then.
Okay.
Guidelines on what that upside risks could be steel and labor costs to creep up.
Yes, certainly the initial.
Outlook for this investment was approximately $150 million.
And really we're in the process of assessing the Overages and we're going to provide more clarity going forward.
But we expect the rate of return on this project, even with the cost that we're assessing right. Now this investment is still going to continue to exceed our cost of capital Emily.
And in spite of these higher inflationary costs and those costs associated with the construction.
And a reminder, this investment it's central to our long term strategy to deliver the higher margins.
And really positioning us with a strong defensible position as we go forward in the packaging market. So we've evaluated these costs and we're trying to minimize those and we'll be assessing and giving more clarity in upcoming calls.
Understood. Thank you.
Alright, thank you.
Sorry, our next question comes from Josh Sullivan, and then Luis please.
Please go ahead.
Hey, good morning.
Good morning, Josh.
Just jumping from another call so apologies.
On the aerospace demand.
Youll confirm that go into 38 per month on the 737 going through pretty strong on the that the supply chain regardless of some other disruption.
How much of the strength this quarter was.
More dynamic Paul or has it been more consistent.
Just a reflection of the overall market moving forward.
Yeah, well, thanks, Josh well, we've been seeing.
The expected rate increases coming for a while.
We generally talk with the air Framers and plan about a year ahead of time. So this is actually coming through fruition to what our expectations were but I will tell you with the strong defense space and business jet associated with this it's actually accelerated a little faster than we.
<unk>.
So that's good news that's good news for US we are well positioned to handle the increased outlook and we think that's only going to continue to accelerate as the supply chains. I think both companies have talked about that really the whole back right now is not demand, it's the supply chain catching.
Up to it and we're all looking to ramp up accordingly, but this is actually coming on.
On the 2020 timeframe when all the Covid issues hit we talked about as a company. We expected the return back to 2023 2024 back to that 2019 level, which was a record and we're well on our way there.
So I'm very pleased with the outlook is as expected I would say the only difference that we're seeing is the strong demand in business jet and defense, especially as it relates to Kaiser.
So all of those coming together are going to really ramp this up to the expected levels that we hope it gets to in 'twenty four and beyond.
And maybe a similar question on the automotive side I know you are.
If you are looking at more material cover a little recovery a little bit later, we had some plant shutdowns last year.
Steel for how much of the recent automotive strength of catch up to that relative to kind of the seller expectations for this year.
Okay.
Yes, I think I think the.
The economics are or it's mixed right now.
Think they're prepared I see inventories going up a little bit more we see demand is still there but on the other side you see challenging for rise.
Rising.
Interest rates.
The period of time to the cost of the vehicles overall is going to be very challenging for the consumer.
I think you see us we're generally conservative on the approach I say that.
But our numbers for the first quarter were a lot better than we expected now I believe most of that is our ability to pass through costs and to get higher prices on the products that we provide and with the new programs that are coming in we're getting a little better price.
Missing.
On those products, so I think that more than demand really.
Improved our numbers overall.
I continue to believe that those challenges with interest rates and the consumers' ability to pay for these rates are really going to be the determined or in the second half of the year, whether or not we're going to have a muted response in 'twenty three or we're going to have a breakout year.
We are well positioned to do it and as you know, it's a smaller part of our portfolio, but but we're watching those numbers and so far we've had a great start to the year.
Thank you.
Thank you.
As a reminder to ask a question please press <unk>.
Sure Juan.
One moment, please while windfall.
Yes.
There being no further questions at this time I would like to turn the floor over to Keith Harvey for closing comments. Please Sir go ahead.
Alright. Thank you operator, thanks for being with US today, and I look forward to updating you on our second quarter 2023 results in July have a great day.
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